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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended June 30, 2002 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 PA 19020
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(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 215-639-4274
------------
Indicate mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing
requirements for past 90 days.
YES X NO
------ -------
Number of shares of common stock, issued and outstanding as of July 12, 2002 is
11,304,005
Total of 27 Pages
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Consolidated Balance Sheets as of June 30, 2002 and 2
December 31, 2001
Consolidated Statements of Income for the Three Months ended 3
June 30, 2002 and 2001
Consolidated Statements of Income for the Six Months ended
June 30, 2002 and 2001 4
Consolidated Statements of Cash Flows for the Six Months 5
ended June 30, 2002 and 2001
Notes To Consolidated Financial Statements 6 - 10
Management's Discussion and Analysis of Financial Condition 10 - 16
and Results Of Operations
Part II. Other Information 17
-----------------
Signatures 18
Exhibits 19
Healthcare Services Group, Inc.
Consolidated Balance Sheets
(Unaudited)
June 30, December 31,
2002 2001
--------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 38,338,683 $ 34,259,334
Accounts and notes receivable, less
allowance for doubtful accounts of
$8,559,000 in 2002 and $6,936,000 in 2001 54,763,992 54,076,007
Prepaid income taxes 351,407 8,188
Inventories and supplies 8,210,120 7,944,199
Deferred income taxes 3,126,198 2,162,845
Prepaid expenses and other 2,796,881 2,156,871
------------ ------------
Total current assets 107,587,281 100,607,444
PROPERTY AND EQUIPMENT
Laundry and linen equipment installations 6,906,575 6,872,513
Housekeeping and office equipment 11,154,711 10,570,888
Autos and trucks 88,819 57,321
------------ ------------
18,150,105 17,500,722
Less accumulated depreciation 13,519,959 12,738,533
------------ ------------
4,630,146 4,762,189
COST IN EXCESS OF FAIR VALUE OF NET ASSETS
ACQUIRED less accumulated amortization
of $1,743,155 in 2002 and 2001 1,612,322 1,612,322
DEFERRED INCOME TAXES 1,811,691 1,523,144
OTHER NONCURRENT ASSETS 11,615,909 12,285,398
------------ ------------
$127,257,349 $120,790,497
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,780,365 $ 6,439,609
Accrued payroll, accrued and withheld
payroll taxes 9,866,433 9,705,000
Other accrued expenses 234,239 199,635
Accrued insurance claims 1,367,253 1,155,655
------------ ------------
Total current liabilities 17,248,290 17,499,899
ACCRUED INSURANCE CLAIMS 5,143,475 4,347,464
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 30,000,000
shares authorized, 11,537,518 shares
issued in 2002 and 11,337,719 in 2001 115,375 113,377
Additional paid in capital 28,935,710 27,240,496
Retained earnings 77,401,312 73,176,074
Common stock in treasury, at cost
262,500 shares in 2002 and 2001 (1,586,813) (1,586,813)
------------ ------------
Total stockholders' equity 104,865,584 98,943,134
------------ ------------
$127,257,349 $120,790,497
============ ============
See accompanying notes.
Healthcare Services Group, Inc.
Consolidated Income Statements
(Unaudited)
For the Three Months Ended
June 30,
2002 2001
--------------------------------
Revenues $82,066,566 $69,275,449
Operating costs and expenses:
Costs of services provided 72,574,414 61,402,484
Selling, general and administrative 6,059,877 5,334,186
Other Income:
Interest Income 196,412 257,227
----------- -----------
Income before income taxes 3,628,687 2,796,006
Income taxes 1,434,000 1,090,600
----------- -----------
Net Income $ 2,194,687 $ 1,705,406
=========== ===========
Earnings per share of common stock:
Basic earnings per common share $ 0.20 $ 0.16
=========== ===========
Diluted earnings per common share $ 0.19 $ 0.16
=========== ===========
See accompanying notes
Healthcare Services Groups, Inc.
Consolidated Income Statements
(Unaudited)
For the Six Months Ended
June 30,
2002 2001
---------------------------------
Revenues $160,998,622 $135,893,519
Operating costs and expenses:
Costs of services provided 142,297,159 120,484,843
Selling, general and administrative 12,099,290 10,506,315
Other Income:
Interest Income 383,066 564,490
------------ ------------
Income before income taxes 6,985,239 5,466,851
Income taxes 2,760,000 2,132,600
------------ ------------
Net Income $ 4,225,239 $ 3,334,251
============ ============
Basic earnings per common share $ 0.38 $ 0.31
============ ============
Diluted earnings per common share $ 0.36 $ 0.30
============ ============
See accompanying notes
For the Six Months Ended
June 30,
---------------------------
2002 2001
------ ------
Cash flows from operating activities
Net Income $ 4,225,239 $ 3,334,251
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,090,803 1,163,379
Bad debt provision 3,250,000 2,350,000
Deferred income tax benefits (1,251,900) (979,000)
Tax benefit of stock option transactions 342,074 3,752
Unrealized (gain) loss on SERP investments (4,174) 61,879
Changes in operating asets and liabilities:
Accounts and notes receivable (3,937,985) (1,368,444)
Prepaid income taxes (343,219) 1,128,624
Inventories and supplies (265,921) 375,423
Changes to long term notes receivable 1,019,270 (713,277)
Accounts payable and other accrued expenses (624,639) (922,056)
Accrued payroll, accrued and withheld payroll
taxes 291,082 (442,823)
Accrued insurance claims 1,007,609 868,964
Income taxes payable 261,026
Prepaid expenses and other assets (985,619) (115,382)
----------- -----------
Net cash provided by operating activities 3,812,620 5,006,316
----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 27,708 146,219
Additions to property and equipment (986,468) (927,097)
----------- -----------
Net cash used in investing activities (958,760) (780,878)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (520,938)
Proceeds from the exercise of stock options 1,225,489 22,361
----------- -----------
Net cash provided by (used in) financing activities 1,225,489 (498,577)
----------- -----------
Net increase in cash and cash equivalents 4,079,349 3,726,861
Cash and cash equivalents at beginning of the year 34,259,334 22,841,618
----------- -----------
Cash and cash equilvanets at end of the period $38,338,683 $26,568,479
=========== ===========
Supplementary Cash Flow Information:
Issuance of 23,926 and 38,753 shares of
Common Stock in 2002 and 2001, respectively
pursuant to Employee Stock Purchase Plan $ 129,649 $ 209,993
=========== ===========
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, 2001 has been derived from, and
does not include, all the disclosures contained in the financial statements for
the year ended December 31, 2001. 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, 2001. The
results of operations for the quarters and six month periods ended June 30, 2002
and 2001 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, 2002. The Company believes the line will be renewed at
that time. Amounts drawn under the line are payable upon demand. At June 30,
2002 , there were no borrowings under the line. However, at such date, the
Company had outstanding $14,500,000 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 $14,500,000 at June 30, 2002 .
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.
The Balance Budget Act of 1997 ("BBA") 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 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. Since the passage of the BBA, Congress has passed
additional legislation, principally the Balanced Budget Refinement Act of 1999
("BBRA") and the Benefit Improvement and Protection Act of 2000 ("BIPA"). These
enactments were intended primarily to mitigate, temporarily, the reduction in
reimbursement for skilled nursing facilities under the Medicare PPS. In total,
four add-on payments were established by the enactments to offset the impact of
PPS. On April 23, 2002, the Centers for Medicare and Medicaid Services ("CMS")
announced that it would delay implementation of any refinements to the scope of
two of the add-on payments enacted pursuant to the BBRA and BIPA, thereby
extending the related add-ons to at least September 30, 2003. The other two
add-on payment provisions are still due to expire on September 30, 2002. Any
decisions by the government to discontinue or adversely modify the legislative
add-ons will have a material adverse affect on the Company's clients' revenues.
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.
At June 30, 2002, the Company has receivables of approximately
$4,000,000 ($2,000,000, net of reserves) from a client group currently Debtors
in Chapter 11 bankruptcy proceedings. The Company expects the client group will
file bankruptcy plans sometime during 2002. If the amount collected is
materially less than $2,000,000, it could adversely affect the Company's results
of operations and financial condition.
Note 3 - Segment Information
The Company manages and evaluates its operations in two reportable
operating segments. The two operating segments are 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. Prior to 2001,
food service was not deemed a reportable operating segment as its revenues did
not meet the quantitative threshold of FASB SFAS 131. The Company considers the
various services provided within the housekeeping, laundry, linen and other
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, laundry, linen and other services' segment of the
Company does provide 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,
laundry, linen
and other Food Corporate and
services services eliminations Total
------------- ------------ ---------------- ------------
Six Months Ended June 30, 2002
- ------------------------------
Revenues $ 136,388,928 $ 24,039,804 $ 569,890 $160,998,622
Income before income
taxes $ 11,558,711 $ 619,133 $ (5,192,605)(1) $ 6,985,239
Six Months Ended June 30, 2001
- ------------------------------
Revenues $ 116,950,795 $ 18,427,951 $ 514,773 $135,893,519
Income before income
taxes $ 9,215,268 $ 696,257 $ (4,444,674)(1) $ 5,466,851
Quarter Ended June 30, 2002
- ---------------------------
Revenues $ 69,545,555 $ 12,631,551 $ (110,540) $ 82,066,566
Income before income
taxes $ 5,980,238 $ 210,852 $ (2,562,402)(1) $ 3,628,687
Quarter Ended June 30, 2001
- ---------------------------
Revenues $ 59,580,357 $ 9,722,774 $ (27,682) $ 69,275,449
Income before income
taxes $ 4,785,962 $ 387,244 $ (2,377,200)(1) $ 2,796,006
(1) represents primarily corporate office cost and related overhead, as well as
certain operating expenses that are not allocated to the service operating
segments.
The Company earned revenue in the following service business categories:
For the quarter ended June 30,
--------------------------------
2002 2001
----------- -----------
Housekeeping services $49,352,530 $41,852,475
Laundry and linen services 19,839,205 17,036,475
Maintenance services and Other 402,544 713,402
Food Services 12,472,287 9,673,097
----------- -----------
$82,066,566 $69,275,449
=========== ===========
For the six months ended June 30,
---------------------------------
2002 2001
------------ ------------
Housekeeping services $ 97,007,274 $ 82,287,551
Laundry and linen services 39,069,920 33,746,141
Maintenance services and Other 1,026,331 1,444,297
Food Services 23,895,097 18,415,530
------------ ------------
$160,998,622 $135,893,519
============ ============
The Company has one client which in 2002 and 2001 accounted for
approximately 16% and 12%, respectively of consolidated revenues. With respect
to such client, the Company derived revenues from both operating segments.
Note 4 - Earnings Per Common Share
A reconciliation of the numerator and denominator of basic and diluted
earnings per common share is as follows:
Quarter Ended June 30, 2002
------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 2,194,687
===========
Basic earnings per
common share $ 2,194,687 11,224,347 $ .20
Effect of dilutive securities:
Options 594,460 (.01)
----------- ---------- ---------
Diluted earnings per
Common share $ 2,194,687 11,818,807 $ .19
=========== ========== =========
Quarter 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
=========== ========== =========
Six Months Ended June 30, 2002
------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $ 4,225,239
===========
Basic earnings per
common share $ 4,225,239 11,196,845 $ .38
Effect of dilutive securities:
Options 499,029 (.02)
----------- ---------- ---------
Diluted earnings per
Common share $ 4,225,239 11,695,874 $ .36
=========== ========== =========
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 (.01)
----------- ---------- ---------
Diluted earnings per
Common share $ 3,334,251 10,972,369 $ .30
=========== ========== =========
Options to purchase approximately 695,120 and 935,216 shares of common stock at
an average exercise price of $8.14 and $7.83 per common share for the quarter
and six month period ended June 30, 2001, respectively, were outstanding but not
included in the computation of diluted earnings per common share because the
options' exercise prices were greater than the average market value of the
common shares. For the quarter and six month period ended June 30, 2002, no
outstanding options were excluded as none have an exercise price in excess of
the average market value of the Company's Common Stock.
Note 5 - Effect of Recently Issued Accounting Pronouncements
Busines Combinations and Intangible Assets - Accounting for Goodwill
As of January 1, 2002, the Company has adopted SFAS 142, "Goodwill and
Other Intangible Assets", which eliminated the amortization of purchased
goodwill. Upon adoption of SFAS No. 142, the Company performed an impairment
test of its goodwill (amounting to $1,612,322 at January 1, 2002) and determined
that no impairment of the recorded goodwill existed. Under SFAS No. 142,
goodwill will be tested for impairment at least annually and more frequently if
an event occurs which indicates the goodwill may be impaired.
The following table presents a reconciliation of net income and
earnings per share amounts, as reported in the financial statements, to those
amounts adjusted for goodwill and intangible asset amortization determined in
accordance with SFAS 142.
For the Quarter ended June 30,
--------------------------------
2002 2001
---------- ----------
Reported net income $2,194,687 $1,705,406
Addback: goodwill amortization - 26,906
---------- ----------
Adjusted net income $2,194,687 $1,732,312
========== ==========
Basic earnings per
Common share:
Reported net income $ .20 $ .16
Goodwill amortization - -
---------- ----------
Adjusted net income $ .20 $ .16
========== ==========
Diluted earnings per
Common share:
Reported net income $ .19 $ .16
Goodwill amortization - -
---------- ----------
Adjusted net income $ .19 $ .16
========== ==========
For the six months ended June 30,
--------------------------------
2002 2001
---------- ----------
Reported net income $4,225,239 $3,334,251
Addback: goodwill amortization - 53,812
---------- ----------
Adjusted net income $4,225,239 $3,388,063
========== ==========
Basic earnings per
common share:
Reported net income $ .38 $ .31
Goodwill amortization - -
---------- ----------
Adjusted net income $ .38 $ .31
========== ==========
Diluted earnings per
common share:
Reported net income $ .36 $ .30
Goodwill amortization - .01
---------- ----------
Adjusted net income $ .36 $ .31
========== ==========
Accounting for the Impairment or Disposal of Long-lived Assets
As of January 1, 2002 the Company has adopted SFAS No. 144, Accounting
for the Impairment or Disposal of Long-lived Assets which supersedes SFAS No.
121, Accounting for the Impairment of Long-lived Assets and for Long-lived
Assets to be Disposed Of. The adoption of SFAS No. 144 had no effect on the
Company.
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
--------------------------
Second Quarter Six months Ended June 30,
------------------- -------------------------
2002 2001 2002 2001
------ ------ ------ ------
Revenues 100.0% 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 88.4 88.6 88.4 88.7
Selling, general and
Administration 7.4 7.7 7.5 7.7
Interest income .2 .4 .2 .4
----- ----- ----- -----
Income before income taxes 4.4 4.1 4.3 4.0
Income taxes 1.7 1.6 1.7 1.6
----- ----- ----- -----
Net income 2.7% 2.5% 2.6% 2.4%
====== ===== ===== =====
Revenues for both the second quarter and six month period ended June
30, 2002 increased 18.5% in each period, compared to the corresponding 2001
periods. The growth in revenues in each period is a result of a net increase in
service agreements entered into with new clients, as well as providing
additional services to existing clients. Additionally, in each period,
approximately 78% of the revenue growth resulted from the Company's
housekeeping, laundry and linen, and other services provided, with the remaining
approximately 22% revenue growth generated from the Company's food service
division. The Company believes that in 2002 both housekeeping, laundry, linen
and other services, and food services' revenues, as a percentage of total
revenues, will remain approximately the same as their respective 2001
percentages.
Cost of services provided as a percentage of revenues decreased to
88.4% for the second quarter of 2002 from 88.6 % in the corresponding 2001
quarter. The primary factors affecting specific variations in the 2002 second
quarter's cost of services provided as a percentage of revenue and its affect on
the respective .2% decrease are as follows: a decrease of .4% in the cost of
supplies consumed in providing services which was primarily attributable to
reduced costs in purchasing of supplies consumed in performing housekeeping,
laundry and linen services; a decrease of .3% in labor costs, which is primarily
a result of efficiencies achieved in managing the housekeeping, laundry, linen
and other services' segment labor. Offsetting these decreases was an increase of
..8% in health insurance and employee benefits.
Cost of services provided as a percentage of revenue decreased to 88.4%
for the six month period ended June 30, 2002 from 88.7% in the same 2001 period.
The primary factors affecting specific variations in the 2002 six month period's
cost of services provided as a percentage of revenue and its affect on the
respective .3% decrease are as follows: a decrease of .6% in labor costs which
is primarily a result of efficiencies achieved in managing the housekeeping,
laundry, linen and other services' segment labor; a .3% decrease in the cost of
supplies consumed in providing services which was primarily attributable to
reduced costs in purchasing of supplies consumed in performing housekeeping,
laundry and linen services. Offsetting these decreases were increases of .6% in
health insurance and employee benefits' costs and .3% in bad debt expense.
Selling, general and administrative expenses as a percentage of revenue
decreased in the 2002 second quarter and six month period by .3% and .2%,
respectively, compared to the same 2001 periods. The decreases are primarily
attributable to the Company's ability to control these expenses while comparing
them to a greater revenue base in the respective periods.
Interest income in the second quarter and six month period ended June
30, 2002 decreased in each case, as compared to the corresponding 2001 periods.
The decreases are attributable to lower rates of return on the Company's cash
balances.
Critical Accounting Policies
The 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 all of these policies, management cautions that future events
rarely develop exactly as forecast, and the best estimates routinely require
adjustment.
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
those in bankruptcy, those who have terminated service agreements and slow
payers experiencing financial difficulties. In making its 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, as well as performing 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 which the Company is in
litigation for collection. 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, and is
further described in the Company's Form 10-K filed with Securities and Exchange
Commission for the year ended December 31, 2001 in Part I thereof under
"Government Regulation of Clients", "Competition" and "Service
Agreements/Collections", 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. At June 30, 2002, the Company has
receivables of approximately $4,000,000 ( $2,000,000, net of reserves ) from a
client group currently Debtors in a Chapter 11 bankruptcy proceeding. The
Company expects the client group will file bankruptcy plans sometime during
2002. If the amount collected is materially less than $2,000,000, it could
adversely affect the Company's results of operations and financial condition.
Accrued Insurance Claims
The Company currently 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 and actuarial analysis done by an independent company
specialist. The present value of the payout is determined by applying an 8%
discount factor against the estimated remaining pay-out period.
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
Company 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.
Liquidity and Capital Resources
At June 30, 2002 the Company had working capital and cash of
$90,338,993 and $38,338,683, respectively, compared to December 31, 2001 working
capital and cash of $83,107,545 and $34,259,334. The Company's current ratio at
June 30, 2002 increased to 6.2 to 1 from 5.7 to 1 at December 31, 2001.
Management views the Company's cash, $38,838,683 at June 30, 2002, as its
principal measure of liquidity.
The net cash provided by the Company's operating activities was
$3,812,620 for the six month period ended June 30, 2002 as compared to net cash
provided by operating activities of $5,006,316 in the same 2001 six month
period. The principal sources of net cash flows from operating activities for
the six month period ended June 30, 2002 were net income, charges to operations
for bad debt provisions and depreciation and amortization. The operating
activities that used the largest amount of cash during the six month period
ended June 30, 2002 were net increases in accounts and notes receivable and long
term notes receivable of $2,918,715. These increases resulted primarily from the
growth in the Company's revenues, as well as the timing of collections from
clients. Additionally, operating activities' cash flows in the six month period
ended June 30, 2002 were negatively impacted by an increase of $985,619 in
prepaid expenses and other assets, and a $624,639 decrease in accounts payable
and other accrued expenses. The respective uses of cash resulted primarily from
the timing of such payments. The principal sources of net cash flows from
operating activities for the six month period ended June 30, 2001 were net
income, charges to operations for bad debt provisions and depreciation and
amortization. Additionally, operating activities' cash flows were increased by
the timing of payments for income taxes of $1,128,624 in the six month period
ended June 30, 2001. The operating activities that used the largest amount of
cash during the six month period ended June 30, 2001 were net increases in
accounts and notes receivable and long term notes receivable of $2,081,721.
These increases resulted primarily from the growth in the Company's revenues, as
well as the timing of collections from clients. Additionally, operating
activities' cash flows in the six month period ended June 30, 2001 were
negatively impacted by a $922,056 decrease in accounts payable and accrued
expenses resulting from the timing of such payments.
The Company's principal use of cash in investing activities in each of
the six month periods ended June 30, 2002 and 2001, respectively was the
purchase of housekeeping equipment and computer software and equipment.
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 ("BBA") 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 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. Since the passage of the BBA, Congress has passed
additional legislation, principally the Balanced Budget Refinement Act of 1999
("BBRA") and the Benefit Improvement and Protection Act of 2000 ("BIPA"). These
enactments were intended primarily to mitigate, temporarily, the reduction in
reimbursement for skilled nursing facilities under the Medicare PPS. In total,
four add-on payments were established by the enactments to offset the impact of
PPS. On April 23, 2002, the Centers for Medicare and Medicaid Services ("CMS")
announced that it would delay implementation of any refinements to the scope of
two of the add-on payments enacted pursuant to the BBRA and BIPA, thereby
extending the related add-ons to at least September 30, 2003. The other two
add-on payment provisions are still due to expire on September 30, 2002. Any
decisions by the government to discontinue or adversely modify the legislative
add-ons will have a material adverse effect on the Company's clients' revenues.
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 June 30, 2002 and December 31, 2001, the Company had
approximately, net of reserves, $12,521,000 and $14,159,000, 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 $3,250,000 and $2,350,000 in the six month periods ended
June 30, 2002 and 2001, respectively. These provisions represent approximately
2.0% and 1.7%, as a percentage of revenue for such respective periods. 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 also
establishes credit limits, as well as performing ongoing credit evaluation and
account monitoring procedures 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 affect
on the Company's results of operations and financial condition. At June 30,
2002, the Company has receivables of approximately $4,000,000 ( $2,000,000, net
of reserves ) from a client group currently Debtors in Chapter 11 bankruptcy
proceedings. The Company expects the client group will file bankruptcy plans
sometime during 2002. If the amount collected is materially less than
$2,000,000, it could adversely affect the Company's results of operations and
financial condition.
The Company currently 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 open claims and
actuarial analysis done by an independent company specialist. The present value
of the payout is determined by applying an 8% discount factor against the
estimated remaining pay-out period.
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
Company 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.
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, 2002. The Company believes the line
will be renewed at that time. Amounts drawn under the line are payable on
demand. At June 30, 2002, there were no borrowings under the line. However, at
such date, the Company had outstanding $14,500,000 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 $14,500,000 at June 30, 2002. In
addition, the Company has lease commitments totaling $2,613,790 through 2008.
The level of capital expenditures by the Company is generally dependent
on the number of new clients obtained. Such capital expenditures primarily
consist of housekeeping equipment and laundry and linen equipment installations.
Although the Company has no specific material commitments for capital
expenditures through the end of calendar year 2002, 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 seek to obtain necessary working
capital from such sources as long-term debt or equity financing.
Although the Company remains authorized to purchase up to 786,450
shares of its outstanding common stock pursuant to previous Board of Directors'
action, it did not make any such purchases during the six month period ended
June 30, 2002.
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; the
Company's claims experience related to workers' compensation and general
liability insurance; 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, 2001 in Part
I thereof under "Government Regulation of Clients", "Competition" and "Service
Agreements/Collections". The Company's clients have been and continue to be
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 for
bankruptcy protection. Others may follow. These factors, in addition to delays
in payments from clients has 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.
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.
PART II. Other Information
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities. Not Applicable
Item 3. Defaults under Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
c) The Company's Annual Meeting of Shareholders was held on May 21,
2002. The results are as follows:
(1) All of management's nominees for directors were elected
as follows:
Shares Voted Withheld
"FOR"
6,953,093 1,360,653
(2) Proposal to approve and adopt the Company's 2002 Stock
Option Plan was approved as follows:
Shares Voted Shares Voted Shares
"FOR" "AGAINST" "ABSTAINING"
7,459,735 841,196 12,815
(3) Proposal to approve and ratify selection of Grant
Thornton LLP as the independent certified public
accountants of the Company for its current fiscal year
ending December 31, 2002 as approved as follows.
Shares Voted Shares Voted Shares
"FOR" "AGAINST" "ABSTAINING"
8,305,190 2,096 6,460
Item 5. Other Information.
a) None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits - The 2002 Stock Option Plan as
adopted
b) Reports on Form 8-K - None
Item 10. Exhibit Index
10.1 2002 Stock Option Plan
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE SERVICES GROUP, INC.
-------------------------------
July 22, 2002 /s/ Daniel P. McCartney
- ------------------------- ---------------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
July 22, 2002 /s/ Thomas A. Cook
- ------------------------- --------------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
July 22, 2002 /s/ James L. DiStefano
- ------------------------- --------------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
July 22, 2002 /s/ Richard W. Hudson
- ------------------------- --------------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer