Form 10-Q

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (do not check if a smaller reporting company)

Smaller reporting company

0001193125-11-182907.txt : 20110706 0001193125-11-182907.hdr.sgml : 20110706 20110706170343 ACCESSION NUMBER: 0001193125-11-182907 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20110522 FILED AS OF DATE: 20110706 DATE AS OF CHANGE: 20110706 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MORGANS FOODS INC CENTRAL INDEX KEY: 0000068145 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 340562210 STATE OF INCORPORATION: OH FISCAL YEAR END: 0602 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08395 FILM NUMBER: 11953995 BUSINESS ADDRESS: STREET 1: 4829 GALAXY PARKWAY, SUITE S CITY: CLEVELAND STATE: OH ZIP: 44128 BUSINESS PHONE: 2163607500 MAIL ADDRESS: STREET 1: 4829 GALAXY PARKWAY, SUITE S CITY: CLEVELAND STATE: OH ZIP: 44128 FORMER COMPANY: FORMER CONFORMED NAME: MORTRONICS INC DATE OF NAME CHANGE: 19861014 FORMER COMPANY: FORMER CONFORMED NAME: MORGANS RESTAURANTS INC DATE OF NAME CHANGE: 19820616 FORMER COMPANY: FORMER CONFORMED NAME: SUGARDALE FOODS INC DATE OF NAME CHANGE: 19760608 10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended May 22, 2011

¨	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.

(Exact name of registrant as specified in its charter)


Ohio		34-0562210
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

4829 Galaxy Parkway, Suite S, Cleveland, Ohio		44128
(Address of principal executive offices)		(Zip Code)

(216) 359-9000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

As of July 1, 2011, the issuer had 2,934,995 common shares outstanding.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

MORGAN’S FOODS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


	Quarter Ended
	May 22, 2011			May 23, 2010
Revenues	$	19,562,000		$	22,170,000

Cost of sales:
Food, paper and beverage		6,497,000			6,757,000
Labor and benefits		5,685,000			6,256,000
Restaurant operating expenses		4,864,000			5,676,000
Depreciation and amortization		602,000			647,000
General and administrative expenses		1,249,000			1,253,000
Loss on restaurant assets		96,000			50,000

Operating income		569,000			1,531,000
Interest expense:
Prepayment and deferred financing costs		33,000			98,000
Bank debt and notes payable		469,000			561,000
Capital leases		23,000			24,000
Other expense, net		87,000			89,000

Income (loss) before income taxes		(43,000	)		759,000
Provision for income taxes		174,000			184,000

Net income (loss)	$	(217,000	)	$	575,000

Basic net income (loss) per common share:	$	(0.07	)	$	0.20

Diluted net income (loss) per common share:	$	(0.07	)	$	0.19


Basic weighted average number of shares outstanding		2,934,995			2,934,995
Diluted weighted average number of shares outstanding		2,934,995			3,033,634

See notes to these consolidated financial statements

MORGAN’S FOODS, INC.

CONSOLIDATED BALANCE SHEET


	May 22, 2011			February 27, 2011
	(UNAUDITED)
ASSETS
Current assets:
Cash and equivalents	$	3,317,000		$	3,034,000
Restricted Cash		252,000			140,000
Receivables		434,000			561,000
Inventories		647,000			715,000
Prepaid expenses		558,000			799,000
Deferred tax asset		—			2,000
Assets held for sale		1,650,000			545,000

		6,858,000			5,796,000
Property and equipment:
Land		7,832,000			8,677,000
Buildings and improvements		16,758,000			18,861,000
Property under capital leases		1,314,000			1,314,000
Leasehold improvements		9,518,000			9,502,000
Equipment, furniture and fixtures		17,967,000			19,128,000
Construction in progress		19,000			19,000

		53,408,000			57,501,000
Less accumulated depreciation and amortization		27,644,000			29,663,000

		25,764,000			27,838,000
Other assets		382,000			410,000
Franchise agreements, net		896,000			906,000
Goodwill		9,138,000			9,138,000

	$	43,038,000		$	44,088,000

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Long-term debt, current	$	26,458,000		$	27,049,000
Current maturities of capital lease obligations		48,000			48,000
Accounts payable		3,373,000			4,331,000
Accrued liabilities		4,398,000			4,138,000

		34,277,000			35,566,000
Long-term debt		—			—
Long-term capital lease obligations		1,002,000			1,013,000
Other long-term liabilities		4,657,000			4,362,000
Deferred tax liabilities		2,684,000			2,512,000
SHAREHOLDERS’ EQUITY
Preferred shares, 1,000,000 shares authorized, no shares outstanding		—			—
Common stock, no par value
Authorized shares - 25,000,000
Issued shares - 2,969,405		30,000			30,000
Treasury shares - 34,410		(81,000	)		(81,000	)
Capital in excess of stated value		29,488,000			29,488,000
Accumulated deficit		(29,019,000	)		(28,802,000	)

Total shareholders’ equity		418,000			635,000

	$	43,038,000		$	44,088,000

See notes to these consolidated financial statements

MORGAN’S FOODS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(UNAUDITED)


											Capital in					Total
	Common Shares				Treasury Shares						Excess of		Accumulated			Shareholders’
	Shares		Amount		Shares			Amount			Stated Value		Deficit			Equity
Balance February 27, 2011		2,969,405	$	30,000		(34,410	)	$	(81,000	)	$	29,488,000	$	(28,802,000	)	$	635,000
Net loss														(217,000	)		(217,000	)

Balance May 22, 2011		2,969,405	$	30,000		(34,410	)	$	(81,000	)	$	29,488,000	$	(29,019,000	)	$	418,000

See notes to these consolidated financial statements.

MORGAN’S FOODS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


	Twelve Weeks Ended
	May 22, 2011			May 23, 2010
Cash flows from operating activities:
Net income (loss)	$	(217,000	)	$	575,000
Adjustments to reconcile to net cash provided by operating activities:
Depreciation and amortization		602,000			647,000
Amortization of deferred financing costs		24,000			26,000
Amortization of supply agreement advances		(240,000	)		(282,000	)
Funding from supply agreements		721,000			764,000
Deferred income taxes		174,000			180,000
Disposal of restaurant assets		96,000			50,000
Changes in assets and liabilities:
Deposit to restricted cash account		(112,000	)		—
Receivables		128,000			(25,000	)
Inventories		68,000			(80,000	)
Prepaid expenses		241,000			147,000
Other assets		4,000			(13,000	)
Accounts payable		(958,000	)		387,000
Accrued liabilities		(260,000	)		89,000

Net cash provided by operating activities		271,000			2,465,000

Cash flows from investing activities:
Proceeds from sale of restaurant		—			232,000
Capital expenditures		(87,000	)		(381,000	)
Proceeds from sale/leaseback transactions		717,000			—
Purchase of franchise agreements		(16,000	)		—

Net cash provided by (used in) investing activities		614,000			(149,000	)

Cash flows from financing activities:
Principal payments on long-term debt		(336,000	)		(743,000	)
Principal payments on capital lease obligations		(11,000	)		(10,000	)
Bank debt repayment in advance		(255,000	)		(451,000	)

Net cash used in financing activities		(602,000	)		(1,204,000	)

Net change in cash and equivalents		283,000			1,112,000
Cash and equivalents, beginning balance		3,034,000			4,205,000

Cash and equivalents, ending balance	$	3,317,000		$	5,317,000

Supplemental Cash Flow Information:

Interest paid on debt and capitalized leases was $521,000 and $624,000 in fiscal 2012 and 2011, respectively.

There were no cash payments for income taxes in fiscal 2012 and cash refunds were ($15,000) in fiscal 2011.

See notes to these consolidated financial statements.

MORGAN’S FOODS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The interim consolidated financial statements of Morgan's Foods, Inc. (the “Company”) have been prepared without audit. In the opinion of Company management, all adjustments have been included. Unless otherwise disclosed, all adjustments consist only of normal recurring adjustments necessary for a fair statement of results of operations for the interim periods. These unaudited financial statements have been prepared using the same accounting principles that were used in preparation of the Company’s annual report on Form 10-K for the year ended February 27, 2011. Certain prior period amounts have been reclassified to conform to current period presentations. The results of operations for the twelve weeks ended May 22, 2011 are not necessarily indicative of the results to be expected for the full year. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed consolidated financial statements be read in conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Form 10-K for the fiscal year ended February 27, 2011.

The Company’s debt is reported at historical cost, based upon stated interest rates which represented market rates at the time of borrowing. Due to subsequent declines in credit quality throughout the restaurant industry resulting from weak and volatile operating performance and related declines in restaurant values, the market for fixed rate mortgage debt for restaurant financing is currently extremely limited. The Company’s debt is not publicly traded and there are few lenders or financing transactions for similar debt in the marketplace at this time. Consequently, management has not been able to identify a market for fixed rate restaurant mortgage debt with a similar risk profile, and has concluded that it is not practicable to estimate the fair value of the Company’s debt as of May 22, 2011.

Certain prior period items are reclassified to conform to the current period presentations.

NOTE 2 – RECENT ACCOUNTING PRONOUNCEMENTS

ASU 2011-04 May, 2011 - Topic 820 “Fair Value Measurement”

This update creates comparability in fair value measurement between Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”). The update enhances the disclosures required for entities presenting assets at fair value. The Company has determined that the changes to the accounting standards required by this update do not have a material effect on the Company’s financial position or results of operations.

ASU 2011-05 June, 2011 - Topic 220 “Comprehensive Income”

This update facilitates the convergence of GAAP and IFRS by eliminating certain options for presenting comprehensive income that are inconsistent with IFRS. The Company has determined that the changes to the accounting standards required by this update do not have a material effect on the Company’s financial position or results of operations.

NOTE 3 – NET INCOME (LOSS) PER COMMON SHARE

Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income per common share is based on the combined weighted average number of shares outstanding, which includes the assumed exercise, or conversion of options. In computing diluted net income per common share, the Company has utilized the treasury stock method. The following table reconciles the difference between basic and diluted earnings per common share:


	Quarter ended May 22, 2011								Quarter ended May 23, 2010
	Net income			Shares		Per Share			Net income		Shares		Per Share
	(Numerator)			(Denominator)		Amount			(Numerator)		(Denominator)		Amount
Basic EPS
Income (loss) available to common shareholders	$	(217,000	)		2,934,995	$	(0.07	)	$	575,000		2,934,995	$	0.20

Effect of Dilutive Securities
Weighted Average Stock Options		—			—					—		98,639

Diluted EPS
Income (loss) available to common shareholders	$	(217,000	)		2,934,995	$	(0.07	)	$	575,000		3,033,634	$	0.19

NOTE 4 – DEBT

The Company’s debt arrangements require the maintenance of a consolidated fixed charge coverage ratio of 1.20 to 1 regarding all of the Company’s loans and the maintenance of individual restaurant fixed charge coverage ratios of between 1.20 and 1.50 to 1 on certain of the Company’s individual restaurant loans. A portion of the Company’s debt also contains a funded debt to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) requirement of 5.5. Fixed charge coverage ratios are calculated by dividing the cash flow before rent and debt service for the previous 12 months by the debt service and rent due in the coming 12 months. In the calculation of funded debt to EBITDAR, funded debt is the next twelve month operating lease obligation times eight plus the debt balance at the measurement date. The funded debt is then divided by the prior twelve month EBITDAR to obtain the calculated ratio. The consolidated and individual ratios are all computed quarterly. As of May 22, 2011, the Company was not in compliance with the consolidated fixed charge coverage ratio of 1.2 or with the funded debt to EBITDAR ratio of 5.5. As of the measurement date of May 22, 2011, the Company’s consolidated fixed charge coverage ratio was 0.95 to 1 and funded debt to EBITDAR was 6.2. Also, at the end of the fiscal first quarter of 2012 the Company was not in compliance with the individual fixed charge coverage ratio on 21 of its restaurant properties including five closed locations. The Company has not obtained waivers with respect to the non-compliance from the applicable lenders at May 22, 2011 and at February 27, 2011.

The Company has engaged the services of a financial advisor to renegotiate its existing financing arrangements and to raise replacement capital to fund its required restaurant image enhancement obligations discussed in Note 6. As disclosed previously in its public filings, in April 2011 the Company began deferring the payment of principal and paying interest only on substantially all of its debt as part of a strategy to engage in the negotiation of recapitalization of its debt and in order to conserve operating cash while adjusting to the closure of twelve restaurants during April 2011. As a result of this event of default, all of the Company’s debt is classified as current in the balance sheets as of May 22, 2011 and February 27, 2011 since waivers of non-compliance were not obtained. The Company is continuing with its plan to recapitalize its existing debt using a combination of new debt and sale/leaseback financing which structure contemplates the payment of the debt on which it has not met its loan covenants. If the Company does not comply with the covenants of its various debt agreements and if the recapitalization plan is not executed successfully, the respective lenders will have certain remedies available to them which include calling the debt and the acceleration of payments. Noncompliance with the requirements of the Company’s debt agreements could also trigger cross-default provisions contained in the respective agreements.

Management expects that it will be able to complete the financial restructuring successfully. Nonetheless, given the level of the Company’s indebtedness and the cash requirements to fund image enhancement requirements under certain KFC restaurant franchise agreements, there can be no assurance that the Company’s lenders will consent to the restructuring, that the restructuring will be accomplished, or that other actions might not be taken by lenders that would impede the Company’s ability to satisfy its obligations.

The Company’s reduced debt payments and covenant violations discussed above could result in the exercise of certain remedies available to the lenders which may include calling of the debt, acceleration of payments or foreclosure on the Company’s assets which secure the debt. The lenders have not initiated any of these remedies, and management believes, but cannot assure, that these actions will not be taken prior to the Company completing the financial restructuring described above. However, if the lenders initiate any of the remedies, the Company’s ability to fulfill its obligations under its franchise agreements will be adversely affected, and there would be significant uncertainty as to the Company’s ability to complete a financial restructuring. Consequently, there is substantial doubt that the Company will be able to continue as a going concern, and therefore, if applicable, the Company may be unable to realize its asset carrying values and discharge its liabilities in the normal course of business. The financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts and classification of liabilities that may be necessary if the Company is unable to continue as a going concern.

NOTE 5 - STOCK OPTIONS

On April 2, 1999, the Board of Directors of the Company approved a Stock Option Plan for Executives and Managers. Under the plan 145,500 shares were reserved for the grant of options. The Stock Option Plan for Executives and Managers provides for grants to eligible participants of nonqualified stock options only. The exercise price for any option awarded under the Plan is required to be not less than 100% of the fair market value of the shares on the date that the option is granted. Options are granted by the Stock Option Committee of the Company. Options for 145,150 shares were granted to executives and managers of the Company on April 2, 1999 at an exercise price of $4.125, all of which have either expired or been exercised. Options for 350 common shares were granted on November 6, 2008 at the closing price on that day of $1.50 per share all of which are currently outstanding. The options vested in six months and expire ten years after date of issue.

At the Company’s annual meeting on June 25, 1999 the shareholders approved the Key Employees Stock Option Plan. This plan allows the granting of options covering 291,000 shares of stock and has essentially the same provisions as the Stock Option Plan for Executives and Managers which was discussed above. Options for 129,850 shares were granted to executives and managers of the Company on January 7, 2000 at an exercise price of $3.00. Options for 11,500 shares were granted to executives on April 27, 2001 at an exercise price of $.85, all of which have either expired or been exercised. Options for 149,650 common shares were granted on November 6, 2008 at the closing price on that day of $1.50 per share of which 147,650 are currently outstanding. The options vested in six months and expire ten years after date of issue.

As of May 22, 2011, a total of 148,000 options were outstanding, fully vested and exercisable at a weighted average exercise price of $1.50 per share. No options are available for grant.

The following table summarizes information about stock options outstanding at May 22, 2011:


Exercise Prices	Outstanding 5-22-11		Average Life		Number Exercisable
1.50		148,000		7.4		148,000

NOTE 6 – CAPITAL EXPENDITURES

The Company is required by its franchise agreements to periodically bring its restaurants up to the required image of the franchisor. This typically involves a new dining room décor and seating package and exterior changes and related items but can, in some cases, require the relocation of the restaurant. If the Company deems a particular image enhancement expenditure to be inadvisable, it has the option to cease operations at that restaurant. Over time, the estimated cost and time deadline for each restaurant may change due to a variety of circumstances and the Company revises its requirements accordingly. Also, significant numbers of restaurants may have image enhancement deadlines that coincide, in which case, the Company will adjust the actual timing of the image enhancements in order to facilitate an orderly construction schedule. During the image enhancement process, each restaurant is normally closed for up to two weeks, which has a negative impact on the Company’s revenues and operating efficiencies. At the time a restaurant is closed for a required image enhancement, the Company may deem it advisable to make other capital expenditures in addition to those required for the image enhancement.

The franchise agreements with KFC and Taco Bell Corporation require the Company to upgrade and remodel its restaurants to comply with the franchisors’ current standards within agreed upon timeframes. As discussed below, the Company has not met its obligations with respect to certain of its restaurants. As a result, the franchisor may terminate the franchise agreement for those restaurants. In the case of a restaurant containing two concepts, even though only one is required to be remodeled, additional costs will be incurred because the dual concept restaurant is generally larger and contains more equipment and signage than the single concept restaurant. If a property is of usable size and configuration, the Company can perform an image enhancement to bring the building to the current image of the franchisor. If the property is not large enough to fit a drive-thru or has some other deficiency, the Company would need to relocate the restaurant to another location within the trade area to meet the franchisor’s requirements.

During April 2011 the Company was required by KFC Corporation to close twelve KFC locations because they did not meet the franchisor’s current image. Image enhancement requirements for these closed locations were formerly included in the capital requirements schedules published by the Company and have now been removed. As discussed in its report on Form 8-K filed May 20, 2011, the Company has entered into a Pre-negotiation Agreement with KFC Corporation with the intention of arriving at a definitive schedule for the completion of the image enhancement of thirteen KFC restaurants which were the subject of default notices received on May 2, 2011, as well as other restaurant locations. Under the May 19, 2011 Pre-negotiation Agreement, KFC has agreed to forbear until August 31, 2011 from terminating the franchise agreements on the 13 operating restaurants on which KFC on May 2, 2011 delivered to the Company a notice of default (for failure to timely comply with required image enhancement obligations) provided that the Company is 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), (iii) the Company submits to KFC a written proposal by June 20, 2011 (which the Company has submitted) detailing how the Company will obtain the necessary funds to enable it to comply with the Company’s image enhancement obligations, (iv) the Company will establish a remodel escrow account, and (v) the Company will enter into a definitive remodel agreement with KFC by August 31, 2011.

Even though the Pre-negotiation Agreement outlines generally the mutually acceptable terms of a final agreement related to the Company’s image enhancement obligations, there can be no assurance that the Company (i) will be able to reach an agreement with KFC regarding image enhancements that would extend the time periods for completion of the required image enhancements, or (ii) will complete the financial restructuring or that the restructuring will create the ability for the Company to complete a satisfactory number of image enhancements. If KFC exercises its termination rights, it is unclear, what, if any, action the Company’s landlords and creditors may take under cross default provisions of the Company’s agreements that would impede the Company’s ability to satisfy its obligations. The termination of those franchise agreements would have a material adverse effect on the Company’s financial condition and results of operations.

The negotiations which are being conducted under the Pre-negotiation Agreement involve mainly restaurants with delinquent image enhancement requirement dates or dates that are two years or less in the future. The capital requirements for these restaurants are included in the schedule in the time frame where management believes they are most likely to be when the definitive agreement is completed. A deposit toward the completion of the initial two image enhancements is shown on the Company’s balance sheet at May 22, 2011 as restricted cash and the image enhancement of both restaurants was completed during June 2011, subsequent to the balance sheet date. The following schedule contains the capital requirements for image enhancements of restaurants for which the due dates are either estimated or definitive:


Number of Units	Period	Type	Capital Cost (1)
8	Fiscal 2012	Remodels	$	2,600,000
6	Fiscal 2013	Remodels		1,950,000
2	Fiscal 2013	Relo (2)		800,000
	Total 2013			2,750,000
3	Fiscal 2014	Remodels		450,000
1	Fiscal 2014	Relo (2)		400,000
	Total 2014			850,000
1	Fiscal 2015	Remodels		150,000
5	Fiscal 2018	Remodels		750,000
16	Fiscal 2020	Remodels		3,600,000
3	Fiscal 2021	Remodels		450,000

45	Total		$	11,150,000

(1)	These amounts are based on estimates of current construction costs and actual costs may vary.

(2)

Relocations of fee owned properties are shown net of expected recovery of capital from the sale of the former location. Relocation of leased properties assumes the capital cost of only equipment because it is not known until each lease is finalized whether the lease will be a capital or operating lease.

As discussed in Note 4, in connection with the image enhancement program and negotiations, the Company has retained a financial advisor, Brookwood Associates, LLC, to evaluate alternatives for providing the capital necessary for its capital improvements. The Company has paid a retainer to Brookwood which can be applied to success fees generated by strategic objectives attained by them on behalf of the Company. Brookwood’s engagement began on November 23, 2010.

Capital expenditures to meet the image requirements of the franchisors and additional capital expenditures on those same restaurants being image enhanced are a large portion of the Company’s annual capital expenditures. However, the Company also has made and may make capital expenditures on restaurant properties not included on the foregoing schedule for upgrades or replacement of capital items appropriate for the continued successful operation of its restaurants. The Company may not be able to finance capital expenditures in the volume and time horizon required by the image enhancement deadlines solely from existing cash balances and existing cash flow and the Company expects that it will have to utilize financing for a portion of the capital expenditures. The Company may use both debt and sale/leaseback financing but has no commitments for either.

There can be no assurance that the Company will be able to accomplish the image enhancements and relocations required in the franchise agreements on terms acceptable to the Company. If the Company is unable to meet the requirements of a franchise agreement, the franchisor may choose to extend the time allowed for compliance or may terminate the franchise agreement for the affected location.

NOTE 7 – ASSET ACTIVITIES

The Company owns the land and building of eight closed KFC restaurants and the land and building adjacent to another of its restaurants, all of which are listed for sale and are shown on the Company’s consolidated balance sheet as Assets Held for Sale as of May 22, 2011. Three of the restaurant locations are under contract to be sold.

On May 3, 2011 the Company completed the sale and leaseback of its KFC restaurant property in Ashtabula, Ohio. The proceeds of the sale were used to pay off the mortgage debt on the property as well as certain other debt in the same trust and will also be used to fund the image enhancement of the Ashtabula, Ohio restaurant as well as contribute to the image enhancement of other properties. The payoff of the debt related to the sale and leaseback of the Ashtabula, Ohio property reduced the Company’s principal and interest payments by approximately $126,000 annually, the Company’s debt balance by approximately $264,000 and will add approximately $62,000 in annual lease payments.

NOTE 8 – SUBSEQUENT EVENTS

Subsequent to May 22, 2011 the Company completed the image enhancement of two of its KFC restaurant location, one in Ohio and the other in Pennsylvania. The Ohio restaurant was completed at a total cost of approximately $345,000 and the Pennsylvania restaurant at approximately $390,000. Both amounts include required image enhancement amounts as well as other capital items that were done during the remodeling.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Description of Business. Morgan’s Foods, Inc. (the “Company”), which was formed in 1925, operates through wholly-owned subsidiaries KFC restaurants under franchises from KFC Corporation, Taco Bell restaurants under franchises from Taco Bell Corporation, Pizza Hut Express restaurants under licenses from Pizza Hut Corporation and an A&W restaurant under a license from A&W Restaurants, Inc. As of July 1, 2011, the Company operates 56 KFC restaurants, 5 Taco Bell restaurants, 10 KFC/Taco Bell "2n1's" under franchises from KFC Corporation and franchises or licenses from Taco Bell Corporation, 3 Taco Bell/Pizza Hut Express “2n1’s” under franchises from Taco Bell Corporation and licenses from Pizza Hut Corporation, 1 KFC/Pizza Hut Express “2n1” under a franchise from KFC Corporation and a license from Pizza Hut Corporation and 1 KFC/A&W “2n1” operated under a franchise from KFC Corporation and a license from A&W Restaurants, Inc. The Company’s fiscal year is a 52 - 53 week year ending on the Sunday nearest the last day of February.

Summary of Expenses and Operating Income as a Percentage of Revenues


	Quarter Ended
	May 22, 2011			May 23, 2010
Cost of sales:
Food, paper and beverage		33.2	%		30.5	%
Labor and benefits		29.1	%		28.2	%
Restaurant operating expenses		24.9	%		25.6	%
Depreciation and amortization		3.1	%		2.9	%
General and administrative expenses		6.4	%		5.7	%
Operating income		2.9	%		6.9	%

Revenues. The revenue decrease of $2,608,000 in the quarter ended May 22, 2011 as compared to the prior year quarter was primarily the result of the permanent closing of 16 restaurants, including the 12 for which the franchise agreements were terminated, causing a reduction in revenues of approximately $1,674,000 as well as a decrease in comparable restaurant revenues of 3.9% or $755,000. Also, the removal of the Taco Bell concept from three locations caused a reduction of approximately $215,000 partially offset by the temporary closing during the previous year quarter of two restaurants for image enhancement reducing the prior year revenues by approximately $36,000.

Cost of Sales - Food, Paper and Beverage. Food, paper and beverage costs increased as a percentage of revenue to 33.2% for the quarter ended May 22, 2011 compared to 30.5% for the quarter ended May 23, 2010. The increase in the current year quarter was primarily the result of higher commodity costs as well as higher food costs related to promotional items.

Cost of Sales - Labor and Benefits. Labor and benefits increased as a percentage of revenue for the quarter ended May 22, 2011 to 29.1% compared to 28.2% for the comparable year earlier quarter. The increase was primarily due to the inclusion, in the prior year fiscal first quarter, of a worker’s compensation retrospective reserve credit.

Restaurant Operating Expenses. Restaurant operating expenses decreased to 24.9% of revenue in the first quarter of fiscal 2012 compared to 25.6% in the first quarter of fiscal 2011 primarily due to decreased manager bonuses resulting from lower sales volumes in the current year period and lower advertising expense due to the timing of the local advertising window.

Depreciation and Amortization. Depreciation and amortization decreased to $602,000 for the quarter ended May 22, 2011 compared to $647,000 in the prior year quarter primarily due to the permanent closing of 16 restaurant locations.

General and Administrative Expenses. General and administrative expenses decreased slightly to $1,249,000 in the first quarter of fiscal 2012 compared to $1,253,000 in the first quarter of fiscal 2011. This decrease was primarily caused by the reduction of administrative staff and lower manager bonuses resulting from lower sales volumes, offset by the costs related to the retention of a financial advisory firm and higher legal fees related to certain active litigation.

Loss on Restaurant Assets. The Company experienced a loss on restaurant assets of $96,000 for the first quarter of fiscal 2012 compared to a loss of $50,000 in the comparable prior year quarter. The current year includes the loss related to recording the reserve for disposal of two permanently closed restaurant locations. The prior year loss includes the permanent closing of one restaurant and the sale of one previously closed restaurant location.

Operating Income. Operating income decreased to $569,000 or 2.9% of revenue for the quarter ended May 22, 2011 from $1,531,000 or 6.9% of revenue in the prior year quarter. The decrease of $962,000 was caused primarily by the decrease in revenues from the closing of restaurants and the decline in comparable restaurant revenues.

Interest Expense. The first quarter of fiscal 2012 contained $33,000 of prepayment penalties and the write off of deferred financing costs related to the early payment of debt to facilitate the sale/leaseback of one operating restaurant. Interest expense on bank debt and notes payable including capitalized leases decreased to $492,000 in the first quarter of fiscal 2012 from $585,000 in the first quarter of fiscal 2011 due to lower debt balances.

Other Income and Expense. Other income and expense was an expense of $87,000 for the quarter ended May 22, 2011 compared to and an expense of $89,000 for the prior year quarter. Other expenses for the current year quarter include closed unit expense of $115,000 while prior year quarter included $111,000 in charitable contributions to the Susan G. Komen Foundation generated by KFC’s Buckets for the Cure promotion.

Provision for Income Taxes. The provision for income taxes for the quarter ended May 22, 2011 was $174,000 on a pre-tax loss of $43,000 compared to $184,000 on pre-tax income of $759,000 for the comparable prior year period. The provision consists of a current provision of $1,000 and a deferred tax provision of $173,000 compared to a current tax provision of $5,000 and a deferred tax provision of $179,000 for the comparable prior year period.

As a result of the issues discussed in Note 4 and elsewhere regarding its debt agreements and recapitalization plan, the Company changed its estimate regarding its projected future income and its estimate regarding the realization of its net deferred tax assets. Accordingly, the Company increased the valuation allowance and reduced its net deferred tax assets to zero which resulted in an increase in its deferred tax provision for the quarter of $106,000. Additionally, the Company determined that the use of its annual effective tax rate would not be appropriate to record its income taxes in the quarter because a small change in its estimate of income would result in a large change in its effective tax rate. Accordingly, the Company recorded its income taxes based on its results for the quarter.

Liquidity and Capital Resources. Cash flow activity for the twelve weeks ended May 22, 2011 is presented in the Consolidated Statements of Cash Flows. Cash provided by operating activities was $271,000 for the twelve weeks ended May 22, 2011 compared to $2,465,000 for the twelve weeks ended May 23, 2010. The decrease in operating cash flow was primarily the result of the net loss of $217,000 in the current year period compared to net income of $575,000 in the prior year and the decrease of $1,218,000 of accounts payable and accrued liabilities compared to an increase of $476,000 in the same categories during the first quarter of the prior fiscal year. The reduction of accounts payable and accrued liabilities was mainly caused by the payment of liabilities associated with the 12 restaurants which were closed during the first quarter of fiscal 2012. There was a $128,000 decrease in accounts receivable in the current year period compared to an increase of $25,000 in the prior year period. The Company paid scheduled long-term bank and capitalized lease debt of $347,000 and

$255,000 of debt before its scheduled maturity in the first twelve weeks of fiscal 2012 compared to payments of $753,000 and $451,000 of debt before its scheduled maturity for the same period in fiscal 2011. Capital expenditures for the first twelve weeks of fiscal 2012 were $87,000 compared to $381,000 less $232,000 of proceeds from the sale of assets for the same period in fiscal 2011 as the Company completed the image enhancement of one location in the prior year period. Capital expenditure activity is discussed in more detail in Note 6 to the consolidated financial statements.

The Company has engaged the services of a financial advisor to renegotiate its existing financing arrangements and to raise replacement capital to fund its required restaurant image enhancement obligations discussed in Note 6. As disclosed previously in its public filings, in April 2011 the Company began deferring the payment of principal and paying interest only on substantially all of its debt as part of a strategy to engage in the negotiation of recapitalization of its debt and in order to conserve operating cash while adjusting to the closure of twelve restaurants during April 2011. As a result of this event of default, waivers of non-compliance were not obtained. The Company is continuing with its plan to recapitalize its existing debt using a combination of new debt and sale/leaseback financing which structure contemplates the payment of the debt on which it has not met its loan covenants. If the Company does not comply with the covenants of its various debt agreements and if the recapitalization plan is not executed successfully, the respective lenders will have certain remedies available to them which include calling the debt and the acceleration of payments. Noncompliance with the requirements of the Company’s debt agreements could also trigger cross-default provisions contained in the respective agreements.

Recent Accounting Pronouncements.

ASU 2011-04 May, 2011 - Topic 820 “Fair Value Measurement”

This update creates comparability in fair value measurement between GAAP and IFRS. The update enhances the disclosures required for entities presenting assets at fair value. The Company has determined that the changes to the accounting standards required by this update do not have a material effect on the Company’s financial position or results of operations.

ASU 2011-05 June, 2011 - Topic 220 “Comprehensive Income”

This update facilitates the convergence of GAAP and IFRS by eliminating certain options for presenting comprehensive income that are inconsistent with IFRS. February 27, 2011. The Company has determined that the changes to the accounting standards required by this update do not have a material effect on the Company’s financial position or results of operations.

Seasonality. The operations of the Company are affected by seasonal fluctuations. Historically, the Company's revenues and income have been highest during the summer months with the fourth fiscal quarter representing the slowest period. This seasonality is primarily attributable to weather conditions in the Company's marketplace, which consists of portions of Ohio, Pennsylvania, Missouri, Illinois, West Virginia and New York.

Safe Harbor Statements. This report contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The statements include those identified by such words as “may,” “will,” “expect” “anticipate,” “believe,” “plan” and other similar terminology. Forward looking statements involve risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied in this report. The “forward-looking statements” reflect the Company’s current expectations and are based upon data available at the time of the statements. Actual results involve risks and uncertainties, including both those specific to the Company and general economic and industry factors. Factors specific to the Company include, but are not limited to, its debt covenant compliance, actions that lenders may take with respect to any debt covenant violations, its ability to obtain waivers of any debt covenant violations and its ability to pay all of its current and long-term obligations, the Company’s ability to negotiate extensions to franchisors’ image enhancement requirements and those factors described in Part I Item 1A (“Risk Factors”) of the Company’s annual report on Form 10-K filed with the SEC on May 31, 2011. Economic and industry risks and uncertainties include, but are not limited, to, franchisor promotions, business and economic conditions, legislation and governmental regulation, competition, success of operating initiatives and advertising and promotional efforts, volatility of commodity costs and increases in minimum wage and other operating costs, availability and cost of land and construction, consumer preferences, spending patterns and demographic trends.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Certain of the Company’s debt comprising approximately $12.1 million of principal balance has a variable rate which is adjusted monthly. A one percent increase in the variable rate base (90 day LIBOR) of the loans at the beginning of the year would cost the Company approximately $121,000 in additional annual interest costs. The Company may choose to offset all, or a portion of the risk through the use of interest rate swaps or caps. The Company’s remaining borrowings are at fixed interest rates, and accordingly the Company does not have market risk exposure for fluctuations in interest rates relative to those loans. The Company does not enter into derivative financial investments for trading or speculation purposes. Also, the Company is subject to volatility in food costs as a result of market risk and we manage that risk through the use of a franchisee purchasing cooperative which uses longer term purchasing contracts. Our ability to recover increased costs through higher pricing is, at times, limited by the competitive environment in which we operate. The Company believes that its market risk exposure is not material to the Company’s financial position, liquidity or results of operations.

Item 4.

Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) carried out an evaluation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“the Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Company’s PEO and PFO concluded that our disclosure controls and procedures were effective as of May 22, 2011.

Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the Exchange Act) during the quarter ended May 22, 2011 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

The Company is a party to various legal proceedings and claims arising in the ordinary course of its business. The Company believes that the outcome of these matters will not have a material adverse affect on its consolidated financial position, results of operations or liquidity.

Item 1A.

Risk Factors

The Company’s annual report on Form 10-K for the fiscal year ended February 27, 2011 discusses the risk factors facing the Company. There has been no material change in the risk factors facing our business since February 27, 2011.

Item 2.

Unregistered Sale of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Submission of Matters to a Vote of Security Holders (removed and reserved)

Item 5.

Other Information

None

Item 6.

Exhibits

Reference is made to “Index to Exhibits”, filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

MORGAN’S FOODS, INC.

/s/ Kenneth L. Hignett

Senior Vice President,

Chief Financial Officer and Secretary

July 6, 2011

INDEX TO EXHIBITS


Exhibit Number		Exhibit Description

10.9		Pre-negotiation Agreement with KFC Corporation dated May 19, 2011

31.1		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 2002

31.2		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 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

EX-10.9 2 dex109.htm PRE-NEGOTIATION AGREEMENT WITH KFC CORPORATION Pre-negotiation Agreement with KFC Corporation

Exhibit 10.9

PRE-NEGOTIATION AGREEMENT

This Pre-negotiation Agreement (this “Agreement”), dated as of this 19^th day of May, 2011, is among KFC Corporation, a Delaware corporation (“Franchisor”), and Morgan’s Restaurants of Pennsylvania, Inc., Morgan’s Restaurants of Ohio, Inc., Morgan’s Restaurants of West Virginia, Inc., Morgan’s Foods of Missouri, Inc., Morgan’s Restaurants of New York, Inc., and Morgan Foods, Inc. (collectively, the “Franchisee”).

WHEREAS, Franchisor and Franchisee executed certain Franchise Agreements identified on Exhibit A hereto (the “Franchise Agreements”);

WHEREAS, the Franchise Agreements require the Franchisee to remodel the restaurant facilities identified on Exhibit A (“Facilities”) by specified dates;

WHEREAS, the Franchisee has not been able to remodel certain of the Facilities by the specified dates as required by the Franchise Agreements;

WHEREAS, the Franchisor issued formal written notices (“Notices”) to the Franchisee confirming the Franchisee’s failure to timely remodel the Facilities identified on Exhibit B; and

WHEREAS, Franchisee has requested, and Franchisor has agreed, to the presentation and consideration of a restructuring proposal on the terms and conditions set forth in this Agreement;

NOW, THEREFORE, in consideration of the promises and the representations, warranties, covenants and agreements contained hereinafter set forth, the parties hereto agree as follows:

ARTICLE I

DEFINITIONS

1.1 Definitions.

(a) Capitalized terms used but not defined herein shall have the respective meanings ascribed to them in the Franchise Agreements.

(b) “Affiliate” of any person means another person that directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, such first person.

ARTICLE II

STATUS OF FRANCHISE AGREEMENTS

2.1 Effect on the Franchise Agreements. Except as expressly provided in this Agreement, all of the terms, conditions, restrictions and other provisions contained in the Franchise Agreements shall remain in full force and effect.

2.2 Franchise Agreements Enforceable. Franchisee acknowledges and agrees that each of its obligations, liabilities and duties under the Franchise Agreements is and shall remain valid and enforceable against it to the extent and as provided in the Franchise Agreements.

2.3 Notices of Failure To Timely Remodel. Franchisee acknowledges the fact that it has not performed the remodels required by the Franchise Agreements and that Franchisor delivered formal written notices memorializing the Franchisee’s non-compliance. Those notices entitle Franchisor to exercise all Franchisor’s rights and remedies under the Franchise Agreements or applicable law in connection with the Franchisee’s non-compliance. No agreement exists documenting a cure of the Franchisee’s non-compliance or otherwise modifying or amending its remodeling obligations under the Franchise Agreements.

ARTICLE III

NEGOTIATIONS

3.1 Restructuring Proposal. Franchisee shall submit to Franchisor a written restructuring plan (“Proposal”) within thirty (30) days of the date of this Agreement (the “Proposal Deadline”). The Proposal shall consist of a detailed written plan for how Franchisee will obtain the necessary capital (including identifying all sources of capital funding) and otherwise restructure its business to enable it to comply with the remodeling requirements set forth in the Notices and meet Franchisee’s upgrading obligations for all Facilities under the Franchise Agreements. The Proposal shall include, without limitation, the following:

(a) Listing of all Facilities with: (i) cross reference between Franchisee and Franchisor numbering conventions; and (ii) indication of fee and leased properties;

(b) Store level P&L statements through April 30, 2011 or Franchisee’s equivalent period end date;

(d) Updated (as of April 30, 2011) accounts payable aging summary;

(e) Aggregated income statements (including above store/G&A expenses) for Franchisee’s:

(i) KFC business;

(ii) Single branded Taco Bell business; and

(iii) Total Franchisee business

(f) Detail supporting G&A structure of KFC, single branded Taco Bell and overall Franchisee businesses.

(g) Detailed debt disclosure, including:

(i) Amount of debt by lender for all Franchisee businesses;

(ii) Amount of debt by line of business (e.g. KFC, Taco Bell, and any wholly owned subsidiaries);

(iii) Amount of debt by store (for all brands – KFC, Taco Bell, etc.);

(iv) How each loan is collateralized (e.g., by land only, land and real property, cross collateralization, etc.);

(v) Interest rate and indication of floating or fixed for each loan;

(vi) Maturity of each loan;

(vii) Monthly payment of each loan in aggregate;

(viii) Monthly payment of each loan by store; and

(ix) Loan covenant schedule, including: (A) calculation formula; (B) frequency of calculation; and (C) an indication of whether required covenant levels are part of any Loan Modification Agreement referenced in Franchisee’s 10-Q disclosure.

(h) Cash flow model for last 2 years and for the next 5 years with the following:

(i) Same store sales assumption by brand;

(ii) Inflation factor by food, labor, other;

(iii) Capex schedule with cost assumptions;

(iv) Debt service coverage ratio;

(v) Fixed charge coverage ratio; and

(vi) Assumptions of any cost controlling outcomes (e.g., rent decreases negotiated by Prime Locations).

(i) Sources of potential capital and anticipated terms;

(j) Up-to-date sale / leaseback candidate worksheet;

(k) Details of potential debt refinancing – assumptions on amortization, rate, pro-forma monthly repayment amounts, securitization, etc.

(l) Copies of all agreements with brokers, marketing companies and other consultants that Franchisee has engaged or intends to engage to assist in the disposition of any Franchisee properties, buildings and other assets, such as sale leaseback transactions; and

(m) Bi-weekly updates on capital funding efforts, including, but not limited to, marketing reports, status of negotiations with potential purchasers and market research.

3.2 Franchisee acknowledges that, as of the date of this Agreement, Franchisee is current in all financial obligations required by the Franchise Agreements, and that Franchisee must remain current on all financial obligations required under the Franchise Agreements during the term of this Agreement. Franchisee’s failure to remain current in such financial obligations shall be deemed a breach of this Agreement, entitling the Franchisor to unilaterally and immediately terminate this Agreement.

3.3 Franchisee shall execute a written release of liability, in the form of Exhibit C attached hereto, granted in favor of Franchisor as of the date of the Proposal.

3.4 Franchisee shall provide Franchisor with additional information as reasonably requested by Franchisor.

3.5 No Prejudice from Discussions. Without liability for failing to do so, Franchisor and Franchisee each plan to discuss various courses of action which might be in their mutual interest, including, but not limited to, the Proposal. All such discussions, meetings, negotiations and communications in connection therewith relating to the Franchise Agreements and occurring either before or after the date of this Agreement shall be privileged and without prejudice to any party to this Agreement, and without exception, shall constitute settlement negotiations which shall not be introduced or admissible as evidence in any administrative, judicial or other proceeding without the express written consent of all of the parties to this Agreement. No action or proceeding of any kind (whether legal or equitable, whether based in tort, contract, or

otherwise) may be brought by any of the parties to this Agreement against anyone based upon or relating to the negotiations contemplated by this Agreement.

3.6 No Obligations to Negotiate. Franchisee acknowledges and agrees that Franchisor does not have any obligation to accept any Proposal or to modify, amend or enter into negotiations with respect to the Franchise Agreements. No party is obligated to enter into or continue negotiations relating to the Franchise Agreements, and any party, in its sole and absolute discretion, may terminate negotiations at any time and for any reason if it so elects, without notice or liability to any other party. Franchisee acknowledges that Franchisor would not enter into any negotiations or otherwise consider the Proposal without the parties entering into this Agreement.

3.7 Only Written Agreements and Amendments. The negotiations and discussions by the parties may be lengthy and complex. While an agreement may be reached on one or more issues which are part of the overall obligations of the Franchisee under the Franchise Agreements that the parties are trying to resolve, the parties agree that, except for the preliminary agreements contained in this Agreement, none of the parties shall be bound by or rely upon any agreement on any issues until (a) agreement is reached on all issues, and (b) the agreement on all issues has been reduced to a written agreement, signed and delivered by an authorized representative of each of the parties to this Agreement. Furthermore, in order to avoid any confusion or misunderstanding, each of the parties agrees that this Agreement may only be amended in a writing, signed by Franchisee and Franchisor. Nothing in this Agreement shall be construed to impose any duty or obligation whatsoever upon any party to negotiate or enter into a settlement or agreement.

3.8 No Waivers or Estoppel. No negotiations or other action undertaken pursuant to this Agreement shall constitute a waiver of any party’s rights under the Franchise Agreements, except to the extent specifically stated in a written agreement complying with the provisions of paragraph 3.7 of this Agreement. Subject to Article VI of this Agreement, in addition, participation in negotiations concerning the Franchise Agreement shall not restrict, inhibit or estop any party from exercising any right, remedy or power available to such party at any time (whether or not settlement negotiations are continuing) including, but not limited to, all rights, remedies and powers granted under the Franchise Agreements or otherwise available at law or in equity, or require any delay in the exercise of any such, right, remedy or power. Franchisee also agrees that no failure to exercise and no delay in exercising any rights, remedies and powers under the Franchise Agreements or otherwise available at law or in equity shall operate as a waiver of any such rights, remedies or powers.

ARTICLE IV

FRANCHISEE COOPERATION

4.1 Access to Information. Franchisee and Franchisor including their respective agents and representatives, will cooperate in good faith to conduct physical assessments, appraisals or other evaluations of the properties and assets, real

or personal, utilized in connection with Franchisee’s performance under the Franchise Agreements. In connection therewith, Franchisee shall permit Franchisor, its agents and its representatives reasonable access to inspect and review all such properties and assets and all books, records and information relating thereto at all reasonable times and shall permit them to make copies of all such books, records and information. Franchisee also agrees that it will furnish Franchisor current, complete and accurate financial statements in a form satisfactory to Franchisor.

ARTICLE V

FRANCHISEE REPRESENTATIONS AND WARRANTIES

5.1 Authority; Non-Contravention. Franchisee has the requisite corporate power and authority to execute and deliver this Agreement and to consummate the transactions contemplated hereby. The execution and delivery of this Agreement and the consummation by Franchisee of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Franchisee and no stockholder votes are necessary to authorize this Agreement or to consummate the transactions contemplated hereby.

5.2 Business Not Viable Absent Franchise Agreements. Franchisee acknowledges that its business is not viable absent the Franchise Agreements remaining in effect.

5.3 Use of Counsel. Franchisee acknowledges and represents that it (i) has fully and carefully read this Agreement prior to signing it, (ii) has been, or has had the opportunity to be, advised by independent legal counsel of its own choice at its own expense as to the legal effect and meaning of each of the terms and conditions of this Agreement, and (iii) is signing and entering into this Agreement as a free and voluntary act without duress or undue pressure or influence of any kind or nature whatsoever and has not relied on any promises, representations or warranties regarding the subject matter hereof other than those set forth in this Agreement.

ARTICLE VI

FORBEARANCE

6.1 Forbearance. Subject to the terms of this Agreement, Franchisor agrees to forbear from terminating the Franchise Agreements or commencing any judicial proceedings to enforce the termination of the Franchise Agreements (to the extent applicable) until the earlier to occur of (a) August 31, 2011, and (b) the date upon which any of the Forbearance Conditions (as defined below) is not satisfied by the date required.

6.2 Forbearance Conditions. For purposes of this Agreement, “Forbearance Conditions” shall mean the requirement that each of the conditions set

forth below shall be performed or satisfied, as and when required, TIME BEING OF THE ESSENCE, in all respects:

(a) Franchisee shall timely and fully pay any and all amounts owing under the Franchise Agreements, arising on and after the date of this Agreement.

(b) Franchisee shall not be in default of any of its obligations under this Agreement or under the Franchise Agreements (except for the remodel obligations relating to the Facilities listed in Exhibit B).

(d) By July 31, 2011, Franchisee shall establish a remodel fund account (“Account”) in a manner and form agreed to by Franchisor, but including the following:

(i) The Account shall be established at a mutually agreed to financial institution, separate from other financial accounts of Franchisee.

(ii) The Account shall be funded through a combination of (1) net proceeds, after repayment of senior debt only, from the disbursements resulting from the disposition of any property, building, equipment, and the like owned by Franchisee through sale leaseback transactions, store closures, and sale of property, (2) free cash flows after debt payments (the definition of “free cash flow” must be mutually agreed to by the parties within thirty (30) days of the date of this Agreement) and three (3) other funding services identified by Franchisee;

(iii) Franchisee shall submit to Franchisor, in a format and manner agreed to by Franchisor, weekly Account balance reconciliations, including up-to-date reporting of any asset disbursements and free cash flow calculation;

(iv) Franchisee may only withdraw funds from the Account in accordance with specific terms, conditions and restrictions (“Account Agreement”) mutually agreed to by the parties within thirty (30) days of the date of this Agreement.

(v) Franchisee shall use Account funds for the sole purpose of remodeling and upgrading the Facilities in accordance with the Franchise Agreements; and

(vi) The amount of the initial deposit into the Account must be agreed to by the parties by August 31, 2011, as an integral part of the Remodel Agreement, and be funded from Franchisee’s existing cash balances and proceeds from its proposed restructuring deals.

(e) By July 31, 2011, Franchisee shall submit to KFCC for its approval: (i) a schedule for remodeling, relocating or rebuilding (based on the required scope of work determined by Franchisor) (collectively “Remodel” or “Remodeling”) all of the Facilities listed in Exhibit A, and (ii) a list of specific Facilities that Franchisee commits to Remodel in 2011-2012 (based on the required scope of work determined by Franchisor), including the start and completion dates for each Facility, and any anticipated Facility closures in 2011-2012, and (iii) sources of funding for the remodeling for 2011-2012.

(f) By August 31, 2011, the parties must finalize and execute a comprehensive agreement (“Remodel Agreement”) acceptable to Franchisor that addresses Remodeling commitments for all of the Facilities listed in Exhibit A, including the number and scope of each Remodel action to be undertaken by Franchisee, any anticipated Facility closures, and the required funding for the Account during each year of the Remodel Agreement.

(g) Franchisee shall not commence any judicial proceedings against or involving Franchisor, including arbitration or mediation proceedings, or formal or informal proceedings for the dissolution or rehabilitation of Franchisee.

(h) Franchisee shall be in compliance with the Franchise Agreements on and after the date of this Agreement, except with respect to the matters listed on Exhibit D.

6.3 Upon completion of the Forbearance Conditions above, Franchisor will rescind the Notices of non-compliance issued to Franchisee.

ARTICLE VII

CONFIDENTIALITY

Franchisee and its present and prospective affiliates, and its and their respective directors, officers, employees, agents or advisors (including, without limitation, attorneys, accountants, consultants, financial advisors and equity holders) (collectively, “Representatives”), agree to treat, with the utmost strictest confidence, and not to disclose in any manner whatsoever, in whole or in part, the terms of this Agreement, the fact that this Agreement exists, the negotiations and discussions leading up to this Agreement, and any other information relating to this Agreement (collectively, the “Confidential Information”). The Confidential Information shall not, without the prior written consent of Franchisor, be disclosed to any person or entity other than Franchisee’s Representatives who need to know such information for the purpose of providing legal or financial advice to the Franchisee (and in those instances only to the extent justifiable by that need), who are informed by Franchisee of the confidential nature of the Confidential Information and who are provided with a copy of this Article VII and agree to be bound by the terms hereof. Notwithstanding the foregoing, Franchisee and its representatives shall not, under any circumstances, disclose the Confidential Information to any other franchisee of Franchisor or franchisees of any affiliates of Franchisor. In any event,

Franchisee shall be responsible for any breach of this Agreement by any of Franchisee’s Representatives for prohibited or unauthorized disclosure or use of the Confidential Information, and Franchisee agrees, at its sole expense, to take all reasonable measures to restrain its Representatives from prohibited or unauthorized disclosure or use of the Confidential Information. In the event that Franchisee or its Representatives are requested pursuant to, or required by, applicable law or regulation or by legal process to disclose any Confidential Information, Franchisee agrees that it will provide Franchisor with prompt written notice (and copies, if applicable) of such request or requirement in order to enable Franchisor to seek an appropriate protective order or other remedy, to consult with Franchisee with respect to Franchisor taking steps to resist or narrow the scope of such request or legal process, or to waive compliance, in whole or in part, with the terms of this Article VII of the Agreement. In any such event, Franchisee and its Representatives agree to (i) furnish only that portion of the Confidential Information for which Franchisor has waived compliance or for which Franchisee is advised by counsel is legally required to be furnished and (ii) use their reasonable best efforts to ensure that all Confidential Information and other information that is so disclosed will be accorded confidential treatment. Immediately upon termination of this Agreement, or at any time upon the request of Franchisor, Franchisee and its Representatives shall promptly deliver to Franchisor all written material containing or reflecting any Confidential Information (including all copies, extracts or other reproductions in whole or in part) and agree to destroy all documents, memoranda, notes and other writings whatsoever (including all copies, extracts or other reproductions in whole or in part) prepared by Franchisee or its Representatives based on the Confidential Information. Upon the written request of Franchisor, Franchisee shall certify in writing to Franchisor Franchisee’s destruction of such documents, memoranda, notes and other writings. Notwithstanding the return or destruction of the Confidential Information, Franchisee and its Representatives will continue to be bound by the obligations imposed by this Article VII. It is further understood and agreed that money damages would not be a sufficient remedy for any breach of this Agreement by Franchisee or its Representatives, and that Franchisor would be entitled to specific performance and injunctive or other equitable relief as a remedy for any such breach. Such remedy shall not be deemed to be the exclusive remedy for Franchisee’s or its Representatives’ breach of this Agreement, but shall be in addition to all other remedies available at law or equity to Franchisor. Franchisee shall be responsible to pay or reimburse Franchisor for any costs and expenses (including reasonable attorney’s fees and costs) incurred by Franchisor in connection with the enforcement of this Article VII if it is determined that Franchisee or its Representatives has breached this Article VII; provided, however the parties agree that nothing in this Article VII shall be interpreted to restrain Franchisee from making disclosures required of it by law or regulation as an SEC reporting company.

ARTICLE VIII

RELEASE

7.1 Release. Franchisee, on behalf of itself and each of its Affiliates, hereby releases and forever discharges Franchisor and each of its past, present and future Representatives, Affiliates, members, controlling persons, subsidiaries, successors and assigns (individually, a “Releasee” and collectively, “Releasees”) from any and all claims, demands, proceedings, causes of action, suits, liens, losses, costs, expenses, orders, obligations, contracts, debts and liabilities of any kind, character or nature whatsoever, whether known or unknown, suspected or unsuspected, asserted or unasserted, fixed or contingent, both at law and in equity, that Franchisee or any of its Affiliates now has, has ever had, or may hereafter have arising contemporaneously with or prior to the date of this Agreement or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the date of this Agreement; provided, however, that nothing contained herein shall operate to release any obligations of the Franchisor arising under the Franchise Agreements after the date of this Agreement. Franchisee hereby irrevocably covenants to refrain from, directly or indirectly, asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby.

7.2 Indemnification. Without in any way limiting any of the rights and remedies otherwise available to any Releasee, Franchisee shall indemnify and hold harmless each Releasee from and against all loss, liability, claim, damage (including incidental and consequential damages) or expense (including costs of investigation and defense and reasonable attorney’s fees) whether or not involving third party claims, arising directly or indirectly from or in connection with (i) the assertion by or on behalf of Franchisee or any of its Affiliates of any claim or other matter purported to be released pursuant to this Article VIII and (ii) the assertion by any third party of any claim or demand against any Releasee which claim or demand arises directly or indirectly from, or in connection with, any assertion by or on behalf of Franchisee or any of its Affiliates against such third party of any claims or other matters purported to be released pursuant to this Article VIII, or arises directly or indirectly from or in connection with any Default, any default under this Agreement, or any other obligation of Franchisee or its Affiliates.

7.3 Waiver of Unknown Claims. Franchisee hereby expressly waives all rights afforded by Section 1542 of the Civil Code of California or any statute or common law principle of similar effect in any jurisdiction with respect to the Releasees (collectively, “Section 1542”). Section 1542 of the Civil Code of California states as follows:

A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN ITS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR.

Notwithstanding the provisions of Section 1542, and for the purpose of implementing a full and complete release, Franchisee expressly waives and relinquishes any rights and benefits that it may have under Section 1542. Franchisee understands and agrees that the release contained in this Article V is intended to include all claims, if any, which Franchisee may have and which Franchisee does not now know or suspect to exist in its favor against the Releasees and that this release extinguishes those claims. Franchisee represents and warrants to the Releasees that it has been advised by its attorney of the effect and import of the provisions of Section 1542, and that Franchisee has not assigned or otherwise transferred or subrogated any interest in any claims, demands or causes of action that are the subject of this release. Franchisee agrees to indemnify, defend and hold the Releasees harmless for any liability, loss, claims, demands, damages, costs, expenses or attorneys’ fees incurred as a result of any person or entity asserting such assignment, transfer or subrogation. Franchisee further agrees that in the event of litigation relating to the subject matter of this release contained in Article VIII, each Releasee shall be entitled to reasonable attorneys’ fees and costs if it is the prevailing party in such litigation.

ARTICLE VIII

GENERAL PROVISIONS

8.1 Binding Effect, Etc. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business and/or assets of either party), spouses, heirs, executors and personal and legal representatives.

8.2 Severability. The provisions of this Agreement shall be severable in the event that any of the provisions hereof (including any provision within a single section, paragraph or sentence) are held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable in any respect, and the validity and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired and shall remain enforceable to the fullest extent permitted by law.

8.3 Survival. The provisions of Articles VII and VIII shall remain in full force and effect and shall survive any termination of this Agreement.

8.4 Notices. All notices, consents, waivers, and other communications under this Agreement must be in writing and will be deemed to have been duly given when (a) delivered by hand (with written confirmation of receipt), (b) sent by telecopier (with written confirmation of receipt) or (c) when received by the addressee, if sent by a nationally recognized overnight delivery service (receipt requested), in each case to the appropriate addresses and telecopier numbers set forth below (or to such other addresses and telecopier numbers as a party may designate by notice to the other parties):

Franchisor:

KFC Corporation

1441 Gardiner Lane

Louisville, KY 40213

Attention: General Counsel, KFCC

Facsimile: (502) 874-2198

Franchisee:

Morgan Foods, Inc.

4829 Galaxy Parkway

Cleveland, OH 44128-5955

Attention: Jim Liguori

Facsimile: (216) 359-2105

8.5 Section Headings. The headings of sections in this Agreement are provided for convenience only and will not affect its construction or interpretation.

8.6 Certain Interpretive Matters. No provision of this Agreement shall be interpreted in favor of, or against, either of the parties hereto by reason of the extent to which any such party or its counsel participated in the drafting thereof or by reason of the extent to which any such provision is inconsistent with any prior draft hereof or thereof.

8.7 Governing Law. This Agreement shall be governed by the laws of the Commonwealth of Kentucky without regard to conflicts of laws principles.

8.8 Consent to Personal Jurisdiction in Kentucky. As further consideration for Franchisor’s agreement to enter into this Agreement, Franchisee consents to the non-exclusive jurisdiction of the courts in the Commonwealth of Kentucky and consents to personal jurisdiction in Kentucky for all purposes.

8.9 Counterparts. This Agreement may be executed in one or more counterparts, each of which will be deemed to be an original copy of this Agreement and all of which, when taken together, will be deemed to constitute one and the same agreement. Delivery of a signed counterpart by facsimile transmission will constitute a party’s due execution and delivery of this Agreement.

IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above.


KFC CORPORATION

By:		/s/ Cathy Tang
Name:		CATHY TANG
Title:		CHIEF LEGAL OFFICER
		KFC CORPORATION

Morgan Foods, Inc.

By:		/s/ James J. Liguori
Name:		James J. Liguori
Title:		President & Chief Operating Officer

Morgan’s Restaurants of Pennsylvania, Inc.

By:		/s/ James J. Liguori
Name:		James J. Liguori
Title:		President & Chief Operating Officer

Morgan’s Restaurants of Ohio, Inc.

By:		/s/ James J. Liguori
Name:		James J. Liguori
Title:		President & Chief Operating Officer

Morgan’s Restaurants of West Virginia, Inc.

By:		/s/ James J. Liguori
Name:		James J. Liguori
Title:		President & Chief Operating Officer

Morgan’s Foods of Missouri, Inc.

By:		/s/ James J. Liguori
Name:		James J. Liguori
Title:		President & Chief Operating Officer


Morgan’s Restaurants of New York, Inc.

By:		/s/ James J. Liguori
Name:		James J. Liguori
Title:		President & Chief Operating Officer

EXHIBIT A


STORE #	STREET ADDRESS	CITY, STATE	Date of Franchise Agreement
L125-005	825 EAST STATE STREET	ALLIANCE, OH	6/13/1997
L125-006	3445 ELM ROAD	WARREN, OH	6/13/1997
L125-008	4673 WILLIAM FLYNN HIGHWAY	ALLISON PARK, PA	6/13/1997
L125-018	100 S. HERMITAGE RD.	HERMITAGE, PA	6/13/1997
L125-024	156 NORTH LINCOLN AVE.	SALEM, OH	6/13/1997
L125-038	4015 MAIN ST.	WEIRTON, WV	6/13/1997
L125-051	5684 WARREN-YOUNGSTOWN RD.	NILES, OH	6/13/1997
L125-055	3299 CANFIELD RD.	YOUNGSTOWN, OH	6/13/1997
L125-056	4187 SUNSET BLVD.	STEUBENVILLE, OH	6/13/1997
L125-064	4642 MAHONING AVE.	YOUNGSTOWN, OH	6/13/1997
L125-082	4400 WILLIAM PENN HIGHWAY	MURRYSVILLE, PA	6/13/1997
L125-086	212 NEW CASTLE ROAD	BUTLER, PA	6/13/1997
L125-101	9390 ROUTE 30	IRWIN, PA	6/13/1997
L125-114	3517 SOUTH GRAND	ST. LOUIS, MO	6/11/1997
L125-117	1510 JOHNSON ROAD	GRANITE CITY, IL	6/11/1997
L125-124	5020 DELMAR	ST. LOUIS, MO	6/11/1997
L125-125	10557 PAGE	ST. LOUIS, MO	6/11/1997
L125-129	590 LATROBE THIRTY PLAZA	LATROBE, PA	6/13/1997
L125-130	865 ROSTRAVER RD.	BELLE VERNON, PA	6/13/1997
L125-134	975 E. PITTSBURGH ST.	GREENSBURG, PA	7/11/1997
L125-135	50 MILLER LANE	WAYNESBURG, PA	6/13/1997
L125-136	109 CAVASINA DR.	CANONSBURG, PA	6/13/1997
L125-137	2656 W. 12TH STREET	ERIE, PA	7/28/1997
L125-138	4410 BUFFALO RD.	ERIE, PA	7/28/1997
L125-139	3100 N.RIDGE RD., EAST	ASHTABULA, OH	7/28/1997
L125-141	6636 SOUTH AVE.	YOUNGSTOWN, OH	9/9/1998
L125-144	219 N. FLORISSANT	FERGUSON, MO	6/16/1997
L125-147	15644 ST. RT 170	CALCUTTA, OH	5/4/1999
L125-148	5933 PEACH STREET	ERIE, PA	11/6/1997
L125-149	1116 PARADE ST.	ERIE, PA	9/23/1997
L125-152	1098-A WASHINGTON AVENUE	BRIDGEVILLE, PA	7/13/1999
L125-153	120 MURTLAND AVENUE	WASHINGTON, PA	7/13/1999
L125-156	222 WEST 8TH AVENUE	HOMESTEAD, PA	7/13/1999
L125-157	804 W. VIEW PARK DRIVE	WEST VIEW, PA	7/13/1999
L125-158	640 LONGRUN ROAD	MCKEESPORT, PA	7/13/1999
L125-159	278 YOST BLVD.	PITTSBURGH, PA	7/13/1999
L125-160	6190 STEUBENVILLE PIKE	MCKEESROCK, PA	7/13/1999
L125-161	509 PENN AVENUE	PITTSBURGH, PA	7/13/1999
L125-162	9797 MCKNIGHT RD.	PITTSBURGH, PA	7/13/1999


L125-163	5130 CLAIRTON BLVD.	PITTSBURGH, PA	7/13/1999
L125-164	6901 UNIVERSITY BLVD.	MOON TOWNSHIP, PA	7/13/1999
L125-165	4915 BAUM BLVD.	PITTSBURGH, PA	7/13/1999
L125-167	1 LANDINGS DRIVE	PITTSBURGH, PA	7/13/1999
L125-168	740 LYSLE BLVD.	MCKEESPORT, PA	7/13/1999
L125-169	1100 BROWNSVILLE RD.	PITTSBURGH, PA	7/13/1999
L125-170	3770 PENN HIGHWAY	MONROEVILLE, PA	7/13/1999
L125-171	4306 OHIO RIVER BLVD.	PITTSBURGH, PA	7/13/1999
L125-172	2500 WASHINGTON BLVD.	BELPRE, OH	7/13/1999
L125-173	401 GREENE STREET	MARIETTA, OH	7/13/1999
L125-175	207 MARSHALL STREET	BENWOOD, WV	7/13/1999
L125-176	122 N. LAFAYETTE AVENUE	MOUNDSVILLE, WV	7/13/1999
L125-177	120 ZANE STREET	WHEELING, WV	7/13/1999
L125-178	930 SEVENTH STREET	PARKERSBURG, WV	7/13/1999
L125-179	2604 OHIO AVENUE	PARKERSBURG, WV	7/13/1999
L125-180	HIGHWAY 32, ROUTE 67	FARMINGTON, MO	7/13/1999
L125-181	#3 CHAT ROAD	LEADINGTON, MO	7/13/1999
L125-186	9955 WATSON ROAD	ST. LOUIS, MO	7/13/1999
L125-187	15493 MANCHESTER ROAD	BALLWIN, MO	7/13/1999
L125-188	210 RODI ROAD	PITTSBURGH, PA	8/10/1999
L125-189	101 S. WEIDMAN ROAD	MANCHESTER, MO	9/7/1999
L125-190	1031 PAXTON DRIVE	BETHEL PARK, PA	10/21/1999
L125-192	45 FOSTER AVENUE	CRAFTON, PA	12/7/1999
L125-193	270 E. FAIRMOUNT AVE.	LAKEWOOD, NY	9/24/1999
L125-194	210 N. STATE ROUTE 2	NEW MARTINSVILLE, WV	12/7/1999
L125-195	14 HILLTOP PLAZA	KITTANNING, PA	12/7/1999
L125-197	2666 CONSTITUTION BLVD.	BEAVER FALLS, PA	3/27/2000
L125-207	2407 WILMINGTON ROAD	NEW CASTLE, PA	6/21/2004
L125-209	3717 BELMONT AVE.	YOUNGSTOWN, OH	6/13/1997

EXHIBIT B


STORE #	STREET ADDRESS	CITY, STATE	Date of Franchise Agreement
L125-152	1098-A WASHINGTON AVENUE	BRIDGEVILLE, PA	7/13/1999
L125-153	120 MURTLAND AVENUE	WASHINGTON, PA	7/13/1999
L125-156	222 WEST 8TH AVENUE	HOMESTEAD, PA	7/13/1999
L125-159	278 YOST BLVD.	PITTSBURGH, PA	7/13/1999
L125-161	509 PENN AVENUE	PITTSBURGH, PA	7/13/1999
L125-163	5130 CLAIRTON BLVD.	PITTSBURGH, PA	7/13/1999
L125-167	1 LANDINGS DRIVE	PITTSBURGH, PA	7/13/1999
L125-168	740 LYSLE BLVD.	MCKEESPORT, PA	7/13/1999
L125-169	1100 BROWNSVILLE RD.	PITTSBURGH, PA	7/13/1999
L125-172	2500 WASHINGTON BLVD.	BELPRE, OH	7/13/1999
L125-178	930 SEVENTH STREET	PARKERSBURG, WV	7/13/1999
L125-190	1031 PAXTON DRIVE	BETHEL PARK, PA	10/21/1999
L125-192	45 FOSTER AVENUE	CRAFTON, PA	12/7/1999

Exhibit C

GENERAL RELEASE

, a corporation, on behalf of itself and each of its present and prospective affiliates, members, subsidiaries, successors and assigns and its and their respective directors, officers, employees, agents or advisors (including, without limitation, attorneys, accountants, consultants, financial advisors and equity holders) (collectively “Franchisee”) hereby releases and forever discharges KFC Corporation and each of its past, present and future directors, officers, employees, agents or advisors, affiliates, members, controlling persons, subsidiaries, successors and assigns (individually, a “Releasee” and collectively, “Releasees”) from any and all claims, demands, proceedings, causes of action, suits, liens, losses, costs, expenses, orders, obligations, contracts, debts and liabilities of any kind, character or nature whatsoever, whether known or unknown, suspected or unsuspected, asserted or unasserted, fixed or contingent, both at law and in equity, that Franchisee now has, has ever had, or may hereafter have arising contemporaneously with or prior to the date of this General Release or on account of or arising out of any matter, cause or event occurring contemporaneously with or prior to the date of this General Release. Franchisee hereby irrevocably covenants to refrain from, directly or indirectly, asserting any claim or demand, or commencing, instituting or causing to be commenced, any proceeding of any kind against any Releasee, based upon any matter purported to be released hereby.

Signed this day of , 201 .


Morgan Foods, Inc.

By:
Name:
Title:

Morgan’s Restaurants of Pennsylvania, Inc.

By:
Name:
Title:

Morgan’s Restaurants of Ohio, Inc.

By:
Name:
Title:


Morgan’s Restaurants of West Virginia, Inc.

By:
Name:
Title:

Morgan’s Foods of Missouri, Inc.

By:
Name:
Title:

Morgan’s Restaurants of New York, Inc.

By:
Name:
Title:

Exhibit D

INTENIONALLY LEFT BLANK

EX-31.1 3 dex311.htm SECTION 302 CEO CERTIFICATION Section 302 CEO Certification

Exhibit 31.1

CERTIFICATIONS

I, Leonard R. Stein-Sapir, certify that:

1.	I have reviewed this quarterly report on Form 10-Q of Morgan’s Foods, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Rules 13a-15(f) and Rule 15d-15(f)) for the registrant and we have:

a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provided reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of May 22, 2011, based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during registrant’s third fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: July 6, 2011				/s/ Leonard R. Stein-Sapir
				Leonard R. Stein-Sapir
				Chairman of the Board, Chief Executive Officer

EX-31.2 4 dex312.htm SECTION 302 CFO CERTIFICATION Section 302 CFO Certification

Exhibit 31.2

CERTIFICATIONS

I, Kenneth L. Hignett, certify that:

1.	I have reviewed this report on Form 10-Q of Morgan’s Foods, Inc.;

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of May 22, 2011, based on such evaluation; and

5.	The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: July 6, 2011				/s/ Kenneth L. Hignett
				Kenneth L. Hignett
				Senior Vice President, Chief Financial Officer and Secretary

EX-32.1 5 dex321.htm SECTION 906 CEO CERTIFICATION Section 906 CEO Certification

Exhibit 32.1

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Leonard R. Stein-Sapir, Chairman of the Board and Chief Executive Officer of Morgan’s Foods, Inc. (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Quarterly Report on Form 10-Q of the Company for the period ended May 22, 2011, (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 6, 2011

/s/ Leonard R. Stein-Sapir

Leonard R. Stein-Sapir, Chairman of the Board and

Chief Executive Officer

EX-32.2 6 dex322.htm SECTION 906 CFO CERTIFICATION Section 906 CFO Certification

Exhibit 32.2

CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

I, Kenneth L. Hignett, Senior Vice President, Chief Financial Officer and Secretary of Morgan’s Foods, Inc. (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

(3)

The Quarterly Report on Form 10-Q of the Company for the period ended May 22, 2011 (the “Report”), which this certification accompanies, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and

(4)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: July 6, 2011

/s/ Kenneth L. Hignett

Kenneth L. Hignett, Senior Vice President,

Chief Financial Officer and Secretary