##### 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 24, 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)
 (216) 359-9000
 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 4. 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 HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESMORGANS FOODS, INC. INDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Quarter EndedMay 24, 2009
    
    May 25, 2008Revenues
    
    $
    22,931,000
    
    
    $
    21,753,000Cost of sales:Food, paper and beverage
    
    
    7,410,000
    
    
    
    6,964,000Labor and benefits
    
    
    6,428,000
    
    
    
    6,238,000Restaurant operating expenses
    
    
    5,876,000
    
    
    
    5,487,000Depreciation and amortization
    
    
    717,000
    
    
    
    773,000General and administrative expenses
    
    
    1,409,000
    
    
    
    1,350,000Loss on restaurant assets
    
    
    6,000
    
    
    
    5,000Operating income
    
    
    1,085,000
    
    
    
    936,000Interest expense:Bank debt and notes payable
    
    
    625,000
    
    
    
    824,000Capital leases
    
    
    25,000
    
    
    
    26,000Other income and expense, net
    
    
    (44,000
    )
    
    
    (90,000
    )Income before income taxes
    
    
    479,000
    
    
    
    176,000Provision for income taxes
    
    
    125,000
    
    
    
    82,000Net income
    
    $
    354,000
    
    
    $
    94,000Basic net income per common share:
    
    $
    0.12
    
    
    $
    0.03Diluted net income per common share:
    
    $
    0.12
    
    
    $
    0.03
  2




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May 24, 2009
    
    March 1, 2009(UNAUDITED)
    
    (AS RESTATED)ASSETSCurrent assets:Cash and equivalents
    
    $
    7,634,000
    
    
    $
    5,257,000Receivables
    
    
    447,000
    
    
    
    806,000Inventories
    
    
    778,000
    
    
    
    731,000Prepaid expenses
    
    
    511,000
    
    
    
    624,000Assets held for sale
    
    
    828,000
    
    
    
    828,00010,198,000
    
    
    
    8,246,000Property and equipment:Land
    
    
    9,558,000
    
    
    
    9,558,000Buildings and improvements
    
    
    20,702,000
    
    
    
    20,692,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,364,000
    
    
    
    10,615,000Equipment, furniture and fixtures
    
    
    20,043,000
    
    
    
    19,891,000Construction in progress
    
    
    308,000
    
    
    
    316,00062,289,000
    
    
    
    62,386,000Less accumulated depreciation and amortization
    
    
    30,028,000
    
    
    
    29,827,00032,261,000
    
    
    
    32,559,000Other assets
    
    
    647,000
    
    
    
    676,000Franchise agreements, net
    
    
    1,224,000
    
    
    
    1,260,000Deferred tax asset
    
    
    555,000
    
    
    
    594,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    54,112,000
    
    
    $
    52,562,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,058,000
    
    
    $
    16,475,000Current maturities of capital lease obligations
    
    
    40,000
    
    
    
    39,000Accounts payable
    
    
    4,840,000
    
    
    
    3,909,000Accrued liabilities
    
    
    4,608,000
    
    
    
    3,934,00012,546,000
    
    
    
    24,357,000Long-term debt
    
    
    32,429,000
    
    
    
    19,738,000Long-term capital lease obligations
    
    
    1,095,000
    
    
    
    1,105,000Other long-term liabilities
    
    
    4,254,000
    
    
    
    4,061,000Deferred tax liabilities
    
    
    2,207,000
    
    
    
    2,130,000SHAREHOLDERS EQUITYPreferred shares, 1,000,000 shares authorized,
no shares outstanding
    
    
    
    
    
    
    Common shares, 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
    
    
    (27,856,000
    )
    
    
    (28,210,000
    )Total shareholders equity
    
    
    1,581,000
    
    
    
    1,171,000$
    54,112,000
    
    
    $
    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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    354,000
    
    
    
    354,000Stock compensation
expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    
    
    
    
    56,000Balance May 24, 2009
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,488,000
    
    
    $
    (27,856,000
    )
    
    $
    1,581,000
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Quarter EndedMay 24, 2009
    
    May 25, 2008Cash flows from operating activities:Net income
    
    $
    354,000
    
    
    $
    94,000Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    717,000
    
    
    
    773,000Amortization of deferred financing costs
    
    
    27,000
    
    
    
    27,000Amortization of supply agreement advances
    
    
    (257,000
    )
    
    
    (242,000
    )Funding from supply agreements
    
    
    
    
    
    
    37,000Deferred income taxes
    
    
    116,000
    
    
    
    68,000Stock compensation expense
    
    
    56,000
    
    
    
    Loss on restaurant assets
    
    
    6,000
    
    
    
    5,000Changes in assets and liabilities:Receivables
    
    
    359,000
    
    
    
    73,000Inventories
    
    
    (47,000
    )
    
    
    (38,000
    )Prepaid expenses
    
    
    113,000
    
    
    
    (121,000
    )Other assets
    
    
    2,000
    
    
    
    Accounts payable
    
    
    931,000
    
    
    
    (482,000
    )Accrued liabilities
    
    
    1,136,000
    
    
    
    (431,000
    )Net cash provided by (used in) operating activities
    
    
    3,513,000
    
    
    
    (237,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (401,000
    )
    
    
    (2,213,000
    )Net cash used in investing activities
    
    
    (401,000
    )
    
    
    (2,213,000
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (726,000
    )
    
    
    (804,000
    )Principal payments on capital lease obligations
    
    
    (9,000
    )
    
    
    (7,000
    )Net cash used in financing activities
    
    
    (735,000
    )
    
    
    (811,000
    )Net change in cash and equivalents
    
    
    2,377,000
    
    
    
    (3,261,000
    )Cash and equivalents, beginning balance
    
    
    5,257,000
    
    
    
    6,428,000Cash and equivalents, ending balance
    
    $
    7,634,000
    
    
    $
    3,167,000
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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
    NOTE 2  NET INCOME PER COMMON SHARE
  For the Quarter ended May 24, 2009
    
    For the Quarter ended May 25, 2008Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net income
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    354,000
    
    
    
    2,934,995
    
    
    $
    0.12
    
    
    $
    94,000
    
    
    
    2,934,995
    
    
    $
    0.03Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    28,110
    
    
    
    
    
    
    
    
    
    
    
    22,901Diluted EPSIncome available to common shareholders
    
    $
    354,000
    
    
    
    2,963,105
    
    
    $
    0.12
    
    
    $
    94,000
    
    
    
    2,957,896
    
    
    $
    0.03
  6




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NOTE 3  DEBT
  Restatement
  NOTE 4  STOCK OPTIONS
     Exercise
    
    Outstanding
    
    Average
    
    NumberPrices
    
    5-24-09
    
    Life
    
    Exercisable$
    3.00
    
    
    
    7,500
    
    
    
    0.6
    
    
    
    7,5001.50
    
    
    
    150,000
    
    
    
    9.7
    
    
    
    150,000$
    1.57
    
    
    
    157,500
    
    
    
    9.2
    
    
    
    157,500
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NOTE 5  CAPITAL EXPENDITURES
   Number of Units
    
    Period
    
    Type
    
    Total (1)
    
    Required (2)
    
    Additional (3)1
    
    Fiscal 2010
    
    IE
    
    $
    390,000
    
    
    
    350,000
    
    
    $
    40,0001
    
    Fiscal 2011
    
    Relo (4)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    8
    
    Fiscal 2011
    
    IE
    
    
    2,560,000
    
    
    
    2,240,000
    
    
    
    320,0001
    
    Fiscal 2012
    
    Relo (4)
    
    
    750,000
    
    
    
    750,000
    
    
    
    8
    
    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
    
    
    
    2
    
    Fiscal 2020
    
    Rebuild
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    36
    
    Total
    
    
    
    
    
    $
    24,860,000
    
    
    $
    23,980,000
    
    
    $
    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 enhancement.(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.   8




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NOTE 6 ASSETS HELD FOR SALE
  
 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 24, 2009
    
    May 25, 2008Cost of sales:Food, paper and beverage
    
    
    32.3
    %
    
    
    32.0
    %Labor and benefits
    
    
    28.0
    %
    
    
    28.7
    %Restaurant operating expenses
    
    
    25.6
    %
    
    
    25.2
    %Depreciation and amortization
    
    
    3.1
    %
    
    
    3.6
    %General and administrative expenses
    
    
    6.1
    %
    
    
    6.2
    %Operating income
    
    
    4.7
    %
    
    
    4.3
    %
 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 on Restaurant Assets
 9




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Operating Income
 Interest Expense
 Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
  New Accounting Pronouncements
  10




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Seasonality
 Safe Harbor Statements
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures.
     11




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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
  
   MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and Secretary 
July 13, 2009 12




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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.
 13