ITEM 1. BUSINESS.
GENERAL. Morgan's Foods, Inc. ("the Company") operates through wholly owned subsidiaries Kentucky Fried Chicken ("KFC") restaurants under franchises from KFC Corporation and Taco Bell restaurants under franchises from Taco Bell Corp. As of May 25, 2000, the Company operates 79 KFC restaurants, 11 Taco Bell restaurants, and 16 KFC/Taco Bell "2n1's" under franchises from KFC Corporation and franchises or licenses from Taco Bell Corp. The Company formerly operated five East Side Mario's restaurants, a business segment which the Company had previously chosen to discontinue (see Note 3 to the consolidated financial statements). The Company's fiscal year is a 52 - 53 week year ending on the Sunday nearest the last day of February.
RESTAURANT OPERATIONS. The Company's KFC restaurants prepare and sell the distinctive "Kentucky Fried Chicken" and Tender Roast(R) chicken along with related food items. All containers and packages bear KFC trademarks. The Company's Taco Bell restaurants prepare and sell a full menu of quick service Mexican food items using the appropriate Taco Bell containers and packages. The KFC/Taco Bell "2n1" restaurants operated under franchise agreements from KFC Corporation and license agreements from Taco Bell Corp. prepare and sell a limited menu of Taco Bell items as well as the full KFC menu while those operated under franchise agreements from both KFC Corporation and Taco Bell Corp. offer a full menu of both KFC and Taco Bell items. The East Side Mario's restaurants were full service, mid-priced, casual family restaurants inspired by New York City's famous "Little Italy" district of the 1950's.
Of the 106 KFC, Taco Bell and "2n1" restaurants operated by the Company as of May 25, 2000, 16 are located in Ohio, 61 in Pennsylvania, 19 in Missouri, 2 in Illinois, 7 in West Virginia and 1 in New York. The Company was one of the first KFC Corporation franchisees and has operated in excess of 20 KFC franchises for more than 25 years. Operations relating to these units are seasonal to a certain extent, with higher sales generally occurring in the summer months.
FRANCHISE AGREEMENTS. All of the Company's KFC and Taco Bell restaurants are operated under franchise agreements with KFC Corporation and Taco Bell Corp. respectively. The Company's KFC/Taco Bell "2n1" restaurants are operated under franchises from KFC Corporation and either franchises or licenses from Taco Bell Corp. The Company considers retention of these agreements to be important to the success of its restaurant business and believes that its relationships with KFC Corporation and Taco Bell Corp. are satisfactory. For KFC products, the Company is required to pay royalties of 4% of gross revenues and to expend an additional 5% of gross revenues on national and local advertising pursuant to its franchise agreements. For Taco Bell products in KFC/Taco Bell "2n1" restaurants operated under license agreements from Taco Bell Corp. and franchise agreements from KFC Corporation the Company is required to pay royalties of 10% of Taco Bell gross revenues and to make advertising fund contributions of 1/2% of Taco Bell gross revenue. For Taco Bell product sales in Taco Bell restaurants operated under franchises the Company is required to pay royalties of 5.5% of gross revenues and to expend an additional 4.5% of gross revenues on
MORGAN'S FOODS, INC.
PART I (CONT'D)
national and local advertising. In May 1997, the Company renewed substantially all of its existing franchise agreements for twenty years. New 20 year franchise agreements were obtained for all 54 restaurants acquired in July 1999. Subject to satisfying KFC and Taco Bell requirements for restaurant image and other matters, franchise agreements are renewable at the Company's option for successive ten year periods. The franchise and license agreements provide that each KFC and Taco Bell unit is to be inspected by KFC Corporation and Taco Bell Corp., respectively, approximately three or four times per year. These inspections cover product preparation and quality, customer service, restaurant appearance and operation.
COMPETITION. The restaurant business is highly competitive. Each of the Company's KFC and Taco Bell 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 chicken and Mexican food to the public.
The Company's KFC and Taco Bell restaurants and KFC/Taco Bell "2n1" 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 programs sponsored by KFC Corporation, Taco Bell Corp. and their franchisees. 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 its KFC and Taco Bell restaurants are competitive with other quick service 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, however, one of the Company's primary suppliers has recently entered Chapter 11 bankruptcy which may negatively impact the Company in terms of product pricing and product availability.
GROWTH. On July 14, 1999 the Company acquired the assets of 54 existing KFC and Taco Bell restaurants and the land and building of a non-operating KFC restaurant from various subsidiaries of Tricon Global Restaurants, Inc. See Note 2 to the consolidated financial statements for further details. As part of this acquisition, the Company was granted the rights to develop 20 KFC, Taco Bell or KFC/Taco Bell "2n1" restaurants in specific geographic areas. Under the agreement, five restaurants are required to be developed each year over a four year period. Also, during fiscal 2000, the Company acquired two KFC restaurants in the Erie, PA market area and completed construction of restaurants in Calcutta, OH and Troy, IL. On December 9, 1999 the Company sold four of the remaining five former East Side Mario's restaurant locations to Steak & Ale, a division of Metromedia Restaurants Group, and is marketing the remaining location, which is no longer in operation, with the expectation of selling this location early in fiscal year 2001. See Note 3 to the consolidated financial statements for further details. During fiscal 1999, the Company completed construction of a new KFC restaurant in Boardman, OH and acquired four KFC restaurants in the Erie, PA market area, two KFC restaurants in the Jamestown, NY area and two KFC restaurants in the St. Louis market area. During fiscal 1999, the Company also ceased operations at its East Side Mario's restaurant in Mayfield
MORGAN'S FOODS, INC.
PART I (CONT'D)
Heights, OH and liquidated its leasehold interest subsequent to the end of the fiscal year. During fiscal 1998, the Company completed the construction of a new KFC restaurant on leased land in Greensburg, PA and completed the rebuilding of a KFC restaurant in the St. Louis market area.
EMPLOYEES. As of May 25, 2000, the Company employed approximately 2,053 persons, including 53 administrative and 195 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.
ITEM 2.
ITEM 2. PROPERTIES.
The Company leases approximately 6,071 square feet of space for its headquarters in Cleveland, Ohio. The lease expires February 28, 2002 and the rent under the current term is $7,993 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 a regional office in Youngstown, OH, which is used to assist in the operation of the KFC and Taco Bell restaurants.
Of the 106 KFC and Taco Bell restaurants, the Company owns the land and building for 56 locations, owns the building and leases the land for 21 locations and leases the land and building for 29 locations. 51 of the owned properties are subject to mortgages. Remaining lease terms (including renewal options) range from 1 to 27 years and average approximately 15 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 leased KFC or Taco Bell restaurant in amounts ranging from $11,000 to $79,000. In addition, 18 of these leases require payment of additional rentals based on a percentage of gross sales in excess of certain base amounts. Sales for nine KFC and Taco Bell restaurants exceeded the respective base amounts in fiscal 2000.
The Company believes that its restaurants are generally efficient, well equipped and maintained and in good condition.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4.
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 27, 2000.
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:
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.
MORGAN'S FOODS, INC.
PART II
ITEM 5.
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 ---------------- YEAR ENDED FEBRUARY 27, 2000: 1st Quarter ...................... $5 1/2 $2 5/8 2nd Quarter ...................... 4 3/4 3 1/8 3rd Quarter ...................... 3 7/8 2 7/8 4th Quarter ...................... 3 3/4 2 5/8
YEAR ENDED FEBRUARY 28, 1999: 1st Quarter ...................... $3 5/8 $2 1/8 2nd Quarter ...................... 2 13/16 2 3rd Quarter ...................... 2 3/8 2 4th Quarter ...................... 2 3/4 2
As of May 10, 2000, the Company had approximately 1,020 shareholders of record. The Company has paid no dividends since fiscal 1975.
MORGAN'S FOODS, INC.
PART II (CONT'D)
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial information for each of the five fiscal years in the period ended February 27, 2000, 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.
Dollars in thousands except per share amounts.
(1) Computed based upon the weighted average number of common and common equivalent shares outstanding during each year, which were 2,912,894 in 2000, 2,910,839 in 1999, 2,936,877 in 1998, 2,967,574 in 1997 and 2,969,355 in 1996.
(2) Prepayment penalty, write off of deferred financing and early buy-out of capitalized leases costs related to early extinguishment of debt.
(3) The results of operations of the former East Side Mario's restaurant segment.
MORGAN'S FOODS, INC.
PART II (CONT'D)
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS. During fiscal 1998 through 2000 the Company operated Kentucky Fried Chicken ("KFC") franchised restaurants, of which several also offer Taco Bell products, in the states of Illinois, Missouri, Ohio, Pennsylvania, West Virginia and New York. On July 14, 1999 the Company acquired 12 stand alone Taco Bell units in the state of Pennsylvania. The average number of KFC and Taco Bell restaurants in operation during fiscal 2000 was 77 compared to 44 during fiscal 1999 and 39 during fiscal 1998. During fiscal 2000, the Company acquired 56 restaurants and built two restaurants. During fiscal 1999, the Company acquired eight KFC restaurants and opened one new KFC restaurant.
REVENUES. Revenue was $65,660,000 in fiscal 2000 an increase of $32,620,000 or 98.7% compared to an increase of $3,127,000 or 10.5% in fiscal 1999.
The 98.7% increase in restaurant revenues during fiscal 2000 was the result of a 5.1% decrease in comparable KFC revenues and $34,577,000 in revenues generated by the 56 KFC's and Taco Bell's which were acquired and the two new KFC's which were built during fiscal 2000. The decline in comparable restaurant revenues was a result of several very effective promotions in the prior year and a somewhat ineffective chicken sandwich promotion in the current year which also decreased chicken on the bone sales. The 10.5% increase in revenue during fiscal 1999 was due to the combination of several factors. First, sales in the comparable KFC restaurants increased 1.0%. Second, $2,569,000 in revenues was generated by eight KFC's which were acquired and one new KFC which was built during fiscal 1999. The 4.8% increase in revenue during fiscal 1998 was due to the combination of several factors. First, sales in the comparable restaurants increased 1.8% primarily due to the addition of Taco Bell products. Second, two KFC restaurants which were acquired just prior to the beginning of fiscal 1998 and the new KFC that opened during the year accounted for an increase of $1,735,000. This increase was partially offset by three closed KFC restaurants in the St. Louis market which caused a decline of $738,000 in sales. Revenues for the comparable KFC restaurants were flat during fiscal 1998 compared to the prior year primarily because fiscal 1997 revenues were extremely strong and many of the Company's KFC restaurants were closed for short periods of time during the fiscal 1998 year to facilitate remodeling and image enhancements.
Revenues for the 16 weeks ended February 27, 2000 were $23,474,000, an increase of $13,494,000 from the 16 weeks ended February 28, 1999. Restaurant revenues increased $13,494,000 to $23,474,000 in the fiscal 2000 quarter compared to the fiscal 1999 quarter due to a comparable restaurant decrease of 5.0% and the addition of 56 new restaurants, one of which was added during the fiscal fourth quarter. The reasons for these changes are the same as mentioned above in the full year comparisons.
COST OF SALES - FOOD, PAPER AND BEVERAGE. Food, paper and beverage costs were $19,955,000 or 30.4% of sales in fiscal 2000 compared to $10,510,000 or 31.8% of sales in fiscal 1999. Food, paper and beverage costs declined by 1.4% of sales due to efficiencies from higher average restaurant volumes in the acquired and newly built restaurants, the continuation of low chicken prices and favorable contract pricing. Food, paper and beverage costs were $10,510,000 or 31.8% of sales in fiscal 1999 compared to $9,600,000 or
MORGAN'S FOODS, INC.
PART II (CONT'D)
32.1% of sales in fiscal 1998. Food, paper and beverage costs declined by .3% of sales in the KFC's due to efficiencies from higher volumes and the continuation of low chicken prices.
For the fourth quarter of fiscal 2000, food, paper and beverage costs decreased as a percentage of sales to 30.9% from 32.1% in fiscal 1999. Food, paper and beverage cost decreased 1.2% of sales due to the reasons discussed above in the full year comparison.
COST OF SALES - LABOR AND BENEFITS. Labor and benefits increased to 25.9% of sales or $16,978,000 in fiscal 2000 from 23.9% of sales or $7,894,000 in fiscal 1999. The increase was primarily due to higher labor costs in the newly acquired restaurants caused by the reorganization and training necessary to assimilate the new restaurants into the operations of the Company. Labor and benefit costs in fiscal 1999 decreased to 23.9% of sales or $7,894,000 compared to 24.35% of sales or $7,285,000 in fiscal 1998 due to reduced workers compensation costs.
Labor and benefit costs for the fourth quarter decreased to 26.7% of sales or $6,270,000 compared to 24.7% of sales or $2,464,000 in fiscal 1999. This increase was a result of the reasons discussed above in the full year comparison.
RESTAURANT OPERATING EXPENSES. Restaurant operating expenses in fiscal 2000 increased to 26.8% of sales or $17,577,000 compared to 25.7% of sales or $8,486,000 in the prior year. This was caused by increased advertising expenses as a result of the introduction and promotion of five new sandwiches during the fiscal 2000 third quarter and fourth quarter and also some of the newly acquired restaurants having a higher local advertising co-op expense than the Company's average for its previously existing restaurants. Restaurant operating expenses in fiscal 1999 declined slightly to $8,486,000 or 25.7% of revenue from $7,800,000 or 26.1% of revenue in fiscal 1998 due to increased average sales volumes.
Restaurant operating expenses for the fourth quarter of fiscal 2000 decreased to 26.9% of sales or $6,314,000 from 27.0% of sales or $2,692,000 in the year earlier quarter. As a percentage of sales, these expenses were above average in the fourth quarter of fiscal 2000 and 1999 due to the reasons mentioned above for the current year and an ineffective Star Wars promotion in the prior year.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in fiscal 2000 increased to $2,778,000 from $1,389,000 in fiscal 1999. This increase resulted from the Company's restaurant acquisitions and newly built restaurants. Amortization for fiscal 2000 increased to $520,000 from $191,000 in the prior year due to increased balances for franchise fees and deferred financing costs. Depreciation and amortization in fiscal 1999 increased slightly to $1,389,000 from $1,282,000 in fiscal 1998. Amortization increased to $191,000 in fiscal 1999 from $130,000 in fiscal 1998 primarily due to the write off of goodwill in the fourth quarter of fiscal 1998.
MORGAN'S FOODS, INC.
PART II (CONT'D)
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses increased to $4,420,000 in fiscal 2000 from $2,810,000 in fiscal 1999. The increase of $1,610,000 was mainly the result of adding costs and resources to support 56 additional restaurants. The incremental general and administrative expenses incurred as a result of acquiring these 56 restaurants was $1,460,000 or 4.5% of the related sales. General and administrative expenses increased to $2,810,000 in fiscal 1999 from $2,668,000 in fiscal 1998. The increase of $142,000 was the result of adding a KFC market manager to keep pace with the KFC expansion and higher training costs due to KFC acquisitions.
GAIN (LOSS) ON SALE OF RESTAURANT ASSETS. In fiscal 2000, the Company recorded losses of $213,000 for the disposal of equipment related to several KFC restaurant image enhancements and the closedown of one KFC. In fiscal 1999, the Company recorded losses of $11,000 related to the disposal of equipment during several image enhancements.
OPERATING INCOME (LOSS). Operating income in fiscal 2000 increased $1,799,000 to $3,739,000 from $1,940,000 in fiscal 1999. This increase was a result of operating an additional 56 restaurants. Operating income in fiscal 1999 was $1,940,000 compared to an operating income of $1,180,000 in fiscal 1998. This increase was the result of expansion of the KFC restaurants.
INTEREST EXPENSE AND OTHER INCOME. Interest expense from bank debt and notes payable increased to $3,481,000 in fiscal 2000 from $992,000 in fiscal 1999. This increase is due to increased borrowings to fund the acquisition and expansion of KFC and Taco Bell restaurants. The Company acquired 54 KFC and Taco Bell restaurants from the franchisor, acquired two restaurants from a franchisee and built two new KFC restaurants during fiscal 2000. Interest expense from capitalized lease debt remained constant at $92,000 in fiscal 2000. Interest expense from bank debt and notes payable increased to $992,000 in fiscal 1999 compared to $836,000 in fiscal 1998. Interest on capitalized lease debt, was $92,000 in fiscal 1999, compared to $61,000 in fiscal 1998. This increase was a result of fact that the capital leases entered into in 1998 incurred a full year of interest in 1999.
EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. During fiscal 1999, the Company paid $4,899,000 of 15 year maturity, fixed rate debt, carrying an interest rate of approximately 10.0%, which was originally incurred in the third quarter of fiscal 1996, in advance of its scheduled maturity. This prepayment was funded by borrowing $6,762,000 of 20 year maturity, fixed rate debt carrying an interest rate of approximately 8.7%. The Company paid prepayment penalties of $98,000, wrote off $140,000 of deferred financing costs related to this transaction and incurred a loss of $49,000 on the early buy out of capitalized leases covering equipment at three of the locations. This transaction is more fully described in Note 4 to the consolidated financial statements.
DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE. On September 3, 1999, Management made the decision to discontinue the operation of its East Side Mario's restaurant segment. On December 9, 1999 the Company sold four of the remaining five former East Side Mario's restaurant locations, to Steak & Ale, a division of Metromedia Restaurant Group, and is marketing the remaining location, which it closed, with the
MORGAN'S FOODS, INC.
PART II (CONT'D)
expectation of selling this location early in fiscal year 2001. The cash received as a result of this transaction of $3,867,000 was used to pay off the capital lease obligations and other expenses of the transaction. Certain assets of the East Side Mario's operations are shown in the Consolidated Balance Sheet as "Assets held for sale". The results of operations of the discontinued segment are shown in the Consolidated Statements of Operations as "Loss from discontinued operations". There is no tax effect of the loss. The Company believes there will not be significant gain or loss on disposal of the remaining assets.
LIQUIDITY AND CAPITAL RESOURCES. The Company, like others in the restaurant industry, operates on minimal working capital and relies on cash flow from operations, debt borrowings and lease financing for the construction and refurbishment of restaurant properties and repayment of debt. Cash flow activity for fiscal 2000, 1999 and 1998 is presented in the Consolidated Statements of Cash Flows.
Capital expenditures for fiscal 2000 were $41,279,000, substantially all of which related to KFC and Taco Bell restaurants. In fiscal 2000, the Company received $39,133,000 in mortgage financing for the construction of two new KFC restaurants and the acquisition of 54 existing KFC and Taco Bell restaurants. The Company made principal payments on long-term debt of $1,074,000 in fiscal 2000.
The KFC operations of the Company have historically provided sufficient cash flow to service the Company's debt, refurbish and upgrade restaurant properties and cover administrative overhead. Management believes that operating cash flow will provide sufficient capital to continue to operate and maintain the KFC and Taco Bell restaurants, service the Company's debt and support required corporate expenses. In addition to the Company's operating cash flow, management believes that additional financing, including long-term leases of build-to-suit restaurants, development lines of credit and sale/leaseback arrangements can be obtained to refurbish and acquire KFC and Taco Bell restaurants.
Certain of the Company's debt arrangements require the maintenance of consolidated fixed charge coverage ratio of 1.2 to 1 and individual restaurant coverage ratios of 1.4 to 1. The Company is not currently in full compliance with maintaining the required individual restaurant coverage ratios but was able to obtain a waiver of these violations from the applicable lender.
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 would continue to be monitored by the Exchange.
The Company has been financing the expansion and image enhancement of its restaurants primarily through the use of fixed rate long-term debt on which the rate is fixed at the time of funding. At February 27, 2000 there was $51,730,000 of such debt outstanding at rates ranging from 8.3% to 10.6%. The Company's market risk exposure is primarily due to possible fluctuations in interest rates as they relate to future borrowings. The Company has evaluated the potential effect of a 1.0% increase in these rates on future capital spending plans and believes that there would be no material effect. The Company does not enter into derivative financial investments for trading or speculation purposes. As a result, the Company believes that its market risk exposure is not material to the Company's financial position, liquidity or results of operations.
MORGAN'S FOODS, INC.
PART II (CONT'D)
The Company will commit approximately $2,160,000 to image enhancements and expansions of existing KFC restaurants, $960,000 to add a concept to three existing restaurants, $1,880,000 to build two new restaurants and $880,000 to relocate an existing restaurant during fiscal 2001, for which financing is not yet committed. At a minimum, in fiscal years 2002 through 2004 the Company will commit approximately $10,760,000 in order to fulfill the terms of the development agreement with Tricon Global Restaurants, Inc.
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.
YEAR 2000 COMPLIANCE. All of the Company's business application software systems were year 2000 compliant by December 1999. The Company has not experienced any disruptions related to year 2000.
NEW ACCOUNTING STANDARD. The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company has not yet completed its analysis of SFAS No. 133 and accordingly has not yet determined what effect, if any, it may have on future financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this item is included under "Liquidity and Capital Resources".
ITEM 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
MORGAN'S FOODS, INC.
PART III
ITEM 10.
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 2000 annual meeting to be filed with the Securities and Exchange Commission on or before June 23, 2000.
Information regarding the Executive Officers of the Company is reported in a separate section captioned "Executive Officers of the Company" included in Part I hereof.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
Information on executive compensation is incorporated herein by reference to the definitive Proxy Statement to security holders for the 2000 annual meeting to be filed with the Securities and Exchange Commission on or before June 23, 2000.
ITEM 12.
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 2000 annual meeting to be filed with the Securities and Exchange Commission on or before June 23, 2000.
ITEM 13.
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 2000 annual meeting to be filed with the Securities and Exchange Commission on or before June 23, 2000.
MORGAN'S FOODS, INC.
PART IV
ITEM 14.
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.
MORGAN'S FOODS, INC. INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES ITEM 14 (a) 1 AND 2
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.
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 27, 2000 and February 28, 1999 and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended February 27, 2000. 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 auditing standards generally accepted in the United States of America. 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 27, 2000 and February 28, 1999 and the results of their operations and their cash flows for each of the three years in the period ended February 27, 2000 in conformity with accounting principles generally accepted in the United States of America.
/s/ Deloitte & Touche LLP Cleveland, Ohio May 19, 2000
MORGAN'S FOODS, INC. CONSOLIDATED BALANCE SHEETS FEBRUARY 27, 2000 AND FEBRUARY 28, 1999
See notes to consolidated financial statements.
MORGAN'S FOODS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
See notes to consolidated financial statements.
MORGAN'S FOODS, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
See notes to consolidated financial statements.
MORGAN'S FOODS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
See notes to consolidated financial statements.
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. and its subsidiaries ("The Company") operates 95 Kentucky Fried Chicken ("KFC") restaurants, of which 16 also offer Taco Bell products, in the states of Illinois, Missouri, Ohio, Pennsylvania, West Virginia and New York. The Company also operates 11 Taco Bell restaurants. The Company formerly operated five East Side Mario's ("ESM") restaurants. The Company's fiscal year is a 52-53 week year ending on the Sunday nearest the last day of February.
USE OF ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions pending completion of related events. These estimates and assumptions affect the amounts reported at the date of the financial statements for assets, liabilities, revenues and expenses and the disclosure of contingencies. Actual results could differ from those estimates.
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 an initial maturity of three months or less to be cash equivalents.
INVENTORIES. Inventories, principally food, beverages and paper products, are stated at the lower of aggregate cost (first-in, first-out basis) or market.
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; equipment, furniture and fixtures - 7 to 10 years. Leasehold improvements are amortized over 3 to 15 years, which is the shorter of the life of the asset or life of the lease. The asset values of the capitalized leases are amortized using the straight-line method over the lives of the respective leases which range from 15 to 20 years.
Management evaluates the net carrying value of property and equipment periodically in light of both the estimated future cash flows resulting from the use of the assets as well as the estimated liquidation value of such assets. Management believes the carrying value of property and equipment at February 27, 2000 will be recovered from future cash flows.
DEFERRED FINANCING COSTS. Costs related to the acquisition of long-term debt are capitalized and expensed as interest over the term of the related debt. Amortization expense was $106,000, $34,000 and $29,000 for fiscal years 2000, 1999 and 1998. The balance of deferred financing costs was $1,482,000 for fiscal 2000 and $500,000 for fiscal 1999.
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
FRANCHISE AGREEMENTS. Franchise agreements are recorded at cost. Amortization is computed on the straight-line method over the term of the franchise agreement. The Company's franchise agreements are predominantly 20 years in length. Amortization expense was $100,000, $43,000 and $29,000 for fiscal years 2000, 1999 and 1998. Accumulated amortization was $151,000 for fiscal 2000 and $104,000 for fiscal 1999, respectively.
ACQUIRED FRANCHISE RIGHTS. Acquired Franchise Rights (excess of purchase price over net tangible assets acquired) are amortized over the life of the franchise agreement on a straight-line basis. Amortization expense was $314,000 for fiscal 2000. Management evaluates the carrying amount of acquired franchise rights periodically based upon past and projected cash flows from operations and the estimated fair value of related assets and believes the carrying value of the acquired franchise rights at February 27, 2000 will be recovered from future cash flows.
INCOME TAXES. The provision for income taxes is based upon income or loss before tax for financial reporting purposes. Deferred tax assets or liabilities are recognized for the expected future tax consequences of temporary differences between the tax basis of assets and liabilities and their carrying values for financial reporting purposes. A deferred tax asset is recorded for the benefits of future deductible temporary differences and operating loss and tax credit carryforwards. A valuation allowance is recorded to reduce deferred tax assets to the amount more likely than not to be realized in the future, based on an evaluation of historical and projected profitability.
STOCK-BASED COMPENSATION. The Company's outstanding stock options are accounted for using the intrinsic value method, under which compensation cost is measured as the excess, if any, of the quoted market price of the stock at the grant date over the amount an employee must pay to acquire the stock.
NOTE 2. ACQUISITION OF KFC AND TACO BELL RESTAURANTS.
On July 14, 1999 Morgan's Restaurants of Pennsylvania, Inc., Morgan's Restaurants of Ohio, Inc., Morgan's Restaurants of West Virginia, Inc. and Morgan's Foods of Missouri, Inc., all wholly owned subsidiaries of Morgan's Foods, Inc., acquired the assets of fifty-four (54) existing KFC and Taco Bell restaurants and the land and building of a non-operating KFC restaurant from various subsidiaries of Tricon Global Restaurants, Inc. for cash in the amount of $33,740,000. The acquisition was accounted for as a purchase and, accordingly, assets were recorded at fair value.
The allocation of the purchase price is as follows:
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
The following pro forma results for the fifty-two weeks ended February 27, 2000 and February 28, 1999, were developed assuming that all of the acquired units previously described had been acquired at the beginning of the respective periods. The pro forma data shown below is not necessarily indicative of the consolidated results that would have occurred had the acquisition taken place at the beginning of the respective periods nor are they necessarily indicative of results that may occur in the future.
NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE.
On December 9, 1999 the Company sold four of the remaining five former East Side Mario's restaurant locations, and is marketing the remaining location, which it closed, with the expectation of selling this location early in fiscal year 2001. The cash received as a result of this transaction of $3,867,000 was used to pay off the capital lease obligations and other expenses of the transaction. Certain assets of the East Side Mario's operations are shown in the Consolidated Balance Sheet as "Assets held for sale". The results of operations of the discontinued segment are shown in the Consolidated Statements of Operations as "Loss from discontinued operations". There is no tax effect of the loss. The Company believes there will not be significant gain or loss on disposal of the remaining assets. 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 have declined since fiscal 1996 and the restaurant concept was not appropriately supported by the franchisor. The assets being held for sale and the related capitalized lease obligations have been classified as current assets and current liabilities respectively.
The Consolidated Balance Sheets at February 27, 2000 and February 28, 1999, include assets and liabilities related to the East Side Mario's restaurants, which are being accounted for as a discontinued operation, the details of which are listed below:
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
The results of operations for the East Side Mario's segment, reported separately as a loss from discontinued operations in the Consolidated Statement of Operations, are as follows:
NOTE 4. EARLY EXTINGUISHMENT OF DEBT.
In the fourth quarter of fiscal 1999, the Company paid, in advance of scheduled maturity, seven mortgage loans with a combined balance of $4,899,000. The seven loans were originated in September 1995 with an original balance of $5,509,000, 15 year terms, fixed interest rates of approximately 10.0% and were secured by mortgages on seven of the Company's KFC restaurants. The loans were replaced by new mortgage loans having 20 year terms, 8.7% fixed interest rates, secured by the same seven KFC properties and having an initial, combined balance of $6,762,000. In consummating this transaction, the Company incurred prepayment penalties of $98,000 and expensed $140,000 of deferred financing costs related to the loans, which were paid early. As part of the refinancing transaction, the Company also incurred a loss of $49,000 to buy out capitalized leases covering equipment at three of the locations. In addition, the Company received $1,205,000 in cash net of loan costs and replaced annual debt service of $785,000 with new annual debt service of $716,000.
NOTE 5. DISPOSITION OF ASSETS.
During fiscal 2000, 1999 and 1998, the Company recognized losses totaling $213,000, $11,000 and $98,000, respectively from the sale or disposal of restaurant assets and the closing of unprofitable restaurants. These restaurants did not have a material effect upon the Company's consolidated results of operations or financial position.
NOTE 6. ACCRUED LIABILITIES.
Accrued liabilities consist of the following at February 27, 2000 and February 28, 1999:
2000 1999 ---------- ----------
Accrued compensation ................ $1,226,000 $ 738,000 Accrued taxes other than income taxes 721,000 411,000 Accrued liabilities related to sold restaurants ................ 488,000 172,000 Accrued royalties and advertising ... -- 430,000 Other accrued expenses .............. 1,290,000 578,000 ---------- ---------- $3,725,000 $2,329,000 ========== ==========
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
NOTE 7. LONG-TERM DEBT.
Long-term debt consists of the following at February 27, 2000 and February 28, 1999:
Certain of the Company's debt arrangements require the maintenance of a consolidated fixed charge coverage ratio of 1.2 to 1.0 and individual restaurants coverage ratios of 1.4 to 1.0. The Company is currently not in full compliance with maintaining the required individual restaurant coverage ratios but was able to obtain a waiver of these violations from the applicable lender.
The Company paid interest relating to long-term debt of approximately $3,481,000, $992,000 and $836,000 in fiscal 2000, 1999 and 1998, respectively.
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
NOTE 8. LEASE OBLIGATIONS AND OTHER COMMITMENTS.
Property under capital leases at February 27, 2000 and February 28, 1999 are as follows:
2000 1999 ---------- ----------
Leased property: Buildings ................... $ 600,000 $3,720,000 Equipment, furniture and fixtures ............... 571,000 1,369,000 ---------- ---------- Total ....................... 1,171,000 5,089,000 Less accumulated amortization 354,000 1,946,000 ---------- ---------- $ 817,000 $3,143,000 ========== ==========
Amortization of leased property under capital leases was $119,000, $545,000 and $482,000 in fiscal 2000, 1999 and 1998, respectively.
Related obligations under capital leases at February 27, 2000 and February 28, 1999 are as follows:
2000 1999 ---------- ----------
Capital lease obligations ........... $1,714,000 $4,697,000 Less current maturities ............. 969,000 453,000 ---------- ---------- Long-term capital lease obligations . $ 745,000 $4,244,000 ========== ==========
The Company paid interest of approximately $92,000, $92,000 and $61,000 relating to capital lease obligations in fiscal 2000, 1999 and 1998, respectively.
Future minimum rental payments to be made under capital leases at February 27, 2000, are as follows:
2001 ..................... $1,864,000 2002 ..................... 165,000 2003 ..................... 165,000 2004 ..................... 157,000 2005 ..................... 98,000 Later years .............. 714,000 ----------- 3,163,000 Less amount representing interest ................. 1,449,000 ---------- Total obligations under capital leases ........... $1,714,000 ==========
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
The Company's leases for restaurant land and buildings are noncancellable and expire on various dates through 2019. The leases have renewal options ranging from 1 to 26 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. The interest rates on the leases range predominantly from 9.5% to 13.0%. Total contingent rentals were $82,000 $75,000 and $72,000 in fiscal 2000, 1999 and 1998, respectively. Future noncancellable minimum rental payments under operating leases at February 27, 2000, are as follows: 2001 - $3,630,000, 2002 - $1,901,000; 2003 - $1,722,000; 2004 - $1,635,000; 2005 - $1,429,000 and an aggregate $8,138,000 for the years thereafter. Rental expense for all operating leases was $1,824,000, $1,146,000 and $1,058,000 for fiscal 2000, 1999 and 1998, respectively.
For KFC products, the Company is required to pay royalties of 4% of gross revenues and to expend an additional 5% of gross revenues on national and local advertising pursuant to its franchise agreements. For Taco Bell products in KFC/Taco "2n1" restaurants operated under license agreements from Taco Bell Corp. and franchise agreements from KFC Corporation the Company is required to pay royalties of 10% of Taco Bell gross revenues and to make advertising fund contributions of 1/2% of Taco Bell gross revenue. For Taco Bell product sales in Taco Bell restaurants operated under franchises the Company is required to pay royalties of 5.5% of gross revenues and to expend an additional 4.5% of gross revenues on national and local advertising.
As part of the acquisition of the 54 restaurants from Tricon Global Restaurants, Inc., the Company signed an agreement which granted it the rights to develop 20 KFC, Taco Bell or KFC "2n1" restaurants in specific geographic areas. Under the agreement five restaurants are required to be developed each year over a four year period. As of February 27, 2000 the Company has developed two restaurants under this agreement. In fiscal years 2001 through 2004 the Company will commit approximately an additional $13,600,000 to complete its obligation under this agreement.
NOTE 9. NET INCOME (LOSS) PER COMMON SHARE.
All net income (loss) per common share amounts have been computed based on the weighted average number of common shares outstanding during each year which totaled 2,912,894, 2,910,839 and 2,936,877 for fiscal 2000, 1999 and 1998, respectively.
NOTE 10. INCOME TAXES.
The current provision for income taxes, which approximates tax payments, consists of state and local taxes of $4,000, $20,000 and $14,000 for fiscal 2000, 1999 and 1998, respectively. There was no deferred provision for income taxes during each of the fiscal years 2000, 1999 and 1998. There was no provision for income taxes from discontinued operations.
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
A reconciliation between the provision for income taxes and income taxes calculated at the statutory tax rate of 35% is as follows:
The components of deferred tax assets (liabilities) at February 27, 2000 and February 28, 1999 are as follows:
2000 1999 ----------- -----------
Operating loss carryforwards ............ $ 4,539,000 $ 5,942,000 Tax credit carryforwards ................ 56,000 93,000 Property and equipment .................. 897,000 1,134,000 Accrued expenses not currently deductible 393,000 355,000 Inventory valuation ..................... 7,000 4,000 Intangible assets ....................... (60,000) -- Deferred tax asset valuation adjustment . (5,232,000) (6,928,000) ----------- ----------- Net deferred tax asset .................. $ 600,000 $ 600,000 =========== ===========
The valuation allowance decreased $1,696,000 and $2,729,000 during fiscal 2000 and 1999, respectively and increased $296,000 during fiscal 1998.
At February 27, 2000, the Company has net operating loss carryforwards which, if not utilized, will expire as follows:
2001 ................... $ 4,044,000 2002 ................... 16,000 2003 ................... 116,000 2004 ................... 1,030,000 2005 ................... 2,376,000 2008 ................... 90,000 2009 ................... 987,000 2012 ................... 744,000 2013 ................... 728,000 2019................... 268,000 2020................... 948,000 ----------- Total .................. $11,347,000 ===========
The Company also has alternative minimum tax net operating loss carryforwards of $9,351,000 which will expire, if not utilized, in varying amounts through fiscal 2020. These carryforwards are available to offset up to 90% of any alternative minimum taxable income which would otherwise be taxable. As of February 27, 2000 and February 28, 1999, the Company has an alternative minimum tax credit carryforward of $56,000 and $69,000, respectively.
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
NOTE 11. STOCK OPTIONS AND SHAREHOLDERS' EQUITY.
The Company previously had an Incentive Stock Option Plan ("Incentive Plan") and a Stock Option Plan ("Stock Option Plan") which provided options exercisable at the market value of the underlying common shares on the date of the grant. Both plans expired during fiscal 1995.
On April 2, 1999, the Board of Directors of the Company approved a Stock Option Plan for Executives and Managers. Under the plan 145,500 shares were reserved for the grant of options. The Stock Option Plan for Executives and Managers provides for grants to eligible participants of nonqualified stock options only. The exercise price for any option awarded under the Plan is required to be not less than 100% of the fair market value of the shares on the date that the option is granted. Options are granted by the Stock Option Committee of the Company. Options for the 145,500 shares were granted to executives and managers of the Company on April 2, 1999 at an exercise price of $4 1/8. As of February 27, 2000 the closing price of the Company's stock was $3.00 per share. The plan provides that the options are exercisable after a waiting period of 6 months and that each option expires 10 years after its date of issue.
At the Company's annual meeting on June 25, 1999 the shareholders approved the Key Employees Stock Option Plan. This plan allows the granting of options covering 291,000 shares of stock and has essentially the same provisions as the Stock Option Plan for Executives and Managers which was discussed above. Options for 129,850 shares were granted to executives and managers of the Company on January 7, 2000 at an exercise price of $3.00.
Information with respect to these option plans follows:
NUMBER OF SHARES ------------------------------------------ 2000 1999 1998 -------- -------- --------
Outstanding, beginning of year 24,166 57,500 60,167 Expired during year .......... (24,516) (33,334) (2,667) Granted during the year ...... 275,350 -- -- -------- -------- -------- Outstanding, end of year ..... 275,000 24,166 57,500 ======== ======== ======== Exercisable, end of year ..... 145,150 24,166 57,500 ======== ======== ========
On April 8, 1999, the Company adopted a Shareholder Rights Plan in which the Board of Directors declared a distribution of one Right for each of the Company's outstanding Common Shares. Each Right entitles the holder to purchase from the Company one one-thousandth of a Series A Preferred Share (a "Preferred Share") at a purchase price of $30.00 per Right, subject to adjustment. One one-thousandth of a Preferred Share is intended to be approximately the economic equivalent of one Common Share. The Rights will expire on April 7, 2009, unless redeemed by the Company as described below.
The Rights are neither exercisable nor traded separately from the Common Shares. The Rights will become exercisable and begin to trade separately from the Common Shares if a person or group becomes the beneficial owner of 21% or more of the then-outstanding Common Shares or announces an offer to acquire 21% or more of the then-outstanding Common Shares.
MORGAN'S FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998
If a person or group acquires 21% or more of the outstanding Common Shares, then each Right not owned by the acquiring person or its affiliates will entitle its holder to purchase, at the Right's then-current exercise price, fractional Preferred Shares that are approximately the economic equivalent of Common Shares (or, in certain circumstances, Common Shares, cash, property or other securities of the Company) having a market value equal to twice the then-current exercise price. In addition, if, after the Rights become exercisable, the Company is acquired in a merger or other business combination transaction with an acquiring person or its affiliates or sells 50% or more of its assets or earnings power to an acquiring person or its affiliates, each Right will entitle its holder to purchase, at the Right's then-current exercise price, a number of shares of the acquiring person's common stock having a market value of twice the Right's exercise price. The Board of Directors may redeem the Rights in whole, but not in part, at a price of $.01 per Right, subject to certain limitations.
The dividend distribution was made on May 12, 1999, payable to shareholders of record on that date. The initial distribution of Rights is not taxable to shareholders.
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 would continue to be monitored by the Exchange.
NOTE 12. 401(k) RETIREMENT PLAN.
The Company has a 401(k) Retirement Plan in which 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. The Company matches, in Company stock, a percentage of employee contributions. During fiscal 2000, 1999 and 1998, respectively, the Company incurred $62,000, $19,000 and $20,000, respectively, in expenses for matching contributions to the plan.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS.
Management believes that the fair value of the Company's debt at February 27, 2000 approximates carrying value, based upon interest rates obtained in recent financing transactions.
NOTE 14. NEW ACCOUNTING STANDARD.
The Financial Accounting Standards Board has issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities. The Company has not yet completed its analysis of SFAS No. 133 and, accordingly, has not yet determined what effect, if any, it may have on future financial statements.
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 Specimen Taco Bell Franchise Agreement
10.3 Executive and Manager Nonqualified Stock Option Plan (4)
10.4 Key Employee Nonqualified Stock Option Plan (4)
10.5 Asset Purchase Agreements with Taco Bell Corp. and KFC Corporation and their Various Affiliated Companies (5)
10.6 Form of Mortgage Loan Agreement with Captec Financial Group, Inc. (6)
19 Form of Indemnification Contract between Registrant and its Officers and Directors (4)
21 Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedule
(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 S-8 filed November 17, 1999 and incorporated herein by reference.
(5) Filed as an exhibit to Registrant's Form 8-KA filed September 27, 1999 and incorporated herein by reference.
(6) Filed as an exhibit to the Registrant's Form 10-K for the 1996 fiscal year and incorporated herein by reference.
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.
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 30, 2000 Dated: May 30, 2000
/s/ James J. Liguori /s/ Steven S. Kaufman - ----------------------------------------- ----------------------------------- By: James J. Liguori By: Steven S. Kaufman Director, President & Director Chief Operating Officer Dated: May 30, 2000 Dated: May 30, 2000
/s/ Kenneth L. Hignett /s/ Richard A. Arons - ----------------------------------------- ----------------------------------- By: Kenneth L. Hignett By: By: Richard A. Arons Director, Senior Vice President, Director Chief Financial Officer & Secretary Dated: May 30, 2000 Dated: May 30, 2000
/s/ Bernard Lerner ----------------------------------- By: Bernard Lerner Director Dated: May 30, 2000