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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (215) 639-4274
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Shares of Common Stock ($.01 par value)
---------------------------------------
Title of Class
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [X] NO [ ]
The aggregate market value of the voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant, based upon the closing sale
price of the Registrant's Common Stock on June 30, 2004 as reported on the
NASDAQ Stock Market, Inc. was approximately $239,565,000.
At March 9, 2005 there were outstanding approximately 17,648,000 shares
of the Registrant's Common Stock, $.01 par value.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Annual Report to Shareholders for the year
ended December 31, 2004 have been incorporated by reference into Parts I and II
of this Annual Report on Form 10-K. Portions of the definitive Proxy Statement
for the Registrant's Annual Meeting of Shareholders to be held on May 24, 2005
have been incorporated by reference into Parts II and III of this Annual Report
on Form 10-K.
PART I
References made herein to "we," "our," or "us" include Healthcare Services
Group, Inc. and its wholly owned subsidiaries HCSG Supply, Inc. and Huntingdon
Holdings, Inc., unless the context otherwise requires.
ITEM I. BUSINESS
(a) General
Healthcare Services Group, Inc. provides housekeeping, laundry, linen,
facility maintenance and food services to the health care industry, including
nursing homes, retirement complexes, rehabilitation centers and hospitals. We
believe that we are the largest provider of contractual housekeeping and laundry
services to the long-term care industry in the United States, rendering such
services to approximately 1,600 facilities in 42 states and Canada as of
December 31, 2004.
Additionally, we operate two wholly-owned subsidiaries. HCSG Supply, Inc.
purchases, warehouses and distributes the supplies and equipment used in
providing our Housekeeping segment services. Huntingdon Holdings, Inc. invests
our cash and cash equivalents.
(b) Segment Information
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 2004, a
copy of which accompanies this Report.
(c) Description of Services
General
We provide management, administrative and operating expertise and services
to the housekeeping, laundry, linen, facility maintenance and food service
departments of the health care industry.
We are organized into two operating segments: housekeeping, laundry, linen
and other services ("Housekeeping") and food services ("Food"). Our labor force
is interchangeable with respect to each of the services within the Housekeeping
segment. Our labor force with respect to the Food segment is specific to it.
Although there are many similarities in the nature of the
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services performed, there are some significant differences in the specialized
expertise required of the professional management personnel responsible for
delivering the services of the respective segments. We believe the services of
each segment provide opportunity for growth.
For the year ended December 31, 2004, one client, Beverly Enterprises,
Inc., accounted for 20% of our total consolidated revenues. In 2004, we derived
19% and 27% of the Housekeeping and Food segments' revenues, respectively, from
such client. Although we expect to continue the relationship with this client,
the loss of such client would have a material adverse affect on our results of
operations.
Housekeeping Segment
Housekeeping services. Housekeeping services is our largest service sector,
representing approximately 56% or $249,314,000 of total consolidated revenues in
2004. This service involves cleaning, disinfecting and sanitizing resident areas
in our clients' facilities. In providing services to any given client facility,
we typically hire and train the hourly employees employed by such facility prior
to our engagement. We normally assign two on-site managers to each facility to
supervise and train hourly personnel and coordinate housekeeping services with
other facility support functions. Such management personnel also oversee the
execution of a variety of quality and cost-control procedures including
continuous training and employee evaluation and 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 represents
approximately 24% or $105,545,000 of total consolidated revenues in 2004.Laundry
services involve the laundering and processing of the residents' personal
clothing. We provide laundry service to all of our housekeeping clients. Linen
services involve providing, laundering and processing of the sheets, pillow
cases, blankets, towels, uniforms and assorted linen items used by our clients'
facilities. At some facilities that utilize our laundry and linen services, we
install our own equipment. Such installation generally requires an initial
capital outlay by us ranging from $5,000 to $150,000 depending on the size of
the facility, installation and construction costs, and the amount of equipment
required. We could incur relocation or other costs in the event of the
cancellation of a linen service agreement where there was an investment by us in
a corresponding laundry installation. The
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hiring, training and supervision of the hourly employees who perform laundry and
linen services are similar to, and performed by the same management personnel
who oversee the housekeeping services hourly employees located at the respective
client facility.
In some instances we own linen supplies utilized at our clients'
facilities. We maintain a sufficient inventory of linen supplies in order to
ensure their availability. We provide linen supplies to approximately 20% of the
facilities for which we provide housekeeping services.
Maintenance and other services. Maintenance services consist of repair and
maintenance of laundry equipment, plumbing and electrical systems, as well as
carpentry and painting. This service sector's total revenues represent less than
1% of total consolidated revenues.
Laundry installation sales. We (as a distributor of laundry equipment) sell
laundry installations to our clients which generally represent the construction
and installation of a turn-key operation. We generally offer payment terms,
ranging from 36 to 60 months. During the years 2002 through 2004, laundry
installation sales were not material to our operating results as we prefer to
own such laundry installations in connection with performance of our service
agreements.
Food Segment
Food services. We began providing food services in 1997. Food services
represents 19% or $85,593,000 of total consolidated revenues in 2004. Food
services consist of the development of a menu that meets the residents' dietary
needs, purchasing and preparing the food to assure that residents receive an
appetizing meal, and participation in monitoring the residents' on-going
nutritional 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. We also provide
consulting services to facilities to assist them in cost containment, as well as
the updating of their food service operations.
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Operational Management Structure
By applying our professional management techniques, we are generally able
to contain or control certain housekeeping, laundry, linen, facility maintenance
and food service costs on a continuing basis. We manage and provide our services
through a network of management personnel, as illustrated below.
PRESIDENT / CHIEF OPERATING OFFICER
VICE PRESIDENT - OPERATIONS
DIVISIONAL VICE PRESIDENT
(4 DIVISIONS)
REGIONAL VICE
PRESIDENT/MANAGER
(31 REGIONS)
DISTRICT MANAGER
(151 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 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 in close
proximity to each facility. These managers provide active support to clients in
addition to the support provided by our on-site management team. Training
Managers are responsible for the recruitment, training and development of
Facility Managers. A division consists of a number of regions within a specific
geographical area. Divisional Vice Presidents manage each division.
At December 31, 2004 we maintained 31 regions within four divisions. Each region
is headed by a
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Regional Vice President/Manager. Some regions also have a Regional Sales
Director who assumes primary responsibility for marketing our services. Regional
Vice Presidents/Managers report to Divisional Vice Presidents who in turn report
to the President/Chief Operating Officer or Vice President of Operations. We
believe that our divisional, regional and district organizational structure
facilitates our ability to obtain new clients, and our ability to sell
additional services to existing clients.
Market
The market for our 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 our services is expected to continue to grow as the elderly
population increases as a percentage of the United States population and as
government reimbursement policies require increased cost control or containment
by constituents which comprise our targeted market.
The American Health Care Association reports that there are approximately
16,300 nursing homes in the United States with about 1.78 million beds and
1.45 million residents. The facilities primarily range in size from small
private facilities with 65 beds to facilities with over 500 beds. We generally
market our services to facilities with 100 or more beds. We believe that
approximately 8% of long-term care facilities currently use outside providers of
housekeeping and laundry services.
Marketing and Sales
Our services are marketed at four levels of our organization: at the
corporate level by the Chief Executive Officer, President/Chief Operating
Officer and the Vice President of Operations; at the divisional level by
Divisional Vice Presidents; at the regional level by the Regional Vice
Presidents/Managers and Regional Sales Directors; and at the district level by
District Managers. We provide incentive compensation to our operational
personnel based on achieving budgeted earnings and to our Regional Sales
Directors based on achieving budgeted earnings and new business revenues.
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Our services are marketed primarily through referrals and in-person
solicitation of target facilities. We also utilize direct mail campaigns and
participate 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 we conduct our
business. Our 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 marketing opportunities for us. Indications of interest in our
services arising from initial marketing efforts are followed up with a
presentation regarding our services and a 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, we can set up our operations on-site within days.
Government Regulation of Clients
Our clients are subject to government regulation. Congress has enacted
three major laws during the past several years that have significantly altered
government payment procedures and amounts for nursing home services. They are
the Balance Budget Act of 1997 ("BBA"), the Medicare Balanced Budget Refinement
Act of 1999 ("BBRA") and the Benefits Improvement and Protection Act of 2000
("BIPA").
Under BBA, participating nursing facilities are reimbursed under a
prospective payment system referred to as PPS. Under PPS, nursing homes are paid
a predetermined amount per patient, per day based on the anticipated costs of
treating patients.
In November 1999, Congress passed BBRA which provided some relief (since
expired) for certain reductions in Medicare reimbursement caused by PPS.
The overall effect of these laws, as well as other trends in the long term
care industry have and could adversely affect the liquidity of our clients
resulting in their inability to make payments to us on agreed upon payment
terms.
The BBA included provisions affecting Medicaid and repealed the "Boren
Amendment" federal payment standard for Medicaid payments to nursing facilities.
With the repeal of the federal payment standards, there can be no assurance that
budget
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constraints or other factors will not cause states to reduce Medicaid
reimbursements to nursing homes or that payments to nursing homes will be made
on a timely basis. BIPA enacted a phase-out of certain governmental transfers
that may reduce federal support for a number of state Medicaid plans. The
reduced federal payments may impact aggregate available funds requiring states
to further contain payments to providers.
Although PPS directly affects how clients are paid for certain services, we
do not directly participate in any government reimbursement programs.
Accordingly, all of our contractual relationships with our clients continue to
determine the clients' payment obligations to us. However, clients' revenues are
generally highly reliant on Medicare and Medicaid reimbursement funding rates.
Therefore, many clients have been, and continue to be, adversely affected by
PPS, and other trends in the long-term care industry which have resulted in
certain of our clients filing for bankruptcy protection. Others may follow (See
" Liquidity and Capital Resources").
The prospects for legislative relief are uncertain. We are unable to
estimate the ultimate impact of any changes in reimbursement programs affecting
our clients' future results of operations and/or its impact on our cash flows
and operations.
Service Agreements/Collections
We provide our services primarily pursuant to full service agreements with
our clients. In such agreements, we are responsible for our management and
hourly employees located at our clients' facilities. We provide services on the
basis of a management agreement for a very limited number of clients. In such
agreements, our services are comprised of providing on-site management
personnel, while the hourly and staff personnel remain employees of the
respective client.
We typically adopt and follow the client's employee wage structure,
including its policy of wage rate increases, and pass through to the client any
labor cost increases associated with wage rate adjustments. Under a management
agreement, we provide management and supervisory services while the client
facility retains payroll responsibility for its hourly employees. Substantially
all of our agreements are full service agreements. These agreements typically
provide for a one year term, cancelable by either party upon 30 to 90 days'
notice after the initial 90-day period. As of December 31, 2004, we provided
services to approximately 1,600 client facilities.
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Although the service agreements are cancelable on short notice, we have
historically had a favorable client retention rate and expect to continue to
maintain satisfactory relationships with our clients. The risk associated with
short-term service agreements have not materially affected either our linen and
laundry services, which may from time-to-time require a capital investment, or
our laundry installation sales, which may require us to finance the sales price.
Such risks are often mitigated by certain provisions set forth in the agreements
entered into with our clients.
We have had varying collection experience with respect to our accounts and
notes receivable. When contractual terms are not met, we generally encounter
difficulty in collecting amounts due from certain of our clients. Therefore, we
have sometimes been required to extend the period of payment for certain clients
beyond contractual terms. These clients include 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, we have recorded bad debt
provisions (in an Allowance for Doubtful Accounts) of $3,700,000, $4,550,000 and
$6,050,000 in the years ended December 31, 2004, 2003 and 2002, respectively
(See Schedule II- Valuation and Qualifying Accounts, for year-end balances).
These provisions represent .8%, 1.2% and 1.8%, as a percentage of revenues, for
the years ended December 31, 2004, 2003 and 2002, respectively. In making our
credit evaluations, in addition to analyzing and anticipating, where possible,
the specific cases described above, we consider the general collection risks
associated with trends in the long-term care industry. We also establish credit
limits, perform ongoing credit evaluation and monitor accounts to minimize the
risk of loss. Notwithstanding our efforts to minimize our credit risk exposure,
our clients could be adversely affected if future industry trends, as discussed
in "Government Regulation of Clients" and "Risk Factors", change in such a
manner as to negatively impact their cash flows. If our clients experience a
negative impact in their cash flows, it would have a material adverse effect on
our results of operations and financial condition.
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Competition
We compete primarily with the in-house support service departments of our
potential clients. Most healthcare facilities perform their own support service
functions without relying upon outside management firms. In addition, a number
of local firms compete with us in the regional markets in which we conduct
business. Several national service firms are larger and have greater financial
and marketing resources than us, although historically, such firms have
concentrated their marketing efforts on hospitals rather than the long-term care
facilities typically serviced by us. Although the competition to provide service
to health care facilities is strong, we believe that we compete effectively for
new agreements, as well as renewals of existing agreements, based upon the
quality and dependability of our services and the cost savings we believe we can
usually implement for existing and new clients.
Employees
At December 31, 2004, we employed approximately 3,400 management, office
support and supervisory personnel. Of these employees, 300 held executive,
regional/district management and office support positions, and 3,100 of these
employees were on-site management personnel. On such date, we employed
approximately 18,600 hourly employees. Many of our hourly employees were
previously support employees of our clients. We manage, for a limited number of
our client facilities, the hourly employees who remain employed by those
clients.
Approximately 14% of our hourly employees are unionized. The majority of
these employees are subject to collective bargaining agreements that are
negotiated by individual client facilities and are assented to by us, so as to
bind us as an "employer" under the agreements. We may be adversely affected by
relations between our client facilities and the employee unions. We are also a
direct party to negotiated collective bargaining agreements covering a limited
number of employees at a few facilities serviced by us. We believe our employee
relations are satisfactory.
(d) Financial Information About Geographic Areas
Our Housekeeping segment provides services in Canada, although essentially
all of its revenues and net income, 99% in both categories, are earned in one
geographic area, the United
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States. The Food segment only provides services in the United States.
(e) Available Information
Healthcare Services Group, Inc. is a reporting Company under the Securities
Exchange Act of 1934, as amended, and files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission" or
"SEC"). The public may read and copy any of our filings at the Commissioner's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. Because we make filings to the Commission
electronically, you may access this information at the Commission's internet
site: www.sec.gov. This site contains reports, proxies and information
statements and other information regarding issuers that file electronically with
the Commission.
Website Access
Our website address is www.hcsgcorp.com. Our filings with the Commission,
as well as other pertinent financial and company information are available at no
cost on our website as soon as reasonably practicable after the filing of such
reports with the Commission.
Risk Factors
Certain matters discussed in this report include forward-looking statements
that are subject to risks and uncertainties that could cause actual results or
objectives to differ materially from those projected. We undertake no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise. Such risks and uncertainties
include, but are not limited to, risks arising from our providing services
exclusively to the health care industry, primarily providers of long-term care;
credit and collection risks associated with this industry; one client accounting
for 20% of revenue in 2004; our claims experience related to workers'
compensation and general liability insurance; the effects of changes in, or
interpretations of laws and regulations governing the industry, including state
and local regulations pertaining to the taxability of our services; and risk
factors described in Part I hereof under "Government Regulation of Clients",
"Service Agreements/Collections" and "Competition". Many of our clients'
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revenues are highly contingent on Medicare and Medicaid reimbursement funding
rates, which have been and continue to be adversely affected by the change in
Medicare payments under the 1997 enactment of the Medicare Prospective Payment
System. That change, and the lack of substantive reimbursement funding rate
reform legislation, as well as other trends in the long-term care industry have
resulted in certain of our clients filing for bankruptcy protection. Others may
follow. Any decisions by the government to discontinue or adversely modify
legislation related to reimbursement funding rates will have a material adverse
affect on our clients. These factors, in addition to delays in payments from
clients, have resulted in, and could continue to result in, significant
additional bad debts in the near future. Additionally, our operating results
would also be adversely affected if unexpected increases in the costs of labor
and labor related costs, materials, supplies and equipment used in performing
our services could not be passed on to clients.
In addition, we believe that to improve our financial performance we must
continue to obtain service agreements with new clients and provide additional
services to existing clients, achieve modest price increases on current service
agreements with existing clients and maintain internal cost reduction strategies
at our various operational levels. Furthermore, we believe that our ability to
sustain the internal development of managerial personnel is an important factor
impacting future operating results and successfully executing projected growth
strategies.
ITEM 2. PROPERTIES
We lease our corporate offices, located at 3220 Tillman Drive, Suite 300,
Bensalem, Pennsylvania 19020, which consists of 16,195 square feet. The
corporate office lease expires on September 30, 2005. We expect to renew such
lease at that time. We also lease office space at other locations in
Pennsylvania, Connecticut, Florida, Illinois, California, Colorado, Georgia,
Alabama and New Jersey. The office sizes range from approximately 1,000 to 2,500
square feet. These locations serve as divisional or regional offices providing
management and administrative services to both of our operating segments in
their respective geographical areas. None of these leases are for more than a
five-year term. In addition, we lease warehouse space in Bristol, Pennsylvania
accommodating the operations of HCSG Supply, Inc. The warehouse in Bristol,
Pennsylvania consists of approximately 19,000 square feet. Supplies and
equipment warehoused and distributed out of this location are
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used by both operating segments in providing their respective services. The
Bristol, Pennsylvania warehouse lease expires on March 31, 2008. We are also
provided with office and storage space at each of our client facilities.
Management does not foresee any difficulties with regard to the continued
utilization of all of the aforementioned premises. We also believe that such
leases are sufficient for our current operations.
We presently own laundry equipment, office furniture and equipment,
housekeeping equipment and vehicles. Such office furniture and equipment, and
vehicles are primarily located at our corporate office, warehouse, and
divisional and regional offices. We have housekeeping equipment at all client
facilities where we provide services under a full service housekeeping
agreement. Generally, the aggregate cost of housekeeping equipment located at
each client facility is less than $2,500. Additionally, we have laundry
installations at approximately 125 client facilities. Our cost of such laundry
installations ranges between $5,000 and $150,000. We believe that such laundry
equipment, office furniture and equipment, housekeeping equipment and vehicles
are sufficient for our current operations.
ITEM 3. LEGAL PROCEEDINGS.
As of December 31, 2004, there were no material pending legal proceedings
to which we were a party, or as to which any of our property was subject, other
than routine litigation or claims and/or proceedings believed to be adequately
covered by insurance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Our common stock, $.01 par value (the "Common Stock"), is traded under the
symbol "HCSG" on the NASDAQ National Market System. On December 31, 2004, there
were 17,515,000 shares of Common Stock outstanding.
The high and low closing price quotations for our Common Stock during the
years ended December 31, 2004 and 2003 ranged as follows:
2004 HIGH 2004 LOW
--------- --------
1st Qtr. $ 17.00 $ 12.65
2nd Qtr. $ 16.85 $ 14.79
3rd Qtr. $ 18.62 $ 15.20
4th Qtr. $ 21.41 $ 17.53
2003 HIGH 2003 LOW
--------- --------
1st Qtr. $ 9.31 $ 7.87
2nd Qtr. $ 9.35 $ 7.49
3rd Qtr. $ 11.40 $ 9.30
4th Qtr. $ 13.44 $ 10.52
(b) Holders
As of February 25, 2005, there were 570 holders of record of our common
stock, including holders whose stock was held in nominee name by brokers or
other nominees. It is estimated that there are 3,500 beneficial holders.
(c) Dividends
We have paid regular quarterly cash dividends since the second quarter of
2003. During 2004, we paid regular quarterly dividends totaling $4,598,000. Such
regular quarterly dividend payments of $.05, $.06, $.07 and $.08 per common
share were paid on February 14, 2004, May 14, 2004, August 14,2004 and November
12, 2004, respectively. Such payments were made to shareholders of record as of
January 31, 2004, April 30, 2004, July 30, 2004 and October 29, 2004,
respectively. Additionally, on January 18, 2005, our Board of Directors declared
a regular quarterly cash dividend of $.09 per common share, which was paid on
February 11, 2005 to shareholders of record as of January 28, 2005. Our
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Board of Directors reviews our dividend policy on a quarterly basis. Although
there can be no assurance that we will continue to pay dividends or the amount
of such dividend payments, we expect to continue to pay regular quarterly cash
dividends. In connection with the declaration of cash dividends, we adopted a
Dividend Reinvestment Plan in 2003 for such payments.
On February 12, 2004, our Board of Directors approved a 3 for 2 stock split
in the form of a 50% Common Stock dividend, which was paid on March 1, 2004 to
holders of Common Stock of record as of the close of business on February 23,
2004. All fractional share interests were rounded up to the nearest whole
number. The effect of this action was to increase common shares outstanding by
5,980,000 to 17,950,000.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
The information regarding securities authorized for issuance under equity
compensation plans is incorporated herein by reference to the Company's
definitive proxy statement to be mailed to its shareholders in connection with
its 2005 Annual Shareholders' Meeting and to be filed within 120 days of the
close of the year ended December 31, 2004.
ITEM 6. SELECTED FINANCIAL DATA
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 2004, a
copy of which accompanies this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 2004, a
copy of which accompanies this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is not significant.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for herein is incorporated by reference to the
Company's Annual Report to Shareholders for the year ended December 31, 2004, a
copy of which accompanies this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company maintains "disclosure controls and procedures", as such term is
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), that are designed to ensure that information
required to be disclosed in its reports, pursuant to the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms, and that such information is accumulated and
communicated to its management, including its Chief Executive Officer and
Principal Financial Officer, as appropriate, to allow timely decisions regarding
the required disclosures. In designing and evaluating the disclosure controls
and procedures, management has recognized that any controls and procedures, no
matter how well designed and operated, can provide only reasonable assurances of
achieving the desired control objectives, and management necessarily is required
to apply its judgment in evaluating the cost benefit relationship of possible
controls and procedures.
During the course of the audit of our consolidated financial statements for
the year ended December 31, 2004, our independent registered public accounting
firm, Grant Thornton LLP, advised management and the Audit Committee of our
Board of Directors that they had identified two significant deficiencies in
internal controls. The significant deficiencies, individually or in the
aggregate, are not considered to be a "material weakness" as defined under
standards established by the Public Companies Accounting Oversight Board
(United States).
15
A significant deficiency was found in the design and operation of our
general computer controls relating to secure access to certain parts of our
computer system. While overall access to our financial system is secure, access
to sub-processes of the system may not be sufficiently limited. We believe
compensating controls and procedures, which include manual controls and
reconciliations, are in place to detect errors that may result from
inappropriate access. We are in the process of addressing this significant
deficiency by implementing certain changes to the security involving access to
the sub-processes at issue in our computer system.
Additionally, it was determined that a significant deficiency exists in the
processing of employee payroll which could result in a discrepancy in the
reporting of payroll expense. Even though we believe compensating controls exist
to address this significant deficiency, we are in the process of implementing
additional controls to improve the reporting of payroll expense.
We have no reason to believe that these significant deficiencies could
result in or have resulted in a material misstatement of our financial
statements that have not been prevented or detected. We have assigned a high
priority to the short term and long term improvement of our internal controls
and are in the process of addressing the issues associated with the significant
deficiencies discussed above. We are implementing plans to strengthen the
internal controls associated with these issues.
The Company's Chief Executive Officer and Chief Financial Officer (its
Principal Executive Officer and Principal Financial Officer, respectively) have
evaluated the effectiveness of our "disclosure controls and procedures" as of
the end of the period covered by this Annual Report on Form 10-K. Based on their
evaluation, the Principal Executive Officer and Principal Financial Officer
concluded that our disclosure controls and procedures are effective. There were
no significant changes in its internal controls or in other factors that could
significantly affect these controls subsequent to the date the controls were
evaluated.
16
Management's Annual Report on Internal Control Over Financial
Reporting
The management of the Company is responsible for establishing and
maintaining adequate internal control over financial reporting. Internal control
over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated
under the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's Principal Executive Officer and Principal
Financial Officer and effected by the Company's board of directors, management
and other personnel, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
1. Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of assets
of the Company;
2. Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the Company; and
3. Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
The Company's management assessed the effectiveness of the Company's
internal control over financial reporting as of December 31, 2004. In making
this assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework.
Under the supervision and with the participation of our management,
including our Principal Executive Officer and Principal Financial Officer, we
conducted an evaluation of our internal control over financial reporting as
prescribed above for the periods covered by this report. Based on our
evaluation, our Principal Executive Officer and Principal Financial Officer
concluded that the Company's internal control over financial reporting is
effective.
17
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
The Company's independent auditors have attested to, and reported on,
management's evaluation of our internal control over financial reporting. This
report is contained in this Annual Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
None.
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 2005 Annual Shareholders' Meeting and to
be filed within 120 days of the close of the year ended December 31, 2004.
The Company has adopted a Code of Ethics and Business Conduct which apply
to all directors and salaried employees, including the Company's principal
executive, financial and accounting officers. The Code of Ethics and Business
Conduct is posted on the Company website at www.hcsgcorp.com and is filed as an
exhibit to this Annual Report on Form 10-K. The Company intends to satisfy the
requirements under Item 10 of Form 8-K regarding disclosure of amendments to, or
waivers from, provisions of our Code of Ethics and Business Conduct that apply,
by posting such information on the Company's website. Copies of the Code of
Ethics and Business Conduct will be provided, free of charge, upon written
request directed to the Secretary, Healthcare Services Group, Inc.,
3220 Tillman Drive, Suite 300, Bensalem PA 19020.
18
ITEM 11. EXECUTIVE COMPENSATION
The information regarding executive compensation is incorporated herein by
reference to the Company's definitive proxy statement to be mailed to
shareholders in connection with its 2005 Annual Shareholders Meeting and to be
filed within 120 days of the close of the fiscal year ended December 31, 2004.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The information regarding security ownership of certain beneficial owners
and management and related stockholder matters is incorporated herein by
reference to the Company's definitive proxy statement to be mailed to
shareholders in connection with its 2005 Annual Meeting and to be filed within
120 days of the close of the fiscal year ending December 31, 2004.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information regarding certain relationships and related transactions is
incorporated herein by reference to the Company's definitive proxy statement
mailed to shareholders in connection with its 2005 Annual Shareholders Meeting
and to be filed within 120 days of the close of the fiscal year ended
December 31, 2004.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information regarding principal accounting fees and services is
incorporated herein by reference to the Company's definitive proxy statement
mailed to shareholders in connection with its 2005 Annual Shareholders Meeting
and to be filed within 120 days of the close of the fiscal year ended
December 31, 2004.
19
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. Financial Statements
The documents shown below are contained in the Company's Annual Report to
Shareholders for 2004 and are incorporated herein by reference, a copy of which
accompanies this report.
Report of Independent Registered Public Accounting Firm.
Report of Independent Registered Public Accounting Firm on Internal
Control.
Balance Sheets as of December 31, 2004 and 2003.
Statements of Income for the years ended December 31, 2004, 2003 and 2002.
Statements of Cash Flows for the years ended December 31, 2004, 2003 and
2002.
Statement of Stockholders' Equity for the years ended December 31, 2004,
2003 and 2002.
Notes to Financial Statements.
2. Financial Statement Schedules
Required to be filed by Item 8 and by Item 15(d) of this report:
Report of Independent Registered Public Accounting Firm.
Schedule II - Valuation and Qualifying Accounts for the years ended
December 31, 2004, 2003 and 2002.
All other schedules are omitted because they are not required or not
applicable, or the required information is provided in the consolidated
financial statements or notes thereto described in Item 15(a)(1) above.
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).
20
3.2 Amendment to Articles of Incorporation of the Registrant as of
May 30, 2000, is incorporated by reference to Exhibit 3.2 to the
Company's Form 10-K for the period ended December 31, 2001.
3.3 Amended By-Laws of the Registrant as of July 18, 1990, are
incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-2 (File No. 33-35798).
4.1 Specimen Certificate of the Common Stock, $.01 par value, of the
Registrant is incorporated by reference to Exhibit 4.1 of
Registrant's Registration Statement on Form S-18
(Commission File No. 2-87625-W).
4.2** Employee Stock Purchase Plan of the Registrant is incorporated by
reference to Exhibit 4(a) of Registrant's Registration Statement
on Form S-8 (Commission File No. 333-92835).
4.3** Amendment to Employee Stock Purchase Plan is incorporated by
reference to Exhibit 4.3 to the Company's Form 10-K for the
period ended December 31, 2003.
4.4** Deferred Compensation Plan is incorporated by reference to
Exhibit 4(b) of Registrant's Registration Statement on Form S-8
(Commission File No. 333-92835).
10.1** 1995 Incentive and Non-Qualified Stock Option Plan, as amended is
incorporated by reference to Exhibit 4(d) of the Form S-8 filed
by the Registrant, Commission File No. 33-58765.
10.2** Amendment to the 1995 Employee Stock Option Plan is incorporated
by reference to Exhibit 4(a) of Registrant's Registration
Statement on Form S-8 (Commission File No. 333-46656).
10.3** 1996 Non-Employee Directors' Stock Option Plan, Amended and
Restated as of October 28, 1997 is incorporated by reference to
Exhibit 10.6 of Form 10-Q Report for the quarter ended
September 30, 1997 filed by Registrant on November 14, 1997).
21
10.4** Form of Non-Qualified Stock Option Agreement granted to certain
Directors is incorporated by reference to Exhibit 10.9 of
Registrant's Registration Statement on Form S-1
(Commission File No. 2-98089).
10.5** 2002 Stock Option Plan is incorporated by reference to
Exhibit 4(a) to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 2002.
10.6** Amendment to 2002 Stock Option Plan is incorporated by reference
to Exhibit 4.1 to the Company's Registration Statement on
Form S-8 (Commission File No. 333-107467).
10.7 Healthcare Services Group, Inc. Dividend Reinvestment Plan is
incorporated by reference to the Company's Registration Statement
on Form S-3 (Commission File No. 333-108182).
14. Code of Ethics and Business Conduct. Such document is available
at our website www.hcsgcorp.com.
21. List of subsidiaries is filed herewith in Part I, Item I.
22
23. Consent of Independent Registered Public Accounting Firm.
31.1 Certification of Principal Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
31.2 Certification of Principal Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act.
32.1 Certification of the Principal Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
32.2 Certification of the Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act.
** indicates that exhibit is a management contract or a
management compensatory plan or arrangement
(b) Reports on Form 8-K
Date Filed or Furnished October 19, 2004
Item No. Item 12.
Description Results of Operations and Financial
Condition- a press release announcing
(i) the Company's unaudited financial and
operating results for the nine month
and three month periods ended
September 30, 2004 (ii) declaration of
quarterly cash dividend
23
SELECTED FINANCIAL DATA
The selected financial data presented below should be read in conjunction with,
and is qualified in its entirety by reference to, the Financial Statements and
Notes thereto.
(In thousands except for per share data and employees)
Years Ended December 31: 2004 2003 2002 2001 2000
- ----------------------------------- ------------ ------------ ------------ ------------ ------------
Revenues $ 442,568 $ 379,718 $ 328,500 $ 284,190 $ 254,668
Net income $ 14,699 $ 10,860 $ 8,631 $ 7,035 $ 5,588
Basic earnings per common share $ .84 $ .64(1) $ .51(1) $ .43(1) $ .34(1)
Diluted earnings per common share $ .80 $ .61(1) $ .49(1) $ .43(1) $ .34(1)
Cash Dividends per common share $ .26 $ .09(1) - - -
Weighted average number of common
shares outstanding for basic EPS 17,481 17,049(1) 16,895(1) 16,392(1) 16,446(1)
Weighted average number of common
shares outstanding for diluted EPS 18,440 17,788(1) 17,534(1) 16,617(1) 16,475(1)
As of December 31:
Working Capital $ 125,012 $ 112,073 $ 96,117 $ 84,089 $ 74,574
Total Assets $ 166,964 $ 158,328 $ 134,296 $ 120,790 $ 108,343
Stockholders' Equity $ 131,460 $ 121,198 $ 107,881 $ 98,943 $ 90,805
Book Value Per Share $ 7.51 $ 7.01(1) $ 6.44(1) $ 5.95(1) $ 5.53(1)
Employees 20,400 18,400 16,100 15,900 14,800
(1) Adjusted to reflect the 3 for 2 Stock Split paid in the form of a 50%
Common Stock Dividend on March 1, 2004
9
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
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This report includes forward-looking statements that are subject to risks and
uncertainties that could cause actual results or objectives to differ materially
from those projected. We undertake no obligation to publicly update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Such risks and uncertainties include, but are not limited
to, risks arising from our providing services exclusively to the health care
industry, primarily providers of long-term care; credit and collection risks
associated with this industry; one client accounting for approximately 20% of
revenue in 2004; our claims experience related to workers' compensation and
general liability insurance; the effects of changes in, or interpretations of
laws and regulations governing the industry, including state and local
regulations pertaining to the taxability of our services; and risk factors
described in our Form 10-K filed with the Securities and Exchange Commission for
the year ended December 31, 2004 in Part I thereof under "Government Regulation
of Clients", "Competition" and "Service Agreements/Collections". Many of our
clients' revenues are highly contingent on Medicare and Medicaid reimbursement
funding rates, which have been and continue to be adversely affected by the
change in Medicare payments under the 1997 enactment of the Medicare Prospective
Payment System. That change, and the lack of substantive reimbursement funding
rate reform legislation, as well as other trends in the long-term care industry
have resulted in certain of our clients filing for bankruptcy protection. Others
may follow. Any decisions by the government to discontinue or adversely modify
legislation related to reimbursement funding rates will have a material adverse
affect on our clients. These factors, in addition to delays in payments from
clients have resulted in and could continue to result in significant additional
bad debts in the near future. Additionally, our operating results would be
adversely affected if unexpected increases in the costs of labor and labor
related costs, materials, supplies and equipment used in performing services
could not be passed on to our clients.
In addition, we believe that to improve our financial performance we must
continue to obtain service agreements with new clients, provide new services to
existing clients, achieve modest price increases on current service agreements
with existing clients and maintain internal cost reduction strategies at our
various operational levels. Furthermore, we believe that our ability to sustain
the internal development of managerial personnel is an important factor
impacting future operating results and successfully executing projected growth
strategies.
RESULTS OF OPERATIONS
The following discussion is intended to provide the reader with information that
will assist them in understanding our financial statements including the changes
in certain key items in comparing financial statements period to period. We also
intend to provide the primary factors that accounted for those changes, as well
as a summary of how certain accounting principles affect our financial
statements. In addition, we are providing information about the financial
results of our two operating segments to further assist in understanding how
these segments and their results affect our results of operations. This
discussion should be read in conjunction with our financial statements as of
December 31, 2004 and the year then ended and the notes accompanying those
financial statements.
OVERVIEW
Healthcare Services Group, Inc. provides housekeeping, laundry, linen, facility
maintenance and food services to the health care industry, including nursing
homes, retirement complexes, rehabilitation centers and hospitals located
throughout the United States. We believe that we are the largest provider of
housekeeping and laundry services to the long-term care industry in the United
States, rendering such services to approximately 1,600 facilities in 42 states
as of December 31, 2004. Although we do not directly participate in any
government reimbursement programs, our clients' reimbursements are subject to
government regulation. Therefore, they are directly affected by any legislation
relating to Medicare or Medicaid reimbursement programs.
10
We provide our services primarily pursuant to full service agreements with our
clients. In such agreements, we are responsible for our management and hourly
employees located at our clients' facilities. We also provide services on the
basis of a management agreement for a very limited number of clients. Our
agreements with clients typically provide for a one year service term,
cancelable by either party upon 30 to 90 days notice after the initial 90-day
period.
Additionally, we operate two wholly-owned subsidiaries. HCSG Supply, Inc.
purchases, warehouses and distributes the supplies and equipment used in
providing our Housekeeping segment services. Huntingdon Holdings, Inc. invests
our cash and cash equivalents.
CONSOLIDATED OPERATIONS
The following table sets forth, for the years indicated, the percentage which
certain items bear to total revenues:
Relation to Total Revenues
Years Ended December 31,
-------------------------------
2004 2003 2002
------ ------ ------
Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 87.8 88.1 88.2
Selling, general and administrative 7.1 7.6 7.7
Investment and interest income .3 .4 .2
------ ------ ------
Income before income taxes 5.4 4.7 4.3
Income taxes 2.0 1.8 1.7
------ ------ ------
Net income 3.4% 2.9% 2.6%
====== ====== ======
Subject to the factors noted in the Cautionary Statement Regarding Forward
Looking Statements included in this report, we anticipate 2005's financial
performance to be comparable to the 2004 percentages presented in the above
table as they relate to total revenues.
Although there can be no assurance thereof, we believe that in 2005 both the
Housekeeping and Food segments' revenues, as a percentage of total revenues,
will remain approximately the same as their respective 2004 percentages.
Furthermore, we expect the sources of growth in 2005 for the respective business
segments will be primarily the same as historically experienced. That is the
growth in the Food segment is expected to come from our current Housekeeping
segment's client base, while growth in the Housekeeping segment will primarily
come from obtaining new clients.
During the period from 1999 through 2004, our total revenues grew at a compound
annual rate of approximately 14%.
We are organized into two operating segments; housekeeping, laundry, linen and
other services ("Housekeeping"), and food services ("Food"). During this period,
our Housekeeping segment grew at a compound annual rate of 10%, whereas the Food
segment experienced compound annual growth of 48%. This growth in the
Housekeeping segment was achieved primarily through obtaining new clients. The
growth in the Food segment was achieved from providing such services to existing
clients of our Housekeeping segment. Although there can be no assurance thereof,
we anticipate future revenue growth due to the strength of our presence in the
long-term health care market. It is likely though, that our total compound
growth rates will decrease as total growth is measured against an increasing
revenue base.
Housekeeping is our largest and core operating segment, representing 80.7% or
$356,975,000 of total 2004 revenues. The services provided by this segment
consist primarily of the cleaning, disinfecting and sanitizing of patient rooms
and common areas of a client's facility, as well as the laundering and
processing of the personal clothing belonging to the facility's patients. Also
within the scope of this segment's service is the laundering and processing of
the bed linens, uniforms and other assorted linen items utilized by a client
facility.
11
The Food segment, which began operations in 1997, consists of providing for the
development of a menu that meets the patient's dietary needs, and the purchasing
and preparing of the food for delivery to the patients. Food segment revenues
represented 19.3% or $85,593,000 of total 2004 revenues.
2004 Compared with 2003
The following table sets forth 2004 revenues, income before income taxes, and
percentage increases of each compared to 2003. Revenues and income before income
taxes are shown in total and on a reportable segment basis.
Reportable Segments
--------------------------------------------------------
Housekeeping Food
Percent Corporate and ----------------------- ------------------------------
Total increase eliminations Amount % Incr Amount % Incr (Decr)
------------- ----------- ------------- -------------- ------ -------------- -------------
Revenues $ 442,568,000 16.5% $ (2,495,000) $ 357,754,000 12.3% $ 87,309,000 40.4%
Income before income taxes 23,706,000 35.3 (7,564,000) 29,336,000 25.6 1,934,000 (1.5)
Total revenues increased 16.5% to $442,568,000 in 2004 from $379,718,000
in 2003.
The Housekeeping segment's 12.3% growth in revenues is primarily a result of a
net increase in service agreements entered into with new clients. Housekeeping's
25.6% increase in income before income taxes, on an operating segment basis, is
attributable to both a modest improvement in the gross profit earned at the
client facility level and the gross profit earned on the 12.3% increase in
operating segment revenues. The improvement in gross profit is primarily a
result of a .7% reduction, as a percentage of operating segment revenues, in the
total labor costs. The reduction is attributable to our ability to manage these
costs more efficiently.
The Food segment's 40.4% revenue growth is a result of providing this service to
an increasing number of existing Housekeeping segment clients. Food segment
income before income taxes decreased 1.5%, on an operating segment basis. The
decrease is attributable to a lower gross profit earned at the client facility
level. The decrease is primarily due to a 1.2% increase in total labor costs, as
a percentage of operating segment revenues. Such increase in total labor costs
resulted primarily from inefficiencies experienced in district and regional
management of these costs in connection with this operating segment's 40.4%
growth in revenues.
We have one client, a nursing home chain, which in 2004 and 2003 accounted for
20% and 23%, respectively of total revenues. In 2004, we derived 19% and 27%,
respectively, of the Housekeeping and Food segments' revenues from such client.
Additionally, at both December 31, 2004 and 2003, amounts due from such client
represented less than 1% of our accounts receivable balances. Although we expect
the relationship with this client to continue, the loss of such client would
have a material adverse affect on our results of operations.
Costs of services provided, on a consolidated basis, as a percentage of total
revenues in 2004 decreased slightly to 87.8% as compared to 88.1% in 2003. The
following table provides a comparison, as a percentage of total revenues (unless
otherwise noted), of the key indicators of our financial performance in respect
to our cost of services provided:
Cost of Services Provided Key Indicators 2004 % 2003 % Inc (Decr) %
- ---------------------------------------------- ------ ------ ------------
Labor and costs of labor 66.5 67.1 (.6)
Workers' compensation and general
liability insurance 4.0 4.6 (.6)
Bad debt provision .8 1.2 (.4)
Health insurance and employee benefits 2.3 2.6 (.3)
Housekeeping segment supplies (as a percentage
of Housekeeping segment revenues) 5.2 4.7 .5
Food segment supplies (as a percentage of Food
segment revenues) 39.5 39.3 .2
12
The following is an explanation of significant increases and decreases of key
indicators of cost of services provided in comparing 2004 to 2003.
The decrease in labor and costs of labor is primarily attributable to
efficiencies achieved in managing the Housekeeping segment's labor. The workers'
compensation and liability insurance expense decrease is primarily a result of a
current reduction in average claim cost. The decrease in bad debt provision
resulted primarily from improved collection experience. The decrease in health
insurance and employee benefits is a result of less employees participating in
our health insurance programs. Housekeeping segment supplies, as a percentage of
Housekeeping segment revenues, increased primarily as a result of price
increases from vendors. The slight increase in Food segment supplies, as
percentage of Food segment revenues, is a result of price increases from
vendors.
Consistent with our 16.5% growth in total revenues, selling, general and
administrative expenses increased $2,478,000. Although, as a percentage of total
revenues, these expenses decreased to 7.1% in 2004 as compared to 7.6% in 2003.
This decrease is primarily attributable to our ability to control these expenses
and comparing them to a greater revenue base in the current year.
Investment and interest income, as a percentage of total revenues, was .3% as
compared to .4% in 2003. The decrease is primarily attributable to a reduction
in interest income earned on clients' notes receivable resulting from having
less outstanding balances on such notes during 2004.
Our effective tax rate at both December 31, 2004 and 2003 was 38%. Absent any
significant change in federal, or state and local tax laws, we expect our
effective rate to be approximately the same in 2005. More specifically, changes
by federal and state legislatures negatively effecting the various tax credit
programs, which we participate in, would result in our effective tax rate
increasing in 2005. Our 38% effective tax rate differs from the federal income
tax statutory rate principally because of the effect of state and local income
taxes.
As a result of the matters discussed above, 2004 net income increased to 3.4%,
as a percentage of total revenues, compared to 2.9% in 2003.
2003 Compared with 2002
The following table sets forth 2003 revenues, income before income taxes, and
percentage increases of each compared to 2002. Revenues and income before income
taxes are shown in total and on a reportable segment basis:
Reportable Segments
--------------------------------------------------------
Housekeeping Food
Percent Corporate and ------------------------ ------------------------------
Total increase eliminations Amount % (Incr) Amount % Incr (Decr)
------------- ----------- ------------- -------------- -------- -------------- -------------
Revenues $ 379,718,000 15.6% $ (1,010,000) $ 318,540,000 14.7% $ 62,189,000 20.3%
Income before income taxes 17,515,000 22.8 (7,811,000) 23,361,000 7.3 1,964,000 35.1
Total revenues increased 15.6% to $379,718,000 in 2003 from $328,500,000 in
2002.
The Housekeeping segment's 14.7% growth in revenues is primarily a result of a
net increase in service agreements entered into with new clients.
The Food segment's 20.3% revenue growth is a result of providing this service to
existing Housekeeping segment clients.
We have one client, a nursing home chain, which in 2003 and 2002 accounted for
approximately 23% and 17%, respectively, of total revenues. In 2003, we derived
from such client approximately 23% and 22%, respectively, of the Housekeeping
and Food segments' revenues.
13
Cost of services provided, on a consolidated basis, as a percentage of total
revenues in 2003 remained essentially unchanged at 88.1% as compared to 88.2% in
2002. The following table provides a comparison, as a percentage of total
revenues (unless otherwise noted), of the key indicators of our financial
performance in respect to our cost of services provided:
Cost of Services Provided Key Indicators 2003 % 2002 % Inc (Decr) %
- ---------------------------------------------- ------ ------ ------------
Bad debt provision 1.2 1.8 (.6)
Health insurance and employee benefits 2.6 3.0 (.4)
Labor and costs of labor 67.1 67.4 (.3)
Food segment supplies (as a percentage of Food
segment revenues) 39.3 37.5 1.8
Housekeeping segment supplies (as a percentage
of Housekeeping segment revenues) 4.7 4.0 .7
Workers' compensation and general liability
insurance 4.6 4.3 .3
The following is an explanation of significant increases and decreases of key
indicators of cost of services provided in comparing 2003 to 2002.
The decrease in bad debt provision resulted primarily from improved collection
experience. The decrease in health insurance and employee benefits is a result
of a reduction in the number of employees participating in such benefit
programs. The decrease in labor and costs of labor is primarily attributable to
efficiencies achieved in managing the Housekeeping segment's labor. The
increases in both the Housekeeping segment and Food segment supplies' costs
resulted primarily from price increases from vendors for items used in providing
the respective services. The increase in workers' compensation and liability
insurance is a result of the current year's increase in the average claim cost.
Selling, general and administrative expenses, as a percentage of revenue,
remained essentially unchanged at 7.6% in 2003 as compared to 7.7% in 2002. This
is primarily attributable to our ability to control these expenses and comparing
them to a greater revenue base in the current year.
Investment and interest income increased 88% to $1,451,000 in 2003 compared to
approximately $771,000 in 2002. The increase is attributable to higher cash
balances throughout 2003, as well as increased rates of return on investments in
the company's deferred compensation trust account.
Our 2003 effective tax rate decreased to 38% from 39.5% in 2002. The decrease is
primarily a result of an increase in tax credits available to us. Our 38%
effective tax rate differs from the federal income tax statutory rate
principally because of the effect of state and local income taxes.
As a result of the matters discussed above, 2003 net income increased to 2.9%,
as a percentage of revenue, compared to 2.6% in 2002.
CRITICAL ACCOUNTING POLICIES
We consider the two policies discussed below to be critical to an understanding
of our financial statements because their application places the most
significant demands on our judgment. Therefore, it should be noted that
financial reporting results rely on estimating the effect of matters that are
inherently uncertain. Specific risks for these critical accounting policies are
described in the following paragraphs. For these policies, we caution that
future events rarely develop exactly as forecasted, and the best estimates
routinely require adjustment. Any such adjustments or revisions to estimates
could result in material differences to previously reported amounts.
The two policies discussed are not intended to be a comprehensive list of all of
our accounting policies. In many cases, the accounting treatment of a particular
transaction is specifically dictated by generally accepted accounting
principles, with no need for our
14
judgment in their application. There are also areas in which our judgment in
selecting another available alternative would not produce a materially different
result. See our audited consolidated financial statements and notes thereto
which are included in this Annual Report which contain accounting policies and
other disclosures required by generally accepted accounting principles.
Allowance for Doubtful Accounts
The Allowance for Doubtful Accounts is established as losses are estimated to
have occurred through a provision for bad debts charged to earnings. The
Allowance for Doubtful Accounts is evaluated based on our periodic review of
accounts and notes receivable and is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
We have had varying collection experience with respect to our accounts and notes
receivable. When contractual terms are not met, we generally encounter
difficulty in collecting amounts due from certain of our clients. Therefore, we
have sometimes been required to extend the period of payment for certain clients
beyond contractual terms. These clients include those who have terminated
service agreements and slow payers experiencing financial difficulties. In
making credit evaluations, in addition to analyzing and anticipating, where
possible, the specific cases described above, we consider the general collection
risks associated with trends in the long-term care industry. We also establish
credit limits, perform ongoing credit evaluation, and monitor accounts to
minimize the risk of loss.
In accordance with the risk of extending credit, we regularly evaluate our
accounts and notes receivable for impairment or loss of value and when
appropriate will provide in our Allowance for Doubtful Accounts for such
receivables. We generally follow a policy of reserving for receivables from
clients in bankruptcy, clients with which we are in litigation for collection
and other slow paying clients. The reserve is based upon our estimates of
ultimate collectibility. Correspondingly, once our recovery of a receivable is
determined through either litigation, bankruptcy proceedings or negotiation to
be less than the recorded amount on our balance sheet, we will charge-off the
applicable amount to the Allowance for Doubtful Accounts.
At December 31, 2004, we have identified accounts totaling $4,255,000 that
require an Allowance for Doubtful Accounts based on potential impairment or loss
of value. An Allowance for Doubtful Accounts totaling $1,869,000 was established
for these accounts at December 31, 2004. Actual collections of these accounts
could differ from that which we currently estimate. If our actual collection
experience is 5% less than our estimate, the related increase to our Allowance
for Doubtful Accounts would decrease net income by $130,000.
Notwithstanding our efforts to minimize credit risk exposure, our clients could
be adversely affected if future industry trends, as more fully discussed under
Liquidity and Capital Resources below, and as further described in our Form 10-K
filed with Securities and Exchange Commission for the year ended December 31,
2004 in Part I thereof under "Government Regulation of Clients" and "Service
Agreements/Collections", change in such a manner as to negatively impact the
cash flows of our clients. If our clients experience a negative impact in their
cash flows, it would have a material adverse affect on our results of operations
and financial condition.
Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability
and workers' compensation insurance, which comprise approximately 40% of our
liabilities as of December 31, 2004. Our accounting for this plan is affected by
various uncertainties because we must make assumptions and apply judgment to
estimate the ultimate cost to settle reported claims and claims incurred but not
reported as of the balance sheet date. We address these uncertainties by
regularly evaluating our claims pay-out experience, present value factor and
other factors related to the nature of specific claims in arriving at the basis
for our accrued insurance claims estimate. Our evaluations are based primarily
on current information derived from reviewing our claims experience and industry
trends. In the event that our claims experience and/or industry trends result in
an unfavorable change, it would have a material adverse effect on our results of
operations and financial condition. Under these plans, pre-determined loss
limits are arranged with an insurance company to limit both our per occurrence
cash outlay and annual insurance plan cost.
For workers' compensation, we record 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 our historical data and open claims.
The present value of the payout is determined by applying an 8% discount factor
against the estimated value of the claims over the estimated remaining
15
pay-out period. Reducing the discount factor by 1% would reduce net income by
approximately $78,000. Additionally, reducing the estimated payout period by
six months would result in an approximate $128,000 reduction in net income.
For general liability, we record a reserve for the estimated ultimate amounts to
be paid for known claims.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004 we had cash and cash equivalents of $74,847,000 and working
capital of $125,012,000 as compared to December 31, 2003 cash and cash
equivalents, and working capital of $64,181,000 and $112,073,000, respectively.
We view our cash and cash equivalents of $74,847,000 at December 31, 2004 as our
principal measure of liquidity. Our current ratio at December 31, 2004 increased
to 7.2 to 1 compared to 5.5 to 1 at December 31, 2003. This is a result
primarily of improved accounts receivable collection experience and related
higher cash and cash equivalents balances. On an historical basis, our
operations have generally produced consistent cash flow and have required
limited capital resources. We believe our current and near term cash flow
positions will enable us to fund our continued growth.
Operating Activities
The net cash provided by our operating activities was approximately $19,435,000
for the year ended December 31, 2004. The principal sources of net cash flows
from operating activities for 2004 was net income, including non-cash charges to
operations for bad debt provisions and depreciation. Additionally, operating
activities' cash flows were increased by the timing of payments under our
various insurance plans of approximately $2,481,000, as well as the timing of
payments for accounts payable and other accrued expenses of $1,553,000. The
operating activity that used the largest amount of cash was a decrease of
approximately $7,651,000 in accrued payroll, accrued and withheld payroll taxes.
The decrease resulted from the timing of payments for such payroll and payroll
related taxes.
Investing Activities
Our principal use of cash in investing activities for the year ended December
31, 2004 was $2,387,000 for the purchase of housekeeping equipment, computer
software and equipment, and laundry equipment installations. Under our current
plans, which are subject to revision upon further review, it is our intention to
spend an aggregate of $2,000,000 to $3,000,000 during 2005 for such capital
expenditures.
Financing Activities
During 2004, we expended $6,026,000 for the repurchase of 386,000 shares of our
common stock. We remain authorized to purchase 499,000 shares pursuant to
previous Board of Directors' actions. In addition, we received proceeds of
$3,910,000 from the exercise of stock options by employees and directors.
We paid regular quarterly cash dividends since the second quarter of 2003.
During 2004, we paid regular quarterly cash dividends totaling $4,598,000. Such
regular quarterly cash dividend payments of $.05, $.06, $.07 and $.08, per
common share were paid on February 14, 2004, May 14, 2004, August 13, 2004 and
November 12, 2004, respectively. Such payments were made to shareholders of
record as of January 31, 2004, April 30, 2004, July 30, 2004 and October 29,
2004, respectively. Additionally, on January 18, 2005, our Board of Directors
declared a regular quarterly cash dividend of $.09 per common share, to be paid
on February 11, 2005 to shareholders of record as of January 28, 2005. Our Board
of Directors reviews our dividend policy on a quarterly basis. Although there
can be no assurance that we will continue to pay dividends or the amount of the
dividend, we expect to continue to pay regular quarterly cash dividends. In
connection with the declaration of dividends, we adopted a Dividend Reinvestment
Plan in 2003 for such payments.
Line of Credit
We have an $18,000,000 bank line of credit on which we may draw to meet
short-term liquidity requirements in excess of internally generated cash flow.
Amounts drawn under the line of credit are payable upon demand. At December 31,
2004, there were no borrowings under the line of credit. However, at such date,
we had outstanding a $15,925,000 (increased to $17,925,000 on February 1, 2005)
irrevocable standby letter of credit which relates to payment obligations under
our insurance programs. As a result of the letter of credit issued, the amount
available under the line of credit was reduced by $15,925,000 at December 31,
2004.
16
The line of credit requires us to satisfy several financial covenants. Such
covenants, and their respective status at December 31, 2004, are as follows:
Covenant Description and Requirement Status at December 31, 2004
- ------------------------------------------ -----------------------------------
Commitment coverage ratio in cash and cash Commitment coverage ratio is 7.6.
equivalents, and eligible receivables
must equal or exceed outstanding
obligations under the line of credit by
2 times.
Tangible net worth must exceed $102,000,000. Tangible net worth is $129,800,000.
Fixed charge coverage ratio EBITDA must Fixed charge coverage ratio is 1.63.
exceed fixed charges by 1.5 times.
As noted above, we are in compliance with all financial covenants at
December 31, 2004 and expect to continue to remain in compliance with all such
financial covenants. This line of credit expires on June 30, 2005. We believe
the line of credit will be renewed at that time.
Accounts and Notes Receivable
We expend considerable effort to collect the amounts due for our services on the
terms agreed upon with our clients. Many of our clients participate in programs
funded by federal and state governmental agencies which historically have
encountered delays in making payments to its program participants. The Balance
Budget Act of 1997 changed Medicare policy in a number of ways, most notably the
phasing in, effective July 1, 1998, of a Medicare Prospective Payment System for
skilled nursing facilities which significantly changed the reimbursement
procedures and the amounts of reimbursement our clients receive. Many of our
clients' revenues are highly contingent on Medicare and Medicaid reimbursement
funding rates. Therefore, they have been and continue to be adversely affected
by changes in applicable laws and regulations, as well as other trends in the
long-term care industry. This has resulted in certain of our clients filing for
bankruptcy protection. Others may follow. These factors, in addition to delays
in payments from clients have resulted in and could continue to result in
significant additional bad debts in the near future. Whenever possible, when a
client falls behind in making agreed-upon payments, we convert the unpaid
accounts receivable to interest bearing promissory notes. The promissory notes
provide a means by which to further evidence the amounts owed and provide a
definitive repayment plan and therefore may ultimately enhance our ability to
collect the amounts due. At December 31, 2004 and 2003, we had $8,942,000 and
$12,638,000, net of reserves, respectively, of such promissory notes
outstanding. Additionally, we consider restructuring service agreements from
full service to management service in the case of certain clients experiencing
financial difficulties. We believe that the restructuring provides us with a
means to maintain a relationship with the client while at the same time
minimizing collection exposure.
We have had varying collection experience with respect to our accounts and notes
receivable. When contractual terms are not met, we generally encounter
difficulty in collecting amounts due from certain of our clients. Therefore, we
have sometimes been required to extend the period of payment for certain clients
beyond contractual terms. These clients include 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, we have recorded bad debt provisions (in an
Allowance for Doubtful Accounts) of $3,700,000, $4,550,000 and $6,050,000 in the
years ended December 31, 2004, 2003 and 2002, respectively. These provisions
represent approximately .8%, 1.2% and 1.8%, as a percentage of revenue, for the
years ended December 31, 2004, 2003 and 2002, respectively. In making our credit
evaluations, in addition to analyzing and anticipating, where possible, the
specific cases described above, we consider the general collection risks
associated with trends in the long-term care industry. We also establish credit
limits, perform ongoing credit evaluation and monitor accounts to minimize the
risk of loss. Notwithstanding our efforts to minimize credit risk exposure, our
clients could be adversely affected if future industry trends change in such a
manner as to negatively impact their cash flows. If our clients experience such
significant impact in their cash flows, it would have a material adverse effect
on our results of operations and financial condition.
17
Insurance Programs
We have 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 our per occurrence cash
outlay and annual insurance plan cost.
For workers' compensation, we record 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 our historical data and open claims.
The present value of the payout is determined by applying an 8% discount factor
against the estimated value of the claims over the estimated remaining pay-out
period.
For general liability, we record a reserve for the estimated ultimate amounts to
be paid for known claims.
We regularly evaluate our claims pay-out experience, present value factor and
other factors related to the nature of specific claims in arriving at the basis
for our accrued insurance claims estimate. Our evaluation is based primarily on
current information derived from reviewing our claims experience and industry
trends. In the event that our claims experience and/or industry trends result in
an unfavorable change, it would have an adverse effect on our results of
operations and financial condition.
Lease Commitments
We have operating lease commitments totaling approximately $1,772,000 through
2009.
Below is a table which presents our contractual obligations and commitments at
December 31, 2004.
Payments Due by Period
-----------------------------------------------------------------
Less Than 1-3 4-5 After
Contractual Obligations Total One Year Years Years 5 Years
- ----------------------------------------------- ------------ ------------ ----------- ----------- -----------
Operating Leases $ 1,772,000 $ 811,000 $ 945,000 $ 16,000 $ -
Irrevocable Standby Letters of Credit
(increased to $17,925,000 on February 1, 2005) 15,925,000 15,925,000 - - -
------------ ------------ ----------- ----------- -----------
Total Contractual Cash Obligations $ 17,697,000 $ 16,736,000 $ 945,000 $ 16,000 $ -
============ ============ =========== =========== ===========
Capital Expenditures
The level of capital expenditures is generally dependent on the number of new
clients obtained. Such capital expenditures primarily consist of housekeeping
equipment, laundry and linen equipment installations, and computer hardware and
software. Although we have no specific material commitments for capital
expenditures through the end of calendar year 2005, we estimate we will have
capital expenditures of approximately $2,000,000 to $3,000,000 during this
period in connection with housekeeping equipment purchases and laundry and linen
equipment installations in our clients' facilities, as well as expenditures
relating to internal data processing hardware and software requirements. We
believe that our cash from operations, existing cash and cash equivalents
balance and credit line will be adequate for the foreseeable future to satisfy
the needs of our operations and to fund our continued growth. However, should
these sources not be sufficient, we would, if necessary, seek to obtain
necessary working capital from such sources as long-term debt or equity
financing.
Material Off-balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than our irrevocable
standby letter of credit previously discussed.
Effects of Inflation
Although there can be no assurance thereof, we believe that in most instances we
will be able to recover increases in costs attributable to inflation by passing
through such cost increases to our clients.
18
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------------------
2004 2003
--------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 74,847,000 $ 64,181,000
Accounts and notes receivable, less allowance for
doubtful accounts of $1,869,000 in 2004
and $3,414,000 in 2003 55,725,000 58,145,000
Inventories and supplies 11,015,000 10,455,000
Deferred income taxes 574,000 675,000
Prepaid expenses and other 3,110,000 3,313,000
--------------- ---------------
Total current assets 145,271,000 136,769,000
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 2,329,000 2,190,000
Housekeeping and office equipment 13,987,000 12,831,000
Autos and trucks 80,000 80,000
--------------- ---------------
16,396,000 15,101,000
Less accumulated depreciation 11,592,000 10,489,000
--------------- ---------------
4,804,000 4,612,000
NOTES RECEIVABLE- long term portion, net of discount 5,557,000 7,904,000
DEFERRED COMPENSATION FUNDING 4,062,000 2,848,000
DEFERRED INCOME TAXES- long term portion 5,563,000 4,476,000
OTHER NONCURRENT ASSETS 1,707,000 1,719,000
--------------- ---------------
$ 166,964,000 $ 158,328,000
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,272,000 $ 6,536,000
Accrued payroll, accrued and withheld payroll taxes 6,110,000 14,127,000
Other accrued expenses 1,692,000 875,000
Income taxes payable 1,016,000 179,000
Accrued insurance claims 4,169,000 2,979,000
--------------- ---------------
Total current liabilities 20,259,000 24,696,000
ACCRUED INSURANCE CLAIMS - long term portion 10,227,000 8,937,000
DEFERRED COMPENSATION LIABILITY 5,018,000 3,497,000
COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 45,000,000 shares
authorized, 18,507,191 shares issued in
2004 and 17,938,613 in 2003 185,000 180,000
Additional paid in capital 39,466,000 33,515,000
Retained earnings 101,279,000 91,178,000
Common stock in treasury, at cost, 992,276 shares
in 2004 and 652,238 in 2003 (9,470,000) (3,675,000)
--------------- ---------------
Total stockholders' equity 131,460,000 121,198,000
--------------- ---------------
$ 166,964,000 $ 158,328,000
=============== ===============
See accompanying notes.
19
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Revenues $ 442,568,000 $ 379,718,000 $ 328,500,000
Operating costs and expenses:
Cost of services provided 388,719,000 334,609,000 289,858,000
Selling, general and administrative 31,523,000 29,045,000 25,148,000
Other income:
Investment and interest 1,380,000 1,451,000 771,000
--------------- --------------- ---------------
Income before income taxes 23,706,000 17,515,000 14,265,000
--------------- --------------- ---------------
Income taxes 9,007,000 6,655,000 5,634,000
--------------- --------------- ---------------
Net income $ 14,699,000 $ 10,860,000 $ 8,631,000
=============== =============== ===============
Basic earnings per common share $ .84 $ .64 $ .51
=============== =============== ===============
Diluted earnings per common share $ .80 $ .61 $ .49
=============== =============== ===============
Cash dividends per common share $ .26 $ .09 $ -
=============== =============== ===============
Basic weighted average number of
common shares outstanding 17,481,000 17,049,000 16,895,000
=============== =============== ===============
Diluted weighted average number of
common shares outstanding 18,440,000 17,788,000 17,534,000
=============== =============== ===============
See accompanying notes
20
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Cash flows from operating activities:
Net Income $ 14,699,000 $ 10,860,000 $ 8,631,000
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation 1,873,000 1,914,000 2,034,000
Bad debt provision 3,700,000 4,550,000 6,050,000
Deferred income tax benefits (986,000) (174,000) (1,291,000)
Tax benefit of stock option transactions 1,900,000 1,039,000 521,000
Unrealized (gain) loss on deferred
compensation fund investments (336,000) (418,000) 162,000
Changes in operating assets and liabilities:
Accounts and notes receivable (1,279,000) (11,141,000) (3,540,000)
Prepaid income taxes - 883,000 (875,000)
Inventories and supplies (560,000) (1,792,000) (692,000)
Notes receivable - long term portion 2,347,000 2,034,000 1,384,000
Deferred compensation funding (879,000) (954,000) (805,000)
Accounts payable and other
accrued expenses 1,553,000 1,865,000 (113,000)
Accrued payroll, accrued and
withheld payroll taxes (7,651,000) 3,177,000 1,587,000
Accrued insurance claims 2,481,000 4,103,000 2,310,000
Deferred compensation liability 1,521,000 1,602,000 913,000
Income taxes payable 837,000 179,000 -
Prepaid expenses and other assets 215,000 (985,000) (162,000)
--------------- --------------- ---------------
Net cash provided by operating
activities 19,435,000 16,742,000 16,114,000
--------------- --------------- ---------------
Cash flows from investing activities:
Disposals of fixed assets 321,000 221,000 152,000
Additions to property and equipment (2,387,000) (2,309,000) (1,862,000)
--------------- --------------- ---------------
Net cash used in investing activities (2,066,000) (2,088,000) (1,710,000)
--------------- --------------- ---------------
Cash flows from financing activities:
Acquisition of treasury stock (6,026,000) (163,000) (2,130,000)
Dividends paid (4,598,000) (1,488,000) -
Reissuance of treasury stock pursuant
to Dividend Reinvestment Plan 11,000 2,000 -
Proceeds from the exercise of
stock options 3,910,000 2,856,000 1,787,000
--------------- --------------- ---------------
Net cash provided by (used in)
financing activities (6,703,000) 1,207,000 (343,000)
--------------- --------------- ---------------
Net increase in cash and
cash equivalents 10,666,000 15,861,000 14,061,000
Cash and cash equivalents at
beginning of the year 64,181,000 48,320,000 34,259,000
--------------- --------------- ---------------
Cash and cash equivalents at end of
the year $ 74,847,000 $ 64,181,000 $ 48,320,000
=============== =============== ===============
Supplementary Cash Flow Information:
Issuance of 48,000, 37,000 and 36,000
shares of common stock in 2004,
2003 and 2002, respectively pursuant
to Employee Stock Plans $ 366,000 $ 212,000 $ 130,000
=============== =============== ===============
See accompanying notes.
21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
----------------------------------------------------------------------------------------------------
Common Stock Additional Total
-------------------------------- Paid-in Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
--------------- --------------- --------------- --------------- --------------- ---------------
Balance, December 31, 2001 17,007,000 $ 170,000 $ 27,184,000 $ 73,176,000 $ (1,587,000) $ 98,943,000
Net income for year 8,631,000 8,631,000
Exercise of stock options 376,000 4,000 1,783,000 1,787,000
Tax benefit arising from
stock option transactions 521,000 521,000
Purchase of common stock
for treasury (274,000
shares) (2,130,000) (2,130,000)
Shares issued pursuant to
Employee Stock Purchase
Plan 36,000 1,000 129,000 130,000
--------------- --------------- --------------- --------------- --------------- ---------------
Balance, December 31, 2002 17,419,000 175,000 29,617,000 81,807,000 (3,717,000) 107,882,000
Net income for year 10,860,000 10,860,000
Exercise of stock options 520,000 5,000 2,851,000 2,856,000
Tax benefit arising from
stock option transactions 1,039,000 1,039,000
Purchase of common stock
for treasury (22,000
shares) (164,000) (164,000)
Cash dividends - $.09 per
common share (1,489,000) (1,489,000)
Shares issued pursuant to
dividend reinvestment
plan (89 shares) 1,000 1,000 2,000
Shares issued pursuant to
Employee Stock Plans
(37,000 shares) 7,000 205,000 212,000
--------------- --------------- --------------- --------------- --------------- ---------------
Balance, December 31, 2003 17,939,000 180,000 33,515,000 91,178,000 (3,675,000) 121,198,000
Net income for year 14,699,000 14,699,000
Exercise of stock options 568,000 5,000 3,951,000 (46,000) 3,910,000
Tax benefit arising from
stock option transactions 1,900,000 1,900,000
Purchase of common stock
for treasury (386,000
shares) (6,026,000) (6,026,000)
Cash dividends - $.26 per
common share (4,598,000) (4,598,000)
Shares issued pursuant to
dividend reinvestment
plan (528 shares) 6,000 5,000 11,000
Shares issued pursuant to
Employee Stock Plans
(48,000 shares) 94,000 272,000 366,000
--------------- --------------- --------------- --------------- --------------- ---------------
Balance, December 31, 2004 18,507,000 $ 185,000 $ 39,466,000 $ 101,279,000 $ (9,470,000) $ 131,460,000
=============== =============== =============== =============== =============== ===============
See accompanying notes.
22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
We provide housekeeping, laundry, linen, facility maintenance and food services
to the healthcare industry, including nursing homes, retirement complexes,
rehabilitation centers and hospitals located throughout the United States. Such
services are primarily provided pursuant to full service agreements with our
clients. In such agreements, we are responsible for the management and hourly
employees located at our clients' facilities. Our agreements with clients
typically provide for a one year service term, cancelable by either party upon
30 to 90 days notice after the initial 90-day period.
Additionally, we operate two wholly-owned subsidiaries. HCSG Supply, Inc.
purchases, warehouses and distributes the supplies and equipment used in
providing our Housekeeping segment services. Huntingdon Holdings, Inc. invests
our cash and cash equivalents.
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
We evaluate our 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, are subject to collection activity or
those slow payers that are experiencing financial difficulties. In the event
that a note receivable is impaired, it is accounted for in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 114 and SFAS No. 118;
that is, it is valued at the present value of expected cash flows or market
value of related collateral.
At December 31, 2004, 2003 and 2002, we had notes receivable aggregating
$2,500,000, $3,900,000 and $5,800,000, respectively, that are impaired. During
2004, 2003 and 2002, the average outstanding balance of impaired notes
receivable was $3,200,000, $4,800,000 and $6,700,000, respectively. No interest
income was recognized in any of these years.
23
Summary schedules of impaired notes receivable, and the related reserve, for the
years ended December 31, 2004, 2003 and 2002 are as follows.
Impaired Notes Receivable
---------------------------------------------------------
Balance Balance
Beginning End of
of Year Additions Deductions Year
------------ ------------ ------------ ------------
2004 $ 3,900,000 $ 1,600,000 $ 3,000,000 $ 2,500,000
============ ============ ============ ============
2003 $ 5,800,000 $ 100,000 $ 2,000,000 $ 3,900,000
============ ============ ============ ============
2002 $ 7,700,000 $ - $ 1,900,000 $ 5,800,000
============ ============ ============ ============
Reserve for Impaired Notes Receivable
---------------------------------------------------------
Balance Balance
Beginning End of
of Year Additions Deductions Year
------------ ------------ ------------ ------------
2004 $ 1,900,000 $ 1,300,000 $ 2,700,000 $ 500,000
============ ============ ============ ============
2003 $ 2,500,000 $ 1,250,000 $ 1,850,000 $ 1,900,000
============ ============ ============ ============
2002 $ 3,200,000 $ 1,000,000 $ 1,700,000 $ 2,500,000
============ ============ ============ ============
We follow 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 receivable are impaired. The
difference between income recognition on a full accrual basis and cash basis,
for notes receivable that are not considered impaired, is not material. For
impaired notes receivable, 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 provisions. Inventories and supplies are stated to approximate a first-in,
first-out (FIFO) basis. Linen supplies are included in inventory and are
amortized over a 24 month period.
Property and Equipment
Property and equipment are stated at cost. Additions, renewals and improvements
are capitalized, while maintenance and repair costs are expensed when incurred.
When assets are retired or otherwise disposed of, the cost and related
accumulated depreciation are removed from the respective accounts and any
resulting gain or loss is included in income. Depreciation is provided by the
straight-line method over the following estimated useful lives: laundry and
linen equipment installations - 3 to 7 years; housekeeping and
office equipment - 3 to 7 years; autos and trucks - 3 years.
Revenue Recognition
Revenues from our annual service agreements with clients are recognized as
services are performed.
As a distributor of laundry equipment, we occasionally sell 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. Our accounting policy for these sales is to
recognize the gross profit over the life of the payments associated with our
financing of the transactions. During 2004, 2003 and 2002 laundry installation
sales were not material.
24
Income Taxes
Deferred income taxes result from temporary differences between tax and
financial statement recognition of revenue and expenses. These temporary
differences arise from differing methods used for financial and tax purposes to
calculate insurance expense, certain receivable reserves, supplies expense and
other provisions which are not currently deductible for tax purposes.
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 common shares, such as stock options.
Stock-Based Compensation
At December 31, 2004, we had stock based compensation plans, which are described
more fully in Note 4. As permitted by SFAS No. 123, "Accounting for Stock Based
Compensation", we account for stock-based compensation arrangements in
accordance with provisions of Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation expense
for stock options issued to employees is based on the difference on the date of
grant, between the fair market value of our stock and the exercise price of the
option. No stock based employee compensation cost is reflected in net income, as
all options granted under our plans had an exercise price equal to the market
value of the underlying common stock at the date of grant. We account for equity
instruments issued to non-employees in accordance with the provisions of SFAS
No. 123 and Emerging Issues Task Force ("EITF") Issue No. 96-18, "Accounting for
Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction With Selling, or in Conjunction With Selling Goods or Services". All
transactions in which goods or services are the consideration received for the
issuance of equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued,
whichever is more reliably measurable.
The following table illustrates the effect on net income and earnings per share
if we had applied the fair value recognition provisions of SFAS No. 123 to stock
based compensation.
Year Ended December 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Net Income
As reported $ 14,699,000 $ 10,860,000 $ 8,631,000
Deduct:
Total stock based employee compensation
expense determined under fair value based
method for all awards, net of related
tax effects (1,619,000) (1,639,000) (1,790,000)
--------------- --------------- ---------------
Pro forma $ 13,080,000 $ 9,221,000 $ 6,841,000
=============== =============== ===============
Basic Earnings Per Common Share
As reported $ .84 $ .64 $ .51
Pro forma $ .75 $ .54 $ .40
Diluted Earnings Per Common Share
As reported $ .80 $ .61 $ .49
Pro forma $ .71 $ .52 $ .39
25
Advertising Costs
Advertising costs are expensed when incurred. For the years ended December 31,
2004, 2003 and 2002, advertising costs were not material.
Long-Lived Assets and Impairment of Long-Lived Assets
Our long-lived assets include property and equipment and costs in excess of fair
value of net assets acquired (i.e. goodwill). Costs in excess of fair value of
net assets acquired arose from the purchase of another company in 1985 which
were being amortized over a 31 year period and is included in other noncurrent
assets.
As of January 1, 2002 we adopted SFAS No. 142 "Goodwill and Other Intangible
Assets", which eliminated the amortization of purchased goodwill. Upon adoption
of SFAS No. 142, as well as at December 31, 2004 and 2003, we performed an
impairment test of our goodwill (amounting to $1,612,322 at these dates) and
determined that no impairment of the recorded goodwill existed. Under
SFAS No. 142, goodwill is tested annually and more frequently if an event occurs
which indicates the goodwill may be impaired.
As of January 1, 2002, we adopted SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-lived Assets" which supersedes SFAS No. 121, "Accounting for
the Impairment of Long-lived Assets to be Disposed Of". The adoption of
SFAS No. 144 had no effect on the Company.
Treasury Stock
Treasury stock purchases are accounted for under the cost method whereby the
entire cost of the acquired stock is recorded as treasury stock. Gains or losses
on the subsequent reissuance of shares are credited or charged to additional
paid in capital.
Three-for-Two Stock Split
On February 12, 2004, our Board of Directors approved a three-for-two stock
split in the form of a 50% common stock dividend which was paid on March 1, 2004
to shareholders of record on February 23, 2004. All share and per common share
information for all periods presented have been adjusted to reflect the
three-for-two stock split.
Reclassification
Certain prior period amounts have been reclassified to conform to current year
presentation.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, we make 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. Significant estimates are used for, but not
limited to, our allowance for doubtful accounts, accrued insurance claims and
deferred tax benefits. The estimates are based upon various factors including
current and historical trends, as well as other pertinent industry and
regulatory authority information. We regularly evaluate this information to
determine if it is necessary to update the basis for our estimates and to
compensate for known changes.
26
Concentrations of Credit Risk
SFAS No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires the disclosure of significant concentrations of credit risk,
regardless of the degree of such risk. Financial instruments, as defined by SFAS
No. 105, which potentially subject us to concentrations of credit risk, consist
principally of cash and cash equivalents and accounts and notes receivable. At
December 31, 2004 and 2003, substantially all of our cash and cash equivalents
were invested with one financial institution.
Our clients are concentrated in the health care industry, primarily providers of
long-term care. Many of our clients' revenues are highly contingent on Medicare
and Medicaid reimbursement funding rates, which have been and continue to be
adversely affected by the change in Medicare payments under the 1997 enactment
of the Prospective Payment System. That change, and lack of substantive
reimbursement funding rate reform legislation, as well as other trends in the
long-term care industry have resulted in certain of our clients filing for
bankruptcy protection. Others may follow. Any decisions by the government to
discontinue or adversely modify legislation related to reimbursement funding
rates will have a material adverse affect on our clients. These factors, in
addition to delays in payments from clients, have resulted in, and could
continue to result in, significant additional bad debts in the near future.
Major Client
We have one client, a nursing home chain, which due to its significant
contribution to our total revenues, we consider a major client. Such client's
percentage contribution to revenues and accounts receivable balances is
summarized below:
Reportable Segments Revenues
------------------------------ Amounts due at December 31,
Year Total Revenues Housekeeping Food of accounts receivable balance
- ---- -------------- -------------- ------------- ------------------------------
2004 20% 19% 27% less than 1%
2003 23% 23% 22% less than 1%
2002 17% 17% 15% approximately 2%
Although we expect to continue the relationship with this client, the loss of
such client would materially adversely affect our results of operations.
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 based on their short-term nature. We estimate the fair
value of our other financial instruments through the use of public market
prices, quotes from financial institutions and other available information.
We have certain notes receivable that do not bear interest. Therefore, such
notes receivable of $3,984,000 and $3,502,000 at December 31, 2004 and 2003,
respectively, have been discounted to their present value and are reported at
such values of $2,855,000 and $3,139,000 at December 31, 2004 and 2003,
respectively.
Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued a
revision of Financial Accounting Standards No. 123 ("SFAS 123R") which requires
all share-based payments to employees to be recognized in the income statement
based on their fair values. Our option grants to employees, non-employees and
directors, as well as common stock shares issued pursuant to our Employee Stock
Purchase Plan will represent share-based payments. We expect to calculate the
fair value of share-based payments under SFAS 123R on a basis substantially
consistent with the fair value approach of SFAS 123. We plan to adopt SFAS 123R
in our fiscal quarter ending September 30, 2005. We expect the adoption of
SFAS 123R will have a material impact on our financial statements in that fiscal
quarter, but we cannot reasonable estimate the impact of adoption because we
expect certain assumptions that can materially affect the calculation of the
value of share-based payments to employees to change in 2005.
27
NOTE 2--ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Balance Budget Act of 1997 changed Medicare policy in a number of ways, most
notably the phasing in, effective July 1, 1998 of a Medicare Prospective Payment
System for skilled nursing facilities which significantly changed the manner and
the amounts of reimbursement such facilities receive. Many of our clients'
revenues are highly contingent on Medicare and Medicaid reimbursement funding
rates. Therefore, they have been and continue to be adversely affected by
changes in applicable laws and regulations, as well as other trends in the
long-term care industry. This has resulted in certain of our clients filing for
bankruptcy protection. Others may follow. These factors, in addition to delays
in payments from clients have resulted in, and could continue to result in,
significant additional bad debts in the near future.
The allowance for doubtful accounts is established as losses are estimated to
have occurred through a provision for bad debts charged to earnings. The
allowance for doubtful accounts is evaluated based on our periodic review of
accounts and notes receivable and is inherently subjective as it requires
estimates that are susceptible to significant revision as more information
becomes available.
We have had varying collection experience with respect to our accounts and notes
receivable. When contractual terms are not met, we generally encounter
difficulty in collecting amounts due by certain of our clients. Therefore, we
have sometimes been required to extend the period of payment for certain clients
beyond contractual terms. These clients have included 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, we have recorded bad debt provisions (in an
Allowance for Doubtful Accounts) of $3,700,000, $4,550,000 and $6,050,000 in the
years ended December 31, 2004, 2003 and 2002, respectively. In making our credit
evaluations, in addition to analyzing and anticipating, where possible, the
specific cases described above, we consider the general collection risks
associated with trends in the long-term care industry. Notwithstanding our
efforts to minimize our credit risk exposure, our clients could be adversely
affected if future industry trends change in such a manner as to negatively
impact their cash flows. In the event that our clients experience such
significant impact in their cash flows, it would have a material adverse effect
on our results of operations and financial condition.
NOTE 3--LEASE COMMITMENTS
We lease office facilities, equipment and autos under operating leases expiring
on various dates through 2009 and certain office leases contain renewal options.
The following is a schedule, by calendar year, of future minimum lease payments
under operating leases that have remaining terms in excess of one year as of
December 31, 2004.
Operating
Year Leases
- ---- -----------
2005 $ 811,000
2006 426,000
2007 387,000
2008 132,000
2009 16,000
Thereafter -
-----------
Total minimum lease payments $ 1,772,000
===========
Total expense for all operating leases was approximately $973,000, $961,000 and
$914,000 for the years ended December 31, 2004, 2003 and 2002, respectively.
28
NOTE 4--STOCKHOLDERS' EQUITY
The Nominating, Compensation and Stock Option Committee of the Board of
Directors 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.
We have granted incentive and non-qualified stock options primarily to employees
and directors under either our 2002 Stock Option Plan, 1995 Incentive and
Non-Qualified Stock Option Plan for key employees or 1996 Non-Employee
Director's Stock Option Plan. On April 22, 2003, our Board of Directors adopted
an Amendment to the 2002 Stock Option Plan. Such Amendment was approved by
shareholders on May 27, 2003. The Amendment increased the total number of shares
of our Common Stock available for issuance under such Plan from 750,000 shares
to 1,575,000. On March 28, 2002, our Board of Directors adopted the 2002 Stock
Option Plan. It was approved by shareholders on May 21, 2002. Amendments to the
1995 Plan, as well as the 1996 Plan were adopted on March 6, 1996 and approved
by shareholders on June 4, 1996.
Incentive Stock Options
As of December 31, 2004, 1,504,000 shares of common stock were reserved under
our incentive stock option plans, including 191,000 shares which are available
for future grant. 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 grant will have a term in excess of ten years. Additionally, all options
granted vest and become exercisable commencing six months from the option grant
date.
A summary of incentive stock option activity is as follows.
2004 2003 2002
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
---------- ---------- ---------- ---------- ---------- ----------
Beginning of period $ 7.89 1,471,000 $ 5.85 1,502,000 $ 4.95 1,318,000
Granted 20.48 312,000 12.43 432,000 8.20 399,000
Cancelled 11.29 (20,000) 6.60 (3,000) 4.51 (2,000)
Exercised 7.30 (450,000) 5.50 (460,000) 4.73 (213,000)
---------- ---------- ---------- ---------- ---------- ----------
End of period $ 11.03 1,313,000 $ 7.89 1,471,000 $ 5.85 1,502,000
========== ========== ========== ========== ========== ==========
The weighted average fair value of incentive stock options granted during 2004,
2003 and 2002 was $5.20, $2.77 and $3.54, respectively.
29
The following table summarizes information about incentive stock options
outstanding at December 31, 2004.
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
- ----------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.38 - 6.78 475,000 5.07 $ 5.08 475,000 $ 5.08
$ 8.15 - 8.43 204,000 7.94 8.23 204,000 8.23
$12.43 - 12.43 322,000 8.99 12.43 322,000 12.43
$20.48 - 20.48 312,000 9.99 20.48 - -
--------------- --------------- --------------- --------------- ---------------
1,313,000 7.64 $ 11.03 1,001,000 $ 8.09
=============== =============== =============== =============== ===============
Non-Qualified Options
As of December 31, 2004, 1,128,000 shares of common stock were reserved under
our non-qualified stock option plans, including 183,000 shares which are
available for future grant. 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 ten year period, commencing six months from
the option date.
A summary of non-qualified stock option activity is as follows.
2004 2003 2002
----------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Number Average Number Average Number
Price of Shares Price of Shares Price of Shares
---------- ---------- ---------- ---------- ---------- ----------
Beginning of period $ 6.78 959,000 $ 5.77 876,000 $ 5.25 919,000
Granted 20.48 105,000 12.43 143,000 8.41 120,000
Cancelled - - - - - -
Exercised 5.67 (119,000) 5.44 (60,000) 4.77 (163,000)
---------- ---------- ---------- ---------- ---------- ----------
End of period $ 8.44 945,000 $ 6.78 959,000 $ 5.77 876,000
========== ========== ========== ========== ========== ==========
The weighted average fair value of non-qualified options granted during 2004,
2003 and 2002 were $6.73, $3.80 and $3.63, respectively.
The following table summarizes information about non-qualified stock options
outstanding at December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Range Outstanding Life Price Exercisable Price
- ----------------------- --------------- --------------- --------------- --------------- ---------------
$ 3.38 - 6.78 596,000 5.71 $ 5.38 596,000 $ 5.38
$ 8.15 - 8.43 101,000 7.95 8.40 101,000 8.40
$12.43 - 12.43 143,000 8.99 12.43 143,000 12.43
$20.48 - 20.48 105,000 9.99 20.48 - -
--------------- --------------- --------------- --------------- ---------------
945,000 6.92 $ 8.44 840,000 $ 6.94
=============== =============== =============== =============== ===============
30
Fair Value Valuation Estimates
As discussed in Note 1, we apply APB Opinion 25 in measuring stock-based
compensation. Accordingly, no compensation cost has been recorded for options
granted to employees or directors in the years ended December 31, 2004, 2003 and
2002. 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:
2004 2003 2002
---------- ---------- ----------
Risk-Free Interest-Rate 3.00% 2.00% 4.07%
Expected Life -
Incentive Options 2.65 years 2.34 years 5.50 years
Non-Qualified Options 4.46 years 5.00 years 5.50 years
Expected Volatility 35.0% 37.9% 40.0%
Dividend Yield 1.25% 1.6% -
Dividends
We have paid regular quarterly cash dividends since the second quarter of 2003.
During 2004, we paid regular quarterly dividends totaling $4,598,000. Such
regular quarterly dividend payments of $.05, $.06, $.07 and $.08 per common
share were paid on February 14, 2004, May 14, 2004, August 14, 2004 and
November 12, 2004, respectively. Such payments were made to shareholders of
record as of January 31, 2004, April 30, 2004, July 30, 2004 and October 29,
2004, respectively. Additionally, on January 18, 2005, our Board of Directors
declared a regular quarterly cash dividend of $.09 per common share, which was
paid on February 11, 2005 to shareholders of record as of January 28, 2005. Our
Board of Directors reviews our dividend policy on quarterly basis. Although
there can be no assurance that we will continue to pay dividends or the amount
of such dividend payments, we expect to continue to pay regular quarterly cash
dividends. In connection with the declaration of cash dividends, we adopted a
Dividend Reinvestment Plan in 2003 for such payments.
On February 12, 2004, our Board of Directors approved a 3 for 2 stock split in
the form of a 50% Common Stock dividend, which was paid on March 1, 2004 to
holders of Common Stock of record as of the close of business on February 23,
2004. All fractional share interests were rounded up to the nearest whole
number. The effect of this action was to increase common shares outstanding by
5,980,000 to 17,950,000.
NOTE 5--INCOME TAXES
The following table summarizes the provision for income taxes.
Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Current:
Federal $ 7,687,000 $ 5,095,000 $ 5,106,000
State 2,306,000 1,734,000 1,819,000
--------------- --------------- ---------------
9,993,000 6,829,000 6,925,000
Deferred:
Federal (814,000) (99,000) (981,000)
State (172,000) (75,000) (310,000)
--------------- --------------- ---------------
(986,000) (174,000) (1,291,000)
--------------- --------------- ---------------
Tax Provision $ 9,007,000 $ 6,655,000 $ 5,634,000
=============== =============== ===============
31
Under FAS No. 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amount used for income tax purposes.
Significant components of our federal and state deferred tax assets and
liabilities are as follows:
Year Ended December 31,
----------------------------
2004 2003
------------ ------------
Net current deferred assets:
Allowance for doubtful accounts $ 765,000 $ 1,383,000
Accrued insurance claims- current 1,705,000 1,206,000
Expensing of housekeeping supplies (2,013,000) (1,922,000)
Other 117,000 8,000
------------ ------------
$ 574,000 $ 675,000
============ ============
Net noncurrent deferred tax assets:
Deferred compensation $ 1,883,000 $ 1,341,000
Non-deductible reserves 462,000 296,000
Depreciation of property and equipment (1,077,000) (869,000)
Accrued insurance claims- noncurrent 4,183,000 3,620,000
Other 112,000 88,000
------------ ------------
$ 5,563,000 $ 4,476,000
============ ============
A reconciliation of the provision for income taxes and the amount computed by
applying the statutory federal income tax rate to income before income taxes is
as follows:
Year Ended December 31,
----------------------------------------------
2004 2003 2002
------------- ------------- -------------
Tax expense computed at
statutory rate $ 8,297,000 $ 5,955,000 $ 4,850,000
Increases (decreases) resulting
from:
State income taxes, net of
federal tax benefit 1,386,000 1,128,000 996,000
Federal jobs credits (641,000) (578,000) (433,000)
Tax exempt interest (102,000) (73,000) (98,000)
Other, net 67,000 223,000 319,000
------------- ------------- -------------
$ 9,007,000 $ 6,655,000 $ 5,634,000
============= ============= =============
Income taxes paid were $7,256,000, $4,728,000 and $7,308,000 during 2004, 2003
and 2002, respectively.
The Internal Revenue Service has completed its examination of our federal income
tax return for the 2002 year. We have agreed to the assessment and paid the
related liability. The liability did not have a material effect on the Company's
Financial Statements.
NOTE 6--RELATED PARTY TRANSACTIONS
One of our directors, as well as the brother of an officer and director
(collectively "Related Parties"), have separate ownership interests in several
different client facilities which have entered into service agreements with us.
During the years ended December 31, 2004, 2003 and 2002 the service agreements
with the client facilities in which the Related Parties have ownership interests
resulted in
32
revenues of $6,608,000, $4,265,000 and $3,540,000, respectively. At December 31,
2004 and 2003, accounts receivable from such facilities of $1,633,000 and
$748,000, respectively, are included in the accompanying consolidated balance
sheets. The subject accounts receivable balances are within agreed upon payment
terms.
Another of our directors is a member of a law firm which was retained by the
Company during the years ended December 31, 2004, 2003 and 2002. Fees received
from us by such firm did not exceed $75,000 in any of the years ended December
31, 2004, 2003 and 2002. Additionally, such fees did not exceed, in any year, 5%
of such firm's revenues.
NOTE 7--SEGMENT INFORMATION
Reportable Operating Segments
We manage and evaluate our operations in two reportable operating segments. The
two operating segments are Housekeeping (housekeeping, laundry, linen and other
services), and Food. Although both segments serve the same client base and share
many operational similarities, they are managed separately due to distinct
differences in the type of service provided, as well as the specialized
expertise required of the professional management personnel responsible for
delivering the respective segments' services. We consider the various services
provided within the Housekeeping segment to be one reportable operating segment
since such services are rendered pursuant to a single service agreement and the
delivery of such services is managed by the same management personnel.
Differences between the reportable segments' operating results and other
disclosed data and our consolidated financial statements relate primarily to
corporate level transactions, as well as transactions between reportable
segments and our warehousing and distribution subsidiary. The subsidiary's
transactions with reportable segments are made on a basis intended to reflect
the fair market value of the goods transferred. Additionally, included in the
differences between the reportable segments' operating results and other
disclosed data are amounts from our investment holding company subsidiary. This
subsidiary does not transact any business with the reportable segments. Segment
amounts disclosed are prior to any elimination entries made in consolidation.
The Housekeeping segment provides services in Canada, although essentially all
of its revenues and net income, 99% in both categories, are earned in one
geographic area, the United States. Food services are provided solely in the
United States.
Housekeeping Food Corporate and
services services eliminations Total
--------------- --------------- --------------- ---------------
Year Ended December 31, 2004
Revenues $ 357,754,000 $ 87,309,000 $ (2,495,000) $ 442,568,000
Income before income taxes 29,336,000 1,934,000 (7,564,000)(1) 23,706,000
Depreciation 1,191,000 97,000 585,000 1,873,000
Total assets 60,958,000 15,546,000 90,460,000(2) 166,964,000
Year Ended December 31, 2003
Revenues $ 318,540,000 $ 62,189,000 $ (1,010,000) $ 379,718,000
Income before income taxes 23,361,000 1,964,000 (7,811,000)(1) 17,515,000
Depreciation 1,159,000 69,000 687,000 1,915,000
Total assets 65,045,000 14,789,000 78,494,000(2) 158,328,000
Year Ended December 31, 2002
Revenues $ 277,749,000 $ 51,689,000 $ (938,000) $ 328,500,000
Income before income taxes 21,773,000 1,454,000 (8,962,000)(1) 14,265,000
Depreciation 1,219,000 43,000 772,000 2,034,000
Total assets 62,585,000 13,493,000 58,219,000(2) 134,296,000
(1) represents primarily corporate office cost and related overhead, as well as
consolidated subsidiaries' operating expenses that are not allocated to the
service segments.
(2) represents primarily cash and cash equivalents, deferred income taxes and
other current and noncurrent assets.
33
Total Revenues from Clients
The following revenues earned from clients differ from segment revenues reported
above due to the inclusion of adjustments used for segment reporting purposes by
management. We earned revenues from clients in the following service categories:
Year Ended December 31,
---------------------------------------------------
2004 2003 2002
--------------- --------------- ---------------
Housekeeping services $ 249,314,000 $ 223,303,000 $ 196,771,000
Laundry and linen services 105,545,000 93,257,000 79,148,000
Food services 85,593,000 61,677,000 50,959,000
Maintenance services and Other 2,116,000 1,481,000 1,622,000
--------------- --------------- ---------------
$ 442,568,000 $ 379,718,000 $ 328,500,000
=============== =============== ===============
Major Client
We have one client, a nursing home chain, which in 2004, 2003 and 2002 accounted
for 20%, 23% and 17%, respectively, of total revenues. In the year ended
December 31, 2004, we derived 19% and 27%, respectively, of the Housekeeping and
Food segments' revenues from such client. Although we expect to continue our
relationship with this client, the loss of such client would materially
adversely affect the operations of our two operating segments.
34
NOTE 8--EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of basic and diluted
earnings per common share is as follows:
Year Ended December 31, 2004
----------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Net Income $ 14,699,000
=============
Basic earnings per common share 14,699,000 17,481,000 $ .84
Effect of dilutive securities:
Options 959,000 (.04)
------------- ------------- -------------
Diluted earnings per common share $ 14,699,000 18,440,000 $ .80
============= ============= =============
Year Ended December 31, 2003
----------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Net Income $ 10,860,000
=============
Basic earnings per common share 10,860,000 17,049,000 $ .64
Effect of dilutive securities:
Options 739,000 (.03)
------------- ------------- -------------
Diluted earnings per common share $ 10,860,000 17,788,000 $ .61
============= ============= =============
Year Ended December 31, 2002
----------------------------------------------
Income Shares Per-share
(Numerator) (Denominator) Amount
------------- ------------- -------------
Net Income $ 8,631,000
=============
Basic earnings per common share 8,631,000 16,895,000 $ .51
Effect of dilutive securities:
Options 639,000 (.02)
------------- ------------- -------------
Diluted earnings per common share $ 8,631,000 17,534,000 $ .49
============= ============= =============
No outstanding options were excluded from the computation of diluted earnings
per common share for the years ended December 31, 2004 and 2003 as none have an
exercise price in excess of the average market value of our common stock during
such periods. Options to purchase 9,000 shares of common stock at an average
exercise price of $8.43 for the year ended December 31, 2002 were outstanding
during such years but not included in the computation of diluted earnings per
common share because the options' exercise prices were greater than the average
market price of the common shares, and therefore, their effect would be
antidilutive.
35
NOTE 9--OTHER CONTINGENCIES
We have a $18,000,000 bank line of credit on which we may draw to meet
short-term liquidity requirements in excess of internally generated cash flow.
Amounts drawn under the line of credit are payable on demand. At December 31,
2004 there were no borrowings under the line of credit. However, at such date,
we had outstanding a $15,925,000 (increased to $17,925,000 on February 1, 2005)
irrevocable standby letter of credit which relates to payment obligations under
our insurance programs. As a result of the letter of credit issued, the amount
available under the line of credit was reduced by $15,925,000 at December 31,
2004. The line of credit requires us to satisfy several financial covenants. We
are in compliance with all financial covenants at December 31, 2004 and expect
to continue to remain in compliance with all such financial covenants. This line
of credit expires on June 30, 2005. We believe the line of credit will be
renewed at that time.
We provide our services in 42 states and numerous local taxing jurisdictions
within those states. Consequently, the taxability of our services is subject to
various interpretations within these jurisdictions. In the ordinary course of
business, a jurisdiction may contest our application and reporting requirements
of its tax code to our services, which may result in additional tax liabilities.
As of December 31, 2004, we have unsettled tax assessments (including interest
to date) from various state taxing authorities of $2,800,000 ($1,800,000, net of
federal income taxes). Although we intend to vigorously defend our positions
that the assessments are without merit, we have recorded a reserve at December
31, 2004 of $900,000 ($590,000, net of federal income taxes), for these
assessments where we could estimate a tax settlement is probable and the range
of such settlement. In other tax matters, because of the uncertainties related
to both the probable outcome and amount of probable assessment due, we are
unable to make a reasonable estimate of a liability. We do not expect the
resolution of any of these matters, taken individually or in the aggregate, to
have a material adverse effect on our financial position or results of
operations.
We are involved in miscellaneous claims and litigation arising in the ordinary
course of business. We believe that these matters, taken individually or in the
aggregate, would not have a material adverse affect on our financial position or
results of operations.
The Balance Budget Act of 1997 changed Medicare policy in a number of ways, most
notably the phasing in, effective July 1, 1998, of a Medicare Prospective
Payment System for skilled nursing facilities which significantly changed the
manner and the amounts of reimbursement they receive. Many of our clients'
revenues are highly contingent on Medicare and Medicaid reimbursement funding
rates. Therefore, they have been and continue to be adversely affected by
changes in applicable laws and regulations, as well as other trends in the
long-term care industry. This has resulted in certain of our clients filing for
bankruptcy protection. Others may follow. These factors in addition to delays in
payments from clients, have resulted in and could continue to result in
significant additional bad debts in the near future.
NOTE 10--ACCRUED INSURANCE CLAIMS
We have a Paid Loss Retrospective Insurance Plan for general liability and
workers' compensation insurance. Under these plans, pre-determined loss limits
are arranged with our insurance company to limit both our per occurrence cash
outlay and annual insurance plan cost.
We regularly evaluate our claims pay-out experience, present value factor and
other factors related to the nature of specific claims in arriving at the basis
for our accrued insurance claims estimate. Our evaluation is based primarily on
current information derived from reviewing our claims experience and industry
trends. In the event that our claims experience and/or industry trends result in
an unfavorable change, it would have an adverse effect on our results of
operations and financial condition.
For workers' compensation, we record 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 our historical data and open claims.
The accrued insurance claims were reduced by approximately $935,000, $1,287,000
and $1,784,000 at December 31, 2004, 2003 and 2002, respectively in order to
record the estimated present value at the end of each year using an 8% discount
factor over the estimated remaining pay-out period.
36
For general liability, we record a reserve for the estimated amounts to be paid
for known claims.
NOTE 11--EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
Since January 1, 2000, we have had a non-compensatory Employee Stock Purchase
Plan ("the ESPP") for all eligible employees. All full-time and certain
part-time employees who have completed two years of continuous service with us
are eligible to participate. The ESPP was implemented through four annual
offerings. The first annual offering commenced on January 1, 2000. On February
12, 2004 (effective January 1, 2004), our Board of Directors extended the ESPP
for an additional eight annual offerings. All future annual offerings likewise
commence and terminate on the respective year's first and last calendar day.
Under the ESPP, we are authorized to issue up to 1,200,000 shares of our common
stock to our employees. Furthermore, under the terms of the ESPP, eligible
employees can choose each year to have up to $25,000 of their annual earnings
withheld to purchase our Common Stock. The purchase price of the stock is 85% of
the lower of its beginning or end of the plan year market price.
As a result of the 2004, 2003 and 2002 annual offerings, a total of 60,000
shares, 48,000 shares and 36,000 shares of our Common Stock were purchased at
$10.76, $7.59 and $5.67 per common share in 2004, 2003 and 2002, respectively,
under the ESPP. The 2004, 2003 and 2002 annual offerings' shares were issued on
January 10, 2005, January 9, 2004 and January 8, 2003, respectively.
Retirement Savings Plan
Since October 1, 1999, we have had a retirement savings plan for non-highly
compensated employees (the "RSP") under Section 401(k) of the Internal Revenue
Code. The RSP allows eligible employees to contribute up to fifteen percent
(15%) of their eligible compensation on a pre-tax basis. There is no match by
the Company.
Deferred Compensation Plan
Since January 1, 2000, we have had a Supplemental Executive Retirement Plan (the
"SERP") for certain key executives and employees. The SERP is not qualified
under section 401 of the Internal Revenue Code. Under the SERP, participants may
defer up to percent 15% of their income on a pre-tax basis. As of the last day
of each plan year, each participant will receive a 25% match of their deferral
in our Common Stock based on the then current market value. SERP participants
fully vest in our matching contribution three years from the first day of the
initial year of participation. The income deferred and our matching contribution
are unsecured and subject to the claims of our general creditors. The amounts
expensed under the SERP during the years ended December 31, 2004, 2003 and 2002
were $280,000, $238,000 and $288,000, respectively. We funded such expense
through the reissuance to the SERP's trustee of 13,000 shares, 19,000 shares and
23,000 shares of our treasury stock for the years ended December 31, 2004, 2003
and 2002, respectively. In the aggregate, since initiation of the SERP, 100,000
shares ( including the 2004 funding of shares delivered in 2005) held by the
trustee are accounted for at cost, as treasury stock. At December 31, 2004,
66,000 of such shares are vested in the respective participants' accounts.
The SERP's trust account had a balance of $4,062,000, $2,848,000 and $1,476,000
at December 31, 2004, 2003 and 2002, respectively. The account's investments are
recorded at their fair value which is based on quoted market prices.
Accordingly, we recorded unrealized gains of $336,000 and $418,000 for the years
ended December 31, 2004 and 2003, respectively. For the year ended December 31,
2002, we recorded an unrealized loss of $162,000.
37
NOTE 12--SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
---------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------- --------------- --------------- ---------------
2004
Revenues $ 106,622,000 $ 110,489,000 $ 112,324,000 $ 113,133,000
Operating costs and expenses $ 101,463,000 $ 105,101,000 $ 106,611,000 $ 107,067,000
Income before income taxes $ 5,352,000 $ 5,694,000 $ 6,006,000 $ 6,654,000
Net income $ 3,318,000 $ 3,530,000 $ 3,724,000 $ 4,127,000
Basic earnings per common share(1) $ .19 $ .20 $ .21 $ .24
Diluted earnings per common share(1) $ .18 $ .19 $ .20 $ .22
Cash dividends per common share $ .05 $ .06 $ .07 $ .08
2003
Revenues $ 89,531,000 $ 92,806,000 $ 95,878,000 $ 101,503,000
Operating costs and expenses $ 85,488,000 $ 88,712,000 $ 91,761,000 $ 97,694,000
Income before income taxes $ 4,243,000 $ 4,285,000 $ 4,486,000 $ 4,501,000
Net income $ 2,546,000 $ 2,661,000 $ 2,803,000 $ 2,850,000
Basic earnings per common share(1) $ .15 $ .16 $ .16 $ .17
Diluted earnings per common share(1) $ .14 $ .15 $ .16 $ .16
Cash dividends per common share $ - $ - $ .04 $ .05
(1) Year-to-date earnings per common share amounts may differ from the sum of
quarterly amounts due to rounding.
38
MANAGEMENT'S ANNUAL REPORT ON INTERNAL CONTROL OVER
FINANCIAL REPORTING
The management of the company is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under
the Securities Exchange Act of 1934 as a process designed by, or under the
supervision of, the Company's principal executive and principal financial
officers and effected by the Company's board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and
includes those policies and procedures that:
1. Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
assets of the Company;
2. Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the Company are being made only in accordance with
authorizations of management and directors of the company; and
3. Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the financial statements.
The Company's management assessed the effectiveness of the Company's internal
control over financial reporting as of December 31, 2004. In making this
assessment, the Company's management used the criteria set forth by the
Committee of Sponsoring Organizations of the Treadway Commission in Internal
Control-Integrated Framework.
Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of our internal control over financial reporting, as prescribed
above, for the periods covered by this report. Based on our evaluation, our
principal executive officer and principal financial officer concluded that the
Company's internal control over financial reporting is effective.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
The Company's independent auditors have attested to, and reported on,
management's evaluation of the company's internal control over financial
reporting. This report appears on page 41.
/s/ Daniel P. McCartney /s/ James L. DiStefano
----------------------- ----------------------
Daniel P. McCartney James L. DiStefano
Chief Executive Officer Chief Financial Officer
March 10, 2005 March 10, 2005
39
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Healthcare Services Group, Inc.
We have audited the accompanying consolidated balance sheets of Healthcare
Services Group, Inc. and subsidiaries as of December 31, 2004 and 2003, and the
related consolidated statements of income, cash flows, and stockholders' equity
for each of the three years in the period ended December 31, 2004. 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 standards of the Public Company
Accounting Oversight Board (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. and subsidiaries at December 31, 2004 and 2003
and the consolidated results of their operations and their consolidated cash
flows for each of the three years in the period ended December 31, 2004, in
conformity with accounting principles generally accepted in the United States of
America.
We also have audited, in accordance with the standards of the Public Company
Oversight Board (United States), the effectiveness of Healthcare Services Group,
Inc.'s internal control over financial reporting as of December 31, 2004, based
on criteria established in Internal Control--Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated March 10, 2005 expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
- ----------------------
Edison, New Jersey
March 10, 2005
40
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Stockholders and Board of Directors
Healthcare Services Group, Inc.
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that Healthcare Services
Group, Inc. and Subsidiaries maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (the COSO criteria). The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A Company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A Company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the Company are
being made only in accordance with authorizations of management and directors of
the Company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the Company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that Healthcare Services Group, Inc. and
Subsidiaries maintained effective internal control over financial reporting as
of December 31, 2004, is fairly stated, in all material respects, based on the
COSO criteria. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of
the Company as of December 31, 2004 and 2003, and the related consolidated
statements of income, cash flows, and stockholders' equity, for each of the
three years in the period ended December 31, 2004, and our report dated
March 10, 2005 expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
- ----------------------
Edison, New Jersey
March 10, 2005
41
TRANSFER AGENT
American Stock Transfer & Trust Co.
99 Wall St.
New York, NY 10005
CORPORATE OFFICES
Healthcare Services Group, Inc.
3220 Tillman Drive, Suite 300
Bensalem, PA 19020
215-639-4274
STOCK LISTING
Listed on the NASDAQ
National Market System Symbol - "HCSG"
AUDITORS
Grant Thornton LLP
399 Thornall Street
Edison, NJ 08837
CORPORATE COUNSEL
Olshan Grundman Frome
Rosenzweig & Wolosky LLP
Park Avenue Tower
65 East 55th Street
New York, NY 10022
ANNUAL STOCKHOLDERS' MEETING
Date - May 24, 2005
Time - 10:00 A.M.
Place - The Radisson Hotel of Bucks County
2400 Old Lincoln Highway
Trevose, PA 19047
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
Chairman-NuVision Management, LLC
Robert L. Frome, Esq.
Senior Partner - Olshan Grundman Frome
Rosenzweig & Wolosky LLP
Robert J. Moss, Esq.
President - Moss Associates
John M. Briggs
Certified Public Accountant
OFFICERS AND CORPORATE MANAGEMENT
Daniel P. McCartney
Chief Executive Officer
Thomas A. Cook
President & Chief Operating Officer
Curt Barringer
Southeast Divisional Vice President
Thomas B. Carpenter
General Counsel and Assistant Secretary
James L. DiStefano
Chief Financial Officer and Treasurer
Michael Hammond
Western Regional Vice President
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
Bryan D. McCartney
Mid-Atlantic Divisional Vice President
Joseph F. McCartney
Northeast Divisional Vice President
Kevin McCartney
Northeast Divisional Vice President
David Smigel
Western Divisional Vice President
James P. O'Toole
Mid-Atlantic Regional Vice President
Brian M. Waters
Vice President - Operations
MARKET MAKERS
As of the end of 2004, the following firms were making a market in the shares of
Healthcare Services Group, Inc.:
UBS Capital Markets, L.P.
Goldman, Sachs & Co.
Jefferies & Company, Inc.
Morgan Stanley & Co., Inc.
C.L. King & Associates
Citigroup Global Markets, Inc.
Merrill Lynch, Pierce, Fenner
Crown Financial Group
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, 2004 there were
17,515,000 of the Company's common shares issued and outstanding. As of
February 25, 2005 there were 570 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 3,500 beneficial holders.
The high and low closing price quotations for our Common Stock during the years
ended December 31, 2004 and 2003, ranged as follows:
2004 High 2004 Low 2003 High 2003 Low
---------- ---------- ---------- ----------
1st Qtr. $ 17.00 $ 12.65 $ 9.31 $ 7.87
2nd Qtr. 16.85 14.79 9.35 7.49
3rd Qtr. 18.62 15.20 11.40 9.30
4th Qtr. 21.41 17.53 13.44 10.52
AVAILABILITY OF FORM 10-K
A copy of Healthcare Services Group, Inc.'s 2004 Annual Report on Form 10-K, as
filed with the Securities and Exchange Commission is available on the Company's
website "www.hcsgcorp.com". Additionally, it will be provided without charge to
each shareholder making a written request to the Investor Relations Department
of the Company at its Corporate Offices.
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 10, 2005 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 March 10, 2005
- ----------------------- Officer and Chairman
Daniel P. McCartney
/s/ Joseph F.McCartney Director and Vice March 10, 2005
- ----------------------- President
Joseph F. McCartney
/s/ Barton D. Weisman Director March 10, 2005
- -----------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 10, 2005
- -----------------------
Robert L. Frome
/s/ Thomas A. Cook Director, President March 10, 2005
- ----------------------- and Chief Operating
Thomas A. Cook Officer
/s/ John M. Briggs Director March 10, 2005
- -----------------------
John M. Briggs
/s/ Robert J. Moss Director March 10, 2005
- -----------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial March 10, 2005
- ----------------------- Officer and
James L. DiStefano Treasurer
/s/ Richard W. Hudson Vice President- March 10, 2005
- ----------------------- Finance, Secretary
Richard W. Hudson and Chief Accounting
Officer