<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 May 21, 1995
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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
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As of June 30, 1995, the issuer had 17,816,430 shares of common stock
outstanding.
1
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<TABLE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
Quarter Ended
-----------------------------
May 21, 1995 May 22, 1994
------------ ------------
<S> <C> <C>
Revenues ................................ $11,616,000 $ 11,754,000
Cost of sales:
Food, paper and beverage ............... 3,726,000 3,733,000
Labor and benefits ..................... 3,120,000 3,028,000
Restaurant operating expenses ........... 3,782,000 3,765,000
General and administrative expenses ..... 762,000 870,000
---------- -----------
Operating income ........................ 226,000 358,000
Interest Expense:
Bank debt and notes payable ............ (298,000) (350,000)
Capital leases ......................... (142,000) (66,000)
Gain on sale of restaurants (Note 2) .... 1,681,000 -
Other income ............................ 77,000 99,000
----------- -----------
Income before income taxes .............. 1,544,000 41,000
Provision for income taxes .............. 3,000 3,000
----------- -----------
Net income .............................. $ 1,541,000 $ 38,000
=========== ===========
Net income per common share ............. $ .09 $ .00
=========== ===========
Weighted average number
of shares outstanding .................. 17,816,340 17,802,392
</TABLE>
See notes to consolidated financial statements
2
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<TABLE>
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<CAPTION>
MAY 21, 1995 FEBRUARY 26, 1995
------------ -----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ................................. $ 1,109,000 $ 1,993,000
Marketable securities ................................ 359,000 359,000
Receivables .......................................... 266,000 105,000
Inventories .......................................... 307,000 298,000
Prepaid expenses ..................................... 97,000 299,000
Assets held for sale, net ............................ - 8,354,000
----------- -----------
2,138,000 11,408,000
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Property and equipment:
Land ................................................. 1,464,000 1,464,000
Buildings and improvements ........................... 5,224,000 5,224,000
Property under capital leases ........................ 4,605,000 4,605,000
Leasehold improvements ............................... 3,930,000 3,809,000
Equipment, furniture and fixtures .................... 7,777,000 7,433,000
Construction in progress.............................. 162,000 465,000
----------- -----------
23,162,000 23,000,000
Less accumulated depreciation and amortization ....... 8,222,000 7,886,000
----------- -----------
14,940,000 15,114,000
Other assets .......................................... 964,000 990,000
Deferred taxes ........................................ 600,000 600,000
Excess of cost over amounts assigned
to net assets of acquired businesses ................. 1,311,000 1,320,000
----------- -----------
$19,953,000 $29,432,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ................. $ 851,000 $10,600,000
Current maturities of capital lease obligations....... 78,000 263,000
Accounts payable ..................................... 1,843,000 2,680,000
Accrued liabilities .................................. 1,608,000 1,593,000
----------- -----------
4,380,000 15,136,000
Long-term debt ........................................ 3,941,000 4,151,000
Long-term capital lease obligations ................... 3,839,000 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 .................................... (21,112,000) (22,653,000)
----------- -----------
Total shareholders' equity ............................. 7,793,000 6,249,000
----------- -----------
$19,953,000 $29,432,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
3
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<TABLE>
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<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 ........................ 1,541,000 1,541,000
Issue treasury shares for
401K contributions ............... 1,502 3,000 3,000
---------- ----------- ------ ------ ------------ ------------ ------------
Balance, May 21, 1995 ............. 17,816,430 $17,817,000 - $ - $11,088,000 $(21,112,000) $7,793,000
========== =========== ====== ====== =========== ============ ============
</TABLE>
See notes to consolidated financial statements
4
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<TABLE>
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
QUARTER ENDED
-------------------------------------
MAY 21, 1995 MAY 22, 1994
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<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $1,541,000 $ 38,000
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization ................. 568,000 548,000
Loss (gain) on sale of restaurants and
other property and equipment ................. (1,680,000) 7,000
Change in assets and liabilities:
(Increase) in receivables ................... (67,000) (38,000)
(Increase) decrease in inventories .......... 8,000 (36,000)
(Increase) decrease in prepaid expenses ..... 166,000 (108,000)
(Increase) in other assets .................. - (16,000)
(Decrease) in accounts payable............... (837,000) (612,000)
Increase (decrease) in accrued expenses ..... (400,000) 289,000
---------- -----------
Net cash provided by (used in)
operating activities .......................... (701,000) 72,000
Cash flows from investing activities:
Sale of restaurants, net of expenses of sale.... 10,257,000 -
Capital expenditures ........................... (369,000) (739,000)
Purchase of licenses ........................... - (5,000)
Proceeds from sale and maturity
of marketable securities ...................... - 459,000
Purchase of marketable securities .............. - (429,000)
---------- -----------
Net cash provided by (used in)
investing activities .......................... 9,888,000 (714,000)
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Cash flows from financing activities:
Bank debt repayment in advance of
scheduled maturity ............................ (9,750,000)
Principal payments on long-term debt............ (394,000) (419,000)
Principal payments on capital lease obligations. (73,000) (41,000)
Proceeds from property and equipment financing.. 146,000 752,000
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Net cash provided by (used in)
financing activities ..........................(10,071,000) 292,000
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Net change in cash and equivalents .............. (884,000) (350,000)
Cash and equivalents, beginning balance ......... 1,993,000 3,078,000
---------- -----------
Cash and equivalents, ending balance ............ $1,109,000 $ 2,728,000
========== ===========
</TABLE>
See notes to consolidated financial statements.
5
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MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MAY 21, 1995 AND MAY 22, 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 quarter ended May 21, 1995 and revenues of
$3,746,000 in the quarter ended May 22, 1994.
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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. As of June 30, 1995, the
Company operates 41 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 May 21, 1995 were
$11,616,000 compared to $11,754,000 for the quarter ended May 22, 1994. The
1.2% decrease was due to 17 days less revenue from the 24 KFC restaurants sold
on May 5, 1995. This revenue decrease was partially offset by the operation of
three additional East Side Mario's in the quarter ended May 21, 1995, including
one restaurant which opened April 25, 1995, compared to the quarter ended May
22, 1994. The six East Side Mario's contributed $2,606,000 to total revenue
during the first quarter of fiscal 1996, compared to revenue of $1,910,000 from
three East Side Mario's in the prior year. The Company began Home Delivery in
one of its KFC restaurants on June 9, 1995 and expects Home Delivery in 14 of
its restaurants by fiscal year end. Management anticipates sale increases from
the implementation of Home Delivery Service in the KFC restaurants.
COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and
beverage costs for fiscal 1996 increased as a percentage of revenue from 31.76%
in fiscal 1995 to 32.08%. The increase is primarily due to the mega meal
introduced in the fourth quarter of fiscal 1995 which continues into fiscal
1996.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits
increased as a percentage of revenue for the quarter ended May 21, 1995 to
26.86% compared to 25.76% one year ago. The increase is primarily due to
restaurant management salaries in the East Side Mario's opened for one year or
more as of May 21, 1995 which remained relatively flat from year to year
despite decreases in sales.
RESTAURANT OPERATING EXPENSE. Restaurant operating expenses increased
as a percentage of revenue from 32.03% in fiscal 1995 to 32.56% in fiscal 1996.
The Company's promotional discounting was higher in the first quarter of fiscal
1996 compared to the first quarter of 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 3 additional restaurants. These increases
were partially offset by decreases in utilities and property taxes in the KFC
restaurants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for fiscal 1996 of $762,000 were $108,000 or 12.41% below the first
quarter of fiscal 1995. The decrease is due to several reasons. First, the
elimination of the administrative expenses related to operation of the 24 KFC
restaurants that were sold late in the first quarter of fiscal 1996. Second,
elimination of salaries and related expenses of the Vice President of Marketing
position and an Area Manager in the St. Louis market. Third, both the
President and Chairman of the Company took a 10% salary reduction. Finally,
administrative functions 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 three additional East Side
Mario's.
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OPERATING INCOME. Operating income in the current quarter decreased
to $226,000 from $358,000 for the first quarter of fiscal 1995. 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 remained relatively constant in
the first quarter of fiscal 1996 when compared to fiscal 1995. The Company
repaid $9,750,000 of bank debt in advance of scheduled maturity from the
proceeds of the sale of 24 KFC restaurants. This reduced debt balance resulted
in lower bank debt interest expense in the first quarter of fiscal 1996 but
interest expense was negatively effected by increases in prime interest rate
and increased expense due to capital leases used to finance East Side Mario's
restaurants. Also, during the fourth quarter of fiscal 1994, the Company
incurred $2,000,000 of additional temporary debt related to the construction of
East Side Mario's restaurants, which was repaid during the second quarter of
fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCE. Cash flow activity for the first
quarters of fiscal 1996 and fiscal 1995 is presented in the Consolidated
Statements of Cash Flow. Cash used in operating activities was $701,000 in the
first quarter of fiscal 1996 which includes $837,000 payment of accounts
payable balances from February 26, 1995. The Company paid scheduled long-term
bank debt of $394,000 in the first quarter of fiscal 1996 and received property
and equipment financing of $146,000.
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 complete the development of the Company's East Side Mario's
franchised restaurants in Ohio.
On May 5, 1995, the Company sold 24 of its KFC restaurants to another
franchisee. The Company used a portion of the proceeds of the sale to pay down
floating rate bank debt totaling $9,750,000 in advance of its scheduled
maturity. As a result, annual interest expense, at current interest rates,
will be reduced by approximately $1,009,000. In addition, annual interest
expense of $117,000 relating to capital leases assumed by the buyer of the
restaurants will no longer be incurred by the Company as a result of the sale.
As a further result of the early payment of floating rate bank debt, scheduled
principal payments for fiscal 1996 have been reduced from $1,945,000 to
$850,000.
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.
8
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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: July 5, 1995 BY: /S/ Kenneth L. Hignett
-----------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
9
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000068145
<NAME> MORGAN FOODS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-3-1996
<PERIOD-START> FEB-27-1995
<PERIOD-END> MAY-21-1995
<CASH> 1,109,000
<SECURITIES> 359,000
<RECEIVABLES> 266,000
<ALLOWANCES> 0
<INVENTORY> 307,000
<CURRENT-ASSETS> 2,138,000
<PP&E> 23,162,00
<DEPRECIATION> 8,222,000
<TOTAL-ASSETS> 19,953,000
<CURRENT-LIABILITIES> 4,380,000
<BONDS> 7,780,000
<COMMON> 17,817,000
0
0
<OTHER-SE> (10,024,000)
<TOTAL-LIABILITY-AND-EQUITY> 19,953,000
<SALES> 11,616,000
<TOTAL-REVENUES> 11,616,000
<CGS> 6,846,000
<TOTAL-COSTS> 10,628,000
<OTHER-EXPENSES> 762,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 440,000
<INCOME-PRETAX> 1,544,000
<INCOME-TAX> 3,000
<INCOME-CONTINUING> 1,544,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,541,000
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
</TABLE>
