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 <FN1>
(12) No Exhibit Required. n/a
(15) Letter on Unaudited Interim
Financial Information n/a <FN2>
(18) Letter on Change in Accounting
Principles n/a
(19) Previously Unfiled Documents n/a
(20) Reports Furnished to Security
Holders n/a
(23) Published Report Regarding
Matters Submitted to Vote n/a
(24) Consent of Experts and Counsel n/a
(25) Power of Attorney n/a
(27) Financial Data Schedule attached
(28) Additional Exhibits n/a
<FN1> No explanation of the computation of per share
earnings on both the primary and fully diluted basis is
necessary because the computation can be clearly
determined from the financial statements.
<FN2> 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