UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2000 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 - ------------------------------------------- ----------------------- Registrant's telephone number, including area code: (770)437-3300 ----------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 12,844,012 - -------------------------------------------------------------------------------- (Number of shares of $0.01 par value common stock outstanding as of September 30, 2000) INDEX ----- Page Number ------ PART I Financial Information Item 1. Financial Statements Condensed Consolidated Balance Sheets as of August 31, 2000 and May 31, 2000.................................................. 3 Condensed Consolidated Statements of Income for the Three Months Ended August 31, 2000 and August 31, 1999......................... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended August 31, 2000 and August 31, 1999.................. 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 August 31, May 31, 2000 2000 --------------------------------- (Unaudited) Assets Current assets: Cash...................................... $ 3,748 $ 3,645 Receivables - accounts and notes (net).... 41,908 40,417 Inventories............................... 4,986 4,909 Prepaid expenses.......................... 5,352 3,209 Deferred income tax benefits.............. 1,397 1,397 -------------------------------- Total current assets.................... 57,391 53,577 -------------------------------- Property and equipment - at cost............ 42,066 40,799 Less accumulated depreciation............. 15,881 15,408 -------------------------------- 26,185 25,391 Cost in excess of net assets acquired, net.. 18,132 18,670 Other assets................................ 25,138 22,822 -------------------------------- Total assets............................ $126,846 $120,460 ================================ Liabilities and Stockholders' Equity Current liabilities: Accounts payable.......................... $ 19,166 $ 19,290 Accrued other liabilities................. 17,746 17,389 Current portion of long-term debt......... 1 28 -------------------------------- Total current liabilities............... 36,913 36,707 -------------------------------- Long-term debt.............................. 57,120 54,865 Other deferred liabilities.................. 13,585 13,803 Stockholders' equity: Common stock, $0.01 par value (authorized 100,000 shares; issued: 12,819 and 12,704 shares, Aug. 31, 2000 and May 31, 2000, respectively).......................... 128 127 Capital in excess of par value............ 16,680 16,488 Unearned ESOP shares...................... (2,167) (2,292) Deferred Compensation Plan liability payable in Company stock................ 1,651 1,645 Company stock held by Deferred Compensation Plan....................... (1,651) (1,645) Retained earnings......................... 4,587 762 -------------------------------- Total stockholders' equity.................. 19,228 15,085 -------------------------------- Total liabilities and stockholders' equity.. $126,846 $120,460 ================================ 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 August 31, August 31, 2000 1999 --------------------------------- Revenues...................................... $131,029 $93,983 Operating expenses............................ 113,065 78,952 --------------------------------- Gross profit.................................. 17,964 15,031 Selling, general and administrative expenses.. 9,980 8,382 --------------------------------- 7,984 6,649 Interest expense, net of interest income, totaling $69 and $72, in fiscal 2001 and fiscal 2000, respectively............... 847 629 --------------------------------- Income before provision for income taxes...... 7,137 6,020 Provision for federal and state income taxes.. 2,819 2,375 --------------------------------- Net income.................................... $ 4,318 $ 3,645 ================================= Earnings per share - Basic.................... $ 0.34 $ 0.28 ================================= Earnings per share - Diluted.................. $ 0.33 $ 0.27 ================================= Weighted-average common shares - Basic........ 12,657 13,079 Net effect of dilutive stock options.......... 618 406 --------------------------------- Weighted-average common and common equivalent shares - Diluted.............. 13,275 13,485 ================================= The prior year's 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. Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) For the Three Months Ended August 31, August 31, 2000 1999 ----------------------------- Operating activities: Net income......................................... $ 4,318 $ 3,645 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................... 1,331 1,122 Amortization of intangibles.................... 265 260 Deferred income taxes.......................... 0 276 Gain on disposition of assets.................. 0 (12) Changes in operating assets and liabilities: Receivables................................. (1,465) 770 Inventories................................. (76) (157) Prepaid expenses and other assets........... (1,486) (2,151) Accounts payable, accrued and other liabilities......................... 289 (3,799) Income taxes payable........................ 0 1,883 ----------------------------- Net cash provided by operating activities.......... 3,176 1,837 ----------------------------- Investing activities: Purchases of property and equipment................ (2,166) (935) Proceeds from disposal of assets................... 41 141 Investment in foodbuy.com.......................... (3,000) 0 Cost of acquisitions, net.......................... 0 46 ----------------------------- Net cash used by investing activities.............. (5,125) (748) ----------------------------- Financing activities: Net proceeds from long-term debt................... 10,000 0 Principal payments on long-term debt............... (7,771) (1,849) Proceeds from exercise of stock options and issuance of stock, net of income tax benefits.... 7,918 1,793 Payments to acquire Treasury Stock................. (7,871) 0 Dividends paid..................................... (495) (474) ESOP shares released............................... 271 191 ----------------------------- Net cash provided/(used) by financing activities... 2,052 (339) ----------------------------- Increase in cash and short-term investments........ 103 750 Cash and short-term investments at the beginning of the period.......................... 3,645 2,780 ----------------------------- Cash and short-term investments at the end of the period................................ $ 3,748 $ 3,530 ============================= 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 period presented. The results of operations for the interim period 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, 2000. Certain prior reported amounts and balances have been reclassified to conform to the current year presentation. NOTE B - SUBSEQUENT EVENTS Declaration of Cash Dividend On September 28, 2000, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on October 31, 2000 to shareholders of record at the close of business on October 13, 2000. 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. ("MMS" or the "Company") for the quarter ended August 31, 2000 compared with the results for the comparable period of the prior year. MANAGED VOLUME The Company 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. Managed volume from operations for the three months ended August 31, 2000 increased $35.6 million or 19.9% to $214.4 million compared to $178.8 million for corresponding prior year period due to growth in new and existing accounts. RESULTS OF OPERATIONS The Company's net income increased 18.5% to $4.3 million for the quarter as compared with net income of $3.6 million reported for the corresponding period of the prior fiscal year. Earnings before interest and taxes increased 20.1% or $1.3 million to $8.0 million for the quarter as compared to $6.6 million for the prior year quarter. The increase from the corresponding prior year period was due to growth in new account income. The Company also continues to experience high account retention. For the three months ended August 31, 2000, revenue from operations increased $37.0 million or 39.4% to $131.0 million as compared to $94.0 million in revenue for the corresponding prior year period. The increase was primarily attributable to the conversion of client-paid payroll to Company-paid payroll in continuing accounts and opening new accounts. OPERATING EXPENSES Operating expenses increased $34.1 million or 43.2% to $113.1 million for the three months ended August 31, 2000 as compared to $79.0 million reported for the corresponding period of the prior fiscal year. These expenses have increased over the prior year period primarily as a result of costs associated with the addition of new accounts and the conversion of client-paid payroll to Company-paid payroll in continuing accounts. Selling, general and administrative expenses increased $1.6 million or 19.1% to $10.0 million for the three months ended August 31, 2000 as compared to $8.4 million for the corresponding period of the prior fiscal year. This increase is due to costs related to 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 increased from $0.6 million to $0.8 million for the three months ended August 31, 2000 as compared to the same period 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 three months ended August 31, 2000 and for the corresponding period of the prior year was 39.5%. LIQUIDITY AND CAPITAL RESOURCES 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 requires capital principally for acquisitions, new accounts, equipment replacement and remodeling of existing accounts, and the construction of Advanced Culinary CentersTM. The Company did not have material commitments for capital expenditures as of August 31, 2000. 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 expects that funds generated from operations and existing lines of credit will be sufficient to meet its normal operating requirements over the near term. Total assets at August 31, 2000 were $126.8 million, a $6.4 million increase over $120.5 million in total assets of the prior fiscal year end. This increase is attributable to an increase in current assets of $3.8 million comprised of increases in accounts receivable and prepaid assets and an increase in long-term assets of $2.6 million comprised of increases in fixed assets, investments and deferred other assets. Total liabilities at August 31, 2000 were $107.6 million, a $2.2 million increase from $105.4 million as of the end of the prior fiscal year. This increase was primarily due to a $2.3 million increase in long-term debt. 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. 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 or senior living markets; 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 Cash Dividend On September 28, 2000, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on October 31, 2000 to shareholders of record at the close of business on October 13, 2000. 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 None ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27 Financial Data Schedule - For the Three Months ended August 31, 2000 (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) 10/11/00 By:/s/K. WYATT ENGWALL - -------- -------------------- DATE K. WYATT ENGWALL Chief Financial Officer and Assistant Secretary (Principal Accounting Officer) MORRISON MANAGEMENT SPECIALISTS, INC. LIST OF EXHIBITS Exhibit Number Description - -------------------------------------------------------------------------------- 27 Financial Data Schedule - For the Three Months ended August 31, 2000