##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended May 23, 2010
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from  to
 Commission File Number 1-08395
 Morgans Foods, Inc.
  Ohio
    
    34-0562210(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer Identification No.)4829 Galaxy Parkway, Suite S, Cleveland, Ohio
    
    44128(Address of principal executive offices)
    
    (Zip Code)
  (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
(do not check if a smaller reporting company)
    
    Smaller reporting company þ
 o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4T. Controls and Procedures.PART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sale of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security Holders (removed and reserved)Item 5. Other InformationItem 6. ExhibitsSIGNATURESINDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Quarter EndedMay 23, 2010
    
    
    May 24, 2009Revenues
    
    $
    22,170,000
    
    
    $
    22,931,000Cost of sales:Food, paper and beverage
    
    
    6,757,000
    
    
    
    7,410,000Labor and benefits
    
    
    6,231,000
    
    
    
    6,428,000Restaurant operating expenses
    
    
    5,634,000
    
    
    
    5,876,000Depreciation and amortization
    
    
    647,000
    
    
    
    717,000General and administrative expenses
    
    
    1,320,000
    
    
    
    1,409,000Loss on restaurant assets
    
    
    50,000
    
    
    
    6,000Operating income
    
    
    1,531,000
    
    
    
    1,085,000Interest expense:Prepayment fees and deferred financing costs
    
    
    98,000
    
    
    
    Bank debt and notes payable
    
    
    561,000
    
    
    
    625,000Capital leases
    
    
    24,000
    
    
    
    25,000Other (income) expense, net
    
    
    89,000
    
    
    
    (44,000
    )Income before income taxes
    
    
    759,000
    
    
    
    479,000Provision for income taxes
    
    
    184,000
    
    
    
    125,000Net income
    
    $
    575,000
    
    
    $
    354,000Basic net income per common share:
    
    $
    0.20
    
    
    $
    0.12Diluted net income per common share:
    
    $
    0.19
    
    
    $
    0.12Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,934,995Diluted weighted average number of shares outstanding
    
    
    3,033,634
    
    
    
    2,963,105
  2




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May 23, 2010
    
    
    February 28, 2010UNAUDITEDASSETSCurrent assets:Cash and equivalents
    
    $
    5,317,000
    
    
    $
    4,205,000Receivables
    
    
    440,000
    
    
    
    470,000Inventories
    
    
    762,000
    
    
    
    682,000Prepaid expenses
    
    
    595,000
    
    
    
    742,000Deferred tax asset
    
    
    15,000
    
    
    
    15,000Assets held for sale
    
    
    678,000
    
    
    
    678,0007,807,000
    
    
    
    6,792,000Property and equipment:Land
    
    
    9,308,000
    
    
    
    9,558,000Buildings and improvements
    
    
    20,609,000
    
    
    
    20,960,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,306,000
    
    
    
    10,373,000Equipment, furniture and fixtures
    
    
    20,226,000
    
    
    
    20,337,000Construction in progress
    
    
    268,000
    
    
    
    626,00062,031,000
    
    
    
    63,168,000Less accumulated depreciation and amortization
    
    
    31,318,000
    
    
    
    31,941,00030,713,000
    
    
    
    31,227,000Other assets
    
    
    533,000
    
    
    
    546,000Franchise agreements, net
    
    
    1,099,000
    
    
    
    1,133,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    49,379,000
    
    
    $
    48,925,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,163,000
    
    
    $
    3,165,000Current maturities of capital lease obligations
    
    
    45,000
    
    
    
    44,000Accounts payable
    
    
    4,070,000
    
    
    
    3,683,000Accrued liabilities
    
    
    4,426,000
    
    
    
    3,884,00011,704,000
    
    
    
    10,776,000Long-term debt
    
    
    28,533,000
    
    
    
    29,725,000Long-term capital lease obligations
    
    
    1,050,000
    
    
    
    1,061,000Other long-term liabilities
    
    
    3,827,000
    
    
    
    3,853,000Deferred tax liabilities
    
    
    2,067,000
    
    
    
    1,887,000SHAREHOLDERS EQUITYPreferred shares, 1,000,000 shares authorized,
no shares outstanding
    
    
    
    
    
    
    Common stock, no par valueAuthorized shares - 25,000,000Issued shares - 2,969,405
    
    
    30,000
    
    
    
    30,000Treasury shares - 34,410
    
    
    (81,000
    )
    
    
    (81,000
    )Capital in excess of stated value
    
    
    29,488,000
    
    
    
    29,488,000Accumulated deficit
    
    
    (27,239,000
    )
    
    
    (27,814,000
    )Total shareholders equity
    
    
    2,198,000
    
    
    
    1,623,000$
    49,379,000
    
    
    $
    48,925,000
  3




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Common

    
    
    Treasury
    
    
    Capital in
    
    
    
    
    
    
    TotalShares

    
    
    Shares
    
    
    excess of
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    stated value
    
    
    Deficit
    
    
    EquityBalance February 28, 2010
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,488,000
    
    
    $
    (27,814,000
    )
    
    $
    1,623,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    575,000
    
    
    
    575,000Balance May 23, 2010
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,488,000
    
    
    $
    (27,239,000
    )
    
    $
    2,198,000
  4




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Twelve Weeks EndedMay 23, 2010
    
    
    May 24, 2009Cash flows from operating activities:Net income
    
    $
    575,000
    
    
    $
    354,000Adjustments to reconcile net income to net cash
from operating activities:Depreciation and amortization
    
    $
    647,000
    
    
    
    717,000Amortization of deferred financing costs
    
    
    26,000
    
    
    
    27,000Amortization of supply agreement advances
    
    
    (282,000
    )
    
    
    (257,000
    )Funding from supply agreements
    
    
    764,000
    
    
    
    Deferred taxes
    
    
    180,000
    
    
    
    116,000Stock compensation expense
    
    
    
    
    
    
    56,000Loss on restaurant assets
    
    
    50,000
    
    
    
    6,000Changes in assets and liabilities:Receivables
    
    
    (25,000
    )
    
    
    359,000Inventories
    
    
    (80,000
    )
    
    
    (47,000
    )Prepaid expenses
    
    
    147,000
    
    
    
    113,000Other assets
    
    
    (13,000
    )
    
    
    2,000Accounts payable
    
    
    387,000
    
    
    
    931,000Accrued liabilities and other
    
    
    89,000
    
    
    
    1,136,000Net cash from operating activities
    
    
    2,465,000
    
    
    
    3,513,000Cash flows from investing activities:Capital expenditures
    
    
    (381,000
    )
    
    
    (401,000
    )Proceeds from sale of fixed assets
    
    
    232,000
    
    
    
    Net cash from investing activities
    
    
    (149,000
    )
    
    
    (401,000
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (743,000
    )
    
    
    (726,000
    )Principal payments on capital
lease obligations
    
    
    (10,000
    )
    
    
    (9,000
    )Bank debt repayment in advance
    
    
    (451,000
    )
    
    
    Net cash from financing activities
    
    
    (1,204,000
    )
    
    
    (735,000
    )Net change in cash and equivalents
    
    
    1,112,000
    
    
    
    2,377,000Cash and equivalents, beginning balance
    
    
    4,205,000
    
    
    
    5,257,000Cash and equivalents, ending balance
    
    $
    5,317,000
    
    
    $
    7,634,000
  
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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   NOTE 2  RECENT ACCOUNTING PRONOUNCEMENTS
    NOTE 3  NET INCOME PER COMMON SHARE
  For the Quarter ended May 23, 2010
    
    
    For the Quarter ended May 24, 2009Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    575,000
    
    
    
    2,934,995
    
    
    $
    0.20
    
    
    $
    354,000
    
    
    
    2,934,995
    
    
    $
    0.12Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    98,639
    
    
    
    
    
    
    
    
    
    
    
    28,110Diluted EPSIncome available to common shareholders
    
    $
    575,000
    
    
    
    3,033,634
    
    
    $
    0.19
    
    
    $
    354,000
    
    
    
    2,963,105
    
    
    $
    0.12
  6




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NOTE 4  DEBT
  NOTE 5  STOCK OPTIONS
     Exercise
    
    Outstanding
    
    Average
    
    NumberPrices
    
    5-23-10
    
    Life
    
    Exercisable1.50
    
    149,000
    
    8.7
    
    149,000
 NOTE 6  CAPITAL EXPENDITURES
  7




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Number of Units
    
    
    Period
    
    Type
    
    
    Total (1)
    
    
    Required (2)
    
    
    Additional (3)2
    
    
    Fiscal 2010
    
    IE (4)
    
    $
    660,000
    
    
    
    580,000
    
    
    $
    80,0001
    
    
    Fiscal 2010
    
    Relo (4) (5)
    
    
    750,000
    
    
    
    750,000
    
    
    $
    1
    
    
    Fiscal 2011
    
    Relo (5)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    5
    
    
    Fiscal 2011
    
    IE
    
    
    1,600,000
    
    
    
    1,400,000
    
    
    
    200,0008
    
    
    Fiscal 2012
    
    IE
    
    
    2,560,000
    
    
    
    2,240,000
    
    
    
    320,0005
    
    
    Fiscal 2013
    
    IE
    
    
    1,600,000
    
    
    
    1,400,000
    
    
    
    200,0001
    
    
    Fiscal 2015
    
    Rebuild
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    4
    
    
    Fiscal 2015
    
    Relo (5)
    
    
    5,600,000
    
    
    
    5,600,000
    
    
    
    1
    
    
    Fiscal 2016
    
    Relo (5)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    4
    
    
    Fiscal 2020
    
    Relo (5)
    
    
    5,600,000
    
    
    
    5,600,000
    
    
    
    1
    
    
    Fiscal 2020
    
    Rebuild
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    33
    
    
    Total
    
    
    
    
    
    $
    23,170,000
    
    
    $
    22,370,000
    
    
    $
    800,000
 
 (1)
    
    These amounts are based on estimates of current construction costs and actual costs may vary.(2)
    
    These amounts include only the items required to meet the franchisors current image requirements.(3)
    
    These amounts are for capital upgrades performed on or which may be performed on the image enhanced restaurants which were or may
be deemed by the Company to be advantageous to the operation of the
units and which may be done at the time of the image enhancement.(4)
    
    Not completed in fiscal 2010, as required.(5)
    
    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.  8




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NOTE 7  ASSETS HELD FOR SALE
  NOTE 8  SUBSEQUENT EVENTS
  
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Description of Business
 Summary of Expenses and Operating Income as a Percentage of Revenues
 Quarter EndedMay 23, 2010
    
    
    May 24, 2009Cost of sales:Food, paper and beverage
    
    
    30.5
    %
    
    
    32.3
    %Labor and benefits
    
    
    28.1
    %
    
    
    28.0
    %Restaurant operating expenses
    
    
    25.4
    %
    
    
    25.6
    %Depreciation and amortization
    
    
    2.9
    %
    
    
    3.1
    %General and administrative expenses
    
    
    6.0
    %
    
    
    6.1
    %Operating income
    
    
    6.9
    %
    
    
    4.7
    %
 Revenues
 Cost of Sales  Food, Paper and Beverage
 9




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Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization
 General and Administrative Expenses
 Loss on Restaurant Assets
 Operating Income
 Interest Expense
 Other Income and Expense
 Provision for Income Taxes
  Liquidity and Capital Resources
 10




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Recent Accounting Pronouncements
     Seasonality
 Safe Harbor Statements
 11




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Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4T.
    
    Controls and Procedures.
     
 PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
  
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sale of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders (removed and reserved)
 
 Item 5.
    
    Other Information
  
 Item 6.
    
    Exhibits
  12




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MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and SecretaryJuly 7, 2010 13




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ExhibitNumber
    
    Exhibit Description31.1
    
    Certification of the Chairman of the Board and Chief Executive
Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification of the Senior Vice President, Chief Financial
Officer and Secretary pursuant to Rule 13a-14(a) of Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Senior Vice President, Chief Financial
Officer and Secretary pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.