<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 November 8, 1998
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Commission file number 0-3833
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Morgan's Foods, Inc
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-562210
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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
-----------------------------
- --------------------------------------------------------------------------------
(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 December 18, 1998, the issuer had 2,910,839 shares of common stock
outstanding.
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------
NOVEMBER 8, 1998 NOVEMBER 9, 1997
--------------- ----------------
<S> <C> <C>
Revenues $ 9,972,000 $ 9,034,000
Cost of sales:
Food, paper and beverage 3,314,000 2,900,000
Labor and benefits 2,647,000 2,404,000
Restaurant operating expenses 2,595,000 2,440,000
Depreciation and amortization 448,000 419,000
General and administrative expenses 761,000 641,000
--------------- ----------------
Operating income 207,000 230,000
Interest Expense:
Bank debt and notes payable (236,000) (188,000)
Capital leases (124,000) (124,000)
Loss on disposal of restaurants (Note 4) - (80,000)
Other income 28,000 24,000
--------------- ----------------
Loss before income taxes (125,000) (138,000)
Provision for income taxes 7,000 5,000
--------------- ----------------
Net loss $ (132,000) $ (143,000)
=============== ================
Net loss per common share $ (.05) $ (.05)
============== ================
Weighted average number
of shares outstanding 2,910,839 2,916,315
</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)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
------------------------------------------
NOVEMBER 8, 1998 NOVEMBER 9, 1997
--------------- ----------------
<S> <C> <C>
Revenues $ 28,638,000 $ 27,644,000
Cost of sales:
Food, paper and beverage 8,977,000 8,761,000
Labor and benefits 7,434,000 7,329,000
Restaurant operating expenses 7,856,000 7,541,000
Depreciation and amortization 1,359,000 1,271,000
General and administrative expenses 2,107,000 1,863,000
--------------- ----------------
Operating income 905,000 879,000
Interest Expense:
Bank debt and notes payable (630,000) (591,000)
Capital leases (381,000) (375,000)
Loss on disposal of restaurants (Note 4) - (80,000)
Other income 56,000 57,000
--------------- ----------------
Loss before income taxes (50,000) (110,000)
Provision for income taxes 18,000 7,000
--------------- ----------------
Net loss $ (68,000) $ (117,000)
=============== ================
Net loss per common share $ (.02) $ (.04)
=============== ===============
Weighted average number
of shares outstanding 2,910,839 2,934,893
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
<PAGE> 4
Morgan's Foods, Inc.
CONSOLIDATED BALANCE SHEETS
(unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NOVEMBER 8, 1998 MARCH 1, 1998
---------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 2,612,000 $ 2,316,000
Marketable securities - 102,000
Receivables 86,000 74,000
Inventories 331,000 325,000
Prepaid expenses 92,000 157,000
---------------- ----------------
3,121,000 2,974,000
Property and equipment:
Land 3,129,000 1,949,000
Buildings and improvements 8,527,000 7,160,000
Property under capital leases 5,546,000 5,621,000
Leasehold improvements 3,548,000 3,280,000
Equipment, furniture and fixtures 9,348,000 8,995,000
Construction in progress 195,000 28,000
---------------- ----------------
30,293,000 27,033,000
Less accumulated depreciation and amortization 13,014,000 11,934,000
---------------- ----------------
17,279,000 15,099,000
Other assets 1,708,000 1,437,000
Deferred taxes 600,000 600,000
---------------- ----------------
$ 22,708,000 $ 20,110,000
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 638,000 $ 563,000
Current maturities of capital lease obligations 524,000 503,000
Accounts payable 1,836,000 1,969,000
Accrued liabilities 2,285,000 1,985,000
---------------- ----------------
5,283,000 5,020,000
Long-term debt 10,600,000 7,815,000
Long-term capital lease obligations 4,637,000 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 (26,578,000) (26,510,000)
---------------- ----------------
Total shareholders' equity 2,188,000 2,256,000
---------------- ----------------
$ 22,708,000 $ 20,110,000
================ ================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
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 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 loss ................... - - - - - (68,000) (68,000)
Balance, November 8, 1998... 2,969,405 $30,000 (58,566) $ (139,000) $ 28,875,000 $ (26,578,000) $2,188,000
============ ======= ========= =========== ============= ============== =============
</TABLE>
See notes to consolidated financial statements
5
<PAGE> 6
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
THIRTY-SIX WEEKS ENDED
----------------------
NOVEMBER 8, 1998 NOVEMBER 9, 1997
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (68,000) $ (117,000)
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,359,000 1,271,000
Loss on sale of restaurants and
other property and equipment 8,000 80,000
Change in assets and liabilities:
Decrease (increase) in receivables (12,000) 8,000
(Increase) in inventories (6,000) (18,000)
Decrease in prepaid expenses 57,000 3,000
(Increase) in other assets (180,000) (44,000)
(Decrease) in accounts payable (133,000) (132,000)
Increase (decrease) in accrued expenses 300,000 (233,000)
------------------ -------------------
Net cash provided by
operating activities 1,325,000 818,000
------------------ ------------------
Cash flows from investing activities:
Sale of restaurants and leaseholds,
net of expenses of sale - 15,000
Capital expenditures (3,488,000) (2,576,000)
Purchase of franchise agreements (142,000) (443,000)
Proceeds from sale and maturity
of marketable securities 102,000 72,000
------------------ ------------------
Net cash used in
investing activities (3,528,000) (2,932,000)
------------------ ------------------
Cash flows from financing activities:
Proceeds from property and equipment financing 3,257,000 2,515,000
Principal payments on long-term debt (397,000) (337,000)
Principal payments on capital lease obligations (361,000) (288,000)
Purchase of treasury shares - (116,000)
------------------ ------------------
Net cash provided by
financing activities 2,499,000 1,774,000
------------------ ------------------
Net change in cash and equivalents 296,000 (340,000)
Cash and equivalents, beginning balance 2,316,000 3,013,000
------------------ ------------------
Cash and equivalents, ending balance $ 2,612,000 $ 2,673,000
================== ==================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 7
Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED NOVEMBER 8, 1998 AND NOVEMBER 9, 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 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 was effective on July 14, 1997. All share and
per share data have been restated to reflect the one for six reverse stock
split.
Note 3. 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. On September 15,1998, the Company completed the purchase of two
existing KFC restaurants in the St. Louis, MO area from another franchisee. The
cash purchase, in the amount of $350,000, was allocated $275,000 to land and
buildings, $28,000 to equipment and $47,000 to other assets. The purchase and
related costs were funded by long-term debt of $475,000 incurred by the Company
concurrently with the closing of the purchase transaction. Subsequent to the end
of the quarter, on December 10,1998, the Company completed the purchase of two
existing KFC restaurants in Jamestown, NY and Warren, PA from another
franchisee. The cash purchase, in the amount of $715,000, was allocated $569,000
to land and buildings, $100,000 to equipment and $46,000 to other assets. The
purchase and related costs were funded by long-term debt of $750,000 incurred by
the Company concurrently with the closing of the purchase transaction.
Note 4. Closing of Restaurants
During the third quarter of fiscal 1998, the Company closed an
under-performing KFC restaurant in the St. Louis market and recognized a loss on
disposal of the leasehold improvements and equipment. In addition, the Company
closed the East Side Mario's restaurant in Mayfield Heights, OH on October 2,
1998 and is not expected to incur a significant loss or gain on disposal of the
property.
7
<PAGE> 8
Note 5. Change in stated value of common shares
On June 28, 1996 the Board of Directors of the Company approved a change in
the stated value of the Company's common shares from $1.00 per share to $.01 per
share.
Note 6. Future Financial Statement Disclosures
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, Disclosures about Segments of an
Enterprise and Related Information, which will be effective for the Company's
1999 fiscal year. SFAS No. 131 redefines how operating segments are determined
and requires disclosure of certain financial and descriptive information about a
company's operating segments. The Company has not yet completed its analysis of
SFAS No. 131 and accordingly has not yet determined what effect, if any, it may
have on future financial statement disclosures.
8
<PAGE> 9
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 December 18, 1998, the Company operates 47 KFC restaurants,
three of which also offer Taco Bell products, and five 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 November 8, 1998 were $9,972,000
compared to $9,034,000 for the quarter ended November 9, 1997. The increase of
$938,000 was the net effect of four factors. The first was the increase of
$925,000 in KFC revenues from restaurants acquired or built since November 9,
1997. Secondly, closed KFC restaurants accounted for approximately $11,000 of
revenues and the closed Eastside Mario's restaurant for approximately $203,000
of revenues in the quarter ended November 9, 1997 which were not present in the
quarter ended November 8, 1998. Third, sales at the East Side Mario's
restaurants declined by $134,000 compared to the third quarter of the prior
year, which represents an 8.0% decrease in comparable sales. Last, comparable
restaurant revenues in the KFC restaurants increased $361,000 or 3.8% compared
to the year earlier quarter. Comparable restaurant KFC revenues increased
because of the continued successful advertising campaigns and the lack of
promotions of the prior year quarter. The East Side Mario's restaurants, the
oldest of which opened nearly five years ago, have exhibited significant
declines from their opening sales levels due to increased competition and lack
of effective menu changes and advertising.
For the thirty-six weeks ended November 8, 1998 revenue increased $994,000 to
$28,638,000 compared to $27,644,000 in the prior year to date period. Several
factors combined to produce this result. First, new KFC restaurants increased
revenues by $1,179,000 partially offset by closed KFC restaurants which
accounted for a decrease of $280,000 and the closed East Side Mario's restaurant
which accounted for a decrease of $288,000 in the year-to-date period ended
November 8, 1998 compared to the year earlier period. Second, KFC revenues
increased $796,000 in the comparable restaurants and third, comparable revenues
in the East Side Mario's declined $413,000 in the thirty-six weeks ended
November 8, 1998 compared to the year earlier period. These changes were caused
by the factors described above for the third quarter.
COST OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage costs for
the quarter ended November 8, 1998 as a percentage of revenue were 33.2%
compared to 32.1% in the prior year. These results were caused by higher chicken
costs in the KFC restaurants, combined with decreased efficiency in the East
Side Mario's restaurants caused by lower revenue levels compared to the prior
year period. Food, paper and beverage costs for the thirty-six weeks ended
November 8, 1998 decreased slightly as a percentage of sales to 31.3% compared
to 31.7% in the same period of the prior year. This was the result of improved
efficiency and favorable menu mix in the KFC restaurants partially offset by
higher chicken costs in the KFC restaurants and lower efficiency in the East
Side Mario's restaurants.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits remained substantially
constant as a percentage of revenue for the quarter ended November 8, 1998 at
26.5% compared to 26.6% one year ago. This was the result of the increased
minimum wage rates raising the overall labor rates in the Company's restaurants
offset by the decline in significance of the East Side Mario's operations which
have inherently higher labor percentages than the KFC restaurants. For the
thirty-six weeks ended November 8, 1998 labor and benefits decreased as a
percentage of revenue to 26.0% from 26.5% in the same period a year earlier.
This was
9
<PAGE> 10
caused by lower workers' compensation rates partially offset by the minimum wage
increases in the KFC restaurants and lower labor efficiency in the East Side
Mario's restaurants due to lower revenue levels.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses decreased as a
percentage of revenue from 27.0% in the third quarter of fiscal 1997 to 26.0% in
fiscal 1998. The decrease was primarily caused by reduced advertising
expenditures in both the East Side Mario's and the KFC restaurants combined with
reduced reserves for loss contingencies related to sold KFC restaurants. For the
thirty-six weeks ended November 8, 1998, restaurant operating expenses remained
relatively constant at 27.4% of revenue compared to 27.3% in the year earlier
period due to the factors cited above combined with lower operating efficiency
in the East Side Mario's restaurants caused by declining volumes.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the quarter
ended November 8, 1998 increased to $448,000 from $419,000 in the same quarter a
year earlier due to the effect of the six KFC restaurants purchased during the
fiscal 1999 year-to date. Depreciation and amortization for the year to date
fiscal 1999 increased to $1,359,000 from $1,271,000 in fiscal 1998 for the same
reasons cited above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses for
the third quarter of fiscal 1999 increased to $761,000 from $641,000. The
increase was caused by the addition of one KFC market manager to accommodate the
rapid growth in the number of KFC restaurants as well as approximately $70,000
of legal expenses related to the lawsuit against the franchisor of East Side
Mario's and related parties. General and administrative expenses for the
thirty-six weeks ended November 8, 1998 were $2,107,000 compared to $1,863,000
in the thirty-six weeks ended November 9, 1997. The increase was due primarily
to the factors mentioned above in the quarterly comparison.
OPERATING INCOME. Operating income in the quarter ended November 8, 1998 was
$207,000 compared to $230,000 for the quarter ended November 9, 1997. Operating
income for the KFC restaurants in the current quarter was greater than the prior
year due to additional restaurants, improved operating efficiencies and the
elimination of low volume restaurants. This increase was offset by the greater
operating losses of the East Side Mario's in the third quarter of fiscal 1999
caused by declining volume and the expenses associated with the litigation
mentioned above. Operating income for the thirty-six weeks ended November 8,
1998 increased to $905,000 compared to operating income of $879,000 in the
comparable year earlier period. During the thirty-six weeks ended November 9,
1997 operating income for the KFC restaurants increased and operating losses of
the East Side Mario's restaurants increased significantly from the same period a
year earlier for the reasons cited above.
INTEREST EXPENSE. Interest expense on bank debt increased to $236,000 in the
quarter ended November 8, 1998 from $188,000 in the quarter ended November 9,
1997 due to additional bank debt for the acquisition of six KFC restaurants.
Interest expense on capitalized leases in the quarter ended November 8, 1998
remained approximately the same at $124,000. Interest expense on bank debt for
the thirty-six weeks ended November 8, 1998 increased to $630,000 from $591,000
in the same period a year earlier due to the same factors mentioned above.
Interest expense on capitalized leases remained essentially unchanged at
$381,000 in fiscal 1999 compared to $375,000 in fiscal 1998.
LOSS ON DISPOSAL OF RESTAURANTS. The loss of $80,000 in the third quarter of
fiscal 1998 as well as the year-to-date period was primarily the result of
closing an under-performing KFC restaurant in the St. Louis market, which had
come to the end of its lease term. The leasehold was abandoned because
acceptable terms for a new lease of the site could not be reached.
10
<PAGE> 11
OTHER INCOME. Other income of $28,000 in the quarter ended November 8, 1998
was similar in amount to the $24,000 in the comparable prior year period. These
amounts are comprised primarily of interest income, rental income, and payment
discounts. Other income for the thirty-six weeks ended November 8, 1998 was
$56,000 compared to $57,000 in the comparable year earlier period.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the first thirty-six
weeks of fiscal 1999 and fiscal 1998 is presented in the Consolidated Statements
of Cash Flows. In fiscal 1999, cash provided by operating activities was
$1,325,000 and the Company purchased property and equipment of $3,488,000. The
Company paid scheduled long-term bank and capitalized lease debt of $758,000 in
fiscal 1999 and received property and equipment financing of $3,257,000 to fund
acquisitions of KFC property, equipment and franchise agreements. Capital
expenditures during fiscal 1999 include the acquisition of six KFC restaurants
from other franchisees, the acquisition of land on which to build two new KFC
restaurants and the image enhancement of two existing KFC restaurants.
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 and refurbishment of existing KFC properties.
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
would continue to be monitored by the Exchange.
Item 6. Exhibits
(a) Exhibit 27 - Financial Data Schedule
11
<PAGE> 12
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: December 23, 1998 By: /s/ Kenneth L. Hignett
----------------------- --------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-2-1998
<PERIOD-END> NOV-8-1998
<CASH> 2,612,000
<SECURITIES> 0
<RECEIVABLES> 86,000
<ALLOWANCES> 0
<INVENTORY> 331,000
<CURRENT-ASSETS> 3,121,000
<PP&E> 30,293,000
<DEPRECIATION> 13,014,000
<TOTAL-ASSETS> 22,708,000
<CURRENT-LIABILITIES> 5,283,000
<BONDS> 15,237,000
0
0
<COMMON> 30,000
<OTHER-SE> 2,158,000
<TOTAL-LIABILITY-AND-EQUITY> 22,708,000
<SALES> 9,972,000
<TOTAL-REVENUES> 9,972,000
<CGS> 5,961,000
<TOTAL-COSTS> 9,765,000
<OTHER-EXPENSES> (28,000)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 360,000
<INCOME-PRETAX> (125,000)
<INCOME-TAX> 7,000
<INCOME-CONTINUING> (132,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (132,000)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
