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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-K
 Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
 For the fiscal year ended February 25, 2007Commission file number 1-08395
 MORGANS FOODS, INC.
  Ohio
    
    34-0562210(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
  
  (216) 359-9000
  Title of each class
    
    Name of each exchange on
which registeredCommon Shares, Without Par Value 
Securities registered pursuant to Section 12 (g) of the Act:
    
    None
 o þ
 o þ
 þ o
 þ
  o o þ
 o þ
   DOCUMENTS INCORPORATED BY REFERENCE




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TABLE OF CONTENTS  PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSPART IIITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESITEM 15 (A) 1ITEM 15 (A) 2INDEX TO EXHIBITSSIGNATURESEX-21EX-23.1EX-23.2EX-31.1EX-31.2EX-32.1EX-32.2    Table of Contents  MORGANS FOODS, INC.
 
 PART I
 
 ITEM 1. BUSINESS
 General
  Restaurant Operations
   Franchise Agreements
  2




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MORGANS FOODS, INC.
 PART I (contd)
   Competition
   3




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##### Table of Contents



MORGANS FOODS, INC.
 PART I (contd)
  Government Regulation
    Suppliers
  Growth
  Employees
  
 ITEM 1A. RISK FACTORS
  -
    
    Due to the Companys reliance on poultry in its menu items, an outbreak of the
avian influenza in the United States could cause a shortage of chicken or
could cause unreasonable panic in the
 4




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##### Table of Contents



MORGANS FOODS, INC.
 PART I (contd)
  -
    
    The Company faces significant image enhancement and relocation requirements in
future fiscal years as described under Other Contractual Obligations and Commitments
in Part II of this report. There is no assurance that the Company will be able to
obtain sale/leaseback or debt financing on terms which it finds reasonably acceptable to
fund these obligations when due. Lack of acceptable financing could have a material
adverse affect on the operations of the Company, including the loss of restaurants
subject to enhancement or relocation requirements under applicable franchise agreements.-
    
    The food supply in general is subject to the accidental or intentional
introduction of contaminants which can cause illness or death in humans. To the extent
that the Companys food supplies become impacted by any of these contaminants, the
Companys revenue could be significantly reduced and the Company could be subjected to
related liability claims.-
    
    The Company is involved in various commercial activities in the operation of its
restaurants. These activities may generate the potential for legal claims against the
Company. While many of these risks are covered by insurance, the costs of litigating
large claims and any potential resulting uninsured liability could have a material
adverse effect on the Companys results of operations.-
    
    In operating its restaurants, the Company is the owner of many real estate
parcels. Environmental problems at any of these sites could cause significant costs and
liabilities for the Company.-
    
    The Company is exposed to numerous cost pressures in the operation of its
restaurants including food, fuel and minimum wage increases. To the extent that the
business environment prohibits the Company from passing on these increased costs in its
selling prices, there could be a material negative impact on the results of operations.
 
 ITEM 1B. UNRESOLVED STAFF COMMENTS
  
 ITEM 2. PROPERTIES
   5




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MORGANS FOODS, INC.
 PART I (contd)
   
 ITEM 3. LEGAL PROCEEDINGS
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Executive Officers of the Company
  Name
    
    Age
    
    Position with Registrant
    
    Officer SinceExecutive Officers:Leonard R. Stein-Sapir
    
    
    68
    
    
    Chairman of the Board
and Chief Executive
Officer
    
    April 1989James J. Liguori
    
    
    58
    
    
    President and Chief
Operating Officer
    
    June 1979Kenneth L. Hignett
    
    
    60
    
    
    Senior Vice President-
Chief Financial Officer& Secretary
    
    May 1989Other Officers:Barton J. Craig
    
    
    58
    
    
    Senior Vice President-
General Counsel
    
    January 1994Vincent J. Oddi
    
    
    64
    
    
    Vice President-
Restaurant Development
    
    September 1979Ramesh J. Gursahaney
    
    
    58
    
    
    Vice President-
Operations
    
    January 1991
  6




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##### Table of Contents



MORGANS FOODS, INC.
 
 PART II
 
 ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
  Price RangeHigh
    
    LowYear ended February 25, 2007:1st Quarter
    
    $
    5.50
    
    
    $
    4.502nd Quarter
    
    
    6.15
    
    
    
    4.553rd Quarter
    
    
    7.95
    
    
    
    4.554th Quarter
    
    
    12.89
    
    
    
    7.67Year ended February 26, 2006:1st Quarter
    
    $
    1.60
    
    
    $
    .902nd Quarter
    
    
    4.25
    
    
    
    1.603rd Quarter
    
    
    6.30
    
    
    
    4.504th Quarter
    
    
    8.00
    
    
    
    4.50
  7




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MORGANS FOODS, INC.
PART II (contd)
 Shareholder Return Performance Graph
  
 2002
    
    
    2003
    
    
    2004
    
    
    2005
    
    
    2006
    
    
    2007MORGANS FOODS INC
    
    
    
    100
    
    
    
    
    79
    
    
    
    
    93
    
    
    
    
    43
    
    
    
    
    233
    
    
    
    
    588S&P MIDCAP400 INDEX
    
    
    
    100
    
    
    
    
    80
    
    
    
    
    119
    
    
    
    
    135
    
    
    
    
    159
    
    
    
    
    178RESTAURANT PEER GROUP
    
    
    
    100
    
    
    
    
    83
    
    
    
    
    112
    
    
    
    
    123
    
    
    
    
    219
    
    
    
    
    317
  8




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##### Table of Contents



MORGANS FOODS, INC.


PART II (contd)
 
 ITEM 6. SELECTED FINANCIAL DATA
  Years EndedFebruary 25,
    
    
    February 26,
    
    
    February 27,
    
    
    February 29,
    
    
    March 2,2007
    
    
    2006
    
    
    2005
    
    
    2004
    
    
    2003Revenues
    
    $
    91,248
    
    
    $
    87,457
    
    
    $
    80,960
    
    
    $
    81,738
    
    
    $
    82,326Cost of sales:Food, paper and beverage
    
    
    27,981
    
    
    
    27,146
    
    
    
    25,222
    
    
    
    24,712
    
    
    
    25,645Labor and benefits
    
    
    24,798
    
    
    
    23,186
    
    
    
    22,803
    
    
    
    22,816
    
    
    
    22,329Restaurant operating expenses
    
    
    22,765
    
    
    
    22,190
    
    
    
    21,015
    
    
    
    21,320
    
    
    
    21,018Depreciation and amortization
    
    
    2,950
    
    
    
    3,254
    
    
    
    3,419
    
    
    
    3,518
    
    
    
    3,499General and administrative expenses
    
    
    5,428
    
    
    
    5,133
    
    
    
    4,870
    
    
    
    5,574
    
    
    
    5,749Loss (gain) on restaurant assets
    
    
    5
    
    
    
    (715
    )
    
    
    574
    
    
    
    567
    
    
    
    551Operating income
    
    
    7,321
    
    
    
    7,263
    
    
    
    3,057
    
    
    
    3,231
    
    
    
    3,535Net income (loss)
    
    
    3,527
    
    
    
    3,437
    
    
    
    (2,141
    )
    
    
    (1,579
    )
    
    
    (1,673
    )Basic net income (loss) per comm. sh. (1)
    
    $
    1.29
    
    
    $
    1.26
    
    
    $
    (0.79
    )
    
    $
    (0.58
    )
    
    $
    (0.62
    )Diluted net income (loss) per comm. sh.
(1)
    
    $
    1.27
    
    
    $
    1.24
    
    
    $
    (0.79
    )
    
    $
    (0.58
    )
    
    $
    (0.62
    )Working capital (deficiency)
    
    $
    (2,403
    )
    
    $
    (3,178
    )
    
    $
    (46,048
    )
    
    $
    (3,999
    )
    
    $
    (3,111
    )Total assets
    
    
    52,323
    
    
    
    50,751
    
    
    
    48,790
    
    
    
    52,672
    
    
    
    56,025Long-term debt (less current maturities)
    
    
    34,445
    
    
    
    37,357
    
    
    
    
    
    
    
    43,370
    
    
    
    46,113Long-term capital lease obligations
    
    
    1,299
    
    
    
    1,194
    
    
    
    368
    
    
    
    379
    
    
    
    436Shareholders equity (deficiency)
    
    
    1,839
    
    
    
    (2,186
    )
    
    
    (5,623
    )
    
    
    (3,482
    )
    
    
    (1,903
    )
 
 (1)
    
    Computed based upon the basic weighted average number of common shares outstanding
during each year, which were 2,738,982 in 2007, 2,718,495 in 2006, 2,718,495 in 2005,
2,718,441 in 2004 and 2,720,182 in 2003 and the diluted weighted average number of
common and common equivalent shares outstanding during each year, which were 2,767,478
in 2007, 2,778,524 in 2006, 2,718,495 in 2005, 2,718,441 in 2004 and 2,720,182 in 2003. 
 ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Results of Operations
  9




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MORGANS FOODS, INC.
PART II (contd)
 2007
    
    2006
    
    2005Cost of sales:Food, paper and beverage
    
    
    30.7
    %
    
    
    31.0
    %
    
    
    31.2
    %Labor and benefits
    
    
    27.2
    %
    
    
    26.5
    %
    
    
    28.2
    %Restaurant operating expenses
    
    
    24.9
    %
    
    
    25.4
    %
    
    
    26.0
    %Depreciation and amortization
    
    
    3.2
    %
    
    
    3.7
    %
    
    
    4.2
    %General and administrative expenses
    
    
    5.9
    %
    
    
    5.9
    %
    
    
    6.0
    %Operating income
    
    
    8.0
    %
    
    
    8.3
    %
    
    
    3.8
    %
 Revenues
   Cost of Sales  Food, Paper and Beverage
   10




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##### Table of Contents



MORGANS FOODS, INC.
PART II (contd)
 Cost of Sales  Labor and Benefits
   Restaurant Operating Expenses
   Depreciation and Amortization
  General and Administrative Expenses
   11




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MORGANS FOODS, INC.
PART II (contd)
 Loss (gain) on Restaurant Assets
   Operating Income
  Interest Expense
  Other Income
  12




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MORGANS FOODS, INC.
PART II (contd)
 Provision for Income Taxes
  Liquidity and Capital Resources
   Financial Restructuring
  13




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MORGANS FOODS, INC.
PART II (contd)
  Market Risk Exposure
   Contractual Obligations
    
    2008
    
    2009
    
    2010
    
    2011
    
    2012
    
    Thereafter
    
    TotalLong-term debt,
including current
    
    $
    2,913
    
    
    $
    3,046
    
    
    $
    3,313
    
    
    $
    3,603
    
    
    $
    3,844
    
    
    $
    20,639
    
    
    $
    37,358Interest expense on
long-term debt
    
    $
    3,395
    
    
    $
    3,105
    
    
    $
    2,801
    
    
    $
    2,482
    
    
    $
    2,121
    
    
    $
    6,262
    
    
    $
    20,166Capital leases (1)
    
    $
    159
    
    
    $
    160
    
    
    $
    161
    
    
    $
    161
    
    
    $
    160
    
    
    $
    1,911
    
    
    $
    2,712Operating leases (1)
    
    $
    1,857
    
    
    $
    1,776
    
    
    $
    1,421
    
    
    $
    1,218
    
    
    $
    1,072
    
    
    $
    4,268
    
    
    $
    11,612
 
 (1)
    
    does not include contingent rental obligations based on sales performance Other Contractual Obligations and Commitments
  14




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MORGANS FOODS, INC.
PART II (contd)
   NumberFiscal Year
    
    Of Units
    
    
    Obiligation (1)2008 Image enhancements
    
    
    10
    
    
    $
    2,300,0002008 relocations
    
    
    1
    (2)
    
    
    1,400,0002009 Image enhancements
    
    
    10
    
    
    
    2,725,0002010 Image enhancements
    
    
    14
    
    
    
    3,650,0002011 Image enhancements
    
    
    10
    
    
    
    2,650,0002011 relocations
    
    
    1
    (2)
    
    
    750,0002014 Image enhancements
    
    
    1
    
    
    
    800,0002015 relocations
    
    
    4
    (2)
    
    
    5,000,0002016 relocations
    
    
    1
    (2)
    
    
    1,400,0002020 Image enhancements
    
    
    3
    
    
    
    2,900,0002020 relocations
    
    
    4
    (2)
    
    
    5,700,00059
    
    
    $
    29,275,000
 
 (1)
    
    These amounts are based on current construction cost estimates and actual costs may vary.(2)
    
    Generally at the time relocation of an existing restaurant is required, the related assets
have been depreciated or amortized to a low net book value. If an economically suitable new
location cannot be obtained, the Company may choose to close the restaurant and abandon the
remaining assets.  15




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MORGANS FOODS, INC.
PART II (contd)
 Seasonality
  Critical Accounting Policies
  
    
    Estimating future cash flows and fair value of assets associated
with assessing potential impairment of long-lived tangible and
intangible assets and projected compliance with debt covenants.
 
    
    Determining the appropriate valuation allowances for deferred tax
assets and reserves for potential tax exposures. See Note 8 to
the consolidated financial statements for a discussion of income
taxes.
 
    
    Applying complex lease accounting requirements to the Companys
capital and operating leases of property and equipment. The
Company leases the building or land, or both, for nearly one-half
of its restaurants. See Note 6 to the consolidated financial
statements for a discussion of lease accounting.
 New Accounting Standards
   16




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MORGANS FOODS, INC.
PART II (contd)
  Safe Harbor Statements
   
 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  
 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  17




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MORGANS FOODS, INC.
PART II (contd)
 
 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
  
 ITEM 9A. CONTROLS AND PROCEDURES
  
 ITEM 9B. OTHER INFORMATION
  18




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MORGANS FOODS, INC.
 
 PART III
 
 ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
   
 ITEM 11. EXECUTIVE COMPENSATION
  
 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
  
 ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
  
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  19




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MORGANS FOODS, INC.
 
 PART IV
 
 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 (a)
    
    1 and 2. Financial Statements and Financial Statement Schedules.The Financial Statements and Financial Statement Schedules listed on the accompanying Index to
Financial Statements and Financial Statement Schedules are filed as part of this Annual Report
on Form 10-K.(a)
    
    3. Exhibits.The Exhibits listed on the accompanying Index to Exhibits are filed as part of this Annual
Report on Form 10-K.
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MORGANS FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEM 15 (a) 1 and 2
 
 ITEM 15 (A) 1
 PageReferenceReports of Independent Registered Public Accounting Firms
    
    
    22Consolidated Balance Sheets at February 25, 2007 and February 26, 2006
    
    
    24Consolidated Statements of Operations for the years ended
February 25, 2007, February 26, 2006 and February 27, 2005
    
    
    25Consolidated Statements of Shareholders Equity (Deficiency) for the years ended
February 25, 2007, February 26, 2006 and February 27, 2005
    
    
    26Consolidated Statements of Cash Flows for the years ended
February 25, 2007, February 26, 2006 and February 27, 2005
    
    
    27Notes to Consolidated Financial Statements
    
    
    28
 
 ITEM 15 (A) 2
  21




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REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
 
    Share-Based Payment
  
 22




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REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS (cont.)
 
    
 23




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MORGANS FOODS, INC.
 February 25,
    
    
    February 26,2007
    
    
    2006ASSETSCurrent assets:Cash and equivalents
    
    $
    7,829,000
    
    
    $
    6,415,000Receivables
    
    
    345,000
    
    
    
    332,000Inventories
    
    
    684,000
    
    
    
    643,000Prepaid expenses
    
    
    600,000
    
    
    
    856,0009,458,000
    
    
    
    8,246,000Property and equipment:Land
    
    
    10,462,000
    
    
    
    10,462,000Buildings and improvements
    
    
    20,200,000
    
    
    
    19,688,000Property under capital leases
    
    
    1,433,000
    
    
    
    1,298,000Leasehold improvements
    
    
    7,841,000
    
    
    
    7,436,000Equipment, furniture and fixtures
    
    
    20,531,000
    
    
    
    19,964,000Construction in progress
    
    
    1,107,000
    
    
    
    55,00061,574,000
    
    
    
    58,903,000Less accumulated depreciation and amortization
    
    
    31,104,000
    
    
    
    28,678,00030,470,000
    
    
    
    30,225,000Other assets
    
    
    824,000
    
    
    
    925,000Franchise agreements
    
    
    1,519,000
    
    
    
    1,578,000Deferred tax asset
    
    
    825,000
    
    
    
    550,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    52,323,000
    
    
    $
    50,751,000LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)Current liabilities:Long-term debt, current
    
    $
    2,913,000
    
    
    $
    3,116,000Current maturities of capital lease obligations
    
    
    28,000
    
    
    
    24,000Accounts payable
    
    
    4,291,000
    
    
    
    4,308,000Accrued liabilities
    
    
    4,629,000
    
    
    
    3,976,00011,861,000
    
    
    
    11,424,000Long-term debt (Note 4)
    
    
    34,445,000
    
    
    
    37,357,000Long-term capital lease obligations
    
    
    1,299,000
    
    
    
    1,194,000Other long-term liabilities
    
    
    1,302,000
    
    
    
    1,631,000Deferred tax liabilities
    
    
    1,577,000
    
    
    
    1,331,000SHAREHOLDERS EQUITY (DEFICIENCY)Preferred 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 - 88,410 and 250,910
    
    
    (131,000
    )
    
    
    (284,000
    )Capital in excess of stated value
    
    
    29,174,000
    
    
    
    28,829,000Accumulated deficit
    
    
    (27,234,000
    )
    
    
    (30,761,000
    )Total shareholders equity (deficiency)
    
    
    1,839,000
    
    
    
    (2,186,000
    )$
    52,323,000
    
    
    $
    50,751,000
 24




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MORGANS FOODS, INC.
 2007
    
    
    2006
    
    
    2005Revenues
    
    $
    91,248,000
    
    
    $
    87,457,000
    
    
    $
    80,960,000Cost of sales:Food, paper and beverage
    
    
    27,981,000
    
    
    
    27,146,000
    
    
    
    25,222,000Labor and benefits
    
    
    24,798,000
    
    
    
    23,186,000
    
    
    
    22,803,000Restaurant operating expenses
    
    
    22,765,000
    
    
    
    22,190,000
    
    
    
    21,015,000Depreciation and amortization
    
    
    2,950,000
    
    
    
    3,254,000
    
    
    
    3,419,000General and administrative expenses
    
    
    5,428,000
    
    
    
    5,133,000
    
    
    
    4,870,000Loss (gain) on restaurant assets (Note 2)
    
    
    5,000
    
    
    
    (715,000
    )
    
    
    574,000Operating income
    
    
    7,321,000
    
    
    
    7,263,000
    
    
    
    3,057,000Interest expense:Bank debt and notes payable
    
    
    (3,762,000
    )
    
    
    (4,078,000
    )
    
    
    (4,341,000
    )Capital leases
    
    
    (117,000
    )
    
    
    (89,000
    )
    
    
    (45,000
    )Other income and expense, net
    
    
    221,000
    
    
    
    154,000
    
    
    
    78,000Income (loss) before income taxes
    
    
    3,663,000
    
    
    
    3,250,000
    
    
    
    (1,251,000
    )Provision (credit) for income taxes (Note 8)
    
    
    136,000
    
    
    
    (187,000
    )
    
    
    890,000Net income (loss)
    
    
    3,527,000
    
    
    
    3,437,000
    
    
    
    (2,141,000
    )Basic net income (loss) per common share:
    
    $
    1.29
    
    
    $
    1.26
    
    
    $
    (0.79
    )Diluted net income (loss) per common share:
    
    $
    1.27
    
    
    $
    1.24
    
    
    $
    (0.79
    )
 25




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##### Table of Contents



MORGANS FOODS, INC.
 Capital in
    
    
    
    
    
    
    TotalCommon Shares
    
    
    Treasury Shares
    
    
    excess of
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    stated value
    
    
    Deficit
    
    
    Equity (Deficiency)Balance February 29, 2004
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (250,964
    )
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (32,057,000
    )
    
    $
    (3,482,000
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,141,000
    )
    
    
    (2,141,000
    )Adjustment of Treasury
Shares
    
    
    
    
    
    
    
    
    
    
    54Balance February 27, 2005
    
    
    2,969,405
    
    
    
    30,000
    
    
    
    (250,910
    )
    
    
    (284,000
    )
    
    
    28,829,000
    
    
    
    (34,198,000
    )
    
    
    (5,623,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,437,000
    
    
    
    3,437,000Balance February 26, 2006
    
    
    2,969,405
    
    
    
    30,000
    
    
    
    (250,910
    )
    
    
    (284,000
    )
    
    
    28,829,000
    
    
    
    (30,761,000
    )
    
    
    (2,186,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,527,000
    
    
    
    3,527,000Exercise of Stock Options
    
    
    
    
    
    
    
    
    
    
    162,500
    
    
    
    153,000
    
    
    
    345,000
    
    
    
    
    
    
    
    498,000Balance February 25, 2007
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (88,410
    )
    
    $
    (131,000
    )
    
    $
    29,174,000
    
    
    $
    (27,234,000
    )
    
    $
    1,839,000
 26




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##### Table of Contents



MORGANS FOODS, INC.
 2007
    
    
    2006
    
    
    2005Cash flows from operating activities:Net income (loss)
    
    $
    3,527,000
    
    
    $
    3,437,000
    
    
    $
    (2,141,000
    )Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,950,000
    
    
    
    3,254,000
    
    
    
    3,419,000Amortization of deferred
financing costs
    
    
    108,000
    
    
    
    115,000
    
    
    
    121,000Amortization of supply agreement
advances (Note 1)
    
    
    (783,000
    )
    
    
    (712,000
    )
    
    
    (709,000
    )Funding from supply agreements (Note 1)
    
    
    793,000
    
    
    
    626,000
    
    
    
    641,000Decrease (increase) in deferred tax assets
    
    
    (275,000
    )
    
    
    (550,000
    )
    
    
    600,000Increase in deferred tax liabilities
    
    
    246,000
    
    
    
    282,000
    
    
    
    283,000Loss (gain) on restaurant assets
    
    
    5,000
    
    
    
    (715,000
    )
    
    
    574,000Business interruption insurance proceeds
    
    
    
    
    
    
    30,000
    
    
    
    152,000Changes in assets and liabilities:Decrease (Increase) in receivables
    
    
    (13,000
    )
    
    
    60,000
    
    
    
    (150,000
    )Increase in inventories
    
    
    (41,000
    )
    
    
    (46,000
    )
    
    
    (15,000
    )Decrease (Increase) in prepaid expenses
    
    
    256,000
    
    
    
    (267,000
    )
    
    
    (265,000
    )Decrease (Increase) in other assets
    
    
    (7,000
    )
    
    
    
    
    
    
    25,000Increase (Decrease) in accounts payable
    
    
    (17,000
    )
    
    
    274,000
    
    
    
    392,000Increase in accrued liabilities
    
    
    365,000
    
    
    
    134,000
    
    
    
    139,000Net cash provided by operating activities
    
    
    7,114,000
    
    
    
    5,922,000
    
    
    
    3,066,000Cash flows from investing activities:Capital expenditures
    
    
    (2,970,000
    )
    
    
    (1,502,000
    )
    
    
    (2,141,000
    )Insurance proceeds
    
    
    
    
    
    
    694,000
    
    
    
    588,000Purchase of franchise agreement
    
    
    (87,000
    )
    
    
    (30,000
    )
    
    
    (25,000
    )Redemption of short term investment
    
    
    
    
    
    
    
    
    
    
    300,000Net cash used in investing activities
    
    
    (3,057,000
    )
    
    
    (838,000
    )
    
    
    (1,278,000
    )Cash flows from financing activities:Proceeds from issuance of long-term debt,
net of financing costs
    
    
    
    
    
    
    12,000
    
    
    
    414,000Principal payments on long-term debt
    
    
    (3,115,000
    )
    
    
    (3,221,000
    )
    
    
    (2,845,000
    )Proceeds from sale leaseback
    
    
    
    
    
    
    912,000
    
    
    
    Principal payments on capital
lease obligations
    
    
    (26,000
    )
    
    
    (26,000
    )
    
    
    (56,000
    )Cash received for exercise of stock options
    
    
    498,000
    
    
    
    
    
    
    
    Net cash used in financing activities
    
    
    (2,643,000
    )
    
    
    (2,323,000
    )
    
    
    (2,487,000
    )Net change in cash and equivalents
    
    
    1,414,000
    
    
    
    2,761,000
    
    
    
    (699,000
    )Cash and equivalents, beginning balance
    
    
    6,415,000
    
    
    
    3,654,000
    
    
    
    4,353,000Cash and equivalents, ending balance
    
    $
    7,829,000
    
    
    $
    6,415,000
    
    
    $
    3,654,000
 27




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
 Description of Business 
 Use of Estimates 
 Principles of Consolidation 
 Revenue Recognition 
 Advertising Costs 
 Cash and Investments 
 Inventories 
 Property and Equipment 
 28




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##### Table of Contents



MORGANS FOODS, INC.
  Deferred Financing Costs 
 Franchise Agreements 
 Goodwill 
 Advance on Supply Agreements 
 Lease Accounting 
 29




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##### Table of Contents



MORGANS FOODS, INC.
 Income Taxes 
 Stock-Based Compensation 
 NOTE 2. (GAIN) LOSS ON RESTAURANT ASSETS
  30




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 3. INTANGIBLE ASSETS
  Intangible AssetsAs of February 25, 2007
    
    As of February 26, 2006Gross Carrying
    
    Accumulated
    
    Gross Carrying
    
    AccumulatedAmount
    
    Amortization
    
    Amortization
    
    AmortizationFranchise Agreements
    
    $
    2,482,000
    
    
    $
    (953,000
    )
    
    $
    2,420,000
    
    
    $
    (842,000
    )Goodwill
    
    
    10,593,000
    
    
    
    (1,366,000
    )
    
    
    10,593,000
    
    
    
    (1,366,000
    )Total
    
    $
    13,075,000
    
    
    $
    (2,319,000
    )
    
    $
    13,013,000
    
    
    $
    (2,208,000
    )
   NOTE 4. ACCRUED LIABILITIES
  2007
    
    
    2006Accrued compensation
    
    $
    1,939,000
    
    
    $
    1,742,000Accrued taxes other than income taxes
    
    
    874,000
    
    
    
    762,000Accrued liabilities related to closed restaurants
    
    
    53,000
    
    
    
    221,000Deferred gain on sale/leaseback
    
    
    18,000
    
    
    
    346,000Current portion of supply agreement
    
    
    613,000
    
    
    
    Current portion rent smoothing
    
    
    33,000
    
    
    
    Other accrued expenses
    
    
    1,099,000
    
    
    
    905,000$
    4,629,000
    
    
    $
    3,976,000
 31




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 5. DEBT
  2007
    
    
    2006Mortgage debt, including
interest at 8.3% to 10.6%, through 2021,
collateralized by seventy-five restaurants having a
net book value at February 25, 2007 of $22,177,000
    
    $
    37,210,000
    
    
    $
    39,731,000Equipment loans, including
interest at 9.9% to 11.1% through October 2007
collateralized by equipment at several KFC
restaurants
    
    
    148,000
    
    
    
    742,00037,358,000
    
    
    
    40,473,000Less long term debt, current
    
    
    2,913,000
    
    
    
    3,116,000$
    34,445,000
    
    
    $
    37,357,000
  2008
    
    $
    2,913,0002009
    
    
    3,046,0002010
    
    
    3,313,0002011
    
    
    3,603,0002012
    
    
    3,844,000Later years
    
    
    20,639,000$
    37,358,000
   32




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 6. LEASE OBLIGATIONS AND OTHER COMMITMENTS
  2007
    
    
    2006Leased property:Buildings and land
    
    $
    1,417,000
    
    
    $
    1,298,000Equipment, furniture and fixtures
    
    
    16,000
    
    
    
    Total
    
    
    1,433,000
    
    
    
    1,298,000Less accumulated amortization
    
    
    269,000
    
    
    
    187,000$
    1,164,000
    
    
    $
    1,111,000
    2007
    
    
    2006Capital lease obligations
    
    $
    1,458,000
    
    
    $
    1,218,000Less current maturities
    
    
    159,000
    
    
    
    24,000Long-term capital lease obligations
    
    $
    1,299,000
    
    
    $
    1,194,000
  33




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##### Table of Contents



MORGANS FOODS, INC.
  2008
    
    $
    159,0002009
    
    
    160,0002010
    
    
    161,0002011
    
    
    161,0002012
    
    
    160,000Later years
    
    
    1,911,0002,712,000Less amount representing
interest at 10.0%
    
    
    1,254,000Total obligations under
capital leases
    
    $
    1,458,000
   34




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##### Table of Contents



MORGANS FOODS, INC.
   NumberFiscal Year
    
    Of Units
    
    
    Obiligation (1)2008 Image enhancements
    
    
    10
    
    
    $
    2,300,0002008 relocations
    
    
    1
    (2)
    
    
    1,400,0002009 Image enhancements
    
    
    10
    
    
    
    2,725,0002010 Image enhancements
    
    
    14
    
    
    
    3,650,0002011 Image enhancements
    
    
    10
    
    
    
    2,650,0002011 relocations
    
    
    1
    (2)
    
    
    750,0002014 Image enhancements
    
    
    1
    
    
    
    800,0002015 relocations
    
    
    4
    (2)
    
    
    5,000,0002016 relocations
    
    
    1
    (2)
    
    
    1,400,0002020 Image enhancements
    
    
    3
    
    
    
    2,900,0002020 relocations
    
    
    4
    (2)
    
    
    5,700,00059
    
    
    $
    29,275,000
 
 (1)
    
    These amounts are based on current construction cost estimates and actual costs
may vary.(2)
    
    Generally at the time relocation of an existing restaurant is required, the
related assets have been depreciated or amortized to a low net book value. If an
economically suitable new location cannot be obtained, the Company may choose to close
the restaurant and abandon the remaining assets. 35




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##### Table of Contents



MORGANS FOODS, INC.
  NOTE 7. NET INCOME (LOSS) PER COMMON SHARE
  NOTE 8. INCOME TAXES
   2007
    
    2006
    
    2005Tax provision (benefit) at statutory rate
    
    $
    1,237,000
    
    
    $
    1,138,000
    
    
    $
    (438,000
    )State and local taxes, net of federal benefit
    
    
    80,000
    
    
    
    9,000
    
    
    
    5,000Deferred tax provision-change in valuation allowance
    
    
    (1,451,000
    )
    
    
    (1,515,000
    )
    
    
    1,296,000Deferred tax provision-change in deferred state and
local income taxes
    
    
    191,000
    
    
    
    165,000
    
    
    
    (52,000
    )Expiration of operating loss carryforwards
    
    
    
    
    
    
    
    
    
    
    204,000Other
    
    
    79,000
    
    
    
    16,000
    
    
    
    (125,000
    )$
    136,000
    
    
    $
    (187,000
    )
    
    $
    890,000
 36




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##### Table of Contents



MORGANS FOODS, INC.
  2007
    
    
    2006Operating loss carryforwards
    
    $
    974,000
    
    
    $
    1,981,000Tax credit carryforwards
    
    
    173,000
    
    
    
    125,000Property and equipment
    
    
    2,683,000
    
    
    
    2,662,000Deferred gain on sale/leaseback
    
    
    128,000
    
    
    
    145,000Accrued expenses not currently deductible
    
    
    889,000
    
    
    
    894,000Prepaid expenses
    
    
    (158,000
    )
    
    
    Inventory valuation
    
    
    6,000
    
    
    
    5,000Advance payments
    
    
    230,000
    
    
    
    284,000Intangible assets
    
    
    (80,000
    )
    
    
    (75,000
    )Deferred tax asset valuation allowance
    
    
    (4,020,000
    )
    
    
    (5,471,000
    )Net deferred tax asset
    
    $
    825,000
    
    
    $
    550,000Deferred tax liabilities associated with
indefinite lived intangiable assets
    
    
    (1,577,000
    )
    
    
    (1,331,000
    )Net total deferred taxes
    
    $
    (752,000
    )
    
    $
    (781,000
    )
   2023
    
    $
    674,0002024
    
    
    383,0002025
    
    
    1,481,000Total
    
    $
    2,538,000
  37




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 9. STOCK OPTIONS AND SHAREHOLDERS EQUITY
      Number
    
    Average
    
    Number of SharesOutstanding at
    
    Remaining
    
    Exercisable atExercise Prices
    
    2/25/07
    
    Life
    
    2/25/07$3.00
    
    
    10,100
    
    
    
    2.9
    
    
    
    10,100$4.13
    
    
    113,900
    
    
    
    2.1
    
    
    
    113,900124,000
    
    
    
    2.2
    
    
    
    124,000
 38




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##### Table of Contents



MORGANS FOODS, INC.
    NOTE 10. 401(k) RETIREMENT PLAN
  NOTE 11. FAIR VALUE OF FINANCIAL INSTRUMENTS
  39




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 12. NEW ACCOUNTING STANDARDS
    40




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##### Table of Contents



MORGANS FOODS, INC.
 NOTE 13. SELECTED QUARTERLY FINANCIAL DATE (UNAUDITED)
 Fiscal 2007 Quarter EndedMay 21,
    
    August 13,
    
    November 5,
    
    February 25,2006
    
    2006
    
    2006
    
    2007Revenues
    
    $
    21,101,000
    
    
    $
    22,543,000
    
    
    $
    21,782,000
    
    
    $
    25,822,000Operating costs and expenses, net
    
    
    19,198,000
    
    
    
    20,272,000
    
    
    
    19,792,000
    
    
    
    24,665,000Operating income
    
    
    1,903,000
    
    
    
    2,271,000
    
    
    
    1,990,000
    
    
    
    1,157,000Net income
    
    
    899,000
    
    
    
    1,289,000
    
    
    
    1,002,000
    
    
    
    337,000Basic net income per share
    
    
    0.33
    
    
    
    0.47
    
    
    
    0.37
    
    
    
    0.12Fully diluted net income per share
    
    
    0.32
    
    
    
    0.46
    
    
    
    0.35
    
    
    
    0.12
 Fiscal 2006 Quarter EndedMay 22,
    
    August 14,
    
    November 6,
    
    February 26,2005
    
    2005
    
    2005
    
    2006Revenues
    
    $
    20,760,000
    
    
    $
    21,558,000
    
    
    $
    20,006,000
    
    
    $
    25,133,000Operating costs and expenses, net
    
    
    18,526,000
    
    
    
    19,519,000
    
    
    
    18,385,000
    
    
    
    23,764,000Operating income
    
    
    2,234,000
    
    
    
    2,039,000
    
    
    
    1,621,000
    
    
    
    1,369,000Net income
    
    
    1,192,000
    
    
    
    1,019,000
    
    
    
    630,000
    
    
    
    596,000Basic net income per share
    
    
    0.44
    
    
    
    0.37
    
    
    
    0.23
    
    
    
    0.22Fully diluted net income per share
    
    
    0.43
    
    
    
    0.37
    
    
    
    0.23
    
    
    
    0.21
  41




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##### Table of Contents



MORGANS FOODS, INC.
 
 INDEX TO EXHIBITS
 ITEM 14 (A)(3)
 ExhibitNumber
    
    Exhibit Description3.1
    
    
    Amended Articles of Incorporation, as amended (1)3.2
    
    
    Amended Code of Regulations (1)4.1
    
    
    Specimen Certificate for Common Shares (2)4.2
    
    
    Shareholder Rights Plan (3)4.3
    
    
    Amendment to Shareholder Rights Agreement (9)10.1
    
    
    Specimen KFC Franchise Agreements (4)10.2
    
    
    Specimen Taco Bell Franchise Agreement (5)10.3
    
    
    Executive and Manager Nonqualified Stock Option Plan (6)10.4
    
    
    Key Employee Nonqualified Stock Option Plan (6)10.6
    
    
    Form Mortgage Loan Agreement with Captec Financial Group, Inc. (7)14
    
    
    Code of Ethics for Senior Financial Officers (8)19
    
    
    Form of Indemnification Contract between Registrant and its Officers and Directors (6)21
    
    
    Subsidiaries23.1
    
    
    Consent of Independent Registered Public Accounting Firm  Grant Thornton LLP23.2
    
    
    Consent of Independent Registered Public Accounting Firm  Deloitte & Touche LLP31.1
    
    
    Certification of the Chairman 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 200231.2
    
    
    Certification of the Senior Vice President, Chief Financial Officer & 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 200232.1
    
    
    Certification of the Chairman of
the Board and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 200232.2
    
    
    Certification of the Senior Vice President, Chief Financial Officer and
Secretary pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
 
 (1)
    
    Filed as an exhibit to Registrants Form 10-K for the 1992 fiscal year and incorporated
herein by reference.(2)
    
    Filed as an exhibit to the Registrants Registration Statement (No. 33-35772) on Form S-2
and incorporated herein by reference.(3)
    
    Filed as an exhibit to the Registrants Form 8-A dated May 7, 1999 and incorporated herein
by reference.(4)
    
    Filed as an exhibit to the Registrants Registration Statement (No. 2-78035) on Form S-1
and incorporated herein by reference.(5)
    
    Filed as an exhibit to Registrants Form 10-K for the 2000 fiscal year and incorporated
herein by reference.(6)
    
    Filed as an exhibit to the Registrants Form S-8 filed November 17, 1999 and incorporated
herein by reference.(7)
    
    Filed as an exhibit to the Registrants Form 10-K for the 1996 fiscal year and incorporated
herein by reference.(8)
    
    Filed as an exhibit to the Registrants Form 10-K for the 2004 fiscal year and incorporated
herein by reference.(9)
    
    Filed as an exhibit to the Registrants Form 8-A/A filed June 9, 2003 and incorporated
herein by reference. 42




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##### Table of Contents



SIGNATURES
  Morgans Foods, Inc.Dated: May 29, 2007
    
    /s/ Leonard R. Stein-SapirBy:
    
    Leonard R. Stein-SapirChairman of the Board,Chief Executive Officer & Director
  /s/
    
    Leonard R. Stein-Sapir
    
    /s/
    
    Lawrence S. DolinBy:
    
    Leonard R. Stein-Sapir
    
    By:
    
    Lawrence S. DolinChairman of the Board,
    
    
    
    DirectorChief Executive Officer & Director
    
    
    
    Dated: May 29, 2007Dated: May 29, 2007/s/
    
    James J. Liguori
    
    /s/
    
    Bahman GuyuronBy:
    
    James J. Liguori
    
    By:
    
    Bahman GuyuronDirector, President &
    
    
    
    DirectorChief Operating Officer
    
    
    
    Dated: May 29, 2007Dated: May 29, 2007/s/
    
    Kenneth L. Hignett
    
    /s/
    
    Steven S. KaufmanBy:
    
    Kenneth L. Hignett
    
    By:
    
    Steven S. KaufmanDirector, Senior Vice President,
    
    
    
    DirectorChief Financial Officer & Secretary
    
    
    
    Dated: May 29, 2007Dated: May 29, 2007/s/
    
    Bernard LernerBy:
    
    Bernard LernerDirectorDated: May 29, 2007
 43