<PAGE>
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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 June 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 Ientification
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
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Number of shares of common stock, outstanding as of July 25, 2000 is
10,939,091
Total of 15 Pages
<PAGE>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Consolidated Balance Sheets as of
June 30, 2000 and December 31, 1999 2
Consolidated Statements of Income for the Three Months Ended
June 30, 2000 and 1999 3
Consolidated Statements of Income for the Six Months Ended
June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows for the Six Months
ended June 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 - 13
-----------------
Signatures 14
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<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
(Unaudited)
-----------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 18,118,618 $ 17,198,687
Accounts and notes receivables, less allowance
for doubtful accounts of $7,559,000 in 2000 and
$7,278,000 in 1999 53,845,115 48,612,738
Prepaid income taxes 843,889
Inventories and supplies 8,634,604 8,580,181
Deferred income taxes 1,806,698 1,777,536
Prepaid expenses and other 2,114,894 1,869,091
------------ ------------
Total current assets 84,519,929 78,882,122
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 7,797,122 7,824,038
Housekeeping and office equipment 9,429,031 9,012,178
Autos and trucks 51,110 51,110
------------ ------------
17,277,283 16,887,326
Less accumulated depreciation 11,737,687 10,990,792
------------ ------------
5,539,576 5,896,534
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,581,719 in 2000 and
$1,527,907 in 1999 1,773,757 1,827,569
DEFERRED INCOME TAXES 719,391 628,553
OTHER NONCURRENT ASSETS 10,835,563 10,795,104
------------ ------------
$103,388,216 $ 98,029,882
============ ============
LIABILITIES AND STOCKHOLDERS EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,440,744 $ 2,472,021
Accrued payroll, accrued and withheld payroll
taxes 6,966,334 5,417,367
Other accrued expenses 286,003 417,966
Income taxes payable 395,924
Accrued insurance claims 803,390 789,945
------------ ------------
Total current liabilities 11,892,395 9,097,299
ACCRUED INSURANCE CLAIMS 3,022,276 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 25,297,254
Retained earnings 63,808,361 60,552,961
Less: Common stock in treasury, at cost,
127,500 shares in 2000 (761,875)
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Total stockholders' equity 88,473,545 85,960,886
------------ ------------
$103,388,216 $ 98,029,882
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</TABLE>
See accompanying notes.
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<PAGE>
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended June 30,
2000 1999
-----------------------------------
<S> <C> <C>
Revenues $63,850,053 $56,883,026
Operating costs and expenses:
Costs of services provided 56,264,096 4,757,219
Selling, general and administrative 4,955,434 4,579,671
Other Income:
Interest Income 224,030 209,371
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Income before income taxes 2,854,563 3,755,507
Income taxes 1,100,000 1,319,000
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Net Income $ 1,754,563 $ 2,436,507
=========== ===========
Basic earnings per common share $ 0.16 $ 0.22
=========== ===========
Diluted earnings per common share $ 0.16 $ 0.22
=========== ===========
Basic weighted average number
of common shares outstanding 10,946,595 11,048,495
=========== ===========
Diluted weighted average number
of common shares outstanding 10,952,312 11,323,505
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended June 30,
2000 1999
---------------------------------
<S> <C> <C>
Revenues $123,977,694 $112,505,230
Operating costs and expenses:
Costs of services provided 109,489,079 96,160,521
Selling general and administrative 9,610,235 8,880,491
Other Income:
Interest income 437,021 407,296
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Income before income taxes 5,315,401 7,871,514
Income taxes 2,060,000 3,006,000
------------ ------------
Net Income $ 3,255,401 $ 4,865,514
============ ============
Basic earnings per common share $ 0.30 $ 0.44
============ ============
Diluted earnings per common share $ 0.30 $ 0.43
============ ============
Basic weighted average number
of common shares outstanding 10,988,791 11,048,620
============ ============
Diluted weighted average number
of common shares outstanding 11,028,998 11,351,754
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
--------------------------------
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,255,401 $ 4,865,514
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,127,286 933,181
Bad debt provision 1,500,000 1,500,000
Deferred income taxe (120,000) 68,928
Tax benefit of stock option transactions 832 31,879
Changes in operating assets and liabilities:
Accounts and notes receivable (6,720,560) (5,416,819)
Prepaid income taxes 843,889 (11,030)
Inventories and supplies (54,423) (641,399)
Long term notes receivable (105,698) (562,375)
Accounts payable and other accrued expenses 836,760 (2,688,694)
Accounts payroll, accrued and withheld
payroll taxes 1,548,967 (95,727)
Accrued insurance claims 64,024 471,148
Income taxes payable 395,924 (283,980)
Prepaid expenses and other assets (192,381) 16,834
----------- -----------
Net cash provided by (used in) operating activities 2,380,021 (1,812,540)
----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 138,496 1,561
Additions to property and equipment (855,013) (1,152,399)
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Net cash used in investing activities (716,517) (1,150,838)
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Cash flows from financing activities:
Purchase of treasury stock (761,875) (183,750)
Proceeds from the exercise of stock options 18,302 186,998
----------- -----------
Net cash provided by (used in) financing activities (743,573) 3,248
----------- -----------
Net increase (decrease) in cash and cash equivalents 919,931 (2,960,130)
Cash and cash equivalents at beginning of the year 17,198,687 17,201,408
----------- -----------
Cash and cash equivalents at end of the period $18,118,618 $14,241,278
=========== ===========
</TABLE>
See accompanying notes.
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<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 six month periods ended June 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, 2000. Amounts drawn under the line are payable upon demand. At
both June 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 June 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 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 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 June 30,
----------------------------------------------
2000 1999
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Housekeeping services $41,110,000 $36,705,000
Laundry & linen services 17,100,000 16,300,000
Food services 4,803,000 2,991,000
Maintenance services &
Other 837,000 887,000
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$63,850,000 $56,883,000
=========== ===========
For the six month period ended June 30,
-----------------------------------------------
2000 1999
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Housekeeping services $ 79,544,000 $ 72,833,000
Laundry & linen services 34,206,000 32,576,000
Food services 8,685,000 5,447,000
Maintenance services &
Other 1,543,000 1,649,000
------------ ------------
$123,978,000 $112,505,000
============ ============
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.
-7-
<PAGE>
PART I.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the second quarter of 2000 increased by 12.2% over
revenues in the corresponding 1999 quarter. Revenues for the six months ended
June 30, 2000 increased by 10.2% over the corresponding 1999 period. The three
and six 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
88.1% for the second quarter of 2000 from 85.7% in the corresponding 1999
quarter. In addition, cost of services as a percentage of revenue increased to
88.3% for the six month period ended June 30, 2000 from 85.5% in the same 1999
period. The primary factors affecting specific variations in the 2000 second
quarter and six month period's cost of services provided as a percentage of
revenue and their effects on the respective 2.4% and 2.8% increases are as
follows: in the second quarter an increase of 1.9% in the cost of supplies
consumed in performing services and an increase of .6% in health insurance and
employee benefits costs; offsetting these increases was a decrease of .3% in
labor costs and payroll related taxes; in the six month period an increase of
.9% in the cost of supplies consumed in performing services, an increase of .7%
in labor costs and payroll related taxes, and a .6% increase in health insurance
and employee benefits costs.
Selling, general and administrative expenses as a percentage of revenue
decreased in the second quarter of 2000 to 7.8% as compared to 8.1% in the
corresponding 1999 three month period. Additionally, during the six month period
ended June 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 six 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.
The effective income tax rate is decreased for the three and six month
periods ended June 30, 1999, 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 June 30, 2000 the Company had working capital and cash and cash
equivalents of $72,627,534 and $18,118,618, respectively, which represents an
increase of 4% in working capital, as well as a 5% 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.
The net cash provided by the Company's operating activities was
$2,380,021 for the six month period ended June 30, 2000 as compared to net cash
used of $1,812,540 in the same 1999 period. The principle sources of cash flows
from operating activities were: for the six month period ended June 30, 2000 net
income, the timing of payments for payroll and payroll related taxes, charges to
operations for bad debt provisions and depreciation and amortization; in the six
month period ended June 30, 1999 net income, charges to operations for bad debt
-8-
<PAGE>
provisions and depreciation and amortization. The operating activity that used
the largest amount of cash was a net increase in accounts and long term notes
receivable at June 30, 2000 and 1999 of $6,826,258 and $5,979,194, respectively.
The increases in these amounts resulted primarily from the growth in the
Company's revenues. Additionally, operating activities' cash flows for the six
month period ended June 30, 1999 was decreased by $2,688,694 as a result of the
timing of payments to vendors.
The Company's principle use of cash in investing activities in each of
the six month periods ended June 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 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 $1,500,000 in each of the six month periods ended June 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.
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 June 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 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 June 30, 2000 and December 31, 1999.
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<PAGE>
At June 30, 2000, the Company had $18,118,618 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 $2,500,000 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
purchase its outstanding common stock, the Company expended $761,875 to purchase
127,500 shares of its common stock in the six months period June 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
System ("PPS"), as well as other trends in the long-term care industry resulting
in certain of the Company's clients recently filing voluntary bankruptcy
petitions 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.
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<PAGE>
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.
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<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
(c) The Company's Annual Meeting of Shareholders was held on May 30, 2000.
The results are as follows:
(1) All of management's nominees for directors were elected as follows:
Shares Voted Withheld
"FOR"
7,569,126 1,016,144
(2) Proposal to approve an amendment to the Company's 1995 Employee
Stock Option Plan to increase the number of shares of Common Stock,
$.01 par value of the Company reserved for issuance thereunder from
a maximum of 500,000 to 1,000,000 was approved as follows:
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" "UNVOTED"
4,040,496 3,303,868 6,961 1,233,945
(3) Proposal to approve and adopt the Company's 1999 Employee Stock
Purchase Plan was approved as follows:
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" "UNVOTED"
6,247,749 1,101,240 2,336 1,233,945
(4) Proposal to approve and adopt the Company's 1999 Deferred
Compensation Plan was approved as follows:
Shares Voted Shares Voted Shares Shares
"FOR" "AGAINST" "ABSTAINING" "UNVOTED"
7,280,742 68,397 2,186 1,233,945
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<PAGE>
(5) Proposal to approve an amendment to the Company's Articles of
Incorporation increasing the number of authorized shares of Common
Stock by 15,000,000 shares to 30,000,000 shares of Common Stock was
approved as follows:
Shares Voted Shares Voted Shares
"FOR" "AGAINST" "ABSTAINING"
7,749,068 827,763 8,439
(6) Proprosal to approve and ratify selection of Grant Thornton LLP as
the independent public accountants of the Company for its current
fiscal year ending December 31, 2000 was approved as follows:
Shares Voted Shares Voted Shares
"FOR" "AGAINST" "ABSTAINING"
8,558,348 25,224 1,698
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
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<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.
-------------------------------
July 31, 2000 /s/ Daniel P. McCartney
---------------------- -------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
July 31, 2000 /s/ Thomas A. Cook
---------------------- -------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
July 31, 2000 /s/ James L. DiStefano
---------------------- -------------------------------------
Date JAMES L. DiSTEFANO,
Chief Financial Officer and
Treasurer
July 31, 2000 /s/ Richard W. Hudson Date
---------------------- -------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and
Chief Accounting Officer
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