<PAGE>
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 (FEE REQUIRED)
For the fiscal year ended December 31, 1995
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.)
incorporation or organization)
2643 Huntingdon Pike, Huntingdon Valley, Pennsylvania 19006
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (215) 938-1661
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Titles of Each Class on Which Registered
-------------------- ---------------------
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
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
--- ----
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. YES X NO
---- ----
The aggregate market value of voting stock (Common Stock, $.01 par
value) held by non-affiliates of the Registrant as of March 22, 1996 was
approximately $67,893.000.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date: At March 22, 1996,
there were outstanding 8,143,563 shares of the Registrant's Common Stock, $.01
par value.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III of Form 10-K will be incorporated
by reference to certain portions of a definitive proxy statement which is
expected to be filed by the Registrant pursuant to Regulation 14A within 120
days after the close of its fiscal year.
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Index to Annual Report on Form 10-K
Year Ended December 31, 1995
<PAGE>
<TABLE>
<CAPTION>
PART 1 PAGE
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<S> <C> <C>
Item 1 Business 1
Item 2 Properties 6
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Registrant's Common Stock and Related Security
Holder Matters 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations 10-14
Item 8 Financial Statements and Supplementary Data 15-41
Item 9 Changes in and Disagreements with Accountants on Accounting
And Financial Disclosure 42
PART III
Item 10 Directors and Executive Officers of the Registrant 43
Item 11 Executive Compensation 43
Item 12 Security Ownership of Certain Beneficial Owners and Management 43
Item 13 Certain Relationships and Related Transactions 43
PART IV
Item 14 Exhibits, Financial Statements Schedules and Reports on Form 8-K 44-45
</TABLE>
<PAGE>
PART I
Item 1. Business
(a) General
Healthcare Services Group, Inc. (the "Company") provides housekeeping,
laundry and linen services to long-term care facilities, including nursing homes
and retirement complexes. The Company believes that it is the largest provider
of contractual housekeeping and laundry services to the long-term care industry
in the United States, rendering such services to in excess of 800 facilities in
41 states and Canada.
(b) Not Applicable
(c) Description of Services
The Company provides management, administrative and operating expertise
and services to the housekeeping, laundry and linen departments of a single
industry segment (long-term care). The Company's labor force is also
interchangeable with respect to each of these services. The Company believes
that each service it performs offers similar opportunity for growth.
Accordingly, the Company does not deem it meaningful to identify the percentage
of revenues derived from the several services which it performs.
Housekeeping and laundry services. Housekeeping and laundry services is
the largest service sector of the Company. It involves cleaning, disinfecting
and sanitizing resident areas in the facilities as well as laundering and
processing the residents' personal clothing. In providing services to any given
client facility, the Company typically hires and trains the hourly employees who
were employed by such facility prior to the engagement of the Company. The
Company normally assigns two on-site managers to each facility to supervise and
train hourly housekeeping and laundry personnel and to coordinate housekeeping
and laundry with other facility support functions. Such management also oversees
the execution of a variety of quality and cost-control procedures, including
continuous training and employee evaluation as well as on-site testing for
infection control. The on-site management team also assists the facility in
complying with Federal, state and local regulations.
Linen services. Linen services is the other significant service sector
of the Company. It involves providing and laundering the sheets, pillow cases,
blankets, towels, uniforms and assorted linen items used by the facilities. At
most of the facilities that utilize the Company's linen services, the equipment
is acquired and installed by the Company. On many occasions the Company
purchases the existing laundry installations from nursing homes with which it
concurrently enters into service agreements to provide laundry and linen
services. Each such installation generally requires initial capital outlays by
the Company of from $50,000 to $250,000 depending on the size of the facility
and the amount of equipment required. The Company could incur relocation or
other costs in the event of the cancellation of a linen agreement where there
was a corresponding laundry installation. From January 1, 1989 through December
31, 1995, the Company's services were cancelled by forty-one facilities with
respect to which the Company had previously invested in a laundry installation.
-1-
<PAGE>
During each year, except for certain agreements cancelled in 1995 and 1993, the
laundry installations were sold to the Company's clients for an amount in excess
of the net amount recorded on the Company's balance sheets. The laundry
installations relating to agreements cancelled in 1995 and 1993 resulted in the
Company receiving approximately $15,000 and $17,000, respectively, less than the
net amount at which these assets have been recorded on its balance sheet. Linen
supplies are, in most instances also owned by the Company, and the Company
maintains a sufficient inventory of these items in order to ensure their
availability. The Company provides linen services to approximately 46% of the
facilities to which it provides housekeeping and laundry services.
Facility maintenance, materials acquisition and consulting services.
Facility maintenance services consist of the repair and maintenance of laundry
equipment, plumbing and electrical systems, as well as carpentry and painting.
In many instances, materials, equipment and supplies utilized by the Company in
the performance of maintenance services, as well as housekeeping, laundry and
linen services, are provided by the Company through its Huntingdon Supply
division. The Company also provides consulting services to facilities to assist
them in updating their housekeeping, laundry and linen operations.
Laundry installation sales. The Company (as distributor of laundry
equipment) sells laundry installations to its clients which generally represent
the construction and installation of a turn-key operation. With regard to
laundry installation sales, the Company generally offers payment terms, ranging
from 36 to 60 months. In 1995, two facilities that purchased laundry
installations from the Company canceled the Company's services. The Company
received approximately $18,000 less than the net amount recorded on its balance
sheet as of the dates of such cancellations. In 1993, one facility that
purchased a laundry installation from the Company cancelled the Company's
services. The Company received approximately $9,000 less than the net amount
recorded on its balance sheet as of the date of cancellation. During 1992, five
facilities that had purchased laundry installations from the Company cancelled
the Company's services. In the aggregate, the Company received approximately
$10,000 less than the net amount recorded on its balance sheet as of the date of
the latest of such cancellations. Although the Company has incurred only minor
losses related to amounts not collected as result of these laundry installation
sales, there can be no assurance that any such losses will not occur in the
future. Although the Company has sold laundry installations since 1981, they
were not significant to the Company's operations prior to 1991 (see Note 1 of
Notes to Financial Statements). During the years 1993 through 1995, laundry
installation sales were not material as the Company prefers to own such laundry
installations in connection with performance of its service agreements.
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<PAGE>
Operational-Management Structure
By applying its professional management techniques, the Company is able
to contain certain housekeeping and laundry costs on a continuing basis. The
Company provides its services through a network of management personnel, as
illustrated below.
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Vice President
- Operations
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Divisional Vice President
(4 Divisions)
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Regional Vice President/Manager
(15 Regions)
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District Manager
(83 Districts)
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----------------------------------
Training Manager
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Facility Manager and
Assistant Facility Manager
-------------------------------------
Each facility is managed by an on-site Facility Manager, an Assistant
Facility Manager, and, if necessary, additional supervisory personnel.
Districts, typically consisting of from eight to twelve facilities, are
supported by a District Manager and a Training Manager. District Managers bear
overall responsibility for the facilities within their districts. They are
generally based within close proximity to each facility. These managers provide
active support to clients in addition to the support provided by the Company's
on-site management. Training Managers are responsible for the recruitment,
training and development of Facility Managers. At December 31, 1995, the Company
maintained fifteen regions within four divisions. A division consists of two to
six regions within a specific geographical area. A Divisional Vice President
manages each division. Additionally, each division has a Divisional Vice
President-Sales who supports the Divisional Vice President by managing the
marketing efforts of the divisions's Regional Sales Managers. Regions are
geographically structured to include three to eight districts and are each
headed by a Regional Vice President/Manager and a Regional Sales Director who
assumes primary responsibility for marketing the Company's services. Regional
managers report to Divisional Vice Presidents who in turn report to the Vice
President of Operations. The Company believes that its regional and district
organizational structure facilitates its expansion into new geographic areas.
-3-
<PAGE>
Market and Services
The market for the Company's services consists of a large number of
facilities involved in various aspects of the long-term care field, including
nursing homes, retirement complexes and rehabilitation centers. Such facilities
may be specialized or general, privately owned or public, profit or
not-for-profit and may serve patients on a long-term or short-term basis. The
market for the Company's services is expected to continue to grow as the elderly
increase as a percentage of the United States population and as government
reimbursement policies require increased cost control or containment by
long-term care facilities.
According to estimates of the Department of Health and Human Services,
the long-term care market in the United States consists of approximately 23,000
facilities, which range in size from small private facilities with 65 beds to
facilities with over 500 beds. The Company markets its services primarily to
facilities with 100 or more beds. The Company believes that less than five
percent of long-term facilities currently use outside providers of housekeeping
and laundry services such as the Company.
Marketing and Sales
The Company's services are marketed at four levels of the Company's
organization: at the corporate level by the Chief Executive Officer, President
and the Vice President of Operations; at the divisional level by Divisional Vice
Presidents and Divisional Sales Directors; at the regional level by the Regional
Vice Presidents/Managers; and at the district level by District Managers. The
Company provides incentive compensation to its operational personnel based on
achieving budgeted earnings and to its Divisional Sales Directors and Regional
Sales Directors based on new business revenues.
The Company's services are marketed primarily through referrals and
in-person solicitation of target facilities. The Company also utilizes direct
mail campaigns and participates in industry trade shows, healthcare trade
associations and healthcare support service seminars that are offered in
conjunction with state or local health authorities in most of the states in
which the Company conducts its business. The Company's programs have been
approved for continuing education credits by state nursing home licensing boards
in certain states, and are typically attended by facility owners, administrators
and supervisory personnel, thus presenting a marketing opportunity for the
Company. Indications of interest in the Company's services arising from initial
marketing efforts are followed up with a presentation regarding the Company's
services and survey of the service requirements of the facility. Thereafter, a
formal proposal, including operational recommendations and recommendations for
proposed savings, is submitted to the prospective client. Once the prospective
client accepts the proposal and signs the service agreement, the Company can set
up its operations on-site within days.
-4-
<PAGE>
Service Agreements
The Company offers two kinds of service agreements, a full service
agreement or a management agreement. In a full service agreement, the Company
assumes both management and payroll responsibility for the hourly housekeeping
and laundry employees.
The Company typically adopts and follows the client's employee wage
structure, including its policy of wage rate increases, and passes through to
the client any labor cost increases associated with wage rate adjustments. Some
full service agreements also include linen services. Under a management
agreement, the Company provides management and supervisory services while the
client facility retains payroll responsibility for its hourly employees.
Substantially all of the Company's agreements are full service agreements. These
agreements typically provide for a one year term, cancelable by either party
upon 30 days' notice after the initial 90-day period. As of December 31, 1995,
the Company had approximately 2,075 service agreements with in excess of 800
client facilities.
Although the service agreements are cancelable on short notice, the
Company has historically had a very favorable client retention rate and expects
to be able to continue to maintain a good relationship with its clients. The
risks associated with short-term service agreements have not affected either the
Company's linen services, which generally require a capital investment or
laundry installation sales, which require the Company to finance the sales
price. Such risks are often mitigated by certain provisions set forth in the
agreements which are entered into by the Company. Many of the linen service
agreements, where the Company has first purchased the laundry installation from
its clients, require that in the event the Company's services are terminated,
the client becomes obligated to purchase the laundry installation from the
Company at a price no less then the value recorded on the Company's financial
statements at the time of termination. The laundry installation sales agreements
obligate the purchaser to pay for such installation upon terms independent of
the services rendered by the Company.
The Company encounters difficulty in collecting amounts due from
certain of its clients, including those in bankruptcy, those who have terminated
service agreements and slow payers experiencing financial difficulties. In order
to provide for these collection problems and the general risk associated with
the granting of credit terms, the Company has increased its bad debt provisions
(Allowance for Doubtful Accounts) by $1,672,594, $1,423,338 and $567,754 in
1995, 1994 and 1993, respectively. In making its evaluation, in addition to
analyzing and anticipating, where possible, the specific cases described above,
management considers the general collection risk associated with trends in the
long-term care industry.
Competition
The Company competes primarily with the in-house support service
departments of its potential clients. Most healthcare facilities perform their
own support service functions without relying upon outside management firms such
as the Company. In addition, a number of local firms compete with the Company in
the regional markets in which the Company conducts business. Several national
service firms are larger and have greater financial and marketing resources than
the Company, although historically, such firms have concentrated their
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<PAGE>
marketing efforts on hospitals rather than the long-term care facilities
typically serviced by the Company. Although the competition to service long-term
care facilities is strong, the Company believes that it competes effectively for
new agreements, as well as renewals of existing agreements based upon the
quality and dependability of its services and the cost savings it can effect for
the client.
Employees
At December 31, 1995, the Company employed 1,614 management and
supervisory personnel. Of these employees, 168 held executive, management and
office support positions, and 1,446 of these salaried employees were on-site
management personnel. On such date, the Company employed approximately 10,911
hourly employees. Many of the Company's hourly employees are previous support
employees of the Company's clients. In addition, the Company manages hourly
employees who remain employed by certain of its clients.
Approximately 11% of the Company's hourly employees are unionized.
These employees are subject to collective bargaining agreements that are
negotiated by individual client facilities and are assented to by the Company so
as to bind the Company as an "employer" under the contract. The Company may be
adversely affected by relations between its client facilities and the employee
unions. The Company is a party to a negotiated collective bargaining agreement
with respect to approximately 20 employees at three facilities located in New
York. The Company believes its employee relations are satisfactory.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales
Not Applicable.
Item 2. Properties
The Company leases its corporate offices, located at 2643 Huntingdon
Pike, Huntingdon Valley, Pennsylvania 19006, which consists of 6,600 square
feet. The term of the lease expires on March 31, 2001. The Company also leases
office space at other locations in Pennsylvania, Massachusetts, Florida,
Illinois, California, Colorado, Georgia, Missouri and Texas. These locations
serve as divisional or regional offices. In addition, the Company leases
warehouse space in Pennsylvania, Illinois and Florida for the Huntingdon Supply
division. Each office consists of approximately 1,000 square feet, and each
warehouse consists of approximately 5,000 square feet. None of these leases is
for more than a five-year term.
The Company is provided with office and storage space at each of its
client facilities. Management does not foresee any difficulties with regard to
the continued utilization of such premises.
The Company presently owns laundry equipment, office furniture and
equipment, housekeeping equipment and automobiles and trucks. Management
believes that all of such equipment is sufficient for the conduct of the
Company's current operations.
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<PAGE>
Item 3. Legal Proceedings
The Securities and Exchange Commission (SEC) has been conducting a
non-public investigation since 1990 with respect to certain matters, including
the Company's financial statements, financial condition and results of
operations. The Company has cooperated fully with such inquiry on a
voluntary basis. On March 21, 1996, the Staff of the SEC informed the Company
that the SEC had accepted a settlement which had been offered by the Company and
recommended by the Staff, pertaining to certain allegations of violations of the
Federal securities laws by the Company and certain of its officers with respect
to periods ended on or before March 31, 1992. The settlement is subject to
mutual agreement on the final form of the Complaint and Consent to be filed in
the United States District Court. Under the settlement, upon the filing of the
complaint and the entry of a final judgment upon consent, and without admitting
or denying any of the allegations of the complaint, the Company, two officers
and a former officer, will be permanently enjoined from violating certain
provisions of the Federal securities laws, and the Company and these individuals
will be required to pay civil penalties aggregating approximately $825,000. Upon
entry of a final judgement, the Company will file a Report with the SEC
containing the final Judgement, the Consent and the SEC Complaint. The estimated
monetary impact of this settlement plus related legal costs have been reflected
in the accompanying financial statements (see Note 10 of Notes to Financial
Statements).
In addition, the United States Attorney for the Eastern District of
Pennsylvania is investigating matters relating to certain payments
(approximately $84,000 in 1988, $54,000 in 1989, $110,000 in 1990, $125,000 in
1991 and $34,000 in 1992) made by the Company between June 1988 and January 1992
to certain vendors that were not in accordance with Company policy. This matter
was previously investigated and reported upon by the Company in its Form 10-K
for the year ended December 31, 1991. Information regarding this matter was
voluntarily furnished to the U.S. Attorney's office in New Jersey in May and
November 1992 and such payments were recovered by the Company in November 1992.
The Company is cooperating with the U.S. Attorney's office in an attempt to
resolve any issues or claims arising out of these payments.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
-7-
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Security Holder
Matters
(a) Market Information
The Company's common stock, $.01 par value (the "Common Stock") is
traded on the NASDAQ National Market System. On December 31, 1995, there were
8,143,063 shares of Common Stock outstanding.
Price quotations during the two years ended December 31, 1995, ranged
as follows:
1995 High 1995 Low
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1st Qtr. 15 5/8 10 3/4
2nd Qtr. 12 1/4 10 1/4
3rd Qtr. 12 1/8 10 3/16
4th Qtr. 10 3/8 8 1/4
1994 High 1994 Low
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1st Qtr. 11 3/4 9 1/8
2nd Qtr. 13 3/8 9 7/16
3rd Qtr. 12 3/4 11 1/8
4th Qtr. 13 1/2 11 1/4
(b) Holders
As of March 22, 1996, there were approximately 460 holders of record of
the common stock, including stock held in nominee name by brokers or other
nominees. It is estimated that there are approximately 3,200 beneficial holders.
(c) Dividends
The Company has not paid any dividends on its Common Stock during the
last two years. Currently, it intends to continue this policy of retaining all
of its earnings, if any, to finance the development and expansion of its
business.
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<PAGE>
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.
<TABLE>
<CAPTION>
(In thousands except for per share data and employees)
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Years ended December 31: 1995 1994 1993 1992 1991
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<S> <C> <C> <C> <C> <C>
Revenues $148,747 $136,414 $114,275 $99,303 $82,943
Income (loss) before extraordinary item and
cumulative effect of change in accounting
for income taxes $ 3,941 $ 6,400 $ 5,531 $ 4,789 $(1,213)
Extraordinary item -- class action
litigation settlement, net of income tax
benefit $ (1,437)
Cumulative effect of change in accounting
for income taxes $ 104
Net income (loss) $ 3,941 $ 6,400 $ 4,198 $ 4,789 $(1,213)
Earnings (loss) per common share before
extraordinary item and cumulative effect
of change in accounting for income taxes $ .48 $ .79 $ .70 $ .61 $ (.16)
Extraordinary item, net of income tax
benefit $ (.18)
Cumulative effect of change in accounting
for income taxes $ .01
Earnings (loss) per common share $ .48 $ .79 $ .53 $ .61 $ (.16)
Cash dividend per common share $ .06(1)
Weighted average number of common shares
outstanding 8,221 8,141 7,898 7,840 7,726
As of December 31:
Working Capital $ 51,068 $ 46,146 $ 41,106 $36,529 $34,916
Total Assets $ 80,290 $ 75,815 $ 68,862 $61,089 $59,390
Long-Term Obligations $ -- $ 300 $ 600 $ 1,000 $ 1,910
Stockholders' Equity $ 68,470 $ 62,124 $ 55,045 $50,268 $45,246
Book Value Per Share $ 8.41 $ 7.83 $ 6.99 $ 6.45 $ 5.84(1)
Employees 10,911 10,808 8,880 7,804 6,718
</TABLE>
See Notes 2, 9 and 10 of Notes to Financial Statements regarding
uncertainties with respect to litigation and other contingencies.
(1) Adjusted to reflect the 3 for 2 Stock Split paid in the form of a 50%
Stock Dividend on November 15, 1991.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto.
RESULTS OF OPERATIONS
From 1991 through 1995, the Company's revenues grew at a compound annual
rate of 12%. This growth was achieved through obtaining new clients in both
existing and newly developed market areas, as well as providing additional
services to existing clients. Although there can be no assurance thereof, the
Company anticipates future growth, although its compound growth rates will
likely decrease as growth is measured against the Company's increasing
revenue base.
The following table sets forth for the years indicated the percentage
which certain items bear to revenues:
<TABLE>
<CAPTION>
Relation to Total Revenues
Years Ended December 31,
-------------------------------
1995 1994 1993
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<S> <C> <C> <C>
Revenues 100.0% 100.0% 100.0%
Operating costs and expenses:
Costs of services provided 85.6 84.4 84.7
Selling, general and
administrative 8.2 8.1 7.9
Recovery of contingent
losses on promissory notes sold (0.2) (0.2) (0.4)
Other income .6 0.3 .2
Provision for estimated cost related to SEC
inquiry and other matters (Note 10) (2.1) -- --
-------- -------- --------
Income before income taxes, extraordinary
item and cumulative effect of change in
accounting for income taxes 4.9 8.0 8.0
Income taxes 2.3 3.3 3.2
-------- -------- --------
Income before extraordinary item and
cumulative effect of change in accounting
for income taxes 2.6 4.7 4.8
Extraordinary item -- class action
litigation settlement, net of income tax
benefit (1.2)
Cumulative effect of change in accounting
for income taxes .1
-------- -------- --------
Net income 2.6% 4.7% 3.7%
======== ======== ========
</TABLE>
1995 COMPARED WITH 1994
Revenues increased 9% to $148,746,773 in 1995 from $136,414,172 in 1994.
The following factors contributed to the increase in revenues: service
agreements with new clients in existing geographic areas increased revenues
19.3%; geographic expansion increased revenues 2.7%; and cancellations and
other minor changes decreased revenues 13.0%.
Costs of services provided as a percentage of revenues increased to 85.6%
in 1995 from 84.4% in 1994. The primary factors affecting the
<PAGE>
variations and their impact on the 1.2% change in cost of services provided
as a percentage of revenue are as follows: increase in labor costs of 1.1%;
increase of .7% in amortization of service agreements and costs associated
with service agreements cancelled (See Note 1 -- Intangible Assets of Notes
to Financial Statements); offsetting these increases were decreases of .4%
and .3% in regional and district costs and depreciation expense,
respectively.
Selling, general and administrative expenses as a percentage of revenue
increased slightly to 8.2% in 1995 from 8.1% in 1994 primarily as a result of
additional costs associated with expanding the divisional and regional staffs
in order to better position the Company to achieve its performance objectives
in the future.
RECOVERY FROM COLLECTING $300,000 OF PROMISSORY NOTES SOLD THAT WAS RESERVED
FOR IN 1991
A client paid; $150,000 in the first quarter of 1995, $50,000 in the
second quarter of 1995, and $100,000 in the third quarter of 1995 (or an
aggregate of $300,000). These payments represent the pay-off of the remaining
balance on a note. As a result, the Company recorded the recovery as income
in its Statements of Income for the year ended December 31, 1994 (see Note 6
of Notes to Financial Statements).
1994 COMPARED WITH 1993
Revenues increased 19% to $136,414,172 in 1994 from $114,275,458 in 1993.
The following factors contributed to the increase in revenues: service
agreements with new clients in existing geographic areas increased revenues
21.1%; geographic expansion increased revenues 2.8%; and cancellations and
other minor changes decreased revenues 4.7%.
Costs of services provided as a percentage of revenues decreased to 84.4%
in 1994 from 84.7% in 1993. The primary factors affecting the variations and
their impact on the net .3% change in cost of services provided as a
percentage of revenue are as follows: decrease in workers' compensation,
general liability and other insurance of 1%; decrease in depreciation expense
of .3%; offsetting these decreases was an increase of .5% in allowance for
doubtful accounts.
Selling, general and administrative expenses as a percentage of revenue
increased slightly to 8.1% in 1994 from 7.9% in 1993 primarily as a result of
additional costs associated with expanding the divisional and regional staffs
in order to better position the Company to achieve its performance objectives
in the future.
RECOVERY FROM COLLECTING $300,000 OF PROMISSORY NOTES SOLD THAT WAS RESERVED
FOR IN 1991
A client paid; $50,000 in the first quarter of 1994, $75,000 in each of
the second and third quarters of 1994, and $100,000 in the fourth quarter of
1994 (or an aggregate of $300,000) as partial payment on a note. As a result,
the Company recorded the recovery as income in its Statements of Income for
the year ended December 31, 1994 (see Note 6 of Notes to Financial
Statements).
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1995, the Company had working capital of $51,067,973 which
represents a 11% increase over $46,146,376 at December 31, 1994. Working
capital continues to grow, reflected principally in increased cash and cash
equivalents and higher accounts receivable. The increase in cash and cash
equivalents is a result of the improvement in the collection of receivables,
as well as the timing of payments to vendors. Higher accounts receivable are
primarily attributable to the Company's 9% increase in revenues. The
Company's current ratio at December 31, 1995 was 6.3 to 1 compared to 6.5 to
1 and 6.2 to 1 in 1994 and 1993, respectively.
The net cash provided by the Company's operating activities was $5,940,040
for the year ended December 31, 1995. The components of working capital that
required the largest amount of cash were: increases in accounts receivable
and long term trade notes receivable of $1,362,583 and $1,712,922,
respectively and a $1,466,184 increase in prepaid income taxes. The increase
in accounts receivable and long term trade notes receivable resulted
primarily from the continued growth in the Company's revenues, which
increased 9%. The increased use of cash associated with prepaid income taxes
resulted primarily from the timing of estimated income tax liability
payments. Although accounts receivable have increased in 1995, the number of
days revenue (based on fourth quarter revenues) in the accounts receivable
balance at December 31, 1995 was reduced to 79 days from 81 days at December
31, 1994.
At December 31, 1994, the Company had working capital of $46,146,376 which
represents a 16% increase over December 31, 1993. Working capital continues
to grow, reflected principally in increased cash and cash equivalents and
higher accounts receivable. The increase in cash and cash equivalants is a
result of the improvement in the collection of receivables, as well as the
timing of payments to vendors. Higher accounts receivable is primarily
attributable to the Company's 19% increase in revenues. The Company's current
ratio at December 31, 1994 was 6.5 to 1 compared to 6.2 to 1 and 6.6 to 1 in
1993 and 1992, respectively.
The net cash provided by the Company's operating activities was $3,934,184
for the year ended December 31, 1994. The component of working capital that
required the largest amount of cash was accounts receivable, which increased
by $3,394,706. The increase resulted primarily from the continued growth in
the Company's revenues, which increased 19%. Although accounts receivable
have increased in 1994, the number of days revenue (based on fourth quarter
revenues) in the accounts receivable balance at December 31, 1994 was reduced
to 81 days from 90 days at December 31, 1993.
The net cash provided by the Company's operating activities was $2,992,440
for the year ended December 31, 1993. The component of working capital that
required the largest amount of cash was accounts receivable, which increased
by $4,712,412. The increase resulted primarily from the continued growth in
the Company's revenues, which increased 15%. Although accounts receivable
have increased in 1993, the number of days revenue (based on fourth quarter
revenues) in the accounts receivable balance at December 31, 1993 was reduced
to 90 days from 91 days at December 31, 1992.
<PAGE>
The Company expends considerable effort to collect the amounts due for its
services on the terms agreed upon with its clients. Many of the Company's
clients participate in programs funded by federal and state governmental
agencies which historically have encountered delays in making payments to its
program participants. Whenever possible, when a client falls behind in making
agreed-upon payments, the Company converts the unpaid accounts receivable to
interest bearing promissory notes receivable. The promissory notes receivable
provide a means by which to further evidence the amounts owed, provide a
definitive repayment plan and therefore may enhance the ultimate
collectibility of the amounts due. In some instances the Company obtains a
security interest in certain of the debtors' assets.
The Company encounters difficulty in collecting amounts due from certain of
its clients, including those in bankruptcy, those which have terminated service
agreements and slow payers experiencing financial difficulties. In order to
provide for these collection problems and the general risk associated with the
granting of credit terms, the Company has increased its bad debt provisions
(allowance for doubtful accounts) by $1,672,594, $1,423,338 and $567,754 in
1995, 1994 and 1993, respectively. In making its evaluation, in addition to the
analyzing, and anticipating, where possible, the specific cases described above,
management considers the general collection risk associated with trends in the
long-term care industry.
The Company has a $13,000,000 bank line of credit on which it may draw to
meet short-term liquidity requirements in excess of internally generated cash
flow, that expires on June 30, 1996. Amounts drawn under the line are payable
on demand. At December 31, 1995, there were no borrowings under the line.
However, at such date, the amount available under the line had been reduced
by approximately $8,200,000 as a result of contingent liabilities of the
Company to the lender relating to letters of credit issued for the Company.
At December 31, 1995, the Company had $16,335,886 of cash and cash
equivalents, which it views as its principal measure of liquidity.
In the fourth quarter of 1993, the Company and its insurer reached an
agreement in principle to settle the consolidated class action complaints
filed against it in Federal District Court. The Order approving the
settlement was approved by the court on September 8, 1994 and became
effective on October 10, 1994. The settlement provided for the payment of
$2,625,000 by the Company's insurer and common stock having a value of
$2,125,000 to be issued by the Company (see Note 8 of Notes to Financial
Statements). On August 1, 1995, the Company issued 180,851 shares of its
common stock representing its payment obligation under the 1993 settlement of
the consolidated class action complaints. Accordingly, the December 31, 1995
Balance Sheet reflects the payment of the previously recorded Litigation
Liability of $2,125,000 by increasing stockholders' equity in the same
amount.
The Company has no specific material commitments for capital expenditures
and believes that its cash from operations, existing balances and available
<PAGE>
credit line will be adequate for the foreseeable future to satisfy the needs of
its operations and to fund its continued growth. However, if the need arose,
the Company would seek to obtain capital from such sources as long-term debt or
equity financing.
EFFECTS OF INFLATION
All of the Company's service agreements allow it to pass through to its
clients increases in the cost of labor resulting from new wage agreements.
The Company believes that it will be able to recover increases in costs
attributable to inflation by continuing to pass through cost increases to its
clients.
OTHER DEVELOPEMENTS/ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 1993, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109 (SFAS No. 109) "Accounting for Income Taxes",
which requires a change from the deferred method to the asset and liability
method of accounting for income taxes for temporary differences between the
financial reporting basis and tax basis of the Company's assets and
liabilities. The statement also requires that deferred tax liabilities or
assets be adjusted for the future effects of any changes in tax laws or
rates. The effect of adopting SFAS No. 109 as of January 1, 1993 required the
recognition of a deferred tax asset of $103,853 (see Note 4 to Notes to
Financial Statements).
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," is required to be implemented in 1996.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by the entity be reviewed for impairment whenever
events or changes in circumstances indicates that the carrying amount of an
asset may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest) is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of that loss would be
based on the fair value of the asset. The Company believes that
implementation of this statement will not have any material effect on its
financial position.
SFAS No. 123, "Accounting for Stock-Based Compensation," is also required
to be implemented in 1996 and introduces a choice of the method of accounting
used for stock-based compensation. Entities may use the "intrinsic value"
method currently based on APB No. 25 or the new "fair value" method contained
in SFAS No. 123. The Company intends to implement SFAS No. 123 in 1996 by
continuing to account for stock-based compensation under APB No. 25. As
required by SFAS No. 123, the pro forma effects on net income and earnings
per share will be determined as if the fair value based method had been
applied and disclosed in the notes to the financial statements.
<PAGE>
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31,
------------------------------
Current Assets: 1995 1994
------------- -------------
<S> <C> <C>
Cash and cash equivalents $16,335,886 $11,230,118
Accounts and notes receivable, less allowance for doubtful
accounts of $4,468,000 in 1995 and $4,500,000 in 1994 32,463,288 32,773,299
Prepaid income taxes 1,466,184
Inventories and supplies 7,200,033 6,298,370
Deferred income taxes (Note 4) 1,104,350 1,435,350
Prepaid expenses and other 2,090,409 2,791,376
------------- -------------
Total current assets 60,660,150 54,528,513
Property and Equipment:
Laundry and linen equipment (Note 7) 12,135,849 10,835,247
Housekeeping equipment and office furniture 6,216,950 5,174,624
Autos and trucks 178,006 140,703
------------- -------------
18,530,805 16,150,574
Less accumulated depreciation 12,347,675 10,207,941
------------- -------------
6,183,130 5,942,633
INTANGIBLE ASSETS less accumulated amortization of $398,565 in
1994 (Note 1) 1,106,666
COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED less
accumulated amortization of $1,117,413 in 1995 and $1,008,455 in
1994 (Note 1) 2,258,064 2,367,021
CERTIFICATES OF DEPOSIT PLEDGED FOR LOAN GUARANTEES
(Note 9) 1,500,000
DEFERRED INCOME TAXES (Note 4) 1,449,236 2,207,236
OTHER NONCURRENT ASSETS (Note 1) 9,739,191 8,163,134
------------- -------------
$80,289,771 $75,815,203
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 3,480,499 $ 3,630,573
Accrued payroll, accrued and withheld payroll taxes 2,312,907 1,946,089
Other accrued expenses (Note 10) 2,843,890 720,749
Income taxes payable 727,741
Accrued insurance claims (Notes 1 and 11) 954,881 1,356,984
------------- -------------
Total current liabilities 9,592,177 8,382,136
ACCRUED INSURANCE CLAIMS (Notes 1 and 11) 2,228,054 2,883,591
RESERVE FOR CONTINGENT LOSSES ON PROMISSORY NOTES (Note 6) 300,000
LITIGATION SETTLEMENT LIABILITY (Note 8) 2,125,000
COMMITMENTS AND CONTINGENCIES (Notes 2, 9 and 10)
STOCKHOLDERS' EQUITY: (Note 3)
Common stock, $.01 par value: 15,000,000 shares authorized,
8,143,063 shares issued in 1995 and 7,935,874 in 1994 81,431 79,359
Additional paid in capital 35,023,468 32,621,034
Retained earnings 33,364,641 29,424,083
------------- -------------
Total stockholders' equity 68,469,540 62,124,476
------------- -------------
$80,289,771 $75,815,203
============= =============
</TABLE>
See accompanying notes.
<PAGE>
INCOME STATEMENTS
HEALTHCARE SERVICES GROUP, INC.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
1995 1994 1993
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $148,746,773 $136,414,172 $114,275,458
Operating costs and expenses:
Cost of services provided 127,340,970 115,171,944 96,771,866
Selling, general and administrative 12,184,128 11,094,621 9,018,780
Recovery of contingent losses on promissory
notes sold (Note 6) (300,000) (300,000) (400,000)
Other income (expense):
Provision for estimated cost related to SEC
inquiry and other matters (Note ) (3,100,000)
Interest income 867,883 421,827 265,483
-------------- -------------- ---------------
Income before income taxes, extraordinary item
and cumulative effect of change in accounting
for income taxes 7,289,558 10,869,434 9,150,295
Income taxes (Note 4) 3,349,000 4,469,000 3,619,000
-------------- -------------- ---------------
Income before extraordinary item and cumulative
effect of change in accounting for income
taxes 3,940,558 6,400,434 5,531,295
Extraordinary item -- class action litigation
settlement, net of income tax benefit of
$844,000 (Note 8) (1,437,047)
Cumulative effect of change in accounting for
income taxes (Note 4) 103,853
-------------- -------------- ---------------
Net income $ 3,940,558 $ 6,400,434 $ 4,198,101
============== ============== ===============
Earnings per common share before extraordinary
item and cumulative effect of change in
accounting for income taxes $ .48 $ .79 $ .70
Extraordinary item, net of income tax benefit (0.18)
Cumulative effect of change in accounting for
income taxes .01
-------------- -------------- ---------------
Earnings per common share $ .48 $ .79 $ .53
============== ============== ===============
Weighted average number of common shares
outstanding 8,221,479 8,141,520 7,898,268
============== ============== ===============
</TABLE>
See accompanying notes.
<PAGE>
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1995 1994 1993
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 3,940,558 $ 6,400,434 $ 4,198,101
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,573,216 2,598,783 2,614,112
Bad debt provision 1,672,594 1,423,338 567,754
Recovery of contingent losses on promissory
notes sold (Note 6) (300,000) (300,000) (400,000)
Deferred income taxes (benefits) (Note 4) 1,089,000 899,000 (212,184)
Cumulative effect of change in accounting for
income taxes (Note 4) (103,853)
Tax benefit of stock option transactions 63,000 63,153 24,004
Litigation settlement liability (Note 8) (100,000) 2,225,000
Changes in operating assets and liabilities:
Accounts and notes receivable (1,362,583) (3,394,706) (4,712,412)
Prepaid income taxes (1,466,184) 1,242,317
Inventories and supplies (901,663) (981,379) (1,022,827)
Changes to long term trade notes receivable (1,712,922) (2,618,215) (1,846,259)
Accounts payable and other accrued expenses 1,973,067 368,502 118,091
Accrued payroll, accrued and withheld payroll
taxes 366,818 426,890 407,049
Accrued insurance claims (Notes 1 and 11) (1,057,639) (637,951) 34,027
Income taxes payable (727,741) 116,327 611,604
Prepaid expenses and other assets 1,790,520 (329,982) (752,084)
------------- ------------- -------------
Net cash provided by operating activities 5,940,040 3,934,194 2,992,440
------------- ------------- -------------
Cash flows from investing activities:
Disposals of fixed assets 116,819 515,451 181,383
Additions to property and equipment (2,667,597) (1,694,039) (2,231,208)
Cash provided by release of certificates of
deposits pledged for loan guarantees (Note 6) 1,500,000
------------- ------------- -------------
Net cash used in investing activities (1,050,778) (1,178,588) (2,049,825)
------------- ------------- -------------
Cash flows from financing activities:
Purchase of treasury stock (264,303)
Proceeds from the exercise of stock options 480,809 615,828 555,325
------------- ------------- -------------
Net cash provided by financing activities 216,506 615,828 555,325
------------- ------------- -------------
Net increase in cash and cash equivalents 5,105,768 3,371,424 1,497,940
Cash and cash equivalents at beginning of the year 11,230,118 7,858,684 6,360,744
------------- ------------- -------------
Cash and cash equivalents at end of the year $16,335,886 $11,230,118 $ 7,858,684
============= ============= =============
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITY:
On August 1, 1995, the Company issued 180,851 shares of its common stock
representing its payment obligation under the 1993 settlement of the lawsuits
relating to the consolidated class action complaints filed against it in 1991
and 1992. Accordingly, the December 31, 1995 Balance Sheet reflects the
payment of the previously recorded Litigation Liability of $2,125,000 by
increasing stockholders' equity in the same amount.
See accompanying notes.
<PAGE>
Statements of Stockholders' Equity
Years Ended December 31, 1995, 1994, and 1993
<TABLE>
<CAPTION>
Additional Total
Common Stock Paid-In Retained Treasury Stockholders'
Shares Amount Capital Earnings Stock Equity
----------- --------- ------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 7,789,911 $77,899 $31,364,185 $18,825,548 $ -- $50,267,632
Net income for the year 4,198,101 4,198,101
Exercise of stock options 80,225 802 554,522 555,324
Tax benefit arising from stock
transactions 24,004 24,004
----------- --------- ------------- ------------- ----------- ---------------
Balance, December 31, 1993 7,870,136 78,701 31,942,711 23,023,649 -- 55,045,061
Net income for the year 6,400,434 6,400,434
Exercise of stock options 65,738 658 615,170 615,828
Tax benefit arising from stock
transactions 63,153 63,153
----------- --------- ------------- ------------- ----------- ---------------
Balance, December 31, 1994 7,935,874 79,359 32,621,034 29,424,083 -- 62,124,476
Net income for the year 3,940,558 3,940,558
Exercise of stock options 54,538 545 480,264 480,809
Tax benefit arising from stock
transactions 63,000 63,000
Shares issued in connection
with class action
settlement (Note 8) 180,851 1,809 2,123,191 2,125,000
Purchase of common stock for
treasury (28,200 shares) (264,303) (264,303)
Treasury stock retired (28,200) (282) (264,021) 264,303
----------- --------- ------------- ------------- ----------- ---------------
Balance, December 31, 1995 8,143,063 $81,431 $35,023,468 $33,364,641 $ -- $68,469,540
=========== ========= ============= ============= =========== ===============
</TABLE>
See accompanying notes.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
Note 1 -- Summary of SignificanT Accounting Policies
General
The Company provides housekeeping, laundry and linen services to long-term
care facilities, including nursing homes and retirement complexes.
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.
Inventories and supplies
Inventories and supplies include housekeeping and laundry supplies which are
valued at the lower of cost or market. Cost is determined on a first-in,
first-out (FIFO) basis. Linen supplies are included in inventory and are
amortized over a 24 month period.
Property and equipment
Property and equipment are stated at cost. Additions, renewals and
improvements are capitalized, while maintenance and repair costs are
expensed. 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 -- 3 to 7 years; housekeeping equipment and office
furniture -- 3 to 7 years; autos and trucks -- 3 years.
Revenue recognition
Revenues from service agreements are recognized as services are performed.
The Company (as a distributor of laundry equipment since 1981) occasionally
makes sales of laundry installations to certain of its clients. The sales in
<PAGE>
most cases represent the construction and installation of a turn-key operation
and are for payment terms ranging from 36 to 60 months. The Company's accounting
policy for these sales is to recognize the gross profit over the life of the
original payment terms associated with the financing of the transactions by
the Company. During 1995, 1994 and 1993, laundry installation sales were not
material.
Income taxes
Deferred income taxes result from temporary differences between tax and
financial statement recognition of revenue and expense. These temporary
differences arise primarily from differing methods used for financial and tax
purposes to calculate insurance expense, certain receivable reserves, other
provisions which are not currently deductible for tax purposes, and revenue
recognized on laundry installation sales.
During the first quarter of 1993 the Company adopted the provisions of Statement
of Financial Accounting Standards No. 109 (SFAS No. 109) "Accounting for Income
Taxes" (see Note 4).
Income taxes paid were approximately $3,391,000, $3,356,000 and $2,310,000
during 1995, 1994 and 1993, respectively.
Intangible assets
Intangible assets at December 31, 1994 arose from the 1988 acquisition of
American Services Company (subsequently renamed HEalthcare Services Company
and merged into the Company). They consisted principally of commenced service
agreements of $1,454,996 (prior to accumulated amortization) at December 31,
1994. The amounts reflect an adjustment to the original purchase price, as
well as certain service agreement cancellations. The commenced service
<PAGE>
agreements were being amortized on a straight-line basis over twenty-six years
up to December 1994. In December 1994, as a result of a change in control of the
nursing homes, the long term service agreements with the Company were cancelled.
However, many of the nursing homes continued to utilize the services of the
Company under standard 30 day cancellable service agreements. As a result, the
Company reevaluated the remaining life of the related intangible assets and
commenced amortization of the remaining balance over a three year period
beginning in January 1995. During 1995, the remaining service agreements were
cancelled and the unamortized balance was charged to operations. There was no
significant effect on operations in 1994 as a result of this change in estimated
remaining lives.
Amortization charged to earnings was $954,000 for the year ended December 31,
1995 and $55,960 per year for the years ended December 31, 1994 and 1993.
Costs in excess of fair value of net assets acquired
Costs in excess of the fair value of net assets of businesses acquired are
amortized on a straight-line basis over periods not exceeding forty years. All
of the carrying value at December 31, 1995 resulted from a 1985 acquisition
which is being amortized over a thirty-one year period. Amortization charged to
earnings was $108,958 in 1995 and $111,625 per year in 1994 and 1993.
On an ongoing basis, management reviews the valuation and amortization of costs
in excess of fair value of net assets acquired. As part of this review, the
Company estimates the value and future benefits of the net income generated by
the related service agreements to determine that no impairment has occurred.
<PAGE>
Other noncurrent assets
Other noncurrent assets consist of:
1995 1994
------------ ------------
Long-term note
receivables $9,471,036 $7,758,114
Other 268,155 405,020
------------ ------------
$9,739,191 $8,163,134
============ ============
Long-term notes receivable primarily represent trade receivables that were
converted to notes to enhance collection efforts. Interest income is only
recognized as cash payments are received. Amounts shown are net of allowance of
$549,400 and $965,900 in 1995 and 1994, respectively.
Reclassification
Certain reclassifications to 1994 reported amounts have been made in the
financial statements to conform to 1995 presentation.
Concentration of credit risk
Statement of Financial Accounting Standards No. 105 ("SFAS no. 105") requires
the disclosure of significant concentrations of credit risk, regardless of the
degree of such risk. Financial instruments, as defined by SFAS No. 105, which
potentially subject the Company to concentrations of credit risk, consist
principally of cash and cash equivalents and trade accounts receivable. At
December 31, 1995 and 1994, substantially, all of the company's cash and cash
equivalents were invested with one financial institution.
The Company's clients are concentrated in one industry, providers of long-term
care. The clients are generally individual long-term care facilities with a wide
geographical dispersion. However, recent industry trends indicate consolidation
of nursing home ownership into chains, which can lead to a customer
concentration. At DECEMBER 31, 1995, no single client or nursing home chain
accounted for more than 10% of total revenue.
<PAGE>
Fair value of Financial
Instruments
The carrying value of financial instruments (principally consisting of cash and
cash equivalents, accounts and notes receivable and accounts payable)
approximate fair value.
Use of Estimates in Financial Statements
In preparing financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements, as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Accounting Pronouncements Not Yet Adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," Is required to be implemented in 1996.
SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles held and used by the entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. If the sum of the expected future cash flows
(undiscounted and without interest) is less than the carrying amount of the
asset, an impairment loss is recognized. Measurement of that loss would be based
on the fair value of the asset. The Company believes that implementation of this
statement will not have any material effect on its financial position.
SFAS NO. 123, "Accounting for Stock-Based Compensation," is also required to
be implemented in 1996 and introduces a choice of the method of accounting used
<PAGE>
for stock-based compensation. Entities may use the "intrinsic value" method
currently based on APB No. 25 or the new "fair value" method contained in SFAS
No. 123. The Company intends to implement SFAS No. 123 in 1996 by continuing to
account for stock-based compensation under APB No. 25. As required by SFAS No.
123, the pro forma effects on net income and earnings per share will be
determined as if the fair value based method had been applied and disclosed in
the notes to the financial statements.
Note 2 -- Lease Commitments
The Company leases office facilities and autos under operating leases expiring
on various dates through 2002 (see Note 5).
The following is a schedule, by calendar years, of future minimum lease payments
under operating leases having remaining terms in excess of one year as of
December 31, 1995:
Operating
Year Leases
- ---- ----------
1996 $ 394,564
1997 225,579
1998 148,470
1999 133,231
2000 108,324
Thereafter 32,746
-----------
Total minimum lease payments $1,042,914
===========
Total expense for all operating leases was $644,302, $792,570 and $725,222 for
the years ended December 31, 1995, 1994 and 1993, respectively.
Note 3 -- Stockholders' Equity
On May 23, 1995, the Stockholders approved an increase in authorized shares
of common stock from 10,000,000 to 15,000,000 authorized shares, $.01 par
value.
As of December 31, 1995, 1,062,388 shares of common stock were reserved under
various Incentive Stock Option Plans, including one approved by stockholders on
May 23, 1995 (the "1995 Plan"). Of such amount, 550,515 shares which were
<PAGE>
available for future grant. On December 1, 1995, 90,039 incentive stock options
were granted under the 1995 Plan. These options are exercisable commencing
June 1, 1996. The Stock Option Committee is responsible for determining the
individuals who will be granted options, the number of options each individual
will receive, the option price per share, and the exercise period of each
option. The incentive stock option price will not be less than the fair market
value of the common stock on the date the option is Granted. No option will have
a term in excess of ten years. As to any stockholder who owns 10% or more of the
common stock, the option price per share will be no less than 110% of the fair
market value of the common stock on the date the options are granted and such
options shall not have a term in excess of ten years.
<PAGE>
A summary of incentive stock option activity is as follows:
<TABLE>
<CAPTION>
Incentive Stock Options
- ----------------------------------------------------------------------------------------------------
1995 1994 1993
----------------------- ----------------------- -----------------------
Number Number Number
Average of Average of Average of
Price Shares Price Shares Price Shares
--------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $10.86 473,385 $10.38 419,789 $10.25 397,700
Granted 8.61 90,039 11.45 116,183 8.51 111,075
Cancelled 12.20 (6,016) 8.58 (26,850) 9.16 (8,762)
Exercised 8.81 (45,536) 8.89 (35,737) 6.92 (80,224)
--------- ---------- --------- ---------- --------- ----------
End of period $10.63 511,872 $10.86 473,385 $10.38 419,789
========= ========== ========= ========== ========= ==========
Exercisable at end of
period 421,833 357,202 308,714
========== ========== ==========
</TABLE>
The Company has granted non-qualified stock options to directors and outside
consultants under the Company's Non-qualified Stock Option Plan, which was
adopted on March 8, 1995 and approved by stockholders on May 23, 1995. The
non-qualified options were granted at an option price which was not less than
the fair market value of the common stock on the date the option was granted.
The options are exercisable over a five year period, commencing six months from
the option date.
On November 5, 1993, December 6, 1994 and December 1, 1995
certain directors were granted nonqualified options to purchase 42,000, 58,217
and 53,236 shares respectively. The 1993 options were granted at an exercise
price of $8.25 per share, the 1994 options were granted at an average exercise
price of $11.61 and the 1995 options were granted at an average exercise price
of $8.95. The 1995 options are exercisable commencing June 1, 1996.
<PAGE>
A summary of non-qualified stock option activity is as follows:
<TABLE>
<CAPTION>
Non-qualified Stock Options
- --------------------------------------------------------------------------------------------------
1995 1994 1993
---------------------- ----------------------- ----------------------
Number Number Number
Average of Average of Average of
Price Shares Price Shares Price Shares
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Beginning of period $9.87 297,717 $ 9.41 269,500 $9.72 212,500
Granted 8.95 53,236 11.61 58,217 8.25 57,000
Cancelled 8.83 (4,500)
Exercised 8.83 (9,000) 9.13 (30,000)
--------- --------- --------- ---------- --------- ---------
End of period $9.77 337,453 $ 9.87 297,717 $9.41 269,500
========= ========= ========= ========== ========= =========
Exercisable at end of
period 284,217 239,500 212,500
========= ========== =========
</TABLE>
NOTE 4 -- INCOME TAXES
The provision for income taxes consists of:
Year Ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------ ------------
Current:
Federal $1,695,400 $2,692,000 $2,193,400
State 564,600 878,000 793,600
------------ ------------ ------------
2,260,000 3,570,000 2,987,000
------------ ------------ ------------
Deferred:
Federal 805,000 677,600 463,500
State 284,000 221,400 168,500
------------ ------------ ------------
1,089,000 899,000 632,000
------------ ------------ ------------
Income tax provision
before tax benefit
of extraordinary
item 3,349,000 4,469,000 3,619,000
Tax (benefit) of
extraordianry item
Deferred (844,000)
------------ ------------ ------------
Tax
Provision $3,349,000 $4,469,000 $2,775,000
============ ============ ============
<PAGE>
Under FAS 109, deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Significant
components of the Company's federal and state deferred tax assets and
liabilities are as follows:
Year Ended December 31,
-----------------------------
1995 1994
------------- ------------
Net current deferred tax
assets:
Allowance for doubtful
accounts $ 1,814,008 $1,827,000
Accrued insurance
claims-current 387,682 550,936
Expensing of housekeeping
supplies (1,097,340) (942,586)
------------- ------------
$ 1,104,350 $1,435,350
============= ============
Net noncurrent deferred tax
assets:
Deferred profit on laundry
installation sales $ 235,140 $ 341,444
Non-deductible reserves 1,046,393 1,611,933
Depreciation of property
and equipment (786,056) (916,879)
Accrued insurance
claims-noncurrent 904,590 1,170,738
Other 49,169
------------- ------------
$ 1,449,236 $2,207,236
============= ============
<PAGE>
Deferred tax expense (benefit) results from temporary differences in the
recognition of revenue and expense for tax and financial statement purposes. The
sources of these differences and the tax effect of each were as follows:
Year Ended December 31,
------------------------------------------
1995 1994 1993
------------ ---------- -------------
Accrued insurance claims
liability not currently
deductible $ 429,400 $259,000 $ 560,800
Deferred profit recognition
on laundry installation
sales 106,300 144,200 219,100
Reserves recorded on the
books not currently
deductible for tax
purposes 539,400 325,600 (1,183,000)
Use of direct write-off
method for bad debts for
tax purposes 13,000 (14,200) (68,000)
Housekeeping supplies
expensed for tax purposes
prior to financial
purposes 154,800 146,100 207,200
Depreciation computed under
the accelerated cost
recovery system for tax
purposes and the
straight-line method for
financial accounting (130,800) (26,100) 70,000
Other (23,100) 64,400 (18,100)
------------ ---------- -------------
$1,089,000 $899,000 $ (212,000)
============ ========== =============
<PAGE>
A reconciliation of the provision for income taxes and the amount computed by
applying the statutory federal income tax rate (34%) to income before income
taxes is as follows:
Year Ended December 31,
-------------------------------------------
1995 1994 1993
------------ ------------ ------------
Computed "expected" tax
expense $2,478,500 $3,695,600 $2,335,500
Increases (decreases) in
taxes resulting from:
State income taxes, net of
federal tax benefit 560,100 734,200 486,500
Tax exempt interest (111,000) (54,000) (10,600)
Reserves recorded on the
books not deductible for
tax purposes 408,000 -- --
Amortization of costs in
excess of fair value of
net assets acquired 37,000 38,000 38,000
Other, net (23,600) 55,200 (74,400)
------------ ------------ ------------
$3,349,000 $4,469,000 $2,775,000
============ ============ ============
SFAS No. 109
Effective January 1, 1993, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 109 (SFAS NO. 109) "Accounting for Income
Taxes", which requires recognition of deferred tax liabilities and assets for
the expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the diferences are expected to reverse.
The effect of adopting SFAS No. 109 as of January 1, 1993 required the recording
of a deferred tax asset of $103,853. Such amount has been reflected in the
statement of income for the year ended December 31, 1993 as the cumulative
effect of an accounting change. SFAS No. 109 did not have a material impact on
the results of 1993 operations.
<PAGE>
Note 5 -- Related Party Transactions
The Company leases its corporate offices from a partnership in which the chief
executive officer of the Company is a general partner. The rental payments made
during the year ended December 31, 1995 was $88,617 and $74,900 per year for the
years ended December 31, 1994 and 1993. The Company made no leasehold
improvements in either 1994 or 1993, although in 1995 the Company made leasehold
improvements of approximately $23,150. A director of the Company has an
ownership interest in several client facilities which have entered into service
agreements with the Company. In addition, an officer of the Company has minority
ownership interests in a client facility of the Company. During the years ended
December 31, 1995, 1994 and 1993 all of these agreements collectively resulted
in revenues of approximately $3,010,000, $3,203,000, and $2,991,000
respectively.
Note 6 -- Sale of Promissory Notes Receivable and Provision for Contingent
Losses on Promissory Notes Sold
In 1991 and 1990, the Company sold to its bank, with recourse, promissorY notes
receivable at face value of approximately $3,800,000 and $2,500,000,
respectively. As of December 31, 1995 the 1991 and 1990 promissory notes sold
have been paid in full. As of December 31, 1994 approximately $300,000 and
$800,000, respectively, of the aggregate amount of such promissory notes sold in
each year remained out standing. On July 15, 1992, a client paid in full
<PAGE>
to the Company's bank one of the promissory notes in the amount of $910,000. In
addition, the client paid $400,000 in 1993 and $300,000 in both 1994 and 1995 as
partial payment on another note (see discussion below regarding these promissory
notes). Therefore, the Company reversed the provision recorded as of December
31, 1991 and recognized the $910,000, $400,000, $300,000 and $300,000 payments
as income in 1992, 1993, 1994 and 1995, respectively. All of the promissory
notes sold during 1990 and all but one of the promissory notes sold during 1991
represent accounts receivable due to the Company for services rendered. These
accounts receivable had been converted to promissory notes prior to their sale
to the bank. The Company converted the accounts receivable to interest bearing
promissory notes receivable in order to further evidence the amounts owed and to
enhance its collection efforts. All of the promissory notes (except the one
mentioned in the following paragraph) provided for monthly payments of principal
and interest and some were secured by certain assets of the issuers. Pursuant to
agreements with its bank, the Company would have been required to post
substitute collateral if its line of credit from its bank expired or was
terminated prior to the promissory notes being paid in full.
In 1991, the Company made arrangements with its bank to provide financing of
$1,000,000 to one of its clients for which the Company agreed to guarantee
payment. In order for the Company to negotiate maximum security for its
guarantee, the Company made the loan directly to the client and simultaneously
sold the promissory note receivable to the bank. In addition, among the notes
sold during 1991, is a promissory note in the amount of $910,000 which was
<PAGE>
issued in 1990 by an entity related to this client and subsequently paid in full
to the bank on July 15, 1992. On April 22, 1992 a director of the Company, who
is not an officer, agreed to purchase these promissory notes (for the full
principal amount thereof plus accrued interest) without recourse to the Company,
upon a request by the bank that the Company post substitute collateral. Any such
purchase would include the assignment of the collateral pledged as security. The
Company entered into this agreement (which was approved by the Board of
Directors) with the director in order to protect its interests with respect to
these promissory notes. The director is engaged in the operation of nursing
homes. Although the Company believed that it would not have incurred any
financial loss as a result of these promissory notes, it had, as of December 31,
1994 established a reserve for contingent losses in the amount of $300,000. The
borrower of the $1,000,000 financing used the proceeds to fully fund the
purchase price for its acquisition of the client. The equity method of
accounting had been used to value the collateral held as security for these
promissory notes, which, as a consequence of losses incurred by the client after
the closing date of the transaction, had resulted in the Company providing a
reserve for the total unpaid amount of the promissory notes as of December 31,
1994. During 1995, the balance of the promissory note was paid in full.
Note 7 -- Laundry Installation Purchases
During 1993, 1994 and 1995 the Company purchased certain existing laundry
installations from nursing homes with which it concurrently entered into
service agreements to provide laundry and linen services. The Company entered
<PAGE>
into the following laundry installation purchase transactions; in 1993 with ten
nursing homes for approximately $545,000, in 1994 with six nursing homes for
approximately $306,000 and in 1995 with seven nursing homes for approximately
$100,125. the agreements governing these purchase transactions provide that if
the service agreements are terminated at any time, the nursing home is obligated
to buy the laundry installations at a purchase price based on the Company's
original cost together with any additional equipment, improvements or expansion
required in order to improve or increase the productivity of operation (after
depreciation on a straight line basis over the original term of the service
agreement which is generally three to seven years). THe Company has recorded
these transactions as purchases of property and equipment and they are reported
as such in the accompanying balance sheets net of accumulated depreciation. The
equipment is generally being depreciated over a three to five year period.
<PAGE>
Note 8 -- Extraordinary Item -- Settlement of Class Action Litigation
In the fourth quarter of 1993 the Company and its insurer consummated an
agreement to settle the consolidated class action complaints filed against it in
Federal District Court in 1991 and 1992. The settlement was approved by court
order dated September 8, 1994 and became effective on October 10, 1994. The
settlement provided for the payment of $2,625,000 by the Company's insurer and
the issuance of common shares by the Company having a value of $2,125,000. The
settlement and related estimated legal costs have been recorded as an
extraordinary item in 1993. Such extraordinary item reduced 1993 net income by
approximately $1,437,000, net of income tax benefit of $844,000. On August 1,
1995, the Company issued 180,851 shares of its common stock representing its
payment obligation under the 1993 settlement relating to the consolidated class
action complaints. Accordingly, the effect of issuing these shares is reflected
in the per share amounts reported for the years ended December 31, 1995 and
1994. The December 31, 1995 Balance Sheet also reflects the payment of the
previously recorded Litigation Liability of $2,125,000 by increasing
stockholders' equity in the same amount.
Note 9 -- Other Contingencies
In 1988, the Company acquired a 19.5% interest in T.L.C. St Petersburg, Inc.
("TLC"), a corporation which owned and operated a long-term care facility in
Florida and which was a client of the Company. The Company had guaranteed
$1,500,000 of working capital loans of TLC at both December 31, 1994 and
December 31, 1993 and has pledged equal amounts of
<PAGE>
certificates of deposit as collateral for the guarantees (which is listed as
Certificates of Deposit Pledged for Loan Guarantees in the accompanying balance
sheets at December 31, 1994. In addition, the Company had guaranteed notes
payable of approximately $1,700,000. TLC made all required principal and
interest payments due under the terms of these loans through December 31, 1994.
Total guarantees for TLC aggregate $3,200,000 at December 31, 1994.
During 1993, one of the Company's clients, which owns and operates a significant
number of long-term care facilities throughout the country, purchased from a
third party the balance of the issued and outstanding shares of TLC and that
client now holds 90.1% of the issued and outstanding shares of TLC. During the
fourth quarter of 1993, TLC entered into an agreement to sell substantially all
of its assets to an unrelated third party. The sale closed on March 28, 1995 and
all loans guaranteed by the Company have been paid in full and the Certificates
of Deposit pledged for the Loan Guarantees have been released to the Company.
As of January 1, 1994, TLC entered into a twenty year agreement to lease the
operations of the facility to an entity controlled by TLC's majority
shareholder. The purchaser of TLC's assets assumed such operating lease.
By reason of TLC's uncertain financial condition, the Company, until the time
TLC entered into an agreement to sell its assets, fully reserved advances to and
receivables from TLC which amounted to approximately $2,000,000 at both December
31, 1994 and 1993 and $1,200,000 at December 31, 1992. Subsequent to the sales
agreement, the Company advanced approximately $2,900,000 to TLC. The obligations
<PAGE>
are being repaid in accordance with the terms of a promissory note issued to
the Company.
The Company has a $13,000,000 bank line of credit on which it may draw to meet
short-term liquidity requirements or for other purposes, that expires on June
30, 1996. Amounts drawn under the line are payable upon demand. At both December
31, 1995 and 1994, there were no borrowings under the line. However during 1991
and 1990, the Company sold promissory notes receivable of approximately
$3,800,000 and $2,500,000, respectively, to its bank with recourse. As of
December 31, 1995 the 1991 and 1990 promissory notes receivable have been paid
in full. At December 31, 1994, the unpaid balance of the promissory notes
receivable sold was approximately $1,100,000 (see Note 7). At both December 31,
1995 and 1994, the Company had outstanding approximately $8,200,000 of
irrevocable standby letters of credit, which primarily relate to payment
obligations under the Company's insurance program. As a result of the promissory
notes receivable sold and letters of credit issued, the amount available under
the line was reduced by approximately $8,200,000 at December 31, 1995 and
$9,300,000 at December 31, 1994.
Note 10 -- Provision for Estimated Cost Related to SEC Inquiry and Other
Matters
The Securities and Exchange Commission (SEC) has been conducting a non-public
investigation since 1990 with respect to certain matters, including the
Company's financial statements, financial condition and results of operations.
The Company has cooperated fully with such inquiry on a voluntary basis. On
March 21, 1996 the Staff of the SEC informed the Company that the SEC had
accepted a settlement which had been offered by the Company and
<PAGE>
recommended by the staff pertaining to certain allegations of violations of the
Federal securities laws by the Company and certain of its officers with respect
to periods ended on or before March 31, 1992. The settlement is subject to
mutual agreement on the final form of the Complaint and Consent to be filed in
the United States District Court. Under the settlement, upon filing of the
Complaint and the entry of a final judgment upon Consent, and without admitting
or denying any of the allegations of the Complaint, the Company, two officers
and a former officer, will be permanently enjoined from violating certain
provisions of the Federal securities laws, and the Company and these individuals
will be required to pay civil penalties aggregating approximately $825,000. The
estimated monetary impact of this settlement plus related legal costs have been
reflected in the accompanying financial statements.
In addition, the United States Attorney for the Eastern District of Pennsylvania
is investigating matters relating to certain payments (approximately $84,000 in
1988, $54,000 in 1989, $110,000 in 1990, $125,000 in 1991 and $34,000 in 1992)
made by the Company between June 1988 and January 1992 to certain vendors that
were not in accordance with Company policy. This matter was previously
investigated and reported upon by the Company in its Form 10-K for the year
ended December 31, 1991. Information regarding this matter was voluntarily
furnished to the U.S. Attorney's office in New Jersey in May and November 1992
and such payments were recovered by the Company in November 1992. The Company is
cooperating with the United States Attorney's office in an attempt to resolve
any issues or claims arising out of these payments.
<PAGE>
The Company anticipates that it will incur a significant amount of legal and
related costs in connection with these matters. During 1995, the Company
incurred approximately $950,000 of costs and estimates that the additional costs
which may be incurred in connection with these matters will be in a range of
approximately $2,150,000 to $3,500,000 and accordingly has accrued as of
December 31, 1995 the estimated low range of this liability. The result of this
$3,100,000 provision was to reduce 1995 net income by approximately $2,321,000
or $.28 per common share.
Note 11 -- Accrued Insurance Claims
For years 1993 through 1995, the Company has a PAid Loss Retrospective Insurance
plan for general liability and workers' compensation insurance. In addition, for
years 1993 and 1994, the Company also had a Paid Loss Retrospective Insurance
Plan for its automobiles. Under these plans, predetermined loss limits are
arranged with an insurance company to limit both The Company's per occurence
cash outlay and annual insurance plan cost.
For workers' compensation and automobile insurance, the Company records a
reserve based on the present value of future payments that are developed as a
result of a review of the Company's historical data and actuarial analysis done
by an independent company. The accrued insurance claims were reduced by
approximately $1,360,000, $1,247,000 and $895,000 at December 31, 1995, 1994 and
1993, respectively in order to record the estimated present value at the end of
each year using an 8% interest factor for 1995 and 1994 and a 5% interest factor
for 1993. During 1995, the Company amended its Insurance Plan from a 66 month to
a 126 month claim payout. This amendment decreased the 1995
<PAGE>
estimated insurance cost by approximately $1,360,000. During the fourth quarter
of 1994, the Company changed the present value discount factor which it applies
to estimated accrued workers' compensation insurance claims liability from 5.0%
to 8.0% to reflect a more current rate. This change in discount factor decreased
the 1994 estimated insurance cost by approximately $400,000. In the fourth
quarter of 1993, the Company changed the present value discount factor from 7.5%
to 5.0% which had the effect of increasing the 1993 estimated insurance cost by
approximately $375,000. It was actuarially estimated that the accrued workers'
compensation insurance claims will principally be paid to the claimants within
six years from the date of the incident.
For general liability insurance, the Company records a reserve for the estimated
ultimate amounts to be paid for known claims.
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
The Stockholders and Board of Directors
Healthcare Services Group, Inc.
We have audited the accompanying balance sheets of Healthcare Services Group,
Inc. as of December 31, 1995 and 1994, and the related statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1995. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Healthcare Services Group, Inc.
at December 31, 1995 and 1994 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Parsippany, New Jersey
February 26, 1996 (except for
Note 10, as to which the
date is March 21, 1996)
<PAGE>
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures
Not Applicable.
<PAGE>
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 1996 Annual Shareholders'
Meeting and to be filed within 120 days of the close of the year ended December
31, 1995.
Item ll. Executive Compensation
The information regarding executive compensation is incorporated herein
by reference to the Company's proxy statement to be mailed to shareholders in
connection with its 1996 Annual Meeting and to be filed within 120 days of the
close of the fiscal year ended December 31, 1995.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding security ownership of certain beneficial
owners and management is incorporated herein by reference to the Company's proxy
statement to be mailed to shareholders in connection with its 1996 Annual
Meeting and to be filed within 120 days of the close of the fiscal year ending
December 31, 1995.
Directors holding approximately 12% of the outstanding voting stock of
the registrant have been deemed to be "affiliates" solely for the purpose of
computing the aggregate market value of the voting stock held by non-affiliates
set forth on the cover page of this Report.
Item 13. Certain Relationships and Related Transactions
The information regarding certain relationship and related transactions
is incorporated herein by reference to the Company's proxy statement mailed to
shareholders in connection with its 1996 Annual Meeting and to be filed within
120 days of the close of the fiscal year ended December 31, 1995.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. Financial Statements
Report of Independent Certified Public Accountants
Balance Sheets as of December 31, 1995 and 1994
Statements of Income for the three years ended December 31, 1995, 1994
and 1993 Statements of Stockholders Equity for the three years ended
December 31, 1995, 1994 and 1993
Statements of Cash Flows for the three years ended December 31, 1995,
1994 and 1993
Notes to Financial Statements
<PAGE>
2. Financial Statement Schedules
Included in Part IV of this report:
Consent of Independent Certified Public Accountants
Report of Independent Certified Public Accountants on
Schedule VII - Valuation and Qualifying Accounts for the three
years ended December 31, 1995, 1994 and 1993
Financial Data Schedule
All other schedules are omitted since they are not required, not
applicable or the information has been included in the Financial Statements or
notes thereto.
3. Exhibits
The following Exhibits are filed as part of this Report (references are
to Reg. S-K Exhibit Numbers):
<TABLE>
<CAPTION>
Exhibit
Number Title
- ------ -----
<C> <C>
3.1 Articles of Incorporation of the Registrant, as amended, are incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on Form S-2
(File No. 33-35798).
3.2 Amended By-Laws of the Registrant as of July 18, 1990, are incorporated by
reference to Exhibit 4.2 to the Company's Registration Statement on Form S-2
(File No. 33-35798).
4. 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).
10.1 Incentive Stock Option Plan adopted on August 31, 1983,
amended and readopted on April 30, 1991 is incorporated by
reference to Exhibit 10.1 of Registrant's Statement on Form
S-18 (Commission File No. 2-87625-W), as well as reference to
the Company's definitive proxy statement dated April 30, 1991.
10.2 Agreements between the Registrant and H.B.A. Corporation are
incorporated by reference to Exhibit 10.3 of Registrant's
Registration Statements on Form S-18 (Commission File No.
2-87625-W) and on Form S-1 (Commission File No. 2-98089).
10.3 Agreement between the Registrant and Barton D. Weisman dated
April 22, 1992 regarding certain promissory notes.(filed with
registrant's 1991 Foem 10-K).
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).
24. Consent of Independent Certified Public Accountants.
25 Powers of Attorney - filed herewith, see page 19.
27. Financial Data Schedule
(b) Reports on Form 8-K
None
</TABLE>
<PAGE>
POWER OF ATTORNEY
Healthcare Services Group, Inc. and each of the undersigned do hereby
appoint Daniel P. McCartney and Thomas A. Cook and each of them severally, its
or his true and lawful attorneys to execute on behalf of Healthcare Services
Group, Inc. and the undersigned any and all amendments to this Report and to
file the same with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission. Each of such attorneys
shall have the power to act hereunder with or without the others.
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: HEALTHCARE SERVICES GROUP, INC.
(Registrant)
By: /s/ Daniel P. McCartney
-------------------------
Daniel P. McCartney,
Chief Executive Officer and Chairman
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 dated indicated:
<TABLE>
<CAPTION>
Signature Title Date
---------- ----- -----
<S> <C> <C>
/s/ Daniel P. McCartney Chief Executive Officer, March 29, 1996
- --------------------------- and Chairman and Principal Executive Officer
Daniel P. McCartney
/s/ Joseph F. McCartney Director and Vice President March 29, 1996
- ---------------------------
Joseph F. McCartney
/s/ W. Thacher Longstreth Director March 29, 1996
- ---------------------------
W. Thacher Longstreth
/s/ Barton D. Weisman Director March 29, 1996
- ---------------------------
Barton D. Weisman
/s/ Robert L. Frome Director March 29,1996
- ---------------------------
Robert L. Frome
/s/ Thomas A. Cook Director and President March 29, 1996
- ---------------------------
Thomas A. Cook
/s/ John M. Briggs Director March 29, 1996
- ---------------------------
John M. Briggs
/s/ Robert J. Moss Director March 29, 1996
- ------------------
Robert J. Moss
/s/ James L. DiStefano Chief Financial Officer, Treasurer March 29, 1996
- --------------------------- and Principal Financial Officer
James L. DiStefano
/s/ Richard W. Hudson Vice President-Finance, Secretary March 29, 1996
- --------------------------- and Principal Accounting Officer
Richard W. Hudson
</TABLE>
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Schedule VII - VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1995, 1994, 1993
<TABLE>
<CAPTION>
Balance Balance
beginning end of
Description of period Additions Deductions of period
----------- --------- --------- ---------- ---------
<S> <C> <C> <C> <C>
1995
Allowance for
doubtful accounts $4,500,000 $1,672,594 $1,704,594 $4,468,000
========== ========== ========== ==========
Reserve for contingent
losses on promissory
notes sold $300,000 $300,000
========== ==========
1994
Allowance for
doubtful accounts $4,465,000 $1,423,338 $1,388,338 $4,500,000
========== ========== ========== ==========
Reserve for contingent
losses on promissory
notes sold $600,000 $300,000 $300,000
========== ========== ==========
1993
Allowance for
doubtful accounts $4,300,000 $567,754 $402,754 $4,465,000
========== ========== ========== ==========
Allowance related to
cancelled service
agreements $261,510 $261,510
========== ==========
Reserve for contingent
losses on promissory
notes sold $1,000,000 $400,000 $600,000
========== ========== ==========
</TABLE>
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our reports dated February 26, 1996, accompanying the financial
statements included in the Annual Report of Healthcare Services Group, Inc. on
Form 10-K for the year ended December 31, 1995.
We hereby consent to the incorporation by reference in Post-Effective Amendment
No. 1 to the Registration Statements (Form S-8 No.2-95092 and No. 2-99215) and
in the Registration Statement (Form S-8 No. 33-35915) pertaining to the
Incentive Stock Option Plan and the Non-Qualified Stock Options of Healthcare
Services Group, Inc. and in the related prospectuses of our report dated
February 26, 1996.
GRANT THORNTON LLP
Parsippany, New Jersey
March 26, 1996
REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS ON SCHEDULE
Board of Directors and Stockholders
Healthcare Services Group, Inc.
In connection with our audit of the financial statements of Healthcare Services
Group, Inc., referred to in our report dated February 26, 1996, which is
included in this Annual Report on Form 10-K, we have also audited Schedule VII
for each of the three years in the period ended December 31, 1995. In our
opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Parsippany, New Jersey
February 26, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 16,335,886
<SECURITIES> 0
<RECEIVABLES> 36,931,288
<ALLOWANCES> 4,468,000
<INVENTORY> 7,200,033
<CURRENT-ASSETS> 60,660,150
<PP&E> 18,530,805
<DEPRECIATION> 12,347,675
<TOTAL-ASSETS> 80,289,771
<CURRENT-LIABILITIES> 9,592,177
<BONDS> 0
0
0
<COMMON> 81,431
<OTHER-SE> 68,388,109
<TOTAL-LIABILITY-AND-EQUITY> 80,289,771
<SALES> 0
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<CGS> 127,340,970
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<INCOME-PRETAX> 7,289,558
<INCOME-TAX> 3,349,000
<INCOME-CONTINUING> 3,940,558
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,940,558
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
</TABLE>
