##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 For the period endedNovember 6, 2005
 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 Number)
 24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio
    
    44122(Address of principal executive offices)
    
    (Zip Code)
 (216) 360-7500
 
   þ o
  o þ
  o þ




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONItem 1. Financial StatementsPART 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 ProceduresINDEX TO EXHIBITSSIGNATURESEX-31.1 302 Certification for CEOEX-31.2 302 Certification for CFOEX-32.1 906 Certification for CEOEX-32.2 906 Certification for CFO    Table of Contents  
 PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Morgans Foods, Inc.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Quarter EndedNovember 6, 2005
    
    
    November 7, 2004Revenues
    
    $
    20,006,000
    
    
    $
    19,190,000Cost of sales:Food, paper and beverage
    
    
    6,285,000
    
    
    
    6,182,000Labor and benefits
    
    
    5,373,000
    
    
    
    5,290,000Restaurant operating expenses
    
    
    5,077,000
    
    
    
    4,927,000Depreciation and amortization
    
    
    745,000
    
    
    
    944,000General and administrative expenses
    
    
    1,225,000
    
    
    
    1,110,000(Gain)loss on restaurant assets
    
    
    (319,000
    )
    
    
    434,000Operating income
    
    
    1,620,000
    
    
    
    303,000Interest Expense:Bank debt and notes payable
    
    
    (924,000
    )
    
    
    (991,000
    )Capital leases
    
    
    (23,000
    )
    
    
    (11,000
    )Other income and expense, net
    
    
    21,000
    
    
    
    23,000Income (loss) before income taxes
    
    
    694,000
    
    
    
    (676,000
    )Provision for income taxes
    
    
    
    
    
    
    601,000Net income (loss)
    
    $
    694,000
    
    
    $
    (1,277,000
    )Basic net income (loss) per common share
    
    $
    .26
    
    
    $
    (.47
    )Diluted net income (loss) per common share
    
    $
    .25
    
    
    $
    (.47
    )Basic weighted average number of
shares outstanding
    
    
    2,718,495
    
    
    
    2,718,441Diluted weighted average number of
shares outstanding
    
    
    2,808,375
    
    
    
    2,718,441
 See notes to consolidated financial statements.
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PART I FINANCIAL INFORMATION
 
 Item 1. Financial Statements.
 Morgans Foods, Inc.
 CONSOLIDATED STATEMENTS OF OPERATIONS
 (unaudited)
 Thirty-Six Weeks EndedNovember 6, 2005
    
    
    November 7, 2004Revenues
    
    $
    62,324,000
    
    
    $
    57,324,000Cost of sales:Food, paper and beverage
    
    
    19,327,000
    
    
    
    18,057,000Labor and benefits
    
    
    16,228,000
    
    
    
    16,129,000Restaurant operating expenses
    
    
    15,643,000
    
    
    
    14,818,000Depreciation and amortization
    
    
    2,257,000
    
    
    
    2,504,000General and administrative expenses
    
    
    3,692,000
    
    
    
    3,505,000(Gain)loss on restaurant assets
    
    
    (717,000
    )
    
    
    726,000Operating income
    
    
    5,894,000
    
    
    
    1,585,000Interest Expense:Bank debt and notes payable
    
    
    (2,865,000
    )
    
    
    (3,037,000
    )Capital leases
    
    
    (54,000
    )
    
    
    (33,000
    )Other income and expense, net
    
    
    63,000
    
    
    
    62,000Income (loss) before income taxes
    
    
    3,038,000
    
    
    
    (1,423,000
    )Provision for income taxes
    
    
    2,000
    
    
    
    602,000Net income (loss)
    
    $
    3,036,000
    
    
    $
    (2,025,000
    )Basic net income (loss) per common share
    
    $
    1.12
    
    
    $
    (.74
    )Diluted net income (loss) per common share
    
    $
    1.11
    
    
    $
    (.74
    )Basic weighted average number of
shares outstanding
    
    
    2,718,495
    
    
    
    2,718,441Diluted weighted average number of
shares outstanding
    
    
    2,726,555
    
    
    
    2,718,441
 See notes to consolidated financial statements.
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Morgans Foods, Inc.
 CONSOLIDATED BALANCE SHEETS
 (unaudited)
 November 6, 2005
    
    
    February 27, 2005ASSETSCurrent assets:Cash and equivalents
    
    $
    5,157,000
    
    
    $
    3,654,000Receivables
    
    
    460,000
    
    
    
    392,000Inventories
    
    
    615,000
    
    
    
    588,000Prepaid expenses
    
    
    715,000
    
    
    
    589,0006,947,000
    
    
    
    5,223,000Property and equipment:Land
    
    
    10,462,000
    
    
    
    10,662,000Buildings and improvements
    
    
    19,552,000
    
    
    
    19,423,000Property under capital leases
    
    
    1,298,000
    
    
    
    435,000Leasehold improvements
    
    
    7,412,000
    
    
    
    7,210,000Equipment, furniture and fixtures
    
    
    19,772,000
    
    
    
    19,428,000Construction in progress
    
    
    96,000
    
    
    
    189,00058,592,000
    
    
    
    57,347,000Less accumulated depreciation and amortization
    
    
    27,742,000
    
    
    
    25,740,00030,850,000
    
    
    
    31,607,000Other assets
    
    
    960,000
    
    
    
    1,040,000Franchise agreements
    
    
    1,604,000
    
    
    
    1,693,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    49,588,000
    
    
    $
    48,790,000LIABILITIES AND SHAREHOLDERS DEFICIENCYCurrent liabilities:Long-term debt, current
    
    $
    3,147,000
    
    
    $
    43,682,000Current maturities of capital lease obligations
    
    
    24,000
    
    
    
    13,000Accounts payable
    
    
    3,607,000
    
    
    
    4,034,000Accrued liabilities
    
    
    3,739,000
    
    
    
    3,542,00010,517,000
    
    
    
    51,271,000Long-term debt
    
    
    38,112,000
    
    
    
    Long-term capital lease obligations
    
    
    1,204,000
    
    
    
    368,000Other long-term liabilities
    
    
    1,293,000
    
    
    
    1,725,000SHAREHOLDERS DEFICIENCYPreferred shares, 1,000,000 shares authorized,
no shares outstandingCommon StockAuthorized
shares  25,000,000Issued
shares  2,969,405
    
    
    30,000
    
    
    
    30,000Treasury
stock  250,910
    
    
    (284,000
    )
    
    
    (284,000
    )Capital in excess of stated value
    
    
    28,829,000
    
    
    
    28,829,000Accumulated deficit
    
    
    (30,113,000
    )
    
    
    (33,149,000
    )Total shareholders deficiency
    
    
    (1,538,000
    )
    
    
    (4,574,000
    )$
    49,588,000
    
    
    $
    48,790,000
 See notes to consolidated financial statements.
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Morgans Foods, Inc.
 CONSOLIDATED STATEMENT OF SHAREHOLDERS DEFICIENCY
 (unaudited)
 Capital in
    
    
    
    
    
    
    TotalCommon Shares
    
    
    Treasury Shares
    
    
    excess of
    
    
    Accumulated
    
    
    Shareholders'Shares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    stated value
    
    
    Deficit
    
    
    DeficiencyBalance February 27, 2005
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    (250,910
    )
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (33,149,000
    )
    
    $
    (4,574,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,036,000
    
    
    
    3,036,000Balance November 6, 2005
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    250,910
    
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (30,113,000
    )
    
    $
    (1,538,000
    )
 See notes to consolidated financial statements
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Morgans Foods, Inc.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 Thirty-Six Weeks EndedNovember 6, 2005
    
    
    November 7, 2004Cash flows from operating activities:Net income (loss)
    
    $
    3,036,000
    
    
    $
    (2,025,000
    )Adjustments to reconcile to net cash
provided by operating activities:Depreciation and amortization
    
    
    2,257,000
    
    
    
    2,420,000Amortization of deferred financing costs
    
    
    80,000
    
    
    
    84,000Amortization of supply agreement advances
    
    
    (490,000
    )
    
    
    (535,000
    )Funding from supply agreements
    
    
    52,000
    
    
    
    130,000(Gain) Loss on restaurant assets
    
    
    (717,000
    )
    
    
    726,000Business interruption insurance proceeds
    
    
    30,000
    
    
    
    Provision for deferred taxes
    
    
    
    
    
    
    600,000Change in assets and liabilities:(Increase) decrease in receivables
    
    
    (68,000
    )
    
    
    71,000Increase in inventories
    
    
    (20,000
    )
    
    
    (96,000
    )Increase in prepaid expenses
    
    
    (126,000
    )
    
    
    (661,000
    )Decrease in other assets
    
    
    
    
    
    
    110,000Increase (decrease) in accounts payable
    
    
    (427,000
    )
    
    
    349,000Decrease in accrued liabilities
    
    
    (92,000
    )
    
    
    (275,000
    )Net cash provided by operating activities
    
    
    3,515,000
    
    
    
    898,000Cash flows from investing activities:Capital expenditures
    
    
    (1,166,000
    )
    
    
    (665,000
    )Property insurance proceeds
    
    
    694,000
    
    
    
    Redemption of certificate of deposit
    
    
    
    
    
    
    300,000Purchase of franchise agreement
    
    
    (13,000
    )
    
    
    (25,000
    )Net cash used in investing activities
    
    
    (485,000
    )
    
    
    (390,000
    )Cash flows from financing activities:Principal payments on long-term debt
    
    
    (2,423,000
    )
    
    
    (2,197,000
    )Proceeds from sale leaseback
    
    
    912,000
    
    
    
    Principal payments on capital lease obligations
    
    
    (16,000
    )
    
    
    (49,000
    )Proceeds from issuance of long-term debt,
net of financing costs
    
    
    
    
    
    
    29,000Net cash used in financing activities
    
    
    (1,527,000
    )
    
    
    (2,217,000
    )Net change in cash and equivalents
    
    
    1,503,000
    
    
    
    (1,709,000
    )Cash and equivalents, beginning balance
    
    
    3,654,000
    
    
    
    4,353,000Cash and equivalents, ending balance
    
    $
    5,157,000
    
    
    $
    2,644,000
 See notes to consolidated financial statements.
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Morgans Foods, Inc.
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
QUARTERS ENDED NOVEMBER 6, 2005 AND NOVEMBER 7, 2004
(unaudited)
 Note 1. Summary of Significant Accounting Policies.
  Note 2. Income (Loss) Per Common Share.
  Note 3. (Gain) Loss on Restaurant Assets.
  Note 4. Long-Term Debt.
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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 EndedNov. 6, 2005
    
    Nov. 7, 2004
    
    Nov. 6, 2005
    
    Nov. 7, 2004Cost of sales:Food, paper and beverage
    
    
    31.4
    %
    
    
    32.2
    %
    
    
    31.0
    %
    
    
    31.5
    %Labor and benefits
    
    
    26.9
    %
    
    
    27.6
    %
    
    
    26.0
    %
    
    
    28.1
    %Restaurant operating expenses
    
    
    25.4
    %
    
    
    25.7
    %
    
    
    25.1
    %
    
    
    25.9
    %Depreciation and amortization
    
    
    3.7
    %
    
    
    4.9
    %
    
    
    3.6
    %
    
    
    4.4
    %General and administrative expenses
    
    
    6.1
    %
    
    
    5.8
    %
    
    
    5.9
    %
    
    
    6.1
    %Operating income
    
    
    8.1
    %
    
    
    1.6
    %
    
    
    9.5
    %
    
    
    2.8
    %
 Revenues
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Costs of Sales  Food, Paper and Beverages
 Cost of Sales  Labor and Benefits
 Restaurant Operating Expenses
 Depreciation and Amortization
 General and Administrative Expenses
 Gain) Loss on Restaurant Assets
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Operating Income
 Interest Expense
 Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
  10




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Market Risk Exposure
  Seasonality
 Safe Harbor Statements
  
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  11




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Item 4. Controls and Procedures.
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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 the 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 the 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:   December 21, 2005
    By:
    /s/ Kenneth L. HignettKenneth L. HignettSenior Vice President,
Chief Financial Officer & Secretary
 14