##### 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 May 25, 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)
 (216) 359-9000
  þ o
  Large accelerated filer o
Accelerated filer o
Non-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. ExhibitsSIGNATURESMORGANS FOODS, INC. INDEX TO EXHIBITSEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Quarter EndedMay 25, 2008
    
    May 20, 2007Revenues
    
    $
    21,753,000
    
    
    $
    22,650,000Cost of sales:Food, paper and beverage
    
    
    6,964,000
    
    
    
    6,939,000Labor and benefits
    
    
    6,238,000
    
    
    
    6,051,000Restaurant operating expenses
    
    
    5,487,000
    
    
    
    5,573,000Depreciation and amortization
    
    
    773,000
    
    
    
    654,000General and administrative expenses
    
    
    1,350,000
    
    
    
    1,380,000Loss (gain) on restaurant assets
    
    
    5,000
    
    
    
    (16,000
    )Operating income
    
    
    936,000
    
    
    
    2,069,000Interest expense:Bank debt and notes payable
    
    
    824,000
    
    
    
    847,000Capital leases
    
    
    26,000
    
    
    
    29,000Other income and expense, net
    
    
    (90,000
    )
    
    
    (44,000
    )Income before income taxes
    
    
    176,000
    
    
    
    1,237,000Provision for income taxes
    
    
    82,000
    
    
    
    407,000Net income
    
    
    94,000
    
    
    
    830,000Basic net income per common share:
    
    $
    0.03
    
    
    $
    0.29Diluted net income per common share:
    
    $
    0.03
    
    
    $
    0.28Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,880,995Diluted weighted average number of shares outstanding
    
    
    2,957,896
    
    
    
    2,964,527
  2




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May 25,
    
    March 02,2008
    

2008(UNAUDITED)
    
    (AUDITED)ASSETSCurrent assets:Cash and equivalents
    
    $
    3,167,000
    
    
    $
    6,428,000Receivables
    
    
    350,000
    
    
    
    423,000Inventories
    
    
    793,000
    
    
    
    755,000Prepaid expenses
    
    
    800,000
    
    
    
    679,0005,110,000
    
    
    
    8,285,000Property and equipment:Land
    
    
    10,798,000
    
    
    
    10,798,000Buildings and improvements
    
    
    23,903,000
    
    
    
    22,588,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,870,000
    
    
    
    10,110,000Equipment, furniture and fixtures
    
    
    20,661,000
    
    
    
    21,047,000Construction in progress
    
    
    584,000
    
    
    
    1,193,00068,130,000
    
    
    
    67,050,000Less accumulated depreciation and amortization
    
    
    31,254,000
    
    
    
    31,620,00036,876,000
    
    
    
    35,430,000Other assets
    
    
    810,000
    
    
    
    837,000Franchise agreements, net
    
    
    1,389,000
    
    
    
    1,417,000Deferred tax asset
    
    
    730,000
    
    
    
    766,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    54,142,000
    
    
    $
    55,962,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    
    3,260,000
    
    
    $
    3,190,000Current maturities of capital lease obligations
    
    
    35,000
    
    
    
    34,000Accounts payable
    
    
    5,236,000
    
    
    
    5,718,000Accrued liabilities
    
    
    4,030,000
    
    
    
    4,678,00012,561,000
    
    
    
    13,620,000Deferred tax liabilities
    
    
    1,885,000
    
    
    
    1,853,000Long-term debt
    
    
    34,915,000
    
    
    
    35,789,000Long-term capital lease obligations
    
    
    1,136,000
    
    
    
    1,144,000Other long-term liabilities
    
    
    1,078,000
    
    
    
    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
    
    
    (26,726,000
    )
    
    
    (26,820,000
    )Total shareholders equity
    
    
    2,567,000
    
    
    
    2,473,000$
    54,142,000
    
    
    $
    55,962,000
  3




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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 income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    94,000
    
    
    
    94,000Balance May 25, 2008
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,344,000
    
    
    $
    (26,726,000
    )
    
    $
    2,567,000
  4




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Quarter EndedMay 25, 2008
    
    May 20, 2007Cash flows from operating activities:Net income
    
    $
    94,000
    
    
    $
    830,000Adjustments to reconcile to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    773,000
    
    
    
    654,000Amortization of deferred financing costs
    
    
    27,000
    
    
    
    24,000Amortization of supply agreement advances
    
    
    (242,000
    )
    
    
    (226,000
    )Funding from supply agreements
    
    
    37,000
    
    
    
    60,000Decrease in deferred tax assets
    
    
    36,000
    
    
    
    201,000Increase in deferred tax liabilities
    
    
    32,000
    
    
    
    102,000Loss (gain) on restaurant assets
    
    
    5,000
    
    
    
    (16,000
    )Changes in assets and liabilities:Decrease in receivables
    
    
    73,000
    
    
    
    65,000Increase in inventories
    
    
    (38,000
    )
    
    
    (57,000
    )Decrease (increase) in prepaid expenses
    
    
    (121,000
    )
    
    
    77,000Increase (decrease) in accounts payable
    
    
    (482,000
    )
    
    
    468,000Increase (decrease) in accrued liabilities
    
    
    (431,000
    )
    
    
    93,000Net cash provided by (used in) operating activities
    
    
    (237,000
    )
    
    
    2,275,000Cash flows from investing activities:Capital expenditures
    
    
    (2,213,000
    )
    
    
    (735,000
    )Net cash used in investing activities
    
    
    (2,213,000
    )
    
    
    (735,000
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (804,000
    )
    
    
    (747,000
    )Principal payments on capital lease obligations
    
    
    (7,000
    )
    
    
    (7,000
    )Net cash used in financing activities
    
    
    (811,000
    )
    
    
    (754,000
    )Net change in cash and equivalents
    
    
    (3,261,000
    )
    
    
    786,000Cash and equivalents, beginning balance
    
    
    6,428,000
    
    
    
    7,829,000Cash and equivalents, ending balance
    
    $
    3,167,000
    
    
    $
    8,615,000
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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
      NOTE 2  NET INCOME PER COMMON SHARE
  NOTE 3  DEBT
  6




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NOTE 4  STOCK OPTIONS
     Number
    
    Average
    
    Number of SharesExercise
    
    Outstanding at
    
    Remaining
    
    Exercisable atPrices
    
    May 25, 2008
    
    Life
    
    May 25, 2008$3.000
    
    
    7,500
    
    
    
    1.4
    
    
    
    7,500$4.125
    
    
    62,500
    
    
    
    0.8
    
    
    
    62,50070,000
    
    
    
    0.9
    
    
    
    70,000
 NOTE 5  CAPITAL EXPENDITURES
   7




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Number of Units
    
    Period
    
    Type
    
    Total (1)
    
    Required (2)
    
    Additional (3)3
    
    Fiscal 2009
    
    IE
    
    
    980,000
    
    
    
    860,000
    
    
    
    120,0001
    
    Fiscal 2009
    
    Rebuild
    
    
    450,000
    
    
    
    450,000
    
    
    
    1
    
    Fiscal 2009
    
    Relo (4)
    
    
    400,000
    
    
    
    400,000
    
    
    
    1
    
    Fiscal 2010
    
    IE
    
    
    750,000
    
    
    
    750,000
    
    
    
    18
    
    Fiscal 2011
    
    IE
    
    
    6,400,000
    
    
    
    5,680,000
    
    
    
    720,0001
    
    Fiscal 2011
    
    Relo (4)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    1
    
    Fiscal 2012
    
    Relo (4)
    
    
    1,400,000
    
    
    
    1,400,000
    
    
    
    0
    
    Fiscal 2013
    
    IE
    
    
    
    
    
    
    
    
    
    
    1
    
    Fiscal 2014
    
    Rebuild
    
    
    1,000,000
    
    
    
    1,000,000
    
    
    
    4
    
    Fiscal 2015
    
    Relo (4)
    
    
    4,000,000
    
    
    
    4,000,000
    
    
    
    1
    
    Fiscal 2016
    
    Relo (4)
    
    
    500,000
    
    
    
    500,000
    
    
    
    0
    
    Fiscal 2017-2019
    
    IE
    
    
    
    
    
    
    
    
    
    
    5
    
    Fiscal 2020
    
    Relo (4)
    
    
    7,000,000
    
    
    
    7,000,000
    
    
    
    2
    
    Fiscal 2020
    
    Rebuild
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    39
    
    Total
    
    
    
    $
    26,280,000
    
    
    $
    25,440,000
    
    
    $
    840,000
 
 (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.(4)
    
    Relocation of fee owned properties are shown net of expected recovery of capital from the sale
of the former location. Relocation of leased properties assumes the capital cost of only equipment
because it is not known until each lease is finalized whether the lease will be a capital or
operating lease.   NOTE 6  SUBSEQUENT EVENTS
  
 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 EndedMay 25, 2008
    
    May 20, 2007Cost of sales:Food, paper and beverage
    
    
    32.0
    %
    
    
    30.6
    %Labor and benefits
    
    
    28.7
    %
    
    
    26.7
    %Restaurant operating expenses
    
    
    25.2
    %
    
    
    24.6
    %Depreciation and amortization
    
    
    3.6
    %
    
    
    2.9
    %General and administrative expenses
    
    
    6.2
    %
    
    
    6.1
    %Operating income
    
    
    4.3
    %
    
    
    9.1
    %
 Revenues
 Cost of Sales  Food, Paper and Beverage
 Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization.
 General and Administrative Expenses
 Loss (gain) on Restaurant Assets
 Operating Income
 Interest Expense
 Other Income
 9




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Provision for Income Taxes
 Liquidity and Capital Resources
   New Accounting Pronouncements
    Seasonality
 10




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Safe Harbor Statements
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  
 Item 4. Controls and Procedures.
     
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
 11




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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
  12




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MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and SecretaryJuly 9, 2008 13




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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.
 14