-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C0cmSkUyz7LFIgJRJYb4KKDFq1ZcSUsYPhN+kDJICOI3l9fwzrkWTwU8KRSU0Gqx P0H/og9OTv6M8tzVjvyHQA== 0000930881-99-000009.txt : 19990517 0000930881-99-000009.hdr.sgml : 19990517 ACCESSION NUMBER: 0000930881-99-000009 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990103 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSONS GRILL OF AMERICA INC CENTRAL INDEX KEY: 0000729545 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 953477313 STATE OF INCORPORATION: CA FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: ARS SEC ACT: SEC FILE NUMBER: 000-13642 FILM NUMBER: 99622450 BUSINESS ADDRESS: STREET 1: 16970 DALLAS PKWY STE 402 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 2149319743 MAIL ADDRESS: STREET 1: 16970 DALLAS PARKWAY STREET 2: SUITE 402 CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN RESTAURANTS CORP DATE OF NAME CHANGE: 19910825 ARS 1 HUDSON'S GRILL OF AMERICA, INC. 1998 ANNUAL REPORT LETTER TO THE SHAREHOLDERS To the Shareholders of Hudson's Grill of America, Inc.: In 1998, Hudson's Grill of America, Inc. (the "Company"), continued to sell franchises. However, because franchise growth has been slow, it has also begun to focus again on building new Hudson's Grills through subsidiaries. In January 1999 a new location opened for business in the Dallas area near the suburb of Richardson, Texas. This continues the Company's policy of building a greater territorial base for its sales. The Company currently has operating franchises in California, Texas, and Michigan. This past year has been a busy year for the Company, especially regarding franchise development. In September of 1998, the Company announced that Mark Myers, a franchisee, had opened a Hudson's Grill in Jackson, Michigan. Mr. Myers is a former Little Caesar's franchisee. In April 1999, another franchisee, Sharfe, L.L.C., a Michigan limited liability company, opened a Hudson's Grill in Marquette, Michigan. Like the Jackson, Michigan, Hudson's Grill, the Marquette restaurant is a free standing building; it will be operated by Frank and Jim Stabile, the owners of Sharfe, L.L.C. Although there have been considerable costs associated with all of these activities, and though the benefits won't be realized until the new units have been "on line" for a while, Hudson's appears to be poised to show considerable progress in the coming months, provided that it can steer clear of problems with past leases, which, unfortunately, continue to plague the Company. David L. Osborn President and Chief Executive Officer HUDSON'S GRILLS Hudson's Grill is a full service, limited menu concept with alcoholic beverage service. The management teams work with the philosophy that the customer should be viewed as their "Guest". They stress quality of product and service, efficient flow of communications, integrity in job performance and strong employee morale. These restaurants range in size from 2,500 to 5,500 square feet. The decor package has the theme of a "Classic Grill of the 50's and 60's", with the front end of a Hudson's automobile coming through the wall as a main feature. Some restaurants are in free standing buildings, and some are located within in-line shopping centers. The average Hudson's Grill employs approximately forty employees, seventy percent of whom are part-time employees. The restaurants have similar operations and offer similar food. The Company's expansion plans include adding new franchises, and now also include opening a limited number of Company owned and operated units in the future. Since the restaurant industry is very competitive, the Company plans to attract loyal patrons by higher levels of service and more exacting specifications for its products. Most Hudson's Grill restaurants open at 11 a.m. and remain open until midnight, seven days a week, utilizing the same menu throughout all parts of the day. They specialize in 1/3 pound hamburgers with the beef patties produced to very exacting specifications. The menu also features an expanded chicken sandwich section using top quality chicken breasts and whole wheat buns. Also on the menu are salads, sandwiches, a variety of appetizers, fajitas, tacos, and handmade milkshakes and malts. Cocktails, beer and wine are also available with food. The full service restaurant concept utilizes booths and tables with waiters and waitresses serving the guests. At January 3, 1999, the Company employed four (4) persons, who were corporate employees. One of the three employees was employed part-time. FRANCHISE PROGRAM The Company has been issued the trademark registration of a "Hudson's Grill" logo and of the "Hudson's" name. It also has registered its "Burgers*Shakes*Rock'n Roll" service mark. In the past, the Company has secured a permit from the California Department of Corporations to issue Hudson's Grill franchises in California and uses a Uniform Franchise Offering Circular where permitted. Beginning in 1998, a subsidiary of the Company has been securing the permit. As of January 3, 1999, the Company had eight (8) franchised restaurants that were in operation and one Company owned restaurant. The current standard terms to franchise a restaurant are an initial fee of Thirty Five Thousand Dollars and a royalty of four percent of sales, and require that three percent of sales be used for advertising. For these payments, the Company is obligated to do the following: screen and train potential franchisees, review and approve sites, and provide an operations manual and assistance. The Company currently plans to construct several Hudson's Grill restaurants in the Dallas, Texas, area to use for demonstration and testing purposes. It may also give serious consideration to opening restaurants in medium sized markets, where advertising for one or two restaurants is cost effective. One location in Dallas is currently in operation. Other than these units and the possible purchase and conversion of other restaurants if funds, credit and opportunities become available, the Company plans to expand mostly through adding franchises. OFFICERS AND DIRECTORS Below are officers and directors of the Company and their primary employer: Name Position Principal Name of Principal Occupation or Employer Business of Employment Employer David L. Osborn Chairman of Chief Southpoint Restaurant the Board, Executive Management Management Chief Officer or Corp., Famous Services and Executive Bars, Grills Operations Officer, and & Cafes of Director America, Inc., and DAC Associates Robert W. Director Attorney and Fischer & Sanger Legal Fischer Partner Services Anthony B. Director Franchisee Hudson's Grill Restaurants Duncan and Director of El Paso, Inc. Mitzy Ferguson Secretary Administrative Hudson's Grill Franchisor of Am., Inc. of Restaurants Jane Taylor Treasurer Administrative Hudson's Grill Franchisor of Am., Inc. of Restaurants
MARKET PRICE AND MARKET INFORMATION MARKET INFORMATION The Company's Common Stock, no par value, is traded in the over-the-counter market and trades under the National Association of Security ("NASD") symbol "HDSG". As of April 30, 1999, there were approximately Three Hundred Twenty (320) registered holders of record of the company's Common Stock (this excludes shareholders whose stock is held by a nominee or in "streetname", because a nominee or streetname holder is counted as one registered shareholder even if a nominee is holding stock for several shareholders). The following table sets forth the reported high and low bid prices of the Common Stock for the periods indicated as regularly quoted by the NASD OTC Bulletin Board. The over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. FISCAL YEAR ENDED JANUARY 3, 1999 High Low First Quarter ended March 31, 1998 3/32 3/32 Second Quarter ended June 30, 1998 3/32 .04 Third Quarter ended September 30, 1998 1/16 1/16 Fourth Quarter ended December 31, 1998 .10 .045 FISCAL YEAR ENDED DECEMBER 28, 1997 High Low First Quarter ended March 31, 1997 3/32 1/32 Second Quarter ended June 30, 1997 3/32 3/32 Third Quarter ended September 30, 1997 3/32 3/32 Fourth Quarter ended December 28, 1997 3/32 3/32 FISCAL YEAR ENDED DECEMBER 29, 1996 High Low First Quarter ended March 31, 1996 3/32 1/16 Second Quarter ended June 30, 1996 1/8 1/16 Third Quarter ended September 30, 1996 3/16 1/16 Fourth Quarter ended December 31, 1996 1/16 1/32 As of May 5, 1999, the last trading price of the Common Stock was nineteen cents ($0.19). This information was obtained from the Stock Quote provided by "Yahoo" on the Hudson's Grill internet site http://www.hudsonsgrill.com. DIVIDENDS The Company has not paid cash dividends on its common stock, and, if and when earnings are achieved, the present policy of the Company's Board of Directors (the "Board") is to retain earnings attributable to common stock to provide funds for the operation and expansion of the Company's business. The Company does not expect to pay cash dividends on its common stock in the foreseeable future. ACCOUNTANTS The Company has invited accountants from Hein + Associates to be present at the Annual Meeting; therefore they may be present. If a representative of Hein + Associates is present at the Annual Meeting of Shareholders, the representative will be allowed to answer appropriate questions, and will be afforded an opportunity to make a statement if so desired. MANAGEMENT'S DISCUSSION AND ANALYSIS OF ITS FINANCIAL STATEMENTS For the year ended January 3, 1999, the Company had a net loss of Three Hundred Twenty-three Thousand Nine Hundred One Dollars ($323,901). This compares to a net loss of Three Hundred Ninety-one Thousand One Hundred Ninety-eight Dollars ($391,198) for the year ended December 28, 1997, and a net loss of Two Hundred Sixty One Thousand Three Hundred Thirty Four Dollars ($261,334) for the year ended December 29, 1996. One Hundred Sixty-five Thousand Seven Hundred Thirty Dollars ($165,730) of the 1998 losses were due to losses on sales of restaurants, and One Hundred Seven Thousand Seven Hundred Sixty Dollars ($107,760) were preopening expenses of the Richardson restaurant. Three hundred Forty-six Thousand Sixty-seven Dollars ($346,067) of the 1997 losses were attributable to closing restaurants and setting aside a reserve for litigation expenses related to leases at former Hudson's Grills; Forty-five Thousand One Hundred Thirty-one Dollars ($45,131) of the losses in 1997 were from ongoing operations, whereas Fifty Thousand Four Hundred Eleven Dollars ($50,411) of the losses in 1998 were from ongoing operations. Several years ago the Company began closing poorly performing restaurants and selling the remaining profitable ones. Losses due to restaurant closures amounted to One Hundred Forty-six Thousand Sixty-seven Dollars ($146,067) for the year ended December 28, 1997. The loss in 1997 resulted primarily from the write-off of One Hundred Thirty Thousand Seven Hundred Ninety Dollars ($130,790) of equipment and improvements on the Westlake location, which was abandoned in March 1998. The Company has disposed of almost all of its direct and indirect restaurant operations and is almost solely in the franchising business; since 1997 it has proceeded to build and operate one Company owned restaurant, which will be used as a model and training facility for future franchisees. This restaurant was opened in January 1999. REVENUES Because the Company was holding its remaining restaurants for sale and those restaurants were operated by third parties under joint venture agreements, it had no sales or expenses from restaurant operations after January 1994, except for portions of each year, during which time the Company operated restaurants that were temporarily taken back from prospective purchasers of the restaurants. The Company continued to record only joint venture revenues for the remaining stores which were operated under joint venture agreements. These revenues ceased when the last joint venture stores were sold in 1996. The remaining restaurants which were subject to sales contracts, were not operated as joint ventures but were being operated by their prospective purchasers. The prospective purchasers paid royalties and advertising fees even though they were not yet franchisees, and these fees were being accounted for separately from the royalties received from franchisees. This non franchise royalty fee income amounted to Fifteen Thousand Five Hundred Seventy-two Dollars ($15,572) in the year ended December 28, 1997, and were Forty Thousand Four Hundred Fifty Nine Dollars ($40,459) for the year ended December 29, 1996; there were no such fees in 1998. As the sale of these restaurants is completed, the Company does not expect any future royalties from restaurants under sales contracts, but rather these fees will be accounted for as normal franchising revenues. Franchise revenues dropped due to closures. Franchising revenues decreased in 1998 to Two Hundred Eighty-Eight Thousand Nine Hundred Forty-three Dollars ($288,943) from Three Hundred Forty-one Thousand Five Hundred Forty-six ($341,546) for the year ended December 28, 1997. Continuing franchise revenues decreased from Two Hundred Ninety One Thousand Five Hundred Forty-Six Dollars ($291,546) for the year ended December 28, 1997, to Two Hundred Sixty Three Thousand Nine Hundred Forty-three Dollars ($263,943) for the year ended January 3, 1999. COSTS AND EXPENSES Since the Company is and has been selling or closing restaurants, an analysis of restaurant costs of sales and of restaurant operating expenses is no longer meaningful because almost all of the Company's restaurants have been or are being sold and converted to franchises, or shut down. Restaurant cost of sales have risen from the temporary operating of restaurants held for sale as described above or as a result of subsidiaries operating for short periods of time during 1998 before closures or sales. General and administrative expenses, and the depreciation and amortization expenses for equipment leased to restaurants will continue to be important, but are decreasing as various assets are sold or abandoned to landlords. General and administrative expenses for the year ended January 3, 1999, decreased to Five Hundred Six Thousand Forty Dollars ($506,040) from Seven Hundred Four Thousand Nine Hundred Sixty Dollars ($704,960) for the year ended December 28, 1997, which in turn decreased from Seven Hundred Ninety Eight Thousand Six Hundred Seventy Five Dollars ($798,675) for the year ended December 29, 1996. Under an oral agreement which ended December 31, 1997, the Company was paying for a consultant whose job it was to increase the number of franchises and to monitor the franchisees' restaurant operations. Moreover, the consultant was responsible for supervising most management and administrative functions of the Company. The consultant has since discontinued working for the Company, but if he is involved in bringing in franchisees, he will be paid a portion of the franchise fees paid by new franchisees signed by the consultant. This portion of general and administrative expenses is likely to decrease in the future as the Company returns to building new restaurants, and as the Company has less fixed expenses related to the terminated consulting agreement. Depreciation and amortization, which for the year ended January 3, 1999, was Nine Thousand Nine Hundred Eighty-nine Dollars ($9,989), for the year ended December 28, 1997, was Thirty-two Thousand Eight Hundred Ninety-three Dollars ($32,893); and for the year ended December 29, 1996, was Fifty Eight Thousand Three Hundred Seventy One Dollars ($58,371), has decreased to the extent that furniture, fixtures and equipment have been sold to the purchasers of the Company's restaurants, to the extent restaurants have been closed and written off and to the extent that current furniture, fixtures and equipment age. This expense will increase in the future as the Company builds and operates its own restaurants. Interest expense has decreased significantly since the year ended December 29, 1996. The Company recorded interest expense of Seven Thousand Two Hundred Eighty Dollars ($7,280) for the year ended January 3, 1999, and Six Hundred Seventy-to Dollars ($672) for the year ended December 28, 1997; this compares with Ninety Six Thousand Seven Hundred Thirty Four Dollars ($96,734) for the year ended December 28, 1997. A large part of the decrease resulted from the exchange of notes owed to the Company to pay off obligations owed to Mr. Travis Bryant. The Company had only one remaining note payable after that exchange, for $35,542, which was repaid in 1997. Interest income has decreased significantly since the year ended December 29, 1996 for the same reason that interest expense has decreased. The Company received interest income of Eighty-one Thousand Nine Hundred Fifty-four Dollars ($81,954) in the year ended December 28, 1997, and Forty Seven Thousand Three Hundred Thirty Five Dollars ($47,335) in the year ended January 3, 1999. It received interest income of One Hundred Eighty Thousand One Hundred Thirty Five Dollars ($180,135) during the year ended December 29, 1996. Thus, the net interest income (interest income minus interest expense) has dropped somewhat. In the year ended December 28, 1997, it was Eighty-one Thousand Two Hundred Eighty-two Dollars ($81,282); it was Eighty Three Thousand Four Hundred one Dollars ($83,401) for the year ended December 26, 1996; but it dropped to Forty Thousand Fifty Five Dollars ($40,055) for the year ended January 3, 1999. LIQUIDITY AND CAPITAL RESOURCES At January 3, 1999, the Company had a negative working capital of Three Hundred Thirty Three Thousand One Hundred Thirteen Dollars ($333,113) as compared to December 28, 1997, when the Company had a negative working capital of Six Thousand Eight Hundred Thirteen (negative $6,813). The decrease is largely due to a substantial increase in current liabilities. The increase in current liabilities was largely the result of a substantial increase in trade accounts payable from $40,886 at fiscal year end 1997 to $291,772 at fiscal year end 1998, resulting from costs incurred to build the Company's new restaurant and from insufficient cash flow from operations. After the Company has sold most or all of its restaurants, changes in its liquidity and capital will depend mostly on initial franchise fees and from continuing royalty fees received from franchisees using the Company's trademark and restaurant concept, rather than on equipment leasing, which should remain stable for the next several years. As the Company resumes building restaurants, its liquidity and working capital will again become more dependent on net profits from direct restaurant operations. Three Hundred Twenty-one Thousand Six Hundred Fourteen Dollars ($321,614) were used in acquisitions of property and equipment in 1998, which essentially were funded by an increase in accounts payable and by proceeds from long term debt. In January 1997, the Company sold its Pomona, California, restaurant and received a note receivable of $114,200 and a lease receivable of $155,000. This location is delinquent in its obligations to the Company as of January 3, 1999. The Company's investment in this note receivable, net of deferred income, was approximately $33,000 as of December 28, 1997. This amount was written off in 1998. However, the Company believes the restaurant is a sufficiently profitable location to allow it to recoup its investment should it need to foreclose. Also, the Company has obtained a judgment for the note and lease receivables, which it is attempting to collect. The Company currently is in litigation concerning a former lease in Whittier, California. It has just settled a similar problem with a landlord at a former leasehold in Westlake, California. Pursuant to the settlement of the Westlake lease, beginning November 2001, the Company is obligated to pay $83,333 to Roy Millender, a guarantor of the lease and former director of the Company. Mr. Millender has agreed to pay the settlement with the landlord. The Company and another defendant agreed to make contributions to Mr. Millender. The Company does not know what the outcome will be regarding the Whittier lease; however, the landlord is asking for several million dollars as damages. Mr. Millender is also a guarantor of that lease. If the Company is required to contribute any substantial funds to the settlement of the Whittier lease, then the Company's liquidity and ability to fund ongoing operations will be greatly impacted and possibly force the Company into bankruptcy. The effects of inflation on the Company are minimal on the Company; however, the recent raises in the minimum wage have affected franchisees and as a result the Company raised the prices charged for various menu items. To the extent that the Company owns and opens new restaurants, the increases in minimum wage will reduce the Company's profitability unless the increased menu prices produce an increase in revenues equal to or more than the increase in labor costs. The Company does not sustain much seasonal volatility in revenues since its franchisees are dispersed geographically and climactically. The Company does not believe that it will be affected by any Y2K problems as it concerns computing and administration performed by the issuer. The Company may be affected by third parties, however, to an unknown extent. Such third party effects include problems with bank accounts (paying and depositing funds) and with delays in receiving franchiser fees and payments from franchisees who encounter Y2K problems. Since the Company does not rely heavily on computer software and processing to run its business, problems with changing software to accommodate the year 2000 and years thereafter are not likely to have a material impact on the Company. FORM 10-KSB ANNUAL REPORT A COPY OF HUDSON'S 1998 FORM 10-KSB ANNUAL REPORT, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, IS AVAILABLE UPON REQUEST TO SHAREHOLDERS AND BENEFICIAL OWNERS OF SHARES IN THE COMPANY UPON WRITTEN REQUEST ADDRESSED TO: HUDSON'S GRILL OF AMERICA, INC., 16970 DALLAS PARKWAY, SUITE 402, DALLAS, TEXAS 75248. ADDITIONAL INFORMATION EXECUTIVE OFFICE The address for the executive office is: 16970 Dallas Parkway, Suite 402 Dallas, Texas 75248 INDEPENDENT AUDITORS Hein + Associates 12770 Coit Road, Suite 1150 Dallas, Texas 75251 LEGAL COUNSEL Fischer & Sanger 5956 Sherry Lane, Suite 1204 Dallas, Texas 75225 REGISTRAR AND TRANSFER AGENT U. S. Stock Transfer Corporation 1745 Gardena Avenue Glendale, CA 91204-2991 STOCKHOLDERS MEETING The 1999 Annual Meeting of Stockholders will be held at the Hudson's Grill in Dallas, Texas, located at the parking lot of the Keystone Shopping Center at the southwest corner of Spring Valley and Central Expressway, Dallas, Texas, on Thursday, June 10, 1999, at 10:00 a.m. A notice of the meeting, proxy statement and proxy voting sheet, have been mailed to stockholders with this Annual Report. FINANCIAL STATEMENTS Attached are the audited financial statements of the Company for the most recent fiscal year ended January 3, 1999. f\sec\990428.O01 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT FOR THE PERIODS ENDED JANUARY 3, 1999, DECEMBER 28, 1997, AND DECEMBER 29, 1996 INDEPENDENT AUDITOR'S REPORT Board of Directors Hudson's Grill of America, Inc. Dallas, Texas We have audited the accompanying consolidated balance sheets of Hudson's Grill of America, Inc. as of January 3, 1999 and December 28, 1997, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the periods ended January 3, 1999, December 28, 1997, and December 29, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 Hudson's Grill of America, Inc. as of January 3, 1999 and December 28, 1997, and the results of their operations and their cash flows for the periods ended January 3, 1999, December 28, 1997, and December 29, 1996 in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations and currently has a shareholders' deficit and certain contingent liabilities, which raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Hein + Associates LLP Certified Public Accountants March 19, 1999 Dallas, Texas F-1
HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS ASSETS ------ JANUARY 3, DECEMBER 28, 1999 1997 ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 22,169 $ 42,401 Accounts receivable, net of allowance for doubtful accounts of $62,000 and $49,000, respectively 9,992 58,359 Other receivable 101,633 11,471 Current portion of notes and leases receivable 60,350 100,000 Prepaid expenses and other 26,354 23,185 ----------- ----------- Total current assets 220,498 235,416 PROPERTY AND EQUIPMENT, at cost: Leasehold improvements 282,877 2,969 Restaurant equipment 91,477 33,378 Furniture and fixtures 5,851 5,851 ----------- ----------- Total property and equipment 380,205 42,198 Less accumulated depreciation and amortization (13,763) (7,030) ----------- ----------- Property and equipment, net 366,442 35,168 LONG-TERM PORTION OF NOTES AND LEASES RECEIVABLE, net of allowance of $0 and $33,000, respectively 134,521 791,858 LIQUOR LICENSES, net of accumulated amortization of $0 and $30,000, respectively 3,288 30,815 OTHER ASSETS 15,981 23,463 ----------- ----------- Total assets $ 740,730 $ 1,116,720 =========== =========== LIABILITIES AND SHAREHOLDERS' DEFICIT ------------------------------------- CURRENT LIABILITIES: Current portion of long-term debt and capital lease obligation $ 8,689 $ -- Accounts payable - trade 291,772 40,886 Advances - related parties 56,940 -- Accrued liabilities 196,210 201,343 ----------- ----------- Total current liabilities 553,611 242,229 LONG-TERM DEBT AND CAPITAL LEASE OBLIGATION, net of current portion 258,884 -- OTHER LONG-TERM LIABILITIES 130,654 206,494 DEFERRED INCOME 231,852 778,367 COMMITMENTS AND CONTINGENCIES (Notes 5 and 11) SHAREHOLDERS= DEFICIT: Preferred stock, 5,000,000 shares authorized, none issued or outstanding -- -- Common stock, no par value, 100,000,000 shares authorized, 6,056,986 shares issued and outstanding 4,456,457 4,456,457 Accumulated deficit (4,890,728) (4,566,827) ----------- ----------- Total shareholders= deficit (434,271) (110,370) ----------- ----------- Total liabilities and shareholders= deficit $ 740,730 $ 1,116,720 =========== ===========
See accompanying notes to these financial statements. F-2
HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS PERIODS ENDED ----------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 29, 1999 1997 1996 ----------- ----------- ----------- REVENUES: Net sales $ 301,440 $ 226,009 $ 109,806 Franchising revenues 288,943 341,546 307,549 Franchising fees from restaurants under sales contracts -- 15,572 40,459 Joint venture revenues -- -- 107,662 Equipment lease income 52,347 77,776 51,439 Gain on sales of restaurants 30,897 67,938 31,462 Other 69,196 66,161 67,773 ----------- ----------- ----------- Total revenues 742,823 795,002 716,150 COST AND EXPENSES: Cost of sales 310,380 183,562 158,111 General and administrative 506,040 704,960 798,675 Preopening costs 107,760 -- -- Provision for litigation expenses -- 200,000 -- Depreciation and amortization 9,989 32,893 58,371 Loss on sales of restaurants 165,730 -- -- Loss on restaurant closures -- 146,067 -- Loss on sale of assets 6,880 -- 45,728 ----------- ----------- ----------- Total costs and expenses 1,106,779 1,267,482 1,060,885 ----------- ----------- ----------- Loss from operations (363,956) (472,480) (344,735) OTHER INCOME (EXPENSE): Interest expense (7,280) (672) (96,734) Interest income 47,335 81,954 180,135 ----------- ----------- ----------- Total other income (expense) 40,055 81,282 83,401 ----------- ----------- ----------- NET LOSS $ (323,901) $ (391,198) $ (261,334) =========== =========== =========== BASIC AND DILUTED LOSS PER SHAR $ (.05) $ (.06) $ (.04) =========== =========== ===========
See accompanying notes to these financial statements. F-3
HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD FROM DECEMBER 31, 1995 THROUGH JANUARY 3, 1999 COMMON STOCK ACCUMULATED -------------------------- ----------- SHARES AMOUNT DEFICIT TOTAL ----------- ------------ ----------- ------------ BALANCES, December 31, 1995 6,056,986 $ 4,456,457 $(3,914,295) $ 542,162 Net loss -- -- (261,334) (261,334) ----------- ----------- ----------- ----------- BALANCES, December 29, 1996 6,056,986 4,456,457 (4,175,629) 280,828 Net loss -- -- (391,198) (391,198) ----------- ----------- ----------- ----------- BALANCES, December 28, 1997 6,056,986 4,456,457 (4,566,827) (110,370) Net loss -- -- (323,901) (323,901) ----------- ----------- ----------- ----------- BALANCES, January 3, 1999 6,056,986 $ 4,456,457 $(4,890,728) $ (434,271) =========== =========== =========== ===========
See accompanying notes to these financial statements. F-4
HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS PERIODS ENDED --------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 29 1999 1997 1996 ----------- ------------ ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(323,901) $(391,198) $(261,334) Adjustments to reconcile net loss to net cash used by operating activities: Depreciation and amortization 9,989 32,893 58,371 Loss on sale of assets 6,880 -- 45,728 Loss (gain) on sales and closures of restaurants 134,833 78,129 (31,462) Provision for bad debts 13,000 33,000 -- Changes in assets and liabilities: Accounts receivable 46,838 (3,665) (113,584) Prepaid expenses and other (3,169) (6,694) 218 Accounts payable 250,886 (6,836) 9,493 Accrued liabilities and other (142,403) 53,644 61,935 --------- --------- --------- Net cash used in operating activities (7,047) (210,727) (230,635) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of property and equipment (321,614) (15,234) (14,012) Net proceeds from sales of assets 17,391 -- 116,821 Notes receivable principal payments 38,274 179,207 160,123 Leases receivable principal payments 38,795 34,769 85,006 Decrease in other assets 7,482 11,248 -- --------- --------- --------- Net cash provided by investing activities (219,672) 209,990 347,938 --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term debt 207,500 -- -- Repayments of long-term debt (1,013) (35,542) (86,918) --------- --------- --------- Net cash provided by (used in) financing activities 206,487 (35,542) (86,918) --------- --------- --------- NET( DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (20,232) (36,279) 30,385 CASH AND CASH EQUIVALENTS, beginning of period 42,401 78,680 48,295 --------- --------- --------- CASH AND CASH EQUIVALENTS, end of period $ 22,169 $ 42,401 $ 78,680 ========= ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION - Interest paid $ 2,036 $ 672 $ 96,734 ========= ========= =========
-Continued- F-5 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS: Year Ended January 3, 1999 -------------------------- In connection with the acquisition of property and equipment, the Company (1) executed a capital lease agreement for $28,359, (2) incurred long-term debt of $32,727 and (3) received advances from related parties of $56,940. In addition, the Company recorded a receivable of $101,633 from the owner of the property related to reimbursement of certain of the costs of construction of a restaurant.. Year Ended December 28, 1997 ---------------------------- In connection with the sale of a restaurant, the Company received a note receivable of $114,200 and a lease receivable of approximately $155,000. Year Ended December 29, 1996 ---------------------------- In connection with the sale of a restaurant, the Company received a note receivable of $294,000. In connection with the sale of another restaurant, the Company received a note receivable of $282,086 and a lease receivable of $450,000. The note and lease receivable were foreclosed on during 1996 and the location repossessed. A note and lease receivable in the total amount of $195,000 were foreclosed upon by the Company and the location repossessed. A note receivable in the amount of $1,269,066, including accrued interest due from a related party was decreased by $118,221 by the Company and the remaining note receivable was assigned to the holder of a note payable in the amount of $1,150,845, including accrued interest, in full satisfaction of the note payable. See accompanying notes to these financial statements. F-6 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ----------------------------------------------------------- Hudson's Grill of America, Inc. (the "Company") franchises and owns and operates full-service restaurants, primarily in California and Texas. As of January 3, 1999, the Company has twelve franchised restaurants. In late 1998, the Company completed construction of a training store in Richardson, Texas which is owned and operated by a subsidiary of the Company. Previously, the Company had owned two restaurants, both of which were closed in early 1998. In January 1998, the Company took over the operations of a franchised restaurant which it subsequently sold in 1998. The consolidated financial statements include the Company and its wholly-owned subsidiaries, Equipco, Inc., Hudson's Grill of Whittier, Inc., Hudson=s Grill International, Inc., and Hudson's Grill of Richardson, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Fiscal Year ----------- The Company's fiscal year is a fifty-two week period ending on the Sunday nearest December 31. The fiscal years 1998, 1997, and 1996 ended on January 3, 1999, December 28, 1997 and December 29, 1996, respectively. Cash and Cash Equivalents ------------------------- Cash and cash equivalents for purposes of reporting cash flows consist of cash and short-term investments purchased with an original maturity of three months or less. Non-Current Assets ------------------ Depreciation of property and equipment is recognized using the straight-line method over the estimated lives of the assets (generally five to seven years). Amortization of leaseholds is recognized using the straight-line method over the shorter of the initial term of the respective lease or the service life of the leased asset. Liquor licenses are recorded at cost and are amortized over ten years. Impairment of Long-Lived Assets ------------------------------- In accordance with Statement of Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of", the Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of long lived assets may not be recoverable. An impairment loss would be recognized when estimated future undiscounted cash flows associated with an asset and its eventual disposition is less than the asset's carrying amount. Revenue Recognition ------------------- Initial franchise fees are recognized as revenue when all material services or conditions relating to the sale have been substantially performed or satisfied. Continuing franchise fees are recognized as revenue as the fees are earned and become receivable from the franchisee. Income Taxes ------------ Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the financial and income tax reporting bases of assets and liabilities. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. F-7 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Stock-Based Compensation ------------------------ The Company accounts for stock options and warrants granted to directors and employees in accordance with Accounting Principles Board Opinion No. 25 ("APB No. 25"). "Accounting for Stock Issued to Employees", and related interpretations. Required pro forma disclosures of compensation expense determined under the fair value option pricing model method prescribed by Statement of Financial Accounting Standards No. 132 ("SFAS 132"), "Accounting for Stock-Based Compensation", are presented in Note 7. Income (Loss) per share ----------------------- Income (loss) per share is calculated in accordance with Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings Per Share". Basic income (loss) per share is computed based upon the weighted average number of common shares outstanding during the period. Diluted income (loss) per share takes common equivalent shares into consideration. However, common equivalent shares are not considered if their effect is antidilutive. Common stock equivalents consist of outstanding stock options and warrants. Common stock equivalents are assumed to be exercised with the related proceeds used to repurchase outstanding shares except when the effect would be antidilutive. Common equivalent shares were antidilutive in the periods ended January 3, 1999, December 28, 1997, December 29, 1996. The weighted average number of shares outstanding used in the income (loss) per share computation was 6,056,986 for each of the periods ended January 3, 1999, December 28, 1997, and December 29, 1996. Segment Data ------------ During 1998, the Company adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and related Information". SFAS 131 establishes standards for the way public business enterprises report financial information about operating segments and supercedes SFAS 14, "Financial Reporting for Segments of a Business Enterprise", by replacing the "industry segment" approach with the "management" approach. The management approach designates the internal reporting that is used by management for making operating decisions and assessing performance as the source of the Company's reportable segments. SFAS 131 also requires disclosures about products and services, geographic areas and major customers. The adoption of SFAS 131 did not affect the Company's results of operations or financial position, but did affect the disclosure of segment information (see Note 11). Preopening Costs ---------------- During 1998, the Company adopted Statement of Position 98-5 ("SOP 98-5"), "Reporting of the Costs of Start-up Activities". SOP 98-5 requires that start-up activity costs, such as those associated with the opening of a new restaurant be expensed as incurred. Preopening costs primarily consist of training and other costs incurred to develop new restaurant management teams, and the food, beverage and supplies costs incurred in the testing of equipment, concept systems, and recipes. Prior to 1998, the impact of recording preopening costs was not material to the consolidated financial statements. Continued Operations -------------------- The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has incurred recurring losses from operations and has a shareholders= deficit of $434,271, as of January 3, 1999. In addition, the Company has significant contingent liabilities for future lease payments on closed restaurant locations as described in Note 5. These issues raise substantial doubt about the Company's ability to continue as a going concern. F-8 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Management of the Company has recently opened a Company owned restaurant location and intends to continue to sell franchises in an attempt to improve operating results. They also believe the contingent lease liabilities can be settled without a significantly adverse effect on the Company. 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 revenues and expenses during the reporting period. Significant items in the accompanying financial statements that include estimates are notes and leases receivable and lease contingencies. Actual results could differ materially from those estimates. Reclassifications ----------------- Certain reclassifications have been made to conform the prior year financial statements to the current year presentation. The reclassifications have no effect on net loss. 2. FRANCHISE ACTIVITIES -------------------- In 1991, the Company commenced franchising its Hudson's Grill concept. Under the terms of the standard franchise agreement, the franchisees are obligated to pay the Company an initial franchise fee of $25,000 (increased to $35,000 for agreements executed after October 1998), and a weekly continuing royalty fee of generally 4% of gross restaurant revenues, and must spend 3% of gross sales on approved advertising, including a weekly 1% marketing fee contributed to the Company's marketing fund. The Company is obligated to provide initial training, continuing management assistance, administration of advertising and sales promotion programs and establishment and monitoring of a marketing fund. Franchising revenues consisted of: PERIODS ENDED ----------------------------------------- JANUARY 3, DECEMBER 28, DECEMBER 29, 1999 1997 1996 ---------- ------------ ------------ Initial franchise revenues $ 25,000 $ 50,000 $ 20,000 Continuing franchise revenues 263,943 291,546 287,549 -------- -------- --------- Total franchise revenues $288,943 $341,546 $ 307,549 ======== ======== ========= 3. NOTES AND LEASES RECEIVABLE ---------------------------- In connection with the sale of a restaurant in 1997, the Company received a $114,200 note with interest equal to the greater of prime plus 2% or 12%. Terms of the note require monthly payments of interest only for one year, and then eighty-four monthly payments in amounts necessary to repay the remaining principal and interest on the note. At December 28, 1997, the balance of the note was $81,200, net of an allowance of $33,000. The note was written off during the year ended January 3, 1999 as described below. In connection with the sale of a restaurant in 1996, the Company received a $294,000 note with interest at 10.25%. Terms of the note require forty-seven monthly payments of principal and interest of $6,400 and a final payment of $76,655. At January 3, 1999 and December 28, 1997, the balance of the note was $194,871 and $234,507, respectively. F-9 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In connection with the sale of a restaurant in 1994, the Company received a $262,800 note with interest equal to the greater of prime plus 2% or 9%, adjusted on a quarterly basis. Terms of the note require monthly payments of interest only for one year, and then ninety-six monthly payments in amounts necessary to repay the remaining principal and interest on the note. At December 28, 1997, the balance of the note was $235,272. The note was written off during the year ended January 3, 1999 as described below. Certain assets of the restaurant sold collateralize each of the notes referred to above. The Company also leased restaurant equipment to the purchasers of the restaurants sold in 1997 and 1994 mentioned above. The leases were classified as sales-type leases. At December 28, 1997, the net carrying value of the leases was $340,879. However, the lease receivables were written off during the year ended January 3, 1999 as described below. During 1998, both of the purchasers of the restaurants sold in 1997 and 1994 defaulted on their respective note and lease agreements. As a result, the Company recognized a loss on the sale of restaurants in 1998 of $165,730, which represents the net carrying value of the receivables offset by the deferred income associated with the sales of the restaurants
4. Long-Term Debt -------------- Long-term debt at January 3, 1999 consists of the following: Note payable to a shareholder, interest at 12%, principal and accrued interest due April 2000, collateralized by restaurant assets. $ 150,000 Note payable to an entity owned by the Company's president, interest at 12%, principal and accrued interest due April 2000, collateralized by subordinated interest in restaurant assets. 90,227 Equipment lease obligation payable in monthly installments of $1,016 through September 2001 (see Note 5). 27,346 --------- Total 267,573 Less current portion 8,689 --------- Long-term debt $ 258,884 =========
At January 3, 1999, future maturities of long-term debt are summarized as follows: Fiscal year: 1999 $ 8,689 2000 250,287 2001 8,597 -------- Total $267,573 ======== Subsequent to January 3, 1999 the Company received an additional $50,000 in connection with the note payable to the shareholder. 5. Commitments and Contingencies ----------------------------- Capital Leases -------------- The Company leases certain equipment under a capital lease agreement which expires in 2001. At the end of the lease term, the Company has the option F-10 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS to purchase the equipment for an amount equal to 10% its original cost. The value of the equipment, totaling $28,359, is included in property and equipment at January 3, 1999. Subsequent to January 3, 1999, the Company executed a capital lease agreement with a shareholder of the Company in connection with property and equipment of the Company's Richardson, Texas restaurant. Terms of the agreement require minimum lease payments of $4,500 payable monthly through March 2006. At the end of the lease term, the Company has the option to purchase the equipment for an amount equal to its fair market value. Operating Leases ---------------- The Company's restaurant buildings are leased under noncancellable lease agreements having terms expiring at various dates through 2010. One lease provides for two 5 year renewals, at the option of the Company, to extend the term of the lease through 2013 and 2018, respectively. Certain leases are guaranteed by former directors. In addition to minimum lease payments (see below), the leases generally provide that the Company pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property, plus a percentage of gross receipts in excess of certain limits stated in the lease agreements. The payments on several of the leases have been made by other parties during 1998, 1997 and 1996 in connection with agreements to sell those restaurants. Commitments ----------- At January 3, 1999, future minimum lease payments on capital and operating leases are summarized as follows: Fiscal Year: Capital Operating ---------- ---------- 1999 $ 12,192 $ 202,596 2000 12,192 202,596 2001 9,144 216,797 2002 -- 227,124 2003 -- 227,124 Thereafter -- 1,512,569 ---------- ---------- Total minimum lease payments 33,528 $2,588,806 ========== Amount representing interest (6,182) ---------- Capital lease obligation (Note 4) $ 27,346 ========== In addition to the leases discussed above, the Company has assigned to respective purchasers certain building leases covering five restaurants previously sold. The Company is secondarily liable for the lease payments should the purchaser not fulfill their responsibility under the leases. The future lease payments for these restaurants total approximately $4,680,000 at January 3, 1999. In addition, the Company may be secondarily liable under other leases for restaurants sold in prior years. Total rent expense for operating leases were $65,051, $98,826 and $28,892 for the periods ended January 3, 1999, December 28, 1997 and December 29, 1999, respectively. Contingencies ------------- During 1998, the Company closed its Westlake and Whittier locations and ceased paying rent under the related lease agreements. As a result, the F-11 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Company recognized a loss on restaurant closures as of December 28, 1997 of $146,067, which represents the book value of the restaurant equipment that was forfeited to the landlords. However, the Westlake and Whittier lease agreements do not expire until 2010 and 2011, respectively, and the remaining payments under the lease agreements are each approximately $1,500,000. The landlords for each location filed a lawsuit against the Company to attempt to recover any losses they may incur. The Company and two co-guarantors reached an agreement with the landlord of the Westlake location to pay $500,000 to settle the landlord's claim. The Company and the two co-guarantors have negotiated an agreement to divide the settlement cost, such that the Company's share would total $83,333, to be paid out over several years. Management of the Company believes the agreement to divide the settlement cost is final, but it has not yet been signed by the parties. The Company and its legal counsel believe the Company has several courses of action to mitigate any additional liability under the Whittier lease agreement, but that the additional liability could range up to$950,000. The future lease payments under the Whittier lease are included in the future minimum lease payment schedule above. The future lease payments for the Westlake lease are not included in the schedule, due to the settlement. In March 1998, a former franchisee initiated an action against the Company claiming damages related to losses sustained by the franchisee in connection with a joint venture agreement with the Company to operate a restaurant location. Damages claimed by the franchisee are between $140,000 and $350,000, plus punitive damages. The Company and its legal counsel believe the lawsuit to be without merit and intend to defend vigorously against this action. The Company has accrued $185,000 as of January 3, 1999 for legal and other settlement costs related to the three matters described above. In 1998, the Company transferred certain assets and liabilities to its wholly-owned subsidiary Hudson's Grill International, Inc. ("HGI"). The Company may distribute to its shareholders the shares of HGI and register those shares with the Securities and Exchange Commission. 6. INCOME TAXES ------------ There was no income tax provision in 1998, 1997 and 1996 due to the net losses incurred in those years. Temporary differences between accounting for income tax and financial reporting purposes give rise to deferred income taxes as follows: JANUARY 3, DECEMBER 28, 1999 1997 ------------ ------------ Deferred tax asset: Depreciation $ 152,000 $ 165,000 Accrued settlement 63,000 68,000 Deferral income and rent 79,000 251,000 Net operating loss 400,000 231,000 Valuation allowance (694,000) (715,000) ---------- ---------- $ -- $ -- ========== ========== At January 3, 1999 the Company had net operating loss (NOL) and investment F-12 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS tax credit carryforwards for Federal income tax purposes of approximately $1,200,000 and $180,000, respectively. Use of these carryforwards (with the exception of approximately $1,030,000 of the NOL carryforward) are limited. 7. SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION ------------------------------------------------- Preferred Stock --------------- The Company is authorized to issue up to 5,000,000 shares of preferred stock. It can be issued with rights and preferences as determined by the Company's board of directors. Stock Option Plans ------------------ The Company has an incentive stock option plan ("ISO") which provides for the issuance of options to officers, directors and employees to purchase up to 825,000 shares of the Company's common stock. Options are exercisable at prices equal to the fair market value of common stock at the grant date, vest 20% annually and expire generally within five years. The Company also has a Directors' Stock Option Plan ("DSO"). This plan provides for the issuance of up to 200,000 shares of stock to non-employee directors in increments of 10,000 shares every two years. Options will be issued at the average of the closing bid-ask price on the date of the grant. No options were outstanding as of January 3, 1999, December 28, 1997, and December 29, 1996 under either plan. Other Options and Warrants -------------------------- In January 1994, in connection with a debt restructuring agreement, the Company issued warrants to a former director. The warrants are exercisable for 4,000,000 shares of common stock at $.0625 per share and expire in 2004. The exercise price approximated the market value of the stock at the time of grant. None of the warrants had been exercised as of January 3, 1999. During 1995, the Company granted options to an officer to purchase 400,000 shares of common stock with 100,000 shares vesting each year from 1995 to 1998. The exercise price is the market price at time of vesting. The exercise prices of the shares vested in 1997, 1996 and 1995 are $.14, $.17 and $.11 per share, respectively. All the options expire, if not exercised, in May 2003. During 1997, the final 100,000 options due under this agreement were canceled.
The following table summarizes the option and warrant activity for the years ended: JANUARY 3, DECEMBER 28, DECEMBER 29, 1999 1997 1996 --------------------- ----------------------- ------------------------ Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number of Exercise of Shares Price of Shares Price Shares Price ---------- -------- ---------- -------- --------- -------- Outstanding, beginning of year 4,300,000 .07 4,200,000 .07 4,200,000 .09 Granted to officer and director -- -- 100,000 .14 100,000 .17 Expired -- -- -- -- (100,000) 1.00 Exercised -- -- -- -- -- -- --------- ------ --------- ------ ---------- ------ Outstanding, end of year 4,300,000 .07 4,300,000 .07 4,200,000 .07 ========= ====== ========= ====== ========== ======
F-13 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of January 3, 1999, 4,300,000 options and warrants are exercisable. If not previously exercised, warrants and options outstanding will expire as follows: Period Ending December 28, 1997 Number of Weighted Average Shares Exercise Price 2003 300,000 .14 2004 4,000,000 .06 --------- ---- 4,300,000 .07 ========= ==== The weighted average exercise price equaled the market price for all warrants and options granted during the periods ended December 28, 1997, and December 29, 1996. Pro Forma Stock Based Compensation Disclosures ---------------------------------------------- As reflected in Note 1, the Company applies APB No. 25 and related interpretations in accounting for its stock options. Accordingly, no compensation cost has been recognized for grants of options to the employees since the exercise prices were not less than the fair value of the Company's common stock on the measurement date. Had compensation been determined based on the fair value at the measurement dates for awards under those plans consistent with the method prescribed by SFAS No.123, the Company's net loss and loss per share would have been changed to the pro forma amounts indicated below. PERIOD ENDED DECEMBER 28, DECEMBER 29, 1997 1996 ----- ---- Net loss As reported $ (391,198) $ (261,334) Pro forma (399,558) (276,334) Net loss per common share As reported $ (.06) $ (.04) Pro forma (.06) (.05) The fair value of the options granted in 1997 and 1996 were estimated on the date of vesting using the Black-Scholes option-pricing model with the following weighted assumptions: PERIOD ENDED DECEMBER 28, DECEMBER 29, 1997 1996 ------------ ------------ Expected volatility 132.3% 116.3% Risk-free interest rate 5.75% 6.25% Expected dividends -- -- Expected terms (in years) 6 7 8. RELATED PARTY TRANSACTIONS -------------------------- The Company has amounts payable to an officer and to a shareholder that total $56,940 at January 3, 1999. The payables result from advances made by these related parties. F-14 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS During the periods ended January 3, 1999 and December 38, 1997, the Company incurred $41,000 and $69,000, respectively for legal services provided by a firm associated with a director of the Company. Additional related party transactions are described in Note 4. 9. FINANCIAL INSTRUMENTS --------------------- Concentrations of Credit Risk Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly effected by changes in economic or other conditions. In accordance with FASB Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, the credit risk amounts shown do not take into account the value of any collateral or security. Financial instruments that subject the Company to credit risk consist principally of accounts receivable, cash on deposit and notes and leases receivable. At January 3, 1999, accounts receivable totaled $9,992, net of an allowance for doubtful accounts of $62,000. The Company does not require collateral for accounts receivable, but performs periodic credit evaluations on its customers' financial condition and believes that the allowance for doubtful accounts is adequate. The Company periodically maintains cash balances in excess of FDIC insurance limits. Notes and leases receivables are described in Note 3. Fair Value of Financial Instruments ----------------------------------- The estimated fair values of the Company's financial instruments were determined by management using available market information and appropriate valuation methodologies. The estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. At January 3, 1999, cash, accounts receivable, other receivable and accounts payable have fair values that approximate book values based on their short term or demand maturity. The fair values of notes receivable and notes payable are based on estimated discounted cash flows. Management believes the fair values of these instruments approximate book values at January 3, 1999. 10. YEAR 2000 --------- The Company and/or other entities with which the Company transacts business could be adversely affected by the year 2000 problem, which is the result of computer programs being written using two digits rather than four to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations. The Company has taken actions it believes are reasonably designed to address the year 2000 problem with respect to computer systems in use, but has not fully determined the impact on their future operations or the costs they may incur to remediate the problem. There can be no assurance the actions taken F-15 HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS by the Company will be sufficient to avoid any adverse impacts to the Company. However, management believes the year 2000 problem will not have a materially adverse effect on the Company. 11. OPERATING SEGMENT INFORMATION ----------------------------- Full service restaurants are owned and operated by the Company or operated by independent owners under a franchise agreement. Accordingly, the Company categorizes its operating segments based on ownership of underlying business enterprises. Management evaluates financial performance and allocates resources based on the revenue streams associated with these operating segments. Revenues from Company operated restaurants consist of food and beverage sales. Revenues from franchise operations are as described in Note 2 and includes income derived from leased equipment. Certain restaurants have been operated under joint venture arrangements and sales contracts and the Company presents them with the franchise operating segment due to similarity of associated revenues. Operating segment information is summarized as follows: PERIOD ENDED JANUARY 3, DECEMBER 28, DECEMBER 29, 1999 1997 1996 ----------- ------------ ------------ Segment revenue: Company $ 301,440 $ 226,009 $ 109,806 Franchise 341,290 434,894 507,109 ---------- ---------- ----------- Total 642,730 660,903 616,915 Other revenue 100,093 134,099 99,235 ---------- ---------- ---------- Consolidated revenues $ 742,823 $ 795,002 $ 716,150 ========== ========== ========== Operating costs and revenues are not reported to management by segment. Management measures profit and loss on a company-wide basis, therefore such segment information is not presented. The assets attributable to the Company's operating segments consist primarily of accounts receivable, property and equipment, note and lease receivables, liquor licenses and other non-current items. Segment assets exclude corporate assets consisting of cash and cash equivalents and corporate office property and equipment as well as certain unallocated prepaid expense and supply items. Operating segment asset information is summarized as follows: JANUARY 3, DECEMBER 28, DECEMBER 29, 1999 1997 1996 ------------ ------------ ------------ Segment assets: Company $ 448,296 $ 37,754 $ 27,186 Franchise 236,454 1,003,597 1,216,218 ------------ ----------- ------------ Total 684,750 1,041,351 1,243,404 General corporate assets 55,980 75,369 108,656 ------------ ----------- ----------- Consolidated assets $ 740,730 $ 1,116,720 $ 1,352,060 ============ =========== =========== Expenditures for long-lived assets Company $ 276,921 $ 13,434 $ -- Franchise -- -- -- Other -- 1,800 14,012 ------------ ----------- ----------- Total $ 276,921 $ 15,234 $ 14,012 ============ =========== =========== F-16
-----END PRIVACY-ENHANCED MESSAGE-----