U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended July 11, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ___________ to ___________.
Commission File Number 33-95796
TANNER'S RESTAURANT GROUP, INC.
-------------------------------
(Name of small business issuer in its charter)
Texas 76-0406417
----- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
5500 Oakbrook Parkway, Suite 260
Norcross, Georgia 30093
-----------------------
(Address of principal executive offices, including zip code)
Issuer's telephone number: (770) 248-2298
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,334,489 shares as of August
23, 1999.
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TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements........................................... 3
Item 2. Management's Discussion and Analysis or Plan of Operation...... 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 15
Item 2. Changes in Securities and Use of Proceeds...................... 15
Item 3. Defaults Upon Senior Securities................................ 16
Item 6. Exhibits and Reports on Form 8-K............................... 16
SIGNATURES.................................................................. 18
EXHIBIT INDEX............................................................... 19
2
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
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Tanner's Restaurant Group, Inc.
Consolidated Balance Sheet
July 11, December 27,
1999 1998
(Unaudited)
----------- -----------
Assets
- ------
Current assets:
<S> <C> <C>
Cash $ 53,656 $ 222,163
Accounts receivable 142,997 130,086
Inventory 127,025 113,734
Prepaid expenses 39,788 21,989
----------- -----------
Total current assets 363,466 487,972
Property and equipment, net 2,378,915 2,092,698
Intangible assets, net 2,954,469 3,119,870
Goodwill, net 971,876 1,002,303
Other assets 144,611 161,252
----------- -----------
Total assets $ 6,813,337 $ 6,864,095
=========== ===========
Liabilities and Stockholders' Equity
- ------------------------------------
Current liabilities:
Accounts payable $ 1,040,034 $ 1,390,697
Accrued expenses 1,606,274 2,254,666
Current portion of long-term debt 771,884 882,801
----------- -----------
Total current liabilities 3,418,192 4,528,164
Long-term debt 2,240,362 2,306,884
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Total liabilities 5,658,554 6,835,048
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Commitments and contingencies
Stockholders' equity:
Preferred stock 1,215,152 1,253,822
Common stock: $.01 par value; authorized 200
million shares: issued and outstanding 8,334,489
in 1999 and 8,230,080 in 1998 83,345 82,301
Additional paid-in capital 9,120,555 9,082,929
Stock subscription receivable (1,500,000) (4,000,000)
Accumulated deficit (7,764,269) (6,390,005)
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Total stockholders' equity 1,154,783 29,047
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Total liabilities and stockholders' equity $ 6,813,337 $ 6,864,095
=========== ===========
The accompanying notes are an integral part
of these consolidated financial statements.
3
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Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations
For the 12 Weeks Ended
--------------------------
July 11, July 12,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Revenue
- -------
Restaurant sales revenue $ 2,183,706 $ 2,474,192
Catering revenue 133,390 146,849
Franchise and royalty revenue 14,267
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Total revenue 2,317,096 2,635,308
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Costs and expenses
- ------------------
Restaurant and catering operating expenses:
Food, beverage and paper 779,647 902,458
Payroll and benefits 851,035 916,621
Depreciation and amortization 166,380 158,823
Other operating expenses 677,900 691,645
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Total restaurant and catering
operating expenses 2,474,962 2,669,547
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Loss from restaurant and
catering operations (157,866) (34,239)
General and administrative expenses 312,040 294,509
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Operating loss (469,906) (328,748)
Other income (expense):
Other income (expense) 37,088 (23,924)
Interest expense (91,065) (187,343)
----------- -----------
Net loss $ (523,883) $ (540,015)
=========== ===========
Basic and diluted loss per share $ (.11) $ (.16)
The accompanying notes are an integral part
of these consolidated financial statements.
4
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Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations
For the 28 Weeks Ended
--------------------------
July 11, July 12,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Revenue
- -------
Restaurant sales revenue $ 5,160,558 $ 5,998,475
Catering revenue 264,561 342,803
Franchise and royalty revenue 955 50,745
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Total revenue 5,426,074 6,392,023
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Costs and expenses
- ------------------
Restaurant and catering operating expenses:
Food, beverage and paper 1,777,700 2,255,479
Payroll and benefits 1,978,982 2,273,890
Depreciation and amortization 374,327 361,834
Other operating expenses 1,421,342 1,424,063
Loss on restaurant closings 300,000
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Total restaurant and catering
operating expenses 5,852,351 6,315,266
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Income (loss) from restaurant
and catering operations (426,277) 76,757
General and administrative expenses 745,734 691,474
----------- -----------
Operating loss (1,172,011) (614,717)
Other income (expense):
Other income (expense) 3,956 (23,576)
Interest expense (206,209) (398,889)
----------- -----------
Net loss $(1,374,264) $(1,037,182)
=========== ===========
Basic and diluted loss per share $ (.26) $ (.31)
The accompanying notes are an integral part
of these consolidated financial statements.
5
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Tanner's Restaurant Group, Inc.
Consolidated Statements of Cash Flows
For the 28 Weeks Ended
--------------------------
July 11, July 12,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(1,374,264) $(1,037,182)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 374,327 361,834
Loss on sale of property and equipment 35,369 12,244
Loss on restaurant closings 300,000
Changes in assets and liabilities:
Accounts receivable 9,089 (5,269)
Inventory (13,291) 9,572
Prepaid expenses (17,799) 14,697
Other assets (17,648) (5,510)
Accounts payable (350,663) (312,727)
Accrued expenses and other liabilities (948,392) 461,842
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Net cash used in operating activities (2,003,272) (512,567)
----------- -----------
Cash flows from investing activities:
Proceeds from sale of property and equipment 365,496
Purchase of property and equipment (487,796) (462,275)
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Net cash used in investing activities (487,796) (84,711)
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Cash flows from financing activities:
Cash overdraft (212,605)
Repayments of debt (177,439) (107,079)
Proceeds from issuance of long-term debt 1,016,617
Proceeds from sale of Series D preferred stock 2,500,000
----------- -----------
Net cash provided by financing activities 2,322,561 696,933
----------- -----------
Net change in cash and cash equivalents (168,507) 99,655
Cash and cash equivalents, beginning of year 222,163
----------- -----------
Cash and cash equivalents, end of period $ 53,656 $ 99,655
=========== ===========
Non-cash investing and financing activities:
Accretion of redeemable TRC preferred stock $ 76,183
Dividends on redeemable TRC preferred stock 150,000
Sale of equipment for a note $ 22,000
Supplemental cash flow information:
Interest paid $ 224,260 $ 261,522
The accompanying notes are an integral part
of these consolidated financial statements.
6
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Tanner's Restaurant Group
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation:
On January 14, 1999, Tanner's Restaurant Group, Inc. ("we" or
"Tanner's," formerly known as Harvest Restaurant Group, Inc.) and TRC
Acquisition Corporation ("TRC") completed a forward triangular merger. For
financial and accounting purposes, the effective date of the merger was
December 27, 1998, and we have prepared the consolidated financial
statements assuming the merger closed as of the end of the day on December
27, 1998. In the merger, shareholders of TRC received a majority of the
shares of our outstanding common stock. For this reason, we treated the
merger as a reverse acquisition by TRC for accounting purposes.
Consequently, the consolidated financial statements presented are those of
TRC rather than Harvest.
2. Description of Business:
Tanner's and its wholly owned subsidiaries operate eight casual dining
restaurants and franchise two restaurants under the name "Rick Tanner's
Original Grill." The restaurants specialize in fresh, convenient meals
featuring rotisserie chicken entrees, barbecued ribs, chicken fingers,
hamburgers, freshly prepared vegetables, salads, and other side dishes. At
the end of fiscal year 1998, 11 company-owned restaurants were located in
the Atlanta, Georgia metropolitan area. During the first quarter of 1999,
we closed two under-performing restaurants, resulting in a charge to
earnings of $300,000. During the second quarter, we sold one restaurant to,
and established a franchise arrangement with, a franchisee. We also operate
one casual dining seafood restaurant under the name "Crabby Bob's Seafood
Grill," which we opened in May 1999 in suburban Atlanta. Additionally, we
have entered into an agreement with Crabby Bob's Seafood, Inc. and its
parent entities to acquire the assets of two more Crabby Bob's restaurants
in California.
We have prepared the accompanying unaudited consolidated financial
statements 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 management's opinion, we have
made all adjustments (consisting of normal accruals and adjustments)
considered necessary for a fair presentation. The financial statements are
subject to year-end adjustment. The consolidated results of operations for
the 28 weeks ended July 11, 1999 may not be indicative of the results for
the full fiscal year. For further information, refer to the audited
financial statements we filed with the SEC in our Form 10-KSB for the year
ended December 27, 1998.
The accompanying unaudited consolidated financial statements assume
that we will continue as a going concern. The significant net losses we
have incurred, our negative working capital position, and our inability to
generate significant positive cash flows from operations significantly
strain our financial position. We have obtained a commitment from a group
of outside investors to invest $6,000,000 in us, and, as of July 11, 1999,
these investors had invested $4,500,000 under this commitment. We believe
that the successful completion of this financing commitment is critical to
our current plan of operation. We expect that the $2,500,000 that we
received under the financing commitment during the first half of 1999,
combined with our cost containment and cash flow management strategies,
will enable us to continue operations until we receive the final
$1,500,000, assuming that we receive the $1,500,000 shortly. Because we
believe it is probable that we will receive the final $1,500,000 shortly,
the consolidated financial statements do not reflect any adjustments that
will be necessary if we do not receive that $1,500,000.
7
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3. Earnings Per Share:
We calculate 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 by giving effect to our dilutive stock options, warrants
and preferred stock. We have adjusted the weighted average common shares
outstanding presented below to reflect the 1.57075-to-1 exchange ratio in
the merger. Options and warrants, which we refer to as potential common
stock equivalents, are excluded from the diluted earnings per share
calculations because they are antidilutive, given that we are operating at
a net loss. These securities could become dilutive when our operations
result in a net profit.
The following table represents the calculation of basic and diluted
earnings per share:
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<CAPTION>
For the 12 Weeks Ended For the 28 Weeks Ended
-------------------------- --------------------------
July 11, July 12, July 11, July 12,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $ (523,883) $ (540,015) $(1,374,264) $(1,037,182)
Less: Dividends on Series A preferred stock (138,436) (276,872)
Dividends on Series D preferred stock (121,035) (241,930)
Dividends on Series E preferred stock (153,387) (290,457)
Dividends on TRC preferred stock (75,000) (150,000)
Accretion on TRC preferred stock (33,878) (76,183)
----------- ----------- ----------- -----------
Net loss attributable to common shareholders (936,741) (648,893) (2,183,523) (1,263,365)
Weighted average common shares outstanding 8,334,489 4,123,219 8,321,635 4,123,219
Basic and diluted loss per share $ (.11) $ (.16) $ (.26) $ (.31)
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4. Common Stock Purchase Warrants:
In connection with an agreement to provide financial communication
activities on our behalf, we have agreed to issue warrants to purchase
150,000 shares of our common stock to an outside public relations firm. The
warrants will be exercisable at the following prices: 50,000 will be
exercisable at $0.31 per share; 50,000 will be exercisable at $0.81 per
share; and the remaining 50,000 will be exercisable at $1.31 per share. The
warrants expire May 21, 2004, have full piggyback registration rights (with
customary underwriter "knock-out" provisions) and provide for net issue
exercise. The warrants vest on the following schedule: 50,000 vested on May
21, 1999, 25,000 vested on August 4, 1999, 25,000 will vest on November 12,
1999, 25,000 will vest on February 15, 2000, and 25,000 will vest on May
15, 2000. If the agreement is terminated after the first three months, any
warrants that have not yet vested will be voided.
8
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Item 2. Management's Discussion and Analysis or Plan of Operation
- -----------------------------------------------------------------
Please read the following discussion in connection with the consolidated
financial statements and related notes to them included elsewhere in this
report.
Overview
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Tanner's Restaurant Group, Inc. ("we" or "Tanner's"), formerly known as
Harvest Restaurant Group, Inc., was incorporated in June 1993 under the name
"Clucker's Tex-Mex Venture, Inc."
On January 14, 1999, Harvest Restaurant Group, Inc. and TRC Acquisition
Corporation completed a forward triangular merger. For financial and accounting
purposes, the effective date of the merger was December 27, 1998, and we have
prepared the consolidated financial statements assuming the merger closed as of
the end of the day on December 27, 1998. In the merger, TRC's shareholders
received a majority of the shares of our outstanding common stock. For this
reason, we have treated the merger as a reverse acquisition by TRC for
accounting purposes. Therefore, the consolidated financial statements presented
are those of TRC rather than Harvest.
As a result of the merger, we now own and franchise ten "Rick Tanner's
Original Grill" restaurants formerly owned and franchised by TRC. All ten
Tanner's restaurants are located in Georgia - eight are company-owned and two
are franchised. In May 1999, we opened a seafood restaurant, also in Georgia,
operating under the name "Crabby Bob's Seafood Grill." Additionally, in May 1999
we entered into an agreement with Crabby Bob's Seafood, Inc. and its parent
entities to acquire the assets of two more Crabby Bob's restaurants. Assuming we
receive the $1,500,000 balance under the financing commitment described below,
we expect to complete this acquisition in the third quarter of 1999. In June
1999, upon the expiration of one of our restaurant leases, we sold the assets of
that restaurant to a franchisee with whom we established a franchise
arrangement.
Our restaurants are designed to appeal to traditional casual dining
customers by offering large portions of high quality foods at low prices. Our
restaurants are competitively positioned between home meal replacement
restaurants and full bar casual restaurants that have less portable foods. The
menu at our Rick Tanner's Original Grill restaurants features over 40 different
entrees and 11 different appetizers. All entrees are prepared using aged beef
and fresh chicken and seafood, cooked to order, and served with a choice of two
out of 13 different freshly prepared vegetables. Since inception, over 20% of
our sales at Rick Tanner's Original Grill restaurants have come from
takeout/take-home service. Our Crabby Bob's restaurant offers fresh seafood,
crabs, oysters and a full service bar.
Our growth strategy is to open new company-owned restaurants, to increase
sales at existing restaurants, to develop and expand our franchising program,
and to evaluate and possibly acquire complementary restaurant concepts. We
intend to develop restaurants both in Atlanta, to complete our penetration of
the Atlanta market, and in southern California, where, if our acquisition of
Crabby Bob's is successful, we will operate two Crabby Bob's restaurants. We
believe we will be able to use existing supervisory, marketing and distribution
systems in both Atlanta and southern California to facilitate our development in
these areas. Additionally, we may seek to acquire other restaurant concepts that
would complement our existing business, allowing growth and improving
profitability. We continue to evaluate our existing restaurant locations and may
close certain unprofitable restaurants as we expand our business concept and
focus on achieving profitability. We anticipate leasing most of our future
locations.
9
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A significant factor in both the structure and completion of the merger
with TRC was a commitment by third party investors to invest $6,000,000 in the
new combined company. As of July 11, 1999, we had received $4,500,000 of this
$6,000,000 commitment. Of the net proceeds of the remaining $1,500,000 to be
invested, we intend to use up to $600,000 as consideration for the acquisition
of Crabby Bob's and approximately $550,000 to pay certain liabilities of Crabby
Bob's that we are assuming as part of the acquisition, including a $350,000
bridge loan made in March 1999 to the parent entity of Crabby Bob's by Clyde E.
Culp, III, our Chairman and Chief Executive Officer. We intend to use the
balance of the net proceeds primarily for working capital, the payment of
indebtedness, and general corporate purposes, including the development of new
company-owned restaurants, the opening of a franchised restaurant, and the
evaluation of opportunities to acquire new restaurant concepts. We cannot assure
you that any of our development or acquisition plans will be successful.
Results of Operations for the 28 Week Period Ended July 11, 1999 Compared to the
28 Week Period Ended July 12, 1998
Revenues. Total net revenues decreased $965,949, or 15.1%, during the first
two quarters (28 weeks) ended July 11, 1999, compared to the corresponding
period of 1998. This decrease in sales is primarily due to a decline in same
store sales of 17.7%. Same store sales decreased by $961,953, partially due to
the leveling of sales at two restaurants that opened in the fourth quarter of
1997. Sales also decreased as a result of the closings of two stores, offset by
the opening of our Crabby Bob's restaurant on May 24, 1999. Crabby Bob's net
sales through July 11 were $283,801.
Costs and Expenses. In general, costs of goods sold decreased as a
percentage of sales during the first two quarters of 1999. This is due to
operational improvements and purchasing efficiencies, and a reduction in coupons
and promotions, which decreased from $217,078 to $84,815, or 60.9%. Although
these types of promotions tend to increase the number of customers that visit
the restaurant and thereby increase sales, the operating expenses on these sales
are higher than on ordinary sales because the sales have been discounted below
the menu price. This decrease in costs as a percentage of sales is most evident
in food, beverage and paper costs.
Food, beverage and paper costs were $1,777,700, or 32.8% of sales, for the
first two quarters of 1999 versus $2,255,479, or 35.3% of sales, for the same
period in 1998. Operational improvements and reduced coupon and discount
promotions caused a 3.0% decrease in food costs as a percentage of sales at
comparable stores. This was offset somewhat by opening promotions at our new
Crabby Bob's restaruant.
Payroll and benefit expense was $1,978,982, or 36.5% of sales, for the
first two quarters of 1999 compared to $2,273,890, or 35.6% of sales, for the
same period in 1998. Labor costs rose 0.9% due to increased competition for
labor and higher costs associated with the opening of our new Crabby Bob's
restaurant.
Other operating expenses increased as a percentage of sales to 26.2%
($1,421,342) for the first two quarters of 1999 from 22.3% ($1,424,063) for the
same period in 1998. Advertising expenditures decreased by 1.4% of sales.
Repairs and maintenance expenses increased, while service contracts decreased
due to negotiation of a more favorable pest control contract, for a net increase
of .3% of sales. Utilities increased by 0.4% of sales, primarily because of the
decrease in sales. Restaurant administration expense increased by 0.7% of sales,
partially due to
10
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an increase in credit card processing fees. Rent expense increased by 2.7 % of
sales, primarily due to the sale and leaseback of one restaurant in late June of
1998. Pre-opening expenses increased 1.2% of sales in the first half of 1999,
due to the development of our Crabby Bob's restaurant. Development of this
restaurant involved the conversion of a nearly-completed Tanner's restaurant
into a Crabby Bob's restaurant, resulting in a longer construction period than
usual. We also had higher costs at this store due to the travel expenses and
payroll costs of training personnel from Crabby Bob's.
Total occupancy costs, consisting of depreciation, rent and restaurant
interest expense, increased to 11.0% of sales in the first two quarters of 1999
from 8.2% of sales in the first two quarters of 1998. Again, this is primarily
due to the sale and leaseback of one restaurant. We expect occupancy costs to
decrease as a percentage of sales as we open more "end-cap" restaurants located
at the end of strip shopping centers, as opposed to freestanding buildings.
Depreciation and amortization expense in the first two quarters of 1999
increased by 1.2% of sales over the first two quarters of 1998, due to fixed
asset additions at two new stores opened since May of 1998.
Loss on restaurant closings of $300,000 for the first half of 1999 relates
to charges recognized in connection with the closure of two of our
under-performing units. Included in this item are charges for the write-down of
property and equipment to their net realizable values and real estate
disposition costs.
General and administrative expenses increased to $745,735 in the first two
quarters of 1999 from $691,474 in the first two quarters of 1998. This is due to
the write-off of costs associated with abandonment of a potential site, the
disposal of old warehoused equipment, and the increased cost of corporate office
personnel to support additional growth.
Other Income (Expense). Interest expense decreased to $206,209 in the first
two quarters of 1999 from $398,889 in the first two quarters of 1998. This is
primarily attributable to the cancellation of the debenture to the former
president of Tanner's. Our effective interest rate increased to 12.3% for the
first half of 1999.
Net Loss. We incurred a net loss of $1,374,264 for the first two quarters
of 1999 compared to $1,037,182 for the same period in 1998. This increase was
primarily attributable to the $300,000 charge for store closings, and the
additional expenses associated with the opening of Crabby Bob's restaurant. We
expect to incur losses in future periods until we expand our base of restaurants
to offset current general and administrative expenses and costs of expansion.
As we pursue our plans for growth, we expect to see the following trends in
operating costs. We expect that food, beverage and paper costs and payroll
expenses will increase during the first two months of a restaurant's operations.
Pre-opening 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 pre-opening
costs are incurred in the accounting period prior to opening and in the period
that a restaurant opens. If we are able to increase our base of restaurants, the
effects of the above-mentioned operating trends will decrease, and the new
restaurants will have less of an impact on our consolidated results.
11
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Liquidity and Capital Resources
- -------------------------------
Our cash and cash equivalents decreased $168,507 during the first two
quarters of 1999. The principal source of funds consisted of $2,500,000 received
from outside investors. The primary uses of funds consisted of
(a) cash used in operations of $2,003,272, including the payment and
resolution of current accounts payable and accrued liabilities of $1,299,055,
(b) the purchase of additional fixed assets for one new restaurant and the
remodeling of another for $487,796, and
(c) payment of debt of $177,439.
We have incurred operating losses since inception, and as of July 11, 1999,
we had an accumulated deficit of $7,764,269 and a working capital deficit of
$3,054,726. We are not currently generating sufficient revenues from operations
to meet our cash requirements. Because substantially all sales in our
restaurants are for cash, and operating costs are generally due in 15 to 45
days, we are able to operate with negative working capital. We have obtained
extended payment schedules with several of our larger vendors allowing for
longer payment terms. Additionally, some of our vendors have agreed to extend
payment terms for obligations we previously incurred.
In addition to our other liabilities, we currently owe a total of
approximately $650,000 to two lenders, one of which is SECA VII, LLC, a
significant shareholder, for interim financing loaned in early 1998. One of our
directors, James R. Walker, is an equity owner of SECA. The $350,000 SECA loan
matured on July 31, 1999, thereby placing us in technical default of the SECA
loan. The other unsecured loan, with an outstanding balance of approximately
$300,000, matures on our receipt of the final $1,500,000 of the financing
commitment. FINOVA Mezzanine Capital, Inc., our senior secured lender, has
advised us that any payment of the principal amount on these two loans will be a
default under our outstanding $2,000,000 loan from FINOVA, unless we repay the
FINOVA loan in full at the same time. The final $1,500,000 that we are scheduled
to receive under the financing commitment will be insufficient to repay the
FINOVA loan, repay the short-term loans, and provide necessary working capital.
We presently have no arrangement to repay these loans. Therefore, we may default
on the other loan as well, unless we can make other arrangements. We are working
to resolve this situation. If we cannot work out an acceptable arrangement to
extend the terms of these loans, we may be forced to sell some or all of our
assets, to relinquish control of the company, or to renegotiate terms of our
outstanding obligations on terms less favorable to us. Any event of that nature
is likely to have a material adverse effect on us.
We have not paid dividends on our Series A preferred stock since June 1998,
and we are currently analyzing our alternatives for addressing these arrearages.
The total amount of dividends in arrears on our Series A preferred stock as of
June 30, 1999 was $716,813. Additionally, the total amount of dividends
accumulated but not paid on our Series D preferred stock and Series E preferred
stock as of July 11, 1999 was $532,387. Dividends on our Series D and Series E
preferred stock are payable only on conversion of these shares into common
stock.
12
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We opened one new company-owned restaurant in May 1999. One of our
franchised restaurants closed in February 1999 due to franchisee financing
arrangements and location issues. We closed two under-performing company-owned
restaurants in March 1999, resulting in a charge to earnings of $300,000. We
also sold one store to a franchisee. In the remainder of 1999, we plan to open
new company-owned restaurants and a franchised restaurant. Our capital
requirements to meet this development plan could be as much as $1.2 million.
On May 11, 1999, we entered into an agreement to acquire certain assets of
Crabby Bob's. Crabby Bob's is a restaurant chain consisting of two restaurants
located in Southern California that offer fresh seafood, crabs, oysters and a
full service bar. We will pay $600,000 in cash and assume certain liabilities
related to the Crabby Bob's business as consideration for the acquisition of
these restaurants and other assets related to their operation.
Although we do not currently have the capital resources to meet our
development plan, outside investors invested $2,500,000 of their $6,000,000
financing commitment in the first half of 1999, after having invested $2,000,000
of the $6,000,000 commitment during 1998. These investors have committed to
invest the remaining $1,500,000 of the commitment on or before the date on which
the shares of common stock into which the Series D preferred shares are
convertible are registered with the SEC, which we expect to occur shortly. We
plan to meet our capital requirements for new restaurant development, the
acquisition of Crabby Bob's, and working capital through the remainder of this
funding. We may also raise additional funds by borrowing.
Additionally, we sold our property on Tezel Road in San Antonio, Texas on
July 30, 1999. The sale generated approximately $382,000 in net proceeds. Under
the terms of a severance agreement that we entered into with William J.
Gallagher, our former chief executive officer and a former director, we were
obligated to apply the proceeds of the sale of the Tezel property to satisfy any
remaining obligations to Mr. Gallagher. We paid Mr. Gallagher $65,000 out of
these net proceeds, in full satisfaction of our outstanding obligations to him.
Forward-Looking Statements
- --------------------------
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
statements appear in a number of places in this report and include all
statements that are not historical facts. Some of the forward-looking statements
relate to our intent, belief or expectations regarding our strategies and plans
for operations and growth, including development and construction of new
restaurants. Other forward-looking statements relate to trends affecting our
financial condition and results of operations, and our anticipated capital needs
and expenditures.
Our forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those anticipated in the forward-looking statements, as a result of:
- an inability to meet our obligations as they become due;
- increased competition in the casual dining market;
- difficulty attracting and keeping good managers and franchisees;
- increased labor, food and other costs;
- changes in economic conditions;
- the possibility that we do not close the Crabby Bob's acquisition as
we anticipate; and
- the possibility that we will not receive the final $1,500,000 of our
$6,000,000 financing commitment.
13
<PAGE>
In addition, the market price of the common stock may from time to time
fluctuate widely because of, among other things:
- our operating results;
- the operating results of other similarly-situated companies;
- and changes in the performance of the stock market in general.
Investors should review the more detailed description of these and other
possible risks contained in the "Risk Factors" sections of the registration
statements we file with the SEC under the Securities Act.
Year 2000 Computer Issues
- -------------------------
The "Year 2000 problem" is a general term used to identify those computer
problems or applications that are programmed to use a two-digit field, instead
of a four-digit field, for the year component of a date. Those programs or
applications that are programmed in this manner, may, for example, recognize the
year 2000 as the year 1900; thus causing potential system failures or
miscalculations that could result in disruptions of normal business operations.
We have evaluated our state of readiness, the costs involved to become
compliant, the risks involved, and our contingency plans. Our primary uses of
software systems are our corporate accounting and restaurant management
software.
We have completed an initial assessment of our core computer information
systems and are now undertaking the necessary steps to make our systems Year
2000 compliant. We believe that the cost to upgrade our software will not be
material. We are currently evaluating and assessing those computer systems that
do not relate to information systems, such as telecommunications, HVAC, and fire
and safety systems. These typically include embedded technology such as
microcontrollers that may be harder to test, and may require repairs or complete
replacement. We expect to complete this assessment during the third quarter of
1999.
We are in the process of contacting all significant vendors and our
independent payroll vendor to verify that those vendors are also addressing the
problem. We have developed contingency plans where necessary. Some Year 2000
issues that may adversely affect our operations are beyond our control. We
cannot now estimate the potential adverse effect that may result from the
failure of any of our vendors to become Year 2000 compliant. We continue to
believe that there will be no direct material effect on our operating
performance or results of operations.
14
<PAGE>
PART II-OTHER INFORMATION
- -------------------------
Item 1. Legal Proceedings
- -------------------------
We are a named party in the following legal proceedings:
On June 1, 1998, Harvest 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 plaintiffs are seeking damages of $150,000 for breach of a
commercial lease. This case is set for trial in December 1999.
On August 12, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas by Green Tree Vendor Services Co. in Bexar County Court (Case No. 247317).
The plaintiff is seeking to recover damages of $38,691 for Harvest's failure to
make payments under two equipment leases. The plaintiff has filed a first
amended motion for summary judgment, which has not yet been set for hearing.
Settlement negotiations are ongoing. Because the plaintiff has not sold the
property, damages are unliquidated.
On August 20, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas by Toufic Khalifa in Bexar County District Court (Case No. 98-CI-12200).
The plaintiff is seeking damages in the amount of at least $240,000 for breach
of a commercial lease. The case is now in the discovery phase.
Before the merger, Harvest settled a number of lawsuits and claims, and
since the merger, we have settled additional lawsuits and claims. Some of these
settlements are documented by executed settlement agreements and releases while
others are not.
We are also involved in other claims arising in the normal course of
business. In our opinion, although the outcomes of any such claims are
uncertain, taken together they are not likely to have a material adverse effect
on us.
Item 2. Changes in Securities and Use of Proceeds
- -------------------------------------------------
We have issued the following unregistered securities in reliance on one or
more of the exemptions from registration provided by Sections 3(a)(9), 3(a)(11),
4(2) and 4(6) of the Securities Act, Regulation D and Rule 701, as promulgated
by the SEC under the Securities Act. Recipients of securities in these
transactions represented their intention to acquire the securities for
investment purposes only and not with a view to or for the sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. We believe that all recipients of
these securities had adequate information about us, either through their
relationships with us, or through information that we provided to them.
During May and June 1999 we issued 500 shares of our Series D preferred
stock to certain Series D investors who invested an aggregate of $500,000 in us
during that time period. Each share of Series D preferred stock is convertible
into that number of shares of common stock determined by the following formula:
1,000 divided by 80% of the Market Value of the common stock, where "Market
Value" is defined as being the five day average closing bid price of the common
stock for the five days prior to the date when the notice of conversion is
delivered to us.
15
<PAGE>
As part of the financing commitment, we have agreed to issue warrants to
acquire 100,000 shares of common stock to the Series D investors for each
$1,000,000 of Series D preferred stock issued. Because the outside investors
invested $500,000 during May and June, we will issue to them warrants to acquire
50,000 shares of common stock. The exercise price of the warrants, which are
exercisable for five years, is $2.00 per share. Upon completion of the financing
commitment, we will have issued an aggregate of $9,198,000 of Series D preferred
stock and, accordingly, will have issued warrants to acquire an aggregate of
919,800 shares of common stock.
In May we issued warrants to acquire 150,000 shares of common stock to an
outside public relations firm. The warrants will be exercisable at the following
prices: 50,000 will be exercisable at $0.31 per share; 50,000 will be
exercisable at $0.81 per share; and the remaining 50,000 will be exercisable at
$1.31 per share. The warrants expire May 21, 2004, have full piggyback
registration rights (with customary underwriter "knock-out" provisions) and
provide for net issue exercise. The warrants vest on the following schedule:
50,000 vested on May 21, 1999, 25,000 vested on August 4, 1999, 25,000 will vest
on November 12, 1999, 25,000 will vest on February 15, 2000, and 25,000 will
vest on May 15, 2000. The warrants are being issued as partial consideration for
the services that the public relations firm has agreed to provide to us. If our
agreement with this firm is terminated after the first three months, any
warrants that have not yet vested will be voided.
Item 3. Defaults Upon Senior Securities
- ---------------------------------------
We have not paid dividends on our Series A preferred stock since June 1998,
and we are currently analyzing our alternatives for addressing these arrearages.
The amount of dividends that accrued on the Series A preferred stock during the
first two quarters of 1999 was $276,872. As of June 30, 1999, the aggregate
amount of the dividends in arrears was $716,813.
Item 6. Exhibits and Reports on Form 8-K
- ----------------------------------------
16
<PAGE>
(a) Exhibit No. Title
--------------- -----
10.1 Purchase and Sale Agreement, dated May 11, 1999, by and
between CB Acquisition, Inc. and, for purposes of
Section 5.2 of the Purchase and Sale Agreement, Tanner's
Restaurant Group, Inc., and Pacific Ocean Restaurants,
Inc. and Crabby Bob's Seafood, Inc. (1)
27.1 Financial Data Schedule as of July 11, 1999.
-------------------------
(1) Incorporated by reference to Exhibit 10.15 to our Registration
Statement on Form SB-2, Amendment No. 1, file No. 333-78111,
filed on July 26, 1999.
(b) Reports on Form 8-K.
------------------------
On May 26, 1999 we filed a report on Form 8-K to report our execution of a
Purchase and Sale Agreement, dated May 11, 1999, regarding the purchase, through
our wholly-owned subsidiary, CB Acquisition, Inc., of certain of the assets of
two restaurants owned by Crabby Bob's Seafood, Inc.
17
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TANNER'S RESTAURANT GROUP, INC.
Date: August 25, 1999 By: /s/ Clyde E. Culp, III
---------------------------
Name: Clyde E. Culp, III
Title: Chairman of the Board of
Directors and Chief Executive
Officer
Date: August 25, 1999 By: /s/ Timothy R. Robinson
---------------------------
Name: Timothy R. Robinson
Title: Chief Financial Officer
18
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
----------- -----
10.1 Purchase and Sale Agreement, dated May 11, 1999, by and
between CB Acquisition, Inc. and, for purposes of Section
5.2 of the Purchase and Sale Agreement, Tanner's Restaurant
Group, Inc., and Pacific Ocean Restaurants, Inc. and Crabby
Bob's Seafood, Inc. (1)
27.1 Financial Data Schedule as of July 11, 1999.
-----------------------
(1) Incorporated by reference to Exhibit 10.15 to our Registration
Statement on Form SB-2, Amendment No. 1, file No. 333-78111, filed
on July 26, 1999.
19
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> JUL-11-1999
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