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 November 30, 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 MANAGEMENT SPECIALISTS, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in charter) GEORGIA 63-1155966 - ---------------------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or 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 11,827,194 - -------------------------------------------------------------------------------- (Number of shares of $0.01 par value common stock outstanding as of December 31, 1999) INDEX PART I Financial Information Page Number ------ Item 1. Financial Statements Condensed Consolidated Balance Sheets as of November 30, 1999 and May 31, 1999..................... 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended November 30,1999 and 1998.............................. 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 30, 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................................................... 9 PART II Other Information Item 1. Legal Proceedings...................................... 10 Item 2. Changes in Securities.................................. 10 Item 3. Defaults upon Senior Securities........................ 10 Item 4. Submission of Matters to a Vote of Security Holders.... 10 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 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except per share data) As of As of November 30, May 31, 1999 1999 ------------------------------------- (Unaudited) Assets Current assets: Cash and short-term investments.......... $ 3,234 $ 2,780 Receivables - accounts and notes (net)... 38,336 34,035 Inventories.............................. 3,641 2,940 Prepaid expenses......................... 2,880 2,312 Deferred income tax benefits............. 1,971 1,747 ------------------------------------- Total current assets................... 50,062 43,814 ------------------------------------- Property and equipment - at cost........... 34,264 30,975 Less accumulated depreciation............ 13,440 12,376 ------------------------------------- 20,824 18,599 Cost in excess of net assets acquired, net. 18,957 18,331 Other assets............................... 23,527 22,183 ------------------------------------- Total assets........................... $113,370 $102,927 ===================================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable......................... $ 15,500 $ 15,091 Other accrued liabilities................ 12,027 12,917 Current portion of long-term debt........ 81 136 ------------------------------------- Total current liabilities.............. 27,608 28,144 ------------------------------------- Long-term debt............................. 55,750 49,305 Other deferred liabilities................. 11,811 10,915 Stockholders' equity: Common stock, $0.01 par value (authorized 100,000 shares; issued: 11,837 and 11,977 shares, FY2000 and FY1999, respectively)....... 119 120 Capital in excess of par value........... 574 3,324 Unearned ESOP shares..................... (2,586) (2,806) Deferred Compensation Plan liability payable in Company stock............... 1,635 1,518 Company stock held by Deferred Compensation Plan....................... (1,635) (1,518) Retained earnings ....................... 20,094 13,925 ------------------------------------- Total stockholders' equity............. 18,201 14,563 ------------------------------------- Total liabilities and stockholders' equity............................... $113,370 $102,927 ===================================== The accompanying notes are an integral part of the financial statements. Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited) For the Three Months Ended For the Six Months Ended ----------------------------- ----------------------------- November 30, November 30, November 30, November 30, 1999 1998 1999 1998 ----------------------------- ----------------------------- Revenues......................... $101,185 $77,833 $195,168 $150,079 Operating expenses............... 85,075 64,578 164,027 125,227 ----------------------------- ----------------------------- Gross profit..................... 16,110 13,255 31,141 24,852 Selling, general and administrative expenses........ 9,756 6,995 18,138 12,913 ----------------------------- ----------------------------- 6,354 6,260 13,003 11,939 Interest expense, net of interest income, totaling $104 and $133, in FY2000 and FY1999, respectively........... 674 640 1,303 1,064 ----------------------------- ----------------------------- Income before provision for income taxes................... 5,680 5,620 11,700 10,875 Provision for federal and state income taxes................... 2,232 2,196 4,607 4,299 ----------------------------- ----------------------------- Net income....................... $ 3,448 $ 3,424 $ 7,093 $ 6,576 ============================= ============================= Earnings per share - Basic....... $ 0.29 $ 0.28 $ 0.60 $ 0.54 ============================= ============================= Earnings per share - Diluted..... $ 0.28 $ 0.28 $ 0.58 $ 0.54 ============================= ============================= Weighted-average common shares - Basic................. 11,857 12,044 11,874 11,970 Net effect of dilutive stock options.................. 339 171 354 209 ----------------------------- ----------------------------- Weighted-average common and common equivalent shares - Diluted...................... 12,196 12,215 12,228 12,179 ============================= ============================= The accompanying notes are an integral part of the financial statements. Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited) For the Six Months Ended ----------------------------- November 30, November 30, 1999 1998 ----------------------------- Operating activities: Net income......................................... $ 7,093 $ 6,576 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation................................... 2,273 1,375 Amortization of intangibles.................... 531 374 Deferred income taxes.......................... 132 (59) Gain on disposition of assets.................. (118) (94) Changes in operating assets and liabilities: Receivables................................. (4,257) (8,663) Inventories................................. (701) 12 Prepaid and other assets.................... (2,364) (3,958) Accounts payable, accrued and other liabilities......................... 226 (1,587) Income taxes payable........................ 189 (174) ----------------------------- Net cash provided/(used) by operating activities... 3,004 (6,198) ----------------------------- Investing activities: Purchases of property and equipment................ (5,321) (5,878) Proceeds from disposal of assets................... 940 715 Cost of acquisitions, net.......................... (1,104) (6,251) ----------------------------- Net cash used by investing activities.............. (5,485) (11,414) ----------------------------- Financing activities: Net change in long-term debt....................... 6,390 19,629 Proceeds from the issuance of stock................ 808 522 Proceeds from exercise of stock options............ 2,058 1,240 Purchase of Treasury Stock......................... (5,755) (6,058) Dividends paid..................................... (924) (979) ESOP shares released............................... 358 232 ----------------------------- Net cash (used)/ provided by financing activities.. 2,935 14,586 ----------------------------- Increase/(decrease) in cash and short-term investments...................................... 454 (3,026) Cash and short-term investments at the beginning of the period.......................... 2,780 5,720 ----------------------------- Cash and short-term investments at the end of the period................................ $ 3,234 $ 2,694 ============================= The accompanying notes are an integral part of the financial statements. Morrison Management Specialists, 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, 1999. Certain prior reported amounts and balances have been reclassified to conform to the current year presentation. NOTE B - SUBSEQUENT EVENTS Declaration of Quarterly Dividend On January 7, 2000, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on January 31, 2000 to shareholders of record at the close of business on January 17, 2000. Tenet Healthcare Corp. Contract In January, 2000, Tenet Healthcare Corp., one of the nation's largest healthcare systems, awarded the Company a five-year contract to provide foodservice to 58 of Tenet's acute care hospitals. Under the contract, the Company will manage an estimated $100 million in annual revenue and managed volume. 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 Management Specialists, Inc. ("MMSI" or the "Company") for the quarter and six months ended November 30, 1999 compared with the results for the comparable periods of the prior year. MANAGED VOLUME The Company generally performs its services pursuant to either management fee or profit and loss contracts. While actual services performed are the same, revenue recognition varies by type of contract. In a management fee account, MMSI manages the services and facilities, but the client is responsible for all or nearly all the costs. Revenues and fees are recognized for the amount of the contractually agreed-upon management fee and any earned incentives plus the amount of any expenses or employee payroll costs paid by the Company and charged back to the client. In a profit and loss account, MMSI assumes the risk of profit or loss for the food service operation. For such accounts, the amount of revenue reported is the actual revenue generated from meals served to patients, client employees and visitors. Because of the difference between the amount of revenue that is reported for the fee account (net management fees 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 MMSI as the total costs of operating the food services, regardless of which type of contract exists with the client. Management believes managed volume is its best indicator of performance because it measures total activity from all client accounts and provides an indication of what gross revenues would be if the Company performed all services pursuant to profit and loss contracts. Management uses managed volume as an additional indicator of performance and not as a replacement of measures such as revenues, as defined and required by generally accepted accounting principles. Managed volume from operations increased $29.0 million or 18.6% to $184.7 million for the quarter and increased $65.9 million or 22.1% to $363.4 million for the six months ended November 30, 1999 over the corresponding prior year periods due to new accounts, acquired accounts and growth in existing accounts. RESULTS OF OPERATIONS The Company's net income from continuing operations was even for the quarter at $3.4 million and increased 7.9% to $7.1 million for the six months ended November 30, 1999, compared with net income of $3.4 million and $6.6 million reported for the corresponding periods of the prior fiscal year. Earnings before interest and taxes increased 1.5% or $0.9 million to $6.4 million for the quarter and increased 8.9% or $1.1 million to $13.0 million for the six months ended November 30, 1999. The increase over the corresponding prior year periods was due to growth in continuing and new accounts and high account retention which was partially offset by start-up costs associated with a significant level of new business and expenses for recruiting, training, relocations and promotions. REVENUE Revenue from operations increased $23.4 million or 30.0% to $101.2 million for the quarter and increased $45.1 million or 30.0% to $195.2 million for the six months ended November 30, 1999 over the corresponding prior year periods. The increase was primarily attributable to the conversion of client-paid payroll to Company-paid payroll in continuing accounts, new accounts and accounts acquired in acquisitions. OPERATING EXPENSES Operating expenses increased $20.5 million or 31.7% to $85.1 million for the quarter and increased $38.8 million or 31.0% to $164.0 million for the six months ended November 30, 1999. These expenses have increased over the prior year periods primarily as a result of start-up costs associated with the addition of a significant level of new and acquired accounts and the conversion of client-paid payroll to Company-paid payroll in continuing accounts. Selling, general and administrative increased $2.8 million or 39.5% to $9.8 million for the quarter and increased $5.2 million or 40.5% to $18.1 million for the six months ended November 30, 1999 as compared to the corresponding periods of the prior year. This increase is due to the prior year acquisitions, start-up and opening costs related to a significant level of new business and actual account openings which resulted in increased investments in human resources recruiting, training and development, relocations and promotions. INTEREST EXPENSE, Net of Interest Income Net interest expense was level for the quarter and increased from $1.1 million to $1.3 million for the six months ended November 30, 1999 as compared to the corresponding periods of the prior year. The increase in interest is attributable to higher average borrowings. INCOME TAXES The effective income tax rate on continuing operations for the quarter and the six months ended November 30, 1999 was 39.3% and 39.4%, respectively, as compared to 39.1% and 39.5%, respectively, for the quarter and the six months ended November 30, 1998. LIQUIDITY AND CAPITAL RESOURCES Total assets at November 30, 1999 were $113.4 million, a $10.4 million increase over $102.9 million as of the prior fiscal year end. This increase is attributable to an increase in current assets of $6.2 million comprised of increases in accounts receivable, inventories and prepaid assets and an increase in long-term assets of $4.2 million comprised of increases in fixed assets, goodwill and other assets. Total liabilities at November 30, 1999 were $95.2 million, a $6.8 million increase from $88.4 million as of the end of the prior fiscal year. This increase was primarily due to a $6.4 million increase in long-term debt. 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." YEAR 2000 The Company has not experienced any disruptions in its business as a result of the transition to the year 2000. However, the Company cannot give any assurances that the Company will not encounter year 2000 related issues in the future, particularly, problems associated with the Company's systems' ability to process year 2000 as a leap year. The Company will continue to monitor its software programs and information systems for Year 2000 issues. 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 impact of the year 2000 issue. 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: healthcare spending trends; the growth of systems and group purchasing organizations; changes in healthcare regulations; increased competition in the healthcare food and nutrition market; customer acceptance of the Company's cost saving programs; impact of the year 2000; and changes in laws and regulations affecting labor and employee benefit costs. SUBSEQUENT EVENTS Declaration of Quarterly Dividend On January 7, 2000, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on January 31, 2000 to shareholders of record at the close of business on January 17, 2000. Tenet Healthcare Corp. Contract In January, 2000, Tenet Healthcare Corp., one of the nation's largest healthcare systems, awarded the Company a five-year contract to provide foodservice to 58 of Tenet's acute care hospitals. Under the contract, the Company will manage an estimated $100 million in annual revenue and managed volume. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's swap agreements expose it to market and credit risks which are inherent in all interest rate swaps. Counterparties to these agreements are major financial institutions. Consequently, the Company believes that the credit risk of its swap agreements is minimal. The Company does not believe that any reasonably likely change in near-term interest rates would have a material adverse effect on the future earnings or cash flows of the Company. 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 On September 28, 1999, the Company held its Annual Meeting of Shareholders in Atlanta, Georgia. During the meeting, the following matters were voted upon. Proposal for the election of Directors The following nominees were elected as a Class I or Class III director to the Board of Directors for a three year term. Number of Number of Votes Nominees Votes For Withheld - -------------------------------------------------------------------------------- E. Eugene Bishop Class I 9,580,304 62,934 Fred L. Brown Class I 9,581,559 61,679 Arthur R. Outlaw, Jr. Class I 9,582,036 61,202 Michael F. Corbett Class III 9,613,977 29,261 Other members of the Board of Directors are Claire L. Arnold, Glenn A. Davenport, John B. McKinnon and Dr. Benjamin F. Payton. ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27 Financial Data Schedule - For the Six Months ended November 30, 1999 (b) Reports on Form 8-K: None 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 MANAGEMENT SPECIALISTS, INC. (Registrant) 01/13/00 By:/S/ K. WYATT ENGWALL - -------- -------------------- Date K. WYATT ENGWALL Senior Vice President, Finance (Senior Vice President and Principal Accounting Officer) MORRISON MANAGEMENT SPECIALISTS, INC. LIST OF EXHIBITS Exhibit Number Description - ------- -------------------------------------------------------------------- 27 Financial Data Schedule - For the Six Months ended November 30, 1999