<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended November 5, 1995
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Commission file number 0-3833
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Morgan's Foods, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-0562210
- --------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
25201 Chagrin Boulevard, Suite 330, Beachwood, Ohio 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 360-7500
---------------------------
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 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 .......
As of December 19, 1995, the issuer had 17,816,430 shares of common
stock outstanding.
1
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------
November 5, 1995 November 6, 1994
---------------- ----------------
<S> <C> <C>
REVENUES ................................ $ 9,543,000 $12,653,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ............... 3,135,000 4,222,000
LABOR AND BENEFITS ..................... 2,428,000 3,237,000
RESTAURANT OPERATING EXPENSES ........... 3,113,000 4,027,000
GENERAL AND ADMINISTRATIVE EXPENSES ..... 714,000 914,000
---------- -----------
OPERATING INCOME ........................ 153,000 253,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ............ (112,000) (314,000)
CAPITAL LEASES ......................... (140,000) (116,000)
OTHER INCOME ............................ 28,000 19,000
----------- -----------
LOSS BEFORE INCOME TAXES ................ (71,000) (158,000)
PROVISION FOR INCOME TAXES .............. 3,000 3,000
----------- -----------
NET LOSS ................................ $ (74,000) $ (161,000)
=========== ===========
NET LOSS PER COMMON SHARE ............... $ (.00) $ (.01)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING .................. 17,816,430 17,807,345
</TABLE>
See notes to consolidated financial statements
2
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<TABLE>
<CAPTION>
Thirty-Six Weeks Ended
------------------------------------
November 5, 1995 November 6, 1994
---------------- ----------------
<S> <C> <C>
REVENUES ................................ $31,063,000 $38,021,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ............... 10,015,000 12,284,000
LABOR AND BENEFITS ..................... 8,096,000 9,729,000
RESTAURANT OPERATING EXPENSES ........... 10,117,000 12,053,000
GENERAL AND ADMINISTRATIVE EXPENSES ..... 2,171,000 2,722,000
---------- -----------
OPERATING INCOME ........................ 664,000 1,233,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ............ (523,000) (968,000)
CAPITAL LEASES ......................... (384,000) (294,000)
GAIN ON SALE OF RESTAURANTS (NOTE 2) .... 1,681,000 -
OTHER INCOME ............................ 133,000 155,000
----------- -----------
INCOME BEFORE INCOME TAXES .............. 1,571,000 126,000
PROVISION FOR INCOME TAXES .............. 9,000 9,000
----------- -----------
NET INCOME .............................. $ 1,562,000 $ 117,000
=========== ===========
NET INCOME PER COMMON SHARE ............. $ .09 $ .01
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING .................. 17,816,413 17,804,998
</TABLE>
See notes to consolidated financial statements
3
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MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<TABLE>
<CAPTION>
NOVEMBER 5, 1995 FEBRUARY 26, 1995
---------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS ................................. $ 2,703,000 $ 1,993,000
MARKETABLE SECURITIES ................................ 313,000 359,000
RECEIVABLES .......................................... 86,000 105,000
INVENTORIES .......................................... 357,000 298,000
PREPAID EXPENSES ..................................... 215,000 299,000
ASSETS HELD FOR SALE, NET (NOTE 2).................... - 8,354,000
----------- -----------
3,674,000 11,408,000
----------- -----------
PROPERTY AND EQUIPMENT:
LAND ................................................. 1,464,000 1,464,000
BUILDINGS AND IMPROVEMENTS ........................... 5,268,000 5,224,000
PROPERTY UNDER CAPITAL LEASES ........................ 6,152,000 4,605,000
LEASEHOLD IMPROVEMENTS ............................... 3,952,000 3,809,000
EQUIPMENT, FURNITURE AND FIXTURES .................... 8,010,000 7,433,000
CONSTRUCTION IN PROGRESS.............................. 35,000 465,000
----------- -----------
24,881,000 23,000,000
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ....... 8,868,000 7,886,000
----------- -----------
15,913,000 15,114,000
OTHER ASSETS .......................................... 1,093,000 990,000
DEFERRED TAXES ........................................ 600,000 600,000
EXCESS OF COST OVER AMOUNTS ASSIGNED
TO NET ASSETS OF ACQUIRED BUSINESSES ................. 1,292,000 1,320,000
----------- -----------
$22,572,000 $29,432,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT ................. $ 254,000 $10,600,000
CURRENT MATURITIES OF CAPITAL LEASE OBLIGATIONS....... 337,000 263,000
ACCOUNTS PAYABLE ..................................... 1,663,000 2,680,000
ACCRUED LIABILITIES .................................. 1,803,000 1,593,000
----------- -----------
4,057,000 15,136,000
----------- -----------
LONG-TERM DEBT ........................................ 5,602,000 4,151,000
LONG-TERM CAPITAL LEASE OBLIGATIONS ................... 5,099,000 3,896,000
SHAREHOLDERS' EQUITY
PREFERRED SHARES, 1,000,000 SHARES AUTHORIZED,
NO SHARES OUTSTANDING
COMMON STOCK
AUTHORIZED SHARES - 25,000,000
ISSUED SHARES - 17,816,430 ............................ 17,817,000 17,817,000
TREASURY SHARES - 1,502 AS OF FEBRUARY 26, 1995 ....... - (3,000)
CAPITAL IN EXCESS OF STATED VALUE ...................... 11,088,000 11,088,000
ACCUMULATED DEFICIT .................................... (21,091,000) (22,653,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................. 7,814,000 6,249,000
----------- -----------
$22,572,000 $29,432,000
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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Morgan's Foods, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
COMMON SHARES TREASURY SHARES CAPITAL IN TOTAL
------------------------ ----------------- EXCESS OF ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT EQUITY
---------- ----------- ------ ------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, February 26, 1995 ........... 17,816,430 $17,817,000 (1,502) $(3,000) $11,088,000 $(22,653,000) $6,249,000
Net income ........................... 1,562,000 1,562,000
Issue treasury shares for
401K contributions .................. 1,502 3,000 3,000
---------- ----------- ------ ------- ----------- ------------ ----------
Balance, November 5, 1995 ............ 17,816,430 $17,817,000 - - $11,088,000 $(21,091,000) $7,814,000
========== =========== ====== ======= =========== ============ ==========
</TABLE>
See notes to consolidated financial statements
5
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Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Thirty-Six Weeks Ended
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November 5, 1995 November 6, 1994
---------------- ----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ..................................... $1,562,000 $ 117,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION ................. 1,443,000 1,711,000
LOSS (GAIN) ON SALE OF RESTAURANTS AND
OTHER PROPERTY AND EQUIPMENT ................. (1,681,000) 74,000
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RECEIVABLES .......... 113,000 (43,000)
(INCREASE) IN INVENTORIES ................... (42,000) (52,000)
(INCREASE) DECREASE IN PREPAID EXPENSES ..... 84,000 (214,000)
(INCREASE) IN OTHER ASSETS .................. (109,000) (66,000)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE ..... (1,017,000) (575,000)
INCREASE (DECREASE) IN ACCRUED EXPENSES ..... (205,000) 249,000
---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 148,000 1,201,000
CASH FLOWS FROM INVESTING ACTIVITIES:
SALE OF RESTAURANTS, NET OF EXPENSES OF SALE.... 10,257,000 -
CAPITAL EXPENDITURES ........................... (681,000) (1,534,000)
PURCHASE OF LICENSES ........................... - (86,000)
PROCEEDS FROM SALE AND MATURITY
OF MARKETABLE SECURITIES ...................... 359,000 888,000
PURCHASE OF MARKETABLE SECURITIES .............. (313,000) (820,000)
----------- -----------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .......................... 9,622,000 (1,552,000)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
BANK DEBT REPAYMENT IN ADVANCE OF
SCHEDULED MATURITY ............................(13,913,000) -
PROCEEDS FROM LONG-TERM BORROWING .............. 5,343,000 -
PRINCIPAL PAYMENTS ON LONG-TERM DEBT............ (554,000) (3,280,000)
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATIONS. (222,000) (129,000)
PROCEEDS FROM PROPERTY AND EQUIPMENT FINANCING.. 287,000 2,311,000
---------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .......................... (9,059,000) (1,098,000)
---------- -----------
NET CHANGE IN CASH AND EQUIVALENTS .............. 710,000 (1,449,000)
CASH AND EQUIVALENTS, BEGINNING BALANCE ......... 1,993,000 3,078,000
---------- -----------
CASH AND EQUIVALENTS, ENDING BALANCE ............ $2,703,000 $ 1,629,000
========== ===========
NON-CASH INVESTING AND FINANCING ACTIVITIES -
PROPERTY ACQUIRED UNDER CAPITAL LEASE .......... $1,547,000
==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED NOVEMBER 5, 1995 AND NOVEMBER 6, 1994
Note 1. Summary of Significant Accounting Policies
The interim consolidated financial statements of Morgan's Foods, Inc.
have been prepared without audit. In the opinion of Company Management, all
adjustments have been included. Unless otherwise disclosed, all adjustments
consist only of normal recurring adjustments necessary for a fair statement of
results of operations for the interim periods. These unaudited financial
statements have been prepared using the same accounting principles that were
used in preparation of the Company's annual report on Form 10-K for the year
ended February 26, 1995.
Note 2. Disposition of Assets
On May 5, 1995 Morgan's Restaurants of Pennsylvania, Inc., and
Morgan's Restaurants of New Jersey, Inc., both wholly owned subsidiaries of
Morgan's Foods, Inc., completed the sale to Kazi Foods of New Jersey, Inc. of
the assets of twenty-four KFC restaurants located in Central Pennsylvania and
New Jersey. Through the transaction Kazi acquired all of the assets,
properties and leases of the twenty-four KFC restaurants, which the Company had
previously classified as assets held for sale, for a cash purchase price of
$10,625,000. The Company used the proceeds primarily to pay down $9,750,000 of
floating rate bank debt in advance of scheduled maturities. The Company
received net cash proceeds from the sale of $294,000, after payment of various
closing costs and buyouts of previously leased equipment at certain retained
restaurants. The Company recorded a gain on sale of the restaurants of
$1,681,000 which represents the excess of the sale price and lease liabilities
assigned to the buyer, net of estimated expenses related to the transaction,
over the carrying value of the assets sold.
All obligations and liabilities which arose from or in connection with
the operation of the twenty-four KFC restaurants prior to the closing of the
sale transaction remain an obligation of the Company. All leases related to
the twenty-four KFC restaurants were assigned to Kazi. The Company remains as
the guarantor on six of the restaurant leases for periods of time ranging from
1 to 15 years.
The twenty-four KFC restaurants which were sold had revenues prior to
the sale of $2,418,000 in the thirty-six weeks ended November 5, 1995 and
revenues of $12,969,000 in the thirty-six weeks ended November 6, 1994.
Note 3. Long-Term Debt
On September 25, 1995 the Company completed a debt financing which
resulted in the borrowing of $5,509,000 for a 15 year term at a fixed interest
rate. The borrowing is collateralized by property and equipment at seven of
the Company's KFC restaurants. The proceeds of the borrowing were used to pay
the remaining balance of $4,163,000 of floating rate bank debt in advance of
its scheduled maturity, pay transaction costs of approximately $160,000
(including prepayment penalties) and to add to working capital.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("the Company")
operates through wholly-owned subsidiaries Kentucky Fried Chicken ("KFC")
restaurants under franchises from KFC Corporation and has exclusive rights to
operate, as a franchisee, East Side Mario's restaurants in the Cleveland/Akron
and Columbus, Ohio areas. As of December 19, 1995, the Company operates 40 KFC
restaurants and six East Side Mario's restaurants. The Company's fiscal year
is a 52 - 53 week year ending on the Sunday nearest the last day of February.
REVENUES. Revenues for the quarter ended November 5, 1995
were $9,543,000 compared to $12,653,000 for the quarter ended November 6, 1994.
The 24.6% decrease was primarily due to the sale on May 5, 1995 of 24 KFC
restaurants which had contributed $4,407,000 to revenues during the quarter
ended November 6, 1994. This revenue decrease was partially offset by revenues
generated by the operation of two additional East Side Mario's in the quarter
ended November 5, 1995 compared to the quarter ended November 6, 1994. The
East Side Mario's contributed $2,655,000 of revenue during the third quarter
of fiscal 1996, compared to revenue of $2,145,000 in the third quarter of the
prior year. Revenues for the thirty-six weeks ended November 5, 1995 were
$31,063,000, or 18.3% less than the year earlier period for the reasons
mentioned above. The 24 KFC restaurants had contributed revenues of
$12,969,000 for the fiscal 1995 year to date period, compared to $2,418,000 for
the current year to date. The East Side Mario's restaurants contributed
$8,409,000 in the fiscal 1996 year to date period compared to $6,631,000 during
the year earlier period. The 40 KFC restaurants which the Company continues to
operate have shown significant revenue increases over the prior year due to the
introduction of new products as well as Home Delivery which the Company has
implemented in 6 of its restaurants.
COST OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and
beverage costs for the third quarter decreased as a percentage of revenue to
32.85% in fiscal 1996 from 33.37% in fiscal 1995. The decrease is primarily
due to the promotion of lower food cost items during the third quarter of
fiscal 1996 than in the year earlier period. Year to date food, paper and
beverage cost for fiscal 1996 at 32.24% of revenue was substantially unchanged
from 32.31% in the comparable fiscal 1995 period.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits as a
percentage of revenue for the quarter ended November 5, 1996 remained
relatively constant at 25.44% compared to 25.58% one year ago. Although the
East Side Mario's restaurants, which have higher labor costs than the KFC's,
accounted for a greater portion of business during the quarter, labor costs for
the East Side Mario's restaurants declined as a percentage of revenue from the
prior year by 1.7 percentage points. The labor cost improvement in the East
Side Mario's restaurants is the result of favorable variances in workers'
compensation and other benefits as well as management programs to control
costs. Labor and benefits increased as a percentage of revenue for the year to
date November 5, 1995 to 26.06% from 25.59% during the year earlier period
because of the increased portion of business accounted for by the East Side
Mario's restaurants.
RESTAURANT OPERATING EXPENSE. Restaurant operating expenses increased
as a percentage of revenue from 31.83% to 32.62% in the current quarter and
from 31.70% to 32.57% in the current year to date. The Company's promotional
discounting was higher during the third quarter and year to date fiscal 1996
compared to the same periods in fiscal 1995. In addition, occupancy costs in
the East Side Mario's division were higher as a percentage of sales in fiscal
1996 when compared to fiscal 1995 due to the operation of 2 additional
restaurants.
8
<PAGE> 9
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the third quarter of fiscal 1996 of $714,000 were $200,000, or
21.88%, below the third quarter of fiscal 1995. General and administrative
expenses for the year to date fiscal 1996 of $2,171,000 were $551,000 or 20.24%
below fiscal 1995. The decrease is due to several reasons. First,
administrative expenses of $101,000 in the third quarter were eliminated as the
result of the sale of the KFC restaurants late in the first quarter of fiscal
1996. Second, administrative expense reductions implemented during late fiscal
1995, including the elimination of salaries and related expenses of two
administrative positions and 10% salary reductions taken late in fiscal 1995 by
the President and the Chairman of the Company, continue to have a positive
impact on expense levels. Finally, administrative costs associated with the
development, expansion and operation of the East Side Mario's restaurants
decreased in fiscal 1996 compared to fiscal 1995 despite the operation of two
additional East Side Mario's.
OPERATING INCOME. Operating income decreased to $153,000 in the third
quarter of fiscal 1996 from $253,000 for the third quarter of fiscal 1995 and
to $664,000 from $1,233,000 for the year to date periods. Operating income for
the KFC restaurants in the third quarter of fiscal 1996 was lower compared to
the prior year due to the sale of 24 KFC restaurants late in the first quarter
of fiscal 1996, which was partially offset by improved operating results from
the remaining KFC's. Operating income of the East Side Mario's in fiscal 1996
was below fiscal 1995 primarily due to high fixed occupancy costs and lower
revenue in those restaurants opened one year or more.
INTEREST EXPENSE. Interest expense on bank debt decreased $202,000
for the third quarter and $445,000 for the year to date period primarily due to
the repayment of bank debt totaling $9,750,000 in advance of its scheduled
maturity using the proceeds of the sale of 24 KFC restaurants and the
refinancing of floating rate bank debt at lower fixed rates. Interest expense
on capitalized leases increased $24,000 for the third quarter and $90,000 for
the year to date over the comparable periods in the prior year. The increase
was due to the addition of capitalized leases used to finance the new East Side
Mario's restaurants, partially offset by the elimination of several capitalized
leases from the sale of the 24 KFC restaurants.
LIQUIDITY AND CAPITAL RESOURCE. Cash flow activity for year to date
fiscal 1996 and fiscal 1995 is presented in the Consolidated Statements of Cash
Flow. Cash provided by operating activities was $148,000 in fiscal 1996 which
includes $1,017,000 payment of accounts payable balances from February 26,
1995. The Company used proceeds from the sale of the 24 KFC restaurants and
the new debt financing to repay $13,913,000 of bank debt in advance of
scheduled maturity. The Company also made scheduled payments on long-term debt
and capital lease obligations totaling $776,000 during the period. The Company
had capital expenditures of $681,000 and received proceeds from property and
equipment financing of $287,000.
The KFC operations of the Company have historically provided
sufficient cash flow to service the Company's debt, refurbish and upgrade KFC
restaurant properties and cover administrative overhead. Management believes
that operating cash flow will provide sufficient capital to continue to operate
and maintain the KFC and East Side Mario's restaurants, service the Company's
debt and support required corporate expenses. In addition to the Company's
operating cash flow, management believes that additional financing, including
long term leases of build-to-suit restaurants and development lines of credit
can be obtained to develop new restaurants and perform necessary upgrades and
image enhancements to existing restaurants.
9
<PAGE> 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 10 - "Guaranty of Subsidiary Debt Agreement"
Subsidiaries of the Company entered into seven (7)
debt agreements aggregating $5,509,000 on September 20, 1995. The agreements
represent debt of each subsidiary and are guaranteed by Morgan's Foods, Inc.,
the parent company. A guaranty which is substantially identical to the one
attached hereto as Exhibit 10 has been executed for each of the seven (7) debt
agreements. Each of the debt agreements pledges the land, building, equipment
and other assets of a specific KFC restaurant location as collateral for the
indebtedness.
Exhibit 27 - Financial Data Schedule
b. The Company did not file any reports on Form 8-K during the
quarter ended November 5, 1995.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Morgan's Foods, Inc.
---------------------------------------
(Registrant)
Dated: December 20, 1995 By: /s/ Kenneth L. Hignett
--------------------- -----------------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
11
<PAGE> 1
Exhibit 10
Loan No. 05942
GUARANTY
--------
Morgan's Foods, Inc., an Ohio corporation ("Guarantor"), as a material
inducement to and in consideration of CAPTEC FINANCIAL GROUP, INC., a Michigan
corporation, whose address is 24 Frank Lloyd Wright Drive, Lobby L, Ann Arbor,
Michigan 48106 ("Lender"), making a loan in the original principal amount of
Eight Hundred Forty-Four Thousand Two Hundred and 00/100 Dollars ($844,200.00)
to be evidenced by a Promissory Note substantially in the form of Exhibit A
attached hereto ("Note"), which Note is to be secured by a Mortgage, Security
Agreement, Assignment of Leases and Rents and Fixture Filing substantially in
the form of Exhibit B attached hereto ("Mortgage") to Morgan's Restaurants of
Pennsylvania, Inc., a Pennsylvania corporation ("Borrower"), hereby jointly and
severally, unconditionally and irrevocably, personally guarantees to and for
the benefit of Lender, and Lender's successors and assigns, the full and timely
payment and performance of all of the Borrower's duties, obligations and
covenants under the Note and the Mortgage.
This Guaranty shall not be affected by Lender's failure or delay to
enforce any of its rights.
Guarantor's obligations are independent of Borrower's obligations.
If Borrower defaults under the Note or the Mortgage, Lender can proceed
immediately against Guarantor or Borrower, or both, or Lender can enforce
against Guarantor or Borrower, or both, any rights that it has under the Note,
the Mortgage or pursuant to applicable laws. If the lien of the Mortgage
terminates and Lender has any rights it can enforce against Borrower after
termination, Lender can enforce those rights against Guarantor without giving
previous notice to Borrower or Guarantor or without making any demand on either
of them.
To the extent permitted by law, Guarantor waives the benefit of any
statute of limitations affecting Guarantor's liability under this Guaranty.
Guarantor waives the right to require Lender to first or concurrently: (1)
proceed against Borrower; (2) proceed against or exhaust any security that
Lender holds from Borrower; or (3) pursue any other remedy in Lender's power.
The liability of Guarantor shall not be affected or exonerated by any
indulgence, compromise, settlement or variation of terms which may be extended
by Lender to Borrower, or agreed upon by Lender or Borrower, and, unless agreed
to in writing by Lender, shall not be affected or exonerated by any assignment
or sublease by Borrower of its interest in the Note or the Mortgage, nor shall
the liability of the Guarantor be affected or exonerated by the insolvency,
bankruptcy (voluntary or involuntary), or reorganization of Borrower, nor by
the voluntary or involuntary liquidation, sale or other disposition of all or
substantially all of the assets of Borrower, or by the release of any other
Guarantor. Lender and Borrower, without notice to or consent by Guarantor, may
at any time or times enter into such modifications, extensions, amendments or
other covenants respecting the Note and the Mortgage as they may deem
appropriate, and Guarantor shall not be released or its liability exonerated
thereby but shall continue to be fully liable for the payment and performance
of all obligations and duties of Borrower under the Note and the Mortgage as so
modified, extended or amended.
<PAGE> 2
Guarantor further agrees to indemnify and hold harmless Lender from and
against any claims, damages, expenses or losses, including to the extent
permitted by law, all reasonable attorneys' fees incurred by counsel of
Lender's choice (whether or not litigation is commenced), resulting from or
arising out of any breach of any provision of the Note or the Mortgage by
Borrower or by reason of Borrower's failure to perform any of its obligations
thereunder. Should Guarantor or Lender institute any action or proceeding to
enforce any provisions hereof or for a declaration of such party's rights or
obligations hereunder, the prevailing party shall be entitled to receive from
the losing party such amounts the court would adjudged to be reasonable
attorneys' fees, expert witness fees, court costs, deposition costs, court
report fees and sheriff's fees for services rendered to and expenses incurred
by the party prevailing in any such action or proceeding, and such fees and
expenses shall be deemed to have accrued upon the commencement of such action
or proceeding and shall be enforceable whether or not such action or proceeding
is prosecuted to judgment.
Until all of Borrower's obligations to Lender have been discharged in
full, Guarantor has no right of subrogation against Borrower. Guarantor
assumes the responsibility to remain informed of the financial condition of
Borrower and of all other circumstances bearing upon the risk of Borrower's
default, which reasonable inquiry would reveal, and agrees that Lender shall
have no duty to advise Guarantor of information known to it regarding such
condition or any such circumstances. Lender shall not be required to inquire
into the powers of Borrower or the officers, employees, partners or agents
acting or purporting to act on its behalf, and any indebtedness made or created
in reliance upon the professed exercise of such powers shall be guaranteed
under this Guaranty. Each Guarantor hereby represents and warrants to Lender
that such Guarantor has received a copy of the Note and the Mortgage, has read
or had the opportunity to read the Note and the Mortgage, and understands the
terms of the Note and the Mortgage. The provisions in the Note and the
Mortgage relating to the execution of additional documents, legal proceedings
by Lender against Borrower, severability of the provisions of the Note and the
Mortgage, interpretation of the Note and the Mortgage, notices, waivers
(including waiver of a jury trial), limitation on right of recovery against
Lender, disclaimer of individual liability, and the applicable laws which
govern the interpretation of the Note and the Mortgage are incorporated herein
in their entirety by this reference and made a part hereof as though set forth
in full herein; any reference in those provisions to "Borrower" shall mean each
Guarantor and any reference in those provisions to the "Note" or the "Mortgage"
shall mean this Guaranty.
To the extent permitted by law, Guarantor waives its right to enforce
any remedies that Borrower now has, or later may have, against Lender.
Guarantor waives any right to participate in any security now or later held by
Lender. Guarantor waives notice of acceptance of this Guaranty, and all other
notices in connection with this Guaranty or in connection with the liabilities,
obligations and duties guaranteed hereby, including notices to Guarantor of
default by the Borrower under the Note and the Mortgage. Guarantor hereby
waives diligence, presentment, demand for performance, notice of
nonperformance, protest, notice of protest, notice of dishonor, and notice of
acceptance of this Guaranty, and waives all notices of the existence, creation,
or incurring of new or additional obligations.
- 2 -
<PAGE> 3
If there is more than one Guarantor, the liability of each Guarantor
shall be joint and several. Guarantor's obligations under this Guaranty shall
be binding on Guarantor's legal representatives, heirs, successors and
assigns.
If Borrower disposes of its interest in the property secured by the
Mortgage, "Borrower", as used in this Guaranty, shall mean Borrower's
successors or assigns. Assignment of the Note and the Mortgage by Lender (as
permitted by the Note or the Mortgage) shall not affect this Guaranty. In the
event of an assignment of the Note and the Mortgage by Lender, the term
"Lender" as used in this Guaranty shall mean Lender's successors or assigns.
Guarantor hereby covenants and agrees to deliver annual audited
financial statements to Lender within one hundred twenty (120) days after the
end of Guarantor's fiscal year. By execution of this Guaranty by Guarantor
and acceptance of this Guaranty by Lender, Guarantor and Lender covenant and
agree that the dealing between them shall be conducted in good faith and in
fair dealing, such that each party shall avoid: (a) affirmative misstatements
of material facts; (b) half-truths in connection with material facts; and
(c) pure omissions of facts material to the purpose of this Guaranty.
If any one or more of the provisions of this Guaranty shall be held to
be invalid, illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Guaranty, and this Guaranty shall be construed as if such invalid, illegal or
unenforceable provision had never been contained herein. This Guaranty shall
be construed according to the laws of the Commonwealth of Pennsylvania
("State"). By execution hereof, the undersigned specifically consents to this
choice of law designation and agrees that all actions or proceedings arising
directly, indirectly or otherwise in connection with, out of, related to, or
from this Guaranty or the Note shall be litigated only in the courts located
in the State or in Michigan, and the undersigned (i) consents and submits to
the IN PERSONAM jurisdiction of any state or federal court located within the
State or in Michigan, (ii) waives any right to transfer or change the venue of
litigation brought against the undersigned, and (iii) agrees to service of
process, to the extent permitted by law, by mail.
Dated this 20th day of September, 1995.
WITNESSES: MORGAN'S FOODS, INC.
_____________________________ By _____________________________
_____________________________ Its Chairman of the Board
_______________________
- 3 -
<PAGE> 4
STATE OF OHIO )
---------- ) ss.
COUNTY OF CUYAHOGA )
----------
The foregoing instrument was acknowledged before me this 19th day of
September, 1995, by Leonard Stein-Sapir , as Chairman of the Board of
-------------------------- -----------------------
Morgan's Foods, Inc., an Ohio corporation on behalf of the corporation.
Kathleen M. Philbin
------------------------------------
Notary Public
Cuyahoga County, Ohio
---------- -------------------
My Commission Expires: 11-15-95
---------------
[Notary Public's Seal]
- 4 -
<PAGE> 5
EXHIBIT A
TO
GUARANTY
--------
[NOTE]
<PAGE> 6
EXHIBIT B
TO
GUARANTY
--------
[MORTGAGE]
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-26-1995
<PERIOD-END> NOV-05-1995
<CASH> 2,703,000
<SECURITIES> 313,000
<RECEIVABLES> 86,000
<ALLOWANCES> 0
<INVENTORY> 357,000
<CURRENT-ASSETS> 3,674,000
<PP&E> 24,881,000
<DEPRECIATION> 8,868,000
<TOTAL-ASSETS> 22,572,000
<CURRENT-LIABILITIES> 4,057,000
<BONDS> 5,602,000
<COMMON> 17,817,000
0
0
<OTHER-SE> 11,088,000
<TOTAL-LIABILITY-AND-EQUITY> 22,572,000
<SALES> 31,063,000
<TOTAL-REVENUES> 31,063,000
<CGS> 18,111,000
<TOTAL-COSTS> 30,399,000
<OTHER-EXPENSES> (133,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 907,000
<INCOME-PRETAX> (110,000)
<INCOME-TAX> 9,000
<INCOME-CONTINUING> 119,000
<DISCONTINUED> 0
<EXTRAORDINARY> 1,681,000
<CHANGES> 0
<NET-INCOME> 1,562,000
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
