10-Q 1 0001.txt 10-Q ================================================================================ 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 September 30, 2000 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, outstanding as of November 2, 2000 is 10,939,091 Total of 14 Pages INDEX PART I. FINANCIAL INFORMATION PAGE NO. ------- --------------------- -------- Consolidated Balance Sheets as of September 30, 2000 and December 31, 1999 2 Consolidated Statements of Income for the Three Months Ended September 30, 2000 and 1999 3 Consolidated Statements of Income for the Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2000 and 1999 5 Notes To Consolidated Financial Statements 6 - 7 Management's Discussion and Analysis of Financial Condition and Results Of Operations 8 - 11 Part II. Other Information 12 Signatures 13 Page 1 Consolidated Balance Sheets
September 30, December 31, 2000 1999 (Unaudited) ------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 16,966,797 $ 17,198,687 Accounts and notes receivable, less allowance for doubtful accounts of $6,809,000 in 2000 and $7,278,000 in 1999 53,121,363 48,612,738 Prepaid income taxes 300,585 843,889 Inventories and supplies 8,487,792 8,580,181 Deferred income taxes 1,512,372 1,777,536 Prepaid expenses and other 1,977,515 1,869,091 ------------ ----------- Total current assets 82,366,424 78,882,122 PROPERTY AND EQUIPMENT: Laundry and linen equipment installations 7,560,480 7,824,038 Housekeeping and office equipment 9,588,565 9,012,178 Autos and trucks 21,329 51,110 ------------ ----------- 17,170,374 16,887,326 Less accumulated depreciation 11,866,336 10,990,792 ------------ ----------- 5,304,038 5,896,534 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED less accumulated amortization of $1,608,625 in 2000 and $1,527,908 in 1999 1,746,852 1,827,569 DEFERRED INCOME TAXES 800,517 628,553 OTHER NONCURRENT ASSETS 12,218,064 10,795,104 ------------ ----------- $102,435,895 $98,029,882 ============ =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $3,969,675 $2,472,021 Accrued payroll, accrued and withheld payroll taxes 4,208,558 5,417,367 Other accrued expenses 172,912 417,966 Income taxes payable Accrued insurance claims 798,708 789,945 ------------ ----------- Total current liabilities 9,149,853 9,097,299 ACCRUED INSURANCE CLAIMS 3,004,662 2,971,697 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock, $.01 par value: 30,000,000 shares authorized, 11,066,591 shares issued in 2000 and 11,064,107 in 1999 110,666 110,641 Additional paid in capital 25,316,393 25,297,284 Retained earnings 65,616,196 60,552,961 Less: Common stock in treasury, at cost, 127,500 shares in 2000 (761,875) ------------ ----------- Total stockholders' equity 90,281,380 85,960,886 ------------ ----------- $102,435,895 $98,029,882 =========== ===========
See accompanying notes. Page 2 Consolidated Statements of Income (Unaudited)
For the Three Months Ended September 30, 2000 1999 ------------------------------------------ Revenues $ 65,210,687 $ 59,620,142 Operating costs and expenses: Costs of services provided 57,374,336 51,110,966 Selling, general and administrative 5,138,984 4,779,988 Other Income: Interest Income 265,468 176,139 ------------ ------------ Income before income taxes 2,962,835 3,905,327 Income taxes 1,155,000 1,469,000 ------------ ------------ Net Income $ 1,807,835 $ 2,436,327 ============ ============ Basic earnings per common share $ 0.17 $ 0.22 ============ ============ Diluted earnings per common share $ 0.17 $ 0.22 ============ ============ Basic weighted average number of common shares outstanding 10,939,057 11,052,307 ============ ============ Diluted weighted average number of common shares outstanding 10,939,057 11,270,979 ============ ============
See accompanying notes. Page 3 Consolidated Statements of Income (Unaudited)
For the Nine Months Ended September 30, 2000 1999 ------------------------------------------- Revenues $ 189,188,381 $ 172,125,372 Operating costs and expenses: Costs of services provided 166,863,415 147,271,486 Selling, general and administrative 14,749,220 13,660,479 Other Income: Interest Income 702,489 583,435 ------------- ------------- Income before income taxes 8,278,235 11,776,842 Income taxes 3,215,000 4,475,000 ------------- ------------- Net Income $ 5,063,235 $ 7,301,842 ============ ============= Basic earnings per common share $ 0.46 $ 0.66 ============ ============= Diluted earnings per common share $ 0.46 $ 0.64 ============ ============= Basic weighted average number of common shares outstanding 10,972,092 11,049,863 ============ ============= Diluted weighted average number of common shares outstanding 10,996,991 11,324,843 ============ =============
See accompanying notes. Page 4 Consolidated Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, ------------------------------------- 2000 1999 ----------- ----------- Cash flows from operating activities: Net Income $ 5,063,235 $ 7,301,842 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 1,640,297 1,312,875 Bad debt provision 2,250,000 2,250,000 Deferred income taxes 93,200 1,640,517 Tax benefit of stock option transactions 832 45,588 Changes in operating assets and liabilities: Accounts and notes receivable (6,758,625) (7,833,785) Prepaid income taxes 543,304 (1,085,169) Inventories and supplies 92,389 (752,773) Long term notes receivable (1,336,356) (1,382,544) Accounts payable and other accrued expenses 1,252,601 (2,196,242) Accrued payroll, accrued and withheld payroll taxes (1,208,809) (2,575,225) Accrued insurance claims 41,728 43,029 Income taxes payable (283,980) Prepaid expenses and other assets (195,028) 101,646 ----------- ----------- Net cash provided by (used in) operating activities 1,478,768 (3,414,221) ----------- ----------- Cash flows from investing activities: Disposals of fixed assets 355,732 783,305 Additions to property and equipment (1,322,817) (2,046,775) ----------- ----------- Net cash used in investing activities (967,085) (1,263,470) ----------- ----------- Cash flows from financing activities: Purchase of treasury stock (761,875) (183,750) Proceeds from the exercise of stock options 18,302 339,805 ----------- ----------- Net cash provided by (used in) financing activities (743,573) 156,055 ----------- ----------- Net decrease in cash and cash equivalents (231,890) (4,521,636) Cash and cash equivalents at beginning of the year 17,198,687 17,201,408 ----------- ----------- Cash and cash equivalents at end of the period $16,966,797 $12,679,772 =========== ===========
See accompanying notes. Page 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 and are of a normal recurring nature. The balance sheet shown in this report as of December 31, 1999 has been derived from, and does not include, all the disclosures contained in the audited financial statements for the year ended December 31, 1999. 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, 1999. The results of operations for the three and nine month periods ended September 30, 2000 and 1999 are not necessarily indicative of the results that may be expected for the full fiscal year. Note 2 - Other Contingencies The Company has a $18,000,000 bank line of credit on 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 September 30, 2000 and December 31, 1999, 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 September 30, 2000 and December 31, 1999. 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 recently filing for bankruptcy protection. 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. Page 6 Note 3 - Segment Information The Company provides housekeeping, laundry and linen, food, and maintenance 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%, are earned in one geographic area, the United States. The Company earned revenue in the following service business categories: For the three month period ended September 30, ---------------------------------------------- 2000 1999 ----------- ----------- Housekeeping services $41,679,000 $37,613,000 Laundry & linen services 17,104,000 17,118,000 Food services 5,777,000 3,031,000 Maintenance services & Other 651,000 1,858,000 ----------- ----------- $65,211,000 $59,620,000 =========== =========== For the nine month period ended September 30, --------------------------------------------- 2000 1999 ------------ ------------ Housekeeping services $121,223,000 $108,263,000 Laundry & linen services 51,310,000 49,693,000 Food services 14,462,000 8,478,000 Maintenance services & Other 2,193,000 5,691,000 ------------ ------------ $189,188,000 $172,125,000 ============ ============ Note 4 - 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 for fiscal years beginning after June 15, 2000. This standard is not expected to have a material effect on the Company's financial statements. Page 7 PART I. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Revenues for the third quarter of 2000 increased by 9.4% over revenues in the corresponding 1999 quarter. Revenues for the nine months ended September 30, 2000 increased by 9.9% over the corresponding 1999 period. The three and nine month periods' revenue increases are primarily a result of net new service agreements entered into with new clients. Cost of services provided as a percentage of revenues increased to 88.0% for the third quarter of 2000 from 85.7% in the corresponding 1999 quarter. In addition, cost of services as a percentage of revenue increased to 88.2% for the nine month period ended September 30, 2000 from 85.6% in the same 1999 period. The primary factors affecting specific variations in the 2000 third quarter and nine month period's cost of services provided as a percentage of revenue and their effects on the respective 2.3% and 2.6% increases are as follows: in the third quarter an increase of 1.8% in the cost of supplies consumed in performing services resulting primarily from increases in food purchases and an increase of .4% in health insurance and employee benefits costs; offsetting these increases was a decrease of .3% in labor costs and payroll related taxes; in the nine month period an increase of 1.2% in the cost of supplies consumed in performing services resulting primarily from increases in food purchases; a .6% increase in health insurance and employee benefits costs and an increase of .3% in labor costs and payroll related taxes. Selling, general and administrative expenses as a percentage of revenue decreased slightly in the third quarter of 2000 to 7.9% as compared to 8.0% in the corresponding 1999 three month period. Additionally, during the nine month period ended September 30, 2000 selling, general and administrative expenses as a percentage of revenue decreased slightly to 7.8 % as compared to 7.9% in the corresponding 1999 period. The three and nine month period decreases are primarily attributable to the Company's ability to control certain selling, general and administrative expenses while comparing them to a greater revenue base in the current period. The effective income tax rate for the three and nine month periods ended September 30, 1999 is lower, as compared to the respective 2000 periods, as a result of the reversal of previously established income tax reserves no longer required as a result of the conclusion of an Internal Revenue Service examination for the tax years ended December 31, 1997 and 1996. Liquidity and Capital Resources At September 30, 2000 the Company had working capital and cash and cash equivalents of $73,216,571 and $16,966,797, respectively, which represents an increase of 5% in working capital and a slight decrease of 1% increase in cash and cash equivalents compared to December 31, 1999 working capital and cash and cash equivalents of $69,784,823 and $17,198,687, respectively. Page 8 The net cash provided by the Company's operating activities was $1,478,768 for the nine month period ended September 30, 2000 as compared to net cash used of $3,414,221 in the same 1999 period. The principle sources of cash flows from operating activities were: for the nine month period ended September 30, 2000 net income, charges to operations for bad debt provisions and depreciation and amortization; in the nine month period ended September 30, 1999 net income, charges to operations for bad debt provisions and depreciation and amortization, as well as the timing of payments for income taxes. The operating activity that used the largest amount of cash was a net increase in accounts and long term notes receivable at September 30, 2000 and 1999 of $8,094,981 and $9,216,329, respectively. The increases in these amounts resulted primarily from the growth in the Company's revenues. Additionally, operating activities' cash flows for the nine month periods ended September 30, 2000 and 1999 was decreased by the timing of payments for payroll and payroll related taxes of $1,208,809 and $2,575,225, respectively, as well as a $2,196,242 increase in accounts payable and other accrued expenses in 1999 resulting from the timing of payments to vendors. The Company's principal use of cash in investing activities in each of the nine month periods ended September 30, 2000 and 1999 was the purchase of housekeeping equipment and laundry and linen equipment installations. 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 recently 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 which therefore may enhance the ultimate collectibility of 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 such restructuring provides it with a means to maintain a relationship with the client while at the same time minimizing collection exposure. 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 $2,250,000 in each of the nine month periods ended September 30, 2000 and 1999. 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. Page 9 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 September 30, 2000, 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 both September 30, 2000 and December 31, 1999. At September 30, 2000, the Company had $16,966,797 of cash and cash equivalents, which it views as its principal measure of liquidity. The level of capital expenditures 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 during calendar year 2000, it estimates that it will incur capital expenditures of approximately $2,000,000 during 2000 in connection with housekeeping equipment and laundry and linen equipment installations in its clients' facilities, as well as hardware and software expenditures relating to the implementation of a new computerized financial reporting system. 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 re-purchase its outstanding common stock, the Company expended $761,875 to purchase 127,500 shares of its common stock in the nine months period September 30, 2000 at an average price of $5.98 per common share. The Company remains authorized to purchase 321,450 shares pursuant to previous Board of Directors' action. 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 healthcare 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, 1999 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 recently enacted Prospective Payment Page 10 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 the costs of labor, 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. Although there can be no assurance thereof, the Company will continue to seek to recover increases in costs attributable to inflation by continuing to pass through cost increases to its clients. Page 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 Holders a) None Item 5. Other Information. a) None Item 6. Exhibits and Reports on Form 8-K. a) Exhibits - 27 - Financial Data Schedule b) Reports on Form 8-K - None Page 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. November 2, 2000 /s/ Daniel P. McCartney ---------------------------- ------------------------------------- Date DANIEL P. McCARTNEY, Chief Executive Officer November 2, 2000 /s/ Thomas A. Cook ---------------------------- ------------------------------------- Date THOMAS A. COOK, President and Chief Operating Officer November 2, 2000 /s/ James L. DiStefano ---------------------------- ------------------------------------- Date JAMES L. DiSTEFANO, Chief Financial Officer and Treasurer November 2, 2000 /s/ Richard W. Hudson ---------------------------- ------------------------------------- Date RICHARD W. HUDSON, Vice President-Finance, Secretary and Chief Accounting Officer Page 13