2000 FINANCIAL REVIEW
Selected Financial Data..................................18
Management's Discussion and Analysis of
Financial Condition and Results of Operations............19
Consolidated Statements of Income........................22
Consolidated Balance Sheets..............................23
Consolidated Statements of Cash Flows....................24
Consolidated Statements of Stockholders' Equity..........25
Notes to Consolidated Financial Statements...............26
Report of Independent Auditors...........................35
Shareowner Information...................................36
Directors and Executive Officers.........................37
Page 17 in Annual Report
SELECTED FINANCIAL DATA
Morrison Management Specialists, Inc. and Subsidiaries
The following table summarizes certain selected financial information with
respect to Morrison Management Specialists, Inc. (the "Company" or "MMS") and is
derived from the Financial Statements of MMS. Effective March 9, 1996, Morrison
Health Care, Inc. ("MHCI") was spun off (the "Distribution") from Morrison
Restaurants Inc. ("MRI"), becoming an independent public corporation trading
under the symbol MHI on the New York Stock Exchange. MHCI subsequently changed
its name to Morrison Management Specialists, Inc. effective June 30, 1999. The
Selected Financial Data of MMS is presented as if MMS had been a separate entity
for fiscal year 1996. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of MMS and notes
thereto. Weighted average shares for 1996 were determined as if the shares
issued in connection with the Distribution were outstanding from the beginning
of the year.
For the Fiscal Year*
- ----------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Consolidated Statements of Income Data:
Revenues ................................... $441,074 $ 324,968 $ 250,371 $ 221,011 $ 219,995
==============================================================================================================
Income before provision for income taxes.... $ 23,573 $ 22,197 $ 19,065 $ 17,576 $ 16,011
Provision for federal and state income taxes. 9,311 8,657 7,513 7,290 6,731
----------------------------------------------------------------
Net income.................................. $ 14,262 $ 13,540 $ 11,552 $ 10,286 $ 9,280
================================================================
Earnings per share - Basic.................. $ 1.10 $ 1.04 $ 0.88 $ 0.79 $ 0.72
================================================================
Earnings per share - Diluted................ $ 1.07 $ 1.02 $ 0.86 $ 0.79 $ 0.72
Weighted average common shares - Basic ..... 12,918 13,071 13,132 12,964 12,841
Net dilutive effect of stock options and
nonvested stock awards................... 427 244 279 62 56
------------------------------------------------------------------
Weighted average common shares - Diluted.... 13,345 13,315 13,411 13,026 12,897
==================================================================
*Fiscal years 2000, 1999 and 1998 are 12-month years. Fiscal years 1997 and 1996
are composed of 52 weeks. Prior years' share data and earnings per share amounts
have been adjusted to reflect the May 2000 stock dividend.
Consolidated Balance Sheets Data:
Total assets............................... $120,460 $ 102,927 $ 84,374 $ 60,203 $ 61,101
Long-term debt............................. $ 54,865 $ 49,305 $ 31,690 $ 15,022 $ 20,034
Stockholders'equity........................ $ 15,085 $ 14,563 $ 10,220 $ 6,969 $ 5,645
Working capital............................ $ 16,870 $ 15,670 $ 7,344 $ 3,891 $ 8,677
Current ratio.............................. 1.5:1 1.6:1 1.2:1 1.1:1 1.3:1
Other Data:
Managed volume** (unaudited)............... $778,600 $ 647,900 $ 504,400 $464,800 $ 435,600
Cash dividends per share of common stock*** $ 0.16 $ 0.16 $ 0.82 $ 0.82 $ 0.205
**The Company generally performs its services pursuant to either management fee
or profit and loss contracts. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Managed Volume". Management uses
the concept of managed volume as an important indicator of the Company's growth
and performanace. MMS defines and estimates managed volume as the total cost of
operating all client accounts as if MMS performed all services on a profit and
loss basis. Managed volume is not a measure of performance under accounting
principles generally accepted in the United States. Management uses managed
volume as an additional indicator of performance and not as a replacement of
financial measures, such as revenues, as defined and required by accounting
principles generally accepted in the United States.
***Dividends were not paid prior to the fourth quarter of fiscal year 1996. Cash
dividends per share of common stock have not been adjusted to reflect the May
2000 stock dividend.
Page 18 in Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Morrison Management Specialists, Inc. and Subsidiaries
This discussion should be read in conjunction with the Financial Statements and
related notes found on pages 22 to 34.
MANAGED VOLUME
- --------------
Morrison Management Specialists, Inc. (the "Company" or "MMS") generally
performs its services pursuant to either management fee or profit and loss
contracts. While the services performed are the same, revenue recognition varies
by type of contract. In a management fee account, MMS 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, any earned incentives, plus any expenses or employee payroll
costs paid by the Company and charged back to the client. In a profit and loss
account, MMS assumes the risk of profit or loss for the foodservice operation.
For such accounts, the amount of revenue reported is the actual revenue
generated from meals served to patients, client employees and visitors.
Due to the difference between the amount of revenue that is reported for a
fee account (net management fees plus reimbursed expenses) and a profit and loss
account (gross revenues from meal sales), Management uses the concept of managed
volume as an important indicator of the Company's growth and performance. MMS
defines and estimates managed volume as the total cost of operating all client
accounts as if MMS performed all services on a profit and loss basis. Management
uses managed volume as an additional indicator of performance and not as a
replacement of financial measures, such as revenues, as defined and required by
accounting principles generally accepted in the United States.
The Company's managed volume continues to increase at record levels. In
fiscal year 2000, managed volume increased $130.7 million, or 20.2%, to $778.6
million compared to $647.9 million in fiscal year 1999. Managed volume increased
$143.5 million in fiscal year 1999, or 28.5%, to $647.9 million as compared to
$504.4 million in fiscal year 1998.
RESULTS OF OPERATIONS
- ---------------------
2000 Compared To 1999
Overview
The Company is the nation's second largest outsourcing provider in the
healthcare and senior living industries. MMS is the only national, publicly held
company which specializes exclusively in providing food, nutrition and dining
services to the healthcare and senior living markets. MMS serves some of the
largest and most prominent hospitals, integrated healthcare systems and senior
living communities in the United States.
In fiscal year 2000, the Company continued to demonstrate strong financial
results, with increases in revenue, operating profit and net income. These
accomplishments were due to record levels of new account sales, high account
retention, and growth in existing accounts. A key factor contributing to the new
record new business was the award of a five-year contract to provide food and
nutrition services to over 60 of Tenet HealthSystem Medical, Inc.'s hospitals.
Revenue
For fiscal year 2000, revenue increased $116.1 million, or 35.7%, to $441.1
million as compared to $325.0 million for fiscal year 1999. The primary source
of the increase was the opening of a significant number of new accounts that
were larger than accounts which closed during the year. Adding vending
operations and increasing employee payrolls at existing accounts also
contributed to the growth of revenue as a whole.
Gross Profit
Gross profit, defined as revenue less operating expenses, increased $12.5
million, or 22.9%, to $66.8 million in fiscal year 2000 as compared to $54.3
million in fiscal year 1999. Management's continued emphasis on food and labor
cost reductions and growth of existing account business contributed to the
favorable results.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $10.7 million, or 35.9%,
to $40.5 million in fiscal year 2000 as compared to $29.8 million in fiscal year
1999. The increase was associated with significant new business attained during
the fiscal year, which required additional operating costs and expenses for
human resources, training, relocations and promotions.
Interest Expense, Net
Interest expense increased 16.0% to $2.7 million in fiscal year 2000 as compared
to $2.4 million in the prior year due to increased debt levels associated with
the Company's increased capital expenditures and stock repurchases.
Federal and State Income Taxes
The combined federal and state effective tax rate increased to 39.5% in fiscal
year 2000 from 39.0% in fiscal year 1999.
1999 Compared To 1998
Overview
In fiscal year 1999, the Company showed strong financial results, with increases
in revenue, operating profit and net income. The accomplishments were due to
continued focus on cost reductions in all accounts, growth in existing accounts,
strong new account sales and the acquisition of Culinary Service Network, Inc.
("CSN") in October 1998. CSN was MMS's third acquisition in the senior living
market. The experience and practices of these industry experts created a solid
foundation for further developing and growing the nation's foremost senior
dining services business. (See Note 2 of the Notes to Consolidated Financial
Statements for more information.)
Page 19 in Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
Revenue
In fiscal year 1999, revenue increased $74.6 million, or 29.8%, to $325.0
million as compared to $250.4 million in fiscal year 1998. The primary sources
of this increase were growth at existing accounts, including adding vending
operations and increasing employee payrolls, opening more and larger accounts
than were closed and key acquisitions.
Gross Profit
Gross profit increased $11.2 million, or 26.0%, to $54.3 million for fiscal year
1999 as compared to $43.1 million in fiscal year 1998. Growth of existing
account business, continued emphasis on food and labor cost reductions, and
acquisitions all contributed to the favorable results.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $6.9 million, or 29.9%,
to $29.8 million for fiscal year 1999 as compared to $22.9 million in fiscal
year 1998. The increase was associated with additional costs associated with
obtaining new business, such as additional expenses related to human resources,
training, relocations and promotions.
Interest Expense, Net
Interest expense increased 110.0% to $2.4 million in fiscal year 1999 as
compared to $1.1 million in the prior year due to higher debt levels associated
with the Company's acquisitions and increased capital expenditures for both the
Advanced Culinary Centers(TM) and the Company's technology initiatives.
Federal and State Income Taxes
The combined federal and state effective tax rate decreased to 39.0% in fiscal
1999 from 39.4% in fiscal 1998.
YEAR 2000 COMPLIANCE
- --------------------
The Company's technology initiatives included both preparations for the year
2000 issue and significant system upgrades and enhancements. Such initiatives
identified plans necessary to minimize failures of systems to process
date-sensitive information in the year 2000 and beyond. MMS elected to replace
its most critical system, a shared-mainframe corporate system, with
client-server systems developed using Year 2000 compliant standards. The Company
also verified that all other significant vendor licensed software applications
were either Year 2000 compliant or would be by December 31, 1999. The Company
did not experience any significant failures of its systems during the transition
from 1999 to 2000. MMS will continue to monitor system performance throughout
the year 2000 to ensure continued compliance. While it is not possible to give
an estimate of the costs specifically related to the year 2000 issue, the total
cost of these technology initiatives was approximately $5 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Cash Flow, Capital Expenditures and Financing
Due to the nature of its contract foodservice business, the Company is able to
maintain a relatively steady cash flow. Cash flow from operations has
historically financed MMS's capital investments. MMS has plans for expansion
over the next several years and expects that cash flow from operations plus
utilization of the existing lines of credit will be sufficient to provide for
this expansion. See "Special Note Regarding Forward-Looking Information."
The Company has a $75 million revolving credit facility from four financial
institutions extending through July 2, 2003. Borrowings under the credit
facility bear interest based on LIBOR.
The Company utilizes two interest rate swap agreements with notional
amounts of $10 million each to reduce the impact of changes in the interest
rates on its floating rate debt. These swap agreements effectively converted $20
million of variable rate borrowings to fixed rates of approximately 5.6% plus
the credit spread. Interest expense is adjusted for the differential to be paid
or received as interest rates change. The effect of such adjustments on interest
expense has not been significant. The Company's swap agreements expose it to
credit risks that 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.
The Company's effective interest rate increased to approximately 6.1% in
fiscal year 2000 from 5.8% in fiscal year 1999. The increase was primarily due
to the increase in the LIBOR rate throughout the fiscal year.
On May 31, 2000, MMS had $54.9 million outstanding in total debt, an
increase of $5.5 million from $49.4 million in the prior year.
Trade accounts receivable make up the majority of MMS's total current
assets. Historically, the average days outstanding in trade accounts receivable
is less than one month and bad debt expense has been minimal.
MMS requires capital principally for acquisitions, new accounts, equipment
replacement and remodeling of existing accounts, and the construction of
Advanced Culinary Centers(TM). Cash provided by operating activities
approximated $22.0 million for fiscal year 2000 compared to $8.1 million in
fiscal year 1999. Capital expenditures were approximately $12.6 million, an
increase of $4.2 million compared to the $8.4 million in the prior year. The
Company did not have material commitments for capital expenditures as of the end
of fiscal year 2000. Capital expenditures are anticipated to total approximately
$15 million to $20 million for fiscal year 2001. MMS plans to finance this
amount primarily through internally generated funds. See "Special Note Regarding
Forward-Looking Information." Cash used for acquisition-related expenditures was
$1.4 million for fiscal year 2000, a decrease of $5.5 million compared to the
$6.9 million in fiscal year 1999.
Page 20 in Annual Report
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(continued)
Morrison Management Specialists, Inc. and Subsidiaries
Stock Repurchase Program
In March 1998, MMS's Board of Directors authorized a program to repurchase up to
1,000,000 shares of the Company's Common Stock. An additional 1,000,000 shares
were authorized to be repurchased in June of 1999. During fiscal year 2000, the
Company repurchased 868,200 shares of the Company's stock at an aggregate cost
of $21.0 million. During fiscal year 1999, the Company repurchased 777,210
shares at an aggregate cost of $14.5 million. A total of 259,790 shares remained
authorized for repurchase under the Company's stock repurchase program as of the
end of fiscal year 2000. Subsequent to year end, in June 2000, the Company's
Board of Directors authorized the repurchase of another 1,000,000 shares.
Working Capital
As of May 31, 2000, working capital was $16.9 million while the current ratio
was 1.5:1. Working capital increased $1.2 million from $15.7 million and the
current ratio decreased 0.1 from 1.6:1 for fiscal year 1999.
Dividends
MMS paid approximately $1.9 million in cash dividends to stockholders during
fiscal year 2000. The Company plans to pay annual cash dividends of
approximately $2.1 million in the next fiscal year. On March 28, 2000, MMS's
Board of Directors declared a 10% stock dividend payable on May 19, 2000 to
shareholders of record on May 1, 2000. See "Special Note Regarding
Forward-Looking Information."
KNOWN EVENTS, UNCERTAINTIES AND TRENDS
- --------------------------------------
Impact of Inflation
In the past, MMS has been able to recover inflationary cost increases through
contract inflation adjustments, increased productivity and menu changes. There
have been, and there may be in the future, delays in contract inflation
adjustments and competitive pressures which limit MMS's ability to recover such
cost increases in their entirety. Historically, the effects of inflation on
MMS's net income have not been materially adverse. See "Special Note Regarding
Forward-Looking Information."
Management's Outlook
Management believes that growth will continue to occur through sales to
integrated healthcare systems and senior living communities, and through
expanding services at the Company's existing accounts and the Advanced Culinary
Centers(TM). Morrison believes that pressures on hospitals and healthcare
systems to outsource foodservices are increasing due to the Balanced Budget Act
and managed care. Management believes these pressures will aid the continued
growth of MMS. The Company expects growth from the senior living market
primarily from focused expertise and the ability to provide unique dining
solutions for senior living communities.
MMS serves some of the largest and most prominent hospitals, healthcare
systems and senior living communities in the United States. The Company strives
to maintain its long-term partnerships with these facilities and communities by
continuing to increase quality and lower costs. During the upcoming year, MMS
believes that additional investments in its team members and programs designed
to enhance its aggressive sales drive will add new clients while building
stronger relationships with current accounts. By focusing on its market of
hospitals and integrated healthcare systems and expanding into the senior living
market, the Company believes that it is strategically positioned for strong
growth. See "Special Note Regarding Forward-Looking Information."
Special Note Regarding Forward-Looking Information
The foregoing section and other areas of this report contain various
"forward-looking statements" which represent the Company's expectations or
beliefs concerning future events, including the following: statements regarding
account growth, future capital expenditures and borrowings, the payment of
dividends, the impact of inflation and the effects of Management's strategies
for growth. The Company cautions that a number of important factors could,
individually or in the aggregate, cause actual results to differ materially from
those included in the 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 or senior living markets;
customers' acceptance of the Company's cost-saving programs; and laws and
regulations affecting labor and employee benefit costs.
Page 21 in Annual Report
CONSOLIDATED STATEMENTS OF INCOME
Morrison Management Specialists, Inc. and Subsidiaries
For the Fiscal Year Ended
- -----------------------------------------------------------------------------------
(In thousands, except per share data)
May 31, 2000 May 31, 1999 May 31, 1998
- -----------------------------------------------------------------------------------
Revenues........................... $441,074 $324,968 $250,371
Operating expenses................. 374,310 270,637 207,265
------------------------------------------------
Gross profit....................... 66,764 54,331 43,106
Selling, general and administra-
tive expenses.................... 40,457 29,776 22,919
------------------------------------------------
26,307 24,555 20,187
Interest expense, net of interest
income of $315 in 2000, $396
in 1999 and $406 in 1998......... 2,734 2,358 1,122
------------------------------------------------
Income before provision for
income taxes..................... 23,573 22,197 19,065
Provision for federal and state
income taxes..................... 9,311 8,657 7,513
------------------------------------------------
Net income......................... $ 14,262 $ 13,540 $ 11,552
================================================
Earnings per share - Basic......... $ 1.10 $ 1.04 $ 0.88
Earnings per share - Diluted....... $ 1.07 $ 1.02 $ 0.86
Weighted average common
shares - Basic................... 12,918 13,071 13,132
Net dilutive effect of stock
options and nonvested stock
awards........................... 427 244 279
------------------------------------------------
Weighted average common
shares - Diluted................. 13,345 13,315 13,411
================================================
Prior years' share data and earnings per share amounts have been adjusted to
reflect the May 2000 stock dividend.
The accompanying notes are an integral part of the financial statements.
Page 22 in Annual Report
CONSOLIDATED BALANCE SHEETS
Morrison Management Specialists, Inc. and Subsidiaries
(In thousands) May 31, 2000 May 31, 1999
----------------------------
ASSETS
Current assets:
Cash and short-term investments................ $ 3,645 $ 2,780
Receivables:
Trade, less allowance for doubtful
accounts of $677 at May 31, 2000 and
$712 at May 31, 1999......................... 34,952 27,804
Other........................................ 5,465 6,231
Inventories.................................... 4,909 2,940
Prepaid expenses............................... 3,209 2,312
Deferred income tax benefits................... 1,397 1,747
----------------------------
Total current assets............................. 53,577 43,814
Property and equipment - at cost:
Land........................................... 1,375 -
Buildings and improvements..................... 6,512 5,931
Equipment...................................... 28,445 24,923
Construction in progress....................... 4,467 121
----------------------------
40,799 30,975
Less accumulated depreciation.................... 15,408 12,376
----------------------------
25,391 18,599
Deferred income tax benefits..................... 2,506 2,947
Cost in excess of net assets acquired, net....... 18,670 18,331
Notes receivable, less current portion........... 1,024 3,626
Deferred Compensation Plan assets................ 6,517 4,910
Other assets..................................... 12,775 10,700
----------------------------
Total assets..................................... $120,460 $102,927
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 19,290 $ 15,091
Accrued liabilities:
Taxes, other than income taxes............... 3,834 2,187
Payroll and related costs.................... 10,675 7,322
Insurance.................................... 1,278 1,909
Other........................................ 1,602 1,499
Current portion of long-term debt.............. 28 136
----------------------------
Total current liabilities........................ 36,707 28,144
Long-term debt................................... 54,865 49,305
Deferred Compensation Plan obligation............ 6,517 4,910
Other liabilities................................ 7,286 6,005
Stockholders' equity:
Common stock, $0.01 par value (authorized
100,000 shares; issued: 2000 - 12,704 shares;
1999 - 11,977 shares)....................... 127 120
Capital in excess of par value................ 16,488 3,324
Unearned ESOP shares.......................... (2,292) (2,806)
Deferred Compensation Plan liability
payable in Company stock.................... 1,645 1,518
Retained earnings............................. 762 13,925
-----------------------------
16,730 16,081
Less cost of Company stock held by Deferred
Compensation Plan............................. 1,645 1,518
-----------------------------
Total stockholders' equity...................... 15,085 14,563
-----------------------------
Total liabilities and stockholders' equity...... $120,460 $102,927
=============================
The accompanying notes are an integral part of the financial statements.
Page 23 in Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS
Morrison Management Specialists, Inc. and Subsidiaries
For the Fiscal Year Ended
-------------------------------------------------
(In thousands) May 31, 2000 May 31, 1999 May 31, 1998
-------------------------------------------------
OPERATING ACTIVITIES:
Net income..................... $14,262 $ 13,540 $ 11,552
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation................... 4,862 3,254 2,538
Amortization of intangibles.... 1,021 860 377
Deferred income taxes.......... 791 (182) (811)
Gain on disposition of assets.. (140) (112) (19)
Changes in operating assets and
liabilities:
Receivables................ (3,780) (5,949) (6,359)
Inventories................ (1,969) (4) (246)
Prepaid and other assets... (4,579) (4,141) (3,420)
Accounts payable, accrued
and other liabilities.... 11,559 855 3,430
-------------------------------------------------
Net cash provided by operating
activities................... 22,027 8,121 7,042
-------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and
equipment.................... (12,582) (8,389) (8,850)
Proceeds from disposal of
assets....................... 1,068 799 268
Acquisition of businesses,
net of cash acquired......... (1,360) (6,859) (7,464)
-------------------------------------------------
Net cash used by investing
activities................... (12,874) (14,449) (16,046)
-------------------------------------------------
FINANCING ACTIVITIES:
Net proceeds from long-term
debt......................... 26,560 19,893 21,690
Principal payments on long-term
debt......................... (21,108) (7,309) (5,011)
Proceeds from exercise of stock
options and issuance of
stock, net of income tax
benefits..................... 8,211 6,766 3,054
Dividends paid................. (1,886) (1,937) (9,877)
Payments to acquire Treasury
Stock........................ (20,961) (14,539) (1,891)
ESOP shares released .......... 896 514 412
-------------------------------------------------
Net cash (used)/provided by
financing activities.......... (8,288) 3,388 8,377
-------------------------------------------------
Increase/(decrease) in cash
and short-term investments... 865 (2,940) (627)
Cash and short-term
investments at the
beginning of the year........ 2,780 5,720 6,347
-------------------------------------------------
Cash and short-term investments
at the end of the year....... $ 3,645 $ 2,780 $ 5,720
=================================================
Supplemental disclosure of cash flow information - cash paid for:
Interest................... $ 3,015 $ 2,924 $ 1,696
Income taxes............... $ 6,938 $ 9,386 $ 7,933
The accompanying notes are an integral part of the financial statements.
Page 24 in Annual Report
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Morrison Management Specialists, Inc. and Subsidiaries
(In thousands, except per share data)
May 31, 2000 May 31, 1999 May 31, 1998
Shares Amount Shares Amount Shares Amount
----------------- ----------------- -----------------
COMMON STOCK
Beginning balance..................... 11,977 $ 120 12,379 $ 124 12,165 $ 122
Stock dividend........................ 1,144 11 0 0 0 0
Shares issued under Stock Incentive
Plans............................... 451 5 470 5 214 2
Cancellation of Treasury Stock........ (868) (9) (872) (9) 0 0
----------------- ----------------- -----------------
Ending balance........................ 12,704 127 11,977 120 12,379 124
----------------- ----------------- -----------------
CAPTIAL IN EXCESS OF PAR VALUE
Beginning balance..................... 3,324 12,859 9,717
Stock dividend........................ 25,528 0 0
Shares issued under Stock Incentive
Plans, net of income tax benefits... 8,206 6,761 3,052
Shares released from ESOP............. 382 125 90
Cancellation of Treasury Stock........ (20,952) (16,421) 0
------------------ ----------------- -----------------
Ending balance........................ 16,488 3,324 12,859
------------------ ----------------- -----------------
UNEARNED ESOP SHARES
Beginning balance..................... (198) (2,806) (226) (3,195) (249) (3,517)
Shares released from ESOP............. 20 514 28 389 23 322
------------------ ----------------- -----------------
Ending balance........................ (178) (2,292) (198) (2,806) (226) (3,195)
------------------ ----------------- -----------------
DEFERRED COMPENSATION PLAN LIABILITY
PAYABLE IN COMPANY STOCK
Beginning balance..................... 1,518 1,848 1,341
Net change............................ 127 (330) 507
------------------ ----------------- -----------------
Ending balance........................ 1,645 1,518 1,848
------------------ ----------------- -----------------
RETAINED EARNINGS
Beginning balance..................... 13,925 2,322 647
Net income............................ 14,262 13,540 11,552
Stock dividend........................ (25,539) 0 0
Cash dividends of $0.16 per share in
fiscal 2000 and 1999; $0.82 per
share in fiscal 1998................ (1,886) (1,937) (9,877)
------------------ ----------------- -----------------
Ending balance........................ 762 13,925 2,322
------------------ ----------------- -----------------
TREASURY/COMPANY STOCK HELD BY
DEFERRED COMPENSATION PLAN
Beginning balance..................... (85) (1,518) (199) (3,738) (95) (1,341)
Cancellation/(Purchase) of Treasury
Stock............................... 0 0 95 1,891 (95) (1,891)
(Purchase)/Sale of Company Stock -
held by Deferred Compensation Plan.. (13) (127) 19 329 (9) (506)
------------------ ----------------- -----------------
Ending balance........................ (98) (1,645) (85) (1,518) (199) (3,738)
------------------ ----------------- -----------------
Total Stockholders' Equity............ $15,085 $14,563 $10,220
================== ================= =================
The accompanying notes are an integral part of the financial statements.
Page 25 in Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Morrison Management Specialists, Inc. and Subsidiaries
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
On March 9, 1996, Morrison Health Care, Inc. and Subsidiaries ("MHCI") was spun
off (the "Distribution") from Morrison Restaurants Inc. ("MRI"). Effective June
30, 1999 MHCI changed its name to Morrison Management Specialists, Inc. (the
"Company" or "MMS"). Prior to the Distribution, MMS was a wholly owned
healthcare contract food and nutrition business of MRI.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Management to make estimates
and assumptions that affect the reported amounts of the assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
BUSINESS AND CREDIT RISK CONCENTRATIONS
The Company primarily competes in the healthcare food, nutrition and senior
dining services and encounters significant competition in these markets. The
length of each contract varies by customer. During fiscal year 2000, the Company
was awarded a new five-year contract to provide food and nutrition services to
over 60 of Tenet HealthSystem Medical, Inc.'s ("Tenet") hospitals. The revenue
from the Tenet accounts for fiscal years 2000, 1999 and 1998 was $69.2 million,
$23.2 million and $12.0 million, respectively. These revenues accounted for
15.7%, 7.2% and 4.8% of total revenue for fiscal years 2000, 1999 and 1998,
respectively.
Concentration of credit risk with respect to trade accounts receivable is
generally limited due to the large number of customers that make up the
Company's customer base, thus spreading trade risk. With the addition of new
Tenet accounts, Tenet accounted for 12.9% and 6.8% of total accounts receivable
at May 31, 2000 and 1999, respectively. The Company maintains reserves for
potential uncollectible amounts which, in aggregate, have not exceeded
Management's expectations.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of MMS
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
FISCAL YEAR
Effective with the fiscal year 1998, the Company's fiscal year ends on May 31.
Starting with fiscal year 1998, the Company changed from a 52-53 week fiscal
year to a 12-month fiscal year ending May 31 each year.
CASH AND SHORT-TERM INVESTMENTS
The Company's cash management program provides for the investment of excess cash
balances in short-term money market instruments. Short-term investments are
stated at cost, which approximates market. The Company considers marketable
securities with a maturity of three months or less when purchased to be
short-term investments.
INVENTORIES
Inventories consist of materials, food supplies, china and silver and are stated
at the lower of cost (first in-first out) or market.
PROPERTY AND EQUIPMENT DEPRECIATION
Property and equipment are stated at cost and are being depreciated for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets. Annual rates of depreciation generally range from 3%
to 5% for buildings and from 10% to 34% for kitchen and other equipment. Costs
incurred in connection with the construction at major facilities or of Advanced
Culinary Centers(TM) are capitalized as construction in progress until such
facilities or centers become operational. Interest is capitalized in connection
with these capitalized construction costs. The capitalized interest is recorded
as part of the asset to which it relates and is amortized over the asset's
estimated useful life. In fiscal 2000, 1999 and 1998, $37,011, $219,000 and
$127,000 of interest was capitalized, respectively.
Property and equipment are periodically reviewed for impairment based on an
assessment of future operations. The Company records impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the asset's carrying amount.
INTANGIBLE ASSETS
Excess of costs over the fair value of net assets acquired with purchased
businesses generally is amortized on a straight-line basis over periods ranging
from 10 to 40 years. At May 31, 2000, 1999 and 1998, the accumulated
amortization for costs in excess of net assets acquired was $3.8 million, $2.8
million and $1.9 million, respectively.
The carrying value of goodwill and other intangibles is evaluated
periodically in relation to the operating performance and future undiscounted
cash flows of each operating business acquired. Adjustments are made if the sum
of expected future net cash flows is less than net book value. The Company
believes that the remaining amounts of these assets have continuing value.
Page 26 in Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
REVENUE RECOGNITION
Revenue is recognized upon performance of services. 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, MMS manages the
services and facilities, but the client is responsible for all or nearly all the
costs. Revenue 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, MMS assumes the risk of profit or loss for
the foodservice operation. For such accounts, the amount of revenue reported is
the actual revenue generated from meals served to patients, client employees and
visitors.
INCOME TAXES
Deferred income taxes are determined utilizing a liability approach. This method
gives consideration to the future tax consequences associated with differences
between financial accounting and tax bases of assets and liabilities.
STOCK-BASED COMPENSATION
Stock options are recorded in accordance with Accounting Principles Board
Opinion ("APB") No. 25, with pro forma disclosures of net income and earnings
per share as if Statement of Financial Accounting Standards ("SFAS") No. 123 had
been applied.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities," Statement No.
137, "Accounting for Derivative and Hedging Activities-Deferral of the Effective
Date of FASB Statement No. 133," and statement No. 138, "Accounting for Certain
Derivative Instruments and certain Hedging Activities- an amendment of FASB
Statement No. 133," which establish reporting standards for derivative
instruments. These statements are effective for all fiscal quarters of all
fiscal years beginning after June 15, 2000, and will be adopted by the Company
in fiscal 2002.
Based upon the Company's current limited use of derivative instruments and
hedging activities, Management does not believe the statement will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
PRE-OPENING EXPENSES
Pre-opening costs, such as salaries, personnel training costs and other expenses
of opening a new account, are often reimbursed by the client. In circumstances
when they are not reimbursed, these costs are charged to expense as incurred.
FINANCIAL INSTRUMENTS
The Company's financial instruments at May 31, 2000, 1999 and 1998 consisted of
cash and short-term investments, accounts and notes receivable, long-term debt
and interest rate swap agreements. The fair value of these financial
instruments, except the interest rate swap agreements, approximated the carrying
amounts reported in the balance sheets. Cash is deposited in financial
institutions which carry FDIC insurance. From time to time, the cash balances in
these institutions exceed the insured amount. Management does not believe this
is a significant risk to the Company.
The Company uses interest rate swap agreements to manage interest rate
exposure. The fair value of such swap agreements was not significant at May 31,
2000.
Although substantially all of the Company's trade accounts receivable are
from healthcare institutions, Management believes that concentrations of credit
risk are limited due to the geographic diversity of the Company's customer base.
The Company performs periodic credit evaluations of its customers' financial
condition and generally does not require collateral. Historically, the Company
has not experienced significant losses related to trade accounts receivable from
individual customers or from groups of customers in any geographic area.
RECLASSIFICATION
Certain prior year amounts and balances have been reclassified to conform to the
current year presentation.
Page 27 in Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
NOTE 2. ACQUISTIONS
In October 1998, the Company acquired all of the outstanding common stock of
Philadelphia-based Culinary Service Network, Inc. In March 1998, the Company
acquired substantially all of the assets of Chicago-based Spectra Services, Inc.
In January 1998, the Company acquired all of the outstanding common stock of
Phoenix-based Drake Management Services, Inc. Each of the companies, which
provided dining services in the senior living market, were acquired for cash,
with a total acquisition price of $12.1 million. Contingent payments may be
earned by sellers in future years. Approximately $1.4 million of additional
consideration was paid in the year ended May 31, 2000. The acquisitions were
accounted for using the purchase method of accounting, and the resulting
goodwill is being amortized over 20 years using the straight-line method. The
operating results of these companies have been included from their respective
acquisition dates. Pro forma results are not presented for these acquisitions as
they were not significant during the periods presented.
NOTE 3. LONG-TERM DEBT
Long-term debt consists of the following:
---------------------------------------
(In thousands) May 31, 2000 May 31, 1999
---------------------------------------
Variable rate revolving credit
facility due in full 7/2/03............ $52,115 $46,555
Other notes and mortgages................ 2,778 2,886
---------------------------------------
54,893 49,441
Less current maturities.................. 28 136
---------------------------------------
$54,865 $49,305
=======================================
The Company has a $75 million credit facility with four financial
institutions extending through July 2, 2003. Borrowings under the credit
facility bear a variable interest rate based upon LIBOR. Commitment fees range
from 0.20% to 0.30% per annum based on the Company's leverage ratio and are
payable on the unused portion of the credit facility. At May 31, 2000, the
Company had $52.1 million in borrowings under the agreement, with a weighted
average variable rate of approximately 6.5%.
The Company utilizes two interest rate swap agreements, with a notional
amount of $20 million at May 31, 2000, to reduce the impact of changes in the
interest rates on its floating rate debt. Under these agreements, MMS pays the
counterparties interest at a weighted average fixed rate of approximately 5.6%
plus the credit spread, and the counterparties pay MMS interest at a variable
rate equal to LIBOR. The differential to be paid or received is accrued as
interest rates change and is recognized as an adjustment to the interest expense
related to the debt. The related amount payable or receivable from
counterparties is included in trade and other receivables or payables.
In addition, the Company had uncommitted demand lines of credit amounting
to $5 million. At May 31, 2000, the Company did not have any borrowings
outstanding under these agreements.
The credit facility contains certain restrictions on incurring additional
indebtedness and certain funded debt, and fixed charge coverage requirements.
The Company was in compliance with all such covenants at May 31, 2000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
NOTE 4. INCOME TAXES
The components of income tax expense (benefit) are as follows:
(In thousands) For the Fiscal Year Ended
--------------------------------------------------
May 31, 2000 May 31, 1999 May 31,1998
--------------------------------------------------
Current:
Federal...................... $7,399 $7,301 $6,875
State........................ 1,121 1,538 1,449
--------------------------------------------------
8,520 8,839 8,324
--------------------------------------------------
Deferred:
Federal...................... 838 (150) (670)
State........................ (47) ( 32) (141)
--------------------------------------------------
791 (182) (811)
--------------------------------------------------
$9,311 $8,657 $7,513
==================================================
Deferred tax assets and liabilities are comprised of the following:
------------------------------------
(In thousands) May 31, 2000 May 31, 1999
------------------------------------
Deferred tax assets:
Employee benefits.......................... $5,410 $4,484
Insurance reserves......................... 798 1,093
Bad debt reserve........................... 271 292
Other...................................... 467 907
------------------------------------
Total deferred tax assets.................. 6,946 6,776
------------------------------------
Deferred tax liabilities:
Property and equipment..................... 1,991 517
Retirement plans........................... 502 451
Prepaid deductions......................... 111 157
Other...................................... 439 957
------------------------------------
Total deferred tax liabilities............. 3,043 2,082
------------------------------------
Net deferred tax assets.................... $3,903 $4,694
====================================
Page 28 in Annual Report
SFAS No. 109 specifies that deferred tax assets are to be reduced by a
valuation allowance if it is more likely than not that some portion of the
deferred tax assets will not be realized. Management believes that future
taxable income will be sufficient to realize all of the Company's deferred tax
assets based on historical earnings of the Company; therefore, a valuation
allowance has not been established.
A reconciliation from the statutory federal income tax expense to the
reported income tax expense is shown below:
(In thousands) For the Fiscal Year Ended
--------------------------------------------
May 31, 2000 May 31, 1999 May 31,1998
--------------------------------------------
Statutory federal income taxes..... $8,250 $7,769 $6,673
State income taxes net of
federal income tax benefit....... 702 839 853
Other, net......................... 359 49 (13)
--------------------------------------------
$9,311 $8,657 $7,513
============================================
The effective income tax rate was 39.5%, 39.0% and 39.4% in fiscal years
2000, 1999 and 1998, respectively.
NOTE 5. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLANS:
Salary Deferral Plan
Under the Company's Salary Deferral Plan, each eligible employee may elect to
make pretax contributions to a trust fund in amounts ranging from 2% to 10% of
their annual earnings. The Company's contribution to the Plan is based on the
employee's pretax contribution and years of service. Under the provisions of the
Plan, highly compensated employees, as defined by the Internal Revenue Code, are
limited to contributions of 3% and receive a maximum of a 20% match. The
Company's contributions to the trust fund approximated $655,000, $515,000 and
$414,000 for fiscal years 2000, 1999 and 1998, respectively.
During fiscal year 1997, the Company began sponsorship of an employee stock
ownership (ESOP) feature covering participants in the Salary Deferral Plan. The
Company loaned the Plan $3.6 million (with outstanding balances of $2.3 million
and $2.8 million at May 31, 2000 and May 31, 1999, respectively) to purchase
approximately 280,000 shares of common stock, at an interest rate of 5.47%. The
Company adopted the provisions of AICPA Statement of Position No. 93-6 which
requires that compensation expense be measured based on the fair value of the
shares over the period the shares are earned. The fair value of unearned shares
at May 31, 2000 and May 31, 1999 was approximately $4,853,000 and $3,885,000,
respectively.
Deferred Compensation Plan
The Company maintains the Deferred Compensation Plan for certain selected
employees. The provisions of this Plan are similar to those of the Salary
Deferral Plan. Differences include which employees are eligible to participate
and the limitations on the amount of deferrals that may be elected by
participants. The Company's contributions under the Plan approximated $185,000,
$112,000 and $104,000, for fiscal years 2000, 1999 and 1998, respectively.
Assets of the Plan are held in a rabbi trust and must be accounted for as if
they are assets of the Company. Assets and liabilities of the Plan approximated
$8,162,000 and $6,428,000 at May 31, 2000 and 1999, respectively, and include
$1,645,000 and $1,518,000, respectively, of MMS common stock, which is accounted
for as treasury stock at cost.
DEFINED BENEFIT PLANS:
Retirement Plan
The Retirement Plan was frozen by Ruby Tuesday, Inc. ("RTI") (formerly Morrison
Restaurants Inc.) on December 31, 1987. The Company is a joint sponsor of the
Retirement Plan. No additional benefits accrued, no contributions were made, and
no new participants entered the Plan after that date. The Company will continue
to share in future expenses of the Plan. Participants will receive benefits
based upon salary and length of service. The Plan's assets include common stock,
fixed income securities, short-term investments and cash.
Executive Supplemental Pension Plan
Under the Company's Executive Supplemental Pension Plan, employees with a salary
of at least $100,000 for five consecutive years in a qualifying position become
eligible to earn supplemental retirement payments based upon salary and length
of service, reduced by Social Security benefits and amounts otherwise receivable
under the Retirement Plan.
Management Retirement Plan
Under the Company's Management Retirement Plan, individuals that have 15 years
of credited service (as defined by the Company) and earn an average annual
compensation of at least $40,000 for the immediately preceding three years
become participants. Participants receive benefits based upon salary and length
of service, reduced by Social Security benefits and benefits payable under the
Retirement Plan and Executive Supplemental Pension Plan.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
To provide a funding source for the payment of benefits under the Executive
Supplemental Pension Plan and the Management Retirement Plan, the Company owns
various life insurance contracts on some of the participants. The cash value of
these policies, net of loans, was $3,632,000 at May 31, 2000 and $2,204,000 at
May 31, 1999. The policies have been placed in a rabbi trust which will hold the
policies and death benefit proceeds as they are received.
Page 29 in Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
The following table reconciles the change in the pension benefit obligation
and the fair market value of plan assets and presents the components of pension
expense, the funded status and the amounts recognized in the Company's
consolidated financial statements for the Retirement Plan, the Executive
Supplemental Pension Plan and the Management Retirement Plan.
(In thousands) Benefit Obligation
Assets Exceed Exceeds Assets -Executive
Benefit Obligation - Supplemental Pension Plan
Retirement Plan and Management Retirement Plan
---------------------------------- ------------------------------------
May 31, May 31, May 31, May 31, May 31, May 31,
For the Fiscal Year Ended 2000 1999 1998 2000 1999 1998
---------------------------------- ------------------------------------
COMPONENTS OF NET PERIODIC PENSION
EXPENSE/(INCOME):
Service cost........................ $ 0 $ 0 $ 0 $ 177 $ 140 $ 108
Interest cost....................... 293 274 347 408 322 270
Expected return on plan assets...... (391) (342) (1,046) 0 0 0
Amortization and deferral........... 128 (8) 629 220 184 149
---------------------------------- --------------------------------------
Net periodic pension expense/
(income)........................... $ 30 $ (76) $ (70) $ 805 $ 646 $ 527
================================== ======================================
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning
of year........................... $4,163 $3,895 $ 5,261 $ 4,318
Service cost ....................... 0 0 177 140
Interest cost....................... 293 274 408 322
Actuarial (gains) losses............ (33) 588 616 524
Benefit payments.................... (571) (594) (134) (43)
-------------------- ------------------------
Benefit obligation at end of year... $3,852 $4,163 $ 6,328 $ 5,261
==================== ========================
CHANGE IN FAIR VALUE OF PLAN ASSETS:
Fair value at beginning of year..... $4,174 $4,425 $ 0 $ 0
Benefit payments.................... (572) (593) 0 0
Actual return on plan assets........ 391 266 0 0
Gains on investments................ 18 76 0 0
-------------------- ------------------------
Fair value at end of year........... $4,011 $4,174 $ 0 $ 0
==================== ========================
FUNDED(UNFUNDED) STATUS $ 159 $ 11 $(6,328) $(5,261)
Unrecognized prior service cost..... 0 0 677 207
Unrecognized net losses............. 961 1,071 1,370 1,383
Unrecognized net transition
obligation........................ 142 211 396 456
Additional minimum liability........ 0 0 (609) (291)
-------------------- ------------------------
Prepaid (accrued) benefit cost...... $1,262 $1,293 $(4,494) $(3,506)
==================== ========================
The weighted average discount rate for all three plans was 8.0%, 7.5% and 7.5%
for fiscal years 2000, 1999 and 1998, respectively. The rate of increase in
compensation levels for the Executive Supplemental Pension Plan and the
Management Retirement Plan was 4% for all three years presented. The expected
long-term rate of return on plan assets for the Retirement Plan was 10% for all
three years. The aggregate projected benefit obligation and the accumulated
benefit obligation for the Executive Supplemental Pension Plan and the
Management Retirement Plan, both of which exceed the fair value of plan assets,
were $6,328,000 and $4,494,000, respectively, as of May 31, 2000, and $5,261,000
and $3,463,000, respectively, as of May 31, 1999. For the Retirement Plan, the
projected benefit obligation equaled the accumulated benefit obligation and was
less than the fair value of plan assets as of May 31, 2000 and May 31, 1999.
Page 30 in Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
NOTE 6. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The Company provides health care benefits and life insurance benefits to
eligible retirees. Benefits are funded as medical claims and life insurance
premiums are incurred. Retirees become eligible for retirement benefits if they
have met certain service and minimum age requirements at date of retirement. The
Company accrues expenses related to postretirement healthcare and life insurance
benefits during the years an employee provides services.
The following table reconciles the change in the postretirement benefit
obligation and the fair market value of plan assets and presents the components
of net periodic postretirement benefit expense, the funded status and the
amounts recognized in the Company's consolidated financial statements:
(In thousands)
-------------------------------------------------------------------------------
For the Fiscal Year Ended May 31, 2000 May 31, 1999 May 31,1998
-------------------------------------------------------------------------------
Components of net periodic postretirement expense:
Service cost........................ $ 6 $ 8 $ 7
Interest cost....................... 89 136 147
Amortization and deferral........... 24 17 4
--------------------------------------------
Net periodic postretirement expense. $ 119 $ 161 $158
============================================
Change in benefit obligation:
Benefit obligation at beginning
of year.......................... $ 1,853 $ 1,919
Service cost....................... 6 8
Interest cost...................... 89 136
Actuarial (gains) losses........... (502) 0
Benefit payments................... (119) (210)
--------------------------------
Benefit obligation at end of year.. $ 1,327 $ 1,853
================================
Change in fair value of plan assets:
Fair value at beginning of year.... $ 0 $ 0
Employer contributions............. 119 210
Benefit payments................... (119) (210)
--------------------------------
Fair value at end of year.......... $ 0 $ 0
================================
Funded (unfunded) status........... $(1,327) $(1,853)
Unrecognized prior service cost.... (95) (117)
Unrecognized net (gains)/losses.... (34) 466
--------------------------------
Accrued postretirement benefit
cost............................. $(1,456) $(1,504)
================================
The weighted average discount rate used for measuring the accumulated
postretirement benefit obligation was 8.0%, 7.5% and 7.5% for fiscal years 2000,
1999 and 1998, respectively. SFAS No. 132 requires the disclosure of the impact
of a one percent increase and a one percent decrease in the assumed healthcare
cost trend rates on the accumulated postretirement benefit obligation and the
service and interest costs components of net periodic postretirement benefit
costs. This benefit is not subject to healthcare inflation, therefore, there is
no impact from a one percent increase or decrease in the trend rates.
NOTE 7. PREFERRED STOCK
Under its Certificate of Incorporation, the Company is authorized to issue
preferred stock with a par value of $0.01 in an amount not to exceed 250,000
shares which may be divided into and issued in designated series, with dividend
rates, rights of conversion, redemption, liquidation prices and other terms or
conditions as determined by the Board of Directors. No preferred shares have
been issued as of May 31, 2000. The Board of Directors has designated 50,000 of
such shares as Series A Junior Participating Preferred Stock and has issued
rights to acquire such shares, upon certain events, at an exercise price of $75
per one one-thousandth of a share, subject to adjustment. Under certain
circumstances, the rights will entitle the holders thereof to receive, upon
payment of the exercise price, in lieu of preferred shares, shares of common
stock with a market value equal to twice the exercise price. The rights will
expire on March 1, 2006 and may be redeemed prior to ten days after the
acquisition by any person or group of 20% or more of the Company's common stock
without the consent of the Company.
NOTE 8. STOCK DIVIDEND
On May 19, 2000, the Company paid a 10% stock dividend to shareholders of record
on May 1, 2000. Fractional shares were cashed out and payments were made to
shareholders in lieu of fractional shares on May 19, 2000. The basic and diluted
weighted average number of shares outstanding and net income per share
information for all prior reporting periods have been restated to reflect the
effects of the stock dividend.
Page 31 in Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
NOTE 9. STOCK INCENTIVE PLANS
Under the Company's stock incentive plans, equity incentives may be granted to
key employees and outside directors to purchase shares of Company stock. The
Company's 1996 Stock Incentive Plan and 1996 Non-Executive Stock Incentive Plan
(the Plans) are both administered by a Committee, appointed by the Board, which
has complete discretion to determine participants and the terms and provisions
of stock incentives, subject to the Plans. The Plans permit the Committee to
make awards of a variety of stock incentives, including (but not limited to)
dividend equivalent rights, incentive stock options, non-qualified stock
options, performance unit awards, phantom shares, stock appreciation rights and
stock awards. All options awarded under the Plans have been at the prevailing
market value at the time of issue or grant. All options granted have five-year
or ten-year terms and become exercisable at the end of two or three years of
continued employment. At May 31, 2000 and 1999, the Company had reserved a total
of 1,565,758 and 1,762,684 shares, respectively, of common stock under the
Company's 1996 Stock Incentive Plan, and a total of 1,725,717 and 2,020,924
shares, respectively, of common stock under the 1996 Non-Executive Stock
Incentive Plan.
The Company's Stock Incentive and Deferred Compensation Plan for Directors
provides non-management directors with opportunities to defer the receipt of
their retainer fees or to allocate their retainer fees to purchase shares of the
Company. In general, the Plan sets a target ownership level for non-management
directors. All options awarded under the Plan have been at the prevailing market
price at the time of grant. A Committee, appointed by the Board, administers the
Plan on behalf of the Company. At May 31, 2000 and 1999, the Company had
reserved 78,910 and 85,380 shares, respectively, of common stock for this Plan.
The Company applies APB No. 25 and related interpretations in accounting
for its stock incentive plans. Under APB No. 25, because the exercise price of
the Company's employee stock options is set at the prevailing market value, no
compensation expense is recognized.
Pro forma information regarding net income and earnings per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of SFAS No. 123. The fair value for these options was
estimated at the date of grant using a Black-Scholes option pricing model with
the following weighted average assumptions for fiscal years 2000, 1999 and 1998,
respectively: risk-free interest rates of 5.7%, 5.5% and 5.7%; volatility
factors of .28, .17 and .24; dividend yields of 0.6%, 0.7% and 0.9%; and
weighted average expected lives of 6.7, 7.0 and 7.5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Prior years'
share data and earnings per share amounts have been adjusted to reflect the May
2000 stock dividend. The Company's pro forma information follows:
(In thousands, except per share data) For the Fiscal Year Ended
-------------------------------------
May 31, May 31, May 31,
2000 1999 1998
-------------------------------------
Pro forma net income - Basic and Diluted... $12,216 $12,224 $10,771
Pro forma earnings per share - Basic....... $ 0.95 $ 0.94 $ 0.82
Pro forma earnings per share - Diluted..... $ 0.92 $ 0.92 $ 0.80
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS No. 123 does not apply to awards made prior
to fiscal year 1996, and additional awards are anticipated.
Page 32 in Annual Report
A summary of the Company's stock option activity and related information for the
years ended May, 31, 2000, 1999 and 1998 follows:
May 31, 2000 May 31, 1999 May 31, 1998
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
------------------- ------------------- -------------------
Outstanding - beginning of year........ 2,114 $15.20 2,471 $14.95 2,538 $14.38
Granted................................ 1,100 $18.25 628 $15.93 392 $16.15
Exercised.............................. (498) $15.19 (697) $13.35 (301) $10.95
Forfeited.............................. (130) $20.93 (288) $19.15 (158) $14.14
------------------- ------------------- -------------------
Outstanding - end of year.............. 2,586 $16.21 2,114 $15.20 2,471 $14.95
=================== =================== ===================
Exercisable at end of year............. 874 $14.26 1,143 $15.02 1,210 $15.54
=================== =================== ===================
Weighted average fair value of
options granted during the year..... $ 6.30 $ 4.85 $ 6.05
=================== =================== ===================
The following table summarizes information about stock options outstanding at
May 31, 2000:
-----------------------------------------------------------------
Options Outstanding Options Exercisable
-----------------------------------------------------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Exercisable Exercise
Prices (000) Price Life (000) Price
- ------------------------------------------------------------------------------------------------------
$ 8.16 - $15.00...................... 814 $13.80 2.96 743 $13.70
$15.06 - $16.14...................... 693 $15.65 7.35 80 $15.77
$16.36 - $17.78...................... 674 $17.68 8.73 11 $16.97
$17.84 - $28.72...................... 405 $19.60 6.07 40 $20.73
-----------------------------------------------------------------
2,586 $16.21 6.13 874 $14.26
=================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Morrison Management Specialists, Inc. and Subsidiaries
NOTE 10. CONTINGENCIES
At May 31, 2000, the Company was contingently liable for approximately $5.8
million in letters of credit, issued primarily in connection with its workers'
compensation and casualty insurance programs.
The Company is presently, and from time to time, subject to pending claims
and lawsuits 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 financial
position.
Prior to the Distribution, the Company entered into an agreement with
Morrison Fresh Cooking, Inc., a company also spun off in the Distribution, and
MRI, which subsequently changed its name to Ruby Tuesday, Inc., providing for
assumptions of liabilities and cross-indemnities. These agreements are designed
to allocate generally, among the three companies, effective as of the
Distribution date, financial responsibility for liabilities arising out of or in
connection with business activities prior to the Distribution. No significant
amounts were incurred under this agreement during fiscal year 2000 or 1999.
NOTE 11. SUBSEQUENT EVENT (UNAUDITED)
Subsequent to May 31, 2000, the Company entered into a strategic alliance with
foodbuy.com, Inc., a purchasing services firm in the foodservice industry
utilizing e-business technology. In addition, the Company made a minority
investment in foodbuy.com, Inc. of approximately $3.0 million.
Page 33 in Annual Report
NOTE 12. SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial results for the years ended May 31, 2000 and May 31, 1999
are summarized below. All quarters are composed of three months.
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------
For the fiscal year ended May 31, 2000
Revenues................................... $93,983 $101,185 $115,024 $130,882 $441,074
=====================================================================================================
Gross profit*.............................. $15,031 $ 16,110 $ 15,425 $ 20,198 $ 66,764
=====================================================================================================
Income before income taxes................. $ 6,020 $ 5,680 $ 3,876 $ 7,997 $ 23,573
Provision for federal and state
income taxes............................. 2,375 2,232 1,546 3,158 9,311
----------------------------------------------------------
Net income................................. $ 3,645 $ 3,448 $ 2,330 $ 4,839 $ 14,262
==========================================================
Earnings per share:**
Basic.................................. $ 0.28 $ 0.26 $ 0.19 $ 0.37 $ 1.10
Diluted................................ $ 0.27 $ 0.26 $ 0.18 $ 0.36 $ 1.07
For the fiscal year ended May 31, 1999
Revenues................................... $72,246 $ 77,833 $84,085 $90,804 $324,968
====================================================================================================
Gross profit*.............................. $11,597 $ 13,255 $13,771 $15,708 $ 54,331
====================================================================================================
Income before income taxes................. $ 5,255 $ 5,620 $ 5,251 $ 6,071 $ 22,197
Provision for federal and state
income taxes............................. 2,103 2,196 2,021 2,337 8,657
---------------------------------------------------------
Net income................................. $ 3,152 $ 3,424 $ 3,230 $ 3,734 $ 13,540
=========================================================
Earnings per share:**
Basic.................................. $ 0.24 $ 0.25 $ 0.26 $ 0.29 $ 1.04
Diluted................................ $ 0.24 $ 0.25 $ 0.24 $ 0.29 $ 1.02
*The Company defines gross profit as revenue less operating expenses. **Earnings
per share amounts have been adjusted to reflect the May 2000 stock dividend.
Page 34 in Annual Report
REPORT OF INDEPENDENT AUDITORS
Morrison Management Specialists, Inc. and Subsidiaries
Stockholders and Board of Directors
Morrison Management Specialists, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Morrison
Management Specialists, Inc. and Subsidiaries (formerly Morrison Health Care,
Inc.) as of May 31, 2000 and May 31, 1999, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the three
fiscal years in the period ended May 31, 2000. These financial statements are
the responsibility of the Company's Management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Morrison
Management Specialists, Inc. and Subsidiaries at May 31, 2000 and May 31, 1999,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended May 31, 2000, in conformity with
accounting principles generally accepted in the United States.
/s/Ernst & Young LLP
Atlanta, Georgia
June 22, 2000
Page 35 in Annual Report
SHAREOWNER INFORMATION
Morrison Management Specialists, Inc. and Subsidiaries
COMMON STOCK MARKET PRICES AND DIVIDENDS
Morrison Management Specialists, Inc. common stock is publicly traded on the New
York Stock Exchange (NYSE) under the ticker symbol MHI. The following table sets
forth the reported high and low sales prices on the NYSE for each quarter during
fiscal years 2000 and 1999.
First Second Third Fourth
Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------
2000 MARKET PRICE PER SHARE:
High............................... $23.409 $22.046 $22.841 $28.000
Low................................ $16.875 $16.364 $17.273 $19.205
1999 MARKET PRICE PER SHARE:
High............................... $18.068 $16.818 $18.295 $18.125
Low................................ $15.341 $14.545 $16.477 $15.909
Market price per share data has been adjusted to reflect the May 2000 stock
dividend.
Cash dividends on the common stock of Morrison Management Specialists, Inc. were
paid during each quarter of fiscal years 2000 and 1999 as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------
2000 cash dividends per share.......$0.040 $0.040 $0.040 $0.040 $0.160
1999 cash dividends per share.......$0.040 $0.040 $0.040 $0.040 $0.160
On June 28, 2000, the Company's Board of Directors declared a quarterly dividend
of $0.04 per share, payable July 31, 2000, to 3,320 stockholders of record on
July 14, 2000. Cash dividends per share of common stock have not been adjusted
to reflect the May 2000 stock dividend.
TRANSFER AGENT, REGISTRAR, DIVIDEND EXECUTIVE AND OPERATING OFFICES
DISBURSING AGENT AND DIVIDEND 1955 Lake Park Drive, SE
REINVESTMENT PLAN ADMINISTRATOR Suite 400
SunTrust Bank, Atlanta Smyrna, GA 30080
Mail Code 258 (770) 437-3300
PO Box 4625
Atlanta, GA 30302 FORM 10-K INFORMATION
(800) 568-3476 A copy of the Company's annual
report on Form 10-K, excluding
DIVIDEND REINVESTMENT PLAN exhibits, filed with the Securities
For information contact the and Exchange Commission, will be
the Dividend Reinvestment Plan furnished to any shareholder
Administrator or the Investor Relations without charge upon written request
Department. to the:
INDEPENDANT AUDITORS Investor Relations Department
Ernst & Young LLP 1955 Lake Park Drive, SE, Suite 400
600 Peachtree Street Smyrna, GA 30080
Atlanta, GA 30308
ANNUAL MEETING
LEGAL COUNSEL The Annual Meeting of Shareholders Powell, Goldstein, Frazer &
Murphy LLP will be held Wednesday, 191 Peachtree Street, NE September 27, 2000,
starting at Atlanta, GA 30303 1:00 p.m. EST at the:
Georgia International Convention Center
1902 Sullivan Road
College Park, GA 30337
Morrison's Spice of Life(TM), The Spice Event (TM) , Advanced Culinary
System(TM), Advanced Culinary Center(TM), ACC(TM), Strides for Life(TM), PhD
(Pro-Health Dining)(R) and Resident Choice(TM) are trademarks or registered
trademarks of Morrison Management Specialists, Inc. Clients for Life(R) is a
registered trademark of Tenacity, Inc. All other trademarks identified in this
Annual Report are the property of third parties.
Page 36 in Annual Report
DIRECTORS AND EXECUTIVE OFFICERS
Morrison Management Specialists, Inc.
THE BOARD OF DIRECTORS EXECUTIVE OFFICERS OF THE COMPANY
Glenn A. Davenport Glenn A. Davenport
Chairman and Chairman and
Chief Executive Officer, Chief Executive Officer
Morrison Management Specialists, Inc.
K. Wyatt Engwall
Claire L. Arnold (1,2,3) Chief Financial Officer
Chairman and Chief Executive and Assistant Secretary
Officer, Leapfrog Services Inc.;
Former Chief Executive John E. Fountain
Officer, NCC L.P. Vice President, General
Counsel and Secretary
E. Eugene Bishop (1,2,3)
Former Chairman Jerry D. Underhill
and Chief Executive Officer, President, Morrison Healthcare
Morrison Restaurants Inc. Food Services
Fred L. Brown (1,2,3) Eugene D. Dolloff
Vice Chairman, BJC Health President, Morrison Senior Dining
System; Immediate Past Chairman,
American Hospital Association; Gary L. Gaddy
Visiting Professor, Executive Vice President, Sales
George Washington University and Marketing
Michael F. Corbett (1,2,3) Richard C. Roberson
President, Michael F. Corbett & Division Vice President,
Associates, LTD; Chairman and Morrison Healthcare Food Services
Executive Director of The
Outsourcing Research Council George T. Levins
Chairman of The Corbett Group Division Vice President,
Morrison Healthcare Food Services
John B. McKinnon (1,2,3)
Former Dean, Babcock Graduate School
of Management, Wake Forest University;
Former President, Sara Lee Corporation
A. Robert Outlaw, Jr. (1,2,3)
Chairman and Chief Executive
Officer, Marshall Biscuit Company
Dr. Benjamin F. Payton (1,2,3)
President, Tuskegee University
Committees of the Board
1. Compensation and Stock Option*
2. Audit*
3. Nominating*
*Comprised entirely of non-employee Board Members
Page 37 in Annual Report