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 November 4, 2001
----------------------------------------------------------
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 December 19, 2001, the issuer had 2,745,341 shares of common
stock outstanding.
1
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
------------------------------------------------------------------------------
QUARTER ENDED
--------------------------------------
NOVEMBER 4, 2001 NOVEMBER 5, 2000
---------------- ----------------
Revenues ................................... $ 20,418,000 $ 18,719,000
Cost of sales:
Food, paper and beverage .................. 6,134,000 6,109,000
Labor and benefits ........................ 5,107,000 5,001,000
Restaurant operating expenses .............. 5,284,000 4,753,000
Depreciation and amortization .............. 893,000 903,000
General and administrative expenses ........ 1,210,000 1,277,000
Loss on restaurant assets (Note 4) ......... 81,000 205,000
------------ ------------
Operating income ........................... 1,709,000 471,000
Interest expense:
Bank debt and notes payable ............... (1,157,000) (1,176,000)
Capital leases ............................ (16,000) (19,000)
Other income and expense, net .............. 25,000 52,000
------------ ------------
Income (loss) from continuing operations
before income taxes ....................... 561,000 (672,000)
Provision for income taxes ................. 9,000 3,000
------------ ------------
Income (loss) from continuing operations ... 552,000 (675,000)
Gain from discontinued operations (Note 2) . -- 137,000
------------ ------------
Net income (loss) .......................... $ 552,000 $ (538,000)
============ ============
Basic income (loss) per
Common share (Note 3):
Income (loss) from continuing operations $ .20 $ (.23)
Income from discontinued operations .... -- .05
------------ ------------
Net income (loss) per share ............ $ .20 $ (.18)
============ ============
Diluted income (loss) per
common share (Note 3):
Income (loss) from continuing operations $ .20 $ (.23)
Income from discontinued operations .... -- .05
------------ ------------
Net income (loss) per share ............ $ .20 $ (.18)
============ ============
Basic weighted average number of
shares outstanding ........................ 2,795,524 2,937,572
Diluted weighted average number of
shares outstanding ........................ 2,797,635 2,937,572
See notes to consolidated financial statements.
2
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
------------------------------------------------------------------------------
THIRTY-SIX WEEKS ENDED
-----------------------------------
NOVEMBER 4, 2001 NOVEMBER 5, 2000
---------------- ----------------
Revenues ................................. $ 58,964,000 $ 55,567,000
Cost of sales:
food, paper and beverage ................ 17,982,000 17,706,000
Labor and benefits ...................... 15,162,000 14,835,000
Restaurant operating expenses ............ 15,122,000 13,705,000
Depreciation and amortization ............ 2,667,000 2,624,000
General and administrative expenses ...... 3,517,000 3,851,000
Loss on restaurant assets (Note 4) ....... 112,000 421,000
------------ ------------
Operating income ......................... 4,402,000 2,425,000
Interest expense:
Bank debt and notes payable ............. (3,526,000) (3,488,000)
Capital leases .......................... (49,000) (57,000)
Other income and expense, net ............ 105,000 118,000
------------ ------------
Income (loss) from continuing operations
before income taxes ..................... 932,000 (1,002,000)
Provision for income taxes ............... 10,000 10,000
------------ ------------
Income (loss) from continuing operations . 922,000 (1,012,000)
Gain from discontinued operations (Note 2) -- 137,000
------------ ------------
Net income (loss) ........................ $ 922,000 $ (875,000)
============ ============
Basic income (loss) per
common share (Note 3):
Income (loss) from continuing operations $ .32 $ (.35)
Income from discontinued operations .... -- .05
------------ ------------
Net income (loss) per share ............ $ .32 $ (.30)
============ ============
Diluted income (loss) per
common share (Note 3):
Income (loss) from continuing operations $ .32 $ (.35)
Income from discontinued operations .... -- .05
------------ ------------
Net income (loss) per share ............ $ .32 $ (.30)
============ ============
Basic weighted average number of
shares outstanding ...................... 2,882,442 2,928,441
Diluted weighted average number of
shares outstanding ...................... 2,883,776 2,928,441
See notes to consolidated financial statements.
3
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
------------------------------------------------------------------------------
NOVEMBER 4, 2001 FEBRUARY 25, 2001
---------------- -----------------
Assets
Current assets:
Cash and equivalents ............................. $ 6,898,000 $ 5,840,000
Receivables ...................................... 49,000 78,000
Inventories ...................................... 521,000 488,000
Prepaid expenses ................................. 346,000 222,000
------------ ------------
7,814,000 6,628,000
Property and equipment:
Land ............................................. 10,801,000 10,802,000
Buildings and improvements ....................... 17,913,000 17,701,000
Property under capital leases .................... 1,006,000 1,006,000
Leasehold improvements ........................... 7,439,000 7,294,000
Equipment, furniture and fixtures ................ 17,962,000 17,771,000
Construction in progress ......................... 75,000 110,000
------------ ------------
55,196,000 54,684,000
Less accumulated depreciation and amortization ... 16,319,000 14,130,000
------------ ------------
38,877,000 40,554,000
Other assets ...................................... 1,537,000 1,621,000
Franchise agreements .............................. 2,160,000 2,241,000
Deferred taxes .................................... 600,000 600,000
Acquired franchise rights ......................... 9,537,000 9,910,000
------------ ------------
$ 60,525,000 $ 61,554,000
============ ============
Liabilities and shareholders' equity (deficiency)
Current liabilities:
Current maturities of long-term debt ........... $ 2,235,000 $ 2,076,000
Current maturities of capital lease obligations 108,000 94,000
Accounts payable ............................... 3,681,000 3,590,000
Accrued liabilities ............................ 3,122,000 3,322,000
------------ ------------
9,146,000 9,082,000
Long-term debt ................................... 49,387,000 51,046,000
Long-term capital lease obligations .............. 571,000 651,000
Other long-term liabilities ...................... 1,203,000 1,353,000
Shareholders' equity (deficiency)
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 - 179,064 in 2001 and 31,833 in 2000 (171,000) (76,000)
Capital in excess of stated value .................. 28,844,000 28,875,000
Accumulated deficit ................................ (28,485,000) (29,407,000)
------------ ------------
Total shareholders' equity (deficiency) ............ 218,000 (578,000)
------------ ------------
$ 60,525,000 $ 61,554,000
============ ============
See notes to consolidated financial statements.
4
MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIENCY)
(unaudited)
Common Shares Treasury Shares Capital in
------------------------------ ------------------------------- excess of
Shares Amount Shares Amount stated value
------------ ------------ ------------ ------------ ------------
Balance, February 27, 2000 . 2,969,405 $ 30,000 (46,678) $ (111,000) $ 28,875,000
Net loss ................... -- -- -- -- --
Issue of treasury shares for
401(k) contributions ...... -- -- 14,845 35,000 --
------------ ------------ ------------ ------------ ------------
Balance, February 25, 2001 . 2,969,405 30,000 (31,833) (76,000) 28,875,000
Net income ................. -- -- -- -- --
Issue of treasury shares for
401(k) contributions ...... -- -- 31,833 76,000 (31,000)
Purchase of common shares .. -- -- (179,064) (171,000) --
------------ ------------ ------------ ------------ ------------
Balance, November 4, 2001 .. 2,969,405 $ 30,000 (179,064) $ (171,000) $ 28,844,000
============ ============ ============ ============ ============
Total
Shareholders'
Accumulated Equity
Deficit (Deficiency)
------------ ------------
Balance, February 27, 2000 . $(27,864,000) $ 930,000
Net loss ................... (1,543,000) (1,543,000)
Issue of treasury shares for
401(k) contributions ...... -- 35,000
------------ ------------
Balance, February 25, 2001 . (29,407,000) (578,000)
Net income ................. 922,000 922,000
Issue of treasury shares for
401(k) contributions ...... -- 45,000
Purchase of common shares .. -- (171,000)
------------ ------------
Balance, November 4, 2001 .. $(28,485,000) $ 218,000
============ ============
See notes to consolidated financial statements
5
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THIRTY-SIX WEEKS ENDED
---------------------------------
NOVEMBER 4, 2001 NOVEMBER 5, 2000
---------------- ----------------
Cash flows from operating activities:
Net income (loss) .............................. $ 922,000 $ (875,000)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization, including
deferred financing costs ................... 2,765,000 2,723,000
Amortization of supply agreement advances ... (124,000) (69,000)
Funding from supply agreements .............. 52,000 971,000
Loss on sale or disposal of
restaurant assets .......................... 112,000 421,000
Change in assets and liabilities:
Decrease in receivables .................... 29,000 13,000
(Increase) decrease in inventories ......... (33,000) 65,000
(Increase) decrease in prepaid expenses .... (124,000) 100,000
Increase in other assets ................... (16,000) (11,000)
Increase (decrease) in accounts payable .... 91,000 (739,000)
Decrease in accrued liabilities ............ (286,000) (243,000)
----------- -----------
Net cash provided by operating activities ...... 3,388,000 2,356,000
----------- -----------
Cash flows from investing activities:
Capital expenditures .......................... (583,000) (3,112,000)
Purchase of franchise agreements and
acquired franchise rights .................... (10,000) (175,000)
Proceeds from sale of restaurant assets ....... -- 2,000
----------- -----------
Net cash used in investing activities ......... (593,000) (3,285,000)
----------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt,
net of financing costs ....................... 36,000 3,025,000
Principal payments on long-term debt ........... (1,536,000) (1,355,000)
Principal payments on capital
lease obligations ............................. (66,000) (940,000)
Purchase of treasury shares .................... (171,000) --
----------- -----------
Net cash (used) provided by financing activities (1,737,000) 730,000
----------- -----------
Net change in cash and equivalents ............. 1,058,000 (199,000)
Cash and equivalents, beginning balance ........ 5,840,000 4,612,000
----------- -----------
Cash and equivalents, ending balance ........... $ 6,898,000 $ 4,413,000
=========== ===========
See notes to consolidated financial statements.
6
Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED NOVEMBER 4, 2001 AND NOVEMBER 5, 2000
(unaudited)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The interim consolidated financial statements of Morgan's Foods, Inc.
("the Company") 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 25, 2001. Certain prior year amounts have been
reclassified to conform to the current year presentation.
NOTE 2. DISCONTINUED OPERATIONS
The Company sold the one remaining former East Side Mario's location
and the liquor license and equipment during the third quarter of fiscal 2001.
The cash received as a result of these transactions was used to pay off the
capital lease obligations, purchase the leased property to be sold and other
expenses of the transactions. The results of operations of the discontinued
segment are shown in the Consolidated Statements of Operations as "Gain from
discontinued operations" and there is no tax effect of the gain. The Company
recorded a gain on the 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.
NOTE 3. 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.
NOTE 4. IMPAIRMENT OF LONG-LIVED ASSETS
During the third quarter of fiscal 2001 the cash flow forecast for one
of the Company's restaurants demonstrated continuing losses. Based upon this the
Company performed an analysis comparing the net book value of this restaurants
assets to the fair value of the assets. Fair value was determined by review of
recent sales transactions. Based upon this analysis the Company recorded an
impairment loss of $133,000 which is included in the loss on restaurants assets.
7
NOTE 5. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
(SFAS 142). SFAS 142 addresses the accounting for goodwill and other intangible
assets after an acquisition. The most significant changes made by SFAS 142 are:
1) goodwill and intangible assets with indefinite lives will no longer be
amortized; 2) goodwill and intangible assets with indefinite lives must be
tested for impairment at least annually; and 3) the amortization period for
intangible assets with finite lives will no longer be limited to forty years.
The Company plans to adopt SFAS 142 for its fiscal year beginning March 4, 2002,
as required. The Company is currently evaluating the provisions of SFAS 142 and
has not yet determined the effect that adoption of this standard will have on
its consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS 143, "Accounting for Asset
Retirement Obligations" which will become effective for the Company on March 2,
2003. This statement requires entities to record the fair value of a liability
for an asset retirement obligation in the period in which it is incurred. The
amount recorded as a liability, will be capitalized by increasing the carrying
amount of the related long-lived asset. Subsequent to initial measurement, the
liability is accreted to the ultimate amount anticipated to be paid and is also
adjusted for revisions to the timing or amount of estimated cash flows. The
capitalized cost is depreciated over the useful life of the related asset. Upon
settlement of the liability, an entity either settles the obligation for its
recorded amount or incurs a gain or loss upon settlement. The Company has not
determined the impact, if any, that this statement will have on its consolidated
financial position or results of operations.
In August 2001, the FASB issued SFAS 144, "Impairment or Disposal of
Long-Lived Assets" which will become effective for the Company on March 4, 2002.
This statement further refines the rules for accounting for long-lived assets
and long-lived assets to be disposed of. The Company has not determined the
impact, if any, that this statement will have on its consolidated financial
position or results of operations.
8
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 KFC restaurants under franchises from KFC
Corporation and Taco Bell restaurants under franchises from Taco Bell
Corporation. As of December 19, 2001, the Company operates 76 KFC restaurants, 7
Taco Bell restaurants, 17 KFC/Taco Bell "2n1's" under franchises from KFC
Corporation and franchises or licenses from Taco Bell Corp., and 3 Taco
Bell/Pizza Hut Express "2n1's" operated under franchises from Taco Bell
Corporation and licenses from Pizza Hut Corporation. The Company's fiscal year
is a 52 - 53 week year ending on the Sunday nearest the last day of February.
SUMMARY OF EXPENSES AS A PERCENTAGE OF REVENUES
QUARTER ENDED THIRTY-SIX WEEKS ENDED
------------------------------------ -----------------------------------
NOVEMBER 4, NOVEMBER 5, NOVEMBER 4, NOVEMBER 5,
2001 2000 2001 2000
---------------- --------------- ---------------- --------------
Cost of sales:
Food, paper and beverage......................... 30.0% 32.6% 30.5% 31.9%
Labor and benefits............................... 25.0% 26.7% 25.7% 26.7%
Restaurant operating expenses...................... 25.9% 25.4% 25.7% 24.7%
Depreciation and amortization...................... 4.4% 4.8% 4.5% 4.7%
General and administrative expenses................ 5.9% 6.8% 6.0% 6.9%
Operating income................................... 8.4% 2.5% 7.5% 4.4%
REVENUES. Revenues for the quarter ended November 4, 2001 were
$20,418,000 compared to $18,719,000 for the quarter ended November 5, 2000. This
increase of $1,699,000 included an increase of 10.8% in comparable restaurant
revenues which was partially offset by $232,000 in lost sales due to restaurants
being permanently or temporarily closed. The increase in comparable restaurant
revenues was primarily the result of effective product promotions by the
franchisors during the quarter. Revenues for the thirty-six weeks ended November
4, 2001 were $58,964,000 compared to $55,567,000 for the thirty-six weeks ended
November 5, 2000. The increase of $3,397,000 was attributable to $262,000 of
revenues generated by restaurants which were remodeled or to which a concept was
added and a 7.8% increase in comparable restaurant revenues which was partially
offset by $754,000 in lost sales due to restaurants being permanently or
temporarily closed.
COSTS OF SALES - FOOD, PAPER AND BEVERAGES. Food, paper and beverage
costs for the fiscal 2002 third quarter decreased as a percentage of revenue
from 32.6% in fiscal 2001 to 30.0%. This decrease was the result of several
factors, including product promotions in the third quarter of fiscal 2002 having
a lower food cost than those promoted during the third quarter of fiscal 2001
and by efficiencies gained due to higher average restaurant volumes. Food, paper
and beverage costs were also reduced by $259,000 received during the third
quarter of fiscal 2002 as the result of a settlement negotiated by FRANMAC, the
Taco Bell franchisee association, with certain system food suppliers. Food,
paper and beverage costs for the thirty-six weeks ended November 4, 2001
decreased to 30.5% of revenue compared to 31.9% in the year earlier period
primarily for the reasons discussed above.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits were decreased
as a percentage of revenue for the quarter ended November 4, 2001 to 25.0%
compared to 26.7% for the year earlier quarter due to higher average
9
restaurant volumes, decreased benefit costs and improved operating efficiencies.
Labor and benefits decreased as a percentage of revenue for the thirty-six weeks
ended November 4, 2001 from 26.7% to 25.7% for the reasons discussed above.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses increased
as a percentage of revenue to 25.9% in the third quarter of fiscal 2002 compared
to 25.4% in the third quarter of fiscal 2001 due mainly to higher repairs and
maintenance costs and an increase in KFC national advertising expenses from 2.0%
of KFC revenues to 2.5% of KFC revenue. The increased advertising was approved
by the national advertising co-op and will remain in effect for the foreseeable
future. Restaurant operating expenses for the thirty-six weeks ended November 4,
2001 increased to 25.7% of revenue compared 24.7% of revenue in the comparable
prior year period for the reasons discussed above.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
fiscal 2002 third quarter was substantially unchanged at $893,000 compared to
$903,000 in the prior year third quarter. Depreciation and amortization for the
thirty-six weeks ended November 4, 2001 increased to $2,667,000 from $2,624,000
for the year earlier period primarily due to the addition of concepts to 3
restaurants.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased to $1,210,000 in the third quarter of fiscal 2002 from
$1,277,000 in the third quarter of fiscal 2001. This decrease of $67,000 was
mainly the result of improved cost control at both the Corporate and field
operations levels as well as $90,000 in fees accrued to pay an advisor to
solicit indications of interest for the Company in the prior year quarter and
partially offset by increased accruals for bonuses due to the improved operating
results in the current year quarter. General and administrative expenses for the
thirty-six weeks ended November 4, 2001 decreased to $3,517,000 compared to
$3,851,000 for the year earlier period primarily for the reasons discussed
above.
LOSS ON RESTAURANT ASSETS. The loss on restaurant assets decreased to
$81,000 in the third quarter of fiscal 2002 from $205,000 in fiscal 2001. The
loss on restaurant assets in the third quarter of fiscal 2002 was the result of
an increase in the reserve for the costs necessary to dispose of previously
closed restaurants and the write off of previously capitalized pre-construction
costs related to projects which management has determined will not be
undertaken. The loss on restaurant assets in the third quarter of fiscal 2001
was the result of an impairment loss of $133,000 for the excess of net book
value over fair value of a restaurant (see Note 4 for further details) and an
increase in the reserve for the costs necessary to dispose of previously closed
restaurants.
OPERATING INCOME. Operating income in the third quarter of fiscal 2002
increased to $1,709,000 or 8.4% of revenue compared to $471,000 or 2.5% of
revenue for the third quarter of fiscal 2001. This increase was primarily the
result of higher average restaurant volumes, improved operating efficiencies and
the receipt of the settlement with certain Taco Bell system food suppliers
mentioned earlier. Operating income for the thirty-six weeks ended November 4,
2001 increased to $4,402,000 or 7.5% of revenue from $2,425,000 or 4.4% of
revenue for the reasons discussed above.
INTEREST EXPENSE. Interest expense on bank debt decreased to $1,157,000
in the third quarter of fiscal 2002 from $1,176,000 in fiscal 2001 due to lower
debt balances which has occurred as a result of the Company continuing to pay
down its debt and not incurring any significant new debt during the current year
periods. Interest expense on bank debt for the thirty-six weeks ended November
4, 2001 increased to $3,526,000 from $3,488,000 due to the addition of debt for
the construction of restaurants in previous quarters. Interest expense on
capitalized leases was substantially unchanged from the prior year third quarter
and for the thirty-six weeks.
10
OTHER INCOME. Other income for the quarter ended November 4, 2001
decreased to $25,000 from $52,000 in the prior year third quarter. The decrease
is due mainly to decreased interest income earned on cash balances as a result
of lower rates of return. Other income for the thirty-six weeks ended November
4, 2001 decreased to $105,000 from $118,000 due to the reasons discussed above.
PROVISION FOR INCOME TAXES. The provision for income taxes for the
third quarter ended November 4, 2001 increased to $9,000 as compared to $3,000
for the year earlier period due to the improved operating results discussed
above. The provision for income taxes for the thirty-six weeks ended November 4,
2001 is substantially unchanged from the prior year.
DISCONTINUED OPERATIONS. On September 3, 1999, Management made the
decision to discontinue the operation of its East Side Mario's restaurant
segment. The Company sold the one remaining former East Side Mario's location
and the liquor license and equipment during the third quarter of fiscal 2001.
The cash received as a result of these transactions was used to pay off the
capital lease obligations, purchase the leased property to be sold and other
expenses of the transactions. The results of operations of the discontinued
segment are shown in the Consolidated Statements of Operations as "Gain from
discontinued operations" and there is no tax effect of the gain. The Company
recorded a gain on the disposal of the remaining assets.
LIQUIDITY AND CAPITAL RESOURCES. Cash flow activity for the thirty-six
weeks of fiscal 2002 and fiscal 2001 is presented in the Consolidated Statements
of Cash Flows. Cash provided by operating activities was $3,388,000 for the
thirty-six weeks ended November 4, 2001. The Company paid scheduled long-term
bank and capitalized lease debt of $1,602,000 in the first thirty-six weeks of
fiscal 2002.
The quick service restaurant operations of the Company have
historically provided sufficient cash flow to service the Company's debt,
refurbish and upgrade the Company's restaurant properties and cover
administrative overhead. Management believes that operating cash flow will
provide sufficient capital to continue to operate and maintain its restaurants,
service the Company's debt and support required corporate expenses.
Certain of the Company's debt arrangements require the maintenance of a
consolidated fixed charge coverage ratio of 1.2 to 1.0 regarding all of its
mortgage loans and individual restaurant coverage ratios of 1.4 to 1.0 on
certain of its loans as measured at each of the Company's fiscal year ends. At
February 25, 2001, the Company was in compliance with the consolidated ratio of
1.2 applicable to $43,621,000 of its loans and fell short of compliance on the
consolidated ratio regarding $6,501,000 of its loans with another lender.
Additionally, the Company was not in compliance with the 1.4 unit level ratio on
certain of its restaurants. The Company obtained waivers of these violations
from the applicable lenders and expects to be in compliance with the minimum
coverage ratios and other terms and conditions of the agreements by the end of
fiscal 2002.
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.
The Board of Directors of the Company at its meeting on June 22, 2001
authorized the purchase of up to 250,000 shares of the Company's common stock in
the open market from time to time over the next twelve months. On July 11, 2001
the Company purchased 73,730 shares which constitutes all of the stock formerly
held
11
by the Morgan's Foods, Inc. 401(k) Profit Sharing Plan under authority granted
by the Board of Directors specifically for that purpose. On August 13, 2001 and
October 18, 2001 the Company purchased 100,334 and 5,000 shares respectively
under its previously disclosed authorization to purchase 250,000 shares during
the twelve months ending June 21, 2002. Also, subsequent to the end of the
fiscal third quarter, the Company purchased 45,000 additional shares in the open
market under the same 250,000 share authorization.
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.
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)
By: /s/ Kenneth L. Hignett
-------------------------------------
Dated: December 19, 2001 Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
13