<PAGE>
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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, 1999 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 26, 1999 is
11,057,957
Total of 13 Pages
<PAGE>
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
Consolidated Balance Sheets as of 2
March 31, 1999 and December 31, 1998
Consolidated Statements of Income for the 3
Three Months Ended March 31, 1999 and
1998
Consolidated Statements of Cash Flows 4
for the Three Months ended March 31,
1999 and 1998
Notes To Consolidated Financial 5 - 6
Statements
Management's Discussion and Analysis 7 - 10
of Financial Condition and Results Of
Operations
Part II. Other Information 11
-----------------
Signatures 12
-1-
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<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
(Unaudited) (Audited)
---------------------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $18,834,277 $17,201,408
Accounts and notes receivable, less allowance
for doubtful accounts of $3,449,000 in 1999 and 1998 46,477,454 45,086,828
Iventories and supplies 8,079,812 7,803,437
Deferred income taxes 386,287 324,054
Prepaid expenses and other 2,238,032 2,318,285
----------- -----------
Total current assets 76,015,862 72,714,012
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 9,107,289 8,985,945
Housekeeping equipment and office
furniture 8,913,042 8,482,207
Autos and trucks 51,110 51,110
----------- -----------
18,071,441 17,519,262
Less accumulated depreciation 11,871,377 11,416,214
----------- -----------
6,200,064 6,103,048
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,447,190 in 1999 and
$1,420,284 in 1998 1,908,287 1,935,193
DEFERRED INCOME TAXES 2,334,141 2,131,535
OTHER NONCURRENT ASSETS l0,973,778 10,225,439
----------- -----------
$97,432,132 $93,109,227
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,443,692 $ 4,366,015
Accured payroll, accrued and withheld payroll taxes 7,625,376 5,147,634
Other accrued epenses 195,359 319,333
Income taxes payable 1,783,374 283,980
Accrued insurance claims 749,351 588,040
----------- -----------
Total current liabilities 11,797,152 10,705,002
ACCURED INSURANCE CLAIMS 2,818,985 2,212,151
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY: (Note 2)
Common stock $.01 par value: 22,500,000
shares authorized, 11,057,957 shares issued
and outstanding in 1999 and 11,034,207 in 1998 110,580 110,342
Additional paid in capital 25,259,509 25,064,832
Retained earnings 57,445,906 55,016,900
----------- -----------
Total stockholders' equity 82,815,995 80,192,074
----------- -----------
$97,432,132 $93,109,227
=========== ===========
</TABLE>
See accompanying notes.
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<PAGE>
Healthcare Services Group, Inc.
Consolidated Income Statements
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended March 31,
1999 1998
------------------------------------
<S> <C> <C>
Revenues $55,622,204 $47,767,127
Operating costs and expenses:
Costs of services provided 47,403,301 40,596,844
Selling, general and administrative 4,300,820 3,949,148
Other Income:
Interest Income 197,924 338,111
----------- --------------
Income before income taxes 4,116,007 3,559,246
Income taxes 1,687,000 1,459,000
----------- --------------
Net Income $ 2,429,007 $ 2,100,246
=========== ==============
Earnings per share of common stock: (Note 2)
Basic earnings per common share $ 0.22 $ 0.19
=========== ==============
Diluted earnings per common share $ 0.21 $ 0.18
=========== ==============
Basic weighted average number
of common shares outstanding 11,048,746 11,134,953
=========== ==============
Diluted weighted average number
of common shares outstanding 11,380,004 11,455,056
=========== ==============
</TABLE>
See accompanying notes
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<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------------------------
1999 1998
------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 2,429,007 $ 2,100,246
Adjustmetits to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 481,919 496,852
Bad debt provision 750,000 550,000
Deferred income taxes (benefits) (264,839) (473,208)
Tax benefit of stock cption transactions 29,938 115,624
Changes in operating assets and liabilities:
Accounts and notes receivable (2,160,626) (3,103,380)
Prepaid income taxes 366,712
Inventories and supplies (276,375) (176,132)
Changes to long term notes receivable (515,665) 516,261
Accounts payable and other accrued expenses (3,046,297) (1,897,779)
Accrued payroll, accrued and vdthheld payroll
taxes 2,477,742 2,239,107
Accrued insurance claims 768,145 59,699
Income taxes payable 1,499,393 958,375
Prepaid expenses and other assets (152,421) (179,004)
----------- -----------
Net cash provided by operating activities 2,019,921 1,573,373
----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 150 30,525
Additions to property and equipment (552,179) (271,131)
----------- -----------
Net cash used in investing activities (552,029) (240,606)
----------- -----------
Cash flows from financing activities:
Proceeds from the exercise of stock options 164,977 557,086
----------- -----------
Net cash provided by financing activities 164,977 557,086
----------- -----------
Net increase in cash and cash equivalents 1,632,869 1,889,853
Cash and cash equivalents at beginning of the year 17,201,408 17,774,219
----------- -----------
Cash and cash equivalents at end of the period $18,834,277 $19,664,072
=========== ===========
</TABLE>
See accompanying notes.
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<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,
1998 has been derived from, and does not include, all the disclosures contained
in the financial statements for the year ended December 31, 1998. 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, 1998. The results of operations for the three month period ended
March 31, 1999 and 1998 are not necessarily indicative of the results that may
be expected for the full fiscal year.
Note 2 - Three-For-Two Stock Split
On August 5, 1998, the Board of Directors declared a three-for-two
stock split of the Company's Common Stock effected in the form of a 50% stock
dividend payable on August 27, 1998 to Common Stock stockholders of record on
August 17, 1998. An amount equal to the par value of the shares of Common Stock
issued was transferred from additional paid in capital to common stock in the
December 31, 1998 balance sheet. All stock options, share and per share
disclosures have been adjusted to reflect the 3-for-2 stock split.
Note 3 - 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, 1999. Amounts drawn under the line are payable upon demand. At
both March 31, 1999 and December 31, 1998, there were no borrowings under the
line. However, at such dates, the line was fully utilized as a result of
contingent liabilities of the Company to the lender relating to letters of
credit issued for the Company, which relate to payment obligations under the
Company's insurance program.
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.
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<PAGE>
Note 4 - Segment Information
The Company provides housekeeping, laundry, linen, facility maintenance
and food services to the healthcare industry. The Company considers its business
to consist of one reportable operating segment, based on the service business
categories, provided to a client facility, sharing similar economic
characteristics in the nature of the service provided, method of delivering
service and client base. Although the Company does provide services in Canada,
essentially all of its revenue and net income, approximately 99%, are earned in
one geographic area, the United States.
The Company earned revenue in the following service business categories:
For the three month period ended March 31,
------------------------------------------
1999 1998
----------- -----------
Housekeeping services $35,101,000 $31,498,000
Laundry & linen services 16,279,000 11,509,000
Food Services 2,455,000 3,030,000
Maintenance services &
Other 1,787,000 1,730,000
----------- -----------
$55,622,000 $47,767,000
=========== ===========
Note 5 - Effect of Recently Issued Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
-------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June, 1999. SFAS No. 133 requires all entities to recognize all
derivative instruments on their balance sheet as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that my be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
Adoption of SFAS No. 133 is not expected to have a material effect on
the Company's consolidated financial statements.
-6-
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<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. All share and per share data
has been adjusted for the three-for-two stock split declared by the Board of
Directors on August 5, 1998.
RESULTS OF OPERATIONS
Revenues for the first quarter of 1999 increased by 16.4% over revenues
in the corresponding 1998 quarter. The following factors contributed to the
increase in 1999 first quarter revenues: service agreements with new clients
increased revenues by 35.1%; new services to existing clients increased
revenues 2.1%; and cancellations and other minor changes decreased revenues
20.8%.
Cost of services provided as a percentage of revenues increased
slightly to 85.2% for the first quarter of 1999 from 85.0% in the corresponding
1998 quarter. The primary factors affecting specific variations in the 1999
first quarter's cost of services provided as a percentage of revenue and their
effects on the .2% increase are as follows: an increase of 2.3% in labor costs
and payroll related taxes; offsetting this increase was a decrease of 1.0% in
workers' compensation, general liability and other insurance, and a decrease of
.8% in the cost of supplies consumed in performing services.
Selling, general and administrative expenses as a percentage of revenue
decreased in the first quarter of 1999 to 7.7% as compared to 8.3% in the
corresponding 1998 three month period. The decrease 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 1999 first quarter compared to the
same 1998 period principally due to the Company's shift from investing excess
funds in taxable securities to tax exempt securities, as well as lower average
cash balances.
Liquidity and Capital Resources
At March 31, 1999 the Company had working capital and cash of
$64,218,710 and $18,834,277 respectively, which represents increases of 4% and
10%, respectively, compared to December 31, 1998 working capital and cash of
$62,009,010 and $17,201,408.
The net cash provided by the Company's operating activities was
$2,019,921 for the three month period ended March 31, 1999 as compared to net
cash provided of $1,573,373 in the same 1998 period. The principle sources of
-7-
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<PAGE>
net cash flows from operating activities for the three month periods ended March
31, 1999 and 1998 were 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 during the three month period ended March 31, 1999 was a
$3,046,297 decrease in accounts payable and accrued expenses which resulted from
the timing of payments to vendors. Additionally, operating activities' cash
flows for the three month periods ended March 31, 1999 and 1998 were decreased
by $2,676,291 and $2,587,119, respectively, as a result of net increases in
accounts and notes receivable and long term notes receivable. The net increases
in these amounts resulted primarily from the growth in the Company's revenues.
The Company's principle use of cash in investing activities for the
three month periods ended March 31, 1999 and 1998 was the purchase of property
and equipment.
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 recorded a
bad debt provision of $750,000 in the three month period ended March 31, 1999.
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, 1999. Amounts drawn under the line are
payable on demand. At March 31, 1999, there were no borrowings under the line.
However, at such date, the line was fully utilized as result of contingent
liabilities of the Company to the lender relating to letters of credit issued
for the Company (see Note 3 of Notes to Financial Statements).
At March 31, 1999, the Company had $18,834,277 of cash and cash
equivalents, which it views as its principal measure of liquidity.
-8-
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<PAGE>
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 1999, it estimates that it will
incur capital expenditures of approximately $2,500,000 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 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 $3,946,000 to
purchase 369,000 shares of its common stock during 1998 at an average price of
$9.47 per common share. The Company remains authorized to purchase 469,950
shares pursuant to previous Board of Directors' action.
Effect of Recently Issued Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
- ------------------------------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is effective for fiscal years
beginning after June, 1999. SFAS No. 133 requires all entities to recognize all
derivative instruments on their balance sheet as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that my be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
Adoption of SFAS No. 133 is not expected to have a material effect on
the Company's consolidated financial statements.
Other Matters - Year 2000 Compliance
The Company has implemented new operating and application software
which became fully operational during 1998. The Company has been notified by its
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 and payment of
payroll and payroll related taxes. The Company has been notified by its payroll
processing company that all of its systems will be fully compliant with year
2000 requirements. Many of the Company's clients participate in programs funded
by federal and state governmental agencies which may be affected by year 2000
issues. Any failure by the Company, its outside processing company, its clients
or 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.
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<PAGE>
Cautionary Statements Regarding Forward Looking Statements
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, primarily
providers of long-term care; credit and collection risks associated with this
industry and risk factors described in the Company's Form 10-K for the year
ended December 31, 1998 in Part I thereof under "Government Regulation of
Clients", "Competition" and "Service Agreements". 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 to improve its financial
performance it must continue to obtain service agreements with new clients,
provide 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.
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.
Although there can be no assurance thereof, 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.
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<PAGE>
PART II. Other Information
-----------------
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
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HEALTHCARE SERVICES GROUP, INC.
----------------------------------------
April 26, 1999 /s/ Daniel P. McCartney
- ------------------- ----------------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
April 26, 1999 /s/ Thomas A. Cook
- ------------------- ----------------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
April 26, 1999 /s/ James L. DiStefano
- ------------------- ----------------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
April 26, 1999 /s/ Richard W. Hudson
- ------------------- ----------------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 18,834,277
<SECURITIES> 0
<RECEIVABLES> 49,926,454
<ALLOWANCES> 3,449,000
<INVENTORY> 8,079,812
<CURRENT-ASSETS> 76,015,862
<PP&E> 18,071,441
<DEPRECIATION> 11,871,377
<TOTAL-ASSETS> 97,432,132
<CURRENT-LIABILITIES> 11,797,152
<BONDS> 0
0
0
<COMMON> 110,580
<OTHER-SE> 82,705,415
<TOTAL-LIABILITY-AND-EQUITY> 82,815,995
<SALES> 0
<TOTAL-REVENUES> 55,622,204
<CGS> 47,403,301
<TOTAL-COSTS> 51,704,121
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,116,007
<INCOME-TAX> 1,687,000
<INCOME-CONTINUING> 2,429,007
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,429,007
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
</TABLE>
