##### 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 August 16, 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)
 (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer
o
    
    Non-accelerated filer o
    
    Smaller reporting company
þ(Do not check if a smaller reporting company)
 o þ




---



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 ProceduresPART 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. ExhibitsSIGNATURESINDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Financial Statements
 
 Quarter EndedAugust 16, 2009
    
    August 17, 2008Revenues
    
    $
    23,202,000
    
    
    $
    23,049,000Cost of sales:Food, paper and beverage
    
    
    7,356,000
    
    
    
    7,506,000Labor and benefits
    
    
    6,405,000
    
    
    
    6,557,000Restaurant operating expenses
    
    
    6,004,000
    
    
    
    6,041,000Depreciation and amortization
    
    
    711,000
    
    
    
    791,000General and administrative expenses
    
    
    1,437,000
    
    
    
    1,364,000Loss (gain) on restaurant assets
    
    
    15,000
    
    
    
    (9,000
    )Operating income
    
    
    1,274,000
    
    
    
    799,000Interest expense:Prepayment and deferred financing costs
    
    
    82,000
    
    
    
    428,000Bank debt and notes payable
    
    
    591,000
    
    
    
    734,000Capital leases
    
    
    25,000
    
    
    
    27,000Other income and expense, net
    
    
    (43,000
    )
    
    
    (79,000
    )Income (loss) before income taxes
    
    
    619,000
    
    
    
    (311,000
    )Provision for income taxes
    
    
    299,000
    
    
    
    330,000Net income (loss)
    
    $
    320,000
    
    
    $
    (641,000
    )Basic net income (loss) per common share:
    
    $
    0.11
    
    
    $
    (0.22
    )Diluted net income (loss) per common share:
    
    $
    0.11
    
    
    $
    (0.22
    )Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,934,995Diluted weighted average number of shares outstanding
    
    
    2,990,361
    
    
    
    2,944,450
  2




---



##### Table of Contents



Twenty-four Weeks EndedAugust 16, 2009
    
    August 17, 2008Revenues
    
    $
    46,133,000
    
    
    $
    44,802,000Cost of sales:Food, paper and beverage
    
    
    14,766,000
    
    
    
    14,470,000Labor and benefits
    
    
    12,833,000
    
    
    
    12,795,000Restaurant operating expenses
    
    
    11,880,000
    
    
    
    11,528,000Depreciation and amortization
    
    
    1,428,000
    
    
    
    1,564,000General and administrative expenses
    
    
    2,846,000
    
    
    
    2,714,000Loss (gain) on restaurant assets
    
    
    21,000
    
    
    
    (4,000
    )Operating income
    
    
    2,359,000
    
    
    
    1,735,000Interest expense:Prepayment and deferred financing costs
    
    
    82,000
    
    
    
    428,000Bank debt and notes payable
    
    
    1,216,000
    
    
    
    1,558,000Capital leases
    
    
    50,000
    
    
    
    53,000Other income and expense, net
    
    
    (87,000
    )
    
    
    (169,000
    )Income (loss) before income taxes
    
    
    1,098,000
    
    
    
    (135,000
    )Provision for income taxes
    
    
    424,000
    
    
    
    412,000Net income (loss)
    
    $
    674,000
    
    
    $
    (547,000
    )Basic net income (loss) per common share:
    
    $
    0.23
    
    
    $
    (0.19
    )Diluted net income (loss) per common share:
    
    $
    0.23
    
    
    $
    (0.19
    )Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,934,995Diluted weighted average number of shares outstanding
    
    
    2,976,733
    
    
    
    2,951,173
  3




---



##### Table of Contents



August 16, 2009
    
    March 1, 2009ASSETSCurrent assets:Cash and equivalents
    
    $
    6,875,000
    
    
    $
    5,257,000Receivables
    
    
    461,000
    
    
    
    806,000Inventories
    
    
    710,000
    
    
    
    731,000Prepaid expenses
    
    
    322,000
    
    
    
    624,000Assets held for sale
    
    
    678,000
    
    
    
    828,0009,046,000
    
    
    
    8,246,000Property and equipment:Land
    
    
    9,558,000
    
    
    
    9,558,000Buildings and improvements
    
    
    20,886,000
    
    
    
    20,692,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,444,000
    
    
    
    10,615,000Equipment, furniture and fixtures
    
    
    20,115,000
    
    
    
    19,891,000Construction in progress
    
    
    372,000
    
    
    
    316,00062,689,000
    
    
    
    62,386,000Less accumulated depreciation and amortization
    
    
    30,708,000
    
    
    
    29,827,00031,981,000
    
    
    
    32,559,000Other assets
    
    
    614,000
    
    
    
    676,000Franchise agreements, net
    
    
    1,198,000
    
    
    
    1,260,000Deferred tax asset
    
    
    398,000
    
    
    
    594,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    52,464,000
    
    
    $
    52,562,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,066,000
    
    
    $
    16,475,000Current maturities of capital lease obligations
    
    
    41,000
    
    
    
    39,000Accounts payable
    
    
    4,105,000
    
    
    
    3,909,000Accrued liabilities
    
    
    4,408,000
    
    
    
    3,934,00011,620,000
    
    
    
    24,357,000Long-term debt
    
    
    31,363,000
    
    
    
    19,738,000Long-term capital lease obligations
    
    
    1,085,000
    
    
    
    1,105,000Other long-term liabilities
    
    
    4,152,000
    
    
    
    4,061,000Deferred tax liabilities
    
    
    2,343,000
    
    
    
    2,130,000SHAREHOLDERS 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
    
    
    
    29,432,000Accumulated deficit
    
    
    (27,536,000
    )
    
    
    (28,210,000
    )Total shareholders equity
    
    
    1,901,000
    
    
    
    1,171,000$
    52,464,000
    
    
    $
    52,562,000
  4




---



##### Table of Contents



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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    674,000
    
    
    
    674,000Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    
    
    
    
    56,000Balance May 24, 2009
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,488,000
    
    
    $
    (27,536,000
    )
    
    $
    1,901,000
  5




---



##### Table of Contents



Twenty-four Weeks EndedAugust 16, 2009
    
    August 17, 2008Cash flows from operating activities:Net income (loss)
    
    $
    674,000
    
    
    $
    (547,000
    )Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,428,000
    
    
    
    1,564,000Amortization of deferred financing costs
    
    
    57,000
    
    
    
    59,000Amortization of supply agreement advances
    
    
    (563,000
    )
    
    
    (473,000
    )Funding from supply agreements
    
    
    
    
    
    
    38,000Deferred income taxes
    
    
    409,000
    
    
    
    472,000Stock compensation expense
    
    
    56,000
    
    
    
    Disposal of restaurant assets
    
    
    21,000
    
    
    
    (4,000
    )Changes in assets and liabilities:Receivables
    
    
    395,000
    
    
    
    18,000Inventories
    
    
    21,000
    
    
    
    (32,000
    )Prepaid expenses
    
    
    302,000
    
    
    
    297,000Other assets
    
    
    5,000
    
    
    
    Accounts payable
    
    
    196,000
    
    
    
    (840,000
    )Accrued liabilities
    
    
    1,106,000
    
    
    
    (819,000
    )Net cash provided by (used in) operating activities
    
    
    4,107,000
    
    
    
    (267,000
    )Cash flows from investing activities:Proceeds from sale of restaurant
    
    
    119,000
    
    
    
    Capital expenditures
    
    
    (802,000
    )
    
    
    (2,956,000
    )Proceeds from sale/leasebacks
    
    
    
    
    
    
    1,972,000Purchase of license and other investments
    
    
    (4,000
    )
    
    
    Net cash used in investing activities
    
    
    (687,000
    )
    
    
    (984,000
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    
    
    
    
    3,000,000Principal payments on long-term debt
    
    
    (1,478,000
    )
    
    
    (1,532,000
    )Principal payments on capital lease obligations
    
    
    (18,000
    )
    
    
    (13,000
    )Bank debt repayment in advance
    
    
    (306,000
    )
    
    
    (2,451,000
    )Deferred gain on sale/leaseback transactions
    
    
    
    
    
    
    3,216,000Net cash provided by (used in) financing activities
    
    
    (1,802,000
    )
    
    
    2,220,000Net change in cash and equivalents
    
    
    1,618,000
    
    
    
    969,000Cash and equivalents, beginning balance
    
    
    5,257,000
    
    
    
    6,428,000Cash and equivalents, ending balance
    
    $
    6,875,000
    
    
    $
    7,397,000
    6




---



##### Table of Contents



NOTE 1   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
   NOTE 2  RECENT ACCOUNTING PRONOUNCEMENTS
  NOTE 3  NET INCOME PER COMMON SHARE
  7




---



##### Table of Contents



For the Quarter ended August 16, 2009
    
    
    For the Quarter ended August 17, 2008Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    320,000
    
    
    
    2,934,995
    
    
    $
    0.11
    
    
    $
    (641,000
    )
    
    
    2,934,995
    
    
    $
    (0.22
    )Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    55,366
    
    
    
    
    
    
    
    
    
    
    
    9,455Diluted EPSIncome available to common shareholders
    
    $
    320,000
    
    
    
    2,990,361
    
    
    $
    0.11
    
    
    $
    (641,000
    )
    
    
    2,944,450
    
    
    $
    (0.22
    )
 Twenty-four weeks ended August 16, 2009
    
    
    Twenty-four weeks ended August 17, 2008Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome available to common shareholders
    
    $
    674,000
    
    
    
    2,934,995
    
    
    $
    0.23
    
    
    $
    (547,000
    )
    
    
    2,934,995
    
    
    $
    (0.19
    )Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    41,738
    
    
    
    
    
    
    
    
    
    
    
    16,178Diluted EPSIncome available to common shareholders
    
    $
    674,000
    
    
    
    2,976,733
    
    
    $
    0.23
    
    
    $
    (547,000
    )
    
    
    2,951,173
    
    
    $
    (0.19
    )
  NOTE 4  DEBT
  NOTE 5  STOCK OPTIONS
   8




---



##### Table of Contents



Exercise
    
    
    
    Outstanding
    
    
    
    
    
    NumberPrices
    
    
    
    8-16-09
    
    Average Life
    
    Exercisable$
    3.00
    
    
    
    
    
    7,500
    
    
    
    0.5
    
    
    
    7,500$
    1.50
    
    
    
    
    
    150,000
    
    
    
    9.2
    
    
    
    150,000$
    1.57
    
    
    
    
    
    157,500
    
    
    
    8.8
    
    
    
    157,500
 NOTE 6  CAPITAL EXPENDITURES
   9




---



##### Table of Contents



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.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. Capital
expenditures in the volume and time horizon required by the image enhancement deadlines cannot be
financed solely from existing cash balances and existing cashflow and the Company expects that it
will have to utilize financing for a portion of the capital expenditures. The Company may use both
debt and sale leaseback financing but has no commitments for either.  NOTE 7
 ASSETS HELD FOR SALE
  
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
 Description of Business
 10




---



##### Table of Contents



Summary of Expenses and Operating Income as a Percentage of Revenues
 Quarter Ended
    
    Twenty-four Weeks EndedAugust 16, 2009
    
    August 17, 2008
    
    August 16, 2009
    
    August 17, 2008Cost of sales:Food, paper and beverage
    
    
    31.7
    %
    
    
    32.6
    %
    
    
    32.0
    %
    
    
    32.3
    %Labor and benefits
    
    
    27.6
    %
    
    
    28.4
    %
    
    
    27.8
    %
    
    
    28.6
    %Restaurant operating expenses
    
    
    25.9
    %
    
    
    26.2
    %
    
    
    25.8
    %
    
    
    25.7
    %Depreciation and amortization
    
    
    3.1
    %
    
    
    3.4
    %
    
    
    3.1
    %
    
    
    3.5
    %General and administrative expenses
    
    
    6.2
    %
    
    
    5.9
    %
    
    
    6.2
    %
    
    
    6.1
    %Operating income
    
    
    5.5
    %
    
    
    3.5
    %
    
    
    5.1
    %
    
    
    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
 Operating Income
 Interest Expense
 11




---



##### Table of Contents



Other Income
 Provision for Income Taxes
   Liquidity and Capital Resources
  12




---



##### Table of Contents



Recent Accounting Pronouncements
 Seasonality
 Safe Harbor Statements
 
 Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4.
    
    Controls and Procedures.
   13




---



##### Table of Contents



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
   WITHHOLD/NAME
    
    FOR
    
    ABSTAINLeonard Stein-Sapir
    
    
    2,273,335
    
    
    
    372,085Lawrence S. Dolin
    
    
    2,282,622
    
    
    
    362,798Bahman Guyuron, M.D.
    
    
    2,282,622
    
    
    
    362,798Kenneth L. Hignett
    
    
    2,273,405
    
    
    
    372,015Steven S. Kaufman
    
    
    2,161,560
    
    
    
    483,860Bernard Lerner
    
    
    2,282,614
    
    
    
    362,806James J. Liguori
    
    
    2,273,405
    
    
    
    372,015
 
 Item 5.
    
    Other Information
  
 Item 6.
    
    Exhibits
  14




---



##### Table of Contents



MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and SecretarySeptember 30, 2009 15




---



##### Table of Contents



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.
 16