SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
Commission file number 0-13642
HUDSON'S GRILL OF AMERICA, INC.
(Name of small business issuer in its charter)
California
(State or other jurisdiction of incorporation)
95-3477313
(IRS Employer Identification Number)
16970 Dallas Parkway, Suite 402, Dallas, Texas 75248
(Address of Principal Executive Offices)
Issuer's telephone number, including area code:
(972) 931-9743
PAGE
<PAGE>
Check whether the issuer (1) filed all reports
required to be filed by Section 13 or 15(d) of the
Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of
the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the
issuer's classes of common equity, as of the latest
practicable date. 6,056,986
PAGE
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 1996 and December 31, 1995
September 30, December 31,
1996 1995
ASSETS
Current assets:
Cash and cash equivalents $ 122,792 $ 48,295
Accounts receivable, net of allowance
for doubtful accounts of $8,850
at September 30, 1996 and $-0- at
December 31, 1995 47,256 40,379
Current portion of notes and lease
receivable 179,893 217,221
Prepaid expenses and other 14,475 24,826
Total current assets 364,416 330,721
Property and equipment, at cost:
Leasehold improvements 541,238 662,879
Restaurant equipment 556,686 480,933
Furniture and fixtures 174,106 196,052
Total property and equipment 1,272,030 1,339,864
Less accumulated depreciation
and amortization (1,056,358) (1,206,293)
Property and equipment-net 215,672 133,571
Long term portion of notes
and lease receivable 2,382,361 2,053,387
Liquor licenses-net of
accumulated amortization
of $28,126 at September 30, 1996
and $67,085 at December 31, 1995 46,874 156,530
Other assets 42,643 49,735
Total assets $ 3,051,966 $ 2,723,944<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30, 1996 and December 31, 1995
September 30, December 31,
1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 57,287 $ 65,199
Accounts payable 14,074 37,430
Accrued liabilities 1,600 32,586
Total current liabilities 72,961 135,215
Long-term debt 1,141,758 1,172,989
Other long-term liabilities 427,425 422,720
Deferred income 955,480 450,858
Commitments and contingencies
(Note 4)
Shareholders' equity:
Preferred stock, 1,000,000
shares authorized, none
issued or outstanding
Common stock, no par value
100,000,000 shares authorized
6,056,986 shares issued and
outstanding 4,456,457 4,456,457
Accumulated deficit (4,002,115) (3,914,295)
Total shareholders' equity 454,342 542,162
Total liabilities and
and shareholders' equity $3,051,966 $2,723,944
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
September 30, 1996 and September 30,1995
September 30, September 30,
1996 1995
Franchise revenue $ 73,274 $ 50,750
Capital lease income 13,691 16,437
Joint venture revenues 37,584 39,608
124,549 106,795
Costs and expenses:
Restaurant operations - net 3,246 40,671
General and administrative 129,544 118,770
Depreciation and amortization 8,808 20,307
141,598 179,748
Loss from operations (17,049) (72,953)
Interest expense (24,059) (25,295)
Interest income 47,212 38,838
Gain on sale of assets 13,140 7,412
Miscellaneous income 422 5,780
Gain (loss) on store closure 86,766
Net income before
provision for income taxes 19,666 40,548
Provision for income taxes
Net income 19,666 40,548
Net income attributable
to common shares 19,666 40,548
Net income common share $ .0020 $ .0041
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine months ended
September 30, 1996 and September 30,1995
September 30, September 30,
1996 1995
Franchise revenue $ 221,010 $ 198,891
Capital lease income 49,030 51,183
Joint venture revenues 114,405 155,960
384,445 406,034
Costs and expenses:
Restaurant operations - net 47,997 86,517
General and administrative 477,992 367,561
Depreciation and amortization 32,501 66,821
558,490 520,899
Loss from operations (174,045) (114,865)
Interest expense (73,075) (78,220)
Interest income 131,105 125,677
Gain on sale of assets 27,775 13,684
Miscellaneous income 422 10,899
Gain (loss) on store closure 86,766
Net income (loss) before
provision for income taxes (87,818) 43,941
Provision for income taxes
Net income (loss) (87,818) 43,941
Net income (loss) attributable
to common shares (87,818) 43,941
Net income (loss) common share $ (.0145) $ .0044
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the nine months ended
September 30, 1996 and September 30, 1995
September 30, September 30,
1996 1995
Cash flows from operating
activities:
Net income (loss) $ (87,818) $ 43,941
Adjustments to reconcile income (loss)
to net cash flows from operating
activities:
Depreciation and amortization 32,502 66,821
Amortization of deferred income (63,608) (51,907)
Gain on sale of assets (27,775) (13,684)
Other non-cash items 12,375 (132,400)
Net cash provided by (used for)
changes in assets and liabilities:
Accounts receivable (15,726) (24,569)
Prepaid expenses and other 4,264 (16,356)
Accounts payable (23,356) (9,214)
Accrued and other liabilities (16,875) 2,055
Net cash flows from operating activities (186,017) (135,313)
Cash flows from investing activities:
Net proceeds from sale of assets 7,913 12,182
Note receivable principal payments 155,861 84,358
Payments on lease receivables 157,114 80,377
Refund of other assets 4,799 7,787
Net cash flows from investing
activities 325,687 184,704
Net cash flows from financing
activities:
Repayment of notes payable (65,173) (80,801)
Repayment of long term liabilities (82,772)
Proceeds from borrowing 25,000
Net cash flows from financing
activities: (65,173) (138,573)
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D)
For the nine months ended
September 30, 1996 and September 30,1995
September 30, September 30,
1996 1995
Net increase (decrease) in cash 74,497 (89,182)
Cash at beginning of period 48,295 92,750
Cash at end of period $ 122,792 $ 3,568
Supplemental cash flow
information:
Interest paid $ 70,894 $ 78,656
Income taxes paid $ 4,800 $
In the period ended September 30, 1996 - In connection with
the sale of two restaurants, the Company received notes
receivable of $282,087 and $294,000, along with a lease
receivable of $450,000. Also, during this period, notes
and leases receivable in the amount of $157,415 were
exchanged to reacquire restaurant assets to be resold,
and notes and leases receivable in the amount of $108,907
were paid off early by a franchisee.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Hudson's Grill of America, Inc. (the "Company") franchises and
previously owned and operated full-service restaurants, primarily in
Southern California and Texas. As of September 30, 1996, the Company
has fifteen franchised restaurants. Additionally, it owns three
restaurants, all of which are held for sale. (See Notes 2 and 8).
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, Equipco, Inc. and Hudson's Grill of
Whittier, Inc. All significant intercompany balances and transactions
have been eliminated in consolidation.
Management is in the process of attempting to sell and franchise
the Company's restaurants and believes that these and other cost
cutting actions will assist the Company in meeting its cash flow
requirements over the next twelve months.
Restaurants Held for Sale
As of September 30, 1996, all restaurants held for sale are
operated under formal or informal joint venture agreements with
prospective purchasers. The Company has ceased recording operating
revenues and expenses on these restaurant locations, but records joint
venture revenues (see Note 8). One restaurant held for sale was
operated by the Company through mid-March, 1996, following a
foreclosure under a joint venture agreement during 1995. The assets
of the restaurants held for sale are primarily property and equipment
and liquor licenses. Management has evaluated the remaining net
assets of the restaurants held for sale and believes the carrying
values do not exceed the net realizable values of those assets.
Cash and Cash Equivalents
Cash and cash equivalents for purposes of the statement of cash
flows consist of cash and short-term investments purchased with an
original maturity of three months or less.
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
Non-current Assets
All of the Company's property and equipment is leased under
operating leases to prospective purchasers.
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 basis 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.
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
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONT'D)
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Significant items in the accompanying financial statements that
include estimates are notes and leases receivable and lease
contingencies. Actual results could differ materially from those
estimates.
Income (loss) per share
Income (loss) per common share is computed based upon the
weighted average number of common and common equivalent shares
outstanding during the year. 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.
The weighted average number of shares outstanding used in the
income (loss) per share computation was 6,056,986 for the period ended
September 30, 1996 and 10,056,986 for the period ended September 30,
1995.
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:
September 30, September 30,
1996 1995
Initial franchise revenues $ 521 $ 49,374
Continuing franchise
revenues 220,489 149,517
Total franchise revenues $ 221,010 $ 198,891
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
2. FRANCHISE ACTIVITIES (CONT'D)
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 September 30, 1996 is $132,925.
3. NOTES AND LEASES RECEIVABLE
At September 30, 1996 and December 31, 1995, the Company had a
note receivable with a balance of $1,199,114 from its Texas
franchisee. A principal shareholder of the Company owns an interest
in this entity and Travis L. Bryant (see Note 5) owned an interest in
this entity until 1994. Monthly payments of principal and interest
in the amount of $14,006 were required for ten years at which time all
remaining principal and accrued interest was due. The note bears
interest at a rate of 8% per year and is collateralized by restaurant
equipment and improvements. In addition, an offset agreement exists
in which the Company can offset any past due amounts on the note
against a note payable to Travis L. Bryant with a balance of
$1,141,758 and $1,148,110 at September 30, 1996 and December 31, 1995
respectively. See Note 5.
Only three payments were received in 1995 from the Texas
franchisee and were applied to accrued interest. The Company began
to exercise its right of offset on its note payable to Travis L.
Bryant beginning in February 1996. Subsequent to December 31, 1995,
the Company and the Texas franchisee agreed to modify the note by
foregoing payments until February 1997, at which time the entire
amount of unpaid principal and interest is to be amortized at 8% over
ten years. The Company was assigned several notes receivable with an
aggregate face value of $1,199,000 as additional collateral in
connection with the modification agreement. These notes arose from
the sale by the Texas franchisee of four of its restaurants and are
collateralized by the assets of the restaurants.
In connection with the sale of restaurants in the year ended
January 2, 1994, the Company received a note for $490,000 with annual
installments due over four years with the balance due in the fifth
year, plus interest at prime plus 2%. The balance of the note at
September 30, 1996 and December 31, 1995 was $146,335 and $228,409
respectively.
In connection with the sale of a restaurant in the year ended
January 1, 1995, the Company received a note for $262,800.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
3. NOTES AND LEASES RECEIVABLE (CONT'D)
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 were required in amounts necessary to amortize the
remaining principal balance of the note. The Company has agreed to
accept interest only payments from April 1996 through December 1996.
After that time amortization of principal begins again. The balance
of the note was $250,300 at September 30, 1996 and $255,752 at
December 31, 1995.
During the period ended September 30, 1996, the Company had a
note receivable from a franchisee in the amount of $11,111. The note
bore interest at 10% and was payable in equal monthly installments
over a two year period. During the period ended September 30, 1996,
this note was paid off by the franchisee.
In connection with the sale of a restaurant in the year ended
December 31, 1995 the Company received a note for $50,000 with annual
installments of $12,023 over five years including interest at 7.5
percent. During the period ended September 30, 1996, this note was
paid off by the franchisee.
In connection with the sale of a restaurant in January 1996, the
Company received a note for $282,087. The note bears interest at
9.75%. Payments of interest only are required for two years, after
which the balance is due over ten years. The balance of the note was
$282,087 at September 30, 1996.
In the first quarter of 1996 a franchisee breached his franchise
agreement and a restaurant was reacquired by the Company. The Company
agreed to forgive debt in the amount of $157,415 in reacquiring all
assets of the restaurant. The Company immediately joint ventured the
restaurant and it is currently under contract to be sold.
In connection with a restaurant sold July 17, 1996, the Company
received a note for $294,000. The note bears interest at a rate equal
to the greater of prime plus 2% or 9%. The note is amortized over a
period of 48 months with payments of $6,400 per month. At the end of
47 months all remaining unpaid interest and principal is due.
The notes that arose with the sales of the various restaurants
referred to above are collateralized with certain assets of those
restaurants.<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
3. NOTES AND LEASE RECEIVABLE (CONT'D)
The Company also leased the restaurant equipment to the
purchasers of the restaurants sold in the periods September 30, 1996
and December 31, 1995. The leases have been classified as sales-type
leases. During the period ended September 30, 1996 a franchisee paid
off a lease receivable with a net carrying value of $74,581. The net
carrying value of the leases receivable at September 30, 1996 and
December 31, 1995 is $333,033 and $419,093 respectively.
Future lease payments due in fiscal periods ending:
December 29, 1996 $ 19,500
January 4, 1998 78,000
January 3, 1999 78,000
January 2, 2000 78,000
January 1, 2001 78,000
Thereafter 497,225
Total 828,725
Less amount representing
unearned interest (495,692)
$ 333,033
4. COMMITMENTS AND CONTINGENT LIABILITIES
The Company's restaurant buildings and certain equipment are
operated under noncancelable 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
under joint venture agreements and the rental payments are being made
by those parties.
The following is a summary by years of future minimum lease
payments on the restaurant locations:
Fiscal Period Ending:
December 29, 1996 $ 299,898
January 4, 1998 271,680
January 3, 1999 271,680
January 2, 2000 271,680
January 1, 2001 204,480
Thereafter 3,213,412
Total minimum lease payments $4,532,830
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
4. COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D)
In addition to the leases discussed above, the Company has
assigned to the purchasers the leases of buildings for nine of the
restaurants sold in the periods September 30, 1996 and December 31,
1995. 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 $9,804,152 at September 30, 1996. In
addition, the Company may be secondarily liable under other leases for
restaurants sold in prior years.
Total rental expenses for operating leases were $25,746 and
$66,934 for the periods ended September 30, 1996 and September 30,
1995, respectively.
5. LONG-TERM DEBT
Long-term debt at September 30, 1996 and December 31, 1995, which
is collateralized by substantially all of the assets of the Company,
is summarized as follows:
September 30, December 31,
1996 1995
Note payable to Travis L.
Bryant, a former director
of the Company and a former
part owner of a Texas
franchisee; monthly
interest payments of $7,696
through November 1995 and
monthly installments of
$14,006 including interest
at 8% through November 2005.
(See below and Note 3.) $1,141,758 $1,148,110
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
5. LONG-TERM DEBT (CONT'D)
September 30, December 31,
1996 1995
Note payable to Corona Market
Partnership, due in monthly
installments of $5,327,
including interest of 8%
through June 1997. 46,385 90,078
Note payable, due in monthly
installments of $2,240,
including interest at 6%,
through December 1996. 10,902
Total 1,199,045 1,238,188
Less current portion (57,287) (65,199)
Long-term debt $1,141,758 $1,172,989
Principal payments due in the fiscal periods subsequent to
September 30, 1996 are as follows: (following the modification to the
note agreement with a Texas franchisee referred to in Note 3).
Fiscal Period Ending:
December 29, 1996 $ 23,963
January 4, 1998 33,324
January 3, 1999 90,529
January 2, 2000 98,043
January 1, 2001 106,180
Thereafter 847,006
Total $1,199,045
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
5. LONG-TERM DEBT (CONT'D)
In the year ended January 1, 1995, Travis L. Bryant formally
agreed to reduce a $3,360,000 note payable to him into a $1,300,000
note due in monthly installments as described above. In addition,
Bryant agreed to forgive certain other amounts due him by the Company,
which totalled approximately $720,000. In connection with the
restructuring transaction, Bryant also received a warrant to purchase
4,000,000 shares of the Company's common stock at $.0625 per share
anytime over the next ten years. Consummation of the agreement was
contingent on the Company's performance of certain conditions,
including the loan of an additional amount to the Texas franchisee to
increase that note receivable from $300,000 to $1,300,000 (see Note
3) and the compromise and satisfaction of certain liabilities due
lessors of certain closed restaurant locations (See Note 4). These
conditions were satisfied in the year ended January 1, 1995 and the
debt restructure was consummated. The total debt forgiveness of
$1,747,233, net of approximately $1,033,000 of the write-off of
associated goodwill, was recorded as an extraordinary item.
6. INCOME TAXES
There was no federal income tax provision as of
September 30, 1996 due to the application of tax net operating loss
carryforwards. The actual tax expense differs from the "expected" tax
expense computed by applying the U.S. Federal corporate tax rate of
34% to earnings before income taxes primarily due to differences
between financial reporting and income tax treatment of the debt
restructuring described in Note 5.
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
6. INCOME TAXES (CONT'D)
Deferred income taxes are provided for temporary differences
between income tax and financial reporting as of September 30, 1996,
and September 30, 1995 as follows:
September 30, September 30,
1996 1995
Deferred tax asset:
Depreciation $ 182,000 $ 230,000
Net operating loss 134,000 167,000
Accrued settlement 46,000 60,000
Deferral income and rent 36,000
Valuation allowance (398,000) (457,000)
$ $
At September 30, 1996, the Company had net operating loss (NOL)
and investment tax credit carryforwards for Federal income tax
purposes of approximately $824,000 and $200,000, respectively. Use
of these carryforwards (with the exception of approximately $390,000
of the NOL carryforward) were limited due to issuance of the warrant
described in Note 5.
7. SHAREHOLDERS' EQUITY
The Company is authorized to issue 1,000,000 shares of preferred
stock with rights and preferences as designated by the Board of
Directors.
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. In 1993 the shareholders of the Company
approved 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 September 30, 1996
or December 31, 1995 under either plan.
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
7. SHAREHOLDERS EQUITY (CONT'D)
The Company granted options to a consultant 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 price of the shares vested in 1995 is $.11 per share and
$.09 per share for the shares vested in 1996. The options expire, if
not exercised in 2003.
The following summarizes information regarding options granted,
outstanding and exercisable:
Number of Shares Option Price
ISO OTHER DSO Per Share
Outstanding at January 4, 1993 189,750 305,800 $.15-$1.14
Canceled (189,750) (305,800)
Outstanding at January 2, 1994
and January 1, 1995
Granted 400,000 Market price
Outstanding at
September 30, 1996 400,000
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 January 1, 1996.
In January 1994, in connection with a debt restructuring
agreement described in Note 5, the Company issued warrants to Travis
L. Bryant. The warrants are exercisable for 4,000,000 shares of
common stock at $.0625 per share and expire in ten years. The
exercise price approximated the market value of the stock at the time
of grant.
8. RESTAURANT SALES AND CLOSURES
During the year ended January 1, 1995, the Company sold one
restaurant and recorded a deferred gain of $348,782 on the sale, which
will be amortized into income over the terms of the related note and
lease receivables (see Note 3). The balance of the deferred gain at
September 30, 1996 and December 31, 1995 was $294,379 and $305,129
respectively.<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
8. RESTAURANT SALES AND CLOSURES (CONT'D)
During the period ended September 30, 1996 the Company sold one
restaurant and recorded a deferred gain of $342,821 on the sale, which
will be amortized into income over the terms of the related note and
lease receivables (see Note 3). The balance of the deferred gain at
September 30, 1996 was $333,423.
During the period ended September 30, 1996, the Company sold a
second restaurant and recorded a deferred gain of $204,152 on the
sale, which will be amortized into income over the terms of the
related note (see note 3). The balance of the deferred gain at
September 30, 1996, was $194,753.
The Company is endeavoring to sell all remaining restaurants and
has granted purchase options for three of the remaining restaurants
owned. These purchase options also include certain joint venture
provisions, whereby, the future purchasers operate the restaurants and
the Company receives a joint venturer's fee based on sales, net of
certain operating expenses. Based on the option price provided in
these agreements, management does not anticipate recording a loss on
sale of these restaurants.
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 affected 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.
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
9. FINANCIAL INSTRUMENTS (CONT'D)
At September 30, 1996, accounts receivable totalled $47,256 and
the Company has provided an allowance for doubtful accounts of $8,850.
Bad debts were immaterial for 1995 and 1994. The Company performs
periodic credit evaluations on its customers' financial conditions 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 September 30, 1996, cash, accounts receivable and accounts
payable have fair values that approximate book values based on their
short term or demand maturity.
The fair value of notes receivable and notes payable are based
on estimated discounted cash flows. The fair value of these
Instruments approximates book value at September 30, 1996.
<PAGE>
Item 2. Management's Discussion and Analysis.
Net Sales
Franchise revenue increased from $198,891 for the nine months
ended September 30, 1995, to $221,010 for the nine months ended
September 30, 1996. For the comparable 3 month period ending
September 30th, franchise revenue increased to $73,274 in 1996 from
$50,750 in 1995. Net joint venture revenue and capital lease income
was $207,143 in the first nine months of 1995 and decreased to
$163,435 in the first nine months of 1996. During this past year
several of the Company's joint ventures became franchises, and thus
joint venture revenues decreased. For the nine months ended September
30, 1995, the Company had capital lease income of $51,183; capital
lease income decreased slightly in the first nine months of 1996 to
$49,030.
Expenses
Net restaurant operating expenses were $47,997 for the nine
months ended September 30, 1996, compared to $86,517 for the nine
months ended September 30, 1995.
General and administrative expenses for the nine months ended
September 30, 1996, were $477,992 compared to $367,561 for the nine
months ended September 30, 1995. This increase is partially due to
the Company's hiring of a vice president to coordinate new franchising
opportunities and to support existing franchises and the hiring of
another administrative employee.
Depreciation declined in the first nine months of 1996 to $32,501
from 1995's amount of $66,821. This is mostly due to the sales of
Company restaurants.
Liquidity and Capital Resources
The Company had a working capital surplus of approximately
$291,455 as of September 30, 1996, as compared to a surplus of
$195,506 for December 31, 1995. The increase is due to an increase
in cash and a decrease in accounts payable and accrued liabilities.
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On May 30, 1996, Jordano's, Inc., a California corporation, filed
suit against Ron Stayer and against Hudson's Grill of America, Inc.,
in the Superior Court of the State of California in and for the County
of Santa Barbara. The suit is a complaint for money that alleged that
Jordano's provided goods to the Hudson's Grill located in Pomona,
California, and operated by Ronald Stayer, that with interest added
to it amounted to an indebtedness (not including attorney's fees) of
$104,212.52. The suit has been amended and now alleges that the
registrant gave a continuing guarantee of the indebtedness of the
Pomona restaurant and/or is liable as a joint venturer with Mr.
Stayer. The registrant denies any obligation owed to Jordano's based
on the alleged guaranty and has filed an answer to the lawsuit on
November 13, 1996. At the same time, registrant is initiating
discovery in the case. The case is currently set for trial on March
7, 1997.
The registrant continues to be in litigation with its former
franchisee in Bend, Oregon, about trademark and proprietary matters.
The Bend location is no longer operated as a Hudson's Grill and is no
longer operated as a restaurant by the registrant's former franchisee
or by its former principals.
Item 5. Other Information.
The registrant's development agreement with Jackie's
International, Inc., has resulted in the beginning of construction of
Hudson's Grills in the State of Mississippi in the cities of
Vicksburg, Oxford and Greenville. A Hudson's Grill restaurant is also
being built in Santa Clarita, California, by George Miller, a
California sole proprietor. Additionally, sites are under
consideration in Cincinnati, Ohio; Bakersfield, California; Pensacola,
Florida; and Arcadia, California.
The registrant anticipates that it will close on the sale of its
Pomona, California, Hudson's Grill on or before December 1, 1996, to
Burgers of Diamond Bar, a California partnership. The closing on the
sale of the registrant's Hudson's Grill restaurants located in
Whittier, California, and Westlake, California, have been postponed
until a California Board of Equalization lien against the Whittier
property (based on a prior owner) can be resolved.
The registrant has modified its agreements with its Lancaster,
California, franchisee by extending to December 1, 1996, the due date
of certain of the franchisee's payments owed to the registrant. One
of the registrant's two franchises in Austin, Texas, was terminated
on August 27, 1996, for non-payment of royalty fees. The registrant's
Oxnard, California, franchisee and its remaining Austin, Texas,
franchisee are currently delinquent in paying their obligations to the
registrant.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit Index. Following are the exhibits required
under Item 601 of Regulation S-B for Form 10-QSB:
Item 601
Exhibit No. Description Page Number
(2) Plan of Acquisition, Reorgani-
zation, Arrangement, Liquida-
tion, or Succession n/a
(4) Instruments Defining the Rights
of Holders Including Indentures n/a
(6) No Exhibit Required. n/a
(11) Statement Re: Computation of
Per Share Earnings n/a <FN1>
(12) No Exhibit Required. n/a
(15) Letter on Unaudited Interim
Financial Information n/a <FN2>
(18) Letter on Change in Accounting
Principles n/a
(19) Previously Unfiled Documents n/a
(20) Reports Furnished to Security
Holders n/a
(23) Published Report Regarding
Matters Submitted to Vote n/a
(24) Consent of Experts and Counsel n/a
(25) Power of Attorney n/a
(27) Financial Data Schedule attached
(99) Additional Exhibits n/a
<PAGE>
<FN1> No explanation of the computation of per share
earnings on both the primary and fully diluted basis is
necessary because the computation can be clearly
determined from the financial statements.
<FN2> No reports on unaudited interim financial
information has been prepared by the Company's independent
accountants, and therefore, no letter is required from the
Company's independent accountants.
(b) Reports on Form 8-K. The following reports on Form
8-K were filed during the quarter ending September 30, 1996:
1. August 20, 1996. The registrant announced that on July
22, 1996, another Hudson's Grill restaurant was opened. FUN Remco,
Inc., which already operates two other franchises from the Company,
opened its third Hudson's Grill restaurant in California. This new
franchise is in Fullerton in Orange County.
The registrant also entered into another franchise agreement.
George Thomas, a California businessman has signed a franchise
agreement to open a Hudson's Grill in Santa Clarita, California. The
restaurant is under construction and is planned to be open in early
1997; it will be in a freestanding building in a new shopping center
called Solemint Junction
2. July 25, 1996. The registrant announced that on July 17,
1996, the sale of its Hornblowers restaurant in Ventura's Harbor in
Ventura, California, had closed. Kian Farzadam, an individual who has
been cojoint venturer of the restaurant for several years, purchased
the restaurant. Hornblowers has been owned by Hudson's or operated
as a joint venture with the registrant for many years; however, the
restaurant uses a theme that is different from the Hudson's Grills
franchised by the registrant.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant) HUDSON'S GRILL OF AMERICA, INC.
By: s/s David L. Osborn
David L. Osborn, President
Date: November 15, 1996<PAGE>
<PAGE>
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