<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended May 25, 1997
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Commission file number 0-3833
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Morgan's Foods, Inc.
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(Exact name of registrant as specified in its charter)
Ohio 34-0562210
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 360-7500
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of July 7, 1997, the issuer had 2,941,738 shares of common stock
outstanding.
1
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<TABLE>
<CAPTION>
Quarter Ended
----------------------------
May 25, 1997 May 26, 1996
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<S> <C> <C>
REVENUES ................................ $ 8,896,000 $ 9,005,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ............... 2,768,000 2,818,000
LABOR AND BENEFITS ..................... 2,374,000 2,323,000
RESTAURANT OPERATING EXPENSES ........... 2,458,000 2,696,000
DEPRECIATION AND AMORTIZATION ........... 419,000 453,000
GENERAL AND ADMINISTRATIVE EXPENSES ..... 661,000 637,000
----------- -----------
OPERATING INCOME ........................ 216,000 78,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ............ (191,000) (133,000)
CAPITAL LEASES ......................... (125,000) (129,000)
OTHER INCOME ............................ 16,000 32,000
----------- -----------
LOSS BEFORE INCOME TAXES ................ (84,000) (152,000)
PROVISION FOR INCOME TAXES .............. - -
----------- -----------
NET LOSS ................................ $ ( 84,000) $ (152,000)
=========== ===========
NET LOSS PER COMMON SHARE ............... $ (.03) $ (.05)
=========== ===========
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING .................. 2,949,320 2,969,405
</TABLE>
See notes to consolidated financial statements
2
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MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<TABLE>
<CAPTION>
MAY 25, 1997 MARCH 2, 1997
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS ................................. $ 2,504,000 $ 3,013,000
MARKETABLE SECURITIES ................................ 175,000 198,000
RECEIVABLES .......................................... 116,000 112,000
INVENTORIES .......................................... 346,000 293,000
PREPAID EXPENSES ..................................... 175,000 191,000
----------- -----------
3,316,000 3,807,000
PROPERTY AND EQUIPMENT:
LAND ................................................. 1,949,000 1,724,000
BUILDINGS AND IMPROVEMENTS ........................... 6,060,000 5,973,000
PROPERTY UNDER CAPITAL LEASES ........................ 5,182,000 5,182,000
LEASEHOLD IMPROVEMENTS ............................... 3,320,000 3,323,000
EQUIPMENT, FURNITURE AND FIXTURES .................... 8,622,000 8,121,000
CONSTRUCTION IN PROGRESS ............................. 1,051,000 461,000
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26,184,000 24,784,000
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ....... 11,266,000 10,875,000
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14,918,000 13,909,000
OTHER ASSETS .......................................... 1,026,000 996,000
DEFERRED TAXES ........................................ 600,000 600,000
----------- -----------
$19,860,000 $19,312,000
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LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT ................. $ 378,000 $ 324,000
CURRENT MATURITIES OF CAPITAL LEASE OBLIGATIONS....... 411,000 409,000
ACCOUNTS PAYABLE ..................................... 1,934,000 1,914,000
ACCRUED LIABILITIES .................................. 2,151,000 2,044,000
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4,874,000 4,691,000
LONG-TERM DEBT ........................................ 7,076,000 6,474,000
LONG-TERM CAPITAL LEASE OBLIGATIONS ................... 4,746,000 4,847,000
SHAREHOLDERS' EQUITY
PREFERRED SHARES, 1,000,000 SHARES AUTHORIZED,
NO SHARES OUTSTANDING
COMMON STOCK
AUTHORIZED SHARES - 25,000,000
ISSUED SHARES - 2,969,405 ............................. 30,000 30,000
TREASURY STOCK - 27,667 AND 8,333 SHARES .............. (75,000) (23,000)
CAPITAL IN EXCESS OF STATED VALUE ...................... 28,875,000 28,875,000
ACCUMULATED DEFICIT .................................... (25,666,000) (25,582,000)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY ............................. 3,164,000 3,300,000
----------- -----------
$19,860,000 $19,312,000
=========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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Morgan's Foods, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
COMMON SHARES TREASURY SHARES CAPITAL IN TOTAL
------------------------ ------------------ EXCESS OF ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT EQUITY
----------- ------------ ------ ------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 3, 1996 .... 2,969,405 $ 2,969,000 -- -- $25,936,000 $(21,527,000) $ 7,378,000
Change in stated value .... -- (2,939,000) -- -- 2,939,000 -- --
Net loss .................. -- -- -- -- -- (4,055,000) (4,055,000)
Purchase of treasury shares -- -- (8,333) (23,000) -- -- (23,000)
--------- ----------- ------- -------- ----------- -------------- -----------
Balance, March 2, 1997 .... 2,969,405 30,000 (8,333) $(23,000) 28,875,000 (25,582,000) 3,300,000
Net loss .................. -- -- -- -- -- (84,000) (84,000)
Purchase of treasury shares -- -- (19,334) (52,000) -- -- (52,000)
--------- ----------- ------- -------- ----------- -------------- -----------
Balance, May 25, 1997 ..... 2,969,405 $ 30,000 (27,667) $(75,000) $28,875,000 $(25,666,000) $ 3,164,000
========= =========== ======= ======== =========== ============== ===========
</TABLE>
See notes to consolidated financial statements
4
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Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
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May 25, 1997 May 26, 1996
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS ....................................... $ (84,000) $ (152,000)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION ................. 419,000 453,000
LOSS ON SALE OF RESTAURANTS AND
OTHER PROPERTY AND EQUIPMENT ................. 12,000 -
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RECEIVABLES ......... (4,000) 59,000
INCREASE IN INVENTORIES .................... (53,000) (71,000)
DECREASE IN PREPAID EXPENSES ............... 16,000 60,000
INCREASE IN OTHER ASSETS ................... (37,000) (78,000)
INCREASE IN ACCOUNTS PAYABLE ............... 20,000 90,000
INCREASE IN ACCRUED EXPENSES ............... 107,000 380,000
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NET CASH PROVIDED BY OPERATING ACTIVITIES ..... 396,000 741,000
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CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES ........................... (1,433,000) (496,000)
PROCEEDS FROM SALE AND MATURITY
OF MARKETABLE SECURITIES ...................... 23,000 21,000
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NET CASH (USED IN) INVESTING ACTIVITIES ........ (1,410,000) (475,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM PROPERTY AND EQUIPMENT FINANCING.. 741,000 575,000
PRINCIPAL PAYMENTS ON LONG-TERM DEBT............ (85,000) (42,000)
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATIONS. (99,000) (79,000)
PURCHASE OF TREASURY SHARES .................... (52,000) -
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NET CASH PROVIDED BY FINANCING ACTIVITIES ...... 505,000 454,000
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NET CHANGE IN CASH AND EQUIVALENTS .............. (509,000) 720,000
CASH AND EQUIVALENTS, BEGINNING BALANCE ......... 3,013,000 2,666,000
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CASH AND EQUIVALENTS, ENDING BALANCE ............ $2,504,000 $ 3,386,000
========== ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
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Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MAY 25, 1997 AND MAY 26, 1996
Note 1. Summary of Significant Accounting Policies
The interim consolidated financial statements of Morgan's Foods, Inc.
have been prepared without audit. In the opinion of Company Management, all
adjustments have been included. Unless otherwise disclosed, all adjustments
consist only of normal recurring adjustments necessary for a fair statement of
results of operations for the interim periods. These unaudited financial
statements have been prepared using the same accounting principles that were
used in preparation of the Company's annual report on Form 10-K for the year
ended March 2, 1997.
Note 2. Reverse Stock Split
On June 27, 1997, shareholders approved a one for six reverse stock
split of the Company's common shares which will become effective on July 14,
1997. All share and per share data have been restated to reflect the one for six
reverse stock split.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("the Company") operates
through wholly-owned subsidiaries Kentucky Fried Chicken ("KFC") restaurants
under franchises from KFC Corporation and has rights to operate, as a
franchisee, East Side Mario's restaurants in the Cleveland/Akron and Columbus,
Ohio areas. As of July 7, 1997, the Company operates 40 KFC restaurants, two of
which also offer Taco Bell products, and six East Side Mario's restaurants. The
Company's fiscal year is a 52 - 53 week year ending on the Sunday nearest the
last day of February.
REVENUES. Revenues for the quarter ended May 25, 1997 were $8,896,000
compared to $9,005,000 for the quarter ended May 26, 1996. The decrease of
$109,000 was the result of a $75,000 increase in KFC revenues offset by a
$184,000 decline in revenues from the East Side Mario's restaurants. This
reflects a 1.9% comparable restaurant increase in KFC revenues and an 8.0%
comparable restaurant decline for the East Side Mario's. Revenues at the KFC
restaurants increased because of effective marketing support and the
introduction of new products by the franchisor while the East Side Mario's
restaurant revenues continued to decline due to the lack of marketing support
and inadequate menu and food systems provided by the franchisor.
COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage
costs for the fiscal 1998 quarter decreased as a percentage of revenue from
31.3% in fiscal 1997 to 31.1%. The decrease was due to refunds received from a
poultry price guarantee program in the KFC restaurants and improvements in the
food and paper costs of the East Side Mario's restaurants, partially offset by
inefficiencies in the addition of the Company's first Taco Bell 2-in-1 location
in Youngstown, Ohio and the opening of a new KFC restaurant in Greensburg,
Pennsylvania.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits increased as a
percentage of revenue for the quarter ended May 25, 1997 to 26.7% compared to
25.8% one year ago. The increase is primarily due to the minimum wage increase
and temporary inefficiencies associated with the KFC and Taco Bell additions
mentioned above.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses decreased
as a percentage of revenue from 29.9% in fiscal 1997 to 27.6% in fiscal 1998.
The decrease was primarily caused by lower promotional activities and $25,000 in
one time expenses incurred by the East Side Mario's restaurants in the prior
fiscal year for dinnerware and supplies related to the adoption of a new menu.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for fiscal
1998 declined to $419,000 from $453,000 in fiscal 1997 due to asset writedowns
recorded in the fourth quarter of fiscal 1997 for certain East Side Mario's
restaurant properties and goodwill remaining from a previous KFC acquisition.
This effect was partially offset by the addition of property and equipment for
the KFC restaurants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for fiscal 1998 were $661,000 compared to $637,000 in the first quarter
of fiscal 1997. The increase of $24,000 was primarily the result of one time
expenses for travel and lodging related to a system-wide KFC manager training
program held during the first quarter of fiscal 1998.
OPERATING INCOME. Operating income in the current quarter increased to
$216,000 from $78,000 for the first quarter of fiscal 1997. Operating income for
the KFC restaurants in the first quarter of fiscal 1998 improved
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by $56,000 compared to the prior year quarter while the operating loss
for the East Side Mario's restaurants decreased by $82,000.
INTEREST EXPENSE. Interest expense on bank debt increased to $191,000
in fiscal 1998 from $133,000 in fiscal 1997 due to the increase in bank debt
balances. Interest expense on capitalized leases was substantially unchanged
from the prior year first quarter.
OTHER INCOME. Other income decreased to $16,000 in fiscal 1998 from
$32,000 in fiscal 1997 as the result of lower interest income earned on cash
balances during the first quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the first
quarters of fiscal 1998 and fiscal 1997 is presented in the Consolidated
Statements of Cash Flows. Cash provided by operating activities was $396,000 in
the first quarter of fiscal 1998. The Company paid scheduled long-term bank and
capitalized lease debt of $184,000 in the first quarter of fiscal 1998 and
received property and equipment financing of $741,000 to purchase a previously
leased KFC restaurant in St. Louis, Missouri and to refurbish three restaurants
in Pennsylvania and one in Ohio. In addition, the Company purchased property and
equipment of $1,433,000 which includes amounts financed by the $741,000 of
financing mentioned above as well as the addition of the Company's first Taco
Bell 2-in-1 to an existing KFC restaurant in Youngstown, Ohio and the building
of a new KFC restaurant in Greensburg, Pennsylvania. Completion of both
facilities occurred after the end of the fiscal first quarter and the related
financing will be completed during the second fiscal quarter.
The KFC operations of the Company have historically provided
sufficient cash flow to service the Company's debt, refurbish and upgrade KFC
restaurant properties and cover administrative overhead. Management believes
that operating cash flow will provide sufficient capital to continue to operate
and maintain the KFC and East Side Mario's restaurants, service the Company's
debt and support required corporate expenses. In addition to the Company's
operating cash flow, management believes that additional financing, including
long term leases of build-to-suit restaurants and development lines of credit
can be obtained for use in the acquisition of new KFC properties and
refurbishment of existing ones.
OTHER. The Company is currently not in full compliance with the
American Stock Exchange financial condition guidelines for continued listing.
Specifically, the guidelines indicate that any company with shareholders'
equity less than $4,000,000 and losses in 3 of its last 4 fiscal years may be
considered for delisting. This condition has been reviewed with representatives
of the American Stock Exchange who indicated that the company's performance
will continue to be monitored by the Exchange.
Item 6. Exhibits
(a) Exhibit 27 - Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Morgan's Foods, Inc.
-----------------------------
(Registrant)
Dated: July 9, 1997 By: /s/ Kenneth L. Hignett
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Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-01-1998
<PERIOD-START> MAR-03-1997
<PERIOD-END> MAY-25-1997
<CASH> 2,504,000
<SECURITIES> 175,000
<RECEIVABLES> 116,000
<ALLOWANCES> 0
<INVENTORY> 346,000
<CURRENT-ASSETS> 3,316,000
<PP&E> 26,184,000
<DEPRECIATION> 11,266,000
<TOTAL-ASSETS> 19,860,000
<CURRENT-LIABILITIES> 4,874,000
<BONDS> 7,076,000
<COMMON> 30,000
0
0
<OTHER-SE> 3,134,000
<TOTAL-LIABILITY-AND-EQUITY> 19,860,000
<SALES> 8,896,000
<TOTAL-REVENUES> 8,896,000
<CGS> 5,142,000
<TOTAL-COSTS> 8,680,000
<OTHER-EXPENSES> (16,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 316,000
<INCOME-PRETAX> (84,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (84,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (84,000)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
