TANNERS RESTAURANT GROUP INC, 10KSB, 2000-04-11

TANNERS RESTAURANT GROUP INC
10KSB, 2000-04-11
EATING PLACES

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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the fiscal year ended December 26, 1999

[ ] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934. For the transition period from ________ to ________.

Commission File Number 33-95796

TANNER'S RESTAURANT GROUP, INC.
-------------------------------
(Name of small business issuer in its charter)

Texas 76-0406417
----- ----------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)

5500 Oakbrook Parkway, Suite 260
Norcross, Georgia 30093
----------------- -----
(Address of principal executive offices) (Zip Code)

Issuer's telephone number: (770) 248-2298

Securities registered pursuant to Name of exchange on which registered:
Section 12(b) of the Act:
None None

Securities registered pursuant to Section 12(g) of the Exchange Act:

Common Stock, $.01 par value
Series A Preferred Stock, $1.00 par value
-----------------------------------------
(Title of class)

Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the issuer was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes X No ___

Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of the issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]

The issuer's revenues for its most recent fiscal year were $9,219,555.

<PAGE>

As of March 31, 2000, the aggregate market value of the voting and
non-voting common stock held by non-affiliates, computed by reference to the
price at which the common equity was sold, or the average bid and asked price of
such common equity, was $788,521.10, based upon a closing sales price of $.10
per share of common stock on the OTC Bulletin Board.

As of March 31, 2000, 11,625,560 shares of the Registrant's common stock
were outstanding.

The following documents are incorporated by reference into Part III, Items 9
through 12 hereof: None.

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PART I

ITEM 1. DESCRIPTION OF BUSINESS

Portions of this Annual Report on Form 10-KSB contain "forward-looking"
statements which can be identified by the use of forward-looking terms such as
"expect," "estimate," "anticipate," "intend" 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 our actual results,
performance, or achievements to differ materially from those discussed in the
forward-looking statements. These risks and uncertainties include, among others,
those described in "Item 6, Management's Discussion and Analysis or Plan or
Operation."

Overview

Recent Developments

As of December 26, 1999, Tanner's Restaurant Group, Inc., through its
subsidiaries, owned seven restaurants and franchised one restaurant operating
under the name "Rick Tanner's Original Grill." We also owned one restaurant
operating under the name "Crabby Bob's Seafood Grill." In January 2000, the
Company's wholly-owned subsidiary, Hartan, Inc., and six of Hartan's
subsidiaries filed voluntary bankruptcy petitions under Chapter 11 of the United
States Bankruptcy Code. Hartan and these six subsidiaries owned substantially
all of the assets used in the operation of our restaurants. On February 10,
2000, the Bankruptcy Court approved the sale of substantially all of the assets
of Hartan and its subsidiaries to Restaurant Teams International, Inc. ("RTI").
All proceeds from the sale were paid to the creditors of Hartan and its
subsidiaries. As a result of the sale, we no longer own, operate or franchise
any restaurants, and we no longer have any operating assets.

History

We were incorporated in June 1993 under the name "Clucker's Tex-Mex
Venture, Inc." Initially, Clucker's operated as an area developer for Cluckers
Wood Roasted Chicken, Inc., the developer and franchiser of the "Cluckers"
restaurant concept. By 1996, Cluckers had decided to focus its operations on the
development, operation and franchising of its own line of restaurants, Harvest
Rotisserie restaurants. In October 1997, Clucker's changed its name to Harvest
Restaurant Group, Inc. In 1997, Harvest attempted to grow this concept by
implementing an area development program in Florida, Indiana and North Carolina.
By the first quarter of 1998, however, all restaurants franchised under this
area development program had been closed, and by July 1998 all four
company-owned restaurants were closed. The last remaining franchised restaurant
was closed in August 1998, leaving Harvest with no ongoing business operations.
By this time, Harvest had decided to pursue a merger with TRC Acquisition
Corporation ("TRC") and focus its resources on the development of TRC's "Rick
Tanner's Original Grill" restaurants.

On January 14, 1999, TRC merged into a wholly owned subsidiary of Harvest
in a forward triangular merger. In this merger, shares representing
approximately 50.1% of the outstanding shares of common stock were issued to the
former shareholders of privately held TRC. Harvest also issued 744,500 shares of
Series E preferred stock in the merger. As part of the merger, the board of
directors was changed to consist of a majority of the former TRC directors, and
the former management team of TRC became the active management team of the

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combined business. As a result of the merger, we owned and franchised the "Rick
Tanner's Original Grill" restaurants that were formerly owned and franchised by
TRC. On March 15, 1999, we changed our name to Tanner's Restaurant Group, Inc.
Unless otherwise indicated herein, the terms "we," "us," or "our" refer to the
company after the date of the merger, and the term "Harvest" refers to the
company before the merger.

A significant factor in both the structure and completion of the merger was
a commitment by outside investors to invest $6,000,000 in the new combined
company. The investors invested $2,000,000 under this financing commitment in
July 1998, in exchange for shares of Harvest's preferred stock (which were
converted into 2,600 shares of our Series D convertible preferred stock). In
1999, the investors invested the remaining $4,000,000 in exchange for 4,600
shares of our Series D convertible preferred stock.

In addition to the 7,200 shares issued in connection with the $6,000,000
financing commitment, we issued 1,998 shares of Series D convertible preferred
stock to holders of Harvest's Series B convertible preferred stock at the time
of the merger. This Series B stock had been purchased by several of the outside
investors for $1,332,000 in December 1997. In total, we have issued an aggregate
of 9,198 shares of Series D preferred stock to these outside investors. In
addition to the share issuances outlined above, we issued warrants to purchase
919,800 shares of common stock at a price of $2.00 per share to the outside
investors. Pursuant to our agreement with the outside investors, we filed with
the SEC, in September 1999, a registration statement on Form SB-2 to register,
among other things, the shares of common stock into which shares of our Series D
preferred stock are convertible.

During 1999, we entered into a letter of intent to acquire the assets used
in the operation of two Crabby Bob's restaurants owned and operated by Crabby
Bob's Seafood, Inc. In anticipation of our acquisition of these restaurants, we
opened a Crabby Bob's restaurant in Atlanta in May 1999 under a license
agreement with Crabby Bob's. In addition, our franchisee in Macon terminated its
relationship with us and converted its Tanner's restaurant into a Crabby Bob's
restaurant. By November 1999, though, we had determined that we would not be
able to complete the Crabby Bob's transaction and we terminated our letter of
intent with Crabby Bob's. In January, after we terminated the letter of intent,
we converted our Crabby Bob's restaurant into a Tanner's restaurant.

During 1999, we closed three restaurants, and one of our franchisees also
closed its restaurant. We also sold one of our company-owned restaurants and our
catering operations to franchisees.

On January 28, 2000, Hartan, our wholly owned subsidiary, filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court for the Northern District of Georgia, Atlanta Division. Six of
Hartan's wholly owned subsidiaries also filed voluntary petitions under Chapter
11 in the same jurisdiction. Hartan and these six subsidiaries owned
substantially all of our assets. The six subsidiaries are
Tanner's-Lawrenceville, Inc., Tanner's Oaks, Inc., Tanner's Mill, Inc.,
Tanner's-Tucker, Inc., Tanner's/Vinings, Inc., and Central Administration, Inc.

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extended in connection with the bankruptcy, forgave any management fees owed to
RTI by Hartan and its subsidiaries, and assumed certain liabilities pertaining
to certain leases of Hartan and its subsidiaries. In addition, RTI agreed to
indemnify Robert J. Hoffman, who is the acting Chief Executive Officer of the
Company, and certain other former and current officers and employees of the
Company and its subsidiaries against any claims relating to the failure of the
company and its subsidiaries to pay certain taxes, with the maximum aggregate
amount of such indemnification to be $125,000. For a discussion of the financial
developments leading to the restaurant closings during 1999 and the bankruptcy
filings described above, see "Item 6, Management's Discussion and Analysis or
Plan of Operations."

Our executive offices are located at 5500 Oakbrook Parkway, Suite 260,
Norcross, Georgia 30093, and our telephone number is (770) 248-2298.

Intellectual Property

We sold any and all intellectual property rights that we owned regarding
the "Rick Tanner's Original Grill" name and any related names to RTI in February
2000. Although we no longer own, franchise or operate any restaurants operating
under the Harvest name, the rights to the "Harvest Rotisserie" name, trademark
and service mark remain registered in our name with the U.S. Patent and
Trademark Office.

Insurance

We carry general liability, product liability and commercial insurance of
up to $2,000,000, together with an umbrella liability coverage of an additional
$10,000,000 and worker's compensation insurance, all of which we believe is
adequate for a business of our size and type. We cannot give any assurance that
our insurance coverage will remain adequate or that insurance will continue to
be available to us at reasonable rates.

Employees

As of March 31, 2000, we had no employees. We currently have one executive
officer and one director.

ITEM 2. DESCRIPTION OF PROPERTY

Property

We lease approximately 4,000 square feet of space for our executive offices
in Norcross, Georgia for $2,919 per month. Prior to the bankruptcy filing and
the subsequent sale of the restaurants, we leased 14 properties that ranged in
size from approximately 3,000 to 5,326 square feet and ranged in rent from
$2,919 to $11,917 per month, as described below. As noted below, many of the
leases are subject to the ongoing bankruptcy proceedings. Included in the
properties listed below are several leases for properties that we no longer use,
as so indicated.

Although there were no ongoing Harvest Rotisserie restaurant operations
when Harvest merged with TRC in January 1999, Harvest had previously guaranteed
all of the real estate leases on all Harvest Rotisserie franchised restaurants.

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We accrued a real estate disposition liability of $145,000 at December 26, 1999,
which we believe will be sufficient to settle all obligations related to the
closing of the company-owned and franchised Harvest Rotisserie restaurants, and
the abandonment of the Harvest Rotisserie restaurant sites under development.

Form of Lease Monthly
Location Ownership Expiration Rent
- -------- --------- ---------- ----

Executive Offices:
- ------------------

5500 Oakbrook Parkway Building Lease March 31, 2004 $2,919
Suite 260
Norcross, Georgia 30093 (2)

Operating Restaurants and
Catering Facility:
- ------------------

3220 Cobb Parkway Building Lease June, 2003 $5,944
Atlanta, GA 30339 (2)

4920 Roswell Road Building Lease June, 2004 $5,922
Atlanta, GA 30342 (2)

1371 Clairmont Road Building Lease June, 2001 $5,528
Decatur, GA 30033 (2)

650 Gwinnett Drive Building Lease April, 2002 $3,755
Suite 203
Lawrenceville, GA 30245 (2)

4450 Hugh Howell Road Building Lease April, 2002 $4,426
Tucker, GA 30084 (2)

94 Pavillion Parkway Building Lease June, 2013 $11,917
Fayetteville, GA 30214 (2)

525 Peachtree Industrial Blvd. Building Lease September, 2002 $6,364
Suwanee, GA 30174 (2)

6470 Spalding Drive, Suite P Building Lease September, 2002 $4,533
Norcross, Georgia 30092 (3)

1065 Buckhead Crossing Building Lease April, 2009 $8,121
Woodstock, GA 30156 (2)

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Form of Lease Monthly
Location Ownership Expiration Rent
- -------- --------- ---------- ----

Closed Restaurants and Abandoned Properties:

350 Northridge Road Building Lease July, 2000 $4,690
Atlanta, GA 30338 (4)

1453 Riverstone Parkway Building Lease February, 2008 $6,879
Suite 100
Canton, GA 30114 (1) (2)

South Braeswood Road Building Lease January, 2004 $3,000
Houston, TX (5)

11730 West Avenue Building Lease May, 2002 $4,500
San Antonio, TX (5)

- ------------------------------

(1) We currently sublease this property for approximately the same amount per
month as we owe on the lease.

(2) This lease is subject to the ongoing bankruptcy proceedings.

(3) We have assigned this lease to a franchisee.

(4) We are in default under this lease.

(5) This lease is currently the subject of litigation. See "Legal Proceedings,"
below.

ITEM 3. LEGAL PROCEEDINGS

On January 28, 2000, Hartan, our wholly owned subsidiary, and six of
Hartan's subsidiaries filed voluntary petitions under Chapter 11 of the U.S.
Bankruptcy Code in the United States Bankruptcy Court for the Northern District
of Georgia, Atlanta Division, Case Numbers 00-61323 through 00-61329. The six
subsidiaries are Tanner's-Lawrenceville, Inc., Tanner's Oaks, Inc., Tanner's
Mill, Inc., Tanner's-Tucker, Inc., Tanner's/Vinings, Inc. and Central
Administration, Inc. Hartan and these six subsidiaries owned substantially all
of our assets.

On February 9, 2000, the Bankruptcy Court approved a Sale of Assets Outside
the Ordinary Course of Business Free and Clear of All Liens pursuant to Section
363(b) of the Bankruptcy Code by Hartan and its subsidiaries. Pursuant thereto,
on February 10, 2000, Hartan and its subsidiaries sold substantially all of the
assets used in the operation of the Rick Tanner's Original Grill restaurants to
Restaurant Teams International, Inc. for cash consideration of approximately
$275,000. All proceeds of the sale were paid to creditors of Hartan and its
subsidiaries. In addition, RTI forgave Hartan's repayment of $50,000 of
debtor-in-possession financing that RTI had extended in connection with the
bankruptcy, forgave any management fees owed to RTI by Hartan and its
subsidiaries, and assumed certain liabilities pertaining to certain leases of
Hartan and its subsidiaries. In addition, RTI agreed to indemnify Robert J.
Hoffman, who is the acting Chief Executive Officer of the Company, and certain
other former and current officers and employees of the Company and its
subsidiaries against any claims relating to the failure of the company and its
subsidiaries to pay certain taxes, with the maximum aggregate amount of such
indemnification to be $125,000. The liabilities of Hartan and these six
subsidiaries remain subject to the bankruptcy proceedings.

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We are a named party in the following legal proceedings:

On June 1, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas in Nueces District Court by Lin Chin Liu Ho and Chi Pen Ho (Case Number
98-2048-E). The Court awarded the plaintiffs a judgment in the amount of
$75,000. We are in the process of perfecting an appeal on the grounds that the
plaintiffs failed to plead and prove all required elements of their claim.

On August 12, 1998, Harvest was named as a defendant in a lawsuit filed in
Texas by Green Tree Vendor Services Co. in Bexar County Court (Case No. 247317).
The plaintiff is seeking to recover damages of $38,691 for Harvest's failure to
make payments under two equipment leases. The plaintiff has filed a first
amended motion for summary judgment. A hearing has been set for May 18, 2000.
Settlement negotiations are ongoing.

Before the merger, Harvest settled a number of lawsuits and claims, and
since the merger we have settled additional lawsuits and claims. Some of these
settlements are documented by executed settlement agreements and releases while
others are not.

We are involved in certain claims arising in the normal course of business.
In our opinion, although the outcomes of any such claims are uncertain, in the
aggregate they are not likely to have a material adverse effect on us.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1999.

<PAGE>

PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market for Common Stock

Our common stock has been quoted on the OTC Bulletin Board under the symbol
"ROTI" since September 17, 1998. Prior to that date, it was quoted on the Nasdaq
SmallCap Market. During the period from March 1, 2000 to March 31, 2000, the
high and low sales prices for the common stock were $.18 and $.07, respectively.
The range of high and low sales prices for the common stock as reported by
NASDAQ (indicated by an asterisk) and the range of high and low bid prices as
quoted on the OTC Bulletin Board are listed below for the periods indicated. The
quotations reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.

Price
---------------------
High Low
---- ---
Fiscal Year 1998: Quarter Ended:
- ----------------- --------------
First Quarter April 19, 1998 $2.2188* $ .25*
Second Quarter July 12, 1998 $ .875* $ .25*
Third Quarter October 4, 1998 $ .875* $ .125
Fourth Quarter December 27, 1998 $ .29 $ .09

Fiscal Year 1999:
- -----------------
First Quarter April 18, 1999 $ .56 $ .22
Second Quarter July 11, 1999 $ .28 $ .10
Third Quarter October 3, 1999 $ .24 $ .04
Fourth Quarter December 26, 1999 $ .06 $ .02

Holders of Record

We had approximately 89 holders of record of our common stock as of March
31, 2000.

Dividends

We have never paid cash dividends on our common stock and do not foresee
that we will have earnings with which to pay dividends in the foreseeable
future. Our board of directors would determine the amount of future dividends,
if any, based upon our earnings, financial condition, capital requirements and
other conditions. Our loan agreement with FINOVA prohibits us from paying cash
dividends on our common stock.

Recent Sales of Unregistered Securities

We have issued the following unregistered securities in reliance on the
exemptions from registration provided by Section 4(2) of the Securities Act and
Regulation D, as promulgated by the SEC pursuant to the Securities Act.

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Recipients of securities in these transactions represented their intention to
acquire the securities for investment purposes only and not with a view to or
for the sale in connection with any distribution thereof, and appropriate
legends were affixed to the share certificates issued in such transactions.

On November 2, 1999, we issued warrants to purchase 100,000 shares of
common stock at an exercise price of $.04 per share to SECA VII, LLC (of which
James R. Walker, our sole director, is an equity member) and we issued warrants
to purchase 75,000 shares of common stock at an exercise price of $.04 per share
to another of our unsecured lenders. We issued these warrants to SECA VII, LLC
and the other lender as consideration for the agreement of each of them to
extend the maturity dates of the loans, in the approximate outstanding amounts
of $350,000 and $300,000, respectively, that they each made to us.

In May 1999, we agreed to issue warrants to acquire 150,000 shares of
common stock to an outside public relations firm. The warrants will be
exercisable at the following prices: 50,000 will be exercisable at $0.31 per
share; 50,000 will be exercisable at $0.81 per share; and the remaining 50,000
will be exercisable at $1.31 per share. The warrants will expire on May 21,
2004, have full piggyback registration rights (with customary underwriter
"knock-out" provisions) and provide for net issue exercise. The warrants vest on
the following schedule: 50,000 vested on May 21, 1999, 25,000 vested on August
4, 1999, 25,000 vested on November 12, 1999, 25,000 vested on February 15, 2000,
and 25,000 will vest on May 15, 2000. The warrants are being issued as partial
consideration for the services that the public relations firm has agreed to
provide to us.

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS

This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, and Section 21E of the Securities
Exchange Act of 1934. These statements relate to future economic performance,
plans and objectives of management for future operations and projections of
revenues and other financial items that are based on the beliefs of our
management, as well as assumptions made by, and information currently available
to, our management. The words "expect," " estimate," "anticipate," "believe" and
similar expressions are intended to identify forward-looking statements. Those
statements involve risks, uncertainties and assumptions, including industry and
economic conditions, competition and other factors discussed in this and our
other filings with the SEC, including the "Risk Factors" section of the
prospectus included in our Registration Statement on Form SB-2 (Registration
number 333-78111), as declared effective by the SEC on September 9, 1999. If one
or more of these risks or uncertainties materialize or underlying assumptions
prove incorrect, actual outcomes may vary materially from those indicated.

Overview

The following discussion should be read in connection with the consolidated
financial statements and related notes thereto included elsewhere in this
report.

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On January 14, 1999, TRC merged into a wholly owned subsidiary of Harvest
in a forward triangular merger. Because the former shareholders of TRC received
a majority of the shares of our common stock outstanding immediately after the
merger, the historical financial statements of the surviving company for the
periods prior to the merger are those of TRC rather than Harvest. For financial
and accounting purposes, the merger was deemed to have been completed on
December 27, 1998.

On February 10, 2000, Hartan and its subsidiaries sold substantially all of
the assets used in the operation of our restaurants to RTI. All proceeds of this
sale were paid to our creditors.

As a result of the sales of assets to RTI we have no ongoing operations and
no operating assets.

Results of Operations for the Year Ended December 26, 1999 Compared to the Year
Ended December 27, 1998

Revenues. Total net revenues decreased $2,474,989, or 21.2%, during the
year (52 weeks) ended December 26, 1999, compared to the corresponding period of
1998. The leveling of sales at two restaurants that opened in the fourth quarter
of 1997 resulted in a $571,544 decrease in sales. In addition, same store sales
decreased by $745,410, or 13.9%. Sales also decreased as a result of the closing
of three stores and the sale of one store, as well as the sale of our catering
division. The opening of the Crabby Bob's restaurant on May 24, 1999 partially
offset these decreases. Crabby Bob's net sales for the year were $812,785.

Costs and Expenses. In general, costs of goods sold decreased as a
percentage of sales during 1999. This decrease resulted from operational
improvements, increased purchasing efficiencies and a reduction in coupons and
promotions, which decreased from $371,836 to $155,840, or 58.1%. Although these
types of promotions tend to increase the number of customers that visit the
restaurant and thereby increase sales, the operating expenses on these sales are
higher than on ordinary sales because the sales have been discounted below the
menu price. This decrease in costs as a percentage of sales is most evident in
food, beverage and paper costs.

Food, beverage and paper costs were $3,138,804, or 34.0% of sales, for 1999
versus $4,114,903, or 35.2% of sales, for 1998. Operational improvements and
reduced coupon and discount promotions caused a 3.1% decrease in food costs as a
percentage of sales at comparable stores. This was offset somewhat by opening
promotions at the new Crabby Bob's restaurant.

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Payroll and benefit expense was $3,421,795, or 37.1% of sales, for 1999
compared to $4,151,723, or 35.5% of sales, for 1998. Labor costs rose 1.6% due
to increased competition for labor and higher costs associated with the opening
of the new Crabby Bob's restaurant.

Other operating expenses increased as a percentage of sales to 26.6%
($2,450,873) for 1999 from 23.5% ($2,746,175) for 1998. Advertising expenditures
decreased by 1.0% of sales. Repairs and maintenance expenses, property tax
expense and restaurant supplies increased while insurance expense, utility
expense and service contracts decreased for a net increase of 0.4%. Restaurant
administration expense increased by 0.4% of sales, partially due to an increase
in credit card processing fees. Rent expense increased by 2.2% of sales
primarily due to the sale and leaseback of one restaurant in late June of 1998.
Pre-opening expenses increased 1.1% of sales in 1999, due to the development of
the Crabby Bob's restaurant. Because we converted a nearly completed Tanner's
restaurant into a Crabby Bob's restaurant, construction took longer than usual.
We also had higher costs at this store due to the travel expenses and payroll
costs of training personnel from Crabby Bob's California operations.

Depreciation and amortization expense increased by 1.7% of sales, to 7.7%
in 1999, from 6.0% in 1998. This is primarily due to the decrease in sales.

General and administrative expenses decreased to $1,430,595 in 1999 from
$1,651,474 in the 1998, primarily due to reduced expenses in the corporate
office.

The write-down of goodwill and intangible assets in 1999 is due to a
one-time charge of $3,742,321 related to the recognition that the assets were
impaired because of the financial condition of the Company. In 1998 the write
down of an intangible asset was due to a one-time charge of $547,000 related to
the cancellation and termination of an employment contract with the former
president of TRC.

Other Income (Expense). Interest expense decreased to $380,294 in 1999 from
$700,451 in 1998. This was primarily attributable to the cancellation of the
debenture to the former president of Tanner's. Our effective interest rate for
1999 was 12.3%. In 1998 our effective interest rate was 11.3%.

Net Loss. We incurred a net loss of $7,777,603 for 1999 compared to
$2,897,759 in 1998. This increase was primarily attributable to the $3,742,321
write off for goodwill and other intangibles and the $1,670,784 write down of
assets to liquidation value, offset by the $547,000 intangible write off in
1998.

Liquidity and Capital Resources.

We have incurred operating losses since inception, and as of December 26,
1999, we had an accumulated deficit of $14,167,608 and a working capital deficit
of $3,748,556. Following the bankruptcy filings and sales of assets by Hartan
and six of its subsidiaries, we had no ongoing operations with which to generate
cash flow or revenue. Hartan and these six subsidiaries owned substantially all
of our assets.

We are unable to pay our ongoing financial obligations. However, management
believes that there may be value in keeping us current in our reporting
obligations under the Securities Exchange Act of 1934. An outside firm involved
in our issuance of Series D preferred stock has agreed to pay those expenses
necessary for us to remain current in those reporting obligations. We can give
no assurance, however, that we will ever be able to realize any value from our
situation, and the outside firm may decide to stop paying our reporting expenses
at any time.

Our cash and cash equivalents decreased $142,087 during 1999. The principal
source of funds consisted of $4,000,000 received from outside investors, and
$397,168 generated by the sale of property and equipment. The primary uses of
funds were:

o cash used in operations of $3,735,505, including the payment and
resolution of current accounts payable and accrued liabilities of
$2,331,557;

o the purchase of additional fixed assets including those for one new
restaurant and the remodeling of another for $576,504; and

o payment of debt of $227,246.

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We have not paid dividends on the Series A preferred stock since June 1998
and we are currently analyzing our alternatives for addressing these arrearages.

We opened one new restaurant in May 1999. One of our franchised restaurants
closed in February of 1999 due to franchisee financing arrangements and location
issues. Our franchisee in Macon converted to a Crabby Bob's franchise in
November 1999. We closed two under-performing restaurants in March 1999,
resulting in a charge to earnings of approximately $300,000 in the first quarter
of 1999. In June, at the expiration of the original lease term, we sold the
assets of another restaurant to a franchisee. In August we sold the assets of
our catering operation and franchised that operation as well. In December, we
closed another under performing restaurant.

On May 11, 1999, we entered into an agreement to acquire certain assets of
Crabby Bob's. Crabby Bob's is a restaurant chain that consisted of two
restaurants located in Southern California that offered fresh seafood, crabs,
oysters and a full service bar. We were not able to complete this transaction.
Therefore, in January 2000, we converted our Crabby Bob's franchised restaurant
into a Tanner's restaurant.

Year 2000 Computer Issues

We rely on computer software programs, internal operating systems and
telephone and other network communications connections to conduct our business.
If any of these programs, systems or network connections are not programmed to
recognize and properly process dates after December 31, 1999, significant system
failures or errors may result. We have experienced no such problems as of the
date of this report, although it is still possible that we could experience such
problems in the future. These matters are commonly referred to as year 2000
issues, and they could have a material adverse effect on us. Our potential areas
of exposure include:

o information technology, including computers, software and systems that
we have developed internally or purchased or licensed from others,
such as our billing system and accounts receivable system,

o non-information technology, including telephone systems and other
equipment that we use internally, and

o external systems.

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<PAGE>

We believe that our internal accounting and operating programs and systems
and the network connections we maintain are adequately programmed to address the
year 2000 problem. Our costs for assessment, remediation and testing related to
the year 2000 problem have been minimal to date, and we do not expect to incur
any additional costs that are material.

ITEM 7. FINANCIAL STATEMENTS

The financial information required by this item begins on page F-1.

ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

None.

14
<PAGE>

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

Directors and Executive Officers

Our officers and directors as of March 31, 2000 are listed below.

Name Age Office
- ---- --- ------

Robert J. Hoffman 50 Acting Chief Executive Officer,
President, and Secretary

James R. Walker 50 Director

William Gallagher resigned from his position as a member of the Board of
Directors in April 1999, having already resigned from his position as an officer
at the time of the merger with TRC. In December 1999, Clyde E. Culp, III
resigned from his positions as Chairman of the Board, member of the Board of
Directors, and Chief Executive Officer of the Company for health reasons. In
January 2000, Richard E. Tanner resigned from his position as a member of the
Board of Directors and Timothy R. Robinson resigned from his positions as Vice
President, Chief Financial Officer and Secretary. Following these resignations,
Mr. Walker is our sole remaining director and Mr. Hoffman is our sole remaining
officer.

Background of Our Directors and Executive Officers

James R. Walker has been a director since January 1999. He has been the
owner and operator of Sim's Wholesale Co., Inc. in Lynchburg, Virginia, since
1986 and is also a Visiting Professor of Business Administration at the Darden
Graduate School of Business at the University of Virginia, a position he has
held since 1995. He has held marketing management positions at Smith Kline
Beecham, Inc. and Eli Lilly and Co.

Robert J. Hoffman, formerly our Senior Vice President of Operations,
assumed the position of acting Chief Executive Officer upon the resignation of
Clyde E. Culp III in December 1999. Mr. Hoffman had served TRC as Senior Vice
President of Operations from 1996 until the merger, and served us in that same
capacity from the time of the merger until he assumed the position of acting
Chief Executive Officer. Mr. Hoffman has over 30 years' experience in restaurant
operations. Before joining TRC, from 1994 to 1996, Mr. Hoffman served as a vice
president for Miami Subs and was responsible for operations and training of 260
company-owned and franchised restaurants. From 1969 to 1993, he served in
various management roles, most recently as senior vice president of operations,
with Metromedia Steakhouse LP, which operated 836 Ponderosa Steakhouses.

15
<PAGE>

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our directors
and executive officers and persons who own beneficially more than 10% of our
outstanding common stock to file with the SEC initial reports of ownership and
reports of changes in their ownership of our common stock. Directors, executive
officers and greater than 10% shareholders are required by SEC regulations to
furnish us with copies of the forms they file. To our knowledge, based solely on
a review of the copies of such reports furnished to us, during the fiscal year
ended December 26, 1999, our directors, executive officers and greater than 10%
shareholders complied with all applicable Section 16(a) filing requirements;
provided, however, that SECA VII, LLC, one of our shareholders (of which Mr.
Walter, one of our directors, is an equity member), may have filed a Form 5 for
year-end 1999 late. This filing pertained to the issuance to SECA VII, in
November 1999, of warrants to purchase 100,000 shares of our common stock. See
"Item 12, Certain Relationships and Related Transactions."

ITEM 10. EXECUTIVE COMPENSATION

The following table provides information concerning compensation for the
past fiscal three years to our executive officers.

<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term
Compensation
Awards
Annual Compensation Securities
Other Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options(#)
- --------------------------- ---- --------- -------- --------------- ----------
<S> <C> <C> <C> <C> <C>
William J. Gallagher 1999 200,000(4) 0 0 0
Former Chairman and Chief 1998 90,000 0 13,691(2) 140,000(1)
Executive Officer 1997 89,519 37,156 17,663 0

Clyde E. Culp, III
Former Chairman and Chief
Executive Officer 1999 142,308 0 0 0

Robert J. Hoffman
Current Chief Executive
Officer, President and
Secretary;
Formerly our Senior Vice
President of Operations 1999 126,575 0 4,200(3) 0

Timothy R. Robinson
Former Vice President
and Chief Financial
Officer 1999 122,599 0 0 0

</TABLE>

(1) On February 5, 1998, the Board of Directors authorized a repricing of the
option exercise price for all outstanding options granted under the Harvest
Stock Option Plan to $1.00, with no change in the vesting periods. Mr.
Gallagher owned 140,000 options at that time. This revised exercise price
represented approximately 200% of the market price of the common stock on
the date of the repricing.
(2) This amount consists of a car allowance of $5,157 and $8,534 that was used
to pay off a loan.
(3) This amount represents a car allowance.
(4) This amount represents payments made to Mr. Gallahger pursuant to his
severance agreement. See "-Employment Contracts and Termination of
Employment and Change-in-Control Arrangements."

16
<PAGE>

Compensation of Directors

While we have stated previously that directors are paid $250 per meeting,
we have not paid our directors for attending meetings since the date of the
merger with TRC.

Employment Contracts and Termination of Employment and Change-in-Control
Arrangements

When we completed the merger on January 14, 1999, Clyde E. Culp, III, the
chairman and chief executive officer of TRC prior to the merger, became our
Chairman and Chief Executive Officer. Mr. Culp's five year employment agreement
provided that Mr. Culp would be paid an annual salary of $200,000. Mr. Culp
resigned in December 1999.

In connection with the merger, William J. Gallagher, our chief executive
officer prior to the merger, executed a severance agreement with us pursuant to
which he resigned from all positions that he held with us, other than as one of
our directors, in exchange for our agreement to pay him a total of $200,000. Mr.
Gallagher remained on the board of directors until April 1999. We have paid Mr.
Gallagher all amounts owed him under his severance agreement.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table provides information as of March 31, 2000 concerning
ownership of the capital stock by each director and officer, all directors and
officers as a group, and all beneficial owners of 5% or more of the outstanding
shares of common stock. As of March 31, 2000, 11,625,560 shares of our common
stock were outstanding.

Except as otherwise noted, the persons named in the table own the shares
beneficially and of record and have sole voting and investment power with
respect to all shares of capital stock shown as owned by them, subject to
community property laws, where applicable. Each shareholder's address is in care
of us at 5500 Oakbrook Parkway, Suite 260, Norcross, Georgia, 30093. The Right
to Acquire column in the table also reflects all shares of common stock that
each individual has the right to acquire within 60 days from the above date upon
exercise of stock options or common stock purchase warrants or upon conversion
of preferred stock.

17
<PAGE>
<TABLE>
<CAPTION>

Percent of
Class of Number of Right Outstanding
Name Stock Shares Owned to Acquire Shares of Class
- ---- ----- ------------ ---------- ---------------

<S> <C> <C> <C> <C>
Clyde E. Culp, III Common 1,178,063 78,538 10.7%
William J. Gallagher Common 46,667 140,000 1.6
Richard Tanner Common 1,413,675 353,419 26.3
Series E(5) 469,775 (5) 1,879,100 (5) 63.1
James R. Walker (1) Common 765,741 154,976 13.2
Series E(5) 183,150 (5) 732,600 (5) 24.6
SECA VII, LLC (1) Common 765,741 154,976 (4) 13.2
Series E(5) 183,150 (5) 732,600 (5) 24.6
Robert J. Hoffman Common -- 243,466 2.1
Timothy R. Robinson Common -- 254,462 2.1
John Feltman Common 382,870 (2) 353,419 6.1
FINOVA Mezzanine Common -- 699,259 5.7
Capital, Inc.
All officers and
directors as a group
(2 persons) (3) Common 765,741 398,442 14.9%
Series E 183,150 0 24.6%
- ------------------
</TABLE>

(1) Mr. Walker, a director, is an equity owner of SECA VII, LLC, which directly
owns 765,741 shares of common stock and 183,150 shares of Series E
preferred stock and has the right to acquire 154,976 shares of common
stock.
(2) Represents 382,870 shares held by Brookhaven Capital Corporation, of which
Mr. Feltman is the chairman.
(3) Messrs. Walker and Hoffman.
(4) Includes options to purchase 54,976 shares of common stock at an exercise
price of $.01 per share and a warrant to purchase 100,000 shares of common
stock at an exercise price of $.04 per share.
(5) Each share of our Series E preferred stock is convertible into four shares
of common stock. The figures presented in the "Right to Acquire" column in
each row representing shares of "Series E" preferred stock reflect the
number of shares of common stock into which the shares of Series E
preferred stock identified in the "Number of Shares Owned" column are
convertible.

18
<PAGE>

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Several of our current and former officers and directors, as well as
holders of 5% or more of our outstanding common stock, received our securities
in the January 1999 merger. Clyde E. Culp, III, our former Chairman and Chief
Executive Officer, received 1,178,063 shares of common stock in exchange for his
shares of TRC common stock and received options to acquire an additional 78,538
shares of common stock in exchange for his options to acquire shares of TRC.
Also as part of the merger, Mr. Culp executed an employment agreement to become
our Chairman and Chief Executive Officer. James R. Walker, our sole director, is
also an equity owner of SECA VII, LLC, which received 765,741 shares of common
stock, 183,150 shares of Series E preferred stock, and options to acquire 54,976
shares in the merger, also in exchange for its TRC securities. Timothy R.
Robinson, our former Chief Financial Officer, received options to acquire
254,462 shares of common stock, and Robert J. Hoffman, our acting Chief
Executive Officer, received options to acquire 243,466 shares of common stock,
in each case in exchange for their options to acquire shares of common stock of
TRC. John D. Feltman, a significant shareholder and the chairman of Brookhaven
Capital Corporation, received options to acquire 394,986 shares of common stock
in exchange for his options to acquire shares of TRC common stock. Moreover,
Brookhaven received 382,870 shares of common stock in exchange for its shares of
TRC common stock.

Also in the merger with TRC, Richard Tanner, our former director, received
approximately 469,775 shares of Series E preferred stock in exchange for his
agreement to cancel a promissory note from TRC to him, his agreement to
terminate his employment agreement with TRC, and his conversion of shares of
Class A preferred stock of TRC. Mr. Tanner also received 1,413,675 shares of
common stock in exchange for his outstanding TRC shares and options to acquire
353,419 shares of common stock in exchange for his options to acquire shares of
TRC.

Mr. Culp has also personally guaranteed two loans on our behalf. As of
August 31, 1999, the aggregate outstanding principal amount of these two loans
was approximately $346,000.

In addition, Mr. Culp loaned approximately $350,000 to Pacific Ocean
Restaurants, Inc., the parent entity of Crabby Bob's Seafood, Inc., in March
1999 to enable Pacific Ocean to satisfy certain immediate obligations while
continuing to pursue our proposed acquisition. Interest on Mr. Culp's loan began
accruing at a rate of 10% per annum in September 1999. Mr. Culp's loan became
due on the date of termination of the letter of intent between us and Pacific
Ocean.

The obligations of Pacific Ocean under Mr. Culp's note are secured by the
personal property, general intangibles and intellectual property used in the
operation of the Crabby Bob's Seafood Grill and Bob's on the Bay restaurants
operated by Crabby Bob's Seafood, Inc.

Mr. Gallagher, a former director and officer, is an officer of Santa Cruz
Squeeze, Inc., which advanced money to Harvest in 1998 secured by a real estate
lien note in the approximate amount of $150,000. Harvest paid this note in full
before the merger.

19
<PAGE>

We have no official policy regarding material transactions between our
directors and officers and us. We generally seek to have any such transaction
approved or ratified by a majority of our directors who lack a personal interest
in the matter. Because we currently have only three directors, that approval or
ratification is not always available to us.

SECA VII, LLC, a significant shareholder and an entity in which Mr. Walker,
our sole director, is an equity owner, has loaned us $350,000 at an interest
rate of 12.5%. This loan matured on September 9, 1999. In November 1999, SECA
agreed to extend the maturity date of the loan until January 31, 2000 in
exchange for our issuance to SECA of warrants to acquire 100,000 shares of our
common stock at an exercise price of $.04 per share.

In February 2000, in connection with the sale of assets of Hartan and six
of Hartan's subsidiaries to RTI, RTI agreed to indemnify Robert J. Hoffman, our
acting Chief Executive Officer, and certain other of our and our subsidiaries'
current and former officers and employees against any claims relating to our
failure or the failure of our subsidiaries to pay certain sales taxes, with the
maximum aggregate amount of such indemnification to be $125,000.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits. We have filed certain of the exhibits required by Item 601 of
Regulation S-B with previous registration statements or reports. As specifically
noted in the footnotes to the following Index to Exhibits, those exhibits are
incorporated into this annual report on Form 10-KSB by reference to the
applicable statement or report.

EXHIBIT INDEX
-------------

Exhibit No. Title
- ----------- -----

2.01 Agreement and Plan of Merger by and among Harvest Restaurant
Group, Inc., a Texas corporation, Hartan, Inc., a Texas
corporation, and TRC Acquisition Corporation, a Georgia
corporation, dated December 27, 1998. (4)

2.02 Asset Purchase Agreement by and among Hartan, Inc., certain of its
subsidiaries, and Restaurant Teams International, Inc., dated
February 2, 2000. (8)

3.01 Articles of Incorporation, as amended. (5)

3.02 Bylaws. (l)

4.01 Loan Agreement by and among TRC Acquisition Corporation and Sirrom
Capital Corporation, dated October 22, 1996. (5)

4.02 Assumption Agreement, Consent and First Amendment to Loan
Agreement, dated January 14, 1999, by and among Hartan, Inc.,
Harvest Restaurant Group, Inc., and Sirrom Capital Corporation.
(5)

4.03 Guaranty Agreement, dated January 14, 1999, Harvest Restaurant
Group, Inc., and Sirrom Capital Corporation. (5)

4.04 Amended and Restated Secured Promissory Note, dated January 14,
1999, made by Hartan, Inc. for the benefit of Sirrom Capital
Corporation. (5)

4.05 Amended and Restated Stock Purchase Warrant, dated January 14,
1999. (5)

20
<PAGE>

Exhibit No. Title
- ----------- -----

4.06 Second Amendment, dated November 2, 1999, to 11% Subordinated
Debenture Due January 30, 1999, by and between Tanner's Restaurant
Group, Inc. and Ralph C. DiIorio. (9)

4.07 Stock Purchase Warrant, dated November 2, 1999, by and between
Tanner's Restaurant Group, Inc. and Ralph C. DiIorio. (9)

4.08 Second Amendment, dated November 2, 1999, to $350,000 12.5%
Promissory Note Dated April 1, 1998 and Due January 30, 1999, by
and between Tanner's Restaurant Group, Inc. and SECA VII, LLC. (9)

4.09 Stock Purchase Warrant, dated November 2, 1999, by and between
Tanner's Restaurant Group, Inc. and SECA VII, LLC. (9)

10.01 Incentive Stock Option Plan. (l)

10.02 TRC Acquisition Corporation 1996 Employee Stock Option Plan. (5)

10.03 Settlement Agreement with Cluckers Wood Roasted Chicken, Inc. (l)

10.04 Employment Agreement, dated January 14, 1999, by and among Harvest
Restaurant Group, Inc., Hartan, Inc. and Clyde E. Culp, III. (5)

10.05 Severance Agreement, dated January 14, 1999, by and among Harvest
Restaurant Group, Inc., Hartan, Inc. and William J. Gallagher. (5)

10.05(a) Letter Amendment to Severance Agreement, dated March 16, 1999. (5)

10.06 Form of Subscription Agreement for Series D Convertible Preferred
Stock. (5)

10.07 Form of Registration Rights Agreement for Series D Convertible
Preferred Stock. (5)

10.08 Form of Warrant Agreement for Series D Convertible Preferred
Stock. (5)

10.09 Letter Amendment, dated January 12, 1999. (5)

10.10 Letter Amendment, dated January 13, 1999. (5)

10.11 Agreement with Roasters Corp. (2)

10.12 Agreement with Pollo Operators, Inc. (2)

10.13 Subordinated Debenture, dated January 30, 1998. (6)

10.13(a) First Amendment to Subordinated Debenture, dated January 30, 1999.
(6)

10.14 Promissory Note, dated March 31, 1998. (6)

10.14(a) First Amendment to Promissory Note, dated January 30, 1999. (6)

10.15 Purchase and Sale Agreement, dated May 11, 1999, by and between CB
Acquisition, Inc. and, for purposes of Section 5.2 of the Purchase
and Sale Agreement, Tanner's Restaurant Group, Inc., and Pacific
Ocean Restaurants, Inc., and Crabby Bob's Seafood, Inc. (7)

21
<PAGE>

Exhibit No. Title
- ----------- -----

10.16 Letter Agreement, dated April 6, 1999, by and between Pacific
Ocean Restaurants, Inc. and Tanner's Restaurant Group. (7)

21 Subsidiaries.

23 Consent of Porter Keadle Moore, LLP.

27 Financial Data Schedule as of December 26, 1999.

- -----------------
(1) Incorporated by reference to our definitive Registration Statement on Form
SB-2, file No. 33-95796 declared effective on July 9, 1996.
(2) Incorporated by reference to our definitive Registration Statement on Form
SB-2, file no. 333-21067 declared effective on June 11, 1997.
(3) Incorporated by reference to our definitive Registration Statement on Form
S-3, file no. 333-45189 declared effective on February 17, 1998.
(4) Filed as Exhibit 2.1 to our Current Report on Form 8-K, filed on January
21, 1999, and incorporated herein by reference.
(5) Incorporated by reference to our Annual Report on Form 10-KSB, as filed on
March 29, 1999.
(6) Incorporated by reference to our Registration Statement on Form SB-2, as
filed on May 7, 1999.
(7) Incorporated by reference to Amendment No. 1 to our Registration Statement
on Form SB-2, as filed on July 26, 1999.
(8) Incorporated by reference to our Current Report on Form 8-K, as filed on
February 25, 2000.
(9) Incorporated by reference to our Quarterly Report on Form 10-QSB, as filed
on November 17, 1999.

Reports on Form 8-K

During the fourth quarter of 1999, we filed the following reports on Form
8-K:

(i) On December 6, 1999, we filed a current report on Form 8-K to report
the termination of our agreement to purchase certain assets used in the
operation of the Crabby Bob's restaurant chain.

(ii) On December 23, 1999, we filed a current report on Form 8-K to
announce the resignation of Clyde E. Culp, III as our Chairman of the
Board, Chief Executive Officer and Director.

22
<PAGE>

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Company has
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized, on April 10, 2000.

TANNER'S RESTAURANT GROUP, INC.

By: /s/ Robert J. Hoffman
-------------------------
Name: Robert J. Hoffman
Title: Acting Chief Executive Officer

In accordance with the Exchange Act, this Report has been signed below by
the following persons on behalf of the Company and in the capacities and on the
dates indicated.

Signature Title Date
- --------- ----- ----

/s/ Robert J. Hoffman Acting Chief Executive Officer April 10, 2000
- ---------------------
Robert J. Hoffman

/s/ James R. Walker Director April 10, 2000
- -------------------
James R. Walker

23
<PAGE>

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

The Board of Directors and Stockholders
Tanner's Restaurant Group, Inc.

We have audited the accompanying consolidated balance sheet of Tanner's
Restaurant Group, Inc. (formerly Harvest Restaurant Group, Inc.) and
subsidiaries as of December 26, 1999 and the related consolidated statements of
operations, stockholders' equity (deficit) and cash flows for the years ended
December 26, 1999 and December 27, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Tanner's Restaurant
Group, Inc. and subsidiaries as of December 26, 1999, and the results of their
operations and their cash flows for the years ended December 26, 1999 and
December 27, 1998.

As discussed in Note 1, the Company's operating subsidiaries filed a voluntary
petition under Chapter 11 of the United States Bankruptcy Code on January 28,
2000. Subsequently, on February 8, 2000, substantially all assets of the Company
were sold to a third party. Immediately upon completion of the sale, the Company
had no operations, had approximately $4 million of current liabilities,
including long-term debt in default, and had assets of approximately $200
thousand. These facts raise substantial doubt about the Company's ability to
continue as a going concern. The consolidated financial statements have been
adjusted to reflect the estimated impact of the bankruptcy and subsequent sale
of assets in 2000. All assets at December 26, 1999 are recorded at their
estimated fair value less costs to sell, with a corresponding charge to
operations to record the write down of those assets, and all liabilities are
presented as current liabilities.

/s/ PORTER KEADLE MOORE, LLP

Atlanta, Georgia
March 17, 2000

F-1
<PAGE>
<TABLE>
<CAPTION>

Tanner's Restaurant Group, Inc.
Consolidated Balance Sheet

December 26,
1999
------------

Assets
- ------
Current assets:
<S> <C>
Cash $ 80,076
Accounts receivable 27,723
Notes receivable 123,254
Inventory 80,197
Property and equipment held for sale 152,086
Prepaid expenses and other current assets 59,623
------------
Total current assets $ 522,959
============

Liabilities and Stockholders' Deficit
- -------------------------------------
Current liabilities:
Accounts payable $ 721,522
Accrued expenses 587,554
Current portion of long-term debt and notes in default 2,962,439
------------
Total current liabilities 4,271,515
------------

Commitments and contingencies

Stockholders' deficit:
Preferred stock (see Note 5) 1,215,093
Common stock: $.01 par value; authorized 200 million shares:
issued and outstanding 11,223,194 in 1999, and 8,230,080 in 1998 112,232
Additional paid-in capital 9,091,727
Accumulated deficit (14,167,608)
------------
Total stockholders' deficit (3,748,556)
------------
Total liabilities and stockholders' deficit $ 522,959
============

The accompanying notes are an integral part of
these consolidated financial statements.

F-2
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

Tanner's Restaurant Group, Inc.
Consolidated Statements of Operations

For the Years Ended
----------------------------
December 26, December 27,
1999 1998
------------ ------------
Revenue
- -------
<S> <C> <C>
Restaurant sales revenue $ 8,849,241 $ 10,830,898
Catering revenue 366,881 800,305
Franchise and royalty revenue 3,433 63,341
------------ ------------
Total revenue 9,219,555 11,694,544
------------ ------------

Costs and expenses
- ------------------
Restaurant and catering operating expenses:
Food, beverage and paper 3,138,804 4,114,903
Payroll and benefits 3,421,795 4,151,723
Depreciation and amortization 713,578 705,658
Other operating expenses 2,450,692 2,746,175
------------ ------------

Total restaurant and catering operating expenses 9,724,869 11,718,459
------------ ------------

Loss from restaurant and catering operations (505,314) (23,915)

General and administrative expenses 1,430,776 1,651,474
Write down of goodwill and intangible assets 3,742,321 547,000
Write down of assets to fair value less costs to sell 1,670,784
------------ ------------

Operating loss (7,349,195) (2,222,389)

Other income (expense):
Miscellaneous income (expense) (48,114) 25,081
Interest expense (380,294) (700,451)
------------ ------------

Net loss $ (7,777,603) $ (2,897,759)
============ ============

Basic and diluted loss per share $ (1.10) $ (0.81)

The accompanying notes are an integral part of
these consolidated financial statements.

F-3
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

Tanner's Restaurant Group, Inc.
Consolidated Statements of Stockholders' Equity(Deficit)

Common Stock Preferred Stock
Shares Amount Shares Amount
---------------------------------------------------------------
TRC:
- ----
<S> <C> <C> <C> <C>
Balance, December 28, 1997 2,625,000 $ 26,250

Net loss
Repricing of stock options
Dividends accrued on
redeemable preferred stock
Accretion on redeemable
preferred stock

-------------------------------------------------------------
Balance, December 27, 1998 2,625,000 26,250

Company:
- --------
Assumed cancellation of TRC
common shares in
connection with Merger (2,625,000) (26,250)
Assumed issuance of Company
common stock in
connection with Merger 8,230,080 82,301
Assumed issuance of series A
preferred stock in
connection with Merger 500,124 $ 500,124
Assumed issuance of series D
preferred stock in
connection with Merger 9,198 9,198
Assumed issuance of series E
preferred stock in
connection with Merger 744,500 744,500

------------------------------------------------------------
Balance, December 27, 1998,
giving effect to Merger 8,230,080 82,301 1,253,822 1,253,822

Net Loss
Receipt of stock subscription
receivable
Conversion of Series A
preferred stock 104,409 1,044 (38,670) (38,670)
Conversion of Series D
preferred stock 2,888,705 28,887 (59) (59)

------------------------------------------------------------
Balance December 26, 1999 11,223,194 $ 112,232 1,215,093 $ 1,215,093
========== ============ ========= ============

Table continues on following page.

F-4
<PAGE>

Tanner's Restaurant Group, Inc.
Consolidated Statements of Stockholders' Equity (Deficit)
(Continued)

Additional Stock Stockholders'
Paid-In Subscription Accumulated Equity
Capital Receivable Deficit (Deficit)
------------------------------------------------------------
TRC:
- ----
Balance, December 28, 1997 $ (3,039,883) $ (3,013,633)

Net loss (2,897,759) (2,897,759)
Repricing of stock options $ 58,903 58,903
Dividends accrued on
redeemable preferred stock (300,000) (300,000)
Accretion on redeemable
preferred stock (152,363) (152,363)

-------------------------------------------------------------
Balance, December 27, 1998 58,903 (6,390,005) (6,304,852)

Company:
- --------
Assumed cancellation of TRC
common shares in
connection with Merger (26,250)
Assumed issuance of Company
common stock in
connection with Merger 82,301
Assumed issuance of series A
preferred stock in
connection with Merger 500,124
Assumed issuance of series D
preferred stock in
connection with Merger 5,396,433 $ (4,000,000) 1,405,631
Assumed issuance of series E
preferred stock in
connection with Merger 3,627,593 4,372,093

-------------------------------------------------------------
Balance, December 27, 1998,
giving effect to Merger 9,082,929 (4,000,000) (6,390,005) 29,047

Net Loss (7,777,603) (7,777,603)
Receipt of stock subscription
receivable 4,000,000 4,000,000
Conversion of Series A
preferred stock 37,626 0
Conversion of Series D
preferred stock (28,828) 0

-------------------------------------------------------------
Balance December 26, 1999 $ 9,091,727 $ 0 $(14,167,608) $ (3,748,556)
============ ============ ============ ============

The accompanying notes are an integral part of these consolidated financial statements.

F-4(a)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>

Tanner's Restaurant Group, Inc.
Consolidated Statements of Cash Flows
For the Years Ended
--------------------------
December 26, December 27,
1999 1998
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net loss $(7,777,603) $(2,897,759)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 713,578 705,658
Loss on sales of property and equipment 109,983 24,690
Write-downs of goodwill and intangible assets 3,742,321 547,000
Write-down of assets to fair value less costs to sell 1,670,784
Compensation expense related to repricing of stock options 58,903
Changes in assets and liabilities:
Accounts receivable 102,363 (28,536)
Notes receivable 4,746
Inventory 33,537 493
Prepaid expenses and other current assets (3,657) 31,041
Other assets (16,867)
Accounts payable (669,175) (153,643)
Accrued expenses (1,662,382) 1,508,822
----------- -----------
Net cash used in operating activities (3,735,505) (220,198)
----------- -----------
Cash flows from investing activities:
Net cash acquired in Merger 411,150
Proceeds from sale of property and equipment 397,168 365,496
Purchase of property and equipment (576,504) (972,724)
----------- -----------
Net cash used in investing activities (179,336) (196,078)
----------- -----------
Cash flows from financing activities:
Cash overdraft (212,605)
Repayments of long-term debt (227,246) (164,543)
Proceeds from issuance of long-term debt 1,016,617
Additions to deferred financing costs (1,030)
Receipt of stock subscription receivable 4,000,000
----------- -----------

Net cash provided by financing activities 3,772,754 638,439
----------- -----------

Net change in cash and cash equivalents (142,087) 222,163
Cash and cash equivalents, beginning of year 222,163 0
----------- -----------
Cash and cash equivalents, end of period $ 80,076 $ 222,163
=========== ===========

Non-cash investing and financing activities:
Accretion of redeemable TRC preferred stock $ 152,363
Dividends on redeemable TRC preferred stock 300,000
Retirement of mortgage loan upon sale of property 939,101
Sale of property and equipment for notes receivable $ 128,000
Exchange of TRC Preferred Stock for Series E preferred stock 3,825,093
Settlement of employment contract through issuance of Series E preferred
stock 547,000
Write down of goodwill and intangibles 3,742,321
Write down of assets to fair value less costs to sell 1,670,784
Series A preferred stock acquired in connection with Merger 500,124
Stock subscription receivable for Series D preferred stock 4,000,000
Common stock issued and acquired in connection with Merger, net of TRC
common stock cancelled 56,051
Conversion of Series A preferred stock into common stock 38,670
Conversion of Series D preferred stock into common stock 59

Supplemental cash flow information:
Interest paid $ 413,401 $ 423,661

The accompanying notes are an integral part of these consolidated financial statements.

F-5
</TABLE>
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

1. Description of Business:

TRC Acquisition Corporation Merger

On January 14, 1999 Harvest Restaurant Group, Inc. ("Harvest" or "the
Company") and TRC Acquisition Corporation ("TRC") completed a forward
triangular merger (the "Merger") where Harvest acquired TRC. The effective
date of the Merger was December 27, 1998 and the consolidated financial
statements have been prepared assuming the Merger closed as of the end of
the day on December 27, 1998. In the Merger, shareholders of TRC received a
majority of the shares of common stock of Harvest. For this reason, the
Merger was treated as a reverse acquisition by TRC for accounting purposes.
As a result, the consolidated financial statements presented are those of
TRC rather than Harvest. On March 12, 1999, the company's shareholders
voted to change the name of the Company to Tanner's Restaurant Group, Inc.

Bankruptcy Proceedings and Sale of Assets

On January 28, 2000, Hartan Inc. ("Hartan"), a wholly owned subsidiary of
Tanner's Restaurant Group, Inc. (formerly Harvest Restaurant Group, Inc.),
filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code in
the United States Bankruptcy Court for the Northern District of Georgia. In
addition, six wholly owned operating subsidiaries of Hartan filed voluntary
petitions under Chapter 11 in the same jurisdiction. Hartan and these six
subsidiaries owned substantially all of assets of Tanner's Restaurant
Group, Inc.

As part of the bankruptcy proceedings, the court granted an order to hold a
sale of the assets of Hartan and its subsidiaries. On February 8, 2000, an
order was granted approving the sale of all of the assets of Hartan and its
subsidiaries and the assets were sold to a third party (the "Buyer") for
approximately $275,000. The Company recorded a charge in the fourth quarter
of 1999 amounting to $1,670,784 to adjust the carrying value of Hartan's
assets to their estimated fair value less costs to sell.

Prior to the Bankruptcy and subsequent sale of the assets of Hartan,
Tanner's Restaurant Group, Inc. and its wholly owned subsidiaries operated
casual dining restaurants under the name "Rick Tanner's Original Grill".
These restaurants specialized in fresh, convenient meals featuring
rotisserie chicken entrees, barbecued ribs, hamburgers, freshly prepared
vegetables, salads, and other side dishes. At December 26, 1999, there were
eight company owned stores and one franchised store located in the Atlanta,
Georgia metropolitan area.

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 26, 1999 and December 27, 1998. All general references to years
relate to fiscal years unless otherwise noted.

F-6
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

2. Summary of Significant Accounting Policies, continued:

Cash and Cash Equivalents

Cash and cash equivalents consist primarily of cash in banks and temporary
cash investments with original maturities of less than three months. At
times, cash and cash equivalent balances at a limited number of banks and
financial institutions may exceed insurable amounts. The Company believes
it mitigates its risks by depositing cash or investing in cash equivalents
in major financial institutions.

Inventories

Inventories are stated at the lower of cost (first-in, first-out) or market
and consist of food, beverages, paper products and supplies.

Property and Equipment

Property and equipment has historically been stated at cost, less
accumulated depreciation. The provision for depreciation had been
calculated using the straight-line method. Smallwares, consisting primarily
of linens and silverware, are expensed as incurred. The following
represents the useful lives over which the assets are depreciated:

Furniture and fixtures 5 years
Signage 7 years
Office equipment 5 years
Computer equipment and software 3 years
Kitchen and service equipment 7 years
Leasehold improvements Life of lease

As a result of the sale of its property and equipment in early 2000, the
Company has stated property and equipment at its estimated fair value less
costs to sell based on the actual and anticipated 2000 sales. No future
depreciation will be recorded on these assets.

Expenditures for maintenance and repairs are charged to expense as
incurred.

Goodwill and Intangible Assets

The Company is required to analyze the value of its recorded intangible
assets on an ongoing basis to determine that the recorded amounts are
reasonable and are not impaired. The Company's management considers the
Company's financial condition and expected future operating income in
determining if intangible assets are impaired at each balance sheet date.

In November 1999, the Company recorded a goodwill and intangible asset
writedown of $3,742,321. This writedown eliminated all remaining goodwill
and intangible assets of the Company. The goodwill and intangible assets
were determined to have been impaired because of the current financial
condition of the Company and the Company's inability to generate future
operating income without substantial sales volume increases. Moreover,
anticipated future cash flows of the Company indicated that the
recoverability of the assets was not reasonably assured.

Prior to November 1999, goodwill was amortized using the straight-line
method over twenty years and intangible assets were amortized over 5 to 15
years using the straight-line method as well. In connection with the Merger
(see Note 1), intangibles were adjusted to their estimated fair value at
that time, which resulted in a charge of $547,000 in the 1998 consolidated
statement of operations.

F-7
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

2. Summary of Significant Accounting Policies, continued:

Revenue Recognition

Revenue is recognized in the period for which related food and beverage
products are sold. Initial fees from the awarding of individual franchises
are deferred and recorded as revenue when the franchised restaurant is
opened.

Advertising

The Company expenses advertising costs as incurred. Total advertising
expense included in other operating expense was $370,439 and $586,686 for
the years ended December 26, 1999 and December 27, 1998, respectively.

Preopening Costs

Preopening costs are incurred before a restaurant is opened and consist
primarily of wages and salaries, hourly employee recruiting, license fees,
meals, lodging and travel plus the cost of hiring and training the
management teams. Preopening costs are expensed as incurred.

Income Taxes

The Company accounts for income taxes using the liability method that
requires the recognition of deferred tax assets and liabilities for the
expected future tax consequences of events that have been recognized in the
Company's consolidated financial statements or tax returns. In estimating
future tax consequences, the Company considers all expected future events
other than enactments of changes in the tax law or rates.

Earnings Per Share

The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 128, Earnings Per Share, which
requires dual disclosure of earnings per share, basic and diluted. Basic
earnings per share equals net earnings divided by the weighted average
number of common shares outstanding and does not include the dilutive
effects of stock options or convertible securities. Diluted earnings per
share are computed by giving effect to the Company's dilutive stock
options, warrants and preferred stocks. The weighted average common shares
outstanding presented below have been adjusted to reflect the 1.57075 to 1
exchange ratio in the Merger. See Notes 6, 7 and 8 for further discussion
of options and warrants ("potential common stock equivalents"). These
potential common stock equivalents are excluded from the diluted earnings
per share calculations, as they are antidulitive since the Company is
operating at a net loss. These securities could become dilutive when the
Company's operations result in a net profit.

F-8
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

2. Summary of Significant Accounting Policies, continued:

The following table represents the calculation of basic and diluted
earnings per share:

December 26, December 27,
1999 1998
----------- -----------

<S> <C> <C>
Net loss $(7,777,603) $(2,897,759)
Less: Dividends on Series A preferred stock (553,744)
Dividends on Series D preferred stock (522,712)
Dividends on Series E preferred stock (564,597)
Dividends on TRC Preferred Stock (Note 5) (300,000)
Accretion on TRC Preferred Stock (Note 5) (152,363)
----------- -----------
$(9,418,656) $(3,350,122)
=========== ===========

Weighted average common shares outstanding 8,547,070 4,123,219

Basic and diluted loss per share $ (1.10) $ (0.81)

</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. Property and Equipment Held for Resale:

Property and equipment at December 26, 1999 consist of the following:

Construction in progress $ 12,830
Furniture and fixtures 110,624
Signage 50,431
Office and computer equipment and software 230,865
Kitchen and service equipment 980,820
Leasehold improvements 819,885
-----------
2,205,455
Less accumulated depreciation (457,624)
Less write down to fair value less costs to sell (1,595,745)
-----------

Property and equipment held for sale, net $ 152,086
===========

As discussed in Note 1, substantially all property and equipment of the
Company was sold in February 2000. Accordingly, all property and equipment
at December 26, 1999 is presented as held for sale, is classified in
current assets on the consolidated balance sheet, and has been written down
to its estimated fair value less costs to sell based on the actual and
anticipated sales in 2000.

Depreciation expense was $286,219 and $223,595 for the years ended December
26, 1999 and December 27, 1998, respectively.

F-9
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

4. Notes Payable:

Notes payable at December 26, 1999 consists of the following:

Collateralized promissory note $ 2,000,000

Note payable to First Union Bank, collateralized by
restaurant equipment, bearing interest at 8.8% and maturing
in December 2000 92,469

Note payable to shareholder, bearing interest at 12.5%,
maturing on January 31, 2001 350,000

Note payable to individual, bearing interest at 11.0%,
maturing on January 31, 2001 306,617

Note payable to Colonial Bank, collateralized by restaurant
equipment, bearing interest at 8.0%, and maturing in June
2005 213,353
-----------
$ 2,962,439
===========

By January 28, 2000, the Company had defaulted on all of these notes.
Accordingly, all of the notes are included in current liabilities in the
consolidated balance sheet.

Effective October 15, 1996, the Company entered into a $2 million
collateralized promissory note with Sirrom Capital Corporation (the
"Note"). The Note matures on September 1, 2001 and bears interest at 13.5%
per annum. The payment terms require monthly payments of interest only
until maturity, upon which the outstanding principal balance will become
due. The Note is collateralized by substantially all of the Company's
assets. Three shareholders of the Company have pledged common shares in the
Company, totaling 1,560,933 shares, as collateral for performance under the
terms of the Note.

The two unsecured notes totaling $656,617 matured in 1999. On November 2,
1999 the Company reached an agreement with these two lenders to extend the
maturity dates on these loans until January 31, 2001. As consideration for
their willingness to extend the maturity dates, the Company has agreed to
issue warrants to purchase 175,000 shares of its common stock to these two
lenders. The warrants are fully vested, are exercisable at $0.04 per share
and will expire October 31, 2004.

Based on the borrowing rates currently available to the Company for loans
with similar terms, the fair value of this debt approximates the book value
recorded.

The aggregate annual contractual maturities of this debt, were the debt not
in default, for the years subsequent to December 26, 1999 are as follows:

Fiscal year ending:
-------------------
2000 125,607
2001 2,691,617
2002 38,433
2003 41,670
2004 45,181
2005 19,931
----------
$2,962,439
==========

F-10
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

5. Capital Structure:

TRC Acquisition Corporation

TRC had authorized 100 million shares of common stock and 1 million shares
of non-voting Preferred Stock, 2,000 shares of which were designated as
Class A Preferred Stock ("TRC Preferred Stock"). The TRC Preferred Stock
was entitled to a cumulative annual dividend at a rate of 10%. In the
Merger, the TRC Common Stock was exchanged for Harvest Common Stock and the
TRC Preferred Stock was exchanged for Harvest Series E Preferred Stock.

(b) Tanner's Restaurant Group, Inc

On March 12, 1999, the Company's shareholders voted to amend its articles
of incorporation to increase the number of authorized shares of common
stock from 20,000,000 to 200,000,000.

Series A Preferred Stock: The Company has designated 3,000,000 shares out
of a total of 5,000,000 authorized shares of its $1.00 par value preferred
stock as Series A Redeemable Convertible Preferred Stock ("Series A
Preferred Stock").

Dividends of the Series A Preferred Stock are cumulative and payable
quarterly in arrears at a quarterly rate of $.30 per share, representing a
yield of 12% per year. Dividends may be paid in cash or an equivalent value
of common stock. The Series A Preferred Stock has no voting rights and has
a liquidation preference of $10 per share ($4,614,540 at December 26,1999).
At December 26, 1999 dividends in arrears on this preferred stock totaled
$876,034.

The Series A Preferred Stock is convertible at the option of the holder
into shares of the Company's common stock. The initial conversion rate is
2.7 shares of common stock for each share of Series A Preferred Stock,
subject to adjustment in certain events. The Series A Preferred Stock will
automatically convert into the Company's common stock if the closing price
of the Series A Preferred Stock exceeds $20 per share for ten consecutive
days. The Series A Preferred Stock may also be redeemed by the Company upon
30 days written notice at 110% of the average bid price for the twenty
trading days prior to the redemption date. The Company has the option to
pay the redemption in either cash or common stock.

Series D Preferred Stock: The Company has designated 9,200 shares out of a
total of 5,000,000 authorized shares of its $1.00 par value preferred stock
as Series D Redeemable Convertible Preferred Stock ("Series D Preferred
Stock"). The original issue price of the Series D Preferred Stock is $1,000
per share. Dividends on the Series D Preferred Stock accrue at an annual
rate of 7% of the original issue price, or $70 per share, and are payable
in cash or common stock, as determined by the holders, only at the time of
conversion of such shares. Dividends are cumulative from the date of issue.
Unless full cumulative dividends have been or are contemporaneously paid on
the Series D Preferred Stock, the Company may not declare or pay cash
dividends on the common stock, nor may it redeem, purchase or otherwise
acquire common stock, nor may it make any other distribution with respect
to the common stock or any class of capital stock on a parity with or
junior to the Series D Preferred Stock. Under the terms of the Company's
loan with Sirrom Capital Corporation, the Company may pay cash dividends on
the Series D Preferred Stock so long as (a) the Company makes an equal
payment on the Sirrom note; and (b) the Company is not in default under the
loan documents governing such loan and no default is created by such
payments.

The Series D Preferred Stock is convertible at the option of the holder
into shares of common stock for up to three years after initial issuance.
After three years, the Series D Preferred Stock will automatically convert
into shares of common stock. The conversion rate is equal to $1,000 divided

F-11
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

5. Capital Structure, continued:

by 80% of the five-day average closing bid price of the common stock on the
NASDAQ Stock Market, the OTC Bulletin Board, or any other national
securities exchange on which the common stock is listed at the time of
conversion. The Company is not required to convert any shares if such
conversion would result in issuance of 20% or more of the issued and
outstanding common stock to the holders of the Series D Preferred Stock, as
provided by NASDAQ Marketplace Rule 4320(e)(21)(H), unless shareholder
approval of such conversion is obtained. In the event that such a
conversion is requested and the Company does not convert the Series D
Preferred Stock because of the NASDAQ rule, the Company will pay the holder
of the Series D Preferred Stock 125% of the principal amount of the issued
and outstanding Series D Preferred Stock plus accrued interest.

Holders of Series D Preferred Stock are allowed to convert the aggregate
amount of such holder's Series D Preferred Stock into common stock.
However, a holder of Series D Preferred Stock may not convert those shares
into shares of common stock if and to the extent that upon conversion such
holder would own more than 4.99% of the outstanding common stock.

The holders of the Series D Preferred Stock have no preemptive rights or
other rights to subscribe for any other shares or securities of the
Company. The third party investors who purchased Series D Preferred Stock
will be issued common stock purchase warrants, as described below.

The terms of the Series D Preferred Stock agreement, which permit the
conversion of the Series D Preferred Stock at a discount to market, is
considered a beneficial conversion feature (the "Beneficial Conversion
Feature"). However, since the preferred stock is presented at par value
with the excess of carrying value over par value included in additional
paid-in capital, the Company has not separately recorded the intrinsic
value of the Beneficial Conversion Feature as a component of additional pai
in capital.

The third party investors who purchased Series D Preferred Stock were
issued common stock purchase warrants, as described below.

For the year ended December 26, 1999, 59 shares of Series D Preferred Stock
were converted into 2,888,705 shares of common stock.

At December 26, 1999, dividends in arrears on this preferred stock totaled
$522,712.

Series E Preferred Stock: The Company has designated 745,000 shares out of
a total of 5,000,000 authorized shares of its $1.00 par value preferred
stock as Series E Redeemable Convertible Preferred Stock ("Series E
Preferred Stock"). In connection with the Merger, the Company issued a
total of 744,500 shares of Series E Preferred Stock. The original issue
price of the Series E Preferred Stock is $10.00 per share. Dividends on the
Series E Preferred Stock accrue at an annual rate of 8% of the original
price, or $0.80 per share, and are payable in cash or common stock, as
determined by the Company, only at the time of conversion of such shares.
Dividends are cumulative from the date of issue. Unless full cumulative
dividends have been or are contemporaneously paid on Series E Preferred
Stock, the Company may not declare or pay cash dividends on the common
stock, nor may it redeem, purchase or otherwise acquire common stock, nor
may it make any other distribution with respect to the common stock or any
class of capital stock on a parity with or junior to the Series E Preferred
Stock. Under the terms of the Company's secured loan with Sirrom Capital
Corporation, the Company may not pay cash dividends on the Series E
Preferred Stock.

The Series E Preferred Stock is redeemable at the option of the Company at
any time after six months of issuance, in whole or in part, for $0.01 per
share, if the average closing bid price of the Company's common stock, as

F-12
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

5. Capital Structure, continued:

quoted on any national securities exchange, NASDAQ, or the OTC Bulletin
Board exceeds $3.50 per share for five consecutive trading days.

Each share of Series E Preferred Stock is convertible at the option of the
holder into four shares of common stock at any time after six months from
the date of issuance, subject to adjustment. The Series E Preferred Stock
is non-voting, and it is ranked junior to the Company's Series A Preferred
Stock and Series D Preferred Stock. The holders of the Series E Preferred
Stock have no preemptive rights or other rights to subscribe for any other
shares or securities of the Company.

At December 26, 1999, dividends in arrears on this preferred stock totaled
$564,597.

6. Redeemable Preferred Stock Purchase Warrants:

At December 26, 1999 1,723,400 Redeemable Preferred Stock Purchase Warrants
were outstanding ("Preferred Warrants"). Each Preferred Warrant represents
the right to purchase one share of Series A Preferred Stock at an exercise
price of $10.50 per share until June 11, 2002, subject to adjustment.
Preferred Warrants may be redeemed, in whole or in part, at the Company's
option, upon 30-day's notice, at a redemption price equal to $0.01 per
Preferred Warrant if the closing price of the Series A Preferred Stock on
the NASDAQ Small Cap Market averages at least $11.00 per share for a period
of 20 consecutive trading days or if the Company redeems the Series A
Preferred Stock.

7. Common Stock Purchase Warrants:

At December 26, 1999 there where 2,300,000 Common Stock Purchase Warrants
outstanding (the "IPO Warrants"), plus an additional 300,000 warrants
issued to the underwriters of the offering of the IPO Warrants, plus an
additional 250,000 warrants issued in connection with other transactions.
Each IPO Warrant entitles the holder to purchase one share of common stock
at $4.00 per share until July 9, 2001, subject to adjustment. IPO Warrants
may be redeemed, in whole or in part, at the option of the Company, upon
30-day's notice, at a redemption price equal to $0.01 per IPO Warrant if
the closing price of the common stock on the NASDAQ Small Cap 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.

Through December 26, 1999, 171,939 stock options with an exercise price of
$0.01 and 175,000 stock options with an exercise price of $0.04 have been
issued primarily to creditors to facilitate the financing which has been
received since December 28, 1997.

In connection with the issuance of the $2,000,000 collateralized promissory
note, the Company issued to Sirrom Capital Corporation a stock warrant to
purchase shares of the Company's common stock. The warrant is exercisable
at any time until November 30, 2001 at an exercise price of $0.01 per
share. At December 26, 1999 the lender has the right to purchase 699,259
shares. The warrant provides for an increase in the number of common shares
available for purchase to 756,331 shares in October 2000. The lender has a
put option to sell to the Company this warrant within 30 days of the
expiration of the warrant at a purchase price equal to the fair market
value of the common stock, as defined.

Additionally, the third party investors who purchased Series D Preferred
Stock have been issued common stock purchase warrants to purchase 919,800
shares of common stock at a price of $2.00 per share. Such warrants are
exercisable for five years and expire on January 14, 2004. The Company is
required to register the shares underlying the warrants in the registration

F-13
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

7. Common Stock Purchase Warrants continued:

statement filed by the Company with the SEC to register, among other
things, the shares of common stock reasonably anticipated to be issuable
upon conversion of the Series D Preferred Stock.

8. Stock Based Compensation:

(a) Harvest Restaurant Group, Inc

The Company's 1994 Stock Option Plan provides for the granting of either
incentive stock options or non-qualified stock options. Options can be
issued to officers, employees, and directors and outside consultants;
however, incentive stock options are issuable only to eligible officers and
employees. The Company has reserved a total of 500,000 shares of common
stock for the plan. Options to acquire 483,000 shares of common stock at
$1.00 per share were issued and exercisable at the time of the Merger.

(b) TRC Acquisition Corporation

TRC has granted options to purchase its common stock to certain key
employees and officers under fixed stock option agreements. In conjunction
with the Merger, these options were converted into options to acquire
Harvest common stock at the same ratio as the TRC common shareholders and
all options immediately vested. Accordingly, the number of shares under
option as presented below has been restated to reflect the 1.57075 to 1
exchange ratio in the Merger. Under these agreements, 2,044,326 shares of
the Company's common stock have been reserved for stock option awards. As
of December 26, 1999, none of the options had been exercised or forfeited.
Awards granted to date have a term of six years.

Further information relating to total options follows:

Weighted
Average
Exercise
Shares Price
------ -----

Outstanding at December 28, 1997 1,088,923 $ .11
Granted in 1998 472,403 .01
Converted Harvest grants 483,000 1.00
---------
Outstanding at December 27, 1998 2,044,326 .30
Granted in 1999 0
---------
Outstanding at December 26, 1999 2,044,326 $ .30
=========

F-14
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

8. Stock Based Compensation, continued:

The following table summarizes information concerning currently outstanding
and exercisable options:

Weighted-Average
Exercise Number Number Remaining
Price Outstanding Exercisable Life
----- ----------- ----------- ----

$0.01 854,488 854,488 3.6

$0.16 706,838 706,838 2.9

$1.00 483,000 483,000 1.7
--------- ---------

2,044,326 2,044,326
========= =========

The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related Interpretations in accounting
for its stock options. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation cost
for the Company's stock option plans been determined based upon the fair
value methodology prescribed under Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," fiscal 1999
net loss and loss per share would have been unaffected and fiscal 1998 net
loss and loss per share would have been as follows.

Net loss:
As reported $ (2,897,759)
Proforma (2,926,171)

Basic and diluted loss per share
As reported (0.81)
Proforma (0.82)

The fair value of the options granted and repriced during 1998 was
estimated using the minimum value valuation model and the following
assumptions: dividend yield 0%, risk-free interest rate of 6%, and an
expected life of 5 years.

9. Income Taxes:

The Company has available at December 26, 1999, unused federal and state
net operating loss carry forwards of approximately $ 5,880,000 expiring
beginning in 2012, which may be applied to reduce future taxable income.
Use of net operating loss carry forwards may be limited on an annual basis
due to changes in ownership.

The Company's net deferred tax asset results principally from net operating
loss carry forwards and has been fully reserved by a valuation allowance.
Management has determined that it is more likely than not that the net
deferred tax asset will not be realized.

F-15
<PAGE>

Tanner's Restaurant Group, Inc.

Notes to Consolidated Financial Statements:

10. Leases:

The Company has various leases for restaurants, equipment and office
facilities. Restaurant and office original lease terms range from four to
fifteen years, with renewal options ranging from five to fifteen years.
Equipment leases are renewable annually. In the normal course of business,
some leases will 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.

In connection with the sale of assets discussed in Note 1, the Buyer was
assigned and assumed from the Company all leases for store locations it
acquired.

Future minimum lease payments under noncancelable operating leases at
December 26, 1999, excluding leases assigned to and assumed by the Buyer,
are as follows:

Fiscal year ending:
-------------------
2000 $ 151,199
2001 125,833
2002 128,917
2003 135,707
2004 108,387
Thereafter 312,015
---------
Total minimum lease payments $ 962,058
=========

The Company incurred rental expense for operating leases of $767,444 and
$714,520 during the years ended December 26, 1999 and December 27, 1998,
respectively.

11. Commitments and Contingencies:

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.

F-16
<PAGE>

EXHIBIT INDEX

We have filed certain of the exhibits required by Item 601 of Regulation
S-B with previous registration statements or reports. As specifically noted in
the footnotes to the following Index to Exhibits, those exhibits are
incorporated into this annual report on Form 10-KSB by reference to the
applicable statement or report.