13
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 February 28, 1998
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___
12,351,376
(Number of shares of $0.01 par value common stock outstanding
as of March 31, 1998)
INDEX
-----
PART I Financial Information
Page
Number
------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as
of February 28, 1998 and May 31, 1997......... 3
Condensed Consolidated Statements of
Income for the Quarter and Nine Months Ended
February 28, 1998 and March 1, 1997........... 4
Condensed Consolidated Statements of Cash
Flows for the Nine Months Ended
February 28, 1998 and March 1, 1997........... 5
Notes to Condensed Consolidated Financial
Statements.................................... 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 8-10
Item 3. Quantitative and Qualitative Disclosures
about Market Risk............................. N/A
PART II Other Information
Item 1. Legal Proceedings............................. 11
Item 2. Changes in Securities......................... None
Item 3. Defaults upon Senior Securities............... None
Item 4. Submission of Matters to a Vote of
Security Holders.............................. None
Item 5. Other Information............................. 11
Item 6. Exhibits and Reports on Form 8-K.............. 11
Signatures................................................... 12
Index to Exhibits, Financial Statement Schedules, and
Reports on Form 8-K.......................................... 13
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
February 28, May 31,
1998 1997
------------------------------------
(Unaudited) (Audited)
Assets
Current assets:
Cash and short-term investments............... $ 4,550 $ 6,347
Receivables - accounts and notes (net)........ 25,023 21,271
Inventories................................... 3,052 2,686
Prepaid expenses.............................. 1,094 1,006
Deferred income tax benefits.................. 2,136 1,929
------------------------------------
Total current assets........................ 35,855 33,239
------------------------------------
Property and equipment - at cost................ 20,419 16,343
Less accumulated depreciation................. 9,662 8,471
------------------------------------
10,757 7,872
Cost in excess of net assets acquired, net...... 11,092 4,582
Deferred charges................................ 4,368 2,830
Other assets.................................... 12,905 11,680
------------------------------------
Total assets................................ $74,977 $60,203
====================================
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.............................. $10,384 $10,381
Book bank overdrafts.......................... 1,653 2,596
Other accrued liabilities..................... 11,528 11,360
Current portion of long-term debt............. 5,011 5,011
------------------------------------
Total current liabilities................... 28,576 29,348
------------------------------------
Notes payable................................... 26,387 15,022
Other deferred liabilities...................... 10,920 10,205
Stockholders' equity:
Common stock, $0.01 par value
(authorized 100,000 shares;
issued: 12,326 and 12,165 shares,
1998 and 1997, respectively)................ 123 122
Capital in excess of par value................ 11,914 9,717
Unearned ESOP shares.......................... (3,283) (3,517)
Retained earnings............................. 1,727 647
------------------------------------
10,481 6,969
Less cost of treasury stock................... 1,387 1,341
------------------------------------
Total stockholders' equity.................. 9,094 5,628
------------------------------------
Total liabilities and stockholders' equity.. $74,977 $60,203
====================================
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 Quarter Ended For the Nine Months Ended
----------------------------- ------------------------------
February 28, March 1, February 28, March 1,
1998 1997 1998 1997
----------------------------- ------------------------------
Revenues.............................. $63,337 $57,483 $181,737 $164,496
Operating costs and expenses:
Operating expenses.................. 52,796 48,067 150,481 135,155
Selling, general and
administrative.................... 5,925 5,517 16,475 15,777
Interest expense, net of
interest income, totaling $107 and
$1,387, respectively, in 1998
and $152 and $566, respectively,
in 1997............................. 324 204 780 602
---------------------------- -------------------------------
59,045 53,788 167,736 151,534
Income before provision for
income taxes........................ 4,292 3,695 14,001 12,962
Provision for federal and state
income taxes........................ 1,695 1,533 5,530 5,378
---------------------------- -------------------------------
Net income............................ $ 2,597 $ 2,162 $ 8,471 $ 7,584
============================ ===============================
Earnings per share - Basic............ $ 0.22 $ 0.18 $ 0.71 $ 0.64
Earnings per share - Diluted.......... $ 0.21 $ 0.18 $ 0.70 $ 0.64
Weighted average common
shares - Basic...................... 11,975 11,785 11,927 11,783
Net effect of dilutive stock options.. 283 58 222 54
---------------------------- --------------------------------
Weighted average common and common
equivalent shares - Diluted......... 12,258 11,843 12,149 11,837
============================ ================================
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 Nine Months Ended
---------------------------------
February 28, March 1,
1998 1997
---------------------------------
Operating activities:
Net income........................................ $ 8,471 $ 7,584
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization................. 1,858 1,469
Amortization of intangibles................... 220 116
Other, net.................................... 734 811
Deferred income taxes......................... (454) (715)
(Gain)/Loss on disposition of assets.......... (47) 21
Changes in operating assets and liabilities:
(Increase)/Decrease in receivables.......... (3,974) 4,004
Increase in inventories..................... (362) (17)
(Increase)/Decrease in prepaid and
other assets............................. (301) 675
(Decrease)/Increase in accounts payable,
accrued and other liabilities............ (986) 1,988
Increase in income taxes payable............ 506 1,113
---------------------------------
Net cash provided by operating activities......... 5,665 17,049
---------------------------------
Investing activities:
Purchases of property and equipment............... (4,911) (2,933)
Proceeds from disposal of asset................... 242 61
Acquisitions...................................... (6,303) 0
Deferred charges.................................. (2,253) (649)
Other, net........................................ (598) (332)
---------------------------------
Net cash used by investing activities............. (13,823) (3,853)
---------------------------------
Financing activities:
Principal payments on long-term debt.............. (3,761) (11)
Net change in short-term borrowings............... 15,125 (6,761)
Proceeds from exercise of stock options........... 2,139 375
Dividends paid.................................... (7,391) (7,289)
(Increase) in treasury stock held by
Deferred Comp Plan............................ (45) (237)
ESOP shares released.............................. 294 0
---------------------------------
Net cash provided (used) by financing activities.. 6,361 (13,923)
---------------------------------
Decrease in cash and short-term investments....... (1,797) (727)
Cash and short-term investments at the
beginning of the period......................... 6,347 6,088
---------------------------------
Cash and short-term investments at the
end of the period............................... $ 4,550 $ 5,361
=================================
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 May 31, 1997.
Certain prior reported amounts have been reclassified to be
consistent with current reporting practices.
NOTE B - ACQUISITION OF DRAKE MANAGEMENT SERVICES
In January 1998, the Company acquired for approximately $6
million all of the outstanding common stock of Drake
Management Services (DMS). The purchase price may increase
contingent on the future earnings of DMS as defined in the
purchase agreement. The acquisition was accounted for using
the purchase method. The resulting goodwill is being amortized
over twenty years using the straight-line method. The results
of Drake Management Services have been included from the
acquisition date.
NOTE C - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards (SFAS) No.
128, "Earnings Per Share." The provisions of SFAS No. 128 are
applicable to reporting periods after December 15, 1997, and
supercede Accounting Principles Board Opinion No. 15,
"Earnings Per Share." Under SFAS No. 128 basic earnings per
share ("EPS") are computed by dividing income available to
common shareholders by the weighted average number of shares
outstanding during the period. Diluted EPS are computed based
on the weighted average number of shares outstanding during
the period plus the effect of outstanding stock options using
the treasury stock method. As required, the Company adopted
SFAS No. 128 during the quarter ended February 28, 1998 and
restated its EPS for all prior periods presented.
NOTE D - SUBSEQUENT EVENTS
Declaration of Quarterly Dividend
On March 26, 1998, the Company's Board of Directors declared a
quarterly cash dividend of $0.205 per share of outstanding
common stock payable on April 30, 1998 to shareholders of
record at the close of business on April 10, 1998.
Strategic Dividend Decision and Stock Repurchase Program
Also on March 26, 1998, the Board of Directors adopted a new
dividend policy which calls for the payment of annual dividends
at a rate of $0.16 per share effective with the quarterly
dividend payment in July 1998.
Morrison Health Care, Inc. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - continued
(UNAUDITED)
At the same Board of Directors meeting, the Board authorized a
program to repurchase up to 1,000,000 shares of common stock
from time to time in open market and other negotiated
transactions. The timing and actual number of shares that will
be purchased will depend on a variety of factors, including the
Company's liquidity and financial resources, and the market price
of the stock and other market conditions. The Company may, at
its discretion, extend or terminate the stock repurchase program
at any time.
Acquisition - Spectra Services, Inc.
In March 1998, the Company acquired Chicago-based Spectra
Services, Inc. ("Spectra") in a cash transaction. The
acquisition will be accounted for using the purchase method.
The resulting goodwill will be amortized over twenty years
using the straight-line method. The results of Spectra will
be included from the acquisition date.
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 quarter and nine
months ended February 28, 1998 compared with the results for
the comparable periods of the prior year.
Results of Operations
The Company's net income from continuing operations increased
20.1% to $2.6 million for the quarter and 11.7% to $8.5 million
for the nine months ended February 28, 1998, compared with net
income of $2.2 and $7.6 million reported for the corresponding
periods of the prior fiscal year. Earnings before interest and
taxes increased 18.4% or $0.7 million to $4.6 million for the
quarter and increased 9.0% or $1.2 million to $14.8 million for
the nine months ended February 28, 1998.
Revenue
Revenue from operations increased $5.9 million or 10.2% to
$63.3 million for the quarter and increased $17.2 million or
10.5% to $181.7 million for the nine months ended February 28,
1998. The increase was primarily attributable to the conversion
of client paid payroll to MHCI paid payroll in continuing
accounts and the revenue from the accounts acquired from Drake
Management Services.
Managed volume (which is the amount of estimated total
operating costs managed) from operations increased $11.4
million or 9.7% to $129.3 million for the quarter and increased
$22.4 million or 6.5% to $367.7 million for the nine months
ended February 28, 1998 from the prior year period due to the
expansion of the vending and branded concepts programs in
continuing accounts.
Operating Costs
Operating costs increased $4.7 million or 9.8% to $52.8 million
for the quarter and increased $15.3 million or 11.3% for the
nine months ended February 28, 1998. On a year to date basis,
these costs have increased as a percentage of revenue from the
prior year primarily as a result of the conversion of client
paid payroll to MHCI paid payroll in continuing accounts.
Selling, general and administrative expenses increased $0.4
million or 7.4% for the quarter and increased $0.7 million or
4.4% for the nine months ended February 28, 1998 as compared to
the same periods of the prior year. Selling, general and
administrative expenses as percentage of revenue were
relatively flat when compared to the corresponding periods of
the prior year.
Interest Expense (net of Interest Income)
Net interest expense increased from $0.2 million to $0.3
million for the quarter and increased to $0.8 million for the
nine months ended February 28, 1998 from $0.6 million for the
same period of the prior year. Interest on funds used to
finance construction of significant additions to property and
equipment is capitalized. The capitalized interest is recorded
as part of the asset to which it relates and will be amortized
over the asset's estimated useful life. The Company
capitalized interest totaling $33,000 and $62,000 for the three
and nine months ended February 28, 1998, respectively, related
to the construction of the Advanced Culinary Centers and the
development of a new computer information system.
Income Taxes
The effective income tax rate on continuing operations for the
three months and nine months ended February 28, 1998 was 39.5%
as compared to 41.5% for the same periods of the prior year.
The Company has lowered its estimated effective income tax rate
for the current year based upon anticipated tax credits and a
review of the first full year of tax filings.
Earnings per Share
The Company has adopted Financial Accounting Standards Board
Statement (SFAS) No. 128, "Earnings Per Share", and has
restated earnings per share amounts reported in prior periods
in accordance with SFAS No. 128. Basic earnings per share is based
on the weighted average number of shares outstanding during
each quarter. Diluted earnings per share is based on the
weighted average number of shares outstanding during each
quarter plus the effect of outstanding stock options using the
treasury stock method.
Liquidity and Capital Resources
Total assets at February 28, 1998 were $75.0 million, a $14.8
million increase from $60.2 million as of the prior fiscal year
end. This increase is attributable to the following: 1) an
increase of $3.8 million in accounts and notes receivable due
in part to the month of February having only 28 days; 2) an
increase of $2.9 million in net fixed assets primarily due to
the construction of the Advanced Culinary Centers and the
development of a new computer information system, 3) an
increase of $1.5 million in client investments, 4) $0.6 million
increase in investments due to the increase in the cash
surrender value of company owned life insurance policies and 5)
an increase in net costs in excess of assets acquired primarily
due to the January 1998 acquisition of Drake Management Services.
Total liabilities at February 28, 1998 were $65.9 million, a
$11.3 million increase from $54.6 million as of the end of the
prior fiscal year. This increase was primarily due to an $11.3
million increase 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.
Subsequent Events
Declaration of Quarterly Dividend
On March 26, 1998, the Company's Board of Directors declared a
quarterly cash dividend of $0.205 per share of outstanding
Common Stock payable on April 30, 1998 to shareholders of
record at the close of business on April 10, 1998.
Strategic Dividend Decision and Stock Repurchase Program
In order to create a more flexible financial structure moving
forward, the Board of Directors has determined that it is in
the Company's best interests to reduce its dividend. In
accordance with the new dividend policy adopted on March 26,
1998, the annual dividend rate will be reduced to $0.16 per
share effective with the quarterly dividend payment in July
1998. This policy change will make the Company's dividend
payment as a percent of earnings more comparable with other
companies in its industry.
Subsequent Events - continued
At the same Board of Directors meeting, the Board authorized a
program to repurchase up to 1,000,000 shares of common stock
from time to time in open market and other negotiated
transactions. The timing and actual number of shares that will
be purchased will depend on a variety of factors, including the
Company's liquidity and financial resources, and the market
price of the stock and other market conditions. The Company
believes that the reduction in the long-term capital gains tax
makes it more efficient to return capital to its shareholders
through a stock repurchase program instead of dividends. The
Company may, at its discretion, extend or terminate the stock
repurchase program at any time.
Acquisition - Spectra Services, Inc.
The Company has identified investment opportunities in the
Senior Living Dining Services, a market the Company believes is
under-penetrated and rapidly expanding. The Company's plans
for future growth in the senior living market are to result
from acquisitions and internal development. In March 1998, the
Company acquired Chicago-based Spectra Services, Inc. in a cash
transaction.
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.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II - OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is presently, and from time to time, subject to
pending claims and suits arising in the ordinary course of its
business. In the opinion of Management, the ultimate
resolution of these pending legal proceedings will not have a
material adverse effect on the Company's operations or
consolidated financial position.
ITEM 2 CHANGES IN SECURITIES
None
ITEM 3 DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit 3.2 Bylaws of Morrison Health Care, Inc., as amended
Exhibit 27.1 Financial Data Schedule - For the Nine
Months ended February 28, 1998 (for SEC use only)
Exhibit 27.2 Financial Data Schedule - For the Six
Months ended November 30, 1997 and
November 30, 1996 (for SEC use only)
Exhibit 27.3 Financial Data Schedule - For the Three
Months ended August 31, 1997 and
August 31, 1996 (for SEC use only)
Exhibit 27.4 Financial Data Schedule - For the Nine
Months ended March 1, 1997 (for SEC use only)
Exhibit 27.5 Financial Data Schedule - For the Year
ended May 31, 1997 (for SEC use only)
(b) Reports on Form 8-K:
None
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)
04/13/98 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
- ------ --------------------------------------------------------
3.2 Bylaws of Morrison Health Care, Inc., as amended
27.1 Financial Data Schedule - For the Nine Months ended
February 28, 1998 (for SEC use only)
27.2 Financial Data Schedule - For the Six Months ended
November 30, 1997 and November 30, 1996 (for SEC use only)
27.3 Financial Data Schedule - For the Three Months ended
August 31, 1997 and August 31, 1996 (for SEC use only)
27.4 Financial Data Schedule - For the Nine Months ended
March 1, 1997 (for SEC use only)
27.5 Financial Data Schedule - For the Year ended
May 31, 1997 (for SEC use only)