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 28, 2010

    
    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)4829 Galaxy Parkway, Suite S, Cleveland, OH 44128(Address of principal executive officers)
    
    (Zip Code)
   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
  ITEM 1A. RISK FACTORS
  3




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Outbreak of Avian Flu or Mad Cow Disease
  Image Enhancement and Capital Expenditure Requirements
  Contamination of the Food Supply
  Litigation
  Environmental Liabilities
  Food and Labor Cost Increases
  Product and Marketing Success of Franchisors
  Governmental Laws and Regulations
  4




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Quick Service Restaurant Competition
  Failure to Meet Loan Covenants
  Litigation by National Advertising Co-op Against KFC Corporation
  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
    
    
    71
    
    
    Chairman of the Board and
Chief Executive Officer
    
    April 1989James J. Liguori
    
    
    61
    
    
    President and
Chief Operating Officer
    
    June 1979Kenneth L. Hignett
    
    
    63
    
    
    Senior Vice President 
Chief Financial Officer
& Secretary
    
    May 1989Other Officers:Barton J. Craig
    
    
    61
    
    
    Senior Vice President 
General Counsel
    
    January 1994Vincent J. Oddi
    
    
    67
    
    
    Vice President 
Restaurant Development
    
    September 1979Ramesh J. Gursahaney
    
    
    61
    
    
    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 28, 2010:1st Quarter
    
    $
    2.60
    
    
    $
    1.012nd Quarter
    
    
    3.00
    
    
    
    1.753rd Quarter
    
    
    3.00
    
    
    
    2.054th Quarter
    
    
    3.60
    
    
    
    2.00Year ended March 1, 2009:1st Quarter
    
    $
    6.55
    
    
    $
    5.302nd Quarter
    
    
    5.51
    
    
    
    4.103rd Quarter
    
    
    5.00
    
    
    
    1.504th Quarter
    
    
    2.00
    
    
    
    0.52
   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
  
 2005
    
    2006
    
    2007
    
    2008
    
    2009
    
    2010MORGANS FOODS INC
    
    
    100
    
    
    
    541
    
    
    
    1,368
    
    
    
    708
    
    
    
    216
    
    
    
    373S&P
MIDCAP 400 INDEX
    
    
    100
    
    
    
    118
    
    
    
    133
    
    
    
    122
    
    
    
    71
    
    
    
    118RESTAURANT PEER
GROUP
    
    
    100
    
    
    
    142
    
    
    
    182
    
    
    
    180
    
    
    
    55
    
    
    
    106
  8




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##### 



ITEM 6. SELECTED FINANCIAL DATA
  Years EndedFebruary 28,
    
    
    March 1,
    
    
    March 2,
    
    
    February 25,
    
    
    February 26,2010
    
    
    2009
    
    
    2008
    
    
    2007
    
    
    2006$ in thousands, except per share amountsRevenues
    
    $
    90,544
    
    
    $
    92,485
    
    
    $
    96,318
    
    
    $
    91,248
    
    
    $
    87,457Cost of sales:Food, paper and beverage
    
    
    28,457
    
    
    
    29,695
    
    
    
    29,524
    
    
    
    27,981
    
    
    
    27,146Labor and benefits
    
    
    26,332
    
    
    
    26,850
    
    
    
    27,404
    
    
    
    24,798
    
    
    
    23,186Restaurant operating expenses
    
    
    23,765
    
    
    
    24,068
    
    
    
    24,415
    
    
    
    22,765
    
    
    
    22,190Depreciation and amortization
    
    
    3,026
    
    
    
    3,224
    
    
    
    2,953
    
    
    
    2,950
    
    
    
    3,254General and administrative expenses
    
    
    5,691
    
    
    
    5,740
    
    
    
    6,111
    
    
    
    5,428
    
    
    
    5,133Loss (gain) on restaurant assets
    
    
    75
    
    
    
    417
    
    
    
    112
    
    
    
    5
    
    
    
    (715
    )Operating income
    
    
    3,198
    
    
    
    2,491
    
    
    
    5,799
    
    
    
    7,321
    
    
    
    7,263Net income (loss)
    
    
    396
    
    
    
    (1,390
    )
    
    
    414
    
    
    
    3,527
    
    
    
    3,437Basic net income (loss) per comm. sh. (1)
    
    
    0.13
    
    
    
    (0.47
    )
    
    
    0.14
    
    
    
    1.29
    
    
    
    1.26Diluted net income (loss) per comm. sh. (1)
    
    
    0.13
    
    
    
    (0.47
    )
    
    
    0.14
    
    
    
    1.27
    
    
    
    1.24Working capital (deficiency)
    
    
    (3,984
    )
    
    
    (16,091
    )
    
    
    (5,335
    )
    
    
    (2,403
    )
    
    
    (3,178
    )Total assets
    
    
    48,925
    
    
    
    51,988
    
    
    
    55,962
    
    
    
    52,323
    
    
    
    50,751LT debt and capital lease (current portion)
    
    
    3,209
    
    
    
    16,514
    
    
    
    3,224
    
    
    
    2,941
    
    
    
    3,140Long-term debt (less current maturities)
    
    
    29,725
    
    
    
    19,738
    
    
    
    35,789
    
    
    
    34,445
    
    
    
    37,357Long-term capital lease obligations
    
    
    1,061
    
    
    
    1,105
    
    
    
    1,144
    
    
    
    1,299
    
    
    
    1,194Shareholders equity (deficiency)
    
    
    1,623
    
    
    
    1,171
    
    
    
    2,473
    
    
    
    1,839
    
    
    
    (2,186
    )
  
 (1)
    
    Computed based upon the basic weighted average number of common shares outstanding
during each year, which were 2,934,995 in 2010, 2,934,995 in 2009, 2,911,448 in 2008,
2,738,982 in 2007 and 2,718,495 in 2006 and the diluted weighted average number of
common and common equivalent shares outstanding during each year, which were 2,991,941
in 2010, 2,934,995 in 2009, 2,968,654 in 2008, 2,767,478 in 2007 and 2,778,524 in 2006. 9




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##### 



ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
   2010
    
    2009Cost of sales:Food, paper and beverage
    
    
    31.4
    %
    
    
    32.1
    %Labor and benefits
    
    
    29.1
    %
    
    
    29.0
    %Restaurant operating expenses
    
    
    26.2
    %
    
    
    26.0
    %Depreciation and amortization
    
    
    3.3
    %
    
    
    3.5
    %General and administrative expenses
    
    
    6.3
    %
    
    
    6.2
    %Operating income
    
    
    3.5
    %
    
    
    2.7
    %
 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
  Provision for Income Taxes
  Liquidity and Capital Resources
  12




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##### 



Subsequent Events
  Market Risk Exposure
  13




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##### 



Other Contractual Obligations and Commitments
  Contractual Obligations
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    2015
    
    
    ThereafterLong-term debt,
including current (1)
    
    $
    3,165
    
    
    $
    3,360
    
    
    $
    12,056
    
    
    $
    4,036
    
    
    $
    1,814
    
    
    $
    8,459Interest expense on
long-term debt
    
    $
    2,225
    
    
    $
    1,979
    
    
    $
    1,686
    
    
    $
    1,062
    
    
    $
    854
    
    
    $
    1,887Capital leases (2)
    
    $
    148
    
    
    $
    148
    
    
    $
    146
    
    
    $
    147
    
    
    $
    148
    
    
    $
    1,270Operating leases (2)
    
    $
    2,489
    
    
    $
    2,375
    
    
    $
    2,137
    
    
    $
    1,759
    
    
    $
    1,409
    
    
    $
    12,520
 
 (1)
    
    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 Required Capital Expenditures
   14




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Number of Units
    
    Period
    
    Type
    
    
    Total (1)
    
    Required (2)
    
    Additional (3)3
    
    
    Fiscal 2010
    
    IE (4)
    
    
    $
    980,000
    
    
    
    860,000
    
    
    $
    120,0001
    
    
    Fiscal 2010
    
    Relo (4) (5)
    
    
    
    750,000
    
    
    
    750,000
    
    
    $
    1
    
    
    Fiscal 2011
    
    Relo (5)
    
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    5
    
    
    Fiscal 2011
    
    IE
    
    
    
    1,600,000
    
    
    
    1,400,000
    
    
    
    200,0008
    
    
    Fiscal 2012
    
    IE
    
    
    
    2,560,000
    
    
    
    2,240,000
    
    
    
    320,0005
    
    
    Fiscal 2013
    
    IE
    
    
    
    1,600,000
    
    
    
    1,400,000
    
    
    
    200,0001
    
    
    Fiscal 2015
    
    Rebuild
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    4
    
    
    Fiscal 2015
    
    Relo (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
    
    
    
    34
    
    
    Total
    
    
    
    
    
    $
    23,490,000
    
    
    $
    22,650,000
    
    
    $
    840,000
 
 (1)
    
    These amounts are based on estimates of current construction costs and actual costs may vary.(2)
    
    These amounts include only the items required to meet the franchisors current image
requirements.(3)
    
    These amounts are for capital upgrades performed on or which may be performed on
the image enhanced restaurants which were or may be deemed by the Company to be advantageous to the
operation of the units and which may be done at the time of the image enhancement.(4)
    
    Not completed in fiscal 2010, as required.(5)
    
    Relocations of fee owned properties are shown net of expected recovery of capital from the sale
of the former location. Relocation of leased properties assumes the capital cost of only equipment
because it is not known until each lease is finalized whether the lease will be a capital or
operating lease.   15




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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 Note 3 to the consolidated financial statements for a 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
nearly one-half of its restaurants. See Note 6 to the consolidated financial statements for a
discussion of lease accounting.
 New Accounting Standards
       16




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Safe Harbor Statements
   ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  17




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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
    
    
    19Consolidated Balance Sheets at February 28, 2010 and March 1, 2009
    
    
    20Consolidated Statements of Operations for the years ended
February 28, 2010 and March 1, 2009
    
    
    21Consolidated Statements of Shareholders Equity for the years ended
February 28, 2010 and March 1, 2009
    
    
    22Consolidated Statements of Cash Flows for the years ended
February 28, 2010 and March 1, 2009
    
    
    23Notes to Consolidated Financial Statements
    
    
    24
  18




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##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
     
 19




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##### 



MORGANS FOODS, INC.
 
 
 2010
    
    
    2009ASSETSCurrent assets:Cash and equivalents
    
    $
    4,205,000
    
    
    $
    5,257,000Receivables
    
    
    470,000
    
    
    
    806,000Inventories
    
    
    682,000
    
    
    
    731,000Prepaid expenses
    
    
    742,000
    
    
    
    624,000Deferred tax assets
    
    
    15,000
    
    
    
    20,000Assets held for sale
    
    
    678,000
    
    
    
    828,0006,792,000
    
    
    
    8,266,000Property and equipment:Land
    
    
    9,558,000
    
    
    
    9,558,000Buildings and improvements
    
    
    20,960,000
    
    
    
    20,692,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,373,000
    
    
    
    10,615,000Equipment, furniture and
fixtures
    
    
    20,337,000
    
    
    
    19,891,000Construction in progress
    
    
    626,000
    
    
    
    316,00063,168,000
    
    
    
    62,386,000Less accumulated
depreciation and
amortization
    
    
    31,941,000
    
    
    
    29,827,00031,227,000
    
    
    
    32,559,000Other assets
    
    
    546,000
    
    
    
    676,000Franchise agreements, net
    
    
    1,133,000
    
    
    
    1,260,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    48,925,000
    
    
    $
    51,988,000LIABILITIES AND SHAREHOLDERS
EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,165,000
    
    
    $
    16,475,000Current maturities of
capital lease obligations
    
    
    44,000
    
    
    
    39,000Accounts payable
    
    
    3,683,000
    
    
    
    3,909,000Accrued liabilities
    
    
    3,884,000
    
    
    
    3,934,00010,776,000
    
    
    
    24,357,000Long-term debt
    
    
    29,725,000
    
    
    
    19,738,000Long-term capital lease
obligations
    
    
    1,061,000
    
    
    
    1,105,000Other long-term liabilities
    
    
    3,853,000
    
    
    
    4,061,000Deferred tax liabilities
    
    
    1,887,000
    
    
    
    1,556,000SHAREHOLDERS EQUITYPreferred shares, 1,000,000
shares authorized,
no shares outstanding
    
    
    
    
    
    
    Common stock, no par value
Authorized shares - 25,000,000
Issued 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
    
    
    (27,814,000
    )
    
    
    (28,210,000
    )Total shareholders equity
    
    
    1,623,000
    
    
    
    1,171,000$
    48,925,000
    
    
    $
    51,988,000
  20




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##### 



MORGANS FOODS, INC.
 
 
 2010
    
    
    2009Revenues
    
    $
    90,544,000
    
    
    $
    92,485,000Cost of sales:Food, paper and beverage
    
    
    28,457,000
    
    
    
    29,695,000Labor and benefits
    
    
    26,332,000
    
    
    
    26,850,000Restaurant operating expenses
    
    
    23,765,000
    
    
    
    24,068,000Depreciation and amortization
    
    
    3,026,000
    
    
    
    3,224,000General and administrative expenses
    
    
    5,691,000
    
    
    
    5,740,000Loss on restaurant assets
    
    
    75,000
    
    
    
    417,000Operating income
    
    
    3,198,000
    
    
    
    2,491,000Interest expense:Prepayment and deferred financing costs
    
    
    13,000
    
    
    
    (525,000
    )Bank debt and notes payable
    
    
    (2,558,000
    )
    
    
    (3,190,000
    )Capital leases
    
    
    (108,000
    )
    
    
    (111,000
    )Other income and expense, net
    
    
    191,000
    
    
    
    336,000Income (loss) before income taxes
    
    
    736,000
    
    
    
    (999,000
    )Provision for income taxes
    
    
    340,000
    
    
    
    391,000Net income (loss)
    
    $
    396,000
    
    
    $
    (1,390,000
    )Basic net income (loss) per common share:
    
    $
    0.13
    
    
    $
    (0.47
    )Diluted net income (loss) per common share:
    
    $
    0.13
    
    
    $
    (0.47
    )
  21




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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 2, 2008
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,344,000
    
    
    $
    (26,820,000
    )
    
    $
    2,473,000Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,390,000
    )
    
    
    (1,390,000
    )Stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    88,000
    
    
    
    
    
    
    
    88,000Balance 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
    )
    
    $
    1,623,000
  22




---



##### 



MORGANS FOODS, INC.
 
 
 2010
    
    
    2009Cash flows from operating activities:Net income (loss)
    
    $
    396,000
    
    
    $
    (1,390,000
    )Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    3,026,000
    
    
    
    3,224,000Amortization of deferred financing costs
    
    
    118,000
    
    
    
    122,000Amortization of supply agreement advances
    
    
    (1,265,000
    )
    
    
    (1,165,000
    )Funding from supply agreements
    
    
    204,000
    
    
    
    457,000Deferred income taxes
    
    
    336,000
    
    
    
    449,000Stock compensation expense
    
    
    56,000
    
    
    
    88,000Loss on restaurant assets
    
    
    75,000
    
    
    
    417,000Changes in assets and liabilities:Receivables
    
    
    415,000
    
    
    
    (383,000
    )Inventories
    
    
    49,000
    
    
    
    24,000Prepaid expenses
    
    
    (118,000
    )
    
    
    55,000Other assets
    
    
    12,000
    
    
    
    39,000Accounts payable
    
    
    (226,000
    )
    
    
    (1,809,000
    )Accrued liabilities
    
    
    771,000
    
    
    
    (226,000
    )Net cash provided by (used in) operating activities
    
    
    3,849,000
    
    
    
    (98,000
    )Cash flows from investing activities:Capital expenditures
    
    
    (1,648,000
    )
    
    
    (3,626,000
    )Purchase of franchise agreement, net of disposals
    
    
    (10,000
    )
    
    
    (9,000
    )Proceeds from sale/leaseback transactions
    
    
    
    
    
    
    5,188,000Proceeds from sale of fixed assets
    
    
    119,000
    
    
    
    174,000Net cash provided by (used in) investing activities
    
    
    (1,539,000
    )
    
    
    1,727,000Cash flows from financing activities:Proceeds from issuance of long-term debt,
net of financing costs
    
    
    
    
    
    
    3,003,000Principal payments on long-term debt
    
    
    (3,323,000
    )
    
    
    (5,769,000
    )Principal payments on capital lease obligations
    
    
    (39,000
    )
    
    
    (34,000
    )Net cash used in financing activities
    
    
    (3,362,000
    )
    
    
    (2,800,000
    )Net change in cash and equivalents
    
    
    (1,052,000
    )
    
    
    (1,171,000
    )Cash and equivalents, beginning balance
    
    
    5,257,000
    
    
    
    6,428,000Cash and equivalents, ending balance
    
    $
    4,205,000
    
    
    $
    5,257,000
     23




---



##### 



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 
  24




---



##### 



Deferred Financing Costs 
 Franchise Agreements 
 Goodwill 
 Advance on Supply Agreements 
 Lease Accounting 
 Income Taxes
 Stock-Based Compensation 
 NOTE 2. LOSS ON RESTAURANT ASSETS
  25




---



##### 



NOTE 3. INTANGIBLE ASSETS
  Intangible AssetsAs of February 28, 2010
    
    As of March 1, 2009Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amount
    
    AmortizationFranchise Agreements
    
    $
    2,399,000
    
    
    $
    (1,266,000
    )
    
    $
    2,418,000
    
    
    $
    (1,158,000
    )Goodwill
    
    
    10,593,000
    
    
    
    (1,366,000
    )
    
    
    10,593,000
    
    
    
    (1,366,000
    )Total
    
    $
    12,992,000
    
    
    $
    (2,632,000
    )
    
    $
    13,011,000
    
    
    $
    (2,524,000
    )
   NOTE 4. ACCRUED LIABILITIES
  2010
    
    2009Accrued compensation
    
    $
    1,854,000
    
    
    $
    1,911,000Accrued taxes other than income taxes
    
    
    955,000
    
    
    
    896,000Accrued liabilities related to closed restaurants
    
    
    
    
    
    
    51,000Current portion of deferred gain on sale/leaseback
    
    
    197,000
    
    
    
    197,000Current portion of supply agreement
    
    
    263,000
    
    
    
    201,000Current portion rent smoothing
    
    
    63,000
    
    
    
    65,000Other accrued expenses
    
    
    552,000
    
    
    
    613,000$
    3,884,000
    
    
    $
    3,934,000
 26




---



##### 



NOTE 5. DEBT
  2010
    
    2009Mortgage debt, interest at 8.3-10.6%,
through 2019, collateralized by 43
restaurants in 2010 and 44
restaurants in 2009 having a net book
value at February 28, 2010 of
$16,510,000 and at March 1, 2009 of $17,287,000
    
    $
    16,982,000
    
    
    $
    19,095,000Mortgage debt, interest at 7.2-7.3%
fixed through 2018 and variable
thereafter, collateralized by two
restaurants having a net book value
at February 28, 2010 of $1,805,000
and at March 1, 2009 of $1,483,000
    
    
    2,101,000
    
    
    
    2,155,000Equipment loan, interest at 7.1%
fixed through 2017, collateralized by
equipment at two restaurants
    
    
    363,000
    
    
    
    397,000Mortgage debt, variable interest of
3.9% at February 28, 2010,
amortization to 2028 with a term to
2013 collateralized by 13 restaurants
in both 2010 and 2009 having a net
book value at February 28, 2010 of
$5,632,000 and at March 1, 2009 of $5,902,000
    
    
    8,366,000
    
    
    
    8,834,000Equipment loan, variable interest of
4.65% at February 28, 2010,
amortization to 2018 with a term to
2013 collateralized by the equipment
at 17 restaurants
    
    
    2,578,000
    
    
    
    2,910,000Equipment loan from franchisor for
proprietary equipment, paid off in
January 2010, with variable interest
rate of 3.11% as of March 1, 2009
through 2010
    
    
    
    
    
    
    22,000Equipment loan, variable interest
rate of 5.0% at February 28, 2010,
amortization to 2018 with a term to
2013 collateralized by the equipment
at 10 restaurants
    
    
    2,500,000
    
    
    
    2,800,00032,890,000
    
    
    
    36,213,000Less long term debt
    
    
    29,725,000
    
    
    
    19,738,000Long term debt, current portion
    
    $
    3,165,000
    
    
    $
    16,475,000
  2011
    
    $
    3,165,0002012
    
    
    3,360,0002013
    
    
    12,056,0002014
    
    
    4,036,0002015
    
    
    1,814,000Later years
    
    
    8,459,000$
    32,890,000
  27




---



##### 



28




---



##### 



NOTE 6. LEASE OBLIGATIONS AND OTHER COMMITMENTS
  2010
    
    2009Leased 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
    
    
    517,000
    
    
    
    434,000$
    797,000
    
    
    $
    880,000
   2010
    
    2009Capital lease obligations
    
    $
    1,105,000
    
    
    $
    1,144,000Less current maturities
    
    
    44,000
    
    
    
    39,000Long-term capital lease obligations
    
    $
    1,061,000
    
    
    $
    1,105,000
   2011
    
    $
    148,0002012
    
    
    148,0002013
    
    
    146,0002014
    
    
    147,0002015
    
    
    148,000Later years
    
    
    1,270,0002,007,000Less amount representing interest at 10%
    
    
    902,000Total obligations under capital leases
    
    $
    1,105,000
  29




---



##### 



30




---



##### 



Number of Units
    
    Period
    
    Type
    
    
    Total (1)
    
    Required (2)
    
    Additional (3)3
    
    
    Fiscal 2010
    
    IE (4)
    
    
    $
    980,000
    
    
    
    860,000
    
    
    $
    120,0001
    
    
    Fiscal 2010
    
    Relo (4) (5)
    
    
    
    750,000
    
    
    
    750,000
    
    
    $
    1
    
    
    Fiscal 2011
    
    Relo (5)
    
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    5
    
    
    Fiscal 2011
    
    IE
    
    
    
    1,600,000
    
    
    
    1,400,000
    
    
    
    200,0008
    
    
    Fiscal 2012
    
    IE
    
    
    
    2,560,000
    
    
    
    2,240,000
    
    
    
    320,0005
    
    
    Fiscal 2013
    
    IE
    
    
    
    1,600,000
    
    
    
    1,400,000
    
    
    
    200,0001
    
    
    Fiscal 2015
    
    Rebuild
    
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    4
    
    
    Fiscal 2015
    
    Relo (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
    
    
    
    34
    
    
    Total
    
    
    
    
    
    $
    23,490,000
    
    
    $
    22,650,000
    
    
    $
    840,000
 
 (1)
    
    These amounts are based on estimates of current construction costs and actual costs
may vary.(2)
    
    These amounts include only the items required to meet the franchisors current image
requirements.(3)
    
    These amounts are for capital upgrades performed on or which may be performed on the image
enhanced restaurants which were or may be deemed by the Company to be advantageous to the operation
of the units and which may be done at the time of the image enhancement.(4)
    
    Not completed in fiscal 2010, as required.(5)
    
    Relocations of fee owned properties are shown net of expected recovery of capital from the sale
of the former location. Relocation of leased properties assumes the capital cost of only equipment
because it is not known until each lease is finalized whether the lease will be a capital or
operating lease.    31




---



##### 



NOTE 7. NET INCOME (LOSS) PER COMMON SHARE
  Fiscal year ended February 28, 2010
    
    
    Fiscal year ended March 1, 2009Net income
    
    
    Shares
    
    
    Per Share
    
    
    Net loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    Amount
    
    
    (Numerator)
    
    
    (Denominator)
    
    
    AmountBasic EPSIncome (loss) available to
common shareholders
    
    $
    396,000
    
    
    
    2,934,995
    
    
    $
    0.13
    
    
    $
    (1,390,000
    )
    
    
    2,934,995
    
    
    $
    (0.47
    )Effect of Dilutive SecuritiesWeighted Average Stock Options
    
    
    
    
    
    
    56,946
    
    
    
    
    
    
    
    
    
    
    
    Diluted EPSIncome (loss) available to
common shareholders
    
    $
    396,000
    
    
    
    2,991,941
    
    
    $
    0.13
    
    
    $
    (1,390,000
    )
    
    
    2,934,995
    
    
    $
    (0.47
    )
  NOTE 8. INCOME TAXES
    2010
    
    
    2009Tax provision (benefit) at statutory rate
    
    $
    250,000
    
    
    $
    (340,000
    )State and local taxes, net of federal benefit
    
    
    2,000
    
    
    
    4,000Deferred tax provision-change in valuation
allowance
    
    
    (124,000
    )
    
    
    846,000Deferred tax provision-change in deferred state
and local income taxes
    
    
    54,000
    
    
    
    (60,000
    )Deferred tax provision-change in effective tax
rate
    
    
    44,000
    
    
    
    Deferred tax provision-change in estimated
deferred tax items
    
    
    206,000
    
    
    
    Employment tax credits
    
    
    (73,000
    )
    
    
    (86,000
    )Other
    
    
    (19,000
    )
    
    
    27,000$
    340,000
    
    
    $
    391,000
 32




---



##### 



2010
    
    
    2009Accrued expenses not currently deductible
    
    $
    244,000
    
    
    $
    302,000Prepaid expenses
    
    
    (174,000
    )
    
    
    (176,000
    )Inventory valuation
    
    
    5,000
    
    
    
    6,000Current portion of advance payments
    
    
    79,000
    
    
    
    48,000Current deferred tax valuation allowance
    
    
    (139,000
    )
    
    
    (160,000
    )Current portion of deferred taxes
    
    $
    15,000
    
    
    $
    20,000Operating loss carryforwards
    
    $
    1,688,000
    
    
    $
    1,620,000Tax credit carryforwards
    
    
    403,000
    
    
    
    284,000Stock options
    
    
    55,000
    
    
    
    34,000Property and equipment
    
    
    1,715,000
    
    
    
    2,049,000Deferred gain on sale/leaseback
    
    
    1,224,000
    
    
    
    1,319,000Advance payments
    
    
    125,000
    
    
    
    87,000Intangible assets
    
    
    (112,000
    )
    
    
    (102,000
    )Deferred tax asset valuation allowance
    
    
    (4,614,000
    )
    
    
    (4,717,000
    )Net non-current deferred tax asset
    
    $
    484,000
    
    
    $
    574,000Deferred tax liabilities associated with
indefinite lived intangible assets
    
    
    (2,371,000
    )
    
    
    (2,130,000
    )Net total non-current deferred taxes
    
    $
    (1,887,000
    )
    
    $
    (1,556,000
    )
   2023
    
    $
    705,0002024
    
    
    383,0002025
    
    
    1,481,0002028
    
    
    1,022,0002029
    
    
    997,0002030
    
    
    226,000Total
    
    $
    4,814,000
   33




---



##### 



NOTE 9. STOCK OPTIONS AND SHAREHOLDERS EQUITY
     SharesBalance March 1, 2009
    
    
    220,000Expired
    
    
    (71,000
    )Balance February 28, 2010
    
    
    149,000
  Exercise Price
    
    Outstanding 2-28-10
    
    Average Life
    
    Number Exercisable1.500
    
    149,000
    
    8.7
    
    149,000
   34




---



##### 



NOTE 10. 401(k) RETIREMENT PLAN
  NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
  NOTE 12. SUBSEQUENT EVENTS
  NOTE 13. NEW ACCOUNTING STANDARDS
    35




---



##### 



NOTE 14. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
 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
    
    
    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
    )
 Fiscal 2009 Quarter EndedMay 25,
    
    
    August 17,
    
    
    November 9,
    
    
    March 1,2008
    
    
    2008
    
    
    2008
    
    
    2009Revenues
    
    $
    21,753,000
    
    
    $
    23,049,000
    
    
    $
    21,967,000
    
    
    $
    25,716,000Operating costs and expenses, net
    
    
    20,817,000
    
    
    
    22,250,000
    
    
    
    21,100,000
    
    
    
    25,827,000Operating income
    
    
    936,000
    
    
    
    799,000
    
    
    
    867,000
    
    
    
    (111,000
    )Net income (loss)
    
    
    94,000
    
    
    
    (641,000
    )
    
    
    (67,000
    )
    
    
    (776,000
    )Basic net income (loss) per share
    
    
    0.03
    
    
    
    (0.22
    )
    
    
    (0.02
    )
    
    
    (0.26
    )Fully diluted net income (loss) per share
    
    
    0.03
    
    
    
    (0.22
    )
    
    
    (0.02
    )
    
    
    (0.26
    )
  36




---



##### 



ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
  ITEM 9A(T). CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  Managements Report on Internal Control Over Financial Reporting
    ITEM 9B. OTHER INFORMATION
  37




---



##### 



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
  38




---



##### 



PART IV
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    Financial Statements and Financial Statement Schedules.
    The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual
Report on Form 10-K.
 39




---



##### 



SIGNATURES
  Morgans Foods, Inc.Dated: June 1, 2010
    By:
    /s/ Leonard R. Stein-SapirLeonard R. Stein-SapirChairman of the Board, Chief
Executive Officer & Director  By:
    /s/ Leonard R. Stein-SapirLeonard R. Stein-SapirChairman of the Board,
Chief Executive Officer & Director  Dated:  June 1, 2010By:
    /s/ James J. LiguoriJames J. LiguoriDirector, President &
Chief Operating Officer Dated:  June 1, 2010By:
    /s/ Kenneth L. HignettKenneth L. HignettDirector, Senior Vice President,
Chief Financial Officer & Secretary
also as Principal Accounting Officer Dated:  June 1, 2010By:
    /s/ Bernard LernerBernard LernerDirector Dated:  June 1, 2010By:
    /s/ Lawrence S. DolinLawrence S. DolinDirector Dated:  June 1, 2010By:
    /s/ Bahman GuyuronBahman GuyuronDirector Dated:  June 1, 2010By:
    /s/ Steven S. KaufmanSteven S. KaufmanDirector  Dated:  June 1, 2010 40




---



##### 



INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Description3.1
    
    Amended Articles of Incorporation, as amended3.2
    
    Amended Code of Regulations4.1
    
    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)14
    
    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
 41