U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [Fee Required] For the fiscal year ended December 28, 1997
OR
[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 [No Fee Required]
Commission File No. 33-95796
----------------------------
HARVEST RESTAURANT GROUP, INC.
-------------------------------------------
(Name of Small Business Issuer in its Charter)
Texas 76-0406417
- -------------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
1250 N.E. Loop 410, Suite 335 San Antonio, Texas 78209
------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (210) 824-2496
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
Series A Preferred Stock, $1 par value
(Title of Each Class)
Check whether the Registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports) , and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
----- -----
Check if there is no disclosure contained herein of delinquent filers in
response to Item 405 of Regulation S-B, and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
As of March 27, 1998, the market value of the Registrant's Common Stock,
excluding shares held by affiliates, was $5,326,536 based upon a closing bid
price of $2.06 per share of Common Stock on the NASDAQ SmallCap Market. As of
March 27, 1998, 2,699,030 shares of the Registrant's Common Stock were
outstanding.
The Registrant's revenues for its most recent fiscal year were $2,037,569
The following documents are incorporated by reference into Part III, Items 9
through 12 hereof: None.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Except for the historical information contained herein, the matters set forth in
this Form 10-KSB include "forward-looking statements" which can be identified by
the use of forward-looking terminology such as "believes", "expects", "may",
"should", or "anticipates" and similar terminology, or by discussions of
strategy, future operating results or events. These forward-looking statements
are subject to risks and uncertainties that may cause actual results,
performance or achievements of Harvest Restaurant Group, Inc. (the "Company") to
differ materially from those discussed in the forward-looking statements. These
risks and uncertainties include, among others: ability to obtain additional
financing to continue as a going concern; restaurant performance (including
sales and margins); possible NASDAQ delisting; competition; availability of site
locations; development and operating costs; consumer acceptance; adverse
publicity; availability and terms of capital; products and services; changes in
business strategy; completion of acquisitions; general economic conditions; and
acts of third parties; as well as other factors as detailed throughout this Form
10-KSB and in the Company's reports filed with the Securities and Exchange
Commission. The forward-looking statements included in the Report speak only as
of the date hereof, and no assurance can be given that the future results
covered by the forward-looking statements will be achieved.
General
Harvest Restaurant Group, Inc. owns, operates and franchises quick service
restaurants under the name "Harvest Rotisserie", which feature marinated
oak-roasted rotisserie chicken, oak-roasted turkey breast, roast ham, an
assortment of sandwiches and other fresh homestyle food items. Harvest
Rotisserie restaurants emphasize rotisserie oak-roasted chicken and complete
homestyle meals that the Company believes to be consistent with (i) an increased
consumer demand for take-home prepared foods, (ii) an emphasis on quality,
coupled with value and convenience, and (iii) the popularity of homestyle
cooking. Harvest Rotisserie side dishes include hot and cold dishes such as
coleslaw, various salads, baked beans, stuffing, corn, parsley potatoes,
macaroni and cheese, steamed fresh vegetables, mashed potatoes and gravy, rice,
creamed spinach, cheese rice and baked cinnamon apples. The Company maintains
strict quality standards in purchasing, storing, preparing and serving its
entrees, side dishes, desserts and other products.
At December 28, 1997, the Company had 14 Harvest Rotisserie restaurants in
operation, four of which were Company-owned restaurants in Texas and ten
operated as franchised stores in Florida, Indiana, North Carolina, and Northern
California. The Company also had executed leases for five additional restaurant
properties in Texas for future development as Harvest Rotisserie restaurants.
Eight of the franchised stores were Kenny Roger Roaster restaurants prior to
being acquired by the Company in June 1997 and assigned to three area developers
for operation as Harvest Rotisserie franchise restaurants. The Company provided
financing to the area developers under a secured loan to for the purchase price,
cost of conversion and working capital.
2
<PAGE>
Recent Developments
Closure of Restaurants and Write-off of Notes Receivable
During 1997, the Company began the conceptual development of a multi-branded
restaurant featuring Harvest Rotisserie along with two or more additional
branded restaurants in one building (referred to as "Harvest Food Court"). In
January 1998, the Company decided to concentrate its future expansion efforts on
the development, operation and franchising of its Harvest Food Court restaurants
in Texas. This decision was made partially due to lower per unit development and
operating costs for a Harvest Food Court as opposed to a Harvest Rotisserie.
Consistent with this change in strategy, the Company no longer intends to
develop four of the five properties in San Antonio and Houston, Texas that the
Company had previously executed leases for, and is negotiating a disposition of
the properties with the respective landlords. The Company intends to develop one
remaining leased property in San Antonio, Texas, but currently does not have the
necessary funds. In January 1998, the Company closed its restaurant located in
Corpus Christi, Texas. The Company also cancelled previous letters of intent to
acquire thirteen additional Kenny Rogers Roasters restaurants located in
Maryland and Utah.
In the first quarter of 1998, three area developers that operate nine franchised
Harvest Rotisserie restaurants in Florida, Indiana and North Carolina closed all
nine of these restaurants. The closures were the result of restaurant operating
losses caused in part by the inability to develop a sufficient number of stores
to reach critical mass in the market place, and the Company's decision not to
provide the area developers with additional financing. The Company had
guaranteed the leases for all franchised locations, as well as four promissory
notes connected with two of the franchised locations and a mortgage note for a
restaurant property purchased by the area developer.
Subsequent to closing the restaurants, the Company has contacted each of the
lessors and lenders in order to obtain settlement agreements on the related
obligations, and generally has been successful in reaching settlement
agreements. The Company is a defendant in four lawsuits filed in federal court
demanding payment of the four promissory notes it guaranteed in association with
the acquisition of the restaurants in Florida.
As a result of the restaurant closings and defaults by the area developers under
the loan agreements, the Company has recorded losses totaling $3,387,541 in 1997
associated with the write-off of area developer loans and $1,184,656 for real
estate disposition costs for Company-owned and franchised restaurants.
Pending Acquisitions
To facilitate the Company's expansion of the Harvest Food Court restaurants in
Texas, the Company has entered into an agreement in principle to acquire an 80%
interest in the intangible property rights of Red Line, Inc for a nominal cash
payment. Red Line was the franchisor of 25 Red Line Burger restaurants in South
Texas prior to filing for Chapter 11 of the U.S. Bankruptcy Code in 1996. The
Company intends to utilize the Red Line trademarks and systems within its
3
<PAGE>
Harvest Food Court, and will seek to enter into new franchise agreements with
the former Red Line franchises that remain in operation. The Company may also
seek to acquire some of the Red Line properties and convert them into Harvest
Food Courts, which the Company may later offer for resale to new franchisees.
The success of the acquisition is contingent upon the Company's ability to enter
into new franchisee agreements for the Red Line restaurants and to raise
financing necessary to fund the costs of conversion of the Red Line franchised
restaurants into Harvest Food Court restaurants. There can be no assurance that
the Company will be successful in obtaining such financing or converting any of
the Red Line restaurants into Harvest Food Courts.
On March 24 1998, the Company entered into two nonbinding agreements for the
exchange of common stock of the Company for all the issued and outstanding
common stock of Surf City Squeeze Acquisition II, Inc. ("Surf City") and Sports
Group International, Inc. ("SGI"). The acquisition also requires the payment of
$1,000,000 to the shareholders of Surf City. The completion of the acquisitions
is subject to a feasibility period that expires April 17,1998. The completion of
the acquisitions is also subject to the Company raising $2,000,000 of new
financing and obtaining approval of the Company's shareholders and continuation
of the Company's NASDAQ SmallCap Market listing. Upon completion of the
acquisitions, the Company's current shareholders would retain approximately a
25% interest in the Company on a post acquisition basis.
Surf City is the franchisor of 110-store chain of juice bar restaurants in the
United States. Surf City filed a petition for relief under Chapter 11 of the
U.S. Bankruptcy Code in January 1997, and successfully emerged from bankruptcy
in January 1998 when its plan of reorganization became effective.
SGI has an exclusive license for the international distribution of a line of
Spalding sports drinks and water. The Company obtained the exclusive Spalding
license in 1996, and recently began its marketing efforts. The year ended
December 1997, SGI incurred losses of approximately $3.4 million on revenues of
$1.5 million, and had an accumulated deficit of approximately $11 million at
December 31, 1997.
History
The Company was incorporated in Texas in June 1993 under the name Clucker's
Tex-Mex Venture, Inc., and changed its name to CluckCorp International, Inc. in
April 1995, and changed its name again to Harvest Restaurant Group, Inc. in
October 1997. Prior to November 1994, the Company was an area developer for
Cluckers Wood Roasted Chicken, Inc. ("CWRC"), the developer and franchiser of
the "Cluckers" restaurant concept. In November 1994, the Company exchanged its
Cluckers area development agreement with CWRC for systems, franchising materials
and the exclusive right to use the Cluckers name in Texas. During 1996 the
Company completed the evolution to the Harvest Rotisserie concept and began to
concentrate on the development, operation and franchising of Harvest Rotisserie
restaurants, which the Company believed to be an improvement over the original
Cluckers concept. Accordingly in 1996, the Company converted its one Cluckers
restaurant in San Antonio to a Harvest Rotisserie restaurant.
4
<PAGE>
In July 1996, the Company sold 1,000,000 shares of Common Stock and 2,300,000
Common Stock Purchase Warrants ("IPO Warrants") in an initial public offering
("IPO") of its securities through Global Equities Group, Inc. ("Global" or the
"Representative") as representative of the underwriters of the IPO. The Company
realized net proceeds of approximately $4,700,000 from the IPO based upon the
sale of the Common Stock at $5.50 per share and the IPO Warrants at $.125 per
IPO Warrant. Proceeds from the IPO were utilized to repay bridge-financing
notes, develop the Company-owned restaurants, and develop a corporate
infrastructure.
In July 1997, the Company sold 515,000 shares of 12% Series A Redeemable
Convertible Preferred Stock ("Series A Preferred Stock") at $10.00 per share and
1,723,400 Redeemable Preferred Stock Purchase Warrants ("Preferred Warrants") in
a public offering of its securities (the "Preferred Offering") through Global as
representative of the underwriters of the Preferred Offering. The Company
realized net proceeds of approximately $4,375,000 from the Preferred Offering
based upon the sale of the Series A Preferred Stock at $10.00 per share and the
Preferred Warrants at $.10 per Preferred Warrant. Substantially all of the
proceeds of the Preferred Offering were used to acquire restaurant properties in
certain metropolitan markets which were resold to area developers for operation
as franchised Harvest Rotisserie restaurants and for loans made to the area
developers to the fund the purchase price, conversion costs and initial working
capital needs.
In December 1997, the Company sold 150 shares of 7% Series B Convertible
Preferred Stock ("Series B Preferred Stock") at $10,000 per share in a private
transaction. The Company realized net proceeds of $1,340,000 from the sale for
working capital purposes.
Area Developers
The Company's area development agreement requires the development of a specified
number of restaurants within a delineated territory in accordance with a
development schedule and provides the area developer with the exclusive right to
open restaurants within the specified territory during the term of the
development agreement. The area developers generally pay a nonrefundable fee of
$5,000 per restaurant in addition to a restaurant franchise fee of $35,000 as
each restaurant is opened.
On June 25, 1997, the Company completed the purchase of certain assets of eight
Kenny Rogers Roasters (Roasters") restaurants located in Florida, Indiana, and
North Carolina from Roasters Corp., a Florida Corporation. The purchase price
included $1,050,000 in cash and the assumption of certain liabilities and lease
obligations. For accounting purposes, the acquisition was accounted for as a
purchase, and the purchase price, including related acquisition expenses of
$71,405, was fully allocated to identified assets and liabilities. Effective
5
<PAGE>
concurrent with the acquisition, the Company resold these assets to three area
developers, each majority-owned and controlled by the same individual, in
exchange for a note receivable and the assignment of the assumed liabilities by
the area developers. The Company realized no gain or loss on the resale of the
properties. The Company subsequently entered into one additional area
development agreement in Northern California. The combined total of the
agreements provided for the development of up to 40 franchised Harvest
Rotisserie restaurants over a two to three year period in Florida, Indiana,
North Carolina, and Northern California.
In addition to providing the financing for the purchase of the acquired Roasters
properties, the Company provided financing for renovation and a portion of the
working capital. The loans were made pursuant to a convertible secured loan
agreement which provided for a two to three year draw period up to the maximum
amount as set in the loan agreements. During the draw period, interest only is
payable to the Company. Upon expiration of the draw period, the loan converts to
a ten year amortizing loan with interest at prime plus 4% and a balloon payment
after the fifth year. The loans are secured by a pledge of substantially all of
the assets of the area developer and of all the outstanding stock held by the
owners of the area developer. The loan agreement also provides the Company with
an option to convert all or any part of the loan amount at any time after the
draw period into equity of the area developer.
Ten franchised restaurants were opened in 1997; however in the first quarter of
1998, area developers have closed all nine of the franchised restaurants located
in Florida, Indiana, and North Carolina. Accordingly, the Company believes that
all of the area developer loans are impaired and has recorded a write-off of the
area developer loans totaling $3,387,541 as of December 28, 1997. The amount of
the write-off was equal to the total amount of loans outstanding. The Company
also accrued $800,000 as a real estate disposition liability resulting from the
guarantee of the long-term real estate leases on the franchised restaurants, and
its abandonment of four Compnay-owned leased locations.
No officer or director of the Company has any equity or financial interest in
any area developer.
Franchise Agreements
The Company has completed a Uniform Franchise Offering Circular ("UFOC") and
related franchise documents for its Harvest Rotisserie restaurants. The Company
intends to amend its UFOC to also provide for the franchising of Harvest Food
Court restaurants.
The Harvest Rotisserie franchise agreement provides for (i) a $35,000 per
restaurant franchise fee (ii) a 5% royalty on the restaurant's gross revenue,
and (iii) a reserve for a national and local advertising fund contribution
aggregating up to 3% of gross revenues per restaurant. The franchise agreements
provide for a limited area of exclusivity surrounding the franchised restaurant
in which the Company may neither develop nor grant to others the right to
develop additional restaurants.
6
<PAGE>
The Company's franchise agreement requires that the restaurants be operated in
accordance with the operating procedures and menus established by the Company.
The Company conducts regular inspections of its restaurants to determine whether
they meet applicable quality, service and cleanliness standards and will work
with franchisees to improve substandard performance or any items of
non-compliance revealed in the course of the inspection. The Company may
terminate its agreement with any franchisee that does not comply with such
standards. The Company believes that maintaining superior food quality, a clean
and pleasing environment and excellent customer service is critical to the
reputation and success of its restaurants and intends to act aggressively to
enforce applicable contractual requirements. Franchisees could contest such
terminations, which would cause the Company to incur potentially significant
legal expenses.
Harvest Rotisserie - Current Operations
The following discussion describes the current operations of the three
Company-owned Harvest Rotisserie restaurants located in San Antonio, Texas. The
Company is not considering opening any additional Harvest Rotisserie restaurants
in 1998.
Complete Meal Value. The Company's restaurants emphasize complete,
reasonably priced meals rather than focusing on discounted individual items or
an a la carte pricing system. Complete meals begin at approximately $3.99, and
menu combinations provide convenient multiple meal selections for couples,
families or larger groups. The Company's operating philosophy is to provide3
high quality, quick service meals rather than the food often associated with the
fast-food industry. The restaurants offer large food portions, lunch specials
and entree combinations at lower prices in order to create a competitive "price
to value" concept.
Fresh, High Quality, Convenient Homestyle Meals. The Company focuses its
Harvest Rotisserie restaurant concept on rotisserie oak-roasted chicken,
oak-roasted turkey breast, roast ham, meatloaf, sandwiches and a variety of
freshly prepared side dishes. Chicken, turkey and ham are delivered to the
Company's Harvest Rotisserie restaurants several times each week in order to
allow for the fresh preparation of these food products. Cooked food items are
prepared with the use of ovens and steamers, rather than the fryers, grills, and
microwaves used by many other fast-food establishments. The Company maintains
strict quality standards in purchasing, storing, preparing and serving its
entrees, fresh side dishes, desserts and other products. All visible fat is
removed from poultry and ham prior to preparation. The chicken is marinated for
24 hours in a blend of citrus juices, fresh garlic and natural herbs and spices,
and roasted for ninety minutes over hardwood flames in a custom built rotisserie
at temperatures as high as 1,200 degrees. The self-basting characteristic of
rotisserie cooking is believed to reduce fat and result in moister meat and
crispier skin.
Operations. The Company's Harvest Rotisserie restaurants prominently
display a rotisserie within customer view. The location of the rotisserie,
coupled with the flames emanating from the hardwood, creates a focal point for
the restaurants. Chicken, turkey and other entrees may be purchased in varying
quantities or in combination with a choice of side dishes. Most restaurants
range in size from approximately 2,200 to 2,800 square feet, offer inside
seating and takeout service, have drive-through windows, and seating capacities
for 45 to 70 customers. Generally, restaurant hours are from 11 A.M. to 11 P.M.,
seven days a week.
7
<PAGE>
Management and Training. A typical Harvest Rotisserie restaurant will
employ between fifteen and twenty people daily, on a staggered basis designed to
match employee work hours to customer traffic. Restaurant personnel generally
include a manager, assistant manager, cooks, counter personnel and kitchen
workers. In addition, restaurant managers are responsible for selecting and
training new employees who will generally undergo an on-the-job training period
under the supervision of an experienced employee. Ongoing employee training is
the responsibility of the restaurant manager.
Advertising and Promotion. The Company currently markets its restaurants on
a limited basis primarily through restaurant signage, direct mail, and in-store
displays, which emphasize the quality and homestyle nature of the food products.
The Company expanded its advertising efforts during the second and third
quarters of 1997 to include additional use of print media, together with radio
commercials. The Company's expanded advertising efforts were intended to promote
awareness of the Harvest Rotisserie restaurants in target markets.
Unit Economics. The average cost of opening a Harvest Rotisserie restaurant
in a leased facility, including site selection costs, leasehold improvements,
acquisition of furniture, fixtures and equipment, opening inventories and
certain preopening expenses (including salaries, training, travel, advertising
and promotion), has ranged from $125,000 to $600,000 per restaurant, depending
upon the size and location of the restaurant and the amount of leasehold
improvements required. If the Company elects to purchase the land and/or
building, the development costs will be significantly higher.
Site Selection. The Company considers the location of a restaurant to be
critical to its long-term success and therefore devotes significant efforts to
the evaluation of potential sites. The site selection process involves
consideration of a variety of factors including (i) demographics, such as target
population density and household income levels, (ii) specific site
characteristics such as visibility, accessibility and traffic volume, (iii)
proximity to activity centers, (iv) parking availability and (v) potential
competition in the area. The Company's executive officers inspect each potential
Company-owned and franchised restaurant location prior to the execution of a
lease. The opening of new restaurants is contingent upon, among other things,
locating satisfactory sites, negotiating favorable leases or purchase
agreements, completing construction and securing appropriate government permits
and approvals. Once a site is available to the Company and necessary approvals
and permits have been obtained, approximately 60 to 180 days are required to
complete construction and open the restaurant.
Growth Strategy
Historically, the Company's primary growth strategy has been to expand its
Harvest Rotisserie restaurant concept, principally by franchising through
financed area developers. However, the Company is not considering opening any
additional Harvest Rotisserie restaurants or entering into additional area
developer agreements in 1998. The Company currently does not have any funds
available to develop any restaurants.
8
<PAGE>
The Company intends to concentrate its future expansion efforts on the
development of Harvest Food Court restaurants in Texas. To facilitate its
expansion, the Company has entered into an agreement in principle to acquire an
80% interest in the intangible property rights of Red Line, Inc. The success of
this acquisition is contingent upon the Company's ability to raise the necessary
financing to the fund costs of conversion of the Red Line restaurants into
Harvest Food Court restaurants.
The Company has also entered into non-binding stock exchange agreements with
Surf City and SGI. The completion of these acquisitions is contingent upon the
completion of a feasibility period, the Company raising $2,000,000 of financing
necessary to complete the transaction, shareholder approval, and continuation of
the Company's NASDAQ SmallCap Market listing.
Competition
The food service industry is intensely competitive with respect to food quality,
concept, location, service and price. There are many well-established food
service competitors with substantially greater financial and other resources
than the Company and with substantially longer operating histories. The Company
competes with take-out food service companies, fast-food restaurants, casual
full-service dine-in restaurants, delicatessens, cafeteria-style buffets and
prepared food stores, as well as with supermarkets and convenience stores.
Competitors include pizza restaurants, Chinese food restaurants, other purveyors
of carryout food and convenience dining establishments, including such chains as
Pizza Hut, McDonald's, Dairy Queen and others. Other rotisserie chicken and
homestyle food concept restaurants, such as Boston Market and Kenny Rogers'
Roasters, provide direct and intensive competition. This intense competition has
resulted in the sale or closing of a number of rotisserie roasted chicken
restaurants including establishments operated by the Company and some of the
larger franchise chains. The inclusion of roasted or baked chicken at many
large, national food service chains, such as KFC and Roy Rogers, and in
supermarkets and convenience stores, creates significant additional competition.
Moreover, other national food service chains or companies could introduce new
rotisserie roasted or baked chicken restaurants.
Competition in the food service business is often affected by changes in
consumer tastes, national, regional, and local economic and real estate
conditions, demographic trends, traffic patterns, the cost and availability of
labor, purchasing power, availability of product and local competitive factors.
Some or all of these factors could cause the Company and future franchisees to
be adversely affected.
The Company also competes for franchisees with multinational fast-food chains,
national and regional restaurant chains and other regional and local restaurant
franchisers. Most restaurant franchisers have greater market recognition and
greater financial, marketing and human resources than the Company.
9
<PAGE>
Trademarks and Service Marks
The Company has registered with the United States Patent and Trademark Office
its "Harvest Rotisserie" name, trademark and service mark ("Marks"). There can
be no assurance that the Company will obtain sufficient protection for its
Harvest Rotisserie Marks or, that it will have the financial resources to
enforce or defend its Marks.
Government Regulation
The Company's restaurants must comply with federal, state and local government
regulations applicable to consumer food service businesses, including those
relating 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 and employment. The Company believes
that it is in compliance with these provisions.
Certain states and the Federal Trade Commission require a franchiser to provide
specified disclosure statements to potential franchisees before granting a
franchise. Additionally, many states require the franchiser to register its
Uniform Franchise Offering Circular ("UFOC") with the state before it may offer
a franchise. The Company believes that its Harvest Rotisserie UFOC (together
with any applicable state versions or supplements) complies with both the
Federal Trade Commission guidelines and all applicable state laws regulating
franchising in those states in which the Company intends to offer franchises.
Insurance
The Company carries general liability, product liability and commercial
insurance of up to $2,000,000, which it believes is adequate for businesses of
its size and type. However, there can be no assurance that the Company's
insurance coverage will remain adequate or that insurance will continue to be
available to the Company at reasonable rates.
Franchisees are required to maintain certain minimum standards of insurance
pursuant to their franchise agreements including commercial general liability
insurance, worker's compensation insurance and all risk property and casualty
insurance. The Company requires that it be named as an additional insured on any
such policies.
10
<PAGE>
Employees
At March 27, 1998, the Company had approximately 100 employees, of whom 10 are
corporate management and administrative personnel, 6 are restaurant management
personnel, and the remaining serve as restaurant hourly employees. The Company's
employees are not represented by a union and the Company believes that its
relations with its employees are satisfactory.
11
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases 2,500 square feet of space for its executive offices in San
Antonio, Texas under a month-to-month lease for $3,300 per month. The Company
believes its executive office facilities are adequate for its needs in the
foreseeable future and that additional space if needed, is available at
reasonable rates.
As of December 28, 1997, the Company had three Company-owned Harvest Rotisserie
restaurants in operation in San Antonio, Texas and one restaurant in Corpus
Christi, Texas. The Company had also executed leases for five additional
restaurant properties for future Harvest Rotisserie restaurants to be developed
in San Antonio and Houston, Texas. In January 1998, the Company decided not to
develop at least four of its five properties in San Antonio and Houston, Texas
which the Company had previously executed leases for, and is negotiating a
disposition of the properties with the respective landlords. The Company intends
to develop the remaining leased property in San Antonio, Texas but currently
does not have the funds necessary to do so. In January 1998, the Company closed
its restaurant located in Corpus Christi, Texas.
In addition, during the first quarter of 1998, nine of the Company's ten
franchised locations were closed. The Company had guaranteed the real estate
leases on all franchised locations. The Company has accrued a real estate
disposition liability of $800,000 at December 28, 1997, which the Company
believes will be sufficient to settle all obligations related to the closing of
the Company-owned and franchised restaurants, and the abandonment of the
restaurant properties under development.
Form of Lease Monthly
Location ownership Expiration Rent
- -------- --------- ---------- ----
Operating Harvest Rotisserie Restaurants:
Fredericksburg Road Building Lease August 1998 $2,554
San Antonio, TX
Walzem Road Building Lease February 2006 $2,700
San Antonio, TX
Tezel Road Real Estate N/A N/A N/A
San Antonio, TX Owned
Undeveloped Site:
4620 Broadway (1) Building Lease January 2002 $4,900
San Antonio, TX
12
<PAGE>
Closed Restaurants and Abandoned Properties:
South Padre Island Drive Building Lease November 1999 $5,000
Corpus Christi, TX
2Hwy 281/Loop 1604 (2) Ground Lease February 2022 $4,500
San Antonio, TX
DeZavala Road (2) Ground Lease May 2027 $5,000
San Antonio, TX
South Braeswood Road (2) Building Lease January 2004 $3,000
Houston, TX
11730 West Avenue (2) Building Lease May 2002 $4,500
San Antonio, TX
(1) The Company currently does not have the funds required to develop this
property, and is seeking a joint venture partner to share in the
development cost.
(2) The Company intended to develop these properties as Harvest Rotisserie
restaurants when initially acquired but has since decided to abandon these
lease sites.
13
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
The Company is a named party in the following legal proceedings:
On January 22, 1998, the Company and its Florida area developer were named as
defendants in three separate lawsuits filed in Florida in Broward County Circuit
Court by K.R. Chicken Associates, K.R. Sarasota Associates, Ltd., and K.R.
Memphis-Florida Associates Limited Partnership. (Case numbers 98-01090,
98-01092, and 98-01093) The plaintiffs are seeking to foreclose a security
interest on promissory notes of the Company's Florida area developer, Florida
Harvest, Inc., which are guaranteed by the Company in the aggregate principal
amount of $455,244. The plaintiffs have agreed not to proceed with further legal
action until after May 1, 1998, to allow the parties the opportunity to
negotiate a settlement.
On January 27, 1998, the Company and Florida Harvest, Inc. its Florida area
developer, were named as defendants in a lawsuit filed in Florida in
Hillsborough County Circuit Court by Pollo Operations, Inc. (case number
98-00604) The plaintiff is seeking to foreclose a mortgage lien and security
interest in real property. The Company is guarantor of the $868,000 mortgage
note payable to Pollo Operations, Inc. The Company's area developer is in the
process of marketing the real property, and the plaintiffs have agreed not to
proceed with further legal action until the sale of the property is completed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
14
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
The Company's Common Stock has traded on the NASDAQ SmallCap Market under the
symbol "ROTI" since July 9, 1996. The following table sets forth for the
quarters indicating the range of high and low closing sale prices of the
Company's Common Stock for each quarter of fiscal 1996 and 1997, as reported by
the NASDAQ SmallCap Market.
Price
------------------
High Low
---- ---
Fiscal Year 1996:
Third Quarter (October 6, 1996) $ 8.25 $ 5.67
Fourth Quarter (December 29, 1996) $ 7.75 $ 5.75
Fiscal Year 1997:
First Quarter (April 20, 1997) $ 7.75 $ 6.00
Second Quarter (July 13, 1997) $ 8.00 $ 4.75
Third Quarter (October 5, 1997) $ 5.09 $ 1.43
Fourth Quarter (December 28, 1997) $ 2.63 $ .75
Fiscal Year 1998:
First Quarter (Through March 27, 1998) $ 2.06 $ .50
The National Association of Securities Dealers, Inc., which administers the
NASDAQ SmallCap Market, sets the criteria for continued eligibility on the
NASDAQ SmallCap Market. In order to continue to be included on the NASDAQ
SmallCap Market, a company must maintain $2 million in value of its net tangible
assets, a $1 million market public float, two market-makers, at least 300
holders of the Common Stock, 500,000 shares in the public float and a minimum
bid price of $1.00 per share. At this time the Company does not meet the minimum
net tangible asset criteria, and which cannot be met by the Company without
obtaining additional equity capital. The Company's failure to meet the NASDAQ
SmallCap Market's maintenance criteria may result in the discontinuance of the
inclusion of its securities in the NASDAQ SmallCap Market. In such event,
trading, if any, in the securities may then continue to be conducted in the
non-NASDAQ over-the-counter market in what are commonly referred to as the
electronic bulletin board and the "pink sheets." As a result, a shareholder may
find it more difficult to dispose of or obtain accurate quotations as to the
market value of the securities.
15
<PAGE>
Holders of Record
As of March 27, 1998, the Company had approximately 600 beneficial holders of
its Common Stock.
Dividend Policy
The Company has never paid cash dividends on its Common Stock and intends to
retain earnings, if any, for use in the operation and expansion of its business.
The amount of future dividends, if any will be determined by the Board of
Directors based upon the Company's earnings, financial condition, capital
requirements and other conditions.
Description of Securities
Common Stock
The Company is authorized to issue 20,000,000 shares of $.0l par value Common
Stock. At December 28, 1997, there were 2,698,630 shares of Common Stock
outstanding. The holders of Common Stock are entitled to one vote for each share
held of record on all matters submitted to a vote of stockholders, including the
election of directors. There is no right to cumulate votes in the election of
directors. Holders of Common Stock have no preemptive rights and have no right
to convert their Common Stock into any other securities. All of the outstanding
shares of Common Stock are fully paid and non-assessable.
Preferred Stock
The Company is authorized to issue 5,000,000 shares of preferred stock, $1.00
par value (the "Preferred Stock"). The Preferred Stock may, without action by
the stockholders of the Company, be issued by the Board of Directors from time
to time, in one or more series for such consideration and with such relative
rights, privileges and preferences as the Board may determine. Accordingly, the
Board has the power to fix the dividend rate and to establish the provisions, if
any, relating to voting rights, redemption rate, sinking fund, liquidation
preferences and conversion rights for any series of Preferred Stock issued in
the future.
In 1997, the Board of Directors of the Company authorized two series of
Preferred Stock, i) Series A Redeemable Convertible Preferred Stock ("Series A
Preferred Stock") consisting of up to 3,000,000 shares, and (ii) Series B
Convertible Preferred Stock ("Series B Preferred Stock") consisting of up to
1,000 shares.
16
<PAGE>
Series A Redeemable Convertible Preferred Stock
At December 28, 1997 there were 515,000 shares of $1.00 par value Series A
Redeemable Convertible Stock. Series A Preferred Stock shareholders are entitled
to receive dividends at the quarterly rate of $.30 per share, payable in cash or
in the Company's Common Stock at the sole discretion of the Company. The Series
A Preferred Stock may be redeemed in whole or in part by the Company at any time
after March 11, 1998, for cash or in Common Stock of the Company in its sole
discretion, at 110% of the bid price per share of the Series A Preferred Stock
on the NASDAQ SmallCap Market for the 20 trading days prior to the redemption
date.
The Series A Preferred Stock automatically converts into Common Stock at any
time after March 11, 1998 if the closing price for the Series A Preferred Stock,
as quoted on the NASDAQ SmallCap Market or any national securities exchange,
exceeds $20.00 per share for ten consecutive trading days. The holder of Series
A Preferred Stock has the right, at the holder's option, at any time after March
11, 1998, to convert any or all such shares of Series A Preferred Stock into
Common Stock. The number of shares of Common Stock issuable upon conversion of a
share of Series A Preferred Stock is equal to $10.00 divided by $3.70, subject
to certain adjustments.
The holders of the Series A Preferred Stock have no voting rights except as to
matters affecting the rights of Series A Preferred Stockholders or as to matters
that all stockholders are entitled to vote on as a matter of law. The Series A
Preferred Stock has a liquidation preference of $10.00 per share.
Series B Preferred Stock
At December 28, 1997, there were 150 shares of Series B Preferred Stock. The
Series B Preferred Stock is convertible into either the Company's Series A
Preferred Stock or the Company's Common Stock. The conversion rate per share is
equal to $10,000 divided by the lower of (a) $11.00 or (b) 80% of the average
bid price of the Series A Preferred or Common Stock at the time of conversion.
Provided, however, in order to convert into Common Stock, the price of the
Common Stock must be above $3.00 per share. The Series B Preferred Stock accrue
dividends at the rate of 7% annually, payable at the time of conversion. The
Series B Preferred Stock is junior to the Series A Preferred Stock, has no
voting rights and has a liquidation preference of $10,000 per share.
Redeemable Preferred Stock Purchase Warrants
At December 28, 1997 there were 1,723,400 Redeemable Preferred Stock Purchase
Warrants outstanding ("Preferred Warrants"). Each Preferred Warrant represents
the right to purchase one share of Series A Preferred Stock at an exercise price
of $10.50 per share until June 11, 2002.
Preferred Warrants may be redeemed, in whole or in part, at the option of the
Company, upon 30 days' notice, at a redemption price equal to $.01 per Preferred
Warrant at any time after March 11, 1998 if the closing price of the Company's
Series A Preferred Stock on the NASDAQ SmallCap Market averages at least $11.00
per share for a period of 20 consecutive trading days or if the Company redeems
the Series A Preferred Stock.
17
<PAGE>
Common Stock Purchase Warrants.
At December 28, 1997 there were 2,300,000 Common Stock Purchase Warrants
outstanding (the "IPO Warrants"). Each IPO Warrant entitles the holder to
purchase one share of Common Stock at $4.00 per share until July 9, 2001.
IPO Warrants may be redeemed, in whole or in part, at the option of the Company,
upon 30 days notice, at a redemption price equal to $.01 per IPO Warrant at any
time after July 9, 1997, if the closing price of the Company's Common Stock on
the NASDAQ SmallCap Market averages at least $8.00 per share for a period of 20
consecutive trading days.
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
At the end of the Company's fiscal year on December 28, 1997, the Company had
fourteen restaurants in operation, however, ten of these restaurants were
subsequently closed during the first quarter of 1998. The Company opened its
first restaurant in January 1994, and three additional Company-owned restaurants
between November 1996 and February 1997, and ten franchised restaurants were
opened between July 1997 and October 1997. Eight of the franchised restaurants
were originally Kenny Roger Roaster restaurants prior to being acquired by the
Company on June 25, 1997. The purchase price included $1,050,000 in cash and the
assumption of certain liabilities and lease obligations. Effective concurrent
with the acquisition, the Company resold these assets to three area developers,
each majority-owned and controlled by the same individual, in exchange for a
note receivable and the assignment of the assumed liabilities by the area
developers. The Company realized no gain or loss on the resale of the
properties. The Company subsequently entered into one additional area
development agreement in California.
In addition to providing the financing for the purchase of the acquired Roaster
properties, the Company provided financing for the costs to renovate and reopen
the properties as Harvest Rotisserie restaurants. The Company also financed a
portion of the area developers initial working capital. The loans were made
pursuant to a convertible secured loan agreement which provided for a two to
three year draw period up to the maximum amount as set in the loan agreements.
In the first quarter of 1998, three area developers that operated nine Harvest
Rotisserie restaurants in Florida, Indiana and North Carolina closed all nine of
these restaurants. In addition, one Company-owned restaurant was closed, and
development plans ceased at four other locations that were to be developed in
San Antonio, Texas. The Company had entered into long-term real estate leases on
the Company owned locations, and guaranteed similar leases for the franchised
locations, as well as guaranteed certain promissory notes connected with three
of the franchised locations.
The Company believes that all of the area developer loans are impaired and has
recorded a write-off of loans totaling $3,387,541 as of December 28, 1997. The
Company has evaluated its potential costs for the full settlement of each of the
long-term real estate leases, as well as the assumed promissory notes, and has
accrued $700,000 as a real estate disposition liability with a relating charge
to operations. In addition it accrued $100,000 as a real estate disposition
liability and has recognized a total charge of $484,656 related to the ceasing
of development of four other Company-owned restaurants properties and the
closing of one operating restaurant. The charge to operations includes the full
impairment of the leasehold property and equipment, and the recognition of a
loss on disposition of the restaurant location and applicable rent expense.
19
<PAGE>
Results of Operations - Fiscal Year 1997 Compared to Fiscal Year 1996
Revenues. Revenues from Company-owned restaurants for 1997 were $1,637,569,
an increase of over 500% as compared to 1996. The increase in revenues was due
to the opening of three additional restaurants between November 1996 and
February 1997. Revenues from these restaurants are lower than management's
expectations and averaged approximately 60% of capacity during 1997. The Company
also recognized $400,000 in franchise fees which were received from the sale of
ten franchises in 1997.
Costs and Expenses. Cost of food and paper was 48.4% of restaurant revenues
for 1997, as compared to 46.4% in 1996. Food and paper costs remained higher
than historical averages during 1997 primarily due to food usage for recipe
development and the opening of an additional restaurants during 1997, which
typically has higher costs during the initial periods after opening.
Restaurant salaries, benefits, occupancy and related expenses, and operating
expenses include all other restaurant level operating expenses, the major
components of which are direct and indirect labor, payroll taxes and benefits,
operating supplies, rent, advertising, repairs and maintenance, utilities and
other occupancy costs. The combined total of these expenses was $1,646,175, or
100.5% of restaurant revenues and $257,806, or 97.7% of restaurant revenues for
1997 and 1996, respectively. A substantial portion of these costs are fixed or
indirectly variable and therefore were disproportionate to restaurant revenues
for both years due to low sales volumes and the opening of new restaurants,
which have higher expenses during the initial periods after opening.
General and administrative expenses increased $657,509, or 52.1% in 1997 as
compared to 1996. The increase resulted from the development of a corporate
infrastructure needed to support the expansion of Company-owned and franchised
restaurants, and an advertising program initiated during the second quarter of
1997 intended to create brand name recognition for the Company's Harvest
Rotisserie restaurants. In 1997, these expenses included: salaries, benefits and
contract services (39%); professional fees (15%); travel related expenses (13%);
advertising and promotion (19%); and other general and administrative expenses
(14%).
Preopening expenses of $152,548 in 1997 relate to initial costs associated with
the opening of two new Harvest Rotisserie restaurants in 1997 and lease costs
for maintaining a restaurant site which the Company still intends to develop in
the future.
Other Income (Expense). Interest income increased $54,333 in 1997 as
compared to 1996, primarily due to interest received on developer loans.
Interest and debt discount expense decreased $435,900 in 1997 as compared to
1996 due to the repayment of $1,684,500 of long-term debt in July 1996.
Net Loss. The Company incurred a net loss of $7,240,827 and $2,011,254 for
1997 and 1996, respectively. The increase in net loss for 1997 was primarily due
to losses associated with the write-off of area developer notes receivable and
20
<PAGE>
the disposition of properties for closed restaurants. The Company expects to
incur losses in future periods until it generates sufficient revenues from an
expanded base of restaurants to offset ongoing operating, financing and
expansion costs. The Company currently lacks the funds necessary to develop
additional restaurants and requires additional financing to continue as a going
concern.
Results of Operations - Fiscal Year 1996 Compared to Fiscal Year 1995
Revenues. Restaurant revenues for 1996 were $263,892, a 16.4% increase as
compared to 1995. The increase in revenues was due to the opening of an
additional restaurant in November 1996. On a comparative basis, the same store
revenues decreased $32,820 or 14.5% between 1996 and 1995, due in part to a
reduction in the restaurant operating hours. In 1996 this restaurant was also
being used as a training facility.
Costs and Expenses. Cost of food and paper was 46.4% of restaurant revenues
for 1996, as compared to 36.3% in 1995. The increase in food and paper costs
resulted primarily from food usage for recipe development for the Company's
expanded Harvest Rotisserie menu, and the opening of an additional restaurant in
November 1996, which typically has higher costs during the initial periods after
opening.
Restaurant salaries, benefits, occupancy and related expenses, and operating
expenses include all other restaurant level operating expenses, the major
components of which are direct and indirect labor, payroll taxes and benefits,
operating supplies, rent, advertising, repairs and maintenance, utilities, and
other occupancy costs. The combined total of these expenses was $257,806 or
97.7% of restaurant revenue for 1996, as compared to 277,646 or 122% for 1995. A
substantial portion of these costs is fixed or indirectly variable and therefore
is disproportionate to revenues for both periods due to low sales volumes.
General and administrative expenses increased $693,593 or 122% in 1996 as
compared to 1995. The increase resulted from the establishment of the Company's
corporate offices in 1996 and expenses associated with the Company's financing,
franchising, and expansion activities. In 1996, these expenses included:
salaries, benefits and contract services (25%); professional fees and offering
expenses (37%); travel related expenses (10%); advertising and promotion (11%);
and other general and administrative expenses (17%).
Preopening expenses increased by $71,711 for 1996 as compared to the same period
in 1995. A substantial portion of the increase relates to initial costs
associated with the development of a new Harvest Rotisserie restaurant, which
opened in November 1996.
Interest and Debt Discount Expense. Interest and debt discount expense
increased to $454,818 for 1996, as compared to $140,497 for 1995. The
significant increase relates to the issuance of $1,684,000 face amount of 10%
Bridge Notes from December 1994 to March 1996. The total amount of amortized
debt discount in 1996 was $367,153. The Bridge Notes were repaid in full in July
1996 from proceeds of the Company's IPO.
21
<PAGE>
Net Loss. The Company incurred a net loss of $2,011,254 for 1996 as
compared to $924,483 for 1995. The increase in net loss for 1996 was primarily
the result of significantly higher interest, debt discount expenses and general
and administrative expenses.
Liquidity and Capital Resources
The Company has incurred operating losses since inception, and as of December
28, 1997 had an accumulated deficit of $10,817,623 and a working capital deficit
of $713,637. In addition, during the first quarter of 1998, ten of the Company's
fourteen restaurants have closed. The Company is not currently generating
sufficient revenues from operations to meet its cash requirements. All of these
factors raise substanial doubts about the Company's ability to continue as a
going concern. In order to continue as a going concern, the Company will need to
obtain additional funds through debt or equity offerings to fund its working
capital needs and the development of new restaurants and a franchising program
until profitable operations are achieved. Management believes that it will
require approximately $2 million of additional financing for working capital and
to develop additional restaurants.
During 1997, the Company used $1,986,540 of cash in its operations. In order to
continue as a going concern and generate positive cash flow from operations, the
Company must develop an expanded base of profitable restaurants and realize
revenues from its franchise program. The Company currently does not have the
necessary funds to develop any additional restaurants and will require
additional capital in 1998 for the development of restaurants and for working
capital.
During 1997, the Company invested $1,213,603 for the purchase of property and
equipment for Company-owned restaurants opened in 1997 and provided $3,387,541
of financing to its area developers in the form of notes receivable for the
development and operation of ten franchised Harvest Rotisserie restaurants. In
the first quarter of 1998, the area developers closed nine of the franchised
restaurants. Accordingly, the Company considers the entire amount of the area
developer loans to be impaired and recognized a full write-off of the loans as
of December 28, 1997. The Company has accrued a real estate disposition
liability of $800,000 at December 28, 1997, which the Company believes will be
sufficient to settle all obligations related to the closing of the Company-owned
and franchised locations.
To date, the Company has financed its capital and operational needs with funds
provided from the sale of its securities, including its IPO in July 1996, the
exercise of common stock warrants in January 1997, the sale of preferred stock
and warrants completed in June 1997, and the private sale of preferred stock in
December 1997. The Company does not have a working capital line of credit with
any financial institution.
Sources of capital are limited to the Company's ability to raise additional
capital from investors, and ultimately achieving profitable operations. The
22
<PAGE>
Company will require additional capital to continue as a going concern. If the
Company is unsuccessful in obtaining additional capital, the Company's
operations and expansion plans will be substantially curtailed or terminated.
23
<PAGE>
ITEM 7. FINACIAL STATEMENTS
The financial information required by this item is found beginning on page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with accounting or financial
disclosure.
24
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Harvest Restaurant Group, Inc.
San Antonio, Texas
We have audited the accompanying consolidated balance sheet of Harvest
Restaurant Group, Inc. and Subsidiaries as of December 28, 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each year in the two year period then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these 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 financial statements referred to above present fairly, in
all material respects, the financial position of Harvest Restaurant Group, Inc.
and Subsidiaries as of December 28, 1997 and the results of its operations and
its cash flows for each year in the two year period then ended, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note B to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note B. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
AKIN, DOHERTY, KLEIN & FEUGE, P.C.
San Antonio, Texas
March 27, 1998
F-1
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Balance Sheet
December 28,
1997
------------
ASSETS
Current Assets
Cash $ 774,674
Cash, restricted 300,000
Inventories 15,345
Other current assets 17,400
------------
Total Current Assets 1,107,419
Property and Equipment, net 2,039,052
Other Assets
Intangible property rights, net of accumulated
amortization of $237,750 161,750
Deposits 70,978
Other assets 110,406
------------
343,134
------------
$ 3,489,605
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 652,817
Accrued liabilities:
Real estate disposition costs 800,000
Other accrued liabilities 156,460
Current portion of long-term debt 211,779
------------
Total Current Liabilities 1,821,056
Long-term Debt, less current portion 41,963
Commitments and Contingencies
Stockholders' Equity
Preferred stock 515,150
Common stock - $.01 par value; 20,000,000 shares
authorized, 2,698,630 shares issued and outstanding 26,986
Additional paid-in capital 11,902,073
Accumulated deficit (10,817,623)
------------
Total Stockholders' Equity 1,626,586
------------
$ 3,489,605
============
See notes to consolidated financial statements.
F-2
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Fiscal Year Ended
December 28, December 29,
1997 1996
----------- -----------
Revenues
Restaurant operations $ 1,637,569 $ 263,892
Franchise fees 400,000
----------- -----------
2,037,569 263,892
Costs and Expenses
Cost of food and paper 791,704 122,530
Restaurant salaries and benefits 703,148 125,954
Occupancy and related expenses 281,611 58,191
Operating expenses 661,416 73,661
Preopening expenses 152,548 131,074
General and administrative expenses 1,918,707 1,261,198
Depreciation and amortization 289,227 104,467
Loss on abandonment of company-owned properties 484,656
Loss on disposition of franchised restaurants 700,000
Write-off of area developer notes receivable 3,387,541
----------- -----------
Total costs and expenses 9,370,558 1,877,075
----------- -----------
Loss from operations (7,332,989) (1,613,183)
Other income (expense)
Interest income 111,080 56,747
Interest expense and debt discount (18,918) (454,818)
----------- -----------
92,162 (398,071)
----------- -----------
Net loss $(7,240,827) $(2,011,254)
=========== ===========
Per Share Data
Basic loss per common share $ (3.18) $ (1.29)
=========== ===========
Weighted average number of common
shares outstanding, basic 2,380,547 1,553,824
=========== ===========
See notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Total
Additional Stockholders'
Preferred Common Paid-In Accumulated Equity
Stock Stock Capital Deficit (Deficit)
----- ----- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ -- $ 9,900 $ 994,007 $ (1,565,542) $ (561,635)
Issuance of common stock in
initial public offering 10,000 4,730,290 4,740,290
Other issuances of common stock 650 219,233 219,883
Common stock no longer subject
to rescission 578 195,240 195,818
Net loss for the year (2,011,254) (2,011,254)
------------ ------------ ------------ ------------ ------------
Balance at December 29, 1996 -- 21,128 6,138,770 (3,576,796) 2,583,102
Issuance of common stock
for exercise of warrants 2,562 566,313
568,875
Issuance of preferred stock in
public offering 515,000 3,860,436 4,375,436
Preferred stock dividends paid
with common stock 3,296 (3,296)
Issuance of preferred stock in
private placement 150 1,339,850 1,340,000
Net loss for the year (7,240,827) (7,240,827)
------------ ------------ ------------ ------------ ------------
Balance at December 28, 1997 $ 515,150 $ 26,986 $ 11,902,073 $(10,817,623) $ 1,626,586
============ ============ ============ ============ ============
See notes to consolidated financial statements.
F-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Harvest Restaurant Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Fiscal Years Ended
December 28, December 29,
1997 1996
----------- -----------
Operating Activities
<S> <C> <C>
Net loss for the year $(7,240,827) $(2,011,254)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 289,227 104,467
Amortization of bridge note discount 367,154
Provision for real estate disposition costs 800,000
Impairment of property and equipment 219,249
Forfeitures of deposits 117,100
Write-off of area developer notes receivable 3,387,541
Changes in operating assets and liabilities:
Inventories (6,687) (3,614)
Deferred financing costs 144,074
Other current assets (6,810) 29,410
Accounts payable and accrued expenses 454,667 103,925
----------- -----------
Net cash (used) by operating activities (1,986,540) (1,265,838)
Investing Activities
Purchases of property and equipment (1,213,603) (1,059,654)
Increase in deposits and other assets (102,138) (161,555)
Issuance of notes receivable to area developers (3,387,541)
----------- -----------
Net cash (used) by investing activities (4,703,282) (1,221,209)
Financing Activities
Net proceeds from sale of preferred stock and warrants 5,715,436
Net proceeds from sale of common stock and warrants 568,875 4,960,173
Proceeds from issuance of bridge notes payable 376,370
Proceeds from bank borrowings 200,000
Increase in restricted cash for bank obligations (80,000) (220,000)
Repayments of bridge notes payable (1,684,500)
Repayments of bank borrowings (11,258)
----------- -----------
Net cash provided by financing activities 6,193,053 3,632,043
----------- -----------
Net increase (decrease) in cash (496,769) 1,144,996
Cash at beginning of year 1,271,443 126,447
----------- -----------
Cash at End of Year $ 774,674 $ 1,271,443
=========== ===========
See notes to consolidated financial statements.
F-5
</TABLE>
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 28, 1997 and December 29, 1996
NOTE A - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization: Harvest Restaurant Group, Inc. ("Harvest" or the "Company") is an
operator and developer of a quick service restaurant concept operated under the
name Harvest Rotisserie. The restaurants provide high quality, quick service
food featuring marinated oak-roasted rotisserie chicken with a variety of
homemade side dishes. At December 28, 1997, there were fourteen restaurants in
operation, consisting of three company-owned restaurants in San Antonio, Texas,
one company-owned restaurant in Corpus Christi, Texas, and ten franchised
restaurants located in four other states. During January and February of 1998,
the Company's area developers closed nine of the ten franchised restaurants and
the Company also closed its Corpus Christi restaurant.
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Fiscal Year: The Company has adopted a 52/53-week fiscal year that ends on the
last Sunday in December, and consists of thirteen four-week periods. The first
quarter consists of four periods and each of the remaining three quarters
consist of three periods, with the first, second and third quarters ending 16
weeks, 28 weeks and 40 weeks, respectively, into the fiscal year.
Cash and Cash Equivalents: The Company considers all highly liquid debt
instruments with an original maturity of three months or less to be cash
equivalents. At December 28, 1997, the Company had deposits of $291,791 in
financial institutions that exceeded the FDIC insured amount.
Inventories: Inventories are stated at the lower of cost (first-in, first-out
method) or market and consist primarily of restaurant food and paper.
Property and Equipment: Property and equipment are stated at cost. Depreciation
is provided using the straight-line method over the estimated useful lives or
applicable lease terms of the respective assets (generally five to seven years
for furniture, fixtures and equipment and 15 to 20 years for buildings and
leasehold improvements). Maintenance and repairs are charged to expense as
incurred, while improvements that increase the value of the property and extend
the useful lives are capitalized.
Intangible Property Rights: Intangible property rights acquired from an
unaffiliated corporation are stated at the original acquired cost and amortized
over the expected period to be benefited. Amortization expense of $97,925 and
$39,950 is included in the accompanying statements of operations for 1997 and
1996, respectively.
Long-Lived Assets: The Company periodically assesses the valuation of its
long-lived assets in light of projected operating results and economic
conditions. When factors indicate that the carrying amount of an asset may not
be recoverable, the Company estimates the future cash flows expected from the
use of such asset and its eventual disposition. If the sum of the undiscounted
future cash flows is less than the carrying amount of the asset, the Company
will recognize an impairment loss equal to the excess of the carrying amount
over the fair value of the asset.
Revenue Recognition: Revenue from Company-owned restaurants is recognized in the
period during which the related food and beverage products are sold. Royalties
are recognized in the period that the related franchise store revenue is
generated. Revenue from initial nonrefundable franchise and area development
fees is recognized when the franchise store is opened and all conditions
relating to the sale have been substantially performed or satisfied by the
Company.
Preopening Costs: Preopening costs, which consist primarily of salaries and
other direct expenses relating to the set up, initial stocking, training, and
general management activities incurred prior to the opening of new stores, are
charged to expense as incurred.
Advertising Costs: Advertising costs of $360,028 and $133,366 during 1997 and
1996, respectively, were charged to expense as incurred.
Federal Income Taxes: Deferred tax assets and liabilities are recognized for
temporary differences between the tax basis of assets and liabilities and their
reported amounts in the financial statements. A valuation allowance is provided
against net deferred tax assets when realization is uncertain.
F-6
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 28, 1997 and December 29, 1996
Loss Per Common Share: Loss per common share is presented in accordance with
SFAS No. 128 "Earnings per Share", and is computed by dividing net loss, less
dividends on preferred stock, by the weighted average number of shares
outstanding during each year. The effects of incremental shares issuable upon
the assumed exercise of stock options and warrants is not presented as the
results on loss per common share is antidilutive for both 1997 and 1996.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
NOTE B - UNCERTAINTIES
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. The Company has incurred operating losses
since inception, and as of December 28, 1997 had an accumulated deficit of
$10,817,623 and a working capital deficit of $713,637. In addition, during the
first quarter of 1998, ten of the Company's fourteen restaurants have closed all
of which raise doubts about the Company's ability to continue as a going
concern. In order to continue as a going concern, the Company will need to
obtain additional financing through debt or equity offerings to fund the
development of new restaurants and a franchising program until profitable
operations are achieved.
NOTE C - LONG-TERM DEBT
At December 28, 1997, the Company had a $200,000 note payable to a financial
institution. The note is collateralized by a $200,000 money market account,
bears interest at the rate of 6.50% and is payable in monthly installments of
interest only. The principal and accrued interest is due at the maturity date of
April 2, 1998.
At December 28, 1997 the Company has a $53,742 note payable to a financial
institution, which the Company had assumed payment responsibility for on behalf
of an unaffiliated entity in connection with obtaining the Corpus Christi
restaurant site. The note bears interest at 10.25% and is payable in monthly
installments of $1,394 including principal and interest, and matures in November
2001. Certain equipment, fixtures and equipment collateralize the note.
The Company also has a letter of credit outstanding at December 28, 1997 in the
amount of $100,000 issued in the favor of a landlord as security for the
Company's obligations under a real estate lease. The letter of credit is secured
by a $100,000 certificate of deposit.
The Company's weighted-average interest rate on it short-term borrowings, before
amortization of debt discount, was 7.42% in 1997 and 9.8% in 1996. After
considering amortization of debt discount in 1996, the weighted-average interest
rate was 50.6% in 1996.
F-7
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
NOTE D - SUPPLEMENTAL FINANCIAL STATEMENT DATA
Property and equipment consists of the following at December 28, 1997:
Land $ 160,000
Buildings and improvements 477,936
Furniture, fixtures and equipment 679,871
Leasehold improvements 975,261
-----------
2,293,068
Less accumulated depreciation (254,016)
-----------
Property and equipment, net $ 2,039,052
===========
Other accrued liabilities consist of the following at December 28, 1997:
Payroll and related liabilities $ 45,706
Reporting costs 59,755
Taxes, other than payroll and income taxes 50,999
-----------
Total other accrued liabilities $156,460
===========
NOTE E - OPERATING LEASES
The Company currently conducts the majority of its operations and maintains
administrative offices in leased facilities. The Company is also the primary
lessee under various leases for restaurants operated by the Company's
franchisees. See Note L. Lease terms generally are ten years with two or three
five-year renewal options. Most of the leases contain escalation clauses and
require payment of common area maintenance charges or taxes, insurance and other
expenses. The Company also leases certain equipment under non-cancelable
operating leases having terms expiring at various dates through 2002. Rental
expense under operating lease agreements, including common area maintenance
charges, was $427,048 and $120,262 for the years ended December 28, 1997 and
December 29, 1996, respectively.
Future minimum lease payments that are required under operating leases and
sublease proceeds that have initial or remaining non-cancelable lease terms in
excess of one year are as follows:
Minimum Sublease Net
Rental Rental Rental
Years Ending December: Payments Proceeds Payments
---------------------- -------- -------- --------
1998 $ 457,525 $ 54,135 $ 403,390
1999 432,673 54,135 378,538
2000 406,824 54,135 352,689
2001 397,610 54,135 343,475
2002 365,343 54,135 311,208
Thereafter 1,899,530 1,899,530
---------- ---------- ----------
Total future minimum lease payments $3,959,505 $ 270,675 $3,688,830
========== ========== ==========
F-8
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
NOTE F - FEDERAL INCOME TAXES
Deferred income taxes resulted from the following temporary differences and loss
carryforwards at December 28, 1997:
Deferred tax asset - loss carryforwards $ 10,900,000
============
Net deferred tax asset at expected rates $ 3,706,000
Less valuation allowance (3,706,000)
------------
Deferred tax asset allowed $ --
============
The Company has not recorded any income tax expense (benefit) since its
inception. The Company's tax operating loss carryforwards are available for
utilization against taxable income and expire in various amounts from 2008
through 2012.
NOTE G - STOCKHOLDERS' EQUITY
Initial Public Offering: In July 1996, the Company sold 1,000,000 shares of
common stock and 2,300,000 warrants to purchase common stock in an initial
public offering of its securities. The Company realized net proceeds of
$4,740,290 from the offering based upon the sale of the common stock at $5.50
per share and the warrants at $.125 per warrant.
Series A Preferred Stock: The Company has designated 3,000,000 shares out of a
total of 5,000,000 authorized shares of its $1.00 par value preferred stock as
Series A Redeemable Convertible Preferred Stock ("Series A Preferred Stock").
In June 1997, the Company sold 515,000 shares of Series A Preferred Stock and
1,723,400 warrants to purchase Series A Preferred Stock in a public offering.
The Company realized net proceeds of $4,375,436 from the sale of the Series A
Preferred Stock at the face amount of $10 per share and the warrants at $.10 per
warrant.
Dividends on the Series A Preferred Stock are cumulative and payable quarterly
in arrears at a quarterly rate of $.30 per share, representing a yield of 12%
per annum. Dividends may be paid in either cash or an equivalent value of common
stock. The Series A Preferred Stock has no voting rights and has a liquidation
preference of $10 per share.
The Series A Preferred Stock is convertible at the option of the holder at any
time after March 11, 1998, into shares of the Company's common stock. The
initial conversion rate is 2.7 shares of common stock for each share of Series A
Preferred Stock, subject to adjustment in certain events. The Series A Preferred
Stock will automatically convert into the Company's common stock at any time
after March 11, 1998, if the closing price of the Series A Preferred Stock
exceeds $20 per share for ten consecutive days. The Series A Preferred Stock may
also be redeemed at the option of the Company at any time after March 11, 1998,
upon 30 days written notice at 110% of the average bid price for the twenty
trading days prior to the redemption date. The Company has the option to pay the
redemption price in either cash or common stock.
Series B Preferred Stock: The Company has designated 1,000 shares of its
authorized preferred stock as Series B Convertible Preferred Stock ("Series B
Preferred Stock"). In December 1997, the Company sold 150 shares of Series B
Preferred Stock in a private transaction. The Company realized net proceeds of
$1,340,000 from the sale of the Series B Preferred Stock at a face amount of
$10,000 per share.
The Series B Preferred Stock is convertible at the option of the holder into
either the Company's Series A Preferred Stock or the Company's common stock. The
conversion rate per share is equal to $10,000 divided by the lower of (a) $11.00
or (b) 80% of the average bid price of the Series A Preferred or common stock at
the time of conversion. However, in order to convert into common stock, the
price of the common stock must be above $3.00 per share. The Series B preferred
stock accrue dividends at the rate of 7% annually, payable in cash or stock at
the time of conversion. The Series B Preferred Stock is junior to the Series A
Preferred Stock, has no voting rights and has a liquidation preference of
$10,000 per share.
F-9
<PAGE>
<TABLE>
<CAPTION>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
Share Amounts Issued and Outstanding: The Company has issued and outstanding the
following preferred and common stock:
Series A Series B
Preferred Preferred Common
Stock Stock Stock
----- ----- -----
<S> <C> <C> <C>
Shares outstanding at January 1, 1996 -- -- 990,000
Issuance of common stock in initial public offering 1,000,000
Other issuances of common stock 65,000
Common stock no longer subject to rescission 57,750
--------- --------- ---------
Shares outstanding at December 29, 1996 -- -- 2,112,750
Issuance of common stock for exercise of warrants 256,280
Issuance of preferred stock in a public offering 515,000
Issuance of preferred stock in private placement 150
Preferred stock dividend paid with common stock 329,600
--------- --------- ---------
Shares outstanding at December 28, 1997 515,000 150 2,698,630
========= ========= =========
Loss Per Common Share: A reconciliation of the calculation of the basic loss per
common share for the years 1997 and 1996 is as follows:
1997 1996
----------- -----------
Net loss $(7,240,827) $(2,011,254)
Preferred stock dividends paid in common stock (339,900)
----------- -----------
Net loss applicable to common shareholders $(7,580,727) $(2,011,254)
=========== ===========
Weighted average common shares outstanding 2,380,547 1,553,824
=========== ===========
Basic loss per common share $ (3.18) $ (1.29)
=========== ===========
Stock Option Plan: The Company's 1994 Stock Option Plan provides for the
granting of either incentive stock options or non-qualified stock options.
Options can be issued to officers, employees, directors and outside consultants;
however, incentive stock options are issuable only to eligible officers and
employees. The Company has reserved a total of 500,000 shares of common stock
for the plan. All options granted under the plan during 1997 and 1996 have been
at or above fair market value at the date of grant and vest over various periods
beginning in 1997 through 2001.
On September 3, 1997 and February 5, 1998, the Board of Directors authorized a
repricing of the option exercise price for all outstanding options granted under
the Plan to $2.25 and $1.00, respectively, with no change in the vesting
periods. The revised exercise prices represented approximately 150% and 200%,
respectively, of the fair market value of the stock at the date of the
repricing.
The Company has adopted the disclosure-only provisions of SFAS No. 123. Pro
forma information regarding net income and earnings per share is required by
SFAS No. 123, which also requires that the information be determined as if the
Company has accounted for its employee stock options granted subsequent to
December 29, 1996, under the fair value method of that Statement.
F-10
</TABLE>
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
The fair value of options granted is estimated using the Black-Scholes option
pricing model with the following weighted average assumptions at December 28,
1997 and December 29, 1996:
1997 1996
-------- -------
Expected volatility 93% 47%
Risk-free interest rate 6.6% 6.5%
Expected lives 3 years 4 years
Dividend yield none none
The Black-Scholes option valuation model was developed for use in estimating the
fair value of trade options that have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including, the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the vesting periods. The Company's pro forma
information is as follows for the years 1997 and 1996:
1997 1996
------------- -------------
Pro forma net loss $ (7,323,827) $ (2,082,678)
Pro forma net loss per common share (3.22) (1.34)
<TABLE>
<CAPTION>
A summary of the activity of the Company's stock option plan is presented below:
1997 1996
------------------------------ -------------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding options at beginning of year 206,000 $ 5.94 80,000 $ 2.50
Granted 240,000 2.80 206,000 5.94
Exercised -- -- -- --
Forfeited -- -- (80,000) 2.50
-------- --------
Outstanding options at end of year 446,000 $ 4.25 206,000 $ 5.94
======== ========
Options exercisable at year end 196,375 85,000
======== ==========
Weighted average fair value of
options granted during the year $ 2.80 $ 5.94
========== ==========
F-11
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
The following table summarizes information about the options outstanding at
December 28, 1997, after consideration of the repricing on February 5, 1998:
Options Outstanding Options Exercisable
------------------------------------------------------ -----------------------------
Weighted-Average
Number Remaining Weighted-Average Number Weighted-Average
Exercise Price Outstanding Contractual Life Exercise Price Exercisable Exercise Price
-------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.00 446,000 3.3 years $ 1.00 196,375 $ 1.00
Warrants: The following is a summary of warrants outstanding at December 28, 1997:
Warrants/ Exercise
Issue Date Purpose Options Price Expiration
- ---------- ------- ------- ----- ----------
Common stock warrants:
July 1996 Initial public offering 2,300,000 4.00 July 9, 2001
July 1996 Initial public offering 100,000 6.60 July 9, 2001
July 1996 Initial public offering 200,000 4.15 July 9, 2001
----------
Outstanding at December 28, 1997 2,600,000
=========
Series A Preferred Stock warrants:
June 1997 Public offering 1,723,400 10.50 June 11, 2002
June 1997 Public offering 50,000 16.00 June 11, 2002
June 1997 Public offering 150,000 10.63 June 11, 2002
----------
Outstanding at December 28, 1997 1,923,400
=========
NOTE H - AREA DEVELOPER FINANCING AND WRITE-OFF OF NOTES RECEIVABLE
On June 25, 1997, the Company completed the purchase of certain assets of eight
Kenny Rogers Roasters restaurants located in Florida, Indiana, and North
Carolina from Roasters Corp., a Florida Corporation. The purchase price included
$1,050,000 in cash and the assumption of certain liabilities and lease
obligations. The acquisition was accounted for as a purchase, and accordingly,
the purchase price, including related acquisition expenses of $71,405, was
allocated to identified assets and liabilities, with no excess of purchase price
over the net assets acquired. Effective concurrent with the acquisition, the
Company resold these assets to three area developers, each majority owned and
controlled by the same individual, in exchange for a note receivable and the
assignment of the assumed liabilities by the area developers. The Company
realized no gain or loss on the resale of the properties. The Company
subsequently entered into one additional area development agreement in
California. The combined total of the agreements provided for the development of
up to 40 franchised Harvest Rotisserie restaurants over a two to three year
period in Florida, Indiana, North Carolina, and California.
In addition to providing the financing for the purchase of the acquired Roasters
properties, the Company provided financing for the costs to renovate and reopen
the properties as Harvest Rotisserie restaurants. The Company also financed a
portion of the area developers initial working capital needs. The loans were
made pursuant to a convertible secured loan agreement which provided for a two
to three year draw period up to the maximum amount as set in the loan
F-12
</TABLE>
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
agreements. During the draw period, interest only is payable to the Company.
Upon expiration of the draw period, the loan converts to a ten year amortizing
loan with interest at prime plus 4% and a balloon payment after the fifth year.
The loans are secured by a pledge of substantially all of the assets of the area
developer and of all the outstanding stock held by the owners of the area
developer. The loan agreement also provides the Company an option to convert all
or any part of the loan amount at any time after the draw period into equity of
the area developer.
Ten franchised restaurants were opened in 1997; however in the first quarter of
1998, area developers have closed all nine of the franchised restaurants located
in Florida, Indiana, and North Carolina. Accordingly, the Company believes that
all of the area developer loans are impaired and has recorded a write-off of the
area developer loans totaling $3,387,541 as of December 28, 1997. The entire
amount of the area developer loans were written off, as the Company does not
expect to recover any amounts from the area developers. The costs expected to be
incurred with respect to the Company's guarantee of the long-term real estate
lease agreements on the franchised restaurants is discussed in Note L -
Contingencies.
Total interest income for 1997 recognized on the impaired loans was $65,059,
which is based on the actual amounts collected. Interest income is not accrued
on loans considered impaired. The total interest income the Company would have
earned based on the contractual terms of the loans was $170,191.
NOTE I - RELATED PARTY TRANSACTIONS
On August 10, 1995, the Company entered into a five year employment agreement
with its Chairman and Chief Executive Officer. Annual compensation is fixed at
the larger of $75,000 or 20% of all franchise and area development fees paid to
the Company, together with 5% of all royalty fees received by the Company under
any franchise agreements and area development agreements executed during the
Chairman's employment. In September 1996, the employment agreement was amended
to increase his salary from $75,000 to $90,000 per year.
During 1996, the Company paid its Chairman and Chief Executive Officer $29,800
for certain furniture and fixtures used in the operations of the Company.
Pursuant to Statement of Financial Accounting Standards No. 57. "Related Party
Disclosures" all the Company financed area developers may be deemed to be
related parties as a result of the lending and franchise relationships with the
area developers. No Company officer, director or members of their families have
any direct or indirect interest with any of the Company's area developers.
Franchise fees earned from area developers in 1997 was $400,000, and total
interest income received from the area developers in 1997 was $65,059. During
1997, the Company loaned $3,381,255 to its area developers to finance the
purchase, development and operation of certain restaurant properties.
NOTE J - SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
1997 1996
-------- --------
Supplemental disclosure of cash flow information:
Interest paid in cash $ 18,918 $139,423
Income taxes paid in cash -- --
Supplemental disclosure of noncash investing and financing activities:
Assumption of note payable for assets $ 65,000 $ --
Payment of preferred stock dividends in common stock 339,900 --
NOTE K - FAIR VALUE OF FINANCIAL INSTRUMENTS
The only financial instruments of the Company at December 28,1997, are cash
equivalents and notes payable. The carrying amount of the financial instruments
approximate fair value.
F-13
<PAGE>
Harvest Restaurant Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements-Continued
December 28, 1997 and December 29, 1996
NOTE L - CONTINGENCIES
As discussed in Note H, nine of the Company's ten franchised restaurants opened
in 1997 were subsequently closed in the first quarter of 1998. In addition, one
Company-owned restaurant was closed, and development plans were ceased at four
other locations which were to be developed as Company-owned restaurants in San
Antonio. The Company had entered into long-term real estate leases on the
Company-owned locations, and guaranteed similar leases for the franchised
locations, as well as guaranteeing certain promissory notes connected with three
of the franchised locations.
Subsequent to the closing of the restaurants and ceasing of development efforts
at the other locations, the Company has contacted each of the lessors and
lenders in order to obtain settlement agreements on the related obligations. The
Company generally has been successful in reaching settlement agreements. The
Company is also a defendant in three lawsuits filed in federal court demanding
full payment plus court costs associated with certain promissory notes
associated with the acquisition of the Kenny Rogers Roaster's restaurants in
Florida.
The Company has evaluated its potential costs for the full settlement of each of
the long-term real estate leases on the franchise restaurants, as well as the
assumed promissory notes, and has accrued $700,000 at December 28, 1997 as a
real estate disposition liability with a relating charge to operations.
The Company has also accrued $100,000 at December 28, 1997 as a real estate
disposition liability and recognized a total charge of $484,656 related to the
impairment and loss on the abandonment of the four other Company-owned
restaurant locations as well as the closing of one Company-owned restaurant. The
charge to operations includes the full impairment of the leasehold property and
equipment, and the recognition of a loss on disposition on the restaurant
location and applicable rent expense.
Management believes the accrued real estate disposition liability of $800,000 at
December 28, 1997 will be sufficient to settle all obligations related to the
closing of franchised locations, Company-owned location and the restaurant sites
under development, and anticipates that settlement agreements will be reached
with all respective parties during 1998.
NOTE M - SUBSEQUENT EVENTS
On March 24 1998, the Company entered into two nonbinding agreements for an
exchange of common stock of the Company for the all issued and outstanding
common stock of Surf City Squeeze Acquisition Corp. II ("Surf City"), and SGI,
Inc. ("SGI"). The agreement also requires the payment of $1,000,000 to the
shareholders of Surf City. The completion of the acquisitions is subject to a
feasibility period that expires no later than April 17, 1998. The completion of
the acquisitions is also subject to the Company's ability to raise $2,000,000 of
new financing and obtaining shareholder approval for the acquisition. Upon
completion, the Company's current shareholders would retain approximately a 25%
interest of the Company on a post acquisition basis.
F-14
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
The following table sets forth certain information regarding the Company's
executive officers and directors:
<TABLE>
<CAPTION>
Officer or
Name Age Office Director Since
- ---- --- ------ --------------
<S> <C> <C> <C>
William J. Gallagher(1)(2) 58 Chairman of the Board of June 1993
Directors and Chief
Executive Officer
Larry F. Harris 39 President, Chief Operating October 1996
Officer and Director
Sam Bell Steves Rosser 34 Vice President - Development June 1993
and Director
Joseph Fazzone 37 Chief Financial Officer January 1997
Michael M. Hogan(1)(2) 49 Director August 1996
Theodore M. Heesch(1)(2) 60 Director August 1996
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Directors hold office for a period of one year from their election at the annual
meeting of stockholders and until their successors are duly elected and
qualified. Officers of the Company are elected by, and serve at the discretion
of, the Board of Directors. None of the above individuals has any family
relationship with any other Director of Executive Officer expect Mr. Rosser who
is Mr. Gallagher's son-in-law. Directors not employed by the Company receive
$750 each for attending Board of Directors' meetings and are reimbursed for
out-of-pocket expenses.
25
</TABLE>
<PAGE>
Background
The following is a summary of the business experience of each executive officer
and director of the Company for at least the last five years:
William J. Gallagher is the Chairman and Chief Executive Officer of the
Company since December 1996 and he devotes approximately 90% of his time in this
capacity. In addition, he is President of Jagbanc Capital Ltd., a merchant bank
headquartered in San Antonio, Texas. From February 1991 to September 1994, Mr.
Gallagher was the founder and then Chairman and CEO of WaterMarc Food
Management, Inc., which operated 32 Marcos Mexican restaurants, Billy Blues
Barbecue Grills, Longhorn Cafes and BBQ Pete's restaurants. In addition,
WaterMarc produced and marketed Chris Pitts and Billy Blues Bar-B-Q sauce. From
February 1990 until September 1992, Mr. Gallagher was a Vice President at Kemper
Securities. Prior to 1990, Mr. Gallagher founded or co-founded several companies
including Sunny's National Stores (a 150-unit convenience store chain in Texas),
American Drive-Inn (an 18-unit drive-in restaurant chain in Houston, Texas) and
the Guadeloupe Valley Winery in New Braunfels, Texas. Mr. Gallagher also served
as a director of Cluckers Wood Roasted Chicken, Inc., the developer and
franchiser of the "Cluckers" restaurant concept, from June 1993 to November
1994.
Larry F. Harris joined the Company in October 1996 as Executive Vice
President and Chief Operating Officer and was appointed President in December
1996. From December 1994 to September 1996 he was Co-President and Chief
Operating Officer for a Monterey Pasta Company franchisee. From June 1994 to
December 1994, he was Director of Operations for a Boston Market area developer
and from 1984 to 1992, he was employed by PepsiCo's Pizza Hut, Inc., division in
various senior management roles, including National Director of Operations for
PepsiCo Foods International Mexico.
Sam Bell Steves Rosser joined the Company in June 1993, as its President
and assumed the duties of Vice President-Development in March 1995. He was
employed by Olive Garden restaurants as a member of the store operating staff
from March 1992 until May 1993. From October 1988 until December 1991, he was
employed by Dwight L. Lieb, a real estate developer, as a commercial property
manager and leasing agent.
Joseph Fazzone joined the Company in January 1997 as Chief Financial
Officer. He has provided accounting and financial consulting services in San
Antonio, Texas as a sole practitioner since November 1994. From December 1991 to
November 1994, he served as Chief Financial Officer of WaterMarc Food
Management, Inc., a restaurant operator and franchiser founded by Mr. Gallagher.
From 1990 to 1991, he served as Corporate Controller of TI-IN Network, Inc., a
San Antonio based educational satellite broadcasting network. From 1989 to 1990,
he served as Manager-Corporate Planning and Financial Analysis of Intelogic
Trace, Inc., a nationwide computer service provider. From 1984 to 1989, Mr.
Fazzone served as an Audit Manager with the San Antonio office of Ernst & Young.
Mr. Fazzone devotes approximately 90% of his time to the Company's affairs. Mr.
Fazzone is a certified public accountant, having received a B.B.A. degree in
accounting from Southwest Texas State University and an M.B.A. degree from the
University of Texas at San Antonio.
26
<PAGE>
Michael M. Hogan received his B.B.A. degree in accounting from the
University of Texas at Austin in 1972, and has been engaged in the private
practice of accounting since 1975. His practice emphasizes restaurant formation,
operation and financing. From 1987 to 1989, he was a co-founder and Chief
Financial Officer of the 18-unit American Drive-Inn restaurants in Houston,
Texas, and in 1990 was one of the founders of two Tejas Grill restaurants in
Austin, Texas.
Theodore M. Heesch has been a registered architect specializing in
restaurant and hotel design since 1967. From 1981 to 1987, he was employed by
McFaddin Kendrick, Inc., an entertainment club developer, as Executive Vice
President. In 1988, Mr. Heesch formed TMHI to offer consulting services to the
hospitality industry, specializing in the design and development of food and
beverage facilities. In June 1994, Mr. Heesch became Senior Vice President of
Development for McFaddin Partners, a restaurant developer.
Significant Employee
Paul C. LaMotta joined the Company in September 1997 as Vice President of
Operations. Mr. LaMotta has over 16 years experience in the multi-unit
restaurant business. From October 1994 to September 1997 he was Vice President -
Operations for BC Superior, a Boston Market area developer, with responsibility
for over 30 stores in the southeast U.S. Prior to September 1994, he held
operations and franchise management positions with Wendy's from February 1994 to
September 1994; Bonanza from July 1992 to February 1994 and Sbarro's May 1986 to
May 1992.
27
<PAGE>
<TABLE>
<CAPTION>
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth certain information concerning compensation for
the past three years to the Chief Executive Officer and to other executive
officers who received compensation in excess of $100,000 during the year ended
December 28, 1997.
Summary Compensation Table
Annual Compensation
------------------------------------
Other Long-term
Annual Compensation All
Name and Compen- Awards Other
Principal Position Year Salary Bonus sation Options Compensation
- ------------------ ---- ------ ----- ------ ------- ------------
<S> <C> <C> <C> <C> <C> <C>
William J. Gallagher 1997 $89,519 $ 37,156 $17,663 $0 $0
Chairman and 1996 79,209 0 3,640 0 0
Chief Executive 1995 59,211 0 0 0 0
Officer
Larry F. Harris 1997 $87,692 $ 25,000 $ 0 $0 $0
President and 1996 23,158 0 0 0 0
Chief Operating 1995 0 0 0 0 0
Officer
In August 1995, the Company entered into a five-year employment agreement with
William J. Gallagher, its Chairman, to act as its franchise sales director based
upon a salary equal to the greater of $75,000 per year or 20% of all franchise
and area development fees paid to the Company, together with 5% of all royalty
fees received by the Company under any franchise agreements and area development
agreements which were executed during the time of Mr. Gallagher's employment
agreement. Mr. Gallagher was appointed Chief Executive Officer of the Company in
December 1996 and continues to be responsible for franchise and area development
sales. In September 1996, Mr. Gallagher's employment agreement was amended to
increase his base salary from $75,000 to $90,000 per year. Mr. Gallagher's
employment agreement also provides for the payment of other annual compensation
in the form of an auto allowance and life insurance benefits, which amounted to
$17,663 in 1997.
Larry F. Harris, the Company's President, is paid a base salary of $90,000 per
year and is entitled to incentive bonuses aggregating up to an additional
$90,000 computed under a formula based upon the number of Company-owned
restaurants in operation and gross revenues in connection with the restaurants.
Stock Option Plan
In July 1994, the Company adopted its 1994 Stock Option Plan (the "Plan"), which
provides for the grant to employees, officers, directors and consultants of
options to purchase shares of Common Stock, consisting of both "incentive stock
options" within the meaning of Section 422A of the United States Internal
Revenue Code of 1986 (the "Code") and "non-qualified" options. Incentive stock
options are issuable only to employees of the Company, while non-qualified
options may be issued to non-employee directors, consultants and others, as well
as to employees of the Company. In July 1997, the number of shares of Common
Stock reserved to be issued under the Plan was increase from 250,000 to 500,000
shares.
28
</TABLE>
<PAGE>
The Plan is administered by the Board of Directors, which determines those
individuals who shall receive options, the time period during which the options
may be partially or fully exercised, the number of shares of Common Stock that
may be purchased under each option and the option price.
The per share exercise price of the Common Stock subject to an incentive stock
option may not be less than the fair market value of the Common Stock on the
date the option is granted. The per share exercise price of the Common Stock
subject to a non-qualified option is established by the Board of Directors. The
aggregate fair market value (determined as of the date the option is granted) of
the Common Stock that any employee may purchase in any calendar year pursuant to
the exercise of incentive stock options may not exceed $100,000. No person who
owns, directly or indirectly, at the time of the granting of an incentive stock
option more than 10% of the total combined voting power of all classes of stock
of the Company is eligible to receive any incentive stock options under the Plan
unless the option price is at least 110% of the fair market value of the Common
Stock subject to the option, determined on the date of grant. Non-qualified
options are not subject to these limitations.
No incentive stock option may be transferred by an optionee other than by will
or the laws of descent and distribution, and during the lifetime of an optionee,
the option will be exercisable only by him or her. In the event of termination
of employment other than by death or disability, the optionee will have three
months after such termination during which he or she can exercise the option.
Upon termination of employment of an optionee by reason of death or permanent
total disability, his or her option remains exercisable for one year thereafter
to the extent it was exercisable on the date of such termination. No similar
limitation applies to nonqualified options.
Options under the Plan must be granted within ten years from the effective date
of the Plan. The incentive stock options granted under the Plan cannot be
exercised more than ten years from the date of grant except that incentive stock
options issued to 10% or greater stockholders are limited to five-year terms.
All options granted under the Plan provide for the payment of the exercise price
in cash or by delivery to the Company of shares of Common Stock already owned by
the optionee having a fair market value equal to the exercise price of the
options being exercised, or by a combination of such methods of payment.
Therefore, an optionee may be able to tender shares of Common Stock to purchase
additional shares of Common Stock and may theoretically exercise all of their
stock options with no additional investment other than their original shares.
Any unexercised options that expire or that terminate upon an optionee ceasing
to be an officer, director or an employee of the Company become available again
for issuance.
On September 3, 1997 and February 5, 1998, the Board of Directors authorized a
repricing of the option exercise price for all outstanding options granted under
the Plan to $2.25 and $1.00, respectively, with no change in the vesting
periods. The revised exercise prices represented approximately 150% and 200% ,
respectively, of the fair market value of the stock at the date of the
29
<PAGE>
repricing. As of March 27, 1998, options to purchase 483,000 shares have been
granted under the Plan, but no options have been exercised to date. A total of
420,000 options have been issued to the Company's executive officers and
directors, as follows.
Number of Exercise
Name Options Granted Price Expiration Date
---- --------------- ----- ---------------
William J. Gallagher 140,000 $1.00 September 2001
Larry F. Harris 100,000 1.00 September 2001
Sam Bell Steves Rosser 40,000 1.00 September 2002
Joseph Fazzone 80,000 1.00 January 2002
Theodore M. Heesch 30,000 1.00 September 2001
Michael M. Hogan 30,000 1.00 September 2001
--------
Total 420,000
========
30
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 27, 1998
concerning stock ownership of the Company's Common Stock by all persons known to
the Company to own beneficially 5% or more of the outstanding shares of Common
Stock, by each director and by all directors and officers as a group.
Except as otherwise noted, the persons named in the table own the shares
beneficially and of record and have sole voting and investment power with
respect to all shares of Common Stock shown as owned by them, subject to
community property laws, where applicable. Each stockholder's address is in care
of the Company at 1250 N.E. Loop 410, Suite 335, San Antonio, Texas 78209. The
table also reflects all shares of Common Stock, which each individual has the
right to acquire within 60 days from the date hereof upon exercise of stock
options, or common stock purchase warrants.
Number of
Shares of
Common
Stock Owned Percent of
of Record Common Stock
Name and Beneficially Owned
---- ---------------- -----
William J. Gallagher (l) (2) 186,667 6.6%
Larry F. Harris (3) 100,000 3.6%
Sam Bell Steves Rosser (4) 106,666 3.9%
Joseph Fazzone (5) 80,000 2.9%
Michael M. Hogan (6) 30,000 1.1%
Theodore M. Heesch (6) 30,000 1.1%
All officers and directors
as a group (6 persons) (2)(3)(4) 3,119,030 17.1%
(5)(6)
(1) Messrs. Gallagher and Rosser may be deemed to be "promoters" and "founders"
of the Company as those terms are defined under the Securities Act of 1933,
as amended, and the rules and regulations promulgated thereunder.
(2) Includes 140,000 shares that Mr. Gallagher may purchase pursuant to
options.
(3) Includes 100,000 shares that Mr. Harris may purchase pursuant to options.
(4) Includes 40,000 shares that Mr. Rosser may purchase pursuant to options.
(5) Includes 50,000 shares that Mr. Fazzone may purchase pursuant to options
(6) Includes 30,000 shares that Mr. Hogan, and Mr. Heesch may purchase pursuant
to options.
31
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In March 1995, the Company executed an agreement with Bruce T. McGill, then a
director of the Company, to develop up to ten Cluckers restaurants in Singapore
over a 20-year period. Mr. McGill agreed to pay a $50,000 license fee (including
$20,000 in cash and a promissory note for $30,000), a 5% royalty and a 4%
advertising fee on the gross revenues generated from the Cluckers restaurants.
The license was converted to apply to Harvest Rotisserie restaurants in March
1996. In October 1996, the Company refunded $10,000 of the deposit, cancelled
the $30,000 promissory note and reduced the number of restaurants under the
agreement from ten to two restaurants. Under the agreement, Mr. McGill also had
the right of first refusal until March 30, 1997 to match the terms of any
license the Company agrees to sell to develop Harvest Rotisserie restaurants in
Malaysia. No restaurants have yet been developed under the agreement.
In August 1995, the Company entered into an employment agreement with Mr.
Gallagher, the Chairman and Chief Executive Officer of the Company that was
subsequently amended in September 1996.
During 1996, the Company paid Mr. Gallagher $29,800 for the purchase of certain
furniture and fixtures used in the operation of the Company.
32
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM -K
- ----------------------------------------
(a.) Exhibits:
Exhibit No. Title
- ----------- -----
2.01 Articles of Incorporation of the Registrant, as amended(l)
2.02 Bylaws of the Registrant(l)
2.03 Articles of Incorporation of Harvest Restaurants, Inc.(l)
2.04 Bylaws of Harvest Restaurants, Inc.(l)
2.05 Articles of Incorporation, of Cluckers Restaurants, Inc.(l)
2.06 Bylaws of Cluckers Restaurants, Inc.(l)
10.01 Incentive Stock Option Plan(l)
10.02 Settlement Agreement with Cluckers Wood Roasted Chicken, Inc.(l)
10.12 Uniform Franchise Offering Circular (Cluckers) (1)
10.13 Form of Franchise Agreement (Cluckers)(1)
10.14 Form of Area Development Agreement (Cluckers)(1)
10.15 Employment Agreement with Mr. Gallagher(l)
10.16 Employment Agreement with Mr. Gibbs (l)
10.17 Area Development Agreement with Mr. McGill(l)
10.20 Uniform Franchise Offering Circular (Harvest Rotisserie)(1)
10.21 Form of Area Development Agreement (Harvest Rotisserie)(1)
10.22 Form of Franchise Agreement (Harvest Rotisserie)(1)
10.23 License Agreement(l)
10.24 License Agreement(l)
33
<PAGE>
10.25 Amendment to Area Development Agreement with Mr. McGill (2)
10.27 Ground Lease (Harvest Rotisserie - Dezavala) (2)
10.28 Ground Lease (Harvest Rotisserie - Herzberg) (2)
10-29 Consulting Agreement with the Representative (2)
10.30 Building Lease (Harvest Rotisserie - Corpus Christi) (2)
10.31 Building Lease (Harvest Rotisserie - San Antonio) (2)
10.32 Agreement with Roasters Corp. (2)
10.33 Agreement with Pollo Operators, Inc. (2)
10.34 Building Lease (Harvest Rotisserie - 11730 West Avenue) (2)
10.35 Land Contract (St. Petersburg) (2)
10.37 Subscription Documents relative to purchase of Series B Preferred
Stock (3)
10.38 Form of Convertible Secured Note issued to area developers
10.39 Form of Revolving Promissory Note issued to area developers
10.40 Share Exchange Agreement with Surf City Acquisition Corp II.
10.41 Share Exchange Agreement with Sports Group International, Inc.
27.1 Financial Data Schedule as of December 28, 1997
(1) Incorporated by reference to the Registrant's definitive Registration
Statement on Form SB-2, file No. 33-95796 declared effective on July 9,
1996.
(2) Incorporated by reference to the Registrant's definitive Registration
Statement on Form SB-2, file no. 333-21067 declared effective on June 11,
1997.
(3) Incorporated by reference to the Registrant's definitive Registration
Statement on Form S-3, file no. 333-45189 declared effective on February
17, 1998.
(B) Reports on Form 8-K
The Company filed a Form 8-K during the fourth quarter of 1997 dated December
26, 1997. The Form 8-K reported under Item 5. (Other Events) the completion of
the sale of 150 shares of the Company's $1.00 par value Series B Preferred Stock
in a private transaction for gross proceeds of $1,500,000.
34
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant has
duly caused this Report to be signed on its behalf by the undersigned, thereunto
duly authorized, in San Antonio,Texas, on April 13, 1998.
HARVEST RESTAURANT GROUP, INC.
By: /s/ William J. Gallagher
----------------------------------
William J. Gallagher
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Report has been signed below by the following persons on the dates indicated.
Signature Title Date
- --------- ----- ----
/s/ William J. Gallagher Chairman of the Board of April 13, 1998
William J. Gallagher Directors and Chief Executive
Officer
/s/ Larry F. Harris President and Director April 13, 1998
Larry F. Harris
/s/ Sam Bell Steves Rosser Vice President - Development, April 13, l998
Sam Bell Steves Rosser and Director
/s/ Joseph Fazzone Chief Financial officer April 13, 1998
Joseph Fazzone and Principal Accounting
Officer
/s/ Michael M. Hogan Director April 13, 1998
Michael M. Hogan
/s/ Theodore M. Heesch Director April 13, 1998
Theodore M. Heesch
35
CONVERTIBLE SECURED NOTE
$________________________ Date:______________
1. FOR VALUE RECEIVED, ___________________, a ________ corporation (the
"Company"), promises to pay to the order of Harvest Restaurants, Inc., a Texas
corporation ("Harvest"), pursuant to the Secured Loan Agreement (as hereinafter
defined), at such place as Harvest may from time to time designate in writing,
in lawful money of the United States of America and in immediately available
funds, the principal sum of ___________________Dollars ($____________) and any
interest thereon or, if less, the aggregate unpaid amount of the Loan made
pursuant to Section 1.1 of the Loan Agreement and any interest thereon.
2. This Note evidences the Loan made under and is executed and delivered
pursuant to a Secured Loan Agreement dated of even date herewith between the
Company and Harvest (the "Secured Loan Agreement"), to which reference is hereby
made for a statement of the terms and conditions under which this Note may be
repaid and accelerated and for a description of the collateral and security
securing this Note. Capitalized terms not otherwise defined herein shall have
the meanings described to them in the Secured Loan Agreement.
3. Interest shall accrue on the aggregate outstanding principal balance of
the Loan, for the period commencing on the date an Advance is made until the
Loan is paid in full, at a per annum rate equal to the rate announced by the
Frost National Bank, or its successor in interest (the "Bank") from time to time
as its "Prime Rate" in effect at its office in San Antonio, Texas, plus four
percent (4%). The interest rate shall be adjusted, from time to time, on the
same day on which the Bank adjusts its "Prime Rate." As of the date of this
Agreement, the Bank's Prime Rate is _____%. Interest on the outstanding
principal amount of the Loan shall be payable on the dates set forth herein and
at maturity (whether at stated maturity, by acceleration or otherwise). Interest
shall be computed on the basis of a 360-day year and the actual number of days
elapsed.
4. From the date of the first Advance to and through the Draw Loan
Termination Date,______________, the Company shall pay to Harvest interest on
the outstanding principal balance of the Loan on the first day of each Retail
Period (hereinafter defined), commencing on the first day of the Retail Period
immediately following the Retail Period in which the Company initially draws on
the Loan under this Agreement.
5. From the close of business on the Draw Loan Termination Date, the
outstanding principal amount of the Loan and all accrued interest thereon shall
be payable as follows: the principal balance of the Loan shall be payable to
Harvest in sixty-five (65) installments of principal (the amount of each
periodic principal installment shall be determined by dividing the loan balance
by one hundred thirty [130]) plus accrued interest, on the first day of each of
Harvest's thirteen (13) consecutive four-week accounting periods used for
accounting purposes (each such four- week period shall be referred to herein as
a "Retail Period"), commencing on the first day of the Retail Period immediately
following the Draw Loan Termination Date and continuing thereafter for
sixty-five (65) Retail Periods, when the entire remaining principal balance of
the Loan and all interest accrued thereon shall be due and payable.
CONVERTIBLE SECURED NOTE PAGE 1
<PAGE>
6. Any principal payment due under this Note not paid when due, whether at
stated maturity, by notice of repayment, by acceleration or otherwise, shall, to
the extent permitted by applicable law, thereafter bear interest at the maximum
rate allowed by law until such unpaid amount has been paid in full (whether
before or after judgment).
7. This Note may not be prepaid at any time without the prior written
consent of Harvest, which consent may be withheld in its sole discretion. All
payments made hereunder shall be applied first to interest and then to
outstanding principal.
8. If payment hereunder becomes due and payable on a Saturday, Sunday or
legal holiday, the due date thereof shall be extended to the next succeeding
business day.
9. Harvest, in its sole discretion and without obligation on Harvest to do
so, may advance and pay sums on behalf and for the benefit of the Company for
costs necessary for the protection and preservation of the collateral (as
described in the Security Agreement of even date herewith executed by the
Company for the benefit of Harvest) securing this Note and other costs that may
be appropriate, in Harvest's sole discretion, including but not limited to,
insurance premiums, ad valorem taxes, and attorneys' fees. Any sums which may be
so paid out by Harvest including all sums paid for insurance premiums, or costs,
expenses, and attorneys' fees paid in any suit affecting the collateral when
necessary to protect the lien hereof shall bear interest from the dates of such
payments at the interest rate applied to the matured and past due principal
balance of this Note and shall be paid by Company to Harvest upon demand, at the
same place at which this Note is payable, and shall be deemed a part of the debt
and recoverable as such in all aspects.
10. Any assumption by any other person, partnership, corporation, limited
liability company, organization or any other entity of the obligations of the
Company shall only be effective upon the written consent of Harvest and any such
assumption with Harvest's consent shall not release the liability of the Company
for payment of the Note unless expressly released by Harvest.
11. Payment of this Note is secured by a Security Agreement of even date
executed by the Company covering the rights and properties more fully described
therein.
12. Company and all sureties, endorsers, guarantors and any other party now
or hereafter liable for the payment of this Note in whole or in party, hereby
severally: (i) expressly waive all demands for payment, presentations for
payment, notices of intention to accelerate maturity, notices of acceleration of
maturity, protests, notices of protest, diligence, notice of dishonor and all of
the notice, filing of suit and diligence in collecting this Note or enforcing
any of the security herefor, (ii) agree to any substitution, subordination,
exchange or release of any such security or the release of any party primarily
or secondarily liable hereon, (iii) agree that Harvest shall not be required to
first institute suit or exhaust its remedies hereon against the Company or other
liable or to become liable hereon or to enforce its rights against them or any
security herefor, and (iv) consent to any extension or postponement of time of
payment of this Note and to any other indulgence with respect hereto without
notice to any of them.
CONVERTIBLE SECURED NOTE PAGE 2
<PAGE>
13. In the event all or any part of the Collateral secured by this Note or
all or any part of the stock or partnership interests or other ownership
interests in the Company are sold, conveyed, or otherwise disposed of without
the prior written consent of Harvest, the maturity of this Note, at the option
of Harvest, shall be accelerated and Harvest may immediately demand payment of
the then outstanding principal sum together with all accrued and unpaid interest
due thereon.
14. If default is made in the payment of any installment hereof, either
principal or interest, or in the payment of any other sum due hereunder,
promptly when the same shall be due and payable hereunder, or if there is any
default under any instrument which secures the payment of this Note or which is
executed in connection with the Loan evidenced by this Note, then Harvest, in
addition to its other remedies hereunder and the Loan Agreement and any
instrument which secures the payment of this Note or at law or in equity, shall
have the right and option, without notice or demand, to declare the unpaid
balance of principal and interest and all other sums owing on this Note at once
due and payable. If this Note is not paid at its maturity, regardless of how
such maturity may be brought about, Harvest may foreclose the liens and security
interests securing payment hereof or exercise any of its other rights hereunder
or the Loan Agreement or under any instrument which securest the payment of this
Note, or at law or in equity. Failure to exercise any such rights upon default
shall not constitute a waiver of the right to exercise any of them at any time.
15. If there is any default under this Note, and this Note is placed in the
hands of an attorney for collection, or is collected through any court,
including any bankruptcy court, the Company and all parties now or hereafter
liable hereon agree to and promise to pay to the order of the holder hereof such
holder's reasonable attorneys' fees and court costs incurred in collecting or
attempting to collect or securing or attempting to secure this Note or enforcing
the holder's rights with respect to the Collateral to the extent allowed by the
laws of the State of Texas or any state in which any Collateral is situated,
including reasonable attorneys' fees of not less than 10% of the unpaid amounts
and all other costs incurred by Harvest.
16. THE COMPANY AND ANY GUARANTOR AGREE TO GIVE HARVEST WRITTEN NOTICE OF
ANY ACTION OR INACTION BY HARVEST OR ANY AGENT OR ATTORNEY OF HARVEST IN
CONNECTION WITH THIS NOTE OR THE LOAN THAT MAY BE ACTIONABLE AGAINST HARVEST OR
ANY AGENT OR ATTORNEY OF HARVEST OF A DEFENSE TO PAYMENT OF THE LOAN FOR ANY
REASON, INCLUDING, BUT NOT LIMITED TO, COMMISSION OF A TORT OF VIOLATION OF ANY
CONTRACTUAL DUTY OR DUTY IMPLIED BY LAW. THE COMPANY AGREES THAT UNLESS SUCH
NOTICE IS DULY GIVEN AS PROMPTLY AS POSSIBLE (AND IN ANY EVENT WITHIN TEN (10)
CALENDAR DAYS) AFTER THE COMPANY AND/OR GUARANTOR HAS KNOWLEDGE OR WITH THE
EXERCISE OF REASONABLE DILIGENCE SHOULD HAVE HAD KNOWLEDGE OF ANY SUCH ACTION OR
INACTION, THE COMPANY AND GUARANTOR SHALL NOT ASSERT, AND THE COMPANY AND
GUARANTOR SHALL BE DEEMED TO HAVE WAIVED, ANY CLAIM OR DEFENSE ARISING
THEREFROM.
17. This Loan shall be governed by and construed in accordance with Texas
law and applicable federal law. The parties hereto intend to conform strictly to
the applicable usury laws. In no event, whether by reason of acceleration of the
CONVERTIBLE SECURED NOTE PAGE 3
<PAGE>
maturity hereof or otherwise, shall the amount paid or agreed to be paid to
Harvest for the use, forbearance or detention of money hereunder or otherwise
exceed the maximum amount permissible under applicable law. If fulfillment of
any provision hereof or of any note or other document now or hereafter
evidencing, securing or pertaining to the indebtedness evidenced hereby, at the
time performance of such provision shall be due, would involve transcending the
limit of validity prescribed by law, then the obligation to be fulfilled shall
be reduced automatically to the limit of such validity. If Harvest shall ever
receive anything of value deemed interest under applicable law which would
exceed interest at the highest lawful rate, an amount equal to any amount which
would have been excessive interest shall be applied to the reduction of the
unpaid principal amount owing hereunder in the inverse order of its maturity and
not to the payment of interest, or if such amount which would have been
excessive interest exceeds the unpaid balance of principal hereof, such excess
shall be refunded to the Company. All sums paid or agreed to be paid to Harvest
for the use, forbearance or detention of the indebtedness of Company to Harvest
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of such indebtedness so
that the amount of interest on account of such indebtedness does not exceed the
maximum permitted by applicable law. The provisions of this paragraph shall
control all existing and future agreements between the Company and Harvest.
18. THIS NOTE HAS BEEN DELIVERED IN, AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS
THEREOF. IN THE EVENT ANY ITEM, TERMS OR PROVISIONS CONTAINED IN THIS INSTRUMENT
ARE IN CONFLICT WITH THE LAWS OF THE STATE OF TEXAS, OR FEDERAL LAW, THIS
INSTRUMENT SHALL BE AFFECTED ONLY AS TO ITS APPLICATION TO SUCH ITEM, TERMS OR
PROVISIONS, AND SHALL IN ALL OTHER RESPECTS REMAIN IN FULL FORCE AND EFFECT.
19.1 Harvest or any subsequent holder of this Note (collectively
referred to in this section as "Holder") shall have the right, at such Holder's
option, at any time after the earlier of any acceleration of this Note or
______________ and up to the date on which the Company has properly repaid the
outstanding principal balance of the Loan and all accrued interest thereon in
full, subject to the terms and provisions of this Note and the Loan Agreement,
to convert all or any portion of the outstanding principal balance of this Note
into shares of common stock of the Company (the "Common Stock"), at an initial
price per share of $___________ , subject to price adjustment as provided herein
and the Loan Agreement (the "Conversion Price"). After the Company has opened
____ Restaurants under the Company's Area Development Agreement with Harvest,
the price per share which Holder shall pay for the common stock of the Company
pursuant to this conversion right shall increase from the initial Conversion
Price per share every time the Company opens an additional Restaurant under the
Company's Area Development Agreement with Harvest by fifty cents ($.50) per
share beginning with the ____ Restaurant up to and through the ___ Restaurant to
a maximum Conversion Price per share of $_______.
19.2 Conversion of any portion of the principal balance of the Loan
shall not relieve the Company of its obligation to pay any accrued but unpaid
interest through the date of conversion on the portion of the principal balance
of the Loan so converted. In no event shall interest be convertible into shares
CONVERTIBLE SECURED NOTE PAGE 4
<PAGE>
of common stock in the Company. Upon such conversion, that portion of principal
so converted shall be deemed to be paid in full upon the delivery to the holder
of the Note of a certificate or certificates representing the proper number of
shares of common stock of the Company to be issued to the holder of the Note
upon such conversion. To the extent that any portion of this Note is not
converted into shares of Common Stock, such portion shall remain a secured debt
of the Company payable in accordance with the terms of the Loan Agreement and
this Note. In the event this Note is to be converted in part only, the Company
shall upon surrender of this Note, execute and deliver to the Holder thereof, at
the expense of the Company, a new Note in the principal amount equal to the
unconverted portion of this Note.
19.3 Holder may exercise this right of conversion by first submitting
to the Company a written notice of its election to convert ("Conversion Notice")
the specified portion of the outstanding principal of this Note into the
specified number of shares to be issues to the specified name or names (along
with their addresses) in which the certificate(s) evidencing such shares of
Common Stock shall be issued. Holder's conversion right and Conversion Price
shall be fixed upon delivery of such written notice, delivery being deemed given
upon actual delivery or on the second day after the notice is deposited with the
United States Post Office, postage prepaid, certified mail, return receipt
requested. As soon as practical after delivery of the Conversion Notice to the
Company but in no event more than ______ (___) days after delivery of the
Conversion Notice, the Company and Holder shall close on the conversion by the
Holder delivering this Note properly endorsed for the conversion of the
specified principal amount to the Company and the Company delivering a
certificate or certificates representing the number of fully paid shares of
Common Stock and a new Note for any unconverted portion of the principal amount
hereof. Such conversion shall be deemed to have been made immediately before the
close of business on the date that this Note shall have been surrendered for
conversion, so that the rights of the Holder of this Note as a noteholder shall
cease at such time and the person or persons entitled to receive the shares of
Common Stock upon conversion of this Note shall be treated for all purposes as
having become the record holder or holders of such shares of Common Stock at
such time. If the last day for the exercise of the conversion right shall not be
a business day, then such conversion right may be exercised on the next
succeeding business day.
19.4 In case of any reclassification or change of outstanding shares
of Common Stock issuable upon conversion of this Note, or in case of any
consolidation or merger of the Company with or into any partnership,
corporation, or other entity (other than a merger in which the Company is the
surviving corporation and which does not result in any reclassification or
change of outstanding shares of Common Stock, other than a change in number of
shares issuable upon conversion of this Note) or in case of any sale or
conveyance to any partnership, corporation, or other entity of the property of
the Company as an entirety or substantially as an entirety, then the holder of
this Note shall have the right thereafter to convert this Note into the kind and
amount of shares of stock and other securities and property receivable upon such
reclassification, change, consolidation, merger, sale, or conveyance by a holder
of the number of shares of Common Stock of the Company issuable upon conversion
of this Note immediately prior to such reclassification, change, consolidation,
merger, sale, or conveyance, subject to adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for herein.
CONVERTIBLE SECURED NOTE PAGE 5
<PAGE>
19.5 The Conversion Price shall be adjusted in the event the Company
shall at any time (i) make a subdivision of or combine shares of Common Stock
outstanding or (ii) pay a dividend or make a distribution in cash, in kind, or
in securities of any kind. In the event the Company makes a subdivision of
shares of Common Stock or pays a dividend or makes a distribution in cash, in
kind, or in securities of any kind, the Conversion Price in effect immediately
prior to such action shall be appropriately decreased, and in the event the
Company shall at any time combine the shares of Common Stock outstanding, the
Conversion Price in effect immediately prior to such combination shall be
appropriately increased. An adjustment made pursuant to this Section 19.5 shall,
in the event of a subdivision or combination, become effective retroactively
immediately after the effective date thereof, and shall, in the event of a
dividend or distribution, become effective retroactively immediately after the
record date for the determination of stockholders entitled thereto. Whenever the
Conversion Price is adjusted, pursuant to this Section 19.5, the Company shall
promptly cause a notice to be given to the Holder of this Note which will state
the adjusted Conversion Price.
19.6 The Company covenants that it will at all times reserve and keep
available out of its authorized Common Stock solely for the purpose of issuance
upon conversion of this Note as herein provided, such number of shares of Common
Stock as shall be issuable upon the conversion of the entire Maximum Principal
Balance of the Loan. The Company covenants that all shares of Common Stock which
shall be so issuable shall be duly and validly issued and fully-paid and
non-assessable.
19.7 The Company covenants that if any shares of Common Stock to be
issued upon conversion of this Note require registration with or approval of any
governmental authority under any federal or state law before such shares may be
issued upon conversion, the Company will, at its expense and as expeditiously as
possible, cause such shares to be duly registered or approved, as the case may
be.
19.8 The issuance of certificates for shares of Common Stock upon the
conversion of this Note shall be made without charge to the converting
Noteholder for any tax in respect of the issuance of such certificates, and such
certificates shall be issued in the names as may be directed by the Holder of
this Note; provided, however, that the Company shall not be required to pay any
tax which may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate in a name other than that of the Holder of this
Note, and the Company shall not be required to issue or deliver such
certificates unless and until the person or parsons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the reasonable satisfaction of the Company that such tax has been
paid.
20. The Company and Harvest further agree as follows:
20.1 Any and all controversies between the parties shall be settled by
arbitration, in accordance with the commercial arbitration rules, then
obtaining, of the American Arbitration Association. Any arbitration hereunder
shall be before at least three arbitrators associated with the American
Arbitration Association and selected in accordance with the commercial
arbitration rules of the American Arbitration Association. The award of the
arbitrators, or of a majority of them, shall be final, and judgment upon the
award rendered may be entered in any court, state or federal, having
jurisdiction.
CONVERTIBLE SECURED NOTE PAGE 6
<PAGE>
20.2 Arbitrable Disputes include any and all controversies or claims
between the parties, of whatsoever type or manner, including any claim based on
contract, tort, or statute, and including without limitation, any claim arising
out of or relating to this agreement or any other proposed or actual loan, all
past, present, and/or future agreements involving the parties, any transactions
between or involving the parties and/or any aspect of the past, present or
future relationship of the parties, whether related to lending funds or
otherwise, specifically including any alleged tort committed by either party.
20.3 Depositions may be taken and other discovery obtained in any
arbitration under this agreement. Within thirty (30) days of the date a
responsive pleading is filed in any arbitration proceeding hereunder, all
parties shall serve on all other parties in initial disclosure as would be
required by rule 26, federal rules of civil procedure.
20.4 For purposes of this provision, "the parties" means the Company,
Harvest, any guarantor, beneficiary, trustee, successor or assigns, all persons
and entities signing this or any other agreements, security instruments, and/or
guarantees, executed heretofore or contemporaneously with and as part of the
same transaction with this agreement. "The parties" shall also include
individual partners, shareholders, officers, directors, employees, agents and/or
representatives of any party of those documents, and shall include any other
owner and holder of the loan documents.
20.5 The parties shall have the right to invoke self-help remedies
(such as set-off, notification of account debtors, seizure and/or foreclosure of
collateral, and non-judicial sale of personal property and real property
collateral) before, during or after any arbitration and/or to request ancillary
or provisional judicial remedies (such as garnishment, attachment, specific
performance, receiver, injunction or restraining order, and sequestration)
before or after any arbitration. The parties need not await the outcome of the
arbitration before using self-help remedies. Use of self-help or ancillary
and/or provisional remedies shall not operate as a waiver of either party's
right to compel arbitration.
20.6 The parties agree that any action regarding any controversy
between the parties shall either be brought by arbitration, as described herein,
or by judicial proceedings, but shall not be pursued simultaneously in different
or alternative forums. This provision shall not operate to limit the parties
from the pursuing self-help remedies before, during or after any arbitration is
described in paragraph 20.5 above. A timely written notice of intent to
arbitrate pursuant to this agreement stays and/or abates all action in a trial
court, save and except a hearing on a motion to compel arbitration and/or the
entry of an order compelling arbitration and staying and/or abating the
litigation pending the filing of the final award of the arbitrators.
20.7 Any aggrieved party shall serve a written notice of intent to
arbitrate to any and all opposing parties within 360 days after dispute has
arisen. A dispute is defined to have arisen only upon receipt of service of
CONVERTIBLE SECURED NOTE PAGE 7
<PAGE>
judicial process or of a complaint in arbitration. Failure to serve a written
notice of intent to arbitrate within the time specified above shall be deemed. A
waiver of the aggrieved party's right to compel arbitration of such claim. The
issue of waiver pursuant to this agreement is an arbitrable dispute.
20.8 Active participation in pending litigation during the 360 day
notice period, whether as plaintiff or defendant, is not a waiver of the right
to compel arbitration. All discovery obtained in the pending litigation may be
used in any subsequent arbitration proceeding.
20.9 Any arbitrator selected shall be knowledgeable in the subject
matter of the dispute. Qualified retired judges shall be selected whenever
possible through panels maintained by the american arbitration association. Each
of the parties shall pay an equal share of the arbitration costs, fees, and
expenses, and of the arbitrators' costs, fees, and expenses.
20.10 All statutes of limitations which would otherwise be applicable
shall apply to any arbitration proceeding hereunder and the commencement of any
arbitration proceeding tolls such limitations.
20.11 In any arbitration proceedings subject to these provisions, the
arbitrators, or a majority of them, are specifically empowered to decided (by
documents only, or with a hearing, at the arbitrators' sole discretion)
pre-hearing motions which are substantially similar to pre-hearing motions to
dismiss and motions for summary adjudication.
20.12 The provisions of this section shall survive any termination,
amendment, or expiration of the agreement in which this section is contained,
unless all the parties otherwise expressly agree in writing.
20.13 The parties acknowledge that this agreement evidences a
transaction involving interstate commerce in that funds which may be advanced or
committed under this agreement are derived from interstate and/or international
financial markets. The federal arbitration act shall govern the interpretation,
enforcement, and proceedings pursuant to the arbitration clause in this
agreement.
20.14 The arbitrators, or a majority of them, shall award attorney's
fees and costs to the prevailing party pursuant to the terms of this agreement.
20.15 Venue of any arbitration proceeding hereunder will be in Bexar
County, Texas.
21. THIS NOTE IS PAYABLE IN FULL AT MATURITY. AT MATURITY THE COMPANY MUST
REPAY THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE AND UNPAID INTEREST THEN DUE.
HARVEST IS UNDER NO OBLIGATION TO REFINANCE THIS NOTE AT THAT TIME. COMPANY
WILL, THEREFORE, BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS THE COMPANY MAY
OWN, OR COMPANY WILL HAVE TO FIND A LENDER, WHICH MAY BE HARVEST, WILLING TO
LEND COMPANY THE MONEY. IF COMPANY REFINANCES THIS NOTE AT MATURITY, COMPANY MAY
HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY ASSOCIATES WITH A NEW LOAN
EVEN IF THE COMPANY OBTAINS REFINANCING FROM HARVEST.
CONVERTIBLE SECURED NOTE PAGE 8
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be executed in its
corporate name by its undersigned duly authorized officer on _________________
to be effective
By:__________________________________
Name: _______________________________
Title:________________________________
CONVERTIBLE SECURED NOTE PAGE 9
REVOLVING PROMISSORY NOTE
$________________________ Date:_________________
1. FOR VALUE RECEIVED, ___________________, a ________ corporation (the
"Company"), promises to pay to the order of Harvest Restaurants, Inc., a Texas
corporation ("Harvest"), at 1250 N.E. Loop 410, Suite 335, San Antonio, Texas
78209 or at such place as Harvest may from time to time designate in writing, in
lawful money of the United States of America and in immediately available funds,
the principal sum of ___________________Dollars ($____________) and any interest
thereon.
2. It is contemplated that there will be advances and payment on this Note
from time to time, but no advances or payments on this Note (including the total
payment of the unpaid balance of principal prior to maturity) shall affect or
impair the validity or enforceability of this Note as to any future advances
hereunder. At no time shall outstanding advances exceed the sum of
$________________. Harvest shall have the right to approve or disapprove
requests for advances from time to time in Harvest's sole discretion.
3. Interest shall accrue on the aggregate outstanding principal balance at
a per annum rate equal to the rate announced by the Frost National Bank, or its
successor in interest (the "Bank"), from time to time as its "Prime Rate" in
effect at its office in San Antonio, Texas, plus four percent (4%). The interest
rate shall be adjusted, from time to time, on the same day on which the Bank
adjusts its "Prime Rate." As of the date of this Agreement, the Bank's Prime
Rate is _____%. Interest on the outstanding principal amount of the Loan shall
be payable on the dates set forth herein and at maturity (whether at stated
maturity, by acceleration or otherwise). Interest shall be computed on the basis
of a 360-day year and the actual number of days elapsed.
4. Interest accruing hereunder shall be due and payable in monthly
installments, payable on the first day of each Retail Period (hereinafter
defined), commencing on the first day of the Retail Period immediately following
the Retail Period in which the Company initially draws on this Note and
continuing regularly thereafter until _________________, at which time the
entire amount of unpaid principal and interest remaining unpaid will be payable.
Each payment will be credited first to the accrued interest and then to
reduction of principal. As used in this Note, the term "Retail Period" shall
mean a four-week period which is one of Harvest's thirteen (13) consecutive
four-week accounting periods used for accounting purposes.
5. Any principal payment due under this Note not paid when due, whether at
stated maturity, by notice of repayment, by acceleration or otherwise, shall, to
the extent permitted by applicable law, thereafter bear interest at the maximum
rate allowed by law until such unpaid amount has been paid in full (whether
before or after judgment).
6. The Company may prepay all or any part of the principal of this Note at
any time before maturity without penalty ,and interest shall immediately cease
to accrue on any amount so prepaid. e without the prior written consent of
Harvest, which consent may be withheld in its sole discretion. All payments made
hereunder shall be applied first to interest and then to outstanding principal.
REVOLVING PROMISSORY NOTE PAGE 1
<PAGE>
7. If payment hereunder becomes due and payable on a Saturday, Sunday or
legal holiday, the due date thereof shall be extended to the next succeeding
business day.
8. Payment of this Note is secured by a Security Agreement of even date
executed by the Company covering the rights and properties more fully described
therein. However, the lien securing this Note shall remain subordinate to the
lien, as renewed, extended, re-amortized, or otherwise adjusted from time to
time, securing that other certain Secured Loan Agreement and related Convertible
Secured Note, both from the Company to Harvest and both dated effective
___________, 199___ in the original principal amount of ____________________
Dollars ($----------).
9. Harvest, in its sole discretion and without obligation on Harvest to do
so, may advance and pay sums on behalf and for the benefit of the Company for
costs necessary for the protection and preservation of the collateral described
in the Security Agreement securing this Note and other costs that may be
appropriate, in Harvest's sole discretion, including but not limited to,
insurance premiums, ad valorem taxes, and attorneys' fees. Any sums which may be
so paid out by Harvest including all sums paid for insurance premiums, or costs,
expenses, and attorneys' fees paid in any suit affecting the collateral when
necessary to protect the lien hereof shall bear interest from the dates of such
payments at the interest rate applied to the matured and past due principal
balance of this Note and shall be paid by Company to Harvest upon demand, at the
same place at which this Note is payable, and shall be deemed a part of the debt
and recoverable as such in all aspects.
10. Any assumption by any other person, partnership, corporation, limited
liability company, organization or any other entity of the obligations of the
Company shall only be effective upon the written consent of Harvest and any such
assumption with Harvest's consent shall not release the liability of the Company
for payment of the Note unless expressly released by Harvest.
11. Company and all sureties, endorsers, guarantors and any other party now
or hereafter liable for the payment of this Note in whole or in party, hereby
severally: (i) expressly waive all demands for payment, presentations for
payment, notices of intention to accelerate maturity, notices of acceleration of
maturity, protests, notices of protest, diligence, notice of dishonor and all of
the notice, filing of suit and diligence in collecting this Note or enforcing
any of the security herefor, (ii) agree to any substitution, subordination,
exchange or release of any such security or the release of any party primarily
or secondarily liable hereon, (iii) agree that Harvest shall not be required to
first institute suit or exhaust its remedies hereon against the Company or other
liable or to become liable hereon or to enforce its rights against them or any
security herefor, and (iv) consent to any extension or postponement of time of
payment of this Note and to any other indulgence with respect hereto without
notice to any of them.
REVOLVING PROMISSORY NOTE PAGE 2
<PAGE>
12. In the event all or any part of the Collateral secured by this Note or
all or any part of the stock or partnership interests or other ownership
interests in the Company are sold, conveyed, or otherwise disposed of without
the prior written consent of Harvest, the maturity of this Note, at the option
of Harvest, shall be accelerated and Harvest may immediately demand payment of
the then outstanding principal sum together with all accrued and unpaid interest
due thereon.
13. If default is made in the payment of any installment hereof, either
principal or interest, or in the payment of any other sum due hereunder,
promptly when the same shall be due and payable hereunder, or if there is any
default under any instrument which secures the payment of this Note or which is
executed in connection with the Loan evidenced by this Note, then Harvest, in
addition to its other remedies hereunder or the Security Agreement or any other
instrument which secures the payment of this Note or at law or in equity, shall
have the right and option, without notice or demand, to declare the unpaid
balance of principal and interest and all other sums owing on this Note at once
due and payable. If this Note is not paid at its maturity, regardless of how
such maturity may be brought about, Harvest may foreclose the liens and security
interests securing payment hereof or exercise any of its other rights hereunder
or the Loan Agreement or under any instrument which securest the payment of this
Note, or at law or in equity. Failure to exercise any such rights upon default
shall not constitute a waiver of the right to exercise any of them at any time.
14. If there is any default under this Note, and this Note is placed in the
hands of an attorney for collection, or is collected through any court,
including any bankruptcy court, the Company and all parties now or hereafter
liable hereon agree to and promise to pay to the order of the holder hereof such
holder's reasonable attorneys' fees and court costs incurred in collecting or
attempting to collect or securing or attempting to secure this Note or enforcing
the holder's rights with respect to the Collateral to the extent allowed by the
laws of the State of Texas or any state in which any Collateral is situated,
including reasonable attorneys' fees of not less than 10% of the unpaid amounts
and all other costs incurred by Harvest.
15. THE COMPANY AND ANY GUARANTOR AGREE TO GIVE HARVEST WRITTEN NOTICE OF
ANY ACTION OR INACTION BY HARVEST OR ANY AGENT OR ATTORNEY OF HARVEST IN
CONNECTION WITH THIS NOTE THAT MAY BE ACTIONABLE AGAINST HARVEST OR ANY AGENT OR
ATTORNEY OF HARVEST OF A DEFENSE TO PAYMENT OF THIS NOTE FOR ANY REASON,
INCLUDING, BUT NOT LIMITED TO, COMMISSION OF A TORT OF VIOLATION OF ANY
CONTRACTUAL DUTY OR DUTY IMPLIED BY LAW. THE COMPANY AGREES THAT UNLESS SUCH
NOTICE IS DULY GIVEN AS PROMPTLY AS POSSIBLE (AND IN ANY EVENT WITHIN TEN (10)
CALENDAR DAYS) AFTER THE COMPANY AND/OR GUARANTOR HAS KNOWLEDGE OR WITH THE
EXERCISE OF REASONABLE DILIGENCE SHOULD HAVE HAD KNOWLEDGE OF ANY SUCH ACTION OR
INACTION, THE COMPANY AND GUARANTOR SHALL NOT ASSERT, AND THE COMPANY AND
GUARANTOR SHALL BE DEEMED TO HAVE WAIVED, ANY CLAIM OR DEFENSE ARISING
THEREFROM.
16. This Note shall be governed by and construed in accordance with Texas
law and applicable federal law. The parties hereto intend to conform strictly to
the applicable usury laws. In no event, whether by reason of acceleration of the
REVOLVING PROMISSORY NOTE PAGE 3
<PAGE>
maturity hereof or otherwise, shall the amount paid or agreed to be paid to
Harvest for the use, forbearance or detention of money hereunder or otherwise
exceed the maximum amount permissible under applicable law. If fulfillment of
any provision hereof or of any note or other document now or hereafter
evidencing, securing or pertaining to the indebtedness evidenced hereby, at the
time performance of such provision shall be due, would involve transcending the
limit of validity prescribed by law, then the obligation to be fulfilled shall
be reduced automatically to the limit of such validity. If Harvest shall ever
receive anything of value deemed interest under applicable law which would
exceed interest at the highest lawful rate, an amount equal to any amount which
would have been excessive interest shall be applied to the reduction of the
unpaid principal amount owing hereunder in the inverse order of its maturity and
not to the payment of interest, or if such amount which would have been
excessive interest exceeds the unpaid balance of principal hereof, such excess
shall be refunded to the Company. All sums paid or agreed to be paid to Harvest
for the use, forbearance or detention of the indebtedness of Company to Harvest
shall, to the extent permitted by applicable law, be amortized, prorated,
allocated, and spread throughout the full stated term of such indebtedness so
that the amount of interest on account of such indebtedness does not exceed the
maximum permitted by applicable law. The provisions of this paragraph shall
control all existing and future agreements between the Company and Harvest.
17. THIS NOTE HAS BEEN DELIVERED IN, AND SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS APPLICABLE TO CONTRACTS MADE
AND TO BE PERFORMED THEREIN WITHOUT REGARD TO THE CONFLICTS OF LAW PROVISIONS
THEREOF. IN THE EVENT ANY ITEM, TERMS OR PROVISIONS CONTAINED IN THIS INSTRUMENT
ARE IN CONFLICT WITH THE LAWS OF THE STATE OF TEXAS, OR FEDERAL LAW, THIS
INSTRUMENT SHALL BE AFFECTED ONLY AS TO ITS APPLICATION TO SUCH ITEM, TERMS OR
PROVISIONS, AND SHALL IN ALL OTHER RESPECTS REMAIN IN FULL FORCE AND EFFECT.
18. The Company and Harvest further agree as follows:
18.1 Any and all controversies between the parties shall be settled by
arbitration, in accordance with the commercial arbitration rules, then
obtaining, of the American Arbitration Association. Any arbitration hereunder
shall be before at least three arbitrators associated with the American
Arbitration Association and selected in accordance with the commercial
arbitration rules of the American Arbitration Association. The award of the
arbitrators, or of a majority of them, shall be final, and judgment upon the
award rendered may be entered in any court, state or federal, having
jurisdiction.
18.2 Arbitrable Disputes include any and all controversies or claims
between the parties, of whatsoever type or manner, including any claim based on
contract, tort, or statute, and including without limitation, any claim arising
out of or relating to this agreement or any other proposed or actual loan, all
past, present, and/or future agreements involving the parties, any transactions
between or involving the parties and/or any aspect of the past, present or
future relationship of the parties, whether related to lending funds or
otherwise, specifically including any alleged tort committed by either party.
REVOLVING PROMISSORY NOTE PAGE 4
<PAGE>
18.3 Depositions may be taken and other discovery obtained in any
arbitration under this agreement. Within thirty (30) days of the date a
responsive pleading is filed in any arbitration proceeding hereunder, all
parties shall serve on all other parties in initial disclosure as would be
required by rule 26, federal rules of civil procedure.
18.4 For purposes of this provision, "the parties" means the Company,
Harvest, any guarantor, beneficiary, trustee, successor or assigns, all persons
and entities signing this or any other agreements, security instruments, and/or
guarantees, executed heretofore or contemporaneously with and as part of the
same transaction with this agreement. "The parties" shall also include
individual partners, shareholders, officers, directors, employees, agents and/or
representatives of any party of those documents, and shall include any other
owner and holder of the loan documents.
18.5 The parties shall have the right to invoke self-help remedies
(such as set-off, notification of account debtors, seizure and/or foreclosure of
collateral, and non-judicial sale of personal property and real property
collateral) before, during or after any arbitration and/or to request ancillary
or provisional judicial remedies (such as garnishment, attachment, specific
performance, receiver, injunction or restraining order, and sequestration)
before or after any arbitration. The parties need not await the outcome of the
arbitration before using self-help remedies. Use of self-help or ancillary
and/or provisional remedies shall not operate as a waiver of either party's
right to compel arbitration.
18.6 The parties agree that any action regarding any controversy
between the parties shall either be brought by arbitration, as described herein,
or by judicial proceedings, but shall not be pursued simultaneously in different
or alternative forums. This provision shall not operate to limit the parties
from the pursuing self-help remedies before, during or after any arbitration is
described in paragraph 21.5 above. A timely written notice of intent to
arbitrate pursuant to this agreement stays and/or abates all action in a trial
court, save and except a hearing on a motion to compel arbitration and/or the
entry of an order compelling arbitration and staying and/or abating the
litigation pending the filing of the final award of the arbitrators.
18.7 Any aggrieved party shall serve a written notice of intent to
arbitrate to any and all opposing parties within 360 days after dispute has
arisen. A dispute is defined to have arisen only upon receipt of service of
judicial process or of a complaint in arbitration. Failure to serve a written
notice of intent to arbitrate within the time specified above shall be deemed. A
waiver of the aggrieved party's right to compel arbitration of such claim. The
issue of waiver pursuant to this agreement is an arbitrable dispute.
18.8 Active participation in pending litigation during the 360 day
notice period, whether as plaintiff or defendant, is not a waiver of the right
to compel arbitration. All discovery obtained in the pending litigation may be
used in any subsequent arbitration proceeding.
18.9 Any arbitrator selected shall be knowledgeable in the subject
matter of the dispute. Qualified retired judges shall be selected whenever
possible through panels maintained by the american arbitration association. Each
of the parties shall pay an equal share of the arbitration costs, fees, and
expenses, and of the arbitrators' costs, fees, and expenses.
REVOLVING PROMISSORY NOTE PAGE 5
<PAGE>
18.10 All statutes of limitations which would otherwise be applicable
shall apply to any arbitration proceeding hereunder and the commencement of any
arbitration proceeding tolls such limitations.
18.11 In any arbitration proceedings subject to these provisions, the
arbitrators, or a majority of them, are specifically empowered to decided (by
documents only, or with a hearing, at the arbitrators' sole discretion)
pre-hearing motions which are substantially similar to pre- hearing motions to
dismiss and motions for summary adjudication.
18.12 The provisions of this section shall survive any termination,
amendment, or expiration of the agreement in which this section is contained,
unless all the parties otherwise expressly agree in writing.
18.13 The parties acknowledge that this agreement evidences a
transaction involving interstate commerce in that funds which may be advanced or
committed under this agreement are derived from interstate and/or international
financial markets. The federal arbitration act shall govern the interpretation,
enforcement, and proceedings pursuant to the arbitration clause in this
agreement.
18.14 The arbitrators, or a majority of them, shall award attorney's
fees and costs to the prevailing party pursuant to the terms of this agreement.
18.15 Venue of any arbitration proceeding hereunder will be in Bexar
County, Texas.
19. If there is a default by the Company under that one certain Secured
Loan Agreement ("Loan Agreement") or related Convertible Secured Note
("Convertible Note"), both from the Company to Harvest and both dated effective
___________, 199___ in the original principal amount of ____________________
Dollars ($__________), or any of the instruments securing such Loan Agreement or
Convertible Note, shall constitute a default hereunder and the debt evidenced by
this Note shall immediately become payable at the option of Payee. The Company
further agrees that a default under this Note shall be a default under the Loan
Agreement and Convertible Note.
20. THIS NOTE IS PAYABLE IN FULL ON __________________. ON ______________,
THE COMPANY MUST REPAY THE ENTIRE PRINCIPAL BALANCE OF THIS NOTE AND UNPAID
INTEREST THEN DUE. HARVEST IS UNDER NO OBLIGATION TO REFINANCE THIS NOTE AT THAT
TIME. COMPANY WILL, THEREFORE, BE REQUIRED TO MAKE PAYMENT OUT OF OTHER ASSETS
THE COMPANY MAY OWN, OR COMPANY WILL HAVE TO FIND A LENDER, WHICH MAY BE
HARVEST, WILLING TO LEND COMPANY THE MONEY. IF COMPANY REFINANCES THIS NOTE AT
MATURITY, COMPANY MAY HAVE TO PAY SOME OR ALL OF THE CLOSING COSTS NORMALLY
ASSOCIATES WITH A NEW LOAN EVEN IF THE COMPANY OBTAINS REFINANCING FROM HARVEST.
REVOLVING PROMISSORY NOTE PAGE 6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Note to be executed in its
corporate name by its undersigned duly authorized officer on _________________
to be effective
By:_____________________________________
Name: ______________________________
Title:______________________________
GUARANTY OF THIS NOTE
For value received, ____(I or we)____, _____(names)___________________,
__(jointly and severally)________, absolutely and unconditionally guarantee
payment of this Note according to its terms to the same extent as if ______(I or
we)___, were the maker(s) of this Note, ___(I or we)___ (jointly and
severally)_________ waive all demand and all notices, including notice of
intention to accelerate the maturity, notice of acceleration of maturity, notice
of nonpayment, presentment for payment, protest, notice of protest, suit and
diligence. _____(I or we)____ also (____(jointly and severally)_____ waive any
notice of and defense based on the extension of time of payment or change in
methods of payment and consent to all renewals, extensions, and other
adjustments in the manner of payment of this Note. This is a guaranty of payment
and performance, not of collection, and it is an agreement of guaranty, not of
suretyship. ____(I or We)____ (___(jointly and severally)____ waive all
requirements of law, if any, to require that any collection efforts be made
against the Company or that any action be brought against the Company before
resorting to this guaranty.
Date: ________________ _____________________________
Printed Name: _____________________________
REVOLVING PROMISSORY NOTE PAGE 7
SHARE EXCHANGE AGREEMENT
This SHARE EXCHANGE AGREEMENT is made and entered into as of this ___ day
of March, 1998, between HARVEST RESTAURANT GROUP, INC., a Texas corporation
("Harvest"), and KOOTENAY HOLDINGS, L.L.C., an Arizona Limited Liability Company
("Kootenay") which is the sole shareholder of SURF CITY ACQUISITION II, INC., an
Arizona corporation ("Surf City").
RECITALS
WHEREAS, the parties, together with Surf City Acquisition Corporation II,
an Arizona corporation ("Surf City"), executed an Agreement in Principle wherein
the basic terms of the transactions described herein were agreed to and reduced
to writing, subject to further negotiations;
WHEREAS, Kootenay owns all of the issued and outstanding shares of Surf
City;
WHEREAS, the intended result of this Agreement and the Sports Group
International, Inc. ("Sports")/Harvest Share Exchange Agreement of even date
hereof, taken together, is for Harvest to own all outstanding shares of Sports
and Surf City and for Harvest's shares of Common Stock to be allocated as
follows upon the Effective Date:
4,089,500 To Harvest's shareholders
4,000,000 To Sports shareholders
542,045 To Sports debt holders
9,290,545 To Kootenay
17,922,090 Total issued shares of Harvest Common Stock
on the Effective Date
WHEREAS, it is understood and agreed that Harvest's outstanding shares of
Common Stock shall be determined as of the Effective Date and that, to the
extent Harvest Common Stock on the Effective Date is proportionally greater or
lesser than 4,129,130 shares, then the shares of Harvest Common Stock to be
issued to Sports shareholders and to Kootenay as set forth above shall be
adjusted pro rata in the same proportion;
WHEREAS, it is intended that the Peterson Note shall be exchanged for a
single indivisible share of Peterson Preferred class of Harvest stock. Peterson
Preferred Stock shall accrue dividends at the Wall Street Journal's National
Prime Rate upon the first business day of each year upon a principal sum of
$4,500,000, the dividend being payable by January 31 of each succeeding year.
Peterson Preferred shall have preferred rights against all assets of Sports, and
shall have default rights in the event of failure to timely pay such dividends
which shall permit the holder to demand immediate redemption of the full amount
of $4,500,000 and all past-due dividends. Peterson Preferred may, at its
holder's option, convert to 1,600,000 shares of Harvest Common Stock after two
years from the Effective Date, in which event Kootenay shall receive an
additional 1,000,000 shares of Harvest Common Stock. Peterson Preferred is a
non-voting share, does not vote as a class, and does not participate in
Harvest's dividends, or profits other than as is expressly set forth herein;
WHEREAS, it is the intention of the parties hereto that (a) the transfer
and allocation of economic benefits and burdens described in this Agreement
shall for all purposes shall be deemed as having been transferred and allocated
as of the Effective Date and (b) if the execution of the Agreement, the
obtaining of certain regulatory consents, the actual exchange of share
certificates and other documents should occur subsequent to the Effective Date,
then each of the before- referenced events shall be deemed conditions subject to
an executed contract and shall in no fashion be considered as deferrals of the
effective exchange of stock which occurred, for all purposes, as of the
Effective Date; and
WHEREAS, the parties intend this transaction to qualify as a "tax free
re-organization" within the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended, and that Sports become a subsidiary of
Harvest.
1
<PAGE>
ARTICLE I.
CLOSING CONTINGENT UPON
CLOSING OF CONTEMPLATED TRANSACTIONS
1.01 Share Exchange. The obligation of the parties to this Agreement to
close this transaction is contingent upon the closing of certain other
transactions listed below and defined collectively as the "Contemplated
Transactions." Each of the parties to each of the Contemplated Transactions
shall use their best efforts to fulfill their obligations to close all of the
Contemplated Transactions. If any of the Contemplated Transactions do not close,
parties who are not in breach or default of their own obligations under this
Agreement shall not be required to close their respective transactions which are
part of the Contemplated Transactions and will not be in default of their
obligations for not closing the same.
1.02 Contemplated Transactions. This Agreement contemplates that the
following multiple transactions (collectively, the "Contemplated Transactions")
shall be closed before or concurrently with the Closing of this transaction.
1.02.1 Sports/Harvest Share Exchange Agreement. The Sports/Harvest
Share Exchange Agreement executed between the parties of even date hereof shall
be closed before or concurrently with the closing of the transaction described
in this Agreement.
1.02.2 Financing. A $4,000,000 financing arrangement shall have been
obtained on or before Closing, and is to be used, in part, as follows:
(a) $500,000 to partially redeem all Harvest Preferred B Stock;
(b) $1,000,000 to Kootenay;
(c) $1,000,000 loan to Kootenay, which shall be evidenced by a
promissory note and secured by stock of Surf City;
(d) $250,000 payable to the Bank of L.A. for corporate purposes;
(e) $500,00 payable to Sports for corporate purposes; $500,000
paid to Surf City for corporate purposes; and
(f) $750,000 payable to Harvest accounts dedicated to Harvest
Food Court/Red Line project; and the remainder being
retained by Harvest for corporate purposes.
2
<PAGE>
1.02.3 Voting Agreement. Harvest, Sports, and Surf City shall have
executed the Voting Agreement attached hereto as Exhibit "A" simultaneously with
the execution of this Agreement. The Voting Agreement provides for the election
of a new Harvest Board of Directors at a Shareholder Meeting to be held promptly
after Closing of this transaction the following to be the new Directors: Kevin
Blackwell, Kathy Blackwell, David Guarino, Ernest (KiKi) Vandewaehe III, Dean
Miller, Clyde Drexler, Bill Gallagher, and Robert Schwartz. It is agreed and
understood that election of these Directors is subject to closing of the
transaction described in this Agreement.
1.02.4 Employment Agreements. Dean Miller, William Gallagher, Kevin
Blackwell, David Guarino, Kathy Blackwell, and Ernest (KiKi) Vandewaehe III
shall have executed the agreements with Harvest which are attached hereto as
Exhibits B-1, B-2, B-3, B-4, and B-5. The Miller and Gallagher agreements will
be consulting agreements at $10,000 per month plus approved expenses. The
Blackwell and Guarino agreements shall be employment contracts paying an annual
amount of $200,000. The Vandewaehe III Agreement will be a consulting Agreement
paying an annual amount of $70,000. Each of these employment agreements will
extend four years from the Effective Date.
1.02.5 Peterson Preferred. The holders of the Sports Peterson
Preferred Note have executed the Peterson Preferred Agreement attached hereto as
Exhibit C. The Peterson Preferred Agreement will exchange the Peterson Note for
a single indivisible share of Peterson Preferred Class of Harvest Stock.
Peterson Preferred Stock shall accrue dividends at the Wall Street Journal's
national prime rate on the first business day of each year upon the amount of
$4,500,000, the dividend being payable by January 1, of each succeeding year.
Peterson Preferred shall have preferred rights against all assets of Sports, and
if Harvest shall fail to timely pay such dividends, the holder shall have the
right to demand immediate redemption of the full amount of $4,500,000 and all
past-due dividends. Peterson Preferred may, at its holder's option, convert to
1,600,000 shares of Harvest Common Stock after two years from the Effective
Date, in which event Kootenay shall receive an additional 1,000,000 shares of
Harvest Common Stock. Peterson Preferred is a non-voting share, does not vote as
a class, and does not participate in Harvest's dividends, or profits other than
as is expressly set forth herein.
3
<PAGE>
1.02.6 Harvest Preferred B Agreement. The Harvest Series B Preferred
Stock amendments shall be entered into before Closing.
1.02.7 Guarantee. Harvest will guarantee the guarantors of Sports
$500,000 note to the Bank of L.A. that the note will be paid.
II.
FEASIBILITY PERIOD
2.01 Feasibility Study. Each party is granted the right to conduct a
feasibility study of all of the existing and contingent assets and liabilities
of the other party including a physical inspection of all leases, improvements,
fixtures, mechanical equipment, personnel property, and other tangible and
intangible assets ("Feasibility Study"). Each party shall have until March 30,
1998 ("Feasibility Period"). During the Feasibility Period, either party, or
their designated agents, may enter upon the leased or owned premises of the
other party for such analyses, tests, and inspections which may be deemed
necessary by either party. If either party determines, in their sole reasonable
judgment, that the transaction is not desirable for any reason, then that party
may, on written notice to the other party, on or before expiration of the
Feasibility Period, terminate this Agreement without penalty or being in default
of their obligations. If the written notice is not given to the other party on
or before 5:00 p.m. Central Standard Time on the expiration date of the
Feasibility Period, this right to terminate shall be deemed to have been waived
by the party failing to give the notice.
2.02 Documents to be Delivered. Each party shall deliver to the other party
copies of the following within five business days from the date of this
Agreement. Failure to deliver any of the listed documents is an independent
reason for the other party to rightfully terminate this Agreement. If any one or
more of the items described in Section 2.02 do not exist, the disclosing party
shall advise the receiving party, in writing, to that effect.
2.02.1 Financial Statements. Copies of financial statements as set
forth in Sections 5.01.20 and 7.01.20. This includes monthly sales reports for
the period commencing January 1, 1998, through the calendar month immediately
proceeding the date of submittal of the same.
2.02.2 Asset List. A detailed inventory of all equipment, furnishings,
fixtures, and inventories.
2.02.3 Leases. All leases of real or personal property and any
documents pertaining to such leases in the disclosing parties' possession.
2.02.4 Contracts. Copies of all contracts and warranties and related
documents including service, maintenance, management, employment, or other
4
<PAGE>
agreements, including loan agreements which affect the disclosing party or its
assets. If such exist, all documents, notices, or citations indicating a default
or breach by the disclosing party of any contract in which the disclosing party
is a party.
2.02.5 Certificates. Certificates of all fire, hazard, liability, and
other insurance policies maintained by the disclosing party.
2.02.6 Taxes. The most recent real estate and personal property tax
statements regarding the disclosing party's property along with the disclosing
party's federal income tax returns for the last two years and proof of payment
of all sales and payroll taxes.
2.02.7 Litigation. If such exists, all notices, citations, or other
documents evidencing actions, suits or proceedings pending or threatened or
asserted against the disclosing party, at law or in equity, before any state,
federal, county, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality, whether domestic or foreign.
2.02.8 Violations. If such exists, all documents, notices, or
citations indicating a violation by the disclosing party of zoning, building,
fire, or similar law, ordinance, code, order, regulation or restriction claimed
by any applicable governmental authority.
2.02.9 Organizational Documents. All currently effective
organizational documents and other records of the disclosing party including,
without limitation, articles, by laws, directors, minutes, and stock ledger.
ARTICLE III.
THE SHARE EXCHANGE
3.01. Closing.
3.01.1 Time and Place of Closing. Subject to the provisions of
Articles V and VII, the Closing of the transaction contemplated hereby
("Closing") shall take place at the offices of Titus, Brueckner & Berny, P.C.,
7373 N. Scottsdale Road, Suite B-252, Scottsdale, Arizona 85253 at 10:00 a.m.,
local time, on the Effective Date, or at such other place, date, or time, as the
parties may mutually agree upon writing for the Closing to take place.
3.01.2 Actions of Harvest at Closing. At the Closing, Harvest shall
deliver to Kootenay and Surf City the following:
3.01.2.1 Resignations. Harvest shall deliver to Kootenay and Surf
City the written and executed resignations of such directors of Harvest and such
executed employment agreements, dated as of the Effective Date, as called for in
this Agreement.
5
<PAGE>
3.01.2.2 Certificate of Harvest. Harvest shall deliver to
Kootenay and Surf City a certificate, which shall be dated as of Closing and
which shall be signed by Harvest's Chief Executive Officer certifying (i) the
authority of Harvest to enter into and consummate the transactions contemplated
by this Agreement; (ii) the authority of the officers of Harvest to execute and
deliver any document contemplated by this Agreement on behalf of Harvest; (iii)
that the representations and warranties of Harvest obtained herein were correct
and true when made and are correct and true as of the date of Closing (except to
the extent that any representation or warranty of Harvest specifically relates
to an earlier date); and (iv) that each and every covenant and agreement of
Harvest contained in the Agreement to be performed by Harvest on or prior to
Closing has been performed by Harvest. Kootenay and Surf City may rely upon the
certificate as if it were delivered to them directly.
3.01.2.3 Corporation Resolutions. Harvest shall deliver to
Kootenay and Surf City certified copies of the resolutions of the Board of
Directors of Harvest authorizing the execution, delivery, and performance of
this Agreement and the transactions contemplated herein.
3.01.2. Actions of Surf City at Closing. At the Closing, Surf City
shall deliver to Harvest the following:
3.01.2.1 Resignations. Surf City shall deliver to Harvest the
written and executed resignations of such directors of Surf City and such
executed employment agreements, dated as of the Effective Date, as called for in
this Agreement.
3.01.2.2 Certificate of Surf City. Surf City shall deliver to
Harvest a certificate, which shall be dated as of Closing and which shall be
signed by Surf City Chief Executive Officer certifying (i) the authority of Surf
City to enter into and consummate the transactions contemplated by this
Agreement; (ii) the authority of the officers of Surf City to execute and
deliver any document contemplated by this Agreement on behalf of Surf City;
(iii) that the representations and warranties of Surf City obtained herein were
correct and true when made and are correct and true as of the date of Closing
(except to the extent that any representation or warranty of Surf City
specifically relates to an earlier date); and (iv) that each and every covenant
and agreement of Surf City contained in the Agreement to be performed by Surf
City on or prior to Closing has been performed by Surf City. Kootenay and Surf
City may rely upon the certificate as if it were delivered to them directly.
3.01.2.3 Corporation Resolutions. Surf City shall deliver to
Harvest certified copies of the resolutions of the Board of Directors of Surf
City and the shareholder approval of Surf City authorizing the execution,
delivery, and performance of this Agreement and the transactions contemplated
herein.
6
<PAGE>
3.02.3 Effective Date. The date on which the Exchange of Shares occurs
and becomes effective is hereinafter called the "Effective Date." The Effective
Date shall be March 31, 1998, except and unless there is a delay in the filing
of Articles of Share Exchange with any state Secretary of State which is needed
for the exchange of shares to lawfully occur, in which event the Effective Date
shall be the earliest date after March 31, 1998, that is lawful for the exchange
of shares to occur. The parties shall cause all such documents and instruments
to be filed with the appropriate state Secretaries of State as promptly as
practicable upon satisfaction of the conditions described herein.
ARTICLE IV.
EXCHANGE OF SHARES AND OTHER MATTERS
4.01. Exchange of Shares. Upon the Effective Date, by virtue of this
Agreement, each of the following shall be deemed to occur contemporaneously:
4.01.1 Exchange of Surf City Common Stock. All issued and outstanding
shares of Surf City Common Stock shall be exchanged for a total of 9,290,545
fully paid and non-assessable shares of Harvest Common Stock in accordance with
the provisions of Section 4.02. An exception is that, if more or less than
4,089,500 issued shares of Harvest Common Stock are issued on the Effective
Date, then the Harvest Common Stock shares received by Kootenay in exchange for
each Surf City share shall be increased or decreased by the same pro rata
proportion as Harvest's Common Stock at Effective Date is greater or lesser than
4,089,500 shares.
4.01.2 Total Harvest Shares Exchanged. The shares of Harvest Common
Stock to be issued pursuant to this Section shall total 9,290,545 shares
adjusted as set forth herein.
4.02 Exchange Procedure. Surf City Common Stock. Following the Effective
Date, Kootenay shall surrender to the Secretary of Harvest (or to any agent
designated for such purpose by the President of Harvest) its outstanding
certificate which prior thereto represented Surf City Common Stock, and shall
upon such surrender receive in substitution and exchange therefor a certificate
representing the number of shares of Harvest Common Stock into which such Surf
City Common Stock shall have been converted. Until so surrendered and exchanged,
each outstanding certificate which, prior to the Effective Date, represented
Surf City Common Stock shall, following the Effective Date, be deemed for all
purposes to evidence ownership of the number of shares of Harvest Common Stock
into which such shares of Surf City Common Stock have been converted.
ARTICLE V.
SURF CITY'S REPRESENTATIONS AND WARRANTIES
5.01. Surf City's Representations and Warranties. Surf City makes the
following representations and warranties to Harvest and to Sports and Surf City
as a material inducement for Harvest to enter into this Agreement and for Sports
7
<PAGE>
and Surf City to enter into the Sports/Harvest Share Exchange Agreement subject
only to such disclaimers as disclosures and exceptions as are expressly set
forth in the attachments hereto. These representations and warranties are
limited to the best actual knowledge of Surf City Directors and officers.
Further, immaterial breaches of these representations and warranties are
specifically agreed to not comprise actionable breaches.
5.01.1 Capitalization.
5.01.1.1 Authorized Stock. The authorized capital stock of Surf
City consists of ______ shares of Surf City Common Stock, $___ par value per
share.
5.01.1.2. Issued Common Stock. There are _______ shares of Surf
City Common Stock issued and outstanding, all of which are owned beneficially
and of record by the listed shareholders. All such issued and outstanding shares
of Surf City Common Stock are duly authorized, validly issued, fully paid and
non-assessable, were not issued in violation of the terms of any contract,
agreement or commitment binding upon Surf City or any preemptive rights or
rights of first refusal, and were issued in compliance with all of its charter
documents and applicable law.
5.01.2 Organization, Standing and Power. Surf City is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Arizona and is qualified to do business where the failure to be so
qualified would materially and adversely affect its condition, properties,
assets or operations. Surf City has all requisite corporate power and authority
to enter into and perform and consummate the transactions contemplated by this
Agreement. The copies of the charter documents of Surf City and all amendments
thereto and of its bylaws as amended to date which have heretofore been
furnished or delivered to the Harvest are correct and complete.
5.01.3 Subsidiaries. Surf City has no subsidiaries.
5.01.4 Title to Assets. Surf City has good, valid and indefeasible
title to its assets, free and clear of all security interests, mortgages, liens,
encumbrances, title retention or security agreements, claims, restrictions,
leases, options, rights of first offer or first refusal, confidentiality or
secrecy agreements, non-competition agreements, defects of title or other
encumbrances or rights of others. The execution and delivery of this Agreement
and the consummation of the transaction contemplated hereby will not constitute
a violation of, nor be in conflict with, nor constitute a default, under any
terms or provisions of any contract, lease, mortgage, indenture, or any other
document whatsoever to which Surf City may be a party or to which Surf City may
be bound on each Closing Date.
8
<PAGE>
5.01.5 Other Relationships. No affiliate, director, officer, principal
executive, or employee of or consultant to Surf City owns, directly or
indirectly, in whole or in part, any property, asset or right, tangible or
intangible relating to or affecting Surf City.
5.01.6 Other Transactions Etc. No affiliate, director, officer,
principal executive or employee of Surf City, has, directly or indirectly,
engaged in any transaction with Surf City outside of the ordinary course of
business.
5.01.7 Undisclosed Liabilities. Surf City has no debts, liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due, including, but not limited to, liabilities or
obligations on account of known fraud by any merchant customer, taxes, other
governmental charges, duties, penalties, interest, fines, vacation pay,
workmen's compensation claims, or pension plan obligations and there is no known
basis for the assertion against Surf City.
5.01.8 Absence of Certain Changes or Events. The business of Surf City
has been operated only in the usual and ordinary course of business and there
has not been any occurrence, event or condition outside of the ordinary course
of business.
5.01.9 Condition of Assets. The assets of Surf City are in good
operating condition for the purposes of conducting the business of Surf City on
the Effective Date as such business has been or is being conducted. Surf City
has good and marketable title to all of the Assets subject to no mortgage,
pledge, lien, conditional sales agreement, encumbrance, security interest,
encumbrance, or charge of any nature whatsoever, except as herein provided.
5.01.10 No Violation of Law. Neither Surf City, nor any of its assets
or property of Surf City or the ownership, leasing, occupancy or operation
thereof, is in violation of any applicable law, code, rule, regulation,
ordinance, license or permit, including, but not limited to, those related to
building, zoning, environmental matters or employee health and safety, and no
notice from any governmental body or other person has been served upon Surf City
occupied or operated by Surf City claiming any such violation.
5.01.11 Contracts. All of Surf City' contracts, agreements, customer
and supplier purchase order and other commitments are legal, valid and binding
and in full force and effect, and there are no defaults thereunder. None of the
rights of Surf City thereunder will be impaired by the consummation of the
transactions contemplated by this Agreement, and all of the rights of Surf City
thereunder will be enforceable by Harvest after the Merger without the consent
or agreement of any other party except for the agreements specifically listed in
attachments hereto which contracts require consent to assignment. Copies of the
all such contracts have heretofore been delivered to Harvest by Surf City and
are true and complete and include all amendments and supplements thereto and
modifications thereof.
9
<PAGE>
5.01.12 Permits, Licenses, Consents, Etc. Surf City has all
governmental leases, licenses, permits, consents, approvals, authorizations,
qualifications and orders necessary to conduct its business and to operate its
properties and assets, and such leases, licenses, permits, consents, approvals,
authorizations, qualifications and orders are in full force and effect. No
notification to or approval of any governmental agency is required for all
governmental leases, licenses, permits, consents, approvals, authorizations,
qualifications and orders to remain in full force and effect after the closing.
No violations exist or have been recorded in respect of any governmental lease,
license, permit, consent, approval, authorization, qualification or order of
Surf City. No proceeding is pending or, to the best of Surf City's knowledge,
threatened looking toward the revocation or limitation of any such governmental
lease, license, permit, consent, approval, authorization, qualification or order
and there is no basis or grounds for any such revocation or limitation. Surf
City has complied in all material respects with all present and, to the best of
Surf City's knowledge, enacted but not yet effective, federal, state and local
laws, rules, regulations, ordinances, codes, orders, licenses and permits
relating to any of its properties or applicable to its business.
5.01.13 Absence of Defaults. Surf City is not nor is it alleged to be,
in default under, or in breach of any term or provision of, any contract,
agreement, lease, license, commitment, instrument or fiduciary or other
obligation. No other party to any contract, agreement, lease, license,
commitment, instrument or fiduciary or other obligation to which Surf City is
party is in default thereunder or in breach of any term or provision thereof.
There exists no condition or event which, after notice or lapse of time or both,
would constitute a default by any party to any such contract, agreement, lease,
license, commitment, instrument or fiduciary or other obligation.
5.01.14 Litigation. There is (i) no suit, action or claim, (ii)_no
investigation or inquiry by any administrative agency or governmental body, and
(iii) no legal, administrative or arbitration proceeding pending or, to the best
of Surf City's knowledge, threatened against Surf City or any of the properties,
assets, business or prospects of Surf City or to which Surf City is or might
become a party, and to the best of Surf City's knowledge, there is no basis or
grounds for any such suit, action, claim, investigation, inquiry or proceeding,
including but not limited to, labor, equal employment opportunity, safety and
health, environmental and antitrust laws. There is no outstanding order, writ,
injunction or decree of any court, administrative agency or governmental body or
arbitration tribunal against or affecting or relating to Surf City.
5.01.15 No Breach or Violation of Law. The execution and delivery of
this Agreement by Surf City and the consummation of the transactions
contemplated hereby will not (i) conflict with, or result in the breach of any
of the terms or conditions of, or constitute a default under, or result in the
acceleration of any obligation under, or require any consent, approval or notice
under, the charter documents or the bylaws or any resolution of Surf City or any
10
<PAGE>
contract, agreement, commitment, indenture, mortgage, deed of trust, lease,
pledge agreement, note, bond, license or other instrument or obligation to which
Surf City is now a party or by which Surf City or any of the properties or
assets of Surf City may be bound or affected, or (ii) violate any law, or any
rule or regulation of any administrative agency or governmental body, or any
order, writ, injunction or decree of any court, administrative agency or
governmental body.
5.01.16 Validity and Authorization. This Agreement has been duly
authorized by all necessary corporate and shareholder action and duly and
validly executed and delivered by Surf City and is legally binding on Surf City
in accordance with its terms.
5.01.17 Completeness; No Misrepresentations. The copies of all
instruments, agreements, and written information, including without limitation
the Schedules hereto, delivered pursuant to this Agreement or otherwise
furnished or made available to Harvest by Surf City, or any representatives of
either of them are complete and correct as of the date hereof. The
representations and warranties made by Surf City or the Shareholder in this
Agreement or in any Schedule or other document furnished in connection with this
Agreement do not contain any untrue statement of a material fact, or omit to
state a material fact necessary to make the statements or facts contained herein
or therein not misleading. The fact that Harvest and its representatives have
conducted an investigation of Surf City prior to the execution of this Agreement
shall not affect the representations and warranties contained in this Article or
the extent of the obligations or liabilities of Surf City in the event of a
breach of any such representation or warranty.
5.01.18 Tax Matters. Surf City has duly and timely filed all returns
with respect to any taxes required to be filed by it or for which it may be held
responsible, and has paid, or will pay on a timely basis, all taxes shown to be
due and payable on such returns, all deficiencies and assessments of taxes,
notice of which has been received by it, and all other taxes payable by it. Surf
City is not aware of any basis upon which any assessment for a material amount
of additional taxes could be made.
5.01.20 Financial Statements. It is understood that Surf City's
financial statements are not audited unless indicated as such on the delivered
financial documents. The year-end financial statements and interim financial
statements delivered by Surf City to the Purchaser have been prepared in
accordance with generally accepted accounting principles and present fairly the
financial position of Surf City as of December 31, 1998, and as of February 28,
1998, respectively, and the statement of income presents fairly the results of
operations and changes in financial position of Surf City for the periods ended
December 31, 1997, and February 28, 1998, respectively, and sales reports for
the period commencing January 1, 1998, through the calendar month immediately
proceeding the date of submittal of the same, all in conformity with generally
accepted accounting principles applied on a basis consistent with that of prior
periods, except that the interim financial statements are not audited and do not
contain footnotes and are subject to audit adjustments. Other than as disclosed
11
<PAGE>
in the Financial Statements, or elsewhere herein, as supplemented, as of the
Closing Date, Surf City has no outstanding liabilities as of the closing Date
and Surf City has no knowledge of any threatened claims, actions or
investigations which would result in the incurrence of any additional
liabilities by Surf City which will result in Harvest being liable to any third
party due to Buyer's purchase of the Transferred Assets. Surf City has no
indebtedness, liability or obligation or any character whatsoever, whether or
not accrued, whether known or unknown, fixed or unfixed, choate or inchoate,
liquidated or unliquidated, contingent or otherwise, including without
limitation liabilities for taxes, other governmental charges or pending
lawsuits, other than (i) liabilities reflected in the Financial Statements or
Interim Financial Statements, or elsewhere herein, or (ii) liabilities since the
date of the Interim Financial Statements as disclosed in writing to Harvest.
5.01.21 Full Disclosure. Surf City has disclosed to Harvest all
material facts relating to Surf City and its operations and has not omitted to
disclose to Harvest any material fact relating to Surf City, or its operations
necessary to make the statements made herein not misleading.
5.02. Survival of Representations, Warranties, Covenants and
Indemnification. All covenants, agreements, representations and warranties of
Surf City under this Agreement shall survive indefinitely and shall be deemed
material and relied upon by the other parties, regardless of any investigation
made by or on behalf of the other parties.
5.03. Disclosures. All of Surf City's warranties and representations herein
are modified to the extent needed to take into account Surf City's disclosures
set forth or identified in the attachment hereto entitled Surf City Disclosures.
ARTICLE VI.
SURF CITY'S COVENANTS
6.01. Continuation of Business. Surf City covenants and agrees with
Harvest, Kootenay, and Sports as follows: between the date hereof and the
Effective Date,(i) unless otherwise consented to in writing by Harvest, it shall
conduct its affairs solely in the ordinary course of business consistent with
past practice and shall not materially change its policies and practices; (ii)
shall not issue or caused to be issued by Surf City any capital stock or
security convertible into capital stock, except pursuant to outstanding
warrants, convertible preferred stock, stock options and convertible debentures,
or grant any options or rights to acquire capital stock, or otherwise alter Surf
City's capital structure; (iii) shall not repurchase any of its securities or
pay any dividend or make any distribution with respect to its securities other
than normal cash dividends; (iv) shall not enter into any contract or
arrangement other than in the ordinary course of business; and (v) shall not
amend its charter documents or bylaws.
12
<PAGE>
6.02. No Solicitation. Unless and until the Effective Date occurs, Surf
City shall not (i) solicit any offer to acquire all or any part of Surf City's
business, assets or other properties or capital stock, whether by merger,
purchase of assets, tender offer or otherwise or (ii) except as required by law,
disclose, directly or indirectly, any information not customarily disclosed to
any person or entity concerning Surf City's business or properties, afford to
any other person or entity access to Surf City's properties, books or records or
otherwise assist or encourage any person or entity in connection with any of the
foregoing.
ARTICLE VII.
HARVEST'S REPRESENTATIONS AND WARRANTIES
7.01. Harvest's Representations and Warranties. Harvest makes the following
representations and warranties to Surf City and Kootenay as a material
inducement for Surf City and Kootenay to enter into this Agreement subject only
to such disclaimers as disclosures and exceptions as are expressly set forth in
the attachments hereto. These representations and warranties are limited to the
best actual knowledge of Harvest Directors and officers. Further, immaterial
breaches of these representations and warranties are specifically agreed to not
comprise actionable breaches.
7.01.1 Capitalization.
7.01.1.1 Authorized Stock. The authorized capital stock of
Harvest consists of 20,000,000 shares of Harvest Common Stock, $0.01 par value
per share, 3,000,000 Series A, Preferred Stock, and 1,000 shares of Harvest
Series B Preferred Stock, $1.00 par value per share.
7.01.1.2. Issued Common Stock. There are 2,699,030 shares of
Harvest Common Stock issued and outstanding, all of which are owned beneficially
and of record by the listed shareholders. All such issued and outstanding shares
of Harvest Common Stock are duly authorized, validly issued, fully paid and
non-assessable, were not issued in violation of the terms of any contract,
agreement or commitment binding upon Harvest or any preemptive rights or rights
of first refusal, and were issued in compliance with all of its charter
documents and applicable law.
7.01.1.3 Issued Preferred Stock. There are 515,000 shares of
Harvest Series A preferred Stock and 150 shares of Harvest Series B Preferred
Stock issued and outstanding, all of which are owned beneficially and of record
by the listed shareholders. All such issued and outstanding shares of Harvest
Preferred Stock are duly authorized, validly issued, fully paid and
non-assessable, were not issued in violation of the terms of any contract,
agreement or commitment binding upon Harvest or any preemptive rights or rights
of first refusal, and were issued in compliance with all of its charter
documents and applicable law.
13
<PAGE>
7.01.2 Organization, Standing and Power. Harvest is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and is qualified to do business where the failure to be so qualified would
materially and adversely affect its condition, properties, assets or operations.
Harvest has all requisite corporate power and authority to enter into and
perform and consummate the transactions contemplated by this Agreement. The
copies of the charter documents of Harvest and all amendments thereto and of its
bylaws as amended to date which have heretofore been furnished or delivered to
the Surf City are correct and complete.
7.01.3 Subsidiaries. Harvest has no subsidiaries.
7.01.4 Title to Assets. Harvest has good, valid and indefeasible title
to its assets, free and clear of all security interests, mortgages, liens,
encumbrances, title retention or security agreements, claims, restrictions,
leases, options, rights of first offer or first refusal, confidentiality or
secrecy agreements, non-competition agreements, defects of title or other
encumbrances or rights of others. The execution and delivery of this Agreement
and the consummation of the transaction contemplated hereby will not constitute
a violation of, nor be in conflict with, nor constitute a default, under any
terms or provisions of any contract, lease, mortgage, indenture, or any other
document whatsoever to which Harvest may be a party or to which Harvest may be
bound on each Closing Date.
7.01.5 Other Relationships. No affiliate, director, officer, principal
executive, or employee of or consultant to Harvest owns, directly or indirectly,
in whole or in part, any property, asset or right, tangible or intangible
relating to or affecting Harvest.
7.01.6 Other Transactions Etc. No affiliate, director, officer,
principal executive or employee of Harvest, has, directly or indirectly, engaged
in any transaction with Harvest outside of the ordinary course of business.
7.01.7 Undisclosed Liabilities. Harvest has no debts, liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due, including, but not limited to, liabilities or
obligations on account of known fraud by any merchant customer, taxes, other
governmental charges, duties, penalties, interest, fines, vacation pay,
workmen's compensation claims, or pension plan obligations and there is no known
basis for the assertion against Harvest.
7.01.8 Absence of Certain Changes or Events. The business of Harvest
has been operated only in the usual and ordinary course of business and there
has not been any occurrence, event or condition outside of the ordinary course
of business.
7.01.9 Condition of Assets. The assets of Harvest are in good
operating condition for the purposes of conducting the business of Harvest on
14
<PAGE>
the Effective Date as such business has been or is being conducted. Harvest has
good and marketable title to all of the Assets subject to no mortgage, pledge,
lien, conditional sales agreement, encumbrance, security interest, encumbrance,
or charge of any nature whatsoever, except as herein provided.
7.01.10 No Violation of Law. Neither Harvest, nor any of its assets or
property of Harvest or the ownership, leasing, occupancy or operation thereof,
is in violation of any applicable law, code, rule, regulation, ordinance,
license or permit, including, but not limited to, those related to building,
zoning, environmental matters or employee health and safety, and no notice from
any governmental body or other person has been served upon Harvest occupied or
operated by Harvest claiming any such violation.
7.01.11 Contracts. All of Harvest' contracts, agreements, customer and
supplier purchase order and other commitments are legal, valid and binding and
in full force and effect, and there are no defaults thereunder. None of the
rights of Harvest thereunder will be impaired by the consummation of the
transactions contemplated by this Agreement, and all of the rights of Harvest
thereunder will be enforceable by Surf City after the Merger without the consent
or agreement of any other party except for the agreements specifically listed in
attachments hereto which contracts require consent to assignment. Copies of the
all such contracts have heretofore been delivered to Surf City by Harvest and
are true and complete and include all amendments and supplements thereto and
modifications thereof.
7.01.12 Permits, Licenses, Consents, Etc. Harvest has all governmental
leases, licenses, permits, consents, approvals, authorizations, qualifications
and orders necessary to conduct its business and to operate its properties and
assets, and such leases, licenses, permits, consents, approvals, authorizations,
qualifications and orders are in full force and effect. No notification to or
approval of any governmental agency is required for all governmental leases,
licenses, permits, consents, approvals, authorizations, qualifications and
orders to remain in full force and effect after the closing. No violations exist
or have been recorded in respect of any governmental lease, license, permit,
consent, approval, authorization, qualification or order of Harvest. No
proceeding is pending or, to the best of Harvest' knowledge, threatened looking
toward the revocation or limitation of any such governmental lease, license,
permit, consent, approval, authorization, qualification or order and there is no
basis or grounds for any such revocation or limitation. Harvest has complied in
all material respects with all present and, to the best of Harvest' knowledge,
enacted but not yet effective, federal, state and local laws, rules,
regulations, ordinances, codes, orders, licenses and permits relating to any of
its properties or applicable to its business.
7.01.13 Absence of Defaults. Harvest is not nor is it alleged to be,
in default under, or in breach of any term or provision of, any contract,
agreement, lease, license, commitment, instrument or fiduciary or other
obligation. No other party to any contract, agreement, lease, license,
commitment, instrument or fiduciary or other obligation to which Harvest is
15
<PAGE>
party is in default thereunder or in breach of any term or provision thereof.
There exists no condition or event which, after notice or lapse of time or both,
would constitute a default by any party to any such contract, agreement, lease,
license, commitment, instrument or fiduciary or other obligation.
7.01.14 Litigation. There is (i) no suit, action or claim, (ii)_no
investigation or inquiry by any administrative agency or governmental body, and
(iii) no legal, administrative or arbitration proceeding pending or, to the best
of Harvest' knowledge, threatened against Harvest or any of the properties,
assets, business or prospects of Harvest or to which Harvest is or might become
a party, and to the best of Harvest' knowledge, there is no basis or grounds for
any such suit, action, claim, investigation, inquiry or proceeding, including
but not limited to, labor, equal employment opportunity, safety and health,
environmental and antitrust laws. There is no outstanding order, writ,
injunction or decree of any court, administrative agency or governmental body or
arbitration tribunal against or affecting or relating to Harvest.
7.01.15 No Breach or Violation of Law. The execution and delivery of
this Agreement by Harvest and the consummation of the transactions contemplated
hereby will not (i) conflict with, or result in the breach of any of the terms
or conditions of, or constitute a default under, or result in the acceleration
of any obligation under, or require any consent, approval or notice under, the
charter documents or the bylaws or any resolution of Harvest or any contract,
agreement, commitment, indenture, mortgage, deed of trust, lease, pledge
agreement, note, bond, license or other instrument or obligation to which
Harvest is now a party or by which Harvest or any of the properties or assets of
Harvest may be bound or affected, or (ii) violate any law, or any rule or
regulation of any administrative agency or governmental body, or any order,
writ, injunction or decree of any court, administrative agency or governmental
body.
7.01.16 Validity and Authorization. This Agreement has been duly
authorized by all necessary corporate and shareholder action and duly and
validly executed and delivered by Harvest and is legally binding on Harvest in
accordance with its terms.
7.01.17 Completeness; No Misrepresentations. The copies of all
instruments, agreements, and written information, including without limitation
the Schedules hereto, delivered pursuant to this Agreement or otherwise
furnished or made available to Surf City by Harvest, or any representatives of
either of them are complete and correct as of the date hereof. The
representations and warranties made by Harvest or the Shareholder in this
Agreement or in any Schedule or other document furnished in connection with this
Agreement do not contain any untrue statement of a material fact, or omit to
state a material fact necessary to make the statements or facts contained herein
or therein not misleading. The fact that Surf City and its representatives have
conducted an investigation of Harvest prior to the execution of this Agreement
shall not affect the representations and warranties contained in this Article VI
or the extent of the obligations or liabilities of Harvest in the event of a
breach of any such representation or warranty.
16
<PAGE>
7.01.18 Tax Matters. Harvest has duly and timely filed all returns
with respect to any taxes required to be filed by it or for which it may be held
responsible, and has paid, or will pay on a timely basis, all taxes shown to be
due and payable on such returns, all deficiencies and assessments of taxes,
notice of which has been received by it, and all other taxes payable by it.
Harvest is not aware of any basis upon which any assessment for a material
amount of additional taxes could be made.
7.01.20 Financial Statements. It is understood that Harvest' financial
statements are not audited unless indicated as such on the delivered financial
documents. The year-end financial statements and interim financial statements
delivered by Harvest to the Purchaser have been prepared in accordance with
generally accepted accounting principles and present fairly the financial
position of Harvest as of December 31, 1998, and as of February 28, 1998,
respectively, and the statement of income presents fairly the results of
operations and changes in financial position of Harvest for the periods ended
December 31, 1998, and February 28, 1998, respectively, and sales reports for
the period commencing January 1, 1997, through the calendar month immediately
proceeding the date of submittal of the same, all in conformity with generally
accepted accounting principles applied on a basis consistent with that of prior
periods, except that the interim financial statements are not audited and do not
contain footnotes and are subject to audit adjustments. Other than as disclosed
in the Financial Statements, or elsewhere herein, as supplemented, as of the
Closing Date, Harvest has no outstanding liabilities as of the closing Date and
Harvest has no knowledge of any threatened claims, actions or investigations
which would result in the incurrence of any additional liabilities by Harvest
which will result in Surf City or Kootenay being liable to any third party due
to Buyer's purchase of the Transferred Assets. Harvest has no indebtedness,
liability or obligation or any character whatsoever, whether or not accrued,
whether known or unknown, fixed or unfixed, choate or inchoate, liquidated or
unliquidated, contingent or otherwise, including without limitation liabilities
for taxes, other governmental charges or pending lawsuits, other than (i)
liabilities reflected in the Financial Statements or Interim Financial
Statements, or elsewhere herein, or (ii) liabilities since the date of the
Interim Financial Statements as disclosed in writing to Surf City and Kootenay.
7.01.21 Full Disclosure. Harvest has disclosed to Surf City and
Kootenay all material facts relating to Harvest and its operations and has not
omitted to disclose to Surf City any material fact relating to Harvest, or its
operations necessary to make the statements made herein not misleading.
7.01.22 Financing. Harvest has been negotiating for debt/equity
financing which is in process and is anticipated to close by the end of March
1998.
7.02. Survival of Representations, Warranties, Covenants and
Indemnification. All covenants, agreements, representations and warranties of
17
<PAGE>
Harvest under this Agreement shall survive indefinitely and shall be deemed
material and relied upon by the other parties, regardless of any investigation
made by or on behalf of the other parties.
7.03. Disclosures. All of Harvest' warranties and representations herein
are modified to the extent needed to take into account Harvest' disclosures set
forth or identified in the attachment hereto entitled Harvest Disclosures.
ARTICLE VIII.
HARVEST'S COVENANTS
8.01. Continuation of Business. Harvest covenants and agrees as follows:
between the date hereof and the Effective Date,(i) unless otherwise consented to
in writing by Surf City and Kootenay, it shall conduct its affairs solely in the
ordinary course of business consistent with past practice and shall not
materially change its policies and practices; (ii) shall not issue or caused to
be issued by Harvest any capital stock or security convertible into capital
stock, except pursuant to outstanding warrants, convertible preferred stock,
stock options and convertible debentures, or grant any options or rights to
acquire capital stock, or otherwise alter Harvest's capital structure; (iii)
shall not repurchase any of its securities or pay any dividend or make any
distribution with respect to its securities other than normal cash dividends;
(iv) shall not enter into any contract or arrangement other than in the ordinary
course of business; and (v) shall not amend its charter documents or bylaws
8.02. No Solicitation. Unless and until the Effective Date occurs, Harvest
shall not (i) solicit any offer to acquire all or any part of Harvest's
business, assets or other properties or capital stock, whether by merger,
purchase of assets, tender offer or otherwise or (ii) except as required by law,
disclose, directly or indirectly, any information not customarily disclosed to
any person or entity concerning Harvest's business or properties, afford to any
other person or entity access to Harvest's properties, books or records or
otherwise assist or encourage any person or entity in connection with any of the
foregoing.
ARTICLE IX.
CONDITIONS TO THE EXCHANGE OF STOCK
9.01. Conditions Precedent to Performance by Harvest. The obligations of
Harvest under this Agreement are subject to the satisfaction of the following
conditions (any or all of which may be waived by Harvest in its sole discretion
to the extent permitted by law):
9.01.1 Board and Stockholder Approval. The Merger shall have been
effectively adopted and approved at or prior to the Effective Date by the Board
of Directors and stockholders of Surf City and the members of Kootenay in
accordance with applicable law.
18
<PAGE>
9.01.2 Representations True Representations and Covenants Performed.
The representations and warranties of Surf City set forth herein shall be true
and correct in all material respects immediately prior to the Effective Date
with the same effect as if made at that time. Surf City shall have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by them on or prior to the Effective Date. The
President of Surf City shall have delivered to Harvest a certificate to such
effect.
9.01.3 No Litigation Affecting Merger. No judgment, decree, order or
ruling of any court or regulatory or governmental authority shall have been
issued or entered against Surf City which would be violated by the completion of
the Merger, and no person or entity which is not a party to this Agreement shall
have commenced any litigation against Surf City seeking to restrain or prohibit,
or to obtain substantial damages in connection with, this Agreement or the
transactions contemplated hereby.
9.01.4 Securities Laws. All approvals, consents, permits, licenses or
qualifications from authorities administering the securities or "blue-sky" laws
of any state having jurisdiction required for the consummation of the Merger
shall have been obtained and shall be effective.
9.01.5 Regulatory Compliance, Approvals and Consents. Surf City shall
have complied with all legal provisions applicable to the Merger, and all
approvals required under any legal provision to carry out the Merger, and all
consents required to be obtained in connection with the Merger in order to avoid
a default under any contract, agreement, commitment, lease, mortgage, instrument
or other document to or by which any of Surf City is a party or may be bound,
shall have been obtained on terms reasonably satisfactory to Harvest.
9.01.6 Filings. A duly certified, executed and acknowledged copy of
articles of merger with respect to the Merger shall have been filed with the
appropriate Secretary in accordance with applicable law and a duly certified,
executed and acknowledged copy of this Agreement, or a certificate of merger
with respect thereto, shall have been filed with the appropriate Secretary in
accordance with applicable law.
90.02. Conditions Precedent to Performance by Surf City. The obligations of
Surf City under this Agreement are subject to the satisfaction of the following
conditions (any or all of which may be waived by Surf City in their sole
discretion to the extent permitted by law):
9.02.1 Board and Stockholder Approval. The Merger shall have been
effectively adopted and approved at or prior to the Effective Date by the Board
of Directors of Harvest and stockholders of Harvest in accordance with
applicable law and Harvest shall have delivered such certificate and evidence of
the same as reasonably requested by Surf City.
19
<PAGE>
9.02.2 Representations True and Covenants Performed. The
representations and warranties of Harvest set forth herein shall be true and
correct in all material respects immediately prior to the Effective Date with
the same effect as if made at that time. Harvest shall have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by them on or prior to the Effective Date. The
President of Harvest shall have delivered to Surf City and Kootenay a
certificate to such effect.
9.02.3 No Litigation Affecting Merger. No judgment, decree, order or
ruling of any court or regulatory or governmental authority shall have been
issued or entered against Harvest which would be violated by the completion of
the Merger, and no person or entity which is not a party to this Agreement shall
have commenced any litigation against Harvest seeking to restrain or prohibit,
or to obtain substantial damages in connection with, this Agreement or the
transactions contemplated hereby.
9.02.4 Securities Laws. All approvals, consents, permits, licenses or
qualifications from authorities administering the securities or "blue-sky" laws
of any state having jurisdiction required for the consummation of the Merger
shall have been obtained and shall be effective.
9.02.5 Regulatory Compliance, Approvals and Consents. Surf City shall
have complied with all legal provisions applicable to the Merger, and all
approvals required under any Legal Provisions to carry out the Merger, and all
consents required to be obtained in connection with the Merger in order to avoid
a default under any contract, agreement, commitment, lease, mortgage, instrument
or other document to or by which Harvest is a party or may be bound, shall have
been obtained on terms reasonably satisfactory to Surf City and Kootenay.
9.02.6 Filings. A duly certified, executed and acknowledged copy of
this Agreement, or a certificate of merger with respect thereto, shall have been
filed with the appropriate state Secretary in accordance with applicable law and
a duly certified, executed and acknowledged copy of articles of merger with
respect to the Merger shall have been filed with the appropriate Secretary in
accordance with applicable law.
ARTICLE X.
NOTICES
10.01 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder or with respect hereto shall be in
writing, and may be given by (a) personal service, (b) first-class United States
mail postage prepaid, (c) overnight delivery service, charges prepaid or (d)
telecopy or other means of electronic transmission, if confirmed promptly by any
20
<PAGE>
of the methods specified in clauses (a) (c) of this sentence, and will be deemed
to have been duly given or made when delivered personally, when mailed
first-class, postage prepaid, registered or certified mail when delivered to the
telegraph company, charges prepaid or when sent by electronic transmission, to
the respective parties, as follows:
If to Harvest:
Harvest Restaurant Group, Inc.
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
Attention: William J. Gallagher
If to Kootenay Holdings, L.L.C. or Surf City Squeeze, Inc.
Surf City Squeeze, Inc.
c/o Suite B-252 Scotsdale Centre
7373 North Scottsdale Road
Scottsdale, Arizona 85253-3527
10.02 Change of Address. Any of the parties hereto may change the address
to which such communications are to be directed to it or him by giving written
notice to the other parties in the manner provided in Section_10.01
ARTICLE XI.
GENERAL
11.01 Governing Law. This Agreement and the performance of the transactions
contemplated hereby shall be governed by and construed and enforced in
accordance with the laws of Texas, notwithstanding any contrary application of
conflicts of laws principles.
11.02 Press Releases. The parties hereto agree to use their best efforts to
coordinate the preparation of and making of any public announcements of the
transactions contemplated by this Agreement. No such release or public
announcement pertaining to the transactions contemplated by this Agreement may
be made by either party without the prior consent of the other party, unless
such release or announcement is required by law.
11.03 Entire Agreement. This Agreement and the Schedules hereto and the
agreements, documents and instruments referred to herein, set forth the entire
agreement and understanding of the parties in respect of the transactions
contemplated hereby and supersede all prior agreements, arrangements and
understandings relating to the subject matter hereof, whether oral or written.
The parties hereto have not relied upon any promises, representations,
warranties, agreements, covenants or undertakings, other than those expressly
set forth or referred to herein.
21
<PAGE>
11.04 Successors. All of the terms, covenants, representations, warranties
and conditions of this Agreement shall be binding upon, and inure to the benefit
of and be enforceable by, the parties hereto and their respective successors,
heirs, and other legal representatives, but this Agreement and the rights and
obligations hereunder shall not be assigned, except that Harvest may assign or
transfer any of its rights and obligations hereunder to any of its affiliates
without Surf City's or the Shareholder's consent.
11.05 Modification. No amendment, modification or attempt to supersede or
cancel any of the terms, covenants, representations, warranties or conditions
hereof shall be effective unless such amendment, modification or direction to
supersede or cancel such term, covenant, representation, warranty or condition
is in writing executed by Harvest, Surf City, or, in the case of a waiver, by or
on behalf of the party waiving compliance. No waiver by any party of any
condition, or of any breach of any term, covenant, representation or warranty
contained in this Agreement, in any one or more instances, shall be deemed to be
a further or continuing waiver of any such condition or breach or a waiver of
any other condition or of any breach of any other term, covenant, representation
or warranty.
11.06 Counterparts. This Agreement and any amendment or modification hereof
may be executed simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which taken together shall constitute one and
the same instrument.
11.07 Signatures by Facsimile. Any facsimile signature of any party hereto
shall constitute a legal, valid and binding execution hereof by such party.
11.08 Arbitration. In the event of a dispute between the parties arising
under this Agreement, the parties shall submit to binding arbitration before a
single arbitrator in a neutral city, under the Commercial Arbitration Rules of
the American Arbitration Association. The decision of the arbitrator shall be
final and binding with respect to the dispute subject to arbitration and shall
be enforceable in any court of competent jurisdiction. Each party shall bear its
own expenses and costs incurred in such arbitration. Nothing in this paragraph
shall derogate from the rights of the parties to seek preliminary injunctive
relief to preserve the status quo.
22
<PAGE>
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
and Plan of Merger as of the date first above written.
HARVEST RESTAURANT GROUP, INC. SURF CITY ACQUISITION
CORPORATION II, INC.
By:_____________________________
Title: Chairman & Chief Executive Officer By: William J. Gallagher
Title: President
KOOTENAY HOLDINGS, L.L.C.
By:__________________________________
Title: ______________________________
24
SHARE EXCHANGE AGREEMENT
This SHARE EXCHANGE AGREEMENT is made and entered into as of this ___ day
of March, 1998, between HARVEST RESTAURANT GROUP, INC., a Texas corporation
("Harvest"), and SPORTS GROUP INTERNATIONAL, INC., a Delaware corporation
("Sports").
RECITALS
WHEREAS, the parties, together with Surf City Acquisition Corporation II,
an Arizona corporation ("Surf City"), executed an Agreement in Principle wherein
the basic terms of the transactions described herein were agreed to and reduced
to writing, subject to further negotiations;
WHEREAS, Sports has approximately 13,500,000 issued and outstanding shares
of Common Stock and a liability of approximately $4,500,000, (the "Peterson
Note"), which is convertible, at the Peterson Note holder's option, into Sports
stock;
WHEREAS, Kootenay Holdings, L.L.C. ("Kootenay") owns all of the issued and
outstanding shares of Surf City;
WHEREAS, the intended result of this Agreement and the Kootenay/Harvest
Share Exchange Agreement of even date hereof, taken together, is for Harvest to
own all outstanding shares of Sports and Surf City and for Harvest's shares of
Common Stock to be allocated as follows upon the Effective Date:
4,089,500 To Harvest's shareholders
4,000,000 To Sports shareholders
542,045 To Sports debt holders
9,290,545 To Kootenay
17,922,090 Total issued shares of Harvest Common Stock on the
Effective Date
WHEREAS, it is understood and agreed that Harvest's outstanding shares of
Common Stock shall be determined as of the Effective Date and that, to the
extent Harvest Common Stock on the Effective Date is proportionally greater or
lesser than 4,129,130 shares, then the shares of Harvest Common Stock to be
issued to Sports shareholders and to Kootenay as set forth above shall be
adjusted pro rata in the same proportion;
WHEREAS, it is intended that the Peterson Note shall be exchanged for a
single indivisible share of Peterson Preferred class of Harvest stock. Peterson
Preferred Stock shall accrue dividends at the Wall Street Journal's National
Prime Rate upon the first business day of each year upon a principal sum of
$4,500,000, the dividend being payable by January 31 of each succeeding year.
Peterson Preferred shall have preferred rights against all assets of Sports, and
shall have default rights in the event of failure to timely pay such dividends
which shall permit the holder to demand immediate redemption of the full amount
of $4,500,000 and all past-due dividends. Peterson Preferred may, at its
holder's option, convert to 1,600,000 shares of Harvest Common Stock after two
years from the Effective Date, in which event Kootenay shall receive an
additional 1,000,000 shares of Harvest Common Stock. Peterson Preferred is a
non-voting share, does not vote as a class, and does not participate in
Harvest's dividends, or profits other than as is expressly set forth herein;
1
<PAGE>
WHEREAS, it is the intention of the parties hereto that (a) the transfer
and allocation of economic benefits and burdens described in this Agreement
shall for all purposes shall be deemed as having been transferred and allocated
as of the Effective Date and (b) if the execution of the Agreement, the
obtaining of certain regulatory consents, the actual exchange of share
certificates and other documents should occur subsequent to the Effective Date,
then each of the before- referenced events shall be deemed conditions subject to
an executed contract and shall in no fashion be considered as deferrals of the
effective exchange of stock which occurred, for all purposes, as of the
Effective Date; and
WHEREAS, the parties intend this transaction to qualify as a "tax free
re-organization" within the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended, and that Sports become a subsidiary of
Harvest.
ARTICLE I.
CLOSING CONTINGENT UPON
CLOSING OF CONTEMPLATED TRANSACTIONS
1.01 Share Exchange. The obligation of the parties to this Agreement to
close this transaction is contingent upon the closing of certain other
transactions listed below and defined collectively as the "Contemplated
Transactions." Each of the parties to each of the Contemplated Transactions
shall use their best efforts to fulfill their obligations to close all of the
Contemplated Transactions. If any of the Contemplated Transactions do not close,
parties who are not in breach or default of their own obligations under this
Agreement shall not be required to close their respective transactions which are
part of the Contemplated Transactions and will not be in default of their
obligations for not closing the same.
1.02 Contemplated Transactions. This Agreement contemplates that the
following multiple transactions (collectively, the "Contemplated Transactions")
shall be closed before or concurrently with the Closing of this transaction.
1.02.1 Kootenay/Harvest Share Exchange Agreement. The Kootenay/Harvest
Share Exchange Agreement executed between the parties of even date hereof shall
be closed before or concurrently with the closing of the transaction described
in this Agreement.
1.02.2 Financing. A $4,000,000 financing arrangement shall have been
obtained on or before Closing and is to be used, in part, as follows:
(a) $500,000 to partially redeem all Harvest Preferred B Stock;
2
<PAGE>
(b) $1,000,000 to Kootenay;
(c) $1,000,000 loan to Kootenay, which shall be evidenced by a
promissory note and secured by stock of Surf City;
(d) $250,000 payable to the Bank of L.A. for corporate purposes;
(e) $500,00 payable to Sports for corporate purposes; $500,000
paid to Surf City for corporate purposes; and
(f) $750,000 payable to Harvest accounts dedicated to Harvest
Food Court/Red Line project; and the remainder being
retained by Harvest for corporate purposes.
1.02.3 Voting Agreement. Harvest, Sports, and Surf City shall have
executed the Voting Agreement attached hereto as Exhibit "A" simultaneously with
the execution of this Agreement. The Voting Agreement provides for the election
of a new Harvest Board of Directors at a Shareholder Meeting to be held promptly
after Closing of this transaction the following to be the new Directors: Kevin
Blackwell, Kathy Blackwell, David Guarino, Ernest (KiKi) Vandewaehe III, Dean
Miller, Clyde Drexler, Bill Gallagher, and Robert Schwartz. It is agreed and
understood that election of these Directors is subject to closing of the
transaction described in this Agreement.
1.02.4 Employment Agreements. Dean Miller, William Gallagher, Kevin
Blackwell, David Guarino, Kathy Blackwell, and Ernest (KiKi) Vandewaehe III
shall have executed the agreements with Harvest which are attached hereto as
Exhibits B-1, B-2, B-3, B-4, and B-5. The Miller and Gallagher agreements will
be consulting agreements at $10,000 per month plus approved expenses. The
Blackwell and Guarino agreements shall be employment contracts paying an annual
amount of $200,000. The Vandewaehe III Agreement will be a consulting Agreement
paying an annual amount of $70,000. Each of these employment agreements will
extend four years from the Effective Date.
1.02.5 Peterson Preferred. The holders of the Sports Peterson
Preferred Note have executed the Peterson Preferred Agreement attached hereto as
Exhibit C. The Peterson Preferred Agreement will exchange the Peterson Note for
a single indivisible share of Peterson Preferred Class of Harvest Stock.
Peterson Preferred Stock shall accrue dividends at the Wall Street Journal's
national prime rate on the first business day of each year upon the amount of
$4,500,000, the dividend being payable by January 1, of each succeeding year.
Peterson Preferred shall have preferred rights against all assets of Sports, and
if Harvest shall fail to timely pay such dividends, the holder shall have the
right to demand immediate redemption of the full amount of $4,500,000 and all
past-due dividends. Peterson Preferred may, at its holder's option, convert to
1,600,000 shares of Harvest Common Stock after two years from the Effective
Date, in which event Kootenay shall receive an additional 1,000,000 shares of
Harvest Common Stock. Peterson Preferred is a non-voting share, does not vote as
a class, and does not participate in Harvest's dividends, or profits other than
as is expressly set forth herein.
3
<PAGE>
1.02.6 Harvest Preferred B Agreement. The Harvest Series B Preferred
Stock amendments shall be entered into before Closing.
1.02.7 Guarantee. Harvest will guarantee the guarantors of Sports
$500,000 note to the Bank of L.A. that the note will be paid.
II. FEASIBILITY PERIOD
2.01 Feasibility Study. Each party is granted the right to conduct a
feasibility study of all of the existing and contingent assets and liabilities
of the other party including a physical inspection of all leases, improvements,
fixtures, mechanical equipment, personnel property, and other tangible and
intangible assets ("Feasibility Study"). Each party shall have until March 30,
1998 ("Feasibility Period"). During the Feasibility Period, either party, or
their designated agents, may enter upon the leased or owned premises of the
other party for such analyses, tests, and inspections which may be deemed
necessary by either party. If either party determines, in their sole reasonable
judgment, that the transaction is not desirable for any reason, then that party
may, on written notice to the other party, on or before expiration of the
Feasibility Period, terminate this Agreement without penalty or being in default
of their obligations. If the written notice is not given to the other party on
or before 5:00 p.m. Central Standard Time on the expiration date of the
Feasibility Period, this right to terminate shall be deemed to have been waived
by the party failing to give the notice.
2.02 Documents to be Delivered. Each party shall deliver to the other party
copies of the following within five business days from the date of this
Agreement. Failure to deliver any of the listed documents is an independent
reason for the other party to rightfully terminate this Agreement. If any one or
more of the items described in Section 2.02 do not exist, the disclosing party
shall advise the receiving party, in writing, to that effect.
2.02.1 Financial Statements. Copies of financial statements as set
forth in Sections 5.01.20 and 7.01.20. This includes monthly sales reports for
the period commencing January 1, 1998, through the calendar month immediately
proceeding the date of submittal of the same.
2.02.2 Asset List. A detailed inventory of all equipment, furnishings,
fixtures, and inventories.
2.02.3 Leases. All leases of real or personal property and any
documents pertaining to such leases in the disclosing parties' possession.
4
<PAGE>
2.02.4 Contracts. Copies of all contracts and warranties and related
documents including service, maintenance, management, employment, or other
agreements, including loan agreements which affect the disclosing party or its
assets. If such exist, all documents, notices, or citations indicating a default
or breach by the disclosing party of any contract in which the disclosing party
is a party.
2.02.5 Certificates. Certificates of all fire, hazard, liability, and
other insurance policies maintained by the disclosing party.
2.02.6 Taxes. The most recent real estate and personal property tax
statements regarding the disclosing party's property along with the disclosing
party's federal income tax returns for the last two years and proof of payment
of all sales and payroll taxes.
2.02.7 Litigation. If such exists, all notices, citations, or other
documents evidencing actions, suits or proceedings pending or threatened or
asserted against the disclosing party, at law or in equity, before any state,
federal, county, municipal, or other governmental department, commission, board,
bureau, agency, or instrumentality, whether domestic or foreign.
2.02.8 Violations. If such exists, all documents, notices, or
citations indicating a violation by the disclosing party of zoning, building,
fire, or similar law, ordinance, code, order, regulation or restriction claimed
by any applicable governmental authority.
2.02.9 Organizational Documents. All currently effective
organizational documents and other records of the disclosing party including,
without limitation, articles, by laws, directors, minutes, and stock ledger.
ARTICLE III.
THE SHARE EXCHANGE
3.01. Closing.
3.01.1 Time and Place of Closing. Subject to the provisions of
Articles V and VII, the Closing of the transaction contemplated hereby
("Closing") shall take place at the offices of Titus, Brueckner & Berny, P.C.,
7373 N. Scottsdale Road, Suite B-252, Scottsdale, Arizona 85253 at 10:00 a.m.,
local time, on the Effective Date, or at such other place, date, or time, as the
parties may mutually agree upon writing for the Closing to take place.
3.01.2 Actions of Harvest at Closing. At the Closing, Harvest shall
deliver Sports the following:
5
<PAGE>
3.01.2.1 Resignations. Harvest shall deliver to Sports the
written and executed resignations of such directors of Harvest and such executed
employment agreements, dated as of the Effective Date, as called for in this
Agreement.
3.01.2.2 Certificate of Harvest. Harvest shall deliver to Sports
a certificate, which shall be dated as of Closing and which shall be signed by
Harvest's Chief Executive Officer certifying (i) the authority of Harvest to
enter into and consummate the transactions contemplated by this Agreement; (ii)
the authority of the officers of Harvest to execute and deliver any document
contemplated by this Agreement on behalf of Harvest; (iii) that the
representations and warranties of Harvest obtained herein were correct and true
when made and are correct and true as of the date of Closing (except to the
extent that any representation or warranty of Harvest specifically relates to an
earlier date); and (iv) that each and every covenant and agreement of Harvest
contained in the Agreement to be performed by Harvest on or prior to Closing has
been performed by Harvest. Kootenay and Surf City may rely upon the certificate
as if it were delivered to them directly.
3.01.2.3 Corporation Resolutions. Harvest shall deliver to Sports
certified copies of the resolutions of the Board of Directors of Harvest
authorizing the execution, delivery, and performance of this Agreement and the
transactions contemplated herein.
3.01.2. Actions of Sports at Closing. At the Closing, Sports shall
deliver to Harvest the following:
3.01.2.1 Resignations. Sports shall deliver to Harvest the
written and executed resignations of such directors of Sports and such executed
employment agreements, dated as of the Effective Date, as called for in this
Agreement.
3.01.2.2 Certificate of Sports. Sports shall deliver to Harvest a
certificate, which shall be dated as of Closing and which shall be signed by
Sports' Chief Executive Officer certifying (i) the authority of Sports to enter
into and consummate the transactions contemplated by this Agreement; (ii) the
authority of the officers of Sports to execute and deliver any document
contemplated by this Agreement on behalf of Sports; (iii) that the
representations and warranties of Sports obtained herein were correct and true
when made and are correct and true as of the date of Closing (except to the
extent that any representation or warranty of Sports specifically relates to an
earlier date); and (iv) that each and every covenant and agreement of Sports
contained in the Agreement to be performed by Sports on or prior to Closing has
been performed by Sports. Kootenay and Surf City may rely upon the certificate
as if it were delivered to them directly.
3.01.2.3 Corporation Resolutions. Sports shall deliver to Harvest
certified copies of the resolutions of the Board of Directors of Sports and the
shareholder approval of Sports authorizing the execution, delivery, and
performance of this Agreement and the transactions contemplated herein.
6
<PAGE>
3.02.3 Effective Date. The date on which the Exchange of Shares occurs
and becomes effective is hereinafter called the "Effective Date." The Effective
Date shall be March 31, 1998, except and unless there is a delay in the filing
of Articles of Share Exchange with any state Secretary of State which is needed
for the exchange of shares to lawfully occur, in which event the Effective Date
shall be the earliest date after March 31, 1998, that is lawful for the exchange
of shares to occur. The parties shall cause all such documents and instruments
to be filed with the appropriate state Secretaries of State as promptly as
practicable upon satisfaction of the conditions described herein.
ARTICLE IV.
EXCHANGE OF SHARES AND OTHER MATTERS
4.01. Exchange of Shares. Upon the Effective Date, by virtue of this
Agreement, each of the following shall be deemed to occur contemporaneously:
4.01.1 Exchange of Sports Common Stock. All issued and outstanding
shares of Sports Common Stock shall be exchanged for a total of 4,000,000 fully
paid and non-assessable shares of Harvest Common Stock in accordance with the
provisions of Section 4.02, which shall be allocated equally among all issued
and outstanding shares of Sports Common Stock. An exception is that, if more or
less than 4,089,500 issued shares of Harvest Common Stock are issued on the
Effective Date, then the Harvest Common Stock shares received by holders of
Sports shares in exchange for each Sports share shall be increased or decreased
by the same pro rata proportion as Harvest's Common Stock at Effective Date is
greater or lesser than 4,089,500 shares.
4.01.2 Exchange of Peterson Note. The Peterson Note, valued in an
amount of approximately $4,500,000 shall be exchanged for a single individual
share of Peterson Preferred Class of Harvest Stock. The Peterson Preferred
Agreement will exchange the Peterson Note for a single indivisible share of
Peterson Preferred Class of Harvest Stock.
4.01.3 Exchange of Sports Debt. The Sports debt shall be exchanged for
a total of 542,045 fully-paid and non-assessable shares of Harvest Common Stock
in accordance with the provisions of Section 4.02. An exception is that, if more
or less than 4,089,500 issued shares of Harvest Common Stock are issued on the
Effective Date, then the Harvest Common Stock shares received by holders of
Sports debt shall be increased or decreased by the same pro rata proportion as
Harvest's Common Stock at Effective Date is greater or lesser than 4,089,500
shares.
4.01.4 Total Harvest Shares Exchanged. The shares of Harvest Common
Stock to be issued pursuant to this Section shall total 4,542,045 shares
adjusted as set forth herein; provided, however, that no such exchange and
conversion shall be made with respect to any shares of Sports Stock held by
stockholders who have properly exercised and perfected their appraisal rights
("Dissenting Shares").
7
<PAGE>
4.02 Exchange Procedure.
4.02.1 Sports Common Stock. Following the Effective Date, the holder
of each share of Sports Common Stock exchanged pursuant to Section 4.01 shall
surrender to the Secretary of Harvest (or to any agent designated for such
purpose by the President of Harvest) his outstanding certificate which prior
thereto represented Sports Common Stock, and shall upon such surrender receive
in substitution and exchange therefor a certificate representing the number of
shares of Harvest Common Stock into which such Sports Common Stock shall have
been converted. Until so surrendered and exchanged, each outstanding certificate
which, prior to the Effective Date, represented Sports Common Stock shall,
following the Effective Date, be deemed for all purposes to evidence ownership
of the number of shares of Harvest Common Stock into which such shares of Sports
Common Stock have been converted.
4.02.2 Sports Preferred Stock. Following the Effective Date, the
holder of each share of Sports Preferred Stock exchanged pursuant to Section
4.01 shall surrender to the Secretary of Harvest (or to any agent designated for
such purpose by the President of Harvest) his outstanding certificate which
prior thereto represented Sports Preferred Stock, and shall upon such surrender
receive in substitution and exchange therefor a certificate representing the
number of shares of Harvest Preferred Stock into which such Sports Preferred
Stock shall have been converted. Until so surrendered and exchanged, each
outstanding certificate which, prior to the Effective Date, represented Sports
Preferred Stock shall, following the Effective Date, be deemed for all purposes
to evidence ownership of the number of shares of Harvest Preferred Stock into
which such shares of Sports Preferred Stock have been converted.
4.03 Appraisal Rights. Notwithstanding anything to the contrary contained
in this Agreement, Dissenting Shares shall not be canceled or converted into
Harvest Common Stock unless and until the holder thereof shall have failed to
perfect or shall have effectively withdrawn or lost his right to seek payment of
the fair value of his shares under applicable law. If any such holder shall have
so failed to perfect or shall have effectively withdrawn or lost such right,
such holder's Dissenting Shares shall thereupon be deemed to have been exchanged
into, at the Effective Date, Harvest Common Stock, as set forth in this Article.
Any payments made in respect of Dissenting Shares shall be made by Sports.
ARTICLE V.
SPORTS' REPRESENTATIONS AND WARRANTIES
5.01. Sports' Representations and Warranties. Sports makes the following
representations and warranties to Harvest and to Kootenay and Surf City as a
8
<PAGE>
material inducement for Harvest to enter into this Agreement and for Kootenay
and Surf City to enter into the Kootenay/Harvest Share Exchange Agreement
subject only to such disclaimers as disclosures and exceptions as are expressly
set forth in the attachments hereto. These representations and warranties are
limited to the best actual knowledge of Sports Directors and officers. Further,
immaterial breaches of these representations and warranties are specifically
agreed to not comprise actionable breaches.
5.01.1 Capitalization.
5.01.1.1 Authorized Stock. The authorized capital stock of Sports
consists of ______ shares of Sports Common Stock, $___ par value per share.
5.01.1.2. Issued Common Stock. There are _______ shares of Sports
Common Stock issued and outstanding, all of which are owned beneficially and of
record by the listed shareholders. All such issued and outstanding shares of
Sports Common Stock are duly authorized, validly issued, fully paid and
non-assessable, were not issued in violation of the terms of any contract,
agreement or commitment binding upon Sports or any preemptive rights or rights
of first refusal, and were issued in compliance with all of its charter
documents and applicable law.
5.01.1.3 Issued Preferred Stock. There are no shares of Sports
Preferred Stock issued and outstanding other than the Peterson Note, which has
the following conversion rights: _______________________________.
5.01.2 Organization, Standing and Power. Sports is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is qualified to do business where the failure to be so qualified
would materially and adversely affect its condition, properties, assets or
operations. Sports has all requisite corporate power and authority to enter into
and perform and consummate the transactions contemplated by this Agreement. The
copies of the charter documents of Sports and all amendments thereto and of its
bylaws as amended to date which have heretofore been furnished or delivered to
the Harvest are correct and complete.
5.01.3 Subsidiaries. Sports has no subsidiaries.
5.01.4 Title to Assets. Sports has good, valid and indefeasible title
to its assets, free and clear of all security interests, mortgages, liens,
encumbrances, title retention or security agreements, claims, restrictions,
leases, options, rights of first offer or first refusal, confidentiality or
secrecy agreements, non-competition agreements, defects of title or other
encumbrances or rights of others. The execution and delivery of this Agreement
and the consummation of the transaction contemplated hereby will not constitute
a violation of, nor be in conflict with, nor constitute a default, under any
terms or provisions of any contract, lease, mortgage, indenture, or any other
document whatsoever to which Sports may be a party or to which Sports may be
bound on each Closing Date.
9
<PAGE>
5.01.5 Other Relationships. No affiliate, director, officer, principal
executive, or employee of or consultant to Sports owns, directly or indirectly,
in whole or in part, any property, asset or right, tangible or intangible
relating to or affecting Sports.
5.01.6 Other Transactions Etc. No affiliate, director, officer,
principal executive or employee of Sports, has, directly or indirectly, engaged
in any transaction with Sports outside of the ordinary course of business.
5.01.7 Undisclosed Liabilities. Sports has no debts, liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due, including, but not limited to, liabilities or
obligations on account of known fraud by any merchant customer, taxes, other
governmental charges, duties, penalties, interest, fines, vacation pay,
workmen's compensation claims, or pension plan obligations and there is no known
basis for the assertion against Sports.
5.01.8 Absence of Certain Changes or Events. The business of Sports
has been operated only in the usual and ordinary course of business and there
has not been any occurrence, event or condition outside of the ordinary course
of business.
5.01.9 Condition of Assets. The assets of Sports are in good operating
condition for the purposes of conducting the business of Sports on the Effective
Date as such business has been or is being conducted. Sports has good and
marketable title to all of the Assets subject to no mortgage, pledge, lien,
conditional sales agreement, encumbrance, security interest, encumbrance, or
charge of any nature whatsoever, except as herein provided.
5.01.10 No Violation of Law. Neither Sports, nor any of its assets or
property of Sports or the ownership, leasing, occupancy or operation thereof, is
in violation of any applicable law, code, rule, regulation, ordinance, license
or permit, including, but not limited to, those related to building, zoning,
environmental matters or employee health and safety, and no notice from any
governmental body or other person has been served upon Sports occupied or
operated by Sports claiming any such violation.
5.01.11 Contracts. All of Sports' contracts, agreements, customer and
supplier purchase order and other commitments are legal, valid and binding and
in full force and effect, and there are no defaults thereunder. None of the
rights of Sports thereunder will be impaired by the consummation of the
transactions contemplated by this Agreement, and all of the rights of Sports
thereunder will be enforceable by Harvest after the Merger without the consent
or agreement of any other party except for the agreements specifically listed in
attachments hereto which contracts require consent to assignment. Copies of the
all such contracts have heretofore been delivered to Harvest by Sports and are
true and complete and include all amendments and supplements thereto and
modifications thereof.
10
<PAGE>
5.01.12 Permits, Licenses, Consents, Etc. Sports has all governmental
leases, licenses, permits, consents, approvals, authorizations, qualifications
and orders necessary to conduct its business and to operate its properties and
assets, and such leases, licenses, permits, consents, approvals, authorizations,
qualifications and orders are in full force and effect. No notification to or
approval of any governmental agency is required for all governmental leases,
licenses, permits, consents, approvals, authorizations, qualifications and
orders to remain in full force and effect after the closing. No violations exist
or have been recorded in respect of any governmental lease, license, permit,
consent, approval, authorization, qualification or order of Sports. No
proceeding is pending or, to the best of Sports' knowledge, threatened looking
toward the revocation or limitation of any such governmental lease, license,
permit, consent, approval, authorization, qualification or order and there is no
basis or grounds for any such revocation or limitation. Sports has complied in
all material respects with all present and, to the best of Sports' knowledge,
enacted but not yet effective, federal, state and local laws, rules,
regulations, ordinances, codes, orders, licenses and permits relating to any of
its properties or applicable to its business.
5.01.13 Absence of Defaults. Sports is not nor is it alleged to be, in
default under, or in breach of any term or provision of, any contract,
agreement, lease, license, commitment, instrument or fiduciary or other
obligation. No other party to any contract, agreement, lease, license,
commitment, instrument or fiduciary or other obligation to which Sports is party
is in default thereunder or in breach of any term or provision thereof. There
exists no condition or event which, after notice or lapse of time or both, would
constitute a default by any party to any such contract, agreement, lease,
license, commitment, instrument or fiduciary or other obligation.
5.01.14 Litigation. There is (i) no suit, action or claim, (ii)_no
investigation or inquiry by any administrative agency or governmental body, and
(iii) no legal, administrative or arbitration proceeding pending or, to the best
of Sports' knowledge, threatened against Sports or any of the properties,
assets, business or prospects of Sports or to which Sports is or might become a
party, and to the best of Sports' knowledge, there is no basis or grounds for
any such suit, action, claim, investigation, inquiry or proceeding, including
but not limited to, labor, equal employment opportunity, safety and health,
environmental and antitrust laws. There is no outstanding order, writ,
injunction or decree of any court, administrative agency or governmental body or
arbitration tribunal against or affecting or relating to Sports.
5.01.15 No Breach or Violation of Law. The execution and delivery of
this Agreement by Sports and the consummation of the transactions contemplated
hereby will not (i) conflict with, or result in the breach of any of the terms
or conditions of, or constitute a default under, or result in the acceleration
11
<PAGE>
of any obligation under, or require any consent, approval or notice under, the
charter documents or the bylaws or any resolution of Sports or any contract,
agreement, commitment, indenture, mortgage, deed of trust, lease, pledge
agreement, note, bond, license or other instrument or obligation to which Sports
is now a party or by which Sports or any of the properties or assets of Sports
may be bound or affected, or (ii) violate any law, or any rule or regulation of
any administrative agency or governmental body, or any order, writ, injunction
or decree of any court, administrative agency or governmental body.
5.01.16 Validity and Authorization. This Agreement has been duly
authorized by all necessary corporate and shareholder action and duly and
validly executed and delivered by Sports and is legally binding on Sports in
accordance with its terms.
5.01.17 Completeness; No Misrepresentations. The copies of all
instruments, agreements, and written information, including without limitation
the Schedules hereto, delivered pursuant to this Agreement or otherwise
furnished or made available to Harvest by Sports, or any representatives of
either of them are complete and correct as of the date hereof. The
representations and warranties made by Sports or the Shareholder in this
Agreement or in any Schedule or other document furnished in connection with this
Agreement do not contain any untrue statement of a material fact, or omit to
state a material fact necessary to make the statements or facts contained herein
or therein not misleading. The fact that Harvest and its representatives have
conducted an investigation of Sports prior to the execution of this Agreement
shall not affect the representations and warranties contained in this Article or
the extent of the obligations or liabilities of Sports in the event of a breach
of any such representation or warranty.
5.01.18 Tax Matters. Sports has duly and timely filed all returns with
respect to any taxes required to be filed by it or for which it may be held
responsible, and has paid, or will pay on a timely basis, all taxes shown to be
due and payable on such returns, all deficiencies and assessments of taxes,
notice of which has been received by it, and all other taxes payable by it.
Sports is not aware of any basis upon which any assessment for a material amount
of additional taxes could be made.
5.01.20 Financial Statements. It is understood that Sports' financial
statements are not audited unless indicated as such on the delivered financial
documents. The year-end financial statements and interim financial statements
delivered by Sports to the Purchaser have been prepared in accordance with
generally accepted accounting principles and present fairly the financial
position of Sports as of December 31, 1998, and as of February 28, 1998,
respectively, and the statement of income presents fairly the results of
operations and changes in financial position of Sports for the periods ended
December 31, 1998, and February 28, 1998, respectively, and sales reports for
the period commencing January 1, 1998, through the calendar month immediately
proceeding the date of submittal of the same, all in conformity with generally
accepted accounting principles applied on a basis consistent with that of prior
periods, except that the interim financial statements are not audited and do not
contain footnotes and are subject to audit adjustments. Other than as disclosed
12
<PAGE>
in the Financial Statements, or elsewhere herein, as supplemented, as of the
Closing Date, Sports has no outstanding liabilities as of the closing Date and
Sports has no knowledge of any threatened claims, actions or investigations
which would result in the incurrence of any additional liabilities by Sports
which will result in Harvest being liable to any third party due to Buyer's
purchase of the Transferred Assets. Sports has no indebtedness, liability or
obligation or any character whatsoever, whether or not accrued, whether known or
unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
contingent or otherwise, including without limitation liabilities for taxes,
other governmental charges or pending lawsuits, other than (i) liabilities
reflected in the Financial Statements or Interim Financial Statements, or
elsewhere herein, or (ii) liabilities since the date of the Interim Financial
Statements as disclosed in writing to Harvest.
5.01.21 Full Disclosure. Sports has disclosed to Harvest all material
facts relating to Sports and its operations and has not omitted to disclose to
Harvest any material fact relating to Sports, or its operations necessary to
make the statements made herein not misleading.
5.02. Survival of Representations, Warranties, Covenants and
Indemnification. All covenants, agreements, representations and warranties of
Sports under this Agreement shall survive indefinitely and shall be deemed
material and relied upon by the other parties, regardless of any investigation
made by or on behalf of the other parties.
5.03. Disclosures. All of Sports' warranties and representations herein are
modified to the extent needed to take into account Sports' disclosures set forth
or identified in the attachment hereto entitled Sports Disclosures.
ARTICLE VI.
SPORTS' COVENANTS
6.01. Continuation of Business. Sports covenants and agrees with Harvest,
Kootenay, and Surf City as follows: between the date hereof and the Effective
Date,(i) unless otherwise consented to in writing by Harvest, it shall conduct
its affairs solely in the ordinary course of business consistent with past
practice and shall not materially change its policies and practices; (ii) shall
not issue or caused to be issued by Sports any capital stock or security
convertible into capital stock, except pursuant to outstanding warrants,
convertible preferred stock, stock options and convertible debentures, or grant
any options or rights to acquire capital stock, or otherwise alter Sports'
capital structure; (iii) shall not repurchase any of its securities or pay any
dividend or make any distribution with respect to its securities other than
normal cash dividends; (iv) shall not enter into any contract or arrangement
other than in the ordinary course of business; and (v) shall not amend its
charter documents or bylaws
6.02. No Solicitation. Unless and until the Effective Date occurs, Sports
shall not (i) solicit any offer to acquire all or any part of Sports' business,
13
<PAGE>
assets or other properties or capital stock, whether by merger, purchase of
assets, tender offer or otherwise or (ii) except as required by law, disclose,
directly or indirectly, any information not customarily disclosed to any person
or entity concerning Sports' business or properties, afford to any other person
or entity access to Sports' properties, books or records or otherwise assist or
encourage any person or entity in connection with any of the foregoing.
ARTICLE VII.
HARVEST'S REPRESENTATIONS AND WARRANTIES
7.01. Harvest's Representations and Warranties. Harvest makes the following
representations and warranties to Sports as a material inducement for Sports to
enter into this Agreement subject only to such disclaimers as disclosures and
exceptions as are expressly set forth in the attachments hereto. These
representations and warranties are limited to the best actual knowledge of
Harvest Directors and officers. Further, immaterial breaches of these
representations and warranties are specifically agreed to not comprise
actionable breaches.
7.01.1 Capitalization.
7.01.1.1 Authorized Stock. The authorized capital stock of
Harvest consists of 20,000,000 shares of Harvest Common Stock, $0.01 par value
per share, 3,00,00 Series A, Preferred Stock, and 1,000 shares of Harvest Seris
B Preferred Stock, $1.00 par value per share.
7.01.1.2. Issued Common Stock. There are 2,699,030 shares of
Harvest Common Stock issued and outstanding, all of which are owned beneficially
and of record by the listed shareholders. All such issued and outstanding shares
of Harvest Common Stock are duly authorized, validly issued, fully paid and
non-assessable, were not issued in violation of the terms of any contract,
agreement or commitment binding upon Harvest or any preemptive rights or rights
of first refusal, and were issued in compliance with all of its charter
documents and applicable law.
7.01.1.3 Issued Preferred Stock. There are 515,000 shares of
Harvest Series A Preferred Stock and 150 shares of Harvest Series B Preferred
Stock issued and outstanding, all of which are owned beneficially and of record
by the listed shareholders. All such issued and outstanding shares of Harvest
Preferred Stock are duly authorized, validly issued, fully paid and
non-assessable, were not issued in violation of the terms of any contract,
agreement or commitment binding upon Harvest or any preemptive rights or rights
of first refusal, and were issued in compliance with all of its charter
documents and applicable law.
7.01.2 Organization, Standing and Power. Harvest is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Texas and is qualified to do business where the failure to be so qualified would
materially and adversely affect its condition, properties, assets or operations.
14
<PAGE>
Harvest has all requisite corporate power and authority to enter into and
perform and consummate the transactions contemplated by this Agreement. The
copies of the charter documents of Harvest and all amendments thereto and of its
bylaws as amended to date which have heretofore been furnished or delivered to
the Sports are correct and complete.
7.01.3 Subsidiaries. Harvest has no subsidiaries.
7.01.4 Title to Assets. Harvest has good, valid and indefeasible title
to its assets, free and clear of all security interests, mortgages, liens,
encumbrances, title retention or security agreements, claims, restrictions,
leases, options, rights of first offer or first refusal, confidentiality or
secrecy agreements, non-competition agreements, defects of title or other
encumbrances or rights of others. The execution and delivery of this Agreement
and the consummation of the transaction contemplated hereby will not constitute
a violation of, nor be in conflict with, nor constitute a default, under any
terms or provisions of any contract, lease, mortgage, indenture, or any other
document whatsoever to which Harvest may be a party or to which Harvest may be
bound on each Closing Date.
7.01.5 Other Relationships. No affiliate, director, officer, principal
executive, or employee of or consultant to Harvest owns, directly or indirectly,
in whole or in part, any property, asset or right, tangible or intangible
relating to or affecting Harvest.
7.01.6 Other Transactions Etc. No affiliate, director, officer,
principal executive or employee of Harvest, has, directly or indirectly, engaged
in any transaction with Harvest outside of the ordinary course of business.
7.01.7 Undisclosed Liabilities. Harvest has no debts, liabilities or
obligations of any nature, whether accrued, absolute, contingent or otherwise,
whether due or to become due, including, but not limited to, liabilities or
obligations on account of known fraud by any merchant customer, taxes, other
governmental charges, duties, penalties, interest, fines, vacation pay,
workmen's compensation claims, or pension plan obligations and there is no known
basis for the assertion against Harvest.
7.01.8 Absence of Certain Changes or Events. The business of Harvest
has been operated only in the usual and ordinary course of business and there
has not been any occurrence, event or condition outside of the ordinary course
of business.
7.01.9 Condition of Assets. The assets of Harvest are in good
operating condition for the purposes of conducting the business of Harvest on
the Effective Date as such business has been or is being conducted. Harvest has
good and marketable title to all of the Assets subject to no mortgage, pledge,
lien, conditional sales agreement, encumbrance, security interest, encumbrance,
or charge of any nature whatsoever, except as herein provided.
15
<PAGE>
7.01.10 No Violation of Law. Neither Harvest, nor any of its assets or
property of Harvest or the ownership, leasing, occupancy or operation thereof,
is in violation of any applicable law, code, rule, regulation, ordinance,
license or permit, including, but not limited to, those related to building,
zoning, environmental matters or employee health and safety, and no notice from
any governmental body or other person has been served upon Harvest occupied or
operated by Harvest claiming any such violation.
7.01.11 Contracts. All of Harvest' contracts, agreements, customer and
supplier purchase order and other commitments are legal, valid and binding and
in full force and effect, and there are no defaults thereunder. None of the
rights of Harvest thereunder will be impaired by the consummation of the
transactions contemplated by this Agreement, and all of the rights of Harvest
thereunder will be enforceable by Sports after the Merger without the consent or
agreement of any other party except for the agreements specifically listed in
attachments hereto which contracts require consent to assignment. Copies of the
all such contracts have heretofore been delivered to Sports by Harvest and are
true and complete and include all amendments and supplements thereto and
modifications thereof.
7.01.12 Permits, Licenses, Consents, Etc. Harvest has all governmental
leases, licenses, permits, consents, approvals, authorizations, qualifications
and orders necessary to conduct its business and to operate its properties and
assets, and such leases, licenses, permits, consents, approvals, authorizations,
qualifications and orders are in full force and effect. No notification to or
approval of any governmental agency is required for all governmental leases,
licenses, permits, consents, approvals, authorizations, qualifications and
orders to remain in full force and effect after the closing. No violations exist
or have been recorded in respect of any governmental lease, license, permit,
consent, approval, authorization, qualification or order of Harvest. No
proceeding is pending or, to the best of Harvest' knowledge, threatened looking
toward the revocation or limitation of any such governmental lease, license,
permit, consent, approval, authorization, qualification or order and there is no
basis or grounds for any such revocation or limitation. Harvest has complied in
all material respects with all present and, to the best of Harvest' knowledge,
enacted but not yet effective, federal, state and local laws, rules,
regulations, ordinances, codes, orders, licenses and permits relating to any of
its properties or applicable to its business.
7.01.13 Absence of Defaults. Harvest is not nor is it alleged to be,
in default under, or in breach of any term or provision of, any contract,
agreement, lease, license, commitment, instrument or fiduciary or other
obligation. No other party to any contract, agreement, lease, license,
commitment, instrument or fiduciary or other obligation to which Harvest is
party is in default thereunder or in breach of any term or provision thereof.
There exists no condition or event which, after notice or lapse of time or both,
would constitute a default by any party to any such contract, agreement, lease,
license, commitment, instrument or fiduciary or other obligation.
16
<PAGE>
7.01.14 Litigation. There is (i) no suit, action or claim, (ii)_no
investigation or inquiry by any administrative agency or governmental body, and
(iii) no legal, administrative or arbitration proceeding pending or, to the best
of Harvest' knowledge, threatened against Harvest or any of the properties,
assets, business or prospects of Harvest or to which Harvest is or might become
a party, and to the best of Harvest' knowledge, there is no basis or grounds for
any such suit, action, claim, investigation, inquiry or proceeding, including
but not limited to, labor, equal employment opportunity, safety and health,
environmental and antitrust laws. There is no outstanding order, writ,
injunction or decree of any court, administrative agency or governmental body or
arbitration tribunal against or affecting or relating to Harvest.
7.01.15 No Breach or Violation of Law. The execution and delivery of
this Agreement by Harvest and the consummation of the transactions contemplated
hereby will not (i) conflict with, or result in the breach of any of the terms
or conditions of, or constitute a default under, or result in the acceleration
of any obligation under, or require any consent, approval or notice under, the
charter documents or the bylaws or any resolution of Harvest or any contract,
agreement, commitment, indenture, mortgage, deed of trust, lease, pledge
agreement, note, bond, license or other instrument or obligation to which
Harvest is now a party or by which Harvest or any of the properties or assets of
Harvest may be bound or affected, or (ii) violate any law, or any rule or
regulation of any administrative agency or governmental body, or any order,
writ, injunction or decree of any court, administrative agency or governmental
body.
7.01.16 Validity and Authorization. This Agreement has been duly
authorized by all necessary corporate and shareholder action and duly and
validly executed and delivered by Harvest and is legally binding on Harvest in
accordance with its terms.
7.01.17 Completeness; No Misrepresentations. The copies of all
instruments, agreements, and written information, including without limitation
the Schedules hereto, delivered pursuant to this Agreement or otherwise
furnished or made available to Sports by Harvest, or any representatives of
either of them are complete and correct as of the date hereof. The
representations and warranties made by Harvest or the Shareholder in this
Agreement or in any Schedule or other document furnished in connection with this
Agreement do not contain any untrue statement of a material fact, or omit to
state a material fact necessary to make the statements or facts contained herein
or therein not misleading. The fact that Sports and its representatives have
conducted an investigation of Harvest prior to the execution of this Agreement
shall not affect the representations and warranties contained in this Article VI
or the extent of the obligations or liabilities of Harvest in the event of a
breach of any such representation or warranty.
7.01.18 Tax Matters. Harvest has duly and timely filed all returns
with respect to any taxes required to be filed by it or for which it may be held
responsible, and has paid, or will pay on a timely basis, all taxes shown to be
due and payable on such returns, all deficiencies and assessments of taxes,
notice of which has been received by it, and all other taxes payable by it.
Harvest is not aware of any basis upon which any assessment for a material
amount of additional taxes could be made.
17
<PAGE>
7.01.20 Financial Statements. It is understood that Harvest' financial
statements are not audited unless indicated as such on the delivered financial
documents. The year-end financial statements and interim financial statements
delivered by Harvest to the Purchaser have been prepared in accordance with
generally accepted accounting principles and present fairly the financial
position of Harvest as of December 31, 1998, and as of February 28, 1998,
respectively, and the statement of income presents fairly the results of
operations and changes in financial position of Harvest for the periods ended
December 31, 1998, and February 28, 1998, respectively, and sales reports for
the period commencing January 1, 1998, through the calendar month immediately
proceeding the date of submittal of the same, all in conformity with generally
accepted accounting principles applied on a basis consistent with that of prior
periods, except that the interim financial statements are not audited and do not
contain footnotes and are subject to audit adjustments. Other than as disclosed
in the Financial Statements, or elsewhere herein, as supplemented, as of the
Closing Date, Harvest has no outstanding liabilities as of the closing Date and
Harvest has no knowledge of any threatened claims, actions or investigations
which would result in the incurrence of any additional liabilities by Harvest
which will result in Sports being liable to any third party due to Buyer's
purchase of the Transferred Assets. Harvest has no indebtedness, liability or
obligation or any character whatsoever, whether or not accrued, whether known or
unknown, fixed or unfixed, choate or inchoate, liquidated or unliquidated,
contingent or otherwise, including without limitation liabilities for taxes,
other governmental charges or pending lawsuits, other than (i) liabilities
reflected in the Financial Statements or Interim Financial Statements, or
elsewhere herein, or (ii) liabilities since the date of the Interim Financial
Statements as disclosed in writing to Sports.
7.01.21 Full Disclosure. Harvest has disclosed to Sports all material
facts relating to Harvest and its operations and has not omitted to disclose to
Sports any material fact relating to Harvest, or its operations necessary to
make the statements made herein not misleading.
7.01.22 Financing. Harvest has been negotiating for debt/equity
financing which is in process and is anticipated to close by the end of March
1998.
7.02. Survival of Representations, Warranties, Covenants and
Indemnification. All covenants, agreements, representations and warranties of
Harvest under this Agreement shall survive indefinitely and shall be deemed
material and relied upon by the other parties, regardless of any investigation
made by or on behalf of the other parties.
7.03. Disclosures. All of Harvest' warranties and representations herein
are modified to the extent needed to take into account Harvest' disclosures set
forth or identified in the attachment hereto entitled Harvest Disclosures.
18
<PAGE>
ARTICLE VIII.
HARVEST'S COVENANTS
8.01. Continuation of Business. Harvest covenants and agrees as follows:
between the date hereof and the Effective Date,(i) unless otherwise consented to
in writing by Sports, it shall conduct its affairs solely in the ordinary course
of business consistent with past practice and shall not materially change its
policies and practices; (ii) shall not issue or caused to be issued by Harvest
any capital stock or security convertible into capital stock, except pursuant to
outstanding warrants, convertible preferred stock, stock options and convertible
debentures, or grant any options or rights to acquire capital stock, or
otherwise alter Harvest's capital structure; (iii) shall not repurchase any of
its securities or pay any dividend or make any distribution with respect to its
securities other than normal cash dividends; (iv) shall not enter into any
contract or arrangement other than in the ordinary course of business; and (v)
shall not amend its charter documents or bylaws
8.02. No Solicitation. Unless and until the Effective Date occurs, Harvest
shall not (i) solicit any offer to acquire all or any part of Harvest's
business, assets or other properties or capital stock, whether by merger,
purchase of assets, tender offer or otherwise or (ii) except as required by law,
disclose, directly or indirectly, any information not customarily disclosed to
any person or entity concerning Harvest's business or properties, afford to any
other person or entity access to Harvest's properties, books or records or
otherwise assist or encourage any person or entity in connection with any of the
foregoing.
ARTICLE IX.
CONDITIONS TO THE EXCHANGE OF STOCK
9.01. Conditions Precedent to Performance by Harvest. The obligations of
Harvest under this Agreement are subject to the satisfaction of the following
conditions (any or all of which may be waived by Harvest in its sole discretion
to the extent permitted by law):
9.01.1 Board and Stockholder Approval. The Merger shall have been
effectively adopted and approved at or prior to the Effective Date by the Board
of Directors and stockholders of Sports in accordance with applicable law.
9.01.2 Representations True Representations and Covenants Performed.
The representations and warranties of Sports set forth herein shall be true and
correct in all material respects immediately prior to the Effective Date with
the same effect as if made at that time. Sports shall have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by them on or prior to the Effective Date. The
President of Sports shall have delivered to Harvest a certificate to such
effect.
19
<PAGE>
9.01.3 No Litigation Affecting Merger. No judgment, decree, order or
ruling of any court or regulatory or governmental authority shall have been
issued or entered against Sports which would be violated by the completion of
the Merger, and no person or entity which is not a party to this Agreement shall
have commenced any litigation against Sports seeking to restrain or prohibit, or
to obtain substantial damages in connection with, this Agreement or the
transactions contemplated hereby.
9.01.4 Securities Laws. All approvals, consents, permits, licenses or
qualifications from authorities administering the securities or "blue-sky" laws
of any state having jurisdiction required for the consummation of the Merger
shall have been obtained and shall be effective.
9.01.5 Regulatory Compliance, Approvals and Consents. Sports shall
have complied with all legal provisions applicable to the Merger, and all
approvals required under any legal provision to carry out the Merger, and all
consents required to be obtained in connection with the Merger in order to avoid
a default under any contract, agreement, commitment, lease, mortgage, instrument
or other document to or by which any of Sports is a party or may be bound, shall
have been obtained on terms reasonably satisfactory to Harvest.
9.01.6 Filings. A duly certified, executed and acknowledged copy of
articles of merger with respect to the Merger shall have been filed with the
appropriate Secretary in accordance with applicable law and a duly certified,
executed and acknowledged copy of this Agreement, or a certificate of merger
with respect thereto, shall have been filed with the appropriate Secretary in
accordance with applicable law.
9.02. Conditions Precedent to Performance by Sports. The obligations of
Sports under this Agreement are subject to the satisfaction of the following
conditions (any or all of which may be waived by Sports in their sole discretion
to the extent permitted by law):
9.02.1 Board and Stockholder Approval. The Merger shall have been
effectively adopted and approved at or prior to the Effective Date by the Board
of Directors of Harvest and stockholders of Harvest in accordance with
applicable law and Harvest shall have delivered such certificate and evidence of
the same as reasonably requested by Sports.
9.02.2 Representations True and Covenants Performed. The
representations and warranties of Harvest set forth herein shall be true and
correct in all material respects immediately prior to the Effective Date with
the same effect as if made at that time. Harvest shall have performed all
obligations and complied with all covenants required by this Agreement to be
performed or complied with by them on or prior to the Effective Date. The
President of Harvest shall have delivered to Sports a certificate to such
effect.
20
<PAGE>
9.02.3 No Litigation Affecting Merger. No judgment, decree, order or
ruling of any court or regulatory or governmental authority shall have been
issued or entered against Harvest which would be violated by the completion of
the Merger, and no person or entity which is not a party to this Agreement shall
have commenced any litigation against Harvest seeking to restrain or prohibit,
or to obtain substantial damages in connection with, this Agreement or the
transactions contemplated hereby.
9.02.4 Securities Laws. All approvals, consents, permits, licenses or
qualifications from authorities administering the securities or "blue-sky" laws
of any state having jurisdiction required for the consummation of the Merger
shall have been obtained and shall be effective.
9.02.5 Regulatory Compliance, Approvals and Consents. Sports shall
have complied with all legal provisions applicable to the Merger, and all
approvals required under any Legal Provisions to carry out the Merger, and all
consents required to be obtained in connection with the Merger in order to avoid
a default under any contract, agreement, commitment, lease, mortgage, instrument
or other document to or by which Harvest is a party or may be bound, shall have
been obtained on terms reasonably satisfactory to Sports.
9.02.6 Filings. A duly certified, executed and acknowledged copy of
this Agreement, or a certificate of merger with respect thereto, shall have been
filed with the appropriate state Secretary in accordance with applicable law and
a duly certified, executed and acknowledged copy of articles of merger with
respect to the Merger shall have been filed with the appropriate Secretary in
accordance with applicable law.
ARTICLE X.
NOTICES
10.01 Notices. All notices, requests, demands and other communications
required or permitted to be given hereunder or with respect hereto shall be in
writing, and may be given by (a) personal service, (b) first-class United States
mail postage prepaid, (c) overnight delivery service, charges prepaid or (d)
telecopy or other means of electronic transmission, if confirmed promptly by any
of the methods specified in clauses (a) (c) of this sentence, and will be deemed
to have been duly given or made when delivered personally, when mailed
first-class, postage prepaid, registered or certified mail when delivered to the
telegraph company, charges prepaid or when sent by electronic transmission, to
the respective parties, as follows:
If to Harvest:
Harvest Restaurant Group, Inc.
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
21
<PAGE>
Attention: William J. Gallagher
If to Sports:
Sports Group International, Inc.
P.O. Box 13285
LaJolla, California 92039
10.02 Change of Address. Any of the parties hereto may change the address
to which such communications are to be directed to it or him by giving written
notice to the other parties in the manner provided in Section_10.01
ARTICLE XI.
GENERAL
11.01 Governing Law. This Agreement and the performance of the transactions
contemplated hereby shall be governed by and construed and enforced in
accordance with the laws of Texas, notwithstanding any contrary application of
conflicts of laws principles.
11.02 Press Releases. The parties hereto agree to use their best efforts to
coordinate the preparation of and making of any public announcements of the
transactions contemplated by this Agreement. No such release or public
announcement pertaining to the transactions contemplated by this Agreement may
be made by either party without the prior consent of the other party, unless
such release or announcement is required by law.
11.03 Entire Agreement. This Agreement and the Schedules hereto and the
agreements, documents and instruments referred to herein, set forth the entire
agreement and understanding of the parties in respect of the transactions
contemplated hereby and supersede all prior agreements, arrangements and
understandings relating to the subject matter hereof, whether oral or written.
The parties hereto have not relied upon any promises, representations,
warranties, agreements, covenants or undertakings, other than those expressly
set forth or referred to herein.
11.04 Successors. All of the terms, covenants, representations, warranties
and conditions of this Agreement shall be binding upon, and inure to the benefit
of and be enforceable by, the parties hereto and their respective successors,
heirs, and other legal representatives, but this Agreement and the rights and
obligations hereunder shall not be assigned, except that Harvest may assign or
transfer any of its rights and obligations hereunder to any of its affiliates
without Sports' or the Shareholder's consent.
11.05 Modification. No amendment, modification or attempt to supersede or
cancel any of the terms, covenants, representations, warranties or conditions
22
<PAGE>
hereof shall be effective unless such amendment, modification or direction to
supersede or cancel such term, covenant, representation, warranty or condition
is in writing executed by Harvest, Sports, or, in the case of a waiver, by or on
behalf of the party waiving compliance. No waiver by any party of any condition,
or of any breach of any term, covenant, representation or warranty contained in
this Agreement, in any one or more instances, shall be deemed to be a further or
continuing waiver of any such condition or breach or a waiver of any other
condition or of any breach of any other term, covenant, representation or
warranty.
11.06 Counterparts. This Agreement and any amendment or modification hereof
may be executed simultaneously in two or more counterparts, each of which shall
be deemed an original, but all of which taken together shall constitute one and
the same instrument.
11.07 Signatures by Facsimile. Any facsimile signature of any party hereto
shall constitute a legal, valid and binding execution hereof by such party.
11.08 Arbitration. In the event of a dispute between the parties arising
under this Agreement, the parties shall submit to binding arbitration before a
single arbitrator in a neutral city, under the Commercial Arbitration Rules of
the American Arbitration Association. The decision of the arbitrator shall be
final and binding with respect to the dispute subject to arbitration and shall
be enforceable in any court of competent jurisdiction. Each party shall bear its
own expenses and costs incurred in such arbitration. Nothing in this paragraph
shall derogate from the rights of the parties to seek preliminary injunctive
relief to preserve the status quo.
23
<PAGE>
24
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
and Plan of Merger as of the date first above written.
HARVEST RESTAURANT GROUP, INC. SPORTS GROUP INTERNATIONAL, INC.
- ------------------------- ----------------------------------
By: William J. Gallagher By:
Title: Chairman & Chief Executive Officer Title: President
25
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 1,074,674
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 15,345
<CURRENT-ASSETS> 1,107,419
<PP&E> 2,293,068
<DEPRECIATION> 254,016
<TOTAL-ASSETS> 3,489,605
<CURRENT-LIABILITIES> 1,821,056
<BONDS> 0
0
0
<COMMON> 26,986
<OTHER-SE> 1,084,450
<TOTAL-LIABILITY-AND-EQUITY> 3,489,605
<SALES> 1,637,569
<TOTAL-REVENUES> 2,037,569
<CGS> 791,704
<TOTAL-COSTS> 2,590,427
<OTHER-EXPENSES> 3,392,590
<LOSS-PROVISION> 3,387,541
<INTEREST-EXPENSE> 18,918
<INCOME-PRETAX> (7,240,827)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,240,827)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,240,827)
<EPS-PRIMARY> (3.18)
<EPS-DILUTED> 0
</TABLE>
