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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 232018365
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporated or organization)
2643 Huntingdon Pike, Huntingdon Valley, Pennsylvania 19006
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 938-1661)
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Titles of Each Class on Which Registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act
Shares of Common Stock ($.01 par value)
---------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports 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 the past 90 days.
YES __X__ NO_______
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
YES __X__ NO_______
The aggregate market value of voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant as of March 7, 1997
was approximately $74,632,000
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: At
March 7, 1997 there were outstanding 8,096,243 shares of the
Registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated
by reference to certain portions of a definitive proxy statement which is
expected to be filed by the Registrant pursuant to Regulation 14A within 120
days after the close of its fiscal year.
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PART I
Item I. Business
(a) General
Healthcare Services Group, Inc. (the "Company" or the "Registrant")
provides housekeeping, laundry and linen services to the healthcare industry,
including nursing homes, retirement complexes, sub-acute and re-habilitation
centers and hospitals. The Company believes that it is the largest provider of
contractual housekeeping and laundry services to the long-term care industry in
the United States, rendering such services to more than 800 facilities in 41
states and Canada as of December 31, 1996.
(b) Not Applicable
(c) Description of Services
The Company provides management, administrative and operating expertise and
services to the housekeeping, laundry and linen departments of a single industry
segment (long-term care). The Company's labor force is also interchangeable with
respect to each of these services. The Company believes that each service it
performs offers similar opportunity for growth. Accordingly, the Company does
not deem it meaningful to identify the percentage of revenues derived from the
several services which it performs.
Housekeeping and laundry services. Housekeeping and laundry services is the
largest service sector of the Company. It involves cleaning, disinfecting and
sanitizing resident areas in the facilities, as well as laundering and
processing the residents' personal clothing. In providing services to any given
client facility, the Company typically hires and trains the hourly employees who
were employed by such facility prior to the engagement of the Company. The
Company normally assigns two on-site managers to each facility to supervise and
train hourly housekeeping and laundry personnel and to coordinate housekeeping
and laundry with other facility support functions. Such management personnel
also oversee the execution of a variety of quality and cost-control procedures
including continuous training and employee evaluation as well as on-site testing
for infection control. The on-site management team also assists the facility in
complying with Federal, state and local regulations.
Linen services. Linen services is the other significant service sector of
the Company. It involves providing and laundering the sheets, pillow cases,
blankets, towels, uniforms and assorted linen items used by the facilities. At
most of the facilities that utilize the Company's linen services, the equipment
is generally either acquired and installed by the Company, or the existing
laundry installations are purchased from the facility and upgraded when
required. Each such installation generally requires initial capital outlays by
the Company of from $50,000 to $250,000 depending on the size of the facility
installation or construction and the amount of equipment required. The Company
could incur relocation or other costs in the event of the cancellation of a
linen agreement where there was a corresponding laundry installation. From
January 1, 1994 through December 31, 1996, the Company's services were cancelled
by fifty-seven facilities with respect to which the Company had previously
invested in a laundry installation.
1
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During each year, except for certain agreements cancelled in 1995, the laundry
installations were sold to the Company's clients for an amount in excess of the
net amount recorded on the Company's balance sheets. The laundry installations
relating to agreements cancelled in 1995 resulted in the Company receiving
approximately $15,000 less than the net amount at which these assets have been
recorded on its balance sheet. Linen supplies are, in most instances also owned
by the Company, and the Company maintains a sufficient inventory of these items
in order to ensure their availability. The Company provides linen services to
approximately half of the facilities to which it provides housekeeping and
laundry services.
Facility maintenance, materials acquisition and consulting services.
Facility maintenance services consist of repair and maintenance of laundry
equipment, plumbing and electrical systems, as well as carpentry and painting.
In many instances, materials, equipment and supplies utilized by the Company in
the performance of maintenance services, as well as housekeeping, laundry and
linen services, are provided by the Company through its Supply division. The
Company also provides consulting services to facilities to assist them in
updating their housekeeping, laundry and linen operations.
Laundry installations sales. The Company (as distributor of laundry
equipment) sells laundry installations to its clients which generally represent
the construction and installation of a turn-key operation. With regard to
laundry installation sales, the Company generally offers payment terms, ranging
from 36 to 60 months. There were no service agreement cancellations in either
1996 or 1994 by clients who have purchased laundry installations from the
Company, although in 1995 two facilities that purchased laundry installations
from the Company cancelled the Company's services. The Company received
approximately $18,000 less than the aggregate net amount recorded on its balance
sheet with respect to such installations as of the dates of such cancellations.
During the years 1994 through 1996, laundry installation sales were not material
as the Company prefers to own such laundry installations in connection with
performance of its service agreements.
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Operational-Management Structure
By applying its professional management techniques, the Company is able
to contain certain housekeeping and laundry costs on a continuing basis. The
Company provides its services through a network of management personnel, as
illustrated below.
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Vice President - Operations
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Divisional Vice President
(4 Divisions)
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Regional Vice President/Manager
(15 Regions)
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District Manager
(88 Districts)
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Training Manager
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Facility Manager and
Assistant Facility Manager
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Each facility is managed by an on-site Facility Manager, an Assistant
Facility Manager, and if necessary, additional supervisory personnel. Districts,
typically consisting of from eight to twelve facilities, are supported by a
District Manager and a Training Manager. District Managers bear overall
responsibility for the facilities within their districts. They are generally
based within close proximity to each facility. These managers provide active
support to clients in addition to the support provided by the Company's on-site
management. Training Managers are responsible for the recruitment, training and
development of Facility Managers. At December 31, 1996, the Company maintained
15 regions within four divisions. A division consists of two to six regions
within a specific geographical area. A Divisional Vice President manages each
division. Additionally, each division has a Divisional Vice President-Sales who
supports the Divisional Vice President by managing the marketing efforts of the
regions. Each region is headed by a Regional Vice President/Manager and a
Regional Sales Director who assumes primary responsibility for marketing the
Company's services. Regional Vice President/Managers report to Divisional Vice
Presidents who in turn report to the Vice President of Operations. The Company
believes that its regional and district organizational structure facilitates its
expansion into new geographic areas.
3
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Market and Services
The market for the Company's services consists of a large number of
facilities involved in various aspects of the long-term care field, including
nursing homes, retirement complexes and rehabilitation centers. Such facilities
may be specialized or general, privately owned or public, profit or
not-for-profit, and may serve patients on a long-term or short-term basis. The
market for the Company's services is expected to continue to grow as the elderly
increase as a percentage of the United States population and as government
reimbursement policies require increased cost control or containment by
long-term care facilities.
According to recent estimates of the Department of Health and Human
Services, the long-term care market in the United States consists of
approximately 23,000 facilities, which range in size from small private
facilities with 65 beds to facilities with over 500 beds. The Company markets
its services primarily to facilities with 100 or more beds. The Company believes
that less than five percent of long-term facilities use outside providers of
housekeeping and laundry services such as the Company.
Marketing and Sales
The Company's services are marketed at four levels of the Company's
organization: at the corporate level by the Chief Executive Officer, President
and the Vice President of Operations, at the divisional level by Divisional Vice
Presidents and Divisional Vice Presidents- Sales; at the regional level by the
Regional Vice Presidents/Managers; and at the district level by District
Managers. The Company provides incentive compensation to its operational
personnel based on achieving budgeted earnings and to its Divisional Vice
Presidents- Sales and Regional Sales Directors based on achieving budgeted
earnings and new business revenues.
The Company's services are marketed primarily through referrals and
in-person solicitation of target facilities. The Company also utilizes direct
mail campaigns and participates in industry trade shows, healthcare trade
associations and healthcare support services seminars that are offered in
conjunction with state or local health authorities in many of the states in
which the Company conducts its business. The Company's programs have been
approved for continuing education credits by state nursing home licensing boards
in certain states, and are typically attended by facility owners, administrators
and supervisory personnel, thus presenting a marketing opportunity for the
Company. Indications of interest in the Company's services arising from initial
marketing efforts are followed up with a presentation regarding the Company's
services and survey of the service requirements of the facility. Thereafter, a
formal proposal, including operational recommendations and recommendations for
proposed savings, is submitted to the prospective client. Once the prospective
client accepts the proposal and signs the service agreement, the Company can set
up its operations on-site within days.
4
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Service Agreements
The Company offers two kinds of service agreements, a full service
agreement or a management agreement. In a full service agreement, the Company
assumes both management and payroll responsibility for the hourly housekeeping
and laundry employees.
The Company typically adopts and follows the client's employee wage
structure, including its policy of wage rate increases, and passes through to
the client any labor cost increases associated with wage rate adjustments. Some
full service agreements also include linen services. Under a management
agreement, the Company provides management and supervisory services while the
client facility retains payroll responsibility for its hourly employees.
Substantially all of the Company's agreements are full service agreements. These
agreements typically provide for a one year term, cancelable by either party
upon 30 days' notice after the initial 90-day period. As of December 31, 1996,
the Company provided services to more than 800 client facilities.
Although the service agreements are cancelable on short notice, the
Company has historically had a favorable client retention rate and expects to be
able to continue to maintain satisfactory relationships with its clients. The
risk associated with short-term agreements have not materially affected either
the Company's linen services, which generally require a capital investment, or
laundry installation sales, which require the Company to finance the sales
price. Such risks are often mitigated by certain provisions set forth in the
agreements which are entered into by the Company. Many of the linen service
agreements, where the Company has first purchased the laundry installation from
its clients, require that in the event the Company's services are terminated,
the client becomes obligated to purchase the laundry installation from the
Company at a price no less than the value recorded on the Company's financial
statements at the time of termination. The laundry installation sales agreements
obligate the purchaser to pay for such installation upon terms independent of
the services rendered by the Company.
The Company encounters difficulty in collecting amounts due from
certain of its clients, including 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 increased its bad debt provisions by
$2,050,000, $1,672,594 and $1,423, 338 in 1996, 1995 and 1994 respectively. In
making its evaluation, in addition to analyzing and anticipating, where
possible, the specific cases described above, management considers the general
collection risk associated with trends in the long-term care industry.
Competition
The Company competes primarily with the in-house support service
departments of its potential clients. Most healthcare facilities perform their
own support service functions without relying upon outside management firms such
as the Company. In addition, a number of local firms compete with the Company in
the regional markets in which the Company conducts business. Several national
service firms are larger and have greater financial and marketing resources than
the Company, although historically, such firms have concentrated their marketing
efforts on hospitals rather than the long-term care facilities typically
serviced by the Company. Although the competition to service long-term care
facilities is strong, the Company believes that it competes effectively for new
agreements, as well as
5
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renewals of the existing agreements based upon the quality and dependability of
its services and the cost savings it can effect for the client.
Employees
At December 31, 1996, the Company employed 1,631 management and
supervisory personnel. Of these employees, 180 held executive, management and
office support positions, and 1,451 of these salaried employees were on-site
management personnel. On such date, the Company employed approximately 9,586
hourly employees. Many of the Company's hourly employees were previous support
employees of the Company's clients. In addition, the Company manages hourly
employees who remain employed by certain of its clients.
Approximately 15% of the Company's hourly employees are unionized.
These employees are subject to collective bargaining agreements that are
negotiated by individual facilities and are assented to by the Company so as to
bind the Company as an "employer" under the agreements. The Company may be
adversely affected by relations between its client facilities and the employee
unions. The Company is a party to a negotiated collective bargaining agreement
with respect to approximately 20 employees at three facilities located in New
York. The Company believes its employee relations are satisfactory.
(d) Risk Factors - This information is contained in the Company's Annual Report
to Shareholders for 1996 on page 13,"Management's Discussion and Analysis
of Financial Condition and Results of Operations" and is incorporated
herein by reference.
(e) Financial Information About Foreign and Domestic Operations and Export
Sales
Not Applicable
Item 2. Properties
The Company leases its corporate offices, located at 2643 Huntingdon
Pike, Huntingdon Valley, Pennsylvania 19006, which consists of 6,600 square
feet. The term of the lease expires on March 31, 2001. The Company also leases
office space at other locations in Pennsylvania, Massachusetts, Florida,
Illinois, California, Colorado, Georgia, Missouri and Texas. These locations
serve as divisional or regional offices. In addition, the Company leases
warehouse space in Pennsylvania, Illinois and Florida for the Supply division.
Each office consists of approximately 1,000 square feet, and each warehouse
consists of approximately 5,000 square feet. None of these leases is for more
than a five-year term.
The Company is provided with office and storage space at each of its
client facilities. Management does not foresee any difficulties with regard to
the continued utilization of such premises.
The Company presently owns laundry equipment, office furniture and
equipment, housekeeping equipment and automobiles and trucks. Management
believes that all of such equipment is sufficient for the conduct of the
Company's current operations.
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Item 3. Legal Proceedings.
a) On or about October 16, 1996 the investigation by the Securities and
Exchange Commission previously reported was concluded and settled.
Accordingly on such date a final judgment, upon consent, was entered
in the United States District Court for the Eastern District of
Pennsylvania (96 Civ. 6464) based on a complaint filed by the
Securities and Exchange Commission against the Registrant, two of its
executive officers and one former officer, without admission or denial
of the allegations of the complaint by any parties. The action had
alleged violations of the certain Federal Securities laws, including
anti-fraud, reporting, internal controls and books and records
provisions thereof by the Registrant and such officers. The claims
included alleged violations of Section 10b of the Exchange Act, Rule
10b-5 thereunder, Section 13a of the Exchange Act and Rules 13a-1,
13a-13 and 12b-20. The Company and such officers were permanently
enjoined from violating certain provisions of the Federal securities
laws and are required to pay civil penalties aggregating $850,000.
Reference is made to Note 9 of the Notes to Financial Statements.
b) As previously reported on the Form 8-K dated May 24, 1996 and on the
Form 10-Q for the quarters ended June 30, 1996 and September 30, 1996,
the Company, two of its current Officers and Directors and a former
Officer are among the Defendants in a civil action pending in the
United States District Court for the Eastern District of Pennsylvania,
United States of America v. Healthcare Services Group, Inc., et al.,
No. 96-CV-3940.
The litigation is primarily a result of and arises from (1)
payments made by the Company for supplies which were allegedly
furnished to clients of the Company and the actions of the Company
after the payments were made and (2) payments made to certain
clients of the Company in connection with the purchase of laundry
installations from those clients. There are various motions
pending including a joint motion to dismiss the complaint. A copy
of the Complaint was filed as Exhibit 99(a) to the Form 10Q for
the quarter ended September 30, 1996.
The Company has been informed by the United States Attorney
that other investigations of the Company and its officers related
to these matters have been terminated.
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Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder Matters
(a) Market Information
The Company's common stock, $.01 par value (the "Common Stock") is
traded on the NASDAQ National Market System. On December 31, 1996, there were
8,090,663 shares of Common Stock outstanding.
Price quotations during the two years ended December 31, 1996, ranged
as follows
1996 High 1996 Low
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1st Qtr. 10 15/16 7 9/16
2nd Qtr. 10 3/8 7 3/4
3rd Qtr. 11 1/4 8 7/8
4th Qtr. 11 1/8 9 1/2
1995 High 1995 Low
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1st Qtr. 15 5/8 10 3/4
2nd Qtr. 12 1/4 10 1/4
3rd Qtr. 12 1/8 10 3/16
4th Qtr. 10 3/8 8 1/4
(b) Holders
As of March 13, 1997, there were approximately 400 holders of record of
the common stock, including stock held in nominee name by brokers or other
nominees. It is estimated that there are approximately 3,200 beneficial holders.
(c) Dividends
The Company has not paid any dividends on its Common Stock during the
last two years. Currently, it intends to continue this policy of retaining all
of its earnings, if any, to finance the development and expansion of its
business.
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Items 6 through 8 - Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations
and Financial Statements and Supplementary Data
The information called for herein is incorporated by reference to pages
8 through 13 of the Company's Annual Report to Shareholders for the year ended
December 31, 1996.
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
Not Applicable
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Selected Financial Data
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The selected financial data presented below should be read in conjunction with,
and is qualified in its entirety by reference to, the Financial Statements and
Notes thereto.
<TABLE>
<CAPTION>
(In thousands except for per share data and employees)
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Years ended December 31: 1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Revenues. ............................................. $162,482 $148,747 $136,414 $114,275 $99,303
income before extraordinary item and
cumulative effect of change in
accounting for income taxes ........................... $ 6,889 $ 3,941 $ 6,400 $ 5,531 $ 4,789
Extraordinary item - class action
litigation settlement, net of
income tax benefit. $ (1,437)
Cumulative effect of change
in accounting for
income taxes. $ 104
Net income. ........................................... $ 6,889 $ 3,941 $ 6,400 $ 4,198 $ 4,789
Earnings per common
share before extraordinary item
and cumulative effect of change
in accounting for
income taxes. ......................................... $ .85 $ .48 $ .79 $ .70 $ .61
Extraordinary item, net of
income tax benefit $ (.18)
Cumulative effect of change
in accounting for
income taxes $ .01
Earnings per common
share ................................................. $ .85 $ .48 $ .79 $ .53 $ .61
Weighted average number of
common shares
outstanding ........................................... 8,139 8,221 8,141 7,898 7,840
As of December 31:
Working Capital ....................................... $ 57,434 $ 51,068 $ 46,146 $ 41,106 $36,529
Total Assets. ......................................... $ 86,446 $ 80,290 $ 75,815 $ 68,862 $61,089
Long-Term Obligations ................................. $ - $ - $ 300 $ 600 $ 1,000
Stockholders' Equity. ................................. $ 74,938 $ 68,470 $ 62,124 $ 55,045 $50,268
Book Value Per Share. ................................. $ 9.26 $ 8.41 $ 7.83 $ 6.99 $ 6.45
Employees ............................................. 11,217 10,911 10,808 8,880 7,804
</TABLE>
See Notes 2, 8 and 9 of Notes to Financial Statements regarding uncertainties
with respect to litigation and other contingencies.
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The following
discussion and analysis Management's Discussion and
should be read in Analysis of Financial Condition
conjunction with the And Results of Operations
financial statements
and notes thereto.
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Results of Operations
From 1992 through 1996, the Company's revenues grew at a compound annual rate
of 10%. This growth was achieved through obtaining new clients in both existing
and newly developed market areas, as well as providing additional services to
existing clients. Although there can be no assurance thereof, the Company
anticipates future growth, although its compound growth rates will likely
decrease as growth is measured against the Company's increasing revenue base.
The following table sets forth for the years indicated the percentage which
certain items bear to revenues:
<TABLE>
<CAPTION>
Relation to Total Revenues
Years Ended December 31,
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1996 1995 1994
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<S> <C> <C> <C>
Revenues. ......................................... 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided. ..................... 85.7 85.6 84.4
Selling, general and
administrative. ................................. 8.0 8.2 8.1
Recovery of contingent
losses on promissory notes sold ................. - (0.2) (0.2)
Other income. ..................................... .7 .6 0.3
Provision for estimated cost related to
SEC inquiry and other matters
(Note 9) ......................................... - (2.1) -
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Income before income taxes, . ..................... 7.0 4.9 8.0
Income taxes ...................................... 2.8 2.3 3.3
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Net income. ....................................... 4.2 2.6% 4.7%
===== ===== =====
</TABLE>
1996 Compared with 1995
Revenues increased 9% to $162,482,169 in 1996 from $148,746,773 in 1995. The
following factors contributed to the increase in revenues: service agreements
with new clients in existing geographic areas increased revenues 19.0%;
geographic expansion increased revenues .8%; and cancellations and other minor
changes decreased revenues 10.8%.
Costs of services provided as a percentage of revenues increased slightly to
85.7% in 1996 from 85.6% in 1995. The primary factors affecting the variations
and their impact on the slight increase in cost of services provided as a
percentage of revenue are as follows: increase in workers' compensation, general
liability and other insurance of 1.2%; increase of .3% in regional and district
operating costs; offsetting these increases were decreases of .8% and .7% in
labor costs and costs associated with service agreements cancelled,
respectively.
Selling, general and administrative expenses as a percentage of revenue
decreased slightly to 8.0% in 1996 from 8.2% in 1995 primarily as a result of
the Company's ability to control these expenses while comparing them to a
greater revenue base.
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1995 COMPARED WITH 1994
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Revenues increased 9% to $148,746,773 in 1995 from $136,414,172 in 1994. The
following factors contributed to the increase in revenues: service agreements
with new clients in existing geographic areas increased revenues 19.3%;
geographic expansion increased revenues 2.7%; and cancellations and other minor
changes decreased revenues 13.0%.
Costs of services provided as a percentage of revenues increased to 85.6% in
1995 from 84.4% in 1994. The primary factors affecting the variations and their
impact on the 1.2% change in cost of services provided as a percentage of
revenue are as follows: increase in labor costs of 1.1%; increase of .7% in
amortization of service agreements and costs associated with service agreements
cancelled; offsetting these increases were decreases of .4% and .3% in regional
and district costs and depreciation expense, respectively.
Selling, general and administrative expenses as a percentage of revenue
increased slightly to 8.2% in 1995 from 8.1% in 1994 primarily as a result of
additional costs associated with expanding the divisional and regional staffs in
order to better position the Company to achieve its performance objectives in
the future.
Recovery From Collecting $300,000 of Promissory Notes Sold that was Reserved for
in 1991
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A client paid $300,000 in 1995 representing the pay-off of the remaining
balance on a promissory note. As a result, the Company recorded the recovery as
income in its Statements of Income for the year ended December 31, 1995.
Liquidity and Capital Resources
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At December 31, 1996, the Company had working capital of $57,434,314 which
represents a 12% increase over $51,067,973 at December 31, 1995. Working capital
continues to grow, reflected principally in increased cash and cash equivalents
and higher accounts and notes receivable. The increase in cash and cash
equivalents is primarily a result of the net cash provided by operating
activities. Higher accounts and notes receivable are primarily attributable to
the Company's 9% increase in revenues. The Company's current ratio at December
31, 1996 was 7.6 to 1 compared to 6.3 to 1 in 1995.
The net cash provided by the Company's operating activities was $8,899,210 for
the year ended December 31, 1996. The components of working capital that
required the largest amount of cash were: increases in accounts and notes
receivable and long term notes receivable of $2,905,442 and $786,737,
respectively, and a decrease in accounts payable and other accrued expenses of
$1,407,510. The increase in accounts and notes receivable and long term notes
receivable resulted primarily from the continued growth in the Company's
revenues. The increased use of cash associated with accounts payable and other
accrued expenses resulted primarily from the payments made in connection with
the Company's settlement with the Securities and Exchange Commission (see Note 9
of Notes to Financal Statements). Although accounts and notes receivable
increased in 1996, the number of days revenue (based on fourth quarter revenues)
in the accounts and notes receivable balance at December 31, 1996 was reduced to
74 days from 79 days at December 31, 1995.
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At December 31, 1995, the Company had working capital of $51,067,973 which
represents an 11% increase over $46,146,376 at December 31, 1994. Working
capital continues to grow, reflected principally in increased cash and cash
equivalents and higher accounts and notes receivable. The increase in cash and
cash equivalents is a result of the improvement in the collection of
receivables, as well as the timing of payments to vendors. Higher accounts and
notes receivable are primarily attributable to the Company's 9% increase in
revenues. The Company's current ratio at December 31, 1995 was 6.3 to 1 compared
to 6.5 to 1 in 1994.
The net cash provided by the Company's operating activities was $5,940,040 for
the year ended December 31, 1995. The components of working capital that
required the largest amount of cash were: increases in accounts and notes
receivable and long term notes receivable of $1,362,583 and $1,712,922,
respectively and a $1,466,184 increase in prepaid income taxes. The increase in
accounts and notes receivable and long term notes receivable resulted primarily
from the continued growth in the Company's revenues, which increased 9%. The
increased use of cash associated with prepaid income taxes resulted primarily
from the timing of estimated income tax liability payments. Although accounts
receivable have increased in 1995, the number of days revenue (based on fourth
quarter revenues) in the accounts receivable balance at December 31, 1995 was
reduced to 79 days from 81 days at December 31, 1994.
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. The promissory notes receivable provide a
means by which to further evidence the amounts owed, 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 encounters difficulty in collecting amounts due from certain of
its clients, including those in bankruptcy, those which have terminated service
agreements and slow payers experiencing financial difficulties. In order to
provide for these collection problems and the general risk associated with the
granting of credit terms, the Company has increased its bad debt provisions by
$2,050,000, $1,672,594 and $1,423,338 in 1996, 1995 and 1994, respectively. In
making its evaluation, in addition to analyzing, and anticipating, where
possible, the specific cases described above, management considers the general
collection risk associated with trends in the long-term care industry.
13
<PAGE>
- -------------------------------------------------------------------------------
The Company has a $13,000,000 bank line of credit on which it may draw to meet
short-term liquidity requirements in excess of internally generated cash flow,
that expires on June 30, 1997. The Company anticipates that this credit line
will be continued. Amounts drawn under the line are payable on demand. At
December 31, 1996, there were no borrowings under the line. However, at such
date, the amount available under the line had been reduced by approximately
$8,000,000 as a result of contingent liabilities of the Company to the lender
relating to letters of credit issued for the Company. (See Note 8 of Notes to
Financial Statements)
At December 31, 1996, the Company had $22,677,290 of cash and cash
equivalents, which it views as its principal measure of liquidity.
In the fourth quarter of 1993, the Company and its insurer reached an
agreement in principle to settle the consolidated class action complaints filed
against it in Federal District Court. The Order approving the settlement was
approved by the court on September 8, 1994 and became effective on October 10,
1994. The settlement provided for the payment of $2,625,000 by the Company's
insurer and common stock having a value of $2,125,000 to be issued by the
Company (see Note 7 of Notes to Financial Statements). On August 1, 1995, the
Company issued 180,851 shares of its common stock representing its payment
obligation under the 1993 settlement of the consolidated class action
complaints. Accordingly, the December 31, 1995 Balance Sheet reflects the
payment of the previously recorded Litigation Liability of $2,125,000 by
increasing stockholders' equity in the same amount.
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 1997, it estimates that it will incur capital
expenditures of approximately $2,000,000 during this period in connection with
housekeeping equipment and laundry and linen equipment installations in its
clients' facilities, as well as hardware and software expenditures relating to
the implementation of a new computerized financial reporting system. The Company
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.
14
<PAGE>
- -------------------------------------------------------------------------------
FORWARD LOOKING STATEMENTS/RISK FACTORS
- -------------------------------------------------------------------------------
Certain matters discussed may include forward-looking statements that are
subject to risks and uncertainties that could cause actual results or objectives
to differ materially from those projected. Such risks and uncertainties include,
but are not limited to, risks arising from the Company providing its services
exclusively to the healthcare industry, credit and collection risks associated
with this industry, unexpected increases in the costs of labor, materials,
supplies and equipment used in performing its services and risks arising from
pending litigation referred to in Note 9 of the Notes to Financial Statements
including the possibility of increased legal and other costs.
In addition, the Company believes that to improve its future financial
performance it must continue to obtain service agreements with new clients, as
well as providing 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. Additionally, the Company believes that its ability to sustain the
internal development of managerial personnel is an important factor impacting
future operating results in respect to 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.
15
<PAGE>
BALANCE SHEETS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS December 31,
---------------------------
Current Assets: 1996 1995
----------- -----------
<S> <C> <C>
Cash and cash equivalents ................................................. $22,677,290 $16,335,886
Accounts and notes receivable, less allowance for
doubtful accounts of $3,812,$4,468,000 in 1995 .......................... 33,318,730 32,463,288
Prepaid income taxes ...................................................... 1,466,184
Inventories and supplies .................................................. 7,392,507 7,200,033
Deferred income taxes (Note 4) ............................................ 620,024 1,104,350
Prepaid expenses and other ................................................ 2,102,330 2,090,409
----------- -----------
Total current assets .................................................... 66,110,881 60,660,150
Property and Equipment:
Laundry and linen equipment installations (Note 6) 11,322,459 12,135,849
Housekeeping equipment and office furniture ............................... 7,534,025 6,216,950
Autos and trucks .......................................................... 178,006 178,006
----------- -----------
19,034,490 18,530,805
Less accumulated depreciation ............................................. 12,821,500 12,347,675
----------- -----------
6,212,990 6,183,130
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
less accumulated amortization of $1,205,036 in 1996 and
$1,117,413 in 1995 (Note 1) ............................................... 2,150,440 2,258,064
DEFERRED INCOME TAXES (Note 4) ............................................. 1,272,765 1,449,236
OTHER NONCURRENT ASSETS (Note 1) ........................................... 10,698,571 9,739,191
----------- -----------
$86,445,647 $80,289,771
----------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ......................................................... $ 4,106,094 $ 3,480,499
Accrued payroll, accrued and withheld payroll taxes ...................... 2,954,099 2,312,907
Other accrued expenses (Note 9 ........................................... 810,785 2,843,890
Income taxes payable (Note 4) ............................................ 53,139
Accrued insurance claims (Notes 1 and 10) ................................ 752,450 954,881
----------- -----------
Total current liabilities ............................................... 8,676,567 9,592,177
ACCRUED INSURANCE CLAIMS (Notes 1 and 10) .................................. 2,830,647 2,228,054
COMMITMENTS AND CONTINGENCIES (Notes 2, 8 and 9)
STOCKHOLDERS' EQUITY: (Note 3)
Common stock, $.01 par value: 15,000,000 shares authorized,
8,090,663 shares issued in 1996 and 8,143,063 in 1995 .................... 80,907 81,431
Additional paid in capital ............................................... 34,603,813 35,023,468
Retained earnings ........................................................ 40,253,713 33,364,641
----------- -----------
Total stockholders' equity .............................................. 74,938,433 68,469,540
----------- -----------
$86,445,647 $80,289,771
----------- -----------
</TABLE>
See accompanying notes.
16
<PAGE>
INCOME STATEMENTS
- -------------------------------------------------------------------------------
HEALTHCARE SERVICES GROUP, INC.
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------------
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Revenues ............................... $ 162,482,169 $ 148,746,773 $ 136,414,172
Operating costs and expenses:
Cost of services provided .............. 139,178,736 127,340,970 115,171,944
Selling, general and administrative .... 12,967,523 12,184,128 11,094,621
Recovery of contingent losses on
promissory notes sold ................. (300,000) (300,000)
Other income (expense):
Provision for estimated cost related to
SEC inquiry and other matters (Note 9) (3,100,000)
Interest income ........................ 1,143,162 867,883 421,827
------------- ------------- -------------
Income before income taxes ............. 11,479,072 7,289,558 10,869,434
Income taxes (Note 4) .................. 4,590,000 3,349,000 4,469,000
------------- ------------- -------------
Net income ............................. $ 6,889,072 $ 3,940,558 $ 6,400,434
============= ============= =============
Earnings per common share .............. $ 0.85 $ 0.48 $ 0.79
============= ============= =============
Weighted average number of common shares
outstanding ............................ 8,139,415 8,221,479 8,141,520
============= ============= =============
</TABLE>
See accompanying notes.
17
<PAGE>
STATEMENT OF CASH FLOWS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1996 1995 1994
--------------------------------------------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net Income ....................................... $ 6,889,072 $ 3,940,558 $ 6,400,434
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 2,212,570 2,573,216 2,598,783
Bad debt provision............................... 2,050,000 1,672,594 1,423,338
Recovery of contingent losses on promissory
notes sold .................................... (300,000) (300,000)
Deferred income taxes (Note 4) .................. 660,797 1,089,000 899,000
Tax benefit of stock option transactions ........ 2,821 63,000 63,153
Litigation settlement liability (Note 7) ........ (100,000)
Changes in operating assets and liabilities:
Accounts and notes receivable ................... (2,905,442) (1,362,583) (3,394,706)
Prepaid income taxes ............................ 1,466,184 (1,466,184)
Inventories and supplies ........................ (192,474) (901,663) (981,379)
Changes to long term notes receivable ........... (786,737) (1,712,922) (2,618,215)
Accounts payable and other accrued expenses
(Note 9)....................................... (1,407,510) 1,973,067 368,502
Accrued payroll, accrued and withheld payroll
taxes ......................................... 641,193 366,818 426,890
Accrued insurance claims (Notes 1 and 10) ........ 400,161 (1,057,639) (637,951)
Income taxes payable ............................. 53,139 (727,741) 116,327
Prepaid expenses and other assets ................ (184,564) 1,790,519 (329,982)
------------ ------------ ------------
Net cash provided by operating activities ....... 8,899,210 5,940,040 3,934,194
------------ ------------ ------------
Cash flows from investing activities:
Disposals of fixed asset ......................... 251,211 116,819 515,451
Additions to property and equipment .............. (2,386,017) (2,667,597) (1,694,039)
Cash provided by release of certificates of
deposits pledged for loan guarantees ............ 1,500,000
------------ ------------ ------------
Net cash used in investing activities ........... (2,134,806) (1,050,778) (1,178,588)
------------ ------------ ------------
Cash flows from financing activities:
Purchase of treasury stock ....................... (528,975) (264,303)
Proceeds from the exercise of stock options ...... 105,975 480,809 615,828
------------ ------------ ------------
Net cash provided by (used in) financing
activities ...................................... (423,000) 216,506 615,828
------------ ------------ ------------
Net increase in cash and cash equivalents ........ 6,341,404 5,105,768 3,371,434
Cash and cash equivalents at beginning of the year 16,335,886 11,230,118 7,858,684
------------ ------------ ------------
Cash and cash equivalents at end of the year ..... $ 22,677,290 $ 16,335,886 $ 11,230,118
============ ============ ============
</TABLE>
Supplemental Disclosure of Noncash Financing Activity:
On August 1, 1995, the Company issued 180,851 shares of its common stock
representing its payment obligation under the 1993 settlement of the lawsuits
relating to the consolidated class action complaints filed against it in 1991
and 1992. Accordingly, the December 31, 1995 Balance Sheet reflects the payment
of the previously recorded Litigation Liability of $2,125,000 by increasing
stockholders' equity in the same amount.
See accompanying notes.
18
<PAGE>
STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31, 1996, 1995, and 1994
----------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
------ ------ ------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ........... 7,870,136 $78,701 $31,942,711 $23,023,649 $ -- $55,045,061
Net income for the year .............. 6,400,434 6,400,434
Exercise of stock options ............ 65,738 658 615,170 615,828
Tax benefit arising from
stock transactions .................. 63,153 63,153
--------- ------- ----------- ----------- -------- -----------
Balance, December 31, 1994 ........... 7,935,874 79,359 32,621,034 29,424,083 -- 62,124,476
Net income for the year .............. 3,940,558 3,940,558
Exercise of stock options ............ 54,538 545 480,264 480,809
Tax benefit arising from
stock transactions .................. 63,000 63,000
Shares issued in connection
with class action settlement (Note 7) 180,851 1,809 2,123,191 2,125,000
Purchase of common stock for
treasury (28,200 shares) ............ (264,303) (264,303)
Treasury stock retired ............... (28,200) (282) (264,021) 264,303
--------- ------- ----------- ----------- -------- -----------
Balance, December 31, 1995 ........... 8,143,063 81,431 35,023,468 33,364,641 -- 68,469,540
Net income for the year .............. 6,889,072 6,889,072
Exercise of stock options ............ 12,600 126 105,849 105,975
Tax benefit arising from stock
transactions ........................ 2,821 2,821
Purchase of common stock for
treasury (65,000 shares ............. (528,975) (528,975)
Treasury stock retired ............... (65,000) (650) (528,325) 528,975
--------- ------- ----------- ----------- -------- -----------
Balance December 31, 1996 ............ 8,090,663 $80,907 $34,603,813 $40,253,713 $ -- $74,938,433
========= ======= =========== =========== ======== ===========
</TABLE>
See accompanying notes.
19
<PAGE>
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1 -- Summary of
Significant Accounting Policies
General
- -------
The Company provides housekeeping, laundry and linen services to long-term care
facilities, including nursing homes and retirement complexes.
Cash and cash equivalents
- -------------------------
Cash and cash equivalents consist of short-term, highly liquid investments with
a maturity of three months or less at time of purchase.
Impaired notes receivable
- -------------------------
In the event that a promissory note receivable is impaired, it is accounted for
in accordance with FAS 114 and FAS 118; that is, they are valued at the present
value of expected cash flows or market value of related collateral. The Company
evaluates its notes receivable for impairment quarterly and on an individual
client basis. Notes receivable considered impaired are generally attributable to
clients that are either in bankruptcy, have been turned over to collection
attorneys and or those slow payers that are experiencing severe financial
difficulties. At December 31, 1996, the Company had notes receivable aggregating
$3,300,000 that are impaired. During 1996, the Company increased its reserve
against these notes by $1,200,000 and charged the reserve $1,100,000 resulting
in a reserve balance at December 31, 1996 of $2,600,000. During 1996, the
average outstanding balance of these notes receivable was $3,800,000 and no
interest income was recognized. At December 31, 1995, the Company had notes
receivable aggregating $4,500,000 that are impaired. During 1995, the Company
increased its reserve against these notes by $475,000 resulting in a reserve
balance at December 31, 1995 of $3,100,000. During 1995, the average outstanding
balance of these notes receivable was $4,400,000 and no interest income was
recognized. In addition, at December 31, 1994, the Company had notes receivable
aggregating $4,500,000 that are impaired. During 1994, the Company increased its
reserve against these notes by $100,000 resulting in a reserve balance at
December 31, 1994 of $2,700,000. During 1994, the average outstanding balance of
these notes receivable was $3,900,000 and no interest income was recognized.
Since 1986, the Company has followed an income recognition policy on all notes
receivable that does not recognize interest income until cash payments are
received. This policy was established for conservative reasons, recognizing the
environment of the long-term care industry, and not because such notes are
impaired. The difference between income recognition on a full accrual basis and
cash basis, for notes that are not considered impaired, is not material. For
impaired loans, interest income is recognized on a cost recovery basis only.
Inventories and supplies
- ------------------------
Inventories and supplies include housekeeping and laundry supplies which are
valued at the lower of cost or market. Cost is determined on a first-in,
first-out (FIFO) basis. Linen supplies are included in inventory and are
amortized over a 24 month period.
Property and equipment
- ----------------------
Property and equipment are stated at cost. Additions, renewals and improvements
are capitalized, while maintenance and repair costs are expensed. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the respective accounts and any resulting gain or
loss is included in income. Depreciation is provided by the straight-line method
over the following estimated useful lives: laundry and linen equipment
installations -- 3 to 7 years; housekeeping equipment and office furniture -- 3
to 7 years; autos and trucks -- 3 Years.
Revenue recognition
- -------------------
Revenues from service agreements are recognized as services are performed. The
Company (as a distributor of laundry equipment since 1981) occasionally makes
sales of laundry installations to certain of its clients. The sales in most
cases represent the construction and installation of a turn-key operation and
are for payment terms ranging from 36 to 60 months. The Company's accounting
policy for these sales is to
20
<PAGE>
- -------------------------------------------------------------------------------
recognize the gross profit over the life of the original payment terms
associated with the financing of the transactions by the Company. During 1996,
1995 and 1994, laundry installation sales were not material.
Income taxes
- ------------
Deferred income taxes result from temporary differences between tax and
financial statement recognition of revenue and expense. These temporary
differences arise primarily from differing methods used for financial and tax
purposes to calculate insurance expense, certain receivable reserves, other
provisions which are not currently deductible for tax purposes, and revenue
recognized on laundry installation sales.
Income taxes paid were approximately $1,936,000, $3,391,000 and $3,356,000
during 1996, 1995 and 1994, respectively.
Earnings per common share
- -------------------------
Primary Earnings per common share is based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the year.
Common stock equivalents consist of stock options.
Costs in excess of fair value of net asssets
- --------------------------------------------
Costs in excess of the fair value of net assets of businesses acquired are
amortized on a straight-line basis over periods not exceeding forty years. All
of the carrying value at december 31, 1996 resulted from a 1985 acquisition
which is being amortized over a thirty-one year period. Amortization charged to
earnings was $107,623 in 1996, $108,958 in 1995 and $111,625 in 1994.
On an ongoing basis, management reviews the valuation and amortization of costs
in excess of fair value of net assets acquired. As part of this review, the
Company estimates the value and future benefits of the net income generated by
the related service agreements to determine that no impairment has occurred.
Other noncurrent assets
- -----------------------
Other noncurrent assets consist of:
1996 1995
------------------------------
Long-term note
Receivables $10,257,773 $9,471,036
Other 440,798 268,155
----------- ----------
$10,698,571 $9,739,191
=========== ==========
Long-term notes receivable primarily represent trade receivables that were
converted to notes to enhance collection efforts. Interest income is only
recognized as cash payments are received. Amounts shown are net of allowance of
$350,000 and $549,400 in 1996 and 1995, respectively.
Reclassification
- ----------------
Certain reclassifications to 1995 reported amounts have been made in the
financial statements to conform to 1996 presentation.
Concentration of Credit Risk
- ----------------------------
Statement of Financial Accounting Standards No. 105 ("SFAS No. 105") requires
the disclosure of significant concentrations of credit risk, regardless of the
degree of such risk. Financial instruments, as defined by SFAS No. 105, which
potentially subject the Company to concentrations of credit risk, consist
principally of cash and cash equivalents and accounts and notes receivable. At
December 31, 1996 and 1995, substantially, all of the Company's cash and cash
equivalents were invested with one financial institution. The Company's clients
are concentrated in one industry, providers of long-term care. The clients are
comprised of many companies with a wide geographical dispersion. However, recent
industry trends indicate consolidation of nursing home ownership into chains,
which can lead to a client concentration. At December 31, 1996, no single client
or nursing home chain accounted for more than 10% of total revenue.
Fair Value of Financial Instruments
- -----------------------------------
The carrying value of financial instruments (principally consisting of cash and
cash equivalents, accounts and notes receivable and accounts payable)
approximate fair value.
21
<PAGE>
- -------------------------------------------------------------------------------
Use of Estimates in Financial Statements
- ----------------------------------------
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Note 2 -- Lease Commitments
- ---------------------------
The Company leases office facilities and autos under operating leases expiring
on various dates through 2002 (see note 5). The following is a schedule,
bycalendar years, of future minimum lease payments under operating leases having
remaining terms in e xcess of one year as of December 31, 1996:
Operating
Year Leases
----------
1997 $ 374,204
1998 297,813
1999 209,455
2000 122,832
2001 47,254
Thereafter 32,746
----------
Total minimum lease payments $1,084,304
==========
Total expense for all operating leases was $698,041, $644,302 and $792,570 for
the years ended December 31, 1996, 1995 and 1994, respectively.
Note 3 -- Stockholders' Equity
- ------------------------------
On May 23, 1995, the Stockholders approved an increase in authorized shares of
common stock from 10,000,000 to 15,000,000 authorized shares, $.01 par value.
As of December 31, 1996, 1,057,787 shares of common stock were reserved under
the incentive stock option plans, as amended and readopted on June 4, 1996,
including 428,205 shares which were available for future grant. The Stock Option
Committee is responsible for determining the individuals who will be granted
options, the number of options each individual will receive, the option price
per share, and the exercise period of each option. The incentive stock option
price will not be less than the fair market value of the common stock on the
date the option is granted. No option will have a term in excess of ten years.
As to any stockholder who owns 10% or more of the common stock, the option price
per share will be no less than 110% of the fair market value of the common stock
on the date the options are granted and such options shall not have a term in
excess of ten years.
On December 6, 1996 the Stock Option Committee extended the expiration date of
92,800 Incentive Stock Options which were due to expire on December 18, 1996 to
December 18, 2001. Such options were extended at their original grant price
which is greater than the fair market value on the date of the extension.
As of December 31, 1996, options outstanding, under the Incentive Stock Option
Plans, for 498,937 shares were exercisable at prices ranging from $8.25 to
$14.85, and the weighted average remaining contractual life was 3.1 years. The
weighted average fair value of incentive options granted during 1996 and 1995
was $2.59 and $2.30, respectively.
22
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A summary of incentive stock
option activity is as follows:
<TABLE>
<CAPTION>
Incentive Stock Options
-----------------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------------
Number Number Number
Average of Average of Average of
Price Shares Price Shares Price Shares
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $10.63 511,872 $ 10.86 473,385 $ 10.38 419,789
Granted 9.38 158,410 8.61 90,039 11.45 116,183
Cancelled 13.50 (36,100) 12.20 (6,016) 8.58 (26,850)
Exercised 8.47 (4,600) 8.81 (45,536) 8.89 (35,737)
------ ------- ------- ------- ------- -------
End of period $10.17 629,582 $ 10.63 511,872 $ 10.86 473,385
====== ======= ======= ======= ======= =======
Exercisable at end of
Period 498,937 421,833 357,202
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The Company has granted non-qualified stock options primarily to employees and
directors under either the Company's 1995 Incentive and Non-Qualified Stock
Option Plan for key employees or the Company's 1996 Non-Employee Director's
Stock Option Plan. The Amendments to the 1995 Plan, as well as the 1996 Plan
were adopted on March 6, 1996 and approved by shareholders on June 4, 1996.
Pursuant to the terms of the 1996 Non-Employee Director's Stock Option Plan,
each eligible non-employee director receives an automatic grant based on a
prescribed formula on the fixed annual grant date. The non-qualified options
were granted at an option price which was not less than the fair market value of
the common stock on the date the option was granted. The options are exercisable
over a five year period, commencing six months from the option date.
As of December 31, 1996, non-qualified options outstanding, under the above
mentioned plans, for 347,688 shares were exercisable at prices ranging from
$8.25 to $12.51, and the weighted average remaining contractual life was 3.1
years. The weighted average fair value of non-qualified options granted during
1996 and 1995 was $2.52 and $2.00, respectively.
- --------------------------------------------------------------------------------
23
<PAGE>
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A summary of non-qualified stock
option activity is as follows:
<TABLE>
<CAPTION>
Non Qualified Stock Options
---------------------------------------------------------------------
1996 1995 1994
Number Number Numbers
Average of Average of Average of
Price Shares Price Shares Price Shares
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $9.77 337,453 $9.87 297,717 $ 9.41 269,500
Granted 9.45 78,140 8.95 53,236 11.61 58,217
Cancelled -- -- 8.83 (4,500)
Exercised 8.38 8,000 8.83 (9,000) 9.13 (30,000)
----- ------- ----- ------- ------ -------
End of period $9.73 407,593 $9.77 337,453 $ 9.87 297,717
===== ======= ===== ======= ====== =======
Exercisable at end of
period 347,688 284,217 239,500
======= ======= =======
</TABLE>
- --------------------------------------------------------------------------------
The Company applies APB Opinion 25 in measuring stock compensation. Accordingly,
no compensation cost has been recorded for options granted to employees or
directors in the years ended December 31, 1996 or December 31, 1995. The fair
value of each option granted has been estimated on the grant date using the
Black-Scholes Option Valuation Model. The following assumptions were made in
estimating fair value:
1996 1995
---- ----
Risk-Free Interest-Rate 5.83% 5.44%
Expected Life after Vesting Period 2.0 years 2.0 years
Expected Volatility 42.2% 41.0%
Had compensation cost been determined under FASB Statement No. 123, net income
and earnings per share would have been reduced as follows:
(in thousands)
Year Ended Year Ended
December 31, December 31,
1996 1995
------------------------------------
Net Income
As reported $6,889 $3,941
Pro forma $6,516 $3,896
Earnings Per Share
As reported $ .85 $ .48
Pro forma $ .80 $ .47
24
<PAGE>
- -------------------------------------------------------------------------------
Note 4 - Income Taxes
- ---------------------
The provision for income taxes consists of:
Year Ended December 31,
---------------------------------------
1996 1995 1994
---------- ---------- ----------
Current:
Federal $2,923,800 $1,695,400 $2,692,000
State 1,005,400 564,600 878,000
---------- ---------- ----------
3,929,200 2,260,000 3,570,000
---------- ---------- ----------
Deferred:
Federal 498,000 805,000 677,600
State 162,800 284,000 221,400
---------- ---------- ----------
660,800 1,089,000 899,000
---------- ---------- ----------
Tax
Provision $4,590,000 $3,349,000 $4,469,000
========== ========== ==========
Under FAS 109, deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of the Company's federal and state deferred tax assets and
liabilities are as follows:
Year Ended December 31,
-----------------------------
1996 1995
---------- ----------
Net current deferred
tax assets:
Allowance for doubtful
accounts $1,547,517 $1,814,008
Accrued insurance
claims-current 305,495 387,682
Expensing of
housekeeping supplies (1,232,988) (1,097,340)
---------- ----------
$ 620,024 $1,104,350
========== ==========
Net noncurrent deferred tax assets:
Deferred profit on
laundry installation
sales $ 200,585 $ 235,140
Non-deductible reserves 762,464 1,046,393
Depreciation of property
and equipment (869,765) (786,056)
Accrued insurance
claims-noncurrent 1,149,241 904,590
Other 30,240 49,169
---------- ----------
$1,272,765 $1,449,236
========== ==========
25
<PAGE>
A reconciliation of the provision for income taxes and the amount computed by
applying the statutory federal income tax rate (34%) to income before income
taxes is as follows:
Year Ended December 31,
--------------------------------------
1996 1995 1994
---------- ---------- ----------
Computed
"expected"
tax expense $3,902,900 $2,478,500 $3,695,600
Increases
(decreases)
in taxes
resulting
from:
State income
taxes, net of
federal tax
benefit 771,000 560,100 734,200
Tax exempt
interest (222,100) (111,000) (54,000)
Reserves recorded on
the books
not deductible
for tax
purposes -- 408,000 --
Amortization
of costs in
excess of fair
value of net
assets
acquired 36,600 37,000 38,000
Other, net 101,600 (23,600) 55,200
---------- ---------- ----------
$4,590,000 $3,349,000 $4,469,000
========== ========== ==========
Note 5 -- Related Party Transactions
- ------------------------------------
The company leases its corporate offices from a partnership in which the chief
executive officer of the Company is a general partner. The rental payments made
during the years ended December 31, 1996 and 1995 were $88,617 per year and
$74,900 for the year ended December 31, 1994. The Company made no leasehold
improvements in either 1996 or 1994, although in 1995 the Company made leasehold
improvements of approximately $23,150. A director of the Company has an
ownership interest in several client facilities which have entered into service
agreements with the Company. In addition, an officer of the Company had a
minority ownership interest,
26
<PAGE>
- -------------------------------------------------------------------------------
which he disposed of in April 1996, in a client facility of the Company. During
the years ended December 31, 1996, 1995 and 1994 all of these agreements
collectively resulted in revenues of approximately $2,838,704, $3,010,000, and
$3,203,000 respectively.
Note 6 -- Laundry And Linen Equipment Installation Purchases
- ------------------------------------------------------------
During 1994 and 1995 the Company purchased certain existing laundry and linen
equipment installations from nursing homes with which it concurrently entered
into service agreements to provide laundry and linen services. There were no
such laundry installation purchases during 1996. With regard to the 1995 and
1994 purchases, the Company entered into the following laundry and linen
equipment installations purchase transactions; in 1994 with six nursing homes
for approximately $306,000 and in 1995 with seven nursing homes for
approximately $100,125. The agreements governing these purchase transactions
provide that if the service agreements are terminated at any time, the nursing
home is obligated to buy the laundry and linen equipment installations at a
purchase price based on the Company's original cost together with any additional
equipment, improvements or expansion costs required in order to improve or
increase the productivity of the operation (after depreciation on a straight
line basis over the original term of the service agreement which is generally
three to seven years). The Company has recorded these transactions as purchases
of property and equipment and they are reported as such in the accompanying
balance sheets net of accumulated depreciation. The equipment is generally being
depreciated over a three to five year period.
Note 7 -- Extraordinary Item -- Settlement of Class Action Litigation
- ---------------------------------------------------------------------
In the fourth quarter of 1993 the Company and its insurer consummated an
agreement to settle the consolidated class action complaints filed against it in
Federal District Court in 1991 and 1992. The settlement was approved by court
order dated September 8, 1994 and became effective on October 10, 1994. The
settlement provided for the payment of $2,625,000 by the Company's insurer and
the issuance of common shares by the Company having a value of $2,125,000. The
settlement and related estimated legal costs have been recorded as an
extraordinary item in 1993. Such extraordinary item reduced 1993 net income by
approximately $1,437,000, net of income tax benefit of $844,000. On August 1,
1995, the Company issued 180,851 shares of its common stock representing its
payment obligation under the 1993 settlement relating to the consolidated class
action complaints. Accordingly, the effect of issuing these shares is reflected
in the per share amounts reported for the years ended December 31, 1996, 1995
and 1994. The December 31, 1995 Balance Sheet also reflects the payment of the
previously recorded Litigation Liability of $2,125,000 by increasing
stockholders' equity in the same amount.
Note 8 -- 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, that expires on June
30, 1997. Amounts drawn under the line are payable upon demand. At both December
31, 1996 and 1995, there were no borrowings under the line. At December 31, 1996
and 1995, the Company had outstanding approximately $8,000,000 and $8,200,000,
respectively of irrevocable standby letters of credit, which primarily relate to
payment obligations under the Company's insurance program. As a result of
letters of credit issued, the amount available under the line was reduced by
approximately $8,000,000 and $8,200,000 at December 31, 1996 and December 31,
1995, respectively.
The Company is also involved in miscellaneous claims and litigations 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.
27
<PAGE>
- -------------------------------------------------------------------------------
Note 9 -- 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 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. A settlement was concluded
on October 16, 1996 when a final judgment, upon consent, was entered in the
United States District Court for the Eastern District of Pennsylvania
(96 Civ.6464) based on a complaint filed by the Securities and Exchange
Commission against the Company, two of its executive officers and one former
officer, without admission or denial of the allegations of the complaint by any
parties. The action had alleged violations of certain Federal securities laws,
including anti-fraud, reporting, internal controls and books and records
provisions thereof by the Company and such officers. The claims included alleged
violations of Section 10b of the Exchange Act, Rule 10b-5 thereunder, Section
13a of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20. The Company and such
officers are permanently enjoined from violating certain provisions of the
Federal Securities laws, and the Company and these individuals were required to
pay civil penalties aggregating approximately $850,000 which was paid in
December, 1996. The Company agreed to indemnify the current officers with
respect to their payment obligations. 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. The litigation is primarily a result of and arises from (1)
payments made by the Company for supplies which were allegedly furnished to
clients of the Company and the actions of the Company after the payments were
made and (2) payments made to certain clients of the Company in connection with
the purchase of laundry installations from those clients.
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 would 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. Due to the uncertainty as to the costs remaining to be
incurred relating to the United States Attorney civil action described above,
the Company may incur additional legal and related costs in excess of the
remaining amounts recorded ($400,000 at December 31, 1996) in the accompanying
financial statements. The ultimate outcome of this matter is uncertain and the
amount of any additional liability which might finally exist cannot reasonably
be estimated at this time.
Note 10 -- Accrued Insurance Claims
- -----------------------------------
For years 1994 through 1996, the Company has a Paid Loss Retrospective Insurance
Plan for general liability and workers' compensation insurance. In addition, for
year 1994, the Company also had a Paid Loss Retrospective Insurance Plan for its
automobiles. Under these plans, pre-determined loss limits are arranged with an
insurance company to limit both the Company's per occurence cash outlay and
annual insurance plan cost.
For workers' compensation and automobile insurance, 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 hist orical data and actuarial analysis done by an independent
company. The accrued insurance claims were reduced by approximately $2,956,000,
$2,773,000 and $1,247,000 at December 31, 1996,
28
<PAGE>
- -------------------------------------------------------------------------------
1995 and 1994, respectively in order to record the estimated present value at
the end of each year using an 8% interest factor. During 1995, the Company
amended its Insurance Plan to increase the claim payout term from 66 months to
126 months. This amendment decreased the 1995 estimated insurance costs by
approximately $1,360,000. During the fourth quarter of 1994, the Company changed
the present value discount factor which it applies to estimated accrued workers'
compensation insurance claims liability from 5.0% to 8.0% to reflect a more
current rate. This change in discount factor decreased the 1994 estimated
insurance cost by approximately $400,000. It was actuarially estimated that the
accrued workers' compensation insurance claims will principally be paid to the
claimants within six years from the date of the incident. For general liability
insurance, the Company records a reserve for the estimated ultimate amounts to
be paid for known claims.
Market Makers
- -------------
As of the end of 1996, the following firms were making a market in the shares of
Healthcare Services Group, Inc.:
Smith Barney Shearson, Inc.
Prudential Securities, Inc.
Troster Singer Corp.
Mayer & Schweitzer Inc.
Herzog, Heine, Geduld, Inc.
Cantor, Fitzgerald & Co.
Allen & Company, Inc.
About Your Shares
- -----------------
Healthcare Services Group, Inc.'s common stock is traded on the NASDAQ National
Market System of the over-the-counter market. On December 31, 1996 there was
8,090,663 of the Company's common shares issued and outstanding. As of February
28, 1997 there were approximately 400 holders of record of the common stock,
including holders whose stock was held in nominee name by brokers or other
nominees. It is estimated that there are approximately 3,200 beneficial holders.
Price quotations during the two years ended
December 31, 1996, ranged as follows
- -------------------------------------------------------------------------------
1996 High 1996 Low
--------- --------
1st Qtr. 10 15/16 7 9/16
2nd Qtr. 10 3/8 7 3/4
3rd Qtr. 1 11/4 8 7/8
4th Qtr. 1 11/8 9 1/2
1995 High 1995 Low
--------- --------
1st Qtr. 15 5/8 10 3/4
2nd Qtr. 12 1/4 10 1/4
3rd Qtr. 12 1/8 10 3/16
4th Qtr. 10 3/8 8 1/4
29
<PAGE>
- -------------------------------------------------------------------------------
Report Of Independent Certified
Public Accountants
The Stockholders and Board of Directors
Healthcare Services Group, Inc.
We have audited the accompanying balance sheets of Healthcare Services Group,
Inc. as of December 31, 1996 and 1995, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Healthcare Services Group, Inc.
at December 31, 1996 and 1995 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
----------------------------
Parsippany, New Jersey
February 27, 1997
30
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding Directors and executive officers is
incorporated herein by reference to the Company's definitive proxy statement to
be mailed to its shareholders in connection with its 1997 Annual Shareholders'
Meeting and to be filed within 120 days of the close of the year ended December
31, 1996.
Item 11. Executive Compensation
The Information regarding executive compensation is incorporated herein
by reference to the Company's proxy statement to be mailed to shareholders in
connection with its 1996 Annual Shareholders Meeting and to be filed within 120
days of the close of the fiscal year ended December 31, 1996.
Directors holding approximately 12% of the outstanding voting stock of
the Registrant have been deemed to be "affiliates" solely for the purpose of
computing the aggregate market value of the voting stock held by non-affiliates
set forth on the cover page of this Report.
Item 13. Certain Relationships and Related Transactions
The information regarding certain relationship and related transactions
is incorporated herein by reference to the Company's proxy statement mailed to
shareholders in connection with its 1996 Annual Shareholders Meeting and to be
filed within 120 days of the close of the fiscal year ended December 31, 1996.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The documents shown below are contained in the Company's Annual Report
to Shareholders for 1996 on pages 14 through 26, and are incorporated herein by
reference.
Report of Independent Certified Public Accountants.
Balance Sheets as of December 31, 1996 and 1995.
Statements of Income for the three years ended December 31, 1996, 1995
and 1994.
Statements of Stockholders Equity for the three years ended
December 31, 1996, 1995 and 1994.
Statements of Cash Flows for the three years ended December 31, 1996,
1995 and 1994.
Notes to Financial Statements.
31
<PAGE>
2. Financial Statement Schedules
Included in Part IV of this report:
Consent of Independent Certified Public Accountants.
Report of Independent Certified Public Accountants.
Schedule II - Valuation and Qualifying Accounts for the three years
ended December 31, 1996, 1995 and 1994.
Financial Data Schedule.
All other schedules are omitted since they are not required, not
applicable or the information has been included in the Financial Statements or
notes thereto.
3. Exhibits
The following Exhibits are filed as part of this Report (references are
to Reg. S-K Exhibit Numbers):
Exhibit
Number Title
- ------ -----
3.1 Articles of Incorporation of the Registrant, as amended, are
incorporated by reference to Exhibit 4.1 to the Company's Registration
Statement on Form S-2 (File No. 33-35798).
3.2 Amended By-Laws of the Registrant as of July 18, 1990, are incorporated
by reference to Exhibit 4.2 to the Company's Registration Statement on
Form S-2 (File No. 33-35798).
4. Specimen Certificate of the Common Stock, $.01 par value, of the
Registrant is incorporated by reference to Exhibit 4.1 of Registrant's
Registration Statement on Form S-18 (Commission File No. 2-87625-W).
10.1 Incentive Stock Option Plan adopted on August 31, 1983, amended and
readopted on April 30, 1991 is incorporated by reference to Exhibit 10.1
of Registrant's Registration Statement on Form S-18 (Commission File No.
2-87625-W), as well as reference to the Company's definitive proxy
statement dated April 30, 1991.
10.2 1995 Incentive and Non-Qualified Stock Option Plan, as amended
(incorporated by reference to Exhibit 4(d) of the Form S-8 filed by the
Registrant on July 31, 1996).
10.3 1996 Non-Employee Directors' Stock Option Plan (incorporated by
reference to Exhibit 4(f) of the Form S-8 filed by the Registrant on
July 31, 1996).
10.4 1995 Non-Qualified Stock Option Plan for Directors (incorporated by
reference to the Company's Definitive Proxy Statement dated April 21,
1995.
32
<PAGE>
10.5 Form of Non-Qualified Stock Option Agreement granted to certain
Directors is incorporated by reference to Exhibit 10.9 of Registrant's
Registration Statement on Form S-1 (Commission File No. 2-98089).
24. Consent of Independent Certified Public Accountants
27. Financial Data Schedule
99(a). Civil complaint captioned U.S. of America v. Healthcare Services Group,
Inc. et al. incorporated by reference to Exhibit 99(a) to Form 10Q for
the Nine-months ended September 30, 1996.
(b) Reports on Form 8-K
On October 16, 1996 the Registrant filed an 8-K, (Item 5. Other Events)
with respect to the entry of a Final Judgment pursuant to a settlement of a
complaint filed by the Securities and Exchange Commission against the Registrant
and certain officers.
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 24, 1997 HEALTHCARE SERVICES GROUP, INC.
(Registrant)
By: /s/ Daniel P. McCartney
-------------------------------------------------
Daniel P. McCartney
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons and in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Daniel P. McCartney Chief Executive Officer and March 24, 1997
- --------------------------- Chairman
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 24, 1997
- ---------------------------
Joseph F. McCartney
/s/ W. Thacher Longstreth Director March 24, 1997
- ---------------------------
Thacher Longstreth
/s/ Barton D. Weisman Director March 24, 1997
- ---------------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 24, 1997
- ---------------------------
Robert L. Frome
/s/ Thomas A. Cook Director and President March 24, 1997
- ---------------------------
Thomas A. Cook
/s/ John M. Briggs Director March 24, 1997
- ---------------------------
John M. Briggs
/s/ Robert J. Moss Director March 24, 1997
- ---------------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 24, 1997
- --------------------------- Treasurer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance and March 24, 1997
- --------------------------- Secretary
Richard W. Hudson
34
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1996, 1995, 1994
<TABLE>
<CAPTION>
Balance Balance
beginning end of
Description of period Additions Deductions of period
- ----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
1996
Allowance for
doubtful accounts $4,468,000 $2,050,000 $2,706,000 $3,812,000
========== ========== ========== ==========
1995
Allowance for
doubtful accounts $4,500,000 $1,672,594 $1,704,594 $4,468,000
========== ========== ========== ==========
Reserve for contingent
losses on promissory
notes sold $300,000 $300,000
======== ========
1994
Allowance for
doubtful accounts $4,465,000 $1,423,338 $1,388,338 $4,500,000
========== ========== ========== ==========
Reserve for contingent
losses on promissory
notes sold $600,000 $300,000 $300,000
======== ======== ========
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 27, 1997, accompanying the financial
statements included in the Annual Report of Healthcare Services Group, Inc. on
Form 10-K for the year ended December 31, 1996.
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 1 to the Registration Statements (Form S-8 No. 2-95092 and No. 2-99215) and
in the Registration Statement (Form S-8 No. 33-35915) pertaining to the
Incentive Stock Option Plan and the Non-Qualified Stock Options of Healthcare
Services Group, Inc. and in the related prospectuses of our report dated
February 27, 1997.
/s/ GRANT THORNTON LLP
- -------------------------
GRANT THORNTON LLP
Parsippany, New Jersey
March 14, 1997
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
Healthcare Services Group, Inc.
In connection with our audit of the financial statements of Healthcare Services
Group, Inc., referred to in our report dated February 27, 1997, which is
included in this Annual Report on Form 10-K, we have also audited Schedule II
for each of the three years in the period ended December 31, 1996. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
/s/ GRANT THORNTON LLP
- -------------------------
GRANT THORNTON LLP
Parsippany, New Jersey
February 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 22,677,290
<SECURITIES> 0
<RECEIVABLES> 37,130,730
<ALLOWANCES> 3,812,000
<INVENTORY> 7,392,507
<CURRENT-ASSETS> 66,110,881
<PP&E> 19,034,490
<DEPRECIATION> 12,821,500
<TOTAL-ASSETS> 86,445,647
<CURRENT-LIABILITIES> 8,676,567
<BONDS> 0
80,907
0
<COMMON> 0
<OTHER-SE> 74,857,526
<TOTAL-LIABILITY-AND-EQUITY> 86,445,647
<SALES> 0
<TOTAL-REVENUES> 162,482,169
<CGS> 139,178,736
<TOTAL-COSTS> 152,146,259
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,479,072
<INCOME-TAX> 4,590,000
<INCOME-CONTINUING> 6,889,072
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,889,072
<EPS-PRIMARY> .85
<EPS-DILUTED> .85
</TABLE>
