-----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, E51p3ggnblQoU3javDBEEo5LtUWatT3eJqOHotJgh5MQQb4UBeX492vBkH+LEmAt tXEi10Qz31TA3IPCRF0VOw== 0000930881-96-000022.txt : 19961120 0000930881-96-000022.hdr.sgml : 19961120 ACCESSION NUMBER: 0000930881-96-000022 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961118 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: 96668139 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 September 30, 1996 Commission file number 0-13642 HUDSON'S GRILL OF AMERICA, INC. (Name of small business issuer in its charter) California (State or other jurisdiction of incorporation) 95-3477313 (IRS Employer Identification Number) 16970 Dallas Parkway, Suite 402, Dallas, Texas 75248 (Address of Principal Executive Offices) Issuer's telephone number, including area code: (972) 931-9743 PAGE 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 PART I - FINANCIAL INFORMATION Item 1. Financial Statements. HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 1996 and December 31, 1995 September 30, December 31, 1996 1995 ASSETS Current assets: Cash and cash equivalents $ 122,792 $ 48,295 Accounts receivable, net of allowance for doubtful accounts of $8,850 at September 30, 1996 and $-0- at December 31, 1995 47,256 40,379 Current portion of notes and lease receivable 179,893 217,221 Prepaid expenses and other 14,475 24,826 Total current assets 364,416 330,721 Property and equipment, at cost: Leasehold improvements 541,238 662,879 Restaurant equipment 556,686 480,933 Furniture and fixtures 174,106 196,052 Total property and equipment 1,272,030 1,339,864 Less accumulated depreciation and amortization (1,056,358) (1,206,293) Property and equipment-net 215,672 133,571 Long term portion of notes and lease receivable 2,382,361 2,053,387 Liquor licenses-net of accumulated amortization of $28,126 at September 30, 1996 and $67,085 at December 31, 1995 46,874 156,530 Other assets 42,643 49,735 Total assets $ 3,051,966 $ 2,723,944 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 1996 and December 31, 1995 September 30, December 31, 1996 1995 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 57,287 $ 65,199 Accounts payable 14,074 37,430 Accrued liabilities 1,600 32,586 Total current liabilities 72,961 135,215 Long-term debt 1,141,758 1,172,989 Other long-term liabilities 427,425 422,720 Deferred income 955,480 450,858 Commitments and contingencies (Note 4) Shareholders' equity: Preferred stock, 1,000,000 shares authorized, none issued or outstanding Common stock, no par value 100,000,000 shares authorized 6,056,986 shares issued and outstanding 4,456,457 4,456,457 Accumulated deficit (4,002,115) (3,914,295) Total shareholders' equity 454,342 542,162 Total liabilities and and shareholders' equity $3,051,966 $2,723,944 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the three months ended September 30, 1996 and September 30,1995 September 30, September 30, 1996 1995 Franchise revenue $ 73,274 $ 50,750 Capital lease income 13,691 16,437 Joint venture revenues 37,584 39,608 124,549 106,795 Costs and expenses: Restaurant operations - net 3,246 40,671 General and administrative 129,544 118,770 Depreciation and amortization 8,808 20,307 141,598 179,748 Loss from operations (17,049) (72,953) Interest expense (24,059) (25,295) Interest income 47,212 38,838 Gain on sale of assets 13,140 7,412 Miscellaneous income 422 5,780 Gain (loss) on store closure 86,766 Net income before provision for income taxes 19,666 40,548 Provision for income taxes Net income 19,666 40,548 Net income attributable to common shares 19,666 40,548 Net income common share $ .0020 $ .0041 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) For the nine months ended September 30, 1996 and September 30,1995 September 30, September 30, 1996 1995 Franchise revenue $ 221,010 $ 198,891 Capital lease income 49,030 51,183 Joint venture revenues 114,405 155,960 384,445 406,034 Costs and expenses: Restaurant operations - net 47,997 86,517 General and administrative 477,992 367,561 Depreciation and amortization 32,501 66,821 558,490 520,899 Loss from operations (174,045) (114,865) Interest expense (73,075) (78,220) Interest income 131,105 125,677 Gain on sale of assets 27,775 13,684 Miscellaneous income 422 10,899 Gain (loss) on store closure 86,766 Net income (loss) before provision for income taxes (87,818) 43,941 Provision for income taxes Net income (loss) (87,818) 43,941 Net income (loss) attributable to common shares (87,818) 43,941 Net income (loss) common share $ (.0145) $ .0044 HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOW For the nine months ended September 30, 1996 and September 30, 1995 September 30, September 30, 1996 1995 Cash flows from operating activities: Net income (loss) $ (87,818) $ 43,941 Adjustments to reconcile income (loss) to net cash flows from operating activities: Depreciation and amortization 32,502 66,821 Amortization of deferred income (63,608) (51,907) Gain on sale of assets (27,775) (13,684) Other non-cash items 12,375 (132,400) Net cash provided by (used for) changes in assets and liabilities: Accounts receivable (15,726) (24,569) Prepaid expenses and other 4,264 (16,356) Accounts payable (23,356) (9,214) Accrued and other liabilities (16,875) 2,055 Net cash flows from operating activities (186,017) (135,313) Cash flows from investing activities: Net proceeds from sale of assets 7,913 12,182 Note receivable principal payments 155,861 84,358 Payments on lease receivables 157,114 80,377 Refund of other assets 4,799 7,787 Net cash flows from investing activities 325,687 184,704 Net cash flows from financing activities: Repayment of notes payable (65,173) (80,801) Repayment of long term liabilities (82,772) Proceeds from borrowing 25,000 Net cash flows from financing activities: (65,173) (138,573) HUDSON'S GRILL OF AMERICA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONT'D) For the nine months ended September 30, 1996 and September 30,1995 September 30, September 30, 1996 1995 Net increase (decrease) in cash 74,497 (89,182) Cash at beginning of period 48,295 92,750 Cash at end of period $ 122,792 $ 3,568 Supplemental cash flow information: Interest paid $ 70,894 $ 78,656 Income taxes paid $ 4,800 $ In the period ended September 30, 1996 - In connection with the sale of two restaurants, the Company received notes receivable of $282,087 and $294,000, along with a lease receivable of $450,000. Also, during this period, notes and leases receivable in the amount of $157,415 were exchanged to reacquire restaurant assets to be resold, and notes and leases receivable in the amount of $108,907 were paid off early by a franchisee. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Hudson's Grill of America, Inc. (the "Company") franchises and previously owned and operated full-service restaurants, primarily in Southern California and Texas. As of September 30, 1996, the Company has fifteen franchised restaurants. Additionally, it owns three restaurants, all of which are held for sale. (See Notes 2 and 8). The consolidated financial statements include the Company and its wholly-owned subsidiaries, Equipco, Inc. and Hudson's Grill of Whittier, Inc. All significant intercompany balances and transactions have been eliminated in consolidation. Management is in the process of attempting to sell and franchise the Company's restaurants and believes that these and other cost cutting actions will assist the Company in meeting its cash flow requirements over the next twelve months. Restaurants Held for Sale As of September 30, 1996, all restaurants held for sale are operated under formal or informal joint venture agreements with prospective purchasers. The Company has ceased recording operating revenues and expenses on these restaurant locations, but records joint venture revenues (see Note 8). One restaurant held for sale was operated by the Company through mid-March, 1996, following a foreclosure under a joint venture agreement during 1995. The assets of the restaurants held for sale are primarily property and equipment and liquor licenses. Management has evaluated the remaining net assets of the restaurants held for sale and believes the carrying values do not exceed the net realizable values of those assets. Cash and Cash Equivalents Cash and cash equivalents for purposes of the statement of cash flows consist of cash and short-term investments purchased with an original maturity of three months or less. 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 September 30, 1996 and 10,056,986 for the period ended September 30, 1995. 2. FRANCHISE ACTIVITIES In 1991, the Company commenced franchising its Hudson's Grill concept. Under the terms of the standard franchise agreement, the franchisees are obligated to pay the Company an initial franchise fee of $25,000, and a weekly continuing royalty fee of 4% of gross restaurant revenues, and must spend 3% of gross sales on approved advertising, including a weekly 1% marketing fee contributed to the Company's marketing fund. The Company is obligated to provide initial training, continuing management assistance, administration of advertising and sales promotion programs and establishment and monitoring of a marketing fund. Franchising revenues consisted of: September 30, September 30, 1996 1995 Initial franchise revenues $ 521 $ 49,374 Continuing franchise revenues 220,489 149,517 Total franchise revenues $ 221,010 $ 198,891 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 2. FRANCHISE ACTIVITIES (CONT'D) In November, 1995, the Company received $150,000 from a franchisee to prepay franchise fees. The Company recorded the amount received as deferred income and will amortize it to income over the life of the agreement. The balance at September 30, 1996 is $132,925. 3. NOTES AND LEASES RECEIVABLE At September 30, 1996 and December 31, 1995, the Company had a note receivable with a balance of $1,199,114 from its Texas franchisee. A principal shareholder of the Company owns an interest in this entity and Travis L. Bryant (see Note 5) owned an interest in this entity until 1994. Monthly payments of principal and interest in the amount of $14,006 were required for ten years at which time all remaining principal and accrued interest was due. The note bears interest at a rate of 8% per year and is collateralized by restaurant equipment and improvements. In addition, an offset agreement exists in which the Company can offset any past due amounts on the note against a note payable to Travis L. Bryant with a balance of $1,141,758 and $1,148,110 at September 30, 1996 and December 31, 1995 respectively. See Note 5. Only three payments were received in 1995 from the Texas franchisee and were applied to accrued interest. The Company began to exercise its right of offset on its note payable to Travis L. Bryant beginning in February 1996. Subsequent to December 31, 1995, the Company and the Texas franchisee agreed to modify the note by foregoing payments until February 1997, at which time the entire amount of unpaid principal and interest is to be amortized at 8% over ten years. The Company was assigned several notes receivable with an aggregate face value of $1,199,000 as additional collateral in connection with the modification agreement. These notes arose from the sale by the Texas franchisee of four of its restaurants and are collateralized by the assets of the restaurants. In connection with the sale of restaurants in the year ended January 2, 1994, the Company received a note for $490,000 with annual installments due over four years with the balance due in the fifth year, plus interest at prime plus 2%. The balance of the note at September 30, 1996 and December 31, 1995 was $146,335 and $228,409 respectively. In connection with the sale of a restaurant in the year ended January 1, 1995, the Company received a note for $262,800. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 3. NOTES AND LEASES RECEIVABLE (CONT'D) The note bears interest at a rate equal to the greater of prime plus 2% or 9%, adjusted on a quarterly basis. Payments of interest only were required for one year, after which ninety-six monthly payments were required in amounts necessary to amortize the remaining principal balance of the note. The Company has agreed to accept interest only payments from April 1996 through December 1996. After that time amortization of principal begins again. The balance of the note was $250,300 at September 30, 1996 and $255,752 at December 31, 1995. During the period ended September 30, 1996, the Company had a note receivable from a franchisee in the amount of $11,111. The note bore interest at 10% and was payable in equal monthly installments over a two year period. During the period ended September 30, 1996, this note was paid off by the franchisee. In connection with the sale of a restaurant in the year ended December 31, 1995 the Company received a note for $50,000 with annual installments of $12,023 over five years including interest at 7.5 percent. During the period ended September 30, 1996, this note was paid off by the franchisee. In connection with the sale of a restaurant in January 1996, the Company received a note for $282,087. The note bears interest at 9.75%. Payments of interest only are required for two years, after which the balance is due over ten years. The balance of the note was $282,087 at September 30, 1996. In the first quarter of 1996 a franchisee breached his franchise agreement and a restaurant was reacquired by the Company. The Company agreed to forgive debt in the amount of $157,415 in reacquiring all assets of the restaurant. The Company immediately joint ventured the restaurant and it is currently under contract to be sold. In connection with a restaurant sold July 17, 1996, the Company received a note for $294,000. The note bears interest at a rate equal to the greater of prime plus 2% or 9%. The note is amortized over a period of 48 months with payments of $6,400 per month. At the end of 47 months all remaining unpaid interest and principal is due. The notes that arose with the sales of the various restaurants referred to above are collateralized with certain assets of those restaurants. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 3. NOTES AND LEASE RECEIVABLE (CONT'D) The Company also leased the restaurant equipment to the purchasers of the restaurants sold in the periods September 30, 1996 and December 31, 1995. The leases have been classified as sales-type leases. During the period ended September 30, 1996 a franchisee paid off a lease receivable with a net carrying value of $74,581. The net carrying value of the leases receivable at September 30, 1996 and December 31, 1995 is $333,033 and $419,093 respectively. Future lease payments due in fiscal periods ending: December 29, 1996 $ 19,500 January 4, 1998 78,000 January 3, 1999 78,000 January 2, 2000 78,000 January 1, 2001 78,000 Thereafter 497,225 Total 828,725 Less amount representing unearned interest (495,692) $ 333,033 4. COMMITMENTS AND CONTINGENT LIABILITIES The Company's restaurant buildings and certain equipment are operated under noncancelable operating leases. Terms of these leases extend from 3 to 25 years. Certain leases are guaranteed by former directors. In addition to amounts included below, the leases generally provide that the company pay taxes, maintenance, insurance and certain other operating expenses applicable to the leased property, plus a percentage of gross receipts in excess of certain limits stated in the lease agreements. As explained in Note 8, most of the Company's remaining restaurants are operated by third parties under joint venture agreements and the rental payments are being made by those parties. The following is a summary by years of future minimum lease payments on the restaurant locations: Fiscal Period Ending: December 29, 1996 $ 299,898 January 4, 1998 271,680 January 3, 1999 271,680 January 2, 2000 271,680 January 1, 2001 204,480 Thereafter 3,213,412 Total minimum lease payments $4,532,830 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 4. COMMITMENTS AND CONTINGENT LIABILITIES (CONT'D) In addition to the leases discussed above, the Company has assigned to the purchasers the leases of buildings for nine of the restaurants sold in the periods September 30, 1996 and December 31, 1995. The Company is secondarily liable for the lease payments on these restaurants should the purchasers not fulfill their responsibility under the leases. The future lease payments for these restaurants total approximately $9,804,152 at September 30, 1996. In addition, the Company may be secondarily liable under other leases for restaurants sold in prior years. Total rental expenses for operating leases were $25,746 and $66,934 for the periods ended September 30, 1996 and September 30, 1995, respectively. 5. LONG-TERM DEBT Long-term debt at September 30, 1996 and December 31, 1995, which is collateralized by substantially all of the assets of the Company, is summarized as follows: September 30, December 31, 1996 1995 Note payable to Travis L. Bryant, a former director of the Company and a former part owner of a Texas franchisee; monthly interest payments of $7,696 through November 1995 and monthly installments of $14,006 including interest at 8% through November 2005. (See below and Note 3.) $1,141,758 $1,148,110 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 5. LONG-TERM DEBT (CONT'D) September 30, December 31, 1996 1995 Note payable to Corona Market Partnership, due in monthly installments of $5,327, including interest of 8% through June 1997. 46,385 90,078 Note payable, due in monthly installments of $2,240, including interest at 6%, through December 1996. 10,902 Total 1,199,045 1,238,188 Less current portion (57,287) (65,199) Long-term debt $1,141,758 $1,172,989 Principal payments due in the fiscal periods subsequent to September 30, 1996 are as follows: (following the modification to the note agreement with a Texas franchisee referred to in Note 3). Fiscal Period Ending: December 29, 1996 $ 23,963 January 4, 1998 33,324 January 3, 1999 90,529 January 2, 2000 98,043 January 1, 2001 106,180 Thereafter 847,006 Total $1,199,045 HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 5. LONG-TERM DEBT (CONT'D) In the year ended January 1, 1995, Travis L. Bryant formally agreed to reduce a $3,360,000 note payable to him into a $1,300,000 note due in monthly installments as described above. In addition, Bryant agreed to forgive certain other amounts due him by the Company, which totalled approximately $720,000. In connection with the restructuring transaction, Bryant also received a warrant to purchase 4,000,000 shares of the Company's common stock at $.0625 per share anytime over the next ten years. Consummation of the agreement was contingent on the Company's performance of certain conditions, including the loan of an additional amount to the Texas franchisee to increase that note receivable from $300,000 to $1,300,000 (see Note 3) and the compromise and satisfaction of certain liabilities due lessors of certain closed restaurant locations (See Note 4). These conditions were satisfied in the year ended January 1, 1995 and the debt restructure was consummated. The total debt forgiveness of $1,747,233, net of approximately $1,033,000 of the write-off of associated goodwill, was recorded as an extraordinary item. 6. INCOME TAXES There was no federal income tax provision as of September 30, 1996 due to the application of tax net operating loss carryforwards. The actual tax expense differs from the "expected" tax expense computed by applying the U.S. Federal corporate tax rate of 34% to earnings before income taxes primarily due to differences between financial reporting and income tax treatment of the debt restructuring described in Note 5. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 6. INCOME TAXES (CONT'D) Deferred income taxes are provided for temporary differences between income tax and financial reporting as of September 30, 1996, and September 30, 1995 as follows: September 30, September 30, 1996 1995 Deferred tax asset: Depreciation $ 182,000 $ 230,000 Net operating loss 134,000 167,000 Accrued settlement 46,000 60,000 Deferral income and rent 36,000 Valuation allowance (398,000) (457,000) $ $ At September 30, 1996, the Company had net operating loss (NOL) and investment tax credit carryforwards for Federal income tax purposes of approximately $824,000 and $200,000, respectively. Use of these carryforwards (with the exception of approximately $390,000 of the NOL carryforward) were limited due to issuance of the warrant described in Note 5. 7. SHAREHOLDERS' EQUITY The Company is authorized to issue 1,000,000 shares of preferred stock with rights and preferences as designated by the Board of Directors. The Company has an incentive stock option plan ("ISO") which provides for the issuance of options to officers, directors and employees to purchase up to 825,000 shares of the Company's common stock. Options are exercisable at prices equal to the fair market value of common stock at the grant date, vest 20% annually and expire generally within five years. In 1993 the shareholders of the Company approved a Directors' Stock Option Plan ("DSO"). This plan provides for the issuance of up to 200,000 shares of stock to non-employee directors in increments of 10,000 shares every two years. Options will be issued at the average of the closing bid-ask price on the date of the grant. No options were outstanding as of September 30, 1996 or December 31, 1995 under either plan. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 7. SHAREHOLDERS EQUITY (CONT'D) The Company granted options to a consultant to purchase 400,000 shares of common stock with 100,000 shares vesting each year from 1995 to 1998. The exercise price is the market price at time of vesting. The exercise price of the shares vested in 1995 is $.11 per share and $.09 per share for the shares vested in 1996. The options expire, if not exercised in 2003. The following summarizes information regarding options granted, outstanding and exercisable: Number of Shares Option Price ISO OTHER DSO Per Share Outstanding at January 4, 1993 189,750 305,800 $.15-$1.14 Canceled (189,750) (305,800) Outstanding at January 2, 1994 and January 1, 1995 Granted 400,000 Market price Outstanding at September 30, 1996 400,000 In connection with a transaction with another company in 1991, the Company issued a warrant to acquire 100,000 shares of the Company's common stock at $1.00 per share. This warrant expired unexercised January 1, 1996. In January 1994, in connection with a debt restructuring agreement described in Note 5, the Company issued warrants to Travis L. Bryant. The warrants are exercisable for 4,000,000 shares of common stock at $.0625 per share and expire in ten years. The exercise price approximated the market value of the stock at the time of grant. 8. RESTAURANT SALES AND CLOSURES During the year ended January 1, 1995, the Company sold one restaurant and recorded a deferred gain of $348,782 on the sale, which will be amortized into income over the terms of the related note and lease receivables (see Note 3). The balance of the deferred gain at September 30, 1996 and December 31, 1995 was $294,379 and $305,129 respectively. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 8. RESTAURANT SALES AND CLOSURES (CONT'D) During the period ended September 30, 1996 the Company sold one restaurant and recorded a deferred gain of $342,821 on the sale, which will be amortized into income over the terms of the related note and lease receivables (see Note 3). The balance of the deferred gain at September 30, 1996 was $333,423. During the period ended September 30, 1996, the Company sold a second restaurant and recorded a deferred gain of $204,152 on the sale, which will be amortized into income over the terms of the related note (see note 3). The balance of the deferred gain at September 30, 1996, was $194,753. The Company is endeavoring to sell all remaining restaurants and has granted purchase options for three of the remaining restaurants owned. These purchase options also include certain joint venture provisions, whereby, the future purchasers operate the restaurants and the Company receives a joint venturer's fee based on sales, net of certain operating expenses. Based on the option price provided in these agreements, management does not anticipate recording a loss on sale of these restaurants. 9. FINANCIAL INSTRUMENTS Concentrations of credit risk Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. In accordance with FASB Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, the credit risk amounts shown do not take into account the value of any collateral or security. Financial instruments that subject the Company to credit risk consist principally of accounts receivable, cash on deposit and notes and leases receivable. HUDSON'S GRILL OF AMERICA, INC. Notes to Consolidated Financial Statements (Cont'd) 9. FINANCIAL INSTRUMENTS (CONT'D) At September 30, 1996, accounts receivable totalled $47,256 and the Company has provided an allowance for doubtful accounts of $8,850. Bad debts were immaterial for 1995 and 1994. The Company performs periodic credit evaluations on its customers' financial conditions and believes that the allowance for doubtful accounts is adequate. The Company periodically maintains cash balances in excess of FDIC insurance limits. Notes and leases receivables are described in Note 3. Fair Value of Financial Instruments The estimated fair values of the Company's financial instruments were determined by management using available market information and appropriate valuation methodologies. The estimates are not necessarily indicative of the amounts the Company could realize in a current market exchange. At September 30, 1996, cash, accounts receivable and accounts payable have fair values that approximate book values based on their short term or demand maturity. The fair value of notes receivable and notes payable are based on estimated discounted cash flows. The fair value of these Instruments approximates book value at September 30, 1996. Item 2. Management's Discussion and Analysis. Net Sales Franchise revenue increased from $198,891 for the nine months ended September 30, 1995, to $221,010 for the nine months ended September 30, 1996. For the comparable 3 month period ending September 30th, franchise revenue increased to $73,274 in 1996 from $50,750 in 1995. Net joint venture revenue and capital lease income was $207,143 in the first nine months of 1995 and decreased to $163,435 in the first nine months of 1996. During this past year several of the Company's joint ventures became franchises, and thus joint venture revenues decreased. For the nine months ended September 30, 1995, the Company had capital lease income of $51,183; capital lease income decreased slightly in the first nine months of 1996 to $49,030. Expenses Net restaurant operating expenses were $47,997 for the nine months ended September 30, 1996, compared to $86,517 for the nine months ended September 30, 1995. General and administrative expenses for the nine months ended September 30, 1996, were $477,992 compared to $367,561 for the nine months ended September 30, 1995. This increase is partially due to the Company's hiring of a vice president to coordinate new franchising opportunities and to support existing franchises and the hiring of another administrative employee. Depreciation declined in the first nine months of 1996 to $32,501 from 1995's amount of $66,821. This is mostly due to the sales of Company restaurants. Liquidity and Capital Resources The Company had a working capital surplus of approximately $291,455 as of September 30, 1996, as compared to a surplus of $195,506 for December 31, 1995. The increase is due to an increase in cash and a decrease in accounts payable and accrued liabilities. PART II - OTHER INFORMATION Item 1. Legal Proceedings. On May 30, 1996, Jordano's, Inc., a California corporation, filed suit against Ron Stayer and against Hudson's Grill of America, Inc., in the Superior Court of the State of California in and for the County of Santa Barbara. The suit is a complaint for money that alleged that Jordano's provided goods to the Hudson's Grill located in Pomona, California, and operated by Ronald Stayer, that with interest added to it amounted to an indebtedness (not including attorney's fees) of $104,212.52. The suit has been amended and now alleges that the registrant gave a continuing guarantee of the indebtedness of the Pomona restaurant and/or is liable as a joint venturer with Mr. Stayer. The registrant denies any obligation owed to Jordano's based on the alleged guaranty and has filed an answer to the lawsuit on November 13, 1996. At the same time, registrant is initiating discovery in the case. The case is currently set for trial on March 7, 1997. The registrant continues to be in litigation with its former franchisee in Bend, Oregon, about trademark and proprietary matters. The Bend location is no longer operated as a Hudson's Grill and is no longer operated as a restaurant by the registrant's former franchisee or by its former principals. Item 5. Other Information. The registrant's development agreement with Jackie's International, Inc., has resulted in the beginning of construction of Hudson's Grills in the State of Mississippi in the cities of Vicksburg, Oxford and Greenville. A Hudson's Grill restaurant is also being built in Santa Clarita, California, by George Miller, a California sole proprietor. Additionally, sites are under consideration in Cincinnati, Ohio; Bakersfield, California; Pensacola, Florida; and Arcadia, California. The registrant anticipates that it will close on the sale of its Pomona, California, Hudson's Grill on or before December 1, 1996, to Burgers of Diamond Bar, a California partnership. The closing on the sale of the registrant's Hudson's Grill restaurants located in Whittier, California, and Westlake, California, have been postponed until a California Board of Equalization lien against the Whittier property (based on a prior owner) can be resolved. The registrant has modified its agreements with its Lancaster, California, franchisee by extending to December 1, 1996, the due date of certain of the franchisee's payments owed to the registrant. One of the registrant's two franchises in Austin, Texas, was terminated on August 27, 1996, for non-payment of royalty fees. The registrant's Oxnard, California, franchisee and its remaining Austin, Texas, franchisee are currently delinquent in paying their obligations to the registrant. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit Index. Following are the exhibits required under Item 601 of Regulation S-B for Form 10-QSB: Item 601 Exhibit No. Description Page Number (2) Plan of Acquisition, Reorgani- zation, Arrangement, Liquida- tion, or Succession n/a (4) Instruments Defining the Rights of Holders Including Indentures n/a (6) No Exhibit Required. n/a (11) Statement Re: Computation of Per Share Earnings n/a (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 (99) 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 September 30, 1996: 1. August 20, 1996. The registrant announced that on July 22, 1996, another Hudson's Grill restaurant was opened. FUN Remco, Inc., which already operates two other franchises from the Company, opened its third Hudson's Grill restaurant in California. This new franchise is in Fullerton in Orange County. The registrant also entered into another franchise agreement. George Thomas, a California businessman has signed a franchise agreement to open a Hudson's Grill in Santa Clarita, California. The restaurant is under construction and is planned to be open in early 1997; it will be in a freestanding building in a new shopping center called Solemint Junction 2. July 25, 1996. The registrant announced that on July 17, 1996, the sale of its Hornblowers restaurant in Ventura's Harbor in Ventura, California, had closed. Kian Farzadam, an individual who has been cojoint venturer of the restaurant for several years, purchased the restaurant. Hornblowers has been owned by Hudson's or operated as a joint venture with the registrant for many years; however, the restaurant uses a theme that is different from the Hudson's Grills franchised by the registrant. SIGNATURES In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) HUDSON'S GRILL OF AMERICA, INC. By: s/s David L. Osborn David L. Osborn, President Date: November 15, 1996 EX-27 2 ARTICLE 5 FINANCIAL DATA SCHEDULE EXTRACTED FROM FINANCIAL STATEMENTS FOR 3RD QUARTER 1996 FORM 10-QSB
5 9-MOS DEC-26-1996 SEP-30-1996 122,792 0 47,256 0 0 364,416 1,272,030 1,056,358 3,051,966 72,961 0 0 0 4,456,457 (4,002,115) 3,051,966 384,445 384,445 0 558,490 0 0 73,075 (87,818) 0 (87,818) 0 0 0 (87,818) (.01) (.01)
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