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EX-10.1 - EXHIBIT 10.1 - MORGANS FOODS INCex10-1.htm
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v2.4.0.6
Note 6 - Capital Expenditures
9 Months Ended
Nov. 04, 2012
Commitments and Contingencies Disclosure [Text Block]
NOTE 6 – CAPITAL EXPENDITURES

The Company is required by its franchise agreements to periodically bring its restaurants up to the required image of the franchisor.  This typically involves a new dining room décor and seating package and exterior changes and related items but can, in some cases, require the relocation of the restaurant.  If the Company deems a particular image enhancement expenditure to be inadvisable, it has the option to cease operations at that restaurant.  Over time, the estimated cost and time deadline for each restaurant may change due to a variety of circumstances and the Company revises its requirements accordingly.  Also, significant numbers of restaurants may have image enhancement deadlines that coincide, in which case, the Company will adjust the actual timing of the image enhancements in order to facilitate an orderly construction schedule.  During the image enhancement process, each restaurant is normally closed for up to two weeks, which has a negative impact on the Company’s revenues and operating efficiencies.  At the time a restaurant is closed for a required image enhancement, the Company may deem it advisable to make other capital expenditures in addition to those required for the image enhancement.

The franchise agreements with KFC and Taco Bell Corporation require the Company to upgrade and remodel its restaurants to comply with the franchisors’ current standards within agreed upon timeframes and the franchisor may terminate the franchise agreement for failure to meet those requirements.  In the case of a restaurant containing two concepts, even though only one is required to be remodeled, additional costs will be incurred because the dual concept restaurant is generally larger and contains more equipment and signage than the single concept restaurant.  If a property is of usable size and configuration, the Company can perform an image enhancement to bring the building to the current image of the franchisor.  If the property has a deficiency which would render it unsuitable, the Company would need to relocate the restaurant to another location within the trade area to meet the franchisor’s requirements.  The capital requirements for the KFC branded restaurants are included in the schedule based on the requirements of the KFC Remodel Agreement and the Taco Bell restaurants are shown at the time management believes they will be done so that all of them can be completed before the due date for the group.

Number of Units
   
Period
   
Type
 
Capital Cost (1)
 
1
   
Fiscal 2014
   
Rebuild
    750,000  
3
   
Fiscal 2014
   
Remodels
    650,000  
2
   
Fiscal 2014
   
Relo (2)
    250,000  
 
   
Total 2014
   
 
    1,650,000  
4
   
Fiscal 2015
   
Remodels
    950,000  
7
   
Fiscal 2016
   
Remodels
    1,745,000  
4
   
Fiscal 2017
   
Remodels
    1,000,000  
1
   
Fiscal 2017
   
Refresh (3)
    100,000  
2
   
Fiscal 2017
   
Taco Bell
    800,000  
 
   
Total 2017
   
 
    1,900,000  
3
   
Fiscal 2018
   
Remodels
    740,000  
1
   
Fiscal 2018
   
Refresh (3)
    100,000  
2
   
Fiscal 2018
   
Taco Bell
    800,000  
 
   
Total 2018
   
 
    1,640,000  
1
   
Fiscal 2019
   
Remodels
    200,000  
3
   
Fiscal 2019
   
Remodels
    300,000  
2
   
Fiscal 2019
   
Taco Bell
    800,000  
 
   
Total 2019
   
 
    1,300,000  
7
   
Fiscal 2020
   
Refresh (3)
    675,000  
1
   
Fiscal 2020
   
Taco Bell
    400,000  
 
   
Total 2020
   
 
    1,075,000  
7
   
Fiscal 2021
   
Refresh (3)
    625,000  
7
   
Fiscal 2022
   
Refresh (3)
    675,000  
8
   
Fiscal 2023
   
Refresh (3)
    675,000  
1
   
Fiscal 2025
   
Refresh (3)
    75,000  
67
   
Total
   
 
  $ 12,310,000  

(1) These amounts are based on estimates of current construction costs and actual costs may vary.
(2) Relocations of fee owned properties are shown net of expected recovery of capital from the sale of the former location.  Relocation of leased properties assumes the capital cost of only equipment because it is not known until each lease is finalized whether the lease will be a capital or operating lease.
(3) Reflects the estimated cost of dining room update and exterior paint and refurbishment on restaurants previously remodeled to the current image.  Costs may also include the addition of equipment such as coolers necessary to meet Franchisor standards.

In addition to the various facilities actions listed on the table above, the Company is obligated to spend approximately $1,800,000 by the end of calendar year 2014, which it expects to commit ratably over the remainder of calendar year 2012 and the calendar years 2013 and 2014, to install the KFC operations platform consisting of a new point of sale system and related reporting and management systems, new food holding cabinets that improve the quality of product held for sale and a new drive-thru speed of service system in all of its KFC and KFC/Taco Bell "2n1" restaurants.  During the first thirty-six weeks of fiscal 2013, the Company completed the remodeling of five of its restaurants in the amount of approximately $2,324,000 and installed 15 of the new KFC operations platforms mentioned above, at a cost of approximately $536,000.

Capital expenditures to meet the image requirements of the franchisors and additional capital expenditures on those same restaurants being image enhanced are a large portion of the Company’s annual capital expenditures.  However, the Company also has made and may make capital expenditures on restaurant properties not included on the foregoing schedule for upgrades or replacement of capital items appropriate for the continued successful operation of its restaurants.  The Company may not be able to finance capital expenditures in the volume and time horizon required by the image enhancement deadlines solely from existing cash balances and existing cash flow and the Company may have to utilize financing for a portion of the capital expenditures as well as draw funds from its remodel escrow account.  The Company may use both debt and sale/leaseback financing but has no commitments for either.

There can be no assurance that the Company will be able to accomplish the image enhancements and relocations required in the franchise agreements on terms acceptable to the Company.  If the Company is unable to meet the requirements of a franchise agreement, the franchisor may choose to extend the time allowed for compliance or may terminate the franchise agreement for the affected location.