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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 March 31,June 30, 2001 Commission File Number 0-12015
HEALTHCARE SERVICES GROUP, INC.
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(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
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 215-639-4274
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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(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,August 2, 2001 is
10,882,84410,888,844
Total of 1417 Pages
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Consolidated Balance Sheets as of 2
March 31, 2001 and December 31, 2000
Consolidated Statements of Income for the Three Months Ended 3
March 31, 2001 and 2000
Consolidated Statements of Cash Flows for the Three Months 4 - 5
ended March 31, 2001 and 2000
Notes To Consolidated Financial Statements 6 - 7
Management's Discussion and Analysis of Financial Condition 8 - 11
and Results Of Operations
Part II. Other Information 12
-----------------
Signatures 13
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of 2
June 30, 2001 and December 31, 2000
Consolidated Statements of Income for the Three Months Ended 3
June 30, 2001 and 2000
Consolidated Statements of Income for the
Six Months Ended June 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the Six Months 5 - 6
ended June 30, 2001 and 2000
Notes To Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition 10 - 14
and Results Of Operations
Item 3. Quantitative and Qualitative Disclosure of 14
Market Risks
Part II. Other Information 15
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Submission of Matters to a Vote of
Security Holders
Signatures 16
-1-
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HEALTHCARE SERVICES GROUP, INC.
Consolidated Balance Sheets
(Unaudited)
March 31,(Unaudited)
June 30, December 31,
2001 2000
-------------------------------------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,417,92626,568,479 $ 22,841,618
Accounts and notes receivable, less allowance
for doubtful accounts of $5,173,000$5,999,000 in 2001 and
$4,914,000 in 2000 51,771,23451,762,796 52,744,352
Prepaid income taxes 1,128,624
Inventories and supplies 8,053,8118,008,540 8,383,963
Deferred income taxes 1,009,8831,411,358 839,103
Prepaid expenses and other 2,156,2482,136,981 2,184,141
------------ ------------
Total current assets 84,409,10289,888,154 88,121,801
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 7,014,9517,006,186 7,303,508
Housekeeping and office equipment 9,854,51310,144,046 9,696,825
Autos and trucks 21,329 21,329
------------ ------------
16,890,79317,171,561 17,021,662
Less accumulated depreciation 11,932,21112,342,222 11,863,635
------------ ------------
4,958,5824,829,339 5,158,027
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,662,437$1,689,343 in 2001 and
$1,635,531 in 2000 1,693,0401,666,134 1,719,946
DEFERRED INCOME TAXES 1,378,2061,772,931 1,366,186
OTHER NONCURRENT ASSETS 12,553,08212,790,843 11,976,905
------------ ------------
$104,992,012$110,947,401 $108,342,865
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 4,391,4603,860,108 $ s 4,829,183
Accrued payroll, accrued and withheld payroll taxes 4,051,2757,556,528 8,209,344
Income taxes payable 15,766261,026
Other accrued expenses 101,631228,485 181,466
Accrued insurance claims 904,8321,089,182 906,699
------------ ------------
Total current liabilities 9,464,96412,995,329 14,126,692
ACCRUED INSURANCE CLAIMS 3,403,8924,097,397 3,410,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 30,000,000
shares authorized, 11,105,34411,109,494 shares issued
in 2001 and 11,066,591 in 2000 111,053111,095 110,666
Additional paid in capital 25,525,35925,551,430 25,315,753
Retained earnings 67,769,55769,474,963 66,140,713
Common stock in treasury, at cost, 222,500
shares in 2001 and 127,500 shares in 2000 (1,282,813) (761,875)
------------ ------------
Total stockholders' equity 92,123,15693,854,675 90,805,257
------------ ------------
$104,992,012$110,947,401 $108,342,865
============ ============
See accompanying notes.
-2-
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Healthcare Services Group, Inc.
Consolidated Income Statements
(Unaudited)
For the Three Months Ended March 31,
--------------------------------June 30,
2001 2000
----------- -----------------------
Revenues $66,618,070 $60,127,632$69,275,449 $ 63,850,063
Operating costs and expenses:
Costs of services provided 59,082,359 53,224,98361,402,484 56,264,096
Selling, general and administrative 5,172,129 4,654,8015,334,186 4,955,434
Other Income :Income:
Interest Income 307,263 212,991257,227 224,030
----------- -----------------------
Income before income taxes 2,670,845 2,460,8392,796,006 2,854,563
Income taxes 1,042,000 960,0001,090,600 1,100,000
----------- -----------------------
Net Income $ 1,628,8451,705,406 $ 1,500,8391,754,563
=========== =======================
Basic earnings per common share $ 0.150.16 $ 0.140.16
=========== =======================
Diluted earnings per common share $ 0.150.16 $ 0.140.16
=========== =======================
See accompanying notes
-3-
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Healthcare Services Group, Inc.
Consolidated Income Statements
(Unaudited)
For the Six Months Ended June 30,
2001 2000
------------ ------------
Revenues $135,893,519 $123,977,694
Operating costs and expenses:
Costs of services provided 120,484,843 109,489,079
Selling, general and administrative 10,506,315 9,610,235
Other Income :
Interest Income 564,490 437,021
------------ ------------
Income before income taxes 5,466,851 5,315,401
Income taxes 2,132,600 2,060,000
------------ ------------
Net Income $ 3,334,251 $ 3,255,401
============ ============
Basic earnings per common share $ 0.31 $ 0.30
============ ============
Diluted earnings per common share $ 0.30 $ 0.30
============ ============
See accompanying notes
-4-
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HEALTHCARE SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the ThreeSix Months Ended
March 31,
---------------------------------June 30,
-----------------------------------
2001 2000
---- --------------- -----------
Cash flows from operating activities:
Net Income $ 1,628,8453,334,251 $ 1,500,8393,255,401
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 588,276 543,4751,163,379 1,127,286
Bad debt provision 750,000 750,0002,350,000 1,500,000
Deferred income taxes (benefits) (182,800) 111,626tax benefits (979,000) (120,000)
Tax benefit of stock option transactions 3,752 832
Changes in operating assets and liabilities:
Accounts and notes receivable 223,118 (3,143,456)(1,368,444) (6,720,560)
Prepaid income taxes 1,128,624 794,847843,889
Inventories and supplies 330,152 (233,422)375,423 (54,423)
Long-term notes receivable (419,427) (1,124,505)(713,277) (105,698)
Accounts payable and other accrued expenses (517,559) 448,447(922,056) 836,760
Accrued payroll, accrued and withheld payroll
taxes (3,948,075) (2,134,835)(442,823) 1,548,967
Income taxes payable 15,766261,026 395,924
Accrued insurance claims (8,891) (83,257)868,964 64,024
Prepaid expenses and other assets (128,859) (173,129)
------------ ------------(53,503) (192,381)
----------- -----------
Net cash used inprovided by operating activities (540,830) (2,742,538)
------------ ------------5,006,316 2,380,021
----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 86,123 52,233146,219 138,496
Additions to property and equipment (448,047) (438,258)
------------ ------------(927,097) (855,013)
----------- -----------
Net cash used in investing activities (361,924) (386,025)
------------ ------------(780,878) (716,517)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (520,938) (550,625)(761,875)
Proceeds from the exercise of stock options 18,303
------------ ------------22,361 18,302
----------- -----------
Net cash used in financing activities (520,938) (532,322)
------------ ------------(498,577) (743,573)
----------- -----------
Net decreaseincrease in cash and cash equivalents (1,423,692) (3,660,885)3,726,861 919,931
Cash and cash equivalents at beginning of the year 22,841,618 17,198,687
------------ ----------------------- -----------
Cash and cash equivalents at end of the period $ 21,417,926 $ 13,537,802
============ ============$26,568,479 $18,118,618
=========== ===========
See accompanying notes.
-4--5-
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For the Three Months Ended
March 31,
---------------------------------
2001 2000
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Supplementary Cash Flow Information:
Issuance of common stock pursuant to
Employee Stock Purchase Plan $ 209,993
============
-5-For the Six Months Ended
June 30,
-------
2001 2000
---- -------
Supplementary Cash Flow Information:
Issuance of 38,753 shares of common stock
Pursuant to Employee Stock Purchase Plan $209,993 $ -0-
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-6-
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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 (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. The balance
sheet shown in this report as of December 31, 2000 has been derived from, and
does not include, all the disclosures contained in the financial statements for
the year ended December 31, 2000. The financial statements should be read in
conjunction with the financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000. The
results of operations for the three and six month periodperiods ended March 31,June 30, 2001
and 2000 are not necessarily indicative of the results that may be expected for
the full fiscal year.
Note 2 - Other Contingencies
The Company has an $18,000,000 bank line of credit under which it may
draw to meet short-term liquidity requirements or for other purposes, that
expires on September 30, 2001. Amounts drawn under the line are payable upon
demand. At both March 31,June 30, 2001 and December 31, 2000, there were no borrowings
under the line. However, at such dates, the Company had outstanding
approximately $13,000,000 of irrevocable standby letters of credit, which relate
to payment obligations under the Company's insurance program. As a result of the
letters of credit issued, the amount available under the line was reduced by
approximately $13,000,000 at both March 31,June 30, 2001 and December 31, 2000.
The Company is also involved in miscellaneous claims and litigation
arising in the ordinary course of business. The Company believes that these
matters, taken individually or in the aggregate, would not have a material
adverse impact on the Company's financial position or results of operations.
Federal legislation enacted in August 1997 changed Medicare policy in a
number of ways, most notably the phasing in, effective July 1, 1998, of a
Medicare Prospective Payment System ("PPS") for skilled nursing facilities which
significantly changed the manner and the amounts of reimbursement they receive.
The Company's clients have been adversely affected by PPS, as well as other
trends in the long-term care industry resulting in certain of the Company's
clients filing for bankruptcy. Others may follow. These factors, in addition to
delays in payments from clients, have resulted in and could result in additional
bad debts in the near future.
-6--7-
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Note 3 - Segment Information
The Company provides housekeeping, laundry, linen, facility maintenance
and food services to the healthcare industry. TheAlthough there are several service
categories, the Company considers its business to consist of one reportable
operating segment, based onby reason of the service business
categories, provided to a client facility, sharing similarsimilarities of the economic characteristics
inof such services, the nature of the service provided, methodmethods of delivering servicesuch services and the commonality of
overall client base. AlthoughWhile the Company does provide services in Canada,
essentially all of its revenue and net income, approximately 99% in each case,
is earned in one geographic area, the United States.
The Company earned revenue in the following service business
categories:
For the three month period ended March 31,
------------------------------------------June 30,
-----------------------------------------
2001 2000
----------- ---------------- ----
Housekeeping services $40,435,076 $38,434,188$ 41,852,475 $ 41,110,058
Laundry & linen services 16,701,985 17,105,99517,036,475 17,104,103
Food Services 8,742,434 3,882,1039,673,097 4,802,810
Maintenance services &
Other 738,575 705,346
----------- -----------
$66,618,070 $60,127,632
=========== ===========713,402 833,092
------------ ------------
$ 69,275,449 $ 63,850,063
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For the six month period ended June 30,
---------------------------------------
2001 2000
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Housekeeping services $ 82,287,551 $ 79,544,246
Laundry & linen services 33,746,141 34,213,292
Food Services 18,415,530 8,684,913
Maintenance services &
Other 1,444,297 1,535,243
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$135,893,519 $123,977,694
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-8-
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Note 4 - Earnings Per Common Share
Three Months Ended March 31, 2001
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $1,628,845
==========
Basic earnings per
common share $1,628,845 10,948,372 $ .15
Effect of dilutive securities:
Options 23,708
---------- ---------- ----------
Diluted earnings per
Common share $1,628,845 10,972,080 $ .15
========== ========== ==========
-7-
Three Months Ended June 30, 2001
--------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $1,705,406
==========
Basic earnings per
common share $1,705,406 10,883,845 $ .16
Effect of dilutive securities:
Options 89,169
---------- ---------- --------
Diluted earnings per
Common share $1,705,406 10,973,014 $ .16
========== ========== ========
Three Months Ended June 30, 2000
--------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $1,754,563
==========
Basic earnings per
common share $1,754,563 10,946,595 $ .16
Effect of dilutive securities:
Options 5,717
---------- ----------- ---------
Diluted earnings per
Common share $1,754,563 10,952,312 $ .16
========== =========== =========
Six Months Ended June 30, 2001
------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $3,334,251
==========
Basic earnings per
common share $3,334,251 10,915,930 $ .31
Effect of dilutive securities:
Options 56,439
---------- ----------- ---------
Diluted earnings per
Common share $3,334,251 10,972,369 $ .30
========== =========== =========
Six Months Ended June 30, 2000
------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $3,255,401
==========
Basic earnings per
common share $3,255,401 10,988,790 $ .30
Effect of dilutive securities:
Options 40,208
---------- ----------- ---------
Diluted earnings per
Common share $3,255,401 11,028,998 $ .30
========== =========== =========
-9-
---
Three Months Ended March 31, 2000
-------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $1,500,839
==========
Basic earnings per
common share $1,500,839 11,033,140 $ .14
Effect of dilutive securities:
Options 74,698
---------- ---------- ---------
Diluted earnings per
Common share $1,500,839 11,107,838 $ .14
========== ========== =========
Note 5 - Effect of Recently Issued Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which requires all entities to recognize
all derivative instruments on their balance sheet as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods of
accounting for hedging transactions, prescribes the items and transactions that
my be hedged, and specifies detailed criteria to be met to qualify for hedge
accounting. SFAS No. 133, as amended by SFAS No.Nos. 137 and 138, is effective
beginning January 1, 2001. This standard does not have a material effect on the
Company's financial statements.
Business Combinations and Intangible Assets - Accounting for Goodwill
---------------------------------------------------------------------
In May 2001, the Financial Accounting Standards Board established a
transition provision in association with their review of accounting standards
relating to business combinations previously issued within the Exposure Draft,
"Business Combinations and Intangible Assets" in 1999 and subsequently reissued
in February 2001 as "Business Combinations and Intangible Assets - Accounting
for Goodwill." The statements were issued in July 2001. Among other rules stated
within the transition provision, calendar year end companies will be required to
continue to amortize goodwill and other related intangible assets until the
beginning of fiscal year 2002. At the transition date, goodwill will no longer
be amortized, but will be tested for impairment annually, and any impairment
charge resulting from the initial application of the new rules will be
classified as a cumulative change in accounting principle.
PART I.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the firstsecond quarter of 2001 increased by 11%8.5% compared to
revenues in the
corresponding 2000 quarter. Revenues for the six months ended June 30, 2001
increased by 9.6% over the corresponding 2000 six month period. The increase
is primarily a result
ofresults from new food service agreements obtained from existing
clients, as well as increases in other services provided to new clients.
Cost of services provided as a percentage of revenues increased slightly to
88.7%88.6% for the firstsecond quarter of 2001 from 88.588.1 % in the corresponding 2000
quarter. In addition, cost of services as a percentage of revenue increased to
88.7% for the six month period ended June 30, 2001 from 88.3% in the same 2000
period. The primary factors affecting specific variations in the 2001 first quarter'ssecond
-10-
----
quarter and six month period's cost of services provided as a percentage of
revenue and their effects on the .2% increaserespective .5% and .4% increases are as
follows: in the second quarter an increase of 3.3%2.0% in the cost of supplies
consumed in providing services which is primarily attributable to increased food
costs associated with food service clients; and an increase .5%of 1.3% in workers'
compensation, general liability and other insurance; an increase of 1.1% in bad
debt expense; offsetting these increases waswere decreases of 2.5% in labor costs
and a decrease.9% in health insurance and employee benefits; in the six month period an
increase of 3.3%2.6% in the cost of labor.
-8-
supplies consumed in providing services which is
primarily attributable to increased food costs associated with food service
clients; an increase of .9% in workers' compensation, general liability and
other insurance; and an increase of .5% in bad debt expense; offsetting these
increases were decreases of 2.9% in labor costs and .5% in health insurance and
employee benefits.
Selling, general and administrative expenses as a percentage of revenue
remained essentially unchangeddecreased in the firstsecond quarter of 2001 at 7.8% asto 7.7% compared to 7.7%8.1% in the
corresponding 2000 three month period. Additionally, during the six month period
ended June 30, 2001 selling, general and administrative expenses as a percentage
of revenue decreased slightly to 7.7% as compared to 7.8% in the corresponding
2000 period. The three and six month 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.
Liquidity and Capital Resources
At March 31,June 30, 2001 the Company had working capital and cash of
$74,944,138$76,892,826 and $21,417,926$26,568,479, respectively, representing increases of 3.9% and
16.3%, respectively, compared to December 31, 2000 working capital and cash of
$73,995,109 and $22,841,618.
The net cash usedprovided by the Company's operating activities was
$750,823$5,006,316 for the threesix month period ended March 31,June 30, 2001 as compared to net cash
usedprovided by operating activities of $2,742,538$2,380,021 in the same 2000 period. The
principal sources of net cash flows from operating activities for the threesix month
periods ended March 31,June 30, 2001 and 2000 were net income, charges to operations for
bad debt provisions and depreciation and amortization. Additionally, operating
activities' cash flows for the six month period ended June 30, 2000 increased by
$1,548,967 resulting from the timing of payments for incomepayroll and payroll related
taxes. The operating activity that used the largest amount of cash during each
of the threesix month periodperiods ended March 31,June 30, 2001 was a $3,948,075
decrease in accrued payroll, accrued and withheld payroll taxes resulting from
the timing of these payments. The operating activity that used the largest
amount of cash during the three month period ended March 31, 2000 was a
$4,267,961were net increaseincreases in
accounts and notes receivable and long term notes receivable.receivable of $2,081,721 in
2001 and $6,826,258 in 2000. The net increases in these amounts resulted
primarily from the timing of collections from clients. Additionally, first quarter 2000in the six
month period ended June 30, 2001 cash flows were negatively impacted by a
$2,134,835$922,056 decrease in accounts payable and other accrued payroll, accrued
and withheld payroll taxesexpenses resulting from
the timing of these payments.payments to vendors.
The Company's principal use of cash in investing activities forin each of
the threesix month periods ended March 31,June 30, 2001 and 2000 was the purchase of property
and equipment.
-11-
----
The Company expends considerable effort to collect the amounts due for
its services on the terms agreed upon with its clients. Many of the Company's
clients participate in programs funded by federal and state governmental
agencies which historically have encountered delays in making payments to its
program participants. Additionally, legislation enacted in August 1997 changed
Medicare policy in a number of ways, most notably the phasing in, effective July
1, 1998 of a Medicare Prospective Payment System ("PPS") for skilled nursing
facilities which significantly changed the manner and amount of reimbursements
they receive. The Company's clients have been adversely affected by PPS, as well
as other trends in the long-term care industry resulting in certain of the
Company's clients filing for voluntary bankruptcy protection. Others may follow.
These factors, in addition to delays in payments from clients, has resulted in
and could result in additional bad debts in the near future. Whenever possible,
when a client falls behind in making agreed-upon payments, the Company converts
the unpaid accounts receivable to interest bearing promissory notes. The
promissory notes receivable provide a means by which to further evidence the
amounts owed and provide a definitive repayment plan and therefore may
ultimately enhance the Company's ability to collect the amounts due. In some
instances the Company obtains a security interest in certain of the debtors'
assets. Additionally, the Company considers restructuring service agreements
from full service to management-only service in the case of certain clients
experiencing financial difficulties. The Company believes that the restructuring
provides it with a means to maintain a relationship with the client while at the
same time minimizing collection exposure.
-9-
The Company encounters difficulty in collecting amounts due from
certain of its clients, including those in bankruptcy, those which have
terminated service agreements and slow payers experiencing financial
difficulties. In order to provide for these collection problems and the general
risk associated with the granting of credit terms, the Company has recorded bad
debt provisions of $750,000$2,350,000 and $1,500,000 in the threesix month periods ended March 31,June
30, 2001 and 2000, respectively. In making its evaluation, in addition to
analyzing, and anticipating, where possible, the specific cases described above,
management considers the general collection risk associated with trends in the
long-term care industry.
The Company has an $18,000,000 bank line of credit on which it may draw
to meet short-term liquidity requirements in excess of internally generated cash
flow. This facility expires on September 30, 2001. Amounts drawn under the line
are payable on demand. At March 31,June 30, 2001, there were no borrowings under the
line. However, at such date, the Company had outstanding approximately
$13,000,000 of irrevocable standby letters of credit, which relate to payment
obligations under the Company's insurance program. As a result of the letters of
credit issued, the amount available under the line was reduced by approximately
$13,000,000 at March 31,June 30, 2001.
At March 31,June 30, 2001, the Company had $21,417,926$26,568,479 of cash and cash
equivalents, which it views as its principal measure of liquidity.
The level of capital expenditures incurred by the Company is generally
dependent on the number of new clients obtained. Such capital expenditures
primarily consist of housekeeping equipment and laundry and linen equipment
installations. Although the Company has no specific material commitments for
-12-
----
capital expenditures through the end of calendar year 2001, it estimates that it
will incur capital expenditures of approximately $2,000,000 during this period
in connection with housekeeping equipment and laundry and linen equipment
installations in its clients' facilities, as well as expenditures relating to
internal data processing hardware and software requirements. The Company
believes that its cash from operations, existing balances and credit line will
be adequate for the foreseeable future to satisfy the needs of its operations
and to fund its continued growth. However, if the need arose, the Company would
seek to obtain capital from such sources as long-term debt or equity financing.
In accordance with the Company's previously announced authorizations to
purchase its outstanding common stock, the Company expended approximately
$521,000 to purchase 95,000 shares of its common stock during the first quarter
ofsix month
period ended June 30, 2001 at an average price of $5.48 per common share. TheIn
addition, on July 18, 2001, the Company's Board of Directors authorized the
future purchase of up to 600,000 shares of its common stock on the open market.
As a result of this action, as well as previous Board of Directors' actions, the
Company remains authorized to purchase 226,450 shares pursuant to previous Board of Directors'
action.
-10-
an additional 826,450 shares.
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.Nos. 137 and 138, is effective
beginning January 1, 2001. This standard does not have a material effect on the
Company's financial statements.
Business Combinations and Intangible Assets - Accounting for Goodwill
- ---------------------------------------------------------------------
In May 2001, the Financial Accounting Standards Board established a
transition provision in association with their review of accounting standards
relating to business combinations previously issued within the Exposure Draft,
"Business Combinations and Intangible Assets" in 1999 and subsequently reissued
in February 2001 as "Business Combinations and Intangible Assets - Accounting
for Goodwill." The statements were issued in July 2001. Among other rules stated
within the transition provision, calendar year end companies will be required to
continue to amortize goodwill and other related intangible assets until the
beginning of fiscal year 2002. At the transition date, goodwill will no longer
be amortized, but will be tested for impairment annually, and any impairment
charge resulting from the initial application of the new rules will be
classified as a cumulative change in accounting principle.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
The Company's exposure to market risk is not significant.
Cautionary Statements Regarding Forward Looking Statements
Certain matters discussed may include forward-looking statements that
are subject to risks and uncertainties that could cause actual results or
objectives to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, risks arising from the Company
providing its services exclusively to the health care industry, primarily
providers of long-term care; credit and collection risks associated with this
industry; the effects of changes in regulations governing the industry and risk
factors described in the Company's Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 2000 in Part I thereof under
"Government Regulation of Clients", "Competition" and "Service
Agreements/Collections". The Company's clients have been adversely affected by
the change in Medicare payments under the 1997 enactment of Prospective Payment
System ("PPS"), as well as other trends in the long-term care industry resulting
in certain of the Company's clients filing voluntary bankruptcy petitions.
Others may follow. These factors, in addition to delays in payments from clients
has resulted in and could result in additional bad debts in the near future.
Additionally, the Company's operating results would be adversely affected if
unexpected increases in labor and labor related costs, materials, supplies and
equipment used in performing its services could not be passed on to clients.
In addition, the Company believes that to improve its financial
performance it must continue to obtain service agreements with new clients,
provide new services to existing clients, achieve modest price increases on
current service agreements with existing clients and maintain internal cost
reduction strategies at the various operational levels of the Company.
Furthermore, the Company believes that its ability to sustain the internal
development of managerial personnel is an important factor impacting future
operating results and successfully executing projected growth strategies.
Effects of Inflation
All of the Company's service agreements allow it to pass through to its
clients increases in the cost of labor resulting from new wage agreements. The
Company believes that it will be able to recover increases in costs attributable
to inflation by continuing to pass through cost increases to its clients.
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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
c) The Company's Annual Meeting of Shareholders was held on May 22, 2001. The
results are as follows:
(1) All of management's nominees for directors were elected as follows:
Shares Voted Withheld
"FOR"
7,712,976 1,170,003
(2) Proposal 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, 2001 was approved as follows:
Shares Voted Shares Voted Shares
"FOR" "AGAINST" "ABSTAINING"
8,861,857 18,989 2,133
Item 5. Other Information.
a) None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits - None
b) Reports on Form 8-K - None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE SERVICES GROUP, INC.
-------------------------------
May 1, 2000---------------------------------------
August 2, 2001 /s/ Daniel P. McCartney
- ------------------------- ------------------------------------------------------------------ ---------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
May 1, 2000August 2, 2001 /s/ Thomas A. Cook
- ------------------------- ------------------------------------------------------------------ ---------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
May 1, 2000August 2, 2001 /s/ James L. DiStefano
- ------------------------- ------------------------------------------------------------------ ---------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
May 1, 2000August 2, 2001 /s/ Richard W. Hudson
- ------------------------- ----------------------------------------------------------------- ---------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
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