##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, DC 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the quarterly period ended August 17, 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
    
    Smaller reporting company þ(Do not check if a smaller reporting company)
 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 ProceduresPART 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 EndedAugust 17, 2008
    
    August 12, 2007Revenues
    
    $
    23,049,000
    
    
    $
    22,877,000Cost of sales:Food, paper and beverage
    
    
    7,506,000
    
    
    
    6,977,000Labor and benefits
    
    
    6,557,000
    
    
    
    6,196,000Restaurant operating expenses
    
    
    6,041,000
    
    
    
    5,727,000Depreciation and amortization
    
    
    791,000
    
    
    
    661,000General and administrative expenses
    
    
    1,364,000
    
    
    
    1,380,000Loss (gain) on restaurant assets
    
    
    (9,000
    )
    
    
    8,000Operating income
    
    
    799,000
    
    
    
    1,928,000Interest expense:Prepayment and deferred financing costs
    
    
    428,000
    
    
    
    Bank debt and notes payable
    
    
    734,000
    
    
    
    803,000Capital leases
    
    
    27,000
    
    
    
    29,000Other income and expense, net
    
    
    (79,000
    )
    
    
    (128,000
    )Income (loss) before income taxes
    
    
    (311,000
    )
    
    
    1,224,000Provision for income taxes
    
    
    330,000
    
    
    
    354,000Net income (loss)
    
    $
    (641,000
    )
    
    $
    870,000Basic net incomen (loss) per common share:
    
    $
    (0.22
    )
    
    $
    0.30Diluted net income (loss) per common share:
    
    $
    (0.22
    )
    
    $
    0.29Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,888,999Diluted weighted average number of shares outstanding
    
    
    2,944,450
    
    
    
    2,960,272
  2




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##### Table of Contents



Twenty-four Weeks EndedAugust 17, 2008
    
    August 12, 2007Revenues
    
    $
    44,802,000
    
    
    $
    45,527,000Cost of sales:Food, paper and beverage
    
    
    14,470,000
    
    
    
    13,916,000Labor and benefits
    
    
    12,795,000
    
    
    
    12,247,000Restaurant operating expenses
    
    
    11,528,000
    
    
    
    11,300,000Depreciation and amortization
    
    
    1,564,000
    
    
    
    1,315,000General and administrative expenses
    
    
    2,714,000
    
    
    
    2,760,000Gain on restaurant assets
    
    
    (4,000
    )
    
    
    (8,000
    )Operating income
    
    
    1,735,000
    
    
    
    3,997,000Interest expense:Prepayment and deferred financing costs
    
    
    428,000
    
    
    
    Bank debt and notes payable
    
    
    1,558,000
    
    
    
    1,650,000Capital leases
    
    
    53,000
    
    
    
    58,000Other income and expense, net
    
    
    (169,000
    )
    
    
    (172,000
    )Income (loss) before income taxes
    
    
    (135,000
    )
    
    
    2,461,000Provision for income taxes
    
    
    412,000
    
    
    
    761,000Net income (loss)
    
    $
    (547,000
    )
    
    $
    1,700,000Basic net income (loss) per common share:
    
    $
    (0.19
    )
    
    $
    0.59Diluted net income (loss) per common share:
    
    $
    (0.19
    )
    
    $
    0.57Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,884,997Diluted weighted average number of shares outstanding
    
    
    2,951,173
    
    
    
    2,962,399
  3




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August 17,
    
    
    March 02,2008
    
    
    2008ASSETSCurrent assets:Cash and equivalents
    
    $
    7,397,000
    
    
    $
    6,428,000Receivables
    
    
    405,000
    
    
    
    423,000Inventories
    
    
    787,000
    
    
    
    755,000Prepaid expenses
    
    
    382,000
    
    
    
    679,000Assets held for sale
    
    
    508,000
    
    
    
    9,479,000
    
    
    
    8,285,000Property and equipment:Land
    
    
    9,994,000
    
    
    
    10,798,000Buildings and improvements
    
    
    21,435,000
    
    
    
    22,588,000Property under capital leases
    
    
    1,314,000
    
    
    
    1,314,000Leasehold improvements
    
    
    10,889,000
    
    
    
    10,110,000Equipment, furniture and fixtures
    
    
    20,597,000
    
    
    
    21,047,000Construction in progress
    
    
    243,000
    
    
    
    1,193,00064,472,000
    
    
    
    67,050,000Less accumulated depreciation and amortization
    
    
    30,099,000
    
    
    
    31,620,00034,373,000
    
    
    
    35,430,000Other assets
    
    
    712,000
    
    
    
    837,000Franchise agreements, net
    
    
    1,362,000
    
    
    
    1,417,000Deferred tax asset
    
    
    404,000
    
    
    
    766,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    55,557,000
    
    
    $
    55,962,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    3,086,000
    
    
    $
    3,190,000Current maturities of capital lease obligations
    
    
    37,000
    
    
    
    34,000Accounts payable
    
    
    4,878,000
    
    
    
    5,718,000Accrued liabilities
    
    
    3,623,000
    
    
    
    4,678,00011,624,000
    
    
    
    13,620,000Deferred tax liabilities
    
    
    1,963,000
    
    
    
    1,853,000Long-term debt
    
    
    34,910,000
    
    
    
    35,789,000Long-term capital lease obligations
    
    
    1,128,000
    
    
    
    1,144,000Other long-term liabilities
    
    
    4,006,000
    
    
    
    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
    
    
    (27,367,000
    )
    
    
    (26,820,000
    )Total shareholders equity
    
    
    1,926,000
    
    
    
    2,473,000$
    55,557,000
    
    
    $
    55,962,000
  4




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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 (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (547,000
    )
    
    
    (547,000
    )Balance August 17, 2008
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (34,410
    )
    
    $
    (81,000
    )
    
    $
    29,344,000
    
    
    $
    (27,367,000
    )
    
    $
    1,926,000
  5




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Twenty-four Weeks EndedAugust 17, 2008
    
    August 12, 2007Cash flows from operating activities:Net (loss) income
    
    $
    (547,000
    )
    
    $
    1,700,000Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    1,564,000
    
    
    
    1,315,000Amortization of deferred
financing costs
    
    
    59,000
    
    
    
    48,000Amortization of supply agreement
advances
    
    
    (473,000
    )
    
    
    (487,000
    )Funding from supply agreements
    
    
    38,000
    
    
    
    107,000Decrease in deferred tax assets
    
    
    362,000
    
    
    
    445,000Increase in deferred tax liabilities
    
    
    110,000
    
    
    
    211,000Gain on restaurant assets
    
    
    (4,000
    )
    
    
    (8,000
    )Changes in assets and liabilities:Decrease (increase) in receivables
    
    
    18,000
    
    
    
    (55,000
    )Increase in inventories
    
    
    (32,000
    )
    
    
    (59,000
    )Decrease in prepaid expenses
    
    
    297,000
    
    
    
    185,000Increase (decrease) in accounts payable
    
    
    (840,000
    )
    
    
    551,000Increase in accrued liabilities and other
    
    
    (819,000
    )
    
    
    269,000Net cash provided by operating activities
    
    
    (267,000
    )
    
    
    4,222,000Cash flows from investing activities:Capital expenditures
    
    
    (2,956,000
    )
    
    
    (2,263,000
    )Proceeds from sale/leasebacks
    
    
    1,972,000
    
    
    
    Net cash used in investing activities
    
    
    (984,000
    )
    
    
    (2,263,000
    )Cash flows from financing activities:Proceeds from long-term borrowings
    
    
    3,000,000
    
    
    
    Principal payments on long-term debt
    
    
    (1,532,000
    )
    
    
    (1,488,000
    )Principal payments on capital
lease obligations
    
    
    (13,000
    )
    
    
    (16,000
    )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
    
    
    2,220,000
    
    
    
    (1,284,000
    )Net change in cash and equivalents
    
    
    969,000
    
    
    
    675,000Cash and equivalents, beginning balance
    
    
    6,428,000
    
    
    
    7,829,000Cash and equivalents, ending balance
    
    $
    7,397,000
    
    
    $
    8,504,000
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NOTE 1
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
      NOTE 2
 NET INCOME (LOSS) PER COMMON SHARE
  7




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NOTE 3
 DEBT
   NOTE 4  STOCK OPTIONS
     Number
    
    Average
    
    Number of SharesExercise
    
    Outstanding at
    
    Remaining
    
    Exercisable atPrices
    
    August 17, 2008
    
    Life
    
    August 17, 2008$3.000
    
    
    7,500

    
    
    1.4

    
    
    7,500$4.125
    
    
    62,500

    
    
    0.6

    
    
    62,50070,000

    
    
    0.7

    
    
    70,000
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NOTE 5
 CAPITAL EXPENDITURES
   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)
    
    Relocations of fee owned properties are shown net of expected recovery of capital from the sale of the former location.
Relocation of leased properties assumes the capital cost of only equipment because it is not known until each lease is
finalized whether the lease will be a capital or operating lease.   9




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NOTE 6
ASSETS HELD FOR SALE
  NOTE 7
SUBSEQUENT EVENTS
  
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Description of Business
 Summary of Expenses and Operating Income as a Percentage of Revenues
 Quarter Ended
    
    Twenty-four Weeks EndedAugust 17, 2008
    
    August 12, 2007
    
    August 17, 2008
    
    August 12, 2007Cost of sales:Food, paper and beverage
    
    
    32.6
    %
    
    
    30.5
    %
    
    
    32.3
    %
    
    
    30.6
    %Labor and benefits
    
    
    28.4
    %
    
    
    27.1
    %
    
    
    28.6
    %
    
    
    26.9
    %Restaurant operating expenses
    
    
    26.2
    %
    
    
    25.0
    %
    
    
    25.7
    %
    
    
    24.8
    %Depreciation and amortization
    
    
    3.4
    %
    
    
    2.9
    %
    
    
    3.5
    %
    
    
    2.9
    %General and administrative expenses
    
    
    5.9
    %
    
    
    6.0
    %
    
    
    6.1
    %
    
    
    6.1
    %Operating income
    
    
    3.5
    %
    
    
    8.4
    %
    
    
    3.9
    %
    
    
    8.8
    %
 Revenues
 Cost of Sales  Food, Paper and Beverage
 Cost of Sales  Labor and Benefits
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Restaurant Operating Expenses
 Depreciation and Amortization.
 General and Administrative Expenses
 Loss (gain) on Restaurant Assets
 Operating Income
 Interest Expense
 Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
  11




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New Accounting Pronouncements
    Seasonality
 12




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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
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Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
   WITHHOLD/NAME
    
    FOR
    
    ABSTAINLeonard Stein-Sapir
    
    
    2,171,540
    
    
    
    132,784Lawrence S. Dolin
    
    
    2,171,624
    
    
    
    132,700Bahman Guyuron, M.D.
    
    
    2,171,540
    
    
    
    132,784Kenneth L. Hignett
    
    
    2,171,640
    
    
    
    132,684Steven S. Kaufman
    
    
    2,171,640
    
    
    
    132,684Bernard Lerner
    
    
    2,171,640
    
    
    
    132,684James J. Liguori
    
    
    2,171,640
    
    
    
    132,684
 
 Item 5. Other Information
  
 Item 6. Exhibits
  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.
 16