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 June 30, 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>
Item 1. Financial Statements.
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 29,
1997 1996
CURRENT ASSETS:
Cash and cash equivalents $ 58,371 $ 78,680
Accounts receivable, net of allowance
for doubtful accounts of $27,645
and $22,907 respectively 28,611 66,165
Current portion of notes and leases
receivable 200,938 121,055
Prepaid expenses and other 24,392 16,492
Total current assets 312,312 282,392
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 (838,587) (1,080,338)
Property and equipment, net 194,253 241,549
LONG TERM PORTION OF NOTES
AND LEASES RECEIVABLE 870,566 748,222
LIQUOR LICENSES-net of
accumulated amortization
of $27,000 at June 30, 1997
and $30,000 at December 29, 1996 33,000 45,186
OTHER ASSETS 26,116 34,711
Total assets $ 1,436,247 $ 1,352,060
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
June 30, December 29,
1997 1996
CURRENT LIABILITIES:
Current portion of long-term debt $ $ 35,542
Accounts payable 15,203 46,922
Accrued liabilities 31,730 82,500
Total current liabilities 46,933 164,964
LONG-TERM DEBT
OTHER LONG-TERM LIABILITIES 260,000 293,908
DEFERRED INCOME 798,143 612,360
COMMITMENTS AND CONTINGENCIES
(Note 4)
SHAREHOLDERS' EQUITY:
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 (4,125,286) (4,175,629)
Total shareholders' equity 331,171 280,828
Total liabilities and
and shareholders' equity $1,436,247 $1,352,060
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the six months ended
June 30, June 30,
1997 1996
REVENUES:
Net sales $ $ 109,806
Joint venture revenues 26,939
Franchising fees from restaurants
under sales contracts 12,257 49,882
Franchise revenues 182,859 147,736
Equipment lease income 38,042 35,339
Gain on sales of restaurants 36,144 14,635
Other income 34,263
Total revenues 303,565 384,337
COSTS AND EXPENSES:
Cost of sales 154,557
General and administrative 277,426 348,448
Depreciation and amortization 16,303 23,693
Total costs and expenses 293,729 526,698
Income (loss) from operations 9,836 (142,361)
OTHER INCOME (EXPENSE):
Interest expense (672) (49,016)
Interest income 41,179 83,893
Total other income (expense) 40,507 34,877
INCOME (LOSS) BEFORE INCOME TAXES 50,343 (107,484)
Provision for income taxes
NET INCOME (LOSS) $ 50,343 $ (107,484)
INCOME (LOSS) PER SHARE
Net income (loss) per share $ .005 $ (.0178)
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended
June 30, June 30,
1997 1996
REVENUES:
Net sales $ $
Joint venture revenues 15,128
Franchising fees from restaurants
under sales contracts 4,164 33,917
Franchise revenues 106,871 74,069
Equipment lease income 21,230 18,535
Gain on sales of restaurants 20,041 5,260
Other income 17,792
Total revenues 170,098 146,909
COSTS AND EXPENSES:
Cost of sales 8,368
General and administrative 143,192 169,913
Depreciation and amortization 8,004 11,573
Total costs and expenses 151,196 189,854
Income (loss) from operations 18,902 (42,945)
OTHER INCOME (EXPENSE):
Interest expense (106) (24,450)
Interest income 20,822 42,897
Total other income (expense) 20,716 18,447
INCOME (LOSS) BEFORE INCOME TAXES 39,618 (24,498)
Provision for income taxes
NET INCOME (LOSS) $ 39,618 $ (24,498)
INCOME (LOSS) PER SHARE
Net income (loss) per share $ .004 $ (.004)
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the six months ended
June 30, June 30,
1997 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 50,343 $ (107,484)
Adjustments to reconcile net income
(loss) to net cash used by operating
activities:
Depreciation and amortization 16,303 23,693
(Gain) loss on sales and closures
of restaurants (36,144) (14,635)
Changes in assets and liabilities:
Accounts receivable 28,470 1,554
Prepaid expenses and other 574 6,548
Accounts payable (31,720) 14,092
Accrued liabilities and other (107,718) (54,542)
Net cash used by operating
activities (79,892) (130,774)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of assets 4,634 5,230
Notes receivable principal payments 53,991 80,415
Leases receivable principal payments 36,500 61,038
Net cash provided (used) by
investing activities 95,125 146,683
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of notes payable (35,542) (43,825)
Net cash provided (used) by
financing activities (35,542) (43,825)
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (20,309) (27,916)
CASH AND CASH EQUIVALENTS, beginning
of period 78,680 48,295
CASH AND CASH EQUIVALENTS, end
of period $ 58,371 $ 20,379
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 902 $ 47,225
Income taxes paid $ $ 2,400
HUDSON'S GRILL OF AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
SUPPLEMENTAL DISCLOSURES OF NON-CASH TRANSACTIONS:
Period ended June 30, 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 June 30, 1996
In connection with the sale of the Oxnard, CA 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 relating to the
Westlake, CA restaurant 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 June 30, 1997, the Company has thirteen
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 June 30, 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 June 30, 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 June 30, 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 June 30,
1997 and 6,056,986 for the period ended June 30, 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:
June 30, June 30,
1997 1996
Initial franchise revenues $ 25,000 $ 521
Continuing franchise
revenues 157,859 147,215
Total franchise revenues $ 182,859 $ 147,736
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 June 30, 1997 is $121,101.
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 June 30, 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 $241,410 at June 30, 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 June 30, 1997 was $253,583 and
$278,245 at December 29, 1996.
In connection with the sale of a restaurant in the period ended June 30,
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 June 30, 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 June 30, 1997 and December 29, 1996.
The leases have been classified as sales-type leases. The net carrying
value of the leases receivable at June 30, 1997 and December 29, 1996 is
$350,997 and $207,697 respectively.
Future lease payments required under these agreements are as follows:
Due in fiscal periods ending:
January 4, 1998 $ 39,921
January 3, 1999 78,000
January 2, 2000 78,000
January 1, 2001 78,000
December 31, 2001 78,000
Thereafter 246,880
Total 598,801
Less amount representing
unearned interest (247,804)
$ 350,997
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 $ 107,258
January 3, 1999 214,416
January 2, 2000 214,416
January 1, 2001 214,416
December 31, 2001 225,636
Thereafter 3,021,434
Total minimum lease payments $3,997,576
In addition to the leases discussed above, the Company has assigned to the
purchasers the leases of buildings for eight restaurants previously sold.
The Company is secondarily liable for the lease payments on these
restaurants should the purchasers not fulfill their responsibility under
the leases. The future lease payments for these restaurants total
approximately $8,989,406 at June 30, 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 $8,832 and $23,355 for the
periods ended June 30, 1997 and June 30, 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 June 30, 1997 was $18,000.
5. LONG-TERM DEBT
Long-term debt at June 30, 1997 and December 29, 1996, is summarized as
follows:
June 30, December 29,
1997 1996
Note payable to Corona Market
Partnership, due in monthly
installments of $5,327,
including interest of 8%
through June 1997. $ $ 31,230
Other note payable 4,312
Total 35,542
Less current portion (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 June 30, 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 June 30, 1997 and December 29, 1996 as
follows:
June 30, December 29,
1997 1996
Deferred tax asset:
Depreciation $ 134,000 $ 137,000
Net operating loss 197,000 197,000
Accrued settlement 27,000 27,000
Deferral income and rent 157,000 171,000
Valuation allowance (515,000) (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.
During 1997, the shareholders of the Company granted the Company the
authority to issue up to 5,000,000 shares of preferred stock.
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 June 30, 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 June 30, 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 1997, 1996, and 1995 are $.14, $.17,
and $.11 per share, respectively. All the options expire, if not exercised
in 2003.
<PAGE>
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
The following summarizes the option and warrant activity for the period
ended June 30, 1997:
Weighted
Average
Number of Exercise
Shares Price
Outstanding,
beginning of year 4,300,000 .07
Granted to:
Officer and
director
Former director
Exercised
Outstanding, June 30, 1997 4,300,000 .07
In addition to the warrants and options in the table above, there are
options to purchase 100,000 shares of common stock which were granted in
1995 and vest in 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 was to 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. This agreement was terminated before any warrants
were granted.
As of June 30, 1997, 4,300,000 of the 4,400,000 outstanding options and
warrants were exercisable. If not previously exercised, warrants and
options outstanding at June 30, 1997 will expire as follows:
Number of Weighted Average
Period Ending Shares Exercise Price
2003 300,000 .14
2004 4,000,000 .06
4,300,000
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
The weighted average exercise price equaled the market price for all
warrants and options granted during the periods ended June 30, 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)
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
HUDSON'S GRILL OF AMERICA, INC.
Notes to Consolidated Financial Statements
8. RESTAURANT SALES AND CLOSURES
During the period ended June 30, 1997, a franchisee in Austin, Texas closed
its restaurant. An experimental food court location in Paramus, New Jersey
also closed in June, 1997. Revenues recognized for these locations for the
period ended June 30, 1997 were $10,399 and $2,866, respectively.
During the period ended June 30, 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 June 30, 1997 was $224,664.
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 June 30, 1997 and December 29, 1996 was
$172,565 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 June 30, 1997 and December
29, 1996 was $279,813 and $294,029, respectively.
The Company is endeavoring to sell both of the remaining restaurants owned
as of June 30, 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 June 30, 1997, accounts receivable totaled $28,611 net of an allowance
for doubtful accounts of $27,645. 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 June 30, 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 June 30, 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 June 30, 1997 ("Q2") were
$28,611 as compared to $66,165 at December 29, 1996 ("FYE"). The
current portion of issuer's notes and leases receivable at Q2 was
$200,938 as compared to $121,055 at FYE. Leasehold improvements at Q2
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 Q2.
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 $870,566.
Current liabilities decreased at Q2 to $46,933 from $164,964 at FYE.
The current portion of long term debt, accounts payable, and accrued
liabilities all decreased in Q2, as debts were being paid. Deferred
income increased at Q2 to $798,143 from $612,360 at FYE. This reflects
the sale of a restaurant in the first quarter.
Material changes in the results of operations of Q2 compared to the
second quarter of 1996 ("Q96") include the following.
Net Sales dropped to $0 in Q2 from $15,128 in Q96, and cost of
sales also dropped to $0 in Q2 from $8,368 in Q96. These are a result
of the sale of restaurants during the last year and because the issuer no
longer recorded the sales of restaurants that were contracted to be
sold.
General and administrative expenses decreased in Q2 to $143,192 from
$169,913 in Q96. Interest expense decreased to $106 in Q2 from $24,450
in Q96 as various notes have been paid off during the past year.
The issuer made a profit of $39,618 ($.004 per share) in Q2 as
compared to a loss of $24,498 ($.004 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,
1997. 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 was one change in securities or in the rights of the holders
of the registrant's securities during Q2. At the annual shareholders
meeting, the shareholders passed a resolution to permit the issuance
of preferred shares of stock. At the time, no preferred shares were
authorized. Since the resolution passed, 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.
Several matters were submitted to a vote of security holders during
Q2. On May 27, 1997, at the annual shareholders meeting,
shareholders voted 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. At the time, the issuer had only two nominees
for the three director posts; the two running for directorships were
David L. Osborn and Thomas A. Sacco. As a result of the votes, David
Osborn and Thomas Sacco were elected as directors, Hein + Associates were
appointed as the Company's auditors, and the Company's articles were
amended to authorize the issuance of up to 5,000,000 shares of
preferred stock. Since the annual meeting, the Company's directors
have filled the third directorship; the Company's outside counsel,
Robert W. Fischer, Esq., was elected a director in July 1997.
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 has
contracted with a regional investment broker with the hope of
raising capital for the registrant. A private placement memorandum has
been prepared for delivery to prospective investors in the registrant.
A lease has been signed 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. The lease is conditioned on the registrant's
receipt of financing for its furniture, fixtures and equipment for the
restaurant. It may also purchase two restaurants from a franchisee that
is affiliated with the registrant's`president, Mr. Osborn.
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 June 30, 1996:
1. April 18, 1997. The Company announced that its Chief Financial
Officer, D. Marion Wood, had resigned; the directors had recommended a
vote to amend the registrant's articles to authorize the issuance of
preferred shares of stock; it had begun negotiations with an investment
banker to raise funds; it had exchanged a note to pay off a note
payable; and that it had signed a new development agreement for parts
of Texas.
2. June 6, 1997. The Company signed an agreement for investment
banking services to be provided to it by Rauscher Pierce Refnes, a Dallas,
Texas, regional investment banker. It also announced that the Company had
approved an amendment to its articles authorizing the issuance of up
to 5,000,000 shares of preferred stock and also had elected David Osborn
and Thomas Sacco as directors of the Company.
3. July 21, 1997. The Company announced that its directors had
voted Robert Fischer to fill a vacancy on the Company's board of
directors; it also announced various news items about potential new
franchisees, former franchisees, former developers, and Company
restaurants for sale.
<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: August 15, 1997
elink\filing\10QSB1.972
<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> 6-MOS
<FISCAL-YEAR-END> JAN-04-1998
<PERIOD-END> JUN-30-1997
<CASH> 58,371
<SECURITIES> 0
<RECEIVABLES> 28,611
<ALLOWANCES> 27,645
<INVENTORY> 0
<CURRENT-ASSETS> 312,312
<PP&E> 1,032,840
<DEPRECIATION> 838,587
<TOTAL-ASSETS> 1,436,247
<CURRENT-LIABILITIES> 46,933
<BONDS> 0
0
0
<COMMON> 4,456,457
<OTHER-SE> (4,125,286)
<TOTAL-LIABILITY-AND-EQUITY> 1,436,247
<SALES> 0
<TOTAL-REVENUES> 170,098
<CGS> 0
<TOTAL-COSTS> 151,196
<OTHER-EXPENSES> (20,716)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 106
<INCOME-PRETAX> 39,618
<INCOME-TAX> 0
<INCOME-CONTINUING> 39,618
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,618
<EPS-PRIMARY> .004
<EPS-DILUTED> .004
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