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 February 28, 1999
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.
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(Exact name of Registrant as specified in charter)
GEORGIA 63-115596
----------------------------------------- --------------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
1955 Lake Park Drive, Suite 400,
Smyrna, GA 30080-8855
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(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___
12,112,226
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(Number of shares of $0.01 par value common stock outstanding as of
March 31, 1999)
<PAGE>
INDEX
PART I Financial Information
Page
Number
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
February 28, 1999 and May 31, 1998.........................3
Condensed Consolidated Statements of Income for
the Three Months and Nine Months Ended February 28, 1999
and 1998...................................................4
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended February 28, 1999 and 1998.......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..............................................N/A
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 Security 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
<TABLE>
Morrison Health Care, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands, except per share data)
<CAPTION>
As of As of
February 28, 1999 May 31, 1998
----------------------------------------
(Unaudited) (Audited)
<S> <C> <C>
Assets
Current assets:
Cash and short-term investments $ 3,103 $ 5,720
Receivables - accounts and
notes (net) 34,030 27,753
Inventories 3,015 2,936
Prepaid expenses 645 1,262
Deferred income tax benefits 2,977 1,949
----------------------------------------
Total current assets 43,770 39,620
Property and equipment - at cost 30,486 24,191
Less accumulated depreciation 11,517 10,232
----------------------------------------
18,969 13,959
Cost in excess of net assets
acquired, net 18,248 12,097
Deferred charges 6,591 4,083
Other assets 16,026 14,615
----------------------------------------
Total assets $103,604 $84,374
========================================
Liabilities and Stockholders'
Equity
Current liabilities:
Accounts payable $ 11,150 $11,975
Disbursements in transit 2,374 2,570
Other accrued liabilities 12,232 12,709
Current portion of long-term debt 11 5,022
----------------------------------------
Total current liabilities 25,767 32,276
Long-term debt 53,475 31,690
Other deferred liabilities 11,206 10,188
Stockholders' equity:
Common stock, $0.01 par value
(authorized 100,000 shares;
issued: 12,669 and 12,379
shares, 1999 and 1998,
respectively) 127 124
Capital in excess of par value 17,321 12,859
Unearned ESOP shares (2,923) (3,195)
Deferred Comp Plan liability payable
in Company Stock 1,489 1,848
Retained earnings 10,656 2,322
----------------------------------------
26,670 13,958
Less cost of treasury stock 13,514 3,738
----------------------------------------
Total stockholders' equity 13,156 10,220
----------------------------------------
Total liabilities and
stockholders' equity $103,604 $84,374
========================================
The accompanying notes are an integral part of the financial statements.
</TABLE>
<PAGE>
<TABLE>
Morrison Health Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(In thousands, except per share data)
(Unaudited)
<CAPTION>
For the Three Months Ended For the Nine Months Ended
--------------------------- ---------------------------
February 28, February 28, February 28, February 28,
1999 1998 1999 1998
--------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenues $84,085 $63,337 $234,164 $181,737
Operating costs and expenses:
Operating expenses 70,314 52,796 195,541 150,481
Selling, general and administrative 7,876 5,925 20,789 16,475
Interest expense, net of interest income 644 324 1,708 780
--------------------------- ---------------------------
78,834 59,045 218,038 167,736
--------------------------- ---------------------------
Income before provision for income taxes 5,251 4,292 16,126 14,001
Provision for federal and state income taxes 2,021 1,695 6,320 5,530
--------------------------- ---------------------------
Net income $ 3,230 $ 2,597 $ 9,806 $ 8,471
=========================== ===========================
Earnings per share - Basic $ 0.28 $ 0.22 $ 0.82 $ 0.71
=========================== ===========================
Earnings per share - Diluted $ 0.27 $ 0.21 $ 0.81 $ 0.70
=========================== ===========================
Weighted-average common shares - Basic 11,867 11,975 11,935 11,927
Net effect of dilutive stock options 273 283 231 222
--------------------------- ---------------------------
Weighted-average common and common
equivalent shares - Diluted 12,140 12,258 12,166 12,149
=========================== ===========================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
<TABLE>
Morrison Health Care, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
<CAPTION>
For the Nine Months Ended
-------------------------------
February 28, February 28,
1999 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net income $ 9,806 $ 8,471
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,182 1,858
Amortization of intangibles 610 220
Other, net 1,472 734
Deferred income taxes (1,344) (454)
Gain on disposition of assets (101) (47)
Changes in operating assets and liabilities:
Increase in receivables (5,994) (3,974)
Increase in inventories (80) (362)
Increase in prepaid and other assets (646) (301)
Decrease in accounts payable,
accrued and other liabilities (1,106) (1,031)
Increase in income taxes payable 0 506
------------ ------------
Net cash provided by operating activities 4,799 5,620
------------ ------------
Investing activities:
Purchases of property and equipment (7,663) (4,911)
Proceeds from disposal of assets 763 242
Cost of acquisitions, net (6,528) (6,303)
Increase in deferred charges (3,943) (2,253)
Other, net 196 (598)
------------ ------------
Net cash used by investing activities (17,175) (13,823)
------------ ------------
Financing activities:
Net change in long-term debt 16,629 11,364
Proceeds from the issuance of stock 522 0
Proceeds from exercise of stock options 3,855 2,139
Purchase of treasury stock (10,134) 0
Dividends paid (1,472) (7,391)
Decrease/(Increase) in treasury stock held by
deferred compensation plan 359 (45)
(Decrease)/Increase in deferred compensation
liability payable in Company stock (359) 45
ESOP shares released 359 294
------------ ------------
Net cash provided by financing activities 9,759 6,406
------------ ------------
Decrease in cash and short-term investments (2,617) (1,797)
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 $ 3,103 $ 4,550
============ ============
</TABLE>
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 previously reported amounts have been reclassified to be consistent with
current reporting practices.
NOTE B - SUBSEQUENT EVENTS
Declaration of Quarterly Dividend
On March 23, 1999, the Company's Board of Directors declared a quarterly cash
dividend of $0.04 per share of outstanding common stock payable on April 30,
1999 to shareholders of record at the close of business on April 9, 1999.
NOTE C - 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.
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.
NOTE D - ACQUISITION
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 purchase price may increase contingent on
the future earnings of CSN. The acquisition was accounted for using the purchase
method. The resulting goodwill is being amortized over twenty years using the
straight-line method. The results of CSN have been 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 quarter and the nine months ended
February 28, 1999 compared with the results for the comparable periods of the
prior year.
RESULTS OF OPERATIONS
The Company's net income from continuing operations increased 24.4% to $3.2
million for the quarter and increased 15.8% to $9.8 million for the nine months
ended February 28, 1999, compared with net income of $2.6 million and $8.5
million reported for the corresponding periods of the prior fiscal year.
Earnings before interest and taxes increased 27.7% or $1.3 million to $5.9
million for the quarter and increased 20.7% or $3.1 million to $17.8 million for
the nine months ended February 28, 1999. The increase over the corresponding
prior year periods was due to growth in continuing and new accounts and high
account retention.
MANAGED VOLUME AND REVENUE
Due to the difference between the amount of revenue that is reported for the fee
accounts (net management fee plus reimbursed expenses) and the profit and loss
accounts (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, regardless of which type of
contract exists with the client. Managed volume from operations increased $39.4
million or 30.5% to $168.6 million for the quarter and increased $98.5 million
or 26.8% to $466.2 million for the nine months ended February 28, 1999 over the
corresponding prior year periods due to new accounts, acquired accounts and
growth in existing accounts.
Revenue from operations increased $20.7 million or 32.8% to $84.1 million for
the quarter and increased $52.4 million or 28.8% to $234.2 million for the nine
months ended February 28, 1999 over the corresponding prior year periods. The
increase was primarily attributable to the conversion of client-paid payroll to
MHCI-paid payroll in continuing accounts, new accounts and accounts acquired in
acquisitions.
OPERATING EXPENSES
Operating expenses increased $17.5 million or 33.2% to $70.3 million for the
quarter and increased $45.1 million or 29.9% to $195.5 million for the nine
months ended February 28, 1999. These expenses have increased over the prior
year periods 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.
Selling, general and administrative expenses remained constant as a percent of
managed volume and increased $2.0 million or 32.9% for the quarter and $4.3
million or 26.2% for the nine months ended February 28, 1999 as compared to the
corresponding periods of the prior year. This increase is due to the three
acquisitions in the past year, expenses related to the opening of new accounts
and increased investment in human resources training and development.
INTEREST EXPENSE, Net of Interest Income
Net interest expense increased from $0.3 million to $0.6 million for the quarter
and increased from $0.8 million to $1.7 million for the nine months ended
February 28, 1999 as compared to the corresponding periods 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 $25,000 and
$219,000, respectively, for the quarter and the nine months ended February 28,
1999, 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 quarter and the
nine months ended February 28, 1999 was 38.5% and 39.2%, respectively, as
compared to 39.5% for the quarter and the nine months ended February 28, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Total assets at February 28, 1999 were $103.6 million, a $19.2 million increase
over $84.4 million as of the prior fiscal year end. This increase is
attributable to an increase of $6.3 million in receivables due to the increase
in revenue from new, acquired and continuing accounts, a $6.2 increase in
goodwill from acquisitions, an increase in net fixed assets primarily due to the
construction of Advanced Culinary Centers and the acquisition and implementation
of a new computer information system and an increase in deferred charges.
Total liabilities at February 28, 1999 were $90.4 million, an $16.3 million
increase from $74.2 million as of the end of the prior fiscal year. This
increase was primarily due to a $16.8 million increase in debt to fund the
increase in fixed assets, receivables and acquisitions.
The Company repurchased 207,450 shares of Common Stock, at an average purchase
price of $19.65 per share, during the quarter ended February 28, 1999 and
636,850 shares of Common Stock, at an average purchase price of $18.88 per
share, during the nine months ended February 28, 1999. Giving effect to these
repurchases, the Company has 363,150 shares remaining available for repurchase
under its stock repurchase program authorized by the Board of Directors in March
1998.
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 95% 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."
<PAGE>
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 March 23, 1999, the Company's Board of Directors declared a quarterly cash
dividend of $0.04 per share of outstanding common stock payable on April 30,
1999 to shareholders of record at the close of business on April 9, 1999.
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 Nine Months
ended February 28, 1999
(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)
04/13/99 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 Nine Months ended February 28, 1999
<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 quarter ended February 28,
1999 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001007507
<NAME> MORRISON HEALTH CARE, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1999
<PERIOD-START> JUN-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 3,103
<SECURITIES> 0
<RECEIVABLES> 27,456
<ALLOWANCES> 715
<INVENTORY> 3,015
<CURRENT-ASSETS> 43,770
<PP&E> 30,486
<DEPRECIATION> 11,517
<TOTAL-ASSETS> 103,604
<CURRENT-LIABILITIES> 25,767
<BONDS> 53,475
0
0
<COMMON> 127
<OTHER-SE> 13,029
<TOTAL-LIABILITY-AND-EQUITY> 103,604
<SALES> 234,164
<TOTAL-REVENUES> 234,164
<CGS> 195,541
<TOTAL-COSTS> 195,541
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,060
<INCOME-PRETAX> 16,126
<INCOME-TAX> 6,320
<INCOME-CONTINUING> 9,806
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,806
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0.81
</TABLE>
