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 September 30, 1996 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
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(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 November
14, 1996 is 8,089,363 shares.
Total of 14 Pages
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
Balance Sheets as of September 30, 1996
and December 31, 1995 2
Statements of Income for the Three Months
ended September 30, 1996 and 1995 3
Statements of Income for the Nine Months
ended September 30, 1996 and 1995 4
Statements of Cash Flows for the Nine Months
ended September 30, 1996 and 1995 5
Notes to Financial Statements 6 to 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 to 10
PART II. OTHER INFORMATION 11 to 12
SIGNATURES 13
-1-
HEALTHCARE SERVICES GROUP, INC
Balance Sheets
September 30, December 31,
1996 1995
(Unaudited) (Audited)
--------------- ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 21,750,048 16,335,886
Accounts and notes receivable, less
allowance for doubtful
accounts of $4,162,000 in
1996 and $4,468,000 in
1995 34,028,298 32,463,288
Prepaid income taxes 1,466,184
Inventories and supplies 7,345,356 7,200,033
Deferred income taxes 862,096 1,104,350
Prepaid expenses and other 2,311,089 2,090,409
----------- -----------
Total current assets 66,296,887 60,660,150
PROPERTY AND EQUIPMENT:
Laundry and linen equipment 11,131,944 12,135,849
Housekeeping equipment and office
furniture 7,276,483 6,216,950
Autos and trucks 178,006 178,006
----------- -----------
18,586,433 18,530,805
Less accumulated depreciation 12,338,996 12,347,675
----------- -----------
6,247,437 6,183,130
COST IN EXCESS OF FAIR VALUE OF
NET ASSETS ACQUIRED less
accumulated amortization of
$1,178,131 in 1996 and $1,117,413
in 1995 2,177,346 2,258,064
DEFERRED INCOME TAXES 1,786,468 1,449,236
OTHER NONCURRENT ASSETS 11,074,505 9,739,191
----------- -----------
$87,582,643 $80,289,771
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,027,380 $3,480,499
Accrued payroll, accrued and
withheld payroll taxes 4,699,746 2,312,907
Other accrued expenses 1,887,859 2,843,890
Income taxes payable 454,173
Accrued insurance claims 875,224 954,881
----------- -----------
Total current liabilities 10,944,382 9,592,177
ACCRUED INSURANCE CLAIMS 3,292,511 2,228,054
COMMITMENTS AND
CONTINGENCIES (Notes 2 and 3)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value;
15,000,000 shares
authorized, 8,089,063 shares
issued in 1996 and
8,143,063 in 1995 80,891 81,431
Additional paid in capital 34,586,758 35,023,468
Retained earnings 38,678,101 33,364,641
----------- -----------
Total stockholders' equity 73,345,750 68,469,540
----------- -----------
$87,582,643 $80,289,771
=========== ===========
See accompanying notes.
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HEALTHCARE SERVICES GROUP, INC.
Statements of Income
(Unaudited)
For Three Months Ended
September 30,
---------------------------------
1996 1995
---- ----
Revenues $41,342,483 $38,208,527
Operating costs and expenses:
Cost of services provided 35,631,791 32,800,523
Selling, general and administrative 3,137,780 3,103,320
Recovery of contingent losses on promissory notes sold (100,000)
Other income:
Interest income 265,865 187,311
----------- -----------
Income before income taxes 2,838,777 2,591,995
Income taxes 1,163,000 1,063,000
----------- -----------
Net Income $ 1,675,777 $ 1,528,995
=========== ===========
Earnings per common share $ 0.21 $ 0.19
---========== -==========
Weighted average number of common shares
outstanding 8,108,189 8,215,348
=========== ===========
See accompanying notes.
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HEALTHCARE SERVICES GROUP, INC.
Statements of Income
(Unaudited)
For Nine Months Ended
September 30,
---------------------------------
1996 1995
---- ----
Revenues 121,589,907 111,219,213
Operating costs and expenses:
Cost of services provided 103,766,687 94,417,799
Selling, general and administrative 9,478,957 9,357,390
Recovery of contingent losses on promissory notes sold (300,000)
Other income (expense):
Provision for estimated cost related to SEC (2,400,000)
Inquiry and Other Matters (Note 3)
Interest income 662,197 621,103
----------- -----------
Income before income taxes 9,006,460 5,965,127
Income taxes 3,693,000 2,610,000
----------- ----------
Net Income $ 5,313,460 $3,355,127
=========== ==========
Earnings per common share $ 0.65 $ 0.41
---========== ==========
Weighted average number of common shares
outstanding 8,130,861 8,243,414
=========== ==========
See accompanying notes.
-4-
HEALTHCARE SERVICES GROUP, INC.
Statements of Cash Flow
(Unaudited)
For the Nine Months Ended
September 30,
--------------------------------------
1996 1995
---- ----
Cash flows from operating activities:
Net Income $ 5,313,460 $ 3,355,127
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 1,598,856 1,936,984
Bad debt provision 1,725,000 398,303
Recovery of contingent losses on promissory notes sold (300,000)
Deferred income taxes (benefits) (94,978) 726,365
Tax benefit of stock option transactions 62,000
Changes in operating assets and liabilities:
Accounts receivable (3,290,009) (1,749,197)
Prepaid income taxes 1,466,184 (1,109,665)
Inventories and supplies (145,323) (767,822)
Changes to long term trade notes receivable (1,090,186) (1,680,609)
Accounts payable and other accrued expenses (1,409,151) (1,055,771)
Accrued payroll, accrued and withheld payroll taxes 2,386,839 1,769,200
Accrued insurance claims 984,799 (532,069)
Reserve for estimated cost related to SEC inquiry and
other matters (Note 3) 1,542,673
Income taxes payable 454,174 (727,741)
Prepaid expenses and other assets (465,808) 1,680,814
----------- -----------
Net cash provided by operating activities 7,433,857) 3,549,192
----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 294,620
Additions to property and equipment (1,877,065) (2,061,350)
Cash provided by release of certificates of deposit
pledged for loan guarantees 1,500,000
----------- -----------
Net cash used in investing activities (1,582,445) (561,350)
----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (528,975) (51,875)
Proceeds from the exercise of stock options 91,725 434,159
----------- -----------
Net cash provided by (used in) financing activities (437,250) 382,284
----------- -----------
Net increase in cash and cash equivalents 5,414,162 3,370,126
Cash and cash equivalents at beginning of the year 16,335,886 11,230,118
Cash and cash equivalents at end of the year $21,750,048 $14,600,244
See accompanying notes.
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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. The balance sheet shown
in this report as of September 30, 1996 has been derived from, and does not
include, all the disclosures contained in the financial statements for the year
ended December 31, 1995. These 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, 1995. However, in the opinion of
the Company, all adjustments considered necessary for a fair presentation have
been included. The results of operations for the three and nine months ended
September 30, 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 or for other purposes. This line expires
on June 30, 1997. Amounts drawn under the line are payable upon demand. At both
September 30, 1996 and December 31, 1995, there were no borrowings under the
line. However, the amount available under the line was reduced by approximately
$8,000,000 at September 30, 1996 and $8,200,000 at December 31, 1995 as a result
of outstanding irrevocable standby letters of credit, which relate primarily to
contingent payment obligations under the Company's insurance program.
Note 3 - Provision for Estimated Cost Related to SEC Inquiry and Other Matters
The Securities and Exchange Commission (SEC) conducted a non-public
investigation since 1990 with respect to certain matters, including the
Company's financial statements, financial condition and results of operations.
On March 21, 1996 the Staff of the SEC informed the Company that the SEC had
accepted a settlement which had been offered by the Company and recommended by
the Staff 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. The settlement was concluded on
October 16, 1996 when a final judgment, upon consent, was entered in the United
States District Court for the Eastern District of Pennsylvania (96 Civ.6464)
based on a complaint filed by the Securities and Exchange Commission against the
Company, two of its executive officers and one former officer, without admission
or denial of the allegations of the complaint by any parties. The action had
alleged violations of certain Federal Securities laws, including anti-fraud,
reporting, internal controls and books and records provisions thereof by the
Company and such officers. The claims included alleged violations of Section 10b
of the Exchange Act, Rule 10b-5 thereunder, Section 13a of the Exchange Act and
Rules 13a-a, 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
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penalties aggregating approximately $850,000. The Company has agreed to
indemnify the current officers with respect to their payment obligations. The
estimated monetary impact of this settlement plus related legal costs have been
reflected in the accompanying financial statements.
In addition, on or about May 24, 1996 the United States Attorney for the
Eastern District of Pennsylvania filed a civil action against the Company. The
litigation is primarily a result of and arises from (1) payments made by the
Company for supplies which were allegedly furnished to clients of the Company
and the actions of the Company after the payments were made and (2) payments
made to certain clients of the Company in connection with the purchase of
laundry installations from those clients. See Part II - Item 1.(b) Legal
Proceedings, for additional information.
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. Costs incurred through September 30, 1996
aggregated approximately $2,400,000, including the civil penalties of $850,000
which was concluded on October 16, 1996. Due to the uncertainty as to the costs
remaining to be incurred relating to the matters described above, the Company
may incur additional legal and related costs in excess of the remaining amounts
recorded ($700,000 at September 30, 1996) in the accompanying financial
statements. The ultimate outcome of these matters is uncertain and the amount of
any additional liability which might finally exist cannot reasonably be
estimated at this time.
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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 third quarter of 1996 increased by 8.2% over revenues in the
corresponding 1995 quarter. Revenues for the nine months ended September 30,
1996 increased by 9.3% over the same 1995 period. The following factors
contributed to the increase in revenues: service agreements with new clients in
existing geographic areas increased revenues by 18.6% for the third quarter and
19.4% for the nine month period; providing new services to existing clients
increased revenues 1.6% for the third quarter and 1.9% for the nine month
period; and cancellations and other minor changes decreased revenues 12 % in
both the third quarter and nine month period.
Cost of services provided as a percentage of revenues increased to 86.2% for
the third quarter of 1996 from 85.9% in the corresponding 1995 quarter. In
addition, cost of services provided as a percentage of revenue increased to
85.3% for the nine month period ending September 30, 1996 from 84.9% in the same
1995 period. The primary factors affecting the variations in the 1996 third
quarter and nine month periods' cost of services provided as a percentage of
revenue and their effects on the respective periods' .3% and .4% increases are
as follows: in the third quarter, an increase of 1.4% in workers' compensation,
general liability and other insurance costs; and offsetting this increase was an
.8% decrease in costs associated with service agreements canceled ( see Note 1-
Intangible Assets in Notes to Financial Statements at December 31, 1995); in the
nine month period an increase of .8% in workers' compensation, general liability
and other insurance costs: and a .6% increase in the allowance for doubtful
accounts and other reserves; and offsetting these increases was a decrease in
costs associated with service agreements canceled of .9%; and a .6% decrease in
labor costs.
Selling, general and administrative expenses as a percentage of revenue
decreased to 7.6% in the third quarter of 1996 as compared to 8.1% in the
corresponding 1995 three month period. The nine month period ending September
30, 1996 also recognized a decrease in SG &A expenses to 7.8% as a percentage of
revenue as compared to 8.4% in the corresponding 1995 period. The three and nine
month decreases are primarily attributable to the Company's ability to control
certain selling, general and administrative expenses while also comparing them
to a greater revenue base.
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 ).
-8-
Liquidity and Capital Resources
At September 30, 1996 the Company had working capital of $55,352,505 which
represents an 8% increase over December 31, 1995 working capital of $51,067,973.
Working capital continues to grow primarily as a result of higher accounts
receivable attributable to the Company's 9.3% increase in revenues for the nine
months ending September 30, 1996.
The Company's current ratio at September 30, 1996 decreased slightly to 6.1
to 1 compared to 6.3 to 1 at December 31, 1995.
The net cash provided by the Company's operating activities was $7,433,857
for the nine month period ended September 30, 1996. The components of working
capital that required the largest amount of cash were: a $3,290,009 increase in
accounts receivable and a $1,409,151 decrease in accounts payable and other
accrued expenses. The increase in accounts 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 receivable. The promissory notes receivable
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.
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 the market value of related collateral.
The Company evaluates it accounts receivable and notes receivable for impairment
quarterly and on an individual client basis.
Receivables considered impaired are generally attributable to clients that
are either in bankruptcy, have been turned over to collection attorneys and or
those of slow payers that are experiencing severe financial difficulties. At
September 30, 1996 long term note receivables, aggregating approximately
$300,000, from three clients were deemed to be impaired and at December 31, 1995
long term notes receivable included obligations representing a total of
approximately $1,300,000 from two clients that met this category.
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 the notes are
impaired. The differences between income recognition on a full accrual basis and
cash basis, for notes that are not considered impaired, is not material . For
impaired loans, interest income is recognized on a cost recovery basis only.
-9-
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. This line expires
on June 30, 1997. Amounts drawn under the line are payable on demand. At
September 30, 1996 there were no borrowings under the line. However, at such
date, the amount available under the line was reduced by approximately
$8,000,000 as a result of outstanding irrevocable standby letters of credit,
which primarily relate to contingent payment obligations under the Company's
insurance program.
At September 30, 1996, the Company had $21,750,048 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 nursing home clients obtained. Such capital expenditures
primarily consist of housekeeping equipment and laundry equipment installations.
Although the Company has no specific material commitments for capital
expenditures through the end of calendar year 1996, it anticipates that it will
incur capital expenditures of approximately $700,000 during this period in
connection with housekeeping equipment and laundry 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.
Forward Looking Statements/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 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 and risks arising from pending civil and criminal
investigations referred to in Note 3 of the Notes to Financial Statements,
including the possibility of increased legal and other costs and other possible
remedies which may be sought.
-10-
PART II. Other Information
Item 1. Legal Proceedings.
(a) On or about October 16, 1996 the investigation by the Securities
and Exchange Commission previously reported was concluded and
settled. Accordingly on such date a final judgment, upon consent,
was entered in the United States District Court for the Eastern
District of Pennsylvania (96 Civ. 6464) based on a complaint
filed by the Securities and Exchange Commission against the
Registrant, two of its executive officers and one former officer,
without admission or denial of the allegations of the complaint
by any parties. The action had alleged violations of the certain
Federal Securities laws, including anti-fraud, reporting,
internal controls and books and records provisions thereof by the
Registrant and such officers. The claims included alleged
violations of Section 10b of the Exchange Act, Rule 10b-5
thereunder, Section 13a of the Exchange Act and Rules 13a-1,
13a-13 and 12b-20. The Company and such officers were permanently
enjoined from violating certain provisions of the Federal
securities laws and are required to pay civil penalties
aggregating $850,000. Reference is made to Note 3 of the Notes to
Financial Statements.
(b) As previously reported on the Form 8-K dated May 24, 1996 and in
the Form 10-Q for the quarter ended June 30, 1996, the Company,
two of its current Officers and Directors and a former Officer
are among the Defendants in a civil action pending in the United
States District Court for the Eastern District of Pennsylvania.
The action is captioned United States of America v. Healthcare
Services Group, Inc., et al., No. 96-CV-3940.
The litigation is primarily a result of and arises from (1)
payments made by the Company for supplies which were allegedly
furnished to clients of the Company and the actions of the
Company after the payments were made and (2) payments made to
certain clients of the Company in connection with the purchase of
laundry installations from those clients.
A copy of the Complaint is attached hereto as Exhibit 99(a) and
incorporated herein by reference.
The Company has been advised that a former Officer (named as a
Defendant in the Civil Action) has appeared before the Grand Jury
which is investigating the transactions described in the
Complaint and that such former officer also has agreed to plead
guilty to obstruction of agency proceedings in connection with
the investigation by the Securities and Exchange Commission
reported in Item 1(a) above.
On September 30, 1996, the Company and the two Officers and
Directors filed a Joint Motion to Dismiss, Joint Motion for a
More Definite Statement and Joint Motion to Strike. A response to
the Joint Motions was due November 15, 1996.
-11-
The United States Attorney for the Eastern District of
Pennsylvania and the Department of Health and Human Services
(HHS) have informed the Company that they presently intend to
institute criminal proceedings and further civil actions and seek
other possible remedies against the Company and certain of its
Executive Officers and/or Directors with respect to the making of
the payments described in the Complaint. They continue to
investigate the transactions described in the Complaint to
determine if they believe that there were additional criminal
violations and additional civil violations which are not covered
by the Complaint.
The Company is engaged in discussions with the U.S. Attorney and
HHS and is attempting to resolve these issues before any
additional actions are taken by the government.
Item 2. Changes in Securities. None.
Item 3. Defaults under Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibit - 99(a)
Civil Complaint captioned United States of America v.
Healthcare Services Group, Inc., et al. in United States
District Court for Eastern District of Pennsylvania (96 Civ.
3940).
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.
November 18, 1996 /s/ Daniel P. McCartney
Date -----------------------
DANIEL P. McCARTNEY, Chief
Executive Officer
November 18, 1996 /s/ Thomas A. Cook
Date ------------------
THOMAS A. COOK, President and
Chief Operating Officer
November 18, 1996 /s/ James L. DiStefano
Date ----------------------
JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
November 18, 1996 /s/ Richard W. Hudson
Date ---------------------
RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
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