Item 2. Properties
The Company leases its corporate offices, located at 3220 Tillman Drive, Suite 300, Bensalem , Pennsylvania 19020, which consists of 16,195 square feet. The term of the lease expires on September 30, 2005. The Company also leases office space at other locations in Pennsylvania, Connecticut, Florida, Illinois, California, Colorado, Georgia and Texas. The office sizes range from approximately 1,000 to 2,500 square feet. These locations serve as divisional or regional offices. In addition, the Company leases warehouse space in Pennsylvania and Florida. The warehouses in Pennsylvania and Florida consist of approximately 18,000 and 6,000 square feet, respectively. None of these leases is for more than a five-year term.
The Company is provided with office and storage space at each of its client facilities. Management does not foresee any difficulties with regard to the continued utilization of such premises.
The Company presently owns laundry equipment, office furniture and equipment, housekeeping equipment and vehicles. Management believes that all of such equipment is sufficient for the conduct of the Company's current operations.
Item 3.
Item 3. Legal Proceedings.
As of December 31, 2000, there were no material pending legal proceedings to which the Company was a party, or as to which any of its property was subject, other than routine litigation or claims believed to be adequately covered by insurance.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
PART II
Item 5.
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, 2000, there were 10,939,091 shares of Common Stock outstanding.
The high and low bids for the Common Stock during the two years ended December 31, 2000, ranged as follows:
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
1999 High 1999 Low --------- -------- 1st Qtr. 11.500 9.125 2nd Qtr. 10.625 8.750 3rd Qtr. 9.875 7.875 4th Qtr. 8.500 6.625
(b) Holders As of March 12, 2001, there were approximately 434 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 2,600 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.
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, 2000, copies of which accompany this Report.
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.
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.
Contents 2 Letter to Shareholders 4 Company Profile 8 Selected Financial Data 9 Management's Discussion and Analysis 13 Financial Statements 17 Notes to Financial Statements 28 Report of Independent Certified Public Accountants
The following discussion and analysis should be read in conjunction with the financial statements and notes thereto.
Management's Discussion and Analysis of Financial Condition And Results of Operations
Results of Operations From 1995 through 2000, the Company's revenues grew at a compound annual rate of 11.4%. This growth was achieved through obtaining new clients in both existing market areas, as well as providing additional services to existing clients. Although there can be no assurance thereof, the Company anticipates future growth, although its compound growth rates will likely decrease as growth is measured against the Company's increasing revenue base.
The following table sets forth for the years indicated the percentage which certain items bear to revenues:
Relation to Total Revenues Years Ended December 31, ------------------------------- 2000 1999 1998 ------ ------ ------ Revenues 100.0% 100.0% 100.0% Operating costs and expenses: Costs of services provided 89.1 88.5 85.1 Selling, general and administrative 7.7 8.1 8.5 Interest income .4 .4 .6 ----- ----- ----- Income before income taxes 3.6 3.8 7.0 Income taxes 1.4 1.4 2.7 ----- ----- ----- Net income 2.2% 2.4% 4.3% ===== ===== =====
2000 Compared with 1999 Revenues increased 9.6% to $254,668,213 in 2000 from $232,431,888 in 1999 resulting primarily from new service agreements entered into with new clients.
Costs of services provided as a percentage of revenues in 2000 increased to 89.1% from 88.5% in 1999. The primary factors affecting specific variations in the 2000 cost of services provided as a percentage of revenues and their effect on the .6% increase are as follows: an increase of 1.3% in the cost of supplies consumed in performing services; an increase of .7% in labor costs; an 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 to the Company's ability to control these expenses while comparing them to a greater revenue base.
As a result of the matters discussed above, 2000 net income decreased to 2.2% as a percentage of revenue compared to 2.4% in 1999.
1999 Compared with 1998 Revenues increased 13.5% to $232,431,888 in 1999 from $204,869,023 in 1998. The following factors contributed to the increase in revenues: service agreements with new clients increased revenues 30.4%; new services to existing clients increased revenues 2.5%; and cancellations and other minor changes decreased revenues by 19.4%.
Costs of services provided as a percentage of revenues in 1999 increased to 88.5% from 85.1% in 1998. The primary factors affecting specific variations in the 1999 cost of services provided as a percentage of revenues and their effect on the 3.4% increase are as follows: an increase of 2.0% in bad debt provision; increase of 1.6% in labor costs; increase of .4% in workers' compensation insurance; offsetting these increases was a decrease of .8% in the cost of supplies consumed in performing services.
Selling, general and administrative expenses as a percentage of revenue decreased to 8.1% in 1999 from 8.5% in 1998. The decrease is primarily attributable to the Company's ability to control these expenses while comparing them to a greater revenue base.
Income taxes as a percentage of revenue decreased in 1999 as a result of the Internal Revenue Service concluding an examination of the company's 1996 and 1997 returns. Therefore, previously established reserves are no longer required. Accordingly, the effective tax rate for 1999 has been reduced to reflect the reversal of these reserves.
Interest income in 1999 decreased to .4% as a percentage of revenue as compared to .6% in the 1998 twelve month period principally due to the Company's shift from investing excess funds in taxable securities to tax exempt securities, as well as lower average cash balances.
As a result of the matters discussed above, 1999 net income decreased to 2.4% as a percentage of revenue compared to 4.3% in 1998.
Liquidity and Capital Resources At December 31, 2000 the Company had working capital and cash of $73,995,108 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 6.2 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.
At December 31, 1999 the Company had working capital and cash of $69,784,823 and $17,198,687 respectively, which represents a 13% increase in working capital and slight decrease in cash compared to December 31, 1998 working capital and cash of $62,009,010 and $17,201,408. During 1999, the Company expended $183,750 for open market purchases of 21,000 shares of its common stock. The Company's current ratio at December 31, 1999 increased, to 8.7 to 1 from 6.8 to 1 at December 31, 1998.
The net cash provided by the Company's operating activities was $1,645,549 for the year ended December 31, 1999. The principal source of cash flows from operating activities for 1999 was net income, charges to operations for bad debt provisions and depreciation and amortization. The operating activity that used the largest amount of cash was an $11,344,617 net increase in accounts and notes receivable and long-term notes receivable, as well as a $1,795,361 decrease in accounts payable and other accrued expenses. The net increase in accounts and current and long-term notes receivable resulted primarily from the growth in the Company's revenues. The decrease in accounts payable and other accrued expenses is principally due to the timing of payments to vendors.
The Company's principal use of cash in investing activities for the year ended December 31, 1999 was the purchase of housekeeping equipment, computer software and equipment and laundry equipment installations.
The Company expends considerable effort to collect the amounts due for its services on the terms agreed upon with its clients. Many of the Company's clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Additionally, legislation enacted in August 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998 of a Medicare Prospective Payment System ("PPS") for skilled nursing facilities which significantly changed the manner and amount of reimbursements they receive. The Company's clients have been adversely effected by PPS, as well as other trends in the long-term care industry resulting in certain of the Company's clients filing voluntary bankruptcy protection. Others may follow. These factors, in addition to delays in payments from clients has resulted in and could result in 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. 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 encounters difficulty in collecting amounts due from certain of its clients, including those in bankruptcy, those which have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, the Company has recorded bad debt provisions of $3,250,000, $7,250,314 and $2,339,515 in the years ended December 31, 2000, 1999 and 1998, respectively. In making its evaluation, in addition to analyzing, and anticipating, where possible, the specific cases described above, management considers the general collection risk associated with trends in the long-term care industry.
The Company has an $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, 2001. Amounts drawn under the line are payable on demand. At December 31, 2000, there were no borrowings under the line. However, at such date, the Company had outstanding approximately $13,000,000 of irrevocable standby letters of credit, which relate to payment obligations under the Company's insurance program. As a result of the letters of credit issued, the amount available under the line was reduced by approximately $13,000,000 at December 31, 2000.
At December 31, 2000, the Company had $22,841,618 of cash and cash equivalents, which it views as its principal measure of liquidity.
The level of capital expenditures by the Company is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment and laundry and linen equipment installations. Although the Company has no specific material commitments for capital expenditures through the end of calendar year 2001, it estimates that it will incur capital expenditures of approximately $2,000,000 during this period in connection with housekeeping equipment and laundry and linen equipment installations in its clients' facilities, as well as expenditures relating to internal data processing hardware and software requirements. The Company believes that its cash from operations, existing balances and credit line will be adequate for the foreseeable future to satisfy the needs of its operations and to fund its continued growth. However, if the need arose, the Company would seek to obtain capital from such sources as long-term debt or equity financing.
In accordance with the Company's previously announced authorizations to purchase its outstanding common stock, the Company expended $761,875 to purchase 127,500 shares of its common stock during 2000 at an average price of $5.98 per common share. The Company remains authorized to purchase 321,450 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. Such risks and uncertainties include, but are not limited to, risks arising from the Company providing its services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; the effects of changes in regulations governing the industry and risk factors described in the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2000 in Part I thereof under "Government Regulations of Clients", "Competition" and "Service Agreements/Collections". The Company's clients have been adversely effected by the change in Medicare payments under the 1997 enactment of the Prospective Payment System ("PPS"), as well as other trends in the long-term care industry resulting in certain of the Company's clients filing voluntary bankruptcy petitions. Others may follow. These factors, in addition to delays in payments from clients has resulted in and could result in additional bad debts in the near future. Additionally, the Company's operating results would be adversely affected if unexpected increases in labor and labor related costs, materials, supplies and equipment used in performing its services could not be passed on to its clients.
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 pass through cost increases to its clients.
Consolidated Balance Sheets
See accompanying notes.
Consolidated Statements of Income
All per share data has been adjusted to reflect the 3-for-2 stock split paid in the form of a 50% stock dividend on August 27, 1998.
See accompanying notes.
Consolidated Statements of Cash Flows
See accompanying notes.
Consolidated Statement of Stockholders' Equity
See accompanying notes.
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 in the United States.
Principles of Consolidation The consolidated financial statements include the accounts of Healthcare Services Group, Inc. and its wholly-owned subsidiaries, HCSG Supply Inc. and Huntingdon Holdings, Inc. after elimination of intercompany transactions and balances.
Cash and cash equivalents Cash and cash equivalents consist of short-term, highly liquid investments with a maturity of three months or less at time of purchase.
Impaired notes receivable In the event that a promissory note receivable is impaired, it is accounted for in accordance with FAS 114 and FAS 118; that is, they are valued at the present value of expected cash flows or market value of related collateral. The Company evaluates its notes receivable for impairment quarterly and on an individual client basis. Notes receivable considered impaired are generally attributable to clients that are either in bankruptcy, have been turned over to collection attorneys or those slow payers that are experiencing severe financial difficulties.
At December 31, 2000, the Company had notes receivable aggregating approximately $8,000,000 that are impaired. During 2000, the Company increased its reserve against these notes by $3,400,000 and charged the reserve $4,200,000 for write-offs resulting in a reserve balance at December 31, 2000 of $1,800,000. During 2000, the average outstanding balance of these notes receivable was $8,100,000 and no interest income was recognized.
At December 31, 1999, the Company had notes receivable aggregating $8,200,000 that are impaired. During 1999, the Company increased its reserve against these notes by $2,900,000 and charged the reserve $4,400,000 for write-offs resulting in a reserve balance at December 31, 1999 of $2,600,000. During 1999, the average outstanding balance of these notes receivable was $6,800,000 and no interest income was recognized.
At December 31, 1998, the Company had notes receivable aggregating $5,300,000 that are impaired. During 1998, the Company increased its reserve against these notes by $3,250,000 and charged the reserve $50,000 for write-offs resulting in a reserve balance at December 31, 1998 of $4,100,000. During 1998, the average outstanding balance of these notes receivable was $3,500,000 and no interest income was recognized.
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. 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.
Revenue recognition Revenues from service agreements are recognized as services are performed. The Company (as a distributor of laundry equipment since 1981) occasionally makes sales of laundry installations to certain clients. The sales in most cases represent the construction and installation of a turn-key operation and are for payment terms ranging from 36 to 60 months. The Company's accounting policy for these sales is to recognize the gross profit over the life of the original payment terms associated with the financing of the transactions by the Company. During 2000, 1999 and 1998, laundry installation sales were not material.
Income taxes Deferred income taxes result from temporary differences between tax and financial statement recognition of revenue and expense. These temporary differences arise primarily from differing methods used for financial and tax purposes to calculate insurance expense, certain receivable reserves, other provisions which are not currently deductible for tax purposes, and revenue recognized on laundry installation sales.
Income taxes paid were approximately $3,345,000, $4,169,000 and $5,120,000 during 2000, 1999 and 1998, respectively.
Earnings per common share Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per common share reflects the weighted-average common shares outstanding and dilutive potential common shares, such as stock options. Earnings per common share has been adjusted to reflect the 1998 3-for-2 stock split described in Note 3.
Costs in excess of fair value of net assets Costs in excess of the fair value of net assets of businesses acquired are amortized on a straight-line basis over periods not exceeding forty years. All of the carrying value at December 31, 2000 resulted from a 1985 acquisition which is being amortized over a thirty-one year period. Amortization charged to earnings was $107,624 per year for the years 2000, 1999 and 1998, respectively.
On an ongoing basis, management reviews the valuation and amortization of costs in excess of fair value of net assets acquired. As part of this review, the Company estimates the value and future benefits of the expected cash flows generated by the related service agreements to determine that no impairment has occurred.
Other noncurrent assets Other noncurrent assets consist of: 2000 1999 ----------- ----------- Long-term notes receivable $11,400,615 $10,296,602 Deferred compensation funding 349,384 -- Other 226,906 498,502 ----------- ----------- $11,976,905 $10,795,104 =========== ===========
Long-term notes receivable primarily represent trade receivables that were converted to notes to enhance collection efforts.
Reclassification Certain reclassifications to prior periods reported amounts have been made in the financial statements to conform to 2000 presentation.
Concentrations of Credit Risk Statement of Financial Accounting Standards No. 105 (SFAS No. 105) requires the disclosure of significant concentrations of credit risk, regardless of the degree of such risk. Financial instruments, as defined by SFAS No. 105, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents and accounts and notes receivable. At December 31, 2000 and 1999, substantially all of the Company's cash and cash equivalents were invested with one financial institution. The Company's clients are concentrated in the health care industry, primarily providers of long-term care. Legislation enacted in August 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998, of a Medicare Prospective Payment System ("PPS") for skilled nursing facilities which significantly changed the manner and the amounts of reimbursement they receive. The Company's clients have been adversely effected by PPS, as well as other trends in the long-term care industry resulting in certain of the Company's clients filing voluntary bankruptcy petitions. Others may follow. These factors, in addition to delays in payments from clients has resulted in and could result in 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, 2000, no single client or nursing home chain accounted for more than 10% of total revenue.
Fair Value of Financial Instruments The carrying value of cash and cash equivalents are assumed to be at fair value because of the liquidity of the instruments. Accounts and notes receivable and accounts payable are assumed to be at fair value because of the short term maturity of the portfolio.
Use of Estimates in Financial Statements In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, 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.
Note 2--Lease Commitments
The Company leases office facilities, equipment and autos under operating leases expiring on various dates through 2006 and certain office leases contain renewal options (see Note 5). The following is a schedule, by calendar years, of future minimum lease payments under operating leases having remaining terms in excess of one year as of December 31, 2000:
Operating Year Leases - ---- ------------ 2001 ........................................... $ 777,274 2002 ........................................... 543,485 2003 ........................................... 488,290 2004 ........................................... 352,312 2005 and thereafter ............................ 254,839 ---------- Total minimum lease payments ................... $2,416,199 ==========
Total expense for all operating leases was $832,211, $635,951 and $861,245 for the years ended December 31, 2000, 1999 and 1998, respectively.
Note 3--Stockholders' Equity
On August 5, 1998, the Board of Directors declared a three-for-two stock split of the Company's Common Stock effected in the form of a 50% stock dividend payable on August 27, 1998 to Common Stock stockholders of record on August 17, 1998. An amount equal to the par value of the shares of Common Stock issued was transferred from additional paid in capital to common stock in the December 31, 1998 balance sheet. All stock options, share and per share disclosures have been adjusted to reflect the 3-for-2 stock split.
As of December 31, 2000, 1,331,504 shares of common stock were reserved under the incentive stock option plans, including 236,766 shares which were available for future grant. The Stock Option Committee is responsible for determining the individuals who will be granted options, the number of options each individual will receive, the option price per share, and the exercise period of each option. The incentive stock option price will not be less than the fair market value of the common stock on the date the option is granted. No option will have a term in excess of ten years and are exercisable commencing six months from the option date. As to any stockholder who owns 10% or more of the common stock, the option price per share will be no less than 110% of the fair market value of the common stock on the date the options are granted and such options shall not have a term in excess of five years.
As of December 31, 2000, options outstanding, under the Incentive Stock Option Plans, for 880,759 shares were exercisable at prices ranging from $5.67 to $9.90, and the weighted average remaining contractual life was 6.0 years. The weighted average fair value of incentive options granted during 2000, 1999 and 1998 was $2.15, $3.02 and $3.74, respectively.
A summary of incentive stock option activity is as follows:
The Company has granted non-qualified stock options primarily to officer-employees and directors under either the Company's 1995 Incentive and Non-Qualified Stock Option Plan for key employees and the Company's 1996 Non-Employee Director's Stock Option Plan. Amendments to the 1995 Plan, as well as the 1996 Plan were adopted on March 6, 1996 and approved by shareholders on June 4, 1996. Pursuant to the terms of the 1996 Non-Employee Director's Stock Option Plan, each eligible non-employee director receives an automatic grant based on a prescribed formula on the fixed annual grant date. The non-qualified options were granted at option prices which were not less than the fair market value of the common stock on the date the options were granted. The options are exercisable over a five to ten year period, commencing six months from the option date.
As of December 31, 2000, non-qualified options outstanding, under the above mentioned plans, for 363,477 shares were exercisable at prices ranging from $5.67 to $9.21, and the weighted average remaining contractual life was 4.1 years. The weighted average fair value of non-qualified options granted during 2000, 1999 and 1998 was $3.04, $4.03 and $5.53, respectively.
A summary of non-qualified stock option activity is as follows:
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, 2000, 1999 and 1998. 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:
Had compensation cost been determined under FASB Statement No. 123, net income and earnings per share would have been reduced as follows:
Note 4--Income Taxes
The provision for income taxes consists of:
Year Ended December 31, ----------------------------------- 2000 1999 1998 ---------- ---------- ---------- Current: Federal $2,507,800 $2,449,700 $4,789,900 State 842,400 687,800 1,552,900 ---------- ---------- ---------- 3,350,200 3,137,500 6,342,800 ---------- ---------- ---------- Deferred: Federal 155,400 500 (631,700) State 45,400 49,000 (189,100) ---------- ---------- ---------- 200,800 49,500 (820,800) ---------- ---------- ---------- Tax Provision $3,551,000 $3,187,000 $5,522,000 ========== ========== ==========
Under FAS 109, deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Significant components of the Company's federal and state deferred tax assets and liabilities are as follows:
Year Ended December 31, ----------------------- 2000 1999 ---------- ---------- Net current deferred tax assets: Allowance for doubtful accounts ................... $1,960,686 $2,903,922 Accrued insurance claims - current ................ 361,773 315,188 Expensing of housekeeping supplies ................ (1,496,333) (1,449,280) Other ............................................. 12,977 7,706 ---------- ---------- $ 839,103 $1,777,536 ========== ========== Net noncurrent deferred tax assets: Deferred profit on laundry installation sales ..... $ 27,273 $ 76,803 Non-deductible reserves ........................... 426,306 95,600 Depreciation of property and equipment ............ (646,639) (742,268) Accrued insurance claims- noncurrent .............. 1,360,955 1,185,707 Deferred compensation ............................. 180,475 -- Other ............................................. 17,816 12,711 ---------- ---------- $1,366,186 $ 628,553 ========== ==========
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, ----------------------------------- 2000 1999 1998 ---------- ---------- ---------- Tax expense computed at statutory rate $3,107,200 $2,965,800 $4,892,900 Increases (decreases) resulting from: State income taxes, net of federal tax benefit 586,000 486,300 900,100 Settlement of prior years' income tax examination -- (328,100) -- Tax exempt interest (97,500) (91,900) (400) Amortization of costs in excess of fair value of net assets acquired 36,600 36,600 36,600 Other, net (81,300) 118,300 (307,200) ---------- ---------- ---------- $3,551,000 $3,187,000 $5,522,000 ========== ========== ==========
In June, 1999, the Internal Revenue Service concluded its examination of the tax years ended December 31, 1997 and 1996. As a result, previously established reserves are no longer required. The effective rate for 1999 was reduced to reflect the reversal of these reserves.
Note 5--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 years ended December 31, 1999 and 1998 were $66,463 and $88,617, respectively.
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, 2000, 1999 and 1998 the agreements with the client facilities which the director has an ownership interest resulted in Company revenues of approximately $3,265,000, $3,033,000 and $2,931,000, respectively.
Note 6--Segment Information
The Company provides housekeeping, laundry, linen, facility maintenance and food services to the healthcare industry. The Company considers its business to consist of one reportable operating segment, based on the service business categories, provided to a client facility, sharing similar economic characteristics in the nature of the service provided, method of delivering service and client base. Although the Company does provide services in Canada, essentially all of its revenue and net income, approximately 99%, are earned in one geographic area, the United States.
The Company earned revenue in the following service business categories:
Year Ended December 31, ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ Housekeeping services $161,840,927 $150,343,572 $134,727,421 Laundry & linen services 68,285,181 67,013,585 53,065,926 Food services 21,602,962 12,113,838 13,373,320 Maintenance services & other 2,939,143 2,960,893 3,702,356 ------------ ------------ ------------ $254,668,213 $232,431,888 $204,869,023 ============ ============ ============
Note 7--Earnings Per Common Share
A reconciliation of the numerator and denominators of basic and diluted earnings per common share is as follows:
Options to purchase 1,176,288, 151,284 and 27,215 shares of common stock at an average exercise price of $7.57, $9.38 and $9.78 for the years ended December 31, 2000, 1999 and 1998, respectively were outstanding during such years but not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market value of the common shares.
Note 8-- Contingencies
The Company has an $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, 2001. Amounts drawn under the line are payable upon demand. At both December 31, 2000 and 1999, there were no borrowings under the line. However, at such dates, the Company had outstanding approximately $13,000,000 of irrevocable standby letters of credit, which relates to payment obligations under the Company's insurance program. As a result of letters of credit issued, the amount available under the line was reduced by approximately $13,000,000 at both December 31, 2000 and 1999.
The Company is also involved in miscellaneous claims and litigation arising in the ordinary course of business. The Company believes that these matters, taken individually or in the aggregate, would not have a material adverse impact on the Company's financial position or results of operations.
Legislation enacted in August 1997 changed Medicare policy in a number of ways, most notably the phasing in, effective July 1, 1998, of a Medicare Prospective Payment System ("PPS") for skilled nursing facilities which significantly changed the manner and the amounts of reimbursement they receive. The Company's clients have been adversely affected by PPS, as well as other trends in the long-term care industry resulting in certain of the Company's clients filing bankruptcy. Others may follow. These factors, in addition to delays in payments from clients has resulted in and could result in additional bad debts in the near future.
Note 9--Accrued Insurance Claims
For years 1998 through 2000, 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 worker's 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. The accrued insurance claims were reduced by approximately $2,975,000, $2,763,000 and $2,200,000 at December 31, 2000, 1999 and 1998, 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 10--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 Commencing on January 1, 2000. The remaining three annual offerings likewise commence on the respective year's first 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 2000 annual offering, a total of 38,753 shares of the company's common stock were purchased at $5.42 per common share under the ESPP. Such shares were issued on January 6, 2001.
Retirement Savings Plan
On October 1, 1999, the Company established a retirement savings plan for non-highly compensated employees ("the RSP") under Section 401(k) of the Internal Revenue Code. 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") 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 last 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 amount expensed under the SERP during the year ended December 31, 2000 was approximately $34,000, which was funded through the reissuance to the SERP's trustee of 15,822 common shares of the Company's treasury stock. The SERP's trust account had a balance of approximately $349,000 at December 31, 2000. The Account's investments are recorded at their fair value which is based on quoted market prices. Accordingly, the Company recorded unrealized losses of approximately $54,000 on such investments during 2000. The trust account is included in other noncurrent assets in the accompanying balance sheets.
Note 11--1999 Fourth Quarter Adjustments - Unaudited
During the fourth quarter of 1999, the Company increased its allowance for doubtful accounts by approximately $5,000,000 as a result of financial difficulties incurred by its client base arising from changes in Medicare payments enacted under the "Prospective Pay System", and other industry trends, including recent bankruptcy petitions filed by some national clients. The Company assesses the adequacy of its allowance on a quarterly basis by analyzing its receivables on a client-by-client basis, with particular emphasis on those in bankruptcy, slow payers experiencing financial difficulty and terminated accounts.
During the fourth quarter of 1999, the Company increased its accrued workers' compensation insurance claims liability by approximately $1,200,000 as a result of an approximately 30% increase in the number of claims incurred during the quarter, as compared to previous 1999 quarters, as well as an approximately 20% increase in the amount paid per claim incurred.
Note 12--Selected Quarterly Financial Data (Unaudited)
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. as of December 31, 2000 and 1999, and the related consolidated statements of income, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2000. 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. at December 31, 2000 and 1999 and the consolidated results of their operations and their consolidated cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP - ------------------------
New York, New York February 14, 2001
Market Makers As of the end of 2000, 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, 2000 there were 10,939,091 of the Company's common shares issued and outstanding. As of March 8, 2001 there were approximately 494 holders of record of the common stock, including holders whose stock was held in nominee name by brokers or other nominees. It is estimated that there are approximately 2,600 beneficial holders.
Price quotations during the two years ended December 31, 2000, ranged as follows:
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
1999 High 1999 Low --------- -------- 1st Qtr. ......... 11.500 9.125 2nd Qtr. ......... 10.625 8.750 3rd Qtr. ......... 9.875 7.875 4th Qtr. ......... 8.500 6.625
Availability of Form 10-K A copy of Healthcare Services Group, Inc.'s 2000 Annual Report on Form 10-K, as filed with the Securities and Exchange Commission, will be provided without charge to each shareholder making a written request to the Investor Relations Department of the Company at its Corporate Offices.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
Not Applicable
PART III
Item 10.
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 2001 Annual Shareholders' Meeting and to be filed within 120 days of the close of the year ended December 31, 2000.
Directors holding approximately 10.4% of the outstanding voting stock of the Registrant have been deemed to be "affiliates" solely for the purpose of calculating the aggregate market value of the voting stock held by non-affiliates set forth on the cover page of this Report.
Item 11.
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 2001 Annual Shareholders Meeting and to be filed within 120 days of the close of the fiscal year ended December 31, 2000.
Item 12.
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 2001 Annual Meeting and to be filed within 120 days of the close of the fiscal year ending December 31, 2000.
Directors holding approximately 12% 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 Repot.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information regarding certain relationship and related transactions is incorporated herein by reference to the Company's definitive proxy statement mailed to shareholders in connection with its 2001 Annual Shareholders Meeting and to be filed within 120 days of the close of the fiscal year ended December 31, 2000.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements The documents shown below are contained in the Company's Annual Report to Shareholders for 2000 and are incorporated herein by reference, copies of which accompany this report.
Report of Independent Certified Public Accountants. Balance Sheets as of December 31, 2000 and 1999. Statements of Income for the three years ended December 31, 2000, 1999 and 1998. Statements of Cash Flows for the three years ended December 31, 2000, 1999 and 1998. Statement of Stockholders' Equity for the three years ended December 31, 2000, 1999 and 1998. 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, 2000, 1999 and 1998.
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.
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 attached.
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
(b) Reports on Form 8-K
None
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 19, 2001 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 19, 2001 - ----------------------- Chairman Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 19, 2001 - ----------------------- Joseph F. McCartney
/s/ W.Thacher Longstreth Director March 19, 2001 - ------------------------ W. Thacher Longstreth
/s/ Barton D. Weisman Director March 19, 2001 - ------------------------ Barton D. Weisman
/s/ Robert L. Frome Director March 19, 2001 - ------------------------ Robert L. Frome
/s/ Thomas A. Cook Director, President and March 19, 2001 - ------------------------ Chief Operating Officer Thomas A. Cook
/s/ John M. Briggs Director March 19, 2001 - ------------------------ John M. Briggs
/s/ Robert J. Moss Director March 19, 2001 - ------------------------ Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 19, 2001 - ------------------------ Treasurer James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance, March 19, 2001 - ------------------------ Secretary and Chief Richard W. Hudson Accounting Officer