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, 2004 Commission File Number 0-120152
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 by check 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
----- -----
Indicate by check mark whether the registrant is an Accelerated Filer (
as defined in Rule 12b-2 of the Exchange Act )
YES X NO
----- -----
Number of shares of common stock, issued and outstanding as of April 28, 2004 is
17,527,286
Total of 22 Pages
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of
March 31, 2004 and December 31, 2003 2
Consolidated Statements of Income for the Three Months Ended
March 31, 2004 and 2003 3
Consolidated Statements of Cash Flows for the Three Months
ended March 31, 2004 and 2003 4
Consolidated Statement of Stockholders' Equity as of March
31, 2004 5
Notes To Consolidated Financial Statements 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results Of Operations 10 - 15
Item 3. Quantitative and Qualitative Disclosure About Market Risk 16
Item 4. Controls and Procedures 17
Part II.
Other Information 17
-----------------
Signatures 19
Exhibits - Certifications 20 - 22
-1-
Consolidated Balance Sheets
(Unaudited)
March 31, December 31,
2004 2003
----------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 67,343,847 $ 64,180,697
Accounts and notes receivable, less allowance for doubtful
accounts of $3,987,000 in 2004 and $3,414,000 in 2003 55,052,808 58,145,440
Inventories and supplies 10,720,268 10,454,838
Deferred income taxes 2,268,698 2,016,798
Prepaid expenses and other 3,813,273 3,312,959
-------------- --------------
Total current assets 139,198,894 138,110,732
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 2,243,499 2,190,388
Housekeeping and office equipment 13,336,723 12,830,794
Autos and trucks 79,639 79,639
-------------- --------------
15,659,861 15,100,821
Less accumulated depreciation 10,936,000 10,489,224
-------------- --------------
4,723,861 4,611,597
NOTES RECEIVABLE- long term portion 7,930,505 7,904,195
DEFERRED COMPENSATION FUNDING 3,093,067 2,847,575
DEFERRED INCOME TAXES- long term portion 3,088,191 3,134,691
OTHER NONCURRENT ASSETS 1,719,342 1,719,342
-------------- --------------
$ 159,753,860 $ 158,328,132
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 6,368,432 $ 6,536,395
Accrued payroll, accrued and withheld payroll taxes 9,212,904 14,127,469
Other accrued expenses 2,133,919 874,523
Income taxes payable 656,418 178,862
Accrued insurance claims 3,060,711 2,978,974
-------------- --------------
Total current liabilities 21,432,384 24,696,223
ACCRUED INSURANCE CLAIMS- long term portion 9,182,135 8,936,921
DEFERRED COMPENSATION LIABILITY 3,805,532 3,496,810
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 45,000,000 shares authorized,
18,081,616 shares issued in 2004 and 17,938,613 in 2003 180,816 179,386
Additional paid in capital 34,989,853 33,515,234
Retained earnings 93,565,654 91,178,370
Common stock in treasury, at cost, 603,907 shares in 2004 and
652,238 in 2003 (3,402,514) (3,674,812)
-------------- --------------
Total stockholders' equity 125,333,809 121,198,178
-------------- --------------
$ 159,753,860 $ 158,328,132
============== ==============
See accompanying notes.
-2-
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31,
2004 2003
---------------- ----------------
Revenues $ 106,621,820 $ 89,531,352
Operating costs and expenses:
Costs of services provided 93,396,926 78,690,855
Selling, general and administrative 8,014,901 6,796,788
Other Income :
Investment and interest income 142,202 199,203
------------- ------------
Income before income taxes 5,352,195 4,242,912
Income taxes 2,034,000 1,697,000
------------- ------------
Net Income $ 3,318,195 $ 2,545,912
============= ============
Basic earnings per common share $ 0.19 $ 0.15
============= ============
Diluted earnings per common share $ 0.18 $ 0.15
============= ============
Cash dividends per common share $ 0.053 $ --
============= ============
Basic weighted average number of
common shares outstanding 17,476,278 16,867,871
============= ============
Diluted weighted average number of
common shares outstanding 18,429,590 17,511,581
============= ============
See accompanying notes.
-3-
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
-----------------------------
2004 2003
------------- --------------
Cash flows from operating activities:
Net Income $ 3,318,195 $ 2,545,912
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation 482,961 500,093
Bad debt provision 1,000,000 1,500,000
Deferred income taxes (benefit) (205,400) 806,000
Tax benefit of stock option transactions 428,035 52,740
Changes in operating assets and liabilities:
Accounts and notes receivable 2,092,632 (2,023,620)
Prepaid income taxes 680,541
Inventories and supplies (265,430) (987,412)
Notes Receivable--long-term (26,311) 89,828
Deferred compensation funding (245,492) (230,446)
Accounts payable and other accrued expenses 1,091,433 1,503,629
Accrued payroll, accrued and withheld payroll
taxes (4,548,387) (4,302,684)
Deferred compensation liability 308,722 283,283
Income taxes payable 477,556 --
Accrued insurance claims 326,951 787,016
Prepaid expenses and other assets (500,314) (1,044,758)
------------- --------------
Net cash provided by operating activities 3,735,151 160,122
------------- --------------
Cash flows from investing activities:
Disposals of fixed assets 54,783 60,551
Additions to property and equipment (650,008) (569,119)
------------- --------------
Net cash used in investing activities (595,225) (508,568)
------------- --------------
Cash flows from financing activities:
Dividends paid (930,911) --
Reissuance of treasury stock 1,534 --
Proceeds from the exercise of stock options 952,601 129,902
------------- --------------
Net cash provided by financing activities 23,224 129,902
------------- --------------
Net increase (decrease) in cash and cash equivalents 3,163,150 (218,544)
Cash and cash equivalents at beginning of the period 64,180,697 48,320,098
------------- --------------
Cash and cash equivalents at end of the period $ 67,343,847 $ 48,101,554
============= ==============
Supplementary Cash Flow Information:
Issuance of 48,224 shares of Common Stock in 2004 and
36,212 shares of Common Stock in 2003 pursuant to
Employee Stock Plans $ 366,177 $ 205,199
============= ==============
See accompanying notes.
-4-
Consolidated Statements of Stockholders' Equity
(Unaudited)
For the Three Months Ended March 31, 2004
-----------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
---------------- --------- ------------ ------------ ------------- --------------
Balance, December 31, 2003 17,938,613 $179,386 $33,515,234 $91,178,370 ($3,674,812) $121,198,178
Net income 3,318,195 3,318,195
Exercise of stock options 143,003 1,430 951,171 952,601
Tax benefit arising from stock option transactions 428,035 428,035
Shares issued pursuant to Employee Stock Plans
(48,224 shares) 94,478 271,699 366,177
Cash dividends paid - $.053 per common share (930,911) (930,911)
Shares issued pursuant to Dividend Reinvestment
Plan (107 shares) 935 599 1,534
---------------- --------- ------------ ------------ ------------- --------------
Balance, March 31, 2004 18,081,616 $180,816 $34,989,853 $93,565,654 ($3,402,514) $125,333,809
================ ========= ============ ============ ============= ==============
See accompanying notes.
-5-
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, 2003 has been derived from, and
does not include, all the disclosures contained in the financial statements for
the year ended December 31, 2003. 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, 2003. The
results of operations for the quarter ended March 31, 2004 are not necessarily
indicative of the results that may be expected for the full fiscal year.
NOTE 2 - THREE-FOR-TWO STOCK SPLIT
On February 12, 2004, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% common stock dividend which was
paid on March 1, 2004 to shareholders of record on February 23, 2004. All share
and per share information for all periods presented have been adjusted to
reflect the three-for-two stock split.
NOTE 3 - OTHER CONTINGENCIES
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 January 31, 2005. The Company believes the line
will be renewed at that time. Amounts drawn under the line are payable upon
demand. At both March 31, 2004 and December 31, 2003, there were no borrowings
under the line. However, at such dates, the Company had outstanding $15,925,000
and $14,500,000, respectively 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 $15,925,000 and $14,500,000 at March 31, 2004 and December 31, 2003,
respectively.
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 affect on the Company's financial position or results of operations.
The Balance Budget Act of 1997 changed Medicare policy in a number of
ways, most notably the phasing in, effective July 1, 1998, of a Medicare
Prospective Payment System for skilled nursing facilities which significantly
changed the manner and the amounts of reimbursement they receive. Many of the
Company's clients' revenues are highly contingent on Medicare and Medicaid
reimbursement funding rates. Therefore, they have been and continue to be
adversely affected by changes in applicable laws and regulations, as well as
other trends in the long-term care industry. This has resulted in certain of the
Company's clients filing for bankruptcy protection. Others may follow. These
factors in addition to delays in payments from clients have resulted in and
could continue to result in significant additional bad debts in the near future.
-6-
NOTE 4 - SEGMENT INFORMATION
The Company manages and evaluates its operations in two reportable
operating segments. The two operating segments are Housekeeping services
(housekeeping, laundry, linen and other services), and Food service. Although
both segments serve the same client base and share many operational similarities
they are managed separately due to distinct differences in the type of service
provided, as well as the specialized expertise required of the professional
management personnel responsible for delivering the respective segments'
services. The Company considers the various services provided within the
Housekeeping services' segment to be one reportable operating segment since such
services are rendered pursuant to a single service agreement and the delivery of
such services is managed by the same management personnel.
Differences between the reportable segments' operating results and
other disclosed data, and the Company's consolidated financial statements relate
primarily to corporate level transactions, as well as transactions between
reportable operating segments and the Company's warehousing and distribution
subsidiary. The subsidiary's transactions with reportable segments are
immaterial and are made on a basis intended to reflect the fair market value of
the goods transferred. Segment amounts disclosed are prior to any elimination
entries made in consolidation.
The Housekeeping services' segment provides services in Canada,
although essentially all of its revenues and net income, 99% in both categories,
are earned in one geographic area, the United States.
Housekeeping Food Corporate and
services services eliminations Total
-------- -------- ------------ -----
Quarter Ended March 31, 2004
- ----------------------------
Revenues $ 87,791,789 $ 18,854,548 $ (24,517) $ 106,621,820
Income before income taxes $ 7,799,548 $ 497,071 $ (2,944,424)(1) $ 5,352,195
Quarter Ended March 31, 2003
- ----------------------------
Revenues $ 75,579,077 $ 13,420,908 $ 531,367 $ 89,531,352
Income before income taxes $ 6,085,650 $ 471,715 $ (2,314,453)(1) $ 4,242,912
(1) represents primarily corporate office cost and related overhead, as well as
certain operating expenses that are not allocated to the service segments.
-7-
The Company earned revenue in the following service categories:
For the quarter ended March 31,
-------------------------------
2004 2003
---- ----
Housekeeping services $ 61,651,194 $ 53,805,771
Laundry and linen services 26,073,253 21,828,640
Food Services 18,419,879 13,546,960
Maintenance services
and Other 477,494 349,981
------------- ------------
$ 106,621,820 $ 89,531,352
============= ============
The Company has one client, a nursing home chain, which in 2004 and
2003 accounted for approximately 21% and 22%, respectively of consolidated
revenues. The Company derived approximately 19% and 29%, respectively of the
Housekeeping services and Food services' segments' 2004 revenues from such
client. Although the Company expects to continue its relationship with this
client, the loss of such client would adversely affect the operations of the
Company's two operating segments.
NOTE 5 - EARNINGS PER COMMON SHARE
A reconciliation of the numerator and denominator of basic and diluted
earnings per common share is as follows:
Quarter Ended March 31, 2004
----------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $3,318,195
==========
Basic earnings per common share $3,318,195 17,476,278 $ .19
Effect of dilutive securities:
Options 953,312 (.01)
----------- ------------- -----
Diluted earnings per
Common share $3,318,195 18,429,590 $ .18
=========== ============= =====
Quarter Ended March 31, 2003
----------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ------
Net income $2,545,912
==========
Basic earnings per common share $2,545,912 16,867,871 $ .15
Effect of dilutive securities:
Options 643,710
----------- ------------- -----
Diluted earnings per
Common share $2,545,912 17,511,581 $ .15
=========== ============= =====
-8-
No outstanding options were excluded at either March 31, 2004 or March 31, 2003
as none have an exercise price in excess of the average market value of the
Company's Common Stock at such dates.
NOTE 6 - STOCK BASED COMPENSATION
At both March 31, 2004 and December 31, 2003, the Company has stock
based compensation plans. As permitted by the Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation", the Company
accounts for stock-based compensation arrangements in accordance with provisions
of Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock
Issued to Employees". Compensation expense for stock options issued to employees
is based on the difference on the date of grant, between the fair value of the
Company's stock and the exercise price of the option. No stock-based employee
compensation cost is reflected in net income, as all options granted under those
plans had an exercise price equal to the market value of the underlying common
stock at the date of grant. The Company accounts for equity instruments issued
to nonemployees in accordance with the provisions of SFAS No. 123 and Emerging
Issues Task Force ("EITF") Issue No. 96-18, "Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in Conjunction With
Selling, or in Conjunction With Selling Goods or Services". All transactions in
which goods or services are the consideration received for the issuance of
equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.
The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock based compensation:
Quarter Ended March 31,
-----------------------
2004 2003
---- ----
Net Income
As reported $3,318,195 $2,545,912
Deduct:
Total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (767,000) (748,000)
---------- ----------
Pro forma net income $2,551,195 $1,797,912
========== ==========
Basic Earnings Per Common Share
As reported $ .19 $ .15
Pro forma $ .15 $ .11
Diluted Earnings Per Common Share
As reported $ .18 $ .15
Pro forma $ .14 $ .10
-9-
PART I.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the
percentage which certain items bear to revenues:
Relation to Total Revenues
For the Quarter Ended March 31,
-------------------------------
2004 2003
---- ----
Revenues 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 87.6 87.9
Selling, general and
administration 7.5 7.6
Investment and interest income .1 .2
----- -----
Income before income taxes 5.0 4.7
Income taxes 1.9 1.9
----- -----
Net income 3.1% 2.8%
===== =====
Revenues increased 19.1% to $106,621,820 in the quarter ended March 31,
2004 compared to $89,531,352 in the corresponding 2003 period. Housekeeping
services' segment revenues increased to $87,791,789, an increase of
approximately 15.9% from first quarter 2003 segment revenues of $75,759,077.
This segment's growth in revenues is primarily a result of a net increase in
service agreements entered into with new clients. The Food service's segment
revenues increased approximately 40.5% to $18,854,548 as compared to first
quarter 2003 segment revenues of $13,420,908. The Food service's segment revenue
growth is a result of providing this service to existing Housekeeping service's
segment clients. Although there can be no assurance thereof, the Company
believes that in 2004 both Housekeeping services, and Food services' revenues,
as a percentage of total revenues, will remain approximately the same as their
respective 2003 percentages.
The Company has one client, a nursing home chain, which in 2004 and
2003 accounted for approximately 21% and 22%, respectively of consolidated
revenues. The Company derived approximately 19% and 29%, respectively of the
Housekeeping services and Food services' segments' 2004 revenues from such
client. Although the Company expects to continue its relationship with this
client, the loss of such client would adversely affect the operations of the
Company's two operating segments.
-10-
Cost of services provided as a percentage of revenues decreased to
87.6% for the first quarter of 2004 from 87.9 % in the corresponding 2003
quarter. The primary factors affecting the .3% decrease are as follows: decrease
of .8% in labor costs which is primarily a result of efficiencies achieved in
managing the Housekeeping segment's labor and a .7% decrease in bad debt
provision. Offsetting these decreases was an increase of 1.6% in the cost of
supplies consumed in providing services which was primarily attributable to
increased costs associated with the Food service segment.
Selling, general and administrative expenses as a percentage of
revenue remained essentially unchanged at 7.5% compared to 7.6% in the 2003
first quarter.
As a result of the matters discussed above, net income for the 2004
first quarter increased to 3.1% as a percentage of revenue compared to 2.8% in
the 2003 first quarter.
CRITICAL ACCOUNTING POLICIES
The two policies discussed below are considered by the Company's
management to be critical to an understanding of the Company's financial
statements because their application places the most significant demands on
management's judgment. Therefore, it should be noted that financial reporting
results rely on estimating the effect of matters that are inherently uncertain.
Specific risks for these critical accounting policies are described in the
following paragraphs. For these policies, management cautions that future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment.
The two policies discussed are not intended to be a comprehensive list
of all of our accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in their application. There
are also areas in which management's judgment in selecting another available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto which are included in our
Annual Report for the year ended December 31, 2003 which contain accounting
policies and other disclosures required by generally accepted accounting
principles.
Allowance for Doubtful Accounts
- -------------------------------
The allowance for doubtful accounts is established as losses are
estimated to have occurred through a provision for bad debts charged to
earnings. The allowance for doubtful accounts is evaluated based on management's
periodic review of accounts and notes receivable and is inherently subjective as
it requires estimates that are susceptible to significant revision as more
information becomes available.
The Company has had varying collection experience with respect to its
accounts and notes receivable. When contractual terms are not met, the Company
generally encounters difficulty in collecting amounts due from certain of its
clients. Therefore, the Company has sometimes been required to extend the period
of payment for certain clients beyond contractual terms. These clients include
-11-
those in bankruptcy, those who have terminated service agreements and slow
payers experiencing financial difficulties. In making credit evaluations, in
addition to analyzing and anticipating, where possible, the specific cases
described above, management considers the general collection risks associated
with trends in the long-term care industry. The Company also establishes credit
limits and performs ongoing credit evaluation and account monitoring procedures
to minimize the risk of loss.
In accordance with the risk of extending credit, the Company regularly
evaluates its accounts and notes receivable for impairment or loss of value and
when appropriate will provide in its Allowance for Doubtful Accounts for such
receivables. The Company generally follows a policy of reserving for receivables
from clients in bankruptcy, as well as clients, with which the Company is in
litigation for collection. The reserve is based upon management estimates of
ultimate collectibility. Correspondingly, once the Company's recovery of a
receivable is determined through either litigation, bankruptcy proceedings or
negotiation at less than the recorded amount on its balance sheet, it will
charge-off the applicable amount to the Allowance for Doubtful Accounts.
Notwithstanding the Company's efforts to minimize its credit risk
exposure, the Company's clients could be adversely affected if future industry
trends, as more fully discussed under Liquidity and Capital Resources below, and
as further described in the Company's Form 10-K filed with Securities and
Exchange Commission for the year ended December 31, 2003 in Part I thereof under
"Government Regulation of Clients" and "Service Agreements/Collections", change
in such a manner as to negatively impact the cash flows of its clients. If the
Company's clients experience such significant impact in their cash flows, it
could have a material adverse affect on the Company's results of operations and
financial condition.
Accrued Insurance Claims
- ------------------------
The Company has a Paid Loss Retrospective Insurance Plan for general
liability and workers' compensation insurance. Under these plans, pre-determined
loss limits are arranged with an insurance company to limit both the Company's
per occurrence cash outlay and annual insurance plan cost.
For workers' compensation, the Company records a reserve based on the
present value of future payments, including an estimate of claims incurred but
not reported, that are developed as a result of a review of the Company's
historical data, open claims and actuarial analysis done by an independent
insurance specialist. The present value of the payout is determined by applying
an 8% discount factor against the estimated remaining pay-out period.
For general liability, the Company records a reserve for the estimated
amounts to be paid for known claims.
Management regularly evaluates its claims' pay-out experience, present
value factor and other factors related to the nature of specific claims in
arriving at the basis for its accrued insurance claims' estimate. Management
evaluations are based primarily on current information derived from reviewing
the Company's claims' experience and industry trends. In the event that the
Company's claims' experience and/or industry trends result in an unfavorable
change, it could have an adverse affect on the Company's results of operations
and financial condition.
-12-
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2004 the Company had cash and cash equivalents of $67,343,847 and
working capital of $117,766,510 compared to December 31, 2003 cash and cash
equivalents, and working capital of $64,180,697 and $113,414,509, respectively.
Management views the Company's cash and cash equivalents of $67,343,847 at March
31, 2004 as its principal measure of liquidity. The Company's current ratio at
March 31, 2004 increased to 6.5 to 1 from 5.6 to 1 at December 31, 2003.
The net cash provided by the Company's operating activities was
$3,735,151 for the three month period ended March 31, 2004. The principal
sources of net cash flows from operating activities for the three month period
ended March 31, 2004 were net income, including non-cash charges to operations
for bad debt provisions and depreciation. Additionally, operating activities'
cash flows were increased by the timing of payments for accounts payable and
other accrued expenses, as well as, a $2,066,321 net decrease in accounts and
notes receivable and long term notes receivable. The operating activity that
used the largest amount of cash during the three month period ended March 31,
2004 was a decrease of $4,548,387 in accrued payroll, accrued and withheld
payroll taxes resulting from the timing of such payments.
The Company's principal use of cash in investing activities in the
three month period ended March 31, 2004 was the purchase of housekeeping
equipment and computer software and equipment.
On February 12, 2004, the Company's Board of Directors approved a
three-for-two stock split in the form of a 50% common stock dividend which was
paid on March 1, 2004 to shareholders of record on February 23, 2004. An amount
equal to the par value of the shares of Common Stock issued was transferred from
Additional Paid In Capital to Common Stock in the March 31, 2004 balance sheet.
All share and earnings per common share information presented in this report
have been adjusted to reflect the three-for-two stock split. The effect of this
action was to increase shares outstanding at March 1, 2004 by 6,016,799 to
17,646,172.
On February 14, 2004, the Company paid to shareholders of record as of
January 31, 2004, regular cash dividends in the aggregate of $930,911 ($.053 per
common share as adjusted for the three-for-two stock split). Additionally, on
April 20, 2004, the Company's Board of Directors declared a regular cash
dividend of $.06 per common share to be paid on May 14, 2004 to shareholders of
record as of April 30, 2004.
-13-
Accounts and Notes Receivable
- -----------------------------
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. The Balance Budget Act of 1997 changed Medicare policy in
a number of ways, most notably the phasing in, effective July 1, 1998 of a
Medicare Prospective Payment System for skilled nursing facilities which
significantly changed the reimbursement procedures and the amounts of
reimbursement they receive. Many of the Company's clients' revenues are highly
contingent on Medicare and Medicaid reimbursement funding rates. Therefore, they
have been and continue to be adversely affected by changes in applicable laws
and regulations, as well as other trends in the long-term care industry. This
has resulted in certain of the Company's clients filing for bankruptcy
protection. Others may follow.
These factors, in addition to delays in payments from clients have
resulted in and could continue to 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. At March 31, 2004 and December 31, 2003, the Company
had approximately, net of reserves, $12,782,000 and $12,638,000, respectively of
such notes outstanding. 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 has had varying collection experience with respect to its
accounts and notes receivable. When contractual terms are not met, the Company
generally encounters difficulty in collecting amounts due from certain of its
clients. Therefore, the Company has sometimes been required to extend the period
of payment for certain clients beyond contractual terms. These clients include
those in bankruptcy, those who 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 (in an Allowance for
Doubtful Accounts) of $1,000,000 and $1,500,000 in the three month periods ended
March 31, 2004 and 2003, respectively. These provisions represent approximately
..9% and 1.7%, as a percentage of revenue for such respective periods. In making
its credit evaluations, 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 also establishes credit limits, performs ongoing credit evaluation and
monitors accounts to minimize the risk of loss. Notwithstanding the Company's
efforts to minimize its credit risk exposure, the Company's clients could be
adversely affected if future industry trends change in such a manner as to
negatively impact their cash flows. If the Company's clients experience such
significant impact in their cash flows, it could have a material adverse effect
on the Company's results of operations and financial condition.
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Insurance Programs
- ------------------
The Company has a Paid Loss Retrospective Insurance Plan for general
liability and workers' compensation insurance. Under these plans, pre-determined
loss limits are arranged with an insurance company to limit both the Company's
per occurrence cash outlay and annual insurance plan cost.
For workers' compensation, the Company records a reserve based on the
present value of future payments, including an estimate of claims incurred but
not reported, that are developed as a result of a review of the Company's
historical data, open claims and actuarial analysis done by an independent
insurance specialist. The present value of the payout is determined by applying
an 8% discount factor against the estimated remaining pay-out period.
For general liability, the Company records a reserve for the estimated
amounts to be paid for known claims.
Management regularly evaluates its claims' pay-out experience, present
value factor and other factors related to the nature of specific claims in
arriving at the basis for its accrued insurance claims' estimate. Management
evaluations are based primarily on current information derived from reviewing
the Company's claims' experience and industry trends. In the event that the
Company's claims' experience and/or industry trends result in an unfavorable
change, it could have an adverse effect on the Company's results of operations
and financial condition.
Line of Credit
- --------------
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 January 31, 2005. The Company believes the line
will be renewed at that time. Amounts drawn under the line are payable on
demand. At March 31, 2004 there were no borrowings under the line. However, at
such date, the Company had outstanding $15,925,000 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 $15,925,000 at March 31, 2004.
Capital Expenditures
- --------------------
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, laundry and linen equipment installations,
and computer hardware and software. Although the Company has no specific
material commitments for capital expenditures through the end of calendar year
2004, it estimates that it will incur capital expenditures of approximately
$2,500,000 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, should
cash flows from current operations not be sufficient, the Company would utilize
its existing working capital and if necessary seek to obtain necessary working
capital from such sources as long-term debt or equity financing.
-15-
Material Off-Balance Sheet Arrangements
- ---------------------------------------
The Company has not entered into any material off-balance sheet arrangements.
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 include forward-looking statements that are
subject to risks and uncertainties that could cause actual results or objectives
to differ materially from those projected. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. 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; one
client accounting for approximately 21% of revenues in 2004; our claims'
experience related to workers' compensation and general liability insurance; the
effects of changes in laws and 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, 2003 in Part I thereof under
"Government Regulation of Clients", "Competition" and "Service
Agreements/Collections". Many of the Company's clients' revenues are highly
contingent on Medicare and Medicaid reimbursement funding rates, which have been
and continue to be adversely affected by the change in Medicare payments under
the 1997 enactment of Prospective Payment System. That change, and lack of
substantive reimbursement funding rate reform legislation, as well as other
trends in the long-term care industry have resulted in certain of the Company's
clients filing for bankruptcy protection. Others may follow. Any decisions by
the government to discontinue or adversely modify legislation related to
reimbursement funding rates will have a material adverse affect on the Company's
clients. These factors, in addition to delays in payments from clients have
resulted in and could continue to result in significant 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 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.
-16-
EFFECTS OF INFLATION
The Company believes in most instances it will be able to recover
increases in costs attributable to inflation by passing through such cost
increases to its clients.
ITEM 4. CONTROLS AND PROCEDURES
The Company maintains "disclosure controls and procedures", as such
term is defined in Rules 13a-15e of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed in its reports, pursuant to the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to its management, including its Chief Executive Officer and
Principal Accounting Officer, as appropriate, to allow timely decisions
regarding the required disclosures. In designing and evaluating the disclosure
controls and procedures, management has recognized that any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurances of achieving the desired control objectives, and
management necessarily is required to apply its judgment in evaluating the cost
benefit relationship of possible controls and procedures.
The Company's Chief Executive Officer and Principal Accounting Officer
(its Principal Executive Officer and Principal Accounting Officer, respectively)
have evaluated the effectiveness of its "disclosure controls and procedures" as
of the end of the period covered by this Quarterly Report on Form 10-Q. Based on
their evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that its disclosure controls and procedures are effective.
There were no significant changes in its internal controls or in other factors
that could significantly affect these controls subsequent to the date the
controls were evaluated.
PART II. Other Information
-----------------
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities. Not Applicable
Item 3. Defaults under Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Not Applicable
Holders
Item 5. Other Information.
a) None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits -
31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
b) Reports on Form 8-K - None
-17-
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.
-------------------------------
April 30, 2004 /s/ Daniel P. McCartney
- ---------------------------- --------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
April 30, 2004 /s/ Thomas A. Cook
- ---------------------------- --------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
April 30, 2004 /s/ James L. DiStefano
- ---------------------------- --------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
April 30, 2004 /s/ Richard W. Hudson
- ---------------------------- --------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
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