UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 1998
OR
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 1-14194
MORRISON HEALTH CARE, INC.
(Exact name of Registrant as specified in charter)
GEORGIA 63-1155966
- ----------------------------------------------------- --------------------
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) identification No.)
1955 Lake Park Drive, Suite 400, Smyrna, GA 30080-8855
- ----------------------------------------------------- --------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (770) 437-3300
--------------------
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
12,133,108
- --------------------------------------------------------------------------------
(Number of shares of $0.01 par value common stock outstanding as of
September 30, 1998)
<PAGE>
INDEX
PART I Financial Information
Page
Number
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
August 31, 1998 and May 31, 1998............................ 3
Condensed Consolidated Statements of Income for
the Three Months Ended August 31, 1998 and 1997............. 4
Condensed Consolidated Statements of Cash Flows
for the Three Months Ended August 31, 1998 and 1997......... 5
Notes to Condensed Consolidated Financial Statements........ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 7-9
Item 3. Quantitative and Qualitative Disclosures about Market Risk.. 9
PART II Other Information
Item 1. Legal Proceedings........................................... 10
Item 2. Changes in Securities....................................... None
Item 3. Defaults upon Senior Securities............................. None
Item 4. Submission of Matters to a Vote of Securit Holders.......... None
Item 5. Other Information........................................... 10
Item 6. Exhibits and Reports on Form 8-K........................... 10
Signatures........................................................... 11
Index to Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................................ 12
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Morrison Health Care, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
As of As of
August 31, 1998 May 31, 1998
--------------------------------------
(Unaudited) (Audited)
Assets
Current assets:
Cash and short-term investments........ $ 2,088 $ 5,720
Receivables - accounts and notes (net). 29,298 27,753
Inventories............................ 2,958 2,936
Prepaid expenses....................... 1,296 1,262
Deferred income tax benefits........... 2,067 1,949
- -------------------------------------------------------------------------------
Total current assets................. 37,707 39,620
- -------------------------------------------------------------------------------
Property and equipment - at cost......... 26,539 24,191
Less accumulated depreciation.......... 10,334 10,232
- -------------------------------------------------------------------------------
16,205 13,959
Cost in excess of net assets
acquired, net.......................... 12,405 12,097
Deferred charges......................... 3,822 4,083
Other assets............................. 15,301 14,615
- -------------------------------------------------------------------------------
Total assets......................... $85,440 $84,374
===============================================================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable....................... $10,429 $11,975
Disbursements in transit............... 3,787 2,570
Other accrued liabilities.............. 9,654 12,709
Current portion of long-term debt...... 1,275 5,022
- -------------------------------------------------------------------------------
Total current liabilities............ 25,145 32,276
- -------------------------------------------------------------------------------
Long-term debt........................... 40,000 31,690
Other deferred liabilities............... 11,988 12,036
Stockholders' equity:
Common stock, $0.01 par value
(authorized 100,000 shares;
issued: 12,465 and 12,379 shares,
1999 and 1998, respectively)........ 125 124
Capital in excess of par value........ 14,019 12,859
Unearned ESOP shares.................. (3,103) (3,195)
Retained earnings..................... 4,987 2,322
- -------------------------------------------------------------------------------
16,028 12,110
Less cost of treasury stock........... 7,721 3,738
- -------------------------------------------------------------------------------
Total stockholders' equity.......... 8,307 8,372
- -------------------------------------------------------------------------------
Total liabilities and
stockholders' equity.............. $85,440 $84,374
===============================================================================
The accompanying notes are an integral part of the financial statements.
<PAGE>
Morrison Health Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
For the Three Months Ended
August 31, August 31,
1998 1997
-----------------------------
Revenues $72,246 $57,754
Operating costs and expenses:
Operating expenses........................... 60,649 47,727
Selling, general and administrative.......... 5,918 5,126
Interest expense, net of interest income,
totaling $50 and $177, in 1999
and 1998, respectively..................... 424 227
- ----------------------------------------------------------------------------
66,991 53,080
- ----------------------------------------------------------------------------
Income before provision for income taxes....... 5,255 4,674
Provision for federal and state income taxes... 2,103 1,846
- ----------------------------------------------------------------------------
Net income..................................... $ 3,152 $ 2,828
============================================================================
Earnings per share - Basic..................... $ 0.26 $ 0.24
=============================
Earnings per share - Diluted................... $ 0.26 $ 0.24
=============================
Weighted-average common shares - Basic......... 11,895 11,842
Net effect of dilutive stock options........... 247 186
-----------------------------
Weighted-average common and common
equivalent shares - Diluted.................. 12,142 12,028
=============================
The accompanying notes are an integral part of the financial statements.
<PAGE>
Morrison Health Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
For the Three Months Ended
August 31, August 31,
1998 1997
-------------------------------
Operating activities:
Net income....................................... $ 3,152 $ 2,828
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization................ 682 580
Amortization of intangibles.................. 161 56
Other, net................................... 439 214
Deferred income taxes........................ (589) 167
Gain on disposition of assets................ (87) (43)
Changes in operating assets and liabilities:
Increase in receivables.................... (1,495) (3,292)
(Increase)/Decrease in inventories......... (22) 43
Increase in prepaid and other assets....... (119) (29)
Decrease in accounts payable,
accrued and other liabilities........... (5,767) (2,615)
Increase in income taxes payable........... 2,337 1,578
- --------------------------------------------------------------------------------
Net cash used by operating activities............ (1,308) (513)
- --------------------------------------------------------------------------------
Investing activities:
Purchases of property and equipment.............. (3,484) (981)
Proceeds from disposals of assets................ 704 197
Deferred charges................................. (141) (1,238)
Other, net....................................... (745) (835)
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Net cash used by investing activities............ (3,666) (2,857)
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Financing activities:
Net change in long-term debt..................... 4,563 731
Proceeds from the issuance of stock.............. 522 0
Proceeds from exercise of stock options.......... 606 396
Purchases of Treasury Stock...................... (4,418) 0
Dividends paid................................... (488) (2,496)
Decrease/(Increase) in Treasury Stock held by
deferred compensation plan................... 435 (33)
ESOP shares released............................. 122 93
- --------------------------------------------------------------------------------
Net cash provided/(used) by financing activities. 1,342 (1,309)
- --------------------------------------------------------------------------------
Decrease in cash and short-term investments...... (3,632) (4,679)
Cash and short-term investments at the
beginning of the period........................ 5,720 6,347
- --------------------------------------------------------------------------------
Cash and short-term investments at the
end of the period.............................. $ 2,088 $ 1,668
================================================================================
The accompanying notes are an integral part of the financial statements.
<PAGE>
Morrison Health Care, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying unaudited
condensed consolidated financial statements reflect all adjustments for normal
recurring accruals. These adjustments are necessary, in the opinion of
Management, for a fair presentation of the financial position, the results of
operations and the cash flows for the interim periods presented. The results of
operations for the interim periods reported herein are not necessarily
indicative of results to be expected for the full year. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended May 31, 1998.
Certain prior reported amounts have been reclassified to be consistent with
current reporting practices.
NOTE B - LONG-TERM DEBT
Refinancing of Credit Facility
In June 1998, the Company replaced its $50 million credit facility with a $75
million revolving credit line from four financial institutions. The new credit
line has a variable interest rate based upon LIBOR and variable interest payment
requirements. The principal is due no later than June 30, 2003. The initial
amount borrowed was $35.4 million, all of which was used to repay the balance
due on the $50 million and $5 million credit facilities.
NOTE C - SUBSEQUENT EVENTS
Declaration of Quarterly Dividend
On September 29, 1998, the Company's Board of Directors declared a quarterly
cash dividend of $0.04 per share of outstanding common stock payable on October
30, 1998 to shareholders of record at the close of business on October 12, 1998.
Industrial Revenue Bonds
On September 1, 1998, the Company entered into a loan agreement with Maryland
Economic Development Corporation relating to tax-exempt adjustable mode
Industrial Development Revenue Bonds in the aggregate principal amount of $2.75
million. The bonds bear interest at a variable rate in accordance with the terms
of an Indenture of Trust and are due January 1, 2013. The debt is secured by a
stand-by letter of credit.
Acquisition - Culinary Service Network, Inc.
In October 1998, the Company acquired for approximately $6 million all of the
outstanding common stock of Philadelphia-based Culinary Service Network, Inc.
("CSN"), in a cash transaction. The price purchase may increase contingent on
the future earnings of CSN. The acquisition will be accounted for using the
purchase method. The resulting goodwill will be amortized over twenty years
using the straight-line method. The results of CSN will be included from the
acquisition date.
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion below relates to the results of operations of Morrison Health
Care, Inc. ("MHCI" or the "Company") for the three months ended August 31, 1998
compared with the results for the comparable period of the prior year.
RESULTS OF OPERATIONS
The Company's net income from continuing operations increased 11.5% to $3.2
million for the three months ended August 31, 1998, compared with net income of
$2.8 reported for the corresponding period of the prior fiscal year. Earnings
before interest and taxes increased 15.9% or $0.8 million to $5.7 million for
the three months ended August 31, 1998. The increase was due to growth in
continuing and new account income.
MANAGED VOLUME AND REVENUE
Due to the difference between the amount of revenue that is reported for the fee
account (net management fee plus reimbursed expenses) and the profit and loss
account (gross revenues of meal sales), Management uses the concept of managed
volume to evaluate the Company's true growth. Managed volume is defined by MHCI
as the total cost of operating the foodservices. Managed volume from operations
increased $24.5 million or 20.8% to $141.9 million for the three months ended
August 31, 1998 over the prior year period due to new and acquired accounts.
Revenue from operations increased $14.5 million or 25.1% to $72.2 million for
the three months ended August 31, 1998 over the prior year period. The increase
was primarily attributable to the conversion of client-paid payroll to MHCI-paid
payroll in continuing accounts, new accounts and accounts acquired from
acquisitions.
OPERATING EXPENSES
Operating expenses increased $12.9 million or 27.1% to $60.6 million for the
three months ended August 31, 1998. These expenses have increased over the prior
year period primarily as a result of the addition of new and acquired accounts
and the conversion of client-paid payroll to MHCI-paid payroll in continuing
accounts. These expenses expressed as a percentage of managed volume increased
slightly compared to the prior year period.
Selling, general and administrative expenses increased $0.8 million or 15.9% for
the three months ended August 31, 1998 as compared to the same period of the
prior year. Selling, general and administrative expenses as percentage of
managed volume decreased slightly when compared to the corresponding period of
the prior year.
INTEREST EXPENSE, Net of Interest Income
Net interest expense increased from $0.2 million to $0.4 million for the three
months ended August 31, 1998 as compared to the same period of the prior year.
Interest on funds used to finance construction of significant additions to
property and equipment is capitalized. The capitalized interest is recorded as
part of the asset to which it relates and is amortized over the asset's
estimated useful life. The Company capitalized interest totaling $75,000 for the
three months ended August 31,1998, related to the construction of Advanced
Culinary Centers and the development and implementation of a new computer
information system.
<PAGE>
INCOME TAXES
The effective income tax rate on continuing operations for the three months
ended August 31, 1998 was 40.0% as compared to 39.5% for the same period of the
prior year.
EARNINGS PER SHARE
The Company has adopted Financial Accounting Standards Board Statement (SFAS)
No. 128, "Earnings Per Share", and has restated earnings per share amounts
reported in prior periods in accordance with SFAS 128. Basic earnings per share
is based on the weighted average number of shares outstanding during each
quarter. Diluted earnings per share is based on the weighted average number of
shares outstanding during each quarter plus the effect of outstanding stock
options using the treasury stock method.
LIQUIDITY AND CAPITAL RESOURCES
Total assets at August 31, 1998 were $85.4 million, a $1.1 million increase over
$84.4 million as of the prior fiscal year end. This increase is attributable to
an increase of $2.2 million in net fixed assets for the construction of Advanced
Culinary Centers and the development of a new computer information system and a
$1.5 million increase in receivables in conjunction with the increase in
revenue.
Total liabilities at August 31, 1998 were $77.1 million, a $1.1 million increase
from $76.0 million as of the end of the prior fiscal year. This increase was
primarily due to a $4.6 million increase in debt to fund the increase in fixed
assets and accounts receivable.
In June 1998, the Company replaced its $50 million credit facility with a $75
million revolving credit line from four financial institutions. The new credit
line has a variable interest rate based upon LIBOR and variable interest payment
requirements. The principal is due no later than June 30, 2003. The initial
amount borrowed was $35.4 million, all of which was used to repay the balance
due on the prior $50 million and $5 million credit facilities.
The Company expects that funds generated from operations and existing lines of
credit will be sufficient to meet its normal operating requirements over the
near term. See "Special Note Regarding Forward-Looking Information."
IMPACT OF YEAR 2000
Currently there is significant uncertainty within the software industry and
among software users regarding the impact of installed computer software that
has been programmed to accept only two-digit entries in the date code fields and
to use such two-digit entries in the software's calculation and report
generation formats. Current versions of the Company's software programs have
been and are being assessed to determine the impact of becoming Year 2000
compliant. Similarly, as part of its continuing review and improvement of
systems and operations, the Company is in the process of modifying and replacing
certain software programs to avoid any detrimental effects in its installed
software programs while upgrading and enhancing the overall effectiveness of its
information management systems. The project is expected to be completed well in
advance of December 31, 1999. While this project includes both Year 2000 and
general improvements, the estimate of the costs to address both issues is less
than $5 million, most of which has already been spent. At this time, the design,
testing, and implementation has been completed for approximately 60% to 70% of
the Company's software programs. Conversion of the remaining software programs
has been designed and is in the final testing phase, with implementation
scheduled to be completed before the end of the fiscal year. Given the progress
to date, the Company does not expect this project to pose significant
operational problems for the Company. However, the Company cannot make
assurances that the Company will not be exposed to any potential claims
resulting from the systems problems associated with the century change. See
"Special Note Regarding Forward-Looking Information."
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
The foregoing sections contain "forward-looking" statements which represent the
Company's expectations or beliefs concerning future events, including statements
regarding liquidity and capital resources and Year 2000 compliance. The Company
cautions that a number of important factors could, individually or in the
aggregate, cause actual results to differ materially from such forward-looking
statements including, without limitation, the following: health care spending
trends; the growth of systems and group purchasing organizations; changes in
health care regulations; increased competition in the health care food and
nutrition market; customer acceptance of the Company's cost savings programs;
and changes in laws and regulations affecting labor and employee benefit costs.
SUBSEQUENT EVENTS
Declaration of Quarterly Dividend
On September 29, 1998, the Company's Board of Directors declared a quarterly
cash dividend of $0.04 per share of outstanding Common Stock payable on October
30, 1998 to shareholders of record at the close of business on October 12, 1998.
Industrial Revenue Bonds
On September 1, 1998, the Company entered into a loan agreement with Maryland
Economic Development Corporation relating to tax-exempt adjustable mode
Industrial Development Revenue Bonds in the aggregate principal amount of $2.75
million. The bonds bear interest at a variable rate in accordance with the terms
of an Indenture of Trust and are due January 1, 2013. The debt is secured by a
stand-by letter of credit.
Acquisition - Culinary Service Network, Inc.
In October 1998, the Company acquired for approximately $6 million all of the
outstanding common stock of Philadelphia-based Culinary Service Network, Inc.
("CSN"), in a cash transaction. The price purchase may increase contingent on
the future earnings of CSN. The acquisition will be accounted for using the
purchase method. The resulting goodwill will be amortized over twenty years
using the straight-line method. The results of CSN will be included from the
acquisition date.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is presently, and from time to time, subject to pending claims and
suits arising in the ordinary course of its business. In the opinion of
Management, the ultimate resolution of these pending legal proceedings will not
have a material adverse effect on the Company's operations or consolidated
financial position.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
None
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 27 Financial Data Schedule - For the Three Months ended
August 31, 1998
(b) Reports on Form 8-K:
None
<PAGE>
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.
MORRISON HEALTH CARE, INC.
--------------------------
(Registrant)
10/13/98 By:/S/ K. WYATT ENGWALL
- -------- ---------------------------------------------------
DATE K. WYATT ENGWALL
Senior Vice President, Finance
(Senior Vice President and Principal Accounting Officer)
<PAGE>
MORRISON HEALTH CARE, INC.
LIST OF EXHIBITS
Exhibit
Number Description
- --------------------------------------------------------------------------------
27 Financial Data Schedule - For the Three Months ended August 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of income in the
Company's Quarterly Report to Shareholders for the three months ended August 31,
1998 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001007507
<NAME> MORRISON HEALTH CARE, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> AUG-31-1998
<CASH> 2,088
<SECURITIES> 0
<RECEIVABLES> 22,357
<ALLOWANCES> 887
<INVENTORY> 2,958
<CURRENT-ASSETS> 37,707
<PP&E> 26,539
<DEPRECIATION> 10,334
<TOTAL-ASSETS> 85,440
<CURRENT-LIABILITIES> 25,145
<BONDS> 40,000
0
0
<COMMON> 125
<OTHER-SE> 8,182
<TOTAL-LIABILITY-AND-EQUITY> 85,440
<SALES> 72,246
<TOTAL-REVENUES> 72,246
<CGS> 60,649
<TOTAL-COSTS> 60,649
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 475
<INCOME-PRETAX> 5,255
<INCOME-TAX> 2,103
<INCOME-CONTINUING> 3,152
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,152
<EPS-PRIMARY> 0.26
<EPS-DILUTED> 0.26
</TABLE>
