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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 9, 2003
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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)
24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio 44122
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 360-7500
---------------------------
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(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 .......
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule (2b-2 of the act).
Yes....... No...X...
As of December 19, 2003, the issuer had 2,718,441 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 9, 2003 NOVEMBER 10, 2002
---------------- -----------------
Revenues .................................. $ 19,382,000 $ 19,617,000
Cost of sales:
Food, paper and beverage ................. 5,963,000 6,245,000
Labor and benefits ....................... 5,219,000 5,190,000
Restaurant operating expenses ............. 5,065,000 5,055,000
Depreciation and amortization ............. 809,000 811,000
General and administrative expenses ....... 1,170,000 1,348,000
Loss on restaurant assets ................. 27,000 125,000
------------ ------------
Operating income .......................... 1,129,000 843,000
Interest Expense:
Bank debt and notes payable .............. (1,047,000) (1,136,000)
Capital leases ........................... (11,000) (14,000)
Other income and expense, net ............. 19,000 24,000
------------ ------------
Income (loss) before income taxes ......... 90,000 (283,000)
Provision for income taxes ................ -- 1,000
------------ ------------
Net income (loss) ......................... $ 90,000 $ (284,000)
============ ============
Basic and diluted net income (loss)
per common share ......................... $ .03 $ (.10)
============ ============
Basic weighted average number of
shares outstanding ....................... 2,718,441 2,718,441
Diluted weighted average number of
shares outstanding ....................... 2,723,984 2,718,441
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 9, 2003 NOVEMBER 10, 2002
---------------- -----------------
Revenues .................................. $ 58,873,000 $ 59,124,000
Cost of sales:
Food, paper and beverage ................. 17,844,000 18,432,000
Labor and benefits ....................... 16,200,000 15,811,000
Restaurant operating expenses ............. 15,066,000 14,946,000
Depreciation and amortization ............. 2,408,000 2,361,000
General and administrative expenses........ 3,859,000 4,054,000
Loss on restaurant Assets ................. 74,000 193,000
------------ ------------
Operating income .......................... 3,422,000 3,327,000
Interest Expense:
Bank debt and notes payable .............. (3,213,000) (3,391,000)
Capital leases ........................... (34,000) (42,000)
Other income and expense, net ............. 73,000 118,000
------------ ------------
Income before income taxes ................ 248,000 12,000
Provision for income taxes ................ 4,000 6,000
------------ ------------
Net income ................................ $ 244,000 $ 6,000
============ ============
Basic and diluted net income
per common share ......................... $ .09 $ --
============ ============
Basic weighted average number of
shares outstanding ....................... 2,718,441 2,720,926
Diluted weighted average number of
shares outstanding ....................... 2,724,758 2,731,158
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
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NOVEMBER 9, 2003 MARCH 2, 2003
---------------- -------------
ASSETS
Current assets:
Cash and equivalents ............................................... $ 4,338,000 $ 4,901,000
Short term investment .............................................. 300,000 --
Receivables ........................................................ 176,000 300,000
Inventories ........................................................ 532,000 492,000
Prepaid expenses ................................................... 525,000 562,000
------------ ------------
5,871,000 6,255,000
Property and equipment:
Land ............................................................... 10,971,000 10,970,000
Buildings and improvements ......................................... 19,260,000 18,781,000
Property under capital leases ...................................... 1,006,000 1,006,000
Leasehold improvements ............................................. 7,506,000 7,380,000
Equipment, furniture and fixtures .................................. 18,948,000 18,618,000
Construction in progress ........................................... 58,000 54,000
------------ ------------
57,749,000 56,809,000
Less accumulated depreciation and amortization ..................... 22,656,000 20,357,000
------------ ------------
35,093,000 36,452,000
Other assets ........................................................ 1,237,000 1,331,000
Franchise agreements ................................................ 1,935,000 1,982,000
Deferred taxes ...................................................... 600,000 600,000
Goodwill ............................................................ 9,405,000 9,405,000
------------ ------------
$ 54,141,000 $ 56,025,000
============ ============
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
Current liabilities:
Current maturities of long-term debt ............................. $ 2,708,000 $ 2,603,000
Current maturities of capital lease obligations .................. 75,000 108,000
Accounts payable ................................................. 3,313,000 3,193,000
Accrued liabilities .............................................. 3,250,000 3,462,000
------------ ------------
9,346,000 9,366,000
Long-term debt ..................................................... 44,073,000 46,113,000
Long-term capital lease obligations ................................ 390,000 436,000
Other long-term liabilities ........................................ 1,510,000 1,532,000
SHAREHOLDERS' 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 - 250,964 shares ..................................... (284,000) (284,000)
Capital in excess of stated value .................................... 28,829,000 28,829,000
Accumulated deficit .................................................. (29,753,000) (29,997,000)
------------ ------------
Total shareholders' deficiency ....................................... (1,178,000) (1,422,000)
------------ ------------
$ 54,141,000 $ 56,025,000
============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' DEFICIENCY
(unaudited)
COMMON SHARES TREASURY SHARES CAPITAL IN TOTAL
--------------------- ------------------------ EXCESS OF ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT DEFICIENCY
--------- -------- -------- ---------- ------------ ------------ ------------
Balance, March 3, 2002 .. 2,969,405 $ 30,000 (241,564) $ (251,000) $ 28,829,000 $(28,805,000) $ (197,000)
Net loss ................ -- -- -- -- -- (1,192,000) (1,192,000)
Purchase of common shares -- -- (9,400) (33,000) -- -- (33,000)
--------- -------- -------- ---------- ------------ ------------ ------------
Balance, March 2, 2003 .. 2,969,405 30,000 (250,964) (284,000) 28,829,000 (29,997,000) (1,422,000)
Net income .............. -- -- -- -- -- 244,000 244,000
--------- -------- -------- ---------- ------------ ------------ ------------
Balance November 9, 2003 2,969,405 $ 30,000 (250,964) $ (284,000) $ 28,829,000 $(29,753,000) $ (1,178,000)
========= ======== ======== ========== ============ ============ ============
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
Morgan's Foods, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
THIRTY-SIX WEEKS ENDED
------------------------------------------
NOVEMBER 9, 2003 NOVEMBER 10, 2002
---------------- -----------------
Cash flows from operating activities:
Net income ........................................................ $ 244,000 $ 6,000
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization .................................. 2,408,000 2,361,000
Amortization of deferred financing costs ....................... 94,000 97,000
Amortization of supply agreement advances ...................... (599,000) (499,000)
Funding from supply agreements ................................. 647,000 664,000
Loss on restaurant assets ...................................... 73,000 193,000
Change in assets and liabilities:
Decrease in receivables ....................................... 124,000 114,000
Increase in inventories ....................................... (40,000) (29,000)
Decrease (increase) in prepaid expenses ....................... 37,000 (422,000)
Decrease in other assets ...................................... -- 43,000
Increase (decrease) in accounts payable ....................... 120,000 (173,000)
Decrease in accrued liabilities ............................... (346,000) (555,000)
----------- -----------
Net cash provided by operating activities ......................... 2,762,000 1,800,000
----------- -----------
Cash flows from investing activities:
Capital expenditures .............................................. (976,000) (1,849,000)
Purchase of short term investment ................................. (300,000) --
Purchase of franchise agreements .................................. (35,000) --
----------- -----------
Net cash used in investing activities ............................. (1,311,000) (1,849,000)
----------- -----------
Cash flows from financing activities:
Principal payments on long-term debt .............................. (1,935,000) (1,544,000)
Principal payments on capital lease obligations ................... (79,000) (73,000)
Purchase of treasury shares ....................................... -- (33,000)
----------- -----------
Net cash used by financing activities ............................. (2,014,000) (1,650,000)
----------- -----------
Net change in cash and equivalents ................................ (563,000) 1,699,000
Cash and equivalents, beginning balance ........................... 4,901,000 7,441,000
----------- -----------
Cash and equivalents, ending balance .............................. $ 4,338,000 $ 5,742,000
=========== ===========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
Morgan's Foods, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED NOVEMBER 9, 2003 AND NOVEMBER 10, 2002
(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. Except as noted in
the notes to the financial statements, 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 March 2, 2003.
Certain prior year amounts have been reclassified to conform to the current year
presentation.
Short Term Investment. During the first quarter of fiscal 2004, the
Company obtained a letter of credit for $300,000 in favor of one of its vendors.
The letter of credit, which expires February 15, 2004, is secured by a $300,000
certificate of deposit.
NOTE 2. 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. For the
quarter ended November 10, 2002, 286,500 shares were excluded from the
computation of diluted earnings per share due to their antidilutive effect. For
the quarter ended November 9, 2003 and for the 36 weeks ended November 9, 2003
and November 10, 2002, 275,000 shares were excluded from the computation of
diluted earnings per share due to their antidilutive effect.
NOTE 3. STOCK OPTIONS.
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. Had compensation cost for the
options granted been determined based on their fair values at the grant dates in
accordance with the fair value method of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the
Company's net income (loss) and earnings (loss) per share would have been
presented at the pro forma amounts indicated below:
7
Quarter Ended Thirty Weeks Ended
----------------------------- ----------------------------
Nov. 9, 2003 Nov. 10, 2002 Nov. 9, 2003 Nov. 10, 2002
------------ ------------- ------------ -------------
Net income (loss) as reported .......... $ 90,000 $ (284,000) $ 244,000 $6,000
Add (subtract) stock-based compensation
expense, net of tax:
- As reported (intrinsic value method) -- -- -- --
- Pro forma (fair value method) ...... -- -- -- --
---------- ----------- ----------- ------
Net income (loss) - pro forma .......... $ 90,000 $ (284,000) $ 244,000 $6,000
========== =========== =========== ======
Basic and diluted income (loss)
per common share:
As reported ............................ $ .03 $ (.10) $ .09 --
Pro forma .............................. $ .03 $ (.10) $ .09 --
NOTE 4. NEW ACCOUNTING STANDARDS.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated asset retirement costs.
The new rules apply to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or normal operation of long-lived assets. The Company adopted the provisions
of SFAS No. 143 beginning in fiscal 2004. The adoption of SFAS No. 143 did not
have a material impact on the Company's consolidated financial position or
results of operations.
NOTE 5. LONG-TERM DEBT
The Company's debt arrangements require the maintenance of a
consolidated fixed charge coverage ratio of 1.2 to 1 regarding all of its
mortgage loans and individual restaurant coverage ratios between 1.2 and 1.5 to
1 on certain of its loans. As of March 2, 2003, the Company was not in
compliance with the consolidated ratio of 1.2 to 1 or the unit level ratios
relating to $33,346,000 of its debt. The Company has obtained waivers of these
violations from the applicable lenders as of March 2, 2003 and November 9, 2003.
As these waivers continue through the following twelve months, the Company has
classified its debt as long term as of March 2, 2003 and November 9, 2003. All
payments on the Company's debt have been, and continue to be current and
management believes that the Company will continue to be able to service the
debt. The fixed charge coverage ratios are computed based upon financial results
for the preceding twelve months. Based upon financial results for the thirty-six
weeks ended November 9, 2003, management anticipates that the Company may not
achieve certain ratios as of the end of the fiscal year. If the Company does not
comply with debt covenants in the future, and if future waivers are not
obtained, the lenders will have certain remedies available to them which could
include calling of the debt or acceleration of payments. Noncompliance with the
requirements of the Company's mortgage debt, if not waived, could also trigger
cross-default provisions of other debt agreements.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Description of Business. Morgan's Foods, Inc. 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, 2003, the Company operates 75 KFC restaurants, 7 Taco Bell
restaurants, 16 KFC/Taco Bell "2n1's" under franchises from KFC Corporation and
franchises or licenses from Taco Bell Corporation, 3 Taco Bell/Pizza Hut Express
"2n1's" operated under franchises from Taco Bell Corporation and licenses from
Pizza Hut Corporation, 1 KFC/Pizza Hut Express "2n1" operated under a franchise
from KFC Corporation and a license from Pizza Hut Corporation and 1 KFC/A&W
operated under a franchise from KFC Corporation and a license from A&W
Restaurants, Inc. The Company's fiscal year is a 52 - 53 week year ending on the
Sunday nearest the last day of February.
SUMMARY OF EXPENSES AND OPERATING INCOME AS A PERCENTAGE OF REVENUES
QUARTER ENDED THIRTY-SIX WEEKS ENDED
----------------------------- ----------------------------
NOV. 9, 2003 NOV. 10, 2002 NOV. 9, 2003 NOV. 10, 2002
------------ ------------- ------------ -------------
Cost of sales:
Food, paper and beverage ........................ 30.8% 31.8% 30.3% 31.2%
Labor and benefits .............................. 26.9% 26.5% 27.5% 26.7%
Restaurant operating expenses ..................... 26.1% 25.8% 25.6% 25.3%
Depreciation and amortization ..................... 4.2% 4.1% 4.1% 4.0%
General and administrative expenses................ 6.0% 6.9% 6.6% 6.9%
Operating income .................................. 5.8% 4.3% 5.8% 5.6%
Revenues. Revenues for the quarter ended November 9, 2003 were
$19,382,000 compared to $19,617,000 for the quarter ended November 10, 2002.
This decrease of $235,000 was due mainly to a 1.0% decline in comparable
restaurant revenues which was primarily the result of ineffective product
promotions by the KFC franchisor during the quarter. Revenues for the thirty-six
weeks ended November 9, 2003 were $58,873,000 compared to $59,124,000 for the
thirty-six weeks ended November 10, 2002. This decrease of $251,000 was
primarily due to a 0.5% decrease in comparable restaurant revenues for the
reason discussed above.
Costs of Sales - Food, Paper and Beverages. Food, paper and beverage
costs for the third quarter decreased as a percentage of revenue from 31.8% in
fiscal 2003 to 30.8% in fiscal 2004. This decrease was primarily the result of
product promotions during the third quarter of fiscal 2004 having a lower food
cost than those which were promoted during the third quarter of fiscal 2003 as
well as improved operating efficiencies. Food, paper and beverage costs for the
thirty-six weeks ended November 9, 2003 decreased to 30.3% of revenue compared
to 31.2% in the year earlier period for the reasons discussed above.
Cost of Sales - Labor and Benefits. Labor and benefits increased as a
percentage of revenue for the quarter ended November 9, 2003 to 26.9% compared
to 26.5% for the year earlier quarter. The increase was primarily due to higher
healthcare costs, higher wages due to an increasingly competitive labor market
in the Company's market areas and lower average restaurant volumes in the
current year quarter which were partially offset by improved operating
efficiencies. Labor and benefits for the thirty-six weeks ended November 9, 2003
increased as a percentage of revenue to 27.5% from 26.7% in the year earlier
period primarily due to the reasons discussed above.
9
Restaurant Operating Expenses. Restaurant operating expenses increased
as a percentage of revenue to 26.1% in the third quarter of fiscal 2004 compared
to 25.8% in the third quarter of fiscal 2003. This increase was the result of
higher repair and maintenance expenses which were partially offset by lower
utility costs. Restaurant operating expenses for the thirty-six weeks ended
November 9, 2003 increased to 25.6% of revenue compared to 25.3% in the prior
year period for the reasons discussed above.
Depreciation and Amortization. Depreciation and amortization was
substantially unchanged at $809,000 in the current year third quarter and
$811,000 in the prior year third quarter and $2,408,000 and $2,361,000 in the
current and prior year 36 weeks.
General and Administrative Expenses. General and administrative
expenses decreased to $1,170,000 in the third quarter of fiscal 2004 from
$1,348,000 in the third quarter of fiscal 2003. The decrease of $178,000 was
mainly the result of decreased legal and professional, office supply and
telephone expenses. These decreases were the result of negotiated price
decreases as well as reduced usage. General and administrative expenses for the
thirty-six weeks ended November 9, 2003 decreased to $3,859,000 from $4,054,000
in the prior year period. The decrease of $195,000 was mainly due to the reasons
discussed above.
Loss on Restaurant Assets. The loss on restaurant assets decreased from
$125,000 in the third quarter of fiscal 2003 to $27,000 in the third quarter of
fiscal 2004 reflecting lower charges in the current year quarter for the costs
necessary to dispose of one previously closed restaurant. The loss on restaurant
assets for the thirty-six weeks ended November 9, 2003 decreased to $74,000 from
$193,000 in the year earlier period for the reason discussed above.
Operating Income. Operating income in the third quarter of fiscal 2004
increased to $1,129,000 or 5.8% of revenues compared to $843,000 or 4.3% of
revenues for the third quarter of fiscal 2003. Operating income for the
thirty-six weeks ended November 9, 2003 increased to $3,422,000 or 5.8% of
revenues compared to $3,327,000 or 5.6% of revenues for the year earlier period.
These increases were primarily the result of lower food cost product promotions,
improved operating efficiencies and negotiated price decreases on telephone
costs and office supplies as well as decreased prices and usage of professional
services which were partially offset by the decreased revenues and increased
healthcare costs.
Interest Expense. Interest expense on bank debt decreased to $1,047,000
in the third quarter of fiscal 2004 from $1,136,000 in the third quarter of
fiscal 2003 due to lower debt balances during the fiscal 2004 quarter. Interest
expense on bank debt for the thirty-six weeks ended November 9, 2003 decreased
to $3,213,000 from $3,391,000 for the year earlier period for the reason
discussed above. Interest expense on capitalized leases was substantially
unchanged from the prior year third quarter and prior year thirty-six weeks.
Other Income. Other income decreased to $19,000 from $24,000 and to
$73,000 from $118,000 in the third quarter and first thirty-six weeks,
respectively, of fiscal 2004 compared to the comparable periods in 2003 as a
result of lower interest income due to decreases in both the interest rate
earned and the amount of average cash investments in the first three quarters of
fiscal 2004.
Provision for Income Taxes. The provision for income taxes was
substantially unchanged in the third quarter and first thirty-six weeks of
fiscal 2004 compared to the comparable periods in 2003. The low effective tax
rates result from tax net operating loss carryforwards.
10
Liquidity and Capital Resources. Cash flow activity for the first
thirty-six weeks of fiscal 2004 and fiscal 2003 is presented in the Consolidated
Statements of Cash Flows. Cash provided by operating activities was $2,762,000
for the thirty-six weeks ended November 9, 2003. The Company paid scheduled
long-term bank and capitalized lease debt of $2,014,000 in the first thirty-six
weeks of fiscal 2004.
The quick service restaurant 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 its restaurants, service the Company's debt and
support required corporate expenses.
The Company's debt arrangements require the maintenance of a
consolidated fixed charge coverage ratio of 1.2 to 1 regarding all of its
mortgage loans and individual restaurant coverage ratios between 1.2 and 1.5 to
1 on certain of its loans. As of March 2, 2003, the Company was not in
compliance with the consolidated ratio of 1.2 to 1 or the unit level ratios
relating to $33,346,000 of its debt. The Company has obtained waivers of these
violations from the applicable lenders as of March 2, 2003 and November 9, 2003.
As these waivers continue through the following twelve months, the Company has
classified its debt as long term as of March 2, 2003 and November 9, 2003. All
payments on the Company's debt have been, and continue to be current and
management believes that the Company will continue to be able to service the
debt. The fixed charge coverage ratios are computed based upon financial results
for the preceding twelve months. Based upon financial results for the thirty-six
weeks ended November 9, 2003, management anticipates that the Company may not
achieve certain ratios as of the end of the fiscal year. If the Company does not
comply with debt covenants in the future, and if future waivers are not
obtained, the lenders will have certain remedies available to them which could
include calling of the debt or acceleration of payments. Noncompliance with the
requirements of the Company's mortgage debt, if not waived, could also trigger
cross-default provisions of other debt agreements.
The Company continues to be out of compliance with certain of the
continued listing standards of the American Stock Exchange and was required to
submit a revised business plan to the Exchange indicating how the Company would
achieve compliance with those standards. Specifically, the Company fell under
the guidelines in Section 1003(a)(i) with shareholders' equity of less than
$2,000,000 and has sustained losses from continuing operations and/or net losses
in two of its three most recent fiscal years and Section 1003(a)(ii) with
shareholder's equity of less than $4,000,000 and has sustained losses from
continuing operations and/or net losses in three out of its four most recent
fiscal years.
On October 1, 2003 the Company submitted its second quarter fiscal 2004
actual results and fiscal 2004 projected results to the staff at the Exchange
indicating how it would regain compliance with the continued listing standards
and received notice from the Exchange on October 27, 2003 that it has accepted
the Company's revised plan. The Exchange has allowed the Company to continue its
plan for compliance until the Exchange has reviewed the financial results for
the period ending November 9, 2003, the end of the Company's third fiscal
quarter, at which time the Exchange will reassess the Company's compliance with
the continued listing standards. During the term of the extension, the Exchange
will monitor the Company's performance and the Company will be required to
report to the Exchange any change in its performance which would be inconsistent
with the plan which was approved by the Exchange on October 27, 2003. Concurrent
with this filing, the Company will provide updated information to the Exchange
including third quarter fiscal 2004 financial results which did not meet the
previously accepted operating plan but which continue to be profitable. The
Company cannot predict the Exchange's response, but the failure to meet the
previously accepted operating plan could result in the commencement of delisting
proceedings. If the Company were delisted, or if its common shares were
suspended from trading, the liquidity of its common shares would likely be
adversely affected.
11
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.
Commitments. During the first quarter of fiscal year 2004, the Company
obtained a letter of credit for $300,000 in favor of one of its vendors. The
letter of credit which expires February 15, 2004 is secured by a $300,000
certificate of deposit.
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.
Safe Harbor Statements. This document contains "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The
statements include those identified by such words as "may," "will," "expect"
"anticipate," "believe," "plan" and other similar terminology. The
"forward-looking statements" reflect the Company's current expectations and are
based upon data available at the time of the statements. Actual results involve
risks and uncertainties, including both those specific to the Company and
general economic and industry factors. Factors specific to the Company include,
but are not limited to, its debt covenant compliance and its ability to obtain
waivers of any debt covenant violations as well as the listing status of its
common shares with the American Stock Exchange.
Economic and industry risks and uncertainties include, but are not
limited, to, franchisor promotions, business and economic conditions,
legislation and governmental regulation, competition, success of operating
initiatives and advertising and promotional efforts, volatility of commodity
costs and increases in minimum wage and other operating costs, availability and
cost of land and construction, consumer preferences, spending patterns and
demographic trends.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information required by this item is included under "Liquidity and
Capital Resources".
ITEM 4. CONTROLS AND PROCEDURES.
(a) Within the 90-day period prior to the filing date of this
Quarterly Report on Form 10-Q, the Company, under the
supervision, and with the participation, of its management,
including its Chief Executive Officer and Chief Financial
Officer, performed an evaluation of the Company's disclosure
controls and procedures, as contemplated by Securities
Exchange Act Rule 13a-15. Based on that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer
concluded that such disclosure controls and procedures were
effective.
(b) No significant changes were made in the Company's internal
controls or in other factors that could significantly affect
these controls subsequent to the date of the evaluation
performed pursuant to Securities Exchange Act Rule 13a-15
referred to above.
12
MORGAN'S FOODS, INC.
INDEX TO EXHIBITS
Exhibit
Number Exhibit Description
------- -------------------
31.1 Certification of Leonard R. Stein-Sapir Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Kenneth L. Hignett Pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Leonard R. Stein-Sapir, Chairman of the Board and
Chief Executive Officer
32.2 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 Kenneth L. Hignett, Senior Vice President, Chief
Financial Officer and Secretary
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Morgan's Foods, Inc.
---------------------------------
(Registrant)
Dated: December 23, 2003 By: /s/ Kenneth L. Hignett
----------------- -----------------------------
Kenneth L. Hignett
Senior Vice President,
Chief Financial Officer & Secretary
14