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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 August 12, 2007
 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
  o o þ
 o þ




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PART I  FINANCIAL INFORMATION
Item 1. Financial Statements
 
 Quarter EndedAugust 12, 2007
    
    August 13, 2006Revenues
    
    $
    22,877,000
    
    
    $
    22,543,000Cost of sales:Food, paper and beverage
    
    
    6,977,000
    
    
    
    6,910,000Labor and benefits
    
    
    6,196,000
    
    
    
    5,858,000Restaurant operating expenses
    
    
    5,727,000
    
    
    
    5,582,000Depreciation and amortization
    
    
    661,000
    
    
    
    722,000General and adminstrative expenses
    
    
    1,380,000
    
    
    
    1,220,000(Gain) loss on restaurant assets
    
    
    8,000
    
    
    
    (20,000
    )Operating income
    
    
    1,928,000
    
    
    
    2,271,000Interest expense:Bank debt and notes payable
    
    
    803,000
    
    
    
    873,000Capital leases
    
    
    29,000
    
    
    
    27,000Other income and expense, net
    
    
    (128,000
    )
    
    
    (78,000
    )Net income before income taxes
    
    
    1,224,000
    
    
    
    1,449,000Provision for income taxes
    
    
    354,000
    
    
    
    160,000Net income
    
    $
    870,000
    
    
    $
    1,289,000Basic net income per common share
    
    $
    0.30
    
    
    $
    0.47Diluted net income per common share
    
    $
    0.29
    
    
    $
    0.46Basic weighted average number of shares outstanding
    
    
    2,888,999
    
    
    
    2,718,495Diluted weighted average number of shares
outstanding
    
    
    2,960,272
    
    
    
    2,820,397
  2




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Twenty-four Weeks EndedAugust 12, 2007
    
    August 13, 2006Revenues
    
    $
    45,527,000
    
    
    $
    43,644,000Cost of sales:Food, paper and beverage
    
    
    13,916,000
    
    
    
    13,550,000Labor and benefits
    
    
    12,247,000
    
    
    
    11,353,000Restaurant operating expenses
    
    
    11,300,000
    
    
    
    10,793,000Depreciation and amortization
    
    
    1,315,000
    
    
    
    1,445,000General and adminstrative expenses
    
    
    2,760,000
    
    
    
    2,355,000Gain on restaurant assets
    
    
    (8,000
    )
    
    
    (26,000
    )Operating income
    
    
    3,997,000
    
    
    
    4,174,000Interest expense:Bank debt and notes payable
    
    
    1,650,000
    
    
    
    1,792,000Capital leases
    
    
    58,000
    
    
    
    54,000Other income and expense, net
    
    
    (172,000
    )
    
    
    (101,000
    )Net income before income taxes
    
    
    2,461,000
    
    
    
    2,429,000Provision for income taxes
    
    
    761,000
    
    
    
    241,000Net income
    
    $
    1,700,000
    
    
    $
    2,188,000Basic net income per common share
    
    $
    0.59
    
    
    $
    0.80Diluted net income per common share
    
    $
    0.57
    
    
    $
    0.78Basic weighted average number of shares outstanding
    
    
    2,884,997
    
    
    
    2,718,495Diluted weighted average number of shares outstanding
    
    
    2,962,399
    
    
    
    2,813,593
  3




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August 12,
    
    February 25,2007
    
    2007(UNAUDITED)
    
    (AUDITED)ASSETSCurrent assets:Cash and equivalents
    
    $
    8,504,000
    
    
    $
    7,829,000Receivables
    
    
    400,000
    
    
    
    345,000Inventories
    
    
    743,000
    
    
    
    684,000Prepaid expenses
    
    
    415,000
    
    
    
    600,00010,062,000
    
    
    
    9,458,000Property and equipment:Land
    
    
    10,639,000
    
    
    
    10,462,000Buildings and improvements
    
    
    20,958,000
    
    
    
    20,200,000Property under capital leases
    
    
    1,433,000
    
    
    
    1,433,000Leasehold improvements
    
    
    8,001,000
    
    
    
    7,841,000Equipment, furniture and fixtures
    
    
    20,694,000
    
    
    
    20,531,000Construction in progress
    
    
    1,523,000
    
    
    
    1,107,00063,248,000
    
    
    
    61,574,000Less accumulated depreciation and amortization
    
    
    31,785,000
    
    
    
    31,104,00031,463,000
    
    
    
    30,470,000Other assets
    
    
    756,000
    
    
    
    824,000Franchise agreements
    
    
    1,456,000
    
    
    
    1,519,000Deferred tax asset
    
    
    380,000
    
    
    
    825,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    53,344,000
    
    
    $
    52,323,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    2,912,000
    
    
    $
    2,913,000Current maturities of capital lease obligations
    
    
    33,000
    
    
    
    28,000Accounts payable
    
    
    4,842,000
    
    
    
    4,291,000Accrued liabilities
    
    
    4,530,000
    
    
    
    4,629,00012,317,000
    
    
    
    11,861,000Long-term debt
    
    
    32,958,000
    
    
    
    34,445,000Long-term capital lease obligations
    
    
    1,278,000
    
    
    
    1,299,000Other long-term liabilities
    
    
    1,244,000
    
    
    
    1,302,000Deferred tax liabilities
    
    
    1,788,000
    
    
    
    1,577,000SHAREHOLDERS EQUITYPreferred shares, 1,000,000 shares authorized, no
shares outstandingCommon Stock, 25,000,000 shares authorizedIssued shares  2,969,405
    
    
    30,000
    
    
    
    30,000Treasury
shares  34,410 and 88,410
    
    
    (81,000
    )
    
    
    (131,000
    )Capital in excess of stated value
    
    
    29,344,000
    
    
    
    29,174,000Accumulated deficit
    
    
    (25,534,000
    )
    
    
    (27,234,000
    )Total shareholders equity
    
    
    3,759,000
    
    
    
    1,839,000$
    53,344,000
    
    
    $
    52,323,000
  4




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Capital in
    
    
    
    
    
    TotalCommon Shares
    
    Treasury Shares
    
    excess of
    
    Accumulated
    
    ShareholdersShares
    
    Amount
    
    Shares
    
    Amount
    
    stated value
    
    Deficit
    
    EquityBalance February 25, 2007
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    88,410
    
    
    $
    (131,000
    )
    
    $
    29,174,000
    
    
    $
    (27,234,000
    )
    
    $
    1,839,000Exercise of Stock Options
    
    
    
    
    
    
    
    
    
    
    (54,000
    )
    
    
    50,000
    
    
    
    170,000
    
    
    
    
    
    
    
    220,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,700,000
    
    
    
    1,700,000Balance August 12, 2007
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    34,410
    
    
    $
    (81,000
    )
    
    $
    29,344,000
    
    
    $
    (25,534,000
    )
    
    $
    3,759,000
  5




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Twenty-Four Weeks EndedAugust 12, 2007
    
    August 13, 2006OPERATING ACTIVITIESNet income
    
    $
    1,700,000
    
    
    $
    2,188,000Adjustments to reconcile to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,315,000
    
    
    
    1,445,000Amortization of deferred financing costs
    
    
    48,000
    
    
    
    51,000Amortization of supply agreement advances
    
    
    (487,000
    )
    
    
    (340,000
    )Funding from supply agreements
    
    
    107,000
    
    
    
    41,000Decrease in deferred tax assets
    
    
    445,000
    
    
    
    Increase in deferred tax liabilities
    
    
    211,000
    
    
    
    132,000Gain on restaurant assets
    
    
    (8,000
    )
    
    
    (26,000
    )Change in assets and liabilities:(Increase) decrease in receivables
    
    
    (55,000
    )
    
    
    109,000Increase in inventories
    
    
    (59,000
    )
    
    
    (81,000
    )Decrease in prepaid expenses
    
    
    185,000
    
    
    
    421,000Increase (decrease) in accounts payable
    
    
    551,000
    
    
    
    (523,000
    )Increase in accrued liabilities and other
    
    
    269,000
    
    
    
    168,000NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    4,222,000
    
    
    
    3,585,000INVESTING ACTIVITIESCapital expenditures
    
    
    (2,263,000
    )
    
    
    (945,000
    )Purchase of franchise agreement
    
    
    
    
    
    
    (36,000
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (2,263,000
    )
    
    
    (981,000
    )FINANCING ACTIVITIESPrincipal payments on long-term debt
    
    
    (1,488,000
    )
    
    
    (1,562,000
    )Principal payments on capital lease obligations
    
    
    (16,000
    )
    
    
    (11,000
    )Cash received for exercise of stock options
    
    
    220,000
    
    
    
    NET CASH USED FOR FINANCING ACTIVITIES
    
    
    (1,284,000
    )
    
    
    (1,573,000
    )NET CHANGE IN CASH AND EQUIVALENTS
    
    
    675,000
    
    
    
    1,031,000Cash and equivalents, beginning balance
    
    
    7,829,000
    
    
    
    6,415,000CASH AND EQUIVALENTS, ENDING BALANCE
    
    $
    8,504,000
    
    
    $
    7,446,000
    6




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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
  7




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NOTE 4STOCK OPTIONS
      Number
    
    Average
    
    NumberExercise
    
    
    
    Outstanding at
    
    Remaining
    
    Exercisable atPrices
    
    
    
    August 12, 2007
    
    Life
    
    August 12, 2007$
    3.00
    
    
    
    
    
    7,500
    
    
    
    2.3
    
    
    
    7,500$
    4.13
    
    
    
    
    
    62,500
    
    
    
    1.6
    
    
    
    62,50070,000
    
    
    
    1.7
    
    
    
    70,000
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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 12, 2007
    
    August 13, 2006
    
    August 12, 2007
    
    August 13, 2006Cost of sales:Food, paper and beverage
    
    
    30.5
    %
    
    
    30.7
    %
    
    
    30.6
    %
    
    
    31.0
    %Labor and benefits
    
    
    27.1
    %
    
    
    26.0
    %
    
    
    26.9
    %
    
    
    26.0
    %Restaurant operating expenses
    
    
    25.0
    %
    
    
    24.8
    %
    
    
    24.8
    %
    
    
    24.7
    %Depreciation and amortization
    
    
    2.9
    %
    
    
    3.2
    %
    
    
    2.9
    %
    
    
    3.3
    %General and administrative
expenses
    
    
    6.0
    %
    
    
    5.4
    %
    
    
    6.1
    %
    
    
    5.4
    %Operating income
    
    
    8.4
    %
    
    
    10.1
    %
    
    
    8.8
    %
    
    
    9.6
    %
 Revenues
 Cost of Sales  Food, Paper and Beverage
 Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization.
 General and Administrative Expenses
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(Gain)Loss on Restaurant Assets
 Operating Income
 Interest Expense
 Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
  New Accounting Pronouncements
  10




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Seasonality
 Safe Harbor Statements
  Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Item 4. Controls and Procedures.
  11




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PART II  OTHER INFORMATION
 Item 1. Legal Proceedings
  Item 1A. Risk Factors
  Item 5. Submission of Matters to vote of Security Holders
   WITHHOLD/NAME
    
    FOR
    
    ABSTAINLeonard Stein-Sapir
    
    
    2,240,621
    
    
    
    151,147Lawrence S. Dolin
    
    
    2,257,438
    
    
    
    134,330Bahman Guyuron, M.D.
    
    
    2,257,371
    
    
    
    134,397Kenneth L. Hignett
    
    
    2,240,754
    
    
    
    151,014Steven S. Kaufman
    
    
    2,257,471
    
    
    
    134,297Bernard Lerner
    
    
    2,247,471
    
    
    
    144,297James J. Liguori
    
    
    2,240,705
    
    
    
    151,063
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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.
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14