<PAGE>
================================================================================
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
<PAGE>
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
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(Unaudited)
-------------------------------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes.
Page 2
<PAGE>
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
2000 1999
------------------------------------------
<S> <C> <C>
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
============ ============
</TABLE>
See accompanying notes.
Page 3
<PAGE>
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
2000 1999
-------------------------------------------
<S> <C> <C>
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
============ =============
</TABLE>
See accompanying notes.
Page 4
<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
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
=========== ===========
</TABLE>
See accompanying notes.
Page 5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
