12 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, 1996 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 HEALTH CARE, INC. (Exact name of Registrant as specified in charter) GEORGIA 63-1155966 (State or other jurisdiction of (I.R.S. Employer identification No.) incorporation or organization) 1955 Lake Park Drive, Suite 400, Smyrna, Ga 30080-8855 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (770) 437-3300 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 11,858,164 (Number of shares of $0.01 par value common stock outstanding as of October 4, 1996) INDEX PART I Financial Information Page Number Item 1. Financial Statements Condensed Consolidated Balance Sheets as of August 31, 1996 and June 1, 1996 3 Condensed Consolidated Statements of Income for the Thirteen Weeks Ended August 31, 1996 and September 2, 1995 4 Condensed Consolidated Statements of Cash Flows for the Thirteen Weeks Ended August 31, 1996 and September 2, 1995 5 Notes to Condensed Consolidated Financial Statements 6-7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-9 PART II Other Information Item 1. Legal Proceedings 10 Item 2. Changes in Securities None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of None Security Holders 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 Health Care, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except per share data) Historical As of As of August 31, 1996 June 1, 1996 (Unaudited) Assets Current assets: Cash and short-term investments $ 8,208 $ 6,088 Receivables - accounts and notes (net) 21,620 24,077 Inventories 2,636 2,662 Prepaid expenses 1,482 1,616 Deferred income tax benefits 2,604 2,397 Total current assets 36,550 36,840 Property and equipment - at cost 15,520 15,229 Less accumulated depreciation 9,422 9,571 6,098 5,658 Cost in excess of net assets acquired, net 4,697 4,736 Other assets 14,666 15,309 Total assets $62,011 $62,543 Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 8,398 $ 8,684 Short-term borrowings 5,000 6,760 Other accrued liabilities 11,386 11,266 Current portion of long-term debt 1,261 11 Total current liabilities 26,045 26,721 Notes payable 18,772 20,034 Other deferred liabilities 12,137 11,072 Stockholders' equity: Common stock, $0.01 par value (authorized 100,000 shares; issued: 11,849 and 11,848 shares, 1997 and 1996, respectively) 118 118 Capital in excess of par value 5,576 5,441 Retained earnings 358 86 6,052 5,645 Less cost of treasury stock 995 929 Total stockholders' equity 5,057 4,716 Total liabilities and stockholders' equity $62,011 $62,543 The accompanying notes are an integral part of the financial statements. Morrison Health Care, Inc. and Subsidiaries Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited) For the Thirteen Weeks Ended September 2, 1995 Pro Forma For the Thirteen Weeks Ended Adjustments August 31, 1996 Historical Note (C) Pro Forma Revenues $52,658 $56,289 $ 0 $56,289 Operating costs and expenses: Operating expenses 43,024 45,963 53 (a) 46,016 Selling, general and administrative 4,913 4,287 698 (a) 4,985 Interest expense, net of interest income, totaling $294 in 1997 and $34 in 1996 102 362 362 48,039 50,612 751 51,363 Income before provision for income taxes 4,619 5,677 (751) 4,926 Provision for federal and state income taxes 1,923 2,342 (310)(b) 2,032 Net income $ 2,696 $ 3,335 $(441) $ 2,894 Earnings per common and common equivalent share $ 0.23 $ 0.24 Weighted average common and common equivalent shares 11,837 11,850 The accompanying notes are an integral part of the financial statements. Morrison Health Care, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited) Historical For the Thirteen Weeks Ended August 31, 1996 September 2, 1995 Operating activities: Net income $ 2,696 $ 3,335 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 455 689 Amortization of intangibles 39 38 Other, net 317 296 Deferred income taxes (351) 2,416 (Gain)/loss on disposition of assets 18 (8) Changes in operating assets and liabilities: Decrease in receivables 3,460 2,393 (Increase)/decrease in inventories 26 (63) Decrease in prepaid and other assets 135 321 Increase/(decrease) in accounts payable, accrued and other liabilities 91 (5,433) Increase in income taxes payable 601 5,291 Net cash provided by operating activities 7,487 9,275 Investing activities: Purchases of property and equipment (944) (1,679) Proceeds from disposal of assets 34 40 Other, net (330) 171 Net cash used by investing activities (1,240) (1,468) Financing activities: Proceeds from long-term debt 0 9,216 Principal payments on long-term debt (11) (11) Net change in short-term borrowings (1,761) 0 Proceeds from exercise of stock options 134 0 Dividends paid (2,423) 0 (Increase) in Treasury Stock held by Deferred Comp Plan (66) 0 Net transfers to Morrison Restaurants Inc. 0 (16,872) Net cash used by financing activities (4,127) (7,667) Increase/(decrease) in cash and short-term investments 2,120 140 Cash and short-term investments at the beginning of the period 6,088 732 Cash and short-term investments at the end of the period $ 8,208 $ 872 The accompanying notes are an integral part of the financial statements. Morrison Health Care, 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 June 1, 1996. NOTE B - SUBSEQUENT EVENTS Declaration of Quarterly Dividend On September 26, 1996 the Company declared a quarterly cash dividend of $0.205 per share of outstanding common stock payable on October 31, 1996 to shareholders of record at the close of business on October 11, 1996. NOTE C - PRO FORMA ADJUSTMENTS The prior year historical condensed consolidated financial statements for the thirteen weeks ended September 2, 1995 reflect a period during which the Company did not operate as a separate, independent company, and certain assumptions were made in preparing such statements. Therefore, such historical statements may not necessarily reflect the consolidated results of operations or financial position that would have existed had the Company been a separate, independent company. The pro forma information presents the Company's results as if the spin-off from Morrison Restaurants Inc. ("MRI") occurred on June 5, 1994 and reflects adjustments for the estimated additional costs of being a separate, independent company. Note 1--The pro forma adjustments to the accompanying historical statement of income for the thirteen weeks ending September 2, 1995 are described below: (a) To record the increase in operating and selling, general and administrative expenses which presumably would have been incurred by the Company as a separate, stand-alone entity. (b) To record the estimated income tax benefit associated with pro forma adjustment (a) at an assumed combined state and federal effective income tax rate of 41.3% for the thirteen week period ending September 2, 1995. 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. Note 2--The historical operating costs and expenses include certain allocated expenses from MRI. NOTE D - EARNINGS PER SHARE Earnings per share are based on the weighted average number of shares outstanding during each quarter and are adjusted for equivalent shares. Equivalent shares are the assumed conversion of shares issuable upon exercise of options, after the assumed repurchase of common shares with the related proceeds. The difference between primary and fully diluted weighted average shares reflects the maximum extent of potential dilution that conversions of shares could create. The number of equivalent shares used for the prior year for purposes of calculating pro forma earnings per share is based on the number of shares of Morrison Restaurants Inc. common stock and common stock equivalents for such period adjusted for the one for three distribution ratio. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Morrison Health Care, Inc. ("MHCI" or the "Company"), a Georgia corporation, was spun off from Morrison Restaurants Inc. in March 1996. The discussion below relates to the results of operations of the Company for the thirteen week period ending August 31, 1996. The pro forma financial information for the first quarter of fiscal 1996 presents the Company's results as if the spin-off from Morrison Restaurants Inc. had occurred on June 5, 1994, and reflects adjustments for the estimated additional costs of being an independent company. The equivalent shares for periods prior to the spin-off are based on the number of shares of Morrison Restaurants Inc. common stock and common stock equivalents adjusted for the one for three distribution ratio. Results of Operations The Company reported net income from continuing operations of $2.7 million for the thirteen week period ended August 31, 1996, compared with pro forma net income of $2.9 million reported for the corresponding period of the prior fiscal year. The decrease in net income from the prior year primarily relates to increased insurance costs. Revenue Revenue from continuing operations decreased $3.6 million or 6.5% from $56.3 million for the quarter ended August 31, 1996. The decrease was the result of a net decrease in the number of accounts and contract shifts from a profit or loss account type to a management fee account type. Managed volume (which is defined as MHCI revenue, as reported, plus client paid cost) from continuing operations increased $4.2 million or 3.8% from $109.4 million for the quarter ended August 31, 1996. The increase was due to growth in continuing accounts. Operating Costs Operating costs decreased $3.0 million or 6.5% to $43.0 million for the quarter ended August 31, 1996. These costs have decreased from the comparable periods in the prior year as a result of a change in the mix of account types where the Company pays operating expenses to account types where the client pays such expenses. Selling, general and administrative expenses for the quarter were flat as compared to the same period of the prior year. Interest Expense (net of Interest Income) Net interest expense decreased to $0.1 million for the quarter ended August 31, 1996 from $.4 million for the same period of the prior year due to a decrease in the Company's debt and receipt of $.2 million in interest income. Income Taxes The effective income tax rate on continuing operations for the thirteen weeks ended August 31, 1996 was 41.6% as compared to 41.3% for the same period of the prior year. Earnings per Share Earnings per share are based on the weighted average number of shares outstanding during each quarter and are adjusted for equivalent shares. Equivalent shares are the assumed conversion of shares issuable upon exercise of options, after the assumed repurchase of common shares with the related proceeds. The difference between primary and fully diluted weighted average shares reflects the maximum extent of potential dilution that conversions of shares could create. The number of equivalent shares used for the prior year for purposes of calculating pro forma earnings per share is based on the number of shares of Morrison Restaurants Inc. common stock and common stock equivalents for such period adjusted for the one for three distribution ratio. Liquidity and Capital Resources Total assets at August 31, 1996 were $62.0 million, a $.5 million decrease from $62.5 million as of the prior fiscal year end. This decrease is attributable to a decrease in accounts receivable and the early collection of a note receivable net of an increase in cash. Total liabilities at August 31, 1996 were $57.0 million, a $.9 million decrease from $57.8 million as of the end of the prior fiscal year. This decrease was primarily due to a $1.3 million decrease in debt. The Company expects that funds generated from operations and existing lines of credit will be sufficient to meet its normal operating requirements over the near term. 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. 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: health care spending trends; changes in health care regulations; increased competition in the health care food and nutrition market; customer's acceptance of the Company's cost savings programs; and changes in laws and regulations affecting labor and employee benefit costs. 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 5 OTHER INFORMATION At its quarterly meeting held on September 26, 1996, the Board of Directors declared a cash dividend of $0.205 per share, payable on October 31, 1996 to shareholders of record at the close of business on October 11, 1996. ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit 11 Computation of Earnings per Share and Pro Forma Earnings per Share Exhibit 27 Financial Data Schedule (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the fiscal quarter ended August 31, 1996. 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 HEALTH CARE, INC. (Registrant) 10/15/96 BY: /s/ K. WYATT ENGWALL DATE K. WYATT ENGWALL Senior Vice President, Finance (Senior Vice President and Principal Accounting Officer) MORRISON HEALTH CARE, INC. LIST OF EXHIBITS Exhibit Number Description 11 Computation of Earnings per Share and Pro Forma Earnings per Share 27 Financial Data Schedule