<PAGE>
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, 1997
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
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
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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 13, 1998 was
approximately $93,556,000
Indicate the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date: At March 13, 1998 there
were outstanding 7,448,463 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.
<PAGE>
PART I
References made herein to the Company include Healthcare Services
Group, Inc. and its wholly owned subsidiary HCSG Supply, Inc., unless the
context otherwise requires.
Item I. Business
(a) General
Healthcare Services Group, Inc. (the "Company" or the "Registrant")
provides housekeeping, laundry, linen and food services to the healthcare
industry, including nursing homes, retirement complexes, sub-acute and
rehabilitation 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
approximately 850 facilities in 42 states and Canada as of December 31, 1997.
(b) Not Applicable
(c) Description of Services
The Company provides management, administrative and operating
expertise and services to the housekeeping, laundry, linen and dietary
departments of the healthcare industry. The Company's labor force is also
interchangeable with respect to each of these services, with the exception of
food services. The Company believes that each service it performs is similar
in nature and each provides similar opportunity for growth. Accordingly, the
Company does not deem it meaningful to identify the percentage of revenues
derived from each of 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 and construction cost 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 an investment
by the Company in a corresponding laundry installation.
<PAGE>
From January 1, 1995 through December 31, 1997, the Company's services were
cancelled by thirty-eight facilities with respect to which the Company had
previously invested in a laundry installation. Laundry installations relating
to agreements cancelled in 1997 and 1995 resulted in the Company receiving
approximately $41,000 and $15,000 less, respectively than the net amount at
which these assets were recorded on its balance sheet. In 1996, laundry
installations, relating to clients who terminated their service agreements,
were sold to the Company's clients for an amount in excess of the net amount
recorded on the Company's 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 for 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.
Food services. The Company commenced providing food services to a
limited number of clients in 1997. Food services consist of the development of
a menu that meets the residents dietary needs, purchasing and preparing the
food to assure the residents receive an appetizing meal, and participation in
monitoring the residents' ongoing nutrition status. On-site management is
responsible for all daily food service activities, with regular support being
provided by a district manager specializing in food service, as well as a
registered dietitian. In 1998, the Company will continue to offer to its
existing, new and prospective clients this service and believes the growth in
providing this service will be consistent with the growth projected for all
other services being provided.
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 1997 or 1996 by clients who have purchased laundry
installations from the Company , although in 1995 two facilities that
purchased laundry installations from the Company canceled the Company's
services. With respect to the 1995 canceled service agreements, the Company
received approximately $18,000 less than the net amount recorded on its
balance sheet as of the dates of such cancellations. During the years 1995
through 1997, 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
(5 Divisions)
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Regional Vice President/Manager
(18 Regions)
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District Manager
(82 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,
1997, the Company maintained 18 regions within five divisions. A division
consists of two to six regions within a specific geographical area. A
Divisional Vice President manages each division. Additionally, each division,
with the exception of Food Service, 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. With
respect to the Food Service division, the Divisional Vice President assumes
primary responsibility for the marketing efforts of his division. Such efforts
are supplemented by the Food Service division Regional Managers, as well as
the other divisions' sales and marketing personnel. The Company believes that
its divisional, regional and district organizational structure facilitates its
expansion into new geographic areas, as well as its ability to sell new
services to existing clients.
<PAGE>
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.
In 1997 the long-term care market consisted of approximately 23,000
facilities, according to estimates of the Department of Health and Human
Services. The facilities primarily 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 Regional Sales Directors; 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.
<PAGE>
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, laundry and food service 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 housekeeping and laundry 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, 1997, the Company provided services to
approximately 850 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. In cases
where the Company has purchased the laundry installation from its clients,
many of the linen service agreements 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 generally obligate the purchaser to pay for such
installation upon terms independent of the services rendered by the Company.
From time to time, 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 $899,551, $2,050,000 and $1,672,594 in
1997, 1996 and 1995 respectively. In making its evaluations, in addition to
analyzing and anticipating, where possible, the specific cases described
above, management considers the general collection risk associated with trends
in the long-term care industry.
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 renewals of the existing
agreements based upon the quality and dependability of its services and the
cost savings it can effect for the client.
<PAGE>
Employees
At December 31, 1997, the Company employed 1,729 management and
supervisory personnel. Of these employees, 177 held executive, management and
office support positions, and 1,552 of these salaried employees were on-site
management personnel. On such date, the Company employed approximately 10,451
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 negotiated collective bargaining agreements
with respect to approximately 70 employees at eight facilities. The Company
believes its employee relations are satisfactory.
(d) Risk Factors - Certain matters discussed in this report 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.
Additionally, the Company's operating results would be adversely effected if
unexpected increases in the costs of labor, materials supplies and equipment
used in performing its services could not be passed on to clients.
In addition, the Company believes that in order to improve its
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. Furthermore, 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 successfully executing
projected growth strategies.
(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 6,638 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, Ohio and Texas. These
locations serve as divisional or regional offices. In addition, the Company
leases warehouse space in Pennsylvania, Illinois and Florida for HCSG Supply,
Inc.. 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.
<PAGE>
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.
Item 3. Legal Proceedings.
As of December 31, 1997, there were no material pending legal
proceedings to which the Company was a party or of which any of its property
was subject other than routine litigation or claims believed to be adequately
covered by insurance.
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, 1997, there were
7,386,863 shares of Common Stock outstanding.
The high and low bides for the Common Stock during the two years
ended December 31, 1997, ranged as follows
1997 High 1997 Low
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1st Qtr. 12 1/2 10 1/8
2nd Qtr. 12 1/2 10
3rd Qtr. 14 11 1/2
4th Qtr. 14 3/8 12 1/4
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
<PAGE>
(b) Holders
As of March 13, 1998, 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.
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 26 of the Company's Annual Report to Shareholders for the year
ended December 31, 1997.
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
Not Applicable
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HEALTHCARE SERVICES GROUP INC.
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: 1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Revenues .......................................... $181,359 $162,482 $148,747 $136,414 $114,275
Income before
extraordinary item and
cumulative effect of change in
accounting for income taxes ..................... $ 5,894 $ 6,889 $ 3,941 $ 6,400 $ 5,531
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 ........................................ $ 5,894 $ 6,889 $ 3,941 $ 6,400 $ 4,198
Basic earnings per common
share before extraordinary item
and cumulative effect of change
in accounting for income taxes .................. $ .78 $ .85 $ .48 $ .80 $ .70
Extraordinary item, net of
income tax benefit .............................. $ (.18)
Cumulative effect of change
in accounting for income taxes .................. $ .01
Basic earnings per common share ................... $ .78 $ .85 $ .48 $ .80 $ .53
Diluted earnings per common
share before extraordinary item
and cumulative effect of
change in accounting for
income taxes .................................... $ .76 $ .85 $ .48 $ .79 $ .70
Extraordinary item, net of
income tax benefit .............................. (.18)
Cumulative effect of change in
accounting for income taxes ..................... .01
Diluted earning per common share .................. $ .76 $ .85 $ .48 $ .79 $ .53
Weighted average number of common shares
outstanding for basic EPS ....................... 7,569 8,104 8,140 8,029 7,886
Weighted average number of common shares
outstanding for diluted EPS ..................... 7,719 8,136 8,223 8,142 7,907
As of December 31:
Working Capital ................................... $ 55,706 $ 57,434 $ 51,068 $ 46,146 $ 41,106
Total Assets ...................................... $ 84,890 $ 86,446 $ 80,290 $ 75,815 $ 68,862
Long-Term Obligations ............................. $ - $ - $ - $ 300 $ 600
Stockholders' Equity .............................. $ 72,227 $ 74,938 $ 68,470 $ 62,124 $ 55,045
Book Value Per Share .............................. $ 9.78 $ 9.26 $ 8.41 $ 7.83 $ 6.99
Employees ......................................... 12,180 11,217 10,911 10,808 8,880
</TABLE>
8
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THE FOLLOWING
DISCUSSION AND ANALYSIS
SHOULD BE READ IN MANAGEMENT'S DISCUSSION AND
CONJUNCTION WITH THE ANALYSIS OF FINANCIAL CONDITION
FINANCIAL STATEMENTS AND RESULTS OF OPERATIONS
AND NOTES THERETO.
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Results of Operations
From 1993 through 1997, the Company's revenues grew at a compound annual rate
of 12%. 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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1997 1996 1995
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<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided . . . . . . . 85.1 85.7 85.6
Selling, general and administrative. . . 8.8 8.0 8.2
Recovery of contingent losses on
promissory notes sold . . . . . . . . - - (0.2)
Interest income . . . . . . . . . . . . . .8 .7 .6
Provision for estimated cost related to
SEC inquiry and other matters (Note 9) . (1.0) - (2.1)
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Income before income taxes, . . . . . . . 5.9 7.0 4.9
Income taxes . . . . . . . . . . . . . . . 2.6 2.8 2.3
------ ------ ------
Net income . . . . . . . . . . . . . . . . 3.3% 4.2 2.6%
====== ====== ======
</TABLE>
1997 COMPARED WITH 1996
Revenues increased 12% to $181,359,305 in 1997 from $162,482,169 in 1996.
The following factors contributed to the increase in revenues: service
agreements with new clients in existing geographic areas increased revenues
16.8%; new services to existing clients increased revenues 5.2%; and
cancellations and other minor changes decreased revenues 10%.
Costs of services provided as a percentage of revenues decreased to 85.1%
in 1997 from 85.7% in 1996. The primary factors affecting specific variations
in the 1997 cost of services provided as a percentage of revenue and their
effects on the .6% decrease are as follows: decrease in allowance for
doubtful accounts of .9%; decrease in workers' compensation, general
liability and other insurance of .7%; offsetting these decreases was an
increase of 1.2% in the cost of supplies consumed in performing services.
Selling, general and administrative expenses as a percentage of revenue
increased to 8.8% in 1997 as compared to 8.0% fiscal year 1996. The increase is
primarily a result of the additional costs associated with the expansion of the
Company's divisional and regional staffs, as well as the costs of installing a
new computerized financial reporting system.
In the second quarter of 1997 the Company established a provision
$1,800,000 for additional legal and related costs in connection with the
settlement of a previously pending civil lawsuit which was fully settled in
July 1997. (see Note 9 - Provision for Estimated Cost Related to SEC Inquiry
and Other Matters)
9
<PAGE>
HEALTHCARE SERVICES GROUP INC.
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1996 COMPARED WITH 1995
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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.
LIQUIDITY AND CAPITAL RESOURCES
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At December 31, 1997 the Company had working capital and cash of
$55,705,917 and $17,774,219 respectively which represents a 3% and 22%
decrease as compared to December 31, 1996 working capital and cash of
$57,434,314 and $22,677,290, respectively. The decline is primarily a result
of the Company's expending approximately $10,900,000 for open market
purchases of 942,500 shares of its common stock. As a result of the stock
buy-back the Company's current ratio at December 31, 1997 decreased to 6.7 to
1 from 7.6 to 1 at December 31, 1996.
The net cash provided by the Company's operating activities was $5,364,992
for the year ended December 31, 1997. The principle source of cash flows from
operating activities for 1997 was net income, depreciation and amortization,
charges to operations for bad debt provisions and the timing of payments for
payroll and payroll related taxes. The operating activity that used the
largest amount of cash was a $4,261,684 increase in accounts and current and
long term notes receivable, as well as a $506,560 increase in prepaid
expenses and other assets. The increase in accounts and current and long term
notes receivable resulted primarily from the growth in the Company's
revenues. The increase in prepaid expenses and other assets primarily
resulted from payments made in connection with laundry installations not
complete as of December 31, 1997.
The Company's principle use of cash in investing activities for the year ended
December 31, 1997 was the purchase of housekeeping equipment and laundry
equipment installations.
10
<PAGE>
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At December 31, 1996, the Company had working capital of $57,434,314 which
represents an 12% increase over $51,067,973 at December 31, 1995. Working
capital improved 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 Financial Statements). Although accounts
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.
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 $899,551, $2,050,000, and $1,672,594 in 1997, 1996 and
1995 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.
11
<PAGE>
HEALTHCARE SERVICES GROUP INC.
- --------------------------------------------------------------------------------
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 September 30, 1998. The Company anticipates that this credit
line will be continued. Amounts drawn under the line are payable on demand. At
December 31, 1997, there were no borrowings under the line. However, at such
date, the amount available under the line had been reduced by approximately
$11,200,000 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, 1997, the Company had $17,774,219 of cash and cash
equivalents, which it views as its principal measure of liquidity.
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 1998, 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.
In accordance with the Company's previously announced authorizations to
purchase its outstanding common stock, the Company expended approximately
$10,900,000 to purchase 942,500 shares of its common stock during 1997 at an
average price of $11.59 per share. The Company remains authorized to purchase
approximately 559,000 shares pursuant to previous Board of Directors action.
EFFECT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
---------------------------------------------------
REPORTING COMPREHENSIVE INCOME
------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for fiscal years beginning after December 15,
1997. The Statement addresses the reporting and displaying of comprehensive
income and its components. Adoption of SFAS No. 130 relates to disclosure
within the financial statements and is not expected to have a material effect
on the Company's financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
-------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Statement changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information
in their quarterly reports. Adoption of SFAS No. 131 is not expected to have a
material effect on the Company's financial statements.
OTHER MATTERS
-------------
The Company is in the process of implementing new operating and application
software which it believes will be fully operational during 1998. The
Company has been notified by the software manufacturer, as well as the firm
providing installation support, that the new applications have functionality
for the year 2000. Therefore, the Company does not believe it will incur any
material expense, beyond the new systems installation costs, with respect to
year 2000 issues. Additionally, the Company utilizes an independent service
bureau for the processing of payroll and payroll tax related operations.
Many of the Company's clients participate in programs funded by federal and
state governmental agencies which may be affected by year 2000 issue. The
Company has been notified by its payroll processing company that all of its
systems will be fully compliant with year 2000 requirements. Any failure by
the Company, its outside processing company, its clients and the federal and
state governmental agencies to effectively monitor, implement or improve the
above referenced operational, financial, management and technical support
systems could have a material adverse effect on the Company's business and
consolidated results of operations.
12
<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. Additionally, the Company's
operating results would be adversely effected if unexpected increases in the
costs of labor, materials, supplies and equipment used in performing its
services could not be passed on to its clients.
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. Furthermore, 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 successfully executing projected
growth strategies.
EFFECTS OF INFLATION
- --------------------------------------------------------------------------------
All of the Company's service agreements allow it to pass through to its
clients increases in the cost of labor resulting from new wage agreements.
The Company believes that it will be able to recover increases in costs
attributable to inflation by continuing to pass through cost increases to its
clients.
13
<PAGE>
HEALTHCARE SERVICES GROUP INC.
<TABLE>
<CAPTION>
ASSETS DECEMBER 31,
-----------------------------
CURRENT ASSETS: 1997 1996
---- ----
<S> <C> <C> <C>
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $17,774,219 $22,677,290
Accounts and notes receivable, less allowance for
doubtful accounts of $3,663,000 in 1997 and $3,812,000 in 1996 . . . 36,560,661 33,318,730
Prepaid income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 366,712
Inventories and supplies . . . . . . . . . . . . . . . . . . . . . . . . 7,339,928 7,392,507
Deferred income taxes (Note 4) . . . . . . . . . . . . . . . . . . . . . 567,119 620,024
Prepaid expenses and other . . . . . . . . . . . . . . . . . . . . . . . 2,859,133 2,102,330
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . 65,467,772 66,110,881
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations (Note 6) . . . . . . . . . . . 10,993,558 11,322,459
Housekeeping equipment and office furniture . . . . . . . . . . . . . . 8,731,042 7,534,025
Autos and trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157,611 178,006
---------- ----------
19,882,211 19,034,490
Less accumulated depreciation . . . . . . . . . . . . . . . . . . . . . 14,245,071 12,821,500
---------- ----------
5,637,140 6,212,990
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED
less accumulated amortization of $1,312,660 in 1997 and
$1,205,036 in 1996 (Note 1) . . . . . . . . . . . . . . . . . . . . . . 2,042,817 2,150,440
DEFERRED INCOME TAXES (Note 4) . . . . . . . . . . . . . . . . . . . . . . 1,067,670 1,272,765
OTHER NONCURRENT ASSETS (Note 1) . . . . . . . . . . . . . . . . . . . . . 10,674,340 10,698,571
---------- ----------
$84,889,739 $86,445,647
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,275,902 $ 4,106,094
Accrued payroll, accrued and withheld payroll taxes . . . . . . . . . . 3,770,310 2,954,099
Other accrued expenses (Note 9) . . . . . . . . . . . . . . . . . . . . 944,501 810,785
Income taxes payable (Note 4) . . . . . . . . . . . . . . . . . . . . . 53,139
Accrued insurance claims (Notes 1 and 10) . . . . . . . . . . . . . . . 771,142 752,450
---------- ----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . 9,761,855 8,676,567
ACCRUED INSURANCE CLAIMS (Notes 1 and 10) . . . . . . . . . . . . . . . . 2,900,964 2,830,647
COMMITMENTS AND CONTINGENCIES (Notes 2 and 8)
STOCKHOLDERS' EQUITY: (Note 3)
Common stock, $.01 par value: 15,000,000 shares authorized,
7,386,863 shares issued in 1997 and 8,090,663 in 1996 . . . . . . . . . 73,869 80,907
Additional paid in capital . . . . . . . . . . . . . . . . . . . . . . . 26,005,004 34,603,813
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,148,047 40,253,713
---------- ----------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . 72,226,920 74,938,433
---------- ----------
$84,889,739 $86,445,647
---------- ----------
</TABLE>
See accompanying notes.
14
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . $181,359,305 $162,482,169 $148,746,773
Operating costs and expenses:
Cost of services provided . . . . . . . . . . . . . 154,417,984 139,178,736 127,340,970
Selling, general and administrative . . . . . . . . 15,859,083 12,967,523 12,184,128
Recovery of contingent losses on
promissory notes sold . . . . . . . . . . . . . (300,000)
Other income (expense):
Provision for estimated cost related to
SEC inquiry and other matters (Note 9). . . . . . (1,800,000) (3,100,000)
Interest income . . . . . . . . . . . . . . . . . . 1,412,096 1,143,162 867,883
----------- ---------- ----------
Income before income taxes. . . . . . . . . . . . . . 10,694,334 11,479,072 7,289,558
Income taxes (Note 4) . . . . . . . . . . . . . . . . 4,800,000 4,590,000 3,349,000
----------- ---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . $5,894,334 $6,889,072 $3,940,558
=========== ========== ==========
Basic earnings per common share (Notes 1 and 7) . . . $ .78 $ .85 $ .48
=========== ========== ==========
Diluted earnings per common share (Notes 1 and 7) . . $ .76 $ .85 $ .48
=========== ========== ==========
</TABLE>
See accompanying notes.
15
<PAGE>
HEALTHCARE SERVICES GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income . . . . . . . . . . . . . . . . . . . . . . $5,894,334 $ 6,889,072 $ 3,940,558
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 2,119,053 2,212,570 2,573,216
Bad debt provision. . . . . . . . . . . . . . . . . . . 899,551 2,050,000 1,672,594
Recovery of contingent losses on promissory
notes sold . . . . . . . . . . . . . . . . . . . . . (300,000)
Deferred income taxes (Note 4) . . . . . . . . . . . . 258,000 660,797 1,089,000
Tax benefit of stock option transactions . . . . . . . 120,826 2,821 63,000
Changes in operating assets and liabilities:
Accounts and notes receivable . . . . . . . . . . . . . (4,141,482) (2,905,442) (1,362,583)
Prepaid income taxes . . . . . . . . . . . . . . . . . (366,712) 1,466,184 (1,466,184)
Inventories and supplies. . . . . . . . . . . . . . . . 52,579 (192,474) (901,663)
Changes to long term notes receivable . . . . . . . . . (120,202) (786,737) (1,712,922)
Accounts payable and other accrued expenses (Note 9). . 303,524 (1,407,510) 1,973,067
Accrued payroll, accrued and withheld payroll taxes . . 816,211 641,193 366,818
Accrued insurance claims (Notes 1 and 10) . . . . . . . . 89,009 400,161 (1,057,639)
Income taxes payable . . . . . . . . . . . . . . . . . . (53,139) 53,139 (727,741)
Prepaid expenses and other assets . . . . . . . . . . . . (506,560) (184,564) 1,790,519
----------- ----------- ----------
Net cash provided by operating activities . . . . . . . 5,364,992 8,899,210 5,940,040
----------- ----------- ----------
Cash flows from investing activities:
Disposals of fixed assets . . . . . . . . . . . . . . . . 212,721 251,211 116,819
Additions to property and equipment . . . . . . . . . . . (1,754,111) (2,386,017) (2,667,597)
Cash provided by release of certificates of
deposits pledged for loan guarantees . . . . . . . . . 1,500,000
----------- ----------- ----------
Net cash used in investing activities . . . . . . . . . (1,541,390) (2,134,806) (1,050,778)
----------- ----------- ----------
Cash flows from financing activities:
Purchase of treasury stock. . . . . . . . . . . . . . . . (10,923,679) (528,975) (264,303)
Proceeds from the exercise of stock options . . . . . . . 2,197,006 105,975 480,809
----------- ----------- ----------
Net cash provided by (used in) financing activities . . . (8,726,673) (423,000) 216,506
----------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents. . . . . . . . . . . . . . . . . . . . . (4,903,071) 6,341,404 5,105,768
Cash and cash equivalents at beginning of the year. . . . . 22,677,290 16,335,886 11,230,118
----------- ----------- ----------
Cash and cash equivalents at end of the year. . . . . . . . $17,774,219 $22,677,290 $16,335,886
=========== =========== ===========
</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.
16
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
---------------------------------------------------------------------------
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, 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
Net income for year. . . . . . . 5,894,334 5,894,334
Exercise of stock options. . . . 238,700 2,387 2,194,619 2,197,006
Tax benefit arising from
stock transactions . . . . . . 120,826 120,826
Purchase of common stock for
treasury (942,500 shares). . (10,923,679) (10,923,679)
Balance December 31, 1997
treasury stock retired. . . . (942,500) (9,425) (10,914,254) $10,923,679
--------- -------- ----------- ----------- ----------- -----------
7,386,863 $73,869 $26,005,004 $46,148,047 -- $72,226,920
========= ======== ============ =========== =========== ===========
</TABLE>
See accompanying notes.
17
<PAGE>
HEALTHCARE SERVICES GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- Summary of
Significant Accounting Policies
GENERAL
- --------------------------------------------------------------------------------
The Company provides housekeeping, laundry, linen and food services
exclusively to the healthcare industry such as hospitals, nursing homes,
rehabilitation centers and retirement facilities.
PRINCIPLES OF CONSOLIDATION
- --------------------------------------------------------------------------------
The consolidated financial statements include the accounts of Healthcare
Services Group, Inc. and its wholly owned subsidiary, HCSG Supply, Inc. after
elimination of intercompany transactions.
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 or those slow payers that are experiencing severe
financial difficulties.
At December 31, 1997, the Company had notes receivable aggregating
$1,600,000 that are impaired. During 1997, the Company reduced its reserve
against these notes by 1,100,000 and charged the reserve $600,000 resulting
in a reserve balance at December 31, 1997, of $900,000. During 1997, the
average outstanding balance of these notes receivable was $2,400,000 and no
interest was recognized.
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.
<PAGE>
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 notes, interest income is recognized on a cost recovery basis only.
INVENTORIES AND SUPPLIES
- --------------------------------------------------------------------------------
Inventories and supplies include housekeeping and laundry supplies, as well
as food service provisions 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 recognize the gross profit over the life of the
original payment terms associated with the financing of the transactions by the
Company. During 1997, 1996 and 1995, laundry installation sales were not
material.
18
<PAGE>
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 $5,481,000, $1,936,000 and $3,391,000
during 1997, 1996 and 1995, respectively.
EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS No. 128) Earnings per Share, which
is effective for financial statements for periods ending after December 15, 1997
and requires that all prior period earnings per share data be restated. The new
standard eliminates primary and fully diluted earnings per common share and
requires presentation of basic and, if applicable, diluted earnings per common
share. Basic earnings per common share is computed by dividing income available
to common shareholders by the weighted-average common shares outstanding for the
period. Diluted earnings per common share reflects the weighted-average common
shares outstanding and dilutive potential common shares, such as stock options.
The adoption of this new standard had no impact on reported earnings per common
share for the years ended December 31, 1996 and 1995.
COSTS IN EXCESS OF FAIR VALUE OF NET ASSETS
- --------------------------------------------------------------------------------
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, 1997 resulted from a 1985 acquisition
which is being amortized over a thirty-one year period. Amortization charged to
earnings was $107,623 in both 1997 and 1996, and $108,958 in 1995.
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.
<PAGE>
OTHER NONCURRENT ASSETS
- --------------------------------------------------------------------------------
Other noncurrent assets consist of:
1997 1996
Long-term note ---------------------------
Receivables $10,377,975 $10,257,773
Other 296,365 440,798
----------- -----------
$10,674,340 $10,698,571
=========== ===========
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
$336,500 and $350,000 in 1997 and 1996, respectively.
RECLASSIFICATION
- --------------------------------------------------------------------------------
Certain reclassifications to 1996 reported amounts have been made in the
financial statements to conform to 1997 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, 1997 and 1996, 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, 1997, no single client
or nursing home chain accounted for more than 10% of total revenue.
19
<PAGE>
HEALTHCARE SERVICES GROUP INC.
REPORTING COMPREHENSIVE INCOME
- --------------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which is effective for fiscal years beginning after December 15, 1997. The
Statement addresses the reporting and displaying of comprehensive income and
its components. Adoption of SFAS No. 130 relates to disclosure within the
financial statements and is not expected to have a material effect on the
Company's financial statements.
DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
- --------------------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which is effective for fiscal years
beginning after December 15, 1997. The Statement changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports. Adoption of SFAS No. 131 is not expected to have a
material effect on the Company's financial statements.
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.
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.
<PAGE>
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, by
calendar years, of future minimum lease payments under operating leases having
remaining terms in excess of one year as of December 31, 1997:
OPERATING
YEAR LEASES
----------
1998 $ 480,168
1999 371,810
2000 209,046
2001 54,281
2002 3,514
----------
Total minimum lease payments $1,118,819
==========
Total expense for all operating leases was $813,719, $698,041 and $644,302 for
the years ended December 31, 1997, 1996 and 1995, respectively.
NOTE 3 -- STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
As of December 31, 1997, 931,988 shares of common stock were reserved under the
incentive stock option plans including 337,711 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 was greater than the fair market value on the date of the extension.
As of December 31, 1997, options outstanding, under the Incentive Stock Option
Plans, for 477,582 shares were exercisable at prices ranging from $8.25 to
$14.85, and the weighted average remaining contractual life was 4.2 years. The
weighted average fair value of incentive options granted during 1997, 1996 and
1995 was $1.75, $2.59 and $2.59, respectively.
20
<PAGE>
================================================================================
A SUMMARY OF INCENTIVE STOCK
OPTION ACTIVITY IS AS FOLLOWS:
INCENTIVE STOCK OPTIONS
---------------------------------------------------------
1997 1996 1995
---------------------------------------------------------
NUMBER NUMBER NUMBER
AVERAGE OF AVERAGE OF AVERAGE OF
PRICE SHARES PRICE SHARES PRICE SHARES
------- ------ ------- ------ ------- ------
Beginning of period $10.17 619,207 $10.63 511,872 $10.86 473,385
Granted 11.58 116,695 9.38 158,410 8.61 90,039
Cancelled 10.02 (15,825) 13.50 (36,100) 12.20 (6,016)
Exercised 9.30 (125,800) 8.47 (4,600) 8.81 (45,536)
------ -------- ------ ------- ------ -------
End of period $10.64 594,277 $10.17 629,582 $10.63 511,872
====== ======== ====== ======= ====== =======
Exercisable at end of
Period 477,582 498,937 421,833
======== ======= =======
- --------------------------------------------------------------------------------
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 of 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 to ten year period, commencing six months from the option date.
As of December 31, 1997, non-qualified options outstanding, under the above
mentioned plans, for 270,693 shares were exercisable at prices ranging from
$8.25 to $12.65, and the weighted average remaining contractual life was 4.2
years. The weighted average fair value of non-qualified options granted during
1997, 1996 and 1995 was $7.45, $2.52 and $2.52, respectively.
================================================================================
21
<PAGE>
HEALTHCARE SERVICES GROUP INC.
================================================================================
A SUMMARY OF NON-QUALIFIED STOCK
OPTION ACTIVITY IS AS FOLLOWS:
NON QUALIFIED STOCK OPTIONS
----------------------------------------------------------
1997 1996 1995
----------------------------------------------------------
NUMBER NUMBER NUMBER
AVERAGE OF AVERAGE OF AVERAGE OF
PRICE SHARES PRICE SHARES PRICE SHARES
------- ------- ------- ------ ------- ------
Beginning of period $ 9.73 387,593 $9.77 337,453 $9.87 297,717
Granted 11.84 58,350 9.45 78,140 8.95 53,236
Cancelled -- -- -- -- 8.83 (4,500)
Exercised 9.19 (116,900) 8.38 8,000 8.83 (9,000)
------- ------- ----- ------- ----- -------
End of period $10.26 329,043 $9.73 407,593 $9.77 337,453
======= ======= ===== ======= ===== =======
Exercisable at end of period 270,693 347,688 284,217
======= ======= =======
- --------------------------------------------------------------------------------
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, 1997, 1996 and 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:
1997 1996 1995
---- ---- ----
Risk-Free Interest-Rate 5.69% and 6.54% 5.83% 5.44%
Expected Life 1 and 10 years 2.0 years 2.0 years
Expected Volatility 32.0% and 49.5% 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 YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------------------------------------
Net Income
As reported $5,894 $6,889 $3,941
Pro forma $5,174 $6,516 $3,896
Basic Earnings Per Share
As reported $ .78 $ .85 $ .48
Pro forma $ .68 $ .80 $ .48
Diluted Earnings Per Share
As reported $ .76 $ .85 $ .48
Pro forma $ .67 $ .80 $ .47
22
<PAGE>
NOTE 4 - INCOME TAXES
- --------------------------------------------------------------------------------
The provision for income taxes consists of:
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
---------- ---------- ----------
Current:
Federal $3,361,900 $2,923,800 $1,695,400
State 1,180,100 1,005,400 564,600
---------- ---------- ----------
4,542,000 3,929,200 2,260,000
---------- ---------- ----------
Deferred:
Federal 194,500 498,000 805,000
State 63,500 162,800 284,000
---------- ---------- ----------
258,000 660,800 1,089,000
---------- ---------- ----------
Tax
Provision 4,800,000 $4,590,000 $3,349,000
========== ========== ==========
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,
------------------------------
1997 1996
---------- ----------
Net current deferred
tax assets:
Allowance for doubtful
accounts $1,487,424 $1,547,517
Accrued insurance
claims-current 313,084 305,495
Expensing of
housekeeping supplies (1,233,389) (1,232,988)
---------- ----------
$567,119 $620,024
========== ==========
Net noncurrent deferred tax assets:
Deferred profit on
laundry installation
sales $ 182,719 $200,585
Non-deductible reserves 479,126 762,464
Depreciation of property
and equipment (901,975) (869,765)
Accrued insurance
claims-noncurrent 1,177,791 1,149,241
Other 130,009 30,240
---------- ----------
$1,067,670 $1,272,765
========== ==========
<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,
--------------------------------------------------
1997 1996 1995
--------------------------------------------------
Computed
"expected"
tax expense $3,636,100 $3,902,900 $2,478,500
Increases
(decreases)
in taxes
resulting
from:
State income
taxes, net of
federal tax
benefit 820,700 771,000 560,100
Tax exempt
interest (268,800) (222,100) (111,000)
Reserves
recorded on
the books
not deductible
for tax
purposes 416,500 408,000
Amortization
of costs in
excess of fair
value of net
assets
acquired 37,100 36,600 37,000
Other, net 158,400 101,600 (23,600)
---------- ---------- ----------
$4,800,000 $4,590,000 $3,349,000
---------- ---------- ----------
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, 1997, 1996 and 1995 were $88,617 per year.
The Company made no leasehold improvements in either 1997 or 1996, 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.
23
<PAGE>
HEALTHCARE SERVICES GROUP INC.
- --------------------------------------------------------------------------------
During the years ended December 31, 1997, 1996 and 1995 the agreements with the
client facilities which the Director has an ownership interest resulted in
revenues of approximately $2,957,000, $2,838,704 and $3,010,000 respectively.
NOTE 6 -- LAUNDRY AND LINEN EQUIPMENT INSTALLATION PURCHASES
- --------------------------------------------------------------------------------
During 1995 the Company purchased for approximately $100,125 certain existing
laundry and linen equipment installations from seven nursing homes with which it
concurrently entered into service agreements to provide laundry and linen
services. There were no such laundry installation purchases during 1997 or 1996.
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 -- EARNINGS PER COMMON SHARE
- --------------------------------------------------------------------------------
A reconcilation of the numerator and denominators of basic and diluted earnings
per common share is as follows:
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------
Net Income 5,894,334
Basic earnings per
common share 5,894,334 7,569,068 .78
Effect of dilutive
securities:
Options 149,692
--------- --------- ---
Diluted earnings per
common share 5,894,334 7,718,760 .76
========= ========= ===
YEAR ENDED DECEMBER 31, 1996
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------
Net Income 6,889,072
Basic earnings per
common share 6,889,072 8,103,715 .85
Effect of dilutive
securities:
Options 31,785
--------- --------- ---
Diluted earnings per
common share 6,889,072 8,135,500 .85
========= ========= ===
YEAR ENDED DECEMBER 31, 1995
-------------------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------------------------------------------
Net Income 3,940,558
Basic earnings per
common share 3,940,558 8,140,293 .48
Effect of dilutive
securities:
Options 83,148
--------- --------- ---
Diluted earnings per
common share 3,940,558 8,223,441 .48
========= ========= ===
Options to purchase 214,300, 439,800 and 310,144 shares of common stock at an
average exercise price of $12.59, $11.58, and $11.86 for the years ended
December 31, 1997, 1996 and 1995, respectively were outstanding during such
years but not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market value of the
common shares.
24
<PAGE>
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
September 30, 1998. Amounts drawn under the line are payable upon demand. At
both December 31, 1997 and 1996, there were no borrowings under the line. At
December 31, 1997 and 1996, the Company had outstanding approximately
$11,200,000 and $8,000,000, 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 $11,200,000 and $8,000,000 at
December 31, 1997 and December 31, 1996, 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.
NOTE 9 -- PROVISION FOR ESTIMATED COST RELATED TO SEC INQUIRY AND OTHER MATTERS
- --------------------------------------------------------------------------------
On July 24, 1997 the Company and the U.S. Attorney for the Eastern District of
Pennsylvania reached a settlement of the civil litigation commenced by the
United States Attorney on or about May 24, 1996. This litigation was a result of
and arose 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. All claims described in the complaint were settled through the payment
in July, 1997 of $1,225,000 to the United States government. The Company and its
officers denied all allegations, and all allegations against the Company and its
officers were dismissed with prejudice. The monetary impact of this settlement
plus estimated related legal costs of $575,000, amounting to approximately
$1,800,000 was accrued at June 30, 1997 and reduced the net income for the year
ended December 31, 1997 by $1,577,000 or $.21 per basic common share and $.20
per diluted common share. The Company has not recorded an income tax benefit in
the accompanying financial statements for the settlement payment of $1,225,000
and therefore the effectiv e tax rate of 44.9% for the year ended December 31,
1997 is in excess of the statutory rate.
<PAGE>
On March 21, 1996 the Staff of the Securities and Exchange Commission (SEC)
informed the Company that the SEC had accepted a settlement pertaining to
certain allegations of violations of the Federal securities laws by the Company
and certain of its officers with respect to periods ended on or before March 31,
1992. 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 SEC
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 its officers with respect to their payment
obligations. The estimated monetary impact of this settlement plus related legal
costs have been reflected in the December 31, 1995 financial statements.
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 could be incurred in connection with these matters would
be in a range of appproximately $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 $.29 per basic common share and $.28 per diluted common share.
NOTE 10 -- ACCRUED INSURANCE CLAIMS
- --------------------------------------------------------------------------------
For years 1995 through 1997, the Company has a Paid Loss Retrospective Insurance
Plan for general liability and workers' compensation insurance. Under these
plans, pre-determined loss limits are arranged with an insurance company to
limit both the Company's per occurence cash outlay and annual insurance plan
cost.
25
<PAGE>
HEALTHCARE SERVICES GROUP INC.
- --------------------------------------------------------------------------------
For workers' compensation, the Company records a reserve based on the present
value of future payments, including an estimate of claims incurred but not
reported, that are developed as a result of a review of the Company's historical
data and actuarial analysis done by an independent company. The accrued
insurance claims were reduced by approximately $2,353,000, $2,956,000 and
$2,773,000 at December 31, 1997, 1996 and 1995, 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. 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 1997, 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, 1997 there was
7,386,863 of the Company's common shares issued and outstanding. As of February
28, 1998 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, 1997, RANGED AS FOLLOWS
- --------------------------------------------------------------------------------
1997 HIGH 1997 LOW
----------- ----------
1st Qtr. 12 1/2 10 1/8
2nd Qtr. 12 1/2 10
3rd Qtr. 14 11 1/2
4th Qtr. 14 3/8 12 1/4
1996 HIGH 1996 LOW
----------- ----------
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
26
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
HEALTHCARE SERVICES GROUP, INC.
We have audited the accompanying consolidated balance sheets of Healthcare
Services Group, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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 consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Healthcare Services Group, Inc. at December 31, 1997 and 1996 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Grant Thornton LLP
- --------------------------
Grant Thornton LLP
Parsippany, New Jersey
February 18, 1998
27
<PAGE>
HEALTHCARE SERVICES GROUP INC.
- --------------------------------------------------------------------------------
Transfer Agent
- --------------------------------------------------------------------------------
American Stock Transfer & Trust Co.
99 Wall St.
New York, NY 10005
Auditors
- --------------------------------------------------------------------------------
Grant Thornton LLP
9 Campus Drive
Parsippany, NJ 07054
Corporate Counsel
Olshan Grundman Frome
& Rosenzweig LLP
505 Park Ave.
New York, NY 10022
STOCK LISTING
- --------------------------------------------------------------------------------
Listed on the NASDAQ
National Market System
Symbol - "HCSG"
Annual Stockholders'
Meeting
- --------------------------------------------------------------------------------
Date - May 19, 1998
Time - 10:00 A.M.
Place - The Radisson Hotel of Bucks County
2400 Old Lincoln Highway Trevose, PA
19047
Corporate Offices
- --------------------------------------------------------------------------------
Healthcare Services Group, Inc. 2643 Huntingdon Pike
Huntingdon Valley, PA 19006
215-938-1661
Officers And Corporate
Management
- --------------------------------------------------------------------------------
Daniel P McCartney
Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
James L. DiStefano
Chief Financial Officer
and Treasurer
<PAGE>
Michael Harder
Vice President -
Credit Administration
Richard W. Hudson
Vice President - Finance And Secretary
John D. Kelly
Western Divisional Vice President
Nicholas R. Marino
Payroll & Benefits Manager
Michael E. McBryan
Mid-Atlantic Divisional Vice President - Sales
Bryan D. McCartney
Mid-Atlantic Divisional Vice President
Joseph F. McCartney
Northeastern Regional Vice
President
James P. O'Toole
Mid-Atlantic Regional Vice President
Brian M. Waters
Vice President - Operations
Michael L. Wyse
Western Divisional Vice
President - Sales
<PAGE>
Directors
- --------------------------------------------------------------------------------
Daniel P. McCartney
Chairman & Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
Joseph F. McCartney
Northeastern Regional Vice
President
Barton D. Weisman
President & Ceo-H.B.A. Corp.
W. Thacher Longstreth
Vice Chairman - Packard Press
Robert L. Frome, Esq.
Senior Partner - Olshan Grundman Frome & Rosenzweig LLP
Robert J. Moss, Esq.
American Express Co.
John M. Briggs, CPA
Partner - Briggs, Bunting & Dougherty LLP
AVAILABILITY OF FORM 10-K
A copy of Healthcare Services Group, Inc.'s 1997 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, will be provided without
charge to each shareholder making a written request to the Investor Relations
Department of the Company at its Corporate Offices.
28
<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 1998 Annual
Shareholders' Meeting and to be filed within 120 days of the close of the year
ended December 31, 1997.
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 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 1998 Annual Shareholders Meeting and to be
filed within 120 days of the close of the fiscal year ended December 31, 1997.
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 1998 Annual
Shareholders Meeting and to be filed within 120 days of the close of the
fiscal year ended December 31, 1997.
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 1997 on pages 8 through 26, and are incorporated
herein by reference.
Report of Independent Certified Public Accountants.
Balance Sheets as of December 31, 1997 and 1996.
Statements of Income for the three years ended December 31, 1997, 1996
and 1995.
Statements of Stockholders Equity for the three years ended December 31,
1997, 1996 and 1995.
Statements of Cash Flows for the three years ended December 31, 1997,
1996 and 1995.
Notes to Financial Statements.
<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, 1997, 1996 and 1995.
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, Amended and Restated
as of October 28, 1997 (incorporated by reference to Exhibit 10.6 of
Form 10-Q Report filed by Registrant on November 14, 1997).
10.4 1995 Non-Qualified Stock Option Plan for Directors (incorporated by
reference to the Company's Definitive Proxy Statement dated April 21,
1995.
<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.
(b) Reports on Form 8-K
None
<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 19, 1998 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:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Daniel P. McCartney Chief Executive Officer and March 19, 1998
- ----------------------- Chairman
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 19, 1998
- -----------------------
Joseph F. McCartney
/s/ W. Thacher Longstreth Director March 19, 1998
- -------------------------
W. Thacher Longstreth
/s/ Barton D. Weisman Director March 19, 1998
- ---------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 19, 1998
- -------------------
Robert L. Frome
/s/ Thomas A. Cook Director and President March 19, 1998
- ------------------
Thomas A. Cook
/s/ John M. Briggs Director March 19, 1998
- ------------------
John M. Briggs
/s/ Robert J. Moss Director March 19, 1998
- ------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 19, 1998
- ---------------------- Treasurer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance and March 19, 1998
- --------------------- Secretary
Richard W. Hudson
</TABLE>
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Schedule II - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996, 1995
<TABLE>
<CAPTION>
Balance Balance
beginning end of
Description of period Additions Deductions of period
<S> <C> <C> <C> <C>
1997
Allowance for
doubtful accounts $3,812,000 $899,551 $1,048,551 $3,663,000
========== ======== ========== ==========
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
======== ========
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 18, 1998, accompanying the
consolidated financial statements included in the Annual Report of Healthcare
Services Group, Inc. on Form 10-K for the year ended December 31, 1997.
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 18, 1998.
/s/ GRANT THORNTON LLP
- -------------------------
GRANT THORNTON LLP
Parsippany, New Jersey
February 18, 1998
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
Healthcare Services Group, Inc.
In connection with our audit of the consolidated financial statements of
Healthcare Services Group, Inc., referred to in our report dated February 18,
1998, which is included in the Annual Report on Form 10-K, we have also audited
Schedule II for each of the three years in the period ended December 31, 1997.
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 18, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 17,774,219
<SECURITIES> 0
<RECEIVABLES> 40,223,661
<ALLOWANCES> 3,663,000
<INVENTORY> 7,339,928
<CURRENT-ASSETS> 65,467,772
<PP&E> 19,882,211
<DEPRECIATION> 14,245,071
<TOTAL-ASSETS> 84,889,739
<CURRENT-LIABILITIES> 9,761,855
<BONDS> 0
0
0
<COMMON> 73,869
<OTHER-SE> 72,153,051
<TOTAL-LIABILITY-AND-EQUITY> 84,889,739
<SALES> 0
<TOTAL-REVENUES> 181,359,305
<CGS> 0
<TOTAL-COSTS> 170,277,067
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 1,800,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,694,334
<INCOME-TAX> 4,800,000
<INCOME-CONTINUING> 5,894,334
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,894,334
<EPS-PRIMARY> .78
<EPS-DILUTED> .76
</TABLE>
