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As filed with the Securities and Exchange Commission on October 12, 1999
Registration No. 333 -
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT
Under the Securities Act of 1933
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RANCH *1, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 5812 13-3941565
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
130 West 42nd Street, 21st Floor
New York, New York 10036
(212) 354-6666
(Address, Including Zip Code, and Telephone Number,
Including Area Code, or Registrant's Principal Executive Offices)
Sebastian Rametta
President and Chief Executive Officer
Ranch *1, Inc.
130 West 42nd Street, 21st Floor
New York, New York 10036
(212) 354-6666
(Address, Including Zip Code, and Telephone
Number, Including Area Code, of Agent for Service)
Copies to:
Stephen A. Weiss, Esq. Lawrence B. Fisher, Esq.
Greenberg Traurig Orrick, Herrington & Sutcliffe LLP
200 Park Avenue 666 Fifth Avenue
New York, New York 10166 New York, New York 10103
(212) 801-9200 (212) 506-5000
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Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this
Registration Statement.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the
Securities Act, check the following box and list the Securities Act registration statement number of the earlier
effective registration 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 for the
same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the
following box and list the Securities Act registration statement number of the earlier effective registration for the
same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. |_|
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CALCULATION OF REGISTRATION FEE
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Proposed Maximum
Title of Each Class of Securities to Aggregate Amount of
be Registered Offering Price (2) Registration Fee
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Common Stock, par value $.001 per share $23,000,000 $ 6,394
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(1) Includes __________ shares of common stock that the underwriters have the option to purchase to cover
over-allotments, if any.
(2) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the amount of the registration fee.
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, as amended,
or until the registration Statement shall become effective on such date as the Commission, acting pursuant to Section
8(a), may determine.
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The information in this preliminary prospectus is not complete and may
change without notice. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any jurisdiction where the offer
or sale is not permitted.
SUBJECT TO COMPLETION, DATED OCTOBER 12, 1999
__________ Shares
[Ranch *1 logo]
RANCH *1, INC.
Common Stock
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This is the initial public offering of Ranch *1, Inc. and we are offering
____________ shares of our common stock. Prior to this offering, there has been
no public market for our common stock. We anticipate that the initial public
offering price for our shares will be between $______ and $______ per share.
After the offering, the market price for our shares may be above or below this
range.
We are applying to have our common stock listed on the Nasdaq National Market
under the symbol "RNCH."
Investing in our common stock involves a high degree of risk. Please see "Risk
Factors" starting on page 6 to read about certain risks that you should consider
carefully before buying shares of our common stock.
Per Share Total
Public offering price.......................... $ $
Underwriting discounts and commissions......... $ $
Proceeds to us................................. $ $
The underwriters have an option to purchase __________ additional shares of
common stock from us at the initial public offering price to cover any
over-allotments of shares.
Neither the Securities and Exchange Commission nor any other regulatory body has
approved or disapproved of these securities or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
JOSEPHTHAL & CO. INC.
Prospectus dated , 1999
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Inside front cover and gatefold
Pictures of our restaurant interiors and exteriors, as well as a picture of
our free-standing restaurant model. Pictures of food from our menu, with
captions identifying the name of each product. Captions describing Ranch *1
achievements/awards.
Inside back cover
Map showing existing and proposed sites of our restaurants. Proposed new
locations are highlighted in a different color.
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PROSPECTUS SUMMARY
This summary highlights some of the information found in greater detail
elsewhere in this prospectus. This summary does not contain all of the
information that you should consider before investing in our common stock. We
urge you to read the entire prospectus carefully, especially the risks of
investing in our common stock discussed under "Risk Factors" and the
consolidated financial statements and notes thereto appearing elsewhere in this
prospectus, before you decide to buy our common stock.
Our Business
Ranch *1 owns, operates, franchises and licenses upscale quick-service
restaurants. We specialize in fresh-grilled skinless, boneless chicken breast
sandwiches which we advertise as "The Best Grilled Chicken Sandwich on
Earth(R)," Idaho french-fried potatoes and a variety of freshly-prepared healthy
menu selections. In July 1999, we were selected by Restaurants and Institutions,
an industry publication, as one of the top 400 U.S. restaurant concepts of the
year and were awarded "Best Fast Food of New York" by New York Magazine in April
1996. There are currently 45 Ranch *1 restaurants located in eight states and
the District of Columbia. We own and operate 18 restaurants, and our franchisees
and licensees operate 27 restaurants. All of our company-owned stores, except
one, are currently located in the borough of Manhattan in New York City. Our
franchise restaurants are located in New York, New Jersey, Connecticut,
Maryland, the District of Columbia, Virginia, North Carolina, Missouri,
California and Taiwan.
Our restaurants feature a clean and inviting environment. Our guests may
purchase a meal for in-store dining, take-out or delivery. We believe our
restaurants are positioned as upscale quick-service restaurants between the
fast-food and casual dining segments of the restaurant industry. The critical
components of our concept are as follows:
o distinctive, fresh, high-quality food, featuring fresh-grilled
skinless, boneless chicken breast sandwiches;
o excellent dining values; and
o one of the fastest service times in the industry--we strive to deliver
meals to our customers within 45 seconds from taking their orders
during peak hours.
Our Business Strategy
Our business objective is to become the leading upscale quick-service
restaurant brand nationwide and internationally. In order to achieve our
business objective, we have developed the following strategies:
o Execute a Disciplined Expansion Program. Our current expansion plan
calls for us to open 7 company-owned restaurants in fiscal 2000, and
24 company-owned restaurants in fiscal 2001. We have signed lease
agreements for 3 new company-owned restaurants to date. We have
commitments to open approximately 26 domestic franchise restaurants
and 5 international franchise restaurants in fiscal 2000 of which, 3
domestic and 2 international franchise restaurants have opened to
date. We believe we will open 59 domestic franchise restaurants and 11
international franchise restaurants in fiscal 2001. Our franchisee
expansion plan is focused upon establishing strategic relationships
with area developers with food service experience. We have entered
into strategic relationships with experienced area developers and
multi-unit operators such as Host International, CulinArt, Inc. and
Coyote Ventures, Inc. as well as Madison Square Garden in New York
City.
o Strategic Site Selection Process. In an effort to reduce our
occupancy, development and labor costs and reduce the seasonal impact
on our revenues, we intend to expand into specific sites outside of
Manhattan including suburban drive-thru prototype stores and select
mall locations such as indoor food court locations.
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o Strengthen our Distinctive Concept and Brand. We intend to strengthen
our concept and brand by promoting our brand through comprehensive
regional and local media and direct marketing campaigns and expanding
our menu offerings with additional grilled chicken dishes.
o Continue to Improve Attractive Restaurant-Level Economics. We intend
to improve operating results through lower than average product costs,
careful site selection, cost-effective development and formal employee
training programs. In an effort to increase delivery sales in urban
centers we are implementing an on-line internet ordering system.
o Continue to Ensure a High-Quality Guest Experience. We focus on
creating a fun, team-like culture for our restaurant employees, which
we believe fosters a friendly and inviting atmosphere for our guests.
We will continue to provide extensive training, experienced
restaurant-level management and rigorous operational controls and
ensure prompt, friendly and efficient service to our guests.
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The Offering
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Common stock offered by us.................................. ___________ shares
Common stock outstanding prior to this offering............. 12,857,743 shares
Common stock outstanding after this offering................ ___________ shares
Use of proceeds............................................. To finance the development and opening
of additional restaurants, for
repayment of a portion of our debt, and
for working capital and other general
corporate purposes. Please see "Use of
Proceeds".
Proposed Nasdaq National Market symbol........................RNCH
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The information in the table above is based on the number of shares
outstanding on October 11, 1999. References in this prospectus to our fiscal
year means our fiscal year ending May 31st. Unless otherwise specifically
stated, information throughout this prospectus assumes:
o an initial public offering price of $___ per share;
o the effectiveness of a ____-for-___ reverse stock split of our outstanding
common stock immediately prior to the date of this prospectus; and
o the underwriters' over-allotment option is not exercised;
and excludes as of October 11, 1999:
o _________ shares issuable upon exercise of outstanding warrants and ___
shares issuable upon the exercise of outstanding warrants relating to the
October 1999 private placement of 38 shares of Series C preferred stock;
o 251,263 shares issuable upon the exercise of outstanding stock options; and
o 1,180,843 shares reserved for future issuance under our stock option plan.
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We were incorporated as Franchise Concepts Group, Inc. in Delaware on June
12, 1996 and, on August 20, 1999, changed our corporate name to Ranch *1, Inc.
Our principal executive offices are located at 130 West 42nd Street, 21st Floor,
New York, New York 10036. Our telephone number at that location is (212)
354-6666. Information contained on our Web site, www.ranch1.com, does not
constitute part of this prospectus. "Ranch *1" and "The Best Grilled Chicken
Sandwich on Earth" are registered trademarks of Ranch *1, Inc. Other service
marks, trademarks and tradenames referred to in this prospectus are the property
of their respective owners.
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Summary Consolidated Financial and Operating Data
(in thousands, except per share and selected operating data)
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Year Ended May 31,
1998 1999
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Consolidated Statement of Operations Data:
Total revenues ....................................................................... $ 10,680 $ 18,012
Loss before income taxes and extraordinary items ..................................... (9,727) (5,595)
Income taxes ......................................................................... (15) (60)
Loss before extraordinary item ....................................................... (9,742) (5,655)
Extraordinary gain on extinguishment of debt ......................................... 225 --
Net loss ............................................................................. (9,517) (5,655)
Accrual of dividends, issuance of performance warrants and amortization of
issuance costs on preferred shares ................................................... (112) (1,001)
Net loss applicable to common shares holders ......................................... (9,629) (6,656)
Net loss per common share:
Loss before extraordinary item .................................................. $ (0.91) $ (0.61)
Extraordinary item .............................................................. 0.02 --
Net loss basic and diluted ...................................................... (0.89) (0.61)
Weighted average number of common and common equivalent shares outstanding
Basic and diluted ............................................................... 10,773,778 10,952,206
Pro forma net loss per share
Basic and diluted
Weighted average number of common and common equivalent shares outstanding (pro forma)
Basic and diluted
Selected Operating Data:
Number of company-owned restaurants at end of period ................................. 16 18
Number of franchised restaurants at end of period .................................... 13 23
Comparable system-wide restaurant sales increase ..................................... N/A 6.6%
Average system-wide restaurant volume of restaurants open 18 months .................. $ 1,011,000 $ 986,000
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o Please see note 1 to the consolidated financial statements for an
explanation of the determination of the number of shares used in computing
pro forma net loss per share.
o Comparable restaurant sales are determined based on sales for stores which
were in operation for the previous 18 months.
The following table provides a summary of our balance sheet at May 31, 1999:
o on an actual basis;
o on a pro forma basis giving effect to (a) the sale in August 1999 of
273,300 shares of our Series B convertible preferred stock, (b) the sale in
October 1999 of 38 shares of our Series C convertible preferred stock, (c)
the conversion of $2,757,972 of outstanding indebtedness into 55.16 shares
of Series C convertible preferred stock, (d) the conversion of warrants to
purchase 2,193,333 shares of common stock into 1,456,480 shares of common
stock and (e) the conversion into common stock of 2,800,000 shares of
Series A preferred stock, in addition to accumulated dividends of $662,356
as of May 31, 1999 and an acceleration of $2,137,644 of dividends payable
through the remaining term; and
o on a pro forma as adjusted basis to reflect the sale of ___ shares of
common stock by us in this offering, after deducting underwriting discounts
and commissions and estimated offering expenses.
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As of May 31, 1999
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Pro forma,
Actual Pro forma as adjusted
Consolidated Balance Sheet Data:
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Cash and cash equivalents .................................... $ 574
Total assets ................................................. 9,974
Long-term debt, excluding current portion .................... 203
Convertible redeemable preferred stock ....................... 7,522
Total stockholders' deficit .................................. (11,616)
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RISK FACTORS
An investment in our common stock involves a high degree of risk. You
should consider carefully the following information about these risks, together
with the other information contained in this prospectus, before you decide
whether to buy our common stock.
Risks Related to Our Business
We may be unable to achieve profitability.
Since our inception in June 1996, we have incurred accumulated net losses
of approximately $17,653,000 through the end of fiscal 1999, primarily due to
new restaurant opening expenses, funding operating losses and the costs of
hiring and terminating senior management. We intend to continue to expend
significant financial and management resources on the development of additional
restaurants. We cannot predict when or whether we will be able to achieve or
sustain revenue growth, profitability or positive cash flow in the future.
Failure to achieve profitability and positive cash flow in the near future may
cause us to delay or abandon our expansion plans, cause our stock price to
decline and make it difficult to raise additional capital. Our independent
auditors have included an explanatory paragraph in their report on our
consolidated financial statements stating that certain factors raise doubt about
our ability to continue as a going concern.
Our planned expansion into new geographic areas involves a number of risks,
many of which are beyond our control.
Approximately 76% of our 45 company-owned, franchised and licensed
restaurants are located in the New York, New Jersey and Connecticut tri-state
area. Our planned expansion into geographic areas outside this area and
internationally involves a number of risks, including:
o uncertainties related to demographics, regional tastes and
preferences;
o legal requirements, local customs, wages, costs and other economic
conditions;
o development of relationships with local distributors and suppliers of
food products, fresh produce and other ingredients;
o potential difficulties related to management of operations located in
a number of broadly dispersed locations; and
o lack of market awareness or acceptance of our restaurant concept.
We may not be successful in addressing these risks. We also may not be able
to open our planned new operations on a timely basis, or at all. Once the new
restaurants are opened, they may not be operated profitably. Delays in opening
or failure to open planned new restaurants could adversely affect our business
and results of operations. We currently anticipate that our new restaurants will
take several months to reach planned operating levels due to inefficiencies
typically associated with new restaurants, such as lack of market awareness,
acceptance of our restaurant concept and inability to hire sufficient staff.
We plan to expand our operations overseas and, therefore, our business will
be susceptible to numerous risks associated with international operations.
We have entered into an agreement with an area developer to open Ranch *1
restaurants overseas. We plan to continue to expand our operations by entering
into more of these types of agreements. We currently have two restaurants
located outside the United States and have limited experience in marketing and
selling the Ranch *1 concept internationally. We can make no assurance that our
restaurants will be accepted outside the United States. If the Ranch *1
restaurants fail to gain sufficient acceptance in international markets, our
expansion plan could be materially adversely affected. In addition, we may fail
to maintain or increase international market demand for our restaurants.
As we expand our operations internationally, we may be increasingly
affected by economic and political conditions in other countries. For example,
we may find our business and results of operations to be increasingly affected
by fluctuations in the value of currency, foreign taxes, greater difficulty in
collecting royalty payments, and
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the burdens and costs of compliance with a variety of foreign laws and
regulations which, in certain respects, may contradict laws of the United States
and other countries.
Our failure to obtain additional financing when needed could adversely
affect our business.
We believe that the net proceeds from this offering and the sale of 38
shares of our Series C preferred stock completed in October 1999, together with
anticipated cash flow from operations, will be sufficient to satisfy our working
capital requirements for at least the next twelve months. We plan to incur
substantial costs over the near-term in connection with our expansion plans. We
may need to seek additional financing sooner than we anticipate as a result of
the following factors:
o changes in our operating plans;
o acceleration of our expansion plans;
o lower than anticipated sales of our menu offerings;
o increased food and/or labor costs; and
o potential acquisitions.
Our failure to pay past due New York State sales taxes and New York City
occupancy taxes, which has caused a default in one of our loan agreements. Such
default as well as other adverse factors may prevent us from obtaining
additional financing on acceptable terms, or at all. Our business and results of
operations could be materially, adversely affected if we fail to get additional
financing as needed.
The success of our rapid expansion program will depend on a variety of
factors, many of which are beyond our control.
We intend to pursue a rapid expansion program. Our ability to successfully
achieve our expansion program will depend on a variety of factors, many of which
are beyond our control. These factors include:
o our ability to locate suitable restaurant sites or negotiate
acceptable lease terms;
o our ability to obtain required local, state, federal and foreign
governmental approvals and permits related to construction of the
sites, food and beverages;
o our dependence on contractors to construct new restaurants in a timely
manner;
o our ability to attract, train and retain qualified and experienced
restaurant personnel and management;
o our ability to operate our restaurants profitably;
o our need for additional capital and our ability to obtain such capital
on favorable terms or at all;
o our ability to respond effectively to the intense competition in the
quick-service restaurant industry; and
o general economic conditions.
If we are not able to successfully address these factors, we may not be
able to expand at a rate currently contemplated by our strategy, and our
business and results of operations may be adversely impacted.
We are dependent on our ability to attract and train qualified franchisees,
licensees and area developers and their success.
Our success is largely dependent on our ability to attract and train
qualified franchisees and area developers, and how these persons develop and
operate their Ranch *1 restaurants. There can be no assurance that area
developers and franchisees will have the business abilities or access to
financial resources necessary to open the Ranch *1 stores required by their
development schedules or will successfully develop or operate Ranch *1 stores in
their franchise areas in a manner consistent with our concepts and standards.
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Our operating results may fluctuate significantly, which could have a
negative effect on the price of our common stock.
Our quarterly and annual operating results and comparable restaurant sales
may fluctuate significantly as a result of a variety of factors, including:
o the timing of new restaurant openings and related expenses;
o the amount of sales contributed by new and existing restaurants;
o labor costs for our hourly and management personnel, including
increases in federal, state or foreign minimum wage requirements;
o fluctuations in food costs, particularly the cost of chicken, potatoes
and produce;
o the ability to achieve and sustain profitability on a quarterly or
annual basis;
o consumer confidence;
o changes in consumer preferences;
o the level of competition from existing or new competitors in the
quick-service restaurant industry;
o factors associated with closing a restaurant including payment of the
base rent for the balance of the lease term;
o the impact of weather on revenues and costs of food;
o general economic conditions; and
o unanticipated costs related to our expansion strategy.
Accordingly, results for any one period are not necessarily indicative of
results to be expected for any other period. We cannot assure that comparable
restaurant sales for any particular future period will not decrease.
The restaurant industry is intensely competitive and we may not have the
resources to adequately compete.
The restaurant industry is intensely competitive. There are many different
segments within the restaurant industry that are distinguished by types of
service, food types and price/value relationships. The performance of individual
restaurants is affected by factors such as traffic patterns, demographic
considerations and the type, number and proximity of competing restaurants. We
have positioned our restaurants in the upscale quick-service food segment of the
industry. In this segment, our closest competitors include Au Bon Pain and
Chick-fil-a. We also compete with full-service restaurants including Appleby's
and TGI Fridays, and fast-food restaurants, particularly those focused on
chicken dishes such as Boston Market and KFC. In addition, we compete with
McDonald's, Wendy's and Burger King. Competition in our industry segment is
based primarily upon food quality, price, restaurant ambiance, service and
location. Although we believe we compete favorably with respect to each of these
companies and competitive factors, many of our direct and indirect competitors
are well-established national, regional or local chains and have substantially
greater financial, marketing, personnel and other resources than we do. We also
compete with other retail establishments for site locations.
The ability to attract and retain highly qualified personnel to operate and
manage our restaurants is extremely important and our failure to do so could
adversely affect our business.
Our success depends upon our ability to attract and retain highly
motivated, well-qualified restaurant personnel. These personnel include not only
the restaurant operators and management, but also guest service and kitchen
staff employees needed to keep pace with our expansion schedule. Qualified
individuals needed to fill these positions are in short supply in some areas,
and our inability to recruit and retain such individuals may delay the planned
openings of new restaurants or result in higher employee turnover in existing
restaurants. We also face significant competition in the recruitment of
qualified employees. Additionally, competition for qualified employees could
require us to pay higher wages to attract sufficient employees, which could
result in higher labor costs. Further, we are heavily dependent upon the
services of our officers and key management involved in restaurant operations,
marketing, finance, purchasing, expansion, human resources and administration.
The loss of any of these individuals could have a material adverse effect on our
business and results of operations.
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We may not be able to manage the growth we expect in our operations.
Our expansion strategy will place a strain on our management, financial and
other resources. To manage our growth effectively, we must maintain the level of
quality and service at our existing and future restaurants. We must also
continue to enhance our operational, financial and management systems and
locate, hire, train and retain experienced and dedicated operating personnel,
particularly managers. We may not be able to effectively manage any one or more
of these or other aspects of our expansion. Failure to do so could have a
material adverse effect on our business and results of operations.
Our expansion strategy may be hindered by development costs and delays
beyond our control.
We depend on contractors and real estate developers to construct our
restaurants. Many factors may adversely affect the cost and time associated with
the development and construction of our restaurants, including:
o labor disputes;
o shortages of materials and skilled labor;
o adverse weather;
o unforeseen engineering problems;
o environmental problems;
o construction or zoning problems;
o domestic and foreign government regulations;
o modifications in design; and
o other unanticipated increases in costs.
Any of these factors could give rise to delays or cost overruns which may
prevent us from developing additional restaurants within our anticipated budgets
or time periods. Any such failure could have a material adverse effect on our
business and results of operations.
Our restaurants are concentrated in a certain geographic region and are
therefore subject to fluctuations in business in that region.
All but eleven of our existing restaurants are located in the New York, New
Jersey and Connecticut tri-state area. Occupancy costs are higher in this region
than in other regions and we are susceptible to fluctuations in our business
caused by adverse economic or other conditions in this region, including natural
or other disasters. Our significant investment in, and long-term commitment to,
each of our restaurants limits our ability to respond quickly or effectively to
changes in local competitive conditions or other changes that could affect our
operations. In addition, some of our competitors have many more restaurants than
we do. Consequently, adverse economic or other conditions in the tri-state area,
a decline in the profitability of several existing restaurants or the
introduction of several unsuccessful new restaurants in a new geographic area
could have a more significant effect on our results of operations than would be
the case for a company with a larger number of restaurants or with more
geographically dispersed restaurants.
Our failure or inability to enforce our trademarks and trade names could
adversely affect our efforts to establish brand equity.
Our ability to successfully expand our concept will depend on our ability
to establish and maintain "brand equity" through the use of our trademarks,
service marks, trade dress and other proprietary intellectual property,
including our name and logos. We currently hold one registered U.S. trademark,
two registered U.S. service marks and one registered Taiwanese service mark
relating to our brand. We also have two domestic trademark applications and
seven international trademark applications pending. Some or all of the rights in
our intellectual property may not be enforceable, even if registered, against
any prior users of similar intellectual property or our competitors who seek to
utilize similar intellectual property in areas where we operate or intend to
conduct operations. If we fail to enforce any of our intellectual property
rights, we may be unable to capitalize on our efforts to establish brand equity.
It is also possible that we will encounter claims from prior users of similar
intellectual property in areas where we operate or intend to conduct operations.
Claims from prior users could
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limit our operations and possibly cause us to pay damages or licensing fees to a
prior user or registrant of similar intellectual property.
We are dependent on one supplier for our core product.
We rely on Perdue Farms Inc. as our sole supplier of chicken breasts, the
core product used to prepare virtually all our menu items. Although we believe
that alternative sources are available, any increase in the prices or failure to
perform by that supplier could cause our food costs to increase or disrupt our
operations. Further, various factors affecting our supplier beyond our control,
including labor strikes and government regulation, may affect our supplier's
performance and consequently our operations. We cannot predict whether we will
be able to anticipate and react to factors affecting our supplier, and our
failure to do so could materially adversely affect our business and results of
operations.
Our profitability is dependent on our food and labor costs, over which we
have limited control.
Our restaurant operating costs principally consist of food and labor costs.
Our profitability is dependent on our ability to anticipate and react to changes
in food and labor costs. Various factors beyond our control, including adverse
weather conditions and governmental regulation, may affect our food costs. We
may not be able to anticipate and react to changing food costs, whether through
our purchasing practices, menu composition or menu price adjustments in the
future. In the event that food or labor price increases cause us to increase our
menu prices, we face the risk that our guests will choose to patronize
lower-cost restaurants. Failure to react to changing food costs or to retain
guests if we are forced to raise menu prices could have a material adverse
effect on our business and results of operations.
Changes in consumer preferences of discretionary consumer spending could
negatively impact our results.
Our restaurants feature a variety of grilled chicken items. Our continued
success depends, in part, upon the popularity of this type of cuisine and this
style of quick-service dining. Shifts in consumer preferences away from our
cuisine or dining style could materially adversely affect our future
profitability. Also, our success depends to a significant extent on numerous
factors affecting discretionary consumer spending, including economic
conditions, disposable consumer income and consumer confidence. Adverse changes
in these factors could reduce guest traffic or impose practical limits on
pricing, either of which could materially adversely affect our business and
results of operations.
As a restaurant service provider, we could be subject to adverse publicity
or claims from our guests.
We may be the subject of complaints or litigation from guests alleging
food-related illness, injuries suffered on the premises or other food quality,
health or operational concerns. Adverse publicity resulting from such
allegations or a significant judgment entered against us may materially
adversely affect us and our restaurants. We may also be the subject of
complaints or allegations from current, former or prospective employees from
time to time. A lawsuit or claim could result in an adverse decision against us
that could materially adversely affect our business and results of operations.
We may not be able to comply with federal, state and local laws and
regulations necessary to operate our restaurants, which would adversely affect
our business.
The failure to maintain necessary licenses, permits or approvals, including
food licenses, or to comply with other government regulations, could have a
material adverse effect on our business and results of operations. In addition,
difficulties or failures in obtaining required licenses and approvals will
result in delays in, or cancellation of, the opening of new restaurants.
Restaurants are subject to licensing and regulation by state and local health,
environmental, labor relations, sanitation, building, zoning, safety, fire and
other departments. Our activities are also subject to the Federal Americans With
Disabilities Act and related regulations, which prohibit discrimination on the
basis of disability in public accommodations and employment. In addition, given
the location of many of our restaurants, even if our operation of those
restaurants is in strict compliance with the requirements of the Immigration and
Naturalization Service, our employees may not all meet federal citizenship or
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residency requirements, which could lead to disruptions in our work force. The
development and construction of additional restaurants will also be subject to
compliance with applicable zoning, land use and environmental regulations. There
can be no assurance that we will be able to obtain necessary variances or other
approvals on a cost-effective and timely basis in order to construct and develop
units in the future. Changes in any or all of these laws or regulations could
have a material adverse effect on our business and results of operations.
We are also subject to federal regulation and state laws that govern the
offer and sale of franchises and the franchisor-franchisee relationship. Many
state franchise laws impose substantive requirements on franchise agreements,
including limitations on noncompetition provisions and on provisions concerning
the termination or nonrenewal of a franchise. Some states require companies to
register certain materials before franchises can be offered or sold in that
state. The failure to obtain or retain licenses or registration approvals to
sell franchises could delay or preclude franchise sales and otherwise adversely
affect our business and results of operations. Additionally, any franchise law
violations may give existing and future franchisees a basis to bring claims
against us. Franchise law violation claims could include unfair business
practices, negligent misrepresentation, fraud, and statutory franchise
investment and/or relationship violations. Remedies may include damages and/or
rescission of the franchise agreement by the franchisee. After consummation of
this offering, we intend to amend our franchise offering circular to disclose
this offering and where required, file the amendment. Until an amendment is
filed and, where required, approved, we may not be able to sell any franchises
in those states.
Our current insurance may not provide adequate levels of coverage against
claims which could have an adverse effect on our business.
There are certain types of losses we may incur that may be uninsurable or
that we believe are not economically insurable, such as losses due to natural
disasters. In the event of a natural disaster affecting the geographic area of
our operations, we could suffer a loss of the capital invested in, as well as
anticipated earnings from, the damaged or destroyed properties. Further, we do
not currently maintain any insurance coverage for employee-related litigation or
the effects of adverse publicity. In addition, punitive damage awards are
generally not covered by insurance. We may also be subject to litigation which,
regardless of the outcome, could result in adverse publicity and damages. Such
litigation, adverse publicity, or damages could have a material adverse effect
on our business and results of operations.
If we fail to be year 2000 compliant, it could harm our business.
We may realize exposure and risk if the systems on which we are dependent
to conduct our operations are not year 2000 compliant. Our restaurant
information systems may need to be upgraded in order to prevent system failure
or miscalculation resulting from the year 2000 that could disrupt our normal
business activities. Ranch *1 and third parties with whom we do business rely on
numerous computer programs for day to day operations. We cannot predict whether
we will be able to effectively address our year 2000 issues in a timely and
cost-efficient manner and without interruption to our business. We have
initiated discussions with our significant suppliers regarding their plans to
solve year 2000 issues where their systems interface with our systems or
otherwise impact our operations. We cannot predict whether year 2000
difficulties encountered by our suppliers and other third parties with whom we
do business will have a material adverse impact on our business, financial
conditions, operating results or cash flows.
Risks Related To This Offering
The large number of shares eligible for public sale after this offering
could cause our stock price to decline.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of our common stock in the
market after this offering or the perception that such sales could occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.
11
<PAGE>
The liquidity of our stock is uncertain, since it has never been publicly
traded.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market or how liquid that market might
become. The market price of the common stock may decline below the initial
public offering price. The initial public offering price for the shares will be
determined by negotiations among us and the representatives of the underwriters.
This initial price may not be indicative of prices that will prevail in the
trading market.
The market price of our stock may be adversely affected by market
volatility.
The stock market has experienced extreme price and volume fluctuations. The
trading price of our common stock could be subject to wide fluctuations in
response to a number of factors, including:
o fluctuations in our quarterly or annual results of operations;
o changes in published earnings estimates by analysts and whether our
earnings meet or exceed such estimates;
o additions or departures of key personnel; and
o changes in overall stock market conditions, including the stock prices
of other restaurant companies.
In the past, companies that have experienced volatility in the market price
of their stock have been the object of securities class action litigation. If we
were subject to securities class action litigation, it could result in
substantial costs and a diversion of our management's attention and resources.
The interests of our controlling stockholders may conflict with your
interests.
We anticipate that the executive officers, directors and entities
affiliated with them will, in the aggregate, beneficially own approximately
_____% of our outstanding common stock following the completion of this
offering. These stockholders will be able to exercise control over all matters
requiring approval by our stockholders, including the election of directors and
approval of significant corporate transactions. This concentration of ownership
may also have the effect of delaying or preventing a change in control of our
company.
Anti-takeover provisions in our charter documents and Delaware law could
make a third-party acquisition of us difficult.
Some provisions of our certificate of incorporation, our bylaws and
Delaware law could make it more difficult for a third party to acquire us, even
if doing so might be beneficial to our stockholders.
You will suffer dilution in the value of your shares.
Investors purchasing shares in this offering will incur immediate and
substantial dilution in net tangible book value per share. To the extent
outstanding options to purchase common stock are exercised, there will be
further dilution.
----------
FORWARD-LOOKING STATEMENTS
This prospectus may contain forward-looking statements. These
forward-looking statements are not historical facts, but rather are based on our
current expectations, assumptions, estimates and projections about us and our
industry, and certain beliefs and assumptions. Words including "may," "could,"
"would," "will," "anticipates," "expects," "intends," "plans," "projects,"
"believes," "seeks," "estimates," and similar expressions are intended to
identify forward-looking statements. These statements are not guarantees of
future performance and are subject to certain risks, uncertainties and other
factors, some of which are beyond our control, are difficult to predict and
could cause actual results to differ materially from those expressed or
forecasted in the forward-looking statements. These risks and uncertainties are
described in "Risk Factors" and elsewhere in this prospectus. We caution you not
to place undue reliance on these forward-looking statements, which reflect our
management's view
12
<PAGE>
only as of the date of this prospectus. We are not obligated to update or revise
these forward-looking statements to reflect new events or circumstances after
the date of this prospectus.
13
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of the _________ shares
offered by us will be approximately $________ million, after deducting the
estimated underwriting discounts and commissions and estimated offering expenses
payable by us. If the underwriters' over-allotment option is exercised in full,
we estimate that the net proceeds will be approximately $_____ million.
We intend to use approximately $____ million of the net proceeds of this
offering for development and opening of new restaurants, approximately
$1,135,000 for the repayment of a portion of our outstanding debt, and the
balance for working capital and other general corporate purposes. A total of
$750,000 of the $1,135,000 allocated to repayment of our debt will be repaid in
February 2000 when all or some debentures have matured. The remaining $385,000
will be used immediately following the consummation of this offering to satisfy
other outstanding indebtedness. To achieve our expansion and growth plans, we
may also use a portion of the net proceeds to acquire or invest in businesses
complementary to our business. We have no agreements or investments of that
nature at this time.
The proposed allocation of the net proceeds of the offering represents our
management's best estimate of and current intention concerning the expected use
of funds to finance our activities in accordance with our management's current
objectives and market conditions. Our management and board of directors may
allocate the funds in significantly different proportions depending upon their
assessment of our needs at the time. Pending any such use as described above, we
intend to invest the net proceeds in short-term, investment grade,
interest-bearing securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
do not expect to pay any cash dividends for the foreseeable future on our shares
of common stock. We currently intend to retain future earnings, if any, to
finance the expansion of our business. Any future determination to pay cash
dividends on our common stock will be at the discretion of our board of
directors and will be dependent on our financial condition, operating results,
capital requirements and other factors that our board deems relevant.
Upon the consummation of this offering and subject to subordination to the
Series C convertible preferred stock, dividends accruing on the Series A
convertible preferred stock at 8% per year that are due through February 26,
2003 and have been accelerated, will, at our option, either automatically
convert into shares of common stock at the price per share in this offering or
be paid in cash.
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<PAGE>
DILUTION
Our pro forma net tangible book value as of May 31, 1999, after giving
effect to:
o the sale in August 1999 of 273,300 shares of our Series B convertible
preferred stock;
o the sale in October 1999 of 38 shares of our Series C convertible
preferred stock;
o the conversion of aggregate principal amount of $2,757,972 of
outstanding indebtedness and accrued interest to 55.16 shares of
Series C convertible preferred stock;
o the conversion of warrants to purchase 2,193,333 shares of common
stock into 1,456,480 shares of common stock; and
o the conversion of 2,800,000 shares of Series A preferred stock, in
addition to accumulated dividends of $662,356 as of May 31, 1999 and
acceleration of $2,137,644 of dividends payable through the remaining
term.
Net tangible book value per share is equal to the amount of our total
tangible assets less total liabilities, divided by the number of shares of
common stock outstanding as of May 31, 1999. After giving effect to our sale of
the shares offered hereby and after deducting underwriting discounts and
estimated offering expenses, and the initial application of the estimated net
proceeds therefrom, our pro forma net tangible book value as of May 31, 1999
would have been $___________, or $____ per share of common stock. This
represents an immediate increase in net tangible book value of $____ per share
to existing stockholders and an immediate dilution in pro forma net tangible
book value of $____ per share to new investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................ $
--------
Pro forma net tangible book value per share before this offering........ $
--------
Pro forma increase per share attributable to new investors..............
--------
Pro forma net tangible book value per share after this offering............
--------
Dilution per share to new investors........................................ $
========
</TABLE>
Assuming the exercise in full of the underwriters' over-allotment option,
the pro forma net tangible book value as of May 31, 1999 would have been $_____
per share, representing an immediate increase in net tangible book value of
$_____ per share for existing stockholders and an immediate dilution in net
tangible book value of $____ per share to new investors.
The following table summarizes, as of May 31, 1999, on a pro forma basis
giving effect to:
o the sale in August 1999 of 273,300 shares of our Series B convertible
preferred stock;
o the sale in October 1999 of 38 shares of our Series C convertible
preferred stock;
o the conversion of aggregate principal amount of $2,757,972 of
outstanding indebtedness and accrued interest to 55.16 shares of
Series C convertible preferred stock;
o the conversion of warrants to purchase 2,193,333 shares of common
stock into 1,456,480 shares of common stock;
o the sale of shares of common stock by us in this offering, after
deducting underwriting discounts and commissions and estimated
offering expenses; and
o the conversion into common stock of 2,800,000 shares of Series A
preferred stock, in addition to accumulated dividends of $662,356 as
of May 31, 1999 and acceleration of $2,137,644 of dividends payable
through the remaining term.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average Price
- ------------------------------------------------------------------------------------------------------------------
Number Percent Amount Percent Per Share
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Existing Stockholders $ $
- ------------------------------------------------------------------------------------------------------------------
New Investors
- ------------------------------------------------------------------------------------------------------------------
Total 100% $ 100% $
==================================================================================================================
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of May 31, 1999:
o on an actual basis;
o on a pro forma basis giving effect to (a) the sale in August 1999 of
273,300 shares of our Series B convertible preferred stock, (b) the
sale in October 1999 of 38 shares of our Series C convertible
preferred stock, (c) the conversion of aggregate principal amount of
$2,757,972 of outstanding indebtedness and accrued interest to 55.16
shares of Series C convertible preferred stock, (d) the conversion of
warrants to purchase 2,193,333 shares of common stock into 1,456,480
shares of common stock; and (e) the conversion into common stock of
2,800,000 shares of Series A preferred stock, in addition to
accumulated dividends of $662,356 as of May 31, 1999; and acceleration
of $2,137,644 of dividends payable through the remaining term.
o on a pro forma as adjusted basis giving effect to the sale of ___
shares of common stock by us in this offering.
You should read this table in conjunction with the Management's Discussion
and Analysis of Financial Condition and Results of Operations section and the
financial statements and related notes appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
May 31, 1999
---------------------------------------
Pro forma,
Actual Pro forma as adjusted
------ --------- -----------
<S> <C> <C> <C>
Long-term debt, less current portion ........................................... $ 203,375 $ $
Series A convertible redeemable preferred stock, $.001 par value, 2,800,000
shares authorized; 2,800,000 shares issued and outstanding on an actual and pro
forma basis; no shares issued and outstanding on a pro forma as adjusted basis . 7,521,583
Series C convertible redeemable preferred stock, $.001 par value, 150 shares
authorized; no shares issued and outstanding on an actual basis; ____ shares
issued and outstanding on a pro forma basis; no shares issued and outstanding
on a pro forma as adjusted basis ............................................... --
Stockholders' deficit:
Common stock, $.001 par value, 20,000,000 shares authorized; 11,401,263 shares
issued and outstanding on an actual basis; ___ shares issued and outstanding on
a pro forma basis; ___ shares issued and outstanding on a pro-forma as adjusted
basis .......................................................................... 11,401
Series B convertible preferred stock, $.001 par value, 5,000,000 shares
authorized, no shares issued and outstanding on an actual basis; ______ shares
issued and outstanding on a pro forma basis; ____ shares issued and outstanding
on a pro forma as adjusted basis ............................................... --
Additional paid-in capital ..................................................... 6,024,853
Accumulated deficit ............................................................ (17,652,653)
------------ ------------- ------------
Total stockholders' deficit .................................................... (11,616,399)
------------ ------------- ------------
Total capitalization ........................................................... ($3,891,441) $ $
============ ============= ============
</TABLE>
16
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of
operations should be read in conjunction with our consolidated financial
statements and notes appearing elsewhere in this prospectus.
Overview
As of October 11, 1999, we own, operate, franchise and license 45 upscale
quick-service restaurants with 34 restaurants located in the New York, New
Jersey and Connecticut tri-state area, 9 restaurants located in Maryland, the
District of Columbia, Virginia, North Carolina, Missouri and California and 2
restaurants located in Taiwan. The first Ranch *1 restaurant was opened in 1990
in the borough of Manhattan in New York. Due to the success of the first
restaurant, a second restaurant was opened and Ranch *1 began franchising its
operations in 1994, growing to 10 company-owned and franchise restaurants in
1996.
We acquired the Ranch *1 business in November 1996 and subsequently have
increased the number of system-wide restaurant openings. During fiscal 1997, we
closed and relocated 1 company-owned restaurant, and acquired 2 franchise
restaurants. In addition, during fiscal 1997, we opened 7 franchise restaurants.
During fiscal 1998, we opened 9 company-owned and acquired 1 franchise
restaurant. In addition, 4 franchise restaurants opened in fiscal 1998. In
fiscal 1999, we opened 2 company owned restaurants and 11 franchise restaurants.
Since we acquired the Ranch *1 business, 4 restaurants have been closed, all of
which were operated by franchisees that did not meet our performance criteria.
As a result of our rapid expansion since acquiring the Ranch *1 business,
period to period comparisons of our financial results may not be meaningful.
When a new restaurant opens, it will typically incur higher than normal levels
of food and labor costs until reaching routine levels of business. Hourly labor
schedules are gradually adjusted downward during the first three months of a
restaurant opening until the restaurant reaches operating efficiencies similar
to those at established restaurants. Therefore, in determining both comparable
system-wide and company-owned restaurant performance, we introduce a restaurant
into our comparable restaurant base after it has been in operation for 18
months. For fiscal 1999, we used 20 restaurants system-wide and 10 company-owned
restaurants as a restaurant base, to measure financial and operating results,
primarily sales, from period to period.
Restaurant sales represent gross sales less sales taxes, coupons and other
discounts. We also receive royalties and franchise related fees from our
franchise restaurants and area development agreements. Franchise fees are
recognized as revenue when we perform substantially all initial services
required by the franchise agreement, which is generally upon restaurant opening.
Revenue under area development agreements is recognized ratably over the number
of restaurants opened, as provided for in the respective agreements. Franchise
and area development fees received prior to completion of the revenue
recognition process are recorded as deferred revenue.
Restaurant operating expenses include labor costs, such as direct hourly
and management wages, bonuses and fringe benefit costs, pre-opening expenses and
other restaurant expenses, such as utilities, maintenance, cleaning supplies and
repairs. Restaurant occupancy and related expenses include rent, property tax,
and property insurance.
We have increased our sales and marketing expenditures from $972,824 in
fiscal 1998 to $1,572,298 in fiscal 1999, excluding franchisee advertising
contributions. We increased media spending which we believe is an effective
medium to augment growth in our sales. In particular, we believe our restaurant
sales are favorably impacted by radio and television advertising. In fiscal 1998
and fiscal 1999, we spent approximately $1,000,000 for the development and
airing of two commercials on major television stations, running in August
through September 1998. However, because of capital constraints, we were unable
to continue the commercials.
General and administrative expenses include all corporate and
administrative functions that support existing operations and provide
infrastructure to facilitate our future growth. Components of this category
include
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<PAGE>
management, supervisory and staff salaries, employee benefits, travel,
information systems, training, headquarters' rent and professional and
consulting fees.
We have leased all of our facilities in order to minimize the cash
investment associated with each restaurant. The majority of our leases are for
10-15 year terms.
During fiscal 1999, our expansion of company-owned restaurants was put on
hold due to insufficient capital. We opened 2 company-owned restaurants in
fiscal 1999 as compared to 10 company-owned restaurants in fiscal 1998. Due to
our rapid expansion in fiscal 1998, we spent much of our capital, including
numerous loans, to open new stores, fund operating losses and prepare ourselves
for additional development. As a result of higher than anticipated operating
losses in fiscal 1998, with a corresponding reduction in working capital, our
ability to execute our strategic plan in fiscal 1999 was significantly
encumbered. As a result, in March 1999 we restructured our senior management and
instituted additional cost reduction plans. As a result of our efforts to secure
additional financing in the second half of fiscal 1999 and in fiscal 2000, we
are now able to proceed with our newly developed expansion plan and anticipate
opening 7 company-owned restaurants and 28 franchise restaurants in fiscal 2000.
However, without the proceeds from this offering, we will be unable to execute
our expansion plans and will be required to dramatically reduce operating
expenses.
Results of Operations
Our operating results, expressed as a percentage of restaurant sales, were
as follows:
Year Ended May 31,
---------------------
1998 1999
Revenues:
Restaurant sales ..................................... 100% 100%
------ ------
Expenses:
Food and paper cost .................................. 29.8% 31.4%
Restaurant operating expenses ........................ 44.1% 37.5%
Restaurant occupancy and related expenses ............ 25.3% 23.4%
Marketing and promotional expenses ................... 9.0% 6.9%
General and administrative ........................... 44.8% 28.0%
Depreciation and amortization ........................ 6.7% 4.6%
Impairment charges ................................... 35.1% 0.4%
Interest expense, net ................................ 6.0% 5.5%
------ ------
Loss before income taxes and extraordinary item ...... (95.7%) (32.6%)
Income taxes ......................................... 0.1% 0.3%
------ ------
Loss before extraordinary item ....................... (95.8%) (33.0%)
Extraordinary gain on extinguishment of debt ......... 2.2% 0.0%
------ ------
Net loss ............................................. (93.6%) (33.0%)
====== ======
Year Ended May 31, 1999 Compared to Year Ended May 31, 1998
Results of operations reflect a full year of operations of 16 restaurants
and 6 restaurants for the fiscal years ended May 31, 1999, and May 31, 1998,
respectively. Results of operations also reflect a partial year of operations of
2 restaurants and 10 restaurants for the fiscal years ended May 31, 1999, and
May 31, 1998, respectively.
Restaurant Sales and Franchising Fees. Restaurant sales in company-owned
restaurants increased $6,983,205 or 68.7%, to $17,147,358 in 1999, from
$10,164,153 in 1998. This increase was primarily due to the opening of 2
company-owned restaurants in 1999, and the realization of a full year of
operations for the 10 company-owned restaurants opened in 1998. Comparable
restaurant sales in 1999 were equal to those in 1998. Fees from franchising
activities increased $339,344 or 71.3%, to $815,296 in 1999 from $475,952 in
1998. The increase was primarily due to the opening of 10 franchised restaurants
in 1999.
18
<PAGE>
Food and Paper costs. Food and paper costs increased by $2,362,769 or 78.1%
to $5,387,758 in 1999, from $3,024,989 in 1998. As a percentage of sales, food
and paper costs increased to 31.4% in 1999, from 29.8% in 1998, primarily due to
higher chicken prices and to an operating change from cutting whole chicken
breasts on site to the purchase of pre-sliced product, which is more expensive.
Restaurant Operating Expenses. Restaurant operating expenses increased by
$1,943,007 or 43.4% to $6,422,061 in 1999 from $4,479,054 in 1998. As a
percentage of sales, restaurant operating expenses decreased to 37.5% in 1999,
from 44.1% in 1998, due primarily to the elimination of skilled labor resulting
from the change to purchasing pre-sliced chicken breasts, reduced pre-opening
expenses due to the reduction in new restaurant openings and improved operating
efficiencies.
Restaurant Occupancy and Related Expenses. Restaurant occupancy and related
expenses increased by $1,444,947 or 56.1%, to $4,019,274 in 1999 from $2,574,327
in 1998, reflecting a full year of operations of 11 restaurants in the
high-priced real estate market of Manhattan. As a percentage of sales,
restaurant occupancy and related expenses decreased to 23.4% of sales in 1999
from 25.3% in 1998, primarily due to slightly favorable lease rates on later
restaurant openings.
Marketing and Promotional Expenses. Marketing and promotional expenses
increased by $255,925 or 27.9%, to $1,174,756 in 1999 from $918,831 in 1998. As
a percentage of sales, marketing and promotional expenses decreased to 6.9% of
sales in 1999 from 9.0% in 1998, primarily as a result of the implementation of
cost containment efforts after the introduction of television advertising in the
summer of 1998.
General and Administrative. General and administrative increased by
$257,416 or 5.7% to $4,806,110 in 1999, from $4,548,694 in 1998 primarily due to
increased professional fees, costs associated with severance agreements and the
impact of investments in corporate infrastructure. General and administrative
decreased as a percentage of sales to 28.0% in 1999, from 44.8% in 1998
primarily due to increased revenue and the implementation of a cost containment
plan.
Depreciation and Amortization. Depreciation and amortization increased to
$787,104 in 1999 from $685,864 in 1998. The $101,240 increase is attributable to
2 new restaurants opened during 1999 and a full year of depreciation for the 10
restaurants opened in 1998, offset by the impact of the impairment charge
recorded in 1998.
Impairment Charges. Based on a strategic assessment of operating results,
pursuant to the approval of our Board of Directors, in 1998 we recorded a
non-recurring charge of $3,566,871, recognizing the write-down of impaired
restaurant assets, enterprise value goodwill and goodwill associated with
restaurants acquired. In fiscal 1999, a further impairment charge of $66,420 was
recorded.
Interest Expense, net. Interest expense, net increased to $944,197 in 1999,
from $608,011 in 1998. This increase was attributable to a variety of factors
including additional borrowings with high interest rates, the value of warrants
associated with the additional borrowings and the triggering of default interest
rates due to our non-compliance with payment conditions of some of our debt.
Extraordinary Gain. In 1998, we entered into a stipulation with the holder
of a $1,500,000 convertible note payable to satisfy the obligation for a cash
payment of $1,275,000. We have accounted for the forgiveness of debt of $225,000
as an extraordinary gain.
Accrual of Dividends, Issuance of Performance Warrants and Amortization of
Issuance Costs on Preferred Shares. Accrual of dividends, issuance of
performance warrants and amortization of issuance costs on preferred shares
increased to $1,000,739 in 1999 from $111,741 in 1998. The increase of $888,998
is attributable to a full year of dividends accruing on the Series A convertible
preferred stock, as well as a charge of $403,200 relating to the issuance of
1,440,000 performance warrants due to our inability to achieve the financial
performance covenants stipulated in the Series A preferred stock agreement.
19
<PAGE>
Inflation
Components of our operations subject to inflation include food, beverage,
lease and labor costs. Our leases require us to pay taxes, maintenance, repairs,
insurance and utilities, all of which are subject to inflationary increases. We
believe inflation has not had a material impact on our results of operations in
recent years.
Liquidity and Capital Resources
We have generated significant operating losses since inception, which has
depleted our capital resources and has resulted in our inability to fulfill
certain contractual obligations and the incurrence of a significant amount of
indebtedness. In fiscal 1999, we implemented a cost reduction plan which
included the termination of several corporate officers and a reduction in work
force. Without additional funds, we will have to abandon our expansion efforts
as outlined in our strategic plan and dramatically reduce operating expenses.
Our strategic plan provides for the satisfaction and restructuring of delinquent
debt obligations, the completion of new financing arrangements, the development
of new prototype restaurants and a significant expansion of franchising
operations. There can be no assurance that we will have sufficient liquidity to
sustain current operations or obtain additional financing or if such financing
is obtained, that profitable operations can be attained.
For the fiscal year ended May 31, 1999, our cash position increased by
$302,287, principally as a result of the proceeds of a $2,600,000 facility with
a financial institution, bridge financing arrangements of approximately
$1,300,000, shareholder loans of approximately $1,287,500 and the sale of common
stock, which were partially offset by operating losses, capital expenditures and
principal debt repayments.
Subsequent to May 31, 1999, we executed three leases for new company-owned
restaurant development. Each of the leases are for ten years, with no renewal
options. Minimum aggregate rental payments pursuant to the terms of the lease is
approximately $2,386,000. Our management anticipates incurring capital
expenditures relating to the development of the restaurants of an aggregate of
$1,027,000. Total projected capital expenditures for fiscal 2000 is expected to
be approximately $4,600,000.
Additionally, at May 31, 1999, we were delinquent in the filing and payment
of New York State sales taxes of approximately $320,000 and New York City
occupancy taxes of approximately $290,000. At May 31, 1999, we were in default
in the payment of obligations pursuant to restaurant operating leases of
$147,000. As indicated in note 15 of our consolidated financial statements, we
have entered into stipulation agreements to cure these lease defaults, and our
management is of the opinion that all past due lease obligations have been
satisfied as of September 30, 1999, except for an eviction notice received for a
restaurant under development. We are currently negotiating with the landlord of
this site to permit us to resume our tenancy. Additionally, two $300,000 notes
payable matured on June 6, 1998, a $60,000 note payable matured on April 27,
1999, a $225,000 note payable matured on December 16, 1998, three $100,000 notes
payable matured on December 17, 1998, a $500,000 note payable matured on
December 18, 1998, two notes payable aggregating $62,500 matured on January 30,
1999 and a $250,000 note payable matured on February 6, 1999. All of these
obligations aggregating $1,997,500 plus related accrued interest, were in
default at May 31, 1999. On September 10, 1999, holders of notes in the
aggregate principal amount of $2,937,500, including $1,937,500 of notes payable
which were in default on May 31, 1999, extended the maturity date of these
obligations, including accrued interest, until March 10, 2000. In addition, we
were in violation of certain covenants of a $2,439,769 loan agreement with a
financial institution.
In August 1999, we sold 273,300 shares of Series B preferred stock for
$683,250 and obtained one year bridge loans aggregating $685,000, each bearing
interest at 15%. All outstanding shares of Series B preferred stock are
automatically convertible into our common stock at the lower of $2.50 or 70% of
initial public offering price of the common stock in this offering on the date
of the consummation of this offering.
In September 1999, holders of notes in the aggregate principal amount of
$2,487,500, including $2,087,500 of notes payable outstanding at May 31, 1999
and $400,000 of bridge loans issued subsequent to May 31, 1999, converted their
obligations, inclusive of accrued interest, into Series C preferred stock at
$50,000 per share, which is automatically convertible into our common stock at
70% of the initial public offering price of the common stock in this offering
upon the date of consummation of this offering.
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In September 1999, the holders of 2,800,000 shares of Series A preferred
stock agreed to convert their holdings into common stock at the rate equal to
the lesser of $2.50 per share or 70% of the price per share in this offering. In
addition, accumulated dividends of $662,356 and an acceleration of $2,137,644 of
dividends payable through the remaining term of the Series A preferred stock
agreement, into shares of common stock at the initial public offering price of
the common stock in this offering upon the date of consummation of this
offering.
Additionally, on July 30, 1999, warrant holders of 2,193,333 outstanding
warrants converted the warrants into 1,456,480 shares of our common stock on a
cash-less exercise basis, at the conversion rate of $2.40 per share.
At May 31, 1999, we had net operating loss carry-forwards for federal,
state and city income tax purposes of approximately $12,022,000, $11,038,000 and
$12,110,000, respectively, which are available to offset future taxable income,
if any before 2014. In accordance with Section 382 of the Internal Revenue Code
of 1986, as amended, as it applies to the net operating loss carry-forwards, a
change in more than 50% in the beneficial ownership of Ranch *1 within a
three-year period will place an annual limitation on our ability to utilize our
existing net operating loss carry-forwards to offset United States federal
taxable income in future years. We believe that ownership changes have occurred
and will cause the annual limitations to apply. We have not determined what the
maximum annual amount of taxable income is that can be reduced by the net
operating loss carryforwards.
We believe that the net proceeds from this offering and the sale of 38
shares of our Series C preferred stock completed in October 1999, together with
anticipated cash flow from operations, will be sufficient to satisfy our working
capital and capital expenditure requirements for at least the next 12 months
following the date of this prospectus. We plan to incur substantial costs over
the near-term in connection with our expansion program. Changes in our operating
plans, acceleration of our expansion plans, lower than anticipated sales,
increased expenses, potential acquisitions or other events may cause us to seek
additional financing sooner than anticipated. Additional financing may not be
available on acceptable terms, or at all. Failure to obtain additional financing
as needed could have a material adverse effect on our business and results of
operations.
Year 2000 Readiness Disclosure
Historically, most computer databases, as well as embedded microprocessors
in computer systems and industrial equipment, were designed with date data using
only two digits of the year. Most computer programs, computers and embedded
microprocessors controlling equipment were programmed to assume that all two
digit dates were preceded by "19," causing "00" to be interpreted as the year
1900. This formerly common practice now could result in a computer system or
embedded microprocessor which fails to recognize properly a year that begins
with "20," rather than "19." This in turn could result in computer system
miscalculations or failures, as well as failures of equipment controlled by date
sensitive microprocessors, and is generally referred to as the "year 2000"
issue.
Our State of Year 2000 Readiness
We have reviewed both our information technology and our non-information
technology systems to determine whether they are year 2000 compliant. Based on
the results of the work performed to date, our mission-critical computer systems
and applications are currently year 2000 compliant, or will be brought into year
2000 compliance prior to January 1, 2000. Our mission-critical systems include
point-of-sale systems and computerized accounting systems. We have initiated
formal communications with all significant supplier and service providers to
determine the extent to which we are vulnerable to those third parties' failures
to solve their year 2000 problem. We have received written assurances of year
2000 compliance from a majority of the third parties with whom we have
relationships, including providers of computerized accounting and point-of-sale
systems and major suppliers. Testing and replacement of all systems is scheduled
to be completed by November 30, 1999. We intend to continue to make efforts to
ensure that third parties with whom we have relationships are year 2000
compliant.
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The Costs to Address Our Year 2000 Issue
We currently estimate the total costs of completing our year 2000 plan,
including costs incurred to date, to be less than $100,000. This estimate is
based on currently available information and will be updated as we continue our
assessment of third-party relationships, proceed with our testing and
implementation and design contingency plans.
The Risks of Our Year 2000 Issue
If any information technologies or embedded microprocessor technology
systems critical to our operations have been overlooked, there could be a
material adverse effect on our business or results of operations of a magnitude
which we have not yet fully analyzed. If the vendors of most important goods and
services or the suppliers of our necessary energy, telecommunications and
transportation needs fail to provide us with (1) the materials and services
which are necessary to produce, distribute and sell our products, (2) the
electrical power and other utilities necessary to sustain our operations, or (3)
reliable means of transporting supplies to our restaurants, such failure could
affect our ability to sell our products, which could have a material adverse
effect on our business or results of operations.
Our Contingency Plan
We are in the initial stages of developing a business contingency plan to
address both unavoided and unavoidable year 2000 risks. This plan currently
includes developing and maintaining relationships with suppliers of services and
products to mitigate the risks associated with suppliers who are not year 2000
compliant. Although we expect to have the plan well-developed by November 30,
1999, enhancements and revisions will be continuously considered and implemented
as appropriate.
Market Risk
We are not subject to interest rate risk, as substantially all borrowings
are fixed rate obligations. However, we have exposure to commodity risk,
including the dependence on the rapid availability of food, principally chicken,
and fluctuations in price of these commodities. Although we believe that our
relationships with suppliers are satisfactory and that alternative sources are
available, the loss of certain suppliers, or substantial price increases could
have a material adverse effect on our business and results of operations.
Seasonality and External Influences on Quarterly Results
Our sales and earnings reflect a seasonality of the business, which
generally produces higher revenues during the summer months. Quarterly results
have been and, in the future are likely to be, substantially affected by the
timing of new restaurant openings. Because of the impact of new restaurant
openings, results for any quarter are not necessarily indicative of the results
that may be achieved for a full fiscal year and cannot be used to indicate
financial performance for the entire year.
Recent Accounting Announcements
In April 1998, Statement of Position 98-5, "Reporting the Cost of Start-up
Activities," was issued. This statement requires that costs incurred during
start-up activities, including pre-opening costs, be expensed as incurred. We
have historically expensed pre-opening costs as incurred. Accordingly, the
adoption of this statement will not have an impact on our financial position or
results of operations.
In June 1997, the FASB issued Statement 131, "Disclosures about Segments of
an Enterprise and Related Information", effective for fiscal years beginning
after December 15, 1997. This statement established standards for reporting
information about operating segments in annual financial statements and requires
selected information about operating segments in interim financial reports
issued to shareholders. It also established standards for related disclosures
about products and services, geographic areas and major customers. Operating
segments are defined as components of an enterprise about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
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performance. This statement requires reporting segment profit or loss, certain
specific revenue and expense items and segment assets. It also requires
reconciliations of total segment revenues, total segment profits or loss, total
segment assets and other amounts disclosed for segments to corresponding amounts
reported in the consolidated financial statements. Restatement of comparative
information for earlier periods presented is required in the initial year of
application. Interim information is not required until the second year of
application, at which time comparative information is required. We do not
believe that adoption of this statement had a significant impact on our
financial statements disclosures. Our management believes that we operate in a
single segment, which is franchising and operating of food service stores under
the Ranch *1 brand name.
In June 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", was issued which
is effective for fiscal years beginning after June 15, 2000. This statement
standardizes the accounting for derivative instruments and requires that all
derivative instruments be carried at fair value. We have not determined the
impact that, this statement will have on our financial statements.
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BUSINESS
Ranch *1 owns, operates, franchises and licenses upscale quick-service
restaurants that specialize in fresh-grilled skinless, boneless chicken breast
sandwiches, which we advertise as "The Best Grilled Chicken Sandwich on Earth,"
Idaho french-fried potatoes and a variety of freshly-prepared healthy menu
selections. In July 1999, we were selected by Restaurants and Institutions, an
industry publication, as one of the top 400 U.S. restaurant concepts of the year
and were awarded "Best Fast Food of New York" by New York Magazine in April
1996. There are currently 45 Ranch *1 restaurants located in eight states and
the District of Columbia. We own and operate 18 restaurants, and our franchisees
and licensees operate 27 restaurants. All of our company-owned stores, except
one, are currently located in the borough of Manhattan in New York City. Our
franchise restaurants are located in New York, New Jersey, Connecticut,
Maryland, the District of Columbia, Virginia, North Carolina, Missouri,
California and Taiwan. We plan to open an additional 35 restaurants in fiscal
2000 and 94 restaurants in fiscal 2001, including both domestic and
international franchise operations.
Our History
Ranch *1 was founded in 1989 by Ori Gottlieb and Mordechai Davidi. They
emigrated to the United States from Israel where they had opened and operated
several successful restaurants. Once in the United States, they recognized an
opportunity in the lunch segment of the market to satisfy growing consumer
demand for grilled chicken breast sandwiches. In 1990, they opened the first
Ranch *1 restaurant, a 1,000 square foot restaurant on Broadway in Manhattan
next to the Ed Sullivan Theater. The Ranch *1 concept, menu, and our open-flame
grill process were developed by Messrs. Gottlieb and Davidi. Due to the success
of the first restaurant, a second restaurant was opened and Ranch *1 began
franchising its operations in 1994, growing to 10 system-wide restaurants by
1996.
In November 1996, our company, owned by James Chickara and Sebastian
Rametta under the name Franchise Concepts Group, Inc., purchased the Ranch *1
business. In November 1996, George Naddaff, founder of Boston Chicken, became an
investor and our Chairman of the Board. In April 1997, David Sculley, former
President and Chief Executive Officer of Heinz U.S.A., also became a major
investor, and was named Vice Chairman of the Board. In August 1999, we changed
our corporate name from Franchise Concepts Group, Inc. to Ranch *1, Inc.
The Ranch *1 Concept
By providing high-quality food in an upscale quick-service environment, we
believe we have differentiated ourselves from our competition. We believe the
Ranch *1 restaurants are positioned between the fast-food and casual dining
segments of the restaurant industry, creating a new niche-the upscale
quick-service restaurant. The critical elements of our concept are as follows:
o Distinctive, Fresh, High-Quality Food. We seek to differentiate
ourselves from other quick-service and fast-food restaurants by
offering high-quality products made with fresh ingredients. We have
experienced a high degree of success to date by developing distinctive
and flavorful offerings that generate strong customer loyalty. Our
signature items include our grilled chicken breast sandwich and
french-fried potatoes. Our menu is served at lunch and dinner, and a
breakfast menu is served at selected locations.
o Excellent Dining Value. We offer guests high-quality food typically
associated with sit-down, casual dining restaurants at quick-service
prices. In addition to favorable prices, we offer the convenience and
rapid delivery of a traditional quick-service format. Our restaurants
provide guests a clean and inviting environment in which to enjoy
their meal. We also offer guests the convenience of take-out and
delivery service. We believe the strong value we deliver to our
customers is critical to building strong repeat business and customer
loyalty.
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o Fast Serving Time. We believe we have one of the fastest service times
in the industry-we strive to deliver meals to our customers within 45
seconds from taking of the order to service of the food during our
peak hours.
The Industry
According to The National Restaurant Association, an industry trade
association, the quick-service restaurant remains the largest segment of the
$338 billion foodservice industry sector, representing approximately one-third
of sales in 1997 and 1998. We are attempting to capitalize on the public's
increasing recognition that chicken is a healthy alternative to meat, as
evidenced by a United States Department of Agriculture report predicting that
chicken consumption per person which increased from 27.8 pounds per year in 1960
to 72.1 pounds per year in 1990, will increase to approximately 93 pounds per
year by 2005. We believe that the public is seeking healthy and nutritious
offerings from quick-service restaurants, including grilled rather than fried
foods, provided that the offerings combine good taste, attractive presentation
and convenience.
According to the National Restaurant Association, the quick-service market
has been growing steadily at 4 to 6 percent per year. We believe this growth can
be attributed to a number of factors, including consumer preference towards
convenience, longer work hours, higher divorce rates, decreasing family sizes,
greater accessibility to fast-food restaurants and individual time constraints,
among others. Further, we believe there is a growing desire among individuals to
eat healthier and stay fit. Ranch *1 is poised to benefit from these
demographic/market trends. Ranch *1 offers fast-food customers a quick-service
alternative to unhealthy fast-foods, while still maintaining fast-food prices.
In 1997, J.S. Cacciola Marketing Service, a market survey company,
conducted a small-scale consumer research study in New York City. Although not
indicative of the likelihood of success on a nationwide basis, the survey
results indicated that our products were well accepted by consumers, as 84% of
those surveyed found our chicken sandwich much better or better than other
fast-food chicken, 69% preferred our french-fried potatoes to other fast-food
fries, and 80% felt that overall, Ranch *1 was much better or better than
McDonald's, Burger King and Wendy's.
Our Business Strategy
Our business objective is to become the leading upscale quick-service
restaurant brand nationwide and internationally. In order to achieve our
business objective, we have developed the following strategies:
o Execute a Disciplined Expansion Program. We believe that our
restaurant concept has broad national and international appeal and
that, as a result, we have significant opportunities to expand our
operations and generate attractive restaurant-level economics. Our
current expansion plan calls for us to open 7 company-owned
restaurants in fiscal 2000 and 24 company-owned restaurants in fiscal
2001. We have signed lease agreements for 3 new company-owned
restaurants to date. We believe we will open 22 domestic and 6
international franchise restaurants in fiscal 2000. To date, we have
entered into area development agreements, single-unit franchise
agreements and license agreements to open in fiscal 2000 approximately
26 domestic franchise restaurants and 5 international franchise
restaurants, of which 3 domestic and 2 international franchise
restaurants have opened to date. We believe we will open approximately
59 domestic franchise restaurants and 11 international franchise
restaurants in fiscal 2001. Our franchise expansion plan is focused on
establishing strategic relationships with area developers with food
service experience.
o Strategic Site Selection Process. We have targeted specific types of
sites for expansion outside of Manhattan, such as:
(i) Suburban Drive-Thru Prototype Restaurants. We intend to develop
free-standing drive-thru prototype restaurants in suburban areas
which we believe will improve our
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restaurant economics by in part lowering occupancy costs and
increasing restaurant traffic.
(ii) Selecting Sites Outside Manhattan. We intend to reduce occupancy
costs associated with higher Manhattan rents by executing a
careful site selection process in both urban and suburban
locations.
(iii) Expanding to Select Mall Locations. Currently, the majority of
our locations are located in urban areas and these restaurants
experience higher revenues in spring and summer as compared to
fall and winter. We believe that opening new restaurants in
malls, such as in indoor food court locations, will reduce the
effects of seasonality, since the most popular seasons for
attracting mall clientele are fall and winter.
o Strengthen our Distinctive Concept and Brand. We have developed a
distinctive restaurant concept and brand featuring one core item,
fresh-grilled skinless, boneless chicken breast, that is served in an
upscale quick-service environment. Our restaurants provide guests with
a distinctive dining experience which, we believe, helps promote
frequent visiting patterns and strong customer loyalty. We continue to
focus on several key initiatives designed to enhance the performance
of our existing restaurants and strengthen our brand identity
including expanding our menu offerings with additional grilled chicken
dishes. In addition, we will continue to promote the awareness of our
brand through comprehensive regional and local media campaigns. We
will also continue our popular street-level marketing campaigns
featuring costumed individuals and our Ranch *1 chicken mascot to
attract attention to our restaurants. In addition, we plan to sponsor
charitable benefits to introduce people to our restaurants.
o Continue to Improve Restaurant-Level Economics. We believe that we can
continue to improve operating results through lower than average
product costs, careful site selection, cost-effective development,
achieving lower than average product costs and consistent application
of our management and training programs. We are improving our
information and accounting systems to better control our labor, food
and other direct operating expenses, and provide our management with
faster access to financial and operating data. We believe we achieve
lower-than-average product costs and better-than-average production
efficiency compared to our competitors, due to our focused, simple
menu which consists of one core ingredient used to prepare most of our
menu items.
o Continue to Ensure a High-Quality Guest Experience. We strive to
provide a consistent high-quality guest experience in order to
generate frequent visiting patterns and brand loyalty. To achieve this
goal, we focus on creating a fun, team-like culture for our restaurant
employees, which we believe fosters a friendly and inviting atmosphere
for our guests. We will continue to provide extensive training,
experienced restaurant-level management and rigorous operational
controls and ensure prompt, friendly and efficient service to our
guests. Overall, we designed our concept to appeal to a broad variety
of guests and believe the cleanliness of our facilities provides an
additional advantage over many of our competitors.
Strategic Relationships
We have entered into the following strategic relationships to assist in our
development, expansion, marketing and promotion efforts.
Host International, Inc. (Host Marriott Services U.S.A., Inc.) We entered
into a license agreement in June 1998 with Host International, Inc., one of the
leading food, beverage and retail concessionaires in the United States, to open
Ranch *1 restaurants over a five-year period with three five-year options in
some of the 210 locations they operate and control. The restaurants will be
located in airports, highway travel plazas and shopping malls where Host
Marriott is the master concessionaire of a food court or multiple food concept
area, and will be operated by Host Marriott. We will receive 4% of the
restaurants' gross revenues as a royalty payment plus a $10,000 initial license
fee upon the opening of a domestic restaurant and a $30,000 initial license fee
upon the
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opening of a foreign restaurant. Host Marriott has opened and operates six Ranch
*1 restaurants to date in Washington, D.C., North Carolina, Virginia and
Missouri. There are 6 restaurants proposed to be developed in fiscal 2000. On
July 26, 1999, Host International was acquired by AutoGrill, a leading catering
group for travelers and second largest commercial catering group in Europe with
636 restaurants and bars in nine European countries. We believe this opportunity
will make it easier for us to expand and develop our brand recognition beyond
our core geographic area.
CulinArt, Inc. In June 1999, we entered into a franchise agreement with
CulinArt, a regional foodservice company that operates restaurants in
universities and amusement parks. Under the agreement, we opened a Ranch *1
restaurant at Rye Playland in Rye, New York where CulinArt has received a
ten-year contract to manage food concessions. CulinArt has the right to relocate
the restaurant to one of their college campus locations during the school year.
Arizona Area Development Agreement. On June 4, 1999, we entered into an
area development agreement with Coyote Ventures, Inc. to open 10 Ranch *1 stores
over a five-year period in Tucson and Phoenix, Arizona, of which 2 are expected
to open in fiscal 2000. Coyote Ventures also operates Johnny Rockets franchise
restaurants in Arizona and New Mexico.
Taiwan Area Development Agreement. In April 1999, after retaining Hwa Wei &
Grey Advertising Co. to evaluate the appeal of our restaurants in the Asian
market, we entered into an area development agreement with the owner of the
agency. The agreement provides for the opening of 35 Ranch *1 restaurants in
Taiwan over the next six years, 2 of which have opened to date.
Madison Square Garden. We currently offer selected Ranch *1 products at all
sports and entertainment events as well as publicize our brand name at Madison
Square Garden in Manhattan, New York.
Restaurant Economics
Historically, our Manhattan locations required an average investment of
approximately $453,500, inclusive of approximately $41,500 in pre-opening
expenses, including advertising costs. The cash investment required to open a
restaurant in Manhattan is generally greater than outside Manhattan due to
higher real estate occupancy and construction and development costs in Manhattan
as well as higher labor costs. We intend to lower the costs of opening a
restaurant in Manhattan by establishing site criteria for real estate occupancy
costs and through the use of value engineering. We believe that our experience
in operating in Manhattan will enable us over time to reduce the average
investment in additional urban, metropolitan area units to approximately
$390,000, including $21,000 in pre-opening expenses. In addition, we intend to
develop restaurants in suburban areas where the occupancy, construction and
development costs are generally less than Manhattan and will require, on
average, a total investment of approximately $350,000, including pre-opening
expenses of approximately $21,000.
In our fiscal year ended May 31, 1999, our 10 company-owned restaurants
which were open for at least 18 months generated average sales of $1,063,562, as
compared to 2 company-owned restaurants in fiscal 1998 which generated average
sales of $1,553,520. The reduction in company-owned restaurant sales is
attributable to the rapid growth in the restaurant base and the disportionate
impact of our flagship 42nd Street restaurant in 1998. Our 10 franchise
restaurants with over 18 months of operating results generated average sales of
$908,508 in fiscal 1999, as compared to 6 restaurants in fiscal 1998 which
generated average sales of $830,172. The increase in franchise restaurant sales
is principally attributable to improved operating performance in 2 mall based
restaurants. These results are not necessarily indicative of the results we will
obtain in connection with the restaurants open for less than 18 months, or those
we may open in the future.
Historically, the size of our restaurants has generally ranged from 1,000
to 3,500 square feet, excluding our smaller, food court locations, which
customarily consist of approximately 600 square feet. We expect the size of our
future sites to range from 1,000 to 2,500 square feet. We believe that the
decrease in the average size of our restaurants should contribute to decreases
in real estate occupancy and construction and development costs. We currently
lease all of our company-owned restaurant locations, and our franchisees
currently lease all of their operating restaurants. Lease terms generally run
for periods ranging from 10 years to 15 years and are generally on a triple-net
basis, with the tenant paying substantially all utilities and other operating
expenses. We plan to
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continue to lease substantially all of our future restaurant locations in order
to minimize the cash investment associated with each restaurant.
Existing Locations
The following table sets forth certain information about our existing
company-owned and franchise restaurants.
<TABLE>
<CAPTION>
Location City/State Date Opened Square Footage
- -------- ---------- ----------- --------------
<S> <C> <C> <C>
Company-Owned Restaurants:
1695 Broadway New York, NY 10/01/90 900
14 East 42nd Street New York, NY 11/01/92 3,500
1333 Broadway New York, NY 04/27/98* 1,400
987 Third Avenue New York, NY 05/08/97* 1,500
308 Fifth Avenue New York, NY 02/03/97* 1,200
180 Broadway New York, NY 02/05/97 3,000
315 Seventh Avenue New York, NY 04/26/97 1,600
1111 Sixth Avenue New York, NY 08/25/97 2,700
325 Broadway New York, NY 10/06/97 3,500
717 Eighth Avenue New York, NY 11/22/97 1,200
832 Eighth Avenue New York, NY 02/13/98 3,400
599 Lexington Avenue New York, NY 03/07/98 3,200
567 Seventh Avenue New York, NY 04/28/98 2,200
Palisades Center Nyack, NY 05/15/98 700
62 Pearl Street New York, NY 05/19/98 3,500
115 W. 57th Street New York, NY 05/31/98 1,400
583 Sixth Avenue New York, NY 09/15/98 2,000
24 Beaver Street New York, NY 11/17/98 2,740
Franchise Restaurants:
303 Park Avenue South New York, NY 08/01/94 1,500
The Westchester Mall White Plains, NY 04/01/95 600
684 Third Avenue New York, NY 07/26/95 900
Roosevelt Field Mall Westbury, NY 10/28/95 700
864 Broadway New York, NY 08/01/96 900
Garden State Plaza Paramus, NJ 12/28/96 765
Stamford Town Center Stamford, CT 03/08/97 1,960
16 West 48th Street New York, NY 08/28/97 2,000
Galleria Mall White Plains, NY 11/20/97 1,000
Manhattan Mall New York, NY 03/29/98 475
Montgomery Mall Bethesda, MD 04/07/98 535
80 Court Street Brooklyn, NY 08/17/98 1,800
Leesberg Corner Premium Outlet Mall Leesberg, VA 10/14/98 650
(Host Marriott)
120 Old Country Road Mineola, NY 11/04/98 900
The Block Orange Orange, CA 11/19/98 775
Independence Center Mall Independence, MO 11/20/98 675
(Host Marriott)
Charlotte Douglas International Airport, Charlotte, NC 12/22/98 850
(Host Marriott)
Ronald Reagan National Airport Arlington, VA 01/29/99 600
MacArthur Center Norfolk, VA 03/12/99 700
(Host Marriott)
Rockaway Town Center Rockaway, NJ 04/22/99 450
</TABLE>
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<TABLE>
<CAPTION>
Location City/State Date Opened Square Footage
- -------- ---------- ----------- --------------
<S> <C> <C> <C>
Washington Dulles International Airport Washington, D.C. 05/02/99 850
(Host Marriott)
Rye Playland Rye, NY 05/15/99 650
(CulinArt)
1273 First Avenue New York, NY 06/14/99 1,850
Tun Nan Taipei, Taiwan 08/02/99 3,800
Bridgewater Commons Bridgewater, NJ 09/03/99 443
Concord Mills Concord, NC 09/17/99 1,102
(Host Marriott)
Fu Shin Road Taipei, Taiwan 09/27/99 4,900
</TABLE>
* Represents date purchased by Ranch *1 from a franchisee.
Expansion and Site Selection
We plan to open approximately 35 company-owned, franchised and licensed
restaurants in fiscal 2000 and approximately 94 company-owned, franchised and
licensed restaurants in fiscal 2001, for a total of 129 new restaurants. 10 of
the 35 restaurants we plan to open in 2000 are currently under construction and
to date we have leased sites for an additional three restaurants. We are
currently negotiating new leases in Massachusetts, Arizona and Texas, as well as
in our existing markets. A majority of the restaurants to be opened in 2000 and
2001 will be located outside of the New York, New Jersey and Connecticut
tri-state area.
Our expansion program has been modified from its previous concentration of
development efforts in Manhattan to emphasize development in areas such as
suburban malls, suburban shopping centers, free-standing drive-thru restaurant
facilities, airports and highway travel plazas and urban areas other than
Manhattan. Our urban locations are in major metropolitan areas that have
attractive demographic characteristics including high population density, high
education levels, density of daytime office workers, and strong retail and
entertainment centers. Once a metropolitan area is selected, we identify viable
trade areas based on the character of the neighborhood, the nature of other
businesses in the area and other commercial characteristics. We then select
sites that have the most desirable characteristics within a trade area, such as
high-traffic patterns, high visibility, accessibility, exposure to a large
number of potential customers and we examine the nature of other businesses in
proximity to the site. Our site selection process will take additional factors
into account when evaluating suburban mall, suburban shopping center and
free-standing venues such as parking, signage, and adaptability of any current
structure.
A thorough analysis of each site, including the foregoing types of
information and neighboring areas and the size, appearance and other physical
characteristics of the proposed site, as well as costs related to the particular
site, must be submitted to us for approval. We visit each site in connection
with the site approval process. In addition, leases must contain specific terms
and conditions and be approved by us.
We believe that the quality of our site selection criteria for
company-owned and franchise restaurants is critical to our success. Therefore,
our senior management team is actively involved in the selection of each new
market and specific site, personally visiting all new markets and conducting a
photographic tour of all sites prior to granting final approval. Each new
company-owned restaurant site must be approved by our Executive Real Estate
Committee which currently consists of Messrs. Naddaff, Kirchen and Rametta.
Factors used in evaluating potential sites include income and population
demographics, occupancy costs and the ability for the area to absorb additional
restaurants known as cluster developing. This process allows us to analyze each
potential location taking into account its effect on all aspects of our
business.
Menu
Our simple, focused menu features fresh-grilled skinless, boneless chicken
breast sandwiches known as "The Best Grilled Chicken Sandwich on Earth" as well
as a variety of healthy items freshly-prepared using grilled chicken breasts,
such as fajitas, burritos, salads and pastas. We also offer baked potatoes,
soups, chicken fingers, and side items that are all made fresh daily. Where
possible, our french-fries are prepared daily from fresh
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potatoes. Our prices range from $3.75 for our single grilled chicken sandwich to
$7.75 for our double grilled chicken sandwich combo. Side items such as french
fries and baked potatoes can be purchased individually for lower prices. Our
average per-check charge was $6.30 in fiscal 1999.
We also offer unique sauces for our chicken sandwiches which were created
from a recipe developed by our founders. The Ranch *1 special sauce consists of
sweet roasted red peppers and blended with a combination of ingredients. Other
Ranch *1 sauces include honey mustard, salsa, barbecue and spicy. In addition,
we offer salads as main dishes, as well as on our chicken sandwiches. Our salads
include radicchio, romaine and iceberg lettuce, watercress, toasted slivered
almonds and goat cheese - ingredients not typically found in the quick-service
restaurant segment of the industry. All meals are prepared in full view of our
guests on our specially designed "V"-shaped grill. Our grill is made to our
founders' specifications to allow the chicken to cook evenly and quickly, while
sealing in the flavors and channeling away the remaining fat.
To provide added variety, we periodically introduce limited time offerings
such as our grilled club sandwich. Some of these items have been permanently
added to the menu, such as the grilled chicken philly sandwich. Other items such
as soup and a fruit cup are offered seasonally.
Decor and Atmosphere
We believe that the decor and atmosphere of our restaurants is a critical
factor in our guests' overall dining experience. We strive to create a clean,
inviting environment. Our design elements include our signature yellow awnings
and decor, accent lighting, open kitchens, eye-catching menu boards and
oversized food photographs. In addition, guests are continually impressed by our
friendly, efficient employees. We believe the decor and atmosphere of our
restaurants appeal to a broad variety of consumers.
Marketing
We utilize broadcast advertising as a marketing tool to increase our brand
awareness, attract new guests and build customer loyalty. Our advertising is
also utilized to promote special offers to increase sales including
limited-time-only product introductions, such as our chicken club sandwich, as
well as price promotions, such as our "Two Can Dine for $9.99" promotion. Media
used for these promotions have included radio, television, celebrity
endorsements, coupons and in-store merchandising materials. For additional
promotion, we utilize street-level "guerilla" marketing campaigns that feature a
team of costumed individuals, including the Ranch *1 chicken mascot, handing out
flyers and attracting attention to our restaurants. We are also implementing
site-specific marketing strategies, such as our participation in community
events and localized promotional campaigns. We believe word-of-mouth advertising
is also a key component in attracting new guests.
As part of our expansion program, we select target markets which we believe
will support multiple restaurants and the efficient use of broadcast
advertising. Upon entry into each new market, we also hire local public
relations firms to help establish brand awareness for our restaurants. In fiscal
1999, we spent approximately $1,572,000 on marketing, of which approximately
$398,000 was offset by franchisee contributions. We expect our marketing
expenditures to increase as we add new restaurants and expand into new markets.
Operations
Restaurant Management and Employees
Our typical restaurant employs one general manager, one manager and 15 to
25 hourly employees, approximately 25% of which are full-time employees and
approximately 75% of which are part-time employees. The general manager is
responsible for the day-to-day operations of the restaurant, including food
quality, service, staffing and purchasing. The restaurant industry is
experiencing difficulties in attracting and retaining experienced restaurant
managers. As a result, we have developed a plan to attract and retain restaurant
managers so that our expansion strategy can be achieved. For example, we seek to
hire experienced general managers and staff and we motivate them by providing
opportunities for increased responsibilities and advancement, as well as
performance-based cash incentives. We intend to grant general managers and
managers options to purchase shares of our common stock when hired or promoted.
All employees working more than 35 hours per week are eligible
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<PAGE>
for health benefits. An important component of our retention strategy will be
our Managing Partner Program, a program that will enable our managers to earn a
percentage of their restaurant's revenues. This program, which is currently
being tested in two restaurants, will require a general manager of a restaurant
to contribute $10,000 to Ranch *1 in exchange for which they will receive an
amount equal to ten percent of the cash flow generated from that restaurant over
a five-year period, after a 1 1/2 % administrative charge is deducted. We
anticipate formally implementing this program in the beginning of fiscal 2001.
We currently employ a Director of Company Operations and three area
leaders. These area leaders direct restaurant management in all phases of
restaurant operations, as well as assist in opening new restaurants. We also
intend to grant area leaders options to purchase shares of our common stock when
hired or promoted.
Training
We strive to maintain quality and consistency in each Ranch *1 restaurant
through the careful training and supervision of personnel and the establishment
of, and adherence to, high standards relating to personnel performance, food and
beverage preparation and maintenance of facilities. In addition, we have
implemented a training program that is designed to teach new managers of
company-owned and franchise restaurants the technical and supervisory skills
necessary to direct the operation of our restaurants in a professional and
profitable manner. Each manager must successfully complete a six-week training
course, which includes hands-on experience in both the kitchen and dining areas.
Our management training program is conducted at our "Ranch *1 University"
located in New York City, which has been in operation since March 1998. Our
"Ranch *1 University" provides facilities for classroom instruction,
point-of-sale training, and a fully operational restaurant for hands-on
instruction. We have also prepared operations manuals and videotapes relating to
food and beverage handling, preparation and service. In addition, we maintain a
continuing education program to provide both company and franchise restaurant
managers with ongoing training and support. We strive to maintain a
team-oriented atmosphere and instill enthusiasm and dedication in our employees.
We regularly have meetings with our general managers to solicit employee
suggestions concerning the improvement of our operations in order to be
responsive to both them and our guests.
Quality Controls
We require that all of our company-owned and franchise restaurants maintain
appropriate cleanliness standards and comply with applicable health and safety
regulations. Our emphasis on excellent customer service is enhanced by our
quality control programs which include regular visits by professional "mystery
shoppers" who provide us with written reports of their findings. We welcome
comments on the quality of service and food at our restaurants by distributing
customer surveys. Area leaders are directly responsible for ensuring that these
comments are addressed to achieve a high level of customer satisfaction.
Hours of Operations
Our restaurants are generally open 7 days a week from 11 a.m. until 9 p.m.
Franchise Operations
The franchise operations department is our primary contact with the
franchise community. We believe that each Ranch *1 franchisee is our partner in
every way. Consequently, we accept the responsibility of assisting our
franchisees in the following ways:
o The franchise operations department is given the responsibility of
helping to ensure the success of each and every franchisee that comes
into our system.
o Once our franchise sales department has met with a prospective
franchisee and performed a preliminary analysis of his/her background
and financial qualifications, the franchise operations department is
given the responsibility of verifying that the prospective franchisee
is operationally qualified to be granted either a single restaurant
franchise or an area development agreement.
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<PAGE>
o Once the franchise or area development agreement has been awarded, the
department will take the lead in communicating the franchisee's status
throughout the development stages to other concerned departments
within the company.
o Once the restaurant is open, a Ranch *1 franchise consultant is
assigned to the franchisee. The consultant makes routine visits to the
franchisees' locations to review all aspects of the business,
including operations, recipes, training, and marketing.
o Management team members oversee and coordinate franchise seminars,
franchise advisory board meetings, and advertising co-op meetings, as
well as any regional or national conventions. The director of
franchise operations is assigned to be the contact person within Ranch
*1 when it comes to interacting with the franchise community.
Franchise Agreements
Current franchise agreements typically provide for payment of a $40,000 per
store franchise fee (less any applicable deposit), a 5% royalty on gross store
revenue (minus sales/service taxes, customer refunds and coupons, and the
portion of employee meals not charged to the employees), a 3% regional
advertising fund contribution, a 1% national creative advertising fund
contribution and a $9,000 grand opening expenditure. The national creative
advertising fund contribution may, in most cases, be increased to 2% of gross
store revenue.
All of our franchise agreements require that the restaurant be operated in
accordance with the operating procedures and menu we establish. We conduct
regular inspections of our restaurants to ensure that the restaurants meet
applicable quality, service and cleanliness standards. We work with franchisees
to improve substandard performance or any items of non-compliance revealed in
the course of our inspection. We may default and terminate any franchisee who
does not comply with our standards.
Our franchise agreements generally provide that we may specify computer
hardware and software for use in the stores, including the use of licensed
software designated or created by or for us and our franchisees from time to
time. The computer hardware that we currently specify is anticipated to cost
approximately $30,000 per restaurant.
Area Development Agreements
Area development agreements provide for the development of a specified
number of stores within a specific territory in accordance with a schedule of
dates. The development schedule in the agreements generally covers two to six
years, and has store operation benchmarks to determine the number of stores to
be opened and to analyze existing restaurants performance from period to period.
The agreements may vary from region to region but generally contemplate a
minimum of 10 franchises to be developed. Area developers typically pay a
development fee of $40,000 per restaurant to be developed. These payments are
made when the area development agreement is executed and are nonrefundable. Area
development agreements generally provide that the area developer has the
exclusive right to open Ranch *1 restaurants within the specified territory
during the term of the development schedule. However, the area development
agreement generally provides that the exclusivity does not apply to pre-existing
franchises, institutional feeders, who are third parties operating restaurants,
cafeterias or kiosks at institutions such as hospitals and schools, and to
national/regional institutional account kiosks. In addition, we reserve the
right to license Ranch *1 restaurants within the development area.
Failure to meet development schedules or other breaches of the area
development agreement may lead to termination of the limited exclusivity
provided by the agreements, or renegotiation of development and franchise
provisions, and retention of all fees paid by the developer, although such
termination does not generally affect existing franchise agreements for
developed locations. These terminations could be contested by the area
developer.
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<PAGE>
Once an acceptable lease for an approved store site has been fully
executed, we enter into a franchise agreement under which the area developer
becomes the franchisee for the specific restaurant to be developed at the site.
Licensing Agreements
Licensing agreements permit the licensee to conduct business using our
trade name, methodology and products, provided that the licensee satisfies
specific performance goals. We are able to negotiate favorable deals with each
licensee because licensing agreements may vary from region to region. Licensing
agreements provide a fixed royalty payment to be made to us as well as an
initial license fee for the opening of a restaurant. At present, we have 6
licensing agreements for currently operating restaurants with Host
International.
Management Information Systems
Our restaurants use computerized point-of-sale systems, which are designed
to improve operating efficiencies, provide corporate management timely access to
financial and marketing data, and reduce restaurant and corporate administrative
time and expenses. The data captured for use by operations and corporate
management include gross sales amounts, cash and credit card receipts, and
quantities of each menu item sold. Sales and receipts information is generally
transmitted to the corporate office weekly, where it is reviewed and reconciled
by the accounting department before being recorded in the accounting system. We
are implementing a system in which daily sales information will be sent nightly
to the corporate office and distributed to management via electronic mail each
morning. Additional reports include sales trends, food costs and labor
utilization. This information is compiled into a weekly financial statement.
This system is currently operational in 28 of our restaurants and is expected to
be installed in most of our existing restaurants by the end of fiscal 2000.
Our corporate systems provide management with operating reports that show
restaurant performance comparisons with budget and prior year results both for
the accounting period and year-to-date, as well as trend formats by both dollars
and percents of sales. These systems allow us to closely monitor restaurant
sales, cost of sales, labor expense and other restaurant trends on a daily,
weekly, and monthly basis. We believe these systems will enable both restaurant
and corporate management to adequately manage the operational and financial
performance of the restaurants in support of our planned expansion.
Purchasing
We strive to obtain consistently high-quality ingredients at competitive
prices from reliable sources. To achieve operating efficiencies and provide
fresh ingredients for our food products, we seek to obtain the lowest possible
prices while maintaining our quality level. We control the purchase of food
items other than chicken through buying from a variety of national, regional and
local suppliers at negotiated prices. Most food and other products are shipped
from a central distributor directly to the restaurants two to four times per
week. Produce is delivered daily from local suppliers to ensure product
freshness. We do not maintain a central food product warehouse or commissary. We
purchase our chicken from one supplier, our potatoes from two suppliers and some
of our other food and paper products from one or two suppliers. We believe,
however, that other sources of supply are readily available at substantially
similar prices. We have not experienced significant delays in receiving our food
and beverage inventories, restaurant supplies or equipment.
Competition
The restaurant industry is intensely competitive. There are many different
segments within the restaurant industry that are distinguished by types of
service, food types and price/value relationships. We position our restaurants
in the upscale quick-service food segment of the industry. In this segment, our
closest competitors include Au Bon Pain and Chick-fil-a. We also compete with
full-service restaurants including Appleby's and TGI Fridays, and fast-food
restaurants, particularly those focused on chicken dishes such as Boston Market
and KFC. In addition, we compete with McDonald's, Wendy's and Burger King.
Competition in our industry segment is based primarily upon food quality, price,
restaurant ambiance, service and location. Although we believe we compete
favorably with respect to each of these factors, many of our direct and indirect
competitors are well-established national, regional or local chains and have
substantially greater financial, marketing, personnel and other resources than
we do. We also compete with many other retail establishments for site locations.
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<PAGE>
Properties
Our corporate headquarters are located in 8,400 square feet of leased space
at 130 West 42nd Street, 21st Floor, New York, New York 10036. We occupy this
facility under a lease which terminates in November 2001. We lease each of our
restaurant facilities typically for 10-15 year terms.
Trademarks
We have registered the service marks "Ranch *1" and "The Best Grilled
Chicken Sandwich on Earth," and the trademark "The Grilled Chicken Barons." We
have a registration pending on the trademark "Ya gotta have *1." We also have
registered the "Ranch *1" service mark in Taiwan and have international
trademark applications pending for "Ranch *1." in seven other countries. We
believe that our trademarks, service marks and other proprietary rights have
significant value and are important to the marketing of our restaurant concept.
We vigorously protect each of our proprietary rights. We cannot predict,
however, whether steps taken by us to protect our proprietary rights will be
adequate to prevent misappropriation of these rights or the use by others of
restaurant features based upon, or otherwise similar to, our concept. It may be
difficult for us to prevent others from copying elements of our concept and any
litigation to enforce our rights will likely be costly. In addition, other local
restaurant operations with names similar to those we use may try to prevent us
from using our marks in those locales.
Employees
As of October 1, 1999, we had approximately 380 employees, including
approximately 25 employees located at our corporate headquarters. We believe
that our relationship with our employees is good.
Insurance
We carry property, liability, business interruption and workers'
compensation insurance policies, which we believe are customary for businesses
of our size and type. However, there can be no assurance that our insurance
coverage will be adequate or that insurance will continue to be available to us
at reasonable rates. In the event coverage is inadequate or becomes unavailable,
our business could be materially adversely affected.
Franchisees are also required to maintain certain minimum standards of
insurance under their franchise agreements. Under the current form of franchise
agreement, insurance must be issued by insurers that are acceptable to us and
must include commercial general liability insurance, worker's compensation
insurance, fire and extended coverage and business interruption insurance. We
must be named as an additional insured on appropriate policies.
Government Regulation
Our restaurants are required to comply with federal, state, and local
government regulations applicable to consumer food service businesses generally,
including those related to the preparation and sale of food, minimum wage
requirements, overtime, working and safety conditions, mandated health insurance
coverage, and citizenship requirements, as well as regulations relating to
zoning, construction, health, business licensing, employment, and compliance
with the Federal Americans With Disabilities Act. We believe that our
company-owned and franchisee-owned restaurants are in material compliance with
these provisions. The development and construction of additional restaurants
will also be subject to compliance with applicable zoning, land use and
environmental regulations. In addition, we plan to expand our operations
overseas and will, therefore, be subject to the burdens and costs of compliance
with foreign laws and regulations such as foreign tax laws. We are not presently
familiar with these laws and regulations and their requirements and our business
and results of operations may be affected by the requirements imposed by these
laws and regulations. For a description of risks faced by us related to
government regulation, please see "Risk Factors-Risks Related to Our Business-We
may not be able to obtain and maintain state and local permits and to comply
with federal, state and local laws and regulations necessary to operate our
restaurants, which would adversely affect our business," and "-We plan to expand
overseas, and therefore, our business will be susceptible to numerous risks
associated with international operations."
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<PAGE>
We are subject to Federal Trade Commission, or FTC, regulation and state
laws that regulate the offer and sale of franchisees as well as the franchise
relationship.
The FTC's Trade Regulation Rule relating to Disclosure Requirements and
Prohibitions Concerning Franchising and Business Opportunity Ventures generally
requires us to give prospective franchisees a franchise offering circular
containing information prescribed by the rule.
State laws that regulate the offer and sale of franchises and the
franshisor-franchiseee relationship exist in a substantial number of states.
These laws generally require registration of the franchise offering with state
authorities before making offers or sales and regulate the franchise
relationship by, for example:
o prohibiting interference with the right of free association among
franchisees;
o prohibiting discrimination in fees and charges;
o regulating the termination of the relationship by requiring "good
cause" to exist as a basis for the termination, advance notice to the
franchisee of the termination, and an opportunity to cure a default;
o requiring repurchase of inventories in some circumstances;
o restricting nonrenewal by the franchisor;
o limiting restrictions on transfers or inheritance of the franchisee's
interests; and
o regulating placement of competing units that might adversely affect
the franchisee's results.
Legal Proceedings
As of the date of this prospectus, we are not a party to any material
litigation.
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<PAGE>
MANAGEMENT
Executive Officers, Key Employees and Directors
Our executive officers, key employees and directors, as of October 11,
1999, are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
George A. Naddaff(1) 68 Chairman of the Board
David W. Sculley(1)(2) 52 Vice Chairman of the Board
James Chickara 44 Vice Chairman of the Board
Sebastian Rametta(2) 34 President, Chief Executive Officer and Director
Christopher P. Kirchen(2) 56 Director
Marc A. Singer(1) 28 Director
Mordechai Davidi 45 Director
R. John Speich 53 Vice President, Secretary and Chief Financial Officer
Louis Mancuso 58 Vice President of Development
Gary Occhiogrosso 41 Vice President of Franchising and Marketing
</TABLE>
- ----------
(1) Audit committee member.
(2) Compensation committee member.
George A. Naddaff has been our Chairman of the Board since November 1996
and was our Chief Executive Officer until June 1997. He has been Vice Chairman
of Mortgage.com, an Internet mortgage company, since 1997. In addition, since
1987, Mr. Naddaff has been the President and is the founder of Business
Expansion Capital Corporation, a company that provides financial and managerial
resources to newly formed ventures. Mr. Naddaff was also the Chairman and Chief
Executive Officer of New Boston Chicken, Inc., which he founded in 1988, until
1993. He also established Living and Learning Center Inc. in 1970, and opened a
total of 47 facilities before selling them to Kindercare in 1979. Additionally,
early in his career, Mr. Naddaff co-founded International Foods, Inc., opening
19 Kentucky Fried Chicken franchised outlets from 1967 to 1970.
David W. Sculley has served as Vice Chairman of our Board of Directors
since April 1997. In 1996, Mr. Sculley and his brothers founded Sculley
Brothers, a private investment firm. From 1994 to 1996, Mr. Sculley served as
Senior Vice President of H.J. Heinz Company. Prior to that time, from 1972 to
1994, he served in various capacities with Heinz U.S.A., most recently as the
President and Chief Executive Officer. Mr. Sculley received a B.A. degree in
Economics from Harvard University.
James Chickara has served as Vice Chairman of our Board of Directors since
November 1996 and was our President from 1996 to June 1997. Prior to acquiring
Ranch *1, he co-founded Arnie's Bagelicious Bagels, Inc., a wholesale baking
company based in New York. He is also the President and principal stockholder of
World Gourmet Soups, Inc., a wholesaler of gourmet soup products based in New
York.
Sebastian Rametta has been our President since March 1999 and has been our
Chief Executive Officer since June 1999. Mr. Rametta was elected to our board of
directors in November 1996, and was our Executive Vice President from 1996 to
1998. Prior to acquiring Ranch *1, Mr. Rametta co-founded Arnie's Bagelicious
Bagels in 1991. Mr. Rametta is also a stockholder and director of World Gourmet
Soups, Inc., a wholesaler of gourmet soup products.
Christopher P. Kirchen has been a member of our board of directors since
February 1998. Mr. Kirchen is the Managing General Partner of Brand Equity
Ventures, a venture capital firm which he co-founded in 1997. Since 1986, Mr.
Kirchen has been a general partner at Consumer Venture Partners, a venture
capital firm. His venture capital career began in 1977 with the Sprout Group at
Donaldson, Lufkin & Jenrette, where he was a Vice President. Prior to becoming a
venture capitalist, from 1970 to 1977, Mr. Kirchen was a management consultant
with McKinsey & Company. Mr. Kirchen currently serves on the boards of Select
Comfort Corporation, a manufacturer and marketer of adjustable air-beds and on
the boards of several private companies. He received his B.A. from the
University of the South and his M.B.A. from the Wharton Graduate School of
Business.
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<PAGE>
Marc A. Singer has served as a member of our board of directors since
February 1998. Mr. Singer is a Vice President of Brand Equity Ventures, a
venture capital firm. Prior to joining Brand Equity Ventures, he was a Senior
Associate at Consumer Venture Partners, a venture capital firm from 1993 to
1997. Previously, Mr. Singer worked at Donaldson, Lufkin & Jenrette in
Investment Banking. He currently serves on the boards of several privately held
service companies. Mr. Singer received his B.S. degree from the Wharton School
of Business.
Mordechai Davidi has been a member of our board of directors since November
1996. Mr. Davidi co-founded the Ranch *1 business in 1990 and was Vice President
of Real Estate until November 1998. Prior to Ranch *1, he opened and operated
several restaurants in Tel Aviv, including the White House Steakhouse and the
White Hall restaurant.
R. John Speich has been our Vice President since September 1997, Secretary
since September 1998 and Chief Financial Officer since March 1999. Prior to
joining Ranch *1, Mr. Speich held the position of Vice President and Controller
from 1996 to 1997 at Hartz Restaurants International, Inc., an operator and
franchiser of fast-food chicken restaurants. From 1993 to 1996, he held the
position of Manager of Internal Audit at Insurance Corporation of America, Inc.
Previously, from 1988 to 1992, Mr. Speich was the Executive Vice President and
Chief Financial Officer for Birraporetti's Restaurants. From 1980 to 1987, he
was the Vice President Finance of Graco Interests, Inc. He received his B.A.
from the University of Southwestern Louisiana and his Bachelor of Accountancy
from the University of Houston.
Louis Mancuso has been our Vice President of Development since April 1998.
Prior to joining Ranch *1, Mr. Mancuso served as Vice President of Real Estate
for several divisions of H.J. Heinz Company from 1981 to 1998. At H.J. Heinz, he
was responsible for real estate, construction and facilities management. From
1970 to 1981, Mr. Mancuso was Vice President of National Accounts for the Grubb
& Ellis National Real Estate Company. He received his B.S. in Business
Administration from Fordham University.
Gary Occhiogrosso joined Ranch *1 in 1997 as our Vice President of
Franchising and Marketing. Mr. Occhiogrosso served as a consultant to Ranch *1
from 1993 to 1997. Prior to joining Ranch *1, Mr. Occhiogrosso founded GPM
Consulting in 1991 which offers various consulting services for both single unit
and chain restaurant/retail operations. He has been a board member of TD
Advertising since 1996. In addition, Mr. Occhiogrosso is a former franchisee of
Dunkin' Donuts, where he served on their Franchise Advisory Council and
Advertising Committee from 1985 to 1988.
Our executive officers are appointed by the board and serve until their
successors are elected or appointed.
Board Committees
Audit Committee. The audit committee of the board of directors with respect
to various auditing and accounting matters, including the recommendation of our
auditors, the scope of the annual audits, fees to be paid to the auditors, the
performance of our independent auditors and our accounting practices. The
members of the audit committee are Messrs. Naddaff, Sculley and Singer. The
committee did not meet during fiscal 1999.
Compensation Committee. The compensation committee of the board of
directors recommends, reviews and oversees the salaries, benefits and stock
option plans for our employees, consultants, directors and other individuals
compensated by us. The compensation committee also administers our compensation
plans. The members of the compensation committee are Messrs. Rametta, Sculley
and Kirchen.
Director Compensation
Directors do not receive cash compensation for their service on our board
of directors. Non-employee directors are reimbursed for reasonable expenses
incurred in connection with serving as a director.
Executive Compensation
The following table sets forth all compensation received during fiscal 1999
by our President, Chief Executive Officer, three of our other executive officers
and one former officer whose salary and bonus exceeded
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<PAGE>
$100,000 in such fiscal year. Perquisites and other personal benefits paid to
officers in the table below are less than the minimum reporting thresholds.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
----------------------------------
Other Securities
Annual Underlying All Other
Name and Principal Salary Compensation Options/SARs Compensation
Position Year ($) ($)(1) (#) ($)
- ------------------------------ ---- ------ ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Sebastian Rametta,
President and Chief
Executive Officer......... 1999 $53,365 $3,600 75,000 $66,019(2)
R. John Speich, Chief
Financial Officer,
Vice President and
Secretary................. 1999 $125,000 101,263
Louis Mancuso,
Vice President of
Development .............. 1999 $120,000
Gary Occhiogrosso,
Vice President of
Franchising and
Marketing ............... 1999 $100,000
George Samaras, former
Chief Executive
Officer and President .... 1999 $147,427 $11,667 $148,819(3)
</TABLE>
(1) Other Annual Compensation for Mr. Rametta includes amounts received for a
car allowance. Other Annual Compensation for Mr. Samaras includes housing
and travel allowances.
(2) Pursuant to his termination agreement in September 1998, Mr. Rametta
received severance pay, medical benefits and a car allowance.
(3) Pursuant to his termination agreement in April 1999, Mr. Samaras was
scheduled to receive severance pay medical benefits, reimbursement of legal
expenses and a housing allowance. In addition, his stock options were
canceled and replaced by 350,000 shares of our common stock and we agreed
to pay the purchase price of the common stock and the respective income
taxes that Mr. Samaras will owe as a result of the receipt of these shares
of common stock. Subsequent to May 31, 1999 we defaulted on the payment
obligation to Mr. Samaras.
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<PAGE>
Stock Option Information
The following table sets forth information regarding options granted to
the executive officers listed in the Summary Compensation Table during fiscal
1999.
<TABLE>
<CAPTION>
Option Grants in Last Fiscal Year
Individual Grants
------------------------------------------------------------------
Number of Potential Realizable
Securities Percent of Total Value at Assumed Annual
Underlying Options Granted Exercise Price Rates of Stock Price
Options Granted to Employees In Per Share Expiration Appreciation for Option
Name (#) Fiscal Year(1) ($/Sh) Date Term
- ------------------ --------------- ---------------- -------------- ---------- ------------------------
5%($) 10%($)
<S> <C> <C> <C> <C> <C> <C>
Sebastian Rametta 75,000 29.9% $2.50 9/2/03 $18,000 $39,800
R. John Speich 101,263 40.3% $2.00 9/1/02 $56,000 $123,600
</TABLE>
Each option represents the right to purchase one share of common stock. Mr.
Rametta's options are immediately exercisable. Mr. Speich's options vest 30%
after the completion of the first year of service, 30% after the completion of
the second year of service and 40% after the completion of the third year of
service.
The potential, realizable value at assumed annual rates of stock price
appreciation for the option term represents hypothetical gains that could be
achieved for the respective options if exercised at the end of the option term.
The 5% and 10% assumed annual rates of compounded stock price appreciation are
mandated by rules of the Securities and Exchange Commission and do not represent
our estimate or projection of our future common stock prices. These amounts
represent certain assumed rates of appreciation in the value of our common stock
from the fair market value on the date of grant. Actual gains on stock option
exercises are dependent on the future performance of the common stock and
overall stock market conditions. The amounts reflected in the table may not
necessarily be achieved.
Fiscal Year-End Option Values
The following table sets forth information concerning the number and value
of unexercised options held by each of the executive officers listed in the
Summary Compensation Table at May 31, 1999. None of these executive officers
exercised options to purchase common stock during fiscal 1999.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised
Unexercised Options at May 31, 1999 In-the-Money Options at May 31, 1999
----------------------------------- -------------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Sebastian Rametta 75,000 -- ($7,500) --
R. John Speich 30,379 70,884 $12,152 $28,354
</TABLE>
There was no public trading market for the common stock as of May 31, 1999.
Accordingly, the value of unexercised in-the-money options is based on $2.40 per
share the assumed fair market value of the common stock at May 31, 1999 less the
exercise price per share, multiplied by the number of shares underlying such
options.
Stock Option Plan
In June 1998, we adopted the Ranch *1, Inc. 1998 Stock Option Plan which
provides for the issuance to officers, directors and employees of nonqualified
options to purchase up to 1,432,106 shares of our common stock.
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<PAGE>
As of October 11, 1999, 251,263 shares of common stock have been granted
pursuant to our stock option plan and 1,180,843 shares were available for future
grant. This plan is currently administered by a committee of the Board of
Directors, which committee is either composed of the entire Board of Directors
or of two or more Non-Employee Directors. Full payment of the exercise price may
be made in cash or in shares of our common stock valued at the fair market value
thereof on the date of exercise, or by agreeing with us to cancel a portion of
the exercised options. Additionally, the option agreements contain antidilution
provisions and acceleration provisions for a change in control, as defined. The
exercise price for all nonqualified options granted will be the fair market
value of our shares at the date of grant.
Termination Agreements
On April 19, 1999, we entered into an agreement with George Samaras, our
former Chief Executive Officer and President, which terminated his employment
agreement. This termination agreement provided six months of compensation and
the payment of medical benefits to Mr. Samaras. In addition, his stock options
were replaced by 350,000 shares of the our common stock which was valued at $.10
per share, the fair value as determined by an independent valuation. We also
agreed to make a payment equal to the amount Mr. Samaras owed as a result of the
receipt of these shares of common stock, as well as payment for any capital
gains owed, up to a specified maximum, as a result of the sale of this stock
eighteen months from the date of this agreement. Subsequent to May 31, 1999, we
defaulted on the payment obligation.
On April 19, 1999, we entered into an agreement with James W. Knight which
terminated his employment agreement. This termination agreement provided six
months of compensation and the payment of medical benefits to Mr. Knight. In
addition, his stock options were replaced by 101,263 shares of the our common
stock which was valued at $.10 per share, the fair value as determined by an
independent valuation. We also agreed to make a payment equal to the amount Mr.
Knight owed as a result of the receipt of these shares of common stock, as well
as payment for any capital gains owed, up to a specified maximum, as a result of
the sale of this stock eighteen months from the date of this agreement.
Subsequent to May 31, 1999, we defaulted on the payment obligation.
On April 8, 1999, we entered into an agreement with Andrew Howard which
terminated his employment agreement. This termination agreement included six
months of compensation, the payment of medical benefits and moving expenses.
On September 1, 1998, we notified James Chickara that his employment had
terminated and that he would be entitled to receive six months of compensation
and the payment of medical benefits.
In September 1998, we entered into an agreement with Sebastian Rametta
terminating his employment. This termination agreement included six months of
compensation and the payment of medical benefits. In addition, the termination
agreement provided for the granting of qualified stock options pursuant to our
1998 Stock Option Plan, to purchase up to 75,000 shares of our common stock at
an exercise price of $2.50 per share, which vested immediately.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Sales of Securities by Sebastian Rametta and James Chickara
Between June 16, 1997 and December 1, 1998, Sebastian Rametta sold 393,585
shares of our common stock and received an aggregate of $848,963 consideration
for such sales. Between June 16, 1997 and June 8, 1999, James Chickara sold
491,585 shares of our common stock and received an aggregate of $1,117,963
consideration for such sales.
Stockholder Loans
On December 8, 1997, we issued promissory notes in favor of two of our
board members, David Sculley and George Naddaff, evidencing loans they made to
Ranch *1 each in the principal amounts of $500,000. Each note has an interest
rate of prime plus 2.0% per annum, due upon the earlier of 180 days after the
date of the note or the date on which Ranch *1 issues shares yielding at least
$1,000,000. Interest is payable at 90 days and at maturity. Each note provides
for the issuance to the holder of five-year warrants to purchase 100,000 shares
of common stock with an exercise price of $2.75 per share, subject to
adjustment. Each note was paid down to $300,000 on April 17, 1998. In September
1999, the outstanding principal balance and accrued but unpaid interest on each
of these notes, $347,152 and $346,857 respectively, was converted to 6.94 shares
of Series C preferred stock.
On February 19, 1999, we obtained bridge financing from Brand Equity
Ventures I, L.P., a shareholder and an entity affiliated with 2 directors,
through the issuance of a promissory note in the amount of $250,000. The note is
unsecured, bears interest at a fixed rate of 10% and matures on March 19, 2000.
The loan agreement contains a provision accelerating the payment of principal
and interest if we obtain additional financing of at least $5,000,000 through
either debt or equity. The notes also provide for a default interest rate
penalty of 4% for any period in which the note is in default. In connection with
this transaction, we also executed a Common Stock Purchase Warrant Agreement.
Under the provisions of this agreement, the lender can purchase 112,500 shares
of our common stock at a per share price of $2.50. In September 1999, Brand
Equity converted the outstanding principal balance and accrued but unpaid
interest of $264,332 on this note into 5.29 shares of Series C preferred stock.
In July and August 1998, we obtained bridge financing from Silver Brand
Partners, L.P. through the issuance of an unsecured promissory note of $250,000.
The note bears interest at a rate of 12% and matured in February 1999. The note
provides for a default interest rate penalty of 2%, for any period in which the
note is in default. In connection with this transaction, we also executed a
Common Stock Purchase Warrant Agreement. Under the provisions of this agreement,
the noteholder can purchase 50,000 shares of our common stock at a price per
share equal to the price per share we obtained in the next private placement of
equity securities for which we receive an aggregate of $5,000,000 or more. In
September 1999, Silver Brands Partners, L.P. converted the outstanding principal
amount and accrued but unpaid interest of $285,694 into 5.71 shares of Series C
preferred stock.
In June 1998, we obtained bridge financing through the issuance of
promissory notes aggregating $925,000, including $225,000 provided by Mr.
Sculley, $200,000 provided by trusts controlled by Mr. Naddaff and $500,000
provided by Brand Equity Ventures. The notes bear interest at a rate of 12% and
matured in December 1998. The notes also provide for a default interest rate
penalty of 5%, for any period in which the note is in default. In connection
with this transaction, we also executed a Common Stock Purchase Warrant
Agreement. Under the provisions of this agreement, the noteholders can purchase
from 20,000 to 100,000 shares of our common stock at a price per share equal to
the price per share we obtain in the next private placement of equity securities
for which we receive an aggregate of $5,000,000 or more. We recorded the fair
value of these warrants as determined by an independent valuation in connection
with financing arrangements. Mr. Sculley and Brand Equity have agreed to convert
the outstanding principal amount and accrued but unpaid interest of $260,646 and
$578,840, respectively, into 5.21 and 11.58 shares of Series C Preferred Stock,
respectively. In addition, the outstanding principal amount of the note with the
trusts controlled by Mr. Naddaff converted to 4 shares of Series C preferred
stock and the accrued but unpaid interest will be paid in cash.
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<PAGE>
On January 30, 1995 we obtained financing from David Sculley in the
principal amount of $100,000. This promissory note bore interest at prime plus
2% and was paid in full on April 17, 1998.
On February 16, 1998 we obtained financing from George Naddaff in the
principal amount of $100,000. This promissory note bore interest at a rate of
prime plus 2% and was paid in full on April 17, 1998.
Debentures
On December 22, 1998 and January 25, 1999, Salvatore J. Rametta invested an
aggregate of $350,000 in Ranch *1. Mr. Rametta was issued debentures evidencing
the investment with an interest rate of 10% per annum payable quarterly and a
maturity period of 13 months from issuance. If not paid on maturity, the
interest rate on the debentures increases monthly and the conversion price
decreases so that if not paid, on the 19-month anniversary of their issuance,
the debentures will become convertible into common stock at a rate of $.25 per
share. As part of this financing, Mr. Rametta received five-year warrants to
purchase 157,500 shares of our common stock at a purchase price of $2.50 per
share, subject to adjustment. Salvatore Rametta is the father of our President
and Chief Executive Officer, Sebastian Rametta. Mr. Rametta's loan will be
repaid upon maturity of the debentures with a portion of the net proceeds from
this offering.
Other Transactions
One of our executive officers and stockholders, Gary Occhiogrosso, owns
approximately 33% and is a director of TD Advertising Inc., a company that
performs media buying services for Ranch *1. In 1999, we paid TD $95,995 in
fees.
In connection with its purchase of our Series A convertible preferred stock
in February 1998, the Series A stockholders, including Brand Equity Ventures and
Silver Brand Partners, were issued performance-based warrants to purchase shares
of common stock based on the results of our operations in fiscal 1999. They
received an aggregate of 1,440,000 performance-based warrants having a ten-year
term and an exercise price of $1.00 per share.
In connection with the acquisition of Ranch *1 Group, Inc. and
subsidiaries, we issued unsecured promissory notes to Messrs. Davidi and
Gottlieb, founders of Ranch *1, aggregating $600,000, bearing interest at 6% and
payable in monthly installments of $11,600. As of May 31, 1999, the outstanding
balance of the notes was $316,536.
On June 1, 1997, we entered into a one-year consulting agreement with
George Naddaff to assist us in opening both company-owned and franchise
restaurants. This agreement provided for annual compensation to Mr. Naddaff of
$125,000 and was subsequently terminated by mutual consent upon the expiration
of the initial term.
On May 1, 1997, we entered into a one-year consulting agreement with David
Sculley to assist us in opening both company-owned and franchise restaurants.
This agreement provided for annual compensation to Mr. Sculley of $125,000. In
addition, Mr. Sculley received a warrant to purchase 150,000 shares of our
common stock at an exercise price of $2.00 per share. This agreement was
terminated by mutual consent upon the expiration of the initial term.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of October 11, 1999, assuming the
automatic conversion of all outstanding shares of our convertible preferred
stock and as adjusted to reflect the sale of the shares of common stock offered
hereby, by:
o each person or group of affiliated persons who we know owns
beneficially 5% or more of our common stock;
o each of our directors;
o our executive officers listed in the Summary Compensation Table; and
o all of our directors and executive officers as a group.
Except as indicated in the footnotes to this table, the persons named in
the table have sole voting and investment power with respect to all shares of
common stock shown as beneficially owned by them, subject to community property
laws. The table below includes the number of shares underlying options which are
exercisable within 60 days from the date of this offering. The address for those
individuals for which an address is not otherwise indicated is: 130 West 42nd
Street, 21st Floor, New York, New York 10036.
<TABLE>
<CAPTION>
Shares Beneficially Owned Prior Shares Beneficially Owned After
to this Offering this Offering
------------------------------------------ -----------------------------------
Number of Number of
Shares Shares
Underlying Underlying
Number of Options or Percent Number of Options or Percent
Beneficial Owner Shares Warrants (%) Shares Warrants (%)
- ------------------------------- ------------ ------------ -------- --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Mordechai Davidi 879,349 --
Ori Gottlieb 879,349 --
James Chickara 1,409,731 --
Sebastian Rametta 75,326
George A. Naddaff (1) 115,619
Gary Occhiogrosso 100,000 --
David W. Sculley 202,599
Brand Equity Ventures I, LP 192,947
Three Pickwick Plaza
Greenwich, CT 06830
R. John Speich -- 101,263
Christopher P. Kirchen (2)
Marc Singer (2)
Silver Brands Partners, LP 95,231
5121 Broadway
San Antonio, TX 78209
Lou Mancuso -- --
All directors and executive
officers as a group (10 persons)
</TABLE>
- ----------
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<PAGE>
- ---------------------
* Less than 1% of total.
(1) Includes _____ shares of our common stock held by affiliated trusts for the
benefit of Mr. Naddaff's children. Mr. Naddaff disclaims beneficial
ownership of such shares.
(2) Includes ________ shares held by Brand Equity Ventures I, LP as of October
11, 1999. Mr. Kirchen is the Managing General Partner and founder of Brand
Equity and disclaims beneficial ownership of such shares. Mr. Singer is the
Investment Manager of Brand Equity and disclaims beneficial ownership of
such shares.
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<PAGE>
DESCRIPTION OF SECURITIES
The following description of the material terms of our capital stock is not
intended to be complete. Our capital stock is fully described in our certificate
of incorporation, certificates of designation and bylaws, which are included as
exhibits to the registration statement of which this prospectus forms a part.
Our capital stock is also governed by provisions of applicable Delaware law.
As of October 11, 1999, our authorized capital stock consists of 25,000,000
shares of common stock, par value $.001 per share and 7,800,000 shares of
preferred stock, par value $.001 per share, of which 2,800,000 shares are
designated as Series A convertible preferred stock, par value $.001 per share,
500,000 shares are designated as Series B convertible preferred stock, par value
$.001 per share, and 150 shares are designated as Series C convertible preferred
stock, par value $.001 per share. Upon completion of this offering, all of our
outstanding shares of Series A, Series B and Series C preferred stock will be
converted into an aggregate of ____ shares of common stock, and will no longer
be outstanding.
Common Stock
As of October 11, 1999, there were 12,857,743 shares of common stock
outstanding and held of record by 59 stockholders. Holders of common stock are
entitled to one vote for each share held on all matters submitted to a vote of
stockholders and do not have cumulative voting rights. Accordingly, holders of a
majority of the shares of common stock entitled to vote in any election of
directors may elect all of the directors standing for election. Holders of
common stock are entitled to receive ratably such dividends as may be declared
by the board of directors out of funds legally available for that purpose,
subject to any preferential dividend rights of any outstanding preferred stock.
Holders of common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
offered by us in this offering will be, when issued in consideration for payment
thereof, fully paid and nonassessable. The rights, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
designate and issue in the future. Upon the closing of this offering, there will
be no shares of preferred stock outstanding.
Preferred Stock
The board of directors is authorized, without further stockholder approval,
to issue from time to time up to an aggregate of 7,800,000 shares of preferred
stock in one or more series and to fix or alter the designations, powers,
preferences, rights and any qualifications, limitations or restrictions of the
shares of each such series thereof, including the dividend rights, dividend
rates, conversion rights, voting rights, terms of redemption (including sinking
fund provisions), redemption price or prices, liquidation preferences and the
number of shares constituting any series or designations of such series. We have
no present plans to issue any shares of preferred stock. Please see
"-Anti-Takeover Effects of Certain Provisions of Delaware Law and our
Certificate of Incorporation and Bylaws."
Series A. As of October 11, 1999, there were 2,800,000 shares of Series A
preferred stock issued and outstanding, with a liquidation preference of $2.50
per share. All outstanding shares of Series A preferred stock will be converted
into an aggregate of _________ shares of common stock upon the closing of this
offering and such shares of convertible preferred stock will no longer be
authorized, issued or outstanding.
The Series A preferred stock is convertible into shares of common stock at
the rate equal to the lesser of $2.50 per share or 70% of the price per share in
this offering. Dividends on the common stock are subject to the preferences and
other rights of the Series A convertible preferred stock, and stockholders are
entitled to receive such dividends as declared by the board of directors.
Dividends on the Series A preferred stock accrue at an annual rate of 8% and
will convert into common stock at the initial public offering price or payable
in cash, at the Company's option.
In the event of any liquidation, holders of the Series A preferred stock
share ratably in all our assets remaining after payments to the holders of the
Series C preferred stock, and before payments to holders of the Series B
preferred stock and holders of the common stock. The Series A stockholders have
a $2.50 per share liquidation preference. Holders of the Series A preferred
stock are entitled to receive all accrued and unpaid
45
<PAGE>
dividends in the event of a liquidation. The Series A stockholders have the
right to elect two of our directors under certain conditions.
Series B. As of October 11, 1999, there were issued and outstanding 273,300
shares of Series B preferred stock issued and outstanding, with a liquidation
preference of $2.50 per share. All outstanding shares of Series B preferred
stock will be converted into an aggregate of ________ shares of common stock
upon the closing of this offering and such shares of convertible preferred stock
will no longer be authorized, issued or outstanding. Holders of the Series B
preferred stock are not entitled to dividends.
The Series B preferred stock is convertible into shares of common stock at
the rate equal to the lesser of $2.50 per share or 70% of the price per share in
this offering. In the event of any liquidation, holders of the Series B
preferred stock share ratably in all our assets remaining after payments to the
holders of the Series A and Series C preferred stock, but before payments to
holders of the common stock. The Series B stockholders have a $2.50 per share
liquidation preference.
Series C. As of October 11, 1999, there are 38 shares of Series C preferred
stock outstanding, with a liquidation preference of $50,000 per share. The
Series C preferred stock is automatically convertible into common stock upon
consummation of this offering at 70% of the price per share in this offering.
Dividends on the Series A and Series B preferred stock and common stock are
subject to the preferences and other rights of the Series C preferred stock, and
stockholders are entitled to receive such dividends as declared by the board of
directors. Dividends on the Series C preferred stock are payable semi-annually
at the rate of 15% per annum.
In the event of any liquidation, holders of the Series C preferred stock
share ratably in all our assets remaining before payments to holders of the
Series A and Series B preferred stock and common stock. The Series C
stockholders have a $50,000 per share liquidation preference. In addition,
holders of the Series C preferred stock are entitled to receive all accrued and
unpaid dividends.
Warrants
As of October 11, 1999, there are five-year warrants outstanding to
purchase a total of 414,500 shares of common stock. The exercise price of
337,500 of these warrants is $2.50 per share and the exercise price of 77,000 of
these warrants is based on the price per share we will obtain in our next
private placement of at least $5,000,000. The warrants contain anti-dilution
provisions providing for adjustments of the exercise price and the number of
shares underlying the warrants upon the occurrence of certain events, including
any recapitalization, reclassification, stock dividend, stock split, stock
combination or similar transaction. The warrants are all presently exercisable.
In October 1999, warrants to purchase _______ shares of common stock were
issued to purchasers of our Series C preferred stockholders. The warrants have a
five-year term and an exercise price per share equal to the price per share of
our common stock in this offering. The warrants are immediately exercisable.
Registration Rights
We have agreed to grant registration rights to holders of our common stock
to be issued upon conversion of our Series A, Series B and Series C convertible
preferred stock. The shares of our outstanding preferred stock will be converted
upon consummation of this offering for an aggregate of approximately _________
shares of our common stock. The stockholders have the right to demand one
registration of their common stock commencing twelve months following completion
of this offering. The stockholders also have the right to piggy-back their
shares in an underwritten offering other than this offering.
We entered into a registration rights agreement with Manhattan Bagel
Company, Inc. which provides that Manhattan Bagel has the right to piggy-back
their shares of common stock in this offering.
Anti-Takeover Effects of Certain Provisions of Delaware Law and Our Certificate
of Incorporation and Bylaws
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<PAGE>
General
Some provisions of Delaware law and our certificate of incorporation and
bylaws could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of us. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. These provisions of Delaware law
and the certificate of incorporation and bylaws may also have the effect of
discouraging or preventing certain types of transactions involving an actual or
threatened change of control of us, including unsolicited takeover attempts,
even though such a transaction may offer our stockholders the opportunity to
sell their stock at a price above the prevailing market price.
Delaware Takeover Statute
We are subject to the "business combination" provisions of Section 203 of
the Delaware General Corporation Law. Subject to certain exceptions, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless:
o the transaction is approved by the board of directors prior to the
date the interested stockholder obtained interested stockholder
status;
o upon consummation of the transaction that resulted in the
stockholder's becoming an interested stockholder, the stockholder
owned at least 85% of our voting stock outstanding at the time the
transaction commenced, excluding for purposes of determining the
number of shares outstanding those shares owned by (a) persons who are
directors and also officers and (b) employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
o on or subsequent to the date the business combination is approved by
the board and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66% of the
outstanding voting stock that is not owned by the interested
stockholder.
A "business combination" includes mergers, asset sales and other
transactions resulting in a financial benefit to the interested stockholder.
Subject to some exceptions, an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years did own,
15% or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts with respect to us and, accordingly, may discourage attempts to acquire
us.
In addition, some provisions of our certificate of incorporation and bylaws
summarized in the following paragraphs may be deemed to have an anti-takeover
effect and may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Limitation of Liability and Indemnification Matters
Our certificate of incorporation provides that, except to the extent
prohibited by Delaware law, our directors shall not be personally liable to us
or our stockholders for monetary damages for any breach of fiduciary duty as our
directors. Under Delaware law, the directors have a fiduciary duty to us which
is not eliminated by this provision of the certificate and, in appropriate
circumstances, equitable remedies such as injunctive or other forms of
nonmonetary relief will remain available. In addition, each director will
continue to be subject to liability under Delaware law for breach of the
director's duty of loyalty to us for acts or omissions which are found by a
court of competent jurisdiction to be not in good faith or which involve
intentional misconduct or knowing violations of law, for actions leading to
improper personal benefit to the director, and for payment of dividends or
approval of stock repurchases or redemptions that are prohibited by Delaware
law. This provision does not affect the directors, responsibilities under any
other laws, such as the Federal securities laws or state or Federal
environmental laws.
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<PAGE>
The certificate of incorporation also provides that directors and officers
shall be indemnified against liabilities arising from their service as directors
or officers to the fullest extent permitted by law, which generally requires
that the individual has acted in good faith, and in a manner he or she
reasonably believed to be in or not opposed to the company's best interests.
Delaware law provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under our bylaws, any agreement, a vote of stockholders
or otherwise.
Our bylaws provide for the indemnification of our directors and executive
officers. We believe that these provisions are necessary to attract and retain
qualified directors and executive officers. We are also in the application
process to obtain liability insurance for our directors and officers.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the certificate of incorporation. We are not aware
of any threatened litigation or proceeding that may result in a claim for such
indemnification.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Continental Stock
Transfer and Trust Company.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The market price of our common stock could decline as a result of sales of
a large number of shares of our common stock in the market after this offering,
or the perception that such sales could occur. Such sales also might make it
more difficult for us to sell equity securities in the future at a time and
price that we deem appropriate. After this offering, ___________ shares of
common stock will be outstanding. Of these shares, _____________ shares being
offered hereby are freely tradable. This leaves __________ shares eligible for
sale in the public market as follows:
Number of Shares Date
- ---------------- --------------------------------------------------------
After the date of this prospectus
Upon the filing of a registration statement to register
for resale shares of common stock issuable upon the
exercise of options granted under our stock option
plans
At various times after 90 days from the date of this
prospectus (Rules 701 and 144)
At various times after 180 days from the date of this
prospectus (subject, in some cases, to volume
limitations) (lock-up and Rule 144)
In general, under Rule 144, as currently in effect, our affiliates or a
person (or persons whose shares are required to be aggregated) who has
beneficially owned shares for at least one year will be entitled to sell, within
any three-month period, a number of shares that does not exceed the greater of:
o 1% of the then outstanding shares of common stock (approximately
_________ shares immediately after this offering) or
o (2) the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is
filed, subject to certain restrictions.
In addition, a person who is not deemed to have been our affiliate at any
time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from one of our affiliates, such
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
As of the date of this prospectus, options to purchase a total of 251,263
shares of common stock are outstanding, of which 180,379 shares are currently
vested and immediately exercisable. Upon the closing of this offering, we intend
to file a registration statement to register for resale the __________ shares of
common stock reserved for issuance under our stock option plans. We expect such
registration statement to become effective immediately upon filing. Shares
issued upon the exercise of stock options granted under our stock option plans
will be eligible for resale in the public market from time to time subject to
vesting and, in the case of certain options, the expiration of the lock-up
agreements referred to below.
All of our directors, officers and stockholders have entered into lock-up
agreements pursuant to which they have agreed that they will not sell directly
or indirectly, any shares of common stock without the prior written consent of
Josephthal & Co. Inc. for a period of 180 days from the date of this prospectus.
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<PAGE>
UNDERWRITING
The underwriters named below, for whom Josephthal & Co. Inc. is acting as
representative, have agreed to buy, subject to the terms and conditions of the
underwriting agreement, the number of shares listed opposite their names below.
The underwriters are committed to purchase and pay for all of the shares if any
are purchased, other than those shares covered by the over-allotment option
described below.
Underwriters Number of Shares
------------ ----------------
Josephthal & Co. Inc.
The underwriters have advised us that they propose to offer the shares to
the public at the initial public offering price set forth on the cover of this
prospectus. The underwriters propose to offer the shares to certain dealers at
the same price less a concession of not more than $___ per share. The
underwriters may allow and the dealers may reallow a concession of not more than
$__ per share on sales to other brokers and dealers. After the offering, these
figures may be changed by the representative.
We have granted to the underwriters an option to purchase up to an
additional ______ shares of common stock from us, at the same price to the
public, and with the same underwriting discount, as set forth in the table on
the cover page of this prospectus. The underwriters may exercise this option any
time during the 45-day period after the date of this prospectus, but only to
cover over-allotments, if any. To the extent the underwriters exercise the
option, each underwriter will become obligated, subject to certain conditions,
to purchase approximately the same percentage of the additional shares as it was
obligated to purchase under the underwriting agreement.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters in connection with this offering.
These amounts are shown assuming both no exercise and full exercise of the
over-allotment option to purchase additional shares.
Paid by Ranch *1
No Exercise Full Exercise
----------- -------------
Per share ............ $ $
Total ................ $ $
Josephthal & Co. Inc., the representative, acted as placement agent in
connection with the private placement of our Series C convertible preferred
stock in October, 1999. We issued warrants to purchase shares of Series C
convertible preferred stock and ____ warrants to purchase common stock at an
exercise price of $___________ per share to Josephthal & Co. Inc. for its
services as placement agent. We paid Josephthal & Co. Inc. $ for its services as
placement agent. In addition, JP Partners L.P., an affiliate of Dan Purjes,
Chairman of Josephthal & Co. Inc., participated in the private placement by
purchasing 5 units, consisting of shares of Series C convertible preferred stock
and warrants.
We have also agreed to sell to the representative of the underwriters, for
nominal consideration, warrants to purchase the number of shares of our common
stock equal to 10% of the total number of shares of common stock sold in this
offering at a price per share equal to 120% of the initial public offering price
of the common stock. The warrants will be exercisable for a period of four years
commencing one year from the effective date of this offering and will contain
demand and "piggyback" registration rights with respect to the common stock
issuable upon the exercise of the warrants. The warrants will be restricted from
sale, transfer, assignment or hypothecation for a period of one year from the
effective date of the offering except to officers or partners of the
representative and members of the selling group and/or their officers or
partners.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act, or to contribute to payments that the
underwriters may be required to make in respect to those liabilities. The
underwriters have informed us that neither they, nor any other underwriter
participating in the distribution of the
50
<PAGE>
offering, will make sales of the common stock offered by this prospectus to
accounts over which they exercise discretionary authority without the prior
written approval of the customer specifically relating to the shares offered in
this prospectus. The offering of our shares of common stock is made for delivery
when, as and if accepted by the underwriters and subject to prior sale and to
withdrawal, cancellation or modification of the offering without notice. The
underwriters reserve the right to reject an order for the purchase of shares in
whole or part.
We and each of our directors, executive officers and stockholders have
agreed with the representative not to directly or indirectly offer for sale,
sell, contract to sell, grant any option for the sale of, or otherwise issue or
dispose of, any shares of common stock, options or warrants to acquire shares of
common stock, or any related security or instrument, for a period of 180 days
after the date of this prospectus, without the prior written consent of the
representative.
Prior to the offering, there has been no established trading market for the
common stock. The initial public offering price for the shares of common stock
offered by this prospectus was negotiated by us and the representative of the
underwriters. The factors considered in determining the initial public offering
price include:
o the history of and the prospects for the industry in which we compete;
o our past and present operations;
o our historical results of operations;
o our prospects for future earnings;
o the recent market prices of securities of generally comparable
companies;
o the general condition of the securities markets at the time of the
offering; and
o other relevant factors.
There can be no assurance that the initial public offering price of the
common stock will correspond to the price at which the common stock will trade
in the public market subsequent to this offering or that an active public market
for the common stock will develop and continue after this offering.
To facilitate the offering, the underwriters may engage in transactions
that stabilize, maintain or otherwise affect the price of the common stock
during and after the offering. Specifically, the underwriters may over-allot or
otherwise create a short position in the common stock for their own account by
selling more shares of common stock than have been sold to them by us. The
underwriters may elect to cover any such short position by purchasing shares of
common stock in the open market or by exercising the over-allotment option
granted to the underwriters.
The underwriters may also stabilize or maintain the price of the common
stock by bidding for or purchasing shares of common stock on the open market and
may impose penalty bids. If penalty bids are imposed, selling concessions
allowed to syndicate members or other broker-dealers participating in the
offering are reclaimed if shares of common stock previously distributed in the
offering are repurchased, whether in connection with stabilization transactions
or otherwise. The effect of these transactions may be to stabilize or maintain
the market price of the common stock at a level above that which might otherwise
prevail in the open market. The imposition of a penalty bid may also affect the
price of the common stock to the extent that it discourages resales of the
common stock. The magnitude or effect of any stabilization or other transactions
is uncertain. These transactions may be effected on the Nasdaq National Market
or otherwise and, if commenced, may be discontinued at anytime.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Greenberg Traurig, New York, New York. Certain legal matters in
connection with this offering will be passed upon for the underwriters by
Orrick, Herrington & Sutcliffe LLP, New York, New York.
51
<PAGE>
EXPERTS
The consolidated financial statements of Ranch *1, Inc. (formerly Franchise
Concepts Group, Inc.) and subsidiaries as of May 31, 1999 and for each of the
years in the two-year period then ended, have been included herein and in the
registration statement in reliance upon the report of KPMG LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form SB-2 (including
the exhibits, schedules and amendments to the registration statement) under the
Securities Act with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information set forth in the
registration statement. For further information with respect to our company and
the shares of common stock to be sold in this offering, reference is made to the
registration statement. Statements contained in this prospectus as to the
contents of any contract, agreement or other document referred to are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
You may read and copy all or any portion of the registration statement or
any other information we file at the SEC's public reference room at 450 Fifth
Street N.W., Washington, D.C. 20549. You can request copies of these documents,
upon payment of a duplicating fee, by writing to the SEC, Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. Our SEC filings, including the registration statement, are also available
to you on the Commission's Web site (http://www.sec.gov).
We intend to furnish our stockholders with annual reports containing
audited consolidated financial statements and with quarterly reports for the
first three quarters of each year containing unaudited interim consolidated
financial information.
52
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report ............................................... F-2
Financial Statements:
Consolidated Balance Sheet, May 31, 1999 .............................. F-3
Consolidated Statements of Operations,
Years Ended May 31, 1998 and 1999 ................................... F-4
Consolidated Statements of Stockholders'
Deficit, Years Ended May 31, 1998 and 1999 .......................... F-5
Consolidated Statements of Cash Flows,
Years Ended May 31, 1998 and 1999 ............................ F-6 - F-7
Notes to Consolidated Financial Statements .......................... F-8 - F-53
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Ranch*1, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheet of Ranch *1, Inc.
and subsidiaries (formerly Franchise Concepts Group, Inc. and subsidiaries) as
of May 31, 1999 and the related consolidated statements of operations,
stockholders' deficit, and cash flows for each of the years in the two-year
period ended May 31, 1999. 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 financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Ranch*1, Inc. and
subsidiaries as of May 31, 1999 and the results of their operations and their
cash flows for each of the years in the two-year period ended May 31, 1999 in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in note 2 to the
consolidated financial statements, the Company has suffered recurring losses
from operations that raise substantial doubt about its ability to continue as a
going concern. Management of the Company is finalizing its cost reduction plan,
and implementing a new strategic plan, which includes the opening of additional
restaurants and raising investment capital. At May 31, 1999, $1,997,500 of the
Company's outstanding notes payable, as well as related accrued interest, were
past due and in default. At May 31, 1999, the Company was in violation of
certain covenants of a $2,439,769 loan agreement with a financial institution,
which has been classified as a current liability in the accompanying
consolidated balance sheet. At May 31, 1999, the Company was also delinquent in
the payment of New York State sales taxes, New York City occupancy taxes,
certain real estate lease obligations and obligations under separation
agreements with several former members of Company management. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Melville, New York
October 1, 1999
F-2
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(formerly Franchise Concepts Group, Inc.
and Subsidiaries)
Consolidated Balance Sheet
May 31, 1999
<TABLE>
<S> <C>
Assets
Cash $ 574,298
Restricted cash 435,835
Franchise and other receivables, net of allowance for doubtful accounts of $70,000 411,560
Inventory 117,196
Prepaid expenses and other assets 310,637
------------
Total current assets 1,849,526
Property and equipment, net 5,974,821
Security deposits 1,012,263
Deferred financing costs, net 155,611
Intangible assets, net 466,156
Other assets 515,610
------------
Total assets $ 9,973,987
============
Liabilities and Stockholders' Deficit
Accounts payable $ 2,317,093
Accrued expenses 1,725,917
Current installments of long-term debt, including amounts due to related
parties of $2,550,661 5,783,387
Current installments of capital lease obligations 91,814
Other short-term liabilities 361,500
------------
Total current liabilities 10,279,711
Long-term debt due to related parties, excluding current installments 203,375
Deferred franchise and area development fees 1,091,900
Deferred rent 1,706,535
Capital lease obligations, less current installments 357,866
Deferred revenue 91,873
Other long-term liabilities 337,543
------------
Total liabilities 14,068,803
------------
Series A convertible, redeemable preferred stock $.001 par value,
2,800,000 shares authorized, issued and outstanding 7,521,583
Stockholders' deficit:
Common stock, $.001 par value, 20,000,000 shares authorized,
11,401,263 shares issued and outstanding 11,401
Additional paid-in capital 6,024,853
Accumulated deficit (17,652,653)
------------
Total stockholders' deficit (11,616,399)
------------
Total liabilities and stockholders' deficit $ 9,973,987
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(formerly Franchise Concepts Group, Inc.
and Subsidiaries)
Consolidated Statements of Operations
Years ended May 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Revenues:
Restaurant sales $ 10,164,153 17,147,358
Royalties and franchise related revenue 475,952 815,296
Other 39,702 49,628
------------ ------------
10,679,807 18,012,282
------------ ------------
Expenses:
Food and paper costs 3,024,989 5,387,758
Restaurant operating expenses 4,479,054 6,422,061
Restaurant occupancy and related expenses 2,574,327 4,019,274
Marketing and promotional expenses 918,831 1,174,756
General and administrative 4,548,694 4,806,110
Depreciation and amortization 685,864 787,104
Impairment charges 3,566,871 66,420
Interest expense, net 608,011 944,197
------------ ------------
20,406,641 23,607,680
------------ ------------
Loss before income taxes and extraordinary item (9,726,834) (5,595,398)
Income taxes 14,936 59,398
------------ ------------
Loss before extraordinary item (9,741,770) (5,654,796)
Extraordinary gain on extinguishment of debt 225,000 --
------------ ------------
Net loss (9,516,770) (5,654,796)
Accrual of dividends, issuance of performance warrants and
amortization of issuance costs on preferred shares (111,741) (1,000,739)
------------ ------------
Net loss applicable to common shares $ (9,628,511) (6,655,535)
============ ============
Net loss per common share:
Loss before extraordinary item (0.91) (0.61)
Extraordinary gain 0.02 --
------------ ------------
Net loss - basic and diluted $ (0.89) (0.61)
============ ============
Weighted average number of common and common equivalent shares outstanding:
Basic and diluted 10,773,778 10,952,206
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(formerly Franchise Concepts Group, Inc.
and Subsidiaries)
Consolidated Statements of Stockholders' Deficit
Years ended May 31, 1998 and 1999
<TABLE>
<CAPTION>
Common stock Total
------------------------- Additional stock-
Number of paid-in Accumulated holders'
shares Amount capital deficit deficit
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at May 31, 1997 10,000,000 $ 10,000 4,265,424 (2,481,087) 1,794,337
Proceeds from issuance of common stock 750,000 750 1,499,250 -- 1,500,000
Issuance of stock warrants in connection with financing
arrangements -- -- 183,400 -- 183,400
Issuance of stock and stock warrants for services 60,000 60 31,044 -- 31,104
Accrued dividends on preferred shares -- -- (102,356) -- (102,356)
Amortization of issuance costs on preferred shares -- -- (9,385) -- (9,385)
Net loss -- -- -- (9,516,770) (9,516,770)
----------- ----------- ----------- ----------- -----------
Balance at May 31, 1998 10,810,000 10,810 5,867,377 (11,997,857) (6,119,670)
Proceeds from issuance of common stock 100,000 100 299,900 -- 300,000
Issuance of stock warrants in connection
with financing arrangements -- -- 272,716 -- 272,716
Issuance of stock for services 491,263 491 51,899 -- 52,390
Issuance of options in connection with
separation agreements -- -- 130,500 -- 130,500
Accrued dividends on preferred shares -- -- (560,000) -- (560,000)
Amortization of issuance costs on preferred shares -- -- (37,539) -- (37,539)
Net loss -- -- -- (5,654,796) (5,654,796)
Accrued dividends on preferred shares relating to issuance
of performance warrants -- -- (403,200) -- (403,200)
Issuance of performance warrants -- -- 403,200 -- 403,200
----------- ----------- ----------- ----------- -----------
Balance at May 31, 1999 11,401,263 $ 11,401 6,024,853 (17,652,653) (11,616,399)
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(formerly Franchise Concepts Group, Inc.
and Subsidiaries)
Consolidated Statements of Cash Flows
Years ended May 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(9,516,770) (5,654,796)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 685,864 787,104
Amortization of debt discount 52,731 29,559
Impairment charges 3,566,871 66,420
Gain on extinguishment of debt (225,000) --
Warrants or stock issued for services or debt 236,296 455,606
Increase in provision for doubtful accounts -- 50,000
Deferred compensation charge (reversal) 503,143 (326,418)
Changes in operating assets and liabilities, net of effect of purchase
of acquired business:
Franchise and other receivables (156,577) (107,998)
Inventory (62,254) (2,898)
Prepaid expenses and other assets (198,657) (209,615)
Security deposits (525,522) (118,255)
Accounts payable 60,453 1,238,178
Accrued expenses 472,140 80,111
Deferred franchise and area development fees (82,600) 472,000
Deferred revenue 166,762 (74,889)
Other short-term liabilities -- 361,500
Deferred rent 917,390 420,020
----------- -----------
Net cash used by operating activities (4,105,730) (2,534,371)
----------- -----------
Cash flows from investing activities:
Purchases of property, plant and equipment (4,378,272) (1,435,391)
Acquisition of franchise restaurant (200,000) --
----------- -----------
Net cash used by investing activities (4,578,272) (1,435,391)
----------- -----------
Cash flows from financing activities:
Proceeds from sale of common stock 1,500,000 300,000
Restricted cash (200,000) (235,835)
Repayments of capital lease obligations (8,884) (56,485)
Proceeds from convertible redeemable preferred stock, net 6,812,303 --
Payments of deferred financing costs (45,849) (126,359)
Proceeds from third-party debt -- 3,900,298
Repayments of third-party debt (2,947,292) (694,433)
Proceeds from stockholder borrowings 1,200,000 1,287,500
Repayments of stockholder borrowings (694,389) (102,637)
----------- -----------
Net cash provided by financing activities 5,615,889 4,272,049
----------- -----------
Net (decrease) increase in cash (3,068,113) 302,287
Cash at beginning of year 3,340,124 272,011
----------- -----------
Cash at end of year $ 272,011 574,298
=========== ===========
</TABLE>
(Continued)
F-6
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(formerly Franchise Concepts Group, Inc.
and Subsidiaries)
Consolidated Statements of Cash Flows
Years ended May 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Non-cash transactions:
Issuance of notes payable and assumption of liabilities in
connection with acquisition of franchisee restaurant $ 260,000 --
=========== ===========
Accrued dividends and issuance of performance warrants on
preferred shares $ 102,356 963,200
=========== ===========
Cash paid during the period for:
Interest $ 658,402 302,935
=========== ===========
Income taxes $ 14,936 59,398
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(1) DESCRIPTION OF BUSINESS
Ranch*1, Inc. and subsidiaries (Ranch*1) (formerly Franchise Concepts
Group, Inc.) operates in a single segment, which is the franchising and
operating of food service stores under the Ranch*1 brand name, specializing
in fresh, convenient meal solutions featuring a fresh grilled chicken
breast sandwich, fresh-cut Ranch Fries and a variety of freshly prepared
menu selections. Unless otherwise indicated, Ranch*1 are hereinafter
referred to collectively as the "Company".
At May 31, 1999, there were 41 Ranch*1 stores, consisting of 23 franchise
stores and 18 Company owned stores.
(A) CORPORATE ORGANIZATION
The Company was incorporated in the State of Delaware on June 12, 1996. In
November 1996, the Company acquired 100% of the outstanding common stock of
Ranch*1 Group, Inc. and affiliates, pursuant to a stock purchase agreement
dated September 26, 1996, for aggregate consideration of $2,422,234.
In April 1997, an amendment to the Company's certificate of incorporation
was approved and adopted to give the Company the authority to issue the
following classes of stock: (i) a total of 15,000,000 shares of common
stock, with a par value of $.001; (ii) a total of 1,000,000 shares of
preferred stock, with a par value of $.001, to be issued in such series and
with such designations, powers, preferences, rights, and such
qualifications, limitations or restrictions thereof as the Board of
Directors shall fix by resolution.
On February 26, 1998, a second amendment to the Company's certificate of
incorporation was approved and adopted pursuant to the sale of $4,000,000
of Series A Convertible Preferred Stock (note 8). The amendment increases
the number of authorized common shares to 20,000,000 and established the
authority to issue 2,800,000 shares of Series A Convertible Preferred
Stock, with a par value of $.001 per share. The amendment also established
parameters for dividends, liquidation preferences, voting rights and other
governance matters.
On July 30, 1999, the Board of Directors adopted a resolution and
certificate of amendment to the second amended and restated certificate of
incorporation, as well as adopted certificates of designation of Series B
and Series C Convertible Preferred Stock. The Board designated 500,000
shares of Series B preferred stock, with a $.001 par value and $2.50
liquidation value per share. The Series B preferred stock are non-dividend
bearing and are automatically convertible into shares of common stock on
the date that a Registration Statement registering shares of common stock
is declared effective. The Series C 15% convertible preferred stock are
automatically convertible into shares of common stock on the date that a
Registration Statement registering shares common stock is declared
effective. The Series C certificate of designation was subsequently amended
on September 13, 1999 and September 20, 1999 (note 8).
F-8
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On August 20, 1999, a third amendment to the Company's certificate of
incorporation was approved and adopted, pursuant to the July 30, 1999
resolution. The amendment changes the name of the Company to Ranch*1, Inc.
The amendment also (i) increases the number of authorized shares of capital
stock to 32,800,000 of which 25,000,000 shares are designated $.001 par
value common stock, (ii) designated 2,800,000 shares as Series A
Convertible Preferred Stock with a $.001 par value and (iii) designated
5,000,000 shares of $.001 par value Preferred Stock, to be issued in such
series and such designations, preferences, powers and rights as the Board
of Directors may authorize. The amendment also re-established parameters
for dividends, liquidations preferences, voting rights and other governance
matters.
F-9
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All
significant inter-company balances and transactions have been
eliminated in consolidation.
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets
and the satisfaction of liabilities and commitments in the normal
course of business. However, due to the matters discussed below, its
continuation as a going concern can not be reasonably assured.
The Company has incurred aggregate losses since inception of
$17,652,653, inclusive of a net loss in fiscal 1999 of $5,654,796.
Based upon interim financial information prepared by management, the
Company has continued to incur losses in fiscal 2000.
Additionally, at May 31, 1999, the Company is delinquent in the filing
and payment of New York State sales taxes of approximately $320,000
and New York City occupancy taxes of approximately $290,000. At May
31, 1999, the Company was in default in the payment of obligations
pursuant to restaurant operating leases of $147,000. As indicated in
note 15, the Company has entered into Stipulation Agreements to cure
the above mentioned lease defaults. Additionally, two $300,000 notes
payable which matured on June 6, 1998, a $60,000 note payable which
matured on April 27, 1999, a $225,000 note payable which matured on
December 16, 1998, three $100,000 notes payable which matured on
December 17, 1998, a $500,000 note payable which matured on December
18, 1998, two notes payable aggregating $62,500 which matured on
January 30, 1999, a $250,000 note payable which matured on February 6,
1999, such obligations aggregating $1,997,500 plus related accrued
interest, and all of which are in default at May 31, 1999.
Additionally, as indicated in note 7, the Company was in violation of
certain covenants of a $2,439,769 loan agreement with a financial
institution.
In fiscal 1999, the Company commenced a Cost Reduction Plan which
included the resignation of several corporate officers (note 13) and a
reduction in workforce. The Company also began the implementation of a
new strategic plan, which includes a significant expansion in
franchising operations, the development of new prototype restaurants,
the satisfaction and restructuring of delinquent debt obligations and
the completion of new financing arrangements.
F-10
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On May 6, 1999, the Company entered into an agreement with an
investment banking firm for a proposed initial public offering of
$20,000,000 of the common stock of the Company on a firm commitment
basis, subject to various terms and conditions as outlined in the
Agreement. Additionally, on June 11, 1999, the Company entered into a
second agreement with the investment banking firm to sell a maximum of
$4,000,000 of convertible preferred stock on a best efforts basis.
Subsequent to May 31, 1999, the Company sold 124,000 shares of Series
B Preferred Stock for $310,000 and obtained one year bridge loans
aggregating $685,000, bearing interest at 15% and issued an aggregate
of 137,000 warrants exercisable at $2.50 per share, based on a change
in control, or the initial public offering price.
F-11
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On September 10, 1999, noteholders aggregating $2,937,500, including
$1,937,500 of notes payable in default on May 31, 1999 extended the
maturity date of these obligations, including accrued interest, until
March 10, 2000.
As indicated in note 8, all outstanding shares of Series B Preferred
Stock are also automatically convertible into Company common stock at
the lower of $2.50 per share or 70% of the initial public offering
price on the date that a Registration Statement registering shares of
common stock is declared effective.
In September 1999, noteholders aggregating $2,487,500, including
$2,087,500 of notes payable outstanding at May 31, 1999 and $400,000
of bridge loans issued subsequent to May 31, 1999, converted their
obligations, inclusive of accrued interest, into Series C preferred
stock at $50,000 per share, effective immediately, which is
automatically convertible into Company common stock at 70% of the
initial public offering price of the common stock on the date that a
Registration Statement registering shares of common stock is declared
effective. The Series C noteholders will receive warrants equal to 1/3
of the preferred stock acquired, exercisable at the initial public
offering price. In the event that an initial public offering is not
consumated within an 18 month period, at the option of the holder, the
Company must redeem the preferred stock at $50,000 per share plus
accrued dividends. In the event of a change in control prior to an
initial public offering, the holder has the option to redeem as noted
above or convert their holdings into common stock at $2.50 per share.
As a condition of this conversion, all warrants previously held by the
aforementioned bridge noteholders were surrendered.
In September 1999, the holders of 2,800,000 shares of Series A of
Preferred Stock, pursuant to the approval of greater than 60% of the
Series A preferred stockholders, agreed to convert their shares of
Series A Preferred Stock into shares of common stock, at the lower of
$2.50 per share or 70% of the initial public offering price on the
date that a Registration Statement registering shares of common stock
is declared effective and, at the Company's option, either convert
$662,356 of accumulated dividends as of May 31, 1999 and an
acceleration of $2,137,644 of dividends payable through the remaining
term of the Series A preferred stock agreement into shares of common
stock at the initial public offering price or be paid in cash.
Additionally, on July 30, 1999, warrant holders of 2,193,333
outstanding warrants converted the warrants into 1,456,480 shares of
Company common stock on a cash-less exercise, based upon the fair
value of the warrants on July 30, 1999 as determined by the Company's
Board of Directors, at a conversion rate of $2.40 per share.
Management believes that the finalization of its financing
arrangements and implementation of its Strategic Plan will enable the
Company to achieve profitable operations and restore liquidity.
However, no assurance can be made regarding the successful completion
of the aforementioned financing arrangements or achievement of the
Strategic Plan as outlined above, or if such plans are achieved, that
the Company's operations will be profitable.
F-12
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(B) RESTRICTED CASH
Restricted cash consists of segregated balances relating to certain
franchise agreements, co-operative advertising funds and construction
funds.
(C) INVENTORIES
Inventories consist primarily of restaurant food items and supplies
and are stated at the lower of cost or market value. Cost is
determined using the first-in, first-out method.
F-13
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(D) DEFERRED FINANCING COSTS
Deferred financing costs are being amortized over the term of the
debt. Accumulated amortization was $16,596 at May 31, 1999.
(E) PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is calculated
on the straight-line basis over the estimated useful lives of the
assets. Leasehold improvements are amortized over the shorter of the
estimated useful life or the lease term of the related asset. The
estimated useful lives are as follows:
Restaurant equipment 5-7 years
Furniture and fixtures 5-7 years
Computer equipment and software 5 years
(F) PRE-OPENING COSTS
Pre-opening costs incurred in connection with the opening of new
restaurants are expensed as incurred and are included in restaurant
operating expenses in the accompanying consolidated statements of
operations.
(G) INTANGIBLE ASSETS
Intangible assets represents goodwill, the excess of purchase price
over the fair value of net assets acquired. Goodwill and related
intangible assets are being amortized on a straight-line basis over a
twenty-year period.
The Company assesses the recoverability of goodwill and other
intangibles by determining whether the amortization of the related
balances over their remaining useful lives can be recovered through
undiscounted future operating cash flows. The amount of goodwill
impairment, if any, is measured based on estimated fair value.
Estimated fair value is generally determined based upon discounting
estimated future cash flows. The assessment of the recoverability of
goodwill and other intangibles will be impacted if estimated future
operating cash flows are not achieved (note 4). At May 31, 1999,
goodwill was $521,600 and accumulated amortization was $55,444.
Amortization expense was $169,919 and $26,729 for the years ended May
31, 1998 and 1999, respectively.
(H) FRANCHISE, LICENSING AND AREA DEVELOPMENT FEE REVENUE RECOGNITION
F-14
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Franchisees are required to execute a separate franchise or license
agreement for each restaurant. Under an area development agreement,
the number of restaurants and the area designated for development are
established and the franchisee is required to construct and open such
restaurants within a defined timetable. For each restaurant under an
area development agreement, a separate franchise or license agreement
is executed.
Franchisees under a franchise agreement are generally required to pay
an initial franchise fee and a monthly royalty of 5% of restaurant
sales. Licensees are required to pay an initial licensing fee and a
monthly royalty of 4% of restaurant sales.
F-15
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Franchise and licensing fees are recognized as revenue when the
Company performs substantially all initial services required by the
franchise or licensing agreement, which is generally upon restaurant
opening. Revenue under area development agreements is recognized
ratably over the number of restaurants opened, as provided for in the
respective agreements. Franchise and licensing royalties are accrued
as earned. Franchise, licensing and area development fees received
prior to completion of the revenue recognition process are recorded as
deferred revenue. At May 31, 1999, $1,091,900 of deferred franchise
and area development fees are included in the accompanying
consolidated balance sheet.
(I) ADVERTISING
The Company maintains advertising funds for local and regional
advertising, in accordance with the Ranch*1 Franchise Agreement. Under
this arrangement, the Company collects and disburses fees paid by
franchisees and Company-owned stores for advertising, promotional and
public relations programs for the Ranch*1 concept. Contributions are
based on specified percentages of net sales, generally ranging between
3% - 4%. Advertising contributions from Company-owned stores are
included in marketing and promotional expenses in the accompanying
consolidated statements of operations. Total advertising expenses were
$972,824 and $1,572,298 for the years ended May 31, 1998 and 1999,
respectively, which are included in marketing and promotional expenses
in the accompanying consolidated statements of operations. Total
advertising contributions realized from franchisees was $53,993 and
$397,542 for the years ended May 31, 1998 and 1999, respectively, and
is recorded as an offset to advertising expense in marketing and
promotional expenses. The Company charges all production costs of
advertising to expense when the advertisements are run. The Company
also funds the excess of any advertising expenditures over revenues,
if any, and records such amounts in marketing and promotional expenses
in the accompanying consolidated statements of operations.
(J) LONG-LIVED ASSETS
The Company's accounting policies relating to the recording of
long-lived assets, including property and equipment and intangibles
are discussed above. The Company has adopted the provisions of
Statement 121. Statement 121 requires, among other things, that
long-lived assets held and used by an entity be reviewed for
impairment whenever events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. Recoverability of
assets to be held and used is measured by a comparison of the carrying
amount of an asset to future net cash flows expected to be generated
by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair values of the assets
(note 4). Assets to be disposed of or sold are reported at the lower
of the carrying amount or fair value less costs to sell.
F-16
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(K) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their existing tax bases and operating loss carryforwards. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the
temporary differences and carryforwards are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date.
F-17
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(L) DEFERRED RENT
Rent expense on operating leases with scheduled or minimum rent
increases is expensed on the straight-line basis over the lease terms.
Deferred rent represents the excess of rent charged to expense over
rent payable under the lease agreement.
(M) DEFERRED REVENUE
Deferred revenues represent advances received pursuant to the terms of
a marketing agreement, which are recorded as revenue over the term of
the agreement.
(N) FINANCIAL INSTRUMENTS
Management of the Company believes that the book value of its monetary
assets and liabilities, approximates fair value as a result of the
short-term nature of such assets and liabilities.
(O) ACCOUNTING FOR STOCK-BASED COMPENSATION
Effective July 1, 1996, the Company adopted SFAS No. 123 "Accounting
for Stock-Based Compensation", which encourages, but does not require,
companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation under the existing accounting
rules contained in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees", and related
interpretations, but has provided disclosures of stock-based
compensation expense determined under the fair value provisions of
SFAS No. 123.
(P) BASIC AND DILUTED LOSS PER COMMON SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share" ("Statement 128"). Statement
128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Basic earnings per
share excludes any dilution. It is based upon the weighted average
number of common shares outstanding during the period. Dilutive
earnings per share reflects the potential dilution that would occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The Company's dilutive earnings per share
equals basic earnings per share for each of the years in the two-year
period ended May 30, 1999 because all common stock equivalents (i.e.,
options and warrants) were antidilutive in those periods.
F-18
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(Q) COMPREHENSIVE INCOME
Effective for fiscal 1999, the Company adopted the provisions of SFAS
No. 130, "Reporting Comprehensive Income". This Statement requires
that companies disclose comprehensive income, which includes net
income, foreign currency translation adjustments, minimum pension
liability adjustments, and unrealized gains and losses on marketable
securities classified as available-for-sale. Because the Company did
not have any foreign currency translation adjustments, minimum pension
liability adjustments, or unrealized gains or losses on marketable
securities classified as available-for-sale, for the years ended May
31, 1998 and 1999, comprehensive loss equaled the net loss of
($9,516,770) and ($5,654,796), respectively.
F-19
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(R) CONCENTRATIONS OF RISK
At May 31, 1999, all but one of the Company's owned and operated
restaurants are located in the New York, New Jersey and Connecticut
tri-state area. Consequently, adverse economic or other conditions in
the tri-state area could have a more significant effect on the results
of operations than would be the case for a company with a more
geographically dispersed restaurant base.
The Company has one supplier for chicken breasts, the core product
used in virtually all the Company's menu items. Although the Company
believes that alternative sources of supply are available, any increse
in price or failure to perform by the supplier could significantly
increase food costs or disrupt restaurant operations.
The Company's trade receivables consist principally of receivables
from franchisees for royalties and advertising contributions, as well
as one receivable pursuant to an area development agreement. At May
31, 1999, two franchise receivables individually exceeded 5% of
franchise royalties receivable, aggregating 15%, and one area
development receivable was $250,000, including $167,000 which is
classified as a long-term asset.
(S) USE OF ESTIMATES
Management of the Company has made a number of estimates and
assumptions relating to the reporting of assets and liabilities and
the disclosures of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
(3) ACQUISITIONS
On April 27, 1998, the Company purchased the assets and assumed certain
liabilities of a franchised restaurant for an aggregate consideration of
$460,000, including cash payments of $200,000. This transaction has been
accounted for using the purchase method of accounting and, accordingly, the
purchase price was allocated to identifiable assets and liabilities based
upon their fair values at the date of acquisition. The excess of the
aggregate purchase price over the fair value of net assets acquired of
$399,000 was recorded as goodwill and is being amortized over twenty years.
The Company's 1998 financial statements contain one month of operations of
this restaurant. Pro forma data has not been provided, as they were deemed
immaterial to the operations of the Company by management.
(4) IMPAIRMENT CHARGES
Based upon a strategic assessment of recent trends, pursuant to the
approval of the Board of Directors, in 1998 the Company recorded a charge
of $3,566,871, representing the write-down of impaired restaurant assets,
as well as the write-down of goodwill.
F-20
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
The Company performed an in-depth analysis of historical and projected
operating results, which reflected a pattern of historical operating losses
and negative cash flows, as well as continued projected negative cash flow
and operating results. Accordingly, the Company has recorded an impairment
charge to write-down these impaired assets, including both enterprise value
goodwill and goodwill associated with restaurant acquisitions and will
contemplate the restaurants' potential closure upon future operating
results. The Company has ascribed no value to the leasehold improvements as
these assets inure to the benefit of the landlord and has estimated the net
realizable value of furniture and equipment. In fiscal 1999, a further
impairment charge of $66,420 was recorded. The components of the charges
are as follows:
F-21
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
1998 1999
---------- ----------
Write-down of goodwill $3,005,839 --
Write-down of leasehold improvements
and equipment 561,032 66,420
---------- ----------
$3,566,871 66,420
========== ==========
(5) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at May 31, 1999:
Restaurant equipment $ 952,777
Furniture and fixtures 791,165
Computer equipment and software 762,286
Leasehold improvements 4,607,435
-----------
7,113,663
Less accumulated depreciation
and amortization (1,138,842)
-----------
Property and equipment, net $ 5,974,821
===========
Depreciation and amortization expense of property and equipment was
$324,795 and $760,375 for the years ended May 31, 1998 and May 31, 1999,
respectively.
(6) AREA DEVELOPMENT AGREEMENT
On April 27, 1999, the Company entered into an international development
agreement to develop and operate up to 35 units of Ranch*1 in Asia for
$500,000. As of May 31, 1999, no units have opened pursuant to the
provisions of the agreement. The agreement provided for an initial cash
payment of $250,000 and the remaining $250,000 payable in three annual
installments, due on the anniversary date of this agreement. At May 31,
1999, these fees are included in the accompanying consolidated balance
sheet as deferred franchise and area development fees.
(7) FINANCING ARRANGEMENTS
Long-term debt at May 31, 1999 is summarized as follows:
F-22
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Obligations to financial institutions (a) $2,439,769
Convertible note payable (b) --
Promissory notes, net of debt discount of
$6,608 (c) 3,546,993
----------
5,986,762
Less current installments 5,783,387
----------
$ 203,375
==========
F-23
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(A) OBLIGATIONS TO FINANCIAL INSTITUTION
On August 31, 1998, the Company entered into a $2,600,000 loan
agreement with a financial institution and $2,439,769 is outstanding
at May 31, 1999. The loan bears interest at a fixed rate of 10.08% and
is secured by a first priority interest in specified corporate assets
and stipulated cross-corporate subsidiary guarantees, with monthly
principal and interest payments payable over a ninety month term. The
loan agreement contains a variety of financial and operating covenants
and the Company was not in compliance with several of these covenants
as of May 31, 1999. Accordingly, at May 31, 1999, the obligation is
classified as a current liability in the accompanying consolidated
balance sheet.
(B) CONVERTIBLE NOTE PAYABLE
On November 18, 1996, the Company executed a loan agreement with
Manhattan Bagel Company (MBC), which provided for the issuance of a
$1,500,000 convertible note, bearing interest at prime plus 2% (10% at
May 31, 1997). As additional consideration for the issuance of the
note, MBC received 5% of the then outstanding common stock of the
Company. The Company has recorded the fair value of the shares at the
date of issuance, approximately $100,000, as a deferred financing cost
and additional paid-in capital in the accompanying consolidated
balance sheet. The note also provides for a default interest rate
penalty of 4%, for any period in which the note is in default. The
debt is convertible into common stock at the option of MBC upon the
Company's filing for an initial public offering of its common stock
pursuant to the Securities Act of 1933. The shares are convertible at
a formula rate defined in the loan agreement. The note matures at the
earlier of the consummation of a qualified initial public offering or
November 18, 1999.
At May 31, 1997, the Company was in default with the provisions of the
$1,500,000 convertible note agreement with MBC. On November 19, 1997,
MBC filed a voluntary petition for relief under Chapter 11 of the
United States Bankruptcy Code. On January 22, 1998, legal counsel for
MBC issued a default letter to the Company, demanding immediate and
full payment of the $1,500,000 obligation plus accrued interest and
indicated its intention to perfect its security interest in the
pledged collateral. On February 26, 1998, the Company entered into a
stipulation agreement with MBC, subject to Bankruptcy Court and other
approvals, which would provide for a settlement of the $1,500,000
convertible note payable for $1,275,000 and accrued interest, among
other conditions. On March 30, 1998, the Bankruptcy Court entered an
approval order of the stipulation agreement and the obligation was
satisfied by the Company. The Company has accounted for the
forgiveness of debt of $225,000 as an extraordinary gain in the
accompanying 1998 consolidated statement of operations.
F-24
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(C) NOTES PAYABLE
On February 19, 1999, the Company obtained bridge financing from a
shareholder and director through the issuance of a promissory note in
the amount of $250,000. The notes are unsecured, bear interest at a
fixed rate of 10% and mature on March 19, 2000. The loan agreement
contains a provision accelerating the payment of principal and
interest if the Company obtains additional financing of at least
$5,000,000 through either debt or equity. The notes also provide for a
default interest rate penalty of 4%, for any period in which the note
is in default. In connection with this transaction, the Company also
executed a Common Stock Purchase Warrant Agreement. Under the
provisions of the Agreement, the lender could purchase 112,500 shares
of the Company's common stock at a per share price of $2.50. The
Company recorded the fair value of these warrants as determined by an
independent valuation in connection with financing arrangements of $0
as additional paid-in capital and debt discount. At May 31, 1999,
$250,000 is outstanding under this financing arrangement.
F-25
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On January 25, 1999, the Company obtained $350,000 of short-term
financing. The loan is unsecured, bears interest at a fixed rate of
10% and is payable quarterly and the principal amount is due on
February 25, 2000. Additionally, if the notes are in default at or
subsequent to the maturity date, they are convertible at the option of
the holder into common stock at the rate of $.25 per share. The loan
agreement contains a provision accelerating the payment of principal
and interest if the Company obtains additional financing of at least
$5,000,000 through either debt or equity. The loan also provides for a
default interest rate penalty of 4%, for any period in which the note
is in default. In connection with this transaction, the Company also
executed a Common Stock Purchase Warrant Agreement. Under the
provisions of the Agreement, the lender could purchase 157,500 shares
of the Company's common stock at a per share price of $2.50. The
Company recorded the fair value of these warrants as determined by an
independent valuation in connection with financing arrangements of
$4,725 as additional paid-in capital and debt discount. At May 31,
1999, $350,000 is outstanding under this financing arrangement.
On January 18, 1999, the Company issued a note payable for
construction services performed in the amount of $250,298. The note is
unsecured, bears interest at a rate of 9.00% and matured on May 10,
1999. The Company has obtained an extension on the due date of this
note through October 8, 1999. At May 31, 1999, the outstanding balance
of the note was $100,092.
On January 4, 1999, the Company obtained $400,000 of short-term
financing. The loan is unsecured, bears interest at a rate of 10%,
with interest payable quarterly and the principal amount is due in its
entirety in February 2000. The loan agreement contains a provision
accelerating the payment of principal and interest if the Company
obtains additional financing of at least $5,000,000 through either
debt or equity. The loan also provides for a default interest rate
penalty of 4%, for any period in which the note is in default. In
connection with this transaction, the Company also executed a Common
Stock Purchase Warrant Agreement. Under the provisions of the
Agreement, the lender could purchase 180,000 shares of the Company's
common stock at a per share price of $2.50. The Company recorded the
fair value of these warrants as determined by an independent valuation
in connection with financing arrangements of $5,400 as additional
paid-in capital and debt discount. At May 31, 1999, the outstanding
balance of the note was $400,000.
F-26
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
In July and August 1998, the Company obtained bridge financing from
shareholders through the issuance of unsecured promissory notes
aggregating $62,500 and $250,000, respectively. The notes bear
interest at a rate of 12% and matured in January and February 1999.
The notes provide for a default interest rate penalty of 2%, for any
period in which the note is in default. In connection with this
transaction, the Company also executed a Common Stock Purchase Warrant
Agreement. Under the provisions of the Agreement, the note holders
could purchase from 3,750 to 50,000 shares of the Company's common
stock at a price per share equal to the price per share the Company
obtains in the next private placement of equity securities for which
the Company receives an aggregate of $5,000,000 or more. The Company
recorded the fair value of these warrants as determined by an
independent valuation in connection with financing arrangements of
$54,626 as additional paid-in capital and debt discount. At May 31,
1999, an aggregate of $312,500 is outstanding under these financing
arrangements and the Company was in default in the payment of these
obligations.
F-27
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
In June 1998, the Company obtained bridge financing through the
issuance of promissory notes aggregating $1,025,000, including
$225,000 provided by the Company's Vice Chairman, $200,000 provided by
an entity controlled by the Company's Chairman and $500,000 provided
by a Company shareholder and director. The notes bear interest at a
rate of 12% and matured in December 1998. The notes also provide for a
default interest rate penalty of 5%, for any period in which the note
is in default. In connection with this transaction, the Company also
executed a Common Stock Purchase Warrant Agreement. Under the
provisions of the Agreement, the note holders could purchase from
20,000 to 100,000 shares of the Company's common stock at a price per
share equal to the price per share the Company obtains in the next
private placement of equity securities for which the Company receives
an aggregate of $5,000,000 or more. The Company recorded the fair
value of these warrants as determined by an independent valuation in
connection with financing arrangements of $205,000 as additional
paid-in capital and debt discount. At May 31, 1999, an aggregate of
$1,025,000 is outstanding under these financing arrangements and the
Company is in default in the payment of these obligations.
In connection with the April 27, 1998 acquisition of a franchised
restaurant, the Company issued unsecured promissory notes aggregating
$210,334, bearing interest at a rate of 7.50%. The Company satisfied a
$60,334 note and the remaining notes are due as follows; $60,000 on
April 27, 1999, and $90,000 on April 27, 2000. At May 31, 1999 the
Company is in default on the note due April 27, 1999.
On December 8, 1997, the Company's Chairman and Vice Chairman each
provided the Company with $500,000 of short-term financing. The notes
bear interest at prime plus 2% and are payable in two installments
over a 180 day period. The maturity date of the notes accelerates upon
the completion of a financing transaction, as defined. In connection
with these financings, the Company also issued 100,000 common stock
purchase warrants to each officer, exercisable at $2.75 per share,
which expire in December 2002. The Company recorded the fair value of
these warrants as determined by an independent valuation in connection
with financing arrangements of $142,000 as additional paid-in capital
and debt discount. At May 31, 1999, $600,000 is outstanding under this
financing arrangements and the Company was in default in the payment
of these obligations.
The Company issued promissory notes in the amount of $135,000. The
notes are payable in monthly installments of $5,983 commencing in
November 1997, including interest at 6%. The noteholders have the
right to convert the debt into common stock at the time of an initial
public offering of the common stock, convertible at a rate defined in
the loan agreement. The conversion option terminates upon the
commencement of principal payments and such principal payments
commenced in November 1997. At May 31, 1999, the outstanding balance
of the note was $29,473.
F-28
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
In connection with the acquisition of Ranch*1 Group, Inc. and
subsidiaries, the Company issued a series of sixty unsecured
promissory notes to the former majority stockholders of Ranch*1
aggregating $600,000, bearing interest at 6% and payable in monthly
installments of $11,600. The Company has recorded a debt discount of
approximately $56,000 and a corresponding reduction of goodwill, in
order to fair value the interest rate as of the date of issuance. As
of May 31, 1999, the outstanding balance of the notes was $316,536.
In connection with the March 31, 1997 acquisition of a franchise
restaurant, the Company issued a non-interest bearing unsecured
promissory note in the amount of $47,500. At May 31, 1999, the
outstanding balance of the note was $20,000.
F-29
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Maturities of all long-term debt are as follows:
Year ended May 31:
2000 $5,783,387
2001 124,767
2002 78,608
2003 --
2004 --
2005 and thereafter --
----------
$5,986,762
==========
As indicated in note 17, on September 10, 1999, noteholders
aggregating $2,937,500 including $1,937,500 of notes payable in
default at May 31, 1999, including accrued interest, extended the
maturity date of the obligations until March 10, 2000.
Also as indicated in note 17, in September 1999, noteholders
aggregating $2,487,500 including $2,087,500 of notes payable
outstanding at May 31, 1999 and $400,000 of bridge loans issued
subsequent to May 31, 1999, converted their obligations, inclusive of
accrued interest, into Series C preferred stock at $50,000 per share,
effective immediately.
(8) CAPITAL STRUCTURE
The Company's capital structure at May 31, 1999 is as follows:
VOTING
SHARES RIGHTS
PAR SHARES ISSUED AND PER
SECURITY VALUE AUTHORIZED OUTSTANDING SHARE
-------- ----- ---------- ----------- -----
Common stock .001 20,000,000 11,401,263 One
Preferred stock, Series A .001 2,800,000 2,800,000 One
COMMON STOCK
F-30
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Each holder of common stock is entitled to one vote for each share owned of
record on all matters submitted to a vote of stockholders. There are no
cumulative voting rights. Subject to the preferential rights of any
outstanding preferred stock, the holders of common stock will be entitled
to such dividends as may be declared from time to time by the Board of
Directors. In the event of any liquidation, the holders of common stock
share ratably in all assets of the Company remaining after payments to the
holders of preferred stock. The Series A stockholders have a $2.50 per
share liquidation preference which is superior to the common stockholders
and Series B preferred stockholders, but subordinate to the liquidation and
dividend preference of the Series C preferred stockholders. Holders of
common stock have no redemption or conversion rights or preemptive rights
to purchase or subscribe for securities of the Company.
F-31
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
During the period July 17, 1997 through September 23, 1997, the Company
completed a series of five sales of common stock, whereby the Company
issued 750,000 shares for a total consideration of $1,500,000. The
Company's Chairman and Vice Chairman each purchased 125,000 shares of
common stock at a price of $2.00 per share.
On October 23, 1998, the Company completed the sale of common stock,
whereby the Company issued 100,000 shares for a total consideration of
$300,000. Pursuant to the terms of the stock subscription agreement, that
in the event that the Company successfully completes a private placement of
securities for which the Company receives at least $5,000,000, the Company
issues shares of common stock or securities convertible into common stock
at a price that is less than $3.00 per share, the Company shall issue
additional common shares equivalent to the lower value.
SERIES A CONVERTIBLE REDEEMABLE PREFERRED STOCK
On February 26, 1998, the Company completed the sale of $3,000,000 of
Series A Convertible Preferred Stock. Pursuant to the terms of the Series A
Agreement, the shares are convertible into shares of common stock at the
rate of $2.50 per share. The Series A Agreement includes, among other
things, restrictions and limitations on dividends, additional indebtedness
and capital expenditures. The agreement also provides that the Company can
require these investors to purchase an additional $4,000,000 of Series A
Convertible Preferred Stock, under similar terms and conditions, prior to
December 31, 1998, as long as the Company is not in default with the
provisions of the Series A Agreement. On April 14, 1998, the Company
completed the sale of the remaining $4,000,000 of Series A Convertible
Preferred Stock. The preferred stock is mandatorily converted into common
stock upon the consummation of a qualified initial public offering of the
Company's common stock, as defined. Additionally, the Agreement provides
for a preference payment to the preferred stockholders upon the sale of the
Company. At the end of a five-year period, the preferred stockholders have
the right to redeem their shares for cash at $2.50 per share.
In connection with this transaction, the Company also executed a Common
Stock Purchase Warrant Agreement. Under the provisions of the Agreement,
the preferred stockholders could receive warrants, calculated on a formula
basis, to purchase additional shares of common stock at $1.00 per share, if
the Company does not meet specified financial covenants. As of May 31,
1999, the Company did not meet these specified financial covenants, and as
such has issued 1,440,000 warrants to the preferred stockholders. The
Company has accounted for the fair value of the warrants issued, $403,200,
based upon an independent valuation as additional dividends, with a
corresponding offset to additional paid-in-capital. As indicated in note
17, the warrants were subsequently converted into shares of common stock on
a cash-less exercise basis.
F-32
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Dividends on Series A Convertible Preferred Stock accrue at an annual
rate of 8%. Holders of the Series A Convertible Preferred Stock are
entitled to receive all accrued and unpaid dividends. The February 20,
1998 amendment to the Articles of Incorporation provide the Series A
holders with the right to elect a stipulated number of Directors of
the Company, under specified conditions and limit the number of
directors. Holders of a majority of the outstanding shares of
Preferred Stock may elect, beginning on February 26, 2008, to have the
Company redeem all of the then outstanding shares of Preferred Stock
at the original price plus cumulative and unpaid dividends. As a
result of this "put" provision, the Preferred Stock has been
classified outside of equity in the accompanying consolidated balance
sheet. In addition, the offering related expenses are being amortized
directly to additional paid-in capital on a straight-line basis over
the five-year period of the preferred stock agreement. At May 31, 1998
and 1999, dividends of $102,356 and $560,000, respectively, have been
accrued and are charged directly to additional paid-in capital.
F-33
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
At May 31, 1999, the Company was in violation of certain covenants of the
Series A preferred stock agreement. On September 28, 1999, the Company
received a waiver of these covenant violations through June 1, 2000.
In September 1999, the holders of 2,800,000 shares of Series A of Preferred
Stock, pursuant to the approval of greater than 60% of the Series A
preferred stockholders, agreed to convert their shares of Series A
Preferred Stock into shares of common stock, at the lower of $2.50 per
share or 70% of the initial public offering price on the date that a
Registration Statement registering shares of common stock is declared
effective and, at the Company's option, either convert $662,356 of
accumulated dividends as of May 31, 1999 and an acceleration of $2,137,644
of dividends payable through the remaining term of the Series A preferred
stock agreement into shares of common stock at the initial public offering
price or be paid in cash.
SERIES B CONVERTIBLE PREFERRED STOCK
During the period March 23, 1999 through May 7, 1999, the Company executed
stock subscriptions for $373,250 of Series B Convertible Preferred Stock
for 149,300 shares at $2.50 per share. Pursuant to a Board of Directors
resolution and certificate of amendment to the second amendment and
restated certificate of incorporation on July 30, 1999, the Board
designated 5,000,000 shares of Series B preferred stock, with a $.001 par
value and $2.50 liquidation value per share. In August 1999, the Company
then issued the 149,300 shares of Series B preferred stock. Accordingly, at
May 31, 1999, $361,500, net of offering expenses, is classified as a
current liability in the accompanying consolidated balance sheet.
Subsequent to May 31, 1999, the Company sold an additional 124,000 shares
of Series B preferred stock at $2.50 per share and received an aggregate of
$310,000.
In the event of any liquidation, dissolution, merger, or winding down of
the Company, the proceeds will be distributed first to the Series C
Convertible Preferred Stockholders until they have received an amount equal
to $50,000 per share. Once the Series C Convertible Preferred Stock has
received its liquidation preference, the Series A preferred stockholders
receive an amount equal to $2.50 per share and any remaining proceeds will
be distributed to the Series B Convertible Preferred Stockholders until
they have received an amount equal to $2.50 per share. Any remaining
proceeds will be distributed pro rata among the holders of common stock.
The Series B preferred stock is non-dividend bearing and will have voting
rights based upon the number of shares which could be converted at the
optional conversion price, as defined.
F-34
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
The Series B preferred stock is automatically convertible into common stock
at the lesser of 70% of the initial offering price or $2.50 per share on
the date that a Registration Statement registering shares of common stock
is declared effective.
SERIES C PREFERRED STOCK
On July 30, 1999, the Board of Directors adopted a resolution and
certificate of amendment and adopted a certificate of designation of Series
C convertible preferred stock. The certificate of designation was
subsequently amended on September 13, 1999 and September 20, 1999. The
Board designated 150 shares of Series C preferred stock, with a $.001 par
value and a liquidation value of $50,000 per share. The Series C preferred
stock provides for an 15% cumulative dividend, payable semi-annually in
cash or additional shares of Series C preferred stock at the Company's
option. The Series C preferred stock has a liquidation and dividend
preference superior to the holders of Series A and Series B preferred
stock. Series C preferred stock is automatically convertible into common
stock at 70% of the initial public offering price of the common stock on
the date that a Registration Statement registering shares of common stock
is declared effective. The Series C noteholders will receive warrants equal
to 1/3 of the preferred stock acquired, exercisable at the initial public
offering price. In the event that an initial public offering is not
consumated within an 18 month period, at the option of the holder, the
Company must redeem the preferred stock at $50,000 per share plus accrued
dividends. In the event of a change in control prior to an initial public
offering, the holder has the option to redeem as noted above or convert
their holdings into common stock at $2.50 per share.
F-35
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
OPTIONS
The Company adopted the Ranch*1, Inc. 1998 Stock Option Plan (the Plan)
which provides for the issuance of non-qualified stock options to
employees, directors and consultants. The Plan automatically terminates on
the fourth anniversary of the adoption of the Plan. The Plan provides that
options, having a maximum term of four years, may be granted to purchase a
maximum of 1,432,106 shares of common stock.
The exercise price and vesting period of the options will be determined by
a committee of the Board of Directors, however, the exercise price must be
at least equal to the fair market value at the date of grant. Additionally,
the options agreements contain anti-dilution provisions and acceleration
provisions for a change in control, as defined.
Activity in stock options is summarized as follows:
1998 1999
-------------------- -------------------
WEIGHTED SHARES WEIGHTED SHARES
AVERAGE SUBJECT AVERAGE SUBJECT
EXERCISE TO EXERCISE TO
PRICE OPTION PRICE OPTION
Beginning of year $ -- -- $2.00 552,526
Options granted 2.00 552,526 2.50 75,000
Options exercised -- -- -- --
Options canceled -- -- 2.00 (451,263)
----- -------- ----- --------
End of year $2.00 552,526 $2.21 176,263
===== ======== ===== ========
As of May 31, 1999, there were 180,379 options exercisable, including
75,000 options issued pursuant to a separation agreement and excluded from
the table above, with a weighted average exercise price of $2.42.
F-36
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, "Accounting for Stock-Based Compensation" (Statement 123), which
was adopted by the Company. The Company has elected to disclose the pro
forma net income and earnings per share as if such method had been used to
account for stock-based compensation cost as described in Statement 123.
The per share weighted average fair value of stock options granted during
fiscal 1998 and 1999 was $0.50 and $0.87 on the date of grant using the
Black-Scholes option-pricing model with the following weighed average
assumptions: 1998 - expected dividend yield 0.0%, risk-free interest rate
of 6.22%,
F-37
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
volatility of 45% and an expected life of 5 years; 1999 - expected dividend
yield 0.0%, risk-free interest rate of 4.90%, volatility of 55% and an
expected life of 5 years. However, as the 75,000 options granted during
1999 were pursuant to a separation agreement, these options have been
excluded from the stock option activity table above and the pro forma
disclosure in the table below.
The Company applies APB Opinion No. 25 in accounting for its Stock Option
Plan and, accordingly, no compensation cost has been recognized for its
stock options in the consolidated financial statements. Had the Company
determined compensation cost based on the fair value at the grant date for
its stock options under Statement 123, the Company's net loss and net loss
per share would have been reduced to the pro forma amounts indicated below:
1998 1999
------------- -----------
Net loss applicable to common
stockholders:
As reported $ (9,628,511) (6,655,530)
Pro forma (9,649,036) (6,748,425)
Net loss per common share:
As reported $ (0.89) (0.61)
Pro forma (0.90) (0.62)
(9) INCOME TAXES
Income tax expense for the years ended May 31, 1998 and 1999 consists of:
1998 1999
------- -------
Current:
Federal $ -- --
State 14,936 9,398
Foreign -- 50,000
------- -------
$14,936 59,398
======= =======
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at May 31,
1999 is presented below:
F-38
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Deferred tax assets:
Net operating loss carryforward $5,263,000
Deferred revenue 518,000
Accounts receivable 32,000
Property and equipment 94,000
Foreign tax credit 50,000
----------
Total gross deferred tax assets 5,957,000
----------
Less valuation allowance 5,957,000
----------
Net deferred tax assets $ --
==========
The difference between the Company's effective and statutory income tax
rate is principally attributable to a 100% valuation allowance applied
against deferred tax assets.
F-39
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
The change in the total valuation allowance for the years ended May 31,
1998 and 1999 was approximately $2,524,000 and $2,466,000, respectively. In
assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred
tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income during the
periods in which the net operating losses and temporary differences become
deductible. Management considers projected future taxable income and tax
planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable
income of approximately $12,110,000. At May 31, 1999, the Company has net
operating loss carryforwards for Federal of $12,022,000, State of
$11,038,000 and New York City of $12,110,000 for income tax purposes, which
are available to offset future taxable income, if any, through 2019. The
loss for income tax purposes for the period ended May 31, 1999 was
$5,282,000. Based upon the limited operating history of the Company and
losses incurred to date, management does not believe that it is more likely
than not that it will realize the benefit of the deferred tax assets and
has fully reserved the deferred tax assets. The amount of the deferred tax
asset considered realizable, however, could be revised in the near term if
estimates of future taxable income during the carryforward period are
revised.
In accordance with Section 382 of the Internal Revenue Code of 1986, as
amended, as it applies to the NOL carryforwards, a change in more than 50%
in the beneficial ownership of the Company within a three-year period (an
"Ownership Change") will place an annual limitation of the Company's
ability to utilize its existing NOL carryforwards to offset United States
Federal taxable income in future years. Generally, such limitation would be
equal to the value of the Company as of the date of the Ownership Change
multiplied by the Federal long-term tax exempt interest rate, as published
by the Internal Revenue Service. The Company believes that an Ownership
Change has occurred relating to the net operating loss carryforward
acquired in the Ranch*1 business acquisition and may have occurred due to
changes in the beneficial ownership of the Company's Common Stock in the
current three-year testing period and could cause the annual limitations as
described above to apply. The Company has not determined what the maximum
annual amount of taxable income is that can be reduced by the NOL
carryforwards.
(10) OPERATING LEASES
The Company's operations are conducted in leased premises. Including
renewal options, remaining lease terms range from 1 to 17 years.
F-40
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
The Company leases certain office and restaurant facilities and related
equipment under noncancelable operating lease agreements with third
parties. Certain leases provide for rent deferral during the initial term
of such leases. At May 31, 1999, accruals related to rent deferrals and
scheduled rent increases were $1,706,535, which represents amounts expensed
for financial reporting purposes in excess of amounts paid. For financial
reporting purposes, such leases are accounted for on a straight-line rental
basis. At May 31, 1999, the Company was in default on obligations relating
to certain lease agreements of which rental payments in arrears on these
leased premises approximated $147,000. As indicated in note 15(b), the
Company has entered into a variety of Stipulation Agreements for these
leases and other leases which became in default subsequent to May 31, 1999.
F-41
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
Rental expense for all leases was approximately $2,435,000 and $3,673,000
for the years ended May 31, 1998 and 1999.
Future minimum annual rental commitments under these leases are
approximately as follows:
YEARS AMOUNT
----- ------
Fiscal 2000 $ 3,744,475
Fiscal 2001 3,649,972
Fiscal 2002 3,627,852
Fiscal 2003 3,508,686
Fiscal 2004 3,608,701
Fiscal 2005 and thereafter 21,189,102
-----------
Total minimum lease payments $39,328,788
===========
(11) CAPITAL LEASES
The Company finances the purchase of certain restaurant equipment through
capital leases. At May 31, 1999, property and equipment include $432,759 of
net assets recorded under capital leases. These assets are amortized over
the life of the respective leases.
The Company's minimum future obligations under capital leases at May 31,
1999 are as follows:
Fiscal 2000 $151,689
Fiscal 2001 150,293
Fiscal 2002 132,666
Fiscal 2003 126,374
Fiscal 2004 40,256
--------
Total minimum lease payments 601,278
Less amount representing interest 151,598
--------
Present value of net minimum
lease payments (including
current portion of $91,814) $449,680
========
F-42
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(12) EMPLOYMENT AGREEMENTS
On September 2, 1997 an agreement was signed between the Company and the
Vice President of Finance and Administration of the Company for a period
commencing in September 1997 through September 2000. The agreement provides
for annual compensation of $125,000 and a relocation allowance not to
exceed $15,000. This agreement also included the grant of non-qualified
options to purchase up to 101,263 shares of stock at an exercise price of
$2.00, the fair value at the date of grant. The options vest as follows:
30% on the first anniversary of the grant date; 30% on the second
anniversary of the grant date; and 40% on the third anniversary of the
grant date. In addition, the Company shall pay the employee a cash bonus
after taxes to pay for the exercise price of the options exercised.
Compensation expense of $75,462 and $101,263 relating to the bonus
provision was recorded in fiscal 1998 and 1999, respectively.
F-43
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On August 25, 1997, an agreement was signed between the Company and the
Vice President for Company Operations for a period commencing in August
1997 through August 2000. The agreement provides for annual compensation
of $125,000 and expenses for one year of $25,000. This agreement also
included the grant of non-qualified options to purchase up to 101,263
shares of stock at an exercise price of $2.00, the fair value at the date
of grant. The options vest as follows: 30% on the first anniversary of
the grant date; 30% on the second anniversary of the grant date; and 40%
on the third anniversary of the grant date. In addition, the Company
shall pay the employee a cash bonus after taxes to pay for the exercise
price of the options exercised. Compensation expense of $77,861 and
$80,456 relating to the bonus provision was recorded in fiscal 1998 and
1999, respectively. The agreement was subsequently terminated in April
1999 (note 13) and $158,317 of previously recorded compensation expense
was reversed in fiscal 1999 because, as a result of the termination
agreement, the Company was no longer liable for the cash payments that
had been accrued for under the compensation agreement.
On June 16, 1997 an agreement was signed between the Company and the
President and Chief Executive Officer of the Company for a period
commencing in June 1997 through June 2000. The agreement provides for
annual compensation of $175,000 and expenses of $35,000. This agreement
also included the grant of non-qualified stock options to purchase up to
350,000 shares of stock at an exercise price of $2.00, the fair value at
the date of issuance. The options vest as follows: 30% on the first
anniversary of the grant date; 30% on the second anniversary of the grant
date; and 40% on the third anniversary of the grant date. In addition,
the Company shall pay the employee a cash bonus after taxes to pay for
the exercise price of the options exercised. Compensation expense of
$350,000 and $278,082 relating to the bonus provision was recorded in
fiscal 1998 and 1999, respectively. The agreement was subsequently
terminated in April 1999 (note 13) and $628,082 of previously recorded
compensation expense was reversed in fiscal 1999 because, as a result of
the termination agreement, the Company was no longer liable for the cash
payments that had been accrued for under the compensation arrangement.
F-44
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On December 30, 1996, an agreement was signed between the Company and a
senior executive of the Company for a period commencing on December l996
through December 1999. The agreement provides for annual compensation of
$125,000 and housing expenses. This agreement also included the grant of
120,000 shares of the Company's common stock with a fair value of $.018 per
share at the date of grant, which shares vest as follows: 20,000 shares
vest immediately; 60,000 shares vest at the time of the first year the term
of the agreement is completed, provided that the employee is in the employ
of the Company, and 40,000 shares vest at the earlier of the termination of
the employee or eighteen months from the date of the agreement.
Compensation expense of $10,896 and $7,264 was recorded in fiscal 1998 and
1999, respectively, relating to award of common stock. The agreement was
subsequently terminated in April 1999 (note 13).
On November 8, 1996, an agreement was signed between the Company and the
Vice President for Store Development of the Company for a period commencing
in November 1996 and terminating in November 1998. The agreement provided
for annual compensation of $125,000, as revised.
F-45
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(13) SEPARATION AGREEMENTS
On April l9, 1999, an agreement was signed between the Company and the
President and Chief Executive Officer which terminated the previous June
16, 1997 employment agreement. This agreement included six months of
compensation and the payment of medical benefits. In connection with this
agreement, the President and Chief Executive Officer's stock options were
replaced by the issuance of 350,000 shares of the Company's common stock
valued at $.10 per share, the fair value as determined by an independent
valuation. In addition, the Company shall make a payment equal to the
amount owed by the President and Chief Executive Officer as a result of the
receipt of this stock, as well as payment for any capital gains owed, up to
a specified maximum, as a result of the sale of this stock eighteen months
from the date of this agreement. The Company has recorded a charge of
$161,607 in the accompanying 1999 consolidated statement of operations
relating to this separation agreement. Subsequent to May 31, 1999, the
Company defaulted on the payment obligation.
On April 19, 1999, an agreement was signed between the Company and the Vice
President of Company Operations, which terminated the previous August 25,
1997 employment agreement. This agreement included six months of
compensation and the payment of medical benefits. In connection with this
agreement, the Vice President's stock options were replaced by the issuance
of 101,263 shares of the Company's common stock valued at $.10 per share,
the fair value as determined by an independent valuation. In addition, the
Company shall make payment equal to the amount owed by the Vice President
as a result of the receipt of this stock as well as payment for any capital
gains owed, up to a specified maximum, as a result of the sale of this
stock eighteen months from the date of this agreement, the fair value as
determined by an independent appraisal. The Company has recorded a charge
of $94,430 in the accompanying 1999 consolidated statement of operations
relating to this separation agreement. Subsequent to May 31, 1999, the
Company defaulted on the payment obligation.
On April 8, 1999, an agreement was signed between the Company and a senior
executive of the Company which terminated the previous December 30, 1996
employment agreement. This agreement included six months of compensation,
the payment of medical benefits and moving expenses. The Company has
recorded a charge of $80,108 in the accompanying 1999 consolidated
statement of operations relating to this separation agreement.
On September 1, 1998, the Company had notified a previous Vice Chairman
terminating his employment with the Company and that he would be entitled
to receive six months of compensation and the payment of medical benefits.
The Company has recorded a charge of $63,619 in the accompanying 1999
consolidated statement of operations relating to this separation agreement.
In September 1998, an agreement was executed between the Company and an
Executive Vice President and Vice President, Construction and Concept
Development terminating his employment.
F-46
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
This agreement included six months of compensation and the payment of
medical benefits. In addition, the agreement provided for the issuance of a
stock option award in the amount of 75,000 shares at an exercise price of
$2.50 per share, which vested immediately. The Company has recorded a
charge of $131,269 in the accompanying 1999 consolidated statement of
operations relating to this separation agreement, including a provision for
the fair value of the stock options at the date of grant.
F-47
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(14) CONSULTING AGREEMENTS
On June 1, 1998, the Company entered into a consulting agreement for the
development of free-standing restaurants and urban, in-line units. In
consideration, the consultant is to receive $5,000 plus expenses for each
in-line unit and $20,000 plus expenses for each free-standing restaurant.
In addition, the consultant is to receive a commission of 20% on all Area
Territorial Fees received for all international franchise deals in Asia. As
of May 31, 1999, $100,000 of commissions have been accounted for as prepaid
expenses in the accompanying consolidated balance sheet and will be
amortized on a basis consistent with the deferred revenue on the related
area development agreements.
On June 1, 1997, the Company entered into a one year consulting agreement,
with an automatic extension for an indefinite period, until either party
terminates the agreement with a Chairman of the Company to assist the
Company in reaching its objective of expansion of the restaurants owned or
franchised. This agreement provides for annual compensation of $125,000.
The agreement was terminated by mutual consent of the parties upon the
expiration of the initial term.
On May 1, 1997, the Company entered into a one year consulting agreement,
with an automatic extension for an indefinite period, until either party
terminates the agreement with a Vice Chairman of the Company to assist the
Company in reaching its objective of expansion of the restaurants owned or
franchised. This agreement provides for annual compensation of $125,000. In
addition, the consultant received a warrant, expiring on April 15, 2002, to
purchase 150,000 shares of the Company's common stock at an exercise price
of $2.00 per share. In connection with the issuance of these warrants, the
Company recorded consulting expense of approximately $42,000 for the year
ended May 31, 1998. The agreement was terminated by mutual consent of the
parties upon the expiration of the initial term.
(15) COMMITMENTS AND CONTINGENCIES
(A) RELATED PARTY TRANSACTIONS
As indicated in note 8, in fiscal 1998, the Company's Chairman and
Vice Chairman each purchased 125,000 shares of common stock at $2.00
per share.
As indicated in note 7, members of the Board of Directors and Company
officers have entered into a variety of financing arrangements with
the Company. At May 31, 1999, current installments of long-term debt
owed to related parties was $2,550,661, including $1,837,500 which
were in default. As indicated in note 17, on September 10, 1999,
agreements were executed with noteholders extending the maturity date
on the obligations, including the above-mentioned $1,837,500 in
default and due to related parties, until March 10, 2000.
F-48
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
As indicated in note 14, the Company entered into consulting
agreements with the Chairman and Vice Chairman providing for annual
compensation of $125,000. Both agreements were terminated by mutual
consent upon the expiration of the initial one-year terms of the
agreements.
A Company Vice President holds a direct and indirect 33% ownership
interest in an advertising agency utilized by the Company. Commission
expenses paid to the agency amounted to $15,133 and $95,995 in fiscal
1998 and 1999, respectively.
F-49
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(B) CONTINGENCIES
At May 31, 1999, the Company is delinquent in the payment and filing
of New York State sales taxes of approximately $320,000. Additionally,
at May 31, 1999, the Company is delinquent in the payment and filing
of approximately $290,000 of New York City occupancy taxes and the
Company was not in compliance with an agreement dated December 5, 1997
with the New York City Department of Finance related to the payment of
prior period New York City occupancy taxes, pursuant to which the
Company had paid $156,306 through May 31, 1999. As of May 31, 1999,
the New York City Department of Finance placed warrants and liens on
certain Company assets. Subsequent to May 31, 1999, the Company paid
$47,742 relating to the above-mentioned warrants and liens.
At May 31, 1999, the Company was delinquent in the payment of $147,000
of restaurant lease obligations. Subsequent to May 31, 1999, the
Company entered into three stipulation agreements and satisfied the
delinquent lease obligations at the balance sheet date. Additionally,
the Company entered into a further stipulation agreement pursuant to a
delinquent lease obligation occurring subsequent to May 31, 1999. In
the opinion of management, the Company has satisfied all past due
lease obligations as of September 30, 1999, except as noted below.
On June 16, 1999, the Company was evicted from a location which was
under construction. The Company is currently negotiating with the
landlord to permit the Company to resume its tenancy.
The Company is involved in various legal actions incidental to the
normal course of its business. Management does not believe that the
ultimate resolution of these actions will have a material adverse
effect on the Company's consolidated financial position, equity,
results of operations, liquidity and capital resources.
(16) LOSS PER SHARE
As discussed in note 2, the Company adopted Statement 128, which replaced
the calculation of primary and fully diluted earnings per share with basic
and diluted earnings per share. Dilutive net loss per share for fiscal 1998
and 1999 are the same as basic net loss per share due to the anti-dilutive
effect of the assumed conversion of preferred stock, and exercise of stock
options and warrants.
The following table reconciles net loss per share with net loss per share
applicable to common stockholders:
1998 1999
---- ----
Net loss per share $(0.88) (0.52)
Net loss per share attributable to preferred
stock dividends and issuance of
performance warrants (0.01) (0.09)
----- -----
Net loss per share applicable to common
stockholders $(0.89) (0.61)
===== =====
F-50
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
(17) SUBSEQUENT EVENTS
On July 30, 1999, the Board of Directors adopted a resolution and
certificate of amendment to the second amended and restated certificate of
incorporation, as well as adopted certificates of designation of Series B
and Series C Convertible Stock. The Board designated 500,000 shares of
Series B preferred stock, with a $.001 par value and $2.50 liquidation
value per share. The Series B preferred stock are non-dividend bearing and
are automatically convertible into shares of common stock on the date that
a Registration Statement registering shares of common stock is declared
effective. The Series C 15% convertible preferred stock are automatically
convertible into shares of common stock on the date that a Registration
Statement registering shares common stock is declared effective. The Series
C certificate of designation was subsequently amended on September 13, 1999
and September 27, 1999 (note 8).
On August 20, 1999, a third amendment to the Company's certificate of
incorporation was approved and adopted, pursuant to the July 30, 1999
resolution. The amendment changes the name of the Company to Ranch*1, Inc.
The amendment also (i) increases the number of authorized shares of capital
stock to 32,800,000 of which 25,000,000 shares are designated $.001 par
value common stock, (ii) designated 2,800,000 shares as Series A
Convertible Preferred Stock with a $.001 par value and (iii) designated
5,000,000 shares of $.001 par value Preferred Stock, to be issued in such
series and such designations, preferences, powers and rights as the Board
of Directors may authorize. The amendment also re-established parameters
for dividends, liquidations preferences, voting rights and other governance
matters.
On June 11, 1999, the Company entered into an agreement with an investment
banking firm to sell a maximum of $4,000,000 of convertible preferred stock
on a best efforts basis.
Subsequent to May 31, 1999, the Company sold 124,000 shares of Series B
Preferred Stock for $310,000 and obtained one year bridge loans aggregating
$685,000, bearing interest at 15% and issued an aggregate of 137,000
warrants exercisable at the lower of $2.50 per share or the initial public
offering price.
On June 29, 1999, the Company entered into a $282,593 note with a service
provider. The note bears interest at 10% and provides for monthly principal
payments of $20,000 commencing July 15, 1999 and a final $162,593 payment
due January 15, 2000.
On July 30, 1999, warrant holders of 2,193,333 outstanding warrants
converted the warrants into 1,456,480 shares of Company common stock on a
cash-less exercise, based upon the fair value of the warrants on July 30,
1999 as determined by the Company's Board of Directors, at a conversion
rate of $2.40 per share.
F-51
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
On September 10, 1999, noteholders aggregating $2,937,500, including
$1,937,500 of notes payable in default on May 31, 1999 extended the
maturity date of these obligations, including accrued interest, until March
10, 2000.
In September 1999, note holders aggregating $2,487,500, including
$2,087,500 of notes payable outstanding at May 31, 1999 and $400,000 of
bridge loans issued subsequent to May 31, 1999, converted their
obligations, inclusive of accrued interest, into Series C Preferred Stock
at $50,000 per share, effectively immediately, which is automatically
convertible into Company common stock at 70% of the initial public offering
price of the common stock on the date that a Registration Statement
registering shares of common stock is declared effective. The Series C
noteholders will receive warrants equal to 1/3 of the preferred stock
acquired, exercisable at the initial public offering price. In the event
that an initial public offering is not consumated within an 18 month
period, at the option of the holder, the Company must redeem the preferred
stock at $50,000 per share plus accrued dividends. In the event of a change
in control prior to an initial public offering, the holder has the option
to redeem as noted above or convert their holdings into common stock at
$2.50 per share. As a condition of this conversion, all warrants previously
held by the aforementioned bridge noteholders were surrendered.
F-52
<PAGE>
RANCH*1, INC. AND SUBSIDIARIES
(FORMERLY FRANCHISE CONCEPTS GROUP, INC.
AND SUBSIDIARIES)
Notes to Consolidated Financial Statements
Years ended May 31, 1998 and 1999
In September 1999, the holders of 2,800,000 shares of Series A of Preferred
Stock, pursuant to the approval of greater than 60% of the Series A
preferred stockholders, agreed to convert their shares of Series A
Preferred Stock into shares of common stock, at the lower of $2.50 per
share or 70% of the initial public offering price on the date that a
Registration Statement registering shares of common stock is declared
effective and, at the Company's option, either convert $662,356 of
accumulated dividends as of May 31, 1999 and an acceleration of $2,137,644
of dividends payable through the remaining term of the Series A preferred
stock agreement into shares of common stock at the initial public offering
price or be paid in cash.
Subsequent to May 31, 1999, the Company executed three leases for new
restaurant development. Each of the leases are for ten years, with no
renewal options. Minimum aggregate rental payment pursuant to the terms of
the leases are approximately $2,386,000. Company management anticipates
incurring capital expenditures relating to the development of the
restaurants of an aggregate of $1,027,000.
F-53
<PAGE>
================================================================================
You should rely only on the information contained in this prospectus or to which
we have referred you. Neither we nor any underwriter has authorized anyone to
provide you with information that is different. This prospectus is not an offer
to sell nor is it seeking an offer to buy these securities in any jurisdiction
where the offer or sale is not permitted. The information contained in this
prospectus is correct only as of the date of this prospectus, even if this
prospectus is delivered to you after the prospectus date, or you buy our common
stock after the prospectus date.
TABLE OF CONTENTS
Page
----
Prospectus Summary ........................................................ 3
Risk Factors .............................................................. 6
Forward-Looking Statements ................................................ 12
Use of Proceeds ........................................................... 14
Dividend Policy ........................................................... 14
Dilution .................................................................. 15
Capitalization ............................................................ 16
Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................................... 17
Business .................................................................. 24
Management ................................................................ 36
Certain Relationships and Related Transactions ............................ 41
Principal Stockholders .................................................... 43
Description of Securities ................................................. 45
Shares Eligible For Future Sale ........................................... 49
Underwriting .............................................................. 50
Legal Matters ............................................................. 51
Experts ................................................................... 52
Where You Can Find More Information ....................................... 52
Index to Consolidated Financial Statements ................................ F-1
Until ________, 1999, all dealers selling shares of our common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This delivery requirement 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.
================================================================================
================================================================================
[Ranch *1 Logo]
_______________ Shares
Common Stock
Ranch *1, Inc.
PROSPECTUS
----------------------------------------------------------
Josephthal & Co. Inc.
October __, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by the Registrant are as follows. All amounts other
than the SEC registration fee, the NASD filing fees and the Nasdaq National
Market listing fee are estimates.
Amount
to be Paid
----------
SEC registration fee ........................................ $6,394
NASD filing fee ............................................. 2,800
Nasdaq National Market listing fee .......................... *
Legal fees and expenses ..................................... *
Accounting fees and expenses ................................ *
Printing and engraving ...................................... *
Blue sky fees and expenses (including legal fees) ........... *
Transfer agent fees ......................................... *
Miscellaneous ............................................... *
Total ....................................................... *
- ----------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant indemnity to directors and
officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933.
As permitted by the Delaware General Corporation Law, the Registrant's
Second Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of our directors for monetary damages for
breach of fiduciary duty as a director, except for liability (1) for any breach
of the director's duty of loyalty to the Registrant or our stockholders, (2) for
acts or omissions not in good faith or that involve intentional misconduct or a
knowing violation of law, (3) under section 174 of the Delaware General
Corporation Law (regarding unlawful dividends and stock purchases), or (4) for
any transaction from which the director derived an improper personal benefit.
As permitted by the Delaware General Corporation Law, the bylaws of the
Registrant provide that (1) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (2) the Registrant
may indemnify its other employees and agents as set forth in the Delaware
General Corporation Law, (3) the Registrant is required to advance expenses, as
incurred, to its directors and executive officers in connection with a legal
proceeding to the fullest extent permitted by the Delaware General Corporation
Law, subject to certain very limited exceptions and (4) the rights conferred in
the bylaws are not exclusive.
The Registrant has entered into indemnification agreements with each of its
directors and executive officers to give such directors and officers additional
contractual assurances regarding the scope of the indemnification set forth in
the Registrant's Amended and Restated Certificate of Incorporation and to
provide additional procedural protections. At present, there is no pending
litigation or proceeding involving a director, officer or employee of the
Registrant regarding which indemnification is sought, nor is the Registrant
aware of any threatened litigation that may result in claims for
indemnification.
II-1
<PAGE>
Reference is also made to Section ___ of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling persons
of the Registrant against certain liabilities. The indemnification provision in
the Registrant's Certificate of Incorporation, bylaws and the indemnification
agreements entered into between the Registrant and each of its directors and
executive officers may be sufficiently broad to permit indemnification of the
Registrant's directors and executive officers for liabilities arising under the
Securities Act of 1933.
The Registrant is currently in the application process to obtain liability
insurance for its officers and directors.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since June 1,
1996:
(1) On February 26, 1998 and April 14, 1998, the Registrant issued a total
of 2,800,000 shares of Series A preferred stock to various venture
capitalists and accredited investors for an aggregate consideration of
$7,000,000.
(2) On August 27, 1999, the Registrant issued a total of 273,300 shares of
Series B preferred stock to various accredited investors for an
aggregate consideration of $683,250.
(3) On October 11, 1999, the Registrant issued a total of 38 shares of
Series C preferred stock to various accredited investors for an
aggregate consideration of $1,900,000. In addition, for each share of
Series C preferred stock purchased, investors received a warrant to
purchase $16,667 worth of shares of our common stock at a per share
price equal to $____________.
(4) The following lists additional issuances of securities:
1. In June the Registrant issued 100 shares of common stock to its
founders at par.
2. On November 11, 1996, Franchise Concepts Group, Inc. acquired the
Ranch *1 business from the shareholders of Ome, Inc., Dome, Inc.,
Moorgrho, Inc. and Ranch 1 Group, Inc. (collectively, the "Ranch
1 Entities") for an aggregate consideration of $150,000 and the
shareholders of Franchise Concepts Group, Inc. received 100% of
the outstanding shares of the Ranch *1 Entities.
3. On December 30, 1996, the Registrant issued 120,000 shares of
common stock pursuant to an employee agreement with Andrew
Howard.
4. On April 16, 1997, the Registrant issued 2,750,000 shares of
common stock to various accredited investors for an aggregate
consideration of $5,500,000.
5. On May 1, 1997, the Registrant issued 150,000 warrants for common
stock to a member of the Board of Directors as partial
compensation for consulting services.
6. On December 8, 1997, the Registrant issued warrants for 200,000
shares of common to two directors George Naddaff and David
Sculley, as partial compensation for short-term loans totaling
$1,000,000.
7. On January 30, 1998 and February 16, 1998 the Registrant issued
warrants for 40,000 shares of common stock to two directors
George Naddaff and David Sculley,as partial compensation for
short term loans totaling $200,000.
II-2
<PAGE>
8. From June 16, 1998 to August 6, 1998 the Registrant issued
warrants for 270,833 shares of common stock to several of its
shareholders as partial compensation for short-term loans
totaling $1,437,500.
9. On October 23, 1998, the Registrant issued 100,000 shares of
common stock to an accredited investor with the final number
shares to be based on the next round of financing completed in
excess of $5,000,000, for an aggregate consideration of $300,000.
10. On January 4, 1999, the Registrant issued warrants for 180,000
shares of common stock to an institutional lender as partial
compensation for a short-term loan of $400,000.
11. On January 25, 1999, the Registrant issued warrants for 157,500
shares to Salvatore Rametta the father of its President and Chief
Executive Officer as partial compensation for a short-term loan
of $350,000.
12. On February 19, 1999, the Registrant issued warrants for 112,500
shares of common stock to a Brand Equity Venture, L.P. as partial
compensation for a short-term loan of $250,000.
13. On April 19, 1999, the Registrant canceled options to purchase
350,000 shares of common stock and issued 350,000 shares of
common stock to George Samaras of the corporation as part of a
separation settlement.
14. On April 19, 1999, the Registrant canceled options to purchase
101,263 shares of common stock and issued 101,263 shares of
common stock to James W. Knight of the corporation as part of a
separation settlement.
15. On July 30, 1999 the Registrant issued 1,456,480 shares of common
stock to various accredited shareholders in exchange for the
cancellation of 2,193,333 warrants for common stock in a
cash-less exchange.
16. From August 30, 1999 to September 10, 1999, the Registrant issued
warrants for 57,000 shares of common stock as partial
compensation for short-term loans of $285,000.
17. From September 10, 1999 to September 20, 1999, the Registrant
issued 55.16 shares of Series C preferred stock to certain note
holders and warrants for common shares in exchange for the
cancellation of $2,757,972 of debt including accrued interest.
The above securities were offered and sold by the Registrant in reliance
upon exemptions from registration pursuant to either (1) Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering, or (2)
Rule 701 promulgated under the Securities Act of 1933. No underwriters were
involved in connection with the sales of securities referred to in this Item 15.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
Number Description
------ -----------
1.1* Form of Underwriting Agreement.
3.1 Corrected Third Amended and Restated Certificate of
Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation to be
in effect upon the closing of this offering.
3.3 Second Amended and Restated By-laws.
3.4* Form of Restated Bylaws to be in effect upon the closing of this
offering.
4.1* Specimen common stock certificate.
II-3
<PAGE>
4.2 Certificate of Designation of Series B Convertible
Preferred Stock.
4.3 Second Amended Certificate of Designation of Series C 15%
Convertible Preferred Stock.
4.4* Form of Representatives Warrant Agreement
4.5* Loan Agreement between various Ranch *1 corporations and Global
Alliance Finance Corporation (plus corporate guaranty by Ranch
*1.)
5.1* Opinion of Greenberg Traurig.
10.1* Series A Preferred Stock Purchase Agreement, dated February 26,
1996.
10.2* Common Stock Purchase Warrant between the Registrant and certain
Series A preferred stockholders, dated February 26, 1996.
10.3* Employment Agreement between the Registrant and Sebastian
Rametta.
10.4* Form of Employment Agreement between the Registrant and R. John
Speich.
10.5* Form of Franchise Agreement
10.6* Stock Option Plan
10.7* Agreement with Host Marriott
10.8* [Agreement with Taiwan Franchisee]
10.9* Leases for premises at 130 W. 42nd St., New York, New York 10036
10.10* Separation Agreement between the Registrant and Sebastian
Rametta.
10.11* Separation Agreement between the Registrant and George Samaras.
10.12* Separation Agreement between the Registrant and James W. Knight.
10.13* Separation Agreement between the Registrant and Andrew Howard.
10.14* Separation Agreement between the Registrant and James Chickara.
10.15* Common Stock Purchase Warrant, dated October 11, 1999.
21.1* Subsidiary List.
23.1 Independent Auditors' Consent.
23.3* Consent of Greenberg Traurig (included in Exhibit 5.1).
24.1 Powers of Attorney (See Signature Page on Page II-5).
27.1 Financial Data Schedule.
- ----------
* To be filed by amendment.
(b) Financial Statement Schedules.
All financial statement schedules have been omitted because the required
information is not applicable or not present in amounts sufficient to require
submission of the schedule, or because the information required is included in
the consolidated financial statements or the notes thereto.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
II-4
<PAGE>
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 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 Exchange 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 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 hereunder, 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 that:
(1) For purposes of determining any liability under the Securities Act
of 1933, 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 shall be deemed to be part of this
registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
Signatures
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in New York, New York, on this 12th day
of October, 1999.
RANCH *1, INC.
By: /s/ SEBASTIAN RAMETTA
-------------------------------------
Sebastian Rametta
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Sebastian Rametta and R. John Speich as
his attorneys-in-fact, with full power of substitution for him in any and all
capacities, to sign any and all amendments to this Registration Statement,
including post-effective amendments and any and all new registration statements
filed pursuant to Rule 462 under the Securities Act of 1933 in connection with
or related to the offering contemplated by this Registration Statement, as
amended, and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorney-in-fact or his substitute
may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933 this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ GEORGE A. NADDAFF Chairman of the Board
- ----------------------------------
George A. Naddaff
/s/ SEBASTIAN RAMETTA President, Chief Executive Officer
- ---------------------------------- and Director (principal executive)
Sebastian Rametta
/s/ DAVID W. SCULLEY Director
- ----------------------------------
David W. Sculley
/s/ JAMES CHICKARA Director
- ----------------------------------
James Chickara
/s/ CHRISTOPHER P. KIRCHEN Director
- ----------------------------------
Christopher P. Kirchen
/s/ MARC A. SINGER Director
- ----------------------------------
Marc A. Singer
/s/ MORDECHAI DAVIDI Director
- ----------------------------------
Mordechai Davidi
/s/ R. JOHN SPEICH Chief Financial Officer, Vice
- ---------------------------------- President and Secretary (principal
R. John Speich financial and accounting)
</TABLE>
II-6
<PAGE>
Index to Exhibits
Number Description
------ -----------
1.1* Form of Underwriting Agreement.
3.1 Corrected Third Amended and Restated Certificate of Incorporation.
3.2* Form of Amended and Restated Certificate of Incorporation to be in
effect upon the closing of this offering.
3.3 Second Amended and Restated By-laws.
3.4* Form of Restated Bylaws to be in effect upon the closing of this
offering.
4.1* Specimen common stock certificate.
4.2 Certificate of Designation of Series B Convertible Preferred Stock.
4.3 Second Amended Certificate of Designation of Series C 15%
Convertible Preferred Stock.
4.4* Form of Representatives Warrant Agreement
4.5* Loan Agreement between various Ranch *1 corporations and Global
Alliance Finance Corporation (plus corporate guaranty by Ranch
*1.)
5.1* Opinion of Greenberg Traurig.
10.1* Series A Preferred Stock Purchase Agreement, dated February 26,
1996.
10.2* Common Stock Purchase Warrant between the Registrant and Series A
preferred stockholders, dated February 26, 1996.
10.3* Form of Employment Agreement between the Registrant and Sebastian
Rametta.
10.4* Form of Employment Agreement between the Registrant and R. John
Speich.
10.5* Form of Franchise Agreement
10.6* Stock Option Plan
10.7* Agreement with Host Marriott
10.8* [Agreement with Taiwan Franchisee]
10.9* Leases for premises at 130 W. 42nd St., New York, New York 10036
10.10* Separation Agreement between the Registrant and Sebastian Rametta.
10.11* Separation Agreement between the Registrant and George Samaras.
10.12* Separation Agreement between the Registrant and James W. Knight.
10.13* Separation Agreement between the Registrant and Andrew Howard.
10.14* Separation Agreement between the Registrant and James Chickara.
10.15* Common Stock Purchase Warrant, dated October 11, 1999.
21.1* Subsidiary List.
23.1 Independent Auditors' Consent.
23.3* Consent of Greenberg Traurig (included in Exhibit 5.1).
24.1 Powers of Attorney (See Signature Page on Page II-5).
27.1 Financial Data Schedule.
- ----------
* To be filed by amendment.
II-7
CORRECTED
THIRD AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
RANCH *1, INC.
The Third Amended and Restated Certificate of Incorporation of Ranch *1,
Inc. was erroneously filed and is an inaccurate record of the corporate action.
An administrative error was made by filing the wrong version of the instrument.
The corrected instrument of the Third Amended and Restated Certificate of
Incorporation of Ranch *1, Inc. is as follows:
"Sebastian Rametta, President of Ranch *1, Inc. (hereinafter called the
"Corporation"), a corporation organized and existing under the General
Corporation Law of the State of Delaware, does hereby certify that:
The Corporation's original Certificate of Incorporation (under the name
Franchise Concepts Group, Inc.) was filed with the Secretary of State of the
State of Delaware on June 12, 1996.
The Corporation's Amended and Restated Certificate of Incorporation was
filed with the Secretary of State of the State of Delaware on April 11, 1997.
The Corporation's Second Amended and Restated Certificate of Incorporation
was filed with the Secretary of State of Delaware on February 26, 1998.
An Amendment to the Corporation's Second Amended and Restated Certificate
of Incorporation, changing the name of the Corporation to Ranch *1, Inc., was
filed with the Secretary of State of Delaware on August 20, 1999.
This Third Amended and Restated Certificate of Incorporation restates,
integrates and amends the Second Amended and Restated Certificate of
Incorporation, as amended, and has been duly adopted in accordance with Section
228, 242 and 245 of the General Corporation Law of the State of Delaware.
The text of the Certificate of Incorporation of the Corporation in hereby
amended and restated to read in its entirety as follows:
FIRST: The name of the Corporation is Ranch *1, Inc.
SECOND: The address, including street, number, city and country, of the
registered office of the Corporation in the State of Delaware is 1013 Centre
Road, Wilmington, County of New Castle (zip code 19085-1297); and the name of
the registered agent of the Corporation at such address is Corporation Service
Corporation.
<PAGE>
THIRD: The nature of the business and of the purposes to be conducted and
promoted by the Corporation are to conduct any lawful business, to promote any
lawful purpose, and to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
FOURTH: The total number of shares of stock which the Corporation shall
have authority to issue is Thirty Two Million Eight Hundred Thousand
(32,800,000) shares of capital stock, of which
(a) Twenty Five Million (25,000,000) shares shall be designated as Common
Stock, having a par value of $.001 per share (the "Common Stock")
(b) Five Million (5,000,000) shares shall be designated as preferred stock,
par value $.001 per share (the "Preferred Stock"), each of such shares of
Preferred Stock to be issued (i) in such series and with such designations,
powers, preferences, rights, and such other qualifications, limitations or
restrictions thereon as the Board of Directors of the Corporation may, from time
to time, fix by resolution or resolutions which are permitted by Section 151 of
the Delaware General Corporation Law for any such series of Preferred Stock, and
(ii) in such number of shares in each series as the Board of Directors shall
from time to time, by resolution or resolutions, fix; provided, that the
aggregate number of all shares of such Preferred Stock issued by the Board of
Directors of the Corporation does not exceed the maximum number of shares of
Preferred Stock authorized by this Section (b) of this Article FOURTH; and
(c) Two Million Eight Hundred Thousand (2,800,000) shares shall be
designated as Series A Convertible Preferred Stock having par value of $.001 per
share ("Series A Convertible Preferred Stock").
The following is a statement of the designations, preferences, voting
powers, qualifications, limitations, restrictions, and the relative
participating, optional or other special rights of the Common Stock and the
Series A Convertible Preferred Stock, respectively.
COMMON STOCK
1. Dividends. Subject to the preferences and other rights of the Series A
Convertible Preferred Stock and other Preferred Stock hereafter issued, the
holders of record of Common Stock shall be entitled to receive such dividends as
may be declared from time to time by the Board of Directors out of funds legally
available therefor.
2. Liquidation. In the event of any liquidation, dissolution of winding up
of the affairs of the Corporation, voluntary or involuntary, the holders of
shares of Common Stock shall be entitled to share ratably in all assets of the
Corporation remaining after payment to the holders of the Series A Convertible
Preferred Stock and other Preferred Stock which may hereafter be issued of the
amounts to which they are entitled under the provisions of this Article.
<PAGE>
3. Voting Rights. Each holder of shares of Common Stock shall be entitled
to one vote for each such share held by such holder, on each matter submitted to
a vote of the stockholders of the Corporation.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
SERIES A CONVERTIBLE PREFERRED STOCK
1. Voting.
(a) General. Except as may be otherwise provided in these terms of the
series A Convertible Preferred Stock, in the Certificate of Incorporation of the
Corporation or by law, the Series A Convertible Preferred Stock shall vote
together with all other classes and series of stock of the Corporation as a
single class on all actions to be taken by the stockholders of the Corporation.
Each share of Series A Convertible Preferred Stock shall entitle the holder
thereof to such number of votes per share on each such action as shall equal the
number of shares of Common Stock (including fractions of a share) into which
each share of Preferred Stock is then convertible.
(b) Board Size. For so long as any of the Purchasers (as defined in Section
8(a) below) continue to hold at least 50% of the shares of Series A Convertible
Preferred Stock issued to it pursuant to the Purchase Agreement and all
Purchasers continue to hold, in the aggregate, at least fourteen percent (14%)
of all shares of Series A Convertible Preferred Stock issued pursuant to the
Purchase Agreement (as defined in Section 8(a) below), the Corporation shall
not, without the written consent or affirmative vote of the holders of at least
sixty percent (60%) in interest of the then outstanding shares of Series A
Convertible Preferred Stock given in writing or by vote at a meeting, consenting
or voting (as the case may be) separately as a series, increase the maximum
number of directors constituting the Board of Directors to a number in excess of
eight (8).
(c) Board Seats. For so long as the Purchasers continue to hold an
aggregate of at least 50% of the shares of Series A Convertible Preferred Stock
issued pursuant to the Purchase Agreement (as defined in Section 8(a) below),
the holders of the Series A Convertible Preferred Stock, voting as a separate
series, shall be entitled to elect two (2) directors of the Corporation;
provided, however, that at any time when the Purchasers hold less than fifty
percent (50%), but at least fourteen percent (14%) of the shares of Series A
Convertible Preferred Stock issued pursuant to the Purchase Agreement, the
holders of the Series A Convertible Preferred Stock, voting as a separate
<PAGE>
series, shall be certified to elect one (1) director of the Corporation. Any
meeting (or in a written (or in a written consent in lieu thereof) held for the
purpose of electing directors, the presence in person or by proxy (or the
written consent) of the holders of at least sixty percent (60%) in interest of
the then outstanding shares of Series A Convertible Preferred Stock shall
constitute a quorum of the Series A Convertible Preferred Stock for the election
of directors to be elected solely by the holders of the Series A Convertible
Preferred Stock. A vacancy in any directorship elected by the holders of the
Series A Convertible Preferred Stock shall be filled only by vote or written
consent of the holders of at least sixty percent (60%) in interest of the then
outstanding shares of Series A Convertible Preferred Stock.
2. Dividends.
(a) The holders of the Series A Convertible Preferred Stock shall be
entitled to receive "Accruing Dividends" (as defined below) in accordance with
the provisions of Section 2(b) hereof. No dividends may be paid on any shares of
Series A Convertible Preferred Stock, unless and until all declared but unpaid
dividends on the issued and outstanding shares of 8% Series C convertible
preferred stock of the Corporation (the "Series C Preferred Stock"), which ranks
senior in priority with respect to dividends and/or liquidation to the Series A
Convertible Preferred Stock (the "Senior Securities"), shall have been paid in
full. No dividends may be paid on any shares of the Corporation's 8% Series B
convertible preferred stock (the "Series B Preferred Stock"), or any other class
or series of capital stock ranking junior in priority with respect to dividends
and/or liquidation to the Series A Convertible Preferred Stock, unless and until
all declared but unpaid dividends on the Series A Convertible Preferred Stock
have been paid in full, including, without limitation, the dividend set forth
above.
(b) Accruing Dividends. From and after the dates of issuance of any shares
of Series A Convertible Preferred Stock but only until and through February 26,
2003, the holders of such shares of the Series A Convertible Stock shall be
entitled to receive, out of funds legally available therefor, when and if
declared by the Board of Directors, cumulative dividends at the rate per annum
of eight percent (8%) of the Liquidation Value (as defined below) (such
dividends, the "Accruing Dividends"). Accruing Dividends shall accrue from day
to day, whether or not earned or declared, and whether or not there are profits,
surplus or other funds of the Corporation legally available for the payment of
dividends, and shall be cumulative. Holders of such shares of Series A
Convertible Preferred Stock shall receive all Accruing Dividends, accrued and
unpaid as of February 26, 2003, in three equal installments, with the first such
installment payable within 20 business days after February 27, 2003, the second
such installment payable on February 27, 2004 and the third such installment
payable on February 27, 2005. Except as provided in section 2, 3, 5 and 6, the
Corporation shall be under no obligation to pay such Accruing Dividends unless
so declared by the Board of Directors.
<PAGE>
(c) Common Stock Dividends. If the Corporation declares or pays a dividend
upon the Common Stock payable in cash out of earnings or earned surplus
(determined in accordance with generally accepted accounting principles) (a
"Common Stock Dividend"), then prior to paying any dividend on the Common Stock,
the Corporation will pay to the holders of the Series A Convertible Preferred
Stock at the time of payment thereof the Common Stock Dividends which would have
been paid on the shares of Common Stock therefore issuable upon conversion of
the Series A Convertible Preferred Stock been converted immediately prior to the
date on which a record is taken or such Common Stock Dividends, or, if no
records is taken, the date as to which the record holders of Common Stock
entitled to such dividends are to be determined.
3. Liquidation Dissolution and Winding-up
(a) Liquidation. Subject only to the prior rights of the holders of the
Senior Securities, upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the shares of
Series A Convertible Preferred Stock shall be paid an amount equal to $2.50 per
share (such amount, as it may be adjusted from time to time give effect to any
stock split or combination, recapitalizations or other similar event, the
"Liquidation Value") plus, in the case of each share, an amount equal to
dividends accrued but unpaid thereon, computed to the date payment thereof is
made available, and before any payment shall be made to the holders of any
shares of Class B Preferred Stock or any other shares of capital stock of the
Corporation ranking on liquidation junior to the Series A Convertible Preferred
Stock, such amount payable with respect to one share of Series A Convertible
Preferred Stock being sometimes referred to as the "Series A Liquidation
Preferred Payment" and with respect to all shares of Series A Convertible
Preferred Stock being sometimes referred to as the "Series A Liquidation
Preferred Payments." Upon any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, no payments in respect of any
Series A Liquidation Preferred Payment shall be made to the Purchasers or any
other holders of Series A Convertible Preferred Stock unless and until the
holders of all outstanding shares of the Corporation's 8% Series C convertible
preferred stock (constituting the only Senior Securities) shall have received
payment in full, at the rate of $50,000 per share plus accrued dividends
thereon, on all outstanding shares of such Senior Securities. If, upon any
liquidation, dissolution, or winding up of the Corporation, the assets to be
distributed to the holders of the Series A Convertible Preferred Stock shall be
insufficient to permit payment to such stockholders of the full preferential
amounts aforesaid, then all of the assets of the Corporation available for
distribution to holders of the Series A Convertible Preferred Stock shall be
distributed to such holders of the Series A Convertible Preferred Stock pro
rata.
(b) Upon any liquidation, dissolution or winding up of the Corporation
immediately after the holders of Senior Securities, the holders of Series A
Convertible Preferred Stock and the holders of any class of preferred stock
ranking junior to the Series A Convertible Preferred Stock have been paid in
full pursuant to Subsection 3(a) above, the remaining net assets of the
Corporation available for distribution shall be distributed among the holders of
the shares of the Common Stock, and, if such liquidation, dissolution or winding
up occurs prior to February 27, 2003, the holders of the shares of Series A
Convertible Preferred Stock pro rata in an amount per share as would have been
payable had each share of Series A Convertible Preferred Stock been converted to
Common Stock pursuant to section 5 immediately prior to such liquidation,
dissolution or winding up.
<PAGE>
Written notice of such liquidation, dissolution or winding up, starting a
payment date and the place where said payments shall be made, shall be given by
mail, postage prepaid, or by facsimile transmission to non-U.S. residents, not
less than 20 days prior to the payment date state therein, to the holders of
record of Series A Convertible Preferred Stock, such notice to be addressed to
cash such holder at its address as shown by the records of the Corporation.
Each of (i) the consolidation or merger of the Corporation into or with any
other entity or entities which results in the exchange of outstanding shares of
the Corporation for securities or other consideration issued or paid or caused
to be issued or paid by any such entity or affiliate thereof (except a
consolidation or merger into a Subsidiary or merger in which the Corporation is
the surviving Corporation and the holders of the Corporation's voting stock
outstanding immediately prior to the transaction), (ii) sale or transfer by the
Corporation of all or substantially all its assets, or (iii) sale or transfer by
the Corporation's stockholders of capital stock representing a majority of the
voting power at elections of directors of the Corporation shall be deemed to be
a liquidation, dissolution or winding up of the Corporation within the meaning
of the provisions of this section 3 and the holders of the Series A Convertible
Preferred Stock shall be entitled to receive the payment from the Corporation of
the amounts payable with respect to the Series A Convertible Preferred Stock
upon a liquidation, dissolution or winding up the Corporation under this section
3; provided, however, if the consideration per share receivable by the holders
of the Series A Convertible Preferred Stock upon the occurrence of any of the
events set forth in clauses (i), (ii) or (iii) above (as determined in good
faith by an investment banking firm mutually agreed upon by the Board of
Directors of the Corporation and the holders of at least sixty percent (60%) in
interest of the then outstanding shares of Series A Convertible Preferred Stock)
if the provisions of section 5(g) were to be applicable) is equal to or greater
than $5.50 (as adjusted for any stock split, subdivision, reclassification or
similar event), no liquidation, dissolution or winding up of the Corporation
within the meaning of the provisions of this section 3 shall be deemed to have
occurred and the provisions of section 5(g) shall, in fact, apply. Whenever any
distribution provided for in this section 3 shall be payable in property other
than cash, the value of such distribution shall be the fair market value of such
property as determined in good faith by an investment banking firm mutually
agreed upon by the Board of Directors of the Corporation and the holders of at
least sixty percent (60%) in interest of the then outstanding shares of Series A
Convertible Preferred Stock. In the event of a consolidation or merger pursuant
to clause (i) of this section which results in the exchange of outstanding
shares of the Corporation for securities of another entity or entities, the
Series A Liquidation Preference Payment shall be paid in the same such
securities.
<PAGE>
4. Restrictions. At any time when at least 25% of the shares of Series A
Convertible Preferred Stock issued pursuant to the Purchase Agreement (as
defined in Section 8(a) below) remain outstanding, except where the vote or
written consent of the holders of a greater number of shares of the Corporation
is required by law or by the Certificate of Incorporation, and in addition to
any other vote required by law or the Certificate of Incorporation, without the
written consent of the holders of at least sixty (60%) in interest of the then
outstanding shares of Series A Convertible Preferred Stock given in writing or
by vote at a meeting consenting or voting (as the case may be) separately as a
series, the Corporation will not:
(a) Consent to any liquidation, dissolution or winding up of the
Corporation or merge or consolidate with or into, or permit any Subsidiary to
merge or consolidate with or into, any other corporation, corporations, entity
or entities (except a consolidation or merger into a Subsidiary or merger in
which the Corporation is the surviving corporation and the holders of the
Corporation's voting stock outstanding immediately prior to the transaction
constitute a majority of the holders of voting stock outstanding immediately
following the transaction);
(b) Sell, abandon, transfer, lease or otherwise dispose of all or
substantially all of its properties or assets;
(c) Amend, alter or repeal any provision of its Certificate of
Incorporation or By-laws in a manner adverse to holders of the Series A
Convertible Preferred Stock;
(d) Create or authorize the creation of any additional class or series of
shares of stock unless the same ranks junior to the Series A Convertible
Preferred Stock as to dividends and the distribution of assets or the
liquidation, dissolution or winding up of the Corporation, or increase the
authorized amount of Series A Convertible Preferred Stock or increase the
authorized amount of any additional class or series of shares of stock unless
the same ranks junior to the Series A Convertible Preferred Stock as to
dividends and the distribution of assets on the liquidation, dissolution or
winding up of the Corporation, or create or authorize any obligation or security
convertible into shares of Series A Convertible Preferred Stock or into shares
of any other class or series of stock unless the same ranks junior to the Series
A Convertible Preferred Stock as to dividends and the distribution of assets on
the liquidation, dissolution or winding up of the Corporation, whether any such
creation, authorization or increase shall be by means of amendment to the
Certificate of Incorporation or by merger, consolidation or otherwise;
(e) In any manner amend, alter or change the designations or the powers,
preferences or rights, privileges or the restrictions of the Series A
Convertible Preferred Stock adversely;
<PAGE>
(f) Purchase or redeem, or set aside any sums for the purchase or
redemption of, or pay any dividend or make any distribution on, any shares of
stock other than the Series A Convertible Preferred Stock, except for dividends
or other distributions payable on the Common Stock solely in the form of
additional shares of Common Stock or pursuant to Section 2(a) above.
5. Conversion. The holders of shares of Series A Convertible Preferred
Stock shall have the following conversion rights:
(a) Automatic Conversion. Unless earlier converted and in accordance with
the procedures and subject to the terms and conditions set forth in this Section
5, subject to the terms and conditions set forth below in this Section 5(a), all
the outstanding shares of Series A Convertible Preferred Stock shall
automatically convert, without any further action by the Corporation or by the
holders of the Series A Convertible Preferred Stock, into shares of Common Stock
at the Conversion Price per share specified in Section 5(b) below on the date
(the "Automatic Conversion Date") that a registration statement registering for
sale shares of Common Stock of the Corporation is declared effective by the
Securities and Exchange Commission (the "Initial Public Offering") under the
Securities Act of 1933, as amended (the "Securities Act"). Notwithstanding the
foregoing, the provisions of this Section 5(a) shall only be applicable, if the
following conditions are met:
(i) On or prior the Automatic Conversion Date, the Corporation shall
have paid to the holders of the Series A Convertible Preferred Stock all
Accruing Dividends which shall have accrued and be unpaid for all periods
through and including February 28, 2003; it being understood and agreed
that such Accruing Dividends are hereby fixed at $2,800,000. The
Corporation shall have the right, at its sole option, to pay all any part
of such Accruing Dividends either in cash or in the form of additional
shares of Common Stock, or any combination thereof. To the extent that
Accruing Dividends shall be paid in shares of the Corporation's Common
Stock, each such share shall be valued at the initial price per share that
shares of Common Stock are offered to the public in the Initial Public
Offering (the "Initial Per Share Offering Price").
(ii) In the event that the Initial Public Offering and the Automatic
Conversion Date shall occur at any time after March 31, 2000, the
provisions of this Section 5(a) shall only be applicable if, in connection
with such Initial Public Offering (A) the Initial Per Share Offering Price
shall be equal to or in excess of $5.50 per share, and (B) the gross
proceeds of such Initial Public Offering shall be equal to or in excess of
$15,000,000.
(b) Conversion Price. The shares of Series A Convertible Preferred Stock to
be converted into Common Stock pursuant to the provisions of this Section 5,
shall, subject to adjustment as hereinafter provided, be initially convertible
into that number of fully paid and nonassessable shares of Common Stock as is
obtained by (i) multiplying the number or shares of Series A Convertible
Preferred Stock so to be converted by the then applicable Liquidation Value and
(ii) dividing the result by a price (the "Conversion Price") which shall be
equal to the lesser of (A) $2.50 per share, or in case an adjustment of such
price has taken place pursuant to the further provisions of this section 5, then
by the conversion price as last adjusted and in effect at the date any share or
shares of Series A Convertible Preferred Stock are surrendered for conversion,
or (B) unless previously converted into Common Stock, seventy (70%) of the
Initial Per Share Offering Price in the Initial Public Offering.
<PAGE>
(c) Right to Convert. Subject to the terms and conditions of this Section
5, the holder of any share or shares of Series A Convertible Preferred Stock
shall have the right, at its option at any time, to convert any such shares of
Series A Convertible Preferred Stock (except that upon any liquidation of the
Corporation the right of conversion shall terminate at the close of business on
the business day fixed for payment of the amounts distributable on the Series A
Convertible Preferred Stock) into fully paid and nonassessable shares of Common
Stock, at the Conversion Price then in effect.. Such rights of conversion shall
be exercised by the holder thereof by giving written notice that the holder
elects to convert a stated number of shares of Series A Convertible Preferred
Stock into Common Stock and by surrender of a certificate or certificates for
the shares so to be converted, which certificate or certificates, if the
Corporation shall so request, shall be duly endorsed to the Corporation or in
blank, to the Corporation at its principal office (or such other office or
agency of the Corporation as the Corporation may designate by notice in writing
to the holders of the Series A Convertible Preferred Stock) at any time during
its usual business hours on the date set forth in such notice, together with a
statement of the name or names (with address) to which the certificate or
certificates for shares of Common Stock shall be issued.
(d) Issuance of Certificates: Time Conversion Effected. Promptly after the
receipt of the written notice referred to in section 5(c) and surrender of the
certificate or certificates for the shares or shares of Series A Convertible
Preferred Stock to be converted, the Corporation shall issue and deliver, or
cause to be issued and delivered, to the holder, registered in such name or
names as such holder may direct, a certificate or certificates for the number of
whole shares of Common Stock issuable upon the conversion of such share or
shares of Series A Convertible Preferred Stock. To the extent permitted by law,
such conversion shall be deemed to have been effected and the Conversion Price
shall be determined as of the close of business on the date on which such
written notice shall have been received by the Corporation and the certificate
or certificates for such share or shares shall have been surrendered as
aforesaid, and at such time the rights of the holder of such share or shares of
Series A Convertible Preferred Stock shall cease, and the person or persons in
whose name or names any certificate or certificates for shares of Common Stocks
hall be issuable upon such conversion shall be deemed to have become the holder
or holders or record of the shares represented thereby.
(e) Fractional Shares: Dividends: Partial Conversion. No fractional shares
shall be issued upon conversion of Series A Convertible Preferred Stock into
<PAGE>
Common Stock. Subject to the provisions of section 3(a), at the time of each
conversion, the Corporation shall at its option: (i) pay in cash an amount equal
to all dividends accrued and unpaid on the shares of Series A Convertible
Preferred Stock surrendered for conversion to the date upon which such
conversion is deemed to take a place as provided in section 5(d), or (ii)
provide to such holder a certificate representing a number of shares of Common
Stock equal to the quotient of all dividends accrued and unpaid on the shares of
Series A Convertible preferred Stock so surrendered divided (x) by the fair
market value of one share of Common Stock, as determined in good faith by an
investment banking firm mutually agreed upon by the Board of Directors of the
Corporation and the holders of at least sixty percent (60%) in interest of the
then outstanding shares of Series A Convertible Preferred Stock, or (y) in the
event of a conversion in connection with a public offering of Common Stock, by
the price per share paid by the public for such Common Stock. In case the number
of shares of Series A Convertible Preferred Stock represented by the certificate
or certificates surrendered exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the holder, at
the expense of the Corporation, a new certificate or certificates for the number
of shares of Series A Convertible Preferred Stock represented by the certificate
or certificates surrendered which are not to be converted. If any fractional
share of Common Stock would except for the provisions of the first sentence of
this section 5(e), be delivered upon such conversion, the Corporation, in lieu
of delivering such fractional share, shall pay to the holder surrendering the
Series A Convertible Preferred Stock for conversion an amount in cash equal to
the current market price of such fractional share as determined in good faith by
an investment banking firm mutually agreed upon by the Board of Directors of the
Corporation and the holders of at least sixty percent (60%) in interest of the
then outstanding shares of Series A Convertible Preferred Stock, and based upon
the aggregate number of shares of Series A Convertible Preferred Stock
surrendered by any one holder.
(f) Adjustment of Conversion Price Upon Issuance of Common Stock. The
provisions of this Section 5(f) shall be subject to the full-rachet
anti-dilution price provisions set forth in Section 5(p) below. Except as
provided in sections 5(e) and 5(g), if any whenever the Corporation shall issue
or sell, or is, in accordance with subsections 5(f)(1) through 5(f)(7), deemed
to have issued or sold, any shares of Common Stock for a consideration per share
less than the Conversion Price in effect immediately prior to the time of such
issue or sale (such number being appropriately adjusted to reflect the
occurrence of any event described in section 5(h), then, forthwith upon such
issue or sale, the Conversion Price shall be reduced, concurrently with such
issue, to a price determined by dividing (i) an amount equal to the sum of (A)
the number of Common Stock outstanding immediately prior to such issue or sale
multiplied by the number of Common Stock outstanding immediately prior to such
issue or sale multiplied by the then existing Conversion Price and (B) the
consideration, if any, received by the Corporation upon such issue or sale, by
(ii) the total number of Common Stock outstanding immediately after such issue
or sale; provided, however, that, for the purpose of this subsection 5(f), all
shares of Common Stock issuable upon conversion of shares of Series A
Convertible Preferred Stock outstanding immediately prior to such issue shall be
deemed to be outstanding, and immediately after any additional shares of Common
Stock are deemed issued pursuant to subsection 5(f)(1) or 5(f)(2), such
additional shares of Common Stock shall be deemed to be outstanding.
<PAGE>
For purposes of this section 5(f), the following subsections 5(f)(1) to
5(f)(7) shall also be applicable:
(1) Issuance of Rights or Options. In case at any time the Corporation
shall in any manner grant (whether directly or by assumption in a merger or
otherwise) any warrants or other rights to, subscribe for or to purchase,
or any options for the purchase of, Common Stock or any stock or security
convertible into or exchangeable for Common Stock (such warrants, rights or
options being called "Options" and such convertible or exchangeable stock
or securities being called "Options" and such convertible or exchangeable
stock or securities being called "Convertible Securities") whether or not
such Options or the right to convert or exchange any such Convertible
Securities are immediately exercisable, and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon the
conversion or exchange of such Convertible Securities (determined by
dividing (i) the total amount, if any, received or receivable by the
Corporation as consideration for the granting of such Options, plus the
minimum aggregate amount of additional consideration payable to the
Corporation upon the exercise of all such Options, plus, in the case of
such Options which relate to Convertible Securities, the minimum aggregate
amount of additional consideration, if any, payable upon the issue or sale
of such Convertible Securities and upon the conversion or exchange thereof,
by (ii) the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon the conversion or exchange of all such
Convertible Securities issuable upon the exercise of such Options) shall be
less than the Conversion Price in effect immediately prior to the time of
the granting of such Options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such Options or upon conversion
or exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options shall be deemed to have been
issued for such price per share as of the date of granting of such Options
or the issuance of such Convertible Securities and thereafter shall be
deemed to be outstanding. Except as otherwise provided in subsection
5(f)(3), no adjustment of the Conversion Price shall be made upon the
actual issue of such Common Stock or such Convertible Securities upon
exercise of such Options or upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities.
(2) Issuance of Convertible Securities. In case the Corporation shall
in any manner issue (whether directly or by assumption in a merger or
otherwise) or sell any Convertible Securities, whether or not the rights to
exchange or convert any such Convertible Securities are immediately
exercisable, and the price per share for which Common Stock is issuable
upon such conversion or exchange (determined by dividing (i) the total
amount received or receivable by the Corporation as consideration for the
issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the Corporation upon
the conversion of exchange thereof, by (ii) the total maximum number of
shares of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities) shall be less than the Conversion Price in effect
immediately prior to the time of such issue or sale, then the total maximum
number of shares of Common Stock issuable upon conversion of exchange of
all such Convertible Securities shall be deemed to have been issued for
such price per share as of the date of the issue or sale of such
Convertible Securities and thereafter shall be deemed to be outstanding,
provided that (a) except as otherwise provided in subsection 5(f)(3), no
adjustment of the Conversion Price shall be made upon the actual issue of
such Common Stock upon conversion or exchange of such Convertible
Securities and (b) if any such issue or sale of such Convertible Securities
is made upon exercise of any Options to purchase any such Convertible
Securities for which adjustments of the Conversion Price have been or are
to be made pursuant to other provisions of this section 5(f), no further
adjustment of the Conversion Price shall be made by reason of such issue or
sale.
<PAGE>
(3) Change in Option Price or Conversion Rate. Upon the happening of
any of the following events, namely, if the purchase price provided for in
any Option referred to in subsection 5(f)(1), the additional consideration,
if any, payable upon the conversion or exchange of any Convertible
Securities referred to in subsection 5(f)(1) or 5(f)(2), or the rate at
which Convertible Securities referred to in subsection 5(f)(1) or 5(f)(2)
are convertible into or exchangeable for Common Stock shall change at any
time (including, but not limited to, changes under or by reason of
provisions designed to protect against dilution), the Conversion Price in
effect at the time of such event shall forthwith be readjusted to the
Conversion Price which would have been in effect at such time had such
Options or Convertible Securities still outstanding provided for such
changed purchase price, additional consideration or conversion rate, as the
case may be, at the time initially granted, issued or sold, but only if as
a result of such adjustment the Conversion Price then in effect hereunder
is thereby reduced; and on the expiration of any such Option or the
termination of any such right to convert or exchange such Convertible
Securities, the Conversion Price then in effect hereunder shall forthwith
be increased to the Conversion Price which would have been in effect at the
time of such expiration or termination had such Option or Convertible
Securities, to the extent outstanding immediately prior to such expiration
or termination, never been issued.
(4) Stock Dividends. In case the Corporation shall declare a dividend
or make any other distribution upon any stock of the Corporation payable in
Common Stock (except for the issue of stock dividends or distributions upon
the outstanding Common Stock for which adjustment is made pursuant to
section 5(h). Options or convertible Securities, any Common Stock, Options
or Convertible Securities, as the case may be, issuable in payment of such
dividend or distributions shall be deemed to have been issued or sold
without consideration.
<PAGE>
(5) Consideration for Stock. In case any shares of Common Stock,
Options or Convertible Securities shall be issued or sold for cash, the
consideration received therefor shall be deemed to be the amount received
by the corporation therefor, without deduction therefrom of any expenses
incurred or any underwriting commissions or concessions paid or allowed by
the Corporation in connection therewith. In case any shares of Common
Stock, Options or Convertible Securities shall be issued or sold for
consideration other than cash, the amount of the consideration other than
cash received by the Corporation shall be deemed to be the fair value of
such consideration as determined in good faith by an investment banking
from mutually agreed upon by the Board of Directors of the Corporation and
the holders of at least sixty percent (60%) in interest of the then
outstanding shares of Series A Convertible Preferred Stock, without
deduction of any expenses incurred or any underwriting commissions or
concessions paid or allowed by the Corporation in connection therewith. In
case any Options shall be issued in connection with the issue and sale of
other securities of the Corporation, together comprising one integral
transaction in which no specific consideration is allocated to such Options
by the parties thereto, such Options shall be deemed to have been issued
for such consideration as determined in good faith by the Board of
Directors of the Corporation.
(6) Record Date. In case the Corporation shall take a record of the
holders of its Common Stock for the purpose of entitling them (i) to
receive a dividend or other distribution payable in Common Stock, Options
or Convertible Securities or (ii) to subscript for or purchase Common
Stock, Options or Convertible Securities, then such record date shall be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividends
or the making of such other distribution or the date of the granting of
such right or subscription or purchase, as the case may be.
(7) Treasury Shares. The number of shares of Common Stock outstanding
at any given time shall not include shares owned or held by or for the
account of the Corporation, and the disposition of any such shares shall be
considered an issue or sale of Common Stock for the purpose of this section
5(d).
(g) Certain Issues of Common Stock Extended. Anything herein to the
contrary notwithstanding, the Corporation shall not be required to make any
adjustment of the Conversion Price in the case of the issuance of (i) shares of
Common Stock issuable upon conversion of the Series A Convertible Preferred
Stock and (ii) the Reserved Employee Shares (as defined in section B hereof).
<PAGE>
(h) Subdivision or Contribution of Common Stock. In case the Corporation
shall at any time subdivide (by any stock split, stock dividend or otherwise)
its outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision shall be
proportionately reduced and, conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, the Conversion
Price in effect immediately prior to such combination shall be proportionately
increased.
(i) Reorganization or Reclassification. If any reorganization,
reclassification, recapitalizations, consolidation, merger, sale of all or
substantially all of the Corporation's assets or other similar transaction (any
such transaction being referred to herein as an "Organic Change") shall be
effected in such away than holders of Common Stock shall be entitled to receive
(either directly or upon subsequent liquidation) stock, securities or assets
with respect to or in exchange for Common Stock, then as a condition of such
Organic Change, lawful and adequate provisions shall be made whereby by each
holder of a shares or shares of Series A Convertible Preferred Stock shall
thereupon have the right to receive, upon the basis and upon the terms and
conditions specified herein and in lieu of or in addition to, as the case may
be, the shares of Common Stock immediately therefore receivable upon the
conversion of such share or shares or Series A Convertible Preferred Stock, such
shares or stock, securities or assets as may be issued or payable with respect
to or in exchange or a number of outstanding shares of each Common Stock equal
to the number of shares of such Common Stock immediately therefore receivable
upon such conversion had such Organic Change not taken place, and in any case of
a reorganization or reclassification only appropriate provisions shall be made
with respect to the rights and interests of such holder to the end that the
provisions hereof (including without limitation provisions for adjustments of
the Conversion Price) shall thereafter be applicable, as neatly as may be, in
relation to any shares of stock, securities or assets thereafter deliverable
upon the exercise of such conversion rights.
(j) Notices of Adjustment. Upon any adjustment of the Conversion Price,
then and in each such case Corporation shall give written notice thereof by
first class mail postage prepaid, or by facsimile transmission to non-US
residents, addressed to each older of shares or Preferred Stock at the address
of such holder as shown on the books of the Corporation, which notes shall state
the Conversion Price resulting from such adjustment setting forth in reasonable
detail the method upon which such calculation is based.
(k) Other Notices. In case at any time:
(8) the Corporation shall declare any dividend upon its Common Stock
payable in cash or stock or make any other distribution to the holders of
its Common Stock;
<PAGE>
(9) the Corporation shall offer the subscription pro rata to the
holders of its common Stock any additional shares of stock of any class or
other rights;
(10) there shall be any capital reorganization or reclassification of
the capital stock of the Corporation, or a consolidation or merger of the
Corporation with or into, or a sale of all or substantially all its assets
to, another entity or entitles; or
(11) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation;
then in any one or more of said cases, Corporation shall give, by first class
mail, postage prepaid, or by facsimile transmission to non-US residents,
addressed to each holder of any shares of Preferred Stock at the address of such
holder as shown on the books of the Corporation shall close or a record shall be
taken for such dividend, distribution or subscription rights or for determining
rights to vote in respect of any such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up and (b) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up. At least 20 days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause (a) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Common Stock shall be entitled thereto and such notice in accordance with the
foregoing clause (b) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their 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.
(l) Stock to be Reserved. The Corporation will at all times reserve and
keep available out of its authorized Common Stock, solely for the purpose of
issuance upon the conversion of Series A Convertible Preferred Stock as herein
provided, such number of shares of Common Stock as shall then be issuable upon
the conversion of all outstanding shares of Series A Convertible Preferred
Stock. The Corporation covenants that all shares of Common Stock which shall be
so issued shall be duly and validly issued and fully paid and nonassessable and
free from all taxes, liens and charges with respect to the issue thereof and,
without limiting the generality of the foregoing, the Corporation covenants that
it will from time to time take all such action as may be requisite to assure
that the par value per share of the Common Stock is at all times equal to or
less than the Conversion Price in effect at the time. The Corporation will take
all such action as may be necessary to assure that all such shares of Common
stock may be so issued without violation of any applicable law or regulation, or
of any requirement of any national securities exchange upon which the Common
Stock may be listed.
<PAGE>
(m) No Reissuance of Series A Convertible Preferred Stock. Shares of Series
A Convertible Preferred Stock which are converted into shares of Common Stock as
provided herein shall not be reissued.
(n) Issue Tax. The issuance of certificates for shares of Common Stock upon
conversion of Series A Convertible Preferred Stock shall be made without charge
to the holders thereof for any issuance tax in respect thereof, provided that
the Corporation shall not be required to pay any tax which may be payable in
respect of any transfer involved in the issuance and delivery of any certificate
in a name other than that of the holder of the Series A Convertible Preferred
Stock which is being converted.
(o) Closing of Books. The Corporation will at no time close its transfer
books against the transfer of any shares of Common Stock issued or issuable upon
the conversion of any shares of Preferred Stock in any manner which interferes
with the timely conversion of such Preferred Stock, except as may otherwise be
required to comply with applicable laws.
(p) Full Rachet Price Adjustment. From and after the date of issuance of
the Series A Convertible Preferred Stock and prior to such date as the
Corporation shall on a cumulative basis (measured from the date of issuance of
the Series A Convertible Preferred Stock) have received aggregate gross proceeds
of $10,000,000 or more in connection with one or more sales of shares of any
class or series of its capital stock or notes convertible into shares of capital
stock, whether pursuant to the registration requirements of the Securities Act
of 1933, as amended, or any exemption from such registration requirements, if
the Corporation shall issue or sell, or is, in accordance with subsections
5(f)(1) through 5(f)(7) above, deemed to have issued or sold, any shares of
Common Stock for a consideration per share which shall be less than the
Conversion Price in effect immediately prior to the time of such issue or sale
(such number being appropriately adjusted to reflect the occurrence of any event
described in section 5(h)), then, forthwith upon such issue or sale, the
Conversion Price shall be reduced, concurrently with such issue, to the low
consideration price per share. The provisions of this Section 5(p) shall not be
applicable to the issuance of shares of Common Stock (A) in connection with any
stock option or stock purchase plan provided to employees or agents of the
Corporation, or (B) in connection with the acquisition of any shares of capital
stock, assets, properties or businesses of any unaffiliated third person, firm
or corporation, for such consideration as the Board of Directors of the
Corporation deems to fair and reasonable to the Corporation, and not otherwise
in violation of the provisions of this Certificate of Incorporation.
(q) Definition of Common Stock. As used in this section 5, the term "Common
Stock" shall mean and include the Corporation's authorized Common Stock, par
value $.001 per share, as constituted on the date of filing of these terms of
the Preferred Stock, and shall also include any capital stock of any class of
the Corporation thereafter authorized which shall neither be limited to a fixed
sum or percentage of par value in respect of the rights of the holders thereof
to participate in dividends nor entitled to a preference in the distribution of
assets upon the voluntary or involuntary liquidation, dissolution or winding up
of the Corporation; provided that the shares of Common Stock receivable upon
conversion of shares of Series A Convertible Preferred Stock shall include only
shares designated as Common Stock of the Corporation on the date of filing of
this instrument, or in case of any reorganization or reclassification of the
outstanding shares thereof, the stock, securities or assets provided for in
subsection 5(i).
<PAGE>
6. Redemption. The shares of Preferred Stock shall be redeemed as follows:
(a) Optional Redemption.
(1) With the approval of the holders of at least sixty percent (60%)
in interest of the then outstanding shares of Series A Convertible
Preferred Stock, one or more holders of shares of Series A Convertible
Preferred Stock may, by giving notice (the "Notice") to the Corporation at
any time after February 26,2003 require the Corporation to redeem all of
the outstanding Series A Convertible Preferred Stock which, at the
Corporation's sole election shall be redeemed either (A) in three equal
installments, with one-third of the Series A Convertible Preferred Stock
then held by all such holder redeemed on the First Redemption Date (the
"Second Redemption Date") and the remainder of the Series A Convertible
Preferred Stock then held by all such holders redeemed on the second
anniversary of the First Redemption Date (the "Third Redemption Date") or
(B) all at one time (the "Immediate Redemption"), in which ease all then
remaining rights of the holders of the then outstanding shares of Series A
Convertible Preferred Stock shall terminate as of the Immediate Redemption
Date (as defined below). Upon receipt of the Notice, the Corporation will
so notify all other persons holding Series A Convertible Preferred Stock.
After receipt of the Notice, the Corporation shall fix the date for
redemption for the First Redemption Date or the Immediate Redemption Date,
as the case may be, shall occur within sixty (60) days after receipt of the
Notice. All holders of Series A Convertible Preferred Stock shall deliver
to the Corporation during regular business hours, at the office of any
transfer agent of the Corporation for the Series A Convertible Preferred
Stock or at the principal office of the Corporation or at such other place
as may be designated by the Corporation, the certificate or certificates
for the Series A Convertible Preferred Stock, duly endorsed for transfer to
the Corporation (if required by it) on or before the First Redemption Date.
The First Redemption Date, the Second Redemption Date and the Third
Redemption Date are collectively referred to as the "Redemption Dates."
(2) On or after February 26, 2008 (the "Call Redemption Date"), the
Corporation may, at its option, redeem all, but not a part, of the
outstanding Series A Convertible Preferred Stock.
(b) Redemption Price and Payment. The Series A Convertible Preferred Stock
to be redeemed on the Redemption Date, the Immediate Redemption
<PAGE>
Date, as the case may be, shall be redeemed by paying for each share in cash an
amount equal to the (a) Liquidation Value, plus (b) an amount equal to all
dividends accrued and unpaid on each such share, such amount being referred to
as the "Series A Redemption Price." Such payment shall be made in the
installments required pursuant to Section 6(a) above on the application
Redemption Dates, in full on the Call Redemption Date or in full on the
Immediate Redemption Date, as the case may be, to the holders entitled thereto,.
(c) Redemption Mechanics. At least 20 but not more than 30 days prior to
any Redemption Date, the Immediate Redemption Date or the Call Redemption Date,
written notice (the "Redemption Notice") shall be given by the Corporation by
first-class mail, postage prepaid, or by facsimile transmission to non-U.S.
residents, to each holder of record (at the close of business on the business
day next preceding the day on which the Redemption Notice is given) of shares of
Series A Convertible Preferred Stock notifying such holder of the redemption and
specifying the Series A Redemption Price, the Redemption Date, the Immediate
Redemption Date or the Call Redemption Date and the place where said Series A
Redemption Price shall be payable. The Redemption Notice shall be addressed to
each holder at the address as shown by the records of the Corporation. From and
after the close of business on the Redemption Date, the Immediate Redemption
Date or the Call Redemption Date, unless there shall have been a default in the
payment of the Series A Redemption Price, all rights of holders of shares of
Series A Convertible Preferred Stock (except the right to receive the Series A
Redemption Price) shall cease with respect to the shares for which payment is to
be made at such Redemption Date, the Immediate Redemption Date or Call
Redemption Date, as the case may be, and such shares shall not thereafter be
transferred on the books of the Corporation or be deemed to be outstanding for
any purpose whatsoever. If the funds of the Corporation legally available for
redemption of shares of Series A Convertible Preferred Stock on the Redemption
Date, the Immediate Redemption Date or the Call Redemption Date, are
"insufficient" (as defined herein) to redeem the total number of outstanding
shares of Series A Convertible Preferred Stock to be redeemed on such redemption
date, the holders of shares of Series A Convertible Preferred Stock shall share
ratably in any funds legally available for redemption of such shares according
to the respective amounts which would be payable with respect to the full number
of shares owned by them if all such outstanding shares were redeemed in full.
Any shares of Series A Convertible Preferred Stock not redeemed shall remain
outstanding and entitled to all rights and preferences provided herein;
provided, however, that such unredeemed shares which were otherwise subject to
redemption on such Redemption Date, the Immediate Redemption Date or the Call
Redemption Date shall be entitled to receive interest accruing daily with
respect to the applicable Series A Redemption Price at the rate of 15% per
annum. At any time thereafter when additional funds of the Corporation are
legally available and not "insufficient" for the redemption of such shares of
Series A Convertible Preferred Stock, such funds will be used, at the end of the
next succeeding fiscal quarter to redeem the balance of such shares, or such
portion thereof for which funds are then legally available, on the basis set
forth above. As used herein, the Corporation's funds shall be deemed
"insufficient" if immediately following any such redemption, the working capital
of the Corporation would be less than $1,000,000.
<PAGE>
(d) Redeemed or Otherwise Acquired Shares to be Retired. Any shares of
Series A Convertible Preferred Stock redeemed pursuant to this section 6 or
otherwise acquired by the Corporation in any member whatsoever shall be canceled
and shall not under any circumstances be reissued; and the Corporation may from
time to time take such appropriate corporate action as may be necessary to
reduce accordingly the number of authorized shares of Series A Convertible
Preferred Stock.
7. Amendments. Except where the vote or written consent of the holders of a
greater number of shares of the Corporation is required by these terms of the
Series A Convertible Preferred Stock by law or by the Restated Certificate of
Incorporation, no provision of these terms of the Series A Convertible Preferred
Stock may be amended, modified or waived in a manner adverse to the holders of
the Series A Convertible Preferred Stock without the written counsel or
affirmative vote of the holders of at least sixty percent (60%) in interest of
the then outstanding shares of Series A Convertible Preferred Stock.
8. Definitions. As used herein, the following terms shall have the
following meanings:
(a) The term "Purchase Agreement" shall mean the Series A Convertible
Preferred Stock and the Common Stock Warrant Purchase Agreement dated as of
February 24, 1998, between the Corporation and the Purchasers listed in Exhibit
1.01 thereto. As used herein, the term "Purchasers" shall mean the individuals
and/or entities which shall have executed the Purchase Agreement and who are
listed In Exhibit 1.01 thereto.
(b) The term "Reserved Employee Shares" shall mean shares of Common Stock
reserved by the Corporation from time to time for the exercise of options to
purchase Common Stock granted to employees, consultants or non-employee
directors (other than representatives of the holders of Preferred Stock) of the
Corporation, not to exceed in the aggregate 1,236,018 shares of Common Stock
(appropriately adjusted to reflect an event described in section 5(h) hereof).
The foregoing number of Reserved Employee Shares may be increased by vote or
written consent of the holders of at least sixty percent (60%) in interest of
the then outstanding shares of Series A Convertible Preferred Stock.
(c) The term "Fair Market Value" shall man an amount equal to the fair
market value of a share of Series A Convertible Preferred Stock (giving effect
to the value of the rights and preferences of such shares as herein provided)
determined as follows: an investment banking firm mutually agreeable to a
majority in interest of the then outstanding shares of Series A Convertible
Preferred Stock and to the Corporation shall calculate such value. In such case,
the Corporation shall bear the costs and expenses of such investment banking
firm. If an investment banking firm cannot be agreed upon within fifteen (15)
days of undertaking such selection process, an investment banking firm chosen by
sixty percent (60%) in interest of the then outstanding shares of Series A
Convertible Preferred Stock and an investment banking firm chosen by the
Corporation shall each calculate such value. In such case, each party shall bear
the costs and expenses of the investment banking firm chosen by it. In the event
the difference between such valuation is less than 20% of the higher valuation,
then the Fair Market Value shall be deemed to be the average of such two
valuations. In the event that the difference between such valuations is greater
than 20% of the higher valuation, the two investment banking firms shall
designate a third investment banking firm which shall select from the two
valuations the valuation that such third firm determines to be closer to its own
valuation, and the valuation so selected shall be considered the Fair Market
Value. In such case, the costs and expenses of the third investment banking firm
shall be borne equally by the parties.
<PAGE>
(d) The term "Subsidiary" or "Subsidiaries" shall mean any corporation,
partnership, trust or other entity of which the Corporation and/or any of its
other subsidiaries directly or indirectly owns at the time a majority of the
outstanding shares or other equity interest of every class of equity security of
such corporation, partnership, trust or other entity.
FIFTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them an/or between this
Corporation and its stockholders or any classofthem, any court of equitable
jurisdiction within the Sstate of Delaware may, on the application in a summary
way of this Corporation or any creditor or stockholder thereof or on the
application of ay receiver or receivers appointed for this Corporation under the
provisios of Section 291 of Title 8 of the Delaware Code or on the application
of trustees in dissolution or of any receiver or receivers appointed for this
Corporation under the provisions of Section 279 of Title 8 of the Delaware Code,
order a meeting of the creditors or class of creditors, and/or of the
stockholders or class of stockholders, of this Corporation, as the case may be,
to be summoned in such manner as the said court directs. If a majority in number
representing three-fourths in value of the creditors or class of creditors,
and/or of the stockholders or class of stockholders, of this Corporation, as the
case may be, agree to any compromise or arrangement and to any reorganization of
this Corporation as a consequence of such compromise or arrangement, the said
compromise or arrangement and the said reorganization shall, if sanctioned by
the court to which the said application has been made, be binding on all the
creditors or class of creditors, and/or on all the stockholders or class of
stockholders, of this Corporation, as the case may be, and also on this
Corporation.
SIXTH: The original By-Laws of the Corporation were adopted by the
incorporator. The Board of Directors shall have the power to make, alter, or
repeal the By-Laws, and to adopt any new By-Law.
SEVENTH: To the fullest extent permitted by the General Corporation Law of
Delaware, as the same exists or may hereafter be amended, a Director of the
Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breaches of fiduciary dutie as a director.
Notwithstanding the foregoing, a director shall be liable to the extent provided
by appicable law (1) for any breach of the directors' duty of loyalty to the
Corporation or its stockholders, (2) for acts or omissions not in a good faith
or which involve intentional misconduct or a knowing violation of law, (3) under
Section 174 of the General Corporation Law of the State of Delaware, or (4) for
any transaction from which the director derived any improper personal benefit.
Neither the amendment or repeal of this Article, nor the adoption of any
provision of this Certificate of Incorporation inconsistent with this Article
shall adversely affect any right or protection of a director of the Corporation
existing at the time of such amendment, repeal or adoption.
<PAGE>
EIGHTH: The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of the State of Delaware, as the same may be
amended and supplemented, or by any successor thereto, indemnify any and all
persons whom it shall have power to indemnify under said section from and
against any and all of the expenses, liabilities or other matters referred to in
or covered by said section. The Corporation shall advance expenses to the
fullest extent permitted by said section. Such right to indemnification and
advancement of expenses shall continue as to a person who has ceased to be a
director officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person. The indemnification and
advancement of expenses provided for herein shall not be deemed exclusive of any
other rights to which those seeking indemnificatinor advancement of expenses may
be entitled under any By-Law, agreement, vote of stockholders or disinterested
directors or otherwise.
The Third Amended and Restated Certificate of Incorporation herein
certified has been duly adopted in accordance with the provisions of Sections
228, 242 and 245 of the General Corporation Law of the State of Delaware."
<PAGE>
IN WITNESS WHEREOF, Ranch *1, Inc. has caused this corrected Third Amended
and Restated Certificate of Incorporation to be signed and attested by the
undersigned this 27th day of September, 1999.
/S/ Sebastian Rametta
-----------------------------------
Sebastian Rametta,
President and CEO
SECOND AMENDED AND RESTATED
BY-LAWS
OF
FRANCHISE CONCEPTS GROUP, INC.
(A Delaware corporation)
ARTICLE I
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK.
(a) Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of, the Corporation by the Chairman or
Vice-Chairman of the Board of Directors, if any, or by the President or a
Vice-President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation representing the number of shares
owned by such person in the Corporation. If such certificate is countersigned by
a transfer agent other than the Corporation or its employee or by a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent or registrar at
the date of issue.
(b) Whenever the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
Corporation shall issue any shares of its stock as partly paid stock, the
certificates representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
(c) The Corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Board of Directors may require the owner of any lost, stolen
or destroyed certificate, or such person's representative, to give the
Corporation a bond sufficient to indemnify the Corporation against any claim
that may be made against it on account of the alleged loss, theft or destruction
of any such certificate or the issuance of any such new certificate.
<PAGE>
2. FRACTIONAL SHARE INTERESTS.
The Corporation may, but shall not be required to, issue fractions of a
share.
3. STOCK TRANSFERS.
Upon compliance with provisions restricting the transfer or registration of
transfer of shares of stock, if any, transfers or registration of transfer of
shares of stock of the Corporation shall be made only on the stock ledger of the
Corporation by the registered holder thereof, or by such person's attorney
thereunto authorized by power of attorney duly executed and filed with the
Secretary of the Corporation or with a transfer agent or a registrar, if any,
and on surrender of the certificate or certificates for such shares of stock
properly endorsed and the payment of all taxes due thereon.
4. RECORD DATE FOR STOCKHOLDERS.
(a) In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is adopted
by the Board of Directors, and which record date shall not be more than sixty
nor less than ten days before the date of such meeting. If no record date has
been fixed by the Board of Directors, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. A determination of stockholders
of record entitled to notice of or to vote at a meeting of stockholders shall
apply to any adjournment of the meeting; provided, however that the Board of
Directors may fix a new record date for the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights or the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date has been fixed, the record date for determining
stockholders for any such purpose shall be at the close of business on the day
on which the Board of Directors adopts the resolution relating thereto.
-2-
<PAGE>
5. MEANING OF CERTAIN TERMS.
As used herein in respect of the right to notice of a meeting of
stockholders or a waiver thereof or to participate or vote thereat or to consent
or dissent in writing in lieu of a meeting, as the case may be, the term "share"
or "shares" or "share of stock" or "shares of stock" or "stockholder" or
"stockholders" refers to an outstanding share or shares of stock and to a holder
or holders of record of outstanding shares of stock when the Corporation is
authorized to issue only one class of shares of stock, and said reference is
also intended to include any outstanding share or shares of stock and any holder
or holders of record of outstanding shares of stock of any class upon which or
upon whom the Certificate of Incorporation confers such rights where there are
two or more classes or series of shares of stock or upon which or upon whom the
General Corporation Law confers such rights notwithstanding that the Certificate
of Incorporation may provide for more than one class or series of shares of
stock, one or more of which are limited or denied such rights thereunder;
provided, however that no such right shall vest in the event of an increase or a
decrease in the authorized number of shares of stock of any class or series
which is otherwise denied voting rights under the provisions of the Certificate
of Incorporation, including any preferred stock which is denied voting rights
under the provisions of the resolution or resolutions adopted by the Board of
Directors with respect to the issuance thereof.
6. STOCKHOLDER MEETINGS.
(a) TIME. The annual meeting shall be held on the date and at the time
fixed, from time to time, by the Board of Directors. A special meeting shall be
held on the date and at the time fixed by the Board of Directors.
(b) PLACE. Annual meetings and special meetings shall be held at such
place, within or without the State of Delaware, as the Board of Directors may,
from time to time, fix. Whenever the Board of Directors shall fail to fix such
place, the meeting shall be held at the registered office of the Corporation in
the State of Delaware.
(c) CALL. Annual meetings and special meetings may be called by any two
members of the Board of Directors, by any officer instructed by the Board of
Directors to call the meeting or by holders of at least 25% in interest of the
then outstanding shares of Series A Convertible Preferred Stock, $.001 par value
(the "Series A Preferred Stock").
(d) NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall be
given, stating the place, date and hour of the meeting. The notice of an annual
meeting shall state that the meeting is called for the election of Directors and
for the transaction of other business which may properly come before the
meeting, and shall (if any other action which could be taken at a special
meeting is to be taken at such annual meeting), state such other action or
actions as are known at the time of such notice. The notice of a special meeting
shall in all instances state the purpose or purposes for which the meeting is
called. If any action is proposed to be taken which would, if taken, entitle
stockholders to receive payment for their shares of stock, the notice shall
include a statement of that purpose and to that effect. Except as otherwise
provided by the General Corporation Law, a copy of the notice of any meeting
shall be given, personally or by mail, not less than ten days nor more than
sixty days before the date of the meeting, unless the lapse of the prescribed
period of time shall have been waived, and directed to each stockholder at such
person's address as it appears on the records of the Corporation. Notice by mail
shall be deemed to be given when deposited, with postage thereon prepaid, in the
United States mail. If a meeting is adjourned to another time, not more than
thirty days hence, and/or to another place, and if an announcement of the
adjourned time and place is made at the meeting, it shall not be necessary to
give notice of the adjourned meeting unless the Board of Directors, after
adjournment, fixes a new record date for the adjourned meeting. Notice need not
be given to any stockholder who submits a written waiver of notice before or
after the time stated therein. Attendance of a person at a meeting of
stockholders shall constitute a waiver of notice of such meeting, except when
the stockholder attends a meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened. Neither the business to be transacted at,
nor the purpose of, any regular or special meeting of the stockholders need be
specified in any written waiver of notice.
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<PAGE>
(e) STOCKHOLDER LIST. There shall be prepared and made, at least ten days
before every meeting of stockholders, a complete list of the stockholders,
arranged in alphabetical order, and showing the address of each stockholder and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present. The stock
ledger shall be the only evidence as to who are the stockholders entitled to
examine the stock ledger, the list required by this section or the books of the
Corporation, or to vote at any meeting of stockholders.
(f) CONDUCT OF MEETING. Meetings of the stockholders shall be presided over
by one of the following officers in the order of seniority and if present and
acting: the Chairman of the Board, if any, the Vice-Chairman of the Board, if
any, the President, a Vice President, a chairman for the meeting chosen by the
Board of Directors or, if none of the foregoing is in office and present and
acting, by a chairman to be chosen by the stockholders. The Secretary of the
Corporation or, in such person's absence, an Assistant Secretary, shall act as
secretary of every meeting, but if neither the Secretary nor an Assistant
Secretary is present the chairman for the meeting shall appoint a secretary of
the meeting.
(g) PROXY REPRESENTATION. Every stockholder may authorize another person or
persons to act for such stockholder by proxy in all matters in which a
stockholder is entitled to participate, whether by waiving notice of any
meeting, voting or participating at a meeting, or expressing consent or dissent
without a meeting. Every proxy must be signed by the stockholder or by such
person's attorney-in-fact. No proxy shall be voted or acted upon after three
years from its date unless such proxy provides for a longer period. A duly
executed proxy shall be irrevocable if it states that it is irrevocable and, if,
and only as long as, it is coupled with an interest sufficient in law to support
an irrevocable power. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally.
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<PAGE>
(h) INSPECTORS AND JUDGES. The Board of Directors, in advance of any
meeting, may, but need not, appoint one or more inspectors of election or judges
of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If an inspector or inspectors or judge or judges are not appointed by
the Board of Directors, the person presiding at the meeting may, but need not,
appoint one or more inspectors or judges. In case any person who may be
appointed as an inspector or judge fails to appear or act, the vacancy may be
filled by appointment made by the person presiding thereat. Each inspector or
judge, if any, before entering upon the discharge of such person's duties, shall
take and sign an oath faithfully to execute the duties of inspector or judge at
such meeting with strict impartiality and according to the best of his ability.
The inspectors or judges, if any, shall determine the number of shares of stock
outstanding and the voting power of each, the shares of stock represented at the
meeting, the existence of a quorum and the validity and effect of proxies,
receive votes, ballots or consents, hear and determine all challenges and
questions arising connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such other acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the person presiding at the meeting, the inspector or inspectors or
judge or judges, if any, shall make a report in writing of any challenge,
question or matter determined by such person or persons and execute a
certificate of any fact so found.
(i) QUORUM. Except as the General Corporation Law or these By-Laws may
otherwise provide, the holders of a majority of the outstanding shares of stock
entitled to vote shall constitute a quorum at a meeting of stockholders for the
transaction of any business. The stockholders present may adjourn the meeting
despite the absence of a quorum. When a quorum is once present to organize a
meeting, it is not broken by the subsequent withdrawal of any shareholders.
(j) VOTING. Each stockholder entitled to vote in accordance with the terms
of the Certificate of Incorporation and of these By-Laws, or, with respect to
the issuance of preferred stock, in accordance with the terms of a resolution or
resolutions of the Board of Directors, shall be entitled to one vote, in person
or by proxy, for each share of stock entitled to vote held by such stockholder.
In the election of Directors, a plurality of the votes present at the meeting
shall elect. Any other action shall be authorized by a majority of the votes
cast except where the Certificate of Incorporation or the General Corporation
Law prescribes a different percentage of vote and/or a different exercise of
voting power.
Voting by ballot shall not be required for corporate action except as
otherwise provided by the General Corporation Law.
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<PAGE>
7. STOCKHOLDER ACTION WIHOUT MEETING.
Any action required to be taken, or any action which may be taken, at any
annual or special meeting of stockholders, may be taken without a meeting,
without prior notice and without a vote, if a consent or consents in writing,
setting forth the action so taken, shall be signed by the holders of the
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented in writing and shall
be delivered to the Corporation by delivery to its registered office in
Delaware, its principal place of business or an officer or agent of the
Corporation having custody of the book in which proceedings of meetings of
stockholders are recorded. Delivery made to the Corporation's registered office
shall be by hand or by certified or registered mail, return receipt requested.
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION.
The business and affairs of the Corporation shall be managed by or under
the direction of the board of Directors of the Corporation. The use of the
phrase "whole Board" herein refers to the total number of Directors which the
Corporation would have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER
A Director need not be a stockholder, a citizen of the United States, or a
resident of the State of Delaware. The initial Board of Directors shall consist
of two persons. Thereafter the number of Directors constituting the whole Board
shall be at least one. Subject to the foregoing limitation and except for the
first Board of Directors, such number may be fixed from time to time by action
of the stockholders of the Board of Directors, or, if the number is not fixed,
the number shall be three. The number of Directors may be increased or decreased
by action of the stockholders or of the Board of Directors.
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<PAGE>
3. ELECTION AND TERM
The first Board of Directors, unless the members thereof shall have been
named in the Certificate of Incorporation, shall be elected by the incorporator
or incorporators and shall hold office until the first annual meeting of
stockholders and until their successors have been elected and qualified or until
their earlier resignation or removal. Any Director may resign at any time upon
written notice to the Corporation. Thereafter, Directors who are elected at an
annual meeting of stockholders, and Directors who are elected in the interim to
fill vacancies and newly created Directorships, shall hold office until the next
annual meeting of stockholders and until their successors have been elected and
qualified or until their earlier resignation or removal. In the interim between
annual meetings of stockholders or of special meetings of stockholders called
for the election of Directors and/or for the removal of one or more Directors
and for the filling of any vacancies in the Board of Directors, including
vacancies resulting from the removal of Directors for cause or without cause,
any vacancy in the Board of Directors may be filled by the vote of a majority of
the remaining Directors then in office, although less than a quorum, or by the
sole remaining Director.
4. MEETINGS.
(a) TIME. Regular meetings shall be held at such time as the Board shall
fix. Special meetings may be called upon notice.
(b) FIRST MEETING. The first meeting of each newly elected Board may be
held immediately after each annual meeting of the stockholders at the same place
at which the meeting is held, and no notice of such meeting shall be necessary
to call the meeting, provided a quorum shall be present. In the event such first
meeting is not so held immediately after the annual meeting of the stockholders,
it may be held at such time and place as shall be specified in the notice given
as provided for special meetings of the Board of Directors, or at such time and
place as shall be fixed by the consent in writing of all of the Directors.
(c) PLACE. Meetings, both regular and special, shall be held at such place
within or without the State of Delaware as shall be fixed by the Board.
(d) CALL. No call shall be required for regular meetings for which the time
and place have been fixed. Special meetings may be called by or at the direction
of the Chairman of the Board, if any, the Vice-Chairman of the Board, if any,
the President, any two Directors or holders of at least 25 % in interest of the
then outstanding shares of Series A Preferred Stock.
(e) NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be required
for regular meetings for which the time and place have been fixed. Written, oral
or any other mode of notice of the time and place shall be given for special
meetings at least twenty-four hours prior to the meeting; notice may be given by
telephone of telefax (in which case it is effective when given) or by mail (in
which case it is effective seventy-two hours after mailing by prepaid first
class mail). The notice of any meeting need not specify the purpose of the
meeting. Any requirement of furnishing a notice shall be waived by any Director
who signs a written waiver of such notice before or after the time stated
therein. Attendance of a Director at a meeting of the Board shall constitute a
waiver of notice of such meeting, except when the Director attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
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<PAGE>
(f) QUORUM AND ACTION. A majority of the whole Board shall constitute a
quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the Directors in office shall constitute a quorum, provided that
such majority shall constitute at least one-third (1/3) of the whole Board. Any
Director may participate in a meeting of the Board by means of a conference
telephone or similar communications equipment by means of which all Directors
participating in the meeting can hear each other, and such participation in a
meeting of the Board shall constitute presence in person at such meeting. A
majority of the Directors present, whether or not a quorum is present, may
adjourn a meeting to another time and place. Except as herein otherwise
provided, and except as otherwise provided by the General Corporation Law, the
act of the Board shall be the act by vote of a majority of the Directors present
at a meeting, a quorum being present. The quorum and voting provisions herein
stated shall not be construed as conflicting with any provisions of the General
Corporation Law and these By-Laws which govern a meeting of Directors held to
fill vacancies and newly created Directorships in the Board.
(g) CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if
present and acting, shall preside at all meetings. Otherwise, the Vice-Chairman
of the Board, if any if present and acting, or the President, if present and
acting, or any other Director chosen by the Board, shall preside.
5. REMOVAL OF DIRECTORS.
Any or all of the Directors may be removed for cause or without cause by
the stockholders.
6. COMMITTEES.
The Board of Directors may, by resolution passed by a majority of the whole
Board, designate one or more committees, each committee to consist of one or
more of the Directors of Corporation. The Board may designate one or more
Directors as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. Any such committee, to the
extent provided in the resolution of the Board, shall have and may exercise the
powers of the Board of Directors in the management of that business and affairs
of the Corporation, and may authorize the seal of the Corporation to be affixed
to all papers which may require it. In the absence or disqualification of any
member of any such committee or committees, the members thereof present at any
meeting and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint another member of the Board of Directors to act
at the meeting in the place of any such absent or disqualified member.
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<PAGE>
7. ACTION IN WRITING.
Any action required or permitted to be taken at any meeting of the Board of
Directors or any committee thereof may be taken without a meeting if all members
of the Board or committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
ARTICLE III
OFFICERS
1. EXECUTIVE OFFICERS.
The Board of Directors may elect or appoint a Chairman of the Board of
Directors, a President, one or more Vice Presidents (which may be denominated
with additional descriptive title), a Secretary, one or more Assistant
Secretaries, a Treasurer, one or more Assistant Treasurers and such other
officers as it may determine. Any number of offices may be held by the same
person.
2. TERM OF OFFICE: REMOVAL.
Unless otherwise provided in the resolution of election or appointment,
each officer shall hold office until the meeting of the Board of Directors
following the next annual meeting of stockholders and until such officer's
successor has been elected and qualified or until the earlier resignation or
removal of such officer. The Board of Directors may remove any officer for cause
or without cause.
3. AUTHORITY AND DUTIES.
All officers, as between themselves and the Corporation, shall have such
authority and perform such duties in the management of the Corporation as may be
provided in these By-Laws, or, to the extent not so provided, by the Board of
Directors.
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<PAGE>
4. THE CHAIRMAN OF THE BOARD OF DIRECTORS.
The Chairman of the Board of Directors, if present and acting, shall
preside at all meetings of the Board of Directors, otherwise, the President, if
present, shall preside, or if the President does not so preside, any other
Director chosen by the Board shall preside. The Chairman of the Board of
Directors and the Vice Chairman of the Board of Directors shall not be deemed
officers of the Corporation solely by virtue of being the Chairman or Vice
Chairman, as the case may be.
5. THE PRESIDENT.
The President shall be the chief executive officer of the Corporation.
6. VICE PRESIDENTS.
Any Vice President that may have been appointed, in the absence or
disability of the President, shall perform the duties and exercise the powers of
the President, in the order of their seniority, and shall perform such other
duties as the Board of Directors shall prescribe.
7. THE SECRETARY.
The Secretary shall keep in safe custody the seal of the Corporation and
affix it to any instrument when authorized by the Board of Directors, and shall
perform such other duties as may be proscribed by the Board of Directors. The
Secretary (or in such officer's absence, an Assistant Secretary, but if neither
is present another person selected by the Chairman for the meeting) shall have
the duty to record the proceedings of the meetings of the stockholders and
Directors in a book to be kept for that purpose.
8. THE TREASURER.
The Treasurer shall have the care and custody of the corporate funds, and
other valuable effects, including securities, and shall keep full and accurate
accounts of receipts and disbursements in books belonging to the Corporation and
shall deposit all moneys and other valuable effects in the name and to the
credit of the Corporation in such depositories as may be designated by the Board
of Directors. The Treasurer shall disburse the funds of the Corporation as may
be ordered by the Board, taking proper vouchers for such disbursements, and
shall render to the President and Directors, at the regular meetings of the
Board, or whenever they may require it, an account of all transactions as
Treasurer and of the financial condition of the Corporation. If required by the
Board of Directors, the Treasurer shall give the Corporation a bond for such
term, in sum and with such surety or sureties as shall be satisfactory to the
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<PAGE>
Board for the faithful performance of the duties of such office and for the
restoration to the Corporation, in case of such person's death, resignation,
retirement or removal from office, of all books, papers, vouchers, money and
other property of whatever kind in such person's possession or under such
person's control belonging to the Corporation.
ARTICLE IV
CORPORATE SEAL
AND
CORPORATE BOOKS
The corporate seal shall be in such form as the Board of Directors shall
prescribe. The books of the Corporation may be kept within or without the State
of Delaware, at such place or places as the Board of Directors may, from time to
time, determine.
ARTICLE V
FISCAL YEAR
The fiscal year of the Corporation shall be fixed, and shall be subject to
change, by the Board of Directors.
ARTICLE VI
INDEMNITY
(a) Any person who was or is a party or threatened to be made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he or she is or was a
Director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
(including employee benefit plans) (hereinafter an "indemnitee"), shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the General Corporation Law, as the same exists or may hereafter
be amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification than
permitted prior thereto), against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such indemnitee in connection with such action, suit or proceeding, if the
indemnitee acted in good faith and in a manner he or she reasonably believed to
be in or not opposed to the best interests of the Corporation, and with respect
to any criminal action or proceeding, had no reasonable cause to believe such
conduct was unlawful.
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<PAGE>
The termination of the proceeding, whether by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he or she reasonably believed to be in or not opposed to the best
interests of the Corporation and, with respect to any criminal action or
proceeding, had reasonable cause to believe such conduct was unlawful.
(b) Any person who was or is a party or is threatened to be made a party to
any threatened pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he or
she is or was a Director, officer, employee or agent of the Corporation, or is
or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise (including employee benefit plans) shall be indemnified and
held harmless by the Corporation to the fullest extent authorized by the General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification than permitted prior thereto),
against expenses (including attorneys' fees) actually and reasonably incurred by
him or her in connection with the defense or settlement of such action or suit
if he or she acted in good faith and in a manner he or she reasonably believed
to be in or not opposed to the best interests of the Corporation and except that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the court in which such suit or action was
brought, shall determine, upon application, that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such court
shall deem proper.
(c) All reasonable expenses incurred by or on behalf of the indemnitee in
connection with any suit, action or proceeding, may be advanced to the
indemnitee by the Corporation.
(d) The rights to indemnification and to advancement of expenses conferred
in this article shall not be exclusive of any other right which any person may
have or hereafter acquire under any statute, the Certificate of incorporation, a
By-law of the Corporation, agreement, vote of stockholders or disinterested
Directors or otherwise.
(e) The indemnification and advancement of expenses provided by this
article shall continue as to a person who has ceased to be a Director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such person.
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CERTIFICATE OF DESIGNATION
OF
SERIES B CONVERTIBLE PREFERRED STOCK
(Par Value $.001 Per Share)
OF
RANCH *1, INC.
The undersigned DOES HEREBY CERTIFY that following resolution was adopted
by the Board of Directors (the "Board") of Ranch *1, Inc., a Delaware
corporation (the "Company"), by unanimous written consent of all members of the
Board dated as of July 30, 1999 in accordance with Section 141(f) of the General
Corporation Law of the State of Delaware:
RESOLVED, that pursuant to the authority conferred upon the Board by
Section 151 of the General Corporation Law of the State of Delaware and Article
4 of the Amended and Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), one series of the class of authorized preferred
stock of the Company, $.001 par value and $2.50 liquidation value per share, is
hereby created and that the designations, powers, preferences and relative,
participating, optional or other special rights of the shares of such series,
and qualifications, limitations and restrictions thereof, are hereby fixed as
follows:
1. Number of Shares and Designation. Five Hundred Thousand (500,000) shares
of preferred stock of the Company, $.001 par value and $2.50 liquidation value
per share, are hereby constituted as a series of preferred stock of the Company
designated as Series B Convertible Preferred Stock (the "Series B Preferred
Stock").
2. Dividends. No dividends shall be payable, whether in cash or in
property, with respect to the Series B Preferred Stock.
3. Liquidation Preference. The Board of Directors of the Company is
expressly empowered to authorize, create and issue one or more series of Senior
Securities of the Company, including series of preferred stock (whether or not
convertible into shares of common stock, $.001 par value per share (the "Common
Stock") of the Company) which shall be senior as dividends and liquidation
preferences and privileges to the Series B Preferred Stock.
Subject at all times to the priority rights of holders of Senior
Securities, in the event of any liquidation, dissolution or winding-up of the
Company, either voluntary or involuntary, the holders of shares of the Series B
Preferred Stock shall be entitled to receive, prior to and in preference to any
distribution of any of the assets of the Company to the holders of the Common
Stock or any other class of capital stock of the Company ranking junior in
priority with respect to distributions on liquidation, dissolution or winding up
to the Series B Preferred Stock, two dollars and fifty cents ($2.50) per share
(subject to adjustment as provided in Section 4 hereof), for each outstanding
share of Series B Preferred Stock (the "Series B Liquidation Preference"). If,
upon the occurrence of such an event, the assets and funds thus distributed
among the holders of the Series B Preferred Stock shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then the entire assets and funds of the Company legally available for
distribution shall be distributed among the holders of the Series B Preferred
Stock in proportion to the preferential amount each such holder is otherwise
entitled to receive in respect of such shares.
<PAGE>
For purposes of this Section 3, a liquidation, dissolution or winding-up of
the Company shall be deemed to be occasioned by, or to include, (A) the
acquisition of the Company by another entity by means of any transaction or
series of related transactions (including, without limitation, any
reorganization, merger or consolidation, but excluding any merger effected
exclusively for the purpose of changing the domicile of the Company) in which
outstanding shares of the Company are exchanged for securities or other
consideration issued, or caused to be issued by the acquiring corporation or its
subsidiary, or (B) a sale, lease, exchange or other transfer (in one transaction
or a series of transactions) of all or substantially all of the assets of the
Company, unless, in each case, the Company's stockholders of record as
constituted immediately prior to such acquisition or sale will, immediately
after such acquisition or sale (by virtue of securities issued as consideration
for the Company's acquisition or sale or otherwise) hold at least 50% of the
voting power of the surviving or acquiring entity.
Whenever the distribution provided for in this Section 3 shall be payable
in property other than cash, the value of such property shall be the fair market
value thereof as determined in good faith by not less than a majority of the
directors then serving on the Board.
4. Conversion. The holder of the Series B Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Automatic Conversion. Unless earlier converted and in accordance with
the procedures and subject to the terms and conditions set forth in this Section
4, all the outstanding shares of Series B Preferred Stock shall automatically
convert, without any further action by the Company or by the holders of the
Series B Preferred Stock, into shares of Common Stock on the date (the
"Automatic Conversion Date") that a registration statement registering shares of
Common Stock of the Company is declared effective by the Securities and Exchange
Commission (the "Initial Public Offering") under the Securities Act of 1933, as
amended (the "Securities Act").
(b) Optional Conversion; Mechanics of Conversion. Any holder of Series B
Preferred Stock may elect at any time prior to the Automatic Conversion Date to
convert all or any part of his or its Series B Preferred Stock into shares of
Common Stock at the "Optional Conversion Price" set forth below. Any such holder
of Series B Preferred Stock who wishes to convert the same into shares of Common
Stock pursuant to this paragraph (b) of Section 4, must surrender the
certificate therefor, at the office of the Corporation or of any transfer agent
for such stock, and give written notice to, the Corporation at such office that
he elects to convert the same. Such notice shall not be required if the
conversion is automatic under paragraph (a) of this Section 4. The Corporation
shall, as soon as practicable thereafter, issue to such holder of Series B
Preferred Stock, a certificate for the number of shares of Common Stock to which
he or she shall be entitled as aforesaid. Such conversion shall be deemed to
have been made upon the surrender of the certificate for the shares of Series B
Preferred Stock to be converted, and the person entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder of such shares of Common Stock at and after such time. In
the event that the conversion is automatic under paragraph (a) of this Section
4, no later than one business day after the Automatic Conversion Date, the
Company shall deliver or cause to be delivered a notice to each holder of the
Series B Preferred Stock (i) stating that the Series B Preferred Stock has been
converted; (ii) setting forth the number of full shares of Common Stock to be
issued due to such conversion as determined in accordance with this Section 4;
(iii) informing the holder of the address of the Company or agent to which the
holder may deliver its Series B Preferred Stock certificate in exchange for a
Common Stock certificate representing the number of shares into which such
holder's Series B Preferred Stock has been converted.
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(c) Automatic Conversion Price. Each share of Series B Preferred Stock to
be converted under paragraph (b) of this Section 4, shall be initially
convertible into the number of fully paid and nonassessable shares of Common
Stock determined by dividing two dollars and fifty cents ($2.50), the original
price paid for each share of Series B Preferred Stock (the "Original Purchase
Price"), by a price (the "Automatic Conversion Price") equal to the lesser of
(i) $2.50 (the "Optional Conversion Price"), and (ii) 70% of the price per share
of the Common Stock in the Initial Public Offering.
(d) Adjustments to Conversion Price. If the Corporation at any time or from
time to time while shares of Series B Preferred Stock are issued and outstanding
shall declare or pay, without consideration, any dividend on the Common Stock
payable in Common Stock, or shall effect a subdivision of the outstanding shares
of Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or if the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, then the Optional Conversion Price
and the Automatic Conversion Price for Series B Preferred Stock in effect
immediately before such event shall, concurrently with the effectiveness of such
event, be proportionately decreased or increased, as appropriate. If the
Corporation shall declare or pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common Stock for no consideration,
then the Corporation shall be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.
(e) Adjustments for Reclassification and Reorganization. If the Common
Stock issuable upon conversion of the Series B Preferred Stock shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for in paragraph (d) of
this Section 4), the Conversion Price then in effect shall, concurrently with
the effectiveness of such reorganization or reclassification, be proportionately
adjusted so that the Series B Preferred Stock shall be convertible into, in lieu
of the number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or classes of
stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of the Series B Preferred
Stock immediately before that change.
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<PAGE>
(f) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all of the provisions of
this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Preferred Stock against impairment. The provisions of this paragraph
(f) may be waived by the affirmative vote of the holders of at least a majority
of the then outstanding shares of Series B Preferred Stock voting together as a
single class and taken in advance of any action that would conflict with this
paragraph (f).
(g) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of any Conversion Price pursuant to this Section 4, the Corporation
at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series B Preferred Stock a notice setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based.
(h) Notice of Record Date. If the Corporation shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock, whether in
cash, property, stock or other securities, other than a regular cash dividend
out of earnings or earned surplus or a dividend as to which adjustment of the
Conversion Price will be made under paragraph (d) of this Section 4; (ii) to
offer for subscription pro rata to the holders of any class or series of its
stock any additional shares of stock of any class or series or other rights;
(iii) to effect any reclassification or recapitalization of its common stock
outstanding involving a change in the Common Stock other than one as to which
adjustments of the Conversion Price will be made under paragraph (d) of this
Section 4; or (iv) to merge or consolidate with or into any other corporation,
or sell all or substantially all of its assets, or to liquidate, dissolve or
wind up then, in connection with such event, the Corporation shall send to the
holders of the Series B Preferred Stock:
(1) at least ten (10) days' prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in clauses (iii) and (iv) above; and
(2) in the case of the matters referred to in clauses (iii) and (iv) above,
at least ten (10) days' prior written notice of the date when the same shall
take place (and specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common stock for securities or other property
(deliverable upon the occurrence of such event).
(i) Issue Taxes. The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series B Preferred Stock pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.
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(j) No Fractional Shares. No fractional shares shall be issued upon the
conversion of any share or shares of the Series B Preferred Stock, and the
number of shares of Common Stock to be issued shall be rounded up to the nearest
whole share. Whether or not fractional shares are issuable upon such conversion
shall be determined on the basis of the total number of shares of Series B
Preferred Stock the holder is at the time converting into the Common Stock and
the number of shares of Common Stock issuable upon such aggregate conversion.
(k) Reservation of Stock Issuable Upon Conversion. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
the Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series B Preferred Stock, such number of its shares of the Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series B Preferred Stock. If at any time the number of
authorized but unissued shares of the Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series B Preferred
Stock, in addition to such other remedies as shall be available to the holders
of the Series B Preferred Stock, the Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of the Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any necessary amendment
to these provisions.
(l) Notices. Any notice required by the provisions of this Section 4 to be
given to the holders of shares of Series B Preferred Stock shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Corporation.
5. Voting Rights. Each holder of shares of Series B Preferred Stock will be
entitled to the number of votes equal to the number of shares of Common Stock
into which such holder's shares of Series B Preferred Stock could be converted
at the Optional Conversion Price at the time of the vote, will have voting
rights equal to the voting rights of such number of shares of Common Stock
voting together with the Common Stock as a single class on all matters submitted
to the holders of Common Stock and shall be entitled to notice of any
stockholders' meeting. Any fractional voting rights resulting from the above
formula (after aggregating all shares of Common Stock into which shares of
Series B Preferred Stock held by a single holder are converted) will be
disregarded.
6. Restrictions and Limitations.
(a) Shares of Series B Preferred Stock acquired by the Corporation by
reason of purchase, conversion, redemption or otherwise shall be retired and
shall become authorized but unissued shares of Series B Preferred Stock, which
may be reissued as part of a new series of Preferred Stock hereafter created
under Article Fourth of the Certificate of Incorporation.
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(b) So long as shares of Series B Preferred Stock remain outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least a
majority of the then outstanding shares of Series B Preferred Stock voting
together as a separate class, amend the terms of this Resolution. The holders of
the outstanding shares of the Series B Preferred Stock shall be entitled to vote
as a separate class upon a proposed amendment of the Certificate of
Incorporation if the amendment would alter or change the powers, preferences or
special rights of the shares of Series B Preferred Stock so as to affect them
adversely.
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IN WITNESS WHEREOF, the Company's Board of Directors has authorized this
Certificate of Designation to be executed on its behalf by the Company's duly
authorized officer on this 26th day of August 1999.
RANCH *1, INC.
By: /s/ Sebastian Rametta
-------------------------------------
Sebastian Rametta,
President and Chief Executive Officer
7
SECOND AMENDED
CERTIFICATE OF DESIGNATION
OF
SERIES C 15% CONVERTIBLE PREFERRED STOCK
(Par Value $.001 Per Share)
OF
RANCH *1, INC.
The undersigned DOES HEREBY CERTIFY that following resolution was adopted
by the Board of Directors (the "Board") of Ranch *1, Inc., a Delaware
corporation (the "Company"), by unanimous written consent of all members of the
Board dated as of September 9, 1999 in accordance with Section 141(f) of the
General Corporation Law of the State of Delaware:
RESOLVED, that pursuant to the authority conferred upon the Board by
Section 151 of the General Corporation Law of the State of Delaware and Article
4 of the Amended and Restated Certificate of Incorporation of the Company (the
"Certificate of Incorporation"), the certificate of designation which created
the Company's Series C 8% Convertible Preferred Stock, with a par value of $.001
per share and a liquidation value of $50,000 per share, as filed with the Office
of the Secretary of State of the State of Delaware on August 27, 1999, is hereby
amended, and that the designations, powers, preferences and relative,
participating, optional or other special rights of the shares of such series,
and qualifications, limitations and restrictions thereof, are hereby fixed as
follows:
1. Number of Shares and Designation. One Hundred and Fifty (150) shares of
preferred stock, $.001 par value, of the Company are hereby constituted as a
series of preferred stock of the Company designated as Series C 15% Cumulative
Convertible Preferred Stock (the "Series C Preferred Stock").
2. Dividends. The holders of the Series C Preferred Stock shall be entitled
to receive if, when and declared by the Board of Directors, out of funds legally
available therefor, cumulative dividends payable in cash or in additional shares
of Series C Preferred Stock, at the Company's election at the rate of 15% per
annum. The dividend is payable semi-annually on December 31 (or the next
business days thereafter) and June 30 (or the next business days thereafter),
commencing on December 31, 1999. Dividends shall be paid to the holders of
record as of a date, as may be fixed by the Board, not more than thirty (30)
days prior to the dividend payment date. If no such date is fixed by the Board,
dividends shall be paid to the holders of record on December 15th (or the next
business day thereafter) and June 15th (or the next business days thereafter),
preceding each dividend payment date. Dividends accrue from the first day of the
semi-annual period in which such dividend may be payable, except with respect to
the first semi-annual dividend, which shall accrue from the date of issuance of
the shares of the Series C Preferred Stock (the "Original Issue Date"). No
dividends may be paid on any shares of capital stock ranking junior in priority
with respect to dividends to the Series C Preferred Stock, including, without
limitation (a) the Company's 8% Series A convertible preferred stock, par value
$.001 and liquidation value $2.50 per share (the "Series A Preferred Stock") and
(b) the Company's 8% Series B convertible preferred stock, par value $.001 and
liquidation value $2.50 per share (the "Series B Preferred Stock"), unless and
until all declared but unpaid dividends on the Series C Preferred Stock have
been paid in full, including, without limitation, the dividend set forth above.
<PAGE>
3. Liquidation Preference. In the event of any liquidation, dissolution or
winding-up of the Company, either voluntary or involuntary, the holders of
shares of the Series C Preferred Stock shall be entitled to receive prior and in
preference to any distribution of any of the assets of the Company to the
holders of shares of the common stock of the Company, $.001 par value (the
"Common Stock") or any other class of capital stock of the Company (including,
without limitation, the Series A Preferred Stock and the Series B Preferred
Stock), fifty thousand dollars ($50,000) per share (subject to adjustment as
provided in Section 4 hereof), plus any accrued but unpaid dividends, for each
outstanding share of Series C Preferred Stock (the "Series C Liquidation
Preference"). If, upon the occurrence of such an event, the assets and funds
thus distributed among the holders of the Series C Preferred Stock shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then the entire assets and funds of the Company legally
available for distribution shall be distributed among the holders of the Series
C Preferred Stock in proportion to the preferential amount each such holder is
otherwise entitled to receive in respect of such shares.
For purposes of this Section 3, a liquidation, dissolution or winding-up of
the Company shall be deemed to be occasioned by, or to include (i) any
consolidation or merger of the Company, other than any merger or consolidation
resulting in the holders of the capital stock of the Company entitled to vote
for the election of directors holding a majority of the capital stock of the
surviving or resulting entity entitled to vote for the election of directors,
(ii) any person or entity (including affiliates thereof) becoming the holder of
a majority of the outstanding capital stock of the Company, or (iii) a sale,
lease, exchange or other transfer (in one transaction or a series of
transactions) of all or substantially all of the assets of the Company and its
consolidated subsidiaries, unless, in each case, the Company's stockholders of
record as constituted immediately prior to such acquisition or sale will,
immediately after such acquisition or sale (by virtue of securities issued as
consideration for the Company's acquisition or sale or otherwise) hold at least
50% of the voting power of the surviving or acquiring entity. Any of the
transactions set forth above is hereinafter referred to as a "Sale of Control."
Whenever the distribution provided for in this Section 3 shall be payable
in property other than cash, the value of such property shall be the fair market
value thereof as determined in good faith by not less than a majority of the
directors then serving on the Board.
4. Conversion. The holder of the Series C Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) Automatic Conversion. Unless earlier converted and in accordance with
the procedures and subject to the terms and conditions set forth in this Section
4, all the outstanding
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<PAGE>
shares of Series C Preferred Stock shall automatically convert at the "Automatic
Conversion Price" (set forth below in paragraph (c) of this Section 4), without
any further action by the Company or by the holders of the Series C Preferred
Stock, into shares of Common Stock on the date (the "Automatic Conversion Date")
that a registration statement registering shares of Common Stock of the Company
is declared effective by the Securities and Exchange Commission (the "Initial
Public Offering") under the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optional Conversion; Mechanics of Conversion. If at any time prior to
the Automatic Conversion Date, there is a Sale of Control of the Company, then
any holder of Series C Preferred Stock may elect to convert all of his or its
Series C Preferred Stock into shares of Common Stock at the "Optional Conversion
Price" set forth below in paragraph (c) of this Section 4. Any such holder of
Series C Preferred Stock who wishes to convert the same into shares of Common
Stock pursuant to this paragraph (b) of Section 4, must surrender the
certificate therefor, at the office of the Corporation or of any transfer agent
for such stock, and give written notice to, the Corporation at such office that
he elects to convert the same. Such notice shall not be required if the
conversion is automatic under paragraph (a) of this Section 4. The Corporation
shall, as soon as practicable thereafter, issue to such holder of Series C
Preferred Stock, a certificate for the number of shares of Common Stock to which
he or she shall be entitled as aforesaid. Such conversion shall be deemed to
have been made upon the surrender of the certificate for the shares of Series C
Preferred Stock to be converted, and the person entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder of such shares of Common Stock at and after such time. In
the event that the conversion is automatic under paragraph (a) of this Section
4, no later than one business day after the Automatic Conversion Date, the
Company shall deliver or cause to be delivered a notice to each holder of the
Series C Preferred Stock (i) stating that the Series C Preferred Stock has been
converted; (ii) setting forth the number of full shares of Common Stock to be
issued due to such conversion as determined in accordance with this Section 4;
(iii) informing the holder of the address of the Company or agent to which the
holder may deliver its Series C Preferred Stock certificate in exchange for a
Common Stock certificate representing the number of shares into which such
holder's Series C Preferred Stock has been converted.
(c) Conversion Price. Each share of Series C Preferred Stock to be
converted under paragraph (a) of this Section 4, shall be initially convertible
into the number of fully paid and nonassessable shares of Common Stock
determined by dividing fifty thousand dollars ($50,000), the original price paid
for each share of Series C Preferred Stock (the "Original Purchase Price"), by a
price (the "Automatic Conversion Price") which shall be equal to seventy (70%)
percent of the initial offering price per share of the Company's Common Stock,
as reflected on the cover page of the final prospectus included in the
registration statement declared effective by the Securities and Exchange
Commission in connection with the Initial Public Offering (the "IPO Offering
Price"). Each share of Series C Preferred Stock to be converted under paragraph
(b) of this Section 4, shall be initially convertible into the number of fully
paid and nonassessable shares of Common Stock which shall be equal to the number
determined by dividing the Original Purchase Price by a price which shall be
equal to $2.50.
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<PAGE>
(d) Adjustments to Conversion Price. If the Corporation at any time or from
time to time while shares of Series C Preferred Stock are issued and outstanding
shall declare or pay, without consideration, any dividend on the Common Stock
payable in Common Stock, or shall effect a subdivision of the outstanding shares
of Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or if the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, then the Optional Conversion Price
and the Automatic Conversion Price for Series C Preferred Stock in effect
immediately before such event shall, concurrently with the effectiveness of such
event, be proportionately decreased or increased, as appropriate. If the
Corporation shall declare or pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common Stock for no consideration,
then the Corporation shall be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.
(e) Adjustments for Reclassification and Reorganization. If the Common
Stock issuable upon conversion of the Series C Preferred Stock shall be changed
into the same or a different number of shares of any other class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares provided for in paragraph (d) of
this Section 4), the Conversion Price then in effect shall, concurrently with
the effectiveness of such reorganization or reclassification, be proportionately
adjusted so that the Series C Preferred Stock shall be convertible into, in lieu
of the number of shares of Common Stock which the holders would otherwise have
been entitled to receive, a number of shares of such other class or classes of
stock equivalent to the number of shares of Common Stock that would have been
subject to receipt by the holders upon conversion of the Series C Preferred
Stock immediately before that change.
(f) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Corporation, but will at
all times in good faith assist in the carrying out of all of the provisions of
this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series C Preferred Stock against impairment. The provisions of this paragraph
(f) may be waived by the affirmative vote of the holders of at least a majority
of the then outstanding shares of Series C Preferred Stock voting together as a
single class and taken in advance of any action that would conflict with this
paragraph (f).
(g) Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of any Conversion Price pursuant to this Section 4, the Corporation
at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and prepare and furnish to each holder of
Series C Preferred Stock a notice setting forth such adjustment or readjustment
and showing in detail the facts upon which such adjustment or readjustment is
based.
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<PAGE>
(h) Notice of Record Date. If the Corporation shall propose at any time:
(i) to declare any dividend or distribution upon its Common Stock, whether in
cash, property, stock or other securities, other than a regular cash dividend
out of earnings or earned surplus or a dividend as to which adjustment of the
Optional Conversion Price and the Automatic Conversion Price will be made under
paragraph (d) of this Section 4; (ii) to offer for subscription pro rata to the
holders of any class or series of its stock any additional shares of stock of
any class or series or other rights; (iii) to effect any reclassification or
recapitalization of its common stock outstanding involving a change in the
Common Stock other than one as to which adjustments of the Optional Conversion
Price and the Automatic Conversion Price will be made under paragraph (d) of
this Section 4; or (iv) to merge or consolidate with or into any other
corporation, or sell all or substantially all of its assets, or to liquidate,
dissolve or wind up then, in connection with such event, the Corporation shall
send to the holders of the Series C Preferred Stock:
(1) at least ten (10) days' prior written notice of the date on which a
record shall be taken for such dividend, distribution or subscription rights
(and specifying the date on which the holders of Common Stock shall be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in clauses (iii) and (iv) above; and
(2) in the case of the matters referred to in clauses (iii) and (iv) above,
at least ten (10) days' prior written notice of the date when the same shall
take place (and specifying the date on which the holders of Common Stock shall
be entitled to exchange their Common stock for securities or other property
(deliverable upon the occurrence of such event).
(i) Issue Taxes. The Corporation shall pay any and all issue and other
taxes that may be payable in respect of any issue or delivery of shares of
Common Stock on conversion of Series C Preferred Stock pursuant hereto;
provided, however, that the Corporation shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.
(j) No Fractional Shares. No fractional shares may be issued upon the
conversion of any share or shares of the Series C Preferred Stock into Common
Stock, and the number of shares of Common Stock to be issued shall be rounded up
to the nearest whole share. Whether or not fractional shares are issuable upon
such conversion shall be determined on the basis of the total number of shares
of Series C Preferred Stock the holder is at the time converting into the Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.
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<PAGE>
(k) Reservation of Stock Issuable Upon Conversion. The Company shall at all
times reserve and keep available out of its authorized but unissued shares of
the Common Stock, solely for the purpose of effecting the conversion of the
shares of the Series C Preferred Stock, such number of its shares of the Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of the Series C Preferred Stock. If at any time the number of
authorized but unissued shares of the Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of the Series C Preferred
Stock, in addition to such other remedies as shall be available to the holders
of the Series C Preferred Stock, the Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of the Common Stock to such number of shares as shall be
sufficient for such purposes, including, without limitation, engaging in best
efforts to obtain the requisite stockholder approval of any necessary amendment
to these provisions.
(l) Notices. Any notice required by the provisions of this Section 4 to be
given to the holders of shares of Series C Preferred Stock shall be deemed given
if deposited in the United States mail, postage prepaid, and addressed to each
holder of record at his address appearing on the books of the Corporation.
5. Registration Rights and Lockup. The Corporation hereby covenants and
agrees, commencing twelve (12) months following completion of the Initial Public
Offering, to prepare and file with the Securities and Exchange Commission
("SEC") and use its best efforts to be declared effective, a registration
statement on Form S-3 or other applicable form of registration which shall
including therein the shares issuable upon conversion of the Series C Preferred
Stock (the "Conversion Common Stock"), and hereby undertakes to keep any such
registration statement current on the underlying Common Stock until the first to
occur of the expiration of one year from the effective date of such registration
statement or the sale of all shares of the Conversion Common Stock in accordance
with the plan of distribution contained in any such registration statement. Upon
completion of the Company's Initial Public Offering and the automatic conversion
of the shares of Series C Preferred Stock into shares of Conversion Common
Stock, as provided herein, the holders of such shares of Conversion Common Stock
may not, without obtaining the prior written consent of the underwriter of such
public offering, directly or indirectly sell, offer to sell, grant an option for
the sale of, transfer, assign, hypothecate, pledge, distribute or otherwise
dispose of or encumber any shares of the Conversion Common Stock or any
beneficial interest therein for a period of six months from the effective date
of such Initial Public Offering; provided, however, that such six month period
may be extended at the request of any federal of state governmental agency or
regulatory authority or securities exchange.
6. Redemption.
(a) By the Company. At any time subsequent to five years following the
Original Issue Date, the Series C Preferred Stock may be redeemed, at the
Corporation's option, in whole or in part, for $50,000 per share plus all
dividends accrued but unpaid on such Series C Preferred Stock; provided,
however, that in the event that the Company shall not have consummated a
"Liquidity Event" (as defined in paragraph (e) of this Section 6) by the
"Liquidity Date" (as defined in paragraph (b) of this Section 6), the Company
may, at any time subsequent to twenty-four (24) months following the Original
Issue Date (the "Optional Redemption Date"), by written notice (the "Optional
Redemption Notice") given to the holders of the Series C Preferred Stock at any
time after the Optional Redemption Date, redeem and repurchase for cash all, and
not less than all, of the then issued and outstanding shares of Series Preferred
Stock by paying to the holders thereof the Series C Liquidation Preference for
each share of Series C Preferred Stock outstanding.
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<PAGE>
(b) By the Holder. In the event that (i) the Company shall not, by a date
which shall be eighteen (18) months from the Original Issue, have consummated a
"Liquidity Event" (as that term is defined in paragraph (e) of this Section 6)
or (ii) there is a Sale of Control of the Company prior to the Automatic
Conversion Date, then any of the holder(s) of the Series C Preferred Stock shall
have the right (but not the obligation), by written notice (the "Mandatory
Redemption Notice") given to the Company to require the Company to redeem and
repurchase for cash all or any portion of such holder(s) shares of Series C
Preferred Stock by paying to the holders thereof an amount in cash equal to the
Series C Liquidation Preference for each shares of Series C Preferred Stock to
be redeemed and repurchased from such holder(s).
(c) Optional Redemption Notice; Mandatory Redemption Notice. The Optional
Redemption Notice will be given to holders of the Series C Preferred Stock by
mailing notice thereof to holders of record by the transfer agent. The Mandatory
Redemption Notice will be given to the Company at its principal place of
business to the attention of the President of the Company. The Optional
Redemption Notice will be deemed to have been given three days after the date of
mailing as evidenced by an affidavit from the transfer agent and the Mandatory
Redemption Notice will be deemed to have been given when hand delivered or three
days after the date of mailing postage prepaid, by certified or registered mail.
In the case of an Optional Redemption, the Optional Redemption Notice will be
given, not more than ninety (90) days nor less than thirty (30) days prior to
the redemption date. In the case of a partial Option Redemption (to the extent
permitted hereby), the Option Redemption Notice will be given twice, the first
such notice to be given not more than seventy-five (75) days nor less than sixty
(60) days prior to the redemption date and the second such Option Redemption
Notice to be given at least twenty (20) days thereafter but not less than thirty
(30) days prior to the redemption date.
(d) No Impairment of Conversion Rights Nothing contained in this Section 6
or elsewhere herein shall be deemed to limit, impair or prohibit the right of
any of the holder(s) of Series C Preferred Stock from exercising their
Conversion Rights pursuant to Section 4 hereof at any time prior to the date
fixed for such Option Redemption.
(e) Definition of Liquidity Event. As used in this Section 6, a "Liquidity
Event" shall mean any of (i) an Initial Public Offering, (ii) a Sale of Control,
or (iii) the merger of the Company with any publicly traded corporation (whether
or not then operational) whose shares of common stock are listed or (within 60
days of such merger) become listed on The Nasdaq Stock Exchange, Inc., the New
York Stock Exchange, Inc. or the American Stock Exchange, Inc.
7
<PAGE>
7. Voting Rights. Each holder of shares of Series C Preferred Stock will be
entitled to the number of votes equal to the number of shares of Common Stock
into which such holder's shares of Series C Preferred Stock could be converted
at the Optional Redemption Price at the time of the vote, will have voting
rights equal to the voting rights of such number of shares of Common Stock
voting together with the Common Stock as a single class on all matters submitted
to the holders of Common Stock and shall be entitled to notice of any
stockholders' meeting. Any fractional voting rights resulting from the above
formula (after aggregating all shares of Common Stock into which shares of
Series C Preferred Stock held by a single holder are converted) will be
disregarded.
8. Restrictions and Limitations.
(a) Shares of Series C Preferred Stock acquired by the Corporation by
reason of purchase, conversion, redemption or otherwise shall be retired and
shall become authorized but unissued shares of Series C Preferred Stock, which
may be reissued as part of a new series of Preferred Stock hereafter created
under Article Fourth of the Certificate of Incorporation.
(b) So long as shares of Series C Preferred Stock remain outstanding, the
Corporation shall not, without the affirmative vote of the holders of at least a
majority of the then outstanding shares of Series C Preferred Stock voting
together as a separate class, amend the terms of this Resolution. The holders of
the outstanding shares of the Series C Preferred Stock shall be entitled to vote
as a separate class upon a proposed amendment of the Certificate of
Incorporation if the amendment would alter or change the powers, preferences or
special rights of the shares of Series C Preferred Stock so as to affect them
adversely.
[the balance of this page intentionally left blank]
8
<PAGE>
IN WITNESS WHEREOF, the Company's Board of Directors has authorized this
Certificate of Designation to be executed on its behalf by the Company's duly
authorized officer on this 13th day of September 1999.
RANCH *1, INC.
By: /s/ Sebastian Rametta
-------------------------------------
Sebastian Rametta,
President and Chief Executive Officer
9
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Ranch*1, Inc. and Subsidiaries:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
KPMG LLP
Melville, New York
October 11, 1999
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