<PAGE>
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, 1996 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)
2643 Huntingdon Pike, Huntingdon Valley, Pennsylvania 19006
-----------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 215-938-1661
----------------------
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 May 13, 1996 is
8,113,563 shares
Total of 11 Pages
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Balance Sheets as of March 31, 1996 and
December 31, 1995 2
Statements of Income for the Three Months
ended March 31, 1996 and 1995 3
Statements of Cash Flows for the Three Months
ended March 31, 1996 and 1995 4
Notes to Financial Statements 5 to 6
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 7 to 8
PART II. OTHER INFORMATION 9
SIGNATURES 10
- 1 -
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
(Unaudited) (Audited)
-------------- -------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 17,326,438 16,335,886
Accounts and notes receivable, less allowance
for doubtful accounts of $4,461,000
in 1996 and $4,468,000 in 1995 34,860,034 32,463,288
Prepaid income taxes 218,653 1,466,184
Inventories and supplies 7,117,130 7,200,033
Deferred income taxes 1,049,650 1,104,350
Prepaid expenses and other 2,498,527 2,090,409
-------------- -------------
Total current assets 63,070,432 60,660,150
PROPERTY AND EQUIPMENT:
Laundry and linen equipment 12,333,857 12,135,849
Housekeeping equipment and office
furniture 6,615,095 6,216,950
Autos and trucks 178,090 178,006
-------------- -------------
19,127,042 18,530,805
Less accumulated depreciation 12,941,226 12,347,675
-------------- -------------
6,185,816 6,183,130
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,144,319 in 1996 and
$1,117,413 in 1995 2,231,158 2,258,064
DEFERRED INCOME TAXES 1,584,826 1,449,236
OTHER NONCURRENT ASSETS 9,362,172 9,739,191
-------------- -------------
$ 82,434,404 80,289,771
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,924,991 3,480,499
Accrued payroll, accrued and withheld payroll tax 4,546,998 2,312,907
Other accrued expenses 2,489,195 2,843,890
Accrued insurance claims 1,037,754 954,881
-------------- -------------
Total current liabilities 9,998,938 9,592,177
ACCRUED INSURANCE CLAIMS 2,421,426 2,228,054
COMMITMENTS AND CONTINGENCIES (Notes 2 and 3)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 10,000,000
shares authorized, 8,113,563 shares
issued in 1996 and 8,143,063 in 1995 81,136 81,431
Additional paid in capital 34,787,488 35,023,468
Retained earnings 35,145,416 33,364,641
-------------- -------------
Total stockholders' equity 70,014,040 68,469,540
-------------- -------------
$ 82,434,404 80,289,771
============== =============
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Revenues $ 39,410,651 36,385,777
Operating costs and expenses:
Cost of services provided 33,570,692 30,765,990
Selling, general and administrative 3,013,349 2,927,764
Recovery of contingent losses on promissory
notes sold 150,000
Other income:
Interest income 191,165 200,158
------------- -------------
Income before income taxes 3,017,775 3,042,181
Income taxes 1,237,000 1,233,000
------------- -------------
Net income $ 1,780,775 $ 1,809,181
============= =============
Earnings per common share $ 0.22 $ 0.22
============= =============
Weighted average number of common
shares outstanding 8,164,995 8,286,414
============= =============
</TABLE>
See accompanying notes.
-3-
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
----------------------------
1996 1995
----------- -----------
Cash flows from operating activities:
<S> <C> <C>
Net Income $ 1,780,775 $ 1,809,181
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 620,457 660,149
Bad debt provision 600,060 147,000
Recovery of contingent losses on
promissory notes sold (150,000)
Deferred income taxes (benefits) (81,000) (83,338)
Tax benefit of stock option transactions 41,445
Changes in operating assets and liabilities:
Accounts receivable (2,996,806) (2,121,251)
Prepaid income taxes 1,247,641
Inventories and supplies 82,903 (320,086)
Changes to long term trade notes
receivable 302,069 (401,695)
Accounts payable and other accrued expenses (1,910,202) (2,334,584)
Accrued payroll, accrued and withheld payroll
taxes 2,234,091 1,327,594
Accrued insurance claims 276,244 299,905
Income taxes payable 159,445
Prepaid expenses and other assets (333,168) 1,199,431
----------- -----------
Net cash provided by operating activities 1,823,064 233,196
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (596,237) (948,992)
Cash provided by release of Certificates of
Deposits pledged for loan guarantees 1,500,000
----------- -----------
Net cash provided by (used in) investing activities (596,237) 551,008
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (240,700)
Proceeds from the exercise of stock options 4,425 160,336
----------- -----------
Net cash provided by (used in ) financing activities (236,275) 160,336
----------- -----------
Net increase in cash and cash equivalents 990,552 944,540
Cash and cash equivalents at beginning of the year 16,335,886 11,230,118
----------- -----------
Cash and cash equivalents at end of the year $17,326,438 $12,174,658
=========== ===========
See accompanying notes.
</TABLE>
-4-
<PAGE>
NOTES TO 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. The balance sheet shown
in this report as of March 31, 1996 has been derived from, and does not include,
all the disclosures contained in the financial statements for the year ended
December 31, 1995. These 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, 1995. However, in the opinion of
the Company, all adjustments considered necessary for a fair presentation have
been included. The results of operations for the three months ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
full fiscal year.
Note 2 - Other Contingencies
The Company has a $13,000,000 bank line of credit on which it may draw
to meet short-term liquidity requirements or for other purposes. This line
expires on June 30, 1996. Amounts drawn under the line are payable upon demand.
At both March 31, 1996 and December 31, 1995, there were no borrowings under the
line. However, the amount available under the line was reduced by approximately
$8,000,000 at March 31, 1996 and $8,200,000 at December 31, 1995 as a result of
outstanding irrevocable standby letters of credit, which primarily relate to
contingent payment obligations under the Company's insurance program.
Note 3 - Provision for Estimated Cost Related to SEC Inquiry and Other Matters
The Securities and Exchange Commission (SEC) has been conducting a
non-public investigation since 1990 with respect to certain matters, including
the Company's financial statements, financial condition and results of
operations. The Company has cooperated fully with such inquiry on a voluntary
basis. On March 21, 1996 the Staff of the SEC informed the Company that the SEC
had accepted a settlement which had been offered by the Company and recommended
by the Staff pertaining to certain allegations of violations of the Federal
securities laws by the Company and certain of its officers with respect to
periods ended on or before March 31, 1992. The settlement is subject to mutual
agreement on the final form of the Complaint and Consent to be filed in the
United States District Court. Under the settlement, upon filing of the
- 5 -
<PAGE>
Complaint and the entry of a final judgment upon Consent, and without admitting
or denying any of the allegations of the Complaint, the Company , two officers
and a former officer, will be permanently enjoined from violating certain
provisions of the Federal securities laws, and the Company and these individuals
will be required to pay civil penalties aggregating approximately $825,000. The
estimated monetary impact of this settlement plus related legal costs have been
reflected in the accompanying financial statements.
In addition, the United States Attorney for the Eastern District of
Pennsylvania is investigating matters relating to certain payments
(approximately $84,000 in 1988, $54,000 in 1989, $110,000 in 1990, $125,000 in
1991 and $34,000 in 1992) made by the Company between June 1988 and January
1992 to certain vendors that were not in accordance with Company policy. This
matter was previously investigated and reported upon by the Company in its Form
10-K for the year ended December 31, 1991. Information regarding this matter was
voluntarily furnished to the U.S. Attorney's office in New Jersey in May and
November 1992 and such payments were recovered by the Company in November 1992.
The Company is cooperating with the United States Attorney's office to attempt
to resolve any issues or claims arising out of these payments.
During 1995, the Company anticipated that it would incur a significant
amount of legal and related costs in connection with these matters. The Company
incurred approximately $950,000 of costs in 1995 and estimated
that the additional costs which may be incurred in connection with these
matters will be in a range of approximately $2,150,000 to $3,500,000 and
accordingly accrued as of December 31, 1995 the estimated low range of this
liability. The result of this $3,100,000 provision was to reduce 1995 net income
by approximately $2,321,000 or $.28 per common share.
- 6 -
<PAGE>
PART I.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto.
RESULTS OF OPERATIONS
Revenues for the first quarter of 1996 increased by 8.3% over revenues
in the corresponding 1995 quarter. The following factors contributed to the
increase in first quarter revenues: service agreements with new clients in
existing geographic areas increased 18.7%; providing new services to existing
clients increased revenues 1.9% ; and cancellations and other minor changes
decreased revenues 12.3 %.
Cost of services provided as a percentage of revenues increased to
85.2% for the first quarter of 1996 from 84.6% in the corresponding 1995
quarter. The primary factors affecting the .6% variation in cost of services
provided as a percentage of revenue include the following: an increase of .8% in
the allowance for doubtful accounts and other reserves; and an increase of .8%
in the cost of laundry and housekeeping supplies; and offsetting these increases
was a decrease in costs associated with service agreements cancelled 1.4% ( see
Note 1- Intangible Assets in Notes to Financial Statements at December 31,
1995); and a decrease of .4% in workers' compensation, general liability and
other insurance costs.
Selling, general and administrative expenses as a percentage of revenue
decreased to 7.6% for the first quarter of 1996 as compared to 8.0% in the
corresponding 1995 three month period due to the Company's ability to control
other selling, general and administrative expenses while comparing them to a
greater revenue base.
The Company presently anticipates that it will incur a significant
amount of additional legal and related costs in connection with the pending
governmental investigations and accordingly has established a provision for this
purpose (see Note 3 - Provision for Estimated Cost Related to SEC Inquiry and
Other Matters ).
Liquidity and Capital Resources
At March 31, 1996 the Company had working capital of $53,071,494 which
represents a 4% increase over December 31, 1995 working capital of $51,067,973.
Working capital continues to grow primarily as a result of higher accounts
receivable attributable to the Company's 8.3% increase in revenues.
- 7 -
<PAGE>
The Company's current ratio at March 31, 1996 remains at 6.3 to 1 as it
was at December 31, 1995.
The net cash provided by the Company's operating activities was
$1,823,064 for the three month period ended March 31, 1996. The components of
working capital that required the largest amount of cash were: a $2,996,806
increase in accounts receivable and a $1,910,202 decrease in accounts payable
and other accrued expenses. The increase in accounts receivable resulted
primarily from the continued growth in the Company's revenues which increased by
8.3% in the three month period ended March 31, 1996. The increased use of cash
associated with accounts payable and other accrued expenses resulted primarily
from the timing of payments to vendors.
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. Whenever possible, when a client falls behind in making
agreed-upon payments, the Company converts the unpaid accounts receivable to
interest bearing promissory notes receivable. The promissory notes receivable
provide a definitive repayment plan and therefore may enhance the ultimate
collectibility of the amounts due. In some instances the Company obtains a
security interest in certain of the debtors' assets.
The Company has a $13,000,000 bank line of credit on which it may draw
to meet short-term liquidity requirements or for other purposes. This line
expires on June 30, 1996. Amounts drawn under the line are payable on demand. At
March 31, 1996 there were no borrowings under the line. However, at such date,
the amount available under the line was reduced by approximately $8,000,000 as a
result of outstanding irrevocable standby letters of credit, which primarily
relate to contingent payment obligations under the Company's insurance program.
At March 31, 1996, the Company had $17,326,438 of cash and cash
equivalents, which it views as its principal measure of liquidity.
The Company has no specific material commitments for capital
expenditures and believes that its cash from operations, existing balances and
available 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.
- 8 -
<PAGE>
PART II. Other Information
Item 1. Legal Proceedings. None.
Item 2. Changes in Securities. None.
Item 3. Defaults under Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security
Holders. Not Applicable.
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
- 9 -
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE SERVICES GROUP, INC.
-------------------------------
May 14, 1996 /s/ Daniel P. McCartney
- ------------------------------ ---------------------------------------
Date DANIEL P. McCARTNEY, Director and
Chief Executive Officer
May 14, 1996 /s/ Thomas A. Cook
- ------------------------------ ---------------------------------------
Date THOMAS A. COOK, Director, President,
and Chief Operating Officer
May 14, 1996 /s/ James L. DiStefano
- ------------------------------ ---------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
May 14, 1996 /s/ Richard W. Hudson
- ------------------------------ ---------------------------------------
Date RICHARD W. HUDSON, Vice President-
Finance, Secretary and Chief Accounting
Officer
- 10 -
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 17,326,438
<SECURITIES> 0
<RECEIVABLES> 39,321,034
<ALLOWANCES> 4,461,000
<INVENTORY> 7,117,130
<CURRENT-ASSETS> 63,070,432
<PP&E> 19,127,042
<DEPRECIATION> 12,941,226
<TOTAL-ASSETS> 82,434,404
<CURRENT-LIABILITIES> 9,998,938
<BONDS> 0
0
0
<COMMON> 81,136
<OTHER-SE> 69,932,904
<TOTAL-LIABILITY-AND-EQUITY> 82,434,404
<SALES> 0
<TOTAL-REVENUES> 39,410,651
<CGS> 33,570,692
<TOTAL-COSTS> 36,584,041
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,017,775
<INCOME-TAX> 1,237,000
<INCOME-CONTINUING> 1,780,775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,780,775
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
