Morrison Health Care, Inc. and Subsidiaries
Selected Financial Data
The following table summarizes certain selected financial
information with respect to Morrison Health Care, Inc. (MHCI) and
is derived from the Financial Statements of MHCI. The Financial
Statements of MHCI are presented as if MHCI had been a separate
entity for fiscal years 1996, 1995, 1994, 1993 and 1992. The
statements of income data for the years ended June 1, 1996, June
3, 1995, June 4, 1994 and June 5, 1993, and the balance sheet
data as of June 1, 1996, June 3, 1995 and June 4, 1994 are
derived from the Audited Financial Statements of MHCI. The
statement of income data for the year ended June 6, 1992, and the
balance sheet data as of June 5, 1993 and June 6, 1992 are
derived from the Unaudited Financial Statements of MHCI and, in
the opinion of management, include all adjustments consisting of
normal recurring accruals, which MHCI considers necessary for a
fair representation of the financial position and the results of
operations for these periods. The financial information
presented below may not be indicative of MHCI's future
performance as an independent company. The information set forth
below should be read in conjunction with "MHCI Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of MHCI and notes
thereto and the Unaudited Pro Forma Financial Information of MHCI
included in Note 2 of the Notes to Consolidated Financial
Statements. Weighted average shares for 1996 are determined as if
the shares issued in connection with the Distribution were
outstanding from the beginning of the year. Earnings per share
and dividend data have not been presented for fiscal year 1995,
1994, 1993 and 1992 as MHCI was not a publicly held company prior
to March, 1996.
Fiscal years 1994, 1993 and 1992 information includes the
results of B&I operations which were sold in fiscal year 1995.
Income Before Cumulative Effect of Accounting Changes for Fiscal
year 1995 includes an after tax gain of $25.8 million from the
sale of the B&I operations. See Note 3 of the Notes to
Consolidated Financial Statements for more information on the
sale of B&I.
Fiscal Year
(In thousands, except per share data) 1996 1995 1994 1993 1992
Consolidated statements of income data:
Revenues $219,995 $225,392 $461,780 $430,145 $399,634
Income before provision for income
taxes and cumulative effect of
accounting changes $ 16,011 $ 65,295 $ 21,588 $ 18,122 $ 15,620
Provision for federal and state
income taxes 6,731 28,469 8,351 6,980 6,014
Income before cumulative effect
of accounting changes 9,280 36,826 13,237 11,142 9,606
Cumulative effect of accounting
changes:
Postretirement benefits 0 0 0 (640) 0
Income taxes 0 0 0 426 0
Net income $ 9,280 $ 36,826 $ 13,237 $ 10,928 $ 9,606
Earnings per common and common
equivalent share $ 0.79
Weighted average common and common
equivalent shares 11,724
All fiscal years are composed of 52 weeks except 1992 which contains 53
weeks.
Consolidated balance sheet data:
Total assets $ 62,543 $ 70,422 $107,942 $109,434 $106,043
Long-term debt $ 20,034 $ 19,245 $ 3,128 $ 4,686 $ 13,051
Stockholders' equity $ 4,716 $ 9,015 $ 51,164 $ 56,807 $ 55,080
Working capital $ 10,119 $ 14,712 $ 11,217 $ 21,524 $ 27,493
Current ratio 1.4:1 1.6:1 1.3:1 1.6:1 1.9:1
Dividends for the fourth quarter of fiscal year 1996 were $0.205 per share.
MORRISON HEALTH CARE, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the business
information and the Financial Statements and related notes found
on pages 24 to 39.
RESULTS OF OPERATIONS
Effects of Distribution on Results of Operations
Effective March 9, 1996, Morrison Health Care, Inc. (MHCI) was
spun off (the Distribution) from Morrison Restaurants Inc. (MRI)
becoming an independent corporation trading under the symbol MHI
on the New York Stock Exchange. Management believes that the
Distribution, see Note 2 of the Notes to Consolidated Financial
Statements, will have a material impact on the results of
operations due to the added separate company costs that will be
incurred by MHCI. The estimated effect of the Distribution on
the results of operations of MHCI for the fiscal years ending
June 1, 1996 and June 3, 1995 are presented in the Unaudited Pro
Forma Financial Information on pages 30 and 31. Such pro forma
financial information is presented as if the Distribution had
been effective as of the dates indicated.
1996 Compared To 1995
Because Management believes that the Distribution will have a
material impact on the results of operations due to the added
separate company costs that will be incurred, the following
discussion is based on Unaudited Pro Forma Financial Information.
Overview
Fiscal 1996 was a transitional year for MHCI due to the Company's
spin-off from Morrison Restaurants Inc. This new independence
allows the Company's Management to concentrate on its own
resources and core competencies, health care food and nutrition
services. The Company is now able to specifically focus on its
own customers, employees and shareholders. Fiscal 1996 was
important as Management took the opportunity to restructure its
sales force. As a result, the Company's earnings were negatively
impacted; however, positive results are noticeable in the
increase of sales activity.
MHCI is the only national, publicly held company which
specializes exclusively in health care food and nutrition
services. MHCI's client base includes some of the largest and
most prestigious hospitals in the country.
In the third quarter of fiscal year 1996, MHCI incurred
charges of $2.1 million consisting primarily of estimated
professional and other fees incurred in connection with the
Distribution ($1.4 million), relocation costs for personnel
moving in connection with the Distribution ($0.5 million) and
miscellaneous other asset write-offs ($0.2 million).
Revenue
While actual services performed are the same, revenue recognition
varies by type of contract based on the expenses and payroll paid
by MHCI. In a management fee account, revenue, in addition to
the fee, is recognized only when the Company pays expenses or
employees are on the Company's payroll. In a profit and loss
account where MHCI assumes the risk of profit or loss for the
foodservice operation, the amount of revenue reported is the
actual revenue generated from meals served to patients, client
employees and visitors. Because of the difference between the
amount of revenue that is reported for the fee account, where
MHCI pays all or part of the cost, and the account where no cost
is paid, it is Management's opinion that Managed Volume is a
better measure of performance. Managed Volume is defined as MHCI
revenue, as reported, plus client paid cost. Managed Volume
increased 7% in fiscal year 1996 when compared to fiscal year
1995. This increase is due to growth in existing units and
opening accounts with larger Managed Volume than those that were
closed.
Revenue decreased $5.4 million or 2.4% in 1996 as compared
to 1995. The decrease in revenue was due to the net decrease of
accounts during 1996. In addition to loss of accounts, several
accounts converted from MHCI paying for food, payroll and other
costs to directly paying for these costs themselves.
To address lower sales of new accounts, the sales team was
expanded and new sales positions were created. The new sales
organization allows expanded focus on prospecting while
continuing to grow existing relationships with current accounts.
Gross Profit
Gross profit, revenue less operating expenses, increased $1.4
million or 3.7% for 1996. The increase in gross profit is
attributed to continuing emphasis on food and labor cost
reductions.
Selling, General and Administrative
Selling, general and administrative expenses increased as a
percentage of revenue due to the addition of a regional team, the
expansion of the sales force and the relocation of corporate
headquarters.
Interest Expense, net
Interest expense increased due to increased debt. The increased
debt resulted from the allocation of MRI's debt in connection
with the Distribution.
Federal and State Income Taxes
The combined federal and state effective tax rate decreased to
42.1% in 1996, from 43.6% in 1995. The higher effective rate in
fiscal year 1995 was due to the nondeductibility of acquired
goodwill disposed of in connection with the divestiture of the
B&I accounts.
1995 Compared To 1994
Overview
On August 8, 1994, MHCI sold certain B&I contracts and assets to
Gardner Merchant Food Services, Inc., a wholly owned subsidiary
of Gardner Merchant Ltd., for $100 million in cash. B&I accounts
not sold were subsequently closed. The sale, net of related
transaction expenses and closing costs of approximately $11.1
million, resulted in a net pretax gain of $46.8 million. This
sale had a material impact on the amount of reported income from
continuing operations for fiscal 1995.
Revenue
Due to the sale of the B&I contracts and assets, revenue
decreased 51.2% from 1994. Excluding 1994 B&I revenue of $250.7
million, the revenue increase was 6.8%. This increase reflects
the addition of larger accounts to MHCI's customer base and a net
addition of accounts as compared to 1994.
Operating Profits
Operating profits excluding the $46.8 million gain on the sale of
B&I decreased 14.2% for 1995. Excluding 1994 B&I operating
profit of $6.3 million, operating profit increased 21.1% due to
increased revenue and a 1.4% operating margin increase. Because
of the sale of B&I, the client mix changed in 1995 resulting in a
larger number of clients that pay for food, payroll and other
costs directly rather than indirectly through MHCI. During the
year, MHCI implemented food cost control programs aimed at
increased food preparation efficiency and waste reduction,
coupled with higher value-added menu offerings. Payroll costs
also decreased due to improved experience for health and workers'
compensation claims and a change in vacation policy. Selling,
general and administrative expenses increased to 8.4% of revenues
from 6.4% in fiscal 1994 due to increased spending. The changes
discussed above resulted in the improved margin.
MHCI's pre-distribution interest income results from an
allocation of MRI's interest income based on MHCI's cash flow.
The combined federal and state effective tax rate increased to
43.6% in 1995 from 38.7% in 1994 due to the nondeductibility for
tax of acquired goodwill disposed of in connection with the
divestiture of the B&I accounts.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow, Capital Expenditures and Financing
As part of the Distribution MRI allocated $27.0 million of its
March 2, 1996 debt balance to MHCI. MHCI refinanced $20 million
of the debt on a long-term basis with a term note and obtained
lines of credit to provide cash for working capital needs and
funds to support the Company's growth. During fiscal year 1996,
interest costs increased due to allocated debt in connection with
the spin-off and lines of credit secured as an independent
entity.
Due to the nature of its contract foodservice business, MHCI
is able to maintain a relatively steady cash flow. Cash flow from
operations has historically financed MHCI's capital investments.
MHCI plans for controlled expansion over the next several years,
and anticipates that cash flow from operations plus utilization
of the existing lines of credit will be sufficient to provide for
this expansion.
To finance its activities, MHCI has obtained a $50 million,
five-year credit facility from various financial institutions.
Of the total facility, $30 million is revolving lines of credit.
The Company has $2.5 million of borrowings outstanding under the
terms of these lines of credit at June 1, 1996, classified as
short-term borrowings. The remaining $20 million of the credit
facility is a five-year term note which will be repaid in
quarterly installments of $1.25 million beginning June 30, 1997.
The credit facility provides for certain restrictions on
incurring additional indebtedness and contains certain funded
debt, net worth and fixed charge coverage requirements. At June
1, 1996, retained earnings in the amount of $86,000 were
available for cash dividends and stock repurchases under the debt
restrictions.
In the event that the Company requires funds for day-to-day
operating activities, it has obtained additional lines of credit
which will allow borrowing up to $5 million. The Company had
$4.3 million of borrowings outstanding under this agreement at
June 1, 1996, classified by the Company as short-term debt.
The Company entered into an interest rate swap agreement to
control its interest costs. This swap agreement effectively
limits the interest rate to a maximum of 6.7% per annum for the
period of the term note.
Trade accounts receivable make up the majority of MHCI'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.
MHCI requires capital principally for new accounts,
equipment replacement and remodeling of existing accounts. Cash
provided by operating activities approximated $12.4 million for
fiscal year 1996. Capital expenditures and client investments
were approximately $2.2 million and $760,000, respectively, for
the same period. Capital expenditures and client investments are
anticipated to total $5.0 million in fiscal 1997. MHCI plans to
finance this amount primarily through internally generated funds.
See "Special Note Regarding Forward-Looking Information."
Working Capital
Working capital and the current ratio as of June 1, 1996 were
$10.1 million and 1.4:1, respectively.
Dividends
MHCI paid approximately $2.4 million in cash dividends to
stockholders in the fourth quarter of 1996. The Company plans to
pay annual dividends of approximately $9.6 million in the next
fiscal year. See "Special Note Regarding Forward-Looking
Information."
Deferred Tax Assets
The recognition of deferred tax assets depends on the anticipated
existence of taxable income in future periods in amounts
sufficient to realize the assets. A valuation allowance must be
provided for the deferred tax asset if such future income is not
likely to be generated. Management believes that future taxable
income should be sufficient to realize all of MHCI's deferred tax
assets based on historical earnings of MHCI; therefore, a
valuation allowance has not been established.
Income Taxes
MHCI had a short tax year due to its spin-off from MRI. Income
taxes are typically paid ratably during the year through
estimated income tax payments. However, as no estimated tax
payments were required to be made during the short tax year, the
Company will have a cash outlay during the first quarter of
fiscal year 1997 for 1996 income taxes. Cash outlay for income
taxes in fiscal year 1997 is expected to exceed 1997 income tax
expense.
Employee Stock Purchase Plan
Consistent with the purpose of enhancing the equity-based
incentive compensation of its employees, the Company intends to
cause its Salary Deferral Plan to hold at least 3% of its
outstanding shares of common stock. The Plan expects to acquire
shares from MHCI directly, in exchange for a promissory note to
be repaid over a period of up to ten years. See "Special Note
Regarding Forward-Looking Information."
KNOWN EVENTS, UNCERTAINTIES AND TRENDS
New Accounting Standards
In March, 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" (FAS 121). FAS 121 establishes accounting
standards that require an entity to review long-lived assets and
certain identifiable intangibles for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets and certain
identifiable intangibles to be disposed of are generally to be
reported at the lower of carrying amount or fair value less cost
to sell. The Company adopted FAS 121 in 1996. Such adoption
did not have a material impact on the Company's financial
position or results of operations.
Impact of Inflation
In the past, MHCI has been able to recover inflationary cost
increases through increased productivity, menu changes and
contract inflation adjustments. There have been and there may be
in the future, delays in contract inflation adjustments and
competitive pressures which limit MHCI's ability to recover such
cost increases in their entirety. At present, Congress is
pursuing a minimum wage price increase which may negatively
impact the Company's payroll costs in the short-term, but which
management feels they can negate in the long-term through
increased efficiencies in its operations and possibly job credit
programs also being pursued by Congress. Historically, the
effects of inflation on MHCI's net income have not been
materially adverse.
Management's Outlook
Management intends to enhance growth through the expansion and
restructuring of the sales teams, maintenance of outstanding
performance and exploration of acquisition opportunities.
Several MHCI accounts are among the largest acute care and
teaching hospitals in the United States. The Company strives to
maintain its long-term partnerships with these facilities while
continuing to increase quality and lower costs. During the
upcoming year, MHCI believes that additional investments in
people and programs designed to enhance its aggressive sales
drive will add new clients while building stronger relationships
with current accounts. See "Special Note Regarding Forward-
Looking Information."
Special Note Regarding Forward-Looking Information
The foregoing section contains various "forward-looking
statements" which represent the Company's expectations or beliefs
concerning future events, including the following: statements
regarding account and unit growth, future capital expenditures
and future borrowings. 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: health care spending trends and regulations; increased
competition in the health care food and nutrition market;
customers acceptance of the Company's cost saving programs;
health care regulators; and laws and regulations affecting labor
and employee benefits cost.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Statements of Income
Historical For the Fiscal Year Ended
(In thousands, except per share data) June 1, June 3, June 4,
1996 1995 1994
Revenues $219,995 $225,392 $461,780
Operating costs and expenses:
Operating expenses 180,607 187,426 410,617
Selling, general and administrative 20,670 18,946 29,377
Restructure costs 1,398 0 0
Asset impairment 193 0 0
Net gain on sale/closure of B&I accounts 0 (46,782) 0
Interest expense, net of interest income,
totaling $428 in 1996, $221 in 1995 and
$205 in 1994. 1,116 507 198
203,984 160,097 440,192
Income before provision for income taxes. 16,011 65,295 21,588
Provision for federal and state income taxes 6,731 28,469 8,351
Net income $ 9,280 $ 36,826 $ 13,237
Earnings per common and common equivalent share $ 0.79
Weighted average common and common
equivalent shares 11,724
The accompanying notes are an integral part of the financial statements.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Balance Sheets
Historical Fiscal Year Ended
(In thousands) June 1, 1996 June 3, 1995
Assets
Current assets:
Cash and short-term investments $ 6,088 $ 732
Receivables:
Trade, less allowance for doubtful
accounts of $1,122 at June 1, 1996,
and $1,641 at June 3, 1995 20,091 18,100
Other 3,986 6,915
Inventories 2,662 2,880
Prepaid expenses 1,616 6,721
Deferred income tax benefits 2,397 5,682
Total current assets 36,840 41,030
Property and equipment - at cost:
Buildings and improvements 3,883 3,656
Equipment 11,346 10,874
15,229 14,530
Less accumulated depreciation 9,571 8,767
5,658 5,763
Deferred income tax benefits 1,656 3,298
Cost in excess of net assets acquired, net 4,736 4,888
Notes receivable 4,940 5,299
Deferred charges 2,833 3,746
Deferred other assets 5,880 6,398
Total assets $62,543 $70,422
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable $ 8,684 $10,000
Short-term borrowings 6,760 0
Accrued liabilities:
Taxes, other than income taxes 1,609 1,848
Payroll and related costs 3,117 3,439
Insurance 3,819 6,834
Other 1,786 4,186
Income taxes payable 935 0
Current portion of long-term debt 11 11
Total current liabilities 26,721 26,318
Notes payable 20,034 19,245
Other deferred liabilities 11,072 15,844
Stockholders' equity:
Investment by and advances from
Morrison Restaurants Inc. 0 9,015
Common stock, $0.01 par value
(authorized 100,000 shares;
issued: 11,791 shares) 118 0
Capital in excess of par value 5,441 0
Retained earnings 86 0
5,645 9,015
Less cost of treasury stock 929 0
Total stockholder's equity 4,716 9,015
Total liabilities and
stockholders' equity $62,543 $70,422
The accompanying notes are an integral part of the financial statements.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Historical For the Fiscal Year Ended
June 1, June 3, June 4,
(In thousands) 1996 1995 1994
Operating activities:
Net income $ 9,280 $ 36,826 $ 13,237
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization 2,330 2,238 5,914
Amortization of intangibles 152 153 557
Gain on sale of B&I contracts and assets 0 (46,782) 0
Other, net 1,172 (3,088) 1,702
Deferred income taxes 4,927 (972) 225
(Gain)/loss on disposition of assets 170 4,372 (556)
Changes in operating assets and liabilities:
(Increase)/decrease in receivables 1,297 2,094 (2,096)
(Increase)/decrease in inventories 218 564 (231)
(Increase)/decrease in prepaid and
other assets (2,005) 1,149 1,949
Increase/(decrease) in accounts payable,
accrued and other liabilities (12,064) (26,072) 4,874
Increase/(decrease) in income taxes payable 6,928 (5,703) (923)
Net cash provided (used) by operating activities 12,405 (35,221) 24,652
Investing activities:
Purchases of property and equipment (2,170) (3,482) (9,184)
Proceeds from disposal of assets 387 674 1,381
Proceeds from sale of B&I contracts and assets 0 100,000 0
Other, net 764 (2,121) (3,818)
Net cash provided (used) by investing activities (1,019) 95,071 (11,621)
Financing activities:
Proceeds from long-term debt 800 19,200 0
Principal payments on long-term debt (11) (4,619) (41)
Net change in short-term borrowings 6,760 0 0
Proceeds from exercise of stock options 1,573 0 0
Dividends paid (2,403) 0 0
Net transfers to Morrison Restaurants Inc. (12,749) (78,975) (18,880)
Net cash used by financing activities (6,030) (64,394) (18,921)
Increase/(decrease) in cash and short-term investments 5,356 (4,544) (5,890)
Cash and short-term investments at the
beginning of the period 732 5,276 11,166
Cash and short-term investments at the
end of the period $ 6,088 $ 732 $ 5,276
Supplemental disclosure of cash flow
information-cash paid for:
Interest $ 1,533 $ 776 $ 313
Income taxes $ 18,586 $ 32,764 $ 8,648
The accompanying notes are an integral part of the financial statements.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
Historical For the FiscalYear Ended
(In thousands, except per share data) June 1, June3, June 4,
1996 1995 1994
Shares Amounts Amounts Amounts
Common stock
Shares issued pursuant to spin-off from
Morrison Restaurants Inc. 11,678 $ 117 $ 0 $ 0
Shares issued under Stock Incentive Plans 113 1 0 0
Ending balances 11,791 118 0 0
Additional paid-in capital
Distribution of Morrison Restaurants Inc.'s
investment in the Company to Morrison
Restaurants Inc. shareholders 3,898 0 0
Shares issued under Stock Incentive Plans 1,543 0 0
Ending balance 5,441 0 0
Morrison Restaurants Inc. equity investment
Beginning balance 9,015 51,164 56,807
Net income for the three quarters ended March 2, 1996
and the years ended June 3, 1995 and June 4, 1994 6,791 36,826 13,237
Cash transfers to Morrison Restaurants Inc. (12,749) (78,975) (18,880)
Distribution of Morrison Restaurants Inc.'s
investment in the Company to Morrison
Restaurants Inc. shareholders (3,057) 0 0
Ending balance 0 9,015 51,164
Retained earnings
Net income for the quarter ended June 1, 1996 2,489 0 0
Cash dividends of $0.205 per share (2,403) 0 0
Ending balance 86 0 0
Treasury stock (held by deferred compensation plan)
Distribution of Morrison Restaurants Inc.'s
investment in the Company to Morrison
Restaurants Inc. shareholders (958) 0 0
Sale of treasury stock 29 0 0
Ending balance (929) 0 0
Total stockholders' equity $ 4,716 $ 9,015 $ 51,164
The accompanying notes are an integral part of the financial statements.
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
On March 9, 1996, Morrison Health Care, Inc. (the "Company" or
"MHCI") was spun off from Morrison Restaurants Inc. ("MRI").
Prior to the spin-off, MHCI was a wholly owned health care
contract food and nutrition business of MRI. Prior to August 8,
1994, the Company's operations included education, business and
industry ("B&I") contracts and assets. The B&I contracts and
assets were sold on that date to Gardner Merchant Food Services,
Inc. See Note 3 of Notes to Consolidated Financial Statements
for more information. The accompanying financial statements have
been prepared as if MRI's health care contract food and nutrition
and B&I businesses had operated as a stand-alone entity for all
periods presented. Such statements include the assets,
liabilities, revenues and expenses that are directly related to
the Company's operations. They also include an allocation of
certain assets, liabilities and general corporate expenses of
MRI, such as executive payroll, legal, data processing and
interest, which are related to the Company. Amounts were
allocated on a specific identification method where appropriate
and on a pro rata basis otherwise. Management believes the
allocation methods used are reasonable.
The preparation of financial statements in conformity with
generally accepted accounting principles requires Management to
make estimates and assumptions that affect the amounts reported
in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Principles of Consolidation
The accompanying consolidated financial statements include the
accounts of Morrison Health Care, Inc. and its wholly owned
subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Fiscal Year
The Company's fiscal year ends on the first Saturday after May
30. The fiscal years ended June 1, 1996, June 3, 1995 and June
4, 1994 were comprised of 52 weeks.
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 and Depreciation
Depreciation for financial reporting purposes is computed using
the straight-line method over the estimated useful lives of the
assets. Annual rates of depreciation range from 3% to 5% for
buildings and from 8% to 34% for kitchen and other equipment.
During March, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of" (FAS 121). FAS 121 requires
that, beginning in fiscal years starting after December 15, 1995,
long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events
or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Long-lived assets and certain
identifiable intangibles to be disposed of are generally to be
reported at the lower of carrying amount or fair value less cost
to sell. The Company adopted FAS 121 in 1996. Such adoption did
not have a material impact on the Company's financial position or
results of operations.
Intangible Assets
Excess of costs over the fair value of net assets acquired of
purchased businesses generally is amortized on a straight-line
basis over 40 years. At June 1, 1996 and June 3, 1995, the
accumulated amortization for costs in excess of net assets
acquired was $1.4 million and $1.3 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.
Revenue Recognition
Revenue is recognized upon performance of services. The Company
operates under two major types of contracts, management fee and
profit and loss. While actual services performed are the same,
revenue recognition varies by type of contract based on the
expenses and payroll paid by the Company. In a management fee
account, revenue, in addition to the fee, is recognized only when
the Company pays expenses or employees are on the Company's
payroll. In a profit and loss account where MHCI assumes the
risk of profit or loss for the foodservice operation, the amount
of revenue reported is the actual revenue generated from meals
served to patients, client employees and visitors.
Income Taxes
For periods prior to the spin-off, the accompanying statements of
income reflect an income tax expense representing the Company's
allocated share of MRI's tax expense and the Company's actual tax
expenses for the fourth quarter of fiscal year 1996. The
allocated income tax expense approximates the tax expense of the
Company on a stand-alone basis.
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.
Earnings Per Share
Earnings per share are computed by dividing net income by the
weighted average number of common and common equivalent shares
outstanding. Weighted average shares for 1996 are determined as
if the shares issued in connection with the Distribution were
outstanding from the beginning of the year. Earnings per share
are not presented for 1995 and 1994 because the Company was not
publicly held prior to the Distribution date.
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 June 1, 1996 and June 3,
1995, consisted of cash and short-term investments, accounts and
notes receivable and long-term debt. The fair value of these
financial instruments approximated the carrying amounts reported
in the balance sheets.
Although substantially all of the Company's trade accounts
receivable are from health care 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.
Stock-Based Employee Compensation Plans
During October, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" (FAS 123). FAS 123
establishes financial accounting and reporting standards for
stock-based employee compensation plans. FAS 123 defines a fair
value based method of accounting for an employee stock option or
similar equity instrument. FAS 123 allows an entity to continue
to measure compensation cost for those plans using the intrinsic
value based method of accounting prescribed by APB Opinion No.
25, "Accounting for Stock Issued to Employees." The Company
intends to continue to measure compensation cost following the
principles of APB Opinion No. 25 and will therefore be required
to present pro forma disclosures of net income and earnings per
share as if the fair value based method had been applied
beginning in fiscal 1997.
Note 2: Distribution
On March 7, 1996, the shareholders of MRI approved the
Distribution by MRI of all the outstanding shares of common stock
of Morrison Health Care, Inc., a wholly owned subsidiary of MRI.
The Board of Directors of MRI believed that the Distribution was
in the best interests of MRI and its stockholders because the
separation of MRI's three lines of business will, among other
things: (i) allow management of each of the three companies to
concentrate its full attention on its business and allow each
company to reward management and employees based on the
performance of its business; (ii) allow each company to access
the capital markets directly to raise capital; (iii) establish a
value for each company that is independent of the other
businesses and provide investors and securities analysts a
clearer basis on which to understand and analyze the three
businesses; and (iv) allow MHCI to establish equity-based benefit
plans which can hold MHCI common stock.
The following Unaudited Pro Forma Consolidated Statements of
Income have been prepared to illustrate certain estimated effects
of the Distribution. These statements include adjustments for
the effect of costs and expenses which might have occurred had
the Distribution occurred June 5, 1994. Adjustments are based on
the assumptions set forth below the statement.
For the Fiscal Year Ended
(In thousands, except per share data)
June 1, 1996 June 3, 1995
Unaudited Unaudited
Pro Forma Unaudited Pro Forma Unaudited
Historical Adjustments Pro Forma Historical Adjustments Pro Forma
Revenues $219,995 $ 0 $219,995 $225,392 $ 0 $225,392
Operating costs
and expenses:*
Operating expenses 180,607 0 180,607 187,426 0 187,426
Selling, general and
administrative 20,670 1,420(a) 22,090 18,946 1,567(a) 20,513
Restructure cost 1,398 0 1,398 0 0 0
Asset impairment 193 0 193 0 0 0
Net gain on sale/
closure of B&I
accounts 0 0 0 (46,782) 0 (46,782)
Interest expense, net 1,116 400(b) 1,516 507 0 507
203,984 1,820 205,804 160,097 1,567 161,664
Income before provision
for income taxes 16,011 (1,820) 14,191 65,295 (1,567) 63,728
Provision for federal
and state income taxes 6,731 (760)(c) 5,971 28,469 (683)(c) 27,786
Net income $ 9,280 $(1,060) $ 8,220 $36,826 $ (884) $ 35,942
Earnings per common and common
equivalent share $ 0.70 $ 3.00
Weighted average common and common
equivalent shares 11,811(d) 11,974(d)
The pro forma adjustments to the accompanying historical
statements of income for the fiscal years ended June 1, 1996
and June 3, 1995 are described below:
(a) To record the increase in operating expenses, selling,
general and administrative expenses which presumably would have
been incurred by MHCI had MHCI been a separate and stand-alone
entity.
(b) To record the increase in interest expense which would have
been incurred by MHCI had MHCI been a separate and stand-alone
entity.
(c) To record the estimated income tax benefit associated with
pro forma adjustments (a) and (b) at an assumed combined state
and federal effective income tax rate of 41.8% and 43.6% for the
years ended June 1, 1996 and June 3, 1995, respectively. The
assumed effective income tax rate is comprised of a 35% statutory
federal income tax rate plus applicable state income taxes and
permanent differences, less applicable tax credits.
(d) The number of equivalent shares for periods prior to the spin-
off is based on the number of MRI's common and common equivalent
shares adjusted for the 1 for 3 distribution ratio.
Unaudited Pro Forma quarterly financial results for the
years ended June 1, 1996 and June 3, 1995 are summarized below.
All quarters are composed of 13 weeks.
For the fiscal year ended June 1, 1996:
First Second Third Fourth
(In thousands, except per share data) Quarter Quarter Quarter Quarter Total
Revenues $ 56,289 $ 56,592 $ 54,224 $ 52,890 $219,995
Gross profit* $ 10,273 $ 10,800 $ 8,417 $ 9,898 $ 39,388
Income before restructure cost, asset
impairment and income taxes $ 4,926 $ 4,378 $ 2,187 $ 4,291 $ 15,782
Restructure cost 0 0 (1,398) 0 (1,398)
Asset impairment 0 0 (193) 0 (193)
Income Before income taxes 4,926 4,378 596 4,291 14,191
Provision for federal and state income taxes 2,032 1,887 250 1,802 5,971
Net income $ 2,894 $ 2,491 $ 346 $ 2,489 $ 8,220
Earnings per common and common equivalent
share:
Before restructure cost and
asset impairment $ 0.24 $ 0.22 $ 0.11 $ 0.21 $ 0.78
Restructure cost and asset impairment 0.00 0.00 (0.08) 0.00 (0.08)
Total $ 0.24 $ 0.22 $ 0.03 $ 0.21 $ 0.70
For the fiscal year ended June 3, 1995:
Revenues $ 53,971 $ 56,578 $ 56,578 $ 58,265 $225,392
Gross profit* $ 8,594 $ 9,585 $ 8,857 $ 10,930 $ 37,966
Income before income taxes $ 50,575** $ 4,965 $ 2,956 $ 5,232 $ 63,728
Provision for federal and state income
taxes 22,495 1,999 1,185 2,107 27,786
Net income $ 28,080 $ 2,966 $ 1,771 $ 3,125 $ 35,942
Earnings per common and common equivalent
share*** $ 2.30 $ 0.26 $ 0.17 $ 0.27 $ 3.00
*The Company defines gross profit as revenues less operating expenses.
**Includes a pretax gain of $46,782 realized upon the sale of B&I.
***The sale of B&I contributed earnings per share of $2.12 in the first
quarter.
Note 3: Sale of the Education, Business and Industry Contracts
and Assets
On August 8, 1994, the Company sold certain education, business
and industry (B&I) contracts and assets to Gardner Merchant
Services, Inc., for a cash payment of $100 million. The
remaining B&I accounts were closed. The sale of the B&I accounts
and the discontinuance of the remaining accounts resulted in a
pretax gain of $46.8 million, or $25.8 million after applicable
taxes.
Sales from B&I contracts in fiscal year 1994 were $250.7
million, with operating profits of $6.3 million (after allocation
of Morrison Restaurants Inc. corporate overhead of $1.0 million).
Note 4: Notes Payable
Notes payable consists of the following:
Fiscal Year Ended
(In thousands) June 1, 1996 June 3, 1995
6.7% Term note due in equal
quarterly installments of
$1,250 from 1998-2001 $20,000 $ 0
Revolving credit facility*m 0 19,200
Other notes and mortgages 45 56
20,045 19,256
Less current maturities 11 11
$20,034 $19,245
*Allocated from Morrison Restaurants Inc.
Aggregate maturities of long-term borrowings over the next five
years are as follows: 1997 - $11; 1998 - $5,011; 1999 - $5,011;
2000 - $5,012; and 2001 - $5,000.
In March, 1996, the Company entered into a five-year $50
million credit facility with various banks. The credit facility
includes a $30 million revolving line of credit which allows the
Company to borrow under various interest rate options. Commitment
fees of 0.25% per annum are payable on the unused portion of the
credit facility. At June 1, 1996, the Company had $2.5 million
of borrowing under the revolver outstanding at an interest rate
of 6.4% per annum. The balance of the $50 million credit
facility, $20 million, is a term note which will be repaid in
quarterly installments of $1.25 million commencing June 30, 1997.
In order to control the interest cost on the term note, the
Company entered into an interest rate swap agreement. This swap
agreement effectively limits the interest rate to a maximum of
6.7% per annum for the period of the term note.
In addition, the Company had lines of credit amounting to $5
million. At June 1, 1996, the Company had $4.3 million of
borrowings outstanding under the terms of these lines at interest
rates ranging from 6.4% to 6.25% per annum.
For fiscal year 1995, the Company's debt allocation was
determined by applying the pro rata percentage intended to be
allocated and to be assumed by the Company at the date of
Distribution to the outstanding Morrison Restaurants Inc.
corporate debt at each balance sheet date.
The credit facility provides for certain restrictions on
incurring additional indebtedness and to certain funded debt, net
worth and fixed charge coverage requirements. At June 1, 1996,
retained earnings in the amount of $86,000 were available for
distribution under the debt restrictions.
Note 5: Rents
Under the terms of certain of its contracts, the Company is
required to make rent payments to its health care institution
customers. These contracts may provide for additional contingent
rents based upon sales volume and contain options to renew.
Generally, the underlying contracts can be canceled upon 60-90
days notice.
Rental expense pursuant to contracts is summarized as
follows:
For the Fiscal Year Ended
June 1, June 3, June 4,
(In thousands) 1996 1995 1994
Minimum rent $1,168 $1,585 $ 6,571
Contingent rent 291 2,497 6,595
$1,459 $4,082 $13,166
Note 6: Income Taxes
The components of income tax expense are as follows:
For the Fiscal
Year Ended
June 1, June 3, June 4,
(In thousands) 1996 1995 1994
Current:
Federal $1,479 $24,486 $6,870
State 325 4,955 1,256
1,804 29,441 8,126
Deferred:
Federal 4,127 (812) 188
State 800 (160) 37
4,927 (972) 225
$6,731 $28,469 $8,351
Deferred tax assets and liabilities are comprised of the
following:
For the Fiscal Year
Ended
(In thousands) June 1, 1996 June 3, 1995
Deferred tax assets:
Employee benefits $3,106 $4,266
Insurance reserves 2,196 4,001
Bad debt reserve 447 644
Account closing reserve 126 3,225
Other 428 115
Total deferred tax assets 6,303 12,251
Deferred tax liabilities:
Depreciation 239 286
Retirement plans 448 567
Prepaid deductions 209 195
B&I related and other 1,354 2,223
Total deferred tax liabilities 2,250 3,271
Net deferred tax asset $4,053 $8,980
FAS 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 should be
sufficient to realize all of the Company's deferred tax assets
based on historical earnings of the Company, and 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:
Fiscal Year Ended
June 1, June 3, June 4,
(In thousands) 1996 1995 1994
Statutory federal income taxes $5,604 $22,853 $7,559
State income taxes net of
federal income tax benefit 732 2,868 908
Tax credits 0 (346) (174)
B&I divestiture items 0 2,575 0
Other, net 395 519 58
$6,731 $28,469 $8,351
The effective income tax rate was 42.0%, 43.6% and 38.7% in 1996,
1995 and 1994, respectively. The effective income tax rate
increase in fiscal year 1995 was due to the nondeductibility of
acquired goodwill disposed of in connection with the divestiture
of the B&I accounts.
In connection with the Distribution, the Company entered
into a tax allocation agreement with Morrison Fresh Cooking, Inc.
("MFC") and RTI. This agreement provided that the Company will
pay its share of RTI's consolidated tax liability for the period
in which the Company was included in MRI's consolidated federal
income tax return. It also provides for sharing, where
appropriate, of state, local and foreign taxes attributable to
periods prior to the date of Distribution.
Note 7: Employee Benefit Plans
Prior to the spin-off, the Company entered into an agreement with
RTI and MFC providing for the allocation of employee benefit
rights and responsibilities among the three companies.
The following benefit plans were established by the Company
as of the spin-off date. These plans were generally designed as
a mirror image of the MRI plans.
Salary Deferral Plan
Under the Morrison Health Care, Inc. 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. Employees contributing a pretax contribution of at
least 2% may elect to make after-tax contributions not in excess
of 10% of annual earnings. The Company contribution to the Plan
is based on the employee's pretax contribution and years of
service. After three years of service (including service with
MRI) the Company contributes 20% of the employee's pretax
contribution, 30% after ten years of service, and 40% after 20
years of service. Normally, the full amount of each
participant's interest in the trust fund will be paid upon
retirement or total disability. However, the Plan allows
participants to make early withdrawals of pretax and after-tax
contributions, subject to certain restrictions. The Company's
contribution to the trust fund approximated $244,000, $349,000
and $342,000, for 1996, 1995 and 1994, respectively.
Deferred Compensation Plan
The Company maintains the Morrison Health Care, Inc. Deferred
Compensation Plan for certain selected employees. The provisions
of this Plan are similar to those of the Salary Deferral Plan.
Differences include employees who are eligible to participate and
different limitation amounts on deferral elections that may be
made by participants. The Company's contributions under the Plan
approximated $137,000, $196,000 and $223,000, for 1996, 1995 and
1994, respectively. Assets of the Plan are held by a rabbi
trust. Under current accounting rules, assets of a rabbi trust
must be accounted for as if they are assets of the Company;
therefore, all earnings and expenses will be recorded in the
Company's financial statements. The net of the MHCI rabbi
trust's earnings and losses is recorded as additional liability
to the participants and is considered to be interest expense to
the Company. The Company recorded interest expense of $12,000
for this Plan in 1996. Assets of the Plan approximated
$4,327,000 at June 1, 1996 and include $929,000 of MHCI common
stock which is accounted for as treasury stock at cost.
Retirement Plan
The Retirement Plan was frozen by RTI (formerly Morrison
Restaurants Inc.) on December 31, 1987 and will remain part of
RTI. No additional benefits accrued 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. There were no contributions made to the
Plan in 1996, 1995 or 1994.
Executive Supplemental Pension Plan
Under the Morrison Health Care, Inc. Executive Supplemental
Pension Plan, employees with average compensation of at least
$120,000 and who have completed five years (including service
with MRI) in a qualifying position become eligible to earn
supplemental retirement payments based upon salary and length of
service (including service as part of MRI), reduced by social
security benefits and amounts otherwise receivable under the
Retirement Plan.
Management Retirement Plan
Under the Morrison Health Care, Inc. Management Retirement Plan,
individuals who have 15 years of credited service (including
service with MRI) and whose average annual compensation for the
immediately preceding three calendar years equaled or exceeded
$40,000, will become participants. Participants will receive
benefits based upon salary and length of service (including
service with MRI), reduced by social security benefits and
benefits payable under the Retirement Plan and Executive
Supplemental Pension Plan.
To provide a funding source for the payment of benefits
under the Executive Supplemental Pension Plan and the Management
Retirement Plan, the Company owns whole-life insurance contracts
on some of the participants. The cash value of these policies,
net of loans, was $873,000 at June 1, 1996. The policies have
been placed in a rabbi trust which will hold the policies and
death benefits as they are received.
The following table presents the components of pension
expense, the funded status and amounts recognized in the
Company's financial statements for the Retirement Plan, the
Executive Supplemental Pension Plan and the Management Retirement
Plan.
Accumulated Benefits Exceed Assets
Assets Exceed Accumulated Benefits Executive Supplemental Pension Plan
Retirement Plan and Management Retirement Plan
For the Fiscal Year Ended
June 1, June 3, June 4, June 1, June 3, June 4,
(In thousands) 1996 1995 1994 1996 1995 1994
Components of pension
expense (income):
Service cost $ 0 $ 0 $ 0 $ 63 $ 82 $ 74
Interest cost 354 544 539 251 315 256
Actual return on plan
assets (833) (174) (802) 0 0 0
Amortization and deferral 526 (413) 226 122 141 178
Curtailment loss 0 0 0 0 288 0
Settlement loss (gain) 0 115 0 0 (162) 0
Other 0 0 0 0 102 0
$ 47 $ 72 $ (37) $ 436 $ 766 $ 508
Plan assets at fair value $4,766 $6,679 $7,658 $ 0 $ 0 $ 0
Actuarial present value
of projected benefit
obligations:
Accumulated benefit
obligations:
Vested 4,691 6,532 7,485 1,606 3,919 2,172
Nonvested 0 0 0 0 9 622
Provision for future
salary increases 0 0 0 1,116 1,009 1,575
Total projected benefit
obligations 4,691 6,532 7,485 2,722 4,937 4,369
Excess (deficit) of plan
assets over projected
benefit obligations 75 147 173 (2,722) (4,937) (4,369)
Unrecognized net
loss(gain) 642 1,300 1,153 216 (302) 166
Unrecognized prior
service cost 0 0 7 351 760 220
Unrecognized net
transition obligations 412 714 808 541 1,133 1,343
Additional minimum
liability 0 0 0 (376) (660) (356)
Prepaid (accrued)
pension cost $1,129 $2,161 $2,141 $(1,990) $(4,006) $(2,996)
The weighted-average discount rate for all three plans was 7.75%,
8.5% and 7.5% for 1996, 1995 and 1994, respectively. The rate of
increase in compensation levels for the Executive Supplemental
Pension Plan and Management Retirement Plan was 4% for 1996 and
1995, and 5% for 1994. The expected long-term rate of return on
plan assets for the Retirement Plan was 10% for all three years.
Note 8: Postretirement Benefits Other Than Pensions
The Company provides health care benefits to substantially all
retired employees and life insurance benefits to certain
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 health care and life insurance
benefits during the years an employee provides services. The
total postretirement benefit costs for 1996, 1995 and 1994 were
$191,000, $143,000 and $140,000, respectively.
The actuarial present value of accumulated postretirement benefit
obligations and the amounts recognized in the Company's balance
sheet are as follows:
Fiscal Year Ended
(In thousands) June 1, 1996 June 3, 1995
Retirees $1,591 $1,061
Fully eligible active plan participants 196 167
Other active plan participants 117 114
Accumulated postretirement benefit obligation 1,904 1,342
Unrecognized net loss (409) (305)
Accrued postretirement benefit cost $1,495 $1,037
The postretirement benefit cost is as follows:
Fiscal Year Ended
(In thousands) June 1, 1996 June 3, 1995 June 4, 1994
Service cost $ 8 $ 7 $ 10
Interest cost 155 104 97
Amortization of unrecognized net loss 28 32 33
Postretirement benefit cost $191 $143 $140
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 0% because the
Company has frozen current and future contribution levels.
Increases in health care cost due to factors such as inflation,
changes in health care utilization or delivery patterns,
technological advances and changes in the health status of plan
participants will be borne by the participants. Measurement of
the accumulated postretirement benefit obligation was based on an
assumed 7.75%, 8.5% and 7.5% discount rate for fiscal 1996, 1995
and 1994, respectively.
Note 9: 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 June 1, 1996. 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, with an exercise price to be determined, but
substantially above the expected trading price. The rights will
expire ten years after the date such rights are issued, and may
be redeemed prior to ten days after the acquisition of 20% or
more of the Company's common stock.
Note 10: Capital Stock, Options and Bonus Plans
The Morrison Health Care, Inc. 1996 Stock Incentive Plan
In March, 1996, the shareholders of MRI approved the Morrison
Health Care, Inc. 1996 Stock Incentive Plan. A Committee,
appointed by the Board, administers the Plan on behalf of the
Company and has complete discretion to determine participants and
the terms and provisions of Stock Incentives, subject to the
Plan. The Plan permits the Committee to make awards of shares of
common stock, awards of derivative securities related to the
value of the common stock, and certain cash awards to eligible
persons. These discretionary awards may be made on an individual
basis or pursuant to a program approved by the Committee for the
benefit of a group of eligible persons. The Plan permits the
Committee to make awards of a variety of stock incentives,
including (but not limited to) dividend equivalent rights,
incentive stock options, nonqualified stock options, performance
unit awards, phantom shares, stock appreciation rights and stock
awards. All options awarded under the Plan have been at the
prevailing market value at the time of issue or grant. During
1996, 35,783 shares were issued under the Plan. At June 1, 1996,
the Company had reserved a total of 714,217 shares of common
stock for this Plan. At the June, 1996 meeting of the Board of
Directors, an additional 100,000 shares of common stock were
reserved for this Plan. Of the total 814,217 reserved, 350,000
of that total have been reserved subject to stockholder approval.
The Morrison Health Care, Inc. Stock Incentive and Deferred
Compensation Plan for Directors
In March, 1996, the shareholders of MRI approved the Morrison
Health Care, Inc. Stock Incentive and Deferred Compensation Plan
for Directors. The Plan provides nonmanagement 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
nonmanagement directors. To facilitate attaining the target
ownership level, the Plan provides that the directors must use
60% of their retainer to purchase shares of the Company. Each
director purchasing stock receives additional shares equal to 15%
of the shares purchased and three times the total shares in
options, which after six months are exercisable for five years
from the grant date. All options awarded under the Plan have
been at the prevailing market value at the time of issue or
grant. During 1996, 967 shares were issued under the Plan.
Pursuant to this Plan, a one-time restricted stock award totaling
5,000 shares was made in fiscal 1996 to a nonmanagement director.
A Committee, appointed by the Board, administers the Plan on
behalf of the Company. At June 1, 1996, the Company has reserved
94,033 shares of common stock for this Plan.
The Morrison Health Care, Inc. 1996 Non-Executive Stock Incentive
Plan
In March, 1996, the Board of Directors approved the Morrison
Health Care, Inc. 1996 Non-Executive Stock Incentive Plan. A
Committee, appointed by the Board, administers the Plan on behalf
of the Company and has full authority in its discretion to
determine the officers and key employees to whom stock incentives
are granted and the terms and provisions of stock incentives,
subject to the Plan. The Plan permits the Committee to make
awards of shares of common stock, awards of derivative securities
related to the value of the common stock and certain cash awards
to eligible persons. These discretionary awards may be made on an
individual basis or pursuant to a program approved by the
Committee for the benefit of a group of eligible persons. All
options awarded under the Plan have been at the prevailing market
value at the time of issue or grant. During 1996, 69,281 shares
were issued under the Plan. At June 1, 1996, the Company had
reserved a total of 2,180,719 shares of common stock for this
Plan.
Under the terms of the Distribution, current holders of MRI
stock options received adjusted, substitute options in MHCI, MFC
and RTI which, in the aggregate, preserved the economic value as
well as the material terms, such as option period, vesting
provisions and payment terms, the optionee had in the original
MRI options prior to the Distribution.
The following table summarizes the activity in options under
these stock option plans:
Number of Shares
Under Option
(Amounts in thousands, except per share data) 1996
March 2, 1996 (Converted MRI options) 1,493
Granted 950
Exercised (57)
Forfeited (18)
End of Year 2,368
Exercisable 1,056
Outstanding options' prices $8.36 - $31.59
Exercised options' prices $9.55 - $14.56
Note 11: Contingencies
At June 1, 1996, the Company was contingently liable for
approximately $6.8 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 enter into an
agreement with MFC and RTI providing for assumptions of
liabilities and cross-indemnities 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.
Note 12: Supplemental Quarterly Financial Data (Unaudited)
Quarterly financial results for the years ended June 1, 1996, and
June 3, 1995, are summarized below. All quarters are composed of
13 weeks. Amounts presented are in thousands.
First Second Third Fourth
Historical Quarter Quarter Quarter Quarter Total
For the year ended June 1, 1996:
Revenues $56,289 $56,592 $54,224 $52,890 $219,995
Gross profit* $10,326 $10,747 $ 8,417 $ 9,898 $ 39,388
Income before income taxes $ 5,677 $ 4,827 $ 1,216 $ 4,291 $ 16,011
Provision for federal and state
income taxes 2,342 2,082 505 1,802 6,731
Net income $ 3,335 $ 2,745 $ 711 $ 2,489 $ 9,280
For the year ended June 3, 1995:
Revenues $53,971 $56,578 $56,578 $58,265 $225,392
Gross profit* $ 8,594 $ 9,585 $ 8,857 $10,930 $ 37,966
Income before income taxes $50,898** $ 5,305 $ 3,345 $ 5,747 $ 65,295
Provision for federal and state
income taxes 22,637 2,149 1,355 2,328 28,469
Net income $ 28,261 $ 3,156 $ 1,990 $ 3,419 $ 36,826
*The Company defines gross profit as revenue less operating expenses.
**Includes a pretax gain of $46,782 realized upon the sale of B&I.
Common Stock Market Prices and Dividends
Morrison Health Care, Inc. common stock is publicly traded on the
New York Stock Exchange under the ticker symbol MHI. The
reported high and low prices for the period from March 11, 1996,
the first day of public trading, to
June 1, 1996, were $18.375 and $13.75, respectively. The
Company paid a quarterly cash dividend during this same period of
$0.205 per share.
On June 26, 1996, the Company's Board of Directors declared
a quarterly dividend of $0.205 per share payable July 31, 1996 to
6,413 shareholders of record on July 12, 1996.
Report of Independent Auditors
Stockholders and Board of Directors
Morrison Health Care, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of
Morrison Health Care, Inc. and Subsidiaries as of June 1, 1996
and June 3, 1995, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three
fiscal years in the period ended June 1, 1996. 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 generally
accepted auditing standards. 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 Health Care, Inc. and Subsidiaries
at June 1, 1996 and June 3, 1995, and the consolidated results
of their operations and their cash flows for each of the three
fiscal years in the period ended June 1, 1996, in conformity with
generally accepted accounting principles.
BY:/s/ ERNST & YOUNG, LLP
ERNST & YOUNG, LLP
Atlanta, Georgia
June 21, 1996