MORGANS FOODS INC, 10-K405, 2000-05-30

MORGANS FOODS INC
10-K405, 2000-05-30
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<PAGE> 1
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934

For the fiscal year ended February 27, 2000 Commission file number 0-3833

MORGAN'S FOODS, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)

Ohio 34-0562210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

24200 Chagrin Boulevard, Suite 126, Beachwood, OH 44122
--------------------------------------------------------------------------------
(Address of principal executive officers) (Zip Code)

Registrant's telephone number, including area code: (216) 360-7500

Securities registered pursuant of Section 12 (b) of the Act:

<TABLE>
<S> <C>
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Shares, Without Par Value American Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act: None
</TABLE>

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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No

Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ X ]

As of May 10, 2000, the aggregate market value of the common stock held
by nonaffiliates of the Registrant was $4,887,768.

As of May 10, 2000, the Registrant had 2,922,727 shares of common stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the
definitive Proxy Statement to security holders for the 2000 annual meeting, to
be filed with the Securities and Exchange Commission on or before June 23, 2000.

1
<PAGE> 2

MORGAN'S FOODS, INC.

PART I

ITEM 1. BUSINESS.

GENERAL. Morgan's Foods, Inc. ("the Company") operates through wholly
owned subsidiaries Kentucky Fried Chicken ("KFC") restaurants under franchises
from KFC Corporation and Taco Bell restaurants under franchises from Taco Bell
Corp. As of May 25, 2000, the Company operates 79 KFC restaurants, 11 Taco Bell
restaurants, and 16 KFC/Taco Bell "2n1's" under franchises from KFC Corporation
and franchises or licenses from Taco Bell Corp. The Company formerly operated
five East Side Mario's restaurants, a business segment which the Company had
previously chosen to discontinue (see Note 3 to the consolidated financial
statements). The Company's fiscal year is a 52 - 53 week year ending on the
Sunday nearest the last day of February.

RESTAURANT OPERATIONS. The Company's KFC restaurants prepare and sell
the distinctive "Kentucky Fried Chicken" and Tender Roast(R) chicken along with
related food items. All containers and packages bear KFC trademarks. The
Company's Taco Bell restaurants prepare and sell a full menu of quick service
Mexican food items using the appropriate Taco Bell containers and packages. The
KFC/Taco Bell "2n1" restaurants operated under franchise agreements from KFC
Corporation and license agreements from Taco Bell Corp. prepare and sell a
limited menu of Taco Bell items as well as the full KFC menu while those
operated under franchise agreements from both KFC Corporation and Taco Bell
Corp. offer a full menu of both KFC and Taco Bell items. The East Side Mario's
restaurants were full service, mid-priced, casual family restaurants inspired by
New York City's famous "Little Italy" district of the 1950's.

Of the 106 KFC, Taco Bell and "2n1" restaurants operated by the Company
as of May 25, 2000, 16 are located in Ohio, 61 in Pennsylvania, 19 in Missouri,
2 in Illinois, 7 in West Virginia and 1 in New York. The Company was one of the
first KFC Corporation franchisees and has operated in excess of 20 KFC
franchises for more than 25 years. Operations relating to these units are
seasonal to a certain extent, with higher sales generally occurring in the
summer months.

FRANCHISE AGREEMENTS. All of the Company's KFC and Taco Bell
restaurants are operated under franchise agreements with KFC Corporation and
Taco Bell Corp. respectively. The Company's KFC/Taco Bell "2n1" restaurants are
operated under franchises from KFC Corporation and either franchises or licenses
from Taco Bell Corp. The Company considers retention of these agreements to be
important to the success of its restaurant business and believes that its
relationships with KFC Corporation and Taco Bell Corp. are satisfactory. For KFC
products, the Company is required to pay royalties of 4% of gross revenues and
to expend an additional 5% of gross revenues on national and local advertising
pursuant to its franchise agreements. For Taco Bell products in KFC/Taco Bell
"2n1" restaurants operated under license agreements from Taco Bell Corp. and
franchise agreements from KFC Corporation the Company is required to pay
royalties of 10% of Taco Bell gross revenues and to make advertising fund
contributions of 1/2% of Taco Bell gross revenue. For Taco Bell product sales in
Taco Bell restaurants operated under franchises the Company is required to pay
royalties of 5.5% of gross revenues and to expend an additional 4.5% of gross
revenues on

2
<PAGE> 3

MORGAN'S FOODS, INC.

PART I (CONT'D)

national and local advertising. In May 1997, the Company renewed substantially
all of its existing franchise agreements for twenty years. New 20 year franchise
agreements were obtained for all 54 restaurants acquired in July 1999. Subject
to satisfying KFC and Taco Bell requirements for restaurant image and other
matters, franchise agreements are renewable at the Company's option for
successive ten year periods. The franchise and license agreements provide that
each KFC and Taco Bell unit is to be inspected by KFC Corporation and Taco Bell
Corp., respectively, approximately three or four times per year. These
inspections cover product preparation and quality, customer service, restaurant
appearance and operation.

COMPETITION. The restaurant business is highly competitive. Each of the
Company's KFC and Taco Bell restaurants competes directly or indirectly with a
large number of national and regional restaurant operations, as well as with
locally owned restaurants, drive-ins, diners and numerous other establishments
which offer low- and medium-priced chicken and Mexican food to the public.

The Company's KFC and Taco Bell restaurants and KFC/Taco Bell "2n1"
restaurants rely on innovative marketing techniques and promotions to compete
with other restaurants in the areas in which they are located. The Company's
competitive position is also enhanced by the national advertising programs
sponsored by KFC Corporation, Taco Bell Corp. and their franchisees. Emphasis is
placed by the Company on its control systems and the training of personnel to
maintain high food quality and good service. The Company believes that its KFC
and Taco Bell restaurants are competitive with other quick service restaurants
on the basis of the important competitive factors in the restaurant business
which include primarily restaurant location, product price, quality and
differentiation; and restaurant and employee appearance.

SUPPLIERS. The Company has been able to obtain sufficient supplies to
carry on its business and believes it will be able to do so in the future,
however, one of the Company's primary suppliers has recently entered Chapter 11
bankruptcy which may negatively impact the Company in terms of product pricing
and product availability.

GROWTH. On July 14, 1999 the Company acquired the assets of 54 existing
KFC and Taco Bell restaurants and the land and building of a non-operating KFC
restaurant from various subsidiaries of Tricon Global Restaurants, Inc. See Note
2 to the consolidated financial statements for further details. As part of this
acquisition, the Company was granted the rights to develop 20 KFC, Taco Bell or
KFC/Taco Bell "2n1" restaurants in specific geographic areas. Under the
agreement, five restaurants are required to be developed each year over a four
year period. Also, during fiscal 2000, the Company acquired two KFC restaurants
in the Erie, PA market area and completed construction of restaurants in
Calcutta, OH and Troy, IL. On December 9, 1999 the Company sold four of the
remaining five former East Side Mario's restaurant locations to Steak & Ale, a
division of Metromedia Restaurants Group, and is marketing the remaining
location, which is no longer in operation, with the expectation of selling this
location early in fiscal year 2001. See Note 3 to the consolidated financial
statements for further details. During fiscal 1999, the Company completed
construction of a new KFC restaurant in Boardman, OH and acquired four KFC
restaurants in the Erie, PA market area, two KFC restaurants in the Jamestown,
NY area and two KFC restaurants in the St. Louis market area. During fiscal
1999, the Company also ceased operations at its East Side Mario's restaurant in
Mayfield

3
<PAGE> 4

MORGAN'S FOODS, INC.

PART I (CONT'D)

Heights, OH and liquidated its leasehold interest subsequent to the end of the
fiscal year. During fiscal 1998, the Company completed the construction of a new
KFC restaurant on leased land in Greensburg, PA and completed the rebuilding of
a KFC restaurant in the St. Louis market area.

EMPLOYEES. As of May 25, 2000, the Company employed approximately 2,053
persons, including 53 administrative and 195 managerial employees. The balance
are hourly employees, most of whom are part-time. None of the restaurant
employees are represented by a labor union. The Company considers its employee
relations to be satisfactory.

ITEM 2. PROPERTIES.

The Company leases approximately 6,071 square feet of space for its
headquarters in Cleveland, Ohio. The lease expires February 28, 2002 and the
rent under the current term is $7,993 per month. The lease also contains a
renewal option of five years, which may be exercised by the Company. The Company
also leases space for a regional office in Youngstown, OH, which is used to
assist in the operation of the KFC and Taco Bell restaurants.

Of the 106 KFC and Taco Bell restaurants, the Company owns the land and
building for 56 locations, owns the building and leases the land for 21
locations and leases the land and building for 29 locations. 51 of the owned
properties are subject to mortgages. Remaining lease terms (including renewal
options) range from 1 to 27 years and average approximately 15 years. These
leases generally require the Company to pay taxes and utilities, to maintain
casualty and liability insurance, and to keep the property in good repair. The
Company pays annual rental for each leased KFC or Taco Bell restaurant in
amounts ranging from $11,000 to $79,000. In addition, 18 of these leases require
payment of additional rentals based on a percentage of gross sales in excess of
certain base amounts. Sales for nine KFC and Taco Bell restaurants exceeded the
respective base amounts in fiscal 2000.

The Company believes that its restaurants are generally efficient, well
equipped and maintained and in good condition.

ITEM 3. LEGAL PROCEEDINGS.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

There were no matters submitted to security holders for a vote during
the last quarter of the Company's fiscal year ended February 27, 2000.

<PAGE> 5

MORGAN'S FOODS, INC.

PART I (CONT'D)

EXECUTIVE OFFICERS OF THE COMPANY

The Executive Officers and other Officers of the Company are as
follows:

<TABLE>
<CAPTION>
POSITION WITH
NAME AGE REGISTRANT OFFICER SINCE
-------------------- ------------ ------------------------ --------------
<S> <C> <C> <C>
EXECUTIVE OFFICERS:

Leonard Stein-Sapir 61 Chairman of the Board April 1989
and Chief Executive
Officer

James J. Liguori 51 President and Chief June 1979
Operating Officer

Kenneth L. Hignett 53 Senior Vice President- May 1989
Chief Financial Officer
& Secretary

OTHER OFFICERS:

Barton J. Craig 51 Senior Vice President - January 1994
General Counsel

Vincent J. Oddi 57 Vice President- September 1979
Restaurant Development

Ramesh J. Gursahaney 51 Vice President- January 1991
Operations Services
</TABLE>

Executive officers of the Company serve for a term of one year and
until their successors are elected and qualified, unless otherwise specified by
the Board of Directors. Any officer is subject to removal with or without cause,
at any time, by a vote of a majority of the Board of Directors.

5
<PAGE> 6

MORGAN'S FOODS, INC.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The Company's Common Shares are traded on the American Stock Exchange
under the symbol "MR". The following table sets forth, for the periods
indicated, the high and low sales prices of the Common Shares as reported on the
American Stock Exchange.

PRICE RANGE
HIGH LOW
----------------
YEAR ENDED FEBRUARY 27, 2000:
1st Quarter ...................... $5 1/2 $2 5/8
2nd Quarter ...................... 4 3/4 3 1/8
3rd Quarter ...................... 3 7/8 2 7/8
4th Quarter ...................... 3 3/4 2 5/8

YEAR ENDED FEBRUARY 28, 1999:
1st Quarter ...................... $3 5/8 $2 1/8
2nd Quarter ...................... 2 13/16 2
3rd Quarter ...................... 2 3/8 2
4th Quarter ...................... 2 3/4 2

As of May 10, 2000, the Company had approximately 1,020 shareholders of
record. The Company has paid no dividends since fiscal 1975.

6
<PAGE> 7

MORGAN'S FOODS, INC.

PART II (CONT'D)

ITEM 6. SELECTED FINANCIAL DATA.

The following selected financial information for each of the five
fiscal years in the period ended February 27, 2000, is derived from, and
qualified in its entirety by, the consolidated financial statements of the
Company. The following selected financial information should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and the
notes thereto included elsewhere in this Report.

Dollars in thousands except per share amounts.

<TABLE>
<CAPTION>
YEARS ENDED
------------------------------------------------------------------------------
FEBRUARY 27, FEBRUARY 28, MARCH 1, MARCH 2, MARCH 3,
2000 1999 1998 1997 1996
-------------- ------------- -------- ---------- -----------

<S> <C> <C> <C> <C> <C>
Revenues................................. $65,660 $33,040 $29,913 $28,533 $30,775
Cost of sales:
Food, paper and beverage............... 19,955 10,510 9,600 9,259 10,138
Labor and benefits..................... 16,978 7,894 7,285 6,503 7,327
Restaurant operating expenses............ 17,577 8,486 7,800 7,663 8,527
Depreciation and amortization............ 2,778 1,389 1,282 1,227 1,338
Asset impairments........................ - - - 1,239 -
General and administrative
expenses................................ 4,420 2,810 2,668 2,513 2,679
(Gain) loss on sale or disposal
of restaurant assets.................... 213 11 98 248 (1,681)
-------- --------- --------- --------- ---------
Operating income (loss).................. 3,739 1,940 1,180 (119) 2,477
Income (loss) from
continuing operations before
extraordinary items.................... 283 913 323 (768) 1,824
Extraordinary loss on early
extinguishment of debt (2).............. - (287) - - -
Loss from discontinued
operations (3).......................... (629) (1,634) (1,251) (3,237) (698)
------- --------- --------- --------- ---------
Net income (loss)........................ (346) (1,008) (928) (4,005) 1,126
Income (loss) per common share (1):
Income (loss) from
continuing operations................ .10 .31 .11 (.27) .61
Loss on early extinguishment
of debt.............................. - (.10) - - -
Loss from discontinued operations...... (.22) (.56) (.42) (1.10) (.23)
-------- --------- ---------- ---------- ---------
Net income (loss)...................... (.12) (.35) (.31) (1.37) .38
Working capital (deficiency)............. (4,228) (2,182) (2,046) (884) (562)
Total assets............................. 62,188 24,011 20,110 19,312 22,034
Long-term debt........................... 49,968 13,094 7,815 6,474 5,448
Long-term capital lease
obligations............................. 745 4,244 5,019 4,847 5,062

Shareholders' equity..................... 930 1,248 2,256 3,300 7,378
</TABLE>

(1) Computed based upon the weighted average number of common and
common equivalent shares outstanding during each year, which were 2,912,894 in
2000, 2,910,839 in 1999, 2,936,877 in 1998, 2,967,574 in 1997 and 2,969,355 in
1996.

(2) Prepayment penalty, write off of deferred financing and early
buy-out of capitalized leases costs related to early extinguishment of debt.

(3) The results of operations of the former East Side Mario's
restaurant segment.

7
<PAGE> 8

MORGAN'S FOODS, INC.

PART II (CONT'D)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

RESULTS OF OPERATIONS. During fiscal 1998 through 2000 the Company
operated Kentucky Fried Chicken ("KFC") franchised restaurants, of which several
also offer Taco Bell products, in the states of Illinois, Missouri, Ohio,
Pennsylvania, West Virginia and New York. On July 14, 1999 the Company acquired
12 stand alone Taco Bell units in the state of Pennsylvania. The average number
of KFC and Taco Bell restaurants in operation during fiscal 2000 was 77 compared
to 44 during fiscal 1999 and 39 during fiscal 1998. During fiscal 2000, the
Company acquired 56 restaurants and built two restaurants. During fiscal 1999,
the Company acquired eight KFC restaurants and opened one new KFC restaurant.

REVENUES. Revenue was $65,660,000 in fiscal 2000 an increase of
$32,620,000 or 98.7% compared to an increase of $3,127,000 or 10.5% in fiscal
1999.

The 98.7% increase in restaurant revenues during fiscal 2000 was the
result of a 5.1% decrease in comparable KFC revenues and $34,577,000 in revenues
generated by the 56 KFC's and Taco Bell's which were acquired and the two new
KFC's which were built during fiscal 2000. The decline in comparable restaurant
revenues was a result of several very effective promotions in the prior year and
a somewhat ineffective chicken sandwich promotion in the current year which also
decreased chicken on the bone sales. The 10.5% increase in revenue during fiscal
1999 was due to the combination of several factors. First, sales in the
comparable KFC restaurants increased 1.0%. Second, $2,569,000 in revenues was
generated by eight KFC's which were acquired and one new KFC which was built
during fiscal 1999. The 4.8% increase in revenue during fiscal 1998 was due to
the combination of several factors. First, sales in the comparable restaurants
increased 1.8% primarily due to the addition of Taco Bell products. Second, two
KFC restaurants which were acquired just prior to the beginning of fiscal 1998
and the new KFC that opened during the year accounted for an increase of
$1,735,000. This increase was partially offset by three closed KFC restaurants
in the St. Louis market which caused a decline of $738,000 in sales. Revenues
for the comparable KFC restaurants were flat during fiscal 1998 compared to the
prior year primarily because fiscal 1997 revenues were extremely strong and many
of the Company's KFC restaurants were closed for short periods of time during
the fiscal 1998 year to facilitate remodeling and image enhancements.

Revenues for the 16 weeks ended February 27, 2000 were $23,474,000, an
increase of $13,494,000 from the 16 weeks ended February 28, 1999. Restaurant
revenues increased $13,494,000 to $23,474,000 in the fiscal 2000 quarter
compared to the fiscal 1999 quarter due to a comparable restaurant decrease of
5.0% and the addition of 56 new restaurants, one of which was added during the
fiscal fourth quarter. The reasons for these changes are the same as mentioned
above in the full year comparisons.

COST OF SALES - FOOD, PAPER AND BEVERAGE. Food, paper and beverage
costs were $19,955,000 or 30.4% of sales in fiscal 2000 compared to $10,510,000
or 31.8% of sales in fiscal 1999. Food, paper and beverage costs declined by
1.4% of sales due to efficiencies from higher average restaurant volumes in the
acquired and newly built restaurants, the continuation of low chicken prices and
favorable contract pricing. Food, paper and beverage costs were $10,510,000 or
31.8% of sales in fiscal 1999 compared to $9,600,000 or

8
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MORGAN'S FOODS, INC.

PART II (CONT'D)

32.1% of sales in fiscal 1998. Food, paper and beverage costs declined by .3% of
sales in the KFC's due to efficiencies from higher volumes and the continuation
of low chicken prices.

For the fourth quarter of fiscal 2000, food, paper and beverage costs
decreased as a percentage of sales to 30.9% from 32.1% in fiscal 1999. Food,
paper and beverage cost decreased 1.2% of sales due to the reasons discussed
above in the full year comparison.

COST OF SALES - LABOR AND BENEFITS. Labor and benefits increased to
25.9% of sales or $16,978,000 in fiscal 2000 from 23.9% of sales or $7,894,000
in fiscal 1999. The increase was primarily due to higher labor costs in the
newly acquired restaurants caused by the reorganization and training necessary
to assimilate the new restaurants into the operations of the Company. Labor and
benefit costs in fiscal 1999 decreased to 23.9% of sales or $7,894,000 compared
to 24.35% of sales or $7,285,000 in fiscal 1998 due to reduced workers
compensation costs.

Labor and benefit costs for the fourth quarter decreased to 26.7% of
sales or $6,270,000 compared to 24.7% of sales or $2,464,000 in fiscal 1999.
This increase was a result of the reasons discussed above in the full year
comparison.

RESTAURANT OPERATING EXPENSES. Restaurant operating expenses in fiscal
2000 increased to 26.8% of sales or $17,577,000 compared to 25.7% of sales or
$8,486,000 in the prior year. This was caused by increased advertising expenses
as a result of the introduction and promotion of five new sandwiches during the
fiscal 2000 third quarter and fourth quarter and also some of the newly acquired
restaurants having a higher local advertising co-op expense than the Company's
average for its previously existing restaurants. Restaurant operating expenses
in fiscal 1999 declined slightly to $8,486,000 or 25.7% of revenue from
$7,800,000 or 26.1% of revenue in fiscal 1998 due to increased average sales
volumes.

Restaurant operating expenses for the fourth quarter of fiscal 2000
decreased to 26.9% of sales or $6,314,000 from 27.0% of sales or $2,692,000 in
the year earlier quarter. As a percentage of sales, these expenses were above
average in the fourth quarter of fiscal 2000 and 1999 due to the reasons
mentioned above for the current year and an ineffective Star Wars promotion in
the prior year.

DEPRECIATION AND AMORTIZATION. Depreciation and amortization in fiscal
2000 increased to $2,778,000 from $1,389,000 in fiscal 1999. This increase
resulted from the Company's restaurant acquisitions and newly built restaurants.
Amortization for fiscal 2000 increased to $520,000 from $191,000 in the prior
year due to increased balances for franchise fees and deferred financing costs.
Depreciation and amortization in fiscal 1999 increased slightly to $1,389,000
from $1,282,000 in fiscal 1998. Amortization increased to $191,000 in fiscal
1999 from $130,000 in fiscal 1998 primarily due to the write off of goodwill in
the fourth quarter of fiscal 1998.

9
<PAGE> 10

MORGAN'S FOODS, INC.

PART II (CONT'D)

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses increased to $4,420,000 in fiscal 2000 from $2,810,000 in fiscal 1999.
The increase of $1,610,000 was mainly the result of adding costs and resources
to support 56 additional restaurants. The incremental general and administrative
expenses incurred as a result of acquiring these 56 restaurants was $1,460,000
or 4.5% of the related sales. General and administrative expenses increased to
$2,810,000 in fiscal 1999 from $2,668,000 in fiscal 1998. The increase of
$142,000 was the result of adding a KFC market manager to keep pace with the KFC
expansion and higher training costs due to KFC acquisitions.

GAIN (LOSS) ON SALE OF RESTAURANT ASSETS. In fiscal 2000, the Company
recorded losses of $213,000 for the disposal of equipment related to several KFC
restaurant image enhancements and the closedown of one KFC. In fiscal 1999, the
Company recorded losses of $11,000 related to the disposal of equipment during
several image enhancements.

OPERATING INCOME (LOSS). Operating income in fiscal 2000 increased
$1,799,000 to $3,739,000 from $1,940,000 in fiscal 1999. This increase was a
result of operating an additional 56 restaurants. Operating income in fiscal
1999 was $1,940,000 compared to an operating income of $1,180,000 in fiscal
1998. This increase was the result of expansion of the KFC restaurants.

INTEREST EXPENSE AND OTHER INCOME. Interest expense from bank debt and
notes payable increased to $3,481,000 in fiscal 2000 from $992,000 in fiscal
1999. This increase is due to increased borrowings to fund the acquisition and
expansion of KFC and Taco Bell restaurants. The Company acquired 54 KFC and Taco
Bell restaurants from the franchisor, acquired two restaurants from a franchisee
and built two new KFC restaurants during fiscal 2000. Interest expense from
capitalized lease debt remained constant at $92,000 in fiscal 2000. Interest
expense from bank debt and notes payable increased to $992,000 in fiscal 1999
compared to $836,000 in fiscal 1998. Interest on capitalized lease debt, was
$92,000 in fiscal 1999, compared to $61,000 in fiscal 1998. This increase was a
result of fact that the capital leases entered into in 1998 incurred a full year
of interest in 1999.

EXTRAORDINARY LOSS ON EARLY EXTINGUISHMENT OF DEBT. During fiscal 1999,
the Company paid $4,899,000 of 15 year maturity, fixed rate debt, carrying an
interest rate of approximately 10.0%, which was originally incurred in the third
quarter of fiscal 1996, in advance of its scheduled maturity. This prepayment
was funded by borrowing $6,762,000 of 20 year maturity, fixed rate debt carrying
an interest rate of approximately 8.7%. The Company paid prepayment penalties of
$98,000, wrote off $140,000 of deferred financing costs related to this
transaction and incurred a loss of $49,000 on the early buy out of capitalized
leases covering equipment at three of the locations. This transaction is more
fully described in Note 4 to the consolidated financial statements.

DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE. On September 3, 1999,
Management made the decision to discontinue the operation of its East Side
Mario's restaurant segment. On December 9, 1999 the Company sold four of the
remaining five former East Side Mario's restaurant locations, to Steak & Ale, a
division of Metromedia Restaurant Group, and is marketing the remaining
location, which it closed, with the

10
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MORGAN'S FOODS, INC.

PART II (CONT'D)

expectation of selling this location early in fiscal year 2001. The cash
received as a result of this transaction of $3,867,000 was used to pay off the
capital lease obligations and other expenses of the transaction. Certain assets
of the East Side Mario's operations are shown in the Consolidated Balance Sheet
as "Assets held for sale". The results of operations of the discontinued segment
are shown in the Consolidated Statements of Operations as "Loss from
discontinued operations". There is no tax effect of the loss. The Company
believes there will not be significant gain or loss on disposal of the remaining
assets.

LIQUIDITY AND CAPITAL RESOURCES. The Company, like others in the
restaurant industry, operates on minimal working capital and relies on cash flow
from operations, debt borrowings and lease financing for the construction and
refurbishment of restaurant properties and repayment of debt. Cash flow activity
for fiscal 2000, 1999 and 1998 is presented in the Consolidated Statements of
Cash Flows.

Capital expenditures for fiscal 2000 were $41,279,000, substantially
all of which related to KFC and Taco Bell restaurants. In fiscal 2000, the
Company received $39,133,000 in mortgage financing for the construction of two
new KFC restaurants and the acquisition of 54 existing KFC and Taco Bell
restaurants. The Company made principal payments on long-term debt of $1,074,000
in fiscal 2000.

The KFC operations of the Company have historically provided sufficient
cash flow to service the Company's debt, refurbish and upgrade restaurant
properties and cover administrative overhead. Management believes that operating
cash flow will provide sufficient capital to continue to operate and maintain
the KFC and Taco Bell restaurants, service the Company's debt and support
required corporate expenses. In addition to the Company's operating cash flow,
management believes that additional financing, including long-term leases of
build-to-suit restaurants, development lines of credit and sale/leaseback
arrangements can be obtained to refurbish and acquire KFC and Taco Bell
restaurants.

Certain of the Company's debt arrangements require the maintenance of
consolidated fixed charge coverage ratio of 1.2 to 1 and individual restaurant
coverage ratios of 1.4 to 1. The Company is not currently in full compliance
with maintaining the required individual restaurant coverage ratios but was able
to obtain a waiver of these violations from the applicable lender.

The Company is currently not in full compliance with the American Stock
Exchange financial condition guidelines for continued listing. Specifically, the
guidelines indicate that any company with shareholders' equity less than
$4,000,000 and losses in 3 of its last 4 fiscal years may be considered for
delisting. This condition has been reviewed with representatives of the American
Stock Exchange who indicated that the Company's performance would continue to be
monitored by the Exchange.

The Company has been financing the expansion and image enhancement of
its restaurants primarily through the use of fixed rate long-term debt on which
the rate is fixed at the time of funding. At February 27, 2000 there was
$51,730,000 of such debt outstanding at rates ranging from 8.3% to 10.6%. The
Company's market risk exposure is primarily due to possible fluctuations in
interest rates as they relate to future borrowings. The Company has evaluated
the potential effect of a 1.0% increase in these rates on future capital
spending plans and believes that there would be no material effect. The Company
does not enter into derivative financial investments for trading or speculation
purposes. As a result, the Company believes that its market risk exposure is not
material to the Company's financial position, liquidity or results of
operations.

11
<PAGE> 12

MORGAN'S FOODS, INC.

PART II (CONT'D)

The Company will commit approximately $2,160,000 to image enhancements
and expansions of existing KFC restaurants, $960,000 to add a concept to three
existing restaurants, $1,880,000 to build two new restaurants and $880,000 to
relocate an existing restaurant during fiscal 2001, for which financing is not
yet committed. At a minimum, in fiscal years 2002 through 2004 the Company will
commit approximately $10,760,000 in order to fulfill the terms of the
development agreement with Tricon Global Restaurants, Inc.

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.

YEAR 2000 COMPLIANCE. All of the Company's business application
software systems were year 2000 compliant by December 1999. The Company has not
experienced any disruptions related to year 2000.

NEW ACCOUNTING STANDARD. The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Instruments and Hedging Activities. The Company has not yet
completed its analysis of SFAS No. 133 and accordingly has not yet determined
what effect, if any, it may have on future financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

Information required by this item is included under "Liquidity and
Capital Resources".

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The Consolidated Financial Statements of the Company are set forth in
Item 14 of this Report.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

12
<PAGE> 13

MORGAN'S FOODS, INC.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information on Directors of the Company is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 2000
annual meeting to be filed with the Securities and Exchange Commission on or
before June 23, 2000.

Information regarding the Executive Officers of the Company is reported
in a separate section captioned "Executive Officers of the Company" included in
Part I hereof.

ITEM 11. EXECUTIVE COMPENSATION.

Information on executive compensation is incorporated herein by
reference to the definitive Proxy Statement to security holders for the 2000
annual meeting to be filed with the Securities and Exchange Commission on or
before June 23, 2000.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Information on security ownership of certain beneficial owners,
officers and directors is incorporated herein by reference to the definitive
Proxy Statement to security holders for the 2000 annual meeting to be filed with
the Securities and Exchange Commission on or before June 23, 2000.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

Information on certain relationships and related transactions is
incorporated herein by reference to the definitive Proxy Statement to security
holders for the 2000 annual meeting to be filed with the Securities and Exchange
Commission on or before June 23, 2000.

<PAGE> 14

MORGAN'S FOODS, INC.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) 1 and 2. Financial Statements and Financial Statement
Schedules.

The Financial Statements and Financial Statement Schedules
listed on the accompanying Index to Financial Statements and
Financial Statement Schedules are filed as part of this Annual
Report on Form 10-K.

(a) 3. Exhibits.

The Exhibits listed on the accompanying Index to Exhibits are
filed as part of this Annual Report on Form 10-K.

<PAGE> 15

MORGAN'S FOODS, INC.
INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
ITEM 14 (a) 1 AND 2

<TABLE>
<CAPTION>
PAGE
ITEM 14 (a) 1 REFERENCE
------------- ---------

<S> <C>
Independent Auditors' Report.................................................. 16

Consolidated Balance Sheets
at February 27, 2000 and February 28, 1999.................................. 17

Consolidated Statements of Operations
for the years ended February 27, 2000, February 28, 1999 and March 1, 1998.. 18

Consolidated Statements of Shareholders' Equity
for the years ended February 27, 2000, February 28, 1999 and March 1, 1998.. 19

Consolidated Statements of Cash Flows
for the years ended February 27, 2000, February 28, 1999 and March 1, 1998.. 20

Notes to Consolidated Financial Statements.................................... 21
</TABLE>

ITEM 14 (a) 2
-------------

All schedules normally required by Form 10-K are not required under the
related instructions or are inapplicable, and therefore are not presented.

15
<PAGE> 16

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Shareholders
Morgan's Foods, Inc.
Cleveland, Ohio

We have audited the accompanying consolidated balance sheets of Morgan's Foods,
Inc. and subsidiaries as of February 27, 2000 and February 28, 1999 and the
related consolidated statements of operations, shareholders' equity, and cash
flows for each of the three years in the period ended February 27, 2000. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Morgan's Foods, Inc. and
subsidiaries at February 27, 2000 and February 28, 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
February 27, 2000 in conformity with accounting principles generally accepted in
the United States of America.

/s/ Deloitte & Touche LLP
Cleveland, Ohio
May 19, 2000

16
<PAGE> 17

MORGAN'S FOODS, INC.
CONSOLIDATED BALANCE SHEETS
FEBRUARY 27, 2000 AND FEBRUARY 28, 1999

<TABLE>
<CAPTION>
ASSETS
2000 1999
------------ ------------
<S> <C> <C>
Current assets:
Cash and equivalents .................................... $ 4,612,000 $ 2,655,000
Receivables ............................................. 112,000 38,000
Inventories ............................................. 583,000 332,000
Prepaid expenses ........................................ 357,000 218,000
Assets held for sale (Note 3) ........................... 653,000 --
------------ ------------
6,317,000 3,243,000

Property and equipment (Notes 7 and 8):
Land .................................................... 10,861,000 3,379,000
Buildings and improvements .............................. 16,560,000 9,433,000
Property under capital leases ........................... 1,171,000 5,089,000
Leasehold improvements .................................. 6,837,000 3,578,000
Equipment, furniture and fixtures ....................... 17,158,000 9,915,000
Construction in progress ................................ 425,000 344,000
------------ ------------
53,012,000 31,738,000
Less accumulated depreciation and amortization ........... 12,179,000 13,346,000
------------ ------------
40,833,000 18,392,000
Other assets ............................................. 1,748,000 1,167,000
Franchise agreements ..................................... 2,242,000 609,000
Deferred taxes (Note 10) ................................. 600,000 600,000
Acquired franchise rights ................................ 10,448,000 --
------------ ------------
$ 62,188,000 $ 24,011,000
============ ============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt (Note 7) ........... $ 1,762,000 $ 577,000
Current maturities of capital lease obligations (Note 8) 969,000 453,000
Accounts payable ........................................ 4,089,000 2,066,000
Accrued liabilities (Note 6) ............................ 3,725,000 2,329,000
------------ ------------
10,545,000 5,425,000

Long-term debt (Notes 4 and 7) ........................... 49,968,000 13,094,000
Long-term capital lease obligations (Note 8) ............. 745,000 4,244,000

Commitments and contingencies (Notes 6, 7 and 8)

SHAREHOLDERS' EQUITY

Preferred shares, 1,000,000 shares authorized,
no shares outstanding
Common Stock:
Authorized shares - 25,000,000
Issued shares - 2,969,405 .............................. 30,000 30,000
Treasury shares - 46,678 in 2000 and 58,566 in 1999 .... (111,000) (139,000)
Capital in excess of stated value ........................ 28,875,000 28,875,000
Accumulated deficit ...................................... (27,864,000) (27,518,000)
------------ ------------
Total shareholders' equity ............................... 930,000 1,248,000
------------ ------------
$ 62,188,000 $ 24,011,000
============ ============
</TABLE>

See notes to consolidated financial statements.

17
<PAGE> 18

MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------

<S> <C> <C> <C>
Revenues .................................. $ 65,660,000 $ 33,040,000 $ 29,913,000

Cost of sales:
Food, paper and beverage ................ 19,955,000 10,510,000 9,600,000
Labor and benefits ...................... 16,978,000 7,894,000 7,285,000
Restaurant operating expenses ............. 17,577,000 8,486,000 7,800,000
Depreciation and amortization ............. 2,778,000 1,389,000 1,282,000
General and administrative expenses ....... 4,420,000 2,810,000 2,668,000
Loss on sale or disposal
of restaurant assets (Note 5) ............ 213,000 11,000 98,000
------------ ------------ ------------
Operating income .......................... 3,739,000 1,940,000 1,180,000
Interest expense:
Bank debt and notes payable ............. (3,481,000) (992,000) (836,000)
Capital leases .......................... (92,000) (92,000) (61,000)
Other income and expense, net ............. 121,000 77,000 54,000
------------ ------------ ------------
Income from continuing operations before
income taxes and extraordinary item ..... 287,000 933,000 337,000
Provision for income taxes (Note 10) ...... 4,000 20,000 14,000
------------ ------------ ------------
Income from continuing operations
before extraordinary items ............... 283,000 913,000 323,000
Extraordinary loss on early
extinguishment of debt (Note 4) .......... -- (287,000) --
Loss from discontinued operations (Note 3) (629,000) (1,634,000) (1,251,000)
------------ ------------ ------------
Net loss .................................. $ (346,000) $ (1,008,000) $ (928,000)
============ ============ ============
Income (loss) per common share:
Income from continuing operations ....... $ .10 $ .31 $ .11
Loss on early extinguishment of debt .... -- (.10) --
Loss from discontinued operations ....... (.22) (.56) (.42)
------------ ------------ ------------
Net loss per share ...................... $ (.12) $ (.35) $ (.31)
============ ============ ============
</TABLE>

See notes to consolidated financial statements.

18
<PAGE> 19

MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

<TABLE>
<CAPTION>
COMMON SHARES TREASURY SHARES CAPITAL IN
--------------------------- ---------------------------- EXCESS OF ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STATED VALUE DEFICIT
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, March 2, 1997 ..... 2,969,405 $ 30,000 (8,333) $ (23,000) $ 28,875,000 $(25,582,000)
Net loss ................... -- -- -- -- -- (928,000)
Purchase of treasury shares -- -- (50,233) (116,000) -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, March 1, 1998 ..... 2,969,405 30,000 (58,566) (139,000) 28,875,000 (26,510,000)
Net loss ................... -- -- -- -- -- (1,008,000)
------------ ------------ ------------ ------------ ------------ ------------
Balance, February 28, 1999 . 2,969,405 30,000 (58,566) (139,000) 28,875,000 (27,518,000)
Net loss ................... -- -- -- -- -- (346,000)
Issue of treasury shares for
401(k) contributions ...... -- -- 11,888 28,000 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, February 27, 2000 . 2,969,405 $ 30,000 (46,678) $ (111,000) $ 28,875,000 $(27,864,000)
============ ============ ============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
------------
<S> <C>
Balance, March 2, 1997 ..... $ 3,300,000
Net loss ................... (928,000)
Purchase of treasury shares (116,000)
------------
Balance, March 1, 1998 ..... 2,256,000
Net loss ................... (1,008,000)
------------
Balance, February 28, 1999 . 1,248,000
Net loss ................... (346,000)
Issue of treasury shares for
401(k) contributions ...... 28,000
------------
Balance, February 27, 2000 . $ 930,000
============
</TABLE>

See notes to consolidated financial statements.

<PAGE> 20

MORGAN'S FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

<TABLE>
<CAPTION>
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................. $ (346,000) $ (1,008,000) $ (928,000)
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization ........... 2,778,000 1,948,000 1,840,000
Loss on sale or disposal
of restaurant assets ................... 213,000 11,000 98,000
Changes in assets and liabilities:
Decrease (Increase) in receivables ..... (74,000) 36,000 38,000
Increase in inventories ................ (251,000) (7,000) (32,000)
Decrease (Increase) in prepaid expenses (139,000) (69,000) 34,000
Increase in other assets ............... (820,000) (203,000) (91,000)
Increase in accounts payable ........... 2,023,000 96,000 55,000
Increase (Decrease) in accrued
liabilities ........................... 1,344,000 344,000 (60,000)
------------ ------------ ------------
Net cash provided by operating activities . 4,728,000 1,148,000 954,000
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of restaurant assets ... 3,745,000 -- 15,000
Capital expenditures ...................... (28,784,000) (5,166,000) (3,074,000)
Purchase of franchise agreements and
acquired franchise rights ................ (12,495,000) (213,000) --
Proceeds from sale of liquor licenses ..... 122,000 -- --
Proceeds from sale and maturity
of marketable securities ................. -- 102,000 96,000
------------ ------------ ------------
Net cash used in investing activities ..... (37,412,000) (5,277,000) (2,963,000)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt,
net of financing costs ................... 39,133,000 10,769,000 1,651,000
Principal payments on long-term debt ...... (1,074,000) (577,000) (490,000)
Principal payments on capital
lease obligations ........................ (347,000) (825,000) (431,000)
Bank debt repayment in advance of
scheduled maturities ..................... -- (4,899,000) --
Payments on capital lease obligations in
advance of scheduled maturity ............ (3,071,000) -- --
Proceeds from sale/leaseback transactions . -- -- 698,000
Purchase of treasury shares ............... -- -- (116,000)
------------ ------------ ------------
Net cash provided by
financing activities ..................... 34,641,000 4,468,000 1,312,000
------------ ------------ ------------
Net change in cash and equivalents ........ 1,957,000 339,000 (697,000)
Cash and equivalents, beginning balance ... 2,655,000 2,316,000 3,013,000
------------ ------------ ------------
Cash and equivalents, ending balance ...... $ 4,612,000 $ 2,655,000 $ 2,316,000
============ ============ ============
Noncash investing and financing activities:
Franchise fees and capital leases ........ $ 435,000 $ -- $ 418,000
============ ============ ============
</TABLE>

See notes to consolidated financial statements.

20
<PAGE> 21

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

NOTE 1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.

DESCRIPTION OF BUSINESS. Morgan's Foods, Inc. and its subsidiaries
("The Company") operates 95 Kentucky Fried Chicken ("KFC") restaurants, of which
16 also offer Taco Bell products, in the states of Illinois, Missouri, Ohio,
Pennsylvania, West Virginia and New York. The Company also operates 11 Taco Bell
restaurants. The Company formerly operated five East Side Mario's ("ESM")
restaurants. The Company's fiscal year is a 52-53 week year ending on the Sunday
nearest the last day of February.

USE OF ESTIMATES. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions pending completion of related events. These estimates
and assumptions affect the amounts reported at the date of the financial
statements for assets, liabilities, revenues and expenses and the disclosure of
contingencies. Actual results could differ from those estimates.

PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.

CASH AND EQUIVALENTS. The Company considers all highly liquid debt
instruments purchased with an initial maturity of three months or less to be
cash equivalents.

INVENTORIES. Inventories, principally food, beverages and paper
products, are stated at the lower of aggregate cost (first-in, first-out basis)
or market.

PROPERTY AND EQUIPMENT. Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets as follows: buildings and improvements - 3 to
20 years; equipment, furniture and fixtures - 7 to 10 years. Leasehold
improvements are amortized over 3 to 15 years, which is the shorter of the life
of the asset or life of the lease. The asset values of the capitalized leases
are amortized using the straight-line method over the lives of the respective
leases which range from 15 to 20 years.

Management evaluates the net carrying value of property and equipment
periodically in light of both the estimated future cash flows resulting from the
use of the assets as well as the estimated liquidation value of such assets.
Management believes the carrying value of property and equipment at February 27,
2000 will be recovered from future cash flows.

DEFERRED FINANCING COSTS. Costs related to the acquisition of long-term
debt are capitalized and expensed as interest over the term of the related debt.
Amortization expense was $106,000, $34,000 and $29,000 for fiscal years 2000,
1999 and 1998. The balance of deferred financing costs was $1,482,000 for fiscal
2000 and $500,000 for fiscal 1999.

<PAGE> 22

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

FRANCHISE AGREEMENTS. Franchise agreements are recorded at cost.
Amortization is computed on the straight-line method over the term of the
franchise agreement. The Company's franchise agreements are predominantly 20
years in length. Amortization expense was $100,000, $43,000 and $29,000 for
fiscal years 2000, 1999 and 1998. Accumulated amortization was $151,000 for
fiscal 2000 and $104,000 for fiscal 1999, respectively.

ACQUIRED FRANCHISE RIGHTS. Acquired Franchise Rights (excess of
purchase price over net tangible assets acquired) are amortized over the life of
the franchise agreement on a straight-line basis. Amortization expense was
$314,000 for fiscal 2000. Management evaluates the carrying amount of acquired
franchise rights periodically based upon past and projected cash flows from
operations and the estimated fair value of related assets and believes the
carrying value of the acquired franchise rights at February 27, 2000 will be
recovered from future cash flows.

INCOME TAXES. The provision for income taxes is based upon income or
loss before tax for financial reporting purposes. Deferred tax assets or
liabilities are recognized for the expected future tax consequences of temporary
differences between the tax basis of assets and liabilities and their carrying
values for financial reporting purposes. A deferred tax asset is recorded for
the benefits of future deductible temporary differences and operating loss and
tax credit carryforwards. A valuation allowance is recorded to reduce deferred
tax assets to the amount more likely than not to be realized in the future,
based on an evaluation of historical and projected profitability.

STOCK-BASED COMPENSATION. The Company's outstanding stock options are
accounted for using the intrinsic value method, under which compensation cost is
measured as the excess, if any, of the quoted market price of the stock at the
grant date over the amount an employee must pay to acquire the stock.

NOTE 2. ACQUISITION OF KFC AND TACO BELL RESTAURANTS.

On July 14, 1999 Morgan's Restaurants of Pennsylvania, Inc., Morgan's
Restaurants of Ohio, Inc., Morgan's Restaurants of West Virginia, Inc. and
Morgan's Foods of Missouri, Inc., all wholly owned subsidiaries of Morgan's
Foods, Inc., acquired the assets of fifty-four (54) existing KFC and Taco Bell
restaurants and the land and building of a non-operating KFC restaurant from
various subsidiaries of Tricon Global Restaurants, Inc. for cash in the amount
of $33,740,000. The acquisition was accounted for as a purchase and,
accordingly, assets were recorded at fair value.

The allocation of the purchase price is as follows:

<TABLE>
<S> <C>
Land $ 6,950,000
Buildings 6,475,000
Leasehold improvements 3,455,000
Equipment 4,550,000
Franchise agreements 1,615,000
Acquired franchise rights 10,695,000
------------
Total $ 33,740,000
============
</TABLE>

22
<PAGE> 23

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

The following pro forma results for the fifty-two weeks ended February
27, 2000 and February 28, 1999, were developed assuming that all of the acquired
units previously described had been acquired at the beginning of the respective
periods. The pro forma data shown below is not necessarily indicative of the
consolidated results that would have occurred had the acquisition taken place at
the beginning of the respective periods nor are they necessarily indicative of
results that may occur in the future.

<TABLE>
<CAPTION>
PRO FORMA RESULTS (UNAUDITED)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
FIFTY-TWO WEEKS ENDED
FEBRUARY 27, 2000 FEBRUARY 28, 1999
----------------- -----------------

<S> <C> <C>
Total revenue................................................. $84,709,000 $75,745,000
Net loss from continuing operations........................... (1,508,000) (1,614,000)
Net loss per share from
continuing operations........................................ (.49) (.55)
</TABLE>

NOTE 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE.

On December 9, 1999 the Company sold four of the remaining five former
East Side Mario's restaurant locations, and is marketing the remaining location,
which it closed, with the expectation of selling this location early in fiscal
year 2001. The cash received as a result of this transaction of $3,867,000 was
used to pay off the capital lease obligations and other expenses of the
transaction. Certain assets of the East Side Mario's operations are shown in the
Consolidated Balance Sheet as "Assets held for sale". The results of operations
of the discontinued segment are shown in the Consolidated Statements of
Operations as "Loss from discontinued operations". There is no tax effect of the
loss. The Company believes there will not be significant gain or loss on
disposal of the remaining assets. The East Side Mario's restaurants formerly
operated by the Company began in March 1993 and encompassed six locations by
April 1995. Comparable restaurant revenues for the East Side Mario's segment
have declined since fiscal 1996 and the restaurant concept was not appropriately
supported by the franchisor. The assets being held for sale and the related
capitalized lease obligations have been classified as current assets and current
liabilities respectively.

The Consolidated Balance Sheets at February 27, 2000 and February 28,
1999, include assets and liabilities related to the East Side Mario's
restaurants, which are being accounted for as a discontinued operation, the
details of which are listed below:

<TABLE>
<CAPTION>
FEBRUARY 27, 2000 FEBRUARY 28, 1999
----------------- -----------------

<S> <C> <C>
Current assets.................................................. $ 11,000 $ 125,000
Assets held for sale............................................ 653,000 -
Property and equipment, net..................................... - 3,771,000
Other assets.................................................... - 579,000
-------------- --------------
Total assets............................................. 664,000 4,475,000
Current liabilities............................................. 1,236,000 1,345,000
Capital lease obligations....................................... - 3,821,000
-------------- --------------
Net liabilities.......................................... $ (572,000) $ (691,000)
============== ==============
</TABLE>

23
<PAGE> 24

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

The results of operations for the East Side Mario's segment, reported
separately as a loss from discontinued operations in the Consolidated Statement
of Operations, are as follows:

<TABLE>
<CAPTION>
FIFTY-TWO WEEKS ENDED
FEBRUARY 27, 2000 FEBRUARY 28, 1999 MARCH 1, 1998
----------------- ----------------- -------------

<S> <C> <C> <C>
Gross sales ........................ $ 4,726,000 $ 7,567,000 $ 8,955,000
=========== =========== ===========
Loss from operations of discontinued
East Side Mario's restaurants ..... $ (629,000) $(1,634,000) $(1,251,000)
=========== =========== ===========
</TABLE>

NOTE 4. EARLY EXTINGUISHMENT OF DEBT.

In the fourth quarter of fiscal 1999, the Company paid, in advance of
scheduled maturity, seven mortgage loans with a combined balance of $4,899,000.
The seven loans were originated in September 1995 with an original balance of
$5,509,000, 15 year terms, fixed interest rates of approximately 10.0% and were
secured by mortgages on seven of the Company's KFC restaurants. The loans were
replaced by new mortgage loans having 20 year terms, 8.7% fixed interest rates,
secured by the same seven KFC properties and having an initial, combined balance
of $6,762,000. In consummating this transaction, the Company incurred prepayment
penalties of $98,000 and expensed $140,000 of deferred financing costs related
to the loans, which were paid early. As part of the refinancing transaction, the
Company also incurred a loss of $49,000 to buy out capitalized leases covering
equipment at three of the locations. In addition, the Company received
$1,205,000 in cash net of loan costs and replaced annual debt service of
$785,000 with new annual debt service of $716,000.

NOTE 5. DISPOSITION OF ASSETS.

During fiscal 2000, 1999 and 1998, the Company recognized losses
totaling $213,000, $11,000 and $98,000, respectively from the sale or disposal
of restaurant assets and the closing of unprofitable restaurants. These
restaurants did not have a material effect upon the Company's consolidated
results of operations or financial position.

NOTE 6. ACCRUED LIABILITIES.

Accrued liabilities consist of the following at February 27, 2000 and
February 28, 1999:

2000 1999
---------- ----------

Accrued compensation ................ $1,226,000 $ 738,000
Accrued taxes other than income taxes 721,000 411,000
Accrued liabilities related
to sold restaurants ................ 488,000 172,000
Accrued royalties and advertising ... -- 430,000
Other accrued expenses .............. 1,290,000 578,000
---------- ----------
$3,725,000 $2,329,000
========== ==========

24
<PAGE> 25

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

NOTE 7. LONG-TERM DEBT.

Long-term debt consists of the following at February 27, 2000 and
February 28, 1999:

<TABLE>
<CAPTION>
2000 1999
----------- -----------
<S> <C> <C>
Mortgage debt, monthly payments of $498,000 including interest at 8.3% to 10.6%,
through 2020, collateralized by seventy-two restaurants having a
net book value at February 27, 2000 of $22,600,000 ............................ $49,614,000 $13,144,000

Equipment loans, monthly payments of $37,000 including interest at 10.1% to
11.0% through February 2007 collateralized by equipment at several KFC
restaurants ................................................................... 2,049,000 314,000

Notes payable, monthly payments of $12,000
including interest at 7.0% through June 2000 .................................. 49,000 190,000

Note payable, monthly payments of $9,100 including interest at 9.0% through
October 1998 and thereafter $500 through October 2003 ......................... 18,000 23,000
----------- -----------
51,730,000 13,671,000
Less current maturities ........................................................ 1,762,000 577,000
----------- -----------
$49,968,000 $13,094,000
=========== ===========
</TABLE>

Certain of the Company's debt arrangements require the maintenance of a
consolidated fixed charge coverage ratio of 1.2 to 1.0 and individual
restaurants coverage ratios of 1.4 to 1.0. The Company is currently not in full
compliance with maintaining the required individual restaurant coverage ratios
but was able to obtain a waiver of these violations from the applicable lender.

The Company paid interest relating to long-term debt of approximately
$3,481,000, $992,000 and $836,000 in fiscal 2000, 1999 and 1998, respectively.

<PAGE> 26

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

NOTE 8. LEASE OBLIGATIONS AND OTHER COMMITMENTS.

Property under capital leases at February 27, 2000 and February 28,
1999 are as follows:

2000 1999
---------- ----------

Leased property:
Buildings ................... $ 600,000 $3,720,000
Equipment, furniture
and fixtures ............... 571,000 1,369,000
---------- ----------
Total ....................... 1,171,000 5,089,000
Less accumulated amortization 354,000 1,946,000
---------- ----------
$ 817,000 $3,143,000
========== ==========

Amortization of leased property under capital leases was $119,000,
$545,000 and $482,000 in fiscal 2000, 1999 and 1998, respectively.

Related obligations under capital leases at February 27, 2000 and
February 28, 1999 are as follows:

2000 1999
---------- ----------

Capital lease obligations ........... $1,714,000 $4,697,000
Less current maturities ............. 969,000 453,000
---------- ----------
Long-term capital lease obligations . $ 745,000 $4,244,000
========== ==========

The Company paid interest of approximately $92,000, $92,000 and
$61,000 relating to capital lease obligations in fiscal 2000, 1999 and 1998,
respectively.

Future minimum rental payments to be made under capital leases at
February 27, 2000, are as follows:

2001 ..................... $1,864,000
2002 ..................... 165,000
2003 ..................... 165,000
2004 ..................... 157,000
2005 ..................... 98,000
Later years .............. 714,000
-----------
3,163,000
Less amount representing
interest ................. 1,449,000
----------
Total obligations under
capital leases ........... $1,714,000
==========

<PAGE> 27

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

The Company's leases for restaurant land and buildings are
noncancellable and expire on various dates through 2019. The leases have renewal
options ranging from 1 to 26 years. Certain restaurant land and building leases
require the payment of additional rent equal to an amount by which a percentage
of annual sales exceeds annual minimum rentals. The interest rates on the leases
range predominantly from 9.5% to 13.0%. Total contingent rentals were $82,000
$75,000 and $72,000 in fiscal 2000, 1999 and 1998, respectively. Future
noncancellable minimum rental payments under operating leases at February 27,
2000, are as follows: 2001 - $3,630,000, 2002 - $1,901,000; 2003 - $1,722,000;
2004 - $1,635,000; 2005 - $1,429,000 and an aggregate $8,138,000 for the years
thereafter. Rental expense for all operating leases was $1,824,000, $1,146,000
and $1,058,000 for fiscal 2000, 1999 and 1998, respectively.

For KFC products, the Company is required to pay royalties of 4% of
gross revenues and to expend an additional 5% of gross revenues on national and
local advertising pursuant to its franchise agreements. For Taco Bell products
in KFC/Taco "2n1" restaurants operated under license agreements from Taco Bell
Corp. and franchise agreements from KFC Corporation the Company is required to
pay royalties of 10% of Taco Bell gross revenues and to make advertising fund
contributions of 1/2% of Taco Bell gross revenue. For Taco Bell product sales in
Taco Bell restaurants operated under franchises the Company is required to pay
royalties of 5.5% of gross revenues and to expend an additional 4.5% of gross
revenues on national and local advertising.

As part of the acquisition of the 54 restaurants from Tricon Global
Restaurants, Inc., the Company signed an agreement which granted it the rights
to develop 20 KFC, Taco Bell or KFC "2n1" restaurants in specific geographic
areas. Under the agreement five restaurants are required to be developed each
year over a four year period. As of February 27, 2000 the Company has developed
two restaurants under this agreement. In fiscal years 2001 through 2004 the
Company will commit approximately an additional $13,600,000 to complete its
obligation under this agreement.

NOTE 9. NET INCOME (LOSS) PER COMMON SHARE.

All net income (loss) per common share amounts have been computed based
on the weighted average number of common shares outstanding during each year
which totaled 2,912,894, 2,910,839 and 2,936,877 for fiscal 2000, 1999 and 1998,
respectively.

NOTE 10. INCOME TAXES.

The current provision for income taxes, which approximates tax
payments, consists of state and local taxes of $4,000, $20,000 and $14,000 for
fiscal 2000, 1999 and 1998, respectively. There was no deferred provision for
income taxes during each of the fiscal years 2000, 1999 and 1998. There was no
provision for income taxes from discontinued operations.

<PAGE> 28

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

A reconciliation between the provision for income taxes and income
taxes calculated at the statutory tax rate of 35% is as follows:

<TABLE>
<CAPTION>
2000 1999 1998
--------- --------- ---------
<S> <C> <C> <C>
Tax provision (benefit) at
statutory rate ............. $(119,000) $(336,000) $(320,000)
State and local taxes,
net of federal benefit ..... 3,000 13,000 9,000
Losses (income) and temporary
differences with no
tax benefit (expense) ...... 108,000 338,000 321,000
Other ....................... 12,000 5,000 4,000
--------- --------- ---------
$ 4,000 $ 20,000 $ 14,000
========= ========= =========
</TABLE>

The components of deferred tax assets (liabilities) at February 27,
2000 and February 28, 1999 are as follows:

2000 1999
----------- -----------

Operating loss carryforwards ............ $ 4,539,000 $ 5,942,000
Tax credit carryforwards ................ 56,000 93,000
Property and equipment .................. 897,000 1,134,000
Accrued expenses not currently deductible 393,000 355,000
Inventory valuation ..................... 7,000 4,000
Intangible assets ....................... (60,000) --
Deferred tax asset valuation adjustment . (5,232,000) (6,928,000)
----------- -----------
Net deferred tax asset .................. $ 600,000 $ 600,000
=========== ===========

The valuation allowance decreased $1,696,000 and $2,729,000 during
fiscal 2000 and 1999, respectively and increased $296,000 during fiscal 1998.

At February 27, 2000, the Company has net operating loss
carryforwards which, if not utilized, will expire as follows:

2001 ................... $ 4,044,000
2002 ................... 16,000
2003 ................... 116,000
2004 ................... 1,030,000
2005 ................... 2,376,000
2008 ................... 90,000
2009 ................... 987,000
2012 ................... 744,000
2013 ................... 728,000
2019................... 268,000
2020................... 948,000
-----------
Total .................. $11,347,000
===========

The Company also has alternative minimum tax net operating loss
carryforwards of $9,351,000 which will expire, if not utilized, in varying
amounts through fiscal 2020. These carryforwards are available to offset up to
90% of any alternative minimum taxable income which would otherwise be taxable.
As of February 27, 2000 and February 28, 1999, the Company has an alternative
minimum tax credit carryforward of $56,000 and $69,000, respectively.

28
<PAGE> 29

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

NOTE 11. STOCK OPTIONS AND SHAREHOLDERS' EQUITY.

The Company previously had an Incentive Stock Option Plan ("Incentive
Plan") and a Stock Option Plan ("Stock Option Plan") which provided options
exercisable at the market value of the underlying common shares on the date of
the grant. Both plans expired during fiscal 1995.

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 the 145,500 shares were granted to
executives and managers of the Company on April 2, 1999 at an exercise price of
$4 1/8. As of February 27, 2000 the closing price of the Company's stock was
$3.00 per share. The plan provides that the options are exercisable after a
waiting period of 6 months and that each option expires 10 years after its 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.

Information with respect to these option plans follows:

NUMBER OF SHARES
------------------------------------------
2000 1999 1998
-------- -------- --------

Outstanding, beginning of year 24,166 57,500 60,167
Expired during year .......... (24,516) (33,334) (2,667)
Granted during the year ...... 275,350 -- --
-------- -------- --------
Outstanding, end of year ..... 275,000 24,166 57,500
======== ======== ========
Exercisable, end of year ..... 145,150 24,166 57,500
======== ======== ========

On April 8, 1999, the Company adopted a Shareholder Rights Plan in
which the Board of Directors declared a distribution of one Right for each of
the Company's outstanding Common Shares. Each Right entitles the holder to
purchase from the Company one one-thousandth of a Series A Preferred Share (a
"Preferred Share") at a purchase price of $30.00 per Right, subject to
adjustment. One one-thousandth of a Preferred Share is intended to be
approximately the economic equivalent of one Common Share. The Rights will
expire on April 7, 2009, unless redeemed by the Company as described below.

The Rights are neither exercisable nor traded separately from the
Common Shares. The Rights will become exercisable and begin to trade separately
from the Common Shares if a person or group becomes the beneficial owner of 21%
or more of the then-outstanding Common Shares or announces an offer to acquire
21% or more of the then-outstanding Common Shares.

29
<PAGE> 30

MORGAN'S FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 27, 2000, FEBRUARY 28, 1999 AND MARCH 1, 1998

If a person or group acquires 21% or more of the outstanding Common
Shares, then each Right not owned by the acquiring person or its affiliates will
entitle its holder to purchase, at the Right's then-current exercise price,
fractional Preferred Shares that are approximately the economic equivalent of
Common Shares (or, in certain circumstances, Common Shares, cash, property or
other securities of the Company) having a market value equal to twice the
then-current exercise price. In addition, if, after the Rights become
exercisable, the Company is acquired in a merger or other business combination
transaction with an acquiring person or its affiliates or sells 50% or more of
its assets or earnings power to an acquiring person or its affiliates, each
Right will entitle its holder to purchase, at the Right's then-current exercise
price, a number of shares of the acquiring person's common stock having a market
value of twice the Right's exercise price. The Board of Directors may redeem the
Rights in whole, but not in part, at a price of $.01 per Right, subject to
certain limitations.

The dividend distribution was made on May 12, 1999, payable to
shareholders of record on that date. The initial distribution of Rights is not
taxable to shareholders.

NOTE 12. 401(k) RETIREMENT PLAN.

The Company has a 401(k) Retirement Plan in which employees age 21 or
older who have completed one year of service with the Company, working at least
1,000 hours, are eligible to participate. The Company matches, in Company stock,
a percentage of employee contributions. During fiscal 2000, 1999 and 1998,
respectively, the Company incurred $62,000, $19,000 and $20,000, respectively,
in expenses for matching contributions to the plan.

NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS.

Management believes that the fair value of the Company's debt at
February 27, 2000 approximates carrying value, based upon interest rates
obtained in recent financing transactions.

NOTE 14. NEW ACCOUNTING STANDARD.

The Financial Accounting Standards Board has issued Statement of
Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities. The Company has not yet completed its
analysis of SFAS No. 133 and, accordingly, has not yet determined what effect,
if any, it may have on future financial statements.

<PAGE> 31

MORGAN'S FOODS, INC.
INDEX TO EXHIBITS
ITEM 14 (a) (3)

Exhibit
Number Exhibit Description
------ -------------------

3.1 Amended Articles of Incorporation, as amended (1)

3.2 Amended Code of Regulations (1)

4.1 Specimen Certificate for Common Shares (2)

10.1 Specimen KFC Franchise Agreements (3)

10.2 Specimen Taco Bell Franchise Agreement

10.3 Executive and Manager Nonqualified Stock Option Plan (4)

10.4 Key Employee Nonqualified Stock Option Plan (4)

10.5 Asset Purchase Agreements with Taco Bell Corp. and KFC
Corporation and their Various Affiliated Companies (5)

10.6 Form of Mortgage Loan Agreement with Captec Financial
Group, Inc. (6)

19 Form of Indemnification Contract between Registrant and its
Officers and Directors (4)

21 Subsidiaries

23 Independent Auditors' Consent

27 Financial Data Schedule

(1) Filed as an exhibit to Registrant's Form 10-K for the 1992 fiscal year
and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant's Registration Statement (No.
33-35772) on Form S-2 and incorporated herein by reference.

(3) Filed as an exhibit to the Registrant's Registration Statement (No.
2-78035) on Form S-1 and incorporated herein by reference.

(4) Filed as an exhibit to the Registrant's Form S-8 filed November 17,
1999 and incorporated herein by reference.

(5) Filed as an exhibit to Registrant's Form 8-KA filed September 27, 1999
and incorporated herein by reference.

(6) Filed as an exhibit to the Registrant's Form 10-K for the 1996 fiscal
year and incorporated herein by reference.

31
<PAGE> 32

SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) 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.

<TABLE>
<S> <C>
Morgan's Foods, Inc.

Dated: May 30, 2000 /s/ Leonard Stein-Sapir
---------------------------------- ----------------------------------------
By: Leonard Stein-Sapir
Chairman of the Board,
Chief Executive Officer & Director
</TABLE>

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

/s/ Leonard Stein-Sapir /s/ Lawrence S. Dolin
----------------------------------------- -----------------------------------
By: Leonard Stein-Sapir By: Lawrence S. Dolin
Chairman of the Board, Director
Chief Executive Officer & Director Dated: May 30, 2000
Dated: May 30, 2000

/s/ James J. Liguori /s/ Steven S. Kaufman
----------------------------------------- -----------------------------------
By: James J. Liguori By: Steven S. Kaufman
Director, President & Director
Chief Operating Officer Dated: May 30, 2000
Dated: May 30, 2000

/s/ Kenneth L. Hignett /s/ Richard A. Arons
----------------------------------------- -----------------------------------
By: Kenneth L. Hignett By: By: Richard A. Arons
Director, Senior Vice President, Director
Chief Financial Officer & Secretary Dated: May 30, 2000
Dated: May 30, 2000

/s/ Bernard Lerner
-----------------------------------
By: Bernard Lerner
Director
Dated: May 30, 2000