<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 26,1996
-----------------------------------------------------------
Commission file number 0-3833
---------------------------------------------------------
Morgan's Foods, Inc.
- --------------------------------------------------------------------------------
(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)
24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio 44122
- --------------------------------------------------------------------------------
(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 July 1, 1996, the issuer had 17,816,430 shares of common stock
outstanding.
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Quarter Ended
----------------------------
May 26, 1996 May 21, 1995
------------ ------------
<S> <C> <C>
REVENUES ................................ $ 9,005,000 $11,616,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ............... 2,818,000 3,726,000
LABOR AND BENEFITS ..................... 2,323,000 3,120,000
RESTAURANT OPERATING EXPENSES ........... 2,696,000 3,252,000
DEPRECIATION AND AMORTIZATION ........... 453,000 568,000
GENERAL AND ADMINISTRATIVE EXPENSES ..... 637,000 724,000
----------- -----------
OPERATING INCOME ........................ 78,000 226,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ............ (133,000) (298,000)
CAPITAL LEASES ......................... (129,000) (142,000)
GAIN ON SALE OF RESTAURANTS (NOTE 2) .... - 1,681,000
OTHER INCOME ............................ 32,000 77,000
----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES ....... (152,000) 1,544,000
PROVISION FOR INCOME TAXES .............. - 3,000
----------- -----------
NET INCOME(LOSS) ........................ $ (152,000) $ 1,541,000
=========== ===========
NET INCOME(LOSS)PER COMMON SHARE ........ $ (.01) $ .09
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING .................. 17,816,430 17,816,340
</TABLE>
See notes to consolidated financial statements
2
<PAGE> 3
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MAY 26, 1996 MARCH 3, 1996
------------ -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS ................................. $ 3,386,000 $ 2,666,000
MARKETABLE SECURITIES ................................ 264,000 285,000
RECEIVABLES .......................................... 19,000 78,000
INVENTORIES .......................................... 418,000 347,000
PREPAID EXPENSES ..................................... 148,000 208,000
----------- -----------
4,235,000 3,584,000
----------- -----------
PROPERTY AND EQUIPMENT:
LAND ................................................. 1,739,000 1,464,000
BUILDINGS AND IMPROVEMENTS ........................... 5,389,000 5,280,000
PROPERTY UNDER CAPITAL LEASES ........................ 6,152,000 6,152,000
LEASEHOLD IMPROVEMENTS ............................... 3,977,000 3,974,000
EQUIPMENT, FURNITURE AND FIXTURES .................... 8,096,000 8,059,000
CONSTRUCTION IN PROGRESS.............................. 124,000 52,000
----------- -----------
25,477,000 24,981,000
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ....... 9,870,000 9,472,000
----------- -----------
15,607,000 15,509,000
OTHER ASSETS .......................................... 1,094,000 1,061,000
DEFERRED TAXES ........................................ 600,000 600,000
EXCESS OF COST OVER AMOUNTS ASSIGNED
TO NET ASSETS OF ACQUIRED BUSINESSES ................. 1,270,000 1,280,000
----------- -----------
$22,806,000 $22,034,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT ................. $ 284,000 $ 263,000
CURRENT MATURITIES OF CAPITAL LEASE OBLIGATIONS....... 358,000 337,000
ACCOUNTS PAYABLE ..................................... 1,974,000 1,884,000
ACCRUED LIABILITIES .................................. 2,042,000 1,662,000
----------- -----------
4,658,000 4,146,000
LONG-TERM DEBT ........................................ 5,960,000 5,448,000
LONG-TERM CAPITAL LEASE OBLIGATIONS ................... 4,962,000 5,062,000
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
CAPITAL IN EXCESS OF STATED VALUE ...................... 11,088,000 11,088,000
ACCUMULATED DEFICIT .................................... (21,679,000) (21,527,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................. 7,226,000 7,378,000
----------- -----------
$22,806,000 $22,034,000
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
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 ............... -- -- -- -- -- 1,126,000 1,126,000
Issuance of treasury stock
for 401(k) contributions 1,502 3,000 -- -- 3,000
---------- ------------ ----- ------- ----------- ------------ ----------
Balance, March 3, 1996 ... 17,816,430 $ 17,817,000 -- $ -- 11,088,000 (21,527,000) 7,378,000
Net loss ................. (152,000) (152,000)
------------ ----------
Balance, May 26, 1996 .... 17,816,430 $ 17,817,000 -- $ -- $11,088,000 $(21,679,000) $7,226,000
========== ============ ===== ======= =========== ============ ==========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
--------------------------
May 26, 1996 May 21, 1995
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS) .............................. $ (152,000) $ 1,541,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION ................. 453,000 568,000
LOSS (GAIN) ON SALE OF RESTAURANTS AND
OTHER PROPERTY AND EQUIPMENT ................. - (1,680,000)
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RECEIVABLES .......... 59,000 (67,000)
(INCREASE) DECREASE IN INVENTORIES .......... (71,000) 8,000
DECREASE IN PREPAID EXPENSES ............... 60,000 166,000
(INCREASE) IN OTHER ASSETS .................. (78,000) -
INCREASE (DECREASE) IN ACCOUNTS PAYABLE...... 90,000 (837,000)
INCREASE (DECREASE) IN ACCRUED EXPENSES ..... 380,000 (400,000)
---------- -----------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES .......................... 741,000 (701,000)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
SALE OF RESTAURANTS, NET OF EXPENSES OF SALE.... - 10,257,000
CAPITAL EXPENDITURES ........................... (496,000) (369,000)
PROCEEDS FROM SALE AND MATURITY
OF MARKETABLE SECURITIES ...................... 21,000 -
---------- ------------
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES .......................... (475,000) 9,888,000
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
BANK DEBT REPAYMENT IN ADVANCE OF
SCHEDULED MATURITY ............................ - (9,750,000)
PRINCIPAL PAYMENTS ON LONG-TERM DEBT............ (42,000) (394,000)
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATIONS. (79,000) (73,000)
PROCEEDS FROM PROPERTY AND EQUIPMENT FINANCING.. 575,000 146,000
---------- -----------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES .......................... 454,000 (10,071,000)
---------- -----------
NET CHANGE IN CASH AND EQUIVALENTS .............. 720,000 (884,000)
CASH AND EQUIVALENTS, BEGINNING BALANCE ......... 2,666,000 1,993,000
---------- -----------
CASH AND EQUIVALENTS, ENDING BALANCE ............ $3,386,000 $ 1,109,000
========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MAY 26, 1996 AND MAY 21, 1995
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 March 3, 1996. Certain prior period amounts have been reclassified to
conform with the current period presentation.
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.
Kazi acquired all of the assets, properties and leases of the twenty-four KFC
restaurants 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 repayment of debt, payment of various closing costs and buyouts
of previously leased equipment at certain retained restaurants. The Company
recorded a gain on the 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. The twenty-four KFC restaurants which were sold had revenues prior
to the sale of $3,106,000 in the quarter ended May 21, 1995.
6
<PAGE> 7
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 rights to operate, as a
franchisee, East Side Mario's restaurants in the Cleveland/Akron and Columbus,
Ohio areas. As of July 1, 1996, the Company operates 39 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 26, 1996 were $9,005,000
compared to $11,616,000 for the quarter ended May 21, 1995. The decrease of
$2,611,000 was due to three factors. The first was the loss of $3,106,000 in
revenue from the 24 KFC restaurants sold on May 5, 1995. Second, revenue from
the KFC restaurants which the Company continues to operate increased $790,000
representing a 15% comparable restaurant increase over the prior year. Last,
revenue from the East Side Mario's restaurants decreased $295,000 compared to
the prior year first quarter despite the addition of a sixth East Side Mario's
which opened April 25, 1995. Comparable restaurant sales in East Side Mario's
declined 22% compared to the prior year first quarter.
COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage
costs for fiscal 1997 decreased as a percentage of revenue from 32.1% in fiscal
1996 to 31.3%. The decrease was entirely due to improvements in the food and
paper costs of the KFC restaurants. These improvements are the result of higher
sales volumes, a new supply contract, and a more efficient menu.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits decreased as a
percentage of revenue for the quarter ended May 26, 1996 to 25.8% compared to
26.9% one year ago. The decrease is primarily due to improved labor efficiency
and lower worker's compensation costs in the KFC restaurants.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased
as a percentage of revenue from 28.0% in fiscal 1996 to 29.9% in fiscal 1997.
The increase was primarily caused by higher utility, repair and maintenance, and
advertising costs in the East Side Mario's restaurants. In addition to these
ongoing expenses, the East Side Mario's incurred one time expenses of
approximately $25,000 for dinnerware and supplies related to the adoption of a
new menu.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for
fiscal 1997 declined to $453,000 from $568,000 in fiscal 1996 due to the sale of
the 24 KFC restaurants on May 5, 1995.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for fiscal 1997 of $637,000 were $87,000 or 12.0% below the first
quarter of fiscal 1996. The decrease is due to two reasons. First,
administrative expenses related to operation of the 24 KFC restaurants that were
sold late in the first quarter of fiscal 1996 were eliminated. Second,
consolidation of the management of the East Side Mario's and KFC restaurants
resulted in the elimination of salary and related expenses of the Director of
Operations for the East Side Mario's restaurants.
OPERATING INCOME. Operating income in the current quarter decreased to
$78,000 from $226,000 for the first quarter of fiscal 1996. Operating income for
the KFC restaurants in the first quarter of fiscal 1997 was greater than the
prior year despite the sale of the 24 KFC restaurants late in the first quarter
of fiscal 1996. Operating income of the East Side Mario's in fiscal 1997 was
significantly below fiscal 1996 primarily due to high fixed occupancy costs and
lower revenue in those restaurants opened one year or more.
7
<PAGE> 8
INTEREST EXPENSE. Interest expense on bank debt declined to $133,000 in
fiscal 1997 from $298,000 in fiscal 1996 due to the reduction of bank debt
balances. Interest expense on capitalized leases also declined to $129,000 in
fiscal 1997 from $142,000 in fiscal 1996 primarily due to the sale of the 24 KFC
restaurants, some of which properties were held under capitalized leases.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the first
quarters of fiscal 1997 and fiscal 1996 is presented in the Consolidated
Statements of Cash Flows. Cash provided by operating activities was $741,000 in
the first quarter of fiscal 1997 and the Company purchased property and
equipment of $496,000. The Company paid scheduled long-term bank and capitalized
lease debt of $121,000 in the first quarter of fiscal 1997 and received property
and equipment financing of $575,000 to purchase and refurbish a previously
leased KFC restaurant in Granite City, Illinois. Also, on June 26, 1996 the
Company completed a mortgage financing in the amount of $350,000 to rebuild an
existing KFC restaurant in New Kensington, Pennsylvania.
The Company also entered into a letter of intent on June 21, 1996 to
purchase two (2) existing KFC restaurants located in Western Pennsylvania from
another KFC franchisee. Under the terms of the letter of intent, the Company
agreed to pay cash for the restaurants but believes that financing for the
purchase is available. The purchase is contingent upon the completion of certain
items including the extension and transfer of existing leases. In addition, the
Company has entered into a letter of intent to lease a site in Western
Pennsylvania on which it intends to build a new KFC restaurant.
On June 15, 1996 the Company sold its leasehold interest in the KFC
restaurant in Normandy, Missouri, part of the St. Louis market area.
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 for
use in the acquisition of new KFC properties and refurbishment of existing ones.
Item 6. Exhibits
(a) Exhibit 27 - Financial Data Schedule
8
<PAGE> 9
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 10, 1996 By: /s/ Kenneth L. Hignett
------------- ------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-03-1996
<PERIOD-START> MAR-04-1996
<PERIOD-END> MAY-26-1996
<CASH> 3,386,000
<SECURITIES> 264,000
<RECEIVABLES> 19,000
<ALLOWANCES> 0
<INVENTORY> 418,000
<CURRENT-ASSETS> 4,235,000
<PP&E> 25,477,000
<DEPRECIATION> 9,870,000
<TOTAL-ASSETS> 22,806,000
<CURRENT-LIABILITIES> 4,658,000
<BONDS> 10,922,000
<COMMON> 17,817,000
0
0
<OTHER-SE> (10,591,000)
<TOTAL-LIABILITY-AND-EQUITY> 22,806,000
<SALES> 9,005,000
<TOTAL-REVENUES> 9,005,000
<CGS> 5,141,000
<TOTAL-COSTS> 8,927,000
<OTHER-EXPENSES> (32,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 262,000
<INCOME-PRETAX> (152,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (152,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (152,000)
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
