<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 March 31, 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, issued and outstanding as of May 1, 2000 is
10,941,557
Total of 13 Pages
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Consolidated Balance Sheets as of 2
March 31, 2000 and December 31, 1999
Consolidated Statements of Income for the 3
Three Months Ended March 31, 2000 and 1999
Consolidated Statements of Cash Flows for 4
the Three Months ended March 31, 2000 and 1999
Notes To Consolidated Financial Statements 5 - 6
Management's Discussion and Analysis of 7 - 10
Financial Condition and Results Of Operations
Part II. Other Information 11
-----------------
Signatures 12
-1-
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
----------- ------------
(Unaudited) (Audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $13,537,802 $17,198,687
Accounts and notes receivable, less allowance
for doubtful accounts of $7,318,000 in 2000 and
$7,278,000 in 1999 51,006,230 48,612,738
Prepaid income taxes 48,616 843,889
Inventories and supplies 8,813,603 8,580,181
Deferred income taxes 1,700,646 1,777,536
Prepaid expenses and other 2,194,518 1,869,091
----------- -----------
Total current assets 77,301,415 78,882,122
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 7,772,985 7,824,038
Housekeeping and office equipment 9,330,970 9,012,178
Autos and trucks 51,110 51,110
----------- -----------
17,155,065 16,887,326
Less accumulated depreciation 11,389,077 10,990,792
----------- -----------
5,765,988 5,896,534
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,554,813 in 2000 and
$1,527,908 in 1999 1,800,663 1,827,569
DEFERRED INCOME TAXES 594,243 628,553
OTHER NONCURRENT ASSETS 11,767,275 10,795,104
----------- -----------
$97,229,584 $98,029,882
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,230,603 $ 2,472,021
Accrued payroll, accrued and withheld payroll taxes 3,282,532 5,417,367
Other accrued expenses 107,831 417,966
Accrued insurance claims 772,461 789,945
----------- -----------
Total current liabilities 7,393,427 9,097,299
ACCRUED INSURANCE CLAIMS 2,905,924 2,971,697
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 15,000,000
shares authorized, 11,066,557 shares issued
in 2000 and 11,064,107 in 1999 110,666 110,741
Additional paid in capital 25,316,393 25,297,284
Retained earnings 62,053,799 60,552,961
Less: Common stock in treasury, at cost, 85,000
shares in 2000 (550,625)
----------- -----------
Total stockholders' equity 86,930,233 85,960,886
----------- -----------
$97,229,584 $98,029,882
=========== ===========
</TABLE>
See accompanying notes.
-2-
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Consolidated Income Statements
(Unaudited)
For the Three Months Ended March 31,
------------------------------------
2000 1999
----------- -----------
Revenues $60,127,632 $55,622,204
Operating costs and expenses:
Costs of services provided 53,224,983 47,403,301
Selling, general and administrative 4,654,801 4,300,820
Other Income:
Interest Income 212,991 197,924
----------- -----------
Income before income taxes 2,460,839 4,116,007
Income taxes 960,000 1,687,000
----------- -----------
Net Income $ 1,500,839 $ 2,429,007
=========== ===========
Basic earnings per common share $ 0.14 $ 0.22
=========== ===========
Diluted earnings per common share $ 0.14 $ 0.21
=========== ===========
Basic weighted average number
of common shares outstanding 11,033,140 11,048,746
=========== ===========
Diluted weighted average number
of common shares outstanding 11,107,838 11,380,004
=========== ===========
See accompanying notes
-3-
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities: $ 1,500,839 $ 2,429,007
Net Income
Adjustments to reconcile net income
to net cash provided by (used in) Operating activities:
Depreciation and amortization 543,475 481,919
Bad debt provision 750,000 750,000
Deferred income taxes (benefits) 111,626 (264,839)
Tax benefit of stock option transactions 832 29,938
Changes in operating assets and liabilities:
Accounts and notes receivable (3,143,456) (2,160,626)
Prepaid income taxes 794,847
Inventories and supplies (233,422) (276,375)
Long term notes receivable (1,124,505) (515,665)
Accounts payable and other accrued expenses 448,447 (3,046,297)
Accrued payroll, accrued and withheld payroll taxes (2,134,835) 2,477,742
Accrued insurance claims (83,257) 768,145
Income taxes payable 0 1,499,393
Prepaid expenses and other assets (173,129) (152,421)
----------- -----------
Net cash provided by (used in) operating activities (2,742,538) 2,019,921
----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 52,233 150
Additions to property and equipment (438,258) (552,179)
----------- -----------
Net cash used in investing activities (386,025) (552,029)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (550,625)
Proceeds from the exercise of stock options 18,303 164,977
----------- -----------
Net cash provided by (used in) financing activities (532,322) 164,977
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,660,885) 1,632,869
Cash and cash equivalents at beginning of the year 17,198,687 17,201,408
----------- -----------
Cash and cash equivalents at end of the period $13,537,802 $18,834,277
=========== ===========
</TABLE>
See accompanying notes.
-4-
<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. 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 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 month period ended
March 31, 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 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, 2000. Amounts drawn under the line are payable upon
demand. At both March 31, 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
relates 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, 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 and others may follow. This,
in addition to delays in payments from clients have resulted in and could result
in additional bad debts in the near future.
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<PAGE>
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%, 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,
------------------------------------------
2000 1999
----------- -----------
Housekeeping services $38,434,000 $36,129,000
Laundry & linen services 17,106,000 16,279,000
Food Services 3,882,000 2,456,000
Maintenance services &
Other 706,000 758,000
----------- -----------
$60,128,000 $55,622,000
=========== ===========
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.
Adoption of this statement is not expected to have a material effect on
the Company's consolidated financial statements.
-6-
<PAGE>
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 2000 increased by over 8% compared to
revenues in the corresponding 1999 quarter. The increase is primarily a result
of net new service agreements obtained from new clients.
Cost of services provided as a percentage of revenues increased to
88.5% for the first quarter of 2000 from 85.2 % in the corresponding 1999
quarter. The primary factors affecting specific variations in the 2000 first
quarter's cost of services provided as a percentage of revenue and their effects
on the 3.3% increase are as follows: an increase of 1.7% in labor costs and
payroll related taxes; an increase .7% in workers' compensation, general
liability and other insurance; and an increase of .6% in health insurance and
employee benefits,
Selling, general and administrative expenses as a percentage of revenue
remained constant in the first quarter of 2000 at 7.7% as compared to the
corresponding 1999 three month period.
Liquidity and Capital Resources
At March 31, 2000 the Company had working capital and cash of
$69,907,988 and $13,537,802 respectively, compared to December 31, 1999 working
capital and cash of $69,784,823 and $17,198,687.
The net cash used by the Company's operating activities was $2,742,538
for the three month period ended March 31, 2000 as compared to net cash provided
of $2,019,921 in the same 1999 period. The principle sources of net cash flows
from operating activities for the three month periods ended March 31, 2000 and
1999 were net income, charges to operations for bad debt provisions and the
timing of payments for income taxes. In addition, cash flows in the three month
period ended March 31, 1999 benefited from a $2,477,742 increase 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. During the three month period ended
March 31, 1999 the operating activity that used the largest amount of cash was a
$3,046,297 decrease in accounts payable which resulted from the timing of
payments to vendors. In addition operating activities' cash flows for the three
month periods ended March 31, 1999 decreased by $2,676,291 as a result of net
increases in accounts and notes receivable and long term notes receivable. The
net increases in these amounts resulted primarily from the growth in the
Company's revenues and timing of collections.
The Company's principal use of cash in investing activities for the
three month periods ended March 31, 2000 and 1999 was the purchase of property
and equipment.
-7-
<PAGE>
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 and others
may follow. This, 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 the 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 $750,000 in the three month periods ended March 31, 2000 and
1999, 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, that expires on September 30, 2000. Amounts drawn under the line are
payable on demand. At March 31, 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 relates to payment obligations
under the Company's insurance program.
At March 31, 2000, the Company had $13,537,802 of cash and cash
equivalents, which it views as its principal measure of liquidity.
-8-
<PAGE>
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 through the end of calendar year 2000, it estimates that it will
incur capital expenditures of approximately $2,500,000 during this year in
connection with housekeeping equipment and laundry and linen equipment
installations in its clients' facilities. 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 $550,625 to purchase
85,000 shares of its common stock during the first quarter of 2000 at an average
price of $6.48 per common share. The Company remains authorized to purchase
363,950 shares pursuant to previous Board of Directors' action.
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 for fiscal
years beginning after June 15, 2000.
Adoption of this statement is not expected to have a material effect on
the Company's consolidated financial statements.
Other Matters - Year 2000 Compliance
The Company has implemented new operating and application software
which became fully operational during 1998. The Company has been notified by its
software manufacturer, as well as the firm providing installation support, that
the new applications have functionality for the year 2000. Additionally, the
Company utilizes an independent service bureau for the processing and payment of
payroll and payroll related taxes. The Company has been notified by its payroll
processing company that all of its systems will be fully compliant with year
2000 requirements. Many of the Company's clients participate in programs funded
by federal and state governmental agencies which may be affected by year 2000
issues. Any failure by the Company, its outside processing company, its clients
or the federal and state governmental agencies to effectively monitor, implement
or improve the above referenced operational, financial, management and technical
support systems could have a material adverse effect on the Company's business
and consolidated results of operations.
-9-
<PAGE>
The Company has not encountered any processing complications, nor has
the Company incurred any additional expense, in regards to the above noted
applications' year 2000 functionality. Additionally, the Company has not
experienced any year 2000 functionality problems with independent service
providers or outside processing companies. Furthermore, there has been no
notification to the Company by its clients that they have been affected by any
year 2000 issues impacting their governmental funding.
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
System ("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 and others may follow. This, 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 believes that it will be
able to recover increases in costs attributable to inflation by continuing to
pass through cost increases to its clients.
-10-
<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 Not Applicable
Holders
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
-11-
<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.
May 4, 2000 /s/ Daniel P. McCartney
- -------------------- ----------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
May 4, 2000 /s/ Thomas A. Cook
- -------------------- ----------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
May 4, 2000 /s/ James L. DiStefano
- -------------------- ----------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
May 4, 2000 /s/ Richard W. Hudson
- -------------------- ----------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
-12-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 13,537,802
<SECURITIES> 0
<RECEIVABLES> 58,324,230
<ALLOWANCES> 7,318,000
<INVENTORY> 8,813,603
<CURRENT-ASSETS> 77,301,415
<PP&E> 17,155,065
<DEPRECIATION> 11,389,077
<TOTAL-ASSETS> 97,229,584
<CURRENT-LIABILITIES> 7,393,427
<BONDS> 0
0
0
<COMMON> 110,666
<OTHER-SE> 87,370,192
<TOTAL-LIABILITY-AND-EQUITY> 97,229,584
<SALES> 0
<TOTAL-REVENUES> 60,127,632
<CGS> 53,224,983
<TOTAL-COSTS> 57,879,784
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,460,839
<INCOME-TAX> 960,000
<INCOME-CONTINUING> 1,500,839
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,500,839
<EPS-BASIC> .14
<EPS-DILUTED> .14
</TABLE>
