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 November 8, 2009
 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)
 
 þ o
 o o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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##### 



PART I  FINANCIAL INFORMATION
 Item 1. Financial Statements
 
 Quarter EndedNovember 8, 2009
    
    November 9, 2008Revenues
    
    $
    20,645,000
    
    
    $
    21,967,000Cost of sales:Food, paper and beverage
    
    
    6,375,000
    
    
    
    7,236,000Labor and benefits
    
    
    5,867,000
    
    
    
    6,301,000Restaurant operating expenses
    
    
    5,374,000
    
    
    
    5,595,000Depreciation and amortization
    
    
    685,000
    
    
    
    789,000General and administrative expenses
    
    
    1,241,000
    
    
    
    1,188,000Loss (gain) on restaurant assets
    
    
    (9,000
    )
    
    
    (9,000
    )Operating income
    
    
    1,112,000
    
    
    
    867,000Interest expense:Prepayment fees and deferred financing costs
    
    
    (98,000
    )
    
    
    Bank debt and notes payable
    
    
    584,000
    
    
    
    716,000Capital leases
    
    
    25,000
    
    
    
    26,000Other income, net
    
    
    (42,000
    )
    
    
    (56,000
    )Income before income taxes
    
    
    643,000
    
    
    
    181,000Provision for income taxes
    
    
    217,000
    
    
    
    248,000Net income (loss)
    
    $
    426,000
    
    
    $
    (67,000
    )Basic net income (loss) per common share:
    
    $
    0.15
    
    
    $
    (0.02
    )Diluted net income (loss) per common share:
    
    $
    0.14
    
    
    $
    (0.02
    )Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,934,995Diluted weighted average number of shares outstanding
    
    
    2,995,541
    
    
    
    2,939,126




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##### 



Thirty-six Weeks EndedNovember 8, 2009
    
    November 9, 2008Revenues
    
    $
    66,778,000
    
    
    $
    66,769,000Cost of sales:Food, paper and beverage
    
    
    21,141,000
    
    
    
    21,706,000Labor and benefits
    
    
    18,700,000
    
    
    
    19,096,000Restaurant operating expenses
    
    
    17,254,000
    
    
    
    17,123,000Depreciation and amortization
    
    
    2,113,000
    
    
    
    2,353,000General and administrative expenses
    
    
    4,087,000
    
    
    
    3,902,000Loss (gain) on restaurant assets
    
    
    12,000
    
    
    
    (13,000
    )Operating income
    
    
    3,471,000
    
    
    
    2,602,000Interest expense:Prepayment fees and deferred financing costs
    
    
    (16,000
    )
    
    
    428,000Bank debt and notes payable
    
    
    1,800,000
    
    
    
    2,274,000Capital leases
    
    
    75,000
    
    
    
    79,000Other income, net
    
    
    (129,000
    )
    
    
    (225,000
    )Income before income taxes
    
    
    1,741,000
    
    
    
    46,000Provision for income taxes
    
    
    641,000
    
    
    
    660,000Net income (loss)
    
    $
    1,100,000
    
    
    $
    (614,000
    )Basic net income (loss) per common share:
    
    $
    0.37
    
    
    $
    (0.21
    )Diluted net income (loss) per common share:
    
    $
    0.37
    
    
    $
    (0.21
    )Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,934,995Diluted weighted average number of shares outstanding
    
    
    2,983,002
    
    
    
    2,947,157




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##### 



November 8, 2009
    
    March 1, 2009UNAUDITEDASSETSCurrent assets:Cash and equivalents
    
    $
    5,581,000
    
    
    $
    5,257,000Receivables
    
    
    451,000
    
    
    
    806,000Inventories
    
    
    677,000
    
    
    
    731,000Prepaid expenses
    
    
    657,000
    
    
    
    624,000Assets held for sale
    
    
    678,000
    
    
    
    828,0008,044,000
    
    
    
    8,246,000Property and equipment:Land
    
    
    9,558,000
    
    
    
    9,558,000Buildings and improvements
    
    
    20,929,000
    
    
    
    20,692,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,485,000
    
    
    
    10,615,000Equipment, furniture and fixtures
    
    
    20,292,000
    
    
    
    19,891,000Construction in progress
    
    
    376,000
    
    
    
    316,00062,954,000
    
    
    
    62,386,000Less accumulated depreciation and amortization
    
    
    31,360,000
    
    
    
    29,827,00031,594,000
    
    
    
    32,559,000Other assets
    
    
    582,000
    
    
    
    676,000Franchise agreements, net
    
    
    1,167,000
    
    
    
    1,260,000Deferred tax asset
    
    
    299,000
    
    
    
    594,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    50,913,000
    
    
    $
    52,562,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,116,000
    
    
    $
    16,475,000Current maturities of capital lease obligations
    
    
    42,000
    
    
    
    39,000Accounts payable
    
    
    3,429,000
    
    
    
    3,909,000Accrued liabilities
    
    
    3,809,000
    
    
    
    3,934,00010,396,000
    
    
    
    24,357,000Long-term debt
    
    
    30,563,000
    
    
    
    19,738,000Long-term capital lease obligations
    
    
    1,074,000
    
    
    
    1,105,000Other long-term liabilities
    
    
    4,088,000
    
    
    
    4,061,000Deferred tax liabilities
    
    
    2,465,000
    
    
    
    2,130,000SHAREHOLDERS EQUITYPreferred shares, 1,000,000 shares authorized,
no shares outstandingCommon 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
    
    
    
    29,432,000Accumulated deficit
    
    
    (27,110,000
    )
    
    
    (28,210,000
    )Total shareholders equity
    
    
    2,327,000
    
    
    
    1,171,000$
    50,913,000
    
    
    $
    52,562,000




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##### 



Capital in
    
    
    
    
    
    TotalCommon Shares
    
    Treasury Shares
    
    excess of
    
    Accumulated
    
    ShareholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    stated value
    
    Deficit
    
    EquityBalance March 1,
2009
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,432,000
    
    
    $
    (28,210,000
    )
    
    $
    1,171,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,100,000
    
    
    
    1,100,000Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    
    
    
    
    56,000Balance November 8,
2009
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,488,000
    
    
    $
    (27,110,000
    )
    
    $
    2,327,000




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##### 



Thirty-six Weeks EndedNovember 8, 2009
    
    November 9, 2008Cash flows from operating activities:Net income (loss)
    
    $
    1,100,000
    
    
    $
    (614,000
    )Adjustments to reconcile net income (loss) to net cash
from operating activities:Depreciation and amortization
    
    
    2,113,000
    
    
    
    2,353,000Amortization of deferred financing costs
    
    
    83,000
    
    
    
    86,000Amortization of supply agreement advances
    
    
    (846,000
    )
    
    
    (706,000
    )Funding from supply agreements
    
    
    42,000
    
    
    
    82,000Deferred taxes
    
    
    630,000
    
    
    
    417,000Stock compensation expense
    
    
    56,000
    
    
    
    296,000(Gain) loss on restaurant assets
    
    
    12,000
    
    
    
    (13,000
    )Changes in assets and liabilities:Receivables
    
    
    389,000
    
    
    
    (4,000
    )Inventories
    
    
    54,000
    
    
    
    1,000Prepaid expenses
    
    
    (33,000
    )
    
    
    48,000Other assets
    
    
    11,000
    
    
    
    67,000Accounts payable
    
    
    (480,000
    )
    
    
    (1,167,000
    )Accrued liabilities and other
    
    
    712,000
    
    
    
    (910,000
    )Net cash from operating activities
    
    
    3,843,000
    
    
    
    (64,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (1,072,000
    )
    
    
    (3,581,000
    )Proceeds from sale of fixed assets
    
    
    119,000
    
    
    
    Purchase of franchise agreement
    
    
    (4,000
    )
    
    
    (9,000
    )Proceeds from sale/leasebacks
    
    
    
    
    
    
    1,972,000Net cash from investing activities
    
    
    (957,000
    )
    
    
    (1,618,000
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    
    
    
    
    3,000,000Principal payments on long-term debt
    
    
    (2,228,000
    )
    
    
    (2,264,000
    )Principal payments on capital lease obligations
    
    
    (28,000
    )
    
    
    (20,000
    )Bank debt repayment in advance
    
    
    (306,000
    )
    
    
    (2,451,000
    )Deferred gain on sale/leaseback transactions
    
    
    
    
    
    
    3,216,000Net cash from financing activities
    
    
    (2,562,000
    )
    
    
    1,481,000Net change in cash and equivalents
    
    
    324,000
    
    
    
    (201,000
    )Cash and equivalents, beginning balance
    
    
    5,257,000
    
    
    
    6,428,000Cash and equivalents, ending balance
    
    $
    5,581,000
    
    
    $
    6,227,000




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##### 



NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   NOTE 2  RECENT ACCOUNTING PRONOUNCEMENTS
  NOTE 3  NET INCOME PER COMMON SHARE




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##### 



For the Quarter ended November 8, 2009
    
    
    For the Quarter ended November 9, 2008Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome available to common
shareholders
    
    $
    426,000
    
    
    
    2,934,995
    
    
    $
    0.15
    
    
    $
    (67,000
    )
    
    
    2,934,995
    
    
    $
    (0.02
    )Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    60,546
    
    
    
    
    
    
    
    
    
    
    
    4,131Diluted EPSIncome available to common
shareholders
    
    $
    426,000
    
    
    
    2,995,541
    
    
    $
    0.14
    
    
    $
    (67,000
    )
    
    
    2,939,126
    
    
    $
    (0.02
    )
 Thirty-six weeks ended November 8, 2009
    
    
    Thirty-six weeks ended November 9, 2008Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome available to common
shareholders
    
    $
    1,100,000
    
    
    
    2,934,995
    
    
    $
    0.37
    
    
    $
    (614,000
    )
    
    
    2,934,995
    
    
    $
    (0.21
    )Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    48,007
    
    
    
    
    
    
    
    
    
    
    
    12,162Diluted EPSIncome available to common
shareholders
    
    $
    1,100,000
    
    
    
    2,983,002
    
    
    $
    0.37
    
    
    $
    (614,000
    )
    
    
    2,947,157
    
    
    $
    (0.21
    )
  NOTE 4  DEBT
  NOTE 5  STOCK OPTIONS




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##### 



Exercise
    
    Outstanding
    
    Average
    
    NumberPrices
    
    11-8-09
    
    Life
    
    Exercisable$3.00
    
    7,500
    
    0.2
    
    7,500$1.50
    
    150,000
    
    9.0
    
    150,000$1.57
    
    157,500
    
    8.6
    
    157,500
 NOTE 6  CAPITAL EXPENDITURES




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##### 



Number of Units
    
    Period
    
    Type
    
    Total (1)
    
    Required (2)
    
    Additional (3)4
    
    Fiscal 2010
    
    IE
    
    $
    1,370,000
    
    
    
    1,210,000
    
    
    $
    160,0002
    
    Fiscal 2011
    
    Relo (4)
    
    
    2,150,000
    
    
    
    2,150,000
    
    
    
    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 (4)
    
    
    5,600,000
    
    
    
    5,600,000
    
    
    
    1
    
    Fiscal 2016
    
    Relo (4)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    4
    
    Fiscal 2020
    
    Relo (4)
    
    
    5,600,000
    
    
    
    5,600,000
    
    
    
    1
    
    Fiscal 2020
    
    Rebuild
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    35
    
    Total
    
    
    
    $
    23,880,000
    
    
    $
    23,000,000
    
    
    $
    880,000
 (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 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(4)
    
    Relocation 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.
   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




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##### 



Summary of Expenses and Operating Income as a Percentage of Revenues
 Quarter Ended
    
    Thirty-six Weeks EndedNovember 8, 2009
    
    November 9, 2008
    
    November 8, 2009
    
    November 9, 2008Cost of sales:Food, paper and beverage
    
    
    30.9
    %
    
    
    32.9
    %
    
    
    31.7
    %
    
    
    32.5
    %Labor and benefits
    
    
    28.4
    %
    
    
    28.7
    %
    
    
    28.0
    %
    
    
    28.6
    %Restaurant operating expenses
    
    
    26.0
    %
    
    
    25.5
    %
    
    
    25.8
    %
    
    
    25.6
    %Depreciation and amortization
    
    
    3.3
    %
    
    
    3.6
    %
    
    
    3.2
    %
    
    
    3.5
    %General and administrative
expenses
    
    
    6.0
    %
    
    
    5.4
    %
    
    
    6.1
    %
    
    
    5.8
    %Operating income
    
    
    5.4
    %
    
    
    3.9
    %
    
    
    5.2
    %
    
    
    3.9
    %
 Revenues ®
 Cost of Sales  Food, Paper and Beverage
 Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization.
 General and Administrative Expenses
 Loss (gain) on Restaurant Assets




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##### 



Operating Income
 Interest Expense
 Other Income
 Provision for Income Taxes
   Liquidity and Capital Resources




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##### 



Recent Accounting Pronouncements
 Seasonality
 Safe Harbor Statements
 Item 3. Quantitative and Qualitative Disclosures About Market Risk




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##### 



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
  Item 5. Other Information
  Item 6. Exhibits




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##### 



MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and SecretaryDecember 23, 2009




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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.