-----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, JWLoO/kzSSapfWfA+RjAOxoO1yC+xSmWVUqWNJekjPFcTD9Qug3JqXtvqK6LTQIo iAg/5cVHtdTEtPVQqhrlnw== 0000930881-98-000005.txt : 19980508 0000930881-98-000005.hdr.sgml : 19980508 ACCESSION NUMBER: 0000930881-98-000005 CONFORMED SUBMISSION TYPE: ARS PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971228 FILED AS OF DATE: 19980507 SROS: NASD 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: 98612067 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. 1997 ANNUAL REPORT LETTER TO THE SHAREHOLDERS To the Shareholders of Hudson's Grill of America, Inc.: In 1997, Hudson's Grill of America, Inc. (the "Company"), continued to sell its company owned and operated and affiliated restaurants and to sell franchises. However, it has also begun to focus again on building new Hudson's Grills through subsidiaries. A new location is currently under construction in the Dallas area near the suburb of Richardson, Texas. This has continued the Company's past policy of building a greater territorial base for its sales. The Company currently has operating franchises in California and Texas, and has franchise agreements for new restaurants in Michigan and Nevada. 1997 has been a busy year for the Company, especially regarding franchise development. In March of 1997, the Company announced that it had entered into a development agreement with Alternate Technologies, Inc. ("ATI"), a company owned by Travis Bryant, the originator of the Hudson's Grill concept, to build twenty restaurants in the State of Texas over the next ten years. And in April of 1997, the Company announced that it had signed a franchise agreement with Mark Myers of Jackson, Michigan. Mr. Myers is a former Little Caesar's franchisee who intends to build and open the new prototype Hudson's Grill building by the end of the year. In September 1997, a subsidiary of the Company signed a lease with the Prudential Insurance Company to lease a freestanding, build-to-suit pad site at the Keystone Park shopping center located near Richardson, Texas, a suburb of Dallas. This is the Company's first new restaurant developed since the early 1990's. The Company announced plans to develop more sites into Company-owned or affiliated restaurants based on its new prototype, which uses free-standing buildings instead of sites in shopping strips. The Company expects that the new site will be open for business in July 1998. The Company formed another new subsidiary called Hudson's Grill International, Inc. ("International"), and as of December 1, 1997, most of the Company's assets were transferred to the new subsidiary; the only liabilities that International assumed were those associated with the operation of its headquarters in Dallas, Texas. The subsidiary is incorporated in Texas; the assets that formerly were operated by the Company essentially have been transferred to the new subsidiary. This was done to move officially the Company's operations to Texas from California, to get out from underneath California rules and regulation, and to give the Company a fresh start if it should decide to spin the subsidiary off to the Company's shareholders. This proposal to spin off the subsidiary will be put to a shareholder vote at the upcoming annual meeting. On December 19, 1997, the Company announced that it had agreed in principle with Kirk, Inc., for a new franchise to be located in the Reno, Nevada, area. Kirk, Inc.'s principal owners are George Matthews and Kirk Neiderhaus, who currently operate a jet ski and para sailing business on Lake Tahoe, Nevada. Kirk, Inc., plans to build a freestanding Hudson's Grill restaurant and to open it in late 1998 or early 1999. Since the end of 1997, the Company has announced that on January 20, 1998, the Company formed an affiliate, Hudson's Grill of Denton/Trinity, Inc., to operate the Carrollton, Texas, Hudson's Grill. The former Carrollton franchisee's furniture, fixtures and equipment had been repossessed and its right to possess the premises had been terminated by the landlord. Afterward, the landlord entered into a lease with the Company's affiliate to lease the premises and the owner of the furniture, fixtures and equipment entered into a lease with the affiliate also. The affiliate is now operating the Carrollton restaurant. On April 1, 1998, the Company signed a franchise agreement with Sharfe, L.L.C., a Michigan limited liability company, to open a Hudson's Grill in Marquette, Michigan. The restaurant will be a free standing building and will be operated by Frank and Jim Stabile. Although there have been considerable costs associated with all of these activities, and though the benefits won't be realized until the new units actually come "on line", 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 now include adding new franchises, as well as 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 December 28, 1997, 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 will be securing the permit. As of December 28, 1997, the Company had thirteen (13) franchised restaurants that were in operation. The current standard terms to franchise a restaurant are an initial fee of Twenty 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 has plans to construct several Hudson's Grill restaurants in the Dallas, Texas, area to use for demonstration and testing purposes. One location in Dallas is currently under construction and is planned to be open on July 1, 1998. Other than these units and the possible purchase and conversion of several other restaurants if funds and credit 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: Principal Occupation Principal or Name of Business of Name Position Employment Employer Employer David L. Osborn Chairman of Chief Southpoint Restaurant the Board, Executive Management Management Chief Officer or Corp., Services and Executive Partner Famous Operations Officer Bars, and Grills & Director Cafes of America, Inc., and DAC Assoc. Thomas A. Sacco Senior Vice Vice- Dalms, Inc. Restaurant President - President Consulting Operations and Franchise Development and Director Robert W. Director Attorney Fischer & Legal Fischer Sanger Services Mitzy Ferguson Secretary Admini- Hudson's Franchisor of strative Grill of Restaurants America, Inc. Jane Taylor Treasurer Admini- Hudson's Franchisor of strative Grill of Restaurants America, Inc. 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 March 31, 1998, 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 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 FISCAL YEAR ENDED DECEMBER 31, 1995 High Low First Quarter ended March 31, 1995 1/8 1/32 Second Quarter ended June 30, 1995 1/16 .02 Third Quarter ended September 30, 1995 1/16 .02 Fourth Quarter ended December 31, 1995 1/16 .02 As of March 27, 1998, the closing bid price of the Common Stock was 3/32 of one dollar (nine and 3/8th cents) ($.09375). This information was obtained from the Stock Quote provided by "Yahoo" on the Hudson's Grill internet site http://www.hudsonsgrill.com. and from the National Quotation Bureau, LLC, of New York City, New York. DIVIDENDS The Company has not paid cash dividends on its common stock, and 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 December 28, 1997, the Company had a net loss of Three Hundred Ninety-one Thousand One Hundred Ninety-eight Dollars ($391,198). This compares to a net loss of Two Hundred Sixty One Thousand Three Hundred Thirty Four Dollars ($261,334) for the year ended December 29, 1996, and net income of Thirteen Thousand Four Hundred Forty Eight Dollars ($13,448) for the year ended December 31, 1995. The net income for the year ended December 31, 1995, resulted primarily from interest income and a gain on restaurant closures. 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 are 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, but showed a gain of Eighty Six Thousand Seven Hundred Sixty Six Dollars ($86,766) for the year ended December 31, 1995. The gain resulted because in 1995 the Company reached a final settlement on a lease of a closed restaurant in an amount of $86,766 less than had been previously accrued. 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; beginning in 1997 it is proceeding to build, buy and operate Company owned restaurants, some of which will be used as models and training facilities for future franchisees. 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, are not operated as joint ventures but are being operated by their prospective purchasers. The prospective purchasers paid royalties and advertising fees even though they were not yet franchisees, and these fees are 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; 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 should continue to increase as new franchises are added and as restaurants under sales contracts become franchises (see above). Franchising revenues have increased from Two Hundred Ninety Five Thousand Three Hundred Thirteen Dollars ($295,313) for the year ended December 31, 1995; to Three Hundred Seven Thousand Five Hundred Forty Nine Dollars ($307,549) for the year ended December 29, 1996; to Three Hundred Forty-one Thousand Five Hundred Forty-six ($341,546) for the year ended December 28, 1997. Seventy Four Thousand Three Hundred Seventy Four Dollars ($74,374) of the franchise revenues for the year ended December 31, 1995, were due to one time initial franchise fees of Twenty Five Thousand Dollars ($25,000) per franchise for three new franchises(minus minimal costs); Twenty Thousand Dollars ($20,000) of the franchise revenues for the year ended December 29, 1996, were due to one time initial franchise fees; and Fifty Thousand Dollars ($50,000) of the franchise revenues for the year ended December 28, 1997, were due to one time initial franchise fees. The rest of the franchise revenues were the result of the weekly continuing royalty fees paid by franchisees. Thus, continuing franchise revenues increased from Two Hundred Twenty Thousand Nine Hundred Thirty Eight Dollars ($220,938) for the year ended December 31, 1995, to Two Hundred Eighty Seven Thousand Five Hundred Forty Nine Dollars ($287,549) for the year ended December 29, 1996, to Two Hundred Ninety-one Thousand Five Hundred Forty-six Dollars ($291,546) for the year ended December 28, 1997. COSTS AND EXPENSES Since the Company is and has been selling or closing its 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. General and administrative expenses, and the depreciation and amortization expenses for equipment leased to restaurants will continue to be important. General and administrative expenses for the year ended December 28, 1997, decreased to Seven Hundred Four Thousand Nine Hundred Sixty Dollars ($704,960) from Seven Hundred Ninety Eight Thousand Six Hundred Seventy Five Dollars ($798,675) for the year ended December 29, 1996. For the year ended December 31, 1995, general and administrative expenses were Four Hundred Eighty Four Thousand Six Hundred Fifty Six Dollars ($484,656). The decrease in general and administrative expenses during the past fiscal year results from a non-recurring charge to expense of One Hundred Eighteen Thousand Two Hundred Twenty-one Dollars ($118,221) in 1996 for the reduction of a note receivable from Famous Bars, Grills and Cafes of America, Inc. The increase in general and administrative expenses from the year ended December 31, 1995, to the year ended December 29, 1996 were the result of increases in franchising activities (e.g., an increase of $39,464 in supplies and advertising), bad debts (e.g., $54,860 in royalties and interest owed by restaurants), the reduction in the Famous Bars, Grills and Cafes of America, Inc. note ($118,221), and contract services (increased by $74,459). 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 continued to work for the Company, but will only 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 December 28, 1997, was Thirty-two Thousand Eight Hundred Ninety- three Dollars ($32,893); for the year ended December 29, 1996, was Fifty Eight Thousand Three Hundred Seventy One Dollars ($58,371); and was Eighty Seven Thousand One Hundred Forty Seven Dollars ($87,147) for the year ended December 31, 1995, 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 31, 1995. The Company recorded interest expense of Six Hundred Seventy-to Dollars ($672) for the year ended December 28, 1997, Ninety Six Thousand Seven Hundred Thirty Four Dollars ($96,734) for the year ended December 29, 1996, and One Hundred Four Thousand Two Hundred Twenty Dollars ($104,220) in the year ended December 31, 1995. 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 31, 1995 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. It received interest income of One Hundred Eighty Thousand One Hundred Thirty Five Dollars ($180,135) during the year ended December 29, 1996; this compares to One Hundred Seventy Six Thousand Seven Hundred Thirty Dollars ($176,730) in interest income for the year ended December 31, 1995. Thus, the net interest income (interest income minus interest expense) has remained somewhat stable. 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 29, 1996, and it was Seventy Two Thousand Five Hundred Ten Dollars ($72,510) for the year ended December 31, 1995. LIQUIDITY AND CAPITAL RESOURCES At December 28, 1997, the Company had a negative working capital of Six Thousand Eight Hundred Thirteen (-$6,813) as compared to a positive working capital of One Hundred Seventeen Thousand Four Hundred Twenty Eight Dollars ($117,428) at December 29, 1996, and One Hundred Ninety Five Thousand Five Hundred Six Dollars ($195,506) at December 31, 1995. 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 accrued liabilities to set up a reserve for potential litigation expenses involving leases of former Hudson's Grills. 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 revenue from direct restaurant operations. The Company received One Hundred Sixteen Thousand Eight Hundred Twenty One Dollars ($116,821) in net cash proceeds from the sale of restaurants in the year ended December 29, 1996, and Twelve Thousand One Hundred Eighty Two Dollars ($12,182) in net cash proceeds from the sale of restaurants in the year ended December 31, 1995. The Company received no cash proceeds in 1997 from the sale of restaurants since most of the remaining sales of restaurants are to a large extent being financed by the Company with notes and leases covering furniture, fixtures and equipment. To the extent that the purchasers of the remaining restaurants pay their notes and their lease obligations on a timely basis, the Company's cash resources and liquidity will increase. In January 1994, the Company reached a tentative agreement with its largest secured creditor to reduce and restructure the secured debt owed to the creditor and certain other related liabilities owed to him. As part of this agreement, the Company loaned money to an entity formerly affiliated with the creditor, and received a note in return (the "FGA Note"). The scheduled payments on the "FGA Note" were approximately equal to the amounts payable to the secured creditor under the restructured credit agreement, and payments not received on the "FGA Note" would be used to offset payments on the note payable to the secured creditor. This arrangement would help reduce the future cash requirements of the Company. The revision of the credit agreement was finalized and completed on June 28, 1994. In 1995, the company formerly affiliated with the secured creditor formally requested and obtained from the Company a modification of the FGA Note; the Company was to forego payments until February 1996, at which time the entire amount of unpaid principal and interest would be amortized at 8% over ten years. Correspondingly, the Company began to exercise its right of offset on its note payable to the secured creditor. The Company was assigned several notes receivable with an aggregate face value of One Million One Hundred Ninety Nine Thousand Dollars($1,199,000) as additional collateral in connection with this note modification. On December 29, 1996, the Company agreed to reduce the FGA note by One Hundred Eighteen Thousand Two Hundred Twenty One Dollars ($118,221) in exchange for the transfer of an additional two percent (2%) in royalty fees from four Hudson's Grill restaurants sold by it since 1995 (one of the restaurants has since been closed). The reduced FGA Note was then exchanged with the secured creditor as full payment of the Company's obligations to the secured creditor. This arrangement improved cash flow by the amount of additional royalties received from the three Hudson's Grills formerly owned by FGA. Until the Company opens or buys other Hudson's Grills, as the Company sells its remaining interests in restaurants and as these restaurants are paid off, the Company's revenues will become more dependent on initial franchise fees and on royalty fees from franchised restaurants that are opened, all of which are currently located in California and Texas. In January 1997, the Company sold its Pomona, California, restaurant and received a note receivable of $114,200 and a lease receivable of $240,000. The Company may repossess this location, which is delinquent in its obligations to the Company as of December 28, 1997. The Company's net investment in this note receivable is approximately $33,000 as of December 28, 1997. The Company believes the restaurant is a sufficiently profitable location to allow it to recoup its investment should it need to foreclose. During 1996 in connection with the sale of its Oxnard, California, restaurant, the Company received a note receivable of $282,086 and a lease receivable of $450,000. The note and lease receivable were re-negotiated during 1996. A note and lease receivable in the total amount of $195,000 received on account of the sale of the Westlake, California Hudson's Grill, were foreclosed upon by a the Company and the location repossessed. This restaurant was resold, and was again repossessed, and in 1998, the location was closed by a subsidiary of the Company. The Westlake landlord has recently filed a lawsuit against the Company, alleging that the Company is a guarantor of the lease, and asking for unpaid future rent. The Company's liquidity and resources will be drained to the extent that the Company has to pay to defend and/or settle this lawsuit. A similar occurrence with a Whittier, California, landlord may also drain liquidity and resources. The effects of inflation on the Company are minimal on the Company; however, the recent rise in the minimum wage has affected franchisees and as a result the Company has raised the prices charged for various menu items. To the extent that the Company owns and opens new restaurants, the increase 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. 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 an impact on the Company. FORM 10-KSB ANNUAL REPORT A copy of Hudson's 1997 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 1998 Annual Meeting of Stockholders will be held at the Hudson's Grill in Carrollton, Texas, located at the Carrollton Value Center at Old Denton Drive and Trinity Mills (2540 Old Denton Drive, Suite 314), Carrollton, Texas, on Friday, May 29, 1998, 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 December 28, 1997. INDEPENDENT AUDITOR'S REPORT HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITOR'S REPORT FOR THE PERIODS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995 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. and subsidiaries as of December 28, 1997 and December 29, 1996, and the related consolidated statements of operations, shareholders' equity (deficit), and cash flows for the periods ended December 28, 1997, December 29, 1996, and December 31, 1995. 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 Hudson's Grill of America, Inc. and its subsidiaries as of December 28, 1997 and December 29, 1996, and the results of their operations and their cash flows for the periods ended December 28, 1997, December 29, 1996, and December 31, 1995 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 uncertainity. Hein + Associates llp Certified Public Accountants March 9, 1998 Dallas, Texas HUDSON'S GRILL OF AMERICA, INC.CONSOLIDATED BALANCE SHEETS ASSETS
December 28, December 29, 1997 1996 CURRENT ASSETS: Cash and cash equivalents $ 42,401 $ 78,680 Accounts receivable, net of allowance for doubtful accounts of $49,000 and $22,907, respectively 69,830 66,165 Current portion of notes and leases receivable 100,000 121,055 Prepaid expenses and other 23,185 16,492 ________ _________ Total current assets 235,416 282,392 PROPERTY AND EQUIPMENT, at cost: Leasehold improvements 2,969 614,706 Restaurant equipment 33,378 518,674 Furniture and fixtures 5,851 188,507 ________ _________ Total property and equipment 42,198 1,321,887 Less accumulated depreciation and amortization (7,030)(1,080,338) ________ _________ Property and equipment, net 35,168 241,549 LONG-TERM PORTION OF NOTES AND LEASES RECEIVABLE, net allowance of $33,000 in 1997 791,858 748,222 LIQUOR LICENSES, net of accumulated amortization of $30,000 30,815 45,186 and $30,000, respectively OTHER ASSETS 23,463 34,711 _________ _________ Total assets $ 1,116,720 $ 1,352,060
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt $ - $ 35,542 Accounts payable 40,886 46,922 Accrued liabilities 201,343 82,500 _________ _________ Total current liabilities 242,229 164,964 OTHER LONG-TERM LIABILITIES 206,494 293,908 DEFERRED INCOME 778,367 612,360 COMMITMENTS AND CONTINGENCIES (Note 4) SHAREHOLDERS' EQUITY (DEFICIT): Preferred stock, 5,000,000 shares authorized, none issued or - - outstanding Common stock, no par value, 100,000,000 shares authorized, 4,456,457 4,456,457 6,056,986 shares issued and outstanding Accumulated deficit (4,566,827) (4,175,629) _________ _________ Total shareholders' equity (deficit) (110,370) 280,828 _________ _________ Total liabilities and shareholders' equity (deficit) $ 1,116,720 $ 1,352,060
CONSOLIDATED STATEMENTS OF OPERATIONS Periods Ended December 28, December 29, December 31, 1997 1996 1995 ___________________________________ REVENUES: Net sales $ 226,009 $ 109,806 $ 592,316 Joint venture revenues - 107,662 171,606 Franchising fees from restaurants under 15,572 40,459 - sales contracts Franchising revenues 341,546 307,549 295,313 Equipment lease income 77,776 51,439 63,989 Gain on sales of restaurants 67,938 - 21,777 Gain on restaurant closures - - 86,766 Other 66,161 67,773 13,317 _______________________________ Total revenues 795,002 684,688 1,245,084 COST AND EXPENSES: Cost of sales 183,562 158,111 732,343 General and administrative 704,960 798,675 484,656 Provision for litigation expenses 200,000 - - Depreciation and amortization 32,893 58,371 87,147 Loss on sales of restaurants - 14,266 - Loss on restaurant closures 146,067 - - __________________________________ Total costs and expenses 1,267,482 1,029,423 1,304,146 Loss from operations (472,480) (344,735) (59,062) OTHER INCOME (EXPENSE): Interest expense (672) (96,734) (104,220) Interest and dividend income 81,954 180,135 176,730 ____________________________________ Total other income (expense) 81,282 83,401 72,510 NET INCOME (LOSS) $ (391,198) $ (261,334) $ 13,448 ____________________________________ BASIC AND DILUTED NET INCOME (LOSS) PER SHARE $ (.06) $ (.04) $ -
HUDSON'S GRILL OF AMERICA, INC.CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT) For the Period from January 2, 1995 through December 28, 1997
Common Stock Accumulated Shares Amount Deficit Total BALANCES, January 2, 1995 6,056,986 $4,456,457 $(3,927,743) $528,714 Net income - - 13,448 13,448 _________ __________ ___________ ________ 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)
HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Periods Ended December 28, December 29, December 31, 1997 1996 1995 __________________________________ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (391,198) $ (261,334) $ 13,448 Adjustments to reconcile net income (loss) to net cash used by operating activities: Depreciation and amortization 32,893 58,371 87,147 (Gain) loss on sales and closures of 78,129 14,266 (108,543) restaurants Provision for bad debts 33,000 - - Changes in assets and liabilities: Accounts receivable (3,665) (113,584) (57,715) Prepaid expenses and other (6,694) 218 (11,865) Accounts payable (6,836) 9,493 36,756 Accrued liabilities and other 53,644 61,935 (314,674) Net cash used by operating activities (210,727) (230,635) (355,446) __________________________________ CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (15,234) (14,012) - Net proceeds from sales of assets - 116,821 12,182 Notes receivable principal payments 179,207 160,123 124,204 Leases receivable principal payments 34,769 85,006 101,300 Decrease in other assets 11,248 - 24,409 Net cash provided by investing activities 209,990 347,938 262,095 __________________________________ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable - - 40,000 Repayments of notes payable (35,542) (86,918) (141,104) Buydown of franchise fees - - 150,000 Net cash provided (used) by financing activities (35,542) (86,918) 48,896 NET INCREASE (DECREASE) IN CASH AND CASH (36,279) 30,385 (44,455) EQUIVALENTS CASH AND CASH EQUIVALENTS, beginning of period 78,680 48,295 92,750 CASH AND CASH EQUIVALENTS, end of period $ 42,401 $ 78,680 $ 48,295 SUPPLEMENTAL CASH FLOW INFORMATION - Interest paid $ 672 $ 96,734 $ 103,714
-Continued- HUDSON'S GRILL OF AMERICA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS, continued SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS: 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. Year Ended December 31, 1995 In connection with the sale of a restaurant and equipment, the Company received two notes receivable totaling $100,000 and leases receivable totaling $320,000. 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Hudson's Grill of America, Inc. (the "Company") franchises and previously owned and operated full-service restaurants, primarily in Southern California and Texas. As of December 28, 1997, the Company has eleven franchised restaurants. Additionally, it owns two restaurants, both of which were closed in early 1998. In December 1997, the Company began construction of a training store in Richardson, Texas that will be owned and operated by a subsidiary of the Company. In January 1998, the Company took over the operations of one of the franchised restaurants. 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. Restaurants Held for Sale As of December 28, 1997, the remaining restaurant held for sale was operated pursuant to a sales agreement with a prospective purchaser. The Company has ceased recording operating revenues and expenses on the restaurant location, but records franchising and advertising fees from the restaurant under a sales contract and equipment rental fees (see Note 8). The assets of the restaurant held for sale were primarily property and equipment and a liquor license. This location was closed in early 1998 and the related net assets were expensed as loss on restaurant closures as of December 28, 1997 (see Note 4). Previously, certain restaurants held for sale were operated under joint venture agreements with prospective purchasers. 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 Predominantly all of the Company's property and equipment was leased under operating leases to prospective purchasers at December 28, 1997 and December 29, 1996. 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. 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. Stock-Based Compensation In 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123 "Accounting for Stock-Based Compensation", which requires recognition of the value of stock options and warrants granted based on an option pricing model. However, as permitted by SFAS No. 123, the Company continues to account for stock options and warrants granted to directors and employees pursuant to APB Opinion No. 25, "Accounting for Stock Issued to Employees", and related interpretations. See Note 7. 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. Income (loss) per share Income (loss) per share is calculated in accordance with Financial Accounting Standards Board Statement No. 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 December 28, 1997, December 29, 1996 and December 31, 1995. 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 December 28, 1997, December 29, 1996 and December 31, 1995. Impact of Recently Issued Pronouncements Statement of Financial Accounting Standards 130, "Reporting Comprehensive Income" establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is presented with the same prominence as other financial statements. Statement 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, the standard may have on the future financial statement disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. 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 $110,310 as of December 28, 1997. In addition, the Company has significant contingent liabilities for future lease payments on closed restaurant locations as described in Note 4. These issues raise substantial doubt of the Company's ability to continue as a going concern. Management of the Company intends to open Company owned restaurant locations and 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. 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, and a weekly continuing royalty fee of 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 ___________________________________ DECEMBER 28,DECEMBER 29, DECEMBER 31, 1997 1996 1995 ____________________________________ INITIAL FRANCHISE REVENUES $ 50,000 & 20,000 $ 74,375 CONTINUING FRANCHISE REVENUES 291,546 287,549 220,938 TOTAL FRANCHISE REVENUES $ 341,546 $ 307,549 $ 295,313
In November 1995, the Company received $150,000 from a franchisee to prepay franchise fees. The Company recorded the amount received as deferred income and will amortize it to income over the life of the agreement. The balance at December 28, 1997 is $113,520. 3. NOTES AND LEASES RECEIVABLE At December 31, 1995 the Company had a note receivable with a balance of $1,199,114 from its Texas franchisee. A principal shareholder of the Company owns an interest in this entity, and Travis L. Bryant , a former director, owned an interest in this entity until 1994. An offset agreement existed in which the Company could offset any past due amounts on the note against a note payable to Mr. Bryant. During 1996, the balance of the note and related accrued interest was reduced by $118,221 and the Company entered into an agreement with Mr. Bryant whereby the Company assigned its interest in the reduced note to Bryant in full satisfaction of the note payable to him. The reduction of the balance of the note receivable and accrued interest of $118,221 was charged to expense in 1996. In exchange for the note reduction, the Texas franchisee assigned a 2% royalty interest in the sales of certain restaurants to the Company. In connection with the sale of restaurants in the period ended January 2, 1994, the Company received a note for $490,000 with annual installments of principal and interest at prime plus 2% due over five years. The balance of the note at December 29, 1996 was $118,486. The note was repaid in 1997. In connection with the sale of a restaurant in the period ended January 1, 1995, the Company received a note for $262,800. The note bears interest at a rate equal to the greater of prime plus 2% or 9%, adjusted on a quarterly basis. Payments of interest only were required for one year, after which ninety-six monthly payments are required in amounts necessary to amortize the remaining principal balance of the note. The balance of the note receivable at December 28, 1997 and December 29, 1996, was $235,272 and $250,300, respectively. In connection with the sale of a restaurant in the period ended December 29, 1996, the Company received a $294,000 note which bears interest at 10.25%. The note requires annual installments of principal and interest of $76,800 due over four years and a final payment of $76,655. The balance of the note receivable at December 28, 1997 and December 29, 1996 was $234,507 and $278,245, respectively. In connection with the sale of a restaurant in the period ended December 28, 1997, the Company received a $114,200 note which bears interest at the greater of prime plus 2% or 12%. Payments of interest only are required for one year, after which ninety-six monthly payments are required in amounts necessary to amortize the remaining principal balance of the note. The balance of the note was $114,200 at December 28, 1997. Each of the notes that arose from the sales of the various restaurants referred to above are collateralized with certain assets of those restaurants. The Company also leased the restaurant equipment to the purchasers of the restaurants sold in the periods ended December 28, 1997 and January 1, 1995. The leases have been classified as sales-type leases. The net carrying value of the leases receivable at December 28, 1997 and December 29, 1996 is $340,879 and $207,697, respectively. Future lease payments required under these agreements are as follows: Due in fiscal periods ending: January 3, 1999 $ 78,000 January 2, 2000 78,000 December 31, 2000 78,000 December 30, 2001 78,000 December 29, 2002 78,000 Thereafter 173,686 ________ Total 563,686 Less amount representing unearned interest (222,807) ________ $ 340,879
4. COMMITMENTS AND CONTINGENCIES The Company's restaurant buildings and certain equipment are operated under noncancellable operating leases. Terms of these leases extend from 3 to 25 years. Certain leases are guaranteed by former directors. In addition to amounts included 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. As explained in Note 8, most of the Company's remaining restaurants are operated by third parties pursuant to sales agreements and the rental payments are being made by those parties. The following is a summary by periods of future minimum lease payments on the restaurant locations: Fiscal period ending: January 3, 1999 $ 272,384 January 2, 2000 313,790 December 31, 2000 313,790 December 30, 2001 330,280 December 29, 2002 330,280 Thereafter 3,427,475 Total minimum lease payments $ 4,987,999
In addition to the leases discussed above, the Company has assigned to the purchasers the leases of buildings for eight restaurants previously sold. The Company is secondarily liable for the lease payments on these restaurants should the purchasers not fulfill their responsibility under the leases. The future lease payments for these restaurants total approximately $8,660,000 at December 28, 1997. In addition, the Company may be secondarily liable under other leases for restaurants sold in prior years. Total rental expenses for operating leases were $19,129, $28,892, and $31,483 for the periods ended December 28, 1997, December 29, 1996, December 31, 1995, respectively. Subsequent to December 28, 1997, the Company closed its Westlake and Whittier locations and ceased paying rent under the related lease agreements. The Company recorded a loss on the restaurant closures as of December 28, 1997 of $160,790, which represented the book value of the restaurant equipment that was forfeited to the landlords. However, the Westlake and Whittier lease agreements do not expire until the years 2010 and 2011, respectively, and the remaining payments under the lease agreements are approximately $2,200,000 and $1,600,000, respectively. The landlord for the Westlake location has filed a lawsuit against the Company to attempt to recover any losses it may incur. A lawsuit on the Whittier location has not yet been filed but is considered likely. The Company and its legal counsel believe the Company has several courses of action to mitigate any additional liability under the lease agreements, but that the additional liability could range up to a total in excess of $1,000,000 for the two leases. The total future lease payments under these leases are included in the future minimum lease payment schedule above. Also, in March 1998, a former franchisee initiated an action against the Company claiming damages related to losses sustained by the franchisee as a result of a restaurant location operated under a joint venture agreement with the Company. The damages claimed by the franchisee are between $140,000 and $350,000, plus punitive damages. The Company believes the lawsuit to be without merit and intends to vigorously defend itself against the action. The amount of loss, if any, as a result of these three matters cannot presently be determined, however, a provision for litigation expenses of $200,000 has been accrued in the accompanying financial statements. 5. LONG-TERM DEBT Long-term debt at December 29, 1996 consisted of a note payable with a balance of $31,230 that was repaid in 1997. 6. INCOME TAXES There was no income tax provision in 1997, 1996 and 1995 due to the net loss in 1997 and 1996 and the application of tax net operating loss carryforwards in 1995. Deferred income taxes are provided for temporary differences between income tax and financial reporting as of December 28, 1997 and December 29, 1996 as follows:
December 28, December 29, 1997 1996 ________________________ Deferred tax asset: Depreciation $ 165,000 $ 137,000 Net operating loss 231,000 197,000 Accrued settlement - 27,000 Deferral income and rent 251,000 171,000 Valuation allowance (647,000) (532,000) $ $ - -
At December 28, 1997, the Company had net operating loss (NOL) and investment tax credit carryforwards for Federal income tax purposes of approximately $930,000 and $180,000, respectively. Use of these carryforwards (with the exception of approximately $760,000 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 December 28, 1997, December 29, 1996, or December 31, 1995 under either plan. Other Options and Warrants In connection with a transaction with another company in 1991, the Company issued a warrant to acquire 100,000 shares of the Company's common stock at $1.00 per share. This warrant expired unexercised on January 1, 1996. 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 December 28, 1997. 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 December 28, 1997, December 29, 1996 and December 31, 1995:
December 28, December 29, December 31, 1997 1996 1995 Weighted Weighted Weighted Average Average Average Number Exercise Number Exercise Number Exercise of Shares Price of Shares Price of Shares Price Outstanding, beginning of year 4,200,000 .07 4,200,000 .09 4,100,000 .09 Granted to officer and director 100,000 .14 100,000 .17 100,000 .11 Expired - - (100,000) 1.00 - - Exercised - - - - - - ____________ ______________ ____________ Outstanding, 4,300,000 .07 4,200,000 .07 4,200,000 .09 end of year
As of December 28, 1997, 4,300,000 options and warrants were exercisable. If not previously exercised, warrants and options outstanding at December 28, 1997 will expire as follows:
Period Number of Weighted Average Ending 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, December 29, 1996 and December 31, 1995. Pro Forma Stock Based Compensation Disclosures As reflected in Note 1, the Company applies APB Opinion 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 income (loss) and earnings per share would have been changed to the pro forma amounts indicated below. Period Ended December 28, December 29, December 31, 1997 1996 1995 Net income (loss) As reported $(391,198) $(261,334) $13,448 Pro forma (399,558) (276,334) 3,448 Net income (loss) per common share As reported $ (.06) $ (.04) - Pro forma (.06) (.05) -
The fair value of the options granted in 1997, 1996 and 1995 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, December 31, 1997 1996 1995 Expected volatility 132.3% 116.3% 113.7% Risk-free interest rate 5.75% 6.25% 6.25% Expected dividends - - - Expected terms (in years) 6 7 8
8. RESTAURANT SALES AND CLOSURES During the period ended December 28, 1997, the Company sold one restaurant and initially recorded a deferred gain of $252,284, to be amortized into income over the terms of the related note and lease receivable (see Note 3). Additionally, as described in Note 4, the Company closed the Westlake and Whittier locations in March 1998 and recorded a loss on restaurant closure of $160,790 as of December 28, 1997. During the period ended December 29, 1996, the Company sold two restaurants and initially recorded deferred gains totaling $599,421, to be amortized into income over the terms of the related note and lease receivables (see Note 3). In December 1996, the Company foreclosed on the purchaser of one of these restaurants. As a result of the foreclosure, the deferred gain of $395,269 was written off against the related note and lease receivable. During the period ended December 31, 1995, the Company sold two restaurants and a liquor license for a total loss of $8,550. Also in 1995, the Company reached a final settlement on a lease of a closed restaurant in an amount of $86,766 less than had been previously accrued. This amount was recorded as a gain in the year ended December 31, 1995. 9. RELATED PARTY TRANSACTIONS During the period ended December 28, 1997, the Company incurred fees of $69,000 for legal services provided by a law firm associated with a director of the Company. 10. 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 December 28, 1997, accounts receivable totaled $69,830, net of an allowance for doubtful accounts of $49,000. 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 December 28, 1997, cash, accounts 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. The fair values of these instruments approximate book values at December 28, 1997. -----END PRIVACY-ENHANCED MESSAGE-----