-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FCyKNL6qCfKXGonCju4FBmeqaW7YPnZzhEIR19QTL3NNcBIPfTnmnivImbqwBkqq yaPSTR3zmHYwo/uUNomrHg== 0000930881-97-000012.txt : 19970819 0000930881-97-000012.hdr.sgml : 19970819 ACCESSION NUMBER: 0000930881-97-000012 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970818 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUDSONS GRILL OF AMERICA INC CENTRAL INDEX KEY: 0000729545 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 953477313 STATE OF INCORPORATION: CA FISCAL YEAR END: 1229 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 000-13642 FILM NUMBER: 97665427 BUSINESS ADDRESS: STREET 1: 16970 DALLAS NORTH PKWY STE 402 CITY: DALLAS STATE: TX ZIP: 75248 BUSINESS PHONE: 2149319743 MAIL ADDRESS: STREET 1: 16970 DALLAS PARKWAY STREET 2: SUITE 402 CITY: DALLAS STATE: TX ZIP: 75248 FORMER COMPANY: FORMER CONFORMED NAME: AMERICAN RESTAURANTS CORP DATE OF NAME CHANGE: 19910825 10QSB 1 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 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 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. 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 (12) No Exhibit Required. n/a (15) Letter on Unaudited Interim Financial Information n/a (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 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. 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. 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 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE EXTRACTED FROM FINANCIAL STATEMENTS FOR 2ND QUARTER 1997 FORM 10-QSB
5 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. 6-MOS JAN-04-1998 JUN-30-1997 58,371 0 28,611 27,645 0 312,312 1,032,840 838,587 1,436,247 46,933 0 0 0 4,456,457 (4,125,286) 1,436,247 0 170,098 0 151,196 (20,716) 0 106 39,618 0 39,618 0 0 0 39,618 .004 .004
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