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, 1997 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 May 7, 1997 is 7,308,993 shares.
INDEX ----- PART I. FINANCIAL INFORMATION PAGE NO. - ------- --------------------- -------- Balance Sheets as of March 31, 1997 and December 31, 1996 2 Statements of Income for the Three Months ended March 31, 1997 and 1996 3 Statements of Cash Flows for the Three Months ended March 31, 1997 and 1996 4 Notes to Financial Statements 5 - 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 - 11 PART II. OTHER INFORMATION 12 ----------------- SIGNATURES 13 Exhibit Index E-1 - 1 -
HEALTHCARE SERVICES GROUP, INC. Balance Sheets <TABLE> <CAPTION> March 31, December 31, 1997 1996 (Unaudited) (Audited) ----------- --------- <S> <C> <C> ASSETS CURRENT ASSETS: Cash and cash equivalents $ 23,208,378 $ 22,677,290 Accounts and notes receivable, less allowance for doubtful accounts of $3,812,000 in 1997 and in 1996 35,390,805 33,318,730 Inventories and supplies 7,415,551 7,392,507 Deferred income taxes 663,193 620,024 Prepaid expenses and other 2,430,340 2,102,330 ------------ ------------ Total current assets 69,108,267 66,110,881 PROPERTY AND EQUIPMENT: Laundry and linen equipment installations 10,841,439 11,322,459 Housekeeping equipment and office furniture 7,818,089 7,534,025 Autos and trucks 178,006 178,006 ------------ ------------ 18,837,534 19,034,490 Less accumulated depreciation 12,832,460 12,821,500 ------------ ------------ 6,005,074 6,212,990 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED less accumulated amortization of $1,231,942 in 1997 and $1,205,036 in 1996 2,123,534 2,150,440 DEFERRED INCOME TAXES 1,433,084 1,272,765 OTHER NONCURRENT ASSETS 10,898,530 10,698,571 ------------ ------------ $ 89,568,489 $ 86,445,647 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,035,016 $ 4,106,094 Accrued payroll, accrued and withheld payroll taxes 4,971,063 2,954,099 Other accrued expenses 236,100 810,785 Income taxes payable 1,478,920 53,139 Accrued insurance claims 858,779 752,450 ------------ ------------ Total current liabilities 9,579,878 8,676,567 ACCRUED INSURANCE CLAIMS 3,230,644 2,830,647 COMMITMENTS AND CONTINGENCIES (Notes 2 and 3) STOCKHOLDERS' EQUITY: Common stock, $.01 par value: 15,000,000 shares authorized, 8,090,243 shares issued in 1997 and 8,090,663 in 1996 80,902 80,907 Additional paid in capital 34,570,989 34,603,813 Retained earnings 42,106,076 40,253,713 Total stockholders' equity 76,757,967 74,938,433 $ 89,568,489 $ 86,445,647 ============ ============ </TABLE> See accompanying notes. -2-
HEALTHCARE SERVICES GROUP, INC. Income Statements (Unaudited) <TABLE> <CAPTION> For the Three Months Ended March 31, ------------ ------------ 1997 1996 ------------ ------------ <S> <C> <C> Revenues $ 41,414,490 $ 39,410,651 Operating costs and expenses: Cost of services provided 35,271,313 33,570,692 Selling, general and administrative 3,507,038 3,013,349 Other income : Interest income 481,224 191,165 ------------ ------------ Income before income taxes 3,117,363 3,017,775 Income taxes 1,265,000 1,237,000 ------------ ------------ Net income $ 1,852,363 $ 1,780,775 ============ ============ Earnings per common share (Note 4) $ 0.23 $ 0.22 ============ ============ Weighted average number of common shares outstanding 8,210,542 8,164,995 ============ ============ </TABLE> See accompanying notes. -3-
HEALTHCARE SERVICES GROUP, INC. Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> For the Three Months Ended March 31, ------------ ------------ 1997 1996 ------------ ------------ <S> <C> <C> Cash flows from operating activities: Net Income $ 1,852,363 $ 1,780,775 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 465,806 620,457 Bad debt provision 375,000 600,060 Deferred income taxes (benefits) (203,488) (81,000) Tax benefit of stock option transactions 2,807 Changes in operating assets and liabilities: Accounts and notes receivable (2,447,075) (2,996,806) Prepaid income taxes 1,247,641 Inventories and supplies (23,044) 82,903 Changes to long term notes receivable (279,856) 302,069 Accounts payable and other accrued expenses (2,645,764) (1,910,202) Accrued payroll, accrued and withheld payroll taxes 2,016,963 2,234,091 Accrued insurance claims 506,325 276,244 Income taxes payable 1,425,781 Prepaid expenses and other assets (248,114) (333,168) ------------ ------------ Net cash provided by operating activities 797,704 1,823,064 ------------ ------------ Cash flows from investing activities: Disposals of fixed assets 69,730 Additions to property and equipment (300,713) (596,237) ------------ ------------ Net cash used in investing activities (230,983) (596,237) ------------ ------------ Cash flows from financing activities: Purchase of treasury stock (174,744) (240,700) Proceeds from the exercise of stock options 139,111 4,425 ------------ ------------ Net cash used in financing activities (35,633) (236,275) ------------ ------------ Net increase in cash and cash equivalents 531,088 990,552 Cash and cash equivalents at beginning of the year 22,677,290 16,335,886 ------------ ------------ Cash and cash equivalents at end of the period $ 23,208,378 $ 17,326,438 ============ ============ </TABLE> See accompanying notes. -4-
NOTES TO FINANCIAL STATEMENTS (Unaudited) Note 1 - Basis of Reporting The accompanying financial statements are unaudited and do not include certain information and note disclosures required by generally accepted accounting principles for complete financial statements. 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, 1996 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 1996. 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, 1996. The results of operations for the three months ended March 31, 1997 and 1996 are not necessarily indicative of the results that may be expected for the full fiscal year. Note 2 - Other Contingencies The Company has a $13,000,000 bank line of credit on which it may draw to meet short-term liquidity requirements in excess of internally generated cash flow, that expires on June 30, 1997. The Company anticipates that this credit line will be continued. Amounts drawn under the line are payable upon demand. At both March 31, 1997 and December 31, 1996, there were no borrowings under the line. However at March 31, 1997 and December 31, 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 at March 31, 1997 and $8,000,000 December 31, 1996. 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 3 - Provision for Estimated Cost Related to SEC Inquiry and Other Matters On March 21, 1996 the Staff of the SEC informed the Company that the SEC has 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 Securities and Exchange Commission against the - 5 -
Company, two of its executive officers and one former officer, without admission or denial of the allegations of the complaint by any parties. The action had alleged violations of certain Federal securities laws, including anti-fraud, reporting, internal controls and books and records provisions thereof by the Company and such officers. The claims included alleged violations of Section 10b of the Exchange Act, Rule 10b-5 thereunder, Section 13a of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20. The Company and such officers are permanently enjoined from violating certain provisions of the Federal Securities laws, and the Company and these individuals were required to pay civil penalties aggregating approximately $850,000, which was paid in December, 1996. The Company agreed to indemnify the current officers with respect to their payment obligations. The estimated monetary impact of this settlement plus related legal costs have been reflected in the accompanying financial statements. In addition, on or about May 24, 1996 the United States Attorney for the Eastern District of Pennsylvania filed a civil action against the Company. This pending litigation is primarily a result of and arises from (1) payments made by the Company for supplies which were allegedly furnished to clients of the Company and the actions of the Company after the payments were made and (2) payments made to certain clients of the Company in connection with the purchase of laundry installations from those clients. During 1995, the Company anticipated that it would incur a significant amount of legal and related costs in connection with these matters. The Company incurred approximately $950,000 of costs in 1995 and estimated that the additional costs which may be incurred in connection with these matters would be in a range of approximately $2,150,000 to $3,500,000 and accordingly accrued as of December 31, 1995 the estimated low range of this liability. The result of this $3,100,000 provision was to reduce 1995 net income by approximately $2,321,000 or $.28 per common share. Due to the uncertainty as to the costs remaining to be incurred relating to the United States Attorney civil action described above, the Company may incur additional legal and related costs in excess of the remaining amounts recorded ( $50,000 at March 31, 1997) in the accompanying financial statements. The ultimate outcome of this matter is uncertain and the amount of any additional liability which might finally exist cannot reasonably be estimated at this time. Note 4 - New Accounting Pronouncement In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share, which is effective for financial statements for both interim and annual periods ending after December 15, 1997. The new -6-
standard eliminates primary and fully diluted earnings per common share and requires presentation of basic and if applicable diluted earnings pre 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 is not expected to have a material impact on the disclosure of earnings per common share in the financial statements. -7-
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 1997 increased by 5.1% over revenues in the corresponding 1996 quarter. The following factors contributed to the increase in first quarter revenues: service agreements with new clients in existing geographic areas increased revenues by 17.1%; service agreements with new clients in new geographical areas increased revenues 1.2%; and cancellations and other minor changes decreased revenues 13.2%. Cost of services provided as a percentage of revenues remained at 85.2% for the first quarter of 1997 as compared to the corresponding 1996 quarter. Although the cost of services as a percentage of revenue reflected no change in the aggregate, the primary factors affecting specific variations in the 1997 first quarter as compared to the 1996 first quarter are as follows: an increase of .8% in workers' compensation, general liability and other insurance costs and a .8% increase in the cost of labor; and offsetting these increases was a .6% decrease in the allowance for doubtful accounts; a .5% decrease in depreciation; and a .5% decrease in housekeeping, laundry and linen supply costs. Selling, general and administrative expenses as a percentage of revenue increased in the first quarter of 1997 to 8.5% as compared to 7.6% in the corresponding 1996 quarter. The increase is primarily attributable to additional costs associated with the expansion of the divisional and regional staffs, as well as the costs of installing a new computerized financial reporting system. -8-
The Company presently anticipates that it will incur a significant amount of additional legal and related costs in connection with the pending governmental civil lawsuit and related investigations and accordingly has established a provision for this purpose ( see Note 3 - Provision for Estimated Cost Related to SEC Inquiry and Other Matters ). Liquidity and Capital Resources At March 31, 1997 the Company had working capital of $59,528,389 which represents a 4% increase over December 31, 1996 working capital of $57,434,314. Working capital continues to grow primarily as a result of higher accounts and notes receivable attributable to the Company's 5.1% increase in revenues for the three months ending March 31, 1997. The Company's current ratio at March 31, 1997 decreased to 7.2 to 1 compared to 7.6 to 1 at December 31, 1996. The net cash provided by the Company's operating activities was $797,704 for the three month period ended March 31, 1997. The components of working capital that required the largest amount of cash were: a $2,447,075 increase in accounts and notes receivable and a $2,645,764 decrease in accounts payable and other accrued expenses. The increase in accounts and notes receivable resulted primarily from the growth in the Company's revenues. The increased use of cash associated with accounts payable and other accrued expenses resulted primarily from the timing of payments to vendors. The Company expends considerable effort to collect the amounts due for its services on the terms agreed upon with its clients. Many of the Company's clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Whenever possible, when a client falls behind in making agreed-upon payments, the Company converts the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan, which 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 provision by $375,000 in the first quarter of 1997. 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. -9-
The Company has a $13,000,000 bank line of credit on which it may draw to meet short-term liquidity requirements in excess of internally generated cash flow, that expires on June 30, 1997. The Company anticipates that this credit line will be continued. Amounts drawn under the line are payable on demand. At March 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 2 of Notes to Financial Statements). At March 31, 1997, the Company had $23,208,378 of cash and cash equivalents, which it views as its principal measure of liquidity. In accordance with the Company's previously announced authorizations to purchase its outstanding common stock, the Company expended approximately $9,000,000 to purchase 786,000 shares of its common stock between April 3 and April 25, 1997 at an average price of $11.42 per share. The Company remains authorized by the Board of Directors to purchase an additional 100,000 shares. The level of capital expenditures by the Company is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment and laundry and linen equipment installations. Although the Company has no specific material commitments for capital expenditures through the end of calendar year 1997, it estimates that it will incur capital expenditures of approximately $2,000,000 during this period in connection with housekeeping equipment and laundry and linen equipment installations in its clients' facilities, as well as hardware and software expenditures relating to the implementation of a new computerized financial reporting system. The Company believes that its cash from operations, existing balances and available credit line will be adequate for the foreseeable future to satisfy the needs of its operations and to fund its continued growth. However, if the need arose, the Company would seek to obtain capital from such sources as long-term debt or equity financing. -10-
Forward Looking Statements/Risk Factors Certain matters discussed may include forward-looking statements that are subject to risks and uncertainties that could cause actual results or objectives to differ materially from those projected. Such risks and uncertainties include, but are not limited to, risks arising from the Company providing its services exclusively to the healthcare industry, credit and collection risks associated with this industry, unexpected increases in the costs of labor, materials, supplies and equipment used in performing its services and risks arising from pending litigation referred to in Note 3 of the Notes to Financial Statements including the possibility of increased legal and other costs. In addition, the Company believes that to improve its future financial performance it must continue to obtain service agreements with new clients, 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. Additionally, the Company believes that its ability to sustain the internal development of managerial personnel is an important factor impacting future operating results in respect of 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. - 11 -
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 Holders. Not Applicable Item 5. Other Information. (a) None Item 6. Exhibits and Reports on Form 8-K. a) Exhibits 10.1 Amended and Restated 1996 Non-Employee Directors' Stock Option Plan. 10.2 Amended and Restated 1995 Directors' Stock Option Plan. 10.3 Amended and Restated 1995 Incentive and Nonqualified Stock Option Plan for Key Employees. 10.4 Amended and Restated 1991 Incentive Stock Option Plan. 27 Financial Data Schedule. b) Reports on Form 8-K - None - 12 -
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 13, 1997 /s/ Daniel P. McCartney - ------------------------------- ------------------------------- Date DANIEL P. McCARTNEY, Chief Executive Officer May 13, 1997 /s/ Thomas A. Cook - ------------------------------- ------------------------------- Date THOMAS A. COOK, President and Chief Operating Officer May 13, 1997 /s/ James L. DiStefano - ------------------------------- ------------------------------- Date JAMES L. DiSTEFANO, Chief Financial Officer and Treasurer May 13, 1997 /s/ Richard W. Hudson - ------------------------------- ------------------------------- Date RICHARD W. HUDSON, Vice President-Finance, Secretary and Chief Accounting Officer - 13 -
EXHIBIT INDEX Number Description - ------ ----------- 10.1 Amended and Restated 1996 Non-Employee Directors' Stock Option Plan. 10.2 Amended and Restated 1995 Directors' Stock Option Plan. 10.3 Amended and Restated 1995 Incentive and Nonqualified Stock Option Plan for Key Employees. 10.4 Amended and Restated 1991 Incentive Stock Option Plan. 27 Financial Data Schedule. E-1