SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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(Mark One)
(X) ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 19992001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 232018365
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporated or organization)
3220 Tillman Drive, Suite 300, Bensalem, PA 19020
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 639-4274
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Titles of Each Class on Which Registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock ($.01 par value)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES __X__ NO_______X NO
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K.
YES __X__ NO_______X NO
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The aggregate market value of voting stock (Common Stock, $.01 par value)
held by non-affiliates of the Registrant as of March 7, 200015, 2002 was approximately
$67,936,000.$115,356,000. Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date: At
March 7, 200015, 2002 there were outstanding 11,011,55711,159,934 shares of the Registrant's
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated by
reference to certain portions of a definitive proxy statement which is expected
to be filed by the Registrant pursuant to Regulation 14A within 120 days after
the close of its fiscal year.
PART I
References made herein to the Company or the Registrant include
Healthcare Services Group, Inc. and its wholly owned subsidiaries HCSG Supply,
Inc. and Huntingdon Holdings, Inc., unless the context otherwise requires.
Item I. Business
(a) General
Healthcare Services Group, Inc. (the "Company" or the "Registrant")
provides housekeeping, laundry, linen, facility maintenance and food services to
the health care industry, including nursing homes, retirement complexes,
rehabilitation centers and hospitals. The Company believes that it is the
largest provider of contractual housekeeping and laundry services to the
long-term care industry in the United States, rendering such services to
approximately 1,1001,200 facilities in 4243 states and Canada as of December 31, 1999.2001.
(b) Not ApplicableApplicable;
(c) Description of Services
The Company provides management, administrative and operating expertise
and services to the housekeeping, laundry, linen, facility maintenance and food
service departments of the health care industry. The Company's labor force is
also interchangeable with respect to each of these services, with the exception
of food services. Although there are many similarities in the nature of the
services performed, there are some significant differences in the specialized
expertise required of the professional management personnel responsible for
delivering the respective services. The Company believes that each service
it performs is similar
in nature and each provides opportunity for growth. At December 31, 2001, the Company had one
client, Beverly Enterprises, Inc., which accounted for approximately 14% of
total consolidated revenues. The Company derived revenues from Beverly
Enterprises, Inc. in both the Housekeeping and Food Services' sectors.
Housekeeping services. Housekeeping services is the largest service
sector of the Company.Company, representing approximately 60% or $170,921,662 of total
consolidated revenues in 2001. It involves cleaning, disinfecting and sanitizing
resident areas in the facilities. In providing services to any given client
facility, the Company typically hires and trains the hourly employees who were
employed by such facility prior to the engagement of the Company. The Company
normally assigns two on-site managers to each facility to supervise and train
hourly personnel and to coordinate housekeeping and laundryservices with other facility
support functions. Such management personnel also oversee the execution of a
variety of quality and cost-control procedures including continuous training and
employee evaluation as well as on-site testing for infection control. The
on-site management team also assists the facility in complying with Federal,
state and local regulations.
Laundry and linen services. Laundry and linen services is the other
significant service sector of the Company.Company, representing approximately 25% or
$70,332,656 of total consolidated revenues in 2001. Laundry services involves
laundering and processing of the residents' personal clothing. The Company
provides laundry service to all of its housekeeping clients. Linen services
involves providing laundering and processing of the sheets, pillow cases,
blankets, towels, uniforms and assorted linen items used by the facilities. The hiring, training and
supervision of laundry and linen services' hourly employees are similar to, and
performed by the same management personnel as housekeeping services. Generally,
at mostAt
some of the facilities that utilize the Company's linen services, the
equipment is either acquired and installed byservice, the Company or the existing
laundry installations are purchased from the facility and upgraded when
required. Each suchhas
installed its own equipment. Such installation generally requires an initial
capital outlaysoutlay by the Company of from $50,000 to $250,000 depending on the size
of the facility, installation and construction 1
costcosts, and the amount of
equipment required. The Company could incur relocation or other costs in the
event of the cancellation of a linen service agreement where there was an
investment by the Company in a corresponding laundry installation. The hiring,
training and supervision of laundry and linen services' hourly employees are
similar to, and performed by the same management personnel who perform
housekeeping services.
1
From January 1, 19971999 through December 31, 1999,2001 the Company's services
were cancelled by 47101 facilities with respect to which the Company had
previously invested in a laundry installation. Laundry installations relating to
facilities where such service agreements were cancelled in 1998 and 19972001 resulted in the
Company receiving approximately $57,000 and $41,000$11,000 less respectively than the net amount at which these
assets were recorded on its balance sheet. In the years ended December 31, 1999
and 2000, respectively, laundry installations relating to clients whowhose service
agreements with the Company were terminated, were sold to the Company's clients
for an amount in excess of the net amount recorded on the Company's balance
sheet. Linen supplies, inIn some instances linen supplies are owned by the Company, and the
Company maintains a sufficient inventory of these items in order to ensure their
availability. The Company provides linen servicessupplies to approximately twenty per
cent of the facilities for which it provides housekeeping services.
Facility maintenance, materials acquisitionMaintenance and consulting services.
Facility maintenanceother services . Maintenance services consist of repair
and maintenance of laundry equipment, plumbing and electrical systems, as well
as carpentry and painting. In many instances, materials, equipment and supplies utilized by the Company in
the performanceThis service sector's total revenues represent
approximately less than 2% of maintenance services, as well as housekeeping, laundry and
linen services, are provided by the Company through its wholly owned subsidiary,
HCSG Supply, Inc..total consolidated revenues. The Company also
provides consulting services to facilities to assist them in updating their
housekeeping, laundry and linen operations.
Food services. The Company commenced providing food services to a
limited numberin 1997
and represents approximately 14% or $40,075,685 of clientstotal consolidated revenues
in 1997.2001. Food services consist of the development of a menu that meets the
residents' dietary needs, purchasing and preparing the food to assure the
residents receive an appetizing meal, and participation in monitoring the
residents' ongoingon-going nutrition status. On-site management is responsible for all
daily food service activities, with regular support being provided by a district
manager specializing in food service, as well as a registered dietitian. The
Company also provides consulting services to facilities to assist them in
updating and cost containment with respect to a client's food service operation.
Laundry installationsinstallation sales. The Company (as distributor of laundry
equipment) sells laundry installations to its clients which generally represent
the construction and installation of a turn-key operation. The Company generally
offers payment terms, ranging from 36 to 60 months. There were no service
agreement cancellations in 1999, 19982001, 2000 or 19971999 by clients who have purchased
laundry installations from the Company. During the years 19971999 through 1999,2001,
laundry installation sales were not material to the Company's operating results
as the Company prefers to own such laundry installations in connection with
performance of its service agreements.
2
Operational-Management Structure
By applying its professional management techniques, the Company is
generally able to contain or control certain housekeeping, laundry, linen,
facility maintenance and food service costs on a continuing basis. The Company
manages and provides its services through a network of management personnel, as
illustrated below.
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President
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Vice President - Operations
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Divisional Vice President
(5(4 Divisions)
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Regional Vice President/Manager
(22(28 Regions)
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District Manager
(108(113 Districts)
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Training Manager
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Facility Manager and
Assistant Facility Manager
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Each facility is managed by an on-site Facility Manager, an Assistant
Facility Manager, and if necessary, additional supervisory personnel. Districts,
typically consisting of from eight to twelve facilities, are supported by a
District Manager and a Training Manager. District Managers bear overall
responsibility for the facilities within their districts. They are generally
based within close proximity to each facility. These managers provide active
support to clients in addition to the support provided by the Company's on-site
management. Training Managers are responsible for the recruitment, training and
development of Facility Managers. At December 31, 1999,2001, the Company maintained
2228 regions within fivefour divisions. A division consists of two to sixa number of regions
within a specific geographical area. A Divisional Vice President managesPresidents manage each
division. Additionally, two divisions have a Divisional Vice President-Sales who
supports the Divisional Vice President by managing the marketing efforts of the
respective divisions. Each region is headed by a Regional Vice President/Manager
andManager. Some
regions have a Regional Sales Director who assumes primary responsibility for
marketing the Company's services. Regional Vice President/Managers report to
Divisional Vice Presidents who in turn report to the President or Vice President
of Operations. With
respect to the Food Service division, the Divisional Vice President assumes
primary responsibility for the marketing efforts of his division. Such efforts
are supplemented by the
3
Food Service division regional manager, as well as the other regional and
divisionals' sales and marketing personnel. The Company believes that its divisional, regional and district
organizational structure facilitates its ability to obtain new clients, as well
as its ability to sell newadditional services to existing clients.
3
Market
The market for the Company's services consists of a large number of
facilities involved in various aspects of the health care industry, including,
nursing homes, retirement complexes, rehabilitation centers and hospitals. Such
facilities may be specialized or general, privately owned or public, profit or
not-for-profit, and may serve patients on a long-term or short-term basis. The
market for the Company's services is expected to continue to grow as the elderly
increase as a percentage of the United States population and as government
reimbursement policies require increased cost control or containment by
constituents of its targeted market.
In 19992001 the long-term care market consisted of approximately 23,000
facilities, according to estimates of the Department of Health and Human
Services. The facilities primarily range in size from small private facilities
with 65 beds to facilities with over 500 beds. The Company markets its services
primarily to facilities with 100 or more beds. The Company believes that
less
than fiveapproximately eight percent of long-term care facilities use outside providers
of housekeeping and laundry services such as the Company.
Marketing and Sales
The Company's services are marketed at four levels of the Company's
organization: at the corporate level by the Chief Executive Officer, President
and the Vice President of Operations, at the divisional level by Divisional Vice
Presidents and Divisional Vice Presidents- Sales;Presidents; at the regional level by the Regional Vice Presidents/Managers and
Regional Sales Directors; and at the district level by District Managers. The
Company provides incentive compensation to its operational personnel based on
achieving budgeted earnings and to its
Divisional Vice Presidents- Sales and Regional Sales Directors based on
achieving budgeted earnings and new business revenues.
The Company's services are marketed primarily through referrals and
in-person solicitation of target facilities. The Company also utilizes direct
mail campaigns and participates in industry trade shows, health care trade
associations and healthcare support services seminars that are offered in
conjunction with state or local health authorities in many of the states in
which the Company conducts its business. The Company's programs have been
approved for continuing education credits by state nursing home licensing boards
in certain states, and are typically attended by facility owners, administrators
and supervisory personnel, thus presenting a marketing opportunity for the
Company. Indications of interest in the Company's services arising from initial
marketing efforts are followed up with a presentation regarding the Company's
services and survey of the service requirements of the facility. Thereafter, a
formal proposal, including operational recommendations and recommendations for
proposed savings, is submitted to the prospective client. Once the prospective
client accepts the proposal and signs the service agreement, the Company can set
up its operations on-site within days.
4
Government Regulation of Clients
The Company's clients are subject to governmental regulation. In August
1997, the President signed into law the Balanced Budget Act of 1997. The
legislation changed1997 ("BBA"). BBA
amended the Medicare policy in a number of ways includingprogram by revising the phasing inpayment system for skilled nursing
services. Additionally, BBA required the establishment of a Medicare prospective payment systemProspective Pay
System ("PPS"), a system under which Medicare Part A payment is prospectively
determined for skilled nursing facilities effectivefor cost reporting periods beginning
on or after July 1, 1998. Under PPS, has significantly changed the manner and the amounts
in which skilled nursing facilities are reimbursedreceive a fixed
per diem rate for inpatient services
provided toeach of their Medicare beneficiaries. UnlikePart A patients that, during the old system,first
three years of PPS, is based on a blend of facility-specific rates and federal
acuity-adjusted rates. Following the full phase in of PPS, which reliedwill occur in
2002, all per diem rates will be based solely on cost reports submitted,federal acuity-adjusted rates.
Included in this per diem rate are ancillary services, such as pharmacy and
rehabilitation therapy services.
4
Since the passage of the BBA in 1997, Congress has twice passed
additional legislation intended to mitigate temporarily the reduction in
reimbursement for skilled nursing facilities under the Medicare PPS. First, in
November 1999, Congress passed the Medicare Balanced Budget Refinement Act of
1999 ("BBRA"). Second, in December 2000, Congress passed the Medicare, Medicaid,
and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). Effective
April 1, 2000, the BBRA temporarily increased the PPS per diem rates by 20
percent for 15 patient-acuity categories (known as resource utilization groups
("RUGs")), including medically-complex patients, pending implementation of a
refined RUG system that better accounts for medically-complex patients. The
Centers for Medicare & Medicaid Services' ("CMS", f/k/a the Health Care
Financing Administration ("HFCA")) first refinement proposal was to become
effective October 1, 2000, but was withdrawn because it did not more accurately
predict the use of non-therapy ancillary services. The current requirement calls
for the refinement to be developed and implemented effective October 1, 2002.
The revised rates, when finally implemented, are based entirelyintended to be budget neutral
and simply a redistribution of total payments compared to the rates that would
be paid under the existing system. The BBRA also provided for a four percent
increase in the federal per diem rate for all patient-acuity categories for
fiscal years 2001 and 2002.
BIPA, among other things, eliminated the scheduled reduction in the
skilled nursing facility market basket update in fiscal year 2001. In fiscal
years 2002 and 2003, payment updates will equal the market basket index ("MBI")
update minus one-half percentage point. Temporary increases in the federal per
diem rates under the BBRA will be in addition to these payment increases. BIPA
also increased payment for the nursing component of each RUG category by 16.66
percent for services furnished after April 1, 2001 and before October 1, 2002.
Moreover, BIPA further refined the consolidated billing requirements.
The law now limits consolidated billing requirements to items and services
furnished to skilled nursing facility patients in a Medicare Part A covered stay
and to therapy services covered under Part B. In other words, for patients not
covered under a Part A stay (e.g., Part A benefits have been exhausted), the
skilled nursing facility may choose to bill for non-therapy Part B services and
supplies, or it may elect to have suppliers continue to bill Medicare directly
for these services. BIPA also modified the treatment of the Part A PPS
rehabilitation patient categories to ensure that Medicare payments for skilled
nursing facility patients with "ultra high" and "high" rehabilitation therapy
needs are appropriate in relation to payments for patients needing "medium" or
"low" levels of therapy. Effective for services furnished on or after April 1,
2001, and before implementation of the federally-acuity-adjustedrefined RUG system (which has yet to
occur), the law increased by 6.7 percent the federal per diem payments for 14
rehabilitation categories. The 20 percent additional payment under the BBRA for
three rehabilitation categories was removed to make this provision budget
neutral.
5
The increases in Medicare and Medicaid reimbursement provided for under
the BBRA and BIPA will sunset in October 2002. Unless additional legislative
action is undertaken by the United States Congress, the loss of revenues
associated with this occurrence will probably have a material adverse effect on
skilled nursing providers. In addition, the federal Medicare Advisory Payment
Commission ("MedPAC"), an independent federal body established to advise
Congress on issues affecting the Medicare program, met on January 17, 2002, to
discuss draft recommendations that will be included in MedPAC's March 2002
Report to Congress. In this meeting, MedPAC failed to recommend the continuation
of certain increases in reimbursement provided under the BBRA and BIPA.
Specifically, MedPAC did not recommend the continuation of the 16.66 percent
increase in the nursing component and the 4 percent increase in the federal per
diem for all patient-acuity categories. The MedPAC did recommend, however, that
the 6.7 percent federal per diem payments for 14 rehabilitation categories and
the 20 percent additional payment under the BBRA for the three rehabilitation
categories, be incorporated into the base rate. While the recommendations are
not binding on Congress, they may affect whether a legislative action to extend
the reimbursement provisions is successful.
Although PPS directly affects how clients are paid for certain
services, the Company itself does not participate in any government
reimbursement programs. Therefore, all of the Company's contractual
relationships with its clients continue to determine the clients' payment
obligations to the Company. However, certain clients have been and continue to
be adversely affected by PPS, as well as other trends in the long-term care
industry resulting in certain clients recently filing voluntary bankruptcy petitions and
otherspetitions.
Others may follow (see " Liquidity and Capital Resources").
The awareness that
PPS has had, and continues to have a negative effect on the long-term care
industry's financial position has been recognized by Congress. In the summer of
1999, a proposal was presented by the President and Congress to add
approximately $7.5 billion in funding in an attempt to address coverage gaps
caused by PPS. Additionally, other measures have been introduced by legislatures
to close the gap between the current system's presumptions and the actual cost
of providing care.
Service Agreements/Collection
The Company offers two kinds of service agreements,primarily provides its services pursuant to a full service
agreement or a management agreement.with its clients. In a full service agreement, the Company assumes
both management and payroll responsibility for the hourly housekeeping, laundry,
linen, facility maintenance and food service employees. For a limited number of
clients, the Company does provide services on the basis of a management only
agreement. In such agreements, the Company services are comprised of providing
on-site management personnel, while the hourly and staff personnel remain
employees of the respective client.
The Company typically adopts and follows the client's employee wage
structure, including its policy of wage rate increases, and passes through to
the client any labor cost increases associated with wage rate adjustments. Under
a management agreement, the Company provides management and supervisory services
while the client facility retains payroll responsibility for its hourly
employees. Substantially all of the Company's agreements are full service
agreements. These agreements typically provide for a one year term, cancelable
by either party upon 30 or 90 days' notice after the initial 90-day period. As
of December 31, 1999,2001, the Company provided services to approximately 1,1001,200
client facilities.
Although the service agreements are cancelable on short notice, the
Company has historically had a favorable client retention rate and expects to be
able to continue to maintain satisfactory relationships with its clients. The
risk associated with short-term agreements have not materially affected either
the Company's linen services, which generally require a capital investment, or
laundry installation sales, which require the Company to finance the sales
price. Such risks are often mitigated by certain provisions set forth in the
agreements which are entered into by the Company.
In cases where6
The Company has had varying collection experience with respect to its
accounts and notes receivable. When contractual terms are not met, the Company
has
purchased the laundry installation from its clients, many of the linen service
agreements require that in the event the Company's services are terminated, the
client becomes obligated to purchase the laundry installation from the Company
at a price no less than the value recorded on the Company's financial statements
at the time of termination. The laundry installation sales agreements obligate
the purchaser to pay for such installation upon terms independent of the
services rendered by the Company.
5
From time to time, the Companygenerally encounters difficulty in collecting amounts due from certain of its
clients. Therefore, the Company has sometimes been required to extend the period
of payment for certain clients includingbeyond contractual terms. These clients have
included those in bankruptcy, those who have terminated service agreements and
slow payers experiencing financial difficulties. In order to provide for these
collection problems and the general risk associated with the granting of credit
terms, the Company recorded bad debt provisions (in an Allowance for Doubtful
Accounts) of $7,250,314, $2,339,515$5,445,000, $3,250,000 and $899,551$7,250,314 in the years ended December
31, 2001, 2000 and 1999, 1998respectively (see Schedule II- Valuation and 1997,Qualifying
Accounts, for year-end balances). These provisions represent 1.9%, 1.3% and 3.1%
as a percentage of revenue for the years ended December 31, 2001, 2000 and 1999,
respectively. In making its credit evaluations, in addition to analyzing and
anticipating, where possible, the specific cases described above, management
considers the general collection risks associated with trends in the long-term
care industry. The Company also establishes credit limits, as well as performing
ongoing credit evaluation and account monitoring procedures to minimize the risk
of loss. Notwithstanding the Company's efforts to minimize its credit risk
exposure, the Company's clients could be adversely effected if future industry
trends as discussed in the Government Regulation of Clients and Risk Factors'
sections of this report change in such a manner as to negatively impact their
cash flows. In the event that the Company's clients experience such significant
impact in their cash flows, it could have a material adverse effect on the
Company's results of operations and financial condition. At December 31, 2001,
the Company has receivables of approximately $4,000,000 from a client group
currently Debtors in Chapter 11 bankruptcy proceedings. The Company expects the
client group will file bankruptcy plans during 2002. In the event that the
amount collected is materially less than the $4,000,000, it could adversely
effect the Company's results of operations and financial condition.
Competition
The Company competes primarily with the in-house support service
departments of its potential clients. Most healthcare facilities perform their
own support service functions without relying upon outside management firms such
as the Company. In addition, a number of local firms compete with the Company in
the regional markets in which the Company conducts business. Several national
service firms are larger and have greater financial and marketing resources than
the Company, although historically, such firms have concentrated their marketing
efforts on hospitals rather than the long-term care facilities typically
serviced by the Company. Although the competition to provide service to health
care facilities is strong, the Company believes that it competes effectively for
new agreements, as well as renewals of the existing agreements based upon the
quality and dependability of its services and the cost savings it believes it
can effect for the client.
Employees
At December 31, 1999,2001, the Company employed 2,272approximately 2,693
management, office support and supervisory personnel. Of these employees, 258264
held executive, regional/district management and office support positions, and
2,0142,429 of these salaried employees were on-site management personnel. On such
date, the Company employed approximately 13,46914,821 hourly employees. Many of the
Company's hourly employees were previous support employees of the Company's
clients. In addition, theThe Company manages, for a limited number of its client facilities, the
hourly employees who remain employed by certain of its clients.
Approximately 15%9% of the Company's hourly employees are unionized. These
employees are subject to collective bargaining agreements that are negotiated by
individual facilities and are assented to by the Company so as to bind the
Company as an "employer" under the agreements. The Company may be adversely
affected by relations between its client facilities and the employee unions. The
Company is a party to a negotiated collective bargaining agreementsagreement with respect to approximately 20a
limited number of employees at two facilities.a few facilities serviced by the Company. The
Company believes its employee relations are satisfactory.
67
(d) Risk Factors - Certain matters discussed in this report may include
forward-looking statements that are subject to risks and uncertainties that
could cause actual results or objectives to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, risks
arising from the Company providing its services exclusively to the health care
industry, primarily providers of long-term care; credit and collection risks
associated with this industry; the effects of changes in regulations governing
the industry and risk factors described in Part I hereof under "Government
Regulation of Clients", "Competition"Service Agreements/Collection" and "Service Agreements/Collection""Competition". The
Company's clients have been and continue to be adversely affected by the change
in Medicare payments under the recently enacted Prospective Payment System ("PPS"), enacted in
1997, as well as other trends in the long-term care industry resulting in
certain of the Company's clients recently filing voluntary bankruptcy petitions and otherspetitions. Others
may follow. This,These factors, in addition to delays in payments from clients has
resulted in and could continue to result in significant additional bad debts in
the near future. The Company's operating results would also be adversely
affected if unexpected increases in the costs of labor, materials supplies and
equipment used in performing its services could not be passed on to clients.
In addition, the Company believes that in order to improve its
financial performance it must continue to obtain service agreements with new
clients and provide newadditional 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.
(e) Financial Information About Foreign and Domestic Operations and Export
Sales
Not Applicable.
Item 2. Properties
The Company leases its corporate offices, located at 3220 Tillman
Drive, Suite 300, Bensalem, , Pennsylvania 19020, which consists of 16,195 square
feet. The term of the lease expires on September 30, 2005. The Company also
leases office space at other locations in Pennsylvania, Connecticut, Florida,
Illinois, California, Colorado, Georgia, Alabama and Texas. The office sizes
range from approximately 1,000 to 2,500 square feet. These locations serve as
divisional or regional offices. In addition, the Company leases warehouse space in
Pennsylvania and Florida. The warehouses in Pennsylvania and Florida consist of
approximately 18,000 and 10,000 square feet, respectively. None of these leases is for more than a
five-year term. In addition, the Company leases warehouse space in Pennsylvania.
The warehouse in Pennsylvania consists of approximately 19,000 square feet. The
Pennsylvania warehouse lease expires on March 31, 2008. The Company is also
provided with office and storage space at each of its client facilities.
Management does not foresee any difficulties with regard to the continued
utilization of such premises. Management believes that such leases are
sufficient for the conduct of the Company's current operations.
The Company presently owns laundry equipment, office furniture and
equipment, housekeeping equipment and vehicles. Management believes that all of
such equipment is sufficient for the conduct of the Company's current
operations.
78
Item 3. Legal Proceedings.
As of December 31, 1999,2001, there were no material pending legal
proceedings to which the Company was a party, or as to which any of its property
was subject, other than routine litigation or claims and/or proceedings believed
to be adequately covered by insurance.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
8
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
(a) Market Information
The Company's common stock, $.01 par value (the "Common Stock") is traded on the
NASDAQ National Market System. On December 31, 1999,2001, there were 11,064,10711,075,219
shares of Common Stock outstanding.
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. The effect of this action was to increase
shares of outstanding Common Stock at August 27, 1998 by approximately
3,693,432.
The high and low bids for the Common Stock during the two years ended
December 31, 1999,2001 ranged as follows (after giving effect to the three-for-two
stock split in 1998):
1999follows:
2001 High 19992001 Low
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1st Qtr. $ 7.375 $ 5.375
2nd Qtr. 7.980 6.060
3rd Qtr. 9.160 7.080
4th Qtr. 10.300 7.520
2000 High 2000 Low
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1st Qtr. 11 1/2 9 1/8$ 9.688 $ 5.000
2nd Qtr. 10 5/8 8 3/45.438 3.719
3rd Qtr. 9 7/8 7 7/85.500 4.531
4th Qtr. 8 1/2 6 5/8
1998 High 1998 Low
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1st Qtr. 9 15/16 8 1/3
2nd Qtr. 9 9/16 9 1/3
3rd Qtr. 11 11/16 8 3/16
4th Qtr. 9 7/8 8 3/86.375 4.750
(b) Holders
As of March 3, 2000,15, 2002, there were approximately 290417 holders of record of
the common stock, including stock held in nominee name by brokers or other
nominees. It is estimated that there are approximately 2,6002,200 beneficial holders.
(c) Dividends
The Company has not paid any cash dividends on its Common Stock during
the last two years. Currently, it intends to continue this policy of retaining
all of its earnings, if any, to finance the development and expansion of its
business.
9
Items 6 through 8 - Selected Financial Data, Management's Discussion and
Analysis of Financial Condition and Results of Operations
and Financial Statements and Supplementary Data
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 2001,
copies of which accompany this Report.
Item 6. Selected Financial Data
The selected financial data presented below should be read in conjunction with,
and is qualified in its entirety by reference to, the Financial Statements and
Notes thereto.
(In thousands except for per share data and employees)
---------------------------------------------------------------------------------------------------------------------
Years endedEnded December 31:
------------------------
2001 2000 1999 1998 1997
1996 1995
-------- -------- -------- -------- -------------- ------ ------ ------ ------
Revenues $284,190 $254,668 $232,432 $204,869 $181,359 $162,482 $148,747
-------- -------- -------- -------- --------
Net income $ 7,035 $ 5,588 $ 5,536 $ 8,869 $ 5,894 $ 6,889 $ 3,941
-------- -------- -------- -------- --------
Basic earnings per common share $ .64 $ .51 $ .50 $ .79 $ .52 $ .57 $ .32
-------- -------- -------- -------- --------
Diluted earnings per common share $ .64 $ .51 $ .49 $ .77 $ .51 $ .56 $ .32
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding for basic EPS 10,928 10,964 11,053 11,188 11,354 12,156 12,210
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding for diluted EPS 11,078 10,983 11,286 11,512 11,578 12,203 12,335
-------- -------- -------- -------- --------
As of December 31:
Working Capital $ 83,108 $ 74,176 $ 69,785 $ 62,009 $ 55,706 $ 57,434 $ 51,068
-------- -------- -------- -------- --------
Total Assets $120,790 $108,343 $ 98,030 $ 93,109 $84,890 $ 86,446 $ 80,29084,890
-------- -------- -------- -------- --------
Stockholders' Equity $ 98,943 $ 90,805 $ 85,961 $ 80,192 $ 72,227 $ 74,938 $ 68,470
-------- -------- -------- -------- --------
Book Value Per Share $ 8.93 $ 8.30 $ 7.77 $7.27 $6.52 $ 6.177.27 $ 5.616.52
-------- -------- -------- -------- --------
Employees 17,514 16,276 15,741 14,046 12,180 11,217 10,911
-------- -------- -------- -------- --------
All share data has been adjusted to reflect the 3-for-2 stock split paid in the
form of a 50% stock dividend on August 27, 1998.
10
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto.
Item 7. Management's Discussion and Analysis of Financial Condition And
Results of Operations
Results of Operations
From 19941996 through 1999,2001, the Company's revenues grew at a compound annual rate of
11.2%11.8%. This growth was achieved through obtaining new clients in both existing
market areas, as well asand providing
additional services to existing clients. Although there can be no assurance
thereof, the Company anticipates future revenue growth althoughdue to the strength of
its presence in the long-term health care market. It is likely though, that its
compound growth rates will likely decrease as growth is measured against the Company's
increasing revenue base.
The following table sets forth for the years indicated the percentage which
certain items bear to revenues:
Relation to Total Revenues
Years Ended December 31,
-------------------------------
2001 2000 1999
1998 1997
----- ----------- ------ ------
Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 88.6 89.1 88.5 85.1 85.1
Selling, general and administrative 7.7 7.7 8.1 8.5 8.8
Interest income .4 .6 .8
Settlement of civil litigation - - (1.0).4 .4
----- ----- -----
Income before income taxes 4.1 3.6 3.8 7.0 5.9
Income taxes 1.6 1.4 2.7 2.61.4
----- ----- -----
Net income 2.5% 2.2% 2.4% 4.3% 3.3%
===== ===== =====
19992001 Compared with 19982000
Revenues increased 13.5%11.6% to $232,431,888$284,189,510 in 19992001 from $204,869,023$254,668,213 in 1998.2000. The
following factors contributed to thegrowth in revenues is primarily a result of a net increase in revenues: service agreements
entered into with new clients increased revenues 30.4%; new services to existing clients
increased revenues 2.5%;clients. Approximately 63% of the revenue growth in 2001
resulted from the Company's food service division with the remaining revenue
growth being generated from housekeeping, laundry and cancellationslinen, and other minor changes decreasedservices
provided. Although food service contributed significantly more in revenue growth
in 2001 than the housekeeping, laundry, linen and other services' division, the
Company does not anticipate this trend to continue. The Company believes that in
2002 both housekeeping, laundry, linen and other services, and food services
revenues, by 19.4%.as a percentage of total revenues, will remain approximately the same
as their respective 2001 percentages.
Costs of services provided as a percentage of revenues in 1999 increased2001 decreased to
88.5%88.6% from 85.1%89.1% in 1998.2000. The primary factors affecting specific variations in
the 19992001 cost of services provided as a percentage of revenues and their effect
on the 3.4% increase.5% decrease are as follows: a decrease of 2.7% in labor costs, which is
primarily a result of an increase in food service business. Food service labor
costs are less as a percentage of that division's revenues as compared to
housekeeping, laundry, linen and other services percentage of labor costs to
their respective revenues. Housekeeping, laundry, linen and other services labor
costs in 2001, as a percentage of the division's revenues, remained essentially
at historical percentage of revenue rates. Offsetting this decrease were; an
increase of 2.0% in bad debt provision;
increase of 1.6% in labor costs; increase of .4% in worker's compensation
insurance; offsetting these increases was a decrease of .8%1.8% in the cost of supplies consumed in performing services.services which
resulted from an increase in food service division cost of supplies, while
housekeeping, laundry, linen and other services' cost of supplies showed a
slight improvement in its cost of supplies as a percentage of housekeeping,
laundry, linen and other services' revenues. In contrast to the discussion on
labor costs above, food service division cost of supplies as a percentage of
food service division revenues is higher than the cost of supplies as a
percentage of revenues associated with the housekeeping, laundry, linen and
other services' division; an increase of .6% in bad debt provision in order to
provide for collection problems; an increase of .5% in worker's compensation
insurance resulting primarily from the effect of the acceleration in the timing
of settlements made with, as well as payments to claimants covered under the
plan.
Selling, general and administrative expenses as a percentage of revenue
remained constant at 7.7% in 2001 as compared to 2000. This is primarily
attributable to the Company's ability to control these expenses in respect to
comparing them to a greater revenue base in the current year.
11
Interest income increased 26% to $1,247,463 in 2001 compared to 2000. The
2001 increase is related to higher cash balances.
The Company's effective tax rate remained unchanged at 39% comparing 2001 to
2000. The Company's 39% effective tax rate differs from the federal income tax
statutory rate principally because of the effect of state and local income
taxes.
As a result of the matters discussed above, 2001 net income increased to 2.5%
as a percentage of revenue compared to 2.2% in 2000.
2000 Compared with 1999
Revenues increased 9.6% to $254,668,213 in 2000 from $232,431,888 in 1999
resulting primarily from net new service agreements entered into with new
clients.
Costs of services provided as a percentage of revenues in 2000 increased to
89.1% from 88.5% in 1999. The primary factors affecting specific variations in
the 2000 cost of services provided as a percentage of revenues and their effect
on the .6% increase are as follows: an increase of 1.3% in the cost of supplies
consumed in performing services; increase of .7% in labor costs; increase of .3%
in employee benefits; offsetting these increases was a decrease of 1.8% in bad
debt provision.
Selling, general and administrative expenses as a percentage of revenue
decreased to 7.7% in 2000 from 8.1% in 1999 from 8.5% in 1998.1999. The decrease is primarily
attributable to the Company's ability to control these expenses while comparing
them to a greater revenue base.
Income taxes as a percentage of revenue decreasedbase in 1999 as a result of the Internal Revenue Service concluding an examination of the company's 1996 and
1997 returns. Therefore, previously established reserves are no longer required.
Accordingly, thecurrent year.
Interest income increased 31% to $988,900 in 2000 comapred to 1999. The 2001
increase is related to higher cash balances.
The Company's 2000 effective tax rate forincreased to 39% from 36.5% in 1999.
The 2.5% increase in the effective rate is primarily related to the 1999
has beeneffective tax rate being reduced to reflect the reversal of these reserves.
11
Interest income in 1999 decreased to .4%reserves no longer
needed as a percentageresult of revenue as
compared to .6% in the 1998 twelve month period principally due toconclusion of an Internal Revenue Service examination
of the Company's shift1996 and 1997 returns. The Company's 39% effective tax rate
differs from investing excess funds in taxable securities tothe federal income tax exempt
securities, as well as lower average cash balances.statutory rate principally because of the
effect of state and local income taxes.
As a result of the matters discussed above, 19992000 net income decreased to 2.4%
as a percentage of revenue compared to 4.3% in 1998.
1998 Compared with 1997
Revenues increased 13% to $204,869,023 in 1998 from $181,359,305 in 1997. The
following factors contributed to the increase in revenues: service agreements
with new clients increased revenues 22.7%; new services to existing clients
increased revenues 4.9%; and cancellations and other minor changes decreased
revenues by 14.6%.
Costs of services provided2.2%
as a percentage of revenues compared to 2.4% in 1998 was 85.1%,1999.
Critical Accounting Policies
Allowance for Doubtful Accounts
The allowance for doubtful accounts is established as losses are estimated to
have occurred through a provision for bad debts charged to earnings. The
allowance for doubtful accounts is evaluated based on managements periodic
review of accounts and notes receivable and is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
The Company has had varying collection experience with respect to its
accounts and notes receivable. When contractual terms are not met, the same asCompany
generally encounters difficulty in 1997. The primary factors affectingcollecting amounts due by certain of its
clients. Therefore, the Company has sometimes been required to extend the period
of payment for certain clients beyond contractual terms. These clients have
included those in bankruptcy, those who have terminated service agreements and
slow payers experiencing financial difficulties. In making its credit
evaluations, in addition to analyzing and anticipating, where possible, the
specific variationscases described above, management considers the general collection
risks associated with trends in the 1998
costlong-term care industry. The Company also
establishes credit limits, as well as performing ongoing credit evaluation and
account monitoring procedures to minimize the risk of services providedloss.
In accordance with the risk of extending credit, the Company regularly
evaluates its accounts and notes receivable for impairment or loss of value and
when appropriate will provide in its Allowance for Doubtful Accounts for such
receivables. The Company generally follows a policy of reserving for receivables
from clients in bankruptcy, as well as clients with which the Company is in
litigation for collection. Correspondingly, once the Company's recovery of a
percentagereceivable is determined through either litigation, bankruptcy proceedings or
other client negotiation at less than the recorded amount on its balance sheet,
it will charge-off the applicable amount to the Allowance for Doubtful Accounts.
Notwithstanding the Company's efforts to minimize its credit risk exposure,
the Company's clients could be adversely effected if future industry trends, as
more fully discussed under liquidity and capital resources, change in such a
manner as to negatively impact their cash flows. In the event that the Company's
clients experience such significant impact in their cash flows, it could have a
material adverse effect on the Company's results of revenue are as follows: decreaseoperations and financial
condition. At December 31, 2001, the Company has receivables of approximately
$4,000,000 from a client group currently Debtors in workers' compensation,Chapter 11 bankruptcy
proceedings. The Company expects the client group will file bankruptcy plans
during 2002. In the event that the amount collected is materially less than the
$4,000,000, it could adversely effect the Company's results of operations and
financial condition.
12
Accrued Insurance Claims
The Company currently has a Paid Loss Retrospective Insurance Plan for general
liability and otherworkers' compensation insurance. Under these plans, pre-determined
loss limits are arranged with an insurance of .5%; decrease of
.3% in the cost of supplies consumed in performing services; decrease of .3% in
employee benefits; offsetting these decreases was an increase in bad debt
provisions of .6%.
Selling, general and administrative expenses as a percentage of revenue
decreasedcompany to 8.5% in 1998 from 8.8% in 1997. The decrease is primarily
attributable tolimit both the Company's
ability to control these expenses while comparing
them toper occurrence cash outlay and annual insurance plan cost.
For workers' compensation, the Company records a greater revenue base.
Interest income, as a percentagereserve based on the present
value of revenue decreased to .6% in 1998 as
compared to .8% in 1997 primarilyfuture payments, including an estimate of claims incurred but not
reported, that are developed as a result of lower average cash balances.a review of the Company's historical
data and actuarial analysis done by an independent company specialist. The
present value of the payout is determined by applying an 8% discount factor
against the pay-out over the policy year's remaining pay-out period.
Management regularly evaluates its claim pay-out experience, present value
factor and other factors related to the nature of specific claims in arriving at
the basis for its accrued insurance claims' estimate. Management evaluations are
based primarily on current information derived from reviewing Company claims'
experience and industry trends. In the event that the Company's claims'
experience and/or industry trends result in an unfavorable change, it could have
an adverse effect on the Company's results of operations and financial
condition.
Liquidity and Capital Resources
At December 31, 19992001 the Company had working capital and cash of $69,784,823$83,107,545 and
$17,198,687$34,259,334 respectively, which represents a 13% increaserepresent increases of 12% and 50%, respectively
in working capital and slight decrease in cash as compared to December 31, 19982000 working capital and
cash of $62,009,010$74,175,584 and $17,201,408.$22,841,618. During 1999,2001, the Company expended $183,750$824,938
for open market purchases of 21,000135,000 shares of its common stock. In addition,
the Company received proceeds of $1,484,930 from the exercise of stock options
by employees and directors. The Company's current ratio at December 31, 2001
decreased to 5.7 to 1 from 6.3 to 1 at December 31, 2000, primarily as a result
of the timing of payments related to accounts payable, accrued insurance, and
accrued payroll and accrued and withheld payroll taxes.
The net cash provided by the Company's operating activities was $12,495,734
for the year ended December 31, 2001. The principal source of cash flows from
operating activities for 2001 was net income, charges to operations for bad debt
provisions, depreciation and amortization, as well as increases in accounts
payable and other accrued expenses, accrued payroll, accrued and withheld
payroll taxes. The operating activity that used the largest amount of cash was a
$6,751,301 net increase in accounts and notes receivable and long term notes
receivable. The net increase in accounts and current and long term notes
receivable resulted primarily from the 11.6% growth in the Company's revenues.
The Company believes this trend will continue as its revenues grow. The increase
in accounts payable and other accrued expenses, accrued payroll, accrued and
withheld payroll taxes are principally due to the timing of the respective
payments.
The Company's principal use of cash in investing activities for the year
ended December 31, 2001 was the purchase of housekeeping equipment, computer
software and equipment and laundry equipment installations.
At December 31, 2000 the Company had working capital and cash of $74,175,584
and $22,841,618 respectively, which represent increases of 6% and 33%,
respectively in working capital and cash as compared to December 31, 1999
working capital and cash of $69,784,823 and $17,198,687. During 2000, the
Company expended $761,875 for open market purchases of 127,500 shares of its
common stock. The Company's current ratio at December 31, 1999 increased,2000 decreased, to 8.76.3
to 1 from 6.88.7 to 1 at December 31, 1998.1999.
The net cash provided by the Company's operating activities was $1,645,549$7,750,533
for the year ended December 31, 1999.2000. The principal source of cash flows from
operating activities for 19992000 was net income, charges to operations for bad debt
provisions, depreciation and amortization.amortization, as well as increases in accounts
payable and other accrued expenses, and accrued payroll and accrued and withheld
payroll taxes. The operating activity that used the largest amount of cash was
an $11,344,617$8,485,627 net increase in accounts and notes receivable and long term notes
receivable, as well as a $1,795,361 decrease in
accounts payable and other accrued expenses.receivable. The net increase in accounts and current and long term notes
receivable resulted primarily from the growth in the Company's revenues. The
decreaseincrease in accounts payable and other accrued expenses, isand accrued payroll and
accrued and withheld payroll taxes are principally due to the timing of payments to vendors.the
respective payments.
The Company's principal use of cash in investing activities for the year
ended December 31, 19992000 was the purchase of housekeeping equipment, computer
software and equipment and laundry equipment installations.
At December 31, 1998 the Company had working capital and cash of $62,009,010
and $17,201,408 respectively, which represent an 11% and 3% decrease,
respectively, compared to December 31, 1997 working capital and cash of
$55,705,917 and $17,774,219. During 1998, the Company expended $3,496,000 for
open market purchases of 369,000 shares of its common stock. The Company's
current ratio at December 31, 1998 increased only slightly, to 6.8 to 1 from 6.7
to 1 at December 31, 1997.
1213
The net cash provided by the Company's operating activities was $3,319,704
for the year ended December 31, 1998. The principal source of cash flows from
operating activities for 1998 was net income, charges to operations for bad debt
provisions, depreciation and amortization, and the timing of payments for
payroll and payroll related taxes. The operating activity that used the largest
amount of cash was a $10,215,917 net increase in accounts and current and long
term notes receivable, as well as a $871,915 decrease in accrued insurance
claims. The net increase in accounts and current and long term notes receivable
resulted primarily from the growth in the Company's revenues. The decrease in
accrued insurance claims is principally due to the estimated final payment on
expiring policies to the Company's insurance carrier.
The Company's principal use of cash in investing activities for the year
ended December 31, 1998 was the purchase of housekeeping equipment, computer
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. Additionally, legislation enacted in August 1997 changed
Medicare policy in a number of ways, most notably the phasing in, effective July
1, 1998 of a Medicare Prospective Payment System ("PPS") for skilled nursing
facilities which significantly changed the manner and amount of reimbursements
they receive. The Company's clients have been and continue to be adversely
effected by PPS, as well as other trends in the long-term care industry
resulting in certain of the Company's clients recently filing voluntary bankruptcy
and othersprotection. Others may follow. This,These factors, in addition to delays in payments
from clients has resulted in and could continue to result in significant
additional bad debts in the near future. 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 and therefore may ultimately enhance the ultimate
collectibility ofCompany's
ability to collect the amounts due. At December 31, 2001 and 2000, the Company
had approximately, net of reserves, $14,159,000 and $14,837,000, respectively of
such notes outstanding. In some instances the Company obtains a security
interest in certain of the debtors' assets. Additionally, the Company considers
restructuring service agreements from full service to management-only service in
the case of certain clients experiencing financial difficulties. The Company
believes that such restructuring provides it with a means to maintain a
relationship with the client while at the same time minimizing collection
exposure.
The Company has had varying collection experience with respect to its
accounts and notes receivable. When contractual terms are not met, the Company
generally encounters difficulty in collecting amounts due fromby certain of its
clients. Therefore, the Company has sometimes been required to extend the period
of payment for certain clients includingbeyond contractual terms. These clients have
included those in bankruptcy, those whichwho 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 bad debt provisions (in an Allowance for Doubtful
Accounts) of $7,250,314, $2,339,515$5,445,000, $3,250,000 and $899,551$7,250,314 in the years ended December
31, 2001, 2000 and 1999, 1998respectively. These provisions represent 1.9%, 1.3% and
1997,3.1% as a percentage of revenue for the years ended December 31, 2001, 2000 and
1999, respectively. In making its evaluation,credit evaluations, in addition to analyzing
and anticipating, where possible, the specific cases described above, management
considers the general collection riskrisks associated with trends in the long-term
care industry. The Company also establishes credit limits, as well as performing
ongoing credit evaluation and account monitoring procedures to minimize the risk
of loss. Notwithstanding the Company's efforts to minimize its credit risk
exposure, the Company's clients could be adversely effected if future industry
trends change in such a manner as to negatively impact their cash flows. In the
event that the Company's clients experience such significant impact in their
cash flows, it could have a material adverse effect on the Company's results of
operations and financial condition. At December 31, 2001, the Company has
receivables of approximately $4,000,000 from a client group currently Debtors in
Chapter 11 bankruptcy proceedings. The Company expects the client group will
file bankruptcy plans during 2002. In the event that the amount collected is
materially less than the $4,000,000, it could adversely effect the Company's
results of operations and financial condition.
The Company currently has a Paid Loss Retrospective Insurance Plan for
general liability and workers' compensation insurance. Under these plans,
pre-determined loss limits are arranged with an insurance company to limit both
the Company's per occurrence cash outlay and annual insurance plan cost.
For workers' compensation, the Company records a reserve based on the present
value of future payments, including an estimate of claims incurred but not
reported, that are developed as a result of a review of the Company's open
claims and actuarial analysis done by an independant company specialist. The
present value of the payout is determined by applying an 8% discount factor
against the pay-out over the policy year's remaining pay-out period.
Management regularly evaluates its claim pay-out experience, present value
factor and other factors related to the nature of specific claims in arriving at
the basis for its accrued insurance claims' estimate. Management evaluations are
based primarily on current information derived from reviewing Company claims'
experience and industry trends. In the event that the Company's claims'
experience and/or industry trends result in an unfavorable change, it could have
an adverse effect on the Company's results of operations and financial
condition.
The Company has a $18,000,000 bank line of credit increased from $13,000,000
at December 31, 1998, on which it may draw to
meet short-term liquidity requirements in excess of internally generated cash
flow, thatflow. This facility expires on September 30, 2000.2002. The Company believes the line
will be renewed at that time. Amounts drawn under the line are payable on
demand. At December 31, 1999,2001, there were no borrowings under the line. However,
at such date, the Company had outstanding approximately $13,000,000$13,500,000 of
irrevocable standby letters of credit, which relatesrelate to payment obligations under
the Company's insurance program. As a result of the letters of credit issued,
the amount available under the line was reduced by approximately $13,500,000 at
December 31, 2001. In addition, the Company has lease commitments totaling
$2,613,790 through 2008.
14
At December 31, 1999,2001, the Company had $17,198,687$34,259,334 of cash and cash
equivalents, which it views as its principal measure of liquidity.
The level of capital expenditures by the Company is generally dependent on
the number of new clients obtained. Such capital expenditures primarily consist
of housekeeping equipment and laundry and linen equipment installations.
Although the Company has no specific material commitments for capital
expenditures through the end of calendar year 2000,2002, it estimates that it will
incur capital expenditures of approximately $2,500,000 during this period in
connection with housekeeping equipment and laundry and linen equipment
installations in its clients' facilities.facilities, as well as expenditures relating to
internal data processing hardware and software requirements. 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,should cash flows from current
operations not be sufficient, the Company would seek to obtain necessary working
capital from such sources as long-term debt or equity financing.
13
In accordance with the Company's previously announced authorizations to
purchase its outstanding common stock, the Company expended $183,750$824,938 to purchase
21,000135,000 shares of its common stock during 19992001 at an average price of $8.75$6.11 per
common share. The Company remains authorized to purchase 448,950786,450 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 may 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
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. 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 the 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 result of operations.
The Company has not encountered any processing complications, nor has the
Company incurred any additional expense, in regards to the above noted
applications' year 2000 functionality. Additionally, the Company has not
experienced any year 2000 functionality problems with independent service
providers or outside processing companies. Furthermore, there has been no
notification to the Company by its clients that they have been effected by any
year 2000 issues impacting their governmental funding.
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 health care industry, primarily providers of long-term care;
credit and collection risks associated with this industry; The Company's claims
experience related to workers' compensation and general liability insurance; the
effects of changes in regulations governing the industry and risk factors
described in the Company's Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 19992001 in Part I thereof under
"Government Regulations of Clients", "Competition" and "Service
Agreements/Collections". The Company's clients have been and continue to be
adversely effected by the change in Medicare payments under the recently enacted1997 enactment
of the Prospective Payment System ("PPS"), as well as other trends in the
long-term care industry resulting in certain of the Company's clients recently filing
voluntary bankruptcy petitions and otherspetitions. Others may follow. This,These factors, in addition to
delays in payments from clients has resulted in and could continue to result in
significant additional bad debts in the near future. Additionally, the Company's
operating results would be adversely affected if unexpected increases in the
costs of labor and labor related costs, materials, supplies and equipment used
in performing its services could not be passed on to its clients.
14
In addition, the Company believes that to improve its future financial
performance it must continue to obtain service agreements with new clients,
providingprovide 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. 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.
15
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
Assets December 31,
--------------------------
Current Assets: 1999 1998
----------- -----------
Cash and cash equivalents $17,198,687 $17,201,408
Accounts and notes receivable, less allowance for
doubtful accounts of $7,278,000 in 1999 and
$3,449,000 in 1998 48,612,738 45,066,828
Prepaid income taxes 843,889 -
Inventories and supplies 8,580,181 7,803,437
Deferred income taxes 1,777,536 324,054
Prepaid expenses and other 1,869,091 2,318,285
----------- -----------
Total current assets 78,882,122 72,714,012
Property and Equipment:
Laundry and linen equipment installations 7,824,038 8,985,945
Housekeeping and office equipment 9,012,178 8,482,207
Autos and trucks 51,110 51,110
----------- -----------
16,887,326 17,519,262
Less accumulated depreciation 10,990,792 11,416,214
----------- -----------
5,896,534 6,103,048
COSTS IN EXCESS OF FAIR VALUE OF
NET ASSETS ACQUIRED
less accumulated amortization of $1,527,908 in 1999
and $1,420,284 in 1998 1,827,569 1,935,193
DEFERRED INCOME TAXES 628,553 2,131,535
OTHER NONCURRENT ASSETS 10,795,104 10,225,439
----------- -----------
$98,029,882 $93,109,227
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,472,021 $ 4,366,015
Accrued payroll, accrued and withheld payroll taxes 5,417,367 5,147,634
Other accrued expenses 417,966 319,333
Income taxes payable - 283,980
Accrued insurance claims 789,945 588,040
----------- -----------
Total current liabilities 9,097,299 10,705,002
ACCRUED INSURANCE CLAIMS 2,971,697 2,212,151
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 15,000,000 shares
authorized, 11,064,107 shares issued in 1999 and
11,034,207 in 1998 110,641 110,342
Additional paid in capital 25,297,284 25,064,832
Retained earnings 60,552,961 55,016,900
----------- -----------
Total stockholders' equity 85,960,886 80,192,074
----------- -----------
$98,029,882 $93,109,227
=========== ===========
December 31,
----------------------------------
2001 2000
------------- -------------
Assets
Current Assets:
Cash and cash equivalents ................................... $ 34,259,334 $ 22,841,618
Accounts and notes receivable, less allowance for
doubtful accounts of $6,936,000 in 2001 and
$4,914,000 in 2000 ........................................ 54,076,007 52,744,352
Prepaid income taxes ........................................ 8,188 1,128,624
Inventories and supplies .................................... 7,944,199 8,383,963
Deferred income taxes ....................................... 2,162,845 1,019,578
Prepaid expenses and other .................................. 2,156,871 2,184,141
------------ ------------
Total current assets .................................... 100,607,444 88,302,276
Property and Equipment:
Laundry and linen equipment installations ................... 6,872,513 7,303,508
Housekeeping and office equipment ........................... 10,570,888 9,696,825
Autos and trucks ............................................ 57,321 21,329
------------ ------------
17,500,722 17,021,662
Less accumulated depreciation ............................... 12,738,533 11,863,635
------------ ------------
4,762,189 5,158,027
COSTS IN EXCESS OF FAIR VALUE OF
NET ASSETS ACQUIRED
less accumulated amortization of $1,743,155 in 2001
and $1,635,531 in 2000 ...................................... 1,612,322 1,719,946
DEFERRED INCOME TAXES .......................................... 1,523,144 1,185,711
OTHER NONCURRENT ASSETS ........................................ 12,285,398 11,976,905
------------ ------------
$120,790,497 $108,342,865
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ............................................ $ 6,439,609 $ 4,829,183
Accrued payroll, accrued and withheld payroll taxes ......... 9,705,000 8,209,344
Other accrued expenses ...................................... 199,635 181,466
Accrued insurance claims .................................... 1,155,655 906,699
------------ ------------
Total current liabilities .............................. 17,499,899 14,126,692
ACCRUED INSURANCE CLAIMS ....................................... 4,347,464 3,410,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 30,000,000 shares
authorized, 11,337,719 shares issued in 2001
and 11,066,591 in 2000 .................................... 113,377 110,666
Additional paid in capital .................................. 27,240,496 25,315,753
Retained earnings ........................................... 73,176,074 66,140,713
Common stock in treasury, at cost, 262,500 shares
in 2001 and 127,500 in 2000 ............................... (1,586,813) (761,875)
------------ ------------
Total stockholders' equity .................................. 98,943,134 90,805,257
------------ ------------
$120,790,497 $108,342,865
============ ============
See accompanying notes.
16
Consolidated Statements of Income
Years Ended December 31,
------------------------
2001 2000 1999
1998 1997
------------ ------------ ------------------ ------ ------
Revenues $284,189,510 $254,668,213 $232,431,888 $204,869,023 $181,359,305
Operating costs and expenses:
Cost of services provided 252,029,939 226,899,572 205,686,044 174,431,075 154,417,984
Selling, general and administrative 21,871,673 19,618,789 18,778,786
17,447,639 15,859,083
Other income (expense):
Settlement of civil litigation (1,800,000)income:
Interest income 1,247,463 988,900 756,003 1,400,544 1,412,096
------------ ------------ ------------
Income before income taxes 11,535,361 9,138,752 8,723,061 14,390,853 10,694,334
Income taxes 4,500,000 3,551,000 3,187,000 5,522,000 4,800,000
------------ ------------ ---------------=--------
Net income $ 5,536,0617,035,361 $ 8,868,8535,587,752 $ 5,894,3345,536,061
============ ============ ============
Basic earnings per common share $ .50.64 $ .79.51 $ .52.50
============ ============ ============
Diluted earnings per common share $ .49.64 $ .77.51 $ .51.49
============ ============ ============
All per share data has been adjusted to reflect the 3-for-2 stock split paid in
the form of a 50% stock dividend on August 27, 1998.
See accompanying notes.
17
Consolidated Statements of Cash Flows
Years Ended December 31,
--------------------------------------------------
2001 2000 1999
1998 1997
------------ ------------ ------------------ ------ ------
Cash flows from operating activities:
Net Income $ 5,536,0617,035,361 $ 8,868,8535,587,752 $ 5,894,3345,536,061
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,241,473 2,210,157 2,149,735 2,080,823 2,119,053
Bad debt provision 5,445,000 3,250,000 7,250,314 2,339,515 899,551
Deferred income taxes (benefits) (1,480,700) 200,800 49,500 (820,800) 258,000
Tax benefit of stock option
transactions 232,531 192 45,427
571,985 120,826Unrealized loss on SERP investments 65,768 54,225
Changes in operating assets and liabilities:
Accounts and notes receivable (6,776,655) (7,381,614) (10,796,225) (10,845,682) (4,141,482)
Prepaid income taxes 1,120,436 (284,735) (843,889) 366,712 (366,712)
Inventories and supplies 439,764 196,218 (776,745) (463,509) 52,579
Long term notes receivable 25,354 (1,104,013) (548,392) 629,765 (120,202)
Accounts payable and other
accrued expenses 1,628,594 2,120,662 (1,795,361) (535,055) 303,524
Accrued payroll, accrued and
withheld payroll taxes 1,705,649 2,791,977 269,733 1,377,324 816,211
Accrued insurance claims 1,185,504 555,973 961,451 (871,915) 89,009
Income taxes payable (283,980) 283,980 (53,139)
Prepaid expenses and other assets (372,345) (447,061) 427,920
337,708 (506,560)
------------ ------------ ----------------------- ----------- -----------
Net cash provided by operating
activities 12,495,734 7,750,533 1,645,549
3,319,704 5,364,992
------------ ------------ ----------------------- ----------- -----------
Cash flows from investing activities:
Disposals of fixed assets 313,209 439,848 1,049,008 400,165 212,721
Additions to property and equipment (2,051,219) (1,803,877) (2,884,602)
(2,816,996) (1,754,111)
------------ ------------ ----------------------- ----------- -----------
Net cash used in investing activities (1,738,010) (1,364,029) (1,835,594)
(2,416,831) (1,541,390)
------------ ------------ ----------------------- ----------- -----------
Cash flows from financing activities:
Purchase of treasury stock (824,938) (761,875) (183,750) (3,496,000) (10,923,679)
Proceeds from the exercise of stock
options 1,484,930 18,302 371,074
2,020,316 2,197,006
------------ ------------ ----------------------- ----------- -----------
Net cash provided by (used in)
financing activities 659,992 (743,573) 187,324
(1,475,684) (8,726,673)
------------ ------------ ----------------------- ----------- -----------
Net decreaseincrease (decrease) in cash and
cash equivalents 11,417,716 5,642,931 (2,721) (572,811) (4,903,071)
Cash and cash equivalents at
beginning of the year 22,841,618 17,198,687 17,201,408
17,774,219 22,677,290
------------ ------------ ----------------------- ----------- -----------
Cash and cash equivalents at end of
the year $34,259,334 $22,841,618 $17,198,687
=========== =========== ===========
Supplementary Cash Flow Information:
Issuance of 38,753 shares of common stock
Pursuant to Employee Stock Purchase Plan $ 17,198,687209,993 $ 17,201,408-- $ 17,774,219
============ ============ ============--
=========== =========== ===========
See accompanying notes.
18
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2001, 2000 and 1999
1998 and 1997
---------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
------------- -------- ----------- ------------------- ---------- ---------- --------- -------------
Balance, December 31, 1996 8,090,663 $ 80,907 $34,603,813 $40,253,7131998 11,034,207 $110,342 $25,064,832 $55,016,900 $ -- $74,938,433
Net income for year 5,894,334 5,894,334
Exercise of stock options 238,700 2,387 2,194,619 2,197,006
Tax benefit arising from
stock transactions 120,826 120,826
Purchase of common
stock for treasury
(942,500 shares) (10,923,679) (10,923,679)
Treasury stock retired (942,500) (9,425) (10,914,254) 10,923,679
------------- -------- ----------- ----------- ------------ -----------
Balance, December 31, 1997 7,386,863 73,869 26,005,004 46,148,047 -- 72,226,920
Three-for-two stock split 3,693,432 36,934 (36,934)
Net income for year 8,868,853 8,868,853
Exercise of stock options 322,912 3,229 2,017,087 2,020,316
Tax benefit arising from
stock transactions 571,985 571,985
Purchase of common
stock for treasury
(369,000 shares) (3,496,000) (3,496,000)
Treasury stock retired (369,000) (3,690) (3,492,310) 3,496,000
------------- -------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 11,034,207 110,342 25,064,832 55,016,900 -- 80,192,074$80,192,074
Net income for year 5,536,061 5,536,061
Exercise of stock options 50,900 509 370,565 371,074
Tax benefit arising from
stock transactions 45,427 45,427
Purchase of common stock
for treasury (21,000 shares) (183,750) (183,750)
Treasury stock retired (21,000) (210) (183,540) 183,750
----------------------- -------- ----------- ----------- ----------------------- -----------
Balance, December 31, 1999 11,064,107 $110,641 $25,297,284 $60,552,961 $11,064,141 110,641 25,297,284 60,552,961 -- $85,960,886
=============85,960,886
Net income for year 5,587,752 5,587,752
Exercise of stock options 2,450 25 18,277 18,302
Tax benefit arising from
stock transaction 192 192
Purchase of common stock
for treasury (127,500 shares) (761,875) (761,875)
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 11,066,591 110,666 25,315,753 66,140,713 (761,875) 90,805,257
Net income 7,035,361 7,035,361
Exercise of stock options 232,375 2,324 1,482,606 1,484,930
Tax benefit arising from
stock transactions 232,531 232,531
Issued pursuant to Employee
Stock Purchase Plan 38,753 387 209,606 209,993
Purchase of common stock
for treasury (135,000 shares) (824,938) (824,938)
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 11,337,719 $113,377 $27,240,496 $73,176,074 $(1,586,813) $98,943,134
========== ======== =========== =========== ======================= ===========
See accompanying notes.
19
Notes to Consolidated Financial Statements
Note 1--Summary of Significant Accounting Policies
General
The Company provides housekeeping, laundry, linen, facility maintenance and food
services exclusively to the healthcare industry such asprimarily to nursing homes,
rehabilitation centers, retirement facilities and hospitals principally located
in the United States.
Principles of Consolidation
The consolidated financial statements include the accounts of Healthcare
Services Group, Inc. and its wholly-owned subsidiaries, HCSG Supply Inc. and
Huntingdon Holdings, Inc. after elimination of intercompany transactions and
balances.
Cash and cash equivalents
Cash and cash equivalents consist of short-term, highly liquid investments with
a maturity of three months or less at time of purchase.
Impaired notes receivable
In the event that a promissory note receivable is impaired, it is accounted for
in accordance with FAS 114 and FAS 118; that is, they are valued at the present
value of expected cash flows or market value of related collateral. The Company
evaluates its notes receivable for impairment quarterly and on an individual
client basis. Notes receivable considered impaired are generally attributable to
clients that are either in bankruptcy, have been turned over to collection
attorneys or those slow payers that are experiencing severe financial
difficulties.
At December 31, 2001, the Company had notes receivable aggregating
approximately $7,700,000 that are impaired. During 2001, the Company increased
its reserve against these notes by $2,300,000 and charged the reserve for
write-offs of $900,000 resulting in a reserve balance at December 31, 2001 of
$3,200,000. During 2001, the average outstanding balance of these notes
receivable was $7,800,000 and no interest income was recognized.
At December 31, 2000, the Company had notes receivable aggregating
approximately $8,000,000 that are impaired. During 2000, the Company increased
its reserve against these notes by $3,400,000 and charged the reserve for
write-offs of $4,200,000 resulting in a reserve balance at December 31, 2000 of
$1,800,000. During 2000, the average outstanding balance of these notes
receivable was $8,100,000 and no interest income was recognized.
At December 31, 1999, the Company had notes receivable aggregating $8,200,000
that are impaired. During 1999, the Company increased its reserve against these
notes by $2,900,000 and charged the reserve $4,400,000 resulting in a reserve
balance at December 31, 1999 of $2,600,000. During 1999, the average outstanding
balance of these notes receivable was $6,800,000 and no interest income was
recognized.
At December 31, 1998, the Company had notes receivable aggregating $5,300,000
that are impaired. During 1998, the Company increased its reserve against these
notes by $3,250,000 and charged the reserve $50,000 resulting in a reserve
balance at December 31, 1998 of $4,100,000. During 1998, the average outstanding
balance of these notes receivable was $3,500,000 and no interest income was
recognized.
At December 31, 1997, the Company had notes receivable aggregating $1,600,000
that are impaired. During 1997, the Company reduced its reserve against these
notes by $1,100,000 and charged the reserve $600,000 resulting in a reserve
balance at December 31, 1997, of $900,000. During 1997, the average outstanding
balance of these notes receivable was $2,400,000 and no interest was
recognized.
The Company follows an income recognition policy on notes receivable that
does not recognize interest income until cash payments are received. This policy
was established for conservative reasons, recognizing the environment of the
long-term care industry, and not because such notes are impaired. The difference
between income recognition on a full accrual basis and cash basis, for notes
that are not considered impaired, is not material. For impaired notes, interest
income is recognized on a cost recovery basis only.
Inventories and supplies
Inventories and supplies include housekeeping and laundry supplies, as well as
food service provisions which are valued at the lower of cost or market. Cost is
determined on a first-in, first-out (FIFO) basis. Linen supplies are included in
inventory and are amortized over a 24 month period.
20
Property and equipment
Property and equipment are stated at cost. Additions, renewals and improvements
are capitalized, while maintenance and repair costs are expended. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the respective accounts and any resulting gain or
loss is included in income. Depreciation is provided by the straight-line method
over the following estimated useful lives: laundry and linen equipment
installations -- 3 to 7 years; housekeeping equipment and office equipment -- 3
to 7 years; autos and trucks -- 3 Years.years.
Revenue recognition
Revenues from service agreements are recognized as services are performed. The
Company (as a distributor of laundry equipment since 1981) occasionally makes
sales of laundry installations to certain clients. The sales in most cases
represent the construction and installation of a turn-key operation and are for
payment terms ranging from 36 to 60 months. The Company's accounting policy for
these sales is to recognize the gross profit over the life of the original
payment terms associated with the financing of the transactions by the Company.
During 1999, 19982001, 2000 and 1997,1999, laundry installation sales were not material.
20
Costs in excess of fair value of net assets
Costs in excess of the fair value of net assets of businesses acquired are
amortized on a straight-line basis over periods not exceeding forty years. All
of the carrying value at December 31, 2001 resulted from a 1985 acquisition
which is being amortized over a thirty-one year period. Amortization charged to
earnings was $107,624 per year for the years 2001, 2000 and 1999, respectively.
On an ongoing basis, management reviews the valuation and amortization of
costs in excess of fair value of net assets acquired. As part of this review,
the Company estimates the value and future benefits of the expected cash flows
generated by the related service agreements to determine that no impairment has
occurred.
Income taxes
Deferred income taxes result from temporary differences between tax and
financial statement recognition of revenue and expense. These temporary
differences arise primarily from differing methods used for financial and tax
purposes to calculate insurance expense, certain receivable reserves, other
provisions which are not currently deductible for tax purposes, and revenue
recognized on laundry installation sales.
Income taxes paid were approximately $4,530,000, $3,345,000 and $4,169,000
$5,120,000during 2001, 2000 and $5,481,000
during 1999, 1998 and 1997, respectively.
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.
Earnings per common share has been adjusted to reflect the 1998 3-for-2 stock
split described in Note 3.
Costs in excess of fair value of net assets
Costs in excess of the fair value of net assets of businesses acquired are
amortized on a straight-line basis over periods not exceeding forty years. All
of the carrying value at December 31, 1999 resulted from a 1985 acquisition
which is being amortized over a thirty-one year period. Amortization charged to
earnings was $107,624 per year for the years 1999, 1998 and 1997, respectively.
On an ongoing basis, management reviews the valuation and amortization of
costs in excess of fair value of net assets acquired. As part of this review,
the Company estimates the value and future benefits of the expected cash flows
generated by the related service agreements to determine that no impairment has
occurred.
Other noncurrent assets Other noncurrent assets consist of:
1999 1998
----------- -----------2001 2000
------ ------
Long-term notes receivable $10,296,602 $ 9,748,210$11,375,262 $11,400,615
Deferred compensation funding (Note 10) 832,677 349,384
Other 498,502 477,22977,459 226,906
----------- -----------
$10,795,104 $10,225,439$12,285,398 $11,976,905
=========== ===========
Long-term notes receivable primarily represent trade receivables that were
converted to notes to enhance collection efforts.
Stock-Based Compensation
As permitted by the Statement of Financial Accounting Standards No. 123 ("SFAS
No. 123"), "Accounting for Stock Based Compensation", the Company accounts for
stock-based compensation arrangements in accordance with provisions of
Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued
to Employees". Compensation expense for stock options issued to employees is
based on the difference on the date of grant, between the fair value of the
Company's stock and the exercise price of the option. The 1998 amount shownCompany accounts for
equity instruments issued to nonemployees in accordance with the provisions of
SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction With Selling, or in Conjunction With Selling Goods
or Services". All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable.
Advertising Costs
Advertising costs are expensed when incurred. For the years ended December 31,
2001, 2000 and 1999, advertising costs were not material.
Long-Lived Assets and Impairment of Long-Lived Assets
The Company's long-lived assets include property and equipment and costs in
excess of fair value of net assets acquired. Costs in excess of allowancefair value of
net assets acquired arose from the purchase of another company in 1985. The
costs are amortized on a straight-line basis over 31 years. Accumulated
amortization was $1,743,155 and $1,635,531 on December 31, 2001 and 2000,
respectively. Additionally, amortization charged to earnings was $107,624 per
year for doubtful accountsthe years 2001, 2000 and 1999, respectively.
The Company records impairment losses on long-lived assets used in operations
or expected to be disposed of $2,777,580. There is no allowance for
doubtful accounts applicablewhen events and circumstances indicate that the
assets might be impaired and the undiscounted cash flows estimated to be
generated by those assets are less than the 1999 amount.carrying amounts of those assets. No
impairment losses were recorded in 2001, 2000 or 1999.
Reclassification
Certain reclassifications to 19982000 and 1999 reported amounts have been made in
the financial statements to conform to 19992001 presentation.
21
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. Management establishes estimates for
its allowance for doubtful accounts and accrued insurance claims based upon
factors including current and historical trends, as well as other pertinent
industry information. Management regularly evaluates this information to
determine if it is necessary to update the basis for its estimates and to
compensate for known changes.
Concentrations of Credit Risk
Statement of Financial Accounting Standards No. 105 (SFAS No. 105) requires the
disclosure of significant concentrations of credit risk, regardless of the
degree of such risk. Financial instruments, as defined by SFAS No. 105, which
potentially subject the Company to concentrations of credit risk, consist
principally of cash and cash equivalents and accounts and notes receivable. At
December 31, 19992001 and 1998,2000, substantially all of the Company's cash and cash
equivalents were invested with one financial institution. The Company's clients
are concentrated in the health care industry, primarily providers of long-term
care. Legislation enacted in August 1997 changed Medicare policy in a number of
ways, most notably the phasing in, effective July 1, 1998, of a Medicare
Prospective Payment System ("PPS") for skilled nursing facilities which
significantly changed the manner and the amounts of reimbursement they receive.
The Company's clients have been and continue to be adversely effected by PPS, as
well as other trends in the long-term care industry resulting in certain of the
Company's client recently filing voluntary bankruptcy and otherspetitions. Others may follow. This,These
factors, in addition to delays in payments from clients has resulted in and
could continue to result in significant additional bad debts in the near future.
The clients are comprised of many companies with a wide geographical dispersion
within the United States. At December 31, 1999, no single2001, the Company had one client, ora
nursing home chain, which accounted for more
than 10%approximately 14% of total revenue.consolidated
revenues.
Fair Value of Financial Instruments
The carrying value of financial instruments (principally consisting of cash and
cash equivalents, accounts and notes receivable and accounts payable)
approximate fair value.
UseNote 2--Allowance for Doubtful Accounts
The allowance for doubtful accounts is established as losses are estimated to
have occurred through a provision for bad debts charged to earnings. The
allowance for doubtful accounts is evaluated based on management's periodic
review of Estimatesaccounts and notes receivable and is inherently subjective as it
requires estimates that are susceptible to significant revision as more
information becomes available.
The Company has had varying collection experience with respect to its
accounts and notes receivable. When contractual terms are not met, the Company
generally encounters difficulty in Financial Statementscollecting amounts due by certain of its
clients. Therefore, the Company has sometimes been required to extend the period
of payment for certain clients beyond contractual terms. These clients have
included those in bankruptcy, those who have terminated service agreements and
slow payers experiencing financial difficulties. In preparingorder to provide for these
collection problems and the general risk associated with the granting of credit
terms, the Company recorded bad debt provisions (in an Allowance for Doubtful
Accounts) of $5,445,000, $3,250,000 and $7,250,314 in the years ended December
31, 2001, 2000 and 1999, respectively. In making its credit evaluations, in
addition to analyzing and anticipating, where possible, the specific cases
described above, management considers the general collection risks associated
with trends in the long-term care industry. Notwithstanding the Company's
efforts to minimize its credit risk exposure, the Company's clients could be
adversely effected if future industry trends change in such a manner as to
negatively impact their cash flows. In the event that the Company's clients
experience such significant impact in their cash flows, it could have a material
adverse effect on the Company's results of operations and financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.condition.
Note 2--Lease3--Lease Commitments
The Company leases office facilities, equipment and autos under operating leases
expiring on various dates through 20052008 and certain office leases contain renewal
options (see Note 5). The following is a schedule, by calendar years, of future
minimum lease payments under operating leases having remaining terms in excess
of one year as of December 31, 1999:2000:
22
Operating
Year Leases
----------
2000 .............................................. $713,523
2001 .............................................. 482,250---- ---------
2002 .............................................. 399,028.................................... $ 848,097
2003 .............................................. 362,489.................................... 648,610
2004 .................................... 495,487
2005 .................................... 377,756
2006 and thereafter ............................... 367,811..................... 243,840
----------
Total minimum lease payments ...................... $2,325,101............ $2,613,790
==========
Total expense for all operating leases was $635,951, $861,245$994,284, $832,211 and $813,719$635,951 for
the years ended December 31, 1999, 19982001, 2000 and 1997,1999, respectively.
Note 3--Stockholders'4--Stockholders' Equity
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.
22
As of December 31, 1999, 966,2952001 1,173,818 shares of common stock were reserved under the
incentive stock option plans, including 6,877176,295 shares which were available for
future grant. The Stock Option Committee is responsible for determining the
individuals who will be granted options, the number of options each individual
will receive, the option price per share, and the exercise period of each
option. The incentive stock option price will not be less than the fair market
value of the common stock on the date the option is granted. No option will have
a term in excess of ten years and are exercisable commencing six months from the
option date. As to any stockholder who owns 10% or more of the common stock, the
option price per share will be no less than 110% of the fair market value of the
common stock on the date the options are granted and such options shall not have
a term in excess of five years.
As of December 31, 1999, options outstanding, under the Incentive Stock
Option Plans, for 634,068 shares were exercisable at prices ranging from $5.67
to $9.90, and the weighted average remaining contractual life was 5.2 years. The weighted average fair value of incentive options granted during 2001,
2000 and 1999 1998was $4.99, $3.02 and 1997 was $3.02, $3.74, and $1.17, respectively.
A summary of incentive stock option activity is as follows:
Incentive Stock Options
-----------------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998 1997---------------------- -------------------- -------------------- ------------------------------------------
Weighted Weighted Weighted
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
-------------- --------- --------------- --------- ------- ----------------- ----------
Beginning of period $7.63 795,355 $7.11 914,076 $6.78 928,818$7.03 1,120,222 $7.40 980,952 $7.59 820,177
Granted 8.85 245,426 5.11 214,229 6.86 325,350
8.43 169,169 7.72 197,696
Cancelled 7.25 (117,887) 5.70 (17,326) 6.68 (23,738)8.04 (210,439) 6.40 (72,509) 7.24 (121,175)
Exercised 6.37 (157,686) 7.47 (2,450) 7.24 (43,400)
6.48 (270,564) 6.20 (188,700)
----- ---------------- ----- --------------- ----- ---------------
End of period $7.43 959,418 $7.63 795,355 $7.11 914,076$7.37 997,523 $7.03 1,120,222 $7.40 980,952
===== ================ ===== ================ ===== ===============
The following table summarizes information about incentive stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
at end of period $7.72 634,068 $7.42 626,186 $6.94 716,380
===== ======= ===== ======= ===== =======-----------------------------------------------------------------------
Average Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
- -------------------- ----------- ----------- -------- ----------- ----------
$5.06 - 10.18 997,523 7.88 $7.37 793,947 $6.88
The Company has granted non-qualified stock options primarily to employees
and directors under either the Company's 1995 Incentive and Non-Qualified Stock
Option Plan for key employees and the Company's 1996 Non-Employee Director's
Stock Option Plan. Amendments to the 1995 Plan, as well as the 1996 Plan were
adopted on March 6, 1996 and approved by shareholders on June 4, 1996. Pursuant
to the terms of the 1996 Non-Employee Director's Stock Option Plan, each
eligible non-employee director receives an automatic grant based on a prescribed
formula on the fixed annual grant date. The non-qualified options were granted
at option prices which were not less than the fair market value of the common
stock on the date the options were granted. The options are exercisable over a
five to ten year period, commencing six months from the option date. As of December 31, 1999, non-qualified options outstanding, under the above
mentioned plans, for 403,381 shares were exercisable at prices ranging from
$5.67 to $9.21, and the weighted average remaining contractual life was 4.1
years. The
weighted average fair value of non-qualified options granted during 2001, 2000
and 1999 1998were $5.39, $3.04 and 1997 was $4.03, $5.53 and $4.97, respectively.
23
A summary of non-qualified stock option activity is as follows:
Non QualifiedNon-qualified Stock Options
-------------------------------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
1998 1997
---------------------- ---------------------- ----------------------------------------- -----------------------
Weighted Weighted Weighted
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
------------- --------- ------------- --------- ----- ----------------- ----------
Beginning of period $7.13 478,696 $6.84 495,525 $6.47 581,391$7.03 376,564 $7.05 404,172 $7.18 454,548
Granted 8.99 223,274 5.06 37,246 6.75 24,950
8.60 52,156 7.89 89,484
Cancelled 5.81 (34,864) 6.04 (64,854) 7.78 (67,815) - - - -(67,826)
Exercised 6.44 (74,689) -- -- 7.58 (7,500) 6.19 (68,985) 6.13 (175,350)
----- ------- ----- ------- ----- -------
End of period $7.00 428,331 $7.13 478,696 $6.84 495,525
===== ======= ===== ======= ===== =======
Exercisable at end of period $7.01 403,381 $6.95 426,540 $6.61 406,041$8.10 490,285 $7.03 376,564 $7.05 404,172
===== ======= ===== ======= ===== =======
The following table summarizes information about non-qualified stock options
outstanding at December 31, 2001:
Options Outstanding Options Exercisable
-----------------------------------------------------------------------
Average Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
- -------------------- ----------- ----------- -------- ----------- ----------
$5.06 - 9.25 490,285 7.19 $8.10 289,661 $7.30
The Company applies APB Opinion 25 in measuring stock compensation. Accordingly,
no compensation cost has been recorded for options granted to employees or
directors in the years ended December 31, 1999, 19982001, 2000 and 1997.1999. The fair value of
each option granted has been estimated on the grant date using the Black-Scholes
Option Valuation Model. The following assumptions were made in estimating fair
value:
2001 2000 1999
1998 1997
--------------- --------------- -------------------------- ----------- ------------
Risk-Free Interest-Rate 4.01%, 5.16% and 5.68% 5.37% and 5.49% 6.44% and 6.68% 4.53% and 4.94% 5.69% and 6.54%
Expected Life 5 and 10 years 5 and 10 years 15 and 10 years
Expected Volatility 37.2% 39.0% and 38.7% 34.0% and 36.0% 42.0% and 49.3% 32.0% and 49.5%
Had compensation cost been determined under fasbFASB Statement No. 123, net income
and earnings per share would have been reduced as follows:
(in thousands except per share data)
Year Ended December 31,
---------------------------------------------------------------------
2000 2000 1999
1998 1997
---------- ------ -------------- ------
Net Income
As reported $7,035 $5,588 $5,536 $8,869 $5,894
Pro forma $6,145 $4,558 $4,763 $8,682 $5,174
Basic Earnings Per Common Share
As reported $ .50.64 $ .79.51 $ .52.50
Pro forma $ .43.56 $ .78.42 $ .46.43
Diluted Earnings Per Common Share
As reported $ .49.64 $ .77.51 $ .51.49
Pro forma $ .42.55 $ .75.41 $ .45.42
24
Note 4--Income5--Income Taxes
The provision for income taxes consists of:
Year Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
Year Ended December 31,
------------------------------------------
2001 2000 1999
-------- -------- --------
Current:
Federal $4,335,200 $2,507,800 $2,449,700 $4,789,900 $3,361,900
State 1,645,500 687,800 687,800 1,552,900 1,180,100
---------- ---------- ----------
3,137,500 6,342,800 4,542,000
---------- ---------- ----------
Deferred:
Federal 500 (631,700) 194,500
State 49,000 (189,100) 63,500
---------- ---------- ----------
5,980,700 3,137,500 3,137,500
---------- ---------- ----------
Deferred:
Federal (1,074,700) 155,400 500
State (406,000) 45,400 49,000
---------- ---------- ----------
(1,480,700) 200,800 49,500 (820,800) 258,000
---------- ---------- ----------
Tax Provision $4,500,000 $3,551,000 $3,187,000 $5,522,000 $4,800,000
========== ========== ==========
Under FAS 109, deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of the Company's federal and state deferred tax assets and
liabilities are as follows:
Year Ended December 31,
-------------------------
1999 1998
---------- -----------2001 2000
-------- --------
Net current deferred assets:
Allowance for doubtful accounts ..................... $2,903,922 $1,431,335$2,737,985 $1,960,686
Accrued insurance claims- current ................... 315,188 244,037claims-current 471,507 361,773
Expensing of housekeeping supplies .................. (1,449,280) (1,351,318)(1,516,141) (1,496,333)
Deferred compensation 453,518 180,475
Other ............................................... 7,706 -15,976 12,977
---------- ----------
$1,777,536 $ 324,054$2,162,845 $1,019,578
========== ==========
Net noncurrent deferred tax assets:
Deferred profit on laundry installation sales ....... $ 76,80315,352 $ 188,06327,273
Non-deductible reserves ............................. 95,600 1,722,076259,057 426,306
Depreciation of property and equipment .............. (742,268) (715,594)(549,301) (646,639)
Accrued insurance claims- noncurrent ................ 1,185,707 918,0431,773,765 1,360,955
Other ............................................... 12,711 18,94724,271 17,816
---------- ----------
$628,553 $2,131,535$1,523,144 $1,185,711
========== ==========
25
A reconciliation of the provision for income taxes and the amount computed by
applying the statutory federal income tax rate (34%) to income before income
taxes is as follows:
Year Ended December 31,
------------------------------------------
1999 1998 1997
---------- ----------
Year Ended December 31,
---------------------------------------
2001 2000 1999
----------- ---------- ---------
Tax expense computed at
statutory rate $3,922,200 $3,107,200 $2,965,800 $4,892,900 $3,636,100
Increases (decreases) resulting
from:
State income taxes, net of
federal tax benefit 818,100 586,000 486,300 900,100 820,700
Settlement of prior years'
income tax examination -- -- (328,100) - -
Tax exempt interest (77,000) (97,500) (91,900) (400) (268,800)
Nondeductible reserves 416,500
Amortization of costs in
excess of fair value of
net assets acquired 36,600 36,600 36,600 37,100
Other, net (199,700) (81,300) 118,300 (307,200) 158,400
---------- ---------- ----------
$4,500,000 $3,551,000 $3,187,000 $5,522,000 $4,800,000
========== ========== ==========
In June, 1999, the Internal Revenue Service concluded its examination of the tax
years ended December 31, 1997 and 1996. As a result, previously established
reserves are no longer required. The effective rate for 1999 was reduced to
reflect the reversal of these reserves.
Note 5--Related6--Related Party Transactions
The Company, through September, 1999, leased its corporate offices from a
partnership in which the chief executive officer of the Company is a general
partner. The rental payments made during the yearsyear ended December 31, 1999 was
$66,463 and $88,617 per year in 1998 and 1997.were
$66,463. The Company made no leasehold improvements on such property in 1999, 1998 or 1997.1999.
A director of the Company has an ownership interest in several client
facilities which have entered into service agreements with the Company. During
the years ended December 31, 1999, 19982001, 2000 and 19971999 the agreements with the client
facilities which the director has an ownership interest resulted in Company
revenues of approximately $3,032,296, $2,931,000$3,440,000, $3,265,000 and $2,957,000,$3,033,000, respectively.
Note 6--Segment7--Segment Information
The Company providesmanages and evaluates its operations in two reportable operating
segments. The two operating segments are housekeeping, laundry, linen facility maintenanceand other
services, and food service. While both segments serve the same client base and
share many operational similarities, they are managed separately due to distinct
differences in the type of service provided, as well as the specialized
expertise required of the professional management personnel responsible for
delivering the respective segments' services. Prior to 2001, food service was
not deemed a reportable segment as its revenues did not meet the quantitative
threshold of FASB SFAS 131. The company considers the various services provided
within the housekeeping, laundry, linen and other services' segment to the healthcare industry. The Company considers its business to
consist ofbe one
reportable operating segment, based on the service business
categories, providedsince such services are rendered pursuant to a client facility, sharing similar economic
characteristics insingle
service agreement, as well as the naturedelivery of such services being managed by the
same management personnel.
Differences between the reportable segments' operating results and other
disclosed data, and the Company's consolidated financial statements relate
primarily to corporate level transactions, as well as transactions between
reportable segments and an 100% owned warehousing and distribution subsidiary.
The subsidiary's transactions with reportable segments are immaterial and are
made on a basis intended to reflect the fair market value of the service provided, methodgoods
transferred. Segment amounts disclosed are prior to any elimination entries made
in consolidation.
26
The housekeeping, laundry, linen and other services' segment of delivering
service and client base. Although the Company does
provide services in Canada, although essentially all of its revenuerevenues and net
income, approximately 99%, in both categories, are earned in one geographic area, the United
States.
Housekeeping,
laundry, linen
and other Food Corporate and
services services eliminations Total
------------ ----------- ------------- -----
Year Ended December 31, 2001
Revenues $244,634,409 $40,442,352 $ (887,251) $284,189,510
Income before income taxes 17,478,914 1,672,788 (7,616,341)(1) 11,535,361
Depreciation and Amortization 1,377,655 21,258 842,560 2,241,473
Total assets 68,256,140 9,377,899 43,156,458 (2) 120,790,497
Year Ended December 31, 2000
Revenues $234,519,076 $21,813,749 $(1,664,612) $254,668,213
Income before income taxes 15,567,038 125,499 (6,553,785)(1) 9,138,752
Depreciation and Amortization 1,450,567 10,543 749,047 2,210,157
Total assets 69,921,784 7,046,050 31,375,030 (2) 108,342,865
Year Ended December 31, 1999
Revenues $220,809,064 $12,018,141 $ (395,317) $232,431,888
Income before income taxes 15,060,078 (97,634) (6,239,383)(1) 8,723,061
Depreciation and Amortization 1,586,358 6,821 556,556 2,149,735
Total assets 68,085,054 4,239,443 25,705,385(2) 98,029,882
(1) represents primarily corporate office cost and related overhead, as well as
certain operating expenses that are not allocated to the service segments.
(2) represents primarily cash and cash equivalents, deferred income taxes and
other current and noncurrent assets.
The Company earned revenue in the following service business categories:
Year Ended December 31,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Housekeeping services $150,344,000 $134,727,000 $127,255,000
Laundry & linen services 67,014,000 53,066,000 43,372,000
Food services 12,114,000 13,374,000 8,085,000
Maintenance services &
other 2,960,000 3,702,000 2,647,000
------------ ------------ ------------
$232,432,000 $204,869,000 $181,359,000
Year Ended December 31,
-----------------------------------------
2001 2000 1999
------------ ------------ ------------
Housekeeping services $170,921,662 $161,840,927 $150,343,572
Laundry and linen services 70,332,656 68,285,181 67,013,585
Food Services 40,075,685 21,602,962 12,113,838
Maintenance services and Other 2,859,507 2,939,143 2,960,893
------------ ------------ ------------
$284,189,510 $254,668,213 $232,431,888
============ ============ ============
26
The Company had one client in 2001 which accounted for approximately 14% of
consolidated revenue. In respect to such client, the Company derived revenues
from both operating segments.
27
Note 7--Earnings8--Earnings Per Common Share
A reconciliation of the numerator and denominators of basic and diluted earnings
per common share is as follows:
Year Ended December 31, 1999
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Year Ended December 31, 2001
------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ----------
Net Income $7,035,361
Basic earnings per
common share 7,035,361 10,928,281 $ .64
Effect of dilutive
securities:
Options 149,665
---------- ---------- ----------
Diluted earnings per
common share $7,035,361 11,077,946 $ .64
========== =========== ==========
Year Ended December 31, 2000
------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ----------- ----------
Net Income $5,587,752
==========
Basic earnings per
common share 5,587,752 10,963,937 $ .51
Effect of dilutive
securities:
Options 19,028
---------- ----------- ----------
Diluted earnings per
common share $5,587,752 10,982,965 $ .51
========== =========== ==========
Year Ended December 31, 1999
------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
---------- ----------- ----------
Net Income $5,536,061
==========
Basic earnings per
common share 5,536,061 11,052,728 $ .50
Effect of dilutive
securities:
Options 232,864
---------- ----------- ---------- ---------- --------
Diluted earnings per
common share $5,536,061 11,285,592 $ .49
========== =========== ==========
========== ========
Year Ended December 31, 1999
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $8,868,853
Basic earnings per
common share 8,868,853 11,187,615 $ .79
Effect of dilutive
securities:
Options 324,582
---------- ----------- --------
Diluted earnings per
common share $8,868,853 11,512,197 $ .77
========== ========== ========
Year Ended December 31, 1999
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $5,894,334
Basic earnings per
common share 5,894,334 11,353,602 $ .52
Effect of dilutive
securities:
Options 224,538
---------- ----------- --------
Diluted earnings per
common share $5,894,334 11,578,140 $ .51
========== ========== ========
Options to purchase 151,284; 27,215563,708, 1,176,288 and 321,450151,284 shares of common stock at
an average exercise price of $9.38, $9.78$7.92, $7.57 and $8.39$9.38 for the years ended December
31, 1999, 19982001, 2000 and 1997,1999, respectively were outstanding during such years but not
included in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market value of the common shares.
2728
Note 8--Other9--Other Contingencies
The Company has a $18,000,000 bank line of credit increased from $13,000,000 at
December 31, 1998, under which it may draw to
meet short-term liquidity requirements or for other purposes, that expires on
September 30, 2000.2002. The Company believes the line will be renewed at that time.
Amounts drawn under the line are payable upon demand. At both December 31, 19992001
and 1998,2000, there were no borrowings under the line. However, at such dates, the
Company had outstanding approximately $13,500,000 and $13,000,000, respectively
of irrevocable standby letters of credit, which relates 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 $13,500,000 and
$13,000,000 at December 31, 19992001 and fully
utilized at December 31, 1998.2000, 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.
Legislation enacted in August 1997 changed Medicare policy in a number of
ways, most notably the phasing in, effective July 1, 1998, of a Medicare
Prospective Payment System ("PPS") for skilled nursing facilities which
significantly changed the manner and the amounts of reimbursement they receive.
The Company's clients have been and continue to be adversely effected by PPS, as
well as other trends in the long-term care industry resulting in certain of the
Company's clients recently filing bankruptcy and othersbankruptcy. Others may follow. This,These factors in
addition to delays in payments from clients has resulted in and could continue
to result in significant additional bad debts in the near future.
Note 9--Settlement of Civil Litigation
On July 24, 1997 the Company and the U.S. Attorney for the Eastern District of
Pennsylvania reached a settlement of the civil litigation commenced by the
United States Attorney on or about May 24, 1996. This litigation was a result of
and arose from (1) payments made by the Company for supplies which were
allegedly furnished to clients of the Company and the actions of the Company
after the payments were made and (2) payments made to certain clients of the
Company in connection with the purchase of laundry installations from those
clients. All claims described in the complaint were settled through the payment
in July, 1997 of $1,225,000 to the United States government. The Company and its
officers denied all allegations, and all allegations against the Company and its
officers were dismissed with prejudice. The monetary impact of this settlement
plus estimated related legal costs of $575,000, amounting to approximately
$1,800,000 was accrued at June 30, 1997 and reduced the net income for the year
ended December 31, 1997 by $1,577,000 or $.14 per basic common share and $.13
per diluted common share (after effect of the August 27, 1998 three-for-two
stock split).
Note 10--Accrued Insurance Claims
For years 19971999 through 1999,2001 the Company has a Paid Loss Retrospective Insurance
Plan for general liability and workers' compensation insurance. Under these
plans, pre-determined loss limits are arranged with an insurance company to
limit both the Company's per occurrence cash outlay and annual insurance plan
cost.
For workers' compensation, the Company records a reserve based on the present
value of future payments, including an estimate of claims incurred but not
reported, that are developed as a result of a review of the Company's historical
data and actuarial analysis done by an independent company.company specialist. The
accrued insurance claims were reduced by approximately $2,763,000, $2,200,000$2,138,000, $2,975,000
and $2,353,000$2,763,000 at December 31, 1999, 19982001, 2000 and 1997,1999, respectively in order to
record the estimated present value at the end of each year using an 8% interest
factor. For general liability insurance, the Company records a reserve for the
estimated ultimate amounts to be paid for known claims.
28
Note 11--Employee Benefit Plans
Employee Stock Purchase Plan
Effective January 1, 2000, the Company subject to shareholder approval,
initiated ana non-compensatory Employee
Stock Purchase Plan ("the ESPP") for all eligible employees. All full-time and
certain part-time employees who have completed two years of continuous service
with the Company are eligible to participate. The planimplementation of the ESPP is to
be implemented
by four annual offerings with the first annual Offering Commencement Date beingcommencing January 1,
2000 with a December 31, 2000 termination.2000. The remaining three annual offerings likewise commence and terminate on
the respective year's first and last calendar day. Under the plan,ESPP, the Company
is authorized to issue up to 800,000 shares of its common stock to its
employees. Furthermore, under the terms of the plan,ESPP, eligible employees can
choose each year to have up to $25,000 of their annual earnings withheld to
purchase the Company's Common Stock. The purchase price of the stock is 85% of
the lower of its beginning or end of the plan year market price.
NoAs a result of the 2001 and 2000 annual offerings, a total of 23,926 and 38,753
shares of the company's common stock were held inpurchased at $5.42 per common share
for 2001 and 2000, respectively under the plan at December 31, 1999.ESPP. The 2001 and 2000 annual
offerings' shares were issued on January 8, 2002 and January 6, 2001,
respectively.
Retirement Savings Plan
On October 1, 1999, the Company established a retirement savings plan for
non-highly compensated employees ("the RSP") under Section 401(k) of the
Internal Revenue Code. This savings planThe RSP allows eligible employees to contribute up to
fifteen percent (15%) of their compensation on a pre-tax basis. There is no
match by the Company.
Deferred Compensation Plan
Effective January 1, 2000, the Company initiated subject to shareholder
approval, a Supplemental Executive
Retirement Plan ("the SERP") for certain key executives and employees. The PlanSERP
is not qualified under section 401 of the Internal Revenue Code. Under the plan,SERP,
participants may defer up to fifteen percent (15%) of their income on a pre-tax
basis. As of the last day of each Planplan year, each participant will receive a
twenty-five percent (25%) match of their deferral in the Company's common stock
based on the then current market value. PlanSERP participants fully vest in the
Company's match three years from the lastfirst day of the initial year of
participation. Shares of Company stock are to be issued to
the participant upon eligible retirement or employment termination subject to
the vesting rules. The income deferred and the Company match are unsecured and
subject to the claims of general creditors of the Company. No shares were
reserved for future allocationThe amounts expensed
under the PlanSERP during the years ended December 31, 2001 and 2000 were
approximately $102,470 and $34,025, respectively. The Company funded such
expense through the reissuance to the SERP's trustee of 13,509 in 2001 and
15,822 in 2000 of common shares of the Company's treasury stock. Such shares are
accounted for as treasury stock. The SERP's trust account had a balance of
$832,677 and $349,384 at December 31, 1999.
Note 12--1999 Fourth Quarter Adjustments - Unaudited
During the fourth quarter of 1999,2001 and 2000, respectively. The account's
investments are recorded at their fair value which is based on quoted market
prices. Accordingly, the Company increased its allowancerecorded unrealized losses of $65,768 and
$54,225 for doubtful accounts by approximately $5,000,000 as a resultthe years ended December 31, 2001 and 2000, respectively.
29
Note 12--Selected Quarterly Financial Data (Unaudited)
(in thousands except for per share data)
Three Months Ended
------------------------------------------------
March 31 June 30 September 30 December 31
------------------------------------------------
2001
Revenues $66,618 $69,276 $72,500 $75,796
Operating costs and expenses $64,255 $66,737 $69,768 $73,142
Income before income taxes $ 2,671 $ 2,796 $ 3,012 $ 3,056
Net income $ 1,629 $ 1,705 $ 1,837 $ 1,864
Basic earnings per common share(1) $ .15 $ .16 $ .17 $ .17
Diluted earnings per common share(1) $ .15 $ .16 $ .17 $ .17
2000
Revenues $60,127 $63,850 $65,211 $65,480
Operating costs and expenses $57,880 $61,219 $62,513 $64,906
Income before income taxes $ 2,461 $ 2,854 $ 2,963 $ 861
Net income $ 1,501 $ 1,754 $ 1,808 $ 525
Basic earnings per common share(1) $ .14 $ .16 $ .17 $ .05
Diluted earnings per common share(1) $ .14 $ .16 $ .17 $ .05
(1) Year-to-date Earnings Per Share amounts may differ from the sum of financial
difficulties incurred by its client base arising from changes in Medicare
payments enacted underquarterly
amounts due to rounding.
Note 13--Recent Accounting Pronouncements
Business Combinations and Intangible Assets - Accounting for Goodwill
On July 20, 2001 the "Prospective Pay System",Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets. SFAS 141 is effective for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginning after December 15, 2001; however, certain provisions of
this Statement apply to goodwill and other industry trends,
including recent bankruptcy petitions filed by some national clients. The
Company assessesintangible assets acquired between
July 1, 2001 and the adequacyeffective date of its allowance on a quarterly basis by analyzing
its receivables on a client-by-client basis, with particular emphasis on those
in bankruptcy, slow payers experiencing financial difficultySFAS 142. Major provisions of these
Statements and terminated
accounts.
During the fourth quarter of 1999,their effective dates for the Company increased its accrued workers'
compensation insurance claimsare as follows:
o all business combinations initiated after June 30, 2001 must use the
purchase method of accounting. The pooling method of accounting is
prohibited except for transactions initiated before July 1, 2001.
o intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal
rights or are separable from the acquired entity and can be sold,
transferred, licensed, rented or exchanged, either individually or as part
of a related contract, asset or liability
by approximately $1,200,000 as a result
of an approximately 30% increase in the number of claims incurred during the
quarter, as compared to previous 1999 quarters,o goodwill, as well as intangible assets with indefinite lives, acquired
after June 30, 2001, will not be amortized. Effective January 1, 2002, all
previously recognized goodwill and intangible assets with indefinite lives
will no longer be subject to amortization.
o effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an
impairment indicator
o all acquired goodwill must be assigned to reporting units for purposes of
impairment testing and segment reporting o the Company will no longer
recognize amortization expense of approximately 20%
increase in$107,000 per year effective
January 1, 2002 related to its intangible assets
Although it is still reviewing the amount paid per claim incurred.
29provisions of these Statements, management's
preliminary assessment is that these Statements will not have a material impact
on the Company's financial position or results of operations.
Accounting for the Impairment or Disposal of Long-lived Assets
On October 3, 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets which
supercedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of. SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 but sets forth new criteria for asset classification
and broadens the scope of qualifying discontinued operations. The Company will
adopt SFAS No. 144 as of January 1, 2002. The Company's management believes the
adoption of SFAS No. 144 will be immaterial to its results of operations and
financial condition.
30
Report Of Independent Certified Public Accountants
The Stockholders and Board of Directors
Healthcare Services Group, Inc.
We have audited the accompanying consolidated balance sheets of Healthcare
Services Group, Inc. and subsidiaries as of December 31, 19992001 and 1998,2000, and the
related consolidated statements of income, cash flows, and stockholders' equity and cash flows
for each of the three years in the period ended December 31, 1999.2001. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States.States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Healthcare Services Group, Inc. and subsidiaries at December 31, 19992001 and 19982000
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 1999,2001, in
conformity with accounting principles generally accepted in the United States.States of
America.
/s/ Grant Thornton LLP
Edison, New Jersey
February 18, 2000
30
Market Makers
As of the end of 1999, the following firms were making a market in the shares of
Healthcare Services Group, Inc.:
Salomon Smith Barney Inc.
Herzog, Heine, Geduld, Inc.
Wedbush Morgan Securities, Inc.
Spear, Leeds & Kellogg
C. L. King & Associates
Knight Securities L.P.
About Your Shares
Healthcare Services Group, Inc.'s common stock is traded on the NASDAQ National
Market System of the over-the-counter market. On December 31, 1999 there were
11,064,107 of the Company's common shares issued and outstanding. As of March 8,
2000 there were approximately 290 holders of record of the common stock,
including holders whose stock was held in nominee name by brokers or other
nominees. It is estimated that there are approximately 2,600 beneficial holders.
Price quotations during the two years ended December 31, 1999, ranged as
follows:
1999 High 1999 Low
--------- --------
1st Qtr. ................................................ 11 1/2 9 1/8
2nd Qtr. ................................................ 10 5/8 8 3/4
3rd Qtr. ................................................ 9 7/8 7 7/8
4th Qtr. ................................................ 8 1/2 6 5/8
1998 High 1998 Low
--------- --------
1st Qtr. ................................................ 9 15/16 8 1/3
2nd Qtr. ................................................ 9 9/16 9 1/3
3rd Qtr. ................................................ 11 11/16 8 3/16
4th Qtr. ................................................ 9 7/8 8 3/8
31
Transfer Agent
American Stock Transfer & Trust Co.
99 Wall St.- ----------------------
New York, NY 10005
Corporate Counsel
Olshan Grundman Frome
Rosenzweig LLP
505 Park Ave.
New York
NY 10022
Stock Listing
Listed on the NASDAQ
National Market System Symbol - "HCSG"
Auditors
Grant Thornton LLP
399 Thornall Street
Edison, NJ 08837
Corporate Offices
Healthcare Services Group, Inc.
3220 Tillman Drive, Suite 300
Bensalem, PA 19020
215-639-4274
Annual Stockholders' Meeting
Date - May 30, 2000
Time - 10:00 A.M.
Place - The Radisson Hotel of Bucks County
2400 Old Lincoln Highway
Trevose, PA 19047
32February 14, 2002
31
Officers and Corporate Management
Daniel P. McCartney
Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
Alan L. Crowell
Vice President - Food Service Division
James L. DiStefano
Chief Financial Officer and Treasurer
Michael Harder
Vice President - Credit Administration
Richard W. Hudson
Vice President - Finance and Secretary
John D. Kelly
Western Divisional Vice President
Nicholas R. Marino
Human Resources Director
Michael E. McBryan
Mid-Atlantic Divisional Vice President - Sales
Bryan D. McCartney
Mid-Atlantic Divisional Vice President
Joseph F. McCartney
Northeastern Divisional Vice President
James P. O'Toole
Mid-Atlantic Regional Vice President
Brian M. Waters
Vice President - Operations
Michael L. Wyse
Western Divisional Vice President - Sales
Directors
Daniel P. McCartney
Chairman & Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
Joseph F. McCartney
Northeastern Divisional Vice President
Barton D. Weisman
President & CEO-H.B.A. Corp.
W. Thacher Longstreth
Vice Chairman - Packard Press
Robert L. Frome, Esq.
Senior Partner - Olshan Grundman Frome Rosenzweig LLP
Robert J. Moss, Esq.
President - Moss Associates
John M. Briggs, CPA
Partner - Briggs, Bunting & Dougherty LLP
Availability of Form 10-K
A copy of Healthcare Services Group, Inc.'s 1999 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, will be provided without
charge to each shareholder making a written request to the Investor Relations
Department of the Company at its Corporate Offices.
33
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 1999,
copies of which accompany this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding Directors and executive officers is
incorporated herein by reference to the Company's definitive proxy statement to
be mailed to its shareholders in connection with its 20002002 Annual Shareholders'
Meeting and to be filed within 120 days of the close of the year ended December
31, 1999.2001.
Directors holding approximately 12.6%10.1% of the outstanding voting stock
of the Registrant have been deemed to be "affiliates" solely for the purpose of
calculating the aggregate market value of the voting stock held by
non-affiliates set forth on the cover page of this Report.
Item 11. Executive Compensation
The Informationinformation regarding executive compensation is incorporated herein
by reference to the Company's definitive proxy statement to be mailed to
shareholders in connection with its 20002002 Annual Shareholders Meeting and to be
filed within 120 days of the close of the fiscal year ended December 31, 1999.2001.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference to the Company's
definitive proxy statement to be mailed to shareholders in connection with its
2002 Annual Meeting and to be filed within 120 days of the close of the fiscal
year ending December 31, 2001.
Directors holding approximately 10.1% of the outstanding voting stock
of the registrant have been deemed to be "affiliates" solely for the purpose of
computing the aggregate market value of the voting stock held by non-affiliates
set forth on the cover page of this Report.
32
Item 13. Certain Relationships and Related Transactions
The information regarding certain relationshiprelationships and related
transactions is incorporated herein by reference to the Company's definitive
proxy statement mailed to shareholders in connection with its 20002002 Annual
Shareholders Meeting and to be filed within 120 days of the close of the fiscal
year ended December 31, 1999.
34
2001.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The documents shown below are contained in the Company's
Annual Report to Shareholders for 19992001 and are incorporated herein by
reference, copies of which accompany this Report.report.
Report of Independent Certified Public Accountants.
Balance Sheets as of December 31, 19992001 and 1998.2000.
Statements of Income for the three years ended December 31, 1999, 19982001, 2000
and 1997.
Statements of Stockholders Equity for the three years ended December
31, 1999, 1998 and 1997.1999. Statements of Cash Flows for the three years ended December
31, 1999,
19982001, 2000 and 1997.1991. Statement of Stockholders' Equity for the
three years ended December 31, 2001, 2000 and 1999. Notes to Financial
Statements.
2. Financial Statement Schedules
Included in Part IV of this report:
Consent of Independent Certified Public Accountants.
Report of Independent Certified Public Accountants.
Schedule II - Valuation and Qualifying Accounts for the three years
ended December 31, 1999, 19982001, 2000 and 1997.
Financial Data Schedule.1999.
All other schedules are omitted since they are not required, not
applicable or the information has been included in the Financial Statements or
notes thereto.
3533
3. Exhibits
The following Exhibits are filed as part of this Report
(references are to Reg. S-K Exhibit Numbers):
Exhibit
Number Title
- -------Exhibit
Number Title
- ------ -----
3.1 Articles of Incorporation of the Registrant, as amended, are
incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-2 (File No. 33-35798).
3.2 Amendment to Articles of Incorporation of the Registrant as of May
30, 2000, is incorporated by reference to Exhibit 3.2 of the
Registrant's Form 10-K for the year ended December 31, 2000.
3.3 Amended By-Laws of the Registrant as of July 18, 1990, are
incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-2 (File No. 33-35798).
4.1 Specimen Certificate of the Common Stock, $.01 par value, of the
Registrant is incorporated by reference to Exhibit 4.1 of
Registrant's Registration Statement on Form S-18 (Commission File
No. 2-87625-W).
4.2 Employee Stock Purchase Plan of the Registrant is incorporated by
reference to Exhibit 4(a) of Registrant's Registration Statement
on Form S-8 (Commission File No. 333-92835)
4.3 Deferred Compensation Plan is incorporated by reference to Exhibit
4(b) of Registrant's Registration Statement on Form S-8
(Commission File No. 333-92835)
10.1 Incentive Stock Option Plan adopted on August 31, 1983, amended and readopted
on April 30, 1991 is incorporated by reference to Exhibit 10.1 of Registrant's
Registration Statement on Form S-18 (Commission File No. 2-87625-W), as well as by
reference to the Company's definitive proxy statement dated April 30, 1991.
10.2 1995 Incentive and Non-Qualified Stock Option Plan, as amended
(incorporated by reference to Exhibit 4(d) of the Form S-8 filed
by the Registrant, Commission File No. 33-58765).
10.2 Amendment to the 1995 Employee Stock Option Plan is incorporated
by reference To Exhibit 4(a) of Registrant's Registration
Statement on Form S-8 (Commission File No. 333-46656)
10.3 1996 Non-Employee Directors' Stock Option Plan, Amended and
Restated as of October 28, 1997 (incorporated by reference to
Exhibit 10.6 of Form 10-Q Report filed by Registrant on November
14, 1997)
10.4 1995 Non-Qualified Stock Option Plan for Directors (incorporated
by reference to the Company's Definitive Proxy Statement dated
April 21, 1995.)
10.5 Form of Non-Qualified Stock Option Agreement granted to certain
Directors is incorporated by reference to Exhibit 10.9 of
Registrant's Registration Statement on Form S-1 (Commission File
No. 2-98089).
23. Consent of Independent Certified Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K
None
3634
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 14, 200021, 2002 HEALTHCARE SERVICES GROUP, INC.
(Registrant)
By: /s/ Daniel P. McCartney
-----------------------
Daniel P. McCartney
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons and in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Daniel P. McCartney Chief Executive Officer and March 14, 2000
- ----------------------- Chairman
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 14, 2000
- -----------------------
Joseph F. McCartney
/s/ W.Thacher Longstreth Director March 14, 2000
- ------------------------
W. Thacher Longstreth
/s/ Barton D. Weisman Director March 14, 2000
- ---------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 14, 2000
- -------------------
Robert L. Frome
/s/ Thomas A. Cook Director, President and March 14, 2000
- ------------------ Chief Operating Officer
Thomas A. Cook
/s/ John M. Briggs Director March 14, 2000
- ------------------
John M. Briggs
/s/ Robert J. Moss Director March 14, 2000
- ------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 14, 2000
- ---------------------- Treasurer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance, March 14, 2000Signature Title Date
--------- ----- ----
/s/ Daniel P. McCartney Chief Executive Officer and March 21, 2002
- ----------------------- Chairman
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 21, 2002
- -----------------------
Joseph F. McCartney
/s/ W.Thacher Longstreth Director March 21, 2002
- ------------------------
W. Thacher Longstreth
/s/ Barton D. Weisman Director March 21, 2002
- ---------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 21, 2002
- -------------------
Robert L. Frome
/s/ Thomas A. Cook Director, President and March 21, 2002
- ------------------ Chief Operating Officer
Thomas A. Cook
/s/ John M. Briggs Director March 21, 2002
- ------------------
John M. Briggs
/s/ Robert J. Moss Director March 21, 2002
- ------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 21, 2002
- ---------------------- Treasurer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance, March 21, 2002
- --------------------- Secretary and Chief
Richard W. Hudson Accounting Officer
37
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 18, 2000, accompanying the
consolidated financial statements and schedule included in the Annual Report of
Healthcare Services Group, Inc. on Form 10-K for the year ended December 31,
1999. We hereby consent to the incorporation by reference of said reports in the
Post-Effective Amendment No. 1 to the Registration Statements (Forms S-8 No.
2-95092 and No. 2-99215), and in the Registration Statement (Form S-8 No.
33-58765) pertaining to the Incentive Stock Option Plan and the Non-Qualified
Stock Option Plans of Healthcare Services Group, Inc. and in the Registration
Statement (Form S-8 No. 333-92835) pertaining to the Employee Stock Purchase
Plan and Deferred Compensation Plan of Healthcare Services Group, Inc.
GRANT THORNTON LLP
Edison, New Jersey
February 18, 2000
14
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
Healthcare Services Group, Inc.
In connection with our audits of the consolidated financial statements of
Healthcare Services Group, Inc., referred to in our report dated February 18,
2000, which is included in the Annual Report to shareholders and is incorporated
by reference in Form 10-K, we have also audited Schedule II for each of the
three years in the period ended December 31, 1999. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
Grant Thornton LLP
- -----------------------
Edison, New Jersey
February 18, 2000
38
Healthcare Services Group, Inc.
Schedule II -- Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998, and 1997
Balance- Charged to Charged to
Beginning of Costs and Other Deductions Balance-End
Description Period Expenses Accounts(A) (B) of Period
- ----------- ------ -------- ----------- ---------- -----------
1999
Allowance for Doubtful
Accounts $3,449,000 $7,250,314 $3,421,314 $7,278,000
========== ========== ========== ========== ==========
Allowance for Doubtful
Accounts--Long-term Notes $2,777,580 $ 816,214 $3,593,794 -0-
========== ========== ========== ========== ==========
1998
Allowance for Doubtful
Accounts $3,663,000 $2,339,515 $2,553,515 $3,449,000
========== ========== ========== ========== ==========
Allowance for Doubtful
Accounts--Long-term Notes $ 336,500 $2,441,080 $2,777,580
========== ========== ========== ========== ==========
1997
Allowance for Doubtful
Accounts $3,812,000 $ 899,551 $1,048,551 $3,663,000
========== ========== ========== ========== ==========
Allowance for Doubtful
Accounts--Long-term Notes $ 350,000 $ 13,500 $ 336,500
========== ========== ========== ========== ==========
(A) Represents reclassifications from allowance for doubtful accounts and other
accounts.
(B) Represents write-offs and reclassifications to allowance for doubtful
accounts--long term notes.35