UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE - --- SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 1999 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 MANAGEMENT SPECIALISTS, INC. - -------------------------------------------------------------------------------- (Exact name of Registrant as specified in charter) GEORGIA 63-1155966 - --------------------------------------------- ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 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 12,124,666 - -------------------------------------------------------------------------------- (Number of shares of $0.01 par value common stock outstanding as of September 30, 1999) INDEX PART I Financial Information Page Number ------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of August 31, 1999 and May 31, 1999....................... 3 Condensed Consolidated Statements of Income for the Three Months Ended August 31, 1999 and 1998........ 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended August 31, 1999 and 1998........ 5 Notes to Condensed Consolidated Financial Statements... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 7-9 Item 3. Quantitative and Qualitative Disclosures about Market Risk................................................... 9 PART II Other Information Item 1. Legal Proceedings ..................................... 10 Item 2. Changes in Securities.................................. 10 Item 3. Defaults upon Senior Securities........................ 10 Item 4. Submission of Matters to a Vote of Security Holders.... 10 Item 5. Other Information...................................... 10 Item 6. Exhibits and Reports on Form 8-K....................... 10 Signatures................................................................. 11 Index to Exhibits, Financial Statement Schedules, and Reports on Form 8-K.. 12 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except per share data) As of As of August 31, May 31, 1999 1999 -------------------------- (Unaudited) Assets Current assets: Cash and short-term investments .................. $ 3,530 $ 2,780 Receivables - accounts and notes (net) ........... 33,325 34,035 Inventories ...................................... 3,097 2,940 Prepaid expenses ................................. 2,712 2,312 Deferred income tax benefits ..................... 2,073 1,747 -------------------------- Total current assets ........................... 44,737 43,814 -------------------------- Property and equipment - at cost ................... 31,420 30,975 Less accumulated depreciation .................... 13,136 12,376 -------------------------- 18,284 18,599 Cost in excess of net assets acquired, net.......... 18,077 18,331 Other assets ....................................... 23,217 22,183 -------------------------- Total assets ................................... $104,315 $102,927 ========================== Liabilities and Stockholders' Equity Current liabilities: Accounts payable ................................. $ 13,847 $ 15,091 Other accrued liabilities ........................ 11,902 12,917 Current portion of long-term debt ................ 116 136 -------------------------- Total current liabilities ...................... 25,865 28,144 -------------------------- Long-term debt ..................................... 47,475 49,305 Other deferred liabilities ......................... 11,258 10,915 Stockholders' equity: Common stock, $0.01 par value (authorized 100,000 shares; issued: 12,076 and 11,977 shares, 2000 and 1999, respectively) ................... 121 120 Capital in excess of par value ................... 5,196 3,324 Unearned ESOP shares ............................. (2,695) (2,806) Deferred Compensation Plan liability payable in Company stock ....................... 1,573 1,518 Company stock held by Deferred Compensation Plan.. (1,573) (1,518) Retained earnings ................................ 17,095 13,925 -------------------------- Total stockholders' equity ..................... 19,717 14,563 -------------------------- Total liabilities and stockholders' equity...... $104,315 $102,927 ========================== The accompanying notes are an integral part of the financial statements. Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Income (In thousands, except per share data) (Unaudited) For the Three Months Ended August 31, August 31, 1999 1998 -------------------------- Revenues ................................... $93,983 $72,246 Operating expenses ......................... 78,952 60,649 -------------------------- Gross profit ............................... 15,031 11,597 Selling, general and administrative expenses ................................. 8,382 5,918 -------------------------- 6,649 5,679 Interest expense, net of interest income, totaling $72 and $50, in 2000 and 1999, respectively ................... 629 424 -------------------------- Income before provision for income taxes ... 6,020 5,255 Provision for federal and state income taxes 2,375 2,103 -------------------------- Net income ................................. $ 3,645 $ 3,152 ========================== Earnings per share - Basic ................. $ 0.31 $ 0.26 ========================== Earnings per share - Diluted ............... $ 0.30 $ 0.26 ========================== Weighted-average common shares - Basic ..... 11,890 11,895 Net effect of dilutive stock options ....... 369 247 -------------------------- Weighted-average common shares - Diluted ... 12,259 12,142 ========================== The accompanying notes are an integral part of the financial statements. Morrison Management Specialists, Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Amounts in thousands) (Unaudited) For the Three Months Ended August 31, August 31, 1999 1998 ----------------------- Operating activities: Net income .............................................. $ 3,645 $ 3,152 Adjustments to reconcile net income to net cash provided/(used) by operating activities: Depreciation ........................................ 1,122 682 Amortization of intangibles ......................... 260 161 Deferred income taxes ............................... 276 (589) Gain on disposition of assets ....................... (12) (87) Changes in operating assets and liabilities: Receivables ...................................... 770 (1,495) Inventories ...................................... (157) (22) Prepaid and other assets ......................... (2,151) (166) Accounts payable, accrued and other liabilities .............................. (3,799) (5,332) Income taxes payable ............................. 1,883 2,337 ---------------------- Net cash provided/(used) by operating activities......... 1,837 (1,359) ---------------------- Investing activities: Purchases of property and equipment ..................... (935) (3,484) Proceeds from disposal of assets ........................ 141 704 Cost of acquisitions, net ............................... 46 (400) ---------------------- Net cash used by investing activities ................... (748) (3,180) ---------------------- Financing activities: Net change in long-term debt ............................ (1,849) 4,563 Proceeds from the issuance of stock ..................... 808 522 Proceeds from exercise of stock options ................. 985 606 Purchase of Treasury Stock .............................. 0 (4,418) Dividends paid .......................................... (474) (488) ESOP shares released .................................... 191 122 ---------------------- Net cash (used)/ provided by financing activities........ (339) 907 ---------------------- Increase/(decrease) in cash and short-term investments .. 750 (3,632) Cash and short-term investments at the beginning of the period ............................... 2,780 5,720 ---------------------- Cash and short-term investments at the end of the period ..................................... $ 3,530 $ 2,088 ====================== The accompanying notes are an integral part of the financial statements. Morrison Management Specialists, 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 period presented. The results of operations for the interim period 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, 1999. Certain prior reported amounts and balances have been reclassified to conform to the current year presentation. NOTE B - SUBSEQUENT EVENTS Declaration of Quarterly Dividend On September 28, 1999, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on October 29, 1999 to shareholders of record at the close of business on October 8, 1999. ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below relates to the results of operations of Morrison Management Specialists, Inc. ("MMSI" or the "Company") for the three months ended August 31, 1999 compared with the results for the comparable period of the prior year. RESULTS OF OPERATIONS The Company's net income from continuing operations increased 15.6% to $3.6 million for the three months ended August 31, 1999, compared with net income of $3.2 reported for the corresponding period of the prior fiscal year. Earnings before interest and taxes increased 17.1% or $1.0 million to $6.6 million for the three months ended August 31, 1999 compared to the same period of the prior fiscal year. The increase was due to growth in new account income. MANAGED VOLUME AND REVENUE Due to the difference between the amount of revenue that is reported for the fee accounts (net management fee plus reimbursed expenses) and the profit and loss accounts (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 cost of operating the foodservices, regardless of which type of contract exists with the client. Managed volume from operations increased $36.9 million or 26.0% to $178.8 million for the three months ended August 31, 1999 from the prior year period due to new and acquired accounts. Revenue from operations increased $21.7 million or 30.1% to $94.0 million for the three months ended August 31, 1999 from the prior year period. The increase was primarily attributable to the conversion of client paid payroll to MMSI paid payroll in continuing accounts, new accounts and accounts acquired from acquisitions. OPERATING EXPENSES Operating expenses increased $18.3 million or 30.2% to $79.0 million for the three months ended August 31, 1999. These expenses have increased over the prior year period primarily as a result of the addition of new and acquired accounts and the conversion of client paid payroll to MMSI paid payroll in continuing accounts. These expenses expressed as a percentage of managed volume increased slightly compared to the prior year period. Selling, general and administrative expenses increased $2.5 million or 41.6% for the three months ended August 31, 1999 as compared to the same period last year. The increase is due to the prior year acquisition of Culinary Services Network and increased spending in human resources and training due to the growth in new business. Selling, general and administrative expenses as percentage of managed volume is consistent with the third and fourth quarters of the prior fiscal year. INTEREST EXPENSE, Net of Interest Income Net interest expense increased from $0.4 million to $0.6 million for the three months ended August 31, 1999 as compared to the same period of the prior year. The increase in interest is attributable to higher average borrowings, partially offset by the capitalization of construction period interest. INCOME TAXES The effective income tax rate on continuing operations for the three months ended August 31, 1999 was 39.5% as compared to 40.0% for the same period of the prior year. The decrease is attributable to a lower amount of non-deductible expenses and additional tax credits. LIQUIDITY AND CAPITAL RESOURCES Total assets at August 31, 1999 were $104.3 million, a $1.4 million increase over $102.9 million as of the prior fiscal year end. This increase is attributable to an increase in current assets of $0.9 million comprised of increases in prepaid assets and deferred income taxes and an increase in long-term assets of $1.0 million comprised of increases in other assets. Total liabilities at August 31, 1999 were $84.6 million, a $3.8 million decrease from $88.4 million as of the end of the prior fiscal year. This decrease was primarily due to a $1.8 million decrease in long-term debt and $2.3 million decrease in current liabilities. 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. See "Special Note Regarding Forward-Looking Information." YEAR 2000 Currently there is significant uncertainty within the software industry and among software users regarding the impact of installed computer software that has 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. 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. 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. Given the progress to date, the Company does not expect this project to pose significant operational problems for the Company. However, the Company cannot make assurances that the Company will not be exposed to any potential claims resulting from the systems problems associated with the century change. See "Special Note Regarding Forward-Looking Information." 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 and impact of the Year 2000 Issue. 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: healthcare spending trends; the growth of systems and group purchasing organizations; changes in healthcare regulations; increased competition in the healthcare food and nutrition market; customer acceptance of the Company's cost saving programs; impact of the year 2000; and changes in laws and regulations affecting labor and employee benefit costs. SUBSEQUENT EVENTS Declaration of Quarterly Dividend On September 28, 1999, the Company's Board of Directors declared a quarterly cash dividend of $0.04 per share of outstanding common stock payable on October 29, 1999 to shareholders of record at the close of business on October 8, 1999. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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. 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 None ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: Exhibit 27 Financial Data Schedule - For the Three Months ended August 31, 1999 (b) Reports on Form 8-K: On July 6, 1999, the Company filed a report on Form 8-K to report its name change to Morrison Management Specialists, Inc., effective June 30, 1999. 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 MANAGEMENT SPECIALISTS, INC. ------------------------------------- (Registrant) 10/15/99 By:/S/ K. WYATT ENGWALL - -------- --------------------- DATE K. WYATT ENGWALL Senior Vice President, Finance (Senior Vice President and Principal Accounting Officer) MORRISON MANAGEMENT SPECIALISTS, INC. LIST OF EXHIBITS Exhibit Number Description - ------ --------------------------------------------------------------------- 27 Financial Data Schedule - For the Three Months ended August 31, 1999