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, 20012002
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) Identification No.)
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
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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
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Indicate by check mark whether the registrant is an accelerated filer
as defined in Rule 12b-2 of the Act).
YES 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 15,June 30, 2002 was
approximately $115,356,000.$174,000,000. Indicate the number of shares outstanding of each of
the registrant's classes of common stock, as of the latest practicable date: At
March 15, 20027, 2003 there were outstanding 11,159,93411,186,005 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"we," "our," or the Registrant"us" 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 believesWe
believe that it iswe are the largest provider of contractual housekeeping and laundry
services to the long-term care industry in the United States, rendering such
services to approximately 1,2001,300 facilities in 43 states and Canada as of
December 31, 2001.2002.
(b) Not Applicable;Segment Information
The information called for herein is incorporated by reference
to the Company's Annual Report to Shareholders for the year ended December 31,
2002, a copy of which accompanies this Report.
(c) Description of Services
The Company providesWe provide 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'sOur 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 believesWe believe that each service provides
opportunity for growth. At December 31, 2001, the Company had2002, one client, Beverly Enterprises,
Inc., which accounted for approximately 14%17% of our total consolidated revenues. The CompanyWe
derived revenues from Beverly Enterprises, Inc. in both the Housekeeping and
Food Services' sectors.
Housekeeping services. Housekeeping services is theour largest service
sector, of the Company, representing approximately 60% or $170,921,662$196,770,462 of total consolidated
revenues in 2001.2002. It involves cleaning, disinfecting and sanitizing resident
areas in the facilities. In providing services to any given client facility, the Companywe
typically hireshire and trainstrain the hourly employees who were employed by such facility
prior to the engagement of the Company. The Companyour engagement. We normally assignsassign two on-site managers to each
facility to supervise and train hourly personnel and to coordinate housekeeping
services 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.
1
Laundry and linen services. Laundry and linen services is the other
significant service sector of the Company, representingrepresents
approximately 25%24% or $70,332,656$79,148,184 of total consolidated revenues in 2001.2002. Laundry
services involves laundering and processing of the residents' personal clothing.
The Company
providesWe provide laundry service to all of itsour 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. At
some of the facilities that utilize the Company'sour linen service, the Company haswe have installed itsour own
equipment. Such installation generally requires an initial capital outlay by the Company ofus
ranging from $50,000 to $250,000 depending on the size of the facility,
installation and construction costs, and the amount of equipment required. The CompanyWe
could incur relocation or other costs in the event of the cancellation of a
linen service agreement where there was an investment by the Companyus 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, 19992000 through December 31, 2001 the Company's2002, our services were
cancelled by 10172 facilities with respect to which the Companywe had previously invested in a
laundry installation. Laundry installations relating to facilities where such
service agreements were cancelled in 2002 and 2001 resulted in the
Companyour receiving
approximately $8,000 and $11,000, respectively, less than the net amount at
which these assets were recorded on itsour balance sheet. In the yearsyear ended
December 31, 1999
and 2000, respectively, laundry installations, relating to clients whose service
agreements with the Companyus were terminated, were sold to the Company'sour clients for an amount in
excess of the net amount recorded on the Company'sour balance sheet. In some instances we own
linen supplies, are owned by the Company, and the
Company maintainswe maintain a sufficient inventory of these items in order
to ensure their availability. The Company providesWe provide linen supplies to approximately twenty
per cent of the facilities for which it provideswe provide housekeeping services.
Maintenance and other services . Maintenance services consist of repair
and maintenance of laundry equipment, plumbing and electrical systems, as well
as carpentry and painting. This service sector's total revenues represent
approximately less than 2% of 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 commencedIn 1997, we began providing food services in 1997
andwhich
represents approximately 14%15.5% or $40,075,685$50,959,106 of total consolidated revenues in
2001.2002. Food services consist of the development of a menu that meets the
residents' dietary needs, purchasing and preparing the food to assure thethat
residents receive an appetizing meal, and participation in monitoring the
residents' on-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
CompanyWe also
providesprovide consulting services to facilities to assist them in updating and cost
containment with respect to a client's food service operation.operations.
Maintenance and other services. Maintenance services consist of repair
and maintenance of laundry equipment, plumbing and electrical systems, as well
as carpentry and painting. This service sector's total revenues represent less
than 1% of total consolidated revenues. We also provide consulting services to
facilities to assist them in updating their housekeeping, laundry and linen
operations.
Laundry installation sales. The CompanyWe (as distributor of laundry equipment)
sellssell laundry installations to itsour clients which generally represent the
construction and installation of a turn-key operation. The CompanyWe generally offersoffer
payment terms, ranging from 36 to 60 months. There were no service agreement
cancellations in 2002, 2001 2000 or 19992000 by clients who have purchased laundry
installations from the Company.us. During the years 19992000 through 2001,2002, laundry installation
sales were not material to the Company'sour operating results as the Company preferswe prefer to own such
laundry installations in connection with performance of itsour service agreements.
2
Operational-Management Structure
By applying itsour professional management techniques, the Company iswe are generally
able to contain or control certain housekeeping, laundry, linen, facility
maintenance and food service costs on a continuing basis. The Company
managesWe manage and provides itsprovide
our 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
(4 Divisions)
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Regional Vice President/Manager
(28(29 Regions)
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District Manager
(113(153 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'sour on-site
management. Training Managers are responsible for the recruitment, training and
development of Facility Managers. At December 31, 2001, the Company2002, we maintained 2829 regions
within four divisions. A division consists of a number of regions within a
specific geographical area. Divisional Vice Presidents manage each division.
Each region is headed by a Regional Vice President/Manager. Some regions have a
Regional Sales Director who assumes primary responsibility for marketing the Company'sour
services. Regional Vice President/Managers report to Divisional Vice Presidents
who in turn report to the President or Vice President of Operations. The Company believesWe believe
that itsour divisional, regional and district organizational structure facilitates
itsour ability to obtain new clients, as well
as itsand our ability to sell additional services
to existing clients.
3
Market
The market for the Company'sour 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'sour 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 itsour
targeted market.
In 20012002, 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 itsWe market our services primarily
to facilities with 100 or more beds. The Company believesWe believe that approximately eight percent
of long-term care facilities use outside providers of housekeeping and laundry
services such as the Company.services.
Marketing and Sales
The Company'sOur services are marketed at four levels of the Company'sour organization: at the
corporate level by the Chief Executive Officer, President and the Vice President
of Operations,Operations; at the divisional level by Divisional Vice 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 providesWe provide incentive
compensation to itsour operational personnel based on achieving budgeted earnings
and to itsour Regional Sales Directors based on achieving budgeted earnings and new
business revenues.
The Company'sOur services are marketed primarily through referrals and in-person
solicitation of target facilities. The CompanyWe also utilizesutilize direct mail campaigns and
participatesparticipate 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 itswe conduct our
business. The Company'sOur 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.us. Indications of interest in the Company'sour
services arising from initial marketing efforts are followed up with a
presentation regarding the Company'sour 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 Companywe can set up itsour operations on-site within days.
4
Government Regulation of Clients
The Company'sOur clients are subject to governmentalgovernment regulation. In August
1997,Congress has enacted
three major laws during the President signed into law the Balancedpast six years that have significantly altered
government payment procedures and amounts for nursing home services. The Balance
Budget Act of 1997 ("BBA"). BBA
amended the Medicare program by revising the payment system for skilled nursing
services. Additionally, BBA required the establishment of a Prospective Pay
System ("PPS"), a system under which Medicare Part A payment is prospectively
determined for skilled nursing facilities for cost reporting periods beginning
on or after July 1, 1998. Under PPS, skilled nursing facilities receive a fixed
per diem rate for each of their Medicare Part A patients that, during the 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 will occur in
2002, all per diem rates will be based solely on 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 and the Medicare, Medicaid,
and SCHIP Benefits Improvement and Protection Act of 2000 ("BIPA"). Effective
April 1, 2000,The
following provides a brief summary of these laws.
Under BBA, participating nursing facilities are reimbursed under a
prospective payment system referred to as PPS. Under PPS, nursing homes are paid
a predetermined amount per patient, per day based on the BBRA temporarily increased the PPSanticipated costs of
treating patients. The per diem ratesrate is determined by 20
percentclassifying each patient
into one of forty-four resource recovery groups ("RUG"). PPS has had, and
continues to have an adverse impact on the revenues of many nursing homes.
In November 1999, Congress passed BBRA. This enactment provided relief
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 forcertain reductions in 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 intended 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 inreimbursement caused by PPS. For covered
skilled nursing home services, the federal per diem rate was increased by 20%
for all patient-acuity categories15 RUG payment categories. These payment add-ons will continue until the
Centers for fiscalMedicare and Medicaid ("CMS") completes certain mandatory
recalculations of current RUG weightings. In April 2002, CMS announced that the
case mix refinements would be postponed for a full year. For 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 theBBRA mandated that federal per diem rates under the BBRA willfor all RUG categories be
in addition to these payment increases.increased an additional 4%.
In December 2000, BIPA also increased payment for the nursing component of each RUG categorythe Federal
PPS rates by 16.66
percent16.7% for services furnished aftera period from April 1, 2001 through September 30, 2002.
The legislation also changed the 20% add-on to 3 of the 14 rehabilitation RUG
categories to a 6.7% add-on to all 14 rehabilitation RUG categories beginning
April 1, 2001.
On September 30, 2002, the BBRA add-on of 4% and beforethe BIPA add-on of
16.7% expired. The expiring add-ons are referred to as the "Medicare Cliff".
CMS announced on July 31, 2002 that effective 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 in2002 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 refined 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 percent2.6%
increase in the nursing component andannual market basket adjustment. CMS estimates that even with
this upward market basket adjustment, Medicare rates will be 8.8% lower than the
4 percent increasecurrent year because of the reduced payment caused by the expiring statutory
add-ons. The Medicare Cliff as well as other trends in the long term care
industry have and could continue to adversely affect the liquidity of the
Company's clients resulting in their inability to make payments on agreed upon
payment terms.
The BBA included provisions affecting Medicaid and repealed the "Boren
Amendment" federal per
diempayment standard for all patient-acuity categories.Medicaid payments to nursing facilities.
With the repeal of the federal payment standards, there can be no assurance that
budget constraints or other factors will not cause states to reduce Medicaid
reimbursements to nursing homes or that payments to nursing homes will be made
on a timely basis. BIPA enacted a phase out of certain governmental transfers
that may reduce federal support for a number of state Medicaid plans. The
MedPAC did recommend, however, that
the 6.7 percentreduced 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 actionimpact aggregate available funds requiring states
to extend
the reimbursement provisions is successful.further contain payments to providers.
5
Although PPS directly affects how clients are paid for certain
services, the Company itself doeswe do not participate in any government reimbursement programs.
Therefore,Accordingly, all of the Company'sour contractual relationships with itsour clients continue to
determine the clients' payment obligations to the Company.us. However, certainclients' revenues are
generally highly contingent on Medicare and Medicaid reimbursement funding
rates. Therefore, many clients have been and continue to be adversely affected
by PPS, as well asand other trends in the long-term care industry resultingwhich have resulted in
certain of our clients filing voluntaryfor bankruptcy petitions.protection. Others may follow (see
" Liquidity and Capital Resources").
The prospects for legislative relief is uncertain. We are unable to
estimate the ultimate impact of any changes in reimbursement programs effecting
our clients' future results of operations and/or its impact on our cash flows
and operations.
Service Agreements/Collection
The CompanyWe primarily provides itsprovide our services pursuant to a full service agreement
with itsour clients. In a full service agreement, the Company assumeswe assume 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 doeswe
provide services on the basis of a management only agreement. In such
agreements, the Companyour services are comprised of providing on-site management
personnel, while the hourly and staff personnel remain employees of the
respective client.
The CompanyWe typically adoptsadopt and followsfollow the client's employee wage structure,
including its policy of wage rate increases, and passespass through to the client any
labor cost increases associated with wage rate adjustments. Under a management
agreement, the Company provideswe provide management and supervisory services while the client
facility retains payroll responsibility for its hourly employees. Substantially
all of the Company'sour 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, 2001, the Company2002, we provided
services to approximately 1,2001,300 client facilities.
Although the service agreements are cancelable on short notice, the
Company haswe have
historically had a favorable client retention rate and expectsexpect to be able to
continue to maintain satisfactory relationships with itsour clients. The risk
associated with short-term agreements have not materially affected either the Company'sour
linen services, which generally require a capital investment, or laundry
installation sales, which require the Companyus 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.
6
The Company hasus.
We have had varying collection experience with respect to itsour accounts
and notes receivable. When contractual terms are not met, the Companywe generally encountersencounter
difficulty in collecting amounts due from certain of itsour clients. Therefore, the Company haswe
have sometimes been required to extend the period of payment for certain clients
beyond contractual terms. These clients have
includedinclude those in bankruptcy, those who
have terminated service agreements and slow payers experiencing financial
difficulties. In order toTo provide for these collection problems and the general risk
associated with the granting of credit terms, the Companywe recorded bad debt provisions
(in an Allowance for Doubtful Accounts) of $6,050,000, $5,445,000 $3,250,000 and $7,250,314$3,250,000
in the years ended December 31, 2002, 2001 2000 and 1999,2000, respectively (see Schedule
II- Valuation and Qualifying Accounts, for year-end balances). These provisions
represent 1.9%1.8%, 1.3%1.9% and 3.1%1.3% as a percentage of revenue for the years ended
December 31, 2002, 2001 2000 and 1999,2000, 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 CompanyWe also establishesestablish
credit limits as well as performingand perform ongoing credit evaluation and account monitoring
procedures to minimize the risk of loss. Notwithstanding the Company'sour efforts to minimize
itsour credit risk exposure, the Company'sour clients could be adversely effectedaffected if future
industry trends, as discussed in the Government"Government Regulation of ClientsClients" and Risk Factors'
sections of this report"Risk
Factors", change in such a manner as to negatively impact their cash flows. In the event that the Company'sIf
our clients experience such significant impact in their cash flows, it could
have a material adverse effect on the
Company'sour results of operations and financial
condition. At December 31, 2001,
the Company has2002, we had receivables of approximately $4,000,000
($1,500,000 net of reserves) from a client group currently Debtors in Chapter 11
bankruptcy proceedings. The Company expectsWe expect the client group will file bankruptcy plans
during 2002.2003. In the event that the amount collected is materially less than
the $4,000,000, it could adversely
effect the Company's$1,500,000, our results of operations and financial condition.condition could be adversely
affected.
6
Competition
The Company competesWe compete primarily with the in-house support service departments of
itsour potential clients. Most healthcare facilities perform their own support
service functions without relying upon outside management firms such
as the Company.firms. In addition, a
number of local firms compete with the Companyus in the regional markets in which the Company conductswe
conduct business. Several national service firms are larger and have greater
financial and marketing resources than the Company,us, although historically, such firms
have concentrated their marketing efforts on hospitals rather than the long-term
care facilities typically serviced by the Company.us. Although the competition to provide
service to health care facilities is strong, the Company believeswe believe that it competeswe compete
effectively for new agreements, as well as renewals of the existing agreements
based upon the quality and dependability of itsour services and the cost savings it believes itwe
believe we can effect for the client.
Employees
At December 31, 2001, the Company2002, we employed approximately 2,6932,770 management,
office support and supervisory personnel. Of these employees, 264285 held
executive, regional/district management and office support positions, and 2,4292,485
of these salaried employees were on-site management personnel. On such date, the Companywe
employed approximately 14,82115,831 hourly employees. Many of the
Company'sour hourly employees
were previouspreviously support employees of the Company'sour clients. The Company manages,We manage, for a limited
number of itsour client facilities, the hourly employees who remain employed by
certain of itsour clients.
Approximately 9%17% of the Company'sour hourly employees are unionized. These
employees are subject to collective bargaining agreements that are negotiated by
individual facilities and are assented to by the Companyus, so as to bind the
Companyus as an
"employer" under the agreements. The Company may beWe maybe adversely affected by relations
between itsour client facilities and the employee unions. The
Company isWe are a party to a
negotiated collective bargaining agreement with a limited number of employees at
a few facilities serviced by the Company. The
Company believes itsus. We believe our employee relations are
satisfactory.
7
Website Access
Our website address is "hcsgcorp.com." Our filings with the Securities
and Exchange Commission (SEC) are available at no cost on our website as soon as
reasonably practicable after the filing of such reports with the SEC.
(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. We undertake no
obligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. Such risks and
uncertainties include, but are not limited to, risks arising from the Company providing itsour
services exclusively to the health care industry, primarily providers of
long-term care; credit and collection risks associated with this industry; one
client accounting for 17% of revenue in 2002; our claims experience related to
workers' compensation and general liability insurance; the effects of changes in
regulations governing the industry and risk factors described in Part I hereof
under "Government Regulation of Clients", Service"Service Agreements/Collection" and
"Competition". The
Company's clientsMany of our clients' revenues are highly contingent on Medicare
and Medicaid reimbursement funding rates, which have been and continue to be
adversely affected by the change in Medicare payments under the 1997 enactment
of Prospective Payment System ("PPS") enacted in
1997,. That change, and the lack of substantive
reimbursement funding rate reform legislation, as well as other trends in the
long-term care industry resultinghave resulted in certain of the Company'sour clients filing voluntaryfor
bankruptcy petitions.protection. Others may follow. Any decisions by the government to
discontinue or adversely modify legislation related to reimbursement funding
rates will have a material adverse affect on our clients. These factors, in
addition to delays in payments from clients, hashave resulted in and could continue
to result in significant additional bad debts in the near future. The Company'sAdditionally,
our operating results would also be adversely affected if unexpected increases
in the costs of labor, materials, supplies and equipment used in performing itsour
services could not be passed on to clients.
At December 31, 2002, we had receivables of approximately $4,000,000
($1,500,000, net of reserves) from a client group currently Debtors in Chapter
11 bankruptcy proceedings. We expect the client group will file bankruptcy plans
sometime during 2003. If the amount collected is materially less than
$1,500,000, our results of operations and financial condition could be adversely
affected.
In addition, the Company believeswe believe that in order to improve itsour financial
performance itwe must continue to obtain service agreements with new clients and
provide additional services to existing clients, achieve modest price increases
on current service agreements with existing clients and maintain internal cost
reduction strategies at theour various operational levels of the
Company.levels. Furthermore, the Company believeswe believe
that itsour ability to sustain the internal development of managerial personnel is
an important factor impacting future operating results and successfully
executing projected growth strategies.
8
(e) Financial Information About Foreign and Domestic Operations and Export
SalesSales. Not Applicable.
Item 2. Properties
The Company leases itsWe lease our 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 CompanyWe also leaseslease 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. None of these leases is for more than a five-year term. In addition, the Company leaseswe
lease 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 isWe are also provided with office and storage space at each of
itsour 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'sour current operations.
The CompanyWe presently ownsown 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'sour current operations.
8
Item 3. Legal Proceedings.
As of December 31, 2001,2002, there were no material pending legal
proceedings to which the Company waswe were a party, or as to which any of itsour 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.
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, 2001,2002, there were
11,075,21911,167,455 shares of Common Stock outstanding.
9
The high and low bids for the Common Stock during the two years ended
December 31, 20012002 ranged as follows:
2002 High 2002 Low
--------- --------
1st Qtr. $ 10.708 $ 9.540
2nd Qtr 15.450 11.650
3rd Qtr. 15.750 11.750
4th Qtr. 13.910 10.751
2001 High 2001 Low
------------------- --------
1st Qtr. $ 7.375 $ 5.375$5.375
2nd Qtr. 7.980 6.060
3rd Qtr. 9.160 7.080
4th Qtr. 10.300 7.520
2000 High 2000 Low
--------- --------
1st Qtr. $ 9.688 $ 5.000
2nd Qtr. 5.438 3.719
3rd Qtr. 5.500 4.531
4th Qtr. 6.375 4.750
(b) Holders
As of March 15, 2002,7, 2003, there were approximately 417448 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 2,200 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, 2001,2002,
copies of which accompany this Report.
Item 6.9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
Not Applicable
10
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 Ended December 31:
-------------------------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
1997
------ ------ ------ ------ ---------- ---- ---- ---- ----
Revenues $328,500 $284,190 $254,668 $232,432 $204,869 $181,359
-------- -------- -------- -------- --------
Net income $ 8,631 $ 7,035 $ 5,588 $ 5,536 $ 8,869 $ 5,894
-------- -------- -------- -------- --------
Basic earnings per common share $ .77 $ .64 $ .51 $ .50 $ .79 $ .52
-------- -------- -------- -------- --------
Diluted earnings per common share $ .74 $ .64 $ .51 $ .49 $ .77 $ .51
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding for basic EPS 11,263 10,928 10,964 11,053 11,188 11,354
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding for diluted EPS 11,689 11,078 10,983 11,286 11,512 11,578
-------- -------- -------- -------- --------
As of December 31:
Working Capital $ 94,222 $ 83,108 $ 74,176 $ 69,785 $ 62,009
$ 55,706
-------- -------- -------- -------- --------
Total Assets $134,296 $120,790 $108,343 $ 98,030 $ 93,109 $ 84,890
-------- -------- -------- -------- --------
Stockholders' Equity $107,881 $ 98,943 $ 90,805 $ 85,961 $ 80,192 $ 72,227
-------- -------- -------- -------- --------
Book Value Per Share $ 9.66 $ 8.93 $ 8.30 $ 7.77 $ 7.27
$ 6.52
-------- -------- -------- -------- --------
Employees 18,600 17,514 16,276 15,741 14,046 12,180
-------- -------- -------- -------- --------
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.
1011
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 19961997 through 2001,2002, the Company's revenues grew at a compound annual rate of
11.8%12.6%. This growth was achieved through obtaining new clients and providing
additional services to existing clients. Although there can be no assurance
thereof, the Company anticipates future revenue growth due to the strength of
its presence in the long-term health care market. It is likely though, that its
compound growth rates will 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
------ ------ ------
Relation to Total Revenues
Years Ended December 31,
---------------------------------
2002 2001 2000
---- ---- ----
Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 88.2 88.6 89.1
Selling, general and administrative 7.7 7.7 7.7
Interest income .2 .4 .4
----- ----- -----
Income before income taxes 4.3 4.1 3.6
Income taxes 1.7 1.6 1.4
----- ----- -----
Net income 2.6% 2.5% 2.2%
===== ===== =====
2002 Compared with 2001
Revenues increased 15.6% to $328,499,982 in 2002 from $284,189,510 in 2001. The
growth in revenues is primarily a result of a net increase in service agreements
entered into with new clients, as well as providing additional services to
existing clients. Additionally, approximately 75% of the revenue growth in 2002
resulted from the Company's housekeeping, laundry and linen, and other services'
segment with the remaining revenue growth being generated from the Company's
food service segment. The Company believes that in 2003 both housekeeping,
laundry, linen and other services, and food services revenues, as a percentage
of total revenues, will remain approximately the same as their respective 2002
percentages.
The company has one client, a nursing home chain, which in 2002 and 2001
accounted for approximately 17% and 14%, respectively of consolidated revenues.
With respect to such client, the Company derived revenues from both operating
segments. While the Company expects its relationship with this client to
continue, the loss of such client would adversely affect the operations of the
Company.
Costs of services provided 88.6 89.1 88.5as a percentage of revenues in 2002 decreased to
88.2% from 88.6% in 2001. The primary factors affecting specific variations in
the 2002 cost of services provided as a percentage of revenues and their effect
on the .4% decrease are as follows: a decrease of .8% in labor costs, which is
primarily a result of efficiencies achieved in managing the housekeeping,
laundry, linen and other services segment's labor . Offsetting this decrease was
an increase of .5% in worker's compensation insurance resulting primarily from
the increased payments to claimants covered under the plan.
Selling, general and administrative 7.7 7.7 8.1expenses as a percentage of revenue were
unchanged at 7.7% in 2002 as compared to 2001. This is primarily attributable to
the Company's ability to control these expenses and comparing them to a greater
revenue base in the current year.
Interest income .4 .4 .4
----- ----- -----
Income beforedecreased approximately 38% to $771,470 in 2002 compared to
$1,247,463 in 2001. The decrease is attributable to 2002 interest rates on funds
invested being significantly lower as compared to returns in 2001, although the
Company did have higher cash balances throughout 2002.
12
The Company's 2002 effective tax rate increased slightly to 39.5% from 39% in
2001. The increase is primarily attributable to graduated income taxes 4.1 3.6 3.8
Income taxes 1.6 1.4 1.4
----- ----- -----
Nettax rates being
applied against increased levels of taxable income. The Company's 39.5%
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, 2002 net income increased
slightly to 2.6% as a percentage of revenue compared to 2.5% 2.2% 2.4%
===== ===== =====in 2001.
2001 Compared with 2000
Revenues increased 11.6% to $284,189,510 in 2001 from $254,668,213 in 2000. The
growth in revenues is primarily a result of a net increase in service agreements
entered into with new 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 linen, and other services
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, as a percentage of total revenues, will remain approximately the same
as their respective 2001 percentages.
The Company has one client, a nursing home chain, which in 2001 and 2000
accounted for approximately 14% and 9%, respectively of consolidated revenues.
With respect to such client, the Company derived revenues from both operating
segments.
Costs of services provided as a percentage of revenues in 2001 decreased to
88.6% from 89.1% in 2000. The primary factors affecting specific variations in
the 2001 cost of services provided as a percentage of revenues and their effect
on the .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 1.8% in the cost of supplies consumed in performing 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 $988,900 in
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.Critical Accounting Policies
The primary factors affecting specific variations in
the 2000 cost of services provided as a percentage of revenues and their effect
on the .6% increasepolicies discussed below 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. The decrease is primarily
attributable toconsidered by the Company's abilitymanagement to control these expenses while comparing
thembe
critical to a greater revenue base in the current 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 increased to 39% from 36.5% in 1999.
The 2.5% increase in the effective rate is primarily related to the 1999
effective tax rate being reduced to reflect the reversal of reserves no longer
needed as a result of the conclusion of an Internal Revenue Service examinationunderstanding of the Company's 1996 and 1997 returns. The Company's 39% effective tax rate
differs fromfinancial statements because their
application places the federal income tax statutory rate principally because ofmost significant demands on management's judgment.
Therefore, it should be noted that financial reporting results rely on
estimating the effect of statematters that are inherently uncertain. Specific risks
for these critical accounting policies are described in the following
paragraphs. For these policies, management cautions that future events rarely
develop exactly as forecast, and local income taxes.
Asthe best estimates routinely require
adjustment.
The two policies discussed are not intended to be a resultcomprehensive list of all
of our accounting policies. In many cases, the matters discussed above, 2000 net income decreased to 2.2%
asaccounting treatment of a
percentage of revenues compared to 2.4%particular transaction is specifically dictated by generally accepted accounting
principles, with no need for management's judgment in 1999.
Critical Accounting Policiestheir application. There
are also areas in which management's judgment in selecting another available
alternative would not produce a materially different result. See our audited
consolidated financial statements and notes thereto which are included in this
Annual Report which contain accounting policies and other disclosures required
by generally accepted accounting principles.
13
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 managementsmanagement's 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 Company
generally encounters difficulty in collecting amounts due byfrom 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
includedinclude
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 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.
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
receivable 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 effectedaffected if future industry trends, as
more fully discussed under liquidity and capital resources below, and as further
described in the Company's Form 10-K filed with Securities and Exchange
Commission for the year ended December 31, 2002 in Part I thereof under
"Government Regulation of Clients" and "Service Agreements/Collections", change
in such a manner as to negatively impact their cash flows. In the event thatIf the Company's
clients experience such significant impact in their cash flows, it could have a
material adverse effectaffect on the Company's results of operations and financial
condition.
At December 31, 2001,2002, the Company has receivables of approximately $4,000,000
($1,500,000, net of reserves) from a client group currently Debtors in a
Chapter 11 bankruptcy proceedings.proceeding. The Company expects the client group will file
bankruptcy plans sometime during 2002. In the event that2003. If the amount collected is materially
less than the
$4,000,000,$1,500,000, it could adversely effectaffect 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 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 specialist. The
present value of the payout is determined by applying an 8% discount factor
against the pay-out over the policy year'sestimated remaining pay-out period.
For general liability, the Company records a reserve for the estimated
ultimate amounts to be paid for known claims.
Management regularly evaluates its claimclaims' 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, 2002 the Company had working capital and cash of $94,222,401 and
$48,320,098 respectively, which represent increases of 13% and 41%, respectively
in working capital and cash as compared to December 31, 2001 working capital and
cash of $83,107,545 and $34,259,334. Management views the Company's cash and
cash equivalents of $48,320,098 at December 31, 2002 as its principal measure of
liquidity. During 2002 the Company expended $2,130,276 for open market purchases
of 182,550 shares of its common stock. The Company remains authorized to
purchase 603,900 shares pursuant to previous Board of Directors' actions. In
addition, the Company received proceeds of $1,787,068 from the exercise of stock
options by employees and directors. The Company's current ratio at December 31,
2002 remained essentially unchanged at 5.6 to 1 compared to 5.7 to 1 at December
31, 2001.
14
The net cash provided by the Company's operating activities was $16,113,446
for the year ended December 31, 2002. The principal source of cash flows from
operating activities for 2002 was net income, charges to operations for bad debt
provisions, and depreciation and amortization. Additionally, operating
activities' cash flows were increased by the timing of payments under the
Company's various insurance plans of $2,309,672. The operating activity that
used the largest amount of cash was a $2,369,311 net increase in accounts and
notes receivable and long term notes receivable, as well an increase of $764,047
in prepaid expenses and other assets. The increase in accounts and notes
receivable and long term notes receivable resulted primarily from the 15.6%
growth in the Company's revenues. The Company believes this trend will continue
as its revenues grow. The increase in prepaid expenses and other assets resulted
primarily from the company's funding of its Deferred Compensation Plan.
The Company's principal use of cash in investing activities for the year
ended December 31, 2002 was the purchase of housekeeping equipment, computer
software and equipment and laundry equipment installations.
At December 31, 2001 the Company had working capital and cash of $83,107,545
and $34,259,334 respectively, which represent increases of 12% and 50%,
respectively in working capital and cash as compared to December 31, 2000
working capital and cash of $74,175,584 and $22,841,618. During 2001, the
Company expended $824,938 for open market purchases of 135,000 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, 2000 decreased, to 6.3
to 1 from 8.7 to 1 at December 31, 1999.
The net cash provided by the Company's operating activities was $7,750,533
for the year ended December 31, 2000. The principal source of cash flows from
operating activities for 2000 was net income, charges to operations for bad debt
provisions, depreciation and 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 $8,485,627 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 growth in the Company's revenues. The
increase in accounts payable and other accrued expenses, and accrued payroll and
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, 2000 was the purchase of housekeeping equipment, computer
software and equipment and laundry equipment installations.
13
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 AugustThe Balance Budget Act of 1997 ("BBA") 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 mannerreimbursement procedures and amountthe amounts of
reimbursementsreimbursement they receive. TheMany of the Company's clientsclients' revenues are highly
contingent on Medicare and Medicaid reimbursement funding rates. Therefore, they
have been and continue to be adversely effectedaffected by PPS,changes in applicable laws
and regulations, as well as other trends in the long-term care industry
resultingindustry. This
has resulted in certain of the Company's clients filing voluntaryfor bankruptcy
protection. Others may follow.
Since the passage of the BBA, Congress has passed additional legislation,
principally the Balanced Budget Refinement Act of 1999 ("BBRA") and the Benefit
Improvement and Protection Act of 2000 ("BIPA"). These laws were intended
primarily to mitigate, temporarily, the reduction in reimbursement for skilled
nursing facilities under the PPS. In total, four add-on payments were
established by the laws to offset the impact of PPS. On April 23, 2002, the
Center for Medicare and Medicaid Services ("CMS") announced that it would delay
implementation of any refinements to the scope of two of the add-on payments
enacted pursuant to BBRA and BIPA, thereby extending the related add-ons to at
least September 30, 2003. The other two add-on payment provisions expired on
September 30, 2002. The Senate introduced legislation during October 2002 which
included a partial reinstatement of the add-on payment provision limited to the
nursing component of the Medicare rate. This legislative proposal would provide
for certain annual increases beginning in 2003 through 2005. There can be no
assurance as to whether this proposal will be adopted. Any decisions by the
government to discontinue or adversely modify any legislation relating to
reimbursement funding rates will have a material adverse effect on the Company's
clients' revenues. These factors, in addition to delays in payments from clients
hashave 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.
15
The BBA included provisions affecting Medicaid and repealed the "Boren
Amendment" federal payment standard for Medicaid payments to nursing facilities.
With the repeal of the federal payment standards, there can be no assurance that
budget constraints or other factors will not cause states to reduce Medicaid
reimbursements to nursing homes or that such payments to nursing homes will be
made on a timely basis. BIPA enacted a phase out of certain governmental
transfers that may reduce federal support for a number of state Medicaid plans.
The reduced federal payments may impact aggregate available funds requiring
states to further contain payments to providers.
These factors, in addition to delays in payments from clients have 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 Company's ability to collect the
amounts due. At December 31, 20012002 and 2000,2001, the Company had approximately, net
of reserves, $14,159,000$14,385,000 and $14,837,000,$14,159,000, 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 byfrom 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
includedinclude
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 $6,050,000, $5,445,000 $3,250,000 and $7,250,314$3,250,000 in the years ended December
31, 2002, 2001 2000 and 1999,2000, respectively. These provisions represent 1.9%approximately
1.8%, 1.3%1.9% and 3.1%1.3% as a percentage of revenue for the years ended December 31,
2002, 2001 2000 and 1999,2000, 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 effectedaffected if
future industry trends change in such a manner as to negatively impact their
cash flows. In the
event thatIf the Company's clients experience such significant impact in their
cash flows, it could have a material adverse effectaffect on the Company's results of
operations and financial condition.
At December 31, 2001,2002, the Company has receivables of approximately $4,000,000
($1,500,000 net of reserves) from a client group currently Debtors in Chapter 11
bankruptcy proceedings. The Company expects the client group will file
bankruptcy plans sometime during 2002. In the event that2003. If the amount collected is materially
less than the $4,000,000,$1,500,000, it could adversely effectaffect 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 independantindependent company specialist. The
present value of the payout is determined by applying an 8% discount factor
against the pay-out over the policy year'sestimated remaining pay-out period.
For general liability, the Company records a reserve for the estimated
ultimate amounts to be paid for known claims.
Management regularly evaluates its claimclaims' 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 on which it may draw to
meet short-term liquidity requirements in excess of internally generated cash
flow. This facility expires on September 30, 2002.2003. The Company believes the line
will be renewed at that time. Amounts drawn under the line are payable on
demand. At December 31, 2001,2002, there were no borrowings under the line. However,
at such date, the Company had outstanding approximately $13,500,000$14,500,000 of irrevocable standby
letters of credit, which relate to payment obligations under the Company's
insurance program.
16
As a result of the letters of credit issued, the amount available under the line
was reduced by approximately $13,500,000$14,500,000 at December 31, 2001.2002. In addition, the Company has
lease commitments totaling $2,613,790$2,166,551 through 2008.
14
AtBelow is a table, which presents our contractual obligations and commitments
at December 31, 2001, the Company had $34,259,334 of cash and cash
equivalents, which it views as its principal measure of liquidity.2002:
Payments Due by Period
--------------------------------------------------------------------------
Less Than 1-3 4-5 After
Contractual Obligations Total One Year Years Years 5 Years
------------ ----------- ---------- -------- -------
Operating Leases $ 2,166,551 $ 863,183 $1,159,211 $144,157 -
Irrevocable Standby Letters of Credit 14,500,000 14,500,000 - - -
----------- ----------- ---------- -------- -------
Total Contractual Cash Obligation $16,666,551 $15,363,183 $1,159,211 $144,157 -
=========== =========== ========== ======== =======
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 2002,2003 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, 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, should cash flows from current
operations not be sufficient, the Company would utilize its existing working
capital, and if necessary seek to obtain necessary working capital from such
sources as long-term debt or equity financing.
In accordance with the Company's previously announced authorizations to
purchase its outstanding common stock, the Company expended $824,938 to purchase
135,000 shares of its common stock during 2001 at an average price of $6.11 per
common share. The Company remains authorized to purchase 786,450 shares pursuant
to previous Board of Directors action.
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. The Company undertakes no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise. 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; Theone
client accounting for 17% of revenue in 2002; the Company's claims experience
related to workers' compensation and general liability insurance; the effects of
changes in laws and 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, 20012002 in Part I thereof under
"Government Regulations of Clients", "Competition" and "Service
Agreements/Collections". TheMany of the Company's clientsclients' revenues are highly
contingent on Medicare and Medicaid reimbursement funding rates, which have been
and continue to be adversely effectedaffected by the change in Medicare payments under
the 1997 enactment of the Prospective Payment System ("PPS"),. That change, and
the lack of substantive reimbursement funding rate reform legislation, as well
as other trends in the long-term care industry resultinghave resulted in certain of the
Company's clients filing voluntaryfor bankruptcy petitions.protection. Others may follow. Any
decisions by the government to discontinue or adversely modify legislation
related to reimbursement funding rates will have a material adverse affect on
the Company's clients. These factors, in addition to delays in payments from
clients hashave 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.
At December 31, 2002, we had receivables of approximately $4,000,000
($1,500,000, net of reserves) from a client group currently Debtors in Chapter
11 bankruptcy proceedings. We expect the client group will file bankruptcy plans
sometime during 2003. If the amount collected is materially less than
$1,500,000, our results of operations and financial condition could be adversely
affected.
In addition, the Company believes that to improve its future financial performance
it must continue to obtain service agreements with new clients, provide new
services to existing clients, achieve modest price increases on current service
agreements with existing clients and maintain internal cost reduction strategies
at the various operational levels of the Company. 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 passpassing through such cost increases to its clients.
1517
Item 8. Financial Statements and Supplementary Data
Consolidated Balance Sheets
December 31,
---------------------------------------------------------------
2002 2001
2000
------------- ------------------------- ------------
Assets
Current Assets:
Cash and cash equivalents ................................................................. $ 34,259,33448,320,098 $ 22,841,61834,259,334
Accounts and notes receivable, less allowance for
doubtful accounts of $7,323,000 in 2002
and $6,936,000 in 2001 and
$4,914,000 in 2000 ........................................................................ 51,750,225 54,076,007 52,744,352
Prepaid income taxes ........................................................................... 883,282 8,188 1,128,624
Inventories and supplies ................................................................... 8,625,727 7,944,199 8,383,963
Deferred income taxes ......................................................................... 3,021,724 2,162,845 1,019,578
Prepaid expenses and other ............................................................... 2,176,913 2,156,871 2,184,141
------------ ------------
Total current assets .................................................................... 114,777,969 100,607,444 88,302,276
Property and Equipment:
Laundry and linen equipment installations ................................. 6,855,886 6,872,513 7,303,508
Housekeeping and office equipment ................................................. 11,641,590 10,570,888 9,696,825
Autos and trucks ................................................................................... 85,489 57,321 21,329
------------ ------------
18,582,965 17,500,722 17,021,662
Less accumulated depreciation ......................................................... 14,144,869 12,738,533 11,863,635
------------ ------------
4,438,096 4,762,189 5,158,027
COSTS IN EXCESS OF FAIR VALUE OF
NET ASSETS ACQUIRED
less accumulated amortization of $1,743,155 in
2002 and 2001 and $1,635,531 in 2000 ................................................................................ 1,612,322 1,719,9461,612,322
DEFERRED INCOME TAXES ............................................................................... 1,955,365 1,523,144 1,185,711
OTHER NONCURRENT ASSETS ........................................................................... 11,512,558 12,285,398 11,976,905
------------ ------------
$134,296,310 $120,790,497
$108,342,865
============ ============-===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable ................................................................................... $ 6,439,6097,201,543 $ 4,829,1836,439,609
Accrued payroll, accrued and withheld payroll taxes ............. 11,162,342 9,705,000 8,209,344
Other accrued expenses ....................................................................... 238,485 199,635 181,466
Accrued insurance claims ................................................................... 1,953,198 1,155,655 906,699
------------ ------------
Total current liabilities ......................................................... 20,555,568 17,499,899 14,126,692
ACCRUED INSURANCE CLAIMS ......................................................................... 5,859,593 4,347,464 3,410,916
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 30,000,000 shares
authorized, 11,337,71911,612,505 shares issued in
2002 and 11,337,719 in 2001 and 11,066,591 in 2000 ............................................................... 116,125 113,377 110,666
Additional paid in capital ............................................................... 29,675,341 27,240,496 25,315,753
Retained earnings ................................................................................. 81,806,772 73,176,074 66,140,713
Common stock in treasury, at cost, 262,500445,050 shares
in 2002 and 262,500 in 2001 and 127,500 in 2000 .......................................................... (3,717,089) (1,586,813) (761,875)
------------ ------------
Total stockholders' equity ............................................................... 107,881,149 98,943,134 90,805,257
------------ ------------
$134,296,310 $120,790,497 $108,342,865
============ ============
See accompanying notes.
1618
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------------------------------------
2002 2001 2000
1999
------ ------ ------------------ ------------ ------------
Revenues $328,499,982 $284,189,510 $254,668,213 $232,431,888
Operating costs and expenses:
Cost of services provided 289,858,898 252,029,939 226,899,572 205,686,044
Selling, general and administrative 25,147,855 21,871,673 19,618,789 18,778,786
Other income:
Interest income 771,470 1,247,463 988,900
756,003
------------ ----------------------- ------------
Income before income taxes 14,264,698 11,535,361 9,138,752
8,723,061
Income taxes 5,634,000 4,500,000 3,551,000
3,187,000
------------ ----------- ------------ ---=--------
Net income $ 8,630,698 $ 7,035,361 $ 5,587,752
$ 5,536,061
============ ======================= ============
Basic earnings per common share $ .77 $ .64 $ .51
$ .50
============ ======================= ============
Diluted earnings per common share $ .74 $ .64 $ .51
$ .49
============ ======================= ============
See accompanying notes.
1719
Consolidated Statements of Cash Flows
Years Ended December 31,
-------------------------------------------------------------------------
2002 2001 2000
1999
------ ------ ------------------ ----------- -----------
Cash flows from operating activities:
Net Income $ 8,630,698 $ 7,035,361 $ 5,587,752 $ 5,536,061
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,033,567 2,241,473 2,210,157 2,149,735
Bad debt provision 6,050,000 5,445,000 3,250,000 7,250,314
Deferred income taxes (benefits) (1,291,100) (1,480,700) 200,800 49,500
Tax benefit of stock option transactions 520,876 232,531 192 45,427
Unrealized loss on SERP investments 161,937 65,768 54,225
Changes in operating assets and liabilities:
Accounts and notes receivable (3,724,217) (6,776,655) (7,381,614) (10,796,225)
Prepaid income taxes (875,094) 1,120,436 (284,735) (843,889)
Inventories and supplies (681,528) 439,764 196,218 (776,745)
Long term notes receivable 1,354,906 25,354 (1,104,013) (548,392)
Accounts payable and other accrued expenses 800,785 1,628,594 2,120,662 (1,795,361)
Accrued payroll, accrued and withheld payroll taxes 1,586,991 1,705,649 2,791,977 269,733
Accrued insurance claims 2,309,672 1,185,504 555,973 961,451
Income taxes payable (283,980)
Prepaid expenses and other assets (764,047) (372,345) (447,061)
427,920
----------- --------------------- -----------
Net cash provided by operating
activities 16,113,446 12,495,734 7,750,533
1,645,549
----------- --------------------- -----------
Cash flows from investing activities:
Disposals of fixed assets 152,109 313,209 439,848 1,049,008
Additions to property and equipment (1,861,583) (2,051,219) (1,803,877)
(2,884,602)
----------- --------------------- -----------
Net cash used in investing activities (1,709,474) (1,738,010) (1,364,029)
(1,835,594)
----------- --------------------- -----------
Cash flows from financing activities:
Purchase of treasury stock (2,130,276) (824,938) (761,875) (183,750)
Proceeds from the exercise of stock
options 1,787,068 1,484,930 18,302
371,074
----------- --------------------- -----------
Net cash provided by (used in)
financing activities (343,208) 659,992 (743,573)
187,324
----------- --------------------- -----------
Net increase (decrease) in cash and
cash equivalents 14,060,764 11,417,716 5,642,931 (2,721)
Cash and cash equivalents at
beginning of the year 34,259,334 22,841,618 17,198,687
17,201,408
----------- --------------------- -----------
Cash and cash equivalents at end of
the year $48,320,098 $34,259,334 $22,841,618 $17,198,687
=========== =========== ===========
Supplementary Cash Flow Information:
Issuance of 23,926 and 38,753 shares of
common stock Pursuantin 2002 and 2001, respectively
pursuant to Employee Stock Purchase Plan $ 129,649 $ 209,993 $ --
$ --
=========== =========== ===========----------- ---------- -----------
See accompanying notes.
1820
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 2002, 2001 and 2000
and 1999
-----------------------------------------------------------------------------------------------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
-------- -------- ---------- ---------- --------- ------------------------ ----------- ----------- ------------
Balance, December 31, 1998 11,034,207 $110,342 $25,064,832 $55,016,9001999 11,064,141 $110,641 $25,297,284 $60,552,961 $ -- $80,192,074
Net income for year 5,536,061 5,536,061
Exercise of stock options 50,900 509 370,565 371,074
Tax benefit arising from
stock transactions 45,427 45,427
Purchase of common stock
for treasury (21,000 shares) (183,750) (183,750)
Treasury stock retired (21,000) (210) (183,540) 183,750
---------- -------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 11,064,141 110,641 25,297,284 60,552,961 --$ 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 transactiontransactions 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) $98,943,134113,377 27,240,496 73,176,074 (1,586,813) 98,943,134
Net income for year 8,630,698 8,630,698
Exercise of stock options 250,860 2,509 1,784,559 1,787,068
Tax benefit arising from
stock transaction 520,876 520,876
Purchase of common stock
for treasury (182,550 shares) (2,130,276) (2,130,276)
Issued pursuant to Employee
Stock Purchase Plan 23,926 239 129,410 129,649
----------- ---------- ----------- ----------- ----------- ------------
Balance, December 31, 2002 11,612,505 $116,125 $29,675,341 $81,806,772 $(3,717,089) $107,881,149
=========== ========== ======== =========== =========== =========== =======================
See accompanying notes.
1921
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 primarily to nursing homes,
rehabilitation centers, retirement facilities and hospitals principally located inthroughout
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 FASStatement of Financial Accounting Standards ("SFAS") No. 114
and FASSFAS No. 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, 2002, the Company had notes receivable aggregating $5,800,000
that are impaired. During 2002, the Company increased its reserve against
impaired notes by $1,000,000 and charged the reserve for write-offs of
$1,700,000 resulting in a reserve balance at December 31, 2002 of $2,500,000.
During 2002, the average outstanding balance of impaired notes receivable was
$6,700,000 and no interest income was recognized.
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 theseimpaired 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 theseimpaired 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 theseimpaired 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 theseimpaired 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.
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.
Property and equipment
Property and equipment are stated at cost. Additions, renewals and improvements
are capitalized, while maintenance and repair costs are expended.expensed when incurred.
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.
22
Revenue recognition
Revenues from service agreements are recognized as services are performed. The
Company (as a distributor of laundry equipment since 1981)equipment) 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 2002, 2001 2000 and 1999,2000
laundry
installation sales were not material.
20
Costs in excess of fair value of net assets Costsacquired
Through December 31, 2001, costs in excess of the fair value of net assets of
businesses acquired arewas being amortized on a straight-line basis over periods
not exceeding forty years. All of the carrying value at December 31, 20012002
resulted from a 1985 acquisition
which isacquisition. Through December 31, 2001 this asset was being
amortized over a thirty-one year period. AmortizationIn July, 2001, the Financial Accounting
Standards Board ( the "FASB") issued SFAS No. 142, "Goodwill and Other
Intangible Assets," which is effective for the Company on January 1, 2002. SFAS
No. 142 requires, among other things, the discontinuance of goodwill
amortization. Therefore, in 2002, no amortization was charged to earnings wasearnings.
Amortization of $107,624 per year was charged to earnings for the years 2001 2000 and
1999,2000, 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, supplies'
expense and other provisions which are not currently deductible for tax
purposes, and revenue
recognized on laundry installation sales.purposes.
Income taxes paid were approximately $7,308,000, $4,530,000 and $3,345,000
during 2002, 2001 and $4,169,000
during 2001, 2000, and 1999, 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.
Other noncurrent assets
Other noncurrent assets consist of:
2002 2001
2000
------ ----------------- -----------
Long-term notes receivable $10,020,355 $11,375,262 $11,400,615
Deferred compensation funding (Note 10)11) 1,476,080 832,677
349,384
OtherOther-net 16,123 77,459 226,906
----------- -----------
$11,512,558 $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
At December 31, 2002, the Company has stock based compensation plans, which are
described more fully in Note 4. As permitted by the Statement of Financial Accounting StandardsSFAS 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. No stock based employee compensation cost is reflected in
net income, as all options granted under those plans had an exercise price equal
to the market value of the underlying common stock at the date of grant. The
Company 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.
23
The following table illustrates the effect on net income and earnings per share
if the company had applied the fair value recognition provisions of SFAS No. 123
to stock based compensation:
(in thousands except per share data)
Year Ended December 31,
------------------------------------
2002 2001 2000
---- ---- ----
Net Income
As reported $8,631 $7,035 $5,588
Deduct:
Total stock based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects (1,790) (890) (1,030)
Pro forma $6,841 $6,145 $4,558
Basic Earnings Per Common Share
As reported $ .77 $ .64 $ .51
Pro forma $ .61 $ .56 $ .42
Diluted Earnings Per Common Share
As reported $ .74 $ .64 $ .51
Pro forma $ .59 $ .55 $ .41
Advertising Costs
Advertising costs are expensed when incurred. For the years ended December 31,
2002, 2001 2000 and 1999,2000, 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 fair 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. AccumulatedAs of January 1, 2002 the Company has adopted SFAS No. 142 "Goodwill and
Other Intangible Assets", which eliminated the amortization was $1,743,155 and $1,635,531 onof purchased
goodwill. Upon adoption of SFAS No. 142, as well as at December 31, 20012002, the
Company performed an impairment test of its goodwill (amounting to $1,612,322 at
both dates) and 2000,
respectively. Additionally,determined that no impairment of the recorded goodwill existed.
Under SFAS No. 142, goodwill is tested annually and more frequently if an event
occurs which indicates the goodwill may be impaired.
The following table presents a reconciliation of net income and earnings per
share amounts, as reported in the financial statements, to those amounts
adjusted for goodwill and intangible asset amortization determined in accordance
with SFAS No. 142.
2002 2001 2000
---------- ---------- ----------
Reported net income $8,630,698 $7,035,361 $5,587,752
Addback: goodwill amortization 107,624 107,624
Adjusted net income $8,630,698 $7,142,985 $5,695,376
Basic earnings per common share:
Reported net income $ .77 $ .64 $ .51
Goodwill amortization .01 .01
Adjusted net income $ .77 $ .65 $ .52
Diluted earnings per common share:
Reported net income $ .74 $ .64 $ .51
Goodwill amortization .01
Adjusted net income $ .74 $ .64 $ .52
As of January 1, 2002, the Company adopted SFAS No. 144, "Accounting
for the Impairment or Disposal of Long-lived Assets" which supersedes SFAS No.
121, "Accounting for the Impairment of Long-lived Assets to be Disposed Of". The
adoption of SFAS No. 144 had no effect on the Company.
24
Treasury stock
Treasury stock purchases are accounted for under the cost method whereby the
entire cost of the acquired stock is recorded as treasury stock. Gains or losses
on the subsequent reissuance of shares are credited or charged to earnings was $107,624 per
year for the years 2001, 2000 and 1999, respectively.
The Company records impairment losses on long-lived assets usedadditional
paid in operations
or expected to be disposed of when 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 carrying amounts of those assets. No
impairment losses were recorded in 2001, 2000 or 1999.capital.
Reclassification
Certain reclassifications to 2001and 2000 and 1999 reported amounts have been made in the
financial statements to conform to 20012002 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 StandardsSFAS No. 105, (SFAS No. 105)Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, 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, 20012002 and 2000,2001, 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 AugustThe Balance Budget Act of 1997 ("BBA") 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 mannerreimbursement procedures and the
amounts of reimbursement they receive. TheMany of the Company's clientsclients' revenues
are highly contingent on Medicare and Medicaid reimbursement funding rates.
Therefore, they have been and continue to be adversely effectedaffected by PPS,changes in
applicable laws and regulations, as well as other trends in the long-term care
industry resultingindustry. This has resulted in certain of the Company's client filing voluntaryfor
bankruptcy petitions.protection. Others may follow.
Since the passage of the BBA, Congress has passed additional legislation,
principally the Balanced Budget Refinement Act of 1999 ("BBRA") and the Benefit
Improvement and Protection Act of 2000 ("BIPA"). These laws were intended
primarily to mitigate, temporarily, the reduction in reimbursement for skilled
nursing facilities under the Medicare PPS. In total, four add-on payments were
established by the laws to offset the impact of PPS. On April 23, 2002, the
Center for Medicare and Medicaid Services ("CMS") announced that it would delay
implementation of any refinements to the scope of the two add-on payments
enacted pursuant to the BBRA and BIPA, thereby extending the related add-ons to
at least September 30, 2003. The other two add-on payment provisions expired on
September 30, 2002. The Senate introduced legislation during October 2002 which
included a partial reinstatement of the add-on payment provision limited to the
nursing component of the Medicare rate. This legislative proposal would provide
for certain increases annually beginning in 2003 through 2005. There can be no
assurance as to whether this proposal will be adopted. Any decisions by the
government to discontinue or adversely modify legislation relating to
reimbursement funding rates will have a material adverse affect on the Company's
clients' revenues. These factors, in addition to delays in payments from clients
hashave 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, 2001,The BBA included provisions affecting Medicaid and repealed the "Boren
Amendment" federal payment standard for Medicaid payments to nursing facilities.
With the repeal of the federal payment standards, there can be no assurance that
budget constraints or other factors will not cause states to reduce Medicaid
reimbursements to nursing homes or that such payments to nursing homes will be
made on a timely basis. BIPA enacted a phase out of certain governmental
transfers that may reduce federal support for a number of state Medicaid plans.
The reduced federal payments that impact aggregate available funds requiring
states to further contain payments to providers.
Major Client
The Company hadhas one client, a nursing home chain, which in 2002, 2001 and 2000
accounted for approximately 17%, 14% and 9%, respectively of consolidated
revenues. While the Company expects to continue its relationship with this
client, the loss of such client would adversely affect the operations of the
Company.
25
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.
Note 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 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 Company
generally encounters difficulty in collecting 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 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 $6,050,000, $5,445,000 $3,250,000 and $7,250,314$3,250,000 in the years ended December
31, 2002, 2001 2000 and 1999,2000, 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 condition.
At December 31, 2002, the Company has receivables of approximately $4,000,000
($1,500,000 net of reserves) from a client group currently Debtors in Chapter 11
bankruptcy proceedings. The Company expects the client group will file
bankruptcy plans sometime during 2003. If the amount collected is materially
less than the $1,500,000, it could adversely affect the Company's results of
operations and financial condition.
Note 3--Lease Commitments
The Company leases office facilities, equipment and autos under operating leases
expiring on various dates through 2008 and certain office leases contain renewal
options (see Note 5).options. 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, 2000:
22
2002
Operating
Year Leases
- ---- ---------
2002 .................................... $ 848,097
2003 .................................... 648,610.............................................. $863,183
2004 .................................... 495,487.............................................. 582,403
2005 .................................... 377,756.............................................. 439,593
2006 and.............................................. 137,215
2007 .............................................. 116,227
thereafter ..................... 243,840........................................ 27,930
----------
Total minimum lease payments ............ $2,613,790...................... $2,166,551
==========
Total expense for all operating leases was $913,816, $994,284 $832,211 and $635,951$832,211 for
the years ended December 31, 2002, 2001 2000 and 1999,2000, respectively.
Note 4--Stockholders' Equity
As of December 31, 2001 1,173,8182002, 1,332,043 shares of common stock were reserved under
the incentive stock option plans, including 176,295330,416 shares which wereare 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.
The weighted average fair value of incentive options granted during 2002,
2001 and 2000 was $5.31, $4.99 and 1999 was $4.99, $3.02, and $3.74, respectively.
26
A summary of incentive stock option activity is as follows:
Incentive Stock Options
----------------------------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
1999----------------------- --------------------- ---------------------- -------------------- -----------------------
Weighted Weighted Weighted
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
-------- --------- -------- ------------------- -------- ---------------------
Beginning of period $7.03 1,120,222 $7.40 980,952 $7.59 820,177$7.42 878,533 $7.04 1,000,932 $7.47 861,662
Granted 12.30 266,069 8.85 245,426245,326 5.11 214,229
6.86 325,350
Cancelled 6.77 (1,200) 8.04 (210,439)(210,039) 6.40 (72,509)
7.24 (121,175)
Exercised 7.10 (141,775) 6.37 (157,686) 7.47 (2,450)
7.24 (43,400)
----------- --------- ----------- -------- ----- -------------- ---------
End of period $7.37 997,523 $7.03 1,120,222 $7.40 980,952
=====$8.77 1,001,627 $7.42 878,533 $7.04 1,000,932
====== ========= =========== ======== ====== ========= ===== ========
The following table summarizes information about incentive stock options
outstanding at December 31, 2001:2002:
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------------------------------------------------
Average Weighted 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 $6.8812.65 1,001,627 7.70 $8.77 735,558 $7.49
The Company has granted non-qualified stock options primarily to employees
and directors under either the Company's 2002 Stock Option Plan, 1995 Incentive
and Non-Qualified Stock Option Plan for key employees and the Company'sor 1996 Non-Employee
Director's Stock Option Plan. On March 28, 2002, the Board of Directors of the
company adopted the 2002 Stock Option Plan. It was approved by shareholders on
May 21, 2002. 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. The weighted average
fair value of non-qualified options granted during 2002, 2001 and 2000 were
$5.45, $5.39 and 1999 were $5.39, $3.04, and $4.03, respectively.
2327
A summary of non-qualified stock option activity is as follows:
Non-qualified Stock Options
------------------------------------------------------------------------------------------------------------------------------------------------------------
2002 2001 2000
1999
---------------------- -------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
-------- --------- ------------------ --------- -------- ----------------- ---------
Beginning of period $7.87 612,875 $7.02 499,154 $7.03 376,564 $7.05 404,172 $7.18 454,548526,762
Granted 12.61 80,146 8.99 223,274 5.06 37,246
6.75 24,950
Cancelled - - 5.81 (34,864) 6.04 (64,854)
7.78 (67,826)
Exercised 7.15 (109,085) 6.44 (74,689) -- -- 7.58 (7,500)- -
----- --------------- ----- ------- ----- -------
End of period $8.10 490,285 $7.03 376,564 $7.05 404,172$8.66 583,936 $7.87 612,875 $7.02 499,154
===== =============== ===== ======= ===== =======
The following table summarizes information about non-qualified stock options
outstanding at December 31, 2001:2002:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------------------------------------------------------------------------
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
- --------------------Exercise Price Range ----------- ---------- ---------- ----------- -------- ----------- ----------
$5.06 - 9.25 490,285 7.19 $8.10 289,661 $7.3012.65 583,936 7.75 $8.66 503,790 $8.03
TheAs discussed in Note 1, 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, 2002, 2001 2000 and
1999.2000. 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:
2002 2001 2000
1999
----------- ----------- ---------------------- --------------------- ---------------
Risk-Free Interest-Rate 4.07% 4.01%, 5.16% and 5.68% 5.37% and 5.49%
6.44% and 6.68%
Expected Life 5 and 105.5 years 5 and 10 years 5 and 10 years
Expected Volatility 37.2%40.0% 37.0% 39.0% and 38.7% 34.0% and 36.0%
Had compensation cost been determined under FASB 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
------ ------ ------
Net Income
As reported $7,035 $5,588 $5,536
Pro forma $6,145 $4,558 $4,763
Basic Earnings Per Common Share
As reported $ .64 $ .51 $ .50
Pro forma $ .56 $ .42 $ .43
Diluted Earnings Per Common Share
As reported $ .64 $ .51 $ .49
Pro forma $ .55 $ .41 $ .42
2428
Note 5--Income Taxes
The provision for income taxes consists of:
Year Ended December 31,
---------------------------------------------------------------------------------------------------
2002 2001 2000
1999
-------- -------- ------------------ ---------- ----------
Current:
Federal $5,106,100 $4,335,200 $2,507,800
$2,449,700
State 1,819,000 1,645,500 687,800 687,800842,400
---------- ---------- ----------
6,925,100 5,980,700 3,137,500 3,137,5003,350,200
Deferred:
Federal (980,600) (1,074,700) 155,400
State ( 310,500) (406,000) 45,400
---------- ---------- ----------
Deferred:
Federal (1,074,700) 155,400 500
State (406,000) 45,400 49,000
---------- ---------- ----------(1,291,100) (1,480,700) 200,800 49,500
---------- ---------- ----------
Tax Provision $5,634,000 $4,500,000 $3,551,000 $3,187,000
========== ========== ==========
Under FAS No. 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,
-------------------------
2001 2000
-------- --------
Net current deferred assets:
Allowance for doubtful accounts $2,737,985 $1,960,686
Accrued insurance claims-current 471,507 361,773
Expensing of housekeeping supplies (1,516,141) (1,496,333)
Deferred compensation 453,518 180,475
Other 15,976 12,977
---------- ----------
$2,162,845 $1,019,578
Year Ended December 31,
------------------------------
2002 2001
----------- -----------
Net current deferred assets:
Allowance for doubtful accounts $ 3,002,430 $ 2,737,985
Accrued insurance claims- current 800,811 471,507
Expensing of housekeeping supplies (1,667,522) (1,516,141)
Deferred compensation 869,951 453,518
Other 16,054 15,976
----------- -----------
$ 3,021,724 $ 2,162,845
=========== ===========
Net noncurrent deferred tax assets:
Deferred profit on laundry installation sales $ 4,825 $ 15,352
Non-deductible reserves 202,101 259,057
Depreciation of property and equipment (683,664) (549,301)
Accrued insurance claims- noncurrent 2,402,433 1,773,765
Other 29,670 24,271
----------- ----------
$1,955,365 $1,523,144
=========== ==========
==========
Net noncurrent deferred tax assets:
Deferred profit on laundry installation sales $ 15,352 $ 27,273
Non-deductible reserves 259,057 426,306
Depreciation of property and equipment (549,301) (646,639)
Accrued insurance claims- noncurrent 1,773,765 1,360,955
Other 24,271 17,816
---------- ----------
$1,523,144 $1,185,711
========== ==========
25
29
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,
-----------------------------------------------------------------------------
2002 2001 2000
1999
----------- ---------- ------------------- ----------
Tax expense computed at
statutory rate $4,850,000 $3,922,200 $3,107,200 $2,965,800
Increases (decreases) resulting
from:
State income taxes, net of
federal tax benefit 995,600 818,100 586,000
486,300
Settlement of prior years'
income tax examination -- -- (328,100)Federal jobs credits (432,800) (354,400) (280,900)
Tax exempt interest (98,300) (77,000) (97,500)
(91,900)
Amortization of costs in
excess of fair value of
net assets acquired 36,600 36,600 36,600
Other, net (199,700) (81,300) 118,300319,500 191,300 236,200
---------- ---------- ----------
$4,500,000$5,634,000 $4,500,200 $3,551,000 $3,187,000
========== ========== ==========
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 6--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 year ended December 31, 1999 were
$66,463. The Company made no leasehold improvements on such property in 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, 2002, 2001 2000 and 19992000 the agreements with the client facilities
which the director has an ownership interest resulted in Company revenues of
approximately $3,540,000, $3,440,000 and $3,265,000, respectively. At December
31, 2002 and $3,033,000, respectively.2001, $464,463 and $325,327, respectively is included in accounts
receivable in the accompanying consolidated balance sheets from such Director's
facilities. The subject accounts' balances due the Company are all within agreed
upon payment terms.
A director of the Company, is a member of a law firm which has been retained
by the Company during the years ended December 31, 2002, 2001 and 2000. Fees
received from the Company by such firm during the years ended December 31, 2002,
2001 and 2000 did not exceed, in any year, 5% of such firm's or the Company's
revenues.
Note 7--Segment Information
The Company manages and evaluates its operations in two reportable operating
segments. The two operating segments are housekeeping, laundry, linen and other
services, and food service. WhileAlthough 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.No. 131, "Disclosure about Segments of an Enterprise and
Other Related Information". The company considers the various services provided
within the housekeeping, laundry, linen and other services' segment to be one
reportable operating segment since such services are rendered pursuant to a
single service agreement as well asand the delivery of such services beingis 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% ownedthe company's 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 goods
transferred. Segment amounts disclosed are prior to any elimination entries made
in consolidation.
2630
During 2002, the company refined its method of allocating divisional overhead
to its two reportable operating segments. The revised allocation is based on a
relationship using the number of facilities serviced by the respective operating
segments as opposed to the previous method which utilized a gross segment
revenue relationship. Such revision increased income before income taxes in the
food services' operating segment's amounts reported below by $425,879, $384,482
and $129,021 for the years ended December 31, 2002, 2001 and 2000, respectively.
The housekeeping, laundry, linen and other services' segment of the Company does
provide services in Canada, although essentially all of its revenues and net
income, 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, 2002
Revenues $277,748,933 $51,689,228 $ (938,179) $328,499,982
Income before income taxes 21,772,632 1,453,703 (8,961,637)(1) 14,264,698
Depreciation and Amortization 1,218,550 43,404 771,613 2,033,567
Total assets 62,584,536 13,493,205 58,218,569(2) 134,296,310
Year Ended December 31, 2001
Revenues $244,634,409 $40,442,352 $ (887,251) $284,189,510
Income before income taxes 17,478,914 1,672,78817,094,432 2,057,270 (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)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 15,567,038 125,49915,438,018 254,519 (6,553,785)(1) 9,138,752
Depreciation and Amortization 1,450,567 10,543 749,047 2,210,157
Total assets 69,921,78469,921,785 7,046,050 31,375,030 (2)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,
------------------------------------------------------------------------------------------
2002 2001 2000
1999------------- ------------ ------------ -------------------------
Housekeeping services $196,770,462 $170,921,662 $161,840,927 $150,343,572
Laundry and linen services 79,148,184 70,332,656 68,285,181
67,013,585
Food Services 50,959,106 40,075,685 21,602,962 12,113,838
Maintenance services and Other 1,622,230 2,859,507 2,939,143 2,960,893
------------ ------------ ------------
$328,499,982 $284,189,510 $254,668,213 $232,431,888
============ ============ ============
The Company hadhas one client, a nursing home chain, which in 2002, 2001 whichand 2000
accounted for approximately 17%, 14% and 9%, respectively of consolidated
revenue.0revenue. In respect to such client, the Company derived revenues from both
operating segments. 27While the Company expects to continue its relationship with
this client, the loss of such client would adversely affect the operations of
the Company's two operating segments.
31
Note 8--Earnings Per Common Share
A reconciliation of the numeratornumerators and denominators of basic and diluted
earnings per common share is as follows:
Year Ended December 31, 2001
------------------------------------------2002
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- -------------------
Net Income $8,630,698
==========
Basic earnings per
common share 8,630,698 11,263,466 $.77
Effect of dilutive
securities:
Options 426,032 (.03)
---------- ---------- ------
Diluted earnings per
common share $8,630,698 11,689,498 $.74
========== ========== ======
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$.64
Effect of dilutive
securities:
Options 149,665
---------- ---------- ----------------
Diluted earnings per
common share $7,035,361 11,077,946 $ .64$.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$.51
Effect of dilutive
securities:
Options 19,028
---------- ----------- ---------- ------
Diluted earnings per
common share $5,587,752 10,982,965 $ .51$.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
========== =========== ================
Options to purchase 6,243 shares, 563,708 1,176,288shares and 151,2841,176,288 shares of
common stock at an average exercise price of $12.65, $7.92 $7.57 and $9.38$7.57 for the
years ended December 31, 2002, 2001 2000 and 1999,2000, respectively were outstanding
during such years but not included in the computation of diluted earnings per
common share because the options' exercise prices were greater than the average
market valueprice of the common shares.
28shares, and therefore, the effect would be
antidilutive.
32
Note 9--Other Contingencies
The Company has a $18,000,000 bank line of credit under which it may draw to
meet short-term liquidity requirements or for other purposes, that expires on
September 30, 2002.2003. The Company believes the line will be renewed at that time.
Amounts drawn under the line are payable upon demand. At both December 31, 20012002
and 2000,2001, there were no borrowings under the line. However, at such dates, the
Company had outstanding approximately$14,500,000 and $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$14,500,000 and $13,500,000 and
$13,000,000 at December
31, 20012002 and 2000,2001, 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 impactaffect
on the Company's financial position or results of operations.
Legislation enacted in AugustThe Balance Budget Act of 1997 ("BBA") 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.
TheMany of the Company's clientsclients' revenues are highly contingent on Medicare and
Medicaid reimbursement funding rates. Therefore, they have been and continue to
be adversely effectedaffected by PPS,changes in applicable laws and regulations, as well as
other trends in the long-term care industry resultingindustry. This has resulted in certain of the
Company's clients filing bankruptcy.for bankruptcy protection. Others may follow. These
factors in addition to delays in payments from clients hashave resulted in and
could continue to result in significant additional bad debts in the near future.
At December 31, 2002, the company has receivables of approximately $4,000,000
($1,500,000 net of reserves) from a client group currently Debtors in Chapter 11
bankruptcy proceedings. The company expects the client group will file
bankruptcy plans sometime during 2003. If the amount collected is materially
less than $1,500,000, it could adversely affect the company's results of
operations and financial condition.
The Company indemnifies its officers and directors against all reasonable
costs and expenses related to shareholder and other claims pertaining to actions
taken in their capacity as officers and directors which are not covered by the
Company's directors and officers insurance policy. This indemnification is
ongoing and does not include a limit on the maximum potential future payments,
nor are there any recourse provisions or collateral that may offset the cost. As
of December 31, 2002, the Company has not recorded a liability for any
obligations arising as a result of these indemnifications.
Note 10--Accrued Insurance Claims
For years 19992000 through 20012002 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 specialist. The
accrued insurance claims were reduced by approximately $1,784,000, $2,138,000
$2,975,000
and $2,763,000$2,975,000 at December 31, 2002, 2001 2000 and 1999,2000, 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.
Note 11--Employee Benefit Plans
Employee Stock Purchase Plan
Effective January 1, 2000, the Company initiated a 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 implementation of the ESPP is
by four annual offerings with the first annual Offering commencingoffering commenced on January 1,
2000. The remaining three annual offerings likewise commence and terminate on
the respective year's first and last calendar day. Under the 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 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.
As a result of the 2002, 2001 and 2000 annual offerings, a total of 24,141
shares, 23,926 shares and 38,753 shares of the company's common stock were
purchased at $8.50 for 2002, and $5.42 per common share for both the 2001 and
2000 respectivelyyears, under the ESPP. The 2002, 2001 and 2000 annual offerings' shares
were issued on January 8, 2003, January 8, 2002 and January 6, 2001,
respectively.
33
Retirement Savings Plan
On October 1, 1999, the Company established a retirement savings plan for
non-highly compensated employees ("the RSP"(the "RSP") under Section 401(k) of the
Internal Revenue Code. The 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 a Supplemental Executive
Retirement Plan ("the SERP"(the "SERP") for certain key executives and employees. The SERP
is not qualified under section 401 of the Internal Revenue Code. Under the SERP,
participants may defer up to fifteen percent (15%) of their income on a pre-tax
basis. As of the last day of each plan 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. SERP participants fully vest in the
Company's match three years from the first day of the initial year of
participation. The income deferred and the Company match are unsecured and
subject to the claims of general creditors of the Company. The amounts expensed
under the SERP during the years ended December 31, 2002, 2001 and 2000 were
approximately$287,743, $102,470 and $34,025, respectively. The Company funded such expense
through the reissuance to the SERP's trustee of 15,160 shares, 13,509 in 2001shares and
15,822 in 2000 of common shares of the Company's treasury stock. Suchstock for the years ended December 31,
2002, 2001 and 2000, respectively. The 44,491 shares held by the trustee are
accounted for at cost, as treasury stock. At December 31, 2002, 40,595 of such
shares became vested in the respective participants' accounts. The SERP's trust
account had a balance of $1,476,080, $832,677 and $349,384 at December 31, 2002,
2001 and 2000, respectively. The account's investments are recorded at their
fair value which is based on quoted market prices. Accordingly, the Company
recorded unrealized losses of $161,937, $65,768 and $54,225 for the years ended
December 31, 2002, 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
-----------------------------------------------------------------------------------------------
2002
Revenues $78,932 $82,066 $83,045 $84,457
Operating costs and expenses $75,762 $78,634 $79,507 $81,103
Income before income taxes $ 3,356 $ 3,629 $ 3,655 $ 3,625
Net income $ 2,030 $ 2,195 $ 2,211 $ 2,195
Basic earnings per common share(1) $ .18 $ .20 $ .20 $ .20
Diluted earnings per common share(1) $ .18 $ .19 $ .19 $ .19
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) $ .14.15 $ .16 $ .17 $ .05.17
(1) Year-to-date Earnings Per Shareearnings per common share amounts may differ from the sum of
quarterly amounts due to rounding.
Note 13--Recent Accounting Pronouncements
Business Combinations and Intangible Assets - Accounting for Goodwill
On July 20, 2001In June 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations,
and SFAS 142, Goodwill and Intangible Assets.No. 146,
"Accounting for Exit or Disposal Activities". SFAS 141No. 146 requires that the
liability for costs associated with an exit or disposal activity be recognized
at their fair values when the liabilities are incurred. Under previous guidance,
liabilities for certain exit costs were recognized at the date that management
committed to an exit plan, which is generally before the actual liabilities are
incurred. As SFAS No. 146 is effective only for all
business combinations completed after June 30, 2001. SFAS 142 is effective for
fiscal years beginningexit or disposal activities
initiated after December 15, 2001; however, certain provisions31, 2002, the Company does not currently expect the
adoption of this Statement applystatement to goodwill and other intangible assets acquired between
July 1, 2001 and the effective date of SFAS 142. Major provisions of these
Statements and their effective dates for the Company are 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
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 $107,000 per year effective
January 1, 2002 related to its intangible assets
Although it is still reviewing the provisions of these Statements, management's
preliminary assessment is that these Statements will not have a material impact on the Company'sits 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.
30statements.
34
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, 20012002 and 2000,2001, and the
related consolidated statements of income, cash flows, and stockholders' equity
for each of the three years in the period ended December 31, 2001.2002. 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 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, 20012002 and 20002001
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2001,2002, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Grant Thornton LLP
- ----------------------
New York, New York
February 14,12, 2003
35
Market Makers
As of the end of 2002, the following firms were making a market in the shares of
Healthcare Services Group, Inc.:
Salomon Smith Barney Inc.
Spears, Leeds & Kellogg
Knight Securities L.P.
C.L. King & Associates
Herzog, Heine, Geduld, Inc.
Wedbush Morgan Securities, Inc.
Robetti & Co., Inc.
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, 2002 there were
11,167,455 of the Company's common shares issued and outstanding. As of March
12, 2003 there were approximately 448 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 2,200 beneficial holders.
Price quotations during the two years ended December 31, 2002, ranged as
follows:
2002 High 2002 Low
----------- ----------
1st Qtr. ............................. $10.708 $ 9.540
2nd Qtr. ............................. 15.450 11.650
3rd Qtr. ............................. 15.750 11.750
4th Qtr. ............................. 13.910 10.751
2001 High 2001 Low
----------- ----------
1st Qtr. ............................. $ 7.375 $5.375
2nd Qtr. ............................. 7.980 6.060
3rd Qtr. ............................. 9.160 7.080
4th Qtr. ............................. 10.300 7.520
36
Item 9. Changes in
Transfer Agent Corporate Offices
American Stock Transfer & Trust Co. Healthcare Services Group, Inc.
99 Wall St. 3220 Tillman Drive, Suite 300
New York, NY 10005 Bensalem, PA 19020
215-639-4274
Auditors
Grant Thornton LLP Stock Listing
The Chrysler Building Listed on the NASDAQ
666 Third Avenue National Market System Symbol - "HCSG"
New York, NY 10017
Annual Stockholders' Meeting
Corporate Counsel Date - May 27, 2003
Olshan Grundman Frome Time - 10:00 A.M.
Rosenzweig & Wolosky LLP Place - The Radisson Hotel of Bucks County
505 Park Ave. 2400 Old Lincoln Highway
New York, NY 10022 Trevose, PA 19047
Officers and Corporate Management
Daniel P. McCartney John D. Kelly
Chief Executive Officer Western Divisional Vice President
Thomas A. Cook Nicholas R. Marino
President & Chief Operating Officer Human Resources Director
Curt Barringer Michael E. McBryan
Southeast Divisional Vice President Mid-Atlantic Divisional Vice President
Thomas B. Carpenter Bryan D. McCartney
General Counsel and Assistant Secretary Mid-Atlantic Divisional Vice President
James L. DiStefano Joseph F. McCartney
Chief Financial Officer and Treasurer Northeastern Divisional Vice President
Michael Hammond James P. O'Toole
Western Regional Vice President Mid-Atlantic Regional Vice President
Michael Harder Brian M. Waters
Vice President - Credit Administration Vice President - Operations
Richard W. Hudson
Vice President - Finance and Secretary
Directors
Daniel P. McCartney W. Thacher Longstreth
Chairman & Chief Executive Officer Philadelphia City Council Member
Thomas A. Cook Robert L. Frome, Esq.
President & Chief Operating Officer Senior Partner - Olshan Grundman Frome Rosenzweig & Wolosky LLP
Joseph F. McCartney Robert J. Moss, Esq.
Northeastern Divisional Vice President President - Moss Associates
Barton D. Weisman John M. Briggs, CPA
President & CEO-H.B.A. Corp. Partner - Briggs, Bunting & Dougherty LLP
Availability of Form 10-K
A copy of Healthcare Services Group, Inc.'s 2002 Annual Report on Form 10-K, as
filed with the Securities and Disagreements with Accountants on Accounting and
Financial Disclosures
Not ApplicableExchange 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.
37
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 20022003 Annual Shareholders'
Meeting and to be filed within 120 days of the close of the year ended 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
calculating the aggregate market value of the voting stock held by
non-affiliates set forth on the cover page of this Report.2002.
Item 11. Executive Compensation
The information regarding executive compensation is incorporated herein
by reference to the Company's definitive proxy statement to be mailed to
shareholders in connection with its 20022003 Annual Shareholders Meeting and to be
filed within 120 days of the close of the fiscal year ended December 31, 2001.2002.
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
20022003 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
2002.
Item 13. Certain Relationships and Related Transactions
The information regarding certain relationships and related
transactions is incorporated herein by reference to the Company's definitive
proxy statement mailed to shareholders in connection with its 20022003 Annual
Shareholders Meeting and to be filed within 120 days of the close of the fiscal
year ended December 31, 2001.2002.
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
CEO and CFO Certifications. Appearing immediately following the
Signatures section of this Annual Report there are two separate forms of
"Certifications" of the CEO and CFO. The first form of Certification is required
in accord with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302
Certification). This section of the Annual Report which you are currently
reading is the information concerning the Controls Evaluation referred to in the
Section 302 Certifications and this information should be read in conjunction
with the Section 302 Certifications for a more complete understanding of the
topics presented.
38
PART IV
Item 14.15. 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 20012002 and are incorporated herein by reference, copies of
which accompany this report.
Report of Independent Certified Public Accountants.
Balance Sheets as of December 31, 20012002 and 2000.2001.
Statements of Income for the three years ended
December 31, 2002, 2001 2000
and 1999.2000.
Statements of Cash Flows for the three years ended
December 31, 2002, 2001 2000 and 1991.2000.
Statement of Stockholders' Equity for the three years ended
December 31, 2002, 2001 2000 and 1999.2000.
Notes to Financial Statements.
2. Financial Statement Schedules
Included in Part IV of this report:
Report of Independent Certified Public Accountants.
Schedule II - Valuation and Qualifying Accounts for the three years
ended December 31, 2002, 2001 2000 and 1999.2000.
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.
33
3. Exhibits
The following Exhibits are filed as part of this Report (references
are to Reg. S-K Exhibit Numbers):
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 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
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 to the Company's Form 10-K for the period ended
December 31, 2001.
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 1995 Incentive and Non-Qualified Stock Option Plan, as amended is 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 is incorporated by reference to Exhibit 10.6 of Form 10-Q Report for the quarter
ended September 30, 1997 filed by Registrant on November 14, 1997.
10.4 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).
10.5 2002 Stock Option Plan (incorporated by reference to
Exhibit 4(a) to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 2002).
23. Consent of Independent Certified Public Accountants. 99. Certification
pursuant to Section 906 of the Sarbanes-Oxley Act.
(b) Reports on Form 8-K
None
34
39
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 21, 200212, 2003 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 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
- ----------------------
Signature Title Date
--------- ----- ----
/s/ Daniel P. McCartney Chief Executive Officer and March 12, 2003
- --------------------------- Chairman
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 12, 2003
- ---------------------------
Joseph F. McCartney
/s/ W.Thacher Longstreth Director March 12, 2003
- ---------------------------
W. Thacher Longstreth
/s/ Barton D. Weisman Director March 12, 2003
- ---------------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 12, 2003
- ---------------------------
Robert L. Frome
/s/ Thomas A. Cook Director, President and March 12, 2003,
- --------------------------- Chief Operating Officer
Thomas A. Cook
/s/ John M. Briggs Director March 12, 2003,
- ---------------------------
John M. Briggs
/s/ Robert J. Moss Director March 12, 2003,
- ---------------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 7, 2003,
- --------------------------- Treasurer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance, Secretary March 12, 2003,
- --------------------------- and Chief Accounting Officer
Richard W. Hudson
Vice President-Finance, March 21, 2002
- --------------------- Secretary and Chief
Richard W. Hudson Accounting Officer
35
40