1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the fiscal year ended February 26, 1995 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)
25201 Chagrin Boulevard, Suite 330, Beachwood, OH 44122
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(Address of principal executive officers) (Zip Code)
Registrant's telephone number, including area code: (216) 360-7500
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Securities registered pursuant of Section 12 (b) of the Act:
Name of each exchange on
Title of each class which registered
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Common Shares, Without Par Value American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
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 and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
As of May 8, 1995, the aggregate market value of the common stock held
by nonaffiliates of the Registrant was $12,201,535.
As of May 8, 1995, the Registrant had 17,816,340 shares of common
stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference certain information from the
definitive Proxy Statement to security holders for the 1994 annual meeting, to
be filed with the Securities and Exchange Commission on or before June 26,
1995.
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MORGAN'S FOODS, INC.
PART I
ITEM 1. BUSINESS.
GENERAL. The Registrant operates, through wholly-owned subsidiaries,
Kentucky Fried Chicken ("KFC") restaurants under franchises from KFC
Corporation and has exclusive rights to operate, as a franchisee, East Side
Mario's restaurants in the Cleveland/Akron and Columbus, Ohio areas. As of
February 26, 1995, the Company operated 66 KFC restaurants. On May 5, 1995,
the company sold twenty-four of its KFC restaurants to another KFC franchisee.
As of May 19, 1995, the Company operates 41 KFC restaurants and six East Side
Mario's restaurants. The headquarters of the Registrant are located in the
Cleveland, Ohio, metropolitan area. Throughout this Report, the Registrant
together with its subsidiaries is referred to as the "Company."
RESTAURANT OPERATIONS. The Company's KFC restaurants prepare and sell
the distinctive "Kentucky Fried Chicken" and Colonel's Rotisserie Gold(R)
chicken along with related food items. All containers and packages bear KFC
trademarks. The East Side Mario's restaurants are full service, mid-priced,
casual restaurants inspired by New York City's famous "Little Italy"
district of the 1950's. The menu features a broad variety of All-American
grill favorites and authentic Italian specialties.
Of the 41 KFC restaurants operated by the Company as of May 19, 1995,
12 are located in Ohio, 14 in Pennsylvania, 13 in Missouri, 1 in Illinois and 1
in West Virginia. The Company was one of the first KFC Corporation franchisees
and has operated in excess of 20 KFC franchises for the past 23 years.
Operations relating to these KFC units are seasonal to a certain extent, with
higher sales generally occurring in the summer months. Five East Side Mario's
restaurants operated by the Company are located in the Cleveland/Akron area and
one in Columbus, Ohio.
FRANCHISE AGREEMENTS. All of the Company's KFC restaurants are
operated under franchise agreements with KFC Corporation. The Company
considers retention of these agreements to be important to the success of its
restaurant business and believes that its relationship with KFC Corporation is
satisfactory. The KFC Corporation franchise agreements require the Company to
pay royalties of 4% on gross revenues and to expend an additional 5% of gross
revenues for national and local advertising and marketing. Remaining franchise
terms range from 1 to 14 years and all franchise agreements are renewable at
the Company's option for an additional 10 years or successive ten-year periods.
The franchise agreements provide that each KFC unit is to be inspected by KFC
Corporation approximately three or four times per year. These inspections
cover product preparation and quality, customer service, and restaurant
appearance and operation. The East Side Mario's restaurants are operated under
franchise agreements with East Side Mario's Restaurants, Inc., a subsidiary of
East Side Mario's, Inc., for a term of 20 years and are renewable by the Company
for one additional term of 10 years. The East Side Mario's franchise agreement
requires the Company to pay royalties of 4% on gross revenue and 1/2% of gross
revenue to an advertising fund. The franchise agreement also requires the
Company to expend an additional 2 1/2% of gross revenue for advertising and
promotion. The East Side Mario's franchise agreement also grants the
right to East Side Mario's, Inc. to perform quality and franchise compliance
inspections without prior notice to the Company. Both KFC Corporation and
Pizza Hut, Inc. are wholly owned by PepsiCo, Inc.
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MORGAN'S FOODS, INC.
PART I (CONT'D)
The Company, like the majority of other KFC franchisees, is a member
of the Association of Kentucky Fried Chicken Franchisees, Inc.
("AKFCF"). Through its Contract Committee, the AKFCF has been
negotiating with KFC Corporation regarding the form and content of a
proposed new franchise agreement. After more than a year of meetings
and negotiations, the AKFCF proceeded with a lawsuit against the
franchisor, KFC Corporation. Key issues addressed in the lawsuit are
protection of trade areas, standard length of the new franchise
agreement and certain rights associated with a 1972 class-action case
settlement. At this time, the Company cannot predict the outcome of
the litigation or any potential effect thereof on the Company's
operations.
COMPETITION. The restaurant business is highly
competitive. Each of the Company's KFC restaurants competes directly
or indirectly with a large number of national and regional restaurant
operations, as well as with locally owned restaurants, drive-ins,
diners and numerous other establishments which offer low- and
medium-priced fried chicken, steak, pizza and other food to the
public. The East Side Mario's restaurants compete with other
mid-priced, casual, full service restaurants.
The Company's KFC restaurants rely on innovative marketing techniques
and promotions to compete with other restaurants in the areas in which
they are located. The Company's competitive position is also enhanced
by the national advertising program sponsored by KFC Corporation and
its franchisees. The East Side Mario's rely on a distinctive themed
decor and a wide variety of Italian and American menu items at
moderate prices. Emphasis is placed by the Company on its control
systems and the training of personnel to maintain high food quality
and good service. The Company believes that it is competitive with
other restaurants on the basis of the important competitive factors in
the restaurant business which include primarily restaurant location;
product price, quality and differentiation; and restaurant and
employee appearance.
SUPPLIERS. The Company has been able to obtain
sufficient supplies to carry on its business and believes it will be
able to do so in the future.
GROWTH. During fiscal 1993, the Company closed two
unprofitable KFC restaurants in St. Louis, Missouri. Both the lease
and franchise agreements had expired on those locations. During
fiscal 1994, the Company relocated existing KFC restaurants in
Steubenville, Ohio and New Stanton, Pennsylvania and opened two East
Side Mario's restaurants. The Company also closed five unprofitable
KFC restaurants during fiscal 1994. The Company opened three East
Side Mario's restaurants in fiscal 1995 and closed one KFC restaurant
on February 26, 1995. The Company opened its sixth East Side Mario's
restaurant on April 26, 1995. On May 5, 1995, the Company sold
twenty-four of its KFC restaurants in Central Pennsylvania and New
Jersey.
EMPLOYEES. As of May 15, 1995, the Company employs
approximately 993 persons, including 32 administrative and 110
managerial employees. The balance are hourly employees, most of whom
are part-time. None of the restaurant employees are represented by a
labor union. The Company considers its employee relations to be
satisfactory.
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MORGAN'S FOODS, INC.
PART I (CONT'D)
ITEM 2. PROPERTIES.
The Company leases approximately 7,700 square feet of space for its
headquarters in Cleveland, Ohio. The lease expires in 1995 and the rent under
the current term is $9,665 per month. The lease also contains a renewal option
of five years which may be exercised by the Company. The Company also leases
space for regional offices in Youngstown, and St. Louis, Missouri, which are
used to assist in the operation of KFC restaurants located near those areas.
Of the 41 KFC restaurants, the Company owns the land and building for
13 locations, owns the building and leases the land for 3 locations and leases
the land and building for 25 locations. All of the owned properties are
subject to mortgages. Remaining lease terms (including renewal options) range
from one month to 24 years and average approximately 13 years. These leases
generally require the Company to pay taxes and utilities, to maintain casualty
and liability insurance, and to keep the property in good repair. The Company
pays annual rental for each KFC restaurant in amounts ranging from $10,800 to
$78,750. In addition, 16 of these leases require payment of additional rentals
based on a percentage of gross sales in excess of certain base amounts. Sales
for five KFC restaurants exceeded the respective base amounts in fiscal 1995.
Of the six East Side Mario's restaurants, the Company owns the building and
leases the land on one location and leases the land and the building for 4
locations. At the sixth location, the building is subject to a short-term
lease which transfers ownership to the Company and the land is under a
long-term lease. In addition, four of the East Side Mario's restaurant leases
require payment of additional rentals based on a percentage of gross sales in
excess of certain base amounts. Sales for one East Side Mario's restaurant
exceeded its base amount for fiscal 1995.
The Company believes that its restaurants are generally efficient,
well equipped and maintained and in good condition.
ITEM 3. LEGAL PROCEEDINGS.
There are no material pending legal proceedings in which the Company
is involved as a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to security holders for a vote during
the last quarter of the Company's fiscal year ended February 26, 1995.
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MORGAN'S FOODS, INC.
PART I (CONT'D)
EXECUTIVE OFFICERS OF THE COMPANY
The Executive Officers and other Officers of the Company are as follows:
POSITION WITH
NAME AGE REGISTRANT OFFICER SINCE
- - ------------------------------ ---- ------------------------------------- ------------------
EXECUTIVE OFFICERS:
Leonard Stein-Sapir 56 Chairman of the Board April 1989
and Chief Executive
Officer
James J. Liguori 46 President and Chief June 1979
Operating Officer
Kenneth L. Hignett 48 Senior Vice President- May 1989
Chief Financial Officer
& Secretary
OTHER OFFICERS:
Barton J. Craig 46 Senior Vice President - January 1994
General Counsel
Vincent J. Oddi 52 Vice President- September 1979
Restaurant Development
Ramesh J. Gursahaney 46 Vice President- January 1991
Operations Services
<FN>
From 1978, Mr. Gursahaney has served the Company in several
positions. Prior to becoming an officer, he was Director-Operations Services.
Until 1988, Mr. Craig was Senior Vice President, General Counsel of
Record Data, Inc. and subsequently served as a Law Professor at Albertus Magnus
College.
Executive officers of the Company serve for a term of one year and
until their successors are elected and qualified, unless otherwise specified by
the Board of Directors. Any officer is subject to removal with or without
cause, at any time, by a vote of a majority of the Board of Directors.
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MORGAN'S FOODS, INC.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Shares are traded on the American Stock Exchange
under the symbol "MR." The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Shares as reported on
the American Stock Exchange.
PRICE RANGE
HIGH LOW
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YEAR ENDED FEBRUARY 26, 1995:
1st Quarter ...................... $2 15/16 $2 5/16
2nd Quarter ...................... 2 7/16 1 7/8
3rd Quarter ...................... 2 1/16 1 1/2
4th Quarter ...................... 1 11/16 1 1/8
YEAR ENDED FEBRUARY 27, 1994:
1st Quarter ...................... $2 1/4 $1 3/8
2nd Quarter ...................... 2 1/16 1 1/4
3rd Quarter ...................... 2 3/4 1 5/8
4th Quarter ...................... 3 2 1/4
As of May 3, 1995, the Company had approximately 1,286 shareholders
of record. The Company has paid no dividends since fiscal 1975. Under its
loan agreement with Citicorp North America, Inc., the Company is not permitted
to pay dividends without prior written consent of Citicorp.
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MORGAN'S FOODS, INC.
PART II (CONT'D)
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for each of the five
fiscal years in the period ended February 26, 1995, is derived from, and
qualified in its entirety by, the consolidated financial statements of the
Company. The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto included elsewhere in this Report.
YEARS ENDED
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FEBRUARY 26, FEBRUARY 27, MARCH 2, MARCH 3, FEBRUARY 26,
1995 1994 1993 1992 1991
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Revenues.......................... $ 53,295,000 $ 46,860,000 $ 44,230,000 $ 44,799,000 $ 46,907,000
Cost of sales:
Food, paper and beverage........ 17,282,000 15,020,000 13,489,000 14,349,000 14,766,000
Labor and benefits.............. 13,807,000 11,967,000 9,940,000 10,141,000 10,694,000
Restaurant operating expenses..... 17,088,000 15,592,000 15,468,000 14,666,000 15,186,000
General and administrative
expenses......................... 3,839,000 3,587,000 3,423,000 3,937,000 3,838,000
Operating income.................. 1,279,000 694,000 1,910,000 1,706,000 2,423,000
Income (loss) from
continuing operations (1)........ (425,000) (692,000) (103,000) 14,000 362,000
Cumulative effect of
accounting change................ - 600,000 - - -
Net income (loss).................. (425,000) (92,000) (103,000) 14,000 505,000
Income (loss) per common share (2):
Income (loss) from continuing
operations (1)................. (.02) (.04) (.01) .00 .03
Cumulative effect of
accounting change.............. - .03 - - -
Net income (loss)................ (.02) (.01) (.01) .00 .04
Working capital (deficiency)....... (3,728,000) (1,637,000) 903,000 2,169,000 2,086,000
Total assets....................... 29,432,000 31,708,000 30,312,000 30,599,000 32,266,000
Long-term debt..................... 4,151,000 16,754,000 16,490,000 17,769,000 18,654,000
Long-term capital lease
obligations....................... 3,896,000 2,573,000 1,782,000 1,880,000 1,963,000
Shareholders' equity............... 6,249,000 6,652,000 6,740,000 6,838,000 6,674,000
<FN>
(1) The Company had a gain on discontinued operations in
fiscal 1991 related to its former Sizzler restaurants which were
divested in 1989.
(2) Computed based upon the weighted average number of
common and common equivalent shares outstanding during each year,
which were 17,806,837 in 1995, 17,796,320 in 1994, 17,778,887 in
1993, 17,771,430 in 1992, and 13,833,403 in 1991.
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MORGAN'S FOODS, INC.
PART II (CONT'D)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS. The Company operated Kentucky Fried Chicken
("KFC") franchised restaurants in Illinois, Missouri, New Jersey, Ohio,
Pennsylvania and West Virginia and East Side Mario's franchised restaurants in
Ohio. The average number of KFC restaurants in operation during the fiscal
year ended February 26, 1995 was 66 compared to 69 during fiscal 1994 and 72
during fiscal 1993. During fiscal 1993, the Company became the exclusive
franchisee for East Side Mario's restaurants in the Cleveland/Akron, Ohio
area. During fiscal 1994, the Company obtained exclusive franchise rights for
East Side Mario's in the Columbus, Ohio area. The Company opened two East Side
Mario's during fiscal 1994, three during fiscal 1995 and a sixth in the first
quarter of fiscal 1996. In the first quarter of fiscal 1996 the Company sold
twenty-four KFC restaurants in Central Pennsylvania and New Jersey.
REVENUES. Revenue was $53,295,000 in fiscal 1995 an increase of
$6,435,000 or 13.7% compared to an increase of 5.9% in fiscal 1994 and a
decrease of 1.3% in fiscal 1993. Fiscal 1994 had two fewer days than fiscal
1993 due to a change in the end of the accounting week.
The 13.7% revenue increase achieved during fiscal 1995 was primarily
due to the addition of three East Side Mario's. Revenues from the East Side
Mario's restaurants totalled $9,824,000 in fiscal 1995 compared to $3,491,000
in fiscal 1994. The Company opened its sixth East Side Mario's on April 26,
1995. Fiscal 1995 revenues from the KFC restaurants remained relatively flat
compared to fiscal 1994. Revenues from the KFC restaurants during fiscal 1995
were negatively affected by continued intense competition and lack of
introduction of new products by the franchisor. The Company's revenues were
also negatively impacted by the severe winter weather in the first quarter of
fiscal 1995, which resulted in extremely low revenue levels for approximately
four weeks. Fiscal 1995 revenues at certain East Side Mario's locations were
below management's expectations due to increased competition from the rapid
expansion of other mid-priced full service restaurant chains. Management
expects competition in this segment of the restaurant industry to continue for
the foreseeable future.
The revenue increase of 5.9% in fiscal 1994 was primarily due to the
opening of the first two East Side Mario's in fiscal 1994 and the introduction
of rotisserie chicken, a new permanent menu item in all the KFC restaurants.
The Company believes that there was a reduction of approximately $795,000 in
fiscal 1994 due to severe weather conditions. In addition, the Company closed
five unprofitable KFC restaurants in fiscal 1994 in order to improve future
profitability of the Company.
Revenues for the sixteen weeks ended February 26, 1995 (fourth
quarter) increased $2,202,000 or 16.8% when compared to the sixteen weeks of
the fourth quarter of the prior fiscal year primarily due to two factors.
First, the Company had three additional East Side Mario's in operation during
the fourth quarter of fiscal 1995 compared to the fourth quarter of fiscal
1994. Second, revenues were lower in the fourth quarter of fiscal 1994 by
approximately $520,000 due to severe winter storms.
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MORGAN'S FOODS, INC.
PART II (CONT'D)
COST OF SALES - FOOD, PAPER AND BEVERAGE. Food, paper and beverage
costs in fiscal 1995 increased $2,262,000 or 15.1% to $17,282,000. Food, paper
and beverage costs as a percentage of revenue in fiscal 1995 also increased to
32.4% from 32.1% in fiscal 1994. Efficiencies attained from experience in
operating the East Side Mario's restaurants were offset in the KFC restaurants
due to the mega meal introduced in the fourth quarter of fiscal 1995 which has
higher food costs. Food, paper and beverage costs in fiscal 1994 increased
$1,531,000 or 11.3% to $15,020,000. Food, paper and beverage as a percentage
of revenue costs in fiscal 1994 also increased 1.6 percentage points to 32.1%
from 30.5% in fiscal 1993. The increases were primarily due to the addition of
East Side Mario's restaurants and higher chicken costs at the KFC restaurants
for both fried chicken and rotisserie chicken. In addition, food costs rose
during the introduction of rotisserie chicken. In addition to the factors
mentioned above, the increases were exacerbated by inefficiencies due to lower
revenues that resulted from adverse weather conditions in the first and fourth
quarters of fiscal 1994.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits in fiscal
1995 increased to $13,807,000 from $11,967,000 in fiscal 1994. Labor and
benefits as a percentage of revenue increased to 25.9% in fiscal 1995 compared
to 25.5% in fiscal 1994. The Company opened three East Side Mario's in fiscal
1995 which produced higher labor percentages primarily due to the normal
learning curve during the first few months of operation of a new restaurant.
These increases were partially offset by decreases in KFC labor and benefits
compared to the higher levels experienced in the prior fiscal year due to the
introduction of rotisserie chicken. In addition, the Company's workers'
compensation expense for the KFC division decreased approximately $399,000 in
fiscal 1995 due to lower rates and retroactive adjustments. Labor and benefits
increased $2,027,000 or 20.4% in fiscal 1994 to $11,967,000. The increases
were due to training during the introduction of rotisserie chicken, an increase
of $440,000 in workers' compensation rates, additional labor to support new
side dishes offered in conjunction with rotisserie chicken, and labor
inefficiencies in the KFC restaurants due to winter storms in the first and
fourth quarters of fiscal 1994. Additionally, labor cost percentages for the
East Side Mario's restaurants in fiscal 1994 were high during the first few
months of operation due to learning curve.
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MORGAN'S FOODS, INC.
PART II (CONT'D)
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses
decreased as a percentage of revenue in fiscal 1995 to 32.1% from 33.3% in
fiscal 1994. The Company's level of promotional discounting and local
advertising was lower during fiscal 1995 than fiscal 1994. Fixed costs such as
rent and property taxes increased as a percentage of revenue to 5.3% in fiscal
1995 from 4.6% in fiscal 1994. Amortization of East Side Mario's pre-opening
expenses was $209,000 in fiscal 1995 compared to $56,000 in fiscal 1994.
Restaurant operating expenses decreased as a percentage of revenue in fiscal
1994 to 33.3% from 35.0% in fiscal 1993. The Company's level of promotional
discounting and local advertising was lower during fiscal 1994 compared to
fiscal 1993.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased $252,000 or 7.0% in fiscal 1995 to $3,839,000. Expenses
increased due to additional training and recruiting expenses required when
opening three East Side Mario's during fiscal 1995. In addition, the company
incurred increases in rent, insurance and bonus accrued for KFC administrative
personnel. Administrative expense reductions which are expected to yield
annual savings of approximately $195,000 were implemented late in the third
quarter of fiscal 1995. These reductions include the elimination of the Vice
President of Marketing position and an Area Manager in the St. Louis market as
well as salary reductions of 10% each for the Chairman and the President of the
Company.
General and administrative expenses for fiscal 1994 of $3,587,000
were $164,000 or 4.8% above fiscal 1993. Expenses increased primarily due to
new administrative functions associated with the development and expansion of
the East Side Mario's operations. The administrative expenses necessary to
manage and expand the East Side Mario's operations were supported by only one
restaurant for the full year and the second restaurant for 2 months. The
additional East Side Mario's administrative expenses were partially offset by
decreases in bonuses, home office furniture rent, travel and claims paid under
the employee health plan.
OPERATING INCOME. Operating income for fiscal 1995 increased
$585,000 to $1,279,000 from $694,000 in fiscal 1994. The increase is favorable
primarily due to reduced local advertising and lower workers' compensation
rates and favorable retroactive adjustments. Operating income for fiscal 1994
decreased to $694,000 from $1,910,000 in fiscal 1993 due in part to reduced
operating income in the first and fourth quarters of fiscal 1994. Management
estimates that the severe winter storms in the first and fourth quarters of
fiscal 1994 which resulted in temporary closing of KFC restaurants caused a
reduction ofapproximately $400,000 in operating income from the KFC
restaurants. The company also incurred increases in workers' compensation
rates, resulting in approximately $440,000 reduction in operating income when
compared to fiscal 1993. Higher food and labor costs associated with the
introduction of rotisserie chicken also had a short term impact on operating
results of the KFC restaurants in the second and third quarters of fiscal 1994.
In addition, the Company amortized $56,000 of pre-opening costs associated with
the addition of East Side Mario's restaurants. Restaurant operating expenses
and general and administrative expenses remained relatively constant in fiscal
1994 when compared to fiscal 1993.
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MORGAN'S FOODS, INC.
PART II (CONT'D)
INTEREST EXPENSE AND OTHER INCOME. Interest expense increased by
$370,000 in fiscal 1995 compared to the prior year. The increase in prime rate
increased the expense of the floating rate debt which has been used in
financing the Company's construction, renovation and acquisition of KFC
restaurants. Also, during the fourth quarter of fiscal 1994, the Company
incurred $2,000,000 of additional temporary debt related to the construction of
East Side Mario's restaurants, which was repaid during the second quarter of
fiscal 1995. Finally, interest expense increased due to capital leases used to
finance four East Side Mario's locations. Other income increased to $208,000
for fiscal 1995 from $186,000 for fiscal 1994.
CHANGES IN ACCOUNTING FOR INCOME TAXES. The Company was required to
adopt Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes" in the year ended February 27, 1994 (See Note 1 to
Consolidated Financial Statements). SFAS No. 109 superseded SFAS No. 96, which
was the accounting method previously used by the Company. The cumulative
effect of adopting SFAS No. 109 as of the beginning of fiscal 1994 was to
increase income by $600,000.
SALE OF RESTAURANTS. As discussed in Note 2 to the consolidated
financial statements, on May 5, 1995 the Company sold twenty-four KFC
restaurants located in Central Pennsylvania and New Jersey. The Company's
consolidated operating results will not include these restaurants after May 5,
1995. For fiscal 1995, consolidated operating results included the following
amounts for these restaurants: revenues - $17,964,000; cost of sales -
$10,366,000; restaurant operating expenses - $5,886,000; and field general and
administrative expenses - $642,000. Additionally, management believes that
further restructuring made possible by the sale of the restaurants will enable
the Company to reduce annual field and home office general and administrative
expenses by approximately $150,000 to $200,000. The Company used a portion of
the proceeds of the sale to pay down floating rate bank debt totaling
$9,750,000 in advance of its scheduled maturity. As a result, annual interest
expense, at current interest rates, will be reduced by approximately
$1,009,000. In addition, annual interest expense of $117,000 relating to
capital leases assumed by the buyer of the restaurants will no longer be
incurred by the Company as a result of the sale. As a further result of the
early payment of floating rate bank debt, scheduled principal payments for
fiscal 1996 have been reduced from $1,945,000 to $850,000.
LIQUIDITY AND CAPITAL RESOURCES. The Company, like others in the
restaurant industry, operates on minimal working capital and relies on cash
flow from operations, floating rate debt borrowings and lease financing for the
construction of restaurant properties and repayment of debt. Cash flow
activity for fiscal 1995, 1994 and 1993 is presented in the Consolidated
Statements of Cash Flows.
The Company had working capital deficiencies of $3,728,000 and
$1,636,000 at February 26, 1995 and February 27, 1994, respectively. The
change in working capital is primarily due to the payment of $2,000,000 of debt
related to the construction of East Side Mario's restaurants that was
classified as long-term at February 27, 1994. In addition, the $9,750,000 debt
repayment made on May 5, 1995 after the sale of twenty-four KFC restaurants is
classified as a current liability, while only the carrying value of the assets
held for sale of $8,354,000, not the proceeds from the sale, is classified as a
current asset held for sale. The early repayment of $9,750,000 of bank debt
reduced scheduled principal payments for fiscal 1996 to $850,000 from
$1,945,000. Cash provided by continuing operations, excluding changes in
operating assets and liabilities was $2,176,000 in fiscal 1995, $1,622,000 in
fiscal 1994 and $1,918,000 in fiscal 1993. Capital expenditures for fiscal
1995 were $1,629,000 of which $1,348,000 related to the development of the East
Side Mario's restaurants. Through capital leases, the Company also financed on
a noncash basis during fiscal 1995 investments in buildings and equipment of
$2,010,000 for East Side Mario's restaurants. In fiscal 1995 the Company
received proceeds from sale/leaseback transactions of $2,440,000. The Company
made principal payments on long-term bank debt of $3,742,000.
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MORGAN'S FOODS, INC.
PART II (CONT'D)
The KFC operations of the Company have historically provided
sufficient cash flow to service the Company's debt, refurbish and upgrade KFC
restaurant properties and cover administrative overhead. Management believes
that operating cash flow will provide sufficient capital to continue to operate
and maintain the KFC and East Side Mario's restaurants, service the Company's
debt and support required corporate expenses. In addition to the Company's
operating cash flow, management believes that additional financing, including
long term leases of build-to-suit restaurants, development lines of credit and
sale/leaseback arrangements can be obtained to complete the development of the
Company's East Side Mario's franchised restaurants in Ohio.
Capital expenditures to build two additional East Side Mario's
restaurants and complete one under construction at year-end are anticipated to
be approximately $5,300,000 in fiscal 1996. The Company also expects to commit
approximately $900,000 to image enhancements of existing KFC restaurants. The
Company is currently pursuing financing for these capital requirements through
development lines of credit and mortgage financing. Management believes that
adequate financing will be available to develop these restaurants through the
aforementioned financing arrangements.
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 New
Jersey, Ohio, Pennsylvania, Missouri, Illinois and West Virginia. The New
Jersey and Central Pennsylvania KFC restaurants were sold subsequent to the
fiscal year ended February 26, 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements of the Company are set forth
in Item 14 of this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
13
MORGAN'S FOODS, INC.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information on Directors of the Company is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 1995
annual meeting to be filed with the Securities and Exchange Commission on or
before June 26, 1995.
Information regarding the Executive Officers of the Company is
reported in a separate section captioned "Executive Officers of the Registrant"
included in Part I hereof.
ITEM 11. EXECUTIVE COMPENSATION.
Information on executive compensation is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 1995
annual meeting to be filed with the Securities and Exchange Commission on or
before June 26, 1995.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information on security ownership of certain beneficial owners,
officers and directors is incorporated herein by reference to the definitive
Proxy Statement to security holders for the 1995 annual meeting to be filed
with the Securities and Exchange Commission on or before June 26, 1995.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information on certain relationships and related transactions is
incorporated herein by reference to the definitive Proxy Statement to security
holders for the 1995 annual meeting to be filed with the Securities and
Exchange Commission on or before June 26, 1995.
13
14
MORGAN'S FOODS, INC.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1 and 2. Financial Statements and Financial Statement
Schedules.
The Financial Statements and Financial Statement Schedules
listed on the accompanying Index to Financial Statements and Financial
Statement Schedules are filed as part of this Annual Report on Form 10-K.
(a) 3. Exhibits.
The Exhibits listed on the accompanying Index to Exhibits
are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the last
quarter of the fiscal 1995 year.
14
15
MORGAN'S FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEM 14 (a) 1 AND 2
PAGE
ITEM 14 (a) 1 REFERENCE
- - ------------- ---------
Independent Auditors' Report.................................................. 16
Consolidated Balance Sheets
at February 26, 1995 and February 27, 1994.................................. 17
Consolidated Statements of Operations
for the years ended February 26, 1995, February 27, 1994 and March 2, 1993.. 18
Consolidated Statements of Shareholders' Equity
for the years ended February 26, 1995, February 27, 1994 and March 2, 1993.. 19
Consolidated Statements of Cash Flows
for the years ended February 26, 1995, February 27, 1994 and March 2, 1993.. 20
Notes to Consolidated Financial Statements.................................... 21
ITEM 14 (A) 2
- - -------------
All schedules normally required by Form 10-K are not required under
the related instructions or are inapplicable, and therefore are not presented.
15
16
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders
Morgan's Foods, Inc.
Cleveland, Ohio
We have audited the accompanying consolidated balance sheets of Morgan's
Foods, Inc. and subsidiaries as of February 26, 1995 and February 27, 1994
and the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the three years in the period ended February 26,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Morgan's Foods, Inc. and
subsidiaries at February 26, 1995 and February 27, 1994 and the results of
their operations and their cash flows for each of the three years in the
period ended February 26, 1995 in conformity with generally accepted
accounting principles.
As discussed in Note 1 to the consolidated financial statements, in the year
ended February 27, 1994 the Company changed its method of accounting for
income taxes to conform with Statement of Financial Accounting Standards No.
109.
/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 19, 1995
16
17
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 26, 1995 AND FEBRUARY 27, 1994
ASSETS
1995 1994
------------ ------------
Current assets:
Cash and equivalents (Note 4)............................ $ 1,993,000 $ 3,078,000
Marketable securities (Note 4)........................... 359,000 459,000
Receivables.............................................. 105,000 52,000
Inventories.............................................. 298,000 356,000
Prepaid expenses......................................... 299,000 148,000
Assets held for sale, net (Note 2)....................... 8,354,000 -
------------ ------------
11,408,000 4,093,000
------------ ------------
Property and equipment(Notes 4 and 5):
Land..................................................... 1,464,000 3,331,000
Buildings and improvements............................... 5,224,000 8,647,000
Property under capital leases............................ 4,605,000 3,250,000
Leasehold improvements................................... 3,809,000 5,201,000
Equipment, furniture and fixtures........................ 7,433,000 12,245,000
Construction in progress................................. 465,000 1,483,000
------------ ------------
23,000,000 34,157,000
Less accumulated depreciation and amortization............ 7,886,000 12,292,000
------------ ------------
15,114,000 21,865,000
Other assets.............................................. 990,000 1,016,000
Deferred taxes (Note 6)................................... 600,000 600,000
Excess of cost over amounts assigned
to net assets of acquired businesses..................... 1,320,000 4,134,000
------------ ------------
$ 29,432,000 $ 31,708,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Note 4)............ $ 10,600,000 $ 1,739,000
Current maturities of capital lease obligations (Note 5). 263,000 125,000
Accounts payable......................................... 2,680,000 2,641,000
Accrued liabilities (Note 3)............................. 1,593,000 1,224,000
------------ ----------
15,136,000 5,729,000
Long-term debt (Note 4)................................... 4,151,000 16,754,000
Long-term capital lease obligations (Note 5).............. 3,896,000 2,573,000
Commitments and contingencies (Notes 4 and 5)
SHAREHOLDERS' EQUITY
Preferred shares, 1,000,000 shares authorized,
no shares outstanding
Common Stock:
Authorized shares - 25,000,000
Issued shares - 17,816,430.............................. 17,817,000 17,817,000
Treasury Shares - 1,502 and 15,266...................... (3,000) (25,000)
Capital in excess of stated value......................... 11,088,000 11,088,000
Accumulated deficit....................................... (22,653,000) (22,228,000)
------------- ------------
Total shareholders' equity................................ 6,249,000 6,652,000
------------ ------------
$ 29,432,000 $ 31,708,000
============ ============
<FN>
See notes to consolidated financial statements.
17
18
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
1995 1994 1993
------------ ------------ ------------
Revenues................................... $ 53,295,000 $ 46,860,000 $ 44,230,000
Cost of sales:
Food, paper and beverage................. 17,282,000 15,020,000 13,489,000
Labor and benefits....................... 13,807,000 11,967,000 9,940,000
Restaurant operating expenses.............. 17,088,000 15,592,000 15,468,000
General and administrative expenses........ 3,839,000 3,587,000 3,423,000
------------ ------------ ------------
Operating income........................... 1,279,000 694,000 1,910,000
Interest Expense:
Bank debt and notes payable.............. (1,430,000) (1,289,000) (1,413,000)
Capital leases........................... (478,000) (249,000) (253,000)
Other income............................... 208,000 186,000 397,000
Costs of terminated acquisition (Note 10).. - - (684,000)
------------ ------------ -----------
Loss before income
taxes and accounting change............... (421,000) (658,000) (43,000)
Provision for income taxes (Note 7)........ 4,000 34,000 60,000
------------ ------------ -----------
Loss before accounting change.............. (425,000) (692,000) (103,000)
Cumulative effect of change in accounting
for income taxes (Note 1)................. - 600,000 -
------------ ------------ -----------
Net loss................................... $ (425,000) $ (92,000) $ (103,000)
============ ============ ===========
Net loss per common share (Note 6):
Loss before accounting change............. $ (.02) $ (.04) $ (.01)
Cumulative effect of change in
accounting for income taxes.............. - .03 -
============ ============= ===========
Net loss................................... $ (.02) $ (.01) $ (.01)
============ ============= ===========
<FN>
See notes to consolidated financial statements.
18
19
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
COMMON SHARES TREASURY SHARES CAPITAL IN
----------------------- ---------------- EXCESS OF
SHARES AMOUNT SHARES AMOUNT STATED VALUE
---------- ----------- ------- ------- ------------
Balance, March 3, 1992......... 17,771,430 $17,772,000 - - $11,099,000
Net loss.......................
Exercise of stock options...... 45,000 45,000 (32,828) $(53,000) 13,000
--------- ----------- ------- ------- -----------
Balance, March 2, 1993......... 17,816,430 17,817,000 (32,828) $(53,000) 11,112,000
Net loss.......................
Exercise of stock options...... 15,204 24,000 (24,000)
Issue treasury shares
for 401K contributions........ 2,358 4,000
--------- ----------- ------- ------- -----------
Balance, February 27, 1994..... 17,816,430 17,817,00 (15,266) (25,000) 11,088,000
Net loss.......................
Issuance of treasury stock
for 401(k) contributions...... 13,764 22,000
---------- ---------- ------- ------- -----------
Balance, February 26, 1995..... 17,816,430 $17,817,00 (1,502) $ (3,000) $11,088,000
========== ========== ======= ======= ===========
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------ -------------
Balance, March 3, 1992......... $(22,033,000) $ 6,838,000
Net loss....................... (103,000) (103,000)
Exercise of stock options...... 5,000
------------ ------------
Balance, March 2, 1993......... (22,136,000) 6,740,000
Net loss....................... (92,000) (92,000)
Exercise of stock options......
Issue treasury shares
for 401K contributions........ 4,000
------------ ------------
Balance, February 27, 1994..... (22,228,000) 6,652,000
Net loss....................... (425,000) (425,000)
Issuance of treasury stock
for 401(k) contributions...... 22,000
------------ ------------
Balance, February 26, 1995..... $(22,653,000) $ 6,249,000
============ ============
<FN>
See notes to consolidated financial statements.
19
20
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
1995 1994 1993
---------- ---------- ----------
Cash flows from operating activities:
Net loss................................... $ (425,000) $ (92,000) $ (103,000)
Adjustments to reconcile to net cash
provided by continuing operations:
Cumulative effect of change in
accounting for income taxes............. (600,000) -
Depreciation and amortization............ 2,536,000 2,215,000 2,059,000
Gain on sale of marketable securities.... - - (109,000)
Loss on disposal of property
and equipment........................... 65,000 99,000 71,000
Change in assets and liabilities:
Decrease (Increase) in receivables...... (53,000) (8,000) 27,000
Decrease (Increase) in inventories...... (82,000) 20,000 (20,000)
Decrease (Increase) in prepaid expenses. (360,000) 47,000 122,000
Increase in other assets................ (65,000) (237,000) (75,000)
Increase in accounts payable............ 39,000 520,000 316,000
Increase (Decrease) in accrued
liabilities............................ 391,000 (267,000) 740,000
---------- ---------- ----------
Net cash provided by continuing operations. 2,046,000 1,697,000 3,028,000
Net cash used by discontinued operations... - - (64,000)
---------- ---------- ----------
Net cash provided by operating activities.. 2,046,000 1,697,000 2,964,000
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures...................... (1,629,000) (5,672,000) (1,927,000)
Purchase of licenses...................... (86,000) (267,000) -
Proceeds from sale and maturity
of marketable securities................. 1,278,000 1,457,000 7,465,000
Purchase of marketable securities......... (1,178,000) (1,419,000) (2,988,000)
Proceeds from sale of property
and equipment............................. - - 81,000
---------- ----------- ----------
Net cash provided by (used in)
investing activities...................... (1,615,000) (5,901,000) 2,631,000
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
notes payable and amounts due bank........ - 2,000,000 308,000
Principal payments on long-term debt....... (3,742,000) (1,584,000) (1,399,000)
Principal payments on capital
lease obligations......................... (214,000) (98,000) (85,000)
Proceeds from sale/leaseback
transactions.............................. 2,440,000 1,929,000 -
Net cash provided by (used in) ---------- ---------- ----------
financing activities...................... (1,516,000) 2,247,000 (1,176,000)
---------- ---------- ----------
Net change in cash and equivalents......... (1,085,000) (1,957,000) 4,419,000
Cash and equivalents, beginning balance.... 3,078,000 5,035,000 616,000
---------- ---------- -----------
Cash and equivalents, ending balance....... $ 1,993,000 $3,078,000 $5,035,000
=========== ========== ==========
Noncash investing and financing
activities - capital leases............... $2,010,000
==========
<FN>
See notes to consolidated financial statements.
20
21
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. ("The Company")
operates Kentucky Fried Chicken ("KFC") restaurants in the states of Illinois,
Missouri, New Jersey, Ohio, Pennsylvania and West Virginia and has exclusive
rights to operate, as franchisee, East Side Mario's restaurants in the
Cleveland/Akron and Columbus, Ohio areas. The Company opened its first two
East Side Mario's restaurants in fiscal 1994, three additional East Side
Mario's during fiscal 1995, and its sixth East Side Mario's in April 1995. In
fiscal 1994, the Company changed its fiscal year from a 52-53 week year ending
on the Tuesday nearest the last day of February to a 52-53 week year ending on
the Sunday nearest the last day of February.
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.
CASH AND EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
MARKETABLE SECURITIES. Marketable securities consist of U.S.
Treasury Notes and Bills, including those pledged as collateral for long-term
debt. In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 115, "Accounting For Certain Investments in Debt and Equity Securities,"
these securities are classified as held to maturity and accordingly, are
carried at amortized cost unless there is a permanent impairment of their
value.
INVENTORIES. Inventories, principally food, beverages and paper
products, are stated at the lower of aggregate cost (first-in, first-out basis)
or market.
PRE-OPENING COSTS. Pre-opening costs, which consist principally of
training costs, are capitalized and amortized over twelve months.
PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives, of the related assets, as follows: buildings and improvements -
3 to 20 years; and equipment, furniture and fixtures - 10 years. Leasehold
improvements are amortized over the shorter of the life of the asset or life of
the lease, which ranges from 3 to 15 years. The asset values of the
capitalized leases are being amortized using the straight-line method over the
lives of the respective leases which range from 15 to 20 years. Depreciation
and amortization expense for fiscal 1995, 1994 and 1993 was $2,122,000,
$1,954,000 and $1,865,000, respectively.
AMORTIZATION. The excess of cost over amounts assigned to net
assets of acquired businesses is being amortized over forty years on a
straight-line basis. Accumulated amortization as of February 26, 1995 and
February 27, 1994 was $3,173,000 and $3,046,000, respectively. Annual
amortization expense for fiscal 1995, 1994 and 1993 was $127,000. Management
evaluates the carrying amount of the excess of cost over amounts assigned to
net assets of acquired businesses periodically based upon past and projected
cash flows from operations and the estimated fair value of related assets.
Management believes there is no impairment of the carrying value at February
26, 1995.
21
22
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
CHANGE IN ACCOUNTING FOR INCOME TAXES. The Company was required to
adopt Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting
for Income Taxes" in the year ended February 27, 1994. This statement
superseded SFAS No. 96, which was the accounting method previously used by the
Company. The cumulative effect of adopting SFAS No. 109 as of the beginning of
fiscal 1994 was to increase income by $600,000.
NOTE 2. ASSETS HELD FOR SALE.
On May 5, 1995, the Company sold twenty-four KFC restaurants located
in Central Pennsylvania and New Jersey to another KFC franchisee. The carrying
value of assets sold and liabilities transferred were reclassified to assets
held for sale as of February 26, 1995:
Inventories $ 140,000
Property and equipment 13,303,000
Accumulated depreciation (6,462,000)
Other assets 98,000
Excess of cost over amounts assigned
to net assets of acquired businesses 2,688,000
Capital lease obligations (1,413,000)
------------
Assets held for sale, net $ 8,354,000
============
The Company received $10,625,000 in cash as consideration for the sale, of
which $9,750,000 was used to pay down floating rate bank debt in advance of
scheduled maturities. The portion of debt repaid on May 5, 1995 was
reclassified from long-term to current maturities as of February 26, 1995. The
early payment of debt has reduced scheduled principal payments for fiscal 1996
to $850,000 from $1,945,000. At current interest rates this reduction of debt
reduces annual interest cost by $1,009,000. The twenty-four KFC restaurants
which were sold had revenues in the fiscal year ended February 26, 1995 of
$17,964,000.
22
23
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
NOTE 3. ACCRUED LIABILITIES.
Accrued liabilities consist of the following at February 26, 1995
and February 27, 1994:
1995 1994
---------- ---------
Accrued compensation.......................... $ 634,000 $ 418,000
Accrued taxes other than income taxes......... 578,000 407,000
Accrued acquisition costs..................... - 100,000
Other accrued expenses........................ 381,000 299,000
---------- ----------
$1,593,000 $1,224,000
========== ==========
NOTE 4. LONG-TERM DEBT.
Long-term debt consists of the following at February 26, 1995 and
February 27, 1994
1995 1994
------------ ------------
Bank debt, monthly payments of principal plus
interest at 1.35% above prime, through 2002...... $14,394,000 $16,062,000
Bank debt, monthly interest payments of .25% above
prime, principal amount due and paid March 31,
1995. Cash investments having a value of
$2,000,000 were pledged as collateral............ - 2,000,000
Note payable at 9%, monthly payments of
principal and interest through October 2003.
Marketable securities and cash investments
having a value of $370,000 at February 26, 1995
have been pledged as collateral.................. 357,000 431,000
----------- -----------
14,751,000 18,493,000
Less current maturities............................ 10,600,000 1,739,000
----------- -----------
$ 4,151,000 $16,754,000
=========== ===========
<FN>
Current maturities of long-term debt at February 26, 1995 includes $9,750,000
repaid on May 5, 1995 in advance of scheduled maturites (See note 2).
23
24
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
All of the Company's property and equipment has been pledged as
collateral for the bank debt. Additionally, the debt agreement includes
restrictions on paying dividends, reacquiring Company shares, incurring debt
and capital expenditures. As of February 26, 1995, the Company was not in
compliance with certain bank debt covenants, but waivers have been obtained
from the bank. The aggregate amount of long- term debt maturing in each of the
next five fiscal years is as follows:
1996:
Repayment on May 5,
1995 (Note 2)....... $ 9,750,000
Scheduled payments.. 850,000
-----------
Total 1996.......... 10,600,000
1997................ 718,000
1998................ 802,000
1999................ 861,000
2000................ 890,000
Later years......... 880,000
-----------
$14,751,000
===========
The Company paid interest relating to long-term debt of
approximately $1,421,000, $1,304,000 and $1,433,000 in fiscal 1995, 1994 and
1993, respectively.
NOTE 5. LEASE OBLIGATIONS AND OTHER COMMITMENTS.
Property under capital leases at February 26, 1995 and February 27,
1994, excluding amounts reclassified to assets held for sale (See Note 2), are
as follows:
1995 1994
------------ -----------
Leased property:
Buildings ..................... $ 3,866,000 $ 3,250,000
Equipment, furniture
and fixtures .................. 739,000
------------ -----------
Total ......................... 4,605,000 3,250,000
Less accumulated amortization ... 613,000 1,119,000
------------ ------------
$ 3,992,000 $ 2,131,000
============ ============
Amortization of leased property under capital leases was $257,000,
$127,000 and $123,000 in fiscal 1995, 1994 and 1993, respectively.
Related obligations under capital leases at February 26, 1995 and
February 27, 1994, excluding amounts reclassified to assets held for sale (See
Note 2), are as follows:
1995 1994
---------- ----------
Capital lease obligations $4,159,000 $2,698,000
Less current maturities 263,000 125,000
---------- ----------
Long-term capital lease obligations $3,896,000 $2,573,000
========== ==========
The Company paid interest of approximately $478,000, $249,000 and
$253,000 relating to capital lease obligations in fiscal 1995, 1994 and 1993,
respectively.
24
25
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
Future minimum rental payments to be made under capital leases at
February 26, 1995, excluding leases transferred on May 5, 1995 (See Note 2),
are as follows:
1996 ......................... $ 693,000
1997 ......................... 696,000
1998 ......................... 664,000
1999 ......................... 653,000
2000 ......................... 590,000
Later years .................. 6,632,000
-----------
9,928,000
Less amount representing
interest ..................... 5,769,000
-----------
Total obligations under
capital leases ............... $ 4,159,000
===========
The Company's leases for restaurant land and buildings are
noncancellable and expire on various dates through 2010. The leases have
renewal options ranging from 1 to 29 years. Certain restaurant land and
building leases require the payment of additional rent equal to an amount by
which a percentage of annual sales exceeds annual minimum rentals. Total
contingent rentals were $75,000, $57,000 and $56,000 in fiscal 1995, 1994 and
1993, respectively. Future noncancellable minimum rental payments under
operating leases at February 26, 1995, excluding leases transferred or
terminated on May 5, 1995 (See Note 2), are as follows: 1996 - $1,780,000;
1997 - $1,425,000; 1998 - $1,280,000; 1999 - $1,217,000; 2000 - $966,000 and
an aggregate $8,873,000 for the years thereafter. Rental expense for all
operating leases was $2,375,000, $1,798,000 and $1,857,000, for fiscal 1995,
1994 and 1993, respectively.
The Company remains as the guarantor on six leases related to the
twenty-four restaurants sold on May 5, 1995. These leases are for periods of
time ranging from 1 to 15 years.
During fiscal 1995 and 1994 the Company completed sale/leaseback
transactions for land and buildings for East Side Mario's restaurants and
rotisserie equipment at KFC restaurants. No gain or loss was recorded for
these transactions. Lease commitments for these transactions are included in
the capital lease obligations and operating lease commitments disclosed above.
The Company is required to pay royalties of 4% of gross revenues to
KFC Corporation and to expend an additional 5% of gross revenues on national
and local advertising pursuant to its franchise agreements.
The East Side Mario's franchise agreement requires the Company to
pay royalties of 4% on gross revenues and 1/2% of gross revenues to an
advertising fund. The franchise agreement also requires the Company to expend
an additional 2 1/2% of gross revenues for advertising and promotion.
NOTE 6. NET INCOME PER COMMON SHARE.
Net income per common share has been computed based on the weighted
average number of common shares outstanding during each year which totalled
17,806,837, 17,796,320 and 17,778,887 for fiscal 1995, 1994 and 1993,
respectively.
25
26
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995, FEBRUARY 27, 1994 AND MARCH 2, 1993
NOTE 7. INCOME TAXES.
In the year ended February 27, 1994 the Company adopted SFAS No.
109, "Accounting for Income Taxes". Under SFAS No. 109, the Company was
required to record deferred tax assets for the benefits of future deductible
temporary differences and operating loss and tax credit carryforwards. After
evaluating historical and projected profitability, a valuation allowance was
recorded to reduce the deferred tax assets to the amount more likely than not
to be realized in the future.
As permitted under SFAS No. 109, the Company elected not to restate
the financial statements of any prior years. The cumulative effect of adopting
SFAS No. 109 as of the beginning of fiscal 1994 increased net income by
$600,000, or $.03 per share. The effects of the change on both income before
income taxes and the effective tax rate for fiscal 1994 and 1995 were not
material.
The current provision for income taxes consists of the following:
1995 1994 1993
--------- ---------- ---------
Federal........... $ - $ - $ 17,000
State and local... 4,000 34,000 43,000
--------- ---------- ----------
Total............. $ 4,000 $ 34,000 $ 60,000
========= ========== ==========
There was no deferred provision for income taxes during fiscal 1995, 1994 and
1993.
A reconciliation between the provision for income taxes and income
taxes calculated at the statutory tax rate of 35% in 1995 and 1994 and 34% in
1993 is as follows:
1995 1994 1993
------------ ------------ -----------
Tax benefit at statutory
rates......................... $ (147,000) $ (230,000) $ (15,000)
Goodwill amortization.......... 44,000 44,000 43,000
State and local taxes,
net of federal benefit........ 3,000 22,000 28,000
Generation/utilization of net
operating loss carryforwards.. 102,000 196,000 (15,000)
Other.......................... 2,000 2,000 19,000
----------- ------------ ------------
$ 4,000 $ 34,000 $ 60,000
=========== ============ ============
The components of deferred tax assets (liabilities) at February 26,
1995 and February 27, 1994 are as follows:
1995 1994
--------- ----------
Operating loss carryforwards.................. $8,716,000 $8,726,000
Tax credit carryforwards...................... 243,000 243,000
Depreciation.................................. 375,000 222,000
Capital leases................................ 244,000 227,000
Accrued expenses not currently deductible..... 9,000 69,000
Inventory valuation........................... (9,000) (8,000)
Valuation allowance........................... (8,978,000) (8,879,000)
---------- ---------
Deferred tax asset - net...................... $ 600,000 $ 600,000
========== ==========
<FN>
The valuation allowance increased $99,000 and $245,000 during fiscal
1995 and 1994, respectively.
26
27
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995 FEBRUARY 27, 1994 AND MARCH 2, 1993
At February 26, 1995, the Company has net operating loss
carryforwards which, if not utilized, will expire as follows:
1996 ................... $ 495,000
1999 ................... 8,124,000
2000 ................... 4,513,000
2001 ................... 4,055,000
2004 ................... 737,000
2005 ................... 2,786,000
2009 ................... 1,077,000
2010 ................... 8,000
-----------
Total .................. $21,795,000
===========
As of February 26, 1995, the Company has an alternative minimum tax
credit carryforward of $56,000. In addition, the Company has approximately
$187,000 of investment tax credits (after reduction pursuant to the Tax Reform
Act of 1986) available to offset future federal income tax liabilities through
2001.
NOTE 8. STOCK OPTIONS AND OTHER EQUITY TRANSACTIONS.
The Company had an Incentive Stock Option Plan ("Incentive Plan")
and a Non-Qualified Stock Option Plan ("Stock Option Plan"). Options granted
under the Incentive and Stock Option plans are exercisable at the market value
of the underlying common shares on the date of the grant. Both plains expired
during fiscal 1995. Options granted under the Incentive Plan remain
outstanding with option prices of $1.125 to $2.6875 until they individually
expire through January 2004 according to the terms of the plan.
Information with respect to these option plans follows:
NUMBER OF SHARES
-----------------------------
1995 1994 1993
-------- ---------- --------
Outstanding, beginning of year......... 506,000 480,000 427,500
Granted at $1.75 per share............. - - 115,000
Granted at $2.6875 per share........... - 66,000 -
Exercised at $1.00 to $1.125 per share. - (35,000) (45,000)
Surrendered at $1.50 per share......... - (5,000) (17,500)
Expired at $1.50 per share............. (109,000) - -
------- -------- -------
Outstanding, end of year............... 397,000 506,000 480,000
======= ======= =======
Exercisable, end of year............... 316,000 366,000 365,000
======= ======= =======
Available for grant, end of year....... -0- 84,000 145,000
======= ======= =======
The Company has Non-Qualified Stock Option Agreements with the
Chairman of the Board and Chief Executive Officer and with the President
granting the option to purchase an additional 500,000 and 300,000 common
shares, respectively, with option prices ranging from $1.25 to $1.75 per share.
During fiscal 1995, 1994 and 1993 the Company incurred approximately
$6,000, $95,000 and $82,000, respectively, in legal fees from a law firm in
which one of the directors of the Company is a major shareholder.
27
28
MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 26, 1995 FEBRUARY 27, 1994 AND MARCH 2, 1993
NOTE 9. 401-K RETIREMENT PLAN.
During fiscal 1994 the Company adopted a 401-K Retirement Plan. All
employees age 21 or older who have completed one year of service with the
Company, working at least 1,000 hours, are eligible to participate in the plan.
The Company matches in Company stock a percentage of employee contributions.
During fiscal 1995 and 1994, respectively, the Company incurred $28,000 and
$10,000, respectively, in expenses for matching contributions to the plan.
NOTE 10. TERMINATED ACQUISITION OF BUSINESS.
During fiscal 1993 the Company signed a letter of intent to acquire
Prime Restaurant Group, formerly franchisor of East Side Mario's. The Company
also began proceedings to make a public offering of common stock to finance a
portion of the acquisition. Agreement on the terms of the acquisition was not
reached and negotiations were terminated by the Company on May 10, 1993.
Consequently, the Company recorded a charge of $684,000 in the fourth quarter
of fiscal 1993 for the estimated total costs of the due diligence process for
the proposed acquisition and the public offering.
28
29
MORGAN'S FOODS, INC.
INDEX TO EXHIBITS
ITEM 14 (a) (3)
Exhibit
Number Exhibit Description
------ -------------------
3.1 Amended Articles of Incorporation, as amended (1)
3.2 Amended Code of Regulations (1)
4.1 Specimen Certificate for Common Shares (2)
10.1 Specimen KFC Franchise Agreements (3)
10.2 Amended and Restated Incentive Stock Option Plan (6)
10.3 Amended and Restated Non-Qualified Stock Option Plan (6)
10.4 Loan Agreement with Citicorp North America, Inc. for $18,900,000
Refinance Loan and $3,000,000 Development Loan (4)
10.5 Non-Qualified Stock Option Agreement with Leonard R. Stein-Sapir (5)
10.6 Non-Qualified Stock Option Agreement with James J. Liguori (1)
10.7 Form of East Side Mario's Area Development Agreement and Franchise Agreement (6)
19 Form of Indemnification Contract between Registrant and its Officers and Directors (6)
21 Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
<FN>
(1) Filed as an exhibit to Registrant's Form 10-K for the 1992 fiscal year
and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Registration Statement (No.
33-35772) on Form S-2 and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration Statement (No.
2-78035) on Form S-1 and incorporated herein by reference.
(4) Filed as an exhibit to the Registrant's Form 10-K for the 1991 fiscal
year and incorporated herein by reference.
(5) Filed as an exhibit to the Registrant's Form 8-K dated May 4, 1989 and
incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Form 10-K for the 1993 fiscal
year and incorporated herein by reference.
29
30
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.
Morgan's Foods, Inc.
Dated: May 19, 1995 /s/ Leonard Stein-Sapir
------------------------------
By: Leonard Stein-Sapir
Chairman of the Board,
Chief Executive Officer &
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Leonard Stein-Sapir /s/ Lawrence S. Dolin
-------------------------------- ------------------------------
By: Leonard Stein-Sapir By: Lawrence S. Dolin
Chairman of the Board, Director
Chief Executive Officer & Director Dated: May 19, 1995
Dated: May 19, 1995
/s/ James J. Liguori /s/ Steven S. Kaufman
-------------------------------- ------------------------------
By: James J. Liguori By: Steven S. Kaufman
Director, President & Director
Chief Operating Officer Dated: May 19, 1995
Dated: May 19, 1995
/s/ Kenneth L. Hignett /s/ Richard A. Arons
-------------------------------- ------------------------------
By: Kenneth L. Hignett By: Richard A. Arons
Director, Senior Vice President, Director
Chief Financial Officer & Secretary Dated: May 19, 1995
Dated: May 19, 1995
/s/ Bernard Lerner
------------------------------
By: Bernard Lerner
Director
Dated: May 19, 1995
30