UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended ~~August~~November 1810, 2013

☐ 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.

(Exact name of registrant as specified in its charter)

Ohio	34-0562210
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

4829 Galaxy Parkway, Suite S, Cleveland, Ohio	44128
(Address of principal executive offices)	(Zip Code)

(216) 359-9000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer	☐
Non-accelerated filer ☐ (do not check if a smaller reporting company)	Smaller reporting company	☑

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

As of ~~September~~December 2418, 2013, the issuer had 4,~~041~~048,147 common shares outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MORGAN’S FOODS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Quarter Ended August 18, 2013 August 12, 2012 Revenues $ 19,752,000 $ 20,642,000 Cost of sales: Food, paper and beverage 6,482,000 6,706,000 Labor and benefits 5,644,000 5,763,000 Restaurant operating expenses 5,153,000 5,285,000 Depreciation and amortization 683,000 621,000 General and administrative expenses 1,207,000 1,190,000 Loss on restaurant assets 472,000 88,000 Operating income 111,000 989,000 Interest expense: Bank debt and notes payable 154,000 217,000 Capital leases 464,000 506,000 Other (income) and expense, net (16,000 ) (12,000 ) Income (loss) before income taxes (491,000 ) 278,000 Provision for income taxes 86,000 72,000 Net income (loss) $ (577,000 ) $ 206,000 Basic net income (loss) per common share: $ (0.14 ) $ 0.07 Diluted net income (loss) per common share: $ (0.14 ) $ 0.07 Basic weighted average number of shares outstanding 4,039,457 2,934,995 Diluted weighted average number of shares outstanding 4,039,545 2,940,194

	Quarter Ended
	November 10, 2013			November 4, 2012
Revenues	$	19,050,000		$	20,060,000

Cost of sales:
Food, paper and beverage		6,137,000			6,466,000
Labor and benefits		5,448,000			5,747,000
Restaurant operating expenses		4,635,000			5,073,000
Depreciation and amortization		707,000			644,000
General and administrative expenses		1,068,000			1,140,000
Loss on restaurant assets		205,000			106,000
Operating income		850,000			884,000
Interest expense:
Bank debt and notes payable		127,000			200,000
Capital leases		465,000			504,000
Other (income) and expense, net		372,000			(16,000	)
Unrealized loss on derivatives		130,000			-
Income (loss) before income taxes		(244,000	)		196,000
Provision for income taxes		63,000			71,000
Net income (loss)	$	(307,000	)	$	125,000
Basic net income (loss) per common share:	$	(0.08	)	$	0.04
Diluted net income (loss) per common share:	$	(0.08	)	$	0.04

Basic weighted average number of shares outstanding		4,044,147			2,934,995
Diluted weighted average number of shares outstanding		4,044,147			2,984,694

See notes to these consolidated financial statements.

MORGAN’S FOODS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

	Twenty-four Weeks Ended
	Thirty-six Weeks Ended
	August 18, 2013			August 12, 2012
	November 10, 2013			November 4, 2012
Revenues	$	4059,~~682~~732,000		$	4061,~~956~~016,000
Cost of sales:
Food, paper and beverage		1319,~~345~~482,000			1319,~~303~~769,000
Labor and benefits		1117,~~601~~049,000			1117,~~514~~261,000
Restaurant operating expenses		1014,~~124~~759,000			1015,~~260~~333,000
Depreciation and amortization		12,~~364~~071,000			1,~~225~~869,000
General and administrative expenses		23,~~375~~443,000			23,~~384~~524,000
Loss on restaurant assets		~~531~~736,000			~~458~~564,000
Early extinguishment of debt		-			-
Operating income		2,192,000			2,696,000
Operating income		1,342,000			1,812,000
Interest expense:
Bank debt and notes payable		~~334~~461,000			~~447~~647,000
Capital leases		~~941~~1,406,000			1,~~008~~512,000
Other (income) and expense, net		66438,000			(3147,000	)
Income (loss) before income taxes		1,000			388,000
Unrealized loss on derivatives		130,000			-
Provision for income taxes		171,000			143,000
Income (loss) before income taxes		(243,000	)		584,000
Net income (loss)	$	(170,000	)	$	245,000
Provision for income taxes		234,000			214,000
Basic net income (loss) per common share:	$	(0.04	)	$	0.08
Net income (loss)	$	(477,000	)	$	370,000
Diluted net income (loss) per common share:	$	(0.04	)	$	0.08
Basic net income (loss) per common share:	$	(0.12	)	$	0.13
Basic weighted average number of shares outstanding		3,790,988			2,934,995
Diluted net income (loss) per common share:	$	(0.12	)	$	0.13
Diluted weighted average number of shares outstanding		3,790,988			2,937,595
Basic weighted average number of shares outstanding		3,875,374			2,934,995
Diluted weighted average number of shares outstanding		3,875,374			2,953,294

See notes to these consolidated financial statements.

MORGAN’S FOODS, INC.

CONSOLIDATED BALANCE SHEET

~~August~~November 1810, 2013 March 3, 2013 (UNAUDITED) ASSETS Current assets: Cash and equivalents $ 32,~~556~~676,000 $ 2,971,000 Restricted cash ~~295~~2,773,000 350,000 Receivables ~~445~~459,000 609,000 Inventories ~~818~~739,000 724,000 Prepaid expenses ~~449~~650,000 812,000 Assets held for sale ~~383~~1,120,000 583,000 Total current assets 58,~~946~~417,000 6,049,000 Property and equipment: Land 1350,~~020,~~000 1,075,000 Buildings and improvements 2,~~862~~130,000 2,639,000 Property under capital leases 2223,~~969~~989,000 22,969,000 Leasehold improvements 12,~~355~~463,000 12,308,000 Equipment, furniture and fixtures 1918,~~255~~691,000 18,870,000 Construction in progress 75420,000 26,000 Total property and equipment 58,~~536~~043,000 57,887,000 Less accumulated depreciation and amortization 23,~~892~~244,000 23,486,000 Net book value of property and equipment 34,~~644~~799,000 34,401,000 Other assets 352,000 411,000 Franchise agreements, net ~~628~~591,000 689,000 Goodwill 8,~~950~~896,000 8,950,000 Total assets $ 5053,~~520~~055,000 $ 50,500,000 LIABILITIES AND SHAREHOLDERS' ~~DEFICIT~~EQUITY Current liabilities: Long-term debt, current $ ~~880~~942,000 $ 878,000 Current maturities of capital lease obligations ~~330~~367,000 304,000 Accounts payable 3,~~722~~250,000 3,297,000 Accrued liabilities 43,~~009~~749,000 3,800,000 Total current liabilities 8,~~941~~308,000 8,279,000 Long-term debt 57,~~306~~789,000 7,338,000 Long-term capital lease obligations 2122,~~933~~839,000 22,079,000 Other long-term liabilities 10,~~557~~541,000 10,812,000 Deferred tax liabilities 3,~~313~~367,000 3,175,000 SHAREHOLDERS' EQUITY (DEFICIT) Preferred shares, 1,000,000 shares authorized, no shares outstanding - - Common shares, no par value Authorized shares - 25,000,000 Issued shares - 4,073,557 and 2,969,405 41,000 30,000 Treasury shares -25,410 and 34,410 (60,000 ) (81,000 ) Capital in excess of stated value 31,327,000 29,488,000 Accumulated deficit (31,097,000 ) (30,620,000 ) Total shareholders' equity (deficit) 211,000 (1,183,000 ) Total liabilities & shareholders' equity (deficit) $ 53,055,000 $ 50,500,000

Common shares, no par value Authorized shares - 25,000,000 Issued shares - 4,073,557

Treasury shares - 33,410

Capital in excess of stated value

Accumulated deficit

Total shareholders' equity (deficit)

Total liabilities & shareholders' equity (deficit)

See notes to these consolidated financial statements

MORGAN’S FOODS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
(UNAUDITED)

Common Shares Treasury Shares Capital in Excess of Stated Value

											Capital in					Total Shareholders'
	Common Shares				Treasury Shares						Excess of		Accumulated			Equity
	Shares		Amount		Shares			Amount			Stated Value		Deficit			(Deficit)
Balance March 3, 2013		2,969,405	$	30,000		(34,410	)	$	(81,000	)	$	29,488,000	$	(30,620,000	)	$	(1,183,000	)
Exercise of share options		21,333		200		9,000			21,000			24,000		-			45,200
Share grant compensation		30,569		300		-			-			107,000		-			107,300
Issuance of shares		1,052,250		10,500		-			-			1,708,000		-			1,718,500
Net loss		-		-		-			-			-		(477,000	)		(477,000	)
Balance November 10, 2013		4,073,557	$	41,000		(25,410	)	$	(60,000	)	$	31,327,000	$	(31,097,000	)	$	211,000

Accumulated Deficit

Total Shareholders'

Equity/Deficit

Amount

Balance March 3, 2013

Exercise of share options

Share grant compensation

Issuance of shares

Net income

Balance August 18, 2013

See notes to these consolidated financial statements.

MORGAN’S FOODS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

	Twenty-Four Weeks Ended
	August 18, 2013			August 12, 2012
Cash flows from operating activities:
Net income (loss)	$	(170,000	)	$	245,000
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization		1,364,000			1,225,000
Amortization of deferred financing costs		39,000			40,000
Amortization of supply agreement advances		(440,000	)		(428,000	)
Funding from supply agreements		765,000			753,000
Deferred income taxes		138,000			112,000
Gains/losses on restaurant assets - net		531,000			424,000
Changes in assets and liabilities:
Restricted cash		-			41,000
Receivables		124,000			86,000
Inventories		(94,000	)		(27,000	)
Prepaid expenses		363,000			(38,000	)
Other assets		20,000			16,000
Accounts payable		359,000			(436,000	)
Accrued liabilities		(188,000	)		27,000
Net cash, operating activities		2,811,000			2,040,000
Cash flows from investing activities:
Proceeds from sale of restaurants		(3,000	)		537,000
Capital expenditures		(1,951,000	)		(2,108,000	)
Use of restricted cash		55,000			-
Purchase of franchise agreements		-			-
Net cash, investing activities		(1,899,000	)		(1,571,000	)
Cash flows from financing activities:
Principal payments on long-term debt		(366,000	)		(24,000	)
Principal payments on capital lease obligations		(120,000	)		(41,000	)
Bank debt repayment in advance		(1,664,000	)		-
Cash from stock transactions		1,823,000			-
Net cash, financing activities		(327,000	)		(65,000	)
Net change in cash and equivalents		585,000			404,000
Cash and equivalents, beginning balance		2,971,000			3,455,000
Cash and equivalents, ending balance	$	3,556,000		$	3,859,000

	Thirty-six Weeks Ended
	November 10, 2013			November 4, 2012
Cash flows from operating activities:
Net income (loss)	$	(477,000	)	$	370,000
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization		2,071,000			1,869,000
Amortization of deferred financing costs		333,000			60,000
Amortization of supply agreement advances		(648,000	)		(640,000	)
Funding from supply agreements		770,000			755,000
Deferred income taxes		192,000			168,000
Loss on restaurant assets		736,000			564,000
Change in fair value of derivatives		130,000			-
Changes in assets and liabilities:
Receivables		120,000			(70,000	)
Inventories		(15,000	)		(71,000	)
Prepaid expenses		162,000			(394,000	)
Other assets		18,000			16,000
Accounts payable		(149,000	)		(380,000	)
Accrued liabilities		(343,000	)		(114,000	)
Net cash, operating activities		2,900,000			2,133,000
Cash flows from investing activities:
Proceeds from sale of restaurants		131,000			541,000
Capital expenditures		(2,800,000	)		(3,633,000	)
Restricted cash		(2,423,000	)		57,000
Net cash, investing activities		(5,092,000	)		(3,035,000	)
Cash flows from financing activities:
Proceeds from long-term borrowings		8,930,000			-
Additions to deferred financing costs		(292,000	)		-
Principal payments on long-term debt		(647,000	)		(36,000	)
Principal payments on capital lease obligations		(197,000	)		(63,000	)
Bank debt repayment in advance		(7,768,000	)		-
Cash from stock transactions		1,871,000			-
Net cash, financing activities		1,897,000			(99,000	)
Net change in cash and equivalents		(295,000	)		(1,001,000	)
Cash and equivalents, beginning balance		2,971,000			3,455,000
Cash and equivalents, ending balance	$	2,676,000		$	2,454,000

Interest paid on debt and capitalized leases	$	1,732,000		$	2,156,000
Cash payments for income taxes	$	61,000		$	34,000

See notes to these consolidated financial statements.

MORGAN’S FOODS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim consolidated financial statements of Morgan's Foods, Inc. (the “Company”) have been prepared without audit. In the opinion of Company management, all adjustments have been included. Unless otherwise disclosed, all adjustments consist only of normal recurring adjustments necessary for a fair statement of results of operations for the interim periods. These unaudited financial statements have been prepared using the same accounting principles that were used in preparation of the Company’s annual report on Form 10-K for the year ended March 3, 2013. Certain prior period amounts have been reclassified to conform to current period presentations. The results of operations for the ~~twenty~~thirty-~~four~~six weeks ended ~~August~~November 1810, 2013 are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended March 3, 2013.

The Company’s bank debt is reported at historical cost and is almost entirely comprised of variable rate borrowings. The market for variable rate debt for restaurant financing is currently extremely limited. The Company’s debt is not publicly traded and there are few lenders or financing transactions for similar debt in the marketplace at this time. Management has concluded that it is not practicable to estimate the fair value of the Company’s debt as of ~~August~~November 1810, 2013.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses in fiscal years 2013 and 2012 and has ~~negative working capital and~~ an accumulated deficit at ~~August~~November 1810, 2013. The Company has managed its liquidity in fiscal 2013 and will manage its liquidity in fiscal 2014 through the refinancing of debt, the sale and leaseback of restaurant properties and the sale of additional equity. Should the Company have difficulty meeting its forecasts, this could have an adverse effect on its liquidity position. The Company has taken actions to improve its cash flows, including closely monitoring its expenses and store closings for underperforming stores and expects to be able to achieve its forecast for fiscal 2014. However, there can be no assurances that our cash flow will be sufficient to allow us to continue as a going concern if we are unable to meet our projections.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2013-01 Balance Sheet Topic 210, January 2013

Clarifies the scope of disclosures related to offsetting assets and liabilities. This release reduces the application of these disclosures to eliminate unintended consequences resulting from the application of a previously issued standard. The standard is effective for fiscal years beginning on or after January 1, 2013. Management has determined that the application of this standard did not have a material effect on the financial statements of the Company.

ASU 2013-10 Derivatives and Hedging Topic 815, July 2013

Provides for the inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, effective for swaps entered into after July 17, 2013. This release allows the use of the overnight index swap rate as an additional benchmark for hedge accounting treatment. Management has determined that the application of this standard will not have a material effect on the financial statements of the Company.

ASU 2013-11 Income Taxes Topic 740, July 2013

Provides for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists, effective for fiscal years beginning after ~~12-~~December 15~~-13~~, 2013. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if available and a company has the intent and ability to use for such purpose. Management has determined that the application of this standard ~~did~~will not have a material effect on the financial statements of the Company.

~~NOTE~~In 3September –2013, ~~NET~~the ~~INCOME~~Internal ~~PER~~Revenue ~~COMMON~~Service ~~SHARE~~issued final regulations governing the income tax treatment of acquisitions, dispositions, and repairs of tangible property. Taxpayers are required to follow the new regulations in taxable years beginning on or after January 1, 2014. Management is currently assessing the impact of the regulations and does not expect they will have a material impact on the Company’s financial statements.

~~Basic~~NOTE ~~net~~3 ~~income~~– ~~per~~NET ~~common~~INCOME ~~share~~(LOSS) isPER ~~computed~~COMMON bySHARE dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is based on the combined weighted average number of shares outstanding, which includes the assumed exercise, or conversion of options. In computing diluted net income per common share, the Company has utilized the treasury stock method. The following table reconciles the difference between basic and diluted earnings per common share:

	Quarter ended August 18, 2013								Quarter ended August 12, 2012
	Net income (Numerator)			Shares(Denominator)		Per ShareAmount			Net income (Numerator)		Shares(Denominator)		Per ShareAmount
Basic EPS
Income (loss) available to common shareholders	$	(577,000	)		4,039,457	$	(0.14	)	$	206,000		2,934,995	$	0.07
Effect of Dilutive Securities
Weighted Average Stock Options		-			-					-		5,199
Diluted EPS
Income (loss) available to common shareholders	$	(577,000	)		4,039,457	$	(0.14	)	$	206,000		2,940,194	$	0.07

Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is based on the combined weighted average number of shares outstanding, which includes the assumed exercise, or conversion of options. In computing diluted net income per common share the Company has utilized the treasury stock method. The following table reconciles the difference between basic and diluted earnings per common share:

	Twenty-four weeks ended August 18, 2013								Twenty-four weeks ended August 12, 2012
	Net income (Numerator)			Shares(Denominator)		Per ShareAmount			Net income (Numerator)		Shares(Denominator)		Per ShareAmount
Basic EPS
Income (loss) available to common shareholders	$	(170,000	)		3,790,988	$	(0.04	)	$	246,000		2,934,995	$	0.08
Effect of Dilutive Securities
Weighted Average Stock Options		-			-					-		2,600
Diluted EPS
Income (loss) available to common shareholders	$	(170,000	)		3,790,988	$	(0.04	)	$	246,000		2,937,595	$	0.08

	Quarter ended November 10, 2013								Quarter ended November 4, 2012
	Net income (Numerator)			Shares (Denominator)		Per Share Amount			Net income (Numerator)		Shares (Denominator)		Per Share Amount
Basic EPS
Income (loss) available to common shareholders	$	(307,000	)		4,044,147	$	(0.08	)	$	125,000		2,934,995	$	0.04
Effect of Dilutive Securities
Weighted Average Stock Options		-			-					-		49,699
Diluted EPS
Income (loss) available to common shareholders	$	(307,000	)		4,044,147	$	(0.08	)	$	125,000		2,984,694	$	0.04

Weighted average stock options of 60,089 shares for the quarter ended August 18, 2013 and 65,719 shares for the twenty-four weeks ended august 18, 2013 have been excluded from the calculations of diluted earnings per share because there was a net loss in those periods.

	Thirty-six weeks ended November 10, 2013								Thirty-six weeks ended November 4, 2012
	Net income (Numerator)			Shares (Denominator)		Per Share Amount			Net income (Numerator)		Shares (Denominator)		Per Share Amount
Basic EPS
Income (loss) available to common shareholders	$	(477,000	)		3,875,374	$	(0.12	)	$	370,000		2,934,995	$	0.13
Effect of Dilutive Securities
Weighted Average Stock Options		-			-					-		18,299
Diluted EPS
Income (loss) available to common shareholders	$	(477,000	)		3,875,374	$	(0.12	)	$	370,000		2,953,294	$	0.13

Weighted average stock options of 67,139 shares for the quarter ended November 10, 2013 and 66,192 shares for the thirty-six weeks ended November 10, 2013 have been excluded from the calculations of diluted earnings per share because there was a net loss in those periods.

NOTE 4 – DEBT

AtOn August 1822, 2013 the Company’s ~~term~~entered ~~loan~~into ~~credit~~a new loan agreement, ~~requires~~comprising ~~the~~two ~~maintenance~~loan offacilities, awith ~~consolidated~~Huntington ~~debt~~National ~~service~~Bank, ~~coverage~~a ~~ratio~~national ofbanking association (“~~DSCR~~Huntington”) 1.80 toThe 1Loan orAgreement ~~greater~~contains ~~regarding~~two ~~all~~new ofloan ~~the~~facilities ~~Company’s~~that, ~~debt.~~in ~~Debt~~addition ~~service~~to ~~coverage~~funding ~~ratios are calculated by dividing~~ the cash ~~flow~~remodel ~~before~~reserve, ~~taxes~~were ~~and~~used ~~debt~~to ~~service~~pay ~~(“EBITDA”)~~off ~~for~~ the ~~previous~~Company’s 12outstanding ~~months~~loan bybalance ~~the~~of ~~debt~~$6,104,000, ~~service~~which ~~payable~~carried ~~for~~an ~~the~~interest ~~same~~rate ~~period~~of 9.0%, ~~The~~the ~~Company’s~~lender, ~~term~~Fortress ~~loan~~Credit ~~also~~Corp. ~~requires a consolidated debt to EBITDA~~ (“~~Leverage~~Fortress”), ~~ratio~~and ofa ~~2.50~~prepayment orpenalty ~~less, minimum EBITDA~~ of $31.0% ~~million, maximum~~ of $4the balance.0 ~~million~~The intwo ~~annual~~facilities ~~capital~~under ~~expenditures~~the ~~and~~Loan ~~minimum~~Agreement ~~unencumbered~~consist ~~cash~~ of ~~$1.5~~a ~~million.~~term ~~The~~loan ~~ratios~~and ~~are~~a ~~computed~~time ~~quarterly.~~loan Atin the ~~end~~total amount of ~~the~~$8,930,000. ~~second~~The ~~quarter~~refinance oftransaction ~~fiscal~~resulted ~~2014,~~in the ~~Company~~write-off ~~had a DSCR~~ of ~~3.33~~deferred ~~and~~financing acosts ~~Leverage ratio~~ of ~~1.5~~$275,000 ~~being~~and inprepayment ~~compliance~~penalties ~~with all~~ of ~~the required ratios~~$61,000.

The Term Note consists of a $7,930,000 three year term loan with an interest rate which has been fixed at the rate of 5.44% through the use of a derivative interest rate swap also entered into with Huntington. Principal and interest on the Term Note are payable in substantially equal monthly payments based on an eight year amortization with a balloon payment of the then remaining principal balance due and payable at the end of the three year term.

The Company’s interest rate swap agreement (the "Swap") with Huntington National Bank had a notional amount at inception equal to the beginning balance of the Term Note, $7,930,000, and amortizes according to the same schedule to hedge its exposure to the variable interest rate of the Term Note. The Company has not designated the Swap as an effective hedge, therefore unrealized changes in the fair value of the Swap will be shown in the Company’s consolidated statements of operation as either income or expense and the fair value will be shown on the Company’s consolidated balance sheet as an asset or liability, as applicable. The critical terms of the Swap are aligned with the terms of the Term Note, including maturity of August 10, 2016.

Under the Swap, the Company pays a fixed interest rate of 5.44% and it receives a variable interest rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 4.25%. The Swap settles monthly on the same date as the payments are due on the Term Note. The difference between amounts to be received and paid under the Swap is recognized as a component of interest expense on the consolidated statements of operations. The Swap increased interest expense by $17,000 for the quarter and year to date ended November 10, 2013. The market value of the Swap as of November 10, 2013 was a liability of $130,000.

The Time Note consists of $1,000,000 having an 18 month term, no scheduled principal payments and a floating interest rate at 30 day LIBOR plus 4.25%. Principal payments on the Time Note are expected to be made with the proceeds of the sales by the Company of excess real estate of closed restaurants. The balance, if any, at the end of the 18 month term will become due and payable. As of November 10, 2013, the Time Note had a balance of $865,000.

During the fiscal third quarter, on October 12, 2013, the Company entered into a capitalized lease for a new KFC restaurant in Pennsylvania which replaced an older facility for which the Company owns the land and building. The term of the lease is 20 years and resulted in the recording of an asset and liability in the amount of $1,020,000.

At November 10, 2013 the Company’s term loan credit agreement requires the maintenance of a consolidated fixed charge coverage ratio (“FCCR”) of 1.15 or greater regarding all of the Company’s debt. The FCCR is calculated by dividing the cash flow before taxes, debt service and rent (“EBITDAR”) for the previous 12 months by the debt service and capital expenditures less the cash remodel reserve payable for the same period. The Company’s term loan also requires a consolidated cash adjusted leverage ratio (“Leverage”) of not greater than 5.25. Leverage is calculated by dividing the sum of debt and 8 times lease payments less cash, including the remodel reserve, by EBITDAR. The ratios are computed quarterly. At the end of the third quarter of fiscal 2014, the Company had a FCCR of 1.31 and a Leverage ratio of 5.07, being in compliance with all of the required ratios.

NOTE 5 - STOCK OPTIONS AND LTIP UNITS

On April 2, 1999, the Board of Directors of the Company approved a Stock Option Plan for Executives and Managers. Under the plan 145,500 shares were reserved for the grant of options. The Stock Option Plan for Executives and Managers provides for grants to eligible participants of nonqualified stock options only. The exercise price for any option awarded under the Plan is required to be not less than 100% of the fair market value of the shares on the date that the option is granted. Options are granted by the Stock Option Committee of the Company. Options for 145,150 shares were granted to executives and managers of the Company on April 2, 1999 at an exercise price of $4.125, all of which have either expired or been exercised. Options for 350 common shares were granted on November 6, 2008 at the closing price on that day of $1.50 per share all of which are currently outstanding. The options vested in six months and expire ten years after date of issue.

At the Company’s annual meeting on June 25, 1999 the shareholders approved the Key Employees Stock Option Plan. This plan allows the granting of options covering 291,000 common shares and has essentially the same provisions as the Stock Option Plan for Executives and Managers which was discussed above. Options for 129,850 shares were granted to executives and managers of the Company on January 7, 2000 at an exercise price of $3.00. Options for 11,500 shares were granted to executives on April 27, 2001 at an exercise price of $.85, all of which have either expired or been exercised. Options for 149,650 common shares were granted on November 6, 2008 at the closing price on that day of $1.50 per share of which ~~122~~114,317 are currently outstanding. The options vested in six months and expire ten years after date of issue.

As of November 10, 2013, a total of 114,667 options were outstanding, fully vested and exercisable at a weighted average exercise price of $1.50 per share. Options for 8,000 shares were exercised during the third quarter of fiscal 2014. No options are available for grant and no options were granted during the current year period. The Company recorded no compensation expense during the current year period related to stock options.

AsThe offollowing ~~August~~table ~~18,~~summarizes ~~2013,~~information aabout ~~total~~stock ~~of 122,667~~ options ~~were~~ outstanding, ~~fully vested and exercisable~~ at aNovember ~~weighted average exercise price of $1.50 per share. Options for 1~~10,~~000~~ shares were exercised during the second quarter of fiscal 2014. No options are available for grant and no options were granted during the current year period. The Company recorded no compensation expense during the current year period related to stock options.2013:

The following table summarizes information about stock options outstanding at August 18, 2013:

Exercise

Prices

Outstanding

11-10-13

Average

Life

Number

Exercisable

1.50

114,667

4.9

114,667

Exercise Prices	Outstanding 8/18/13	Average Life	Number Exercisable
1.50	122,667	5.2	122,667

On April 9, 2013, the Board of Directors approved a Long-Term Incentive Plan, (“LTIP”) reserving 150,000 common shares of the Company for issuance under the LTIP. On April 9, 2013, 30,569 restricted common shares were granted under the LTIP to outside directors of the Company, leaving 119,431 shares available for future grant under the LTIP. The shares issued under the LTIP vest in six months and compensation expense related to such shares totaled $36,000 for the third quarter and $107,000 for the full year which completes the compensation expense for the grants. Additional information regarding the LTIP may be found in a report on Form 8-K filed with the SEC on April 15, 2013.

On April 9, 2013, the Board of Directors approved a Long-Term Incentive Plan, (“LTIP”) reserving 150,000 common shares of the Company for issuance under the LTIP. On April 9, 2013, 30,569 restricted common shares were granted under the LTIP to outside directors of the Company, leaving 119,431 shares available for future grant under the LTIP. The shares issued under the LTIP vest in six months and compensation expense related to such shares totaled $54,000 for the second quarter of fiscal 2014. Unrecognized compensation expense for the grants was $35,000 as of the end of the second quarter of fiscal 2014. Additional information regarding the LTIP may be found in a report on Form 8-K filed with the SEC on April 15, 2013.

NOTE 6 – CAPITAL EXPENDITURES

The Company is required by its franchise agreements to periodically bring its restaurants up to the required image of the franchisor. This typically involves a new dining room décor and seating package and exterior changes and related items but can, in some cases, require the relocation of the restaurant. If the Company deems a particular image enhancement expenditure to be inadvisable, it has the option to cease operations at that restaurant. Over time, the estimated cost and time deadline for each restaurant may change due to a variety of circumstances and the Company revises its requirements accordingly. Also, significant numbers of restaurants may have image enhancement deadlines that coincide, in which case, the Company will adjust the actual timing of the image enhancements in order to facilitate an orderly construction schedule. During the image enhancement process, each restaurant is normally closed for up to two weeks, which has a negative impact on the Company’s revenues and operating efficiencies. At the time a restaurant is closed for a required image enhancement, the Company may deem it advisable to make other capital expenditures in addition to those required for the image enhancement.

The franchise agreements with KFC and Taco Bell Corporation require the Company to upgrade and remodel its restaurants to comply with the franchisors’ current standards within agreed upon timeframes and the franchisor may terminate the franchise agreement for failure to meet those requirements. In the case of a restaurant containing two concepts, even though only one is required to be remodeled, additional costs will be incurred because the dual concept restaurant is generally larger and contains more equipment and signage than the single concept restaurant. If a property is of usable size and configuration, the Company can perform an image enhancement to bring the building to the current image of the franchisor. If the property has a deficiency which would render it unsuitable, the Company would need to relocate the restaurant to another location within the trade area to meet the franchisor’s requirements. The capital requirements for the KFC branded restaurants are included in the schedule based on the requirements of the KFC Remodel Agreement as amended and the Taco Bell restaurants ~~and~~ are shown at the time ~~management~~required ~~believes~~by ~~they~~the ~~will~~Taco beBell ~~done~~remodel soprogram ~~that~~implemented ~~all~~during ~~of them can comfortably be completed before~~ the ~~due~~fiscal ~~date~~2014 ~~for~~third ~~the group~~quarter.

Number of Units	Period	Type	Capital Cost (1)
1	Fiscal 2014	Relo (2)	100,000
4	Fiscal 2015	Remodels	950,000
7	Fiscal 2016	Remodels	1,745,000
4	Fiscal 2017	Remodels	1,000,000
1	Fiscal 2017	Refresh (3)	100,000
2	Fiscal 2017	Taco Bell	800,000
	Total 2017		1,900,000
3	Fiscal 2018	Remodels	740,000
1	Fiscal 2018	Refresh (3)	100,000
2	Fiscal 2018	Taco Bell	800,000
	Total 2018		1,640,000
1	Fiscal 2019	Remodels	200,000
3	Fiscal 2019	Remodels	300,000
2	Fiscal 2019	Taco Bell	800,000
	Total 2019		1,300,000
7	Fiscal 2020	Refresh (3)	675,000
1	Fiscal 2020	Taco Bell	400,000
	Total 2020		1,075,000
7	Fiscal 2021	Refresh (3)	625,000
7	Fiscal 2022	Refresh (3)	675,000
8	Fiscal 2023	Refresh (3)	675,000
1	Fiscal 2025	Refresh (3)	75,000
62	Total		$ 10,760,000

Number of Units

Period

Type

Capital Cost (1)

Fiscal 2015

Remodels

900,000

Fiscal 2016

Remodels

1,655,000

Fiscal 2017

Remodels

1,000,000

Fiscal 2017

Refresh (2)

100,000

Fiscal 2017

Taco Bell

350,000

Total 2017

1,450,000

Fiscal 2018

Remodels

790,000

Fiscal 2018

Refresh (2)

100,000

Fiscal 2018

Taco Bell

350,000

Total 2018

1,240,000

Fiscal 2019

Remodels

940,000

Fiscal 2019

Taco Bell

350,000

Total 2019

1,290,000

Fiscal 2020

Refresh (2)

675,000

Fiscal 2021

Refresh (2)

675,000

Fiscal 2022

Refresh (2)

650,000

Fiscal 2022

Taco Bell

350,000

Total 2022

1,000,000

Fiscal 2023

Refresh (2)

725,000

Fiscal 2023

Taco Bell

350,000

Total 2023

1,075,000

Fiscal 2024

Taco Bell

350,000

Fiscal 2025

Refresh (2)

75,000

Fiscal 2025

Taco Bell

350,000

Total 2025

425,000

Total

10,735,000

(1) These amounts are based on estimates of current construction costs and actual costs may vary.

(2) Reflects the estimated cost of dining room update and exterior paint and refurbishment on restaurants previously remodeled to the current image. Costs may also include the addition of equipment such as coolers necessary to meet Franchisor standards.

~~(1)~~In ~~These~~addition ~~amounts~~to ~~are~~the ~~based~~various facilities actions listed on ~~estimates~~the oftable ~~current~~above, ~~construction~~the ~~costs~~Company ~~and~~is ~~actual~~obligated ~~costs~~to ~~may~~spend ~~vary.~~an ~~(2)~~additional ~~Relocations~~amount of ~~fee~~approximately ~~owned~~$1,000,000 ~~properties~~by ~~are~~the ~~shown~~end ~~net~~of calendar year 2014 to install the KFC operations platform consisting of ~~expected~~a ~~recovery~~new point of ~~capital~~sale ~~from~~system and related reporting and management systems, new food holding cabinets that improve the ~~sale~~quality of ~~the~~product ~~former~~held ~~location.~~for ~~Relocation~~sale ofand ~~leased~~a ~~properties~~new ~~assumes~~drive-thru ~~the~~speed ~~capital~~of ~~cost~~service system in all of ~~only~~its ~~equipment~~KFC ~~because~~and itKFC/Taco isBell ~~not~~"2n1" ~~known~~restaurants. ~~until~~The ~~each~~Company ~~lease~~has isspent ~~finalized~~approximately ~~whether~~$1,425,000 to date on the ~~lease~~operations ~~will~~platform beand aPOS ~~capital~~devices orfor ~~operating~~its ~~lease~~KFC and Taco Bell restaurants. ~~(3)~~During ~~Reflects~~the third quarter, the ~~estimated~~Company ~~cost~~completed the relocation of ~~dining~~one ~~room~~of ~~update~~its ~~and~~restaurants ~~exterior~~in ~~paint~~Pennsylvania. The new restaurant is a leased facility and ~~refurbishment~~the onCompany ~~restaurants~~owns ~~previously~~the ~~remodeled~~land toand building of the ~~current~~former ~~image.~~location ~~Costs~~which ~~may~~is ~~also~~under ~~include~~contract to be sold but the ~~addition~~transaction ofhad ~~equipment~~not ~~such~~closed as ~~coolers~~of ~~necessary~~the todate ~~meet~~of ~~Franchisor~~this ~~standards~~report.

In addition to the various facilities actions listed on the table above, the Company is obligated to spend an additional amount of approximately $1,300,000 by the end of calendar year 2014 to install the KFC operations platform consisting of a new point of sale system and related reporting and management systems, new food holding cabinets that improve the quality of product held for sale and a new drive-thru speed of service system in all of its KFC and KFC/Taco Bell "2n1" restaurants. The company has spent approximately $1,325,000 to date on the operations platform and POS devices for its KFC and Taco Bell restaurants.

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. The Company may not be able to finance capital expenditures in the volume and time horizon required by the image enhancement deadlines solely from existing cash balances and existing cash flow and the Company may 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 at this time.

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. The Company may not be able to finance capital expenditures in the volume and time horizon required by the image enhancement deadlines solely from existing cash balances and existing cash flow and the Company may have to utilize financing for a portion of the capital expenditures. The Company may use debt and build to suit or sale/leaseback financing but has no commitments for any financing at this time.

There can be no assurance that the Company will be able to accomplish the image enhancements and relocations required in the franchise agreements on terms acceptable to the Company. If the Company is unable to meet the requirements of a franchise agreement, the franchisor may choose to extend the time allowed for compliance or may terminate the franchise agreement for the affected location.

NOTE 7 – ASSET ACTIVITIES

The Company owns the land and building of ~~three~~six closed KFC restaurants, all of which are listed for sale and are shown on the Company’s consolidated balance sheet as Assets Held for Sale as of ~~August~~November 1810, 2013. ~~The~~Three ~~Company~~of ~~experienced~~the arestaurants ~~loss~~were onclosed ~~restaurant~~during ~~assets of $472,000 for~~ the ~~second~~Company’s ~~quarter of~~ fiscal ~~2014~~third ~~consisting of $200~~quarter,~~000~~ ~~for~~one ~~the write down~~ of ~~value~~which ofwas ~~two~~due ~~restaurants~~to ~~included~~relocation ~~in assets held for sale, $149,000 in write downs~~ of ~~restaurants~~the ~~scheduled~~restaurant tooperation. ~~be closed~~Additionally, ~~$29,000 related to recording~~ the ~~reserve~~Company ~~for~~closed ~~disposal~~a ofKFC ~~two permanently closed~~ restaurant ~~locations,~~in ~~$31,000~~Ohio ofduring ~~closed~~the ~~unit~~third ~~expense~~quarter and ~~$63,000~~sold ofthe ~~other~~land ~~asset~~and ~~disposals~~building.

The Company experienced a loss on restaurant assets of $~~531~~205,000 for the ~~twenty-four~~third ~~weeks~~quarter ~~ended~~of ~~august~~fiscal ~~18,~~2014 ~~2013~~consisting ~~consisted~~ of $6630,000 related to ~~closed~~recording ~~unit~~the ~~expense, $36,000 change in~~ reserve for ~~the~~ disposal of two permanently closed ~~leased~~ restaurant locations, $~~149~~36,000 inof ~~write~~closed ~~downs~~unit ofexpenses, ~~restaurants~~a ~~scheduled~~charge to begoodwill ~~closed, $81,000~~ related to the ~~disposal~~sale of ~~certain~~one ~~restaurant~~property ~~assets~~of $53,000 and a $~~200~~86,000 ~~reduction in the value~~ of ~~assets~~other ~~held~~asset ~~for sale of two closed locations~~disposals.

The loss on restaurant assets of $736,000 for the thirty-six weeks ended November 10, 2013 consisted of $102,000 related to closed unit expense, $66,000 change in reserve for the disposal of two permanently closed leased restaurant locations, $149,000 in write downs of sold restaurants, $166,000 related to the disposal of certain restaurant assets, a charge to goodwill related to the sale of one property of $53,000 and a $200,000 reduction in the value of assets held for sale of two closed locations.

NOTE 8 – CONTINGENCIES

The Company is a party to various legal proceedings and claims arising in the ordinary course of its business. The Company believes that the outcome of these matters will not have a material adverse effect on its consolidated financial position, results of operations or liquidity.

NOTE 9 - EQUITY TRANSACTION

On April 12, 2013, the Company issued, in a transaction exempt from registration under the Securities Act of 1933, 1,052,250 common shares to Bandera Master Fund LP at a price of $2.00 per share, resulting in net proceeds of $1,718,500 after considering transaction costs of $386,000. The transaction was negotiated and approved by a Special Committee of the Board of Directors. The terms of the Company’s credit agreement required that the net proceeds of the equity transaction be paid as a principal payment in addition to regularly scheduled payments on the credit facility. The transaction is included in the financial statements of the Company and more fully described in a report on Form 8-K filed with the SEC on April 15, 2013.

NOTE 10 – SUBSEQUENT EVENTS

On ~~August~~November 2224, 2013, ~~after~~subsequent to the balance sheet date, the Company ~~entered~~closed ~~into~~ a ~~new~~restaurant ~~loan~~in ~~agreement, comprising two loan facilities with The Huntington National Bank, a national banking association (“Huntington”)~~St. ~~The Loan Agreement contains two new loan facilities that~~Louis, inMO ~~addition~~for towhich ~~funding~~it ~~the~~owns ~~remodel reserve, pay off~~ the ~~Company’s~~land ~~outstanding~~and ~~loan~~building ~~balance~~and ofhas ~~$6,104,351,~~it ~~which~~listed ~~carried~~for ~~an interest rate of 9~~sale.~~0%,~~ ~~with~~On ~~its~~December ~~current lender~~18, ~~Fortress Credit Corp. (“Fortress”)~~2013, ~~and~~subsequent ato ~~prepayment penalty of 1.0% of~~ the balance. ~~The~~sheet ~~Loan~~date, ~~Agreement~~the ~~contains~~Company ~~two~~completed ~~facilities~~the ~~consisting~~sale of a ~~term~~closed ~~loan~~restaurant ~~and~~location ain ~~time~~Ballwin, ~~loan~~MO infor ~~the~~net ~~total~~proceeds ~~amount~~ of $8224,~~930,~~000. ~~The~~and ~~refinance~~resulting ~~transaction is expected to result~~ in ~~the~~a write- off of ~~deferred~~goodwill ~~financing~~in ~~costs~~the amount of ~~approximately~~ $~~275~~104,000.

The Time Note consists of $1,000,000 having an 18 month term, no scheduled principal payments and a floating interest rate at 30 day LIBOR plus 4.25%. Principal payments on the Time Note are expected to be made with the proceeds of the sale by the Company of excess real estate of closed restaurants. The balance, if any, at the end of the 18 month term will become due and payable.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of Business. Morgan’s Foods, Inc. (the “Company”), which was formed in 1925, operates through wholly-owned subsidiaries KFC restaurants under franchises from KFC Corporation, Taco Bell restaurants under franchises from Taco Bell Corporation, and Pizza Hut Express restaurants under licenses from Pizza Hut Corporation. As of ~~September~~December 2518, 2013, the Company operates 5653 KFC restaurants, four Taco Bell restaurants, nine KFC/Taco Bell "2n1's" under franchises from KFC Corporation and franchises from Taco Bell Corporation and three Taco Bell/Pizza Hut Express “2n1’s” under franchises from Taco Bell Corporation and licenses from Pizza Hut Corporation. The Company’s fiscal year is a 52 - 53 week year ending on the Sunday nearest the last day of February.

Summary of Expenses and Operating Income as a Percentage of Revenues

Twelve Weeks Twenty-four Weeks Ended August 18, 2013 August 12, 2012 August 18, 2013 August 12, 2012 Cost of sales: Food, paper and beverage 32.8% 32.5% 32.8% 32.5% Labor and benefits 28.6% 27.9% 28.5% 28.1% Restaurant operating expenses 26.1% 25.6% 24.9% 25.1% Depreciation and amortization 3.5% 3.0% 3.4% 3.0% General and administrative expenses 6.1% 5.8% 5.8% 5.8% Operating income 0.6% 4.8% 3.3% 4.4%

	Twelve Weeks Ended						Thirty-six Weeks Ended
	November 10, 2013			November 4, 2012			November 10, 2013			November 4, 2012
Cost of sales:
Food, paper and beverage		32.2	%		32.2	%		32.6	%		32.4	%
Labor and benefits		28.6	%		28.6	%		28.5	%		28.3	%
Restaurant operating expenses		24.3	%		25.3	%		24.7	%		25.1	%
Depreciation and amortization		3.7	%		3.2	%		3.5	%		3.1	%
General and administrative expenses		5.6	%		5.7	%		5.8	%		5.8	%
Operating income		4.5	%		4.4	%		3.7	%		4.4	%

Revenues The revenue decrease of $~~890~~1,010,000 in the quarter ended ~~August~~November 1810, 2013 as compared to the prior year quarter was primarily the result of a 3.10%, or $~~624~~585,000, comparable sales decrease, $~~360~~511,000 from the permanent closing of a Taco Bell restaurant and athree KFC ~~restaurant~~restaurants, partially offset by additional sales of $9464,000 for ~~restaurant~~restaurants that were temporarily closed for remodeling in the prior year quarter. The comparable sales decrease was primarily the result of poor sales performance in the KFC concept resulting in a comparable ~~sale~~sales decrease of 4.63% for KFC sales only.

The revenue decrease of $1,284,000 for the ~~twenty~~thirty-~~four~~six weeks ended ~~August~~November 1810, 2013 as compared to the prior year period was the result of a 10.41%, or $~~549~~37,000, ~~increase~~decrease in comparable restaurant revenue, reflecting comparable increases in the first quarter, ~~partially~~ offset by the KFC sales declines in the second ~~quarter~~and third quarters, additional sales of $~~204~~268,000 from the temporary closing of ~~six~~eight restaurants for remodeling during the prior year period, offset by $~~832~~1,314,000 from the permanent closing of three restaurant locations and $~~195~~202,000 from the temporary closing of ~~two~~five restaurants for rebuilding or repairs during the current year period.

Cost of Sales - Food, Paper and Beverage Food, paper and beverage costs ~~increased~~remained ~~slightly~~the same as a percentage of revenue toat 32.82% for ~~the~~both ~~quarter ended August 18, 2013 compared to 32.5% for~~ the ~~quarter ended August 12, 2012. The increase in the~~ current year ~~quarter~~and ~~was~~prior ~~primarily~~year ~~the result of high levels of food waste caused by the low sales volume of certain products~~quarters. Food, paper and beverage costs for the ~~twenty~~thirty-~~four~~six weeks ended ~~August~~November 1810, 2013 ~~also~~ increased slightly to 32.86% compared to 32.54% in the comparable prior year period ~~primarily due to the reasons discussed above~~.

Cost of Sales - Labor and Benefits Labor and benefits ~~increased~~remained the same as a percentage of revenue ~~for~~at ~~the quarter ended August 18, 2013 to~~ 28.6% ~~compared to 27.6%~~ for both the ~~comparable~~current year ~~earlier~~and ~~quarter.~~prior ~~The~~year ~~increase was primarily the result of decreased efficiencies due to the lower sales volumes of the KFC products~~quarters. Labor and benefits increased slightly to 28.5% of ~~revenues~~revenue for the ~~twenty~~thirty-~~four~~six weeks ended ~~August~~November 1810, 2013 compared to 28.13% of revenue in the comparable prior year period. ~~The increase in labor and benefit expenses was primarily the result of the reasons discussed above.~~

Restaurant Operating Expenses Restaurant operating expenses ~~increased~~decreased to 2624.13% of revenue in the ~~second~~third quarter of fiscal 2014 compared to 25.63% of revenue in the ~~second~~third quarter of fiscal 2013 primarily due to ~~increased~~decreased ~~repairs~~expenses ~~and~~for ~~maintenance~~manager ~~and~~bonuses, ~~general insurance~~advertising, ~~partially~~repairs ~~offset~~and bymaintenance ~~decreased utilities~~ and ~~advertising expense~~utilities. For the ~~twenty~~thirty-~~four~~six weeks ended ~~August~~November 1810, 2013, restaurant operating expenses decreased to 24.97% of revenue from 25.1% of revenue in the prior year period primarily due to ~~the~~ reduced utilities, manager bonuses and advertising expense.

Depreciation and Amortization Depreciation and amortization of $707,000 for the quarter ended November 10, 2013 increased from $644,000 in the prior year quarter. This increase was a result of an increased balance of tangible assets. Depreciation and amortization of $2,071,000 for the thirty-six weeks ended November 10, 2013 increased from $1,869,000 in the prior year period due to an increased balance of tangible assets.

General and Administrative Expenses General and administrative expenses decreased to $1,068,000 in the third quarter of fiscal 2014 compared to $1,140,000 in the third quarter of fiscal 2014. This decrease was the result of reduction in executive staff and related benefits, partially offset by increased director fees related to restricted share grants to outside directors. General and administrative expense decreased slightly to $3,443,000 in the thirty-six weeks ended November 10, 2013 compared to $3,524,000 in the thirty-six weeks ended November 4, 2012 due to the reduction in executive staff and related benefits, and external accounting services, partially offset by the increase related to restricted share grants to outside directors.

~~Depreciation~~Loss ~~and~~on ~~Amortization~~Restaurant ~~Depreciation~~Assets The ~~and~~Company ~~amortization~~experienced a loss on restaurant assets of $~~683~~205,000 for the third quarter ~~ended~~of ~~August~~fiscal ~~18,~~2014 ~~2013~~compared ~~increased~~to ~~from~~a loss of $~~621~~106,000 in the comparable prior year quarter. ~~This~~The ~~increase~~current ~~was~~fiscal ayear ~~result~~loss consisted of an$30,000 ~~increased~~related ~~balance~~to ofrecording ~~tangible~~the ~~assets.~~reserve ~~Depreciation~~for ~~and~~disposal ~~amortization~~ of two permanently closed restaurant locations, $136,~~364,~~000 ~~for~~of ~~the~~closed ~~twenty-four~~unit ~~weeks~~expenses, ~~ended~~a ~~August~~charge ~~18,~~to ~~2013~~goodwill ~~increased~~related ~~from~~to the sale of one property of $153,~~225~~000 and $86,000 inof ~~the~~other asset disposals. The prior year ~~period~~included ~~due~~$76,000 related to anrecording ~~increased~~the ~~balance~~reserve for disposal of ~~tangible~~two ~~assets~~permanently closed restaurant locations, $16,000 of closed unit expense, and $14,000 of other asset disposal.

~~General~~The ~~and~~Company ~~Administrative~~experienced ~~Expenses~~a ~~General~~loss ~~and~~on ~~administrative~~restaurant ~~expenses~~assets ~~increased~~of $736,000 for the thirty-six weeks ended November 10, 2013 compared to a loss of $1564,~~207,~~000 infor the ~~second~~thirty-six ~~quarter~~weeks ofended November 4, 2012. The current fiscal ~~2014~~year ~~compared~~loss toconsisted of $1102,~~190~~000 related to closed unit expense, $66,000 change in ~~the~~reserve ~~first~~for ~~quarter~~the disposal of ~~fiscal~~two ~~2014.~~permanently ~~This~~closed ~~increase~~leased ~~was~~restaurant ~~the~~locations, ~~result~~$149,000 in write downs of ~~director~~sold ~~fees~~restaurants, $166,000 related to ~~restricted~~the ~~share~~disposal ~~grants~~of tocertain ~~outside~~restaurant ~~directors~~assets, ~~partially~~a ~~offset~~charge byto goodwill related to the sale of one property of $53,000 and a $200,000 reduction in ~~executive~~the ~~staff~~value ~~and~~of ~~external~~assets ~~accountings~~held ~~services~~for sale of two closed locations. The ~~General~~fiscal ~~and~~2013 ~~administrative~~loss ~~expense~~consisted ~~decreased~~of ~~slightly~~$56,000 related to closed unit expense, $2223,~~375,~~000 change in reserve for the ~~twenty-four~~disposal ~~weeks~~of ~~ended~~two ~~August~~permanently ~~18,~~closed ~~2013~~leased ~~compared~~restaurant tolocations, $226,~~384,~~000 inrelated to the ~~twenty-four~~disposal ~~weeks~~of ~~ended~~certain ~~August~~restaurant 12locations, ~~2012~~a ~~due~~charge to goodwill related to the ~~reduction~~sale inof ~~executive~~three ~~staff~~properties of $123,000, and ~~external~~a ~~accounting services~~$136,000 ~~partially~~reduction ~~offset~~in by the ~~increase~~value ~~related~~of toassets ~~restricted~~held ~~share~~for ~~grants~~sale toof ~~outside~~two ~~directors.~~closed locations and the sale of four closed locations.

~~Loss~~Operating onIncome Operating ~~Restaurant~~income ~~Assets~~decreased ~~The~~slightly ~~Company~~to ~~experienced~~$850,000, aor ~~loss~~4.5% ~~on restaurant assets~~ of ~~$472~~revenue,~~000~~ for the ~~second~~ quarter ofended ~~fiscal~~November ~~2014~~10, ~~compared~~2013 tofrom a$884,000, ~~loss~~or 4.4% of ~~$88~~revenue,~~000~~ in the ~~comparable~~ prior year quarter. The ~~current~~decrease ~~fiscal year loss consisted~~ of $~~200~~34,000 ~~for~~was the ~~wite~~result ~~down~~ of ~~value~~the ofitems ~~two~~discussed ~~restaurants~~above. ~~included~~Operating inincome ~~assets held~~ for ~~sale,~~the ~~$149,000~~thirty-six inweeks ~~write~~ended ~~downs~~November of10, ~~restaurants~~2013 ~~scheduled~~decreased to ~~be closed,~~ $292,192,000, ~~related~~or to3.7% ~~recording the reserve for disposal~~ of ~~two permanently closed restaurant locations~~revenue, ~~$31,000~~compared ofto ~~closed unit expenses and~~ $632,696,000, ofor ~~other asset disposals~~4.4% ~~The~~of ~~prior year includes $53~~revenue,~~000~~ ~~related~~in ~~to recording~~ the ~~reserve~~prior ~~for~~year ~~disposal~~period. ofThe ~~two~~decrease ~~permanently closed restaurant locations, $15,000~~ of ~~closed unit expense,~~ $10479,000 ofwas ~~expense related to~~ the ~~sale~~result of ~~one~~the ~~closed~~items ~~restaurant~~discussed ~~location, and $10,000 of other asset disposal~~above.

~~The~~Interest ~~Company~~Expense Interest ~~experienced~~expense ~~a loss~~ on ~~restaurant~~bank ~~assets~~debt ofand ~~$531,000~~notes ~~for~~payable ~~the~~decreased ~~twenty-four weeks ended August 18, 2013 compared~~ to ~~a loss of~~ $~~458~~127,000 ~~for~~in the ~~twenty-four~~third ~~weeks~~quarter ~~ended~~of ~~August 12, 2012. The current~~ fiscal ~~year~~2014 ~~loss~~from ~~consisted of~~ $66200,000 ~~related to closed unit expenses, $36,000 change~~ in ~~reserve~~fiscal ~~for~~2013 ~~disposal~~due ofto ~~two~~lower ~~permanently~~interest ~~closed~~rates ~~leased~~on ~~restaurant~~new ~~locations,~~debt ~~$149,000~~balances. inInterest ~~write~~expense ~~downs~~from ofcapitalized ~~restaurants~~lease ~~scheduled~~debt todecreased ~~be closed, $81,000 related~~ to ~~the disposal of certain restaurant assets and a~~ $~~200~~465,000 ~~reduction~~ in the ~~value~~third ofquarter ~~assets held for sale~~ of ~~two~~fiscal ~~closed~~2014 ~~locations.~~from ~~The 2013 loss consisted of~~ $40504,000 ~~related to closed unit expense, $148,000 change~~ in ~~reserve~~fiscal ~~for~~2013 ~~disposal~~due ~~of two permanently closed leased restaurant locations, $163,000 related~~ to ~~the~~lower ~~disposal~~capital oflease ~~certain restaurant locations and a $136,000 reduction in the value of assets held for sale of two locations~~balances.

~~Operating~~Interest ~~Income~~expense ~~Operating~~on ~~income~~bank debt and notes payable decreased to $~~111~~461,000, orin ~~0.6% of revenue, for~~ the ~~quarter~~thirty-six weeks ended ~~August~~November 1810, 2013 from $~~989~~647,000, ~~or 4.8% of revenue,~~ in the ~~prior~~thirty-six ~~year~~weeks ~~quarter.~~ended ~~The~~November ~~decrease~~4, of2012 ~~$878,000~~due ~~was~~to ~~the~~lower ~~result~~interest ofrates ~~the~~on ~~items~~new ~~discussed~~debt ~~above~~balances. ~~Operating~~Interest ~~income~~expense ~~for~~from ~~the~~capitalized ~~twenty-four~~lease ~~weeks~~debt ~~ended August 18, 2013~~ decreased to $1,~~342~~406,000, orin ~~3.3%~~the ofthirty-six ~~revenue~~weeks ended November 10, ~~compared~~2013 tofrom $1,~~812~~512,000, ~~or 4.4% of revenue,~~ in the ~~prior~~thirty-six ~~year~~weeks ~~period.~~ended ~~The~~November ~~decrease of $470~~4,~~000~~ ~~was~~2012 ~~the~~due ~~result~~to oflower ~~the~~capital ~~items~~lease ~~discussed above~~balances.

~~Interest~~Other Income and Expense Other ~~Interest~~income and expense onwas ~~bank~~an ~~debt~~expense ~~and~~of ~~notes~~$372,000 ~~payable~~for ~~decreased~~the tothird quarter and an expense of $~~154~~438,000 infor the ~~second~~first ~~quarter~~thirty-six weeks of fiscal 2014 ~~from~~compared to income of $~~217~~16,000 infor the third quarter and income of $47,000 for the first thirty-six weeks of fiscal 2013. ~~due~~The tothirty-six ~~lower~~weeks ~~debt~~of ~~balances.~~fiscal ~~Interest~~2014 expense ~~from~~was ~~capitalized~~primarily ~~lease~~the ~~debt~~result ~~decreased~~of tofees ~~$464,000~~related into the ~~second~~early ~~quarter~~termination of ~~fiscal~~a ~~2014~~Taco ~~from~~Bell ~~$506,000~~franchise inagreement ~~fiscal~~and ~~2013~~the ~~due~~write off of deferred financing expenses related to ~~lower~~the ~~capital~~refinancing ~~lease~~of ~~balances.~~the Company’s debt on August 22, 2013.

~~Interest~~Unrealized ~~expense~~Loss on ~~bank~~Derivatives The ~~debt~~loss ~~and~~of ~~notes payable decreased to~~ $~~334~~130,000 reflects the change in the ~~twenty-four~~fair ~~weeks~~value ~~ended~~of an interest rate swap entered into on August 1823, 2013 ~~from~~to ~~$447,000~~offset inthe ~~twenty-four~~changes ~~weeks~~in ~~ended~~interest ~~August~~on ~~12,~~the ~~2012~~Company’s ~~due~~variable torate ~~lower~~bank debt ~~balances.~~and ~~Interest~~has ~~expense~~no ~~from~~effect ~~capitalized~~on ~~lease~~the ~~debt~~Company’s ~~decreased~~cash toflow. ~~$941,000~~The inswap ~~the~~has ~~twenty-four~~a ~~weeks~~maturity ~~ended~~of August 1810, ~~2013~~2016 ~~from~~and ~~$1,008,000~~at inthat date will have a zero value. If the ~~twenty-four~~Company ~~weeks~~holds ~~ended~~the ~~August~~interest 12rate swap to maturity, ~~2012~~as ~~due~~planned, tothe ~~lower~~net ~~capital~~effect ~~lease~~of ~~balances.~~the gains and losses over the term will be zero.

~~Other~~Provision for Income ~~and~~Taxes The ~~Expense~~provision ~~Other~~for income ~~and~~taxes ~~expense was income of $16,000~~ for the ~~second~~ quarter ~~and~~ended anNovember ~~expense~~10, of2013 was $6663,000 ~~for~~on ~~the~~a ~~first twenty~~pre-~~four~~tax ~~weeks~~loss of ~~fiscal~~$244,000 ~~2014~~ compared to $71,000 on pre-tax income of $12196,000 for the ~~second~~comparable ~~quarter~~prior ~~and~~year ~~income~~period. ofThe ~~$31,000~~provision ~~for~~consists ~~the~~of ~~first~~a ~~twenty-four~~current ~~weeks~~tax provision of ~~fiscal~~$10,000 ~~2013.~~and ~~The~~a ~~twenty-four~~deferred ~~weeks~~tax provision of ~~fiscal~~$53,000 ~~2014~~compared ~~expense~~to ~~was~~a ~~primarily~~current ~~the~~tax ~~result~~provision of ~~fees~~$15,000 ~~related~~and toa ~~the~~deferred ~~early~~tax ~~termination~~provision of a$56,000 ~~Taco~~for ~~Bell~~the ~~franchise~~comparable ~~agreement~~prior year period.

~~Provision for Income Taxes~~ The provision for income taxes for the ~~quarter~~thirty-six weeks ended ~~August~~November 1810, 2013 was $86234,000 on a pre-tax loss of $~~491~~243,000 compared to $72214,000 on pre-tax income of $~~278~~584,000 for the comparable prior year period. The components of the tax provision ~~consists~~for ofthe thirty-six weeks ended November 10, 2013 were a current tax provision of $1642,000 and a deferred tax provision of $70192,000 compared to a current tax provision of $1646,000 and a deferred tax provision of $56168,000 for the comparable prior year period. The deferred tax provision for the quarter, thirty-six weeks and comparable prior year periods are a result of deferred tax liabilities associated with franchise rights and goodwill that cannot be used in determining net deferred tax assets. The Company continues to fully reserve its net deferred tax assets to zero.

~~The~~Additionally, ~~provision~~the ~~for~~Company ~~income~~has ~~taxes~~determined ~~for~~that the ~~twenty-four~~use ~~weeks~~of ~~ended~~its ~~August~~annual ~~18,~~effective ~~2013 was $171,000 on pre-~~tax ~~income~~rate ofwould ~~$1,000~~not ~~compared~~be appropriate to ~~$143,000~~record onits ~~pre-tax~~ income oftaxes ~~$388,000~~because ~~for~~a ~~the~~small ~~comparable~~change ~~prior~~in ~~year~~its ~~period.~~estimate ~~The components~~ of ~~the~~income ~~tax~~would ~~provision~~result ~~for~~in ~~the~~a ~~twenty-four~~large ~~weeks~~change ~~ended~~in ~~August~~its ~~18,~~effective ~~2013 were a current~~ tax ~~provision~~rate. ~~of $32~~Accordingly,~~000~~ ~~and~~the ~~deferred~~Company ~~tax~~recorded ~~provision~~its ofincome ~~$139,000~~taxes ~~compared~~based toon aits ~~current~~results ~~tax~~for ~~provision~~the ofquarter ~~$31,000~~ and ~~deferred tax provision of $112,000 for~~ the ~~comparable~~thirty-six ~~prior~~weeks ~~year~~ended ~~period.~~November ~~The~~10, ~~deferred~~2013 ~~tax~~and ~~provision~~ for the ~~quarter, twenty-four weeks and~~ comparable prior year periods ~~are a result of deferred tax liabilities associated with franchise rights and goodwill that cannot be used in determining net deferred tax assets~~. ~~The Company continues to fully reserve its net deferred tax assets to zero.~~

~~Additionally,~~Liquidity ~~the~~and ~~Company~~Capital ~~has~~Resources Cash ~~determined~~provided ~~that~~by ~~the~~operating ~~use~~activities ofwas ~~its~~$2,900,000 ~~annual~~for ~~effective~~the ~~tax~~thirty-six ~~rate~~weeks ~~would~~ended ~~not~~November be10, ~~appropriate~~2013 compared to ~~record its income taxes because a small change in its estimate of income would result in a large change in its effective tax rate. Accordingly~~$2,133,000 ~~the Company recorded its income taxes based on its results~~ for the ~~quarter and the twenty~~thirty-~~four~~six weeks ended ~~August~~November 184, ~~2013~~2012. ~~and~~Primary ~~for~~factors causing the ~~comparable~~change ~~prior year periods.~~were:

~~Liquidity~~● ~~and~~a ~~Capital~~net ~~Resources~~loss ~~Cash~~of ~~provided by operating activities was~~ $2477,~~811,~~000 ~~for~~in the ~~twenty-four~~current ~~weeks~~year ~~ended~~period ~~August 18, 2013~~ compared to ~~$2,040,000~~a ~~for~~net ~~the~~income ~~twenty-four~~of ~~weeks ended August 12~~$370,000 ~~2012.~~in ~~Primary factors causing~~ the ~~change~~prior ~~were:~~year period;

● a$202,000 ~~net~~more ~~loss~~in ofdepreciation ~~$170,000~~and amortization in the current fiscal year ~~period~~ compared to ~~a net income of $245,000 in~~ the prior ~~year~~fiscal ~~period~~year;

● ~~decrease~~increase of $~~171~~172,000 in ~~accounts~~loss ~~payable~~on ~~and~~restaurant ~~accrued~~assets ~~liabilities compared to an decrease of $409,000~~ in the ~~same~~current ~~categories in the prior~~ year ~~quarter~~;

● $~~139~~130,000 ~~more~~of inunrealized ~~depreciation~~loss ~~and~~on ~~amortization~~the change in ~~the~~fair ~~current~~value ~~fiscal~~of ~~year~~derivatives ~~compared~~in to the ~~prior~~current ~~fiscal~~ year;

● ~~increase~~reduction of $~~107~~162,000 in ~~loss~~prepaid onexpenses ~~restaurant~~in ~~assets~~the current year compared to an increase of $394,000 in the ~~current~~prior year; ~~and~~

● ~~reduction of~~ $~~363~~273,000 more in ~~prepaid~~amortization ~~expenses~~of deferred financing costs in the current fiscal year compared to ~~an increase of $38,000 in~~ the prior fiscal year.;

~~The~~● ~~increase~~reduction of accounts payable and accrued liabilities was caused by image enhancement activity and operations platform installation during the second quarter of fiscal 2014. The change in prepaid expenses was due primarily to the relationship of the balance sheet date to the first of the month, affecting prepaid rent and other similar items. The loss on restaurant assets reflects the decrease in carrying value of certain assets held for sale and impairment of the value of a restaurant to be closed and sold. Cash used in investing activities for the current fiscal year of $1120,~~899,~~000 ~~is the product of remodel capital expenditures and the installation of required systems~~ in ~~both~~receivables ~~the KFC and Taco Bell restaurants. In the prior year, $1,571,000 of cash used by investing activities consisted primarily of $2,108,000 of cash used~~ in the image enhancement of facilities, and installation of the KFC operations platform, offset by the proceeds from the sale of one restaurant location. The Company made principal payments of $366,000 and payments in advance of scheduled maturities of $1,664,000 during the current ~~fiscal~~ year ~~and received cash from equity transactions of $1,823,000,~~ compared to ~~scheduled~~an ~~principal~~increase ~~payments~~ of $2470,000 in the ~~comparable~~ prior year; ~~quarter. Management believes that its operating cash flows~~ and ~~available cash for the coming year will be sufficient to meet its liquidity and capital resource needs.~~

●

$56,000 less of increase in inventories in the current year compared to the prior year.

The change in prepaid expenses was due primarily to the relationship of the balance sheet date to the first of the month, affecting prepaid rent and other similar items. The loss on restaurant assets reflects the decrease in carrying value of certain assets held for sale and impairment of the value of a restaurant to be sold. The increase in amortization of deferred financing costs reflects the write off related to the refinancing of the Company’s debt. The decrease in receivables in the current fiscal year was primarily the result of the receipt of beverage vendor rebates during the year. Cash used in investing activities for the current fiscal year of $5,092,000 is the product of remodel capital expenditures and the establishment of the $2,500,000 cash remodel reserve required by the bank financing arrangement. In the prior year, the $3,035,000 of cash used by investing activities consisted primarily of $3,633,000 of cash used in the image enhancement of facilities, and installation of the KFC operations platform, offset by the proceeds from the sale of restaurant locations. The Company made principal payments of $647,000 and payments in advance of scheduled maturities of $7,768,000, received $8,930,000 of proceeds from new borrowings offset by $292,000 of additions to deferred financing costs and received cash from equity transactions of $1,871,000 in the current fiscal year, compared to scheduled principal payments of $36,000 in the comparable prior year quarter. Management believes that its operating cash flows and available cash for the coming year will be sufficient to meet its liquidity and capital resource needs.

On April 12, 2013, the Company issued, in a transaction exempt from registration under the Securities Act of 1933, 1,052,250 common shares to Bandera Master Fund LP at a price of $2.00 per share, resulting in net proceeds of $1,718,500 after considering transaction costs of $386,000. The transaction was negotiated and approved by the Special Committee of the Board of Directors. The terms of the Company’s credit agreement required that the net proceeds of the equity transaction be paid as a principal payment in addition to regularly scheduled payments on the credit facility. The transaction is included in the financial statements of the Company and more fully described in a report on Form 8-K filed with the SEC on April 15, 2013.

On August 22, 2013 the Company entered into a new loan agreement, comprising two loan facilities, with Huntington National Bank, a national banking association (“Huntington”). The Loan Agreement contains two new loan facilities that, in addition to funding the cash remodel reserve, were used to pay off the Company’s outstanding loan balance of $6,104,000, which carried an interest rate of 9.0%, the lender, Fortress Credit Corp. (“Fortress”), and a prepayment penalty of 1.0% of the balance. The two facilities under the Loan Agreement consist of a term loan and a time loan in the total amount of $8,930,000. The refinance transaction resulted in the write-off of deferred financing costs of $275,000 and prepayment penalties of $61,000.

AtThe ~~August~~Term ~~18,~~Note ~~2013~~consists ~~the~~of ~~Company’s~~a $7,930,000 three year term loan ~~credit~~with ~~agreement~~an ~~requires~~interest ~~the~~rate ~~maintenance~~which ofhas abeen ~~consolidated~~fixed ~~debt~~at ~~service~~the ~~coverage~~rate ~~ratio~~ of ~~(“DSCR”) 1~~5.8044% tothrough 1the oruse ~~greater regarding all~~ of ~~the~~a ~~Company’s~~derivative ~~debt.~~interest ~~Debt~~rate ~~service~~swap ~~coverage~~also ~~ratios~~entered ~~are~~into ~~calculated~~with byHuntington. ~~dividing~~Principal ~~the cash flow before taxes~~ and ~~debt~~interest ~~service~~on ~~(“EBITDA”) for~~ the ~~previous~~Term 12Note ~~months~~are bypayable ~~the~~in ~~debt~~substantially ~~service~~equal ~~payable~~monthly ~~for~~payments ~~the~~based ~~same~~on ~~period.~~an ~~The~~eight ~~Company’s~~year ~~term~~amortization ~~loan~~with ~~also requires~~ a ~~consolidated~~balloon ~~debt~~payment ~~to EBITDA (“Leverage”) ratio~~ of ~~2.50~~the orthen ~~less,~~remaining ~~minimum~~principal ~~EBITDA~~balance ofdue ~~$3.0 million, maximum of $4.0 million in annual capital expenditures~~ and ~~minimum~~payable ~~unencumbered~~at ~~cash of $1.5 million. The ratios are computed quarterly. At~~ the end of the ~~second~~three ~~quarter~~year ~~of fiscal 2014, the Company had a DSCR of 3~~term.33 ~~and a Leverage ratio of 1.5, being in compliance with all of the required ratios.~~

The ~~accompanying~~Company’s ~~consolidated~~interest ~~financial~~rate ~~statements~~swap ~~have~~agreement ~~been~~(the ~~prepared~~"Swap") ~~assuming~~with ~~that~~Huntington ~~the~~National ~~Company~~Bank ~~will~~had ~~continue as~~ a ~~going~~notional ~~concern. The~~amount ~~Company~~at ~~has~~inception ~~incurred losses~~equal into ~~fiscal~~the ~~years~~beginning ~~2013~~balance ~~and~~of ~~2012~~the ~~and~~Term ~~has~~Note, ~~negative~~$7,930,000, ~~working capital~~ and anamortizes ~~accumulated~~according ~~deficit~~to atthe ~~August~~same ~~18,~~schedule ~~2013. The~~to ~~Company~~hedge ~~has managed~~ its ~~liquidity~~exposure into ~~fiscal 2013 and will manage its liquidity in fiscal 2014 through~~ the ~~refinancing~~variable ofinterest ~~debt,~~rate ~~the sale and leaseback~~ of ~~restaurant properties and~~ the ~~sale~~Term ~~of additional equity~~Note. ~~Should~~ ~~the~~The Company ~~have~~has ~~difficulty~~not ~~meeting~~designated ~~its~~the ~~forecasts,~~Swap ~~this~~as ~~could have~~ an ~~adverse~~effective ~~effect~~hedge, ontherefore ~~its~~unrealized ~~liquidity~~changes ~~position.~~in ~~Management~~the ~~has~~fair ~~taken~~value ~~actions~~of tothe ~~improve~~Swap ~~its~~will ~~cash~~be ~~flows,~~shown ~~including~~in ~~closely~~the ~~monitoring~~Company’s ~~its~~consolidated ~~expenses~~statements ~~and~~of ~~store~~operation ~~closings~~as ~~for~~either ~~underperforming~~income ~~stores~~or expense and ~~expects~~the tofair bevalue ~~able~~will tobe ~~achieve~~shown ~~its~~on ~~forecast~~the ~~for~~Company’s ~~fiscal~~consolidated ~~2014.~~balance ~~However,~~sheet ~~there~~as ~~can~~an beasset noor ~~assurances~~liability, ~~that~~as ~~our~~applicable. ~~cash~~The ~~flow~~critical ~~will~~terms beof ~~sufficient~~the toSwap ~~allow~~are usaligned towith ~~continue~~the asterms aof ~~going~~the ~~concern~~Term ifNote, weincluding ~~are~~maturity ~~unable~~of toAugust ~~meet~~10, ~~our projections~~2016.

15Under the Swap, the Company pays a fixed interest rate of 5.44% and it receives a variable interest rate equal to the 30 day London Interbank Offered Rate ("LIBOR") plus 4.25%. The Swap settles monthly on the same date as the payments are due on the Term Note. The difference between amounts to be received and paid under the Swap is recognized as a component of interest expense on the consolidated statements of operations. The Swap increased interest expense by $17,000 for the quarter and year to date ended November 10, 2013. The market value of the Swap as of November 10, 2013 was a liability of $130,000.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred losses in fiscal years 2013 and 2012 and has an accumulated deficit at November 10, 2013. The Company has managed its liquidity in fiscal 2013 and will manage its liquidity in fiscal 2014 through the refinancing of debt, the sale and leaseback of restaurant properties and the sale of additional equity. Should the Company have difficulty meeting its forecasts, this could have an adverse effect on its liquidity position. The Company has taken actions to improve its cash flows, including closely monitoring its expenses and store closings for underperforming stores and expects to be able to achieve its forecast for fiscal 2014. However, there can be no assurances that our cash flow will be sufficient to allow us to continue as a going concern if we are unable to meet our projections.

Recent Accounting Pronouncements

ASU 2013-01 Balance Sheet Topic 210, January 2013

ASU 2013-10 Derivatives and Hedging Topic 815, July 2013

~~Inclusion~~Provides for the inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes, effective for swaps entered into after July 17, 2013. This release allows the use of the overnight index swap rate as an additional benchmark for hedge accounting treatment. Management has determined that the application of this standard will not have a material effect on the financial statements of the Company.

ASU 2013-11 Income Taxes Topic 740, July 2013

~~Presentation~~Provides for the presentation of an ~~Unrecognized~~unrecognized ~~Tax~~tax ~~Benefit~~benefit ~~When~~when a ~~Net~~net ~~Operating~~operating ~~Loss~~loss ~~Carryforward~~carryforward, a ~~Similar~~similar ~~Tax~~tax ~~Loss~~loss, or a ~~Tax~~tax ~~Credit~~credit ~~Carryforward~~carryforward ~~Exists~~exists, effective for fiscal years beginning after ~~12-~~December 15~~-13~~, 2013. An unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, ~~except~~if asavailable ~~follows~~and a company has the intent and ability to use for such purpose. Management has determined that the application of this standard ~~did~~will not have a material effect on the financial statements of the Company.

In September 2013, the Internal Revenue Service issued final regulations governing the income tax treatment of acquisitions, dispositions, and repairs of tangible property. Taxpayers are required to follow the new regulations in taxable years beginning on or after January 1, 2014. Management is currently assessing the impact of the regulations and does not expect they will have a material impact on the Company’s financial statements.

Seasonality The operations of the Company are affected by seasonal fluctuations. Historically, the Company's revenues and income have been highest during the summer months with the fourth fiscal quarter representing the slowest period. This seasonality is primarily attributable to weather conditions in the Company's marketplace, which consists of portions of Ohio, Pennsylvania, Missouri, Illinois, West Virginia and New York.

Safe Harbor Statements This quarterly report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements include those identified by such words as “may,” “will,” “expect” “anticipate,” “believe,” “plan” and other similar terminology. Forward looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in this report. The forward-looking statements reflect the Company’s current expectations and are based upon data available at the time of the statements. Actual results involve risks and uncertainties, including both those specific to the Company and general economic and industry factors. Factors specific to the Company include, but are not limited to, its debt covenant compliance, actions that lenders may take with respect to any debt covenant violations, its ability to obtain waivers of any debt covenant violations and its ability to pay all of its current and long-term obligations and those factors described in Part I Item 1A (“Risk Factors”) of the Company’s Annual Report on Form 10-K filed with the SEC on June 3, 2013. Economic and industry risks and uncertainties include, but are not limited, to, franchisor promotions, business and economic conditions, legislation and governmental regulation, competition, success of operating initiatives and advertising and promotional efforts, volatility of commodity costs and increases in minimum wage and other operating costs, availability and cost of land and construction, consumer preferences, spending patterns and demographic trends. In addition, the forward-looking statements contained herein represent our estimates only as of the date of this filing and should not be relied upon as representing our estimates as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, whether to reflect actual results, changes in assumptions, changes in other factors affecting such forward-looking statements or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~Essentially~~The ~~all~~majority of the Company’s debt, ~~comprising~~ approximately $67.28 million of principal balance has its interest rate fixed by the use of an interest rate swap. The remaining $865,000 has a variable rate which is adjusted monthly. A one percent increase in the variable rate base (90 day LIBOR) of the ~~loans~~loan at the beginning of the year would ~~not~~ increase the Company’s annual interest costs asby ~~there~~approximately ~~is more than a 4% difference between the minimum interest rate and the calculated variable rate. The Company may choose to offset all~~$9,000 orfor ~~a portion of its future risk through~~ the ~~use of interest rate swaps or caps~~year. The Company does not enter into derivative financial investments for trading or speculation purposes. Also, the Company is subject to volatility in food costs as a result of market risk and we manage that risk through the use of a franchisee purchasing cooperative which uses longer term purchasing contracts. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. The Company believes that its market risk exposure is not material to the Company’s financial position, liquidity or results of operations.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) carried out an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the ~~period~~quarter ~~covered~~ended byNovember ~~this~~10, ~~report~~2013. Based on that evaluation, the Company’s PEO and PFO concluded that our disclosure controls and procedures were effective as of ~~August~~November 1810, 2013.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended ~~August~~November 1810, 2013 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

The Company is a party to various legal proceedings and claims arising in the ordinary course of its business. The Company believes that the outcome of these matters will not have a material adverse affect on its consolidated financial position, results of operations or liquidity.

Item 1A. Risk Factors

The Company’s Annual Report on Form 10-K for the fiscal year ended March 3, 2013 discusses the risk factors facing the Company. There has been no material change in the risk factors facing our business since March 3, 2013.

Item 2. Unregistered Sale of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosure

Not applicable

Item 5. Other Information

None

Item 6. Exhibits

Reference is made to “Index to Exhibits”~~, filed herewith.~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MORGAN’S FOODS, INC. /s/ Kenneth L. Hignett Kenneth L. Hignett Executive ~~Senior~~ Vice President, Chief Financial Officer and Secretary December ~~September 30~~20, 2013

INDEX TO EXHIBITS

Exhibit

Number

Exhibit Description

4.1 First Amendment to the Amended and Restated Shareholder Rights Agreement, dated July 8, 2013 between the Company and Computershare (1)

10.1	Third Amendment dated October 22, 2013 to the Remodel Agreement, dated December 9, 2011 between the Company and KFC Corporation
10.2	Credit Agreement dated August 23, 2103 between the Company and Huntington National Bank
31.1	Certification of the President and Interim 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 Executive 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 2002
32.1	Certification of the President and Interim Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2	Certification of the Executive Vice President, Chief Financial Officer and Secretary pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS	XBRL Instance
101.SCH	XBRL Taxonomy Extension Schema
101.CAL	XBRL Taxonomy Extension Calculation
101.DEF	XBRL Taxonomy Extension Definition
101.LAB	XBRL Taxonomy Extension Labels
101.PRE	XBRL Taxonomy Extension Presentation

31.1	Certification of the President and Interim 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 & 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 President and Interim 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
101	INSXBRL Instance
101	SCHXBRL Taxonomy Extension Schema
101	CALXBRL Taxonomy Extension Calculation
101	DEFXBRL Taxonomy Extension Definition
101	LABXBRL Taxonomy Extension Labels
101	PREXBRL Taxonomy Extension Presentation
(1)	Incorporated by reference to the Company’s Form 8-K filed with the SEC on July 9, 2013

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