##### 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 4, 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 Procedures.PART II  OTHER INFORMATIONItem 1. Legal ProceedingsItem 1A. Risk FactorsMORGANS FOODS, INC. INDEX TO EXHIBITSSIGNATURESEX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  
 PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 
 Quarter EndedNovember 4, 2007
    
    November 5, 2006Revenues
    
    $
    22,282,000
    
    
    $
    21,782,000Cost of sales:Food, paper and beverage
    
    
    6,806,000
    
    
    
    6,697,000Labor and benefits
    
    
    6,356,000
    
    
    
    5,777,000Restaurant operating expenses
    
    
    5,716,000
    
    
    
    5,347,000Depreciation and amortization
    
    
    678,000
    
    
    
    636,000General and adminstrative expenses
    
    
    1,522,000
    
    
    
    1,313,000Loss on restaurant assets
    
    
    84,000
    
    
    
    22,000Operating income
    
    
    1,120,000
    
    
    
    1,990,000Interest expense:Bank debt and notes payable
    
    
    787,000
    
    
    
    863,000Capital leases
    
    
    29,000
    
    
    
    27,000Other income and expense, net
    
    
    (123,000
    )
    
    
    (39,000
    )Net income before income taxes
    
    
    427,000
    
    
    
    1,139,000Provision for income taxes
    
    
    266,000
    
    
    
    137,000Net income
    
    $
    161,000
    
    
    $
    1,002,000Basic net income per common share
    
    $
    0.05
    
    
    $
    0.37Diluted net income per common share
    
    $
    0.05
    
    
    $
    0.35Basic weighted average number of shares outstanding
    
    
    2,934,995
    
    
    
    2,720,430Diluted weighted average number of shares
outstanding
    
    
    2,977,260
    
    
    
    2,833,889
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Thirty-six Weeks EndedNovember 4, 2007
    
    November 5, 2006Revenues
    
    $
    67,809,000
    
    
    $
    65,426,000Cost of sales:Food, paper and beverage
    
    
    20,722,000
    
    
    
    20,247,000Labor and benefits
    
    
    18,603,000
    
    
    
    17,130,000Restaurant operating expenses
    
    
    17,016,000
    
    
    
    16,140,000Depreciation and amortization
    
    
    1,993,000
    
    
    
    2,081,000General and adminstrative expenses
    
    
    4,282,000
    
    
    
    3,667,000(Gain) loss on restaurant assets
    
    
    76,000
    
    
    
    (4,000
    )Operating income
    
    
    5,117,000
    
    
    
    6,165,000Interest expense:Bank debt and notes payable
    
    
    2,437,000
    
    
    
    2,655,000Capital leases
    
    
    87,000
    
    
    
    81,000Other income and expense, net
    
    
    (295,000
    )
    
    
    (139,000
    )Net income before income taxes
    
    
    2,888,000
    
    
    
    3,568,000Provision for income taxes
    
    
    1,027,000
    
    
    
    378,000Net income
    
    $
    1,861,000
    
    
    $
    3,190,000Basic net income per common share
    
    $
    0.64
    
    
    $
    1.17Diluted net income per common share
    
    $
    0.62
    
    
    $
    1.13Basic weighted average number of shares outstanding
    
    
    2,916,995
    
    
    
    2,719,140Diluted weighted average number of shares
outstanding
    
    
    2,982,685
    
    
    
    2,821,006
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November 04,
    
    February 25,2007
    
    2007(UNAUDITED)
    
    (AUDITED)ASSETSCurrent assets:Cash
    
    $
    5,339,000
    
    
    $
    7,829,000Receivables
    
    
    510,000
    
    
    
    345,000Inventories
    
    
    706,000
    
    
    
    684,000Prepaid expenses
    
    
    624,000
    
    
    
    600,000Assets held for sale (Note 6)
    
    
    175,000
    
    
    
    7,354,000
    
    
    
    9,458,000Property and equipment:
    
    
    
    
    
    
    Land
    
    
    10,489,000
    
    
    
    10,462,000Buildings and improvements
    
    
    22,351,000
    
    
    
    20,200,000Property under capital leases
    
    
    1,433,000
    
    
    
    1,433,000Leasehold improvements
    
    
    8,811,000
    
    
    
    7,841,000Equipment, furniture and fixtures
    
    
    20,643,000
    
    
    
    20,531,000Construction in progress
    
    
    563,000
    
    
    
    1,107,00064,290,000
    
    
    
    61,574,000Less accumulated depreciation and amortization
    
    
    31,189,000
    
    
    
    31,104,00033,101,000
    
    
    
    30,470,000Other assets
    
    
    728,000
    
    
    
    824,000Franchise agreements
    
    
    1,463,000
    
    
    
    1,519,000Deferred tax asset
    
    
    146,000
    
    
    
    825,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    52,019,000
    
    
    $
    52,323,000LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Long-term debt, current
    
    $
    2,972,000
    
    
    $
    2,913,000Current maturities of capital lease obligations
    
    
    33,000
    
    
    
    28,000Accounts payable
    
    
    4,780,000
    
    
    
    4,291,000Accrued liabilities
    
    
    3,835,000
    
    
    
    4,629,00011,620,000
    
    
    
    11,861,000Long-term debt
    
    
    32,184,000
    
    
    
    34,445,000Long-term capital lease obligations
    
    
    1,271,000
    
    
    
    1,299,000Other long-term liabilities
    
    
    1,171,000
    
    
    
    1,302,000Deferred tax liabilities
    
    
    1,853,000
    
    
    
    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
    
    
    (25,373,000
    )
    
    
    (27,234,000
    )Total shareholders equity
    
    
    3,920,000
    
    
    
    1,839,000$
    52,019,000
    
    
    $
    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
    )
    
    $
    1,839,000Exercise of Stock Options
    
    
    
    
    
    
    
    
    
    
    (54,000
    )
    
    
    50,000
    
    
    
    170,000
    
    
    
    
    
    
    
    220,000Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,861,000
    
    
    
    1,861,000Balance November 4, 2007
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    34,410
    
    
    $
    (81,000
    )
    
    $
    29,344,000
    
    
    $
    (25,373,000
    )
    
    $
    3,920,000
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Thirty-six Weeks EndedNovember 4, 2007
    
    November 5, 2006OPERATING ACTIVITIESNet income
    
    $
    1,861,000
    
    
    $
    3,190,000Adjustments to reconcile to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,993,000
    
    
    
    2,081,000Amortization of deferred financing costs
    
    
    71,000
    
    
    
    75,000Amortization of supply agreement advances
    
    
    (487,000
    )
    
    
    (510,000
    )Funding from supply agreements
    
    
    107,000
    
    
    
    41,000Decrease in deferred tax assets
    
    
    679,000
    
    
    
    Increase in deferred tax liabilities
    
    
    276,000
    
    
    
    198,000(Gain) loss on restaurant assets
    
    
    76,000
    
    
    
    (4,000
    )Change in assets and liabilities:(Increase) decrease in receivables
    
    
    (165,000
    )
    
    
    34,000Increase in inventories
    
    
    (22,000
    )
    
    
    (38,000
    )Increase in prepaid expenses
    
    
    (24,000
    )
    
    
    104,000Decrease in other assets
    
    
    30,000
    
    
    
    Increase (decrease) in accounts payable
    
    
    489,000
    
    
    
    (45,000
    )(Increase) decrease in accrued liabilities and other
    
    
    (507,000
    )
    
    
    (17,000
    )NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    4,377,000
    
    
    
    5,109,000INVESTING ACTIVITIESCapital expenditures
    
    
    (4,821,000
    )
    
    
    (1,857,000
    )Proceeds from sale of fixed assets
    
    
    3,000
    
    
    
    Purchase of franchise agreement
    
    
    (44,000
    )
    
    
    (74,000
    )NET CASH USED FOR INVESTING ACTIVITIES
    
    
    (4,862,000
    )
    
    
    (1,931,000
    )FINANCING ACTIVITIESPrincipal payments on long-term debt
    
    
    (2,202,000
    )
    
    
    (2,352,000
    )Principal payments on capital lease obligations
    
    
    (23,000
    )
    
    
    (17,000
    )Cash received from exercise of stock options
    
    
    220,000
    
    
    
    35,000NET CASH USED FOR FINANCING ACTIVITIES
    
    
    (2,005,000
    )
    
    
    (2,334,000
    )NET CHANGE IN CASH AND EQUIVALENTS
    
    
    (2,490,000
    )
    
    
    844,000Cash and equivalents, beginning balance
    
    
    7,829,000
    
    
    
    6,415,000CASH AND EQUIVALENTS, ENDING BALANCE
    
    $
    5,339,000
    
    
    $
    7,259,000
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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
       NOTE 2  NET INCOME PER COMMON SHARE
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NOTE 3  DEBT
  NOTE 4STOCK OPTIONS
     Number Outstanding
    
    Average
    
    Number ExercisableExercise Prices
    
    at November 4, 2007
    

Remaining Life
    
    at November 4, 2007$3.00
    
    
    7,500
    
    
    
    2.1
    
    
    
    7,500$4.13
    
    
    62,500
    
    
    
    1.4
    
    
    
    62,50070,000
    
    
    
    1.5
    
    
    
    70,000
 NOTE 5  CAPITAL EXPENDITURES
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Number of Units
    
    Period
    
    Type
    
    Total (1)
    
    Required (2)
    
    Additional (3)6
    
    
    Fiscal 2008 3Q YTD
    
    IE
    
    $
    2,249,000
    
    
    $
    1,500,000
    
    
    $
    749,0001
    
    
    Fiscal 2008 3Q YTD
    
    Relo (4)
    
    
    1,264,000
    
    
    
    1,264,000
    
    
    
    7
    
    
    Total 3Q YTD
    
    
    
    
    
    
    3,513,000
    
    
    
    2,764,000
    
    
    
    749,00012
    
    
    Fiscal 2008 4Q Est.
    
    IE
    
    
    3,360,000
    
    
    
    3,120,000
    
    
    
    240,00019
    
    
    Full FYE 3-2-2008
    
    
    
    
    
    
    6,873,000
    
    
    
    5,884,000
    
    
    
    989,0007
    
    
    Fiscal 2009
    
    IE
    
    
    2,220,000
    
    
    
    1,820,000
    
    
    
    400,0001
    
    
    Fiscal 2009
    
    Rebuild
    
    
    400,000
    
    
    
    400,000
    
    
    
    1
    
    
    Fiscal 2009
    
    Relo (4)
    
    
    750,000
    
    
    
    750,000
    
    
    
    0
    
    
    Fiscal 2010
    
    IE
    
    
    
    
    
    
    
    
    
    
    19
    
    
    Fiscal 2011
    
    IE
    
    
    5,510,000
    
    
    
    4,940,000
    
    
    
    570,0001
    
    
    Fiscal 2012
    
    Relo (4)
    
    
    1,300,000
    
    
    
    1,300,000
    
    
    
    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)
    
    
    6,500,000
    
    
    
    6,500,000
    
    
    
    2
    
    
    Fiscal 2020
    
    Rebuild
    
    
    2,000,000
    
    
    
    2,000,000
    
    
    
    61
    
    
    Total
    
    
    
    
    
    $
    31,053,000
    
    
    $
    29,094,000
    
    
    $
    1,959,000
 
 (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 were or may be done at the time of th(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 wh   NOTE 6-SUBSEQUENT EVENTS
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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
    
    Thirty-six Weeks EndedNovember 4, 2007
    
    November 5, 2006
    
    November 4, 2007
    
    November 5, 2006Cost of sales:Food, paper and beverage
    
    
    30.5
    %
    
    
    30.7
    %
    
    
    30.6
    %
    
    
    30.9
    %Labor and benefits
    
    
    28.5
    %
    
    
    26.5
    %
    
    
    27.4
    %
    
    
    26.2
    %Restaurant operating expenses
    
    
    25.7
    %
    
    
    24.5
    %
    
    
    25.1
    %
    
    
    24.7
    %Depreciation and amortization
    
    
    3.0
    %
    
    
    2.9
    %
    
    
    2.9
    %
    
    
    3.2
    %General and administrative
expenses
    
    
    6.8
    %
    
    
    6.0
    %
    
    
    6.3
    %
    
    
    5.6
    %Operating income
    
    
    5.0
    %
    
    
    9.1
    %
    
    
    7.5
    %
    
    
    9.4
    %
 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
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New Accounting Pronouncements
     Seasonality
 Safe Harbor Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  12




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Item 4. Controls and Procedures.
  
 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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MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and Secretary December 19, 2007 15