<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1998 Commission File Number 0-12015
HEALTHCARE SERVICES GROUP, INC.
-------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2018365
- ------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) number)
2643 Huntingdon Pike, Huntingdon Valley, Pennsylvania 19006
------------------------------------------------------------------------
(Address of principal executive office) (Zip code)
Registrant's telephone number, including area code: 215-938-1661
----------------
Indicate mark whether the registrant (1) has filed all
reports required to be filed by section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months ( or for such shorter period that the registrant
was required to file such reports) and (2) has been subject
to such filing requirements for past 90 days.
YES X NO ___
---
Number of shares of common stock, issued and outstanding as of April 30, 1998 is
7,471,913
Total of 13 Pages
<PAGE>
INDEX
-----
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
<S> <C> <C>
Consolidated Balance Sheets as of March 31, 1998 and 2
December 31, 1997
Consolidated Statements of Income for the Three Months 3
Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Three Months 4
ended March 31, 1998 and 1997
Notes To Consolidated Financial Statements 5
Management's Discussion and Analysis of Financial 7 - 11
Condition and Results Of Operations
Part II. Other Information 12
-----------------
Signatures 13
</TABLE>
-1-
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
(Unaudited) (Audited)
-------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,664,072 $ 17,774,219
Accounts and notes receivable, less allowance
for doubtful accounts of $3,822,000
in 1998 and $3,663,000 in 1997 39,113,614 36,560,661
Prepaid income taxes - 366,712
Inventories and supplies 7,516,060 7,339,928
Deferred income taxes 636,763 567,119
Prepaid expenses and other 2,781,391 2,859,133
-------------------------------
Total current assets 69,711,900 65,467,772
-------------------------------
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 10,992,338 10,993,558
Housekeeping equipment and office
furniture 8,965,351 8,731,042
Autos and trucks 157,611 157,611
-------------------------------
20,115,300 19,882,211
Less accumulated depreciation 14,707,501 14,245,071
-------------------------------
5,407,799 5,637,140
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,339,566 in 1998 and
$1,312,660 in 1997 2,015,911 2,042,817
DEFERRED INCOME TAXES 1,471,234 1,067,670
OTHER NONCURRENT ASSETS 10,415,251 10,674,340
-------------------------------
$ 89,022,095 $ 84,889,739
===============================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,569,003 $ 4,275,902
Accrued payroll, accrued and withheld payroll taxes 6,009,417 3,770,310
Other accrued expenses 753,621 944,501
income taxes payable 958,375
Accrued insurance claims 783,679 771,142
-------------------------------
Total current liabilities 11,074,095 9,761,855
ACCRUED INSURANCE CLAIMS 2,948,126 2,900,964
COMMITMENTS AND CONTINGENCIES ( Note 2
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 15,000,000
shares authorized, 7,457,763 shares issued
and outstanding in 1998 and 7,386,863 in 1997 74,578 73,869
Additional paid in capital 26,677,004 26,005,004
Retained earnings 48,248,292 46,148,047
-------------------------------
Total stockholders' equity 74,999,874 72,226,920
-------------------------------
$ 89,022,095 $ 84,889,739
===============================
</TABLE>
See accompanying notes.
-2-
<PAGE>
Healthcare Services Group, Inc.
Consolidated Income Statements
(Unaudited)
For the Three Months Ended March 31
1998 1997
----------------------------------------
Revenues $ 47,767,127 $ 41,414,490
Operating costs and expenses:
Costs of services provided 40,596,844 35,271,313
Selling general and administrative 3,949,148 3,507,038
Other Income:
Interest Income 338,111 481,224
---------------- --------------
Income before income taxes 3,559,246 3,117,363
Income taxes 1,459,000 1,265,000
---------------- --------------
Net Income $ 2,100,246 $ 1,852,363
================ ==============
Basic earnings per common share $ .28 $ .23
================ ==============
Diluted earnings per common share $ .28 $ .23
================ ==============
Basic weighted average number
of common shares outstanding 7,423,302 8,099,595
================ ==============
Diluted weighted average number
of common shares outstanding 7,636,704 8,201,542
================ ==============
See accompanying notes
-3-
<PAGE>
Healthcare Services Group, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1998 1997
----------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 2,100,246 $ 1,852,363
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 496,852 465,806
Bad debt provision 550,000 375,000
Deferred income tax benefits (473,208) (203,488)
Tax benefit of stock option transactions 115,624 2,807
Changes in operating assets and liabilities:
Accounts and notes receivable (3,103,380) (2,447,075)
Prepaid income taxes 366,712
Inventories and supplies (176,132) (23,044)
Changes to long term notes receivable 516,261 (279,856)
Accounts payable and other accrued expenses (1,897,779) (2,645,764)
Accrued payroll, accrued and withheld payroll
taxes 2,239,107 2,016,963
Accrued insurance claims 59,699 506,325
Income taxes payable 958,375 1,425,781
Prepaid expenses and other assets (179,004) (248,114)
----------------------------------------
Net cash provided by operating activities 1,573,373 797,704
----------------------------------------
Cash flows from investing activities:
Disposals of fixed assets 30,525 69,730
Additions to property and equipment (271,131) (300,713)
----------------------------------------
Net cash used in investing activities (240,606) (230,983)
----------------------------------------
Cash flows from financing activities:
Purchase of treasury stock (174,744)
Proceeds from the exercise of stock options 557,086 139,111
----------------------------------------
Net cash provided by (used in) financing activities 557,086 (35,633)
----------------------------------------
Net increase in cash and cash equivalents 1,889,853 531,088
Cash and cash equivalents at beginning of the period 17,774,219 22,677,290
----------------------------------------
Cash and cash equivalents at end of the period $19,664,072 $ 23,208,378
========================================
</TABLE>
See accompanying notes.
-4-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
Note 1 - Basis of Reporting
The accompanying financial statements are unaudited and do not include
certain information and note disclosures required by generally accepted
accounting principles for complete financial statements. However, in the opinion
of the Company, all adjustments considered necessary for a fair presentation
have been included. The balance sheet shown in this report as of December 31,
1997 has been derived from, and does not include, all the disclosures contained
in the financial statements for the year ended December 31, 1997. The financial
statements should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1997. The results of operations for the three month periods ended
March 31, 1998 and 1997 are not necessarily indicative of the results that may
be expected for the full fiscal year.
Note 2 - Other Contingencies
The Company has a $13,000,000 bank line of credit on which it may draw
to meet short-term liquidity requirements or for other purposes, that expires on
September 30, 1998. Amounts drawn under the line are payable upon demand. At
both March 31, 1998 and December 31, 1997, there were no borrowings under the
line. At March 31, 1998 and December 31, 1997, the Company had outstanding
approximately $12,600,000 and $11,200,000, respectively of irrevocable standby
letters of credit, which primarily relate to payment obligations under the
Company's insurance program. As a result of letters of credit issued, the amount
available under the line was reduced by approximately $12,600,000 and
$11,200,000 at March 31, 1998 and December 31, 1997, respectively.
The Company is also involved in miscellaneous claims and litigation
arising in the ordinary course of business. The Company believes that these
matters, taken individually or in the aggregate, would not have a material
adverse impact on the Company's financial position or results of operations.
Note 3 - 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 Company's financial statements reflect this adoption. 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.
-5-
<PAGE>
Note 4 - 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 did not impact 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 on a comparative basis beginning with the Company's
quarter ending March 31, 1999. Adoption of SFAS No. 131 is not expected to have
a material effect on the Company's financial statements.
-6-
<PAGE>
PART I.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction
with the financial statements and notes thereto.
RESULTS OF OPERATIONS
Revenues for the first quarter of 1998 increased by 15.3% over revenues
in the corresponding 1997 quarter. The following factors contributed to the
increase in 1998 first quarter revenues as compared to the corresponding 1997
quarter: service agreements with new clients increased revenues by 17.3%;
providing new services to existing clients increased revenues 7.7% ; and
cancellations and other minor changes decreased revenues 9.7%.
Cost of services provided as a percentage of revenues decreased
slightly to 85.0% for the first quarter of 1998 from 85.2% in the corresponding
1997 quarter. The primary factors affecting specific variations in the 1998
first quarter as compared to the 1997 first quarter cost of services provided as
a percentage of revenue and their effects on the .2% decrease are as follows:
decrease of 1.6% in labor costs; decrease of .5% in workers' compensation,
general liability and other insurance; decrease of .4% in payroll related taxes;
offsetting these decreases was an increase of 2.6% in the cost of supplies
consumed in performing services.
Selling, general and administrative expenses as a percentage of revenue
decreased slightly in the first quarter of 1998 to 8.3% as compared to 8.5% in
the corresponding 1997 three month period. The decrease in comparing the three
month periods' selling, general and administrative expenses is primarily
attributable to the Company's ability to control certain selling, general and
administrative expenses while also comparing them to a greater revenue base.
Interest income decreased in the three month period ending March 31,
1998 compared to the same 1997 period principally due to lower average cash
balances. The lower average cash balances in the 1998 first quarter as compared
to 1997 primarily resulted from the Company's expenditure of approximately
$10,900,000 for a common stock buy-back which occurred during 1997.
Liquidity and Capital Resources
At March 31, 1998 the Company had working capital and cash of
$58,637,805 and $19,664,072 respectively which represents a 5% and 11% increase
as compared to December 31, 1997 working capital and cash of $55,705,917 and
-7-
<PAGE>
$17,774,219, respectively. The Company's current ratio at March 31, 1998
decreased to 6.3 to 1 compared to 6.7 to 1 at December 31, 1997.
The net cash provided by the Company's operating activities was
$1,573,373 for the three month period ended March 31, 1998 as compared to
$797,704 in the same 1997 period. The principle sources of cash flows from
operating activities for the three month periods ended March 31, 1998 and 1997
was net income and the timing of payments for payroll, payroll related taxes and
income taxes. The operating activity that used the largest amount of cash was a
$2,587,119 and $2,726,931 net increase in accounts and current and long term
notes receivable at March 31, 1998 and 1997, respectively. The increase in these
amounts resulted primarily from the growth in the Company's revenues.
Additionally, operating activities' cash flows for the three month periods
ending March 31, 1998 and 1997 were decreased by $1,897,779 and $2,645,764,
respectively which resulted from the timing of payments to vendors.
The Company's principle use of cash in investing activities for the
three month periods ended March 31, 1998 and 1997 is the purchase of
housekeeping equipment and laundry equipment installations.
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 turned over to
collection attorneys, 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 provision by approximately
$550,000 in the three month period ending March 31, 1998. In making its
evaluation, in addition to analyzing and anticipating, where possible, the
specific cases described above, management considers the general collection risk
associated with trends in the long-term care industry.
The Company 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 March 31, 1998, there were no borrowings under the line. However, at
such date, the amount available under the line had been reduced by approximately
$12,600,000 as a result of contingent liabilities of the Company to the lender
relating to letters of credit issued for the Company (See Note 2 of Notes to
Financial Statements).
-8-
<PAGE>
At March 31, 1998, the Company had $19,664,072 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 during calendar year 1998, it estimates that it will incur capital
expenditures of approximately $2,000,000 during this year 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 common share. The Company remains authorized to
purchase approximately 559,000 shares pursuant to previous Board of Directors'
action.
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.
Effect of Recently Issued Accounting Pronouncements
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
-9-
<PAGE>
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 Company's financial statements reflect this adoption. 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.
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 did not impact 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 on a comparative basis beginning with the Company's
quarter ending March 31, 1999. Adoption of SFAS No. 131 is not expected to have
a material effect on the Company's financial statements.
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.
Cautionary Statements Regarding Forward Looking Statements
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 clients.
-10-
<PAGE>
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 and successfully executing projected growth strategies.
-11-
<PAGE>
<TABLE>
<CAPTION>
PART II. Other Information
-----------------
<S> <C> <C>
Item 1. Legal Proceedings. Not Applicable
Item 2. Changes in Securities. Not Applicable
Item 3. Defaults under Senior Securities. Not Applicable
Item 4. Submission of Matters to a Vote of Security Not Applicable
Holders
Item 5. Other Information.
a) None
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits -
27 - Financial data schedule
b) Reports on Form 8-K - None
</TABLE>
-12-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE SERVICES GROUP, INC.
May 6, 1998 /s/ Daniel P. McCartney
- -------------------------- -------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
May 6, 1998 /s/ Thomas A. Cook
- -------------------------- -------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
May 6, 1998 /s/ James L. DiStefano
- -------------------------- -------------------------------
Date JAMES L. DiSTEFANO, Chief
Financial Officer and Treasurer
May 6, 1998 /s/ Richard W. Hudson
- -------------------------- ------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance,
Secretary and Chief
Accounting Officer
-13-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 19,664,072
<SECURITIES> 0
<RECEIVABLES> 42,935,614
<ALLOWANCES> 3,822,000
<INVENTORY> 7,516,060
<CURRENT-ASSETS> 69,711,900
<PP&E> 20,115,300
<DEPRECIATION> 14,707,501
<TOTAL-ASSETS> 89,022,095
<CURRENT-LIABILITIES> 11,074,095
<BONDS> 0
0
0
<COMMON> 74,578
<OTHER-SE> 74,925,296
<TOTAL-LIABILITY-AND-EQUITY> 89,022,095
<SALES> 0
<TOTAL-REVENUES> 47,767,127
<CGS> 40,596,844
<TOTAL-COSTS> 44,545,992
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,559,246
<INCOME-TAX> 1,459,000
<INCOME-CONTINUING> 2,100,246
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,100,246
<EPS-PRIMARY> .28
<EPS-DILUTED> .28
</TABLE>
