<PAGE> 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1995
Commission file number 01-15109
MAGNOLIA FOODS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Oklahoma 73-1251800
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 54714 Oklahoma City, Oklahoma 73154
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code (405) 840-9655
----------------------------
Securities registered pursuant to Section 12(g) of the Act:
Common Stock $.01 par value
- --------------------------------------------------------------------------------
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
--- ---
Disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. (X)
Issuer's revenues for the year ended December 31, 1995 were
$2,792,119.
The aggregate market value of voting common stock held by
non-affiliates was $2,890,489 on May 23, 1996, based on the average bid and
asked prices of such stock as reported on the "pink sheets" of the National
Daily Quotation Service.
As of May 23, 1996, 24,927,118 shares of the Issuer's common stock,
par value $.001, were issued and 24,922,588 were outstanding.
Documents incorporated by reference - None
Transitional Small Business Disclosure Format Yes No X
--- ---
<PAGE> 2
PART I
Item 1. Business
Magnolia Foods, Inc. (hereinafter referred to as "MFI") is engaged in
the development, operation and licensing of various restaurant concepts
including Skolniks Bagel Bakery Restaurants, The Texas Ice House Restaurant and
Bar, Cafe 2000 and Gators Restaurant.
Through its wholly owned subsidiary, Bagelco, MFI operates three
Skolniks Bagel Bakery Restaurants in Ohio and Illinois. The company plans to
sell these restaurants and concentrate its efforts on the expansion of its City
Bites joint-venture. MFI also has a 19 state master franchise agreement
covering the Skolniks concept.
The Texas Ice House and Cafe 2000 concepts are deemed experiments in
the casual dinner house and self-service health food segments of the industry.
The Texas Ice House is scheduled to open in June 1996 and feature a rustic,
western style building, concrete floors and wooden booths, tables and chairs.
This full service restaurant will feature such dishes as chicken fried steak,
fried chicken and a large selection of salads. Liquor service will also be
offered.
Cafe 2000 opened in late 1994 and features a selection of freshly
prepared salads, sandwiches and soft drinks. The 1400 sq. ft. facility is
located adjacent to the Oklahoma Medical Complex in downtown Oklahoma City.
Gators Cajun Restaurant has performed below expectations and was
closed in the fourth quarter of 1995. The Texas Ice House was sold in the
second quarter of 1996
MFI has signed a joint venture development agreement with City Bites
of OKC to develop and operate up to 100 City Bites sandwich shops in a selected
territory featuring 7 states.
MFI is continuing to evaluate its existing restaurant businesses and
to explore options for development of other restaurant concepts.
Operations. Magnolia Foods Inc's restaurants are provided standard
operating specifications for preparation and service of food, maintenance of
the premises and proper employee conduct. MFI emphasizes uniform standards for
product quality, portion control, courtesy and cleanliness.
MFI is not dependent on particular suppliers for its food, beverages
and other products and believes there are numerous suppliers from which it can
obtain similar products and services at comparable costs. MFI expects to be
able to offset most increases in the costs of ingredients by increasing the
retail prices of its products. Food, beverage and paper goods inventory in
MFI's restaurants seldom exceed the value of one weeks' sales.
-1-
<PAGE> 3
Marketing. Marketing and advertising is usually handled on a local
restaurant basis. MFI does not, and does not plan to, manage or conduct a
nationwide marketing and advertising program.
Employees. As of March 30, 1996, MFI and its subsidiaries had 52 total
employees of which 8 are considered full time.
Competition. MFI competes with numerous enterprises engaged in the
business of operating casual dining, family style restaurants. There are
numerous restaurants competing for the customers which MFI's restaurants are
designed to attract. Further, MFI's restaurants will be subject to changes in
the eating preferences of the public as well as local and national economic
conditions that influence consumer spending habits. Many of MFI's competitors
are better known, better capitalized and have greater financial resources, more
experienced organizations and a greater number of employees than MFI. MFI
believes, however, that the quality of its food, the attractiveness of its
restaurant facilities, reasonable prices and prior restaurant industry
experience of its key personnel and management will enable MFI to compete
successfully on a market-by-market basis.
Regulation. MFI restaurants are subject to licensing and regulation by
the department of alcohol licensing, health, sanitation, fire, building,
planning, traffic and revenue of the state and municipality in which such
restaurant is located. Delays in obtaining, or denials of, necessary licenses
or approvals could have a material adverse impact on MFI's rate of growth. MFI
is also subject to regulations relating to the protection of the environment
and zoning, compliance with which may have a material effect on MFI's growth
rate and to the Fair Labor Standards Act, which governs such matters as working
conditions and minimum wages. Furthermore, expansion through the sale of
licenses subjects MFI to federal, state and local franchise disclosure laws.
Item 2 Properties. MFI's executive office is located at 1119 N.W.
63rd Street, Oklahoma City, Oklahoma.
Restaurant Locations as of May 23, 1996. The company has three
Skolniks Bagel Bakery Restaurants operating in Oakbrook, Illinois, Columbus,
Ohio and Cincinnati, Ohio, and the Cafe 2000 Joint-venture in Oklahoma City,
Oklahoma.
All restaurant locations are subject to lease agreements. Bagelco, a
subsidiary of the company, currently subleases its former State and Lake,
Chicago location.
-2-
<PAGE> 4
Item 3 Legal Proceedings. The following legal proceedings are pending:
Magnolia Foods, Inc. There are no material legal proceedings pending.
Bagelco, Inc. (Subsidiary)
Sawmill Place Plaza Associates vs Bagelco - Lawsuit or amount due under
lease termination for Sawmill restaurant.
Rykoff-Sexton, Inc. vs Bagelco, Inc. - Lawsuit or amount due under open
purchase contract for Skolniks restaurant after its termination.
Chicago Theatre vs Bagelco and Normco - Lawsuit or amount due under
sub-lease agreement at State and Lake Skolniks location.
Item 4 Submission of Matters to a Vote of Security Holders. A proxy
statement to request an increase in the authorized shares from 25.0 million to
50.0 million plus approval of an Employee Stock Option Plan.
-3-
<PAGE> 5
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
MFI's common stock is traded on the Electronic Bulletin Board in the
over-the-counter market. Quotes are available from the National Quotations
Bureau, Inc. The following table sets forth for the calendar period indicated,
the range of high and low closing bid prices for the common stock in the
over-the-counter market as reported.
<TABLE>
<CAPTION>
Common Stock
Bid
----------------
High Low
---- ---
<S> <C> <C>
1994
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .02 .01
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 .19
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56 .13
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .50 .06
1995
First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1875 .1875
Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1875 .15625
Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4375 .125
Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1875 .125
</TABLE>
As of December 31, 1995, the Company's issued and outstanding common
stock was held by 550 holders of record.
MFI has never declared a cash dividend on its MFI Common. It is the
present policy of MFI not to pay cash dividends on MFI Common. Any payment of
cash dividends in the future will be dependent upon the prior payment of
required dividends on outstanding MFI Preferred Stock, the amount of funds
legally available therefor, MFI's earnings, financial condition, capital
requirements and other factors which the MFI Board of Directors deems relevant.
-4-
<PAGE> 6
Item 6 Managements Discussion and Analysis or Plan of Operation
Results of Operations
Sales reflected on the 1994 income statement are for seven Skolniks
Bagel Bakery Restaurants acquired on July 2, 1994. (Approximately six months of
operations). Sales for 1995 reflect operations for; Philadelphia, Pennsylvania
(2) 1/1-6/15, Downers Grove, Illinois 1/1-11/30; plus Oakbrook, Illinois (1);
Columbus, Ohio (2); Cincinnati, Ohio (1) for 12 months.
For the year, the Bagelco restaurants had income of approximately
$53,732 before depreciation. Corporate overhead expense for the Bagelco
subsidiary during this period was approximately $205,000.
MFI incurred overhead expenses of $286,000 for 1995 of which 164,000
was satisfied by the issuance of common stock. The Company continues to pursue
a turnaround by reducing its liabilities through stock conversion and by
seeking a profitable enterprise to generate earnings.
Liquidity and Financial Resources
Working capital at December 31, 1995 was a deficit of $878,830
compared to a deficit of $479,255 at the end of 1994. During the year, the
Company borrowed $353,750. It also converted $150,000 in debt into equity. The
increase in deficit noted above is due to operating losses for the year plus
the addition of $175,000 to the reserve for stores closing in 1996.
The Company intends to concentrate on improving profitability of all
its existing restaurants while reducing corporate overhead. Management shall
also continue its efforts to convert short term debt into equity, thus
improving its working capital position.
-5-
<PAGE> 7
Item 7 Financial Statements
The financial statements and schedules are included herewith
commencing on page F-1.
Item 8 Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
-6-
<PAGE> 8
PART III
Item 9 Directors and Executive Officers of the Registrant
The current directors and officers of MFI are identified below. No
family relationships exist between or among directors or officers of MFI.
<TABLE>
<CAPTION>
Director
Position Continuously
Name Age with the Company Since
- ---- --- ---------------- ------------
<S> <C> <C> <C>
Joseph J. Johnston 52 Chairman of the Board, June, 1985
President and Director
Sed Kennedy 63 Senior Vice-President June, 1995
David Loveland 48 Secretary, Director June, 1992
Bill Weaver 60 Director June, 1992
</TABLE>
Joseph J. Johnston, Jr., age 52, has been the President of the Company
and also has served as Chairman of the Board and a director of Magnolia Foods,
Inc. since 1985. In 1986, Mr. Johnston was instrumental in formulating and
developing the Mamasita's Mexican Restaurant, which specializes in gourmet
Mexican Food. Prior to joining Magnolia Foods, Inc., Mr. Johnston served as
President and a director of Kelly-Johnston Enterprises, Inc. Mr. Johnston
joined the predecessor companies of Kelly Johnston Enterprises, Inc., in 1971
and served in these capacities from the formation of Kelly-Johnston
Enterprises, Inc., in 1981 until July, 1985. Kelly-Johnston Enterprises, Inc.
conducted business as a franchisee of Chi-Chi's Mexican Restaurants and a
franchisor of Duff's Famous Smorgasbord Restaurants, Joe Kelly's Restaurants
and Joe Kelly's Oyster Docks.
From January, 1973, through May, 1977, Mr. Johnston served in various
capacities with Kentucky Fried Chicken Corporation. Beginning as Regional
Manager of Real Estate, Mr. Johnston subsequently served as Area and District
Manager of Operations and Director of Operations and Marketing, Midwest Region,
supervising 400 Kentucky Fried Chicken Restaurants. Mr. Johnston also served as
director of franchising for new concepts. Mr. Johnston's final position with
the Kentucky Fried Chicken Corporation was its Vice President of operations,
Midwest Region responsible for $82,000,000 in revenues.
Mr. Johnston graduated from Western Illinois State University with a
Bachelors of Business Administration and joined Shell Oil Company as a dealer
salesman in the Chicago, Illinois, area, where he was later promoted to the
Marketing Department of Shell's regional office in Chicago. After four years of
military service. Mr. Johnston became employed by the commercial development
department of American Investment Company Realty Services, Inc.
David Loveland, age 48, was elected as a Director of the Company and
was appointed as corporate Secretary in June 1992. For more than the past five
years, Mr. Loveland has been self-employed as a consultant in television
program production, program creation and marketing of television series. Mr.
Loveland graduated from Central State University with a Bachelor of Arts Degree
in Marketing.
Bill Weaver was elected as a director in June, 1992. Mr. Weaver has
worked in the insurance industry and currently is a principal in the Oklahoma
Intermede Group. Mr. Weaver graduated from Oklahoma City University with a
Bachelor of Arts Degree in Business.
-7-
<PAGE> 9
Item 10 Executive Compensation
Joseph Johnston, MFI CEO, was paid $55,912 during 1995.
Compensation Pursuant to Plans. Under MFI's Stock Option Plan (the "Plan"),
300,000 shares of MFI Common are reserved for issuance upon the exercise of
options. The Plan is designed to serve as an incentive for attracting and
retaining qualified and competent key employees, officers and directors. While
some options granted under the Plan are intended to qualify as "incentive stock
options" under Section 422A of the Internal Revenue Code, other options may be
granted that do not qualify.
The Plan is administered by the MFI Board of Directors. The Board of
Directors is authorized to grant options to such key employees, officers and
directors as it may determine; however, a person must be an employee of MFI to
be eligible to receive an incentive stock option. Thus, nonemployee directors
are not eligible to receive incentive stock options under the Plan.
Options may be granted on such terms and at such prices as determined
by the Board of Directors; provided, however, that the exercise price may not
be less than the fair market value of MFI Common on the date of grant. Each
option will be exercisable after the period or periods spicified in the
individual option agreements, but no incentive stock option shall be
exercisable for more than ten years from the date of grant.
As of May 23, 1996, 60,000 shares of MFI Common were covered by
outstanding options, issued under the Plan to the following persons:
<TABLE>
<CAPTION>
Number Exercise
Of Type Price Date
Shares of per of
Grant Name Covered Option Share Exp.
- ----- ---- ------- ------ -------- ----
<S> <C> <C> <C> <C> <C>
3/12/87 Jack P. Phelan 10,000 Non-incentive $1.65 3/12/97
11/18/91 Jim D. Holland 50,000 Non-incentive $ .02 11/18/96
</TABLE>
-8-
<PAGE> 10
The option granted to Mr. Phelan is exercisable in full for restricted
MFI Common at any time on or after March 12, 1988. All options were granted at
an exercise price equal to the fair market value of the MFI Common on the date
of grant. Option granted on November 18, 1991 are for salaries or directors
fees in lieu of cash compensation.
Item 11 Security Ownership of Certain Beneficial Owners and Management
A. Security Ownership of Certain Beneficial Owners.
Beneficial Ownership of over 5% of Common Stock.
<TABLE>
<CAPTION>
Shares Percentage
------ ----------
<S> <C> <C>
Skolniks, Inc. 2,000,000 17.1
7755 E. Gray Rd.
Scottsdale. AZ 85260
Dulaney's, Inc. 1,512,166 6.5
P.O. Box 54714
Oklahoma City, OK 73154
Joseph J. Johnston. Jr. 289,000 1.2
1615 Drakestone Ave.
Oklahoma City, Ok 73120
Randal Colton 1,256,000 5.4
6404 Avondale
Oklahoma City, OK 73116
</TABLE>
B. Security Ownership of Management.
<TABLE>
<CAPTION>
Number
of Shares
Beneficially
Name of (Owned as Percent of
Title of Class Beneficial Owner of May 1, 1996 (1) Class
- -------------- ---------------- ------------------ ----------
<S> <C> <C> <C>
Magnolia Foods, Joseph J. Johnston 289,000 (3) 1.1
Inc. Common
Stock Linda B. Johnston 130,000 (3)(4) .52
Par Value $0.01
</TABLE>
(1) Except as otherwise described herein, each beneficial owner has sole
voting and investment power with respect to the shares listed.
(2) Percent of class is based upon 24,922,588 shares of MFI Common
outstanding and is calculated without regard to the shares of MFI
Common issuable upon exercise of outstanding warrants or stock options
or upon conversion of convertible securities, except that any shares a
person is deemed to own by having the right to acquire by exercise of
a warrant or option or the conversion of a security are considered to
be outstanding solely for purposes of calculating such person's
percentage ownership.
-9-
<PAGE> 11
(3) Joseph J. Johnston is the husband of Linda B. Johnston. Mr. Johnston
beneficially owns 289,000 shares of MFI Common. Such amount excludes
(i) 5,000 shares held by Mrs. Johnston in her own name; (ii) 75,000
shares held by the Linda B. Johnston Trust for the benefit of Mrs.
Johnston, for which she also serves as the controlling Co-Trustee;
(iii) 25,000 shares held by Michael T. Johnston Trust for the benefit
of Michael T. Johnston, son of Mr. And Mrs. Johnston, for which Mrs.
Johnston serves as Trustee; and (iv) 25,000 shares held by the
Jennifer A. Johnston Trust for the benefit of Jennifer A. Johnston,
daughter of Mr. And Mrs. Johnston, for which Mrs. Johnston serves as
Trustee.
(4) Excludes 289,000 shares of MFI Common beneficially owned by Joseph J.
Johnston.
The following table sets forth the MFI Common ownership of directors
and all directors and officers as a group, as of March 30, 1995:
<TABLE>
<CAPTION>
Number of
Shares Percent
Beneficially of
Name Owned (1) Class (2)
- ---- ------------ ---------
<S> <C> <C>
Joseph J. Johnston 289,000(3) 1.1
</TABLE>
- --------------------------------------------------------------------------------
(1)-(3) For footnotes 1, 2 and 3, see footnotes 1, 2 and 3 of the immediate
preceding table.
Item 12 Certain Relationships and Related Transactions.
During the fiscal year ended December 31, 1995, there existed no
relationships and there were no transactions reportable under this item.
-10-
<PAGE> 12
Item 13 Exhibits and Reports on Form 8-K
The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
11 Statement re: Computation of earnings
per share
22 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
(b) The Company did not file a Form 8-K during the period.
-11-
<PAGE> 13
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
CONSOLIDATED FINANCIAL STATEMENTS
FOR YEARS ENDED DECEMBER 31, 1995 AND 1994
WITH REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
<PAGE> 14
[PETERS & CHANDLER, CPAS, INC. LETTERHEAD]
Board of Directors
Magnolia Foods, Inc.
Oklahoma City, Oklahoma
INDEPENDENT AUDITOR'S REPORT
We have audited the accompanying consolidated balance sheets of Magnolia
Foods, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Magnolia
Foods, Inc. and Subsidiaries as of December 31, 1995 and 1994, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
company will continue as a going concern. As shown in the accompanying
consolidated financial statements, the Company incurred a significant net loss
for 1995 and has incurred substantial operating losses for each of the past
three years. At December 31, 1995, current liabilities exceed current assets by
$878,830. These factors, as discussed further in Note 2, raise substantial
doubt about the Company's ability to continue as a going concern. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might result should the Company
be unable to continue as a going concern.
/s/ PETERS & CHANDLER
CERTIFIED PUBLIC ACCOUNTANTS
Oklahoma City, Oklahoma
May 23, 1996
<PAGE> 15
Page 2
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1995 AND 1994
- --------------------------- --------------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Current Assets
- --------------
Cash and Temporary Cash Investments $ 78,926 $ 127,243
Accounts Receivable 16,903 16,629
Inventories (Note 4) 47,248 89,033
Prepaid Expense 9,187 16,635
Short Term Investment (Note 7) -- 100,000
-------------------------
Total Current Assets $ 152,264 $ 349,540
-------------------- -------------------------
Property and Equipment (Note 5)
- ----------------------
Leasehold Improvements $ 335,305 $ 502,682
Furniture and Equipment 270,927 419,976
Equipment Not in Use 5,000 105,566
-------------------------
$ 611,232 $1,028,224
Less: Accumulated Depreciation 180,326 95,634
-------------------------
$ 430,906 $ 932,590
-------------------------
Other Assets
- ------------
Franchise Rights (Net) (Note 6) $ 50,000 $ 414,375
Other Investments (Note 7) 29,881 2,500
Organization Costs (Net) 14,543 18,698
Deposits 30,624 46,845
Receivable from Related Parties (Note 13) 53,954 53,954
-------------------------
$ 179,002 $ 536,372
-------------------------
Total Assets $ 762,172 $1,818,502
------------ =========================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current Liabilities
- -------------------
Accounts Payable $ 367,262 $ 256,199
Accrued Expense 111,210 153,661
Reserve for Closed Stores (Note 8) 210,864 138,752
Notes Payable (Note 9) 341,758 280,183
-------------------------
Total Current Liabilities $1,031,094 $ 828,795
------------------------- -------------------------
Commitments and Contingencies (Note 14)
- -----------------------------
Stockholders' Equity (Note 10)
- --------------------
Series B 10% Cumulative Convertible Preferred Stock -
Par Value $.10, 25,000 Shares Authorized, Issued and
Outstanding $ 2,500 $ 2,500
Common Stock - Par Value $.01, 25,000,000 Shares
Authorized, 24,927,118 and 16,375,456 Shares Issued,
24,922,588 and 16,370,926 Shares Outstanding 249,271 163,755
Additional Paid In Capital 4,601,831 3,976,089
Retained Earnings (Deficit) (5,121,322) (3,151,435)
-------------------------
$ (267,720) $ 990,909
Less: Treasury Stock - 4,530 Shares At Cost 1,202 1,202
-------------------------
$ (268,922) $ 989,707
-------------------------
Total Liabilities and Stockholders' Equity $ 762,172 $1,818,502
------------------------------------------ =========================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 16
Page 3
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
<TABLE>
<CAPTION>
FOR YEARS ENDED
---------------
CONSOLIDATED INCOME STATEMENTS DECEMBER 31, 1995 AND 1994
- ------------------------------ --------------------------
1995 1994
----------- -----------
<S> <C> <C>
Restaurant Sales $ 2,792,119 $ 1,892,947
- ----------------
Cost of Sales 994,499 656,193
- ------------- --------------------------
Gross Profit $ 1,797,620 $ 1,236,754
--------------------------
Operating Expenses
- ------------------
Restaurant
Labor $ 857,145 $ 532,583
Occupancy 272,266 185,597
Advertising 129,265 109,237
Other 485,212 218,434
General and Administrative 506,873 366,958
Losses on Restaurant Closings 176,291 35,000
Depreciation and Amortization 165,991 90,855
--------------------------
$ 2,593,043 $ 1,538,664
--------------------------
Loss from Operations $ (795,423) $ (301,910)
--------------------
Other Income (Expense)
- ----------------------
Equity in Losses of Unconsolidated
Subsidiaries (Note 7) (7,140) (19,468)
Other Losses on Restaurant Activities (Note 11) (872,019)
Interest Income and Other 14,636 8,147
Interest Expense and Loan Incentive Costs
(Note 10) (337,948) (13,166)
--------------------------
Net Loss Before Income Taxes and Extraordinary Item $(1,997,894) $ (326,397)
---------------------------------------------------
Income Taxes (Note 12) -0- -0-
- ------------ --------------------------
Loss Before Extraordinary Income $(1,997,894) $ (326,397)
--------------------------------
Extraordinary Item
- ------------------
Income from Forgiveness of Debt (Note 10) 28,007 26,104
--------------------------
Net Loss $(1,969,887) $ (300,293)
-------- ==========================
Primary Net Loss Per Share:
- ---------------------------
Loss Before Extraordinary Income $(.11) $(.03)
Extraordinary Income - -
----- -----
Net Loss $(.11) $(.03)
===== =====
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 17
Page 4
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FOR YEARS ENDED
- -------------------------- ---------------
SHAREHOLDERS' EQUITY DECEMBER 31, 1995 AND 1994
- -------------------- --------------------------
Series B Additional Retained
Preferred Common Paid-In Earnings Treasury
Stock Stock Capital (Deficit) Stock
--------- ------ ---------- --------- --------
<S> <C> <C> <C> <C> <C>
Balance - 12-31-93 $ 2,500 $ 81,412 $ 2,579,426 $(2,851,142) $ (60,880)
- ------------------
Issuance of 4,414,543
Common Shares and
225,000 Treasury
Shares for Acquisi-
tion, Debt and Debt
Financing 44,145 509,855 59,678
Issuance of 3,669,750
Shares in Private
Placement Offerings 36,698 885,308
Exercise of Options
for 150,000 Shares 1,500 1,500
Net Income (Loss) (300,293)
-------------------------------------------------------------------
Balance - 12-31-94 $ 2,500 $ 163,755 $ 3,976,089 $(3,151,435) $ (1,202)
- ------------------
Issuance of 8,551,662
Common Shares for
Payment of Expense,
Debt and Debt
Financing 85,516 628,433
Offering Costs (2,691)
Net Income (Loss) (1,969,887)
-------------------------------------------------------------------
Balance - 12-31-95 $ 2,500 $ 249,271 $ 4,601,831 $(5,121,322) $ (1,202)
- ------------------ ===================================================================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 18
Page 5
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS FOR YEARS ENDED
- ----------------------- ---------------
OF CASH FLOWS DECEMBER 31, 1995 AND 1994
- ------------- --------------------------
1995 1994
----------- -----------
<S> <C> <C>
Operating Activities
- --------------------
Net Income (Loss) $(1,969,887) $ (300,293)
Items Not Affecting Cash from Operating Activities:
Depreciation and Amortization 165,991 90,855
Bad Debt Expense -0- 12,500
Loss on Sale of Restaurant 202,025 -0-
Forgiveness of Debt (28,007) (26,104)
Equity Loss in Subsidiaries 7,140 (3,389)
Reserve for Closed Stores 176,291 35,000
Other Losses on Restaurant Activities 471,327 -0-
Issuance of Stock for Expenses 479,359 -0-
Changes in Operating Assets and Liabilities:
Receivables (274) (54,371)
Inventories 41,785 (89,033)
Other Assets 23,669 (84,256)
Payables and Accruals 81,884 260,922
----------------------------
Net Cash Used by Operating Activities $ (348,697) $ (158,169)
------------------------------------- -----------------------------
Investing Activities
- --------------------
Sale of Equipment $ 6,212 $ -0-
Sale of Investments 100,000 -0-
Additions to Property and Equipment (16,179) (346,981)
Acquisition of Franchise Territory -0- (425,000)
Acquisition of Other Investments (34,521) (102,500)
Effect of Subsidiary Not Consolidated for 1994 -0- 31,319
----------------------------
Net Cash Provided (Used) by Investing Activities $ 55,512 $ (843,162)
------------------------------------------------ -----------------------------
Financing Activities
- --------------------
Proceeds from Notes $ 353,750 $ 185,850
Payments on Notes (106,191) -0-
Offering Costs (2,691) -0-
Issuance of Common Stock -0- 945,006
----------------------------
Net Cash Provided by Financing Activities $ 244,868 $ 1,130,856
----------------------------------------- ----------------------------
Increase (Decrease) in Cash and Cash Equivalents $ (48,317) $ 129,525
- ------------------------------------------------
Cash and Cash Equivalents - Beginning of Year 127,243 (2,282)
- --------------------------------------------- -----------------------------
Cash and Cash Equivalents - End of Year $ 78,926 $ 127,243
- --------------------------------------- ============================
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 19
Page 6
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
ORGANIZATION
Magnolia Foods, Inc., (the Company) was incorporated on June 13, 1985 under
the laws of the State of Oklahoma. The Company's sole industry segment is
the business of owning, operating, licensing and joint venturing
restaurants.
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all partnership and corporate subsidiaries in which the Company holds
a majority voting and controlling interest. Investments in affiliates for
which the Company does not exercise significant influence over operating
and financial policies are accounted for on the equity method.
Significant intercompany accounts and transactions are eliminated in
consolidation.
INVENTORIES
Inventories of food and beverages are stated at the lower of cost
(determined by the first-in, first-out method) or market. When a
restaurant is opened, the initial purchase of china, glass, and
silverware (smallwares) is recorded as inventory and is not amortized.
All replacements are expensed.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Expenditures which increase
values, change capacities, or extend useful lives are capitalized.
Routine maintenance, repairs, and renewals are charged to operations.
Leasehold improvements are amortized by the straight-line method over the
lesser of the life of the lease including renewal options or the
estimated useful lives of the assets. Furniture and equipment are
depreciated by the straight-line method over the estimated useful lives
of the assets, generally seven years.
EARNINGS (LOSS) PER SHARE
Net income (loss) per share is based upon the weighted average number of
shares outstanding during the period. Fully diluted earnings per share is
not disclosed because it is antidilutive.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments with a maturity of three months or less to
be cash equivalents.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
<PAGE> 20
Page 7
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
NOTE 2 - GOING CONCERN CONSIDERATIONS
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of
the Company as a going concern. However, the Company has sustained
substantial operating losses in recent years. In addition, the Company has
used substantial amounts of working capital in its operations. Further, at
December 31, 1995, current liabilities exceed current assets by $878,830.
In view of these matters, realization of a major portion of the assets in
the accompanying balance sheet is dependent upon the success of the
Company's future operations and ability to raise capital. Management
believes that actions presently being taken to revise the Company's
operating and financial requirements provide the opportunity for the Company
to continue as a going concern.
NOTE 3 - BUSINESS COMBINATION
Effective July 2, 1994, the Company acquired all of the outstanding common
stock of Bagelco, Inc., a wholly owned subsidiary of Skolniks, Inc. Bagelco
owned and operated eleven Skolniks Bagel Bakery Restaurants, primarily in
Illinois, Ohio and Pennsylvania. The acquisition was accounted for as a
purchase transaction.
The purchase price from Skolniks amounted to $823,000, of which $298,000 was
paid in cash, and 2,000,000 shares of the Company's common stock, valued at
$525,000, were issued (see Note 10). The shares were valued based on the
current market price, and discounted for being unregistered stock. The
Company also included a $273,000 cost reserve to close four of the stores as
part of its basis of the assets acquired.
The results of operations of retained stores from the date of acquisition
are included in the financial statements for 1994.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January l, 1994:
<TABLE>
<S> <C>
Net Sales $3,745,288
--------- ==========
Income (Loss) Before Extraordinary Items $ (316,278)
---------------------------------------- ==========
Net Income (Loss) $ (290,174)
----------------- ==========
Primary Earnings (Loss) Per Share:
----------------------------------
Income (Loss) Before Extraordinary Items $(.03)
=====
Net Income (Loss) $(.03)
=====
</TABLE>
The above amounts reflect adjustments for interest and depreciation on
revalued equipment and leasehold improvements.
<PAGE> 21
Page 8
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
NOTE 4 - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Food and Beverages $ 33,876 $ 71,533
Smallwares 13,372 17,500
------------------------
$ 47,248 $ 89,033
========================
</TABLE>
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consist primarily of restaurant equipment and
leasehold improvements of four Skolniks Bagel Bakery Restaurants located in
Illinois and Ohio, which were acquired July 2, 1994 (see Note 3).
Depreciation recorded for 1995 amounts to $139,986 ($78,049 for 1994).
During 1995, the Company sold two restaurants in Pennsylvania and closed one
in Illinois (see Note ll).
NOTE 6 - FRANCHISE RIGHTS
Related to the transaction described in Note 3, the Company acquired a
twenty year master franchise agreement from Skolniks, Inc. to develop
Skolniks Bagel Bakery Restaurants, which covers part or all of nineteen
states. The cost of this master franchise agreement is being amortized on
the straight-line method over twenty years. Amortization recorded in 1995
amounted to $21,250 ($10,625 for 1994).
Due to the Company's disposal of several restaurants, and its assessment of
the market for future development, it has reduced the remaining value of
franchise rights (see Note ll).
NOTE 7 - OTHER INVESTMENTS
In September of 1994, the Company advanced $100,000 in a short term
financing agreement with a local television limited partnership. The
investment was recovered during 1995.
The Company holds a forty percent (40%) interest in Cafe 2000, Inc., an
Oklahoma City restaurant, which it reports on the equity method.
NOTE 8 - RESERVE FOR CLOSED STORES
This liability represents the expected losses to be incurred in 1996
relating to the closing of one restaurant and the sale of two other
restaurants at a loss (see Note ll).
<PAGE> 22
Page 9
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
NOTE 9 - NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<S> <C>
Related Parties (See Note 13)
---------------
Payable to Joe Johnston, President, Bearing Interest
Based on the Prime Rate, Due on Demand, Unsecured $ 39,758
Payable to Dulaney's, Inc., of Which a Former
Director of the Company is an Officer, Interest
at Prime Rate, Due on Demand, Unsecured 83,650
----------
$ 123,408
Other Notes
-----------
Payable to Thirteen Individuals, 10-12% Interest,
Due During 1996, Unsecured 218,350
----------
$ 341,758
==========
</TABLE>
NOTE 10 - CAPITAL STOCK TRANSACTIONS
During 1994, the Company issued l,049,500 common shares to satisfy
approximately $122,000 of obligations, which resulted in the forgiveness of
debt of about $26,000, and issued l,365,043 common shares and 225,000
treasury shares for debt financing. The Company also issued 2,000,000 shares
as part of the Bagelco, Inc. acquisition (see Note 3). All of the above
issued common stock was unregistered, and was valued at varying prices. Also
during 1994, the Company completed one private placement of 2,100,000 shares
and partially completed another private placement of l,569,750 shares. These
placements netted the Company approximately $922,000 during 1994 after
expenses.
During 1995, the Company issued 2,600,000 common shares to retire $150,000
of debt, 525,000 shares for investment in a restaurant venture (Texas Ice
House), 2,685,288 shares for debt incentives, and 2,741,374 shares for
expenses. All of the above issued common stock was unregistered, and was
valued at varying prices.
At December 31, 1994, the Company had outstanding options to purchase
195,000 shares of the Company's common stock at prices ranging from $.02 to
$2.50 per share, expiring through December 14, 1997. During 1994, the
Company issued warrants to purchase 600,000 shares of common stock at $.50
per share through July 31, 1997, and to purchase 450,000 shares at $.25 per
share through July 2, 1997. There was no change in outstanding options or
warrants during 1995.
At December 31, 1995, dividends in arrears on the 10% cumulative preferred
stock were $2,125 ($.085 per share) ($l,875 and $.075 for 1994).
<PAGE> 23
Page 10
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
NOTE 11 - OTHER LOSSES ON RESTAURANT ACTIVITIES
As detailed in Note 3, the Company, in 1994, acquired all the outstanding
common stock of Bagelco, Inc., a company which operated eleven bagel
restaurants, primarily in Illinois, Ohio and Pennsylvania. Also acquired in
the transaction was a twenty year master franchise agreement (see Note 6)
from Skolniks, Inc., to develop bagel restaurants in part or all of nineteen
states. As planned upon the acquisition, the Company closed four of the
restaurants during 1994.
Because the performance of the remaining restaurants, and the interest for
further development of the market in the franchise areas, has not met the
Company's expectations, management sold two restaurants and closed another
during 1995, and is negotiating to dispose of the remaining restaurants
during the first half of 1996. Also, because management does not intend to
actively pursue further development within the franchise area, the value of
the franchise rights has been written down to reflect estimated current
value. The above activities resulted in charges against earnings during 1995
of $202,025 for the loss on the sales of the restaurants, of $116,869 for
the reduction in value of warehoused store equipment, and $343,125 for the
reduction in value of the master franchise agreement.
Also during 1995, the Company led the development of the Texas Ice House, a
restaurant in Oklahoma City. As the restaurant has not been opened due to
several delays in development, management is negotiating to dispose of the
Company's interest in the venture. A provision for loss of $210,000 has been
included in 1995 costs.
NOTE 12 - INCOME TAXES
Income taxes are provided for the tax effect of transactions reported in the
financial statements in a period different from which they are reported for
income tax purposes. The items creating such a timing difference are the
accelerated depreciation of property and equipment for tax purposes as
compared to the straight-line method for financial reporting purposes, and
the amortization of leasehold improvements over a prescribed thirty-nine
year period for tax purposes as compared to the lease terms for financial
reporting purposes.
At the end of 1995, a non-current deferred asset of less than $10,000 exists
for the timing differences. The Company also has a consolidated net
operating loss carryforward of approximately $5,000,000, which will expire
between the years 2000 and 2005. Because of the uncertainty of the Company's
future operations, and because of possible restrictions on the application
of the net operating losses against future profits due to ownership changes
reflected in 1994 stock issues, no tax benefits are recorded in these
financial statements.
NOTE 13 - RELATED PARTIES
At December 31, 1994, the Company was due $53,954 from Joe Johnston, its
president. This balance arose primarily from the 1994 return by the Company
of its franchise rights in a franchise development territory outside the
restaurant business to Johnston and a former officer, who had given the
rights to the Company in 1992 in settlement of an amount of $50,000 due from
them.
<PAGE> 24
Page ll
MAGNOLIA FOODS, INC. AND SUBSIDIARIES
OKLAHOMA CITY, OKLAHOMA
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995
NOTE 13 - RELATED PARTIES (Continued)
The Company is also indebted to Johnston and to a company whose officer is a
former director of the Company (see Note 9).
NOTE 14 - LEASE COMMITMENTS
The Company leases store space under operating leases expiring in various
years through 2000. The Company's lease commitments for the next five years
and in the aggregate are as follows:
<TABLE>
<S> <C>
1996 $ 202,000
1997 173,000
1998 89,000
1999 83,000
2000 4,000
----------
$ 551,000
==========
</TABLE>
Store lease expense incurred during 1995 was $220,858 ($289,120 for 1994).
NOTE 15 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
As supplemental information to the statement of cash flows, cash paid for
interest during the year was $17,263 ($2,271 for 1994). No income taxes were
due during the reporting years. As discussed more fully in Notes 3 and 10,
2,000,000 shares of common stock, valued at $525,000, were issued during
1994 in the acquisition of Bagelco, Inc. See Note 10 regarding common stock
issued for debt forgiveness, debt financing and expenses.
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has a number of financial instruments, none of which are held
for trading purposes. The Company estimates that the fair value of all
financial instruments at December 31, 1995, does not differ materially from
the aggregate carrying values of its financial instruments recorded in the
accompanying balance sheet. The estimated fair value amounts have been
determined by the Company using available market information and appropriate
valuation methodologies.
<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Magnolia Food, Inc.
/s/ JOSEPH J. JOHNSTON
-------------------------------------
By: Joseph J. Johnston, President
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 24th day of May, 1996.
/s/ JOSEPH J. JOHNSTON /s/ BILL WEAVER
- ------------------------ -------------------------
Joseph J. Johnston Bill Weaver
Director Director
/s/ DAVID LOVELAND
- ------------------------
David Loveland
Director
-12-
<PAGE> 26
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
11 Statement re: Computation of earnings
per share
22 Subsidiaries of the Registrant
27 Financial Data Schedule
</TABLE>
<PAGE> 1
Exhibit 11
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1995 1994
----------------- ----------------
<S> <C> <C>
PRIMARY EARNINGS PER SHARE
Net Income (Loss) $ (1,969,887) $ (300,293)
Weighted average shares outstanding 17,907,972 11,299,667
---------------- -------------
Primary Income (Loss) per share $ (0.11) $ (0.03)
---------------- -------------
FULLY DILUTED EARNINGS PER SHARE
Net Income (Loss) $ (1,969,887) $ (300,293)
Weighted average shares outstanding 17,907,972 11,299,667
Addition from assumes exercise of
Common Stock purchase warrants
and options 1,245,000 1,120,000
Addition from assumed conversion of
Preferred Stock 300,000 300,000
---------------- -------------
Weighted average number of
Common Shares outstanding on a
fully diluted basis 19,452,972 12,719,667
---------------- -------------
FULLY DILUTED (LOSS) PER SHARE $ (0.10) (0.02)
---------------- -------------
</TABLE>
- -------------------------
(a) This calculation is submitted in accordance with regulation S-K Item
601(b)(11) although it is contrary to paragraph 40 of APB Opinion No. 15
because it produces an anti-dilutive results. Accordingly, the (0.02) for 1994
and the (0.10) per share amounts for 1995 are not presented in the annual
report.
<PAGE> 1
Exhibit 22
MAGNOLIA FOODS, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Jurisdiction of
Name Organization
- ---- ------------
<S> <C>
Bagelco, Inc. Oklahoma
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 78,926
<SECURITIES> 0
<RECEIVABLES> 16,903
<ALLOWANCES> 0
<INVENTORY> 47,248
<CURRENT-ASSETS> 152,264
<PP&E> 611,232
<DEPRECIATION> 180,326
<TOTAL-ASSETS> 762,172
<CURRENT-LIABILITIES> 1,031,094
<BONDS> 0
<COMMON> 249,271
0
2,500
<OTHER-SE> (520,693)
<TOTAL-LIABILITY-AND-EQUITY> 762,172
<SALES> 2,792,119
<TOTAL-REVENUES> 2,792,119
<CGS> 994,499
<TOTAL-COSTS> 2,593,043
<OTHER-EXPENSES> 1,228,821
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,316
<INCOME-PRETAX> (1,969,887)
<INCOME-TAX> 0
<INCOME-CONTINUING> (795,423)
<DISCONTINUED> 0
<EXTRAORDINARY> 28,007
<CHANGES> 0
<NET-INCOME> (1,969,887)
<EPS-PRIMARY> (.11)
<EPS-DILUTED> (.11)
</TABLE>
