<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended March 3, 1996 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)
24200 Chagrin Boulevard, Suite 126, Beachwood, OH 44122
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (216) 360-7500
--------------
Securities registered pursuant of Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Shares, Without Par Value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of May 8, 1996, the aggregate market value of the common stock held
by nonaffiliates of the Registrant was $7,039,930.
As of May 8, 1996, the Registrant had 17,816,430 shares of common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
definitive Proxy Statement to security holders for the 1996 annual meeting, to
be filed with the Securities and Exchange Commission on or before June 28, 1996.
<PAGE> 2
MORGAN'S FOODS, INC.
PART I
ITEM 1. BUSINESS.
GENERAL. The Registrant operates, through wholly-owned subsidiaries,
Kentucky Fried Chicken ("KFC") restaurants under franchises from KFC Corporation
and East Side Mario's restaurants in the Cleveland/Akron and Columbus, Ohio
areas under franchises from East Side Mario's, Inc. As of May 24, 1996, the
Company operated 40 KFC restaurants as well as six East Side Mario's
restaurants. The headquarters of the Registrant are located in the Cleveland,
Ohio, metropolitan area. Throughout this Report, the Registrant together with
its subsidiaries is referred to as the "Company."
RESTAURANT OPERATIONS. The Company's KFC restaurants prepare and sell
the distinctive "Kentucky Fried Chicken" and Tender Roast(R) chicken along with
related food items. All containers and packages bear KFC trademarks. The East
Side Mario's restaurants are full service, mid-priced, informal family
restaurants inspired by New York City's famous "Little Italy" district of the
1950's. The menu features a variety of All-American grill favorites and
authentic Italian specialties.
Of the 40 KFC restaurants operated by the Company as of May 24, 1996,
12 are located in Ohio, 14 in Pennsylvania, 12 in Missouri, 1 in Illinois and 1
in West Virginia. The Company was one of the first KFC Corporation franchisees
and has operated in excess of 20 KFC franchises for the past 24 years.
Operations relating to these KFC units are seasonal to a certain extent, with
higher sales generally occurring in the summer months. Five East Side Mario's
restaurants operated by the Company are located in the Cleveland/Akron area and
one in Columbus, Ohio.
FRANCHISE AGREEMENTS. All of the Company's KFC restaurants are operated
under franchise agreements with KFC Corporation. The Company considers retention
of these agreements to be important to the success of its restaurant business
and believes that its relationship with KFC Corporation is satisfactory. The KFC
Corporation franchise agreements require the Company to pay royalties of 4% on
gross revenues and to expend an additional 5% of gross revenues for national and
local advertising and marketing. Remaining franchise terms range from 1 to 14
years and all franchise agreements are renewable at the Company's option for an
additional 10 years or successive ten year periods. The franchise agreements
provide that each KFC unit is to be inspected by KFC Corporation approximately
three or four times per year. These inspections cover product preparation and
quality, customer service, and restaurant appearance and operation. The East
Side Mario's restaurants are operated under franchise agreements with East Side
Mario's Restaurants, Inc., a subsidiary of Pizza Hut, Inc., for a term of 20
years and are renewable by the Company for one additional term of 10 years. The
East Side Mario's franchise agreements require the Company to pay royalties of
4% on gross revenue and 1/2% of gross revenue to an advertising fund. The
franchise agreements also require the Company to expend an additional 2 1/2% of
gross revenue for advertising and promotion. The East Side Mario's franchise
agreements also grant the right to East Side Mario's, Inc. to perform quality
and franchise compliance inspections without prior notice to the Company. Both
KFC Corporation and Pizza Hut, Inc. are wholly owned by PepsiCo, Inc.
2
<PAGE> 3
MORGAN'S FOODS, INC.
PART I (CONT'D)
The Company, like the majority of other KFC franchisees, is a member of
the Association of Kentucky Fried Chicken Franchisees, Inc. ("AKFCF"). The AKFCF
has been involved in a long standing franchise contract dispute with KFC
Corporation. It was announced on February 7, 1996 that a successful conclusion
to this contract dispute was reached. The settlement provides KFC Franchisees
greater territorial protection. In turn, KFC Corporation will have more direct
influence over certain national advertising and public relations activities. The
settlement terms are subject to ratification by the AKFC, the KFC National
Advertising Co-Operative and the Federal District Court.
COMPETITION. The restaurant business is highly competitive. Each of the
Company's KFC restaurants competes directly or indirectly with a large number of
national and regional restaurant operations, as well as with locally owned
restaurants, drive-ins, diners and numerous other establishments which offer
low- and medium-priced chicken, steak, pizza and other food to the public. The
East Side Mario's restaurants compete with other mid-priced, casual, full
service restaurants.
The Company's KFC restaurants rely on innovative marketing techniques
and promotions to compete with other restaurants in the areas in which they are
located. The Company's competitive position is also enhanced by the national
advertising program sponsored by KFC Corporation and its franchisees. The East
Side Mario's rely on a distinctive themed decor and a variety of Italian and
American menu items at moderate prices. Emphasis is placed by the Company on its
control systems and the training of personnel to maintain high food quality and
good service. The Company believes that it is competitive with other restaurants
on the basis of the important competitive factors in the restaurant business
which include primarily restaurant location; product price, quality and
differentiation; and restaurant and employee appearance.
SUPPLIERS. The Company has been able to obtain sufficient supplies to
carry on its business and believes it will be able to do so in the future.
GROWTH. During fiscal 1994, the Company relocated existing KFC
restaurants in Steubenville, Ohio and New Stanton, Pennsylvania and opened two
East Side Mario's restaurants. The Company also closed five unprofitable KFC
restaurants during fiscal 1994. The Company opened three East Side Mario's
restaurants in fiscal 1995 and closed one KFC restaurant on February 26, 1995.
The Company opened its sixth East Side Mario's restaurant on April 26, 1995 and
closed one unprofitable KFC restaurant in St. Louis during fiscal 1996. On May
5, 1995, the Company sold twenty-four of its KFC restaurants in Central
Pennsylvania and New Jersey.
EMPLOYEES. As of May 24, 1996, the Company employs approximately 1,250
persons, including 31 administrative and 105 managerial employees. The balance
are hourly employees, most of whom are part-time. None of the restaurant
employees are represented by a labor union. The Company considers its employee
relations to be satisfactory.
3
<PAGE> 4
MORGAN'S FOODS, INC.
PART I (CONT'D)
ITEM 2. PROPERTIES.
The Company leases approximately 4,300 square feet of space for its
headquarters in Cleveland, Ohio. The lease expires in 2001 and the rent under
the current term is $4,823 per month. The lease also contains a renewal option
of five years which may be exercised by the Company. The Company also leases
space for regional offices in Youngstown, and St. Louis, Missouri, which are
used to assist in the operation of KFC restaurants located near those areas.
Of the 40 KFC restaurants, the Company owns the land and building for
15 locations, owns the building and leases the land for 2 locations and leases
the land and building for 23 locations. Eight of the owned properties are
subject to mortgages. Remaining lease terms (including renewal options) range
from six months to 23 years and average approximately 12 years. These leases
generally require the Company to pay taxes and utilities, to maintain casualty
and liability insurance, and to keep the property in good repair. The Company
pays annual rental for each KFC restaurant in amounts ranging from $10,800 to
$78,750. In addition, 19 of these leases require payment of additional rentals
based on a percentage of gross sales in excess of certain base amounts. Sales
for five KFC restaurants exceeded the respective base amounts in fiscal 1996. Of
the six East Side Mario's restaurants, the Company owns the building and leases
the land on one location and leases the land and the building for 4 locations.
At the sixth location, the building is subject to a short-term lease which
transfers ownership to the Company and the land is under a long-term lease. In
addition, four of the East Side Mario's restaurant leases require payment of
additional rentals based on a percentage of gross sales in excess of certain
base amounts. Sales for these East Side Mario's restaurants did not exceed their
base amounts for fiscal 1996.
The Company believes that its restaurants are generally efficient, well
equipped and maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings in which the Company is
involved as a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to security holders for a vote during
the last quarter of the Company's fiscal year ended March 3, 1996.
4
<PAGE> 5
MORGAN'S FOODS, INC.
PART I (CONT'D)
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers and other Officers of the Company are as
follows:
<TABLE>
<CAPTION>
POSITION WITH
NAME AGE REGISTRANT OFFICER SINCE
- -------------------- --- --------------------- -------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS:
Leonard Stein-Sapir 57 Chairman of the Board April 1989
and Chief Executive
Officer
James J. Liguori 47 President and Chief June 1979
Operating Officer
Kenneth L. Hignett 49 Senior Vice President- May 1989
Chief Financial Officer
& Secretary
OTHER OFFICERS:
Barton J. Craig 47 Senior Vice President - January 1994
General Counsel
Vincent J. Oddi 53 Vice President- September 1979
Restaurant Development
Ramesh J. Gursahaney 47 Vice President- January 1991
Operations Services
</TABLE>
Until 1988, Mr. Craig was Senior Vice President, General Counsel of
Record Data, Inc. and subsequently served as a Law Professor at Albertus Magnus
College.
Executive officers of the Company serve for a term of one year and
until their successors are elected and qualified, unless otherwise specified by
the Board of Directors. Any officer is subject to removal with or without cause,
at any time, by a vote of a majority of the Board of Directors.
5
<PAGE> 6
MORGAN'S FOODS, INC.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Shares are traded on the American Stock Exchange
under the symbol "MR." The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Shares as reported on the
American Stock Exchange.
<TABLE>
<CAPTION>
PRICE RANGE
HIGH LOW
-------------------
<S> <C> <C> <C>
YEAR ENDED MARCH 3, 1996:
1st Quarter ...................... $1 1/2 $15/16
2nd Quarter ...................... 1 5/16 1
3rd Quarter ...................... 1 1/8 13/16
4th Quarter ...................... 7/8 7/16
YEAR ENDED FEBRUARY 26, 1995:
1st Quarter ...................... $2 15/16 $2 5/16
2nd Quarter ...................... 2 7/16 1 7/8
3rd Quarter ...................... 2 1/16 1 1/2
4th Quarter ...................... 1 11/16 1 1/8
</TABLE>
As of May 8, 1996, the Company had approximately 1,260 shareholders of
record. The Company has paid no dividends since fiscal 1975.
6
<PAGE> 7
MORGAN'S FOODS, INC.
PART II (CONT'D)
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for each of the five
fiscal years in the period ended March 3, 1996, is derived from, and qualified
in its entirety by, the consolidated financial statements of the Company. The
following selected financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere in this Report.
<TABLE>
<CAPTION>
YEARS ENDED
---------------------------------------------------------------------------
MARCH 3, FEBRUARY 26, FEBRUARY 27, MARCH 2, MARCH 3,
1996 1995 1994 1993 1992
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Revenues .......................... $ 42,510,000 $ 53,295,000 $ 46,860,000 $ 44,230,000 $44,799,000
Cost of sales:
Food, paper and beverage ........ 13,662,000 17,282,000 15,020,000 13,489,000 14,349,000
Labor and benefits .............. 11,122,000 13,807,000 11,967,000 9,940,000 10,141,000
Restaurant operating expenses ..... 12,256,000 14,632,000 13,448,000 13,475,000 12,710,000
Depreciation and amortization ..... 1,988,000 2,536,000 2,215,000 2,059,000 2,020,000
General and administrative
expenses ......................... 2,947,000 3,759,000 3,516,000 3,357,000 3,873,000
Operating income .................. 535,000 1,279,000 694,000 1,910,000 1,706,000
Gain on sale of restaurants ....... 1,681,000 -- -- -- --
Income (loss) before
accounting change ................ 1,126,000 (425,000) (692,000) (103,000) 14,000
Cumulative effect of
accounting change (2) ............ -- -- 600,000 -- --
Net income (loss) ................. 1,126,000 (425,000) (92,000) (103,000) 14,000
Income (loss) per common share (1):
Income (loss) before
accounting change (1) ......... .06 (.02) (.04) (.01) .00
Cumulative effect of
accounting change ............. -- -- .03 -- --
Net income (loss) ................. .06 (.02) (.01) (.01) .00
Working capital (deficiency) ...... (562,000) (3,728,000) (1,637,000) 903,000 2,169,000
Total assets ...................... 22,034,000 29,432,000 31,708,000 30,312,000 30,599,000
Long-term debt .................... 5,448,000 4,151,000 16,754,000 16,490,000 17,769,000
Long-term capital lease
obligations ...................... 5,062,000 3,896,000 2,573,000 1,782,000 1,880,000
Shareholders' equity .............. 7,378,000 6,249,000 6,652,000 6,740,000 6,838,000
</TABLE>
(1) Computed based upon the weighted average number of common and
common equivalent shares outstanding during each year, which were 17,816,131 in
1996, 17,806,837 in 1995, 17,796,320 in 1994, 17,778,887 in 1993 and 17,771,430
in 1992.
(2) Pertains to adoption of SFAS No. 109, "Accounting for Income
Taxes."
7
<PAGE> 8
MORGAN'S FOODS, INC.
PART II (CONT'D)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS. During fiscal 1994 through 1996 the Company
operated Kentucky Fried Chicken ("KFC") franchised restaurants in Illinois,
Missouri, New Jersey, Ohio, Pennsylvania and West Virginia and East Side Mario's
franchised restaurants in Ohio. The average number of KFC restaurants in
operation during the fiscal year ended March 3, 1996 was 46 compared to 66
during fiscal 1995 and 69 during fiscal 1994. In the first quarter of fiscal
1996 the Company sold twenty-four KFC restaurants in Central Pennsylvania and
New Jersey. During fiscal 1994, the Company obtained exclusive franchise rights
for East Side Mario's in the Columbus, Ohio area. The Company opened two East
Side Mario's during fiscal 1994, three during fiscal 1995 and a sixth in the
first quarter of fiscal 1996.
REVENUES. Revenue was $42,510,000 in fiscal 1996 a decrease of
$10,785,000 or 20.2% compared to an increase of 13.7% in fiscal 1995 and an
increase of 5.9% in fiscal 1994. Fiscal 1996 had 53 weeks compared to 52 weeks
in fiscal 1995 and fiscal 1995 had two more days than fiscal 1994 due to a
change in the end of the accounting week.
The 20.2% revenue decrease during fiscal 1996 was due to the loss of
revenue from the 24 sold KFC restaurants and lower comparable sales in the East
Side Mario's restaurants offset by the addition of one East Side Mario's and
higher revenues in the KFC restaurants the company continues to operate.
Revenues for the 24 sold KFC restaurants were $3,106,000 in fiscal 1996 through
May 5, 1995 (date of sale) compared to $17,964,000 for the full year of fiscal
1995, or a decrease of $14,858,000. Revenues for the three East Side Mario's
operated for the full fiscal years 1996 and 1995 declined by $1,539,000 or 21.6%
while newly opened East Side Mario's restaurants contributed an additional
$3,450,000 in revenues in fiscal 1996 compared to fiscal 1995. The decline in
East Side Mario's comparable sales is primarily the result of intense
competition in the casual mid-priced restaurant segment, lack of national
advertising and normal reductions in sales after the first year of operation of
a new restaurant. Management expects intense competition in this restaurant
segment to continue for the foreseeable future and looks to the franchiser for
changes to supplement the Company's efforts to make the East Side Mario's
restaurants more competitive. Comparable sales in the 40 KFC restaurants which
the Company continues to operate increased $2,742,000 or 11.1% in fiscal 1996
compared to fiscal 1995 while stores closed during fiscal 1996 and 1995
represented a decrease of $635,000 in revenue. The increase in KFC sales is
attributed to the introduction of new products by the franchiser and more
effective national advertising. The differences discussed above include the
effect of an additional week in fiscal 1996 which contributed combined ESM and
KFC revenues of $722,000. The 13.7% revenue increase achieved during fiscal 1995
was primarily due to the addition of three East Side Mario's. Revenues from the
East Side Mario's restaurants totaled $9,824,000 in fiscal 1995 compared to
$3,491,000 in fiscal 1994. Fiscal 1995 revenues from the KFC restaurants
remained relatively flat compared to fiscal 1994. Revenues from the KFC
restaurants during fiscal 1995 were negatively affected by continued intense
competition and lack of introduction of new products by the franchiser. The
Company's revenues were also negatively impacted by the severe winter weather in
the first quarter of fiscal 1995, which resulted in extremely low revenue levels
for approximately four weeks. Fiscal 1995 revenues at certain East Side Mario's
locations were below management's original expectations due to increased
competition from the rapid expansion of other mid-priced full service restaurant
chains.
8
<PAGE> 9
MORGAN'S FOODS, INC.
PART II (CONT'D)
Revenues for the seventeen weeks ended March 3, 1996 (fourth quarter)
decreased $3,814,000 or 25.0% when compared to the sixteen weeks of the fourth
quarter of the prior fiscal year primarily due to the loss of revenue from the
24 sold KFC restaurants offset by increased sales in the KFC restaurants the
company continues to operate and the additional week in the 1996 fourth quarter.
Revenues from the 24 sold KFC restaurants were $4,995,000 in the fourth quarter
of fiscal 1995. Fourth quarter 1996 revenues for the 40 remaining KFC
restaurants increased $1,249,000 and the extra week in fiscal 1996 had $527,000
of revenue. East Side Mario's revenues for the 1996 fourth quarter were
$3,131,000 with six restaurants after removing the extra week compared to
$3,193,000 in the prior year with five restaurants.
COST OF SALES - FOOD, PAPER AND BEVERAGE. Food, paper and beverage
costs declined to $13,662,000 or 32.1% of sales in fiscal 1996 from $17,282,000
or 32.4% of sales in fiscal 1995. While these costs remained relatively constant
as a percentage of sales in both the KFC and East Side Mario's, the company-wide
percentage decreased because of the higher proportion of East Side Mario's
sales, which have a lower percentage of food, paper and beverage costs. Food,
paper and beverage costs in fiscal 1995 increased $2,262,000 or 15.1% to
$17,282,000. Food, paper and beverage costs as a percentage of revenue in fiscal
1995 also increased to 32.4% from 32.1% in fiscal 1994. This was the result of
efficiencies attained from experience in operating the East Side Mario's
restaurants which were offset by higher food costs in the KFC restaurants due to
the mega meal introduced in the fourth quarter of fiscal 1995. For the fourth
quarter, food, paper and beverage costs in fiscal 1996 declined as a percentage
of sales to 31.9% from 32.7% in fiscal 1995. This decrease is entirely due to
improvements in operating efficiency of the KFC restaurants, because of higher
sales and the absence of high food cost promotions.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits decreased to
$11,122,000 or 26.2% of sales in fiscal 1996 from $13,807,000 or 25.9% of sales
in fiscal 1995. While the labor costs as a percentage of sales in the KFC
restaurants improved by one-half percentage point in fiscal 1996 compared to
fiscal 1995, the East Side Mario's labor percentage remained relatively
constant. Expected improvement in labor efficiency of the East Side Mario's
restaurants due to additional management experience was offset by decreased
efficiency due to lower sales volumes. Since the East Side Mario's restaurants
accounted for a greater portion of fiscal 1996 sales, this caused the
company-wide labor percentage to increase. The 24 sold restaurants accounted for
a decrease of $3,575,000 in labor and benefits in fiscal 1996 from fiscal 1995.
Labor and benefits in fiscal 1995 increased to $13,807,000 from $11,967,000 in
fiscal 1994. Labor and benefits as a percentage of revenue increased to 25.9% in
fiscal 1995 compared to 25.5% in fiscal 1994. The Company opened three East Side
Mario's in fiscal 1995 which produced higher labor percentages primarily due to
the normal learning curve during the first few months of operation of a new
restaurant. These increases were partially offset by decreases in KFC labor and
benefits compared to the higher levels experienced in the prior fiscal year due
to the introduction of rotisserie chicken. In addition, the Company's workers'
compensation expense for the KFC division decreased approximately $399,000 in
fiscal 1995 due to lower rates and retroactive adjustments.
9
<PAGE> 10
MORGAN'S FOODS, INC.
PART II (CONT'D)
Labor and benefit costs for the fourth quarter decreased to $3,026,000
in fiscal 1996 from $4,078,000 in fiscal 1995 but increased slightly as a
percentage of sales to 26.4% in 1996, from 26.2% in 1995. The increase was due
to East Side Mario's sales, which carry a higher labor cost percentage than KFC,
accounting for a larger portion of total sales for the fiscal 1996 fourth
quarter.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased
as a percentage of sales in fiscal 1996 to 28.8% from 27.5% in fiscal 1995. This
increase was primarily caused by advertising expenses in both the KFC
restaurants and the East Side Mario's restaurants which increased by
approximately one percent of sales due to increases in promotional activities.
Restaurant operating expenses decreased as a percentage of revenue in fiscal
1995 to 27.5% from 28.7% in fiscal 1994. The Company's level of promotional
activity and local advertising was lower during fiscal 1995 than fiscal 1994.
Fixed costs such as rent and property taxes increased as a percentage of revenue
to 5.3% in fiscal 1995 from 4.6% in fiscal 1994.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in fiscal
1996 decreased to $1,988,000 from $2,536,000 in fiscal 1995. This decrease is
primarily due to $638,000 less depreciation for the 24 sold KFC restaurants,
partially offset by the addition of an East Side Mario's restaurant, the closing
of several unprofitable KFC restaurants, and lower amortization of pre-opening
expenses from the East Side Mario's. Fiscal 1995 depreciation and amortization
increased to $2,536,000 from $2,215,000 in fiscal 1994 primarily due to the
addition of three East Side Mario's restaurants. Amortization of pre-opening
expenses for the East Side Mario's restaurants was $106,000 in fiscal 1996,
$209,000 in fiscal 1995 and $56,000 in fiscal 1994.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased to $2,947,000 in fiscal 1996 from $3,759,000 in fiscal 1995.
The largest factor contributing to the decrease was the elimination of $509,000
of field administrative expenses associated with the 24 sold KFC restaurants. In
addition, East Side Mario's administrative costs declined approximately $120,000
due to reductions in management staff and training and recruiting expenses.
Finally, headquarters administrative costs were reduced by approximately
$162,000 due to staff reductions, salary cuts and lower professional fees and
other miscellaneous expenses. Most of these cost reductions are the result of an
administrative efficiency plan put into effect late in fiscal 1995. Additional
administrative cost reductions will result from the move of the company's
headquarters offices to smaller space in January 1996. General and
administrative expenses increased $243,000 or 6.9% in fiscal 1995 to $3,759,000
compared to fiscal 1994. Expenses increased due to additional training and
recruiting expenses required when opening three East Side Mario's during fiscal
1995. In addition, the company incurred increases in rent, insurance and bonus
accrued for KFC administrative personnel. Administrative expense reductions
which were expected to yield annual savings of approximately $195,000 were
implemented late in the third quarter of fiscal 1995. These reductions included
the elimination of the Vice President of Marketing position and an Area Manager
in the St. Louis market as well as salary reductions of 10% each for the
Chairman and the President of the Company.
10
<PAGE> 11
MORGAN'S FOODS, INC.
PART II (CONT'D)
OPERATING INCOME. Operating income in fiscal 1996 was $535,000 compared
to $1,279,000 in fiscal 1995. The decrease was the result of several factors.
Operating profit in the East Side Mario's division declined by $275,000 and the
sale of the 24 KFC restaurants reduced operating profit by $835,000. These
reductions were offset by an improvement of approximately $366,000 in operating
profit for the KFC restaurants which the company continues to operate. Operating
income for fiscal 1995 increased $585,000 to $1,279,000 from $694,000 in fiscal
1994. The increase was primarily due to reduced local advertising and workers'
compensation rates and retroactive adjustments.
INTEREST EXPENSE AND OTHER INCOME. Interest expense from bank debt and
notes payable decreased to $705,000 from $1,430,000 primarily due to the early
repayment $9,750,000 of bank debt in May 1995 related to the 24 sold KFC's as
well as a reduction in interest rate from 10.35% to less than 10.00% in
September 1995 when the remaining bank debt was refinanced. Interest on
capitalized lease obligations increased in fiscal 1996 to $579,000 from $478,000
in fiscal 1995 due to the addition of two capitalized leases for East Side
Mario's building and equipment. Other income in fiscal 1996 remained relatively
consistent with the prior year at $211,000. Interest expense increased by
$370,000 in fiscal 1995 compared to the prior year. The increase in prime rate
increased the expense of the floating rate debt which had been used in financing
the Company's construction, renovation and acquisition of KFC 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. Finally,
interest expense increased due to capital leases used to finance four East Side
Mario's locations. Other income increased to $208,000 for fiscal 1995 from
$186,000 for fiscal 1994.
CHANGES IN ACCOUNTING FOR INCOME TAXES. The Company was required to
adopt Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes" in the year ended February 27, 1994 (See Note 1 to
Consolidated Financial Statements). SFAS No. 109 superseded SFAS No. 96, which
was the accounting method previously used by the Company. The cumulative effect
of adopting SFAS No. 109 as of the beginning of fiscal 1994 was to increase
income by $600,000.
LIQUIDITY AND CAPITAL RESOURCES. The Company, like others in the
restaurant industry, operates on minimal working capital and relies on cash flow
from operations, debt borrowings and lease financing for the construction and
refurbishment of restaurant properties and repayment of debt. Cash flow activity
for fiscal 1996, 1995 and 1994 is presented in the Consolidated Statements of
Cash Flows.
The Company's working capital deficiency as of March 3, 1996 is
$562,000 compared to $3,728,000 at February 26, 1995. The change in working
capital is primarily due to the refinancing of the company's debt to a 15 year
maturity and the $9,750,000 debt repayment made on May 5, 1995 after the sale of
twenty-four KFC restaurants which was classified as a current liability at
February 26, 1995. Capital expenditures for fiscal 1996 were $813,000,
substantially all of which related to the KFC restaurants.
11
<PAGE> 12
MORGAN'S FOODS, INC.
PART II (CONT'D)
In fiscal 1996 the Company received proceeds from sale/leaseback
transactions of $319,000. In fiscal 1996 the Company remodeled a KFC restaurant
in Allison Park, PA, upgraded drive-thru facilities at 10 KFC restaurants and
added home delivery to six KFC restaurants without external financing. The
Company made principal payments on long-term bank debt of $635,000 in fiscal
1996.
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, development lines of credit and sale/leaseback
arrangements can be obtained to refurbish and acquire KFC restaurants.
Subsequent to the fiscal 1996 year end, the Company used mortgage financing of
$575,000 to purchase and refurbish a previously leased KFC restaurant in Granite
City, IL and is rebuilding a restaurant KFC in New Kensington, PA under a
mortgage financing commitment of $350,000.
The Company expects to commit approximately $1,100,000 to image
enhancements of existing KFC restaurants during fiscal 1997. Plans for
additional East Side Mario's restaurants for the next fiscal year are
indefinite. The Company has the necessary financing in place for the portion of
these capital commitments not to be financed from available cash or cash flow
from operations.
SEASONALITY. The operations of the Company are affected by seasonal
fluctuations. Historically, the Company's revenues and income have been highest
during the summer months with the fourth fiscal quarter representing the slowest
period. This seasonality is primarily attributable to weather conditions in the
Company's marketplace which consists of portions of Ohio, Pennsylvania,
Missouri, Illinois and West Virginia.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company are set forth in
Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
<PAGE> 13
MORGAN'S FOODS, INC.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information on Directors of the Company is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 1996
annual meeting to be filed with the Securities and Exchange Commission on or
before June 28, 1996.
Information regarding the Executive Officers of the Company is reported
in a separate section captioned "Executive Officers of the Registrant" included
in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information on executive compensation is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 1996
annual meeting to be filed with the Securities and Exchange Commission on or
before June 28, 1996.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on security ownership of certain beneficial owners,
officers and directors is incorporated herein by reference to the definitive
Proxy Statement to security holders for the 1996 annual meeting to be filed with
the Securities and Exchange Commission on or before June 28, 1996.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information on certain relationships and related transactions is
incorporated herein by reference to the definitive Proxy Statement to security
holders for the 1996 annual meeting to be filed with the Securities and Exchange
Commission on or before June 28, 1996.
13
<PAGE> 14
MORGAN'S FOODS, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. Financial Statements and Financial Statement Schedules.
The Financial Statements and Financial Statement Schedules listed
on the accompanying Index to Financial Statements and Financial Statement
Schedules are filed as part of this Annual Report on Form 10-K.
(a) 3. Exhibits.
The Exhibits listed on the accompanying Index to Exhibits are
filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
The Registrant filed a report on Form 8-K during the second
quarter of the fiscal 1996 year.
14
<PAGE> 15
MORGAN'S FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEM 14 (A) 1 AND 2
<TABLE>
<CAPTION>
PAGE
ITEM 14 (a) 1 REFERENCE
- ------------- ---------
<S> <C>
Independent Auditors' Report.................................................. 16
Consolidated Balance Sheets
at March 3, 1996 and February 26, 1995...................................... 17
Consolidated Statements of Operations
for the years ended March 3, 1996, February 26, 1995 and February 27, 1994.. 18
Consolidated Statements of Shareholders' Equity
for the years ended March 3, 1996, February 26, 1995 and February 27, 1994.. 19
Consolidated Statements of Cash Flows
for the years ended March 3, 1996, February 26, 1995 and February 27, 1994.. 20
Notes to Consolidated Financial Statements.................................... 21
</TABLE>
ITEM 14 (a) 2
All schedules normally required by Form 10-K are not required under the
related instructions or are inapplicable, and therefore are not presented.
15
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Morgan's Foods, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of Morgan's Foods,
Inc. and subsidiaries as of March 3, 1996 and February 26, 1995 and the related
consolidated statements of operations, shareholders' equity, and cash flows for
each of the three years in the period ended March 3, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Morgan's Foods, Inc. and
subsidiaries at March 3, 1996 and February 26, 1995 and the results of their
operations and their cash flows for each of the three years in the period ended
March 3, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in the year
ended February 27, 1994 the Company changed its method of accounting for income
taxes to conform with Statement of Financial Accounting Standards No. 109.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 24,1996
16
<PAGE> 17
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 3, 1996 AND FEBRUARY 26, 1995
<TABLE>
<CAPTION>
ASSETS
1996 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents..................................... $ 2,666,000 $ 1,993,000
Marketable securities (Note 4)........................... 285,000 359,000
Receivables.............................................. 78,000 105,000
Inventories.............................................. 347,000 298,000
Prepaid expenses......................................... 208,000 299,000
Assets held for sale, net (Note 2)....................... - 8,354,000
----------- -----------
3,584,000 11,408,000
Property and equipment(Notes 4 and 5):
Land..................................................... 1,464,000 1,464,000
Buildings and improvements............................... 5,280,000 5,224,000
Property under capital leases............................ 6,152,000 4,605,000
Leasehold improvements................................... 3,974,000 3,809,000
Equipment, furniture and fixtures........................ 8,059,000 7,433,000
Construction in progress................................. 52,000 465,000
----------- -----------
24,981,000 23,000,000
Less accumulated depreciation and amortization............ 9,472,000 7,886,000
----------- -----------
15,509,000 15,114,000
Other assets.............................................. 1,061,000 990,000
Deferred taxes (Note 7)................................... 600,000 600,000
Excess of cost over amounts assigned
to net assets of acquired businesses..................... 1,280,000 1,320,000
----------- -----------
$22,034,000 $29,432,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 4)............ $ 263,000 $10,600,000
Current maturities of capital lease obligations (Note 5). 337,000 263,000
Accounts payable......................................... 1,884,000 2,680,000
Accrued liabilities (Note 3)............................. 1,662,000 1,593,000
----------- -----------
4,146,000 15,136,000
Long-term debt (Note 4)................................... 5,448,000 4,151,000
Long-term capital lease obligations (Note 5).............. 5,062,000 3,896,000
Commitments and contingencies (Notes 4 and 5)
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................................. - (3,000)
Capital in excess of stated value......................... 11,088,000 11,088,000
Accumulated deficit....................................... (21,527,000) (22,653,000)
----------- -----------
Total shareholders' equity................................ 7,378,000 6,249,000
----------- -----------
$22,034,000 $29,432,000
=========== ===========
</TABLE>
See notes to consolidated financial statements.
17
<PAGE> 18
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................... $ 42,510,000 $ 53,295,000 $ 46,860,000
Cost of sales:
Food, paper and beverage................. 13,662,000 17,282,000 15,020,000
Labor and benefits....................... 11,122,000 13,807,000 11,967,000
Restaurant operating expenses.............. 12,256,000 14,632,000 13,448,000
Depreciation and amortization.............. 1,988,000 2,536,000 2,215,000
General and administrative expenses........ 2,947,000 3,759,000 3,516,000
------------ ------------ ------------
Operating income........................... 535,000 1,279,000 694,000
Interest Expense:
Bank debt and notes payable.............. (705,000) (1,430,000) (1,289,000)
Capital leases........................... (579,000) (478,000) (249,000)
Gain on sale of restaurants (Note 2)....... 1,681,000 - -
Other income............................... 211,000 208,000 186,000
------------ ------------ ------------
Income(Loss) before income
taxes and accounting change............... 1,143,000 (421,000) (658,000)
Provision for income taxes (Note 7)........ 17,000 4,000 34,000
------------ ------------ -----------
Income (Loss) before accounting change..... 1,126,000 (425,000) (692,000)
Cumulative effect of change in accounting
for income taxes (Note 1)................. - - 600,000
------------ ------------ -----------
Net income (loss).......................... $ 1,126,000 $ (425,000) $ (92,000)
============ ============ ===========
Net income (loss) per common share (Note 6):
Income (loss) before accounting change.... $ .06 $ (.02) $ (.04)
Cumulative effect of change in
accounting for income taxes.............. - - .03
============ ============= ===========
Net income (loss).......................... $ .06 $ (.02) $ (.01)
============ ============= ===========
</TABLE>
See notes to consolidated financial statements.
18
<PAGE> 19
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
<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, March 2, 1993......... 17,816,430 $17,817,000 (32,828)$(53,000) $11,112,000 $(22,136,000) $6,740,000
Net loss....................... (92,000) (92,000)
Exercise of stock options...... 15,204 24,000 (24,000)
Issuance of treasury shares
for 401(k) contributions...... 2,358 4,000 4,000
---------- ----------- ------- -------- ----------- ------------ -----------
Balance, February 27, 1994..... 17,816,430 17,817,000 (15,266) (25,000) 11,088,000 (22,228,000) 6,652,000
Net loss....................... (425,000) (425,000)
Issuance of treasury stock
for 401(k) contributions...... 13,764 22,000 22,000
---------- ----------- ------- -------- ----------- ------------ -----------
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
========== =========== ======= ======== =========== ============ ===========
</TABLE>
See notes to consolidated financial statements.
19
<PAGE> 20
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ------------ ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $1,126,000 $ (425,000) $ (92,000)
Adjustments to reconcile to net cash
provided by operating activities:
Cumulative effect of change in
accounting for income taxes............. (600,000)
Depreciation and amortization............ 1,988,000 2,536,000 2,215,000
Loss on disposal of property
and equipment........................... 65,000 99,000
Gain on sale of restaurants.............. (1,681,000)
Changes in assets and liabilities:
Decrease (Increase) in receivables...... 121,000 (53,000) (8,000)
Decrease (Increase) in inventories...... (32,000) (82,000) 20,000
Decrease (Increase) in prepaid expenses. 91,000 (360,000) 47,000
Increase in other assets................ (106,000) (65,000) (237,000)
Increase (Decrease) in accounts payable. (796,000) 39,000 520,000
Increase (Decrease) in accrued
liabilities............................ (346,000) 391,000 (267,000)
----------- ---------- ----------
Net cash provided by operating activities.. 365,000 2,046,000 1,697,000
----------- ---------- ----------
Cash flows from investing activities:
Sale of restaurants....................... 10,257,000 - -
Capital expenditures...................... (813,000) (1,629,000) (5,672,000)
Purchase of licenses...................... - (86,000) (267,000)
Proceeds from sale and maturity
of marketable securities................. 74,000 1,278,000 1,457,000
Purchase of marketable securities......... - (1,178,000) (1,419,000)
----------- ---------- ----------
Net cash provided by (used in)
investing activities...................... 9,518,000 (1,615,000) (5,901,000)
----------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of financing costs.................... 5,343,000 - 2,000,000
Principal payments on long-term debt....... (635,000) (3,742,000) (1,584,000)
Principal payments on capital
lease obligations......................... (324,000) (214,000) (98,000)
Bank debt repayment in advance of
scheduled maturities...................... (13,913,000) - -
----------- ---------- ----------
Proceeds from sale/leaseback
transactions.............................. 319,000 2,440,000 1,929,000
----------- ---------- ----------
Net cash provided by (used in)
financing activities...................... (9,210,000) (1,516,000) 2,247,000
----------- ----------- ----------
Net change in cash and equivalents......... 673,000 (1,085,000) (1,957,000)
Cash and equivalents, beginning balance.... 1,993,000 3,078,000 5,035,000
----------- ----------- ----------
Cash and equivalents, ending balance....... $ 2,666,000 $ 1,993,000 $3,078,000
=========== =========== ==========
Noncash investing and financing
activities - capital leases............... $ 1,547,000 $ 2,010,000 $ -
=========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
20
<PAGE> 21
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("The Company") operates
40 Kentucky Fried Chicken ("KFC") restaurants in the states of Illinois,
Missouri, Ohio, Pennsylvania and West Virginia, which comprised 72% of total
revenues for fiscal 1996. The Company also operates, as franchisee, 6 East Side
Mario's restaurants in the Cleveland/Akron and Columbus, Ohio areas which
comprised 28% of total revenues for fiscal 1996. The Company opened its first
two East Side Mario's restaurants in fiscal 1994, three additional East Side
Mario's during fiscal 1995, and its sixth East Side Mario's in April 1995. The
Company's fiscal year is a 52-53 week year ending on the Sunday nearest the last
day of February. Fiscal 1996 is a 53 week year.
USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions pending completion of related events. These estimates
and assumptions affect the amounts reported at the date of the financial
statements for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
RECLASSIFICATION. Certain fiscal 1995 and 1994 amounts have been
reclassified to conform with current year presentation.
CASH AND EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
MARKETABLE SECURITIES. Marketable securities consist of U.S. Treasury
Notes and Bills, including those pledged as collateral for long-term debt. In
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting For Certain Investments in Debt and Equity Securities", these
securities are classified as held to maturity and accordingly, are carried at
amortized cost unless there is a permanent impairment of their value.
INVENTORIES. Inventories, principally food, beverages and paper
products, are stated at the lower of aggregate cost (first-in, first-out basis)
or market.
PRE-OPENING COSTS. Pre-opening costs, which consist principally of
training costs, are capitalized and amortized over twelve months.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets as follows: buildings and improvements - 3 to
20 years; and equipment, furniture and fixtures - 10 years. Leasehold
improvements are amortized over the shorter of the life of the asset or life of
the lease, which ranges from 3 to 15 years. The asset
21
<PAGE> 22
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
values of the capitalized leases are being amortized using the straight-line
method over the lives of the respective leases which range from 15 to 20 years.
Depreciation and amortization expense for fiscal 1996, 1995 and 1994 was
$1,741,000, $2,122,000 and $1,954,000, respectively.
Management evaluates the net carrying value of property and equipment
periodically in light of both the estimated future cash flows resulting from the
use of the assets as well as the estimated liquidation value of such assets.
Management believes there is no impairment of the carrying value at March 3,
1996.
AMORTIZATION. The excess of cost over amounts assigned to net assets of
acquired businesses is being amortized over forty years on a straight-line
basis. The balances presented in the accompanying consolidated balance sheets as
of March 3, 1996 and February 26, 1995 are net of accumulated amortization of
$2,426,000 and $2,386,000, respectively. Annual amortization expense for fiscal
1996 was $53,000 and for 1995 and 1994 was $127,000. Management evaluates the
carrying amount of the excess of cost over amounts assigned to net assets of
acquired businesses periodically based upon past and projected cash flows from
operations and the estimated fair value of related assets. Management believes
there is no impairment of the carrying value at March 3, 1996.
CHANGE IN ACCOUNTING FOR INCOME TAXES. The Company was required to
adopt Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes" in the year ended February 27, 1994. This statement superseded
SFAS No. 96, which was the accounting method previously used by the Company. The
cumulative effect of adopting SFAS No. 109 as of the beginning of fiscal 1994
was to increase income by $600,000.
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. the assets of
twenty-four KFC restaurants located in Central Pennsylvania and New Jersey with
a net book value of $8,193,000 ($8,354,000 at February 26, 1995). 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
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.
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. As of March 3, 1996 the
Company remains as the guarantor on six of the restaurant leases for various
periods of time ranging up to 15 years.
The twenty-four KFC restaurants which were sold had revenues prior to
the sale of $3,106,000 during fiscal 1996 and revenues of $17,964,000 during
fiscal 1995.
22
<PAGE> 23
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
NOTE 3. ACCRUED LIABILITIES.
Accrued liabilities consist of the following at March 3, 1996 and
February 26, 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Accrued compensation.............................. $ 608,000 $ 634,000
Accrued taxes other than income taxes............. 399,000 578,000
Accrued liabilities related to sold restaurants... 378,000 -
Other accrued expenses............................ 277,000 381,000
---------- ----------
$1,662,000 $1,593,000
========== ==========
</TABLE>
NOTE 4. LONG-TERM DEBT.
Long-term debt consists of the following at March 3, 1996 and February
26, 1995
<TABLE>
<CAPTION>
1996 1995
----------- -----------
<S> <C> <C>
Mortgage debt, monthly payments of $59,000
including interest at 9.96% to 10.00%, through
2010, collateralized by seven restaurants having
a net book value at March 3, 1996 of $1,937,000... $ 5,441,000
Bank debt, monthly payments of principal
plus interest at 1.35% above prime,
repaid in fiscal 1996............................ $14,394,000
Note payable at 9%, monthly payments of
$9,100 including interest through October 1998
and thereafter $500 through October 2003,
collateralized by marketable securities
and cash investments having a value of
$285,000 at March 3, 1996........................ 270,000 357,000
----------- -----------
5,711,000 14,751,000
Less current maturities............................ 263,000 10,600,000
----------- -----------
$ 5,448,000 $ 4,151,000
=========== ===========
</TABLE>
Current maturities of long-term debt at February 26, 1995 includes
$9,750,000 repaid on May 5, 1995 in advance of scheduled maturities (See note
2).
23
<PAGE> 24
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
The Company paid interest relating to long-term debt of approximately
$813,000, $1,421,000 and $1,304,000 in fiscal 1996, 1995 and 1994, respectively.
In April 1996 the Company completed a mortgage financing in the amount
of $575,000 for the purchase and refurbishment of a previously leased KFC
restaurant in Granite City, IL.
NOTE 5. LEASE OBLIGATIONS AND OTHER COMMITMENTS.
Property under capital leases at March 3, 1996 and February 26, 1995,
excluding amounts reclassified to assets held for sale (See Note 2), are as
follows:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Leased property:
Buildings .......................... $ 5,054,000 $ 3,866,000
Equipment, furniture
and fixtures ...................... 1,098,000 739,000
------------ ------------
Total .............................. 6,152,000 4,605,000
Less accumulated amortization ...... 1,012,000 613,000
------------ ------------
$ 5,140,000 $ 3,992,000
============ ============
</TABLE>
Amortization of leased property under capital leases was $391,000,
$257,000 and $127,000 in fiscal 1996, 1995 and 1994, respectively.
Related obligations under capital leases at March 3, 1996 and February
26, 1995, excluding amounts reclassified to assets held for sale (See Note 2),
are as follows:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Capital lease obligations $5,399,000 $4,159,000
Less current maturities 337,000 263,000
---------- ----------
Long-term capital lease obligations $5,062,000 $3,896,000
========== ==========
</TABLE>
The Company paid interest of approximately $579,000, $478,000 and
$249,000 relating to capital lease obligations in fiscal 1996, 1995 and 1994,
respectively.
24
<PAGE> 25
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
Future minimum rental payments to be made under capital leases at March
3, 1996, are as follows:
<TABLE>
<S> <C>
1997 ......................... $ 938,000
1998 ......................... 902,000
1999 ......................... 884,000
2000 ......................... 794,000
2001 ......................... 608,000
Later years .................. 6,685,000
-----------
10,811,000
Less amount representing
interest ..................... 5,412,000
-----------
Total obligations under
capital leases ............... $ 5,399,000
===========
</TABLE>
The Company's leases for restaurant land and buildings are
noncancellable and expire on various dates through 2014. The leases have renewal
options ranging from 1 to 29 years. Certain restaurant land and building leases
require the payment of additional rent equal to an amount by which a percentage
of annual sales exceeds annual minimum rentals. Total contingent rentals were
$41,000, $75,000 and $57,000 in fiscal 1996, 1995 and 1994, respectively. Future
noncancellable minimum rental payments under operating leases at March 3, 1996,
are as follows: 1997 - $1,573,000; 1998 - $1,447,000; 1999 - $1,383,000; 2000 -
$1,146,000; 2001 - $1,104,000 and an aggregate $9,858,000 for the years
thereafter. Rental expense for all operating leases was $1,875,000, $2,375,000
and $1,798,000 for fiscal 1996, 1995 and 1994, respectively.
The Company remains as the guarantor on six leases related to the
twenty-four restaurants sold on May 5, 1995. These leases are for various
periods of time ranging up to 15 years.
During fiscal 1996, 1995 and 1994 the Company completed sale/leaseback
transactions for land and buildings and equipment for East Side Mario's
restaurants. No gain or loss was recorded for these transactions. Lease
commitments for these transactions are included in the capital lease obligations
and operating lease commitments disclosed above.
The Company is required to pay royalties of 4% of gross revenues to KFC
Corporation and to expend an additional 5% of gross revenues on national and
local advertising pursuant to its franchise agreements.
The East Side Mario's franchise agreement requires the Company to pay
royalties of 4% on gross revenues and 1/2% of gross revenues to an advertising
fund. The franchise agreement also requires the Company to expend an additional
2 1/2% of gross revenues for advertising and promotion.
25
<PAGE> 26
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
NOTE 6. NET INCOME PER COMMON SHARE.
Net income per common share has been computed based on the weighted
average number of common shares outstanding during each year which totaled
17,816,131, 17,806,837 and 17,796,320 for fiscal 1996, 1995 and 1994,
respectively.
NOTE 7. INCOME TAXES.
In the year ended February 27, 1994 the Company adopted SFAS No. 109,
"Accounting for Income Taxes". Under SFAS No. 109, the Company was required to
record deferred tax assets for the benefits of future deductible temporary
differences and operating loss and tax credit carryforwards. After evaluating
historical and projected profitability, a valuation allowance was recorded to
reduce the deferred tax assets to the amount more likely than not to be realized
in the future.
As permitted under SFAS No. 109, the Company elected not to restate the
financial statements of any prior years. The cumulative effect of adopting SFAS
No. 109 as of the beginning of fiscal 1994 increased net income by $600,000, or
$.03 per share. The effects of the change on both income before income taxes and
the effective tax rate for fiscal 1994, 1995 and 1996 were not material.
The current provision for income taxes, which approximates tax
payments, consists of state and local taxes of $17,000, $4,000 and $34,000 for
fiscal 1996, 1995 and 1994, respectively. There was no deferred provision for
income taxes during fiscal 1996, 1995 and 1994.
A reconciliation between the provision for income taxes and income
taxes calculated at the statutory tax rate of 35% is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- ---------
<S> <C> <C> <C>
Tax provision (benefit) at
statutory rate................ $ 400,000 $(147,000) $(230,000)
Goodwill amortization.......... 19,000 44,000 44,000
State and local taxes,
net of federal benefit........ 11,000 3,000 22,000
Generation (utilization) of net
operating loss carryforwards.. (414,000) 102,000 196,000
Other.......................... 1,000 2,000 2,000
--------- -------- ---------
$ 17,000 $ 4,000 $ 34,000
========= ======== =========
</TABLE>
26
<PAGE> 27
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
The components of deferred tax assets (liabilities) at March 3, 1996
and February 26, 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C>
Operating loss carryforwards.................. $8,544,000 $8,716,000
Tax credit carryforwards...................... 243,000 243,000
Depreciation.................................. 110,000 375,000
Capital leases................................ 104,000 244,000
Accrued expenses not currently deductible..... 148,000 9,000
Inventory valuation........................... (15,000) (9,000)
Valuation allowance........................... (8,534,000) (8,978,000)
---------- ----------
Deferred tax asset - net...................... $ 600,000 $ 600,000
========== ==========
</TABLE>
The valuation allowance decreased $444,000 and increased $99,000 during
fiscal 1996 and 1995, respectively.
At March 3, 1996, the Company has net operating loss carryforwards
which, if not utilized, will expire as follows:
<TABLE>
<S> <C>
1999 ................... $ 8,124,000
2000 ................... 4,513,000
2001 ................... 4,055,000
2004 ................... 737,000
2005 ................... 2,786,000
2009 ................... 1,077,000
2010 ................... 69,000
-----------
Total .................. $21,361,000
===========
</TABLE>
As of March 3, 1996, the Company has an alternative minimum tax credit
carryforward of $56,000. In addition, the Company has approximately $187,000 of
investment tax credits (after reduction pursuant to the Tax Reform Act of 1986)
available to offset future federal income tax liabilities through 2001.
NOTE 8. STOCK OPTIONS AND OTHER EQUITY TRANSACTIONS.
The Company had an Incentive Stock Option Plan ("Incentive Plan") and a
Non-Qualified Stock Option Plan ("Stock Option Plan"). Options granted under the
Incentive and Stock Option plans are exercisable at the market value of the
underlying common shares on the date of the grant. Both plans expired during
fiscal 1995. Options granted under the Incentive Plan remain outstanding with
option prices of $1.125 to $2.6875 until they individually expire through
January 2004 according to the terms of the plan.
27
<PAGE> 28
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 3, 1996, FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
Information with respect to these option plans follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Outstanding, beginning of year......... 397,000 506,000 480,000
Granted at $2.6875 per share........... - - 66,000
Exercised at $1.125 per share.......... - - (35,000)
Surrendered at $1.50 per share......... - - (5,000)
Expired at $2.6875 per share........... (6,000) (109,000) -
------- ------- -------
Outstanding, end of year............... 391,000 397,000 506,000
======= ======= =======
Exercisable, end of year............... 371,000 316,000 366,000
======= ======= =======
Available for grant, end of year....... -0- -0- 84,000
======= ======= =======
</TABLE>
The Company has Non-Qualified Stock Option Agreements with the Chairman
of the Board and Chief Executive Officer and with the President granting the
option to purchase an additional 500,000 and 300,000 common shares,
respectively, with option prices ranging from $1.25 to $1.75 per share.
During fiscal 1996, 1995 and 1994 the Company incurred approximately
$6,000, $6,000 and $95,000, respectively, in legal fees from a law firm in which
one of the directors of the Company is a major shareholder.
NOTE 9. 401-K RETIREMENT PLAN.
During fiscal 1994 the Company adopted a 401-K Retirement Plan. All
employees age 21 or older who have completed one year of service with the
Company, working at least 1,000 hours, are eligible to participate in the plan.
The Company matches in Company stock a percentage of employee contributions.
During fiscal 1996, 1995 and 1994, respectively, the Company incurred $20,000,
$28,000 and $10,000, respectively, in expenses for matching contributions to the
plan.
NOTE 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107 requires disclosure
about fair value for all financial instruments. Fair value of the Company's debt
at March 3, 1996 approximates carrying value.
28
<PAGE> 29
MORGAN'S FOODS, INC.
INDEX TO EXHIBITS
ITEM 14(a)(3)
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Description
------ -------------------
<S> <C>
3.1 Amended Articles of Incorporation, as amended (1)
3.2 Amended Code of Regulations (1)
4.1 Specimen Certificate for Common Shares (2)
10.1 Specimen KFC Franchise Agreements (3)
10.2 Amended and Restated Incentive Stock Option Plan (5)
10.3 Non-Qualified Stock Option Agreement with Leonard R. Stein-Sapir (4)
10.4 Non-Qualified Stock Option Agreement with James J. Liguori (1)
10.5 Form of East Side Mario's Area Development Agreement and Franchise Agreement (5)
10.6 Form of Mortgage Loan Agreement with Captec Financial Group, Inc.
19 Form of Indemnification Contract between Registrant and its Officers and Directors (5)
21 Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
<FN>
(1) Filed as an exhibit to Registrant's Form 10-K for the 1992 fiscal year
and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement (No.
33-35772) on Form S-2 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement (No.
2-78035) on Form S-1 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form 8-K dated May 4, 1989 and
incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Form 10-K for the 1993 fiscal
year and incorporated herein by reference.
</TABLE>
29
<PAGE> 30
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Dated: May 24, 1996 /s/ Leonard Stein-Sapir
---------------------------- ----------------------------------------
By: Leonard Stein-Sapir
Chairman of the Board,
Chief Executive Officer & Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
/s/ Leonard Stein-Sapir /s/ Lawrence S. Dolin
- --------------------------------------- -----------------------------------
By: Leonard Stein-Sapir By: Lawrence S. Dolin
Chairman of the Board, Director
Chief Executive Officer & Director Dated: May 24, 1996
Dated: May 24, 1996
/s/ James J. Liguori /s/ Steven S. Kaufman
- --------------------------------------- -----------------------------------
By: James J. Liguori By: Steven S. Kaufman
Director, President & Director
Chief Operating Officer Dated: May 24, 1996
Dated: May 24, 1996
/s/ Kenneth L. Hignett /s/ Richard A. Arons
- --------------------------------------- -----------------------------------
By: Kenneth L. Hignett By: Richard A. Arons
Director, Senior Vice President, Director
Chief Financial Officer & Secretary Dated: May 24, 1996
Dated: May 24, 1996
/s/ Bernard Lerner
-----------------------------------
By: Bernard Lerner
Director
Dated: May 24, 1996
30
<PAGE> 1
Loan Number: 05942
Aliquippa, Pennsylvania
EXHIBIT 10.6 - PROMISSORY NOTE
------------------------------
$844,200.00 Date: September 20, 1995
PROMISE TO PAY. For value received, Morgan's Restaurants of
Pennsylvania, Inc., a Pennsylvania corporation ("Borrower") promises to pay to
the order of Captec Financial Group, Inc., a Michigan corporation ("Lender")
Eight Hundred Forty-Four Thousand Two Hundred and 00/100 Dollars ($844,200.00),
or so much of such sum as has been advanced under this Note, as follows:
Installments of principal and interest in the amount of Nine
Thousand Seventy-Two Dollars ($9,072.00) are due and payable on the first day of
each month, commencing November 1, 1995; until October 1,2010 ("Due Date"), when
the outstanding principal balance, plus accrued interest, is due and payable
(unless the indebtedness evidenced by this Note is accelerated, in which case,
the Due Date is the date of acceleration). The amortization period for this
Note, for purposes of calculating the monthly installments of principal and
interest, is fifteen (15) years.
All payments under this Note shall be made at Lender's principal
office at 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. Box 544, Ann
Arbor, Michigan 48106-0544, or at such other address as Lender may designate in
writing, or by electronic funds withdrawal made by Lender upon written
authorization therefor from Borrower, which authorization shall not be revocable
by Borrower without the consent of Lender. Payments due and payable on a day on
which Lender is not open for business are due on the next succeeding business
day. Payments will be applied first to accrued interest and then to principal.
INTEREST RATE. The outstanding principal balance of this Note
will bear interest at a fixed rate equal to ten percent (10%) per annum until
the Due Date (whether by acceleration or otherwise), and thereafter at a rate
which is three percent (3%) above the rate otherwise in effect
Interest will be computed on the basis of a year consisting of
twelve (12) months of thirty (30) days each. In no event, however, shall the
interest rate exceed the maximum rate allowed by law. Any interest payment which
would be deemed unlawful for any reason under applicable law shall be applied to
the outstanding principal balance of this Note.
PREPAYMENT. Borrower may voluntarily prepay the unpaid principal
balance of this Note, in whole or in part, together with accrued interest
thereon, at any time, but only if Borrower concurrently pays to Lender a
prepayment premium determined as follows:
(a) If the prepayment is made during the first loan year, the
prepayment premium shall equal five percent (5%) of the prepaid principal.
(b) If the prepayment is made during the second loan year, the
prepayment premium shall equal four percent (4%) of the prepaid principal.
(c) If the prepayment is made during the third loan year, the
prepayment premium shall equal three percent (3%) of the prepaid principal.
(d) If the prepayment is made during the fourth loan year, the
prepayment premium shall equal two percent (2%) of the prepaid principal.
(e) If the prepayment is made during the fifth through the
fifteenth loan years, the prepayment premium shall equal one percent (1%) of the
prepaid principal.
<PAGE> 2
The "first loan year" shall commence on the date of the closing of the loan
evidenced by this Note, and subsequent loan years shall commence on the
anniversaries of the date of the closing of such loan.
Prepayments will be applied to installments of principal in
their inverse order of maturity. Until this Note is paid in full, no prepayment
shall reduce the dollar amount of monthly installments required to be paid under
this Note.
LATE PAYMENT CHARGE. In the event that any payment under this
Note is not received by Lender within fifteen (15) days of the date when due, a
late charge of five percent (5%) of the amount of such payment will be due.
Borrower agrees that the late charge is a reasonable estimate of the
administrative costs which Lender will incur in processing the delinquency.
Lender's acceptance of a late payment and/or of the late payment charge will not
waive any default under this Note or affect the acceleration of this Note (if
this Note has been accelerated).
COLLATERAL. This Note and any other present or future
indebtedness or liability of Borrower to Lender, whether joint or several,
contingent or absolute (collectively, the "Indebtedness"), is secured by and in
accordance with the terms of any mortgage, deed of trust, security agreement,
pledge, assignment or other agreement executed by Borrower from time to time to
or for the benefit of Lender. All property securing the Indebtedness is referred
to as the "Collateral".
Borrower (or any guarantor) shall not sell or otherwise dispose
of any substantial portion of its assets or property without the prior consent
of Lender, which consent shall not be unreasonably withheld. Borrower (or any
guarantor) shall not merge or otherwise consolidate with any other entity which
results in the surviving entity having a consolidated net worth less than the
consolidated net worth of the Borrower (or any guarantor) immediately prior to
the merger or consolidation.
DEFAULT. Any of the following events shall, for purposes of this Note,
constitute an "Event of Default":
(a) Failure by Borrower to pay any amount owing on or with
respect to the Indebtedness within five (5) days of the date when due,
whether by maturity, acceleration or otherwise.
(b) Any failure by Borrower (or any guarantor of all or any part
of the Indebtedness) to comply with any of the non-monetary terms,
provisions, warranties or covenants of this Note or any other
agreement or commitment between Borrower (or any guarantor) and
Lender, which failure continues for thirty (30) days after the date of
written notice to Borrower (or guarantor) from Lender of such default.
(c) Institution of foreclosure proceedings or other exercise of
rights and remedies by the holder of any mortgage, deed of trust,
security interest or other lien against the Collateral (or any portion
thereof).
(d) Insolvency of Borrower (or any guarantor) or the admission in
writing of Borrower's (or any guarantor's) inability to pay debts as
they mature.
(e) Any material statement, representation or information made or
furnished by or on behalf of Borrower (or any guarantor) to Lender in
connection with or to induce Lender to provide or advance any of the
Indebtedness shall prove to be false or materially misleading when
made or furnished.
(f) Institution of bankruptcy, reorganization, insolvency or
other similar proceedings by or against Borrower (or any guarantor),
unless, in the case of a petition filed against Borrower (or any
guarantor), the same is dismissed within sixty (60) days of the date
of filing.
(g) Any uninsured loss, theft, substantial damage or destruction
to the Collateral, or the issuance or filing of any judgment,
attachment, levy, garnishment or the commencement of any related
proceeding or the commencement of any other judicial process upon or
in respect to Borrower (or any guarantor) or the Collateral.
-2-
<PAGE> 3
(h) Sale or other disposition by Borrower (or any guarantor) of any
substantial portion of its assets or property without Lender's prior
consent, which will not be unreasonably withheld.
(i) Death, dissolution, termination of existence, insolvency, business
failure or assignment for the benefit of creditors of or by Borrower (or
any guarantor) or a merger or consolidation by Borrower (or any guarantor)
in which the surviving entity has a consolidated net worth less than the
consolidated net worth of Borrower (or any guarantor) immediately prior to
the merger or consolidation.
(j) Any failure by Borrower to pay any indebtedness in excess of
Twenty-Five Thousand Dollars ($25,000) (other than to Lender) when due or
any failure by any guarantor to pay and indebtedness in excess of One
Hundred Thousand Dollars ($100,000) (other than to Lender) when due or any
failure in the observance or performance of any term, covenant or condition
In any document evidencing, securing or relating to such indebtedness,
which failure continues beyond any applicable cure period.
(k) There is a substantial change in the existing or prospective
financial condition or worth of Borrower (any guarantor) or the Collateral,
which Lender in good faith determines to be materially adverse.
(l) Receipt by Borrower of a valid notice of termination of the
franchise agreement from KFC Corporation, a Delaware corporation
("Franchisor"), for the Kentucky Fried Chicken franchised restaurant
operation located at 1000 Broadhead Road, Aliquippa, Pennsylvania 15001
("Franchised Operation"). Borrower agrees to promptly provide Lender with a
copy of any such notice of termination. Further, Borrower agrees to
promptly provide Lender with a copy of any notice to Borrower of the
existence of any breach which, with notice or the passage of time, would
entitle Franchisor to terminate the franchise agreement for the Franchised
Operation.
(m) The default by Borrower under any other agreement with Lender or
any "affiliate" of Lender (as hereinafter defined). For purposes of this
Note, "affiliate" shall mean a person or entity which owns ten percent
(10%) or more of the voting securities of Lender, or a person or entity
which directly or indirectly controls or is controlled by Captec Financial
Group, Inc., a Michigan corporation.
Upon an occurrence of an Event of Default, Lender shall have the option to
declare all or part of the Indebtedness (including this Note) immediately due
and payable. In addition, the prepayment premium shall be immediately due and
payable upon the occurrence of an Event of Default. If this Note is not paid at
maturity (whether by acceleration or otherwise), Lender shall have all of the
rights and remedies provided at law or equity or by agreement, including,
without limit, the right to sell or liquidate all or any part of the Collateral.
The remedies of Lender are cumulative and not exclusive.
EXAMINATION OF RECORDS. Borrower shall at all times keep full and accurate
records of its business and of the Collateral, which records shall be open to
inspection and copying by Lender at all reasonable times.
LIABILITY OF SIGNATORIES. Borrower, and all guarantors and endorsers, and
any other party liable for the Indebtedness evidenced by this Note jointly and
severally: (i) waive presentment, demand, protest, notice of dishonor, notice of
non-payment and notice of acceleration of this Note, (ii) release Lender and the
attorney and attorney's from all errors, defects, and imperfections in entering
judgment by confession, issuing any process, or instituting any proceedings
relating to the confession of judgment; (iii) waive all benefit that might
accrue by virtue of any present or future laws exempting the Collateral, or any
other property, real or personal, or any part of the proceeds arising from the
sale of any Collateral, from attachment, levy or sale under execution, or
providing for any stay of execution, exemption from civil process, or extension
of time; (iv) agree that the Collateral may be sold to satisfy any judgment
entered into on this Note or other instrument securing the Indebtedness, in
whole or in part, and in any order that may be desired by Lender; and (v) agree
that no extension or postponement of the time for payment, or waiver, or
indulgence or forbearance granted to Borrower (without limit as to number or
period) or any modification of this Note, or any substitution, or exchange or
release of all or part of the Collateral, or addition of
-3-
<PAGE> 4
any party to this Note, or release or discharge of, or suspension of any rights
and remedies against any party liable on this Note, shall reduce or affect the
obligation of any other party liable for the payment of this Note.
NON-WAIVER. No delay by Lender in the exercise of any right or remedy shall
operate as a waiver. No single or partial exercise by Lender of any right or
remedy shall preclude any future exercise of such right or remedy or the
exercise of any other right or remedy. No waiver or indulgence by Lender of any
default or Event of Default shall be effective unless in writing and signed by
Lender, nor shall a waiver on one occasion be construed as a bar to any right or
remedy, or waiver of any default or Event of Default on any future occasion.
REIMBURSEMENT OF EXPENSES. Should Borrower or Lender institute any action
or proceeding to enforce any provision of this Note or for a declaration of such
parties rights or obligations under this Note, the prevailing party shall be
entitled to receive from the losing party such amounts as the court may adjudge
to be reasonable attorneys' fees, expert witness fees, court costs, deposition
costs, court reporter 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.
WAIVER OF JURY TRIAL. BORROWER AND LENDER ACKNOWLEDGE THAT THE RIGHT TO
TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY,
AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES
ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS NOTE OR THE INDEBTEDNESS.
MISCELLANEOUS. Borrower and Lender covenant and agree that the dealing
between them shall be conducted in good faith and in fair dealing, such that
Borrower and Lender 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 purposes of the Note. The terms and provisions of this
Note shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania. The terms and provisions of this Note may only be
changed in writing, executed by Borrower and Lender.
MORGAN'S RESTAURANTS OF
PENNSYLVANIA, INC.
By /s/ Leonard R. Stein-Sapir
-------------------------------------
Its Chairman of the Board
--------------------------
Address:
25201 Chagrin Blvd., Suite 330
---------------------------------------
Beachwood, OH 44122
---------------------------------------
Tax I.D. No. 25 - 1239132
---------------------------
-4-
<PAGE> 5
MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND RENTS
------------------------------------------------------------
AND FIXTURE FILING
------------------
THIS MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES AND
RENTS AND FIXTURE FILING ("Mortgage") is made this 20th of September, 1995, by
Morgan's Restaurants of Pennsylvania, Inc., a Pennsylvania corporation whose
address is 25201 Chagrin Boulevard, Suite 330, Beachwood, Ohio 44122
("Borrower"), in favor of CAPTEC FINANCIAL GROUP, INC., a Michigan corporation,
whose address is 24 Frank Lloyd Wright Drive, Lobby L, 4th Floor, P.O. Box 544,
Ann Arbor, Michigan 48106-0544 ("Lender").
PRELIMINARY STATEMENT
This Mortgage is made to secure all of the following
(individually and collectively the "Indebtedness") :
1. Payment in the sum of Eight Hundred Forty-Four Thousand Two
Hundred and 00/100 Dollars ($844,200.00), together with interest, costs and all
other sums on that amount, to be paid according to that certain Promissory Note
("Note"), guaranty(ies) or other evidence(s) of indebtedness to Lender made as
of the date of this Mortgage by Borrower; and any and all extensions, renewals,
modifications, substitutions or replacements thereof. This reference to a
particular dollar amount does not in any way limit the dollar amount secured by
this Mortgage.
2. The payment of any and all amounts of any kind now owing or
later to become due to Lender from Borrower during the term of this Mortgage,
however created or arising, whether under the above mentioned note(s),
guaranty(ies), evidence(s) of indebtedness or under any other instrument, or
agreement now or hereafter existing between Borrower and Lender, or otherwise,
and whether direct, indirect, primary, secondary, fixed, contingent, joint or
several, due or to become due, together with interest, costs and all other sums
on that amount and including, without limit, all present and future indebtedness
or obligations of third parties to Lender which is guaranteed by Borrower, and
the present or future indebtedness originally owing by Borrower, to third
parties and assigned by third parties to Lender, and any and all renewals,
extensions, modifications, substitutions or replacements of any of them.
3. The performance of the covenants and obligations due or to
become due to Lender, including, without limit, those due under this Mortgage,
and the repayment of all sums expended by Lender in connection with performance
of those covenants and obligations.
<PAGE> 6
GRANTING CLAUSE
---------------
To secure the Indebtedness and as security for the purposes
stated elsewhere in this Mortgage, Borrower grants, with mortgage covenants, to
Lender, its successors and assigns, the following described properties, rights,
interests and privileges (collectively, "Mortgaged Property"):
1. The parcel(s) of real estate commonly known as 1000 Broadhead
Road located in the City of Aliquippa, Beaver County, Pennsylvania and
particularly described on Schedule A attached to this Mortgage ("Real Estate").
2. All buildings, structures and improvements now located,
or subsequently constructed or placed upon the Real Estate,
including, without limit, all building materials and building
equipment located on the Real Estate;
3. Subject to the provisions of Section 3(a) below, all
machinery, apparatus, equipment, goods, fittings, fixtures and articles of
personal property of every kind and nature located or subsequently located on
the Real Estate (individually and collectively, "Equipment"), and all of the
right, title and interest of Borrower in and to any Equipment which may be
subjected to any title retention or security agreement superior in lien to the
lien of this Mortgage. It is agreed that all Equipment is part and parcel of the
Mortgaged Property and appropriated to the use of the Real Estate and, whether
affixed or not, unless Lender shall otherwise elect, be deemed to be real estate
and granted under this Mortgage;
4. All easements, rights-of-way, licenses, privileges and
appurtenances relating to the Real Estate;
5. All rents, issues, profits, revenues, proceeds, accounts and
general intangibles arising from the Real Estate or relating to any business
conducted by Borrower on the Real Estate, under present or future leases,
reservation and/or purchase agreements, licenses or otherwise, which are
specifically assigned and transferred to Lender;
6. All right, title and interest of Borrower in and to the
land lying in the bed of any street, road, avenue, alley or
walkway, opened or proposed or vacated, adjoining the Real Estate;
and
7. Any and all awards or payments, including, without limit,
interest on any awards or payments, and the right to receive them,
which may be made with respect to the Mortgaged Property as a
result of: (a) the exercise of the right of eminent domain,
(b) the alteration of the grade of any street, (c) any loss of or
-2-
<PAGE> 7
damage to any building or other improvement on the Real Estate, (d) any other
injury to or decrease in the value of the Mortgaged Property, (e) any refund due
on account of the payment of real estate taxes, assessments or other charges
levied against or imposed upon the Mortgaged Property, or (f) any refund of
utility deposits or right to any tenant deposit.
1. COVENANTS AND WARRANTIES. Borrower covenants and warrants to Lender as
follows:
(a) AUTHORITY; NO CONFLICT. Borrower has the power and authority to
execute, deliver and perform its obligations under this Mortgage. The execution,
delivery and performance of this Mortgage by Borrower does not, and will not
violate or conflict with any provision of its organizational or charter
documents or any agreement, court order or consent decree to which Borrower is a
party or by which Borrower may be bound.
(b) TITLE TO MORTGAGED PROPERTY. Borrower is the fee simple owner and is
lawfully seized and possessed of the Mortgaged Property. Borrower has good
right, full power and authority to mortgage and convey the Mortgaged Property in
accordance with the terms of this Mortgage. The Mortgaged Property is and shall
remain free and clear of any liens and encumbrances excepting only Permitted
Liens and liens granted pursuant to Section 3 (a) (iii) below. For purposes of
this Mortgage, "Permitted Liens" shall mean those liens or encumbrances shown on
Schedule B attached hereto. Borrower will warrant and defend the same to Lender
and its successors and assigns forever, against the lawful claims and demands of
all persons.
(c) PAYMENT OF INDEBTEDNESS. Borrower will pay and perform the
Indebtedness when due, whether by maturity, acceleration or otherwise.
(d) MAINTENANCE OF MORTGAGED PROPERTY; WASTE. Borrower shall preserve
and maintain the Mortgaged Property in good repair, working order and condition,
excepting ordinary wear and tear, and shall not commit or permit the commission
of waste against the Mortgaged Property. Failure, refusal or neglect of Borrower
to pay any taxes or assessment or any utility rates levied, assessed or imposed
upon the Mortgaged Property, and/or nonpayment of any premiums for insurance,
shall constitute waste, and shall entitle Lender to exercise the remedies
provided in this Mortgage, as well as those afforded by law.
(e) PAYMENT OF TAXES; DISCHARGE OF LIENS.
-------------------------------------
(i) Borrower shall pay when due, and before any interest,
collection fees or penalties accrue, all taxes, assessments,
encumbrances, liens, mortgages, deeds of trust,
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water or sewer charges and other charges and impositions (individually
and collectively, "Imposition(s)") levied, assessed or existing with
respect to the Mortgaged Property, or any part of it, and Borrower
will deliver to Lender receipts showing payment of the Imposition(s).
If Borrower fails to pay any of the Imposition(s), Lender, at its
option, may pay such Imposition(s) and the monies paid shall be a lien
upon the Mortgaged Property, added to the amount secured by this
Mortgage, and payable immediately by Borrower to Lender with interest
at the higher of (i) the interest rate, if any, charged by the
particular entity levying or assessing the Imposition(s), or (ii) the
highest rate charged by Lender on any of the Indebtedness (but in
either case not to exceed the maximum interest rate permitted by law).
(ii) Following the occurrence of any Event of Default, and at the
option of Lender, Borrower shall pay to Lender, in advance on the
first day of each month, a pro rata portion (as determined by Lender)
of all Imposition(s) levied, assessed or existing on the Mortgaged
Property. In the event that sufficient funds have been deposited with
Lender to cover the amount of these Imposition(s) when they become due
and payable, Lender shall pay them. In the event that sufficient funds
have not been deposited to cover the amount of these Imposition(s) at
least thirty (30) days prior to the time when they become due and
payable, Borrower shall immediately pay the amount of the deficiency
to Lender. In such event, Lender shall be required to keep a separate
account, but shall not be required to pay Borrower any interest on the
funds held by Lender for the payment of the Imposition(s) pursuant to
this Section 1(e) or for the payment of insurance premiums under
Section 1(g) below, or on any other funds deposited with Lender in
connection with this Mortgage. The funds on deposit with Lender are
further security for the Indebtedness and if an Event of Default (as
hereinafter defined) occurs under this Mortgage, any funds remaining
on deposit with Lender may be applied against the Indebtedness at any
time after the Event of Default occurs, and without notice to
Borrower.
(f) SALE OR TRANSFER OF MORTGAGED PROPERTY. Borrower will not sell or
transfer all or any interest in the Mortgaged Property or in Borrower without
the prior written consent of Lender, which shall not be unreasonably withheld.
In the event ownership of the Mortgaged Property, or any part, becomes vested in
any person(s) other than Borrower, Lender may deal with and may enter into any
contract or agreement with the successor(s) in interest with reference to this
Mortgage in the same manner as with Borrower, without discharging or otherwise
affecting the lien of this Mortgage or Borrower's obligations under this
Mortgage.
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<PAGE> 9
(g) INSURANCE.
----------
(i) Borrower shall keep the buildings and all other improvements on
the Mortgaged Property insured for the benefit and Lender against fire and
other hazards and risks, including, without limit, vandalism and malicious
mischief, as Lender may require and shall further provide flood insurance
(if the Mortgaged Property is situated in an area which is considered a
flood risk area by the United States Department of Housing and Urban
Development, and for which flood insurance is available under the National
Flood Insurance Act of 1968, as amended), loss of rents insurance, general
liability and product liability insurance and any other insurance as Lender
may reasonably require from time to time. All insurance shall be in amounts
and in forms and with companies satisfactory to Lender. Borrower shall
deliver to Lender the policies evidencing the required insurance with
standard mortgagee clauses (making all losses payable to Lender). Renewals
of the required insurance shall be delivered to Lender at least thirty (30)
days before the expiration of any existing policies. All policies and
renewals shall provide that they may not be canceled or amended without
giving Lender thirty (30) days prior written notice of cancellation or
amendment.
(ii) Should Borrower fail to insure or fail to pay the premiums on any
required insurance or fail to deliver the policies or renewals as provided
above, Lender may have the insurance issued or renewed (and pay the
premiums on it for the account of Borrower) in amounts and with companies
and at premiums as Lender deems appropriate. If Lender elects to have
insurance issued or renewed to insure Lender's interest, Lender shall have
no duty or obligation of any kind to also insure Borrower's interest or to
notify Borrower of Lender's actions. Any sums paid by Lender for insurance,
as provided above, shall be a lien upon the Mortgaged Property, added to
the amount secured by this Mortgage, and payable immediately by Borrower to
Lender, as the case may be, with interest on those sums at the highest rate
charged by Lender on any of the Indebtedness (but not to exceed the maximum
interest rate permitted by law).
(iii) In the event of loss or damage to the Mortgaged Property,
Borrower shall within thirty (30) days of that event, declare in writing to
Lender whether Borrower will restore the Mortgaged Property. If Borrower
elects to restore the Mortgaged Property, Borrower must make timely payment
to Lender of all amounts due under this Mortgage during the restoration
period. No event of loss or damage shall itself reduce the Indebtedness. So
long as Borrower is current on
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<PAGE> 10
all amounts due under this Mortgage to Lender, Borrower shall receive all
required insurance proceeds and shall be authorized to adjust and
compromise each loss without the consent of Lender, and Borrower shall
complete the restoration of the Mortgaged Property within six (6) months
from the date of the event of loss. If Borrower elects not to restore the
Mortgaged Property, or fails to timely complete the restoration of the
Mortgaged Property, Borrower shall transfer to Lender the proceeds of all
required insurance which shall be applied first toward reimbursement of all
costs and expenses of Lender in collecting the insurance proceeds
(including, without limit, court costs and reasonable attorneys' fees), and
then toward payment of the Indebtedness or any portion of it, whether or
not then due or payable. Upon receipt of payment of the required insurance
proceeds, Lender, at its option, may apply the insurance proceeds, or any
part of them, to the repair or rebuilding of the Mortgaged Property. If
insurance proceeds are paid to Lender without paying off the full amount
then due under the Indebtedness, Borrower shall then be in default under
this Mortgage, and liable for the Prepayment Premium specified in the Note.
If after the occurrence of an event of loss or damage to the Mortgaged
Property, the full Indebtedness is paid to Lender by Borrower, through
insurance or otherwise, the Borrower shall not be obligated to pay the
amounts described in the Prepayment Premium specified in the Note, and
Borrower shall be released of all obligations under Section 1(j) of this
Mortgage.
(iv) In the event of a foreclosure of this Mortgage, or the giving of
a deed in lieu of foreclosure, the purchaser or grantee of the Mortgaged
Property shall succeed to all of the rights of Borrower under the insurance
policies including, without limit, any right to unearned premiums and to
receive the proceeds.
(v) Following the occurrence of any Event of Default, and at the
option of Lender, Borrower shall pay to Lender, in advance on the first day
of each month, a pro rata portion of the annual premiums due (as estimated
by Lender) on the required insurance. In the event that sufficient funds
have been deposited with Lender to cover the amount of the insurance
premiums when the premiums become due and payable, Lender shall pay the
premiums. In the event that sufficient funds have not been deposited with
Lender to pay the insurance premiums at least thirty (30) days prior to the
time when they become due and payable, Borrower shall immediately pay the
amount of the deficiency to Lender.
(h) COMPLIANCE WITH LAW AND OTHER MATTERS. Borrower will comply with all
federal, state and local laws, ordinances,
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<PAGE> 11
rules, regulations and restrictions relating to the ownership, use, occupancy
and operation of the Mortgaged Property. Borrower shall be solely responsible to
apply for and secure any building permit or permission of any duly constituted
authority for the purpose of doing any of the things which Borrower is required
or permitted to do under the provisions of this Mortgage. Further, Borrower will
comply with, perform Borrower's obligations under, and enforce the obligations
of all other parties to all building and use restrictions, ground leases,
leases, reservation and/or purchase agreements, condominium documents and/or
other instruments affecting or relating to the use and/or occupancy of the
Mortgaged Property.
(i) ALTERATION OF IMPROVEMENTS.
---------------------------
(i) Without the prior written consent of Lender, Borrower will not,
remove any building, structure or other improvement forming part of the
Mortgaged Property.
(ii) Borrower may from time to time make alterations, replacements,
additions, changes, and improvements (collectively, "Alterations") in and
to the Mortgaged Property as Borrower may find necessary or convenient for
its purposes; provided, however, that no such Alterations shall decrease
the value of the Mortgaged Property. All work with respect to any
Alteration shall be done in a good and workmanlike manner by properly
qualified and licensed personnel, and such work shall be diligently
prosecuted to completion.
(iii) Borrower shall pay the costs of any Alterations done on the
Mortgaged Property, and shall keep the Mortgaged Property free and clear of
liens of any kind. Borrower shall indemnify and defend Lender from and
against any liability, loss, damage, costs, attorneys' fees, and any other
expense incurred as a result of claims of lien by any person performing
work or furnishing materials or supplies for Borrower or any person
claiming under Borrower.
(iv) No Alteration shall be undertaken until Borrower shall have
procured and paid for all required permits and authorizations of all
municipal departments and governmental subdivisions having jurisdiction.
Any Alteration involving an estimated cost of more than Twenty-Five
Thousand and 00/100 Dollars ($25,000.00) shall be conducted under the
supervision of a licensed architect or engineer selected by Borrower and
satisfactory to Lender and shall be made in accordance with detailed plans
and specifications ("Plans and Specifications") and cost estimates prepared
by such architect or engineer and approved in writing in advance by Lender,
not
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<PAGE> 12
to be unreasonably withheld. Any Alteration shall be made promptly and in a
good workmanlike manner and in compliance with all applicable permits and
authorizations and building and zoning laws and all laws and in accordance
with the orders, rules and regulations of the Board of Fire Insurance
Underwriters and any other body hereafter exercising similar functions
having or asserting jurisdiction over the Mortgaged Property.
(v) In connection with any Alteration involving an estimated cost in
excess of Twenty-Five Thousand and 00/100 Dollars ($25,000.00), Lender
shall have the right to require Borrower to post a bond or other security
reasonably satisfactory to Lender to insure the completion of such
Alteration.
(j) OBLIGATION TO REBUILD.
----------------------
(i) If any portion of the Mortgaged Property is damaged or destroyed
by fire or other casualty, Borrower shall forthwith give notice thereof to
Lender. In the event Borrower elects to repair, rebuild or replace the
damaged Mortgaged Property, Borrower shall, at its sole cost and expense,
forthwith repair, restore, rebuild or replace the damaged or destroyed
improvements, fixtures or equipment, and complete the same as soon as
reasonably possible, to the condition they were in prior to such damage or
destruction, except for such changes in design or materials as may then be
required by law or are approved by Lender in Lender's reasonable
discretion. Lender, in such event, shall, to the extent the proceeds of the
insurance are made available to Lender, reimburse Borrower for the costs of
making such repairs, restoration, rebuilding and replacements on such terms
as Lender may reasonably require. To the extent, if any, that the proceeds
of insurance made available as aforesaid are insufficient to pay the entire
cost of making such repairs, restoration, rebuilding and replacements,
Borrower shall pay the amount by which such costs exceed the insurance
proceeds made available as aforesaid.
(ii) Notwithstanding the foregoing, in the event that Borrower elects
to repair, rebuild or replace the damaged Mortgaged Property and fails to
commence the repair or restoration of the Mortgaged Property pursuant to
this Section 1(j) within sixty (60) days after the casualty, or if Borrower
abandons or fails to diligently pursue completion of such repair or
restoration (as determined in Lender's reasonable judgment), then Lender
shall be entitled to apply the insurance proceeds first towards
reimbursement of all costs and expenses of Lender in collecting the
proceeds (including, without limit, court costs and reasonable
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attorneys' fees), and then toward any payment of the Indebtedness or any
portion of it, whether or not then due or payable and in whatever order of
maturity as Lender may elect. Application of proceeds by Lender toward
later maturing installments of the Indebtedness shall not excuse Borrower
from making the regularly scheduled installment payments nor shall such
application extend or reduce the amount of any of these payments.
(k) RECORDING. Borrower will cause this Mortgage, any
supplemental or restated mortgage and any financing and continuation statements
required by the applicable Uniform Commercial Code to be recorded and filed at
Borrower's expense in such manner and in such place as may, in Lender's opinion,
be necessary or proper.
(l) ADDITIONAL ASSURANCES. Borrower will execute and
deliver additional instruments and take additional actions as
Lender may reasonably request to carry out the terms and conditions
of this Mortgage.
(m) BOOKS AND RECORDS; INSPECTION RIGHTS. Borrower will at all
times maintain accurate and complete books and records and copies of all
building and use restrictions, ground leases, leases, reservation and/or
purchase agreements, condominium documents, contracts and/or other instruments
with respect to the Mortgaged Property. Lender may inspect and make copies of
those books and records and any other data relating to the Mortgaged Property.
Lender may inspect the Mortgaged Property at such reasonable times as Lender
shall determine. Borrower will promptly provide to Lender reports concerning the
income, expenses and financial and other conditions of the Mortgaged Property as
may be required from time to time by Lender.
(n) ENVIRONMENTAL REPRESENTATION, WARRANTY AND INDEMNIFICATION.
Notwithstanding anything in this Mortgage to the contrary, Borrower represents,
covenants and warrants to Lender as follows:
(i) At all times since Borrower has acquired any interest
or rights in the Mortgaged Property, whether through lease, land contract,
deed or otherwise and, to Borrower's knowledge, after conducting a Phase I
environmental review, at all times prior to Borrower's acquisition of such
interest or rights in the Mortgaged Property: there are no and have been no
violations of the Relevant Environmental Laws (as hereinafter defined) at
the Mortgaged Property and no consent orders have been entered with respect
the Mortgaged Property; there are no and have been no Hazardous Materials
(as hereinafter defined) or Asbestos (as hereinafter defined) either at,
upon, under or within, or discharged or emitted at
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<PAGE> 14
or from, the Mortgaged Property; no Hazardous Materials or Asbestos have
flown, blown or otherwise become present at the Mortgaged Property from
neighboring land; and no Hazardous Materials or Asbestos have been removed
from the Mortgaged Property.
(ii) Borrower, after due inquiry, is not aware of any claims of
litigation, and has not received any communication, concerning the presence
or possible presence of Hazardous Materials or Asbestos at the Mortgaged
Property or concerning any violation or alleged violation of the Relevant
Environmental Laws respecting the Mortgaged Property. Borrower shall
promptly notify Lender of any such claims and shall furnish Lender with a
copy of any such communications received after the date of this Mortgage.
(iii) Borrower shall ensure that the Mortgaged Property complies in
all respects with the Relevant Environmental Laws and shall notify Lender
promptly and in reasonable detail in the event that Borrower becomes aware
of the presence of Hazardous Materials or Asbestos or a violation of the
Relevant Environmental Laws at the Mortgaged Property.
(iv) Should Borrower use or permit the Mortgaged Property to be used
or maintained so as to subject Borrower, Lender or the use of the Mortgaged
Property to a claim of violation of the Relevant Environmental Laws (unless
contested in good faith by appropriate proceedings satisfactory to Lender),
Borrower shall immediately remedy and fully cure, at its own cost and
expense, any conditions arising therefrom.
(v) Borrower shall pay immediately when due the cost of compliance
with the Relevant Environmental Laws. Further, Borrower shall keep the
Mortgaged Property free of any lien imposed pursuant to the Relevant
Environmental Laws.
(vi) In the event that Borrower fails to comply with the requirements
of clauses (i) through (v) in this Section 1(n), after notice to Borrower
and the earlier of the expiration of any applicable cure period under this
Mortgage or the expiration of the cure period permitted under the Relevant
Environmental Laws, if any, Lender may exercise its right to do one or more
of the following: (A) elect that such failure constitutes an Event of
Default under this Mortgage; and/or (B) take any and all actions, at
Borrower's expense, that Lender deems necessary or desirable to cure such
failure of compliance. Any costs incurred pursuant to this clause (vi) or
clause (vii) in this Section 1(n), shall become immediately due and payable
without notice and with interest thereon at a rate equal to the highest
interest rate charged
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<PAGE> 15
on the Indebtedness (but not to exceed the maximum interest rate permitted
by law), and such amount, including interest, shall, if incurred prior to
the foreclosure of this Mortgage or the delivery of a deed in lieu of
foreclosure, be added to the Indebtedness and shall be secured by this
Mortgage.
(vii) Lender shall not be liable for and Borrower shall immediately
pay to and indemnify, defend and hold Lender harmless from and against, all
loss, cost, liability, damage and expense (including, without limit,
attorneys' fees and costs incurred in the investigation, defense and
settlement of claims) that Lender may suffer or incur (as holder of this
Mortgage, as mortgagee in possession or as successor in interest to
Borrower as owner of the Mortgaged Property by virtue of foreclosure or
acceptance of a deed in lieu of foreclosure) as a result of or in
connection in any way with Borrower's failure to comply with the terms and
provisions of this Section 1(n).
(viii) The provisions of clauses (i) through (vii) of this Section
1(n) shall survive the repayment of the Indebtedness and the performance of
all duties and obligations related thereto, the foreclosure of this
Mortgage, the delivery of a deed in lieu of foreclosure and/or the
discharge of this Mortgage.
"Relevant Environmental Laws" shall mean all applicable federal, state
and local laws, rules, regulations, orders, judicial determinations and
decisions or determinations by any judicial, legislative or executive body
of any governmental or quasi-governmental entity, whether in the past, the
present or the future, with respect to: (i) the installation, existence or
removal of, or exposure to, Asbestos on the Mortgaged Property; (ii) the
existence on, discharge from, or removal from the Mortgaged Property of
Hazardous Materials; and/or (iii) the effects on the environment of the
Mortgaged Property or of any activity now, previously, or hereafter
conducted on the Mortgaged Property.
"Asbestos" shall have the meanings provided under the Relevant
Environmental Laws, and shall include, without limited, asbestos fibers and
friable asbestos, as such terms are defined under the Relevant
Environmental Laws.
"Hazardous Materials" shall mean any of the following (as defined by
the Relevant Environmental Laws) : solid wastes; toxic or hazardous
substances, wastes, or contaminants (including, without limit,
polychlorinated biphenyls, paint containing lead, and/or urea formaldehyde
foam insulation; and discharges of sewage or effluent.
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<PAGE> 16
(o) REPORTING REQUIREMENTS. Borrower hereby covenants and agrees
to deliver management prepared and certified financial statements for Borrower
and annual audited financial statements for any guarantor(s) of all or any
portion of the Indebtedness (each a "Guarantor") to Lender within one hundred
twenty (120) days after the end of the respective fiscal years of Borrower and
each Guarantor, and management prepared and certified quarterly financial
statements for Borrower and each Guarantor (if not an individual) within
forty-five (45) days after the end of Borrower's and each such Guarantor's (if
not an individual) respective fiscal quarters. Borrower agrees to assist Lender
in obtaining consent from Borrower's auditors in the event that the audit report
is required to be included in a regulatory report filed by Lender. Such
financial statements shall be true and correct in all respects, shall be
prepared in accordance with generally accepted accounting principles, and shall
fairly represent the respective financial conditions of the subjects thereof as
of the respective dates thereof. If Borrower's financial statements are prepared
on a consolidated basis, Borrower hereby covenants and agrees to prepare
financial statements specifically relating to the operation of the Kentucky
Fried Chicken franchised restaurant operation located on the Mortgaged Property
("Franchised Operation"). Lender further agrees to deliver annual, unit-level
profit and loss statements on the operations of the Franchised Operation.
(p) INDEMNIFICATION. Borrower shall appear in and defend any
suit, action or proceeding that might in any way and in the sole judgment of
Lender affect the value of the Mortgaged Property, the validity, enforceability
and priority of this Mortgage or the rights and powers of Lender. Borrower
shall, at all times, indemnify, defend, hold harmless and on demand, reimburse
Lender for any and all loss, damage, expense or cost, including cost of evidence
of title and attorneys' fees, arising out of or incurred in connection with any
such suit, action or proceeding, and the sum of such expenditures shall be
secured by this Mortgage and shall bear interest at the highest rate accruing on
the Indebtedness, not to exceed the maximum rate permitted by law, and shall be
due and payable on demand. Borrower shall pay cost of suit, cost of evidence of
title and reasonable attorneys' fees in any proceeding or suit, including
appellate proceedings, brought by Lender to foreclose or otherwise enforce this
Mortgage.
(q) ESTOPPEL CERTIFICATES. Borrower shall, within ten (10) days
after written request therefor from Lender, furnish to Lender, or such other
persons or entities as Lender shall designate, a duly acknowledged written
statement setting forth the amount of the debt secured by this Mortgage, and
stating either that no setoffs or defenses exist against such debt, or, if such
setoffs or defenses are alleged to exist, the nature thereof.
2. APPLICATION OF CONDEMNATION AWARDS.
-----------------------------------
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<PAGE> 17
(a) CONDEMNATION AWARD. Any eminent domain or condemnation proceeds
shall be paid directly to Borrower so long as Borrower is current on all
payments of the Indebtedness. In the event that Borrower defaults on its
Indebtedness payments to Lender, then eminent domain or condemnation proceeds
shall be paid directly to Lender and applied first toward reimbursement of all
Lender's costs and expenses incurred in connection with collecting the award
(including, without limit, court costs and reasonable attorneys' fees), and
second toward the balance of the Indebtedness less principal, and third toward
the balance of the principal of the Indebtedness whether or not then due or
payable. If the current balance of the principal of the Indebtedness is fully
paid after the conclusion of eminent domain or condemnation proceedings, then
Borrower shall not be obligated to pay Prepayment Premium specified in the Note.
(b) APPOINTMENT OF LENDER. Lender and each of its officers is
irrevocably appointed (which appointment is coupled with an interest)
attorney-in-fact for Borrower (with power of substitution) and is authorized to
receive, receipt for, discharge and satisfy any condemnation award or judgment,
whether joint or several, on behalf of Borrower, Borrower's legal
representatives, successors and assigns; provided, however, that Lender shall
not be liable for failure to collect any condemnation award.
3. ADDITIONAL SECURITY.
--------------------
(a) Security Interest.
-----------------
(i) This Mortgage, as to any Equipment, fixtures, accounts,
general intangibles and other personal property included within the
definition of Mortgaged Property (collectively, "Personal Property"),
shall constitute a security agreement and financing statement within
the meaning of the Uniform Commercial Code and Borrower grants to
Lender a security interest in the Personal Property. Borrower agrees,
upon request of Lender, to promptly furnish a list of personal
property owned by Borrower and subject to this Mortgage and, upon
request by Lender, to immediately execute, deliver and/or file any
amendments to this Mortgage, any separate security agreement and any
financing statements to evidence and perfect the security interest in
such personal property contemplated by this Section. Lender and each
of its officers is irrevocably appointed (which appointment is coupled
with an interest) attorney-in-fact for Borrower (with power of
substitution) and each is authorized to execute, deliver and/or file
any of such amendments to this Mortgage, any separate security
agreement and any financing statements.
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<PAGE> 18
(ii) Upon the occurrence of any Event of Default under this Mortgage,
Lender shall have all of the rights and remedies of a secured party under
the Uniform Commercial Code or otherwise provided by law or by this
Mortgage including, without limit, the right to require Borrower to
assemble the personal property and make it available to Lender at a place
to be designated by Lender which is reasonably convenient to such parties,
the right to collect all accounts receivable, the right to take possession
of the personal property with or without demand and with or without process
of law and the right to sell and dispose of it and distribute the proceeds
according to law. Borrower agrees that any requirement of reasonable
notice, if any, shall be met if Lender sends notice to Borrower at least
five (5) days prior to the date of sale, disposition or other event giving
rise to the required notice. Borrower agrees that the proceeds of any
disposition of the personal property may be applied by Lender first to
Lender's reasonable expenses in connection with the disposition including,
without limit, reasonable attorneys' fees and legal expenses, and then to
payment of the Indebtedness.
(iii) Lender's interest in any personal property and equipment which
Borrower may place on or about the Real Estate in the future, shall be
subordinate to a third party lender providing purchase money financing for
such personal property or equipment. Lender acknowledges that Borrower will
finance such personal property or equipment by granting a personal property
security interest in such personal property or equipment to a lending
institution. To the extent that such personal property or equipment is
financed by a third party lender, Lender hereby: (a) subordinates its
interest in any such personal property or equipment to the interest of the
third party lender; (b) waives all right of levy or distrain, at any time,
upon such personal property or equipment, based on a claim of security
priority higher than that of the third party lender who financed Borrower's
purchase of the personal property or equipment; (c) subject to the
provisions of the following sentence, consents to entry by the third party
lender who financed Borrower's purchase of the personal property or
equipment upon the Real Estate for the purpose of removing the personal
property or equipment therefrom; and (d) subject to the provisions of the
following sentence, agrees to cooperate with the third party lender who
financed Borrower's purchase of the personal property or equipment in order
to facilitate such removal. The third party lender who seeks to remove
personal property or equipment from the Real Estate pursuant to this
provision shall be responsible to Lender for repairing any damage to the
Mortgaged Property or the improvements thereon that such lender causes in
connection with this entry thereon and removal of such personal property
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<PAGE> 19
or equipment. Lenders agreement to subordinate its interest in such
personal property or equipment shall be binding upon Lender, its successors
assigns, and shall inure to the benefit of the third party lender, who
seeks to enforce its security interest in personal property or equipment
placed on the Real Estate by Borrower, and such lender's successors
assigns. Lender and Borrower purposely intend to make the third party
lender, its successors and assigns, who finances Borrower's acquisition of
personal property or equipment the sole beneficiary of this provision.
Nothing in this Section 3 (a) (iii) is intended to diminish any rights or
duties flowing between Lender and Borrower.
(b) LICENSES AND PERMITS. As additional security for the
Indebtedness and to the extent permitted by their terms, Borrower assigns to
Lender all of Borrower's rights and interest in all licenses or permits
affecting the Mortgaged Property. This assignment shall not impose upon Lender
any obligations with respect to any license or permit. Borrower shall not cancel
or amend any of the licenses or permits assigned (nor permit any of them to
terminate if they are necessary or desirable for the operation of the Mortgaged
Property) without first obtaining the written approval of Lender.
(c) ASSIGNMENT OF RENTS AND LEASES.
-------------------------------
(i) As additional security for the payment of the
Indebtedness and performance of this Mortgage, Borrower assigns to Lender
all of Borrower's right, title and interest in and to all written and oral
leases and occupancy agreements, now or later existing, covering the
Mortgaged Property or any part of it (but without an assumption by Lender
of liabilities of Borrower under any of these leases or occupancy
agreements by virtue of this assignment), and Borrower assigns to Lender
the leases, rents, issues and profits of the Mortgaged Property.
(ii) At least annually, and more frequently if requested
by Lender, Borrower shall provide Lender with a certified rent roll and
such other information regarding the leases and/or occupancy agreements as
Lender may reasonably require.
(iii) If an Event of Default occurs under this Mortgage,
Borrower shall, upon written demand from Lender, turn over to Lender all
rents in the possession of Borrower or collected thereafter and, Lender may
receive and collect the rents, issues and profits personally, or through a
receiver, so long as the Event of Default exists and during the pendency of
any foreclosure proceedings and during any redemption
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<PAGE> 20
period. Borrower consents to the appointment of a receiver without notice.
(iv) Lender shall at no time have any obligation whatever to attempt
to collect rent or other amounts from any tenant of the Mortgaged Property.
Further, Lender shall have no obligation to enforce any other obligations
owed by tenants of the Mortgaged Property. No action taken by Lender under
this Mortgage shall make Lender a "mortgagee in possession."
(v) Borrower shall not collect advance rent under any lease or
occupancy agreement pertaining to the Mortgaged Property in excess of one
month (other than as a security deposit) and Lender shall not be bound by
any rent prepayment made or received in violation of this prohibition.
(vi) At the option of Lender, this Mortgage shall become subordinate,
in whole or in part (but not with respect to priority as to insurance
proceeds or any condemnation award) to any or all leases and/or occupancy
agreements of all or part of the Mortgaged Property upon the execution and
recording by Lender of an affidavit to that effect.
4. EVENTS OF DEFAULT AND REMEDIES.
------------------------------
(a) EVENTS OF DEFAULT. Any of the following events shall, for purposes of
this Mortgage, constitute an "Event of Default":
(i) Failure by Borrower to pay any amount owing on or with respect to
the Indebtedness within five (5) days of the date when due, whether by
maturity, acceleration or otherwise.
(ii) Any failure by Borrower (or any Guarantor) to comply with any of
the non-monetary terms, provisions, warranties or covenants of this
Mortgage or any other agreement or commitment between Borrower (or any
Guarantor) and Lender, which failure continues for thirty (30) days after
the date of written notice to Borrower (or guarantor) from Lender of such
default.
(iii) Institution of foreclosure proceedings or other exercise of
rights and remedies under any mortgage, deed of trust or other lien against
the Mortgaged Property (or any portion thereof).
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<PAGE> 21
(iv) Insolvency of Borrower (or any Guarantor) or the admission in
writing of Borrower's (or any Guarantor's) inability to pay debts as they
mature.
(v) Any material statement, representation or information made or
furnished by or on behalf of Borrower (or any Guarantor) to Lender in
connection with or to induce Lender to provide or advance any of the
Indebtedness shall prove to be false or materially misleading when made or
furnished.
(vi) Institution of bankruptcy, reorganization, insolvency or other
similar proceedings by or against Borrower (or any Guarantor), unless, in
the case of a petition filed against Borrower (or any Guarantor) the same
is dismissed within sixty (60) days) of the date of filing.
(vii) Any uninsured loss, theft, substantial damage or destruction to
the Mortgaged Property, or the issuance or filing of any attachment, levy,
garnishment or the commencement of any related proceeding or the
commencement of any other judicial process upon or in respect to Borrower
(or any Guarantor) or the Mortgaged Property.
(viii) Sale or other disposition by Borrower (or any Guarantor) of any
substantial portion of its assets or property without Lender's prior
consent, which will not be unreasonably withheld.
(ix) Death, dissolution, termination of existence, insolvency,
business failure or assignment for the benefit of creditors of or by
Borrower (or any Guarantor) or a merger or consolidation by Borrower (or
any Guarantor) in which the surviving entity has a consolidated net worth
less than the consolidated net worth of Borrower (or any Guarantor)
immediately prior to the merger or consolidation.
(x) Any failure by Borrower to pay any indebtedness in excess of
Twenty-Five Thousand Dollars ($25,000.00) (other than to Lender) when due,
or any failure by any Guarantor to pay any indebtedness in excess of One
Hundred Thousand Dollars ($100,000.00) (other than to Lender) when due, or
any failure in the observance or performance of any term, covenant or
condition contained in any document evidencing, securing or relating to
such indebtedness, which failure continues beyond any applicable cure
period.
(xi) There is a substantial change in the existing or prospective
financial condition or worth of Borrower (any Guarantor) or the Mortgaged
Property, which Lender in good faith determines to be materially adverse.
-17-
<PAGE> 22
(xii) Receipt by Borrower or of a valid notice of termination of the
franchise agreement from KFC Corporation, a Delaware corporation
("Franchisor") for the Franchised Operation. Borrower agrees to promptly
provide Lender with a copy of any such notice of termination. Further,
Borrower agrees to promptly provide Lender with a copy of any notice to
Borrower of the existence of any breach which, with notice or the passage
of time, would entitle the Franchisor to terminate the franchise agreement
for the Franchised Operation.
(xiii) The default by Borrower under any other agreement with Lender
or any "affiliate" of Lender (as hereinafter defined). For purposes of this
Mortgage, "affiliate" shall mean a person or entity which owns ten percent
(10%) or more of the voting securities of Lender, or a person or entity
which directly or indirectly controls or is controlled by Captec Financial
Group, Inc., a Michigan corporation.
(b) REMEDIES UPON EVENT OF DEFAULT. Upon the occurrence of any Event of
Default, Lender shall have the following rights and remedies:
(i) Declare all or part of the Indebtedness immediately due and
payable.
(ii) Demand that Borrower immediately surrender the possession of the
Mortgaged Property to Lender, and Borrower consents to Lender taking
possession of the Mortgaged Property and the books and records relating to
the Mortgaged Property.
(iii) Lease the Mortgaged Property and collect rents for the account
of Borrower.
(iv) Foreclose the interest of Borrower in the Mortgaged Property by
action pursuant to applicable law. Commencement of such an action shall be
deemed a declaration of acceleration pursuant to clause (i) above.
(v) Lender is authorized and empowered to sell the Mortgaged Property
and convey the same to the purchaser thereof to the extent permitted and
pursuant to the procedures provided by applicable law. Lender may direct
the sale of the Mortgaged Property to be in one or several parcels and in
any order as Lender may elect in its sole discretion at such time and
place, upon such terms and after such notice as may be required or
permitted by applicable law.
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<PAGE> 23
(vi) Collect and receive all rents, profits and other amounts that are
due or shall subsequently become due under the terms of any leases, land
contract, or other agreements by which Borrower is leasing or selling the
Mortgaged Property or any interest in the Mortgaged Property. Lender may
also exercise any other rights or remedy of Borrower under any such lease,
land contract or other agreement. However, Lender shall have no obligation
to make any demand or inquiry as to the nature of sufficiency of any
payment received or to present or file any claim or take any other action
to collect or enforce the payment of any amounts to which Lender may become
entitled under this Mortgage. Similarly, Lender shall not be liable for any
of Borrower's obligations under any such lease, land contract or other
agreement.
(vii) Exercise all rights, remedies and privileges afforded a "secured
party" under Article 9 of the Uniform Commercial Code with respect to any
of the Mortgaged Property which is personal property.
(viii) Enter upon the Mortgaged Property and take other actions as
Lender deems appropriate to perform Borrower's obligations under this
Mortgage to inspect, repair, protect or preserve the Mortgaged Property, to
investigate or test for the presence of any Hazardous Materials and/or to
appraise the Mortgaged Property.
(ix) Pursue any other available remedy at law or equity to enforce the
payment of the Indebtedness.
(c) REMEDIES GENERALLY.
------------------
(i) All remedies provided for in Section 4(b) shall be available to
the extent not prohibited by law, and Lender shall have the unrestricted
right to exercise any summary proceeding available at law or in equity in
connection therewith. Each remedy shall be cumulative and additional to any
other remedy of Lender at law, in equity or by statute. No delay or
omission to exercise any right or power accruing upon any default or Event
of Default shall impair any such right or power or shall be construed to be
a waiver of, or acquiescence in, any such default or Event of Default.
(ii) Lender may waive any Event of Default and may rescind any
declaration of maturity of payments on the Indebtedness. In case of such
waiver or recision, Borrower and Lender shall be restored to their
respective former positions and rights under this Mortgage. Any waiver by
Lender of any default or Event of Default shall be in writing
-19-
<PAGE> 24
and shall be limited to the particular default waived and shall not be
deemed to waive any other default.
(d) RECEIVERS. Upon an Event of Default and commencement of
foreclosure proceedings to enforce the rights of Lender under this Mortgage, or
the commission of waste against the Mortgaged Property, Lender shall be entitled
to the appointment of a receiver or receivers of the Mortgaged Property and of
the rents, issues and profits of the Mortgaged Property, pending such
proceedings and without notice to Borrower.
(e) APPLICATION OF PROCEEDS. Any proceeds received by
Lender from the exercise of remedies pursuant to Section 4(b) of this Mortgage
shall be applied as follows:
(i) First, to pay all costs and expenses incidental to the
leasing, foreclosure, sale or other disposition of the Mortgaged
Property. These costs and expenses shall include, without limit,
reasonable compensation to Lender, and its agents and attorneys
and any taxes and assessments or other liens and encumbrances
prior to the lien of this Mortgage.
(ii) Second, to all sums expended or incurred by Lender
directly or indirectly in carrying out any term, covenant or
agreement under this Mortgage or any related document, together
with interest as provided in this Mortgage.
(iii) Third, to the payment of the Indebtedness. If the
proceeds are insufficient to fully pay the Indebtedness, then
application shall be made first to late charges and interest
accrued and unpaid, then to any applicable prepayment premiums,
then to unpaid fees and other charges and then to the outstanding
principal balance.
(iv) Fourth, any surplus remaining shall be paid to Borrower
or to whomsoever may be lawfully entitled.
(f) MARSHALLING. In the event of foreclosure of this Mortgage or
the enforcement by Lender of any other rights and remedies under this Mortgage,
Borrower waives any right in respect to marshalling of assets which secure the
Indebtedness or to require Lender to pursue its remedies against any other
assets or any other party which may be liable for any of the Indebtedness.
(g) FURTHER ACTIONS. Promptly upon the request of Lender,
Borrower shall execute, acknowledge and deliver any and all further conveyances,
documents, mortgages, deeds of trust, security agreements, financing statements
and assurances, and do or cause to be done all further acts as Lender may
require to confirm and
-20-
<PAGE> 25
protect the lien of this Mortgage or otherwise to accomplish the purposes of
this Mortgage.
(h) ATTORNEYS FEES. Any reference in this Mortgage to attorneys' fees
shall refer to fees, charges, costs and expenses of in-house and outside
attorneys and paralegals, whether or not a suit or proceeding is instituted, and
whether incurred at the trial court level, on appeal, in a bankruptcy,
administrative or probate proceeding, in consultation with counsel, or
otherwise. All costs, expenses and fees of any nature for which Borrower is
obligated to reimburse or indemnify Lender are part of the Indebtedness secured
by this Mortgage and are payable upon demand, unless expressly provided
otherwise, with interest until repaid at the highest rate charged on any of the
Indebtedness (but not to exceed the maximum rate permitted by law). Should
either party institute any action or proceeding to enforce any provision of this
Mortgage or for a declaration of such parties rights or obligations under this
Mortgage, the prevailing party shall be entitled to receive from the losing
party such amounts as the court may adjudge to be reasonably attorneys' fees,
expert witness fees, court costs, deposition costs, court reporter fees and
sheriff's fees for services rendered to and expenses incurred by the party
prevailing in any a 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.
5. MISCELLANEOUS.
-------------
(a) GOVERNING LAW. This Mortgage shall be construed in accordance with
the laws of the State of Pennsylvania.
(b) SUCCESSORS AND ASSIGNS. This Mortgage shall be binding upon the
successors and assigns of Borrower including, without limit, any debtor in
possession or trustee in bankruptcy for Borrower, and the rights and privileges
of Lender under this Mortgage shall inure to the benefit of their respective
successors and assigns. This shall not be deemed a consent by Lender to a
conveyance by Borrower of all or any part of the Mortgaged Property or of any
ownership interest in Borrower.
(c) NOTICES. Notice from one party to another relating to this Mortgage
shall be deemed effective if made in writing (including telecommunications) and
delivered to the recipient's address, telex number or telecopier number set
forth in this Mortgage by any of the following means: (i) hand delivery, (ii)
registered or certified mail, postage prepaid, (iii) express mail or other
overnight courier service, or (iv) telecopy, telex or other wire transmission
with request for assurance of receipt in a manner typical with respect to
communications of that type. Notice
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<PAGE> 26
made in accordance with these provisions shall be deemed delivered on receipt if
delivered by hand or wire transmission, on the third business day after mailing
if mailed by registered or certified mail, or on the next business day after
mailing or deposit with the postal service or an overnight courier service if
delivered by express mail or overnight courier. Borrower's telecopier number is
(216) 360-0299, and Lender's telecopier number is (313) 994-1376.
(d) ENTIRE AGREEMENT; AMENDMENTS. This Mortgage and any agreement to which
it refers state all rights and obligations of the parties and supersede all
other agreements (oral or written) with respect to the lien granted by this
Mortgage. Any amendment of this Mortgage shall be in writing and shall require
the signature of Borrower and Lender.
(e) PARTIAL INVALIDITY. The invalidity or unenforceability of any provision
of this Mortgage shall not affect the validity or enforceability of the
remaining provisions of this Mortgage.
(f) INSPECTIONS. Any inspection, audit, appraisal or examination by Lender
or Lender's agents of the Mortgaged Property or of information or documents
pertaining to the Mortgaged Property is for the sole purpose of protecting
Lender's interests under this Mortgage and is not for the benefit or protection
of Borrower or any third party.
(g) JOINT AND SEVERAL LIABILITY. In the event that more than one person or
entity executes this Mortgage, the obligations of each person or entity shall be
joint and several.
(h) AUTOMATIC REINSTATEMENT. Notwithstanding any prior revocation,
termination, surrender or discharge of this Mortgage, the effectiveness of this
Mortgage shall automatically continue or be reinstated, as the case may be, in
the event that:
(i) Any payment received or credit given by Lender in respect of the
Indebtedness is returned, disgorged or rescinded as a preference,
impermissible setoff, fraudulent conveyance, diversion of trust funds, or
otherwise under any applicable state or federal law, including, without
limit, laws pertaining to bankruptcy or insolvency, in which case this
Mortgage shall be enforceable as if the returned, disgorged or rescinded
payment or credit had not been received or given, whether or not Lender
relied upon this payment or credit or changed its position as a consequence
of it.
(ii) Any liability is imposed, or sought to be imposed, against Lender
relating to the environmental condition of, or the presence of Hazardous
Materials on, in or about the Real Estate, whether this condition is known
or
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<PAGE> 27
unknown, now exists or subsequently arises (excluding only conditions which
arise after any acquisition by Lender of any such property, by foreclosure,
in lieu of foreclosure or otherwise, to the extent due to the wrongful acts
or omissions of Lender), in which case this Mortgage shall be enforceable
to the extent of all liability, costs and expenses (including without limit
reasonable attorneys fees) incurred by Lender as the direct or indirect
result of any environmental condition or Hazardous Materials.
(iii) In the event of continuation or reinstatement of this Mortgage,
Borrower agrees upon demand by Lender to execute and deliver to Lender
those documents which Lender determines are appropriate to further evidence
(in the public records or otherwise) this continuation or reinstatement,
although the failure of Borrower to do so shall not affect in any way the
reinstatement or continuation.
(i) WAIVER OF JURY TRIAL. BORROWER AND LENDER ACKNOWLEDGE THAT THE RIGHT
TO TRIAL BY JURY IS A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY,
AFTER CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF
THEIR CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES
ANY RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS MORTGAGE OR THE INDEBTEDNESS.
(j) CONSUMER CREDIT. Notwithstanding anything in this Mortgage to the
contrary, this Mortgage shall not secure any portion of the Indebtedness which
is deemed to be consumer credit under the Truth in Lending Act.
(k) GOOD FAITH AND FAIR DEALING. Borrower and Lender covenant and agree
that the dealing between them shall be conducted in good faith and in fair
dealing, such that Borrower and Lender 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 purposes of the Mortgage.
WITNESSES: BORROWER:
MORGAN'S RESTAURANTS OF
PENNSYLVANIA, INC.
/s/ Vincent J. Oddi By /s/ Leonard R. Stein-Sapir
- ------------------------- --------------------------------------
/s/ Kenneth L. Hignett Its Chairman of the Board
- ------------------------- ----------------------------
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<PAGE> 28
STATE OF Ohio )
--------- )
COUNTY OF Cuyahoga ) ss.
-------- )
The foregoing Mortgage was acknowledged before me the 19th day of
September, 1995, by Leonard Stein-Sapir, the Chairman of the Board of Morgan's
Restaurants of Pennsylvania, Inc., a Pennsylvania corporation on behalf of the
corporation.
/s/ Kathleen M. Philbin
--------------------------------------
Notary Public
Cuyahoga County, Ohio
My Commission Expires: 11-15-95
[Notary Public's Seal]
Prepared By And When Recorded
Return To:
Shumaker, Loop & Kendrick
North Courthouse Square
1000 Jackson
Toledo, Ohio 43624
Attention: Brian N. McMahon
-24-
<PAGE> 29
SCHEDULE A
----------
THIS SCHEDULE ATTACHED TO AND MADE A PART OF THE CERTAIN MORTGAGE AND ASSIGNMENT
OF LEASES AND RENTS, EXECUTED BY MORGAN'S RESTAURANTS OF PENNSYLVANIA, INC. FOR
THE BENEFIT OF CAPTEC FINANCIAL GROUP, INC.
Land in the City of Aliquippa, Beaver County, Pennsylvania described as:
SEE EXHIBIT A
A-1
<PAGE> 30
EXHIBIT A
ALL those two certain tracts of land situated in the Borough of Aliquippa,
County of Beaver and Commonwealth of Pennsylvania, being bounded and described
as follows:
TRACT 1
BEGINNING at a point in the centerline of Broadhead Road, said point being
located at the intersection of the southerly right-of-way of McMinn Street
with the centerline of Broadhead Road;
THENCE following the southerly right-of-way of McMinn Street, N 76 degrees
11'00" E, a distance of 234.42 feet to a point at the northwest corner of lot
39 of the Hiland Plan of Lots, recorded in Plan Book Volume 4, Page 84 of the
Beaver County Recorder of Deed's Office;
THENCE following the westerly line of lot 39 S 14 degrees 24'00" E, a
distance of 100.00 feet to a point at the southwest corner of lot 39, said
point also being at the northerly right-of-way of an unnamed alley 16 feet in
width;
THENCE following the northerly right-of-way of the unnammed alley, S 76
degrees 11'00" W, a distance of 204.70 feet to a point in at the centerline of
Broadhead Road;
THENCE following the centerline of Broadhead Road, N 30 degrees 54'20" W,
a distance of 104.62 feet to the point of beginning. Containing 0.5040 acres
(21,955.86 square feet).
TRACT 2
BEGINNING at a point at the intersection of the easterly right-of-way of
Broadhead Road with the southerly right-of-way of an unnamed alley 16 feet in
width;
THENCE following the southerly right-of-way of the unnamed alley, N 76
degrees 11' 00" E a distance of 194.34 feet to a point at the property line
dividing Lot 1 from Lot 2 of Pappan's Aliquippa Subdivision Plan, recorded in
Plan Book Volume 24, Page 86 of the Beaver County Recorder's Office;
THENCE following the line dividing Lot 1 from Lot 2, S 13 degrees 49'00"
E, a distance of 37.00 feet to a point at the southeast property corner of Lot
1, said point also being a common corner to Lot 2;
THENCE following the southerly line of Lot 1, said line also being common
to Lot 2, S 76 degrees 11'00" W, a distance of 184.50 feet to a point.;
THENCE N 28 degrees 42'45" W, a distance of 38.29 feet to the Point of
Beginning, containing 0.1609 acres (7008.48 square feet) and being known as
Lot 1 of Pappan's Aliquippa Subdivision Plan, recorded in Plan Book Volume 24,
Page 86 of the Beaver County Recorder's Office.
Aliquippa, PA
<PAGE> 31
SCHEDULE B
----------
THIS SCHEDULE ATTACHED TO AND MADE A PART OF THE CERTAIN MORTGAGE AND ASSIGNMENT
OF LEASES AND RENTS, EXECUTED BY MORGAN'S RESTAURANTS OF PENNSYLVANIA, INC., FOR
THE BENEFIT OF CAPTEC FINANCIAL GROUP, INC.
Those exceptions disclosed on Schedule B Section II of First American Title
Insurance Company Commitment of Title Insurance No. 72555 dated August 13, 1995.
B-1
<PAGE> 32
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> 33
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> 34
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.
/s/ Vincent J. Oddi By /s/ Leonard R. Stein-Sapir
- ---------------------------- -----------------------------
/s/ Kenneth L. Hignett Its Chairman of the Board
- ---------------------------- ----------------------
-3-
<PAGE> 35
STATE OF Ohio )
--------- )
COUNTY OF Cuyahoga ) ss.
-------- )
The foregoing instrument was acknowledged before me this 19th day of
September, 1995, by Leonard Stein-Sapir, the Chairman of the Board of Morgan's
Foods, Inc., an Ohio corporation on behalf of the corporation.
/s/ Kathleen M. Philbin
--------------------------------------
Notary Public
Cuyahoga County, Ohio
My Commission Expires: 11-15-95
[Notary Public's Seal]
-4-
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
-------------------------------------------
<TABLE>
<CAPTION>
SUBSIDIARY STATE OF INCORPORATION
---------- ----------------------
<S> <C>
Morgan's Creative Restaurant Concepts, Inc. Ohio
Morgan's Restaurants of Ohio, Inc. Ohio
Morgan's Restaurants of Pennsylvania, Inc. Pennsylvania
Morgan's Weirton Foods, Inc. West Virginia
Morgan's Restaurants of New Jersey, Inc. New Jersey
Morgan's Foods of Missouri, Inc. Missouri
</TABLE>
<PAGE> 1
EXHIBIT 23 - INDEPENDENT AUDITORS' CONSENT
------------------------------------------
We consent to the incorporation by reference in Registration Statements No.
33-29402 and No. 33-70724 of Morgan's Foods, Inc. on Form S-8 of our report
dated May 24, 1996, appearing in this Annual Report on Form 10-K of Morgan's
Foods, Inc. for the year ended March 3, 1996.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Cleveland, Ohio
May 24, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-03-1996
<PERIOD-START> FEB-26-1995
<PERIOD-END> MAR-03-1996
<EXCHANGE-RATE> 1
<CASH> 2,666,000
<SECURITIES> 285,000
<RECEIVABLES> 78,000
<ALLOWANCES> 0
<INVENTORY> 347,000
<CURRENT-ASSETS> 3,584,000
<PP&E> 24,981,000
<DEPRECIATION> 9,472,000
<TOTAL-ASSETS> 22,034,000
<CURRENT-LIABILITIES> 4,146,000
<BONDS> 10,510,000
<COMMON> 17,817,000
0
0
<OTHER-SE> (10,439,000)
<TOTAL-LIABILITY-AND-EQUITY> 22,034,000
<SALES> 42,510,000
<TOTAL-REVENUES> 42,510,000
<CGS> 24,784,000
<TOTAL-COSTS> 41,975,000
<OTHER-EXPENSES> (1,892,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,284,000
<INCOME-PRETAX> 1,143,000
<INCOME-TAX> 17,000
<INCOME-CONTINUING> 1,126,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126,000
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
