<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the period ended August 16, 1998
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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 September 28, 1998, the issuer had 2,910,839 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
----------------------------------------------
AUGUST 16, 1998 AUGUST 17, 1997
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<S> <C> <C>
REVENUES............................................................. $ 9,606,000 $ 9,714,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE........................................... 2,984,000 3,093,000
LABOR AND BENEFITS ................................................ 2,358,000 2,551,000
RESTAURANT OPERATING EXPENSES ....................................... 2,693,000 2,643,000
DEPRECIATION AND AMORTIZATION ....................................... 454,000 433,000
GENERAL AND ADMINISTRATIVE EXPENSES.................................. 681,000 561,000
-------------------- -------------------
OPERATING INCOME..................................................... 436,000 433,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE........................................ (201,000) (212,000)
CAPITAL LEASES..................................................... (130,000) (126,000)
OTHER INCOME......................................................... 22,000 17,000
-------------------- -------------------
NET INCOME BEFORE INCOME TAXES....................................... 127,000 112,000
PROVISION FOR INCOME TAXES........................................... 11,000 2,000
-------------------- -------------------
NET INCOME........................................................... $ 116,000 $ 110,000
==================== ===================
NET INCOME PER COMMON SHARE.......................................... $ .04 $ .04
==================== ===================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING.............................................. 2,910,839 2,939,044
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE> 3
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
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<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
----------------------------------------------
AUGUST 16, 1998 AUGUST 17, 1997
--------------- ---------------
<S> <C> <C>
REVENUES............................................................... $ 18,666,000 $ 18,610,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE.............................................. 5,663,000 5,861,000
LABOR AND BENEFITS.................................................... 4,787,000 4,925,000
RESTAURANT OPERATING EXPENSES ......................................... 5,261,000 5,101,000
DEPRECIATION AND AMORTIZATION ......................................... 911,000 852,000
GENERAL AND ADMINISTRATIVE EXPENSES ................................... 1,346,000 1,222,000
-------------------- -------------------
OPERATING INCOME....................................................... 698,000 649,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE........................................... (394,000) (403,000)
CAPITAL LEASES ....................................................... (257,000) (251,000)
OTHER INCOME.......................................................... 28,000 33,000
-------------------- -------------------
NET INCOME BEFORE INCOME TAXES ........................................ 75,000 28,000
PROVISION FOR INCOME TAXES............................................. 11,000 2,000
-------------------- -------------------
NET INCOME............................................................. $ 64,000 $ 26,000
==================== ===================
NET INCOME PER COMMON SHARE............................................ $ .02 $ .01
==================== ===================
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING................................................ 2,910,839 2,944,182
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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<TABLE>
<CAPTION>
AUGUST 16, 1998 MARCH 1, 1998
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<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS.......................................................... $ 3,129,000 $ 2,316,000
MARKETABLE SECURITIES......................................................... - 102,000
RECEIVABLES................................................................... 85,000 74,000
INVENTORIES................................................................... 358,000 325,000
PREPAID EXPENSES.............................................................. 43,000 157,000
---------------- -----------------
3,615,000 2,974,000
PROPERTY AND EQUIPMENT:
LAND.......................................................................... 2,864,000 1,949,000
BUILDINGS AND IMPROVEMENTS.................................................... 8,369,000 7,160,000
PROPERTY UNDER CAPITAL LEASES................................................. 5,621,000 5,621,000
LEASEHOLD IMPROVEMENTS........................................................ 3,542,000 3,280,000
EQUIPMENT, FURNITURE AND FIXTURES............................................. 9,259,000 8,995,000
CONSTRUCTION IN PROGRESS...................................................... 108,000 28,000
---------------- -----------------
29,763,000 27,033,000
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION................................ 12,661,000 11,934,000
---------------- -----------------
17,102,000 15,099,000
OTHER ASSETS................................................................... 1,619,000 1,437,000
DEFERRED TAXES................................................................. 600,000 600,000
---------------- -----------------
$ 22,936,000 $ 20,110,000
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT........................................ $ 606,000 $ 563,000
CURRENT MATURITIES OF CAPITAL LEASE OBLIGATIONS............................. 531,000 503,000
ACCOUNTS PAYABLE............................................................ 1,990,000 1,969,000
ACCRUED LIABILITIES......................................................... 2,446,000 1,985,000
---------------- -----------------
5,573,000 5,020,000
LONG-TERM DEBT ............................................................... 10,295,000 7,815,000
LONG-TERM CAPITAL LEASE OBLIGATIONS .......................................... 4,748,000 5,019,000
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 - 58,566 SHARES................................................. (139,000) (139,000)
CAPITAL IN EXCESS OF STATED VALUE............................................... 28,875,000 28,875,000
ACCUMULATED DEFICIT............................................................. (26,446,000) (26,510,000)
---------------- -----------
TOTAL SHAREHOLDERS' EQUITY...................................................... 2,320,000 2,256,000
---------------- -----------------
$ 22,936,000 $20,110,000
================ ===========
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
<PAGE> 5
Morgan's Foods, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
CAPITAL IN TOTAL
COMMON SHARES TREASURY SHARES EXCESS OF ACCUMULATED SHAREHOLDERS'
------------------------- --------------------------
SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT EQUITY
------ ------ ------ ------ ------------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, March 2, 1997 .... 2,969,405 $ 30,000 (8,333) $ (23,000) $28,875,000 $(25,582,000) $ 3,300,000
Net loss .................. -- -- -- -- -- (928,000) (928,000)
Purchase of treasury shares -- -- (50,233) (116,000) -- -- (116,000)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance, March 1, 1998 .... 2,969,405 30,000 (58,566) (139,000) 28,875,000 (26,510,000) 2,256,000
Net income ................ -- -- -- -- -- 64,000 64,000
Balance, August 16, 1998 .. 2,969,405 $ 30,000 (58,566) $ (139,000) $28,875,000 $(26,446,000) $ 2,320,000
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See notes to consolidated financial statements
5
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Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
TWENTY-FOUR WEEKS ENDED
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AUGUST 16, 1998 AUGUST 17, 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS)................................................................ $ 64,000 $ 26,000
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES:
DEPRECIATION AND AMORTIZATION...................................................... 911,000 852,000
LOSS ON DISPOSAL OF RESTAURANT ASSETS.............................................. 8,000 -
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RECEIVABLES............................................... (11,000) 11,000
INCREASE IN INVENTORIES.......................................................... (33,000) (35,000)
DECREASE IN PREPAID EXPENSES..................................................... 107,000 106,000
INCREASE IN OTHER ASSETS......................................................... (120,000) (30,000)
INCREASE IN ACCOUNTS PAYABLE..................................................... 21,000 7,000
INCREASE IN ACCRUED EXPENSES..................................................... 461,000 48,000
------------------ ------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... 1,408,000 985,000
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES................................................................ (2,882,000) (2,193,000)
SALE OF PROPERTY AND EQUIPMENT...................................................... - 12,000
PURCHASE OF FRANCHISE AGREEMENTS.................................................... (95,000) -
PROCEEDS FROM SALE AND MATURITY
OF MARKETABLE SECURITIES........................................................... 102,000 47,000
------------------ -----------------
NET CASH USED IN INVESTING ACTIVITIES............................................... (2,875,000) (2,134,000)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM FINANCING FOR PROPERTY AND
EQUIPMENT AND FRANCHISE AGREEMENTS................................................. 2,782,000 1,626,000
PRINCIPAL PAYMENTS ON LONG-TERM DEBT................................................ (259,000) (205,000)
PRINCIPAL PAYMENTS ON CAPITAL
LEASE OBLIGATIONS................................................................ (243,000) (197,000)
PURCHASE OF TREASURY SHARES....................................................... - (71,000)
------------------ -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................................ 2,280,000 1,153,000
------------------ ------------------
NET CHANGE IN CASH AND EQUIVALENTS................................................... 813,000 4,000
CASH AND EQUIVALENTS, BEGINNING BALANCE.............................................. 2,316,000 3,013,000
------------------ ------------------
CASH AND EQUIVALENTS, ENDING BALANCE................................................. $3,129,000 $3,017,000
================== ==================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED AUGUST 16, 1998 AND AUGUST 17, 1997
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 1, 1998. Certain prior year amounts have been restated to conform to
the current year presentation.
Note 2. Acquisition of KFC restaurants
On July 23,1998, the Company completed the purchase of four existing
KFC restaurants in the Erie, PA area from another franchisee. The cash purchase,
in the amount of $2,435,000, was allocated $1,820,000 to land and buildings,
$250,000 to leasehold improvements, $270,000 to equipment and $95,000 to other
assets. The purchase and related costs were funded by long-term debt of
$2,500,000 incurred by the Company concurrently with the closing of the purchase
transaction.
Note 3. Reverse Stock Split
All share and per share data have been restated to reflect the one for
six reverse stock split which was effective on July 14, 1997.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("the Company") operates
through wholly-owned subsidiaries Kentucky Fried Chicken ("KFC") restaurants
under franchises from KFC Corporation and has rights to operate, as a
franchisee, East Side Mario's restaurants in the Cleveland/Akron and Columbus,
Ohio areas. As of September 28, 1998, the Company operates 45 KFC restaurants,
three 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 August 16, 1998 were
$9,606,000 compared to $9,714,000 for the quarter ended August 17, 1997. The
decrease of $108,000 was the result of a $102,000 increase in KFC revenue and a
$210,000 decrease in East Side Mario's revenue. Comparable restaurant revenues
in the KFC restaurants declined by 2.9% compared to the year earlier quarter
with the increase resulting from the addition of four restaurants for the last
three and one half weeks of the quarter. The comparable restaurant revenue
decline in the KFC restaurants was the result of several successful new product
campaigns in the comparable prior year period. The East Side Mario's restaurants
suffered a 9.8% comparable restaurant revenue decline for the quarter. The East
Side Mario's restaurant revenues continued to decline due to the complete lack
of support of the concept by the franchisor. Revenues for the twenty-four weeks
ended August 16, 1998 were $18,666,000 compared to $18,610,000 for the prior
year period. The increase of $56,000 was accounted for by an increase in KFC
revenues of $419,000 partially offset by a decrease in East Side Mario's
revenues for the period of $363,000. KFC comparable restaurant revenues for the
twenty-four week period were consistent with the prior year, with the revenue
increase coming from the addition of new restaurants. The decline in East Side
Mario's revenue was caused by the same reasons as discussed above in the quarter
analysis.
COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage
costs for the fiscal 1999 second quarter decreased as a percentage of revenue
from 31.8% in fiscal 1998 to 31.1%. The decrease was primarily the result of an
incentive purchasing credit from the Company's primary food supplier. Food,
paper and beverage costs for the twenty-four weeks ended August 16, 1998
decreased to 30.3% of revenue compared to 31.5% in the year earlier period for
the reason discussed above.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits decreased as a
percentage of revenue for the quarter ended August 16, 1998 to 24.5% compared to
26.3% for the year earlier quarter. The decrease was entirely due to premium
rebates received from the Ohio Bureau of Workers Compensation in the amount of
approximately $200,000 during the quarter. Labor and benefits decreased as a
percentage of revenue for the twenty-four weeks ended August 16, 1998 to 25.6%
from 26.5% in the year earlier period for the reason mentioned above.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses in the
second quarter increased slightly as a percentage of revenue from 27.2% in
fiscal 1998 to 28.0% in fiscal 1999. The increase was caused by slightly higher
royalties and insurance costs in the KFC restaurants and higher repair and
maintenance costs coupled with rent increases and lower revenues in the East
Side Mario's restaurants. Restaurant operating expenses for the twenty-four
weeks ended August 16, 1998 increased slightly to 28.2% of revenue compared to
27.4% of revenue in the comparable year earlier period. The change was caused by
the same factors mentioned in the discussion of comparisons for the quarter.
8
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DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
fiscal 1999 second quarter increased to $454,000 compared to $433,000 in fiscal
1998. The increase is primarily due to the addition of one new KFC restaurant
and the image enhancement of several others. Depreciation and amortization for
the twenty-four weeks ended August 16, 1998 increased to $911,000 from $852,000
for the year earlier period for the reasons discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the second quarter of fiscal 1999 were $681,000 compared to
$561,000 in the second quarter of fiscal 1998. The increase is primarily due to
two factors. First, the prior year expense was lowered by the reversal of a
litigation accrual in the amount of approximately $85,000. Secondly, the fiscal
1999 quarter contains expenses for an additional market manager who was added to
the KFC management team to support the growth in the number of KFC restaurants.
General and administrative expenses for the twenty-four weeks ended August 16,
1998 increased to $1,346,000 compared to $1,222,000 for the year earlier period
for the reasons discussed above.
OPERATING INCOME. Operating income in the current quarter was
substantially unchanged at $436,000 for the second quarter of fiscal 1999
compared to $433,000 for the second quarter of fiscal 1998. Operating income for
the KFC restaurants in the second quarter of fiscal 1999 increased slightly more
than $100,000 compared to the prior year quarter for the reasons discussed
above. The operating loss for the East Side Mario's restaurants increased
approximately $100,000 due to the continuing decline in sales which has reduced
the operating efficiency of the restaurants. Operating income for the
twenty-four weeks ended August 16, 1998 increased to $698,000 from $649,000 in
the year earlier period due to an improvement in operating income of
approximately $275,000 in the KFC restaurants partially offset by an increase in
the operating loss in the East Side Mario's restaurants of approximately
$225,000, both for the reasons discussed above.
INTEREST EXPENSE. Interest expense on bank debt decreased to $201,000
in fiscal 1999 from $212,000 in fiscal 1998 due to lower average debt balances
during the fiscal 1999 quarter. Interest expense for the twenty-four weeks ended
August 16, 1998 decreased to $394,000 from $403,000 in the comparable year
earlier period for the same reason discussed above. Interest expense on
capitalized leases was substantially unchanged from the prior year second
quarter and for the twenty-four weeks.
OTHER INCOME. Other income for the quarter ended August 16, 1998 of
$22,000 decreased from the year earlier amount of $17,000. Other income for the
twenty-four weeks ended August 16, 1998 decreased to $28,000 from $33,000 in the
year earlier period. The decreases were primarily the result of lower interest
earned on available cash balances.
PROVISION FOR INCOME TAXES. The provision for income taxes was $11,000
for the quarter ended August 16, 1998 compared to $2,000 in the prior year
quarter. This increase was caused by tax refunds received in the prior year
period.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the twenty-four
weeks of fiscal 1999 and fiscal 1998 is presented in the Consolidated Statements
of Cash Flows. Cash provided by operating activities was $1,408,000 in the first
half of fiscal 1999. The Company paid scheduled long-term bank and capitalized
lease debt of $502,000 in the first two quarters of fiscal 1998 and received
financing of $2,782,000 to fund acquisitions of four KFC restaurants and to
complete the image enhancement of another. Capital expenditures during fiscal
1999 include the acquisition of four KFC restaurants and the purchase of land
for a new KFC restaurant in the Youngstown, Ohio area.
9
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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.
GROWTH. On September 15, 1998, the Company purchased two existing KFC
restaurants in the St. Louis, MO area from another franchisee. The Company also
has signed a definitive agreement to purchase two KFC restaurants from another
franchisee and expects to complete the transaction in late October. The Company
is currently constructing a new KFC restaurant in the Youngstown, Ohio area, has
entered into an agreement to purchase land to build a new KFC restaurant in
Illinois and is currently negotiating to purchase several other existing KFC
restaurants.
Item 6. Exhibits
(a) Exhibit 27 - Financial Data Schedule
10
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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: September 30, 1998 By: /s/ Kenneth L. Hignett
------------------ ------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
11
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000068145
<NAME> MORGAN'S FOODS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-02-1998
<PERIOD-END> AUG-16-1998
<CASH> 3,129,000
<SECURITIES> 0
<RECEIVABLES> 85,000
<ALLOWANCES> 0
<INVENTORY> 358,000
<CURRENT-ASSETS> 3,615,000
<PP&E> 29,763,000
<DEPRECIATION> 12,661,000
<TOTAL-ASSETS> 22,936,000
<CURRENT-LIABILITIES> 5,573,000
<BONDS> 15,043,000
0
0
<COMMON> 30,000
<OTHER-SE> 2,290,000
<TOTAL-LIABILITY-AND-EQUITY> 2,320,000
<SALES> 9,606,000
<TOTAL-REVENUES> 9,606,000
<CGS> 5,342,000
<TOTAL-COSTS> 9,170,000
<OTHER-EXPENSES> 22,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 331,000
<INCOME-PRETAX> 127,000
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 116,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 116,000
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
