================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended March 31, 2001 Commission File Number 0-12015 HEALTHCARE SERVICES GROUP, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2018365 - ------------------------------- --------------------------- (State or other jurisdiction of (IRS Employer Identification incorporation or organization) number) 3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania 19020 ---------------------------------------------------------- (Address of principal executive office) (Zip code) Registrant's telephone number, including area code: 215-639-4274 ------------ Indicate 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 past 90 days. YES X NO ----- ------ Number of shares of common stock, issued and outstanding as of May 1, 2001 is 10,882,844 Total of 14 Pages
INDEX PART I. FINANCIAL INFORMATION PAGE NO. --------------------- -------- Consolidated Balance Sheets as of 2 March 31, 2001 and December 31, 2000 Consolidated Statements of Income for the Three Months Ended 3 March 31, 2001 and 2000 Consolidated Statements of Cash Flows for the Three Months 4 - 5 ended March 31, 2001 and 2000 Notes To Consolidated Financial Statements 6 - 7 Management's Discussion and Analysis of Financial Condition 8 - 11 and Results Of Operations Part II. Other Information 12 ----------------- Signatures 13 -1-
HEALTHCARE SERVICES GROUP, INC. Consolidated Balance Sheets (Unaudited) <TABLE> <CAPTION> March 31, December 31, 2001 2000 -------------------------------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 21,417,926 $ 22,841,618 Accounts and notes receivable, less allowance for doubtful accounts of $5,173,000 in 2001 and $4,914,000 in 2000 51,771,234 52,744,352 Prepaid income taxes 1,128,624 Inventories and supplies 8,053,811 8,383,963 Deferred income taxes 1,009,883 839,103 Prepaid expenses and other 2,156,248 2,184,141 ------------ ------------ Total current assets 84,409,102 88,121,801 PROPERTY AND EQUIPMENT: Laundry and linen equipment installations 7,014,951 7,303,508 Housekeeping and office equipment 9,854,513 9,696,825 Autos and trucks 21,329 21,329 ------------ ------------ 16,890,793 17,021,662 Less accumulated depreciation 11,932,211 11,863,635 ------------ ------------ 4,958,582 5,158,027 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED less accumulated amortization of $1,662,437 in 2001 and $1,635,531 in 2000 1,693,040 1,719,946 DEFERRED INCOME TAXES 1,378,206 1,366,186 OTHER NONCURRENT ASSETS 12,553,082 11,976,905 ------------ ------------ $104,992,012 $108,342,865 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 4,391,460 $ 4,829,183 Accrued payroll, accrued and withheld payroll taxes 4,051,275 8,209,344 Income taxes payable 15,766 Other accrued expenses 101,631 181,466 Accrued insurance claims 904,832 906,699 ------------ ------------ Total current liabilities 9,464,964 14,126,692 ACCRUED INSURANCE CLAIMS 3,403,892 3,410,916 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value: 30,000,000 shares authorized, 11,105,344 shares issued in 2001 and 11,066,591 in 2000 111,053 110,666 Additional paid in capital 25,525,359 25,315,753 Retained earnings 67,769,557 66,140,713 Common stock in treasury, at cost, 222,500 shares in 2001 and 127,500 shares in 2000 (1,282,813) (761,875) ------------ ------------ Total stockholders' equity 92,123,156 90,805,257 ------------ ------------ $104,992,012 $108,342,865 ============ ============ </TABLE> See accompanying notes. -2-
Healthcare Services Group, Inc. Consolidated Income Statements (Unaudited) <TABLE> <CAPTION> For the Three Months Ended March 31, -------------------------------- 2001 2000 ----------- ----------- <S> <C> <C> Revenues $66,618,070 $60,127,632 Operating costs and expenses: Costs of services provided 59,082,359 53,224,983 Selling, general and administrative 5,172,129 4,654,801 Other Income : Interest Income 307,263 212,991 ----------- ----------- Income before income taxes 2,670,845 2,460,839 Income taxes 1,042,000 960,000 ----------- ----------- Net Income $ 1,628,845 $ 1,500,839 =========== =========== Basic earnings per common share $ 0.15 $ 0.14 =========== =========== Diluted earnings per common share $ 0.15 $ 0.14 =========== =========== </TABLE> See accompanying notes -3-
HEALTHCARE SERVICES GROUP, INC. Consolidated Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> For the Three Months Ended March 31, --------------------------------- 2001 2000 ---- ---- <S> <C> <C> Cash flows from operating activities: Net Income $ 1,628,845 $ 1,500,839 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 588,276 543,475 Bad debt provision 750,000 750,000 Deferred income taxes (benefits) (182,800) 111,626 Tax benefit of stock option transactions 832 Changes in operating assets and liabilities: Accounts and notes receivable 223,118 (3,143,456) Prepaid income taxes 1,128,624 794,847 Inventories and supplies 330,152 (233,422) Long-term notes receivable (419,427) (1,124,505) Accounts payable and other accrued expenses (517,559) 448,447 Accrued payroll, accrued and withheld payroll taxes (3,948,075) (2,134,835) Income taxes payable 15,766 Accrued insurance claims (8,891) (83,257) Prepaid expenses and other assets (128,859) (173,129) ------------ ------------ Net cash used in operating activities (540,830) (2,742,538) ------------ ------------ Cash flows from investing activities: Disposals of fixed assets 86,123 52,233 Additions to property and equipment (448,047) (438,258) ------------ ------------ Net cash used in investing activities (361,924) (386,025) ------------ ------------ Cash flows from financing activities: Purchase of treasury stock (520,938) (550,625) Proceeds from the exercise of stock options 18,303 ------------ ------------ Net cash used in financing activities (520,938) (532,322) ------------ ------------ Net decrease in cash and cash equivalents (1,423,692) (3,660,885) Cash and cash equivalents at beginning of the year 22,841,618 17,198,687 ------------ ------------ Cash and cash equivalents at end of the period $ 21,417,926 $ 13,537,802 ============ ============ </TABLE> See accompanying notes. -4-
<TABLE> <CAPTION> For the Three Months Ended March 31, --------------------------------- 2001 2000 ---- ---- <S> <C> <C> Supplementary Cash Flow Information: Issuance of common stock pursuant to Employee Stock Purchase Plan $ 209,993 ============ </TABLE> -5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) Note 1 - Basis of Reporting The accompanying financial statements are unaudited and do not include certain information and note disclosures required by generally accepted accounting principles for complete financial statements. However, in the opinion of the Company, all adjustments considered necessary for a fair presentation have been included. The balance sheet shown in this report as of December 31, 2000 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 2000. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the three month period ended March 31, 2001 and 2000 are not necessarily indicative of the results that may be expected for the full fiscal year. Note 2 - Other Contingencies The Company has an $18,000,000 bank line of credit under which it may draw to meet short-term liquidity requirements or for other purposes, that expires on September 30, 2001. Amounts drawn under the line are payable upon demand. At both March 31, 2001 and December 31, 2000, there were no borrowings under the line. However, at such dates, the Company had outstanding approximately $13,000,000 of irrevocable standby letters of credit, which relate to payment obligations under the Company's insurance program. As a result of the letters of credit issued, the amount available under the line was reduced by approximately $13,000,000 at both March 31, 2001 and December 31, 2000. The Company is also involved in miscellaneous claims and litigation arising in the ordinary course of business. The Company believes that these matters, taken individually or in the aggregate, would not have a material adverse impact on the Company's financial position or results of operations. Federal legislation enacted in August 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998, of a Medicare Prospective Payment System ("PPS") for skilled nursing facilities which significantly changed the manner and the amounts of reimbursement they receive. The Company's clients have been adversely affected by PPS, as well as other trends in the long-term care industry resulting in certain of the Company's clients filing for bankruptcy. Others may follow. These factors, in addition to delays in payments from clients, have resulted in and could result in additional bad debts in the near future. -6-
Note 3 - Segment Information The Company provides housekeeping, laundry, linen, facility maintenance and food services to the healthcare industry. The Company considers its business to consist of one reportable operating segment, based on the service business categories, provided to a client facility, sharing similar economic characteristics in the nature of the service provided, method of delivering service and client base. Although the Company does provide services in Canada, essentially all of its revenue and net income, approximately 99% in each case, is earned in one geographic area, the United States. The Company earned revenue in the following service business categories: For the three month period ended March 31, ------------------------------------------ 2001 2000 ----------- ----------- Housekeeping services $40,435,076 $38,434,188 Laundry & linen services 16,701,985 17,105,995 Food Services 8,742,434 3,882,103 Maintenance services & Other 738,575 705,346 ----------- ----------- $66,618,070 $60,127,632 =========== =========== Note 4 - Earnings Per Common Share Three Months Ended March 31, 2001 ------------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- ------ Net income $1,628,845 ========== Basic earnings per common share $1,628,845 10,948,372 $ .15 Effect of dilutive securities: Options 23,708 ---------- ---------- ---------- Diluted earnings per Common share $1,628,845 10,972,080 $ .15 ========== ========== ========== -7-
Three Months Ended March 31, 2000 ------------------------------------------- Income Shares Per-share (Numerator) (Denominator) Amount ----------- ------------- ------ Net income $1,500,839 ========== Basic earnings per common share $1,500,839 11,033,140 $ .14 Effect of dilutive securities: Options 74,698 ---------- ---------- --------- Diluted earnings per Common share $1,500,839 11,107,838 $ .14 ========== ========== ========= Note 5 - Effect of Recently Issued Accounting Pronouncements Accounting for Derivative Instruments and Hedging Activities ------------------------------------------------------------ In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all entities to recognize all derivative instruments on their balance sheet as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that my be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective beginning January 1, 2001. This standard does not have a material effect on the Company's financial statements. PART I. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues for the first quarter of 2001 increased by 11% compared to revenues in the corresponding 2000 quarter. The increase is primarily a result of new food service agreements obtained from existing clients, as well as increases in other services provided to new clients. Cost of services provided as a percentage of revenues increased slightly to 88.7% for the first quarter of 2001 from 88.5 % in the corresponding 2000 quarter. The primary factors affecting specific variations in the 2001 first quarter's cost of services provided as a percentage of revenue and their effects on the .2% increase are as follows: an increase of 3.3% in the cost of supplies consumed in providing services which is primarily attributable to increased food costs associated with food service clients; and an increase .5% in workers' compensation, general liability and other insurance; offsetting these increases was a decrease of 3.3% in the cost of labor. -8-
Selling, general and administrative expenses as a percentage of revenue remained essentially unchanged in the first quarter of 2001 at 7.8% as compared to 7.7% in the corresponding 2000 three month period. Liquidity and Capital Resources At March 31, 2001 the Company had working capital and cash of $74,944,138 and $21,417,926 respectively, compared to December 31, 2000 working capital and cash of $73,995,109 and $22,841,618. The net cash used by the Company's operating activities was $750,823 for the three month period ended March 31, 2001 as compared to net cash used of $2,742,538 in the same 2000 period. The principal sources of net cash flows from operating activities for the three month periods ended March 31, 2001 and 2000 were net income, charges to operations for bad debt provisions and the timing of payments for income taxes. The operating activity that used the largest amount of cash during the three month period ended March 31, 2001 was a $3,948,075 decrease in accrued payroll, accrued and withheld payroll taxes resulting from the timing of these payments. The operating activity that used the largest amount of cash during the three month period ended March 31, 2000 was a $4,267,961 net increase in accounts and notes receivable and long term notes receivable. The net increases in these amounts resulted primarily from the timing of collections from clients. Additionally, first quarter 2000 cash flows were negatively impacted by a $2,134,835 decrease in accrued payroll, accrued and withheld payroll taxes resulting from the timing of these payments. The Company's principal use of cash in investing activities for the three month periods ended March 31, 2001 and 2000 was the purchase of property and equipment. The Company expends considerable effort to collect the amounts due for its services on the terms agreed upon with its clients. Many of the Company's clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Additionally, legislation enacted in August 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998 of a Medicare Prospective Payment System ("PPS") for skilled nursing facilities which significantly changed the manner and amount of reimbursements they receive. The Company's clients have been adversely affected by PPS, as well as other trends in the long-term care industry resulting in certain of the Company's clients filing for voluntary bankruptcy protection. Others may follow. These factors, in addition to delays in payments from clients, has resulted in and could result in additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, the Company converts the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan and therefore may ultimately enhance the Company's ability to collect the amounts due. In some instances the Company obtains a security interest in certain of the debtors' assets. Additionally, the Company considers restructuring service agreements from full service to management-only service in the case of certain clients experiencing financial difficulties. The Company believes that the restructuring provides it with a means to maintain a relationship with the client while at the same time minimizing collection exposure. -9-
The Company encounters difficulty in collecting amounts due from certain of its clients, including those in bankruptcy, those which have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, the Company has recorded bad debt provisions of $750,000 in the three month periods ended March 31, 2001 and 2000, respectively. In making its evaluation, in addition to analyzing, and anticipating, where possible, the specific cases described above, management considers the general collection risk associated with trends in the long-term care industry. The Company has an $18,000,000 bank line of credit on which it may draw to meet short-term liquidity requirements in excess of internally generated cash flow. This facility expires on September 30, 2001. Amounts drawn under the line are payable on demand. At March 31, 2001, there were no borrowings under the line. However, at such date, the Company had outstanding approximately $13,000,000 of irrevocable standby letters of credit, which relate to payment obligations under the Company's insurance program. As a result of the letters of credit issued, the amount available under the line was reduced by approximately $13,000,000 at March 31, 2001. At March 31, 2001, the Company had $21,417,926 of cash and cash equivalents, which it views as its principal measure of liquidity. The level of capital expenditures incurred by the Company is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment and laundry and linen equipment installations. Although the Company has no specific material commitments for capital expenditures through the end of calendar year 2001, it estimates that it will incur capital expenditures of approximately $2,000,000 during this period in connection with housekeeping equipment and laundry and linen equipment installations in its clients' facilities, as well as expenditures relating to internal data processing hardware and software requirements. The Company believes that its cash from operations, existing balances and credit line will be adequate for the foreseeable future to satisfy the needs of its operations and to fund its continued growth. However, if the need arose, the Company would seek to obtain capital from such sources as long-term debt or equity financing. In accordance with the Company's previously announced authorizations to purchase its outstanding common stock, the Company expended approximately $521,000 to purchase 95,000 shares of its common stock during the first quarter of 2001 at an average price of $5.48 per common share. The Company remains authorized to purchase 226,450 shares pursuant to previous Board of Directors' action. -10-
Effect of Recently Issued Accounting Pronouncements Accounting for Derivative Instruments and Hedging Activities - ------------------------------------------------------------ In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which requires all entities to recognize all derivative instruments on their balance sheet as either assets or liabilities measured at fair value. SFAS No. 133 also specifies new methods of accounting for hedging transactions, prescribes the items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. SFAS No. 133, as amended by SFAS No. 137, is effective beginning January 1, 2001. This standard does not have a material effect on the Company's financial statements. Cautionary Statements Regarding Forward Looking Statements Certain matters discussed may include forward-looking statements that are subject to risks and uncertainties that could cause actual results or objectives to differ materially from those projected. Such risks and uncertainties include, but are not limited to, risks arising from the Company providing its services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; the effects of changes in regulations governing the industry and risk factors described in the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000 in Part I thereof under "Government Regulation of Clients", "Competition" and "Service Agreements/Collections". The Company's clients have been adversely affected by the change in Medicare payments under the 1997 enactment of Prospective Payment System ("PPS"), as well as other trends in the long-term care industry resulting in certain of the Company's clients filing voluntary bankruptcy petitions. Others may follow. These factors, in addition to delays in payments from clients has resulted in and could result in additional bad debts in the near future. Additionally, the Company's operating results would be adversely affected if unexpected increases in labor and labor related costs, materials, supplies and equipment used in performing its services could not be passed on to clients. In addition, the Company believes that to improve its financial performance it must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at the various operational levels of the Company. Furthermore, the Company believes that its ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies. Effects of Inflation All of the Company's service agreements allow it to pass through to its clients increases in the cost of labor resulting from new wage agreements. The Company believes that it will be able to recover increases in costs attributable to inflation by continuing to pass through cost increases to its clients. -11-
PART II. Other Information Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities. Not Applicable Item 3. Defaults under Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Not Applicable Holders Item 5. Other Information. a) None Item 6. Exhibits and Reports on Form 8-K. a) Exhibits - None b) Reports on Form 8-K - None -12-
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HEALTHCARE SERVICES GROUP, INC. ------------------------------- May 1, 2000 /s/ Daniel P. McCartney - ------------------------- ------------------------------------------------ Date DANIEL P. McCARTNEY, Chief Executive Officer May 1, 2000 /s/ Thomas A. Cook - ------------------------- ------------------------------------------------ Date THOMAS A. COOK, President and Chief Operating Officer May 1, 2000 /s/ James L. DiStefano - ------------------------- ------------------------------------------------ Date JAMES L. DiSTEFANO, Chief Financial Officer and Treasurer May 1, 2000 /s/ Richard W. Hudson - ------------------------- ----------------------------------------------- Date RICHARD W. HUDSON, Vice President-Finance, Secretary and Chief Accounting Officer -13-