##### 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 20, 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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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 FactorsINDEX TO EXHIBITSSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I
 FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Quarter EndedMay 20, 2007
    
    May 21, 2006Revenues
    
    $
    22,650,000
    
    
    $
    21,101,000Cost of sales:Food, paper and beverage
    
    
    6,939,000
    
    
    
    6,640,000Labor and benefits
    
    
    6,051,000
    
    
    
    5,495,000Restaurant operating expenses
    
    
    5,573,000
    
    
    
    5,211,000Depreciation and amortization
    
    
    654,000
    
    
    
    723,000General and adminstrative expenses
    
    
    1,380,000
    
    
    
    1,135,000Gain on restaurant assets
    
    
    (16,000
    )
    
    
    (6,000
    )Operating income
    
    
    2,069,000
    
    
    
    1,903,000Interest expense:Bank debt and notes payable
    
    
    847,000
    
    
    
    919,000Capital leases
    
    
    29,000
    
    
    
    27,000Other income and expense, net
    
    
    (44,000
    )
    
    
    (23,000
    )Net income before income taxes
    
    
    1,237,000
    
    
    
    980,000Provision for income taxes
    
    
    407,000
    
    
    
    81,000Net income
    
    $
    830,000
    
    
    $
    899,000Basic net income per common share
    
    $
    0.29
    
    
    $
    0.33Diluted net income per common share
    
    $
    0.28
    
    
    $
    0.32Basic weighted average number of shares outstanding
    
    
    2,880,995
    
    
    
    2,718,495Diluted weighted average number of shares outstanding
    
    
    2,964,527
    
    
    
    2,806,030
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May 20,
    
    February 25,2007
    
    2007(UNAUDITED)
    
    (AUDITED)ASSETSCurrent assets:Cash and equivalents
    
    $
    8,615,000
    
    
    $
    7,829,000Receivables
    
    
    280,000
    
    
    
    345,000Inventories
    
    
    741,000
    
    
    
    684,000Prepaid expenses
    
    
    523,000
    
    
    
    600,00010,159,000
    
    
    
    9,458,000Property and equipment:Land
    
    
    10,639,000
    
    
    
    10,462,000Buildings and improvements
    
    
    20,821,000
    
    
    
    20,200,000Property under capital leases
    
    
    1,433,000
    
    
    
    1,433,000Leasehold improvements
    
    
    7,909,000
    
    
    
    7,841,000Equipment, furniture and fixtures
    
    
    20,996,000
    
    
    
    20,531,000Construction in progress
    
    
    451,000
    
    
    
    1,107,00062,249,000
    
    
    
    61,574,000Less accumulated depreciation and amortization
    
    
    31,666,000
    
    
    
    31,104,00030,583,000
    
    
    
    30,470,000Other assets
    
    
    800,000
    
    
    
    824,000Franchise agreements
    
    
    1,487,000
    
    
    
    1,519,000Deferred tax asset
    
    
    624,000
    
    
    
    825,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    52,880,000
    
    
    $
    52,323,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    2,901,000
    
    
    $
    2,913,000Current maturities of capital lease obligations
    
    
    34,000
    
    
    
    28,000Accounts payable
    
    
    4,759,000
    
    
    
    4,291,000Accrued liabilities
    
    
    4,586,000
    
    
    
    4,629,00012,280,000
    
    
    
    11,861,000Long-term debt
    
    
    33,710,000
    
    
    
    34,445,000Long-term capital lease obligations
    
    
    1,286,000
    
    
    
    1,299,000Other long-term liabilities
    
    
    1,256,000
    
    
    
    1,302,000Deferred tax liabilities
    
    
    1,679,000
    
    
    
    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 - 88,410
    
    
    (131,000
    )
    
    
    (131,000
    )Capital in excess of stated value
    
    
    29,174,000
    
    
    
    29,174,000Accumulated deficit
    
    
    (26,404,000
    )
    
    
    (27,234,000
    )Total shareholders equity
    
    
    2,669,000
    
    
    
    1,839,000$
    52,880,000
    
    
    $
    52,323,000
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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
    )
    
    $
    1,839,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    830,000
    
    
    
    830,000Balance May 20, 2007
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    88,410
    
    
    $
    (131,000
    )
    
    $
    29,174,000
    
    
    $
    (26,404,000
    )
    
    $
    2,669,000
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Twelve Weeks EndedMay 20, 2007
    
    May 21, 2006OPERATING ACTIVITIESNet income
    
    $
    830,000
    
    
    $
    899,000Adjustments to reconcile to net cash provided by
operating activities:Depreciation and amortization
    
    
    654,000
    
    
    
    723,000Amortization of deferred financing costs
    
    
    24,000
    
    
    
    26,000Amortization of supply agreement advances
    
    
    (226,000
    )
    
    
    (170,000
    )Funding from supply agreements
    
    
    60,000
    
    
    
    41,000Decrease in deferred tax assets
    
    
    201,000
    
    
    
    Increase in tax liabilities
    
    
    102,000
    
    
    
    66,000Gain on restaurant assets
    
    
    (16,000
    )
    
    
    (6,000
    )Change in assets and liabilities:Decrease in receivables
    
    
    65,000
    
    
    
    4,000Increase in inventories
    
    
    (57,000
    )
    
    
    (74,000
    )Decrease in prepaid expenses
    
    
    77,000
    
    
    
    119,000Increase in accounts payable
    
    
    468,000
    
    
    
    367,000Increase (Decrease) in accrued liabilities and other
    
    
    93,000
    
    
    
    (105,000
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    2,275,000
    
    
    
    1,890,000INVESTING ACTIVITIESCapital expenditures
    
    
    (735,000
    )
    
    
    (362,000
    )Purchase of franchise agreement
    
    
    
    
    
    
    (10,000
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (735,000
    )
    
    
    (372,000
    )FINANCING ACTIVITIESPrincipal payments on long-term debt
    
    
    (747,000
    )
    
    
    (800,000
    )Principal payments on capital lease obligations
    
    
    (7,000
    )
    
    
    (6,000
    )NET CASH USED FOR FINANCING ACTIVITIES
    
    
    (754,000
    )
    
    
    (806,000
    )NET CHANGE IN CASH AND EQUIVALENTS
    
    
    786,000
    
    
    
    712,000Cash and equivalents, beginning balance
    
    
    7,829,000
    
    
    
    6,415,000CASH AND EQUIVALENTS, ENDING BALANCE
    
    $
    8,615,000
    
    
    $
    7,127,000
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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
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NOTE 4STOCK OPTIONS
     Number
    
    Average
    
    NumberExercise
    
    Outstanding at
    
    Remianing
    
    Exercisable atPrices
    
    May 20, 2007
    
    Life
    
    May 20, 2007$3.00
    
    
    10,100
    
    
    
    2.6
    
    
    
    10,100$4.13
    
    
    113,900
    
    
    
    1.9
    
    
    
    113,900124,000
    
    
    
    2.0
    
    
    
    124,000
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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 EndedMay 20, 2007
    
    May 21, 2006Cost of sales:Food, paper and beverage
    
    
    30.6
    %
    
    
    31.5
    %Labor and benefits
    
    
    26.7
    %
    
    
    26.0
    %Restaurant operating expenses
    
    
    24.6
    %
    
    
    24.7
    %Depreciation and amortization
    
    
    2.9
    %
    
    
    3.4
    %General and administrative expenses
    
    
    6.1
    %
    
    
    5.4
    %Operating income
    
    
    9.1
    %
    
    
    9.0
    %
 Revenues
 Costs of Sales  Food, Paper and Beverages
 Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization.
 General and Administrative Expenses
 Gain on Restaurant Assets
 Operating Income
 Interest Expense
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Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
  New Accounting Pronouncements
     Seasonality
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Safe Harbor Statements
  
   
   
 PART
II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
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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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SIGNATURES
  /s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and Secretary
 July 5, 2007
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