SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X ] Preliminary Proxy Statement [ ] Confidential, for Use of the
[ ] Definitive Proxy Statement Commission Only (as Permitted
[ ] Definitive Additional Materials by rule 14A-6(e)(2))
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
Harvest Restaurant Group, Inc.
------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, par value $0.01 per share
Series D Preferred Stock, par value $1.00 per share
(2) Aggregate number of securities to which transaction applies:
18,000,000 shares of Common Stock
722,500 shares of Series D Preferred Stock
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
Common Stock: The market value of $0.25 per share was
established using the average of high and low prices reported
on the OTC Bulletin Board on October 23, 1998.
Series D Preferred Stock: Because there is no market for these
securities and the issuer has an accumulated deficit, the
value of $0.33 per share is based on one-third of the par
value of $1.00 per share.
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(4) Proposed maximum aggregate value of transaction:
$4,738,425
(5) Total fee paid: $948
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: None
(2) Form, Schedule or Registration Statement No.: Not Applicable
(3) Filing Party: Not Applicable
(4) Date Filed: Not Applicable
Notes:
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HARVEST RESTAURANT GROUP, INC.
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
(210) 824-2496
November __, 1998
To Our Shareholders:
We are pleased to announce that our company, Harvest Restaurant Group,
Inc., has agreed to combine with TRC Acquisition Corporation, which owns and
operates 11 "Rick Tanner's Original Grill" restaurants in Georgia and has
franchised two other restaurants in Georgia and Alabama. We need your approval
to complete this transaction. You are cordially invited to attend a special
meeting of the Company's shareholders on November __, 1998, at 8:00 a.m. local
time in the Company's executive offices at the above address.
At the Meeting, you will be asked to consider and vote on the following
proposals:
(1) To approve and adopt the Share Exchange and Merger Agreement,
as amended, by and among the Company, Hartan, Inc., a
wholly-owned subsidiary of the Company, and TRC Acquisition
Corporation.
(2) To amend the Company's Articles of Incorporation to change its
name to "Tanner's Restaurant Group, Inc."
(3) To amend the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock to
100,000,000.
(4) To elect four new directors to a six-person Board of
Directors. Two of the current directors will continue, and the
four new directors will be added from TRC.
(5) To ratify the appointment of Porter Keadle Moore, LLP,
Atlanta, Georgia, as the Company's independent auditors for
the 1998 fiscal year.
The Board of Directors unanimously recommends that you vote for each of the
proposals.
The proposals relate to the proposed merger described in the proxy
materials attached to this letter. We may abandon any or all of the proposals if
the shareholders do not approve certain other proposals. We also reserve the
right to abandon the merger at any time, subject to the terms and conditions of
the Agreement and applicable law. If all of the proposals are abandoned, the
Agreement will be terminated, the Company's Articles of Incorporation will not
be amended, and the Board of Directors will not be changed.
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If the proposals are approved:
* TRC will merge with and into Hartan and become a wholly-owned
subsidiary of the Company.
* All holders of TRC common stock, options and warrants will exchange
them for 18,000,000 shares of Common Stock.
* All holders of TRC's Class A Preferred Stock will exchange such stock
for 352,500 shares of the Company's Series D Preferred Stock at $10.00
per share, or less in certain circumstances.
* Richard Tanner, the founder of Tanner's restaurants, will exchange a
$3,100,000 TRC subordinated debenture and cancel his employment
agreement for 370,000 shares of the Company's Series D Preferred Stock
at $10.00 per share, or less in certain circumstances.
Shareholders have no dissenters' rights under Texas law in connection with
the merger or any of the other proposals.
You may revoke a proxy at any time before it is exercised by delivering a
written revocation to the Company, by substituting a new proxy signed at a later
date, or by requesting in person at the Meeting that the proxy be returned.
You should rely only on the information contained in these proxy materials
or that we have referred you to. We have not authorized anyone to provide you
with information that is different. TRC has supplied all information pertaining
to TRC and its affiliates contained in these materials.
You are cordially invited to attend the Meeting in person. Regardless of
whether you plan to attend the Meeting, please complete, sign and date the
enclosed proxy card and return it as promptly as possible in the enclosed
envelope. No postage is required if the proxy is mailed in the United States.
By Order of the Board of Directors,
William J. Gallagher,
Chief Executive Officer
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HARVEST RESTAURANT GROUP, INC.
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
(210) 824-2496
NOTICE OF SHAREHOLDERS MEETING TO BE HELD NOVEMBER __, 1998
The shareholders of Harvest Restaurant Group, Inc. will hold a special
meeting at the Company's executive offices at the above address, at 8:00 a.m.
local time on November __, 1998, or at any time adjournment or postponement of
such meeting. October 30, 1998 is the record date for the determination of
shareholders entitled to notice of and to vote at the Meeting, which has the
following purposes:
A. Tanner's Merger. At the Meeting shareholders will be asked to consider
and vote upon the following proposals:
(1) To approve and adopt the Share Exchange and Merger Agreement,
as amended, by and among the Company, Hartan, Inc., a
wholly-owned subsidiary of the Company, and TRC Acquisition
Corporation.
(2) To amend the Company's Articles of Incorporation to change its
name to "Tanner's Restaurant Group, Inc."
(3) To amend the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock to
100,000,000.
(4) To elect four new directors to a six-person Board of
Directors. Two of the current directors will continue, and the
four new directors will be added from TRC.
(5) To ratify the appointment of Porter Keadle Moore, LLP,
Atlanta, Georgia, as the Company's independent auditors for
the 1998 fiscal year.
B. Other Business. At the Meeting the shareholders may also transact any
other business that properly comes before the Meeting or any adjournment or
postponement of it. The Board of Directors is not aware of any other business
that will be presented for consideration at the Meeting.
The proposals relating to the proposed merger are described in the proxy
materials attached to this notice. You should read all of the proxy materials
carefully. We may abandon any or all of the proposals if the shareholders do not
approve certain other proposals. We also reserve the right to abandon the merger
at any time, subject to the terms and conditions of the Agreement and applicable
law. If all of the proposals are abandoned, the Agreement will be terminated,
the Company's Articles of Incorporation will not be amended, and the Board of
Directors will not be changed.
<PAGE>
Specifically, pursuant to the Agreement:
* TRC will merge with and into Hartan and become a wholly-owned
subsidiary of the Company.
* All holders of TRC common stock, options and warrants will exchange
them for 18,000,000 shares of Common Stock.
* All holders of TRC's Class A Preferred Stock will exchange such stock
for 352,500 shares of the Company's Series D Preferred Stock at $10.00
per share, or less in certain circumstances.
* Richard Tanner, the founder of Tanner's restaurants, will exchange a
$3,100,000 TRC subordinated debenture and cancel his employment
agreement for 370,000 shares of the Company's Series D Preferred Stock
at $10.00 per share, or less in certain circumstances.
After the merger occurs, and assuming that all shares of the Company's
Series A Preferred Stock are converted to shares of Common Stock, but no shares
of Common Stock are issued upon exercise of outstanding stock options, common
stock purchase warrants or the conversion of any other securities, the TRC
shareholders will own approximately 75% of the Company's issued and outstanding
Common Stock.
THE BOARD OF DIRECTORS (1) BELIEVES THAT THE MERGER WILL PROVIDE
SIGNIFICANT VALUE TO THE COMPANY AND ITS SHAREHOLDERS BY OFFERING OPPORTUNITIES
FOR GROWTH USING THE TANNER'S RESTAURANT CONCEPT, NAME RECOGNITION AND FRANCHISE
EXPERTISE, (2) HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF THE
COMPANY AND ITS SHAREHOLDERS, AND (3) UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
THE PROPOSALS.
Approval of the Agreement and ratification of the Company's independent
auditors requires the affirmative vote of the holders of a majority of the
Company's issued and outstanding shares of Common Stock present and entitled to
vote at the Meeting. Approval of each of the amendments to the Company's
Articles of Incorporation requires the affirmative vote of two-thirds of the
Company's issued and outstanding shares of Common Stock. Directors will be
elected by a plurality of the shares present and entitled to vote at the
Meeting. The presence in person or by proxy of shareholders owning a majority of
the issued and outstanding shares of the Common Stock constitutes a quorum for
the Meeting.
The Company will pay all of the expenses involved in preparing, assembling
and mailing these proxy materials, along with the costs of soliciting proxies.
In addition to solicitation by mail, directors, officers and regular employees
of the Company may solicit proxies by telephone or personal interview. They will
receive no additional compensation for these services. The Company will also
make arrangements with brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of the
shares held of record by such persons. The Company may reimburse such persons
for reasonable out-of-pocket expenses they incur in doing so.
<PAGE>
Whether or not you plan to attend the meeting, please fill in the
appropriate blanks, sign and date the enclosed proxy card and return it in the
enclosed envelope. If you attend the meeting and wish to vote in person, you can
withdraw your proxy before the meeting. Under Texas law, if you choose not to
vote, your abstention (and broker non-votes) will be treated as a "no" vote for
purposes of determining whether approval of each proposal has been obtained,
provided that if a quorum is present, abstentions and broker non-votes will have
no effect on the voting for the election of directors.
Sincerely,
William J. Gallagher
Chief Executive Officer
San Antonio, Texas
November ___, 1998
<PAGE>
November __, 1998
HARVEST RESTAURANT GROUP, INC.
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
Telephone: (210) 824-2496
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD NOVEMBER__, 1998
GENERAL INFORMATION
This Proxy Statement is furnished to the holders as of the Common Stock of
Harvest Restaurant Group, Inc. (the "Company"), in connection with the
solicitation of proxies by the Company's Board of Directors at a special meeting
of shareholders at the Company's executive offices at the above address, at 8:00
a.m., local time, on November __, 1998, or at any adjournment or postponement
thereof. The Company anticipates that this Proxy Statement and the accompanying
form of proxy will be first mailed or given to shareholders on or about November
__, 1998.
At the Meeting, holders of the Common Stock will be asked to consider and
vote upon the proposals relating to the merger of Hartan, Inc., a subsidiary of
the Company, and TRC Acquisition Corporation, which owns and operates 11 "Rick
Tanner's Original Grill" restaurants in Georgia and has franchised two other
restaurants in Georgia and Alabama. The proposals are summarized in the letter
to shareholders and Notice to Shareholders of Special Meeting to which this
Proxy Statement is attached. This Proxy Statement covers the proposals in
greater detail and informs shareholders about the Company, Hartan, TRC and their
plans.
PLEASE READ THE PROXY STATEMENT CAREFULLY AND EXERCISE YOUR RIGHT TO VOTE
BY FILLING IN THE APPROPRIATE BLANKS, SIGNING AND DATING THE ENCLOSED PROXY CARD
AND RETURNING IT IN THE ENCLOSED ENVELOPE.
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<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
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<S> <C>
SUMMARY ........................................................................... 1
THE MEETING......................................................................... 8
Time, Date and Place....................................................... 8
Matters to be Considered at the Meeting.................................... 8
Voting and Record Date..................................................... 8
Proxies.................................................................... 9
No Dissenters' Rights...................................................... 9
Costs of Solicitation...................................................... 9
PROPOSAL 1: APPROVAL AND ADOPTION OF THE MERGER.................................... 10
THE MERGER.......................................................................... 10
The Company................................................................ 10
TRC........................................................................ 11
General.................................................................... 12
Background and Reasons For the Merger...................................... 12
Recommendation of the Board of Directors................................... 14
Regulatory Approvals....................................................... 15
Accounting Treatment....................................................... 15
Material Tax Consequences.................................................. 15
Interests of Certain Persons in the Merger................................. 16
No Dissenting Shareholders' Rights......................................... 16
Effect of the Merger on the Company's Shareholders......................... 17
Plans for the Operation of the Company Following the Merger................ 17
THE AGREEMENT....................................................................... 17
The Merger................................................................. 17
Effective Date............................................................. 17
Terms of the Merger........................................................ 18
Representations, Warranties and Covenants.................................. 18
Conditions to Closing...................................................... 19
Certain Operative Agreements............................................... 19
Indemnification............................................................ 20
Termination................................................................ 20
MARKET PRICE DATA AND RELATED MATTERS
REGARDING THE COMPANY............................................................. 21
Common Stock Information................................................... 21
Dividends.................................................................. 21
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS......................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION OF THE COMPANY.......................................................... 26
Overview................................................................... 26
Results of Operations for the Two Quarters Ended July 12, 1998
Compared to the Two Quarters Ended July 13, 1997......................... 27
Results of Operations for the Fiscal Year Ended December 28, 1997
Compared to the Fiscal Year Ended December 29, 1996...................... 28
Liquidity and Capital Resources............................................ 29
ADDITIONAL INFORMATION ABOUT THE COMPANY............................................ 30
Franchise Operations....................................................... 30
ii
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Current Operations......................................................... 30
Competition................................................................ 31
Trademarks and Service Marks............................................... 31
Government Regulation...................................................... 32
Insurance.................................................................. 32
Employees.................................................................. 32
Property................................................................... 32
Litigation................................................................. 33
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION OF TRC.................................................................. 35
Overview................................................................... 35
Results of Operations for the Two Quarters Ended July 12, 1998
Compared to the Two Quarters Ended July 13, 1997......................... 35
Results of Operations for the Fiscal Year Ended December 28, 1997
Compared to the Pro Forma Fiscal Year Ended December 29, 1996............ 38
ADDITIONAL INFORMATION ABOUT TRC.................................................... 42
General.................................................................... 42
Competition................................................................ 43
Growth Strategy............................................................ 44
Trademarks and Service Marks............................................... 44
Government Regulation...................................................... 44
Franchise Operations....................................................... 45
Insurance.................................................................. 46
Employees.................................................................. 46
Property................................................................... 46
Market Price of TRC Stock.................................................. 47
Dividends.................................................................. 47
Litigation................................................................. 47
PROPOSAL 2: CHANGE OF COMPANY NAME................................................. 48
PROPOSAL 3: INCREASE IN AUTHORIZED SHARES.......................................... 48
PROPOSAL 4: ELECTION OF THE BOARD OF DIRECTORS..................................... 49
MANAGEMENT OF THE COMPANY........................................................... 49
Post-Merger Management of the Company...................................... 49
Background of the Members of the Post-Merger Management of the Company..... 50
Current Directors and Executive Officers of the Company.................... 51
Background of the Current Directors and Executive Officers of the Company.. 52
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY....... 53
EXECUTIVE COMPENSATION - THE COMPANY................................................ 54
Summary Compensation Table................................................. 54
Stock Option Plan.......................................................... 55
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY AFTER THE MERGER........................ 56
Authorized and Outstanding Capital Stock................................... 56
Common Stock............................................................... 56
Preferred Stock............................................................ 57
Redeemable Preferred Stock Purchase Warrants............................... 61
Common Stock Purchase Warrants............................................. 61
PROPOSAL 5: RATIFICATION OF INDEPENDENT AUDITORS................................... 61
OTHER MATTERS....................................................................... 62
SHAREHOLDER PROPOSALS FOR
iii
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THE 1999 ANNUAL MEETING OF SHAREHOLDERS........................................... 63
AVAILABLE INFORMATION............................................................... 63
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS......................................... F-1
EXHIBIT A - SHARE EXCHANGE AND MERGER AGREEMENT
EXHIBIT B - MARKET DEVELOPMENT AGREEMENT
EXHIBIT C - MANAGEMENT AGREEMENT
iv
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<PAGE>
SUMMARY
This summary highlights information contained elsewhere in this Proxy
Statement. It is not complete and does not contain all of the information you
should consider before voting. You should read the entire Proxy Statement
carefully, including the financial statements and notes to the financial
statements, and the Exhibits, before voting. Portions of this Proxy Statement
contain certain "forward-looking" statements which can be identified by the use
of forward-looking terms such as "expect," "estimate," "anticipate," and
"believe" or by discussions of strategy, future operating results or events.
These forward-looking statements are subject to risks and uncertainties that may
cause the Company's actual results, performance or achievements 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); difficulties associated with integrating the operations of the Company
and TRC; possible inability to re-list the Common Stock on the NASDAQ SmallCap
Market or a national exchange; competition; availability of suitable locations
for new restaurants; 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 Proxy Statement and in the Company's reports filed with the
Securities and Exchange Commission. Forward-looking statements are made as of
the date of this Proxy Statement, and the Company cannot assure that the future
results covered by the forward-looking statements will be achieved.
The Parties to the Agreement
The Company. The Company was incorporated in Texas in June 1993 and
initially conducted business as an area developer for Cluckers Wood Roasted
Chicken, Inc. ("CWRC"), the developer and franchisor 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
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, and in 1996 the Company converted its one Cluckers
restaurant in San Antonio to a Harvest Rotisserie.
By the end of 1997, the Company had 14 Harvest Rotisserie restaurants in
operation, four of which were Company-owned restaurants in Texas and ten of
which were operated as franchised restaurants in Florida, Indiana, North
Carolina, and Northern California. The Company also leased five properties in
Texas for future development as Harvest Rotisserie restaurants. During 1997, the
Company also began the conceptual development of a multi-branded restaurant
featuring Harvest Rotisserie along with two or more additional branded
restaurants in one building (a "Harvest Food Court").
In the first quarter of 1998, three area developers that operated 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 an industry-wide decline in consumer
acceptance of the market segment in which the Harvest concept was positioned and
the Company's decision not to provide the area developers with additional
financing. By July 1998, the Company had closed all of its Company-owned
restaurants. The Company also terminated a letter of intent related to the
development of the Harvest Food Court concept. The one remaining franchised
restaurant in Northern
<PAGE>
California was closed in August 1998. By this time, the Company had decided to
focus its resources on the development of Rick Tanner's Original Grill
restaurants ("Tanner's") as described below.
The principal executive offices of the Company are located at 1250 N.E.
Loop 410, Suite 335, San Antonio, Texas 78209, and its telephone number is (210)
824-2496. See "The Merger - The Company" and "Additional Information About the
Company."
TRC Acquisition Corporation. TRC was incorporated in the state of Georgia
in 1996. TRC owns and operates 11 restaurants located in Georgia and franchises
two restaurants, one in Macon, Georgia and one in Montgomery, Alabama. The
restaurants operate under the name "Rick Tanner's Original Grill." Tanner's
restaurants are intended to appeal to traditional casual dining customers by
offering high quality food and large portions at moderate prices.
The original Tanner's concept was founded in 1986 by Richard Tanner, who
grew his chicken rotisserie and ribs concept to eight units in Atlanta, Georgia.
In October 1996, Mr. Tanner joined forces with veteran restaurant investors and
a new management team and created TRC to expand the historically successful
concept by adding new company-owned restaurants and developing a franchise
program. Since its formation in October 1996, TRC has opened three new Tanner's
restaurants and has additional locations in development. TRC has also begun
initial development of a franchise program and currently has two franchisees,
Mr. Tanner and Mr. John Feltman, a current director of TRC who will not be a
director of the Company after the merger. Each franchisee has opened one
Tanner's restaurant in 1998 and has additional sites in development.
Tanner's restaurants are positioned between the fast food chicken, home
meal replacement restaurants and the full bar casual restaurants that have less
portable foods. Tanner's restaurants offer a varied menu of American fare made
from original recipes. The menu features over 40 different entrees and 15
different appetizers including pot roast, meatloaf, rotisserie chicken, steaks,
slow roasted barbecue pork ribs, "cheesy chicken lips," "Texas" chili,
sandwiches, made-from-scratch soups and salads, and family value packs ideal for
take home service. All entrees are prepared using aged beef and fresh chicken
and seafood, are cooked to order and are served with a choice of two out of 15
different freshly prepared vegetables.
TRC's growth strategy is to open new company-owned Tanner's restaurants, to
increase sales at existing restaurants, and to develop and expand its
franchising program. TRC intends to develop Tanner's restaurants in selected
metropolitan markets in the Southeast and in smaller markets in close proximity
to its existing metropolitan markets to enable it to use existing supervisory,
marketing and distribution systems. In the second half of 1998, TRC expects to
open one to two new company-owned and one to three franchised Tanner's
restaurants. In 1999, TRC expects to open seven to nine company-owned Tanner's
restaurants and seven to ten franchised restaurants. TRC can give no assurance,
however, that it will be able to open or franchise any of these restaurants.
TRC's principal executive offices are located at 2662 Holcomb Bridge Road,
Suite 320, Alpharetta, Georgia 30022, and its telephone number is (770)
518-1444.
2
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Recent Financing Commitment
The Company has obtained a financing commitment for the purchase of 600
shares of its Series C Convertible Preferred Stock in a private transaction
totaling $6,000,000, of which $4,000,000 was placed into an escrow account in
early July. The first $2,000,000 of financing was released to the Company on
July 23, 1998, the second $2,000,000 placed in escrow is to be released upon the
effective date of the merger, and the remaining $2,000,000 of financing will be
invested in the Company within 30 days thereafter. Upon each $2,000,000
investment, 200 shares of Series C Preferred Stock has been or will be issued to
the investor. See "Description of Capital Stock - Preferred Stock - Series C
Convertible Preferred Stock."
Proceeds from the financing will be used primarily for working capital and
the development of up to 12 company-owned Tanner's restaurants over the next 18
months, and the opening of up to 13 franchised Tanner's restaurants during the
same period, although there can be no assurance that such development plans will
be successful. The Company also plans to use approximately $550,000 of this
funding for the settlement of the Company's liabilities.
The Meeting
Time, Date and Place. The Meeting will be held on November __, 1998 at the
Company's executive offices at 1250 N.E. Loop 410, Suite 335, San Antonio, Texas
78209 commencing at 8:00 a.m., local time.
Matters to be Considered at the Meeting. At the Meeting, the Company's
shareholders will be asked to consider and vote upon
(1) approval and adoption of the Share Exchange and Merger
Agreement, dated July 9, 1998, by and among the Company,
Hartan and TRC, as amended (the "Agreement"),
(2) approval of an amendment to the Company's Articles of
Incorporation to change the Company name to "Tanner's
Restaurant Group, Inc.,"
(3) approval of an amendment to the Company's Articles of
Incorporation to increase the number of authorized shares of
Common Stock to 100,000,000,
(4) election of four new members of the Board of Directors
consisting of Clyde Culp III, Richard Tanner, Thomas J. Haas,
and James R. Walker (William J. Gallagher and Theodore M.
Heesch are and will continue to be directors of the Company),
and
(5) ratification of the appointment of Porter Keadle Moore,
LLP, Atlanta, Georgia, as the Company's independent auditors
for the 1998 fiscal year.
The proposals relate to the proposed merger described in the proxy
materials attached to this letter. We may abandon any or all of the proposals if
the shareholders do not approve certain other proposals. We also reserve the
right to abandon the merger at any time, subject to the terms and
3
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conditions of the Agreement and applicable law. If all of the proposals are
abandoned, the Agreement will be terminated, the Company's Articles of
Incorporation will not be amended, and the Board of Directors will not be
changed.
Record Date, Shares Entitled to Vote. Holders of record of shares of Common
Stock at the close of business on October 30, 1998 are entitled to notice of and
to vote at the Meeting. At the record date, the Company had [4,035,108] shares
of Common Stock outstanding and entitled to vote.
Voting Rights. Each holder of shares of Common Stock is entitled to one
vote per share with respect to all matters.
Votes Required. Approval of the Agreement and ratification of the Company's
independent auditors requires the affirmative vote of the holders of a majority
of the Company's issued and outstanding shares of Common Stock present and
entitled to vote at the Meeting. Approval of each of the amendments to the
Company's Articles of Incorporation requires the affirmative vote of two-thirds
of the Company's issued and outstanding shares of Common Stock. Directors will
be elected by a plurality of the shares present and entitled to vote at the
Meeting. The presence in person or by proxy of shareholders owning a majority of
the issued and outstanding shares of the Common Stock constitutes a quorum for
the Meeting. Abstentions and broker non-votes will be treated as a "no" vote for
purposes of determining whether approval of each proposal has been obtained,
provided that if a quorum is present, abstentions and broker non-votes will have
no effect on the voting for the election of directors. See "The Meeting - Voting
and Record Date."
Revocability of Proxies. Any shareholder may revoke a proxy at any time
before it is exercised by delivering a written revocation to the Company, by
substituting a new proxy executed at a later date, or by requesting, in person,
before the Meeting that the proxy be returned.
The Merger
Background and Reasons for the Merger. The merger represents the
culmination of numerous steps taken by the Company over the past months to stem
continuing losses, sell its assets to a suitable purchaser or find a strategic
partner to expand the Company's operations. See "The Merger - Background and
Reasons for the Merger."
Recommendation of the Board of Directors. The Board of Directors has
unanimously approved the merger and the transactions described in this Proxy
Statement and recommends to the Company's shareholders that they vote FOR the
approval of each proposal. See "The Merger - Recommendation of the Board of
Directors."
Regulatory Approvals. No federal or state regulatory requirements must be
complied with or approval obtained in connection with the merger. See "The
Merger - Regulatory Approvals."
4
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Accounting Treatment. In accordance with the Agreement, TRC will merge into
Hartan, the Company's wholly-owned subsidiary, as part of a forward triangular
merger. A total of 18,000,000 shares of Common Stock will be issued in exchange
for 100% of the TRC Common Stock and TRC options and warrants, in addition to
the other consideration described in these materials. The merger will be treated
as a reverse acquisition of the Company by TRC for accounting purposes. In a
reverse acquisition the accounting acquirer receives less than 100% of the
post-combination shares (since it is not the legal issuer). The TRC shareholders
will receive approximately 75% of the post-combination Common Stock, assuming
that all shares of the Company's Series A Preferred Stock are converted to
shares of Common Stock, but no shares of Common Stock are issued upon exercise
of outstanding stock options, common stock purchase warrants or the conversion
of any other securities. The cost of the acquisition of the Company will be
based on the fair value of the Company's outstanding shares and certain
acquisition costs and will be allocated to the Company's net assets following
the guidance of APB Opinion No. 16 "Business Combinations." As a result of TRC's
reverse acquisition of the Company, the historical financial statements of the
surviving corporation for periods prior to the merger will be those of TRC
rather than the Company or Hartan. See "Unaudited Pro Forma Condensed Combined
Financial Statements" and "The Merger Accounting Treatment."
Certain Income Tax Consequences. The merger will be a non-taxable
transaction to the Company and will not result in any direct federal or state
income tax consequences to the Company's shareholders. See "The Merger -
Material Tax Consequences."
Interests of Certain Persons in the Merger. Certain members of the
Company's current and proposed Board of Directors and management have or may
have an interest in the merger that is in addition to or different from the
interests of shareholders generally. See "The Merger - Interests of Certain
Persons in the Merger."
No Dissenting Shareholders' Rights. Pursuant to the Texas Business
Corporation Act, holders of the Common Stock have no dissenting shareholders'
rights regarding the merger or any of the other proposals. See "The Merger - No
Dissenting Shareholders' Rights."
Effect of the Merger on the Company's Shareholders. If the merger is
consummated, the shareholders of the Company will retain their equity interests
in the Company, although their equity interests will be only approximately 25%
of the outstanding Common Stock of the surviving corporation, assuming that all
shares of the Company's Series A Preferred Stock are converted to shares of
Common Stock, but no shares of Common Stock are issued upon exercise of
outstanding stock options, common stock purchase warrants or the conversion of
any other securities. The current holders of TRC Common Stock will hold
approximately 75% of the Company's outstanding Common Stock following the
merger. The consummation of the merger will not result in any changes in the
rights of shareholders of the Company.
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Plans for Operation of the Company Following the Merger. Following the
closing of the merger, the Company plans to develop, own and operate additional
Tanner's restaurants and franchise other Tanner's restaurants, all primarily in
the Southeast area of the United States. The Company also plans to relocate its
corporate office to the Atlanta, Georgia metropolitan area to remain in close
proximity to the core of the Tanner's restaurant operations and to reduce
overhead costs from duplicate facilities and personnel. See "The Merger - Plans
for the Operation of the Company Following the Merger."
The Agreement
On July 9, 1998, the Company entered into a Share Exchange and Merger
Agreement (the "Agreement") with its wholly-owned subsidiary, Hartan, and TRC.
Pursuant to the Agreement, as amended, the Company would acquire TRC by merging
TRC with and into Hartan. As part of the Company's relationship with TRC, the
Company through Hartan has entered into a development agreement with TRC to open
up to five Tanner's restaurants under a franchise relationship. TRC will manage
the development and operation of the Tanner's restaurants under a separate
management agreement with Hartan. Upon the completion of the merger, the
franchises will be terminated and these restaurants will become Company-owned
restaurants.
If the merger is not completed, it is expected that either (a) the Tanner's
restaurants developed by the Company will continue to operate as franchised
restaurants under an operating agreement with TRC, or (b) the Company will
exercise its option to require TRC to repurchase the restaurants from the
Company at the development cost.
The Merger. Under the terms of the Agreement,
* TRC will merge with and into Hartan and become a wholly-owned
subsidiary of the Company.
* All holders of TRC common stock, options and warrants will exchange
them for 18,000,000 shares of Common Stock.
* All holders of TRC's Class A Preferred Stock will exchange such stock
for 352,500 shares of the Company's Series D Preferred Stock at $10.00
per share, or less in certain circumstances.
* Richard Tanner will exchange a $3,100,000 TRC subordinated debenture
and cancel his employment agreement for 370,000 shares of the
Company's Series D Preferred Stock at $10.00 per share, or less in
certain circumstances.
In addition, the Company will pay off an outstanding real estate lien note with
a combination of cash and Common Stock. See "Merger Agreement - Terms of
Merger."
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Conditions of the Merger. The respective obligations of the Company and TRC
to consummate the merger are subject to the satisfaction or waiver (where
permissible) of certain conditions, including, but not limited to:
(1) approval of the merger by the board of directors and by the
shareholders of TRC;
(2) approval of the Agreement and related transactions by the
board of directors and the shareholders of the Company;
(3) approval by the Company's shareholders of a new Board of
Directors pursuant to the Agreement; and
(4) settlement of all the Company liabilities in excess of
$10,000, with the aggregate amount of such settlement agreements
to be approximately $550,000 but not to exceed $1,000,000. See
"Merger Agreement - Conditions to Closing."
Amendment or Waiver. Subject to applicable law, the parties may amend or
waive any term of the Agreement in writing at any time before or after the
Company's or TRC's shareholders approve it.
Termination and Other Provisions. The Agreement contains certain
representations, warranties, covenants, conditions and indemnification
agreements of the Company, Hartan and TRC customary for transactions of the type
contemplated by the Agreement. See "The Agreement - Representations and
Warranties," "Indemnification" and "- Conditions to the Closing."
The Agreement may be terminated whether before or after approval of the
merger by the shareholders of the Company, Hartan and/or the shareholders of
TRC, (i) at any time by mutual consent of the Company, Hartan and TRC; (ii) if a
material breach of the Agreement has occurred by any party and the other parties
have not waived such breach; (iii) if any of the required conditions has failed
to occur or becomes impossible to occur at a closing and the other parties have
not waived such conditions, or (iv) by any party if the closing has not occurred
on or before December 31, 1998 or such later date as the Company, Hartan and TRC
may have agreed upon. See "Merger Agreement - Termination."
Pursuant to the Management Agreement between Harton and TRC, if the
Company, TRC, and Hartan do not complete the merger on or before December 31,
1998 or within any permitted or agreed extensions, Hartan has the option to
require TRC to purchase the restaurants, if any, developed by Hartan pursuant to
the Management Agreement and the Market Development Agreement between Hartan and
TRC, at a price equal to the aggregate funds deposited in the operation fund
accounts of Hartan, and TRC will indemnify the Company and Hartan from
liabilities directly associated with such assets after the date of such
transfer. If such option is exercised, such transfers and payment therefor are
required to be completed within 30 days after notice of exercise. Upon payment,
such option may be exercised, at TRC's election, against either the assets or
all of the outstanding stock of Hartan.
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THE MEETING
Time, Date and Place
This Proxy Statement is being furnished to shareholders of the Company of
record as of October 30, 1998 in connection with the solicitation of proxies by
the Board of Directors for use at the Meeting on November __, 1998 at 8:00 a.m.
local time, at the Company's executive offices at 1250 NE Loop 410, Suite 335,
San Antonio, Texas 78209, and at any adjournment or postponement of such
meeting.
Matters to Be Considered at the Meeting
At the Meeting, shareholders will be asked to consider and vote upon the
following proposals:
(1) To approve and adopt the Share Exchange and Merger Agreement,
dated July 9, 1998, as amended, by and among the Company,
Hartan, and TRC.
(2) To amend the Company's Articles of Incorporation to change its
name to "Tanner's Restaurant Group, Inc."
(3) To amend the Company's Articles of Incorporation to increase
the number of authorized shares of Common Stock to 100,000,000
shares.
(4) To elect four new members of the Board of Directors.
(5) To ratify the appointment of Porter Keadle Moore, LLP,
Atlanta, Georgia, as the Company's independent auditors for
the 1998 fiscal year.
The proposals relating to the proposed merger are described in the proxy
materials attached to this notice. You should read all of the proxy materials
carefully. We may abandon any or all of the proposals if the shareholders do not
approve certain other proposals. We also reserve the right to abandon the merger
at any time, subject to the terms and conditions of the Agreement and applicable
law. If all of the proposals are abandoned, the Agreement will be terminated,
the Company's Articles of Incorporation will not be amended, and the Board of
Directors will not be changed.
Voting and Record Date
The Board of Directors has fixed October 30, 1998 as the record date for
the Meeting. Only persons who hold the Common Stock of record as of the record
date will be entitled to notice of and to vote at the Meeting. As of the record
date, there were [4,035,108] shares of the Common Stock outstanding and entitled
to vote.
Each shareholder of record of Common Stock on the record date is entitled
to cast one vote per share, exercisable in person or by a properly executed
proxy at the Meeting.
The presence at the Meeting, in person or by a proxy, of the holders of a
majority of the shares of Common Stock outstanding on the record date will
constitute a quorum at the Meeting. Votes will be counted by inspectors
appointed by the Company. Shares represented by proxies that reflect abstentions
or include "broker non-votes" will be treated as shares that are present and
entitled to vote for purposes of determining the presence of a quorum. (A broker
non-vote occurs when a registered broker holding customer securities in street
name has not received voting instructions from the beneficial owner regarding
any "non-routine" matter as so designated by that broker's self-regulatory
organization.) The approval and adoption of the Agreement and ratification of
the selection of independent auditors require
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the affirmative vote of the holders of a majority of the outstanding shares of
the Company's Common Stock present and entitled to vote at the Meeting. Approval
of each of the amendments to the Company's Articles of Incorporation requires
the affirmative vote of the holders of two-thirds of the Company's issued and
outstanding Common Stock as of the record date. Directors will be elected by a
plurality of the shares present and entitled to vote at the Meeting. Abstentions
and broker non-votes will be treated as a "no" vote for purposes of determining
whether approval of each proposal has been obtained, provided that if a quorum
is present, abstentions and broker non-votes will have no effect on the voting
for the election of directors.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE RELATED
TRANSACTIONS AND RECOMMENDS A VOTE FOR THE APPROVAL OF EACH PROPOSAL.
ACCORDINGLY, THE COMPANY IS SEEKING SHAREHOLDER APPROVAL OF THE MERGER.
Proxies
All shares of Common Stock represented at the Meeting by properly executed
proxies received prior to or at the Meeting, and not duly and timely revoked,
will be voted at the Meeting in accordance with the choices marked by the
shareholders. UNLESS A CONTRARY CHOICE IS MARKED, OR IF THE PROXY IS LEFT BLANK
AS TO CHOICE, THE SHARES WILL BE VOTED FOR APPROVAL OF EACH PROPOSAL.
The Board of Directors is not aware of any other matters not referred to in
this Proxy Statement that will be presented for action at the Meeting. If any
other matters properly come before the Meeting, the persons designated in the
proxy intend to vote the shares represented thereby in accordance with their
best judgment.
Any proxy given pursuant to this solicitation may be revoked by the person
giving it at any time before it is voted. Proxies may be revoked by (i) filing
with the Secretary of the Company at or before the taking of the vote the
Meeting a written revocation bearing a later date than the proxy, (ii) duly
executing a later-dated proxy relating to the same shares and delivering it to
the Secretary of the Company before the taking of the vote at the Meeting, or
(iii) attending the Meeting and voting in person (although attendance at the
Meeting will not in and of itself effectively revoke a proxy).
No Dissenters' Rights
Under the Texas Business Corporation Act shareholders have no right to
dissent from the Agreement or any of the other proposals.
Costs of Solicitation
The Company will pay all of the expenses involved in preparing, assembling
and mailing these proxy materials, along with the costs of soliciting proxies.
In addition to solicitation by mail, directors, officers and regular employees
of the Company may solicit proxies by telephone or personal interview. They will
receive no compensation for their services other than their regular
compensation. The Company will also make arrangements with brokerage houses and
other custodians, nominees and fiduciaries to forward solicitation materials to
the beneficial owners of the shares held of record by such persons. The Company
may reimburse such persons for reasonable out-of-pocket expenses they incur in
doing so.
Holders of shares of the Common Stock are requested to complete, date and
sign the enclosed Proxy and to return it to the Company in the postage paid
envelope that has been provided.
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PROPOSAL 1: APPROVAL AND ADOPTION OF THE AGREEMENT
THE MERGER
The Company
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. In October 1997, the Company began operating under the name Harvest
Restaurant Group, Inc. Prior to November 1994, the Company was an area developer
for Cluckers Wood Roasted Chicken, Inc. ("CWRC"), the developer and franchisor
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.
During 1996 and 1997, the Company owned, operated and franchised quick
service restaurants under the name "Harvest Rotisserie." At the end of 1997, the
Company had 14 Harvest Rotisserie restaurants in operation, four of which were
Company-owned restaurants in Texas and ten of which were operated as franchised
restaurants in Florida, Indiana, North Carolina, and Northern California. The
Company also had leased five additional restaurant properties in Texas for
future development as Harvest Rotisserie restaurants. 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 secured loans for the
purchase price, cost of conversion and working capital.
In August 1997, the Company engaged a financial advisor to assist in
obtaining further capital to fund the development of additional Harvest
Rotisserie restaurants in the target markets to gain economic efficiency. During
1997, the Company also began the conceptual development of a multi-branded
restaurant featuring Harvest Rotisserie along with two or more additional
branded restaurants in one building (a "Harvest Food Court"). The financing
efforts were unsuccessful, and 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 due to the Company's
limited capital and the lower per unit development and operating costs for a
Harvest Food Court compared to a Harvest Rotisserie. In January 1998, the
Company closed its restaurant located in Corpus Christi, Texas. The Company also
canceled previous letters of intent to acquire 13 additional Kenny Rogers
Roasters restaurants located in Maryland and Utah.
To facilitate the Company's expansion of the Harvest Food Court restaurants
in Texas, the Company 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 protection from its creditors under Chapter 11 of the
federal Bankruptcy Code in 1995. The Company subsequently canceled the Red Line
agreement due to the Company's decision to focus its resources on the
development of Rick Tanner's Original Grill restaurants.
In the first quarter of 1998, three area developers that operated nine
franchised Harvest Rotisserie restaurants in Florida, Indiana and North Carolina
closed all nine of these restaurants. The closures were
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the result of restaurant operating losses caused in part by an industry-wide
decline in consumer acceptance of the market segment in which the Harvest
concept was positioned and the Company's decision not to provide the area
developers with additional financing. The Company had guaranteed the leases for
all of the franchised locations, as well as the promissory notes connected with
two of the franchise locations and a mortgage note for a restaurant property
purchased by an area developer. By July 1998, the Company had closed all of its
Company-owned restaurants. The one remaining franchise restaurant in Northern
California was closed in August 1998.
In July 1998, the Company signed the Agreement to acquire TRC , the
operator of a 13 unit chain of Tanner's restaurants. Completion of the merger is
subject to shareholder approval and certain other contingencies, including the
Company obtaining satisfactory settlement agreements for all of its obligations
in excess of $10,000, so long as the total amount paid to obtain the settlement
agreements does not exceed $1,000,000. 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. In July 1998, in connection with the
Agreement, the Company formed Hartan as a wholly-owned subsidiary of the
Company. The Company intends to focus all its available resources on the
development of Tanner's restaurants and will no longer pursue the development of
Harvest Food Courts.
The principal executive offices of the Company are located at 1250 NE Loop
410, Suite 335, San Antonio, Texas 78209 and its telephone number is (210)
824-2496. See "Additional Information About the Company."
TRC
TRC owns and operates 11 restaurants located in Georgia and franchises two
restaurants, one in Macon, Georgia and one in Montgomery, Alabama. The
restaurants operate under the name of Rick Tanner's Original Grill ("Tanner's").
Tanner's restaurants are intended to appeal to traditional casual dining
customers by offering high quality food and large portions at moderate prices.
The original Tanner's concept was founded in 1986 by Richard Tanner, who
grew his chicken rotisserie and ribs concept to eight units in Atlanta, Georgia.
In October 1996, Mr. Tanner joined forces with veteran restaurant investors and
a new management team and created TRC to expand the historically successful
concept by adding new company-owned restaurants and developing a franchise
program. Since its formation in October 1996, TRC has opened three new Tanner's
restaurants and has additional locations in development. In addition, TRC has
begun the initial development of a franchise program. TRC currently has two
franchisees, Mr. Tanner and Mr. John Feltman, a current director of TRC who will
not be a director of the Company after the merger. Each franchisee has opened
one Tanner's restaurant in 1998 and has additional sites in development.
Tanner's restaurants are positioned between the fast food chicken, home
meal replacement restaurants and the full bar casual restaurants who have less
portable foods. Tanner's restaurants offer a varied menu of American fare made
from original recipes. The menu features over 40 different entrees and 15
different appetizers including pot roast, meatloaf, rotisserie chicken, steaks,
slow roasted barbecue pork ribs, "cheesy chicken lips," "Texas" chili,
sandwiches, made-from-scratch soups and salads, and family value packs ideal for
take home service. All entrees are prepared using aged beef and fresh chicken
and seafood, are cooked to order and are served with a choice of two out of 15
different freshly prepared vegetables.
TRC's growth strategy is to open new company-owned Tanner's restaurants and
to increase sales at existing restaurants, as well as to develop and expand its
franchising program. TRC intends to develop Tanner's restaurants in selected new
metropolitan markets in the Southeast and in smaller markets in
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close proximity to the Company's existing metropolitan markets to enable the
Company to utilize existing supervisory, marketing and distribution systems. In
the second half of 1998, TRC expects to open one to two new company-owned and
one to three franchised Tanner's restaurants. In 1999, TRC expects to open seven
to nine company-owned Tanner's restaurants and seven to ten franchised
restaurants. There can be no assurance that TRC will open or franchise any
additional Tanner's restaurants.
The principal executive offices of TRC are located at 2662 Holcomb Bridge
Road, Suite 320, Alpharetta, Georgia 30022, and its telephone number is (770)
518-1444.
General
At the closing of the merger (the "Effective Date"),
* TRC will merge with and into Hartan and become a wholly-owned
subsidiary of the Company.
* All holders of TRC common stock, options and warrants will exchange
them for 18,000,000 shares of Common Stock.
* All holders of TRC's Class A Preferred Stock will exchange such stock
for 352,500 shares of the Company's Series D Preferred Stock at $10.00
per share, or less in certain circumstances.
* Richard Tanner will exchange a $3,100,000 TRC subordinated debenture
and cancel his employment agreement for 370,000 shares of the
Company's Series D Preferred Stock at $10.00 per share, or less in
certain circumstances.
As a result of the merger, the shareholders of TRC will own approximately 75% of
the outstanding Common Stock of the Company immediately after the effective date
of the merger, assuming all shares of the Company's Series A Preferred Stock are
converted to shares of the Common Stock (the Series A Preferred Stock is
convertible at the option of the holders thereof at no cost), but assuming that
no shares are issued upon exercise of outstanding stock options, common stock
purchase warrants or the conversion of any other securities. See "The Agreement
Terms of the Merger - Exchange of Shares." At the Effective Date, the symbol for
the Common Stock on the OTC Bulletin Board will remain "ROTI."
Background and Reasons for the Merger
The merger represents the culmination of numerous steps taken by the
Company over the past months to stem continuing losses due in part to an
industry-wide decline in consumer acceptance of the market segment in which the
Harvest concept was positioned (as evidenced by the significant ongoing losses
reported by Boston Chicken Incorporated and Kenny Rogers Roasters, Inc.), or, as
alternatives, to find a strategic partner to invest in the Company or to sell
all or a substantial part of the Company's assets to a suitable purchaser. As
the Company's working capital diminished, management began to explore
alternative capital sources to support the Company's continuing operations.
During the first quarter of 1998, revenues did not improve and cash flow
remained negative. Accordingly, the Company took measures to reduce overhead and
conserve cash. In addition, the Company began pursuing joint ventures, strategic
partnerships and mergers that might provide funding or more viable business
operations.
At December 31, 1997, the Company had 14 Harvest Rotisserie restaurants in
operation system-wide, four of which were Company-owned and ten operated as
franchised stores. In January 1998, the Company canceled plans to further expand
the Harvest Rotisserie concept due to insufficient capital and declining sales.
In the first quarter of 1998, Harvest significantly curtailed its operations and
closed one
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Company-owned Harvest Rotisserie restaurant, and nine franchised restaurants
were closed. The closures were the result of Harvest's decision not to provide
the area developers with additional financing. Harvest had guaranteed the leases
for all franchised locations, as well as certain debt obligations 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 contacted each of the
lessors and lenders and was successful in reaching settlement agreements for
most of the related obligations. As a result of the restaurant closings and
defaults by the area developers under the loan agreements, Harvest recorded
losses totaling $4,572,197 in 1997, primarily associated with the write-off of
area developer loans and real estate disposition costs for Company-owned and
franchised restaurants.
In the second quarter of 1998, the Company closed its three remaining
Company-owned Harvest Rotisserie restaurants, and in August 1998, the one
remaining franchised Harvest Rotisserie restaurant located in Northern
California was closed. In an effort to develop a successful restaurant concept,
Harvest began the development and initial test marketing of a new multi-branded
restaurant concept under the name Harvest Food Court. As part of this branded
concept, the Company entered into a letter agreement to acquire the trademarks,
trade dress and operating systems of Red Line, Inc., the operator and franchisor
of Red Line hamburger outlets in Texas. The Company subsequently terminated the
letter of intent to acquire an interest in Red Line due to the Company's
decision to focus its resources on the development of Tanner's restaurants.
Accordingly, the Company has determined not to further pursue the Harvest Food
Court concept.
Without a proven viable restaurant concept, additional financing is
difficult to obtain, which raises substantial doubt about the Company's ability
to continue as a going concern. To continue as a going concern, the Company has
sought a successful restaurant concept with proven potential for unit growth
that will enable it to obtain additional funds through debt or equity offerings
to fund growth.
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"), a
franchisor of a 110-store chain of juice bar restaurants, and Sports Group
International, Inc. ("SGI"), which holds an exclusive license for the
international distribution of a line of Spalding sports drinks and water. The
agreements also required the payment of $1,000,000 to the shareholders of Surf
City. The completion of the acquisitions was subject to a feasibility period
that expired April 17, 1998. The completion of the acquisitions was also subject
to the Company's raising $2,000,000 of new financing, obtaining approval of the
Company's shareholders and continuing its NASDAQ SmallCap Market listing. Upon
completion of the Surf City and SGI acquisitions, the Company's current
shareholders would have retained approximately a 25% interest in the Company on
a post-acquisition basis. The agreements for the acquisitions were terminated by
mutual agreement between the parties due to the inability to finalize a business
strategy acceptable to all the parties.
In the second quarter of 1998, the Company began negotiations with TRC and,
after entering into a letter of intent in May 1998, the Company signed the
definitive Agreement in July 1998. The Company's management believes that
Tanner's restaurants is a viable concept with market acceptance and the
potential for unit growth. The Company has obtained a financing commitment for
$6,000,000 ($2,000,000 of which has been paid to the Company and $4,000,000 of
which is in escrow) to be used primarily for the expansion of Tanner's
restaurants directly and through the Company's wholly-owned subsidiary, Hartan,
which was formed in July 1998.
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Recommendation of the Board of Directors
The Board of Directors believes that the merger and the related
transactions are fair to and in the best interests of the Company and its
affiliated and unaffiliated shareholders. Accordingly, the Board of Directors
has unanimously approved the merger and the related transactions and recommends
that the Company's shareholders vote FOR the approval of each proposal.
In reaching its conclusions, the Board of Directors considered, among other
things, the following material factors:
(1) A wide range of alternative strategic options (including
raising additional capital, sales of assets or the entire
Company, possible bankruptcy, further elimination or
reduction of costs and finding strategic partners to invest
in the operations of the Company), none of which management
believes offers as attractive an alternative for continued
operations as the merger.
(2) Information concerning the Company's financial
performance, condition (including serious negative balance
sheet indicators), business operations and prospects. See "-
Background and Reasons for the Merger" and "Management's
Discussion and Analysis of Financial Condition and Results
of Operations of the Company."
(3) The proposed terms and conditions of the Agreement,
including the opportunity to use the Tanner's restaurant
concept with market acceptance, proven results and the
potential for expansion.
(4) Management's belief in the viability of the Tanner's
restaurant concept.
(5) The years of experience and favorable reputation of TRC
and its executives.
(6) The commitment for $6,000,000 of funding based upon the
Company's relationship with TRC and agreement with TRC for
the Company to develop up to five Tanner's restaurants with
such funding.
(7) The recommendation of the Company's management to enter
into the merger.
(8) The effect of the merger on the Company's shareholders.
See "- Effect of the Merger on the Company's Shareholders."
(9) The Board's expectation that completion of the funding
of the $6 million financing commitment would substantially
eliminate the Company's indebtedness, and its belief that in
conjunction with the merger and operation of the Tanner's
restaurant chain, the Company will be in position to operate
profitably.
The Company's Board also considered the risks relating to the merger,
including the risks associated generally with multiple unit restaurant
operations, TRC's and the Company's lack of profitable operations in the past
and the liquidity and capital resources of the surviving corporation following
the merger.
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In light of the Company's debt obligations and other liabilities, and the
perceived viability of the Tanner's restaurant concept, the Board determined
that the merger is in the best interests of the Company and its shareholders.
In view of the wide variety of factors it considered in evaluating the
merger, the Board of Directors did not find it practicable to quantify, and did
not quantify, or otherwise attempt to assign relative weights to, the specific
factors it considered in reaching its decision in favor of the merger.
The Company did not obtain an opinion by a financial advisor regarding the
fairness of the merger because the Company lacked the funds to pay for such an
opinion and because the Company's financial condition was such that if the
Agreement had not been executed and the $6,000,000 commitment for funding had
not been obtained, the Company would probably have had to suspend its business
due to lack of working capital.
The Board also considered recent developments with Nasdaq in evaluating the
merger. On September 16, 1998, Nasdaq notified the Company that effective upon
the close of business on September 16, 1998, the Company's securities were
delisted from the Nasdaq SmallCap Market due to the Company's failure to comply
with the continued listing requirements of maintaining a minimum bid price of
$1.00 per share and maintaining a minimum market value of its public float of
$1,000,000. Nasdaq further stated that if the Company were to seek to list the
Common Stock on the Nasdaq SmallCap Market, the Company would be required to
meet all initial listing requirements, which include, among other requirements,
a minimum bid price of $4.00 per share and a minimum public float of $5,000,000.
The Common Stock and certain other Company securities are currently traded on
the OTC Bulletin Board.
Regulatory Approvals
No federal or state regulatory requirements must be complied with or
approvals must be obtained in connection with the merger.
Accounting Treatment
The merger will be treated as a reverse acquisition of the Company by TRC.
In a reverse acquisition, the accounting acquirer receives less than 100% of the
post combination shares since it is not the legal issuer. The TRC shareholders
will receive approximately 75% of the post-combination shares of Common Stock,
assuming that all shares of the Company's Series A Preferred Stock are converted
to shares of Common Stock, but assuming that no shares of Common Stock are
issued upon exercise of outstanding stock options, common stock purchase
warrants or the conversion of any other securities. TRC will be the accounting
acquirer. The cost of the acquisition of the Company will be based on the fair
value of the Company's outstanding shares and certain acquisition costs and will
be allocated to the Company's net assets following the guidance of APB Opinion
No. 16 "Business Combinations." As a result of the reverse acquisition, the
historical financial statements of the surviving corporation for periods prior
to the merger will be those of TRC rather than the Company. See "Unaudited Pro
Forma Condensed Combined Financial Statements."
Material Tax Consequences
No material gain or loss for federal tax purposes will be recognized by the
Company, Hartan or TRC in the transactions constituting the merger.
15
<PAGE>
Interests of Certain Persons in the Merger
In considering the recommendation of the Board of Directors with respect to
the Agreement, shareholders should be aware that certain members of the
Company's current and proposed Board and management have or may have interests
in the merger that are in addition to or different from the interests of
shareholders generally.
Employment Agreement with Clyde Culp III. As of the Effective Date , the
Company will enter into a five-year employment agreement with Clyde Culp III,
currently the Chairman and Chief Executive Officer of TRC and a nominee for
director of the Company. Pursuant to the terms of this agreement, Mr. Culp will
be the Chairman of the Company. His annual base salary will be $200,000 per
year, with annual increases each anniversary date of the Effective Due directly
proportional to any increase (but no decrease) in the cost of living a reflected
by the Consumer Price Index for Urban Wage Earners and Clerical Workers - All
Items ("CPI") published by the Bureau of Labor Statistics. Mr. Culp will be
eligible for incentive cash bonuses based on the Company attaining certain goals
approved by the Board. In addition, Mr. Culp will be eligible for stock options
under any Company employee stock option plan and will receive employee benefits,
such as health and life insurance, normal and customary for executives in
similar positions.
Transactions with Richard Tanner. Upon the closing of the merger, Richard
Tanner, currently the President and a director of TRC and a nominee for director
of the Company, will exchange a $3,100,00 TRC subordinated debenture and cancel
his employment agreement in exchange for 370,000 shares of the Company's Series
D Preferred Stock at $10.00 per share, or less in certain circumstances. Mr.
Tanner also owns 25% of the outstanding TRC Class A Preferred Stock, which will
be converted into the right to receive 88,125 shares of the Company's Series D
Preferred Stock as part of the merger. As a franchisee of TRC, Mr. Tanner has an
interest in having a stronger franchisor that will be better able to pursue its
growth plans. He will therefore indirectly benefit from the financing to be made
available to the surviving company.
Arrangements with William J. Gallagher. As of the Effective Date, all
employment agreements between the Company and its Chief Executive Officer,
William J. Gallagher, will be terminated and, as severance, Mr. Gallagher will
receive a cash payment of $150,000 and $150,000 in shares of Common Stock,
valued at fair market value at the time of termination, or stock options for
such shares at an exercise price of $.01 per share. Mr. Gallagher, however,
shall remain a director of the Company following the merger.
In addition, Mr. Gallagher is an officer of Santa Cruz Squeeze, Inc., which
holds a real estate lien note issued by the Company in the approximate amount of
$150,000. As of the Effective date, the note will be paid and satisfied in full
by the Company's payment of $50,000 and delivery of 50,000 shares of the Common
Stock.
Receipt of Shares of Common Stock by TRC Director Nominees. The four TRC
nominees to be directors of the Company - Messrs. Clyde Culp III, Richard
Tanner, Thomas J. Haas, and James R. Walker - will receive a total of 9,376,227
shares of Common Stock pursuant to the terms of the merger.
No Dissenting Shareholders' Rights
Under the Texas Business Corporation Act, shareholders have no right to
dissent from the Agreement.
16
<PAGE>
Effect of the Merger on the Company's Shareholders
If the merger is consummated, shareholders will retain their equity
interest in the Company, although such interests will be diluted by the issuance
of additional shares of Common Stock pursuant to the merger. The merger will not
result in any changes in the rights of the shareholders.
Plans for the Operation of the Company Following the Merger
Following the closing of the merger, the Company plans, through its
wholly-owned subsidiary, Hartan, to develop, own and operate Company-owned
Tanner's restaurants and to franchise other Tanner's restaurants, all primarily
in the Southeast area of the United States.
The Company has obtained a financing commitment for the purchase of 600
shares of its Class C Preferred Stock in a private transaction totaling
$6,000,000, of which $4,000,000 was placed into an escrow account in early July.
The first $2,000,000 of financing was released to the Company on July 23, 1998,
the second $2,000,000 placed in escrow is to be released upon the effective date
of the merger, and the remaining $2,000,000 of financing will be invested in the
Company within 30 days thereafter. Upon each $2,000,000 investment, 200 shares
of Series C Preferred Stock has been or will be issued to the investor.
Proceeds from the financing will be used primarily for working capital and
the development of up to 12 company-owned Tanner's restaurants over the next 18
months, and the opening of up to 13 franchised Tanner's restaurants during the
same period, although there can be no assurance that such development plans will
be successful. The Company also plans to use approximately $550,000 of this
funding for the settlement of the Company's liabilities.
THE AGREEMENT
The following is a brief summary of certain provisions of the Agreement, a
copy of which is attached to this Proxy Statement as Exhibit A. The summary is
qualified in its entirety by reference to the Agreement. Shareholders are urged
to read the Agreement in its entirety for a more complete description of the
merger.
The Merger
The Agreement provides that, subject to the approval by the shareholders,
Hartan and TRC, and to the satisfaction of the other conditions to the merger,
TRC will merge into Hartan and become a wholly-owned subsidiary of the Company.
The articles of incorporation and by-laws of the Company and Hartan, as in
effect immediately prior to the effective date will be the articles of
incorporation and by-laws of the Company and Hartan, respectively, following the
merger (provided that the name of the Company will be changed to Tanner's
Restaurant Group, Inc. and the number of authorized shares of Common Stock will
increase to 100,000,000 if the shareholders approve the proposals in that
regard). Thereafter, both the articles of incorporation and the by-laws of the
Company and Hartan may be amended in accordance with their terms and as provided
by law.
Effective Date
Subject to the terms and conditions of the Agreement, the date on which the
exchange of shares pursuant to the Agreement occurs and becomes effective and
the date of the filing of a Plan of Merger and
17
<PAGE>
Articles of Merger with the applicable Secretary of State as required for the
exchange of shares to lawfully occur shall be the Effective Date.
Terms of the Merger
General. At the Effective Date, TRC will merge with and into Hartan and
thereby become a wholly-owned subsidiary of the Company. The Agreement also
calls for certain actions that are being submitted to the shareholders for their
approval as separate proposals: (a) the Company will amend its Articles of
Incorporation to change its name to Tanner's Restaurant Group, Inc. and to
increase the number of authorized shares of Common Stock to 100,000,000 shares,
and (b) the Company's Board of Directors will be increased to six members, four
of whom, Clyde Culp III, Richard Tanner, Thomas J. Haas and James R. Walker,
will be elected pursuant to one of the proposals.
Exchange of TRC Securities and Other Items for Securities of the Company .
Upon the Effective Date, all outstanding shares of TRC common stock, options and
warrants shall be converted into the right to receive a total of 18,000,000
shares of Common Stock or such shares as adjusted in accordance with the
Agreement. Upon receipt of the TRC common stock certificates from the persons
who hold them, the Company will cause its transfer agent to issue, or the
Company itself will issue, to each surrendering holder a certificate
representing the number of shares of Common Stock into which such TRC common
stock will be converted.
Also upon the Effective Date, all holders of TRC's Class A Preferred Stock
will exchange such stock for 352,500 shares of the Company's Series D Preferred
Stock at $10.00 per share, or less in certain circumstances; and Richard Tanner
will exchange a $3,100,000 TRC subordinated debenture and cancel his employment
agreement for 370,000 shares of the Company's Series D Preferred Stock at $10.00
per share, or less in certain circumstances. The holder of each share of TRC
Class A Preferred Stock to be exchanged will surrender to the Company the
certificate for such shares for cancellation, and upon receipt of the
certificate the Company will issue to each surrendering holder a certificate
representing the number of shares of the Company's Series D Preferred Stock into
which such TRC Class A Preferred Stock shall be converted. Upon the Effective
Date, Santa Cruz Squeeze, Inc. will cancel its $150,000 promissory note in
exchange for $50,000 and 50,000 shares of the Common Stock.
Representations, Warranties and Covenants
The Agreement contains certain representations and warranties of the
Company, Hartan and TRC normal and customary to similar transactions. The
representations and warranties include for each of the respective companies,
among other things: (i) their capitalization, (ii) their due organization, valid
existence and good standing and their power and authority to enter into, perform
and consummate the transactions contemplated by the Agreement, (iii) the lack of
subsidiaries except as disclosed, (iv) the title to, ownership of and condition
of assets, (v) the relationship of affiliates, principals, employees and
consultants to the respective company's assets and transactions between such
entities or persons and the respective companies, (vi) the absence of any
undisclosed liabilities and the operation of the respective companies in the
ordinary course of business, (vii) the legal compliance by each company, (viii)
the validity and binding effect of contracts and agreements to which the
companies are a party and the absence of defaults thereunder, (ix) the obtaining
of all governmental permits, licenses and consents, (x) the disclosure of
litigation, if any, (xi) that neither the execution and delivery of the
Agreement, nor the consummation of the transactions contemplated thereby by the
Company, Hartan and TRC will conflict with, or result in a breach of any
agreement or cause the acceleration of any obligation or violate any law, (xii)
that the Agreement has been duly authorized and, upon the shareholders of the
respective companies approving the Agreement, it will be legally binding upon
each such company, (xiii) certain tax matters, (xiv) the accurate presentation
of financial conditions in the Company's and TRC's financial statements
18
<PAGE>
prepared in accordance with generally accepted accounting principles, (xv) the
absence of certain changes and events, (xvi) the compliance with laws, (xvii)
matters relating to intellectual and leased properties, (xviii) matters relating
to employee compensation and employee benefit plans, (xix) access to books and
records, and (xx) that each party has made full disclosure of material facts
relating to that company and its operations and has not knowingly omitted or
failed to disclose material facts relating to that company or its operations
necessary to make the statements made not misleading.
Conditions to Closing
The obligations of the Company to consummate the merger will be subject to
the prior satisfaction (or waiver by the Company) of certain conditions
including: (i) the merger being approved by TRC's shareholders, (ii) all
representations and warranties of TRC in the Agreement being true and correct in
all material respects immediately prior to closing and TRC having performed all
obligations and complied with all covenants required to be performed or complied
with on or prior to closing, (iii) no order of any court or regulatory or
governmental authority shall have been issued or ordered against TRC which would
be violated by the consummation of the transactions contemplated by the
Agreement, (v) TRC shall have obtained all necessary regulatory and other
approvals and consents, and (vi) articles or certificates of merger regarding
the merger shall have been filed with the appropriate Secretaries of State.
The obligations of TRC to consummate the merger will be subject to
reasonable satisfaction (or waiver) of certain conditions including: (i) the
Agreement and the transactions contemplated thereby being approved by the
Company's Board of Directors and the Company's shareholders including, without
limitation, approval of the merger, and approval of a change of management of
the Company, if required, (ii) the representations and warranties of the Company
and Hartan in the Agreement being true and correct in all material respects
immediately prior to closing and the Company and Hartan having performed or
complied with all covenants required to be performed or complied with on or
prior to closing, (iii) no order of any court or regulatory or governmental
authority shall have been issued or ordered against the Company or Hartan which
would be violated by the consummation of the transactions contemplated by the
Agreement and no litigation against the Company or Hartan shall have been
commenced seeking to restrain or prohibit, or to obtain substantial damages in
connection with, the Agreement or the transactions contemplated therein, (iv)
all necessary securities-related approvals have been obtained, (v) TRC shall
have obtained all necessary regulatory and other approvals and consents and (vi)
articles or certificates of merger (Plan of Merger and Articles of Merger)
regarding the merger have been filed with the appropriate Secretary of State.
Certain Operative Agreements
Employment and Severance Agreements. The Agreement requires the Company to
enter into a five-year employment agreement with Clyde Culp and to enter into a
severance agreement with William Gallagher. See "The Merger - Interests of
Certain Persons in the Merger."
Market Development and Management Agreements. In July 1998 Hartan entered
into a Market Development Agreement (the "Market Development Agreement") and a
Management Agreement (the "Management Agreement") with TRC. Pursuant to the
Market Development Agreement and the Management Agreement, (i) the Company,
through Hartan, paid TRC $50,000 for the right to develop and operate up to five
Tanner's restaurants, subject to license and royalty fees, respectively, of an
additional $15,000 and 3% of gross sales per Tanner's restaurant, (ii) the
Company through Hartan will open and operate each of the Tanner's restaurants to
be opened pursuant to the Market Development Agreement, (iii) TRC will provide
assistance to the Company in developing the Tanner's restaurants and (iv) the
License Agreement will be entered into by the parties for an initial term of 20
years with options to renew for two additional ten-year terms.
19
<PAGE>
Upon the closing of the merger, the Market Development Agreement and the
Management Agreement will terminate, and all Tanner's restaurants subject to
such agreements will be owned and operated directly by the Company and its
subsidiaries. If the merger does not close, the Market Development Agreement and
the Management Agreement will remain in effect, provided that Hartan has the
option to require TRC to purchase any restaurants developed pursuant to the
Market Development Agreement and the Management Agreement, at a price equal to
the aggregate funds deposited in the operating fund accounts of Hartan, and TRC
will indemnify the Company and Hartan from liabilities directly associated with
such assets after the date of such transfer. If the option is exercised, the
transfers and payment are to be completed within 30 days after notice of
exercise. Upon payment, such option may be exercised, at TRC's election, against
either the assets or all of the outstanding stock of Hartan.
Indemnification
The Agreement provides that, notwithstanding any investigation by any party
prior to the closing of the merger, the Company and TRC will indemnify, defend
and hold harmless each other and the respective party's officers, directors,
employees and affiliates from and against all damages asserted against, imposed
upon or incurred by such party, directly or indirectly, caused (a) as a result
of any material misrepresentation or any material breach or nonfulfillment of
any representation, warranty, covenant and/or agreement of the indemnifying
party contained in or made pursuant to the Agreement, and (b) by any obligation
of such party, to the extent disclosed to the indemnifying party in the
Agreement for which the other party is or may become personally liable. As part
of the indemnification provision in the Agreement, TRC is entitled to control
any cleanup, containment, remediation, related proceeding, or other action or
proceeding arising from or in connection with any environmental, health or
safety liability or any hazardous materials or activities.
Termination
The Agreement may be terminated whether before or after approval of the
Agreement by the shareholders of the Company and/or the shareholders of TRC, (i)
at any time by mutual consent of the Company and TRC; (ii) if a material breach
of the Agreement has occurred by either party and the other party has not waived
such breach; (iii) if any of the required conditions has failed to occur or
becomes impossible to occur at the Closing and the applicable party has not
waived such conditions or (iv) by either party if the Closing has not occurred
on or before December 31, 1998 or such later date as the Company or TRC may have
agreed upon.
20
<PAGE>
MARKET PRICE DATA AND RELATED MATTERS
REGARDING THE COMPANY
Common Stock Information
The Company had approximately 1,500 holders of record of its Common Stock
as of the date of these proxy materials. Until September 16, 1998 the Common
Stock was quoted on the NASDAQ SmallCap Market System under the symbol "ROTI."
As of close of business on that date the Common Stock was delisted from the
NASDAQ SmallCap Market, and since that date the Common Stock has been quoted on
the OTC Bulletin Board. On July 10, 1998, the business day first preceding
public announcement of the merger, the high and low bid prices for the Common
Stock were $.875 and $.406, respectively. On October 23, 1998, the high and low
bid prices for the Common Stock were $.29 and $.21, respectively. The range of
high and low bid prices for the Common Stock as reported by Nasdaq and as quoted
on the OTC Bulletin Board (indicated by an asterisk) is set below for the
periods indicated.
By Quarter Ended 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: (April 20, 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 (April 19, 1998) $2.22 $ .25
Second Quarter (July 12, 1998) $ .88 $ .25
Third Quarter (October 4, 1998) $ .78 $ .18*
Dividends
No Common Stock Dividends. 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.
Dividends in Arrears on Preferred Stock. Dividends are payable quarterly on
the Series A Preferred Stock at the rate of 12% per annum of the original issue
price per share. Such dividends may be paid in cash or in shares of the Common
Stock in the sole discretion of the Board of Directors. Through the quarter
ended June 30, 1998, the Company has declared dividends on the Series A
Preferred Stock in the total amount of 913,314 shares of Common Stock. The Board
of Directors has declared no dividends for the quarter ended September 30, 1998.
Dividends in the amount of $172,252 are therefore in arrears, and the Board has
not determined when, and if so in what manner, those dividends will be declared
and paid. The Board has not yet determined what effect the merger will have on
its ability to declare and pay dividends on the Series A Preferred Stock.
21
<PAGE>
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial statements have been
derived from the historical consolidated financial statements of the Company and
TRC and give effect to (i) the merger as a reverse acquisition and a purchase
for accounting purposes, and (ii) costs associated with the consummation of the
merger. The unaudited pro forma condensed combined balance sheet gives effect to
the combination as if it had occurred on July 12, 1998. The unaudited pro forma
condensed combined statements of operations give effect to the combination as if
it had occurred at the beginning of the earliest period presented. The pro forma
adjustments are based on preliminary estimates, available information and
certain assumptions that management deems appropriate. The pro forma financial
data do not purport to represent what the combined company's financial position
or results of operations would actually have been if such transactions in fact
had occurred on those dates or to project the combined company's financial
position or results of operations for any future period. The unaudited pro forma
condensed combined financial statements should be read in conjunction with the
Company's and TRC's consolidated financial statements and the notes thereto
included elsewhere herein.
22
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND TRC ACQUISITION CORPORATION
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Fiscal Year Ended December 28, 1997
TRC Harvest
Acquisition Restaurant Acquisition Pro Forma
Corporation Group, Inc. Adjustments Combined
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurant and catering operations ............. $ 8,966,551 $ 1,637,569 $ $ 10,604,120
Franchise Fees ................................. 400,000 400,000
------------ ------------ ------------ ------------
8,966,551 2,037,569 11,004,120
Costs and Expenses:
Costs of food and paper ........................ 3,086,448 791,704 3,878,152
Restaurant payroll and benefits ................ 3,184,827 703,148 3,887,975
Other operating expenses ....................... 2,449,783 1,095,575 3,545,358
General and administrative ..................... 1,278,581 1,918,707 3,197,288
Depreciation and amortization .................. 590,807 289,227 880,034
Loss on abandonment and disposition
OF restaurants and write-off of notes
receivable ................................... 4,572,197 4,572,197
------------ ------------ ------------ ------------
Total costs and expense ................... 10,590,446 9,370,558 19,961,004
------------ ------------ ------------ ------------
Operating loss ...................................... (1,623,895) (7,332,989) (8,956,884)
Other income (expenses):
Interest and other income (expense) ............ 27,038 111,080 138,118
Interest expense ............................... (546,552) (18,918) 264,905(1) (300,565)
------------ ------------ ------------ ------------
(519,514) 92,162 264,905 (162,447)
------------ ------------ ------------ ------------
Net loss ............................................ $ (2,143,409) $ (7,240,827) $ 264,905 $ (9,119,331)
============ ============ ============ ============
Preferred stock dividends ........................... $ (1,057,900)
Net loss attributable to common shareholders ........ $(10,177,231)
Loss per common share ............................... $ (.50)
============
Shares used in per share calculation ................ 20,380,547
============
(1) Adjustment to eliminate interest expense associated with the subordinated
convertible note.
23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND TRC ACQUISITION CORPORATION
Unaudited Pro Forma Condensed Combined Statements of Operations
For the Two Quarters Ended July 12, 1998
TRC Harvest
Acquisition Restaurant Acquisition Pro Forma
Corporation Group, Inc. Adjustments Combined
----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurant and catering operations ............. $ 6,341,288 $ 289,440 $ $ 6,630,728
Franchise Fees ................................. 50,745 50,745
------------ ------------ ------------ ------------
6,392,033 289,440 6,681,473
Costs and Expenses:
Costs of food and paper ........................ 2,264,721 148,448 2,413,169
Restaurant payroll and benefits ................ 2,274,660 152,572 2,427,232
Other operating expenses ....................... 1,486,773 266,136 1,752,909
General and administrative ..................... 703,810 695,507 1,399,317
Depreciation and amortization .................. 342,775 280,399 623,174
Loss on restaurant closures and other .......... 1,204,489 1,204,489
------------ ------------ ------------ ------------
Total costs and expense ................... 7,072,739 2,747,551 9,820,290
------------ ------------ ------------ ------------
Operating loss ...................................... (680,706) (2,458,111) (3,138,817)
Other income (expenses):
Interest and other income (expense) ............ (23,546) 5,069 (18,477)
Interest expense ............................... (322,327) (18,654) 140,073(1) (200,908)
------------ ------------ ------------ ------------
(345,873) (13,585) 140,073 (219,385)
------------ ------------ ------------ ------------
Net loss ............................................ $ (1,026,579) $ (2,471,696) $ 140,073 $ (3,358,202)
============ ============ ============
Preferred stock dividends ........................... $ (731,884)
Net loss attributable to common shareholders ........ $ (4,090,086)
Loss per common share ............................... $ (.20)
============
Shares used in per share calculation ................ 20,911,616
============
(1) Adjustment to eliminate interest expense associated with the subordinated
convertible note.
24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND TRC ACQUISITION CORPORATION
Unaudited Pro Forma Condensed Combined Balance Sheets
As of July 12, 1998
TRC Harvest Acquisition
Acquisition Restaurant Adjustments Pro Forma
Corporation Group, Inc. (1) (2) (3) Combined
------------- ------------ ------------ ------------ ------------ ------------
ASSETS
<S> <C> <C> <C> <C> <C> <C>
Cash .......................... $ 99,659 $ 193 $ 5,978,750 $ 6,078,602
Accounts Receivable ........... 236,823 236,823
------------
Subscription receivable ....... 1,978,750 (1,978,750) 6,681,473
Inventories ................... 104,655 104,655
Other current assets .......... 38,333 25,224 63,557
------------ ------------ ------------ ------------ ------------ ------------
Total current assets ....... 479,470 2,004,167 4,000,000 6,483,637
Property and equipment, net .......... 1,226,967 675,339 1,902,306
Intangible assets, net ............... 3,855,319 3,855,319
Goodwill, net ........................ 1,028,383 1,028,383
Other assets ......................... 135,009 77,730 212,739
------------ ------------ ------------ ------------ ------------ ------------
$ 6,725,148 $ 2,757,236 $ $ 4,000,000 $ $ 13,482,384
============ ============ ============ ============ ============ ============
LIABILITIES
Accounts payable trade ........ $ 1,396,635 $ 374,345 $ 1,770,980
Accrued liabilities ........... 562,043 911,851 $ 100,000 1,573,894
Current portion of long-term
debt ........................ 786,617 225,000 1,011,617
Accrued interest .............. 465,587 $ (460,861) 4,726
------------ ------------ ------------ ------------ ------------ ------------
Total current
liabilities ............. 3,210,882 1,511,196 (460,861) 100,000 4,361,217
Long-term debt ....................... 5,106,098 (2,649,046) 2,457,052
Redeemable preferred stock ........... 2,686,284 (2,686,284)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock ............... 636,225 722,500 400 1,359,125
Common Stock .................. 26,250 37,403 153,750 217,403
Additional paid-in capital .... 13,861,731 6,165,981 3,899,600 $(14,535,359) 9,391,953
Carryover predecessor basis ... (61,747) (61,747)
Accumulated deficit ........... (4,242,619) (13,289,319) 13,289,319 (3,358,202)
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity
(deficit) ................. (4,278,116) 1,246,040 7,042,231 3,900,000 (1,246,040) 6,664,115
------------ ------------ ------------ ------------ ------------ ------------
$ 6,725,148 $ 2,757,236 $ 1,246,040 $ 4,000,000 $ (1,246,040) $ 13,482,384
============ ============ ============ ============ ============ ============
(1) Adjustment to reflect the exchange of TRC common stock, preferred stock, and
subordinated convertible notes with accrued interest thereon, for Common Stock
and preferred stock of the Company. The historical financial statements of the
Company are presented consistent with fair value, and, as the Company has no
operations, the transaction is presented as a capital stock transaction.
(2) Adjustment to reflect the issuance of the Company's preferred stock to a
private investor in connection with the merger for net proceeds of $5,975,000,
of which $1,978,750 is recorded as a subscription receivable in the historical
financial statements of the Company. Also reflects an accrual for the estimated
costs associated with the consummation of the merger.
(3) Adjustment to reflect the elimination of additional paid in capital,
accumulated deficit and other equity account balances of the Company.
25
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION OF THE COMPANY
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 the 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 leased 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.
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
Southeast 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
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
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restaurants and no longer intends to 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, 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 and no longer
intends to pursue the development of Harvest Food Courts.
Results of Operations for the Two Quarters Ended July 12, 1998 Compared to the
Two Quarters Ended July 13, 1997
Revenues. Total revenues for the two quarters ended July 12, 1998 decreased
74% as compared to the same period in 1997. The decrease was due to the closing
of the Company's restaurants in 1998.
Costs and Expenses. Cost of food and paper was 51.3% of restaurant revenues
for the two quarters ended July 12, 1998 as compared to 52.0% for the same
period in 1997, which is higher than industry averages for both periods. In
1998, food and paper costs were negatively affected by higher amounts of wasted
food caused by the lower sales volumes. In 1997, costs were negatively affected
by the opening of new restaurants, which generally have higher costs due to
increased food usage for opening promotions and inefficiencies caused by less
experienced 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 remained constant at 98% of restaurant revenues
for both periods. Substantial portions of these costs are fixed or indirectly
variable and were disproportionate to revenues in both periods due to low sales
volumes.
General and administrative expenses decreased $149,644 or 18% for the two
quarters ended July 12, 1998 as compared to the same period in 1997. The
decrease reflects the closing of the Company's operations during 1998 and the
corresponding reduction in its corporate overhead.
Depreciation and amortization increased $148,108 for the two quarters ended
July 12, 1998 as compared to the same period in 1997. The increase was due to
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 costs of $1,204,489 for the two
quarters ended July 12, 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.
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The Company recorded a loss provision for area developer notes receivable
of $286,023 for the two quarters ended July 13, 1997 for estimated future 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.
Net Loss. The Company incurred a net loss of $2,471,696 for the two
quarters ended July 12, 1998 as compared to $1,696,049 for the same periods in
1997. The increase in net loss was primarily due to charges of $1,204,489
associated with the loss on restaurant closures during the second quarter of
1998. As of the July 12, 1998 all Company-owned restaurants were closed and the
last franchised restaurant was subsequently closed in August 1998.
Results of Operations for the Fiscal Year Ended December 28, 1997 Compared to
the Fiscal Year Ended December 29, 1996
Revenues. Revenues from Company-owned restaurants increased over 500% to
$1,637,569 in 1997, as compared to $263,892 in 1996. The increase in revenues
was due to the opening of three additional restaurants between November 1996 and
February 1997. Revenues from these restaurants were lower than management's
expectations and averaged approximately 60% of capacity during 1997. In 1997 the
Company also recognized $400,000 in franchise fees that 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, compared to 46.4% in 1996. Food and paper costs were higher than
projected levels during both years primarily due to food usage for recipe
development and the opening of an additional restaurants during 1997 and 1996,
which typically have 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 for 1997 and $257,806, or 97.7% of
restaurant revenues for 1996. 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.
Preopening expenses of $152,548 in 1997 and $131,074 in 1996 relate to
initial costs associated with the opening of three new Harvest Rotisserie
restaurants from November 1996 through February 1997 and lease costs for
maintaining additional restaurant sites.
General and administrative expenses increased $657,509 in 1997 compared to
1996, and increased $693,593 in 1996 compared to 1995. The increases resulted
from the development of a corporate infrastructure needed to support the
expansion of Company-owned and franchised restaurants, expenses associated with
the Company's financing and expansion activities, 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%).
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As a result of 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.
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 for 1997 and
$2,011,254 for 1996 . The increase in net loss for 1997 was primarily due to
losses associated with the write-off of area developer notes receivable and the
disposition of properties for closed restaurants.
Liquidity and Capital Resources
The Company has incurred losses from operations since inception, and as of
July 12, 1998 the Company had an accumulated deficit of $13,289,319 and working
capital of $492,971. 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 settle 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 and administrative expenses. The Company
used $1,082,302 of cash in its operations during the two quarters ended July 12,
1998 and used $1,986,540 and $1,265,838 of cash in operating activities for the
years 1997 and 1996, respectively.
For the two quarters ended July 12, 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 Court restaurants opened during the second quarter. During 1997,
the Company invested $1,213,603 for the purchase of property and equipment for
Company-owned restaurants opened in 1997 and invested $1,059,654 in 1996. In
1997, the Company also provided $3,387,541 of financing to its area developers
through the issuance 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, and the last
remaining franchise restaurant subsequently closed in August 1998. Accordingly,
the Company considered the entire amount of the area developer loans to be
impaired and recognized a full write-off of the loans totaling $3,387,541 as of
December 28, 1997. During the second quarter of 1998, the Company closed its
three remaining Harvest Rotisserie restaurants and its two Harvest Food Court
restaurants, and also canceled plans to pursue the development of Harvest Food
Court restaurants and abandoned development plans for an additional leased
restaurant property. The Company intends to focus its future operations on the
development of Tanner's restaurants and no longer intends to utilize its
existing restaurant properties within its future operations.
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The Company has financed a substantial portion of its operational needs
with funds provided from the sale of its securities. These funding sources
include the Company's initial public offering in July 1996, which provided net
proceeds of $4,740,290, the exercise of common stock warrants in January 1997
for $568,875, the sale of preferred stock and warrants in June 1997 for
$4,375,436, and private sales of preferred stock in December 1997 and May 1998
for a total of $1,452,000.
Sources of capital are limited to the Company's ability to raise additional
funds 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 recorded the 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 30 days thereafter.
Proceeds from the equity funding will be used primarily for the development of
additional Tanner's restaurants. The Company believes the proceeds from the
first closing will be sufficient to develop up to five Tanner's 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 will 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 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.
ADDITIONAL INFORMATION ABOUT THE COMPANY
Franchise Operations
In August 1998, with the closure of the last Harvest franchised
restaurants, the Company ceased its Harvest restaurants franchise operations and
does not intend to resume such operations in the future. Subsequent to the
merger, the franchise operations of TRC relating to Tanner's restaurants will be
continued through Hartan. See "Additional Information About TRC Franchise
Operations."
Current Operations
The Company currently does not own or operate any restaurants, and its
operations are limited to the operations of its wholly owned subsidiary, Hartan,
Inc.
In July 1998 Hartan entered into the Market Development Agreement and the
Management Agreement with TRC. Pursuant to the Market Development Agreement, (i)
the Company, through Hartan, paid TRC $50,000 for the right to develop and
operate five Rick Tanner's Original Grill restaurants subject to license and
royalty fees, respectively, of an additional $15,000 and 3% of gross
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sales per Tanner's restaurant, (ii) the Company, through Hartan, will open and
operate each of the Tanner's restaurants in accordance with the Market
Development Agreement, (iii) TRC will provide assistance to the Company in
developing the Tanner's restaurants and (iv) the License Agreement to be entered
into by the parties will be for an initial term of 20 years with options to
renew for two additional 10 year terms. See "Exhibit B - Market Development
Agreement."
The Management Agreement provides for TRC to develop and manage the five
Tanner's Restaurants that the Company received the right to develop under the
Market Development Agreement for a management fee of 5% of gross revenues from
the Company's franchised sites. The Management Agreement further provides for a
term ending at the earlier of either (i) the completion of the merger or (ii)
the fifth anniversary date of the commencement date of the Management Agreement.
See "Exhibit C - Management Agreement."
Hartan, in conjunction with TRC, is in the process of developing its first
Tanner's restaurant in Woodstock, Georgia, a suburb of Atlanta. Hartan intends
to develop its remaining four Tanner's restaurants in the Southeast. TRC has
developed a standardized prototype for all new Tanner's restaurants, with the
first such prototype opening in Fayetteville, Georgia in November 1997. The
prototype Tanner's restaurant is approximately 4,500 square feet with seating
for 170 customers, with either a freestanding building or as the end unit of a
shopping center. The Company anticipates that all Tanner's restaurants developed
by Hartan will utilize the prototype design. See "Additional Information about
TRC."
In anticipation of utilizing the location for a Tanner's restaurant, the
Company purchased certain improved real property in San Antonio, Texas in July
1998 for approximately $235,000. Upon further review of the location and other
factors, the Company has determined not to utilize this site for a Tanner's
restaurant, and the real property is currently for sale.
Competition
Competition in the restaurant industry is intense, and other restaurants
operate with concepts that compete for the same casual dining customers as
Tanner's. Tanner's restaurants compete with mid-price, full-service, casual
dining restaurants primarily on the basis of quality, atmosphere, location and
value. Moreover, Tanner's also competes with other restaurants and retail
establishments for quality sites.
Many of Tanner's competitors are well established and have substantially
greater financial, marketing and other resources than Tanner's. Regional and
national restaurant companies such as Chili's, Applebee's, Black Eyed Pea and
Cracker Barrel have expanded their operations in the current and anticipated
market areas of Tanner's. There can be no assurance that the expansion of these
well-financed chains in these market areas will not adversely impact the
Company.
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"), but
does not intend to utilize its Marks in the future.
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Under the Market Development Agreement Hartan has the right to use the
"Tanner's" service mark, "Rick Tanner's Original Grill" service mark and any
other service marks held in conjunction with the Tanner's name.
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 any of its future restaurants will be in compliance with these provisions.
Certain states and the Federal Trade Commission require a franchisor to
provide specified disclosure statements to potential franchisees before granting
a franchise. Additionally, many states require the franchisor to register its
Uniform Franchise Offering Circular ("UFOC") with the state before it may offer
a franchise. Although the Company believes that its Harvest Rotisserie UFOC
(together with any applicable state versions or supplements) complied with both
the Federal Trade Commission guidelines and all applicable state laws regulating
franchising, the Company does not intend to offer any new Harvest Rotisserie
franchises.
Insurance
Until August 26, 1998, the Company carried general liability, product
liability and commercial insurance of up to $2,000,000, which it believed was
adequate for business of its size and type. The Company's insurance coverage
expired on August 26, 1998 and has not been reinstated.
In accordance with the Management Agreement and the Market Development
Agreement between TRC and Hartan, TRC as manager of the Tanner's restaurants to
be developed by Hartan is required to maintain certain minimum standards of
insurance, including commercial general liability insurance, worker's
compensation insurance and all risk property and casualty insurance. Hartan is
to be named as an additional insured on any such policies.
Employees
At October 22, 1998, the Company had two executive employees and one
assistant.
Property
The Company leases 1,500 square feet of space for its executive offices in
San Antonio, Texas under a month-to-month lease for $1,750 per month. The
Company believes its executive office facilities are adequate for its needs in
the foreseeable future. Upon the closing of the merger, the Company intends to
move its executive offices to those of TRC. See "Additional Information About
TRC - Property."
All Company-owned and franchised Harvest Restaurants have been closed. The
Company had guaranteed the real estate leases on all franchised restaurants and
is in the process of attempting to settle the lease obligations and obtain
releases from liability.
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In addition to the above, the Company, through Hartan, owns the real
property located at 5525 Tezel Road, San Antonio, Texas, which is currently for
sale.
Litigation
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 outstanding
principal amount of $455,244. The Company believes that these cases have been
settled in principle. The Company is currently awaiting final approval from
Captec Financial Group, Inc. ("Captec," see below) and a federal bankruptcy
court having jurisdiction over the matter.
On May 15, 1998, the Company was named as defendant in a lawsuit filed in
Texas by Captec in Bexar County District Court (Case No. 98-CI-07356). The
Plaintiff is seeking to recover damages of $277,656 for failure of the Company
to make payments under three equipment leases. The Company has contested the
amount of damages and is in the process of attempting to settle the lawsuit. The
Company believes that a partial settlement has been reached with respect to the
Florida leases and is now awaiting final documents and further negotiations to
complete the settlement.
On June 1, 1998, the Company was named as a defendant in a lawsuit filed in
Texas in Nueces District Court by Lin Chin Liu Ho and Chi Pen Ho (Case Number
98-2048-E). The Plaintiff is seeking damages for breach of a commercial lease.
The Company is in the process of filing a motion to dismiss this action based
upon the Company never having entered into a lease agreement regarding the
subject property.
On July 6, 1998, the Company was named as a defendant in a lawsuit filed in
Florida, Pinellas County Circuit Court (Case No. 98-03282CI19). 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 at 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 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-12200). Plaintiff is seeking damages for breach of commercial lease. The
Plaintiff rejected a settlement offer of $35,000.00, and the case is now in the
discovery phase.
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
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recover damages of $38,691.20 for the Company's failure to make payments under
two equipment leases. Settlement negotiations are continuing.
In addition, the Company has executed settlement agreements for four
landlord claims and two vendor claims for total payments of $94,760, of which
$57,500 has been paid and the balance will be paid within 14 days of the closing
of the merger with TRC with funds provided by the release of the second
$2,000,000 from the funds placed in escrow by the investors in the shares of the
Company's Series C Preferred Stock. A mortgage claim has also been satisfied in
full by the proceeds of the sale of real property.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION OF TRC
The following discussion should be read in connection with the TRC
consolidated financial statements and related notes thereto included elsewhere
in this report.
Overview
On October 15, 1996, TRC was formed as a corporation under the laws of the
state of Georgia to acquire all of the shares of the 11 corporations commonly
known as Tanner's Chicken Rotisserie (the "Predecessor"), including nine
restaurants, a catering business and a management company (the "Acquisition").
At that time, TRC purchased all of the shares of the Predecessor in a
transaction accounted for as a purchase in accordance with APB Opinion No. 16,
"Business Combinations" ("APB 16").
TRC was formed with the intent to expand the Tanner's concept through
company-operated restaurants as well as franchised restaurants. As part of this
plan, TRC initiated development of a new Tanner's prototype, began preparing a
Uniform Franchise Offering Circular and hired individuals with experience at
high-growth restaurant companies to direct TRC's efforts.
In connection with the Acquisition, Richard Tanner, the sole shareholder of
the Predecessor, acquired a 34% interest in TRC. In addition, TRC issued to Mr.
Tanner a $3,000,000, 10% convertible subordinated debenture due October 15,
2001. During 1997, TRC and Mr. Tanner finalized the purchase price allocation
whereby goodwill was reduced by $411,590, accrued expenses were reduced by
$60,036 and the debenture was reduced by $350,954. To fund TRC's growth plans
subsequent to the Acquisition, TRC entered into a $2,000,000 collateralized
promissory note with a lending institution. TRC also issued to this lending
institution 375,000 warrants to purchase shares of the TRC's common stock for
$.01 per share.
Results of Operations for the Two Quarters Ended July 12, 1998 Compared to the
Two Quarters Ended July 13, 1997
Revenues. Total revenues increased by approximately $1,900,000 during the
first two quarters of fiscal 1998 in comparison to the same two quarters in
fiscal 1997. This increase in sales is partially attributable to sales from two
new restaurants opened in the fourth quarter of 1997 and one new store opened in
the second quarter of 1998 ("New Stores"). The sales increase is also the result
of a rise in same-store sales of approximately 8% over the comparable period in
1997. Management believes that same-store sales growth is primarily the result
of increased advertising expenditures in the first half of 1998 versus the same
period in 1997. In addition, TRC's first franchise stores were opened during the
first half of 1998. Royalties and franchise fees earned during the period were
$50,745 versus $0 in the prior period. This increase in restaurant and
franchise-related sales was partially offset by a 7% decrease in catering sales.
Costs and Expenses. In general, many costs have increased as a percentage
of sales due to the additional coupon and "two-for-one" promotions which began
in August 1997 and continued through the first half of 1998. These types of
promotions increase the number of customers that visit the restaurant
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and increase sales. However, the operating expenses on these sales are higher
because the sales have been discounted below the menu price. This increase in
costs is most evident in food, beverage and paper costs and payroll and benefits
expense.
Food, beverage and paper costs were 35.4% of 1998 sales versus 32.8% of
sales for the same period in 1997. The 2.6% increase in food costs as a
percentage of sales was primarily a result of increased coupon and various
"two-for-one" promotions in the first half of 1998 as mentioned above.
Payroll and benefit expenses were 35.6% of 1998 sales versus 34.7% for the
same period in 1997. In April 1997, TRC implemented a new benefits package
whereby restaurant managers may obtain health, life and disability insurance.
TRC pays for a portion of this package. As a result of this new employee
benefit, benefits costs rose approximately 0.5% as a percentage of sales. Also,
increased labor costs at the New Stores which were opened in late 1997 and the
first half of 1998 accounted for the remainder of the increase (0.4%) in payroll
and benefits expenses.
Other operating expenses decreased as a percentage of sales to 23.3% for
1998 from 25.8% for 1997. Although total advertising expenditures increased, TRC
began to realize some market efficiencies as advertising expense decreased 1.3%
as a percentage of sales when compared to the same period in 1997. Additional
decreases in 1998 were the result of (i) changing all restaurant cleaning from
an externally contracted service to an in-store responsibility (1.1%
improvement) and (ii) general reduction in repair and maintenance expense as a
percentage of sales because 28% of all restaurants are new in 1998 and need
minimal repairs versus no new stores in the first half of 1997 (0.5%
improvement). Rent expense also decreased by 0.8% as a percentage of sales as
the result of owning the land and building for one restaurant through July 1,
1998. However, these margin improvements were partially offset by the preopening
expenses of the new restaurant opened in the first half of 1998 (1.4% of sales
in 1998 compared to 0% for the same period of 1997). These factors resulted in a
net decrease to other operating expenses of 2.5% of total sales.
Total occupancy costs, consisting of depreciation, rent and restaurant
interest expense, decreased to 12.3% in the first half of 1998 from 13.5% in the
first half of 1997. Management expects this trend to continue through 1998 and
into 1999 as TRC opens more "prototypical" restaurants which tend to have higher
average volumes and leverage the occupancy and other relatively fixed costs.
General and administrative expenses increased from $605,815 in 1997 to
$703,810 in 1998, primarily due to costs incurred in anticipation of franchising
and expanding the Tanner's concept, such as recruiting and training restaurant
managers for anticipated new stores, printing and development costs for new
menus, hiring a franchise consultant, and restructuring the corporate office
personnel to support additional growth. Although total general and
administrative expenditures increased, the additional sales generated from new
and old restaurants leveraged these costs down to 11.0% of 1998 sales from 13.6%
of 1997 sales.
The above-mentioned factors resulted in a slight improvement in the
operating loss to - 10.6% of 1998 sales from -13.8% of 1997 total sales.
Other Income (Expense). Other income (expense) decreased to -0.4% in 1998
from 0.4% of sales in 1997 primarily due to the $18,000 loss on the sale of one
restaurant facility in July 1998. Interest expense increased to $322,327 in 1998
from $283,001 in 1997. This is primarily attributable to an
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increase in borrowings of approximately $1,000,000 in the first half of 1998.
TRC's effective interest rate remained at 11.4% for the first half of 1998.
Net Loss. TRC incurred a net loss of $1,026,579 for the two quarters ended
July 12, 1998 compared to $879,588 for the same period in 1997. TRC expects to
incur losses in future periods until it expands its base of restaurants to
offset current general and administrative expenses and costs of expansion.
As TRC pursues its plans for growth, management expects to see the
following trends in operating costs. Food, beverage and paper costs and payroll
expenses will increase during the first two months of a restaurant's operations.
Preopening expenses are expected to total approximately $100,000 for each new
restaurant and are expensed as incurred in accordance with Statement of Position
98-5, Reporting on the Costs of Start-up Activities. The majority of preopening
costs are incurred in the accounting period prior to opening and in the period
that a restaurant opens. As TRC increases its base of restaurants, the effects
of the above-mentioned operating trends will decrease as the new restaurants
will have less of an impact on TRC's consolidated results.
Liquidity and Capital Resources. TRC's cash and cash equivalents increased
$312,264 during the two quarters ended July 12, 1998. Principal sources of funds
consisted of (i) the sale of one of the restaurant facilities for $359,696 and
(ii) additional borrowings totaling $1,016,617 under both secured and unsecured
loan agreements. The primary uses of funds consisted of (i) the purchase of
additional fixed assets for new restaurants ($450,207) and (ii) cash used in
operations ($649,563).
Since substantially all sales in TRC's restaurants are for cash, and
operating costs are generally due in 15 to 45 days, TRC is able to operate with
negative working capital. Also, TRC has obtained extended payment schedules with
several of its larger vendors allowing for payment terms of 60 to 90 days. This
has enabled TRC to operate with a working capital deficit of $2,731,412 as of
July 12, 1998.
TRC opened one new restaurant during the first half of 1998 and had two
franchised restaurants open during this same time period. In the second half of
1998, TRC expects to open one to two new company-owned and one to three
franchised Tanner's restaurants. In 1999, TRC expects to open seven to nine
company-owned Tanner's restaurants and seven to ten franchised restaurants.
TRC's capital requirements to meet this development plan are $4,000,000 to
$4,500,000. However, TRC does not currently have the capital resources to meet
this development plan.
TRC plans to meet its capital requirements for new restaurant development
and working capital through funding provided in the merger. The merger is
expected to be finalized in November 1998. If the merger is not consummated,
management expects to meet TRC's working capital needs through additional equity
funding and unsecured borrowings. In addition, management anticipates that the
development schedule will be delayed until additional secured financing is
obtained. Management believes that additional funding through the sale of equity
or through new secured and unsecured credit facilities is currently available.
If the current development schedule is not delayed, management anticipates
that by June 1999, TRC will have a base of profitable restaurants that will
allow TRC to begin to leverage its nonoperating expenses.
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Results of Operations for the Fiscal Year Ended December 28, 1997 Compared to
the Pro Forma Fiscal Year Ended December 29, 1996
The consolidated financial statements for the period ended October 14, 1996
represent the Predecessor's financial position, results of operations and cash
flows prior to the Acquisition and, consequently, are stated on the
Predecessor's historical cost basis. The consolidated financial statements as of
December 28, 1997 and December 29, 1996, and for the periods then ended, reflect
the adjustments which were made to record the Acquisition. Accordingly, the
financial statements of the Predecessor for periods prior to October 15, 1996
are not comparable in all material respects with the financial statements
subsequent to the date of the Acquisition. As a result of purchase accounting
adjustments and the capital structure subsequent to the Acquisition,
depreciation, amortization, interest and general and administrative expenses
have increased and will remain at levels higher than those prior to the
Acquisition.
The following is a discussion of TRC's results of operations for fiscal
1997 compared with the pro forma results of operations for fiscal 1996. The
discussion is based upon the Predecessor's income statement for the period from
January 1, 1996 through October 14, 1996 combined with TRC's income statement
for the period beginning October 15, 1996 and ending December 29, 1996. Certain
pro forma adjustments have been made as if the Acquisition had taken place as of
the beginning of fiscal 1996. Adjustments relate primarily to changes in
depreciation and amortization, interest expense and general and administrative
expenses. The financial statement information is presented below.
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<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Income Statements
Pro Forma
Year Ended Year Ended
December 28, December 29,
1997 1996
---- ----
<S> <C> <C> <C> <C>
Revenue
Restaurant sales revenue $ 8,041,660 89.7% $ 8,251,816 89.0%
Catering revenue 924,891 27.3% 1,020,787 11.0%
------------------------- -------------------------
Total revenue 8,966,551 100.0% 9,272,603 100.0%
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 3,086,448 34.4% 2,966,947 32.0%
Payroll and benefits 3,184,827 35.5% 2,980,285 32.1%
Depreciation and amortization 590,807 6.6% 583,961 6.3%
Other operating expenses 2,449,783 27.3% 2,072,099 22.3%
------------------------- -------------------------
Total restaurant and catering
operating expenses: 9,311,865 103.9% 8,603,292 92.8%
------------------------- -------------------------
Income (loss) from restaurant and
catering operations" (345,314) -3.19% 669,311 7.2%
General and administrative expenses: 1,278,581 14.3% 1,140,638 12.3%
------------------------- -------------------------
Operating loss (1,623,895) -18.1% (471,327) -5.1%
Other income (expense):
Other income (expense) (27,038) -0.3% 44,136 0.5%
Interest expense (546,552) -6.1% (448,589) -4.8%
Net loss $(2,143,409) -23.9% $ (875,780) -9.4%
========================= =========================
</TABLE>
Revenues. Total revenues decreased 3.3% to $8,966,551 for 1997 from
$9,272,603 for 1996. The decrease was a result of the following: (i) the closure
of one restaurant in November 1996, which accounted for approximately $530,000
of sales in 1996, (ii) a decrease in same-store sales of 2% in 1997 and (iii) a
decrease in catering sales of approximately 9% in 1997. These factors were
partially offset by two new restaurants that were opened in November and
December 1997.
Costs and Expenses. In general, many costs have increased as a percentage
of sales due to additional coupon and "two-for-one" promotions which began in
August 1997 and continued through the first half of 1998. These types of
promotions increase the number of customers that visit the restaurant and
increase total sales. However, the operating expenses on these sales are higher
because the sales have
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been discounted below the menu price. This increase in costs is most evident in
food, beverage and paper costs and payroll and benefits expense.
Food, beverage and paper costs were 34.4% of 1997 sales versus 32.0% of
1996 sales. This 2.4% increase in food costs as a percentage of total sales was
primarily the result of increased coupon and various "two-for-one" promotions as
mentioned above.
Payroll and benefit expenses are 35.5% of 1997 sales versus 32.1% of 1996
sales. Hourly labor increased 2.5% as a percentage of sales in 1997, partially
as the result of coupon and other promotions run during the second half of 1997
and also due to increased labor at the restaurants opened in November and
December 1997. The cost of restaurant-level management also increased by 0.5% in
1997, primarily due to increased managerial supervision needed for new
restaurant openings. Also, in April 1997, TRC implemented a new benefits package
whereby restaurant managers may obtain health, life and disability insurance.
TRC pays for a portion of this package. As a result of this new employee
benefit, benefits costs rose approximately 0.4% as a percentage of sales.
Depreciation and amortization expense increased by 0.3% of sales or $6,846
primarily due to 1997 fixed asset additions for new restaurants. Depreciable
assets acquired in 1997 totaled $1,225,932. Most of these assets were placed
into service in November and December 1997 and are being depreciated over
periods ranging from 3 to 20 years using the straight-line method.
Other operating expenses increased as a percentage of sales to 27.3% in
1997 from 22.3% in 1996. This increase was primarily the result of pre-opening
expenses for the two restaurants opened in late 1997 (2.5% of sales) and an
increase in advertising in the second half of 1997 (3.1% of sales). These
increases were partially offset by decreases in restaurant cleaning expense
(0.4%) as the result of changing this from an externally contracted service to
an in-store responsibility.
General and administrative expenses increased to $1,278,581 in 1997 from
$1,140,638 in 1996 primarily due to costs incurred in anticipation of
franchising and expanding the Tanner's concept, such as recruiting and training
restaurant managers for anticipated new stores, printing and development costs
for new menus, hiring an external franchise consultant and restructuring the
corporate office personnel to support additional growth.
The above-mentioned factors resulted in a substantial increase in the
operating loss to $1,623,895 in 1997 from $471,327 in 1996.
Other Income (Expense). Interest expense increased to $546,552 in 1997 from
$448,589 in 1996 primarily due to a $1,000,000 million increase in borrowings in
February 1997. Also, TRC's effective interest rate increased from 10.8% in 1996
to 11.1% in 1997.
Net Loss. TRC incurred a net loss of $2,143,409 for the year ended December
28, 1997 compared with a net loss of $875,780 for the pro forma year ended
December 29, 1996. TRC expects to incur losses in future periods until it
expands its base of restaurants to offset current general and administrative
expenses and costs of expansion.
As TRC pursues its plans for growth, management expects to see the
following trends in operating costs. Food, beverage and paper costs and payroll
expenses will increase during the first two
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<PAGE>
months of a restaurant's operations. Preopening expenses are expected to total
approximately $100,000 per each new
restaurant and are expensed as incurred in accordance with Statement of Position
98-5, Reporting on the Costs of Start-up Activities. The majority of preopening
costs are incurred in the accounting period prior to opening and in the period
that a restaurant opens. As TRC increases its base of restaurants, the effects
of the above-mentioned operating trends will decrease as the new restaurants
will have less of an impact on TRC's consolidated results.
Liquidity and Capital Resources. During the year ended December 28, 1997,
TRC's cash and cash equivalents decreased from $96,098 to a cash overdraft of
$212,605. TRC's principal source of funds in 1997 consisted of additional
borrowings totaling $2,195,100 which were secured by certain assets of TRC.
TRC's primary uses of funds in 1997 consisted of the purchase of additional
fixed assets primarily for new restaurants, in the amount of $1,922,168, and
cash used in operations, in the amount of $443,109.
Since substantially all of TRC's sales in restaurants are collected in cash
and because operating costs are generally payable in 15 to 45 days, TRC is able
to operate with negative working capital. Also, TRC has obtained extended
payment schedules with several of its large vendors allowing for payment terms
of 90 days or greater. This has enabled TRC to operate with a working capital
deficit of approximately $1,950,000 as of December 28, 1997 and has resulted in
an increase in accounts payable of $823,924 during fiscal 1997. This increase in
accounts payable is also partially the result of the two new restaurants that
were opened in November and December 1997.
TRC opened two new restaurants in fiscal 1997. TRC opened one new
restaurant during the first half of 1998 and had two franchised restaurants open
during this same time period. In the second half of 1998, TRC expects to open
one to two new company-owned and one to three franchised Tanner's restaurants.
In 1999, TRC expects to open seven to nine company-owned Tanner's restaurants
and seven to ten franchised restaurants. Management estimates that the capital
requirements to satisfy this development schedule will approximate $4,000,000 to
$4,500,000. However, TRC does not currently have the capital resources to meet
this development plan.
TRC plans to meet its capital requirements for new restaurant development
and working capital through funding provided in connection with the merger. The
merger is expected to be finalized in November 1998. If the merger is not
consummated, management expects to meet TRC's working capital needs through
additional equity funding and unsecured borrowings. In addition, management
anticipates that the development schedule will be delayed until additional
secured financing is obtained. Management believes that additional funding
through the sale of equity or through new secured and unsecured credit
facilities is currently available.
If the current development schedule is not delayed, management anticipates
that by June 1999, TRC will have a base of profitable restaurants that will
allow TRC to begin to leverage its nonoperating expenses.
41
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ADDITIONAL INFORMATION ABOUT TRC
General
TRC owns and operates 11 restaurants located in Georgia and franchises two
restaurants, one in Macon, Georgia and one in Montgomery, Alabama. The
restaurants operate under the name of Rick Tanner's Original Grill ("Tanner's").
Tanner's restaurants are intended to appeal to traditional casual dining
customers as well as value-oriented customers by offering high quality food and
large portions at moderate prices with outstanding customer service. TRC's
management believes that Tanner's is uniquely positioned between the fast food
chicken, home meal replacement restaurants and full bar casual restaurants with
less portable foods. Since inception, over 25% of sales have come from
takeout/takehome service.
Tanner's restaurants provide fresh, high quality food at moderate prices in
a relaxed atmosphere. The original Tanner's concept was founded in 1986 by
Richard Tanner, who grew a chicken rotisserie and ribs concept to eight units in
Atlanta, Georgia. In October 1996, Mr. Tanner joined forces with veteran
investors and a new management team and created TRC to expand the historically
successful concept by adding new company-owned restaurants and developing a
franchising program. The key elements of the Tanner's concept and strategy
include the following:
Variety. Tanner's restaurants offer a varied menu of American fare made
from original recipes. The menu features over 40 different entrees and 15
different appetizers including pot roast, meatloaf, rotisserie chicken, steaks,
slow roasted barbecue pork ribs, "cheesy chicken lips," chicken fingers, "Texas"
chili, sandwiches, made-from-scratch soups and salads, and family value packs
ideal for take home service. All entrees are prepared using aged beef and fresh
chicken and seafood, are cooked to order and are served with a choice of two out
of 15 different freshly prepared vegetables. Most items are prepared on premises
using fresh ingredients. In addition to its normal menu, Tanner's offers a
children's menu which features smaller portions, as well as hot dogs and grilled
cheese sandwiches.
Value. Tanner's believes its menu offers a compelling value to the
traditional casual dining customer while remaining competitive with restaurants
targeting value-oriented customers. Tanner's prices range from $3.99 to $6.99
for lunch and from $8.99 to $10.99 for dinner, with many items priced under
$8.00. Additionally, Tanner's offers a "Kids" menu for children ten and under
with items priced at $2.95. The average check per customer, including beverages,
is approximately $6.50 for lunch and $9.50 for dinner.
Distinctive Design and Decor and Casual Atmosphere. Each restaurant has a
similar appearance and a flexible design that can accommodate a wide variety of
available sites. Tanner's has developed a prototype look featuring an efficient
operating layout, standardized equipment and tasteful and distinctive trade
dress. Tanner's seeks to create a fun, casual, family friendly neighborhood
atmosphere in its restaurants. From the old Coca-Cola signs on the wall, to the
television set tuned to local sports teams, the design adds comfort to the
dining experience and is not detracting or overwhelming. Hand-painted murals
depicting local history decorate the decor of many of the restaurants. An
outdoor patio is also a feature at many of Tanner's restaurants that adds to the
casual feel.
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Commitment to Customer Satisfaction. Tanner's believes that it must provide
prompt, friendly and efficient service to ensure customer satisfaction. TRC
staffs each restaurant with an experienced management team and keeps
table-to-server ratios low. Through the use of customer surveys, management
receives valuable feedback on its restaurant and through prompt response
demonstrates a continuing dedication to customer satisfaction.
Site Selection. TRC's site selection strategy is to locate Tanner's
restaurants in markets that provide a balance of business and residential
clientele. A variety of factors are analyzed in the site selection process,
including local market demographics, site visibility, accessibility and
proximity to significant generators of potential customers such as major retail
centers, office complexes, residential communities and entertainment facilities.
Management believes that this strategy results in a high volume of new and
repeat customers. Once a restaurant site is obtained, Tanner's will renovate or
build-out the interior and exterior to produce the distinctive atmosphere of a
Tanner's restaurant. Renovation or build-out of a site usually takes from 60-120
days.
Training and Development. Tanner's believes a well-trained, highly
motivated restaurant management team is critical to achieving Tanner's operating
objectives. The training and compensation systems are designed to create
accountability at the restaurant level for the performance of each restaurant.
Tanner's expends significant resources to train, motivate and educate its
restaurant level managers and hourly coworkers. Each new manager participates in
a comprehensive six week training program which combines hands-on experience in
one of the Tanner's training restaurants. To instill a sense of ownership in
restaurant management, compensation is based, in part, on restaurant profit and
quality service scores. Management believes this focus on unit level operations
provides an incentive for managers to focus on increasing same store sales and
restaurant profitability.
Unit Economics. The average investment cost to open a new Tanner's
restaurant, including the cost of the land, building, acquisition of furniture,
fixtures and equipment and preopening costs (including training salaries,
opening inventory, supplies and promotion) is approximately $1,250,000. If
Tanner's elects to open a restaurant through the renovation of a leased
facility, the costs are considerably less and average $200,000 to $450,000,
depending on the level of leasehold improvements required and the amount of
landlord construction allowance available. TRC has sought to minimize its cash
investment in each restaurant to approximately $300,000 or less through the use
of sale/leaseback, or build-to-suite type financing. TRC has been successful in
obtaining such financing for its new freestanding restaurants and believes such
financing will continue to be made available, although no assurance can be made
that such financing will be available in the future.
Competition
Competition in the restaurant industry is intense. Tanner's restaurants
compete with mid-price, full-service, casual dining restaurants primarily on the
basis of quality, atmosphere, location and value. Moreover, other restaurants
operate with concepts that compete for the same casual dining customers as
Tanner's. Tanner's takeout/takehome business competes not only with other
full-service restaurants but also with fast-food outlets and supermarkets.
Tanner's also competes with other restaurants and retail establishments for
quality sites.
Many of Tanner's competitors are well established and have substantially
greater financial, marketing and other resources than Tanner's. Regional and
national restaurant companies such as Chili's, Applebee's, Black Eyed Pea and
Cracker Barrel have expanded their operations in the current and
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anticipated market areas of Tanner's. There can be no assurance that the
expansion of these well-financed chains in these market areas will not adversely
impact Tanner's.
Growth Strategy
TRC's growth strategy is to open new company-owned restaurants, to open new
franchised restaurants, and to increase sales at existing restaurants. TRC
intends to develop Tanner's restaurants in selected new metropolitan markets in
the Southeast and in smaller markets in close proximity to TRC's existing
metropolitan markets to enable TRC to utilize existing supervisory, marketing
and distribution systems.
During the first two quarters ended July 12, 1998, TRC opened one new
company-owned Tanner's restaurant in Canton, Georgia and two franchised Tanner's
restaurants, one in Macon, Georgia and one in Montgomery, Alabama. In the second
half of 1998, TRC expects to open one to two new company-owned and one to three
franchised Tanner's restaurants. In 1999, TRC expects to open seven to nine
company-owned Tanner's restaurants and seven to ten franchised restaurants.
Management devotes significant time and resources to analyzing prospective
restaurant sites and gathering appropriate cost, demographic and traffic data.
TRC utilizes an in-house construction and real estate department to develop
architectural and engineering plans and to oversee new construction. While TRC
prefers to develop its prototype freestanding restaurant, TRC considers
developing additional restaurants in existing buildings where appropriate.
Management believes that its ability to remodel an existing building into a
Tanner's restaurant permits greater accessibility to quality sites in more
developed markets.
Trademarks and Service Marks
TRC has applied for registration with the United States Patent and
Trademark Office of its Rick Tanner's Original Grill and design service mark.
TRC regards its service marks as having significant value and as being important
factors in the marketing of its restaurants. TRC is aware of names and marks
similar to the service marks of Tanner's used by other persons in certain
geographic areas; however, TRC believes such uses will not adversely affect it.
It is TRC's policy to pursue registration of its mark whenever possible and to
oppose vigorously any infringement of its marks.
Government Regulation
TRC is subject to a variety of federal, state and local laws. Each of TRC's
restaurants is subject to permitting, licensing and regulation by a number of
government authorities, including alcoholic beverage control, health, safety,
sanitation, building and fire agencies in the state or municipality in which the
restaurant is located. Difficulties in obtaining or failure to obtain required
licenses or approvals could delay or prevent the development of a new restaurant
in a particular area.
Approximately 2% of TRC's net restaurant sales were attributable to the
sale of alcoholic beverages in 1997. Alcoholic beverage control regulations
require each Tanner's restaurant to apply to a state authority and, in certain
locations, county or municipal authorities for a license or permit to sell
alcoholic beverages on the premises. Typically, licenses must be renewed
annually and may be revoked or suspended for cause at any time. Alcoholic
beverage control regulations relate to numerous aspects of
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restaurant operations, including minimum age of patrons and employees, hours of
operation, advertising, wholesale purchasing, inventory control and handling,
storage and dispensing of alcoholic beverages.
TRC is subject in certain states to "dram shop" statutes, which generally
provide a person injured by an intoxicated person the right to recover damages
from an establishment that wrongfully served alcoholic beverages to the
intoxicated person. TRC carries liquor liability coverage as part of its
existing $2 million comprehensive general liability insurance.
TRC's restaurant operations are also subject to federal and state laws
governing such matters as the minimum hourly wage, unemployment tax rates, sales
tax and similar matters over which TRC has no control. Significant numbers of
TRC's service, food preparation and other personnel are compensated at rates
related to the federal minimum wage, and increases in the minimum wage could
increase TRC's labor costs. The development and construction of additional
restaurants also are subject to compliance with applicable zoning, land use and
environmental laws and regulations.
Franchise Operations
Tanner's is presently offering franchises on a selective basis. No
assurances can be given as to the number of franchise territories that will be
sold during fiscal year 1998 and 1999 nor as to the impact of franchise fees on
TRC's profitability and cash position during fiscal years 1998 and 1999.
TRC franchises market areas or territories through market development
agreements, which grant the right to develop one or more Tanner's restaurants
within a specified geographic area. A franchisee enters into a market
development agreement at the time of choosing a specific territory and prior to
execution of the first license agreement. A franchisee must also enter into a
separate license agreement ("Unit License Agreement") for each individual
Tanner's restaurant that is opened.
The market development agreement obligates a franchisee to build and open a
specified number of restaurants in a designated area over a specific time
period. It grants exclusivity for the franchisee, prohibiting the parent company
or another franchisee from developing in the awarded territory. If a franchisee
fails to open restaurants in accordance with the market development agreement,
TRC can notify the franchisee of default and terminate the market development
agreement if the default is not cured.
Generally, a market development agreement expires after the last restaurant
opening set forth in the schedule. The Unit License Agreements then provide
market operating control for the franchisees. If, after completion of a
development schedule, TRC desires to establish additional restaurants in the
licensed territory, the franchisee has the right of first refusal to enter into
additional restaurant development as long as the existing restaurants are in
compliance with the agreements.
The initial franchise fee is $25,000 per restaurant. A franchisee will pay
$10,000 of this fee for each restaurant to be built upon signing of a market
development agreement. The remaining $15,000 per restaurant is to be paid at the
opening of each restaurant when the Unit License Agreement is signed. A Unit
License Agreement will have a 20-year term and can be renewed with the then
current license if the franchisee is in compliance at the end of the term.
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Generally, under the Unit License Agreement, franchisees are required to
pay a continuing royalty fee of 4% of gross revenues from each restaurant.
Additionally, a continuing fee for advertising materials production will be
initially .5% of gross revenues. This fee can be expanded to 2% of gross
revenues upon implementation of a national advertising program. Currently, TRC
only requires the .5% for advertising materials production.
The Unit License Agreement also provides that franchisees will comply
strictly with TRC's standards, specifications, processes, procedures,
requirements and instructions regarding the operation of a licensed restaurant.
TRC is obligated to provide initial training, new store opening support, and
continuing inspection and training/marketing assistance for each franchise
restaurant. Restaurant managers must be certified in the TRC training program.
Franchisees may purchase food products and restaurant supplies from independent,
approved suppliers as long as they conform to TRC's specifications. Alternate
sources of these items are generally available. The same is true for equipment
and decor packages.
Insurance
TRC carries general liability, product liability and commercial insurance
of up to $2,000,000 together with an umbrella liability coverage of an
additional $10,000,000 and worker's compensation insurance, all of which it
believes is adequate for a business of its size and type. However, there can be
no assurance that TRC's insurance coverage will remain adequate or that
insurance will continue to be available to TRC 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. TRC requires that it be named as an additional insured on any such
policies.
Employees
As of October 22, 1998, TRC employed approximately 450 people, of whom 15
are executive and administrative personnel, 35 are restaurant management
personnel and the remainder are hourly restaurant personnel. Many of TRC's
hourly restaurant employees work part-time. None of TRC's employees are covered
by a collective bargaining agreement. TRC considers its employees relations to
be good.
Property
TRC leases approximately 3,320 square feet of space for its executive
offices in Alpharetta, Georgia under a month-to-month lease for $4,200 per
month. TRC is currently in the process of evaluating other space opportunities
for its executive office and believes that such space will be available at
reasonable rates.
In addition, TRC leases 11 restaurant properties ranging from approximately
3,000 to 5,326 square feet at current base monthly rentals of between $3,700 and
$11,915 per month. The leased property located in Fayetteville, Georgia was sold
by TRC to a limited liability company in which Timothy R. Robinson and Robert J.
Hoffman, officers of TRC, own membership interests. TRC also
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<PAGE>
subleases a restaurant facility located in Montgomery, Alabama to Tanner's
Montgomery, Inc. which is owned by Richard Tanner, an officer and director of
TRC.
Market Price of TRC Stock
The TRC common stock has no existing trading market. As of the record date,
there were approximately six holders of the TRC common stock and four holders of
the TRC preferred stock.
Dividends
TRC does not pay cash dividends on its common stock and intends to retain
earnings, if any, for use in the operation and expansion of its business.
Litigation
TRC is not a party to any legal proceedings other than routine litigation
incidental to its business.
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PROPOSAL 2: CHANGE OF COMPANY NAME
In connection with the merger, the Board of Directors has determined that
it is in the best interests of the Company to change the Company's name to
"Tanner's Restaurant Group, Inc." This name will link the Company to its
principal operations and objectives, which are the development of Company-owned
Tanner's restaurants, the development and expansion of the Tanner's franchise
program, and the increase of sales at existing Tanner's restaurants.
In October 1997, the Company amended its Articles of Incorporation to
change its name from CluckCorp International, Inc. to Harvest Restaurant Group,
Inc. and to increase the number of authorized shares from 10,000,000 to
20,000,000 pursuant to a shareholder vote taken at a shareholder meeting on
September 30, 1997. The Company has now determined that because the amendments
did not receive the affirmative vote of two-thirds of shares of Common Stock
entitled to vote (although the amendments were approved by the holders of a
majority of the shares of Common Stock entitled to vote), the amendments were
filed without the proper shareholder approval. The Company has not sold any
Common Stock in excess of its authorized shares and believes that the
shareholders' approval of proposals 2 and 3 will result in the Company suffering
no adverse effects from the unauthorized amendments.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO CHANGE THE NAME OF THE
COMPANY TO "TANNER'S RESTAURANT GROUP, INC."
Approval and adoption of this proposal requires the affirmative vote of the
holders of two-thirds of the issued and outstanding Common Stock entitled to
vote on the amendment.
PROPOSAL 3: INCREASE IN AUTHORIZED SHARES
In connection with the merger, the Board of Directors has proposed an
amendment to the Company's Articles of Incorporation to increase in the number
of shares of Common Stock to 100,000,000. As of the record date there were
[4,035,108] shares of Common Stock outstanding. The Agreement calls for the
issue of 18,000,000 shares of Common Stock to the holders of common stock,
options and warrants of TRC. In addition, the Company has outstanding shares of
Preferred Stock, which are convertible into shares of Common Stock, as well as
options and warrants to acquire shares of Common Stock. Consequently, the Board
has determined that it is necessary to increase the number of authorized shares
of Common Stock.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO INCREASE THE NUMBER OF
AUTHORIZED SHARES OF COMMON STOCK TO 100,000,000.
Approval and adoption of this proposal requires the affirmative vote of the
holders of two-thirds of the issued and outstanding Common Stock entitled to
vote on the amendment.
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PROPOSAL 4: ELECTION OF THE BOARD OF DIRECTORS
In connection with the merger, the Company, Hartan and TRC have agreed that
the composition of the Company's Board of Directors should change to reflect the
combination of the businesses of the companies. Consequently, the parties have
determined that, subject to the approval of the holders of the Common Stock, the
Board of Directors of the Company should consist of William Gallagher and
Theodore M. Heesch, both of whom are current members of the Board of Directors,
and Clyde Culp III, Richard Tanner, James R. Walker, and Thomas J. Haas, who are
currently directors of TRC.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THE ELECTION OF THE FOUR
INDIVIDUALS BEING PRESENTED TO THE SHAREHOLDERS FOR ELECTION TO THE BOARD OF
DIRECTORS.
Directors will be elected by a plurality of the shares of Common Stock
present and entitled to vote at the Meeting.
The information set forth below is intended for your review in connection
with the evaluation of this proposal and the other proposals contained in this
Proxy Statement. Please give careful consideration to this information.
MANAGEMENT OF THE COMPANY
Post-Merger Management of the Company
As part of the merger, as of the closing, the number of directors on the
Company's Board will be increased to six; all of the directors of the Company,
other than Mr. Gallagher and Mr. Heesch; will resign; and the shareholders will
elect four persons as directors of the Company. Each director will hold office
until the Annual Meeting of shareholders in 1999, except Messrs. Gallagher and
Heesch whose term will expire in June 1999. Cumulative voting is not permitted
in the election of directors. In the absence of instructions to the contrary,
the person named in the accompanying proxy will vote in favor of the election of
all persons named below as the Company's nominees for directors of the Company.
Each nominee has consented to be named herein and to serve if elected. It is not
anticipated that any nominee will become unable or unwilling to accept
nomination or election, but if such event occurs, the person named in the Proxy
intends to vote for the election in his stead of such person as the Board of
Directors of the Company may recommend.
The following table sets forth certain information as to the persons who
are nominated to serve as directors and certain information regarding the
executive officers of the Company after the merger.
Name Age Office
---- --- ------
William J. Gallagher 58 Director
Theodore M. Heesch 60 Director
Clyde Culp III 56 Chairman of the Board of Directors,
President and Chief Executive Officer
49
<PAGE>
Name Age Office
---- --- ------
Richard Tanner 45 Director
James R. Walker 49 Director
Thomas J. Haas 58 Director
Robert J. Hoffman 51 Senior Vice President of Operations
Timothy R. Robinson 35 Vice President and Chief Financial Officer
Background of the Members of the Post-Merger Management of the Company
William J. Gallagher has been the Chairman and Chief Executive Officer of
the Company since December 1996 and devotes 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., a
multi-concept restaurant chain and barbecue sauce producer. Mr. Gallagher also
served as a director of Cluckers Wood Roasted Chicken, Inc., the developer and
franchisor of the "Cluckers" restaurant concept, from June 1993 to November
1994.
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. Since June 1994, Mr. Heesch has been Senior Vice President
of Development for McFaddin Partners, a restaurant developer.
Clyde Culp III currently serves as the Chairman and Chief Executive Officer
of TRC and will assume the position of Chairman of the Board of Directors and
Chief Executive Officer of the Company upon completion of the merger. Mr. Culp
has held numerous executive positions during his 28-year career within the hotel
and restaurant industry. He has served in his current position with TRC since
November 1996. From 1993 to 1996, Mr. Culp served as President and Chief
Executive officer of the 1,500 unit Long John Silvers Restaurant Chain. From
1990 to 1993, he served as President and Chief Executive Officer of Embassy
Suites Hotels and also served as Chief Operating Officer of Holiday Inns from
1987 to 1990. In 1975, Mr. Culp founded Davco Foods, which grew to 146 stores
and was the largest Wendy's Hamburger franchisee in the world.
Richard Tanner is the founder of the Rick Tanner's Original Grill concept
and is currently the president of TRC. Upon completion of the merger, Mr. Tanner
will become a director of the Company and become a real estate and franchise
consultant managing the Company's real estate and franchise committees. Mr.
Tanner will also continue to consult in all aspects of restaurant engineering,
design, layout, menu modifications, and continue to be the marketing spokesman.
James R. Walker has been the owner and operator of Sim's Wholesale Co.,
Inc. in Lynchburg, Virginia, since 1986 and is also a Visiting Professor of
Business Administration at the Darden Graduate
50
<PAGE>
School of Business at the University of Virginia, a position he has held since
1995. He has held marketing management positions at Smith Kline Beecham, Inc.
and Eli Lilly and Co.
Thomas J. Haas is currently chairman/CEO of his own company providing
strategic analysis marketing and sales services to several clients in the food
service industry. He is also chairman and founder of the President's Leadership
Conference for CEOs of major multi-unit restaurant chains. Mr. Haas has served
on the Board of the Culinary Institute, worked as a consultant with several
universities, and has been active with the National Restaurant Association and
the International Food Service Manufacturers' Association. Prior to forming his
own business in 1990, he served as Executive Vice President of CFS Continental
and planning strategist for Ryhoff Sexton. From 1972 to 1985, Mr. Haas was the
editor of Nation's Restaurant News, a prominent publication serving the
restaurant industry.
Robert J. Hoffman has served as Senior Vice President of Operations of TRC
since 1996 and will serve as the Senior Vice President of Operations of the
Company upon completion of the merger. Mr. Hoffman is an industry executive with
over 30 years' experience in restaurant operations. Prior to joining TRC, from
1994 to 1996, Mr. Hoffman served as a Vice President for Miami Subs and was
responsible for operations and training of 260 company-owned and franchised
restaurants. From 1969 to 1993, he served as Senior Vice President of Operations
with Metromedia Steakhouse LP, a restaurant company which operated 836 Ponderosa
Steakhouses.
Timothy R. Robinson has served as the Vice President and Chief Financial
Officer of TRC since December 1996, and will continue in the same capacity for
the Company upon the completion of the merger. Prior to joining TRC, Mr.
Robinson served as a senior manager with Coopers & Lybrand, LLP in Atlanta,
Georgia, and has been engaged in public accounting since 1986. He was
responsible for numerous audits of publicly held companies and has extensive
financial reporting experience. Mr. Robinson is a certified public accountant
and holds a B.B.A. degree in accounting from Georgia State University.
Current Directors and Executive Officers of the Company
The following table sets forth certain information regarding the Company's
current executive officers and directors:
<TABLE>
<CAPTION>
Name Age Office Director Since
---- --- ------ --------------
<S> <C> <C> <C>
William J. Gallagher(1)(2) 58 Chairman of the Board of Directors and
Chief Executive Officer June 1993
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
51
</TABLE>
<PAGE>
Directors hold office for a period of one year from their election at the
annual meeting of shareholders 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 or executive officer. Directors not
employed by the Company receive $750 each for attending Board of Directors'
meetings and are reimbursed for out-of-pocket expenses. The Company has standing
audit and compensation committees, but no standing nominating committee.
The Audit Committee makes recommendations concerning the engagement of the
independent auditors, reviews with the auditors the plans and results of the
audit engagement, approves professional services provided by the auditors,
reviews the independence of the auditors, and reviews the adequacy of the
Company's internal accounting controls. The Audit Committee did not meet in
1997.
The Compensation Committee determines compensation for the Company's
executive officers and administers any stock option or incentive compensation
plan established by the Company. The Compensation Committee met four times in
1997.
The total number of meetings of the Company's Board of Directors during the
preceding fiscal year was nine at which all members of the Board of Directors
were in attendance.
Background of the Current Directors and Executive Officers of the Company
The following is a summary of the business experience of each executive
officer and director of the Company whose business experience is not described
above, for at least the last five years:
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 franchisor 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.
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.
52
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF THE COMPANY
The following table sets forth certain information as of October 16, 1998
concerning stock ownership of the Common Stock by each director and officer and
by all directors and officers as a group. To the Company's knowledge, no persons
own beneficially 5% or more of the outstanding shares of Common Stock.
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 shareholder'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 Percent of
Owned of Record Common Stock
Name or Beneficially Owned
---- --------------- -----
William J. Gallagher(1)(2) 186,667 4.5%
Joseph Fazzone(3) 80,000 2.0%
Michael M. Hogan(4) 30,000 *
Theodore M. Heesch(4) 30,000 *
All officers and directors
as a group (4 persons)(2)(3)(4) 326,667 7.6%
- ----------
* Less than 1%.
(1) Mr. Gallagher may be deemed to be a "promoter" and "founder" of the Company
as those terms are defined under the Securities Act of 1993, as amended,
and the rules and regulations promulgated thereunder.
(2) Includes 140,000 shares that Mr. Gallagher may purchase pursuant to
options.
(3) Includes 80,000 shares that Mr. Fazzone may purchase pursuant to options.
(4) Includes 30,000 shares that Mr. Hogan and Mr. Heesch may purchase pursuant
to options.
53
<PAGE>
EXECUTIVE COMPENSATION - THE COMPANY
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
<TABLE>
<CAPTION>
Annual Compensation
---------------------------------------------
Long-Term
Other Compensation
Name and Annual Awards All Other
Principal Position Year Salary Bonus Compensation 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
1996 23,158 0 0 0 0
1995 0 0 0 0 0
</TABLE>
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. 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. In January 1998, Mr. Gallagher's
employment agreement was amended again to change his compensation arrangement to
provide for $120,000 per year plus 20% of all franchise and area development
fees paid to the Company, plus 5% of all royalties. Mr. Gallagher has
voluntarily deferred receiving an increase in pay in 1998.
Larry F. Harris, the Company's former President, was paid a base salary of
$90,000 per year and was 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.
54
<PAGE>
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 increased from 250,000 to 500,000
shares.
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 non-qualified 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.
55
<PAGE>
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. As of October 22, 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
=======
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
AFTER THE MERGER
Authorized and Outstanding Capital Stock
The Company's Articles of Incorporation authorize the Board of Directors of
the Company to issue 10,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of Preferred Stock, par value $1.00 per share, in
one or more series or classes and to determine the rights, powers, preferences,
limitations and restrictions of such series or class. The Board of Directors has
designated 3,002,000 shares of Preferred Stock into three classes, the terms of
which are discussed below.
Common Stock
Under the Articles of Incorporation, holders of Common Stock are entitled
to receive such dividends as may be legally declared by the Board of Directors.
Each holder of Common Stock is entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors. There is no right to cumulate votes in the election of
directors. Holders of Common Stock have no preemptive or redemption rights and
have no right to convert their Common Stock into any other securities. Upon
liquidation, dissolution or winding up of the Company, holders of Common Stock
will be entitled to share ratably in the net assets of the Company available for
distribution to common shareholders. The rights of the holders of the Common
Stock are subject to the rights of certain classes of Preferred Stock (discussed
below) and such other rights as the Board of Directors may hereafter confer on
the holders of Preferred Stock; accordingly such rights conferred on holders of
any additional shares of Preferred Stock that may be issued in the future under
the Articles of Incorporation may adversely affect
56
<PAGE>
the rights of holders of the Common Stock. All of the outstanding shares of
Common Stock are fully paid and non-assessable. At October 30, 1998, there were
[4,035,108] shares of Common Stock outstanding.
Preferred Stock
The Preferred Stock may, without action by the shareholders 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.
Series A Redeemable Convertible Preferred Stock. On June 23, 1997, the
Board of Directors approved the issuance of 3,000,000 shares of Series A
Redeemable Convertible Preferred Stock of the Company (the "Series A
Preferred"). The original issue price of the Series A Preferred is $10.00 per
share. Holders of Series A Preferred are entitled to receive dividends at the
annual rate of 12% of the original issue price per share, or $1.20 per share,
payable quarterly in cash or in the Company's Common Stock at the sole
discretion of the Company. Dividends are cumulative from the date of issue. The
Company may not declare or pay cash dividends on any other series of Preferred
Stock that is junior to or on parity with the Series A Preferred, or on the
Common Stock, nor may it redeem, purchase or otherwise acquire any of such
stock, unless full cumulative dividends have been or are contemporaneously paid
on the Series A Preferred. In the event of any liquidation or dissolution of the
Company, the holders of shares of Series A Preferred are entitled to receive out
of assets of the Company available for distribution to shareholders, before any
distributions are made to holders of Common Stock or of any other shares of
capital stock of the Company ranking junior to the Series A Preferred,
liquidating distributions in the amount of $10.00 per share, plus accrued and
unpaid dividends.
The Series A Preferred is redeemable at the option of the Company at any
time, in whole or in part, on or after March 11, 1998, for cash or in Common
Stock of the Company, on at least 30 days' notice. The price payable upon
redemption is 110% of the average bid price per share of the Series A Preferred
as quoted on the NASDAQ SmallCap Market, or other national securities exchange,
for the 20 trading days prior to the redemption date, plus all accrued and
unpaid dividends. If the Series A Preferred is not quoted by NASDAQ or listed on
a securities exchange, its market value shall be the fair value as determined by
a member of a national securities exchange selected by the Company or by the
Board of Directors.
The Series A Preferred automatically converts into Common Stock at any time
after March 11, 1998 if the closing price for the Series A Preferred equals or
exceeds $20.00 per share for a period of ten consecutive trading days. The
holders of Series A Preferred have 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 into Common Stock. The number of shares of Common Stock issuable upon
conversion of a share of Series A Preferred is equal to $10.00 divided by $3.70,
subject to certain adjustments. Holders of Series A Preferred may also convert
their shares, if such shares are called for redemption by the Company, at any
time up to and including the close on business on the fifth full business day
prior to the date fixed for redemption.
The holders of the Series A Preferred have no voting rights except as
otherwise required by the Texas Business Corporation Act (the "Act") and
applicable law. The holders of shares of Series A
57
<PAGE>
Preferred have no preemptive or other rights to subscribe for any other shares
or securities. The Series A Preferred ranks prior to the Common Stock as to
dividends and upon liquidation of the Company.
As of October 30, 1998, there were 526,699 shares of Series A Preferred
issued and outstanding.
Series B Convertible Preferred Stock. On December 15, 1997, the Board of
Directors approved the issuance of 1,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred"). The original issue price of the
Series B Preferred is $10,000 per share. Dividends on the Series B Preferred
accrue at an annual rate of 7% of the original issue price per share, or $700
per share, payable only at the time of conversion of such shares. Dividends may
be paid in cash or in shares of Series A Preferred or Common Stock as determined
at the sole discretion of the holders of Series B Preferred. Dividends are
cumulative from the date of issue.
The Company may not declare or pay cash dividends on any other series of
Preferred Stock that is junior to or on parity with the Series B Preferred, or
on the Common Stock, nor may it redeem, purchase or otherwise acquire any of
such stock, unless full cumulative dividends have been or are contemporaneously
paid on the Series B Preferred. In the event of any liquidation or dissolution
of the Company, the holders of shares of Series B Preferred are entitled to
receive out of assets of the Company available for distribution to shareholders,
before any distributions are made to holders of Common Stock or of any other
shares of capital stock of the Company ranking junior to the Series A Preferred,
liquidating distributions in the amount of $10,000 per share, plus accrued and
unpaid dividends.
The Series B Preferred is convertible, at the option of the holder, at any
time within three (3) years after issuance, into shares of the Company's Series
A Preferred or Common Stock (unless a conversion into a particular security
would cause the Company to be in violation of a NASDAQ or NASD rule or listing
requirement). The option to convert shares of Series B Preferred into Common
Stock is available only if (i) the closing bid price of the Common Stock equals
or exceeds $3.00 per share on the date of conversion, (ii) if a majority of the
then current Board of Directors approves the conversion into Common Stock, or
(iii) the holder was precluded from converting into Series A Preferred. This
conversion right expires three years following the date of issuance and, at such
time, all outstanding shares of Series B Preferred automatically convert into
shares of Series A Preferred; provided, however, that if the Series A Preferred
is not actively traded at such time, then the Series B Preferred shall convert
into shares of Common Stock.
If the Series B Preferred is converted to Series A Preferred, the number of
shares issuable upon conversion is equal to $10,000, divided by the lower of (i)
105% of the average closing bid price of the Series A Preferred during the five
trading day period immediately preceding the date of issuance or (ii) 80% of the
average closing bid price of the Series A Preferred during the five trading day
period preceding the date of election to convert, subject to certain
adjustments. If the Series B Preferred is converted to Common Stock, the number
of shares issuable upon conversion is equal to $10,000, divided by 80% of the
average closing bid price of the Common Stock during the five trading day period
immediately preceding the date of election to convert, provided that the price
of the Common Stock is above $3.00 per share, unless the conversion is approved
by the Board of Directors or if the holder was precluded from converting shares
into shares of Series A Preferred. Holders of Series B Preferred will be allowed
to convert 50% of the aggregate amount of such holder's shares of Series B
Preferred beginning the day after the registration statement covering Series A
Preferred or Common Stock is effective, but no sooner than 60 days after the
date the Series B Preferred is issued. Holders of Series B Preferred may
58
<PAGE>
convert any and all remaining such shares beginning 120 days after the issuance
of the Series B Preferred.
The Series B Preferred is non-voting and ranks junior to the Series A
Preferred. The holders of the Series B Preferred have no preemptive rights or
other rights to subscribe for any other shares or securities of the Company.
In May 1998, the Company sold 11.2 shares of Series B Preferred in a
private transaction in which the Company realized net proceeds of $112,000.
During May and June of 1998, holders of Series B Preferred converted a total of
28 shares of Series B Preferred into 688,980 and 120,892 shares of the Company's
Common Stock and Series A Preferred, respectively.
As of October 30, 1998, there were 133.2 shares of Series B Preferred
issued and outstanding.
Series C Convertible Preferred Stock. On July 2, 1998, the Board of
Directors of the Company approved the issuance of 1,000 shares of Series C
Convertible Preferred Stock ("Series C Preferred"). The original issue price of
the Series C Preferred is $10,000 per share. Dividends on the Series C Preferred
accrue at an annual rate of 7% of the original issue price, or $700 per share,
and are payable in cash or Common Stock, as determined by the holders, only at
the time of conversion of such shares. Dividends are cumulative from the date of
issue. Unless full cumulative dividends have been or are contemporaneously paid
on the Series C Preferred, the Company may not declare or pay cash dividends on
the Common Stock, nor may it redeem, purchase or otherwise acquire Common Stock,
nor may it make any other distribution with respect to the Common Stock or any
class of capital stock on a parity with or junior to the Series C Preferred.
In the event of any liquidation or dissolution of the Company, the holders
of shares of Series C Preferred are entitled to receive out of assets of the
Company available for distribution to shareholders, before any distributions are
made to holders of Common Stock or of any other shares of capital stock of the
Company ranking junior to the Series C Preferred, liquidating distributions in
the amount of $10,000 per share, plus accrued and unpaid dividends.
The Series C Preferred is convertible at the option of the holder into
shares of Common Stock for up to three years after initial issuance. After three
years, the Series C Preferred will convert automatically into shares of 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. The Company is
not required, however, to convert any shares if such conversion would result in
the issuance of 20% or more of the issued and outstanding Common Stock to the
holders of the Series C Preferred, as provided by Nasdaq Marketplace Rule
4320(e)(21)(H), unless shareholder approval of such conversion is obtained. In
the event that such a conversion is requested and the Company does not convert
the Series C Preferred because of the Nasdaq rule, the Company will pay the
holder of the Series C Preferred 125% of the principal amount of the issued and
outstanding Series C Preferred plus accrued interest. Holders of Series C
Preferred are allowed to convert up to 50% of the Series C Preferred into Common
Stock beginning on the date that a registration statement registering the Common
Stock has been declared effective, but no sooner than 60 days after the Series C
Preferred is issued. If a registration statement has been declared effective,
holders of Series C Preferred may convert 100% of the Series C Preferred into
Common Stock beginning on the date that is 120 days after the issuance of such
stock.
59
<PAGE>
The Series C Preferred is non-voting, and it is ranked junior to the
Company's Series A Preferred and on parity with the Company's Series B
Preferred. The holders of the Series C Preferred have no preemptive rights or
other rights to subscribe for any other shares or securities of the Company.
On July 9, 1998, in connection with the proposed 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 Preferred at face value of $10,000 per
share, for a total of $6,000,000 of equity funding, of which $4,000,000 was
deposited into escrow. The 600 shares of Series C Preferred are to be issued in
three separate closings of 200 shares each, with the first closing having
occurred in July 1998, the second closing to occur upon the effective date of
the merger, and the third closing within 30 days thereafter. As of July 12,
1998, Company recorded a subscription receivable of $1,978,750 for the net
proceeds from the first closing, as there were no unresolved contingencies in
connection with the closing as of that date. This subscription was subsequently
collected on July 23, 1998.
As of October 16, 1998, there were 200 shares of Series C Preferred issued
and outstanding.
Series D Redeemable Convertible Preferred Stock. It is anticipated that
that the terms of the 722,500 shares of Series D Convertible Preferred Stock of
the Company (the "Series D Preferred") to be issued in connection with the
merger will be in accordance with this paragraph, although a definitive
resolution has not been approved by the Board of Directors. The original issue
price of the Series D Preferred is $10.00 per share. Dividends on the Series D
Preferred accrue at an annual rate of 8% of the original issue price, or $0.80
per share, and are payable in cash or Common Stock, as determined by the
Company, only at the time of conversion of such shares. Dividends are cumulative
from the date of issue. Unless full cumulative dividends have been or are
contemporaneously paid on the Series D Preferred, the Company may not declare or
pay cash dividends on the Common Stock, nor may it redeem, purchase or otherwise
acquire Common Stock, nor may it make any other distribution with respect to the
Common Stock or any class of capital stock on a parity with or junior to the
Series D Preferred.
In the event of any liquidation or dissolution of the Company, the holders
of shares of Series D Preferred are entitled to receive out of assets of the
Company available for distribution to shareholders, before any distributions are
made to holders of Common Stock or of any other shares of capital stock of the
Company ranking junior to the Series D Preferred, liquidating distributions in
the amount of $10.00 per share, plus accrued and unpaid dividends.
The Series D Preferred is redeemable at the option of the Company at any
time after six months of issuance, in whole or in part, for $0.01 per share, if
the closing price of the Company's Common Stock, as quoted on any national
securities exchange, NASDAQ, or any NASD regulated quotation service exceeds
$3.50 per shares for twenty (20) consecutive trading days.
Each share of Series D Preferred is convertible at the option of the holder
into four (4) shares of Common Stock at any time after six months from the date
of issuance, subject to adjustment. The Series D Preferred is non-voting, and it
is ranked junior to the Company's Series A Preferred, Series B Preferred and
Series C Preferred. The holders of the Series D Preferred have no preemptive
rights or other rights to subscribe for any other shares or securities of the
Company.
60
<PAGE>
Redeemable Preferred Stock Purchase Warrants
At October 30, 1998 there were 1,723,400 Redeemable Preferred Stock
Purchase Warrants outstanding ("Preferred Warrants"), plus an additional 200,000
warrants issued to the underwriters of the offering of the Preferred Warrants.
Each Preferred Warrant represents the right to purchase one share of Series A
Preferred at an exercise price of $10.50 per share until June 11, 2002, subject
to adjustment. 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
$0.01 per Preferred Warrant at any time after March 11, 1998 if the closing
price of the Series A Preferred 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.
Common Stock Purchase Warrants
At October 30, 1998 there were 2,300,000 Common Stock Purchase Warrants
outstanding (the "IPO Warrants"), plus an additional 300,000 warrants issued to
the underwriters of the offering of 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, subject to adjustment. 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 $0.01 per IPO Warrant at any time after July 9, 1997, if the closing
price of the Company' Common Stock on the NASDAQ SmallCap Market averages at
least $8.00 per share for a period of 20 consecutive trading days.
PROPOSAL 5: RATIFICATION OF INDEPENDENT AUDITORS
In conjunction with the merger, the Board of Directors of TRC has selected
Porter Keadle Moore, LLP, certified public accountants, to be TRC's independent
auditors for the fiscal year ending December 27, 1998. If the shareholders do
not ratify this selection at the Meeting, the Board of Directors may reevaluate
the selection of Porter Keadle Moore, LLP ("Porter Keadle"), but it would have
the right to and would consider retaining Porter Keadle in any event.
Representatives of Porter Keadle are not expected to be present at the Meeting.
Effective July 17, 1998, Akin, Doherty, Klein & Feuge, P.C. ("Akin Doherty"
or the "Accountants") resigned as the certifying accountant for Harvest
Restaurant Group, Inc. (the "Company"). Representatives of Akin Doherty are not
expected to attend the Meeting.
The report of Akin Doherty on the consolidated financial statements of
Harvest Restaurant Group, Inc. for the year ended December 28, 1997 contained an
explanatory paragraph as to an uncertainty to continue as a going concern. The
report for the year ended December 29, 1996 contained no adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles.
There were no disagreements with Akin Doherty during the two years ended
December 28, 1997 and December 29, 1996 and the subsequent interim period
through the date of their resignation on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
61
<PAGE>
There were no events communicated by Akin Doherty during the two years
ended December 28, 1997 and December 29, 1996 and the subsequent interim period
through the date of their resignation regarding the following:
1. That the internal controls necessary for the Company to develop
reliable financial statements did not exist.
2. That information has come to the Accountant's attention that has led
it to no longer be able to rely on management's representations or
that has made it unwilling to be associated with the financial
statements prepared by management.
3. That the Accountants needed to expand significantly the scope of their
audit or that they have become aware of information that if further
investigated may materially impact the fairness and reliability of a
previously issued audit report or underlying financial statements or
cause it to be unwillingly on management's representations or be
associated with the Company's financial statements.
4. That information has come to the Accountant's attention that it has
concluded materially impacts the fairness or reliability of a
previously issued audit report or the underlying financial statements
and that due to the Accountant's resignation the issue has not been
resolved to the Accountant's satisfaction prior its resignation
The Company had not previously retained or consulted with any new
independent accountant with respect to the application of accounting principals
to any transaction, the type of audit opinion that might be rendered on the
Company's consolidated financial statements, or as to any matter that was either
the subject of a disagreement as defined in 304(a)(1)(iv), or a reportable event
(as described in paragraph (a)(1)(iv) of Item 304 Regulation S-K).
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
RATIFICATION OF PORTER KEADLE AS THE COMPANY'S INDEPENDENT AUDITORS FOR THE
FISCAL YEAR ENDING DECEMBER 27, 1998.
Ratification of Porter Keadle as the Company's independent auditors for the
fiscal year ending December 27, 1998 requires the affirmative vote of the
holders of a majority of the shares of Common Stock present and entitled to vote
at the Meeting.
OTHER MATTERS
At the time of the preparation of this Proxy Statement, the Company's Board
of Directors knows of no other matters to be presented for action at the
meeting. As stated in the accompanying proxy card, if any other business should
come before the meeting, proxies have discretionary authority to vote their
shares according to their best judgment, including, without limitation, a motion
to adjourn or postpone the meeting to another time and/or place for the purpose
of soliciting additional proxies in order to approve the Agreement or otherwise.
62
<PAGE>
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS
The Company anticipates that the 1999 Annual Meeting will be held in June
1999. Therefore, proposals of shareholders of the Company intended to be
presented at the 1999 Annual Meeting of the Company must be received by the
Company not later than February 1, 1999 to be considered for inclusion in the
Company's proxy statement and form of proxy relating to that meeting.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, is required to file reports, proxy statements
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
the Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of the reports, proxy statements and other
information can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxies, information statements, and registration statements and other
information filed with the Commission through the EDGAR system. The Common Stock
of the Company is traded on the OTC Bulletin Board (symbol "ROTI") and such
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
63
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
HARVEST RESTAURANT GROUP, INC.
TO BE HELD NOVEMBER __, 1998
The undersigned hereby appoints William J. Gallagher as the lawful agent and
Proxy of the undersigned (with all the powers the undersigned would possess if
personally present, including full power of substitution), and hereby authorizes
him to represent and to vote, as designated below, all the shares of Common
Stock of Harvest Restaurant Group, Inc., held of record by the undersigned on
October 30, 1998, at the Special Meeting of Shareholders to be held November __,
1998, or any adjournment or postponement thereof.
1. To approve and adopt the Share Exchange and Merger Agreement, as amended,
by and among Harvest Restaurant Group, Inc., a Texas corporation (the
"Company"), Hartan, Inc., a Texas corporation and wholly-owned subsidiary
of the Company, and TRC Acquisition Corporation, a Georgia corporation.
FOR _____ AGAINST _____ ABSTAIN _____
2. To amend the Company's Articles of Incorporation to change its name to
"Tanner's Restaurant Group, Inc."
FOR _____ AGAINST _____ ABSTAIN _____
3. To amend the Company's Articles of Incorporation to increase the number of
authorized shares of Common Stock to 100,000,000 shares.
FOR _____ AGAINST _____ ABSTAIN _____
4. To elect the following persons to the Board of Directors:
CLYDE CULP, III
FOR _____ AGAINST _____ WITHHOLD VOTE _____
RICHARD TANNER
FOR _____ AGAINST _____ WITHHOLD VOTE _____
JAMES R. WALKER
FOR _____ AGAINST _____ WITHHOLD VOTE _____
THOMAS J. HAAS
FOR _____ AGAINST _____ WITHHOLD VOTE _____
5. To ratify the appointment of Porter Keadle Moore, LLP, Atlanta, Georgia, as
the Company's independent auditors for the fiscal year ending December 27,
1998.
FOR _____ AGAINST _____ ABSTAIN _____
It is understood that when properly executed, this proxy will be voted in
the manner directed herein by the undersigned shareholder. WHERE NO CHOICE IS
SPECIFIED BY THE SHAREHOLDER, THE PROXY WILL BE VOTED FOR THE PROPOSALS SET
FORTH IN 1 THROUGH 5 ABOVE.
The undersigned hereby revokes all previous proxies relating to the shares
covered hereby and confirms all that said Proxy may do by virtue hereof.
Please sign exactly as name appears below. When shares are held by joint
tenants, both should sign. When signing as attorney, executor, administrator,
trustee or guardian, please give full title as such. If a corporation, please
sign in full corporate name by President or other authorized officer. If a
partnership, please sign in partnership name by authorized person.
Dated:
-----------------------------
Signature
PLEASE MARK, SIGN, DATE
AND RETURN THE PROXY
CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
-----------------------------
Signature, if held jointly
PLEASE CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE SPECIAL MEETING
OF SHAREHOLDERS. _____
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
<S> <C>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet at December 28, 1997 F-3
Consolidated Statements of Operations for the fiscal years ended
December 28, 1997 and December 29, 1996 F-4
Consolidated Statements of Stockholders' Equity for the fiscal years ended
December 28, 1997 and December 29, 1996 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 1997 and December 29, 1996 F-6
Notes to Consolidated Financial Statements F-7
Consolidated Balance Sheets at July 12, 1998 and December 28, 1997 F-16
Consolidated Statements of Operations for the two quarters ended July 12, 1998 and July 13, 1997 F-17
Consolidated Statements of Cash Flows for the two quarters ended July 12, 1998 and July 13, 1997 F-18
Notes to Consolidated Financial Statements F-19
TRC ACQUISITION CORPORATION
Report of Independent Certified Public Accountants F-22
Consolidated Balance Sheet at December 28, 1997 F-23
Consolidated Statements of Operations for the fiscal year ended
December 28, 1997, the period from October 15, 1996 (inception) through
December 29, 1996 and the period from January 1, 1996 through October 14, 1996 F-24
Consolidated Statements of Stockholders' Equity (Deficit) for the fiscal year ended
December 28, 1997, the period from October 15, 1996 (inception) through
December 29, 1996 and the period from January 1, 1996 through October 14, 1996 F-25
Consolidated Statements of Cash Flows for the fiscal year ended
December 28, 1997, the period from October 15, 1996 (inception) through
December 29, 1996 and the period from January 1, 1996 through October 14, 1996 F-26
Notes to Consolidated Financial Statements F-27
Consolidated Balance Sheets at July 12, 1998 and December 28, 1997 F-40
Consolidated Statements of Operations for the two quarters ended July 12, 1998 and July 13, 1997 F-41
Consolidated Statements of Cash Flows for the two quarters ended July 12, 1998 and July 13, 1997 F-42
Notes to Consolidated Financial Statements F-43
F-1
</TABLE>
<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-2
<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; 10,000,000 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-3
<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-4
<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-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Years Ended
December 28, December 29,
1997 1996
-----------------------------
<S> <C> <C>
Operating Activities
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-6
</TABLE>
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 28, 1997
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.
F-7
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
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.
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-8
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
NOTE D - SUPPLEMENTAL FINANCIAL STATEMENT DATA
Property and equipment consists of the following at December 28, 1997:
<S> <C>
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
===========
</TABLE>
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-9
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
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.
F-10
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
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. A beneficial conversion feature did
not exist at the date of issuance with respect to conversion to common stock
since the market value of the common stock was below the $3.00 minimum level for
conversion.
Share Amounts Issued and Outstanding: The Company has issued and outstanding the
following preferred and common stock:
<TABLE>
<CAPTION>
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
========= ========= =========
</TABLE>
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.
F-11
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
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.
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)
A summary of the activity of the Company's stock option plan is presented below:
<TABLE>
<CAPTION>
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-12
</TABLE>
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
The following table summarizes information about the options outstanding at
December 28, 1997, after consideration of the repricing on February 5, 1998:
<TABLE>
<CAPTION>
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
</TABLE>
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
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
F-13
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
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
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
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 --
F-14
</TABLE>
<PAGE>
HARVEST RESTAURANTS GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -Continued
December 28, 1997
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.
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-15
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
July 12, December 28,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 193 $ 774,674
Cash, restricted -- 300,000
Inventories -- 15,345
Subscription receivable 1,978,750 --
Other current assets 25,224 7,400
------------ ------------
Total Current Assets 2,004,167 1,107,419
Property and Equipment, net 675,339 2,039,052
Other Assets
Intangible property rights, net of accumulated
amortization of $237,750 in 1997 -- 161,750
Deposits 77,730 70,978
Other assets -- 110,406
------------ ------------
77,730 343,134
------------ ------------
$ 2,757,236 $ 3,489,605
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable, trade $ 374,345 $ 652,817
Accrued liabilities:
Real estate disposition costs 700,000 800,000
Other accrued liabilities 211,851 156,460
Current portion of long-term debt 225,000 211,779
------------ ------------
Total Current Liabilities 1,511,196 1,821,056
Long-term debt, less current portion -- 41,963
Stockholders' Equity
Preferred stock 636,225 515,150
Common stock - $.01 par value, authorized 10,000,000,
issued 3,740,287 in 1998 and 2,698,630 in 1997 37,403 26,986
Additional paid-in capital 13,861,731 11,902,073
Accumulated deficit (13,289,319) (10,817,623)
------------ ------------
Total Stockholders' Equity 1,246,040 1,626,586
------------ ------------
$ 2,757,236 $ 3,489,605
============ ============
See notes to consolidated financial statements (unaudited).
F-16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Two Quarters Ended
--------------------------
July 12, July 13,
1998 1997
----------- -----------
<S> <C> <C>
Revenues
Restaurant operations $ 289,440 $ 916,364
Franchise fees -- 200,000
----------- -----------
289,440 1,116,364
Costs and Expenses
Cost of food and paper 148,448 476,828
Salaries and benefits 152,572 411,438
Occupancy and related expenses 83,672 138,382
Operating expenses 109,839 350,416
Preopening expenses 72,625 181,120
General and administrative expenses 695,507 845,151
Depreciation and amortization 280,399 132,291
Loss on restaurant closures and other 1,204,489 --
Loss provision for area developer notes receivable -- 286,023
----------- -----------
Total costs and expenses 2,747,551 2,821,649
----------- -----------
Loss from operations (2,458,111) (1,705,285)
Other income (expense)
Interest income 5,069 20,387
Interest expense (18,654) (11,151)
----------- -----------
(13,585) 9,236
----------- -----------
Net Loss $(2,471,696) $(1,696,049)
=========== ===========
Preferred stock dividends (345,268) --
Net loss applicable to common shareholders (2,816,964) --
Basic loss per common share $ (.97) $ (.73)
=========== ===========
Weighted average common shares outstanding 2,911,616 2,337,604
=========== ===========
See notes to consolidated financial statements (unaudited).
F-17
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
HARVEST RESTAURANT GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Two Quarters Ended
--------------------------
July 12, July 13,
1998 1997
----------- -----------
<S> <C> <C>
Operating Activities:
Net loss for the period $(2,471,696) $(1,696,049)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 280,399 132,291
Loss on restaurant closures and other 1,204,489 --
Forfeitures of deposits 41,178 --
Loss provision for area developer notes receivable -- 286,023
Changes in operating assets and liabilities:
Inventories 15,345 (7,092)
Other current assets and other assets 71,064 79,333
Accounts payable and accrued liabilities (223,081) 331,266
----------- -----------
Net cash used in operating activities (1,082,302) (874,228)
Investing Activities:
Purchase of property and equipment (22,814) (690,690)
Increase in deposits (3,055) (10,562)
Issuance of notes receivable -- (1,963,340)
----------- -----------
Net cash used in investing activities (25,869) (2,664,592)
Financing Activities:
Net proceeds from sale of preferred stock and warrants 112,000 4,374,806
Net proceeds from sale of common stock and warrants -- 568,875
Proceeds from borrowings 225,000 --
Decrease in cash restricted for bank obligations 200,000 220,000
Repayments of bank borrowings (203,310) (5,790)
----------- -----------
Net cash provided by financing activities 333,690 5,157,891
----------- -----------
Net increase (decrease) in cash (774,481) 1,619,071
Cash at beginning of year 774,674 1,271,443
----------- -----------
Cash at end of period $ 193 $ 2,890,514
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 7,404 $ 130,243
Income taxes paid -- --
Assumption of notes payable for assets -- 65,000
Payment of preferred stock dividend in common stock 345,268 --
See notes to consolidated financial statements (unaudited).
F-18
</TABLE>
<PAGE>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
July 12, 1998
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 fourteen Harvest Rotisserie restaurants in
operation, consisting of four company-owned restaurants in Texas and ten
franchised restaurants located in Florida, North Carolina, Indiana and Northern
California. During 1998, the Company significantly curtailed its operations and
all of the Harvest Rotisserie restaurants were closed. In 1998, the Company
opened two Harvest Food Court restaurants in San Antonio, Texas, 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 two quarters ended
July 12, 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 July 12, 1998 had an accumulated
deficit of $13,289,319 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
share exchange with TRC Acquisition Corporation, a company which operates a
chain of thirteen "Rick Tanner's Original Grill" restaurants ("Tanner's"). In
connection with the share exchange, the Company has obtained a financing
commitment for $6 million 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.
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.
F-19
<PAGE>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
July 12, 1998
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
franchisees 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.
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. The board of directors of the Company will be increased to six
members, with two of the Company's current directors remaining. The Company's
corporate offices will also be relocated 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.
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 equity 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, with the first closing to occur within 14 days of the agreement,
the second closing to occur upon the effective date of the Share Exchange, and
the third closing within thirty days thereafter. On July 12, 1998, the Company
recorded a subscription receivable of $1,978,750 for the net proceeds from the
first closing, as there were no unresolved contingencies in connection with the
closing as of that date. This subscription was subsequently collected on July
23, 1998.
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 80% discount to market
is considered a beneficial conversion feature. The Company has valued the
undiscounted beneficial conversion feature at $500,000, which will be reflected
in the subsequent accounting period on the date of issuance 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
$112,000. 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.
F-20
<PAGE>
HARVEST RESTAURANT GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) - Continued
July 12, 1998
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.
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
of $800,000 as of December 27, 1998, which has subsequently been reduced to
$700,000 as of July 12, 1998. Management believes the liability accrual will be
sufficient to settle all obligations related to the closing of restaurant
locations.
F-21
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
TRC Acquisition Corporation
We have audited the accompanying consolidated balance sheets of TRC Acquisition
Corporation and subsidiaries as of December 28, 1997 and December 29, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year ended December 28, 1997, the period from
October 15, 1996 (inception) through December 29, 1996 and the period from
January 1, 1996 to October 14, 1996 (Predecessor). 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 audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TRC Acquisition
Corporation and subsidiaries as of December 28, 1997 and December 29, 1996, and
the results of their operations and their cash flows for the year ended December
28, 1997, the period from October 15, 1996 (inception) through December 29,
1996, and the period from January 1, 1996 through October 14, 1996
(Predecessor), in conformity with generally accepted accounting principles.
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
Atlanta, Georgia
October 20, 1998
F-22
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Balance Sheets
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
December 28, December 29,
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ $ 96,098
Accounts receivable 231,554 123,207
Inventory 114,227 56,512
Prepaid expenses 53,030 77,213
----------- -----------
Total current assets 398,811 353,030
Property and equipment, net 2,186,028 332,080
Intangible assets, net 4,075,175 4,519,826
Goodwill, net 1,058,810 1,526,907
Other assets 130,606 114,784
----------- -----------
Total assets $ 7,849,430 $ 6,846,627
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft $ 212,605 $
Accounts payable 1,379,105 555,181
Accrued expenses 561,705 464,562
Current portion of long-term debt 188,184 98,706
Deferred franchise revenue 15,000
----------- -----------
Total current liabilities 2,356,599 1,118,449
Long-term debt 5,738,747 4,092,329
Other liabilities 319,337 57,693
----------- -----------
Total liabilities 8,414,683 5,268,471
----------- -----------
Preferred stock:
Par value $1.00 per share
Class A: authorized 2,000 shares; issued and outstanding 2,000
shares plus cumulative dividends and accretion 2,448,380 2,006,557
----------- -----------
General: authorized 998,000 shares; no shares issued and outstanding
Stockholders' deficit:
Common stock, no par value; authorized 100,000,000 shares;
issued and outstanding 2,625,000 shares 26,250 26,250
Carryover predecessor basis adjustment (61,747) (61,747)
Accumulated deficit (2,978,136) (392,904)
----------- -----------
Total stockholders' deficit (3,013,633) (428,401)
----------- -----------
Total liabilities, preferred stock and stockholders' deficit $ 7,849,430 $ 6,846,627
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-23
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Statements of Operations
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
Company Predecessor
-------------------------- -----------
Period from Period from
October 15, January 1,
Year 1996 1996
ended through through
December 28, December 29, October 14,
1997 1996 1996
----------- ----------- -----------
<S> <C> <C> <C>
Revenue
Restaurant sales revenue $ 8,041,660 $ 1,411,303 $ 6,840,513
Catering revenue 924,891 187,449 833,338
----------- ----------- -----------
Total revenue 8,966,551 1,598,752 7,673,851
----------- ----------- -----------
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 3,086,448 540,766 2,426,181
Payroll and benefits 3,184,827 582,208 2,398,077
Depreciation and amortization 590,807 118,542 92,685
Other operating expenses 2,449,783 349,969 1,722,130
----------- ----------- -----------
Total restaurant and catering operating expenses 9,311,865 1,591,485 6,639,073
----------- ----------- -----------
Income (loss) from restaurant and catering operations (345,314) 7,267 1,034,778
General and administrative expenses 1,278,581 239,206 747,586
----------- ----------- -----------
Operating income (loss) (1,623,895) (231,939) 287,192
Other income (expense):
Other income (expense) 27,038 31,390 49,730
Interest expense (546,552) (100,986) (33,241)
----------- ----------- -----------
Net income (loss) $(2,143,409) $ (301,535) $ 303,681
=========== =========== ===========
Basic and diluted loss per share $ (0.98) $ (0.15)
The accompanying notes are an integral part of these consolidated financial statements.
F-24
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
Retained
Carryover Additional Earnings Stockholders'
(in 000's) Common Predecessor Paid-In (Accumulated Equity
Shares Stock Basis Capital Deficit) (Deficit)
---------- ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Predecessor:
Balance, December 31, 1995 96 $ 141 $ 75,816 $ (239,646) $ (163,689)
Net income 303,681 303,681
Distributions to shareholder (382,145) (382,145)
---------- ---------- ---------- ---------- ----------- -----------
Balance, October 14, 1996 96 $ 141 0 $ 75,816 $ (318,110) $ (242,153)
========== ========== ========== ========== =========== ===========
Company:
Issuance of common stock 2,625 $ 26,250 $ 26,250
Carryover predecessor basis $ (61,747) (61,747)
Net loss $ (301,535) (301,535)
Dividends accrued on
redeemable preferred stock (62,273) (62,273)
Accretion on redeemable
preferred stock (29,096) (29,096)
---------- ---------- ---------- ---------- ----------- -----------
Balance, December 29, 1996 2,625 26,250 (61,747) 0 (392,904) (428,401)
Net loss (2,143,409) (2,143,409)
Dividends accrued on
redeemable preferred stock (300,000) (300,000)
Accretion on redeemable
preferred stock (141,823) (141,823)
---------- ---------- ---------- ---------- ----------- -----------
Balance, December 28, 1997 2,625 $ 26,250 $ (61,747) 0 $(2,978,136) $(3,013,633)
========== ========== ========== ========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-25
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Statements of Cash Flows
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
Company Predecessor
------------------------ -----------
Period from Period from
October 15, January 1,
1996 1996
Year ended through through
December 28, December 29, October 14,
1997 1996 1996
---------- --------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(2,143,409) $ (301,535) $ 303,681
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 590,807 118,542 92,685
Changes in assets and liabilities:
Accounts receivable (108,347) (29,719) 163,669
Inventory (57,715) 8,405 (1,619)
Prepaid expenses 24,183 (71,729) 151,509
Other assets (6,995) (9,923) 86,019
Accounts payable 823,924 276,046 (24,358)
Accrued expenses 157,779 (144,871) (197,533)
Other liabilities 261,664 57,693
Deferred franchise revenue 15,000
----------- ----------- ----------
Net cash provided by (used in) operating activities (443,109) (97,091) 574,053
----------- ----------- ----------
Cash flows from investing activities:
Purchase of business, net of cash acquired (1,939,325)
Purchase of property and equipment (1,922,168) (7,361) (8,880)
----------- ----------- ----------
Net cash used in investing activities (1,922,168) (1,946,686) (8,880)
----------- ----------- ----------
Cash flows from financing activities:
Cash overdraft 212,605 32,883
Repayments of debt (108,250) (16,815) (215,911)
Proceeds from issuance of long-term debt 2,195,100 1,000,000
Proceeds from issuance of preferred and common stock 1,500,000
Payment of equity issuance costs (262,807)
Distributions to shareholder (382,145)
Additions to deferred financing costs (30,276) (80,503)
----------- ----------- ----------
Net cash provided by (used in) financing activities 2,269,179 2,139,875 (565,173)
----------- ----------- ----------
Net (decrease) increase in cash and cash equivalents (96,098) 96,098 0
Cash and cash equivalents, beginning of year 96,098
----------- ----------- ----------
Cash and cash equivalents, end of year $ 0 $ 96,098 $ 0
=========== =========== ==========
Non-cash investing and financing activities:
Issuance of convertible subordinated debenture $ 3,000,000
Accretion of redeemable preferred shares $ 141,823 29,096
Issuance of preferred stock in connection with acquisition of Oldco 497,500
Issuance of common shares 18,938
Dividends accrued on redeemable preferred shares 300,000 62,273
Debt assumed at acquisition 214,210
Purchase price adjustment (411,590)
Supplemental cash flow information:
Interest paid 290,197 21,173 $ 59,382
The accompanying notes are an integral part of these consolidated financial statements.
F-26
</TABLE>
<PAGE>
TRC Acquisition Corporation
Notes to Consolidated Financial Statements
1. Description of Business:
TRC Acquisition Corporation and its wholly owned subsidiaries operate
casual dining restaurants under the name "Rick Tanner's Original Rotisserie
Grill" that specialize in fresh, convenient meals featuring rotisserie
chicken entrees, barbecued ribs, hamburgers, freshly prepared vegetables,
salads, and other side dishes. At December 28, 1997, there were ten stores
located in the Atlanta, Georgia metropolitan area.
On October 15, 1996, TRC Acquisition Corporation ("Newco" or "Company") was
formed as a corporation under the laws of the state of Georgia to acquire
all of the shares of the 11 corporations commonly known as Tanner's Chicken
Rotisserie ("Oldco" or "Predecessor"), including nine restaurants, a
catering business and a management company. On October 15, 1996, Newco
purchased all of the shares of Oldco. In connection with the acquisition of
the business, the sole shareholder ("Shareholder") of Oldco acquired a 34%
interest in Newco. As provided by the provisions of the Emerging Issues
Task Force Issue No. 88-16, Basis In Leveraged Buyout Transactions When the
Previous Owner's Interest Declines, purchase or fair value accounting does
not apply to the 34% equity interest held by the Shareholder. Accordingly,
for accounting purposes, the Shareholder's equity in Newco has been reduced
by $61,747 to reflect the difference between the fair value and predecessor
basis of the 34% interest in Newco of the Shareholder. During 1997, the
Company and the Shareholder finalized the purchase price allocation whereby
goodwill was reduced by $411,590, accrued expenses were reduced by $60,636
and the convertible subordinated debenture reduced by $350,954.
The combined financial statements presented herein for the period from
January 1, 1996 through October 14, 1996, present the Predecessor's
financial position, results of operations and cash flows prior to the
acquisition and, consequently, are stated on the Predecessor's historical
cost basis. The Predecessor financial statements are combined from the 11
corporations comprising Oldco. The consolidated financial statements as of
December 29, 1996 and December 28, 1997 and for the periods then ended,
reflect the adjustments which were made to record the acquisition.
Accordingly, the financial statements of the Predecessor for periods prior
to October 15, 1996 are not comparable in all material respects with the
financial statements subsequent to the date of the acquisition. The most
significant differences relate to amounts recorded in connection with the
acquisition for property, plant and equipment, intangibles and debt which
resulted in increased amortization, depreciation and interest expense in
the period from October 15, 1996 through December 29, 1996 and the year
ended December 28, 1997 and will continue to do so in future periods.
F-27
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies of the
Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All material intercompany accounts and
transactions have been eliminated in consolidation.
Fiscal Year
The Company operates on a 52/53-week fiscal year ending on the last Sunday
in December. Accordingly, the financial statements presented ended on
December 28, 1997 and December 29, 1996. All general references to years
relate to fiscal years unless otherwise noted.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in banks and temporary
cash investments with original maturities of less than three months. At
times, cash and cash equivalent balances at a limited number of banks and
financial institutions may exceed insurable amounts. The Company believes
it mitigates its risks by depositing cash or investing in cash equivalents
in major financial institutions.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of food, beverages, paper products and supplies.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
The provision for depreciation has been calculated using the straight-line
method. Smallwares, consisting primarily of linens and silverware, are
expensed as incurred. The following represents the useful lives over which
the assets are depreciated:
Transportation equipment and computer equipment 3 years
Furniture, fixtures and office equipment 5 years
Kitchen and service equipment 7 years
Building 20 years
Leasehold improvements Life of lease
F-28
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
For purposes of the Predecessor financial statements, property and
equipment is stated at cost, less accumulated depreciation. The provision
for depreciation for all fixed assets has been calculated using an
accelerated method which approximates the double-declining balance method.
The following represents the useful lives over which the assets are
depreciated:
Leasehold improvements 31.5 years
Furniture, fixtures and equipment 7 years
Vehicles 5 years
Expenditures for maintenance and repairs are charged to expense as
incurred.
Goodwill
Goodwill represents the excess of cost over fair value of net identifiable
assets acquired and is being amortized over 20 years using the
straight-line method. The Company assesses the recoverability of this
intangible asset by determining whether the amortization of the goodwill
balance over its remaining life can be recovered through undiscounted
future operating cash flows of the acquired operations and a valuation
allowance is established for any amount over which unamortized goodwill
exceeds those cash flows. Accumulated amortization of goodwill amounted to
$71,331 and $14,824 at December 28, 1997 and December 29, 1996,
respectively.
Intangible Assets
Intangible assets consist primarily of employment contracts, recipes, and
the trained workforce acquired in the Oldco acquisition. These intangible
assets are being amortized over 5 to 15 years using the straight-line
method. Accumulated amortization of intangible assets was $531,825 and
$87,174 at December 28, 1997 and December 29, 1996, respectively.
Deferred Financing Costs
Deferred financing costs are included in other assets and are amortized
over the period of the related financing. Accumulated amortization of
deferred financing costs amounted to $25,081 and $3,633 at December 28,
1997 and December 29, 1996, respectively.
For purposes of the Predecessor financial statements, loan costs are
amortized over the length of the applicable loan using the straight-line
method.
Revenue Recognition
Revenue is recognized in the period for which related food and beverage
products are sold. Initial fees from the awarding of individual franchises
are deferred and recorded as revenue when the franchised restaurant is
opened.
F-29
<PAGE>
Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
Advertising
The Company and Predecessor expense advertising costs as incurred. Total
advertising expense included in other operating expense was $585,516 and
$103,041 for the year ended December 28, 1997 and the period from October
15, 1996 through December 29, 1996, respectively, and was $394,469 for the
period from January 1, 1996 to October 14, 1996.
Preopening Costs
Preopening costs are incurred before a restaurant is opened and consist
primarily of wages and salaries, hourly employee recruiting, license fees,
meals, lodging and travel plus the cost of hiring and training the
management teams. Preopening costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 is an
asset and liability approach that requires the recognition of deferred tax
assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's consolidated financial
statements or tax returns. In estimating future tax consequences, SFAS 109
generally considers all expected future events other than enactments of
changes in the tax law or rates. Income tax accounting information is
disclosed in Note 8 to the consolidated financial statements.
Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which
requires dual disclosure of earnings per share, basic and diluted. Basic
earnings per share equals net earnings divided by the weighted average
number of common shares outstanding and does not include the dilutive
effects of stock options or convertible securities. Diluted earnings per
share are computed (1) by giving effect to the Company's dilutive stock
options, warrants, convertible subordinated debentures and Class A
Preferred Stock and (2) by adjusting both net earnings and shares
outstanding as if the convertible subordinated debenture had been
converted. See Notes 6 and 7 for further discussion of options, warrants,
and convertible debt and securities ("potential common stock equivalents").
These potential common stock equivalents are excluded from the diluted
earnings per share calculations as they are antidulitive when the Company
is operating at a net loss. These securities could become dilutive when the
Company's operations result in a net profit.
F-30
<PAGE>
Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies, continued:
Earnings Per Share, continued
The following table represents the calculation of basic and diluted
earnings (loss) per share:
Period from
October 15,
1996
Year ended through
December 28, December 29,
1997 1996
---- ----
Net loss $(2,143,409) $ (301,535)
Less: Dividends on redeemable preferred stock (300,000) (62,273)
Accretion of redeemable preferred stock (141,823) (29,096)
----------- ----------
Net loss attributable to common stockholders (2,585,232) (392,904)
Average number of shares outstanding 2,625,000 2,625,000
Basic and diluted loss per share $ (0.98) $ (0.15)
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 revenue and expenses
during the reporting period. The estimated lives of goodwill and intangible
assets represent such estimates. Actual results could differ from those
estimates.
3. Accounts Receivable:
At December 28, 1997 and December 29, 1996, accounts receivable consist of
the following:
1997 1996
---- ----
Catering $ 88,358 $111,420
Other 36,045 9,000
Related party 107,151 2,787
-------- --------
$231,554 $123,207
======== ========
F-31
<PAGE>
Consolidated Financial Statements, Continued
4. Property and Equipment:
At December 28, 1997 and December 29, 1996, property and equipment consist
of the following:
1997 1996
---- ----
Land $ 696,236 $
Construction in progress 242,801
Trucks and automobiles 24,500 27,500
Furniture and fixtures 34,856 25,130
Signage 30,676 21,000
Office and computer equipment 81,707 32,300
Kitchen and service equipment 476,560 209,361
Building 627,929
Leasehold improvements 51,875 29,700
----------- -----------
2,267,140 344,991
Less accumulated depreciation (81,112) (12,911)
----------- -----------
Property and equipment, net $ 2,186,028 $ 332,080
=========== ===========
Depreciation expense for the year ended December 28, 1997, the period from
October 15, 1996 to December 29, 1996 and from January 1, 1996 to October
14, 1996 amounted to $68,220, $12,911 and $92,685, respectively.
5. Intangible Assets:
Intangible assets consist of the following:
1997 1996
---- ----
Management employment $ 1,130,000 $ 1,130,000
Recipes 1,000,000 1,000,000
Pre-mixed ingredients 890,000 890,000
Trained and assembled workforce 760,000 760,000
Restaurant design 575,000 575,000
Other intangible assets 252,000 252,000
----------- -----------
4,607,000 4,607,000
Less accumulated amortization (531,825) (87,174)
----------- -----------
Intangible assets, net $ 4,075,175 $ 4,519,826
=========== ===========
F-32
<PAGE>
<TABLE>
<CAPTION>
Consolidated Financial Statements, Continued
6. Debt:
Long-term debt at December 28, 1997 and December 29, 1996 consists of the
following:
1997 1996
---- ----
<S> <C> <C>
Collateralized promissory note $2,000,000 $1,000,000
Convertible subordinated debenture 2,649,046 3,000,000
Note payable to SouthTrust Bank, collateralized by certain
restaurant equipment, bearing interest at the prime rate plus
2%, and maturing in February 1999 35,154 67,337
Note payable to NationsBank, collateralized by certain restaurant
equipment, bearing interest at the prime rate plus 1.5%,
and maturing in September 1998 47,630 118,103
Note payable to Regions Bank, collateralized by one restaurant
building, bearing interest at 9.5%, and maturing in
January 2000 939,101
Note payable to First Union Bank, collateralized by restaurant
equipment, bearing interest at 8.8% and maturing in
December 2000 256,000
Note payable to related party, bearing interest at 10%, and
maturing in September 1997 5,595
---------- ----------
5,926,931 4,191,035
Less current maturities (188,184) (98,706)
---------- ----------
$5,738,747 $4,092,329
========== ==========
</TABLE>
On October 15, 1996, the Company issued a $3.0 million, 10% convertible
subordinated debenture (the "Debenture") due October 15, 2001 to the sole
shareholder of Oldco and President of the Company. As discussed in Note 1,
during 1997 the principal amount of the Debenture was reduced by $350,954
as a result of the purchase price finalization. Interest accrues at 10% per
annum until October 15, 1998, at which time if the principal remains
unpaid, interest shall be due quarterly. Accrued interest from October 15,
1996 through October 15, 1998 shall be payable upon the earlier of the
payment in full of principal or October 15, 2001. Two shareholders of the
Company have pledged their common shares in the Company, totaling 993,750
shares, as collateral for performance under the terms of the Debenture.
Terms of the Debenture agreement provide that the Company shall not issue
additional convertible debt without the consent of the holder of the
Debenture. The Debenture is convertible into the number of shares of the
Company's common stock obtained by dividing the principal balance plus the
then-outstanding accrued interest by $8.75. The conversion option begins on
the earlier of (1) October 15, 1997, (2) upon the effectiveness of an
Initial Public Offering, as defined, or (3) if the Company affects a
Significant Liquidating Event, as defined. The Debenture agreement provides
that so long as the principal of the Debenture remains outstanding, the
holder of the Debenture shall be allowed to elect one member to the board
of directors.
F-33
<PAGE>
Consolidated Financial Statements, Continued
6. Debt, continued:
Effective October 15, 1996, the Company entered into a $2 million
collateralized promissory note (the "Note") with a lending institution. The
Company received a $1 million advance on October 22, 1996 and the final $1
million on February 25, 1997. The Note matures on September 1, 2001 and
bears interest at 13.5% per annum. The payment terms require monthly
payments of interest only beginning November 1, 1996 until maturity, upon
which the outstanding principal balance will become due. The Note is
collateralized by substantially all of the Company's assets. Three
shareholders of the Company have pledged their common shares in the
Company, totaling 1,150,000 shares, as collateral for performance under the
terms of the Note.
Based on the borrowing rates currently available to the Company for loans
with similar terms, the fair value of long-term debt approximates the book
value recorded.
The aggregate annual maturities of long-term debt for the years subsequent
to December 28, 1997 are as follows:
1998 $ 188,184
1999 117,280
2000 972,422
2001 4,649,045
-----------
$ 5,926,931
===========
7. Stockholders' Equity (Deficit):
The Company has authorized 100 million shares of Common Stock and 1 million
shares of non-voting Preferred Stock, 2,000 shares of which are designated
as Class A Preferred Stock ("Preferred Stock"). The Preferred Stock is
entitled to a cumulative annual dividend at a rate of 10%. Upon
liquidation, holders are entitled to receive $1,500 per share plus all
unpaid dividends. As of the effective date of an Initial Public Offering
("IPO"), as defined, all shares of the Preferred Stock are mandatorily
redeemable into the number of common shares as is determined by dividing
$1,500 by the initial common stock price in the IPO. In the event that an
IPO does not occur, the Preferred Stock is mandatorily redeemable beginning
180 days after the satisfaction of all payment obligations on the
collateralized promissory note. At that time, the Company will redeem 400
shares of Preferred Stock on a pro-rata basis at $1,500 per share and will
redeem 400 shares annually for each of the subsequent four years. If the
Company has not effected an IPO prior to October 15, 1998, all of the
outstanding Preferred Stock dividends shall become payable on a quarterly
basis beginning on October 15, 1998.
F-34
<PAGE>
Consolidated Financial Statements, Continued
7. Stockholders' Equity (Deficit):
The existing common stockholders have a contractual preemptive right to
purchase the number of shares necessary to maintain their respective
ownership percentages should the Company issue additional common stock.
The Company has granted options to purchase its common stock to certain key
employees and officers under fixed stock option agreements. Under these
agreements, 700,000 shares of the Company's common stock have been granted
and reserved for stock option awards. As of December 28, 1997, none of the
options had been exercised or forfeited. Awards granted to date generally
vest on a pro rata basis over a three-year period and have a term of six
years.
As of December 28, 1997, options to purchase 567,000 shares were
exercisable at a weighted average exercise price of $7.86. Further
information relating to total options follows:
Average
Shares Price
------ -----
Outstanding at October 15, 1996 (inception) 450,000 $ 8.75
Granted from October 16, 1996 to December 29, 1996 230,000 4.38
------- --------
Outstanding at December 29, 1996 680,000 7.27
Granted in 1997 20,000 5.47
------- --------
Outstanding at December 28, 1997 700,000 $ 7.22
======= ========
The following table summarizes information concerning currently outstanding
and exercisable options:
Weighted-Average
Exercise Number Number Remaining
Price Outstanding Exercisable Life
----- ----------- ----------- ----
$ 0.01 122,500 57,875 3.8
$ 8.75 577,500 509,125 3.8
-------- -------
700,000 567,000
======== =======
F-35
<PAGE>
Consolidated Financial Statements, Continued
7. Stockholders' Equity (Deficit), continued:
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting
for its stock options. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation cost
for the Company's stock option plans been determined based upon the fair
value methodology prescribed under Statement of Financial Accounting
Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based Compensation,"
the application of SFAS 123 would not result in a significant difference
from reported net loss for 1997 and 1996. The fair value of the options
granted during 1996 and 1997 were de minimis and were estimated using the
minimum value method and the following assumptions: dividend yield 0%,
risk-free interest rate of 6%, and an expected life of 5 years.
In connection with the issuance of the $2,000,000 collateralized promissory
note, the Company issued to the lender a stock warrant to purchase 375,000
shares of the Company's common stock, which is at least 12.5% of the common
stock ("Base Amount") of the Company calculated on a fully-diluted basis.
The warrant is exercisable at any time until November 30, 2001 at an
exercise price of $0.01 per share. The warrant provides for increases in
the number of common shares available for purchase on an annual basis from
October 1998 through October 2000 and allows the lender to purchase between
13.5% and 15.5% of the common stock of the Company, calculated on a
fully-diluted basis, according to a vesting schedule as defined in the
warrant agreement. The lender has a put option to sell to the Company this
warrant within 30 days of the expiration of the warrant at a purchase price
equal to the fair market value of the common stock, as defined.
8. Income Taxes:
The Company has available at December 28, 1997, unused federal and state
net operating loss carryforwards of $2,199,991, expiring beginning in 2012,
which may be applied to reduce future taxable income. Use of net operating
loss carryforwards may be limited on an annual basis due to changes in
ownership.
The Company's net deferred tax assets of $728,000 and $139,000 at December
28, 1997 and December 29, 1996 result principally from net operating loss
carryforwards and have been reduced by a valuation allowance of the same
amount. Management has determined that this valuation allowance is
appropriate because the criteria for recognition of the deferred tax asset
in accordance with SFAS 109 have not been met.
F-36
<PAGE>
Consolidated Financial Statements, Continued
9. Leases:
The Company has various leases for restaurants, equipment and office
facilities. Restaurant and office original lease terms range from four to
ten years, with renewal options ranging from five to fifteen years.
Equipment leases are renewable annually. In the normal course of business,
some leases are expected to be renewed or replaced by leases on other
properties. Future minimum lease payments do not include amounts payable by
the Company for maintenance costs, real estate taxes and insurance, or
contingent rentals payable on a percentage of sales in excess of stipulated
amounts for restaurant facilities.
Future minimum lease payments under noncancelable operating leases at
December 28, 1997 are as follows:
1998 $ 544,635
1999 471,466
2000 366,106
2001 271,483
2002 139,314
----------
Total minimum lease payments $1,793,004
==========
The Company incurred rental expense for operating leases of $468,877,
$105,541 and $450,741 during the year ended December 28, 1997, the period
from October 15, 1996 through December 29, 1996 and the period from January
1, 1996 to October 14, 1996, respectively, which is included in other
operating expenses in the accompanying consolidated statements of
operations.
10. Commitments and Contingent Liabilities:
The Company is a party to a number of lawsuits arising out of the normal
conduct of its business. While there can be no assurance as to their
ultimate outcome, management does not believe these lawsuits will have a
material adverse effect on the Company's financial condition, operating
results or cash flows.
11. Subsequent Events:
In July 1998, the Company signed a definitive share exchange and merger
agreement to merge with Harvest Restaurant Group, Inc. ("Harvest"). The
agreement provides for the exchange of all outstanding shares of the
Company's common and preferred stock for common and preferred shares of
Harvest. The merger is subject to the approval of the Harvest shareholders.
When the merger becomes effective, the Company's shareholders will own
approximately 75% of the total equity of the merged entity. As a result,
this merger will be accounted for as a reverse merger, and the Company will
be the surviving entity for accounting purposes.
F-37
<PAGE>
Consolidated Financial Statements, Continued
11. Subsequent Events, continued:
In June 1998, under a sale-leaseback agreement, the Company sold the land
and building for one of its restaurants for approximately $350,000 in cash
and $940,000 in satisfaction of the related Regions Bank Note. In
connection with this transaction, the Company issued to the buyer-lessor
company warrants to acquire 40,000 shares of the Company's stock at $.01
per share. No value was assigned to these warrants in recording this
sale-leaseback transaction. The Company recognized a loss of approximately
$18,000 on the transaction. Annual lease payments under the lease agreement
are $143,000 which approximates fair market value.
F-38
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Balance Sheets
(Unaudited)
July 12, December 28,
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash $ 99,659 $
Accounts receivable 236,823 231,554
Inventory 104,655 114,227
Prepaid expenses 38,333 53,030
----------- -----------
Total current assets 479,470 398,811
Property and equipment, net 1,226,967 2,186,028
Intangible assets, net 3,855,319 4,075,175
Goodwill, net 1,028,383 1,058,810
Other assets 135,009 130,606
----------- -----------
Total assets $ 6,725,148 $ 7,849,430
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft $ $ 212,605
Accounts payable 1,396,635 1,379,105
Accrued expenses 562,043 561,705
Current portion of long-term debt 786,617 188,184
Accrued interest 465,587
Deferred franchise revenue 15,000
----------- -----------
Total current liabilities 3,210,882 2,356,599
Long-term debt 5,106,098 5,738,747
Accrued interest 319,337
----------- -----------
Total liabilities 8,316,980 8,414,683
----------- -----------
Preferred stock, par value $1.00 per share:
Class A: authorized 2,000 shares; issued 2,000 shares
plus cumulative dividends of $523,811 2,686,284 2,448,380
----------- -----------
General: authorized 998,000 shares; no shares issued and outstanding
Stockholders' deficit:
Common stock, no par value; authorized 100,000,000 shares;
Issued and outstanding 2,625,000 shares 26,250 26,250
Carryover predecessor basis adjustment (61,747) (61,747)
Accumulated deficit (4,242,619) (2,978,136)
----------- -----------
Total stockholders' deficit (4,278,116) (3,013,633)
----------- -----------
Total liabilities, preferred stock and stockholders' deficit $ 6,725,148 $ 7,849,430
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-39
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Statements of Operations
(Unaudited)
For the two quarters ended
--------------------------
July 12, July 13,
1998 1997
----------- -----------
<S> <C> <C>
Revenue
Restaurant sales revenue $ 5,933,583 $ 4,019,203
Catering revenue 407,705 439,800
Franchise and royalty revenue 50,745
----------- -----------
Total revenue $ 6,392,033 $ 4,459,003
----------- -----------
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 2,264,721 1,460,498
Payroll and benefits 2,274,660 1,546,808
Depreciation and amortization 342,775 311,218
Other operating expenses 1,486,773 1,149,289
----------- -----------
Total restaurant and catering operating expenses 6,368,929 4,467,813
----------- -----------
Income (loss) from restaurant and catering operations 23,104 (8,810)
General and administrative expenses 703,810 605,815
----------- -----------
Operating loss (680,706) (614,625)
Other income (expense):
Other income (expense) (23,546) 18,038
Interest expense (322,327) (283,001)
----------- -----------
Net loss $(1,026,579) $ (879,588)
=========== ===========
Basic and diluted loss per share $ (0.48) $ (0.43)
The accompanying notes are an integral part of these consolidated financial statements.
F-40
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Statements of Cash Flows
(Unaudited)
For the two quarters ended
--------------------------
July 12, July 13,
1998 1997
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(1,026,579) $ (879,588)
Adjustments to reconcile net loss to net cash
used in operating activities:
Loss on sale of property, plant and equipment 18,044
Depreciation and amortization 342,775 311,218
Changes in assets and liabilities:
Accounts receivable (5,269) (66,645)
Inventory 9,572 (8,658)
Prepaid expenses 14,697 (80,194)
Other assets (5,510) (515)
Accounts payable 17,530 102,144
Accrued expenses 177 120,398
Deferred franchise revenue (15,000)
Accrued interest 146,250 182,982
----------- -----------
Net cash used in operating activities (503,313) (318,858)
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (450,207) (631,681)
Proceeds from sale of property, plant and equipment 359,696
----------- -----------
Net cash used in investing activities (90,511) (631,681)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,016,617 1,000,000
Principal payments on long-term debt (110,529) (80,642)
----------- -----------
Net cash provided by financing activities 906,088 919,358
----------- -----------
Net change in cash and cash equivalents 312,264 (31,181)
Cash and cash equivalents at the beginning of the period (212,605) 96,098
----------- -----------
Cash and cash equivalents at the end of the period $ 99,659 $ 64,917
=========== ===========
Non-cash investing and financing activities:
Sale of mortgaged property $ 1,318,044
Retirement of related mortgage note payable 940,304
Accretion of redeemable preferred shares 76,366 $ 76,366
Dividends accrued on preferred shares 161,538 161,538
Supplemental disclosure:
Interest paid 184,959 147,554
The accompanying notes are an integral part of these consolidated financial statements.
F-41
</TABLE>
<PAGE>
TRC Acquisition Corporation
Notes to Consolidated Financial Statements
1. Basis of Presentation:
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for annual financial statement reporting purposes. Accordingly, these
interim consolidated financial statements should be read in conjunction
with the financial statements for the year ended December 28, 1997. In the
opinion of management, all adjustments, consisting only of normal recurring
accruals, considered necessary for a fair presentation have been included.
Operating results for the two quarters ended July 12, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 27, 1998.
Effective December 29, 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Comprehensive
Income." However, the only component of comprehensive income that the
Company has is its net loss. Accordingly, no statement of comprehensive
income is presented in these consolidated financial statements.
2. Debt:
During the first six months of 1998, the Company received additional
unsecured financing in the form of two separate notes, totaling $756,617.
The interest rate is 12.5% on a note totaling $350,000 and 11% on a note
totaling $406,617. Interest is payable monthly on both notes until the
maturity date which is the earlier of 1) January 30, 1999 or 2) the date of
additional equity funding. The Company also received an additional $260,000
of collateralized financing at an interest rate of 8%. The collateralized
note provides for monthly installments of principal and interest and
matures on May 5, 2005.
As part of the sale-leaseback discussed in Note 3, the Regions Bank Note,
totaling $940,000, was retired in June 1998.
3. Leases:
In June 1998, under a sale-leaseback agreement, the Company sold the land
and building for one of its restaurants for approximately $350,000 in cash
and $940,000 in satisfaction of the related Regions Bank Note. In
connection with this transaction, the Company issued to the buyer-lessor
company warrants to acquire 40,000 shares of the Company's stock at $.01
per share. No value was assigned to these warrants in recording this
sale-leaseback transaction. The Company recognized a loss of approximately
$18,000 on the transaction. Annual lease payments under the lease agreement
are $143,000 which approximates fair market value.
F-42
<PAGE>
3. Leases, continued:
In addition, the Company entered into a building lease in March 1998 for a
new restaurant which subsequently opened in July 1998. Annual lease
payments under the lease agreement are $82,548.
4. Merger Agreement:
In July 1998, the Company signed a definitive share exchange and merger
agreement to merge with Harvest Restaurant Group, Inc. ("Harvest"). The
agreement provides for the exchange of all outstanding shares of the
Company's common and preferred stock for common and preferred shares of
Harvest. The merger is subject to the approval of the Harvest shareholders.
When the merger becomes effective, the Company's shareholders will own
approximately 75% of the total equity of the merged entity. As a result,
this merger will be accounted for as a reverse merger, and the Company will
be the surviving entity for accounting purposes.
5 Stockholders' Equity:
Through July 12, 1998, 103,463 stock options with an exercise price of $.0l
have been issued primarily to creditors to facilitate the financing which
has been received since December 28, 1997. An additional 300,000 stock
options have been awarded principally to employees.
6. Related Party Transactions:
In the first quarter of 1998, the first two franchised Tanner's restaurants
were opened by two separate franchisees. Both franchises are owned and
operated by individual members of the Company's Board of Directors.
Franchise and royalty income from these related parties has totaled $50,745
through July 12, 1998. Total royalties receivable at July 12, 1998 was
approximately $11,000.
The Company is the primary lessee for the facilities in which one of the
franchisees operates. The franchisee subleases the property from the
Company and is responsible for all payment of rentals, common are
maintenance fees, utilities and property taxes. Annual minimum lease
payments on this property total $80,000. The Company has not incurred any
expense related to this property and does not anticipate such.
As part of the sale-leaseback transaction discussed in Note 3, the Company
entered into a lease for the land and building of one of the restaurant
facilities. Two officers of the Company own approximately 13% of the lessor
company for this lease. Total rent paid for this property through July 12,
1998 is $11,916.
F-43
SHARE EXCHANGE AGREEMENT
by and among
Harvest Restaurant Group, Inc., a Texas Corporation
and
TRC Acquisition Corporation, a Georgia Corporation
Dated as of July 9, 1998
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
-----------------
PAGE
<S> <C> <C>
ARTICLE I ARTICLE I
CONDITIONS TO OBLIGATION OF THE PARTIES 2
Section 1.1 Conditions to Obligations 2
Section 1.2 Contemplated Transactions 2
1.2.1 Financing 2
1.2.2 Shareholder Approval of New Board of Directors 3
1.2.3 Employment Agreements 3
1.2.4 Continued Listing 3
1.2.5 Settlement of Liabilities 3
1.2.6 Conversion of Series A Convertible Preferred Stock 3
1.2.7 Combined Financials of Harvest and TRC 3
ARTICLE II FEASIBILITY PERIOD 3
Section 2.1 Feasibility Study 3
Section 2.2 Pre-Closing Documents to be Delivered 4
2.2.1 Financial Statements 4
2.2.2 Asset List 4
2.2.3 Leases 4
2.2.4 Contracts 4
2.2.5 Certificates 4
2.2.6 Taxes 4
2.2.7 Litigation 4
2.2.8 Violations 4
2.2.9 Organizational Documents 4
ARTICLE III THE CLOSING 5
Section 3.1 Closing 5
3.1.1 Time and Place of Closing 5
3.1.2 Actions of Harvest at Closing 5
3.1.2.1 Resignations 5
3.1.2.2 Certificate of Harvest 5
3.1.2.3 Corporation Resolutions 5
3.1.2.4 Exchange of Shares 5
3.1.3 Actions of TRC at Closing 5
3.1.3.1 Resignations 5
3.1.3.2 Certificate of TRC 5
3.1.3.3 Corporation Resolutions 6
3.1.4 Effective Date 6
1
<PAGE>
ARTICLE IV EXCHANGE OF SHARES 6
Section 4.1 Exchange of Shares 6
4.1.1 Exchange of TRC Common Stock 6
4.1.2 Exchange of Rick Tanner Note and
TRC Class A Preferred Stock 6
Section 4.2 Exchange Procedure 6
4.2.1 TRC Common Stock 6
4.2.2 TRC Class A Preferred Stock 7
Section 4.3 Appraisal Rights 7
ARTICLE V TRC REPRESENTATIONS AND WARRANTIES 7
Section 5.1 TRC's Representations and Warranties 7
5.1.1 Capitalization 7
5.1.1.1 Authorized Stock 7
5.1.1.2 Issued Capital Stock 7
5.1.2 Organization Standing and Power 7
5.1.3 Subsidiaries 8
5.1.4 Title to Assets 8
5.1.5 Other Relationships 8
5.1.6 Other Transactions 8
5.1.7 Undisclosed Liabilities 8
5.1.8 Absence of Certain Changes or Events 8
5.1.9 Condition of Assets 8
5.1.10 Compliance With Law 8
5.1.11 Contracts 9
5.1.12 Permits, Licenses, Consents 9
5.1.13 Absence of Defaults 9
5.1.14 Litigation 9
5.1.15 No Breach or Violation of Law 9
5.1.16 Validity and Authorization 10
5.1.17 Completeness; No Misrepresentations 10
5.1.18 Tax Matters 10
5.1.19 Financial Statements 10
5.1.20 Full Disclosure 10
5.1.21 Absence of Certain Changes and Events 10
5.1.22 Taxes 12
5.1.23 Intellectual Property 14
5.1.24 Books and Records 16
5.1.25 Leased Properties 16
5.1.26 Employees and Employee Benefit Plans 16
5.1.27 Compensation 17
5.1.28 Insurance 17
5.1.29 Full Disclosure 18
ARTICLE VI TRC'S COVENANTS 18
Section 6.1 Continuation of Business 18
Section 6.2 No Solicitation 18
2
<PAGE>
ARTICLE VII HARVEST'S REPRESENTATIONS AND WARRANTIES 18
Section 7.1 Harvest's Representations and Warranties 18
7.1.1 Capitalization 18
7.1.1.1 Authorized Stock 18
7.1.1.2 Issued Common Stock 19
7.1.1.3 Issued Preferred Stock 19
7.1.2 Standing and Power 19
7.1.3 Subsidiaries 19
7.1.4 Title to Asset 19
7.1.5 Other Relationships 19
7.1.6 Other Transactions 19
7.1.7 Undisclosed Liabilities 19
7.1.8 Absence of Certain Changes, or Events 20
7.1.9 Condition of Assets 20
7.1.10 Compliance With Law 20
7.1.11 Contracts and Commitments 20
7.1.12 Permits, Licenses, Consents 20
7.1.13 Absence of Defaults 21
7.1.14 Litigation 21
7.1.15 No Breach or Violation of Law 21
7.1.16 Validity and Authorization 21
7.1.17 Completeness: No Misrepresentations 21
7.1.18 Tax Matters 21
7.1.19 Financial Statements 22
7.1.20 Absence of Certain Changes and Events 22
7.1.21 Taxes 23
7.1.22 Compliance With Law 25
7.1.23 Intellectual Property 25
7.1.24 Books and Records 27
7.1.25 Leased Properties 27
7.1.26 Employees and Employee Benefit Plans 28
7.1.27 Compensation 29
7.1.28 Insurance 29
7.1.29 Full Disclosure 29
7.1.30 Securities and Nasdaq Listing 29
ARTICLE VIII HARVEST'S COVENANTS 29
Section 8.1 Continuation of Business 29
Section 8.2 No Solicitation 29
Section 8.3 Termination of Stock Option Plan 30
ARTICLE IX TERMINATION 30
Section 9.1 Termination Events 30
Section 9.2 Effect of Termination 30
3
<PAGE>
ARTICLE X INDEMNIFICATION; REMEDIES 30
Section 10.1 Survival; Right to Indemnification
Not Affected by Knowledge 30
Section 10.2 Indemnification and Payment of Damages by Harvest 31
Section 10.3 Indemnification and Payment of Damages by Harvest
- Environmental Matters 31
Section 10.4 Indemnification and Payment of Damages by TRC 32
Section 10.5 Indemnification and Payment of Damages by TRC
- Environmental Matters 32
Section 10.6 Time Limitations 33
Section 10.7 Procedure for Indemnification - Third Party Claims 33
ARTICLE XI CONDITIONS TO THE EXCHANGE OF STOCK 34
Section 11.1 Conditions Precedent to Performance by Harvest 34
Section 11.2 Board and Stockholder Approval 34
11.2.1 Representations; True Representations and
Covenants Performed 34
11.2.2 No Litigation Affecting Merger 35
11.2.3 Securities Laws 35
11.2.4 Regulatory Compliance, Approvals and Consents 35
11.2.5 Filings 35
Section 11.3 Conditions Precedent to Performance by TRC 35
11.3.1 Board and Stockholder Approval 35
11.3.2 Representations True and Covenants Performed 35
11.3.3 No Litigation Affecting Merger 35
11.3.4 Securities Laws 36
11.3.5 Regulatory Compliance, Approvals and Consents 36
11.3.6 Filings 36
ARTICLE XII NOTICES 36
Section 12.1 Notices 36
Section 12.2 Change of Address 37
ARTICLE XIII GENERAL 37
Section 13.1 Governing Law 37
Section 13.2 Press Releases 37
Section 13.3 Entire Agreement 37
Section 13.4 Successors 37
Section 13.5 Modification 37
Section 13.6 Severability 38
Section 13.7 Counterparts 38
Section 13.8 Signatures by Facsimile 38
Section 13.9 Remedies of the Parties 38
Section 13.10 Arbitration 38
Section 13.11 Attorney's Fees 38
Section 13.12 Cooperation and Records Retention 38
4
</TABLE>
<PAGE>
SCHEDULES
SCHEDULE 1 TANNER'S RESTAURANTS
SCHEDULE 2 STATEMENT OF RESOLUTION OF HARVEST SERIES C PREFERRED STOCK
SCHEDULE 1.2 BUSINESS TERMS ----- N/A ----
SCHEDULE 1.2.1 FINANCING TERMS
SCHEDULE 1.2.1(A) LOAN TERMS (REVISED - HARTAN OPTION TO PUT TO TRC)
SCHEDULE 1.2.2 BOARD OF DIRECTORS
SCHEDULE 1.2.3 EMPLOYMENT AGREEMENTS
SCHEDULE 1.2.7 COMBINED FINANCIALS OF HARVEST AND TRC ----- N/A -----
SCHEDULE 5.1 TRC DISCLOSURES
SCHEDULE 7.1 HARVEST DISCLOSURES
5
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SHARE EXCHANGE AGREEMENT
This SHARE EXCHANGE AGREEMENT is made and entered into as of this 9th day
of July, 1998, between HARVEST RESTAURANT GROUP, INC., a Texas corporation
("Harvest"), and TRC ACQUISITION CORPORATION, a Georgia corporation ("TRC"),
referred to jointly as the ("Parties").
RECITALS
WHEREAS, TRC has approximately 4,110,000 issued and outstanding shares of
common stock and warrants and options (all warrants and options to be converted
into the 4,110,000 shares prior to the closing contemplated herein) ("TRC Common
Stock"), and approximately 2,000 issued and outstanding shares of class A
preferred stock ("TRC Class A Preferred Stock"), which represents all of the
issued and outstanding capital stock of TRC;
WHEREAS, the principal assets and business of TRC are the operation of
approximately eleven (11) Tanner's restaurants and the franchise of two (2)
Tanner's restaurants, which are described by name and location on Schedule "1"
("Tanner's Restaurant(s)");
WHEREAS, Harvest is a public corporation which operates quick service
restaurants under the name Harvest Rotisserie and Harvest Food Court which
includes the brand names of Red Line Burgers and Old San Antonio Taco Factory;
WHEREAS, on June 9, 1998, Harvest was notified by the NASDAQ Stock Market,
Inc., that its continued listing on The Nasdaq Small Cap Market was subject to
revocation for its failure to meet the net tangible assets/market
capitalization/net income requirement as set forth in NASD Marketplace Rule
4310(c)(2) and for its failure to meet the minimum bid price requirements set
forth in NASD Marketplace Rule 4310(c)(4). A hearing was set before the NASD on
July 9, 1998 (the "NASD Hearing");
WHEREAS, on May 7, 1998, the parties executed a letter of intent wherein
the basic terms of the transactions described herein were agreed to and reduced
to writing, subject to further negotiations;
WHEREAS, this Agreement is entered into to, among other matters, rectify
the deficiencies with NASDAQ Compliance;
WHEREAS, it is understood and agreed that prior to the Effective Date (the
"Effective Date"), the outstanding capital stock of Harvest, including shares
issuable upon exercise of options and warrants, shall not exceed the following
share amounts: 3,463,009 shares of Common Stock (the "Harvest Common Stock"),
635,892 shares of Series A Convertible Preferred Stock (the "Harvest Series A
Preferred Stock"), 133 shares of Series B Convertible Preferred Stock (the
"Harvest Series B Preferred Stock"), and 3,083,000 options or warrants for
Common Stock, 1,923,400 warrants for Series A Convertible Preferred Stock shares
upon exercise of all warrants and options, and 200,000 shares of Common Stock
and 300,000 warrants to Sterling Capital and J.P. Carey at a strike price of
$2.50 per share (the "Harvest Warrants and Options") (the Harvest Common Stock,
Harvest Series A Preferred Stock and Harvest Series B Preferred Stock are
sometimes collectively referred to herein as "Harvest Capital Stock"). Except to
the extent of the number of Harvest Series B Preferred Stock issued in
connection with the financing described in paragraph 1.2.1 below, to the extent
that the number of actual outstanding shares of Harvest Capital Stock on the
Effective Date exceeds the share amounts stated above, then the shares of
Harvest Common Stock to be issued to the holders of TRC Common Stock as set
forth above shall be adjusted pro rata to maintain the same ownership
percentage;
<PAGE>
WHEREAS, the intended result of this Shareholder Exchange Agreement is for
Harvest to issue 18,000,000 shares of Harvest Common Stock to TRC Shareholders
in exchange for 100% of the issued and outstanding TRC Common Stock;
WHEREAS, it is intended that the TRC convertible subordinated debenture to
Rick Tanner (the "Rick Tanner Note") and the TRC Class A Preferred Stock shall
be exchanged for a newly created series of preferred stock of Harvest (the
"Harvest Series C Preferred Stock"). Harvest Series C Preferred Stock shall
accrue dividends at the annual rate of 8%, and is convertible at the option of
the holder at any time after six (6) months into shares of Harvest Common Stock
at conversion rate of $2.50 for each share of Harvest Common Stock. Harvest
Series C Preferred Stock may be redeemed at the option of Harvest after six (6)
months after the Effective Date upon thirty (30) days written notice for $.01
per share if the closing price of Harvest's Common Stock on the NASDAQ SmallCap
Market averages at least $3.50 per share for a period of twenty (20) consecutive
trading days, if after notice to any Harvest Series C Preferred Stock holder,
and such holder does not convert. Harvest Series C Preferred Stock shall have
the rights, preferences, privileges and restrictions as are specified in the
Statement of Resolution attached hereto as Schedule 2;
WHEREAS, the Parties intend this transaction to qualify as a "tax-free
reorganization" within the meaning of Section 368(a)(1)(B) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that TRC become a subsidiary
of Harvest. The Parties believe that the value of Harvest stock to be received
is equal to the value of the TRC stock to be surrendered in exchange therefor.
No other consideration that could constitute "other property" within the meaning
of Section 356 of the Code is being paid by Harvest for the stock of TRC in the
merger;
NOW, THEREFORE, in reliance upon the recitals set forth above, the parties
agree as follows:
ARTICLE I.
CONDITIONS TO OBLIGATION OF THE PARTIES
Section 1.1 Conditions to Obligations. The obligation of the Parties under
this Agreement to consummate the share exchange under this Agreement is
contingent upon the completion of certain other transactions listed below and
defined collectively as the "Contemplated Transactions." Each of the Parties
shall use its best efforts to complete all of the Contemplated Transactions. If
any of the Contemplated Transactions are not completed, then the Parties shall
not be in default of their obligations under this Agreement and each party's
sole remedy shall be the termination of this Agreement.
Section 1.2 Contemplated Transactions. This Agreement contemplates that the
following multiple transactions (collectively, the "Contemplated Transactions")
be completed before or concurrently with the Closing of this transaction.
1.2.1 Financing. A financing commitment of $6,000,000.00 plus
additional sums, if a higher amount shall be required to maintain the listing of
Harvest securities on the Nasdaq Stock Market, shall be obtained on or before
the Nasdaq Hearing and is to be used approximately as follows:
(a) $1,500,000.00 to the Harvest subsidiary described below for
the development of up to five (5) Tanner's restaurants;
2
<PAGE>
(b) $500,000.00 for the payoff of Harvest existing obligations;
and
(c) the remainder for corporate purposes.
Such financing shall be on terms equal to or better than the terms set forth on
Schedule 1.2.1 attached hereto and made a part hereof, and all other terms
reasonably requested by TRC.
The monies to be provided in 1.2.1(a) shall be funded to a new, wholly-owned
subsidiary of Harvest ("Harvest Subsidiary") within five (5) business days after
the date of NASD Hearing of the continued listing of Harvest. The sums shall be
funded for the express purposes described above in Section 1.2.1. Prior to the
advancement of payment of any monies by the Harvest Subsidiary, (1) TRC shall
franchise to the Harvest Subsidiary the right to own and operate up to five (5)
Tanner's Restaurants on terms mutually agreeable; (2) Harvest and TRC shall
enter into a development and management agreement, on terms mutually agreeable,
for TRC to develop up to five (5) Tanner's Restaurants; and (3) Harvest and TRC
shall enter into an option in favor of the Harvest Subsidiary to require TRC to
purchase the developed Tanner's Restaurants, in the event that TRC, for any
reason, does not consummate the closing set forth in this Agreement. The option
shall be on terms mutually agreeable to the parties. The remainder of financing
proceeds shall be available at Closing.
1.2.2 Shareholder Approval of New Board of Directors. Harvest shall
have shareholder approval of a new Harvest Board of Directors in compliance with
all laws, which directors are set forth on Schedule 1.2.2. It is agreed and
understood that election of new Directors is subject to closing of the
transaction described in this Agreement.
1.2.3 Employment Agreements. William Gallagher shall have executed a
consulting agreement and Clyde Culp shall have executed an employment agreement
with Harvest, the essential and principal terms of which are set out and
attached hereto as Schedule 1.2.3 and made a part hereof.
1.2.4 Continued Listing. The shares of Harvest Common Stock shall be
approved for continued listing on The Nasdaq Stock Market at the NASD Hearing.
Upon consummation of the transactions contemplated in this Agreement, the
Harvest Common Stock shall be in compliance with all NASDAQ listing
requirements.
1.2.5 Settlement of Liabilities. Harvest shall obtain settlement
agreements from all creditors with known, actual or contingent outstanding
liabilities in excess of $10,000.00. The total amount of the settlement
agreements shall be approximately $550,000.00, but not to exceed $700,000.00.
1.2.6 Conversion of Series A Convertible Preferred Stock. Harvest
shall have converted the Series A Convertible Preferred Stock to Common Stock.
1.2.7 Combined Financials of Harvest and TRC. That the Combined
Financials of Harvest and TRC are as set forth on Schedule 1.2.7 attached hereto
and made a part hereof in accordance with generally accepted accounting
principals and the Securities and Exchange Commission ("SEC") concurs.
3
<PAGE>
ARTICLE II.
FEASIBILITY PERIOD
Section 2.1 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 August 9,
1998 to conduct such a Feasibility Study ("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 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. Eastern 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.
Section 2.2 Pre-Closing Documents to be Delivered. Each party shall deliver
to the other party copies of the following within five (5) business days from
the date of signature of this Agreement by all parties. 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.
2.2.1 Financial Statements. Copies of financial statements as set
forth in Sections 5.1.19 and 7.1.19. This includes monthly sales and tax reports
for the period commencing January 1, 1998, through the calendar month
immediately preceding the date of submittal of the same.
2.2.2 Asset List. A detail of inventory of all equipment, furnishings,
fixtures, and inventories as of April 19, 1998.
2.2.3 Leases. All leases of real or personal property and any
documents pertaining to such leases in the disclosing parties' possession.
2.2.4 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.
2.2.5 Certificates. Certificates of all fire, hazard, liability, and
other insurance policies maintained by the disclosing party.
2.2.6 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 (2) years and proof of
payment of all sales and payroll taxes.
2.2.7 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.
4
<PAGE>
2.2.8 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.
2.2.9 Organizational Documents. All currently effective organizational
documents and other records of the disclosing party including, without
limitation, articles, by-laws, a list of directors, minutes, and stock ledger.
ARTICLE III.
THE CLOSING
Section 3.1 Closing.
3.1.1 Time and Place of Closing. The closing of the transactions
contemplated hereby (the "Closing") shall take place at the offices of Nelson
Mullins Riley & Scarborough, L.L.P., First Union Plaza, Suite 1400, 999
Peachtree Street, N.E., Atlanta, Georgia 30309 at 10:00 a.m., local time, on a
date to be designated by Harvest (the "Closing Date") which shall be no later
than the 5th business day after the later to occur of (i) the expiration of the
Feasibility Period, (ii) obtaining approval from Harvest stockholders and its
Board of Directors as required in Section 10.2.1, provided, however, in no event
later than December 31, 1998. Prior to, or concurrent with the Closing, the
Articles of Share Exchange or any such other documents as may be required to be
filed to effect the merger shall be filed with the appropriate offices of any
Secretary of State and the merger shall thereby become effective.
3.1.2 Actions of Harvest at Closing. At the Closing, Harvest shall
deliver to TRC the following:
3.1.2.1 Resignations. Harvest shall deliver to TRC the written
and executed resignations of the directors of Harvest and any such executed
employment agreements, dated as of the Effective Date, as called for in this
Agreement.
3.1.2.2 Certificate of Harvest. Harvest shall deliver to TRC 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 (along
with a copy of the proxy sent to each shareholder and a copy of the shareholder
vote); (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.
3.1.2.3 Corporation Resolutions. Harvest shall deliver to TRC
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.
3.1.2.4 Exchange of Shares. Harvest shall deliver all shares
contemplated by Section 4.01.
5
<PAGE>
3.1.3 Actions of TRC at Closing. At the Closing, TRC shall deliver to
Harvest the following:
3.1.3.1 Resignations. TRC shall deliver to Harvest the written
and executed resignations of such directors of TRC and such executed employment
agreements, dated as of the Effective Date, as called for in this Agreement.
3.1.3.2 Certificate of TRC. TRC shall deliver to Harvest a
Certificate, which shall be dated as of Closing and which shall be signed by
TRC's Chief Executive Officer certifying (i) the authority of TRC to enter into
and consummate the transactions contemplated by this Agreement; (ii) the
authority of the officers of TRC to execute and deliver any document
contemplated by this Agreement on behalf of TRC; (iii) that the representations
and warranties of TRC 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 TRC specifically relates to an earlier date); and
(iv) that each and every covenant and agreement of TRC contained in the
Agreement to be performed by TRC on or prior to Closing has been performed by
TRC.
3.1.3.3 Corporation Resolutions. TRC shall deliver to Harvest
certified copies of the resolutions of the Board of Directors of TRC and the
shareholder approval of TRC authorizing the execution, delivery, and performance
of this Agreement and the transactions contemplated herein.
3.1.4 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 the date of the filing of the Articles of Share Exchange with any
state Secretary of State that is required for the exchange of shares to lawfully
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
Section 4.1 Exchange of Shares. Upon the Effective Date, by virtue of this
Agreement, each of the following shall be deemed to occur contemporaneously:
4.1.1 Exchange of TRC Common Stock. As of the Effective Date, all
shares of TRC Common Stock that are outstanding shall be converted into the
right to receive a total of 18,000,000 fully paid and non-assessable shares of
Harvest Common Stock (or such higher adjusted amount as provided for in the
recitals, equally among all issued and outstanding shares of TRC Common Stock
unless ratably reduced pursuant to a reverse split of Harvest Common Stock.
4.1.2 Exchange of Rick Tanner Note and TRC Class A Preferred Stock.
The Rick Tanner Note, valued in an amount of approximately $3,700,000.00, and
the TRC Class A Preferred Stock, valued in an amount of $3,525,000.00, along
with the Employment Agreement of Rick Tanner, shall be exchanged for 722,500
shares of Harvest Series C Preferred Stock at a value of $10.00 per share in
accordance with the provisions of Section 4.2, unless ratably reduced pursuant
to a reverse split of Harvest Common Stock.
6
<PAGE>
Section 4.2 Exchange Procedure.
4.2.1 TRC Common Stock. Unless surrendered to Harvest for exchange at
the Closing, as soon as practical after the Effective Date, the holder of each
share of TRC Common Stock exchanged pursuant to Section 4.1 shall surrender to
Harvest the certificate for such shares. Following the receipt of the TRC Common
Stock certificate, Harvest shall cause its transfer agent to issue, or Harvest
itself shall issue, to each surrendering holder a certificate representing the
number of shares of Harvest Common Stock into which such TRC Common Stock shall
have been converted. Until so surrendered and exchanged, each outstanding
certificate which, prior to the Effective Date, represented TRC 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 TRC Common Stock have been converted.
4.2.2 TRC Class A Preferred Stock. Unless surrendered to Harvest for
exchange at the Closing, as soon as practical after the Effective Date, the
holder of each share of TRC Class A Preferred Stock exchanged pursuant to
Section 4.1.2 shall surrender to Harvest the certificate for such shares for
cancellation. Following the receipt of the TRC Class A Preferred Stock
certificate, Harvest will issue to each surrendering holder a certificate
represented the number of shares of Harvest Series C Preferred Stock into which
such TRC Class C Preferred Stock shall have been converted. Until so surrendered
and exchanged, each outstanding certificate which, prior to the Effective Date,
representing TRC Class A Preferred Stock shall, following the Effective Date, be
deemed for all purposes to evidence ownership of the number of shares of Harvest
Series C Preferred Stock into which such shares of TRC Class A Preferred Stock
have been converted.
Section 4.3 Appraisal Rights. Notwithstanding anything to the contrary
contained in this Agreement, dissenting shares (as defined under Georgia law) of
TRC 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 TRC, out of funds other than those
provided hereunder.
ARTICLE V.
TRC REPRESENTATIONS AND WARRANTIES
Section 5.1 TRC's Representations and Warranties. TRC makes the following
representations and warranties to Harvest as a material inducement for Harvest
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 TRC
Directors and officers. Further, immaterial breaches of these representations
and warranties are specifically agreed to not comprise actionable breaches. All
of TRC warranties and representations herein are modified to the extent needed
to take into account TRC disclosures set forth or identified in the attachment
hereto entitled Schedule 5.1 -- TRC Disclosures, and made a part hereof.
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<PAGE>
5.1.1 Capitalization.
5.1.1.1 Authorized Stock. The authorized capital stock of TRC
consists of 100,000,000 shares of TRC Common Stock, no par value per share, and
1,000,000 shares of preferred stock, $1.00 par value per share, of which 2,000
shares have been designated as Class A.
5.1.1.2 Issued Capital Stock. There are 4,110,000 shares of TRC
Common Stock issued and outstanding, and or warrants and 2,000 shares of TRC
Class A Preferred Stock, all of which are owned beneficially and of record by
the listed shareholders. All such issued and outstanding shares of TRC capital
stock 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 TRC or any preemptive rights or rights of first refusal, and were
issued in compliance with all of its charter documents and applicable law.
5.1.2 Organization Standing and Power. TRC is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Georgia and is qualified to do business where the failure to be so qualified
would materially and adversely affect its condition, properties, assets or
operations. TRC 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 TRC and all amendments thereto and of its
bylaws as amended to date which have heretofore been furnished or delivered to
Harvest are correct and complete.
5.1.3 Subsidiaries. TRC has no subsidiaries other than those set forth
on Schedule 5.1.
5.1.4 Title to Assets. TRC 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, other than those set forth on Schedule 5.1.
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
TRC may be a party or to which TRC may be bound on each Closing Date.
5.1.5 Other Relationships. No affiliate, director, officer, principal
executive, or employee of, or consultant to TRC owns, directly or indirectly, in
whole or in part, any property, asset or right, tangible or intangible, relating
to or affecting TRC other than those set forth on Schedule 5.1.
5.1.6 Other Transactions. No affiliate, director, officer, principal
executive or employee of TRC, has, directly or indirectly, engaged in any
transaction with TRC outside of the ordinary course of business.
5.1.7 Undisclosed Liabilities. Prior to expiration of the Feasibility
Period, TRC has provided to Harvest a listing of its liabilities, at Schedule
5.1, except as and to the extent reflected or disclosed (or adequately reserved
for or against) in the financial statements, or except as specifically provided
by this Agreement, TRC 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 TRC.
8
<PAGE>
5.1.8 Absence of Certain Changes or Events. The business of TRC 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.
5.1.9 Condition of Assets. The assets of TRC are in good operating
condition for the purposes of conducting the business of TRC on the Effective
Date as such business has been or is being conducted. TRC has good and
marketable title to all of the Assets subject to no mortgage, pledge, lien,
conditional sales agreement, encumbrance, security interest, or charge of any
nature whatsoever, except as herein provided.
5.1.10 Compliance With Law. TRC has complied and is in compliance with
all applicable zoning decisions and has complied and is in compliance with all
applicable federal, state, and local laws, statutes, licensing requirements,
rules, and regulations, and judicial or administrative decisions. TRC has been
granted all licenses, permits (temporary and otherwise), authorizations, and
approvals from federal, state, and local government regulatory or zoning bodies
necessary to carry on the business and maintain the assets of TRC, all of which
are currently valid and in full force and effect. All such licenses, permits,
authorizations and approvals shall be valid and in full force and effect upon
the consummation of the transactions contemplated by this Agreement. There is no
order issued, or proceeding pending or threatened, or notice served with respect
to any violation of any law, ordinance, order, writ, decree, rule, or regulation
issued by any federal state, local, or foreign court or governmental agency or
instrumentality applicable to TRC. TRC has valid business licenses to carry on
its operations.
5.1.11 Contracts. All of TRC's 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 TRC thereunder shall be impaired by the consummation of the
transactions contemplated by this Agreement, and all of the rights of TRC
thereunder shall 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 all
such contracts have heretofore been delivered to Harvest by TRC and are true and
complete and include all amendments and supplements thereto and modifications
thereof.
5.1.12 Permits, Licenses, Consents. TRC 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 TRC. No proceeding is
pending or, to the best of TRC'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. TRC has complied in all
material respects with all present and, to the best of TRC'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.
5.1.13 Absence of Defaults. TRC 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
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obligation. No other party to any contract, agreement, lease, license,
commitment, instrument or fiduciary or other obligation to which TRC 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.
5.1.14 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 TRC's knowledge, threatened against TRC or any of the properties, assets,
business or prospects of TRC or to which TRC is or might become a party, and to
the best of TRC'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 TRC.
5.1.15 No Breach or Violation of Law. The execution and delivery of
this Agreement by TRC 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 TRC or any contract,
agreement, commitment, indenture, mortgage, deed of trust, lease, pledge
agreement, note, bond, license or other instrument or obligation to which TRC is
now a party or by which TRC or any of the properties or assets of TRC 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.
5.1.16 Validity and Authorization. This Agreement has been duly
authorized by all necessary corporate and shareholder action and duly and
validly executed and delivered by TRC and is legally binding on TRC in
accordance with its terms.
5.1.17 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 TRC, or any representatives of either
of them are complete and correct as of the date hereof. The representations and
warranties made by TRC 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 TRC 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 TRC in the event of a breach of any such representation or
warranty.
5.1.18 Tax Matters. TRC 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. TRC
is not aware of any basis upon which any assessment for a material amount of
additional taxes could be made.
5.1.19 Financial Statements. It is understood that TRC'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 TRC to Harvest have been prepared in accordance with generally
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accepted accounting principles and present fairly the financial position of TRC
as of December 28, 1997, and as of April 19, 1998, respectively, and the
statement of income presents fairly the results of operations and changes in
financial position of TRC for the periods ended December 28, 1997, and April 19,
1998, respectively, and sales reports for the period commencing January 1, 1998,
through the calendar month immediately preceding 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.
5.1.20 Full Disclosure. TRC has disclosed to Harvest all material
facts relating to TRC and its operations and has not knowingly omitted to
disclose to Harvest any material fact relating to TRC, or its operations
necessary to make the statements made herein not misleading.
5.1.21 Absence of Certain Changes and Events. Except as set forth in
Schedule 5.1 hereto, since the date of the interim financial statements there
has not been:
(i) Any material adverse change in the financial condition,
results of operation, assets, liabilities or prospects of TRC, or any
occurrence, circumstance, or combination thereof which reasonably
could be expected to result in any such material adverse change;
(ii) Any transaction relating to or involving TRC, or the assets
of TRC which was entered into or carried out by TRC other than for
fair consideration in the ordinary course of business;
(iii) Any change by TRC in its accounting or tax practices or
procedures;
(iv) Any incurrence of any liability, other than liabilities
incurred in the ordinary course of business consistent with past
practices;
(v) Any sale, lease, or disposition of, or any agreement to sell,
lease, or dispose of any of its properties (whether leased or owned),
or the assets of TRC, other than sales, leases, or dispositions of
goods, materials, or equipment in the ordinary course of business or
as contemplated by this Agreement;
(vi) Any event permitting any of the assets or the properties of
TRC (whether leased or owned) to be subjected to any pledge,
encumbrance, security interest, lien, charge, or claim of any kind
whatsoever (direct or indirect) (collectively, "Liens");
(vii) Any increase in compensation or any adoption of, or
increase in, any bonus, incentive compensation, pension, profit
sharing, retirement, insurance, medical reimbursement or other
employee benefit plan, payment or arrangement to, for, or with any
employee of TRC;
(viii) Any payment or distribution of any bonus to, or
cancellation of indebtedness owing from, or incurring of any liability
relating to any employees, consultants, directors, officers, or
agents, or any persons related thereto;
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(ix) Any notice (written or unwritten) from any employee of TRC
that such employee has terminated, or intends to terminate, such
employee's employment with TRC;
(x) Any adverse relationship or condition with suppliers or
vendors that may have an adverse effect on TRC;
(xi) Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or
taking of property by any governmental agency, flood, drought,
earthquake, or other natural event, riot, act of God or a public
enemy, or damage, destruction, or other casualty, whether covered by
insurance or not, which has had an adverse effect on TRC, the
properties (whether leased or owned), or any such event which could be
expected to have an adverse effect on TRC, the properties (whether
leased or owned), or the assets of TRC;
(xii) Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with
respect to, any term, condition, or provision of any contract,
agreement, license, or other instrument to which TRC is a party and
relating to or affecting TRC other than any satisfaction by
performance in accordance with the terms thereof in the ordinary
course of business;
(xiii) Any discharge or satisfaction of any lien or payment of
any liabilities, other than in the ordinary course of business;
(xiv) Any waiver of any rights of substantial value by TRC, other
than waivers having no material adverse effect on TRC;
(xv) Any issuance of equity securities of TRC or any issuance of
warrants, calls, options or other rights calling for the issuance,
sale, or delivery of TRC's equity securities;
(xvi) Any declaration of any dividend or any distribution of any
shares of its capital stock, or redemption, purchase, or other
acquisition of any shares of its capital stock or any grant of an
option, warrant, or other right to purchase or acquire any such
shares;
(xvii) Any amendment, or agreement to amend, TRC's Articles of
Incorporation or Bylaws, or any merger or consolidation with, or any
agreement to merge or consolidate with, any other corporation,
partnership, limited liability company or any other entity;
(xviii) Any reduction, or agreement to reduce, the cash or
short-term investments of TRC, other than to meet cash needs arising
in the ordinary course of business;
(xix) Any work interruptions, labor grievances or claims filed,
proposed law or regulation or any event of any character, materially
adversely affecting future prospects of TRC;
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(xx) Any revaluation by TRC of any of its assets;
(xxi) Any loan by TRC to any person or entity, or any guaranty by
TRC of any loan; or
(xxii) Any other event or condition of any character which
materially adversely affects, or reasonably may be expected to so
affect, the assets of TRC or the properties (whether leased or owned)
of TRC.
5.1.22 Taxes.
(i) Definitions. For purposes of this Agreement:
(a) the term "Taxes" means (A) all federal, state, local, foreign
and other net income, gross income, gross receipts, sales, use,
ad valorem, transfer, franchise, profits, license, lease,
service, service use, withholding, payroll, employment, excise,
severance, stamp, occupation, premium, property, windfall
profits, customs, duties or other taxes, fees, assessments or
charges of any kind whatever, together with any interest and any
penalties, additions to tax or additional amounts with respect
thereto, (B) any liability for payment of amounts described in
clause (A) whether as a result of transferee liability, of being
a member of an affiliated, consolidated, combined or unitary
group for any period, or otherwise through operation of law, and
(C) any liability for the payment of amounts described in clauses
(A) or (B) as a result of any tax sharing, tax indemnity or tax
allocation agreement or any other express or implied agreement to
indemnify any other person; and the term "Tax" means any one of
the foregoing Taxes; and
(b) the term "Returns" means all returns, declarations, reports,
statements, claims for refund and other documents required to be
filed in respect of Taxes, and the term "Return" means any one of
the foregoing Returns.
(ii) TRC has properly completed and filed on a timely basis
(including extensions) and in correct form all Returns required to be
filed on or prior to the Closing. As of the time of filing, the
foregoing Returns correctly reflected the facts regarding the income,
business, assets, operations, activities, status or other matters of
TRC or any other information required to be shown thereon. In
particular, the foregoing Returns are not subject to unpaid penalties
under Section 6662 of the Internal Revenue Code of 1986, as amended
(the "Code"), relating to accuracy-related penalties (or any
corresponding provision of state, local or foreign Tax law) or any
other unpaid penalties.
(iii) With respect to all amounts in respect of Taxes imposed
upon TRC, or for which TRC is liable, whether to taxing authorities
(as, for example, under law) or to other persons or entities (as, for
example, under tax allocation agreements), with respect to all taxable
periods ending on or before the Closing and portions of periods
commencing before the Closing and ending after the Closing, all
applicable tax laws and agreements have been fully complied with, and
all such amounts required to be paid by TRC to taxing authorities or
others on or before the Closing have been paid, and all such amounts
required to be paid by TRC to taxing authorities or others after the
Closing which have not been paid are reflected on the financial
statements of TRC.
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(iv) No notices raising tax issues have been received by TRC from
any taxing authority in connection with any of the Returns. No
extensions or waivers of statutes of limitations with respect to the
Returns have been given by or requested from TRC. All deficiencies
asserted or assessments made as a result of any examinations have been
fully paid, or are fully reflected as a liability in the financial
statements of TRC, or are being contested and an adequate reserve
therefor has been established and is fully reflected in the financial
statements of TRC.
(v) There are no liens for Taxes (other than for current Taxes
not yet due and payable) upon the assets of TRC.
(vi) TRC is not a party to or bound by (nor will TRC become a
party to or become bound by) any tax indemnity, tax sharing or tax
allocation agreement.
(vii) TRC has never been a member of an affiliated group of
corporations within the meaning of Section 1504 of the Code.
(viii) TRC has not filed a consent pursuant to the collapsible
corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income Tax law) or
agreed to have Section 341(f)(2) of the Code (or any corresponding
provision of state, local or foreign income Tax law) apply to any
disposition of any asset owned by it.
(ix) None of the assets of TRC directly or indirectly secures any
debt the interest on which is tax exempt under Section 103(a) of the
Code.
(x) None of the assets of TRC is "tax-exempt use property" within
the meaning of Section 168(h) of the Code.
(xi) TRC has not made and will not make a deemed dividend
election under Treas. Reg. ss.1.1502-32(f)(2) or a consent dividend
election under Section 565 of the Code.
(xii) TRC has not agreed to make, nor is it required to make, any
adjustment under Sections 481(a) or 263A of the Code or any comparable
provision of state or foreign tax laws by reason of a change in
accounting method or otherwise.
(xiii) TRC is not party to any joint venture, partnership, or
other arrangement or contract which could be treated as a partnership
for federal income tax purposes.
(xiv) TRC's book basis of each of its assets is reflected in its
financial statements.
(xv) All elections with respect to Taxes made during the fiscal
years ended December 31, 1996, December 31, 1996 and December 31, 1997
are reflected on the Returns for such periods, copies of which have
been provided to Harvest.
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5.1.23 Intellectual Property.
(i) TRC and its subsidiaries own or have the right to use
pursuant to license, sublicense, agreement, or permission all
Intellectual Property necessary or desirable for the operation of the
business of TRC. Each item of Intellectual Property owned or used by
any of TRC and its subsidiaries immediately prior to the closing
hereunder will be owned or available for use by TRC, its subsidiaries,
or its subsidiaries on identical terms and conditions immediately
subsequent to the closing hereunder. Each of TRC and its subsidiaries
has taken all necessary and desirable action to maintain and protect
each item of Intellectual Property that it owns or uses.
(ii) None of TRC and its subsidiaries has interfered with,
infringed upon, misappropriated, or otherwise come into conflict with
any Intellectual Property rights of third parties, and none of TRC
shareholders and the directors and officers (and employees with
responsibility for Intellectual Property matters) of TRC and its
subsidiaries has ever received any charge, complaint, claim, demand,
or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that any of TRC
and its subsidiaries must license or refrain from using any
Intellectual Property rights of any third party). TRC and the
directors and officers (and employees with responsibility for
Intellectual Property matters) of TRC and its subsidiaries, no third
party has interfered with, infringed upon, misappropriated, or
otherwise come into conflict with any Intellectual Property rights of
any of TRC and its subsidiaries.
(iii) Schedule 5.1 identifies each patent or registration which
has been issued to any of TRC and its subsidiaries with respect to any
of its Intellectual Property, identifies each pending patent
application or application for registration which any of TRC and its
subsidiaries has made with respect to any of its Intellectual
Property, and identifies each license, agreement, or other permission
which any of TRC and its subsidiaries has granted to any third party
with respect to any of its Intellectual Property (together with any
exceptions). TRC has delivered to Harvest correct and complete copies
of all such patents, registrations, applications, licenses,
agreements, and permission (as amended to date) and has made available
to Harvest correct and complete copies of all other written
documentation evidencing ownership and prosecution (if applicable) of
each such item. Schedule 5.1 also identifies each trade name or
unregistered trademark used by any of TRC and its subsidiaries in
connection with any of its businesses. With respect to each item of
Intellectual Property required to be identified in Schedule 5.1:
(a) TRC and its subsidiaries possess all right, title, and
interest in and to the item, free and clear of any security
interest, license, or other restriction;
(b) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(c) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or is threatened which
challenges the legality, validity, enforceability, use, or
ownership of the item; and
(d) none of TRC and its subsidiaries has ever agreed to indemnify
any person for or against any interference, infringement,
misappropriation, or other conflict with respect to the item.
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(iv) Schedule 5.1 identifies each item of Intellectual Property
that any third party owns and that any of TRC and its subsidiaries
uses pursuant to license, sublicense, agreement, or permission. TRC
has delivered to Harvest correct and complete copies of all such
licenses, sublicenses, agreements, and permission (as amended to
date). With respect to each item of Intellectual Property required to
be identified in Schedule 5.1:
(a) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable, and in full force
and effect.
(b) the license, sublicense, agreement, or permission will
continue to be legal, valid, binding, enforceable, and in full
force and effect on identical terms following the consummation of
the transactions contemplated hereby (including the assignments
and assumptions referred to above);
(c) no party to the license, sublicense, agreement, or permission
is in breach or default, and no event has occurred which with
notice or lapse of time would constitute a breach of default or
permit termination, modification, or acceleration thereunder;
(d) no party to the license, sublicense, agreement, or permission
has repudiated any provision thereof;
(e) with respect to each sublicense, the representations and
warranties set forth in subsections (A) through (D) above are
true and correct with respect to the underlying license;
(f) the underlying item of Intellectual Property is not subject
to any outstanding injunction, judgment, order, decree, ruling,
or charge;
(g) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending and the directors and
officers (and employees with responsibility for Intellectual
Property matters) of TRC and its subsidiaries, is threatened
which challenges the legality, validity, or enforceability of the
underlying item of Intellectual Property; and
(h) none of TRC and its subsidiaries has granted any sublicense
or similar right with respect to the license, sublicense,
agreement, or permission.
(v) None of TRC and the directors and officers (and employees
with responsibility for Intellectual Property matters) of TRC and its
subsidiaries has any new products, inventions, procedures, or methods
of manufacturing or processing that any competitors or other third
parties have developed which reasonably could be expected to supersede
or make obsolete any product or process of any of TRC and its
subsidiaries.
5.1.24 Books and Records. The books and records of TRC to which
Harvest and their accountants and attorneys have been given access are the true
books and records of TRC and truly and fairly reflect the underlying facts and
transactions in all respects.
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5.1.25 Leased Properties. The Financial Statements and Schedule 5.1
hereto together list all personal property (including equipment leases) and real
property leased by TRC in connection with the business (the "Leased Properties")
and the aggregate annual rent or other fees payable under all such leases. TRC
has a valid leasehold or ownership interest in all of the Leased Properties,
free and clear of any liens. The negotiation and consummation of this Agreement
and the transactions contemplated hereby will not result in any penalties, the
acceleration of payments or the termination of any lease of Leased Properties.
5.1.26 Employees and Employee Benefit Plans.
5.1.26.1 Other than as set forth in Schedule 5.1 hereto, TRC is
not a party to any pension, profit sharing, savings, retirement or other
deferred compensation plan, or any bonus (whether payable in cash or stock) or
incentive program, or any group health plan (whether insured or self-funded), or
any disability or group life insurance plan or other employee welfare benefit
plan, or to any collective bargaining agreement or other agreement, written or
oral, with any trade or labor union, employees' association or similar
organization. TRC is not a party to, nor has made any contribution to or
otherwise incurred any obligation under, any "multi-employer plan" as defined in
Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
5.1.26.2 With respect to each such plan set forth in Schedule 5.1
(a "Plan"), TRC has furnished to Harvest or their counsel complete and accurate
copies of the Plan documents (including trust documents, insurance policies or
contracts, employee booklets, summary plan descriptions and other authorizing
documents, and any material employee communications). With respect to each Plan
subject to ERISA as either an employee pension benefit plan within the meaning
of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning
of Section 3(1) of ERISA, TRC has prepared in good faith and timely filed all
requisite governmental reports and has properly and timely posted, or
distributed all notices and reports to employees required to be filed, posted,
or distributed with respect to each Plan. Each Plan has at all times been
properly and completely funded by TRC and has been operated and administered in
all respects in accordance with its terms and all applicable laws, including,
but not limited to, ERISA and the Code.
5.1.26.3 All Plans that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code have been determined by the Internal
Revenue Service to be so qualified, and copies of such determination letters are
included as part of Schedule 5.1 hereof. Except as disclosed on Schedule 5.1,
all reports and other documents required to be filed with any governmental
agency or distributed to plan participants or beneficiaries have been timely
filed and distributed, and copies thereof are included as part of Schedule 5.1
hereof. TRC further represents that:
(a) there have been no terminations, partial terminations, or
discontinuance of contributions to any such Qualified Plan
intended to qualify under Section 401(a) of the Code without
notice to and approval by the Internal Revenue Service;
(b) no such plan listed in Schedule 5.1, subject to the
provisions of Title IV of ERISA has been terminated;
(c) there have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such
plan listed in Schedule 5.1; and
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(d) TRC has not incurred any liability under Section 4062 of
ERISA.
5.1.26.4 TRC has not made any oral or written communications to
its current or former employees that guarantee current or former employees
continuation of employer-provided benefits or retirement coverage under TRC's
welfare benefit plans or which would have any effect on TRC's ability to
terminate retiree or any other benefits to all current or former employees.
5.1.26.5 TRC has not violated any of the health care continuation
coverage requirements of the Consolidated Omnibus Budget Reconciliation Act of
1985 applicable to its Employees prior to the Closing or any prior actions of or
transactions entered into by TRC.
5.1.27 Compensation. TRC has delivered to Harvest an accurate
schedule, attached to this Agreement as Schedule 5.1, showing all officers,
directors, and key employees of TRC and the rate of compensation (and the
portions thereof attributable to salary, bonus, and other compensation,
respectively) of the directors, officers, and key employees.
5.1.28 Insurance. TRC maintains policies of insurance covering the
assets of TRC, properties, and business in types and amounts as set forth in
Schedule 5.1. TRC is in compliance with each of such policies such that none of
the coverage provided under such policies has been invalidated and TRC has not
received any written notice of cancellation of any such policies. Schedule 5.1
lists and describes all TRC insurance policies in effect immediately prior to
the time of Closing. Such policies are with reputable insurers and are in
amounts sufficient for the prudent protection of the properties and the Business
of TRC.
5.1.29 Full Disclosure. TRC has disclosed to all material facts
relating to TRC and its operations and has not knowingly omitted to disclose to
Harvest any material fact relating to TRC, or its operations necessary to make
the statements made herein not misleading.
ARTICLE VI.
TRC's COVENANTS
Section 6.1 Continuation of Business. TRC covenants and agrees with Harvest
as follows, between the date hereof and the Effective Date, unless otherwise
consented to in writing by Harvest or as provided for by this Agreement, (i) 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 cause to be issued by TRC 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 TRC'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.
Section 6.2 No Solicitation. Unless and until the Effective Date occurs,
TRC shall not (i) solicit any offer to acquire all or any part of TRC'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 TRC's business or properties, afford to any
other person or entity access to TRC's properties, books or records or otherwise
assist or encourage any person or entity in connection with any of the
foregoing.
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ARTICLE VII.
HARVEST'S REPRESENTATIONS AND WARRANTIES
Section 7.1 Harvest's Representations and Warranties. Harvest makes the
following representations and warranties to TRC as a material inducement for TRC
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. All of Harvest's warranties and representations herein are
modified to the extent needed to take into account Harvest's disclosures set
forth or identified in the attachment hereto entitled Schedule 7.1 -- Harvest
Disclosures and made a part thereof.
7.1.1 Capitalization.
7.1.1.1 Authorized Stock. The authorized capital stock of Harvest
consists of 20,000,000 shares of Harvest Common Stock, $0.01 par value per
share, and by Closing shall be 100,000,000 shares of Harvest Common Stock, $0.01
par value per share, and 5,000,000 shares of preferred stock, $1.00 par value
per share, of which 3,000,000 shares have been designated as Series A Preferred
Stock and 1,000 shares have been designated as Series B Preferred Stock.
7.1.1.2 Issued Common Stock. There are 3,463,009 (18,000,000 to
be issued in this transaction) shares of Harvest Common Stock issued and
outstanding. 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.
7.1.1.3 Issued Preferred Stock. There are 635,892 shares of
Harvest Series A Preferred Stock and 133 shares of Harvest Series B Preferred
Stock issued and outstanding. 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.
7.1.2 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 TRC are correct and complete.
7.1.3 Subsidiaries. Harvest has no subsidiaries other than those
listed on Schedule 7.1.
7.1.4 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
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secrecy agreements, non-competition agreements, defects of title or other
encumbrances of 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.
7.1.5 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.
7.1.6 Other Transactions. 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.
7.1.7 Undisclosed Liabilities. Prior to expiration of the Feasibility
Period, Harvest has provided to TRC a listing of its liabilities, at Schedule
7.1, except as and to the extent reflected or disclosed (or adequately reserved
for or against) in the financial statements, or except as specifically provided
by this Agreement, 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.
7.1.8 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.
7.1.9 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 its assets subject to no mortgage, pledge, lien,
conditional sales agreement, encumbrance, security interest, encumbrance, or
charge of any nature whatsoever, except as herein provided.
7.1.10 Compliance With Law. Harvest has complied and is in compliance
with all applicable zoning decisions and has complied and is in compliance with
all applicable federal, state, and local laws, statutes, licensing requirements,
rules, and regulations, and judicial or administrative decisions. Harvest has
been granted all licenses, permits (temporary and otherwise), authorizations,
and approvals from federal, state, and local government regulatory or zoning
bodies necessary to carry on the business and maintain the assets of Harvest,
all of which are currently valid and in full force and effect. All such
licenses, permits, authorizations and approvals shall be valid and in full force
and effect upon the consummation of the transactions contemplated by this
Agreement. There is no order issued, or proceeding pending or threatened, or
notice served with respect to any violation of any law, ordinance, order, writ,
decree, rule, or regulation issued by any federal state, local, or foreign court
or governmental agency or instrumentality applicable to Harvest. Harvest has
valid business licenses to carry on its operations.
7.1.11 Contracts and Commitments. All of Harvest's 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 shall be impaired by the
consummation of the transactions contemplated by this Agreement, and all of the
rights of Harvest thereunder shall be enforceable by TRC 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 all such contracts have heretofore been delivered to TRC
by Harvest and are true and complete and include all amendments and supplements
thereto and modifications thereof.
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7.1.12 Permits, Licenses, Consents. 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'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 limitations Harvest has
complied in all material respects with all present and, to the best of Harvest'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.
7.1.13 Absence of Defaults. Except as provided in the attached
disclosures, 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.
7.1.14 Litigation. Except as provided in the attached disclosures,
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's 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'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, 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.
7.1.15 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.
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7.1.16 Validity and Authorization. This Agreement has been duly
authorized by all necessary corporate action and upon approval of Harvest
shareholders is duly and validly executed and delivered by Harvest and is
legally binding on Harvest in accordance with its terms.
7.1.17 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 TRC 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 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 TRC 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 VII or the extent of the obligations or
liabilities of Harvest in the event of a breach of any such representation or
warranty.
7.1.18 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.
7.1.19 Financial Statements. It is understood that Harvest'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 Harvest to TRC have been prepared in accordance with generally
accepted accounting principles and present fairly the financial position of
Harvest as of December 28, 1997, and as of April 19, 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 28, 1997, and April
19, 1998, respectively, and sales reports for the period commencing January 1,
1998, through the calendar month immediately preceding 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.
7.1.20 Absence of Certain Changes and Events. Except as set forth in
Schedule 7.1 hereto, since the date of the interim financial statements there
has not been:
7.1.20.1 Any material adverse change in the financial condition,
results of operation, assets, liabilities or prospects of Harvest, or any
occurrence, circumstance, or combination thereof which reasonably could be
expected to result in any such material adverse change;
7.1.20.2 Any transaction relating to or involving Harvest, or the
assets of Harvest which was entered into or carried out by Harvest other than
for fair consideration in the ordinary course of business;
7.1.20.3 Any change by Harvest in its accounting or tax practices
or procedures;
7.1.20.4 Any incurrence of any liability, other than liabilities
incurred in the ordinary course of business consistent with past practices;
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7.1.20.5 Any sale, lease, or disposition of, or any agreement to
sell, lease, or dispose of any of its properties (whether leased or owned), or
the assets of Harvest, other than sales, leases, or dispositions of goods,
materials, or equipment in the ordinary course of business or as contemplated by
this Agreement;
7.1.20.6 Any event permitting any of the assets or the properties
of Harvest (whether leased or owned) to be subjected to any pledge, encumbrance,
security interest, lien, charge, or claim of any kind whatsoever (direct or
indirect) (collectively, "Liens");
7.1.20.7 Any increase in compensation or any adoption of, or
increase in, any bonus, incentive compensation, pension, profit sharing,
retirement, insurance, medical reimbursement or other employee benefit plan,
payment or arrangement to, for, or with any employee of Harvest;
7.1.20.8 Any payment or distribution of any bonus to, or
cancellation of indebtedness owing from, or incurring of any liability relating
to any employees, consultants, directors, officers, or agents, or any persons
related thereto;
7.1.20.9 Any notice (written or unwritten) from any employee of
Harvest that such employee has terminated, or intends to terminate, such
employee's employment with Harvest;
7.1.20.10 Any adverse relationship or condition with suppliers or
vendors that may have an adverse effect on Harvest;
7.1.20.11 Any event, including, without limitation, shortage of
materials or supplies, fire, explosion, accident, requisition or taking of
property by any governmental agency, flood, drought, earthquake, or other
natural event, riot, act of God or a public enemy, or damage, destruction, or
other casualty, whether covered by insurance or not, which has had an adverse
effect on Harvest, the properties (whether leased or owned), or any such event
which could be expected to have an adverse effect on Harvest, the properties
(whether leased or owned), or the assets of Harvest;
7.1.20.12 Any modification, waiver, change, amendment, release,
rescission, accord and satisfaction, or termination of, or with respect to, any
term, condition, or provision of any contract, agreement, license, or other
instrument to which Harvest is a party and relating to or affecting the Harvest
other than any satisfaction by performance in accordance with the terms thereof
in the ordinary course of business;
7.1.20.13 Any discharge or satisfaction of any lien or payment of
any liabilities, other than in the ordinary course of business;
7.1.20.14 Any waiver of any rights of substantial value by
Harvest, other than waivers having no material adverse effect on Harvest;
7.1.20.15 Any issuance of equity securities of Harvest or any
issuance of warrants, calls, options or other rights calling for the issuance,
sale, or delivery of Harvest's equity securities;
7.1.20.16 Any declaration of any dividend or any distribution of
any shares of its capital stock, or redemption, purchase, or other acquisition
of any shares of its capital stock or any grant of an option, warrant, or other
right to purchase or acquire any such shares;
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7.1.20.17 Any amendment, or agreement to amend, Harvest's
Articles of Incorporation or Bylaws, or any merger or consolidation with, or any
agreement to merge or consolidate with, any other corporation, partnership,
limited liability company or any other entity;
7.1.20.18 Any reduction, or agreement to reduce, the cash or
short-term investments of Harvest, other than to meet cash needs arising in the
ordinary course of business;
7.1.20.19 Any work interruptions, labor grievances or claims
filed, proposed law or regulation or any event of any character, materially
adversely affecting future prospects of Harvest;
7.1.20.20 Any revaluation by Harvest of any of its assets;
7.1.20.21 Any loan by Harvest to any person or entity, or any
guaranty by Harvest of any loan; or
7.1.20.22 Any other event or condition of any character which
materially adversely affects, or reasonably may be expected to so affect, the
assets of Harvest or the properties (whether leased or owned) of Harvest.
7.1.21 Taxes.
7.1.21.1 Definitions. For purposes of this Agreement:
(a) the term "Taxes" means (A) all federal, state, local,
foreign and other net income, gross income, gross receipts,
sales, use, ad valorem, transfer, franchise, profits,
license, lease, service, service use, withholding, payroll,
employment, excise, severance, stamp, occupation, premium,
property, windfall profits, customs, duties or other taxes,
fees, assessments or charges of any kind whatever, together
with any interest and any penalties, additions to tax or
additional amounts with respect thereto, (B) any liability
for payment of amounts described in clause (A) whether as a
result of transferee liability, of being a member of an
affiliated, consolidated, combined or unitary group for any
period, or otherwise through operation of law, and (C) any
liability for the payment of amounts described in clauses
(A) or (B) as a result of any tax sharing, tax indemnity or
tax allocation agreement or any other express or implied
agreement to indemnify any other person; and the term "Tax"
means any one of the foregoing Taxes; and
(b) the term "Returns" means all returns, declarations, reports,
statements, claims for refund and other documents required
to be filed in respect of Taxes, and the term "Return" means
any one of the foregoing Returns.
7.1.21.2 Harvest has properly completed and filed on a timely
basis (including extensions) and in correct form all Returns required to be
filed on or prior to the Closing. As of the time of filing, the foregoing
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Returns correctly reflected the facts regarding the income, business, assets,
operations, activities, status or other matters of Harvest or any other
information required to be shown thereon. In particular, the foregoing Returns
are not subject to unpaid penalties under Section 6662 of the Internal Revenue
Code of 1986, as amended (the "Code"), relating to accuracy-related penalties
(or any corresponding provision of state, local or foreign Tax law) or any other
unpaid penalties.
7.1.21.3 With respect to all amounts in respect of Taxes imposed
upon Harvest, or for which Harvest is liable, whether to taxing authorities (as,
for example, under law) or to other persons or entities (as, for example, under
tax allocation agreements), with respect to all taxable periods ending on or
before the Closing and portions of periods commencing before the Closing and
ending after the Closing, all applicable tax laws and agreements have been fully
complied with, and all such amounts required to be paid by Harvest to taxing
authorities or others on or before the Closing have been paid, and all such
amounts required to be paid by Harvest to taxing authorities or others after the
Closing which have not been paid are reflected on the financial statements of
Harvest.
7.1.21.4 No notices raising tax issues have been received by
Harvest from any taxing authority in connection with any of the Returns. No
extensions or waivers of statutes of limitations with respect to the Returns
have been given by or requested from Harvest. All deficiencies asserted or
assessments made as a result of any examinations have been fully paid, or are
fully reflected as a liability in the financial statements of Harvest, or are
being contested and an adequate reserve therefor has been established and is
fully reflected in the financial statements of Harvest.
7.1.21.5 There are no liens for Taxes (other than for current
Taxes not yet due and payable) upon the assets of Harvest.
7.1.21.6 Harvest is not a party to or bound by (nor will Harvest
become a party to or become bound by) any tax indemnity, tax sharing or tax
allocation agreement.
7.1.21.7 Harvest has never been a member of an affiliated group
of corporations within the meaning of Section 1504 of the Code.
7.1.21.8 Harvest has not filed a consent pursuant to the
collapsible corporation provisions of Section 341(f) of the Code (or any
corresponding provision of state, local or foreign income Tax law) or agreed to
have Section 341(f)(2) of the Code (or any corresponding provision of state,
local or foreign income Tax law) apply to any disposition of any asset owned by
it.
7.1.21.9 None of the assets of Harvest directly or indirectly
secures any debt the interest on which is tax exempt under Section 103(a) of the
Code.
7.1.21.10 None of the assets of Harvest is "tax-exempt use
property" within the meaning of Section 168(h) of the Code.
7.1.21.11 Harvest has not made and will not make a deemed
dividend election under Treas. Reg. ss.1.1502-32(f)(2) or a consent dividend
election under Section 565 of the Code.
7.1.21.12 Harvest has not agreed to make, nor is it required to
make, any adjustment under Sections 481(a) or 263A of the Code or any comparable
provision of state or foreign tax laws by reason of a change in accounting
method or otherwise.
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7.1.21.13 Harvest is not party to any joint venture, partnership,
or other arrangement or contract which could be treated as a partnership for
federal income tax purposes.
7.1.21.14 Harvest's book basis of each of its assets is reflected
in its financial statements.
7.1.21.15 All elections with respect to Taxes made during the
fiscal years ended December 31, 1996, December 31, 1996 and December 31, 1997
are reflected on the Returns for such periods, copies of which have been
provided to TRC.
7.1.22 Compliance With Law. Harvest has complied and is in compliance
with all applicable zoning decisions and has complied and is in compliance with
all applicable federal, state, and local laws, statutes, licensing requirements,
rules, and regulations, and judicial or administrative decisions. Harvest has
been granted all licenses, permits (temporary and otherwise), authorizations,
and approvals from federal, state, and local government regulatory or zoning
bodies necessary to carry on the business and maintain the assets of Harvest,
all of which are currently valid and in full force and effect. All such
licenses, permits, authorizations and approvals shall be valid and in full force
and effect upon the consummation of the transactions contemplated by this
Agreement. There is no order issued, or proceeding pending or threatened, or
notice served with respect to any violation of any law, ordinance, order, writ,
decree, rule, or regulation issued by any federal state, local, or foreign court
or governmental agency or instrumentality applicable to Harvest. Harvest has
valid business licenses to carry on its operations.
7.1.23 Intellectual Property.
7.1.23.1 Harvest and its subsidiaries own or have the right to
use pursuant to license, sublicense, agreement, or permission all Intellectual
Property necessary or desirable for the operation of the business of Harvest.
Each item of Intellectual Property owned or used by any of Harvest and its
subsidiaries immediately prior to the closing hereunder will be owned or
available for use by Harvest, its subsidiaries, or its subsidiaries on identical
terms and conditions immediately subsequent to the closing hereunder. Each of
Harvest and its subsidiaries has taken all necessary and desirable action to
maintain and protect each item of Intellectual Property that it owns or uses.
7.1.23.2 None of Harvest and its subsidiaries has interfered
with, infringed upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of third parties, and none of Harvest shareholders
and the directors and officers (and employees with responsibility for
Intellectual Property matters) of Harvest and its subsidiaries has ever received
any charge, complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that any of
Harvest and its subsidiaries must license or refrain from using any Intellectual
Property rights of any third party). Harvest and the directors and officers (and
employees with responsibility for Intellectual Property matters) of Harvest and
its subsidiaries, no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Intellectual Property
rights of any of Harvest and its subsidiaries.
7.1.23.3 Schedule 7.1 identifies each patent or registration
which has been issued to any of Harvest and its subsidiaries with respect to any
of its Intellectual Property, identifies each pending patent application or
application for registration which any of Harvest and its subsidiaries has made
with respect to any of its Intellectual Property, and identifies each license,
agreement, or other permission which any of Harvest and its subsidiaries has
granted to any third party with respect to any of its Intellectual Property
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(together with any exceptions). Harvest has delivered to TRC correct and
complete copies of all such patents, registrations, applications, licenses,
agreements, and permission (as amended to date) and has made available to TRC
correct and complete copies of all other written documentation evidencing
ownership and prosecution (if applicable) of each such item. Schedule 7.1 also
identifies each trade name or unregistered trademark used by any of Harvest and
its subsidiaries in connection with any of its businesses. With respect to each
item of Intellectual Property required to be identified in Schedule 7.1:
(a) Harvest and its subsidiaries possess all right, title, and
interest in and to the item, free and clear of any security
interest, license, or other restriction;
(b) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(c) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or is threatened
which challenges the legality, validity, enforceability,
use, or ownership of the item; and
(d) none of Harvest and its subsidiaries has ever agreed to
indemnify any person for or against any interference,
infringement, misappropriation, or other conflict with
respect to the item.
7.1.23.4 Schedule 7.1 identifies each item of Intellectual
Property that any third party owns and that any of Harvest and its subsidiaries
uses pursuant to license, sublicense, agreement, or permission. Harvest has
delivered to TRC correct and complete copies of all such licenses, sublicenses,
agreements, and permission (as amended to date). With respect to each item of
Intellectual Property required to be identified in Schedule 7.1:
(a) the license, sublicense, agreement, or permission covering
the item is legal, valid, binding, enforceable, and in full
force and effect.
(b) the license, sublicense, agreement, or permission will
continue to be legal, valid, binding, enforceable, and in
full force and effect on identical terms following the
consummation of the transactions contemplated hereby
(including the assignments and assumptions referred to
above);
(c) no party to the license, sublicense, agreement, or
permission is in breach or default, and no event has
occurred which with notice or lapse of time would constitute
a breach of default or permit termination, modification, or
acceleration thereunder;
(d) no party to the license, sublicense, agreement, or
permission has repudiated any provision thereof;
(e) with respect to each sublicense, the representations and
warranties set forth in subsections (A) through (D) above
are true and correct with respect to the underlying license;
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(f) the underlying item of Intellectual Property is not subject
to any outstanding injunction, judgment, order, decree,
ruling, or charge;
(g) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending and the directors and
officers (and employees with responsibility for Intellectual
Property matters) of Harvest and its subsidiaries, is
threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual
Property; and
(h) none of Harvest and its subsidiaries has granted any
sublicense or similar right with respect to the license,
sublicense, agreement, or permission.
7.1.23.5 None of Harvest and the directors and officers (and
employees with responsibility for Intellectual Property matters) of Harvest and
its subsidiaries has any new products, inventions, procedures, or methods of
manufacturing or processing that any competitors or other third parties have
developed which reasonably could be expected to supersede or make obsolete any
product or process of any of Harvest and its subsidiaries.
7.1.24 Books and Records. The books and records of Harvest to which
TRC and their accountants and attorneys have been given access are the true
books and records of Harvest and truly and fairly reflect the underlying facts
and transactions in all respects.
7.1.25 Leased Properties. The Financial Statements and Schedule 7.1
hereto together list all personal property (including equipment leases) and real
property leased by Harvest in connection with the business (the "Leased
Properties") and the aggregate annual rent or other fees payable under all such
leases. Harvest has a valid leasehold or ownership interest in all of the Leased
Properties, free and clear of any liens. The negotiation and consummation of
this Agreement and the transactions contemplated hereby will not result in any
penalties, the acceleration of payments or the termination of any lease of
Leased Properties.
7.1.26 Employees and Employee Benefit Plans.
7.1.26.1 Other than as set forth in Schedule 7.1 hereto, Harvest
is not a party to any pension, profit sharing, savings, retirement or other
deferred compensation plan, or any bonus (whether payable in cash or stock) or
incentive program, or any group health plan (whether insured or self-funded), or
any disability or group life insurance plan or other employee welfare benefit
plan, or to any collective bargaining agreement or other agreement, written or
oral, with any trade or labor union, employees' association or similar
organization. Harvest is not a party to, nor has made any contribution to or
otherwise incurred any obligation under, any "multi-employer plan" as defined in
Section 3(37) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA").
7.1.26.2 With respect to each such plan set forth in Schedule 7.1
(a "Plan"), Harvest has furnished to TRC or their counsel complete and accurate
copies of the Plan documents (including trust documents, insurance policies or
contracts, employee booklets, summary plan descriptions and other authorizing
documents, and any material employee communications). With respect to each Plan
subject to ERISA as either an employee pension benefit plan within the meaning
of Section 3(2) of ERISA or an employee welfare benefit plan within the meaning
of Section 3(1) of ERISA, Harvest has prepared in good faith and timely filed
all requisite governmental reports and has properly and timely posted, or
distributed all notices and reports to employees required to be filed, posted,
or distributed with respect to each Plan. Each Plan has at all times been
properly and completely funded by Harvest and has been operated and administered
in all respects in accordance with its terms and all applicable laws, including,
but not limited to, ERISA and the Code.
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7.1.26.3 All Plans that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code have been determined by the Internal
Revenue Service to be so qualified, and copies of such determination letters are
included as part of Schedule 7.1 hereof. Except as disclosed on Schedule 7.1,
all reports and other documents required to be filed with any governmental
agency or distributed to plan participants or beneficiaries have been timely
filed and distributed, and copies thereof are included as part of Schedule 7.1
hereof. Harvest further represents that:
(a) there have been no terminations, partial terminations, or
discontinuance of contributions to any such Qualified Plan
intended to qualify under Section 401(a) of the Code without
notice to and approval by the Internal Revenue Service;
(b) no such plan listed in Schedule 7.1, subject to the
provisions of Title IV of ERISA has been terminated;
(c) there have been no "reportable events" (as that phrase is
defined in Section 4043 of ERISA) with respect to any such
plan listed in Schedule 7.1; and
(d) Harvest has not incurred any liability under Section 4062 of
ERISA.
7.1.26.4 Harvest has not made any oral or written communications
to its current or former employees that guarantee current or former employees
continuation of employer-provided benefits or retirement coverage under
Harvest's welfare benefit plans or which would have any effect on Harvest's
ability to terminate retiree or any other benefits to all current or former
employees.
7.1.26.5 Harvest has not violated any of the health care
continuation coverage requirements of the Consolidated Omnibus Budget
Reconciliation Act of 1985 applicable to its Employees prior to the Closing or
any prior actions of or transactions entered into by Harvest.
7.1.27 Compensation. Harvest has delivered to TRC an accurate
schedule, attached to this Agreement as Schedule 7.1, showing all officers,
directors, and key employees of Harvest and the rate of compensation (and the
portions thereof attributable to salary, bonus, and other compensation,
respectively) of the directors, officers, and key employees.
7.1.28 Insurance. Harvest maintains policies of insurance covering the
assets of Harvest, properties, and business in types and amounts as set forth in
Schedule 7.1. Harvest is in compliance with each of such policies such that none
of the coverage provided under such policies has been invalidated and Harvest
has not received any written notice of cancellation of any such policies.
Schedule 7.1 lists and describes all Harvest insurance policies in effect
immediately prior to the time of Closing. Such policies are with reputable
insurers and are in amounts sufficient for the prudent protection of the
properties and the Business of Harvest.
7.1.29 Full Disclosure. Harvest has disclosed to TRC all material
facts relating to Harvest and its operations and has not knowingly omitted to
disclose to TRC any material fact relating to Harvest, or its operations
necessary to make the statements made herein not misleading.
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7.1.30 Securities and Nasdaq Listing. Harvest is currently listed on
NASDAQ. Harvest is subject to the reporting requirements of the Securities and
Exchange Act of 1933 (the "Exchange Act").
ARTICLE VIII.
HARVEST'S COVENANTS
Section 8.1 Continuation of Business. Harvest covenants and agrees as
follows: between the date hereof and the Closing, unless otherwise consented to
in writing by TRC or as provided for by this Agreement, (i) 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 cause 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.
Section 8.2 No Solicitation. Unless and until the Closing 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.
Section 8.3 Termination of Stock Option Plan. Harvest shall use its best
efforts to modify its Stock Option Plan, if any, at or prior to Closing to
account for new employees from TRC to be included thereunder. As of the Closing,
the amount outstanding under the Stock Option Plan shall not exceed 483,000
shares at $1.00 strike price and all such shares have been included in the total
of all Harvest Common Shares listed in the "Whereas" clauses.
ARTICLE IX.
TERMINATION
Section 9.1 Termination Events. This Agreement may, by notice given prior
to or at the Closing, be terminated:
9.1.1 by either TRC or Harvest if a material Breach of any provision
of this Agreement has been committed by the other party and such Breach has not
been waived;
9.1.2 (i) by TRC if any of the conditions in Article I and Article XI
have not been satisfied as of the Closing or if satisfaction of such a condition
is or becomes impossible (other than through the failure of TRC to comply with
its obligations under this Agreement) and TRC has not waived such condition on
or before the Closing; or (ii) by Harvest, if any of the conditions in Article I
and Article XI have not been satisfied of the Closing or if satisfaction of such
a condition is or becomes impossible (other than through the failure of Harvest
to comply with their obligations under this Agreement) and Harvest has not
waived such condition on or before the Closing;
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9.1.3 by mutual consent of TRC and Harvest; or
9.1.4 by either TRC or Harvest if the Closing has not occurred (other
than through the failure of any party seeking to terminate this Agreement to
comply fully with its obligations under this Agreement) on or before December
31, 1998, or such later date as the parties may agree upon.
Section 9.2 Effect of Termination. Each party's right of termination under
Section 9.1 is in addition to any other rights it may have under this Agreement
or otherwise, and the exercise of a right of termination will not be an election
of remedies. If this Agreement is terminated pursuant to Article I, all further
obligations of the parties under this Agreement will terminate; provided,
however, that if this Agreement is terminated by a party because of the Breach
of the Agreement by the other party or because one or more of the conditions to
the terminating party's obligations under this Agreement is not satisfied as a
result of the other party's failure to comply with its obligations under this
Agreement, the terminating party's right to pursue all legal remedies will
survive such termination unimpaired.
ARTICLE X.
INDEMNIFICATION; REMEDIES
Section 10.1 Survival; Right to Indemnification Not Affected by Knowledge.
All representations, warranties, covenants, and obligations in this Agreement,
and any other certificate or document delivered pursuant to this Agreement will
survive the Closing. The right to indemnification, payment of Damages or other
remedy based on such representations, warranties, covenants, and obligations
will not be affected by any investigation conducted with respect to, or any
Knowledge acquired (or capable of being acquired) at any time, whether before or
after the execution and delivery of this Agreement or the Closing, with respect
to the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant, or obligation. The waiver of any condition based on the
accuracy of any representation or warranty, or on the performance of or
compliance with any covenant or obligation, will not affect the right to
indemnification, payment of Damages, or other remedy based on such
representations, warranties, covenants, and obligations.
Section 10.2 Indemnification and Payment of Damages by Harvest. Harvest
will indemnify and hold harmless TRC, and their respective Representatives,
stockholders, controlling persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage (including incidental and consequential
damages), expense (including costs of investigation and defense and reasonable
attorneys' fees) or diminution of value, whether or not involving a third-party
claim (collectively, "Damages" ), arising, directly or indirectly, from or in
connection with: (a) any breach of any representation or warranty made by
Harvest in this Agreement or any other certificate or document delivered by
Harvest pursuant to this Agreement; (b) any breach of any representation or
warranty made by Harvest in this Agreement as if such representation or warranty
were made on and as of the Closing.
10.2.1 any breach by either Harvest of any covenant or obligation of
such Harvest in this Agreement;
10.2.2 any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with Harvest (or any Person acting
on its behalf) in connection with any of the Contemplated Transactions.
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The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to TRC.
Section 10.3 Indemnification and Payment of Damages by Harvest '
Environmental Matters. In addition to the provisions of Section 10.2, Harvest
will indemnify and hold harmless TRC for, and will pay to TRC, the amount of any
Damages (including costs of cleanup, containment, or other remediation) arising,
directly or indirectly, from or in connection with:
10.3.1 any Environmental, Health, and Safety Liabilities arising out
of or relating to: (i) (A) the ownership, operation, or condition at any time on
or prior to the Closing of the Facilities or any other properties and assets
(whether real, personal, or mixed and whether tangible or intangible) in which
Harvest has or had an interest, or (B) any Hazardous Materials or other
contaminants that were present on the Facilities or such other properties and
assets at any time on or prior to the Closing; or (ii) (A) any Hazardous
Materials or other contaminants, wherever located, that were, or were allegedly,
generated, transported, stored, treated, released, or otherwise handled by
Harvest or by any other Person for whose conduct they are or may be held
responsible at any time on or prior to the Closing, or (B) any Hazardous
Activities that were, or were allegedly, conducted by Harvest or by any other
Person for whose conduct they are or may be held responsible; or
10.3.2 any bodily injury (including illness, disability, and death,
and regardless of when any such bodily injury occurred, was incurred, or
manifested itself), personal injury, property damage (including trespass,
nuisance, wrongful eviction, and deprivation of the use of real property), or
other damage of or to any Person, including any employee or former employee of
Harvest or any other Person for whose conduct they are or may be held
responsible, in any way arising from or allegedly arising from any Hazardous
Activity conducted or allegedly conducted with respect to the facilities or the
operation of Harvest prior to the Closing, or from Hazardous Material that was
(i) present or suspected to be present on or before the Closing, on or at the
facilities (or present or suspected to be present on any other property, if such
Hazardous Material emanated or allegedly emanated from any of the facilities and
was present or suspected to be present on any of the facilities on or prior to
the Closing) or (ii) Released or allegedly Released by Harvest or any other
Person for whose conduct they are or may be held responsible, at any time on or
prior to the Closing.
TRC will be entitled to control any cleanup, any related proceeding,
and, except as provided in the following sentence, any other Proceeding with
respect to which indemnity may be sought under this Section 10.3.
Section 10.4 Indemnification and Payment of Damages by TRC. TRC will
indemnify and hold harmless Harvest, and their respective Representatives,
stockholders, controlling persons, and affiliates (collectively, the
"Indemnified Persons") for, and will pay to the Indemnified Persons the amount
of, any loss, liability, claim, damage (including incidental and consequential
damages), expense (including costs of investigation and defense and reasonable
attorneys' fees) or diminution of value, whether or not involving a third-party
claim (collectively, "Damages"), arising, directly or indirectly, from or in
connection with: (a) any breach of any representation or warranty made by TRC in
this Agreement or any other certificate or document delivered by TRC pursuant to
this Agreement; (b) any breach of any representation or warranty made by TRC in
this Agreement as if such representation or warranty were made on and as of the
Closing.
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10.4.1 any breach by either TRC of any covenant or obligation of such
TRC in this Agreement;
10.4.2 any claim by any Person for brokerage or finder's fees or
commissions or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with TRC (or any Person acting on
its behalf) in connection with any of the Contemplated Transactions.
The remedies provided in this Section 10.2 will not be exclusive of or
limit any other remedies that may be available to Harvest.
Section 10.5 Indemnification and Payment of Damages by TRC - Environmental
Matters. In addition to the provisions of Section 10.2, TRC will indemnify and
hold harmless Harvest for, and will pay to Harvest, the amount of any Damages
(including costs of cleanup, containment, or other remediation) arising,
directly or indirectly, from or in connection with:
10.5.1 any Environmental, Health, and Safety Liabilities arising out
of or relating to: (i) (A) the ownership, operation, or condition at any time on
or prior to the Closing of the Facilities or any other properties and assets
(whether real, personal, or mixed and whether tangible or intangible) in which
TRC has or had an interest, or (B) any Hazardous Materials or other contaminants
that were present on the Facilities or such other properties and assets at any
time on or prior to the Closing; or (ii) (A) any Hazardous Materials or other
contaminants, wherever located, that were, or were allegedly, generated,
transported, stored, treated, released, or otherwise handled by TRC or by any
other Person for whose conduct they are or may be held responsible at any time
on or prior to the Closing, or (B) any Hazardous Activities that were, or were
allegedly, conducted by TRC or by any other Person for whose conduct they are or
may be held responsible; or
10.5.2 any bodily injury (including illness, disability, and death,
and regardless of when any such bodily injury occurred, was incurred, or
manifested itself), personal injury, property damage (including trespass,
nuisance, wrongful eviction, and deprivation of the use of real property), or
other damage of or to any Person, including any employee or former employee of
TRC or any other Person for whose conduct they are or may be held responsible,
in any way arising from or allegedly arising from any Hazardous Activity
conducted or allegedly conducted with respect to the facilities or the operation
of TRC prior to the Closing, or from Hazardous Material that was (i) present or
suspected to be present on or before the Closing, on or at the facilities (or
present or suspected to be present on any other property, if such Hazardous
Material emanated or allegedly emanated from any of the facilities and was
present or suspected to be present on any of the facilities on or prior to the
Closing) or (ii) Released or allegedly Released by TRC or any other Person for
whose conduct they are or may be held responsible, at any time on or prior to
the Closing.
TRC will be entitled to control any cleanup, any related proceeding,
and, except as provided in the following sentence, any other Proceeding with
respect to which indemnity may be sought under this Section 10.5.
Section 10.6 Time Limitations. If the Closing occurs, Harvest shall have no
liability (for indemnification or otherwise) with respect to any representation
or warranty, or covenant or obligation to be performed and complied with prior
to the Closing, unless on or before July 9, 2000 TRC notifies Harvest of a claim
specifying the factual basis of that claim in reasonable detail to the extent
then known by TRC; a claim for indemnification or reimbursement not based upon
any representation or warranty or any covenant or obligation to be performed and
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complied with prior to the Closing, may be made at any time. If the Closing
occurs, TRC shall have no liability (for indemnification or otherwise) with
respect to any representation or warranty, or covenant or obligation to be
performed and complied with prior to the Closing, unless on or before Harvest
notifies TRC of a claim specifying the factual basis of that claim in reasonable
detail to the extent then known by Harvest.
Section 10.7 Procedure for Indemnification - Third Party Claims.
10.7.1 Promptly after receipt by an indemnified party under Section
10.2, 10.4, or (to the extent provided in the last sentence of Section 10.3)
Section 10.3 of notice of the commencement of any Proceeding against it (the
"Proceeding"), such indemnified party shall, if a claim is to be made against an
indemnifying party under such Section, give notice to the indemnifying party of
the commencement of such claim, but the failure to notify the indemnifying party
will not relieve the indemnifying party of any liability that it may have to any
indemnified party, except to the extent that the indemnifying party demonstrates
that the defense of such action is prejudiced by the indemnifying party's
failure to give such notice.
10.7.2 If any Proceeding referred to in Section 10.07.1 is brought
against an indemnified party and it gives notice to the indemnifying party of
the commencement of such Proceeding, the indemnifying party shall, unless the
claim involves Taxes, be entitled to participate in such Proceeding and, to the
extent that it wishes (unless (i) the indemnifying party is also a party to such
Proceeding and the indemnified party determines in good faith that joint
representation would be inappropriate, or (ii) the indemnifying party fails to
provide reasonable assurance to the indemnified party of its financial capacity
to defend such Proceeding and provide indemnification with respect to such
Proceeding), to assume the defense of such Proceeding with counsel satisfactory
to the indemnified party and, after notice from the indemnifying party to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party shall not, as long as it diligently conducts such defense, be
liable to the indemnified party under this Section 10 for any fees of other
counsel or any other expenses with respect to the defense of such Proceeding, in
each case subsequently incurred by the indemnified party in connection with the
defense of such Proceeding, other than reasonable costs of investigation. If the
indemnifying party assumes the defense of a Proceeding, (i) it shall be
conclusively established for purposes of this Agreement that the claims made in
that Proceeding are within the scope of and subject to indemnification; (ii) no
compromise or settlement of such claims may be effected by the indemnifying
party without the indemnified party's consent unless (A) there is no finding or
admission of any violation of Legal Requirements or any violation of the rights
of any Person and no effect on any other claims that may be made against the
indemnified party, and (B) the sole relief provided is monetary damages that are
paid in full by the indemnifying party; and (iii) the indemnified party will
have no liability with respect to any compromise or settlement of such claims
effected without its consent. If notice is given to an indemnifying party of the
commencement of any Proceeding and the indemnifying party does not, within ten
days after the indemnified party's notice is given, give notice to the
indemnified party of its election to assume the defense of such Proceeding, the
indemnifying party will be bound by any determination made in such Proceeding or
any compromise or settlement effected by the indemnified party.
10.7.3 Notwithstanding the foregoing, if an indemnified party
determines in good faith that there is a reasonable probability that a
Proceeding may adversely affect it or its affiliates other than as a result of
monetary damages for which it would be entitled to indemnification under this
Agreement, the indemnified party may, by notice to the indemnifying party,
assume the exclusive right to defend, compromise, or settle such Proceeding, but
the indemnifying party shall not be bound by any determination of a Proceeding
so defended or any compromise or settlement effected without its consent (which
may not be unreasonably withheld).
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10.7.4 Harvest and TRC hereby consent to the non-exclusive
jurisdiction of any court in which a Proceeding is brought against any
Indemnified Person for purposes of any claim that an Indemnified Person may have
under this Agreement with respect to such Proceeding or the matters alleged
therein, and agree that process may be served on Harvest with respect to such a
claim anywhere in the world.
10.7.5 Procedure for Indemnification - Other Claims. A claim for
indemnification for any matter not involving a third-party claim may be asserted
by notice to the party from whom indemnification is sought.
ARTICLE XI.
CONDITIONS TO THE EXCHANGE OF STOCK
Section 11.1 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):
11.1.1 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 TRC in accordance with applicable law; it is
understood, however, that such adoption and approval shall have been obtained
prior to the expiration of the Feasibility Period.
11.1.2 Representations; True Representations and Covenants Performed.
The representations and warranties of TRC set forth herein shall be true and
correct in all material respects immediately prior to the Closing with the same
effect as if made at that time. TRC 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 Closing.
11.1.3 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 TRC which would be violated by the consummation of
this transaction, and no person or entity which is not a party to this Agreement
shall have commenced any litigation against TRC seeking to restrain or prohibit,
or to obtain substantial damages in connection with, this Agreement or the
transactions contemplated hereby.
11.1.4 Securities Laws. All approvals, consents, permits, licenses or
qualifications from authorities administrating the securities or "blue-sky" laws
of any state having jurisdiction required for the consummation of this
transaction shall have been obtained and shall be effective.
11.1.5 Regulatory Compliance, Approvals and Consents. TRC shall have
complied with all legal provisions applicable to this transaction, and all
approvals required under any legal provision to carry out this transaction, and
all consents required to be obtained in connection with this transaction in
order to avoid a default under any contract, agreement, commitment, lease,
mortgage, instrument or other document to or by which any of TRC is a party or
may be bound, shall have been obtained on terms reasonably satisfactory to
Harvest.
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11.1.6 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.
Section 11.2 Conditions Precedent to Performance by TRC. The obligations of
TRC under this Agreement are subject to the satisfaction of the following
conditions (any or all of which may be waived by TRC in their sole discretion to
the extent permitted by law):
11.2.1 Board and Stockholder Approval. This Agreement and the
transactions and matters contemplated herein shall have been effectively adopted
and approved at or prior to the Closing 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
TRC. Those matters include, without limitation, shareholder and Board of
Directors' approval of a reverse split of the shares of each class of stock of
Harvest to meet Nasdaq requirements, and approval of the merger contemplated
herein, approval of the Board of Directors contemplated in Schedule 1.2.2,
approval of a change of management, if required, and approval by Harvest Warrant
holders of a reset to these Warrants as required by TRC.
11.2.2 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 TRC a certificate to such effect.
11.2.3 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.
11.2.4 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.
11.2.5 Regulatory Compliance, Approvals and Consents. Harvest shall
have complied with all legal provisions applicable to this transaction, and all
approvals required under any legal provision to carry out this transaction, and
all consents required to be obtained in connection with this transaction 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 TRC.
11.2.6 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.
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ARTICLE XII.
NOTICES
Section 12.1 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, overnight delivery service, 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
Telecopy: (210) 824-6725
Copy to: Rosenberg, Tuggey, Agather, Rosenthal & Rodriquez P.C.
140 E. Houston Street, 2nd Floor
San Antonio, Texas 78205
Attention: Timothy N. Tuggey
Telecopy: (210) 225-1800
If to TRC: TRC Acquisition Corporation
2662 Holcomb Bridge Rd., Suite 320
Alpharetta, Georgia 30022
Attention: Clyde Culp III
Telecopy: (770) 518-1443
Copy to: Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, GA 30309
Attention: Wade H. Stribling, Esq.
Telecopy: (404) 817-6194
Section 12.2 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 11.01.
ARTICLE XIII.
GENERAL
Section 13.1 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.
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Section 13.2 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 written consent of the other party,
unless such release or announcement is required by law.
Section 13.3 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.
Section 13.4 Successors. This Agreement and the various rights and
obligations arising hereunder shall inure to the benefit of and be binding upon
TRC, its respective successors and permitted assigns, and Harvest and its
successors and permitted assigns. Neither this Agreement nor any of the rights,
interests, or obligations hereunder shall be transferred or assigned (by
operation of law or otherwise) by any of the parties hereto without the prior,
written consent of the other parties.
Section 13.5 Modification. This Agreement may not be changed, amended,
terminated, augmented, rescinded, or discharged (other than by performance), in
whole or in part, except by a writing executed by the parties hereto, and no
waiver of any of the provisions or conditions of this Agreement or any of the
rights of a party hereto shall be effective or binding unless such waiver shall
be in writing and signed by the party claimed to have given or consented
thereto. Except to the extent that a party hereto may have otherwise agreed in
writing, no waiver by that party of any condition of this Agreement or breach by
the other party of any of its obligations or representations hereunder or
thereunder shall be deemed to be a waiver of any other condition or subsequent
or prior breach of the same or any other obligation or representation by the
other party, nor shall any forbearance by the first part, to seek a remedy for
any noncompliance or breach by the other party be deemed to be a waiver by the
first party of its rights and remedies with respect to such noncompliance or
breach.
Section 13.6 Severability. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
Section 13.7 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.
Section 13.8 Signatures by Facsimile. Any facsimile signature of any party
hereto shall constitute a legal, valid and binding execution hereof by such
party.
Section 13.9 Remedies of the Parties. TRC acknowledges that, in addition to
all other remedies to which Harvest is entitled, Harvest shall have the right to
enforce the terms of this Agreement by a decree of specific performance,
provided Harvest is not in material default hereunder. Harvest acknowledges
that, in addition to all other remedies to which TRC is entitled, TRC shall have
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the right to enforce the terms of this Agreement by a decree of specific
performance, provided TRC is not in material default hereunder. The parties also
agree that the rights and remedies of each party to this Agreement set forth in
this Agreement and in all of the exhibits and schedules attached hereto and
documents referred to herein shall be cumulative and shall inure to the benefit
of each such party.
Section 13.10 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 Atlanta, Georgia, 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. Nothing in this
paragraph 13.10 shall derogate from the rights of the parties to seek
preliminary injunctive relief to preserve the status quo.
Section 13.11 Attorney's Fees. In the event of arbitration or litigation
filed or instituted between the parties with respect to this Agreement or
related agreements, the prevailing party will be entitled to receive from the
other party all costs, damages and expenses, including reasonable attorney's
fees, incurred by the prevailing party in connection with that action or
proceeding whether or not the controversy is reduced to judgment or award. The
prevailing party will be that party who may be fairly said by the arbitrator(s)
or the court to have prevailed on the major disputed issues.
Section 13.12 Cooperation and Records Retention. TRC and Harvest shall (i)
provide the other with access to such records, original or copies, or assistance
as may reasonably be requested by them in connection with the preparation of any
Tax Return, in connection with any audit or other examination by any Taxing
authority or any judicial or administrative proceedings relating to liability
for Taxes, or financial reporting obligations, (ii) each retain and provide the
other, with any records or other information which may be relevant to any such
Tax Return, audit or examination, proceeding or determination, or financial
reporting obligations, and (iii) each provide the other with any final
determination of any such audit or examination, proceeding or determination that
affects any amount required to be shown on any Tax Return of the other for any
period. All Tax Returns, supporting work 9schedules and other records or
information which may be relevant to such Tax Returns for all tax periods or
portions thereof ending before or including the Closing date shall remain with
Harvest or TRC and shall be made available for inspection and copying by the
parties hereto during normal business hours.
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. TRC ACQUISITION CORPORATION
__________________________________________ _______________________________
By: William J. Gallagher By: Clyde Culp III
Title: Chairman & Chief Executive Officer Title:
39
<PAGE>
FIRST AMENDMENT
TO
SHARE EXCHANGE AGREEMENT
THIS FIRST AMENDMENT TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
entered into as of this 10th day of August, 1998, by and among HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), and TRC ACQUISITION
CORPORATION, a Georgia corporation ("TRC").
W I T N E S S E T H:
--------------------
WHEREAS, Harvest and TRC have executed that certain Share Exchange
Agreement, dated as of July 9, 1998 (the "Exchange Agreement"); and
WHEREAS, Harvest and TRC have agreed to amend the Exchange Agreement as
provided herein;
NOW, THEREFORE, in consideration of the premises set forth above, and the
mutual covenants herein contained, Harvest and TRC hereby agree as follows:
1. Section 2.1 Feasibility Study. The second sentence of this section is
modified to read as follows: "Each party shall have until the earlier of August
31, 1998 or the date the Proxy Statement describing the Share Exchange is filed
with the Securities Exchange Commission to conduct such a Feasibility Study
("Feasibility Period")."
2. Ratification. Except as set forth herein, the terms and conditions of
the Exchange Agreement shall remain unmodified and in full force and effect and
the Exchange Agreement, as so modified, is hereby ratified and confirmed.
3. Counterparts. This Amendment may be executed in counterparts, each of
which shall constitute an original and all of which together shall constitute
one and the same instrument.
4. Signatures by Facsimile. Any facsimile signature of either party hereto
shall constitute the legal, valid and binding execution hereof by such party.
<PAGE>
IN WITNESS WHEREOF, Harvest and TRC have caused this First Amendment to
Share Exchange Agreement to be executed by their duly authorized representatives
as of the day and year first above written.
HARVEST RESTAURANT GROUP, INC.
By: /s/ Joe Fazzone, CFO
------------------------------------------
Chief Financial Officer
For: William J. Gallagher
Chairman and Chief Executive Officer
TRC ACQUISITION CORPORATION
By: /s/ Clyde E. Culp III
------------------------------------------
Clyde E. Culp III
Chairman and Chief Executive Officer
<PAGE>
SECOND AMENDMENT
TO
SHARE EXCHANGE AGREEMENT
THIS SECONDAMENDMENT TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
entered into as of this 31st day of August, 1998, by and among HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), and TRC ACQUISITION
CORPORATION, a Georgia corporation ("TRC").
WITNESSETH:
-----------
WHEREAS, Harvest and TRC have executed that certain Share Exchange
Agreement, dated as of July 9, 1998 (the "Exchange Agreement"); and
WHEREAS, Harvest and TRC have previously agreed to amend the Exchange
Agreement as provided herein in the First Amendment thereto, and have now agreed
to further amend the sum by the terms set forth below:
NOW, THEREFORE, in consideration of the premises set forth above, and the
mutual covenants herein contained, Harvest and TRC hereby agree as follows:
1. Section 2.1 Feasibility Study. The second sentence of this section is
modified to read as follows: 'Each party shall have until the earlier of
September 8, 1998 or the date the Proxy Statement describing the Share Exchange
is filed with the Securities Exchange Commission to conduct such a Feasibility
Study ("Feasibility Period")."
2. Ratification. Except as set forth herein, the terms and conditions of
the Exchange Agreement shall remain unmodified and in full force and effect and
the Exchange Agreement, as so modified, is hereby ratified and confirmed.
3. Counterparts. This Amendment may be executed in counterparts, each of
which shall constitute an original and all of which together shall constitute
one and the same instrument.
4. Signatures by Facsimile. Any facsimile signature of either party hereto
shall constitute the legal, valid and binding execution hereof by such party.
<PAGE>
IN WITNESS WHEREOF, Harvest and TRC have caused this Second Amendment to
Share Exchange Agreement to be executed by their duly authorized representatives
as of the day and year first above written.
HARVEST RESTAURANT GROUP, INC.
By: /s/ William J. Gallagher
------------------------------------
William J. Gallagher
Chairman and Chief Executive Officer
TRC ACQUISITION CORPORATION
By: /s/ Clyde E. Culp III
------------------------------------
Clyde E. Culp III
Chairman and Chief Executive Officer
<PAGE>
THIRD AMENDMENT
TO
SHARE EXCHANGE AGREEMENT
THIS THIRD AMENDMENT TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
entered into as of this 8TH day of September, 1998, by and among HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), and TRC ACQUISITION
CORPORATION, a Georgia corporation ("TRC").
WITNESSETH:
-----------
WHEREAS, Harvest and TRC have executed that certain Share Exchange
Agreement, dated as of July 9, 1998 (the "Exchange Agreement"); and
WHEREAS, Harvest and TRC have previously agreed to amend the Exchange
Agreement as provided herein in the First Amendment thereto, and have now agreed
to further amend the sum by the terms set forth below:
NOW, THEREFORE, in consideration of the premises set forth above, and the
mutual covenants herein contained, Harvest and TRC hereby agree as follows:
1. Section 2.1 Feasibility Study. The second sentence of this section is
modified to read as follows: "Each party shall have until the earlier of
September 15, 1998 or the date the Proxy Statement describing the Share Exchange
is filed with the Securities Exchange Commission to conduct such a Feasibility
Study ("Feasibility Period")."
2. Counterparts. This Amendment may be executed in counterparts, each of
which shall constitute an original and all of which together shall constitute
one and the same instrument.
3. Signatures by Facsimile. Any facsimile signature of either party hereto
shall constitute the legal, valid and binding execution hereof by such party.
<PAGE>
IN WITNESS WHEREOF, Harvest and TRC have caused this Fourth Amendment to
Share Exchange Agreement to be executed by their duly authorized representatives
as of the day and year first above written.
HARVEST RESTAURANT GROUP, INC.
By: /s/ William J. Gallagher
---------------------------------------
William J. Gallagher
Chairman and Chief Executive Officer
TRC ACQUISITION CORPORATION
By: /s/ Clyde E. Culp III
---------------------------------------
Clyde E. Culp III
Chairman and Chief Executive Officer
<PAGE>
FOURTH AMENDMENT
TO
SHARE EXCHANGE AGREEMENT
THIS FOURTH AMENDMENT TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
entered into as of this 15th day of September, 1998, by and among HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), and TRC ACQUISITION
CORPORATION, a Georgia corporation ("TRC").
WITNESSETH:
-----------
WHEREAS, Harvest and TRC have executed that certain Share Exchange
Agreement, dated as of July 9, 1998 (the "Exchange Agreement"); and
WHEREAS, Harvest and TRC have previously agreed to amend the Exchange
Agreement as provided herein in the First Amendment thereto, and have now agreed
to further amend the sum by the terms set forth below:
NOW, THEREFORE, in consideration of the premises set forth above, and the
mutual covenants herein contained, Harvest and TRC hereby agree as follows:
1. Section 2.1 Feasibility Study. The second sentence of this section is
modified to read as follows: "Each party shall have until the earlier of
September 22, 1998 or the date the Proxy Statement describing the Share Exchange
is filed with the Securities Exchange Commission to conduct such a Feasibility
Study ("Feasibility Period")."
2. Counterparts. This Amendment may be executed in counterparts, each of
which shall constitute an original and all of which together shall constitute
one and the same instrument.
3. Signatures by Facsimile. Any facsimile signature of either party hereto
shall constitute the legal, valid and binding execution hereof by such party.
<PAGE>
IN WITNESS WHEREOF, Harvest and TRC have caused this Fourth Amendment to
Share Exchange Agreement to be executed by their duly authorized representatives
as of the day and year first above written.
HARVEST RESTAURANT GROUP, INC.
By: /s/ William J. Gallagher
------------------------------------
William J. Gallagher
Chairman and Chief Executive Officer
TRC ACQUISITION CORPORATION
By: /s/ Clyde E. Culp III
------------------------------------
Clyde E. Culp III
Chairman and Chief Executive Officer
<PAGE>
FIFTH AMENDMENT
TO
SHARE EXCHANGE AGREEMENT
THIS FIFTH AMENDMENT TO SHARE EXCHANGE AGREEMENT (this "Amendment") is
entered into as of this 22ND day of September, 1998, by and among HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), and TRC ACQUISITION
CORPORATION, a Georgia corporation ("TRC").
WITNESSETH:
-----------
WHEREAS, Harvest and TRC have executed that certain Share Exchange
Agreement, dated as of July 9, 1998 (the "Exchange Agreement"); and
WHEREAS, Harvest and TRC have previously agreed to amend the Exchange
Agreement as provided herein in the various Amendments thereto, and have now
agreed to further amend the sum by the terms set forth below:
NOW, THEREFORE, in consideration of the premises set forth above, and the
mutual covenants herein contained, Harvest and TRC hereby agree as follows:
1. Section 2.1 Feasibility Study. The second sentence of this section is
modified to read as follows: "Each party shall have until the earlier of
September 23, 1998 or the date the Proxy Statement describing the Share Exchange
is filed with the Securities Exchange Commission, to conduct such a Feasibility
Study ("Feasibility Period")."
2. Counterparts. This Amendment may be executed in counterparts, each of
which shall constitute an original and all of which together shall constitute
one and the same instrument.
3. Signatures by Facsimile. Any facsimile signature of either party hereto
shall constitute the legal, valid and binding execution hereof by such party.
<PAGE>
IN WITNESS WHEREOF, Harvest and TRC have caused this Fifth Amendment to
Share Exchange Agreement to be executed by their duly authorized representatives
as of the day and year first above written.
HARVEST RESTAURANT GROUP, INC.
By: /s/ William J. Gallagher
-------------------------------------
William J. Gallagher
Chairman and Chief Executive Officer
TRC ACQUISITION CORPORATION
By: /s/ Clyde E. Culp III
-------------------------------------
Clyde E. Culp III
Chairman and Chief Executive Officer
<PAGE>
SIXTH AMENDMENT
TO
SHARE EXCHANGE AGREEMENT
THIS SIXTH AMENDMENT TO SHARE EXCHANGE AGREEMENT (this "SIXTH AMENDMENT")
is entered into as of this _____ day of September, 1998, by and among HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), TRC ACQUISITION
CORPORATION, a Georgia corporation ("TRC") and HARTAN, INC., a Texas corporation
("Hartan").
W I T N E S S E T H :
---------------------
WHEREAS, Harvest and TRC have executed that certain Share Exchange
Agreement, dated as of July 9, 1998 which was amended pursuant to those certain
amendments dated August 10, 1998, August 31, 1998, September 8, 1998, September
15, 1998, and September 22, 1998, respectively (as amended, the "Agreement");
and
WHEREAS, Harvest and TRC have agreed to amend certain provisions of the
Exchange Agreement as provided herein including, but not limited to, inclusion
of Hartan, a wholly-owned subsidiary of Harvest, as a party, and to describe
this transaction as a forward triangular merger;
NOW, THEREFORE, in consideration of the premises set forth above, and the
mutual covenants herein contained, Harvest, Hartan and TRC hereby agree as
follows:
1. Title. The Agreement is hereby renamed "Share Exchange and Merger
Agreement".
2. Introduction. The introductory paragraph of the Agreement is modified to
read as follows:
This SHARE EXCHANGE AND MERGER AGREEMENT (the "Agreement") is
made and entered into as of the 9th day of July, 1998, between HARVEST
RESTAURANT GROUP, INC., a Texas corporation ("Harvest"), HARTAN, INC.,
a Texas corporation and a wholly-owned subsidiary of Harvest
("Hartan") and TRC ACQUISITION CORPORATION, a Georgia corporation
("TRC"), referred to jointly as the "Parties".
<PAGE>
3. Recitals.
(a) The first "WHEREAS" clause is modified to read as follows:
WHEREAS, TRC has approximately 4,110,000 issued and
outstanding shares of common stock ("TRC Common Stock") including
options and warrants ("TRC Options and Warrants"), and
approximately 2,000 issued and outstanding shares of class A
preferred stock ("TRC Class A Preferred Stock"), which represents
all of the issued and outstanding capital stock of TRC;
(b) In the seventh "WHEREAS" clause, the last sentence is modified to
read as follows:
Except to the extent of the number of shares of Harvest
Series C Preferred Stock issued in connection with the financing
described in subsection 1.2.1 below, and stock dividends issued
on any of the above-referenced stock, to the extent that the
number of actual outstanding shares of Harvest Capital Stock on
the Effective Date exceeds the share amounts stated above, then
the shares of Harvest Common Stock to be issued to the holders of
TRC Common Stock as set forth above shall be adjusted pro rata to
maintain the same ownership percentage;
(c) The eighth "WHEREAS" clause is modified to read as follows:
WHEREAS, the intended result of this Agreement is for TRC to
merge into Hartan, Inc., a new, wholly-owned subsidiary of
Harvest ("Hartan") as part of a forward triangular merger and for
Harvest to issue 18,000,000 shares of Harvest Common Stock in
exchange for 100% of the TRC Common Stock and the TRC Options and
Warrants.
(d) Beginning in the ninth "WHEREAS" clause and continuing throughout
the Agreement, all references to "Harvest Series C Preferred Stock" are
modified to read "Harvest Series D Preferred Stock".
(e) The final "WHEREAS" clause of this section is modified to read as
follows:
WHEREAS, the Parties intend for this transaction to qualify
as a "tax-free reorganization" pursuant to Section 368(a)(1)(A)
within the provisions of the Internal Revenue Code of 1986, as
amended (the "Code") by virtue of the provisions of Section
368(a)(2)(D) of the Code, and agree that TRC shall have the
authority to make any amendments and modifications to this
Agreement as it may deem appropriate to ensure that this
transaction qualifies as a tax-free reorganization under the
Code;
2
<PAGE>
4. Section 1.2 Contemplated Transactions.
(a) All references to "Harvest Subsidiary" in Section 1.2 and
throughout the remainder of the Agreement are deleted and "Hartan" is
inserted in lieu thereof.
(b) In subsection 1.2.1, the next to last sentence is modified to read
as follows: "The option shall be on terms mutually agreeable to the
parties, as set forth in Schedule 1.2.1."
(c) Subsection 1.2.3 is modified to read as follows:
1.2.3 Employment and Severance Agreements. Clyde Culp shall
have executed an employment agreement with Harvest and William
Gallagher shall have executed a severance agreement with Harvest,
the essential and principal terms of each of which are set out
and attached hereto as Schedule 1.2.3 and made a part hereof.
(d) Subsection 1.2.4 is deleted.
(e) Subsection 1.2.5 is modified to read as follows:
1.2.5 Settlement of Liabilities. Harvest shall obtain
settlement agreements from all creditors with known, actual or
contingent outstanding liabilities in excess of $10,000.00. The
total amount permitted to be paid in order to obtain the
settlement agreements (the "Settlement Payment") shall be
approximately $550,000.00, but shall not exceed $1,000,000.00. In
calculating the amount of the Settlement Payment, Harvest shall
have the right to credit any proceeds received by Harvest in
connection with such disputed matters, or liquidation of its
assets, against amounts paid to obtain the settlement agreements.
(f) Subsection 1.2.6 is deleted and the following subsection is added
to Section 11.2 of the Agreement:
11.2.7 Harvest shall have used best efforts to convert the
Harvest Series A Preferred Stock to Harvest Common Stock.
(g) Subsection 1.2.7 is deleted.
5. Section 3.1 Closing. The following new subsection 3.1.5 is added to the
end of this section:
3.1.5 Actions of Hartan at Closing. At the Closing, Hartan
shall deliver to TRC the following:
3
<PAGE>
3.1.5.1 Resignations. Hartan shall deliver to Harvest
the written and executed resignations of the directors of
Hartan and termination of any such executed employment
agreements, if any, dated as of the Effective Date, as
called for in this Agreement.
3.1.5.2 Certificate of Hartan. Hartan shall deliver to
TRC a certificate, which shall be dated as of Closing and
which shall be signed by Hartan's Chief Executive Officer,
certifying: (i) the authority of Hartan to enter into and
consummate the transactions contemplated by this Agreement;
(ii) the authority of the officers of Hartan to execute and
deliver any document contemplated by this Agreement on
behalf of Hartan; (iii) that the representations and
warranties of Hartan 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
Hartan specifically relates to an earlier date); and (iv)
that each and every covenant and agreement of Hartan
contained in the Agreement to be performed by Hartan on or
prior to Closing has been performed by Hartan.
3.1.5.3 Corporate Resolutions. Hartan shall deliver to
TRC certified copies of the resolutions of the Board of
Directors of Hartan and shareholder approval of Hartan
authorizing the execution, delivery and performance of this
Agreement and the transactions contemplated herein.
6. Article IV Exchange of Shares. Article IV is renamed "Exchange of Shares
and Merger".
7. Subsection 4.1.1 Exchange of TRC Common Stock, Options and Warrants.
This subsection is modified to read as follows:
4.1.1 Exchange of TRC Common Stock, Options and Warrants. As of
the Effective Date, all shares of TRC Common Stock and all TRC Options
and Warrants that are outstanding shall be converted into the right to
receive a total of 18,000,000 fully paid and non-assessable shares of
Harvest Common Stock (or such higher adjusted amount as provided for
in the recitals) equally among all issued and outstanding shares of
TRC Common Stock and TRC Options and Warrants unless ratably reduced
pursuant to a reverse split of Harvest Common Stock.
8. Subsection 4.1.2 Exchange of Rick Tanner Note and TRC Class A Preferred
Stock. This subsection is modified to read as follows:
The Rick Tanner Note, including the principal balance and all
interest accrued thereon, valued in an amount of approximately
$3,100,000.00, the Rick Tanner employment agreement, valued in an
amount of approximately $600,000.00, and the TRC Class A Preferred
Stock, valued in an amount of approximately $3,525,000.00, shall be
exchanged for 722,500 shares of Harvest Series D Preferred Stock at a
value of $10.00 per share in accordance with the provisions of Section
4.2, unless ratably reduced pursuant to a reverse split of Harvest
Common Stock.
4
<PAGE>
9. Subsection 4.1.3 Santa Cruz Squeeze, Inc. Note. The following new
subsection is added to Section 4.1:
4.1.3 Exchange of Santa Cruz Squeeze, Inc. Note. The Santa Cruz
Squeeze, Inc. Real Estate Lien Note in the amount of approximately
$150,000.00 shall be paid and satisfied in full by payment of
$50,000.00 cash and delivery of 50,000 shares of registered Harvest
Common Stock.
10. Subsection 4.2.2 TRC Class A Preferred Stock. All references to "TRC
Class C Preferred Stock" are modified to read "TRC Class A Preferred Stock".
11. The following new Section 4.4 shall be added to the end of Article IV:
Section 4.4 Merger Procedure.
4.4.1 Upon the Effective Date, TRC shall be merged with and
into Hartan in accordance with this Agreement. Upon the Effective
Date, Hartan shall be the surviving corporation of the merger by
and between TRC and Hartan. Upon the Effective Date, the separate
existence and corporate organization of TRC shall cease, except
insofar as it may be continued by statute. The identity,
existence, powers, rights and immunities of Hartan shall continue
unaffected.
4.4.2 On the Effective Date, the Articles of Incorporation
and Bylaws of Hartan shall become the Articles of Incorporation
and Bylaws of the surviving corporation and shall thereafter
continue to be Hartan's Articles of Incorporation and Bylaws
until changed as provided by law and in accordance with said
documents.
4.4.3 The new directors and officers of Harvest (required
pursuant to this Agreement) shall become the directors and
officers of Hartan as of the Effective Date.
4.4.4 Except as otherwise provided herein, upon the
Effective Date, Hartan shall be obligated to perform and/or pay
all obligations and liabilities of TRC which obligations and
liabilities Hartan expressly assumes and agrees to perform or
pay, subject to the effectuation of the merger contemplated
herein. Also, upon the Effective Date, Hartan will possess all
property, real, personal and otherwise, owned by TRC (in addition
to any such property owned by Hartan immediately prior to the
Effective Date).
5
<PAGE>
12. Section 5.1 TRC's Representations and Warranties. The first sentence of
Section 5.1 is modified to read as follows:
TRC makes the following representations and warranties to Harvest
and Hartan as a material inducement for Harvest and Hartan to enter
into this Agreement subject only to such disclaimers, disclosures and
exceptions as are expressly set forth in the attachments hereto.
13. Subsection 5.1.7 Undisclosed Liabilities. This subsection is revised to
read as follows:
Prior to expiration of the Feasibility Period, TRC has provided
to Harvest the financial statements set forth in subsection 5.1.19.
Except as and to the extent reflected or disclosed (or adequately
reserved for or against) in such financial statements or in Schedule
5.1, TRC 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 of such against TRC.
14. Article VII Harvest's Representations and Warranties.
(a) Article VII titled "Harvest's Representations and Warranties" is
modified to be titled "Harvest's and Hartan's Representations and
Warranties".
(b) All references to "Harvest" contained in Sections 7.1, 7.1.2,
7.1.3, 7.1.4, 7.1.5, 7.1.6, 7.1.7, 7.1.8, 7.1.9, 7.1.10, 7.1.11, 7.1.12,
7.1.13, 7.1.14, 7.1.15, 7.1.16, 7.1.17, 7.1.18, 7.1.20, 7.1.21, 7.1.22,
7.1.23, 7.1.24, 7.1.25, 7.1.26, 7.1.27, 7.1.28 and 7.1.29 shall be modified
to read "Harvest and/or Hartan".
15. Subsection 7.1.7 Undisclosed Liabilities. This subsection is revised to
read as follows:
Prior to expiration of the Feasibility Period, Harvest has
provided to TRC the financial statements set forth in subsection
7.1.19. Except as and to the extent reflected or disclosed (or
adequately reserved for or against) in such financial statements or in
Schedule 7.1, 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, pension plan obligations,
and there is no known basis for the assertion of such against Harvest.
6
<PAGE>
16. Article X Indemnification and Remedies. This Article is deleted and the
following is inserted in lieu thereof:
ARTICLE X
INDEMNIFICATION AND REMEDIES
Section 10.1 Indemnification by Harvest. Harvest and its successors
and assigns hereby agree that notwithstanding any investigation which may
have been made by or on behalf of TRC prior to the Closing, Harvest shall
indemnify, defend and hold harmless TRC (and any affiliated party, officer,
director or employee of TRC) at any time after consummation of the Closing
from and against all demands, claims, actions or causes of action,
assessments, losses, damages, liabilities, costs and expenses including,
subject to this Article, interest, penalties, court costs and reasonable
attorneys' fees and expenses asserted against, imposed upon or incurred by
TRC or any affiliated party, directly or indirectly, caused (a) by reason
of or resulting from or arising out of any material misrepresentation or
any material breach or nonfulfillment of any representation, covenant,
warranty or agreement of Harvest or Hartan contained in or made pursuant to
this Agreement, and (b) by any obligation of TRC, to the extent disclosed
to Harvest in this Agreement, for which TRC (and any affiliated party of
TRC) is or may become personally liable.
Section 10.2 Indemnification by TRC. TRC and its successors and
assigns hereby agree that notwithstanding any investigation which may have
been made by or on behalf of Harvest prior to the Closing, TRC shall
indemnify, defend and hold harmless Harvest (and any affiliated party,
officer, director or employee of Harvest) at any time after consummation of
the Closing from and against all demands, claims, actions or causes of
action, assessments, losses, damages, liabilities, costs and expenses,
including, subject to this Article, interest, penalties, court costs and
reasonable attorneys' fees and expenses asserted against, imposed upon or
incurred by Harvest or any affiliated party, directly or indirectly, caused
(a) by reason of or resulting from or arising out of any material
misrepresentation or any material breach or nonfulfillment of any
representation, warranty, covenant and/or agreement of TRC contained in or
made pursuant to this Agreement, and (b) by any obligation of Harvest, to
the extent disclosed to TRC in this Agreement, for which Harvest (and any
affiliated party of Harvest) is or may become personally liable.
Section 10.3 Defense
10.3.1 Promptly after the receipt by any person entitled to
indemnification under this Article X of notice of (i) any claim or
(ii) the commencement of any action or proceeding, such party (the
"Aggrieved Party") will, if claim with respect thereto is made against
any party obligated to provide indemnification pursuant to this
Article X (the "Indemnifying Party"), give such Indemnifying Party
written notice of such claim or the commencement of such action or
proceeding and shall permit the Indemnifying Party to assume the
defense of any such claim or any proceeding or litigation resulting
7
<PAGE>
from such claim, unless the action or proceeding seeks an injunction
or other similar relief against the Aggrieved Party or there is a
conflict of interest between it and the Indemnifying Party in the
conduct of the defense of such action. Failure by the Indemnifying
Party to notify the Aggrieved Party of its election to defend any such
proceeding or action within a reasonable time, but in no event more
than fifteen (15) days after written notice thereof shall have been
given to the Indemnifying Party, shall be deemed a waiver by the
Indemnifying Party of its right to defend such action.
10.3.2 If the Indemnifying Party assumes the defense of any such
claim or litigation resulting therefrom with counsel reasonably
acceptable to the Aggrieved Party, the obligations of the Indemnifying
Party as to such claim shall be limited to taking all steps necessary
in the defense or settlement of such claim or litigation resulting
therefrom and to holding the Aggrieved Party harmless from and against
any losses, damages and liabilities caused by or arising out of any
settlement of, or any judgment entered in connection with, such claim
or litigation. The Aggrieved Party may participate, at its expense, in
the defense of such claim or litigation provided that the Indemnifying
Party shall direct and control the defense of such claim or
litigation. The Aggrieved Party shall cooperate and make available all
books and records reasonably necessary and useful in connection with
the defense. The Indemnifying Party shall not, in the defense of such
claim or any litigation resulting therefrom, consent to entry of any
judgment, except with the written consent of the Aggrieved Party, or
enter into any settlement, except with the written consent of the
Aggrieved Party.
10.3.3 If the Indemnifying Party shall not assume the defense of
any such claim or litigation resulting therefrom, the Aggrieved Party
may defend against such claim or litigation in such manner as it may
deem appropriate and reasonably satisfactory to the Aggrieved Party.
The Indemnifying Party shall promptly reimburse the Aggrieved Party
for the amount of all expenses, legal or otherwise, as incurred by the
Aggrieved Party in connection with the defense against or settlement
of such claim or litigation. No settlement of claim or litigation
shall be made without the consent of the Indemnifying Party, which
consent shall not be unreasonably withheld. If no settlement of the
claim or litigation is made, the Indemnifying Party shall promptly
reimburse the Aggrieved Party for the amount of any judgment rendered
with respect to such claim or in such litigation and of all expenses,
legal or otherwise, as incurred by the Aggrieved Party in the defense
against such claim or litigation.
10.3.4 Notwithstanding anything to the contrary herein contained,
TRC shall be entitled to control any cleanup, containment,
remediation, related proceeding, or other action or proceeding arising
from or in connection with any environmental, health or safety
liability or any hazardous materials or activities.
8
<PAGE>
Section 10.4 Remedies Non-Exclusive. The remedies provided in this
Article X shall not be exclusive of or limit any other remedies that may be
available to either party in the event of a breach of this Agreement.
17. Section 11.2 Conditions Precedent to Performance by TRC.
(a) Subsection 11.2.1 is modified to read as follows:
This Agreement and the transactions and matters contemplated
herein shall have been effectively adopted and approved at or
prior to the Closing by the Board of Directors of Harvest and
Hartan, respectively, and stockholders of Harvest and Hartan,
respectively, in accordance with applicable law and Harvest and
Hartan shall have delivered such certificates and evidence of the
same as reasonably requested by TRC. Those matters include,
without limitation, shareholder approval of a reverse split of
the shares of each class of stock of Harvest and approval of the
merger contemplated herein, shareholder approval of the new Board
of Directors set forth in Schedule 1.2.2 and approval of a change
of management, if required.
(b) In subsections 11.2.2, 11.2.3, 11.2.4, 11.2.5 and 11.2.6, all
references to "Harvest" are modified to read "Harvest and Hartan".
18. Section 12.1 Notices. This section is modified to include the following
address for Hartan:
If to Hartan: Hartan, Inc.
c/o Harvest Restaurant Group, Inc.
1250 N.E. Loop 410, Suite 335
San Antonio, Texas 78209
Attention: William J. Gallagher
Telecopy: (210) 824-6725
Copy to: Rosenberg, Tuggey, Agather, Rosenthal &
Rodriguez P.C.
140 E. Houston Street, 2nd Floor
San Antonio, Texas 78205
Attention: Timothy N. Tuggey, Esq.
Telecopy: (210) 225-1800
19. Section 13.9 Remedies of the Parties. All references to "Harvest"
contained in this section are modified to read "Harvest and Hartan".
20. Nondisparagement. At no time shall Harvest, TRC or Hartan or any of
their officers, directors or other representatives, disparage, denigrate or
otherwise defame any other or the business, services, properties or assets, or
any of the officers, directors, employees, agents or other representatives of
Harvest, TRC or Hartan provided, however, that the foregoing shall in no way
9
<PAGE>
limit or preclude obligations of any party to comply with applicable law, and
any disclosures required thereunder. The foregoing sentence shall create no
liability on the part of any party to this Agreement or its officers, directors
or other representatives due to unsubstantiated statements attributed to such
party or its officers, directors or other representatives by a third party.
21. Ratification. Except as set forth herein, the terms and conditions of
the Agreement shall remain unmodified and in full force and effect and the
Agreement, as so modified, is hereby ratified and confirmed.
22. Counterparts. This Sixth Amendment may be executed in counterparts,
each of which shall constitute an original and all of which together shall
constitute one and the same instrument.
23. Facsimile Signatures. Each party shall be authorized to accept, and may
rely upon a facsimile transmission of this Sixth Amendment executed by the other
party and such document shall be binding upon the executing party.
[SIGNATURES ON FOLLOWING PAGE]
10
<PAGE>
IN WITNESS WHEREOF, Harvest, Hartan and TRC have caused this Sixth
Amendment to Share Exchange Agreement to be executed by their duly authorized
representatives as of the day and year first above written.
HARVEST RESTAURANT GROUP, INC.
By: /s/ William J. Gallagher
-------------------------------------
William J. Gallagher
Chairman and Chief Executive Officer
TRC ACQUISITION CORPORATION
By:
-------------------------------------
Clyde E. Culp III
Chairman and Chief Executive Officer
HARTAN, INC.
By: /s/ William J. Gallagher
-------------------------------------
William J. Gallagher
Title: President
----------------------------------
11
<PAGE>
Schedule 1
(List of Tanner's Stores)
Corporate Restaurant Locations Franchise
Restaurant Locations
Tanner's Northridge Tanner's Tucker Tanner's Montgomery
That Chicken Place Inc. Tanner's Tucker, Inc. 3433 McGehee Road
350 Northridge Road 4450 Hugh Howell Road Montgomery, Al 36111
Atlanta, Ga 30338 Tucker, Ga 30084
Tanner's Vinings Tanner's Lilburn Tanner's Macon
Tanner's Vinings, Inc. Tanner's Lilburn, Inc. 5999 Zebulon Road
3220 Cobb Parkway 521 Indian Trail NW Macon, Ga 30120
Atlanta, Ga 30339 Lilburn, Ga 30247
Tanner's Oaks Tanner's Fayetteville *
Tanner's Oaks Inc. 94 Pavillion Parkway
4920 Roswell Road Fayetteville, Ga 30214
Atlanta, Ga 30342
Tanner's Spalding Tanner's Suwanee *
Tanner's Spalding Inc. 525 Peachtree Industrial Blvd.
6275 Spalding Drive Suwanee, Ga 30174
Norcross, Ga 3009
Tanner's Emory Tanner's Canton *
Tanner's Mill Inc. 1453 Riverstone Parkway
1371 Clairmont Road Suite 100
Decatur, Ga 30033 Canton, Ga 30114
Tanner's Lawrenceville
Tanner's Lawrenceville, Inc.
650 Gwinnett Drive
Suite 203
Lawrenceville Ga 30245
Corporate Catering Location
Tanner's Catering
Tanner's Catering, Inc.
6470 Spalding Drive, Suite P
Norcross, Ga 30092
* Operate under TRC Acquisition Corporation legal entity
<PAGE>
Schedule 2
(Statement of Resolution of Harvest Series D Preferred Stock)
See Attached
<PAGE>
HARVEST RESTAURANT GROUP, INC.
(a Texas corporation)
---------------------
STATEMENT OF RESOLUTION
ESTABLISHING SERIES OF PREFERRED STOCK
--------------------------------------
Series D Convertible Preferred Stock
To: The Secretary of State
of the State of Texas
Pursuant to the provisions of Article 2.13 of the Texas Business
Corporation Act (the "Act"), the undersigned corporation, HARVEST RESTAURANT
GROUP, INC., (the "Corporation"), hereby submits the following statement for the
purpose of establishing and designating a series of shares of preferred stock to
be known as Series D Convertible Preferred Stock and fixing and determining the
relative rights and preferences thereof:
ARTICLE ONE
NAME
----
1. The name of the Corporation is HARVEST RESTAURANT GROUP, INC. and
the charter number of the Corporation is 01274398.
ARTICLE TWO
CORPORATE RESOLUTIONS
---------------------
Be it known that on May 19, 1997 the Corporation had established and
designated 3,000,000 shares of its preferred stock as Series A Redeemable
Convertible Preferred Stock ("Series A Preferred Stock") and on December 22,
1997 the Corporation had established and designated 1,000 shares of its
preferred stock as Series B Convertible Preferred Stock ("Series B Preferred
Stock"), and on July 2, 1998 the Corporation had established and designated
1,000 shares of its preferred stock as Series C Convertible Preferred Stock
("Series C Preferred Stock").
2. The following resolution establishing and designating an additional
series of preferred stock, known as: the Series D Convertible Preferred Stock
(the "Series D Preferred Stock"), and fixing and determining the relative rights
and preferences thereof was duly adopted by the Board of Directors of the
Corporation on __________ ___, 1998. The Series D Preferred Stock shall rank
junior to the Series A Preferred Stock, the Series B Preferred Stock and the
Series C Preferred Stock.
BE IT RESOLVED that, pursuant to the authority expressly granted and
vested in the Board of Directors of the Corporation in accordance with Article
Four, Section 1 of the Corporation's Articles of Incorporation, authorizing
5,000,000 shares of Preferred Stock (the "Preferred Stock"), $1.00 par value per
share, approved and adopted on June 17, 1993 by the affirmative vote of the
holders of more than the requisite majority of the issued and outstanding shares
of Common Stock of the Corporation entitled to vote thereon (being the only
voting capital stock of the Corporation then outstanding) in accordance with and
pursuant to the provisions of Article 2.13 of the Texas Business Corporation Act
<PAGE>
(the "Act"), the Board of Directors of the Corporation does hereby approve and
adopt the following resolutions designating and authorizing for issuance, in
accordance with the provisions of Article 2.13 of the Act, the Series D
Preferred Stock of the Corporation, said resolutions hereby effected being made
prior to the issuance of any shares of Series D Preferred Stock, such shares of
Series D Preferred Stock to consist of 750,000 shares, each having a par value
of $1.00 per share, and each of which shares of Series D Preferred Stock shall
have the dividend rights, voting powers, redemption provisions, liquidation
preferences and the relative, optional or other special rights, and shall be
subject to the qualifications, limitations or restrictions set forth below and
the remaining 1,248,000 authorized shares of the Preferred Stock shall remain
undesignated and reserved for future issuance subject to the future action of
the Board of Directors of the Corporation.
Rights and Preferences of Series D Preferred Stock
--------------------------------------------------
1. Dividends.
( a ) Amount and Payment of Dividend. Subject to the limitations
hereinafter set forth, the holders of Series D Preferred Stock shall be entitled
to receive, but only when, if and as declared by the Board of Directors,
dividends at the rate of eight percent (8%) per annum of the original issue
price thereof of Ten and No/100 Dollars ($10.00) per share, and no more, payable
only at the time such shares are converted pursuant to Section 4 hereof. Such
dividends may be paid in cash or in shares of Common Stock of the Corporation as
determined by the Company in its sole discretion; provided, however, no
fractional shares may be issued for dividends, any fractional shares will be
rounded to the nearest whole share, and provided further that if any such
dividend is paid in whole or in part by shares of Common Stock, the number of
shares of such security to be issued as a stock dividend shall be determined by
the reported market price of a share of the respective security on the last day
of the period for such stock dividend. Any shares of Series D Preferred Stock
issued after the date hereof shall accrue dividends from the date of issuance.
( b ) Cumulative Rights. To the extent, if any, that dividends at
the rate set forth in Section 1(a) above shall not be paid or set apart in full
for the Series D Preferred Stock, the aggregate deficiency shall be cumulated
and must be fully paid or set apart for payment before any dividends may be paid
upon or set apart for the Common Stock of the Corporation or before the
Corporation may purchase any of its Common Stock or otherwise make any
distribution on account of its Common Stock or any other class of capital stock
now or hereafter authorized or issued by the Corporation which ranks on a parity
with or junior to the Series D Preferred Stock (other than (i) a dividend
payable in Common Stock, or (ii) by conversion into or exchange for capital
stock of the Corporation ranking junior to the Series D Preferred Stock as to
dividends).
( c ) No Interest on Accrued Dividends. Any accumulations of
dividends on the Series D Preferred Stock shall not bear interest.
( d ) Declaration. Dividends on the Series D Preferred Stock
shall be declared if, when and as the Board of Directors of the Corporation
shall in its sole discretion deem advisable, and only from the surplus of the
Corporation as such shall be fixed and determined by the said Board of
Directors. The determination of the Board of Directors at any time of the amount
of surplus available for the payment of dividends shall be binding and
conclusive on the holders of the shares of Series D Preferred Stock then
outstanding. If dividends are not paid in full upon the Series D Preferred Stock
and any other Preferred Stock ranking on a parity as to dividends with the
Series D Preferred Stock, all dividends declared upon shares of Series D
Preferred Stock and upon such other shares of Preferred Stock will be declared
pro rata so that in all cases the amount of dividends declared per share on the
Series D Preferred Stock and such other Preferred Stock shall bear the same
ratio to each other that the accumulated dividends per share on the shares of
the Series D Preferred Stock and such other shares of Preferred Stock bear to
each other. The holders of the Series D Preferred Stock shall not be entitled to
receive any dividends thereon other than the dividends provided for in the
preceding provisions of this Section.
<PAGE>
2. Voting Rights and Notice of Meetings. The holders of the Common
Stock shall have the exclusive right and power to vote on any matter submitted
to a vote of the shareholders of the Corporation and the holders of the Series D
Preferred Stock shall have no right or power whether authorized by the Act or
otherwise to vote on any matter or in any proceeding or to be represented at or
to receive notice of any meeting of the shareholders.
3. Redemption by Corporation.
The Corporation shall have the right to redeem the shares of Series D
Preferred Stock at any time after six months from the date of issuance for $.01
per share, if the closing price of the Corporation's Common Stock as quoted on
any national securities exchange, NASDAQ, or any NASD regulated quotation
service exceeds $3.50 per share for twenty (20) consecutive trading days. Notice
of redemption must be mailed at least 30 days in advance to each holder of
record of the Series D Preferred Stock to the holder's address as shown on the
stock transfer books of the Corporation. On the redemption date, the shares of
Series D Preferred Stock will automatically convert to into Common Stock at the
conversion rate as set forth in Section 4 below. Upon conversion all rights of
the holders of such Series D Preferred Stock will terminate.
4. Conversion of Series D Preferred Stock.
( a ) Conversion Right of Holder. Each share of the Series D
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after six months from the date of issuance of such share of Series D
Preferred Stock into fully-paid and nonassessable whole shares of Common Stock
upon the terms and conditions set forth in the following paragraphs of this
Section.
( b ) Exercise of Conversion Right. Any holder of the Series D
Preferred Stock electing to convert such stock into Common Stock pursuant to
Section 4(a) hereof shall deliver the certificates for the Series D Preferred
Stock to the Corporation's principal office or the office of the Corporations
Transfer Agent, with the form of written notice to the Corporation endorsed on
such certificate(s) of his election to convert such Series D Preferred Stock
into Common Stock duly filled out and executed. The conversion right in respect
of any such Series D Preferred Stock pursuant to Section 4(a) hereof shall be
deemed to have been exercised at the date on which the holder delivers such
notice of conversion duly filled out and executed to the Corporation or the
Corporation's transfer agent.
( c ) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each share of Series D Preferred Stock shall be
equal to $10.00, divided by $2.50 provided, however, the Corporation shall not
be required, in connection with any such conversion, to issue a fraction of a
share of its Common nor to deliver any stock certificate representing a fraction
thereof.
( d ) Adjustment of Conversion Rate. The number of shares of
Common Stock into which share of the Series D Preferred Stock is convertible
shall be subject to adjustment from time to time in certain instances, as
follows:
(1) On Changes in Capitalization. On any recapitalization of
the Corporation through the spilt, reverse split, subdivision or
combination of its outstanding Common Stock into a greater or
smaller number of shares, the number of shares of Common Stock
into which the shares of Series D Preferred Stock may be
converted shall be increased or reduced in the same proportion by
an adjustment to the conversion rate.
(2) On Capital Reorganization, Reclassification,
Consolidation, Merger or Sale of Corporate Assets. On any capital
reorganization, reclassification of the capital stock,
consolidation, merger, or sale or conveyance of all or
<PAGE>
substantially all of the assets of the Corporation to another
corporation, each share of Series D Preferred Stock shall be
convertible into the same kind and amounts of securities,
including share or other assets, or both, into which the number
of shares of capital stock of the Corporation which would have
been deliverable on conversion of such shares of Series D
Preferred Stock immediately prior to such reorganization,
reclassification, consolidation, merger, sale or conveyance would
have been entitled. Appropriate adjustments, as determined by the
Board of Directors of the Corporation, shall be made in the
application of the provisions herein set forth with respect to
the rights and interests thereafter of the holders of the Series
D Preferred Stock so that said provisions, including the
provisions with respect to changes in, and other adjustments of,
the Conversion Rate, shall thereafter be applicable, as nearly as
reasonably may be, in relation to any securities or other assets
thereafter deliverable on conversion of the shares of Series D
Preferred Stock.
( f ) Statement of Adjusted Amount. Whenever the amount of shares
of Common Stock for the conversion of Series D Preferred Stock shall be adjusted
pursuant to the provisions hereof, the Corporation shall forthwith maintain at
its office and file with the transfer agent or agents, a statement signed by the
President or Vice President of the Corporation and by its Chief Financial
Officer, stating the adjusted amount of any securities deliverable for each
share of Series D Preferred Stock, calculated to the nearest one hundredth
(1/100) share, and setting forth in reasonable detail the method of calculation
and the facts requiring such adjustment and on which the calculation is based.
Each adjustment shall remain in effect until a subsequent adjustment hereunder
is required.
( g ) Fractional Shares. Neither fractional shares nor scrip or
other certificates evidencing such shares shall be issued on conversion of the
Series D Preferred Stock as herein provided, but the Corporation shall, in lieu
thereof, round all such fractional shares to the nearest whole share.
( h ) Payment of Taxes on Conversion of Series D Preferred Stock.
The Corporation shall pay any and all issue and other taxes that may be payable
in respect of any issue or delivery of Common Stock on conversion of shares of
Series D Preferred Stock pursuant hereto. The Corporation shall not, however, be
required to pay any tax which may be payable in respect of any transfer involved
in the issue and delivery of Common Stock in a name other than that in which the
shares of Series D Preferred Stock so converted were registered and no such
issue or delivery shall be made unless and until the person requesting it has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid.
( i ) Reservation of Sufficient Common Stock. So long as any
shares of Series D Preferred Stock shall remain outstanding and the holders
thereof shall have the right to convert said shares in accordance with the
provisions of this Section 4, the Corporation will at all times reserve from the
authorized and unissued shares of its Common Stock a sufficient number of shares
to provide for such conversions, and will take such other corporation action as
may be necessary from time to time in order that it may validly and legally
issue fully-paid and non-assessable shares of such Common Stock upon conversion
of the Series D Preferred Stock.
( j ) Status of Converted Preferred Shares. All shares of Series
D Preferred Stock so converted shall be canceled and such shares shall be
restored to the status of authorized but unissued shares of Preferred Stock.
5. Liquidation Rights.
( a ) Liquidation Preference Amount. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the business
or affairs of the Corporation, and after payment of, or adequate provision for
payment of, the debts, liabilities and other claims of the Corporation as
determined by its Board of Directors, each holder of the Series D Preferred
Stock shall be entitled to receive, out of the remaining net assets of the
Corporation legally available for distribution to its shareholders, before any
payment or distribution shall be made on the Common Stock, or on any other class
of stock of the Corporation ranking junior to the shares of Series D Preferred
Stock upon liquidation, the amount of Ten Dollars ($10.00) per share of Series D
Preferred Stock, plus all accrued and unpaid dividends on each such share up to
the date fixed for distribution.
<PAGE>
( b ) Proportionate Distribution Where Assets Insufficient. In
the event the assets of the Corporation available for distribution to the
holders of shares of Series D Preferred Stock upon dissolution, liquidation or
winding up of the Corporation whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant to paragraph (a) of this Section, no such distribution shall be made on
account of any shares of any class of capital stock of the Corporation ranking
on a parity with the shares of Series D Preferred Stock upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the shares of Series D Preferred Stock, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation or
winding up.
( c ) Nonparticipation Right. After the payment to the holders of
the shares of Series D Preferred Stock of the full preferential amounts provided
for in either paragraph (a) or (b) of this Section, as applicable, the holders
of Series D Preferred Stock as such shall have no right or claim to any of the
remaining assets of the Corporation.
( d ) Excluded Transactions. Neither the consolidation nor merger
of the Corporation with or into any other corporation, nor the sale, mortgage,
exchange or conveyance of all or substantially all of the properties, assets or
business of the Corporation, nor any liquidation, dissolution or winding up of
the Corporation occurring substantially concurrently with any such transaction
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation within the meaning hereof, unless otherwise determined by the Board
of Directors of the Corporation.
6. No Preemptive Rights. No holder of shares of the Series D Preferred
Stock shall, as such holder, have any preemptive right to subscribe to or
purchase any shares of any class of capital stock of the Corporation now or
hereafter authorized or issued, whether or not exchangeable for any capital
stock of the Corporation of any class or classes now or hereafter authorized or
issued; nor shall any holder of shares of the Series D Preferred Stock, as such
holder, have any right to purchase, acquire or subscribe for any securities
which the Corporation may issue or sell whether or not convertible into or
exchangeable for shares of capital stock of the Corporation of any class or
classes, and whether or not any such securities have attached or appurtenant
thereto warrants, options or other instruments which entitle the holders thereof
to purchase, acquire or subscribe for shares of capital stock of any class or
classes of the Corporation.
7. Covenants of the Corporation. The Corporation will not, by
amendment to its Articles of Incorporation, as amended, or through any
reorganization, transfer of assets, consolidation, merger, dissolution, issue or
sale of securities, or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms of the preferences and limitations
of Series D Preferred Stock to be observed or performed hereunder by the
Corporation, but will at all times in good faith assist in the carrying out of
all the provisions set forth herein relating to Series D Preferred Stock and in
the taking of all such action as may be necessary or appropriate in order to
protect the rights of the holders of the Series D Preferred Stock against
dilution or other impairment.
<PAGE>
IN WITNESS WHEREOF, HARVEST RESTAURANT GROUP, INC. has caused this
Statement of Resolution Establishing Series of Shares to be signed by William J.
Gallagher, its Chairman of the Board and Chief Executive Officer, and attested
by Joseph Fazzone, its Secretary, this __th day of _______, 1998.
HARVEST RESTAURANT GROUP, INC.
By: _____________________________________
WILLIAM J. GALLAGHER,
Chairman of the Board and
Chief Executive Officer
By: _____________________________________
JOSEPH FAZZONE,
Chief Financial Officer and Secretary
<PAGE>
Schedule 1.2
(Business Terms)
Not Applicable
<PAGE>
Schedule 1.2.1
(Financing Terms)
See Attached
<PAGE>
J.P. CAREY INC.
SECURITIES
MEMBER NASD SIPC
THURSDAY, JULY 9, 1998
WILLIAM GALLAGHER
HARVEST RESTAURANT GROUP INC.
1250 NORTHEAST LOOP 410
SUITE 335
SAN ANTONIO, TX 78209
DEAR BILL:
PLEASE LET THIS LETTER STAND AS AN AGREEMENT BETWEEN HARVEST RESTAURANT GROUP
(THE "COMPANY-) AND J. P. CAREY SECURITIES, (THE 'CONSULTANT) TO ACCOMPLISH THE
PLACEMENT OF UP TO $6,000,000.00, ON A BEST EFFORTS BASIS, FOR THE COMPANY WHICH
SHALL BE ISSUED PURSUANT TO A PRIVATE PLACEMENT UNDER REGULATION "D" OF THE
SECURITIES LAWS OF THE UNITED STATES. THE CONSULTANT SHALL HAVE AN EXCLUSIVE
RIGHT TO PLACE SUCH SHARES FOR A PERIOD OF 10 DAYS COMMENCING THE DATE OF THIS
AGREEMENT. THE SHARES TO BE ISSUED BY THE COMPANY SHALL BE ON THE FOLLOWING
TERMS AND CONDITIONS:
1, AMOUNT-. $6.000,000.00-, $4,000,000.00 IMMEDIATELY
2. TERMS: 7% CONVERTIBLE PREFERRED, THE PREFERRED $HARES WILL BE CONVERTIBLE
INTO EITHER, THE SERIES "A" PREFERRED STOCK OR COMMON STOCK, AT THE INVESTOR'S
OPTION, AT THE EARLIER OF 90 DAYS OR AN EFFECTIVE REGISTRATION STATEMENT. THE
CONVERSION PRICE WILL BE AT A 20% DISCOUNT TO THE FIVE DAY AVERAGE CLOSING BID
PRICE PRIOR TO CONVERSION. COMPANY SHALL FILE A REGISTRATION STATEMENT WITH THE-
SEC NO LATER THAN 30 DAYS FOLLOWING THE INITIAL FUNDING AND WILL HAVE THE
REGISTRATION EFFECTIVE NO LATER THAN 90 DAYS FOLLOWING THE INITIAL FUNDING OR BE
SUBJECT TO PENALTIES.
2A. CONDITIONS TO FUNDING.
1. THE FIRST TRANCHE OF $2,000,000.00 WILL BE RELEASED FROM ESCROW
UPON A FAVORABLE OUTCOME OF THE NASDAQ HEARING.
2. THE SECOND $2.000,000.00 WILL BE RELEASED FROM ESCROW UPON THE
APPROVAL OF SHAREHOLDERS AND EFFECTIVE DATE OF MERGER WITH TRC.
3. THE THIRD $2,000,000.00 WILL BE FUNDED WITHIN 30 DAYS THEREAFTER OR
IMMEDIATELY UPON THE EFFECTIVE REGISTRATION OF THE UNDERLYING SHARES.
<PAGE>
3. CONSULTING FEES: THE COMPANY AGREES TO PAY CONSULTANT A FEE OF 200,000
SHARES, PRE SPLIT, OF COMMON STOCK. IN ADDITION, COMPANY SHALL ISSUE TO
CONSULTANT WARRANTS EXERCISABLE FOR FIVE YEARS AT $2.50 PER SHARE- THE NUMBER OF
WARRANTS WILL BE EQUAL TO 50,000 PER MILLION DOLLARS RAISED.
4. CONDITIONS: THIS PROPOSAL IS SUBJECT TO REGULATORY APPROVAL AND THE COMPANY'S
B0ARD OF DIRECTORS APPROVAL. COMPANY AGREES TO MAINTAIN THE CONFIDENTIALITY OF
CONSULTANT'S CLIENTS EXCEPT TO THE EXTENT DISCLOSURE THEREOF MAY BE REQUIRED BY
LAW. SUCH CLIENTS ARE DEFINED AS INDIVIDUALS OR INSTITUTIONS WHO INVEST IN THIS
PRIVATE PLACEMENT. FOR TWO YEARS FROM THE DATE HEREOF, COMPANY WILL NOT SOLICIT
SUCH CLIENTS FOR THE PURPOSE OF CORPORATE FINANCE WITHOUT THE WRITTEN PERMISSION
OF CONSULTANT, WHICH CONSENT WILL NOT UNREASONABLY BE WITHHELD. IF ANY FINANCING
IS DONE WITH SUCH CLIENTS, THE COMPANY WILL BE OBLIGATED TO PAY LIKE FEES AS
DESCRIBED ABOVE TO THE CONSULTANT. FURTHERMORE, THE COMPANY AGREES NOT TO ENGAGE
IN ANY ADDITIONAL EQUITY FUNDING FOR A PERIOD OF SIXTY (60) DAYS AFTER THE FINAL
CLOSING WITHOUT CONSENT OF THE CONSULTANT.
IF THIS LETTER MEETS WITH YOUR APPROVAL, PLEASE- EXECUTE IN THE SPACE PROVIDED
BELOW, AND WE SHALL HAVE OUR DRAW LAWYERS UP THE APPROPRIATE LEGAL DOCUMENTS FOR
YOUR REVIEW.
SINCERELY,
JOHN C. CANOUSE
J.P. CAREY SECURITIES INC.
AGREED AND ACCEPTED TO THIS 9 DAY OF 1998
HARVEST RESTAURANT GROUP, INC
BY: /S/ WILLIAM J. GALLAGHER
-------------------------------
WILLIAM J GALLAGHER
<PAGE>
Schedule 1.2.1(a)
(Loan Terms)
(Revised - HarTan Option to Put to TRC)
<PAGE>
SHARE EXCHANGE AGREEMENT
SCHEDULE 1.2.1(a)
HARTAN OPTION TO PUT TO TRC
In the event that TRC and Harvest shall not complete a proposed merger on or
before the outside date for consummation set forth in a binding merger
agreement, including any permitted or agreed extensions, Hartan shall have the
option to require TRC to purchase any assets or the restaurants, if any, and the
associated premises, if any, at a price equal to the aggregate funds deposited
in the operating fund accounts of Hartan, and advanced to TRC, plus TRC's
indemnification of Harvest and Hartan from liabilities directly associated with
such assets after the date of such transfer. Such option shall be exercised by
written notice within 15 days after the earlier of termination of merger
discussions or a binding merger agreement, or expiration of the time for
consummation of such agreement without such a merger. If such option is
exercised, such transfers, and payment therefor, shall be closed within 30 days
after notice of exercise. Upon payment as required hereby, such option may be
exercised, at TRC's option, against the assets or all stock of Hartan.
<PAGE>
Schedule 1.2.2
(Board of Directors)
Proposed Board of Directors is as follows:
New Nominees for Directors of Harvest:
- --------------------------------------
Clyde Culp III
Rick Tanner
James R. Walker
Thomas J. Hass
Existing Harvest Board Members to be retained until June 1999:
- --------------------------------------------------------------
William J. Gallagher
Ted Heesch
<PAGE>
Schedule 1.2.3
(Employment Agreements)
Mr. Culp Employment Terms:
The Company will enter into a five year employment agreement with Mr. Culp,
pursuant to which Mr. Culp will be the Chairman of the Company. His base salary
will be $200,000 per year, with annual CPI increases each anniversary. Mr. Culp
will be eligible for incentive cash bonuses, based on the Company attaining
certain goals approved by the Board. In addition, Mr. Culp will be eligible
participate in any employee stock option plan and will receive employee
benefits, such as health and life insurance normal and customary for executives
in similar positions.
Mr. Gallagher Severance Terms:
All employment agreements with William Gallagher shall be terminated at closing;
in consideration thereof, Gallagher shall receive at closing the sum of $150,000
cash; and $150,000 in shares of registered Harvest common stock, or registered
stock options for such shares at a price of $0.01 per share.
<PAGE>
Schedule 1.2.7
(Combined Financials of Harvest and TRC)
Not Applicable
<PAGE>
Schedule 5.1
(TRC Disclosures)
See Attached
<PAGE>
Schedule 5.1.3
Subsidiaries
Central Administration, Inc. (formerly Tanner's Management, Inc.)
That Chicken Place Inc.
Tanner's Vinings, Inc.
Tanner's Oaks Inc.
Tanner's Spalding Inc.
Tanner's Mill Inc.
Tanner's Lawrenceville, Inc.
Tanner's Tucker, Inc.
NW Store, Inc. (formerly Tanner's Rome, Inc.)
Tanner's Lilburn, Inc.
Tanner's Catering, Inc.
Schedule 5.1.4
Title to Assets
In addition to the leases noted in section 5.1.25, the Company's properties are
subject to security interests under:
Loan and security agreement with NationsBank, N.A.
- --------------------------------------------------
All equipment, fixtures, leasehold improvements and furniture at the Lilburn
restaurant location
Loan agreement with Sirrom Capital Corporation:
- -----------------------------------------------
All capital stock of TRC and subsidiaries
Promissory note and security agreement with First Union National Bank
- ---------------------------------------------------------------------
All equipment located at the Fayetteville restaurant location
Commercial promissory note and security agreement with Colonial Bank, N.A.
- --------------------------------------------------------------------------
All business equipment located at the Canton restaurant location
Loan and security agreement with Southtrust Bank of Georgia, N.A.
- -----------------------------------------------------------------
All equipment, fixtures, leasehold improvements and furniture at the Emory
restaurant location
Security agreement with SYSCO Food Services, Inc.
- -------------------------------------------------
All trade accounts receivable, equipment, inventory, and additions, thereto of
Tanner's locations in Tucker, Lilburn, Lawrenceville, Catering, Emory, Oaks,
Vinings, Northridge and Spalding
Lease agreement with Toshiba Easy Lease:
- ----------------------------------------
Toshiba DK-280 phone system and voice mail
Lease agreement with Minolta Business Systems
- ---------------------------------------------
Office copier (Minolta 5420) and fax machine (Minolta 1800)
Lease agreement with Mazda America Credit:
- ------------------------------------------
1997 Mazda Millenia
Other:
Dishwashing machines are under lease from Auto-Chlor at all locations except
Fayette and Canton. Beverage machines are leased from Coca-Cola at all
locationsand Certain properties are provided by vendors on a loaned basis:
Coffee and tea machines, Snapple Coolers, Neon signs
<PAGE>
Schedule 5.1.5
Other Relationships
Tim Robinson and Bob Hoffman each own a 6.25% interest in the entity (Epic X,
LLC ) that owns the Fayetteville location
Schedule 5.1.6
Other Transactions
Clyde Culp has personally guaranteed the First Union and Colonial notes
Clyde Culp and Rick Tanner guaranteed the former Regions Bank note
John Feltman, through Brookhaven Capital Corporation has either borrowed or TRC
has Brookhavens behalf. Additionally, certain royalties owed to the Company have
not been paid. As of September 15, 1998 the balance is $123,935
Schedule 5.1.14
Litigation
Mae Nell Ingram vs Tanners Rome, Inc. Superior Court, Floyd County, Georgia
Civil Action 97 - CV - 9172-3. Alleged slip and fall at Rome location. Referred
to insurance carrier. Pending.
Riverview Associates, Ltd. v. Tanners Vinings, Inc., Superior Court of Cobb
County, Georgia, Case No. 95-1-6018-33. Dispute concerning breach of lease
regarding Vinings location. Settled, pending mutual dismissal.
Shorter Partners, LP vs. Northwest Store, Inc. and Central Administration, Inc.,
State Court of Fulton County, Georgia, Civil Action File No. 97 VS-0125811.
Pending action by landlord of premises in Rome Georgia seeking rents against
insolvent subsidiary relating to closure of that location.
McClain vs. Tanners Management, Inc., State Court of Fulton County, Georgia
Civil Action 96 VS-0118395, served on October 1, 1996 regarding alleged slip and
fall at Lilburn location. Referred to insurance carrier. Settlement pending.
<PAGE>
Schedule 5.1.21
Absence of Certain Changes and Events
x.v. On July 1, 1998, TRC issued 6,000 $.01 stock purchase warrants to
Riverview Associates, LTD in settlement of dispute under a prior lease.
Schedule 5.1.23
Intellectual Property
i.i.i. Common law trademark rights to the name "Tanner's," "Tanner's Home of the
Rotisserie Tanner's Original Rotisserie Grill," are claimed by TRC Acquisition
Corporation. Said trademarks have not been granted registration with the United
States Patent and Trademark Office. The mark "Tanner's Chicken Rotisserie" has
been denied registration based upon the mark granted U.S. registration No.
1,506,690 as "Tanner's Bar & Grill" registered by Tanner's Inc., a Kansas ,
corporation filed March 7, 1998.
<PAGE>
Schedule 5.1.25
Leased Properties
Corporate Office
TRC Acquisition Corporation
2662 Holcomb Bridge Road Suite 320
Alpharetta, Ga 30202
Annual Rental: $50,400
Tanner's Northridge Tanner's Tucker Tanner's Montgomery **
That Chicken Place Inc. Tanner's Tucker, Inc. 3433 McGehee Road
350 Northridge Road 4450 Hugh Howell Road Montgomery, Al 36111
Atlanta, Ga 30338 Tucker, Ga 30084 Annual Rental: $80,000
Annual Rental: $53,268 Annual Rental: $53,100
Tanner's Vinings Tanner's Lilburn
Tanner's Vinings, Inc. Tanner's Lilburn, Inc.
3220 Cobb Parkway 521 Indian Trail NW
Atlanta, Ga 30339 Lilburn, Ga 30247
Annual Rental: $68,580 Annual Rental: $45,600
Tanner's Oaks Tanner's Fayetteville *
Tanner's Oaks Inc. 94 Pavillion Parkway
4920 Roswell Road Fayetteville, Ga 30214
Atlanta, Ga 30342 Annual Rental: $143,000
Annual Rental: $68,316
Tanner's Spalding Tanner's Suwanee *
Tanner's Spalding Inc. 525 Peachtree Industrial Blvd.
6275 Spalding Drive Suwanee, Ga 30174
Norcross, Ga 30092 Annual Rental:$74,160
Annual Rental: $65,760
Tanner's Emory Tanner's Canton *
Tanner's Mill Inc. 1453 Riverstone Parkway
1371 Clairmont Road Suite 100
Decatur, Ga 30033 Canton, Ga 30114
Annual Rental: $64,728 Annual Rental: $82,548
Tanner's Lawrenceville Tanner's Catering
Tanner's Lawrenceville, Inc. Tanner's Catering, Inc.
650 Gwinnett Drive 6470 Spalding Drive, Suite P
Suite 203 Norcross, Ga 30092
Lawrenceville Ga 30245 Annual Rental: $54,396
Annual Rental: $44,772
* Leased under TRC Acquisition Corporation legal entity
** Leased by TRC Acquisition Corporation with sublease to Tanner's Montgomery,
Inc.
<PAGE>
Schedule 5.1.26
Employees and Employee Benefit Plans
Manager Bonus Plan
Group Health, Life and Disability Plan
Schedule 5.1.27
Compensation
Annual
Officers Title Salary Other Benefits
* Clyde E Culp CEO $0 Health ins.
* Richard Tanner President $225,000 Health ins., car allowance
Robert Hoffman Sr VP Operations $125,000 Health ins., car provided
Timothy R Robinson VP CFO $60,000 Health ins.
* John Feltman Exec VP $0 Health ins.
* Director
Directors
James R Walker $0
James Owens $0
<PAGE>
Schedule 5.1.28
Insurance
Policy information as previously provided still in effect: Summarized as
follows:
PROPERTY:
$4,245,000 Blanket Limit - Real and Personal Property, Leasehold
Improvements
$2,100,000 Blanket Business Income including Extra Expense
ELECTRONIC DATA PROCESSING:
$25,000 Electronic data processing equipment
$10,000 Data/Media
$ 5,000 Extra Expense
COMMERCIAL GENERAL LIABILITY:
$2,000,000 General Aggregate Limit
$1,000,000 Each Occurrence Limit
$1,000,000 Each Occurrence - Liqour Liability
$1,000,000 Per Occurrence - Employee Benefits Liability
COMMERCIAL AUTOMOBILE:
$1,000,000 Bodily Injury and Property Damage Combined
$ 5,000 Medical Payments
$ 300,000 Uninsured/Underinsured Motorist
$1,000,000 Non-Owned/Hired Car
$ 50,000 Hired Car Physical Damage
WORKERS' INDEMNIFICATION POLICY
EMPLOYER'S LIABILITY:
$500,000 Per Person/Per Accident
$500,000 Per Person/Per Occupational Disease
$500,000 Aggregate Occupational Disease
UMBRELLA LIABILITY:
$10,000,000 Each Incident Loss
$10,000,000 Products/Completed operations Aggregate
$10,000,000 General Aggregate
BOILER & MACHINERY
$3,000,000 Combined Property Damage and Business Interruption
$ 100,000 Consequential Damage
$ 25,000 Service Interruption
<PAGE>
CRIME
$250,000 Employee Theft Coverage
$ 25,000 Premises Coverage
$ 25,000 Transit Coverage
$250,000 Depositors Forgery Coverage
$250,000 Computer Thief and Funds Transfer Fraud Coverage
DIRECTOR & OFFICER LIABILITY
$1,000,000 Aggregate
<PAGE>
Schedule 7.1
(Harvest Disclosures)
See Attached
<PAGE>
SCHEDULE 7.1
HARVEST DISCLOSURES
-------------------
SUBSCHEDULE 7.1.1.1
CAPITALIZATION
--------------
In July 1998, Harvest filed a stock designation for Series C Preferred Stock of
1000 shares at a par value of $1.00.
SUBSCHEDULE 7.1.1.2
ISSUED COMMON STOCK
-------------------
As of August 12, 1998, 3,852,661 common shares have been issued.
SUBSCHEDULE 7.1.1.3
ISSUED PREFERRED STOCK
----------------------
Issued preferred stocks are as follows:
594,272 Series A
133 Series B
200 Series C
Additional common share dividends may be issued prior to closing.
SCHEDULE 7.1.2
ORGANIZATION STANDING AND POWER
-------------------------------
None
SCHEDULE 7.1.3
SUBSIDIARIES
------------
1. Harvest Restaurants, Inc.
2. Cluckers Restaurants, Inc.
3. Harvest Rotisserie on Tezel, Inc.
4. Red Line Food Court, Inc.
5. Hartan, Inc.
<PAGE>
SUBSCHEDULE 7.1.4
TITLE TO ASSETS
---------------
None
SUBSCHEDULE 7.1.5
OTHER RELATIONSHIPS
-------------------
None.
SUBSCHEDULE 7.1.6
OTHER TRANSACTIONS
------------------
A company which Mr. William Gallagher is affiliated has loaned money to Harvest
(Santa Cruz).
<PAGE>
SCHEDULE 7.1.7
UNDISCLOSED LIABILITIES
-----------------------
See attachment.
<PAGE>
Harvest Restaurant Group, Inc.
Listing of Potential Claims
As of August 31, 1998
Potential
Creditor
Creditor: Claim
Real Estate Leases:
Company-owned Stores
S. Breaswood 40,562.50
Kingwood 30,000.00
Loop 1640, 32,500.00
West Ave 50,000.00
Medical Road 3,500.00
Walzem Road 0
S. Padre 0
Dezavala Road 0
Broadway 0
Red Line 0
Subtotal 156,562.50
Franchised Stores:
North Carolina Harvest, Inc.
Eastway Square 14,317.96
Hardy 12,465.14
Indiana Harvest, Inc.
CNL Fund 55,592.48
Don Thorgmartin 30,000.00
Kovacs Enter 35,000.00
Florida Harvest, Inc.
Conrad Bansp 0
Port Charlotte Retail Cnt 26,750.00
Bay-Guard Ltd. 11,583.50
KR Chicken Mgmt 0
Apostoleres 30,000.00
Northern California
CEP Investors 54,500.58
Subtotal 270,209.66
Total Real Estate Leases 426,772.16
Equipment Leases:
Company Sign Leases:
Aetna signs 7,898.77
Walton signs 33,262.43
Walton signs 32,194.19
73,355.39
Company Equip Leases:
United Leasing 2,500.00
United Leasing 3,500.00
United Leasing 4,800.00
First Federal 12,000.00
Advanta 20,382.05
Imperial 57,528,.45
Green Tree/Americorp/VAR 23,329.48
Green Tree/VAR 20,582.93
Advanta/VAR Corpus 8,367.19
Alan AcceptancCorp 13,800.00
IBM Credit 3,000.00
Dell 3,500.00
Dell 3,500.00
<PAGE>
Potential
Creditor
Creditor: Claim
Sanwa Leasing 3,710.52
Sanwa Leasing 5,028.33
Sanwa Leasing 6,278.03
Sanwa Leasing 4,173.69
Sanwa Leasing 3,879.72
Sanwa Leasing 2,807.34
Subtotal 212,667.73
Franchisee Equip Leases:
Indiana
Captec 237,553.53
Alan Acceptance 5,512.00
Florida
Captec 28,509.22
Captec 11,593.41
ELC 1,500.00
ELC 1,500.00
ELC 1,500.00
Advanta 3,174.34
Advanta/Camera 4,600.00
Advanta/Camera 5,900.00
Advanta/Camera 4,600.00
Orix 5,560.00
Orix 4,100.00
Alan Acceptance 7,578.25
North Carolina
Alan Acceptance 3,425.01
Northern California
Captec 58,209.29
Subtotal 384,815.05
Total Equipment Leases 670,838.17
Franchisee A/P w/ Company Guarantee:
North Carolina
Sysco Food 48,946.00
Indiana
Sysco Food 39,563.10
Florida
Sysco Food 36,268.05
Forum Systems 25,000.00
HME 15,640.85
Subtotal 165,418.00
Company Vendors 306,494.00
Advances/Notes/Other:
Company:
Equip loan 47,500.00
Advances from Santa Cruz Squeeze Corp 159,060.00
SAMA, Inc 245,171.76
Subtotal 451,731.76
Franchisee Obligations:
KR Chicken 137,756.71
KR Sarasota 172,075.84
KR memphis 145,410.99
Roasters 127,326.62
Pollo Tropical 0
582,570.16
Total Liabilities 2,604,008.00
<PAGE>
SCHEDULE 7.1.8
ABSENCE OF CERTAIN CHANGES OR EVENTS
------------------------------------
All restaurants and operations are closed. The corporation is winding down.
SCHEDULE 7.1.9
CONDITION OF ASSETS
-------------------
No assets remain in the corporation with the exception of the Tezel property and
office furniture and equipment.
SCHEDULE 7.1.10
COMPLIANCE WITH LAW
-------------------
None.
SCHEDULE 7.1.11
CONTRACTS AND COMMITMENTS
-------------------------
All contracts and debts are past due and/or in default.
SCHEDULE 7.1.12
PERMITS, LICENSES, CONSENTS
---------------------------
None.
SCHEDULE 7.1.13
ABSENCE OF DEFAULTS
-------------------
All obligations and debts of the corporation are currently in default.
<PAGE>
SCHEDULE 7.1.14
LITIGATION
----------
1. KR Chicken Assoc. Ltd.
----------------------
KR Sarasota Assoc. Ltd.
-----------------------
KR Memphis-Florida Assoc. Ltd.
------------------------------
Filed 1/22/98 (Case Nos. 98-01090,098-01092,98-01093)
Filed in Florida, Broward County Circuit Court
Seeking to foreclose a security interest on promissory notes guaranteed by
the Company in the amount of $455,244.
Settlement: Plaintiffs have agreed in that in exchange for the Company
settling its obligations with Captec and removing the Plaintiffs from
$38,000 of the debt owed to Captec, they will release the Company from the
promissory notes. The Captec lease settlements are in negotiation.
2. Pollo Operations, Inc.
----------------------
Filed 2/5/98 (case no. 98-00604)
Filed in Florida, Hillsborough County Circuit Court
Seeking to foreclose a mortgage lien and security interest in real
property, for which the Company guaranteed a $868,000 mortgage note to
Plaintiff.
Settlement: The real property was sold in July 1998 in full satisfaction of
the mortgage note, with the Company receiving a full release of all claims.
3. Kovacs Enterprises
------------------
Filed 2/18/98 (case no. 49D079802CP000243)
Filed in Indiana, Marion County
Plaintiff seeking damages for breach of a commercial lease that the Company
guaranteed for its franchisee.
Settlement: Settled all claims for $20,000 to be paid with 14 days of the
completion of the Merger with TRC.
<PAGE>
4. R. Don Throgmartin
------------------
Filed 1/30/98 (case no. 49D079801CP000148)
Filed in Indiana, Marion County
Plaintiff seeking damages for breach of a commercial lease that the Company
guaranteed for its franchisee.
Settlement: Settled all claims for $20,000 which was paid in August 1998.
5. Sysco Food Services
-------------------
Filed 5/29/98 (case no. 98-0001029)
Filed in Florida, Manatee County
Plaintiff seeking payment of $36,268 from sale of products on an open
account which the Company guaranteed for its franchisee.
Settlement: Settled all claims for $11,760 to be paid within 14 days of the
Merger with TRC.
6. Captec Financial Group, Inc.
----------------------------
Filed 5/15/98 (case No. 98-CI-07356)
Filed in Texas, Bexar County District Court
Plaintiff seeking recovery of damages totaling $277,656 for failure to make
payments under (3) Equipment lease which the Company is liable.
Settlement: Plaintiff rejected Company's offer of $74,967. Still being
negotiated.
7. Sembler Enterprises, Inc.
-------------------------
Filed 7/6/98 (case no. 98-03282CI19)
Filed in Florida, Pinellas County Circuit Court
Plaintiff seeking damages for breach of a commercial lease that the Company
guaranteed for its franchisee.
Settlement: Settled all claims for $11,345.49 to be paid within 14 days of
the Merger with TRC.
<PAGE>
8. Herzberg Family Partners
------------------------
Filed 3/2/98 (Case no. 98-CI-03182)
Filed in Texas, Bexar County District Court
Plaintiff seeking damages for breach of a commercial lease that the Company
entered into.
Settlement: Settled all claims for $17,500 paid in July 1998.
9. Lin Chin Ho and Chi Pen Ho
--------------------------
Filed 6/1/98 (Case no. 98-2048-E)
Filed in Texas, Nueces County District Court
Plaintiff seeking damages for breach of a commercial lease. Company never
entered into a lease agreement on the property.
Settlement: Company will make a motion to dismiss the suit. No further
action expected.
10. Wingarten Realty Investors
--------------------------
Filed 12/16/97
Filed in Texas, Harris County
Plaintiff seeking damages for breach of a commercial lease that the Company
entered into.
Settlement: Court Date rescheduled to December 1998. Settlement offer of
$20,000 has not been accepted.
11. Green Tree Vendor Services Co.
------------------------------
Filed 8/12/98
Filed in Texas, Bexar County Court
Plaintiff seeking recovery of damages totaling $38,691.20 for failure to
make payments under (2) Equipment lease which the Company is liable.
Plaintiff's rejected Company's offer of $12,100 plus return of the
equipment.
Settlement: being negotiated.
<PAGE>
12. Toufic Khalife
--------------
Filed 8/20/98
Filed in Bexar County District Court
Plaintiff seeking damages for breach of a commercial lease that the Company
entered.
Plaintiff rejected offer of $35,000 for settlement.
13. Sysco Food Services
-------------------
Filed 7/24/98
Suit on Trade Account; Plaintiff seeks $10,003.40 plus interest.
14. PR Newswire Association, Inc.
-----------------------------
Filed 8/3/98
Suit on Trade Account; Plaintiff seeks $7,110.00
<PAGE>
SCHEDULE 7.1.15
NO BREACH OF VIOLATION OF LAW
-----------------------------
Only to extent disclosed by other Schedule.
SCHEDULE 7.1.16
VALIDITY AND AUTHORIZATION
--------------------------
None.
SCHEDULE 7.1.17
COMPLETENESS, NO MISREPRESENTATIONS
-----------------------------------
None.
SCHEDULE 7.1.18
TAXES
-----
An extension for State Franchise Tax has been filed. The return is now due
November 15, 1998.
SCHEDULE 7.1.19
FINANCIAL STATEMENTS
--------------------
None.
<PAGE>
SCHEDULE 7.1.20
ABSENCE OF CERTAIN CHANGES AND EVENTS
-------------------------------------
None.
SUBSCHEDULE 7.1.20.1
All operations have ceased.
SUBSCHEDULE 7.1.20.2
Harvest has liquidated all "operating" assets and attempts to satisfy
outstanding obligations.
SUBSCHEDULE 7.1.20.3
None.
SUBSCHEDULE 7.1.20.4
None.
SUBSCHEDULE 7.1.20.5
Harvest has liquidated all "operating assets" in an attempt to satisfy
outstanding obligations.
SUBSCHEDULE 7.1.20.6
None.
SUBSCHEDULE 7.1.20.7
None.
SUBSCHEDULE 7.1.20.8
A Consulting Agreement for six (6) months has been entered into with Mr. Joe
Fazzone.
SUBSCHEDULE 7.1.20.9
All employees, with the exception of Mr. William Gallagher and Mr. Joe Fazzone,
have been terminated.
SUBSCHEDULE 7.1.20.10
All debts and obligations currently owed to suppliers and vendors are in
default.
SUBSCHEDULE 7.1.20.11
None.
<PAGE>
SUBSCHEDULE 7.1.20.12
Harvest is attempting to negotiate and settle all liabilities and lawsuits.
SUBSCHEDULE 7.1.20.13
Harvest recently paid off a debt to Comet Signs which had a lien on personal
property.
SUBSCHEDULE 7.1.20.14
None.
SUBSCHEDULE 7.1.20.15
Harvest recently filed a stock designation for Series C preferred stock and paid
dividends by issuing common stocks to holders of Series B preferred stock.
SUBSCHEDULE 7.1.20.16
Dividends have been declared and paid on Series A preferred stock. A claim for a
warranty worth 170,000 shares (approximately) of stock to Mr. Lance T. Bury is
outstanding. Mr. Lance T Bury has also indicated a claim of right of first
refusal on the financing being raised by the Company.
SUBSCHEDULE 7.1.20.17
None.
SUBSCHEDULE 7.1.20.18
None.
SUBSCHEDULE 7.1.20.19
All restaurants have ceased operations.
SUBSCHEDULE 7.1.20.20
Assets of the corporation have been written down pursuant to generally accepted
accounting principles.
SUBSCHEDULE 7.1.20.21
None.
SUBSCHEDULE 7.1.20.22
All operations of the restaurant have ceased.
<PAGE>
SCHEDULE 7.1.21
None.
SUBSCHEDULE 7.1.21.4
The corporation has not paid personal property tax on:
1. Leased office space
2. West Ave. Property
3. Corpus Christi property
4. Medical Dr. property
SUBSCHEDULE 7.1.21.5
None.
SUBSCHEDULE 7.1.21.6
None.
SUBSCHEDULE 7.1.21.7
None.
SUBSCHEDULE 7.1.21.8
None.
SUBSCHEDULE 7.1.21.9
None.
SUBSCHEDULE 7.1.21.10
None.
SUBSCHEDULE 7.1.21.11
None.
SUBSCHEDULE 7.1.21.12
None.
SUBSCHEDULE 7.1.21.13
None.
SUBSCHEDULE 7.1.21.14
All assets of the corporation have been written down pursuant to generally
accepted accounting principles.
SUBSCHEDULE 7.1.21.15
None.
<PAGE>
SCHEDULE 7.1.22
None.
SUBSCHEDULE 7.1.23.1
None.
SUBSCHEDULE 7.1.23.2
None.
SUBSCHEDULE 7.1.23.3
As indicated on Trademark Status Report dated June 10, 1998 as previously
provided
SUBSCHEDULE 7.1.23.4
None.
SUBSCHEDULE 7.1.23.5
None.
SCHEDULE 7.1.24
BOOKS AND RECORDS
-----------------
None.
SCHEDULE 7.1.25
LEASED PROPERTIES
-----------------
None.
SCHEDULE 7.1.26
1994 Stock Compensation Plan
SUBSCHEDULE 7.1.26.2
1994 Stock Compensation Plan
SUBSCHEDULE 7.1.26.3
None.
SUBSCHEDULE 7.1.26.4
None.
SUBSCHEDULE 7.1.26.5
None.
<PAGE>
SCHEDULE 7.1.27
COMPENSATION
------------
None.
SCHEDULE 7.1.28
All insurance has been canceled effective August 26, 1998.
SCHEDULE 7.1.29
None.
SCHEDULE 7.1.30
None.
Multiple __X__
Single _____
TRC ACQUISITION CORPORATION
MARKET DEVELOPMENT AGREEMENT
This Agreement made and entered into this 15th day of July, 1998, in Atlanta,
Georgia by and between TRC ACQUISITION CORPORATION, a Georgia corporation with
its principal office at 2662 Holcomb Bridge Road, Alpharetta, Georgia,
("Licensor" ), and HARTAN, INC., a wholly owned subsidiary of HARVEST RESTAURANT
GROUP, INC., a Texas Corporation with its principal offices at 1250 N.E. Loop
410, Suite 335, San Antonio, Texas 78209 ("Developer").
WHEREAS, Licensor at a substantial expenditure of time, effort and money,
has developed and perfected a system of opening and operating restaurants
utilizing the "TANNER'S" service mark, "Rick Tanner's Original Rotisserie Grill"
service mark and any other service marks held in conjunction with the Tanner's
name (collectively hereinafter referred to as ("TANNER'S restaurants"); and
WHEREAS, Licensor has acquired knowledge and experience in the composition,
distribution, advertising and sale of food products by TANNER'S restaurants and
with respect to the style of the buildings and signs used by said restaurants
and has successfully established a reputation, demand and goodwill for the
products sold by such restaurants; and
WHEREAS, Developer recognizes the value of uniformity in a system of
restaurants and Developer further recognizes the value of Licensor's knowledge
and experience gained through the operation of TANNER'S restaurants, and the
value of the trade names, trademarks, service marks and other distinctive
features of TANNER'S restaurants; and
WHEREAS, Developer acknowledges Licensor's sole and exclusive ownership of
any rights to Licensor's current and future trade names, trademarks and service
marks and to all current and future related practices, procedures, methods,
devices, techniques, recipes and systems; and
WHEREAS, Developer desires to open and operate one or more TANNER'S
restaurants in areas agreed to with Licensor within the terms of this Agreement;
and
WHEREAS, Licensor is willing to grant Developer such rights in accordance
with the terms and conditions of this Agreement;
NOW, THEREFORE, it is mutually agreed as follows:
1. GRANT. Licensor hereby grants to Developer during the term of this Agreement
and subject to the conditions hereof the right to open and operate the number of
TANNER'S restaurants specified in Exhibit A. The operation of any TANNER'S
restaurant developed pursuant to this Agreement will be governed by an
individual License Agreement issued by Licensor in accordance with Paragraph 12
below. During the term of this Agreement, without the consent of Developer,
Licensor shall not grant options for or license others to operate, nor will it
itself operate, any new or additional TANNER'S restaurants in the protected
areas.
<PAGE>
2. TERM.
2.1. Single Unit Agreement. If this Agreement is for the development of only one
(1) TANNER'S restaurant, unless earlier terminated pursuant to the provisions of
Paragraph 14 or extended, this Agreement shall terminate, without any action on
the part of either of the parties being necessary, upon the date of execution by
Licensor of the License Agreement for the TANNER'S restaurant then required to
be opened and operated pursuant to this Agreement.
2.2. Multiple Unit Agreement. If this Agreement is for the development of more
than one (1) TANNER'S restaurant, unless earlier terminated pursuant to
Paragraph 14, the term of this Agreement shall extend through the date of
execution by Licensor of the License Agreement for the last of the TANNER'S
restaurants then required to be opened and operated pursuant to this Agreement.
3. DEVELOPMENT FEE. Upon execution of this Agreement, Developer shall pay to
Licensor the fee set forth in Exhibit A hereto and designated as the development
fee (the "Development Fee"). This Development Fee shall be fully earned by
Licensor in consideration of its execution of this Agreement and shall be
nonrefundable. However, Licensor shall credit the Development Fee, pro rata,
based upon the number of TANNER'S restaurants to be built within the Territory,
toward the License Fees payable under any of the License Agreements issued to
Developer pursuant to this Agreement, provided that the applicable restaurants
are constructed and opened in accordance with the schedule set forth in Exhibit
A (the "Development Schedule").
4. DEVELOPMENT SCHEDULE. Developer shall build, open and operate properly
licensed TANNER'S restaurants in accordance with the Development Schedule set
forth in Exhibit A (the "Development Schedule"). Developer shall inform Licensor
of any delays in the development of a Tanner's restaurant, including, but not
limited to, permits construction, zoning and financial delays. It is the sole
discretion of Licensor to grant an extension of any date set forth in Exhibit A
(the "Development Schedule").
5. LOCATION OF RESTAURANTS. Developer is responsible for locating proposed sites
for any TANNER'S restaurant contemplated. During the term of this Agreement,
Developer shall use its best efforts to locate suitable sites. Licensor, in its
discretion, may offer counseling and advice in site selection. In no event,
however, shall Licensor be obligated to loan money, guarantee leases, provide
financing or otherwise become directly involved and/or obligated to Developer or
to any third party in respect of such site selection or development; these
activities and undertakings, financially and otherwise, shall be the exclusive
responsibility of Developer.
6. SITE ACCEPTANCE. Upon selection by Developer of a proposed site for a
TANNER'S restaurant, Developer promptly shall submit to Licensor such specific
site data and demographic and other information concerning the site as may be
reasonably required by Licensor, utilizing such forms as may be required by
Licensor. Licensor shall review such site in accordance with Licensor's
then-current site selection policies and procedures. Developer understands and
acknowledges that Licensor may reject any proposed site, in which event
Developer will not proceed at the rejected site, but will seek to locate an
acceptable site. The acquisition in any manner of any proposed site prior to
acceptance by Licensor shall be at the sole risk and responsibility of Developer
and shall not obligate Licensor in any way to accept such site or to issue a
License Agreement for operation of a TANNER'S restaurant at such site.
<PAGE>
7. DISCLAIMER. In executing this Agreement, reviewing a proposed site, giving
advice or providing services or assistance in connection with this Agreement,
Licensor does not guarantee the suitability of an accepted site or the success
of any particular TANNER'S restaurant established at any such site. Licensor
expressly disclaims any warranties, express or implied, with respect to the
suitability of any site or the success of any restaurant. Developer understands
and acknowledges that the suitability of a site and the success of any
restaurant depend on many factors outside the control of either Licensor or
Developer (including, without limitation, such factors as interest rates,
unemployment rates, demographic trends and the general economic climate), but
principally depend on Developer's efforts in the operation of the restaurant.
8. LOCATION REQUIREMENTS. As a condition for accepting a proposed site, Licensor
may require Developer to negotiate a lease or sales contract that includes
certain terms regarding duration or other specified matters. Developer
understands and acknowledges that a site acceptance may be conditioned on such
matters and that if Developer does not wish to, or cannot, satisfy the pertinent
conditions within a reasonable time, the site will be deemed rejected.
9. CONSTRUCTION. (a) Upon receiving acceptance for a proposed site, Developer
shall proceed promptly to secure control of the site and to obtain necessary
zoning and building approvals and permits. Following acceptance of any site,
Licensor shall provide Developer a set of standard architectural plans and
specifications for a prototype, freestanding or modified plans for a conversion
TANNER'S restaurant. After a site is accepted but before commencing construction
of any TANNER'S restaurant contemplated by this Agreement, Developer shall, if
requested by Licensor, at Developer's expense, furnish to Licensor for
Licensor's acceptance, the following:
(i) A proposed preliminary site plan for the TANNER'S restaurant which, if
accepted, shall not thereafter be changed without Licensor's prior written
consent; and
(ii) A copy of Developer's plans and specifications for construction of the
TANNER'S restaurant in proposed final form, which plans and specifications shall
have been adopted, at Developer's expense, from Licensor's then standard plans
and specifications and which, if accepted, shall not thereafter be changed,
without Licensor's prior written consent. In addition, upon request by Licensor,
Developer shall furnish Licensor information as Licensor may from time to time
request, which may include, without limitation, copies of all commitments and
plans for construction and permanent financing, the name, address and contact
with respect to each lender, the name and address of the contractor, together
with a copy of the construction contract.
(b) Thereafter, Developer shall break ground and commence construction
of the particular TANNER'S restaurant in accordance with the site plan and
building plans and specifications as soon as possible and shall complete all the
construction thereof, including the acquisition and installation of all
equipment specified by Licensor, and have the restaurant ready to open for
business within the time specified in this Agreement or at an earlier date as
determined by Licensor and Developer. Developer shall not open any location for
business until Developer has complied with the conditions of the Opening
Checklist which form is designated by Licensor and may be changed from time to
time. Licensor and its agents shall have the right to inspect the construction
at any reasonable time. Developer agrees to give Licensor at least ten (10) days
notice prior to pouring the concrete slab for any TANNER'S restaurant to be
opened pursuant to this Agreement and to give Licensor notice immediately after
completion of the electrical and mechanical rough-ins to enable Licensor to
inspect the construction at such times. Developer shall correct, upon request
and at Developer's expense, any deviation from any approved site plan or plans
and specifications. Licensor assumes no responsibility for the quality of any
construction because of any inspections made by it or any reports or
recommendations made as a result of such inspections.
<PAGE>
(c) In the event Developer fails to open any TANNER'S restaurant
within the time periods set forth in this Agreement, except for any delay due in
material part to war, strikes, lockouts, governmentally imposed building
moratoriums, or similar causes beyond the control of Developer (which do not
include general construction delays), or in the event Developer commences
construction of any TANNER'S restaurant according to plans and specifications
not accepted by Licensor or alters such accepted site plan or plans and
specifications without Licensor's approval, then, Licensor, at its option, may
elect to cancel and terminate this Agreement, by written notice to Developer, in
which case any Development Fee paid to Licensor pursuant to Paragraph 3 shall be
retained by Licensor as liquidated and agreed damages and no further License
Agreements or development rights will be issued for any proposed TANNER'S
restaurants.
10. ADVISORY SERVICES AND TRAINING.
(a) During the term of this Agreement, Licensor shall at reasonable times, upon
the, request of, and at no charge to Developer (except as otherwise expressly
provided in this Paragraph 10), furnish counseling and advisory services to
Developer with respect to the construction and pre- opening activities related
to the operation of TANNER'S restaurants, including consultation and advice
regarding:
(i) parking and building layouts;
(ii) traffic planning;
(iii) construction and financing of the restaurant building
and other improvements;
(iv) equipment selection and layout;
(v) employee selection and training;
(vi) advertising and promotion;
(vii) bookkeeping and accounting; and
(viii) purchasing and inventory control.
(b) Developer and its employees shall attend and conduct such training programs
as Licensor may reasonably require in order to train Developer's personnel
properly to operate the TANNER'S restaurants contemplated by this Agreement. No
charge will be made by Licensor for training programs conducted by it, but
Developer shall be required to pay all expenses of Developer's personnel who
take part in any such program or programs.
(c) Developer shall not employ or seek to employ any person who is at the time
employed by Licensor or by any other licensee or optionee of Licensor without
first obtaining the consent of such person's employer and Developer will not,
directly or indirectly, induce any such person to leave his or her employment.
11. LICENSE FEE. Upon execution by Licensor of a License Agreement for any
TANNER'S restaurant contemplated by this Agreement, Developer shall pay to
Licensor the sum set forth on Exhibit A hereto that is specified as the License
Fee for each such TANNER'S restaurant. This License Fee is fully earned by
Licensor upon execution of the License Agreement and thereafter shall be
nonrefundable. Any Development Fee paid by Developer hereunder shall be credited
toward payment of the License Fee in accordance with the terms of Paragraph 3 of
this Agreement.
12. LICENSE AGREEMENTS.
(a) Upon the due performance by Developer within the time periods set forth, of
all of the requirements set forth above (including, without limitation, payment
of the Development Fee and License Fee, and satisfaction of all construction and
training requirements) with respect to any TANNER'S restaurant contemplated by
this Agreement, Licensor, except as set forth below, will execute, issue and
deliver to Developer Licensor's then-current form of License Agreement to
operate such TANNER'S restaurant; provided, however, that, in the event that
<PAGE>
this Agreement is for the development of more than one (1) TANNER'S restaurant,
the License Fees and royalties payable under any License Agreement for a
TANNER'S restaurant to be built and operated within the Territory shall be at
the rate set forth in Exhibit A. In addition, in the event that this Agreement
is for the development of more than one (1) TANNER'S restaurant, during the term
of this Agreement, with respect to any License Agreement executed for a TANNER'S
restaurant to be built and operated within the Territory, Licensor agrees that:
(1) the maximum amount (expressed as a percentage of sales) of required
advertising expenditures under any License Agreement shall not be increased from
the amount set forth in the first License Agreement executed by Developer during
the term of this Agreement for a TANNER'S restaurant to be built and operated
within the Territory;
(2) the protected radius (expressed in distance) provided for in any License
Agreement shall not be reduced from the distance set forth as a protected radius
in the first License Agreement executed by Developer during the term of this
Agreement for a TANNER'S restaurant to be built and operated within the
Territory;
(3) each License Agreement shall have an initial term of twenty (20) years with
the option (upon satisfaction of the conditions for renewal set forth therein)
to renew for 2 additional term of 10 year terms;
(4) neither the radius (expressed in distance) nor the length of time (expressed
in months) of the post-termination covenant not to compete set forth in any
License Agreement shall be increased from those set forth in the first License
Agreement executed by Developer during the term of this Agreement for a TANNER'S
restaurant to be built and operated within the Territory;
(5) the formula for determining the price to be paid by Licensor for any of
Developer' s assets upon termination of any License Agreement shall not be
changed from that set forth in the first License Agreement executed by Developer
during the term of this Agreement for a TANNER'S restaurant to be built and
operated within the Territory; and
(6) no material change, in the reasons that allow a License Agreement to be
terminated shall be made from those set forth in the first License Agreement
executed by Developer during the term of this Agreement for a TANNER'S
restaurant to be built and operated within the Territory.
(b) As a condition of Licensor's execution of such License Agreement, Licensor
may require Developer or its principals to provide a personal guarantee, letter
of credit or corporate guarantee in a form acceptable to Licensor to secure
payment of royalties and other fees required to be paid to Licensor or its
affiliates under any such License Agreement, or otherwise. Developer shall
comply with Licensor's then-current franchising policies and procedures for
issuance of each License Agreement. Licensor shall be under no obligation to
execute and issue a License Agreement unless Developer has complied in a timely
manner with all terms and conditions of this Agreement and has satisfied all
requirements set forth herein. In addition, Licensor shall be under no
obligation to execute and issue a License Agreement if Developer is in breach or
default of any other License Agreement, Market Development Agreement or any
other agreement between Licensor and Developer, or if Developer is not eligible
for expansion pursuant to Licensor's then-current criteria for expansion. If and
when any License Agreement contemplated in this Agreement is executed by
Licensor, it shall supersede this Agreement and govern the relations between the
parties with respect to the particular restaurant.
<PAGE>
13. NO RIGHT TO OPERATE OR USE TRADEMARKS. Developer acknowledges that until a
License Agreement has been issued for a specified site, Developer shall not have
or be entitled to exercise any of the rights, powers and privileges granted by
the License Agreement, including without limitation the right to use Licensor's
trademarks, service marks and trade names; that the execution of this Agreement
shall not be deemed to grant any such rights, powers or privileges to Developer;
and that Developer may not under any circumstances commence operation of any
TANNER'S restaurant prior to execution by Licensor of a License Agreement for
the particular location.
14. TERMINATION.
14.1 Automatic Termination. This Agreement shall terminate immediately and
without notice to either party:
(a) if Developer files a petition under any bankruptcy or reorganization law,
becomes insolvent, or has a trustee or receiver appointed by a court of
competent jurisdiction for all or any part of Developer's property; or,
(b) if Developer seeks to effect a plan of liquidation, reorganization,
composition or arrangement of Developer's affairs, whether or not the same shall
be subsequently approved by a court of competent jurisdiction, it being
understood that in no event shall this Agreement or any right or interest
hereunder be deemed an asset in any insolvency, receivership, bankruptcy,
composition, liquidation, arrangement or reorganization proceeding; or
(c) if Developer has an involuntary proceeding filed under any bankruptcy or
reorganization laws or any other laws and does not have such proceeding
dismissed within ninety (90) days thereafter;
(d) if Developer makes a general assignment for the benefit of creditors; or
(e) if this Agreement is for the development of only one (1) TANNER'S restaurant
within the Territory, upon execution by Licensor and Developer of a License
Agreement for such a TANNER'S restaurant.
14.2 By Licensor. Licensor, at its option, may terminate this Agreement
immediately upon notice to Developer, upon the occurrence of any of the
following:
(a) failure to open any TANNER'S restaurant within the time period(s) specified
in this Agreement;
(b) the assignment of this Agreement without the prior written approval of
Licensor;
(c) if Developer is a corporation or a partnership, the transfer of any of the
capital stock or partnership interest of such corporation or partnership during
the term of this Agreement without the prior written approval of Licensor; or,
in the event that any shareholder or partner of Developer (the "Shareholder") is
a corporation, limited partnership, business trust, partnership or similar
association, the transfer of any of the capital stock or other interests of the
shareholders, limited partners, trustees, beneficiaries, partners or investors,
as the case may be, in such Shareholder, during the term of this Agreement
without the prior written approval of Licensor;
(d) the discovery by Licensor of any material misrepresentation in any of the
information or documents submitted to Licensor by or on behalf of Developer;
(e) any material violation by Developer of any of the provisions of this
Agreement if such material violation shall continue for thirty (30) days after
Licensor gives written notice of such material violation to Developer or if such
material violation cannot be reasonably corrected within such thirty (30) day
<PAGE>
period, then if such material violation is not corrected within such additional
time as may be required assuming Developer proceeds with reasonable diligence;
provided, however, that such written notice and a reasonable time to correct
material violations shall not be required if Developer repeatedly fails to
perform in accordance with the terms and conditions contained herein; or
(f) any default by Developer under any other agreement with Licensor and
Developer's failure to cure such default within the time specified in such
agreement, if any.
15. EFFECT OF EXPIRATION OR TERMINATION. Upon expiration of this Agreement, or
upon its termination for any reason, any and all rights granted to Developer
hereunder shall be extinguished immediately. Licensor thereafter shall have the
right to operate or license others to operate TANNER'S restaurants within the
Territory, except as limited by the provisions of any other then-effective
agreements with Licensor.
16. RESTRICTIONS. Licensor is engaged in the business of developing and
franchising TANNER'S restaurants on a national basis. Developer acknowledges
that the appropriation or duplication of TANNER'S restaurants or any part
thereof for a purpose other than to operate a TANNER'S restaurant pursuant to a
License Agreement with Licensor would damage the franchising business of
Licensor. Developer acknowledges that Licensor owns trade secrets and that all
material or other information now or hereafter provided or disclosed to
Developer regarding TANNER'S restaurants is disclosed to Developer in confidence
and Developer agrees not to disclose any part of it to anyone who is not an
employee of Licensor, or of its licensees. Licensor shall be entitled to obtain
injunctive relief in addition to any other legal or equitable remedies it may
have if Developer fails to comply with the provisions contained herein.
17. ASSIGNMENT.
(a) Developer shall not sell, assign, transfer, convey or encumber its
rights and obligations hereunder or suffer or permit any such assignment,
transfer or encumbrance to occur by operation of law without the prior express
written consent of Licensor. In the event Developer is a corporation, limited
partnership, business trust, partnership or similar association, the
shareholders, limited partners, beneficiaries, partners or investors, as the
case may be, may not sell, assign, or otherwise transfer their shares or
interests in such corporation, limited partnership, business trust, partnership
or similar association, without the prior written consent of Licensor.
Furthermore, in the event that any shareholder of Developer (the "Shareholder")
is a corporation, limited partnership, business trust, partnership or similar
association, the interests of the shareholders, limited partners, trustees,
beneficiaries, partners or investors, as the case may be, in such Shareholder,
may not be sold, assigned or otherwise transferred, without the prior written
consent of Licensor.
(b) In the event of the death of the Developer or if the Developer is a
corporation or similar entity, then in the event of the death of any
stockholder, investor or similar person, Licensor shall not unreasonably
withhold its consent to a transfer or assignment of Developer's interest herein,
or if Developer is a corporation, the transfer of the deceased stockholder's
stock in such corporation to a descendant, heir or legatee of the decedent, who
shall in the sole judgment of Licensor be capable of performing the duties and
obligations of Developer hereunder and under any License Agreement to be issued
pursuant to this agreement, or to a responsible bona fide purchaser acceptable
to Licensor. Any approval by Licensor of such transfer or assignment shall be
subject to the assignee's agreement in writing to assume and perform all of
Developer's duties and obligations hereunder and under any License Agreement to
be issued pursuant to this agreement.
<PAGE>
18. CONSTRUCTION. All terms and words used in this Agreement, regardless of the
number and gender in which they are used, shall be deemed and construed to
include any other number and any other gender, as the context or sense of this
Agreement or any provision hereof may require, as if such words had been fully
and properly written in the appropriate number and gender. All covenants,
agreements and obligations assumed herein by Developer shall be deemed to be
joint and several covenants, agreements and obligations of each of the persons
named as Developer, if more than one person is so named.
19. HEADINGS. Captions and section headings are used herein for convenience
only. They are not part of this Agreement and shall not be used in construing
it.
20. NOTICES. Whenever notice is required or permitted to be given under the
terms of this Agreement, it shall be given in writing, and be delivered
personally, by certified, express or registered mail, or by an overnight
delivery service (e.g., Federal Express), postage prepaid, addressed to the
party for whom intended. All such notices shall be addressed to the party to be
notified at the respective addresses first above written, or at such other
address or addresses as the parties may from time to time designate in writing.
21. COSTS AND ATTORNEY'S FEES. Should Developer institute an action against
Licensor or any of Licensor's agents or employees for any claim arising out of
or related to this Agreement, Licensor (or its agents or employees), if it
prevails, shall recover from Developer its costs and reasonable attorneys' fees
incurred in defending said action.
22. WAIVER. No waiver, delay, omission or forbearance on the part of the
Licensor to exercise any right, option, duty or power arising from any default
or breach by Developer shall affect or impair the rights of Licensor with
respect to any subsequent default of the same or a different kind; nor shall any
delay or omission of Licensor to exercise any right arising from any such
default affect or impair Licensor's rights as to such default or any future
default.
23. SEVERABILITY. If any term, restriction or covenant of this Agreement is
deemed invalid or unenforceable, all other terms, restrictions and covenants and
the application thereof to all persons and circumstances subject thereto shall
remain unaffected to the extent permitted by law; and if any application of any
term, restriction or covenant to any person or circumstance is deemed invalid or
unenforceable, the application of such term, restriction or covenant to other
persons and circumstances shall remain unaffected to the extent permitted by
law.
24. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the
parties hereto and there are no representations, inducements, promises,
agreements, arrangements or undertakings, oral or written, between the parties
that have been relied upon by either party other than those set forth herein. No
agreement of any kind relating to the matters covered by this agreement shall be
binding upon either party unless and until the same is made in writing and
executed by both Developer and Licensor.
25. DEVELOPER'S ACKNOWLEDGMENTS. Developer understands and acknowledges that
there are significant risks in any business venture and that the primary factor
in Developer's success or failure under this Agreement will be Developer's own
efforts. IN ADDITION, DEVELOPER ACKNOWLEDGES THAT LICENSOR AND ITS
REPRESENTATIVES HAVE MADE NO REPRESENTATIONS TO DEVELOPER OTHER THAN OR
INCONSISTENT WITH THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING
CIRCULAR PROVIDED TO DEVELOPER AND THAT DEVELOPER HAS UNDERTAKEN THIS VENTURE
SOLELY IN RELIANCE UPON THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING
CIRCULAR AND DEVELOPER'S OWN INDEPENDENT INVESTIGATION OF THE MERITS OF THIS
VENTURE.
<PAGE>
DATED___________________, 1998
DEVELOPER:
HARTAN, INC.
By: /s/
-------------------------------
LICENSOR:
TRC ACQUISITION CORPORATION
By: /s/ Timothy R. Robinson
-------------------------------
Timothy R. Robinson, Vice President
and Chief Financial Officer
EXHIBIT A
To Market Development Agreement
July 15, 1998
Between TRC ACQUISITION CORPORATION and HARTAN, INC.
DEVELOPMENT TERRITORY: Five agreed upon locations to be determined.
DEVELOPMENT FEE: $50,000 ($10,000 per restaurant to be developed)
LICENSE FEES/ROYALTIES:
For each TANNER'S restaurant opened within the Territory pursuant to this
Agreement, the License Fee payable shall be $25,000 and the royalties
payable shall be Three (3%) Percent of gross sales. ($10,000 per restaurant
being paid at the time of this Development Agreement execution with the
balance of each franchise fee being $15,000 per restaurant being paid at
the time of execution of each License Agreement)
DEVELOPMENT SCHEDULE
--------------------
# OF UNITS OPEN AND OPERATING DUE DATE
- ---------- ---------------------------
1 10/30/98
2 12/30/98
3 6/30/99
4 12/30/99
5 6/30/2000
ACKNOWLEDGED AND APPROVED
(Licensor):________________________
(Developer):_______________________
<PAGE>
FIRST AMENDMENT TO DEVELOPMENT AGREEMENT
THIS FIRST AMENDMENT dated July 16, 1998, by and between TRC ACQUISITION
CORPORATION, a Georgia Corporation, with its principal place of business at 2662
Holcomb Bridge Road, Alpharetta, Georgia ("Licensor") and HARTAN, INC., a
wholly-owned subsidiary of HARVEST RESTAURANT GROUP, INC., a Texas corporation
with its principal place of business at 1250 N.E. Loop 410, Suite 335, San
Antonio, Texas 78209 ("Licensee").
WHEREAS, on July 15, 1998, Licensor and Licensee entered into a Development
Agreement and the parties now desire to enter into an Amendment to the
Development Agreement.
NOW, THEREFORE, for and in consideration of the mutual benefit to the
parties, the parties hereby agree as follows:
1. Licensee desires to and Licensor agrees to enter into a Management
Agreement with Licensee to handle the development and operation of the
restaurants to be built in accordance with the Development Agreement as agreed
to between the parties through the Management Agreement.
2. The parties agree that Licensor will act as the Manager for the area(s)
to be developed and for each of the restaurants to be developed in accordance
with the Development Schedule until such time as the Management Agreement
specifies.
3. The Manager will have the authority to act on behalf of the Developer,
as outlined in the Management Agreement and Operating Fund Agreement in order to
execute the terms of the Development Agreement.
IN WITNESS WHEREOF, the parties have duly executed this First Amendment to
the Development Agreement.
LICENSOR:
TRC ACQUISITON CORPORATION
By: /s/ Clyde E. Culp III
-----------------------------------------
Title: Chairman
--------------------------------------
LICENSEE:
HARTAN, INC.
By: /s/
-----------------------------------------
Title: President
--------------------------------------
<PAGE>
SECOND AMENDMENT TO DEVELOPMENT AGREEMENT
THIS SECOND AMENDMENT dated July 17, 1998, by and between TRC ACQUISITION
CORPORATION, a Georgia Corporation, with its principal place of business at 2662
Holcomb Bridge Road, Alpharetta, Georgia ("Licensor") and HARTAN, INC., a
wholly-owned subsidiary of HARVEST RESTAURANT GROUP, INC., a Texas corporation
with its principal place of business at 1250 N.E. Loop 410, Suite 335, San
Antonio, Texas 78209 ("Licensee").
WHEREAS, on July 15, 1998, Licensor and Licensee entered into a Development
Agreement and the parties now desire to enter into an Amendment to the
Development Agreement.
NOW, THEREFORE, for and in consideration of the mutual benefit to the
parties, the parties hereby agree as follows:
1. TRC ACQUISITION CORPORATION, acknowledges that Harvest Restaurant Group,
Inc. is a publicly held corporation with tradable securities and as such this
constitutes written approval to accept the normal trading and transfer of such
securities within normal business practices.
2. This Development Agreement shall be deemed made and accepted in Georgia
and shall also be construed and interpreted, and be governed by, the laws of the
State of Georgia.
IN WITNESS WHEREOF, the parties have duly executed this Second Amendment to
the Development Agreement.
LICENSOR:
TRC ACQUISITON CORPORATION
By:________________________________________
Title:_____________________________________
LICENSEE:
HARTAN, INC.
By:________________________________________
Title:_____________________________________
MANAGEMENT AGREEMENT BETWEEN TRC ACQUISITION CORPORATION AND HARTAN, INC.
This Management Agreement made this 17th day of July, 1998 between TRC
Acquisition Corp., a Georgia Corporation (Manager) and Hartan, Inc., a Texas
Corporation (Developer), a wholly-owned subsidiary of Harvest Restaurant Group,
Inc., a Texas Corporation.
"PRELIMINARY STATEMENT"
-----------------------
A. Pursuant to that certain Market Development Agreement dated July 17, 1998,
between Hartan, Inc., a Texas Corporation as Developer and Licensee, and
TRC Acquisition Corporation, a Georgia Corporation as licensor (the "Market
Development Agreement"), Developer has been granted the right to use the
"Rick Tanner's" System (hereinafter defined) and to develop and operate up
to five (5) "Rick Tanner's" Restaurants (hereinafter defined) as the
Franchised Sites (hereinafter defined); and
B. Developer and Manager desire that Manager develop up to five (5)
Restaurants and manage the restaurants in accordance with the terms set
forth in the Market Development Agreement and this Management Agreement.
C. NOW, THEREFORE, Developer and Manager agrees as follows:
"ARTICLE 1"
-----------
DEFINITIONS
1.1 The following terms when capitalized in this Agreement shall have the
specific meaning defined in this Article:
1.1.1 Affiliate - means any business entity which controls, is
controlled by, or is under common control with a party.
1.1.2 Budgets - the reports, forecasts and projections developed
pursuant to Section 4.2.
1.1.3 Developer - Hartan, Inc. or the successor of Developer's interest
with respect to this Agreement.
1.1.4 Franchised Sites - real property to be selected and developed by
Manager with approval of Developer and Licensor pursuant to the
Market Development Agreement and one or more Unit Franchise
Agreements.
<PAGE>
1.1.5 Gross Revenues - amounts actually received or receivable from all
sales of every kind and nature from the Franchised Sites,
including but not limited to, the sale of food, beverages and
services, whether sold for consumption on or off the Premises,
and receipts from food catering and any proceeds and/or
condemnation awards received for loss of sales of business, all
whether or a cash or charge sale, paid or unpaid, collected or
uncollected, and further including sales from vending or
amusement or entertainment machines. "Gross Revenues" shall not
include (I) sales taxes, excise tax or cigarette or tobacco taxes
collected from customers and paid to the appropriate taxing
authority; or (ii) customer refunds, adjustments or credits; or
(iii) free food and beverages provided at the Restaurants.
1.1.6 Impositions - all taxes assessments, water, sewer or other
similar rents, rates and charges, levies, licenses fees,
inspection fees and other authorization fees and charges, which
at any time may be assessed, levied, confined or imposed on the
Restaurants or the operation thereof.
1.1.7 Improvements - the buildings, structures (surface and subsurface)
and other improvements now or hereafter located, on the Premises.
1.1.8 Legal Requirements - all public laws, statutes, ordinances,
orders, rules, regulations, permits, licenses, authorizations,
directives and requirements of all governments and governmental
authorities which now or hereafter, may be applicable to the
Premises and the operation of the Restaurants.
1.1.9 Manager - TRC Acquisition Corporation, or its successors with
respect to this Agreement
1.1.9 Management Fee - as defined in Section 6.1
1.1.10 Operating Fund - a fund set up by Developer in the amount of
$1,450,000 to be deposited in an account under the name of
Developer to be used exclusively by Manager, in accordance with
Budgets approved by Developer and Manager, for the licensing,
construction, pre-opening expenses and operation of the
Restaurants, pursuant of the Market Development Agreement and
this Agreement.
1.1.11 Operating Period - the period beginning with the opening of the
first Restaurant and ending upon the expiration or termination
this Agreement.
1.1.12 Operating Year - the Operating Year shall coincide with and be
identical to, the calendar year, except that the first Operating
Year shall be partial year beginning on the Commencement Date and
ending on the following December 31, and if this Agreement shall
be terminated effective on a date other than December 31 in any
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year, then the partial year from January 1 of the year in which
such termination occurs to such effective date of termination
shall be treated as an Operating Year; references to "full
Operating Years" shall mean those Operating Years which are
coextensive with full calendar years and shall exclude any
partial Operating Year at the beginning or the end of the term of
this Agreement.
1.1.13 Outside Commencement Date - July 27, 1998
1.1.14 Premises - a collective term for the Franchised Sites and all
Improvements, and Developer's interest therein, and any greater
estate or interest hereafter acquired, together with all
entrances, exists, rights of ingress and egress, easements, and
appurtenances belonging or pertaining thereto.
1.1.15 Pre-operating Budget - as defined in Section 3.5.
1.1.16 Pre-operating Period - the period from the date hereof to the
date of opening of each Restaurant.
1.1.17 Restaurants - a collective term for the real and personal
property, including accounts of any kind, comprising the
development and operation of up to five (5) "Rick Tanner's
Original Grill" rotisserie chicken restaurants to be located and
operated at the Franchised Sites.
1.1.18 "Rick Tanner's" System - system developed by TRC Acquisition
Corporation, a Georgia corporation for the opening and operating
of restaurants under franchise or license of the "Rick Tanner's"
name and associated system.
"ARTICLE II"
------------
TERM
2.1 Term. The term of the Agreement shall commence no later than July 27, 1998
upon the full execution and delivery of this Agreement and funding of the
Operating Fund (the "Commencement Date"). This Agreement shall have a Term
until the earlier of (a) the completion of the merger between TRC
Acquisition Corporation and Harvest Restaurant Group, Inc. and (b) the
fifth anniversary date of the Commencement Date unless extended or sooner
terminated as hereinafter provided. The last day on which this Agreement is
in effect is called the "Term" or "Expiration Date".
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"ARTICLE III"
-------------
MANAGER'S DUTIES - CONSTRUCTION AND PRE-OPENING
3.1 Manager Duties - Manager shall apply the Operating Fund substantially in
accordance with the Capital Budget and Pre-Opening Budgets approved by
Developer and so far as practicable in accordance with the individual store
budgets and Sources and Uses of Funds forecast submitted to Developer as
required under Section 4.2. Expenditures from the Operating Fund by Manager
shall include expenditures for all necessary site procurement expenses,
deposits, insurance, licenses and permits in connection with the
Restaurants and this Agreement, construction of the Restaurants and
implementation of pre-opening procedures such as training, testing,
procurement and promotion as directed or required under Article III of this
Agreement and the Unit Franchise Agreements for each such Restaurant and,
together with funds from operations, for the continuous operation of the
Restaurants under Article IV of this Agreement.
3.2.1 Construction of Improvements.
3.2.1.1 Manager shall cause the Improvements to be constructed at the
Franchise Site in accordance with Developer approved plans and
Budgets to be charged against the Operating Fund. Upon approval
of the Plans by the Manager and Developer, each party shall date
and initial the Plans. Any material changes not reflected in the
Plans shall require approval by Developer and Manager.
3.2.1.2 Manager shall obtain from contractors and vendors guarantees upon
all materials, equipment and workmanship of the Improvements
found to be defective within one (1) year following the date of
substantial completion.
3.2.1.3 Developer shall have the right to participate in all progress
meetings during the development and construction of the
Restaurants and shall have access to all construction documents
with respect to the Restaurants.
3.3 Construction Insurance and Indemnification - Manager shall cause all
contractors and subcontractors to purchase and maintain in full force and
effect, such insurance in addition to that otherwise required of Developer
and Manager under this Agreement, as may be necessary to protect Developer
and Manager from claims under worker's compensation acts and other
employees benefits acts, for claims because of bodily injury, including
death, and from claims for damage to property which arise out of the
construction of the Improvements on or about the Premises.
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3.4 Pre-opening Programs and Organization - In order to prepare the Restaurants
for full operations, Manager shall render the following services to
Developer during the Pre- opening Period, in substantial conformity to an
approved Pre-opening Budget:
3.4.1 Prepare and put into effect plans for the organization and
effective operation for each Restaurant;
3.4.1 Put into effect programs to secure approved vendors and suppliers
to the Restaurants;
3.4.3 Recruit and train the initial staff of the Restaurants through
such training programs and other training techniques as shall be
approved under the Unit Franchise Agreements;
3.4.5 Prepare and carry out a program for the opening promotion for
each Restaurant; and
3.4.6 Coordinate operation of the Restaurants in order to maintain
compliance with terms of Developer Agreement and the Unit
Franchise Agreements.
3.5 Pre-Opening Budget - Manager shall prepare and submit for Developer's
approval a pre- opening budget (the "Pre-opening Budget") covering (i)
compensation of the employees of the Restaurants during the Pre-opening
Period, (a) the training program during the Pre- opening Period, (iii) the
sale and promotion program during the Pre-opening Period (iv) opening
festivities, and (v) all other pre-opening costs and expenses. Unless
otherwise authorized by Developer, Manager shall not exceed the amounts
budgeted provided that Manager shall be entitled to allocate the amount
budgeted with respect to any item in the Pre-opening Budget to other items
budgeted therein. All costs and expenses shall be charged against the
Operating Fund, it being understood that some of the said costs and
expenses may be or may have been paid by Manager in which case Manager will
be entitled to immediate reimbursement.
"ARTICLE IV"
------------
MANAGER'S DUTIES - OPERATING PERIOD
4.1 Authority and Duties of Manager - Manager shall have the sole and exclusive
right, authority, and obligation to develop, manage and operate the
Restaurants as agent on behalf of Developer pursuant to the terms of the
Agreement. Manager agrees that it shall manage and operate the Restaurants
in a professional manner, generally in keeping with the standards of other
"Rick Tanner's" restaurants, taking into account the size, location and
character of the facility. Manager shall have authority and responsibility,
subject to the provisions of the Agreement, the Market Development
Agreement and Unit Franchise Agreements to (I) designate operating policy,
standards of operation, quality of service, the maintenance and physical
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appearance of the Restaurants and any other matters affecting operations
and management; (ii) supervise and direct all phases of advertising, sales
and business promotions for the Restaurants and (iii) carry out all
programs contemplated by the Budgets approved by Developer. Developer
agrees that it will cooperate reasonably with Manager to permit and assist
Manager to carry out its duties hereunder. Nonetheless, Manager shall have
the right and authority to appoint an employee manager, to manage the
day-to-day operations of the Restaurants under the supervisory control of
Manager.
4.2 Forecasts and Budgets - Manager will provide within 25 days of Commencement
Date an overall plan for the expenditure of $1,450,000 Operating Fund
pursuant to certain Budgets. These Budgets will include:
4.2.1 a comprehensive Development Plan for up to five (5) "Rick
Tanner's" Restaurants;
4.2.2. Capital Budget required to implement the Market Development
Agreement;
4.2.3 an Operating Profit and Loss pro forma Budget for the operating
Year;
4.2.4 a Source and Use of Funds forecast the next Operating Year; and
4.2.5 individual Store Budgets (after the initial Operating Year).
4.3 Future Budgets - Manager shall submit to Developer, no less than forty-five
(45) days in advance of each Operating Year after the first Operating Year
supplementary Budgets for such Operating Year.
4.4 Approval of Budgets - Developer shall have the right to review and approve
plans and Budgets within twenty-five (25) days of delivery. Unless
Developer delivers written comments or criticisms within such time such
submitted plan and/or Budgets shall be deemed approved.
4.5 Compliance with Budgets - Unless otherwise agreed by Developer, Manager
shall at all times substantially comply with the applicable Budgets,
provided, however, that Manager shall be entitled to allocate amounts
budgeted with respect to any items in such approved Budget to another item
budgeted therein so long as the total authorized expenditures authorized
are not exceeded.
4.6 Personnel - All hourly store personnel will be employees of the Manager,
provided that all direct expenses of such personnel shall be charged
against the Operating Account.
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4.7 Additional Responsibilities of Manager - Manager shall, in its own name or
that of Developer, perform the following additional services, or cause the
same to be performed for the Restaurants as a change against the Operating
Account.
4.7.1 enter into such contracts for furnishing of utilities and
maintenance and other services to the Premises, as shall be
reasonably necessary for the proper operation and maintenance
thereof;
4.7.2 subject to compliance with applicable Budgets make all repairs,
decoration, revisions, alterations and improvements to the
Restaurants as shall be reasonably necessary for the proper
maintenance thereof in good order, condition and repair;
4.7.3 purchase such operating equipment and supplies as shall be
reasonably necessary for the proper operation of the Restaurants;
4.7.4 apply for, and use its best effort to obtain and maintain all
license and permits required of the Developers and/or Manager in
connections with the operation and management of the Restaurants.
Developer agrees to execute and deliver any and all applications
and other documents as shall be reasonably required and to
otherwise cooperate with Manager in applying for, obtaining and
maintaining such licenses and permits;
4.7.5. use its reasonable best efforts or cause to be done all such acts
and things in and about the Restaurants as shall be reasonably
necessary to comply with Legal Requirements, the terms of all
insurance policies, and the Unit Franchise Agreements;
4.7.6 pay all Impositions and insurance premiums, when due;
4.7.7 subject to the prior written approval of Developer, retain or
employ legal counsel for the Restaurants which legal counsel
shall perform legal services under the direction of Manager and
Developer.
ARTICLE V
---------
INSURANCE
---------
5.1 Coverage
5.1.1 Required Insurance - The following insurance shall be secured and
maintained by Manager with respect to the Restaurants at all
times during the times during the term of this Agreement;
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5.1.1.1 All property insurance including fire, windstorm, flood,
earthquake and other risks covered by extended coverage
endorsements on the Improvements equal to the full replacement
value thereof;
5.1.1.2 All risks business interruption insurance, including fire,
windstorm, flood, earthquake and other risks covered by extended
coverage endorsements in amount no less than $50,000.00;
5.1.1.3 Insurance against loss from the explosion of boilers, air
conditioning systems, including refrigeration and operating
appliances, pressure vessels and pressure pipes in an amount
equal to the full replacement value of each item;
5.1.1.4 Business interruption insurance against loss from accidental
damage to, or from the explosion of, boilers, air conditioning
systems including refrigeration and heating appliances, pressure
vessels and pressure pipes in the amount not less than
$50,000.00;
5.1.1.5. Commercial general liability insurance including coverage for
personal injury and liquor liability, in an amount not less than
$1,000,000.00 combined single limits per occurrence;
5.1.1.6 Comprehensive crime insurance an amount equal to not less than
$250,000.00;
5.1.1.7 Statutory worker's compensation benefits and employee liability
insurance;
5.1.1.8 Insurance against such other insurable risks as Developer may,
from time to time, reasonably require;
5.1.2 Pre-opening Period - During Pre-opening Period the required
insurance coverages shall be modified where appropriate (e.g. the
policy required under clause (a) shall be a "builder's" all risk
policy"), or shall be eliminated if the risks is not present
during such period.
5.2 Policies and Endorsements
5.2.1 Policies - All insurance provided for under the above Section 5.1
shall be effected by policies issued by insurance companies of
sound and adequate financial responsibility. The party procuring
such insurance shall deliver to the other party certificates of
coverage with respect to all of the policies of insurance
including existing, additional and renewal policies, and in the
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case of insurance about to expire, shall deliver certificates of
insurance with respect to the renewal policies to the other party
not less than thirty (30) days after the respective dates of
expiration. If Developer shall elect to procure any portion of
the property insurance, it shall also deliver to Manager full
copies of the policies under which such insurance is provided.
5.2.2 Endorsements - All policies of insurance provided for under this
Article shall have attached thereto to the extent available (i)
an endorsement that such policy shall not be canceled or
materially changed without at least thirty (30) days prior
written notice to Developer and Manager, and (b) endorsement to
the effect that no act or omission of Developer or Manager shall
affect the obligation of the insurer to pay the full amount of
any loss. All insurance policies required under Sections 5.1.1.5,
5.1.1.6 and 5.1.1.7 shall include and endorsement to the effect
that such insurance shall be primary to any similar insurance
carried by Manager.
5.3 Waiver of Liability - Neither Manager and Developer shall assert against
the other, and do hereby waive with respect to each other, against any
other entity or person named as additional insured on any policies carried
under this Article any claim for any losses, damages, liability or expenses
(including attorneys fees) incurred or sustained by either of them on
account of injury to persons or damages to property to the extent that they
are covered by the insurance required under this Article. Each policy of
insurance shall contain specific waiver of subrogation reflecting the
provisions of this Section 5.3, and a provision to the effect that the
insurance of the preceding waiver shall not effect the validity of any each
policy or the obligation of the insurer to pay the full amount of any loss
sustained.
ARTICLE VI
----------
MANAGEMENT FEE
--------------
6.1 Management Fee
In consideration for the performance whom direct set forth in the
Agreement, Manager shall receive a management fee in an amount of (i) five
percent (5%) of Gross Revenues ( "Management Fee"). The Management Fee shall be
payable to Manager monthly, in arrears, the first payment becoming due and
payable on the 15th day of the month following opening of the first Restaurant
after the Commencement Date.
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ARTICLE V II
------------
ACCOUNTS WORKING FUNDS: RECORDS AND REPORTS
-------------------------------------------
7.1 Application of Operating Fund - Manager shall have authority to draw upon
the Operating Fund for such purposes and in such amounts as shall have been
approved by Developer under the applicable Budgets and for initial
expenditures for the specific purpose of retaining suitable Premises
locations approved by Developer provided such discretionary expenditures do
not exceed an aggregate amount of $100,000.00.
7.2 Bank Accounts - Bank accounts for each Restaurant will be established at
banking institutions mutually approved by Developer and Manager, such
accounts to be in the name of Developer on which Manager shall have
exclusive signature authority. Manager will deposit in such Restaurant
Accounts all monies received from the operation of each Restaurant and
shall disburse the same for the purposes set forth in the Budgets.
Notwithstanding the foregoing, Manager shall be entitled to maintain such
funds as it and Developer reasonably deem proper in house banks or in petty
cash funds at the Restaurant. Manager may transfer funds from the
Restaurant operating accounts to the Operating Fund from time to time for
support of other Restaurants of Developer under this Agreement.
7.3 Audit or Review - Manager and Developer shall hire a firm of independent
certified public accountants of recognized standing in the restaurant
industry to review the assets employed in the operation of the Restaurants
and the liabilities incurred in connection therewith and the results of the
operations, and cash flows of the Restaurants during each year of this
Agreement.
7.3 Developer's Right to Inspect and Review - Manager shall accord to
Developer, its accountants, attorney and agents, the right to enter upon
any part of the Restaurants at all times during the term of this Agreement
for the purpose of examining or inspecting the same or examining and making
extracts of the financial books and records of the Restaurants or for any
other purpose which the Developer, in its discretion, shall deem necessary
or advisable but same shall be done without materia disruption to the
operation and business of the Restaurants..
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ARTICLE VIII
------------
TERMINATION RIGHTS
------------------
8.1 Termination by Developer - If any one of the following events shall happen:
8.1.1 if Manager shall fail to keep, observe or perform any material
covenant, agreement, term or provision this Agreement to be kept,
observed performed by Manager, and such default shall continue
for a period of thirty (30) days after notice thereby Developer
to Manager;
8.1.2 if Manager shall apply for or consent to the appointment of a
receiver, trustee or liquidator of Manager or of all or a
substantial part of its assets, file a voluntary petition in
bankruptcy, or admit in writing its inability to pay debts as
they some due , make a general assignment for the benefit of
creditors, file a petition or an answer seeking reorganization or
arrangement with creditors or take advantage of any insolvency
law, or file answer admitting the material allegations of a
petition filed against manager in any bankruptcy, reorganization
or insolvency proceeding, or if any order, judgment or decree
shall be entered by any court of completion jurisdiction, on the
application of a creditor, adjudicating Manager a bankruptcy or
insolvent or approving petition seeking reorganization of Manager
or appointing a receiver, trustee or liquidator of Manager or all
or a substantial part of its assets, and such order, judgment or
decree shall continue unstayed and effect for any period of sixty
(60) consecutive days; or
8.1.3 if a right of termination on the part of Developer shall have
arisen under section 8.1 or 8.2; then Developer shall have the
right to terminate this Agreement upon written notice to Manager
given at any time following the occurrence of such event or if a
period of grace is provided, then following the expiration of the
applicable grace period, and if such event shall continuing, and
this Agreement shall terminate upon the date specified therein.
8.2 Termination by Manager - If any one of the following events shall happen;
8.2.1 the Developer shall fail to fund the Operating Fund by the
Commencement Date or thereafter fail to transfer additional funds
advanced to Developer for such purpose within five (5) days after
such funds are available or thereafter fails or is unable upon 30
days written notice from Manager to fund all amounts necessary,
in Manager's reasonable judgment, to continue the operations of
any Restaurant as a going concern;
8.2.2 the Developer shall fail to keep, observe or perform any other
material covenant, agreement, term or provision of the Agreement
be kept observed or performed by Developer, and such default
shall continue for a period of thirty (30) days after notice
thereof by Manager to Developer;
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8.2.3 if for any reason not caused by the act or omission of Manager,
any required licenses for the sale of alcoholic beverages are at
any time suspended, terminated or revoked and such suspension,
termination or revocation shall continue for a period of sixty
(60) consecutive days, or if, for any reason not caused by the
act or omission of Manager the right to serve alcoholic beverages
in any Restaurant shall otherwise be suspended for a period of
sixty (60) consecutive days;
8.2.4 if the Developer shall default under any mortgage, lease or
similar encumbrance upon a Premises or apply for or consent to
the appointment of a receiver, trustee or liquidator of Developer
or of its assets, file a voluntary petition in bankruptcy, or
admit in writing its inability to pay debts as they some due,
make a general assignment for the benefit of creditors, file a
petition or an answer seeking reorganization or arrangement with
creditors or take advantage of any insolvency law, or file answer
admitting the material allegations of a petition filed against
manager in any bankruptcy, reorganization or insolvency
proceeding, or if any order, judgment or decree shall be entered
by any court of competent jurisdiction, on the application of a
creditor, adjudicating Developer a bankruptcy or insolvent or
approving petition seeking reorganization of Developer or
appointing a receiver, trustee or liquidator of Developer or all
or a substantial part of its assets; or
8.2.5 if any claim is made successfully prosecuted to the effect that
the Developer is liable for the obligations of its parent
corporation shareholder;
8.3 Curing Defaults - Any default of Manager under clause (a) of Section 8.1 or
the Developer under Section 8.2, as the case may be, which is susceptible
of being cured, shall not constitute a basis or termination if the nature
of such default shall not permit it to be cured within the grace period
allotted, provide that within such grace period other Manager or Developer
shall have commenced to cure such default and shall proceed to complete the
same with reasonable diligence.
8.4 Option to Terminate Agreement or Transfer Restaurants upon Failure of
Merger or Developer Default.
8.4.1. In the event of uncured default by Developer under this Agreement
or the Market Development Agreement or Unit Franchise Agreements
for the Restaurants, Manager shall have the option to purchase
the Restaurants and the associated Premises at a price equal to
the aggregate funds deposited in the Operating Fund plus
Manager's indemnification of Developer from liabilities directly
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associated with the Restaurants. The exercise of such option
shall be without limitation upon other remedies provided for in
this Agreement, the Market Development Agreement or Unit
Franchise Agreements for the Restaurants. Such option shall be
exercised by written notice within 15 days after the earlier of
termination of merger discussions or a binding merger agreement
or expiration of the time for consummation of such agreement
without such a merger or expiration of the period for cure of any
default by Developer under this Agreement. If such option is
exercised, such transfers shall be closed within 30 days after
notice of exercise. Such option may be exercised, at Manager's
option, against the assets of the Restaurants and associated
Premises or all stock of the Developer, for which limited purpose
the shareholder of Developer joins in this Agreement.
8.4.2. In the event that Manager and Harvest Restaurant Group, Inc.
shall not complete a proposed merger on or before the outside
date for consummation set forth in a binding merger agreement,
including any permitted or agreed extensions, Developer shall
have the option to require Manager to purchase the Restaurants
and the associated Premises at a price equal to the aggregate
funds deposited in the Operating Fund plus Manager's
indemnification of Developer from liabilities directly associated
with the Restaurants after the date of such transfer. Such option
shall be exercised by written notice within 15 days after the
earlier of termination of merger discussions or a binding merger
agreement or expiration of the time for consummation of such
agreement without such a merger. If such option is exercised,
such transfers shall be closed within 30 days after notice of
exercise. Such option may be exercised, at Manager's option,
against the assets of the Restaurants and associated Premises or
all stock of the Developer, for which limited purpose the
shareholder of Developer joins in this Agreement.
8.5 Effect of Termination - The termination of this Agreement under the
provisions of this Article VIII shall not affect the rights of the
terminating party with respect to any damages it has suffered as result of
any breach of this Agreement, nor shall it affect the rights of either
party with respect to liability or claims accrued, or arising out of event
recurring prior to the date of termination nor under any other agreement to
which they or either of them are a party.
8.6 Remedies Cumulative - Neither the right of termination nor the right to sue
for damages nor any other remedy available to either party hereunder shall
be exclusive of any other remedy given hereunder or now or hereafter
existing at law or in equity.
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8.7 Developer Financial Responsibility.
8.7.1 By Developer - Developer shall be responsible for and shall
indemnify and hold harmless Manager, and its Affiliates harmless
from all costs, expenses, claims and liabilities, including
reasonable attorneys' fees arising or resulting from the expenses
of constructing and operating the Restaurants to the extent not
covered by the Operating Fund and funds from operations and from
breach of Developer's requirements as outlined in this Agreement.
9.2 Assignment
9.2.1 Prohibited Assignments - Except as provided in the following
Section 9.2.2, and as otherwise provided herein, Manager may not
assign this Agreement without the prior written consent of the
Developer, which consent may not be unreasonably withheld. It is
understood and agreed that any consent granted by the Developer
to any such assignment shall not be deemed a waiver of the
covenant herein against assignment in any subsequent case. Except
as otherwise provided in Section 9.2.2, no assignment of this
Agreement shall operate to release Manager from any of its
obligations under this Agreement. Except as provided in the
following Section 9.2.2, and as otherwise provided herein,
Developer may not assign this Agreement without the prior written
consent of the Manager, which consent may be withheld by the
Manager's sole discretion. It is understood and agreed that any
consent granted by the Manager to any such assignment shall not
be deemed a waiver of the covenant herein against assignment in
any subsequent case. Except as otherwise provided in Section
9.2.2, no assignment of this Agreement shall operate to release
Manager or Developer from any of their respective obligations
under this Agreement
9.2.2 Permitted Assignments - Manager or Developer, without the consent
of the other, shall have the right to assign this Agreement to
any Affiliate or to any entity which may become an Affiliate as a
result of a related transaction, or to any successors or assigns
that may result from any merger, consolidation, reorganization,
or to a corporation or other entity which shall acquire all or
substantially all of the business and assets of Manager or
Developer, or to any company or entity which shall succeed to
Manager's or Developer's business in respect to managing and
operating restaurants provided that such successor or assignee
has a net worth of at least $1,000,000.00.
9.4 Successor and Assigns - subject to the foregoing, this Agreement shall
inure to the benefit of and be binding upon the parties herein their heirs,
legal representatives, successors and assigns.
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ARTICLE X
---------
DAMAGE, DESTRUCTION
-------------------
10.1 In the event of casualty to the Premises, Manager shall have authority to
adjust losses and shall repair or rebuild to the extent necessary or proper
to continue operation of the effected Premises provided (a) Developer shall
approve any such expenditure that shall exceed the sum of proceeds of
insurance payable upon the loss plus budgeted capital improvements and
repairs for such Premises, (b) sums approved by Developer, proceeds of
insurance upon the loss and budgeted capital improvements and repairs are
sufficient to accomplish such repairs or restoration, and (c) such repairs
or restoration can be accomplished in compliance with the terms of the
terms of the Unit Franchise Agreement and any applicable mortgage, lease,
ground lease or similar encumbrance affecting such Premises.
"ARTICLE XI"
------------
INDEMNITIES
-----------
11.1 Indemnities
11.1.1 Indemnification of Manager - Developer shall indemnify and hold
harmless Manager from and against any and all actions, suits,
claims, penalties, losses, damages and expenses including
reasonable attorneys' fees, based upon or arising out of
Manager's performance of its services hereunder, or out of any
occurrence or event happening in or out of the Restaurants or
occurring in connection with the operating or development
thereof, or with respect to the pre-opening activities hereunder,
including any alleged violation of any Legal Requirement
(collectively "Claims"), except to the extent such Claims are
based upon Manager's primary negligence, willful misconduct or
failure to act in good faith, and except to the extent that such
Claims are covered by an insurance policy maintained with respect
to the Restaurants from which proceeds are payable to Manager.
11.1.2 Indemnification of Developer - Manager shall indemnify and hold
Developer harmless from and against any and all Claims which
Developer may suffer, sustain or incur arising from, or based
upon Manager's primary negligence, willful misconduct, failure to
act in good faith, except to the extent such Claims are covered
by any insurance policy maintain with respect to the Restaurants
from which proceeds are payable to Developer.
11.1.3 Indemnified Parties - The indemnities provided in this Section
11.1 shall run to the benefit of both Manager and the Developer
and their respective Affiliates and the directors, partners,
members, agents, officers and employee of the Manager and the
Developer and their respective Affiliates.
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11.1.4 Expenses Pending Determination - Pending the resolution of any
question as to whether Manager or any of its Affiliates o r any
of its officers, employees, are entitled to indemnification under
this Section 11.1, Manager shall be authorized to pay from the
Restaurant accounts and Operating Fund all expenses or defending
or handling any Claim, provided that Manager will reimburse
Developer for all such expenses to the extent ultimately
determined that such entities or persons are not entitled to
indemnification hereunder.
"ARTICLE XII"
-------------
MISCELLANEOUS
-------------
12.1 Restaurant Names - The Restaurants shall be known as "Rick Tanner's" or by
such trade name as may from time to time be mutually approved by Manager
and Developer Franchise Agreement. In the event of any breach of any
covenant under this Section 12.1, Manager, in addition to any remedies
available to it hereunder, or at law or in equity shall have the right to
an injunction.
12.2 Area Restriction - During the term of this Agreement, Manager and its
Affiliates shall not own, lease, operate, franchise or license any
Restaurant under the "Rick Tanner's" name or otherwise within a five-mile
radius of any Restaurant being managed under this Agreement.
12.3 Manager's Retained Rights - Manager and its Affiliates shall retain the
right to own, have an ownership interest in, develop, operating and
license, sell or rent restaurants, wherever located except as set forth in
Section 12.2 and nothing else in this Agreement or by law shall prohibit or
limit Manager or its Affiliates from engaging in such activities. The
parties expressly agree that Manager shall not be bound to subject to this
Agreement or advise the Developer of any business opportunities whatsoever
under the doctrine of "corporate opportunities" nor shall this agreement be
construed as creating a fiduciary relationship between the parties hereto;
such relationship being strictly contractual in nature.
12.4 Notices - Except as otherwise stated within this Agreement, all notices
hall be given in writing and be delivered personally, by certified, express
or registered mail, by an overnight delivery services e.g., Federal or
Airborne Express, or via telecopier, postage prepaid, addressed to the
party to be notified at the respective addresses set forth ? Each other
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address or addresses as the parties may from time to time designate in
writing. Notice delivered personally or sent by overnight delivery service
accordance with the foregoing shall be deemed via certified express or
registered mail to accordance with the foregoing shall be deemed days after
being deposited in the U.S. Mail, and notices sent via telecopier shall be
deemed given to :
to Developer:
Harvest Restaurant Group, Inc.
Attention: William Gallagher, Chairman
1250 Northeast Loop 410
Suite 335
San Antonio, Texas 78209
with a copy to:
Timothy N. Tuggey, Esq.
Rosenberg, Tuggey, Agather, Rosenthal & Rodriguez
140 East Houston Street, 2nd Floor
San Antonio, Texas 78205
to Manager:
"Rick Tanner's" Restaurants
Attention: Clyde Culp, Chairman and
Tim Robinson, Chief Financial Officer
2662 Holcomb Bridge Road, #320
Alpharetta, Georgia 30202
with a copy to:
Robert W. Scholz, Esq.
Dietrick, Evans, Scholz & Williams, LLC
3490 Piedmont Road, Suite 1500
Atlanta, Georgia 30305
12.5 No Lease, Partnership or Joint Venture - Nothing contained in this
Agreement shall be construed to be or create a lese, partnership, joint
venture between the Developer, its successors or assigns, on the one part,
and Manager, its successor and assigns, on the other part.
12.6 Modification and Changes - This Agreement cannot be changed or modified
except by another agreement in writing signed by the party to be charged
therewith, or by its duly authorized agent and agreed to by all parties of
the Agreement
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12.7 Understandings and Agreement - This Agreement constitutes all of the
understandings and agreements whatsoever of any nature between the parties
with respect to Manager's management of the Restaurant. The parties each
acknowledge, represent and agree that in entering into this Agreement, they
are not relying upon any representation, promise or inducement of the other
party (or of any officer, agent, employee, representative or attorney for
any other party). This Agreement is not dependent upon, nor based upon the
inducement of, nor shall it create any implied obligation with respect to a
certain letter of intent regarding a proposed merger between Manager and
the shareholder of Developer, nor any other considerations except as
expressly stated herein.
12.8 Headings - The Article and Section heading contained herein are for
convenience and reference only and are not intended to define, limit or
extend the scope or intent of any provision of this Agreement.
12.9 Consents - Except as specified otherwise provided in this Agreement, each
party agrees that it will not unreasonably withhold any consent approval
requested by the other party pursuant to the terms of the Agreement, and
that any such consent approval shall not be unreasonably delayed or
qualified.
12.10 Survival of Covenants - Any Section of terms or provision of this
Agreement which, in order to be effective, must survive the termination of
this Agreement, shall survive any termination.
12.11 Third Parties - None of the agreements hereunder of either party shall run
to or be enforceable by any party other than a party to or deriving rights
hereunder as a result of an assignment permitted pursuant to the terms
hereof.
12.12 Waivers - No failure by Manager or Developer to insist upon the strict
performance of any covenant, agreement, term, or condition of this
Agreement or to exercise any right or remedy consequent upon the breach
thereof, shall constitute a waiver of any such breach or any subsequent
breach of such covenant, agreement, term or conditions, covenant,
agreement, term or condition of this Agreement and no breach thereof shall
be waiver or modified except by written instrument. No waiver of any breach
shall affect or alter this provision.
12.13 Severability - Any provision of this Agreement prohibited by law or by
court decree in any locality or state shall be ineffective to the event or
with prohibition without in any way invalidating or affecting the remaining
provisions of this Agreement without invalidating or affecting the
provision of this Agreement within the states of localities ? prohibited or
otherwise invalidated by law or by court decree. Further, in the event,
that any provision of this Agreement shall be held unenforceable by virtue
of its scope, but may be made enforceable by duration thereof if, such
provision shall be deemed to be amended to the minimum extent necessary /
enforceable under the laws of the jurisdiction in which enforcement is
sought.
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12.14 Applicable Law - This Agreement shall be deemed made and accepted in
Georgia and shall also be construed and interpreted, and be governed by,
the laws of the State of Georgia.
12.15 Investment Acknowledgment and Notice - Developer acknowledges that the
rights and interests of the parties to this Agreement, and associated
agreements for development and operation of the Restaurants have not been
registered as a security with the Federal or any state government, that
Developer is a sophisticated investor and has had and fully availed itself
of the opportunity to evaluate the facts and merits of this Agreement and
such other agreements and that to the extent this Agreement, alone or
together with such other agreements, may be construed as an investment
contract or other security, Developer has acquired its interests for
investment for its own account, with the intent of holding such interests
for investment and without the intent of participating directly or
indirectly in a distribution of such securities. To the extent applicable
to this Agreement, alone or in conjunction with other Agreements: THESE
SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH (13) OF CODE
SECTION 10-5-9 OF THE 'GEORGIA SECURITIES ACT OF 1973,' AND MAY NOT BE SOLD
OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR
PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement as of the dates set forth below.
- signatures on following page -
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TRC ACQUISITION CORPORATION
Date: July 17, 1998 By: /s/ Clyde E. Culp III
----------------- -----------------------------------
Chairman
CORPORATE SEAL
Attest:
-------------------------------
Secretary
HARTAN, INC.
BY: HARVEST RESTAURANT GROUP, INC., as
Incorporator
Date: July 17, 1998 By:
---------------- -----------------------------------
Chairman
CORPORATE SEAL
Attest:
-------------------------------
Secretary
Consent and Agreement to Section 8.4:
HARVEST RESTAURANT GROUP, INC.
Date: July 17, 1998 By:
---------------- -----------------------------------
Chairman
CORPORATE SEAL
Attest:
-------------------------------
Secretary
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