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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 For the fiscal year ended February 27, 2011 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 Number)
 
   Title of each class
    
    Name of each exchange on which registeredCommon Shares, Without Par Value
  o þ
 o þ
 þ o
 o o
 þ
  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
   DOCUMENTS INCORPORATED BY REFERENCE




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PART I
 ITEM 1. BUSINESS
 General
  Restaurant Operations
   Franchise Agreements
   2




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Competition
   Government Regulation
    Suppliers
  Growth
  Employees
  3




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ITEM 1A. RISK FACTORS
  Image Enhancement and Capital Expenditure Requirements
 The Company faces significant image enhancement and relocation requirements in future fiscal
years as described under Required Image Enhancements in Part II of this report. There is
no assurance that the Company will be able to obtain sale/leaseback or debt financing on
terms which it finds reasonably acceptable to fund these obligations when due. Lack of
acceptable financing could have a material adverse affect on the operations of the Company,
including the loss of restaurants subject to enhancement or relocation requirements under
applicable franchise agreements.
 Product and Marketing Success of Franchisors
 The Company relies heavily on the success of its franchisors in developing products and
marketing programs which support its revenues. Failure of the franchisors to provide
appropriate support could have a significant negative impact on the Companys financial
performance.
 Failure to Meet Loan Covenants
 If the Company does not meet the periodic requirements of its loan covenants and is unable to
obtain waivers of these deficiencies, its lenders could take actions which would have a
material adverse impact on the Companys results of operations.
 Contamination of the Food Supply
 The food supply in general is subject to the accidental or intentional introduction of
contaminants which can cause illness or death in humans. To the extent that the Companys
food supplies become impacted by any of these contaminants, the Companys revenue could be
significantly reduced and the Company could be subjected to related liability claims.
 Litigation
 The Company is involved in various commercial activities in the operation of its restaurants.
These activities may generate the potential for legal claims against the Company. While
many of these risks are covered by insurance, the costs of litigating large claims and any
potential resulting uninsured liability could have a material adverse effect on the Companys
results of operations.
 Environmental Liabilities
 In operating its restaurants, the Company is the owner of many real estate parcels.
Environmental problems at any of these sites could cause significant costs and liabilities
for the Company.
 Food and Labor Cost Increases
 The Company is exposed to numerous cost pressures in the operation of its restaurants
including food, fuel and minimum wage increases. To the extent that the business environment
prohibits the Company from passing on these increased costs in its selling prices, there
could be a material negative impact on the results of operations.
 4




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Outbreak of Avian Flu or Mad Cow Disease
 Due to the Companys reliance on poultry in its menu items, an outbreak of the Avian Flu in
the United States could cause a shortage of chicken or could cause unreasonable
panic in the public related to the consumption of chicken products, either of which would
likely have a significant adverse impact on the Companys business. To a lesser extent the
Company also uses beef in certain of its menu items and the conditions discussed above could
apply to an outbreak of Mad Cow disease.
 Governmental Laws and Regulations
 The operations of the Company are subject to many federal, state and local regulations
governing health, sanitation, workplace safety, public access, wages and benefits among other
things. The Company is also subject to various privacy and security regulations. Changes to
any of these regulations can have a significant adverse impact on the operations of the
Company.
 Quick Service Restaurant Competition
 The quick service restaurant industry in which the Company operates is highly competitive and
consumers have many choices other than the Companys restaurants. Changes in consumer tastes
or preferences could have a significant adverse impact on the operations of the Company.
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  ITEM 2. PROPERTIES
    ITEM 3. LEGAL PROCEEDINGS
  ITEM 4. (Removed and Reserved)
 5




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Executive Officers of the Company
  Name
    
    Age
    
    Position with Registrant
    
    Officer SinceExecutive Officers:Leonard R. Stein-Sapir
    
    
    72
    
    
    Chairman of the Board and Chief Executive Officer
    
    April 1989James J. Liguori
    
    
    62
    
    
    President and Chief Operating Officer
    
    June 1979Kenneth L. Hignett
    
    
    64
    
    
    Senior Vice President  Chief Financial Officer & Secretary
    
    May 1989Other Officers:Barton J. Craig
    
    
    62
    
    
    Senior Vice President  General Counsel
    
    January 1994Vincent J. Oddi
    
    
    68
    
    
    Vice President  Restaurant Development
    
    September 1979Ramesh J. Gursahaney
    
    
    62
    
    
    Vice President  Operations
    
    January 1991
  6




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PART II
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Price RangeHigh
    
    
    LowYear ended February 27, 2011:1st Quarter
    
    $
    5.00
    
    
    $
    3.302nd Quarter
    
    
    4.00
    
    
    
    2.113rd Quarter
    
    
    4.00
    
    
    
    2.654th Quarter
    
    
    3.00
    
    
    
    2.05Year ended February 28, 2010:1st Quarter
    
    $
    2.60
    
    
    $
    1.012nd Quarter
    
    
    3.00
    
    
    
    1.753rd Quarter
    
    
    3.00
    
    
    
    2.054th Quarter
    
    
    3.60
    
    
    
    2.00
   Number of
    
    
    
    
    
    
    Number of sharessecurities to be
    
    
    
    
    
    
    remaining forissued upon
    
    
    Weighted average
    
    
    future issuanceexercise of
    
    
    exercise price of
    
    
    under equityPlan Category
    
    outstanding options
    
    
    outstanding options
    
    
    compensation plansEquity
Compensation plans
approved by
security holders
    
    
    148,650
    
    
    $
    1.50
    
    
    
    Equity
Compensation plans
not approved by
security holders
    
    
    350
    
    
    $
    1.50
    
    
    
    Total
    
    
    149,000
    
    
    $
    1.50
    
    
    
    
 7




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Shareholder Return Performance Graph
  Comparison Of Cumulative Five Year Total Return
 
 2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011MORGANS FOODS INC
    
    
    100
    
    
    
    253
    
    
    
    131
    
    
    
    40
    
    
    
    69
    
    
    
    41S&P MIDCAP 400 INDEX
    
    
    100
    
    
    
    113
    
    
    
    104
    
    
    
    60
    
    
    
    100
    
    
    
    133RESTAURANT PEER
GROUP
    
    
    100
    
    
    
    128
    
    
    
    127
    
    
    
    39
    
    
    
    75
    
    
    
    114
  8




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ITEM 6. SELECTED FINANCIAL DATA
  Years EndedFebruary 27,
    
    
    February 28,
    
    
    March 1,
    
    
    March 2,
    
    
    February 25,$ in thousands, except per share amounts
    
    2011
    
    
    2010
    
    
    2009
    
    
    2008
    
    
    2007Revenues
    
    $
    89,891
    
    
    $
    90,544
    
    
    $
    92,485
    
    
    $
    96,318
    
    
    $
    91,248Cost of sales:Food, paper and beverage
    
    
    28,267
    
    
    
    28,457
    
    
    
    29,695
    
    
    
    29,524
    
    
    
    27,981Labor and benefits
    
    
    26,533
    
    
    
    26,448
    
    
    
    26,850
    
    
    
    27,404
    
    
    
    24,798Restaurant operating expenses
    
    
    23,748
    
    
    
    23,931
    
    
    
    24,068
    
    
    
    24,415
    
    
    
    22,765Depreciation and amortization
    
    
    2,831
    
    
    
    3,026
    
    
    
    3,224
    
    
    
    2,953
    
    
    
    2,950General and administrative expenses
    
    
    5,450
    
    
    
    5,409
    
    
    
    5,740
    
    
    
    6,111
    
    
    
    5,428Loss on restaurant assets
    
    
    841
    
    
    
    75
    
    
    
    417
    
    
    
    112
    
    
    
    5Operating income
    
    
    2,221
    
    
    
    3,198
    
    
    
    2,491
    
    
    
    5,799
    
    
    
    7,321Provision for income taxes
    
    
    637
    
    
    
    340
    
    
    
    391
    
    
    
    349
    
    
    
    136Net income (loss)
    
    
    (988
    )
    
    
    396
    
    
    
    (1,390
    )
    
    
    414
    
    
    
    3,527Basic net income (loss) per comm. sh.
(1)
    
    
    (0.34
    )
    
    
    0.13
    
    
    
    (0.47
    )
    
    
    0.14
    
    
    
    1.29Diluted net income (loss) per comm.
sh. (1)
    
    
    (0.34
    )
    
    
    0.13
    
    
    
    (0.47
    )
    
    
    0.14
    
    
    
    1.27Working capital deficiency
    
    
    (29,770
    )
    
    
    (3,984
    )
    
    
    (16,091
    )
    
    
    (5,335
    )
    
    
    (2,403
    )Total assets
    
    
    44,088
    
    
    
    48,925
    
    
    
    51,988
    
    
    
    55,962
    
    
    
    52,323LT debt and capital lease  current
portion
    
    
    27,097
    
    
    
    3,209
    
    
    
    16,514
    
    
    
    3,224
    
    
    
    2,941Long-term debt less current maturities
    
    
    
    
    
    
    29,725
    
    
    
    19,738
    
    
    
    35,789
    
    
    
    34,445Long-term capital lease obligations
    
    
    1,013
    
    
    
    1,061
    
    
    
    1,105
    
    
    
    1,144
    
    
    
    1,299Shareholders equity
    
    
    635
    
    
    
    1,623
    
    
    
    1,171
    
    
    
    2,473
    
    
    
    1,839Net cash flow operating activities
    
    
    3,667
    
    
    
    3,849
    
    
    
    (98
    )
    
    
    4,856
    
    
    
    7,114Net cash flow investing activities
    
    
    1,047
    
    
    
    (1,539
    )
    
    
    1,727
    
    
    
    (8,061
    )
    
    
    (3,057
    )Net cash flow financing activities
    
    
    (5,885
    )
    
    
    (3,362
    )
    
    
    (2,800
    )
    
    
    1,804
    
    
    
    (2,643
    )
  
 (1)
    
    Computed based upon the basic weighted average number of common shares outstanding
during each year, which were 2,934,995 in 2011, 2010 and 2009, 2,911,448 in 2008, and
2,738,982 in 2007 and the diluted weighted average number of common and common
equivalent shares outstanding during each year, which were 2,934,995 in 2011, 2,991,941
in 2010, 2,934,995 in 2009, 2,968,654 in 2008, and 2,767,478 in 2007. 9




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ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
   2011
    
    
    2010Cost of sales:Food, paper and beverage
    
    
    31.4
    %
    
    
    31.4
    %Labor and benefits
    
    
    29.5
    %
    
    
    29.2
    %Restaurant operating expenses
    
    
    26.4
    %
    
    
    26.4
    %Depreciation and amortization
    
    
    3.1
    %
    
    
    3.3
    %General and administrative expenses
    
    
    6.1
    %
    
    
    6.0
    %Operating income
    
    
    2.5
    %
    
    
    3.5
    %
 Revenues
   Cost of Sales  Food, Paper and Beverage
   Cost of Sales  Labor and Benefits
  10




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Restaurant Operating Expenses
   Depreciation and Amortization
   General and Administrative Expenses
   Loss on Restaurant Assets
   Operating Income
  Interest Expense
 Prepayment and Deferred Financing Costs
  11




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Bank and Capitalized Lease Interest Expense
  Other Income and Expense
   Provision for Income Taxes
   Liquidity and Capital Resources
   12




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Subsequent Events
    13




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Market Risk Exposure
  Other Contractual Obligations and Commitments
  14




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Contractual Obligations
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    2016
    
    
    ThereafterLong-term debt,
including current (1)
    
    $
    3,263
    
    
    $
    11,810
    
    
    $
    3,911
    
    
    $
    1,706
    
    
    $
    1,251
    
    
    $
    5,108Interest expense on
long-term debt
    
    $
    1,784
    
    
    $
    1,499
    
    
    $
    885
    
    
    $
    662
    
    
    $
    534
    
    
    $
    852Capital leases (2)
    
    $
    148
    
    
    $
    146
    
    
    $
    147
    
    
    $
    148
    
    
    $
    149
    
    
    $
    1,121Operating leases (2)
    
    $
    2,307
    
    
    $
    2,139
    
    
    $
    1,857
    
    
    $
    1,544
    
    
    $
    1,308
    
    
    $
    11,452Closed locations (3)
    
    $
    333
    
    
    $
    296
    
    
    $
    213
    
    
    $
    176
    
    
    $
    178
    
    
    $
    1,987
 
 (1)
    
    All debt has been classified as current in the consolidated balance sheet. See Note 5 to the consolidated financial
statements for further discussion regarding expected debt repayment(2)
    
    Does not include contingent rental obligations based on sales performance(3)
    
    Leases related to locations closed subsequent to February 27, 2011 Required Capital Expenditures
    15




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Number of Units
    
    
    Period
    
    Type
    
    
    Capital Cost (1)8
    
    
    Fiscal 2012
    
    Remodels
    
    $
    2,425,0005
    
    
    Fiscal 2013
    
    Remodels
    
    
    1,625,0001
    
    
    Fiscal 2013
    
    Relo (2)
    
    
    400,000Total 2013
    
    
    
    
    
    
    2,025,0003
    
    
    Fiscal 2014
    
    Remodels
    
    
    625,0003
    
    
    Fiscal 2014
    
    Relo (2)
    
    
    1,200,000Total 2014
    
    
    
    
    
    
    1,825,0001
    
    
    Fiscal 2015
    
    Remodels
    
    
    150,0005
    
    
    Fiscal 2018
    
    Remodels
    
    
    750,00016
    
    
    Fiscal 2020
    
    Remodels
    
    
    3,650,0003
    
    
    Fiscal 2021
    
    Romodels
    
    
    450,00045
    
    
    Total
    
    
    
    
    
    $
    11,275,000
 
 (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.    16




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Seasonality
  Critical Accounting Policies
  
    
    Estimating future cash flows and fair value of assets associated with assessing potential
impairment of long-lived tangible and intangible assets and projected compliance with debt
covenants. See Notes 1 and 3 to the consolidated financial statements for further discussion
of intangible assets.
    
    Determining the appropriate valuation allowances for deferred tax assets and reserves for
potential tax exposures. See Note 8 to the consolidated financial statements for a discussion
of income taxes.
    
    Applying complex lease accounting requirements to the Companys capital and operating
leases of property and equipment. The Company leases the building or land, or both, for
approximately one-half of its restaurants. See Note 6 to the consolidated financial
statements for a discussion of lease accounting.
    
    Goodwill represents the cost of acquisitions in excess of the fair value of identifiable
assets acquired. Goodwill is not amortized, but is subject to assessment for impairment
whenever there is an indication of impairment or at least annually as of fiscal year end by
applying a fair value based test. Goodwill is disaggregated by market area, as defined by the
various advertising co-operatives in which the Company participates, for application of the
impairment tests. Also, when a property is sold, the proportion that the proceeds of the
property bears to the total fair value of the market is removed from the goodwill balance of
that market.
 New Accounting Standards
   17




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Safe Harbor Statements
   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  18




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##### 



ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 MORGANS FOODS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 PageReferenceReport of Independent Registered Public Accounting Firm
    
    20Consolidated Balance Sheets at February 27, 2011 and February 28, 2010
    
    21Consolidated Statements of Operations for the years ended
February 27, 2011 and February 28, 2010
    
    22Consolidated Statements of Shareholders Equity for the years ended
February 27, 2011 and February 28, 2010
    
    23Consolidated Statements of Cash Flows for the years ended
February 27, 2011 and February 28, 2010
    
    24Notes to Consolidated Financial Statements
    
    25EX-10.7EX-21EX-23.1EX-31.1EX-31.2EX-32.1EX-32.2
  19




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 Board of Directors and Shareholders
 Morgans Foods, Inc.
 We have audited the accompanying consolidated balance sheets of Morgans Foods, Inc. (an Ohio
corporation) and subsidiaries (the Company) as of February 27, 2011 and February 28, 2010,
and the related consolidated statements of operations, shareholders equity, and cash flows
for each of the years then ended. These financial statements are the responsibility of the
Companys management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we engaged to perform an audit of
its internal control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Companys internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
 In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Morgans Foods, Inc. as of February 27, 2011 and February
28, 2010, and the results of its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of America.
 The accompanying financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Notes 5 and 6 to the financial statements, as of
February 27, 2011, the Company was in default and cross default of certain provisions of its
most significant credit agreements and in default of the image enhancement requirements under
franchise agreements for certain of its restaurants. The Company is attempting to
restructure or refinance its existing credit agreements such that it can obtain capital
sufficient to fund its image enhancement requirements under the affected franchise agreements.
However, as of the date of this report, no such refinancing or restructuring has been
completed, nor has the Company received waivers of the loan covenant violations from its
lenders. The Companys ability to complete the debt refinancing or restructuring and to fund
the image enhancement requirements, which may be necessary to permit the realization of assets
and satisfaction of liabilities in the ordinary course of business, is uncertain and raises
substantial doubt about its ability to continue as a going concern. The financial statements
do not include any adjustments that might result from the outcome of this uncertainty.
  
 20




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MORGANS FOODS, INC.
 
   2011
    
    
    2010ASSETSCurrent assets:Cash and equivalents
    
    $
    3,034,000
    
    
    $
    4,205,000Restricted cash
    
    
    140,000
    
    
    
    Receivables
    
    
    561,000
    
    
    
    470,000Inventories
    
    
    715,000
    
    
    
    682,000Prepaid expenses
    
    
    799,000
    
    
    
    742,000Deferred tax assets
    
    
    2,000
    
    
    
    15,000Assets held for sale
    
    
    545,000
    
    
    
    678,0005,796,000
    
    
    
    6,792,000Property and equipment:Land
    
    
    8,677,000
    
    
    
    9,558,000Buildings and improvements
    
    
    18,861,000
    
    
    
    20,960,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    9,502,000
    
    
    
    10,373,000Equipment, furniture and fixtures
    
    
    19,128,000
    
    
    
    20,337,000Construction in progress
    
    
    19,000
    
    
    
    626,00057,501,000
    
    
    
    63,168,000Less accumulated depreciation and amortization
    
    
    29,663,000
    
    
    
    31,941,00027,838,000
    
    
    
    31,227,000Other assets
    
    
    410,000
    
    
    
    546,000Franchise agreements, net
    
    
    906,000
    
    
    
    1,133,000Goodwill
    
    
    9,138,000
    
    
    
    9,227,000$
    44,088,000
    
    
    $
    48,925,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    27,049,000
    
    
    $
    3,165,000Current maturities of capital lease obligations
    
    
    48,000
    
    
    
    44,000Accounts payable
    
    
    4,331,000
    
    
    
    3,683,000Accrued liabilities
    
    
    4,138,000
    
    
    
    3,884,00035,566,000
    
    
    
    10,776,000Long-term debt
    
    
    
    
    
    
    29,725,000Long-term capital lease obligations
    
    
    1,013,000
    
    
    
    1,061,000Other long-term liabilities
    
    
    4,362,000
    
    
    
    3,853,000Deferred tax liabilities
    
    
    2,512,000
    
    
    
    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
    
    
    (28,802,000
    )
    
    
    (27,814,000
    )Total shareholders equity
    
    
    635,000
    
    
    
    1,623,000$
    44,088,000
    
    
    $
    48,925,000
  21




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MORGANS FOODS, INC.
 
   2011
    
    
    2010Revenues
    
    $
    89,891,000
    
    
    $
    90,544,000Cost of sales:Food, paper and beverage
    
    
    28,267,000
    
    
    
    28,457,000Labor and benefits
    
    
    26,533,000
    
    
    
    26,448,000Restaurant operating expenses
    
    
    23,748,000
    
    
    
    23,931,000Depreciation and amortization
    
    
    2,831,000
    
    
    
    3,026,000General and administrative expenses
    
    
    5,450,000
    
    
    
    5,409,000Loss on restaurant assets
    
    
    841,000
    
    
    
    75,000Operating income
    
    
    2,221,000
    
    
    
    3,198,000Interest expense:Prepayment and deferred financing costs
    
    
    (138,000
    )
    
    
    13,000Bank debt and notes payable
    
    
    (2,286,000
    )
    
    
    (2,558,000
    )Capital leases
    
    
    (104,000
    )
    
    
    (108,000
    )Other income and expense, net
    
    
    (44,000
    )
    
    
    191,000Income (loss) before income taxes
    
    
    (351,000
    )
    
    
    736,000Provision for income taxes
    
    
    637,000
    
    
    
    340,000Net income (loss)
    
    $
    (988,000
    )
    
    $
    396,000Basic net income (loss) per common share:
    
    $
    (0.34
    )
    
    $
    0.13Diluted net income (loss) per common share:
    
    $
    (0.34
    )
    
    $
    0.13
  22




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MORGANS FOODS, INC.
 
   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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    396,000
    
    
    
    396,000Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    
    
    
    
    56,000Balance February 28, 2010
    
    
    2,969,405
    
    
    
    30,000
    
    
    
    (34,410
    )
    
    
    (81,000
    )
    
    
    29,488,000
    
    
    
    (27,814,000
    )
    
    
    1,623,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (988,000
    )
    
    
    (988,000
    )Balance February 27, 2011
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,488,000
    
    
    $
    (28,802,000
    )
    
    $
    635,000
  23




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##### Table of Contents



MORGANS FOODS, INC.
 
   2011
    
    
    2010Cash flows from operating activities:Net income (loss)
    
    $
    (988,000
    )
    
    $
    396,000Adjustments to reconcile to net cash provided by operating activities:Depreciation and amortization
    
    
    2,831,000
    
    
    
    3,026,000Amortization of deferred financing costs
    
    
    110,000
    
    
    
    118,000Amortization of supply agreement advances
    
    
    (1,214,000
    )
    
    
    (1,265,000
    )Funding from supply agreements
    
    
    962,000
    
    
    
    204,000Deferred income taxes
    
    
    638,000
    
    
    
    336,000Stock compensation expense
    
    
    
    
    
    
    56,000Loss on restaurant assets
    
    
    841,000
    
    
    
    75,000Changes in assets and liabilities:Deposit to restricted cash account
    
    
    (140,000
    )
    
    
    Receivables
    
    
    (7,000
    )
    
    
    415,000Inventories
    
    
    (33,000
    )
    
    
    49,000Prepaid expenses
    
    
    (57,000
    )
    
    
    (118,000
    )Other assets
    
    
    26,000
    
    
    
    12,000Accounts payable
    
    
    648,000
    
    
    
    (226,000
    )Accrued liabilities
    
    
    50,000
    
    
    
    771,000Net cash provided by operating activities
    
    
    3,667,000
    
    
    
    3,849,000Cash flows from investing activities:Capital expenditures
    
    
    (1,763,000
    )
    
    
    (1,648,000
    )Purchase of franchise agreements
    
    
    (5,000
    )
    
    
    (10,000
    )Proceeds from sale/leaseback transactions
    
    
    2,205,000
    
    
    
    Proceeds from sale of fixed assets
    
    
    610,000
    
    
    
    119,000Net cash provided by (used in) investing activities
    
    
    1,047,000
    
    
    
    (1,539,000
    )Cash flows from financing activities:Proceeds from issuance of long-term debt
    
    
    18,000
    
    
    
    Principal payments on long-term debt
    
    
    (5,859,000
    )
    
    
    (3,323,000
    )Principal payments on capital lease obligations
    
    
    (44,000
    )
    
    
    (39,000
    )Net cash used in financing activities
    
    
    (5,885,000
    )
    
    
    (3,362,000
    )Net change in cash and equivalents
    
    
    (1,171,000
    )
    
    
    (1,052,000
    )Cash and equivalents, beginning balance
    
    
    4,205,000
    
    
    
    5,257,000Cash and equivalents, ending balance
    
    $
    3,034,000
    
    
    $
    4,205,000
     24




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##### Table of Contents



MORGANS FOODS, INC.
   NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
 Description of Business 
 Use of Estimates 
 Principles of Consolidation 
 Revenue Recognition 
 Advertising Costs 
 Cash and Cash Equivalents 
 Inventories 
 Property and Equipment 
  Deferred Financing Costs 
 25




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##### Table of Contents



Franchise Agreements 
 Goodwill 
 Advance on Supply Agreements 
 Lease Accounting 
 Income Taxes
 Stock-Based Compensation 
 Reclassifications
 26




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##### Table of Contents



NOTE 2. LOSS ON RESTAURANT ASSETS
  NOTE 3. INTANGIBLE ASSETS
  Intangible AssetsAs of February 27, 2011
    
    
    As of February 28, 2010Gross Carrying
    
    
    Accumulated
    
    
    Gross Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationFranchise Agreements
    
    $
    2,291,000
    
    
    $
    (1,385,000
    )
    
    $
    2,399,000
    
    
    $
    (1,266,000
    )Goodwill
    
    
    10,492,000
    
    
    
    (1,354,000
    )
    
    
    10,593,000
    
    
    
    (1,366,000
    )Total
    
    $
    12,783,000
    
    
    $
    (2,739,000
    )
    
    $
    12,992,000
    
    
    $
    (2,632,000
    )
    NOTE 4. ACCRUED LIABILITIES
  2011
    
    
    2010Accrued compensation
    
    $
    1,930,000
    
    
    $
    1,854,000Accrued taxes other than income taxes
    
    
    899,000
    
    
    
    955,000Current portion of deferred gain on sale/leaseback
    
    
    255,000
    
    
    
    197,000Current portion of supply agreement
    
    
    236,000
    
    
    
    263,000Current portion of straight line rent
    
    
    60,000
    
    
    
    63,000Other accrued expenses
    
    
    758,000
    
    
    
    552,000$
    4,138,000
    
    
    $
    3,884,000
 27




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NOTE 5. DEBT
  2011
    
    
    2010Mortgage debt, interest at
8.3-10.6%, through 2019,
collateralized by 42
restaurants in 2011 and 43
restaurants in 2010 having a
net book value at February 27,
2011 of $15,707,000 and at
February 28, 2010 of $16,510,000
    
    $
    14,627,000
    
    
    $
    16,982,000Mortgage debt, interest at
7.2-7.3% fixed through 2018
and variable thereafter,
collateralized by two
restaurants having a net book
value at February 27, 2011 of
$0 and at February 28, 2010 of $1,805,000
    
    
    
    
    
    
    2,101,000Equipment loan, interest at
7.1% fixed through 2017,
collateralized by equipment at
two restaurants
    
    
    
    
    
    
    363,000Equipment loan, interest at
13.27% fixed through 2014,
collateralized by equipment at
two restaurants
    
    
    200,000
    
    
    
    Mortgage debt, variable
interest of 3.95% at February
27, 2011, amortization to 2028
with a term to 2013
collateralized by 13
restaurants in both 2011 and
2010 having a net book value
at February 27, 2011 of
$5,862,000 and at February 28,
2010 of $5,632,000
    
    
    7,898,000
    
    
    
    8,366,000Equipment loan, variable
interest of 4.7% at February
27, 2011, amortization to 2018
with a term to 2013
collateralized by the
equipment at 17 restaurants
    
    
    2,108,000
    
    
    
    2,578,000Equipment loan from franchisor
for proprietary equipment,
with variable interest rate of
2.26% as of February 27, 2011
    
    
    16,000
    
    
    
    Equipment loan, variable
interest rate of 5.05% at
February 27, 2011,
amortization to 2018 with a
term to 2013 collateralized by
the equipment at 10
restaurants
    
    
    2,200,000
    
    
    
    2,500,00027,049,000
    
    
    
    32,890,000Less long term debt
    
    
    
    
    
    
    29,725,000Long term debt, current portion
    
    $
    27,049,000
    
    
    $
    3,165,000
 28




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2012
    
    $
    3,263,0002013
    
    
    11,810,0002014
    
    
    3,911,0002015
    
    
    1,706,0002016
    
    
    1,251,000Later years
    
    
    5,108,000$
    27,049,000
       29




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NOTE 6. LEASE OBLIGATIONS AND OTHER COMMITMENTS
  2011
    
    
    2010Leased property:Buildings and land
    
    $
    1,298,000
    
    
    $
    1,298,000Equipment, furniture and fixtures
    
    
    16,000
    
    
    
    16,000Total
    
    
    1,314,000
    
    
    
    1,314,000Less accumulated amortization
    
    
    515,000
    
    
    
    517,000$
    799,000
    
    
    $
    797,000
   2011
    
    
    2010Capital lease obligations
    
    $
    1,061,000
    
    
    $
    1,105,000Less current maturities
    
    
    48,000
    
    
    
    44,000Long-term capital lease obligations
    
    $
    1,013,000
    
    
    $
    1,061,000
   2012
    
    $
    148,0002013
    
    
    146,0002014
    
    
    147,0002015
    
    
    148,0002015
    
    
    149,000Later years
    
    
    1,121,0001,859,000Less amount representing interest at 10%
    
    
    798,000Total obligations under capital leases
    
    $
    1,061,000
  30




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31




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##### Table of Contents



Number of Units
    
    
    Period
    
    Type
    
    
    Capital Cost (1)8
    
    
    Fiscal 2012
    
    Remodels
    
    $
    2,425,0005
    
    
    Fiscal 2013
    
    Remodels
    
    
    1,625,0001
    
    
    Fiscal 2013
    
    Relo (2)
    
    
    400,000Total 2013
    
    
    
    
    
    
    2,025,0003
    
    
    Fiscal 2014
    
    Remodels
    
    
    625,0003
    
    
    Fiscal 2014
    
    Relo (2)
    
    
    1,200,000Total 2014
    
    
    
    
    
    
    1,825,0001
    
    
    Fiscal 2015
    
    Remodels
    
    
    150,0005
    
    
    Fiscal 2018
    
    Remodels
    
    
    3,650,00016
    
    
    Fiscal 2020
    
    Remodels
    
    
    750,0003
    
    
    Fiscal 2021
    
    Romodels
    
    
    450,00045
    
    
    Total
    
    
    
    
    
    $
    11,275,000
 
 (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.    NOTE 7. NET INCOME (LOSS) PER COMMON SHARE
  32




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Fiscal year ended February 27, 2011
    
    
    Fiscal year ended February 28, 2010Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome (loss) available to common shareholders
    
    $
    (988,000
    )
    
    
    2,934,995
    
    
    $
    (0.34
    )
    
    $
    396,000
    
    
    
    2,934,995
    
    
    $
    0.13Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56,946Diluted EPSIncome (loss) available to common shareholders
    
    $
    (988,000
    )
    
    
    2,934,995
    
    
    $
    (0.34
    )
    
    $
    396,000
    
    
    
    2,991,941
    
    
    $
    0.13
  NOTE 8. INCOME TAXES
    2011
    
    
    2010Tax provision (benefit) at statutory rate
    
    $
    (120,000
    )
    
    $
    250,000State and local taxes, net of federal benefit
    
    
    (1,000
    )
    
    
    2,000Deferred tax provision-change in valuation allowance
    
    
    745,000
    
    
    
    (124,000
    )Deferred tax provision-change in deferred state and
local income taxes
    
    
    (12,000
    )
    
    
    54,000Deferred tax provision-change in effective tax rate
    
    
    11,000
    
    
    
    44,000Deferred tax provision-change in estimated deferred
tax items
    
    
    85,000
    
    
    
    206,000Employment tax credits
    
    
    (68,000
    )
    
    
    (73,000
    )Other
    
    
    (3,000
    )
    
    
    (19,000
    )$
    637,000
    
    
    $
    340,000
  2011
    
    
    2010Accrued expenses not currently deductible
    
    $
    266,000
    
    
    $
    244,000Prepaid expenses
    
    
    (224,000
    )
    
    
    (174,000
    )Inventory valuation
    
    
    5,000
    
    
    
    5,000Current portion of advance payments
    
    
    54,000
    
    
    
    79,000Current deferred tax valuation allowance
    
    
    (99,000
    )
    
    
    (139,000
    )Current portion of deferred taxes
    
    
    2,000
    
    
    
    15,000Operating loss carryforwards
    
    
    2,078,000
    
    
    
    1,688,000Charitable contributions
    
    
    43,000
    
    
    
    
 33




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##### Table of Contents



2011
    
    
    2010Tax credit carryforwards
    
    
    514,000
    
    
    
    403,000Stock options
    
    
    55,000
    
    
    
    55,000Property and equipment
    
    
    1,409,000
    
    
    
    1,715,000Deferred gain on sale/leaseback
    
    
    1,476,000
    
    
    
    1,224,000Advance payments
    
    
    88,000
    
    
    
    125,000Intangible assets
    
    
    (161,000
    )
    
    
    (112,000
    )Deferred tax asset valuation allowance
    
    
    (5,398,000
    )
    
    
    (4,614,000
    )Net non-current deferred tax asset
    
    
    104,000
    
    
    
    484,000Deferred tax liabilities associated with
indefinite lived intangible assets
    
    
    (2,616,000
    )
    
    
    (2,371,000
    )Net total non-current deferred taxes
    
    $
    (2,512,000
    )
    
    $
    (1,887,000
    )
   2023
    
    $
    705,0002024
    
    
    383,0002025
    
    
    1,481,0002028
    
    
    1,022,0002029
    
    
    997,0002030
    
    
    232,0002031
    
    
    1,036,000Total
    
    $
    5,856,000
   NOTE 9. STOCK OPTIONS AND SHAREHOLDERS EQUITY
  34




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SharesBalance February 28, 2010
    
    
    149,000Expired
    
    
    Balance February 27, 2011
    
    
    149,000
  Exercise Price
    
    Outstanding 2-27-11
    
    
    Average Life
    
    
    Number Exercisable$1.50
    
    
    149,000
    
    
    
    7.7
    
    
    
    149,000
    NOTE 10. 401(k) RETIREMENT PLAN
 35




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NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
  NOTE 12. SUBSEQUENT EVENTS
     36




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NOTE 13. NEW ACCOUNTING STANDARDS
   37




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NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 Fiscal 2011 Quarter EndedMay 23,
    
    
    August 15,
    
    
    November 7,
    
    
    February 27,2010
    
    
    2010
    
    
    2010
    
    
    2011Revenues
    
    $
    22,170,000
    
    
    $
    21,673,000
    
    
    $
    21,257,000
    
    
    $
    24,791,000Operating costs and
expenses, net
    
    
    20,639,000
    
    
    
    20,909,000
    
    
    
    20,637,000
    
    
    
    25,485,000Operating income (loss)
    
    
    1,531,000
    
    
    
    764,000
    
    
    
    620,000
    
    
    
    (694,000
    )Net income (loss)
    
    
    575,000
    
    
    
    163,000
    
    
    
    (54,000
    )
    
    
    (1,672,000
    )Basic net income
(loss) per share
    
    
    0.20
    
    
    
    0.06
    
    
    
    (0.02
    )
    
    
    (0.57
    )Fully diluted net
income (loss) per
share
    
    
    0.19
    
    
    
    0.05
    
    
    
    (0.02
    )
    
    
    (0.57
    )
 Fiscal 2010 Quarter EndedMay 24,
    
    
    August 16,
    
    
    November 8,
    
    
    February 28,2009
    
    
    2009
    
    
    2009
    
    
    2010Revenues
    
    $
    22,931,000
    
    
    $
    23,202,000
    
    
    $
    20,645,000
    
    
    $
    23,766,000Operating costs and
expenses, net
    
    
    21,846,000
    
    
    
    21,928,000
    
    
    
    19,533,000
    
    
    
    24,039,000Operating income (loss)
    
    
    1,085,000
    
    
    
    1,274,000
    
    
    
    1,112,000
    
    
    
    (273,000
    )Net income (loss)
    
    
    354,000
    
    
    
    320,000
    
    
    
    426,000
    
    
    
    (704,000
    )Basic net income
(loss) per share
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.15
    
    
    
    (0.24
    )Fully diluted net
income (loss) per
share
    
    
    0.12
    
    
    
    0.11
    
    
    
    0.14
    
    
    
    (0.24
    )
  ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  ITEM 9A. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  38




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Managements Report on Internal Control Over Financial Reporting
   ITEM 9B. OTHER INFORMATION
  39




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PART III
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   ITEM 11. EXECUTIVE COMPENSATION
  ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
  ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  40




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PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    Financial Statements and Financial Statement Schedules.All schedules normally required by Form 10-K are not required under the related instructions or
are inapplicable, and therefore are not presented.The Financial Statements and Financial Statement Schedules listed on the accompanying Index to
Financial Statements and Financial Statement Schedules are filed as part of this Annual Report
on Form 10-K.(b)
    
    Exhibits.The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual
Report on Form 10-K.
 41




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SIGNATURES
  Morgans Foods, Inc.Dated: May 31, 2011
    By:
    /s/ Leonard R. Stein-SapirLeonard R. Stein-SapirChairman of the Board, Chief
Executive Officer & Director  By:
    /s/ Leonard R. Stein-Sapir
    
    By:
    /s/      Marilyn A. EiseleLeonard R. Stein-Sapir
    
    
    Marilyn A. EiseleChairman of the Board,
    
    
    DirectorChief Executive Officer & Director
    
    
    Dated:  May 31, 2011Dated: May 31, 2011By:
    /s/ James J. Liguori
    
    By:
    /s/      Bahman GuyuronJames J. Liguori
    
    
    Bahman GuyuronDirector, President &
    
    
    DirectorChief Operating Officer
    
    
    Dated:  May 31, 2011Dated: May 31, 2011By:
    /s/ Kenneth L. Hignett
    
    By:
    /s/      Steven S. KaufmanKenneth L. Hignett
    
    
    Steven S. KaufmanDirector, Senior Vice President,
    
    
    DirectorChief Financial Officer & Secretary
    
    
    Dated:  May 31, 2011also as Principal Accounting OfficerDated: May 31, 2011By:
    /s/ Bernard LernerBernard LernerDirectorDated: May 31, 2011
 42




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##### Table of Contents



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Description3.1
    
    Amended Articles of Incorporation, as amended (9)3.2
    
    Amended Code of Regulations (9)4.1
    
    Specimen Certificate for Common Shares (1)4.2
    
    Shareholder Rights Plan (2)4.3
    
    Amendment to Shareholder Rights Agreement (8)10.1
    
    Specimen KFC Franchise Agreements (3)10.2
    
    Specimen Taco Bell Franchise Agreement (4)10.3
    
    Executive and Manager Nonqualified Stock Option Plan (5)10.4
    
    Key Employee Nonqualified Stock Option Plan (5)10.6
    
    Form Mortgage Loan Agreement with Captec Financial Group, Inc. (6)10.7
    
    Pre-negotiation Agreement with KFC Corporation dated November 8, 201014
    
    Code of Ethics for Senior Financial Officers (7)19
    
    Form of Indemnification Contract between Registrant and its Officers and Directors (5)21
    
    Subsidiaries23.1
    
    Consent of Independent Registered Public Accounting Firm  Grant Thornton LLP31.1
    
    Certification of the Chairman 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 200231.2
    
    Certification of the Senior Vice President, Chief Financial Officer & 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 200232.1
    
    Certification of the Chairman of the Board and Chief Executive Officer pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of the Senior Vice President, Chief Financial Officer and
Secretary pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Filed as an exhibit to the Registrants Registration Statement (No. 33-35772) on Form S-2
and incorporated herein by reference.(2)
    
    Filed as an exhibit to the Registrants Form 8-A dated May 7, 1999 and incorporated herein
by reference.(3)
    
    Filed as an exhibit to the Registrants Registration Statement (No. 2-78035) on Form S-1
and incorporated herein by reference.(4)
    
    Filed as an exhibit to Registrants Form 10-K for the 2000 fiscal year and incorporated
herein by reference.(5)
    
    Filed as an exhibit to the Registrants Form S-8 filed November 17, 1999 and incorporated
herein by reference.(6)
    
    Filed as an exhibit to the Registrants Form 10-K for the 1996 fiscal year and incorporated
herein by reference.(7)
    
    Filed as an exhibit to the Registrants Form 10-K for the 2004 fiscal year and incorporated
herein by reference.(8)
    
    Filed as an exhibit to the Registrants Form 8-A/A filed June 9, 2003 and incorporated
herein by reference.(9)
    
    Filed as an exhibit to the Registrants Form 10-K for the 2010 fiscal year and incorporated
herein by reference. 43