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