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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, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission File No. 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania 232018365
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporated or organization)
3220 Tillman Drive, Suite 300, Bensalem, PA 19020
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 639-4274
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Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Titles of Each Class on Which Registered
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NONE
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Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock ($.01 par value)
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Title of Class
Indicate by check mark whether the registrant (1) has filed all reports to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
YES __X__ NO_______
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_______
The aggregate market value of voting stock (Common Stock, $.01 par value) held
by non-affiliates of the Registrant as of March 7, 2000 was approximately
$67,936,000. Indicate the number of shares outstanding of each of the
registrant's classes of common stock, as of the latest practicable date: At
March 7, 2000 there were outstanding 11,011,557 shares of the Registrant's
Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated
by reference to certain portions of a definitive proxy statement which is
expected to be filed by the Registrant pursuant to Regulation 14A within 120
days after the close of its fiscal year.
PART I
References made herein to the Company or the Registrant include
Healthcare Services Group, Inc. and its wholly owned subsidiaries HCSG Supply,
Inc. and Huntingdon Holdings, Inc., unless the context otherwise requires.
Item I. Business
(a) General
Healthcare Services Group, Inc. (the "Company" or the "Registrant")
provides housekeeping, laundry, linen, facility maintenance and food services to
the health care industry, including nursing homes, retirement complexes,
rehabilitation centers and hospitals. The Company believes that it is the
largest provider of contractual housekeeping and laundry services to the
long-term care industry in the United States, rendering such services to
approximately 1,100 facilities in 42 states and Canada as of December 31, 1999.
(b) Not Applicable
(c) Description of Services
The Company provides management, administrative and operating expertise
and services to the housekeeping, laundry, linen, facility maintenance and food
service departments of the health care industry. The Company's labor force is
also interchangeable with respect to each of these services, with the exception
of food services. The Company believes that each service it performs is similar
in nature and each provides opportunity for growth.
Housekeeping services. Housekeeping services is the largest service
sector of the Company. It involves cleaning, disinfecting and sanitizing
resident areas in the facilities. In providing services to any given client
facility, the Company typically hires and trains the hourly employees who were
employed by such facility prior to the engagement of the Company. The Company
normally assigns two on-site managers to each facility to supervise and train
hourly personnel and to coordinate housekeeping and laundry with other facility
support functions. Such management personnel also oversee the execution of a
variety of quality and cost-control procedures including continuous training and
employee evaluation as well as on-site testing for infection control. The
on-site management team also assists the facility in complying with Federal,
state and local regulations.
Laundry and linen services. Laundry and linen services is the other
significant service sector of the Company. Laundry services involves laundering
and processing of the residents' personal clothing. The Company provides laundry
service to all of its housekeeping clients. Linen services involves providing,
laundering and processing the sheets, pillow cases, blankets, towels, uniforms
and assorted linen items used by the facilities. The hiring, training and
supervision of laundry and linen services' hourly employees are similar to, and
performed by the same management personnel as housekeeping services. Generally,
at most of the facilities that utilize the Company's linen services, the
equipment is either acquired and installed by the Company, or the existing
laundry installations are purchased from the facility and upgraded when
required. Each such installation generally requires initial capital outlays by
the Company of from $50,000 to $250,000 depending on the size of the facility,
installation and construction
1
cost and the amount of equipment required. The Company could incur relocation or
other costs in the event of the cancellation of a linen service agreement where
there was an investment by the Company in a corresponding laundry installation.
From January 1, 1997 through December 31, 1999, the Company's services
were cancelled by 47 facilities with respect to which the Company had previously
invested in a laundry installation. Laundry installations relating to agreements
cancelled in 1998 and 1997 resulted in the Company receiving approximately
$57,000 and $41,000 less, respectively than the net amount at which these assets
were recorded on its balance sheet. In 1999, laundry installations, relating to
clients who service agreements with the Company were terminated, were sold to
the Company's clients for an amount in excess of the net amount recorded on the
Company's balance sheet. Linen supplies, in some instances are owned by the
Company, and the Company maintains a sufficient inventory of these items in
order to ensure their availability. The Company provides linen services to
approximately twenty per cent of the facilities for which it provides
housekeeping services.
Facility maintenance, materials acquisition and consulting services.
Facility maintenance services consist of repair and maintenance of laundry
equipment, plumbing and electrical systems, as well as carpentry and painting.
In many instances, materials, equipment and supplies utilized by the Company in
the performance of maintenance services, as well as housekeeping, laundry and
linen services, are provided by the Company through its wholly owned subsidiary,
HCSG Supply, Inc.. The Company also provides consulting services to facilities
to assist them in updating their housekeeping, laundry and linen operations.
Food services. The Company commenced providing food services to a
limited number of clients in 1997. Food services consist of the development of a
menu that meets the residents' dietary needs, purchasing and preparing the food
to assure the residents receive an appetizing meal, and participation in
monitoring the residents' ongoing nutrition status. On-site management is
responsible for all daily food service activities, with regular support being
provided by a district manager specializing in food service, as well as a
registered dietitian. The Company also provides consulting services to
facilities to assist them in updating and cost containment with respect to a
client's food service operation.
Laundry installations sales. The Company (as distributor of laundry
equipment) sells laundry installations to its clients which generally represent
the construction and installation of a turn-key operation. The Company generally
offers payment terms, ranging from 36 to 60 months. There were no service
agreement cancellations in 1999, 1998 or 1997 by clients who have purchased
laundry installations from the Company. During the years 1997 through 1999,
laundry installation sales were not material to the Company's operating results
as the Company prefers to own such laundry installations in connection with
performance of its service agreements.
2
Operational-Management Structure
By applying its professional management techniques, the Company is able
to contain certain housekeeping, laundry, linen, facility maintenance and food
service costs on a continuing basis. The Company provides its services through a
network of management personnel, as illustrated below.
Vice President - Operations
Divisional Vice President
(5 Divisions)
Regional Vice President/Manager
(22 Regions)
District Manager
(108 Districts)
Training Manager
Facility Manager and
Assistant Facility Manager
Each facility is managed by an on-site Facility Manager, an Assistant
Facility Manager, and if necessary, additional supervisory personnel. Districts,
typically consisting of from eight to twelve facilities, are supported by a
District Manager and a Training Manager. District Managers bear overall
responsibility for the facilities within their districts. They are generally
based within close proximity to each facility. These managers provide active
support to clients in addition to the support provided by the Company's on-site
management. Training Managers are responsible for the recruitment, training and
development of Facility Managers. At December 31, 1999, the Company maintained
22 regions within five divisions. A division consists of two to six regions
within a specific geographical area. A Divisional Vice President manages each
division. Additionally, two divisions have a Divisional Vice President-Sales who
supports the Divisional Vice President by managing the marketing efforts of the
respective divisions. Each region is headed by a Regional Vice President/Manager
and a Regional Sales Director who assumes primary responsibility for marketing
the Company's services. Regional Vice President/Managers report to Divisional
Vice Presidents who in turn report to the Vice President of Operations. With
respect to the Food Service division, the Divisional Vice President assumes
primary responsibility for the marketing efforts of his division. Such efforts
are supplemented by the
3
Food Service division regional manager, as well as the other regional and
divisionals' sales and marketing personnel. The Company believes that its
divisional, regional and district organizational structure facilitates its
ability to obtain new clients, as well as its ability to sell new services to
existing clients.
Market
The market for the Company's services consists of a large number of
facilities involved in various aspects of the health care industry, including,
nursing homes, retirement complexes, rehabilitation centers and hospitals. Such
facilities may be specialized or general, privately owned or public, profit or
not-for-profit, and may serve patients on a long-term or short-term basis. The
market for the Company's services is expected to continue to grow as the elderly
increase as a percentage of the United States population and as government
reimbursement policies require increased cost control or containment by
constituents of its targeted market.
In 1999 the long-term care market consisted of approximately 23,000
facilities, according to estimates of the Department of Health and Human
Services. The facilities primarily range in size from small private facilities
with 65 beds to facilities with over 500 beds. The Company markets its services
primarily to facilities with 100 or more beds. The Company believes that less
than five percent of long-term care facilities use outside providers of
housekeeping and laundry services such as the Company.
Marketing and Sales
The Company's services are marketed at four levels of the Company's
organization: at the corporate level by the Chief Executive Officer, President
and the Vice President of Operations, at the divisional level by Divisional Vice
Presidents and Divisional Vice Presidents- Sales; at the regional level by the
Regional Vice Presidents/Managers and Regional Sales Directors; and at the
district level by District Managers. The Company provides incentive compensation
to its operational personnel based on achieving budgeted earnings and to its
Divisional Vice Presidents- Sales and Regional Sales Directors based on
achieving budgeted earnings and new business revenues.
The Company's services are marketed primarily through referrals and
in-person solicitation of target facilities. The Company also utilizes direct
mail campaigns and participates in industry trade shows, health care trade
associations and healthcare support services seminars that are offered in
conjunction with state or local health authorities in many of the states in
which the Company conducts its business. The Company's programs have been
approved for continuing education credits by state nursing home licensing boards
in certain states, and are typically attended by facility owners, administrators
and supervisory personnel, thus presenting a marketing opportunity for the
Company. Indications of interest in the Company's services arising from initial
marketing efforts are followed up with a presentation regarding the Company's
services and survey of the service requirements of the facility. Thereafter, a
formal proposal, including operational recommendations and recommendations for
proposed savings, is submitted to the prospective client. Once the prospective
client accepts the proposal and signs the service agreement, the Company can set
up its operations on-site within days.
4
Government Regulation of Clients
The Company's clients are subject to governmental regulation. In August
1997, the President signed into law the Balanced Budget Act of 1997. The
legislation changed Medicare policy in a number of ways including the phasing in
of a Medicare prospective payment system ("PPS") for skilled nursing facilities
effective July 1, 1998. PPS has significantly changed the manner and the amounts
in which skilled nursing facilities are reimbursed for inpatient services
provided to Medicare beneficiaries. Unlike the old system, which relied solely
on cost reports submitted, PPS rates are based entirely on the
federally-acuity-adjusted rate. Although PPS directly affects how clients are
paid for certain services, the Company itself does not participate in any
government reimbursement programs. Therefore, all of the Company's contractual
relationships with its clients continue to determine the clients' payment
obligations to the Company. However, certain clients have been adversely
affected by PPS, as well as other trends in the long-term care industry
resulting in certain clients recently filing voluntary bankruptcy petitions and
others may follow (see " Liquidity and Capital Resources"). The awareness that
PPS has had, and continues to have a negative effect on the long-term care
industry's financial position has been recognized by Congress. In the summer of
1999, a proposal was presented by the President and Congress to add
approximately $7.5 billion in funding in an attempt to address coverage gaps
caused by PPS. Additionally, other measures have been introduced by legislatures
to close the gap between the current system's presumptions and the actual cost
of providing care.
Service Agreements/Collection
The Company offers two kinds of service agreements, a full service
agreement or a management agreement. In a full service agreement, the Company
assumes both management and payroll responsibility for the hourly housekeeping,
laundry, linen, facility maintenance and food service employees.
The Company typically adopts and follows the client's employee wage
structure, including its policy of wage rate increases, and passes through to
the client any labor cost increases associated with wage rate adjustments. Under
a management agreement, the Company provides management and supervisory services
while the client facility retains payroll responsibility for its hourly
employees. Substantially all of the Company's agreements are full service
agreements. These agreements typically provide for a one year term, cancelable
by either party upon 30 days' notice after the initial 90-day period. As of
December 31, 1999, the Company provided services to approximately 1,100 client
facilities.
Although the service agreements are cancelable on short notice, the
Company has historically had a favorable client retention rate and expects to be
able to continue to maintain satisfactory relationships with its clients. The
risk associated with short-term agreements have not materially affected either
the Company's linen services, which generally require a capital investment, or
laundry installation sales, which require the Company to finance the sales
price. Such risks are often mitigated by certain provisions set forth in the
agreements which are entered into by the Company. In cases where the Company has
purchased the laundry installation from its clients, many of the linen service
agreements require that in the event the Company's services are terminated, the
client becomes obligated to purchase the laundry installation from the Company
at a price no less than the value recorded on the Company's financial statements
at the time of termination. The laundry installation sales agreements obligate
the purchaser to pay for such installation upon terms independent of the
services rendered by the Company.
5
From time to time, the Company encounters difficulty in collecting
amounts due from certain of its clients, including those in bankruptcy, those
who have terminated service agreements and slow payers experiencing financial
difficulties. In order to provide for these collection problems and the general
risk associated with the granting of credit terms, the Company recorded bad debt
provisions (in an Allowance for Doubtful Accounts) of $7,250,314, $2,339,515 and
$899,551 in the years ended December 31, 1999, 1998 and 1997, respectively. In
making its 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.
Competition
The Company competes primarily with the in-house support service
departments of its potential clients. Most healthcare facilities perform their
own support service functions without relying upon outside management firms such
as the Company. In addition, a number of local firms compete with the Company in
the regional markets in which the Company conducts business. Several national
service firms are larger and have greater financial and marketing resources than
the Company, although historically, such firms have concentrated their marketing
efforts on hospitals rather than the long-term care facilities typically
serviced by the Company. Although the competition to provide service to health
care facilities is strong, the Company believes that it competes effectively for
new agreements, as well as renewals of the existing agreements based upon the
quality and dependability of its services and the cost savings it can effect for
the client.
Employees
At December 31, 1999, the Company employed 2,272 management and
supervisory personnel. Of these employees, 258 held executive, regional/district
management and office support positions, and 2,014 of these salaried employees
were on-site management personnel. On such date, the Company employed
approximately 13,469 hourly employees. Many of the Company's hourly employees
were previous support employees of the Company's clients. In addition, the
Company manages hourly employees who remain employed by certain of its clients.
Approximately 15% of the Company's hourly employees are unionized.
These employees are subject to collective bargaining agreements that are
negotiated by individual facilities and are assented to by the Company so as to
bind the Company as an "employer" under the agreements. The Company may be
adversely affected by relations between its client facilities and the employee
unions. The Company is a party to negotiated collective bargaining agreements
with respect to approximately 20 employees at two facilities. The Company
believes its employee relations are satisfactory.
6
(d) Risk Factors - Certain matters discussed in this report may include
forward-looking statements that are subject to risks and uncertainties that
could cause actual results or objectives to differ materially from those
projected. Such risks and uncertainties include, but are not limited to, risks
arising from the Company providing its services exclusively to the health care
industry, primarily providers of long-term care; credit and collection risks
associated with this industry; the effects of changes in regulations governing
the industry and risk factors described in Part I hereof under "Government
Regulation of Clients", "Competition" and "Service Agreements/Collection". The
Company's clients have been adversely affected by the change in Medicare
payments under the recently enacted Prospective Payment System ("PPS"), as well
as other trends in the long-term care industry resulting in certain of the
Company's clients recently filing voluntary bankruptcy petitions and others may
follow. This, in addition to delays in payments from clients has resulted in and
could result in additional bad debts in the near future. The Company's operating
results would also be adversely affected if unexpected increases in the costs of
labor, materials supplies and equipment used in performing its services could
not be passed on to clients.
In addition, the Company believes that in order to improve its
financial performance it must continue to obtain service agreements with new
clients and provide 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.
(e) Financial Information About Foreign and Domestic Operations and Export Sales
Not Applicable.
Item 2. Properties
The Company leases its corporate offices, located at 3220 Tillman
Drive, Suite 300, Bensalem , Pennsylvania 19020, which consists of 16,195 square
feet. The term of the lease expires on September 30, 2005. The Company also
leases office space at other locations in Pennsylvania, Connecticut, Florida,
Illinois, California, Colorado, Georgia and Texas. The office sizes range from
approximately 1,000 to 2,500 square feet. These locations serve as divisional or
regional offices. In addition, the Company leases warehouse space in
Pennsylvania and Florida. The warehouses in Pennsylvania and Florida consist of
approximately 18,000 and 10,000 square feet, respectively. None of these leases
is for more than a five-year term.
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.
7
Item 3. Legal Proceedings.
As of December 31, 1999, 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. Submission of Matters to a Vote of Security Holders
Not applicable.
8
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
(a) Market Information
The Company's common stock, $.01 par value (the "Common Stock") is
traded on the NASDAQ National Market System. On December 31, 1999, there were
11,064,107 shares of Common Stock outstanding.
On August 5, 1998, the Board of Directors declared a three-for-two
stock split of the Company's Common Stock effected in the form of a 50% stock
dividend payable on August 27, 1998 to Common Stock stockholders of record on
August 17, 1998. An amount equal to the par value of the shares of Common Stock
issued was transferred from Additional Paid in Capital to Common Stock in the
December 31, 1998 balance sheet. The effect of this action was to increase
shares of outstanding Common Stock at August 27, 1998 by approximately
3,693,432.
The high and low bids for the Common Stock during the two years ended
December 31, 1999, ranged as follows (after giving effect to the three-for-two
stock split in 1998):
1999 High 1999 Low
--------- --------
1st Qtr. 11 1/2 9 1/8
2nd Qtr. 10 5/8 8 3/4
3rd Qtr. 9 7/8 7 7/8
4th Qtr. 8 1/2 6 5/8
1998 High 1998 Low
--------- --------
1st Qtr. 9 15/16 8 1/3
2nd Qtr. 9 9/16 9 1/3
3rd Qtr. 11 11/16 8 3/16
4th Qtr. 9 7/8 8 3/8
(b) Holders
As of March 3, 2000, there were approximately 290 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.
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
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)
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Years ended December 31:
------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Revenues $232,432 $204,869 $181,359 $162,482 $148,747
-------- -------- -------- -------- --------
Net income $ 5,536 $ 8,869 $ 5,894 $ 6,889 $ 3,941
-------- -------- -------- -------- --------
Basic earnings per common share $ .50 $ .79 $ .52 $ .57 $ .32
-------- -------- -------- -------- --------
Diluted earnings per common share $ .49 $ .77 $ .51 $ .56 $ .32
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding for basic EPS 11,053 11,188 11,354 12,156 12,210
-------- -------- -------- -------- --------
Weighted average number of common
shares outstanding for diluted EPS 11,286 11,512 11,578 12,203 12,335
-------- -------- -------- -------- --------
As of December 31:
Working Capital $ 69,785 $ 62,009 $ 55,706 $ 57,434 $ 51,068
-------- -------- -------- -------- --------
Total Assets $ 98,030 $ 93,109 $84,890 $ 86,446 $ 80,290
-------- -------- -------- -------- --------
Stockholders' Equity $ 85,961 $ 80,192 $ 72,227 $ 74,938 $ 68,470
-------- -------- -------- -------- --------
Book Value Per Share $ 7.77 $7.27 $6.52 $ 6.17 $ 5.61
-------- -------- -------- -------- --------
Employees 15,741 14,046 12,180 11,217 10,911
-------- -------- -------- -------- --------
All share data has been adjusted to reflect the 3-for-2 stock split paid in the
form of a 50% stock dividend on August 27, 1998.
10
The following discussion and analysis
should be read in conjunction with
the financial statements and notes thereto.
Management's Discussion and Analysis of
Financial Condition And Results of Operations
Results of Operations
From 1994 through 1999, the Company's revenues grew at a compound annual rate of
11.2%. 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,
-------------------------------
1999 1998 1997
----- ----- ------
Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 88.5 85.1 85.1
Selling, general and administrative 8.1 8.5 8.8
Interest income .4 .6 .8
Settlement of civil litigation - - (1.0)
----- ----- -----
Income before income taxes 3.8 7.0 5.9
Income taxes 1.4 2.7 2.6
----- ----- -----
Net income 2.4% 4.3% 3.3%
===== ===== =====
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 worker's 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.
11
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.
1998 Compared with 1997
Revenues increased 13% to $204,869,023 in 1998 from $181,359,305 in 1997. The
following factors contributed to the increase in revenues: service agreements
with new clients increased revenues 22.7%; new services to existing clients
increased revenues 4.9%; and cancellations and other minor changes decreased
revenues by 14.6%.
Costs of services provided as a percentage of revenues in 1998 was 85.1%, the
same as in 1997. The primary factors affecting specific variations in the 1998
cost of services provided as a percentage of revenue are as follows: decrease in
workers' compensation, general liability and other insurance of .5%; decrease of
.3% in the cost of supplies consumed in performing services; decrease of .3% in
employee benefits; offsetting these decreases was an increase in bad debt
provisions of .6%.
Selling, general and administrative expenses as a percentage of revenue
decreased to 8.5% in 1998 from 8.8% in 1997. The decrease is primarily
attributable to the Company's ability to control these expenses while comparing
them to a greater revenue base.
Interest income, as a percentage of revenue decreased to .6% in 1998 as
compared to .8% in 1997 primarily as a result of lower average cash balances.
Liquidity and Capital Resources
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, 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.
At December 31, 1998 the Company had working capital and cash of $62,009,010
and $17,201,408 respectively, which represent an 11% and 3% decrease,
respectively, compared to December 31, 1997 working capital and cash of
$55,705,917 and $17,774,219. During 1998, the Company expended $3,496,000 for
open market purchases of 369,000 shares of its common stock. The Company's
current ratio at December 31, 1998 increased only slightly, to 6.8 to 1 from 6.7
to 1 at December 31, 1997.
12
The net cash provided by the Company's operating activities was $3,319,704
for the year ended December 31, 1998. The principal source of cash flows from
operating activities for 1998 was net income, charges to operations for bad debt
provisions, depreciation and amortization, and the timing of payments for
payroll and payroll related taxes. The operating activity that used the largest
amount of cash was a $10,215,917 net increase in accounts and current and long
term notes receivable, as well as a $871,915 decrease in accrued insurance
claims. The net increase in accounts and current and long term notes receivable
resulted primarily from the growth in the Company's revenues. The decrease in
accrued insurance claims is principally due to the estimated final payment on
expiring policies to the Company's insurance carrier.
The Company's principal use of cash in investing activities for the year
ended December 31, 1998 was the purchase of housekeeping equipment, computer
equipment and laundry equipment installations.
The Company expends considerable effort to collect the amounts due for its
services on the terms agreed upon with its clients. Many of the Company's
clients participate in programs funded by federal and state governmental
agencies which historically have encountered delays in making payments to its
program participants. Additionally, legislation enacted in August 1997 changed
Medicare policy in a number of ways, most notably the phasing in, effective July
1, 1998 of a Medicare Prospective Payment System ("PPS") for skilled nursing
facilities which significantly changed the manner and amount of reimbursements
they receive. The Company's clients have been adversely effected by PPS, as well
as other trends in the long-term care industry resulting in certain of the
Company's clients recently filing voluntary bankruptcy and others may follow.
This, 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,
provide a definitive repayment plan and therefore may enhance the ultimate
collectibility of the amounts due. In some instances the Company obtains a
security interest in certain of the debtors' assets.
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
$7,250,314, $2,339,515 and $899,551 in the years ended December 31, 1999, 1998
and 1997, 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 a $18,000,000 bank line of credit, increased from $13,000,000
at December 31, 1998, on which it may draw to meet short-term liquidity
requirements in excess of internally generated cash flow, that expires on
September 30, 2000. Amounts drawn under the line are payable on demand. At
December 31, 1999, 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 relates to payment obligations under the
Company's insurance program.
At December 31, 1999, the Company had $17,198,687 of cash and cash
equivalents, which it views as its principal measure of liquidity.
The level of capital expenditures by the Company is generally dependent on
the number of new clients obtained. Such capital expenditures primarily consist
of housekeeping equipment and laundry and linen equipment installations.
Although the Company has no specific material commitments for capital
expenditures through the end of calendar year 2000, 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. 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.
13
In accordance with the Company's previously announced authorizations to
purchase its outstanding common stock, the Company expended $183,750 to purchase
21,000 shares of its common stock during 1999 at an average price of $8.75 per
share. The Company remains authorized to purchase 448,950 shares pursuant to
previous Board of Directors action.
Effect of Recently Issued Accounting Pronouncements
Accounting for Derivative Instruments and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which is effective for fiscal years
beginning after June, 1999. SFAS No. 133 requires all entities to recognize all
derivative instruments on their balance sheet as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
Adoption of SFAS No. 133 is not expected to have a material effect on the
Company's consolidated financial statements.
Other Matters - Year 2000 Compliance
The Company has implemented new operating and application software which became
operational during 1998. The Company has been notified by the software
manufacturer, as well as the firm providing installation support, that the new
applications have functionality for the year 2000. Additionally, the Company
utilizes an independent service bureau for the processing and payment of payroll
and payroll related taxes. The Company has been notified by its payroll
processing company that all of its systems will be fully compliant with year
2000 requirements. Many of the Company's clients participate in programs funded
by federal and state governmental agencies which may be affected by the year
2000 issues. Any failure by the Company, its outside processing company, its
clients or the federal and state governmental agencies to effectively monitor,
implement or improve the above referenced operational, financial, management and
technical support systems could have a material adverse effect on the Company's
business and consolidated result of operations.
The Company has not encountered any processing complications, nor has the
Company incurred any additional expense, in regards to the above noted
applications' year 2000 functionality. Additionally, the Company has not
experienced any year 2000 functionality problems with independent service
providers or outside processing companies. Furthermore, there has been no
notification to the Company by its clients that they have been effected by any
year 2000 issues impacting their governmental funding.
Cautionary Statements Regarding Forward Looking Statements
Certain matters discussed may include forward-looking statements that are
subject to risks and uncertainties that could cause actual results or objectives
to differ materially from those projected. Such risks and uncertainties include,
but are not limited to, risks arising from the Company providing its services
exclusively to the health care industry, primarily providers of long-term care;
credit and collection risks associated with this industry; the 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, 1999 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 recently enacted Prospective Payment System ("PPS"), as well as other trends
in the long-term care industry resulting in certain of the Company's clients
recently filing voluntary bankruptcy petitions and others may follow. This, 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 the costs of
labor, materials, supplies and equipment used in performing its services could
not be passed on to its clients.
14
In addition, the Company believes that to improve its future financial
performance it must continue to obtain service agreements with new clients,
providing new services to existing clients, achieve modest price increases on
current service agreements with existing clients and maintain internal cost
reduction strategies at the various operational levels of the Company.
Furthermore, the Company believes that its ability to sustain the internal
development of managerial personnel is an important factor impacting future
operating results and successfully executing projected growth strategies.
Effects of Inflation
All of the Company's service agreements allow it to pass through to its clients
increases in the cost of labor resulting from new wage agreements. The Company
believes that it will be able to recover increases in costs attributable to
inflation by continuing to pass through cost increases to its clients.
15
Consolidated Balance Sheets
Assets December 31,
--------------------------
Current Assets: 1999 1998
----------- -----------
Cash and cash equivalents $17,198,687 $17,201,408
Accounts and notes receivable, less allowance for
doubtful accounts of $7,278,000 in 1999 and
$3,449,000 in 1998 48,612,738 45,066,828
Prepaid income taxes 843,889 -
Inventories and supplies 8,580,181 7,803,437
Deferred income taxes 1,777,536 324,054
Prepaid expenses and other 1,869,091 2,318,285
----------- -----------
Total current assets 78,882,122 72,714,012
Property and Equipment:
Laundry and linen equipment installations 7,824,038 8,985,945
Housekeeping and office equipment 9,012,178 8,482,207
Autos and trucks 51,110 51,110
----------- -----------
16,887,326 17,519,262
Less accumulated depreciation 10,990,792 11,416,214
----------- -----------
5,896,534 6,103,048
COSTS IN EXCESS OF FAIR VALUE OF
NET ASSETS ACQUIRED
less accumulated amortization of $1,527,908 in 1999
and $1,420,284 in 1998 1,827,569 1,935,193
DEFERRED INCOME TAXES 628,553 2,131,535
OTHER NONCURRENT ASSETS 10,795,104 10,225,439
----------- -----------
$98,029,882 $93,109,227
=========== ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 2,472,021 $ 4,366,015
Accrued payroll, accrued and withheld payroll taxes 5,417,367 5,147,634
Other accrued expenses 417,966 319,333
Income taxes payable - 283,980
Accrued insurance claims 789,945 588,040
----------- -----------
Total current liabilities 9,097,299 10,705,002
ACCRUED INSURANCE CLAIMS 2,971,697 2,212,151
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 15,000,000 shares
authorized, 11,064,107 shares issued in 1999 and
11,034,207 in 1998 110,641 110,342
Additional paid in capital 25,297,284 25,064,832
Retained earnings 60,552,961 55,016,900
----------- -----------
Total stockholders' equity 85,960,886 80,192,074
----------- -----------
$98,029,882 $93,109,227
=========== ===========
See accompanying notes.
16
Consolidated Statements of Income
Years Ended December 31,
------------------------
1999 1998 1997
------------ ------------ ------------
Revenues $232,431,888 $204,869,023 $181,359,305
Operating costs and expenses:
Cost of services provided 205,686,044 174,431,075 154,417,984
Selling, general and administrative 18,778,786 17,447,639 15,859,083
Other income (expense):
Settlement of civil litigation (1,800,000)
Interest income 756,003 1,400,544 1,412,096
------------ ------------ ------------
Income before income taxes 8,723,061 14,390,853 10,694,334
Income taxes 3,187,000 5,522,000 4,800,000
------------ ------------ ------------
Net income $ 5,536,061 $ 8,868,853 $ 5,894,334
============ ============ ============
Basic earnings per common share $ .50 $ .79 $ .52
============ ============ ============
Diluted earnings per common share $ .49 $ .77 $ .51
============ ============ ============
All per share data has been adjusted to reflect the 3-for-2 stock split paid in
the form of a 50% stock dividend on August 27, 1998.
See accompanying notes.
17
Consolidated Statements of Cash Flows
Years Ended December 31,
------------------------
1999 1998 1997
------------ ------------ ------------
Cash flows from operating activities:
Net Income $ 5,536,061 $ 8,868,853 $ 5,894,334
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 2,149,735 2,080,823 2,119,053
Bad debt provision 7,250,314 2,339,515 899,551
Deferred income taxes (benefits) 49,500 (820,800) 258,000
Tax benefit of stock option
transactions 45,427 571,985 120,826
Changes in operating assets and liabilities:
Accounts and notes receivable (10,796,225) (10,845,682) (4,141,482)
Prepaid income taxes (843,889) 366,712 (366,712)
Inventories and supplies (776,745) (463,509) 52,579
Long term notes receivable (548,392) 629,765 (120,202)
Accounts payable and other
accrued expenses (1,795,361) (535,055) 303,524
Accrued payroll, accrued and
withheld payroll taxes 269,733 1,377,324 816,211
Accrued insurance claims 961,451 (871,915) 89,009
Income taxes payable (283,980) 283,980 (53,139)
Prepaid expenses and other assets 427,920 337,708 (506,560)
------------ ------------ ------------
Net cash provided by operating
activities 1,645,549 3,319,704 5,364,992
------------ ------------ ------------
Cash flows from investing activities:
Disposals of fixed assets 1,049,008 400,165 212,721
Additions to property and equipment (2,884,602) (2,816,996) (1,754,111)
------------ ------------ ------------
Net cash used in investing activities (1,835,594) (2,416,831) (1,541,390)
------------ ------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (183,750) (3,496,000) (10,923,679)
Proceeds from the exercise of stock
options 371,074 2,020,316 2,197,006
------------ ------------ ------------
Net cash provided by (used in)
financing activities 187,324 (1,475,684) (8,726,673)
------------ ------------ ------------
Net decrease in cash and
cash equivalents (2,721) (572,811) (4,903,071)
Cash and cash equivalents at
beginning of the year 17,201,408 17,774,219 22,677,290
------------ ------------ ------------
Cash and cash equivalents at end of
the year $ 17,198,687 $ 17,201,408 $ 17,774,219
============ ============ ============
See accompanying notes.
18
Consolidated Statements of Stockholders' Equity
Years Ended December 31, 1999, 1998 and 1997
--------------------------------------------
Additional Total
Common Stock Paid-in Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
------------- -------- ----------- ----------- ---------- -------------
Balance, December 31, 1996 8,090,663 $ 80,907 $34,603,813 $40,253,713 $ -- $74,938,433
Net income for year 5,894,334 5,894,334
Exercise of stock options 238,700 2,387 2,194,619 2,197,006
Tax benefit arising from
stock transactions 120,826 120,826
Purchase of common
stock for treasury
(942,500 shares) (10,923,679) (10,923,679)
Treasury stock retired (942,500) (9,425) (10,914,254) 10,923,679
------------- -------- ----------- ----------- ------------ -----------
Balance, December 31, 1997 7,386,863 73,869 26,005,004 46,148,047 -- 72,226,920
Three-for-two stock split 3,693,432 36,934 (36,934)
Net income for year 8,868,853 8,868,853
Exercise of stock options 322,912 3,229 2,017,087 2,020,316
Tax benefit arising from
stock transactions 571,985 571,985
Purchase of common
stock for treasury
(369,000 shares) (3,496,000) (3,496,000)
Treasury stock retired (369,000) (3,690) (3,492,310) 3,496,000
------------- -------- ----------- ----------- ------------ -----------
Balance, December 31, 1998 11,034,207 110,342 25,064,832 55,016,900 -- 80,192,074
Net income for year 5,536,061 5,536,061
Exercise of stock options 50,900 509 370,565 371,074
Tax benefit arising from
stock transactions 45,427 45,427
Purchase of common stock
for treasury (21,000 shares) (183,750) (183,750)
Treasury stock retired (21,000) (210) (183,540) 183,750
------------- -------- ----------- ----------- ------------ -----------
Balance, December 31, 1999 11,064,107 $110,641 $25,297,284 $60,552,961 $ -- $85,960,886
============= ======== =========== =========== ============ ===========
See accompanying notes.
19
Notes to Consolidated Financial Statements
Note 1--Summary of Significant Accounting Policies
General
The Company provides housekeeping, laundry, linen, facility maintenance and food
services exclusively to the healthcare industry such as nursing homes,
rehabilitation centers, retirement facilities and hospitals principally 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, 1999, the Company had notes receivable aggregating $8,200,000
that are impaired. During 1999, the Company increased its reserve against these
notes by $2,900,000 and charged the reserve $4,400,000 resulting in a reserve
balance at December 31, 1999 of $2,600,000. During 1999, the average outstanding
balance of these notes receivable was $6,800,000 and no interest income was
recognized.
At December 31, 1998, the Company had notes receivable aggregating $5,300,000
that are impaired. During 1998, the Company increased its reserve against these
notes by $3,250,000 and charged the reserve $50,000 resulting in a reserve
balance at December 31, 1998 of $4,100,000. During 1998, the average outstanding
balance of these notes receivable was $3,500,000 and no interest income was
recognized.
At December 31, 1997, the Company had notes receivable aggregating $1,600,000
that are impaired. During 1997, the Company reduced its reserve against these
notes by $1,100,000 and charged the reserve $600,000 resulting in a reserve
balance at December 31, 1997, of $900,000. During 1997, the average outstanding
balance of these notes receivable was $2,400,000 and no interest was recognized.
The Company follows an income recognition policy on notes receivable that
does not recognize interest income until cash payments are received. This policy
was established for conservative reasons, recognizing the environment of the
long-term care industry, and not because such notes are impaired. The difference
between income recognition on a full accrual basis and cash basis, for notes
that are not considered impaired, is not material. For impaired notes, interest
income is recognized on a cost recovery basis only.
Inventories and supplies
Inventories and supplies include housekeeping and laundry supplies, as well as
food service provisions which are valued at the lower of cost or market. Cost is
determined on a first-in, first-out (FIFO) basis. Linen supplies are included in
inventory and are amortized over a 24 month period.
20
Property and equipment
Property and equipment are stated at cost. Additions, renewals and improvements
are capitalized, while maintenance and repair costs are expended. When assets
are retired or otherwise disposed of, the cost and related accumulated
depreciation are removed from the respective accounts and any resulting gain or
loss is included in income. Depreciation is provided by the straight-line method
over the following estimated useful lives: laundry and linen equipment
installations -- 3 to 7 years; housekeeping equipment and office equipment -- 3
to 7 years; autos and trucks -- 3 Years.
Revenue recognition
Revenues from service agreements are recognized as services are performed. The
Company (as a distributor of laundry equipment since 1981) occasionally makes
sales of laundry installations to certain clients. The sales in most cases
represent the construction and installation of a turn-key operation and are for
payment terms ranging from 36 to 60 months. The Company's accounting policy for
these sales is to recognize the gross profit over the life of the original
payment terms associated with the financing of the transactions by the Company.
During 1999, 1998 and 1997, 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 $4,169,000, $5,120,000 and $5,481,000
during 1999, 1998 and 1997, respectively.
Earnings per common share
Basic earnings per common share is computed by dividing income available to
common shareholders by the weighted-average common shares outstanding for the
period. Diluted earnings per common share reflects the weighted-average common
shares outstanding and dilutive potential common shares, such as stock options.
Earnings per common share has been adjusted to reflect the 1998 3-for-2 stock
split described in Note 3.
Costs in excess of fair value of net assets
Costs in excess of the fair value of net assets of businesses acquired are
amortized on a straight-line basis over periods not exceeding forty years. All
of the carrying value at December 31, 1999 resulted from a 1985 acquisition
which is being amortized over a thirty-one year period. Amortization charged to
earnings was $107,624 per year for the years 1999, 1998 and 1997, respectively.
On an ongoing basis, management reviews the valuation and amortization of
costs in excess of fair value of net assets acquired. As part of this review,
the Company estimates the value and future benefits of the expected cash flows
generated by the related service agreements to determine that no impairment has
occurred.
Other noncurrent assets
Other noncurrent assets consist of:
1999 1998
----------- -----------
Long-term notes receivable $10,296,602 $ 9,748,210
Other 498,502 477,229
----------- -----------
$10,795,104 $10,225,439
=========== ===========
Long-term notes receivable primarily represent trade receivables that were
converted to notes to enhance collection efforts. The 1998 amount shown is net
of allowance for doubtful accounts of $2,777,580. There is no allowance for
doubtful accounts applicable to the 1999 amount.
Reclassification
Certain reclassifications to 1998 reported amounts have been made in the
financial statements to conform to 1999 presentation.
21
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, 1999 and 1998, 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
client recently filing voluntary bankruptcy and others may follow. This, 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, 1999, no single client or nursing home chain accounted for more
than 10% of total revenue.
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.
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.
Note 2--Lease Commitments
The Company leases office facilities, equipment and autos under operating leases
expiring on various dates through 2005 and certain office leases contain renewal
options (see Note 5). The following is a schedule, by calendar years, of future
minimum lease payments under operating leases having remaining terms in excess
of one year as of December 31, 1999:
Operating
Year Leases
----------
2000 .............................................. $713,523
2001 .............................................. 482,250
2002 .............................................. 399,028
2003 .............................................. 362,489
2004 and thereafter ............................... 367,811
----------
Total minimum lease payments ...................... $2,325,101
==========
Total expense for all operating leases was $635,951, $861,245 and $813,719 for
the years ended December 31, 1999, 1998 and 1997, 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.
22
As of December 31, 1999, 966,295 shares of common stock were reserved under
the incentive stock option plans, including 6,877 shares which were available
for future grant. The Stock Option Committee is responsible for determining the
individuals who will be granted options, the number of options each individual
will receive, the option price per share, and the exercise period of each
option. The incentive stock option price will not be less than the fair market
value of the common stock on the date the option is granted. No option will have
a term in excess of ten years and are exercisable commencing six months from the
option date. As to any stockholder who owns 10% or more of the common stock, the
option price per share will be no less than 110% of the fair market value of the
common stock on the date the options are granted and such options shall not have
a term in excess of five years.
As of December 31, 1999, options outstanding, under the Incentive Stock
Option Plans, for 634,068 shares were exercisable at prices ranging from $5.67
to $9.90, and the weighted average remaining contractual life was 5.2 years. The
weighted average fair value of incentive options granted during 1999, 1998 and
1997 was $3.02, $3.74 and $1.17, respectively.
A summary of incentive stock option activity is as follows:
Incentive Stock Options
---------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- -------------------
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
------ --------- ------- --------- ------- ---------
Beginning of period $7.63 795,355 $7.11 914,076 $6.78 928,818
Granted 6.86 325,350 8.43 169,169 7.72 197,696
Cancelled 7.25 (117,887) 5.70 (17,326) 6.68 (23,738)
Exercised 7.24 (43,400) 6.48 (270,564) 6.20 (188,700)
----- ------- ----- ------- ----- -------
End of period $7.43 959,418 $7.63 795,355 $7.11 914,076
===== ======= ===== ======= ===== =======
Exercisable at end of period $7.72 634,068 $7.42 626,186 $6.94 716,380
===== ======= ===== ======= ===== =======
The Company has granted non-qualified stock options primarily to employees
and directors under either the Company's 1995 Incentive and Non-Qualified Stock
Option Plan for key employees and the Company's 1996 Non-Employee Director's
Stock Option Plan. Amendments to the 1995 Plan, as well as the 1996 Plan were
adopted on March 6, 1996 and approved by shareholders on June 4, 1996. Pursuant
to the terms of the 1996 Non-Employee Director's Stock Option Plan, each
eligible non-employee director receives an automatic grant based on a prescribed
formula on the fixed annual grant date. The non-qualified options were granted
at option prices which were not less than the fair market value of the common
stock on the date the options were granted. The options are exercisable over a
five to ten year period, commencing six months from the option date.
As of December 31, 1999, non-qualified options outstanding, under the above
mentioned plans, for 403,381 shares were exercisable at prices ranging from
$5.67 to $9.21, and the weighted average remaining contractual life was 4.1
years. The weighted average fair value of non-qualified options granted during
1999, 1998 and 1997 was $4.03, $5.53 and $4.97, respectively.
23
A summary of non-qualified stock option activity is as follows:
Non Qualified Stock Options
-----------------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ---------------------
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
----- --------- ----- --------- ----- ---------
Beginning of period $7.13 478,696 $6.84 495,525 $6.47 581,391
Granted 6.75 24,950 8.60 52,156 7.89 89,484
Cancelled 7.78 (67,815) - - - -
Exercised 7.58 (7,500) 6.19 (68,985) 6.13 (175,350)
----- ------- ----- ------- ----- -------
End of period $7.00 428,331 $7.13 478,696 $6.84 495,525
===== ======= ===== ======= ===== =======
Exercisable at end of period $7.01 403,381 $6.95 426,540 $6.61 406,041
===== ======= ===== ======= ===== =======
The Company applies APB Opinion 25 in measuring stock compensation. Accordingly,
no compensation cost has been recorded for options granted to employees or
directors in the years ended December 31, 1999, 1998 and 1997. 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:
1999 1998 1997
--------------- --------------- ---------------
Risk-Free Interest-Rate 6.44% and 6.68% 4.53% and 4.94% 5.69% and 6.54%
Expected Life 5 and 10 years 5 and 10 years 1 and 10 years
Expected Volatility 34.0% and 36.0% 42.0% and 49.3% 32.0% and 49.5%
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,
------------------------------------
1999 1998 1997
---------- ------ --------
Net Income
As reported $5,536 $8,869 $5,894
Pro forma $4,763 $8,682 $5,174
Basic Earnings Per Common Share
As reported $ .50 $ .79 $ .52
Pro forma $ .43 $ .78 $ .46
Diluted Earnings Per Common Share
As reported $ .49 $ .77 $ .51
Pro forma $ .42 $ .75 $ .45
24
Note 4--Income Taxes
The provision for income taxes consists of:
Year Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
Current:
Federal $2,449,700 $4,789,900 $3,361,900
State 687,800 1,552,900 1,180,100
---------- ---------- ----------
3,137,500 6,342,800 4,542,000
---------- ---------- ----------
Deferred:
Federal 500 (631,700) 194,500
State 49,000 (189,100) 63,500
---------- ---------- ----------
49,500 (820,800) 258,000
---------- ---------- ----------
Tax Provision $3,187,000 $5,522,000 $4,800,000
========== ========== ==========
Under FAS 109, deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of the Company's federal and state deferred tax assets and
liabilities are as follows:
Year Ended December 31,
-------------------------
1999 1998
---------- -----------
Net current deferred assets:
Allowance for doubtful accounts ..................... $2,903,922 $1,431,335
Accrued insurance claims- current ................... 315,188 244,037
Expensing of housekeeping supplies .................. (1,449,280) (1,351,318)
Other ............................................... 7,706 -
---------- ----------
$1,777,536 $ 324,054
========== ==========
Net noncurrent deferred tax assets:
Deferred profit on laundry installation sales ....... $ 76,803 $ 188,063
Non-deductible reserves ............................. 95,600 1,722,076
Depreciation of property and equipment .............. (742,268) (715,594)
Accrued insurance claims- noncurrent ................ 1,185,707 918,043
Other ............................................... 12,711 18,947
---------- ----------
$628,553 $2,131,535
========== ==========
25
A reconciliation of the provision for income taxes and the amount computed by
applying the statutory federal income tax rate (34%) to income before income
taxes is as follows:
Year Ended December 31,
------------------------------------------
1999 1998 1997
---------- ---------- ----------
Tax expense computed at
statutory rate $2,965,800 $4,892,900 $3,636,100
Increases (decreases) resulting
from:
State income taxes, net of
federal tax benefit 486,300 900,100 820,700
Settlement of prior years'
income tax examination (328,100) - -
Tax exempt interest (91,900) (400) (268,800)
Nondeductible reserves 416,500
Amortization of costs in
excess of fair value of
net assets acquired 36,600 36,600 37,100
Other, net 118,300 (307,200) 158,400
---------- ---------- ----------
$3,187,000 $5,522,000 $4,800,000
========== ========== ==========
In June, 1999, the Internal Revenue Service concluded its examination of the tax
years ended December 31, 1997 and 1996. As a result, previously established
reserves are no longer required. The effective rate for 1999 was reduced to
reflect the reversal of these reserves.
Note 5--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, was
$66,463 and $88,617 per year in 1998 and 1997. The Company made no leasehold
improvements in 1999, 1998 or 1997.
A director of the Company has an ownership interest in several client
facilities which have entered into service agreements with the Company. During
the years ended December 31, 1999, 1998 and 1997 the agreements with the client
facilities which the director has an ownership interest resulted in Company
revenues of approximately $3,032,296, $2,931,000 and $2,957,000, 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,
------------------------------------------------
1999 1998 1997
------------ ------------ ------------
Housekeeping services $150,344,000 $134,727,000 $127,255,000
Laundry & linen services 67,014,000 53,066,000 43,372,000
Food services 12,114,000 13,374,000 8,085,000
Maintenance services &
other 2,960,000 3,702,000 2,647,000
------------ ------------ ------------
$232,432,000 $204,869,000 $181,359,000
============ ============ ============
26
Note 7--Earnings Per Common Share
A reconciliation of the numerator and denominators of basic and diluted earnings
per common share is as follows:
Year Ended December 31, 1999
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $5,536,061
Basic earnings per
common share 5,536,061 11,052,728 $ .50
Effect of dilutive
securities:
Options 232,864
---------- ---------- --------
Diluted earnings per
common share $5,536,061 11,285,592 $ .49
========== ========== ========
Year Ended December 31, 1999
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $8,868,853
Basic earnings per
common share 8,868,853 11,187,615 $ .79
Effect of dilutive
securities:
Options 324,582
---------- ----------- --------
Diluted earnings per
common share $8,868,853 11,512,197 $ .77
========== ========== ========
Year Ended December 31, 1999
----------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net Income $5,894,334
Basic earnings per
common share 5,894,334 11,353,602 $ .52
Effect of dilutive
securities:
Options 224,538
---------- ----------- --------
Diluted earnings per
common share $5,894,334 11,578,140 $ .51
========== ========== ========
Options to purchase 151,284; 27,215 and 321,450 shares of common stock at an
average exercise price of $9.38, $9.78 and $8.39 for the years ended December
31, 1999, 1998 and 1997, 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.
27
Note 8--Other Contingencies
The Company has a $18,000,000 bank line of credit, increased from $13,000,000 at
December 31, 1998, under which it may draw to meet short-term liquidity
requirements or for other purposes, that expires on September 30, 2000. Amounts
drawn under the line are payable upon demand. At both December 31, 1999 and
1998, 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 December 31, 1999 and fully
utilized at December 31, 1998.
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 effected by PPS, as well as other
trends in the long-term care industry resulting in certain of the Company's
clients recently filing bankruptcy and others may follow. This, in addition to
delays in payments from clients has resulted in and could result in additional
bad debts in the near future.
Note 9--Settlement of Civil Litigation
On July 24, 1997 the Company and the U.S. Attorney for the Eastern District of
Pennsylvania reached a settlement of the civil litigation commenced by the
United States Attorney on or about May 24, 1996. This litigation was a result of
and arose from (1) payments made by the Company for supplies which were
allegedly furnished to clients of the Company and the actions of the Company
after the payments were made and (2) payments made to certain clients of the
Company in connection with the purchase of laundry installations from those
clients. All claims described in the complaint were settled through the payment
in July, 1997 of $1,225,000 to the United States government. The Company and its
officers denied all allegations, and all allegations against the Company and its
officers were dismissed with prejudice. The monetary impact of this settlement
plus estimated related legal costs of $575,000, amounting to approximately
$1,800,000 was accrued at June 30, 1997 and reduced the net income for the year
ended December 31, 1997 by $1,577,000 or $.14 per basic common share and $.13
per diluted common share (after effect of the August 27, 1998 three-for-two
stock split).
Note 10--Accrued Insurance Claims
For years 1997 through 1999, 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. The accrued
insurance claims were reduced by approximately $2,763,000, $2,200,000 and
$2,353,000 at December 31, 1999, 1998 and 1997, respectively in order to record
the estimated present value at the end of each year using an 8% interest factor.
For general liability insurance, the Company records a reserve for the estimated
ultimate amounts to be paid for known claims.
28
Note 11--Employee Benefit Plans
Employee Stock Purchase Plan
Effective January 1, 2000, the Company, subject to shareholder approval,
initiated an Employee Stock Purchase Plan 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 plan is to
be implemented by four annual offerings with the first annual Offering
Commencement Date being January 1, 2000 with a December 31, 2000 termination.
The remaining three annual offerings likewise commence and terminate on the
respective year's first and last calendar day. Under the plan, the Company is
authorized to issue up to 800,000 shares of its common stock to its employees.
Furthermore, under the terms of the plan, 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. No shares of the company's
common stock were held in the plan at December 31, 1999.
Retirement Savings Plan
On October 1, 1999, the Company established a retirement savings plan for
non-highly compensated employees under Section 401(k) of the Internal Revenue
Code. This savings plan allows eligible employees to contribute up to fifteen
percent (15%) of their compensation on a pre-tax basis. There is no match by the
Company.
Deferred Compensation Plan
Effective January 1, 2000, the Company initiated, subject to shareholder
approval, a Supplemental Executive Retirement Plan for certain key executives
and employees. The Plan is not qualified under section 401 of the Internal
Revenue Code. Under the plan, 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. Plan
participants fully vest in the Company's match three years from the last day of
the initial year of participation. Shares of Company stock are to be issued to
the participant upon eligible retirement or employment termination subject to
the vesting rules. The income deferred and the Company match are unsecured and
subject to the claims of general creditors of the Company. No shares were
reserved for future allocation under the Plan at December 31, 1999.
Note 12--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.
29
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, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1999. 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. 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, 1999 and 1998 and the
consolidated results of their operations and their consolidated cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ Grant Thornton LLP
Edison, New Jersey
February 18, 2000
30
Market Makers
As of the end of 1999, the following firms were making a market in the shares of
Healthcare Services Group, Inc.:
Salomon Smith Barney Inc.
Herzog, Heine, Geduld, Inc.
Wedbush Morgan Securities, Inc.
Spear, Leeds & Kellogg
C. L. King & Associates
Knight Securities L.P.
About Your Shares
Healthcare Services Group, Inc.'s common stock is traded on the NASDAQ National
Market System of the over-the-counter market. On December 31, 1999 there were
11,064,107 of the Company's common shares issued and outstanding. As of March 8,
2000 there were approximately 290 holders of record of the common stock,
including holders whose stock was held in nominee name by brokers or other
nominees. It is estimated that there are approximately 2,600 beneficial holders.
Price quotations during the two years ended December 31, 1999, ranged as
follows:
1999 High 1999 Low
--------- --------
1st Qtr. ................................................ 11 1/2 9 1/8
2nd Qtr. ................................................ 10 5/8 8 3/4
3rd Qtr. ................................................ 9 7/8 7 7/8
4th Qtr. ................................................ 8 1/2 6 5/8
1998 High 1998 Low
--------- --------
1st Qtr. ................................................ 9 15/16 8 1/3
2nd Qtr. ................................................ 9 9/16 9 1/3
3rd Qtr. ................................................ 11 11/16 8 3/16
4th Qtr. ................................................ 9 7/8 8 3/8
31
Transfer Agent
American Stock Transfer & Trust Co.
99 Wall St.
New York, NY 10005
Corporate Counsel
Olshan Grundman Frome
Rosenzweig LLP
505 Park Ave.
New York, NY 10022
Stock Listing
Listed on the NASDAQ
National Market System Symbol - "HCSG"
Auditors
Grant Thornton LLP
399 Thornall Street
Edison, NJ 08837
Corporate Offices
Healthcare Services Group, Inc.
3220 Tillman Drive, Suite 300
Bensalem, PA 19020
215-639-4274
Annual Stockholders' Meeting
Date - May 30, 2000
Time - 10:00 A.M.
Place - The Radisson Hotel of Bucks County
2400 Old Lincoln Highway
Trevose, PA 19047
32
Officers and Corporate Management
Daniel P. McCartney
Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
Alan L. Crowell
Vice President - Food Service Division
James L. DiStefano
Chief Financial Officer and Treasurer
Michael Harder
Vice President - Credit Administration
Richard W. Hudson
Vice President - Finance and Secretary
John D. Kelly
Western Divisional Vice President
Nicholas R. Marino
Human Resources Director
Michael E. McBryan
Mid-Atlantic Divisional Vice President - Sales
Bryan D. McCartney
Mid-Atlantic Divisional Vice President
Joseph F. McCartney
Northeastern Divisional Vice President
James P. O'Toole
Mid-Atlantic Regional Vice President
Brian M. Waters
Vice President - Operations
Michael L. Wyse
Western Divisional Vice President - Sales
Directors
Daniel P. McCartney
Chairman & Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
Joseph F. McCartney
Northeastern Divisional Vice President
Barton D. Weisman
President & CEO-H.B.A. Corp.
W. Thacher Longstreth
Vice Chairman - Packard Press
Robert L. Frome, Esq.
Senior Partner - Olshan Grundman Frome Rosenzweig LLP
Robert J. Moss, Esq.
President - Moss Associates
John M. Briggs, CPA
Partner - Briggs, Bunting & Dougherty LLP
Availability of Form 10-K
A copy of Healthcare Services Group, Inc.'s 1999 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission, will be provided without
charge to each shareholder making a written request to the Investor Relations
Department of the Company at its Corporate Offices.
33
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 1999,
copies of which accompany this Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not Applicable
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding Directors and executive officers is
incorporated herein by reference to the Company's definitive proxy statement to
be mailed to its shareholders in connection with its 2000 Annual Shareholders'
Meeting and to be filed within 120 days of the close of the year ended December
31, 1999.
Directors holding approximately 12.6% of the outstanding voting stock
of the Registrant have been deemed to be "affiliates" solely for the purpose of
calculating the aggregate market value of the voting stock held by
non-affiliates set forth on the cover page of this Report.
Item 11. Executive Compensation
The Information regarding executive compensation is incorporated herein
by reference to the Company's proxy statement to be mailed to shareholders in
connection with its 2000 Annual Shareholders Meeting and to be filed within 120
days of the close of the fiscal year ended December 31, 1999.
Item 13. Certain Relationships and Related Transactions
The information regarding certain relationship and related transactions
is incorporated herein by reference to the Company's proxy statement mailed to
shareholders in connection with its 2000 Annual Shareholders Meeting and to be
filed within 120 days of the close of the fiscal year ended December 31, 1999.
34
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements
The documents shown below are contained in the Company's
Annual Report to Shareholders for 1999 and are incorporated herein by
reference, copies of which accompany this Report.
Report of Independent Certified Public Accountants.
Balance Sheets as of December 31, 1999 and 1998.
Statements of Income for the three years ended December 31, 1999, 1998
and 1997.
Statements of Stockholders Equity for the three years ended December
31, 1999, 1998 and 1997.
Statements of Cash Flows for the three years ended December 31, 1999,
1998 and 1997.
Notes to Financial Statements.
2. Financial Statement Schedules
Included in Part IV of this report:
Consent of Independent Certified Public Accountants.
Report of Independent Certified Public Accountants.
Schedule II - Valuation and Qualifying Accounts for the three years
ended December 31, 1999, 1998 and 1997.
Financial Data Schedule.
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.
35
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 Amended By-Laws of the Registrant as of July 18, 1990, are incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2
(File No. 33-35798).
4.1 Specimen Certificate of the Common Stock, $.01 par value, of the Registrant is
incorporated by reference to Exhibit 4.1 of Registrant's Registration Statement on
Form S-18 (Commission File No. 2-87625-W).
4.2 Employee Stock Purchase Plan of the Registrant is incorporated by reference to Exhibit 4(a)
of Registrant's Registration Statement on Form S-8 (Commission File No. 333-92835)
4.3 Deferred Compensation Plan is incorporated by reference to Exhibit 4(b) of Registrant's
Registration Statement on Form S-8 (Commission File No. 333-92835)
10.1 Incentive Stock Option Plan adopted on August 31, 1983, amended and readopted
on April 30, 1991 is incorporated by reference to Exhibit 10.1 of Registrant's
Registration Statement on Form S-18 (Commission File No. 2-87625-W), as well as by
reference to the Company's definitive proxy statement dated April 30, 1991.
10.2 1995 Incentive and Non-Qualified Stock Option Plan, as amended (incorporated by
reference to Exhibit 4(d) of the Form S-8 filed by the Registrant, Commission
File No. 33-58765).
10.3 1996 Non-Employee Directors' Stock Option Plan, Amended and Restated as of
October 28, 1997 (incorporated by reference to Exhibit 10.6 of Form 10-Q
Report filed by Registrant on November 14, 1997)
10.4 1995 Non-Qualified Stock Option Plan for Directors (incorporated by reference
to the Company's Definitive Proxy Statement dated April 21, 1995.)
10.5 Form of Non-Qualified Stock Option Agreement granted to certain Directors is
incorporated by reference to Exhibit 10.9 of Registrant's Registration Statement on
Form S-1 (Commission File No. 2-98089).
23. Consent of Independent Certified Public Accountants
27. Financial Data Schedule
(b) Reports on Form 8-K
None
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
and Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 14, 2000 HEALTHCARE SERVICES GROUP, INC.
(Registrant)
By: /s/ Daniel P. McCartney
-----------------------
Daniel P. McCartney
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons and in the
capacities and on the date indicated:
Signature Title Date
--------- ----- ----
/s/ Daniel P. McCartney Chief Executive Officer and March 14, 2000
- ----------------------- Chairman
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 14, 2000
- -----------------------
Joseph F. McCartney
/s/ W.Thacher Longstreth Director March 14, 2000
- ------------------------
W. Thacher Longstreth
/s/ Barton D. Weisman Director March 14, 2000
- ---------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 14, 2000
- -------------------
Robert L. Frome
/s/ Thomas A. Cook Director, President and March 14, 2000
- ------------------ Chief Operating Officer
Thomas A. Cook
/s/ John M. Briggs Director March 14, 2000
- ------------------
John M. Briggs
/s/ Robert J. Moss Director March 14, 2000
- ------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer and March 14, 2000
- ---------------------- Treasurer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance, March 14, 2000
- --------------------- Secretary and Chief
Richard W. Hudson Accounting Officer
37
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 18, 2000, accompanying the
consolidated financial statements and schedule included in the Annual Report of
Healthcare Services Group, Inc. on Form 10-K for the year ended December 31,
1999. We hereby consent to the incorporation by reference of said reports in the
Post-Effective Amendment No. 1 to the Registration Statements (Forms S-8 No.
2-95092 and No. 2-99215), and in the Registration Statement (Form S-8 No.
33-58765) pertaining to the Incentive Stock Option Plan and the Non-Qualified
Stock Option Plans of Healthcare Services Group, Inc. and in the Registration
Statement (Form S-8 No. 333-92835) pertaining to the Employee Stock Purchase
Plan and Deferred Compensation Plan of Healthcare Services Group, Inc.
GRANT THORNTON LLP
Edison, New Jersey
February 18, 2000
14
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
Healthcare Services Group, Inc.
In connection with our audits of the consolidated financial statements of
Healthcare Services Group, Inc., referred to in our report dated February 18,
2000, which is included in the Annual Report to shareholders and is incorporated
by reference in Form 10-K, we have also audited Schedule II for each of the
three years in the period ended December 31, 1999. In our opinion, this schedule
presents fairly, in all material respects, the information required to be set
forth therein.
Grant Thornton LLP
- -----------------------
Edison, New Jersey
February 18, 2000
38
Healthcare Services Group, Inc.
Schedule II -- Valuation and Qualifying Accounts
Years Ended December 31, 1999, 1998, and 1997
Balance- Charged to Charged to
Beginning of Costs and Other Deductions Balance-End
Description Period Expenses Accounts(A) (B) of Period
- ----------- ------ -------- ----------- ---------- -----------
1999
Allowance for Doubtful
Accounts $3,449,000 $7,250,314 $3,421,314 $7,278,000
========== ========== ========== ========== ==========
Allowance for Doubtful
Accounts--Long-term Notes $2,777,580 $ 816,214 $3,593,794 -0-
========== ========== ========== ========== ==========
1998
Allowance for Doubtful
Accounts $3,663,000 $2,339,515 $2,553,515 $3,449,000
========== ========== ========== ========== ==========
Allowance for Doubtful
Accounts--Long-term Notes $ 336,500 $2,441,080 $2,777,580
========== ========== ========== ========== ==========
1997
Allowance for Doubtful
Accounts $3,812,000 $ 899,551 $1,048,551 $3,663,000
========== ========== ========== ========== ==========
Allowance for Doubtful
Accounts--Long-term Notes $ 350,000 $ 13,500 $ 336,500
========== ========== ========== ========== ==========
(A) Represents reclassifications from allowance for doubtful accounts and other
accounts.
(B) Represents write-offs and reclassifications to allowance for doubtful
accounts--long term notes.