<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 24, 1998
----------------------------------------------------------
Commission file number 0-3833
----------------------------------------------------------
Morgan's Foods, Inc.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0562210
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio 44122
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 360-7500
----------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ...X... No .......
As of July 6, 1998, the issuer had 2,910,839 shares of common stock
outstanding.
1
<PAGE> 2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
QUARTER ENDED
-----------------------------------
MAY 24, 1998 MAY 25, 1997
-------------- --------------
<S> <C> <C>
REVENUES .......................... $ 9,060,000 $ 8,896,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE ......... 2,679,000 2,768,000
LABOR AND BENEFITS ............... 2,429,000 2,374,000
RESTAURANT OPERATING EXPENSES ..... 2,568,000 2,458,000
DEPRECIATION AND AMORTIZATION ..... 457,000 419,000
GENERAL AND ADMINISTRATIVE EXPENSES 665,000 661,000
-------------- --------------
OPERATING INCOME .................. 262,000 216,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE ...... (193,000) (191,000)
CAPITAL LEASES ................... (127,000) (125,000)
OTHER INCOME ...................... 6,000 16,000
-------------- --------------
LOSS BEFORE INCOME TAXES .......... (52,000) (84,000)
PROVISION FOR INCOME TAXES ........ - -
-------------- --------------
NET LOSS .......................... $ (52,000) $ (84,000)
============== ==============
NET LOSS PER COMMON SHARE ......... $ (.02) $ (.03)
============== ==============
WEIGHTED AVERAGE NUMBER
OF SHARES OUTSTANDING ............ 2,910,834 2,949,320
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE> 3
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
MAY 24, 1998 MARCH 1, 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents .......................... $ 2,523,000 $ 2,316,000
Marketable securities ......................... 76,000 102,000
Receivables ................................... 73,000 74,000
Inventories ................................... 362,000 325,000
Prepaid expenses .............................. 85,000 157,000
------------ ------------
3,119,000 2,974,000
Property and equipment:
Land .......................................... 1,949,000 1,949,000
Buildings and improvements .................... 7,167,000 7,160,000
Property under capital leases ................. 5,621,000 5,621,000
Leasehold improvements ........................ 3,280,000 3,280,000
Equipment, furniture and fixtures ............. 8,909,000 8,995,000
Construction in progress ...................... 125,000 28,000
------------ ------------
27,051,000 27,033,000
Less accumulated depreciation and amortization 12,240,000 11,934,000
------------ ------------
14,811,000 15,099,000
Other assets .................................. 1,443,000 1,437,000
Deferred taxes ................................ 600,000 600,000
------------ ------------
$ 19,973,000 $ 20,110,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt .......... $ 528,000 $ 563,000
Current maturities of capital lease obligations 527,000 503,000
Accounts payable .............................. 1,728,000 1,969,000
Accrued liabilities ........................... 2,391,000 1,985,000
------------ ------------
5,174,000 5,020,000
Long-term debt ................................. 7,722,000 7,815,000
Long-term capital lease obligations ............ 4,873,000 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 ............................. (26,562,000) (26,510,000)
------------ ------------
Total shareholders' equity ...................... 2,204,000 2,256,000
------------ ------------
$ 19,973,000 $ 20,110,000
============ ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
Morgan's Foods, Inc.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
COMMON SHARES TREASURY SHARES CAPITAL IN TOTAL
--------------------- -------------------- EXCESS OF ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT EQUITY
--------- --------- -------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, 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 ............................ - - - - - (52,000)
(52,000)
Balance, May 24, 1998 ............... 2,969,405 $ 30,000 (58,566) $(139,000) $28,875,000 $(26,562,000) $ 2,204,000
========= ========= ======== ========= =========== ============ ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------
May 24, 1998 May 25, 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS .................................................. $ (52,000) $ (84,000)
ADJUSTMENTS TO RECONCILE NET LOSS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION ............................ 457,000 419,000
LOSS ON SALE OF RESTAURANTS AND
OTHER PROPERTY AND EQUIPMENT ............................ 3,000 12,000
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RECEIVABLES ..................... 1,000 (4,000)
INCREASE IN INVENTORIES ................................ (37,000) (53,000)
DECREASE IN PREPAID EXPENSES ........................... 67,000 16,000
INCREASE IN OTHER ASSETS ............................... (23,000) (37,000)
INCREASE (DECREASE) IN ACCOUNTS PAYABLE ................ (241,000) 20,000
INCREASE IN ACCRUED EXPENSES ........................... 406,000 107,000
-------------- --------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 581,000 396,000
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES ...................................... (150,000) (1,433,000)
PROCEEDS FROM SALE AND MATURITY
OF MARKETABLE SECURITIES ................................. 26,000 23,000
-------------- --------------
NET CASH (USED IN) INVESTING ACTIVITIES ................... (124,000) (1,410,000)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM PROPERTY AND EQUIPMENT FINANCING ............ - 741,000
PRINCIPAL PAYMENTS ON LONG-TERM DEBT ...................... (128,000) (85,000)
PRINCIPAL PAYMENTS ON CAPITAL LEASE OBLIGATIONS ........... (122,000) (99,000)
PURCHASE OF TREASURY SHARES ............................... - (52,000)
-------------- --------------
NET CASH PROVIDED BY (USED BY)
FINANCING ACTIVITIES ..................................... (250,000) 505,000
-------------- --------------
NET CHANGE IN CASH AND EQUIVALENTS ......................... 207,000 (509,000)
CASH AND EQUIVALENTS, BEGINNING BALANCE .................... 2,316,000 3,013,000
-------------- --------------
CASH AND EQUIVALENTS, ENDING BALANCE ....................... $ 2,523,000 $ 2,504,000
============== ==============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED MAY 24, 1998 AND MAY 25, 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.
Note 2. 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.
6
<PAGE> 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("the Company") operates
through wholly-owned subsidiaries Kentucky Fried Chicken ("KFC") restaurants
under franchises from KFC Corporation and has rights to operate, as a
franchisee, East Side Mario's restaurants in the Cleveland/Akron and Columbus,
Ohio areas. As of July 1, 1998, the Company operates 39 KFC restaurants, three
of which also offer Taco Bell products under license agreements with Taco Bell
Corporation, 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 24, 1998 were $9,060,000
compared to $8,896,000 for the quarter ended May 25, 1997. The increase of
$164,000 was the result of a $317,000 increase in KFC revenues partially offset
by a $153,000 decline in revenues from the East Side Mario's restaurants. This
reflects a 0.8% comparable restaurant increase in KFC revenues and a 7.2%
comparable restaurant decline for the East Side Mario's. Revenues at the KFC
restaurants increased because of the addition of Taco Bell products and the
replacement of two low volume St. Louis restaurants with the Company's latest
new restaurant in Greensburg, PA which opened June 4, 1997. 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 1999 quarter decreased as a percentage of revenue from
31.1% in fiscal 1998 to 29.6% in fiscal 1999. The decrease was due to refunds
received from a poultry price guarantee program in the KFC restaurants and other
credits from food vendors as well as continuing strong operational controls in
all of the Company's restaurants.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits remained
relatively constant as a percentage of revenue for the quarter ended May 24,
1998 at 26.8% compared to 26.7% one year ago. This was the result of the minimum
wage increase offset by favorable workers' compensation rates and strong
operational controls.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased
as a percentage of revenue from 27.6% in fiscal 1998 to 28.3% in fiscal 1999.
The increase was primarily caused by lower volume in the East Side Mario's
restaurants combined with slightly higher occupancy costs compared to the prior
fiscal year period.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for fiscal
1999 increased to $457,000 from $419,000 in fiscal 1998 due to the addition of
one new KFC restaurant and the image enhancement of nine others over the past
year.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for fiscal 1999 were $665,000 compared to $661,000 in the first quarter
of fiscal 1998. This was the result of decreases in field G & A offset by
increases in expenses related to the upgrading of computer systems.
OPERATING INCOME. Operating income in the current quarter increased to
$262,000 from $216,000 for the first quarter of fiscal 1998. Operating income
for the KFC restaurants in the first quarter of fiscal 1999 improved by $175,000
compared to the prior year quarter while the operating loss for the East Side
Mario's restaurants increased by $129,000.
7
<PAGE> 8
INTEREST EXPENSE. Interest expense on bank debt remained relatively
constant at $193,000 in fiscal 1999 compared to $191,000 in fiscal 1998.
Interest expense on capitalized leases was also substantially unchanged from the
prior year first quarter.
OTHER INCOME. Other income decreased to $6,000 in fiscal 1999 from
$16,000 in fiscal 1998 primarily as the result of lower interest income earned
during the first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the first
quarters of fiscal 1999 and fiscal 1998 is presented in the Consolidated
Statements of Cash Flows. Cash provided by operating activities was $581,000 in
the first quarter of fiscal 1999. The Company paid scheduled long-term bank and
capitalized lease debt of $250,000 in the first quarter of fiscal 1999.
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.
GROWTH. The Company has entered into definitive agreements to purchase
six existing KFC restaurants from other existing franchisees. The purchase of
four of the restaurants is expected to be completed about July 15, 1998 and the
other two approximately August 15, 1998.
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.
8
<PAGE> 9
Item 4. Submission of Matters to a Vote of Security Holders
The Company's annual meeting of shareholders was held on June
25, 1998 and voting was conducted on the following proposal:
Proposal - The election of seven Directors. The following seven Directors were
elected:
<TABLE>
<CAPTION>
NAME FOR WITHHOLD ABSTAIN
- ---- --- -------- -------
<S> <C> <C> <C>
Leonard Stein-Sapir 1,984,181 459,377 192,908
Richard Arons 1,942,017 501,541 192,908
Lawrence S. Dolin 2,405,943 37,615 192,908
James J. Liguori 2,430,561 12,977 192,908
Steven S. Kaufman 2,392,696 50,862 192,908
Bernard Lerner 1,984,363 459,195 192,908
Kenneth L. Hignett 2,391,930 51,628 192,908
</TABLE>
Item 6. Exhibits
(a) Exhibit 27 - Financial Data Schedule
9
<PAGE> 10
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 8, 1998 By: /s/ Kenneth L. Hignett
------------ ------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
10
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-28-1999
<PERIOD-START> MAR-02-1998
<PERIOD-END> MAY-24-1998
<CASH> 2,523,000
<SECURITIES> 76,000
<RECEIVABLES> 73,000
<ALLOWANCES> 0
<INVENTORY> 362,000
<CURRENT-ASSETS> 3,119,000
<PP&E> 27,051,000
<DEPRECIATION> 14,811,000
<TOTAL-ASSETS> 19,973,000
<CURRENT-LIABILITIES> 5,174,000
<BONDS> 12,595,000
0
0
<COMMON> 30,000
<OTHER-SE> 2,226,000
<TOTAL-LIABILITY-AND-EQUITY> 19,973,000
<SALES> 9,060,000
<TOTAL-REVENUES> 9,060,000
<CGS> 5,108,000
<TOTAL-COSTS> 8,798,000
<OTHER-EXPENSES> 6,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320,000
<INCOME-PRETAX> (52,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (52,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (52,000)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
