HUDSON'S GRILL OF AMERICA, INC.
1997 ANNUAL REPORT
LETTER TO THE SHAREHOLDERS
To the Shareholders of Hudson's Grill of America, Inc.:
In 1997, Hudson's Grill of America, Inc. (the "Company"),
continued to sell its company owned and operated and affiliated
restaurants and to sell franchises. However, it has also begun to
focus again on building new Hudson's Grills through subsidiaries.
A new location is currently under construction in the Dallas area
near the suburb of Richardson, Texas. This has continued the
Company's past policy of building a greater territorial base for
its sales. The Company currently has operating franchises in
California and Texas, and has franchise agreements for new
restaurants in Michigan and Nevada.
1997 has been a busy year for the Company, especially
regarding franchise development. In March of 1997, the Company
announced that it had entered into a development agreement with
Alternate Technologies, Inc. ("ATI"), a company owned by Travis
Bryant, the originator of the Hudson's Grill concept, to build
twenty restaurants in the State of Texas over the next ten years.
And in April of 1997, the Company announced that it had signed a
franchise agreement with Mark Myers of Jackson, Michigan. Mr.
Myers is a former Little Caesar's franchisee who intends to build
and open the new prototype Hudson's Grill building by the end of
the year. In September 1997, a subsidiary of the Company signed a
lease with the Prudential Insurance Company to lease a
freestanding, build-to-suit pad site at the Keystone Park shopping
center located near Richardson, Texas, a suburb of Dallas. This is
the Company's first new restaurant developed since the early
1990's. The Company announced plans to develop more sites into
Company-owned or affiliated restaurants based on its new prototype,
which uses free-standing buildings instead of sites in shopping
strips. The Company expects that the new site will be open for
business in July 1998.
The Company formed another new subsidiary called Hudson's
Grill International, Inc. ("International"), and as of December 1,
1997, most of the Company's assets were transferred to the new
subsidiary; the only liabilities that International assumed were
those associated with the operation of its headquarters in Dallas,
Texas. The subsidiary is incorporated in Texas; the assets that
formerly were operated by the Company essentially have been
transferred to the new subsidiary. This was done to move officially
the Company's operations to Texas from California, to get out from
underneath California rules and regulation, and to give the Company
a fresh start if it should decide to spin the subsidiary off to the
Company's shareholders. This proposal to spin off the subsidiary
will be put to a shareholder vote at the upcoming annual meeting.
On December 19, 1997, the Company announced that it had agreed in
principle with Kirk, Inc., for a new franchise to be located in the
Reno, Nevada, area. Kirk, Inc.'s principal owners are George
Matthews and Kirk Neiderhaus, who currently operate a jet ski and
para sailing business on Lake Tahoe, Nevada. Kirk, Inc., plans to
build a freestanding Hudson's Grill restaurant and to open it in
late 1998 or early 1999.
Since the end of 1997, the Company has announced that on
January 20, 1998, the Company formed an affiliate, Hudson's Grill
of Denton/Trinity, Inc., to operate the Carrollton, Texas, Hudson's
Grill. The former Carrollton franchisee's furniture, fixtures and
equipment had been repossessed and its right to possess the
premises had been terminated by the landlord. Afterward, the
landlord entered into a lease with the Company's affiliate to lease
the premises and the owner of the furniture, fixtures and equipment
entered into a lease with the affiliate also. The affiliate is now
operating the Carrollton restaurant. On April 1, 1998, the Company
signed a franchise agreement with Sharfe, L.L.C., a Michigan
limited liability company, to open a Hudson's Grill in Marquette,
Michigan. The restaurant will be a free standing building and will
be operated by Frank and Jim Stabile.
Although there have been considerable costs associated with
all of these activities, and though the benefits won't be realized
until the new units actually come "on line", Hudson's appears to be
poised to show considerable progress in the coming months, provided
that it can steer clear of problems with past leases, which,
unfortunately, continue to plague the Company.
David L. Osborn
President and Chief Executive
Officer
HUDSON'S GRILLS
Hudson's Grill is a full service, limited menu concept with
alcoholic beverage service. The management teams work with the
philosophy that the customer should be viewed as their "Guest".
They stress quality of product and service, efficient flow of
communications, integrity in job performance and strong employee
morale. These restaurants range in size from 2,500 to 5,500 square
feet. The decor package has the theme of a "Classic Grill of the
50's and 60's", with the front end of a Hudson's automobile coming
through the wall as a main feature. Some restaurants are in free
standing buildings, and some are located within in-line shopping
centers. The average Hudson's Grill employs approximately forty
employees, seventy percent of whom are part-time employees.
The restaurants have similar operations and offer similar
food. The Company's expansion plans now include adding new
franchises, as well as opening a limited number of Company owned
and operated units in the future. Since the restaurant industry is
very competitive, the Company plans to attract loyal patrons by
higher levels of service and more exacting specifications for its
products.
Most Hudson's Grill restaurants open at 11 a.m. and remain
open until midnight, seven days a week, utilizing the same menu
throughout all parts of the day. They specialize in 1/3 pound
hamburgers with the beef patties produced to very exacting
specifications. The menu also features an expanded chicken
sandwich section using top quality chicken breasts and whole wheat
buns. Also on the menu are salads, sandwiches, a variety of
appetizers, fajitas, tacos, and handmade milkshakes and malts.
Cocktails, beer and wine are also available with food. The full
service restaurant concept utilizes booths and tables with waiters
and waitresses serving the guests.
At December 28, 1997, the Company employed four (4) persons,
who were corporate employees. One of the three employees was
employed part-time.
FRANCHISE PROGRAM
The Company has been issued the trademark registration of a
"Hudson's Grill" logo and of the "Hudson's" name. It also has
registered its "Burgers*Shakes*Rock'n Roll" service mark. In the
past, the Company has secured a permit from the California
Department of Corporations to issue Hudson's Grill franchises in
California and uses a Uniform Franchise Offering Circular where
permitted. Beginning in 1998, a subsidiary of the Company will be
securing the permit. As of December 28, 1997, the Company had
thirteen (13) franchised restaurants that were in operation. The
current standard terms to franchise a restaurant are an initial fee
of Twenty Five Thousand Dollars and a royalty of four percent of
sales, and require that three percent of sales be used for
advertising. For these payments, the Company is obligated to do
the following: screen and train potential franchisees, review and
approve sites, and provide an operations manual and assistance.
The Company currently has plans to construct several Hudson's
Grill restaurants in the Dallas, Texas, area to use for
demonstration and testing purposes. One location in Dallas is
currently under construction and is planned to be open on July 1,
1998. Other than these units and the possible purchase and
conversion of several other restaurants if funds and credit become
available, the Company plans to expand mostly through adding
franchises.
OFFICERS AND DIRECTORS
Below are officers and directors of the Company and their primary
employer:
Principal
Occupation Principal
or Name of Business of
Name Position Employment Employer Employer
David L. Osborn Chairman of Chief Southpoint Restaurant
the Board, Executive Management Management
Chief Officer or Corp., Services and
Executive Partner Famous Operations
Officer Bars,
and Grills &
Director Cafes of
America,
Inc., and
DAC Assoc.
Thomas A. Sacco Senior Vice Vice- Dalms, Inc. Restaurant
President - President Consulting
Operations
and
Franchise
Development
and Director
Robert W. Director Attorney Fischer & Legal
Fischer Sanger Services
Mitzy Ferguson Secretary Admini- Hudson's Franchisor of
strative Grill of Restaurants
America,
Inc.
Jane Taylor Treasurer Admini- Hudson's Franchisor of
strative Grill of Restaurants
America,
Inc.
MARKET PRICE AND MARKET INFORMATION
MARKET INFORMATION
The Company's Common Stock, no par value, is traded in the
over-the-counter market and trades under the National Association
of Security ("NASD") symbol "HDSG". As of March 31, 1998, there
were approximately Three Hundred Twenty (320) registered holders of
record of the company's Common Stock (this excludes shareholders
whose stock is held by a nominee or in "streetname", because a
nominee or streetname holder is counted as one registered
shareholder even if a nominee is holding stock for several
shareholders). The following table sets forth the reported high
and low bid prices of the Common Stock for the periods indicated as
regularly quoted by the NASD OTC Bulletin Board. The
over-the-counter market quotations reflect interdealer prices,
without retail mark-up, mark-down or commissions and may not
necessarily represent actual transactions.
FISCAL YEAR ENDED DECEMBER 28, 1997 High Low
First Quarter ended March 31, 1997 3/32 1/32
Second Quarter ended June 30, 1997 3/32 3/32
Third Quarter ended September 30, 1997 3/32 3/32
Fourth Quarter ended December 28, 1997 3/32 3/32
FISCAL YEAR ENDED DECEMBER 29, 1996 High Low
First Quarter ended March 31, 1996 3/32 1/16
Second Quarter ended June 30, 1996 1/8 1/16
Third Quarter ended September 30, 1996 3/16 1/16
Fourth Quarter ended December 31, 1996 1/16 1/32
FISCAL YEAR ENDED DECEMBER 31, 1995 High Low
First Quarter ended March 31, 1995 1/8 1/32
Second Quarter ended June 30, 1995 1/16 .02
Third Quarter ended September 30, 1995 1/16 .02
Fourth Quarter ended December 31, 1995 1/16 .02
As of March 27, 1998, the closing bid price of the Common
Stock was 3/32 of one dollar (nine and 3/8th cents) ($.09375).
This information was obtained from the Stock Quote provided by
"Yahoo" on the Hudson's Grill internet site http://www.hudsonsgrill.com.
and from the National Quotation Bureau, LLC, of New York City, New York.
DIVIDENDS
The Company has not paid cash dividends on its common stock,
and the present policy of the Company's Board of Directors (the
"Board") is to retain earnings attributable to common stock to
provide funds for the operation and expansion of the Company's
business. The Company does not expect to pay cash dividends on its
common stock in the foreseeable future.
ACCOUNTANTS
The Company has invited accountants from Hein + Associates to
be present at the Annual Meeting; therefore they may be present.
If a representative of Hein + Associates is present at the Annual
Meeting of Shareholders, the representative will be allowed to
answer appropriate questions, and will be afforded an opportunity
to make a statement if so desired.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF ITS FINANCIAL STATEMENTS
For the year ended December 28, 1997, the Company had a net
loss of Three Hundred Ninety-one Thousand One Hundred Ninety-eight
Dollars ($391,198). This compares to a net loss of Two Hundred
Sixty One Thousand Three Hundred Thirty Four Dollars ($261,334) for
the year ended December 29, 1996, and net income of Thirteen
Thousand Four Hundred Forty Eight Dollars ($13,448) for the year
ended December 31, 1995. The net income for the year ended December
31, 1995, resulted primarily from interest income and a gain on
restaurant closures. Three hundred Forty-six Thousand Sixty-seven
Dollars ($346,067) of the 1997 losses were attributable to closing
restaurants and setting aside a reserve for litigation expenses
related to leases at former Hudson's Grills; Forty-five Thousand
One Hundred Thirty-one Dollars ($45,131) of the losses are from
ongoing operations.
Several years ago the Company began closing poorly performing
restaurants and selling the remaining profitable ones. Losses due
to restaurant closures amounted to One Hundred Forty-six Thousand
Sixty-seven Dollars ($146,067) for the year ended December 28,
1997, but showed a gain of Eighty Six Thousand Seven Hundred Sixty
Six Dollars ($86,766) for the year ended December 31, 1995. The
gain resulted because in 1995 the Company reached a final
settlement on a lease of a closed restaurant in an amount of
$86,766 less than had been previously accrued. The loss in 1997
resulted primarily from the write-off of One Hundred Thirty
Thousand Seven Hundred Ninety Dollars ($130,790) of equipment and
improvements on the Westlake location, which was abandoned in March
1998.
The Company has disposed of almost all of its direct and
indirect restaurant operations and is almost solely in the
franchising business; beginning in 1997 it is proceeding to build,
buy and operate Company owned restaurants, some of which will be
used as models and training facilities for future franchisees.
REVENUES
Because the Company was holding its remaining restaurants for
sale and those restaurants were operated by third parties under
joint venture agreements, it had no sales or expenses from
restaurant operations after January 1994, except for portions of
each year, during which time the Company operated restaurants that
were temporarily taken back from prospective purchasers of the
restaurants. The Company continued to record only joint venture
revenues for the remaining stores which were operated under joint
venture agreements. These revenues ceased when the last joint
venture stores were sold in 1996. The remaining restaurants which
were subject to sales contracts, are not operated as joint ventures
but are being operated by their prospective purchasers. The
prospective purchasers paid royalties and advertising fees even
though they were not yet franchisees, and these fees are being
accounted for separately from the royalties received from
franchisees. This non franchise royalty fee income amounted to
Fifteen Thousand Five Hundred Seventy-two Dollars ($15,572) in the
year ended December 28, 1997, and were Forty Thousand Four Hundred
Fifty Nine Dollars ($40,459) for the year ended December 29, 1996;
as the sale of these restaurants is completed, the Company does not
expect any future royalties from restaurants under sales contracts,
but rather these fees will be accounted for as normal franchising
revenues.
Franchise revenues should continue to increase as new
franchises are added and as restaurants under sales contracts
become franchises (see above). Franchising revenues have increased
from Two Hundred Ninety Five Thousand Three Hundred Thirteen
Dollars ($295,313) for the year ended December 31, 1995; to Three
Hundred Seven Thousand Five Hundred Forty Nine Dollars ($307,549)
for the year ended December 29, 1996; to Three Hundred Forty-one
Thousand Five Hundred Forty-six ($341,546) for the year ended
December 28, 1997. Seventy Four Thousand Three Hundred Seventy
Four Dollars ($74,374) of the franchise revenues for the year ended
December 31, 1995, were due to one time initial franchise fees of
Twenty Five Thousand Dollars ($25,000) per franchise for three new
franchises(minus minimal costs); Twenty Thousand Dollars ($20,000)
of the franchise revenues for the year ended December 29, 1996,
were due to one time initial franchise fees; and Fifty Thousand
Dollars ($50,000) of the franchise revenues for the year ended
December 28, 1997, were due to one time initial franchise fees.
The rest of the franchise revenues were the result of the
weekly continuing royalty fees paid by franchisees. Thus,
continuing franchise revenues increased from Two Hundred Twenty
Thousand Nine Hundred Thirty Eight Dollars ($220,938) for the year
ended December 31, 1995, to Two Hundred Eighty Seven Thousand Five
Hundred Forty Nine Dollars ($287,549) for the year ended December
29, 1996, to Two Hundred Ninety-one Thousand Five Hundred Forty-six
Dollars ($291,546) for the year ended December 28, 1997.
COSTS AND EXPENSES
Since the Company is and has been selling or closing its
restaurants, an analysis of restaurant costs of sales and of
restaurant operating expenses is no longer meaningful because
almost all of the Company's restaurants have been or are being sold
and converted to franchises, or shut down. Restaurant cost of
sales have risen from the temporary operating of restaurants held
for sale as described above. General and administrative expenses,
and the depreciation and amortization expenses for equipment leased
to restaurants will continue to be important. General and
administrative expenses for the year ended December 28, 1997,
decreased to Seven Hundred Four Thousand Nine Hundred Sixty Dollars
($704,960) from Seven Hundred Ninety Eight Thousand Six Hundred
Seventy Five Dollars ($798,675) for the year ended December 29,
1996. For the year ended December 31, 1995, general and
administrative expenses were Four Hundred Eighty Four Thousand Six
Hundred Fifty Six Dollars ($484,656). The decrease in general and
administrative expenses during the past fiscal year results from a
non-recurring charge to expense of One Hundred Eighteen Thousand
Two Hundred Twenty-one Dollars ($118,221) in 1996 for the reduction
of a note receivable from Famous Bars, Grills and Cafes of America,
Inc. The increase in general and administrative expenses from the
year ended December 31, 1995, to the year ended December 29, 1996
were the result of increases in franchising activities (e.g., an
increase of $39,464 in supplies and advertising), bad debts (e.g.,
$54,860 in royalties and interest owed by restaurants), the
reduction in the Famous Bars, Grills and Cafes of America, Inc.
note ($118,221), and contract services (increased by $74,459).
Under an oral agreement which ended December 31, 1997, the
Company was paying for a consultant whose job it was to increase
the number of franchises and to monitor the franchisees' restaurant
operations. Moreover, the consultant was responsible for
supervising most management and administrative functions of the
Company. The consultant has continued to work for the Company, but
will only be paid a portion of the franchise fees paid by new
franchisees signed by the consultant. This portion of general and
administrative expenses is likely to decrease in the future as the
Company returns to building new restaurants, and as the Company has
less fixed expenses related to the terminated consulting agreement.
Depreciation and amortization, which for the year ended
December 28, 1997, was Thirty-two Thousand Eight Hundred Ninety-
three Dollars ($32,893); for the year ended December 29, 1996, was
Fifty Eight Thousand Three Hundred Seventy One Dollars ($58,371);
and was Eighty Seven Thousand One Hundred Forty Seven Dollars
($87,147) for the year ended December 31, 1995, has decreased to
the extent that furniture, fixtures and equipment have been sold to
the purchasers of the Company's restaurants, to the extent
restaurants have been closed and written off and to the extent that
current furniture, fixtures and equipment age. This expense will
increase in the future as the Company builds and operates its own
restaurants.
Interest expense has decreased significantly since the year
ended December 31, 1995. The Company recorded interest expense of
Six Hundred Seventy-to Dollars ($672) for the year ended December
28, 1997, Ninety Six Thousand Seven Hundred Thirty Four Dollars
($96,734) for the year ended December 29, 1996, and One Hundred
Four Thousand Two Hundred Twenty Dollars ($104,220) in the year
ended December 31, 1995. A large part of the decrease resulted
from the exchange of notes owed to the Company to pay off
obligations owed to Mr. Travis Bryant. The Company had only one
remaining note payable after that exchange, for $35,542, which was
repaid in 1997.
Interest income has decreased significantly since the year
ended December 31, 1995 for the same reason that interest expense
has decreased. The Company received interest income of Eighty-one
Thousand Nine Hundred Fifty-four Dollars ($81,954) in the year
ended December 28, 1997. It received interest income of One
Hundred Eighty Thousand One Hundred Thirty Five Dollars ($180,135)
during the year ended December 29, 1996; this compares to One
Hundred Seventy Six Thousand Seven Hundred Thirty Dollars
($176,730) in interest income for the year ended December 31, 1995.
Thus, the net interest income (interest income minus interest
expense) has remained somewhat stable. In the year ended December
28, 1997, it was Eighty-one Thousand Two Hundred Eighty-two Dollars
($81,282); it was Eighty Three Thousand Four Hundred one Dollars
($83,401) for the year ended December 29, 1996, and it was Seventy
Two Thousand Five Hundred Ten Dollars ($72,510) for the year ended
December 31, 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997, the Company had a negative working
capital of Six Thousand Eight Hundred Thirteen (-$6,813) as
compared to a positive working capital of One Hundred Seventeen
Thousand Four Hundred Twenty Eight Dollars ($117,428) at December
29, 1996, and One Hundred Ninety Five Thousand Five Hundred Six
Dollars ($195,506) at December 31, 1995. The decrease is largely
due to a substantial increase in current liabilities. The increase
in current liabilities was largely the result of a substantial
increase in accrued liabilities to set up a reserve for potential
litigation expenses involving leases of former Hudson's Grills.
After the Company has sold most or all of its restaurants,
changes in its liquidity and capital will depend mostly on initial
franchise fees and from continuing royalty fees received from
franchisees using the Company's trademark and restaurant concept,
rather than on equipment leasing, which should remain stable for
the next several years. As the Company resumes building
restaurants, its liquidity and working capital will again become
more dependent on revenue from direct restaurant operations.
The Company received One Hundred Sixteen Thousand Eight
Hundred Twenty One Dollars ($116,821) in net cash proceeds from the
sale of restaurants in the year ended December 29, 1996, and Twelve
Thousand One Hundred Eighty Two Dollars ($12,182) in net cash
proceeds from the sale of restaurants in the year ended December
31, 1995. The Company received no cash proceeds in 1997 from the
sale of restaurants since most of the remaining sales of
restaurants are to a large extent being financed by the Company
with notes and leases covering furniture, fixtures and equipment.
To the extent that the purchasers of the remaining restaurants pay
their notes and their lease obligations on a timely basis, the
Company's cash resources and liquidity will increase.
In January 1994, the Company reached a tentative agreement
with its largest secured creditor to reduce and restructure the
secured debt owed to the creditor and certain other related
liabilities owed to him. As part of this agreement, the Company
loaned money to an entity formerly affiliated with the creditor,
and received a note in return (the "FGA Note"). The scheduled
payments on the "FGA Note" were approximately equal to the amounts
payable to the secured creditor under the restructured credit
agreement, and payments not received on the "FGA Note" would be
used to offset payments on the note payable to the secured
creditor. This arrangement would help reduce the future cash
requirements of the Company. The revision of the credit agreement
was finalized and completed on June 28, 1994.
In 1995, the company formerly affiliated with the secured
creditor formally requested and obtained from the Company a
modification of the FGA Note; the Company was to forego payments
until February 1996, at which time the entire amount of unpaid
principal and interest would be amortized at 8% over ten years.
Correspondingly, the Company began to exercise its right of offset
on its note payable to the secured creditor. The Company was
assigned several notes receivable with an aggregate face value of
One Million One Hundred Ninety Nine Thousand Dollars($1,199,000) as
additional collateral in connection with this note modification.
On December 29, 1996, the Company agreed to reduce the FGA
note by One Hundred Eighteen Thousand Two Hundred Twenty One
Dollars ($118,221) in exchange for the transfer of an additional
two percent (2%) in royalty fees from four Hudson's Grill
restaurants sold by it since 1995 (one of the restaurants has since
been closed). The reduced FGA Note was then exchanged with the
secured creditor as full payment of the Company's obligations to
the secured creditor. This arrangement improved cash flow by the
amount of additional royalties received from the three Hudson's
Grills formerly owned by FGA.
Until the Company opens or buys other Hudson's Grills, as the
Company sells its remaining interests in restaurants and as these
restaurants are paid off, the Company's revenues will become more
dependent on initial franchise fees and on royalty fees from
franchised restaurants that are opened, all of which are currently
located in California and Texas.
In January 1997, the Company sold its Pomona, California,
restaurant and received a note receivable of $114,200 and a lease
receivable of $240,000. The Company may repossess this location,
which is delinquent in its obligations to the Company as of
December 28, 1997. The Company's net investment in this note
receivable is approximately $33,000 as of December 28, 1997. The
Company believes the restaurant is a sufficiently profitable
location to allow it to recoup its investment should it need to
foreclose.
During 1996 in connection with the sale of its Oxnard,
California, restaurant, the Company received a note receivable of
$282,086 and a lease receivable of $450,000. The note and lease
receivable were re-negotiated during 1996.
A note and lease receivable in the total amount of $195,000
received on account of the sale of the Westlake, California
Hudson's Grill, were foreclosed upon by a the Company and the
location repossessed. This restaurant was resold, and was again
repossessed, and in 1998, the location was closed by a subsidiary
of the Company. The Westlake landlord has recently filed a lawsuit
against the Company, alleging that the Company is a guarantor of
the lease, and asking for unpaid future rent. The Company's liquidity
and resources will be drained to the extent that the Company has to pay
to defend and/or settle this lawsuit. A similar occurrence with a Whittier,
California, landlord may also drain liquidity and resources.
The effects of inflation on the Company are minimal on the
Company; however, the recent rise in the minimum wage has affected
franchisees and as a result the Company has raised the prices
charged for various menu items. To the extent that the Company
owns and opens new restaurants, the increase in minimum wage will
reduce the Company's profitability unless the increased menu prices
produce an increase in revenues equal to or more than the increase
in labor costs.
The Company does not sustain much seasonal volatility in
revenues since its franchisees are dispersed geographically and
climactically.
Since the Company does not rely heavily on computer software
and processing to run its business, problems with changing software
to accommodate the year 2000 and years thereafter are not likely to
have an impact on the Company.
FORM 10-KSB ANNUAL REPORT
A copy of Hudson's 1997 Form 10-KSB Annual Report, as filed
with the Securities and Exchange Commission, is available upon
request to shareholders and beneficial owners of shares in the
Company upon written request addressed to: Hudson's Grill of
America, Inc., 16970 Dallas Parkway, Suite 402, Dallas, Texas
75248.
ADDITIONAL INFORMATION
EXECUTIVE OFFICE
The address for the executive office is:
16970 Dallas Parkway, Suite 402
Dallas, Texas 75248
INDEPENDENT AUDITORS
Hein + Associates
12770 Coit Road, Suite 1150
Dallas, Texas 75251
LEGAL COUNSEL
Fischer & Sanger
5956 Sherry Lane, Suite 1204
Dallas, Texas 75225
REGISTRAR AND TRANSFER AGENT
U. S. Stock Transfer Corporation
1745 Gardena Avenue
Glendale, CA 91204-2991
STOCKHOLDERS MEETING
The 1998 Annual Meeting of Stockholders will be held at the
Hudson's Grill in Carrollton, Texas, located at the Carrollton
Value Center at Old Denton Drive and Trinity Mills (2540 Old Denton
Drive, Suite 314), Carrollton, Texas, on Friday, May 29, 1998, at
10:00 a.m. A notice of the meeting, proxy statement and proxy
voting sheet, have been mailed to stockholders with this Annual
Report.
FINANCIAL STATEMENTS
Attached are the audited financial statements of the Company
for the most recent fiscal year ended December 28, 1997.
INDEPENDENT AUDITOR'S REPORT
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITOR'S REPORT
FOR THE PERIODS ENDED
DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 1995
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Hudson's Grill of America, Inc.
Dallas, Texas
We have audited the accompanying consolidated balance sheets of Hudson's Grill
of America, Inc. and subsidiaries as of December 28,
1997 and December 29, 1996, and the related consolidated statements of
operations, shareholders' equity (deficit), and cash flows for the
periods ended December 28, 1997, December 29, 1996, and December 31, 1995.
These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Hudson's Grill of America, Inc. and its subsidiaries as of December 28, 1997
and December 29, 1996, and the results of their operations
and their cash flows for the periods ended December 28, 1997, December 29,
1996, and December 31, 1995 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company has suffered recurring
losses from operations and currently has a shareholders' deficit
and certain contingent liabilities, which raise substantial doubt about its
ability to continue as a going concern. Management's plans in
regard to these matters are described in Note 1. The financial statements do
not include any adjustments that might result from the
outcome of this uncertainity.
Hein + Associates llp
Certified Public Accountants
March 9, 1998
Dallas, Texas
HUDSON'S GRILL OF AMERICA, INC.CONSOLIDATED BALANCE SHEETS
ASSETS
<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.
