##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended November 9, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from  to
 Commission File Number 1-08395
 Morgans Foods, Inc.
  Ohio
    
    34-0562210(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)4829 Galaxy Parkway, Suite S, Cleveland, Ohio
    
    44128(Address of principal executive offices)
    
    (Zip Code)
  
  þ o
  Large accelerated filer oAccelerated filer oNon-accelerated filer o(Do not check if a smaller reporting company)Smaller reporting company þ o þ




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TABLE OF CONTENTS  PART I  FINANCIAL INFORMATIONItem 1. Financial StatementsItem 2. Managements Discussion and Analysis of Financial Condition and Results of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and Procedures.PART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sale of Equity Securities and Use of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Submission of Matters to a Vote of Security HoldersItem 5. Other InformationItem 6. ExhibitsSIGNATURESINDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Quarter EndedNovember 9, 2008
    
    November 4, 2007Revenues
    
    $
    21,967,000
    
    
    $
    22,282,000Cost of sales:Food, paper and beverage
    
    
    7,236,000
    
    
    
    6,806,000Labor and benefits
    
    
    6,301,000
    
    
    
    6,356,000Restaurant operating expenses
    
    
    5,595,000
    
    
    
    5,716,000Depreciation and amortization
    
    
    789,000
    
    
    
    678,000General and administrative expenses
    
    
    1,188,000
    
    
    
    1,522,000Loss (gain) on restaurant assets
    
    
    (9,000
    )
    
    
    84,000Operating income
    
    
    867,000
    
    
    
    1,120,000Interest expense:Bank debt and notes payable
    
    
    716,000
    
    
    
    787,000Capital leases
    
    
    26,000
    
    
    
    29,000Other income, net
    
    
    (56,000
    )
    
    
    (123,000
    )Income before income taxes
    
    
    181,000
    
    
    
    427,000Provision for income taxes
    
    
    248,000
    
    
    
    266,000Net income (loss)
    
    $
    (67,000
    )
    
    $
    161,000Basic net income (loss) per common share:
    
    $
    (0.02
    )
    
    $
    0.05Diluted net income (loss) per common share:
    
    $
    (0.02
    )
    
    $
    0.05Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,934,995Diluted weighted average number of shares outstanding
    
    
    2,939,126
    
    
    
    2,977,260
  2




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Thirty-six Weeks EndedNovember 9, 2008
    
    November 4, 2007Revenues
    
    $
    66,769,000
    
    
    $
    67,809,000Cost of sales:Food, paper and beverage
    
    
    21,706,000
    
    
    
    20,722,000Labor and benefits
    
    
    19,096,000
    
    
    
    18,603,000Restaurant operating expenses
    
    
    17,123,000
    
    
    
    17,016,000Depreciation and amortization
    
    
    2,353,000
    
    
    
    1,993,000General and administrative expenses
    
    
    3,902,000
    
    
    
    4,282,000Loss (gain) on restaurant assets
    
    
    (13,000
    )
    
    
    76,000Operating income
    
    
    2,602,000
    
    
    
    5,117,000Interest expense:Prepayment fees and deferred financing costs
    
    
    428,000
    
    
    
    Bank debt and notes payable
    
    
    2,274,000
    
    
    
    2,437,000Capital leases
    
    
    79,000
    
    
    
    87,000Other income, net
    
    
    (225,000
    )
    
    
    (295,000
    )Income before income taxes
    
    
    46,000
    
    
    
    2,888,000Provision for income taxes
    
    
    660,000
    
    
    
    1,027,000Net income (loss)
    
    $
    (614,000
    )
    
    $
    1,861,000Basic net income (loss) per common share:
    
    $
    (0.21
    )
    
    $
    0.64Diluted net income (loss) per common share:
    
    $
    (0.21
    )
    
    $
    0.62Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,916,995Diluted weighted average number of shares outstanding
    
    
    2,947,157
    
    
    
    2,982,685
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November 9, 2008
    
    March 2, 2008UNAUDITEDASSETSCurrent assets:Cash and equivalents
    
    $
    6,227,000
    
    
    $
    6,428,000Receivables
    
    
    427,000
    
    
    
    423,000Inventories
    
    
    754,000
    
    
    
    755,000Prepaid expenses
    
    
    631,000
    
    
    
    679,000Assets held for sale
    
    
    678,000
    
    
    
    8,717,000
    
    
    
    8,285,000Property and equipment:Land
    
    
    9,969,000
    
    
    
    10,798,000Buildings and improvements
    
    
    21,129,000
    
    
    
    22,588,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,908,000
    
    
    
    10,110,000Equipment, furniture and fixtures
    
    
    20,211,000
    
    
    
    21,047,000Construction in progress
    
    
    727,000
    
    
    
    1,193,00064,258,000
    
    
    
    67,050,000Less accumulated depreciation and amortization
    
    
    30,162,000
    
    
    
    31,620,00034,096,000
    
    
    
    35,430,000Other assets
    
    
    684,000
    
    
    
    837,000Franchise agreements, net
    
    
    1,314,000
    
    
    
    1,417,000Deferred tax asset
    
    
    349,000
    
    
    
    766,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    54,387,000
    
    
    $
    55,962,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,069,000
    
    
    $
    3,190,000Current maturities of capital lease obligations
    
    
    37,000
    
    
    
    34,000Accounts payable
    
    
    4,551,000
    
    
    
    5,718,000Accrued liabilities
    
    
    3,500,000
    
    
    
    4,678,00011,157,000
    
    
    
    13,620,000Deferred tax liabilities
    
    
    2,149,000
    
    
    
    1,853,000Long-term debt
    
    
    34,195,000
    
    
    
    35,789,000Long-term capital lease obligations
    
    
    1,121,000
    
    
    
    1,144,000Other long-term liabilities
    
    
    3,906,000
    
    
    
    1,083,000SHAREHOLDERS EQUITYPreferred shares, 1,000,000 shares authorized,
no shares outstandingCommon stock, no par valueAuthorized shares  25,000,000Issued shares  2,969,405
    
    
    30,000
    
    
    
    30,000Treasury shares  34,410
    
    
    (81,000
    )
    
    
    (81,000
    )Capital in excess of stated value
    
    
    29,344,000
    
    
    
    29,344,000Accumulated deficit
    
    
    (27,434,000
    )
    
    
    (26,820,000
    )Total shareholders equity
    
    
    1,859,000
    
    
    
    2,473,000$
    54,387,000
    
    
    $
    55,962,000
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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
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (614,000
    )
    
    
    (614,000
    )Balance November 9, 2008
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    34,410
    
    
    $
    (81,000
    )
    
    $
    29,344,000
    
    
    $
    (27,434,000
    )
    
    $
    1,859,000
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Thirty-six Weeks EndedNovember 9, 2008
    
    November 4, 2007Cash flows from operating activities:Net (loss) income
    
    $
    (614,000
    )
    
    $
    1,861,000Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,353,000
    
    
    
    1,993,000Amortization of deferred financing costs
    
    
    86,000
    
    
    
    71,000Amortization of supply agreement advances
    
    
    (706,000
    )
    
    
    (487,000
    )Funding from supply agreements
    
    
    82,000
    
    
    
    107,000Decrease in deferred tax assets
    
    
    417,000
    
    
    
    679,000Increase in deferred tax liabilities
    
    
    296,000
    
    
    
    276,000(Gain) loss on restaurant assets
    
    
    (13,000
    )
    
    
    76,000Changes in assets and liabilities:Increase in receivables
    
    
    (4,000
    )
    
    
    (165,000
    )Decrease (increase) in inventories
    
    
    1,000
    
    
    
    (22,000
    )Decrease (increase) in prepaid expenses
    
    
    48,000
    
    
    
    (24,000
    )Decrease in other assets
    
    
    67,000
    
    
    
    30,000Increase (decrease) in accounts payable
    
    
    (1,167,000
    )
    
    
    489,000Decrease in accrued liabilities and other
    
    
    (910,000
    )
    
    
    (507,000
    )Net cash provided by (used in) operating activities
    
    
    (64,000
    )
    
    
    4,377,000Cash flows from investing activities:Capital expenditures
    
    
    (3,581,000
    )
    
    
    (4,821,000
    )Proceeds from sale of fixed assets
    
    
    
    
    
    
    3,000Purchase of franchise agreement
    
    
    (9,000
    )
    
    
    (44,000
    )Proceeds from sale/leasebacks
    
    
    1,972,000
    
    
    
    Net cash used in investing activities
    
    
    (1,618,000
    )
    
    
    (4,862,000
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    3,000,000
    
    
    
    Principal payments on long-term debt
    
    
    (2,264,000
    )
    
    
    (2,202,000
    )Principal payments on capital
    
    
    
    
    
    
    lease obligations
    
    
    (20,000
    )
    
    
    (23,000
    )Bank debt repayment in advance
    
    
    (2,451,000
    )
    
    
    Cash received for exercise of stock options
    
    
    
    
    
    
    220,000Deferred gain on sale/leaseback transactions
    
    
    3,216,000
    
    
    
    Net cash provided by (used in) financing activities
    
    
    1,481,000
    
    
    
    (2,005,000
    )Net change in cash and equivalents
    
    
    (201,000
    )
    
    
    (2,490,000
    )Cash and equivalents, beginning balance
    
    
    6,428,000
    
    
    
    7,829,000Cash and equivalents, ending balance
    
    $
    6,227,000
    
    
    $
    5,339,000
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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
      NOTE 2  NET INCOME (LOSS) PER COMMON SHARE
  NOTE 3  DEBT
  7




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NOTE 4  STOCK OPTIONS
     Exercise Prices
    
    Outstanding 11-9-08
    
    Average Life
    
    Number Exercisable$3.000
    
    
    7,500
    
    
    
    1.2
    
    
    
    7,5004.125
    
    
    62,500
    
    
    
    0.4
    
    
    
    62,5001.500
    
    
    150,000
    
    
    
    10.0
    
    
    
    220,000
    
    
    
    7.0
    
    
    
    70,000
 NOTE 5  CAPITAL EXPENDITURES
  8




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Number of Units
    
    Period
    
    Type
    
    Total (1)
    
    Required (2)
    
    Additional (3)4
    
    Fiscal 2010
    
    IE
    
    $
    1,350,000
    
    
    $
    1,190,000
    
    
    $
    160,0001
    
    Fiscal 2010
    
    Relo (4)
    
    
    750,000
    
    
    
    750,000
    
    
    
    19
    
    Fiscal 2011
    
    IE
    
    
    6,080,000
    
    
    
    5,320,000
    
    
    
    760,0001
    
    Fiscal 2011
    
    Relo (4)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    1
    
    Fiscal 2015
    
    Rebuild
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    4
    
    Fiscal 2015
    
    Relo (4)
    
    
    5,600,000
    
    
    
    5,600,000
    
    
    
    1
    
    Fiscal 2016
    
    Relo (4)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    4
    
    Fiscal 2020
    
    Relo (4)
    
    
    5,600,000
    
    
    
    5,600,000
    
    
    
    2
    
    Fiscal 2020
    
    Rebuild
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    37
    
    Total
    
    
    
    
    
    $
    25,180,000
    
    
    $
    24,260,000
    
    
    $
    920,000
 
 (1)
    
    These amounts are based on current construction costs and actual costs may vary.(2)
    
    These amounts include only the items required to meet the franchisors image requirements.(3)
    
    These amounts are for capital upgrades performed on or which may be performed on the image enhanced restaurants which were
or may be deemed by the Company to be advantageous to the operation of the units and which may be done at the time of the image enhancement.   NOTE 6 ASSETS HELD FOR SALE
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Description of Business
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Summary of Expenses and Operating Income as a Percentage of Revenues
 Quarter Ended
    
    Thirty-six Weeks EndedNovember 9, 2008
    
    November 4, 2007
    
    November 9, 2008
    
    November 4, 2007Cost of sales:Food, paper and beverage
    
    
    32.9
    %
    
    
    30.5
    %
    
    
    32.5
    %
    
    
    30.6
    %Labor and benefits
    
    
    28.7
    %
    
    
    28.5
    %
    
    
    28.6
    %
    
    
    27.4
    %Restaurant operating expenses
    
    
    25.5
    %
    
    
    25.7
    %
    
    
    25.6
    %
    
    
    25.1
    %Depreciation and amortization
    
    
    3.6
    %
    
    
    3.0
    %
    
    
    3.5
    %
    
    
    2.9
    %General and administrative expenses
    
    
    5.4
    %
    
    
    6.8
    %
    
    
    5.8
    %
    
    
    6.3
    %Operating income
    
    
    3.9
    %
    
    
    5.0
    %
    
    
    3.9
    %
    
    
    7.5
    %
 Revenues
 Cost of Sales  Food, Paper and Beverage
 Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization.
 General and Administrative Expenses
 Loss (gain) on Restaurant Assets
 Operating Income
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Interest Expense
 Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
   New Accounting Pronouncements
 11




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Seasonality
 Safe Harbor Statements
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures.
 12




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  13




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MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and SecretaryDecember 24, 2008 14




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ExhibitNumber
    
    Exhibit Description31.1
    
    Certification of the Chairman of the Board and Chief Executive
Officer pursuant to Rule 13a-14(a) of Securities Exchange Act of
1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.31.2
    
    Certification of the Senior Vice President, Chief Financial
Officer and Secretary pursuant to Rule 13a-14(a) of Securities
Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.32.1
    
    Certification of the Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of the Senior Vice President, Chief Financial
Officer and Secretary pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 15