SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997
For the transition period from to
Commission file number 0-13642
HUDSON'S GRILL OF AMERICA, INC.
(Name of small business issuer in its charter)
California 95-3477313
(State or other jurisdiction of incorporation)(IRS Employer
Identification Number)
16970 Dallas Parkway, Suite 402, Dallas, Texas 75248
(Address of Principal Executive Offices)
Issuer's telephone number, including area code:
(972) 931-9237
Securities registered under Section 12(b) of the Exchange
Act:
None None
(Title of each class) (Name of each exchange on which
registered)
Securities registered under Section 12(g) of the Exchange
Act:
Common Stock
(Title of each class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.
[ ]
State issuer's revenues for its most recent fiscal year.
$795,002
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days. (See definition of affiliate in Rule 12b-2 of the Exchange Act).
Average bid and asked during the week ending 3/27/98 is $0.171875. The Issuer
has 6,056,986 shares outstanding; the market value of the voting stock is
$1,041,044.47.
Note: If determining whether a person is an affiliate will involve an
unreasonable effort and expense, the issuer may calculate the aggregate market
value of the common equity held by non-affiliates on the basis of reasonable
assumptions, if the assumptions are stated.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15 (d) of the Exchange Act after the distribution
of securities under a plan confirmed by a court.
Yes No
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
6,056,986
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held on May 29, 1998, are incorporated by reference into Parts II and III.
PART I
ITEM 1. BUSINESS
Hudson's Grill of America, Inc. (the "Company"), was incorporated on June 11,
1979, in California, and the corporation has undergone several name changes
since then. The Company amended its charter to its current name on June
14, 1991. Currently, the Company operates and franchises Hudson's Grill
Restaurants.
Hudson's Grill Restaurants are full service restaurants which serve lunch and
dinner and a wide range of alcoholic beverages. On December 28, 1997, there
were thirteen (13) Hudson's Grill restaurants; eleven(11) were franchised and
two (2) were in escrow awaiting completion of certain conditions and events.
The two escrowed sales were awaiting governmental approvals of liquor licenses
and governmental consents to transfer assets free of any possible state tax
liens. The company's major focus has been to expand the Hudson's Grill
operations through franchising instead of through ownership, but recently it
has changed its emphasis; it also plans to resume opening and purchasing
Hudson's Grills to operate as company stores. The Hudson's Grill Restaurants
are currently operating in California and Texas. Franchises are currently
under contract in Michigan and Nevada. The Company is actively seeking more
franchises, but the franchise market and the restaurant market are very
competitive. Many other franchisers have substantially more capital, thereby
making it much more difficult to compete against them, and for that reason,
the Company plans to resume opening its own restaurants.
BRIEF SUMMARY OF MAJOR EVENTS OVER THE PAST THREE YEARS.
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.
On March 9, 1998, the Company's subsidiary, Hudson's Grill of Whittier, Inc.,
closed the Hudson's Grill located in Westlake, California, and turned the
premises and furniture, fixtures and equipment over to the landlord prior to
the end of the lease. The lease for premises does not end until December 14,
2010. In April 1998, the Company decided not to re-open the Hudson's Grill in
Whittier, California, because of marginal performance and the expense to
upgrade the restaurant to local and national standards.
In February 1998, the Company's franchisee in Guatemala, closed its Hudson's
Grill restaurant in Guatemala City. 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 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.
The Company formed a 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.
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 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.
In August 1997 the franchisee of the Hudson's Grill located in Hurst, Texas,
closed his restaurant. The franchisee had been in arrears with the Company,
and the Company had notified the franchisee that the Company planned to
terminate his franchise for non-payment of franchise fees. The Company has
subsequently terminated the franchise
In July 1997, Mike Miller and the Company mutually agreed to terminate the
contract of sale for the Hudson's Grill in Westlake, California. A subsidiary
of the Company began to operate the restaurant. The Company's franchise
development and area representation agreements with Dr. S.L. Sethi and with
Jotar, Inc., were also terminated because neither developer had built or was
building the required number of franchised restaurants.
At its annual shareholders meeting held on May 27, 1997, the shareholders of
the Company approved a change in the Company's articles of incorporation to
authorize the issuance of up to 5,000,000 shares of preferred stock.
In May 1997 the Hudson's Grill located on Burnet Road in Austin, Texas, filed
a petition for protection under chapter 11 of the U.S. Bankruptcy Code. The
case was converted to a chapter 7 liquidation in June. The restaurant was
then closed, and the Company has terminated the franchise. Because of
increased competition and less than expected sales, the Company's franchisee
in Paramus, New Jersey, decided to close the Hudson's Grill food court
operation in the Garden State Mall. This was a first time, experimental
location inside a shopping mall.
On April 14, 1997, Mark Myers, of Jackson, Michigan, signed a franchise
agreement with the Company on behalf of Hudson's Grill of Jackson, Inc., a
Michigan corporation. Mr. Myers is a principal of the new franchisee and is
building a Hudson's Grill to be opened sometime in the Summer 1998 in Jackson,
Michigan. The new location is near the Jackson Regional Airport. This has
become the Company's first franchise in Michigan, and it is the first unit
based on the Company's new free standing building design.
Pursuant to an exchange of modifications and of notes, the Company has agreed
in April 1997 to transfer its note from Famous Bars, Grills, and Cafes of
America, Inc. ("Famous"), as payment on the Company's debt to Mr. Travis
Bryant. Prior to the exchange of the Famous note as payment in full to Mr.
Bryant, the Company canceled $118,221 of the Famous note in exchange for the
assignment to the Company by Famous of an additional royalty. The additional
royalty consists of two percent of the gross sales made by four franchises
formerly owned by Famous. The resulting Famous note was for $1,150,845, and
it was used to pay $1,150,845 in obligations owed to Mr. Bryant. This
exchange was made effective December 29, 1996, and the Company took a charge
of $118,221 against general and administrative expenses for canceling the
note.
The Company on January 23, 1997, closed on the sale of its interest in the
Hudson's Grill restaurant located in Pomona, California. It sold its interest
in the restaurant for $114,200 and sold its liquor license for $6,000. The
buyer was Burgers of Diamond Bar, a California general partnership led by Mr.
Mike Miller. The buyer assumed the lease and agreed to lease equipment from
the Company for $2,500 per month for 96 months. The company received $6,000
at closing and a note for $114,200, payable with interest at the greater of
12% or prime plus two percent. The note is interest only for the first year,
and then it will be amortized over the next seven years.
In December 1996, the Company settled a trademark infringement lawsuit against
one of its former franchisees. The former franchisee had operated a Hudson's
Grill in Bend, Oregon, and had been terminated as a franchisee for failure to
pay royalties. The former franchisee's operations have been transferred to
new owners, and it no longer is or looks like a Hudson's Grill restaurant; the
former franchisee agreed to pay more than $31,000 to settle the case.
Also in December 1996, the Company signed its first international franchise.
The franchise, since closed, was located in Guatemala City, Guatemala. The
Company also settled a lawsuit against it by an unpaid vendor of a former
joint venture.
In August 1996, the Company announced two new franchises to open in the
future. The new franchises are to be located in Fullerton, California, and in
Santa Clarita, California. Subsequently, the Fullerton franchisee elected not
to proceed with the operation of a Hudson's Grill restaurant.
On July 17, 1996, the Company closed on the sale of its Hornblower's
restaurant. The sale was pursuant to an agreement for sale signed and
announced in 1995.
On May 28, 1996, the Company's shareholders voted to increase the number of
authorized common shares in the company to 100,000,000 shares.
On December 15, 1995, the Company signed an agreement with Wenza, Inc., and
Jotar, Inc., permitting an annex to an existing franchise location in
California.
In June 1995, the Company agreed to sell its "Hornblowers" restaurant in
Ventura, California. This is the Company's only restaurant that is not a
Hudson's Grill. The purchase price was Three Hundred Thousand Dollars
($300,000), and the purchaser was the current manager.
OPERATIONS AND RESTAURANT STYLE
HUDSON'S:
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
plans to expand through adding franchises, and it is again considering
building Company owned and operated units. 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.
MENU
HUDSON'S:
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.
RESTAURANT DEVELOPMENT
HUDSON'S:
In contrast to its past plans to sell all of its directly owned restaurants,
the Company plans to construct several Hudson's Grill restaurants in the
Dallas, Texas, area to use for demonstration and testing purposes. In
addition to these units and the possible purchase and conversion of several
other restaurants if funds and credit become available, the Company plans to
expand also through adding franchises. An affiliate of the Company signed a
lease at the Keystone Park shopping center in Dallas, Texas, to lease a
freestanding building to be constructed for the Company by the landlord. The
Company would like to have this location open for business by July 1998. The
Company has decided to open several Company owned stores for the training of
new franchisees and experimentation with menu items, ambience, and service.
The new Company owned sites are being planned in response to prospective
franchisees who were concerned that the Company was not directly involved with
at least several operations so that the Company would know and understand the
problems that a franchisee faces. Additionally, the Company would like to
accelerate expansion of the Hudson's Grill concept, and it feels that opening
Company owned restaurants will help.
FRANCHISE AGREEMENTS
HUDSON'S:
The Company has been issued the trademark registrations for two "Hudson's
Grill" logos and for the "Hudson's" name. It has also received registration
of its "Burgers*Shakes*Rock'n Roll" mark. 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 28, 1997, the Company had eleven (11) 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.
EMPLOYEES AND UNIONS:
At December 28, 1997, the Company employed four (4) persons,
who were corporate employees. One of the three employees was employed
part-time.
The Company is not a party to any collective bargaining
agreements.
ITEM 2. PROPERTIES
At December 28, 1997, the Company and its subsidiaries were the primary lessee
under leases for two(2) properties which include its headquarters and one (1)
restaurant in the process of being opened. The leases have varying monthly
rentals and expiration dates, which range from as short as month to month for
its headquarters to up to ten (10) years for Dallas (Richardson), Texas. A
majority of leases provide for a rental based on a percentage of gross sales
against a minimum rent. As of February 1994, the Company closed its previous
headquarters located in Ventura, California, and moved to Dallas, Texas, where
it shares space with its majority shareholder.
As the Company opens more Company owned restaurants, it will become primarily
liable on more leases. In the future, the Company intends to negotiate shorter
initial terms on leases and instead to have multiple options to renew leases in
order to limit its exposure to long term lease payments, especially
if locations are not successful. This will also enable staying at locations
that are successful, but with the exposure of higher rental rates when options
for renewals are exercised.
Substantially all of the Company's restaurant equipment is owned by the
Company; some is leased to franchisees. Currently, the Company has no real
property and has no real estate related investments.
ITEM 3. LEGAL PROCEEDINGS
In March and April 1998, the Company was served with two lawsuits in
California. Mr. and Mrs. Daniel Pearstein have sued the Company alleging that
they are entitled to recover losses sustained by them while they operated the
Hudson's Grill restaurant in Pomona, California. The Company intends to
vigorously defend this lawsuit and believes that it has no merit.
Additionally, the Company was served with a lawsuit by one of its
subsidiaries' former landlord in Westlake, California. A subsidiary of the
Company most recently operated a Hudson's Grill restaurant at the site after
taking over the operations from several previous owners and operators who had
failed at that location. In March 1998 the subsidiary ceased operations at
that location and returned the premises and the furniture, fixtures and
equipment at that site to the landlord. The Company plans to defend the
lawsuit; the landlord has sued the Company alleging that it is a guarantor,
among others, of the lease. The Company will probably ask for offsets for the
fixtures and equipment left behind for the landlord and for indemnification
from the different operators of the site, some or all of whom may not be
solvent. It may also deny liability on other legal theories, some of which
are untested.
ITEM 4. SUBMISSION OF MATTERS OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of security holders of the Company through the
solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 ("NASD")
symbol "HDSG". It has several bulletin board market makers, but it has no
pink sheet market makers. 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 table does not reflect offer prices. 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
Common Stock
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
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 (see Legal Proceedings). 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.
ITEM 7. FINANCIAL STATEMENTS
Attached following Item 13.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND
ACCOUNTING AND FINANCIAL DISCLOSURE
Incorporated by reference from the Proxy Statement (the "Proxy
Statement") to shareholders relating to the annual meeting to
be held May 29, 1998.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; IN COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated by reference from the Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference from the Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Financial Statements; Exhibits
Financial statements are incorporated by reference from Item
7, and are attached following this Item.
Independent Auditor's Reports.
Consolidated Balance Sheets - As of December 28, 1997, and
December 29, 1996
Consolidated Statements of Operations - Years ended December 28, 1997,
December 29, 1996, and December 31, 1995.
Consolidated Statements of Shareholders' Equity (Deficiency)
- - For the Period from January 2, 1995, through December 28,
1997.
Consolidated Statements of Cash Flows - Years ended December 28, 1997,
December 29, 1996, and December 31, 1995.
Notes to Financial Statements.
There are no exhibits.
(b) Reports on Form 8-K
The Company filed two Forms 8-K during the last quarter of
the fiscal year ending December 28, 1997.
1. 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.
2. December 15, 1997. The Company formed a 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.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act,
the registrant caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
(Registrant) HUDSON'S GRILL OF AMERICA, INC.
By:
David Osborn, President
Date: May 5,1998
In accordance with the Exchange Act, this report has been
signed below by the following persons on behalf of the
registrant and the capacities and on the dates indicated.
Signature Title Date
DAVID L. OSBORN Chairman of the
Board and Chief
Executive Officer
and Director
ROBERT W. FISCHER Director
THOMAS SACCO Sr. V.P., and Director
f\sec\980408.O01
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
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
<S> <C> <C>
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
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<S> <C> <C>
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
</TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<S> <C> <C> <C>
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) $ -
</TABLE>
HUDSON'S GRILL OF AMERICA, INC.CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(DEFICIT)
For the Period from January 2, 1995 through December 28, 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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)
</TABLE>
HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
-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:
<TABLE>
<CAPTION>
PERIODS ENDED
___________________________________
DECEMBER 28,DECEMBER 29, DECEMBER 31,
<S> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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:
<TABLE>
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
December 28, December 29,
<S> <C> <C>
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)
$ $
- -
</TABLE>
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:
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Period Number of Weighted Average
Ending Shares Exercise Price
<S> <C> <C>
2003 300,000 .14
2004 4,000,000 .06
__________________
4,300,000 .07
</TABLE>
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
<TABLE>
<S> <C> <C> <C>
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) -
</TABLE>
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
<TABLE>
<S> <C> <C> <C>
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
</TABLE>
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.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE REGISTRANT'S ANNUAL FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 42,401
<SECURITIES> 0
<RECEIVABLES> 69,830
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 235,417
<PP&E> 42,198
<DEPRECIATION> (7,030)
<TOTAL-ASSETS> 1,116,720
<CURRENT-LIABILITIES> 242,229
<BONDS> 0
0
0
<COMMON> 4,456,457
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,116,720
<SALES> 226,009
<TOTAL-REVENUES> 795,002
<CGS> 183,562
<TOTAL-COSTS> 1,267,482
<OTHER-EXPENSES> (81,282)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (672)
<INCOME-PRETAX> (391,198)
<INCOME-TAX> 0
<INCOME-CONTINUING> (391,198)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (391,198)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
