As filed with the Securities and Exchange Commission on May , 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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Tanner's Restaurant Group, Inc.
(Exact Name of Registrant as Specified in its Charter)
Texas 5812 76-0406417
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(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification Number)
Incorporation or
Organization)
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5500 Oakbrook Parkway
Suite 260
Norcross, Georgia 30093
(770) 248-2298
(770) 248-2299 (facsimile)
(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
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)
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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)
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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>
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Common stock, par value $.01 per share 48,754,702 $.245 $11,944,902 $3,321
================================================================================================================
(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 May
3, 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.
51,815,261 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 $2,000,000 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 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 May ___,1999.
<PAGE>
TABLE OF CONTENTS
Page
----
Summary.................................................................. 3
Risk Factors ............................................................ 6
Use of Proceeds.......................................................... 14
Dilution................................................................. 16
Market for Common Equity and Related Matters............................. 17
Management's Discussion or Plan of Operation............................. 19
Business................................................................. 24
Management............................................................... 34
Certain Transactions..................................................... 39
Principal and Selling Shareholders....................................... 41
Description of Capital Stock............................................. 44
Shares Eligible for Future Sale.......................................... 50
Plan Of Distribution..................................................... 52
Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... 54
Legal Matters............................................................ 54
Experts.................................................................. 54
Where You Can Find More Information...................................... 55
Index to Consolidated Financial Statements............................... F-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.
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.
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A significant factor in both the structure and completion of the merger was
a commitment by outside investors to purchase shares of our convertible
preferred stock for $6,000,000. To date, we have received $4,000,000 of the
$6,000,000 commitment, and we will receive the final $2,000,000 on the date of
this prospectus.
Our Business
Tanner's restaurants are designed to appeal to traditional casual dining
customers by offering large portions of high quality foods at low prices. These
restaurants are competitively positioned between home meal replacement
restaurants and full bar casual restaurants that have less portable foods. The
menu 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. Since inception, over 25% of sales have come from takeout/takehome
service.
Our growth strategy is:
* to open new company-owned restaurants,
* to increase our sales at existing restaurants,
* to develop and expand our franchising program, and
* to evaluate and possibly acquire complementary restaurant concepts.
We intend to develop restaurants in Atlanta, Georgia to complete our
penetration of the Atlanta market, and in selected Southeastern markets, where
we believe we will be able to use existing supervisory, marketing and
distribution systems. 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.
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 $2,000,000 on date of this
prospectus, as provided in our financing arrangement with those selling
shareholders. We will use the net proceeds of the $2,000,000 primarily for
working capital, the payment of indebtedness, and general corporate purposes,
including the development of up to four new company-owned restaurants, the
opening of one 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.
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The Offering
Estimated common stock offered by selling shareholders upon
conversion of 9,198 shares of Series D preferred stock.......... 49,989,130*
Common stock offered by FINOVA after exercising
its warrant..................................................... 756,331
Common Stock offered by Sterling Capital after exercising
its warrant..................................................... 150,000
Common stock offered by other selling shareholders
after exercising their warrants................................. 919,800
Common stock offered by Tanner's Restaurant
Group........................................................... 0
Estimated common stock outstanding after the
Offering........................................................ 60,149,750**
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
$.23 per share. On May 5, 1999, the closing bid price was $.23 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.
----------------------------
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" and in other places
in this prospectus.
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<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. 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 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 our receipt of
the final $2,000,000 of the financing commitment, and the other loan matures on
the earlier of that date 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 $2,000,000 to be invested on the 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.
We need additional capital immediately.
In addition to our need for capital to repay the $650,000 in short-term
loans, we will 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
6
<PAGE>
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 $2,000,000 to be invested by our outside investors on
the 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 potential acquisitions 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 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. If any of them 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 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."
7
<PAGE>
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.
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.
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<PAGE>
We have a limited restaurant base and are dependent on a limited number of
restaurants.
We presently derive all of our revenues from ten restaurants, one of which
is franchised. We cannot assure you that we will open any new restaurants or, 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.
Conflicts of interest involving a member 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 and will be due on the earlier of our receipt of the final $2,000,000 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."
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Risks Related to Year 2000 Compliance.
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."
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 Capital
Stock."
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. 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."
10
<PAGE>
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
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.
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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. Based on a recent
trading price of $.23 per share, the number of additional common shares
potentially issuable is as large or larger than 66,348,631 shares. 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."
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 month of April 1999, for example,
the closing sales price of the common stock ranged from $.22 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.
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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's 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.
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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USE OF PROCEEDS
We will not receive any proceeds from the conversions 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 the date of this prospectus, we will receive the final
$2,000,000 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 $.23 per share of common stock)
$1,885,113 upon those exercises and we will issue 1,826,131 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 the net proceeds from the $2,000,000 investment - and from
the exercise of the warrants, if any - to develop new restaurants, to evaluate
opportunities to acquire new restaurant concepts, to pay certain indebtedness,
and for working capital.
The $2,000,000 that we will receive on the 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, $4,000,000 has already
been invested, and we have already issued 5,200 shares of Series D preferred
stock for those investments. Upon receipt of the final $2,000,000, we will issue
another 2,000 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,
(4) the final $2,000,000 will be invested in exchange for 2,000 Series D
shares on the 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 shares of Series D preferred
stock to be issued for the final $2,000,000 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.
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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.
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 Capital Stock - 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
the closing market price on the OTC Bulletin Board on May 5, 1999 of $.23 per
share, those 9,198 shares would be convertible into 49,989,130 common shares. If
the market price of the common stock were to decrease to $.15, the 9,198 shares
of Series D preferred stock would be convertible into 76,650,000 common shares.
Conversely, if the market 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.
Furthermore, 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 12,135,576 shares of common stock. If all currently
outstanding convertible preferred shares are converted into shares of common
stock, and if all outstanding options and warrants to purchase shares of common
stock are exercised, approximately 74,683,121 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 are in
arrears, 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.
Such 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. On May 5, 1999, the
high and low sales prices for the common stock were $.25 and $.23, 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*
"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
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.
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Holders of Record
We had approximately 91 holders of record of our common stock as of May 5,
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 possible acquisitions. 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. This financing will be used primarily for working capital and the
development of up to four company-owned restaurants and the opening of one
franchised restaurant during 1999, although we cannot assure you that those
development plans will be successful.
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 is 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 is 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.
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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.
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.
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<PAGE>
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.
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. Food, beverage and paper costs, and payroll expenses will
increase during the first two months of a restaurant's operations. Preopening
expenses are expected to total approximately $100,000 for each new restaurant
and are expensed as incurred in accordance with Statement of Position 98-5,
Reporting on the Costs of Start-up Activities. The majority of preopening costs
are incurred in the accounting period before opening and in the period that a
restaurant opens. As we increase our base of restaurants, the effects of these
operating trends will decrease, as the new restaurants will have less of an
impact on our consolidated results.
Liquidity and Capital Resources
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 December 27,
1998 had an accumulated deficit of $6,390,005 and a working capital deficit of
$4,040,192. 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. 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.
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 unsecured loans matures on our receipt of the final
$2,000,000 of the financing commitment and the other matures on the earlier of
that date 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 $2,000,000 to be invested on the date of this prospectus 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 the Series A preferred stock since June 1998.
We may continue to allow dividends to accrue or may pay all or part of those
dividends by issuing shares of common stock.
We opened one new restaurant during 1998 and had two franchised restaurants
open during this same time period. One of the franchised restaurants closed in
February 1999 due to franchisee financing arrangements and location issues. We
closed two underperforming restaurants in March 1999, which is expected to
result in a charge to earnings of approximately $300,000 in the first quarter of
1999. In the remainder of 1999, we plan to open up to four new company-owned
restaurants and one franchised restaurant. Our capital requirements to meet this
development plan could be as much as $1.6 million. We may also seek to acquire
other restaurant concepts that would complement our existing restaurants.
Although we do not currently have the capital resources to meet this
development plan, outside investors have invested $2,000,000 in 1999 to purchase
shares of our Series D preferred stock and will invest another $2,000,000 in
Series D preferred stock on the date of this prospectus. We plan to apply this
funding to our capital requirements for new restaurant development, the possible
acquisition of other restaurant concepts, the payment of indebtedness, and
working capital. We may also raise additional funds by borrowing. 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.
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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.
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 second 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. 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.
Growth Strategy
We intend to use part of the proceeds of the financing commitment 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 both in Atlanta, to complete our
penetration of the Atlanta market, and in selected Southeastern markets, where
we believe we will be able to use existing supervisory, marketing and
distribution systems. 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.
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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.
Tanner's restaurants are designed to appeal to traditional casual dining
customers by offering large portions of high quality foods at low prices. These
restaurants are competitively positioned between home meal replacement
restaurants and full bar casual restaurants that have less portable foods. The
menu features over 40 different entrees and 15 different appetizers including
pot roast, meatloaf, rotisserie chicken, steaks, slow roasted barbecue pork
ribs, "cheesy chicken lips," "Texas" chili, sandwiches, made-from-scratch soups
and salads, and family value packs ideal for take home service. All entrees are
prepared using aged beef and fresh chicken and seafood, are cooked to order, and
are served with a choice of two out of 15 different freshly prepared vegetables.
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 Tanner's
restaurants are built according to a flexible design concept that allows
recognizable restaurants to be developed at different types of sites. Our
prototype Tanner's store features an efficient operating layout, standardized
equipment and tasteful and distinctive trade dress. Tanner's seeks 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.
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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.
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 a Tanner's restaurant 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 a Tanner's restaurant. 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. 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.
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Competition
Competition in the restaurant industry is intense. Tanner's restaurants
compete with mid-price, full-service, casual dining restaurants primarily on the
basis of quality, atmosphere, location and value. Tanner's 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. Tanner's also competes 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. This competition could adversely affect our operating results.
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,
* 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.
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<PAGE>
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 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.
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.
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<PAGE>
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.
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.
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<PAGE>
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.
Employees
As of May 5, 1999, we employed approximately 375 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.
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<PAGE>
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.
Form of Lease Monthly
Location 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:
- ------------------
350 Northridge Road Building Lease July, 2000 $4,439
Atlanta, GA 30338
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 Pavillion Parkway Building Lease June, 2013 $11,917
Fayetteville, GA 30214
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<PAGE>
Form of Lease Monthly
Location Ownership Expiration Rent
- -------- --------- ---------- ----
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
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.
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<PAGE>
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. We have filed a motion for summary judgment. We are in the
process of filing a motion to dismiss this action on the grounds that Harvest
never entered into a lease agreement for the property.
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.
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.
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<PAGE>
MANAGEMENT
Our officers and directors as of May 5, 1999 are listed below. Under the
TRC merger agreement, all of Harvest's pre-merger officers and directors other
than William Gallagher resigned, including Michael Hogan, Theodore Heesch and
Joseph Fazzone. Mr. Gallagher resigned from his position as an officer at the
time of the merger and resigned from his position as a director on April 28,
1999. When the merger became effective, certain officers and directors of TRC
became our officers and directors, as described below. Consequently, 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 49 Director
Robert J. Hoffman 49 Senior Vice President of Operations
Timothy R. Robinson 36 Vice President and Chief Financial
Officer
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 Silvers restaurant chain. From 1990 to 1993, he served as president
and chief executive officer of Embassy Suites Hotels and also served as chief
operating officer of Holiday Inns from 1987 to 1990. In 1975, Mr. Culp founded
Davco Foods, which grew to 146 stores and was the largest Wendy's Hamburger
franchisee in the world.
Richard 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.
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 $100,000
during the fiscal year ended December 27, 1998.
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
----------
Annual Compensation Securities
Other Annual Underlying
Salary Bonus Compensation Options All Other
Name and Principal Position Year ($) ($) ($) (#) 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
- ------------------
(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.
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</TABLE>
<PAGE>
(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 May 1, 1999 we
have paid him $90,000, and we owe him the remaining $110,000 to be paid as
described below. See "Employment Contracts and Termination of Employment and
Change-in-Control Arrangements.
Option Grants
The following table provides information concerning grants of stock options
to Mr. Gallagher, the only named executive officer under applicable SEC rules,
during the fiscal year ended December 27, 1998.
Option Grants in Last Fiscal Year
Individual Grants
-----------------
Percent
Number of Of Total
Securities Options Exercise
Underlying Granted to Price
Options Employees in ($ per Expiration
Granted(#) Fiscal Year Share) Date
---------- ------------ ------ ----
William J. Gallagher.... 140,000(1) 33.33% 1.00 September
2001
- ------------------
(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.
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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 $2,000,000
installment of funding from the outside investors; the sale of our property on
Tezel Road in San Antonio, Texas; or June 30, 1999. 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 authorizes 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
an informed business judgment based on all material information reasonably
available to them. Absent the limitations authorized by such provision,
directors are accountable to corporations and their shareholders for monetary
damages for conduct constituting gross negligence 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
equitable remedies such as injunction or rescission. Article 3 of our Articles
of Incorporation limits 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:
(a) any breach of the director's duty of loyalty to us or our
shareholders,
(b) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(c) unlawful payments of dividends or unlawful stock repurchases,
redemptions or other distributions, and
(d) any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision may have the effect of reducing 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 such an action, if successful, might
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<PAGE>
otherwise have benefited us and our shareholders. However, the inclusion of this
provision together with a provision that requires us to indemnify our officers
and directors against certain 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 limit the liability of our directors for
monetary damages arising from a breach of their fiduciary duty as directors,
except to the extent otherwise required by the Texas Business Corporation Act.
Such limitation of liability does not affect the availability of equitable
remedies such as injunctive relief or rescission. 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 such 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.
Any such person may be indemnified against judgments, penalties (including
excise and similar taxes), fines, settlements 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 must 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.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to our directors, officers and controlling persons
pursuant to these provisions, or otherwise, the Securities and Exchange
Commission 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.
Prior to the consummation of this offering, 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.
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<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 TRC securities that it held. 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 May
5, 1999, the aggregate outstanding principal amount of these two loans was
approximately $385,000.
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 our receipt of the
final $2,000,000 of the financing commitment and the SECA loan matures on the
earlier of that date 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 $2,000,000 to be invested on the 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.
39
<PAGE>
Mr. Gallagher 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.
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table provides information as of May 1, 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. 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. Common - 643,509 7.2
All officers and
directors as a group (6
persons)(3) 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.
(3) Messrs. Culp, Tanner, Walker, Hoffman and Robinson.
(4) Each share of Series E preferred stock is convertible into four shares
of common stock beginning on July 14, 1999.
41
<PAGE>
Selling Shareholders
Each of the selling shareholders named in the following table has advised
us that he or it 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 transactions, at negotiated prices, with institutional or other
investors. See "Plan of Distribution." Each selling shareholder who is a natural
person has advised us that he 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 or Series E 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 the Company.
The selling shareholders are offering, by this prospectus, an aggregate of
51,815,261 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
49,989,130 shares of the common stock (assuming that the market price of the
common stock is $.23 per share), and (b) all 1,826,131 shares are issued upon
exercise of the outstanding warrants and options held by the selling
shareholders.
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 May
5, 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. 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 60,149,750 shares
estimated to be outstanding after this offering (assuming that none of our
outstanding convertible securities are converted into, and that none of our
outstanding options and warrants are exercised for, shares of common stock) even
though the holder can acquire and then sell, over time, more shares than the
number listed in that column.
42
<PAGE>
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 $.23 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 Offered Shares Owned Shares Owned Shares
Shares Owned for Holder's After the Before the Owned After
Name Before Offering Account Offering Offering the Offering
---- --------------- ------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Sovereign Partners, 3,001,473 22,985,952 0 4.99% 0%
L.P.
Atlantis Capital Fund 3,001,473 6,472,236 0 4.99% 0%
Limited
Dominion Capital 3,001,473 11,488,133 0 4.99% 0%
Fund Limited
G.P.S. America Fund 2,988,783 2,988,783 0 4.99% 0%
Ltd.
Atlas Capital Fund 2,988,783 2,988,783 0 4.99% 0%
Ltd.
Oscar Brito 1,992,522 1,992,522 0 4.99% 0%
Sandro Grimaldi 1,992,522 1,992,522 0 4.99% 0%
FINOVA Mezzanine 756,331 756,331 0 8.32% 0%
Capital Inc.
Sterling Capital, LLC 150,000 150,000 0 1.76% 0%
</TABLE>
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.
43
<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 May 5, 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.
44
<PAGE>
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 May 5, 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.
45
<PAGE>
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.
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, but no sooner than July 10, 1999, the date that is 120
days after our shareholders approved an amendment to our articles of
incorporation increasing the number of authorized shares of common stock to
notless than 100,000,000. If a registration statement has not been declared
effective as of that date, holders of Series D preferred stock may not convert
their shares of Series D preferred stock until the 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 that holder would own more than 4.99% of the outstanding common
stock.
46
<PAGE>
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. We will issue 2,000 shares of
Series D preferred stock when we receive $2,000,000 on the effectiveness 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 were or will be issued common stock
purchase warrants, as described below.
As of May 5, 1999, 7,198 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.
47
<PAGE>
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 May 5, 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 May 5, 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 150,000 shares of common stock at
an exercise price of 110% of the price of the common stock at the time of
exercise 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.
48
<PAGE>
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.
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
under:
(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 Registration Rights Agreement, 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.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Of the 8,334,489 shares of common stock outstanding as of May 5, 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 May 5, 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 14,
2000, at which point only certain of the shares may be sold under Rule 144.
As of May 5, 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 May 5, 1999, 4,726,131 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 securities, including convertible preferred
stock, options and warrants, outstanding. The number of shares of common stock
into which these securities are convertible, or for which they are exercisable,
is given in the right-hand column.
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 49,989,130 (2)
Series E preferred stock.............. 744,500 2,978,000
Common stock purchase warrants........ 4,726,131 (3) 4,726,131
Series A preferred stock
purchase warrants................... 1,923,400 (4) 5,193,180
Options............................... 2,216,265 2,216,265
--------- ---------
Total........................... 74,683,121
- ----------
(1) Each share of Series A preferred stock is convertible into 2.7 shares
of common stock.
50
<PAGE>
(2) Assumes a common stock market price of $.23 per share.
(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 that were granted to the
underwriter of our 1996 initial public offering at exercise prices of
$4.00 and $6.60 per share, warrants to purchase 150,000 shares of
common stock at an exercise price equal to 110% of the market price of
the common stock on the date of exercise that were 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 share that will be issued to J. P. Carey Securities, Inc., upon
receipt of the final $2,000,000 of the financing commitment. Also
includes the warrants to purchase 643,509 shares (increasing to
756,331 shares on October 22, 1999) at an exercise price of $.01 per
share that have been issued to FINOVA 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 1,723,400 publicly-traded warrants to purchase shares of
Series A preferred stock at an exercise price of $10.50 per share and
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 51,815,261 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.
51
<PAGE>
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 has advised us that, when and if he
converts his shares of preferred stock into common stock or exercises his
warrants to purchase shares of common stock, he may, 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 has also indicated that he may
sell the shares of common stock in isolated transactions, at negotiated prices,
with institutional or other investors. The selling shareholders have advised us
that they have not entered into any agreements, understandings or arrangements
with any underwriters regarding the sale of their securities, nor is there an
underwriter acting in connection with the proposed sale of shares by the selling
shareholders. However, each selling shareholder has indicated that sales may be
effected for each selling shareholder through his personal broker. If all shares
of Series D preferred stock are converted and all warrants are exercised,
51,815,261 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 shares of the common stock offered by the selling shareholders may be
sold 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 transaction 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.
52
<PAGE>
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:
(a) the name of 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. Each of the selling
shareholders has advised us that, as his shares become eligible for sale under
Rule 144, he 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 and 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
shall comply 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.
53
<PAGE>
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 our Current
Report on Form 8-K, dated July 9, 1998, for additional information regarding
this resignation. As a result of our 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
Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia, 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.
54
<PAGE>
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.
55
<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 such person:
* 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.
Prior to consummation of this offering, the registrant will enter into
indemnification agreements with each of its directors and executive officers
that provide for indemnification and expense advancement to the fullest extent
permitted under the Texas Business Corporation Act.
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, indemnification and
advancement of expenses in a manner and subject to terms and conditions similar
to those stated in the bylaws. 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 any claim
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.
II-2
<PAGE>
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.
SEC Registration Fee............................... $ 3,321
-------
Printing Fees and Duplicating Fees................. *
Legal Fees and Expenses............................ *
Accounting Fees and Expenses....................... *
Miscellaneous Expenses............................. *
-------
Total........................................ $ *
=======
*To be completed by amendment.
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 will issue 2,000 more shares of Series D preferred stock upon receipt
of $2,000,000 when this registration statement becomes effective.
II-3
<PAGE>
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.
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.
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.
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)
II-4
<PAGE>
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 Nelson Mullins Riley & Scarborough, 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)
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)
II-5
<PAGE>
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.
10.13(a) First Amendment to Subordinated Debenture, dated January 30,
1999.
10.14 Promissory Note, dated March 31, 1998.
10.14(a) First Amendment to Promissory Note, dated January 30, 1999.
21.1 Subsidiaries.
23.1* Consent of Nelson Mullins Riley & Scarborough, L.L.P.
23.2 Consent of Porter Keadle Moore, LLP.
27.1 Financial Data Schedule as of December 28, 1998. (5)
- -----------------
* To be filed by amendment.
(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
FormSB-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.
II-6
<PAGE>
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 May 7, 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 May 7, 1999
- ---------------------- Directors, Chief Executive
Clyde E. Culp, III Officer and Director
Director May , 1999
- ----------------------
Richard E. Tanner
/s/ James R. Walker Director May 5, 1999
- -------------------
James R. Walker
/s/ Timothy R. Robinson Chief Financial Officer and May 7, 1999
- ----------------------- Secretary
Timothy R. Robinson
/s/ Robert J. Hoffman Vice President of Operations May 7, 1999
- ---------------------
Robert J. Hoffman
II-9
<PAGE>
EXHIBIT INDEX
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 Nelson Mullins Riley & Scarborough, 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)
10.06 Form of Subscription Agreement for Series D Convertible Preferred
Stock. (5)
II-10
<PAGE>
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.
10.13(a) First Amendment to Subordinated Debenture, dated January 30,
1999.
10.14 Promissory Note, dated March 31, 1998.
10.14(a) First Amendment to Promissory Note, dated January 30, 1999.
21.1 Subsidiaries.
23.1* Consent of Nelson Mullins Riley & Scarborough, L.L.P.
23.2 Consent of Porter Keadle Moore, LLP.
27.1 Financial Data Schedule as of December 28, 1998. (5)
- -----------------
* To be filed by amendment.
(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
FormSB-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.
II-11
EXHIBIT 10.13
NEITHER THIS DEBENTURE NOR THE SHARES OF COMMON STOCK ISSUABLE
IN CONNECTION WITH THE EXERCISE OF A STOCK OPTION AGREEMENT
ISSUED SIMULTANEOUSLY WITH THE ISSUANCE OF THIS DEBENTURE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE, AND NEITHER MAY BE SOLD
WITHOUT REGISTRATION THEREOF OR AN EXEMPTION THEREFROM.
11% SUBORDINATED DEBENTURE DUE JANUARY 30, 1999
January 30, 1998 $500,000 U.S.
THIS DEBENTURE is one of a duly authorized issue of Debentures of TRC
Acquisition Corporation, a corporation duly organized and existing under the
laws of the State of Georgia (the "Company") designated as its 11% Subordinated
Debenture Due January 30, 1999, in the aggregate principal amount not exceeding
U.S. $500,000 (the "Debenture").
FOR VALUE RECEIVED, the Company promises to pay to RALPH C. DiLORIO
("Dilorio") the following: $220,000 loaned by Dilorio on the date of execution
hereof; and $280,000, which Dilorio will loan to the Company within two business
days of receipt of, and only upon Dilorio's receipt of, full repayment to
Dilorio of that certain loan of $500,000 made in 1997 to FutureMed
Interventional, Inc., a Texas corporation, together with interest on the
principal which shall be paid monthly, as calculated at an annual rate of 11%,
said principal and interest being payable in lawful money of the United States
of America pursuant to the instructions provided to the Company by the Holder.
1. Interest Rate and Interest Payment.
This debenture shall accrue interest on the cumulative principal sum
outstanding at an annual rate of eleven per cent (11%) per annum. Accrued
interest shall be paid monthly on the first day of each month with the first
interest payment due on March 1, 1998.
2. Term and Principal Payments.
The principal of this Debenture is due and payable in full together
with any accrued interest upon the earlier occurrence of (a) the closing of an
initial public offering by the Company, or (b) the Maturity Date of the
Debenture.
3. Prepayment.
This Debenture may be prepaid at any time by the Company.
<PAGE>
4. Default.
(a) The entire unpaid principal balance of this Debenture and all
accrued and unpaid interest thereon shall, at the election of Holder, be and
become immediately due and payable upon the occurrence of any of the following
events (an "Event of Default"):
(i) The nonpayment by the Company when due of any principal or
interest payment or of any other payment as provided in this Debenture, which
default shall continue uncured for a period of five (5) days after notice from
Holder.
(ii) If the Company (A) applies for or consents to the appointment of,
or if there shall be a taking of possession by, a receiver, custodian, trustee
or liquidator for the Company or any of its property; (B) becomes generally
unable to pay its debts as they become due; (C) makes a general assignment for
the benefit of creditors or becomes insolvent; (D) files or is served with any
petition for relief under the Federal Bankruptcy Code or any similar federal or
state statute that is not dismissed within 90 days of filing thereof; (E)
defaults with respect to any evidence of indebtedness or liability for borrowed
money, and such default continues beyond any applicable grace period; or (F) has
assessed or imposed against it, or if there shall exist, any general or specific
lien for any federal, state or local taxes or charges against any of its
property or assets.
(iii) The Company shall fail to perform or observe, in any material
respect, any covenant, term, provision, condition, agreement or obligation of
the Company under this Debenture and such failure shall continue uncured for a
period of five (5) days after notice from Holder of such failure.
(b) Each right, power or remedy of the Holder hereof upon the
occurrence of any Event of Default as provided for in this Debenture or now or
hereafter existing in law or in equity or by statute shall be cumulative and
concurrent and shall be in addition to every other right, power or remedy
provided for in this Debenture or now or hereafter existing at law or in equity
or by statute, and the exercise or beginning of the exercise by the Holder or
transferee hereof of any one or more of such rights, powers or remedies shall
not preclude the simultaneous or later exercise by the Holder hereof of any or
all of such other rights.
5. No Shareholder Rights.
This Debenture shall not entitle the Holder to any of the rights of a
shareholder of the Company.
6. Amendments.
This Debenture shall not be amended without the prior written approval
of the Holder hereof.
<PAGE>
7. Costs of Collection.
If a Default occurs hereunder, or if this Debenture is collected by
suit or legal proceedings or through the probate court or bankruptcy
proceedings, the Company agrees to pay all reasonable attorney's fees and all
expenses of collection and costs of court.
8. Notices.
Any notice, demand, request or communication provided for in this
Debenture shall be in writing and shall be deemed to have been duly given when
personally delivered or sent by overnight delivery service or certified mail,
return receipt requested, postage prepaid, addressed to the respective address
last given by each of the Company and the Holder to the other; provided that all
notices to the Company shall be directed to the attention of the Secretary of
the Company. All notices and communications shall be deemed to have been
received on the date of delivery thereof.
9. Applicable Law.
This Debenture shall be governed and construed under the applicable
laws of the State of Georgia without regard to the conflicts of law provisions
thereof.
10. No Waiver by the Holder.
Any check, draft, money order or other instrument given in payment of
all or any portion hereof may be accepted by Holder and handled in collection in
the Holder's customary manner, but the same shall not constitute payment
hereunder or diminish any rights of the Holder except to the extent that actual
cash proceeds of such instrument are unconditionally received by the Holder.
IN WITNESS WHEREOF, TRC ACQUISITION CORPORATION has caused this Debenture
to be executed in its name by a duly authorized officer.
TRC ACQUISITION CORPORATION
By: /s/ Clyde E. Culp, III
------------------------------------
Clyde E. Culp, III
Its: Chairman & Chief Executive Officer
<PAGE>
EXHIBIT 10.13(a)
FIRST AMENDMENT
11% SUBORDINATED DEBENTURE DUE JANUARY 30, 1999
JANUARY 28, 1999
Item number two: TERM AND PRINCIPAL PAYMENTS is hereby amended to state the
following:
The principal of this Debenture is due and payable in accordance with the
following schedule:
March 1, 1999 $50,000
The earlier of February 21, 1999 or final proxy mailing $50,000
Upon registration of the underlying shares related to
the above proxy statement $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.
Harvest Restaurant Group, Inc.
/s/ Timothy R. Robinson
- -----------------------
Timothy R. Robinson
Secretary and
Vice President, Chief Financial Officer
Accepted:
/s/ Ralph C. DiLorio
- --------------------
Ralph C. DiLorio
EXHIBIT 10.14
PROMISSORY NOTE
$350,000.00 Alpharetta, Georgia
April 1, 1998
FOR VALUE RECEIVED, the undersigned TRC Acquisition Corporation, a Georgia
corporation (the "Maker"), promises to pay to the order of SECA VII, LLC, a
Virginia limited liability company, without offset, at 3523 Waterlick Rd.,
Lynchburg, Virginia, or at such other place as the holder of this Note (the
"Holder") may from time to time in writing designate, in lawful money of the
United States of America, the principal sum of Three Hundred Fifty Thousand
Dollars ($350,000.00), together with interest thereon from date hereof at the
rate of Twelve and One/Half Percent (12.5%) per annum. Interest only shall be
payable monthly on the 1st day of each month beginning May 1, 1998. Principal
with any accrued interest shall be paid in full on the earlier of January 30,
1999 or the closing of one or more public or private placements of equity
securities of the Maker in an aggregate amount equal to or in excess of
$2,000,000.
If default be made in any payment under this Note the entire principal
balance and accrued interest shall at once become due and payable, without
notice, at the option of the Holder of this Note. Failure to exercise this
option in the event of default shall not constitute a waiver of the right to
exercise the same in the event of any subsequent default.
Any default in any payment under any other indebtedness of the Maker hereof
to the Holder shall constitute a default in payment hereunder, and any default
in payment hereunder shall constitute a default in payment under all other
indebtedness of the maker to the Holder, and in any such case all indebtedness
of the Maker to the Holder shall at once become due and payable, without notice,
at the option of the Holder of this Note.
All payments made on account of the indebtedness evidenced by this Note
shall be applied as follows: first, to accrued and unpaid interest on the unpaid
principal balance; and second, the remainder of such payments on account of the
unpaid principal balance.
Should Maker fail to pay interest or principal within ten days of the due
date provided for herein, then Maker further promises to pay a late payment
charge equal to Five Percent (5%) of the amount unpaid as liquidated
compensation to Holder for the additional expense of processing and
administering the late payment. This time for payment shall not be deemed to
extend the time for payment or be a "grace period" or "cure period" that gives
Maker the right to cure a default in payment of the Note.
Upon failure to pay interest or principal when due, interest shall be
payable at a default rate equal to Sixteen Percent (16%) per annum until the
default is cured.
<PAGE>
The Maker waives presentment, protest, demand, diligence, notice of
dishonor and of nonpayment and waives and renounces all right to the benefits of
any statute of limitations, any moratorium, appraisement, exemption or homestead
now provided or which may hereafter be provided by any federal or state statute,
including, but not limited to, exemptions provided by or allowed under the
federal Bankruptcy Code, both as to Maker and as to all of Maker's property,
whether real or personal, against the enforcement and collection of the
obligations evidenced by this Note and all extensions, renewals and
modifications hereof.
Upon default in the payment of the principal and/or interest, whether suit
be brought or not, the undersigned agree to pay all costs of collection,
including reasonable attorney's fees and expenses.
The Maker warrants and represents that the loan evidenced hereby is being
made for business or investment purposes.
This Note shall be interpreted in accordance with the laws of the
Commonwealth of Virginia.
TRC Acquisition Corporation
By: /s/ Timothy R. Robinson
-----------------------------------
Timothy R. Robinson
Its: Vice President, Chief Financial Officer
State of Georgia
To-Wit:
City of Alpharetta
I, Rick Thornton, a Notary Public for the State of Georgia at Large do
hereby certify that Timothy R. Robinson, Vice President & Chief Financial
Officer, of and on behalf of TRC Acquisition Corporation, whose name is signed
to the foregoing instrument bearing date the 1st day of April, 1998, has
acknowledged the same before me.
Given under my hand this 31st day of March, 1998.
My commission expires: March 18, 2000.
/s/ Rick Thornton
-----------------
Notary Public
<PAGE>
EXHIBIT 10.14(a)
FIRST AMENDMENT
$350,000
12.5% PROMISSORY NOTE DATED APRIL 1, 1998
DUE JANUARY 30, 1999
JANUARY 30, 1999
The first paragraph of the note is amended to state the following:
Principal with any accrued interest shall be paid in full on the earlier of July
31, 1999 or the Maker receiving the final $2,000,000 related to the issuance of
the Maker's Series D Preferred Stock.
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.
Hartan, Inc.
(Successor to TRC Acquisition Corporation)
By: /s/ Timothy R. Robinson
------------------------
Timothy R. Robinson
Secretary and
Vice President, Chief Financial Officer
Accepted:
SECA VII, LLC
By: Smither & Company, Manager
By: /s/ Kenneth W. Smither
-----------------------
Kenneth W. Smither
President
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
May 6, 1999
