UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 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 12,783,834 - -------------------------------------------------------------------------------- (Number of shares of $0.01 par value common stock outstanding as of December 31, 2000) 1 INDEX Page Number ------ PART I Financial Information ---------------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of November 30, 2000 and May 31, 2000.................................................. 3 Condensed Consolidated Statements of Income for the Three and Six Months Ended November 30, 2000 and November 30, 1999.............. 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended November 30, 2000 and November 30, 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 2 PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1 FINANCIAL STATEMENTS Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except per share data) As of As of November 30, May 31, 2000 2000 ----------------------------------- (Unaudited) Assets Current assets: Cash....................................... $ 2,542 $ 3,645 Receivables - accounts and notes (net)..... 46,926 40,417 Inventories................................ 5,367 4,909 Prepaid expenses........................... 6,368 3,209 Deferred income tax benefits............... 1,397 1,397 ----------------------------------- Total current assets..................... 62,600 53,577 ----------------------------------- Property and equipment - at cost............. 44,152 40,799 Less accumulated depreciation.............. 16,971 15,408 ----------------------------------- 27,181 25,391 Cost in excess of net assets acquired, net... 18,358 18,670 Other assets................................. 27,603 22,822 ----------------------------------- Total assets............................. $135,742 $120,460 =================================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable........................... $ 19,465 $ 19,290 Accrued other liabilities.................. 18,070 17,389 Current portion of long-term debt.......... 3 28 ----------------------------------- Total current liabilities................ 37,538 36,707 ----------------------------------- Long-term debt, less current portion......... 63,275 54,865 Other deferred liabilities................... 13,915 13,803 Stockholders' equity: Common stock, $0.01 par value (authorized 100,000 shares; issued: 12,777 and 12,704 shares, Nov. 30, 2000 and May 31, 2000, respectively)......... 128 127 Capital in excess of par value............. 14,198 16,488 Unearned ESOP shares....................... (2,035) (2,292) Deferred Compensation Plan liability payable in Company stock................. 1,728 1,645 Company stock held by Deferred Compensation Plan........................ (1,728) (1,645) Retained earnings.......................... 8,723 762 ----------------------------------- Total stockholders' equity................... 21,014 15,085 ----------------------------------- Total liabilities and stockholders' equity................................. $135,742 $120,460 =================================== The accompanying notes are an integral part of the financial statements. 3 Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited) For the Three Months Ended For the Six Months Ended November 30, November 30, November 30, November 30, 2000 1999 2000 1999 --------------------------------------------------------------------- Revenues...................................... $132,336 $101,185 $263,365 $195,168 Operating expenses............................ 114,009 85,075 227,074 164,027 --------------------------------------------------------------------- Gross profit.................................. 18,327 16,110 36,291 31,141 Selling, general and administrative expenses.................................... 9,702 9,756 19,682 18,138 --------------------------------------------------------------------- 8,625 6,354 16,609 13,003 Interest expense, net of interest income...... 949 674 1,796 1,303 --------------------------------------------------------------------- Income before provision for income taxes...... 7,676 5,680 14,813 11,700 Provision for federal and state income taxes.. 3,032 2,232 5,851 4,607 --------------------------------------------------------------------- Net income.................................... $ 4,644 $ 3,448 $ 8,962 $ 7,093 ===================================================================== Earnings per share - Basic.................... $ 0.37 $ 0.26 $ 0.71 $ 0.54 ===================================================================== Earnings per share - Diluted.................. $ 0.35 $ 0.26 $ 0.68 $ 0.53 ===================================================================== Weighted-average common shares - Basic........ 12,699 13,043 12,678 13,061 Net effect of dilutive stock options.......... 550 373 584 390 --------------------------------------------------------------------- Weighted-average common shares - Diluted...... 13,249 13,416 13,262 13,451 ===================================================================== Dividends declared per share.................. $ 0.04 $ 0.04 $ 0.08 $ 0.08 ===================================================================== The prior year's share data and earnings per share amounts have been adjusted to reflect the May 2000 stock dividend. The prior year's dividends declared per share amounts have not been adjusted to reflect the May 2000 stock dividend. The accompanying notes are an integral part of the financial statements. 4 Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (In thousands) (Unaudited) For the Six Months Ended November 30, November 30, 2000 1999 ------------------------------------- Operating activities: Net income....................................... $ 8,962 $ 7,093 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation................................. 2,678 2,273 Amortization of intangibles.................. 540 531 Deferred income taxes........................ (256) 132 Loss/(Gain) on disposition of assets......... 8 (118) Changes in operating assets and liabilities: Receivables............................... (6,509) (4,257) Inventories............................... (458) (701) Prepaid expenses and other assets......... (4,684) (2,364) Accounts payable, accrued and other liabilities....................... 1,240 226 Income taxes payable...................... - 189 ---------------------------------- Net cash provided by operating activities........ 1,521 3,004 ---------------------------------- Investing activities: Purchases of property and equipment.............. (4,566) (5,321) Proceeds from disposal of assets................. 90 940 Investment in foodbuy.com........................ (3,000) 0 Cost of acquisitions, net........................ (500) (1,104) ---------------------------------- Net cash used by investing activities............ (7,976) (5,485) ---------------------------------- Financing activities: Net proceeds from long-term debt................. 17,513 10,000 Principal payments on long-term debt............. (9,128) (3,610) Proceeds from exercise of stock options and issuance of stock, net of income tax benefits.. 11,960 2,866 Payments to acquire Treasury Stock............... (14,575) (5,755) Dividends paid................................... (1,001) (924) ESOP shares released............................. 583 358 ---------------------------------- Net cash provided by financing activities........ 5,352 2,935 ---------------------------------- (Decrease)/Increase in cash and short-term investments.................................... (1,103) 454 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.............................. $ 2,542 $ 3,234 ================================== The accompanying notes are an integral part of the financial statements. 5 Morrison Management Specialists, Inc. and Subsidiaries NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE A - BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The accompanying unaudited condensed consolidated financial statements reflect all adjustments for normal recurring accruals. These adjustments are necessary, in the opinion of management, for a fair presentation of the financial position, the results of operations and the cash flows for the interim periods presented. The results of operations for the interim periods reported herein are not necessarily indicative of results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended May 31, 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 January 9, 2001, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on January 31, 2001 to shareholders of record at the close of business on January 19, 2001. 6 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 and six months ended November 30, 2000 compared with the results for the comparable periods of the prior year. MANAGED VOLUME The Company generally performs its services pursuant to either management fee or profit and loss contracts. While 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 increased $30.2 million or 16.3% to $214.8 million for the quarter and increased $65.8 million or 18.1% to $429.2 million for the six months ended November 30, 2000 as compared to $184.7 million and $363.4 million for the corresponding prior year periods due to new accounts, acquired accounts and growth in existing accounts. RESULTS OF OPERATIONS The Company's net income increased 34.7% to $4.6 million for the quarter and increased 26.4% to $9.0 million for the six months ended November 30, 2000, as compared with net income of $3.4 million and $7.1 million reported for the corresponding periods of the prior fiscal year. Earnings before interest and taxes increased 35.7% or $2.3 million to $8.6 million for the quarter and increased 27.7% or $3.6 million to $16.6 million for the six months ended November 30, 2000, as compared with earnings before interest and taxes of $6.4 million and $13.0 million for the corresponding prior year periods. The increase from the corresponding prior year periods was due to growth in new account income. The Company also continues to experience high account retention. Revenue from operations increased $31.2 million or 30.8% to $132.3 million for the quarter and increased $68.2 million or 34.9% to $263.4 million for the six months ended November 30, 2000, as compared with revenue of $101.2 million and $195.2 million for the corresponding prior year periods. 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 $28.9 million or 34.0% to $114.0 million for the quarter and increased $63.0 million or 38.4% to $227.1 million for the six months ended November 30, 2000, as compared with operating expenses of $85.1 million and $164.0 million for the corresponding prior year periods. 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. 7 Selling, general and administrative expenses decreased $0.1 million or 0.6% to $9.7 million for the quarter and increased $1.5 million or 8.5% to $19.7 for the six months ended November 30, 2000 as compared to $9.8 million and $18.1 million for the corresponding period of the prior fiscal year. This year to date 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 $0.7 million to $0.9 million for the quarter and increased from $1.3 million to $1.8 million for the six months ended November 30, 2000 as compared to the same periods of the prior year. The increases in interest are attributable to higher average borrowings. INCOME TAXES The effective income tax rate for the quarter and six months ended November 30, 2000 was 39.5% as compared to effective income tax rates of 39.3% and 39.4% for the corresponding periods of the prior year. 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 November 30, 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 November 30, 2000 were $135.7 million, a $15.3 million increase over $120.5 million in total assets as of the prior fiscal year end. This increase is attributable to an increase in current assets of $9.0 million comprised of increases in accounts receivable and prepaid expenses and an increase in long-term assets of $6.3 million comprised of increases in fixed assets and other assets. Total liabilities at November 30, 2000 were $114.7 million, a $9.4 million increase from $105.4 million as of the end of the prior fiscal year. This increase was primarily due to an $8.4 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. 8 SUBSEQUENT EVENTS Declaration of Cash Dividend On January 9, 2001, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on January 31, 2001 to shareholders of record at the close of business on January 19, 2001. 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. 9 PART II - OTHER INFORMATION --------------------------- ITEM 1 LEGAL PROCEEDINGS The Company is presently, and from time to time, subject to pending claims and suits arising in the ordinary course of its business. In the opinion of management, the ultimate resolution of these pending legal proceedings will not have a material adverse effect on the Company's operations or consolidated financial position. ITEM 2 CHANGES IN SECURITIES None ITEM 3 DEFAULTS UPON SENIOR SECURITIES None ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On September 27, 2000, the Company held its Annual Meeting of Shareholders in Atlanta, Georgia. During the meeting, the following matters were voted upon. Proposal 1 for the election of Directors - ---------------------------------------- The following nominees were elected as Class II directors to the Board of Directors for a three-year term. Number Number of of Votes Nominees Votes For Withheld - -------------------------------------------------------------------------------- Claire L. Arnold Class II 8,990,276 91,964 Glenn A. Davenport Class II 8,990,578 91,662 Other members of the Board of Directors are E. Eugene Bishop, Fred L. Brown, Michael F. Corbett, John B. McKinnon, Arthur R. Outlaw, Jr. and Dr. Benjamin F. Payton. Proposal 2 for the amendment of the Company's 1996 Stock Incentive Plan - ------------------------------------------------------------------------- The proposal to amend the Company's 1996 Stock Incentive Plan to increase the number of shares authorized for issuance thereunder by 500,000 shares received 6,549,323 FOR votes, 2,471,439 AGAINST votes and 61,478 ABSTAINED votes. ITEM 5 OTHER INFORMATION None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: None (b) Reports on Form 8-K: None 10 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. MORRISON MANAGEMENT SPECIALISTS, INC. (Registrant) 01/11/01 By:/s/ K. WYATT ENGWALL - -------- -------------------- DATE K. WYATT ENGWALL Chief Financial Officer and Assistant Secretary (Principal Accounting Officer) 11 MORRISON MANAGEMENT SPECIALISTS, INC. LIST OF EXHIBITS Exhibit Number Description - ------------------------------------------------------------------------ None