<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 June 30, 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 August 5 , 1996
is 8,078,563 shares
Total of 14 Pages
<PAGE>
INDEX
-----
PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Balance Sheets as of June 30, 1996 and
December 31, 1995 2
Statements of Income for the Three Months
ended June 30, 1996 and 1995 3
Statements of Income for the Six Months
ended June 30, 1996 and 1995 4
Statements of Cash Flows for the Six Months
ended June 30, 1996 and 1995 5
Notes to Financial Statements 6 to 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 to 10
PART II. OTHER INFORMATION 11 to 12
-----------------
SIGNATURES 13
- 1 -
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Balance Sheets
<TABLE>
<CAPTION>
June, December 31,
1996 1995
(Unaudited) (Audited)
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 17,082,312 $ 16,335,886
Accounts and notes receivable, less allowance
for doubtful accounts of $4,501,000
in 1996 and $4,468,000 in 1995 36,916,106 32,463,288
Prepaid income taxes 1,466,184
Inventories and supplies 7,068,967 7,200,033
Deferred income taxes 943,219 1,104,350
Prepaid expenses and other 2,383,195 2,090,409
-------------- -------------
Total current assets 64,393,799 60,660,150
PROPERTY AND EQUIPMENT:
Laundry and linen equipment 12,498,389 12,135,849
Housekeeping equipment and office
furniture 7,048,435 6,216,950
Autos and trucks 178,090 178,006
-------------- -------------
19,724,914 18,530,805
Less accumulated depreciation 13,376,127 12,347,675
-------------- -------------
6,348,787 6,183,130
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,151,225 in 1996 and
$1,117,413 in 1995 2,204,252 2,258,064
DEFERRED INCOME TAXES 1,736,423 1,449,236
OTHER NONCURRENT ASSETS 8,649,074 9,739,191
-------------- -------------
$ 83,332,335 $ 80,289,771
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,624,691 $ 3,480,499
Accrued payroll, accrued and withheld payroll taxes 2,344,557 2,312,907
Other accrued expenses 2,333,483 2,843,890
Income taxes payable 942,013
Accrued insurance claims 736,033 954,881
-------------- -------------
Total current liabilities 8,980,777 9,592,177
ACCRUED INSURANCE CLAIMS 2,768,885 2,228,054
COMMITMENTS AND CONTINGENCIES (Notes 2 and 3)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 15,000,000
shares authorized, 8,078,563 shares
issued in 1996 and 8,143,063 in 1995 80,786 81,431
Additional paid in capital 34,499,563 35,023,468
Retained earnings 37,002,324 33,364,641
-------------- -------------
Total stockholders' equity 71,582,673 68,469,540
-------------- -------------
$ 83,332,335 $ 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 For the Six Months Ended
June 30, June 30,
--------------------------------------------------------------
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 40,836,772 $36,624,908 $ 80,247,424 $ 73,010,685
Operating costs and expenses:
Cost of services provided 34,564,205 30,851,285 68,134,897 61,617,275
Selling, general and administrative 3,327,828 3,326,305 6,341,176 6,254,069
Recovery of contingent losses on promissory
notes sold (50,000) (200,000)
Other income (expense):
Provision for estimated cost related to SEC
Inquiry and other matters (Note 3) (2,400,000) (2,400,000)
Interest income 205,168 233,634 396,332 433,791
------------ ------------- ------------- -------------
Income before income taxes 3,149,907 330,952 6,167,683 3,373,132
Income taxes 1,293,000 314,000 2,530,000 1,547,000
------------ ------------- ------------- -------------
Net income $ 1,856,907 $ 16,952 $ 3,637,683 $ 1,826,132
============ ============= ============= =============
Earnings per common share $ 0.23 $ 0.00 $ 0.45 $ 0.22
============ ============= ============= =============
Weighted average number of common
shares outstanding 8,118,793 8,212,021 8,141,777 8,261,678
============ ============= ============= =============
</TABLE>
See accompanying notes.
- 3 -
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Six Months Ended
June 30,
-----------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 3,637,683 $ 1,826,132
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,082,264 1,333,090
Bad debt provision 1,275,000 250,514
Recovery of contingent losses on
promissory notes sold (200,000)
Deferred income taxes (benefits) (126,166) 150,964
Tax benefit of stock option transactions 59,000
Changes in operating assets and liabilities:
Accounts receivable (5,727,818) (588,391)
Prepaid income taxes 1,466,294
Inventories and supplies 131,066 (664,570)
Changes to long term trade notes
receivable 942,140 1,200,765
Accounts payable and other accrued expenses (1,366,216) (1,956,839)
Accrued payroll, accrued and withheld payroll
taxes 31,650 (492,438)
Accrued insurance claims 321,982 46,580
Income taxes payable 942,013 (37,891)
Prepaid expenses and other assets (144,807) 1,638,184
----------- -----------
Net cash provided by operating activities 2,465,085 2,565,100
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (1,194,109) (1,518,332)
Cash provided by release of certificates of
deposit pledged for loan guarantees 1,500,000
----------- -----------
Net cash used in investing activities (1,194,109) (18,332)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (528,975)
Proceeds from the exercise of stock options 4,425 224,537
----------- -----------
Net cash provided by (used in ) financing activities (524,550) 224,537
----------- -----------
Net increase in cash and cash equivalents 746,426 2,771,305
Cash and cash equivalents at beginning of the year 16,335,886 11,230,118
----------- -----------
Cash and cash equivalents at end of the year $17,082,312 $14,001,423
=========== ===========
</TABLE>
See accompanying notes.
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<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 June 30, 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 and six months ended June
30, 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, 1997. Amounts drawn under the line are payable upon demand.
At both June 30, 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 June 30, 1996 and $8,200,000 at December 31, 1995 as a result of
outstanding irrevocable standby letters of credit, which relate primarily 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) conducted 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 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
- 5 -
<PAGE>
District Court. Under the settlement, upon filing of the 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 $850,000. The estimated monetary
impact of this settlement plus related legal costs have been reflected in the
accompanying financial statements.
In addition, on or about May 24, 1996 the United States Attorney for
the Eastern District of Pennsylvania filed a civil action against the Company
and the aforementioned officers 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 to certain entities that were not in accordance
with Company policy or for a valid business purpose. 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.
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 second quarter of 1996 increased by 11.5% over
revenues in the corresponding 1995 quarter. Revenues for the six months ended
June 30, 1996 increased by 9.9% over the same 1995 period. The following factors
contributed to the increase in revenues: service agreements with new clients in
existing geographic areas increased 20.7 % for the second quarter and 19.7% for
the six month period; providing new services to existing clients increased
revenues 2.4% for the second quarter and 2.1% for the six month period; and
cancellations and other minor changes decreased revenues 11.6% for the second
quarter and 11.9% for the six month period.
Cost of services provided as a percentage of revenues increased
slightly to 84.6% for the second quarter of 1996 from 84.2% in the corresponding
1995 quarter. In addition, cost of services provided as a percentage of revenue
increased slightly to 84.9% for the six month period ending June 30, 1996 from
84.4% in the same 1995 period. The primary factors affecting the variations in
the 1996 second quarter and six month periods' cost of services provided as a
percentage of revenue and their effects on the respective .4% and .5% increases
are as follows: in the second quarter an increase of 1.4% in workers'
compensation, general liability and other insurance costs; an increase of 1.0%
in the allowance for doubtful accounts and other reserves; and an increase of
.6% in the cost of laundry and housekeeping supplies; and offsetting these
increases was a decrease in costs associated with service agreements canceled
.6% ( see Note 1- Intangible Assets in Notes to Financial Statements at December
31, 1995) and a .5% decrease in depreciation expense; in the six month period an
increase of .9% in the allowance for doubtful accounts and other reserves and an
increase of .7% in the cost of laundry and housekeeping supplies; and offsetting
these increases was a decrease in costs associated with service agreements
canceled of 1.0% and a .3% decrease in depreciation expense.
Selling, general and administrative expenses as a percentage of revenue
decreased to 8.1% for the second quarter of 1996 as compared to 9.1% in the
corresponding 1995 three month period. The six month period ending June 30, 1996
also recognized a decrease in SG &A expenses to 7.9% as a percentage of revenue
as compared to 8.6% in the corresponding 1995 period. The three and six month
decreases are primarily attributable to the Company's ability to control certain
selling, general and administrative expenses while comparing them to a greater
revenue base.
- 7 -
<PAGE>
The Company presently anticipates that it will incur a significant
amount of additional legal and related costs in connection with the pending
governmental civil lawsuit and related investigations and pending settlement
with the Securities and Exchange Commission 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 June 30, 1996 the Company had working capital of $55,413,022 which
represents a 9% 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 9.9% increase in revenues for the six
months ending June 30, 1996.
The Company's current ratio at June 30, 1996 increased to 7.2 to 1
compared to 6.3 to 1 at December 31, 1995.
The net cash provided by the Company's operating activities was
$2,465,085 for the six month period ended June 30, 1996. The components of
working capital that required the largest amount of cash were: a $5,727,818
increase in accounts receivable and a $1,366,216 decrease in accounts payable
and other accrued expenses. The increase in accounts receivable resulted
primarily from the growth in the Company's revenues. 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.
- 8 -
<PAGE>
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, 1997. Amounts drawn under the line are payable on demand. At
June 30, 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 June 30, 1996, the Company had $17,082,.312 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.
Forward Looking Statement
Certain matters discussed in this report may include forward-looking
statements that are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risk and uncertainties
include, but are not limited to, risks arising from the Company providing its
services exclusively to the healthcare industry, as well as the credit and
collection risks associated with this industry.
- 9 -
<PAGE>
PART II. Other Information
-----------------
Item 1. Legal Proceedings.
On or about May 24, 1996 the United States Attorney for the
Eastern District of Pennsylvania filed a civil action entitled
United States of America v. Healthcare Services Group, Inc. et.
Al. (96-CV-3940) in the United States District Court for the
Eastern District of Pennsylvania. The action seeks civil penalties
(including treble and other damages) under several U.S. statutes,
including 41 U.S.C. Section 52 et seq., 18 U.S.C. Sections 1956
and 1957, against the Company and two of its officers (as well as
other named defendants) with respect to certain payments
(approximately $84,000 in 1988, $54,000 in 1989, $110,000 in 1990,
$127,000 in 1991 and $34,000 in 1992) made by the Company to
certain entities that were not in accordance with Company policy
or for a valid business purpose. 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 1992. Reference is made to Note 3 of the Notes
to Financial Statements.
Item 2. Changes in Securities. None.
Item 3. Defaults under Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security
Holders.
(c) The Company's Annual Meeting of Shareholders was held on June 4,
1996 for the purpose of electing a board of directors, approving
the appointment of auditors and voting on the proposals described
below.
(1) All of management's nominees for directors were elected as
follows:
Shares Voted Withheld
"FOR"
7,503,075 85,304
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<PAGE>
(2) Proposal to engage Grant Thornton LLP as the independent public
accountants of the Company for its current fiscal year ending
December 31, 1996 was approved as follows:
Shares Voted Shares Voted Shares
"FOR" "AGAINST" "ABSTAINING"
7,537,410 44,914 6,058
(3) The proposal to approve certain amendments to the Company's 1995
Incentive and Non-Qualified Stock Option Plan for key employees
was approved by the following vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" Non-
Votes
7,368,912 104,179 12,843 102,448
(4) The proposal to approve and adopt the Company's 1996 Non-Employee
Directors Stock Option Plan was approved by the following vote:
Shares Voted Shares Voted Shares Broker
"FOR" "AGAINST" "ABSTAINING" Non-
Votes
6,342,248 1,131,518 12,168 102,448
Item 5. Other Information.
a) None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits - None.
b) Reports on Form 8-K:
(1) 8-K Report filed on or about May 29, 1996 relating to
announcement by U.S. Attorney for Eastern District of
Pennsylvania of filing of civil complaint against the
Company and certain officers.
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<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.
-------------------------------
August 6, 1996 /s/ Daniel P. McCartney
- ------------------------- ------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
August 6, 1996 /s/ Thomas A. Cook
- ------------------------- -------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
August 6, 1996 /s/ James L. DiStefano
- ------------------------- --------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
August 6, 1996 /s/ Richard W. Hudson
- ------------------------- -------------------------------------
Date RICHARD W. HUDSON, Vice President-
Finance, Secretary and Chief Accounting
Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 17,082,312
<SECURITIES> 0
<RECEIVABLES> 41,417,106
<ALLOWANCES> 4,501,000
<INVENTORY> 7,068,967
<CURRENT-ASSETS> 64,393,799
<PP&E> 19,724,914
<DEPRECIATION> 13,376,127
<TOTAL-ASSETS> 83,332,335
<CURRENT-LIABILITIES> 8,980,777
<BONDS> 0
0
0
<COMMON> 80,786
<OTHER-SE> 71,501,887
<TOTAL-LIABILITY-AND-EQUITY> 83,332,335
<SALES> 0
<TOTAL-REVENUES> 80,247,424
<CGS> 68,134,897
<TOTAL-COSTS> 74,079,741
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 6,167,683
<INCOME-TAX> 2,530,000
<INCOME-CONTINUING> 3,637,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,637,683
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
</TABLE>
