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 and 1993. 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
balance sheet data as of June 5, 1993 is derived from the
Unaudited Financial Statements of MHCI and, in the opinion of
Management, includes all adjustments consisting of normal
recurring accruals, which MHCI considered necessary for a fair
representation of the financial position and the results of
operations for that period. 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 were 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 years 1995, 1994 and 1993 as
MHCI was not a publicly held company prior to March, 1996.
Fiscal years 1994 and 1993 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.
(In thousands, except per share data)
-------------------------------------------------
Fiscal Year
_________________________________________________
1997 1996 1995 1994 1993
--------- -------- ------- -------- ---------
Consolidated statements
of income data:
Managed volume
(estimated and
unaudited)................$464,800 $435,600 $408,300 * *
======== ======== ======== ======== ========
Revenues..................$221,011 $219,995 $225,392 $461,780 $430,145
======== ======== ======== ======== ========
Income before provision for
income taxes and cumulative
effect of accounting
changes.....................$ 17,576 $ 16,011 $ 65,295 $ 21,588 $ 18,122
Provision for federal
and state income taxes...... 7,290 6,731 28,469 8,351 6,980
-------- -------- -------- -------- -------
Income before cumulative
effect of accounting
changes..................... 10,286 9,280 36,826** 13,237 11,142
Cumulative effect of
accounting changes:
Postretirement benefits... 0 0 0 0 (640)
Income taxes.............. 0 0 0 0 426
-------- -------- -------- -------- --------
Net income....................$ 10,286 $ 9,280 $ 36,826**$ 13,237 $ 10,928
======== ======== ======== ======== ========
Earnings per common and
common equivalent share.....$ 0.87 $ 0.79
======== ========
Weighted average common
and common equivalent
shares........................ 11,841 11,724
======== ========
All fiscal years are composed of 52 weeks.
* Fiscal years 1993 and 1994 not presented because they included B&I
information.
** Includes an after tax gain of $25.8 million from the sale of the B&I
operations.
Other Financial Data:
Total assets................$ 57,607 $ 61,101 $ 69,028 $105,964 $107,581
Long-term debt..............$ 15,022 $ 20,034 $ 19,245 $ 3,128 $ 4,686
Stockholders' equity........$ 5,628 $ 4,716 $ 9,015 $ 51,164 $ 56,807
Cash dividends per
share of common stock.....$ 0.82 $ 0.205*** *** *** ***
Working capital.............$ 3,891 $ 8,677 $ 13,318 $ 9,239 $ 19,672
Current ratio............... 1.1:1 1.3:1 1.5:1 1.2:1 1.6:1
*** Dividends were not paid prior to the fourth quarter of fiscal year 1996.
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 20 to 35.
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, has had a material impact on the results of
operations due to the added separate company costs that were
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 25 - 27. Such pro forma
financial information is presented as if the Distribution had
been effective as of the dates indicated.
1997 Compared To Unaudited Pro Forma 1996
Overview
In MHCI's first full year as an independent company, fiscal year
1997 showed strong financial results with increases in managed
volume, revenue, operating profit and net income. This is due to
continued focus on cost reduction in accounts and growth in
existing accounts
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.
Managed Volume/Revenue
While actual services performed are the same, revenue recognition
varies by type of contract based on the expenses 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 estimated client paid cost. Managed volume
increased $29.2 million or 6.7% in fiscal year 1997 when compared
to fiscal year 1996. This increase is due to growth in existing
accounts and opening accounts with larger managed volume than
those that were closed.
Revenue increased $1.0 million or 0.5% in 1997 as compared to
1996. The increase in revenue was due to the increases in
existing account revenue during 1997. Most of the growth in
existing account revenue is attributable to adding vending
operations and employee payrolls at those accounts.
Gross Profit
Gross profit, revenue less operating expenses, increased $0.4
million or 1% for 1997. The increase in gross profit is
attributed to growth of existing account business and continuing
emphasis on food and labor cost reductions.
Selling, General and Administrative
Selling, general and administrative expenses decreased slightly
as a percentage of revenue due to improved control of expenses.
Interest Expense, net
Interest expense decreased 47% due to much lower debt levels in
fiscal year 1997.
Federal and State Income Taxes
The combined federal and state effective tax rate decreased to
41.5% in 1997, from 42.1% in 1996.
Unaudited Pro Forma 1996 Compared To Unaudited Pro Forma 1995
Overview
Fiscal year 1996 was a transitional year for MHCI due to the
Company's spin-off from MRI. This new independence allowed the
Company's Management to concentrate on its own resources and core
competencies, health care food and nutrition services. In
addition, the Company focused specifically 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 were noticeable in the increase of
sales activity.
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).
Managed Volume/Revenue
Managed volume increased 7% in fiscal year 1996 when compared to
fiscal year 1995. This increase was due to growth in existing
accounts 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 increased $1.4 million or 3.7% in 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 not being able to allocate a portion
of the goodwill tax basis to the sale of the B&I accounts.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow, Capital Expenditures and Financing
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. See "Special Note Regarding Forward-Looking
Information."
To partially 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 had no borrowings outstanding under
the terms of these lines of credit at May 31, 1997. 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 contains
restrictions on incurring additional indebtedness and certain
funded debt, net worth and fixed charge coverage requirements. On
May 31, 1997, MHCI had $20 million outstanding in total debt, a
decrease of $6.8 million from the prior year.
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 no
borrowings outstanding under this agreement at May 31, 1997.
The Company entered into an interest rate swap agreement to
manage the interest costs of the term note. This swap agreement
effectively fixes the interest rate at 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 $19.6 million for fiscal year
1997. Capital expenditures were approximately $4.8 million, an
increase of $2.6 million or 118% compared to the prior year
period. Capital expenditures are anticipated to total $5.9
million in fiscal year 1998. 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 May 31, 1997 were
$3.9 million and 1.1:1, respectively. Working capital and the
current ratio decreased $4.8 million and 0.2, respectively, when
compared to the prior year. This decrease is due primarily to
the use of cash to repay short-term borrowings.
Dividends
MHCI paid approximately $9.7 million in cash dividends to
stockholders during fiscal year 1997. The Company plans to pay
annual dividends of approximately $9.8 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.
KNOWN EVENTS, UNCERTAINTIES AND TRENDS
New Accounting Standards
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 change is not expected to have a material
impact on the Company's primary or fully diluted earnings per
share.
Impact of Inflation
In the past, MHCI has been able to recover inflationary cost
increases through contract inflation adjustments, increased
productivity and menu changes. 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. Historically, the effects of
inflation on MHCI's net income have not been materially adverse.
Management's Outlook
Management believes that the fiscal year 1997 expansion,
restructuring and training of the sales teams will increase the
number and economic value of accounts sold in fiscal year 1998
and beyond. Management believes that growth will also occur
through expanding services at existing accounts and possible
acquisition of companies that complement our core competencies.
The Company has created a new division to develop advanced food
preparation and delivery systems. These systems are designed to
increase customer satisfaction by enhancing production
consistencies and generate significant cost reductions, while
providing quality services for health care facilities nationwide.
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. By continuing to focus on its primary
health care market of acute and life care facilities, the Company
believes that it is strategically positioned to continue its
steady growth. 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 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; the growth of systems and group
purchasing organizations; changes in health care regulations;
increased competition in the health care food and nutrition
market; customers' acceptance of the Company's cost saving
programs; and laws and regulations affecting labor and employee
benefit costs.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share data)
-------------------------------------------
For the Fiscal Year Ended
-------------------------------------------
May 31, 1997 June 1, 1996 June 3, 1995
-------------------------------------------
Revenues.............. $221,011 $219,995 $225,392
Operating costs and
expenses:
Operating expenses.... 181,233 180,607 187,426
Selling, general and
administrative...... 21,395 20,670 18,946
Restructuring costs... 0 1,398 0
Asset impairment...... 0 193 0
Net gain on sale/
closure of B&I
accounts............ 0 0 (46,782)
Interest expense, net
of interest income,
totaling $687 in
1997, $428 in 1996
and $221 in 1995.... 807 1,116 507
-------- -------- --------
203,435 203,984 160,097
-------- -------- --------
Income before provision
for income taxes.... 17,576 16,011 65,295
Provision for federal
and state income taxes. 7,290 6,731 28,469
-------- -------- --------
Net income............ $10,286 $9,280 $36,826
======== ======== ========
Earnings per common
and common equivalent
share............... $ 0.87 $ 0.79
======== ========
Weighted average common
and common equivalent
shares.............. 11,841 11,724
======== ========
The accompanying notes are an integral part of the financial
statements.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
-----------------------------------
May 31, 1997 June 1, 1996
-----------------------------------
Assets
Current assets:
Cash and short-term investments.......... $ 3,751 $ 6,088
Receivables:
Trade, less allowance for doubtful
accounts of $744 at May 31, 1997
and $1,122 at June 1, 1996............. 16,387 17,650
Other.................................... 4,884 4,985
Inventories.............................. 2,686 2,662
Prepaid expenses......................... 1,006 1,616
Deferred income tax benefits............. 1,929 2,397
----------------- ----------------
Total current assets..................... 30,643 35,398
----------------- ----------------
Property and equipment - at cost:
Buildings and improvements............... 2,326 3,883
Equipment................................ 14,017 11,346
----------------- ----------------
16,343 15,229
Less accumulated depreciation............ 8,471 9,571
----------------- ----------------
7,872 5,658
Deferred income tax benefits............. 1,610 1,656
Cost in excess of net assets
acquired, net.......................... 4,582 4,736
Notes receivable......................... 3,817 4,940
Deferred charges......................... 2,830 2,833
Other assets............................. 6,253 5,880
----------------- ----------------
Total assets............................. $57,607 $61,101
================= ================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable.......................... $10,381 $ 8,684
Short-term borrowings..................... 0 6,760
Accrued liabilities:
Taxes, other than income
taxes.................................. 1,546 1,609
Payroll and related costs................ 4,133 3,117
Insurance................................ 3,436 3,819
Other.................................... 2,245 1,786
Income taxes payable..................... 0 935
Current portion of long-term debt........ 5,011 11
----------------- ----------------
Total current liabilities................ 26,752 26,721
----------------- ----------------
Long-term debt........................... 15,022 20,034
Other liabilities........................ 10,205 9,630
Stockholders' equity:
Common stock, $0.01 par value
(authorized 100,000 shares;
issued: 1997 - 12,165 shares,
1996 - 11,791 shares).................. 122 118
Capital in excess of par value........... 9,717 5,441
Unearned ESOP shares..................... (3,517) 0
Retained earnings........................ 647 86
----------------- ----------------
6,969 5,645
Less cost of treasury stock.............. 1,341 929
----------------- ----------------
Total stockholders' equity............... 5,628 4,716
----------------- ----------------
Total liabilities and
stockholders' equity................... $57,607 $61,101
================= ================
The accompanying notes are an integral part of the financial statements.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
------------------------------------------
For the Fiscal Year Ended
------------------------------------------
May 31, 1997 June 1, 1996 June 3, 1995
------------------------------------------
Operating activities:
Net income.......................... $ 10,286 $ 9,280 $ 36,826
Adjustments to reconcile net income
to net cash provided (used) by
operating activities:
Depreciation and amortization... 1,992 2,330 2,238
Amortization of intangibles..... 153 152 153
Gain on sale of B&I contracts
and assets.................... 0 0 (46,782)
Other, net...................... 1,066 1,172 (3,088)
Deferred income taxes........... 514 4,927 (972)
Loss on disposition of assets... 29 170 4,372
Changes in operating assets and
liabilities:
Decrease in receivables............. 2,486 1,345 1,510
(Increase)/Decrease in inventories.. (24) 218 564
Decrease/(Increase) in prepaid and
other assets...................... 631 (2,005) 1,149
Increase/(Decrease) in accounts
payable, accrued and other
liabilities....................... 3,450 (12,112) (25,488)
(Decrease)/Increase in income
taxes payable..................... (935) 6,928 (5,703)
------------------------------------------
Net cash provided (used) by
operating activities.............. 19,648 12,405 (35,221)
------------------------------------------
Investing activities:
Purchases of property and equipment. (4,843) (2,170) (3,482)
Proceeds from disposal of assets.... 459 387 674
Proceeds from sale of B&I
contracts and assets.............. 0 0 100,000
Other, net.......................... (1,456) 764 (2,121)
------------------------------------------
Net cash (used) provided by
investing activities.............. (5,840) (1,019) 95,071
------------------------------------------
Financing activities:
Proceeds from long-term debt........ 0 800 19,200
Principal payments on long-
term debt......................... (11) (11) (4,619)
Net change in short-term
borrowings........................ (6,760) 6,760 0
Proceeds from exercise of stock
options and issuance of stock..... 679 1,544 0
Dividends paid...................... (9,725) (2,403) 0
(Increase)/Decrease in Treasury
Stock held by Deferred
Compensation Plan................. (412) 29 0
ESOP shares released................ 84 0 0
Net transfers to Morrison
Restaurants Inc................... 0 (12,749) (78,975)
------------------------------------------
Net cash used by financing
activities........................ (16,145) (6,030) (64,394)
------------------------------------------
(Decrease)/increase in cash and
short-term investments............ (2,337) 5,356 (4,544)
Cash and short-term investments
at the beginning of the period...... 6,088 732 5,276
------------------------------------------
Cash and short-term investments
at the end of the period.......... $ 3,751 $ 6,088 $ 732
==========================================
Supplemental disclosure of cash
flow information-cash paid for:
Interest........................ $ 1,190 $ 1,533 $ 776
Income taxes.................... $ 8,000 $ 18,586 $ 32,764
The accompanying notes are an integral part of the financial statements.
Morrison Health Care, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except per share data)
For the Fiscal Year Ended
------------------------------------------------
May 31, 1997 June 1, 1996 June 3,1995
---------------- ---------------- -----------
Shares Amounts Shares Amounts Amounts
---------------- ---------------- -----------
COMMON STOCK
Beginning balance............11,791 $ 118 0 $ 0 $ 0
Shares issued pursuant to
spin-off from Morrison
Restaurants Inc............ 0 0 11,678 117 0
Shares issued to ESOP........ 255 3 0 0 0
Shares issued under Stock
Incentive Plans............ 119 1 113 1 0
---------------- ---------------- -----------
Ending balance...............12,165 122 11,791 118 0
---------------- ---------------- -----------
CAPITAL IN EXCESS OF PAR VALUE
Beginning balance............ 5,441 0 0
Shares issued to ESOP........ 3,592 0 0
Shares issued under Stock
Incentive Plans............ 678 1,543 0
Shares released from ESOP.... 6 0 0
Distribution of Morrison
Restaurants Inc.'s
investment in the Company
to Morrison Restaurants
Inc. shareholders.......... 0 3,898 0
---------------- --------------- ----------
Ending balance............... 9,717 5,441 0
---------------- --------------- ----------
MORRISON RESTAURANTS INC. EQUITY INVESTMENT
Beginning balance............ 0 9,015 51,164
Net income for the three
quarters ending March 2,
1996 and the year ended
June 3, 1995............... 0 6,791 36,826
Cash transfers to Morrison
Restaurants Inc............ 0 (12,749) (78,975)
Distribution of Morrison
Restaurants Inc.'s
investment in the Company
to Morrison Restaurants
Inc. shareholders.......... 0 (3,057) 0
---------------- --------------- ----------
Ending balance............... 0 0 9,015
---------------- --------------- ----------
UNEARNED ESOP SHARES
Shares issued to ESOP........ (255) (3,595) 0 0
Shares released from ESOP.... 6 78 0 0
---------------- --------------- ----------
Ending balance............... (249) (3,517) 0 0
---------------- --------------- ----------
RETAINED EARNINGS
Beginning balance............ 86 0 0
Net income for the year
ending May 31, 1997 and
the quarter ending
June 1, 1996............... 10,286 2,489 0
Cash dividends of $0.820
for the year ending
May 31, 1997 and $0.205
per share for the quarter
ending June 1, 1996........ (9,725) (2,403) 0
---------------- --------------- ----------
Ending balance............... 647 86 0
---------------- --------------- ----------
TREASURY STOCK (held by
Deferred Compensation Plan)
Beginning balance............ (929) 0 0
Distribution of Morrison
Restaurants Inc.'s invest-
ment in the Company to
Morrison Restaurants Inc.
shareholders............... 0 (958) 0
(Purchase)/Sale of Treasury
Stock...................... (412) 29 0
---------------- --------------- ----------
Ending balance............... (1,341) (929) 0
---------------- --------------- ----------
TOTAL STOCKHOLDERS' EQUITY... $5,628 $ 4,716 $ 9,015
================ =============== ==========
The accompanying notes are an integral part of the financial statements.
1. Summary of Significant Accounting Policies
Basis of Presentation
On March 9, 1996, Morrison Health Care, Inc. and Subsidiaries
(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 fiscal years prior to 1997. 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 May 31, 1997, June 1, 1996 and June
3, 1995 were comprised of 52 weeks. Starting in fiscal year
1998, the Company will change from a 52-53 week fiscal year to a
12-month fiscal year ending on May 31 each year.
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.
Reclassifications
Certain amounts have been reclassified in the 1996 and 1995
financial statements to conform with the 1997 financial statement
presentation.
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.
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 May 31, 1997 and June 1, 1996, the
accumulated amortization for costs in excess of net assets
acquired was $1.6 million and $1.4 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.
Stock-Based Compensation
During fiscal year 1997, the Company adopted Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation", (FAS No. 123) which was effective for
fiscal years beginning after December 15, 1995. Under the
provisions of FAS No. 123, companies can elect to account for
stock-based compensation plans using a fair-value based method or
continue measuring compensation expense for those plans using the
intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees", (APB
No. 25) and related Interpretations. The Company has elected to
continue to account for such plans under the provisions of APB
No. 25 and to provide certain pro forma disclosures (see Note
10). Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an
employee must pay to acquire the stock.
Earnings Per Share
Earnings per share (EPS) are computed by dividing net income by
the weighted average number of common and common equivalent
shares outstanding. Weighted average shares for 1996 were
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 because the Company
was not publicly held prior to the Distribution date.
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128,
"Earnings Per Share", (FAS No. 128). The provisions of FAS No.
128 are applicable to reporting periods after December 15, 1997,
and supersede Accounting Principles Board Opinion No. 15
"Earnings Per Share." Under FAS No. 128, basic EPS are computed
by dividing income available to common stockholders by the
weighted average number of common shares outstanding during the
period. Early application is not permitted.
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 consist of cash and short-
term investments, accounts and notes receivable, an interest rate
swap 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.
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, among other things, (i) allowed management
of each of the three companies to concentrate on its business and to
reward management and employees based on the performance of its
business; (ii) allowed each company to access the capital markets
directly to raise capital; (iii) established a value for each company
that is independent of the other businesses and provided investors
and security analysts a clearer basis on which to understand and
analyze the three businesses; and (iv) allowed MHCI to establish
equity-based benefit plans which 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 been incurred had the
Distribution occurred June 5, 1994. Adjustments are based on the
assumptions set forth below the statement.
(In thousands, except per share data)
For the Fiscal Year Ended 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
Restructuring 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 selling, and 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.
(In thousands, except per share data)
--------------------------------------------------------
For the Fiscal Year Ended June 1, 1996
--------------------------------------------------------
First Second Third Fourth
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 restructuring
cost, asset impairment
and income taxes................$ 4,926 $ 4,378 $ 2,187 $ 4,291 $ 15,782
Restructuring 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 restructuring
cost and asset impairment.....$ 0.24 $ 0.22 $ 0.11 $ 0.21 $ 0.78
Restructuring 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.
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.
4. Notes Payable
Notes payable consists of the following:
(In thousands)
---------------------------
Fiscal Year Ended
---------------------------
May 31, 1997 June 1, 1996
------------ ------------
6.7% Term note due in equal quarterly
installments of $1,250 from 1998-2001........... $20,000 $20,000
Other notes and mortgages......................... 33 45
------------ ------------
20,033 20,045
Less current maturities........................... 5,011 11
------------ ------------
$15,022 $20,034
============ ============
Aggregate maturities of long-term borrowings over the next five years
are as follows: 1998 - $5,011; 1999 - $5,011; 2000 - $5,011; 2001 -
$5,000 and 2002 - $0.
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 May 31, 1997,
the Company did not have any borrowings under the revolver. 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 fixes the interest rate at 6.7% per annum for the
period of the term note.
In addition, the Company had uncommitted demand lines of credit
amounting to $5 million. At May 31, 1997, the Company did not have any
borrowings outstanding under these lines.
The credit facility contains certain restrictions on incurring
additional indebtedness and certain funded debt, net worth and fixed
charge coverage requirements.
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:
(In thousands)
-----------------------------------
For the Fiscal Year Ended
-----------------------------------
May 31, June 1, June 3,
1997 1996 1995
-------- -------- --------
Minimum rent............................. $1,206 $1,168 $1,585
Contingent rent.......................... 459 291 2,497
-------- -------- --------
$1,665 $1,459 $4,082
======== ======== ========
6. Income Taxes
The components of income tax expense are as follows:
(In thousands)
------------------------------
For the Fiscal Year Ended
------------------------------
May 31, June 1, June 3,
1997 1996 1995
-------- ------- -------
Current:
Federal................................. $5,960 $1,479 $24,486
State................................... 816 325 4,955
-------- ------- -------
6,776 1,804 29,441
Deferred:
Federal................................. 440 4,127 (812)
State................................... 74 800 (160)
-------- ------- -------
514 4,927 (972)
-------- ------- -------
$7,290 $6,731 $28,469
======== ======= =======
Deferred tax assets and liabilities are comprised of the following:
(In thousands)
----------------------------------
Fiscal Year Ended
----------------------------------
May 31, 1997 June 1, 1996
----------------------------------
Deferred tax assets:
Employee benefits.................... $3,547 $3,106
Insurance reserves................... 1,841 2,196
Bad debt reserve..................... 293 447
Other................................ 438 554
-------------- --------------
Total deferred tax assets............ 6,119 6,303
-------------- --------------
Deferred tax liabilities:
Depreciation........................ 254 239
Retirement plans.................... 452 448
Prepaid deductions.................. 133 209
Other............................... 1,741 1,354
-------------- --------------
Total deferred tax liabilities....... 2,580 2,250
-------------- --------------
Net deferred tax asset............... $3,539 $4,053
============== ==============
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 will 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.
6. Income Taxes (continued)
A reconciliation from the statutory federal income tax expense to the
reported income tax expense is shown below:
(In thousands)
------------------------------
For the Fiscal Year Ended
------------------------------
May 31, June 1, June 3,
1997 1996 1995
-------- ------- --------
Statutory federal income taxes.......... $6,152 $5,604 $22,853
State income taxes net of
federal income tax benefit............ 804 732 2,868
Tax credits............................. 0 0 (346)
B&I divestiture items................... 0 0 2,575
Other, net.............................. 334 395 519
-------- ------- --------
$7,290 $6,731 $28,469
======== ======= ========
The effective income tax rate was 41.5%, 42.0% and 43.6% in 1997, 1996
and 1995, respectively. The high effective income tax 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.
In connection with the Distribution, the Company entered into a tax
allocation agreement with Morrison Fresh Cooking, Inc. (MFC) and Ruby
Tuesday, Inc. (RTI). This agreement provided that the Company will pay
its share of RTI's consolidated tax liability for the periods 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.
7. Employee Benefit 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's 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 prior to the Distribution), 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. Under the provisions of
the plan, highly compensated employees, as defined by the Internal
Revenue Code, are limited to contributions of 3% and receive a maximum
of a 20% match. The Company's contributions to the trust fund
approximated $257,000, $244,000 and $349,000 for 1997, 1996 and 1995,
respectively.
During fiscal year 1997, the Company began sponsorship of an employee
stock ownership feature (ESOP) covering participants in the Salary
Deferral Plan. The Company loaned the Plan $3.6 million ($3.5 million
outstanding at May 31, 1997) to purchase approximately 255,000 shares of
common stock, at an interest rate of 5.47%. The loan is payable in 120
monthly installments of principal and interest. The Company makes
monthly contributions sufficient to cover principal and interest on the
loan made to the Plan. Shares are released and allocated to participant
accounts monthly as loan repayments are made.
The Company adopted the provisions of AICPA Statement of Position No. 93-
6 which requires that compensation expense be measured based on the fair
value of the shares over the period the shares are earned. Dividends
paid on unallocated shares held by the Plan are used to make principal
and interest payments and are not charged to retained earnings, and
shares not yet committed to be released are not considered outstanding
in the calculation of earnings per share. The fair value of unearned
shares at May 31, 1997 was approximately $4,046,000.
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
$125,000, $137,000 and $196,000, for 1997, 1996 and 1995, 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 are 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 income of $17,000 and interest expense of
$12,000 for this Plan in 1997 and 1996, respectively. Assets of the
Plan approximated $4,667,000 at May 31, 1997 and $4,327,000 at June 1,
1996 and includes $1,341,000 and $929,000, respectively, 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 1997, 1996 or 1995.
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 prior to the
Distribution) in a qualifying position become eligible to earn
supplemental retirement payments based upon salary and length of service
(including service as part of MRI prior to the Distribution), 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 prior to the Distribution) and whose average annual
compensation for the immediately preceding three calendar years equaled
or exceeded $40,000, become participants. Participants receive benefits
based upon salary and length of service (including service with MRI
prior to the Distribution), 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
$1,256,000 at May 31, 1997 and $873,000 at June 1, 1996. The policies
have been placed in a rabbi trust which will hold the policies and death
benefits as they are received.
The following table presents the components of pension expense, the
funded status and amounts recognized in the Company's financial
statements for the Retirement Plan, the Executive Supplemental Pension
Plan and the Management Retirement Plan.
7. Employee Benefit Plans (continued)
(In thousands)
Accumulated Benefits Exceed Assets -
Assets Exceed Accumulated Benefits - Executive Supplemental Pension Plan
Retirement Plan and Management Retirement Plan
---------------------------------- ------------------------------------
For the Fiscal Year Ended
May 31, June 1, June 3, May 31, June 1, June 3,
1997 1996 1995 1997 1996 1995
---------------------------------- ------------------------------------
Components of pension
(income)/expense:
Service cost...............$ 0 $ 0 $ 0 $ 81 $ 63 $ 82
Interest cost.............. 341 354 544 230 251 315
Actual return on plan assets... (700) (833) (174) 0 0 0
Amortization and deferral...... 341 526 (413) 122 122 141
Curtailment loss............... 0 0 0 0 0 288
Settlement loss (gain)......... 0 0 115 0 0 (162)
Other.......................... 0 0 0 0 0 102
---------------------------------- -------------------------------------
$ (18) $ 47 $ 72 $ 433 $ 436 $ 766
================================== =====================================
Plan assets at fair value......$4,859 $4,766 $6,679 $ 0 $ 0 $ 0
================================== =====================================
Actuarial present value of
projected benefit
obligations:
Accumulated benefit
obligations:
Vested................... 4,210 4,691 6,532 1,950 1,606 3,919
Nonvested................ 0 0 0 0 0 9
Provision for future salary
increases.................... 0 0 0 1,296 1,116 1,009
---------------------------------- -------------------------------------
Total projected benefit
obligations.................. 4,210 4,691 6,532 3,246 2,722 4,937
---------------------------------- -------------------------------------
Excess (deficit) of plan
assets over projected
benefit obligations.......... 649 75 147 (3,246) (2,722) (4,937)
Unrecognized net loss (gain) 150 642 1,300 258 216 (302)
Unrecognized prior service
cost......................... 0 0 0 289 351 760
Unrecognized net transition
obligations.................. 348 412 714 576 541 1,133
Additional minimum liability... 0 0 0 (452) (376) (660)
---------------------------------- -------------------------------------
Prepaid (accrued) pension
cost........................$1,147 $1,129 $2,161 $(2,575) $(1,990) $(4,006)
================================== =====================================
The weighted average discount rate for all three plans was 8.25%, 7.75% and 8.5%
for 1997, 1996 and 1995, respectively. The rate of increase in compensation
levels for the Executive Supplemental Pension Plan and Management Retirement
Plan was 4% for 1997, 1996 and 1995. The expected long-term rate of return
on plan assets for the Retirement Plan was 10% for all three years.
8. Postretirement Benefits Other Than Pensions
The Company provides health care benefits and life insurance benefits to
eligible 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 actuarial present value of accumulated postretirement benefit
obligations and the amounts recognized in the Company's balance sheet
are as follows:
(In thousands)
----------------------------------
Fiscal Year Ended
----------------------------------
May 31, 1997 June 1, 1996
----------------------------------
Retirees....................................... $1,609 $1,591
Fully eligible active plan participants........ 202 196
Other active plan participants................. 123 117
----------------------------------
Accumulated postretirement benefit obligation.. 1,934 1,904
Unrecognized net loss.......................... (328) (409)
----------------------------------
Accrued postretirement benefit cost............ $1,606 $1,495
==================================
The postretirement benefit cost is as follows:
(In thousands)
-------------------------------
For the Fiscal Year Ended
-------------------------------
May 31, June 1, June 3,
1997 1996 1995
-------- ------- --------
Service cost............................ $7 $8 $7
Interest cost........................... 140 155 104
Amortization of unrecognized net loss... 23 28 32
-------- ------- --------
Postretirement benefit cost............. $170 $191 $143
======== ======= ========
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 8.25%, 7.75% and 8.50% discount rate
for fiscal years 1997, 1996 and 1995, respectively.
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 May 31,
1997. 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.
10. Stock Incentive Plans
Under the Company's stock incentive plans, incentive and non-qualified
stock options may be granted to Management, key employees and outside
directors to purchase shares of Company stock. The Morrison Health
Care, Inc. 1996 Stock Incentive Plan and the Morrison Health Care, Inc.
1996 Non-Executive Stock Incentive Plan (the Plans) are administered by
a Committee, appointed by the Board, which has complete discretion to
determine participants and the terms and provisions of stock incentives,
subject to the Plans. The Plans permit the Committee to make awards of
a variety of stock incentives, including (but not limited to) dividend
equivalent rights, incentive stock options, non-qualified stock options,
performance unit awards, phantom shares, stock appreciation rights and
stock awards. 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 Plans have
been at the prevailing market value at the time of issue or grant. All
options granted have five or ten year terms and become exercisable at
the end of two or three years of continued employment.
At May 31, 1997, the Company had reserved a total of 804,376 shares of
common stock under the Company's 1996 Stock Incentive Plan. At the June
1997 meeting of the Board of Directors, an additional 900,000 shares of
common stock was reserved for this Plan, subject to stockholder
approval.
In March 1997, the Board of Directors approved a resolution to offer the
Company's non-executive employees the opportunity to reprice certain
options which were originally granted under the Company's 1996 Non-
Executive Stock Incentive Plan. The repricing occurred on March 25,
1997, and resulted in the cancellation of approximately 290,000 options
and the granting of approximately 174,000 new options with an exercise
price equal to $13.125, the closing price on March 24,1997. The
canceled options were replaced with fewer new options in accordance with
a formula to result in economic equivalence between the old and new
options. The new options were granted with two year vesting periods and
ten year terms.
At May 31,1997, the Company had reserved a total of 2,582,127 shares of
common stock for this Plan.
The Morrison Health Care, Inc. Stock Incentive and Deferred Compensation
Plan for Directors 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 vest and become 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 grant. During 1997, 3,782
shares were issued under the Plan. Pursuant to this Plan, a one-time
restricted stock award totaling 5,000 shares was made in fiscal year
1997 to a nonmanagement director. A Committee, appointed by the Board,
administers the Plan on behalf of the Company. At May 31, 1997, the
Company had reserved 85,251 shares of common stock for this Plan.
Under the terms of the Distribution, 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. For
FAS No. 123 disclosure purposes, these options, if granted in fiscal
year 1996, were valued as of the original grant date.
The Company applies APB No. 25 and related interpretations in accounting
for its stock incentive plans. Under APB No. 25, because the exercise
price of the Company's employee stock options equals the market price of
the stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share has
been determined as if the Company had accounted for its employee stock
options under the fair value method of FAS No. 123. The fair value for
these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted average assumptions for
1997 and 1996, respectively: risk-free interest rates of 6.6% and 6.0%;
volatility factors of .19 and .22; dividend yields of 4.3% and 4.7%;
and weighted average expected lives of 7.6 and 4.8 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows (in thousands, except earnings
per share amounts):
For the Fiscal Year Ended
------------------------------
May 31, June 1,
1997 1996
------ -------
Pro forma net income $9,618 $9,157
Pro forma earnings per share $ 0.82 $ 0.78
The effects of applying FAS No. 123 in this pro forma disclosure are not
indicative of future amounts. FAS No. 123 does not apply to awards made
prior to fiscal year 1996, and additional awards are anticipated.
A summary of the Company's stock option activity and related information
for the years ended May 31, 1997 and June 1, 1996 follows:
May 31, 1997 June 1, 1996
--------------------- --------------------
Weighted Weighted
Average Average
Options Exercise Option Exercise
(000) Price (000) Price
-------- -------- ------ --------
Outstanding - Beginning of year. 2,368 $15.97 0 $ 0.00
Converted MRI options........... 0 0.00 1,493 15.55
Granted......................... 493 13.21 950 16.50
Exercised....................... (200) 9.69 (57) 11.38
Forfeited....................... (354) 16.78 (18) 24.44
- ---------------------------------------------------------------------------
Outstanding - End of year....... 2,307 $15.82 2,368 $15.97
===========================================================================
Exercisable at end of year...... 1,068 $15.95 1,056 $14.52
===========================================================================
Weighted average fair value
of options granted during
the year........................ $1.89 $2.70
===========================================================================
Shares available for future
grants....................... 1,164 1,305
===========================================================================
The following table summarizes information about stock options
outstanding at the end of:
May 31, 1997
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Weighted Average Weighted
Range of Average Remaining Average
Exercise Number Exercise Contractual Number Exercise
Prices Outstanding Price Life Exercisable Price
- -------------------------------------------------------------------------------
$ 8.98 - $13.13 676 $12.16 5.96 317 $11.15
$13.50 - $15.75 596 $14.56 2.70 475 $14.62
$16.50 - $16.50 622 $16.50 3.84 0 $ 0.00
$17.03 - $31.59 413 $22.61 2.40 276 $23.72
- -------------------------------------------------------------------------------
2,307 $15.82 3.91 1,068 $15.95
===============================================================================
11. Contingencies
At May 31, 1997, the Company was contingently liable for approximately
$6.4 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 entered 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. No significant amounts were incurred under
this agreement during fiscal year 1997 or 1996.
12. Supplemental Quarterly Financial Data (Unaudited)
Quarterly financial results for the years ended May 31, 1997 and June 1,
1996 are summarized below. All quarters are composed of 13 weeks.
Amounts presented are in thousands.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
===================================================
For the year ended May 31, 1997
Revenues...........................$52,658 $54,355 $57,483 $56,515 $221,011
===================================================
Gross profit*......................$ 9,634 $10,291 $ 9,416 $10,437 $ 39,778
===================================================
Income before income taxes.........$ 4,619 $ 4,648 $ 3,695 $ 4,614 $ 17,576
Provision for federal and state
income taxes..................... 1,923 1,922 1,533 1,912 7,290
---------------------------------------------------
Net income.........................$ 2,696 $ 2,726 $ 2,162 $ 2,702 $ 10,286
===================================================
Earnings per common and common
equivalent share.................$ 0.23 $ 0.23 $ 0.18 $ 0.23 $ 0.87
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
===================================================
*The Company defines gross profit as revenue less operating expenses.
Common Stock Market Prices and Dividends
Morrison Health Care, Inc. common stock is publicly traded on the New
York Stock Exchange (NYSE) under the ticker symbol MHI. The following
table sets forth the reported high and low prices on the NYSE or the
high and low bid prices for each quarter during fiscal years 1997 and
1996.
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------
1997 market price per share:
High.............................$15.000 $14.375 $14.875 $16.500
Low..............................$11.125 $10.750 $13.250 $13.000
1996 market price per share
High............................. N/A N/A N/A $18.375
Low.............................. N/A N/A N/A $13.750
Cash dividends on the common stock of Morrison Health Care, Inc. were
paid during each quarter of fiscal years 1997 and 1996 as follows:
1997 cash dividends per share.......$0.205 $0.205 $0.205 $0.205 $0.820
1996 cash dividends per share...... N/A N/A N/A $0.205 $0.205
On June 26, 1997, the Company's Board of Directors declared a quarterly
dividend of $0.205 per share payable July 31, 1997, to 5,737
shareholders of record on July 11, 1997.
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 May 31, 1997 and June 1, 1996,
and the related consolidated statements of income, stockholders' equity
and cash flows for each of the three fiscal years in the period ended
May 31, 1997. 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 May 31, 1997 and June 1,
1996, and the consolidated results of their operations and their cash
flows for each of the three fiscal years in the period ended May 31,
1997, in conformity with generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Atlanta, Georgia
June 19, 1997
The Board of Directors Transfer Agent, Registrar, Annual Meeting
Dividend Disbursing Agent The annual meeting of
John B. McKinnon and Dividend Reinvestment Stockholders will be
Chairman of the Board, Plan Administrator held Tuesday,
Former Dean, Babcock AmSouth Bank, N.A. September 23, 1997,
Graduate School of Post Office Box 11426 starting at 1:00
Management,Wake Forest Birmingham, AL 35202 p.m., EDT, at the
University and Former Renaissance Atlanta
President, Sara Lee Dividend Reinvestment Plan Hotel-Concourse, One
Corporation For information contact the Hartsfield Centre
Shareholders Relations Parkway, Atlanta,
Glenn A. Davenport Department or the Dividend GA 30354.
President and Chief Reinvestment Plan
Executive Officer Administrator. Officers of the
Company
Claire L. Arnold (1, 2) Independent Auditors Glenn A.Davenport
Former Chief Executive Ernst & Young LLP President and Chief
Officer NCC L.P. 600 Peachtree Street Executive Officer
Atlanta, GA 30308
E. Eugene Bishop (1, 2) K. Wyatt Engwall
Former Chairman of the Legal Counsel Senior Vice
Board and Chief Executive Powell, Goldstein, Frazer & President, Finance
Officer of Morrison Murphy, LLP and Assistant
Restaurants Inc. 191 Peachtree Street, N.E. Secretary
Atlanta, GA 30303
Fred L. Brown (1, 2) John E. Fountain
President and Chief Common Stock Vice President,
Executive Officer, The Common Stock of General Counsel
BJC Health Systems Morrison Health Care, Inc. and Secretary
is traded on the New York
Stock Exchange. Carolyn L. Kolesar
Arthur R. Outlaw, Jr. (NYSE symbol: MHI) Senior Vice President
(1, 2)
Chairman of the Board Executive and Operating Frances G. Michels
and Chief Executive Offices Senior Vice
Officer of Marshall 1955 Lake Park Dr. SE, President, Support
Biscuit Company. Suite 400 Services
Smyrna, GA 30080
Dr. Benjamin F. Payton 770-437-3300 Jerry D.Underhill
(1, 2) Senior Vice
President, Tuskegee Form 10-K Information President, Sales and
University A copy of the Company's Marketing
annual report on Form 10-K,
Committees of the Board excluding exhibits, filed
with the Securities and
1. Compensation and Exchange Commission, will
Stock Option* be furnished to any
2. Audit* shareholder without
charge upon written
* Comprised entirely of request to the Shareholders
nonemployee Board Relations Department,
Members 1955 Lake Park Dr. SE,
Suite 400
Smyrna, GA 30080.