-----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, Q2RC6SMkELAzVGHvkzDt/eb8+HaxwFWaL4gc68g5QDF9C1moFlFNcpquW5gcFVc4 L4SMuTTK8G1TQ4ugpdH2RQ== 0000930881-96-000019.txt : 19960819 0000930881-96-000019.hdr.sgml : 19960819 ACCESSION NUMBER: 0000930881-96-000019 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960816 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: 96616667 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, 1996 Commission file number 0-13642 HUDSON'S GRILL OF AMERICA, INC. (Name of small business issuer in its charter) California (State or other jurisdiction of incorporation) 95-3477313 (IRS Employer Identification Number) 16970 Dallas Parkway, Suite 402, Dallas, Texas 75248 (Address of Principal Executive Offices) Issuer's telephone number, including area code: (214) 931-9743 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 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, 1996 and December 31, 1995 June 30, December 31, 1996 1995 ASSETS Current assets: Cash and cash equivalents $ 20,379 $ 48,295 Accounts receivable, net of allowance for doubtful accounts of $5,500 at June 30, 1996 and $-0- at December 31, 1995 33,325 40,379 Current portion of notes and lease receivable 234,870 217,221 Prepaid expenses and other 14,220 24,826 Total current assets 302,794 330,721 Property and equipment, at cost: Leasehold improvements 622,883 662,879 Restaurant equipment 581,877 480,933 Furniture and fixtures 183,877 196,052 Total property and equipment 1,388,637 1,339,864 Less accumulated depreciation and amortization (1,121,816) (1,206,293) Property and equipment-net 266,821 133,571 Long term portion of notes and lease receivable 2,189,548 2,053,387 Liquor licenses-net of accumulated amortization of $52,258 at June 30, 1996 and $67,085 at December 31, 1995 97,049 156,530 Other assets 49,703 49,735 Total assets $ 2,905,915 $ 2,723,944 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) June 30, 1996 and December 31, 1995 June 30, December 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 78,634 $ 65,199 Accounts payable 51,522 37,430 Accrued liabilities 2,538 32,586 Total current liabilities 132,694 135,215 Long-term debt 1,141,758 1,172,989 Other long-term liabilities 428,050 422,720 Deferred income 768,737 450,858 Commitments and contingencies (Note 4) Shareholders' equity: Preferred stock, 1,000,000 shares authorized, none issued or outstanding Common stock, no par value 10,000,000 shares authorized 6,056,986 shares issued and outstanding 4,456,457 4,456,457 Accumulated deficit (4,021,781) (3,914,295) Total shareholders' equity 434,676 542,162 Total liabilities and and shareholders' equity $2,905,915 $2,723,944 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended June 30, 1996 and June 30,1995 June 30, June 30, 1996 1995 Franchise revenue $ 74,069 $ 59,264 Capital lease income 18,535 13,421 Joint venture revenues 49,045 59,033 141,649 131,718 Costs and expenses: Restaurant operations - net 8,368 21,752 General and administrative 169,913 164,176 Depreciation and amortization 11,573 20,292 189,854 206,220 Loss from operations (48,205) (74,502) Interest expense (24,450) (24,942) Interest income 42,897 38,817 Gain on sale of assets 5,260 17,624 Miscellaneous income 5,119 Net loss before provision for income taxes (24,498) (37,884) Provision for income taxes -0- -0- Net loss (24,498) (37,884) Net loss attributable to common shares (24,498) (37,884) Net loss common share $ (.004) $ (.0038) HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the six months ended June 30, 1996 and June 30, 1995 June 30, June 30, 1996 1995 Franchise revenue $ 147,736 $ 148,141 Capital lease income 35,339 34,746 Joint venture revenues 76,821 116,352 259,896 299,239 Costs and expenses: Restaurant operations - net 44,751 45,846 General and administrative 348,448 248,791 Depreciation and amortization 23,693 46,514 416,892 341,151 Loss from operations (156,996) (41,912) Interest expense (49,016) (52,925) Interest income 83,893 86,839 Gain on sale of assets 14,635 6,272 Miscellaneous income 5,119 Net income (loss) before provision for income taxes (107,484) 3,393 Provision for income taxes -0- -0- Net income (loss) (107,484) 3,393 Net income (loss) attributable to common shares (107,484) 3,393 Net income (loss) common share $ (.0178) $ .0003 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOW For the six months ended June 30, 1996 and June 30, 1995 June 30, June 30, 1996 1995 Cash flows from operating activities: Net income (loss) $ (107,484) $ 3,393 Adjustments to reconcile income (loss) to net cash flows from operating activities: Depreciation and amortization 23,693 46,513 Amortization of deferred income (45,649) (35,470) Gain on sale of assets (14,635) (6,272) Other non-cash items 5,375 (48,682) Net cash provided by (used for) changes in assets and liabilities: Accounts receivable 1,554 (22,375) Prepaid expenses and other 6,548 (17,457) Accounts payable 14,092 (27,159) Accrued and other liabilities (14,268) (1,469) Net cash flows from operating activities (130,774) (108,978) Cash flows from investing activities: Net proceeds from sale of assets 5,230 12,182 Note receivable principal payments 80,415 36,602 Payments on lease receivables 61,038 55,077 Refund of other assets 17,787 Net cash flows from investing activities 146,683 121,648 Net cash flows from financing activities: Repayment of notes payable (43,825) (67,084) Repayment of long term liabilities (12,772) Net cash flows from financing activities: (43,825) (79,856) HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) For the six months ended June 30, 1996 and June 30,1995 June 30, June 30, 1996 1995 Net decrease in cash (27,916) (67,186) Cash at beginning of period 48,295 92,750 Cash at end of period $ 20,379 $ 25,564 Supplemental cash flow information: Interest paid $ 47,225 $ 53,303 Income taxes paid $ 2,400 $ In the period ended June 30, 1996 - In connection with the sale of a restaurant, the Company received a note receivable of $282,087 and a lease receivable of $450,000. In addition, notes and leases receivable in the amount of $157,415 were exchanged to reacquire restaurant assets to be resold. 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, 1996, the Company has fourteen franchised restaurants. Additionally, it owns four restaurants, all of which are held for sale. (See Notes 2 and 8). The consolidated financial statements include the Company and its wholly-owned subsidiaries, Equipco, Inc. and Hudson's Grill of Whittier, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Management is in the process of attempting to sell and franchise the Company's restaurants and believes that these and other cost cutting actions will assist the Company in meeting its cash flow requirements over the next twelve months. Restaurants Held for Sale As of June 30, 1996, all restaurants held for sale are operated under formal or informal joint venture agreements with prospective purchasers. The Company has ceased recording operating revenues and expenses on these restaurant locations, but records joint venture revenues (see Note 8). One restaurant held for sale was operated by the Company through mid-March, 1996, following a foreclosure under a joint venture agreement during 1995. The assets of the restaurants held for sale are primarily property and equipment and liquor licenses. Management has evaluated the remaining net assets of the restaurants held for sale and believes the carrying values do not exceed the net realizable values of those assets. Cash and Cash Equivalents Cash and cash equivalents for purposes of the statement of cash flows consist of cash and short-term investments purchased with an original maturity of three months or less. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) Non-current Assets All of the Company's property and equipment is leased under operating leases to prospective purchasers. Depreciation of property and equipment is recognized using the straight-line method over the estimated lives of the assets (generally five to seven years). Amortization of leaseholds is recognized using the straight- line method over the shorter of the initial term of the respective lease or the service life of the leased asset. Liquor licenses are recorded at cost and are amortized over ten years. Revenue Recognition Initial franchise fees are recognized as revenue when all material services or conditions relating to the sale have been substantially performed or satisfied. Continuing franchise fees are recognized as revenue as the fees are earned and become receivable from the franchisee. Income Taxes Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the financial and income tax reporting basis of assets and liabilities. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONT'D) liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items in the accompanying financial statements that include estimates are notes and leases receivable and lease contingencies. Actual results could differ materially from those estimates. Income (loss) per share Income (loss) per common share is computed based upon the weighted average number of common and common equivalent shares outstanding during the year. Common equivalent shares are not considered if their effect is antidilutive. Common stock equivalents consist of outstanding stock options and warrants. Common stock equivalents are assumed to be exercised with the related proceeds used to repurchase outstanding shares except when the effect would be antidilutive. The weighted average number of shares outstanding used in the income (loss) per share computation was 6,056,986 for the period ended June 30, 1996 and 10,056,986 for the period ended June 30, 1995. 2. FRANCHISE ACTIVITIES In 1991, the Company commenced franchising its Hudson's Grill concept. Under the terms of the standard franchise agreement, the franchisees are obligated to pay the Company an initial franchise fee of $25,000, and a weekly continuing royalty fee of 4% of gross restaurant revenues, and must spend 3% of gross sales on approved advertising, including a weekly 1% marketing fee contributed to the Company's marketing fund. The Company is obligated to provide initial training, continuing management assistance, administration of advertising and sales promotion programs and establishment and monitoring of a marketing fund. Franchising revenues consisted of: June 30, June 30, 1996 1995 Initial franchise revenues $ 521 $ 49,374 Continuing franchise revenues 147,215 98,767 Total franchise revenues $ 147,736 $ 148,141 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 2. FRANCHISE ACTIVITIES (CONT'D) In November, 1995, the Company received $150,000 from a franchisee to prepay franchise fees. The Company recorded the amount received as deferred income and will amortize it to income over the life of the agreement. The balance at June 30, 1996 is $137,193. 3. NOTES AND LEASES RECEIVABLE At June 30, 1996 and December 31, 1995, the Company had a note receivable with a balance of $1,199,114 from its Texas franchisee. A principal shareholder of the Company owns an interest in this entity and Travis L. Bryant (see Note 5) owned an interest in this entity until 1994. Monthly payments of principal and interest in the amount of $14,006 were required for ten years at which time all remaining principal and accrued interest was due. The note bears interest at a rate of 8% per year and is collateralized by restaurant equipment and improvements. In addition, an offset agreement exists in which the Company can offset any past due amounts on the note against a note payable to Travis L. Bryant with a balance of $1,141,758 and $1,148,110 at June 30, 1996 and December 31, 1995 respectively. See Note 5. Only three payments were received in 1995 from the Texas franchisee and were applied to accrued interest. The Company began to exercise its right of offset on its note payable to Travis L. Bryant beginning in February 1996. Subsequent to December 31, 1995, the Company and the Texas franchisee agreed to modify the note by foregoing payments until February 1997, at which time the entire amount of unpaid principal and interest is to be amortized at 8% over ten years. The Company was assigned several notes receivable with an aggregate face value of $1,199,000 as additional collateral in connection with the modification agreement. These notes arose from the sale by the Texas franchisee of four of its restaurants and are collateralized by the assets of the restaurants. In connection with the sale of restaurants in the year ended January 2, 1994, the Company received a note for $490,000 with annual installments due over four years with the balance due in the fifth year, plus interest at prime plus 2%. The balance of the note at June 30, 1996 and December 31, 1995 was $174,263 and $228,409 respectively. In connection with the sale of a restaurant in the year ended January 1, 1995, the Company received a note for $262,800. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 3. NOTES AND LEASES RECEIVABLE (CONT'D) The note bears interest at a rate equal to the greater of prime plus 2% or 9%, adjusted on a quarterly basis. Payments of interest only 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 Company has agreed to accept interest only payments from April, 1996 through December, 1996. After that time amortization of principal begins again. The balance of the note was $250,300 at June 30, 1996 and $255,752 at December 31, 1995. At June 30, 1996, the Company has a $13,025 note receivable from a franchisee. The note bears interest at 10% and is payable in equal monthly installments over a two year period. In connection with the sale of a restaurant in the year ended December 31, 1995 the Company received a note for $50,000 with annual installments of $12,023 over five years including interest at 7.5 percent. The balance of the note at June 30, 1996 was $23,974. In connection with the sale of a restaurant in January 1996, the Company received a note for $282,087. The note bears interest at 9.75%. Payments of interest only are required for two years, after which the balance is due over ten years. The balance of the note was $282,087 at June 30, 1996. In the first quarter of 1996 a franchisee breached his franchise agreement and a restaurant was reacquired by the Company. The Company agreed to forgive debt in the amount of $157,415 in reacquiring all assets of the restaurant. The Company immediately joint ventured the restaurant and it is currently under contract to be sold. The notes that arose with 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 June 30, 1996 and December 31, 1995. The leases have been classified as sales-type leases. The net carrying value of the leases receivable at June 30, 1996 and December 31, 1995 is $415,418 and $419,093 respectively. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 3. NOTES AND LEASE RECEIVABLE (CONT'D) Future lease payments due in fiscal periods ending: December 29, 1996 $ 106,500 January 4, 1998 126,000 January 3, 1999 114,000 January 2, 2000 78,000 January 1, 2001 78,000 Thereafter 478,499 Total 980,999 Less amount representing unearned interest (548,386) $ 432,613 4. COMMITMENTS AND CONTINGENT LIABILITIES The Company's restaurant buildings and certain equipment are operated under noncancelable operating leases. Terms of these leases extend from 3 to 25 years. Certain leases are guaranteed by former directors. In addition to amounts included below, the leases generally provide that the company pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property, plus a percentage of gross receipts in excess of certain limits stated in the lease agreements. As explained in Note 8, most of the Company's remaining restaurants are operated by third parties under joint venture agreements and the rental payments are being made by those parties. The following is a summary by years of future minimum lease payments on the restaurant locations: Fiscal Period Ending: December 29, 1996 $ 299,898 January 4, 1998 271,680 January 3, 1999 271,680 January 2, 2000 271,680 January 1, 2001 204,480 Thereafter 3,213,412 Total minimum lease payments $4,532,830 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 4. COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D) In addition to the leases discussed above, the Company has assigned to the purchasers the leases of buildings for nine of the restaurants sold in the periods June 30, 1996 and December 31, 1995. The Company is secondarily liable for the lease payments on these restaurants should the purchasers not fulfill their responsibility under the leases. The future lease payments for these restaurants total approximately $9,804,152 at June 30, 1996. In addition, the Company may be secondarily liable under other leases for restaurants sold in prior years. Total rental expenses for operating leases were $23,355 and $44,246 for the periods ended June 30, 1996 and June 30, 1995, respectively. 5. LONG-TERM DEBT Long-term debt at June 30, 1996 and December 31, 1995, which is collateralized by substantially all of the assets of the Company, is summarized as follows: June 30, December 31, 1996 1995 Note payable to Travis L. Bryant, a former director of the Company and a former part owner of the Company's Texas franchisee, monthly interest payments of $7,696 through November, 1995 and monthly installments of $14,006 including interest at 8% through November, 2005. (See below and Note 3.) $1,141,758 $1,148,110 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 5. LONG-TERM DEBT (CONT'D) June 30, December 31, 1996 1995 Note payable to Corona Market Partnership, due in monthly installments of $5,327, including interest of 8% through June, 1997. 61,240 90,078 Note payable, due in monthly installments of $2,240, including interest at 6%, through December 1996. 17,394 Total 1,220,392 1,238,188 Less current portion (78,634) (65,199) Long-term debt $1,141,758 $1,172,989 Principal payments due in the fiscal periods subsequent to June 30, 1996 are as follows: (following the modification to the note agreement with the Texas franchisee referred to in Note 3). Fiscal Period Ending: December 29, 1996 $ 68,362 January 4, 1998 31,230 January 3, 1999 90,529 January 2, 2000 98,043 January 1, 2001 106,180 Thereafter 847,006 Total $1,241,350 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 5. LONG-TERM DEBT (CONT'D) In the year ended January 1, 1995, Travis L. Bryant formally agreed to reduce a $3,360,000 note payable to him into a $1,300,000 note due in monthly installments as described above. In addition, Bryant agreed to forgive certain other amounts due him by the Company, which totalled approximately $720,000. In connection with the restructuring transaction, Bryant also received a warrant to purchase 4,000,000 shares of the Company's common stock at $.0625 per share anytime over the next ten years. Consummation of the agreement was contingent on the Company's performance of certain conditions, including the loan of an additional amount to the Texas franchisee to increase that note receivable from $300,000 to $1,300,000 (see Note 3) and the compromise and satisfaction of certain liabilities due lessors of certain closed restaurant locations (See Note 4). These conditions were satisfied in the year ended January 1, 1995 and the debt restructure was consummated. The total debt forgiveness of $1,747,233, net of approximately $1,033,000 of the write-off of associated goodwill, was recorded as an extraordinary item. 6. INCOME TAXES There was no income tax provision as of June 30, 1996 due to the application of tax net operating loss carryforwards. The actual tax expense differs from the "expected" tax expense computed by applying the U.S. Federal corporate tax rate of 34% to earnings before income taxes primarily due to differences between financial reporting and income tax treatment of the debt restructuring described in Note 5. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 6. INCOME TAXES (CONT'D) Deferred income taxes are provided for temporary differences between income tax and financial reporting as of June 30, 1996 and June 30, 1995 as follows: June 30, June 30, 1996 1995 Deferred tax asset: Depreciation $ 182,000 $ 230,000 Net operating loss 134,000 167,000 Accrued settlement 46,000 60,000 Deferral income and rent 36,000 Valuation allowance (398,000) (457,000) $ $ At June 30, 1996, the Company had net operating loss (NOL) and investment tax credit carryforwards for Federal income tax purposes of approximately $860,000 and $200,000, respectively. Use of these carryforwards (with the exception of approximately $390,000 of the NOL carryforward) were limited due to issuance of the warrant described in Note 5. 7. SHAREHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock with rights and preferences as designated by the Board of Directors. The Company has an incentive stock option plan ("ISO") which provides for the issuance of options to officers, directors and employees to purchase up to 825,000 shares of the Company's common stock. Options are exercisable at prices equal to the fair market value of common stock at the grant date, vest 20% annually and expire generally within five years. In 1993 the shareholders of the Company approved a Directors' Stock Option Plan ("DSO"). This plan provides for the issuance of up to 200,000 shares of stock to non-employee directors in increments of 10,000 shares every two years. Options will be issued at the average of the closing bid-ask price on the date of the grant. No options were outstanding as of June 30, 1996 or December 31, 1995 under either plan. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 7. SHAREHOLDERS EQUITY (CONT'D) The Company granted options to a consultant to purchase 400,000 shares of common stock with 100,000 shares vesting each year from 1995 to 1998. The exercise price is the market price at time of vesting. The exercise price of the shares vested in 1995 is $.11 per share. The options expire, if not exercised in 2003. The following summarizes information regarding options granted, outstanding and exercisable: Number of Shares Option Price ISO OTHER DSO Per Share Outstanding at January 4, 1993 189,750 305,800 $.15-$1.14 Canceled (189,750) (305,800) Outstanding at January 2, 1994 and January 1, 1995 Granted 400,000 Market price Outstanding at June 30, 1996 400,000 In connection with a transaction with another company in 1991, the Company issued a warrant to acquire 100,000 shares of the Company's common stock at $1.00 per share. This warrant expired unexercised January 1, 1996. In January 1994, in connection with a debt restructuring agreement described in Note 5, the Company issued warrants to Travis L. Bryant. The warrants are exercisable for 4,000,000 shares of common stock at $.0625 per share and expire in ten years. The exercise price approximated the market value of the stock at the time of grant. 8. RESTAURANT SALES AND CLOSURES During the year ended January 1, 1995, the Company sold one restaurant and recorded a deferred gain of $348,782 on the sale, which will be amortized into income over the terms of the related note and lease receivables (see Note 3). The balance of the deferred gain at June 30, 1996 and December 31, 1995 was $295,343 and $305,129 respectively. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 8. RESTAURANT SALES AND CLOSURES (CONT'D) During the period ended June 30, 1996 the Company sold one restaurant and recorded a deferred gain of $342,821 on the sale, which will be amortized into income over the terms of the related note and lease receivables (see Note 3). The balance of the deferred gain at June 30, 1996 was $336,201. The Company is endeavoring to sell all remaining restaurants and has granted purchase options for four of the remaining restaurants owned. These purchase options also include certain joint venture provisions, which began in the second half of the year ended January 2, 1994, whereby, the future purchasers operate the restaurants and the Company receives a joint venturer's fee based on sales, net of certain operating expenses. Based on the option price provided in these agreements, management does not anticipate recording a loss on sale of these restaurants. 9. FINANCIAL INSTRUMENTS Concentrations of credit risk Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. In accordance with FASB Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, the credit risk amounts shown do not take into account the value of any collateral or security. Financial instruments that subject the Company to credit risk consist principally of accounts receivable, cash on deposit and notes and leases receivable. At June 30, 1996, accounts receivable totalled $33,325 and the Company has provided an allowance for doubtful accounts of $5,500. Bad debts were immaterial for 1995 and 1994. The Company performs periodic credit evaluations on its customers' financial conditions and believes that the allowance for doubtful accounts is adequate. The Company periodically maintains cash balances in excess of FDIC insurance limits. Notes and leases receivables are described in Note 3. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 9. FINANCIAL INSTRUMENTS (CONT'D) 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, 1996, cash, accounts receivable and accounts payable have fair values that approximate book values based on their short term or demand maturity. The fair value of notes receivable and notes payable are based on estimated discounted cash flows. The fair value of these Instruments approximates book value at June 30, 1996. Item 2. Management's Discussion and Analysis. Net Sales Franchise revenue decreased from $148,141 for the half year ended June 30, 1995 to $147,736 for the half year ended June 30, 1996. However, for the comparable 3 month period ending June 30th, franchise revenue increased to $74,069 in 1996 from $59,264 in 1995. Net joint venture revenue and equipment lease income was $115,352 in the first half year of 1995 and decreased to $76,821 in the first half year of 1996. During this past year several of the Company's joint ventures became franchises, and thus joint venture revenues decreased. For the half year ended June 30, 1995, the Company had capital lease income of $34,746; capital lease income increased slightly in the first half year of 1996 to $35,339. Expenses Net restaurant operating expenses were $44,751 for the half year ended June 30, 1996, compared to $45,846 for the half year ended June 30, 1995. General and administrative expenses for the half year ended June 30, 1996, were $348,448 compared to $248,791 for the half year ended June 30, 1995. This increase is partially due to the Company's hiring of a vice president to coordinate new franchising opportunities and to support existing franchises and the hiring of another administrative employee. Depreciation declined in the first half year of 1995 to $23,693 from 1995's amount of $46,514. This is mostly due to the sales of Company restaurants. Liquidity and Capital Resources The Company had a working capital surplus of approximately $170,100 as of June 30, 1996, as compared to a surplus of $195,506 for December 31, 1995. The decrease is due to a decrease in cash and a decrease in prepaid expenses. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On May 30, 1996, Jordano's, Inc., a California corporation, filed suit against Ron Stayer and against Hudson's Grill of America, Inc., in the Superior Court of the State of California in and for the County of Santa Barbara. The suit is a complaint for money alleging that Jordano's provided $104,212.52 worth of unpaid goods to the Hudson's Grill located in Pomona, California, and operated by Ronald Stayer. The suit alleged that the registrant guaranteed the indebtedness of the Pomona restaurant. The registrant denies any obligation owed to Jordano's based on the alleged guaranty. The court has granted Jordano's the right to amend its suit against the registrant, but currently the registrant has not received any amended complaint. Two years ago, the registrant set up a reserve to cover expenses related to transferring its former interest in the Pomona restaurant; the costs of defending this suit will be deducted from the reserve. Item 4. Submission of Matters to a Vote of Security Holders At its annual meeting held on May 28, 1996, shareholders of the registrant approved an amendment to the registrant's articles of incorporation that increased the number of authorized shares of common stock permitted to be issued by the registrant from 10,000,000 shares to 100,000,000 shares. The number of shares voted for the amendment was 4,420,284; the number shares voted against the amendment was 169,107; and the number of shares that abstained was 3,025. Item 5. Other Information. The registrant has entered into two new franchise agreements. One of the new franchise agreements was for a new Hudson's Grill that opened on July 22, 1996, in Fullerton, California. The second new franchise agreement is for a new Hudson's Grill to be opened at a shopping center under construction in Santa Clarita, California, that is due to be completed in early 1997. 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. No reports on unaudited interim financial information has been prepared by the Company's independent accountants, and therefore, no letter is required from the Company's independent accountants. (b) Reports on Form 8-K. The following reports on Form 8-K were filed during the quarter ending June 30, 1996: 1. May 28, 1996. The registrant announced that it consummated its tentative agreement with Macotela, Inc., to sell its Hudson's Grill in Oxnard, California. Beginning February 1996, the registrant began to offset its note with Travis Bryant because of non payment on the note the registrant holds from Famous Bars, Grills and Cafes of America, Inc. ("FGA"). The registrant was assigned several notes receivable with an aggregate face value at the time of assignment of $1,199,000, which are collateralized by assets of restaurants that had been sold by FGA. On February 6, 1996, the registrant's Directors met and voted to put to a shareholder vote a resolution to increase the number of authorized shares of common stock of the registrant to 100,000,000 shares. On March 2, 1996, the registrant's first franchised restaurant on the East Coast opened for business. The registrant also announced that effective March 25, 1996, it took back the Westlake, California, Hudson's Grill restaurant that had been sold to Grills Unlimited, Inc. Also in March 1996, the registrant entered into a contract to sell the Westlake restaurant and the registrant's Whittier, California Hudson's Grill to the current manager of the restaurants. 2. May 29, 1996. The registrant announced that on May 28, 1996, it executed a letter of intent with Jackie's International, Inc., a corporation associated with Dr. S.L. Sethi of Jackson, Mississippi. The letter of intent offered rights to develop Hudson's Grill restaurant franchises in an area that includes Alabama, Arkansas, Georgia, Louisiana, Mississippi, and Tennessee. The registrant also announced that a new board of directors was elected at its annual shareholders meeting that was held on May 28, 1996. The shareholders also voted to retain Hein + Associates as their auditors and approved an increase in the number of authorized shares of common stock to 100,000,000. 3. July 25, 1996. The registrant announced that on July 17, 1996, the sale of its Hornblowers restaurant in Ventura's Harbor in Ventura, California, had been consummated. 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, 1996 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE EXTRACTED FROM FINANCIAL STATEMENTS FOR 2ND QUARTER 1996 FORM 10-QSB
5 6-MOS DEC-26-1996 JUN-30-1996 20,379 0 33,325 0 0 302,794 1,388,637 1,121,816 2,905,915 132,694 0 0 0 4,456,457 (4,021,781) 2,905,915 259,896 259,896 0 416,892 0 0 49,016 (107,484) 0 (107,484) 0 0 0 (107,484) (.02) (.02)
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