HUDSON'S GRILL OF AMERICA, INC.
1996 ANNUAL REPORT
LETTER TO THE SHAREHOLDERS
To the Shareholders of Hudson's Grill of America, Inc.:
In 1996, Hudson's Grill of America, Inc. (the "Company"),
continued to sell its company owned and operated restaurants and
to focus primarily on being a franchiser of Hudson's Grills.
This has continued the Company's past policy of reducing its
dependence on company operated restaurants and building a greater
territorial base for its sales. The Company currently has
operating franchises in California, Texas, and New Jersey, and
has franchise agreements for new restaurants in Michigan,
Mississippi and Guatemala.
1996 has been a busy year for the Company, especially
regarding franchise development. In March of 1996, the Company's
first franchised restaurant on the East Coast opened in New
Jersey. This Hudson's Grill was also the first "food court"
location, and it opened in the Garden State Mall in Paramus, New
Jersey. In May of 1996, the Company announced that it had
entered into an agreement with Dr. S.L. Sethi, the owner of
Jackie's International, Inc., to develop 40 Hudson's Grills over
a six year period in six Southeastern states. In July of 1996,
the Company closed on the sale of its Hornblower's restaurant in
Ventura, California. In August of 1996, the Company announced
that two new franchises were to open, with one in Fullerton,
California, and the second in Santa Clarita, California. In
December of 1996, the Company agreed to transfer a modified note
owed to it by Famous Bars, Grills and Cafes of America, Inc.
("Famous Grills"), to Travis Bryant as full payment of the
Company's note owed to Mr. Bryant. The note receivable had
previously been modified to reflect an assignment by Famous
Grills to the Company of increased royalty fees associated with
four Hudson's Grills sold by Famous Grills since October of 1995.
Also in December of 1996, the Company signed its first
international franchise, to be located in Guatemala City,
Guatemala. In the same month, the Company reached final
settlement of a lawsuit against it by an unpaid vendor of a
former joint venture operator, and the Company settled a
trademark infringement lawsuit it had filed against one of its
former franchisees, who had operated a Hudson's Grill in Bend,
Oregon.
Since the end of 1996, the Company has announced that it
will seek shareholder approval of an amendment to its articles of
incorporation that reinstates the Company's authority to issue
preferred stock. The Company seeks such authority in order that
it may have flexibility to raise capital and/or acquire assets in
the future. The Company also announced that it had granted six
month extensions to Jackie's International, Inc., and to Jotar,
Inc., to complete their requirements and to stay current in their
franchise development agreements with the Company. In March of
1997, the Copany 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 Ceasar's
franchisee who intends to build and open the new prototype
Hudson's Grill building by the end of the year.
Management has continued to aggressively pursue new
franchises, and has now completed its redesign of a new prototype
of a free standing building, which will reposition the concept in
the marketplace. In conjunction with this new design, which will
be built by several of the new franchisees, the Company has
decided to build and operate a limited number of Company
restaurants in selected locations. The first of these new
Company units should open by the Fall of 1997.
The Company has also begun discussions with a stock
brokerage firm located in Dallas, Texas, and is pursuing
financing that would allow it to accelerate its growth not only
through franchising, but also by the construction and operation
of Company owned units, and/or the acquisition of existing
Hudson's Grill franchises or other restaurants.
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.
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. One new restaurant is located
at a food court in a shopping mall. The average Hudson's Grill
employs approximately forty employees, seventy percent of whom
are part-time employees.
With the exception of the new "food court" location, which
has a limited menu and does not serve alcoholic beverages, the
restaurants have similar operations and offer similar food. The
Company plans to expand primarily through adding franchises, but
it will consider 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 29, 1996, the Company employed three (3)
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 is currently
seeking registration of several older logos and several brand new
ones. 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. As of December 29, 1996, the Company had fourteen
(14) 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.
During 1992, one restaurant was opened in Texas. In 1993,
four additional franchise restaurants opened for business or were
converted from Company owned locations. During 1995, two joint
ventures were sold and became franchises, and the Company entered
into a Franchise Development Agreement with a current franchisee
to open 24 new restaurants in California, New Jersey, and New
York. During 1996, the Company entered into a restaurant
development agreement with Dr. S.L. Sethi to develop 40
restaurants in six Southeastern states. In 1996, the company
signed a franchise agreement with its first international
franchisee, for a restaurant in Guatemala City, Guatemala.
The Company currently has plans to construct several
Hudson's Grill restaurants in the Dallas, Texas, area to use for
demonstration and testing purposes. 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 Exec- Officer or Corp., Fam- Services and
utive Of- Partner ous Bars, Operations
ficer and Grills,
Director and Cafes of
America, Inc.,
and DAC
Associates
D. Marion Wood Director CPA and Wood, Accounting,
Share- Hearn, Management,
holder McClanahan Tax and
& Company Auditing
Services
Thomas A. Sacco Senior Vice Vice- Dalms, Inc. Restaurant
President - President Consulting
Operations
and Fran-
chise Devel-
opment
Mitzy Ferguson Secretary Admini- Hudson's Franchisor of
strative of Am., Restaurants
Inc.
Jane Taylor Treasurer Admini- Hudson's Franchisor of
strative of Am., Restaurants
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 Dealers Automated Quotation System("NASDAQ") symbol
"HDSG". As of March 31, 1997, 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 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
FISCAL YEAR ENDED JANUARY 1, 1995 High Low
First Quarter ended March 31, 1994 3/8 1/8
Second Quarter ended June 30, 1994 1/4 1/16
Third Quarter ended September 30, 1994 3/32 1/16
Fourth Quarter ended December 31, 1994 1/8 1/16
As of March 26, 1997, 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.
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. Prior to the
appointment in December 1993 of Hein + Associates as the
Company's accountants, Deloitte & Touche acted as the Company's
accountants.
Deloitte & Touche was dismissed in December 1993 as the
Company's accountants and replaced by Hein + Associates. Neither
of Deloitte & Touche's reports for its last two year's audits
contained an adverse opinion or disclaimer of opinion, or was
modified as to uncertainty, audit scope, or accounting
principles. The Audit Committee of the Board of Directors
recommended to the Board that Hein + Associates be hired instead
of Deloitte & Touche, and the Directors agreed. The Company did
not have any disagreements with Deloitte & Touche about any
accounting matters, financial statement disclosure, or scope of
audit or procedure. Prior to hiring Hein + Associates, the
Company had not contacted them about what types of opinions they
might make about the Company's financial statements or about any
specific transactions.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF ITS FINANCIAL STATEMENTS
For the year ended December 29, 1996, the Company had a
loss before income taxes and extraordinary items of Two Hundred
Sixty One Thousand Three Hundred Thirty Four Dollars ($261,334).
This compares to a gain before income taxes and extraordinary
items of Thirteen Thousand Four Hundred Forty Eight Dollars
($13,448) for the year ended December 31, 1995, and losses of
Nine Hundred Twenty Six Thousand Nine Hundred Seventy Four
Dollars ($926,974) for the year ended January 1, 1995. For the
year ended December 29, 1996, the Company had a net loss after
taxes and extraordinary items of Two Hundred Sixty One Thousand
Three Hundred Thirty Four Dollars ($261,334). This compares to
net income after taxes and extraordinary items of Thirteen
Thousand Four Hundred Forty Eight Dollars ($13,448)for the year
ended December 31, 1995, and to a net income of One Million One
Hundred Eighty Nine Thousand Two Hundred Sixty One Dollars
($1,189,261) for the year ended January 1, 1995. The net income
for the year ended January 1, 1995, resulted primarily from a
gain on restructuring of troubled debt.
Because the Company intends on becoming primarily a
franchiser, several years ago it began closing poorly performing
restaurants and selling the remaining profitable ones. Losses
due to restaurant closures amounted to Eight Hundred Two Thousand
Seven Hundred Ninety Nine Dollars ($802,799) for the year ended
January 1, 1995, but showed a gain of Eighty Six Thousand Seven
Hundred Sixty Six ($86,766) for the year ended December 31, 1995.
The Company intends to dispose of all of its direct and indirect
restaurant operations as soon as practical so that it will be
solely in the franchising business, before proceeding to build,
buy or operate any Company owned restaurants.
The Company's three remaining restaurants as of December
29, 1996, are all subject to sale agreements, and are all being
operated by their prospective purchasers pending regulatory
approvals and the closings on their agreements.
Now that the Company has sold (or has agreements to sell)
all of its former restaurants, the Company is considering opening
or purchasing several units to use as models and training
facilities for future franchisees.
REVENUES
Because the Company was holding its remaining restaurants
for sale, it had ceased recording sales and expenses from direct
restaurant operations after January 1994. However, because the
Company terminated the joint venture for the Whittier Hudson's
Grill in January, 1995, and operated it as a subsidiary, it once
again recorded sales and expenses for that location for 1995.
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 three remaining restaurants, all
of which are subject to sales contracts, are not operated as
joint ventures but are being operated by their prospective
purchasers. The prospective purchasers are currently paying
royalties and advertising fees even though they are not yet
franchisees, and these fees are being accounted for separately
from the royalties received from franchisees. This non franchise
royalty fee amounted to 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 Seventy Two Thousand Thirty One Dollars ($72,031)
for the year ended January 1, 1995; to Two Hundred Ninety Five
Thousand Three Hundred Twelve Dollars ($295,312) 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. 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), and Twenty Thousand
Dollars($20,000) of the franchise revenues for the year ended
December 29, 1996, were due to one time initial franchise fees.
There were no new initial franchise fees for the year ended
January 1, 1995.
The rest of the franchise revenues were the result of the
weekly continuing royalty fees paid by franchisees. Thus,
continuing franchise revenues increased from Seventy Two Thousand
Thirty One Dollars ($72,031) for the year ended January 1, 1995,
to 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.
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. 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 29, 1996, increased to Seven Hundred Ninety Eight
Thousand Six Hundred Seventy Five Dollars ($798,675) from Four
Hundred Eighty Four Thousand Six Hundred Fifty Six Dollars
($484,656) for the year ended December 31, 1995. For the year
ended January 1, 1995, general and administrative expenses were
Three Hundred Eighty One Thousand One Hundred Eighty Two Dollars
($381,182). The increase in general and administrative expenses
during the past fiscal year results from increases in franchising
activities (e.g., an increase of $39,464.84 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).
As of December 29, 1996, the President of the Company was
not drawing any salary; and until he resigned on March 5, 1997,
the Chief Financial Officer had not drawn any salary. Only the
Secretary of the Company and one administrative assistant are
being compensated full time. The Company is paying for a
consultant whose job it is to increase the number of franchises.
Because of this consulting arrangement, which began in May 1995,
the general and administrative expenses for the years ended
December 29, 1996, December 31, 1995, and January 1, 1995,
increased greatly from the previous year.
Depreciation and amortization, which for the year ended
December 29, 1996, was Fifty Eight Thousand Three Hundred Seventy
One Dollars ($58,371); for the year ended December 31, 1995, was
Eighty Seven Thousand One Hundred Forty Seven Dollars ($87,147);
and was Two Hundred Ninety Seven Thousand Four Hundred Ninety One
Dollars ($297,491) for the year ended January 1, 1995, will
continue to decrease. This primarily decreases to the extent
that furniture, fixtures and equipment are sold to the purchasers
of the Company's restaurants and to the extent restaurants are
closed and written off.
Interest expense has decreased significantly since the year
ended January 1, 1995, but has not changed significantly since
the year ended December 31, 1995. The Company recorded interest
expense of Ninety Six Thousand Seven Hundred Thirty Four Dollars
($96,734) for the year ended December 29, 1996, One Hundred Four
Thousand Two Hundred Twenty Dollars ($104,220) for the year ended
December 31, 1995, and Two Hundred One Thousand Sixty Three
Dollars ($201,063) in the year ended January 1, 1995.
Interest income has increased slightly since the year ended
December 31, 1995. The Company 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 increased from Seventy Two Thousand Five
Hundred Ten Dollars ($72,510) for the year ended December
31,1995, to Eighty Three Thousand Four Hundred one Dollars
($83,401) for the year ended December 29, 1996.
LIQUIDITY AND CAPITAL RESOURCES
At December 29, 1996, the Company had a positive working
capital of One Hundred Seventeen Thousand Four Hundred Twenty
Eight Dollars ($117,428) as compared to a positive working
capital of One Hundred Ninety Five Thousand Five Hundred Six
Dollars ($195,506) at December 31, 1995, and a deficit of Thirty
Six Thousand Seven Hundred Thirty Five Dollars ($36,735) at
January 1, 1995. The decrease is largely due to a decrease in
the current portion of notes receivable (a decrease of $96,166)
that mostly resulted from the transfer of the Company's note from
Famous Bars, Grills and Cafes of America, Inc., as payment of a
debt owed to Mr. Travis Bryant. At the same time, accrued
liabilities increased significantly (an increase of $49,914).
However, these decreases in working capital are offset by an
increase in cash of Thirty Thousand Three Hundred Eighty Five
Dollars ($30,385) and a decrease in the current portion of notes
payable of Twenty Nine Thousand Six Hundred Fifty Seven Dollars
($29,657). Thus, the Company's working capital decreased by
Seventy Eight Thousand Seventy Eight Dollars ($78,078) from the
previous fiscal year end.
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.
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,
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, and Twenty Two Thousand Dollars ($22,000) in
net cash proceeds from the sale of restaurants in the year ended
January 1, 1995. The Company anticipates less cash proceeds in
1997 from the sale of its remaining interests in 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 27, 1994.
Subsequent to December 31, 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 1997, 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 should improve 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, all of which except one in New
Jersey are currently located in California and Texas.
FORM 10-KSB ANNUAL REPORT
A copy of Hudson's 1995 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 1997 Annual Meeting of Stockholders will be held at the
Hudson's Grill of Hurst, 708 Grapevine Highway, Hurst, Texas
76054, on Tuesday, May 27, 1997 at 10:00 a.m. A notice of the
meeting, proxy statement and proxy voting card, 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 29, 1996.
f\sec\970422.O01
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 29, 1996 and December 31,
1995, and the related consolidated statements of operations, shareholders'
equity (deficiency), and cash flows for the periods ended December 29, 1996,
December 31, 1995 and January 1, 1995. 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. and its subsidiaries as of December 29, 1996 and
December 31, 1995, and the results of their operations and their cash flows
for the periods ended December 29, 1996, December 31, 1995, and January 1,
1995 in conformity with generally accepted accounting principles.
The Company is in the process of selling the remainder of its restaurant
operations and is focusing its efforts primarily on franchising activities. As
described in Note 4 to the financial statements, at December 29, 1996 the
Company is the primary obligor for future lease payments on its remaining
restaurant locations and the Company is the secondary obligor for future lease
payments on certain sold locations.
HEIN + ASSOCIATES LLP
February 28, 1997
Dallas, Texas
F- 1
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 29, DECEMBER 31,
1996 1995
CURRENT ASSETS:
Cash and cash equivalents $ 78,680 $ 48,295
Accounts receivable, net of allowance for doubtful
accounts of $22,907 and $0, respectively 66,165 40,379
Current portion of notes and leases receivable 121,055 217,221
Prepaid expenses and other 16,492 24,826
Total current assets 282,392 330,721
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 614,706 662,879
Restaurant equipment 518,674 480,933
Furniture and fixtures 188,507 196,052
Total property and equipment 1,321,887 1,339,864
Less accumulated depreciation and amortization (1,080,338) (1,206,293)
Property and equipment, net 241,549 133,571
LONG-TERM PORTION OF NOTES AND LEASES
RECEIVABLE 748,222 2,053,387
LIQUOR LICENSES, net of accumulated amortization
of $30,000 at December 29, 1996 and $67,085
at December 31, 1995 45,186 156,530
OTHER ASSETS 34,711 49,735
Total assets $ 1,352,060 $ 2,723,944
- - Continued -
F-2
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS, continued
LIABILITIES AND SHAREHOLDERS' EQUITY
DECEMBER 29, DECEMBER 31,
1996 1995
CURRENT LIABILITIES:
Current portion of long-term debt $ 35,542 $ 65,199
Accounts payable 46,922 37,430
Accrued liabilities 82,500 32,586
Total current liabilities 164,964 135,215
LONG-TERM DEBT - 1,172,989
OTHER LONG-TERM LIABILITIES 293,908 422,720
DEFERRED INCOME 612,360 450,858
COMMITMENTS AND CONTINGENCIES (Note 4)
SHAREHOLDERS' EQUITY:
Preferred stock, 1,000,000 shares authorized,
none issued or outstanding
Common stock, no par value, 100,000,000 shares
authorized, 6,056,986 shares issued 4,456,457 4,456,457
and outstanding
Accumulated deficit (4,175,629) (3,914,295)
Total shareholders' equity 280,828 542,162
Total liabilities and shareholders' equity $ 1,352,060 $ 2,723,944
See accompanying notes to these financial statements
F-3
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIODS ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
REVENUES:
Net sales $ 109,806 $ 592,316 $ 44,469
Joint venture revenues 107,662 171,606 489,682
Franchising fees from restaurants under
sales contracts 40,459 - -
Franchising revenues 307,549 295,313 72,031
Equipment lease income 51,439 63,989 48,000
Total revenues 616,915 1,123,224 654,182
COST AND EXPENSES:
Cost of sales 158,111 732,343 175,700
General and administrative 798,675 484,656 381,182
Depreciation and amortization 58,371 87,147 297,491
Total costs and expenses 1,015,157 1,304,146 854,373
Loss from operations (398,242) (180,922) (200,191)
OTHER INCOME (EXPENSE):
Interest expense (96,734) (104,220) (201,063)
Interest and dividend income 180,135 176,730 140,415
Gain (loss) on sales of restaurants (14,266) 21,777 47,751
Gain (loss) on restaurant closures - 86,766 (802,799)
Other 67,773 13,317 88,913
Total other income (expense) 136,908 194,370 (726,783)
INCOME (LOSS) BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM (261,334) 13,448 (926,974)
BENEFIT FOR INCOME TAXES - - 369,002
INCOME (LOSS) BEFORE
EXTRAORDINARY ITEM (261,334) 13,448 (557,972)
Extraordinary gain on restructuring - - 1,747,233
of debt
NET INCOME (LOSS) $ (261,334) $ 13,448 $ 1,189,261
INCOME (LOSS) PER SHARE
Before extraordinary item $ (.04) $ - $ (.06)
Extraordinary item - - .20
Net income (loss) per share $ (.04) $ - $ .14
See accompanying notes to these financial statements
F-4
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
FOR THE PERIOD FROM JANUARY 2, 1994 THROUGH DECEMBER 29, 1996
COMMON STOCK ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
BALANCES, January 2, 1994 6,056,986 $ 4,456,457 $ (5,117,004) $ (660,547)
Net income - - 1,189,261 1,189,261
BALANCES, January 1, 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
See accompanying notes to these financial statements.
F-5
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIODS ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (261,334) $ 13,448 $ 1,189,261
Adjustments to reconcile net
income (loss) to net cash
used by operating activities:
Depreciation and amortization 58,371 87,147 297,491
(Gain) loss on sales and
closures of restaurants 14,266 (108,543) 755,048
Forgiveness of debt, net of
write-off of related assets - - (1,747,233)
Changes in assets and liabilities:
Accounts receivable (113,584) (57,715) 180,030
Inventories - - 86,052
Prepaid expenses and other 218 (11,865) 34,875
Accounts payable 9,493 36,756 (368,144)
Accrued liabilities and other 61,935 (314,674) (729,888)
Net cash used by operating
activities (230,635) (355,446) (302,508)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and
equipment (14,012) - -
Net proceeds from sales of assets 116,821 12,182 22,000
Increase in note receivable - - ( 1,000,000)
Notes receivable principal
payments 160,123 124,204 239,684
Leases receivable principal
payments 85,006 101,300 15,000
Decrease in other assets - 24,409 -
Net cash provided (used)
by investing activities 347,938 262,095 (723,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable - 40,000 -
Repayments of notes payable (86,918) (141,104) (176,028)
Buy down of franchise fees - 150,000 -
Net cash provided (used)
by financing activities (86,918) 48,896 (176,028)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 30,385 (44,455) (1,201,852)
CASH AND CASH EQUIVALENTS, beginning
of period 48,295 92,750 1,294,602
CASH AND CASH EQUIVALENTS, end of
period $ 78,680 $ 48,295 $ 92,750
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 96,734 $ 103,714 $ 102,242
Income taxes paid (recovered) $ - $ - $(369,002)
- -Continued-
F-6
HUDSON'S GRILL OF AMERICA, INC
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
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.
Year Ended January 1, 1995
In connection with the sale of a restaurant and equipment, the Company
received a note receivable of $262,800 and a lease receivable of $223,000.
Liabilities of $2,780,000 were forgiven in a debt restructuring transaction.
See accompanying notes to these financial statements
F-7
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 previously
owned and operated full-service restaurants, primarily in Southern California
and Texas. As of December 29, 1996, the Company has fourteen franchised
restaurants. Additionally, it owns three restaurants, all of which are held
for sale.
The consolidated financial statements include the Company and its wholly-owned
subsidiaries, Equipco, Inc. and Hudson's Grill of Whittier, Inc. All
significant intercompany balances and transactions have been eliminated in
consolidation.
Management is in the process of attempting to sell and franchise the Company's
restaurants and believes that these and other cost cutting actions will assist
the Company in meeting its cash flow requirements over the next twelve months.
Restaurants Held for Sale
As of December 29, 1996, all of the restaurants held for sale are operated
pursuant to sales agreements with prospective purchasers. The Company has
ceased recording operating revenues and expenses on these restaurant
locations, but records franchising and advertising fees from restaurants under
sales contracts and equipment rental fees (see Note 8). The assets of the
restaurants held for sale are primarily property and equipment and liquor
licenses. Management has evaluated the remaining net assets of the restaurants
held for sale and believes the carrying values do not exceed the net
realizable values of those assets. 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
All of the Company's property and equipment is leased under operating leases
to prospective purchasers at 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
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-8
HUDSON'S GRILL OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 common share is computed based upon the weighted average
number of common and common equivalent shares outstanding during the period.
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 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 29,
1996 and December 31, 1995, and 8,845,589 for the period ended January 1,
1995.
Impact of Recently Issued Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and Statement No. 128, "Earnings Per Share".
The Company intends to adopt these standards in 1997. Management believes they
will not have a material impact on the Company's financial statements.
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.
F-9
HUDSON'S GRILL OF AMERICA, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Franchising revenues consisted of:
PERIODS ENDED
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 1995
Initial franchise revenues $ 20,000 $ 74,374 $ -
Continuing franchise revenues 287,549 220,938 72,031
Total franchise revenues $ 307,549 $ 295,312 $ 72,031
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 29, 1996 is $128,983.
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 (see Note 5) owned an
interest in this entity until 1994. Monthly payments of principal and interest
in the amount of $14,006 were required for ten years at which time all
remaining principal and accrued interest was due. The note bore interest at a
rate of 8% per year and was collateralized by restaurant equipment and
improvements. In addition, an offset agreement existed in which the Company
could offset any past due amounts on the note against a note payable to Travis
L. Bryant. During 1996, the balance of this note and related accrued interest
was reduced by $118,221 as described below. In December 1996, the Company
entered into an agreement with Travis L. Bryant whereby the Company assigned
its interest in the reduced note receivable described above to Bryant in full
satisfaction of the note payable to Bryant.
The reduction of the balance of the note receivable and accrued interest of
$118,221 was charged to expense. 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 and December 31, 1995 was $118,486 and $228,409
respectively.
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 was $250,300
at December 29, 1996 and $255,752 at December 31, 1995.
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 29, 1996 is $278,245.
F-10
HUDSON'S GRILL OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 29, 1996, December 31, 1995 and
January 1, 1995. The leases have been classified as sales-type leases. The net
carrying value of the leases receivable at December 29, 1996 and December 31,
1995 is $207,697 and $419,093 respectively.
Future lease payments required under these agreements are as follows:
Due in fiscal periods ending:
January 4, 1998 $ 48,000
January 3, 1999 48,000
January 2, 2000 48,000
January 1, 2001 48,000
December 31, 2001 48,000
Thereafter 155,302
Total 395,302
Less amount representing
unearned interest (187,605)
$ 207,697
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 4, 1998 $ 396,336
January 3, 1999 396,336
January 2, 2000 396,336
January 1, 2001 329,136
December 31, 2001 329,136
Thereafter 4,754,116
Total minimum lease
payments $ 6,601,396
F-11
HUDSON'S GRILL OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the leases discussed above, the Company has assigned to the
purchasers the leases of buildings for six 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 $6,821,792 at
December 29, 1996. In addition, the Company may be secondarily liable under
other leases for restaurants sold in prior years.
Total rental expenses for operating leases were $28,892, $31,483 and $106,426
for the periods ended December 29, 1996, December 31, 1995, and January 1,
1995, respectively.
During 1996, the Company settled a lawsuit with a vendor to the operator of a
former joint venture in which the Company is obligated to pay $58,000 to the
plaintiff in monthly payments until October 1997. If the Company fails to
perform under the payment arrangement above, a stipulated judgement of
$100,000 will be entered by the court and the Company will be liable for the
full amount.
5. LONG-TERM DEBT
Long-term debt at December 29, 1996 and December 31, 1995 is summarized as
follows:
DECEMBER 29, DECEMBER 31,
1996 1995
Note payable to Travis L. Bryant, a former
Company and a former part owner of the
Company's Texas franchisee, monthly interest
payments of $7,696 through November 1995 and
monthly installments of $ 1 4,006 including
interest at 8% through November 2005. (See below
and Note 3.) $ - $ 1,148,110
Note payable to Corona Market Partnership, due
in monthly installments of $5,327, including
interest of 8% through June 1997. 31,230 90,078
Other note payable 4,312 -
Total 35,542 1,238,188
Less current portion (35,542) (65,199)
Long-term debt $ - $ 1,172,989
In the year ended January 1, 1995, Travis L. Bryant formally agreed to reduce
a $3,360,000 note payable to him into a $1,300,000 note due in monthly
installments as described above. In addition, Bryant agreed to forgive certain
other amounts due him by the Company, which totaled approximately $720,000. In
connection with the restructuring transaction, Bryant also received a warrant
to purchase 4,000,000 shares of the Company's common stock at $.0625 per share
anytime over the next ten years. Consummation of the agreement was contingent
on the Company's performance of certain conditions, including the loan of an
additional amount to the Texas franchisee to increase that note receivable
from $300,000 to $1,300,000 (see Note 3) and the compromise and satisfaction
of certain liabilities due lessors of certain closed restaurant locations (see
Note 4). These conditions were satisfied in the year ended January 1, 1995 and
the debt restructure was consummated. The total debt forgiveness of
F-12
HUDSON'S GRILL OF AMERICA, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1,747,233, net of approximately $1,033,000 of the write-off of associated
goodwill, was recorded as an extraordinary item. As discussed in Note 3,
during the year ended December 29, 1996, the Company entered into an agreement
with Bryant whereby the Company assigned the note receivable from the Texas
franchisee to Bryant in full satisfaction of this note payable.
6. INCOME TAXES
There was no income tax provision in 1996 and 1995 due to the net loss in 1996
and the application of tax net operating loss carry forwards in 1995. The
income tax benefit of $369,002 in the period ended January 1, 1995 resulted
from the carry back and receipt of refunds for income tax losses for prior
years. The benefit was not recorded in prior years due to uncertainty of
recovery at that time. The actual tax expense differs from the "expected" tax
expense computed by applying the U.S. Federal corporate tax rate of 34% to
earnings before income taxes for the year ended January 1, 1995 primarily due
to differences between financial reporting and income tax treatment of the
debt restructuring described in Note 5.
Deferred income taxes are provided for temporary differences between income
tax and financial reporting as of December 29, 1996 and December 31, 1995 as
follows:
DECEMBER 29, DECEMBER 31,
1996 1995
Deferred tax asset:
Depreciation $ 137,000 $ 182,000
Net operating loss 197,000 134,000
Accrued settlement 27,000 46,000
Deferral income and rent 171,000 90,000
Valuation allowance (532,000) (452,000)
$ - $ -
At December 29, 1996, the Company had net operating loss (NOL) and investment
tax credit carry forwards for Federal income tax purposes of approximately
$890,000 and $180,000, respectively. Use of these carry forwards (with the
exception of approximately $575,000 of the NOL carry forward) are limited due
to issuance of the warrant described in Note 5.
7. SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
During 1996, the shareholders of the Company increased the Company's
authorized shares of common stock from 10,000,000 shares to 100,000,000
shares.
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
F-13
HUDSON'S GRILL OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
closing bid-ask price on the date of the grant. No options were outstanding as
of December 29, 1996, December 31, 1995 or January 1, 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 described
in Note 5, the Company issued warrants to Travis L. Bryant. The warrants are
exercisable for 4,000,000 shares of common stock at $.0625 per share and
expire in ten years. 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 29, 1996.
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 1996 and 1995 are $.17 and $ .11 per share,
respectively. All the options expire, if not exercised, in 2003.
The following table summarizes the option and warrant activity for the years
ended December 29, 1996, December 31, 1995 and January 1, 1995:
DECEMBER 29, DECEMBER 31, JANUARY 1,
1996 1995 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 4,300,000 .09 4,100,000 .09 100,000 1.00
Granted to:
Officer and
director - - 200,000 .14 - -
Former director 4,000,000 .06
Expired (100,000) 1.00 - - - -
Exercised - - - - - -
Outstanding, end of
year 4,200,000 .07 4,300,000 .09 4,100,000 .09
In addition to the warrants and options in the table above, there are options
to purchase 200,000 shares of common stock which were granted in 1995 and vest
in 1997 and 1998 and expire in 2003. The exercise price will be determined
based on the market value at the time of vesting and therefore these options
are not included in the table above.
F-14
HUDSON'S GRILL OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1996, the Company agreed to issue warrants to a potential franchisor in
connection with the successful development of several restaurants. The
franchisor will be granted 25,000 warrants with an exercise price of $0.09375
per share and a five year term with each successful opening of a franchise
restaurant. There were no warrants granted under this agreement as of December
29, 1996.
As of December 29, 1996, 4,200,000 of the 4,400,000 outstanding options and
warrants were exercisable. If not previously exercised, warrants and options
outstanding at December 29, 1996 will expire as follows:
Number of Weighted Average
Period Ending Shares Exercise Price
2003 200,000 .14
2004 4,000,000 .06
4,200,000
The weighted average exercise price equaled the market price for all warrants
and options granted during the periods ended December 29, 1996, December 31,
1995 and January 1, 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 29, DECEMBER 31,
1996 1995
Net income (loss)
As reported $ (261,334) $ 13,448
Pro forma (276,334) 3,448
Net income (loss) per common share
As reported $ (.04) $ -
Pro forma (.05) -
F- 15
HUDSON'S GRILL OF AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of the options granted in 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 29, 1996 DECEMBER 31,1995
Expected volatility 116.3% 113.7%
Risk-free interest rate 6.25% 6.25%
Expected dividends - -
Expected terms (in years) 7 8
8. RESTAURANT SALES AND CLOSURES
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.
During the period ended January 1, 1995, the Company sold one restaurant and
recorded a deferred gain of $348,782 on the sale, which will be amortized into
income over the terms of the related note and lease receivables (see Note 3).
The balance of the deferred gain at December 29, 1996 and December 31, 1995
was $294,029 and $305,127, respectively.
On January 31, 1994, the Company closed its Irvine restaurant. In connection
with this closure, a loss of $460,000 was recorded as of January 2, 1994 to
write off goodwill and estimate the settlement of lease obligations. An
additional $188,000 of losses related to the closure of the Irvine restaurant
were recorded in the year ended January 1, 1995.
The Company wrote down the carrying value of a restaurant held for sale by
approximately $587,000 during the year ended January 1, 1995 due to diminished
prospects for the sale of the restaurant.
The Company is endeavoring to sell all three of the remaining restaurants
owned as of December 29, 1996 and has granted purchase options for each of
these restaurants. These purchase agreements include certain provisions,
whereby, the future purchasers operate the restaurants and the Company
receives royalty and advertising fees based on the restaurants' sales. In
addition, certain purchasers have agreed to lease in-store assets over the
term of the agreements, which expire upon sale of the restaurants. Based on
the option price provided in these agreements, management does not anticipate
recording a loss on sale of these restaurants.
F-16
HUDSON'S GRILL OF AMERICA, INC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 December 29, 1996, accounts receivable totaled $66,165, net of an allowance
for doubtful accounts of $22,907. 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 29, 1996, 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 29, 1996.
10. SUBSEQUENT EVENTS
In January 1997, the Company closed on the sale of a restaurant located in
California. The sales price of $120,000 will result in a deferred gain of
$71,000 recorded by the Company.
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