================================================================================
As filed with the Securities and Exchange Commission on July 26, 1999
Registration No. 333-78111
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2/A#1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Tanner's Restaurant Group, Inc.
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(Exact Name of Registrant as Specified in its Charter)
Texas 5812 76-0406417
----- ---- ----------
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Identification Number)
Organization) Code Number)
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5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
(770) 248-2298
(770) 248-2299 (facsimile)
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(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
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Clyde E. Culp, III
Chief Executive Officer
or
Timothy R. Robinson
Chief Financial Officer
Tanner's Restaurant Group, Inc.
5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
(770) 248-2298
(770) 248-2299 (facsimile)
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
----------------------------
Copies to:
Wade H. Stribling, Esq.
Charles D. Vaughn, Esq.
Robert E. Copps, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
First Union Plaza, Suite 1400
999 Peachtree Street, N.E.
Atlanta, Georgia 30309
(404) 817-6000
(404) 817-6050 (facsimile)
----------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement becomes effective.
<PAGE>
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for any offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ___________________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ___________________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
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<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Title of Each Class Amount To Be Proposed Maximum Proposed Maximum Amount Of
Of Securities To Be Registered(1)(2) Offering Price Aggregate Offering Registration Fee
Registered Per Share(2) Price(2)
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock, par value $.01 per share 119,640,426 $.1475 $17,646,963 $4,906(3)
=====================================================================================================================
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457(a) under the Securities Act of 1933.
(2) Estimated in accordance with Rule 457(c) under the Securities Act of 1933,
using the average of the bid and asked prices for the common stock on July
21, 1999.
(3) A registration fee of $3,321 was paid in connection with the original
filing of this Registration Statement on Form SB-2 on May 7, 1999.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
===========================================================================================================================
</TABLE>
<PAGE>
PROSPECTUS
TANNER'S RESTAURANT GROUP, INC.
174,273,631 Shares
of
Common Stock
This is an offering of shares of common stock of Tanner's Restaurant Group,
Inc. from time to time by selling shareholders. Tanner's Restaurant Group will
not receive any of the proceeds from the sale of the shares by the selling
shareholders. Some of the selling shareholders, however, will purchase shares of
our preferred stock for $1,500,000 on the date of this prospectus, as provided
in our financing arrangement with those selling shareholders. Our common stock
is currently reported on the NASD's OTC Bulletin Board under the symbol "ROTI."
From time to time, the selling shareholders may use this prospectus to
offer and sell their shares at the prices quoted for the common stock in the
over-the-counter market. The selling shareholders may also attempt to sell their
shares in isolated private transactions, at negotiated prices, with
institutional or other investors.
To the extent required, we will disclose in a prospectus supplement the
names of any agent or broker-dealer, applicable commissions or discounts, and
any other required information about any particular offer. The selling
shareholders will pay commission expenses and brokerage fees, if any.
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved of these securities or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
Investing in the common stock involves risks. You should purchase shares
only if you can afford a complete loss. See "Risk Factors" beginning on page 7.
The date of this prospectus is July ___, 1999.
<PAGE>
TABLE OF CONTENTS
Page
----
Summary........................................................................3
Risk Factors...................................................................7
Disclosure Regarding Forward Looking Statements...............................16
Use of Proceeds...............................................................17
Dilution......................................................................19
Market for Common Equity and Related Matters..................................20
Management's Discussion and Analysis or Plan of Operation.....................22
Business......................................................................30
Management....................................................................41
Certain Transactions..........................................................47
Principal and Selling Shareholders............................................49
Description of Securities.....................................................52
Shares Eligible for Future Sale...............................................58
Plan of Distribution..........................................................60
Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................................62
Legal Matters.................................................................62
Experts.......................................................................62
Where You Can Find More Information...........................................63
Consolidated Financial Statements...........................................FQ-1
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You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. The selling shareholders are offering to sell, and
seeking offers to buy, shares of common stock only in jurisdictions where offers
and sales are permitted. The information in this prospectus may be accurate only
as of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
<PAGE>
SUMMARY
Because this is a summary, it does not contain all of the information that
may be important to you as a prospective purchaser of shares of our common stock
from a selling shareholder. You should read the entire prospectus carefully,
including the risk factors and the financial statements, before you decide to
purchase shares of our common stock.
Shares Offered Under this Prospectus
This prospectus covers the resale of shares by the selling shareholders. We
will not receive any of the proceeds of the shares offered under this
prospectus. We have filed the registration statement that includes this
prospectus with the SEC to comply with our agreements with the selling
shareholders. The selling shareholders have obtained or will obtain the shares
of common stock offered for resale under this prospectus either:
* by converting shares of our Series D preferred stock,
* by exercising warrants we issued along with the Series D preferred
stock,
* by exercising warrants we issued when we borrowed money from FINOVA
Mezzanine Capital Inc., formerly Sirrom Capital Corporation, or
* by exercising warrants we issued when we privately placed shares of
our preferred stock through Sterling Capital, LLC.
Background
On January 14, 1999, TRC Acquisition Corporation merged into a subsidiary
of Harvest Restaurant Group, Inc. As part of the merger:
* the former shareholders of privately-held TRC received 4,123,219
shares of common stock, representing approximately 50.1% of Harvest's
outstanding shares of common stock,
* Harvest changed its board of directors to consist of four members,
three of whom were former directors of TRC, and
* TRC's management team became the management team of the new business.
On March 15, 1999, we changed our name from Harvest Restaurant Group, Inc.
to Tanner's Restaurant Group, Inc. Unless otherwise indicated in this
prospectus, the terms "we," "us," or "our" refer to the company after the date
of the merger, and the term "Harvest" refers to the company before the merger.
3
<PAGE>
A significant factor in both the structure and completion of the merger
with TRC was a commitment by outside investors to purchase shares of our
convertible preferred stock for $6,000,000. To date, we have received $4,500,000
of the $6,000,000 commitment, and we will receive the final $1,500,000 on or
before the date of this prospectus.
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
restaurants are located in Georgia - nine are company-owned, and one is
franchised. In May 1999, we opened a seafood restaurant, also in Georgia, under
the name "Crabby Bob's Seafood Grill." In May 1999, we also 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 expect to complete
this acquisition soon after the date of this prospectus.
Our Business
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 15 different appetizers. 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. Our "Crabby
Bob's Seafood Grill" restaurant offers fresh seafood, crabs, oysters, and a full
service bar.
Our growth strategy is:
* to open new company-owned restaurants,
* to increase our sales at our 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. We are evaluating our existing restaurant
locations and may close unprofitable restaurants as we expand our business
concept and focus on increasing profitability. We anticipate leasing most of our
future locations.
Our principal executive offices are located at 5500 Oakbrook Parkway, Suite
260, Norcross, Georgia 30093; our phone number at that address is (770)
248-2298.
4
<PAGE>
Use of Proceeds
We will not receive any cash proceeds from the resale of common shares by
the selling shareholders. Some of the selling shareholders, however, will
purchase shares of our preferred stock for $1,500,000 on or before the effective
date of this prospectus, as provided in our financing arrangement with those
selling shareholders. We intend to use up to $600,000 of the net proceeds of the
$1,500,000 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 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 and acquisition plans will be successful.
5
<PAGE>
The Offering
Estimated shares of common stock offered by selling shareholders upon
conversion of 9,198 shares of Series D preferred stock.......... 172,462,500*
Shares of common stock offered by FINOVA after exercising
its warrant...................................................... 756,331
Shares of common stock offered by Sterling Capital after exercising
its warrant...................................................... 135,000
Shares of common stock offered by other selling shareholders
after exercising their warrants.................................. 919,800
Estimated shares of common stock outstanding after the
offering.........................................................182,608,120**
OTC Bulletin Board symbol.......................................... "ROTI"
- --------------------
* Because the conversion rate per share of the Series D preferred stock
is equal to $1,000 divided by 80% of the five-day average closing bid
price of the common stock on the OTC Bulletin Board, these amounts are
estimates only, based upon an estimated average closing bid price of
$.10 per share. In addition, because we have agreed with the selling
shareholders to register 150% of the number of shares of common stock
into which the Series D preferred stock is convertible, the figure
given represents the number of shares determined by the formula in the
preceding sentence multiplied by 150%. On July 23, 1999, the closing
market price was approximately $.11 per share. For more information,
see "Description of Securities - Preferred Stock - Series D
Convertible Preferred Stock."
** Assumes that no other convertible securities will be converted into
common stock and that no other options or warrants will be exercised
to purchase common stock.
We will issue these shares of common stock to the holders listed above only
if they convert their shares of Series D preferred stock or exercise their
warrants. We are registering the shares under the terms of our registration
rights agreements with these holders. Even though these shares of common stock
are registered, we may never issue them, and, even if issued, the holders may
never sell them under the prospectus.
6
<PAGE>
RISK FACTORS
An investment in our common stock involves a high degree of risk, including
those risks discussed below. You should carefully consider these risk factors
along with all the other information contained in this prospectus before you
decide to purchase shares of our common stock. If any of these risks actually
occur, our business, financial condition and operating results could be
adversely affected. If that happens, the trading price of our common stock could
decline, and you could lose part or all of your investment.
RISKS RELATED TO OUR BUSINESS AND OPERATIONS
We have experienced losses for the last two years, and our future operating
results are uncertain.
For the fiscal year ended December 27, 1998, we had a net loss of
$2,897,759. For the 1997 fiscal year, our net loss was $2,143,409. For the
fiscal quarter ended April 18, 1999, our net loss was $850,381. As of April 18,
1999, we had an accumulated deficit of $7,240,386. Our future financial results
will depend on, among other things, our ability to generate a level of revenues
sufficient to offset our cost structure and our ability to reduce our operating
costs on a per location basis. We cannot assure you that we will significantly
increase our revenues or become profitable. We note further that our auditors'
report on the financial statements included in this prospectus includes a
reference to the uncertainty that we will continue as a going concern.
We presently have no arrangement to repay short-term debt of $650,000.
In addition to our other outstanding obligations, we owe a total of
$650,000 to two lenders. One of these unsecured loans matures on the effective
date of the registration statement of which this prospectus is a part, and the
other loan matures on the earlier of the date on which we receive the final
installment of our $6,000,000 financing commitment or July 31, 1999. FINOVA, our
senior secured lender, has advised us that any payment of the principal amount
of these loans will be a default under the $2,000,000 FINOVA loan unless we
repay the FINOVA loan in full at the same time. The net proceeds of the
$1,500,000 to be invested on or before the effective date of this prospectus
will be insufficient to repay both the FINOVA loan and the short-term loans. We
are working to resolve this situation. If we default under any of these loan
agreements, 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 closed three restaurants in 1999.
During 1999, we have permanently closed two of our company-owned
restaurants, and one of our franchisees has closed its franchised restaurant.
7
<PAGE>
We need additional capital immediately.
In addition to our need for capital to repay the $650,000 in short-term
loans, we continue to have substantial capital needs that cannot be funded
completely from operations. As a result, we will be required to raise additional
capital through equity or debt financing. Those sources of financing, if
available, may include bank financing, third party equity investors, capital
leases, private limited partnerships, joint venture financing and sale leaseback
arrangements. None of our lenders is under any obligation to make additional
advances to us nor are they under any obligation to approve any financing
arrangement that we may negotiate. Further, we have no source of additional
financing other than the $1,500,000 to be invested by our outside investors on
or before the effective date of this prospectus. Consequently, we cannot assure
you that any additional financing will be available to us when needed, on
commercially reasonable terms, or at all. If we cannot obtain additional
financing, our business operations and financial results will suffer.
We face risks in acquiring complementary businesses.
One component of our growth strategy is to evaluate the feasibility of
acquiring complementary businesses. Any acquisitions, including our acquisition
of Crabby Bob's, will involve a number of risks that could materially and
adversely affect us, including:
* diverting our management's attention from operational and financial
matters,
* assimilating the operations, technologies, products, and personnel of
the acquired companies,
* risks of entering markets in which we have no or limited prior
experience, and
* the potential loss of key personnel of the acquired companies.
Acquisitions could involve the potentially dilutive issuances of equity
securities and/or the incurrence of debt, contingent liabilities, and/or
amortization expenses related to goodwill and other intangible assets, any of
which could materially adversely affect our operating results and/or the market
price of the common stock. Shareholders generally do not have rights to approve
any acquisitions we make. Any acquisition we make may have a material adverse
effect on our business, financial condition, and results of operations.
The loss of members of our management team could adversely affect our business
and operations.
Clyde E. Culp, III is our chief executive officer, Robert J. Hoffman is our
Chief Operating Officer, and Timothy R. Robinson is our Chief Financial Officer.
We are dependent upon these individuals and their managerial and technical
efforts. In addition, if we complete our acquisition of Crabby Bob's, the board
of directors intends to appoint John M. Creed, the current Chairman and Chief
Executive Officer of Crabby Bob's Seafood, Inc., as a director. If any of these
individuals were to resign, we cannot assure you that we would be able to
replace them, and our inability to do so could materially adversely affect our
business. We do not have any "Key man" life insurance on the lives of the
members of our management team, other than insurance payable to FINOVA.
8
<PAGE>
We face risks in acquiring and developing new restaurants.
We are currently considering a strategy to expand our operations and open
additional restaurants. We cannot assure you that we will be successful in
opening any restaurants in a timely manner, or at all, or that, if opened, those
restaurants will operate profitably. See "Business - Growth Strategy."
Our ability to expand successfully depends upon many factors, including:
* identifying and financing suitable restaurant sites and obtaining
construction permits and licenses for the restaurants,
* negotiating acceptable lease terms for the new sites,
* creating awareness and acceptance of our restaurants in any new
geographical markets that we enter, and
* being able to hire skilled restaurant management to successfully
manage our growth, including costs and quality controls.
We cannot assure you that we will be able to accomplish these tasks.
Delays in the development and construction of new restaurants could adversely
affect us.
In developing and constructing new restaurants, a number of events over
which we will have no control could adversely affect us, including:
* delays in obtaining necessary governmental regulatory approvals,
* shortages of or the inability to obtain labor and/or materials,
* inability of the general contractor or subcontractors to perform under
their contracts,
* adverse weather conditions,
* unavailability or unacceptable cost of needed debt or lease financing,
and
* changes in federal, state or local laws or regulations.
In addition, we will be dependent on other parties to complete the
construction of any new restaurants. Accordingly, we cannot assure you that we
will be able to complete any restaurant in a timely manner or within its
proposed budget.
We may be unable to locate and lease appropriate sites for our restaurants.
The location of each restaurant is extremely important to its potential
success. We compete with a wide range of establishments in attempting to
identify and secure desirable locations. Although we believe that we will be
able to locate additional suitable sites, we cannot assure you that any suitable
sites will be available or that we can lease them on acceptable economic terms.
9
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We may need additional personnel.
Our ability to successfully open and operate additional restaurants will
depend upon our ability to hire and retain additional personnel who are
experienced in the operation of casual dining restaurants. Our failure to hire
additional experienced personnel will have a material adverse effect on our
ability to open and successfully operate additional restaurants and to expand
our operations thereafter.
We have a limited restaurant base and are dependent on a limited number of
restaurants.
We presently derive all of our revenues from ten Rick Tanner's Original
Grill restaurants, one of which is franchised, and one Crabby Bob's restaurant.
We cannot assure you that we will open any new restaurants or that, if we open
them, they will be successful or operate profitably. The lack of success or
closing of any of our existing restaurants, or the unsuccessful operation of any
new restaurant, will have a material adverse effect upon our financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition or Plan of Operation" and "Business."
Our strategy of leasing the buildings for our restaurant sites presents risks
and uncertainties.
Leases are often an attractive method of financing the development of
restaurants. We lease most of our restaurant facilities. Any default under a
lease may give the lessor the right to terminate the lease, which would deprive
us of our interest in any improvements that we might have already made. Also,
rent increases over the terms of our leases may adversely affect our
profitability. Finally, the resale value of our interest in leased property may
be less than if we owned the land, particularly toward the end of the lease
term.
We may have insufficient trademark and service mark protection.
The United States Patent and Trademark Office rejected our filing for
trademark protection of the name "Rick Tanner's Original Grill" because the name
"Tanner's" is currently being used by another entity outside our current market.
We cannot assure you that we will be able to secure any protection for our name
or our other intellectual property in the future. Other parties may attempt to
exercise alleged rights in any of the trademarks, copyrights or other
intellectual property rights or appropriate any trademarks, copyrights, or other
intellectual property rights established by us, and our failure or inability to
establish appropriate copyrights and trademarks, or to adequately protect any of
our intellectual property rights, may have a material adverse effect on us.
We are operating our Company-owned "Crabby Bob's Seafood Grill" restaurant
pursuant to a franchise agreement with Crabby's Bob's Seafood, Inc. We will
acquire rights to the "Crabby Bob's Seafood Grill" name from Crabby's Bob's
Seafood, Inc. if we acquire the assets of Crabby Bob's as we anticipate. If we
do not acquire Crabby Bob's as we anticipate, we could lose the right to use the
name, which could have a material adverse effect on us.
10
<PAGE>
Conflicts of interest involving members of our board of directors may adversely
affect us.
SECA VII, LLC, of which James R. Walker, one of our directors, is an equity
owner, has lent us $350,000. This $350,000 is part of the $650,000 in short-term
loans that we owe and will be due on the earlier of our receipt of the final
$1,500,000 of the financing commitment or July 31, 1999. As both an affiliate of
a creditor and a director, Mr. Walker may have a conflict of interest. Generally
speaking, a creditor may have an incentive to maximize his claims against the
company's assets. We cannot assure you that we will reach a satisfactory
resolution regarding the $350,000 loan, that future transactions or arrangements
with Mr. Walker will be advantageous to us, that conflicts of interest will not
arise with respect to those matters, or that if conflicts do arise, they will be
resolved in a manner favorable to us. See " - We presently have no arrangement
to repay short-term debt of $650,000" and "Management - Certain Transactions."
We have no official policy regarding material transactions between our
directors and officers and us. We generally seek to have any such transaction
approved or ratified by a majority of our directors who lack a personal interest
in the matter. Because we currently have only three directors, that approval or
ratification is not always available to us.
Risks Related to Year 2000 Computer Issues.
We have begun a review of our internal information systems to identify
problems associated with the Year 2000 problem and take any necessary corrective
action. We could be materially adversely affected by costs or complications
relating to our internal systems. We could also be materially adversely affected
by similar problems faced by our distributors, suppliers, customers, and
vendors. For more information, see "Management's Discussion and Analysis or Plan
of Operation " Year 2000 Computer Issues."
We are subject to anti-takeover provisions.
Our articles of incorporation, our bylaws and Texas law could make it more
difficult for another company to acquire us, even if a change in control would
benefit our shareholders. For more information, see "Description of Securities."
RISKS RELATED TO OUR INDUSTRY
Our industry is very competitive and many of our competitors have greater
resources than we do.
The restaurant industry is intensely competitive with respect to price,
service, location, and food quality. We have many competitors, including
mid-price, full-service casual atmosphere restaurants, take-out food service
companies, fast food restaurants, delicatessens, cafeteria-style buffets,
prepared food stores, supermarkets, and convenience stores. Our competition also
includes regional and national restaurant companies, including Chili's,
Applebee's, Black Eyed Pea, and Cracker Barrel. In addition to the competition
11
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described above, our Crabby Bob's restaurant competes with seafood restaurants
such as Red Lobster and Joe's Crab Shack. Many of our competitors are better
established, have substantially greater financial, marketing and other
resources, have been in existence for a substantially longer period of time, and
have greater name brand recognition. Further, the restaurant industry is
significantly affected by many external factors, including:
* changes in the national, regional, and local economic and real estate
conditions,
* changes in consumer preferences, tastes, and eating habits,
* demographic trends and traffic patterns,
* increases in food and labor costs and availability, and
* the type, number, and location of competing restaurants in a
particular locale.
Inflation, food costs, and other similar factors may also affect the
restaurant industry. We cannot assure you that we will be able to successfully
compete in the restaurant industry. See "Business - Competition."
Fluctuations in the cost of our raw materials may adversely impact our business.
Our operations, results, and financial condition may be adversely affected
by fluctuations in the cost of our raw materials. Those costs are determined by
constantly changing market forces over which we have no control. The loss of any
of our suppliers could adversely affect our business until we make alternative
arrangements.
We may be held liable for product liability claims or judgments against us.
We may be liable if the consumption of any of our products causes injury,
illness, or death or if anyone is injured or dies on our premises. A product
liability or other claim or judgment against us could have a material adverse
effect on our business or financial results. See "Business."
Government regulation and legal uncertainties may adversely affect our business.
General. Various federal, state, and local laws affect our business. Each
of our restaurants is subject to licensing regulation by numerous governmental
authorities, which may include alcohol beverage control, building, health and
safety, and fire agencies in the state or municipality in which the restaurant
is located. Difficulties in obtaining or the failure to obtain the necessary
licenses or approvals, including zoning, land use, and environmental laws and
regulations, could delay or prevent the development of a new restaurant in an
area. Our restaurant operations are also subject to federal and state laws
governing the minimum hourly wage, unemployment tax rates, sales tax and similar
matters over which we have no control. Significant numbers of our service, food
preparation and other personnel are compensated at rates related to the federal
minimum wage, and increases in the minimum wage could increase our labor costs.
Alcoholic Beverage Regulation. Alcoholic beverage control regulations in
each state require that our restaurants apply to the specific state authority
and, in some locations, county and municipal authorities for a license or permit
to sell alcoholic beverages on the premises and to provide service for extended
hours and on Sundays. The failure of a restaurant to obtain or retain a liquor
or food service license would adversely affect the particular restaurant's
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operations. Typically, an alcoholic beverage license must be renewed annually
and may be revoked or suspended for cause at any time. Alcohol beverage control
regulations relate to numerous aspects of the daily operations of our
restaurants, including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, and storage
and dispensing of alcoholic beverages.
Restaurants in most states are subject to "dram shop" laws, which impose
liability on licensed alcoholic beverage servers for injuries or damages caused
by their negligent service of alcoholic beverages to a visibly intoxicated
person or to a minor, if the service causes the injury or damage and the injury
or damage is reasonably foreseeable. Although we maintain liquor liability
insurance as part of our existing comprehensive general liability insurance, we
may be subject to a judgment in excess of our insurance coverage. We may be
unable to continue to maintain our insurance coverage at reasonable costs or at
all. The imposition of a judgment substantially in excess of our insurance
coverage would have a material adverse effect on us. The unavailability of this
insurance coverage in the future could materially and adversely affect us.
Americans with Disabilities Act. The federal Americans with Disabilities
Act requires that places of public accommodation meet specified requirements
related to access and use by persons with disabilities. Our non-compliance with
these regulations could adversely affect our business, operations and financial
condition.
Franchise Regulation. A number of 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 with the state
before it may offer the franchise to residents of the state. Our non-compliance
with these laws could adversely affect our business, operations, and financial
condition.
RISKS OF THE OFFERING
Additional sales of shares of common stock are likely to cause the market price
of the common stock to decline.
Currently, 8,334,489 shares of common stock are outstanding, and the number
of shares of common stock potentially issuable under our convertible preferred
stock, warrants and options, and in payment of dividends on our preferred stock,
is a multiple of the common shares currently outstanding. The number of
additional common shares potentially issuable is as large or larger than
188,807,002 shares. This number takes into account that we have agreed to
register 150% of the number of shares of common stock into which the 9,198
shares of Series D preferred stock are convertible at a recent trading price of
$.10 per share. The sale, or availability for sale, of substantial amounts of
shares of common stock could materially adversely affect the market price of the
common stock and could impair our ability to raise additional capital by selling
equity securities. This number will increase if the trading price of the common
stock declines further. For more information, see "Shares Eligible for Future
Sale."
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The market price of the common stock is extremely volatile.
Trading volume and prices for the common stock have fluctuated widely since
it first became publicly-traded. During the months between April and July 1999,
for example, the closing sales price of the common stock ranged from $.09 to
$.40 per share. These severe fluctuations may continue in response to quarterly
variations in operating results, announced earnings, and other factors. We
cannot always predict or foresee those events. The market price of the common
stock could also be influenced by developments or matters not related to us,
including the sale or attempted sale of a large amount of the common stock on
the open market by a shareholder. Because of this volatility, your investment in
us may result in a complete loss.
Our common stock has been delisted from the Nasdaq Small Cap Market, and
continued listing on the OTC Bulletin Board may impair its liquidity.
Our common stock was delisted from the Nasdaq Small Cap market on September
16, 1998, and we presently do not meet the requirements to re-list our common
stock on the Nasdaq SmallCap Market. Accordingly, trading in our common stock is
conducted in the over-the-counter market and reported on the NASD's OTC Bulletin
Board. Consequently, selling our shares may be more difficult because smaller
quantities of shares may be bought and sold, transactions may be delayed, and
the news media coverage of us may be reduced. These factors could result in
lower prices and larger spreads in the bid and asked prices for our shares.
Further, securities analysts are unlikely to cover our stock, and institutional
investors are unlikely to purchase our stock. We cannot assure you that we will
ever be able to list our stock on the Nasdaq Small Cap Market again.
"Penny stock" regulations may impair the liquidity of the common stock.
Because the bid price of our common stock is below $5.00 per share, shares
of common stock may be subject to the SEC's Rule 15g-9 and other penny stock
regulations under the Securities Exchange Act of 1934. Rule 15g-9 imposes sales
practice requirements on broker-dealers that sell low-priced securities to
persons other than established customers and institutional accredited investors.
For transactions covered by this rule, a broker-dealer must make a special
suitability determination for the prospective purchaser and have received the
purchaser's written consent to the transaction before the sale. Consequently,
this rule and other "penny stock" regulations may adversely affect the ability
of broker-dealers to sell our shares and may adversely affect the ability of
holders to sell their shares of common stock in the secondary market.
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We may issue additional shares of common stock and preferred stock without
shareholder approval.
Our board of directors may authorize us to issue one or more series of
preferred stock or additional shares of common stock without shareholder
approval, and the existence or terms of these securities may adversely affect
the rights of holders of the common stock. In addition, the issuance of any
additional shares of preferred stock or common stock may be used as an
"anti-takeover" device without shareholder approval. Issuance of additional
preferred stock or common stock, which may be accomplished through a public
offering or a private placement to parties favorable to current management, may
dilute the voting power of holders of common stock and may make it harder to
remove current management, even if removal might be in the shareholders' best
interests.
We do not intend to pay dividends on our common stock.
We do not currently pay any dividends on the common stock and do not intend
to pay dividends on the common stock in the foreseeable future.
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DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward looking statements are identified by words like
expects, intends, believes, anticipates, estimates, may, could, should, would,
will, plans, hopes and similar expressions. Our actual results could differ
materially from those anticipated in these forward-looking statements due to
certain factors, including those described in "Risk Factors" above and in other
places in this prospectus.
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USE OF PROCEEDS
We will not receive any proceeds from the conversion of shares of Series D
preferred stock into shares of common stock or on the sales by the selling
shareholders of the shares of common stock issued to them upon those
conversions. On or before the effective date of this prospectus, we will receive
the final $1,500,000 to be invested by the outside investors under the financing
commitment.
If the selling shareholders exercise all of their outstanding warrants, we
will receive (assuming a market price of $.10 per share of common stock)
approximately $1,877,799 upon those exercises and we will issue 1,811,131 shares
to these shareholders. Given the current trading prices of the common stock on
the OTC Bulletin Board, we believe it is unlikely that the holders of the
warrants issued with the Series D preferred stock will pay $2.00 per share to
exercise those warrants in the near to immediate future.
We intend to use up to $600,000 of the net proceeds of the $1,500,000 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 Crabby
Bob's' parent by Clyde E. Culp, III, our Chairman and Chief Executive Officer.
This bridge loan is currently non-interest bearing and matures upon the first to
occur of several events as described in "Certain Transactions." We intend to use
the balance of the net proceeds from the $1,500,000 investment to develop new
restaurants, to evaluate opportunities, to acquire new restaurant concepts, to
pay certain debt, and for working capital. The debt we may repay is described in
"Risk Factors - We presently have no arrangement to repay short-term debt of
$650,000" and " - Conflicts of interest involving members of our board of
directors may adversely affect us."
The $1,500,000 that we will receive on or before the effective date of this
prospectus represents the final installment of a $6,000,000 financing commitment
that we have received from outside investors. Of this amount, $4,500,000 has
already been invested, and we have already issued 5,700 shares of Series D
preferred stock for those investments. Upon receipt of the final $1,500,000, we
will issue another 1,500 shares of Series D preferred stock to the outside
investors. The $6,000,000 has been or is to be invested in us as follows:
(1) $2,000,000 was invested in July 1998 for shares of preferred stock
that were exchanged in January 1999 for 2,600 shares of Series D
preferred stock in the merger,
(2) $1,000,000 was invested in January 1999 in exchange for 1,300 Series D
shares,
(3) $1,000,000 was invested in February 1999 in exchange for 1,300 Series
D shares,
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(4) $500,000 was invested in May and June 1999 in exchange for the
accelerated delivery of 500 shares of Series D preferred stock (this
$500,000 was originally expected to be invested on the date of this
prospectus, but was accelerated by agreement among the parties),
(5) the final $1,500,000 will be invested in exchange for 1,500 Series D
shares on or before the effective date of this prospectus.
The original issue price of the Series D preferred stock is $1,000 per
share. For each $10,000 investment increment of the first $4,000,000 invested,
however, the investors received 13 shares of Series D preferred stock having an
aggregate original issue price of $13,000. The 500 shares of Series D preferred
stock issued in May and June 1999 have been issued at $1,000 per share, and the
1,500 shares of Series D preferred stock to be issued for the final $1,500,000
investment will be issued at $1,000 per share, so that the investor will receive
10 shares of Series D preferred stock for each $10,000 investment increment.
In addition to the shares of Series D preferred stock issued at the time of
the merger, as described above, we issued 1,998 shares of Series D preferred
stock to holders of 133.2 shares of Series B preferred stock who exchanged their
shares, for which they originally paid $1,332,000. For each $10,000 increment
originally invested in the Series B preferred stock, the investor received 15
shares of Series D preferred stock having an aggregate original issue price of
$15,000. These 1,998 shares of Series D preferred stock, together with the 5,700
shares currently outstanding and the 1,500 yet to be issued, bring the total
numbers of potentially issuable shares of Series D preferred stock to 9,198.
Each share of Series D preferred stock is convertible into shares of common
stock at a ratio determined by the following formula: $1,000 divided by 80% of
the five-day average closing bid price of the common stock. Dividends on the
Series D preferred stock are payable at the rate of 7% of the original issue
price. See "Description of Securities - Preferred Stock - Series D Convertible
Preferred Stock."
In addition, the third party investors who purchased or will purchase
Series D preferred stock for cash or who exchanged Series B or Series C
preferred stock for Series D preferred stock were or will be issued common stock
purchase warrants to purchase, for each $1,000,000 of Series D preferred stock
issued, 100,000 shares of common stock at a price of $2.00 per share. Assuming
that all 9,198 shares of Series D preferred stock are issued, we will be
obligated to issue warrants to purchase 919,800 shares of common stock.
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DILUTION
The outside investors will be able to convert their 9,198 shares of Series
D preferred stock into a large number of shares of common stock. Each share of
Series D preferred stock is convertible into shares of common stock using a
ratio determined by the following formula: $1,000 divided by 80% of the five-day
average closing bid price of the common stock on the OTC Bulletin Board. Using
an estimated closing market price on the OTC Bulletin Board of $.10 per share,
those 9,198 shares would be convertible into 114,975,000 common shares. If the
five day average closing bid price were to decrease to $.05, the 9,198 shares of
Series D preferred stock would be convertible into 229,950,000 shares of common
stock, which exceeds the 200,000,000 shares that we currently are authorized to
issue. Conversely, if the five-day average closing bid price of the common stock
were to increase to $.50, those 9,198 shares of Series D preferred stock would
be convertible into 22,995,000 common shares. These calculations are intended to
serve only as examples, not as predictions as to the future market price of the
common stock.
In addition to the potential conversions by the holders of Series D
preferred stock, the holders of our Series A preferred stock can convert each
share of Series A preferred stock into 2.7 shares of common stock. Because there
are 461,454 shares of Series A preferred stock outstanding, 1,245,926 shares of
common stock are issuable upon their conversion. Similarly, the 744,500
outstanding shares of Series E preferred stock are convertible into 2,978,000
shares of common stock. In addition, holders of options and warrants to acquire
shares of our common stock will be able to convert or exercise, as applicable,
their securities into 12,120,576 shares of common stock. If all currently
outstanding convertible preferred shares are converted into shares of common
stock based upon a market price of $.10 per share, and if all outstanding
options and warrants to purchase shares of common stock are exercised,
approximately 139,653,991 shares of common stock would be outstanding. We have
agreed with the selling shareholders to register 150% of the number of shares of
common stock into which their 9,198 shares of Series D preferred stock are
convertible. If (a) all of the shares of common stock being offered by this
prospectus are issued to the selling shareholders, (b) all outstanding
convertible securities are converted, and (c) all outstanding options and
warrants are exercised, then 197,141,491 shares of common stock would be
outstanding.
We also may elect to pay dividends in shares of common stock, and the board
of directors may decide to issue additional shares. In particular, we can issue
common stock in payment of dividends on our Series A preferred stock. A total of
approximately $578,752 in dividends on the Series A preferred stock were in
arrears as of June 30, 1999, and we may pay those dividends and future dividends
in common shares. Our ability to pay cash dividends on the Series A preferred
stock is substantially limited under our loan agreement with FINOVA.
Consequently, substantial dilution of the voting power of the current
shareholders is likely over time as convertible securities are converted,
options and warrants are exercised, and dividends are paid in common shares.
Those conversions and exercises are also likely to depress the market price of
the common stock.
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MARKET FOR COMMON EQUITY AND RELATED MATTERS
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. During the period
from July 19, 1999 through July 22, 1999, the high and low sales prices for the
common stock were $.1875 and $.0938, respectively. The range of high and low
sales prices for the common stock as reported by Nasdaq and the range of high
and low bid prices as quoted on the OTC Bulletin Board are listed below for the
periods indicated. The OTC Bulletin Board prices are indicated by an asterisk.
The quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Price
---------------------
High Low
---- ---
Fiscal Year 1997: Quarter Ended:
- ----------------- --------------
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 $2.2188 $ .25
Second Quarter July 12, 1998 $ .875 $ .25
Third Quarter October 4, 1998 $ .875 $ .125*
Fourth Quarter December 27, 1998 $ .29* $ .09*
Fiscal Year 1999: Quarter Ended:
- ----------------- --------------
First Quarter April 18, 1999 $ .56* $ .22*
Second Quarter July 11, 1999 $ .28* $ .10*
"Penny Stock" Rules
Because the bid price of the common stock has been below $5.00 per share,
the SEC's Rule 15g-9 may apply to the common stock. This rule imposes additional
sales practice requirements on a broker-dealer that sells Rule 15g-9 securities
to persons other than the broker-dealer's established customers and
institutional accredited investors. For transactions covered under Rule 15g-9,
the broker-dealer must make a suitability determination of the purchaser and
receive the purchaser's written agreement to the transaction before the sale. In
addition, broker-dealers, particularly if they are market makers in the common
stock, have to comply with the disclosure requirements of Rules 15g-2, 15g-3,
15g-4, 15g-5, and 15g-6 under the Exchange Act unless the transaction is exempt
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under Rule 15g-1. Consequently, Rule 15g-9 and these other rules may adversely
affect the ability of broker-dealers to sell or to make markets in the common
stock and also may adversely affect the ability of purchasers of the shares
offered by this prospectus to resell their shares.
Holders of Record
We had approximately 91 holders of record of our common stock as of June
30, 1999.
Dividends
We have never paid cash dividends on our common stock and intend to retain
earnings, if any, to use in operating and expanding our business. Our board of
directors will determine the amount of future dividends, if any, based upon our
earnings, financial condition, capital requirements and other conditions. Our
loan agreement with FINOVA prohibits us from paying cash dividends on our common
stock.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
You should read the following discussion along with the consolidated
financial statements and related notes to them included elsewhere in this
prospectus.
On January 14, 1999 TRC merged into a wholly owned subsidiary of Harvest in
a forward triangular merger. Because the former shareholders of TRC received a
majority of the shares of our common stock outstanding immediately after the
merger, the historical financial statements of the surviving company for the
periods before the merger are those of TRC rather than Harvest.
Overview
Our growth strategy is to open new company-owned restaurants, to increase
sales at existing restaurants, to develop and expand the franchising program,
and to evaluate and possibly acquire complementary businesses. We intend to
develop restaurants primarily in the greater Atlanta market and in selected
Southeastern markets, where we believe we will be able to use existing
supervisory, marketing, and distribution systems. Additionally, we may seek to
acquire other restaurant concepts that would complement our existing business,
allowing growth and improving profitability. We are evaluating existing
restaurant locations, and may close unprofitable restaurants as we focus on
achieving and increasing profitability.
A significant factor in both the structure and completion of the merger was
a commitment by outside investors to invest $6,000,000 in the new combined
company. Of this amount, $1,500,000 remains to be invested in us, and we will
receive this amount on or before the effective date of this prospectus. We
intend to use up to $600,000 of the net proceeds as consideration for the
acquisition of Crabby Bob's, and approximately $550,000 to pay certain
liabilities of Crabby Bob's. We intend to use the balance of the net proceeds of
this $1,500,000 primarily for working capital and the development of
company-owned restaurants and the opening of a franchised restaurant during
1999, although we cannot assure you that those development plans will be
successful.
Results of Operations for the 16 Week Period Ended April 18, 1999 Compared to
the 16 Week Period Ended April 19, 1998
Revenues. Total revenues decreased $647,736, or 17.2%, during the first
quarter (16 weeks) ended April 18, 1999, compared to the corresponding period of
1998. We had nine restaurants in operation on April 18, 1999, which is one fewer
than we had on April 19, 1998. This decrease in sales is partially attributable
to having one fewer restaurant in operation, but is primarily due to a
15.5%decline in same store sales. This decrease in same store sales results
largely from the leveling off of sales of two restaurants that we opened in the
fourth quarter of 1997, and can also be attributed to a 56% decrease in coupons
and promotional discounts.
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Costs and Expenses. In general, costs of goods sold decreased as a
percentage of sales during the first quarter of 1999, due to the reduction in
coupons and promotions that began in the fourth quarter of 1997 and continued
through 1998. These types of promotions tend to increase the number of customers
that visit the restaurant and thereby tend to increase sales. However, the
operating expenses on these sales are higher because the sales have been
discounted below the menu price. This decrease in costs is most evident in food,
beverage and paper costs.
Food, beverage and paper costs were 32.1% of sales for the first quarter of
1999 versus 36.0% of sales for the same period in 1998. The 3.9% decrease in
food costs as a percentage of sales was primarily a result of decreased coupon
and discount promotions in 1999 as mentioned above. Additionally, we achieved
some operational improvements and purchasing efficiencies.
Payroll and benefit expense was 36.3% of sales for the first quarter of
1999 compared to 36.1% of sales for the same period in 1998. We pay a portion of
a benefits package that permits restaurant managers to obtain health, life and
disability insurance. Benefit costs rose 0.3% as a percentage of sales, as a
result of decreased sales. This was offset by a decrease of 0.1% in labor costs.
Other operating expenses increased as a percentage of sales to 25.2% for
the first quarter of 1999 from 19.5% for the same period in 1998. Advertising
expenditures decreased by 1.7% but were partially offset by an increase of 0.9%
in fees for delivery service, resulting in a net decrease of 0.8% as a
percentage of sales. Repairs and maintenance and restaurant administration
expense increased by 1.0% while utility expense increased by 1.1% of sales, and
rent expense increased to 3.2% of sales. All of these increases are primarily a
result of the decrease in sales. Pre-opening expenses increased 1.2% in the
first quarter of 1999 due to the development of one new restaurant scheduled to
open in the second quarter of 1999 compared to no new restaurants in the first
quarter of 1998.
Total occupancy costs, consisting of depreciation, rent and restaurant
interest expense, increased to 11.0% in the first quarter of 1999 from 7.6% in
the first quarter of 1998. These fixed costs fluctuate as a percentage of sales,
increasing as sales decrease. 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. Freestanding
buildings tend to have higher capital investments, as well as financing costs,
thereby resulting in larger depreciation charges and greater interest costs.
Depreciation and amortization expense in the first quarter of 1999
increased by 1.3% over the first quarter of 1998, due to fixed asset additions
at a new store opened at the end of the second quarter of 1998.
Loss on restaurant closings of $300,000 for the first quarter of 1999
relates to charges recognized in connection with the closure of two of our
under-performing units. Included in this caption are charges for the write-down
of property and equipment to their net realizable values and real estate
disposition costs.
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General and administrative expenses increased to $433,695 in the first
quarter of 1999 from $396,965 in the first quarter of 1998, due to reallocating
the corporate office personnel to support additional growth.
Other Income (Expense). Other income increased in the first quarter of 1999
to 0.2% of sales, from 0.01% of sales in the first quarter of 1998. Interest
expense decreased to $114,925 in the first quarter of 1999 from $211,720 in the
first quarter 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% per annum for the first quarter of 1999.
Net Loss. We incurred a net loss of $850,381 for the first quarter of 1999
compared to a net loss of $497,166 for the same period in 1998. This increase
was primarily attributable to the $300,000 charge for store closings. 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.
Results of Operations for the Year Ended December 27, 1998 Compared to the Year
Ended December 28, 1997
Revenues. Total revenues increased by $2,727,993 during the fiscal year
1998 in comparison to fiscal 1997. This increase in sales was partially
attributable to sales from two new restaurants opened in the fourth quarter of
1997 and one new restaurant opened in the second quarter of 1998. The sales
increase was also the result of a rise in same-store sales of 1.9% over 1997.
Our first franchised stores were opened during the first half of 1998. Royalties
and franchise fees earned during the year were $63,341 versus $0 in the prior
year. This increase in restaurant and franchise-related sales was partially
offset by a 13.5% decrease in catering sales.
Costs and Expenses. In general, costs have increased as a percentage of
sales due to the additional coupon and promotions that began in August 1997 and
continued through 1998. These types of promotions increase the number of
customers that visit the restaurant 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.
Food, beverage and paper costs were 35.2% of 1998 sales versus 34.4% of
sales for the same period in 1997. The 0.8% increase in food costs as a
percentage of sales was primarily a result of increased coupon and various
discount promotions in 1998 as described above.
Payroll and benefit expense was a stable 35.5% of sales in 1998 and 1997.
In April 1997, we implemented a new benefits package that permits restaurant
managers to obtain health, life and disability insurance. We pay for a portion
of this package. As a result of this new employee benefit, benefit costs rose
0.1% as a percentage of sales. This increase was offset by a decrease of 0.1% in
labor costs.
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Other operating expenses decreased as a percentage of sales to 23.5% for
1998 from 27.3% for 1997. Although total advertising expenditures remained
constant, we began to realize some market efficiencies as advertising expense
decreased 1.5% as a percentage of sales compared to 1997. Additional decreases
in 1998 resulted from:
* 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 until November of 1997, a .5%
improvement,
* changing all restaurant cleaning from an externally contracted service
to an in-store responsibility, a .3% improvement, and
* negotiating certain contracts related to the purchase of cleaning
materials and supplies, a .3% improvement.
Pre-opening expenses decreased to .9% of sales in 1998 due to one new
restaurant, compared to 2.5% of sales in 1997 due to two new restaurants in
1997. However, these margin improvements were partially offset by the increase
in rent expense, which increased operating expenses by .4% of sales. This is due
to the higher costs associated with new store leases. These factors resulted in
a net decrease to other operating expenses of 3.8% of total sales.
Total occupancy costs, consisting of depreciation, rent and restaurant
interest expense, increased to 9.1% of sales in 1998 from 7.1% in 1997. The 2.0%
increase as a percentage of sales was primarily due to the two new restaurants
that opened in the fourth quarter of 1997 and one new restaurant that opened in
the second quarter of 1998. We believe that this trend will start to reverse in
1999 as we open more "end-cap" restaurants located at the end of strip shopping
centers, as opposed to free- standing buildings, which tend to have higher
capital investments and financing costs, therefore resulting in larger
depreciation charges and greater interest costs.
Depreciation and amortization expense in 1998 increased by 0.6% over 1997
due to fixed asset additions at the new restaurants that were opened in 1997 and
1998. Most of these assets were placed in service in December 1997, and January
and July 1998.
General and administrative expenses increased to $1,651,474 in 1998 from
$1,278,581 in 1997, 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 14.1% of 1998 sales from 14.3%
of 1997 sales.
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The write down of an intangible asset is due to a one-time charge of
$547,000 related to the cancellation and termination of an employment agreement
with the former president of TRC.
Other Income (Expense). Other income decreased in 1998 to 0.2% of sales,
from 0.3% of sales in 1997. Interest expense increased to $700,451 in 1998 from
$546,552 in 1997. This is primarily attributable to an increase in borrowings of
approximately $1,000,000 in the first half of 1998. Our effective interest rate
remained at 11.3% for 1998.
Net Loss. We incurred a net loss of $2,897,759 for the year ended December
27, 1998 compared to a net loss of $2,143,409 for the same period in 1997. 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.
Liquidity and Capital Resources
Our cash and cash equivalents decreased $172,523 during the first quarter
of 1999. The principal source of funds consisted of $2,000,000 received from
outside investors. The primary uses of funds consisted of
* cash used in operations of $1,698,871, including the payment and
resolution of current accounts payable and accrued liabilities of
$1,423,101,
* the purchase of additional fixed assets for a new restaurant of
$327,357, and
* payment of debt of $146,295.
Our cash and cash equivalents increased $434,768 during the year ended
December 27, 1998. Principal sources of funds consisted of:
* additional borrowings totaling $1,016,617 under both secured and
unsecured loan agreements,
* cash of $411,150 acquired in the merger, and
* the sale of one of our restaurant buildings for $359,696.
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Our primary uses of funds consisted of:
* the purchase of additional fixed assets for new restaurants of
$972,724, and
* cash used in operations of $220,198.
We have incurred operating losses since inception, and as of April 18,
1999, we had an accumulated deficit of $7,240,386 and a working capital deficit
of $3,029,554. Currently, we are not 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. Also, we have
obtained extended payment schedules with several of our larger vendors allowing
for payment terms of 60 to 90 days. Additionally, some of our vendors and
governing authorities have agreed to extend payment terms for obligations we
previously incurred.
In addition to our other liabilities, we currently owe an aggregate 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. One of these unsecured
loans matures on the effective date of the registration statement of which this
prospectus is a part, and the SECA loan, in the amount of approximately
$350,000, matures on the earlier of the date on which we receive the final
installment of our $6,000,000 financing commitment or July 31, 1999. FINOVA, 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 both the FINOVA loan and the short-term loans, and we
presently have no arrangement to repay both the FINOVA loan and the short-term
loans. We may, therefore, default on these loans unless we can make other
arrangements. We are working to resolve this situation. If we default under any
of these loan agreements, 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 as of June 30, 1999 is $578,752.
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, which resulted in a charge to earnings of $300,000.
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 the assets of
Crabby Bob's Seafood, Inc. Crabby Bob's is a restaurant chain consisting of two
restaurants located in Southern California that offer fresh seafood, crabs,
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oysters and a full service bar. We will pay $600,000 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. We
will pay this amount at closing by delivery of a note, which will be payable by
us, at our option, either (a) in cash or (b) in a combination of cash and stock.
We do not currently have the capital resources to meet our development
plan. Outside investors invested $2,000,000 of their $6,000,000 financing
commitment in the first quarter of 1999. In May and June 1999, after the first
quarter ended, these investors invested $500,000 of the final $2,000,000 in
exchange for our agreement to deliver 500 shares of Series D preferred stock to
them on an accelerated basis. These investors will invest the remaining
$1,500,000 of the $6,000,000 commitment on or before the date on which the
shares of common stock into which the Series D preferred shares are convertible
are registered under the registration statement of which this prospectus is a
part. As part of the commitment, we are obligated to issue 9,198 shares of our
Series D preferred stock, of which we have already issued 7,698 shares, to these
investors. 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. We
may use up to $600,000 of the net proceeds of the $1,500,000 as consideration
for the acquisition of Crabby Bob's and will use approximately $550,000 to pay
certain liabilities of Crabby Bob's.
Additionally, we have decided to sell our property on Tezel Road in San
Antonio, Texas. We anticipate that the sale of the Tezel property, if and when
completed, will generate approximately $350,000 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 are obligated to apply
the proceeds of the sale of the Tezel property to satisfy any remaining
obligations to Mr. Gallagher under the severance agreement before we apply those
proceeds to any other use. As of June 30, 1999, we owed $70,000 to Mr. Gallagher
under the severance agreement.
If the current development schedule is not delayed, management anticipates
that by the fourth quarter of 1999, we will have a base of profitable
restaurants that will allow us to begin to leverage our non-operating expenses.
Year 2000 Computer Issues
The "Year 2000 problem" is a general term used to identify those computer
programs 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 which 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.
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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, which 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, although we
continue to believe that there will be no direct material effect on our
operating performance or results of operations.
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BUSINESS
Overview
Tanner's Restaurant Group, Inc., formerly known as Harvest Restaurant
Group, Inc., was incorporated in June 1993 under the name "Clucker's Tex-Mex
Venture, Inc." Initially, Harvest operated as an area developer for Cluckers
Wood Roasted Chicken, Inc., the developer and franchiser of the "Cluckers"
restaurant concept. By 1996, Harvest had decided to focus its operations on the
development, operation and franchising of its own line of restaurants, Harvest
Rotisserie restaurants. In 1997, Harvest attempted to grow this concept by
implementing an area development program in Florida, Indiana and North Carolina.
By the first quarter of 1998, however, all restaurants franchised under this
area development program had been closed, and by July 1998 all four
company-owned restaurants had been closed. The last remaining franchised
restaurant was closed in August 1998, leaving Harvest with no ongoing business
operations. By this time, Harvest had decided to pursue a merger with TRC
Acquisition Corporation and focus its resources on the development of TRC's
"Rick Tanner's Original Grill" restaurants.
On January 14, 1999, TRC merged into a wholly-owned subsidiary of Harvest
in a forward triangular merger. In this merger, 4,123,219 shares of common
stock, representing approximately 50.1% of the outstanding common shares, were
issued to the former shareholders of privately-held TRC. Also issued in the
merger were 744,500 shares of Series E preferred stock. As a result of the
merger, we now own and franchise the "Rick Tanner's Original Grill" restaurants
formerly owned and franchised by TRC. All ten restaurants are located in Georgia
- - nine are company-owned, and one is franchised. As part of the merger, our
board of directors was changed to consist of four members, three of whom were
former directors of TRC, and TRC's management team became the active management
team of the combined business. The non-TRC director, Mr. Gallagher, subsequently
resigned from the Board. Additionally, we moved our corporate headquarters from
San Antonio, Texas to Atlanta, Georgia. For accounting purposes, we accounted
for the merger as an acquisition of Harvest by TRC deemed to have occurred on
December 27, 1998. On March 15, 1999, we changed our name to Tanner's Restaurant
Group, Inc.
In May 1999, we opened a seafood restaurant in suburban Atlanta operating
under the name "Crabby Bob's Seafood Grill." We are operating this Crabby Bob's
restaurant pursuant to a franchise agreement with the parent entity of Crabby
Bob's, Pacific Ocean Restaurants, Inc. We paid a $25,000 franchise fee to
Pacific Ocean and are paying 4% of our gross sales from that restaurant as a
royalty fee.
On May 11, 1999, we entered into a definitive agreement to acquire the
assets of two restaurants owned and operated by Crabby Bob's Seafood, Inc. Both
restaurants are located in Southern California and, like our Crabby Bob's
restaurant in suburban Atlanta, offer fresh seafood, crabs, oysters and
full-service bars.
Under the terms of the agreement, we will pay $600,000 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. We
will pay this amount at closing by delivery of a note, which will be payable by
us, at our option, either (a) in cash or (b) in a combination of cash and stock.
Our newly-formed subsidiary, CB Acquisition, Inc., will acquire the assets
of the two Crabby Bob's restaurants. John M. Creed, the current President and
Chief Executive Officer of Crabby Bob's, will become the Chief Executive Officer
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of the subsidiary and Gary Coburn, the Vice President and Chief Operating
Officer of Crabby Bob's, will become the subsidiary's Vice President of
Operations. In addition, we intend to appoint Mr. Creed to our board of
directors if the acquisition of Crabby Bob's is completed. Clyde E. Culp, III,
our Chairman and Chief Executive Officer, loaned $350,000 to Crabby Bob's parent
corporation, Pacific Ocean Restaurants, Inc., in March 1999 to enable Pacific
Ocean to satisfy certain of its immediate obligations while continuing to pursue
our proposed acquisition. No interest accrues on this loan until September 1999,
when interest will begin to accrue at a rate of 10% per annum. We intend to pay
off this loan upon our acquisition of Crabby Bob's. John M. Creed is a
significant shareholder of Pacific Ocean and has personally guaranteed a
$500,000 line of credit of Pacific Ocean. Approximately $300,000 is currently
outstanding under this line of credit. Upon our acquisition of Crabby Bob's, we
will pay off approximately $100,000 of this $300,000. Simultaneously, Mr. Creed
will loan Pacific Ocean approximately $200,000 to terminate the line of credit,
and we will assume his loan. We expect that the loan will mature six months
after the closing date, and that we will secure the loan with some form of
collateral.
The acquisition is expected to be completed in July 1999, subject to our
satisfactory completion of due diligence review, both parties' receipt of all
necessary consents and licenses, and other closing conditions.
Growth Strategy
We intend to pursue the following growth strategy:
* to open new company-owned restaurants,
* to increase our sales at existing restaurants,
* to develop and expand our franchising program, and
* to evaluate possible acquisitions of complementary restaurant
concepts.
We intend to develop restaurants in Atlanta to complete our penetration of
the Atlanta market. We also intend to develop restaurants 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 geographic areas. We currently
anticipate that we will lease most of our future locations. In 1999, we plan to
open up to four company-owned restaurants and one franchised restaurant,
although we cannot assure you that our plans will be successful.
Background of the "Rick Tanner's Original Grill" Concept
In 1986 Richard Tanner developed the original Tanner's concept, which
focused on chicken rotisserie and ribs, and he grew this idea into eight
restaurants in Atlanta over the next ten years. In October 1996, Mr. Tanner
joined forces with veteran restaurant investors and a new management team to
create TRC. TRC expanded Mr. Tanner's successful concept by adding new
company-owned restaurants and developing a franchise program. Between October
1996 and its merger with us in January 1999, TRC opened three new Tanner's
restaurants and began development of several additional locations. TRC also
began initial development of a franchise program and franchised one restaurant
in Macon, Georgia. During 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. The franchised restaurant in
Montgomery, Alabama was closed in February 1999 due to franchisee financing
arrangements and restaurant location issues.
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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 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. Our "Crabby Bob"s
Seafood Grill" restaurant offers fresh seafood, crabs, oysters, and a full
service bar. Since inception, over 25% of sales have come from takeout/takehome
service.
Value. We believe the Tanner's 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 amount spent per customer, including
beverages, is approximately $6.50 for lunch and $9.50 for dinner.
Distinctive Design and Decor and Casual Atmosphere. Our restaurants are
built according to a flexible design concept that allows recognizable
restaurants to be developed at different types of sites. Our prototype store
features an efficient operating layout, standardized equipment and tasteful and
distinctive trade dress. We seek to create a fun, casual, family friendly
neighborhood atmosphere, and we attempt to create this atmosphere by decorating
all our restaurants with things like hand-painted murals depicting local
history.
Commitment to Customer Satisfaction. We believe that we must provide
prompt, friendly and efficient service to ensure customer satisfaction. We seek
to staff each restaurant with an experienced management team and keep
table-to-server ratios low. We use customer surveys to solicit feedback on each
restaurant and attempt to address problems quickly.
Site Selection. Our site selection strategy targets markets that provide a
balance of business and residential clientele. We analyze a variety of factors
in the site selection process, including:
* local market demographics,
* site visibility,
* accessibility, and
* proximity to major retail centers, office complexes, residential
communities, and entertainment facilities.
We believe that this strategy maximizes our exposure to a high volume of new and
repeat customers. We devote significant time and resources to analyzing
prospective restaurant sites and gathering appropriate cost, demographic and
traffic data. We use an in-house construction and real estate department to
develop architectural and engineering plans and to oversee new construction.
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Although we have traditionally focused on developing our prototype freestanding
restaurant, we consider developing additional restaurants in existing buildings
and in strip shopping centers where appropriate. We believe that our ability to
remodel an existing building into one of our restaurants permits greater
accessibility to quality sites in more developed markets. Once we select a site,
we renovate or build-out the interior and exterior to produce the distinctive
atmosphere of our restaurants. Renovation or build-out of a site usually takes
from 60 to 120 days.
Training and Development. We believe a well-trained, highly motivated
restaurant management team is critical to achieving our operating objectives.
Our training and compensation systems are designed to create accountability for
performance at the restaurant level. We expend significant resources to train,
motivate and educate our 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 our training restaurants. To instill a
sense of ownership in restaurant management, compensation is based, partly, on
restaurant profit and quality service scores. We believe our focus on unit level
operations provides an incentive for managers to focus on increasing same store
sales and restaurant profitability.
Unit Economics. The average total investment cost to open a new Tanner's
restaurant, including the costs of the land, building, furniture, fixtures, and
equipment, plus preopening costs that include training salaries, opening
inventory, supplies and promotion, is approximately $1,250,000. Excluding real
estate costs (land purchase or lease costs) and preopening expenses, the average
cost of opening a new restaurant in 1998 was approximately $650,000. Based on
our recent opening of a Crabby Bob's restaurant, we anticipate that the costs of
developing a Crabby Bob's restaurant may be similar to the costs of developing a
Tanner's restaurant. We expect to reduce this average opening cost to
approximately $500,000 in 1999, due primarily to reductions in the average unit
size and a new emphasis on opening restaurants in strip shopping centers rather
than freestanding buildings. Individual unit investment costs could vary,
however, on account of a variety of factors, including competition for new
sites, area construction costs, and the mix of conversions, build-to-suit and
leased locations. We have sought to minimize our cash investment in each
restaurant to approximately $300,000 or less through the use of sale/leaseback,
or build-to-suit type financing, and equipment financing. We have been
successful in obtaining this type of financing for our new freestanding
restaurants and believe that this financing will continue to be available,
although we cannot predict that availability.
Competition
Competition in the restaurant industry is intense. Our restaurants compete
with mid-price, full-service, casual dining restaurants primarily on the basis
of quality, atmosphere, location and value. Our takeout/takehome business
competes not only with other full-service restaurants, but also with take-out
food service companies, fast-food restaurants, delicatessens, cafeteria-style
buffets, prepared food stores, supermarkets and convenience stores. We also
compete with other restaurants and retail establishments for quality sites.
Many of our competitors are well established and have substantially greater
financial, marketing and other resources than we do. Regional and national
restaurant companies such as Chili's, Applebee's, Black Eyed Pea and Cracker
Barrel have expanded their operations in the our current and anticipated market
areas. In addition to the competition described above, our Crabby Bob's
restaurant competes with seafood restaurants such as Red Lobster and Joe's Crab
Shack. This competition could adversely affect our operating results.
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Competition in the food service business is often affected by:
* changes in consumer tastes,
* national, regional, and local economic and real estate
conditions,
* demographic trends,
* traffic patterns,
* the cost and availability of labor,
* the type, number and location of competing restaurants, and
* availability of product and local competitive factors.
Some or all of these factors could adversely affect us and our future
franchisees.
Trademarks and Service Marks
Before the January 1999 merger, TRC had applied for registration with the
United States Patent and Trademark Office of its "Rick Tanner's Original Grill"
and design service mark. The Patent and Trademark Office did not grant our
application because other entities were using similar marks outside our present
market area. We believe that the use of those similar marks will not adversely
affect us. Because we believe that our service mark has significant value and is
an important factor in the marketing of our restaurants, we will vigorously
oppose any infringement of our common law rights to our marks, although our lack
of federal registration could result in our losing the right to use our mark.
We are operating our Company-owned "Crabby Bob's Seafood Grill" restaurant
pursuant to a franchise agreement with Crabby Bob's Seafood, Inc. We will
acquire whatever rights Crabby Bob's Seafood, Inc. has to the name if we acquire
the assets of Crabby Bob's as we anticipate. We currently have no legal rights
to the use of the Crabby Bob's name, however, and if we do not acquire Crabby
Bob's as we anticipate, we could lose the right to use the name, which could
have a material adverse effect on us.
Although we no longer own, franchise or operate any restaurants operating
under the Harvest name, the rights to the "Harvest Rotisserie" name, trademark
and service mark remain registered in our name with the U.S. Patent and
Trademark Office.
Government Regulation
General. A variety of federal, state, and local laws apply to us and our
restaurant business. Each of our restaurants is subject to permitting,
licensing, and regulation by a number of government authorities, including
alcoholic beverage control, zoning, health, safety, sanitation, building, and
fire agencies in the state or municipality in which the restaurant is located.
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Our restaurants must comply with federal, state and local government regulations
applicable to the consumer food service business, including those relating to
the preparation and sale of food, minimum wage requirements, overtime,
unemployment and sales taxes, working and safety conditions, mandated health
insurance coverage and citizenship requirements. Significant numbers of our
service, food preparation and other personnel are compensated at rates related
to the federal minimum wage, and increases in the minimum wage could increase
our labor costs. 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.
Alcoholic Beverage Regulation. Approximately 2% of our net restaurant sales
were attributable to the sale of alcoholic beverages in 1998. Alcoholic beverage
control regulations require each restaurant to apply to a state authority and,
in some 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 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.
"Dram shop" statutes in Georgia generally give a person injured by an
intoxicated person the right to recover damages from a business that wrongfully
served alcoholic beverages to the intoxicated person. We carry liquor liability
coverage as part of our existing $2 million comprehensive general liability
insurance.
Americans with Disabilities Act. The federal Americans with Disabilities
Act requires that places of public accommodation meet certain requirements
related to access and use by persons with disabilities. We design our
restaurants to be accessible to persons with disabilities and believe that we
are in substantial compliance with all current applicable regulations relating
to restaurant accommodations for persons with disabilities.
Franchise Regulation. A number of 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 with the state
before it may offer the franchise to residents of the state.
Franchise Operations
We currently have one franchisee and are presently offering franchises on a
selective basis. We cannot give assurances about either the number of franchise
territories that we will sell during fiscal year 1999 or the impact of franchise
fees on our profitability and cash position.
We franchise 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 when the franchisee chooses a specific territory before
signing the first license agreement. A franchisee must also enter into a
separate license agreement, which we call unit license agreement, for each
individual Tanner's restaurant that the franchisee opens.
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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 us or another
franchisee from developing in the awarded territory. If a franchisee fails to
open restaurants as provided in the market development agreement, we can notify
the franchisee of default and terminate the market development agreement if the
default is not cured.
Generally, a market development agreement expires when the franchisee opens
the last restaurant listed on the schedule in the agreement. The unit license
agreements then provide market operating control for the franchisees. After the
franchisee completes the development schedule, if we decide to establish
additional restaurants in the licensed territory, the franchisee has the right
of first refusal to develop those restaurants as long as the franchisee's
existing restaurants are in compliance with the agreements.
The initial franchise fee is $25,000 per restaurant. A franchisee pays
$10,000 of this fee upon signing a market development agreement, for each
restaurant to be built. The franchisee pays the remaining $15,000 per restaurant
at the opening of each restaurant, when the unit license agreement is signed.
Unit license agreements generally 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.
Generally, under the unit license agreement, a franchisee pays a continuing
royalty fee of 4% of gross revenues from each restaurant. In addition, a
franchisee pays a continuing fee for advertising materials production, initially
.5% of gross revenues. This fee can be increased to 2% of gross revenues upon
implementation of a national advertising program. Currently, we only require the
.5% for advertising materials production.
The unit license agreement also requires a franchisee to comply strictly
with our standards, specifications, processes, procedures, requirements and
instructions regarding the operation of a licensed restaurant. We are 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 our training program. Franchisees may
purchase food products and restaurant supplies from independent, approved
suppliers as long as they conform to our specifications. Alternate sources of
these items are generally available. The same is true for equipment and decor
packages.
Insurance
We carry 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 we believe is
adequate for a business of our size and type. We cannot assure you that our
insurance coverage will remain adequate or that insurance will continue to be
available to us at reasonable rates.
Franchisees are required to maintain minimum standards of insurance under
their franchise agreements, including commercial general liability insurance,
worker's compensation insurance, and all risk property and casualty insurance.
We require that we be named as an additional insured on those policies.
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Employees
As of June 30, 1999, we employed approximately 365 people, of whom 11 are
executive and administrative personnel, 36 are restaurant management personnel
and the remainder are hourly restaurant personnel. Many of our hourly restaurant
employees work part-time. None of our employees is covered by a collective
bargaining agreement. We consider our employee relations to be good.
Properties
We lease approximately 4,000 square feet of space for our executive offices
in Norcross, Georgia for $2,919 per month. We believe that our executive office
facilities will be adequate for our needs in the foreseeable future. We believe
that additional space, if needed, is available at reasonable rates. In addition
to the one property that we own, we lease 19 properties that range in size from
approximately 3,000 to 5,326 square feet and range in rent from $2,700 to
$11,917 per month, as described below. Included in these properties are several
leases for properties that we no longer use, as noted below.
Although Harvest had no ongoing Harvest Rotisserie restaurant operations
when Harvest merged with TRC in January 1999, Harvest had previously guaranteed
all of the real estate leases on all Harvest Rotisserie franchised restaurants.
We accrued a real estate disposition liability of $145,000 at December 27, 1998,
which we believe will be sufficient to settle all obligations related to the
closing of the company-owned and franchised Harvest Rotisserie restaurants, and
the abandonment of the Harvest Rotisserie restaurant sites under development.
Lease Monthly
Location Form of Ownership Expiration Rent
- -------- ----------------- ---------- ----
Executive Offices:
- ------------------
5500 Oakbrook Parkway Building Lease March 31, 2004 $2,919
Suite 260
Norcross, Georgia 30093
Operating Restaurants
and Catering Facility:
- ----------------------
1065 Buckhead Crossing Building Lease February, 2018 $6,879
Woodstock, GA 30189
350 Northridge Road Building Lease July, 2000 $4,439
Atlanta, GA 30338
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Lease Monthly
Location Form of Ownership Expiration Rent
- -------- ----------------- ---------- ----
3220 Cobb Parkway Building Lease June, 2003 $5,716
Atlanta, GA 30339
4920 Roswell Road Building Lease June, 1999 $5,694
Atlanta, GA 30342
1371 Clairmont Road Building Lease June, 2001 $5,394
Decatur, GA 30033
650 Gwinnett Drive Building Lease April, 2002 $3,731
Suite 203
Lawrenceville, GA 30245
4450 Hugh Howell Road Building Lease April, 2002 $4,426
Tucker, GA 30084
521 Indian Trail NW Building Lease June, 1999 $3,800
Lilburn, GA 30247
94 Pavilion Parkway Building Lease June, 2013 $11,917
Fayetteville, GA 30214
525 Peachtree Industrial Blvd. Building Lease September, 2002 $6,180
Suwanee, GA 30174
6470 Spalding Drive, Suite P Building Lease September, 2002 $4,533
Norcross, Georgia 30092
Closed Restaurants and
Abandoned Properties:
- ---------------------
6275 Spalding Drive Building Lease June, 2000 $5,480
Norcross, GA 30092
3433 McGehee Road Building Lease February, 2008 $6,667
Montgomery, AL 36111 (1)
Walzem Road Building Lease February, 2006 $2,700
San Antonio, TX (2)
1453 Riverstone Parkway Building Lease February, 2018 $6,879
Suite 100
Canton, GA 30114
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Lease Monthly
Location Form of Ownership Expiration Rent
- -------- ----------------- ---------- ----
South Padre Island Drive Building Lease November, 1999 $5,000
Corpus Christi, TX
South Braeswood Road Building Lease January, 2004 $3,000
Houston, TX
11730 West Avenue Building Lease May, 2002 $4,500
San Antonio, TX
Tezel Road Owned N/A N/A
San Antonio, TX (3)
- ------------------------------
(1) We currently sublease this property for approximately the same amount
per month as we owe on the lease. See " - Certain Transactions."
(2) We currently sublease this property for $3,600 per month.
(3) Under the terms of a Deed of Trust dated December 28, 1998 and filed
in the County of Bexar in the State of Texas, this property secures
two promissory notes, one in the amount of $150,000 and one in the
amount of $50,000, issued to Mr. William Gallagher, a former director,
as provided in his severance agreement.
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, in 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 August 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, in 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.
39
<PAGE>
On August 20, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas by Toufic Khalifa in Bexar County District Court in 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 written 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 of these claims are
uncertain, in the aggregate they are not likely to have a material adverse
effect on us.
40
<PAGE>
MANAGEMENT
Our officers and directors as of July 26, 1999 are listed below. Our
current management team consists of TRC's pre-merger management team. Each
director listed below will hold office until our 1999 annual meeting of
shareholders. Cumulative voting is not permitted in the election of directors.
The following table provides information about our directors and executive
officers.
Name Age Office
---- --- ------
Clyde E. Culp, III 56 Chairman of the Board of Directors,
President and Chief Executive Officer
Richard E. Tanner 45 Director
James R. Walker 50 Director
Robert J. Hoffman 51 Senior Vice President of Operations
Timothy R. Robinson 36 Vice President and Chief Financial
Officer
- -----------------
In addition, our board intends to appoint Mr. John M. Creed, age 62, as a
director if we acquire Crabby Bob's as anticipated.
Background of Our Directors and Executive Officers
Clyde E. Culp III, formerly the chairman and chief executive officer of
TRC, assumed the positions of our Chairman of the Board of Directors and Chief
Executive Officer upon the merger. Mr. Culp has held numerous executive
positions during his 28-year career in the hotel and restaurant industry. He
served as a director and officer of TRC beginning in November 1996. From 1993 to
1996, Mr. Culp served as president and chief executive officer of the 1,500 unit
Long John Silver's 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 E. Tanner is the founder of the Rick Tanner's Original Grill
concept and was TRC's president before the merger. Upon the merger Mr. Tanner
became a director and consults with our management in all aspects of restaurant
engineering, design, layout and menu modifications. He will continue to be our
marketing spokesman.
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<PAGE>
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 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.
Robert J. Hoffman, our Senior Vice President of Operations, served TRC in
that role from 1996 until the merger. Mr. Hoffman has over 30 years' experience
in restaurant operations. Before 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 in various management roles, most recently as senior vice president of
operations, with Metromedia Steakhouse LP, which operated 836 Ponderosa
Steakhouses.
Timothy R. Robinson, our Vice President and Chief Financial Officer, served
TRC in those roles from December 1996 until the merger. Before joining TRC, Mr.
Robinson served as a senior manager with Coopers & Lybrand, LLP in Atlanta 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.
The board of directors intends to appoint John M. Creed as a director if we
acquire Crabby Bob's as anticipated. Mr. Creed has served as the Chairman of
Pacific Ocean Restaurants, Inc., the parent entity of Crabby Bob's Seafood
Grill, Inc., since September 1997 and has served as its Chief Executive Officer
since August 1998. From 1989 through 1996, Mr. Creed served as the Chairman and
Chief Executive Officer of Chart House Enterprises, Inc., a New York Stock
Exchange company. Mr. Creed also served as the Chief Executive Officer of Hot
Dog on a Stick, Inc., a 100 unit fast food chain, from July 1997 to June 1998.
Executive Compensation
The following table provides information concerning compensation for the
past fiscal three years to William J. Gallagher, our former chief executive
officer. No other executive officer received compensation in excess of $100,000
during the fiscal year ended December 27, 1998.
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<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
----------
Annual Compensation Securities
Other Annual Underlying
Salary Bonus Compensation Options All Other
Name and Principal Position Year ($) ($) ($) (#) Compensation
- --------------------------- ---- ------ ------ ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
William J. Gallagher 1998 90,000 0 13,691(2) 140,000(1) 0
Chairman and Chief 1997 89,519 37,156 17,663 0 0
Executive Officer 1996 79,209 0 3,640 0 0
- ------------------
</TABLE>
(1) On February 5, 1998, the Board of Directors authorized a repricing of
the option exercise price for all outstanding options granted under
the Harvest Stock Option Plan to $1.00, with no change in the vesting
periods. Mr. Gallagher owns 140,000 options. This revised exercise
price represented approximately 200% of the market price of the common
stock on the date of the repricing.
(2) This amount consists of a car allowance of $5,157 and $8,534 that was
used to pay off a loan.
Mr. Gallagher resigned as an officer of Harvest and signed a severance
agreement that requires us to pay him $200,000 during 1999. As of June 30, 1999
we have paid him $130,000, and we owe him the remaining $70,000 to be paid as
described below. See "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements."
Option Grants
The following table provides information concerning grants of stock options
to Mr. Gallagher, the only named executive officer under applicable SEC rules,
during the fiscal year ended December 27, 1998.
Option Grants in Last Fiscal Year
Individual Grants
-----------------
Percent
Number of Of Total
Securities Options Exercise
Underlying Granted to Price
Options Employees in ($ per Expiration
Granted(#) Fiscal Year Share) Date
---------- ------------ ------ ----
September
William J. Gallagher.... 140,000(1) 33.33% 1.00 2001
- ------------------
43
<PAGE>
(1) On February 5, 1998, the Board of Directors authorized a repricing of
the option exercise price for all outstanding options granted under
the Harvest Stock Option Plan to $1.00, with no change in the vesting
periods. This revised exercise price represented approximately 200% of
the market price of the common stock on the date of the repricing.
Compensation of Directors
We pay our directors $250 per meeting.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements
When we completed the merger on January 14, 1999, Clyde E. Culp, III, the
chairman and chief executive officer of TRC before the merger, became our
Chairman and Chief Executive Officer. Under Mr. Culp's five-year employment
agreement with us, we are obligated to pay him an annual salary of $200,000, and
he is entitled to earn a bonus if he meets the criteria to be established by him
and the board of directors.
As part of the merger, William J. Gallagher, our chief executive officer
before the merger, executed a severance agreement with us under which he
resigned from all positions that he held with us, other than as one of our
directors, in exchange for our agreement to pay him a total of $200,000. He
resigned as a director on April 28, 1999. We paid Mr. Gallagher $10,000 in
January 1999 and $10,000 in February 1999. As amended, the severance agreement
calls for us to pay Mr. Gallagher $5,000 per week beginning March 16, 1999 and
continuing until the earlier to occur of: our receipt of the final installment
of funding from the outside investors; the sale of our property on Tezel Road in
San Antonio, Texas; or June 30, 1999. As of June 30, 1999, we still owed Mr.
Gallagher $70,000 of his severance payments. In addition, if we settle an
ongoing disagreement with another third party, we have agreed to forward Mr.
Gallagher the net proceeds of this settlement. The amount we owe to Mr.
Gallagher under his severance agreement is secured by a deed of trust on the
Tezel Road property.
Director and Officer Liability and Indemnification
The Texas Miscellaneous Corporation Act, which we refer to as the Texas
Act, allows a Texas corporation to include a provision in its articles of
incorporation limiting or eliminating the personal liability of its directors to
the corporation and its shareholders for monetary damages for breach of
directors' fiduciary duty of care. The duty of care requires that, when acting
on behalf of the corporation, directors exercise that degree of care which a
person of ordinary prudence would exercise under the same or similar
circumstances. Absent the limitations authorized by such provision, directors
are accountable to corporations and their shareholders for monetary damages for
conduct constituting negligence and fraud in the exercise of their duty of care.
Although Article 1302-7.06 of the Texas Act does not change a director's duty of
care, it enables corporations to limit available relief to non-monetary
equitable remedies such as injunction or rescission. Our articles of
incorporation limit the personal liability of our directors, in their capacity
as directors but not in their capacity as officers, to us or our shareholders to
the fullest extent permitted by the Texas Act. Specifically, a director will not
be personally liable to us or our shareholders for monetary damages for breach
of fiduciary duty as a director, except for:
44
<PAGE>
(a) any breach of the director's duty of loyalty to us or our
shareholders,
(b) acts or omissions not in good faith that constitute a breach of duty
to us or which involve intentional misconduct or a knowing violation
of law,
(c) transactions from which the director receives an improper benefit,
whether or not resulting from an action taken within the scope of the
director's office, or
(d) actions or omissions for which director liability is expressly
provided by applicable statute.
This provision may reduce the likelihood of derivative litigation against
directors and may discourage or deter shareholders or management from bringing a
lawsuit against directors for breach of their duty of care, even though that
action, if successful, might otherwise have benefited us and our shareholders.
However, this provision, together with a provision that requires us to indemnify
our officers and directors against some kinds of liabilities, is intended to
enable us to attract qualified persons to serve as directors who might otherwise
be reluctant to do so. The SEC has taken the position that this provision will
have no effect on claims arising under the federal securities laws.
In addition, our articles state that if the Texas Act or other applicable
provision of Texas law is ever amended to allow for greater exculpation of
directors than presently permitted, the directors will be relieved from
liabilities to the fullest extent provided by Texas law, as so amended. No
further action by the board of directors or our shareholders is required, unless
Texas law provides otherwise. No modification or repeal of this provision will
adversely affect the elimination or reduction in liability provided by it with
respect to any alleged act occurring before the effective date of the
modification or repeal.
Our articles of incorporation permit us to indemnify our directors and
officers to the fullest extent permitted by Texas law, including in
circumstances in which indemnification is otherwise discretionary under Texas
law.
Under Texas law, a corporation may indemnify a director or officer or other
person who was, is, or is threatened to be made a named defendant or respondent
in a proceeding because the person is or was a director, officer, employee or
agent of the corporation, if it is determined that the person:
- Conducted himself or herself in good faith;
- Reasonably believed, in the case of conduct in his or her official
capacity as a director or officer of the corporation, that his or her
conduct was in the corporation's best interests, and, in all other
cases, that his or her conduct was at least not opposed to the
corporation's best interests; and
- In the case of any criminal proceeding, had no reasonable cause to
believe that his or her conduct was unlawful.
45
<PAGE>
A person entitled to indemnification under these provisions may be
indemnified against judgments, penalties (including excise and similar taxes),
fines, settlements and reasonable expenses he or she actually incurs in
connection with the proceeding. If the person is found liable to the corporation
or is found liable on the basis that personal benefit was improperly received by
the person, the indemnification is limited to reasonable expenses actually
incurred by the person in connection with the proceeding, and shall not be made
in respect of any proceeding in which the person is found liable for willful or
intentional misconduct in the performance of his or her duty to the corporation.
Our articles of incorporation make indemnification of directors and
officers mandatory if the conditions previously mentioned are met, and
constitutes under Texas law the authorization to indemnify that is otherwise
left to a vote of the directors, or a committee of the directors, or a
determination by special legal counsel, or a vote of the shareholders.
Indemnification is mandatory, regardless of the conditions previously mentioned,
if the director or officer is wholly successful on the merits or otherwise, in
the defense of the proceeding.
Our articles of incorporation also provide for the advancement of expenses
by us to a director or officer in advance of the final disposition of the
proceeding so long as the director or officer makes a good faith written
affirmation that he or she has a good faith belief that he or she has met the
standard of conduct necessary for indemnification and gives a written
undertaking, which need not be secured, to repay us if ultimately it is
determined that the standard of conduct required for indemnification was not met
or the director or officer was willful or intentional in the misconduct of the
performance of his or her duty to us.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
these provisions, or otherwise, the SEC has advised us that in its opinion, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by our
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether our
indemnification is against public policy as expressed in the Securities Act, and
we will be governed by the final adjudication of such issue.
We plan to enter into indemnification agreements with each of our directors
and executive officers that provide for indemnification and expense advancement
to the fullest extent permitted under the Texas Business Corporation Act.
46
<PAGE>
CERTAIN TRANSACTIONS
Several of our current officers and directors, as well as holders of 5% or
more of our outstanding common stock, received our securities in the January
1999 merger. Clyde E. Culp, III, our Chairman and Chief Executive Officer,
received 1,178,063 shares of common stock in exchange for his shares of TRC
common stock and received options to acquire an additional 78,538 shares of
common stock in exchange for his options to acquire shares of TRC. Also as part
of the merger, Mr. Culp executed an employment agreement to become our Chairman
and Chief Executive Officer. James R. Walker, one of our directors, is also an
equity owner of SECA VII, LLC, which received 765,741 shares of common stock,
183,150 shares of Series E preferred stock, and options to acquire 54,976 shares
in the merger, also in exchange for its TRC securities. Timothy R. Robinson, our
Chief Financial Officer, received options to acquire 254,462 shares of common
stock, and Robert J. Hoffman, our Chief Operating Officer, received options to
acquire 243,466 shares of common stock, in each case in exchange for their
options to acquire shares of common stock of TRC. John D. Feltman, a significant
shareholder and the chairman of Brookhaven Capital Corporation, received options
to acquire 394,986 shares of common stock in exchange for his options to acquire
shares of TRC common stock. Moreover, Brookhaven received 382,870 shares of
common stock in exchange for its shares of TRC common stock.
Also in the merger with TRC, Richard Tanner, one of our directors, received
approximately 469,775 shares of Series E preferred stock in exchange for his
agreement to cancel a promissory note from TRC to him, his agreement to
terminate his employment agreement with TRC, and his conversion of shares of
Class A preferred stock of TRC. Mr. Tanner also received 1,413,675 shares of
common stock in exchange for his outstanding TRC shares and options to acquire
353,419 shares of common stock in exchange for his options to acquire shares of
TRC. Also, we sublease a restaurant facility in Montgomery, Alabama to Tanner's
Montgomery, Inc., which Mr. Tanner owns. Tanner's Montgomery pays us rent of
$6,667 per month under a lease that expires in February 2008. This restaurant
was closed in February 1999.
Mr. Culp has also personally guaranteed two loans on our behalf. As of June
30, 1999, the aggregate outstanding principal amount of these two loans was
approximately $365,000.
In addition, Mr. Culp loaned approximately $350,000 to Pacific Ocean
Restaurants, Inc., the parent entity of Crabby Bob's Seafood, Inc., in March
1999 to enable Pacific Ocean to satisfy certain immediate obligations while
continuing to pursue our proposed acquisition. Mr. Culp may lend an additional
$300,000 under the terms of this financing arrangement. No interest accrues on
this loan until September 1999, when interest will accrue at a rate of 10% per
annum. Mr. Culp's loan is due upon the earlier to occur of:
(a) 360 days from the date of Mr. Culp's last advance of funds to Pacific
Ocean,
(b) the date of termination of the letter of intent between us and Pacific
Ocean,
(c) the termination of the purchase and sale agreement for Crabby Bob's
between us and Pacific Ocean, or
(d) the date of closing of the Crabby Bob's acquisitions.
47
<PAGE>
The obligations of Pacific Ocean under Mr. Culp's note are secured by the
personal property, general intangibles and intellectual property used in the
operation of the Crabby Bob's Seafood Grill and Bob's on the Bay restaurants
operated by Crabby Bob's Seafood, Inc. John M. Creed, whom the board of
directors intends to appoint as a director if the Crabby Bob's acquisition is
completed, owns approximately 40% of the outstanding common stock of Pacific
Ocean Restaurants, Inc., the parent entity of Crabby Bob's Seafood Grill, Inc.
Mr. Creed has personally guaranteed a $500,000 line of credit of Pacific Ocean
Restaurants, Inc. Approximately $300,000 is currently outstanding under this
line of credit. Upon our acquisition of Crabby Bob's, we will pay off
approximately $100,000 of this $300,000. Simultaneously, Mr. Creed will loan
Pacific Ocean approximately $200,000 to terminate the line of credit, and we
will assume his loan. We expect that the loan will mature six months after the
closing date, and that we will secure the loan with some form of collateral.
We currently owe an aggregate of approximately $650,000 to two lenders, one
of which is SECA VII, LLC. One of our directors, James R. Walker, is an equity
owner of SECA. One of these two unsecured loans matures on the effective date of
the registration statement of which this prospectus is a part, and the SECA loan
matures on the earlier of the date on which we receive the final installment of
our $6,000,000 financing commitment or July 31, 1999. FINOVA, our senior secured
lender, has advised us that any payment of the principal amount of these two
loans will be a default under the $2,000,000 FINOVA loan unless we repay the
FINOVA loan in full at the same time. The net proceeds of the $1,500,000 to be
invested on or before the effective date of this prospectus will be insufficient
to repay both the FINOVA loan and the short-term loans. We are working to
resolve this situation. If we default under any of these loan agreements, 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.
Mr. Gallagher, a former director and officer, is an officer of Santa Cruz
Squeeze, Inc., which advanced money to Harvest in 1998 secured by a real estate
lien note in the approximate amount of $150,000. Harvest paid this note in full
before the merger.
We have no official policy regarding material transactions between our
directors and officers and us. We generally seek to have any such transaction
approved or ratified by a majority of our directors who lack a personal interest
in the matter. Because we currently have only three directors, that approval or
ratification is not always available to us.
48
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
Principal Shareholders
The following table provides information as of June 30, 1999 concerning
ownership of the capital stock by each director and officer, all directors and
officers as a group, and all beneficial owners of 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 capital stock shown as owned by them, subject to
community property laws, where applicable. Each shareholder's address is in care
of us at 5500 Oakbrook Parkway, Suite 260, Norcross, Georgia 30093, except that
FINOVA's address is 500 Church Street, Suite 200, Nashville, Tennessee 37219.
The Right to Acquire column in the table also reflects all shares of common
stock that each individual has the right to acquire within 60 days from the
above date upon exercise of stock options or common stock purchase warrants.
Percent of
Number of Outstanding
Class of Shares Right Shares of
Name Stock Owned to Acquire Class
- ---- ----- ----- ---------- -----
Clyde E. Culp, III Common 1,178,063 78,538 15.1%
Richard Tanner Common 1,413,675 353,419 20.6
Series E(4) 469,775 0 63.0
James R. Walker(1) Common 765,741 54,976 9.9
Series E(4) 183,150 0 24.6
SECA VII, LLC(1) Common 765,741 54,976 9.9
Series E(4) 183,150 0 24.6
Robert J. Hoffman Common -- 243,466 2.9
Timothy R. Robinson Common -- 254,462 3.0
John Feltman Common 382,870(2) 353,419 8.6
FINOVA Mezzanine
Capital Inc. (3) Common -- 643,509 7.2
All officers and
directors as a group
(5 persons)(4) Common 3,357,479 984,681 46.6
Series E(4) 652,925 0 87.7%
- --------------------
(1) Mr. Walker, a director, is an equity owner of SECA VII, LLC, which
directly owns 765,741 shares of common stock and 183,150 shares of
Series E preferred stock and has the right to acquire 54,976 shares of
common stock.
(2) Represents 382,870 shares held by Brookhaven Capital Corporation, of
which Mr. Feltman is the chairman.
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<PAGE>
(3) Represents shares of common stock purchasable upon exercise of a
warrant at a price of $.01 per share.
(4) Messrs. Culp, Tanner, Walker, Hoffman and Robinson.
(5) Each share of Series E preferred stock is convertible into four shares
of common stock beginning on July 14, 1999.
Selling Shareholders
Each of the selling shareholders named in the following table may, from
time to time, offer all of the shares shown next to his or its name at the then
current prices in the over-the-counter market or in isolated private
transactions, at negotiated prices, with institutional or other investors. See
"Plan of Distribution." Each selling shareholder who is a natural person will
have sole voting and investment power with respect to his shares of the common
stock after he converts his shares of the Series D preferred stock or exercises
a warrant. No selling shareholder has any voting power with respect to the
shares of the common stock issuable on the exercise of a warrant before
executing it. In addition, the selling shareholder may not sell the underlying
shares of the common stock until after conversion or exercise, as applicable.
See "Description of Securities." No selling shareholder who is a natural person,
and no natural person affiliated with any entity which is a selling shareholder
is, or has ever been, an executive officer or director of our company.
The selling shareholders are offering, by this prospectus, an aggregate of
174,273,631 shares of common stock based on the assumptions explained below. The
total amount of these common shares will not be outstanding until (a) all 9,198
shares of the Series D preferred stock are converted into approximately
114,975,000 shares of the common stock, assuming that the market price of the
common stock is $.10 per share, and (b) all 1,811,131 shares are issued upon
exercise of the outstanding warrants and options held by the selling
shareholders. We have agreed with the selling shareholders to register 150% of
the number of shares of common stock into which their 9,198 shares of Series D
preferred stock are convertible, which is why the number of shares being offered
by this prospectus exceeds the sum of (a) and (b) in the preceding sentence.
The following table gives the names of, and the number and percentage of
shares of common stock beneficially owned by, each selling shareholder as of
June 30, 1999 and when they complete the offering. These figures assume that
each selling shareholder converts all of his or its shares of Series D preferred
stock into common stock and exercises all of his or its warrants and options to
purchase shares of common stock, and then sells all of his or its shares of
common stock under this prospectus. This table also allocates all 174,273,631
shares of common stock being offered by this prospectus among the selling
shareholders, even though only 116,786,131 shares will be issued to the selling
shareholders (assuming, for purposes of conversion of the 9,198 shares of Series
D preferred stock, a market price of $.10 per share). The selling shareholders
named below may have sold, transferred or otherwise disposed of all or a portion
of their shares of common stock or Series D preferred stock since the date of
this prospectus in transactions exempt from the registration requirements of the
Securities Act.
The selling shareholders other than FINOVA and Sterling Capital agreed with
us that notwithstanding the number of shares he or it could otherwise acquire by
converting his or its shares of Series D preferred stock, he or it could not own
more than 4.99% of our outstanding common shares at any time. For that reason
the number of shares listed for some of those shareholders in the Number of
Shares Owned Before Offering is capped at 4.99% of the 182,608,120 shares
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<PAGE>
estimated to be outstanding after this offering, even though the holder can
acquire and then sell, over time, more shares than the number listed in that
column. The number of shares given in the preceding sentence assumes that none
of our other outstanding convertible securities are converted into, and that
none of our other outstanding options and warrants are exercised for, shares of
common stock.
The Number of Shares Offered for Holder's Account lists all the shares the
holder can potentially acquire and sell over time. As described elsewhere in
this prospectus, the Series D preferred stock is convertible at a ratio equal to
$1,000 divided by 80% of the five-day average closing bid price of the common
stock on the OTC Bulletin Board. This table assumes that the five-day average
closing bid price is $.10 per share. Accordingly, if the trading price of common
stock increases, the number of shares the holder can acquire will decrease.
Conversely, if the trading price of the common stock declines, the number of
shares the holder can acquire will increase. For that reason, the numbers of
shares and percentages given in the table for the selling shareholders other
than FINOVA and Sterling Capital are necessarily estimates only.
The shares of common stock offered by this prospectus may be offered from
time to time by the selling shareholders named below and other selling
shareholders named in supplements to this prospectus:
<TABLE>
<CAPTION>
Number of Number of Percentage of Percentage of
Number of Shares Owned Shares Owned Shares Owned Shares Owned
Shares Owned for Holder's After the Before the After the
Name Before Offering Account Offering Offering Offering
---- --------------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Sovereign Partners, L.P. 9,112,145 78,284,050 0 4.99% 0%
Atlantis Capital Fund Limited 9,112,145 22,042,719 0 4.99% 0%
Dominion Capital Fund Limited 9,112,145 39,125,531 0 4.99% 0%
G.P.S. America Fund Ltd. 7,351,500 7,351,500 0 4.03% 0%
Atlas Capital Fund Ltd. 9,112,145 10,179,000 0 4.99% 0%
Cache Capital (USA) L.P. 2,827,500 2,827,500 1.55%
Oscar Brito 6,786,000 6,786,000 0 3.72% 0%
Sandro Grimaldi 6,786,000 6,786,000 0 3.72% 0%
FINOVA Mezzanine 756,331 756,331 0 .41% 0%
Capital Inc.
Sterling Capital, LLC 135,000 135,000 0 .07% 0%
FINOVA currently owns warrants to purchase 643,509 shares of common stock.
On October 22, 1999, the number of shares of common stock issuable under the
warrant will increase to 756,331 unless we repay FINOVA's $2 million loan before
then.
51
</TABLE>
<PAGE>
DESCRIPTION OF SECURITIES
Our articles of incorporation authorize the board of directors to issue
200,000,000 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 each series or class. As described below, the board of directors
has designated 3,754,200 shares of preferred stock into three classes.
Common Stock
Holders of common stock are entitled to receive the dividends as the board
of directors may legally declare from time to time. 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. Shareholders
have 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. On our liquidation, dissolution or
winding up, holders of common stock will be entitled to share ratably in our net
assets available for distribution to common shareholders. The rights of the
holders of the common stock are subordinate to the rights of holders of
preferred stock. Accordingly, the rights conferred on holders of any additional
shares of preferred stock that are issued in the future under the articles of
incorporation may adversely affect the rights of holders of the common stock.
All of the outstanding shares of common stock are fully paid and non-assessable.
At June 30, 1999, 8,334,489 shares of common stock were outstanding.
Preferred Stock
The board of directors may from time to time authorize us to issue
preferred stock without action by the shareholders. The preferred stock may be
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 original issue price
of the Series A preferred stock is $10.00 per share. Holders of Series A
preferred stock 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 common stock in our sole discretion. Dividends are cumulative
from the date of issue. We 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 stock, or on the common stock, nor may we redeem, purchase or
otherwise acquire any of that stock, unless full cumulative dividends have been
or are contemporaneously paid on the Series A preferred stock. Under the terms
of our secured loan from FINOVA, we may pay cash dividends on the Series A
preferred stock only if (a) we make an equal prepayment on the FINOVA note; and
(b) the payments do not cause us to breach a specified financial covenant.
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If we are liquidated or dissolved, the holders of shares of Series A
preferred stock are entitled to receive out of our assets available for
distribution to shareholders, before any distributions are made to holders of
common stock or of any other shares of our capital stock ranking junior to the
Series A preferred stock, liquidating distributions in the amount of $10.00 per
share, plus accrued and unpaid dividends.
The Series A preferred stock is redeemable at our option at any time, in
whole or in part, for cash or in common stock, 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 stock as quoted on the Nasdaq SmallCap Market, or other
national securities exchange, for the 20 trading days before the redemption
date, plus all accrued and unpaid dividends. If the Series A preferred stock is
not quoted by Nasdaq or listed on a securities exchange, its market value will
be the fair value as determined by a member of a national securities exchange
selected by us or by the board of directors.
The Series A preferred stock automatically converts into common stock if
the closing price for the Series A preferred stock equals or exceeds $20.00 per
share for a period of ten consecutive trading days. The holders of Series A
preferred stock have the right, at their option, to convert any or all their
shares of Series A preferred stock into common stock. The number of shares of
common stock issuable on conversion of a share of Series A preferred stock is
equal to $10.00 divided by $3.70, subject to adjustment. Holders of Series A
preferred stock may also convert their shares, if we call them for redemption,
at any time up to and including the close on business on the fifth full business
day before the date fixed for redemption.
The holders of the Series A preferred stock have no voting rights except as
otherwise required by the Texas Business Corporation Act and applicable law. The
holders of shares of Series A preferred stock have no preemptive or other rights
to subscribe for any other shares or securities. The Series A preferred stock
ranks ahead of the common stock as to dividends and on our liquidation.
As of June 30, 1999, 461,454 shares of Series A preferred stock were issued
and outstanding.
Series B Convertible Preferred Stock. On January 14, 1999, all 133.2 of the
outstanding shares of Series B convertible preferred stock were exchanged for
1,998 shares of Series D convertible preferred stock. No other shares of Series
B preferred stock are outstanding, and the board of directors does not intend to
issue any more shares of Series B preferred stock.
Series C Convertible Preferred Stock. On January 14, 1999, all 200 of the
outstanding shares of Series C convertible preferred stock were exchanged for
2,600 shares of Series D preferred stock. No other shares of Series C preferred
stock are outstanding, and the board of directors does not intend to issue any
more shares of Series C preferred stock.
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Series D Convertible Preferred Stock. The original issue price of the
Series D preferred stock is $1,000 per share. Dividends on the Series D
preferred stock accrue at an annual rate of 7% of the original issue price, or
$70 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 D preferred stock, we may not declare or
pay cash dividends on the common stock, nor may we redeem, purchase or otherwise
acquire common stock, nor may we 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 stock. Under the terms of our secured loan from FINOVA, we
may pay cash dividends on the Series D preferred stock so long as (a) we make an
equal prepayment on the FINOVA note; and (b) we are not in default under the
loan documents governing the loan and no default is created by such payments.
If we are liquidated or dissolved, the holders of shares of Series D
preferred stock are entitled to receive out of our assets available for
distribution to shareholders, before any distributions are made to holders of
common stock or of any other shares of our capital stock ranking junior to the
Series D preferred stock, liquidating distributions in the amount of $1,000 per
share, plus accrued and unpaid dividends.
The Series D preferred stock 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 D preferred stock will convert automatically into shares
of common stock. The conversion rate per share is equal to $1,000 divided by 80%
of the five-day average closing bid price of the common stock on the Nasdaq
Stock Market, the OTC Bulletin Board, or on any other national securities
exchange on which the common stock is listed at the time of conversion. We are
not required, however, to convert any shares if the conversion would result in
the issuance of 20% or more of the issued and outstanding common stock to the
holders of the Series D preferred stock, as provided by Nasdaq Marketplace Rule
4320(e)(21)(H), unless we obtain shareholder approval of that conversion. If a
conversion is requested and we do not convert the Series D preferred stock
because of the Nasdaq rule, we will pay the holder of the Series D preferred
stock 125% of the principal amount of the issued and outstanding Series D
preferred stock plus accrued interest.
Holders of Series D preferred stock are allowed to convert the aggregate
amount of their Series D preferred stock into common stock beginning the date
after the registration statement containing this prospectus is declared
effective by the SEC. In addition, a holder of Series D preferred stock may not
convert those shares into shares of common stock if and to the extent that upon
conversion that holder would own more than 4.99% of the outstanding common
stock.
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The Series D preferred stock is non-voting, and it is ranked junior to the
Company's Series A preferred stock. The holders of the Series D preferred stock
have no preemptive rights or other rights to subscribe for any of our other
shares or securities.
On January 14, 1999, as noted above, 133.2 shares of Series B preferred
stock and 200 shares of Series C preferred stock were exchanged for 4,598 shares
of Series D preferred stock. We issued 1,300 shares of Series D preferred stock
for $1,000,000 in January 1999, and we issued another 1,300 shares of Series D
preferred stock for $1,000,000 in February 1999. In May and June 1999, we issued
another 500 shares of Series D preferred stock to certain of the outside
investors in exchange for $500,000. We will issue 1,500 more shares of Series D
preferred stock when we receive $1,500,000 on or before the effective date of
the registration statement containing this prospectus. The outside investors who
purchased or will purchase Series D preferred stock for cash or by exchanging
Series B or Series C preferred stock also were or will be issued common stock
purchase warrants, as described below.
As of June 30, 1999, 7,698 shares of Series D preferred stock were issued
and outstanding.
Series E Convertible Preferred Stock. In the merger, we issued a total of
744,500 shares of Series E preferred stock. The original issue price of the
Series E preferred stock is $10.00 per share. Dividends on the Series E
preferred stock 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 we determine, only
at the time of conversion of the shares. Dividends are cumulative from the date
of issue. Unless full cumulative dividends have been or are contemporaneously
paid on the Series E preferred stock, we may not declare or pay cash dividends
on the common stock, nor may we redeem, purchase or otherwise acquire common
stock, nor may we 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 E
preferred stock. Under the terms of our secured loan with FINOVA, we may not pay
cash dividends on the Series E preferred stock.
If we are liquidated or dissolved, the holders of shares of Series E
preferred stock are entitled to receive out of our assets available for
distribution to shareholders, before any distributions are made to holders of
common stock or of any other shares of our capital stock ranking junior to the
Series E preferred stock, liquidating distributions in the amount of $10.00 per
share, plus accrued and unpaid dividends.
The Series E preferred stock is redeemable at our option at any time after
six months from the date of issuance, in whole or in part, for $0.01 per share,
if the average closing bid price of our common stock, as quoted on any national
securities exchange, Nasdaq, or the OTC Bulletin Board, exceeds $3.50 per share
for five (5) consecutive trading days.
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Each share of Series E preferred stock is convertible at the option of the
holder into four shares of common stock at any time after six months from the
date of issuance, subject to adjustment. The Series E preferred stock is
non-voting, and it is ranked junior to our Series A preferred stock and Series D
preferred stock. The holders of the Series E preferred stock have no preemptive
rights or other rights to subscribe for any of our other shares or securities.
Redeemable Preferred Stock Purchase Warrants
At June 30, 1999 1,723,400 Redeemable Preferred Stock Purchase Warrants
were outstanding, plus an additional 200,000 warrants issued to the underwriters
of the offering of these warrants. Each warrant represents the right to purchase
one share of Series A preferred stock at an exercise price of $10.50 per share
until June 11, 2002, subject to adjustment. These warrants may be redeemed, in
whole or in part, at our option, upon 30 days' notice, at a redemption price
equal to $0.01 per warrant at any time if the closing price of the Series A
preferred stock on the Nasdaq SmallCap Market averages at least $11.00 per share
for a period of 20 consecutive trading days or if we redeem the Series A
preferred stock.
Common Stock Purchase Warrants
At June 30, 1999 there were 2,300,000 Common Stock Purchase Warrants
outstanding, which we refer to as 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 our option, upon 30 days notice, at a
redemption price equal to $0.01 per IPO Warrant at any time, if the closing
price of the common stock on the Nasdaq SmallCap Market averages at least $8.00
per share for a period of 20 consecutive trading days. The other warrants are
exercisable at prices ranging from $2.00 per share to $6.60 per share.
We have also issued warrants to purchase 135,000 shares of common stock at
an exercise price of 110% of the average closing bid price of the common stock
on certain benchmark dates (subject to certain adjustments) to Sterling Capital,
LLC, and have issued warrants to purchase 643,509 shares of common stock
(increasing to 756,331 shares on October 22, 1999) at an exercise price of $.01
to FINOVA, our senior secured lender. Warrants to purchase 300,000 shares at an
exercise price of $2.50 per share are also outstanding.
As noted above, the outside investors who purchased or will purchase Series
D preferred stock for cash or by exchanging Series B or Series C preferred stock
were or will be issued common stock purchase warrants to purchase, for each
$1,000,000 of Series D preferred stock issued, 100,000 shares of common stock at
a price of $2.00 per share. These warrants are exercisable for five years after
issuance, and we are required to register the shares underlying the warrants in
the registration statement containing this prospectus.
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Certain Provisions of Our Bylaws and Texas Law
Number, Term and Removal of Directors. Our bylaws provide that the number
of directors must not be less than one and not be more than five. We currently
have three directors. Upon a vacancy created in the board of directors, a
successor or new director may be appointed by the affirmative vote of a majority
of the directors then in office. The board of directors intends to appoint John
M. Creed, the current Chief Executive Officer of the parent entity of Crabby
Bob's Seafood, Inc., to the board of directors following the acquisition of
Crabby Bob's.
Special Shareholder Meetings. Our bylaws provide that special meetings of
shareholders may be called at any time by a majority of the board of directors,
the chairman of the board or our president, and that special meetings of
shareholders must be called when the holders of shares representing at least 10%
of the votes entitled to be cast on each issue presented at the meeting request
a meeting in writing.
Texas Anti-Takeover Statutes. Some provisions of the Texas Business
Corporation Act may be considered to have anti-takeover effects and may hinder,
delay, deter or prevent a tender offer, proxy contest or other attempted
takeover that a shareholder may deem to be in his best interest. Those
provisions might allow the board of directors to defend against an attempted
transaction that might otherwise result in payment of a premium over the market
price for shares the shareholder holds.
Registration Rights
We have filed the registration statement of which this prospectus is a part
pursuant to:
(1) the Registration Rights Agreements, dated January 13, 1999, relating
to the Series D preferred stock,
(2) the Stock Purchase Warrant, dated October 22, 1996, by and among TRC
Acquisition Corporation and FINOVA, as successor to Sirrom Capital
Corporation, as amended by that certain Amended and Restated Stock
Purchase Warrant, dated January 14, 1999, and
(3) the Warrant to Purchase Common Stock of Harvest Restaurant Group,
Inc., dated December 23, 1997, by and among Harvest Restaurant Group,
Inc. and Sterling Capital, LLC.
Under each of these agreements, we have agreed to pay all of the expenses
of effecting the registration of the shares of common stock covered by the
agreements, other than underwriting discounts and commissions and transfer
taxes, if any. We have no obligation under any of these agreements to retain any
underwriter to effect the sale of shares covered by the agreements.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock, the common stock
purchase warrants, the Series A preferred stock, and the Series A preferred
stock purchase warrants is Corporate Stock Transfer, Republic Plaza, 370 17th
Street, Suite 2350, Denver, Colorado 80202. We have acted as our own transfer
agent and registrar for the Series D and Series E preferred stock.
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SHARES ELIGIBLE FOR FUTURE SALE
Of the 8,334,489 shares of common stock outstanding as of June 30, 1999, we
have previously registered all but 4,123,219 of those shares. A holder of
registered shares of common stock, as of that date, could sell those shares
without any requirement that the holder deliver to his, her or its purchaser a
prospectus naming the holder as a selling shareholder, unless the holder was our
affiliate as defined in Rule 144(a)(1) under the Securities Act. Even a holder
who is an affiliate can sell the holder's shares as permitted by Rule 144
without delivering a prospectus of that type.
As of June 30, 1999, the other 4,123,219 shares of common stock were
restricted securities as defined in Rule 144. These shares were issued on
January 14, 1999 as part of the merger of TRC into one of our wholly-owned
subsidiaries and cannot be sold by the holders under Rule 144 until January 15,
2000, when only certain of the shares may be sold under Rule 144.
As of June 30, 1999, we had granted options to purchase 2,216,265 shares of
common stock, some of which were granted under our employee stock option plans.
The shares of common stock issuable upon exercise of these options have not been
registered under the Securities Act, although we intend to file a registration
statement registering the shares issuable under our stock option plans on Form
S-8 within the next 120 days.
As of June 30, 1999, 4,711,131 shares of common stock were issuable on the
exercise of outstanding common stock purchase warrants, and 1,923,400 shares of
Series A preferred stock were issuable upon exercise of outstanding Series A
purchase warrants.
The following table lists the number of shares of common stock outstanding,
together with the number of other outstanding securities, including convertible
preferred stock, options and warrants. The right-hand column lists the number of
shares of common stock into which these securities are convertible, or for which
they are exercisable.
Number Common Stock
Security Outstanding Equivalents
-------- ----------- -----------
Common stock ................. 8,334,489 8,334,489
Series A preferred stock ..... 461,454 1,245,926(1)
Series D preferred stock ..... 9,198 114,975,000(2)
Series E preferred stock ..... 744,500 2,978,000
Common stock purchase warrants 4,711,131(3) 4,711,131
Series A preferred stock
purchase warrants .......... 1,923,400(4) 5,193,180
Options ...................... 2,216,625 2,216,265
----------
Total ............... 139,653,991(2)
- ----------
(1) Each share of Series A preferred stock is convertible into 2.7 shares
of common stock.
[Footnotes are continued on following page.]
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(2) Assumes a common stock market price of $.10 per share. Because we have
agreed with the selling shareholders to register 150% of the number of
shares of common stock into which their 9,198 shares of Series D
preferred stock are convertible, we are registering 172,462,500 shares
of common stock for that purpose. If all 172,462,500 shares are
issued, the total number of shares listed in the table will be
197,141,491.
(3) Includes:
* 2,300,000 publicly-traded common stock purchase warrants
exercisable at an exercise price of $4.00 per share,
* warrants to purchase 300,000 shares of common stock we granted to
the underwriter of our 1996 initial public offering at exercise
prices of $4.00 and $6.60 per share,
* warrants to purchase 135,000 shares of common stock at an
exercise price equal to 110% of the average closing bid price of
the common stock for the five trading days ending on the most
recent anniversary of the date of issuance (subject to certain
adjustments), which we issued to Sterling Capital, LLC in
connection with our sale of Series B preferred stock,
* and warrants to purchase 300,000 shares at an exercise price of
$2.50 per shares that will be issued to J. P. Carey Securities,
Inc., upon receipt of the final $1,500,000 of the financing
commitment.
Also includes:
* FINOVA's warrants to purchase 643,509 shares (increasing to
756,331 shares on October 22, 1999) at an exercise price of $.01
per share, and
* warrants to purchase 919,800 shares of common stock at an
exercise price of $2.00 per share that have been or will be
issued to the holders of Series D preferred stock.
(4) Includes (a) 1,723,400 publicly-traded warrants to purchase shares of
Series A preferred stock at an exercise price of $10.50 per share and
(b) warrants to acquire 200,000 shares of common stock, with exercise
prices of $16.00 and $10.63 per share, that were granted to the
underwriters of our 1997 public offering of Series A preferred stock.
(5) Includes shares issuable upon exercise of options granted under the
TRC 1996 Employee Stock Option Plan.
We are unable to predict the effect that sales of shares of common stock
made under Rule 144 and the delayed sales of shares or exercise of the options
and warrants may have on the then prevailing market price of the shares of
common stock. It is likely that market sales of large amounts of these shares of
common stock and/or the 174,273,631 shares offered by this prospectus, or the
potential for those sales even if they do not actually occur, will have the
effect of depressing the market price of the common stock.
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PLAN OF DISTRIBUTION
We are registering the shares on behalf of the selling shareholders. As
used in this section, "selling shareholders" includes donees and pledgees
selling shares received from a named selling shareholder after the date of this
prospectus. Each of the selling shareholders may, when and if he converts his
shares of preferred stock into common stock or exercises his warrants to
purchase shares of common stock, from time to time, offer the underlying shares
of common stock for sale under this prospectus at the prices then prevailing on
the OTC Bulletin Board or otherwise in the over-the-counter market. Each selling
shareholder also may sell the shares of common stock in isolated private
transactions, at negotiated prices, with institutional or other investors. We
are not aware of the selling shareholders having entered into any agreements,
understandings or arrangements with any underwriters regarding the sale of their
securities, nor are we aware of any underwriter acting in connection with the
proposed sale of shares by the selling shareholders. However, each selling
shareholder may effect sales through his personal broker. If all shares of
Series D preferred stock are converted and all warrants are exercised, up to
174,273,631 shares of common stock will be so offered by this prospectus.
We will bear all costs, expenses and fees of the registration of the shares
offered by this prospectus. The selling shareholders will bear brokerage
commissions and similar selling expenses, if any, attributable to the sale of
shares.
The selling shareholders may sell shares of the common stock under this
prospectus by one or more of the following methods, without limitation:
(a) a block trade on which the broker-dealer so engaged will attempt to
sell the shares of the common stock as agent, but may position and
resell a portion of the block as principal to facilitate the
transaction,
(b) purchases by the broker-dealer as principal and resale by that
broker-dealer for its account under this prospectus,
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers, or
(d) face-to-face transactions between the selling shareholder and
purchasers without a broker-dealer.
These transactions may be effected at market prices prevailing at the time
of sale or at negotiated prices. In effecting sales, a broker-dealer engaged by
the selling shareholder may arrange for other brokers or dealers to participate.
These brokers or dealers may receive commissions or discounts from the selling
shareholder in amounts to be negotiated immediately before sale. Brokers or
dealers and any participating brokers or dealers acting as described in this
paragraph may be deemed to be underwriters' within the meaning of Section 2(11)
of the Securities Act in connection with such sales.
Upon our being notified by a selling shareholder that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
the common stock through a block trade, special offering, exchange distribution
or secondary distribution or a purchase by a broker or dealer, we will file a
supplement to the prospectus, if required, under Rule 424(c) under the
Securities Act, disclosing:
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(a) the names of each selling shareholder and each broker-dealer,
(b) the number of shares involved,
(c) the price at which such shares were sold,
(d) the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable,
(e) that such broker-dealer(s) did not conduct any investigation to verify
the information set out in this prospectus, as supplemented, and
(f) other facts material to the transaction.
Some of the shares of the common stock being offered by this prospectus may
be sold under Rule 144 under the Securities Act. As his shares become eligible
for sale under Rule 144, each of the selling shareholders may, as an alternative
to use of this prospectus, sell his shares under Rule 144.
Because the selling shareholders may be deemed to be "underwriters" within
the meaning of Section 2(11) of the Securities Act, we will advise them of the
requirement under the Securities Act that each of them, or any broker-dealer
acting for him, must deliver a copy of this prospectus for any sale by the
selling shareholder of shares of the common stock covered by this prospectus. We
will also undertake, if, in our future opinion, this prospectus no longer
complies with Section 10(a)(3) of the Securities Act, to advise the selling
shareholders of this opinion, to request that the selling shareholders stop
using this prospectus, and to confirm our then intention to amend the
registration statement containing this prospectus to effect that compliance. We
will also advise each of the selling shareholders that, if it is determined that
he is an "underwriter," the selling shareholder may be found liable for monetary
damages to purchasers under Sections 11, 12(2) and 15 of the Securities Act if
there are any defects in the registration statement (i.e., material
misstatements or omissions) and also may be found liable under Section 10(b) of
the Exchange Act and Rule 10b-5 for such material misstatements or omissions, if
any.
We, our officers and directors, and the selling shareholders are obligated
to take all steps as may be necessary to ensure that the offer and sale by the
selling shareholders of the common stock offered by this prospectus complies
with the requirements of the federal securities laws, including Regulation M. In
general, Rule 102 under Regulation M prohibits any selling shareholder or a
broker-dealer acting for such selling shareholder from, directly or indirectly,
bidding for or purchasing any shares of the common stock or attempting to induce
any person to bid for or to purchase shares of the common stock during a
restricted period (as defined in Rule 100) which ends when he has completed his
participation in the offering made under this prospectus. Rule 102 provides
certain exceptions for the selling shareholder, including exercising a common
stock purchase warrant.
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Compliance with State Securities Laws
We have not registered or qualified the shares of common stock offered by
this prospectus under the laws of any country, other than the United States. In
certain states, the selling shareholders may not offer or sell their shares of
common stock unless (1) we have registered or qualified such shares for sale in
such states; or (2) we have complied with an available exemption from
registration or qualification. Also, in certain states, to comply with such
states' securities laws, the selling shareholders can offer and sell their
shares of common stock only through registered or licensed brokers or dealers.
Limitations Imposed by Exchange Act Rules and Regulations
Certain provisions of the Securities Exchange Act of 1934, and the related
rules and regulations, will apply to the selling shareholders and any other
person engaged in a distribution of shares of the common stock. Those provisions
may (1) limit the timing of purchases and sales of any of the shares of common
stock by the selling shareholders or such other person; (2) affect the
marketability of that stock; and (3) affect the brokers' and dealers'
market-making activities with respect to such stock.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Effective July 17, 1998, Akin, Doherty, Klein & Feuge, P.C. resigned as the
certifying accountant for Harvest Restaurant Group, Inc. Please see Harvest's
Current Report on Form 8-K, dated July 9, 1998, for additional information
regarding this resignation. As a result of Harvest's merger with TRC on January
14, 1999, Porter Keadle Moore, LLP, the independent accountants for TRC before
the merger, became our independent accountants on the date of the merger.
Neither we nor anyone on our behalf consulted Porter Keadle Moore, LLP regarding
any matter described in Item 304(a)(2)(i) or (ii) of Regulation S-B.
LEGAL MATTERS
Michener, Larimore, Swindle, Whitaker, Flowers, Sawyer, Reynolds & Chalk,
L.L.P., Ft. Worth, Texas, will pass on the validity of the common stock offered
by this prospectus for us.
EXPERTS
The audited consolidated financial statements as of December 27, 1998 and
for the years ended December 27, 1998 and December 28, 1997 have been included
in reliance on the report of Porter Keadle Moore, LLP, independent public
accountants, given on the authority of that firm as experts in accounting and
auditing.
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WHERE YOU CAN FIND MORE INFORMATION
We must comply with the information requirements of the Exchange Act, and
we file reports, proxy and information statements and other information with the
SEC. Those reports, proxy and information statements, and other information may
be inspected and copied at the public reference facilities maintained by the SEC
at 450 Fifth Street, N.W., Washington, D.C., 20549. Copies of that material can
be obtained from the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549 on payment of the prescribed fees. In addition, the
SEC maintains a website (http:\\www.sec.gov) that contains reports, proxy and
information statements, and other information regarding registrants that file
electronically with the SEC through the Electronic Data Gathering, Analysis and
Retrieval system, or EDGAR.
This prospectus is part of a registration statement on Form SB-2 that we
have filed with the SEC under the Securities Act. This prospectus does not
contain all of the information contained in the registration statement, certain
parts of which we have omitted in accordance with SEC rules. For further
information about us and the shares covered by this prospectus, we refer you to
the registration statement. Statements contained in this prospectus concerning
the provisions of any document are not necessarily complete, and each of those
statements is qualified by reference to the copy of that document filed with the
SEC.
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<TABLE>
<CAPTION>
FINANCIAL INFORMATION
Item 1. Financial Statements
Tanner's Restaurant Group, Inc.
Consolidated Balance Sheet
April 18, December 27,
1999 1998
(Unaudited)
----------- -----------
<S> <C> <C>
Assets
Current assets:
Cash $ 49,640 $ 222,163
Accounts receivable 82,938 130,086
Inventory 95,259 113,734
Prepaid expenses 32,755 21,989
----------- -----------
Total current assets 260,592 487,972
Property and equipment, net 2,343,604 2,092,698
Intangible assets, net 3,011,069 3,119,870
Goodwill, net 984,916 1,002,303
Other assets 140,137 161,252
----------- -----------
Total assets $ 6,740,318 $ 6,864,095
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 1,003,458 $ 1,390,697
Accrued expenses 1,514,804 2,254,666
Current portion of long-term debt 771,884 882,801
----------- -----------
Total current liabilities 3,290,146 4,528,164
Long-term debt 2,271,506 2,306,884
----------- -----------
Total liabilities 5,561,652 6,835,048
----------- -----------
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 83,345 82,301
8,230,080 in 1998
Additional paid-in capital 9,120,555 9,082,929
Stock subscription receivable (2,000,000) (4,000,000)
Accumulated deficit (7,240,386) (6,390,005)
----------- -----------
Total stockholders' equity 1,178,666 29,047
----------- -----------
Total liabilities and stockholders' equity $ 6,740,318 $ 6,864,095
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
FQ-1
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations
For the 16 Weeks Ended
--------------------------
April 18, April 19,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Revenue
<S> <C> <C>
Restaurant sales revenue $ 2,976,852 $ 3,524,283
Catering revenue 131,172 195,954
Franchise and royalty revenue 955 36,478
----------- -----------
Total revenue 3,108,979 3,756,715
----------- -----------
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 998,053 1,353,020
Payroll and benefits 1,127,947 1,357,269
Depreciation and amortization 207,947 203,011
Other operating expenses 743,442 732,418
Loss on restaurant closings 300,000
----------- -----------
Total restaurant and catering operating expenses 3,377,389 3,645,718
----------- -----------
Income from restaurant and catering operations (268,410) 110,997
General and administrative expenses 433,695 396,965
----------- -----------
Operating loss (702,105) (285,968)
Other income (expense):
Other income (expense) (33,132) 348
Interest expense (115,144) (211,546)
----------- -----------
Net loss $ (850,381) $ (497,166)
=========== ===========
Basic and diluted loss per share $ (0.12) $ (0.15)
The accompanying notes are an integral part of these
consolidated financial statements.
FQ-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tanner's Restaurant Group, Inc.
Consolidated Statements of Cash Flows
For the 16 Weeks Ended
--------------------------
April 18, April 19,
1999 1998
(Unaudited) (Unaudited)
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $ (850,381) $ (497,166)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 207,947 203,011
Loss on restaurant closings 300,000
Changes in assets and liabilities:
Accounts receivable 47,148 (22,970)
Inventory 18,475 13,121
Prepaid expenses (10,766) (10,643)
Other assets 15,807 (167)
Accounts payable (387,238) (107,620)
Accrued expenses and other liabilities (1,039,863) 471,738
----------- -----------
Net cash provided by (used in) operating activities (1,698,871) 49,304
----------- -----------
Cash flows from investing activities:
Purchase of property and equipment (327,357) (143,240)
----------- -----------
Net cash used in investing activities (327,357) (143,240)
----------- -----------
Cash flows from financing activities:
Cash overdraft (212,605)
Repayments of debt (146,295) (68,876)
Proceeds from issuance of long-term debt 583,115
Proceeds from sale of Series D preferred stock 2,000,000
----------- -----------
Net cash provided by financing activities 1,853,705 301,634
----------- -----------
Net change in cash and cash equivalents (172,523) 207,698
Cash and cash equivalents, beginning of year 222,163
----------- -----------
Cash and cash equivalents, end of period $ 49,640 $ 207,698
=========== ===========
Non-cash investing and financing activities:
Dividends accrued on Series A preferred stock $ 138,436
Accretion of redeemable TRC preferred stock $ 42,305
Dividends accrued on redeemable TRC preferred stock 75,000
Supplemental cash flow information:
Interest paid $ 114,298 $ 65,926
The accompanying notes are an integral part of these
consolidated financial statements.
FQ-3
</TABLE>
<PAGE>
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. As a result, the
consolidated financial statements presented are those of TRC rather than
Harvest Restaurant Group Inc.
2. Description of Business:
Tanner's Restaurant Group, Inc. and its wholly owned subsidiaries operate
nine casual dining restaurants and franchise one restaurant under the name
"Rick Tanner's Original Grill." The restaurants specialize in fresh,
convenient meals featuring rotisserie chicken entrees, barbecued ribs,
hamburgers, freshly prepared vegetables, salads, and other side dishes. At
the end of fiscal year 1998, 11 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. 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.
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 statements are subject to
year-end adjustment. The consolidated results of operations for the 16
weeks ended April 18, 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 all significantly
strain our financial position. We have obtained a commitment from a group
of outside investors to invest $6,000,000 in Tanner's, and as of April 18,
1999, these investors have invested $4,000,000 under this commitment. We
believe that the successful completion of this anticipated transaction is
critical to continue our current plan of operations. We expect that the
$2,000,000 that we received under the financing commitment during the first
quarter of 1999, combined with our cost containment and cash flow
management strategies, will enable us to continue operations until we
receive the final $2,000,000. Because we believe it is probable that we
will receive the final $2,000,000 in the early summer of 1999, the
consolidated financial statements do not reflect any adjustments that will
be necessary if we do not receive that $2,000,000. In May 1999, after the
first quarter ended, we received $375,000 of the $2,000,000 that remains to
be invested. We expect to receive another $125,000 shortly.
FQ-4
<PAGE>
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:
For the 16 Weeks Ended
-------------------------
April 18, April 19,
1999 1998
---- ----
Net loss $ (850,381) $ (497,166)
Less: Dividends on Series A preferred stock (138,436)
Dividends on TRC preferred stock (75,000)
Accretion on TRC preferred stock (42,305)
--------- ----------
Net loss attributable to common shareholders (988,817) (614,471)
Weighted average common shares outstanding 8,311,994 4,123,219
Basic and diluted loss per share $ (.12) $ (0.15)
4. Capital Structure:
On March 12, 1999, our shareholders voted to amend our articles of
incorporation to increase the number of authorized shares of common stock
from 20,000,000 to 200,000,000 and to change our name to "Tanner's
Restaurant Group, Inc."
FQ-5
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
Tanner's Restaurant Group, Inc.
We have audited the accompanying consolidated balance sheets of Tanner's
Restaurant Group, Inc. (formerly Harvest Restaurant Group, Inc.) and
subsidiaries as of December 27, 1998, and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 27, 1998 and December 28, 1997. 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 Tanner's Restaurant
Group, Inc and subsidiaries as of December 27, 1998 and the results of their
operations and their cash flows for the years ended December 27, 1998 and
December 28, 1997.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 15, the
Company has experienced significant net losses since October 15, 1996, has been
unable to generate positive cumulative cash flows from operations since that
date, and, at December 27, 1998, the Company has a significant working capital
deficiency. These facts raise substantial doubt about the Company's ability to
continue as a going concern. Note 15 also describes management plans to
alleviate these financial concerns. The consolidated financial statements do not
include any adjustments that might result from this uncertainty.
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
March 5, 1999, except for Note 16,
as to which the date is March 12, 1999.
F-1
<PAGE>
Tanner's Restaurant Group, Inc.
Consolidated Balance Sheet
December 27,
1998
------------
ASSETS
Current assets:
Cash $ 222,163
Accounts receivable 130,086
Inventory 113,734
Prepaid expenses 21,989
-----------
Total current assets 487,972
Property and equipment, net 2,092,698
Intangible assets, net 3,119,870
Goodwill, net 1,002,303
Other assets 161,252
-----------
Total assets $ 6,864,095
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,390,697
Accrued expenses 2,254,666
Current portion of long-term debt 882,801
-----------
Total current liabilities 4,528,164
Long-term debt 2,306,884
-----------
Total liabilities 6,835,048
-----------
Commitments and contingencies
Stockholders' equity:
Preferred stock (see Note 7) 1,253,822
Common stock: $.01 par value; authorized 20,000,000 shares;
issued and outstanding 8,230,080 shares 82,301
Additional paid-in capital 9,082,929
Stock subscription receivable (4,000,000)
Accumulated deficit (6,390,005)
-----------
Total stockholders' equity 29,047
-----------
Total liabilities and stockholders' equity $ 6,864,095
===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations
For the Years Ended
----------------------------
December 27, December 28,
1998 1997
------------ ------------
Revenue
<S> <C> <C>
Restaurant sales revenue $ 10,830,898 8,041,660
Catering revenue 800,305 924,891
Franchise and royalty revenue 63,341
------------ ------------
Total revenue 11,694,544 8,966,551
------------ ------------
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 4,114,903 3,086,448
Payroll and benefits 4,151,723 3,184,827
Depreciation and amortization 705,658 590,807
Other operating expenses 2,746,175 2,449,783
------------ ------------
Total restaurant and catering operating expenses 11,718,459 9,311,865
------------ ------------
Loss from restaurant and catering operations (23,915) (345,314)
General and administrative expenses 1,651,474 1,278,581
Write down of intangible asset 547,000
------------ ------------
Operating loss (2,222,389) (1,623,895)
Other income (expense):
Other income 25,081 27,038
Interest expense (700,451) (546,552)
------------ ------------
Net loss $ (2,897,759) $ (2,143,409)
============ ============
Basic and diluted loss per share $ (0.81) $ (0.63)
The accompanying notes are an integral part of these consolidated financial statements.
F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tanner's Restaurant Group, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
Common Stock Preferred Stock
Shares Amount Shares Amount
------ ------ ------ ------
TRC:
<S> <C> <C> <C> <C>
Balance, December 29, 1996 2,625,000 $ 26,250 -- --
Net loss -- -- -- --
Dividends accrued on
redeemable preferred stock -- -- -- --
Accretion on redeemable
preferred stock -- -- -- --
----------- ----------- ----------- -----------
Balance, December 28, 1997 2,625,000 26,250 -- --
Net loss -- -- -- --
Repricing of stock options -- -- -- --
Dividends accrued on
redeemable preferred stock -- -- -- --
Accretion on redeemable
preferred stock -- -- -- --
----------- ----------- ----------- -----------
Balance, December 27, 1998 2,625,000 26,250 -- --
Company:
Assumed cancellation of TRC Oldco
common shares in
connection with Merger (2,625,000) (26,250) -- --
Assumed issuance of Company
common stock in
connection with Merger 8,230,080 82,301 -- --
Assumed issuance of series A
preferred stock in
connection with Merger -- -- 500,124 $ 500,124
Assumed issuance of series D
preferred stock in connection
connection with Merger -- -- 9,198 9,198
Assumed issuance of series E
preferred stock in connection
connection with Merger -- -- 744,500 744,500
----------- ----------- ----------- -----------
Balance, December 27, 1998,
giving effect to Merger 8,230,080 $ 82,301 1,253,822 $ 1,253,822
=========== =========== =========== ===========
F-4
<PAGE>
Tanner's Restaurant Group, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(Continued)
Additional Stock Stockholders'
Paid-In Subscription Accumulated Equity
Capital Receivable Deficit (Deficit)
------- ---------- ------- ---------
TRC:
Balance, December 29, 1996 -- -- $ (454,651) $ (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 -- -- (3,039,883) (3,013,633)
Net loss -- -- (2,897,759) (2,897,759)
Repricing of stock options $ 58,903 -- -- 58,903
Dividends accrued on
redeemable preferred stock -- -- (300,000) (300,000)
Accretion on redeemable
preferred stock -- -- (152,363) (152,363)
----------- ----------- ----------- -----------
Balance, December 27, 1998 58,903 -- (6,390,005) (6,304,852)
Company:
Assumed cancellation of TRC Oldco
common shares in
connection with Merger -- -- -- (26,250)
Assumed issuance of Company
common stock in
connection with Merger -- -- -- 82,301
Assumed issuance of series A
preferred stock in
connection with Merger -- -- -- 500,124
Assumed issuance of series D
preferred stock in connection
connection with Merger 5,396,433 $(4,000,000) -- 1,405,631
Assumed issuance of series E
preferred stock in connection
connection with Merger 3,627,593 -- -- 4,372,093
----------- ----------- ----------- -----------
Balance, December 27, 1998,
giving effect to Merger $ 9,082,929 $(4,000,000) $(6,390,005) $ 29,047
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Tanner's Restaurant Group, Inc.
Consolidated Statements of Cash Flows
For the Year Ended
--------------------------
Year ended Year ended
December 27, December 28,
1998 1997
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(2,897,759) (2,143,409)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 705,658 590,807
Loss on sale of property and equipment 24,690
Write down of intangible asset 547,000
Compensation expense related to repricing of stock options 58,903
Changes in assets and liabilities, net of effects of Merger:
Accounts receivable (28,536) (108,347)
Inventory 493 (57,715)
Prepaid expenses 31,041 24,183
Other assets (16,867) (6,995)
Accounts payable (153,643) 823,924
Accrued expenses and other liabilities 1,508,822 434,443
----------- -----------
Net cash used in operating activities (220,198) (443,109)
----------- -----------
Cash flows from investing activities, net of effect of Merger:
Net cash acquired in Merger 411,150
Proceeds from sale of property and equipment 365,496
Purchase of property and equipment (972,724) (1,922,168)
----------- -----------
Net cash used in investing activities (196,078) (1,922,168)
----------- -----------
Cash flows from financing activities, net of effect of Merger:
Cash overdraft (212,605) 212,605
Repayments of debt (164,543) (108,250)
Proceeds from issuance of long-term debt 1,016,617 2,195,100
Additions to deferred financing costs (1,030) (30,276)
----------- -----------
Net cash provided by financing activities 638,439 2,269,179
----------- -----------
Net change in cash and cash equivalents 222,163 (96,098)
Cash and cash equivalents, beginning of year 0 96,098
----------- -----------
Cash and cash equivalents, end of year $ 222,163 0
=========== ===========
Non-cash investing and financing activities:
Accretion of redeemable TRC Preferred Stock $ 152,363 $ 141,823
Dividends accrued on redeemable TRC Preferred Stock 300,000 300,000
Retirement of mortgage loan upon sale of property 939,101
Purchase price adjustment (411,590)
Exchange of TRC Preferred Stock for Series E preferred stock 3,825,093
Settlement of employment contract through issuance of Series E
preferred stock 547,000
Series A preferred stock acquired in connection with Merger 500,124
Stock subscription receivable for Series D preferred stock 4,000,000
Common stock issued and acquired in connection with Merger, net of
TRC common stock cancelled 56,051
Supplemental cash flow information:
Interest paid $ 423,661 $ 290,197
The accompanying notes are an integral part of these consolidated financial statements.
F-6
</TABLE>
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Consolidated Financial Statements:
1. Description of Business:
Tanner's Restaurant Group, Inc. (formerly Harvest Restaurant Group, Inc.)
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 27, 1998, there were 11 stores located in the Atlanta,
Georgia metropolitan area.
TRC Acquisition Corporation Merger
On January 14, 1999 Harvest Restaurant Group, Inc. ("Harvest" or the
"Company") and TRC Acquisition Corporation ("TRC") completed a forward
triangular merger (the "Merger") where Harvest acquired TRC. The effective
date of the Merger was December 27, 1998 and the consolidated financial
statements have been prepared 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 common stock of Harvest. For this reason, the
Merger was treated as a reverse acquisition by TRC for accounting purposes.
As a result, the consolidated financial statements presented are those of
TRC rather than Harvest.
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 ("Oldco"), including nine
restaurants, a catering business and a management company. The aggregate
purchase price was approximately $5.2 million, which included costs of the
acquisition. The aggregate purchase price included a cash payment of
approximately $1.6 million, an approximately $2.6 million, 10% convertible
subordinated debenture to the sole shareholder of Oldco and the issuance of
500 shares of TRC Class A Preferred Stock and 900,000 shares of common
stock. Additionally, the Company entered into a $2 million collateralized
promissory note. The estimated fair value of the net liabilities acquired
was approximately $200,000. The allocation of the purchase price resulted
in identifiable intangibles and goodwill of approximately $6.1 million
which are being amortized on a straight line basis over periods ranging
from five to 20 years.
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 consolidated financial statements presented
ended on December 27, 1998 and December 28, 1997. All general references to
years relate to fiscal years unless otherwise noted.
F-7
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
2. Summary of Significant Accounting Policies, continued:
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:
Furniture and fixtures 5 years
Signage 7 years
Office equipment 5 years
Computer equipment 3 years
Kitchen and service equipment 7 years
Building 20 years
Leasehold improvements Life of lease
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 upon the October 15, 1996 acquisition and is being
amortized over 20 years using the straight-line method. Accumulated
amortization of goodwill amounted to $127,838 and $71,331 at December 27,
1998 and December 28, 1997, respectively.
F-8
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
2. Summary of Significant Accounting Policies, continued:
Intangible Assets
Intangible assets consist primarily of employment contracts, recipes, and
the trained workforce acquired in the October 15, 1996 acquisition. These
intangible assets are being amortized over five to 15 years using the
straight-line method.
Impairment
The Company assesses the recoverability of its goodwill and intangible
assets by determining whether the amortization of the asset 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 the unamortized asset balance exceeds
those cash flows.
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 $42,332 and $25,081 at December 27,
1998 and December 28, 1997, respectively.
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.
Advertising
The Company expenses advertising costs as incurred. Total advertising
expense included in other operating expense was $586,686 and $585,516 for
the years ended December 27, 1998 and December 28, 1997, respectively.
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 using the 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, the Company considers all expected future events
other than enactments of changes in the tax law or rates.
F-9
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
2. Summary of Significant Accounting Policies, continued:
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 by giving effect to the Company's dilutive stock
options, warrants and preferred stocks. The weighted average common shares
outstanding presented below has been adjusted to reflect the 1.57075 to 1
exchange ratio in the Merger. See Notes 8, 9 and 10 for further discussion
of options and warrants ("potential common stock equivalents"). These
potential common stock equivalents are excluded from the diluted earnings
per share calculations as they are antidulitive since the Company is
operating at a net loss. These securities could become dilutive when the
Company's operations result in a net profit.
The following table represents the calculation of basic and diluted
earnings per share:
For the Year Ended
---------------------------
December 27, December 28,
1998 1997
---- ----
Net loss $(2,897,759) $(2,143,409)
Less: Dividends on TRC Preferred Stock (Note 7) (300,000) (300,000)
Accretion on TRC Preferred Stock (Note 7) (152,363) (141,823)
----------- -----------
Net loss attributable to common shareholders (3,350,122) (2,585,232)
Weighted average common shares outstanding 4,123,219 4,123,219
Basic and diluted loss per share $ (0.81) $ (0.63)
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. Actual results could differ from those
estimates.
F-10
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
3. Accounts Receivable:
Accounts receivable at December 27, 1998 consist of the following:
Catering $ 61,710
Other 24,517
Related party, net of allowance of $131,400 43,859
--------
$130,086
========
4. Property and Equipment:
Property and equipment at December 27, 1998 consist of the following:
Land $ 160,000
Construction in progress 192,303
Furniture and fixtures 82,793
Signage 45,840
Office and computer equipment 140,029
Kitchen and service equipment 864,425
Building 328,000
Leasehold improvements 542,659
-----------
2,356,049
Less accumulated depreciation (263,351)
-----------
Property and equipment, net $ 2,092,698
===========
Depreciation expense was $223,595 and $68,220 for the years ended December
27, 1998 and December 28, 1997, respectively.
5. Intangible Assets:
Intangible assets at December 27, 1998 consist of the following:
Management employment $ 583,000
Recipes 1,000,000
Pre-mixed ingredients 890,000
Trained and assembled workforce 760,000
Restaurant design 575,000
Other intangible assets 252,000
-----------
4,060,000
Less accumulated amortization (940,130)
-----------
Intangible assets, net $ 3,119,870
===========
In conjunction with the Merger (see Note 14) the shareholder of Oldco
canceled his employment agreement in exchange for 54,700 shares of the
Company's Series E preferred stock. Accordingly, the Company recorded a
non-cash charge of $547,000, based on the present value of the future cash
flows that would have resulted from this emloyment agreement.
F-11
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
6. Long-Term Debt:
Long-term debt at December 27, 1998 consists of the following:
Collateralized promissory note $2,000,000
Note payable to SouthTrust Bank, collateralized by
certain restaurant equipment bearing interest
10,918 prime rate plus 2%, and maturing in
February 1999 10,918
Note payable to First Union Bank, collateralized
by restaurant equipment, bearing interest at
8.8% and maturing in December 2000 178,821
Note payable to shareholder, bearing interest at
12.5%, maturing at the earlier of July 31,
1999 or the Company receiving the final
$2,000,000 related to the issuance of the
Company's Series D preferred stock 350,000
Note payable to individual, bearing interest at
11.0%, payable in installments until the
balance is due when the Company receives the
final $2,000,000 related to the issuance of
the Company's Series D preferred stock 406,617
Note payable to Colonial Bank, collaterized by
restaurant equipment, bearing interest at
8.0%, and maturing in June 2005 243,329
----------
3,189,685
Less current maturities (882,801)
----------
$2,306,884
==========
In conjunction with the October 15, 1996 acquisition, the Company issued a
$2,649,046, 10% convertible subordinated debenture (the "Debenture") to the
sole shareholder of Oldco. In exchange for 323,500 shares of the Company's
Series E Preferred Stock, the shareholder cancelled this debenture valued
at $3,234,943 (including the principal and interest accrued thereon) and
terminated his employment agreement.
Effective October 15, 1996, the Company entered into a $2 million
collateralized promissory note with Sirrom Capital Corporation (the
"Note"). The Note matures on September 1, 2001 and bears interest at 13.5%
per annum. The payment terms require monthly payments of interest only
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 common shares in the
Company, totaling 1,806,363 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.
F-12
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
6. Long-Term Debt, continued:
The aggregate annual maturities of long-term debt for the years subsequent
to December 27, 1998 are as follows:
Fiscal year ending:
-------------------
1999 882,801
2000 126,398
2001 2,035,446
2002 38,433
2003 41,670
2004 45,181
2005 19,756
---------
3,189,685
=========
7. Capital Structure:
(a) TRC Acquisition Corporation
TRC had authorized 100 million shares of common stock and 1 million shares
of non-voting Preferred Stock, 2,000 shares of which were designated as
Class A Preferred Stock ("TRC Preferred Stock"). The TRC Preferred Stock
was entitled to a cumulative annual dividend at a rate of 10%. In the
Merger, the TRC Common Stock was exchanged for Harvest Common Stock and the
TRC Preferred Stock was exchanged for Harvest Series E Preferred Stock.
(b) Harvest Restaurant Group, Inc
The Company's articles of incorporation authorize the board of directors to
issue 20,000,000 shares of Common Stock, par value $0.01 per share, and
5,000,000 shares of Preferred Stock, par value $1.00 per share.
Series A Perferred 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").
Dividends of 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 year. Dividends may be paid in 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 ($5,001,240 at December 27,
1998). At December 27, 1998 dividends in arrears on this preferred stock
totaled $322,289.
The Series A Preferred Stock is convertible at the option of the holder
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 if the closing price
of the Series A Preferred Stock exceeds $20 per share for 10 consecutive
days. The Series A Perferred Stock may also be redeemed by the Company upon
30-days written notice at 110% of the average bid price for the 20 trading
days prior to the redemption date. The Company has the option to pay the
redemption in either cash or common stock.
F-13
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
7. Capital Structure, continued:
Series D Preferred Stock: The Company has designated 9,200 shares out of a
total of 5,000,000 authorized shares of its $1.00 par value preferred stock
as Series D Redeemable Convertible Preferred Stock ("Series D Preferred
Stock"). The original issue price of the Series D Preferred Stock is $1,000
per share. Dividends on the Series D Preferred Stock accrue at an annual
rate of 7% of the original issue price, or $70 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 D Preferred Stock, 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 Stock. Under the terms of the Company's
loan with Sirrom Capital Corporation, the Company may pay cash dividends on
the Series D Preferred Stock so long as (a) the Company makes an equal
payment on the Sirrom note; and (b) the Company is not in default under the
loan documents governing such loan and no default is created by such
payments.
The Series D Preferred Stock 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 D Preferred Stock will automatically convert
into shares of common stock. The conversion rate is equal to $1,000 divided
by 80% of the five-day average closing bid price of the common stock on the
NASDAQ Stock Market, the OTC Bulletin Board, or any other national
securities exchange on which the common stock is listed at the time of
conversion. The Company is not required to convert any shares if such
conversion would result in issuance of 20% or more of the issued and
outstanding common stock to the holders of the Series D Preferred Stock, 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 D
Preferred Stock because of the NASDAQ rule, the Company will pay the holder
of the Series D Preferred Stock 125% of the principal amount of the issued
and outstanding Series D Preferred Stock plus accrued interest.
Holders of Series D Preferred Stock are allowed to convert the aggregate
amount of such holder's Series D Preferred Stock into common stock
beginning the date after a registration statement registering the common
stock has been declared effective by the SEC, but no sooner than 120 days
after the Company's shareholders approve an amendment to the articles of
incorportion increasing the number of authorized shares of common stock to
not less than 100,000,000 (see Note 16). If a registration statement has
not been declared effective as of a date that is 120 days after the
shareholders' meeting, holders of Series D Preferred Stock may not convert
their shares of Series D Preferred Stock until such a registration
statement is declared effective. In addition, a holder of Series D
Preferred Stock may not convert those shares into shares of common stock if
and to the extent that upon conversion such holder would own more than
4.99% of the outstanding common stock.
The holders of the Series D Preferred Stock have no preemptive rights or
other rights to subscribe for any other shares or securities of thc
Company. The third party investors who purchased Series D Preferred Stock
will be issued common stock purchase warrants, as described below.
The terms of the Series D Preferred Stock agreement which permit the
conversion of the Series D Preferred Stock at a discount to market is
considered a beneficial conversion feature (the "Beneficial Conversion
Feature"). However, since the preferred stock is presented at par value
with the excess of carrying value over par value included in additional
F-14
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
7. Capital Structure, continued:
paid-in capital, the Company has not separately recorded the intrinsic
value of the Benefical Conversion Feature as a component of additional
paid-in capital. Additionally, the Company notes that future presentation
in stockholders' equity of the Beneficial Conversion Feature is not
impacted since the Series D Preferred Stock will likely become fully
convertible in the spring of 1999.
The third party investors who purchased Series D Preferred Stock will be
issued common stock purchase warrants, as described below.
Series E Preferred Stock: The Company has designated 745,000 shares out of
a total of 5,000,000 authorized shares of its $1.00 par value preferred
stock as Series E Redeemable Convertible Preferred Stock ("Series E
Preferred Stock"). In connection with the merger, the Company issued a
total of 744,500 shares of Series E Preferred Stock. The original issue
price of the Series E Preferred Stock is $10.00 per share. Dividends on the
Series E Preferred Stock accrue at an annual rate of 8% of the original
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 Series E Preferred
Stock, 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 E Preferred
Stock. Under the terms of the Company's loan with Sirrom Capital
Corporation, the Company may not pay cash dividends on the Series E
Preferred Stock.
The Series E Preferred Stock 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 average closing bid price of the Company's common stock, as
quoted on any national securities exchange, NASDAQ, or the OTC Bulletin
Board exceeds $3.50 per share for five consecutive trading days.
Each share of Series E Preferred Stock is convertible at the option of the
holder into four shares of common stock at any time after six months from
the date of issuance, subject to adjustment. The Series E Preferred Stock
is non-voting, and it is ranked junior to the Company's Series A Preferred
Stock and Series D Preferred Stock. The holders of the Series E Preferred
Stock have no preemptive rights or other rights to subscribe for any other
shares or securities of the Company.
8. Redeemable Preferred Stock Purchase Warrants
At December 27, 1998 1,923,400 Redeemable Preferred Stock Purchase Warrants
were outstanding ("Preferred Warrants"). Each Preferred Warrant represents
the right to purchase one share of Series A Preferred Stock at an exercise
price of $10.50 per share until June 11, 2002, subject to adjustment.
Preferred Warrants may be redeemed, in whole or in part, at the Company's
option, upon 30-days' notice, at a redemption price equal to $0.01 per
Preferred Warrant if the closing price of the Series A Preferred Stock on
the NASDAQ SmallCap Market averages at least $11.00 per share for a period
of 20 consecutive trading days or if the Company redeems the Series A
Preferred Stock.
F-15
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
9. Common Stock Purchase Warrants
At December 27, 1998 there where 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, plus an
additional 250,000 warrants issued in connection with other transactions.
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 if
the closing price of the common stock on the NASDAQ SmallCap Market
averages at least $8.00 per share for a period of 20 consecutive trading
days. The other warrants are exerciseable at prices ranging from $2.00 per
share to $6.60 per share.
Through December 27, 1998, 171,939 stock options with an exercise price of
$.01 have been issued primarly to creditors to facilitate the financing
which has been received since December 28, 1997.
In connection with the issuance of the $2,000,000 collateralized promissory
note, the Company issued to Sirrom Capital Corporation a stock warrant to
purchase shares of the Company's common stock. The warrant is exercisable
at any time until November 30, 2001 at an exercise price of $0.01 per
share. At December 27, 1998 the lender has the right to purchase 589,031
shares. The warrant provides for increases in the number of common shares
available for purchase on an annual basis to 699,259 shares in October 1999
and 756,331 shares in October 2000. 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.
As noted above, the third party investors who purchased Series D Preferred
Stock will be issued common stock purchase warrants to purchase 919,800
shares of common stock at a price of $2.00 per share. Such warrants are
exercisable for five years after issuance, and the Company is required to
register the shares underlying the warrants in the registration statement
filed by the Company with the SEC to register, among other things, the
shares of common stock reasonably anticipated to be issuable upon
conversion of the Series D Preferred Stock.
10. Stock Based Compensation
(a) Harvest Restaurant Group, Inc
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. Options to acquire 483,000 shares of common stock at
$1.00 per share were issued and exercisable at the time of the Merger.
(b) TRC Acquisition Corporation
TRC has granted options to purchase its common stock to certain key
employees and officers under fixed stock option agreements. In conjunction
with the Merger, these options were converted into options to acquire
Harvest common stock at the same ratio as the TRC common shareholders and
all options immediately vested. Accordingly, the number of shares under
option as presented below has been restated to reflect the 1.57075 to 1
exchange ratio in the Merger. Under these agreements, 1,561,326 shares of
the Company's common stock have been granted and reserved for stock option
awards. As of December 27, 1998, none of the options had been exercised or
forfeited. Awards granted to date have a term of six years. On December 15,
F-16
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
10. Stock Based Compensation, continued:
1998 the Company's board of directors options from $8.75 to $0.01. The
revised exercise prices represented approximately 100% and 6%,
respectively, of the fair market value of the stock at the date of the
repricing. Accordingly, the Company recorded as compensation expense a
charge of approximately $58,903.
Further information relating to total options follows:
Weighted
Average
Exercise
Shares Price
------ -----
Outstanding at December 29, 1996 1,068,111 $ .11
Granted in 1997 20,812 .01
---------
Outstanding at December 28, 1997 1,088,923 .11
Granted in 1998 472,403 .01
Harvest options acquired 483,000 1.00
---------
Outstanding at December 27, 1998 2,044,326 $ .30
=========
The following table summarizes information concerning currently outstanding
and exercisable options:
Weighted-Average
Exercise Number Number Remaining
Price Outstanding Exercisable Life
----- ----------- ----------- ----
$0.01 854,488 854,488 4.6
$0.16 706,838 706,838 3.9
$1.00 483,000 483,000 2.7
--------- ---------
2,044,326 2,044,326
========= =========
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, except in connection
with the December 15, 1998 repricing. 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, "Accounting for Stock-Based Compensation", fiscal 1998 net loss
and loss per share would have been as follows. The fair value of the
options granted and repriced during 1998 was estimated using the minimum
value valuation model and the following assumptions: dividend yield 0%,
risk-free interest rate of 6%, and an expected life of 5 years.
F-17
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
10. Stock Based Compensation, continued:
Net loss:
As reported $ (2,897,759)
Proforma (2,926,171)
Basic and diluted loss per share:
As reported (0.81)
Proforma (0.82)
The fair value of options granted in 1997 was insignificant.
11. Income Taxes:
The Company has available at December 27, 1998, unused federal and state
net operating loss carryforwards of approximately $5,000,000 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 asset of approximately $1,900,000 at
December 27, 1998 results principally from net operating loss carryforwards
and has been reduced by a valuation allowance of the same amount.
Management has determined that this valuation allowance is appropriate
because it is more likely than not that this net deferred tax asset will
not be realized.
12. Leases:
The Company has various leases for restaurants, equipment and office
facilities. Restaurant and office original lease terms range from four to
twenty 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 27, 1998 are as follows:
Fiscal year ending:
1999 $ 769,209
2000 666,731
2001 560,601
2002 391,160
2003 289,989
Thereafter 3,163,868
----------
Total minimum lease payments $5,841,558
==========
The Company incurred rental expense for operating leases of $683,809 and
$468,877 during the years ended December 27, 1998 and December 28, 1997,
respectively.
F-18
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
13. 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.
14. Acquisition of TRC
As of December 27, 1998 TRC merged into a subsidiary of Harvest in a
forward triangular merger in which the former shareholders of privately
held TRC received 4,123,219 shares of common stock, representing
approximately 50.1% of the Company's outstanding shares of common stock.
The Company also issued 744,500 shares of Series E Preferred Stock in
connection with the Merger.
Since the TRC shareholders received a majority of the shares of stock of
the Company, the transaction is treated as a reverse acquisition of the
Company by TRC for accounting purposes. As a result, the historical
financial statements of the surviving company for the periods prior to the
merger are those of TRC rather than those of Harvest.
At the completion of the Merger, the Company will have issued 4,123,219
shares of common stock, 9,198 shares of Class D Preferred Stock, and
744,500 shares of Class E Preferred Stock to the TRC shareholders and to
other third party investors. Additionally, the 4,106,861 shares of common
stock of the Company and the 500,124 shares of Class A Preferred Stock of
the Company that was previously outstanding remained outstanding following
the Merger. The Company incurred issuance related costs of approximately
$600,000, which are presented as a reduction of additional paid-in capital.
The estimated fair value of the assets acquired and liabilities assumed
from Harvest were approximately $556,000 and $705,000, respectively. Since
Harvest had no ongoing operations either immediately before or following
the Merger, the transaction is presented as a capital stock transaction,
and no goodwill is recorded.
In connection with the Merger, outside investors agreed to invest
$6,000,000 in the Company in exchange for 9,198 shares of the Company's
Class D Preferred Stock. These shares are included in the number of shares
presented above, and at December 27, 1998, $4,000,000 of this commitment is
reflected in the consolidated balance sheet as a stock subscription
receivable. Through February 1999, the investors have funded to the Company
$4,000,000 of this commitment, including $2,000,000 invested in fiscal
1998, and have received 7,198 shares of Class D Preferred Stock. The
remaining $2,000,000 will be received upon the Company registering a
sufficient number of shares of common stock into which the Series D
Preferred Stock is convertible, which the Company expects to accomplish in
the spring of 1999.
Unaudited pro forma results of operations have not been presented due to
the fact that the historical results of Harvest are not reflective of its
ongoing operations after the Merger and are therefore not meaningful. After
the Merger, Harvest will continue to incur approximately $200,000 in
certain general and administrative costs, consisting primarily of
professional fees and services associated with public reporting and
corporate governance. Additionally, adjustments would be made to the
historical results of TRC to eliminate interest expense associated with the
subordinated convertible note. For the years ended December 27, 1998 and
December 28, 1997, this amounted to $264,905 each year.
F-19
<PAGE>
Tanner's Restaurant Group, Inc.
Notes to Financial Statements, continued:
15. Significant Anticipated Transaction
As mentioned in Note 14, the Company has obtained a commitment from a group
of outside investors to invest $6,000,000 into the Company, and through
February 1999, these investors have invested $4,000,000 of this commitment.
Management of the Company believes that the successful completion of this
anticipated transaction is critical to continue its current plan of
operations. The significant net losses that have been incurred since
October 15, 1996, the negative working capital position, and the inability
to generate significant positive cash flows from operations all
significantly strain the Company's financial position. Management expects
that the $2,000,000 received during fiscal 1999 combined with its cost
containment and cash flow management strategies will enable the Company to
continue operations through the time that the final $2,000,000 is received.
Since management believes it is probable that the Company will receive the
final $2,000,000 in the spring of 1999, the consolidated financial
statements do not reflect any adjustments that will be necessary in the
event the Company does not receive that $2,000,000.
16. Subsequent Events
On March 12, 1999, the shareholders of the Company voted to amend the
Company's articles of incorporation to increase the number of authorized
shares of common stock from 20,000,000 to 200,000,000 and change the
Company's name to "Tanner's Restaurant Group, Inc."
F-20
<PAGE>
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
Item 24. Indemnification of Officers and Directors.
The Texas Business Corporation Act gives us the authority to indemnify our
directors and officers to the extent provided for in such statute. Our articles
of incorporation permit indemnification of directors and officers to the fullest
extent permitted by law.
The Texas Business Corporation Act provides in part that a corporation may
indemnify a director or officer or other person who was, is, or is threatened to
be made a named defendant or respondent in a proceeding because the person is or
was a director, officer, employee or agent of the corporation, if it is
determined that he:
* conducted himself in good faith,
* reasonably believed, in the case of conduct in his official capacity
as a director or officer of the corporation, that his conduct was in
the corporation's best interests, and, in all other cases, that his
conduct was at least not opposed to the corporation's best interests,
and
* in the case of any criminal proceeding, had no reasonable cause to
believe that his conduct was unlawful.
A corporation may indemnify a person under the Texas Business Corporation
Act against judgments, penalties (including excise and similar taxes), fines,
settlement, and reasonable expenses actually incurred by the person in
connection with the proceeding. If the person is found liable to the corporation
or is found liable on the basis that personal benefit was improperly received by
the person, the indemnification is limited to reasonable expenses actually
incurred by the person in connection with the proceeding, and shall not be made
in respect of any proceeding in which the person shall have been found liable
for willful or intentional misconduct in the performance of his duty to the
corporation.
We are required by Art. 2.02-1 to indemnify a director or officer against
reasonable expenses (including court costs and attorneys' fees) incurred by him
in connection with a proceeding in which he is a named defendant or respondent
because he is or was a director or officer if he has been wholly successful, on
the merits or otherwise, in the defense of the proceeding. The statute provides
that indemnification pursuant to its provisions is not exclusive of other rights
of indemnification to which a person may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise.
II-1
<PAGE>
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
Article Eleven of our articles of incorporation provides that, to the
fullest extent permitted by the Texas Business Corporation Act as the same
exists or as it may hereafter be amended, no director of the registrant shall be
personally liable to the registrant or its shareholders for monetary damages for
breach of fiduciary duty as a director.
We carry directors and officers liability insurance with policy limits of
$1,000,000.
We plan to enter into separate indemnification agreements with each of our
directors and certain of our officers. We expect that these agreements will
contain provisions to provide for, among other things, our right to assume the
defense of suits against directors and officers, indemnification and advancement
of expenses in a manner and subject to terms and conditions similar to those
stated in the bylaws, as well as our obligations to contribute to the expenses,
judgments, fines and settlements for which the directors and officers and us are
jointly liable but for which no indemnification is provided. The shareholders
cannot void these agreements. In addition, we hold an insurance policy covering
directors and officers under which the insurer agrees to pay, subject to certain
exclusions, for certain claims made against our directors and officers for a
wrongful act that they may become legally obligated to pay or for which we are
required to indemnify the directors or officers.
We believe that the above protections are necessary to attract and retain
qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
these provisions, or otherwise, the SEC has advised us that in its opinion such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by our
director, officer or controlling person in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, we will, unless in the
opinion of our counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether our
indemnification is against public policy as expressed in the Securities Act, and
we will be governed by the final adjudication of such issue.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated fees and expenses payable by
the company in connection with the issuance and distribution of the common stock
registered hereby. The selling shareholders will be responsible only for
brokerage commissions incurred in their transactions in the common stock, and
they will not be responsible for any of the expenses listed below. All of such
fees and expenses are estimates, except the Securities Act registration fee.
II-2
<PAGE>
SEC Registration Fee............................... $ 4,906
Printing Fees and Duplicating Fees................. 2,500
Legal Fees and Expenses............................ 40,000
Accounting Fees and Expenses....................... 5,000
Miscellaneous Expenses............................. 0
-------
Total........................................ $52,406
=======
Item 26. Recent Sales of Unregistered Securities.
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 pursuant to 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. All recipients of these securities had
adequate information about us, either through their relationships with us or
through information that we provided to them.
On January 14, 1999, we issued 1,998 shares of Series D preferred stock in
exchange for 133.2 outstanding shares of Series B preferred stock, and we issued
2,600 shares of Series D preferred stock in exchange for the 200 outstanding
shares of Series C preferred stock.
Also on January 14, 1999, we placed 2,600 shares of Series D preferred
stock into escrow to be released to the outside investors upon the occurrence of
certain specified events. On January 22, 1999, the date on which we received
$1,000,000 from the outside investors because we satisfied the condition that we
file a preliminary proxy statement to increase the number of authorized shares
of common stock, we released 1,300 of these Series D shares from escrow. On
February 10, 1999, the date on which we received another $1,000,000 from the
outside investors because we satisfied the condition that we mail definitive
proxy materials to our shareholders, we released the remaining 1,300 shares from
escrow. We issued 500 shares of Series D preferred stock to certain of the
outside investors in May and June 1999 in exchange for $500,000. We will issue
1,500 more shares of Series D preferred stock, in exchange for $1,500,000, on or
before the date on which this registration statement becomes effective.
On January 14, 1999, in connection with the merger, we issued a total of
744,500 shares of Series E preferred stock to Richard E. Tanner, who is one of
our directors, and to SECA VII, LLC, RBB Bank, AG and Holden Holding
Corporation, all of which are also holders of our common stock. We issued
469,775 of these shares of Series E preferred stock to Mr. Tanner in exchange
for his 500 shares of TRC Class A preferred stock, his execution of a severance
agreement, and his cancellation of a note from TRC. We issued 183,150 of these
shares to SECA VII, LLC, 45,787.5 shares to RBB Bank, AG, and 45,787.5 shares to
Holden Holding Corporation, in exchange for the TRC Class A shares these
entities held before the merger.
II-3
<PAGE>
Also on January 14, 1999, we issued an aggregate of 4,123,219 shares of
common stock to the former holders of the common stock of TRC Acquisition
Corporation as consideration for the merger of TRC with and into one of our
wholly-owned subsidiaries.
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. Assuming that the final
$2,000,000 of the financing commitment is received upon the registration of the
shares being offered hereby, we will have issued $9,198,000 of Series D
preferred stock. Accordingly, we have issued or will issue warrants to acquire
an aggregate of 919,800 shares of common stock.
In July 1998 Harvest issued 200 shares of Series C preferred stock to
certain of the outside investors upon receipt of a $2,000,000 investment from
those outside investors.
In December 1997, Harvest issued 150 shares of Series B preferred stock in
exchange for an investment of $1,500,000 from one of the outside investors. In
May and June of 1998, the holder of these Series B shares converted 28 shares
into shares of either Series A preferred stock or common stock, and Harvest sold
another 11.2 Series B shares to the holder at approximately the same time.
Consequently, at the time of the merger, there were 133.2 shares of Series B
preferred stock outstanding.
We have agreed to issue warrants to acquire 150,000 shares of our common
stock to Magnum Financial Group, LP. 50,000 warrants became exercisable at the
closing bid price at the time of engagement of Magnum in May 1999. The remaining
warrants will vest periodically during the one year period following the date of
the initial grant, at increasing exercise prices. If the agreement with Magnum
is terminated after the initial three month period, any warrants that have not
vested shall be void and of no effect.
Item 27. Exhibits.
We have filed certain of the exhibits required by Item 601 of Regulation
S-B with previous registration statements or reports. As specifically noted in
the footnotes to the following Index to Exhibits, those exhibits are
incorporated into this prospectus by reference to the applicable statement or
report.
II-4
<PAGE>
Exhibit No. Title
- ----------- -----
2.01 Agreement and Plan of Merger by and among Harvest Restaurant
Group, Inc., a Texas corporation, Hartan, Inc., a Texas
corporation, and TRC Acquisition Corporation, a Georgia
corporation, dated December 27, 1998. (4)
3.01 Articles of Incorporation, as amended. (5)
3.02 Bylaws. (l)
4.01 Loan Agreement by and among TRC Acquisition Corporation and
Sirrom Capital Corporation, dated October 22, 1996. (5)
4.02 Assumption Agreement, Consent and First Amendment to Loan
Agreement, dated January 14, 1999, by and among Hartan, Inc.,
Harvest Restaurant Group, Inc., and Sirrom Capital Corporation.
(5)
4.03 Guaranty Agreement, dated January 14, 1999, Harvest Restaurant
Group, Inc., and Sirrom Capital Corporation. (5)
4.04 Amended and Restated Secured Promissory Note, dated January 14,
1999, made by Hartan, Inc. for the benefit of Sirrom Capital
Corporation. (5)
4.05 Amended and Restated Stock Purchase Warrant, dated January 14,
1999. (5)
5.01 Opinion of Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P.
10.01 Incentive Stock Option Plan. (l)
10.02 TRC Acquisition Corporation 1996 Employee Stock Option Plan. (5)
10.03 Settlement Agreement with Cluckers Wood Roasted Chicken, Inc. (l)
10.04 Employment Agreement, dated January 14, 1999, by and among
Harvest Restaurant Group, Inc., Hartan, Inc. and Clyde E. Culp,
III. (5)
10.05 Severance Agreement, dated January 14, 1999, by and among Harvest
Restaurant Group, Inc., Hartan, Inc. and William J. Gallagher.
(5)
10.05(a) Letter Amendment to Severance Agreement, dated March 16, 1999.
(5)
II-5
<PAGE>
10.06 Form of Subscription Agreement for Series D Convertible Preferred
Stock. (5)
10.07 Form of Registration Rights Agreement for Series D Convertible
Preferred Stock. (5)
10.08 Form of Warrant Agreement for Series D Convertible Preferred
Stock. (5)
10.09 Letter Amendment, dated January 12, 1999. (5)
10.10 Letter Amendment, dated January 13, 1999. (5)
10.11 Agreement with Roasters Corp. (2)
10.12 Agreement with Pollo Operators, Inc. (2)
10.13 Subordinated Debenture, dated January 30, 1998. (6)
10.13(a) First Amendment to Subordinated Debenture, dated January 30,
1999. (6)
10.14 Promissory Note, dated March 31, 1998. (6)
10.14(a) First Amendment to Promissory Note, dated January 30, 1999.(6)
10.15 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.
10.16 Letter Agreement, dated April 6, 1999, by and between Pacific
Ocean Restaurants, Inc. and Tanner's Restaurant Group, Inc.
21.1 Subsidiaries.
23.1 Consent of Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P. (included in Exhibit 5.01).
23.2 Consent of Porter Keadle Moore, LLP.
27.1 Financial Data Schedule as of April 18, 1999.
- -----------------
(1) Incorporated by reference to our definitive Registration Statement on
Form SB-2, file No. 33-95796 declared effective on July 9, 1996.
II-6
<PAGE>
(2) Incorporated by reference to our definitive Registration Statement on
Form SB-2, file no. 333-21067 declared effective on June 11, 1997.
(3) Incorporated by reference to our definitive Registration Statement on
Form S-3, file no. 333-45189 declared effective on February 17, 1998.
(4) Filed as Exhibit 2.1 to our Current Report on Form 8-K, filed on
January 21, 1999, and incorporated herein by reference.
(5) Incorporated by reference to our Annual Report on Form 10-KSB, as
filed on March 29, 1999.
(6) Incorporated by reference to our Registration Statement on Form SB-2,
as filed on May 7, 1999.
Item 28. Undertakings.
We hereby undertake as follows:
(1) To file, during any period in which we offer or sell securities, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required by section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events which, individually or together ,
represent a fundamental change in the information in the Registration Statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and (iii) to include any
additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, to treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time shall be the initial
bona fide offering.
(3) To file a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to the foregoing provisions, or otherwise, we have been advised that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
II-7
<PAGE>
We hereby undertake to:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1), or (4), or 497(h)
under the Securities Act as part of this Registration Statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
II-8
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the city of Atlanta,
state of Georgia, on July 26, 1999.
TANNER'S RESTAURANT GROUP, INC.
By: /s/ Clyde E. Culp, III
-----------------------
Clyde E. Culp, III
Chairman of the Board of Directors
and Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
--------- ----- ----
/s/ Clyde E. Culp, III Chairman of the Board of July 26, 1999
- ---------------------- Directors, Chief Executive
Clyde E. Culp, III Officer and Director
/s/ Richard E. Tanner Director July 14, 1999
- ----------------------
Richard E. Tanner
Director July , 1999
- -------------------
James R. Walker
/s/ Timothy R. Robinson Chief Financial Officer and July 26, 1999
- ----------------------- Secretary
Timothy R. Robinson
II-9
<PAGE>
Exhibit No. Title
- ----------- -----
2.01 Agreement and Plan of Merger by and among Harvest Restaurant
Group, Inc., a Texas corporation, Hartan, Inc., a Texas
corporation, and TRC Acquisition Corporation, a Georgia
corporation, dated December 27, 1998. (4)
3.01 Articles of Incorporation, as amended. (5)
3.02 Bylaws. (l)
4.01 Loan Agreement by and among TRC Acquisition Corporation and
Sirrom Capital Corporation, dated October 22, 1996. (5)
4.02 Assumption Agreement, Consent and First Amendment to Loan
Agreement, dated January 14, 1999, by and among Hartan, Inc.,
Harvest Restaurant Group, Inc., and Sirrom Capital Corporation.
(5)
4.03 Guaranty Agreement, dated January 14, 1999, Harvest Restaurant
Group, Inc., and Sirrom Capital Corporation. (5)
4.04 Amended and Restated Secured Promissory Note, dated January 14,
1999, made by Hartan, Inc. for the benefit of Sirrom Capital
Corporation. (5)
4.05 Amended and Restated Stock Purchase Warrant, dated January 14,
1999. (5)
5.01 Opinion of Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P.
10.01 Incentive Stock Option Plan. (l)
10.02 TRC Acquisition Corporation 1996 Employee Stock Option Plan. (5)
10.03 Settlement Agreement with Cluckers Wood Roasted Chicken, Inc. (l)
10.04 Employment Agreement, dated January 14, 1999, by and among
Harvest Restaurant Group, Inc., Hartan, Inc. and Clyde E. Culp,
III. (5)
10.05 Severance Agreement, dated January 14, 1999, by and among Harvest
Restaurant Group, Inc., Hartan, Inc. and William J. Gallagher.
(5)
10.05(a) Letter Amendment to Severance Agreement, dated March 16, 1999.
(5)
II-10
<PAGE>
10.06 Form of Subscription Agreement for Series D Convertible Preferred
Stock. (5)
10.07 Form of Registration Rights Agreement for Series D Convertible
Preferred Stock. (5)
10.08 Form of Warrant Agreement for Series D Convertible Preferred
Stock. (5)
10.09 Letter Amendment, dated January 12, 1999. (5)
10.10 Letter Amendment, dated January 13, 1999. (5)
10.11 Agreement with Roasters Corp. (2)
10.12 Agreement with Pollo Operators, Inc. (2)
10.13 Subordinated Debenture, dated January 30, 1998. (6)
10.13(a) First Amendment to Subordinated Debenture, dated January 30,
1999. (6)
10.14 Promissory Note, dated March 31, 1998. (6)
10.14(a) First Amendment to Promissory Note, dated January 30, 1999. (6)
10.15 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.
10.16 Letter Agreement, dated April 6, 1999, by and between Pacific
Ocean Restaurants, Inc. and Tanner's Restaurant Group, Inc.
21.1 Subsidiaries.
23.1 Consent of Michener, Larimore, Swindle, Whitaker, Flowers,
Sawyer, Reynolds & Chalk, L.L.P. (included in Exhibit 5.01).
23.2 Consent of Porter Keadle Moore, LLP.
27.1 Financial Data Schedule as of April 18, 1999.
- -----------------
(1) Incorporated by reference to our definitive Registration Statement on
Form SB-2, file No. 33-95796 declared effective on July 9, 1996.
(2) Incorporated by reference to our definitive Registration Statement on
Form SB-2, file no. 333-21067 declared effective on June 11, 1997.
(3) Incorporated by reference to our definitive Registration Statement on
Form S-3, file no. 333-45189 declared effective on February 17, 1998.
(4) Filed as Exhibit 2.1 to our Current Report on Form 8-K, filed on
January 21, 1999, and incorporated herein by reference.
(5) Incorporated by reference to our Annual Report on Form 10-KSB, as
filed on March 29, 1999.
(6) Incorporated by reference to our Registration Statement on Form SB-2,
as filed on May 7, 1999.
II-11
Exhibit 5.01
Michener, Larimore, Swindle, Whitaker, Flowers
Sawyer, Reynolds & Chalk, L.L.P.
Attorneys & Counselors
A Partnership Including Professional Corporations
3500 City Center Tower II
301 Commerce Street, Suite 3500
Fort Worth, Texas 76102
July 26, 1999
Tanner's Restaurant Group, Inc.
5500 Oakbrook Parkway, Suite 260
Norcross, Georgia 30093
Re: Tanner's Restaurant Group, Inc. Registration Statement on Form SB-2
Filed July 26, 1999 (the "Registration Statement")
Ladies and Gentlemen:
We have acted as special counsel to Tanner's Restaurant Group, Inc., a Texas
corporation (the "Company"), in connection with the opinions given herein for
filing with the Registration Statement under the Securities Act of 1933, as
amended (the "Act"). The Registration Statement relates to the registration of
174,273,631 shares of the Company's common stock, $.01 par value per share (the
"Common Stock") issuable upon conversion of Series D Convertible Preferred Stock
held by shareholders of the Company and upon exercise by holders of certain
warrants to purchase shares of Common Stock (such Common Stock, the "Company
Shares").
This opinion is furnished in accordance with the requirements of Item 601(b)(5)
of Regulation S- B under the Act.
In connection with this opinion, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of (i) the Registration Statement
on Form SB-2 filed with the Securities and Exchange Commission on July 26, 1999;
(ii) the Company's Articles of Incorporation, as presently in effect; (iii) the
form of Amended and Restated Stock Purchase Warrant with Sirrom Capital
Corporation; (iv) the form of Warrant Agreement with holders of Series D
Convertible Preferred Stock; and (v) the form of Warrant to Purchase Common
Stock of Harvest Restaurant Group, Inc. with Sterling Capital, LLC. We have also
examined originals or copies, certified or otherwise identified to our
satisfaction, of such records of the Company and such agreements, certificates
of public officials, certificates of officers or other representatives of the
Company and others, and such other documents, certificates and records as we
have deemed necessary or appropriate as a basis for the opinions set forth
herein.
In our examination, we have assumed the legal capacity of all natural persons,
the genuineness of all signatures, the authenticity of all documents submitted
to us as originals, the conformity to original documents of all documents
submitted to us as forms of executed documents, certified, conformed or
photostatic copies and the authenticity of the originals of such latter
documents. In making our examination of documents, we have assumed that all
parties had, the power, corporate or other, to enter into and perform all
<PAGE>
obligations thereunder and have also assumed the due authorization by all
requisite action, corporate or other, and execution and delivery by such parties
of such documents and the validity and binding effect thereof. As to any facts
material to the opinions expressed herein which we have not independently
established or verified, we have relied upon statements and representations of
officers and other representatives of the Company and others.
With respect to the issuance of the Company Shares upon conversion of the Series
D Convertible Preferred Stock, we have assumed that the consideration for the
issuance of each share of Series D Convertible Preferred Stock was $1,000 and
the Market Value of the Common Stock (as defined in the Statement of Resolution
Establishing Series of Preferred Stock for the Series D Convertible Preferred
Stock) will not be less than $.0157 per share.
Members of our firm are admitted to the bar in the State of Texas, and we do not
express any opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that the Company
Shares have been duly authorized by the Board of Directors of the Company and
will be validly issued, fully paid and nonassessable by the Company when
certificates evidencing the applicable Company Shares shall have been duly
issued in exchange for the consideration specified in and as contemplated in the
warrants referenced above or the Statement of Resolution Establishing Series of
Preferred Stock for the Series D Convertible Preferred Stock, as applicable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement. In giving this consent, we do not thereby admit that we
are included in the category of persons whose consent is required under Section
7 of the Act or the rules and regulations of the Commission thereunder.
Very truly yours,
Michener, Larimore, Swindle, Whitaker, Flowers
Sawyer, Reynolds & Chalk, L.L.P.
Wayne M. Whitaker, Partner
EXHIBIT 10.15
PURCHASE AND SALE AGREEMENT
by and between
CB ACQUISITION, INC.,
a Georgia corporation
and, for purposes of Section 5.2 hereof,
TANNER'S RESTAURANT GROUP, INC.,
a Texas corporation, and
PACIFIC OCEAN RESTAURANTS, INC.,
a Nevada corporation, and
PACIFIC OCEAN RESTAURANTS, INC.,
a California corporation
and
CRABBY BOB'S SEAFOOD, INC.
a California corporation
Dated as of May 11, 1999
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I ACQUISITION..........................................................1
Section 1.1 Purchase and Sale.............................................1
Section 1.2 Purchase Price................................................2
Section 1.3 The Closing...................................................4
ARTICLE II REPRESENTATIONS, WARRANTIES AND COVENANTS...........................4
Section 2.1 Representations and Warranties of Seller......................4
Section 2.2 Representations and Warranties of Purchaser..................17
Section 2.3 Survival of Representations and Warranties...................18
ARTICLE III COVENANTS 18
Section 3.1 Covenants Against Disclosure.................................18
Section 3.2 Access to Information........................................18
Section 3.3 Interim Period...............................................19
Section 3.4 Completion of Schedules......................................20
Section 3.5 Employees and Employee Benefit Matters.......................20
Section 3.6 Further Assurances...........................................21
Section 3.7 Additional Financial Statements;
Co-operation in Registration.................................21
Section 3.8 Representations Regarding Registered Shares..................21
Section 3.9 Release of Shareholder.......................................21
Section 3.11 Waiver of Bulk Sales Compliance.............................21
ARTICLE IV CONDITIONS PRECEDENT TO OBLIGATIONS................................21
Section 4.1 Conditions to Obligations of Purchaser.......................22
Section 4.2 Conditions to Obligations of Seller..........................23
ARTICLE V INDEMNIFICATION.....................................................24
Section 5.1 Indemnification of Purchaser.................................24
Section 5.2 Indemnification of Seller....................................25
Section 5.3 Procedure for Indemnification
with Respect to Third-Party Claims...........................25
Section 5.4 Procedure For Indemnification with
Respect to Non-Third Party Claims............................26
ARTICLE VI TERMINATION AND CONDITIONS SUBSEQUENT..............................26
Section 6.1 Termination..................................................26
Section 6.2 Effect of Termination........................................27
ARTICLE VII MISCELLANEOUS PROVISIONS..........................................27
Section 7.1 Notice.......................................................27
Section 7.2 Entire Agreement.............................................28
Section 7.3 Binding Effect; Assignment...................................28
Section 7.4 Expenses of Transaction......................................28
Section 7.5 Waiver; Consent..............................................28
Section 7.6 Counterparts.................................................28
Section 7.7 Severability.................................................28
Section 7.8 Remedies of the Parties......................................29
Section 7.9 Governing Law................................................29
Section 7.10 Arbitration; Attorneys' Fees................................29
i
<PAGE>
SCHEDULES
Schedule 1.3 Allocation
Schedule 2.1(d) Assumed Liabilities
Schedule 2.1(e) Changes and Events
Schedule 2.1(f) Inventory
Schedule 2.1(g)(vi) Taxes
Schedule 2.1(h)(iii) Severence Payments, et al.
Schedule 2.1(j) Consents
Schedule 2.1(k)(i) Licensing Issues
Schedule 2.1(k)(iii) Intellectual Property
Schedule 2.1(k)(iv) Third Party Rights
Schedule 2.1(m)(i) Contracts
Schedule 2.1(m)(ii) Defaults
Schedule 2.1(n) Debt
Schedule 2.1(o) Related Property
Schedule 2.1(p) Leased Property
Schedule 2.1(r) Acquired Assets
Schedule 2.1(v) Title
Schedule 2.1(x) Litigation
Schedule 2.1(z) Employment
Schedule 2.1(dd) Insurance
Schedule 2.1(ee) Accounts
Schedule 3.3(a) Required Actions
Schedule 3.3(b) Prohibited Actions
Schedule 3.5 Employment Agreement Terms
EXHIBITS
Exhibit 1.2(b) Form of Note
ii
<PAGE>
PURCHASE AND SALE AGREEMENT
THIS PURCHASE AND SALE AGREEMENT (the "Agreement") is dated as of May 11,
1999 by and between CB ACQUISITION, INC., a Georgia corporation ("Purchaser"),
and, for purposes of the indemnity provided in Section 5.2 hereof only, TANNER'S
RESTAURANT GROUP, INC., a Texas corporation ("Parent"), and PACIFIC OCEAN
RESTAURANTS, INC., a Nevada corporation ("POR-NV"), PACIFIC OCEAN RESTAURANTS,
INC., a California corporation ("POR-CA"), and CRABBY BOB'S SEAFOOD, INC., a
California corporation ("CBS"; POR- NV, POR-CA, and CBS are hereinafter referred
to collectively as the "Seller").
WHEREAS, Seller is engaged in, among other things, the business of
operating restaurants known as "Crabby Bob's Seafood Grill" (such business is
referred to herein collectively as the "Crabby Bob's Business"); and
WHEREAS, Purchaser desires to acquire the Crabby Bob's Business and certain
assets related to the Crabby Bob's Business and Seller desires to transfer such
Crabby Bob's Business and assets to Purchaser in exchange for cash or registered
securities of Purchaser and the assumption of certain liabilities of Seller; and
WHEREAS, Purchaser and Seller desire to enter into this Agreement with the
understanding that this Agreement will supersede all prior oral and written
agreements between the parties.
NOW, THEREFORE, in consideration of the mutual promises and covenants set
forth herein, the parties hereto, intending to be legally bound, hereby agree as
follows:
ARTICLE I
ACQUISITION
Section 1.1 Purchase and Sale. Subject to the terms and conditions of this
Agreement, Purchaser agrees to purchase on the Closing Date (as hereinafter
defined) from Seller, and Seller agrees to sell, transfer, convey and deliver to
Purchaser, all of the Acquired Assets (as hereinafter defined) at the Closing
(as hereinafter defined) for the consideration specified below in Section 1.2.
As used herein, "Acquired Assets" shall mean all of Seller's right, title and
interest in and to the following, whether or not set forth on Schedule 2.1(r)
hereto, or on any other Schedule hereto, but only to the extent such assets
relate to or arise from the Crabby Bob's Business:
(a) All real property, including leasehold interests, used in the operation
of the Crabby Bob's Business and all improvements thereon;
1
<PAGE>
(b) All furniture, fixtures and equipment, including computers and related
software, used in the operation of the Crabby Bob's Business;
(c) All accounts receivable as of the date of closing free of any bad debt,
and all rights of Seller in and to any recoveries or proceeds whatsoever of
Seller's lawsuit against the accounting firm of Biller, Archibald et al.
referred to in Schedule 2.1(x) hereto;
(d) All inventory used in the operation of the Crabby Bob's Business;
(e) All supplier contracts associated with the operation of the Crabby
Bob's Business;
(f) All transferable licenses, permits, franchise agreements and related
documents useful or necessary to the operation of the Crabby Bob's Business;
(g) All intellectual property related to the Crabby Bob's Business,
including the right to use the name "Crabby Bob's Seafood Grill";
(h) All cash or other deposits of whatever kind or nature, including,
without limitation, utilities deposits, and all cash-on-hand, petty cash,
deposit accounts, bank deposits, and cash equivalents; and
(i) Such other assets owned by Seller and associated with, related to or
connected with the Crabby Bob's Business that Purchaser desires to purchase and
which are specifically set forth in this Agreement.
Section 1.2 Purchase Price.
(a) Cash Consideration. In consideration for the Acquired Assets, Purchaser
shall in full payment for the Acquired Assets, pay an amount equal to Six
Hundred Thousand and no/100 Dollars ($600,000.00) (the "Cash Consideration") and
will assume and become responsible for the Assumed Liabilities (as hereinafter
defined) of Seller, in the respective amounts set forth in Schedule 2.1(d)
attached hereto (the Cash Consideration and the assumption of the Assumed
Liabilities are hereinafter referred to as the "Purchase Price").
(b) Note Terms. The Cash Consideration shall be payable by the delivery at
Closing of an interest-free promissory note, substantially in the form of
Exhibit 1.2(b) attached hereto and incorporated herein by reference (the
"Note"), made by Purchaser in favor of POR-CA, which Note shall be payable, in
accordance with its terms, at the Purchaser's sole option, either: (i) in cash,
by check or wire transfer, on June 30, 1999 (the "Decision Date"), or (ii) by
Purchaser's written agreement, on the Decision Date, to deliver to POR-CA that
number of registered shares of the Parent's common stock (the "Common Stock"),
the value of which, as determined in the manner described below, is
approximately equal to the Cash Consideration upon the date of effectiveness
(the "Effective Date"), of a registration statement on Form S-4 (or other
appropriate registration statement) to be filed by Purchaser with the Securities
and Exchange Commission ("SEC"). In the event Purchaser elects to deliver its
written agreement to register and deliver shares of Common Stock as provided in
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subparagraph (ii) above, the Note shall provide that Purchaser will be required
to deliver One Hundred Thousand and no/100 Dollars ($100,000.00) in cash on the
Decision Date to POR-CA which amount shall be applied against the principal
amount of the Note. The Note shall further provide that, if the Effective Date
has not occurred within one hundred twenty (120) days from and after the
Decision Date, Seller shall have the option to declare the remaining principal
of the Note due and payable in cash. The Note shall provide that fractional
shares shall not be issued to POR-CA, and that, for purposes hereof and thereof,
the value of each share of the Common Stock shall be deemed to be the
arithmetical average of the last "bid" and "ask" quotations by eligible Market
Makers for the Common Stock on the OTC Bulletin Board(R) ("OTCBB") for the five
(5) trading days immediately prior to the Effective Date. In the event that no
such quotes are available on the OTCBB, the value of the Common Stock shall be
determined by Purchaser in a substantially similar manner with reference to such
quotation medium or service for the Common Stock as is available on the
Effective Date.
(c) Reservation of Rights. In the event that applicable securities laws
make it illegal or inadvisable, in the opinion of Purchaser's legal counsel, to
register or issue Common Stock to POR-CA as contemplated hereby, Purchaser shall
have the right to fulfill its obligations to issue securities of Parent to
POR-CA in payment of the Cash Consideration in such manner, which shall be
acceptable to POR-CA, in its reasonable discretion, as will comply with
applicable securities laws and, at the same time, yield identical economic
benefits to POR-CA.
(d) Final Determination Date. The Note shall further provide that if, on
the date that is one hundred and twenty (120) days after the Effective Date (the
"Final Determination Date"), the value of the Common Stock remaining in the
hands of POR-CA, determined in the aforesaid manner for the five (5) trading
days immediately prior to the Final Determination Date, together with the amount
of any cash proceeds realized by POR-CA from the sale of such Common Stock
during such period, is less than the Cash Consideration, the Purchaser shall
deliver to POR-CA, as full and final payment hereunder and under the Note, cash
in an amount equal to any shortfall. In the event that the value of the Common
Stock remaining in the hands of POR-CA on the Final Determination Date, valued
as aforesaid, together with any cash proceeds realized by POR-CA from the sale
of such Common Stock during such period, is greater than the Cash Consideration,
POR-CA shall deliver shares of Common Stock equivalent in value to any such
overage to Purchaser.
(e) Assumed Liabilities. Purchaser shall not assume or have any
responsibility, with respect to any obligation or liability of Seller not
included within the definition of Assumed Liabilities specified below. Seller
shall remain liable for all liabilities which are not Assumed Liabilities and
shall indemnify Purchaser for any loss, claim, damage, fee, expense, cost, or
liability, including, without limitation, reasonable attorneys' fees, expenses,
penalties and interest incurred by Purchaser as a result of or related to any
such liabilities. As used herein, "Assumed Liabilities" shall mean all
liabilities of Seller as set forth on Schedule 2.1(d) attached hereto.
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Section 1.3 The Closing. Subject to termination of this Agreement as
provided in Article VI below, the closing and consummation of the transaction
contemplated by this Agreement shall take place in the offices of Purchaser's
attorneys on such date as the conditions of closing set forth in Article IV
hereof have been satisfied or waived, or such other date as the parties hereto
may mutually select (the "Closing Date"), which in no event shall be later than
May 31, 1999, unless extended by Purchaser and Seller. The "Closing" shall mean
the deliveries to be made by the parties hereto on the Closing Date in
accordance with this Agreement, as follows: (i) Seller will deliver to Purchaser
the various certificates, instruments and documents referred to in Section 4.1
below; (ii) Purchaser will deliver to Seller the various certificates,
instruments and documents referred to in Section 4.2 below; (iii) Seller will
execute, acknowledge (if appropriate), and deliver to Purchaser a bill of sale,
assignments of leases, and such other documents and instruments of sale,
transfer, conveyance, and assignment as Purchaser and its counsel reasonably may
request; (iv) Purchaser will execute, acknowledge (if appropriate), and deliver
to Seller (A) assumptions of leases and (B) such other instruments of assumption
as Seller and its counsel reasonably may request; and (v) will deliver the
consideration specified in Section 1.2 above. The parties agree to allocate the
Purchase Price (and all other capitalizable costs) among the Acquired Assets for
all purposes (including financial accounting and tax purposes) in accordance
with the allocation schedule attached hereto as Schedule 1.3. The acquisition
shall be deemed to have become effective as of 12:01 a.m. Eastern Standard Time
on the Closing Date.
ARTICLE II
REPRESENTATIONS, WARRANTIES AND COVENANTS
Section 2.1 Representations and Warranties of Seller. All representations
and warranties of Seller are accurate and material and are being made in order
to induce Purchaser to enter into this Agreement. Each representation and
warranty made by "Seller" shall be deemed to have been made, jointly and
severally, by and as to each of POR-NV, POR-CA, and CBS. Seller hereby
represents and warrants to Purchaser that:
(a) Organization. Each of POR-CA and CBS is a corporation duly organized
and validly existing under the laws of the State of California, and POR-NV is a
corporation duly organized and validly existing under the laws of the State of
Nevada, and has all requisite power and authority to lease, own, and operate its
properties and carry on the Crabby Bob's Business and operations and to directly
own, lease, and operate its assets. Seller is duly qualified or licensed to do
business as a corporation, and is in good standing in its respective state of
incorporation and in any other state in which qualification to do business is
required.
(b) Authorization. Seller has full power and authority to enter into this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. Seller has taken all necessary and appropriate
corporate action with respect to the execution and delivery of this Agreement
and any other agreements contemplated hereby. This Agreement constitutes the
valid and binding obligation of Seller, enforceable in accordance with its
terms; except as limited by applicable bankruptcy, insolvency, moratorium,
reorganization or other laws affecting contracts, creditors' rights and other
laws and remedies generally.
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(c) Financial Information. POR-NV will deliver its audited consolidated
balance sheets and related statements of operations and cash flows at and for
the fiscal year ended September 30, 1998 (the "Audited Annual Financial
Statement") within ten (10) days after execution of this Agreement, and on the
Closing Date will deliver the unaudited statements of operations and cash flows
at and for the period from the end of POR-NV's 1998 fiscal year through the
Closing Date (the "Unaudited Interim Financial Statements"). On the Closing
Date, POR-NV will also deliver an unaudited balance sheet as of the Closing Date
(the "Balance Sheet," and together with the Audited Annual Financial Statement
and the Unaudited Interim Financial Statements, collectively referred to herein
as the "Financial Statements"). The Financial Statements will be prepared in
accordance with Generally Accepted Accounting Principles ("GAAP") on a
consistent basis throughout the periods indicated and with each other and will
present accurately the financial condition of Seller, on a consolidated basis,
as of the respective dates thereof and the results of operations for the periods
then ended. All of Seller's general ledgers, books, and records are located at
Seller's principal place of business in the State or at the offices of its
accountant. Purchaser may, at Purchaser's option, elect to engage, at its own
cost and expense, an accounting firm selected by Purchaser and reasonably
acceptable to Seller to audit the Unaudited Interim Financial Statements as of
the Closing Date.
(d) Liabilities and Obligations. Schedule 2.1(d) sets forth an accurate
list at the date of this Agreement of all Assumed Liabilities, and such list
shall be updated as of the Closing Date to include any liabilities related to
the Crabby Bob's Business and the Acquired Assets incurred after the date hereof
which Purchaser agrees to assume. For each such liability for which the amount
is not fixed or is contested, whether in litigation or otherwise, Seller shall
provide the following information:
(i) a summary description of the liability together with the
following:
(1) copies of all relevant documentation relating thereto;
(2) amounts claimed and any other action or relief sought; and
(3) name of claimant and all other parties to the claim, suit, or
proceeding.
(ii) the name of each court or agency before which such claim, suit,
or proceeding is pending;
(iii) the date such claim, suit, or proceeding was instituted;
(iv) a reasonable estimate by Seller of the maximum amount, if any,
which is likely to become payable with respect to each such liability. If
no estimate is provided, Seller's best estimate shall for purposes of this
Agreement be deemed to be zero.
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(e) Absence of Certain Changes and Events. Except as set forth in Schedule
2.1(e) hereto, since the date of the Audited Annual Financial Statements there
has not been:
(i) Any material adverse change in the financial condition, results of
operation, assets, liabilities or prospects of Seller or the Crabby Bob's
Business, 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 Seller, the Crabby Bob's
Business, the assets of Seller which was entered into or carried out by
Seller other than for fair consideration in the Ordinary Course of
Business;
(iii) Any change by Seller in its accounting or tax practices or
procedures;
(iv) 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 Seller, other than sales, leases, or dispositions of goods,
materials, or equipment in the ordinary course of business or as
contemplated by this Agreement;
(v) Any event permitting any of the assets or the properties of Seller
(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");
(vi) 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 Seller, other than certain
bonuses paid to Seller's employees and disclosed in writing to Purchaser,
and other than any such increases previously agreed to by seller and
disclosed to Purchaser in writing;
(vii) 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;
(viii) Any notice (written or unwritten) from any employee of Seller
that such employee has terminated, or intends to terminate, such employee's
employment with Seller;
(ix) Any adverse relationship or condition with suppliers, vendors, or
customers of Seller that may have an adverse effect on Seller, the Crabby
Bob's Business, or the Acquired Assets;
(x) 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 Seller, the properties (whether leased or owned), the Crabby
Bob's Business, or the Acquired Assets or any such event which could be
expected to have an adverse effect on Seller, the Crabby Bob's Business, or
the Acquired Assets;
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(xi) 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 Seller is a party and relating to or affecting the
Crabby Bob's Business or the Acquired Assets other than any satisfaction by
performance in accordance with the terms thereof in the ordinary course of
business;
(xii) Any discharge or satisfaction of any lien or payment of any
liabilities, other than in the ordinary course of business related to the
Crabby Bob's Business or the Acquired Assets;
(xiii) Any waiver of any rights of substantial value by Seller, other
than waivers having no material adverse effect on Seller;
(xiv) Any work interruptions, labor grievances or claims filed,
proposed law or regulation or any event of any character, materially
adversely affecting the Crabby Bob's Business or future prospects of
Seller;
(xv) Any revaluation by Seller of any of the Acquired Assets; or
(xvi) To the best knowledge of Seller, any other event or condition of
any character which materially adversely affects, or reasonably may be
expected to so affect, the Acquired Assets or the Crabby Bob's Business.
(f) Inventory. Schedule 2.1(f) sets forth the reasonable value of Seller's
inventory related to the Crabby Bob's Business (whether located on the premises
of Seller, in transit to or from such premises, in other storage facilities, or
otherwise) (collectively, the "Inventory"). All Inventory is owned by Seller,
including all goods customarily sold and/or rented by Seller in connection with
the Crabby Bob's Business, and Seller maintains appropriate records of such
inventory. Seller has continued to replenish the Inventory in a normal and
customary manner consistent with past practices. Seller has not received written
or oral notice that Seller will experience in the future any difficulty in
obtaining, in the desired quantity and quality and upon reasonable terms and
conditions, the vehicles, materials, supplies, or equipment required for the
Crabby Bob's Business.
(g) Taxes.
(i) Definitions. For purposes of this Agreement:
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(1) 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
(2) 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) Seller has properly completed and filed on a timely basis
(including extensions) and in correct form all Returns related to the
Crabby Bob's Business and the Acquired Assets required to be filed on or
prior to the Closing Date. 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 Seller or any other
information required to be shown thereon. 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
Seller related to the Crabby Bob's Business or the Acquired Assets, or for
which Seller 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 Date and portions of periods commencing before the
Closing Date and ending after the Closing Date, all applicable tax laws and
agreements have been fully complied with, and all such amounts required to
be paid by Seller to taxing authorities or others on or before the Closing
Date related to the Crabby Bob's Business or the Acquired Assets have been
paid, and all such amounts required to be paid by Seller to taxing
authorities or others after the Closing which have not been paid are
reflected on the Financial Statements of Seller.
(iv) No notices raising tax issues have been received by Seller 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 Seller.
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(v) There are no liens for Taxes (other than for current Taxes not yet
due and payable) upon the Crabby Bob's Business or the Acquired Assets.
(vi) The real estate and personal property tax assessments for any of
the Acquired Assets subject to Taxes to be paid by Seller and the amount of
Taxes paid and unpaid in connection therewith are set forth in Schedule
2.1(g)(vi). Seller has paid when due all such Taxes currently due in
connection with the Acquired Assets.
(vii) No assessments for public improvements have been made against
any of the Acquired Assets or remain unpaid, including, without limitation,
those for construction of sewer or water lines or mains, streets, sidewalks
or curbs. There are no public improvements that have been ordered to be
made and/or that have not hereto been completed, assessed and paid with
respect to any of the Acquired Assets.
(h) Employee Payments.
(i) The hours worked by and payments made to Seller's employees have
not been in violation in any respect of the Fair Labor Standards Act or any
other applicable federal, foreign, state or local laws dealing with such
matters.
(ii) All payments due from Seller on account of employee health and
welfare insurance have been paid or accrued.
(iii) All severance, sick, or vacation payments by Seller, which are
or were due under the terms of any agreement or otherwise have been paid or
are described in Schedule 2.1(h)(iii).
(i) Compliance With Laws. To the best of Seller's knowledge, Seller 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 relating to the Crabby Bob's Business and/or the
Acquired Assets, including, without limitation, those relating to zoning,
setback requirements, subdivision, construction, occupancy and operation
thereof. Seller has been granted all licenses, permits (temporary and
otherwise), authorizations, and approvals from federal, state, and local
government regulatory bodies necessary to carry on the Crabby Bob's Business and
maintain the Acquired Assets, 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 to the same extent as if Seller prior to the
Closing Date were continuing the Crabby Bob's Business and operations of Seller.
There is no order issued, or proceeding pending or, to the best of Seller's
knowledge, 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 the Crabby Bob's Business.
(j) Consents. Except as set forth on Schedule 2.1(j), no consent, approval,
order, or authorization of, or registration, qualification, designation,
declaration, or filing with, any person, agency or third party, or any federal,
state, local, or provincial governmental authority on the part of Seller is
required in connection with the consummation of the transactions contemplated
hereunder.
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(k) Intellectual Property.
(i) Other than as set forth on Schedule 2.1(k)(i) hereto, Seller owns
or has the right to use pursuant to license, sublicense, agreement, or
permission all Intellectual Property (as hereinafter defined) necessary or
desirable for the operation of the Crabby Bob's Business of Seller as
presently conducted and as presently proposed to be conducted. As used
herein, "Intellectual Property" shall mean to the extent related to the
Crabby Bob's Business and the Acquired Assets: (1) all inventions (whether
patentable or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and patent
disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations thereof,
(2) all trademarks, service marks, trade dress, logos, trade names, and
corporate names, together with all translations, adaptations, derivations,
and combinations thereof and including all goodwill associated therewith,
(3) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith, (4) all mask works and
all applications, registrations, and renewals in connection therewith, (5)
all trade secrets and confidential business information (including all
applications, registrations, and renewals in connection therewith), (6) all
trade secrets and confidential business information (including ideas,
research and development, know-how, formulas, compositions, manufacturing
the production process and techniques, technical data, designs, drawings,
specifications, customer and supplier lists, pricing and cost information,
and business and marketing plans and proposals), (7) all computer software
(including data and related documentation), (8) all other proprietary
rights, and (9) all copies and tangible embodiments thereof (in whatever
form or medium). Each item of Intellectual Property owned or used by Seller
immediately prior to the Closing hereunder in connection with the Crabby
Bob's Business or the Acquired Assets will be owned or available for use by
Purchaser or its subsidiary on identical terms and conditions immediately
subsequent to the Closing hereunder. Seller has taken all necessary and
desirable action to maintain and protect each item of Intellectual Property
that it owns or uses related to the Crabby Bob's Business and the Acquired
Assets.
(ii) Seller has not interfered with, infringed upon, misappropriated,
or otherwise come into conflict with any Intellectual Property rights of
third parties, and neither Seller nor any of Seller's shareholders,
directors and officers (and employees with responsibility for Intellectual
Property matters) of Seller has ever received any charge, complaint, claim,
demand, or notice alleging any such interference, infringement,
misappropriation, or violation (including any claim that Seller must
license or refrain from using any Intellectual Property rights of any third
party). To the knowledge of Seller, no third party has interfered with,
infringed upon, misappropriated, or otherwise come into conflict with any
Intellectual Property rights of Seller related to the Crabby Bob's Business
or the Acquired Assets.
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(iii) Schedule 2.1(k)(iii) identifies each patent or registration
which has been issued to Seller with respect to any of its Intellectual
Property related to the Crabby Bob's Business or the Acquired Assets,
identifies each pending patent application or application for registration
which Seller has made with respect to any of its Intellectual Property
related to the Crabby Bob's Business or the Acquired Assets, and identifies
each license, agreement, or other permission which Seller has granted to
any third party with respect to any of its Intellectual Property (together
with any exceptions) related to the Crabby Bob's Business or the Acquired
Assets. Seller has delivered to Purchaser correct and complete copies of
all such patents, registrations, applications, licenses, agreements, and
permission (as amended to date) and has made available to Purchaser correct
and complete copies of all other written documentation evidencing ownership
and prosecution (if applicable) of each such item. Schedule 2.1(k)(iii)
also identifies each trade name or unregistered trademark used by Seller in
connection with the Crabby Bob's Business and/or the Acquired Assets. With
respect to each item of Intellectual Property required to be identified in
Schedule 2.1(k)(iii):
(1) Seller possesses all right, title, and interest in and to the
item, free and clear of any security interest, license, or other
restriction;
(2) the item is not subject to any outstanding injunction,
judgment, order, decree, ruling, or charge;
(3) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, to the knowledge of Seller
is threatened which challenges the legality, validity, enforceability,
use, or ownership of the item; and
(4) Seller has never agreed to indemnify any Person for or
against any interference, infringement, misappropriation, or other
conflict with respect to the item.
(iv) Schedule 2.1(k)(iv) identifies each item of Intellectual Property
that any third party owns and that Seller uses related to the Crabby Bob's
Business or the Acquired Assets pursuant to license, sublicense, agreement,
or permission. Seller has delivered to Purchaser 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 2.1(k)(iv):
(1) the license, sublicense, agreement, or permission covering
the item is legal valid, binding, enforceable, and in full force and
effect;
(2) 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);
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(3) 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;
(4) no party to the license, sublicense, agreement, or permission
has repudiated any provision thereof;
(5) with respect to each sublicense, the representations and
warranties set forth in subsections (iv)(1) through (iv)(4) above are
true and correct with respect to the underlying license;
(6) the underlying item of Intellectual Property is not subject
to any outstanding injunction, judgment, order, decree, ruling, or
charge;
(7) no action, suit, proceeding, hearing, investigation, charge,
complaint, claim, or demand is pending or, to the knowledge of Seller
is threatened which challenges the legality, validity, or
enforceability of the underlying item of Intellectual Property; and
(8) Seller has not granted any sublicense or similar right with
respect to the license, sublicense, agreement, or permission.
(1)Restrictive Documents or Orders. Seller is not a party to nor bound
under any agreement, contract, order, judgment, or decree, or any similar
restriction which adversely affects, or reasonably could be expected to
adversely affect (i) the continued operation by Purchaser (through its ownership
of the Acquired Assets) of the Crabby Bob's Business on and after the Closing
Date on substantially the same basis as said business was theretofore operated
or (ii) the consummation of the transactions contemplated by this Agreement.
(m) Contracts and Commitments.
(i) Schedule 2.1(m)(i) hereto sets forth a list of all material
written agreements and contracts, contract rights, licenses, and other
executory commitments (written or unwritten) other than purchase and sale
orders and quotations related to the Crabby Bob's Business or the Acquired
Assets (collectively, the "Contracts") including, without limitation, those
contracts with insurance companies, credit companies, governmental
agencies, rental agencies, and all others under which Seller is supplied
with materials, supplies, or equipment ("Materials") (such suppliers shall
be referred to herein as "Suppliers") to which Seller is a party or to
which any of the assets of Seller are subject. There are no oral agreements
or commitments that would have a material adverse effect on Seller.
(ii) Seller has performed all of its obligations under the terms of
each Contract, and is not in default thereunder, except as described in
Schedule 2.1(m)(ii). No event or omission has occurred which but for the
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giving of notice or lapse of time or both would constitute a default by any
party thereto under any such Contract. Each such Contract is valid and
binding on all parties thereto and in full force and effect, and each
Contract will continue to be valid and binding on identical terms following
the consummation of the transaction contemplated hereby. Seller has
received no written or unwritten notice of default, cancellation, or
termination in connection with any such Contract. Seller is not now and has
never been a party to any governmental contracts subject to price
redetermination or renegotiation.
(iii) There has not been any notice (written or unwritten) from any
Supplier that any such Supplier will not continue to supply the current
level and type of Materials currently being provided by such Supplier upon
the same terms and conditions.
(iv) Any agreements with third parties for the management or lease of
the Acquired Assets shall be terminated by Seller on or before Closing.
(n) Debt. Schedule 2.1(n) sets forth a list of all agreements for the
incurring of indebtedness for borrowed money related to the Crabby Bob's
Business or the Acquired Assets. Other than as set forth on Schedule 2.1(n)
hereto, none of the obligations pursuant to such agreements are subject to
acceleration by reason of the consummation of the transactions contemplated
hereby, nor would the execution of this Agreement or the consummation of the
transactions contemplated hereby result in any default under such agreements.
Seller has furnished Purchaser with true and correct copies of each such
agreement listed in Schedule 2.1(n). Seller is not in default under any of the
agreements listed thereon, nor is Seller aware of any event that, with the
passage of time, or notice, or both, would result in an event of default
thereunder.
(o) Related Property. Schedule 2.1(o) hereto lists all of Seller's
ownership interests related to the Crabby Bob's Business or the Acquired Assets
(except for leasehold interests set forth in Schedule 2.1(p)) in real property,
machinery, equipment, furniture, fixtures, supplies, computer equipment,
printers, copiers, software, telecommunications equipment, miscellaneous
supplies, tools, repair and maintenance parts, and fixed assets.
(p) Leased Properties. Schedule 2.1(p) hereto lists all personal property
(including equipment leases) and real property leased by Seller in connection
with the Crabby Bob's Business or the Acquired Assets (the "Leased Properties")
and the aggregate annual rent or other fees payable under all such leases.
Seller has a valid leasehold or ownership interest in all of the Leased
Properties, free and clear of any liens or title defects, other than as set
forth on Schedule 2.1(p).
(q) Utilities. If requested by Purchaser, Seller shall provide Purchaser
with the following information for the period January 1, 1998 through December
31, 1998: (i) the amount of all utility bills relating to the Acquired Assets,
including, without limitation, bills for gas, water, sewer, electricity, cable
television and garbage and trash removal; and (ii) the amount of all repairs and
maintenance relating to the Acquired Assets.
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(r) Acquired Assets. Upon Closing, each of the Acquired Assets will be in
good condition, comparable to in all respects, the condition existing on the
date of this Agreement, ordinary wear and tear excepted. Each of the Acquired
Assets is set forth and identified on Schedule 2.1(r) hereto. Except as may be
disclosed in Schedule 2.1(r), the heating, air conditioning, sewer, plumbing,
antennae, and electrical systems in or relating to each of the restaurant
buildings and related improvements (collectively, the "Restaurants") which are
part of the Acquired Assets are in good working order, the painted walls, window
treatments, interior and exterior doors, plumbing, roofs and carpeting of all of
such Restaurants are in good repair, ordinary wear and tear excepted, each
building is free from damage by termite and insect infestations, and the
structural supports and members of each Restaurant are sound and in good repair.
There are no latent defects in or to any of the Restaurants or any portion
thereof. Upon the request of Purchaser, Seller will provide information in its
possession concerning the age of the items described above. Seller shall not
remove any items of personal property from any of the Restaurants prior to the
Closing, except for the purpose of repair or replacement or in the ordinary
course of business, and any such item or its replacement, as the case may be,
shall be included in the Acquired Assets.
(s) Repair Requirements. To the best of Seller's knowledge, there are no
outstanding requirements or recommendations by any mortgagee or any insurance
company, requiring or recommending any repairs or work to be done on any of the
Restaurants.
(t) No Condemnation Proceedings. To the best of Seller's knowledge, there
are no pending or threatened condemnation or eminent domain proceedings which
would adversely affect all or any part of any of the Restaurants.
(u) Status of Real Property; Environmental Standards. To the best of
Seller's knowledge, the present use of each of the Restaurants is in compliance
with all applicable zoning ordinances, building codes, fire codes, life safety
codes, or health department ordinances pertaining thereto. To the best of
Seller's knowledge, each of the Restaurants and the real property on which it is
located is in compliance with all federal, state and local laws and ordinances
relating to clean air, water, waste disposal, toxic substances and other
environmental regulations. Each of the Restaurants is in compliance with all
laws and ordinances relating to occupational health and safety. To the best of
Seller's knowledge, during the period of Seller's ownership of each of the
Restaurants, Seller has not caused or permitted any of the Restaurants or the
real property on which it is located to be used, to generate, manufacture,
refine, transport, treat, store, handle, dispose, transfer, produce or process
Hazardous Substances (as hereinafter defined), or other dangerous or toxic
substances, or solid waste, except in compliance with all applicable federal,
state, and local laws or regulations. To the best of Seller's knowledge, during
the period of Seller's ownership of each of the Restaurants, there has been no
Release (as hereafter defined) of any Hazardous Substances on or off-site
relating to the Restaurants. As used herein, (a) "Hazardous Substances" include
any pollutants, dangerous substances, toxic substances, hazardous wastes,
hazardous materials, or hazardous substances as defined in or pursuant to the
Resource Conservation and Recovery Act (42 U.S.C. Section 6901, et seq.) as
amended, the Comprehensive Environmental Response, Compensation and Liability
Act (42 U.S.C. Section 9601, et seq.) as amended, the Clean Water Act (33 U.S.C.
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Section 1251, et seq.) as amended, or any other federal, state or local
environmental law, ordinance, rule or regulation, and (b) "Release" means
releasing, spilling, leaking, pumping, pouring, emitting, emptying, discharging,
injecting, escaping, leaching, disposing or dumping. There has not been
incorporated into any of the Restaurants and none of the Restaurants contains,
any asbestos products, urea-formaldehyde, and other known building products
which may be harmful or injurious to human health or constitute Hazardous
Substances.
(v) Title to the Acquired Assets. Seller has good and marketable title to
the Acquired Assets. Except as described in Schedule 2.1(v), Seller owns all of
the Acquired Assets free and clear of any lien or title encumbrance.
(w) Assets. The Acquired Assets include all the assets necessary to operate
the Crabby Bob's Business in the same manner as the Crabby Bob's Business was
operated by Seller immediately prior to the Closing Date, and none of Seller's
shareholders, nor any family member or entity affiliated with Seller's
shareholders or any such family member, owns, or has any interest in, any asset
used in the operation of Seller.
(x) Litigation. Except as described in Schedule 2.1(x), none of Seller,
Seller's shareholders nor any of Seller's officers or directors is engaged in,
or has received any threat of, any litigation, arbitration, investigation, or
other proceeding relating to the Crabby Bob's Business, the Acquired Assets, or
against or affecting this Agreement, the other agreements contemplated hereby or
the actions taken or contemplated in connection herewith and therewith, nor is
there any reasonable basis therefor. None of Seller, Seller's shareholders, nor
any of Seller's officers or directors is bound by any judgment, decree,
injunction, ruling or order of any court, governmental, regulatory or
administrative department, commission, agency or instrumentality, arbitrator or
any other person which would or could have a material adverse effect on the
Crabby Bob's Business or the Acquired Assets.
(y) No Conflict or Default. Neither the execution and delivery of this
Agreement, nor compliance with the terms and provisions hereof and thereof
including, without limitation, the consummation of the transactions contemplated
hereby will, to the best of Seller's knowledge, violate any statute, regulation,
or ordinance of any governmental or administrative authority, or conflict with
or result in the breach of any term, condition, or provision of Seller's
Articles of Incorporation or Bylaws, as presently in effect, or of any
agreement, deed, contract, mortgage, indenture, writ, order, decree, legal
obligation, or instrument to which Seller is a party or by which it or any of
the Acquired Assets of Seller are or may be bound, or constitute a default (or
an event which, with the lapse of time or the giving of notice, or both, would
constitute a default) thereunder.
(z) Labor Relations.
(i) There are no labor controversies pending or, to the knowledge of
Seller, threatened between Seller and any of its employees (the
"Employees") or any labor union or other collective bargaining unit
representing any of the Employees.
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(ii) Seller has never entered into a collective bargaining agreement
or other labor union contract relating to the Crabby Bob's Business and
applicable to the Employees.
(iii) Except as set forth in Schedule 2.1(z), there are no written
employment or separation agreements, or oral employment or separation
agreements other than (1) those establishing an "at will" employment
relationship between Seller and any of the Employees and which do not
provide for any advance notice requirements to terminate an Employee's
employment or any severance or salary or benefits continuation obligations
on the part of Seller and (2) any unknown future claims for wrongful
termination based upon a theory of implied agreements arising out of course
of conduct.
(aa) Brokers' and Finders' Fees/Contractual Limitations. Seller is not
obligated to pay any fees or expenses of any broker or finder in connection with
the origin, negotiation, or execution of this Agreement, or in connection with
any transactions contemplated hereby. None of Seller's shareholders, Seller, or
any officer, director, employee, agent, or representative of Seller
(collectively, the "Representatives") is or has been subject to any agreement,
letter of intent, or understanding of any kind which prohibits, limits, or
restricts Seller or its representatives from negotiating, entering into, and
consummating this Agreement and the transactions contemplated hereby.
(bb) Books and Records. The books and records of Seller to which Purchaser
and its accountants and attorneys have been given access are the true books and
records of Seller and truly and fairly reflect the underlying facts and
transactions in all respects.
(cc) Complete Disclosure. No representation or warranty by Seller in this
Agreement, and no exhibit, schedule, statement, certificate, or other writing
furnished to Purchaser pursuant to this Agreement or in connection with the
transactions contemplated hereby and thereby, contains or will contain any
untrue statement or omits or will omit to state any fact necessary to make the
statements contained herein and therein not materially misleading. If Seller
becomes aware of any fact or circumstance which would change a representation or
warranty of Seller, Seller shall immediately give notice of such fact or
circumstance to Purchaser. However, such notification shall not relieve Seller
of its respective obligations under this Agreement.
(dd) Insurance. Seller maintains policies of insurance covering the
Acquired Assets of Seller, Seller's properties, and The Crabby Bob's Business in
types and amounts as set forth in Schedule 2.1(dd). Seller is in compliance with
each of such policies such that none of the coverage provided under such
policies has been invalidated and Seller has not received any written notice of
cancellation of any such policies.
(ee) Accounts Receivable. Schedule 2.1(ee) hereto sets forth all accounts
receivable of Seller related to the Crabby Bob's Business and the Acquired
Assets ("Accounts Receivable"). Such Schedule 2.1(ee) shall be updated as of the
Closing Date and delivered to Purchaser at Closing. Schedule 2.1(ee) shows the
aging of Accounts Receivable in amounts due in thirty (30)-day aging categories.
All Accounts Receivable represent sales or rentals actually made or services
actually performed in the ordinar ) and usual course of Seller's Business. No
account receivable is more than 90 days old.
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(ff) Representations and Warranties on the Closing Date. Seller's
representations and warranties contained in this Article II shall be true on and
as of the Closing Date with the same force and effect as though such
representations and warranties had been made on such date, except to the extent
any such representations and warranties were made as of a specified date, in
which case such representations and warranties shall continue on the Closing
Date to have been true in all material respects as o such specified date.
Section 2.2 Representations and Warranties of Purchaser. Purchaser hereby
represents and warrants to Seller that immediately prior to the time of Closing:
(a) Organization and Standing. Each of Purchaser and Parent and is a
corporation duly organized and validly existing under the laws of the State of
Georgia and the State of Texas, respectively, and has all requisite power and
authority to lease, own, and operate its properties and carry on its business
and operations and to directly own, lease, and operate its assets. Purchaser is
a wholly-owned subsidiary of Parent.
(b) Authorization. Each of Purchaser and Parent has full corporate power
and authority to enter into this Agreement, to perform its obligations
hereunder, and to consummate the transactions contemplated hereby, including,
without limitation, the execution and delivery of this Agreement. Each of
Purchaser and Parent has taken all necessary and appropriate corporate action
with respect to the execution and delivery of this Agreement. This Agreement
constitutes the valid and binding obligation of each of Purchaser and Parent,
enforceable in accordance with its respective terms; except as limited by
applicable bankruptcy, insolvency, moratorium, reorganization, or other laws
affecting creditors' rights and remedies generally, and general principles of
equity.
(c) Brokers' and Finders' Fees/Contractual Limitations. Neither Purchaser
nor Parent is obligated to pay any fees or expenses of any broker or finder in
connection with the origin, negotiation, or execution of this Agreement or in
connection with any transactions contemplated hereby. None of Purchaser, Parent
or any officer, director, employee, agent, or representative of Purchaser or
Parent (collectively, the "Purchaser Representatives") is or has been subject to
any agreement, letter of intent, or understanding of any kind which prohibits,
limits, or restricts Purchaser or the Purchaser Representatives from
negotiating, entering into, and consummating this Agreement, and the
transactions contemplated hereby.
(d) Access. Purchaser acknowledges that, to the best of Purchaser's
knowledge, Seller has not denied Purchaser access to such of Seller's assets,
properties, books, and records as Purchaser has requested to see.
Section 2.3 Survival of Representations and Warranties. Purchaser's,
Parent's and Seller's representations and warranties contained in this Article
II shall survive the Closing for a period of two (2) years after the Closing
Date.
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ARTICLE III
COVENANTS
Section 3.1 Covenants Against Disclosure.
(a) The terms and provisions of this Agreement, and any information
heretofore disclosed or to be disclosed in the future in connection herewith by
any party hereto to any other party, other than information which is in the
public domain or which the disclosing party authorizes the receiving party in
writing to disclose (such terms, provisions and information herein called the
"Confidential Material") shall be treated confidentially by the parties;
provided that any party may disclose Confidential Material of another party to
the receiving party's employees, accountants, attorneys and advisors who need to
know the same (it being understood that they shall be informed by the receiving
party of the confidential nature of the Confidential Material, and that the
receiving party shall cause them to treat the same confidentially), and
otherwise to the extent required by law. The parties acknowledge that remedies
at law would be inadequate to enforce the covenants contained in this Section
3.1 and therefore agree that a party aggrieved hereunder may enforce such
covenants through the remedy of specific performance or other equitable relief.
Should an aggrieved party have cause to seek such relief, no bond shall be
required, and the breaching party shall pay all attorney's fees and court costs
which the aggrieved party may incur in enforcing the provisions of this Section.
(b) The parties shall, by mutual agreement, draft a press release for
public dissemination. No party shall disseminate (except to the parties to this
Agreement) any press release or announcement concerning the transactions
contemplated by this Agreement or the parties hereto without the prior written
consent of the other party hereto, except as required by law.
Section 3.2 Access to Information. Through Closing (or such later Closing
Date as Purchaser may establish) Seller will give Purchaser and its accountants,
legal counsel, and other representatives reasonable access, during normal
business hours, at times mutually agreeable among the parties, to all of the
properties, books, contracts, commitments, and records relating to the Crabby
Bob's Business and the Acquired Assets of Seller and to all officers and
managers of Seller, and Seller will furnish to Purchaser, its accountants, legal
counsel and other representatives, at Seller's expense (which expense shall not
include the costs and fees of Purchaser's accountants, legal counsel, and other
representatives), all such information concerning the Crabby Bob's Business or
the Acquired Assets of Seller as Purchaser may request.
Section 3.3 Interim Period.
(a) During the period commencing on the date of this Agreement and ending
with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, Seller agrees that it will, except as
set forth on Schedule 3.3(a):
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(i) carry on the Crabby Bob's Business in substantially the same
manner as it has heretofore and not introduce any material new method of
management, operation or accounting;
(ii) perform all of its respective obligations under agreements
relating to or affecting the Crabby Bob's Business or the Acquired Assets;
(iii) keep in full force and effect present insurance policies or
other comparable insurance coverage related to the Crabby Bob's Business or
the Acquired Assets;
(iv) use its best efforts to maintain and preserve its business
organization intact, retain its respective present key employees, and
maintain its respective relationships with Suppliers, and others having
business relations with it related to The Crabby Bob's Business or the
Acquired Assets;
(v) maintain compliance with all permits laws, rules and regulations,
consent orders, and all other orders of applicable courts, regulatory
agencies, and similar governmental authorities related to the Crabby Bob's
Business or the Acquired Assets;
(vi) maintain present debt and lease instruments and not enter into
new or amended debt or lease instruments related to the Crabby Bob's
Business or the Acquired Assets; and
(vii) maintain present salaries and commission levels for all
officers, directors, employees and agents.
(b) During the period commencing on the date of this Agreement and ending
with the earlier to occur of the Closing Date or the termination of this
Agreement in accordance with its terms, Seller agrees that it will not, except
as set forth on Schedule 3.3(b):
(i) enter into any contract or commitment or incur, or agree to incur,
any liability or make any capital expenditures related to the Crabby Bob's
Business or the Acquired Assets, except in the ordinary course of business
consistent with past practice involving amounts less than $2,000;
(ii) create, assume, or permit to exist mortgage, pledge, or other
lien or encumbrance upon any of the Acquired Assets, except (1) with
respect to purchase money liens incurred in connection with the acquisition
of equipment with an aggregate cost not in excess of $10,000 necessary for
the conduct of the Crabby Bob's Business, or (2) liens for taxes either not
yet due or being contested in good faith and by appropriate proceedings
(and for which contested taxes adequate reserves have been established and
are being maintained) or materialmen's, mechanics', workers', repairmen's,
employees', or other like liens arising in the ordinary course of business.
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(iii) sell, assign, lease, or otherwise transfer or dispose of any of
the Acquired Assets except in the ordinary course of business;
(iv) merge or consolidate or agree to merge or consolidate with or
into any other corporation;
(v) waive any material rights or claims with respect to the Crabby
Bob's Business or the Acquired Assets;
(vi) commit a material breach of or amend or terminate any material
agreement or Permit with respect to the Crabby Bob's Business or the
Acquired Assets;
(vii) enter into any other transaction outside the ordinary course of
its business consistent with past business practice or prohibited hereunder
with respect to the Crabby Bob's Business or the Acquired Assets; or
(viii) change its accounts receivable collection practice or factor
its accounts receivable in any way.
Section 3.4 Completion of Schedules. The parties acknowledge that all of
the Schedules hereto may not be completed as of the date of execution of this
Agreement. Unless otherwise provided herein, all missing or incomplete Schedules
shall be compiled and agreed upon by the parties as soon as possible, but in no
event later than ten (10) days after execution of this Agreement.
Section 3.5 Employees and Employee Benefit Matters. Effective as of the
Closing Date, Purchaser shall (i) offer employment to each employee listed on
Schedule 3.5 hereto, on terms and conditions substantially the same as currently
offered to similarly situated employees of Purchaser and (ii) enter into
employment agreements with John M. Creed, as Chief Executive Officer, and Gary
Coburn, as Chief Operating Officer, which employment agreements shall contain
the terms and conditions set forth on Schedule 3.5 and other such terms and
conditions as may be mutually acceptable to the parties thereto.
Section 3.6 Further Assurances. On or after the Closing Date, each party
shall prepare, execute, and deliver, at the preparer's expense, such further
instruments, and shall take or cause to be taken such other or further action,
as any party shall reasonably request of any other party at any time or from
time to time in order to consummate, in any other manner, the terms and
provisions of this Agreement.
Section 3.7 Additional Financial Statements; Co-operation in Registration.
In the event that Purchaser determines to pay the Purchase Price on the Decision
Date by agreeing to deliver registered shares of Common Stock to Seller in
accordance with Section 1.2 hereof, Seller hereby agrees to co-operate with
Purchaser in filing with federal and state securities commissioners such
registration statements or other filings as are deemed necessary and appropriate
by the Purchaser, including, without limitation, by causing to be prepared and
delivered to Purchaser, at Seller's expense, such additional financial
statements of Seller as Purchaser deems necessary or appropriate to complete
such filings.
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Section 3.8 Representations Regarding Registered Shares. In the event that
Purchaser determines to pay the Purchase Price on the Decision Date by agreeing
to deliver registered shares of Common Stock to Seller in accordance with
Section 1.2 hereof, Purchaser agrees to cause Parent to enter into a purchase
agreement with Seller which shall contain usual and customary representations
and warranties of Parent in favor of Seller with respect to the Parent and the
Common Stock.
Section 3.9 Release of Shareholder. Purchaser, in cooperation with Seller,
hereby agrees to use reasonable commercial efforts, prior to the Closing Date,
to obtain the written release of the personal guarantee of at least $200,000.00
of the obligations of Seller under a certain revolving credit facility from
Sanwa Bank as identified on Schedule 2.1(d) hereto made by John Creed in favor
of Sanwa Bank (the "Release").
Section 3.10 Waiver of Bulk Sales Compliance. The parties hereto hereby
agree to waive compliance with any applicable statutes governing bulk sales or
bulk transfers which may otherwise be applicable to the transactions
contemplated hereby. Seller expressly agrees to pay all of its trade creditors,
as and when due, to the extent that such obligations do not constitute Assumed
Liabilities, both before and after the Closing Date and shall indemnify
Purchaser as provided in Section 5.1 against any and all liability in respect of
any such obligations.
ARTICLE IV
CONDITIONS PRECEDENT TO OBLIGATIONS
Section 4.1 Conditions to Obligations of Purchaser. Each and every
obligation of Purchaser to be performed on the Closing Date shall be subject to
the satisfaction on or before the Closing Date of the following conditions
(unless waived in writing by Purchaser), and Seller shall exercise all
reasonable efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and warranties of
Seller set forth in Section 2.1 of this Agreement shall have been true and
correct when made and shall be true and correct at and as of the Closing Date as
if such representations and warranties were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and other
obligations under this Agreement which are to be performed or complied with by
Seller, including Boards of Directors approval and delivery of the Financial
Statements, shall have been fully performed and complied with at or prior to the
Closing Date.
(c) No Material Adverse Change. Since the date of the Audited Annual
Financial Statements, there shall have occurred no material adverse change in
the financial condition, the Crabby Bob's Business, or the Acquired Assets of
Seller, which adversely affects the conduct of the Crabby Bob's Business as
presently being conducted, the Acquired Assets of Seller, or the financial
condition of the Crabby Bob's Business.
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(d) Absence of Governmental or Other Objection. There shall be no pending
or threatened lawsuit challenging the transaction by any body or agency of the
federal, state, or local government or by any third party, and the consummation
of the transaction shall not have been enjoined by a court of competent
jurisdiction as of the Closing Date and any applicable waiting period under any
applicable federal law shall have expired.
(e) Due Diligence Review. Purchaser shall have completed to its reasonable
satisfaction its due diligence review of Seller and its operations, the Crabby
Bob's Business, the Acquired Assets and financial condition of Seller, and
Purchaser shall have received favorable reviews from its advisors of the results
of their due diligence review of the Crabby Bob's Business.
(f) Certificate of Chief Executive Officer. Seller shall have delivered to
Purchaser a certificate executed by its Chief Executive Officer, dated the date
of the Closing Date, to the effect that the conditions set forth in subsections
(a)-(d) of this Section 4.1 have been satisfied with respect to Seller.
(g) Approval of Documents. The form and substance of all certificates,
instruments, opinions, agreements and other documents delivered or to be
delivered to Purchaser under this Agreement shall be reasonably satisfactory to
Purchaser and its counsel.
(h) Licenses. Purchaser shall have received all licenses from all
appropriate governmental agencies to operate the Crabby Bob's Business in the
same manner as Seller operated the Crabby Bob's Business prior to the Closing
Date and shall have received a certificate, duly issued by the appropriate
governmental authority in Seller's state of incorporation and in each state in
which Seller is authorized to do business, showing that Seller is in good
standing and authorized to do business and that all state franchise and/or
income tax returns and taxes for Seller for all periods prior to the Closing
have been filed and paid.
(i) Consents. Purchaser shall have received each and every consent,
approval and waiver (if any) required for the execution of this Agreement and
the consummation of the transactions contemplated hereby, including, without
limitation, the consents listed on Schedule 2.1(j) hereto, the approval of
Purchaser's Board of Directors, the approval of Seller's Board of Directors and
shareholders, and any Hart-Scott-Rodino approvals which may be required.
(j) Deliveries. Seller shall have delivered to Purchaser executed (i) bills
of sale for the Acquired Assets; (ii) assignments of all leases associated with
the operation of the Restaurants and/or the Crabby Bob's Business; (iii)
consents from all landlords or lessors to the assignment of the leases
referenced in the foregoing clause (ii); (iv) assignments of all other
contracts, agreements or instruments relating to or constituting Acquired
Assets, to the extent assignable after Seller uses commercially reasonable
efforts to obtain assignments from third parties related thereto; and (v) all
other documents reasonably requested by Purchaser to evidence the transactions
contemplated by this Agreement, all in form and substance satisfactory to
Purchaser.
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(k) Finova Consent. The Purchaser shall have received a written consent to
the transactions contemplated hereby from Finova Mezzanine Capital, Inc. upon
terms and subject to conditions satisfactory to Purchaser, in its sole and
absolute discretion.
(l) Remedy of Defaults. Each and every default, violation, or breach of
each agreement, instrument, or document of indebtedness listed on Schedule
2.1(n) and Schedule 2.1(m)(ii) hereof shall have been cured, remedied, or waived
by the obligee of each such obligation to the full satisfaction of Purchaser, in
its sole and absolute discretion.
(m) Proceedings Dismissed. The Seller shall have delivered to the Purchaser
evidence satisfactory to the Purchaser in its sole and absolute discretion, that
each of the proceedings listed in Schedule 2.1(x) hereto has been dismissed with
prejudice in a final adjudication or otherwise settled to the satisfaction of
Purchaser, in its sole and absolute discretion.
(n) Completion of Schedules. The final Schedules hereto, after completion
as provided in Section 3.4 hereof, shall be satisfactory to Purchaser, in its
sole and absolute discretion.
Section 4.2 Conditions to Obligations of Seller. Each and every obligation
of Seller to be performed on the Closing Date shall be subject to the
satisfaction as of or before the Closing Date of the following conditions
(unless waived in writing by Seller), and Purchaser shall exercise all
reasonable efforts in good faith to satisfy such conditions:
(a) Representations and Warranties. The representations and warranties of
Purchaser set forth in Section 2.2 of this Agreement shall have been true and
correct when made and shall be true and correct on and as of the Closing Date as
if such representations and warranties were made as of such date and time.
(b) Performance of Agreement. All covenants, conditions, and other
obligations under this Agreement which are to be performed or complied with by
Purchaser, shall have been fully performed and complied with at or prior to the
Closing Date.
(c) Absence of Governmental or Other Objection. There shall be no pending
or threatened lawsuit challenging the transaction by any body or agency of the
federal, state, or local government or by any third party, and the consummation
of the transaction shall not have been enjoined by a court of competent
jurisdiction as of the Closing Date and any applicable waiting period under any
applicable federal law shall have expired.
(d) Certificate of Officers. Purchaser shall have delivered to Seller a
certificate executed by its authorized officer, dated the date of the Closing
Date, to the effect that the conditions set forth in subsections (a)-(c) of this
Section 4.2 have been satisfied.
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(e) Approval of Documents. The form and substance of all certificates,
instruments, opinions, agreements and other documents delivered or to be
delivered to Seller under this Agreement shall be reasonably satisfactory to
Seller and its counsel.
(f) Release. Seller shall have received the Release referred to in Section
3.9 hereof.
ARTICLE V
INDEMNIFICATION
Section 5.1 Indemnification of Purchaser. Seller hereby agrees to indemnify
and hold harmless Purchaser, Parent and their respective affiliates,
(collectively the "Indemnified Parties") against any and all losses,
liabilities, damages, demands, claims, suits, actions, judgments, causes of
action, assessments, costs, and expenses, including, without limitation,
interest, penalties, attorneys' fees, any and all expenses incurred in
investigating, preparing, and defending against any litigation, commenced or
threatened, and any claim whatsoever, and any and all amounts paid in settlement
of any claim or litigation (collectively, "Damages"), asserted against,
resulting from, imposed upon, or incurred or suffered by the Indemnified Parties
directly or indirectly, as a result of or arising from any inaccuracy in or
breach or nonfulfillment of any of the representations, warranties, covenants,
or agreements made by Seller in this Agreement or any facts or circumstances
constituting such an inaccuracy, breach, or nonfulfillment (all of which shall
be referred to as "Seller Indemnifiable Claims").
Section 5.2 Indemnification of Seller. Purchaser and Parent hereby, jointly
and severally, agree to indemnify and hold harmless Seller against any and all
Damages, asserted against, reasonably resulting from, imposed upon, or incurred
or suffered by Seller as a result of or arising from any inaccuracy in or breach
or nonfulfillment of any of the representations, warranties, covenants, or
agreements made by Purchaser in this Agreement or any facts or circumstances
constituting such an inaccuracy, breach, or nonfulfillment (all of which shall
be referred to as "Purchaser Indemnifiable Claims").
Section 5.3 Procedure for Indemnification with Respect to Third-Party
Claims.
(a) If any party hereto determines to seek indemnification (the party
seeking such indemnification hereinafter referred to as the "Indemnified Party"
and the party against whom such indemnification is sought is hereinafter
referred to as the "Indemnifying Party") under this Article V with respect to
Seller Indemnifiable Claims where the Indemnified Party is Purchaser or any of
its affiliates or Purchaser Indemnifiable Claims where the Indemnified Party is
any of Seller (such Claims shall be referred to herein as "Indemnifiable
Claims") resulting from the assertion of liability by third parties, the
Indemnified Party shall give notice to the Indemnifying Parties within thirty
(30) days of the Indemnified Party becoming aware of any such Indemnifiable
Claim or of facts upon which any such Indemnifiable Claim will be based; the
notice shall set forth such material information with respect thereto as is then
reasonably available to the Indemnified Party. In case any such liability is
asserted against the Indemnified Party or its affiliates, and the Indemnified
Party notifies the Indemnifying Parties thereof, the Indemnifying Parties will
24
<PAGE>
be entitled, if such Indemnifying Parties so elect by written notice delivered
to the Indemnified Party within fifteen (15) days after receiving the
Indemnified Party's notice, to assume the defense thereof with counsel
satisfactory to the Indemnified Party. Notwithstanding the foregoing, (i) the
Indemnified Party or its affiliates shall also have the right to employ its own
counsel in any such case, but the fees and expenses of such counsel shall be at
the expense of the Indemnified Party unless the Indemnified Party or its
affiliates shall reasonably determine that there is a conflict of interest
between or among the Indemnified Party or its affiliates and any Indemnifying
Party with respect to such Indemnifiable Claim, in which case the fees and
expenses of such counsel will be borne by such Indemnifying Parties, (ii) the
Indemnified Party shall have no obligation to give any notice of any assertion
of liability by a third party unless such assertion is in writing, and (iii) the
rights of the Indemnified Party or its affiliates to be indemnified hereunder in
respect of Indemnifiable Claims resulting from the assertion of liability by
third parties shall not be adversely affected by their failure to give notice
pursuant to the foregoing unless, and, if so, only to the extent that, such
Indemnifying Parties are materially prejudiced thereby; provided, however, the
Indemnifying Party shall not be liable for attorneys' fees and expenses incurred
by the Indemnified Party prior to the Indemnified Party's giving notice to the
Indemnifying Party of an Indemnifiable Claim. With respect to any assertion of
liability by a third party that results in an Indemnifiable Claim, the parties
hereto shall make available to each other all relevant information in their
possession material to any such assertion.
(b) In the event that such Indemnifying Parties, within fifteen (15) days
after receipt of the aforesaid notice of an Indemnifiable Claim fail to assume
the defense of the Indemnified Party or its affiliates against such
Indemnifiable Claim, the Indemnified Party or its affiliates shall have the
right to undertake the defense, compromise, or settlement of such action on
behalf of and for the account, expense, and risk of such Indemnifying Parties.
(c) Notwithstanding anything in this Article V to the contrary, (i) if
there is a reasonable probability that an Indemnifiable Claim may materially
adversely affect the Indemnified Party or its affiliates, the Indemnified Party
or its affiliates shall have the right to participate in such defense,
compromise, or settlement and such Indemnifying Parties shall not, without the
Indemnified Party's written consent (which consent shall not be unreasonably
withheld), settle or compromise any Indemnifiable Claim or consent to entry of
any judgment in respect thereof unless such settlement, compromise, or consent
includes as an unconditional term thereof the giving by the claimant or the
plaintiff to the Indemnified Party a release from all liability in respect of
such Indemnifiable Claim.
25
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Section 5.4 Procedure For Indemnification with Respect to Non-Third Party
Claims. In the event that the Indemnified Party asserts the existence of a claim
giving rise to Damages (but excluding claims resulting from the assertion of
liability by third parties), it shall give written notice to the Indemnifying
Parties. Such written notice shall state that it is being given pursuant to this
Section 5.4, specify the nature and amount of the claim asserted and indicate
the date on which such assertion shall be deemed accepted and the amount of the
claim deemed a valid claim (such date to be established in accordance with the
next sentence). If such Indemnifying Parties, within ten (10) days after the
mailing of notice by the Indemnified Party, shall not give written notice to the
Indemnified Party announcing their intent to contest such assertion of the
Indemnified Party, such assertion shall be deemed accepted and the amount of
claim shall be deemed a valid claim. In the event, however, that such
Indemnifying Parties contest the assertion of a claim by giving such written
notice to the Indemnified Party within said period, then the parties shall act
in good faith to reach agreement regarding such claim. If the parties hereto,
acting in good faith, cannot reach agreement with respect to such claim within
ten (10) days after notice thereof, such claim will be submitted to and settled
by arbitration pursuant to Section 7.10 hereof.
ARTICLE VI
TERMINATION AND CONDITIONS SUBSEQUENT
Section 6.1 Termination.
(a) At any time prior to the time of Closing, this Agreement may be
terminated by express written consent of Purchaser and Seller.
(b) Purchaser may terminate this Agreement in the event the conditions set
forth in Section 4.1 of this Agreement have not been satisfied or waived prior
to the time of Closing.
(c) Seller may terminate this Agreement in the event the conditions set
forth in Section 4.2 of this Agreement have not been satisfied or waived prior
to the time of Closing.
(d) Each party's right of termination under this Section 6.1 is in addition
to any other rights it may have under this Agreement or otherwise, and the
exercise of a right of termination shall not be an election of remedies. If this
Agreement is terminated pursuant to this Section 6.1, all further obligations of
the parties under this Agreement shall terminate, except as set forth in Section
6.2; 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 shall survive such termination unimpaired.
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Section 6.2 Effect of Termination. In the event of termination as provided
in Section 6.1 above, Section 3.1, Article V, Section 7.4 and Section 7.10 shall
survive such termination and continue in full force and effect.
ARTICLE VII
MISCELLANEOUS PROVISIONS
Section 7.1 Notice. All notices and other communications required or
permitted under this Agreement shall be delivered to the parties at the address
set forth below their respective signature blocks, or at such other address that
they designate by notice to all other parties in accordance with this Section
7.1. Any party delivering notice to Purchaser shall also deliver a copy to:
Philip P. Gura, Esq., Nelson Mullins Riley & Scarborough, L.L.P., First Union
Plaza, Suite 1400, 999 Peachtree Street, N.E., Atlanta, Georgia 30309, Facsimile
(404) 817-6194. All notices and communications shall be deemed to have been
received unless otherwise set forth herein: (i) in the case of personal
delivery, on the date of such delivery; (ii) in the case of telex or facsimile
transmission, on the date on which the sender receives confirmation by telex or
facsimile transmission that such notice was received by the addressee; (iii) in
the case of recognized, nationwide overnight air courier, on the next business
day following the day sent; and (iv) in the case of mailing by first class
certified or registered mail, postage prepaid, return receipt requested, on the
fourth business day following such mailing.
27
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Section 7.2 Entire Agreement. This Agreement, the exhibits and schedules
hereto, and the documents referred to herein embody the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof,
and supersede all prior and contemporaneous agreements and understandings, oral
or written, relative to said subject matter.
Section 7.3 Binding Effect; Assignment. This Agreement and the various
rights and obligations arising hereunder shall inure to the benefit of and be
binding upon Purchaser, its successors and permitted assigns, and Seller 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 Seller without the prior written consent of
Purchaser or its assignees. Purchaser may assign its rights hereunder without
the prior written consent of Seller.
Section 7.4 Expenses of Transaction. Each party shall pay its professional
fees and expenses incurred in connection with the negotiation and closing of
this Agreement; provided, however, that Purchaser shall pay the expenses of the
preparation of Audited Annual Financial Statements up to an amount not to exceed
$20,000, and Purchaser shall pay the fees of Seller's counsel, Horwitz & Beam,
with respect to work on this transaction only, up to an amount not to exceed
$25,000. Purchaser shall pay all applicable sales, income, use, excise,
transfer, documentary, and any other taxes arising out of the transactions
contemplated herein.
Section 7.5 Waiver; Consent. 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 party 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 7.6 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of which taken
together shall constitute one and the same instrument.
Section 7.7 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.
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Section 7.8 Remedies of the Parties. Seller acknowledges that, in addition
to all other remedies to which Purchaser is entitled, Purchaser shall have the
right to enforce the terms of this Agreement by a decree of specific
performance, provided Purchaser 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 7.9 Governing Law. This Agreement shall in all respects be
construed in accordance with and governed by the laws of the State of Georgia
(without regard to its conflicts of laws or principles).
Section 7.10 Arbitration; Attorneys' Fees.
(a) The parties agree to use reasonable efforts to resolve any dispute
arising out of this Agreement, but should a dispute remain unresolved ten (10)
days following notice of the dispute to the other party (but in no event prior
to said ten (10) days, except as specifically provided otherwise herein), such
dispute shall be finally settled by binding arbitration in Atlanta, Georgia in
accordance with the then current Commercial Arbitration Rules of the American
Arbitration Association (the "AAA") or such other mediation or arbitration
service as shall be mutually agreeable to the parties, and judgment upon the
award rendered by the arbitrator shall be final and binding on the parties and
may be entered in any court having jurisdiction thereof; provided, however, that
any party shall be entitled to appeal a question of law or determination of law
to a court of competent jurisdiction; and provided, further, however, that the
parties may first seek appropriate injunctive relief prior to, and/or in
addition to pursuing negotiation or arbitration. Such arbitration shall be
conducted by an arbitrator chosen by mutual agreement of the parties, or failing
such agreement, an arbitrator appointed by the AAA. There shall be limited
discovery prior to the arbitration hearing as follows: (i) exchange of witness
lists and copies of documentary evidence and documents related to or arising out
of the issues to be arbitrated, (ii) depositions of all party witnesses, and
(iii) such other depositions as may be allowed by the arbitrator upon a showing
of good cause. Depositions shall be conducted in accordance with the Georgia
Code of Civil Procedure and questions of evidence in any hearings shall be
resolved in accordance with the Federal Rules of Evidence. The arbitrator shall
be required to provide in writing to the parties the basis for the award or
order of such arbitrator, and a court reporter shall record all hearings (unless
otherwise agreed to by the parties), with such record constituting the official
transcript of such proceedings.
(b) In the event of arbitration or litigation filed or instituted between
the parties with respect to this Agreement, the prevailing party will be
entitled to receive from the other party all costs, damages and expenses,
including reasonable attorneys' 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.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PURCHASER:
CB ACQUISITION, INC.,
a Georgia corporation
By: /s/ Timothy R. Robinson
Name: Timothy R. Robinson
Title: Vice President and
Chief Financial Officer
Address: 5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
Facsimile: (770) 248-2299
SELLER:
PACIFIC OCEAN RESTAURANTS, INC.,
a Nevada corporation
By: /s/ John M. Creed
Name:
Title:
Address:
Facsimile:
PACIFIC OCEAN RESTAURANTS, INC.,
a California corporation
By: /s/ John M. Creed
Name:
Title:
Address: 34700 Pacific Coast Highway
Capistrano Beach, California
92624
Facsimile: (949) 240-2237
CRABBY BOB'S SEAFOOD, INC.,
a California corporation
By: /s/ John M. Creed
Name:
Title:
Address:
Facsimile:
For purposes of the indemnity set
forth in Section 5.2 hereof:
PARENT:
TANNER'S RESTAURANT GROUP, INC.
By: /s/ Timothy R. Robinson
Name: Timothy R. Robinson
Title: Vice President and
Chief Financial Officer
Address: 5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
Facsimile: (770) 248-2299
30
Exhibit 10.16
[Letterhead
of
Pacific Ocean Restaurants, Inc.]
April 6, 1999
Mr. Clyde E. Culp
Tanner's Restaurant Group
5500 Oak Brook Pkwy
Suite 260
Norcross, Ga. 30093
Dear Clyde:
Pursuant to our note dated March 25, 1999 regarding advances made to Pacific
Ocean Restaurant Group by you on behalf of Tanner's, this letter is to clarify
our franchising commitment to Tanner's.
Specifically, we have agreed to a one-unit franchise of the Towe Lake site, now
partially finished as a Tanner's Restaurant. The franchise fee for this
restaurant is $25,000 which will be billed to Tanner's upon opening. Tanner's
will be entitled to receive image services, menu training, and pre-opening
support, for this fee. We would suggest you send a team to California to
actually work in a Crabby Bob's restaurant. As is standard, Tanner's would be
responsible for all travel and living expenses for your managers and any
trainers required beyond two that we would normally send for an opening.
Once open, Tanner's would pay a 4% royalty fee on gross sales less allowable
discounts. This should be paid monthly within ten days after the end of the
month. If not paid in that period, Tanner's will be charged a 1% per month
interest fee until paid. This royalty will be a standard fee for the use of the
Crabby Bob's name, menu design, and over-all image. Trade dress and operational
support.
Separately, we have also agreed to provide Tanner's a five (5) unit development
territory for Crabby Bob's in Georgia. This will be in addition to the Towne
Lake property operating as a Crabby Bob's. The franchise fee for this will be
$25,000 per store, charged $10,000/store in advance upon signing the development
agreement and $15,000 will be paid on a per store basis when each store opens.
We will waive the $10,000/store or $50,000 front-end fee as part of our loan
agreement with you. Royalties for all stores will be 4% of gross sales less
allowable discounts. Our development schedule expectation will be as follows:
MO./YEAR CRABBY BOB'S CONSTRUCTION
-------- -------------------------
1999 Towne Lake
June, 2000 1
Dec., 2000 1
June, 2001 1
Dec., 2001 1
Dec., 2002 1
As you know, our specific unit, franchise agreement and development agreement
will be patterned after the Tanner's agreements in their UFOC and will be sent
to Tanner's for signing sometime this summer. The above terms will be the basis
for those more detailed agreements.
If you agree to this, please sign where indicated.
Sincerely:
/s/ John Creed
- --------------
John Creed
/s/ Timothy R. Robinson
- -----------------------
On Behalf of Tanner's
4/7/99
- ----------------
Date
EXHIBIT 21.1
Subsidiaries
------------
A. Subsidiaries of Harvest Restaurant Group, Inc.
- -------------------------------------------------
1. Hartan, Inc., a Texas corporation
2. Harvest Restaurants, Inc., a Texas corporation
3. Cluckers Restaurants, Inc., a Texas corporation
4. Harvest Rotisserie on Tezel, Inc., a Texas corporation
5. Red Lion Food Court, Inc., a Texas corporation
6. CB Acquisition, Inc., a Georgia corporation
B. Subsidiaries of Hartan, Inc.
- -------------------------------
1. That Chicken Place, Inc., a Georgia corporation
2. Tanner's/Vinings, Inc., a Georgia corporation
3. Tanner's Oaks, Inc., a Georgia corporation
4. Tanner's Spalding, Inc., a Georgia corporation
5. Tanner's Mill, Inc., a Georgia corporation
6. Tanner's - Lawrenceville, Inc., a Georgia corporation
7. Tanner's - Tucker, Inc., a Georgia corporation
8. Northwest Store, Inc., a Georgia corporation
9. Tanner's Lilburn, Inc., a Georgia corporation
10. Tanner's Catering, Inc., a Georgia corporation
11. Central Administration, Inc., a Georgia corporation
EXHIBIT 23.2
Consent Of Independent Certified Public Accountants
We have issued our report dated March 5, 1999, accompanying the
consolidated financial statements of Tanner's Restaurant Group, Inc. (formerly
Harvest Restaurant Group, Inc.) contained in the Registration Statement and
Prospectus. We consent to the use of the aforementioned report in the
Registration Statement and Prospectus, and to the use of our name as it appears
under the caption "Experts."
/s/ Porter Keadle Moore, LLP
Atlanta, Georgia
July 26, 1999
