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 MARCH 1, 1997 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 11,878,095 (Number of shares of $0.01 par value common stock outstanding as of March 31, 1997) INDEX PART I Financial Information Page Number Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 1, 1997 and June 1, 1996 3 Condensed Consolidated Statements of Income for the Thirteen Weeks and Thirty-Nine Weeks Ended March 1, 1997 and March 2, 1996 4 Condensed Consolidated Statements of Cash Flows for the Thirty-Nine Weeks Ended March 1, 1997 and March 2, 1996 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) As of As of March 1, 1997 June 1, 1996 (Unaudited) (Audited) Assets Current assets: Cash and short-term investments $ 5,361 $ 6,088 Receivables - accounts and notes (net) 19,718 22,635 Inventories 2,679 2,662 Prepaid expenses 929 1,616 Deferred income tax benefits 2,280 2,397 Total current assets 30,967 35,398 Property and equipment - at cost 15,337 15,229 Less accumulated depreciation 8,279 9,571 7,058 5,658 Cost in excess of net assets acquired, net 4,620 4,736 Other assets 15,218 15,309 Total assets $57,863 $61,101 Liabilities and Stockholders' Equity: Current liabilities: Accounts payable $ 8,895 $ 8,684 Short-term borrowings 0 6,760 Other accrued liabilities 13,378 11,266 Current portion of long-term debt 3,761 11 Total current liabilities 26,034 26,721 Notes payable 16,272 20,034 Other deferred liabilities 10,408 9,630 Stockholders' equity: Common stock, $0.01 par value (authorized 100,000 shares; issued: 11,877 and 11,791 shares, 1997 and 1996, respectively) 119 118 Capital in excess of par value 5,815 5,441 Retained earnings 381 86 6,315 5,645 Less cost of treasury stock 1,166 929 Total stockholders' equity 5,149 4,716 Total liabilities and stockholders' equity $57,863 $61,101 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 March 2, 1996 Pro Forma For the Thirteen Weeks Ended Adjustments March 1, 1997 Historical Note (C) Pro Forma Revenues $57,483 $54,224 $ 0 $54,224 Operating costs and expenses: Operating expenses 48,067 45,807 45,807 Selling, general and administrative 5,517 5,631 220(a) 5,851 Interest expense, net of interest income, totaling $152 in 1997 and $332 in 1996 204 (21) 400(c) 379 Restructure Costs 0 1,398 1,398 Asset Impairment 0 193 193 53,788 53,008 620 53,628 Income before provision for income taxes 3,695 1,216 (620) 596 Provision for federal and state income taxes 1,533 505 (255)(b) 250 Net income $ 2,162 $ 711 $(365) $ 346 Earnings per common and common equivalent share $ 0.18 $ 0.03 Weighted average common and common equivalent shares 11,843 11,770 For the Thirty-Nine Weeks Ended March 2, 1996 Pro Forma For the Thirty-Nine Weeks Ended Adjustments March 1, 1997 Historical Note (C) Pro Forma Revenues $164,496 $167,105 $ 0 $167,105 Operating costs and expenses: Operating expenses 135,155 137,615 137,615 Selling, general and administrative 15,777 15,447 1,420(a) 16,867 Interest expense, net of interest income, totaling $566 in 1997 and $403 in 1996 602 732 400(c) 1,132 Restructure Costs 0 1,398 1,398 Asset Impairment 0 193 193 151,534 155,385 1,820 157,205 Income before provision for income taxes 12,962 11,720 (1,820) 9,900 Provision for federal and state income taxes 5,378 4,929 (760)(b) 4,169 Net income $ 7,584 $ 6,791 $(1,060) $ 5,731 Earnings per common and common equivalent share $ 0.64 $ 0.49 Weighted average common and common equivalent shares 11,837 11,794 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) For the Thirty-Nine Weeks Ended March 1, 1997 March 2, 1996 Operating activities: Net income $ 7,584 $ 6,791 Adjustments to reconcile net income to net cash provided (used) by operating activities: Depreciation and amortization 1,469 1,826 Amortization of intangibles 116 115 Other, net 811 825 Deferred income taxes (715) 1,722 Loss/(Gain) on disposition of assets 21 (15) Changes in operating assets and liabilities: Decrease in receivables 4,004 1,720 (Increase)/Decrease in inventories (17) 138 Decrease/(Increase) in prepaid and other assets 675 (1,549) Increase/(Decrease) in accounts payable, accrued and other liabilities 1,988 (10,298) Increase in income taxes payable 1,113 8,283 Net cash provided by operating activities 17,049 9,558 Investing activities: Purchases of property and equipment (2,933) (1,795) Proceeds from disposal of assets 61 170 Other, net (981) 1,613 Net cash used by investing activities (3,853) (12) Financing activities: Principal payments on long-term debt (11) (11) Net change in short-term borrowings (6,761) 7,898 Proceeds from exercise of stock options 375 0 Dividends paid (7,289) 0 Increase in Treasury Stock held by Deferred Comp Plan (237) 0 Net transfers to Morrison Restaurants Inc. 0 (12,749) Net cash used by financing activities (13,923) (4,862) (Decrease)/Increase in cash and short-term investments (727) 4,684 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 $ 5,361 $ 5,416 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. Certain prior reported amounts have been reclassified to be consistent with current reporting practices. NOTE B - SUBSEQUENT EVENTS Declaration of Quarterly Dividend On March 25, 1997 the Company declared a quarterly cash dividend of $0.205 per share of outstanding common stock payable on April 30, 1997 to shareholders of record at the close of business on April 11, 1997. NOTE C - PRO FORMA ADJUSTMENTS The prior year historical condensed consolidated financial statements for the thirteen and thirty-nine weeks ended March 2, 1996 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 4, 1995 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 and thirty-nine weeks ending March 2, 1996 are described below: (a) To record the decrease in operating expenses and the increase in 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 adjustments (a) and (c) at an assumed combined state and federal effective income tax rate of 41.1% and 41.8% for the thirteen and thirty-nine week periods ending March 2, 1996. 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. (c) To adjust interest expense based on the Company's debt allocation. Note 2--The historical operating costs and expenses include certain allocated expenses from MRI. NOTE D - EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share, which is required to be adopted for financial statements issued after December 15, 1997. At that time the Company will be required to change the method currently used to compute earnings per share and to restate all prior periods. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. The impact is expected to result in no change in primary or fully diluted earnings per share for the thirteen or thirty-nine weeks ended March 1, 1997 and March 2, 1996. 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. ("MRI") in March 1996. The discussion below relates to the results of operations of the Company for the thirteen and thirty-nine week periods ended March 1, 1997 compared with the pro forma results for the thirteen and thirty-nine week periods ended March 2,1996. The pro forma financial information for fiscal 1996 presents the Company's results as if the spin-off from MRI had occurred on June 4, 1995, 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 MRI 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 $2.2 and $7.6 million for the thirteen and thirty-nine week periods ending March 1, 1997, compared with pro forma net income of $0.3 and $5.7 million reported for the corresponding periods of the prior fiscal year. The increase in net income for the thirteen and thirty-nine week periods of fiscal 1997 from the same periods as the prior year primarily relates to reduced general and administrative costs, the recording in the corresponding prior year periods of $1.4 million of restructuring costs associated with the Company's spin-off from MRI, $0.2 million for the write-down of assets to their net realizable value and $0.5 million for staffing relocation as a result of the spin-off. Revenue Revenue from operations increased $3.3 million or 6.0% from $54.2 million for the quarter ended March 1, 1997 and decreased $2.6 million or 1.6% from $167.1 million for the thirty-nine weeks ended March 1, 1997 from the comparable periods in the prior year. The quarterly increase was the result of the opening of new accounts. The year-to-date decrease was the result of revenue lost from closed accounts and contract shifts from a profit or loss account type to a management fee account type. Managed volume (which is the amount of estimated total operating costs managed) from operations increased $7.5 million or 6.8% to $117.8 million for the quarter and increased $19.0 million or 5.8% to $345.3 million for the thirty-nine week period ended March 1, 1997 from the prior year periods due to growth in continuing accounts. Operating Costs Operating costs increased $2.3 million or 4.9% to $48.1 million for the quarter and decreased $2.5 million or 1.8% for the thirty-nine weeks ended March 1, 1997. These costs have decreased as a percent of revenue from the comparable periods in the prior year as a result of the implementation of cost containment programs. Selling, general and administrative expenses for the quarter decreased $0.3 million or 5.7% for the quarter and $1.1 million or 6.5% for the thirty-nine week period ending March 1, 1997 as compared to the same periods of the prior year. Interest Expense (net of Interest Income) Net interest expense decreased from $0.4 million to $0.2 million for the quarter and decreased to $0.6 million for the thirty-nine weeks ended March 1, 1997 from $1.1 million for the same period of the prior year due to a decrease in the Company's debt. Income Taxes The effective income tax rate on continuing operations for the thirteen and thirty-nine weeks ended March 1, 1997 was 41.5%, as compared to 41.9% and 42.1%, respectively, for the same periods of the prior year. The lower effective income tax rate for the current year is primarily attributable to the utilization of Work Opportunity Tax credits. 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 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 MRI common stock and common stock equivalents for such period adjusted for the one for three distribution ratio. Liquidity and Capital Resources Total assets at March 1, 1997 were $57.9 million, a $3.2 million decrease from $61.1 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. Total liabilities at March 1, 1997 were $52.7 million, a $3.7 million decrease from $56.4 million as of the end of the prior fiscal year. This decrease was primarily due to a $6.8 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; the growth of systems and group purchasing organizations; changes in health care regulations; increased competition in the health care food and nutrition market; customer 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 March 25, 1997, the Board of Directors declared a cash dividend of $0.205 per share, payable on April 30, 1997 to shareholders of record at the close of business on April 11, 1997. 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 On January 17, 1997, the Company filed a report with the Commission on Form 8-K/A to correct a typographical error in the Registrant's Current Report on Form 8-K filed on March 15, 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) 4/14/97 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