UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended October 4, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from ____ to ____
Commission File Number: 33-95796
HARVEST RESTAURANT GROUP, INC.
(Exact name of registrant as specified in its charter)
Texas 76-0406417
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
(Address of principal executive offices, including zip Code)
(210) 824-2496
(Registrant's telephone number)
-------------------------------------------------------------
Indicate by check mark whether the registrant (1) has 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
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
4,035,108 shares as of October 30, 1998
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HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------
ITEM 1. Financial Statements
Consolidated Balance Sheets -
October 4, 1998 and December 28, 1997 3
Consolidated Statements of Operations -
Quarter and Three Quarters Ended
October 4,1998 and October 5, 1997 4
Consolidated Statements of Cash Flows -
Quarter and Three Quarters Ended
October 4, 1998 and October 5, 1997 5
Notes to Financial Statements 6
ITEM 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 14
ITEM 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 15
2
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<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
October 4, December 28,
1998 1997
------------ ------------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 154,395 $ 774,674
Cash, restricted 910,262 300,000
Inventories -- 15,345
Other current assets -- 17,400
------------ ------------
Total Current Assets 1,064,657 1,107,419
Property and Equipment, net 666,692 2,039,052
Other Assets
Intangible property rights, net of accumulated
amortization of $237,750 in 1997 -- 161,750
Deposits 150,000 70,978
Other assets 80,000 110,406
------------ ------------
230,000 343,134
------------ ------------
$ 1,961,349 $ 3,489,605
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 240,097 $ 652,817
Accrued liabilities:
Real estate disposition costs 636,000 800,000
Other accrued liabilities 160,611 156,460
Current portion of long-term debt -- 211,779
------------ ------------
Total Current Liabilities 1,036,708 1,821,056
Long-term debt, less current portion -- 41,963
Stockholders' Equity
Preferred stock - $1.00 par value 560,005 515,150
Common stock - $.01 par value, authorized 10,000,000,
issued 3,946,081 in 1998 and 2,698,630 in 1997 39,461 26,986
Additional paid-in capital 13,920,893 11,902,073
Accumulated deficit (13,595,718) (10,817,623)
------------ ------------
Total Stockholders' Equity 924,641 1,626,586
------------ ------------
$ 1,961,349 $ 3,489,605
============ ============
See notes to consolidated financial statements (unaudited).
3
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<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Quarter Ended Three Quarters Ended
---------------------------- ----------------------------
October 4, October 5, October 4, October 5,
1998 1997 1998 1997
----------- ----------- ----------- -----------
Revenues
<S> <C> <C> <C> <C>
Restaurant operations $ -- $ 461,243 $ 289,440 $ 1,377,607
Franchise fees -- 160,000 -- 360,000
----------- ----------- ----------- -----------
-- 621,243 289,440 1,737,607
Costs and Expenses
Cost of food and paper -- 223,102 148,448 699,930
Salaries and benefits -- 170,858 152,572 582,297
Occupancy and related expenses -- 67,345 83,672 205,727
Operating expenses -- 136,240 109,839 487,448
Preopening expenses 19,421 74,414 92,046 254,741
General and administrative expenses 258,856 724,995 954,363 1,570,146
Depreciation and amortization 28,122 71,656 308,521 203,947
Loss on restaurant closures and other -- -- 1,204,489 --
Loss provision for area developer notes receivable -- 1,054,784 -- 1,340,807
----------- ----------- ----------- -----------
Total costs and expenses 306,399 2,523,394 3,053,950 5,345,043
----------- ----------- ----------- -----------
Loss from operations (306,399) (1,902,151) (2,764,510) (3,607,436)
Other income (expense)
Interest income -- 16,992 5,069 37,378
Interest expense -- (3,902) (18,654) (15,053)
----------- ----------- ----------- -----------
-- 13,090 (13,585) 22,325
----------- ----------- ----------- -----------
Net Loss $ (306,399) $(1,889,061) $(2,778,095) $(3,585,111)
=========== =========== =========== ===========
Preferred stock dividends (721,770) (185,400) (1,120,861) (185,400)
Net loss applicable to common shareholders (1,028,169) (2,074,461) (3,898,956) (3,770,511)
Basic loss per common share $ (.27) $ (.88) $ (1.22) $ (1.61)
=========== =========== =========== ===========
Weighted average common shares outstanding 3,849,210 2,368,673 3,192,684 2,346,922
=========== =========== =========== ===========
See notes to consolidated financial statements (unaudited).
</TABLE>
4
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<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Three Quarters Ended
--------------------------
October 4, October 5,
1998 1997
----------- -----------
Operating Activities:
<S> <C> <C>
Net loss for the period $(2,778,095) $(3,585,111)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 308,521 203,947
Loss on restaurant closures and other 1,204,489 --
Forfeitures of deposits 49,033 --
Loss provision for area developer notes receivable -- 1,340,807
Changes in operating assets and liabilities:
Inventories 15,345 (4,922)
Other current assets and other assets 96,688 (25,284)
Accounts payable and accrued liabilities (572,569) 262,360
----------- -----------
Net cash used in operating activities (1,676,588) (1,808,203)
Investing Activities:
Purchase of property and equipment (22,814) (722,802)
Increase in deposits and other assets (183,055) (35,561)
Issuance of notes receivable -- (2,877,237)
----------- -----------
Net cash used in investing activities (205,869) (3,635,600)
Financing Activities:
Net proceeds from sale of preferred stock and warrants 2,075,750 4,375,536
Net proceeds from sale of common stock and warrants -- 568,875
Proceeds from borrowings 225,000 65,000
Decrease in cash restricted for bank obligations 200,000 220,000
Increase in cash restricted under agreement (810,262) --
Repayments of borrowings (428,310) (8,272)
----------- -----------
Net cash provided by financing activities 1,262,178 5,221,139
----------- -----------
Net decrease in cash (620,279) (222,664)
Cash at beginning of year 774,674 1,271,443
----------- -----------
Cash at end of period $ 154,395 $ 1,048,779
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 7,404 $ 15,053
Income taxes paid -- --
Payment of preferred stock dividend in common stock 345,268 --
See notes to consolidated financial statements (unaudited).
5
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<PAGE>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
Notes to Financial Statements (Unaudited)
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
Organization
Harvest Restaurant Group, Inc. and its wholly-owned subsidiaries ("Harvest" or
the "Company") is an operator and developer of quick service restaurant concepts
operated under the name Harvest Rotisserie and Harvest Food Court. At the end of
fiscal year 1997, there were 14 Harvest Rotisserie restaurants in operation,
consisting of four company-owned restaurants and ten franchised restaurants.
During 1998, the Company significantly curtailed its operations and all of the
Harvest Rotisserie restaurants were closed. The Company opened two Harvest Food
Court restaurants in 1998, which were also closed. The Company currently has no
restaurants in operation.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
by the Company in accordance with the instructions to Form 10-QSB. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. In the opinion of management, all adjustments
(consisting of normal recurring accruals and adjustments) considered necessary
for a fair presentation have been made. The statements are subject to year-end
adjustment. The consolidated results of operations for the three quarters ended
October 4, 1998 may not be indicative of the results for the full fiscal year.
For further information, refer to the Company's audited financial statements as
filed with the Securities and Exchange Commission in the Company's Form 10-KSB
for the year ended December 28, 1997.
The accompanying unaudited consolidated 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 October 4, 1998 had an accumulated
deficit of $13,595,718 and currently has no restaurants in operation. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. In order to continue as a going concern, the Company will need to
develop or acquire a successful restaurant concept and will need to obtain
additional funds through debt or equity offerings to fund the growth of this
concept. Additional funding will also be required to pay the Company's existing
obligations. In July 1998, the Company entered into a definitive agreement for a
merger with TRC Acquisition Corporation, a company which operates a chain of 13
"Rick Tanner's Original Grill" restaurants ("Tanner's"). In connection with the
merger, the Company has obtained a financing commitment for $6,000,000 to be
used primarily for the expansion of Tanner's restaurants. The Company intends to
focus its future operations on the development of Tanner's restaurants.
6
<PAGE>
NOTE B - FISCAL YEAR
The Company has adopted a 52/53-week fiscal year ending on the last Sunday in
December. The fiscal year is divided into thirteen four-week periods. The first
quarter consists of four periods and each of the remaining three quarters
consists of three periods, with the first, second and third quarters ending 16
weeks, 28 weeks and 40 weeks respectively, into the fiscal year.
NOTE C - SHARE EXCHANGE WITH TRC ACQUISITION CORPORATION
On July 9, 1998, the Company signed a definitive share exchange and merger
agreement with TRC Acquisition Corporation ("TRC"), the operator of "Rick
Tanner's Original Grill" restaurants ("Tanner's"), a twelve-year-old chain of
full service, casual dining restaurants in Georgia and Alabama. TRC owns and
operates eleven Tanner's restaurants in the Atlanta metropolitan area, and
franchises two additional Tanner's restaurants. The merger is subject to
shareholder approval and certain other contingencies, including the Company
obtaining satisfactory settlement agreements for a majority of its obligations,
accordingly, there can be no assurance that the merger will be completed.
Upon completion of the merger, the TRC shareholders including holders of all
options and warrants, will own approximately 75% of the issued and outstanding
equity securities of the Company. Since the TRC shareholders will receive a
substantial majority of the shares of stock of the Company, the transaction will
be treated as a reverse acquisition of the Company by TRC for accounting
purposes. As part of the merger, the board of directors of the Company will be
increased to six members, with two of the Company's current directors remaining.
The Company intends to relocate its corporate offices to Atlanta, Georgia to be
in closer proximity with the core Tanner's restaurant operations.
As part of the merger, the Company has entered into a development agreement with
TRC to open up to five Tanner's restaurants under a franchise relationship. The
Tanner's restaurant development and operations will be managed by TRC under a
separate management agreement with the Company. Upon the completion of the
merger, the development and management agreements would be terminated and any
franchised restaurants operated under these agreements would revert to
company-owned restaurants. Should the merger not be completed, the Tanner's
restaurants developed by the Company would continue to operate as franchised
restaurants under an operating agreement with TRC, or the Company has the option
to require TRC to repurchase the restaurants from the Company at the development
cost.
NOTE D - STOCKHOLDERS' EQUITY
On July 9, 1998, in connection with the merger with TRC, the Company entered
into a securities purchase agreement with a private investor group. The
securities purchase agreement provides for the sale of 600 shares of the
Company's newly designated series C convertible preferred stock, ("Series C
Preferred Stock") at face value of $10,000 per share, for a total of $6,000,000
of funding, of which $4,000,000 was deposited into escrow. The 600 shares of
Series C Preferred Stock are to be issued in three separate closings of 200
shares each. The first closing occurred on July 23, 1998, with the second
closing to occur upon the effective date of the merger, and the third closing
within thirty days thereafter. A substantial portion of the proceeds received
are held by a subsidiary of the Company, and the use of such funds is restricted
under a management agreement with TRC pending the completion of the merger.
7
<PAGE>
The Series C Preferred Stock is convertible at the option of the holder into the
Company's common stock. The conversion rate per share is equal to $10,000
divided by 80% of the average bid price of the common stock at the time of
conversion. Dividends on the Series C Preferred Stock accrue at rate of 7%
annually, payable in cash or stock at the time of conversion. The Series C
Preferred stock is non-voting, and is ranked junior to the Company's series A
redeemable convertible preferred stock and on parity with the Company's series B
convertible preferred stock. Each share of Series C Preferred Stock has a
liquidation preference of $10,000 per share. The terms of the Series C Preferred
stock which allow the conversion into common stock at a 20% discount to market
is considered a beneficial conversion feature. The Company has valued the
undiscounted beneficial conversion feature at $500,000, which is reflected as a
dividend to the holders of the Series C Preferred Stock. The beneficial dividend
does not affect the number of Series C Preferred Stock shares outstanding or the
number of common shares issuable upon conversion or require any additional
payments to the holders of the Series C Preferred Stock.
In May 1998, the Company sold 11.2 shares of its series B convertible preferred
stock in a private transaction in which the Company realized net proceeds of
$97,000. During May and June of 1998, holders of the series B convertible
preferred stock converted 28 shares of their series B preferred stock into
688,980 and 120,892 shares of the Company's common stock and series A redeemable
convertible preferred stock, respectively.
NOTE E - RESTAURANT CLOSURES AND OTHER
In the second quarter of 1998, the Company elected not to extend the property
lease on one of its Harvest Rotisserie restaurants upon its expiration. The
Company also decided to discontinue operating its two remaining company-owned
Harvest Rotisserie restaurants and planned to convert one of these restaurants
along with an additional leased property into Tanner's restaurants.
Subsequently, the Company and TRC determined that greater opportunities existed
in concentrating future development solely on Tanner's restaurants in the
southeastern region of the United States. As a result, the Company canceled
plans to convert two of its existing properties into Tanner's restaurants and
also cancelled plans to pursue the development of Harvest Food Court restaurants
and closed its two Harvest Food Court restaurants. The Company intends to focus
its future operations on the development of Tanner's restaurants within the
southeastern region of the United States and no longer intends to utilize its
existing restaurant properties within its future operations. In light of these
decisions, management has reviewed the carrying amount of certain long-lived
assets and concluded that their costs will not be recoverable. As a result,
certain charges totaling $1,204,489 have been aggregated and are reported
separately in the operating statement as "Loss on Restaurant Closures and
Other". Included in these charges are write-downs of property, equipment and
other assets of $1,212,391 and write-offs of intangible assets of $92,098,
offset by reductions in the accrued liability for real estate disposition costs
of $100,000.
All the assets related to the closed restaurants are to be disposed of, with the
exception of one restaurant property that the Company will sublease. Assets to
be disposed of and held for sale consist of land, building and restaurant
equipment which have been written down to net realizable value of $591,409,
based on estimated market prices less cost to sell. The assets held for sublease
have been written down to the net present value of the discontinued future cash
flows expected from the sublease.
8
<PAGE>
NOTE F - CONTINGENCIES
At the end of the Company's fiscal year on December 28, 1997, the Company had 14
Harvest Rotisserie restaurants in operation, four of which were company-owned
restaurants and ten operated as franchised stores. In 1998, area developers
closed all ten of the Company's franchised Harvest Rotisserie restaurants
located in Florida, Indiana, North Carolina, and Northern California. The
Company also closed all four of its Company-owned Harvest Rotisserie restaurants
and its two Harvest Food Court restaurants, and development plans were ceased at
five other locations. The Company had entered into long-term real estate leases
for most of its Company-owned locations, and guaranteed similar real estate
leases for the franchised locations, as well as guaranteeing certain promissory
notes and equipment leases 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, and
generally has been successful in reaching settlement agreements. The Company has
evaluated the potential costs for the full settlement of the real estate leases
and other liabilities and recorded a liability for real estate disposition cost
at December 28, 1997 of $800,000. Management believes that the remaining amount
of the liability accrual of $636,000 at October 4, 1998 will be sufficient to
settle all obligations related to the closing of the restaurants.
9
<PAGE>
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
Except for the historical information contained herein, the matters set
forth in this report are forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. These forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risks are detailed in
the Company's various reports filed with the Securities and Exchange Commission
and include, without limitation: the possible inability of the Company to
conclude acceptable settlement agreements relating to its restaurant-related
liabilities; risks associated with the Company's planned merger with TRC; and
risks of developing new Tanner's restaurants. These forward-looking statements
speak only as of the date hereof. The Company disclaims any intent or obligation
to update these forward-looking statements.
Overview
At the end of the Company's fiscal year on December 28, 1997, the Company
had 14 Harvest Rotisserie restaurants in operation, four of which were
company-owned restaurants and ten operated as franchised stores. In August 1997,
the Company engaged a financial advisor to assist it in obtaining additional
capital to fund the development of additional restaurants in its targeted
markets in order to reach critical mass and gain economic efficiencies. The
financing efforts proved unsuccessful, and in January 1998, due to insufficient
capital and an industry wide decline in consumer acceptance of the market
segment in which the Harvest concept was positioned, the Company canceled plans
to further expand the Harvest Rotisserie restaurants and began to significantly
curtail its operations. In the first quarter of 1998, the Company closed one
restaurant and area developers closed all nine franchised restaurants in
Florida, Indiana and North Carolina. The Company completed the initial
development of a smaller multi-branded restaurant concept under the name of
Harvest Food Court and opened two units on a test-marketing basis in May and
June 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.
In June 1997 the Company acquired eight Kenny Rogers Roasters restaurants and
assigned them to three area developers for operation as Harvest Rotisserie
franchise restaurants. The Company provided financing to the area developers
under a secured loan for the purchase price, cost of conversion and working
capital. The Company also had executed leases for five additional restaurant
properties in Texas for future development as Harvest Rotisserie restaurants.
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.
As of December 28, 1997, the Company determined that all of the area
developer loans were impaired and recorded a write-off of loans totaling
$3,387,541. In addition, the Company recognized a total charge of $1,184,656
related to (i) estimated settlement of real estate leases and other obligations
for the closed franchise restaurants and (ii) costs related to the closure of
one Company-owned restaurant and cessation of development on four other
properties. The charge to operations included 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.
10
<PAGE>
In the second quarter of 1998, the Company elected not to extend the property
lease on one of its Harvest Rotisserie restaurants upon its expiration. The
Company also decided to discontinue operating its two remaining Company-owned
Harvest Rotisserie restaurants and planned to convert one of these restaurants
along with its remaining leased property into Tanner's restaurants.
Subsequently, the Company and TRC determined that greater opportunities existed
in concentrating future development solely on Tanner's restaurants in the
Southeast region of the Untied States. As a result, the Company canceled plans
to convert two of its existing properties into Tanner's restaurants and also
canceled plans to pursue the development of Harvest Food Court restaurants and
closed its two Harvest Food Court restaurants. The Company intends to focus its
future operations on the development of Tanner's restaurants and will no longer
utilize its existing restaurant properties within its future operations. In
light of these decisions, the Company recognized certain charges totaling
$1,204,489 related to the write-down of property, equipment and other assets and
recognized write-offs of intangible assets, offset by reductions in the accrued
liability for real estate disposition costs.
In July 1998, the Company signed a definitive merger agreement to acquire
TRC by merging TRC with and into Hartan, Inc. ("Hartan"), a wholly-owned
subsidiary of the Company. Completion of the merger is subject to shareholder
approval and certain other contingencies, including the Company obtaining
satisfactory settlement agreements for a majority of its obligations. In
connection with the merger, the Company has obtained a financing commitment for
$6,000,000 to be used primarily for the expansion of Tanner's restaurants. The
Company intends to focus all its available resources on the development of
Tanner's restaurants.
Since July 1998, the Company has had no restaurants in operation and has
terminated all its employees except for two executive officers. The Company,
through Hartan, has entered into a development agreement with TRC to open
Tanner's restaurants under a franchise relationship. The Tanner's restaurant
development is managed by TRC under a separate management agreement with the
Company.
11
<PAGE>
Results of Operations - For the Quarter and Three Quarters ended October 4, 1998
compared to the Quarter and Three Quarters ended October 5, 1997.
Revenues. The Company had no operating revenues during the third quarter
ended October 4, 1998. Revenues for the three quarters ended October 4, 1998
decreased 83% as compared to the same period in 1997 due to the closing of all
of the Company's restaurants during the first and second quarters 1998.
Costs and Expenses. Cost of food and paper was 51.3% of restaurant revenues
for the three quarters ended October 4, 1998 as compared to 50.8% for the same
period in 1997, which is higher than industry averages for both periods. Food
and paper costs were negatively affected by higher amounts of wasted food caused
by the lower sales volumes, and the opening of new restaurants in 1997, which
generally have higher costs due to increased food usage for opening promotions
and inefficiencies caused by less experience employees.
Salaries, benefits, occupancy 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 120% for the three quarters ended October
4, 1998, as compared to 93% for the same comparable period in 1997. Substantial
portions of these costs are fixed or indirectly variable and were
disproportionate to revenues for both periods due to low sales volumes.
Preopening expenses of $19,421 during the quarter ended October 4, 1998 relate
to initial costs incurred in the development of a franchised Tanner's restaurant
which is being developed by Hartan under a management agreement with TRC.
General and administrative expenses decreased $466,139 or 64% and $615,783 or
39% for the quarter and three quarters ended October 4, 1998, respectively, as
compared to the same periods in 1997. The decreases reflect the closing of the
Company's operations during 1998 and the corresponding reduction in its
corporate overhead. The general and administrative expenses incurred during the
quarter ended October 4, 1998 relate primarily to costs associated with the
merger and administrative costs incurred by Hartan related to the development of
a franchised Tanner's restaurant.
Depreciation and amortization decreased $43,534 for the quarter ended October 4,
1998 as compared to the same period in 1997 due to the closing of restaurants in
first and second quarters of 1998. Depreciation and amortization for the three
quarters ended October 4, 1998 increased $104,574 as compared to 1997 due to the
additional restaurants opened in 1997 and a reduction in the recovery periods
for some of the Company's assets in 1998.
Loss on restaurant closures and other of $1,204,489 for the three quarters ended
October 4, 1998, relate to charges recognized by the Company in connection with
the closure of its remaining restaurants in the second quarter of 1998. Included
in this caption is $1,212,391 of charges for the write-down of property,
equipment and other assets to their net realizable values, write-offs of
intangible assets of $92,098, offset by reductions in the accrued liability for
real estate disposition costs of $100,000.
The Company recorded a loss provision for area developer notes receivable of
$1,054,784 and $1,340,807 for the quarter and three quarters ended October 5,
1997 for estimated loan losses. The amount of the loss provision was based on
management's evaluation of the operating results of the franchised restaurants,
financial position of the area developers, and the sufficiency of the underlying
assets securing the loan.
12
<PAGE>
Net Loss. The Company incurred a net loss of $306,399 and $2,778,095 for
the quarter and three quarters ended October 4, 1998 as compared to $1,889,061
and $3,585,111 for the same periods in 1997. The decrease in net loss for the
quarter ended October 4, 1998 reflects the discontinuance of the Company's
operations in 1998.
Preferred Stock Dividends. The Company declared dividends totaling $345,268
on the Series A Preferred Stock for the first and second quarters of 1998, which
were paid in 352,278 shares of common stock. Dividends in the amount of $172,252
on the Series A Preferred Stock for the third quarter of 1998 have not been
declared and are in arrears. Preferred stock dividends for the three quarters
ended October 4, 1998 also reflect accrued dividends of $103,341 on the
Company's Series B and Series C Preferred Stock, and a beneficial conversion
feature on the Series C Preferred Stock valued at $500,000 which is reflected as
a dividend to the holders Series C Preferred Stock.
Liquidity and Capital Resources
The Company has incurred losses from operations since inception and as of
October 4, 1998 the Company had an accumulated deficit of $13,595,718 and
working capital of $27,949. During 1998, all of the Company's restaurants were
closed, which raises substantial doubt about the Company's ability to continue
as a going concern. Management believes that if the Company is to continue as a
going concern, it will need to develop or acquire a restaurant concept with
potential for unit growth and will need to obtain additional funds through debt
or equity offerings to fund the growth of this concept and settled its
outstanding obligations.
Since inception, the Company has utilized the funds acquired in equity financing
of its common and preferred stock, operating leases, vendor credits and certain
borrowings to fund the development of its restaurants and support its operating
losses and fund general administrative expenses. The Company used $1,676,588 of
cash in operations during the three quarters ended October 4, 1998, and
$1,808,203 of cash in operating activities for the same period in 1997.
For the three quarters ended October 4, 1998, the Company made minimal
investments in property and equipment and utilized renovation allowances
provided by landlords for a majority of the development costs for the two
Harvest Food Courts restaurants opened and closed during the second quarter. The
Company used $80,000 to purchase development and franchise rights for Tanner's
restaurants.
Sources of capital are limited to the Company's ability to raise additional
capital from investors, and ultimately achieving profitable operations. Without
a proven viable restaurant concept, additional financing is difficult or
impossible to obtain.
Management considers the merger with TRC as a viable plan to move the Company to
profitability. In connection with the merger with TRC, the Company has obtained
a financing commitment from a private investor group for the purchase of 600
shares of the Company's Series C Preferred Stock for a total of $6,000,000, of
which $4,000,000 was deposited into escrow. The 600 shares of Series C Preferred
Stock are to be issued in three separate closings of 200 shares each. On July
23, 1998, the Company received net proceeds of $1,978,750 from the first
closing, with the second closing to occur upon the effective date of the merger,
and the third closing within thirty days thereafter. Proceeds from the equity
funding will be used primarily for the development of additional Tanner's
13
<PAGE>
restaurants. The Company believes the proceeds from first closing will be
sufficient to develop up to five Tanners restaurants, depending on availability
of lease financing and landlord contribution. The restaurants will operate under
a franchise relationship with TRC until completion of the merger. The restaurant
development and operation will be managed by TRC under separate agreements with
the Company. Upon the completion of the merger, the franchises will be
terminated and the restaurants would become Company-owned restaurants. Should
the merger not be completed, the Tanner's restaurants developed by the Company
would continue to operate as franchised restaurants under a operating agreement
with TRC, or the Company has the option to require TRC to repurchase the
restaurants from the Company at the development cost.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
On July 6, 1998, the Company was named as a defendant in a lawsuit filed in
Florida, Pinellas County Circuit Court (Case No. 98-03282C119). The plaintiff is
seeking damages for breach of a commercial lease that the Company guaranteed for
a franchisee. The Company believes that this case has been settled in principle.
The Company is currently awaiting final approval from Captec and a federal
bankruptcy court having jurisdiction over the matter.
On July 24, 1998, the Company was named as a defendant in a lawsuit filed in
Texas by Sysco Food Services in Bexar County Court of Law No. 3 (Case No.
247031). The plaintiff is seeking $10,003 incurred in connection with the sale
of products on open account guaranteed by the Company. No offer for settlement
has been made.
On August 12, 1998, the Company was named as a defendant in a lawsuit filed in
Texas by Green Tree Vendor services Co. in Bexar County District Court (Case no.
247317). The plaintiff is seeking to recover damages of $38,691 for the
Company's failure to make payments under two equipment leases. The case is now
in the discovery phase.
On August 20, 1998, the Company was named as a defendant in a lawsuit filed in
Texas by Toufic Khalifa in Bexar County district Court (Case No. 98-CI-I2200).
Plaintiff is seeking damages for breach of commercial lease. The plaintiff
rejected a settlement offer of $35,000, and the case is now in the discovery
phase.
In addition, the Company has executed settlement agreements for 15 landlord
claims for total payments of $146,622, of which $71,056 has been paid as of
October 4, 1998. A mortgage claim has also been satisfied in full by the
proceeds of the sale of real property.
14
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
The Company filed one report on Form 8-K during the quarter ended October
4, 1998, which report was dated July 9, 1998. The Form 8-K reported under item 4
(Changes in Registrant's Certifying Accountant) the resignation of the Company's
certifying accountant. The Form 8-K also reported under item 5 (Other Events)
the execution of a definitive share exchange agreement to merge with TRC
Acquisition Corporation, the execution of a Securities Purchase Agreement with
an investor group for $6,000,000 of equity funding. The Company also filed two
amended Forms on 8-K/A during the quarter ended October 4, 1998 to update
information reported under item 4 of the Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARVEST RESTAURANT GROUP, INC.
Date: November 18,1998 By: /s/ William J. Gallagher
------------------ -----------------------------------
William J. Gallagher,
Chairman of the Board and
Chief Executive Officer
(Duly Authorized Signatory)
Date: November 18, 1998 By: /s/ Joseph Fazzone
------------------- ----------------------------------
Joseph Fazzone
Chief Financial Officer
(Duly Authorized Signatory)
15
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