<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 August 13, 1995
-----------------------------------------------------------
Commission file number 0-3833
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Morgan's Foods, Inc.
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0562210
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(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
----------------------------
- -------------------------------------------------------------------------------
(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 September 25, 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)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------
August 13, 1995 August 14, 1994
----------------- ---------------
<S> <C> <C>
REVENUES ................................ $ 9,904,000 $13,622,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ............... 3,154,000 4,329,000
LABOR AND BENEFITS ..................... 2,548,000 3,465,000
RESTAURANT OPERATING EXPENSES ........... 3,222,000 4,285,000
GENERAL AND ADMINISTRATIVE EXPENSES ..... 695,000 909,000
---------- -----------
OPERATING INCOME ........................ 285,000 634,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ............ (113,000) (303,000)
CAPITAL LEASES ......................... (102,000) (113,000)
OTHER INCOME ............................ 28,000 25,000
----------- -----------
INCOME BEFORE INCOME TAXES .............. 98,000 243,000
PROVISION FOR INCOME TAXES .............. 3,000 3,000
----------- -----------
NET INCOME .............................. $ 95,000 $ 240,000
=========== ===========
NET INCOME PER COMMON SHARE ............. $ .01 $ .01
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING .................. 17,816,398 17,804,875
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Twenty-Four Weeks Ended
---------------------------------
August 13, 1995 August 14, 1994
--------------- ---------------
<S> <C> <C>
REVENUES ................................ $21,520,000 $25,376,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ............... 6,880,000 8,062,000
LABOR AND BENEFITS ..................... 5,668,000 6,493,000
RESTAURANT OPERATING EXPENSES ........... 7,004,000 8,050,000
GENERAL AND ADMINISTRATIVE EXPENSES ..... 1,457,000 1,779,000
---------- -----------
OPERATING INCOME ........................ 511,000 992,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ............ (411,000) (653,000)
CAPITAL LEASES ......................... (244,000) (179,000)
GAIN ON SALE OF RESTAURANTS (NOTE 2) .... 1,681,000 -
OTHER INCOME ............................ 105,000 124,000
----------- -----------
INCOME BEFORE INCOME TAXES .............. 1,642,000 284,000
PROVISION FOR INCOME TAXES .............. 6,000 6,000
----------- -----------
NET INCOME .............................. $ 1,636,000 $ 278,000
=========== ===========
NET INCOME PER COMMON SHARE ............. $ .09 $ .02
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING .................. 17,816,369 17,803,824
</TABLE>
See notes to consolidated financial statements
3
<PAGE> 4
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AUGUST 13, 1995 FEBRUARY 26, 1995
--------------- -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................. $ 1,685,000 $ 1,993,000
Marketable securities ................................ 316,000 359,000
Receivables .......................................... 130,000 105,000
Inventories .......................................... 354,000 298,000
Prepaid expenses ..................................... 180,000 299,000
Assets held for sale, net (note 2).................... - 8,354,000
----------- -----------
2,665,000 11,408,000
----------- -----------
Property and equipment:
Land ................................................. 1,464,000 1,464,000
Buildings and improvements ........................... 5,226,000 5,224,000
Property under capital leases ........................ 6,152,000 4,605,000
Leasehold improvements ............................... 3,959,000 3,809,000
Equipment, furniture and fixtures .................... 7,961,000 7,433,000
Construction in progress.............................. 115,000 465,000
----------- -----------
24,877,000 23,000,000
Less accumulated depreciation and amortization ....... 8,569,000 7,886,000
----------- -----------
16,308,000 15,114,000
Other assets .......................................... 977,000 990,000
Deferred taxes ........................................ 600,000 600,000
Excess of cost over amounts assigned
to net assets of acquired businesses ................. 1,301,000 1,320,000
----------- -----------
$21,851,000 $29,432,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................. $ 681,000 $10,600,000
Current maturities of capital lease obligations....... 337,000 263,000
Accounts payable ..................................... 2,148,000 2,680,000
Accrued liabilities .................................. 1,741,000 1,593,000
----------- -----------
4,907,000 15,136,000
----------- -----------
Long-term debt ........................................ 3,811,000 4,151,000
Long-term capital lease obligations ................... 5,245,000 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 shares ........................ - (3,000)
Capital in excess of stated value ...................... 11,088,000 11,088,000
Accumulated deficit .................................... (21,017,000) (22,653,000)
----------- -----------
Total shareholders' equity ............................. 7,888,000 6,249,000
----------- -----------
$21,851,000 $29,432,000
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
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 ........................... 1,636,000 1,636,000
Issue treasury shares for
401K contributions .................. 1,502 3 ,000 3,000
---------- ------------ ------ -------- ------------ ------------- ----------
Balance, August 13, 1995 .............. 17,816,430 $17,817,000 - $ - $11,088,000 ($ 21,017,000) $7,888,000
========== ============ ====== ======== ============ ============== ==========
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Twenty-Four Weeks Ended
--------------------------------
August 13, 1995 August 14, 1994
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $1,636,000 $ 278,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................. 976,000 1,129,000
Loss (gain) on sale of restaurants and
other property and equipment ................. (1,681,000) 73,000
Change in assets and liabilities:
(Increase) decrease in receivables .......... 69,000 (72,000)
(Increase) in inventories ................... (39,000) (39,000)
(Increase) decrease in prepaid expenses ..... 46,000 (114,000)
(Increase) in other assets .................. (27,000) (45,000)
Increase (decrease) in accounts payable...... (532,000) 245,000
Increase (decrease) in accrued expenses ..... (267,000) 274,000
---------- -----------
Net cash provided by operating activities ...... 181,000 1,729,000
---------- -----------
Cash flows from investing activities:
Sale of restaurants, net of expenses of sale.... 10,257,000 -
Capital expenditures ........................... (677,000) (1,385,000)
Purchase of licenses ........................... - (72,000)
Proceeds from sale and maturity
of marketable securities ...................... 359,000 888,000
Purchase of marketable securities .............. (316,000) (820,000)
----------- -----------
Net cash provided by (used in)
investing activities .......................... 9,623,000 (1,389,000)
---------- -----------
Cash flows from financing activities:
Bank debt repayment in advance of
scheduled maturity ............................ (9,750,000)
Principal payments on long-term debt............ (511,000) (2,845,000)
Principal payments on capital lease obligations. (138,000) (81,000)
Proceeds from property and equipment financing.. 287,000 2,311,000
---------- -----------
Net cash provided by (used in)
financing activities ..........................(10,112,000) (615,000)
---------- -----------
Net change in cash and equivalents .............. (308,000) (275,000)
Cash and equivalents, beginning balance ......... 1,993,000 3,078,000
---------- -----------
Cash and equivalents, ending balance ............ $1,685,000 $ 2,803,000
========== ===========
Non-cash investing and financing activities -
property acquired under capital lease .......... $1,547,000
==========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED AUGUST 13, 1995 AND AUGUST 13, 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 twenty-four weeks ended August 13, 1995 and
revenues of $8,563,000 in the twenty-four weeks ended August 14, 1994.
Note 3. Long-Term Debt
On September 25, 1995 the Company completed a debt financing which
resulted in the borrowing of $5,500,000 for a 15 year term at a 9.99% 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 February 27, 1995, the first day of fiscal
1996, the Company operated 65 KFC restaurants. On May 5, 1995, the Company
sold twenty-four of its KFC restaurants to another KFC franchisee (see Note 2
of Notes to Consolidated Financial Statements). As of September 25, 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 August 13, 1995 were
$9,904,000 compared to $13,622,000 for the quarter ended August 14, 1994. The
27.3% decrease was due to the sale on May 5, 1995 of 24 KFC restaurants which
had contributed $4,630,000 to revenues during the quarter ended August 14,
1994. This revenue decrease was partially offset by revenues generated by the
operation of two additional East Side Mario's in the quarter ended August 13,
1995 compared to the quarter ended August 14, 1994. The six East Side Mario's
contributed $3,142,000 of revenue during the second quarter of fiscal 1996,
compared to revenue of $2,568,000 from four East Side Mario's in the second
quarter of the prior year. Revenues for the 41 KFC restaurants which were
operated in both the fiscal 1996 and 1995 second quarters increased 5.3% to
$6,762,000 in fiscal 1996 from $6,424,000 in fiscal 1995. Revenues for the
twenty-four weeks ended August 13, 1995 were $3,856,000, or 15.2%, less than
the year earlier period for the reasons mentioned above. The 24 KFC
restaurants had contributed revenues of $8,563,000 for the fiscal 1994 year to
date period, compared to $2,418,000 for the current year to date. The East
Side Mario's restaurants contributed $5,748,000 in the fiscal 1996 year to date
period compared to $4,478,000 during the year earlier period. The Company
began Home Delivery in certain KFC restaurants during the second quarter of
fiscal 1996 and currently has Home Delivery in 6 of its restaurants. The
restaurants offering Home Delivery have experienced sales increases and
management expects Home Delivery will continue to generate increased
sales.
COST OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and
beverage costs for the second quarter increased as a percentage of revenue to
31.85% in fiscal 1996 from 31.78% in fiscal 1995. The increase is primarily
due to the continuing KFC mega meal promotion introduced in the fourth quarter
of fiscal 1995. Year to date food, paper and beverage cost for fiscal 1996
was 31.97% of revenue, compared to 31.77% in the comparable fiscal 1995 period
primarily for the same reason.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits
increased as a percentage of revenue for the quarter ended August 13, 1995 to
25.72% compared to 25.44% one year ago. The increase is primarily due to a
greater portion of business during the quarter being generated by the East Side
Mario's restaurants, which have, as a percentage of revenues, labor costs
approximately 2.5 percentage points higher than the KFC's. Labor and benefits
increased as a percentage of revenue for the year to date August 13, 1995 to
26.34% from 25.59% during the year earlier period for the reasons cited above.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased
as a percentage of revenue from 31.46% to 32.53% in the current quarter and
31.72% to 32.55% in the current year to date. The Company's promotional
discounting was higher during the second 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 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 second quarter of fiscal 1996 of $695,000 were $214,000, or
23.54%, below the second quarter of fiscal 1995. General and administrative
expenses for the year to date fiscal 1996 of $1,457,000 were $322,000 or 18.10%
below fiscal 1995. The decrease was due to several reasons. First, in the
second quarter administrative expenses of $94,000 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 a 10% salary reduction taken late in fiscal 1995
by the President and Chairman of the Company, continue to have a positive
impact on expense levels. Finally, administrative expenses 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 $285,000 in the second
quarter of fiscal 1996 from $634,000 for the second quarter of fiscal 1995 and
to $511,000 from $992,000 for the year to date periods. Operating income for
the KFC restaurants in the first 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. 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 $190,000 for
the second quarter and $242,000 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. Although this
reduced debt balance resulted in lower overall bank debt interest expense in
fiscal 1996, interest expense related to the remaining bank debt balance was
negatively affected by increases in the prime interest rate from the comparable
period of the prior year. Interest expense on capitalized leases used to
finance East Side Mario's restaurants increased but was offset by the
elimination of several capitalized leases from the sale of the 24 KFC
restaurants.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for year to date
fiscal 1996 and fiscal 1995 is presented in the Consolidated Statements of Cash
Flow. Net cash provided by operating activities was $181,000 in fiscal 1996
which includes $532,000 payment of accounts payable balances from February 26,
1995. The Company paid scheduled long-term bank debt of $511,000 in fiscal 1996
and received 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 complete necessary upgrades and
image enhancements to existing restaurants. Also, the Company completed a debt
financing on September 25, 1995 which resulted in the borrowing of $5,500,000
for a 15 year term at a 9.99% fixed interest rate. The proceeds of the
financing were used to pay the remaining balance of $4,163,000 of bank debt,
transaction costs of approximately $160,000 (including prepayment penalties)
and to add to working capital.
9
<PAGE> 10
PART II OTHER INFORMATION
Item 4. Submission to Matters To a Vote of Security Holders.
At the Company's Annual Meeting of Shareholders, held on June 23, 1995,
the following Directors were elected:
<TABLE>
<CAPTION>
NAME VOTES FOR ABSTENTIONS
- ---- --------- -----------
<S> <C> <C>
Leonard R. Stein-Sapir 15,355,656 319,080
Richard A. Arons 15,356,756 317,980
Lawrence S. Dolin 15,356,656 318,080
James J. Liguori 15,356,756 317,980
Steven S. Kaufman 15,357,456 317,280
Bernard Lerner 15,357,556 317,180
Kenneth L. Hignett 15,357,456 317,280
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) On May 22, 1995 the Company filed a Form 8-K to report the sale on
May 5, 1995 of twenty-four KFC restaurants located in Central Pennsylvania and
New Jersey.
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: September 27, 1995 By: /s/ Kenneth L. Hignett
------------------ ---------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000068145
<NAME> MORGAN'S FOODS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> MAY-22-1995
<PERIOD-END> AUG-13-1995
<CASH> 1,685,000
<SECURITIES> 316,000
<RECEIVABLES> 130,000
<ALLOWANCES> 0
<INVENTORY> 354,000
<CURRENT-ASSETS> 2,665,000
<PP&E> 24,877,000
<DEPRECIATION> 8,569,000
<TOTAL-ASSETS> 21,851,000
<CURRENT-LIABILITIES> 4,907,000
<BONDS> 9,056,000
<COMMON> 17,817,000
0
0
<OTHER-SE> 9,929,000
<TOTAL-LIABILITY-AND-EQUITY> 21,851,000
<SALES> 9,904,000
<TOTAL-REVENUES> 9,904,000
<CGS> 5,702,000
<TOTAL-COSTS> 8,924,000
<OTHER-EXPENSES> 695,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 215,000
<INCOME-PRETAX> 98,000
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 95,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 95,000
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
