U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period ended October 3, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ___________ to ___________.
Commission File Number 33-95796
TANNER'S RESTAURANT GROUP, INC.
-------------------------------
(Name of small business issuer in its charter)
Texas 76-0406417
----- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
5500 Oakbrook Parkway, Suite 260
Norcross, Georgia 30093
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(Address of principal executive offices, including zip code)
Issuer's telephone number: (770) 248-2298
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes X No __
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: 8,334,489 shares as of
November 12, 1999.
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TABLE OF CONTENTS
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PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements .......................................... 3
Item 2. Management's Discussion and Analysis or Plan of Operation ..... 9
PART II . OTHER INFORMATION
Item 1. Legal Proceedings ............................................. 16
Item 2. Changes in Securities and Use of Proceeds ..................... 16
Item 3. Defaults Upon Senior Securities ............................... 17
Item 5. Other Events .................................................. 17
Item 6. Exhibits and Reports on Form 8-K .............................. 18
SIGNATURES ............................................................... 19
EXHIBIT INDEX ............................................................ 20
2
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PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
Tanner's Restaurant Group, Inc.
Consolidated Balance Sheets
October 3, December 27,
1999 1998
(Unaudited)
----------- -----------
Assets
Current assets:
<S> <C> <C>
Cash $ 656,012 $ 222,163
Accounts receivable 62,272 130,086
Notes receivable 127,399
Inventory 109,897 113,734
Prepaid expenses 16,710 21,989
----------- -----------
Total current assets 972,290 487,972
Property and equipment, net 1,847,624 2,092,698
Intangible assets, net 2,872,869 3,119,870
Goodwill, net 958,836 1,002,303
Other assets 126,631 161,252
----------- -----------
Total assets $ 6,778,250 $ 6,864,095
=========== ===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 656,649 $ 1,390,697
Accrued expenses 890,494 2,254,666
Current portion of long-term debt 115,267 882,801
----------- -----------
Total current liabilities 1,662,410 4,528,164
Long-term debt 2,875,054 2,306,884
----------- -----------
Total liabilities 4,537,464 6,835,048
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Commitments and contingencies
Stockholders' equity:
Preferred stock 1,215,152 1,253,822
Common stock: $.01 par value; authorized 200
million shares: issued and outstanding 8,334,489
in 1999 and 8,230,080 in 1998 83,345 82,301
Additional paid-in capital 9,120,555 9,082,929
Stock subscription receivable (4,000,000)
Accumulated deficit (8,178,266) (6,390,005)
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Total stockholders' equity 2,240,786 29,047
----------- -----------
Total liabilities and stockholders' equity $ 6,778,250 $ 6,864,095
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
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Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations
For the 12 Weeks Ended
--------------------------
October 3, October 4,
1999 1998
(Unaudited) (Unaudited)
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Revenue
<S> <C> <C>
Restaurant sales revenue $ 1,959,201 $ 2,542,021
Catering revenue 102,320 242,808
Franchise and royalty revenue 10,610
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Total revenue 2,061,521 2,795,439
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Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 723,367 977,753
Payroll and benefits 759,815 1,011,130
Depreciation and amortization 167,627 173,425
Other operating expenses 515,250 711,749
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Total restaurant and catering operating expenses 2,166,059 2,874,057
----------- -----------
Loss from restaurant and catering operations (104,538) (78,618)
General and administrative expenses 240,560 464,947
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Operating loss (345,098) (543,565)
Other income (expense):
Other income 18,732 47,320
Interest expense (87,630) (149,048)
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Net loss $ (413,996) $ (645,293)
=========== ===========
Basic and diluted loss per share $ (.10) $ (.18)
The accompanying notes are an integral part of these consolidated financial statements.
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Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations
For the 40 Weeks Ended
--------------------------
October 3, October 4,
1999 1998
(Unaudited) (Unaudited)
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Revenue
<S> <C> <C>
Restaurant sales revenue $ 7,119,759 $ 8,540,496
Catering revenue 366,881 585,611
Franchise and royalty revenue 955 61,355
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Total revenue 7,487,595 9,187,462
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Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 2,501,067 3,233,231
Payroll and benefits 2,738,797 3,285,020
Depreciation and amortization 541,954 535,259
Other operating expenses 1,936,592 2,135,812
Loss on restaurant closings 300,000
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Total restaurant and catering operating expenses 8,018,410 9,189,322
----------- -----------
Loss from restaurant and catering operations (530,815) (1,860)
General and administrative expenses 986,294 1,156,421
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Operating loss (1,517,109) (1,158,281)
Other income (expense):
Other income 22,688 23,570
Interest expense (293,839) (547,937)
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Net loss $(1,788,260) $(1,682,648)
=========== ===========
Basic and diluted loss per share $ (.36) $ (.49)
The accompanying notes are an integral part of these consolidated financial statements.
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Tanner's Restaurant Group, Inc.
Consolidated Statements of Cash Flows
For the 40 Weeks Ended
--------------------------
October 3, October 4,
1999 1998
(Unaudited) (Unaudited)
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Cash flows from operating activities:
<S> <C> <C>
Net loss $(1,788,260) $(1,682,648)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 541,954 518,250
Loss on sale of property and equipment 52,138 18,044
Loss on restaurant closings 300,000
Changes in assets and liabilities:
Accounts receivable 67,814 29,576
Notes receivable 601
Inventory 3,837 7,622
Prepaid expenses 5,279 33,690
Other assets (3,649) (9,180)
Accounts payable (734,048) 70,649
Accrued expenses and other liabilities (1,585,145) 840,105
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Net cash used in operating activities (3,139,479) (173,892)
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Cash flows from investing activities:
Proceeds from sale of property and equipment 318,142 359,696
Purchase of property and equipment (545,450) (728,561)
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Net cash used in investing activities (227,308) (368,865)
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Cash flows from financing activities:
Cash overdraft (212,605)
Repayments of debt (199,364) (137,330)
Proceeds from issuance of long-term debt 1,016,617
Proceeds from sale of Series D preferred stock 4,000,000
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Net cash provided by financing activities 3,800,636 666,682
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Net change in cash and cash equivalents 433,849 123,925
Cash and cash equivalents, beginning of year 222,163
----------- -----------
Cash and cash equivalents, end of period $ 656,012 $ 123,925
=========== ===========
Non-cash investing and financing activities:
Accretion of redeemable TRC preferred stock $ 114,273
Dividends on redeemable TRC preferred stock 225,000
Sale of equipment for a note $ 128,000
Supplemental cash flow information:
Interest paid $ 343,413 $ 351,175
The accompanying notes are an integral part of these consolidated financial statements.
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Tanner's Restaurant Group
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation:
On January 14, 1999, Tanner's Restaurant Group, Inc. ("we" or
"Tanner's," formerly known as Harvest Restaurant Group, Inc.) and TRC
Acquisition Corporation ("TRC") completed a forward triangular merger. For
financial and accounting purposes, the effective date of the merger was
December 27, 1998, and we have prepared the consolidated financial
statements assuming the merger closed as of the end of the day on December
27, 1998. In the merger, shareholders of TRC received a majority of the
shares of our outstanding common stock. For this reason, we treated the
merger as a reverse acquisition by TRC for accounting purposes.
Consequently, the consolidated financial statements presented are those of
TRC rather than Harvest.
2. Description of Business:
Tanner's and its wholly owned subsidiaries operate eight casual dining
restaurants and franchise two restaurants under the name "Rick Tanner's
Original Grill." The restaurants specialize in fresh, convenient meals
featuring rotisserie chicken entrees, barbecued ribs, chicken fingers,
hamburgers, freshly prepared vegetables, salads, and other side dishes. At
the end of fiscal year 1998, 11 company-owned restaurants were located in
the Atlanta, Georgia metropolitan area. During the first quarter of 1999,
we closed two under-performing restaurants, resulting in a charge to
earnings of $300,000. During the second quarter, we sold the assets of one
restaurant to a franchisee and during the third quarter, we sold the assets
of our catering division to a franchisee. We also operate one casual dining
seafood restaurant under the name "Crabby Bob's Seafood Grill," which we
opened in May 1999 in suburban Atlanta. Additionally, we have entered into
an agreement with Crabby Bob's Seafood, Inc. and its parent entities to
acquire the assets of two more Crabby Bob's restaurants in California.
We have prepared the accompanying unaudited consolidated financial
statements in accordance with the instructions to Form 10-QSB. Accordingly,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. In management's opinion, we have
made all adjustments (consisting of normal accruals and adjustments)
considered necessary for a fair presentation. The financial statements are
subject to year-end adjustment. The consolidated results of operations for
the 40 weeks ended October 3, 1999 may not be indicative of the results for
the full fiscal year. For further information, refer to the audited
financial statements we filed with the SEC in our Form 10-KSB for the year
ended December 27, 1998.
The accompanying unaudited consolidated financial statements assume
that we will continue as a going concern. The significant net losses we
have incurred, our negative working capital position, and our inability to
generate significant positive cash flows from operations significantly
strain our financial position.
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Outside investors invested the final $4,000,000 of a $6,000,000
financing commitment in the first three quarters of 1999, after having
invested $2,000,000 during 1998. We expect that the $4,000,000 that we have
received under the financing commitment during 1999, combined with our cost
containment and cash flow management strategies, will enable us to continue
operations.
3. Earnings Per Share:
We calculate earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which
requires dual disclosure of earnings per share, basic and diluted. Basic
earnings per share equals net earnings divided by the weighted average
number of common shares outstanding and does not include the dilutive
effects of stock options or convertible securities. Diluted earnings per
share are computed by giving effect to our dilutive stock options, warrants
and preferred stock. We have adjusted the weighted average common shares
outstanding presented below to reflect the 1.57075-to-1 exchange ratio in
the merger. Options and warrants, which we refer to as potential common
stock equivalents, are excluded from the diluted earnings per share
calculations because they are antidilutive, given that we are operating at
a net loss. These securities could become dilutive when our operations
result in a net profit.
The following table represents the calculation of basic and diluted
earnings per share:
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For the 12 Weeks Ended For the 40 Weeks Ended
October 3, October 4, October 3, October 4,
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $ (413,996) $ (645,293) $(1,788,260) $(1,682,648)
Less: Dividends on Series A preferred stock (138,436) (415,308)
Dividends on Series D preferred stock (132,929) (374,860)
Dividends on Series E preferred stock (137,069) (427,527)
Dividends on TRC preferred stock (75,000) (225,000)
Accretion on TRC preferred stock (38,091) (114,273)
----------- ----------- ----------- -----------
Net loss attributable to common shareholders $ (822,430) $ (758,384) $(3,005,955) $(2,021,921)
Weighted average common shares outstanding 8,334,489 4,123,219 8,325,491 4,123,219
Basic and diluted loss per share $ (.10) $ (.18) $ (.36) $ (.49)
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Item 2. Management's Discussion and Analysis or Plan of Operation
Please read the following discussion in connection with the consolidated
financial statements and related notes to them included elsewhere in this
report.
Overview
Tanner's Restaurant Group, Inc. ("we" or "Tanner's"), formerly known as
Harvest Restaurant Group, Inc., was incorporated in June 1993 under the name
"Clucker's Tex-Mex Venture, Inc."
On January 14, 1999, Harvest Restaurant Group, Inc. and TRC Acquisition
Corporation completed a forward triangular merger. For financial and accounting
purposes, the effective date of the merger was December 27, 1998, and we have
prepared the consolidated financial statements assuming the merger closed as of
the end of the day on December 27, 1998. In the merger, TRC's shareholders
received a majority of the shares of our outstanding common stock. For this
reason, we have treated the merger as a reverse acquisition by TRC for
accounting purposes. Therefore, the consolidated financial statements presented
are those of TRC rather than Harvest.
As a result of the merger, we now own and franchise ten "Rick Tanner's
Original Grill" restaurants formerly owned and franchised by TRC. All ten
Tanner's restaurants are located in Georgia - eight are company-owned and two
are franchised. In May 1999, we opened a franchised seafood restaurant, also in
Georgia, operating under the name "Crabby Bob's Seafood Grill." Additionally, in
May 1999 we entered into an agreement with Crabby Bob's Seafood, Inc. and its
parent entities to acquire the assets of two more Crabby Bob's restaurants. We
have extended the closing date of this agreement to November 30, 1999. In June
1999, upon the expiration of one of our restaurant leases, we sold the assets of
that restaurant to a franchisee with whom we established a franchise
arrangement. In August, we sold our catering operation to another franchisee
with whom we established a franchise arrangement.
Our restaurants are designed to appeal to traditional casual dining
customers by offering large portions of high quality foods at low prices. Our
restaurants are competitively positioned between home meal replacement
restaurants and full bar casual restaurants that have less portable foods. The
menu at our Rick Tanner's Original Grill restaurants features over 40 different
entrees and 11 different appetizers. All entrees are prepared using aged beef
and fresh chicken and seafood, are cooked to order and are served with a choice
of two out of 13 different freshly prepared vegetables. Since inception, over
20% of our sales at Rick Tanner's Original Grill restaurants have come from
takeout/take-home service. Our Crabby Bob's restaurant offers fresh seafood,
crabs, oysters and a full service bar.
We plan to open new company-owned restaurants when possible, to increase
sales at existing restaurants and to evaluate and possibly acquire complementary
restaurant concepts. We intend to develop restaurants in Atlanta, to complete
our penetration of the Atlanta market, and possibly in southern California,
where, if our acquisition of Crabby Bob's is successful, we will operate two
Crabby Bob's restaurants. We believe we will be able to use existing
supervisory, marketing and distribution systems in both Atlanta and southern
California to facilitate our development in these areas. Additionally, we may
seek to acquire other restaurant concepts that would complement our existing
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business, allowing growth and improving profitability. We continue to evaluate
our existing restaurant locations and may close certain unprofitable restaurants
as we expand our business concept and focus on achieving profitability. We
anticipate leasing most of our future locations.
Results of Operations for the 12-Week Period Ended October 3, 1999 Compared to
the 12-Week Period Ended October 4, 1998
Revenues. Total net revenues decreased $733,918, or 26.3%, during the
quarter (12 weeks) ended October 3, 1999, compared to the corresponding period
of 1998. Sales decreased by $778,790 as a result of the closing of two stores
and the sale of one store, as well as the sale of our catering division. This
decrease was partially offset by the addition of Crabby Bob's sales of $320,828.
In addition, same store sales decreased by $234,016, or 16.3%.
Costs and Expenses. In general, costs of goods sold remained constant as a
percentage of sales during the quarter in 1999, compared to the corresponding
period of 1998. Food, beverage and paper costs were $723,367, or 35.1% of sales,
for the quarter in 1999 versus $977,753, or 35.0% of sales, for the same period
in 1998. Operational improvements and reduced coupon and discount promotions
caused a decrease in food costs of 1.3% as a percentage of sales at comparable
stores. This was offset by promotions at our new Crabby Bob's restaurant.
Payroll and benefit expense was $759,815, or 36.9% of sales, for the
quarter in 1999 compared to $1,011,130, or 36.2% of sales, for the same period
in 1998. Labor costs rose 0.7% due to increased competition for labor and higher
costs associated with the opening of our new Crabby Bob's restaurant.
Other operating expenses decreased as a percentage of sales to 25.0%
($515,250) for the quarter in 1999 from 25.4% ($711,749) for the same period in
1998. Advertising expenditures decreased by 1.8% of sales. Repairs and
maintenance, and restaurant supplies increased while insurance and utilities
expense decreased for a net decrease of 0.4%. Restaurant administration expense
increased by 0.3% of sales, partially due to an increase in credit card
processing fees. Rent expense increased by 1.5% of sales, primarily due to the
decrease in sales.
Depreciation and amortization expense in the quarter increased by 1.9% of
sales, to 8.1% in 1999, from 6.2% in 1998, primarily due to the decrease in
sales.
General and administrative expenses decreased to $240,560 in the quarter in
1999 from $464,947 in the quarter in 1998, primarily due to reduced expenses in
the corporate office.
Other Income (Expense). Interest expense decreased to $87,630 in the
quarter in 1999 from $149,048 in the quarter in 1998. This was primarily
attributable to the cancellation of the debenture to the former president of
Tanner's.
Net Loss. We incurred a net loss of $413,996 for the quarter in 1999
compared to $645,293 for the same period in 1998. 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.
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Results of Operations for the 40-Week Period Ended October 3, 1999 Compared to
the 40-Week Period Ended October 4, 1998
Revenues. Total net revenues decreased $1,699,867, or 18.5%, during the
first three quarters (40 weeks) ended October 3, 1999, compared to the
corresponding period of 1998. The leveling of sales at two restaurants that
opened in the fourth quarter of 1997 resulted in a $520,927 decrease in sales.
In addition, same store sales decreased by $610,329, or 12.5%. Sales also
decreased as a result of the closing of two stores and the sale of one store, as
well as the sale of our catering division. The opening of our Crabby Bob's
restaurant on May 24, 1999 partially offset these decreases. Crabby Bob's net
sales through October 3 were $604,629.
Costs and Expenses. In general, costs of goods sold decreased as a
percentage of sales during the first three quarters of 1999. This decrease
resulted from operational improvements, increased purchasing efficiencies and a
reduction in coupons and promotions, which decreased from $309,844 to $117,065,
or 62.2%. Although these types of promotions tend to increase the number of
customers that visit the restaurant and thereby increase sales, the operating
expenses on these sales are higher than on ordinary sales because the sales have
been discounted below the menu price. This decrease in costs as a percentage of
sales is most evident in food, beverage and paper costs.
Food, beverage and paper costs were $2,501,067, or 33.4% of sales, for the
first three quarters of 1999 versus $3,233,231, or 35.2% of sales, for the same
period in 1998. Operational improvements and reduced coupon and discount
promotions caused a 3.2% decrease in food costs as a percentage of sales at
comparable stores. This was offset somewhat by opening promotions at our new
Crabby Bob's restaurant.
Payroll and benefit expense was $2,738,797, or 36.6% of sales, for the
first three quarters of 1999 compared to $3,285,020, or 35.8% of sales, for the
same period in 1998. Labor costs rose 0.8% due to increased competition for
labor and higher costs associated with the opening of our new Crabby Bob's
restaurant.
Other operating expenses increased as a percentage of sales to 25.9%
($1,936,592) for the first three quarters of 1999 from 23.3% ($2,135,812) for
the same period in 1998. Advertising expenditures decreased by 1.5% of sales.
Repairs and maintenance expenses increased while insurance expense decreased for
a net increase of 0.2%. Restaurant administration expense increased by 0.6% of
sales, partially due to an increase in credit card processing fees. Rent expense
increased by 2.3% of sales primarily due to the sale and leaseback of one
restaurant in late June of 1998. Pre-opening expenses increased 1% of sales in
the first three quarters of 1999, due to the development of our Crabby Bob's
restaurant. Because we converted a nearly completed Tanner's restaurant into a
Crabby Bob's restaurant, construction took longer than usual. We also had higher
costs at this store due to the travel expenses and payroll costs of training
personnel from Crabby Bob's California operations.
Depreciation and amortization expense in the first three quarters of 1999
increased by 1.4% of sales, to 7.2% in 1999, from 5.8% in 1998, primarily due to
the decrease in sales.
Loss on restaurant closings of $300,000 for the first three quarters of
1999 relates to charges recognized in connection with the closure of two of our
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under-performing units. Included in this item are charges for the write-down of
property and equipment to their net realizable values and real estate
disposition costs.
General and administrative expenses decreased to $986,294 in the first
three quarters of 1999 from $1,156,421 in the first three quarters of 1998,
primarily due to reduced expenses in the corporate office.
Other Income (Expense). Interest expense decreased to $293,839 in the first
three quarters of 1999 from $547,937 in the first three quarters of 1998. This
was primarily attributable to the cancellation of the debenture to the former
president of Tanner's. Our effective interest rate was 12.3% for the first three
quarters of 1999. In 1998 our effective interest rate was 11.3%.
Net Loss. We incurred a net loss of $1,788,260 for the first three quarters
of 1999 compared to $1,682,648 for the same period in 1998. This increase was
primarily attributable to the $300,000 charge for store closings in 1999, offset
by the improvement in general and administrative expenses from 1998. 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.
Looking forward, we expect to see the following trends in operating costs.
We expect that food, beverage and paper costs and payroll expenses will be
higher than normal 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.
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Liquidity and Capital Resources
Our cash and cash equivalents increased $433,849 during the first three
quarters of 1999. The principal source of funds consisted of $4,000,000 received
from outside investors, and $318,142 generated by the sale of property and
equipment. The primary uses of funds were:
o cash used in operations of $3,139,479, including the payment and
resolution of current accounts payable and accrued liabilities of
$2,319,193;
o the purchase of additional fixed assets for one new restaurant
and the remodeling of another for $545,450; and
o payment of debt of $199,364.
We have incurred operating losses since inception, and as of October 3,
1999, we had an accumulated deficit of $8,178,266 and a working capital deficit
of $690,120. We are not currently generating sufficient revenues from operations
to meet our cash requirements. Because substantially all sales in our
restaurants are for cash, and operating costs are generally due in 15 to 45
days, we are able to operate with negative working capital. We have obtained
extended payment schedules with several of our larger vendors allowing for
longer payment terms. Additionally, some of our vendors have agreed to extend
payment terms for obligations we previously incurred.
In addition to our other liabilities, we currently owe a total of
approximately $650,000 to two lenders, one of which is SECA VII, LLC, a
significant shareholder, for interim financing loaned in early 1998. One of our
directors, James R. Walker, is an equity owner of SECA. The $350,000 SECA loan
matured on July 31, 1999, thereby placing us in technical default of the SECA
loan. The other unsecured loan, with an outstanding balance of approximately
$300,000, matured on September 9, 1999 upon our receipt of the final $1,500,000
of the financing commitment. FINOVA Mezzanine Capital Inc., our senior secured
lender, has advised us that any payment of the principal amount on these two
loans will be a default under our outstanding $2,000,000 loan from FINOVA,
unless we repay the FINOVA loan in full at the same time. On November 2, 1999,
we reached an agreement with the two interim lenders to extend the maturity
dates on the $650,000 loans to January 31, 2001. As consideration for their
willingness to extend the maturity dates, we have agreed to issue warrants to
purchase 175,000 shares of our common stock to these interim lenders. The
warrants are fully vested, are exercisable at $0.04 per share and will expire
October 31, 2004.
We have not paid dividends on our Series A preferred stock since June 1998.
The total amount of dividends in arrears on our Series A preferred stock as of
September 30, 1999 was $855,249. Additionally, the total amount of dividends
accumulated but not paid on our Series D preferred stock and Series E preferred
stock as of October 3, 1999 was $802,386. Dividends on our Series D and Series E
preferred stock are payable only on conversion of those shares into common
stock.
We opened one new company-owned restaurant in May 1999. One of our
franchised Tanner's restaurants closed in February 1999 due to franchisee
financing arrangements and location issues. Our franchisee in Macon, Georgia is
currently in the process of converting its Tanner's restaurant to a Crabby Bob's
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franchise. We closed two under-performing company owned restaurants in March
1999, resulting in a charge to earnings of $300,000. In June, at the expiration
of the original lease term, we sold the assets of another Tanner's restaurant to
a franchisee. In the current quarter, we sold the assets of our catering
operation and franchised that operation as well.
On May 11, 1999, we entered into an agreement to acquire certain assets of
Crabby Bob's. Crabby Bob's is a restaurant chain consisting of two restaurants
located in Southern California that offer fresh seafood, crabs, oysters and a
full service bar. We have extended the closing date of this transaction until
November 30, 1999. There is some risk that this acquisition may not occur, based
on the value of our common stock, which has recently traded as low as $0.03 per
share on the OTC Bulletin Board. We are working with our major convertible
preferred shareholder to determine how to recapitalize the company so that we
can proceed with this acquisition.
Although we do not currently have the capital resources to meet our
development plan, outside investors invested the final $4,000,000 of their
$6,000,000 financing commitment in the first three quarters of 1999, after
having invested $2,000,000 during 1998. We plan to use the proceeds of this
investment to meet our capital requirements for new restaurant development, to
fund part of the acquisition of Crabby Bob's and to provide working capital. We
may also attempt to raise additional funds by borrowing.
Additionally, we sold our property on Tezel Road in San Antonio, Texas on
July 30, 1999. The sale generated approximately $318,000 in net proceeds. Under
the terms of a severance agreement that we entered into with William J.
Gallagher, our former chief executive officer and a former director, we were
obligated to apply part of the proceeds of the sale of the Tezel property to
satisfy our remaining $65,000 obligation to Mr. Gallagher.
Forward-Looking Statements
This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Exchange Act. These
statements appear in a number of places in this report and include all
statements that are not historical facts. Some of the forward-looking statements
relate to our intent, belief or expectations regarding our strategies and plans
for operations and growth, including development and construction of new
restaurants. Other forward-looking statements relate to trends affecting our
financial condition and results of operations, and our anticipated capital needs
and expenditures.
Our forward-looking statements are not guarantees of future performance and
involve risks and uncertainties, and actual results may differ materially from
those anticipated in the forward-looking statements, as a result of:
- an inability to meet our obligations as they become due;
- increased competition in the casual dining market;
- difficulty attracting and keeping good managers and franchisees;
- increased labor, food and other costs;
- changes in economic conditions; and
- the possibility that we do not close the Crabby Bob's acquisition as
we anticipate.
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<PAGE>
In addition, the market price of the common stock may from time to time
fluctuate widely because of, among other things:
- our operating results;
- the operating results of other similarly-situated companies; and
- changes in the performance of the stock market in general.
Investors should review the more detailed description of these and other
possible risks contained in the "Risk Factors" sections of the registration
statements we file with the SEC under the Securities Act.
Year 2000 Computer Issues
The "Year 2000 problem" is a general term used to identify those computer
problems or applications that are programmed to use a two-digit field, instead
of a four-digit field, for the year component of a date. Those programs or
applications that are programmed in this manner, may, for example, recognize the
year 2000 as the year 1900; thus causing potential system failures or
miscalculations that could result in disruptions of normal business operations.
We have evaluated our state of readiness, the costs involved to become
compliant, the risks involved, and our contingency plans. Our primary uses of
software systems are our corporate accounting and restaurant management
software.
We have completed an initial assessment of our core computer information
systems and are now undertaking the necessary steps to make our systems Year
2000 compliant. We believe that the cost to upgrade our software will not be
material. We are currently evaluating and assessing those computer systems that
do not relate to information systems, such as telecommunications, HVAC, and fire
and safety systems. These typically include embedded technology such as
microcontrollers that may be harder to test, and may require repairs or complete
replacement. We expect to complete this assessment during the fourth quarter of
1999.
We are in the process of contacting all significant vendors and our
independent payroll vendor to verify that those vendors are also addressing the
problem. We have developed contingency plans where necessary. Some Year 2000
issues that may adversely affect our operations are beyond our control. We
cannot now estimate the potential adverse effect that may result from the
failure of any of our vendors to become Year 2000 compliant. We continue to
believe that there will be no direct material effect on our operating
performance or results of operations.
15
<PAGE>
PART II-OTHER INFORMATION
Item 1. Legal Proceedings
We are a named party in the following legal proceedings:
On June 1, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas in Nueces District Court by Lin Chin Liu Ho and Chi Pen Ho (Case Number
98-2048-E). The plaintiffs are seeking damages of $150,000 for breach of a
commercial lease. This case is set for trial in December 1999.
On August 12, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas by Green Tree Vendor Services Co. in Bexar County Court (Case No. 247317).
The plaintiff is seeking to recover damages of $38,691 for Harvest's failure to
make payments under two equipment leases. The plaintiff has filed a first
amended motion for summary judgment, which has not yet been set for hearing.
Because the plaintiff has not sold the property, damages are unliquidated.
On August 20, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas by Toufic Khalifa in Bexar County District Court (Case No. 98-CI-12200).
The plaintiff is seeking damages in the amount of at least $240,000 for breach
of a commercial lease. The case is now in the discovery phase, and is set for
trial on March 20, 2000.
Before the merger, Harvest settled a number of lawsuits and claims, and
since the merger, we have settled additional lawsuits and claims. Some of these
settlements are documented by executed settlement agreements and releases while
others are not.
We are also involved in other claims arising in the normal course of
business. In our opinion, although the outcomes of any such claims are
uncertain, taken together they are not likely to have a material adverse effect
on us.
Item 2. Changes in Securities and Use of Proceeds
We have issued the following unregistered securities in reliance on one or
more of the exemptions from registration provided by Sections 3(a)(9), 3(a)(11),
4(2) and 4(6) of the Securities Act, Regulation D and Rule 701, as promulgated
by the SEC under the Securities Act. Recipients of securities in these
transactions represented their intention to acquire the securities for
investment purposes only and not with a view to or for the sale in connection
with any distribution thereof, and appropriate legends were affixed to the share
certificates issued in such transactions. We believe that all recipients of
these securities had adequate information about us, either through their
relationships with us, or through information that we provided to them.
During September 1999 we issued 1,500 shares of our Series D preferred
stock to certain Series D investors who contemporaneously invested an aggregate
of $1,500,000 in us during that time period. Each share of Series D preferred
stock is convertible into that number of shares of common stock determined by
the following formula: 1,000 divided by 80% of the Market Value of the common
16
<PAGE>
stock, where "Market Value" is generally defined as being the five day average
closing bid price of the common stock for the five days prior to the date when
the notice of conversion is delivered to us.
As part of the financing commitment, we have agreed to issue warrants to
acquire 100,000 shares of common stock to the Series D investors for each
$1,000,000 of Series D preferred stock issued. Because the outside investors
invested $1,500,000 during September, we will issue to them warrants to acquire
150,000 shares of common stock. The exercise price of the warrants, which are
exercisable for five years, is $2.00 per share. We have now completed the
financing commitment and have issued an aggregate of $9,198,000 of Series D
preferred stock and, accordingly, have issued warrants to acquire an aggregate
of 919,800 shares of common stock.
Item 3. Defaults Upon Senior Securities
We have not paid dividends on our Series A preferred stock since June 1998.
The amount of dividends that accrued on the Series A preferred stock during the
first three quarters of 1999 was $415,308. As of September 30, 1999, the
aggregate amount of the dividends in arrears was $855,249.
Item 5. Other Events
On September 9, 1999, the Securities and Exchange Commission declared
effective our registration statement on Form SB-2, as amended. As we have
discussed in our previous filings, including the registration statement, this
registration statement registered the resale by certain of our shareholders of
the shares of common stock issuable to those shareholders upon conversion of our
Series D preferred stock and exercise of certain of our outstanding warrants. At
the same time as the Commission declared our registration statement effective,
we received the final $1,500,000 of our $6,000,000 financing commitment from the
Series D investors.
17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a)
Exhibit No. Title
- ----------- -----
4.1 Second Amendment, dated November 2, 1999, to 11% Subordinated
Debenture Due January 30, 1999, by and between Tanner's
Restaurant Group, Inc. and Ralph C. DiIorio.
4.2 Stock Purchase Warrant, dated November 2, 1999, by and between
Tanner's Restaurant Group, Inc. and Ralph C. DiIorio.
4.3 Second Amendment, dated November 2, 1999, to $350,000 12.5%
Promissory Note Dated April 1, 1998 and Due January 30, 1999, by
and between Tanner's Restaurant Group, Inc. and SECA VII, LLC.
4.4 Stock Purchase Warrant, dated November 2, 1999, by and between
Tanner's Restaurant Group, Inc. and SECA VII, LLC.
27.1 Financial Data Schedule as of October 3, 1999.
(b) Reports on Form 8-K.
On September 23, 1999 we filed a report on Form 8-K to report our receipt
of the final $1,500,000 installment of a $6,000,000 financing commitment and our
issuance of 1,500 shares of our Series D preferred stock and warrants to
purchase 150,000 shares of our common stock in connection with that final
installment.
On October 27, 1999 we filed a report on Form 8-K to file with the
Securities and Exchange Commission our October 27, 1999 letter to shareholders.
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TANNER'S RESTAURANT GROUP, INC.
Date: November 17, 1999 By: /s/ Clyde E. Culp, III
--------------------------
Name: Clyde E. Culp, III
Title: Chairman of the Board of
Directors
Date: November 17, 1999 By: /s/ Timothy R. Robinson
---------------------------
Name: Timothy R. Robinson
Title: Chief Financial Officer
19
<PAGE>
EXHIBIT INDEX
Exhibit No. Title
- ----------- -----
4.1 Second Amendment, dated November 2, 1999, to 11% Subordinated
Debenture Due January 30, 1999, by and between Tanner's
Restaurant Group, Inc. and Ralph C. DiIorio.
4.2 Stock Purchase Warrant, dated November 2, 1999, by and between
Tanner's Restaurant Group, Inc. and Ralph C. DiIorio.
4.3 Second Amendment, dated November 2, 1999, to $350,000 12.5%
Promissory Note Dated April 1, 1998 and Due January 30, 1999, by
and between Tanner's Restaurant Group, Inc. and SECA VII, LLC.
4.4 Stock Purchase Warrant, dated November 2, 1999, by and between
Tanner's Restaurant Group, Inc. and SECA VII, LLC.
27.1 Financial Data Schedule as of October 3, 1999.
20
EXHIBIT 4.1
SECOND AMENDMENT
11% SUBORDINATED DEBENTURE DUE JANUARY 30, 1999
NOVEMBER 2, 1999
Item number two: TERM AND PRINCIPAL PAYMENTS is hereby amended to state the
following:
The principal of this Debenture is due and payable:
January 31, 2001 $306,617
Interest shall continue to accrue on the unpaid balance at the rate of 11% per
annum, payable on the first day of each month.
Tanner's Restaurant Group, Inc.
/s/ Clyde E. Culp, III
- ----------------------
Clyde E. Culp
Chief Executive Officer
Accepted:
/s/ Ralph C. DiIorio
- --------------------
Ralph C. DiIorio
EXHIBIT 4.2
THIS STOCK PURCHASE WARRANT AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED (THE "GEORGIA ACT"), OR ANY
OTHER APPLICABLE BLUE SKY LAW, AND CANNOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS (i) REGISTERED UNDER SUCH ACTS, (ii) IN THE OPINION OF LEGAL COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE OR (iii) THE REQUEST FOR TRANSFER IS ACCOMPANIED BY NO-ACTION LETTERS
FROM THE SECURITIES AND EXCHANGE COMMISSION AND THE APPLICABLE STATE SECURITIES
COMMISSION.
TANNER'S RESTAURANT GROUP, INC.
STOCK PURCHASE WARRANT
November 2, 1999 75,000 Shares
Warrants to purchase 75,000 shares of common stock (the "Shares") of
Tanner's Restaurant Group, Inc., a Texas corporation (the "Company"), are hereby
granted to Ralph C. DiIorio, (the "Warrant Holder"), in consideration of certain
services rendered to the Company, at the price herein provided, subject to the
following terms and conditions:
1. Exercise of Warrants. The warrants granted in this agreement (the
"Warrant") may be exercised in whole or in part at any time until the Expiration
Date (defined below), subject to the restrictions and conditions set forth in
this Agreement:
(a) Exercise Price. The exercise price (the "Exercise Price") per
Share subject to the Warrant shall be $.04, subject to adjustment
in accordance with the provisions of Section 7.
(b) Expiration of Warrant Term. The Warrant will expire at 5:00 p.m.,
Atlanta, Georgia time, on October 31, 2004 (the "Expiration
Date").
(c) Payment. The Exercise Price shall be payable, at the option of
the Holder, (i) by cash, check, or wireless transfer, or (ii) by
cashless exercise, as herein provided. In the event that the
Warrant Holder elects to exercise the Warrant by "cashless
exercise", this Warrant shall represent the right to subscribe
for and acquire the number of shares (rounded to the next highest
integer) specified by the holder in the written notice required
by Section 1(d) (the "Total Number") less the number of Shares
equal to the quotient obtained by dividing (A) the product of the
Total Number and the Exercise Price by (B) the current market
value of a share of Common Stock. In the absence of an
established public market for the Common Stock, the Company's
board of directors shall establish fair market value in a
commercially reasonable manner.
<PAGE>
(d) Method of Exercise. The Warrant shall be exercisable, in whole or
in part, by a written notice delivered to the Chief Financial
Officer of the Company which shall:
1. State the owner's election to exercise the Warrant, the
number of Shares with respect to which it is being
exercised, the person in whose name the stock certificate
for such Shares is to be registered, such person's address
and tax identification number or (or, if more than one, the
names, addresses and tax identification numbers of such
persons), and whether the payment will be made pursuant to
Section 1(c)(i) or 1(c)(ii);
2. Be signed by the person or persons entitled to exercise the
Warrant and, if the Warrant is being exercised by any person
or persons other than the original holder hereof, be
accompanied by proof satisfactory to counsel for the Company
of the right of such person or persons to exercise the
Warrant; and
3. Be in writing and be accompanied by the originally executed
copy of this Warrant.
(e) Partial Exercise. In the event of a partial exercise of the
Warrant, the Company shall either issue a new agreement for the
balance of the Shares subject to this Warrant after such partial
exercise, or it shall conspicuously note hereon the date and
number of Shares granted pursuant to such exercise and the number
of Shares thereafter covered by this Warrant.
(f) Restrictions on Exercise. The Warrant may not be exercised (i) if
the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or
other law or regulation and (ii) unless the Company or the holder
hereof, as applicable, obtains any approval or other clearance
from any federal or state governmental agency or body which the
Company determines to be necessary. As a condition to the
exercise of the Warrant, the Company may require the person
exercising this Warrant to make any representation or warranty to
the Company as may be required to comply with any applicable law
or regulation, including the Securities Act of 1933 and any
applicable state securities laws.
2. Restrictions on Transferability of Common Stock; Compliance with the
Securities Act of 1933.
(a) The Common Stock issued upon exercise of the Warrant shall not be
transferable except upon the conditions hereinafter specified,
which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (or any similar federal
statute at the time in effect) and applicable state securities or
blue sky laws regarding transfer of the Common Stock.
2
<PAGE>
(b) In the absence of an effective registration statement covering
the shares, each certificate for shares of Common Stock issued
upon exercise of the Warrant shall bear a legend stating that
such shares have not been registered under the Securities Act of
1933 or any state securities laws and referring to the above
restrictions on transferability and sale.
3. Non-Transferability of Warrant. This Warrant and all rights hereunder
are neither assignable nor transferable by the Warrant Holder without the
Company's prior written consent and, if so requested by the Company, the
delivery by the Warrant Holder to the Company of an opinion of counsel in form
and substance satisfactory to the Company stating that such transfer or
assignment is in compliance with the Securities Act of 1933 and any applicable
state securities laws. More particularly, but without limiting the generality of
the foregoing, the Warrant may not be assigned, transferred (except as provided
above), pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process.
Any attempted assignment, transfer, pledge, hypothecation or other disposition
of this Warrant contrary to the provisions hereof shall be without legal effect.
4. Valid Issuance of Common Stock. The Company possesses the full authority
and legal right to issue, sell, transfer, and assign this Warrant and the Common
Stock issuable pursuant to this Warrant. The issuance of this Warrant vests in
the holder the entire legal and beneficial interests in this Warrant, free and
clear of any liens, claims, and encumbrances and subject to no legal or
equitable restrictions of any kind except as described herein. The Common Stock
that is issuable upon exercise of this Warrant, when issued, sold and delivered
in accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and non-assessable, and
will be free of restrictions on transfer other than restrictions on transfer
under applicable state and federal securities laws.
5. Compliance with Securities Laws. The Warrant Holder understands that
this Warrant and the Common Stock issuable upon exercise of the Warrant may not
be sold, transferred or otherwise disposed of without registration under the
Securities Act of 1933, or an exemption therefrom, that in the absence of an
effective registration statement covering such shares or an available exemption
from registration under the Securities Act, such shares must be held
indefinitely, and that the certificates representing the shares will bear a
legend to this effect. The holder acknowledges that this warrant has been
acquired for investment purposes and not with a view to distribution or resale.
The holder understands that the shares are not registered under the Securities
Act on the ground that the sale provided for in this Agreement and the issuance
of securities hereunder is exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, and that the Company's reliance on such
exemption is predicated in part on the holder's representations set forth
herein. In the absence of an effective registration statement covering the
shares, the holder will sell, transfer or otherwise dispose of the shares only
pursuant to an exemption from the requirements for registration under the
Securities Act.
6. Holder Not a Shareholder. Except as otherwise provided herein, this
Warrant does not confer upon the Warrant Holder, as holder of the Warrant, any
right whatsoever as a shareholder of the Company.
3
<PAGE>
7. Adjustments of Exercise Price and Number of Warrant Shares.
(a) Stock Splits, etc. The number and kind of securities purchasable upon
the exercise of this Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of any of the following. In case
the Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock, or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per such Warrant Share or other security
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of Warrant
Shares or other securities of the Company resulting from such adjustment. An
adjustment made pursuant to this paragraph shall become effective immediately
after the effective date of such event retroactive to the record date, if any,
for such event.
(b) Reorganization, Reclassification, Merger, Consolidation or Disposition
of Assets. In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the holder of this Warrant shall have the right thereafter
to receive, upon exercise of this Warrant, the number of shares of common stock
of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 11. For purposes of
this Section 11, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
4
<PAGE>
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 11 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a Saturday, Sunday or
legal holiday.
9. Article and Section Headings. Numbered and titled article and section
headings are for convenience only and shall not be construed as amplifying or
limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or required
to be made under this Warrant shall be in writing, signed by the party giving
such notice, election or demand and shall be delivered personally, telecopied,
or sent by certified mail or overnight via nationally recognized courier service
(such as Federal Express), to the other party at the address set forth below, or
at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery or telecopy or two
(2) business days after the date of mailing (or the next business day after
delivery to such courier service), as the case may be, shall be the date of such
notice, election or demand. For the purposes of this Warrant:
The address of the Warrant Holder is:
Ralph C. DiIorio
7170 Cherry Bluff Drive
Atlanta, Georgia 30350
The Address of Company is:
Tanner's Restaurant Group, Inc.
5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
Attention: Timothy R. Robinson
Telecopy No.: (770) 248-2299
5
<PAGE>
with a copy to:
Wade H. Stribling, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, Suite 1400
Atlanta, Georgia 30309
Telecopy No.: (404) 817-6050
11. Severability. If any provisions(s) of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Warrant Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
enforced under the laws of the State of Georgia applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Successors and Assigns. Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Warrant Holder.
15. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
IN WITNESS WHEREOF, the Company has executed and the Warrant Holder has
accepted this Warrant Agreement as of the date and year first above written.
TANNER'S RESTAURANT GROUP, INC.
By: /s/ Clyde E. Culp, III
--------------------------
Chief Executive Officer
RALPH C. DiIORIO
By: /s/ Ralph C. DiIorio
------------------------
6
EXHIBIT 4.3
SECOND AMENDMENT
$350,000
12.5% PROMISSORY NOTE DATED APRIL 1, 1998
DUE JANUARY 30, 1999
NOVEMBER 2, 1999
The first paragraph of the note is amended to state the following:
Principal with any accrued interest shall be paid in full on January 31, 2001.
Interest shall continue to accrue on the unpaid balance at the rate of 12.5% per
annum, payable on the first day of each month.
Tanner's Restaurant Group, Inc.
/s/ Clyde E. Culp, III
- ----------------------
Clyde E. Culp
Chief Executive Officer
Accepted:
SECA VII, LLC
By: Smither & Company, Manager
By: /s/ Kenneth W. Smither
- --------------------------
Kenneth W. Smither
President
EXHIBIT 4.4
THIS STOCK PURCHASE WARRANT AND THE OTHER SECURITIES ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED,
OR THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED (THE "GEORGIA ACT"), OR ANY
OTHER APPLICABLE BLUE SKY LAW, AND CANNOT BE SOLD OR OTHERWISE TRANSFERRED
UNLESS (i) REGISTERED UNDER SUCH ACTS, (ii) IN THE OPINION OF LEGAL COUNSEL
REASONABLY ACCEPTABLE TO THE COMPANY AN EXEMPTION FROM SUCH REGISTRATION IS
AVAILABLE OR (iii) THE REQUEST FOR TRANSFER IS ACCOMPANIED BY NO-ACTION LETTERS
FROM THE SECURITIES AND EXCHANGE COMMISSION AND THE APPLICABLE STATE SECURITIES
COMMISSION.
TANNER'S RESTAURANT GROUP, INC.
STOCK PURCHASE WARRANT
November 2, 1999 100,000 Shares
Warrants to purchase 100,000 shares of common stock (the "Shares") of
Tanner's Restaurant Group, Inc., a Texas corporation (the "Company"), are hereby
granted to SECA VII, LLC, (the "Warrant Holder"), in consideration of certain
services rendered to the Company, at the price herein provided, subject to the
following terms and conditions:
1. Exercise of Warrants. The warrants granted in this agreement (the
"Warrant") may be exercised in whole or in part at any time until the Expiration
Date (defined below), subject to the restrictions and conditions set forth in
this Agreement:
(a) Exercise Price. The exercise price (the "Exercise Price") per
Share subject to the Warrant shall be $.04, subject to adjustment
in accordance with the provisions of Section 7.
(b) Expiration of Warrant Term. The Warrant will expire at 5:00 p.m.,
Atlanta, Georgia time, on October 31, 2004 (the "Expiration
Date").
(c) Payment. The Exercise Price shall be payable, at the option of
the Holder, (i) by cash, check, or wireless transfer, or (ii) by
cashless exercise, as herein provided. In the event that the
Warrant Holder elects to exercise the Warrant by "cashless
exercise", this Warrant shall represent the right to subscribe
for and acquire the number of shares (rounded to the next highest
integer) specified by the holder in the written notice required
by Section 1(d) (the "Total Number") less the number of Shares
equal to the quotient obtained by dividing (A) the product of the
Total Number and the Exercise Price by (B) the current market
value of a share of Common Stock. In the absence of an
established public market for the Common Stock, the Company's
board of directors shall establish fair market value in a
commercially reasonable manner.
<PAGE>
(d) Method of Exercise. The Warrant shall be exercisable, in whole or
in part, by a written notice delivered to the Chief Financial
Officer of the Company which shall:
1. State the owner's election to exercise the Warrant, the
number of Shares with respect to which it is being
exercised, the person in whose name the stock certificate
for such Shares is to be registered, such person's address
and tax identification number or (or, if more than one, the
names, addresses and tax identification numbers of such
persons), and whether the payment will be made pursuant to
Section 1(c)(i) or 1(c)(ii);
2. Be signed by the person or persons entitled to exercise the
Warrant and, if the Warrant is being exercised by any person
or persons other than the original holder hereof, be
accompanied by proof satisfactory to counsel for the Company
of the right of such person or persons to exercise the
Warrant; and
3. Be in writing and be accompanied by the originally executed
copy of this Warrant.
(e) Partial Exercise. In the event of a partial exercise of the
Warrant, the Company shall either issue a new agreement for the
balance of the Shares subject to this Warrant after such partial
exercise, or it shall conspicuously note hereon the date and
number of Shares granted pursuant to such exercise and the number
of Shares thereafter covered by this Warrant.
(f) Restrictions on Exercise. The Warrant may not be exercised (i) if
the issuance of the Shares upon such exercise would constitute a
violation of any applicable federal or state securities laws or
other law or regulation and (ii) unless the Company or the holder
hereof, as applicable, obtains any approval or other clearance
from any federal or state governmental agency or body which the
Company determines to be necessary. As a condition to the
exercise of the Warrant, the Company may require the person
exercising this Warrant to make any representation or warranty to
the Company as may be required to comply with any applicable law
or regulation, including the Securities Act of 1933 and any
applicable state securities laws.
2. Restrictions on Transferability of Common Stock; Compliance with the
Securities Act of 1933.
(a) The Common Stock issued upon exercise of the Warrant shall not be
transferable except upon the conditions hereinafter specified,
which conditions are intended to insure compliance with the
provisions of the Securities Act of 1933 (or any similar federal
statute at the time in effect) and applicable state securities or
blue sky laws regarding transfer of the Common Stock.
2
<PAGE>
(b) In the absence of an effective registration statement covering
the shares, each certificate for shares of Common Stock issued
upon exercise of the Warrant shall bear a legend stating that
such shares have not been registered under the Securities Act of
1933 or any state securities laws and referring to the above
restrictions on transferability and sale.
3. Non-Transferability of Warrant. This Warrant and all rights hereunder
are neither assignable nor transferable by the Warrant Holder without the
Company's prior written consent and, if so requested by the Company, the
delivery by the Warrant Holder to the Company of an opinion of counsel in form
and substance satisfactory to the Company stating that such transfer or
assignment is in compliance with the Securities Act of 1933 and any applicable
state securities laws. More particularly, but without limiting the generality of
the foregoing, the Warrant may not be assigned, transferred (except as provided
above), pledged or hypothecated in any way (whether by operation of law or
otherwise) and shall not be subject to execution, attachment or similar process.
Any attempted assignment, transfer, pledge, hypothecation or other disposition
of this Warrant contrary to the provisions hereof shall be without legal effect.
4. Valid Issuance of Common Stock. The Company possesses the full authority
and legal right to issue, sell, transfer, and assign this Warrant and the Common
Stock issuable pursuant to this Warrant. The issuance of this Warrant vests in
the holder the entire legal and beneficial interests in this Warrant, free and
clear of any liens, claims, and encumbrances and subject to no legal or
equitable restrictions of any kind except as described herein. The Common Stock
that is issuable upon exercise of this Warrant, when issued, sold and delivered
in accordance with the terms of this Agreement for the consideration expressed
herein, will be duly and validly issued, fully paid, and non-assessable, and
will be free of restrictions on transfer other than restrictions on transfer
under applicable state and federal securities laws.
5. Compliance with Securities Laws. The Warrant Holder understands that
this Warrant and the Common Stock issuable upon exercise of the Warrant may not
be sold, transferred or otherwise disposed of without registration under the
Securities Act of 1933, or an exemption therefrom, that in the absence of an
effective registration statement covering such shares or an available exemption
from registration under the Securities Act, such shares must be held
indefinitely, and that the certificates representing the shares will bear a
legend to this effect. The holder acknowledges that this warrant has been
acquired for investment purposes and not with a view to distribution or resale.
The holder understands that the shares are not registered under the Securities
Act on the ground that the sale provided for in this Agreement and the issuance
of securities hereunder is exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, and that the Company's reliance on such
exemption is predicated in part on the holder's representations set forth
herein. In the absence of an effective registration statement covering the
shares, the holder will sell, transfer or otherwise dispose of the shares only
pursuant to an exemption from the requirements for registration under the
Securities Act.
6. Holder Not a Shareholder. Except as otherwise provided herein, this
Warrant does not confer upon the Warrant Holder, as holder of the Warrant, any
right whatsoever as a shareholder of the Company.
3
<PAGE>
7. Adjustments of Exercise Price and Number of Warrant Shares.
(a) Stock Splits, etc. The number and kind of securities purchasable upon
the exercise of this Warrant and the Exercise Price shall be subject to
adjustment from time to time upon the happening of any of the following. In case
the Company shall (i) pay a dividend in shares of Common Stock or make a
distribution in shares of Common Stock to holders of its outstanding Common
Stock, (ii) subdivide its outstanding shares of Common Stock into a greater
number of shares of Common Stock, (iii) combine its outstanding shares of Common
Stock into a smaller number of shares of Common Stock, or (iv) issue any shares
of its capital stock in a reclassification of the Common Stock, then the number
of Warrant Shares purchasable upon exercise of this Warrant immediately prior
thereto shall be adjusted so that the holder of this Warrant shall be entitled
to receive the kind and number of Warrant Shares or other securities of the
Company which he would have owned or have been entitled to receive had such
Warrant been exercised in advance thereof. Upon each such adjustment of the kind
and number of Warrant Shares or other securities of the Company which are
purchasable hereunder, the holder of this Warrant shall thereafter be entitled
to purchase the number of Warrant Shares or other securities resulting from such
adjustment at an Exercise Price per such Warrant Share or other security
obtained by multiplying the Exercise Price in effect immediately prior to such
adjustment by the number of Warrant Shares purchasable pursuant hereto
immediately prior to such adjustment and dividing by the number of Warrant
Shares or other securities of the Company resulting from such adjustment. An
adjustment made pursuant to this paragraph shall become effective immediately
after the effective date of such event retroactive to the record date, if any,
for such event.
(b) Reorganization, Reclassification, Merger, Consolidation or Disposition
of Assets. In case the Company shall reorganize its capital, reclassify its
capital stock, consolidate or merge with or into another corporation (where the
Company is not the surviving corporation or where there is a change in or
distribution with respect to the Common Stock of the Company), or sell, transfer
or otherwise dispose of all or substantially all its property, assets or
business to another corporation and, pursuant to the terms of such
reorganization, reclassification, merger, consolidation or disposition of
assets, shares of common stock of the successor or acquiring corporation, or any
cash, shares of stock or other securities or property of any nature whatsoever
(including warrants or other subscription or purchase rights) in addition to or
in lieu of common stock of the successor or acquiring corporation ("Other
Property"), are to be received by or distributed to the holders of Common Stock
of the Company, then the holder of this Warrant shall have the right thereafter
to receive, upon exercise of this Warrant, the number of shares of common stock
of the successor or acquiring corporation or of the Company, if it is the
surviving corporation, and Other Property receivable upon or as a result of such
reorganization, reclassification, merger, consolidation or disposition of assets
by a holder of the number of shares of Common Stock for which this Warrant is
exercisable immediately prior to such event. In case of any such reorganization,
reclassification, merger, consolidation or disposition of assets, the successor
or acquiring corporation (if other than the Company) shall expressly assume the
due and punctual observance and performance of each and every covenant and
condition of this Warrant to be performed and observed by the Company and all
the obligations and liabilities hereunder, subject to such modifications as may
be deemed appropriate (as determined by resolution of the Board of Directors of
the Company) in order to provide for adjustments of shares of Common Stock for
which this Warrant is exercisable which shall be as nearly equivalent as
practicable to the adjustments provided for in this Section 11. For purposes of
this Section 11, "common stock of the successor or acquiring corporation" shall
include stock of such corporation of any class which is not preferred as to
dividends or assets over any other class of stock of such corporation and which
is not subject to redemption and shall also include any evidences of
indebtedness, shares of stock or other securities which are convertible into or
exchangeable for any such stock, either immediately or upon the arrival of a
specified date or the happening of a specified event and any warrants or other
4
<PAGE>
rights to subscribe for or purchase any such stock. The foregoing provisions of
this Section 11 shall similarly apply to successive reorganizations,
reclassifications, mergers, consolidations or disposition of assets.
8. Saturdays, Sundays, Holidays, etc. If the last or appointed day for the
taking of any action or the expiration of any right required or granted herein
shall be a Saturday, Sunday or a legal holiday, then such action may be taken or
such right may be exercised on the next succeeding day not a Saturday, Sunday or
legal holiday.
9. Article and Section Headings. Numbered and titled article and section
headings are for convenience only and shall not be construed as amplifying or
limiting any of the provisions of this Warrant.
10. Notice. Any and all notices, elections or demands permitted or required
to be made under this Warrant shall be in writing, signed by the party giving
such notice, election or demand and shall be delivered personally, telecopied,
or sent by certified mail or overnight via nationally recognized courier service
(such as Federal Express), to the other party at the address set forth below, or
at such other address as may be supplied in writing and of which receipt has
been acknowledged in writing. The date of personal delivery or telecopy or two
(2) business days after the date of mailing (or the next business day after
delivery to such courier service), as the case may be, shall be the date of such
notice, election or demand. For the purposes of this Warrant:
The address of the Warrant Holder is:
SECA VII, LLC
11 South 12th Street
Suite 218
Richmond, Virginia 23219
Attention: Kenneth W. Smither
Telecopy: (804) 648-3631
The Address of Company is:
Tanner's Restaurant Group, Inc.
5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
Attention: Timothy R. Robinson
Telecopy No.: (770) 248-2299
5
<PAGE>
with a copy to:
Wade H. Stribling, Esq.
Nelson Mullins Riley & Scarborough, L.L.P.
999 Peachtree Street, Suite 1400
Atlanta, Georgia 30309
Telecopy No.: (404) 817-6050
11. Severability. If any provisions(s) of this Warrant or the application
thereof to any person or circumstances shall be invalid or unenforceable to any
extent, the remainder of this Warrant and the application of such provisions to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
12. Entire Agreement. This Warrant between the Company and Warrant Holder
represents the entire agreement between the parties concerning the subject
matter hereof, and all oral discussions and prior agreement are merged herein.
13. Governing Law and Amendments. This Warrant shall be construed and
enforced under the laws of the State of Georgia applicable to contracts to be
wholly performed in such State. No amendment or modification hereof shall be
effective except in a writing executed by each of the parties hereto.
14. Successors and Assigns. Subject to applicable securities laws, this
Warrant and the rights and obligations evidenced hereby shall inure to the
benefit of and be binding upon the successors of the Company and the successors
and permitted assigns of Warrant Holder.
15. Counterparts. This Warrant may be executed in any number of
counterparts and by different parties to this Warrant in separate counterparts,
each of which when so executed shall be deemed to be an original and all of
which taken together shall constitute one and the same Warrant.
IN WITNESS WHEREOF, the Company has executed and the Warrant Holder has
accepted this Warrant Agreement as of the date and year first above written.
TANNER'S RESTAURANT GROUP, INC.
By: /s/ Clyde E. Culp, III
--------------------------
Chief Executive Officer
SECA VII, LLC
By: /s/ Kenneth W. Smither
--------------------------
Name: Kenneth W. Smither
Title: Manager/Member
6
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-END> OCT-03-1999
<CASH> 656,012
<SECURITIES> 0
<RECEIVABLES> 189,671
<ALLOWANCES> 0
<INVENTORY> 109,897
<CURRENT-ASSETS> 972,290
<PP&E> 2,254,074
<DEPRECIATION> (406,450)
<TOTAL-ASSETS> 6,778,250
<CURRENT-LIABILITIES> 1,662,410
<BONDS> 2,990,321
0
1,215,152
<COMMON> 83,345
<OTHER-SE> 942,289
<TOTAL-LIABILITY-AND-EQUITY> 6,778,250
<SALES> 7,486,640
<TOTAL-REVENUES> 7,487,595
<CGS> 2,501,067
<TOTAL-COSTS> 8,018,410
<OTHER-EXPENSES> 963,606
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<INTEREST-EXPENSE> 293,839
<INCOME-PRETAX> (1,788,260)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,788,260)
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<EXTRAORDINARY> 0
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<EPS-BASIC> (.36)
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