UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 14, 2011
MORGAN’S FOODS, INC.
(Exact name of registrant as specified in its charter)
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| Ohio
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1-08395
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34-0562210 |
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(State or other jurisdiction of
incorporation or organization)
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(Commission IRS
File Number)
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(Employer
Identification Number) |
4829 Galaxy Parkway, Suite S, Cleveland, OH 44128
(Address of principal executive officers) (Zip Code)
Registrant’s telephone number, including area code: (216) 359-9000
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions (see General Instruction
A.2. below):
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Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
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Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
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Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
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Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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On March 14, 2011, the Company received a notice of termination from KFC Corporation (“KFCC” or
“KFC”) terminating the Company’s franchise agreements for the following Company operated KFC
restaurants: New Kensington, PA; Youngstown, OH; Warren, OH; Rochester, PA; Natrona Heights, PA;
Aliquippa, PA; New Stanton, PA; Waynesburg, PA; Ashtabula, OH; and Conneaut Lake, PA for failure to
comply with KFCC’s image enhancement obligations.
The notice of termination letter asserts that the Company has not met its obligations under the
Pre-Negotiation Agreement entered into on or about November 8, 2010 and states that the forbearance
period set forth in the Pre-Negotiation Agreement has ended and that KFCC has elected to exercise
its right to terminate the franchise agreements for the above-referenced locations pursuant to the
franchise agreements. As a result of the terminations, KFCC informed the Company that by March 20,
2011 the Company must, in summary (i) immediately cease operations and doing business at those
locations under the KFC name or trademarks, (ii) discontinue the use of KFC’s service marks,
trademarks, and trade names, (iii) cease making or using of any trade secrets, trademarks or
information imparted by KFCC (and not disclose such information to others), (iv) return all
confidential material and operating manuals, etc. to KFCC, (v) renovate or refurbish the outlets
sufficiently to eliminate any impression that the outlet is connected with KFCC in any manner, and
(vi) remove the red and white KFC striping of the outlets.
As previously disclosed on a Form 8-K filed with the SEC on November 10, 2010, the Company and KFCC
entered into a Pre-Negotiation Agreement outlining the conditions of reaching a final agreement
related to the Company’s required image enhancement obligations. Under the Pre-Negotiation
Agreement KFCC agreed to forbear from terminating its franchise agreements with the Company until
January 31, 2011 as long as the Company was in compliance with certain forbearance conditions,
which include, among others, that (i) the Company is paid up on amounts owing under the franchise
agreements, (ii) the Company is not in default of its obligations under the franchise agreements
(other than the image enhancement obligations), and (iii) the Company submits to KFCC a written
proposal within 30 days detailing how the Company will obtain the necessary funds to enable it to
comply with the Company’s image enhancement obligations. On November 1, 2010 in a Form 8-K filed
with the SEC the Company had also previously disclosed the receipt of notice of defaults on the ten
Company restaurants which are the subject of the termination notices. The notices of default
stated that unless the Company corrects the defaults by November 7, 2010 that KFC would exercise
its right to terminate the franchise agreements. The agreements were not terminated at that time
instead KFCC and the Company entered into the Pre-Negotiation Agreement described above.
The Company submitted a written proposal to KFCC on January 21, 2011 outlining the details of the
Company’s image enhancement schedule and commitment of the Company’s resources, including current
cash flow and proceeds from financing activities, to the completion of the schedule and has been in
active dialog with KFCC regarding the Company’s commitment to obtain the financing necessary to
complete the required image enhancements. As part of the
Company’s efforts to obtain the necessary financings on November 23, 2010, the Company engaged
Brookwood Associates, a financial advisory firm that provides investment banking services for
middle-market clients. Since Brookwood’s founding in 1989, it has executed a broad range of
complex mergers and acquisitions, financings, restructurings and advisory assignments.
As a result of the franchise terminations described above the Company has notified the effected
lenders of the termination and is in active discussions with the lenders on refinancing certain of
the Company’s outstanding debt. The franchise terminations constitute an event of default under
the debt covering nine of the ten effected locations and therefore the lenders have the right to
accelerate the debt obligations. There can be no assurance that the Company (i) will be successful
in renegotiating the Company’s debt obligations on the affected restaurants, (ii) will be able to
reach an agreement with KFCC regarding image enhancements that would extend the time periods for
completion of the required image enhancements which would rescind the terminations of the franchise
agreements for the affected restaurants, or (iii) will complete the restructuring or that the
restructuring will create the ability for the Company to complete a satisfactory number of image
enhancements.
The termination of the franchise agreements described will have a material adverse effect on the
Company’s financial condition and results of operations. At this time, however, it is unclear,
what, if any, action the Company’s landlords and lenders may take under cross default provisions of
the Company’s agreements. Any negative actions would further impede the Company’s ability to
satisfy its obligations and continue operations.