================================================================================
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 JuneSeptember 30, 2001 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( 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 August 2,October 29,
2001 is 10,888,84410,910,919
Total of 1716 Pages
INDEX
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
---------------------
--------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of 2
JuneSeptember 30, 2001 and December 31, 2000
Consolidated Statements of Income for the Three Months Ended 3
JuneSeptember 30, 2001 and 2000
Consolidated Statements of Income for the
SixNine Months Ended JuneSeptember 30, 2001 and 2000 4
Consolidated Statements of Cash Flows for the SixNine Months 5 - 6
ended JuneSeptember 30, 2001 and 2000
Notes To Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of Financial Condition 10 - 1413
and Results Of Operations
Item 3. Quantitative and Qualitative Disclosure of 13 - 14
Market Risks
Part II. Other Information 15
-----------------
Submission of Matters to a Vote of
Security Holders
Signatures 16
-1-
---
HEALTHCARE SERVICES GROUP, INC.Balance Sheet
Consolidated Balance Sheets
(Unaudited)
JuneSeptember 30, December 31,
2001 2000
------------ -----------------------------------------
ASSETS
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,568,47925,690,195 $ 22,841,618
Accounts and notes receivable, less allowance
for doubtful accounts of $5,999,000$5,662,000 in 2001 and
$4,914,000 in 2000 51,762,79652,798,993 52,744,352
Prepaid income taxes 424,534 1,128,624
Inventories and supplies 8,008,5407,892,487 8,383,963
Deferred income taxes 1,411,3581,233,831 839,103
Prepaid expenses and other 2,136,9812,057,228 2,184,141
------------ ------------------------- -------------
Total current assets 89,888,15490,097,268 88,121,801
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 7,006,1866,802,557 7,303,508
Housekeeping and office equipment 10,144,04610,475,730 9,696,825
Autos and trucks 30,342 21,329
21,329
------------ ------------
17,171,561------------- -------------
17,308,629 17,021,662
Less accumulated depreciation 12,342,22212,457,321 11,863,635
------------ ------------
4,829,339------------- -------------
4,851,308 5,158,027
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,689,343$1,716,249 in 2001 and
$1,635,531 in 2000 1,666,1341,639,228 1,719,946
DEFERRED INCOME TAXES 1,772,9312,044,958 1,366,186
OTHER NONCURRENT ASSETS 12,790,84312,717,104 11,976,905
------------ ------------
$110,947,401------------- -------------
$111,349,866 $108,342,865
============ ========================= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,860,1084,442,895 $ s 4,829,183
Accrued payroll, accrued and withheld payroll taxes 7,556,5285,130,379 8,209,344
Income taxes payable 261,026
Other accrued expenses 228,485131,271 181,466
Accrued insurance claims 1,089,1821,223,954 906,699
------------ ------------------------- -------------
Total current liabilities 12,995,32910,928,499 14,126,692
ACCRUED INSURANCE CLAIMS 4,097,3974,604,400 3,410,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 30,000,000
shares authorized, 11,109,49411,168,969 shares issued
in 2001 and 11,066,591 in 2000 111,095111,690 110,666
Additional paid in capital 25,551,43025,980,145 25,315,753
Retained earnings 69,474,96371,311,945 66,140,713
Common stock in treasury, at cost, 222,500262,500
shares in 2001 and 127,500 shares in 2000 (1,282,813)(1,586,813) (761,875)
------------ ------------------------- -------------
Total stockholders' equity 93,854,67595,816,967 90,805,257
------------ ------------
$110,947,401------------- -------------
$111,349,866 $108,342,865
============ ========================= =============
See accompanying notes.
2
Consolidated Income Statements
(Unaudited)
For the Three Months Ended September 30,
2001 2000
------------- -------------
Revenues $ 72,500,363 $ 65,210,687
Operating costs and expenses:
Costs of services provided 64,157,195 57,374,336
Selling, general and administrative 5,610,918 5,138,984
Other Income :
Interest Income 280,132 265,468
------------- -------------
Income before income taxes 3,012,382 2,962,835
Income taxes 1,175,400 1,155,000
------------- -------------
Net Income $ 1,836,982 $ 1,807,835
============= =============
Basic earnings per common share $ 0.17 $ 0.17
============= =============
Diluted earnings per common share $ 0.17 $ 0.17
============= =============
See accompanying notes.
-2-
---notes
3
Healthcare Services Group, Inc.
Consolidated Income Statements
(Unaudited)
For the ThreeNine Months Ended JuneSeptember 30,
2001 2000
----------- -------------------------- --------------
Revenues $69,275,449 $ 63,850,063208,393,882 $ 189,188,381
Operating costs and expenses:
Costs of services provided 61,402,484 56,264,096184,642,038 166,863,415
Selling, general and administrative 5,334,186 4,955,43416,117,233 14,749,220
Other Income:Income :
Interest Income 257,227 224,030
-----------844,622 702,489
------------- ------------
Income before income taxes 2,796,006 2,854,5638,479,233 8,278,235
Income taxes 1,090,600 1,100,000
-----------3,308,000 3,215,000
------------- ------------
Net Income $ 1,705,4065,171,233 $ 1,754,563
===========5,063,235
============= ============
Basic earnings per common share $ 0.160.47 $ 0.16
===========0.46
============= ============
Diluted earnings per common share $ 0.160.47 $ 0.16
===========0.46
============= ============
See accompanying notes
-3-
---4
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-
---
HEALTHCARE SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
(Unaudited)
For the SixNine Months Ended
JuneSeptember 30,
---------------------------------------------------------------
2001 2000
----------- -----------
------------ ------------
Cash flows from operating activities:
Net Income $ 3,334,2515,171,233 $ 3,255,4015,063,235
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 1,163,379 1,127,2861,665,854 1,640,297
Bad debt provision 2,350,000 1,500,0003,350,000 2,250,000
Deferred income tax benefits (979,000) (120,000)taxes (1,073,500) 93,200
Tax benefit of stock option transactions 3,75264,261 832
Changes in operating assets and liabilities:
Accounts and notes receivable (1,368,444) (6,720,560)(3,404,641) (6,758,625)
Prepaid income taxes 1,128,624 843,889704,090 543,304
Inventories and supplies 375,423 (54,423)491,476 92,389
Long-term notes receivable (713,277) (105,698)(492,278) (1,336,356)
Accounts payable and other accrued expenses (922,056) 836,760(436,483) 1,252,601
Accrued payroll, accrued and withheld payroll
taxes (442,823) 1,548,967
Income taxes payable 261,026 395,924(2,868,973) (1,208,809)
Accrued insurance claims 868,964 64,0241,510,739 41,728
Prepaid expenses and other assets (53,503) (192,381)
----------- -----------(121,010) (195,028)
------------ ------------
Net cash provided by operating activities 5,006,316 2,380,021
----------- -----------4,560,768 1,478,768
------------ ------------
Cash flows from investing activities:
Disposals of fixed assets 146,219 138,496178,470 355,732
Additions to property and equipment (927,097) (855,013)
----------- -----------(1,456,886) (1,322,817)
------------ ------------
Net cash used in investing activities (780,878) (716,517)
----------- -----------(1,278,416) (967,085)
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (520,938)(824,938) (761,875)
Proceeds from the exercise of stock options 22,361391,163 18,302
----------- ----------------------- ------------
Net cash used in financing activities (498,577)(433,775) (743,573)
----------- ----------------------- ------------
Net increase (decrease) in cash and cash equivalents 3,726,861 919,9312,848,577 (231,890)
Cash and cash equivalents at beginning of the year 22,841,618 17,198,687
----------- ----------------------- ------------
Cash and cash equivalents at end of the period $26,568,479 $18,118,618
=========== ===========$ 25,690,195 $ 16,966,797
============ ============
See accompanying notes.
-5-
---5
For the SixNine Months Ended
JuneSeptember 30,
----------------------------------
2001 2000
---- --------------- ---------
Supplementary Cash Flow Information:
Issuance of 38,753 shares of common stock
Pursuant to Employee Stock Purchase Plan $209,993 $ -0-
======== ========
-6-
---=========
6
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 sixnine month periods ended JuneSeptember 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, 2001.2002. Amounts drawn under the line are payable upon
demand. At both JuneSeptember 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 JuneSeptember 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
significant additional bad debts in the near future.
-7-
---7
Note 3 - Segment Information
The Company provides housekeeping, laundry, linen, facility maintenance
and food services to the healthcare industry. Although there are several service
categories, the Company considers its business to consist of one reportable
operating segment, by reason of the similarities of the economic characteristics
of such services, the methods of delivering such services and the commonality of
the overall client base. WhileAlthough 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 JuneSeptember 30,
---------------------------------------------------------------------------------------
2001 2000
----- --------------- -----------
Housekeeping services $ 41,852,475 $ 41,110,058$43,306,942 $41,678,910
Laundry & linen services 17,036,475 17,104,10317,866,018 17,103,752
Food Services 9,673,097 4,802,81010,566,023 5,777,386
Maintenance services &
Other 713,402 833,092
------------ ------------
$ 69,275,449 $ 63,850,063
============ ============761,380 650,639
----------- -----------
$72,500,363 $65,210,687
=========== ===========
For the sixnine month period ended JuneSeptember 30,
------------------------------------------------------------------------------------
2001 2000
---- ------------------ ------------
Housekeeping services $ 82,287,551 $ 79,544,246$125,594,493 $121,223,156
Laundry & linen services 33,746,141 34,213,29251,599,357 51,309,572
Food Services 18,415,530 8,684,91328,981,554 14,462,299
Maintenance services &
Other 1,444,297 1,535,2432,218,478 2,193,354
------------ ------------
$135,893,519 $123,977,694$208,393,882 $189,188,381
============ ============
-8-
---8
Note 4 - Earnings Per Common Share
Three Months Ended JuneSeptember 30, 2001
------------------------------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- --------------------- -----------
Net income $1,705,406$1,836,982
==========
Basic earnings per
common share $1,705,406 10,883,845$1,836,982 10,916,889 $ .16.17
Effect of dilutive securities:
Options 89,169207,370
---------- ---------- -----------------
Diluted earnings per
Common share $1,705,406 10,973,014$1,836,982 11,124,259 $ .16.17
========== ========== ========
=========
Three Months Ended JuneSeptember 30, 2000
------------------------------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
------------ -----------
Net income $1,754,563$1,807,835
==========
Basic earnings per
common share $1,754,563 10,946,595$1,807,835 10,939,057 $ .16.17
Effect of dilutive securities:
Options
5,717
---------- --------------------- ---------
Diluted earnings per
Common share $1,754,563 10,952,312$1,807,835 10,939,057 $ .16.17
========== =========== =========
Six========== ========
Nine Months Ended JuneSeptember 30, 2001
----------------------------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
------------ -----------
Net income $3,334,251$5,171,233
==========
Basic earnings per
common share $3,334,251 10,915,930$5,171,233 10,916,253 $ .31.47
Effect of dilutive securities:
Options 56,439106,749
---------- --------------------- ---------
Diluted earnings per
Common share $3,334,251 10,972,369$5,171,233 11,023,002 $ .30.47
========== =========== =========
Six========== ========
Nine Months Ended JuneSeptember 30, 2000
----------------------------------------------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
------------ -----------
Net income $3,255,401$5,063,235
==========
Basic earnings per
common share $3,255,401 10,988,790$5,063,235 10,972,092 $ .30.46
Effect of dilutive securities:
Options 40,20824,899
---------- --------------------- ---------
Diluted earnings per
Common share $3,255,401 11,028,998$5,063,235 10,996,991 $ .30.46
========== =========== =================== ========
-9-
---9
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 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 MayOn July 20, 2001 the Financial Accounting Standards Board established a
transition provision in association with their review(FASB) issued
Statement of accounting standards
relating toFinancial Accounting Standards (SFAS ) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
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 - Accountingcompleted after June 30, 2001. SFAS 142 is effective for
Goodwill." The statements were issued in July 2001. Among other rules stated
within the transition provision, calendar year end companies will be requiredfiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to
continue to amortize goodwill and other related intangible assets untilacquired between
July 1, 2001 and the beginningeffective date of fiscal year 2002. At the transition date,SFAS 142. Effective January 1, 2002,
goodwill will no longer
be amortized, butand intangible assets with indefinite lives will be tested for
impairment annually and any impairment
charge resulting fromwhenever there is an impairment.
Although it is still reviewing the initial applicationprovisions of these Statements,
management's preliminary assessment is that these Statements will not have a
material impact on the new rules will be
classified as a cumulative change in accounting principle.Company's financial position or results of operations.
PART I.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues for the secondthird quarter of 2001 increased 8.5%11.2% compared to the
corresponding 2000 quarter. Revenues for the sixnine months ended JuneSeptember 30,
2001 increased by 9.6%10.2% over the corresponding 2000 sixnine month period. The
increase primarily results 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 to
88.6%88.5% for the secondthird quarter of 2001 from 88.1 %88.0% in the corresponding 2000
quarter. In addition, cost of services as a percentage of revenue increased to
88.7%88.6% for the sixnine month period ended JuneSeptember 30, 2001 from 88.3%88.2% in the same
2000 period. The primary factors affecting specific variations in the 2001 second
-10-
----
third
quarter and sixnine month period's cost of services provided as a percentage of
revenue and their effects on the respective .5% and .4% increases are as
follows: in the secondthird quarter an increase of 2.0%1.4% in the cost of supplies
consumed in providing services which is primarily attributable to increased food
costs associated with food service clients; an increase of 1.3% in workers'
compensation, general liability and other insurance; an increase of 1.1% in bad
debt expense; offsetting these increases
were decreases of 2.5%2.0% in labor costs and a .9%.3% in health insurance and employee
benefits; in the sixnine month period an increase of 2.6%2.2% in the cost of supplies
consumed in providing services which is primarily attributable to increased food
costs associated with food service clients; an increase of .9%1.0% in workers'
compensation, general liability and other insurance; and an increase of .5%.4% in
bad debt expense; offsetting these increases were decreases of 2.9%2.6% in labor
costs and .5%.4% in health insurance and employee benefits.
10
Selling, general and administrative expenses as a percentage of revenue
decreased in the secondthird quarter of 2001 to 7.7% compared to 8.1%7.9% in the
corresponding 2000 three month period. Additionally, during the sixnine month
period ended JuneSeptember 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 sixnine month periods' 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 JuneSeptember 30, 2001 the Company had working capital and cash of
$76,892,826$79,168,769 and $26,568,479,$25,690,195, respectively, representing increases of 3.9%7.0% and
16.3%12.5%, respectively, compared to December 31, 2000 working capital and cash and
cash equivalents of $73,995,109 and $22,841,618.
The net cash provided by the Company's operating activities was
$5,006,316$4,560,768 for the sixnine month period ended JuneSeptember 30, 2001 as compared to net
cash provided by operating activities of $2,380,021$1,478,768 in the same 2000 period. The
principal sources of net cash flows from operating activities for the sixnine month
periods ended JuneSeptember 30, 2001 and 2000 were net income, charges to operations
for bad debt provisions and depreciation and amortization. Additionally,
operating activities' cash flows forwere increased by the sixtiming of payments under
the Company's various insurance plans of $1,510,739 in the nine month period
ended JuneSeptember 30, 2001 and by $1,252,601 in the 2000 increased by
$1,548,967 resultingnine month period from
the timing of payments for payrollrelated to accounts payable and payroll related
taxes.other accrued expenses.
The operating activity that used the largest amount of cash during each of the
sixnine month periods ended JuneSeptember 30, 2001 and 2000 were net increases in
accounts and notes receivable and long term notes receivable of $2,081,721$3,896,919 in
2001 and $6,826,258$8,094,981 in 2000. The net increases in these amounts resulted
primarily from the growth in the Company's revenues, as well as the timing of
collections from clients. Additionally, inoperating activities' cash flows for the
sixnine month period ended JuneSeptember 30, 2001 and 2000 were decreased by the timing
of payments for payroll and payroll related taxes of $2,869,973 and $1,208,809,
respectively. In addition, the 2001 nine month period operating activities' cash
flows were negatively impacted by a $922,056$1,073,500 decrease in accounts payable and other accrued expensesincome taxes
resulting from the timing of payments to vendors.such payments.
11
The Company's principal use of cash in investing activities in each of
the sixnine month periods ended JuneSeptember 30, 2001 and 2000 was the purchase of
personal 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 significant 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.
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 $2,350,000$ 3,350,000 and $1,500,000$2,250,000 in the sixnine month periods ended
JuneSeptember 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, 2001.2002. Amounts drawn under the line
are payable on demand. At JuneSeptember 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 JuneSeptember 30, 2001.
At JuneSeptember 30, 2001, the Company had $26,568,479$25,690,195 of cash and cash
equivalents, which it views as its principal measure of liquidity.
12
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$825,000 to purchase 95,000135,000 shares of its common stock during the sixnine month
period ended JuneSeptember 30, 2001 at an average price of $5.48$6.11 per common share.
In
addition, on July 18, 2001, the Company's Board of Directors authorized the
future purchase of upPursuant 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 an additional 826,450786,450 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 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 MayOn July 20, 2001 the Financial Accounting Standards Board established a
transition provision in association with their review(FASB) issued
Statement of accounting standards
relating toFinancial Accounting Standards (SFAS ) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
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 - Accountingcompleted after June 30, 2001. SFAS 142 is effective for
Goodwill." The statements were issued in July 2001. Among other rules stated
within the transition provision, calendar year end companies will be requiredfiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to
continue to amortize goodwill and other related intangible assets untilacquired between
July 1, 2001 and the beginningeffective date of fiscal year 2002. At the transition date,SFAS 142. Effective January 1, 2002,
goodwill will no longer
be amortized, butand intangible assets with indefinite lives will be tested for
impairment annually and any impairment
charge resulting fromwhenever there is an impairment.
Although it is still reviewing the initial applicationprovisions of these Statements,
management's preliminary assessment is that these Statements will not have a
material impact on the new rules will be
classified as a cumulative change in accounting principle.
-13-
----
Company's financial position or results of operations.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK
The Company's exposure to market risk is not significant.
13
Cautionary Statements Regarding Forward Looking Statements
Certain matters discussed in this report 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 significant 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.
-14-
----14
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
-15-
----15
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.
---------------------------------------
August 2,October 29, 2001 /s/ Daniel P. McCartney
- ---------------------------------- ---------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
August 2,October 29, 2001 /s/ Thomas A. Cook
- ---------------------------------- ---------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
August 2,October 29, 2001 /s/ James L. DiStefano
- ---------------------------------- ---------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
August 2,October 29, 2001 /s/ Richard W. Hudson
- ---------------------------------- ---------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
-16-
----16