<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 15, 1999
------------------------------------------------------------
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 27, 1999, 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 15, 1999 AUGUST 16, 1998
--------------- ---------------
<S> <C> <C>
REVENUES........................................................................ $ 13,589,000 $ 7,659,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE....................................................... 4,028,000 2,404,000
LABOR AND BENEFITS ............................................................ 3,382,000 1,714,000
RESTAURANT OPERATING EXPENSES .................................................. 3,510,000 1,981,000
DEPRECIATION AND AMORTIZATION .................................................. 493,000 326,000
GENERAL AND ADMINISTRATIVE EXPENSES............................................. 893,000 629,000
-------------------- ------------------
OPERATING INCOME................................................................ 1,283,000 605,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE.................................................... (612,000) (201,000)
CAPITAL LEASES................................................................. (24,000) (24,000)
LOSS ON DISPOSAL OF RESTAURANT ASSETS........................................... (79,000) (5,000)
OTHER INCOME.................................................................... 10,000 20,000
-------------------- ------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ............................................. 578,000 395,000
PROVISION FOR INCOME TAXES...................................................... 3,000 7,000
-------------------- ------------------
INCOME FROM CONTINUING OPERATIONS............................................... 575,000 388,000
LOSS FROM DISCONTINUED OPERATIONS
NET OF INCOME TAX (NOTE 3)..................................................... (291,000) (272,000)
-------------------- ------------------
NET INCOME ..................................................................... $ 284,000 $ 116,000
==================== ==================
EARNINGS (LOSS) PER COMMON SHARE (NOTE 4):
CONTINUING OPERATIONS.......................................................... $ .20 $ .13
DISCONTINUED OPERATIONS........................................................ (.10) (.09)
-------------------- ------------------
NET INCOME..................................................................... $ .10 $ .04
==================== ==================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 2,910,839 2,910,839
</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>
TWENTY-FOUR WEEKS ENDED
---------------------------------------------
AUGUST 15, 1999 AUGUST 16, 1998
--------------- ---------------
<S> <C> <C>
REVENUES........................................................................ $ 21,912,000 $ 14,742,000
COST OF SALES:
FOOD, PAPER AND BEVERAGE....................................................... 6,538,000 4,498,000
LABOR AND BENEFITS............................................................. 5,479,000 3,415,000
RESTAURANT OPERATING EXPENSES .................................................. 5,754,000 3,780,000
DEPRECIATION AND AMORTIZATION .................................................. 818,000 653,000
GENERAL AND ADMINISTRATIVE EXPENSES ............................................ 1,667,000 1,238,000
-------------------- ------------------
OPERATING INCOME................................................................ 1,656,000 1,158,000
INTEREST EXPENSE:
BANK DEBT AND NOTES PAYABLE.................................................... (893,000) (394,000)
CAPITAL LEASES ................................................................ (36,000) (46,000)
LOSS ON DISPOSAL OF RESTAURANT ASSETS........................................... (79,000) (8,000)
OTHER INCOME.................................................................... 26,000 32,000
-------------------- ------------------
INCOME FROM CONTINUING OPERATIONS
BEFORE PROVISION FOR INCOME TAXES ............................................. 674,000 742,000
PROVISION (BENEFIT) FOR INCOME TAXES............................................ (1,000) 11,000
-------------------- ------------------
INCOME FROM CONTINUING OPERATIONS............................................... 675,000 731,000
LOSS FROM DISCONTINUED OPERATIONS
NET OF INCOME TAX (NOTE 3)..................................................... (629,000) (667,000)
-------------------- ------------------
NET INCOME ..................................................................... $ 46,000 $ 64,000
==================== ==================
EARNINGS (LOSS) PER COMMON SHARE: (NOTE 4)
CONTINUING OPERATIONS.......................................................... $ .23 $ .25
DISCONTINUED OPERATIONS........................................................ (.21) (.23)
-------------------- ------------------
NET INCOME .................................................................... $ .02 $ .02
-------------------- ==================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING................................... 2,910,839 2,910,839
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
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MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
AUGUST 15, 1999 FEBRUARY 28, 1999
--------------- -----------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
CASH AND EQUIVALENTS.......................................................... $ 6,364,000 $ 2,655,000
RECEIVABLES................................................................... 6,000 38,000
INVENTORIES................................................................... 729,000 332,000
PREPAID EXPENSES.............................................................. 3,000 218,000
ASSETS HELD FOR SALE (NOTE 3)................................................. 3,481,000 -
---------------- -----------------
10,583,000 3,243,000
PROPERTY AND EQUIPMENT: (NOTE 2)
LAND.......................................................................... 10,429,000 3,379,000
BUILDINGS AND IMPROVEMENTS.................................................... 15,947,000 9,433,000
PROPERTY UNDER CAPITAL LEASES................................................. 1,268,000 5,089,000
LEASEHOLD IMPROVEMENTS........................................................ 6,276,000 3,578,000
EQUIPMENT, FURNITURE AND FIXTURES............................................. 14,494,000 9,915,000
CONSTRUCTION IN PROGRESS...................................................... 533,000 344,000
---------------- -----------------
48,947,000 31,738,000
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION................................ 11,015,000 13,346,000
---------------- -----------------
37,932,000 18,392,000
OTHER ASSETS................................................................... 1,788,000 1,167,000
FRANCHISE AGREEMENTS........................................................... 2,169,000 609,000
DEFERRED TAXES................................................................. 600,000 600,000
ACQUIRED FRANCHISE RIGHTS...................................................... 9,742,000 -
---------------- -----------------
$ 62,814,000 $ 24,011,000
================ =================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
CURRENT MATURITIES OF LONG-TERM DEBT........................................ $ 1,513,000 $ 577,000
CURRENT MATURITIES OF CAPITAL LEASE
OBLIGATIONS (NOTE 3)...................................................... 3,973,000 453,000
ACCOUNTS PAYABLE............................................................ 4,544,000 2,066,000
ACCRUED LIABILITIES......................................................... 4,076,000 2,329,000
---------------- -----------------
14,106,000 5,425,000
LONG-TERM DEBT ............................................................... 46,615,000 13,094,000
LONG-TERM CAPITAL LEASE OBLIGATIONS .......................................... 799,000 4,244,000
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............................................................. (27,472,000) (27,518,000)
---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY...................................................... 1,294,000 1,248,000
---------------- -----------------
$ 62,814,000 $ 24,011,000
================ =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
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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 1, 1998 ... 2,969,405 $ 30,000 (58,566) $ (139,000) $ 28,875,000 $(26,510,000) $ 2,256,000
Net loss ................. -- -- -- -- -- (1,008,000) (1,008,000)
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance, February 28, 1999 2,969,405 $ 30,000 (58,566) $ (139,000) $ 28,875,000 $(27,518,000) $ 1,248,000
Net income ............... -- -- -- -- -- 46,000 46,000
---------- ---------- ------------ ------------ ------------ ------------ ------------
Balance, August 15, 1999 . 2,969,405 $ 30,000 (58,566) $ (139,000) $ 28,875,000 $(27,472,000) $ 1,294,000
========== ========== ============ ============ ============ ============ ============
</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
----------------------------------------
AUGUST 15, 1999 AUGUST 16, 1998
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME ...................................................................... $ 46,000 $ 64,000
ADJUSTMENTS TO RECONCILE NET INCOME
TO NET CASH PROVIDED BY OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION...................................................... 818,000 911,000
LOSS ON DISPOSAL OF RESTAURANT ASSETS.............................................. 79,000 8,000
CHANGE IN ASSETS AND LIABILITIES:
(INCREASE) DECREASE IN RECEIVABLES............................................... 32,000 (11,000)
INCREASE IN INVENTORIES.......................................................... (397,000) (33,000)
DECREASE IN PREPAID EXPENSES..................................................... 215,000 107,000
INCREASE IN OTHER ASSETS......................................................... (1,231,000) (120,000)
INCREASE IN ACCOUNTS PAYABLE..................................................... 2,478,000 21,000
INCREASE IN ACCRUED EXPENSES..................................................... 2,614,000 461,000
------------------ -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES........................................... 4,661,000 1,408,000
------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
CAPITAL EXPENDITURES................................................................ (23,862,000) (2,882,000)
PURCHASE OF FRANCHISE AGREEMENTS AND
ACQUIRED FRANCHISE RIGHTS....................................................... (11,338,000) (95,000)
SALE OF PROPERTY AND EQUIPMENT.................................................... 4,000 -
PROCEEDS FROM SALE AND MATURITY
OF MARKETABLE SECURITIES........................................................ - 102,000
------------------ -----------------
NET CASH USED IN INVESTING ACTIVITIES............................................... (35,196,000) (2,875,000)
------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
PROCEEDS FROM FINANCING FOR PROPERTY AND
EQUIPMENT AND FRANCHISE AGREEMENTS................................................. 34,718,000 2,782,000
PRINCIPAL PAYMENTS ON LONG-TERM DEBT................................................ (261,000) (259,000)
PRINCIPAL PAYMENTS ON CAPITAL
LEASE OBLIGATIONS................................................................ (213,000) (243,000)
------------------ -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES............................................ 34,244,000 2,280,000
------------------ -----------------
NET CHANGE IN CASH AND EQUIVALENTS................................................... 3,709,000 813,000
CASH AND EQUIVALENTS, BEGINNING BALANCE.............................................. 2,655,000 2,316,000
------------------ -----------------
CASH AND EQUIVALENTS, ENDING BALANCE................................................. $ 6,364,000 $ 3,129,000
================== =================
NONCASH INVESTING AND FINANCING ACTIVITIES -
CAPITAL LEASES.................................................................... $ 435,000 $ -
================== =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED AUGUST 15, 1999 AND AUGUST 16, 1998
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 February 28, 1999. Certain prior year amounts have been restated to
conform to the current year presentation.
NOTE 2. ACQUISITION OF KFC AND TACO BELL RESTAURANTS
On July 14, 1999 Morgan's Restaurants of Pennsylvania, Inc., Morgan's
Restaurants of Ohio, Inc., Morgan's Restaurants of West Virginia, Inc. and
Morgan's Foods of Missouri, Inc., all wholly owned subsidiaries of Morgan's
Foods, Inc. acquired the assets of fifty-four (54) existing KFC and Taco Bell
restaurants and the land and building of a non-operating KFC restaurant from
various subsidiaries of Tricon Global Restaurants, Inc. for cash in the amount
of $33,740,000. This consideration was arrived at by negotiations between the
parties, giving weight to such factors as revenues, cashflows and real estate
values. The assets involved include land, buildings, leasehold improvements,
equipment and franchise agreements in West Virginia, Ohio, Pennsylvania and
Missouri, used in the operation of the forty-two (42) KFC restaurants and twelve
(12) Taco Bell restaurants. In addition to the contract purchase price, the
Company paid fair market value for usable food and supplies inventories of
approximately $297,000. Although the transaction is essentially complete, as of
the closing date, the assets of 5 of the locations were not transferred to the
Company due to various documentation deficiencies. The Company assumed all
incidents of ownership through a Management Services Agreement ("MSA") for each
location. Locations operated under MSA's covered $200,000 of land, $500,000 of
buildings, $135,000 of leasehold improvements, $350,000 of equipment, $100,000
of franchise agreements and $985,000 of acquired franchise rights included in
the acquisition price. Each MSA requires the transfer of the property to the
Company upon the correction of the stated deficiency. One of the MSA locations
was transferred to the Company during the second quarter of fiscal 2000 and a
second was completed on September 7, 1999 in the third quarter. The transfer of
the remaining 3 locations is expected to be completed before the end of the
third quarter. The Company intends to continue to operate the acquired locations
as KFC and Taco Bell restaurants under the franchise agreements which were
assigned to the Company as part of the asset purchase and sale transaction. It
is also the intention of the Company to reopen the closed KFC restaurant as a
KFC/Taco Bell "2n1" restaurant. Twelve of the KFC restaurants in Pennsylvania
are KFC/Taco Bell "2n1" restaurants. Revenues for the restaurant properties are
included in the pro forma results shown below. Funds for the acquisition were
provided by Captec Financial Group, Inc. in the form of separate loans for each
property. The maturities of the loans range primarily from 13 years to 20 years
at fixed interest rates and the loans are secured by substantially all of the
assets purchased and require the maintenance of certain fixed charge coverage
ratios. The following is a summary of the acquired restaurant locations:
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<TABLE>
<S> <C>
MARKET AREA RESTAURANTS
----------- -----------
Pittsburgh, PA 26 KFC (incl. 12 KFC/Taco Bell "2n1")
12 Taco Bell
Wheeling, WV 7 KFC
(incl. 2 OH) 1 closed KFC
St. Louis, MO 9 KFC
</TABLE>
The preliminary allocation of the purchase price, which does not
include assets related to the 4 locations operated under MSA's as of the end of
the second quarter of fiscal 2000, is as follows:
<TABLE>
<S> <C>
Land $ 6,750,000
Buildings 5,975,000
Leasehold Improvements 3,320,000
Equipment 4,200,000
Franchise Agreements 1,515,000
Acquired Franchise Rights 9,710,000
-----------
Total $31,470,000
===========
</TABLE>
The following unaudited pro forma results for the twelve and twenty-four
weeks ended August 15,1999, and August 16, 1998, were developed assuming that
all of the acquired units previously described, including those operated under
MSA's, had been acquired at the beginning of the respective periods. The
unaudited pro forma data shown below is not necessarily indicative of the
consolidated results that would have occurred had the acquisition taken place at
the beginning of the respective periods nor are they necessarily indicative of
results that may occur in the future.
PRO FORMA RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TWELVE WEEKS ENDED TWENTY-FOUR WEEKS ENDED
AUGUST 15,1999 AUGUST 16, 1998 AUGUST 15,1999 AUGUST 16, 1998
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Total revenue $ 23,739 $ 17,681 $ 40,961 $ 33,570
Net income (loss) from
continuing operations (180) 62 (520) (398)
Net income (loss) per share
from continuing operations (.06) .02 (.18) (.14)
</TABLE>
NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On September 3, 1999, Management made the decision to discontinue the
operation of it's East Side Mario's segment and entered into a letter of intent
to dispose of four of the remaining East Side Mario's locations. The final
remaining location is being actively marketed and is expected to be sold in the
near future. A definitive contract in accordance with the letter of intent is
presently being negotiated and the transaction is expected to close by early
November. Certain assets of the East Side Mario's operations are shown in the
Consolidated Balance Sheet as "Assets held for sale". The results of operations
of the discontinued segment are shown in the Consolidated Statements of
Operations as "Loss from discontinued operations" and there is no tax effect of
the loss. The Company believes there will not be significant gain or loss on
disposal of the assets. The East Side
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Mario's restaurants operated by the Company began in March 1993 and encompassed
six locations by April 1995. Comparable restaurant revenues for the East Side
Mario's segment have been declining since fiscal 1996 and the restaurant concept
was not appropriately supported by the franchisor. The assets being held for
sale and the related capitalized lease obligations have been classified as
current assets and current liabilities respectively.
The Consolidated Balance Sheets at August 15, 1999 and February 28,
1999, include assets and liabilities related to the East Side Mario's
restaurants, which are being accounted for as a discontinued operation, the
details of which are listed below:
<TABLE>
<CAPTION>
AUGUST 15, 1999 FEBRUARY 28, 1999
--------------- -----------------
<S> <C> <C>
Current assets $ 159,000 $ 125,000
Assets held for sale 3,481,000 -
Property and equipment, net - 3,771,000
Other assets - 579,000
-------------- --------------
Total assets 3,640,000 4,475,000
Current liabilities 5,101,000 1,345,000
Capital lease obligations - 3,821,000
-------------- --------------
Net assets $ (1,461,000) $ (691,000)
=============== ===============
</TABLE>
The results of operations for the East Side Mario's segment, reported
separately as a loss from discontinued operations in the Consolidated Statement
of Operations, are as follows:
<TABLE>
<CAPTION>
12 WEEKS ENDED 24 WEEKS ENDED
AUGUST 15,1999 AUGUST 16,1998 AUGUST 15,1999 AUGUST 16,1998
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 1,556,000 1,947,000 3,092,000 3,924,000
========= ========= ========= =========
Loss from operations of discontinued
East Side Mario's restaurants (291,000) (272,000) (629,000) (667,000)
======== ======== ======== ========
</TABLE>
NOTE 4. INCOME (LOSS) PER COMMON SHARE
Basic net income (loss) per common share is computed by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted net income (loss) per common share is based on the combined
weighted average number of shares outstanding, which includes the assumed
exercise, or conversion of options. In computing diluted net income (loss) per
common share, the Company has utilized the treasury stock method. Since the
average share price during the periods presented was below the exercise price of
any outstanding stock options, the calculation of diluted net income (loss) per
common share does not include the effect of the assumed exercise of outstanding
options, as its effect would be anti-dilutive.
NOTE 5. STOCK OPTION PLANS
On April 2, 1999, the Board of Directors of the Company approved a
Nonqualified Stock Option Plan for Executives and Managers. Under the plan
145,500 shares were reserved for the grant of options. Options for the 145,500
shares were granted to executives and managers of the Company on April 2, 1999
by the Stock Option Committee at an exercise price of $4 1/8. As of August 15,
1999 the closing price of the Company's
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stock was $3 5/16 per share. The plan provides that the options are exercisable
after a waiting period of 6 months and that each option expires 10 years after
its date of issue.
The Nonqualified Stock Option Plan for Executives and Managers provides
for grants to eligible participants of nonqualified stock options only. The
exercise price for any option awarded under the Plan is required to be not less
than 100% of the fair market value of the shares on the date that the option is
granted. Options are granted by the Stock Option Committee of the Company.
At the Company's annual meeting on June 25, 1999 the shareholders
approved the Key Employees Nonqualified Stock Option Plan. This plan allows the
granting of options covering 291,000 shares of stock and has essentially the
same provisions as the Nonqualified Stock Option Plan for Executives and
Managers which was discussed above.
NOTE 6. LITIGATION
The Company reached an agreement to settle its two lawsuits against
East Side Mario's, Inc. and related parties. The lawsuits were filed in Federal
District Court in Cleveland, Ohio on April 20, 1998, and July 7, 1998. The
settlement agreement releases all parties from material obligations relating to
any contracts which existed between the parties at the time of the filing of the
lawsuit. The parties' joint stipulation of dismissal will be filed with the
court.
10
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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 Taco Bell restaurants under franchises
from Taco Bell Corporation and five East Side Mario's restaurants as a
franchisee in the Cleveland/Akron and Columbus, Ohio areas. As of September 27,
1999, the Company operates 94 KFC restaurants, 15 of which also offer Taco Bell
products, and 12 Taco Bell restaurants. The Company also operates five East Side
Mario's restaurants, a business segment which the Company has chosen to
discontinue (see Note 3). 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 15, 1999 were
$13,589,000 compared to $7,659,000 for the quarter ended August 16, 1998. This
increase of $5,929,000 was the combination of several factors. First,
approximately $4,464,000 of KFC sales in the second quarter of fiscal 2000 was
added by the acquisition, from Tricon Global Restaurants, Inc., of the 54 KFC
and Taco Bell restaurants described in Note 2. Additionally, $1,706,000 of KFC
revenue is attributable to eight KFC restaurants which were acquired from other
franchisees and two which were newly built since the second quarter of fiscal
1999. The remainder of the change in sales was caused by a comparable sales
decline in the KFC's of 3.3% which resulted in a decrease in revenues of
$241,000. The comparable restaurant revenue decline in the KFC restaurants was
the result of the continuation of the ineffective Star Wars promotion into the
beginning of the second quarter of fiscal 2000. Revenues for the 24 weeks ended
August 15, 1999 were $21,912,000 compared to $14,742,000 for the quarter ended
August 16, 1998. This increase was attributable to $4,464,000 of revenues
generated by the 54 restaurants acquired from Tricon as well as $3,066,000 in
revenues contributed by eight acquired and two newly built KFC restaurants in
the current year period. These increases were partially offset by a decline in
comparable KFC revenues of 2.5% resulting in a decline of $360,000 in revenues.
COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage
costs for the fiscal 2000 second quarter decreased as a percentage of revenue
from 31.4% in fiscal 1999 to 29.6%. This decrease was primarily the result of
lower chicken prices during the fiscal 2000 second quarter as well as the
addition of substantial Taco Bell revenues to the Company, through the
acquisition of 12 Taco Bell restaurants and 12 KFC/Taco Bell `2 in 1'
restaurants discussed earlier, which typically have a lower cost of sales
percentage than KFC restaurants. Food, paper and beverage costs for the
twenty-four weeks ended August 15, 1999 decreased to 29.8% of revenue compared
to 30.5% in the year earlier period for the reasons discussed above.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits increased as a
percentage of revenue for the quarter ended August 15, 1999 to 24.9% compared to
22.4% for the year earlier quarter. The increase was primarily due to higher
labor costs in the newly acquired restaurants caused by the reorganization and
training necessary to assimilate the new restaurants into the operations of the
Company. Labor and benefits increased as a percentage of revenue for the
twenty-four weeks ended August 15, 1999 to 25.0% from 23.2% in the year earlier
period for the reasons mentioned above.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses in the
second quarter were substantially unchanged as a percentage of revenue at 25.8%
in fiscal 2000 compared to 25.9% in fiscal 1999. This result was caused by the
newly acquired restaurants being similar in size and structure to the Company's
existing restaurants. Restaurant operating expenses for the twenty-four weeks
ended August 15, 1999 increased to 26.3% of revenue compared to 25.6% of revenue
in the comparable year earlier period. The increase was caused by one-time
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<PAGE> 12
expenditures during the first quarter of fiscal 2000 to prepare for the
acquisition of 54 restaurants discussed earlier as well as costs related to the
Star Wars promotion.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
fiscal 2000 second quarter increased to $493,000 compared to $326,000 in fiscal
1999. The increase is primarily due to the addition of KFC and Taco Bell
restaurants discussed above. Depreciation and amortization for the twenty-four
weeks ended August 15, 1999 increased to $818,000 from $653,000 for the year
earlier period for the reasons discussed above.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses for the second quarter of fiscal 2000 were $893,000 compared to
$629,000 in the second quarter of fiscal 1999. The increase is primarily due to
factors associated with the acquisition of 54 KFC and Taco Bell restaurants.
First, the acquisition required the addition of a Director of Operations and six
market managers along with related training and support personnel causing field
general & administrative expenses to increase by approximately $197,000 compared
to the prior year. Secondly, the addition of accounting, administrative and
computer support personnel resulted in an increase of approximately $87,000 in
fiscal 2000 second quarter expenses compared to the year earlier period. General
and administrative expenses for the twenty-four weeks ended August 15, 1999
increased to $1,667,000 compared to $1,238,000 for the year earlier period for
the reasons discussed above.
OPERATING INCOME. Operating income in the second quarter of fiscal 1999
increased to $1,283,000 compared to $605,000 for the second quarter of fiscal
1998. This increase was primarily the result of the acquisition of 54 KFC and
Taco Bell restaurants discussed above. Operating income for the twenty-four
weeks ended August 15, 1999 increased to $1,656,000 from $1,158,000 in the year
earlier period for the reasons discussed above.
INTEREST EXPENSE. Interest expense on bank debt increased to $612,000
in fiscal 2000 from $201,000 in fiscal 1999 due to higher debt balances during
the fiscal 2000 quarter necessary to fund the acquisition and construction of
restaurants during the past year. Interest expense for the twenty-four weeks
ended August 15, 1999 increased to $893,000 from $394,000 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.
LOSS ON DISPOSAL OF RESTAURANT ASSETS. The loss on disposal of
restaurant assets of $79,000 in the second quarter of fiscal 2000 and $5,000 in
the second quarter of fiscal 1999 are the result of assets disposed of during
the image enhancement of several KFC restaurants.
OTHER INCOME. Other income for the quarter ended August 15, 1999 of
$11,000 decreased from the year earlier amount of $20,000. Other income for the
twenty-four weeks ended August 15, 1999 decreased to $27,000 from $32,000 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 $3,000
for the quarter ended August 15, 1999 compared to $7,000 in the prior year
quarter. This decrease was caused by tax refunds received in the current year
period.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the twenty-four
weeks of fiscal 2000 and fiscal 1999 is presented in the Consolidated Statements
of Cash Flows. Cash provided by operating activities was $4,661,000 in the first
half of fiscal 2000. The Company paid scheduled long-term bank and capitalized
lease debt of $474,000 in the first two quarters of fiscal 2000 and received
financing of $34,718,000 to fund acquisitions of 54 KFC and Taco Bell
restaurants from Tricon Global Restaurants and two KFC restaurants from another
franchisee and to complete the building of one new KFC and the relocation of two
others.
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 Taco Bell 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 and Taco Bell properties and refurbishment of
existing ones.
The Company has previously installed the newest version of its
accounting software package and a recent version of the network operating system
used at the Home Office, both of which are year 2000 compliant. The KFC
restaurants acquired from Tricon contain point of sale devices which are not
year 2000 compliant and the Company is in the process of replacing them.
Management believes that this will be completed well before the end of 1999 and
that it has no significant year 2000 operating exposure in its critical core
systems. The Company has one major supplier upon which it relies for food and
related restaurant supplies and which is using a computerized ordering system.
This supplier has represented in writing that they will be year 2000 compliant
before the end of the year. Items disclosed herein constitute "Y2000 Readiness
Disclosures" under the Year 2000 Information and Readiness Disclosure Act.
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.
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, West Virginia and New York.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS & REPORTS ON FORM 8-K
(a) Exhibit 27 - Financial Data Schedule
(b) A report on Form 8-K was filed on July 28, 1999 to report the
acquisition of the KFC and Taco Bell restaurants from Tricon Global
Restaurants, Inc. No financial statements were filed with that Form
8-K.
13
<PAGE> 14
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 29, 1999 By: /s/ Kenneth L. Hignett
------------------ --------------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
14
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