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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] CONFIDENTIAL, FOR USE OF THE
[X] Definitive Proxy Statement COMMISSION ONLY (AS PERMITTED BY
[_] Definitive Additional Materials RULE 14A-6(e)(2))
[_] Soliciting Material Pursuant to (S)240.14a-11(c) or (S)240.14a-12
Harvest Restaurant Group, Inc.
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[_] Fee paid previously with preliminary materials.
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[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: None.
(2) Form, Schedule or Registration Statement No.: Not Applicable
(3) Filing Party: Not Applicable
(4) Date Filed: Not Applicable
Notes:
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HARVEST RESTAURANT GROUP, INC.
2662 Holcomb Bridge Road
Suite 320
Alpharetta, Georgia 30022
Letter to Shareholders
and
Notice of Special Meeting to be Held March 12, 1999
February 10, 1999
To Our Shareholders:
On January 14, 1999, TRC Acquisition Corporation ("TRC") merged into a
subsidiary of Harvest Restaurant Group, Inc. (the "Company") in a forward
triangular merger in which former shareholders of privately-held TRC received
4,123,219 shares of common stock, representing approximately 50.1% of the
Company's currently outstanding shares of common stock. As a result of the
merger, the Company now owns and franchises the restaurants formerly owned and
franchised by TRC, which operate under the name "Rick Tanner's Original Grill."
In connection with the merger, outside investors agreed to invest $4,000,000 in
the Company in exchange for shares of the Company's preferred stock that is
convertible into common stock. To provide an adequate number of common shares
for conversion and other corporate purposes, we need to amend the Company's
articles of incorporation to increase the number of authorized common shares. We
also want to amend the articles to change the Company's name to "Tanner's
Restaurant Group, Inc."
We need your approval for both of these proposed amendments. We cordially
invite you to attend a special meeting of the Company's shareholders on March
12, 1999, at 9:00 a.m. local time in the Company's executive offices at the
above address.
At the meeting, we will ask you to consider and vote on the following
proposals:
(1) 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 shares.
(2) To amend the Company's articles of incorporation to change its name
to "Tanner's Restaurant Group, Inc."
The board of directors unanimously recommends that you vote for both
proposals.
The proposals are described in more detail in the proxy materials attached
to this letter. Amending our articles of incorporation requires the affirmative
vote of two-thirds of the issued and outstanding shares of common stock, so we
need your vote for each proposal.
Before the merger, 4,118,390 shares of common stock were issued and
outstanding. In the merger, the Company issued 4,123,219 shares of common stock
and 744,500 shares of the newly-created Series E Preferred Stock to the former
shareholders of TRC.
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The $4,000,000 financing commitment consists of three installments. The
investors invested $1,000,000, and received 1,300 shares of Series D Preferred
Stock, when the Company filed a preliminary version of these proxy materials
with the SEC in January. The investors are investing another $1,000,000, and are
receiving another 1,300 shares of Series D Preferred Stock, when the Company
mails these materials to you. One of the conditions to the investors' agreement
to invest the final $2,000,000 of the $4,000,000 commitment is that the articles
of incorporation be amended to provide an adequate number of shares for
conversion of the preferred stock issued to the investors. If the articles of
incorporation are amended as proposed, the investors will invest the final
$2,000,000, and will receive another 2,000 shares of Series D Preferred Stock,
when the Company registers with the SEC an adequate number of common shares to
allow conversion of the preferred shares. The Company will seek to cause this
registration to become effective in late spring 1999. As part of the financing
commitment, the Company exchanged the outstanding shares of Series B Preferred
Stock and Series C Preferred Stock, which were held by certain of the third
party investors, for 4,598 shares of the newly-created Series D Preferred Stock.
In addition, the Company agreed to issue to the investors warrants to purchase
919,800 shares of common stock at a price of $2.00 per share.
At the meeting, the shareholders may also transact any other business that
properly comes before the meeting or any adjournment or postponement of it. The
board of directors is not aware of any other business that will be presented for
consideration at the meeting. Shareholders have no dissenters' rights under
Texas law in connection with either of the proposals. February 3, 1999 is the
record date for determining shareholders entitled to notice of and to vote at
the meeting. The presence in person or by proxy of shareholders owning a
majority of the issued and outstanding shares of the common stock constitutes a
quorum for the meeting. The Company anticipates that this Proxy Statement and
the accompanying form of proxy will be first mailed or given to shareholders on
or about February 10, 1999.
You should read all of the proxy materials carefully. You should rely only
on the information contained in these proxy materials. We have not authorized
anyone to provide you with information that is different.
We cordially invite you to attend the meeting in person. Regardless of
whether you plan to attend, please complete, sign and date the enclosed proxy
card and return it as promptly as possible in the enclosed envelope. No postage
is required if the proxy is mailed in the United States.
We appreciate your support.
By Order of the Board of Directors,
/s/ Clyde E. Culp, III
-----------------------
Clyde E. Culp, III
Chief Executive Officer
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HARVEST RESTAURANT GROUP, INC.
PROXY STATEMENT
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MARCH 12, 1999
TABLE OF CONTENTS
PAGE
----
SUMMARY .................................................................. 1
THE MEETING................................................................ 4
Time, Date and Place.............................................. 4
Matters to be Considered at the Meeting........................... 4
Voting and Record Date............................................ 4
Proxies........................................................... 5
No Dissenters' Rights............................................. 5
Costs of Solicitation............................................. 5
PROPOSAL 1: AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES......... 6
Overview.......................................................... 6
The Financing Commitment.......................................... 7
Summary of Recent Issuances and Exchanges......................... 8
Background of the Financing Commitment............................ 9
The Company Prior to the Merger................................... 9
TRC............................................................... 9
The Merger........................................................ 10
Previous Preliminary Proxy Materials.............................. 11
Interests of Certain Persons in the Proposals..................... 11
Effect of the Proposed Amendments on the Company's Shareholders... 12
Consequences of the Failure of the Shareholders to
Approve the Proposed Amendment................................... 12
No Dissenting Shareholders' Rights................................ 13
Recommendation of the Board of Directors.......................... 13
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS................ 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION FOR TRC........................................................ 15
Overview.......................................................... 15
Results of Operations for the Three Quarters Ended October 4, 1998
Compared to the Three Quarters Ended October 5, 1997............. 15
Results of Operations for the Fiscal Year Ended December 28, 1997
Compared to the Pro Forma Fiscal Year Ended December 29, 1996.... 17
Liquidity and Capital Resources................................... 20
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF THE COMPANY............................................................ 21
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY................................ 22
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Common Stock..................................................... 22
Preferred Stock.................................................. 22
Redeemable Preferred Stock Purchase Warrants..................... 25
Common Stock Purchase Warrants................................... 25
PROPOSAL 2: CHANGE OF COMPANY NAME....................................... 26
OTHER MATTERS............................................................. 26
SHAREHOLDER PROPOSALS FOR
THE 1999 ANNUAL MEETING OF SHAREHOLDERS................................. 26
ACCOUNTANTS............................................................... 26
AVAILABLE INFORMATION..................................................... 27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................ F-1
ii
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SUMMARY
This summary highlights information contained elsewhere in this Proxy
Statement. It is not complete and does not contain all of the information you
should consider before voting. You should read the entire Proxy Statement
carefully, including the financial statements and notes to the financial
statements, before voting. Portions of this Proxy Statement contain certain
"forward-looking" statements which can be identified by the use of forward-
looking terms such as "expect," "estimate," "anticipate," and "believe" or by
discussions of strategy, future operating results or events. These forward-
looking statements are subject to risks and uncertainties that may cause the
Company's actual results, performance, or achievements to differ materially from
those discussed in the forward-looking statements. These risks and uncertainties
include, among others: possible inability to obtain needed additional financing;
possible deterioration in restaurant performance (including sales and margins);
possible inability to re-list the common stock on the Nasdaq SmallCap Market or
a national exchange; competition within the Company's market segment; lack of
availability of suitable locations for new restaurants; unanticipated
development and operating costs; lack of consumer acceptance of products and
services; risks of changes in business strategy; and risks in identifying,
financing, completing and integrating acquisitions of other restaurants and
restaurant companies; as well as other factors as detailed throughout this Proxy
Statement and in the Company's reports filed with the SEC. Forward-looking
statements are made as of the date of this Proxy Statement, and the Company
cannot assure that the future results covered by the forward-looking statements
will be achieved.
Background
On January 14, 1999, TRC Acquisition Corporation ("TRC") merged into a
subsidiary of Harvest Restaurant Group, Inc. (the "Company") 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. See
"Proposal 1: Amendment to Increase the Number of Authorized Shares--The Merger"
and "--Summary of Recent Issuances and Exchanges." The Company had no ongoing
operations when the merger occurred but, as a result of the merger, now owns and
franchises the restaurants formerly owned and franchised by TRC, which operate
under the name "Rick Tanner's Original Grill." A significant factor in both the
structure and completion of the merger was a commitment by third party investors
to invest $4,000,000 in the Company. To fulfill its obligations under this
financing commitment, the Company is seeking shareholder approval to increase
the number of authorized shares of common stock. In addition, to more closely
identify the Company with its new business, the Company is seeking shareholder
approval to change the Company's name to "Tanner's Restaurant Group, Inc." All
but one of the former shareholders of TRC have agreed with the Company that he
or it will vote his or its shares in favor of the proposals. Mr. William J.
Gallagher, a director of the Company prior to the merger and current director,
has also agreed to vote his shares in favor of the proposals.
Prior to the merger, the Company had experienced a number of financial
difficulties. In the first quarter of 1998, three area developers that operated
nine franchised Harvest Rotisserie restaurants in Florida, Indiana and North
Carolina closed all nine of these restaurants. By July 1998, the Company had
closed all of its Company-owned restaurants. The one remaining franchised
restaurant in Northern California was closed in August 1998. By this time, the
Company had decided to focus its resources on the development of Rick Tanner's
Original Grill restaurants ("Tanner's") and entered into an agreement to merge
with TRC.
As a result of the merger, the Company owns and operates 11 restaurants
located in Georgia and franchises two restaurants, one in Macon, Georgia and one
in Montgomery, Alabama. The restaurants
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operate under the name "Rick Tanner's Original Grill." Tanner's restaurants are
intended to appeal to traditional casual dining customers by offering high
quality food and large portions at moderate prices.
Richard Tanner developed the original Tanner's concept, which focused on
chicken rotisserie and ribs, in 1986, and grew this idea into eight restaurants
in Atlanta, Georgia over the next ten years. In October 1996, Mr. Tanner joined
forces with veteran restaurant investors and a new management team to create
TRC, which was formed to expand Mr. Tanner's successful concept by adding new
company-owned restaurants and developing a franchise program. Between the date
of its formation and its merger with the Company, TRC opened three new Tanner's
restaurants and began development of several additional locations. TRC also
began initial development of a franchise program and currently has two
franchisees, Mr. Tanner and a former director of TRC. Each franchisee opened one
Tanner's restaurant in 1998 and has additional sites in development.
Tanner's restaurants are positioned between the fast food chicken, home
meal replacement restaurants, and the full bar casual restaurants that have less
portable foods. Tanner's restaurants offer a varied menu of American fare made
from original recipes. The menu features over 40 different entrees and 15
different appetizers including pot roast, meatloaf, rotisserie chicken, steaks,
slow roasted barbecue pork ribs, "cheesy chicken lips," "Texas" chili,
sandwiches, made-from-scratch soups and salads, and family value packs ideal for
take home service. All entrees are prepared using aged beef and fresh chicken
and seafood, are cooked to order and are served with a choice of two out of 15
different freshly prepared vegetables.
The Company's growth strategy is to open new company-owned Tanner's
restaurants, to increase sales at existing restaurants, and to develop and
expand its franchising program. The Company intends to develop Tanner's
restaurants in selected metropolitan markets in the Southeast and in smaller
markets in close proximity to its existing metropolitan markets to enable it to
use existing supervisory, marketing and distribution systems.
The Financing Commitment
Summary. The commitment by outside investors to invest $4,000,000 in the
Company was an essential component of the merger and is vital to the future
success of the Company. Pursuant to the terms of the financing commitment, the
Company has sold or will sell an aggregate of 4,600 shares of its Series D
Convertible Preferred Stock for cash as follows:
(a) $1,000,000 was invested upon filing of a preliminary version of
this Proxy Statement with the SEC, in exchange for 1,300
shares;
(b) $1,000,000 will be invested upon mailing of this Proxy Statement
to shareholders, in exchange for 1,300 shares; and
(c) if the articles of incorporation are amended as proposed, the
final $2,000,000 will be invested when the Company registers
with the SEC the shares of common stock into which the Series D
Preferred Stock is convertible, which the Company will seek to
cause to occur in late spring 1999, in exchange for 2,000
shares. See "Description of Capital Stock - Preferred Stock -
Series D Convertible Preferred Stock."
In addition to the sale of shares of Series D Preferred Stock for cash, the
Company issued a total of 4,598 shares of Series D Preferred Stock in exchange
for previously issued shares of Series B and Series C Preferred Stock. The
Company also issued or agreed to issue to the third party investors
2
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warrants to purchase 919,800 shares of common stock at a price of $2.00 per
share. See "Proposal 1: Amendment to Increase the Number of Authorized Shares --
The Financing Commitment" and "-- Summary of Recent Issuances and Exchanges."
The third party investors are Sovereign Partners, L.P., Atlantis Capital
Fund Limited, Dominion Capital Fund Limited, G.P.S. America Fund Ltd., Atlas
Capital Fund Ltd., and two foreign residents.
Need for Additional Authorized Shares of Common Stock; Substantial Dilution
of Voting Power. The Company presently has the authority to issue 20,000,000
shares of common stock under its articles of incorporation. The Series D
Preferred Stock will be convertible into common stock at a conversion ratio that
is related to the market price of the common stock. Based on the current market
price for the common stock, the Company does not have a sufficient number of
authorized shares to support the conversion of all 9,198 shares of Series D
Preferred Stock that have been and are to be issued. Furthermore, the Company's
Series A Preferred Stock and Series E Preferred Stock are convertible into
common stock, and the Company also has outstanding options and warrants to
acquire shares of common stock.
Given the number of shares of common stock now outstanding, and assuming
all of these convertible securities were to be converted or exercised (assuming
for purposes of the Series D Preferred Stock a trading price of the common stock
of $.39 per share, the closing price on the OTC Bulletin Board on the record
date), the Company would have approximately 54,374,760 shares of common stock
outstanding. This amount is approximately 34,374,760 more than the 20,000,000
shares the Company is now authorized to issue. Accordingly, as a condition of
their final $2,000,000 investment, the investors required the Company to seek to
amend the articles of incorporation to increase the number of authorized shares
of common stock as proposed in these proxy materials. If the Company fails to
amend its articles of incorporation as proposed and consequently cannot issue
shares of common stock upon conversion or exercise of the securities described
above, the Company would likely incur substantial liability to the holders of
such securities.
Although the proposed amendment will facilitate a substantial dilution of
the voting power of the current common shareholders, the Company believes that
such dilution is acceptable, given the benefits to the Company of the financing.
We need your vote to ensure that the Company can complete its obligations
under the financing commitment and receive all of the committed investment, as
well as meet its obligations to its other security holders.
Use of Proceeds of the Financing. Proceeds from the $4,000,000 financing
will be used primarily for working capital and the development of four to seven
new Company-owned Tanner's restaurants and the opening of one to three
franchised Tanner's restaurants during 1999, although there can be no assurance
that such development plans will be successful.
The Company's principal executive offices are located at 2662 Holcomb
Bridge Road, Suite 320, Alpharetta, Georgia 30022, and its telephone number is
(770) 518-1444.
3
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THE MEETING
Time, Date and Place
The Company is furnishing this Proxy Statement to shareholders of record as
of February 3, 1999 in connection with the solicitation of proxies by the
Company's board of directors for use at the special shareholders meeting on
March 12, 1999 at 9:00 a.m. local time, at the Company's executive offices at
2662 Holcomb Bridge Road, Suite 320, Alpharetta, Georgia 30022, and at any
adjournment or postponement of such meeting.
Matters to Be Considered at the Meeting
At the meeting, shareholders will be asked to consider and vote upon the
following proposals:
(1) to 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 shares; and
(2) to amend the Company's articles of incorporation to change its name
to "Tanner's Restaurant Group, Inc."
Both proposals are more fully described in this proxy statement. The
Company's articles of incorporation cannot be amended without shareholder
approval.
The board of directors has unanimously approved the amendments to the
articles of incorporation and recommends a vote FOR the approval of each
proposal. Accordingly, the Company is seeking shareholder approval of the
proposals.
Voting and Record Date
The board of directors has fixed February 3, 1999 as the record date for
the meeting. Only persons who hold the common stock of record as of the record
date will be entitled to notice of and to vote at the meeting. (The Company's
preferred stock is non-voting.) Each shareholder of record of common stock on
the record date is entitled to cast one vote per share, exercisable in person or
by a properly executed proxy at the meeting. As of the record date, 8,241,609
shares of the common stock, consisting of 4,123,219 shares held by the former
shareholders of TRC and 4,118,390 shares held by the pre-merger shareholders of
the Company, were outstanding and entitled to vote.
The presence at the meeting, in person or by a proxy, of the holders of a
majority of the shares of common stock outstanding on the record date will
constitute a quorum at the meeting. Inspectors appointed by the Company will
count votes. Shares represented by proxies that reflect abstentions or include
"broker non-votes" will be treated as shares that are present and entitled to
vote for purposes of determining the presence of a quorum. (A broker non-vote
occurs when a registered broker holding customer securities in street name has
not received voting instructions from the beneficial owner regarding any "non-
routine" matter as so designated by that broker's self-regulatory organization.)
Approval of each of the amendments to the Company's articles of incorporation
requires the affirmative vote of the holders of two-thirds of the Company's
issued and outstanding common stock as of the record date. Abstentions and
broker non-votes will be treated as a "no" vote for purposes of determining
whether approval of each proposal has been obtained.
If a sufficient number of votes to adopt the proposals is not present,
either in person or by proxy, at the meeting, the Company intends to adjourn the
meeting to solicit additional votes. At any such adjourned meeting, all proxies
will be voted in the same manner as they would have been voted at the meeting.
4
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Proxies
All shares of common stock represented at the meeting by properly executed
proxies received prior to or at the meeting, and not duly and timely revoked,
will be voted at the meeting in accordance with the choices marked by the
shareholders. Unless a contrary choice is marked, or if the proxy is left blank
as to choice, the shares will be voted FOR approval of each proposal.
The board of directors is not aware of any other matters not referred to in
these proxy materials that will be presented for action at the meeting. If any
other matters properly come before the meeting, the persons designated in the
proxy intend to vote the shares represented thereby in accordance with their
best judgment.
You may revoke any proxy at any time before it is voted. Proxies may be
revoked by (a) filing with the Secretary of the Company at or before the taking
of the vote the meeting a written revocation bearing a later date than the
proxy, (b) duly executing a later-dated proxy relating to the same shares and
delivering it to the Secretary of the Company before the taking of the vote at
the meeting, or (c) attending the meeting and voting in person (although
attendance at the meeting will not in and of itself effectively revoke a proxy).
No Dissenters' Rights
Under the Texas Business Corporation Act shareholders have no right to
dissent from any of the proposals.
Costs of Solicitation
The Company is making this proxy solicitation and will pay all of the
expenses involved in preparing, assembling and mailing these proxy materials,
along with the costs of soliciting proxies. In addition to solicitation by mail,
directors, officers, and regular employees of the Company may solicit proxies by
telephone or personal interview. They will receive no compensation for their
services other than their regular compensation. The Company will also make
arrangements with brokerage houses and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of the
shares held of record by such persons. The Company may reimburse such persons
for reasonable out-of-pocket expenses they incur in doing so.
Holders of shares of the common stock are requested to complete, date, and
sign the enclosed Proxy and to return it to the Company in the postage paid
envelope provided.
5
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PROPOSAL 1: AMENDMENT TO INCREASE THE NUMBER OF AUTHORIZED SHARES
Overview
Under its articles of incorporation, the Company is presently authorized to
issue 20,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $1.00 per share. As of February 3, 1999,
approximately 8,241,609 shares of common stock, 495,854 shares of Series A
Preferred Stock, 5,898 shares of Series D Preferred Stock, and 744,500 shares of
Series E Preferred Stock were outstanding, and the Company has committed to
issue another 3,300 shares of Series D Preferred Stock.
The increase in the number of authorized shares is necessary for the
following reasons:
(1) The Company needs additional authorized shares of common stock to
issue upon conversion of the outstanding shares of Series A Preferred
Stock, Series D Preferred Stock and Series E Preferred Stock, and upon
exercise of outstanding warrants and options. Given the number of
shares of common stock now outstanding, and assuming all of the
preferred stock, warrants, and options were to be converted or
exercised (assuming for purposes of the Series D Preferred Stock a
trading price of the common stock of $.39 per share, the closing price
on the OTC Bulletin Board on the record date), the Company would have
approximately 54,374,760 shares of common stock outstanding. This
amount is approximately 34,374,760 more than the 20,000,000 shares the
Company is now authorized to issue. If the Company does not amend its
articles of incorporation, and cannot issue shares of common stock
upon conversion or exercise of the preferred stock, warrants, and
options, the Company would likely incur substantial liability to the
holders of such securities.
(2) Increasing the Company's authorized common shares is a condition of
the financing commitment for the final $2,000,000 investment in Series
D Preferred Stock by outside investors.
(3) The Company may need additional shares of common stock for future
acquisitions, stock dividends, and for other instances. The Company's
ability to sustain operations, make future capital expenditures, and
fund the development and marketing of its operations is dependent in
part on its ability to raise additional capital.
If the amendment is approved, all or any part of the additional authorized
but unissued shares may be issued without further approval by the shareholders,
for such purposes and on such terms as the board of directors may determine. (If
the Company is able to list the common stock on the Nasdaq SmallCap Market or a
national exchange, of which the Company can offer no assurances, the listing
agreement with Nasdaq or the exchange will require shareholder approval of
certain issuances. No such requirement now applies to the Company.) Holders of
the Company's common stock do not have any preemptive rights to subscribe for
the purchase of any shares of common stock, which means that current
shareholders do not have a prior right to purchase any new issue of common stock
to maintain their proportionate ownership. The amendment will not affect the
rights of existing holders of common stock except to the extent that future
issuances of common stock will dilute each existing shareholder's proportionate
ownership interest in the Company.
6
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The Financing Commitment
The Company has obtained a financing commitment for the purchase of 4,600
shares of its Series D Convertible Preferred Stock in a private transaction
totaling $4,000,000. The $4,000,000 has been or is to be invested in the Company
as follows:
(a) the Company received $1,000,000 in January 1999 when the Company filed
a preliminary version of these proxy materials with the SEC;
(b) the Company will receive $1,000,000 concurrently with the mailing of
these proxy materials to the shareholders of the Company; and
(c) the Company will receive $2,000,000 upon the effective date of a
registration statement with the SEC that registers, at a minimum, the shares of
common stock into which the Series D Preferred Stock is convertible.
The original issue price of the Series D Preferred Stock is $1,000 per
share. For each $10,000 investment increment of the first two $1,000,000
investments, however, the investors have received or are receiving 13 shares of
Series D Preferred having an aggregate original issue price of $13,000.
Investors who are investing $1,500,000 of the first two $1,000,000 investments
had previously placed $1,500,000 in escrow in July 1998 to fund their
subscriptions for shares of Series C Preferred Stock that were never issued. To
compensate those investors for having their money in escrow longer than
anticipated and to encourage them to invest such funds in Series D Preferred,
the Company agreed to issue the shares (and the shares to be issued for the
remaining $500,000 of the first two $1,000,000 investments) on the more
favorable terms described above. The shares to be issued on 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 for each $10,000 investment increment.
Each share of Series D Preferred is convertible into shares of common stock
at a ratio determined by the following formula: $1,000 divided by 80% of the per
share market value of the common stock. Dividends on the Series D Preferred are
payable at the rate of 7% of the original issue price. See "Description of
Capital Stock - Preferred Stock - Series D Convertible Preferred Stock."
Also in connection with the recapitalization of the Company that includes
the $4,000,000 in cash investments:
(a) holders of 133.2 shares of Series B Preferred Stock exchanged their
shares, for which they originally paid $1,332,000, for 1,998 shares of Series D
Preferred Stock, meaning that for each $10,000 increment originally invested,
the investor received 15 shares of Series D Preferred Stock having an aggregate
original issue price of $15,000; and
(b) holders of 200 shares of Series C Preferred Stock exchanged their
shares, for which they originally paid $2,000,000, for 2,600 shares of Series D
Preferred Stock, meaning that for each $10,000 increment originally invested,
the investor received 13 shares of Series D Preferred Stock having an aggregate
original price of $13,000.
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, the Company will
be obligated to issue warrants to purchase 919,800 shares of common stock.
7
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Potential Dilution. If the proposed increase in the number of authorized
common shares is approved and the financing is completed, the third party
investors will be able to convert their shares of preferred stock into a large
number of shares of common stock. As noted above, 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 per share market value of
the common stock. Using the closing market price on the OTC Bulletin Board on
February 3, 1999 of $.39 per share, and assuming all 9,198 shares of Series D
Preferred Stock are outstanding, those 9,198 shares of Series D Preferred Stock
would be convertible into 29,480,769 shares of common stock. If the market price
of the common stock were to decrease to $.25, the 9,198 shares of Series D
Preferred Stock would be convertible into 45,990,000 shares of common stock.
Conversely, if the market price of the common stock were to increase to $.75,
those 9,198 shares of Series D Preferred Stock would be convertible into
15,330,000 shares of common stock. (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 the Company's Series A Preferred Stock and
Series E Preferred Stock, as well as the holders of options and warrants to
acquire shares of the Company's common stock, will be able to convert or
exercise, as applicable, their securities into shares of common stock.
Consequently, substantial dilution of the voting power of the current
shareholders is likely as convertible securities are converted and options and
warrants are exercised over time.
Summary of Recent Issuances and Exchanges
On January 14, 1999, the Company exchanged all outstanding shares of Series
B Preferred Stock and Series C Preferred Stock for 4,598 shares of Series D
Preferred Stock. In the merger that occurred at approximately the same time,
the Company issued 4,123,219 shares of common stock and 744,500 shares of Series
E Preferred Stock to the former shareholders of TRC, as more fully described
below. See "--The Merger." Shortly after the merger, the Company issued another
1,300 shares of Series D Preferred Stock to the third party investors upon the
filing of a preliminary version of this Proxy Statement with the SEC. In
addition, the Company is issuing another 1,300 shares of Series D Preferred
Stock to the third party investors contemporaneously with the mailing of this
Proxy Statement to you, and will issue 2,000 more shares of Series D Preferred
Stock upon the registration of a number of shares of common stock sufficient to
support the conversion of the Series D Preferred Stock. The Company has also
issued or agreed to issue warrants to purchase shares of common stock to the
holders of shares of Series D Preferred Stock.
Assuming that all 9,198 shares of Series D Preferred Stock are issued and
are converted based on a market price of the common stock of $.39 per share, the
closing price on the record date, the Series D Preferred Stock will be
convertible into 29,480,769 shares of common stock. The aggregate cash price
paid for the Series D Preferred Stock, and for the Series B and Series C
Preferred Stock exchanged for the Series D Preferred Stock, is $7,332,000.
Therefore, the equivalent price per common share is approximately $.25.
The following calculations show the estimated impact of the merger and the
financing commitment on the Company's net tangible assets per share. The
Company's unaudited consolidated balance sheet as of October 4, 1998, the most
recent balance sheet available, is used for all calculations. Prior to the
merger, assuming for purposes of this calculation that the number of shares then
outstanding was 4,118,390, and excluding the $2,000,000 invested in the Series C
Preferred Stock in July 1998 in contemplation of the merger, the net tangible
assets per share were $(.26). Subsequent to the merger, assuming for purposes
of this calculation that the merger occurred on October 4, 1998, giving effect
to the $2,000,000 previously invested in the Series C Preferred Stock, and
including the 4,123,219 shares issued to the former shareholders of TRC, the net
tangible assets per share figure decreased to $(.39). Upon receipt of the full
$4,000,000 of the financing commitment, assuming that all shares of Series D
Preferred
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Stock are converted at the market price of the common stock on the record date,
and including all shares issuable upon exercise of "in the money" options and
warrants, the net tangible assets per share would increase to $.20.
Background of the Financing Commitment
As stated above, the financing commitment was an important factor in the
merger. Brief descriptions of: the Company prior to the merger; TRC; and the
merger follow.
The Company Prior to the Merger
The Company was incorporated in Texas in June 1993 and initially conducted
business as an area developer for Cluckers Wood Roasted Chicken, Inc. ("CWRC"),
the developer and franchisor of the "Cluckers" restaurant concept. In November
1994 the Company exchanged its Cluckers area development agreement with CWRC for
systems, franchising materials and the exclusive right to use the Cluckers name
in Texas. During 1996, the Company began to concentrate on the development,
operation and franchising of Harvest Rotisserie restaurants, which the Company
believed to be an improvement over the original Cluckers concept, and in 1996
the Company converted its one Cluckers restaurant in San Antonio to a Harvest
Rotisserie.
By the end of 1997, the Company had 14 Harvest Rotisserie restaurants in
operation, four of which were Company-owned restaurants in Texas and ten of
which were operated as franchised restaurants in Florida, Indiana, North
Carolina, and Northern California. The Company also leased five properties in
Texas for future development as Harvest Rotisserie restaurants. During 1997, the
Company also began the conceptual development of a multi-branded restaurant
featuring Harvest Rotisserie along with two or more additional branded
restaurants in one building (a "Harvest Food Court").
In the first quarter of 1998, three area developers that operated nine
franchised Harvest Rotisserie restaurants in Florida, Indiana and North Carolina
closed all nine of these restaurants. The closures were the result of restaurant
operating losses caused in part by an industry-wide decline in consumer
acceptance of the market segment in which the Harvest concept was positioned and
the Company's decision not to provide the area developers with additional
financing. By July 1998, the Company had closed all of its Company-owned
restaurants. The Company also terminated a letter of intent related to the
development of the Harvest Food Court concept. The one remaining franchised
restaurant in Northern California was closed in August 1998. By this time, the
Company had decided to focus its resources on the development of Rick Tanner's
Original Grill restaurants ("Tanner's") as described below.
TRC
Before the merger, TRC owned and operated 11 restaurants located in Georgia
and franchised two restaurants, one in Macon, Georgia and one in Montgomery,
Alabama. The restaurants operate under the name of Rick Tanner's Original Grill.
Tanner's restaurants are intended to appeal to traditional casual dining
customers by offering high quality food and large portions at moderate
prices.
Richard Tanner founded the original Tanner's concept in 1986 and grew his
chicken rotisserie and ribs concept to eight units in Atlanta, Georgia. In
October 1996, Mr. Tanner joined forces with veteran restaurant investors and a
new management team and created TRC to expand the historically successful
concept by adding new company-owned restaurants and developing a franchise
program. Since its formation in October 1996, TRC has opened three new Tanner's
restaurants and has additional locations in development. In addition, TRC has
begun the initial development of a franchise program. TRC currently has two
franchisees, Mr. Tanner and a former director of TRC. Each franchisee has opened
one Tanner's restaurant in 1998 and has additional sites in development.
9
<PAGE>
Tanner's restaurants are positioned between the fast food chicken, home
meal replacement restaurants, and the full bar casual restaurants that have less
portable foods. Tanner's restaurants offer a varied menu of American fare made
from original recipes with efficient, table-side service. 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.
Post-merger, the Company's growth strategy is to open new company-owned
Tanner's restaurants and to increase sales at existing restaurants, as well as
to develop and expand its franchising program. The Company intends to develop
Tanner's restaurants to fill out Company-store penetration in the Atlanta market
and grow in selected Southeastern markets to enable the Company to utilize
existing supervisory, marketing and distribution systems. Excluding real estate
costs and preopening expenses, the average investment cost to open new
restaurants in 1998 was approximately $650,000 per unit. The Company expects
that its average investment per unit opened will be reduced from the overall
1998 average to an average of approximately $500,000 in 1999 due primarily to
reducing the average unit size from those opened in 1998 and building units in
strip shopping centers as opposed to freestanding buildings. Individual unit
investment costs could vary, however, due to a variety of factors, including
competition for the site, area construction costs, and the mix of conversions,
build-to-suit and leased locations. The Company currently anticipates that it
will lease most of its future locations, which are expected to be less costly
than freestanding locations. In 1999, the Company expects to open four to seven
Company-owned Tanner's restaurants and one to three franchised restaurants. The
Company can give no assurance, however, that it will be able to open or
franchise any of these restaurants.
The principal executive offices of TRC are located at 2662 Holcomb Bridge
Road, Suite 320, Alpharetta, Georgia 30022, and its telephone number is (770)
518-1444.
The Merger
Pursuant to the Amended and Restated Agreement and Plan of Merger by and
among the Company, TRC, and Hartan, Inc., a wholly-owned subsidiary of the
Company, TRC merged with and into Hartan on January 14, 1999. The agreement
provides that the merger became effective for accounting and financial purposes,
to the fullest extent permitted by law, on December 27, 1998.
In the merger:
. TRC merged with and into Hartan and become a wholly-owned
subsidiary of the Company.
. An aggregate of 4,123,219 shares of the Company's common stock was
issued to the former shareholders of TRC. Each holder of TRC
common stock received 1.57075 shares of the Company's common stock
for each share of TRC common stock such holder held at the time of
the merger.
. All holders of TRC options and warrants received options and
warrants to acquire shares of common stock, as adjusted in light
of the exchange ratio.
. The holders of the 2,000 outstanding shares of TRC's Class A
Preferred Stock received an aggregate of 366,300 shares of the
Company's Series E Preferred Stock, with a stated value of $10.00
per share.
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<PAGE>
. In exchange for approximately 378,200 shares of the Company's Series E
Preferred Stock, Richard Tanner cancelled a subordinated debenture
valued at $3,235,000 (including the principal balance and all interest
accrued thereon) and terminated his employment agreement.
. The Company's board of directors was changed to consist of: Clyde E.
Culp, III, James R. Walker, Richard Tanner (all of whom were directors
of TRC prior to the merger) and William J. Gallagher (a director of
the Company prior to the merger).
. The officers of the Company were removed and the following officers
were appointed: Clyde E. Culp, III as Chairman and Chief Executive
Officer; Robert J. Hoffman as Senior Vice President of Operations; and
Timothy R. Robinson as Chief Financial Officer and Secretary. All of
these officers were formerly officers of TRC.
As a result of the merger, the former shareholders of TRC acquired
approximately 50.1% of the shares of common stock outstanding immediately after
the effective date of the merger. The symbol for the common stock on the OTC
Bulletin Board remains "ROTI."
Previous Preliminary Proxy Materials
On October 27, 1998, the Company filed a preliminary proxy statement with
the SEC in connection with the merger. One of the purposes of that proxy
statement was the solicitation of the approval of the merger by Company's
shareholders. After the filing of the proxy statement, however, the Company, TRC
and the third party investors concluded that, because of time constraints and
the fact the Texas Business Corporation Act did not require shareholder approval
of the merger, it was preferable to proceed without shareholder approval.
Consequently, the proxy statement was never mailed to shareholders and the
merger was consummated without their approval.
Interests of Certain Persons in the Proposals
Richard Tanner, one of the Company's directors, holds approximately
1,413,675 shares of common stock and 469,775 shares of the Series E Preferred
Stock. These shares of Series E Preferred Stock will be convertible into
1,879,100 shares of common stock in July 1999. Mr. Tanner also owns options to
acquire 353,419 shares of common stock. If the proposals are not approved, Mr.
Tanner may not be able to convert his shares or exercise his options.
James R. Walker, also a director of the Company, is an equity owner of SECA
VII, LLC, which owns 765,741 shares of common stock and 183,150 shares of Series
E Preferred Stock. These shares of Series E Preferred Stock will be convertible
into 732,600 shares of common stock in July 1999. SECA also holds options to
acquire 54,976 shares of common stock. If the proposals are not approved, SECA
VII may not be able to convert its shares of Series E Preferred Stock or
exercise its options.
In addition, Mr. Culp, who is both a director and an officer of the
Company, owns options to acquire 78,538 shares of common stock, and Mr. Robinson
and Mr. Hoffman, who are both officers of the Company, own options to acquire
254,462 shares and 243,466 shares, respectively. Mr. William J. Gallagher, a
director of the Company, owns options to acquire 140,000 shares of common stock.
In addition, Joseph Fazzone, Michael M. Hogan and Theodore M. Heesch, all of
whom are former officers or directors of the Company, own options to acquire
80,000, 30,000 and 30,000 shares of common stock, respectively. If the proposals
are not approved, Messrs. Culp, Robinson, Hoffman, Gallagher, Fazzone, Hogan and
Heesch may not be able to exercise their options.
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<PAGE>
Effect of the Proposed Amendments on the Company's Shareholders
If the proposals are adopted and the financing is completed, shareholders
will retain their equity interests in the Company, although such interests will
be subject to the possibility of significant dilution of voting power. The
number of shares of common stock that the Company is authorized to issue will
increase from 20,000,000 to 200,000,000, and upon the issuance of additional
shares of common stock, the voting power of the current shareholders will be
diluted. Because the outstanding shares of Series A, Series D and Series E
Preferred Stock are or will be convertible into shares of common stock and the
outstanding options and warrants are currently exercisable for shares of common
stock, the issuance of additional shares is beyond the control of the Company.
The proposed amendments will not result in any changes in the rights of the
shareholders.
Consequences of the Failure of the Shareholders to Approve the Proposed
Amendment
If the shareholders do not approve Proposal 1, the Company will be
adversely affected in several ways. First, the Company most likely will be
unable to obtain the final $2,000,000 installment of the financing commitment
from the third party investors. To obtain this $2,000,000 installment, the
Company must register a number of shares of common stock sufficient to support
the conversion of the outstanding shares of Series D Preferred Stock. Because
the Series D Preferred Stock is convertible into common stock at a conversion
rate that is based on the market price of the common stock, the Company is
unable to predict exactly how many shares of common stock will be needed. The
number of shares required is likely to exceed the number of unissued shares
available under the current Articles of Incorporation, which authorize
20,000,000 shares of common stock. As explained above, the number of shares of
common stock into which all 9,198 shares of Series D Preferred Stock will
convert could vary substantially. But in any event, given that over 8,000,000
shares have already been issued and given that a number of outstanding options
and warrants are currently exercisable for shares of common stock, the Company
will probably be unable to satisfy this condition to the financing commitment
without an amendment to the Articles of Incorporation to increase the number of
authorized shares.
Moreover, the Company may be forced to pay penalties if it is unable to
convert shares of Series D Preferred Stock upon demand. If the Company is
unable to issue the shares of common stock to a holder of Series D Preferred
Stock who presents his shares for conversion, the Company will be required to
rectify the problem within 45 days. If it cannot do so, it must pay a penalty
to all holders of shares of Series D Preferred Stock in an amount equal to
approximately .07% of the stated value of the outstanding shares of Series D
Preferred Stock held by each holder for each day that the Company is unable to
convert shares for which the shareholder has requested conversion. For example,
assuming that no shares of common stock are available for issuance when a holder
of Series D Preferred Stock presents his shares for conversion, and assuming
7,198 shares of Series D Preferred Stock are outstanding (7,198 is the number of
shares that will be outstanding after this Proxy Statement is mailed), the
Company will be penalized approximately $4,930 for each day that it does not
have shares of common stock available to convert all outstanding shares of
Series D Preferred Stock. If the Company could not increase the authorized
shares for 180 days, for example, the total penalty would be approximately
$887,425.
Finally, the failure of the Company's shareholders to approve Proposal 1 is
likely to expose the Company to liability to holders of warrants, options and
other securities that entitle the holder to acquire shares of common stock. A
number of the contracts between these holders and the Company require that the
Company reserve a number of shares sufficient to support the exercise or
conversion of the securities. If an adequate number of shares is not reserved,
the Company will be in violation the underlying agreements and be exposed to
claims by the security holders.
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<PAGE>
No Dissenting Shareholders' Rights
Under the Texas Business Corporation Act, shareholders have no right to
dissent from the proposals.
Recommendation of the Board of Directors
The board of directors believes that the proposed amendment to increase the
number of authorized shares is fair to and in the best interests of the Company
and its affiliated and unaffiliated shareholders. Accordingly, the board of
directors has unanimously approved the proposal and recommends that the
Company's shareholders vote FOR its approval.
UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined balance sheets have been derived
from the historical consolidated financial statements of the Company and TRC and
give effect to (i) the merger as a reverse acquisition and a purchase for
accounting purposes, and (ii) costs associated with the consummation of the
merger. The unaudited pro forma condensed combined balance sheet gives effect to
the combination as if it had occurred on October 4, 1998.
Unaudited pro forma condensed combined statements of operations have not
been presented due to the fact that the historical results of the Company are
not reflective of its ongoing operations after the merger and therefore are not
meaningful. After the merger, the Company 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 three quarters ended October 4, 1998, this would amount to
$203,770 and for the fiscal year ended December 27, 1997 this would amount to
$264,905.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that management deems appropriate. The pro
forma financial data do not purport to represent what the combined company's
financial position or results operations would actually have been if such
transactions in fact had occurred on those dates or to project the combined
company's financial position or results of operations for any future period. The
unaudited pro forma condensed combined balance sheets should be read in
conjunction with TRC's consolidated financial statements and the notes thereto
included elsewhere herein, and with the Company's unaudited consolidated
financial statements and notes thereto previously filed with the SEC in its
quarterly report on Form 10-QSB for the quarter ended October 4, 1998.
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<PAGE>
HARVEST RESTAURANT GROUP, INC. AND TRC ACQUISITION CORPORATION
Unaudited Pro Forma Condensed Combined Balance Sheets
As of October 4, 1998
<TABLE>
<CAPTION>
TRC Harvest Acquisition
Acquisition Restaurant Adjustments Pro Forma
Corporation Group, Inc. (1) (2) (3) Combined
----------- ----------- -------------------------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Cash..................... $ 123,924 $ 1,064,657 $4,000,000 $ 5,188,581
Accounts Receivable...... 201,978 201,978
Inventories.............. 106,605 106,605
Other current assets..... 19,340 19,340
----------- ------------ ----------- ---------- ------------ -----------
Total current assets.. 451,847 1,064,657 4,000,000 5,516,504
Property and equipment, net 1,448,083 666,692 2,114,775
Intangible assets, net 3,761,095 3,761,095
Goodwill, net 1,015,343 1,015,343
Other assets 127,546 230,000 357,546
----------- ------------ ----------- ---------- ------------ -----------
$ 6,803,914 $ 1,961,349 $ $4,000,000 $ $12,765,263
=========== ============ =========== ========== ============ ===========
LIABILITIES
Accounts payable trade... $ 1,449,754 $ 240,097 $ 1,689,851
Accrued liabilities...... 1,163,037 796,611 $ 250,000 2,209,648
Current portion of long-term
debt................... 3,537,154 (2,649,046) 888,108
Accrued interest......... 523,110 (518,923) 4,187
Deferred franchise revenue 50,000 50,000
----------- ------------ ----------- ---------- ------------ -----------
Total current
liabilities........ 6,723,055 1,036,708 (3,167,969) 250,000 4,841,794
Long-term debt.................. 2,328,760 2,328,760
Redeemable preferred stock...... 2,788,244 (2,788,244)
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock.......... 560,005 748,765 4,600 1,313,370
Common Stock............. 26,250 39,461 16,982 82,693
Additional paid-in capital 13,920,893 6,115,107 3,745,400 (14,520,359) 9,261,041
Carryover predecessor basis (61,747) (61,747)
Accumulated deficit...... (5,000,648) (13,595,718) 13,595,718 (5,000,648)
----------- ------------ ----------- ---------- ------------ -----------
Total stockholders' equity
(deficit)............ (5,036,145) 924,641 6,880,854 3,750,000 (924,641) 5,594,709
----------- ------------ ----------- ---------- ------------ -----------
$ 6,803,914 $ 1,961,349 $ 924,641 $4,000,000 $ (924,641) $12,765,263
=========== ============ =========== ========== ============ ===========
</TABLE>
(1) Adjustment to reflect the exchange of TRC common stock, preferred stock,
and subordinated convertible notes with accrued interest thereon, for Common
Stock and preferred stock of the Company. The historical financial statements of
the Company are presented consistent with fair value, and, as the Company has no
operations, the transaction is presented as a capital stock transaction.
(2) Adjustment to reflect the issuance of the Company's preferred stock to
private investors in connection with the merger. The Company has obtained firm
commitments from the investors for the purchase. Also reflects an accrual for
the estimated costs associated with the consummation of the merger.
(3) Adjustment to reflect the elimination of additional paid in capital,
accumulated deficit, and other equity account balances of the Company.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION FOR TRC
The following discussion should be read in connection with the TRC
consolidated financial statements and related notes thereto included elsewhere
in these proxy materials.
On January 14, 1999, TRC merged into a subsidiary of the Company in a
forward triangular merger. Because the former shareholders of TRC received a
majority of the shares of common stock of the Company outstanding immediately
after the merger, the historical financial statements of the surviving company
for the periods prior to the merger are those of TRC rather than those of the
Company.
Overview
On October 15, 1996, TRC was formed as a corporation under the laws of the
state of Georgia to acquire all of the shares of the 11 corporations commonly
known as Tanner's Chicken Rotisserie (the "Predecessor"), including eight
restaurants, a catering business and a management company (the "Acquisition").
At that time, TRC purchased all of the shares of the Predecessor in a
transaction accounted for as a purchase in accordance with APB Opinion No. 16,
"Business Combinations" ("APB 16").
TRC was formed with the intent to expand the Tanner's concept through
company-operated restaurants as well as franchised restaurants. As part of this
plan, TRC initiated development of a new Tanner's prototype, began preparing a
Uniform Franchise Offering Circular, and hired individuals with experience at
high-growth restaurant companies to direct TRC's efforts.
In connection with the Acquisition, Richard Tanner, the sole shareholder of
the Predecessor, acquired a 34% interest in TRC. In addition, TRC issued to Mr.
Tanner a $3,000,000, 10% convertible subordinated debenture due October 15,
2001. During 1997, TRC and Mr. Tanner finalized the purchase price allocation
whereby goodwill was reduced by $411,590, accrued expenses were reduced by
$60,036, and the debenture was reduced by $350,954. To fund TRC's growth plans
subsequent to the Acquisition, TRC entered into a $2,000,000 collateralized
promissory note with a lending institution. TRC also issued to this lending
institution 375,000 warrants to purchase shares of the TRC's common stock for
$.01 per share.
Results of Operations for the Three Quarters Ended October 4, 1998 Compared to
the Three Quarters Ended October 5, 1997
Revenues. Total revenues increased by $2,709,632 during the first three
quarters of fiscal 1998 in comparison to the same three quarters in fiscal 1997.
This increase in sales is partially attributable to sales from two new
restaurants opened in the fourth quarter of 1997 and one new store opened in the
second quarter of 1998 ("New Stores"). The sales increase is also the result of
a rise in same-store sales of 5.3% over the comparable period in 1997.
Management believes that same-store sales growth is primarily the result of
increased advertising expenditures in the first three quarters of 1998 versus
the same period in 1997. In addition, TRC's first franchise stores were opened
during the first half of 1998. Royalties and franchise fees earned during the
period were $61,355 versus $0 in the prior period. This increase in restaurant
and franchise-related sales was partially offset by an 11.7% decrease in
catering sales.
Costs and Expenses. In general, many costs have increased as a percentage
of sales due to the additional coupon and "two-for-one" promotions which began
in August 1997 and continued through the
15
<PAGE>
third quarter of 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 and payroll and benefits expense.
Food, beverage, and paper costs were 35.3% of 1998 sales versus 33.8% of
sales for the same period in 1997. The 1.5% increase in food costs as a
percentage of sales was primarily a result of increased coupon and various "two-
for-one" promotions in the first half of 1998 as mentioned above.
Payroll and benefit expenses were 37.2% of 1998 sales versus 35.2% for the
same period in 1997. In April 1997, TRC implemented a new benefits package
whereby restaurant managers may obtain health, life and disability insurance.
TRC pays for a portion of this package. As a result of this new employee
benefit, benefits costs rose 1.7% as a percentage of sales. Also, increased
labor costs at the New Stores that were opened in late 1997 and the second
quarter of 1998 accounted for the remainder of the increase (.3%) in payroll and
benefits expenses.
Other operating expenses decreased as a percentage of sales to 21.6% for
1998 from 24.6% for 1997. Although total advertising expenditures increased, TRC
began to realize some market efficiencies as advertising expense decreased 2.4%
as a percentage of sales when compared to the same period in 1997. Additional
decreases in 1998 were the result of (i) changing all restaurant cleaning from
an externally contracted service to an in-store responsibility (.5%
improvement), (ii) negotiating certain contracts related to the purchase of
cleaning materials and supplies (.4% improvement) and (iii) general reduction in
repair and maintenance expense as a percentage of sales because 28% of all
restaurants are new in 1998 and need minimal repairs versus no new stores in the
first half of 1997 (.6% improvement). Rent expense also decreased by .2% as a
percentage of sales as the result of owning the land and building for one
restaurant through July 1, 1998. However, these margin improvements were
partially offset by the preopening expenses of the new restaurant opened in the
second quarter of 1998 (1.1% of sales in 1998 compared to 0% for the same period
of 1997). These factors resulted in a net decrease to other operating expenses
of 3.0% of total sales.
Total occupancy costs, consisting of depreciation, rent, and restaurant
interest expense, increased to 8.6% in the first three quarters of 1998 from
7.0% in the first half of 1997. The 1.6% increase as a percentage of sales was
primarily due to the New Stores. Management expects this trend to continue into
1999 as TRC opens more "prototypical" restaurants which tend to have higher
capital investments, as well as financing costs therefore resulting in larger
depreciation charges and greater interest costs.
General and administrative expenses increased from $919,114 in 1997 to
$1,174,485 in 1998, primarily due to costs incurred in anticipation of
franchising and expanding the Tanner's concept, such as recruiting and training
restaurant managers for anticipated new stores, printing and development costs
for new menus, hiring a franchise consultant, and restructuring the corporate
office personnel to support additional growth. Although total general and
administrative expenditures increased, the additional sales generated from new
and old restaurants leveraged these costs down to 12.8% of 1998 sales from 14.2%
of 1997 sales.
The above-mentioned factors resulted in an improvement in the operating
loss to 12.6% of 1998 sales from 14.8% of 1997 total sales.
Other Income (Expense). Other income (expense) decreased to 5.7% in 1998
from 6.0% of sales in 1997. Interest expense increased to $549,663 in 1998 from
$408,112 in 1997. This is primarily attributable to an increase in borrowings of
approximately $1,000,000 in the first three quarters of 1998. TRC's effective
interest rate remained at 11.3% for the first three quarters of 1998.
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<PAGE>
Net Loss. TRC incurred a net loss of $1,682,648 for the three quarters
ended October 4, 1998 compared to $1,343,198 for the same period in 1997. TRC
expects to incur losses in future periods until it expands its base of
restaurants to offset current general and administrative expenses and costs of
expansion.
As TRC pursues its plans for growth, management expects to see the
following trends in operating costs. Food, beverage and paper costs and payroll
expenses will increase during the first two months of a restaurant's operations.
Preopening expenses are expected to total approximately $100,000 for each new
restaurant and are expensed as incurred in accordance with Statement of Position
98-5, Reporting on the Costs of Start-up Activities. The majority of preopening
costs are incurred in the accounting period prior to opening and in the period
that a restaurant opens. As TRC increases its base of restaurants, the effects
of the above-mentioned operating trends will decrease as the new restaurants
will have less of an impact on TRC's consolidated results.
Results of Operations for the Fiscal Year Ended December 28, 1997 Compared to
the Pro Forma Fiscal Year Ended December 29, 1996
The consolidated financial statements for the period ended October 14, 1996
represent the Predecessor's financial position, results of operations and cash
flows prior to the Acquisition and, consequently, are stated on the
Predecessor's historical cost basis. The consolidated financial statements as of
December 28, 1997 and December 29, 1996, and for the periods then ended, reflect
the adjustments which were made to record the Acquisition. Accordingly, the
financial statements of the Predecessor for periods prior to October 15, 1996
are not comparable in all material respects with the financial statements
subsequent to the date of the Acquisition. As a result of purchase accounting
adjustments and the capital structure subsequent to the Acquisition,
depreciation, amortization, interest and general and administrative expenses
have increased and will remain at levels higher than those prior to the
Acquisition.
The following is a discussion of TRC's results of operations for fiscal
1997 compared with the pro forma results of operations for fiscal 1996. The
discussion is based upon the Predecessor's income statement for the period from
January 1, 1996 through October 14, 1996 combined with TRC's income statement
for the period beginning October 15, 1996 and ending December 29, 1996. Certain
pro forma adjustments have been made as if the Acquisition had taken place as of
the beginning of fiscal 1996. Adjustments relate primarily to changes in
depreciation and amortization, interest expense and general and administrative
expenses. The financial statement information is presented below.
17
<PAGE>
<TABLE>
<CAPTION>
TRC Acquisition Corporation
Consolidated Income Statements
Year Ended Pro Forma Year Ended
December 28, 1997 December 29, 1996
------------------------ --------------------------
<S> <C> <C> <C> <C>
Revenue
Restaurant sales revenue $ 8,041,660 89.7% $8,251,816 89.0%
Catering revenue 924,891 27.3% 1,020,787 11.0%
----------- ----- ---------- -----
Total revenue 8,966,551 100.0% 9,272,603 100.0%
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 3,086,448 34.4% 2,966,947 32.0%
Payroll and benefits 3,184,827 35.5% 2,980,285 32.1%
Depreciation and amortization 590,807 6.6% 583,961 6.3%
Other operating expenses 2,449,783 27.3% 2,072,099 22.3%
----------- ----- ---------- -----
Total restaurant and catering
Operating expenses: 9,311,865 103.9% 8,603,292 92.8%
----------- ----- ---------- -----
Income (loss) from restaurant and
Catering operations" (345,314) -3.19% 669,311 7.2%
General and administrative expenses: 1,278,581 14.3% 1,140,638 12.3%
----------- ----- ---------- -----
Operating loss (1,623,895) -18.1% (471,327) -5.1%
Other income (expense):
Other income (expense) 27,038 -0.3% 44,136 0.5%
Interest expense (546,552) -6.1% (448,589) -4.8%
----------- ----- ---------- -----
Net loss $(2,143,409) -23.9% $ (875,780) -9.4%
=========== ===== ========== =====
</TABLE>
Revenues. Total revenues decreased 3.3% to $8,966,551 for 1997 from
$9,272,603 for 1996. The decrease was a result of the following: (i) the closure
of one restaurant in November 1996, which accounted for approximately $530,000
of sales in 1996, (ii) a decrease in same-store sales of 2% in 1997 and (iii) a
decrease in catering sales of approximately 9% in 1997. These factors were
partially offset by two new restaurants that were opened in November and
December 1997.
Costs and Expenses. In general, many costs have increased as a percentage
of sales due to additional coupon and "two-for-one" promotions, which began in
August 1997 and continued through the first three-quarters of 1998. These types
of promotions increase the number of customers that visit the restaurant and
increase total sales. However, the operating expenses on these sales are higher
because the sales have been discounted below the menu price. This increase in
costs is most evident in food, beverage, and paper costs and payroll and
benefits expense.
18
<PAGE>
Food, beverage, and paper costs were 34.4% of 1997 sales versus 32.0% of
1996 sales. This 2.4% increase in food costs as a percentage of total sales was
primarily the result of increased coupon and various "two-for-one" promotions as
mentioned above.
Payroll and benefit expenses are 35.5% of 1997 sales versus 32.1% of 1996
sales. Hourly labor increased 2.5% as a percentage of sales in 1997, partially
as the result of coupon and other promotions run during the second half of 1997
and also due to increased labor at the restaurants opened in November and
December 1997. The cost of restaurant-level management also increased by 0.5% in
1997, primarily due to increased managerial supervision needed for new
restaurant openings. Also, in April 1997, TRC implemented a new benefits package
whereby restaurant managers may obtain health, life and disability insurance.
TRC pays for a portion of this package. As a result of this new employee
benefit, benefits costs rose approximately 0.4% as a percentage of sales.
Depreciation and amortization expense increased by 0.3% of sales or $6,846
primarily due to 1997 fixed asset additions for new restaurants. Depreciable
assets acquired in 1997 totaled $1,225,932. Most of these assets were placed
into service in November and December 1997 and are being depreciated over
periods ranging from 3 to 20 years using the straight-line method.
Other operating expenses increased as a percentage of sales to 27.3% in
1997 from 22.3% in 1996. This increase was primarily the result of pre-opening
expenses for the two restaurants opened in late 1997 (2.5% of sales) and an
increase in advertising in the second half of 1997 (3.1% of sales). These
increases were partially offset by decreases in restaurant cleaning expense
(0.4%) as the result of changing this from an externally contracted service to
an in-store responsibility.
General and administrative expenses increased to $1,278,581 in 1997 from
$1,140,638 in 1996 primarily due to costs incurred in anticipation of
franchising and expanding the Tanner's concept, such as recruiting and training
restaurant managers for anticipated new stores, printing and development costs
for new menus, hiring an external franchise consultant and restructuring the
corporate office personnel to support additional growth.
The above-mentioned factors resulted in a substantial increase in the
operating loss to $1,623,895 in 1997 from $471,327 in 1996.
Other Income (Expense). Interest expense increased to $546,552 in 1997 from
$448,589 in 1996 primarily due to a $1,000,000 million increase in borrowings in
February 1997. Also, TRC's effective interest rate increased from 10.8% in 1996
to 11.1% in 1997.
Net Loss. TRC incurred a net loss of $2,143,409 for the year ended December
28, 1997 compared with a net loss of $875,780 for the pro forma year ended
December 29, 1996. TRC expects to incur losses in future periods until it
expands its base of restaurants to offset current general and administrative
expenses and costs of expansion.
As TRC pursues its plans for growth, management expects to see the
following trends in operating costs. Food, beverage and paper costs and payroll
expenses will increase during the first two months of a restaurant's operations.
Preopening expenses are expected to total approximately $100,000 per each new
restaurant and are expensed as incurred in accordance with Statement of Position
98-5, Reporting on the Costs of Start-up Activities. The majority of preopening
costs are incurred in the accounting period prior to opening and in the period
that a restaurant opens. As TRC increases its base of restaurants, the effects
of the above-mentioned operating trends will decrease as the new restaurants
will have less of an impact on TRC's consolidated results.
19
<PAGE>
Liquidity and Capital Resources
TRC's cash and cash equivalents increased $336,530 during the three
quarters ended October 4, 1998. Principal sources of funds consisted of (i) the
sale of one of the restaurant facilities for $359,696 and (ii) additional
borrowings totaling $1,016,617 under both secured and unsecured loan agreements.
The primary uses of funds consisted of (i) the purchase of additional fixed
assets for new restaurants ($728,561) and (ii) cash used in operations
($173,892).
Since substantially all sales in TRC's restaurants are for cash, and
operating costs are generally due in 15 to 45 days, TRC is able to operate with
negative working capital. Also, TRC has obtained extended payment schedules with
several of its larger vendors allowing for payment terms of 60 to 90 days.
Additionally, TRC has extended payment terms beyond the terms as agreed to by
vendors and authorities. This has enabled TRC to operate with a working capital
deficit of $2,734,054 as of October 4, 1998.
TRC opened one new restaurant during the first three quarters of 1998 and
had two franchised restaurants open during this same time period. In 1999, the
Company expects to open four to seven new Company-owned and one to three
franchised Tanner's restaurants. The Company's capital requirements to meet this
development plan are $1,600,000 to $2,800,000, which the Company expects to fund
out of the proceeds of the $4,000,000 financing commitment. The balance of the
proceeds of the financing commitment will be used for working capital.
If the current development schedule is not delayed, management anticipates
that by the first period of the fourth quarter of 1999, TRC will have a base of
profitable restaurants that will allow TRC to begin to leverage its nonoperating
expenses.
20
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF THE COMPANY
The following table sets forth certain information as of February 3, 1999
concerning ownership of the capital stock by each director and officer and by
all directors and officers as a group and sets forth certain information as of
February 3, 1999 concerning ownership of the common stock by 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 the Company at 2662 Holcomb Bridge Road, Suite 320, Alpharetta, Georgia
30022. 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.
<TABLE>
<CAPTION>
Class of Number of Right Percent of Outstanding
Name Stock Shares Owned to Acquire Shares of Class
- ---- -------- ------------ ---------- ----------------------
<S> <C> <C> <C>
William J. Gallagher Common 46,667 140,000 2.2%
Clyde E. Culp, III Common 1,178,063 78,538 15.1
Richard Tanner Common 1,413,675 353,419 20.6
Series E 469,775 0 63.0
James R. Walker (1) Common 765,741 54,976 9.9
Series E 183,150 0 24.6
SECA VII, LLC (1) Common 765,741 54,976 9.9
Series E 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
Sirrom Funding Corporation Common -- 643,509 7.2
All officers and directors as a
group (6 persons) (3) Common 3,404,146 1,124,861 48.4%
Series E 652,925 0 87.7%
</TABLE>
- ------------------------
(1) Mr. Walker, a director of the Company, 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. Gallagher, Culp, Tanner, Walker, Hoffman and Robinson.
21
<PAGE>
DESCRIPTION OF CAPITAL STOCK OF THE COMPANY
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, in one or more
series or classes and to determine the rights, powers, preferences, limitations
and restrictions of such series or class. The board of directors has designated
3,754,200 shares of Preferred Stock into three classes, the terms of which are
discussed below.
Common Stock
Under the articles of incorporation, holders of common stock are entitled
to receive such dividends as may be legally declared by the board of directors.
Each holder of common stock is entitled to one vote for each share held of
record on all matters submitted to a vote of shareholders, including the
election of directors. 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. Upon liquidation, dissolution or winding up of the Company, holders
of common stock will be entitled to share ratably in the net assets of the
Company available for distribution to common shareholders. The rights of the
holders of the common stock are subject to the rights of certain classes of
Preferred Stock (discussed below) and such other rights as the board of
directors may confer on the holders of Preferred Stock. Accordingly, such rights
conferred on holders of any additional shares of Preferred Stock that may be
issued in the future under the articles of incorporation may adversely affect
the rights of holders of the common stock. All of the outstanding shares of
common stock are fully paid and non-assessable. At February 3, 1999, 8,241,609
shares of common stock were outstanding.
Preferred Stock
The board of directors may from time to time authorize the Company 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 "Series A
Preferred"). The original issue price of the Series A Preferred is $10.00 per
share. Holders of Series A Preferred are entitled to receive dividends at the
annual rate of 12% of the original issue price per share, or $1.20 per share,
payable quarterly in cash or in the common stock at the sole discretion of the
Company. Dividends are cumulative from the date of issue. The Company may not
declare or pay cash dividends on any other series of Preferred Stock that is
junior to or on parity with the Series A Preferred, or on the common stock, nor
may it redeem, purchase or otherwise acquire any of such stock, unless full
cumulative dividends have been or are contemporaneously paid on the Series A
Preferred. Under the terms of the Company's secured loan from Sirrom Capital
Corporation, the Company may pay cash dividends on the Series A Preferred only
if (a) the Company makes an equal prepayment on the Sirrom note; and (b) such
payments do not cause the Company to breach a specified financial covenant.
In the event of any liquidation or dissolution of the Company, the holders
of shares of Series A Preferred are entitled to receive out of assets of the
Company available for distribution to shareholders, before any distributions are
made to holders of common stock or of any other shares of capital stock of
22
<PAGE>
the Company ranking junior to the Series A Preferred, liquidating distributions
in the amount of $10.00 per share, plus accrued and unpaid dividends.
The Series A Preferred is redeemable at the option of the Company at any
time, in whole or in part, on or after March 11, 1998, for cash or in common
stock of the Company, on at least 30 days' notice. The price payable upon
redemption is 110% of the average bid price per share of the Series A Preferred
as quoted on the Nasdaq SmallCap Market, or other national securities exchange,
for the 20 trading days prior to the redemption date, plus all accrued and
unpaid dividends. If the Series A Preferred is not quoted by Nasdaq or listed on
a securities exchange, its market value shall be the fair value as determined by
a member of a national securities exchange selected by the Company or by the
board of directors.
The Series A Preferred automatically converts into common stock if the
closing price for the Series A Preferred equals or exceeds $20.00 per share for
a period of ten consecutive trading days. The holders of Series A Preferred have
the right, at the holder's option, to convert any or all such shares of Series A
Preferred into common stock. The number of shares of common stock issuable upon
conversion of a share of Series A Preferred is equal to $10.00 divided by $3.70,
subject to certain adjustments. Holders of Series A Preferred may also convert
their shares, if the Company calls such shares for redemption, at any time up to
and including the close on business on the fifth full business day prior to the
date fixed for redemption.
The holders of the Series A Preferred have no voting rights except as
otherwise required by the Texas Business Corporation Act and applicable law. The
holders of shares of Series A Preferred have no preemptive or other rights to
subscribe for any other shares or securities. The Series A Preferred ranks prior
to the common stock as to dividends and upon liquidation of the Company.
As of January 31, 1999, 495,854 shares of Series A Preferred 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 C Preferred Stock.
Series C Convertible Preferred Stock. On January 14, 1999, all 200 of the
outstanding shares of Series C Convertible Preferred Stock were exchanged for
2,600 shares of Series D Preferred Stock. No other shares of Series C Preferred
Stock are outstanding, and the board of directors does not intend to issue any
more shares of Series C Preferred Stock.
Series D Convertible Preferred Stock. The original issue price of the
Series D Preferred is $1,000 per share. Dividends on the Series D Preferred
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, 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.
Under the terms of the Company's secured loan from Sirrom Capital Corporation,
the Company may pay cash dividends on the Series D Preferred so long as (a) the
Company makes an equal prepayment 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.
23
<PAGE>
In the event of any liquidation or dissolution of the Company, the holders
of shares of Series D Preferred are entitled to receive out of assets of the
Company available for distribution to shareholders, before any distributions are
made to holders of common stock or of any other shares of capital stock of the
Company ranking junior to the Series D Preferred, liquidating distributions in
the amount of $1,000 per share, plus accrued and unpaid dividends.
The Series D Preferred is convertible at the option of the holder into
shares of common stock for up to three years after initial issuance. After three
years, the Series D Preferred 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. The Company is not
required, however, to convert any shares if such conversion would result in the
issuance of 20% or more of the issued and outstanding common stock to the
holders of the Series D Preferred, as provided by Nasdaq Marketplace Rule
4320(e)(21)(H), unless shareholder approval of such conversion is obtained. In
the event that such a conversion is requested and the Company does not convert
the Series D Preferred because of the Nasdaq rule, the Company will pay the
holder of the Series D Preferred 125% of the principal amount of the issued and
outstanding Series D Preferred plus accrued interest.
Holders of Series D Preferred are allowed to convert the aggregate amount
of such holders' Series D Preferred 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 incorporation increasing the number of
authorized shares of common stock to not less than 100,000,000. 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 may not
convert their shares of Series D Preferred 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 Series D Preferred is non-voting, and it is ranked junior to the
Company's Series A Preferred. The holders of the Series D Preferred have no
preemptive rights or other rights to subscribe for any other shares or
securities of the Company.
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. The Company issued 1,300 shares of Series D
Preferred Stock on receipt of $1,000,000 when a preliminary version of these
proxy materials were filed with the SEC in January 1999, and it is issuing 1,300
shares of Series D Preferred Stock on receipt of $1,000,000 concurrently with
the mailing of these proxy materials. The Company will issue 2,000 shares of
Series D Preferred Stock on receipt of $2,000,000 at the effective time of a
registration statement registering, at a minimum, the number of shares of common
stock into which the Series D Preferred Stock is convertible. The third party
investors who purchased or will purchase Series D Preferred for cash or by
exchanging Series B or Series C Preferred were or will be issued common stock
purchase warrants, as described below.
Immediately before the mailing of these proxy materials, 5,898 shares of
Series D Preferred Stock were issued and outstanding.
Series E Convertible Preferred Stock. In connection with the merger, the
Company issued a total of 744,500 shares of Series E Convertible Preferred
Stock. The original issue price of the Series E
24
<PAGE>
Preferred is $10.00 per share. Dividends on the Series E Preferred accrue at an
annual rate of 8% of the original issue price, or $0.80 per share, and are
payable in cash or common stock, as determined by the Company, only at the time
of conversion of such shares. Dividends are cumulative from the date of issue.
Unless full cumulative dividends have been or are contemporaneously paid on the
Series E Preferred, the Company may not declare or pay cash dividends on the
common stock, nor may it redeem, purchase or otherwise acquire common stock, nor
may it make any other distribution with respect to the common stock or any class
of capital stock on a parity with or junior to the Series E Preferred. Under the
terms of the Company's secured loan with Sirrom Capital Corporation, the Company
may not pay cash dividends on the Series E Preferred.
In the event of any liquidation or dissolution of the Company, the holders
of shares of Series E Preferred are entitled to receive out of assets of the
Company available for distribution to shareholders, before any distributions are
made to holders of common stock or of any other shares of capital stock of the
Company ranking junior to the Series E Preferred, liquidating distributions in
the amount of $10.00 per share, plus accrued and unpaid dividends.
The Series E Preferred is redeemable at the option of the Company at any
time after six months of issuance, in whole or in part, for $0.01 per share, if
the 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 (5) consecutive trading days.
Each share of Series E Preferred 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 is non-voting, and it is
ranked junior to the Company's Series A Preferred and Series D Preferred. The
holders of the Series E Preferred have no preemptive rights or other rights to
subscribe for any other shares or securities of the Company.
Redeemable Preferred Stock Purchase Warrants
At January 31, 1999 1,723,400 Redeemable Preferred Stock Purchase Warrants
were outstanding ("Preferred Warrants"), plus an additional 200,000 warrants
issued to the underwriters of the offering of the Preferred Warrants. Each
Preferred Warrant represents the right to purchase one share of Series A
Preferred at an exercise price of $10.50 per share until June 11, 2002, subject
to adjustment. Preferred Warrants may be redeemed, in whole or in part, at the
option of the Company, upon 30 days' notice, at a redemption price equal to
$0.01 per Preferred Warrant at any time after March 11, 1998 if the closing
price of the Series A Preferred on the Nasdaq SmallCap Market averages at least
$11.00 per share for a period of 20 consecutive trading days or if the Company
redeems the Series A Preferred.
Common Stock Purchase Warrants
At January 31, 1999 there were 2,300,000 Common Stock Purchase Warrants
outstanding (the "IPO Warrants"), plus an additional 300,000 warrants issued to
the underwriters of the offering of the IPO warrants, plus an additional 893,509
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 at any time after July 9, 1997, 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.
25
<PAGE>
As noted above, the third party investors who purchased or will purchase
Series D Preferred for cash or by exchanging Series B or Series C Preferred were
or will be issued common stock purchase warrants to purchase, for each
$1,000,000 of Series D Preferred issued, 100,000 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.
PROPOSAL 2: CHANGE OF COMPANY NAME
In connection with the merger, the board of directors determined that it is
in the best interests of the Company to change the Company's name to "Tanner's
Restaurant Group, Inc." This name will link the Company to its principal
operations and objectives, which are the development of Company-owned Tanner's
restaurants, the development and expansion of the Tanner's franchise program,
and the increase of sales at existing Tanner's restaurants.
The board of directors unanimously recommends that you vote for the
amendment to the Company's articles of incorporation to change the name of the
Company to "Tanner's Restaurant Group, Inc."
Approval and adoption of this proposal requires the affirmative vote of the
holders of two-thirds of the issued and outstanding common stock entitled to
vote on the amendment.
OTHER MATTERS
The board of directors knows of no other matters to be presented for action
at the meeting. As stated in the accompanying proxy card, if any other business
should come before the meeting, proxies have discretionary authority to vote
their shares according to their best judgment, including, without limitation, a
motion to adjourn or postpone the meeting to another time and/or place for the
purpose of soliciting additional proxies.
SHAREHOLDER PROPOSALS FOR THE 1999 ANNUAL MEETING OF SHAREHOLDERS
The Company anticipates that the 1999 annual meeting will be held in June
1999. Proposals of shareholders of the Company intended to be presented at the
1999 annual meeting of the Company must be received by the Company not later
than April 1, 1999 to be considered for inclusion in the Company's proxy
statement and form of proxy relating to that meeting.
ACCOUNTANTS
The Company's certified public accounting firm is Porter Keadle Moore, LLP.
Representatives of Porter Keadle Moore, LLP are not expected to be present at
the meeting.
26
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and, in accordance therewith, is required to file reports, proxy statements,
and other information with the Commission. Such reports, proxy statements and
other information can be inspected and copied at the Public Reference Section of
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
the Commission's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, Suite 1300, New
York, New York 10048. Copies of the reports, proxy statements, and other
information can be obtained from the Public Reference Section of the Commission,
Washington, D.C. 20549, at prescribed rates. The Commission maintains a World
Wide Web site on the Internet at http://www.sec.gov that contains reports,
proxies, information statements, and registration statements and other
information filed with the Commission through the EDGAR system. The common stock
of the Company is traded on the OTC Bulletin Board (symbol "ROTI") and such
reports, proxy statements, and other information concerning the Company also can
be inspected at the offices of Nasdaq Operations, 1735 K Street, N.W.,
Washington, D.C. 20006.
27
<PAGE>
TRC Acquisition Corporation
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Certified Public Accountants F-2
Consolidated Balance Sheet at December 28, 1997 F-3
Consolidated Statements of Operations for the fiscal year ended December 28,
1997, the period from October 15, 1996 (inception) through
December 29, 1996 and the period from January 1, 1995 through October 14,1996 F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the
fiscal years ended
December 28, 1997, the period from October 15, 1996 (inception) through
December 29, 1996 and the period from January 1, 1995 through October 14,1996 F-5
Consolidated Statements of Cash Flows for the fiscal years ended
December 28, 1997, the period from October 15, 1996 (inception) through
December 29, 1996 and the period from January 1, 1995 through October 14, 1996 F-6
Notes to Consolidated Financial Statements F-7
Consolidated Balance Sheets at October 4, 1998 and December 28, 1997 F-19
Consolidated Statements of Operations for the three quarters ended
October 4, 1998 and October 5, 1997 F-20
Consolidated Statements of Cash Flows for the three quarters ended
October 4, 1998 and October 5, 1997 F-21
Note to Consolidated Financial Statements F-22
</TABLE>
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors
TRC Acquisition Corporation
We have audited the accompanying consolidated balance sheets of TRC Acquisition
Corporation and subsidiaries as of December 28, 1997 and December 29, 1996, and
the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year ended December 28, 1997, the period from
October 15, 1996 (inception) through December 29, 1996 and the period from
January 1, 1996 to October 14, 1996 (Predecessor). These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of TRC Acquisition
Corporation and subsidiaries as of December 28, 1997 and December 29, 1996, and
the results of their operations and their cash flows for the year ended December
28, 1997, the period from October 15, 1996 (inception) through December 29,
1996, and the period from January 1, 1996 through October 14, 1996
(Predecessor), in conformity with generally accepted accounting principles.
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
/s/ PORTER KEADLE MOORE, LLP
Atlanta, Georgia
October 20, 1998
F-2
<PAGE>
TRC Acquisition Corporation
Consolidated Balance Sheets
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
December 28, December 29,
1997 1996
---------------- -----------------
ASSETS
Current assets:
Cash $ 96,098
Accounts receivable $ 231,554 123,207
Inventory 114,227 56,512
Prepaid expenses 53,030 77,213
---------------- -----------------
Total current assets 398,811 353,030
Property and equipment, net 2,186,028 332,080
Intangible assets, net 4,075,175 4,519,826
Goodwill, net 1,058,810 1,526,907
Other assets 130,606 114,784
---------------- -----------------
Total assets $ 7,849,430 $ 6,846,627
================ =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overdraft $ 212,605
Accounts payable 1,379,105 $ 555,181
Accrued expenses 561,705 464,562
Current portion of long-term debt 188,184 98,706
Deferred franchise revenue 15,000
---------------- -----------------
Total current liabilities 2,356,599 1,118,449
Long-term debt 5,738,747 4,092,329
Other liabilities 319,337 57,693
---------------- -----------------
Total liabilities 8,414,683 5,268,471
---------------- -----------------
Preferred stock:
Par value $1.00 per share
Class A: authorized 2,000 shares;
issued and outstanding 2,000
shares plus cumulative dividends
and accretion 2,448,380 2,006,557
---------------- -----------------
General: authorized 998,000 shares;
no shares issued and outstanding
Stockholders' deficit:
Common stock, no par value; authorized
100,000,000 shares;
issued and outstanding 2,625,000 shares 26,250 26,250
Carryover predecessor basis adjustment (61,747) (61,747)
Accumulated deficit (2,978,136) (392,904)
---------------- -----------------
Total stockholders' deficit (3,013,633) (428,401)
---------------- -----------------
Total liabilities, preferred
stock and stockholders' deficit$ 7,849,430 $ 6,846,627
================ =================
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
TRC Acquisition Corporation
Consolidated Statements of Operations
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
<TABLE>
<CAPTION>
Company Predecessor
---------------------------------- ---------------------
Period from Period from
October 15, 1996 January 1,
Year 1996 1996
ended through Through
December 28, December 29, October 14,
1997 1996 1996
------------------- ------------------ --------------------
<S> <C> <C> <C>
Revenue
Restaurant sales revenue $ 8,041,660 $ 1,411,303 $ 6,840,513
Catering revenue 924,891 187,449 833,338
------------------- ------------------ ------------------
Total revenue 8,966,551 1,598,752 7,673,851
------------------- ------------------ ------------------
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 3,086,448 540,766 2,426,181
Payroll and benefits 3,184,827 582,208 2,398,077
Depreciation and amortization 590,807 118,542 92,685
Other operating expenses 2,449,783 349,969 1,722,130
------------------- ------------------ ------------------
Total restaurant and catering operating expenses 9,311,865 1,591,485 6,639,073
------------------- ------------------ ------------------
Income (loss) from restaurant and catering
operations (345,314) 7,267 1,034,778
General and administrative expenses 1,278,581 239,206 747,586
------------------- ------------------ ------------------
Operating income (loss) (1,623,895) (231,939) 287,192
Other income (expense):
Other income (expense) 27,038 31,390 49,730
Interest expense (546,552) (100,986) (33,241)
------------------- ------------------ ------------------
Net income (loss) $ (2,143,409) $ (301,535) $ 303,681
=================== ================== ==================
Basic and diluted loss per share $ (0.98) $ (0.15)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
TRC Acquisition Corporation
Consolidated Statements of Stockholders' Equity (Deficit)
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
<TABLE>
<CAPTION>
Retained
Carryover Additional Earnings Stockholders'
(000's) Common Predecessor Paid-In (Accumulated Equity
Shares Stock Basis Capital Deficit) (Deficit)
---------- ----------- --------------- -------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Predecessor:
Balance, December 31, 1995 96 $ 141 $75,816 $(239,646) $ (163,689)
Net income 303,681 303,681
Distributions to
shareholder (382,145) (382,145)
--------------------------------------------------------------------------------------------------
Balance, October 14, 1996 96 $ 141 $75,816 $(318,110) $ (242,153)
==================================================================================================
Company:
Issuance of common stock 2,625 $26,250 $ 26,250
Carryover predecessor basis $(61,747) (61,747)
Net loss $(301,535) (301,535)
Dividends accrued on
redeemable preferred
stock (62,273) (62,273)
Accretion on redeemable
preferred stock (29,096) (29,096)
--------------------------------------------------------------------------------------------------
Balance, December 29, 1996 2,625 26,250 (61,747) 0 (392,904) (428,401)
Net loss (2,143,409) (2,143,409)
Dividends accrued on
redeemable preferred
stock (300,000) (300,000)
Accretion on redeemable
preferred stock (141,823) (141,823)
--------------------------------------------------------------------------------------------------
Balance, December 28, 1997 2,625 $26,250 $(61,747) $0 $ (2,978,136) $(3,013,633)
==================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
TRC Acquisition Corporation
Consolidated Statements of Cash Flows
On October 15, 1996, the Company acquired all of the outstanding shares of the
Predecessor. The purchase method of accounting was used to record assets
acquired and liabilities assumed by the Company. As a result of the acquisition,
the accompanying financial statements of the Predecessor and the Company are not
comparable in all material respects since the financial statements report
financial position, results of operations and cash flows of these two separate
entities.
<TABLE>
<CAPTION>
Company Predecessor
--------------------------------- ----------------
Period from Period from
October 15, January 1,
1996 1996
Year ended through through
December 28, December 29, October 14,
1997 1996 1996
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (2,143,409) $ (301,535) $ 303,681
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 590,807 118,542 92,685
Changes in assets and liabilities:
Accounts receivable (108,347) (29,719) 163,669
Inventory (57,715) 8,405 (1,619)
Prepaid expenses 24,183 (71,729) 151,509
Other assets (6,995) (9,923) 86,019
Accounts payable 823,924 276,046 (24,358)
Accrued expenses 157,779 (144,871) (197,533)
Other liabilities 261,664 57,693
Deferred franchise revenue 15,000
---------------- --------------- ------------------
Net cash provided by (used in) operating activities (443,109) (97,091) 574,053
---------------- --------------- ------------------
Cash flows from investing activities:
Purchase of business, net of cash acquired (1,939,325)
Purchase of property and equipment (1,922,168) (7,361) (8,880)
---------------- --------------- ------------------
Net cash used in investing activities (1,922,168) (1,946,686) (8,880)
---------------- --------------- ------------------
Cash flows from financing activities:
Cash overdraft 212,605 32,883
Repayments of debt (108,250) (16,815) (215,911)
Proceeds from issuance of long-term debt 2,195,100 1,000,000
Proceeds from issuance of preferred and common stock 1,500,000
Payment of equity issuance costs (262,807)
Distributions to shareholder (382,145)
Additions to deferred financing costs (30,276) (80,503)
---------------- --------------- ------------------
Net cash provided by (used in) financing activities 2,269,179 2,139,875 (565,173)
---------------- --------------- ------------------
Net (decrease) increase in cash and cash equivalents (96,098) 96,098
Cash and cash equivalents, beginning of year 96,098 0
---------------- --------------- ------------------
Cash and cash equivalents, end of year $ 0 $ 96,098 $
================ =============== ==================
Non-cash investing and financing activities:
Issuance of convertible subordinated debenture $ 3,000,000
Accretion of redeemable preferred shares $ 141,823 29,096
Issuance of preferred stock in connection with acquisition of Oldco 497,500
Issuance of common shares 18,938
Dividends accrued on redeemable preferred shares 300,000 62,273
Debt assumed at acquisition 214,210
Purchase price adjustment (411,590)
Supplemental cash flow information:
Interest paid $ 290,197 $ 21,173 $ 59,382
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
TRC Acquisition Corporation
Notes to Consolidated Financial Statements
1. Description of Business:
TRC Acquisition Corporation and its wholly owned subsidiaries operate
casual dining restaurants under the name "Rick Tanner's Original
Rotisserie Grill" that specialize in fresh, convenient meals featuring
rotisserie chicken entrees, barbecued ribs, hamburgers, freshly prepared
vegetables, salads, and other side dishes. At December 28, 1997, there
were ten stores located in the Atlanta, Georgia metropolitan area.
On October 15, 1996, TRC Acquisition Corporation ("Newco" or "Company")
was formed as a corporation under the laws of the state of Georgia to
acquire all of the shares of the 11 corporations commonly known as
Tanner's Chicken Rotisserie ("Oldco" or "Predecessor"), including nine
restaurants, a catering business and a management company. On October 15,
1996, Newco purchased all of the shares of Oldco. For financial statement
purposes the acquisition was accounted for as a purchase and,
accordingly, Oldco's results are included in the consolidated financial
statements since the date of acquisition. The aggregate purchase price
was approximately $5.2 million, which includes costs of the acquisition.
The aggregate purchase price included a cash payment of approximately
$1.6 million, a $3 million, 10% convertible subordinated debenture to the
sole shareholder of Oldco and the issuance of 500 shares of Class A
Preferred Stock and 900,000 shares of common stock. Additionally, the
Company entered into a $2 million collateralized promissory note, of
which $1 million was advanced pursuant to this acquisition. 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 5 to 20 years. In
connection with the acquisition of the business, the sole shareholder
("Shareholder") of Oldco acquired a 34% interest in Newco. As provided by
the provisions of the Emerging Issues Task Force Issue No. 88-16, Basis
In Leveraged Buyout Transactions When the Previous Owner's Interest
Declines, purchase or fair value accounting does not apply to the 34%
equity interest held by the Shareholder. Accordingly, for accounting
purposes, the Shareholder's equity in Newco has been reduced by $61,747
to reflect the difference between the fair value and predecessor basis of
the 34% interest in Newco of the Shareholder. During 1997, the Company
and the Shareholder finalized the purchase price allocation whereby
goodwill was reduced by $411,590, accrued expenses were reduced by
$60,636 and the convertible subordinated debenture reduced by $350,954.
The combined financial statements presented herein for the period from
January 1, 1996 through October 14, 1996, present the Predecessor's
financial position, results of operations and cash flows prior to the
acquisition and, consequently, are stated on the Predecessor's historical
cost basis. The Predecessor financial statements are combined from the 11
corporations comprising Oldco. The consolidated financial statements as
of December 29, 1996 and December 28, 1997 and for the periods then
ended, reflect the adjustments which were made to record the acquisition.
Accordingly, the financial statements of the Predecessor for periods
prior to October 15, 1996 are not comparable in all material respects
with the financial statements subsequent to the date of the acquisition.
The most significant differences relate to amounts recorded in connection
with the acquisition for property, plant and equipment, intangibles and
debt which resulted in increased amortization, depreciation and interest
expense in the period from October 15, 1996 through December 29, 1996 and
the year ended December 28, 1997 and will continue to do so in future
periods.
F-7
<PAGE>
Notes to Consolidated Financial Statements, Continued
2. Summary of Significant Accounting Policies:
The following is a summary of significant accounting policies of the
Company.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. All material intercompany accounts
and transactions have been eliminated in consolidation.
Fiscal Year
The Company operates on a 52/53-week fiscal year ending on the last
Sunday in December. Accordingly, the financial statements presented ended
on December 28, 1997 and December 29, 1996. All general references to
years relate to fiscal years unless otherwise noted.
Cash and Cash Equivalents
Cash and cash equivalents consist primarily of cash in banks and
temporary cash investments with original maturities of less than three
months. At times, cash and cash equivalent balances at a limited number
of banks and financial institutions may exceed insurable amounts. The
Company believes it mitigates its risks by depositing cash or investing
in cash equivalents in major financial institutions.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of food, beverages, paper products and supplies.
Property and Equipment
Property and equipment is stated at cost, less accumulated depreciation.
The provision for depreciation has been calculated using the
straight-line method. Smallwares, consisting primarily of linens and
silverware, are expensed as incurred. The following represents the useful
lives over which the assets are depreciated:
Transportation equipment and computer equipment 3 years
Furniture, fixtures and office equipment 5 years
Kitchen and service equipment 7 years
Building 20 years
Leasehold improvements Life of lease
F-8
<PAGE>
Notes to Consolidated Financial Statements, continued
2. Summary of Significant Accounting Policies, continued:
For purposes of the Predecessor financial statements, property and
equipment is stated at cost, less accumulated depreciation. The provision
for depreciation for all fixed assets has been calculated using an
accelerated method which approximates the double-declining balance
method. The following represents the useful lives over which the assets
are depreciated:
Leasehold improvements 31.5 years
Furniture, fixtures and equipment 7 years
Vehicles 5 years
Expenditures for maintenance and repairs are charged to expense as
incurred.
Goodwill
Goodwill represents the excess of cost over fair value of net
identifiable assets acquired and is being amortized over 20 years using
the straight-line method. Accumulated amortization of goodwill amounted
to $71,331 and $14,824 at December 28, 1997 and December 29, 1996,
respectively.
Intangible Assets
Intangible assets consist primarily of employment contracts, recipes, and
the trained workforce acquired in the Oldco acquisition. These intangible
assets are being amortized over 5 to 15 years using the straight-line
method. Accumulated amortization of intangible assets was $531,825 and
$87,174 at December 28, 1997 and December 29, 1996, respectively.
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 $25,081 and $3,633 at December 28,
1997 and December 29, 1996, respectively.
For purposes of the Predecessor financial statements, loan costs are
amortized over the length of the applicable loan using the straight-line
method.
Revenue Recognition
Revenue is recognized in the period for which related food and beverage
products are sold. Initial fees from the awarding of individual
franchises are deferred and recorded as revenue when the franchised
restaurant is opened.
F-9
<PAGE>
Notes to Consolidated Financial Statements, continued:
2. Summary of Significant Accounting Policies, continued:
Advertising
The Company and Predecessor expense advertising costs as incurred. Total
advertising expense included in other operating expense was $585,516 and
$103,041 for the year ended December 28, 1997 and the period from October
15, 1996 through December 29, 1996, respectively, and was $394,469 for
the period from January 1, 1996 to October 14, 1996.
Preopening Costs
Preopening costs are incurred before a restaurant is opened and consist
primarily of wages and salaries, hourly employee recruiting, license
fees, meals, lodging and travel plus the cost of hiring and training the
management teams. Preopening costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Standards No. 109, Accounting for Income Taxes ("SFAS 109"). SFAS 109 is
an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of
events that have been recognized in the Company's consolidated financial
statements or tax returns. In estimating future tax consequences, SFAS
109 generally considers all expected future events other than enactments
of changes in the tax law or rates. Income tax accounting information is
disclosed in Note 8 to the consolidated financial statements.
Earnings Per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share,
which requires dual disclosure of earnings per share, basic and diluted.
Basic earnings per share equals net earnings divided by the weighted
average number of common shares outstanding and does not include the
dilutive effects of stock options or convertible securities. Diluted
earnings per share are computed (1) by giving effect to the Company's
dilutive stock options, warrants, convertible subordinated debentures and
Class A Preferred Stock and (2) by adjusting both net earnings and shares
outstanding as if the convertible subordinated debenture had been
converted. See Notes 6 and 7 for further discussion of options, warrants,
and convertible debt and securities ("potential common stock
equivalents"). These potential common stock equivalents are excluded from
the diluted earnings per share calculations as they are antidulitive when
the Company is operating at a net loss. These securities could become
dilutive when the Company's operations result in a net profit.
F-10
<PAGE>
Notes to Consolidated Financial Statements, continued
2. Summary of Significant Accounting Policies, continued:
Earnings Per Share, continued
The following table represents the calculation of basic and diluted
earnings per share:
<TABLE>
<CAPTION>
Period from
October 15,
1996
Year ended Through
December 28, December 29,
1997 1996
<S> <C> <C>
Net loss $(2,143,409) $ (301,535)
Less: Dividends on redeemable preferred stock (300,000) (62,273)
Accretion on redeemable preferred stock (141,823) (29,096)
--------- --------
(2,585,232) (392,904)
Average number of shares outstanding 2,625,000 2,625,000
Basic and diluted loss per share $ (0.98) $ (0.15)
</TABLE>
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.
3. Accounts Receivable:
At December 28, 1997 and December 29, 1996, accounts receivable consist
of the following:
1997 1996
Catering $ 88,358 $ 111,420
Other 36,045 9,000
Related party 107,151 2,787
------------------- ------------------
$ 231,554 $ 123,207
=================== ==================
F-11
<PAGE>
Notes to Consolidated Financial Statements, continued
4. Property and Equipment:
At December 28, 1997 and December 29, 1996, property and equipment
consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Land $ 696,236
Construction in progress 242,801
Trucks and automobiles 24,500 $ 27,500
Furniture and fixtures 34,856 25,130
Signage 30,676 21,000
Office and computer equipment 81,707 32,300
Kitchen and service equipment 476,560 209,361
Building 627,929
Leasehold improvements 51,875 29,700
------------------ -------------------
2,267,140 344,991
Less accumulated depreciation (81,112) (12,911)
------------------ -------------------
Property and equipment, net $ 2,186,028 $ 332,080
================== ===================
</TABLE>
Depreciation expense for the year ended December 28, 1997, the period
from October 15, 1996 to December 29, 1996 and from January 1, 1996 to
October 14, 1996 amounted to $68,220, $12,911 and $92,685, respectively.
5. Intangible Assets:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Management employment $ 1,130,000 $ 1,130,000
Recipes 1,000,000 1,000,000
Pre-mixed ingredients 890,000 890,000
Trained and assembled workforce 760,000 760,000
Restaurant design 575,000 575,000
Other intangible assets 252,000 252,000
---------------- -------------------
4,607,000 4,607,000
Less accumulated amortization (531,825) (87,174)
---------------- -------------------
Intangible assets, net $ 4,075,175 $ 4,519,826
================= =================
</TABLE>
F-12
<PAGE>
Notes to Consolidated Financial Statements, continued
6. Debt:
Long-term debt at December 28, 1997 and December 29, 1996 consists of the
following:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Collateralized promissory note $2,000,000 $1,000,000
Convertible subordinated debenture 2,649,046 3,000,000
Note payable to SouthTrust Bank, collateralized by certain
Restaurant equipment bearing interest at the prime rate plus
2%, and maturing in February 1999 35,154 67,337
Note payable to NationsBank, collateralized by certain
restaurant equipment, bearing interest at the prime rate
plus 1.5%, and maturing in September 1998 47,630 118,103
Note payable to Regions Bank, collateralized by one restaurant
building, bearing interest at 9.5%, and maturing in January
2000 939,101
Note payable to First Union Bank, collateralized by restaurant
equipment, bearing interest at 8.8% and maturing in December
2000 256,000
Note payable to related party, bearing interest at 10%, and 5,595
maturing in September 1997
--------------- ---------------
5,926,931 4,191,035
Less current maturities (188,184) (98,706)
--------------- ---------------
$5,738,747 $4,092,329
=============== ===============
</TABLE>
On October 15, 1996, the Company issued a $3.0 million, 10% convertible
subordinated debenture (the "Debenture") due October 15, 2001 to the sole
shareholder of Oldco and President of the Company. As discussed in Note
1, during 1997 the principal amount of the Debenture was reduced by
$350,954 as a result of the purchase price finalization. Interest accrues
at 10% per annum until October 15, 1998, at which time if the principal
remains unpaid, interest shall be due quarterly. Accrued interest from
October 15, 1996 through October 15, 1998 shall be payable upon the
earlier of the payment in full of principal or October 15, 2001. Two
shareholders of the Company have pledged their common shares in the
Company, totaling 993,750 shares, as collateral for performance under the
terms of the Debenture. Terms of the Debenture agreement provide that the
Company shall not issue additional convertible debt without the consent
of the holder of the Debenture. The Debenture is convertible into the
number of shares of the Company's common stock obtained by dividing the
principal balance plus the then-outstanding accrued interest by $8.75.
The conversion option begins on the earlier of (1) October 15, 1997, (2)
upon the effectiveness of an Initial Public Offering, as defined, or (3)
if the Company affects a Significant Liquidating Event, as defined. The
Debenture agreement provides that so long as the principal of the
Debenture remains outstanding, the holder of the Debenture shall be
allowed to elect one member to the board of directors.
F-13
<PAGE>
Notes to Consolidated Financial Statements, continued
6. Debt, continued:
Effective October 15, 1996, the Company entered into a $2 million
collateralized promissory note (the "Note") with a lending institution.
The Company received a $1 million advance on October 22, 1996 and the
final $1 million on February 25, 1997. The Note matures on September 1,
2001 and bears interest at 13.5% per annum. The payment terms require
monthly payments of interest only beginning November 1, 1996 until
maturity, upon which the outstanding principal balance will become due.
The Note is collateralized by substantially all of the Company's assets.
Three shareholders of the Company have pledged their common shares in the
Company, totaling 1,150,000 shares, as collateral for performance under
the terms of the Note.
Based on the borrowing rates currently available to the Company for loans
with similar terms, the fair value of long-term debt approximates the
book value recorded.
The aggregate annual maturities of long-term debt for the years
subsequent to December 28, 1997 are as follows:
1998 $ 188,184
1999 117,280
2000 972,422
2001 4,649,045
-------------
$ 5,926,931
=============
7. Stockholders' Equity (Deficit):
The Company has authorized 100 million shares of Common Stock and 1
million shares of non-voting Preferred Stock, 2,000 shares of which are
designated as Class A Preferred Stock ("Preferred Stock"). The Preferred
Stock is entitled to a cumulative annual dividend at a rate of 10%. Upon
liquidation, holders are entitled to receive $1,500 per share plus all
unpaid dividends. As of the effective date of an Initial Public Offering
("IPO"), as defined, all shares of the Preferred Stock are mandatorily
redeemable into the number of common shares as is determined by dividing
$1,500 by the initial common stock price in the IPO. In the event that an
IPO does not occur, the Preferred Stock is mandatorily redeemable
beginning 180 days after the satisfaction of all payment obligations on
the collateralized promissory note. At that time, the Company will redeem
400 shares of Preferred Stock on a pro-rata basis at $1,500 per share and
will redeem 400 shares annually for each of the subsequent four years. If
the Company has not affected an IPO prior to October 15, 1998, all of the
outstanding Preferred Stock dividends shall become payable on a quarterly
basis beginning on October 15, 1998.
F-14
<PAGE>
Notes to Consolidated Financial Statements, continued
7. Stockholders' Equity (Deficit), continued:
The existing common stockholders have a contractual preemptive right to
purchase the number of shares necessary to maintain their respective
ownership percentages should the Company issue additional common stock.
The Company has granted options to purchase its common stock to certain
key employees and officers under fixed stock option agreements. Under
these agreements, 700,000 shares of the Company's common stock have been
granted and reserved for stock option awards. As of December 28, 1997,
none of the options had been exercised or forfeited. Awards granted to
date generally vest on a pro rata basis over a three-year period and have
a term of six years.
As of December 28, 1997, options to purchase 567,000 shares were
exercisable at a weighted average exercise price of $7.86. Further
information relating to total options follows:
<TABLE>
<CAPTION>
Average
Shares Price
<S> <C> <C>
Outstanding at October 15, 1996 (inception) 450,000 $ 8.75
Granted from October 16, 1996 to December 29, 1996 230,000 4.38
------------ ---------
Outstanding at December 29, 1996 680,000 7.27
Granted in 1997 20,000 5.47
------------ ---------
Outstanding at December 28, 1997 700,000 $ 7.22
============ =========
</TABLE>
The following table summarizes information concerning currently
outstanding and exercisable options:
<TABLE>
<CAPTION>
Weighted-Average
Exercise Number Number Remaining
Price Outstanding Exercisable Life
<S> <C> <C> <C>
$0.01 122,500 57,875 3.8
$8.75 577,500 509,125 3.8
--------- ---------
700,000 567,000
========= =========
</TABLE>
F-15
<PAGE>
Notes to Consolidated Financial Statements, continued
7. Stockholders' Equity (Deficit), continued:
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations
in accounting for its stock options. Accordingly, no compensation expense
has been recognized for its stock-based compensation plans. Had
compensation cost for the Company's stock option plans been determined
based upon the fair value methodology prescribed under Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for
Stock-Based Compensation," the application of SFAS 123 would not result
in a significant difference from reported net loss for 1997 and 1996. The
fair value of the options granted during 1996 and 1997 were de minimis
and were estimated using the minimum value method and the following
assumptions: dividend yield 0%, risk-free interest rate of 6%, and an
expected life of 5 years.
In connection with the issuance of the $2,000,000 collateralized
promissory note, the Company issued to the lender a stock warrant to
purchase 375,000 shares of the Company's common stock, which is at least
12.5% of the common stock ("Base Amount") of the Company calculated on a
fully-diluted basis. The warrant is exercisable at any time until
November 30, 2001 at an exercise price of $0.01 per share. The warrant
provides for increases in the number of common shares available for
purchase on an annual basis from October 1998 through October 2000 and
allows the lender to purchase between 13.5% and 15.5% of the common stock
of the Company, calculated on a fully-diluted basis, according to a
vesting schedule as defined in the warrant agreement. The lender has a
put option to sell to the Company this warrant within 30 days of the
expiration of the warrant at a purchase price equal to the fair market
value of the common stock, as defined.
8. Income Taxes:
The Company has available at December 28, 1997, unused federal and state
net operating loss carryforwards of $2,199,991, expiring beginning in
2012, which may be applied to reduce future taxable income. Use of net
operating loss carryforwards may be limited on an annual basis due to
changes in ownership.
The Company's net deferred tax assets of $728,000 and $139,000 at
December 28, 1997 and December 29, 1996 result principally from net
operating loss carryforwards and have been reduced by a valuation
allowance of the same amount. Management has determined that this
valuation allowance is appropriate because the criteria for recognition
of the deferred tax asset in accordance with SFAS 109 have not been met.
F-16
<PAGE>
Notes to Consolidated Financial Statements, continued
9. Leases:
The Company has various leases for restaurants, equipment and office
facilities. Restaurant and office original lease terms range from four to
ten years, with renewal options ranging from five to fifteen years.
Equipment leases are renewable annually. In the normal course of
business, some leases are expected to be renewed or replaced by leases on
other properties. Future minimum lease payments do not include amounts
payable by the Company for maintenance costs, real estate taxes and
insurance, or contingent rentals payable on a percentage of sales in
excess of stipulated amounts for restaurant facilities.
Future minimum lease payments under noncancelable operating leases at
December 28, 1997 are as follows:
1998 $ 544,635
1999 471,466
2000 366,106
2001 271,483
2002 139,314
--------------
Total minimum lease payments $1,793,004
==============
The Company incurred rental expense for operating leases of $468,877,
$105,541 and $450,741 during the year ended December 28, 1997, the period
from October 15, 1996 through December 29, 1996 and the period from
January 1, 1996 to October 14, 1996, respectively, which is included in
other operating expenses in the accompanying consolidated statements of
operations.
10. Commitments and Contingent Liabilities:
The Company is a party to a number of lawsuits arising out of the normal
conduct of its business. While there can be no assurance as to their
ultimate outcome, management does not believe these lawsuits will have a
material adverse effect on the Company's financial condition, operating
results or cash flows.
11. Subsequent Events:
In July 1998, the Company signed a definitive share exchange agreement to
merge with Harvest Restaurant Group, Inc. ("Harvest"). The agreement
provides for the exchange of all outstanding shares of the Company's
common and preferred stock for common and preferred shares of Harvest.
The merger is subject to the approval of the Harvest shareholders. When
the merger becomes effective, the Company's shareholders will own
approximately 75% of the total equity of the merged entity. As a result,
this merger will be accounted for as a reverse merger, and the Company
will be the surviving entity for accounting purposes.
F-17
<PAGE>
Notes to Consolidated Financial Statements, continued
11. Subsequent Events, continued:
In June 1998, under a sale-leaseback agreement, the Company sold the land
and building for one of its restaurants for approximately $350,000 in
cash and $940,000 in satisfaction of the related Regions Bank Note. In
connection with this transaction, the Company issued to the buyer-lessor
company warrants to acquire 40,000 shares of the Company's stock at $.01
per share. No value was assigned to these warrants in recording this
sale-lease back transaction. The Company recognized a loss of
approximately $18,000 on the transaction. Annual lease payments under the
lease agreement are $143,000 which approximates fair market value.
F-18
<PAGE>
TRC Acquisition Corporation
Consolidated Balance Sheets
(Unaudited)
October 4, December 28,
1998 1997
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 123,925
Accounts receivable, net 201,977 $ 231,554
Inventory 106,605 114,227
Prepaid expenses 19,340 53,030
---------- ----------
Total current assets 451,847 398,811
Property and equipment, net 1,448,083 2,186,028
Intangible assets, net 3,761,095 4,075,175
Goodwill, net 1,015,343 1,058,810
Other assets 127,546 130,606
---------- ----------
Total assets $6,803,914 $7,849,430
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Cash overcharges $ 212,605
Accounts payable $1,449,754 1,379,105
Accrued expenses 1,163,037 561,705
Current portion of long-term debt 3,537,154 188,184
Accrued interest 523,110
Deferred franchise revenue 50,000 15,000
---------- ----------
Total current
liabilities 6,723,055 2,356,599
Long-term debt 2,328,760 5,738,747
Accrued interest 319,337
---------- ----------
Total liabilities 9,051,815 8,414,683
---------- ----------
Preferred stock, par value $1.00 per
share:
Class A: authorized 2,000
shares; issued 2,000 shares plus
cumulative dividends and accretion 2,788,244 2,448,380
---------- ----------
General: authorized 998,000 shares;
no shares issued and outstanding
Stockholders' deficit:
Common stock, no par value;
authorized 100,000,000 shares;
Issued and outstanding
2,625,000 shares 26,250 26,250
Carryover predecessor basis adjustment (61,747) (61,747)
Accumulated deficit (5,000,648) (2,978,136)
---------- ----------
Total stockholders'
deficit (5,036,145) (3,013,633)
---------- ----------
Total liabilities, preferred stock
and stockholders' deficit $ 6,803,914 $ 7,849,430
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
<PAGE>
TRC Acquisition Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(Unaudited)
For the three quarters ended
----------------------------
October 4, October 5,
1998 1997
----------- -----------
<S> <C> <C>
Revenue
Restaurant sales revenue $ 8,540,507 $ 5,814,659
Catering revenue 585,612 663,183
Franchise and royalty revenue 61,355
----------- -----------
Total revenue 9,187,474 6,477,842
Costs and expenses
Restaurant and catering operating expenses:
Food, beverage and paper 3,246,407 2,192,283
Payroll and benefits 3,416,931 2,278,627
Depreciation and amortization 518,250 450,629
Other operating expenses 1,988,130 1,594,017
----------- -----------
Total restaurant and catering
operating expenses 9,169,718 6,515,556
----------- -----------
Income (loss) from restaurant and
catering operations 17,756 (37,714)
General and administrative expenses 1,174,485 919,114
----------- -----------
Operating loss (1,156,729) (956,828)
Other income (expense):
Other income (expense) 23,744 21,742
Interest expense (549,663) (408,112)
----------- -----------
Net loss $(1,682,648) $(1,343,198)
=========== ===========
Basic and diluted loss per share $ (0.77) $ (0.64)
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-20
<PAGE>
TRC Acquisition Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(Unaudited)
For the three quarters ended
-----------------------------------
October 4, October 5,
1998 1997
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (1,682,648) $(1,343,198)
Adjustments to reconcile net loss to net cash used
in operating activities:
Loss on sale of property, plant and equipment 18,044
Depreciation and amortization 518,250 450,629
Changes in assets and liabilities:
Accounts receivable 29,576 (80,789)
Inventory 7,622 (12,377)
Prepaid expenses 33,690 (213,793)
Other assets (9,180) 9,112
Accounts payable 70,649 407,549
Accrued expenses 601,332 66,514
Deferred franchise revenue 35,000
Accrued interest 203,773 173,719
------------- -------------
Net cash used in operating activities (173,892) (542,634)
Cash flows from investing activities:
Purchase of property and equipment (728,561) (904,506)
Proceeds from sale of property, plant and equipment 359,696
------------- -------------
Net cash used in investing activities (368,865) (904,506)
Cash flows from financing activities:
Proceeds from issuance of long-term debt 1,016,617 1,534,654
Principal payments on long-term debt (137,330) (84,220)
Additions to deferred financing costs (21,209)
------------- -------------
Net cash provided by financing activities 879,287 1,429,225
Net increase/decrease in cash and cash equivalents 336,530 (17,915)
Cash and cash equivalents at the beginning of the period (212,605) 96,098
------------- -------------
Cash and cash equivalents at the end of the period $ 123,925 $ 78,183
============= =============
Non-cash investing and financing activities:
Sale of mortgaged property $ 1,300,000
Retirement of related mortgage 940,304
Accretion of redeemable preferred shares 109,095 $ 109,095
Dividends accrued on preferred shares 230,769 230,769
Purchase price adjustment (411,590)
Supplemental disclosure:
Interest paid $ 351,175 $ 201,228
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
<PAGE>
TRC Acquisition Corporation
Notes to Consolidated Financial Statements
1. Basis of Presentation
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles
for annual financial statement reporting purposes. However, there has been
no material change in the information disclosed in the consolidated
financial statements for the year ended December 28, 1997 and the period
from October 15,1996 through December 29, 1996, expect as disclosed herein.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals, considered necessary for a fair presentation have been
included. Operating results for the three quarters ended October 4, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 27, 1998.
2. Debt:
During the first three quarters of 1998, the Company received additional
unsecured financing in the form of two separate notes, totaling $756,617.
The interest rate is 12.5% on a note totaling $350,000 and 11% on a note
totaling $406,617. Interest is payable monthly on both notes until the
maturity date which is the earlier of 1) January 30, 1999 or 2) the date of
additional equity funding. The Company also received an additional $260,000
of secured financing at an interest rate of 8%. The secured note provides
for monthly installments of principal and interest and matures on June 5,
2005.
As part of the sale-leaseback discussed in Note 3, the Regions Bank Note,
totaling $940,000, was paid in full in June 1998.
3. Leases:
In June 1998, under a sale-leaseback agreement, the Company sold the land
and building for one of its restaurants for approximately $350,000 in cash
and $940,000 in satisfaction of the related Regions Bank Note. The Company
recognized a loss of approximately $18,000 on the transaction. Annual lease
payments under the lease agreement are $143,000, which approximates fair
market value.
In addition, the Company entered into a building lease in March 1998 for a
new restaurant which subsequently opened in July 1998. Annual lease
payments under the lease agreement are $82,548.
4. Merger Agreement:
In July 1998, the Company signed a definitive share exchange agreement to
merge with Harvest Restaurant Group, Inc. ("Harvest"). The agreement
provides for the exchange of all outstanding shares of the Company's common
and preferred stock for common and preferred shares of Harvest. When the
merger becomes effective, the Company's shareholders will own 50.1% of the
total equity of the Merged Entity on a fully diluted basis. The transaction
closed January 14, 1999.
F-22
<PAGE>
Notes to Consolidated Financial Statements, continued
5. Stockholders' Equity:
Through October 4, 1998, 109,463 stock options with an exercise price of
$.0l have been issued primarily to creditors to facilitate the financing
which has been received since December 28, 1997. An additional 300,000
stock options have been awarded to employees. On December 15, 1998, the
Company's board of directors approved a resolution to reprice 450,000 stock
options from $8.75 to $0.25 and 250,000 stock options from $8.75 to $0.01.
6. Related Party Transactions:
In the first quarter of 1998, the first two franchised Tanner's restaurants
were opened by two separate franchisees. Both franchises are owned and
operated by individual members of the Company's Board of Directors.
Franchise and royalty income from these related parties has totaled $61,355
through October 4, 1998. Total royalties receivable at October 4, 1998 was
approximately $18,745.
The Company is the primary lessee for the facilities in which one of the
franchisees operates. The franchisee subleases the property from the
Company and is responsible for all payment of rentals, common area
maintenance fees, utilities and property taxes. Annual minimum lease
payments on this property total $80,000. The Company has not incurred any
expense related to this property and does not anticipate such.
As part of the sale-leaseback transaction discussed in Note 3, the Company
entered into a lease for the land and building of one of the restaurant
facilities. Two officers of the Company control approximately 16% of the
lessor company for this lease. Total rent paid for this property through
October 4, 1998 is $38,500.
F-23
<PAGE>
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY
FOR THE SPECIAL MEETING OF SHAREHOLDERS OF
HARVEST RESTAURANT GROUP, INC.
TO BE HELD MARCH 12, 1999
The undersigned hereby appoints Timothy R. Robinson as the lawful agent
and Proxy of the undersigned (with all the powers the undersigned would possess
if personally present, including full power of substitution), and hereby
authorizes him to represent and to vote, as designated below, all the shares of
Common Stock of Harvest Restaurant Group, Inc., held of record by the
undersigned on February 3, 1999, at the Special Meeting of Shareholders to be
held March 12, 1999, or any adjournment or postponement thereof.
1. 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 shares.
FOR AGAINST ABSTAIN
----- ----- -----
2. To amend the Company's Articles of Incorporation to change its name to
"Tanner's Restaurant Group, Inc."
FOR AGAINST ABSTAIN
----- ----- -----
It is understood that when properly executed, this proxy will be voted
in the manner directed herein by the undersigned shareholder. WHERE NO CHOICE IS
SPECIFIED BY THE SHAREHOLDER, THE PROXY WILL BE VOTED FOR BOTH PROPOSALS.
The undersigned hereby revokes all previous proxies relating to the
shares covered hereby and confirms all that said Proxy may do by virtue hereof.
Please sign exactly as name appears below. When shares are held by
joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian, please give full title as such. If a
corporation, please sign in full corporate name by President or other authorized
officer. If a partnership, please sign in partnership name by authorized person.
Dated:
-----------------------------------------
Signature:
-------------------------------------
PLEASE MARK, SIGN, DATE
AND RETURN THE PROXY
CARD PROMPTLY USING THE
ENCLOSED ENVELOPE.
Signature,
if held jointly:
------------------------------
PLEASE CHECK THIS BOX IF YOU INTEND TO BE PRESENT AT THE SPECIAL
MEETING OF SHAREHOLDERS.
-----
