##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 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 21, 2006
  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
  
  Ohio
    
    34-0562210(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification Number)
 24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio
    
    44122(Address of principal executive offices)
    
    (Zip Code)
  
  
  ü
  Large accelerated filer
    
    Accelerated filer
    
    Non-accelerated filer  ü
  Yes       No  ü
    1




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial Statements.Morgans Foods, Inc.CONSOLIDATED STATEMENTS OF OPERATIONSMorgans Foods, Inc.CONSOLIDATED BALANCE SHEETS(unaudited)Morgans Foods, Inc.CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIENCY(unaudited)Morgans Foods, Inc.CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)NOTES TO CONSOLIDATED FINANCIAL STATEMENTS            QUARTERS ENDED MAY 21, 2006 AND MAY 22, 2005Note 1. Summary of Significant Accounting PoliciesNote 2. Net Income Per Common ShareNote 3. Gain on Restaurant AssetsNote 4. DebtNote 5. RestatementItem 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.Summary of Expenses and Operating Income as a Percentage of RevenuesItem 3. Quantitative and Qualitative Disclosures About Market Risk.Item 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  
  
  
  
   Quarter EndedMay 21, 2006
    
    
    May 22, 2005(as restated see Note
5)Revenues
    
    $
    21,101,000
    
    
    $
    20,760,000Cost of sales:Food, paper and beverage
    
    
    6,640,000
    
    
    
    6,421,000Labor and benefits
    
    
    5,495,000
    
    
    
    5,344,000Restaurant operating expenses
    
    
    5,211,000
    
    
    
    5,115,000Depreciation and amortization
    
    
    723,000
    
    
    
    750,000General and administrative expenses
    
    
    1,135,000
    
    
    
    1,151,000Gain on restaurant assets (Note 3)
    
    
    (6,000
    )
    
    
    (255,000
    )Operating income
    
    
    1,903,000
    
    
    
    2,234,000Interest Expense:Bank debt and notes payable
    
    
    (919,000
    )
    
    
    (995,000
    )Capital leases
    
    
    (27,000
    )
    
    
    (11,000
    )Other income and expense, net
    
    
    23,000
    
    
    
    29,000Net income before income taxes
    
    
    980,000
    
    
    
    1,257,000Provision for income taxes
    
    
    81,000
    
    
    
    65,000Net income
    
    $
    899,000
    
    
    $
    1,192,000Basic net income per common share
    
    $
    .33
    
    
    $
    .44Diluted net income per common share
    
    $
    .32
    
    
    $
    .43Basic weighted average number of
shares outstanding
    
    
    2,718,495
    
    
    
    2,718,495Diluted weighted average number of
shares outstanding
    
    
    2,806,030
    
    
    
    2,721,879
 See notes to consolidated financial statements.
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##### Table of Contents



Morgans Foods, Inc.
 
 CONSOLIDATED BALANCE SHEETS
 
 (unaudited)
 May 21, 2006
    
    
    February 26, 2006ASSETSCurrent assets:Cash and equivalents
    
    $
    7,127,000
    
    
    $
    6,415,000Receivables
    
    
    328,000
    
    
    
    332,000Inventories
    
    
    717,000
    
    
    
    643,000Prepaid expenses
    
    
    737,000
    
    
    
    856,0008,909,000
    
    
    
    8,246,000Property and equipment:Land
    
    
    10,462,000
    
    
    
    10,462,000Buildings and improvements
    
    
    19,727,000
    
    
    
    19,688,000Property under capital leases
    
    
    1,298,000
    
    
    
    1,298,000Leasehold improvements
    
    
    7,451,000
    
    
    
    7,436,000Equipment, furniture and fixtures
    
    
    20,041,000
    
    
    
    19,964,000Construction in progress
    
    
    248,000
    
    
    
    55,00059,227,000
    
    
    
    58,903,000Less accumulated depreciation and amortization
    
    
    29,337,000
    
    
    
    28,678,00029,890,000
    
    
    
    30,225,000Other assets
    
    
    899,000
    
    
    
    925,000Deferred tax asset
    
    
    550,000
    
    
    
    550,000Franchise agreements
    
    
    1,556,000
    
    
    
    1,578,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    51,031,000
    
    
    $
    50,751,000LIABILITIES AND SHAREHOLDERS DEFICIENCYCurrent liabilities:Long-term debt, current
    
    $
    3,086,000
    
    
    $
    3,116,000Current maturities of capital lease obligations
    
    
    25,000
    
    
    
    24,000Accounts payable
    
    
    4,675,000
    
    
    
    4,308,000Accrued liabilities
    
    
    3,836,000
    
    
    
    3,976,00011,622,000
    
    
    
    11,424,000Long-term debt (Note 4)
    
    
    36,587,000
    
    
    
    37,357,000Long-term capital lease obligations
    
    
    1,187,000
    
    
    
    1,194,000Other long-term liabilities
    
    
    1,525,000
    
    
    
    1,631,000Deferred tax liabilities
    
    
    1,397,000
    
    
    
    1,331,000SHAREHOLDERS DEFICIENCYPreferred shares, 1,000,000 shares authorized,
no shares outstandingCommon StockAuthorized
shares - 25,000,000Issued shares - 2,969,405
    
    
    30,000
    
    
    
    30,000Treasury
shares - 250,910
    
    
    (284,000
    )
    
    
    (284,000
    )Capital in excess of stated value
    
    
    28,829,000
    
    
    
    28,829,000Accumulated deficit
    
    
    (29,862,000
    )
    
    
    (30,761,000
    )Total shareholders deficiency
    
    
    (1,287,000
    )
    
    
    (2,186,000
    )$
    51,031,000
    
    
    $
    50,751,000
 See notes to consolidated financial statements.
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Capital in
    
    
    
    
    
    
    TotalCommon Shares
    
    
    Treasury Shares
    
    
    excess of
    
    
    Accumulated
    
    
    Shareholders'Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    stated value
    
    
    Deficit
    
    
    DeficiencyBalance February 26, 2006
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (250,910
    )
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (30,761,000
    )
    
    $
    (2,186,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    899,000
    
    
    
    899,000Balance May 21, 2006
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (250,910
    )
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (29,862,000
    )
    
    $
    (1,287,000
    )
 See notes to consolidated financial statements
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Quarter EndedMay 21, 2006
    
    
    May 22, 2005(as restatedsee Note 5)Cash flows from operating activities:Net income
    
    $
    899,000
    
    
    $
    1,192,000Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    723,000
    
    
    
    752,000Amortization of deferred financing costs
    
    
    26,000
    
    
    
    26,000Amortization of supply agreement advances
    
    
    (170,000
    )
    
    
    (164,000
    )Funding from supply agreements
    
    
    41,000
    
    
    
    51,000Increase in tax liabilities
    
    
    66,000
    
    
    
    65,000Gain on restaurant assets (Note 3)
    
    
    (6,000
    )
    
    
    (255,000
    )Change in assets and liabilities:Decrease in receivables
    
    
    4,000
    
    
    
    118,000Increase in inventories
    
    
    (74,000
    )
    
    
    (102,000
    )Decrease (increase) in prepaid expenses
    
    
    119,000
    
    
    
    (34,000
    )Increase in accounts payable
    
    
    367,000
    
    
    
    492,000Increase (decrease) in accrued liabilities
and other
    
    
    (105,000
    )
    
    
    389,000Net cash provided by operating activities
    
    
    1,890,000
    
    
    
    2,530,000Cash flows from investing activities:Capital expenditures
    
    
    (362,000
    )
    
    
    (465,000
    )Purchase of franchise agreement
    
    
    (10,000
    )
    
    
    Insurance Proceeds
    
    
    
    
    
    
    261,000Net cash used in investing activities
    
    
    (372,000
    )
    
    
    (204,000
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (800,000
    )
    
    
    (430,000
    )Principal payments on capital lease obligations
    
    
    (6,000
    )
    
    
    (3,000
    )Net cash used in financing activities
    
    
    (806,000
    )
    
    
    (433,000
    )Net change in cash and equivalents
    
    
    712,000
    
    
    
    1,893,000Cash and equivalents, beginning balance
    
    
    6,415,000
    
    
    
    3,654,000Cash and equivalents, ending balance
    
    $
    7,127,000
    
    
    $
    5,547,000
 See notes to consolidated financial statements.
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Note 1. Summary of Significant Accounting Policies
  
 Note 2. Net Income Per Common Share
  
 Note 3. Gain on Restaurant Assets
  
 Note 4. Debt
  
 Note 5. Restatement
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For the Quarter Ended May 22, 2005As PreviouslyReported
    
    
    Adjustment
    
    
    As RestatedConsolidated Statement of OperationsIncome tax expense
    
    $
    
    
    
    $
    65,000
    
    
    $
    65,000Net Income
    
    
    1,257,000
    
    
    
    (65,000
    )
    
    
    1,192,000Net income per share basic
    
    
    .46
    
    
    
    (0.02
    )
    
    
    0.44 diluted
    
    
    .46
    
    
    
    (0.03
    )
    
    
    0.43
 For the Quarter Ended May 22, 2005As PreviouslyReported
    
    
    Adjustment
    
    
    As RestatedConsolidated Statement of Cash FlowsNet Income
    
    $
    1,257,000
    
    
    $
    (65,000
    )
    
    $
    1,192,000Increase in tax liability
    
    
    
    
    
    
    65,000
    
    
    
    65,000
 
 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 21, 2006
    
    
    May 22, 2005Cost of sales:Food, paper and beverage
    
    
    31.5
    %
    
    
    30.9
    %Labor and benefits
    
    
    26.0
    %
    
    
    25.7
    %Restaurant operating expenses
    
    
    24.7
    %
    
    
    24.6
    %Depreciation and amortization
    
    
    3.4
    %
    
    
    3.6
    %General and administrative expenses
    
    
    5.4
    %
    
    
    5.5
    %Operating income
    
    
    9.0
    %
    
    
    10.8
    %
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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
 Other Income
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Provision for Income Taxes
 Liquidity and Capital Resources
  Seasonality
 Safe Harbor Statements.
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  9




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Item 4. Controls and Procedures.
   10




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PART II OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  11




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MORGANS FOODS, INC.
INDEX TO EXHIBITS
 ExhibitNumber
    
    Exhibit Description31.1
    
    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
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Morgans Foods, Inc.
(Registrant)Dated:  July 12, 2006
    By:
    /s/ Kenneth L. HignettKenneth L. HignettSenior Vice President,
Chief Financial Officer & Secretary 13