Selected Financial Data
Morrison Management Specialists, Inc. and Subsidiaries
The following table summarizes certain selected financial information with
respect to Morrison Management Specialists, Inc. (the "Company" or "MMSI") and
is derived from the Financial Statements of MMSI. The Selected Financial Data of
MMSI is presented as if MMSI had been a separate entity for fiscal years 1996
and 1995. The information set forth below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Financial Statements of MMSI and notes thereto. 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 year 1995 as MMSI
was not a separate publicly held company prior to March 1996.
- -----------------------------------------------------------------------------------------------------------------------------------
For The Fiscal Year *
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands except per share data) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated statements of income data:
Managed volume (estimated and unaudited)................. $ 647,900 $ 504,400 $ 464,800 $ 435,600 $ 408,300
=========================================================================
Revenues................................................. $ 324,968 $ 250,371 $ 221,011 $ 219,995 $ 225,392
=========================================================================
Income before provision for income taxes................. $ 22,197 $ 19,065 $ 17,576 $ 16,011 $ 65,295
Provision for federal and state income taxes............. 8,657 7,513 7,290 6,731 28,469
-------------------------------------------------------------------------
Net income............................................... $ 13,540 $ 11,552 $ 10,286 $ 9,280 $ 36,826**
=========================================================================
Earnings per share - Basic............................... $ 1.14 $ 0.97 $ 0.87 $ 0.79
=====================================================
Earnings per share - Diluted............................. $ 1.12 $ 0.95 $ 0.87 $ 0.79
=====================================================
Weighted average common shares - Basic................... 11,883 11,938 11,785 11,673
Net dilutive effect of stock options and
nonvested stock awards................................. 222 254 56 51
-----------------------------------------------------
Weighted average common shares - Diluted................. 12,105 12,192 11,841 11,724
=====================================================
*Fiscal years 1999 and 1998 are twelve-month years. Fiscal years 1997, 1996 and 1995 are composed of 52 weeks.
**Includes an after-tax gain of $25.8 million from the sale of 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.
Other Financial Data:
Total assets............................................. $ 102,927 $ 84,374 $ 60,203 $ 61,101 $ 69,028
Long-term debt........................................... $ 49,305 $ 31,690 $ 15,022 $ 20,034 $ 19,245
Stockholders' equity..................................... $ 14,563 $ 10,220 $ 6,969 $ 5,645 $ 9,015
Cash dividends per share of common stock................. $ 0.16 $ 0.82 $ 0.82 $ 0.205*** -
Working capital.......................................... $ 15,670 $ 7,344 $ 3,891 $ 8,677 $ 13,318
Current ratio............................................ 1.6:1 1.2:1 1.1:1 1.3:1 1.5:1
***Dividends were not paid prior to the fourth quarter of fiscal year 1996.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Morrison Management Specialists, Inc. and Subsidiaries
This discussion should be read in conjunction with the Financial Statements and
related notes found on pages 22 to 34.
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
public corporation trading under the symbol MHI on the New York Stock Exchange.
MHCI subsequently changed its name to Morrison Management Specialists, Inc. (the
"Company" or "MMSI") effective June 30, 1999. Management believes that the
Distribution has had a material impact on the results of operations due to the
added separate company costs that were incurred by MMSI.
1999 Compared To 1998
Overview
MMSI is the only national, publicly held company which specializes exclusively
in providing food, nutrition and dining services to the health care and senior
living industries. MMSI's client base includes some of the largest and most
prominent hospitals, health systems and senior living communities in the United
States.
In fiscal year 1999, MMSI's third full year as an independent company, the
Company again demonstrated strong financial results, with increases in managed
volume, revenue, operating profit and net income. These accomplishments were due
to strong new account sales, high account retention, continued focus on cost
reductions in all accounts, and growth in existing accounts. Hospitals are
experiencing increasing cost pressures and many are outsourcing their food
services to achieve cost reductions along with patient satisfaction goals.
Another prime factor which added to the increases in managed volume, revenue,
operating profit and net income was the acquisition of Culinary Service Network,
Inc. in October 1998. Culinary Service Network was MMSI's third acquisition in
the senior living market. The experience and practices of these industry experts
create a solid foundation for further developing and growing the nation's
foremost senior living services business. (See Note 2 of the Notes to
Consolidated Financial Statements for more information.)
Managed Volume/Revenue
The Company generally performs its services pursuant to either management fee or
profit and loss contracts. While actual services performed are the same, revenue
recognition varies by type of contract. In a management fee account, MMSI
manages the services and facilities, but the client is responsible for all or
nearly all the costs. Revenues and fees are recognized for the amount of the
contractually agreed-upon management fee and any earned incentives plus the
amount of any expenses or employee payroll costs paid by the Company and charged
back to the client. In a profit and loss account, MMSI assumes the risk of
profit or loss for the food service operation. For such accounts, 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 (net management fees plus
reimbursed expenses) and the profit and loss account (gross revenues of meal
sales), Management uses the concept of managed volume to evaluate the Company's
true growth. Managed volume is defined by MMSI as the total costs of operating
the food services, regardless of which type of contract exists with the client.
Management believes managed volume is its best indicator of performance because
it measures total activity from all client accounts and provides an indication
of what gross revenues would be if the Company performed all services pursuant
to profit and loss contracts. Management uses managed volume as an additional
indicator of performance and not as a replacement of measures such as revenues,
as defined and required by generally accepted accounting principles.
Managed volume increased $143.5 million, or 28.5%, to $647.9 million in fiscal
year 1999 when compared to fiscal year 1998. Revenue increased $74.6 million, or
29.8%, to $325.0 million in fiscal year 1999 as compared to fiscal year 1998.
The primary sources of these increases were opening more and larger accounts
than accounts which were closed, key acquisitions, and growth at existing
accounts, including adding vending operations and increasing employee payrolls.
Gross Profit
Gross profit, defined as revenue less operating expenses, increased $11.2
million or 26.0% for fiscal year 1999. Management's continued emphasis on food
and labor cost reductions, acquisitions, and growth of existing account business
all contributed to the favorable results.
Selling, General and Administrative
Selling, general and administrative expenses were 4.6% of managed volume, which
is a slight increase over the 4.5% of managed volume in fiscal year 1998.
Interest Expense, Net
Interest expense increased 110% compared to the prior year due to higher debt
levels associated with the Company's acquisitions and increased capital
expenditures for both the Advanced Culinary Centers(TM) and improvements to the
Company's management information systems.
Federal and State Income Taxes
The combined federal and state effective tax rate decreased to 39% in fiscal
year 1999 from 39.4% in fiscal year 1998.
1998 COMPARED TO 1997
Overview
In MMSI's second full year as an independent company, fiscal year 1998, the
Company showed strong financial results, with increases in managed volume,
revenue, operating profit and net income. The accomplishments were due to
continued focus on cost reductions in all accounts, growth in existing accounts,
strong new account sales, and the acquisitions of Drake Management Services,
Inc. (January 1998) and Spectra Services, Inc. (March 1998) in the senior living
market. (See Note 2 of the Notes to Consolidated Financial Statements for more
information.)
Managed Volume/Revenue
In fiscal year 1998, managed volume increased $39.6 million, or 8.5%, to $504.4
million when compared to fiscal year 1997. Revenue increased $29.4 million, or
13.3%, to $250.4 million in fiscal year 1998 as compared to fiscal year 1997.
The primary sources of these increases were growth at existing accounts,
including adding vending operations and increasing employee payrolls, opening
more accounts and larger accounts than accounts which were closed, and key
acquisitions.
Gross Profit
Gross profit increased $3.3 million, or 8.4%, to $43.1 million for fiscal year
1998. Growth of existing account business, continued emphasis on food and labor
cost reductions, and acquisitions all contributed to the favorable results.
Selling, General and Administrative
Selling, general and administrative expenses decreased as a percentage of
managed volume and revenue, although they increased overall when compared to the
prior year. The expenses were 4.5% of managed volume in fiscal year 1998 and
were 4.6% of managed volume in fiscal year 1997. Compared to fiscal year 1997,
the expenses increased $1.5 million, or 7.1%, versus a revenue increase of 13.3%
for the same period.
Interest Expense, Net
Interest expense increased 39.0% compared to the prior year due to higher debt
levels associated with the Company's acquisitions and increased capital
expenditures for both the Advanced Culinary Centers(TM) and improvements to the
management information systems.
Federal and State Income Taxes
The combined federal and state effective tax rate decreased to 39.4% in fiscal
1998 from 41.5% in fiscal 1997. The higher effective income tax rate in fiscal
1997 as compared to fiscal 1998 is primarily due to higher non-deductible
expenses in fiscal 1997.
YEAR 2000
The "Year 2000 Issue" is a term used to describe the problems created by the
inability of certain computer software programs to properly recognize and
process date-sensitive information relative to dates after December 31, 1999.
These problems arise mostly from the fact that many software programs have
historically been programmed to accept only two digit entries in the date code
fields and use such two digit entries in the software's calculation and report
generation formats.
State of Readiness
The Company is currently addressing the impact of the Year 2000 Issue. After
completing inventories of its technology systems, MMSI elected to replace its
most critical system, a shared-mainframe corporate system, with client-server
systems architected using Year 2000 standards. The transition to this new system
began in June 1997 and was completed in January 1999. The Company continues its
testing and preparations of other systems, which it anticipates completing
before December 31, 1999. In addition, the Company has verified that all other
significant vendor licensed software applications are either currently year 2000
compliant or will be by December 31, 1999.
Costs
The Company's technology initiatives include both preparations for the Year 2000
Issue and significant system upgrades and enhancements. While it is not possible
to give an estimate of the costs specifically related to the Year 2000 Issue,
the total cost of the Company's technology initiatives is approximately $5
million, substantially all of which has been incurred.
External Relationships
All major suppliers have provided letters assuring the Company of their Year
2000 readiness. To date, the Company is not aware of any external supplier,
vendor or other party with a Year 2000 Issue that would materially impact the
Company's results of operations, liquidity or capital resources. However, the
Company has no means of ensuring that external parties will be ready for Year
2000 Issues.
Risks
Management of the Company believes it has an effective program in place to
resolve problems related to the Year 2000 Issue in a timely manner. There can be
no assurance that the Company will be completely successful in its preparations
to address the Year 2000 Issue. If the Company is not completely successful in
its preparations, the Company could suffer loss of sales or other adverse
consequences, including, but not limited to, diversion of resources, damage to
the Company's reputation and increased litigation, any of which could have a
material adverse effect on the Company's business operations or financial
statements.
The Company's year 2000 compliance is also dependent on external parties which
exposes it to risks including, but not limited to, loss of local or regional
utilities, loss of telecommunications services and delays or cancellations by
suppliers. Because of the Company's dependence upon certain external parties
being year 2000 compliant on a timely basis (including infrastructure
providers), there can be no assurance that the Company's preparations will
prevent a material adverse effect on its business, results of operations or
financial condition.
Contingency Plans
The Company maintains manual procedures in the normal course of business that
may be utilized if the Company, or an external party upon which the Company is
dependent, is unable to achieve year 2000 readiness. Although the Company has
not formalized a comprehensive contingency plan specific to the Year 2000 Issue,
the Company's year 2000 preparations are ongoing and its ultimate scope, as well
as the consideration of formalized contingency plans, will continue to be
evaluated as new information becomes available.
See "Special Note Regarding Forward-Looking Information."
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow, Capital Expenditures and Financing
Due to the nature of its contract food service business, the Company is able to
maintain a relatively steady cash flow. Cash flow from operations has
historically financed MMSI's capital investments. MMSI plans for 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."
In July 1998, the Company replaced its $50 million credit facility with a $75
million revolving credit line from four financial institutions. The new credit
line has a variable interest rate based on LIBOR and variable interest payment
requirements. The principal is due no later than July 2, 2003. The initial
amount borrowed was $35.4 million, all of which was used to repay the balance
due on the $50 million and $5 million credit facilities.
In June 1998, the Company entered into two interest rate swap agreements with
notional amounts of $10 million each to reduce the impact of changes in the
interest rates on its floating rate debt and to exchange floating rate for fixed
rate payments on certain debt. These swap agreements effectively convert $20
million of variable rate borrowings to fixed rates of approximately 5.6%.
Interest expense is adjusted for the differential to be paid or received as
interest rates change. The effect of such adjustments on interest expense has
not been significant. The Company's swap agreements expose it to market and
credit risks which are inherent in all interest rate swaps. Counterparties to
these agreements are major financial institutions. Consequently, the Company
believes that the credit risk of its swap agreements is minimal. The Company
does not believe that any reasonably likely change in near-term interest rates
would have a material adverse effect on the future earnings or cash flows of the
Company.
As a result of the new credit facility, the related swap agreements, the
Company's strong financial position, and the general decline in LIBOR, the
Company's effective interest rate was decreased from approximately 6.65% in
fiscal year 1998 to 5.75% in fiscal year 1999.
On May 31, 1999, MMSI had $49.4 million outstanding in total debt, an increase
of $12.7 million from the prior year.
Trade accounts receivable make up the majority of MMSI'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.
MMSI requires capital principally for acquisitions, new accounts, equipment
replacement and remodeling of existing accounts and the construction of Advanced
Culinary Centers(TM). Cash provided by operating activities approximated $8.1
million for fiscal year 1999. Capital expenditures were approximately $8.4
million, a decrease of $0.5 million compared to the prior year period. Capital
expenditures are anticipated to total $10 million to $15 million in fiscal year
2000. Cash used for acquisitions and related costs was $6.9 million for fiscal
year 1999, a decrease of $0.6 million compared to the prior year. MMSI plans to
finance this amount primarily through internally generated funds. See "Special
Note Regarding Forward-Looking Information."
Stock Repurchase Program
In March 1998, MMSI's Board of Directors authorized a program to repurchase up
to 1,000,000 shares of the Company's Common Stock. During fiscal year 1999,
777,210 shares of the Company's stock were purchased at an aggregate cost of
$14.5 million. Subsequent to year end, in June 1999, the Company's Board of
Directors authorized the repurchase of an additional 1,000,000 shares.
Working Capital
As of May 31, 1999, working capital was $15.7 million while the current ratio
was 1.6:1. Working capital increased $8.3 million and the current ratio
increased 0.4 when compared to the prior year.
Dividends
MMSI paid approximately $1.9 million in cash dividends to stockholders during
fiscal year 1999. The Company plans to pay annual dividends of approximately
$1.9 million in the next fiscal year. See "Special Note Regarding
Forward-Looking Information."
KNOWN EVENTS, UNCERTAINTIES AND TRENDS
Impact of Inflation
In the past, MMSI 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 MMSI's ability to recover such
cost increases in their entirety. Historically, the effects of inflation on
MMSI's net income have not been materially adverse. See "Special Note Regarding
Forward-Looking Information."
Management's Outlook
Management believes that growth will continue to occur through sales to health
care systems and senior living communities, and through expanding services at
the Company's existing accounts and the Advanced Culinary Centers(TM). Morrison
Healthcare Food Services, the Company's health care division, believes that
pressures on hospitals and health care systems to outsource food services are
increasing due to the Balanced Budget Act and managed care. Management believes
these pressures will aid the continued growth of MMSI. The Company also expects
growth to come from its newly created Morrison Senior Dining division.
Management believes growth in this division will result primarily from focused
expertise and the ability to provide unique dining solutions for senior living
communities.
MMSI serves some of the largest and most prominent hospitals, health care
systems, and senior living communities in the United States. The Company strives
to maintain its long-term partnerships with these facilities and communities by
continuing to increase quality and lower costs. During the upcoming year, MMSI
believes that additional investments in its team members and programs designed
to enhance its aggressive sales drive will add new clients while building
stronger relationships with current accounts. By focusing on its market of
hospitals and health care systems and expanding into the senior living market,
the Company believes that it is strategically positioned for strong 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, impact of the Year
2000, future capital expenditures and borrowings, the payment of dividends, the
impact of inflation and the effects of Management's strategies for growth. 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; impact of the year 2000; and laws and regulations
affecting labor and employee benefit costs.
Consolidated Statements of Income
Morrison Management Specialists, Inc. and Subsidiaries
For the Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------
(In thousands, except per share data) May 31, 1999 May 31, 1998 May 31, 1997
- -----------------------------------------------------------------------------------------------------
Revenues........................................ $324,968 $250,371 $221,011
Operating expenses.............................. 270,637 207,265 181,233
-----------------------------------------------------
Gross Profit.................................... 54,331 43,106 39,778
Selling, general and administrative expenses.... 29,776 22,919 21,395
-----------------------------------------------------
24,555 20,187 18,383
Interest expense, net of interest income of
$396 in 1999, $406 in 1998, and $687 in 1997.. 2,358 1,122 807
-----------------------------------------------------
Income before provision for income taxes........ 22,197 19,065 17,576
Provision for federal and state income taxes.... 8,657 7,513 7,290
-----------------------------------------------------
Net income...................................... $ 13,540 $ 11,552 $ 10,286
=====================================================
Earnings per share - Basic...................... $ 1.14 $ 0.97 $ 0.87
Earnings per share - Diluted.................... $ 1.12 $ 0.95 $ 0.87
Weighted average common shares - Basic.......... 11,883 11,938 11,785
Net dilutive effect of stock options and
nonvested stock awards........................ 222 254 56
-----------------------------------------------------
Weighted average common shares - Diluted........ 12,105 12,192 11,841
=====================================================
The accompanying notes are an integral part of the financial statements.
Consolidated Balance Sheets
Morrison Management Specialists, Inc. and Subsidiaries
(In thousands) May 31, 1999 May 31, 1998
- --------------------------------------------------------------------------------
Assets
Current assets:
Cash and short-term investments............. $ 2,780 $ 5,720
Receivables:
Trade, less allowance for doubtful
accounts of $712 at May 31, 1999 and
$887 at May 31, 1998..................... 27,804 21,381
Other...................................... 6,231 6,372
Inventories................................. 2,940 2,936
Prepaid expenses............................ 2,312 1,262
Deferred income tax benefits................ 1,747 1,949
-----------------------------------
Total current assets......................... 43,814 39,620
Property and equipment - at cost:
Buildings and improvements.................. 5,931 3,425
Equipment................................... 24,923 16,037
Construction in progress.................... 121 4,729
-----------------------------------
30,975 24,191
Less accumulated depreciation............... 12,376 10,232
-----------------------------------
18,599 13,959
Deferred income tax benefits................. 2,947 2,503
Cost in excess of net assets acquired, net... 18,331 12,097
Notes receivable, less current portion....... 3,626 3,729
Other assets................................. 15,610 12,466
-----------------------------------
Total assets................................. $102,927 $84,374
===================================
Liabilities and Stockholders' Equity:
Current liabilities:
Accounts payable............................ $15,091 $14,545
Accrued liabilities:
Taxes, other than income taxes............. 2,187 1,818
Payroll and related costs.................. 7,322 6,395
Insurance.................................. 1,909 2,289
Other...................................... 1,499 2,207
Current portion of long-term debt........... 136 5,022
-----------------------------------
Total current liabilities.................... 28,144 32,276
Long-term debt............................... 49,305 31,690
Other liabilities............................ 10,915 10,188
Stockholders' equity:
Common stock, $0.01 par value (authorized
100,000 shares; issued: 1999 - 11,977
shares, 1998 - 12,379 shares).............. 120 124
Capital in excess of par value.............. 3,324 12,859
Unearned ESOP shares........................ (2,806) (3,195)
Deferred Compensation Plan liability
payable in Company stock................... 1,518 1,848
Retained earnings............................ 13,925 2,322
-----------------------------------
16,081 13,958
Less cost of treasury/Company stock
held by Deferred Compensation Plan......... 1,518 3,738
-----------------------------------
Total stockholders' equity................... 14,563 10,220
-----------------------------------
Total liabilities and stockholders' equity... $102,927 $84,374
===================================
The accompanying notes are an integral part of the financial statements.
Consolidated Statements of Cash Flows
Morrison Management Specialists, Inc. and Subsidiaries
For the Fiscal Year Ended
- -----------------------------------------------------------------------------------------------
(In thousands) May 31, 1999 May 31, 1998 May 31, 1997
- -----------------------------------------------------------------------------------------------
Operating activities:
Net income....................................... $ 13,540 $ 11,552 $ 10,286
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 3,254 2,538 1,992
Amortization of intangibles...................... 860 377 153
Deferred income taxes............................ (182) (811) 514
(Gain)/loss on disposition of assets............. (112) (19) 29
Changes in operating assets and liabilities:
Receivables.................................... (5,949) (6,359) 2,486
Inventories.................................... (4) (246) (24)
Prepaid and other assets....................... (4,141) (3,420) 241
Accounts payable, accrued and other
liabilities.................................. 855 3,430 4,699
---------------------------------------------
Net cash provided by operating activities........ 8,121 7,042 20,376
---------------------------------------------
Investing activities:
Purchases of property and equipment.............. (8,389) (8,850) (4,843)
Proceeds from disposal of assets................. 799 268 459
Acquisition of businesses, net of cash acquired.. (6,859) (7,464) 0
---------------------------------------------
Net cash used by investing activities........... (14,449) (16,046) (4,384)
---------------------------------------------
Financing activities:
Net proceeds from long-term debt................. 18,323 21,690 0
Principal payments on long-term debt............. (7,309) (5,011) (11)
Net change in short-term borrowings.............. 1,570 0 (6,760)
Proceeds from exercise of stock options and
issuance of stock, net of income tax benefits... 6,766 3,054 679
Dividends paid................................... (1,937) (9,877) (9,725)
Payments to acquire Treasury Stock............... (14,539) (1,891) 0
ESOP shares released............................. 514 412 84
---------------------------------------------
Net cash provided/(used) by financing activities. 3,388 8,377 (15,733)
---------------------------------------------
(Decrease)/Increase in cash and
short-term investments......................... (2,940) (627) 259
Cash and short-term investments at the
beginning of the year........................ 5,720 6,347 6,088
---------------------------------------------
Cash and short-term investments at the
end of the year.............................. $ 2,780 $ 5,720 $ 6,347
=============================================
Supplemental disclosure of cash flow
information-cash paid for:
Interest........................................ $ 2,924 $ 1,696 $ 1,190
Income taxes.................................... $ 9,386 $ 7,933 $ 8,000
The accompanying notes are an integral part of the financial statements.
Consolidated Statements of Stockholders' Equity
Morrison Management Specialists, Inc. and Subsidiaries
For the Fiscal Year Ended
---------------------------------------------------------------------
(In thousands, except per share data) May 31, 1999 May 31, 1998 May 31, 1997
---------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
---------------------------------------------------------------------
Common Stock
Beginning balance..................................... 12,379 $ 124 12,165 $ 122 11,791 $ 118
Shares issued to ESOP................................. 0 0 0 0 255 3
Shares issued under Stock Incentive Plans............. 470 5 214 2 119 1
Cancellation of Treasury Stock........................ (872) (9) 0 0 0 0
---------------------------------------------------------------------
Ending balance............................... 11,977 120 12,379 124 12,165 122
---------------------------------------------------------------------
Capital in Excess of Par Value
Beginning balance..................................... 12,859 9,717 5,441
Shares issued to ESOP................................. 0 0 3,592
Shares issued under Stock Incentive Plans,
net of income tax benefits........................... 6,761 3,052 678
Shares released from ESOP............................. 125 90 6
Cancellation of Treasury Stock........................ (16,421) 0 0
---------------------------------------------------------------------
Ending balance............................... 3,324 12,859 9,717
---------------------------------------------------------------------
Unearned ESOP Shares
Beginning balance..................................... (226) (3,195) (249) (3,517) 0 0
Shares issued to ESOP................................. 0 0 0 0 (255) (3,595)
Shares released from ESOP............................. 28 389 23 322 6 78
----------------------------------------------------------------------
Ending balance............................... (198) (2,806) (226) (3,195) (249) (3,517)
----------------------------------------------------------------------
Deferred Compensation Plan liability
payable in Company stock
Beginning balance..................................... 1,848 1,341 929
Net change ........................................... (330) 507 412
-----------------------------------------------------------------------
Ending balance............................... 1,518 1,848 1,341
-----------------------------------------------------------------------
Retained Earnings
Beginning balance..................................... 2,322 647 86
Net income............................................ 13,540 11,552 10,286
Cash dividends of $0.16 per share
in fiscal 1999 and $0.82 per share
in fiscal 1998 and 1997.............................. (1,937) (9,877) (9,725)
-----------------------------------------------------------------------
Ending balance............................... 13,925 2,322 647
-----------------------------------------------------------------------
Treasury/Company Stock Held By Deferred
Compensation Plan
Beginning balance..................................... (199) (3,738) (95) (1,341) (62) (929)
Cancellation/(Purchase) of Treasury Stock............. 95 1,891 (95) (1,891) 0 0
Sale/(Purchase) of Company Stock - held by
Deferred Compensation Plan.......................... 19 329 (9) (506) (33) (412)
------------------------------------------------------------------------
Ending balance............................... (85) (1,518) (199) (3,738) (95) (1,341)
------------------------------------------------------------------------
Total Stockholders' Equity............................ $ 14,563 $10,220 $6,969
========================================================================
The accompanying notes are an integral part of the financial statements.
Notes to Consolidated Financial Statements
Morrison Management Specialists, Inc. and Subsidiaries
1. Summary of Significant Accounting Policies
Basis of Presentation
On March 9, 1996, Morrison Health Care, Inc. and Subsidiaries ("MHCI") was spun
off (the "Distribution") from Morrison Restaurants Inc. ("MRI"). Effective June
30, 1999 MHCI changed its name to Morrison Management Specialists, Inc. (the
"Company" or "MMSI"). Prior to the Distribution, MMSI was a wholly owned health
care contract food and nutrition business of MRI. The accompanying financial
statements reflect MMSI as a stand-alone entity.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires Management to make estimates and assumptions that
affect the reported amounts of the assets and liabilities at the date of the
financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risk
The Company primarily competes in the health care food and nutrition services
and senior living industries, and encounters significant competition in the
markets in which it operates. The length of contract varies by customer.
Concentration of credit risk with respect to accounts receivable are limited due
to the large number of customers that make up the Company's customer base, thus
spreading trade credit risk. The Company maintains reserves for potential
uncollectible amounts which, in the aggregate, have not exceeded Management's
expectations.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of MMSI
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Fiscal Year
Effective with the fiscal year 1998, the Company's fiscal year ends on May 31.
The fiscal year ended May 31, 1997 comprised of 52 weeks. Starting with fiscal
year 1998, the Company changed from a 52-53 week fiscal year to a 12-month
fiscal year ending 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.
Property and Equipment and Depreciation
Property and equipment are stated at cost and are being depreciated for
financial reporting purposes using the straight-line method over the estimated
useful lives of the assets. Annual rates of depreciation generally range from 3%
to 5% for buildings and from 10% to 34% for kitchen and other equipment. Costs
incurred in connection with the construction at major facilities or of Advanced
Culinary Centers(TM) are capitalized as construction in progress until such
facilities or centers become operational. Interest is capitalized in connection
with these capitalized construction costs. The capitalized interest is recorded
as part of the asset to which it relates and is amortized over the asset's
estimated useful life. In fiscal 1999 and 1998, $219,000 and $127,000 of
interest was capitalized, respectively. No interest was capitalized in fiscal
1997.
Property and equipment are periodically reviewed for impairment based on an
assessment of future operations. The Company records impairment losses on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the asset's carrying amount.
Intangible Assets
Excess of costs over the fair value of net assets acquired with purchased
businesses generally is amortized on a straight-line basis over periods ranging
from 10 to 40 years. At May 31, 1999 and May 31, 1998, the accumulated
amortization for costs in excess of net assets acquired was $2.8 million and
$1.9 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 generally
performs its services pursuant to either management fee or profit and loss
contracts. While actual services performed are the same, revenue recognition
varies by type of contract. In a management fee account, MMSI manages the
services and facilities, but the client is responsible for all or nearly all the
costs. Revenue and fees are recognized for the amount of the contractually
agreed-upon management fee and any earned incentives plus the amount of any
expenses or employee payroll costs paid by the Company and charged back to the
client. In a profit and loss account, MMSI assumes the risk of profit or loss
for the food service operation. For such accounts, the amount of revenue
reported is the actual revenue generated from meals served to patients, client
employees and visitors.
Income Taxes
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
Stock options are recorded in accordance with Accounting Principles Board
Opinion ("APB") No. 25, with pro forma disclosures of net income and earnings
per share as if Statement of Financial Accounting Standards ("SFAS") No. 123 had
been applied.
New Accounting Standards
In 1997, the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131,
"Disclosures about Segments of an Enterprise and Related Information." In 1998,
the Financial Accounting Standards Board issued Statements of Financial
Accounting Standards No. 132, "Employer's Disclosures about Pensions and other
Postretirement Benefits." These statements, which were effective for fiscal
years beginning after December 15, 1997, expand or modify disclosures and had no
impact on the Company's consolidated financial position, results of operations
or cash flow. In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments. The statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000 and will be adopted by the Company in fiscal 2002.
Based upon the Company's current limited use of derivative instruments and
hedging activities, Management does not believe the statement will have a
material impact on the Company's consolidated financial position, results of
operations or cash flows.
Pre-Opening Expenses
Pre-opening costs, such as salaries, personnel training costs and other expenses
of opening a new account, are often reimbursed by the client. In circumstances
when they are not reimbursed, these costs are charged to expense as incurred.
Financial Instruments
The Company's financial instruments at May 31, 1999, May 31, 1998, and May 31,
1997 consisted of cash and short-term investments, accounts and notes
receivable, and long-term debt. The fair value of these financial instruments
approximated the carrying amounts reported in the balance sheets. Cash is
deposited in financial institutions which carry FDIC insurance. From time to
time, the cash balances in these institutions exceed the insured amount.
Management does not believe this is a significant risk to the Company.
The Company uses interest rate swap agreements to manage interest rate
exposures. The Company specifically designates these agreements as hedges of
debt instruments and recognizes interest differentials as adjustments to
interest expense in the period the differentials occur.
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.
Reclassification
Certain prior year amounts and balances have been reclassified to conform to the
current year presentation.
2. Acquisitions
In October 1998, the Company acquired all of the outstanding common stock of
Philadelphia-based Culinary Service Network, Inc. In March 1998, the Company
acquired substantially all of the assets of Chicago-based Spectra Services, Inc.
In January 1998, the Company acquired all of the outstanding common stock of
Phoenix-based Drake Management Services, Inc. Each of the companies, which
provide dining services in the senior living market, were acquired for cash,
with a total acquisition price of $12.1 million. Contingent payments may be
earned by sellers in future years. The acquisitions were accounted for using the
purchase method and the resulting goodwill is being amortized over 20 years
using the straight-line method. The operating results of these companies have
been included from their respective acquisition dates. Pro forma results are not
presented for these acquisitions as they are not significant during the periods
presented.
3. Long-Term Debt
Long-term debt consists of the following:
(In thousands) Fiscal Year Ended
-----------------------------------
May 31, 1999 May 31, 1998
-----------------------------------
Variable rate revolving
credit facility due in full 7/2/03........ $46,555 $17,500
Variable rate demand lines
of credit................................ 0 4,190
Term note................................... 0 15,000
Other notes and mortgages................... 2,886 22
-----------------------------------
49,441 36,712
Less current maturities..................... 136 5,022
-----------------------------------
$49,305 $31,690
===================================
In July 1998, the Company entered into a $75 million credit facility with four
financial institutions. This credit facility replaced the previous $50 million
credit facility. The new credit line has a variable interest rate based upon
LIBOR and variable interest payment requirements. The principal is due no later
than July 2, 2003. Commitment fees of 0.25% per annum are payable on the unused
portion of the credit facility. At May 31, 1999, the Company had $46.6 million
in borrowings under the agreement, with a weighted average variable rate of
approximately 5.8%.
In June 1998, the Company entered into two interest rate swap agreements to
reduce the impact of changes in the interest rates on its floating rate debt and
to exchange floating rate for fixed rate payments at certain debt. Under theses
agreements, with a notional amount of $20 million at May 31, 1999, MMSI will pay
the counterparties interest at a weighted average fixed interest rate of
approximately 5.6% at May 31, 1999, and the counterparties will pay MMSI
interest at a variable rate equal to LIBOR. The differential to be paid or
received is accrued as interest rates change and is recognized as an adjustment
to the interest expense related to the debt. The related amount payable or
receivable from counterparties is included in trade and other receivables or
payables. The fair value of such swap agreements was not significant at May 31,
1999.
In addition, the Company had uncommitted demand lines of credit amounting to $5
million. At May 31, 1999, the Company did not have any borrowings outstanding
under these agreements.
The credit facility contains certain restrictions on incurring additional
indebtedness and certain funded debt, and fixed charge coverage requirements.
The Company was in compliance with all such covenants at May 31, 1999.
4. Income Taxes
The components of income tax expense are as follows:
(In thousands) For the Fiscal Year Ended
---------------------------------------
May 31, 1999 May 31, 1998 May 31,1997
---------------------------------------
Current:
Federal................................. $7,301 $6,875 $5,960
State................................... 1,538 1,449 816
---------------------------------------
8,839 8,324 6,776
Deferred:
Federal................................. (150) (670) 440
State................................... ( 32) (141) 74
---------------------------------------
(182) (811) 514
---------------------------------------
$8,657 $7,513 $7,290
=======================================
Deferred tax assets and liabilities are comprised of the following:
(In thousands) Fiscal Year Ended
---------------------------
May 31, 1999 May 31, 1998
---------------------------
Deferred tax assets:
Employee benefits....................... $4,484 $4,346
Insurance reserves...................... 1,093 1,366
Bad debt reserve........................ 292 349
Other................................... 907 487
---------------------------
Total deferred tax assets............... 6,776 6,548
Deferred tax liabilities:
Depreciation............................ 517 282
Retirement plans........................ 451 479
Prepaid deductions...................... 157 131
Other................................... 957 1,204
---------------------------
Total deferred tax liabilities......... 2,082 2,096
---------------------------
Net deferred tax assets............... $4,694 $4,452
===========================
SFAS No. 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.
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, May 31, May 31,
1999 1998 1997
-------------------------------
Statutory federal income taxes.......... $7,769 $6,673 $6,152
State income taxes net of
federal income tax benefit............ 839 853 804
Other, net.............................. 49 (13) 334
-------------------------------
$8,657 $7,513 $7,290
===============================
The effective income tax rate was 39.0%, 39.4%, and 41.5% in fiscal years 1999,
1998, and 1997, respectively. The higher effective income tax rate in fiscal
year 1997 was due to higher nondeductible expenses.
5. Employee Benefit Plans
Salary Deferral Plan
Under the Company's 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. Generally, after three years of
service, 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 $515,000, $414,000 and $257,000 for fiscal years 1999, 1998 and
1997, respectively.
During fiscal year 1997, the Company began sponsorship of an employee stock
ownership (ESOP) feature covering participants in the Salary Deferral Plan. The
Company loaned the Plan $3.6 million (with outstanding balances of $2.8 million
and $3.2 million at May 31, 1999 and May 31, 1998, respectively) 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, 1999 and May 31, 1998 was approximately
$3,885,000 and $3,874,000, respectively.
Deferred Compensation Plan
The Company maintains the Deferred Compensation Plan for certain selected
employees. The provisions of this Plan are similar to those of the Salary
Deferral Plan. Differences include which employees are eligible to participate
and the limitations on the amount of deferrals that may be elected by
participants. The Company's contributions under the Plan approximated $112,000,
$104,000 and $125,000, for fiscal years 1999, 1998 and 1997, 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 of the rabbi trust are recorded in
the Company's financial statements. Assets and liabilities of the Plan
approximated $6,428,000 and $6,043,000 at May 31, 1999 and 1998, respectively,
and include $1,518,000 and $1,848,000, respectively, of MMSI common stock, which
is accounted for as treasury stock at cost.
Retirement Plan
The Retirement Plan was frozen by Ruby Tuesday, Inc. ("RTI") (formerly Morrison
Restaurants Inc.) on December 31, 1987. The Company is a joint sponsor of the
Retirement Plan. 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
fiscal years 1999, 1998 or 1997.
Executive Supplemental Pension Plan
Under the Company's Executive Supplemental Pension Plan, employees with a salary
of at least $100,000 for five consecutive years in a qualifying position become
eligible to earn supplemental retirement payments based upon salary and length
of service, reduced by Social Security benefits and amounts otherwise
receivable under the Retirement Plan.
Management Retirement Plan
Under the Company's Management Retirement Plan, individuals that have 15 years
of credited service (as defined by the Company) and earn an average annual
compensation of at least $40,000 for the immediately preceding three years
become participants. Participants receive benefits based upon salary and length
of service, 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
various life insurance contracts on some of the participants. The cash value of
these policies, net of loans, was $2,204,000 at May 31, 1999 and $1,897,000 at
May 31, 1998. The policies have been placed in a rabbi trust which will hold the
policies and death benefit proceeds as they are received.
The following table reconciles the change in the pension benefit obligation and
the fair market value of plan assets and presents the components of pension
expense, the funded status and the amounts recognized in the Company's
consolidated financial statements for the Retirement Plan, the Executive
Supplemental Pension Plan and the Management Retirement Plan.
5. Employee Benefit Plans (continued)
(In thousands) Benefit Obligation Exceeds Assets -
Assets Exceed Benefit Obligation - Executive Supplemental Pension Plan
Retirement Plan and Management Retirement Plan
---------------------------------- ------------------------------------
For the Fiscal Year Ended May 31, May 31, May 31, May 31, May 31, May 31,
1999 1998 1997 1999 1998 1997
---------------------------------- ------------------------------------
Components of net periodic
pension (income)/expense:
Service cost....................... $ 0 $ 0 $ 0 $ 140 $ 108 $ 81
Interest cost...................... 274 347 341 322 270 230
Expected return on plan assets..... (342) (1,046) (700) 0 0 0
Amortization and deferral.......... (8) 629 341 184 149 122
---------------------------------- -------------------------------------
Net periodic pension
(income)/expense................. $ (76) $ (70) $ (18) $ 646 $ 527 $ 433
================================== =====================================
Change in benefit obligation:
Benefit obligation at
beginning of year................ $3,895 $4,210 $ 4,318 $ 3,246
Service cost................... 0 0 140 108
Interest cost.................. 274 347 322 270
Actuarial (gains) losses....... 588 (23) 524 730
Benefit payments............... (594) (639) (43) (36)
------------------- ------------------------
Benefit obligation at end of year.. $4,163 $3,895 $ 5,261 $ 4,318
=================== ========================
Change in fair value of plan
assets:
Fair value at beginning of year.... $4,425 $4,859 $ 0 $ 0
Transfer of retiree liability.... 0 (840) 0 0
Benefit payments................. (593) (640) 0 0
Actual return on plan assets..... 266 486 0 0
Gains on investments............. 76 560 0 0
------------------- ------------------------
Fair value at end of year.......... $4,174 $4,425 $ 0 $ 0
=================== ========================
Funded (unfunded) status........... $ 11 $ 530 $(5,261) $(4,318)
Unrecognized prior service cost.... 0 0 207 276
Unrecognized net losses............ 1,071 407 1,383 913
Unrecognized net transition
obligation....................... 211 280 456 516
Additional minimum liability....... 0 0 (291) (658)
------------------- ------------------------
Prepaid (accrued) benefit cost..... $1,293 $1,217 $(3,506) $(3,271)
=================== ========================
The weighted average discount rate for all three plans was 7.5%, 7.5% and 8.25%
for fiscal years 1999, 1998 and 1997, respectively. The rate of increase in
compensation levels for the Executive Supplemental Pension Plan and the
Management Retirement Plan was 4% for all three years presented. The expected
long-term rate of return on plan assets for the Retirement Plan was 10% for all
three years. The projected benefit obligation and the accumulated benefit
obligation for the Executive Supplemental Pension Plan and the Management
Retirement Plan, both of which exceed the fair value of plan assets, were
$5,261,000 and $3,463,000, respectively, as of May 31, 1999 and $4,318,000 and
$2,889,000, respectively, as of May 31, 1998. For the Retirement Plan, the
projected benefit obligation equaled the accumulated benefit obligation and was
less than the fair value of plan assets as of May 31, 1999 and May 31, 1998.
6. 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 following table reconciles the change in the postretirement benefit
obligation and the fair market value of plan assets and presents the components
of net periodic postretirement benefit expense, the funded status and the
amounts recognized in the Company's consolidated financial statements:
(In thousands) -----------------------------------------
For the Fiscal Year Ended May 31, 1999 May 31, 1998 May 31, 1997
-----------------------------------------
Components of net periodic
postretirement expense:
Service cost.......................... $ 8 $ 7 $ 7
Interest cost......................... 136 147 140
Amortization and deferral............. 17 4 23
---------------------------------------
Net periodic postretirement expense... $ 161 $ 158 $ 170
=======================================
Change in benefit obligation:
Benefit Obligation at
beginning of year................... $ 1,919 $ 1,934
Service cost...................... 8 7
Interest cost..................... 136 147
Actuarial (gains) losses.......... - 41
Benefit payments.................. (210) (210)
--------------------------
Benefit obligation at end of year..... $ 1,853 $ 1,919
==========================
Change in fair value of plan assets:
Fair Value at beginning of year...... $ 0 $ 0
Employer contributions............. 210 210
Benefit payments................... (210) (210)
--------------------------
Fair value at end of year............. $ 0 $ 0
==========================
Funded (unfunded) status.............. $ (1,853) $ (1,919)
Unrecognized prior service cost....... (117) (138)
Unrecognized net losses............... 466 504
--------------------------
Accrued postretirement benefit cost... $ (1,504) $ (1,553)
==========================
The weighted average discount rate used for measuring the accumulated
postretirement benefit obligation was 7.5%, 7.5% and 8.25% for fiscal years
1999, 1998 and 1997, respectively. SFAS No. 132 requires the disclosure of the
impact of a one percent increase and a one percent decrease in the assumed
health care cost trend rates on the accumulated postretirement benefit
obligation and the service and interest costs components of net periodic
postretirement benefit costs. This benefit is not subject to health care
inflation and therefore, there is no impact from a one percent increase or
decrease in the trend rates.
7. 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, 1999. 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, at an exercise price of $75
per one one-thousandth of a share, subject to adjustment. Under certain
circumstances, the rights will entitle the holders thereof to receive, upon
payment of the exercise price, in lieu of preferred shares, shares of common
stock with a market value equal to twice the exercise price. The rights will
expire on March 1, 2006 and may be redeemed prior to ten days after the
acquisition by any person or group of 20% or more of the Company's common stock
without the consent of the Company.
8. 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 Company's 1996 Stock Incentive Plan and
1996 Non-Executive Stock Incentive Plan (the Plans) are both 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-year or ten-year terms and become
exercisable at the end of two or three years of continued employment. At May 31,
1999 and 1998, the Company had reserved a total of 1,602,441 and 1,704,376
shares, respectively, of common stock under the Company's 1996 Stock Incentive
Plan.
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, 1999 and 1998, the Company had reserved a total of
1,837,204 and 1,464,820 shares, respectively, of common stock for this Plan.
The Company's 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 at least 60% of their retainer to purchase shares of
the Company until they reach the target ownership level. 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. In addition, under the
Plan, an option to purchase 5,000 shares is granted to each director upon his
initial election to the Board of Directors and options to purchase 2,000 shares
each are granted to directors upon re-election to the Board of Directors. All
options awarded under the Plan have been at the prevailing market price at the
time of grant. 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, 1999 and 1998, the Company had reserved 77,619 and 81,917
shares, respectively, of common stock for this Plan.
Under the terms of the Distribution, holders of MRI stock options received
adjusted, substitute options in MMSI, Morrison Fresh Cooking, Inc. ("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 SFAS 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 SFAS 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 fiscal years 1999, 1998 and 1997,
respectively: risk-free interest rates of 5.5%, 5.7% and 6.6%; volatility
factors of .17, .24 and .19; dividend yields of 0.7%, 0.9% and 4.3%; and
weighted average expected lives of 7.0, 7.5 and 7.6 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:
For the Fiscal Year Ended
------------------------------------
May 31, May 31, May 31,
(In thousands, except per share data) 1999 1998 1997
- --------------------------------------------------------------------------------
Pro forma net income - Basic and Diluted... $12,224 $10,771 $9,618
Pro forma earnings per share - Basic....... $ 1.03 $ 0.90 $ 0.82
Pro forma earnings per share - Diluted..... $ 1.02 $ 0.89 $ 0.82
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts. SFAS 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, 1999, May 31, 1998 and May 31, 1997 follows:
May 31, 1999 May 31, 1998 May 31, 1997
---------------------- --------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Options Exercise Options Exercise
(000) Price (000) Price (000) Price
----------------------- --------------------- ----------------------
Outstanding - beginning of year.. 2,246 $16.45 2,307 $15.82 2,368 $15.97
Granted.......................... 571 17.52 357 17.76 493 13.21
Exercised........................ (634) 14.68 (274) 12.05 (200) 9.69
Forfeited........................ (261) 21.06 (144) 15.55 (354) 16.78
- ------------------------------------------------------------------------------------------------------
Outstanding - end of year........ 1,922 $16.72 2,246 $16.45 2,307 $15.82
======================================================================================================
Exercisable at end of year....... 1,039 $16.52 1,110 $17.09 1,068 $15.95
======================================================================================================
Weighted average fair value of
options granted during the year.. $ 5.34 $ 6.66 $ 1.89
======================================================================================================
The following table summarizes information about stock options outstanding at
the end of:
May 31, 1999
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Exercisable Exercise
Prices (000) Price Life (000) Price
- -------------------------------------------------------------------------------
$ 8.98 - $14.38... 513 $13.56 5.59 341 $13.30
$16.50 - $16.50... 523 $16.50 2.14 498 $16.50
$16.56 - $17.13... 504 $17.10 8.80 14 $17.05
$17.21 - $31.59... 382 $20.76 5.17 186 $22.40
- -------------------------------------------------------------------------------
1,922 $16.72 5.41 1,039 $16.52
===============================================================================
May 31, 1998
Options Outstanding Options Exercisable
----------------------------------- ----------------------
Weighted
Weighted Average Weighted
Range of Number Average Remaining Number Average
Exercise Outstanding Exercise Contractual Exercisable Exercise
Prices (000) Price Life (000) Price
- -------------------------------------------------------------------------------
$ 8.98 - $14.38... 567 $12.77 5.70 187 $11.93
$14.50 - $16.38... 469 $14.78 1.83 432 $14.68
$16.50 - $16.50... 578 $16.50 3.11 110 $16.50
$16.56 - $31.59... 632 $20.94 4.48 381 $22.51
- -------------------------------------------------------------------------------
2,246 $16.45 3.88 1,110 $17.09
===============================================================================
9. Contingencies
At May 31, 1999, the Company was contingently liable for approximately $7.4
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. These
agreements are 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 1999 or 1998.
11. Supplemental Quarterly Financial Data (Unaudited)
Quarterly financial results for the years ended May 31, 1999 and May 31, 1998
are summarized below. All quarters are composed of three months.
(In thousands, except per share First Second Third Fourth
data) Quarter Quarter Quarter Quarter Total
===================================================
For the fiscal year ended
May 31, 1999
Revenues...........................$72,246 $77,833 $84,085 $90,804 $324,968
===================================================
Gross profit*......................$11,597 $13,255 $13,771 $15,708 $ 54,331
===================================================
Income before income taxes.........$ 5,255 $ 5,620 $ 5,251 $ 6,071 $ 22,197
Provision for federal and state
income taxes..................... 2,103 2,196 2,021 2,337 8,657
---------------------------------------------------
Net income.........................$ 3,152 $ 3,424 $ 3,230 $ 3,734 $ 13,540
===================================================
Earnings per share:
Basic............................$ 0.26 $ 0.28 $ 0.28 $ 0.32 $ 1.14
Diluted..........................$ 0.26 $ 0.28 $ 0.27 $ 0.31 $ 1.12
For thefiscal year ended
May 31, 1998
Revenues...........................$57,754 $60,646 $63,337 $68,634 $250,371
===================================================
Gross profit*......................$10,027 $10,688 $10,541 $11,850 $ 43,106
===================================================
Income before income taxes.........$ 4,674 $ 5,035 $ 4,292 $ 5,064 $ 19,065
Provision for federal and state
income taxes..................... 1,846 1,989 1,695 1,983 7,513
---------------------------------------------------
Net income.........................$ 2,828 $ 3,046 $ 2,597 $ 3,081 $ 11,552
===================================================
Earnings per share:
Basic............................$ 0.24 $ 0.25 $ 0.22 $ 0.26 $ 0.97
Diluted..........................$ 0.24 $ 0.25 $ 0.21 $ 0.25 $ 0.95
*The Company defines gross profit as revenue less operating expenses.
Report of Independent Auditors
Morrison Management Specialists, Inc. and Subsidiaries
Stockholders and Board of Directors
Morrison Management Specialists, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Morrison
Management Specialists, Inc. and Subsidiaries (formerly Morrison Health Care,
Inc.) as of May 31, 1999 and May 31, 1998, 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, 1999. 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
Management Specialists, Inc. and Subsidiaries at May 31, 1999 and May 31, 1998,
and the consolidated results of their operations and their cash flows for each
of the three fiscal years in the period ended May 31, 1999, in conformity with
generally accepted accounting principles.
/s/ERNST & YOUNG LLP
Atlanta, Georgia
June 23, 1999
Common Stock Market Prices and Dividends
Morrison Management Specialists, 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 1999 and 1998.
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------------------------------------
1999 market price per share:
High.............................$19.875 $18.500 $20.125 $19.938
Low..............................$16.875 $16.000 $18.125 $17.500
1998 market price per share:
High.............................$17.250 $19.750 $20.188 $22.875
Low..............................$15.375 $15.750 $17.063 $16.250
Cash dividends on the common stock of Morrison Management Specialists, Inc. were
paid during each quarter of fiscal years 1999 and 1998 as follows:
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
---------------------------------------------------
1999 cash dividends per share......$0.040 $0.040 $0.040 $0.040 $0.160
1998 cash dividends per share......$0.205 $0.205 $0.205 $0.205 $0.820
On June 30, 1999, the Company's Board of Directors declared a quarterly dividend
of $0.04 per share, payable July 30, 1999, to 3,493 stockholders of record on
July 16, 1999.
SHAREHOLDER INFORMATION
Morrison Management Specialists, Inc. and Subsidiaries
Transfer Agent, Registrar, Executive and Operating Offices
Dividend Disbursing Agent 1955 Lake Park Drive, SE
and Dividend Reinvestment Suite 400
Plan Administrator Smyrna, GA 30080
SunTrust Bank, Atlanta (770) 437-3300
Mail Code 258
PO Box 4625 Form 10-K Information
Atlanta, GA 30302 A copy of the Company's annual report
(800) 568-3476 on Form 10-K, excluding exhibits,
filed with the Securities and
Dividend Reinvestment Plan Exchange Commission, will be
For information contact the furnished to any shareholder without
Investor Relations Department or charge upon written request to the:
the Dividend Reinvestment Plan Investor Relations Department
Administrator. 1955 Lake Park Drive, SE, Suite 400
Smyrna, GA 30080
Independent Auditors
Ernst & Young LLP
600 Peachtree Street Annual Meeting
Atlanta, GA 30308 The Annual Meeting ofStockholders
will be held Tuesday, September 28,
Legal Counsel 1999, starting at 1:00 p.m. EST at
Powell, Goldstein, Frazer & Murphy LLP the Georgia International Convention
191 Peachtree Street, NE Center, 1902 Sullivan Road, College
Atlanta, GA 30303 Park, GA 30337
Common Stock Morrison's Spice of Life, Advanced
Common Stock of Morrison Management Culinary Centers, ACC and Resident's
Specialists, Inc. is traded on the New Choice are trademarks or registered
York Stock Exchange. (NYSE symbol: MHI) trademarks of Morrison Management
Specialists, Inc. All other
trademarks identified in this Annual
Report are the property of third
parties.
The Board of Directors Officers of the Company
Glenn A. Davenport Glenn A. Davenport
Chairman of the Board and Chairman of the Board and
Chief Executive Officer, Chief Executive Officer
Morrison Management Specialists
Eugene D. Dolloff
Claire L. Arnold (1,2,3) President, Morrison
Chairman and Chief Executive Senior Dining
Officer, Leapfrog Services
Inc.; Former Chief Executive K. Wyatt Engwall
Officer, NCC L.P. Senior Vice President,
Finance and Assistant
E. Eugene Bishop (1,2,3) Secretary
Former Chairman of the
Board and Chief Executive John E. Fountain
Officer, Morrison Vice President, General
Restaurants Inc Counsel and Secretary
Fred L. Brown (1,2,3) Gary L. Gaddy
Vice Chairman, BJC Health Senior Vice President,
Health System; Chairman, Sales and Marketing
American Hospital Association;
Chairman, Advisory Board of Frances G. Michels
AmericasDoctor.com Senior Vice President,
Support Services
Michael F. Corbett (1,2,3)
President, Michael F. Richard C. Roberson
Corbett & Associates, LTD; Division Vice President,
Chairman and Executive Morrison Healthcare Food Services
Director of The Outsourcing
Research Council; Chairman of The Jerry D. Underhill
Corbett Group President, Morrison
Healthcare Food Services
John B. McKinnon (1,2,3)
Former Dean, Babcock
Graduate School of
Management, Wake Forest
University; Former
President, Sara Lee
Corporation; Former President
And Chief Executive Officer,
Integon Corporation
Arthur R. Outlaw, Jr. (1,2,3)
Chairman of the Board and
Chief Executive Officer,
Marshall Biscuit Company
Dr. Benjamin F. Payton (1,2,3)
President, Tuskegee
University
Committees of the Board
1. Compensation and Stock
Option*
2. Audit*
3. Nominating*
*Comprised entirely of
non-employee Board Members