10-Q 1 e10-q.txt MORGAN'S FOODS, INC. FORM 10-Q 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 21, 2000 ---------------------------------------------------------- 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 June 30, 2000, the issuer had 2,922,727 shares of common stock outstanding. 1 2 PART I FINANCIAL INFORMATION Item 1. Financial Statements. Morgan's Foods, Inc. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) --------------------------------------------------------------------------------
QUARTER ENDED -------------------------------- MAY 21, 2000 MAY 23, 1999 ------------ ------------ Revenues .................................. $ 18,194,000 $ 8,323,000 Cost of sales: Food, paper and beverage ................. 5,403,000 2,510,000 Labor and benefits ....................... 4,883,000 2,097,000 Restaurant operating expenses ............. 5,068,000 2,244,000 Depreciation and amortization ............. 888,000 325,000 General and administrative expenses ....... 1,258,000 774,000 Loss on sale or disposal of restaurant assets ..................... 19,000 - ------------ ------------ Operating income .......................... 675,000 373,000 Interest expense: Bank debt and notes payable .............. (1,143,000) (281,000) Capital leases ........................... (19,000) (12,000) Other income and expense, net ............. 48,000 16,000 ------------ ------------ Income (loss) from continuing operations before income taxes and extraordinary item (439,000) 96,000 Provision for income taxes ................ 3,000 (4,000) ------------ ------------ Income (loss) from continuing operations before extraordinary item ................ (442,000) 100,000 Loss from discontinued operations (note 3) - (338,000) ------------ ------------ Net loss .................................. $ (442,000) $ (238,000) ============ ============ Income (loss) per common share (note 4): Income (loss) from continuing operations . $ (.15) $ .03 Loss from discontinued operations ........ - (.11) ------------ ------------ Net loss per share ....................... $ (.15) $ (.08) ============ ============ Weighted average number of shares outstanding ....................... 2,922,727 2,910,834
See notes to consolidated financial statements. 2 3 MORGAN'S FOODS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED) --------------------------------------------------------------------------------
MAY 21, 2000 FEBRUARY 27, 2000 ------------ ----------------- Assets Current assets: Cash and equivalents ......................... $ 3,996,000 $ 4,612,000 Receivables .................................. 84,000 112,000 Inventories .................................. 581,000 583,000 Prepaid expenses ............................. 299,000 357,000 Assets held for sale (note 3) ................ 627,000 653,000 ------------ ------------ 5,587,000 6,317,000 Property and equipment: (note 2) Land ......................................... 10,861,000 10,861,000 Buildings and improvements ................... 16,974,000 16,560,000 Property under capital leases ................ 1,171,000 1,171,000 Leasehold improvements ....................... 6,873,000 6,837,000 Equipment, furniture and fixtures ............ 17,400,000 17,158,000 Construction in progress ..................... 602,000 425,000 ------------ ------------ 53,881,000 53,012,000 Less accumulated depreciation and amortization 12,558,000 12,179,000 ------------ ------------ 41,323,000 40,833,000 Other assets .................................. 1,701,000 1,748,000 Franchise agreements .......................... 2,283,000 2,242,000 Deferred taxes ................................ 600,000 600,000 Acquired franchise rights ..................... 10,324,000 10,448,000 ------------ ------------ $ 61,818,000 $ 62,188,000 ============ ============ Liabilities and shareholders' equity Current liabilities: Current maturities of long-term debt ....... $ 1,787,000 $ 1,762,000 Current maturities of capital lease obligations (note 3) ..................... 944,000 969,000 Accounts payable ........................... 3,715,000 4,089,000 Accrued liabilities ........................ 4,029,000 3,725,000 ------------ ------------ 10,475,000 10,545,000 Long-term debt ................................ 50,132,000 49,968,000 Long-term capital lease obligations ........... 723,000 745,000 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 - 46,678 shares ................ (111,000) (111,000) Capital in excess of stated value .............. 28,875,000 28,875,000 Accumulated deficit ............................ (28,306,000) (27,864,000) ------------ ------------ Total shareholders' equity ..................... 488,000 930,000 ------------ ------------ $ 61,818,000 $ 62,188,000 ============ ============
See notes to consolidated financial statements. 3 4 Morgan's Foods, Inc. CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (unaudited)
COMMON SHARES TREASURY SHARES CAPITAL IN TOTAL -------------------- ------------------- EXCESS OF ACCUMULATED SHAREHOLDERS' SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT EQUITY ------ ------ ------ ------ ------------ ------- ------ Balance, February 28, 1999 . 2,969,405 $ 30,000 (58,566) $ (139,000) $ 28,875,000 $(27,518,000) $ 1,248,000 Net loss ................... - - - - - (346,000) (346,000) Issue of treasury shares for 401(k) contributions ...... - - 11,888 28,000 - - 28,000 --------- --------- --------- ---------- ------------ ------------ ----------- Balance, February 27, 2000 . 2,969,405 $ 30,000 (46,678) (111,000) 28,875,000 (27,864,000) 930,000 Net loss ................... - - - - - (442,000) (442,000) --------- --------- --------- ---------- ------------ ------------ ----------- Balance, May 21, 2000 ...... 2,969,405 $ 30,000 (46,678) $ (111,000) $ 28,875,000 $(28,306,000) $ 488,000 ========= ========= ========= ========== ============ ============ ===========
See notes to consolidated financial statements 4 5 Morgan's Foods, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
QUARTER ENDED ------------------------------- MAY 21, 2000 MAY 23, 1999 ------------ ------------ Cash flows from operating activities: Net loss .................................. $ (442,000) $ (238,000) Adjustments to reconcile to net cash provided by operating activities: Depreciation and amortization .......... 888,000 438,000 Loss on sale or disposal of restaurant assets ..................... 19,000 - Change in assets and liabilities: Decrease (increase) in receivables .... 28,000 (58,000) Increase (decrease) in inventories .... 2,000 (20,000) Decrease in prepaid expenses .......... 58,000 117,000 Increase (decrease) in other assets ... 15,000 (315,000) Increase (decrease) in accounts payable (374,000) 379,000 Increase in accrued liabilities ....... 330,000 360,000 ----------- ----------- Net cash provided by operating activities . 524,000 663,000 ----------- ----------- Cash flows from investing activities: Capital expenditures ..................... (1,211,000) (1,408,000) Purchase of franchise agreements and acquired franchise rights ............... (71,000) - ----------- ----------- Net cash used in investing activities .... (1,282,000) (1,408,000) ----------- ----------- Cash flows from financing activities: Proceeds from issuance of long-term debt, net of financing costs .................. 640,000 650,000 Principal payments on long-term debt ........ (451,000) (129,000) Extinguishment of capitalized leases ........ - (146,000) Principal payments on capital Lease obligations ........................ (47,000) (109,000) ----------- ----------- Net cash provided by financing activities . 142,000 266,000 ----------- ----------- Net change in cash and equivalents ........ (616,000) (479,000) Cash and equivalents, beginning balance ... 4,612,000 2,655,000 ----------- ----------- Cash and equivalents, ending balance ...... $ 3,996,000 $ 2,176,000 =========== ===========
See notes to consolidated financial statements. 5 6 Morgan's Foods, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS QUARTERS ENDED MAY 21, 2000 AND MAY 23, 1999 (unaudited) 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 27, 2000. 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. The acquisition was recorded as a purchase and, accordingly, assets were recorded at fair value. The allocation of the purchase price is as follows: Land $ 6,950,000 Buildings 6,475,000 Leasehold Improvements 3,455,000 Equipment 4,550,000 Franchise Agreements 1,615,000 Acquired Franchise Rights 10,695,000 ------------ Total $ 33,740,000 ============
The following unaudited pro forma results for the twelve weeks ended May 23, 1999, were developed assuming that all of the acquired units previously described had been acquired at the beginning of the period. 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 period nor are they necessarily indicative of results that may occur in the future. 6 7
PRO FORMA RESULTS (DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA) TWELVE WEEKS ENDED MAY 23, 1999 ------------ Total revenue $18,178 Net income (loss) from continuing operations (483) Net income (loss) per share from continuing operations (.17)
NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE On December 9, 1999 the Company sold four of the remaining five former East Side Mario's restaurant locations, to Steak & Ale, a division of Metromedia Restaurant Group, and is marketing the remaining location, which it closed, with the expectation of selling this location in fiscal year 2001. The cash received as a result of this transaction of $3,867,000 was used to pay off the capital lease obligations and other expenses of the transaction. 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 remaining assets. The East Side Mario's restaurants formerly 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 had declined 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 May 21, 2000 and February 27, 2000, include assets and liabilities related to the former East Side Mario's restaurants, which are being accounted for as a discontinued operation, the details of which are listed below:
MAY 21, 2000 FEBRUARY 27, 2000 ------------ ----------------- Current assets $ - $ 11,000 Assets held for sale 627,000 653,000 -------------- -------------- Total assets 627,000 664,000 Current liabilities 1,177,000 1,236,000 -------------- -------------- Net liabilities $ (550,000) $ (572,000) ============== ==============
7 8 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:
12 WEEKS ENDED --------------------------------- MAY 21, 2000 MAY 23, 1999 ------------ ------------ Gross sales $ - $1,536,000 =========== ========== Loss from operations of discontinued East Side Mario's restaurants $ - $ (338,000) =========== ==========
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. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("the Company") operates through wholly-owned subsidiaries Kentucky Fried Chicken ("KFC") restaurants under franchises from KFC Corporation and Taco Bell restaurants under franchises from Taco Bell Corporation. As of June 30, 2000, the Company operates 78 KFC restaurants, 11 Taco Bell restaurants, and 16 KFC/Taco Bell "2n1's" under franchises from KFC Corporation and franchises or licenses from Taco Bell Corp. The Company formerly operated six East Side Mario's restaurants, a business segment which the Company had previously 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 May 21, 2000 were $18,194,000 compared to $8,323,000 for the quarter ended May 23, 1999. This increase of $9,871,000 was due to $10,415,000 in revenues generated by 56 KFC's and Taco Bells which were acquired, two new KFC's which were built since the first quarter of fiscal 2000 and one Taco Bell which was converted to a KFC/Taco Bell "2n1", partially offset by a 5.4% decrease in comparable restaurant revenues. The decline in comparable restaurant revenues was primarily the result of ineffective product promotions by the franchisor during the quarter. COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage costs for the fiscal 2001 first quarter decreased as a percentage of revenue from 30.2% in fiscal 2000 to 29.7%. This decrease was primarily the result of the efficiencies gained from higher average restaurant volumes in the acquired and newly built restaurants, the continuation of low chicken prices and favorable contract pricing. COST OF SALES - LABOR AND BENEFITS. Labor and benefits increased as a percentage of revenue for the quarter ended May 21, 2000 to 26.8% compared to 25.2% for the year earlier quarter. The increase was primarily due to higher labor and benefit costs in the newly acquired restaurants. RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased as a percentage of revenue to 27.9% in the first quarter of fiscal 2001 compared to 27.0% in the first quarter of fiscal 2000. This was caused by the continuation of increased advertising expenses to promote the introduction of five new sandwiches and also the newly acquired restaurants having a higher local advertising co-op expense than the Company's average for its previously existing restaurants. DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the fiscal 2001 first quarter increased to $888,000 compared to $325,000 in the prior year first quarter. The increase is primarily due to the addition of the 58 KFC and Taco Bell restaurants discussed above. GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $1,258,000 in the first quarter of fiscal 2001 from $774,000 in the first quarter of fiscal 2000. The increase of $484,000 was mainly the result of adding the costs and resources necessary to support 58 additional restaurants. The incremental general and administrative expenses incurred as a result of acquiring these 58 additional restaurants was $447,000 or 4.29% of the related sales. LOSS ON DISPOSAL OF RESTAURANT ASSETS. The loss on disposal of restaurant assets of $19,000 in the first quarter of fiscal 2001, was the result of assets disposed of during the image enhancement of several KFC restaurants as well as the disposal of obsolete equipment. 9 10 OPERATING INCOME. Operating income in the first quarter of fiscal 2001 increased to $675,000 or 3.7% compared to $373,000 or 4.5% for the first quarter of fiscal 2000. This increase was primarily the result of operating 58 additional restaurants. INTEREST EXPENSE. Interest expense on bank debt increased to $1,143,000 in the first quarter of fiscal 2001 from $281,000 in fiscal 2000 due to higher debt balances during the fiscal 2001 quarter necessary to fund the acquisition and construction of restaurants during the past year. Interest expense on capitalized leases was substantially unchanged from the prior year first quarter. OTHER INCOME. Other income for the quarter ended May 21, 2000 increased to $48,000 from $16,000 in the prior year first quarter. The increase is due mainly to increased discounts on the payment of sales tax which resulted from the increased sales volumes generated by the operation of 58 additional restaurants. PROVISION FOR INCOME TAXES. The provision for income taxes was $3,000 for the quarter ended May 21, 2000 compared to a credit of $4,000 in the prior year quarter. This increase was caused by tax refunds received in the prior year quarter. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE. On September 3, 1999, Management made the decision to discontinue the operation of its East Side Mario's restaurant segment. On December 9, 1999 the Company sold four of the remaining five former East Side Mario's restaurant locations, to Steak & Ale, a division of Metromedia Restaurant Group, and is marketing the remaining location, which it closed, with the expectation of selling this location in fiscal year 2001. The cash received as a result of this transaction of $3,867,000 was used to pay off the capital lease obligations and other expenses of the transaction. 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". There is no tax effect of the loss. The Company believes there will not be significant gain or loss on disposal of the remaining assets. LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the twelve weeks of fiscal 2000 and fiscal 1999 is presented in the Consolidated Statements of Cash Flows. Cash provided by operating activities was $524,000 for the twelve weeks ended May 21, 2000. The Company paid scheduled long-term bank and capitalized lease debt of $498,000 in the first quarter of fiscal 2001 and received financing of $640,000 to fund the conversion of a Taco Bell to a KFC/Taco Bell "2n1" and the image enhancement of several other restaurants. The KFC operations of the Company have historically provided sufficient cash flow to service the Company's debt, refurbish and upgrade KFC restaurant properties and cover administrative overhead. Management believes that operating cash flow will provide sufficient capital to continue to operate and maintain the KFC and 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 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. 10 11 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 4. Submission of Matters to a Vote of Security Holders The Company's annual meeting of shareholders was held on June 23, 2000 and voting was conducted on the following proposals: Proposal 1 - The election of seven Directors. The following seven Directors were elected:
NAME FOR WITHHOLD ABSTAIN --------- --- -------- ------- Leonard Stein-Sapir 2,428,464 81,794 243,548 Richard Arons 2,509,491 767 243,548 Lawrence S. Dolin 2,413,515 96,743 243,548 James J. Liguori 2,428,513 81,745 243,548 Steven S. Kaufman 2,413,533 96,725 243,548 Bernard Lerner 2,413,533 96,725 243,548 Kenneth L. Hignett 2,428,513 81,745 243,548
Proposal 2 - Shareholder's proposal concerning the Company's rights plan was defeated.
FOR AGAINST ABSTAIN --- ------- ------- 484,389 1,584,807 10,175
ITEM 6. EXHIBITS & REPORTS ON FORM 8-KA (a) Exhibit 27 - Financial Data Schedule 11 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Morgan's Foods, Inc. ----------------------------------------- (Registrant) Dated: July 5, 2000 By /s/ Kenneth L. Hignett ------------ -------------------------------------- Kenneth L. Hignett Senior Vice President, Chief Financial Officer & Secretary 12