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 March 31, 1997
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) 931-9237
<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>
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
March 31, December 29,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 60,632 $ 78,680
Accounts receivable, net of allowance
for doubtful accounts of $32,000
and $22,907 respectively 14,477 66,165
Current portion of notes and leases
receivable 199,822 121,055
Prepaid expenses and other 38,136 16,492
Total current assets 313,067 282,392
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements 558,211 614,706
Restaurant equipment 354,480 518,674
Furniture and fixtures 120,149 188,507
Total property and equipment 1,032,840 1,321,887
Less accumulated depreciation
and amortization (832,098) (1,080,338)
Property and equipment, net 200,742 241,549
LONG TERM PORTION OF NOTES
AND LEASES RECEIVABLE 895,404 748,222
LIQUOR LICENSES-net of
accumulated amortization
of $25,500 at March 31, 1997
and $30,000 at December 29, 1996 34,500 45,186
OTHER ASSETS 23,631 34,711
Total assets $ 1,467,344 $ 1,352,060
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
March 31, December 29,
1997 1996
CURRENT LIABILITIES:
Current portion of long-term debt $ 15,771 $ 35,542
Accounts payable 14,618 46,922
Accrued liabilities 46,322 82,500
Total current liabilities 76,711 164,964
LONG-TERM DEBT
OTHER LONG-TERM LIABILITIES 276,954 293,908
DEFERRED INCOME 822,126 612,360
COMMITMENTS AND CONTINGENCIES
(Note 4)
SHAREHOLDERS' EQUITY:
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 (4,164,904) (4,175,629)
Total shareholders' equity 291,553 280,828
Total liabilities and
and shareholders' equity $1,467,344 $1,352,060
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Periods Ended
March 31, March 31,
1997 1996
REVENUES:
Net sales $ $ 109,806
Joint venture revenues 11,811
Franchising fees from restaurants
under sales contracts 8,093 15,965
Franchise revenues 75,988 73,667
Equipment lease income 16,812 16,804
Total revenues 100,893 228,053
COSTS AND EXPENSES:
Cost of sales 146,189
General and administrative 134,234 178,535
Depreciation and amortization 8,299 12,120
Total costs and expenses 142,533 336,844
Loss from operations (41,640) (108,791)
OTHER INCOME (EXPENSE):
Interest expense (566) (24,566)
Interest income 20,357 40,996
Gain on sales of restaurants 16,103 9,375
Other 16,471
Total other income (expense) 52,365 25,805
INCOME (LOSS) BEFORE INCOME TAXES 10,725 (82,986)
Provision for income taxes
NET INCOME (LOSS) $ 10,725 $ (82,986)
INCOME (LOSS) PER SHARE
Net income (loss) per share $ .001 $ (.014)
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
Periods Ended
March 31, March 31,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 10,725 $ (82,986)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 8,299 12,120
(Gain) loss on sales and closures
of restaurants (16,103) (9,375)
Changes in assets and liabilities:
Accounts receivable 29,829 7,231
Prepaid expenses and other 758 (1,396)
Accounts payable (32,305) 14,442
Accrued liabilities and other (59,143) (24,731)
Net cash used by operating
activities (57,940) (84,695)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 4,634 5,230
Notes receivable principal payments 37,106 30,710
Leases receivable principal payments 17,923 25,308
Net cash provided (used) by
investing activities 59,663 61,248
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (19,771) (22,867)
Net cash provided (used) by
financing activities (19,771) (22,867)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (18,048) (46,314)
CASH AND CASH EQUIVALENTS, beginning
of period 78,680 48,295
CASH AND CASH EQUIVALENTS, end
of period $ 60,632 $ 1,981
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 691 $ 24,847
Income taxes paid $ $
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Period ended March 31, 1997
In connection with the sale of a restaurant and equipment, the Company
received a note receivable of $114,200 and a lease receivable of
$240,000.
Period ended March 31, 1996
In connection with the sale of a 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 fixtures and
equipment repossessed.
A note and lease receivable in the total amount of $195,000 were
foreclosed upon by the Company and the location repossessed.
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 March 31, 1997, the Company has
fifteen franchised restaurants. Additionally, it owns two restaurants,
both of which are held for sale.
The consolidated financial statements include the Company and its
wholly-owned subsidiaries, Equipco, Inc. and Hudson's Grill of Whittier,
Inc. All significant intercompany balances and transactions have been
eliminated in consolidation.
Management is in the process of attempting to sell and franchise the
Company's restaurants and believes that these and other cost cutting
actions will assist the Company in meeting its cash flow requirements
over the next twelve months.
Restaurants Held for Sale
As of March 31, 1997, all of the restaurants held for sale are operated
pursuant to sales agreements with prospective purchasers. The Company
has ceased recording operating revenues and expenses on these restaurant
locations, but records franchising and advertising fees from restaurants
under sales contracts and equipment rental fees (see Note 8). The
assets of the restaurants held for sale are primarily property and
equipment and liquor licenses. Management has evaluated the remaining
net assets of the restaurants held for sale and believes the carrying
values do not exceed the net realizable values of those assets.
Previously, certain restaurants held for sale were operated under joint
venture agreements with prospective purchasers.
Cash and Cash Equivalents
Cash and cash equivalents for purposes of reporting the cash flows
consist of cash and short-term investments purchased with an original
maturity of three months or less.
Non-current Assets
Substantially all of the Company's property and equipment is leased
under operating leases to prospective purchasers at March 31, 1997.
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.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
Liquor licenses are recorded at cost and are amortized over ten years.
Revenue Recognition
Initial franchise fees are recognized as revenue when all material
services or conditions relating to the sale have been substantially
performed or satisfied. Continuing franchise fees are recognized as
revenue as the fees are earned and become receivable from the
franchisee.
Income Taxes
Income taxes are provided for the tax effects of transactions reported
in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the financial
and income tax reporting bases of assets and liabilities. The deferred
tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when
the assets and liabilities are recovered or settled.
Stock-Based Compensation
In 1996, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123 "Accounting for Stock-Based Compensation", which requires
recognition of the value of stock options and warrants granted based on
an option pricing model. However, as permitted by SFAS No. 123, the
Company continues to account for stock options and warrants granted to
directors and employees pursuant to APB Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations. See Note 7.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period.
Significant items in the accompanying financial statements that include
estimates are notes and leases receivable and lease contingencies.
Actual results could differ materially from those estimates.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
Income (loss) per share
Income (loss) per common share is computed based upon the weighted
average number of common and common equivalent shares outstanding
during the period. Common equivalent shares are not considered if their
effect is antidilutive. Common stock equivalents consist of outstanding
stock options and warrants. Common stock equivalents are assumed to be
exercised with the related proceeds used to repurchase outstanding
shares except when the effect would be antidilutive. Common equivalent
shares were antidilutive in the periods ended March 31, 1997 and
December 29, 1996.
The weighted average number of shares outstanding used in the
income (loss) per share computation was 10,056,986 for the period ended
March 31, 1997 and 6,056,986 for the period ended March 31, 1996.
Impact of Recently Issued Pronouncements
The Financial Accounting Standards Board (FASB) has issued Statement No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and Statement No. 128, "Earnings Per
Share". The Company intends to adopt these standards in 1997.
Management believes they will not have a material impact on the
Company's financial statements.
2. FRANCHISE ACTIVITIES
In 1991, the Company commenced franchising its Hudson's Grill concept.
Under the terms of the standard franchise agreement, the franchisees are
obligated to pay the Company an initial franchise fee of $25,000, and a
weekly continuing royalty fee of 4% of gross restaurant revenues, and
must spend 3% of gross sales on approved advertising, including a weekly
1% marketing fee contributed to the Company's marketing fund. The
Company is obligated to provide initial training, continuing management
assistance, administration of advertising and sales promotion programs
and establishment and monitoring of a marketing fund. Franchising
revenues consisted of:
March 31, March 31,
1997 1996
Initial franchise revenues $ $ 521
Continuing franchise
revenues 75,988 73,146
Total franchise revenues $ 75,988 $ 73,667
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
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 March 31, 1997 is $125,042.
3. NOTES AND LEASES RECEIVABLE
At December 31, 1995, the Company had a note receivable with a
balance of $1,199,114 from its Texas franchisee. A principal
shareholder of the Company owns an interest in this entity and
Travis L. Bryant (see Note 5) owned an interest in this entity until
1994. Monthly payments of principal and interest in the amount of
$14,006 were required for ten years at which time all remaining
principal and accrued interest was due. The note bore interest at a rate
of 8% per year and was collateralized by restaurant equipment and
improvements. In addition, an offset agreement existed in which the
Company could offset any past due amounts on the note against a note
payable to Travis L. Bryant. During 1996, the balance of this note and
related accrued interest was reduced by $118,221 as described below. In
December 1996, the Company entered into an agreement with Travis L.
Bryant whereby the Company assigned its interest in the reduced note
receivable described above to Bryant in full satisfaction of the note
payable to Bryant.
The reduction of the balance of the note receivable and accrued interest
of $118,221 was charged to expense. In exchange for the note reduction,
the Texas franchisee assigned a 2% royalty interest in the sales of
certain restaurants to the Company.
In connection with the sale of restaurants in the period ended January
2, 1994, the Company received a note for $490,000 with annual
installments of principal and interest at prime plus 2% due over five
years. The balance of the note at March 31, 1997 and December 29, 1996
was $100,000 and $118,486 respectively.
In connection with the sale of a restaurant in the period ended January
1, 1995, the Company received a note for $262,800. The note bears
interest at a rate equal to the greater of prime plus 2% or 9%, adjusted
on a quarterly basis. Payments of interest only were required for one
year, after which ninety-six monthly payments are required in amounts
necessary to amortize the remaining principal balance of the note. The
balance of the note was $245,808 at March 31, 1997 and $250,300 at
December 29, 1996.
In connection with the sale of a restaurant in the period ended
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
December 29, 1996, the Company received a $294,000 note which bears
interest at 10.25%. The note requires annual installments of principal
and interest of $76,800 due over four years and a final payment of
$76,655. The balance of the note receivable at March 31, 1997 was
$266,071 and $278,245 at December 29, 1996.
In connection with the sale of a restaurant in the period ended March
31, 1997, the Company received a $114,200 note which bears interest at
the greater of prime plus 2% or 12.0%. Payments of interest only are
required for one year, after which ninety-six monthly payments are
required in amounts necessary to amortize the remaining principal
balance of the note. The balance of the note receivable at March 31,
1997 was $114,200.
Each of the notes that arose from the sales of the various restaurants
referred to above are collateralized with certain assets of those
restaurants.
The Company also leased the restaurant equipment to the purchasers of
the restaurants sold in the periods ended March 31, 1997 and December
29, 1996. The leases have been classified as sales-type leases. The
net carrying value of the leases receivable at March 31, 1997 and
December 29, 1996 is $356,010 and $207,697 respectively.
Future lease payments required under these agreements are as follows:
Due in fiscal periods ending:
January 4, 1998 $ 58,500
January 3, 1999 78,000
January 2, 2000 78,000
January 1, 2001 78,000
December 31, 2001 78,000
Thereafter 246,880
Total 617,380
Less amount representing
unearned interest (261,370)
$ 356,010
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
4. COMMITMENTS AND CONTINGENCIES
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, all of the Company's remaining
restaurants are operated by third parties pursuant to sales agreements
and the rental payments are being made by those parties.
The following is a summary by periods of future minimum lease payments
on the restaurant locations:
Fiscal Period Ending:
January 4, 1998 $ 297,252
January 3, 1999 396,336
January 2, 2000 396,336
January 1, 2001 329,136
December 31, 2001 329,136
Thereafter 4,754,116
Total minimum lease payments $6,502,312
In addition to the leases discussed above, the Company has assigned to
the purchasers the leases of buildings for seven restaurants previously
sold. The Company is secondarily liable for the lease payments on these
restaurants should the purchasers not fulfill their responsibility under
the leases. The future lease payments for these restaurants total
approximately $6,821,792 at March 31, 1997. In addition, the Company
may be secondarily liable under other leases for restaurants sold in
prior years.
Total rental expenses for operating leases were $3,696 and $22,069 for
the periods ended March 31, 1997 and March 31, 1996, respectively.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements (Cont'd)
During 1996, the Company settled a lawsuit with a vendor to the operator
of a former joint venture in which the Company is obligated to pay
$58,000 to the plaintiff in monthly payments until October 1997. If the
Company fails to perform under the payment arrangement above, a
stipulated judgment of $100,000 will be entered by the court and the
Company will be liable for the full amount. The balance remaining at
March 31, 1997 was $33,000.
5. LONG-TERM DEBT
Long-term debt at March 31, 1997 and December 29, 1996, is summarized as
follows:
March 31, December 29,
1997 1996
Note payable to Corona Market
Partnership, due in monthly
installments of $5,327,
including interest of 8%
through June 1997. $ 15,771 $ 31,230
Other note payable 4,312
Total 15,771 35,542
Less current portion (15,771) (35,542)
Long-term debt $ $
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.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
As discussed in Note 3, during the year ended December 29, 1996, the
Company entered in to an agreement with Bryant whereby the Company
assigned the note receivable from the Texas franchisee to Bryant in full
satisfaction of this note payable.
6. INCOME TAXES
There was no income tax provision at March 31, 1997 or December 29, 1996
due to a loss in 1996 and 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.
Deferred income taxes are provided for temporary differences between
income tax and financial reporting as of March 31, 1997 and December
29, 1996 as follows:
March 31, December 29,
1997 1996
Deferred tax asset:
Depreciation $ 137,000 $ 137,000
Net operating loss 197,000 197,000
Accrued settlement 27,000 27,000
Deferral income and rent 171,000 171,000
Valuation allowance (532,000) (532,000)
$ $
At December 29, 1996, the Company had net operating loss (NOL) and
investment tax credit carryforwards for Federal income tax purposes of
approximately $890,000 and $180,000, respectively. Use of these
carryforwards (with the exception of approximately $575,000 of the NOL
carryforward) is limited due to issuance of the warrant described in
Note 5.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
7. SHAREHOLDERS' EQUITY AND STOCK-BASED COMPENSATION
During 1996, the shareholders of the Company increased the Company's
authorized shares of common stock from 10,000,000 shares to 100,000,000
shares.
Stock Option Plans
The Company has an incentive stock option plan ("ISO") which provides
for the issuance of options to officers, directors and employees to
purchase up to 825,000 shares of the Company's common stock. Options
are exercisable at prices equal to the fair market value of common stock
at the grant date, vest 20% annually and expire generally within five
years. The Company also has a Directors Stock Option Plan ("DSO").
This plan provides for the issuance of up to 200,000 shares of stock to
non-employee directors in increments of 10,000 shares every two years.
Options will be issued at the average of the closing bid- ask price on
the date of the grant. No options were outstanding as of March 31, 1997
or December 29, 1996 under either plan.
Other Options and Warrants
In January 1994, in connection with a debt restructuring agreement
described in Note 5, the Company issued warrants to Travis L. Bryant.
The warrants are exercisable for 4,000,000 shares of common stock at
$.0625 per share and expire in ten years. The exercise price
approximated the market value of the stock at the time of grant. None
of the warrants had been exercised as of March 31, 1997.
During 1995, the Company granted options to an officer to purchase
400,000 shares of common stock with 100,000 shares vesting each year
from 1995 to 1998. The exercise price is the market price at time of
vesting. The exercise price of the shares vested in 1996 and 1995 are
$.17 and $.11 per share, respectively. All the options expire, if not
exercised in 2003.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
The following summarizes the option and warrant activity for the year
ended December 29, 1996:
Weighted
Average
Number of Exercise
Shares Price
Outstanding,
beginning of year 4,300,000 .09
Granted to:
Officer and
director
Former director
Expired (100,000) 1.00
Exercised
Outstanding, end of year 4,200,000 .07
In addition to the warrants and options in the table above, there are
options to purchase 200,000 shares of common stock which were granted in
1995 and vest in 1997 and 1998 and expire in 2003. The exercise price
will be determined based on the market value at the time of vesting and
therefore these options are not included in the table above.
During 1996, the Company agreed to issue warrants to a potential
franchisor in connection with the successful development of several
restaurants. The franchisor will be granted 25,000 warrants with an
exercise price of $.09375 per share and a five year term with each
successful opening of a franchise restaurant. There were no warrants
granted under this agreement as of March 31, 1997.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
As of March 31, 1997 and December 29, 1996, 4,200,000 of the 4,400,000
outstanding options and warrants were exercisable. If not previously
exercised, warrants and options outstanding at March 31, 1997 will
expire as follows:
Number of Weighted Average
Period Ending Shares Exercise Price
2003 200,000 .14
2004 4,000,000 .06
4,200,000
The weighted average exercise price equaled the market price for all
warrants and options granted during the periods ended March 31, 1997 and
December 29, 1996.
Pro Forma Stock Based Compensation Disclosures
As reflected in Note 1, the Company applies APB Opinion No. 25 and
related interpretations in accounting for its stock options.
Accordingly, no compensation cost has been recognized for grants of
options to the employees since the exercise prices were not less than
the fair value of the Company's common stock on the measurement date.
Had compensation been determined based on the fair value at the
measurement dates for awards under those plans consistent with the
method prescribed by SFAS No. 123, the Company's net income (loss) and
earnings per share would have been changed to the pro forma amounts
indicated below:
Period ended
December 29, 1996
Net income (loss)
As reported $ (261,334)
Pro forma (276,334)
Net income (loss) per common share
As reported $ (.04)
Pro forma (.05)
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
The fair value of the options granted in 1996 were estimated on the date
of vesting using the Black-Scholes option-pricing model with the
following weighted assumptions:
Period ended
December 29, 1996
Expected volatility 116.3%
Risk-free interest rate 6.25%
Expected dividends
Expected terms (in years) 7
8. RESTAURANT SALES AND CLOSURES
During the period ended March 31, 1997, the Company sold a restaurant
and initially recorded deferred gain of $232,685 to be amortized into
income over the terms of the related note and lease receivables (see
Note 3). The balance of deferred gain at March 31, 1997 was $229,477.
During the period ended December 29, 1996 the Company sold a restaurant
and initially recorded deferred gain of $204,152 to be amortized into
income over the terms of the related note and lease receivables (see
Note 3). The balance of the deferred gain at March 31, 1997 and
December 29, 1996 was $181,063 and $189,347, respectively.
During the period ended January 1, 1995 the Company sold one restaurant
and recorded a deferred gain of $348,782 on the sale, which will be
amortized into income over the terms of the related note and lease
receivables (see Note 3). The balance of the deferred gain at March 31,
1997 and December 29, 1996 was $286,544 and $294,029, respectively.
The Company is endeavoring to sell both of the remaining restaurants
owned as of March 31, 1997 and has granted purchase options for each of
these restaurants. These purchase agreements include certain
provisions, whereby, the future purchasers operate the restaurants and
the Company receives royalty and advertising fees based on the
restaurants' sales. In addition, certain purchasers have agreed to
lease in-store assets over the term of the agreements, which expire upon
sale of the restaurants. Based on the option price provided in these
agreements, management does not anticipate recording a loss on sale of
these restaurants.
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
9. FINANCIAL INSTRUMENTS
Concentrations of credit risk
Credit risk represents the accounting loss that would be recognized at
the reporting date if counterparties failed completely to perform as
contracted. Concentrations of credit risk (whether on or off balance
sheet) that arise from financial instruments exist for groups of
customers or counterparties when they have similar economic
characteristics that would cause their ability to meet contractual
obligations to be similarly 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.
At March 31, 1997, accounts receivable totaled $14,477 net of an
allowance for doubtful accounts of $32,000. 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 March 31, 1997, cash, accounts receivable and accounts payable have
fair values that approximate book values based on their short term or
demand maturity. The fair values of notes receivable and notes payable
are based on estimated discounted cash flows. The fair values of these
instruments approximates book values at March 31, 1997.
Item 2. Management Discussion and Analysis.
Material changes in the financial condition of the issuer and in the
results of its operations since the end of its last fiscal year and its
results from the comparable period in its last fiscal year include the
following.
The issuer's accounts receivable at March 31, 1997 ("Q1") were
$14,477 as compared to $66,165 at December 29, 1996 ("FYE"). The
current portion of issuer's notes and leases receivable at Q1 was
$199,822 as compared to $121,055 at FYE. Leasehold improvements at Q1
were $558,211, while at FYE they were $614,706. At the same time,
restaurant equipment decreased from $518,674 at FYE to $354,480 at Q1.
The decreases in these last two asset accounts were due mostly from the
sale of a restaurant in the first quarter. For that same reason, the
long term portion of notes receivable increased in the first quarter
from $748,222 to $895,404.
Current liabilities decreased at Q1 to $76,711 from $164,964 at FYE.
The current portion of long term debt, accounts payable, and accrued
liabilities all decreased in Q1, as debts were being paid. Deferred
income increased at Q1 to $822,126 from $612,360 at FYE. This reflects
the sale of a restaurant in Q1.
Material changes in the results of operations of Q1 compared to the
first quarter of 1996 ("Q96") include the following.
Net Sales dropped to $0 in Q1 from $109,806 in Q96, and cost of
sales also dropped to $0 in Q1 from $146,189 in Q96. These are a result
of the sale of restaurant during the last year and because the issuer no
longer recorded the sales of restaurants that were contracted to be
sold.
Since the issuer no longer has any joint ventures, it no longer had
any joint venture income in Q1, whereas it had $11,811 in Q96.
General and administrative expenses decreased in Q1 to $134,234 from
$178,535 in Q96.
The issuer made a profit of $10,725 ($.001 per share) in Q1 as
compared to a loss of $82,986 ($.014 per share) in Q96.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
The registrant incorporates by reference its response in its Form
10-KSB filed with the Securities and Exchange Commission on April 15,
1996. Currently all major litigation involving the registrant has been
settled, and the registrant is not aware of any material litigation in
process.
Item 2. Changes in Securities.
There were no changes in securities or in the rights of the holders
of the registrant's securities during Q1. The shareholders will vote at
the annual shareholders meeting on a resolution to permit the issuance
of preferred shares of stock. Currently, no preferred shares are
authorized. If the resolution is passed, then the issuer will have
authority to issue up to 5,000,000 shares of preferred stock, with
rights to be determined by the directors on a series by series basis.
Item 3. Defaults Upon Senior Securities.
The registrant does not currently have any senior securities.
Consequently, there are no defaults on senior securities.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during Q1.
However, on May 27, 1997, at the annual shareholders meeting,
shareholders will be voting directly and through proxies on the election
of three directors, the appointment of the registrant's auditors, and to
amend the issuer's articles of incorporation to permit the issuance of
preferred shares of stock. Currently, the issuer has only two nominees
for the three director posts; the two running for directorships are
David L. Osborn and Thomas A. Sacco. The results of the voting at the
annual meeting will be disclosed by the filing of a Form 8-K or in the
registrant's next Form 10-QSB.
Item 5. Other Information.
The registrant has been in "off and on" discussions with various
potential franchisees to develop restaurants. No new agreements have
been signed since the signing of the registrant's first franchise in
Michigan, which was announced in April 1997. The registrant also
expects to contract with a regional investment broker with the hope of
raising capital for the registrant. A lease is currently being
negotiated by the registrant as part of a plan to open a company owned
restaurant for the purpose of using the new restaurant as a model and
training site. It may also purchase two restaurants from one of its
franchisees.
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
(28) 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 and
the notes to the financial statements.
<FN2> No reports on unaudited interim financial information have
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 March 31, 1996:
1. January 13, 1997. The Company announced that it had signed
its first international franchise and that it settled its lawsuit with
Jordano's, a liquor wholesale company in California.
2. March 6, 1997. The Company announced that it consummated
its sale of the Pomona, California Hudson's Grill, and that it settled
its case against its former franchisee in Bend, Oregon.
<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: May 15, 1997
elink\filing\10QSB1.971
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S QUARTERLY FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-END> MAR-31-1997
<CASH> 60,632
<SECURITIES> 0
<RECEIVABLES> 14,477
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 313,067
<PP&E> 1,032,840
<DEPRECIATION> 832,098
<TOTAL-ASSETS> 1,467,344
<CURRENT-LIABILITIES> 76,711
<BONDS> 0
0
0
<COMMON> 4,456,457
<OTHER-SE> (4,164,904)
<TOTAL-LIABILITY-AND-EQUITY> 1,467,344
<SALES> 0
<TOTAL-REVENUES> 100,893
<CGS> 0
<TOTAL-COSTS> 142,533
<OTHER-EXPENSES> (52,365)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 566
<INCOME-PRETAX> 10,725
<INCOME-TAX> 0
<INCOME-CONTINUING> 10,725
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,725
<EPS-PRIMARY> .001
<EPS-DILUTED> .001
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