##### 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 August 13, 2006
 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.)24200 Chagrin Boulevard, Suite 126, Beachwood, Ohio
    
    44122(Address of principal executive offices)
    
    (Zip Code)
 (216) 360-7500
  þ o
 
 Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
 o þ




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TABLE OF CONTENTS  PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)MORGANS FOODS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)MORGANS FOODS, INC. CONSOLIDATED BALANCE SHEETS (UNAUDITED)MORGANS FOODS, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (DEFICIENCY) (UNAUDITED)MORGANS FOODS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)MORGANS FOODS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) August 13, 2006 (Unaudited)Item 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 (Unaudited)
 
 
 Quarter EndedAugust 13, 2006
    
    
    August 14, 2005as restated; seeNote 5Revenues
    
    $
    22,543,000
    
    
    $
    21,558,000Cost of sales:Food, paper and beverage
    
    
    6,910,000
    
    
    
    6,621,000Labor and benefits
    
    
    5,858,000
    
    
    
    5,511,000Restaurant operating expenses
    
    
    5,582,000
    
    
    
    5,451,000Depreciation and amortization
    
    
    722,000
    
    
    
    762,000General and adminstrative expenses
    
    
    1,220,000
    
    
    
    1,316,000Gain on restaurant assets (Note 3)
    
    
    (20,000
    )
    
    
    (142,000
    )Operating income
    
    
    2,271,000
    
    
    
    2,039,000Interest expense:Bank debt and notes payable
    
    
    873,000
    
    
    
    946,000Capital leases
    
    
    27,000
    
    
    
    20,000Other income and expense, net
    
    
    (78,000
    )
    
    
    (11,000
    )Net income before income taxes
    
    
    1,449,000
    
    
    
    1,084,000Provision for income taxes
    
    
    160,000
    
    
    
    65,000Net income
    
    
    1,289,000
    
    
    
    1,019,000Basic net income per common share
    
    $
    0.47
    
    
    $
    0.37Diluted net income per common share
    
    $
    0.46
    
    
    $
    0.37Basic weighted average number of shares outstanding
    
    
    2,718,495
    
    
    
    2,718,495Diluted weighted average number of shares outstanding
    
    
    2,820,397
    
    
    
    2,725,865
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##### Table of Contents



PART I. FINANCIAL INFORMATION
 Item 1. Financial Statements (Unaudited)
 
 Twenty-Four Weeks EndedAugust 13, 2006
    
    
    August 14, 2005as restated; seeNote 5Revenues
    
    $
    43,644,000
    
    
    $
    42,318,000Cost of sales:Food, paper and beverage
    
    
    13,550,000
    
    
    
    13,042,000Labor and benefits
    
    
    11,353,000
    
    
    
    10,855,000Restaurant operating expenses
    
    
    10,793,000
    
    
    
    10,566,000Depreciation and amortization
    
    
    1,445,000
    
    
    
    1,512,000General and adminstrative expenses
    
    
    2,355,000
    
    
    
    2,467,000Gain on restaurant assets (Note 3)
    
    
    (26,000
    )
    
    
    (397,000
    )Operating income
    
    
    4,174,000
    
    
    
    4,273,000Interest expense:Bank debt and notes payable
    
    
    1,792,000
    
    
    
    1,941,000Capital leases
    
    
    54,000
    
    
    
    31,000Other income and expense, net
    
    
    (101,000
    )
    
    
    (40,000
    )Net income before income taxes
    
    
    2,429,000
    
    
    
    2,341,000Provision for income taxes
    
    
    241,000
    
    
    
    130,000Net income
    
    
    2,188,000
    
    
    
    2,211,000Basic net income per common share
    
    $
    0.80
    
    
    $
    0.81Diluted net income per common share
    
    $
    0.78
    
    
    $
    0.81Basic weighted average number of shares outstanding
    
    
    2,718,495
    
    
    
    2,718,495Diluted weighted average number of shares outstanding
    
    
    2,813,593
    
    
    
    2,724,505
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August 13,
    
    
    February 26,2006
    
    
    2006(UNAUDITED)ASSETSCurrent assets:Cash and equivalents
    
    $
    7,446,000
    
    
    $
    6,415,000Receivables
    
    
    223,000
    
    
    
    332,000Inventories
    
    
    724,000
    
    
    
    643,000Prepaid expenses
    
    
    435,000
    
    
    
    856,0008,828,000
    
    
    
    8,246,000Property and equipment:Land
    
    
    10,462,000
    
    
    
    10,462,000Buildings and improvements
    
    
    19,818,000
    
    
    
    19,688,000Property under capital leases
    
    
    1,298,000
    
    
    
    1,298,000Leasehold improvements
    
    
    7,467,000
    
    
    
    7,436,000Equipment, furniture and fixtures
    
    
    20,186,000
    
    
    
    19,964,000Construction in progress
    
    
    554,000
    
    
    
    55,00059,785,000
    
    
    
    58,903,000Less accumulated depreciation and amortization
    
    
    30,007,000
    
    
    
    28,678,00029,778,000
    
    
    
    30,225,000Other assets
    
    
    874,000
    
    
    
    925,000Franchise agreements
    
    
    1,550,000
    
    
    
    1,578,000Deferred tax asset
    
    
    550,000
    
    
    
    550,000Goodwill
    
    
    9,227,000
    
    
    
    9,227,000$
    50,807,000
    
    
    $
    50,751,000LIABILITIES AND SHAREHOLDERS EQUITY (DEFICIENCY)Current liabilities:Long-term debt, current
    
    $
    3,033,000
    
    
    $
    3,116,000Current maturities of capital lease obligations
    
    
    26,000
    
    
    
    24,000Accounts payable
    
    
    3,786,000
    
    
    
    4,308,000Accrued liabilities
    
    
    3,969,000
    
    
    
    4,100,00010,814,000
    
    
    
    11,548,000Long-term debt (Note 4)
    
    
    35,878,000
    
    
    
    37,357,000Long-term capital lease obligations
    
    
    1,181,000
    
    
    
    1,194,000Other long-term liabilities
    
    
    1,469,000
    
    
    
    1,507,000Deferred tax liabilities
    
    
    1,463,000
    
    
    
    1,331,000SHAREHOLDERS EQUITY (DEFICIENCY)Preferred 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
    
    
    (28,573,000
    )
    
    
    (30,761,000
    )Total shareholders equity (deficiency)
    
    
    2,000
    
    
    
    (2,186,000
    )$
    50,807,000
    
    
    $
    50,751,000
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Capital in
    
    
    
    
    
    
    TotalCommon Shares
    
    
    Treasury Shares
    
    
    excess of
    
    
    Accumulated
    
    
    ShareholdersShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    stated value
    
    
    Deficit
    
    
    Equity (Deficiency)Balance February 26, 2006
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    250,910
    
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (30,761,000
    )
    
    $
    (2,186,000
    )Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,188,000
    
    
    
    2,188,000Balance August 13, 2006
    
    
    2,969,405
    
    
    $
    30,000
    
    
    
    250,910
    
    
    $
    (284,000
    )
    
    $
    28,829,000
    
    
    $
    (28,573,000
    )
    
    $
    2,000
  5




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Twenty-Four Weeks EndedAugust 13, 2006
    
    
    August 14, 2005OPERATING ACTIVITIESNet income
    
    $
    2,188,000
    
    
    $
    2,211,000Adjustments to reconcile to net cash provided by
operating activities:Depreciation and amortization
    
    
    1,445,000
    
    
    
    1,512,000Amortization of deferred financing costs
    
    
    51,000
    
    
    
    54,000Amortization of supply agreement advances
    
    
    (340,000
    )
    
    
    (327,000
    )Funding from supply agreements
    
    
    41,000
    
    
    
    52,000Increase in tax liabilities
    
    
    132,000
    
    
    
    130,000Gain on restaurant assets (Note 3)
    
    
    (26,000
    )
    
    
    (397,000
    )Change in assets and liabilities:Decrease in receivables
    
    
    109,000
    
    
    
    104,000Increase in inventories
    
    
    (81,000
    )
    
    
    (54,000
    )Decrease in prepaid expenses
    
    
    421,000
    
    
    
    233,000Increase (decrease) in accounts payable
    
    
    (523,000
    )
    
    
    159,000Increase in accrued liabilities and other
    
    
    168,000
    
    
    
    241,000NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    
    3,585,000
    
    
    
    3,918,000INVESTING ACTIVITIESCapital expenditures
    
    
    (945,000
    )
    
    
    (811,000
    )Purchase of franchise agreement
    
    
    (36,000
    )
    
    
    Insurance Proceeds
    
    
    
    
    
    
    405,000NET CASH (USED) PROVIDED BY INVESTING ACTIVITIES
    
    
    (981,000
    )
    
    
    (406,000
    )FINANCING ACTIVITIESPrincipal payments on long-term debt
    
    
    (1,562,000
    )
    
    
    (1,649,000
    )Principal payments on capital lease obligations
    
    
    (11,000
    )
    
    
    (9,000
    )Proceeds from sale leaseback
    
    
    
    
    
    
    912,000NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES
    
    
    (1,573,000
    )
    
    
    (746,000
    )NET CHANGE IN CASH AND EQUIVALENTS
    
    
    1,031,000
    
    
    
    2,766,000Cash and equivalents, beginning balance
    
    
    6,415,000
    
    
    
    3,654,000CASH AND EQUIVALENTS, ENDING BALANCE
    
    $
    7,446,000
    
    
    $
    6,420,000
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NOTE 1  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
    NOTE 2  NET INCOME PER COMMON SHARE
  NOTE 3  GAIN ON RESTAURANT ASSETS
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NOTE 4  DEBT
  NOTE 5  RESTATEMENT
   For the Quarter Ended August 14, 2005As PreviouslyReported
    
    Adjustment
    
    As RestatedConsolidated Statement of OperationsIncome tax expense
    
    $
    
    
    
    $
    65,000
    
    
    $
    65,000Net income
    
    
    1,084,000
    
    
    
    (65,000
    )
    
    
    1,019,000Net income per share-basic
    
    
    0.40
    
    
    
    (0.03
    )
    
    
    0.37-diluted
    
    
    0.40
    
    
    
    (0.03
    )
    
    
    0.37
 For the 24 Weeks Ended August 14, 2005As PreviouslyReported
    
    Adjustment
    
    As RestatedConsolidated Statement of OperationsIncome tax expense
    
    $
    
    
    
    $
    130,000
    
    
    $
    130,000Net income
    
    
    2,341,000
    
    
    
    (130,000
    )
    
    
    2,211,000Net income per share-basic
    
    
    0.86
    
    
    
    (0.05
    )
    
    
    0.81-diluted
    
    
    0.86
    
    
    
    (0.05
    )
    
    
    0.81
 For the 24 Weeks Ended August 14, 2005As PreviouslyReported
    
    Adjustment
    
    As RestatedConsolidated Statement of Cash FlowsNet income
    
    $
    2,341,000
    
    
    $
    (130,000
    )
    
    $
    2,211,000Increase in tax liability
    
    
    
    
    
    
    130,000
    
    
    
    130,000
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NOTE 6STOCK OPTIONS
   ®
   Number
    
    Average
    
    NumberOutstanding
    
    Remaining
    
    ExercisableExercise Prices
    
    at 8/13/06
    
    Life
    
    at 8/13//06$0.85
    
    
    11,500
    
    
    
    4.7
    
    
    
    11,500$3.00
    
    
    129,850
    
    
    
    3.4
    
    
    
    129,850$4.13
    
    
    145,150
    
    
    
    2.6
    
    
    
    145,150286,500
    
    
    
    3.0
    
    
    
    286,500
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Description of Business
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Summary of Expenses and Operating Income as a Percentage of Revenues
 Quarter Ended
    
    
    YTD EndedAugust 13, 2006
    
    August 14, 2005
    
    
    August 13, 2006
    
    August 14, 2005Cost of sales:Food, paper and beverage
    
    
    30.7
    %
    
    
    30.7
    %
    
    
    
    31.0
    %
    
    
    30.8
    %Labor and benefits
    
    
    26.0
    %
    
    
    25.6
    %
    
    
    
    26.0
    %
    
    
    25.7
    %Restaurant operating expenses
    
    
    24.8
    %
    
    
    25.3
    %
    
    
    
    24.7
    %
    
    
    25.0
    %Depreciation and amortization
    
    
    3.2
    %
    
    
    3.5
    %
    
    
    
    3.3
    %
    
    
    3.6
    %General and administrative
expenses
    
    
    5.4
    %
    
    
    6.1
    %
    
    
    
    5.4
    %
    
    
    5.8
    %Operating income
    
    
    10.1
    %
    
    
    9.5
    %
    
    
    
    9.6
    %
    
    
    10.1
    %
 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
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Operating Income
 Interest Expense
 Other Income
 Provision for Income Taxes
 Liquidity and Capital Resources
  New Accounting Pronouncements
 11




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Seasonality
 Safe Harbor Statements
  
   
   12




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PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  13




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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
  MORGANS FOODS, INC./s/ Kenneth L. HignettSenior Vice President,Chief Financial Officer and Secretary
September 27, 2006 15