UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(MARK ONE)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2012
OR
¨ | TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 0-12015
HEALTHCARE SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Pennsylvania | 23-2018365 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification number) |
|
3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania | 19020 | |
(Address of principal executive office) | (Zip code) |
Registrants telephone number, including area code: 215-639-4274
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | x | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value: 67,252,000 shares outstanding as of July 25, 2012.
PAGE NO. | ||||
PART I. FINANCIAL INFORMATION |
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Item 1. Financial Statements (Unaudited) |
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Consolidated Balance Sheets as of June 30, 2012 and December 31, 2011 |
2 | |||
3 | ||||
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2012 and 2011 |
4 | |||
Consolidated Statements of Stockholders Equity for the Six Months Ended June 30, 2012 |
5 | |||
6 | ||||
Item 2. Managements Discussion and Analysis of Financial Condition and Results Of Operations |
18 | |||
Item 3. Quantitative and Qualitative Disclosure About Market Risk |
32 | |||
32 | ||||
33 | ||||
33 | ||||
33 | ||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
33 | |||
33 | ||||
33 | ||||
33 | ||||
33 | ||||
34 |
Exhibits 10.1
Exhibits 31.1
Exhibits 31.2
Exhibits 32.1
Exhibits 32.2
EX-101 XBRL Instance Document
EX-101 XBRL Taxonomy Extension Schema Document
EX-101 XBRL Taxonomy Calculation Linkbase Document
EX-101 XBRL Taxonomy Extension Definition Linkbase Document
EX-101 XBRL Taxonomy Labels Linkbase Document
EX-101 XBRL Taxonomy Presentation Linkbase Document
-1-
(Unaudited) | ||||||||
June 30, 2012 | December 31, 2011 | |||||||
ASSETS |
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Current assets: |
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Cash and cash equivalents |
$ | 55,599,000 | $ | 38,639,000 | ||||
Marketable securities, at fair value |
21,398,000 | 31,337,000 | ||||||
Accounts and notes receivable, less allowance for doubtful accounts of $5,041,000 in 2012 and $4,506,000 in 2011 |
135,795,000 | 130,744,000 | ||||||
Inventories and supplies |
27,050,000 | 25,144,000 | ||||||
Prepaid income taxes |
| 405,000 | ||||||
Prepaid expenses and other |
10,482,000 | 5,852,000 | ||||||
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Total current assets |
250,324,000 | 232,121,000 | ||||||
Property and equipment: |
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Laundry and linen equipment installations |
2,237,000 | 2,100,000 | ||||||
Housekeeping equipment and office furniture |
25,428,000 | 24,277,000 | ||||||
Autos and trucks |
324,000 | 299,000 | ||||||
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27,989,000 | 26,676,000 | |||||||
Less accumulated depreciation |
17,857,000 | 16,913,000 | ||||||
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10,132,000 | 9,763,000 | |||||||
GOODWILL |
16,955,000 | 16,955,000 | ||||||
OTHER INTANGIBLE ASSETS, less accumulated amortization of $8,993,000 in 2012 and $7,909,000 in 2011 |
6,288,000 | 7,372,000 | ||||||
NOTES RECEIVABLE long term portion, net |
2,973,000 | 1,483,000 | ||||||
DEFERRED COMPENSATION FUNDING, at fair value |
15,795,000 | 13,780,000 | ||||||
DEFERRED INCOME TAXES long term portion |
9,919,000 | 8,181,000 | ||||||
OTHER NONCURRENT ASSETS |
38,000 | 40,000 | ||||||
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TOTAL ASSETS |
$ | 312,424,000 | $ | 289,695,000 | ||||
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
$ | 20,860,000 | $ | 10,650,000 | ||||
Accrued payroll, accrued and withheld payroll taxes |
26,390,000 | 26,833,000 | ||||||
Other accrued expenses |
2,128,000 | 1,657,000 | ||||||
Income taxes payable |
3,335,000 | | ||||||
Deferred income taxes |
384,000 | 951,000 | ||||||
Accrued insurance claims |
6,341,000 | 5,296,000 | ||||||
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Total current liabilities |
59,438,000 | 45,387,000 | ||||||
ACCRUED INSURANCE CLAIMS long term portion |
14,797,000 | 12,358,000 | ||||||
DEFERRED COMPENSATION LIABILITY |
16,132,000 | 14,224,000 | ||||||
COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY: |
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Common stock, $.01 par value; 100,000,000 shares authorized; 69,817,000 shares issued in 2012 and 69,473,000 shares in 2011 |
698,000 | 695,000 | ||||||
Additional paid-in capital |
111,795,000 | 105,727,000 | ||||||
Retained earnings |
125,017,000 | 126,921,000 | ||||||
Accumulated other comprehensive income, net of taxes |
153,000 | 343,000 | ||||||
Common stock in treasury, at cost, 2,624,000 shares in 2012 and 2,684,000 shares in 2011 |
(15,606,000 | ) | (15,960,000 | ) | ||||
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Total stockholders equity |
222,057,000 | 217,726,000 | ||||||
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 312,424,000 | $ | 289,695,000 | ||||
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See accompanying notes
-2-
Consolidated Statements of Comprehensive Income
(Unaudited)
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues |
$ | 267,108,000 | $ | 211,507,000 | $ | 527,715,000 | $ | 419,897,000 | ||||||||
Operating costs and expenses: |
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Costs of services provided |
230,206,000 | 181,742,000 | 457,701,000 | 361,727,000 | ||||||||||||
Selling, general and administrative |
18,524,000 | 15,511,000 | 39,506,000 | 32,291,000 | ||||||||||||
Other income (loss): |
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Investment and interest |
(95,000 | ) | 463,000 | 1,558,000 | 1,177,000 | |||||||||||
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Income before income taxes |
18,283,000 | 14,717,000 | 32,066,000 | 27,056,000 | ||||||||||||
Income taxes |
6,963,000 | 4,889,000 | 12,167,000 | 9,461,000 | ||||||||||||
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Net income |
$ | 11,320,000 | $ | 9,828,000 | $ | 19,899,000 | $ | 17,595,000 | ||||||||
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Basic earnings per common share |
$ | 0.17 | $ | 0.15 | $ | 0.30 | $ | 0.26 | ||||||||
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Diluted earnings per common share |
$ | 0.17 | $ | 0.15 | $ | 0.29 | $ | 0.26 | ||||||||
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Cash dividends per common share |
$ | 0.16 | $ | 0.16 | $ | 0.32 | $ | 0.31 | ||||||||
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Unrealized gain/(loss) on available for sale marketable securities, net of taxes |
(17,000 | ) | 285,000 | (190,000 | ) | 375,000 | ||||||||||
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Comprehensive income |
$ | 11,303,000 | $ | 10,113,000 | $ | 19,709,000 | $ | 17,970,000 | ||||||||
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Weighted average number of common shares outstanding |
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Basic |
67,296,000 | 66,517,000 | 67,189,000 | 66,459,000 | ||||||||||||
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Diluted |
68,228,000 | 67,545,000 | 68,155,000 | 67,499,000 | ||||||||||||
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See accompanying notes
-3-
Consolidated Statements of Cash Flows
( Unaudited ) | ||||||||
For the Six Months Ended
June 30, |
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2012 | 2011 | |||||||
Cash flows from operating activities: |
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Net income |
$ | 19,899,000 | $ | 17,595,000 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
2,528,000 | 2,049,000 | ||||||
Bad debt provision |
1,350,000 | 1,500,000 | ||||||
Deferred income tax benefits |
(2,405,000 | ) | (1,494,000 | ) | ||||
Share-based compensation expense |
1,144,000 | 1,093,000 | ||||||
Amortization of premium on marketable securities |
346,000 | 479,000 | ||||||
Unrealized gain on marketable securities |
82,000 | 252,000 | ||||||
Unrealized (gain) on deferred compensation fund investments |
(937,000 | ) | (548,000 | ) | ||||
Changes in operating assets and liabilities: |
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Accounts and notes receivable |
(7,891,000 | ) | (9,017,000 | ) | ||||
Prepaid income taxes |
3,740,000 | 4,165,000 | ||||||
Inventories and supplies |
(1,906,000 | ) | (803,000 | ) | ||||
Deferred compensation funding |
(1,078,000 | ) | (834,000 | ) | ||||
Accounts payable and other accrued expenses |
10,759,000 | (2,160,000 | ) | |||||
Accrued payroll, accrued and withheld payroll taxes |
536,000 | (561,000 | ) | |||||
Accrued insurance claims |
3,485,000 | 2,671,000 | ||||||
Deferred compensation liability |
2,360,000 | 1,649,000 | ||||||
Income taxes payable |
| | ||||||
Prepaid expenses and other assets |
(4,630,000 | ) | (518,000 | ) | ||||
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Net cash provided by operating activities |
27,382,000 | 15,518,000 | ||||||
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Cash flows from investing activities: |
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Disposals of fixed assets |
10,000 | 18,000 | ||||||
Additions to property and equipment |
(1,825,000 | ) | (2,653,000 | ) | ||||
Purchases of marketable securities, net |
(6,362,000 | ) | (8,603,000 | ) | ||||
Sales of marketable securities, net |
15,784,000 | 10,902,000 | ||||||
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Net cash provided (used) by investing activities |
7,607,000 | (336,000 | ) | |||||
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Cash flows from financing activities: |
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Dividends paid |
(21,803,000 | ) | (20,902,000 | ) | ||||
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan |
59,000 | 66,000 | ||||||
Tax benefits arising from stock option transactions |
1,051,000 | 119,000 | ||||||
Proceeds from the exercise of stock options |
2,664,000 | 1,341,000 | ||||||
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Net cash used in financing activities |
(18,029,000 | ) | (19,376,000 | ) | ||||
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Net increase/(decrease) in cash and cash equivalents |
16,960,000 | (4,194,000 | ) | |||||
Cash and cash equivalents at beginning of the period |
38,639,000 | 39,692,000 | ||||||
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Cash and cash equivalents at end of the period |
$ | 55,599,000 | $ | 35,498,000 | ||||
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Supplementary Cash Flow Information: |
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Income taxes cash payments, net of refunds |
$ | 9,782,000 | $ | 6,683,000 | ||||
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Issuance of 70,000 and 76,000 shares in 2012 and 2011, respectively, of Common Stock pursuant to Employee Stock Plans |
$ | 1,250,000 | $ | 1,233,000 | ||||
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See accompanying notes
-4-
Consolidated Statements of Stockholders Equity (Unaudited)
For the Six Months Ended June 30, 2012 | ||||||||||||||||||||||||||||
Common Stock
Shares |
Amount |
Additional
Paid-in Capital |
Total
Retained Earnings |
Accumulated Other
Comprehensive Income |
Treasury
Stock |
Stockholders
Equity |
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Balance, December 31, 2011 |
69,473,000 | $ | 695,000 | $ | 105,727,000 | $ | 126,921,000 | $ | 343,000 | $ | (15,960,000 | ) | $ | 217,726,000 | ||||||||||||||
Net income |
19,899,000 | 19,899,000 | ||||||||||||||||||||||||||
Unrealized loss on available for sale marketable securities, net of $99,000 of taxes |
(190,000 | ) | (190,000 | ) | ||||||||||||||||||||||||
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Comprehensive income |
19,709,000 | |||||||||||||||||||||||||||
Exercise of stock options and other share- based compensation, net of 13,000 shares tendered for payment |
274,000 | 2,000 | 2,355,000 | 307,000 | 2,664,000 | |||||||||||||||||||||||
Tax benefit arising from stock option transactions |
1,051,000 | 1,051,000 | ||||||||||||||||||||||||||
Share-based compensation expense stock options |
949,000 | 949,000 | ||||||||||||||||||||||||||
Treasury shares issued for Deferred Compensation Plan funding and redemptions (10,000 shares) |
394,000 | 58,000 | 452,000 | |||||||||||||||||||||||||
Shares issued pursuant to Employee Stock Plans |
70,000 | 1,000 | 1,278,000 | (29,000 | ) | 1,250,000 | ||||||||||||||||||||||
Cash dividends $.32 per common share |
(21,803,000 | ) | (21,803,000 | ) | ||||||||||||||||||||||||
Shares issued pursuant to Dividend Reinvestment Plan (1,000 shares) |
41,000 | 18,000 | 59,000 | |||||||||||||||||||||||||
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Balance, June 30, 2012 |
69,817,000 | $ | 698,000 | $ | 111,795,000 | $ | 125,017,000 | $ | 153,000 | $ | (15,606,000 | ) | $ | 222,057,000 | ||||||||||||||
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See accompanying notes.
-5-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 Basis of Reporting
The accompanying financial statements are unaudited and do not include certain information and note disclosures required by accounting principles generally accepted in the United States for complete financial statements. However, in our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The balance sheet shown in this report as of December 31, 2011 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 2011. The financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and six month period ended June 30, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year.
As of June 30, 2012, we operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (Huntingdon) and Healthcare Staff Leasing Solutions, LLC (Staff Leasing). Huntingdon invests our cash and cash equivalents and manages our portfolio of marketable securities. Staff Leasing is an entity formed in 2011 to offer professional employer organization (PEO) services to potential clients in the health care industry. As of June 30, 2012, we have entered into PEO service contracts in certain states.
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but not limited to, our allowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential impairment, share-based compensation, and deferred income taxes. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is necessary to update the basis for our estimates and to compensate for known changes.
Inventories and supplies include housekeeping and, linen and laundry supplies, as well as dietary provisions and supplies. Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized over a 24 month period.
Revenues are recorded net of sales taxes.
Certain amounts have been reclassified for consistent presentation.
Note 2 Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets acquired of businesses and is not amortized. Goodwill is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value. The goodwill associated with the 2009 acquisition of Contract Environmental Services, Inc. (CES) is deductible for tax purposes over a fifteen year period.
Goodwill by reportable operating segment, as described in Note 5 herein, was approximately $14,894,000 and $2,061,000 for Housekeeping and Dietary as of June 30, 2012 and December 31, 2011, respectively.
- 6 -
The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful life (between 7 and 8 years). The following table sets forth the amounts of our identifiable intangible assets subject to amortization, which were acquired in acquisitions.
June 30, 2012 | December 31, 2011 | |||||||
Customer relationships |
$ | 14,481,000 | $ | 14,481,000 | ||||
Non-compete agreements |
800,000 | 800,000 | ||||||
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Total other intangibles, gross |
$ | 15,281,000 | $ | 15,281,000 | ||||
Less accumulated amortization |
8,993,000 | 7,909,000 | ||||||
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Other intangibles, net |
$ | 6,288,000 | $ | 7,372,000 | ||||
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The customer relationships have a weighted-average amortization period of seven years and the non-compete agreements have a weighted-average amortization period of eight years. The following table sets forth the estimated amortization expense for intangibles subject to amortization for the balance of 2012 and the subsequent five fiscal years:
Period/Year |
Customer
Relationships |
Non-Compete
Agreements |
Total | |||||||||
July 1 to December 31, 2012 |
$ | 1,034,000 | $ | 50,000 | $ | 1,084,000 | ||||||
2013 |
1,750,000 | 100,000 | 1,850,000 | |||||||||
2014 |
1,112,000 | 67,000 | 1,179,000 | |||||||||
2015 |
1,112,000 | | 1,112,000 | |||||||||
2016 |
569,000 | | 569,000 | |||||||||
2017 |
297,000 | | 297,000 | |||||||||
Thereafter |
197,000 | | 197,000 |
Amortization expense for the three and six month periods ended June 30, 2012 was $542,000 and $1,084,000, respectively and for the three and six month periods ended June 30, 2011 was $468,000 and $936,000, respectively.
Note 3 - Fair Value Measurements and Marketable Securities
We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Effective January 1, 2008, we elected the fair value option for certain of our marketable securities purchased since such adoption. Management initially elected the fair value option for certain of our marketable securities because it views such investment securities as highly liquid and available to be drawn upon for working capital purposes making them similar to cash and cash equivalents. Accordingly, for such investments, we record net unrealized gain or loss in the other income - investment and interest caption in our consolidated statements of comprehensive income. We have not elected the fair value option for marketable securities acquired after December 31, 2009. Although these assets continue to be highly liquid and available, we do not believe these assets are representative of our operating activities. These assets are representative of our investing activities, and they will be available for future needs of the Company to support its current and projected growth.
-7-
Certain of our assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and liabilities include cash and cash equivalents, marketable securities, accounts and notes receivable, accounts payable, income taxes payable and other accrued expenses. The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as of June 30, 2012 and December 31, 2011.
As of June 30, 2012 | ||||||||||||||||||||
Fair Value Measurement Using: | ||||||||||||||||||||
Carrying
Amount |
Total Fair
Value |
Quoted Prices
in Active Markets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
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Financial Assets |
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Marketable securities |
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Municipal bonds |
$ | 21,398,000 | $ | 21,398,000 | $ | | $ | 21,398,000 | $ | | ||||||||||
Equity securities - Deferred comp fund |
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Money Market |
$ | 3,232,000 | $ | 3,232,000 | $ | | $ | 3,232,000 | $ | | ||||||||||
Large Cap Value |
3,103,000 | 3,103,000 | 3,103,000 | | | |||||||||||||||
Large Cap Growth |
2,470,000 | 2,470,000 | 2,470,000 | | | |||||||||||||||
Fixed income |
1,721,000 | 1,721,000 | 1,721,000 | | | |||||||||||||||
Small Cap Value |
1,329,000 | 1,329,000 | 1,329,000 | | | |||||||||||||||
Balanced and Lifestyle |
1,122,000 | 1,122,000 | 1,122,000 | | | |||||||||||||||
Speciality |
904,000 | 904,000 | 904,000 | | | |||||||||||||||
International |
688,000 | 688,000 | 688,000 | | | |||||||||||||||
Large Cap Blend |
771,000 | 771,000 | 771,000 | | | |||||||||||||||
Mid Cap Growth |
328,000 | 328,000 | 328,000 | | | |||||||||||||||
Small Cap Growth |
64,000 | 64,000 | 64,000 | | | |||||||||||||||
Mid Cap Value |
63,000 | 63,000 | 63,000 | | | |||||||||||||||
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Equity securities - Deferred comp fund |
$ | 15,795,000 | $ | 15,795,000 | $ | 12,563,000 | $ | 3,232,000 | $ | | ||||||||||
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As of December 31, 2011 | ||||||||||||||||||||
Fair Value Measurement Using: | ||||||||||||||||||||
Carrying
Amount |
Total Fair
Value |
Quoted Prices
in Active Markets (Level 1) |
Significant Other
Observable Inputs (Level 2) |
Significant
Unobservable Inputs (Level 3) |
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Financial Assets |
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Marketable securities |
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Municipal bonds |
$ | 31,337,000 | $ | 31,337,000 | $ | | $ | 31,337,000 | $ | | ||||||||||
Equity securities - Deferred comp fund |
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Money Market |
$ | 3,029,000 | $ | 3,029,000 | $ | | $ | 3,029,000 | $ | | ||||||||||
Large Cap Value |
2,716,000 | 2,716,000 | 2,716,000 | | | |||||||||||||||
Large Cap Growth |
2,184,000 | 2,184,000 | 2,184,000 | | | |||||||||||||||
Small Cap Value |
1,244,000 | 1,244,000 | 1,244,000 | | | |||||||||||||||
Fixed Income |
1,429,000 | 1,429,000 | 1,429,000 | | | |||||||||||||||
Specialty |
832,000 | 832,000 | 832,000 | | | |||||||||||||||
Balanced and Lifestyle |
814,000 | 814,000 | 814,000 | | | |||||||||||||||
International |
562,000 | 562,000 | 562,000 | | | |||||||||||||||
Large Cap Blend |
500,000 | 500,000 | 500,000 | | | |||||||||||||||
Mid Cap Growth |
363,000 | 363,000 | 363,000 | | | |||||||||||||||
Mid Cap Value |
54,000 | 54,000 | 54,000 | | | |||||||||||||||
Small Cap Growth |
53,000 | 53,000 | 53,000 | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Equity securities - Deferred comp fund |
$ | 13,780,000 | $ | 13,780,000 | $ | 10,751,000 | $ | 3,029,000 | $ | | ||||||||||
|
|
|
|
|
|
|
|
|
|
-8-
The fair value of the municipal bonds is measured using pricing service data from an external provider. The fair value of equity investments in the funded deferred compensation plan are valued (Level 1) based on quoted market prices. The money market fund in the funded deferred compensation plan is valued (Level 2) at the net asset value (NAV) of the shares held by the plan at the end of the period. As a practical expedient, fair value of our money market fund is valued at the NAV as determined by the custodian of the fund. The money market fund includes short-term United States dollar denominated money-market instruments. The money market fund can be redeemed at its NAV at its measurement date as there are no significant restrictions on the ability of participants to sell this investment.
For the three and six month periods ended June 30, 2012, the other income - investment and interest caption on our consolidated statements of comprehensive income includes unrealized losses from marketable securities of $26,000 and $82,000, respectively, for investments recorded under the fair value option.
For the three and six month periods ended June 30, 2011, the other incomeinvestment and interest caption on our consolidated statements of income includes unrealized losses from marketable securities of $107,000 and $252,000, respectively, for investments recorded under the fair value option.
Amortized
Cost |
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Estimated Fair
Value |
Other-than-
temporary Impairments |
||||||||||||||||
June 30, 2012 |
||||||||||||||||||||
Type of security: |
||||||||||||||||||||
Municipal bonds - available for sale |
$ | 21,146,000 | $ | 254,000 | $ | (2,000 | ) | $ | 21,398,000 | $ | | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities |
$ | 21,146,000 | $ | 254,000 | $ | (2,000 | ) | $ | 21,398,000 | $ | | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
December 31, 2011 |
||||||||||||||||||||
Type of security: |
||||||||||||||||||||
Municipal bonds |
$ | 2,167,000 | $ | 82,000 | $ | | $ | 2,249,000 | $ | | ||||||||||
Municipal bonds - available for sale |
28,745,000 | 352,000 | (9,000 | ) | 29,088,000 | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total debt securities |
$ | 30,912,000 | $ | 434,000 | $ | (9,000 | ) | $ | 31,337,000 | $ | | |||||||||
|
|
|
|
|
|
|
|
|
|
For the three and six month periods ended June 30, 2012, we received total proceeds of $4,274,000 and $14,871,000 respectively, from sales of available for sale municipal bonds. These sales resulted in realized gains of $41,000 and $224,000 recorded in other income, investment and interest caption on our statement of comprehensive income for the three and six month periods ended June 30, 2012, respectively. The basis for the sale of these securities was a specific identification of each bond sold during this period.
For the three and six month periods ended June 30, 2011, we received total proceeds of $1,123,000 and $2,626,000 respectively, from sales of available for sale municipal bonds. These sales resulted in a realized loss of $1,000 and a realized gain of $2,000 recorded in other income, investment and interest caption on our statement of comprehensive income for the three and six month periods ended June 30, 2011, respectively. The basis for the sale of these securities was a specific identification of each bond sold during this period.
-9-
The contractual maturities of total debt securities held at June 30, 2012 and December 31, 2011.
As of June 30, 2012 | ||||||||||||
Contractual maturity: |
Municipal Bonds |
Municipal Bonds -
Available for Sale |
Total Debt Securities | |||||||||
Maturing in one year or less |
$ | | $ | 2,000,000 | $ | 2,000,000 | ||||||
Maturing after one year through three years |
| 13,428,000 | 13,428,000 | |||||||||
Maturing after three years |
| 5,970,000 | 5,970,000 | |||||||||
|
|
|
|
|
|
|||||||
Total debt securities |
$ | | $ | 21,398,000 | $ | 21,398,000 | ||||||
|
|
|
|
|
|
|||||||
As of December 31, 2011 | ||||||||||||
Contractual maturity: |
Municipal Bonds |
Municipal Bonds -
Available for Sale |
Total Debt Securities | |||||||||
Maturing in one year or less |
$ | 34,000 | $ | 4,100,000 | $ | 4,134,000 | ||||||
Maturing after one year through three years |
2,215,000 | 18,874,000 | 21,089,000 | |||||||||
Maturing after three years |
| 6,114,000 | 6,114,000 | |||||||||
|
|
|
|
|
|
|||||||
Total debt securities |
$ | 2,249,000 | $ | 29,088,000 | $ | 31,337,000 | ||||||
|
|
|
|
|
|
Note 4 Other Contingencies
We have a $57,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line of credit are payable upon demand. At June 30, 2012, there were no borrowings under the line of credit. However, at such date, we had outstanding a $40,420,000 irrevocable standby letter of credit which relates to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $40,420,000 at June 30, 2012. The line of credit requires us to satisfy two financial covenants. We are in compliance with the financial covenants at June 30, 2012 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on June 30, 2013. We believe the line of credit will be renewed at that time.
We provide our services in 47 states and we are subject to numerous local taxing jurisdictions within those states. Consequently, the taxability of our services is subject to various interpretations within these jurisdictions. In the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services, which may result in additional tax liabilities.
We have tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, we are unable to make a reasonable estimate of liability. We do not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations based on our best estimate of the outcomes of such matters.
We are also subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As we become aware of such claims and legal actions, we provide accruals if the exposures are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial disclosure, as appropriate. We believe that these matters, taken individually or in the aggregate, would not have a material adverse effect on our financial position or results of operations.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the Act) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs which our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July of 2011, Centers for Medicare and Medicaid Services (CMS) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This new rule was effective as of October 1, 2011. Furthermore, in the coming year, new proposals or additional changes in existing regulations could be made to the Act and/or CMS could propose additional reimbursement
-10-
reductions which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. In addition, certain state governors have recently stated that they will reject Federal Medicaid assistance under the Act. Any negative changes in our clients reimbursements may negatively impact our results of operations. Although we are currently evaluating the Acts effect on our client base, we may not know the full effect until such a time as these laws are fully implemented and CMS and other agencies issue applicable regulations or guidance.
Note 5 Segment Information
Reportable Operating Segments
We manage and evaluate our operations in two reportable segments. The two reportable segments are Housekeeping (housekeeping, laundry, linen and other services), and Dietary (dietary department services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of service provided, as well as the specialized expertise required of the professional management personnel responsible for delivering the respective segments services. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segment since such services are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respective reportable segments services are managed by the same management personnel of the particular reportable segment.
The Companys accounting policies for the segments are generally the same as the Companys significant accounting policies. Differences between the reportable segments operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized for the consolidated financial statements. As discussed, most corporate expense is not allocated to the operating segments, and such expenses include corporate salary and benefit costs, bad debt expense, certain legal costs, information technology costs, depreciation, amortization of finite lived intangibles, share based compensation costs and other corporate specific costs. Additionally, there are allocations for workers compensation and general liability expense within the operating segments that differ from our actual expense recorded for U.S. GAAP. Additionally, included in the differences between the reportable segments operating results and other disclosed data are amounts attributable to Huntingdon, our investment holding company subsidiary. Huntingdon does not transact any business with the reportable segments. Segment amounts disclosed are prior to any elimination entries made in consolidation.
Housekeeping provides services in Canada, although essentially all of its revenues and net income, 99% in both categories, are earned in one geographic area, the United States. Dietary provides services solely in the United States.
-11-
Housekeeping
Services |
Dietary Services |
Corporate and
Eliminations |
Total | |||||||||||||
Three Months Ended June 30, 2012 |
||||||||||||||||
Revenues |
$ | 183,215,000 | $ | 83,891,000 | $ | 2,000 | (1) | $ | 267,108,000 | |||||||
Income before income taxes |
17,671,000 | 4,620,000 | (4,008,000 | ) (1) | 18,283,000 | |||||||||||
Three Months Ended June 30, 2011 |
||||||||||||||||
Revenues |
$ | 158,681,000 | $ | 52,897,000 | $ | (71,000 | ) (1) | $ | 211,507,000 | |||||||
Income before income taxes |
16,195,000 | 2,521,000 | (3,999,000 | ) (1) | 14,717,000 | |||||||||||
Six Months Ended June 30, 2012 |
||||||||||||||||
Revenues |
$ | 364,397,000 | $ | 163,281,000 | $ | 37,000 | (1) | $ | 527,715,000 | |||||||
Income before income taxes |
35,127,000 | 8,674,000 | (11,735,000 | ) (1) | 32,066,000 | |||||||||||
Six Months Ended June 30, 2011 |
||||||||||||||||
Revenues |
$ | 315,143,000 | $ | 104,554,000 | $ | 200,000 | (1) | $ | 419,897,000 | |||||||
Income before income taxes |
33,390,000 | 5,990,000 | (12,324,000 | ) (1) | 27,056,000 |
(1) |
Represents primarily corporate office cost and related overhead, recording of transactions at the reportable segment level which use methods other than U.S. GAAP and consolidated subsidiaries operating expenses that are not allocated to the reportable segments, net of investment and interest income. |
Total Consolidated Revenues from Clients
The following revenues earned from clients represent their reporting in accordance with U.S. GAAP and differ from segment revenues reported above due to the inclusion of adjustments used for segment reporting purposes by management. We earned total revenues from clients in the following service categories:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Housekeeping services |
$ | 121,897,000 | $ | 106,715,000 | $ | 243,550,000 | $ | 212,463,000 | ||||||||
Laundry and linen services |
60,245,000 | 51,266,000 | 118,775,000 | 101,440,000 | ||||||||||||
Dietary services |
83,816,000 | 52,922,000 | 163,206,000 | 104,772,000 | ||||||||||||
Maintenance services and other |
1,150,000 | 604,000 | 2,184,000 | 1,222,000 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 267,108,000 | $ | 211,507,000 | $ | 527,715,000 | $ | 419,897,000 | |||||||||
|
|
|
|
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|
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|
-12-
Major Client
We have one client, a nursing home chain (Major Client), which accounted for the respective percentages of our revenues as detailed below:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Total revenues |
7 | % | 9 | % | 7 | % | 9 | % | ||||||||
Housekeeping |
9 | % | 11 | % | 9 | % | 11 | % | ||||||||
Dietary services |
3 | % | 5 | % | 3 | % | 6 | % |
Additionally, at both June 30, 2012 and December 31, 2011, amounts due from such client represented less than 1% of our accounts receivable balance. The loss of such client, or a significant reduction in revenues from such client, would have a material adverse effect on the results of operations of our two operating segments. In addition, if such client changes its payment terms it may increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.
-13-
Note 6 Earnings Per Common Share
A reconciliation of the numerator and denominator of basic and diluted earnings per common share is as follows:
Three months ended June 30, 2012 | ||||||||||||
Income
(Numerator) |
Shares
(Denominator) |
Per-share Amount | ||||||||||
Net income |
$ | 11,320,000 | ||||||||||
|
|
|||||||||||
Basic earnings per common share |
$ | 11,320,000 | 67,296,000 | $ | .17 | |||||||
Effect of dilutive securities: |
||||||||||||
Options |
932,000 | | ||||||||||
|
|
|
|
|
|
|||||||
Diluted earnings per common share |
$ | 11,320,000 | 68,228,000 | $ | .17 | |||||||
|
|
|
|
|
|
|||||||
Three months ended June 30, 2011 | ||||||||||||
Income
(Numerator) |
Shares
(Denominator) |
Per-share Amount | ||||||||||
Net income |
$ | 9,828,000 | ||||||||||
|
|
|||||||||||
Basic earnings per common share |
$ | 9,828,000 | 66,517,000 | $ | .15 | |||||||
Effect of dilutive securities: |
||||||||||||
Options |
1,028,000 | | ||||||||||
|
|
|
|
|
|
|||||||
Diluted earnings per common share |
$ | 9,828,000 | 67,545,000 | $ | .15 | |||||||
|
|
|
|
|
|
|||||||
Six Months ended June 30, 2012 | ||||||||||||
Income
(Numerator) |
Shares
(Denominator) |
Per-share Amount | ||||||||||
Net income |
$ | 19,899,000 | ||||||||||
|
|
|||||||||||
Basic earnings per common share |
$ | 19,899,000 | 67,189,000 | $ | .30 | |||||||
Effect of dilutive securities: |
||||||||||||
Options |
966,000 | (.01 | ) | |||||||||
|
|
|
|
|
|
|||||||
Diluted earnings per common share |
$ | 19,899,000 | 68,155,000 | $ | .29 | |||||||
|
|
|
|
|
|
|||||||
Six Months ended June 30, 2011 | ||||||||||||
Income
(Numerator) |
Shares
(Denominator) |
Per-share Amount | ||||||||||
Net income |
$ | 17,595,000 | ||||||||||
|
|
|||||||||||
Basic earnings per common share |
$ | 17,595,000 | 66,459,000 | $ | .26 | |||||||
Effect of dilutive securities: |
||||||||||||
Options |
1,040,000 | | ||||||||||
|
|
|
|
|
|
|||||||
Diluted earnings per common share |
$ | 17,595,000 | 67,499,000 | $ | .26 | |||||||
|
|
|
|
|
|
Options to purchase 596,000 and 585,000 shares of common stock having an average exercise price of $17.50 per common share were outstanding during the three and six month period ended June 30, 2012 but not included in the computation of diluted earnings per common share because the options exercise prices were greater than the average market price of the common shares, and therefore, would be antidilutive.
-14-
Options to purchase 508,000 and 494,000 shares of common stock having an average exercise price of approximately $16.11 per common share were outstanding during the three and six month periods ended June 30, 2011 but not included in the computation of diluted earnings per common share because the exercise price of those options were greater than the average market price of the common shares, and therefore, would be anti-dilutive.
Note 7 Dividends
During the six month period ended June 30, 2012, we paid regular quarterly cash dividends approximating $21,803,000 as follows:
Quarter ended | ||||||||
March 31, 2012 | June 30, 2012 | |||||||
Cash dividend per common share |
$ | .16125 | $ | .16250 | ||||
Total cash dividends paid |
$ | 10,847,000 | $ | 10,956,000 | ||||
Record date |
February 24 | April 27 | ||||||
Payment date |
March 26 | May 18 |
Additionally, on July 10, 2012, our Board of Directors declared a regular cash dividend of $.16375 per common share to be paid on August 24, 2012 to shareholders of record as of July 27, 2012.
Note 8 Share-Based Compensation
Stock Options
During the six months ended June 30, 2012, the stock option activity under our 2002 Stock Option Plan, 1995 Incentive and Non-Qualified Stock Option Plan for key employees, and 1996 Non-Employee Directors Stock Option Plan (collectively the Stock Option Plans), was as follows:
Weighted
Average Price Per Share |
Number of Shares |
Weighted
Average Remaining Contractual Life (In Years) |
Aggregate
Intrinsic Value |
|||||||||||||
Outstanding, January 1, 2012 |
$ | 10.97 | 2,912,000 | |||||||||||||
Granted |
17.50 | 601,000 | ||||||||||||||
Cancelled |
12.93 | (69,000 | ) | |||||||||||||
Exercised |
14.95 | (333,000 | ) | |||||||||||||
|
|
|
|
|||||||||||||
Outstanding, June 30, 2012 |
$ | 12.39 | 3,111,000 | 6.36 | $ | 21,738,000 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Options exercisable as of June 30, 2012 |
1,469,000 | 4.27 | $ | 15,129,000 | ||||||||||||
|
|
|
|
|
|
-15-
The weighted average fair value per share of options granted during the 2012 and 2011 first quarters was $4.74 and $3.26, respectively. The following table summarizes information about stock options outstanding at June 30, 2012.
Options Outstanding |
Options
Exercisable |
|||||||||||||||||||
Exercise Price Range |
Number
Outstanding |
Average
Remaining Contractual Life |
Weighted
Average Exercise Price Per Share |
Number
Exercisable |
Weighted
Average Exercise Price |
|||||||||||||||
$ 2.41 - 3.68 |
414,000 | 1.10 | $ | 3.23 | 414,000 | $ | 3.23 | |||||||||||||
6.07 |
278,000 | 2.49 | 6.07 | 278,000 | 6.07 | |||||||||||||||
10.39 |
428,000 | 6.52 | 10.39 | 214,000 | 10.39 | |||||||||||||||
13.93 - 14.31 |
928,000 | 6.69 | 14.15 | 479,000 | 14.08 | |||||||||||||||
$ 16.11 - 17.50 |
1,063,000 | 9.08 | 16.89 | 84,000 | 16.11 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
3,111,000 | 6.36 | $ | 12.39 | 1,469,000 | $ | 9.08 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
Other information pertaining to option activity during the six month periods ended June 30, 2012 and 2011 was as follows:
June 30, 2012 | June 30, 2011 | |||||||
Weighted average grant-date fair value of stock options granted: |
$ | 2,438,000 | $ | 1,477,000 | ||||
Total fair value of stock options vested: |
$ | 1,870,000 | $ | 1,015,000 | ||||
Total intrinsic value of stock options exercised: |
$ | 3,853,000 | $ | 1,459,000 | ||||
Total pre-tax share-based compensation expense charged against income: |
$ | 949,000 | $ | 935,000 | ||||
Total unrecognized compensation expense related to non-vested options: |
$ | 4,948,000 | $ | 4,482,000 |
Under our Stock Option Plans at June 30, 2012, in addition to the 3,111,000 shares issuable pursuant to outstanding option grants, an additional 3,338,000 shares of our Common Stock are available for future grants. Such 3,338,000 shares consist of 1,338,000 shares from our Stock Option Plans that were rolled into our recently approved 2012 Equity Incentive Plan (the 2012 Plan) plus an additional 2,000,000 shares that are contained in the 2012 Plan. Options outstanding and exercisable were granted at stock option prices which were not less than the fair market value of our Common Stock on the date the options were granted and no option has a term in excess of ten years. Additionally, with the exception of the options granted in years 2008 through 2012, options vested and became exercisable either on the date of grant or commencing six months after the option grant date. The options granted in 2008 through 2012 become vested and exercisable ratably over a five year period on each anniversary date of the option grant.
At June 30, 2012, the total unrecognized compensation expense related to non-vested options, as reported above, was expected to be recognized through the fourth quarter of 2016 for the options granted in 2012 and the fourth quarter of 2015 for the options granted in 2011. The fair value of options granted in 2012 and 2011 was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:
2012 | 2011 | |||||||
Risk-free interest rate |
1.3 | % | 2.6 | % | ||||
Expected volatility |
39.2 | % | 27.4 | % | ||||
Weighted average expected life in years |
6.8 | 7.4 | ||||||
Dividend yield |
3.6 | % | 3.7 | % |
Employee Stock Purchase Plan
Total pre-tax share-based compensation expense charged against income for the six month periods ended June 30, 2012 and 2011 for options granted under our Employee Stock Purchase Plan (ESPP) was $195,000 and $158,000, respectively. It is estimated, at this time, that the expense attributable to such share-based payments in each of the subsequent quarters of 2012 will approximate the amount recorded in the 2012 first and second quarter. However, such future expense related to our ESPP will be impacted by, and be dependent on the change in our stock price over the remaining period up to the December 31, 2012 measurement date.
-16-
Such expense was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:
2012 | 2011 | |||||||
Risk-free interest rate |
0.19 | % | 0.04 | % | ||||
Expected volatility |
36.5 | % | 25.0 | % | ||||
Weighted average expected life in years |
1.0 | 1.0 | ||||||
Dividend yield |
3.6 | % | 3.7 | % |
We may issue new common stock or re-issue common stock from treasury to satisfy our obligations under any of our share-based compensation plans.
Note 9 Related Party Transactions
A director is a member of a law firm which was retained by us. In each of the six month periods ended June 30, 2012 and 2011, fees received from us by such firm did not exceed $120,000. Additionally, such fees did not exceed, in either six month period, 5% of such firms revenues.
Note 10 Income Taxes
For the six month period ended June 30, 2012, our effective tax rate was approximately 38%, an increase from the 35% effective tax rate for the comparable 2011 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to a decrease in expected tax credits realized for 2012 compared to previous fiscal periods. The Company received credits in 2011 related to the Work Opportunity Tax Credit (WOTC) program but this program has not yet been renewed in 2012. The Company will continue to receive additional credits related to prior periods but will not have the benefit of credits for 2012 new hires unless the program is renewed. Additionally, the Company realized significant tax credits during 2011 from the New Hire Retention Credit, a one-time general business credit at the Federal level that was authorized by the Hiring Incentives to Restore Employment Act of 2011. The new hire retention credit allowed an employer a credit of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. The Company earned new hire retention credits for the six month period ended June 30, 2011, but did not earn additional amounts in 2012 as the credit expired at December 31, 2011. If the WOTC program is renewed retroactive to the beginning of the year in 2012, our effective tax rate could be reduced below the current 38%.
We account for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, we evaluate regularly the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2008 through 2011 (with regard to U.S. federal income tax returns) and December 31, 2007 through 2011 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of June 30, 2012.
We may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. When we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.
Note 11 Subsequent Event
We evaluated all subsequent events through the date this Form 10-Q is being filed with the SEC. There were no events or transactions occurring during this subsequent event reporting period which require recognition or disclosure in the financial statements.
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ITEM 2 - MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Cautionary Statement Regarding Forward Looking Statements
This report and documents incorporated by reference into this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as believes, anticipates, plans, expects, will, goal, and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; from having several significant clients who each individually contributed at least 3% with one as high as 7% to our total consolidated revenues in the three and six month period ended June 30, 2012; our claims experience related to workers compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2011 under Government Regulation of Clients, Competition and Service Agreements/Collections, and under Item IA Risk Factors in our Form 10-K for the fiscal year ended December 31, 2011. Many of our clients revenues are highly contingent on Medicare, Medicaid and other payors reimbursement funding rates, which Congress and related agencies have affected through the enactment of a number of major laws and regulations during the past decade, including the March 2010 enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Most recently, in July 2011, the United States Center for Medicare Services (CMS) issued final rulings which, among other things, reduce (effective October 1, 2011) Medicare payments to nursing centers by 11.1% and change the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. Currently, the U.S. Congress is considering further changes or revising legislation relating to health care in the United States which, among other initiatives, may impose cost containment measures impacting our clients. These enacted laws, proposed laws and forthcoming regulations have significantly altered, or threaten to significantly alter, overall government reimbursement funding rates and mechanisms. The overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.
In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies.
RESULTS OF OPERATIONS
The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of June 30, 2012 and December 31, 2011 and the periods then ended and the notes accompanying those financial statements.
Overview
We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes,
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rehabilitation centers and hospitals located throughout the United States. We believe that we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to approximately 3,000 facilities in 47 states as of June 30, 2012. Although we do not directly participate in any government reimbursement programs, our clients reimbursements are subject to government regulation. Therefore, clients are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.
We primarily provide our services pursuant to full service agreements with our clients. In such agreements, we are responsible for the day to day management of the department managers and hourly employees located at our clients facilities. We also provide services on the basis of a management-only agreement for a very limited number of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days notice after the initial 90-day period.
We are organized into two reportable segments; housekeeping, laundry, linen and other services (Housekeeping), and dietary department services (Dietary). At June 30, 2012, Housekeeping is being provided at essentially all of our approximately 3,000 client facilities, generating approximately 69% or $364,509,000 of the total revenues for the six month period ended June 30, 2012. Dietary is being provided to approximately 650 client facilities at June 30, 2012 and contributed approximately 31% or $163,206,000 to the six month period ended June 30, 2012 total revenues.
Housekeeping consists of managing the clients housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a clients facility, as well as the laundering and processing of the personal clothing belonging to the facilitys patients. Also within the scope of this segments service is the responsibility for laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility.
Dietary consists of managing the clients dietary department which is principally responsible for food purchasing, meal preparation and providing dietician consulting professional services, which includes the development of a menu that meets the patients dietary needs.
We currently operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (Huntingdon) and Healthcare Staff Leasing Solutions, LLC (Staff Leasing). Huntingdon invests our cash and cash equivalents and manages our portfolio of marketable securities. Staff Leasing is an entity formed in 2011 to offer professional employer organization (PEO) services to potential clients in the health care industry. As of June 30, 2012, we have entered into PEO service contracts in certain states.
Consolidated Operations
The following table sets forth, for the periods indicated, the percentage which certain items bear to consolidated revenues:
Relation to Consolidated Revenues | ||||||||||||||||
For the Quarter Ended June 30, | For the Six Month Period Ended June 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Revenues |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Operating costs and expenses: |
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Costs of services provided |
86.2 | % | 85.9 | % | 86.7 | % | 86.1 | % | ||||||||
Selling, general and administrative |
6.9 | % | 7.3 | % | 7.5 | % | 7.7 | % | ||||||||
Investment and interest |
0.0 | % | 0.2 | % | 0.3 | % | 0.3 | % | ||||||||
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Income before income taxes |
6.9 | % | 7.0 | % | 6.1 | % | 6.5 | % | ||||||||
Income taxes |
2.6 | % | 2.3 | % | 2.3 | % | 2.3 | % | ||||||||
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Net income |
4.3 | % | 4.7 | % | 3.8 | % | 4.2 | % | ||||||||
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Housekeeping is our largest and core reportable segment, representing approximately 69% of consolidated revenues for the quarter ended June 30, 2012. Dietary revenues represented approximately 31% of consolidated revenues for such quarter.
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Although there can be no assurance thereof, we believe that for the remainder of 2012 Dietarys revenues, as a percentage of consolidated revenues, may increase from its respective percentage previously noted. Furthermore, we expect the sources of organic growth for the remainder of 2012 for the respective operating segments will be primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.
2012 Second Quarter Compared with 2011 Second Quarter
The following table sets forth 2012 second quarter income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared to 2011 second quarter amounts. The difference between the reportable segments operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles.
Quarter Ended June 30, 2012 | ||||||||||||||||||||||||||||
Consolidated |
% inc./
(dec.) |
Corporate and
Eliminations |
Housekeeping
Amount |
% inc. |
Dietary
Amount |
% inc. | ||||||||||||||||||||||
Revenues |
$ | 267,108,000 | 26.3 | % | $ | 2,000 | $ | 183,215,000 | 15.5 | % | $ | 83,891,000 | 58.6 | % | ||||||||||||||
Cost of services provided |
230,206,000 | 26.7 | (14,609,000 | ) | 165,544,000 | 16.2 | 79,271,000 | 57.4 | ||||||||||||||||||||
Selling, general and administrative |
18,524,000 | 19.4 | 18,524,000 | | | | | |||||||||||||||||||||
Investment and interest income |
(95,000 | ) | (120.5 | ) | (95,000 | ) | | | | | ||||||||||||||||||
Income before income taxes |
$ | 18,283,000 | 24.2 | % | $ | (4,008,000 | ) | $ | 17,671,000 | 9.1 | % | $ | 4,620,000 | 83.3 | % |
Revenues
Consolidated
Consolidated revenues increased 26.3% to $267,108,000 in the 2012 second quarter compared to $211,507,000 in the 2011 second quarter as a result of the factors discussed below under Reportable Segments.
We have one Major Client that accounted for approximately 7% and 9%, respectively, of consolidated revenues in the three months ended June 30, 2012 and 2011, respectively. Additionally, we have several other significant clients who each individually contributed at least 3% to our total consolidated revenues for the three months ended June 30, 2012. The loss of one or more of these clients would have a material adverse effect on the results of operations of our two operating segments. In addition, if such clients changed their payment terms, it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.
Reportable Segments
Housekeepings 15.5% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients.
Dietarys 58.6% net growth in reportable segment revenues is primarily a result of providing this service to a greater number of existing Housekeeping clients.
We derived 9% and 3%, respectively, of Housekeeping and Dietarys 2012 second quarter revenues from our Major Client.
Costs of services provided
Consolidated
Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues for the 2012 second quarter increased to 86.2% from 85.9% in the corresponding 2011 quarter. The following table provides a comparison of the primary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance. In addition, see the discussion below on Reportable Segments which provides additional details to explain the increase in consolidated costs of services provided.
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Quarter Ended June 30, 2012 | ||||||||||||
Cost of Services Provided-Key Indicators as a % of Revenue |
2012 | 2011 | Decr% | |||||||||
Bad debt provision |
0.2 | 0.2 | | |||||||||
Workers compensation and general liability insurance |
3.5 | 3.7 | (0.2 | ) |
The bad debt provision was consistent as a percentage of revenue for the three month periods ended June 30, 2012 and 2011.
The workers compensation and general liability insurance expense has decreased primarily due to the overall increase in Dietary revenue and the reduced proportion of labor costs as a percentage of revenue. Additionally, there was more favorable claims experience during the three months ended June 30, 2012 compared to the comparable 2011 period.
See below for the changes in our segment key indicators; however, the net increase in our consolidated cost of services as a percentage of revenue in comparing the period ended June 30, 2012 as compared to the same period in 2011 was impacted by the increase in Dietary revenues.
Reportable Segments
Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the 2012 second quarter increased to 90.4% from 89.8% compared to the corresponding 2011 quarter. Cost of services provided for Dietary, as a percentage of Dietary revenues, for the 2012 second quarter decreased to 94.5% from 95.2% in the corresponding 2011 quarter.
The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage of the respective segments revenues, which we manage on a reportable segment basis in evaluating our financial performance:
Quarter Ended June 30, 2012 | ||||||||||||
Cost of Services Provided-Key Indicators as a % of Revenue |
2012 | 2011 | Incr (Decr)% | |||||||||
Housekeeping labor and other labor costs |
80.1 | 80.1 | (0.0 | ) | ||||||||
Housekeeping supplies |
7.7 | 7.1 | 0.6 | |||||||||
Dietary labor and other labor costs |
52.4 | 52.0 | 0.4 | |||||||||
Dietary supplies |
39.1 | 39.4 | (0.3 | ) |
Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, was consistent for the three months ended June 30, 2012 and 2011. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in linen supplies due to the growth in laundry and linen revenue compared to overall Housekeeping revenues. Additionally, we have added more clients where we provide a greater amount of supplies under the terms of our service agreements compared to what we have historically provided to our client base.
The relatively small increase in Dietary labor and other labor costs, as a percentage of increased Dietary revenues, resulted from reduced efficiencies in managing these costs at the facility level. The decrease in Dietary supplies, as a percentage of Dietary revenues, is primarily the result of more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.
Consolidated Selling, General and Administrative Expense
Quarter Ended June 30, | ||||||||||||||||||||
2012 | 2011 | $ Change | % Incr (Decr) | |||||||||||||||||
Selling, general and administrative expense w/o deferred compensation change |
(a | ) | $ | 18,884,000 | $ | 15,392,000 | $ | 3,492,000 | 22.7 | % | ||||||||||
Gain (loss) of deferred compensation fund |
(360,000 | ) | 119,000 | (479,000 | ) | (402.5 | )% | |||||||||||||
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Consolidated selling, general and administrative expense |
(b | ) | $ | 18,524,000 | $ | 15,511,000 | $ | 3,013,000 | 19.4 | % | ||||||||||
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(a) | Selling, general and administrative expense excluding the change in the market value of the Deferred Compensation Fund. |
(b) | Consolidated selling, general and administrative expense reported for the period presented. |
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Although our growth in consolidated revenues was 26.3%, 2012 second quarter selling, general and administrative expenses excluding the change in the deferred compensation fund increased $3,492,000 or 22.7% compared to the 2011 second quarter. Consequently, 2012 second quarter selling, general and administrative expenses (excluding impact of deferred compensation fund), as a percentage of consolidated revenues, decreased to 7.1% compared to 7.3% in the 2011 second quarter. This decrease resulted primarily from the decrease in our payroll and payroll related expenses, travel related costs and professional fees as a percentage of revenues. The decrease in payroll and payroll related costs resulted from the improved leverage of our existing management structure to support the increased revenue.
Consolidated Investment and Interest Income
Investment and interest income, as a percentage of consolidated revenues, decreased to less than .1% in the 2012 second quarter compared to .2% in the 2011 second quarter. The net decrease is primarily due to the investment loss related to the change in the deferred compensation fund during the quarter ended June 30, 2012 versus the investment income related to the change in the deferred compensation fund during the comparable period in 2011.
Income before Income Taxes
Consolidated
As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for the 2012 second quarter decreased to 6.9%, as a percentage of consolidated revenues, compared to 7.0% in the 2011 second quarter.
Reportable Segments
Housekeepings increase in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in reportable segment revenues, offset by the increased cost of housekeeping supplies.
Dietarys increased income before income taxes is primarily attributable to the increase in reportable segment revenues and the slight decrease in dietary supply costs as a percentage of Dietary revenues, offset by the increase in labor and labor related costs.
Consolidated Income Taxes
For the quarter ended June 30, 2012, our effective tax rate was approximately 38%, an increase from the approximately 33% effective tax rate for the comparable 2011 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to a decrease in expected tax credits realized for 2012 compared to previous fiscal periods. The Company received credits in 2011 related to the Work Opportunity Tax Credit (WOTC) program but this program has not yet been renewed in 2012. The Company will continue to receive additional credits related to prior periods but will not have the benefit of credits for 2012 new hires unless the program is renewed. Additionally, the Company realized significant tax credits during 2011 from the New Hire Retention Credit, a one-time general business credit at the Federal level authorized by the Hiring Incentives to Restore Employment Act of 2011. The new hire retention credit allowed an employer a credit of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. The Company earned new hire retention credits for the quarter ended June 30, 2011, but did not earn additional amounts in 2012 as the credit expired at December 31, 2011. If the WOTC program is renewed retroactive to the beginning of the year in 2012, our effective tax rate could be reduced below the current 38%.
Consolidated Net Income
As a result of the matters discussed above, consolidated net income for the 2012 second quarter decreased to 4.3%, as a percentage of consolidated revenues, compared to 4.7% in the 2011 second quarter.
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2012 Six Month Period Compared with 2011 Six Month Period
The following table sets forth the income statement key components for the six month period ended June 30, 2012 that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared to the corresponding 2011 six month period. The difference between the reportable segments operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles.
Six Month Period Ended June 30, 2012 | ||||||||||||||||||||||||||||
Consolidated |
%
inc. |
Corporate and
Eliminations |
Housekeeping
Amount |
% inc |
Dietary
Amount |
% inc. | ||||||||||||||||||||||
Revenues |
$ | 527,715,000 | 25.7 | % | $ | 37,000 | $ | 364,397,000 | 15.6 | % | $ | 163,281,000 | 56.2 | % | ||||||||||||||
Cost of services provided |
457,701,000 | 26.5 | (26,176,000 | ) | 329,270,000 | 16.9 | 154,607,000 | 56.9 | ||||||||||||||||||||
Selling, general and administrative |
39,506,000 | 22.3 | 39,506,000 | | | | | |||||||||||||||||||||
Investment and interest income |
1,558,000 | 32.4 | 1,558,000 | | | | | |||||||||||||||||||||
Income before income taxes |
$ | 32,066,000 | 18.5 | % | $ | (11,735,000 | ) | $ | 35,127,000 | 5.2 | % | $ | 8,674,000 | 44.8 | % |
Revenues
Consolidated
Consolidated revenues increased 25.7% to $527,715,000 in the six month period ended June 30, 2012 compared to $419,897,000 in the corresponding period in 2011 as a result of the factors discussed below under Reportable Segments.
We have one Major Client that accounted for approximately 7% and 9%, respectively, of consolidated revenues in the six month periods ended June 30, 2012 and 2011, respectively. Additionally, we have several other significant clients who each individually contributed at least 3% to our total consolidated revenues for the six months ended June 30, 2012. The loss of one or more of these clients would have a material adverse effect on the results of operations of our two operating segments. In addition, if such clients changed their payment terms, it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.
Reportable Segments
Housekeepings 15.6% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients.
Dietarys 56.2% net growth in reportable segment revenues is primarily a result of providing this service to a greater number of existing Housekeeping clients.
We derived 9% and 3%, respectively, of Housekeeping and Dietarys revenues for the six month period ended June 30, 2012 from our Major Client.
Costs of services provided
Consolidated
Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues for the six months ended June 30, 2012 increased to 86.7% from 86.1% in the corresponding 2011 period. The following table provides a comparison of the primary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance. In addition, see the discussion below on Reportable Segments which provides additional details to explain the increase in consolidated costs of services provided.
Six Months Ended June 30, 2012 | ||||||||||||
Cost of Services Provided-Key Indicators as a % of Revenue |
2012 | 2011 | Decr% | |||||||||
Bad debt provision |
0.3 | 0.4 | (0.1 | ) | ||||||||
Workers compensation and general liability insurance |
3.5 | 3.7 | (0.2 | ) |
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The bad debt provision decreased primarily due to the prior year write-off of amounts owed from certain nursing homes that concluded their bankruptcy proceedings during the six months ended June 30, 2011.
The workers compensation and general liability insurance expense has decreased primarily due to the overall increase in Dietary revenue and the reduced proportion of labor costs as a percentage of revenue. There was additionally more favorable claims experience during the six months ended June 30, 2012 compared to the comparable 2011 period.
See below for the changes in our segment key indicators; however, the net increase in our consolidated cost of services as a percentage of revenue in comparing the six month period ended June 30, 2012 as compared to the same period in 2011 was impacted by the increase in Dietary revenues.
Reportable Segments
Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the six month period ended June 30, 2012 increased to 90.4% from 89.4% compared to the corresponding 2011 period. Cost of services provided for Dietary, as a percentage of Dietary revenues, for the for the six month period ending June 30, 2012 increased to 94.7% from 94.3% in the corresponding 2011 period.
The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage of the respective segments revenues, which we manage on a reportable segment basis in evaluating our financial performance:
Six Months Ended June 30, 2012 | ||||||||||||
Cost of Services Provided-Key Indicators as a % of Revenue |
2012 | 2011 | Incr (Decr)% | |||||||||
Housekeeping labor and other labor costs |
80.2 | 79.8 | 0.4 | |||||||||
Housekeeping supplies |
7.6 | 7.0 | 0.6 | |||||||||
Dietary labor and other labor costs |
52.5 | 52.0 | 0.5 | |||||||||
Dietary supplies |
39.2 | 39.3 | (0.1 | ) |
The increase in Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, resulted primarily from inefficiencies recognized in managing labor at the facility level. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in linen supplies due to the growth in laundry and linen revenue compared to overall Housekeeping revenues. Additionally, we have added more clients where we provide a greater amount of supplies under the terms of our service agreements as compared to what we have historically provided to our client base.
The relatively small increase in Dietary labor and other labor costs, as a percentage of Dietary revenues, resulted from reduced efficiencies in managing these costs at the facility level. The decrease in Dietary supplies, as a percentage of Dietary revenues, is primarily the result of more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.
Consolidated Selling, General and Administrative Expense
Six Months Ended June 30, | ||||||||||||||||||||
2012 | 2011 | $ Change | % Inc. | |||||||||||||||||
Selling, general and administrative expense w/o deferred compensation change |
(a | ) | $ | 38,569,000 | $ | 31,743,000 | $ | 6,826,000 | 21.5 | % | ||||||||||
Gain of deferred compensation fund |
937,000 | 548,000 | 389,000 | 71.0 | % | |||||||||||||||
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Consolidated selling, general and administrative expense |
(b | ) | $ | 39,506,000 | $ | 32,291,000 | $ | 7,215,000 | 22.3 | % | ||||||||||
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(a) | Selling, general and administrative expense excluding the change in the market value of the Deferred Compensation Fund. |
(b) | Consolidated selling, general and administrative expense reported for the period presented. |
Although our growth in consolidated revenues was 25.7%, selling, general and administrative expenses for the six months ended June 30, 2012 excluding the change in the deferred compensation fund increased $6,826,000 or 21.5% compared to the
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corresponding 2011 period. Consequently, selling, general and administrative expenses (excluding impact of deferred compensation fund), as a percentage of consolidated revenues, decreased to 7.3% for the six months ended June 30, 2012 as compared to 7.6% in the corresponding 2011 period. This decrease resulted primarily from the decrease in our payroll and payroll related expenses, travel related costs and professional fees as a percentage of revenues. The decrease in payroll and payroll related costs resulted from the improved leverage of our existing management structure to support the increased revenue.
Consolidated Investment and Interest Income
Investment and interest income, as a percentage of consolidated revenues, was consistently .3% in the six months ended June 30, 2012 and 2011. The net increase in the change in our deferred compensation fund in the six month period ended June 30, 2012 as compared to the same period in 2011, was offset by a decrease in our investment income due primarily due to the decrease in our marketable securities.
Income before Income Taxes
Consolidated
As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for the six month period ended June 30, 2012 decreased to 6.1%, as a percentage of consolidated revenues, compared to 6.5% in the corresponding 2011 period.
Reportable Segments
Housekeepings decrease in income before income taxes is primarily attributable to the key indicators discussed above, specifically the increase in labor and labor related costs and housekeeping supplies.
Dietarys increase in income before income taxes is primarily attributable to the increase in reportable segment revenues, offset by the increase in labor and labor related costs as a percentage of Dietary revenues.
Consolidated Income Taxes
For the six month period ended June 30, 2012, our effective tax rate was approximately 38%, an increase from the 35% effective tax rate for the comparable 2011 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to a decrease in expected tax credits realized for 2012 compared to previous fiscal periods. The Company received credits in 2011 related to the Work Opportunity Tax Credit (WOTC) program but this program has not yet been renewed in 2012. The Company will continue to receive additional credits related to prior periods but will not have the benefit of credits for 2012 new hires unless the program is renewed. Additionally, the Company realized significant tax credits during 2011 from the New Hire Retention Credit, a one-time general business credit at the Federal level that was authorized by the Hiring Incentives to Restore Employment Act of 2011. The new hire retention credit allowed an employer a credit of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. The Company received new hire retention credits for the six month period ended June 30, 2011, but did not earn additional amounts in 2012 as the credit expired. If the WOTC program is renewed retroactive to the beginning of the year in 2012, our effective tax rate could be reduced below the current 38%.
Consolidated Net Income
As a result of the matters discussed above, consolidated net income for the six month period ended June 30, 2012 decreased to 3.8%, as a percentage of consolidated revenues, compared to 4.2% in the corresponding 2011 period.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on our judgment. Therefore, it should be noted that financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.
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The policies discussed below are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting standards generally accepted in the United States, with no need for our judgment in their application. There are also areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2011, which contain accounting policies and estimates and other disclosures required by accounting principles generally accepted in the United States.
Allowance for Doubtful Accounts
The Allowance for Doubtful Accounts (the Allowance) is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The Allowance is evaluated based on our periodic review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, we sometimes have been required to extend the period of payment for certain clients beyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In making credit evaluations, we analyze and anticipate, where possible, the specific cases described above and consider the general collection risks associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluations, and monitor accounts to minimize the risk of loss.
In accordance with the risk of extending credit, we regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, will provide in our Allowance for such receivables. We generally follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow paying clients. The reserve is based upon our estimates of ultimate collectability. Correspondingly, once our recovery of a receivable is typically determined through litigation, bankruptcy proceedings or negotiation to be less than the recorded amount on our balance sheet, we will charge-off the applicable amount to the Allowance.
Our methodology for the Allowance is based upon a risk-based evaluation of accounts and notes receivable associated with a clients ability to make payments. Such Allowance generally consists of an initial amount established based upon criteria generally applied if and when a client account files bankruptcy, is placed for collection/litigation and/or is considered to be pending collection/litigation. The initial Allowance is adjusted either higher or lower when additional information is available to permit a more accurate estimate of the collectability of an account.
Summarized below for the six month period ended June 30, 2012 and year ended December 31, 2011 are the aggregate account balances for the six Allowance criteria noted above, net write-offs of client accounts, bad debt provision and allowance for doubtful accounts.
Period Ended |
Aggregate Account
of Balances of Clients in Bankruptcy or in/or Pending Collection/ Litigation |
Net Write-offs of
Client Accounts |
Bad Debt
Provision |
Allowance
for
Doubtful Accounts |
||||||||||||
June 30, 2012 |
$ | 7,787,000 | $ | 815,000 | $ | 1,350,000 | $ | 5,041,000 | ||||||||
December 31, 2011 |
7,784,000 | 2,013,000 | 2,450,000 | 4,506,000 |
At June 30, 2012, we identified accounts totaling $7,787,000 that require an Allowance based on potential impairment or loss of value. An Allowance totaling $5,041,000 was provided for these accounts at such date. Actual collections of these accounts could differ from that which we currently estimate. If our actual collection experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by $57,000.
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Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends, as more fully discussed under Liquidity and Capital Resources below, and as further described in our 2011 Annual Report on Form 10-K in Part I Item 1A under Risk Factors, and Part 1 Item 1 under Government Regulation of Clients and Service Agreements/Collections, change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.
Accrued Insurance Claims
We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers compensation insurance, which comprise approximately 23% of our liabilities at June 30, 2012. Our accounting for this plan is affected by various uncertainties because we must make assumptions and apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. We address these uncertainties by regularly evaluating our claims pay-out experience, present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluations are based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.
For workers compensation, we record a reserve based on the present value of estimated future cost of claims and related expenses that have been reported but not settled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period. Reducing the discount factor by 1% would reduce net income by approximately $42,000. Additionally, reducing the estimated payout period by six months would result in an approximate $102,000 reduction in net income.
For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.
Asset Valuations and Review for Potential Impairment
We review our fixed assets, goodwill and other intangible assets at least annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. This review requires that we make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. We believe that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.
Income Taxes
Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.
We are subject to income taxes in the United States and numerous state and local jurisdictions. The determination of the income tax provision is an inherently complex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates of the amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgments and estimates inaccurate. No assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Companys historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made.
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Liquidity and Capital Resources
At June 30, 2012, we had cash and cash equivalents, and marketable securities of $76,997,000 and working capital of $190,886,000 compared to December 31, 2011 cash and cash equivalents, and marketable securities of $69,976,000 and working capital of $186,734,000. We view our cash and cash equivalents, and marketable securities as our principal measure of liquidity. Our current ratio at June 30, 2012 decreased to 4.2 to 1 compared to 5.1 to 1 at December 31, 2011. This decrease resulted primarily from the increase in our accounts payable and income taxes payable which were primarily offset by the increase in cash and cash equivalents and marketable securities and prepaid expenses and other current assets. On an historical basis, our operations have generally produced consistent cash flow and have required limited capital resources. We believe our current and near term cash flow positions will enable us to fund our continued anticipated growth.
Operating Activities
The net cash provided by our operating activities was $27,382,000 for the six month period ended June 30, 2012. The principal sources of net cash flows from operating activities for the six month period ended June 30, 2012 were net income, and non-cash charges to operations for bad debt provisions, depreciation and amortization. Additionally, operating activities cash flows increased by $20,880,000 as a result of the increase in accounts payable and other accrued expenses, accrued insurance claims, accrued payroll and related payroll taxes, deferred compensation liability and the decrease in prepaid income taxes for the six month period. These operating cash inflows were offset primarily by the cash outflow of $15,505,000 related to the increase in the total accounts and notes receivables, inventories and supplies and prepaid expenses primarily due to the revenue growth experienced in this period along with the increase in the deferred compensation funding.
Investing Activities
Our principal source of cash in investing activities for the six month period ended June 30, 2012 was $9,422,000 from the net sales less purchases of marketable securities. The net sales of marketable securities were used to increase the Companys available cash to support the increased business in the fourth quarter of 2011 and the six months ended June 30, 2012. Additionally, we expended $1,825,000 for the purchase of housekeeping equipment, computer software and equipment, and laundry equipment installations. Under our current plans, which are subject to revision upon further review, it is our intention to spend an aggregate of $2,000,000 to $3,000,000 during the remainder of 2012 for such capital expenditures.
Financing Activities
During the six month period ended June 30, 2012, we paid regular quarterly cash dividends approximating $21,803,000 as follows:
Quarter ended | ||||||||
March 31, 2012 | June 30, 2012 | |||||||
Cash dividend per common share |
$ | .16125 | $ | .16250 | ||||
Total cash dividends paid |
$ | 10,847,000 | $ | 10,956,000 | ||||
Record date |
February 24 | April 27 | ||||||
Payment date |
March 26 | May 18 |
On July 10, 2012, our Board of Directors declared a regular cash dividend of $.16375 per common share to be paid on August 24, 2012 to shareholders of record as of July 27, 2012.
Operating cash flows exceeded dividend payments for the six months ended June 30, 2012. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.
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During the six months ended 2012, we received proceeds of $2,664,000 from the exercise of stock options by employees. Additionally, as a result of deductions derived from the stock option exercises, we recognized an income tax benefit of $1,051,000.
Line of Credit
We have a $57,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line of credit are payable upon demand. At June 30, 2012, there were no borrowings under the line. However, at such date, we had outstanding a $40,420,000 irrevocable standby letter of credit which relate to payment obligations under our insurance programs. As a result of the letter of credit issued, the amount available under the line of credit was reduced by $40,420,000 at June 30, 2012.
The line of credit requires us to satisfy two financial covenants on a quarterly basis. Such covenants, and their respective status at June 30, 2012, were as follows:
Covenant Description and Requirement |
Status at June 30, 2012 | |||
Commitment coverage ratio: cash and cash equivalents plus marketable securities must equal or exceed outstanding obligations under the line by a multiple of 1.25 |
1.90 | |||
Tangible net worth: must exceed $159,078,000 |
$ | 198,814,000 |
As noted above, we complied with the financial covenants at June 30, 2012 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on June 30, 2013. We believe the line of credit will be renewed at that time.
Accounts and Notes Receivable
We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Congress has enacted a number of laws during the past decade that have significantly altered, or may alter, overall government reimbursement for nursing home services. Because our clients revenues are generally dependent on Medicare and Medicaid reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long term care industry have affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan and therefore may ultimately enhance our ability to collect the amounts due. At June 30, 2012 and December 31, 2011, we had $8,437,000 and $6,693,000, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.
As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, in March 2010, comprehensive health care reform legislation was signed into law. The Act will significantly impact the governmental healthcare programs our clients participate in, and reimbursements received there under from governmental or third-party payors. Furthermore, in the coming year, new proposals or additional changes in existing regulations could be made under the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying those increases. A few states have indicated they may run out of cash to pay Medicaid providers, including nursing homes. In addition, certain state governors have recently stated that they will reject Federal Medicaid assistance under the Act. Any negative changes in our clients reimbursements would negatively impact our results of operations. Although we are currently evaluating the Acts effect on our client base, we may not know the full effect until such a time as these laws are fully implemented and the Centers for Medicare and Medicaid Services and other agencies issue applicable regulations or guidance.
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We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $1,350,000 and $1,500,000 for the six months ended June 30, 2012 and 2011, respectively. These provisions represent approximately .3% and .4% as a percentage of total revenues for such respective periods. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.
At June 30, 2012, amounts due from our Major Client represented less than 1% of our accounts receivable balance. If such client changes its payment terms, it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.
Insurance Programs
We self-insure or carry a high deductible, and therefore retain a substantial portion of the risk associated with the expected losses under our general liability and workers compensation programs. Under our insurance plans for general liability and workers compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost.
For workers compensation, we record a reserve based on the present value of future payments, including an estimate of claims incurred but not reported, that are developed as a result of a review of our historical data and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period.
For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.
We regularly evaluate our claims pay-out experience, present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluation is based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our claims experience and/or industry trends result in an unfavorable change, it would have an adverse effect on our consolidated results of operations, financial condition and cash flows.
Capital Expenditures
The level of capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment purchases, laundry and linen equipment installations, and computer hardware and software. Although we have no specific material commitments for capital expenditures through the end of calendar year 2012, we estimate that for the remainder of 2012 we will have capital expenditures of approximately $2,000,000 to $3,000,000 in connection with housekeeping equipment purchases and laundry and linen equipment installations in our clients facilities, as well as expenditures relating to internal data processing hardware and software requirements. We believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would seek to obtain necessary working capital from such sources as long-term debt or equity financing.
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Material Off-Balance Sheet Arrangements
We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit previously discussed.
Effects of Inflation
Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in costs attributable to inflation by passing through such cost increases to our clients.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
At June 30, 2012 and December 31, 2011, we had $76,997,000 and $69,976,000, respectively, in cash, cash equivalents and marketable securities. In accordance with U.S. GAAP, the fair value of all of our cash, cash equivalents and marketable securities is determined based on Level 1 or Level 2 inputs, which consist of quoted prices whose value is based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines.
Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our investments.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the Exchange Act), such as this Form 10-Q, is reported in accordance with Securities and Exchange Commission (SEC) rules. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Based on their evaluation as of June 30, 2012, pursuant to Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, believe our disclosure controls and procedures (as defined in Exchange Act 13a-15(e) are effective.
In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by our management, including our Chief Executive Officer and Chief Financial Officer, no changes during the quarter ended June 30, 2012, were identified that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Certifications
Certifications of the Principal Executive Officer and Principal Financial Officer regarding, among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.
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ITEM 1. | Legal Proceedings. |
Not Applicable
ITEM 1A. | Risk Factors |
There has been no material change in the risk factors set forth in Part I, Item 1A, Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2011.
ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
None
ITEM 3. | Defaults under Senior Securities. |
Not Applicable
ITEM 4. | Mine Safety Disclosures |
Not Applicable
ITEM 5. | Other Information. |
None
ITEM 6. | Exhibits |
a) | Exhibits - |
10.1 | 2012 Equity Incentive Plan | |
31.1 | Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 | |
32.2 | Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 | |
EX-101 | XBRL Instance Document | |
EX-101 | XBRL Taxonomy Extension Schema Document | |
EX-101 | XBRL Taxonomy Calculation Linkbase Document | |
EX-101 | XBRL Taxonomy Extension Definition Linkbase Document | |
EX-101 | XBRL Taxonomy Labels Linkbase Document | |
EX-101 | XBRL Taxonomy Presentation Linkbase Document |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HEALTHCARE SERVICES GROUP, INC. | ||||
July 27, 2012 |
/s/ Daniel P. McCartney |
|||
Date | DANIEL P. McCARTNEY, | |||
Chief Executive Officer (Principal Executive Officer) |
||||
July 27, 2012 |
/s/ John C. Shea |
|||
Date | JOHN C. SHEA, | |||
Chief Financial Officer and Secretary (Principal Financial Officer) |
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Exhibit 10.1
HEALTHCARE SERVICES GROUP, INC.
2012 EQUITY INCENTIVE PLAN
1. | Purpose . |
The Healthcare Services Group, Inc. 2012 Equity Incentive Plan (the Plan ) is intended to provide an incentive to employees, non-employee directors and advisors of Healthcare Services Group, Inc., a Pennsylvania corporation (the Company ), and its Subsidiaries to remain in the service of the Company and its Subsidiaries and to align their interest in the success of the Company with the interests of the Companys stockholders. The Plan seeks to promote the highest level of performance by providing an economic interest in the long-term success of the Company.
2. | Definitions . |
For purposes of the Plan, the following terms have the following meanings:
Affiliate means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under common control with, such Person. For purposes of this definition, control (including with correlative meanings, the terms controlling , controlled by , or under common control with ), as used with respect to any Person, shall mean the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities or by contract or otherwise.
Agreement means an agreement between the Company and an Eligible Person providing for the grant of an Award hereunder.
Award means any Option, Stock Appreciation Right, Restricted Share, Bonus Stock, Stock Unit, Performance Share, or other incentive payable in cash or in shares of Common Stock as may be designated by the Committee from time to time under the Plan.
Beneficial Owner shall have the meaning set forth in Rule 13d-3 under the 1934 Act.
Beneficiary or Beneficiaries means the person(s) designated by a Participant or such Participants Permitted Transferee in writing to the Company to receive payments or other distributions or rights pursuant to the Plan upon the death of such Participant or such Participants Permitted Transferee. If no Beneficiary is so designated or if no Beneficiary is living at the time a payment, distribution, or right becomes payable or distributable pursuant to the Plan, such payment, distribution, or right shall be made to the estate of the Participant or a Permitted Transferee thereof. The Participant or Permitted Transferee, as the case may be, shall have the right to change the designated Beneficiaries from time to time by written instrument filed with the Committee in accordance with such rules as may be specified by the Committee.
Board of Directors means the Board of Directors of the Company.
Bonus Shares mean an Award of shares of Common Stock granted under Section 9 that are fully vested when granted.
Cashless Exercise means an exercise of Vested Options outstanding under the Plan through (a) the delivery of irrevocable instructions to a broker to make a sale of a number of Option Shares that results in proceeds thereon in an amount required to pay the aggregate exercise price for all the shares underlying such Vested Options being so exercised (and any required withholding tax) and to deliver such proceeds to the Company in satisfaction of such aggregate exercise price (and any required withholding tax) or (b) any other surrender to the Company of Option Shares or Vested Options outstanding under the Plan to satisfy the applicable aggregate exercise price (and any withholding tax) required to be paid upon such exercise.
Cause means, with respect to any Participant, (a) cause as defined in an employment agreement or any other similar type of agreement applicable to the Participant (so long as any act or omission constituting cause for such purpose was willful), or (b) in the case of a Participant who does not have an employment agreement or any other similar type of agreement or has an employment agreement or any other similar type of agreement that does not define cause: (i) any act or omission that constitutes a material breach by the Participant of any of such Participants obligations under such Participants employment agreement (if any) with the Company or any of its Subsidiaries, the applicable Agreement or any other agreement with the Company or any of its Subsidiaries; (ii) the willful and continued failure or refusal of the Participant substantially to perform the duties required of such Participant as an employee of the Company or any of its Subsidiaries, or performance significantly below the level required or expected of the Participant, as determined by the Committee; (iii) any willful violation by the Participant of any federal or state law or regulation applicable to the business of the Company or any of its Subsidiaries or Affiliates including, but not limited to, the rules and regulations promulgated by the Securities and Exchange Commission as well as the provisions of the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Participants commission of any felony or other crime involving moral turpitude, or any willful perpetration by the Participant of a common law fraud; or (iv) any other misconduct by the Participant that is materially injurious to the financial condition or business reputation of, or is otherwise materially injurious to, the Company or any of its Subsidiaries or Affiliates.
Change in Control means the occurrence of any one of the following:
(a) a tender offer (or series of related offers) shall be made and consummated for the ownership of 50% or more of the outstanding voting securities of the Company, unless as a result of such tender offer more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to the commencement of such offer), any employee benefit plan of the Company or its Subsidiaries, and their affiliates;
(b) the Company shall be merged or consolidated with another corporation, unless as a result of such merger or consolidation more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its Subsidiaries, and their affiliates;
(c) the Company shall sell substantially all of its assets to another corporation that is not wholly owned by the Company, unless as a result of such sale more than 50% of such assets shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to such transaction), any employee benefit plan of the Company or its Subsidiaries and their affiliates; or
(d) a Person (as defined below) shall acquire 50% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record), unless as a result of
such acquisition more than 50% of the outstanding voting securities of the surviving or resulting corporation shall be owned in the aggregate by the stockholders of the Company (as of the time immediately prior to the first acquisition of such securities by such Person), any employee benefit plan of the Company or its Subsidiaries, and their affiliates;
(e) a majority of the members of the Board is replaced during any 12-month period by directors whose appointment or election is not endorsed by a majority of the members of the Board prior to the date of the appointment or election.
For purposes of this definition, ownership of voting securities shall take into account and shall include ownership as determined by applying the provisions of Rule 13d-3(d)(I)(i) (as in effect on the date hereof) under the 1934 Act. In addition, for such purposes, Person shall have the meaning given in Section 3(a)(9) of the 1934 Act, as modified and used in Sections 13(d) and 14(d) thereof, however, a Person shall not include (A) the Company or any of its Subsidiaries; (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries; (C) an underwriter temporarily holding securities pursuant to an offering of such securities; or (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company.
Code means the Internal Revenue Code of 1986, as amended, including the rules and regulations promulgated thereunder.
Committee means a Committee of the Board of Directors appointed to administer the Plan.
Common Stock means shares of Common Stock, par value $0.01 per share, of the Company.
Competing Business means a business or enterprise (other than the Company and its direct or indirect Subsidiaries) that is engaged in the housekeeping, laundry, linen, and/or dietary services business, in any form whatsoever, which services healthcare and/or healthcare-related institutions in the continental United States or Canada.
Date of Grant means the date of grant of an Award as set forth in the applicable Agreement.
Delay Period shall have the meaning set forth in Section 24.
Effective Date shall have the meaning set forth in Section 25.
Eligible Persons means employees, non-employee directors and advisors of the Company and its Subsidiaries.
Fair Market Value means, with respect to a share of Common Stock on any relevant day, (a) if such Common Stock is traded on a national securities exchange, the closing price at the end of the applicable business day on such day, or if the Common Stock did not trade on such day, the closing price on the most recent preceding day on which there was a trade, (b) if such Common Stock is quoted on an automated quotation system, the closing price on such day, or if the Common Stock did not trade on such day, the mean between the closing bid and asked prices on such day, or (c) in all other cases, the fair market value as determined by the Committee in good faith and using such financial sources as it deems relevant and reliable (but in any event not less than fair market value within the meaning of Code Section 409A).
Good Reason means, with respect to any Participant, (a) good reason as defined in an employment agreement or any other similar type of agreement applicable to such Participant, or (b) in the case of a Participant who does not have an employment agreement or any other similar type of agreement that defines good reason, a failure by the Company to pay material compensation due and payable to the Participant in connection with such Participants employment.
Incentive Stock Option means an Option granted with the intention that it qualify as an incentive stock option as that term is defined in Code Section 422 or any successor provision.
1933 Act means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder.
1934 Act means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder.
Nonqualified Stock Option means an Option other than an Incentive Stock Option.
Option means a right to purchase Common Stock granted pursuant to Section 8.
Option Price means, with respect to any Option, the exercise price per share of Common Stock to which it relates.
Option Shares means the shares of Common Stock acquired by a Participant upon exercise of an Option.
Outstanding , with respect to any share of Common Stock, means, as of any date of determination, all shares that have been issued on or prior to such date, other than shares repurchased or otherwise reacquired by the Company or any Affiliate thereof, on or prior to such date.
Participant means any Eligible Person who has been granted an Award.
Performance Share has the meaning set forth in Section 12.
Permanent Disability , with respect to any Participant who is an employee of the Company or any of its Subsidiaries, shall mean a permanent and total disability as defined in Code Section 22(e)(3).
Permitted Transferee means, (a) with respect to outstanding shares of Common Stock held by any Participant, any Person with respect to which the Board of Directors shall have adopted a resolution stating that the Board of Directors has no objection if a transfer of shares is made to such Person, and (b) with respect to Awards, or any other share of Common Stock issued as or pursuant to any Award, held by any Participant, (i) any Person to whom such Awards or other shares are transferred by will or the laws of descent and distribution or (ii) the Company.
Person means an individual, a partnership, a joint venture, a corporation, an association, a trust, an estate or other entity or organization, including a government or any department or agency thereof.
Qualifying Performance Criteria has the meaning set forth in Section 14(a) of the Plan.
Restricted Shares mean shares of Common Stock awarded to a Participant subject to the terms and conditions of the Plan under Section 9, the rights of ownership of which are subject to restrictions prescribed by the Committee.
Retirement , with respect to any Participant who is an employee of the Company or any of its Subsidiaries, means resignation or termination of employment (other than termination for Cause) upon the first to occur of the Participants attaining (a) age 62 or (b) age 55 with 20 years of service with the Company or a Subsidiary (including years of service granted by the Company or a Subsidiary as a result of a merger, acquisition, or other transaction); further provided that the Committee may determine in its sole discretion that a resignation or termination of employment under other circumstances shall be considered Retirement for purposes of the Plan.
Stock Appreciation Right means a right that entitles the Participant to receive, in cash or Common Stock (as determined by the Committee in its sole discretion) value equal to or otherwise based on the excess of (a) the Fair Market Value of a specified number of shares of Common Stock at the time of exercise over (b) the exercise price of the right, as established by the Committee on the Date of Grant.
Stock Unit means an Award granted under Section 11 denominated in units of Common Stock.
Subsidiary means any corporation in which more than 50% of the total combined voting power of all classes of stock is owned, either directly or indirectly, by the Company or another Subsidiary.
Substitute Award means any Award issued by the Company in connection with a merger (in which the Company is the survivor), acquisition or other corporate transaction.
Vested Options means, as of any date of determination, Options that by their terms have vested and are exercisable on such date.
Vested Restricted Shares means, as of any date of determination, Restricted Shares that by their terms have vested as of such date.
A Wrongful Solicitation shall be deemed to occur when a Participant or former Participant directly or indirectly (except in the course of such Participants employment with the Company), for the purpose of conducting or engaging in a Competing Business, calls upon, solicits, advises or otherwise does, or attempts to do, business with any Person who is, or was, during the then most recent 12-month period, a client of the Company or any of its Affiliates, or takes away or interferes or attempts to take away or interfere with any custom, trade, business, patronage or affairs of the Company or any of its Affiliates, or hires or attempts to hire any Person who is, or was during the most recent 12-month period, an employee, officer, representative or agent of the Company or any of its Affiliates, or solicits, induces, or attempts to solicit or induce any person who is an employee, officer, representative or agent of the Company or any of its Affiliates to leave the employ of the Company or any of its Affiliates, or violate the terms of their contract, or any employment agreement, with it.
3. | Administration of the Plan . |
(a) Members of the Committee . The Plan shall be administered, and Awards shall be granted hereunder, by the Committee.
(b) Authority of the Committee . Subject to Section 3(a), the Committee shall have full discretionary power and authority, subject to such resolutions not inconsistent with the provisions of the Plan or applicable law as may from time to time be adopted by the Board, to (a) interpret and administer the Plan and any instrument or agreement entered into under the Plan, (b) establish such rules and regulations and appoint such agents as it shall deem appropriate for the proper administration of the Plan, and (c) make any determination and take any other action that the Committee deems necessary or desirable for administration of the Plan. All questions of interpretation, administration, and application of the Plan shall be determined in good faith by a majority of the members of the Committee then in office, except that the Committee may authorize any one or more of its members, or any officer of the Company, to execute and deliver documents on behalf of the Committee, and the determination of such majority shall be final and binding in all matters relating to the Plan.
4. | Number of Shares Issuable in Connection with Awards . |
(a) Limit . The initial total aggregate number of shares of Common Stock for which Awards may be made under the Plan shall not exceed 5% of the Companys issued and outstanding Common Stock on the date of the approval of this Plan by the Companys shareholders. Notwithstanding the foregoing, the number of shares of Common Stock available for issuance under the Plan, including shares subject to then outstanding Awards, shall automatically increase on the first trading day of January of each calendar year during the term of the Plan, beginning with calendar year 2013, by an amount equal to the lesser of (i) 5% of the positive difference, if any, between the number of outstanding shares of Common Stock, including shares subject to outstanding Awards, on the last trading day of the immediately preceding calendar year and the number of outstanding shares of Common Stock, including shares subject to outstanding Awards, on the first trading day of such immediately preceding calendar year; or (ii) an amount determined by the Board of Directors, in its discretion. No Incentive Stock Options may be granted on the basis of the additional shares of Common Stock resulting from such annual increases. The limitation established by this Section 4(a) shall be subject to adjustment as provided in Section 16. In addition, any shares that remain available for future grant in the Healthcare Services Group, Inc. 2002 Stock Option Plan (the Prior Plan) as of the Effective Date shall be added to the number of shares of Common Stock that may be issued under the Plan. Upon the Effective Date, no further awards may be made from the Prior Plan. Notwithstanding the foregoing, shares subject to a tandem SAR (as described more fully in Section 10 hereof) shall be charged against the authorized shares only once for the overall number of shares subject thereto and not for both the number of shares subject to the tandem SAR portion of the Award and the number of shares subject to the Option portion of the Award. The provisions of the preceding sentence shall apply whether an exercised tandem SAR is settled in cash or stock, or partly in both. Subject to the limitations contained in Section 8 hereof with respect to Incentive Stock Options, the maximum number of shares that may be granted as Stock Options or SARs under the Plan to an employee who is a Participant during any calendar year shall not exceed 50,000 shares.
(b) Subject to the overall 5% limit, as adjusted, provided in Section 4(a), the maximum aggregate number of shares of Common Stock for which Restricted Shares may be awarded under the Plan shall not exceed 5% of the Companys issued and outstanding Common Stock on the date of the approval of this Plan by the Companys shareholders. The limitation established by the preceding sentence shall be subject to adjustment as provided in Section 4(a) above and Section 16.
(c) If any Option is exercised by tendering Common Stock, either actually or by attestation, to the Company as full or partial payment in connection with the exercise of such Option under the Plan, or if the tax withholding requirements are satisfied through such tender, only the number of shares of Common Stock issued net of the Common Stock tendered shall be deemed delivered for purposes of determining the maximum number of shares available for Awards under the Plan.
(d) Replenishment Provisions . Shares subject to any Awards that expire without being exercised or that are forfeited (and shares subject to awards made prior to the Effective Date under a Prior Plan that expire or are forfeited) shall again be available for future grants of Awards, provided that shares subject to a tandem SAR shall be replenished only once for the overall number of shares subject thereto and not for both the number of shares subject to the tandem SAR portion of the Award and the number of shares subject to the Option portion of the Award. Shares subject to Awards that have been retained by the Company in payment or satisfaction of the purchase price or tax withholding obligation of an Award shall not count against the limit set forth in paragraph (a) above. The Company shall not be under any obligation, however, to make any such future Awards.
(e) Substitute Awards . Substitute Awards shall not count against the limitation set forth in paragraph (a) above.
(f) Adjustments . The limits provided for in this Section 4 shall be subject to adjustment as provided in Section 16(a).
5. | Eligible Persons . |
Awards may be granted or offered only to Eligible Persons. The Committee shall have the authority to select the individual Participants to whom Awards may be granted from among such class of Eligible Persons and to determine the number and form of Awards to be granted to each Participant.
6. | Agreement . |
The terms and conditions of each grant or sale of Awards shall be embodied in an Agreement in a form approved by the Committee, which shall contain terms and conditions not inconsistent with the Plan and which shall incorporate the Plan by reference. Each Agreement shall: (a) state the date as of which the Award was granted or sold, and (i) in the case of Options and Stock Appreciation Rights, set forth the number of Options and Stock Appreciation Rights being granted to the Participant and the applicable Option Price and/or exercise price (for Stock Appreciation Rights) and expiration date(s), and (ii) in the case of Restricted Shares and other Awards, set forth the number of Restricted Shares or other Awards being granted or offered to the Participant and, if applicable, the purchase price or other consideration for such Restricted Shares or other Awards; (b) set forth the vesting schedule (if any); (c) set forth any other terms and conditions established by the Committee including any additional covenants and promises that the Committee deems, in its discretion, are necessary or desirable, which covenants and promises may include, but are not limited to, covenants regarding confidential information and trade secrets, covenants regarding company property, covenants not to compete, covenants not to solicit clients or accounts, cross-over employment covenants, and covenants not to disparage the Company; (d) set forth any Qualifying Performance Criteria as the Committee may determine in its discretion; (e) be signed by the recipient of the Award and a person designated by the Committee; and (f) be delivered to the recipient of the Award.
7. | Restrictions on Transfer . |
(a) Restrictions on Transfer . No Restricted Share, Bonus Stock, Performance Share, or Option Share or other share of Common Stock issued as or pursuant to any Award may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of (or made the subject of any derivative transaction) to or with any third party (other than a Permitted Transferee); provided, however, that any such restriction on transfer shall terminate as to any such share when such share is no longer subject to any term, condition or other restriction under the Plan (other than Section 7(b)). No Option, Stock Appreciation Right, Stock Unit, or other Award not in the form of a share of Common Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of (or made the subject of any derivative transaction) to or with any third party other than a Permitted Transferee. Each Permitted Transferee (other than the Company) by will or the laws of descent and distribution or otherwise, of any Award (or share issued in respect thereof) shall, as a condition to the transfer thereof to such Permitted Transferee, execute an agreement pursuant to which it shall become a party to the Agreement applicable to the transferor.
(b) No Participant will, directly or indirectly, offer, sell, assign, transfer, grant or sell a participation in, create any encumbrance on or otherwise dispose of any Award or any Shares with respect thereto (or solicit any offers to buy or otherwise acquire, or take a pledge of, any Award or any Shares with respect thereto), in any manner that would conflict with or violate the 1933 Act.
8. | Options . |
(a) Terms of Options Generally . The Committee may grant Options designated as Incentive Stock Options or Nonqualified Stock Options. Options may be granted to any Eligible Person. Each Option shall entitle the Participant to whom such Option was granted to purchase, upon payment of the relevant Option Price, one share of Common Stock. Options granted under the Plan shall comply with the following terms and conditions:
(i) Option Price .
A. The Option Price for shares purchased under an Option shall be as determined by the Committee, but shall not be less than the Fair Market Value of the Common Stock as of the Date of Grant, except in the case of substitute awards issued by the Company in connection with an acquisition or other corporate transaction.
B. The Option Price for shares purchased under an Option shall be paid in full to the Company by delivery of consideration equal to the product of the Option Price and the number of shares purchased, together with any amounts required to be withheld for tax purposes under Section 17(c) of this Plan. Such consideration must be paid before the Company will issue the shares being purchased and must be in a form or a combination of forms acceptable to the Committee for that purchase, which forms may (but are not required to) include:
(1) cash;
(2) check or wire transfer;
(3) tendering (either actually or by attestation) shares of Common Stock already owned by the Participant, provided that the shares have been held for the minimum period required by applicable financial accounting rules to avoid a charge to the Companys earnings for financial reporting purposes;
(4) to the extent permitted by applicable law, Cashless Exercise; or
(5) such other consideration as the Committee may permit in its sole discretion; provided, however, that any Participant may, at any time, exercise any Vested Option (or portion thereof) owned by such Participant pursuant to a Cashless Exercise without any prior approval or consent of the Committee.
(ii) Vesting of Options . Each Option shall vest and become exercisable on such terms and conditions as shall be prescribed by the Committee in the applicable Award Agreement.
(iii) Duration of Options . Subject to earlier termination in accordance with the terms of the Plan and the instrument evidencing the Option, the maximum term of an Option shall be as established for that Option by the Committee but in no event shall be greater than ten years from the Date of Grant.
(iv) Exercise Following Termination of Employment . Except as may be provided in subsection (viii) (D) hereof, and unless otherwise determined by the Committee in its sole discretion, upon termination of a Participants employment with the Company and its Subsidiaries, the following terms and conditions shall apply:
A. if the Participants employment is terminated by the Company other than for Cause, or as a result of the Participants resignation for Good Reason, or as a result of death, Permanent Disability or Retirement, the Participant (or, in the case of the Participants death, such Participants Beneficiary) may exercise any Options, to the extent vested as of the date of such termination, at any time until the earlier of (I) three months following the date of such termination of employment other than for Cause, or as a result of the Participants resignation for Good Reason; (II) 12 months following the date of such termination of employment due to Permanent Disability or death; (III) three years (three months for an Incentive Stock Option) following the date of such termination of employment due to Retirement; and (IV) the expiration of the Option under the provisions of clause (iii) above; and
B. if the Participants employment is terminated by the Company for Cause, or as a result of the Participants resignation other than for Good Reason or Retirement, all of the Participants Options (whether or not vested) shall expire and be canceled without any payment therefor as of the date of such termination.
Any Options not exercised within the applicable time period specified above shall expire at the end of such period and be canceled without any payment therefor.
With respect to a non-employee director or advisor who is a Participant in the Plan, the references to termination of employment above shall be deemed to refer to termination of service as a director or termination of service as an advisor, as applicable, and as determined in the discretion of the Committee.
(v) Certain Restrictions . Options granted hereunder shall be exercisable during the Participants lifetime only by the Participant.
(vi) Stockholder Rights; Option and Share Adjustments . A Participant shall have no rights as a stockholder with respect to any shares of Common Stock issuable upon exercise of an Option until a certificate or certificates evidencing such shares shall have been issued to such Participant. Except as otherwise provided by the Board of Directors, no adjustment (including an adjustment of an Options exercise price) shall be made with respect to (A) outstanding Options for dividends or other distributions, whether made with respect to Common Stock or otherwise, or (B) dividends, distributions or other rights in respect of any share of Common Stock for which the record date is prior to the date upon which the Participant shall become the holder of record thereof.
(vii) Dividends and Distributions . Any shares of Common Stock or other securities of the Company received by the Participant as a result of a stock dividend or other distribution in respect of Option Shares shall be subject to the same restrictions as such Option Shares.
(viii) Incentive Stock Options . Incentive Stock Options granted under this Plan shall be subject to the following additional conditions, limitations, and restrictions:
A. Incentive Stock Options may be granted only to employees of the Company or a Subsidiary or parent corporation of the Company, within the meaning of Code Section 424.
B. No Incentive Stock Option may be granted under this Plan after the 10-year anniversary of the date on which the Plan is adopted by the Board or, if earlier, the date on which the Plan is approved by the Companys stockholders.
C. The aggregate Fair Market Value (as of the Date of Grant) of the Common Stock with respect to which the Incentive Stock Options awarded to any Participant first become exercisable during any calendar year may not exceed $100,000. For purposes of the $100,000 limit, the Participants Incentive Stock Options under this Plan and all other plans maintained by the Company and its Subsidiaries will be aggregated. To the extent any Incentive Stock Option would exceed the $100,000 limit, the Incentive Stock Option will thereafter be treated as a Nonqualified Stock Option for all purposes. No Incentive Stock Option may be granted to any individual who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any Subsidiary.
D. If the Committee exercises its discretion to permit an Incentive Stock Option to be exercised by a Participant more than three months after the termination of a Participants employment for any reason or more than 12 months if the Participant is Permanently Disabled, the Incentive Stock Option will thereafter be treated as a Nonqualified Stock Option for all purposes. For purposes of this subclause D, a Participants employment relationship will be treated as continuing uninterrupted during any period that the Participant is on military leave, sick leave or another Approved Leave of Absence if the period of leave does not exceed 90 consecutive days, or a longer period to the extent that the Participants right to reemployment with the Company or a Subsidiary is guaranteed by statute or by contract. If the period of leave exceeds 90 consecutive days and the Participants right to reemployment is not guaranteed by statute or contract, the employment relationship will be deemed to have ceased on the 91st day of the leave.
(ix) Additional Terms and Conditions . Each Option granted hereunder, and any shares of Common Stock issued in connection with such Option, shall be subject to such additional terms and conditions not inconsistent with the Plan as are prescribed by the Committee and set forth in the applicable Agreement.
(b) Unvested Options . Upon termination of a Participants employment or service with the Company and its Subsidiaries, all Options granted to such Participant that have not theretofore vested (and which do not vest by reason of such termination of employment or service) shall terminate and be canceled without any payment therefor.
9. | Restricted Shares and Bonus Shares . |
(a) Terms of Restricted Shares and Bonus Shares Generally . Restricted Shares and Bonus Shares awarded by the Committee shall not require payment of any consideration by Participants, except as otherwise determined by the Committee in its sole discretion.
(b) Restricted Shares and Bonus Shares shall comply with the following terms and conditions:
(i) Vesting . Any Awards of Restricted Shares shall vest in accordance with a vesting schedule to be specified by the Committee. Except (A) with respect to grants to the Companys non-employee directors, or (B) as vesting may be accelerated pursuant to the terms of the Plan, such restrictions shall not fully terminate prior to three years after the Date of Grant. Bonus Shares shall be fully vested when granted.
(ii) Stockholder Rights . Unless otherwise determined by the Committee in its sole discretion, a Participant shall have all rights of a stockholder as to the Restricted Shares and Bonus Shares awarded to such Participant, including the right to receive dividends and the right to vote in accordance with the Companys Certificate of Incorporation, subject to the restrictions set forth in the Plan and the applicable Agreement.
(iii) Dividends and Distributions . Any shares of Common Stock or other securities of the Company received by a Participant as a result of a stock distribution to holders of Restricted Shares or as a stock dividend on Restricted Shares shall be subject to the same restrictions as such Restricted Shares or Bonus Shares and all references to Restricted Shares or Bonus Shares hereunder shall be deemed to include such shares of Common Stock or other securities.
(iv) Additional Terms and Conditions . Each Restricted Share and Bonus Share granted or offered for sale hereunder shall be subject to such additional terms and conditions not inconsistent with the Plan as are prescribed by the Committee and set forth in the applicable Agreement.
(c) Unvested Restricted Shares . Unless otherwise determined by the Committee in its sole discretion, upon termination of a Participants employment or service with the Company and its Subsidiaries, all Restricted Shares granted or sold to such Participant that have not theretofore vested (and that do not vest by reason of such termination of employment) shall terminate and be canceled without any payment therefor.
10. | Stock Appreciation Rights . |
Stock Appreciation Rights may be granted to Participants either alone ( freestanding ) or in addition to or in tandem with other Awards granted under the Plan and may, but need not, relate to a specific Option granted hereunder. The provisions of Stock Appreciation Rights need not be the same with respect to each grant or each recipient. Any Stock Appreciation Right granted in tandem with an Option may be granted at the same time such Option is granted or at any time thereafter before exercise or expiration of such Option. All Stock Appreciation Rights granted under the Plan shall be granted subject to the same terms and conditions applicable to Nonqualified Stock Options as set forth in Section 8(a); provided, however, that Stock Appreciation Rights granted in tandem with a previously granted Option shall have the same terms and conditions as such Option. Subject to the provisions of Section 8, the Committee may impose such other conditions or restrictions on any Stock Appreciation Right as it shall deem appropriate. Stock Appreciation Rights may be settled in Common Stock or cash as determined by the Committee in its sole discretion.
11. | Stock Units . |
The Committee may also grant Awards of Stock Units under the Plan. With respect to each grant of Stock Units, the Committee shall determine in its sole discretion the period or periods, including any conditions for determining such period or periods, during which any restrictions on full vesting shall apply, provided that in no event, other than in connection with a termination of employment, or with respect to grants to non-employee directors, shall such period or periods be less than three years (the Unit Restriction Period ). The Committee may also make any Award of Stock Units subject to the satisfaction of other conditions, including the attainment of performance goals, or contingencies ( Unit Vesting Condition ), in order for a Participant to receive payment of such Stock Unit Award, which shall be established by the Committee at the Date of Grant thereof. Awards of Stock Units shall be payable in Common Stock or cash as determined by the Committee in its sole discretion. The Committee may permit a Participant to elect to defer receipt of payment of all or part of any Award of Stock Units pursuant to rules and regulations adopted by the Committee. Unless the Committee provides otherwise at the Date of Grant of an Award of Stock Units, the provisions of Section 9 of this Plan relating to the vesting of Restricted Shares shall apply during the Unit Restriction Period or prior to the satisfaction of any Unit Vesting Condition for such Award.
12. | Performance Shares . |
The Committee may grant Awards of Performance Shares and designate the Participants to whom Performance Shares are to be awarded and determine the number of Performance Shares, the length of the performance period and the other terms and conditions of each such Award. Each Award of Performance Shares shall entitle the Participant to a payment in the form of shares of Common Stock upon the attainment of performance goals (which may be Qualifying Performance Criteria) and other terms and conditions specified by the Committee. Notwithstanding satisfaction of any performance goals, the number of shares issued under an Award of Performance Shares may be adjusted on the basis of such further considerations as the Committee shall determine, in its sole discretion. However, the Committee may not, in any event, increase the number of shares earned upon satisfaction of any performance goal by any Participant subject to Code Section 162(m) to the extent such Section is applicable. The Committee, in its sole discretion, may make a cash payment equal to the Fair Market Value of the Common Stock otherwise required to be issued to a Participant pursuant to an Award of Performance Shares.
13. | Other Stock-Based Awards . |
In addition to the Awards described in Sections 8 through 12, and subject to the terms of the Plan, the Committee may grant other Awards payable in shares of Common Stock under the Plan as it determines to be in the best interests of the Company and subject to such other terms and conditions as it deems appropriate.
14. | Performance-Based Awards . |
(a) Qualifying Performance Criteria . Awards of Options, Restricted Shares, Stock Units, Performance Shares, and other Awards made pursuant to the Plan may be made subject to the attainment of performance goals relating to one or more business criteria. For purposes of the Plan, such business criteria shall mean any one or more of the following performance criteria, either individually, alternatively or in any combination: (a) cash flow; (b) earnings (including, without limitation, gross margin, earnings before interest and taxes, earnings before taxes, earnings before interest, taxes, depreciation and amortization, and net earnings); (c) earnings per share; (d) growth in earnings or earnings per share; (e) stock price; (f) return on equity or average stockholders equity; (g) total stockholder return; (h) return on capital; (i) return on assets or net assets; (j) return on investment; (k) sales, growth in sales or return on sales; (l) income or net income; (m) operating income or net operating income; (n) operating profit or net operating profit; (o) operating margin; (p) return on operating revenue; (q) economic profit, (r) market share; (s) overhead or other expense reduction; (t) growth in stockholder value relative to various stock indices, (u) strategic plan development and implementation, (v) net debt, (w) working capital (including components thereof), and (x) during the reliance period (as defined in Treasury Regulation section 1.162-27(f)(2)), any other similar objective financial performance metric selected by the Committee in its sole discretion (collectively, the Qualifying Performance Criteria ). To the extent required by or consistent with Code Section 162(m), the Committee may appropriately adjust any evaluation of performance under a Qualifying Performance Criteria to exclude any of the following events that occur during a performance period: (z) asset write-downs or write-ups, (aa) litigation, claims, judgments or settlements, (bb) the effect of changes in tax law, accounting principles or other such laws or provisions affecting reported results, (cc) accruals for reorganization and restructuring programs, and (dd) any extraordinary, unusual or non-recurring items as described in Accounting Standards Codification (ASC) 225 and/or in managements discussion and analysis of financial condition and results of operations appearing in the Companys Annual Report to stockholders for the applicable year.
(b) Any Qualifying Performance Criteria may be used to measure the performance of the Company as a whole or with respect to any business unit, subsidiary or business segment of the Company, either individually, alternatively or in any combination, and may be measured either annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to previous period results or to a designated comparison group, in each case as specified by the Committee in the Award. To the extent required by Code Section 162(m), prior to the payment of any compensation under an Award intended to qualify as performance-based compensation under Code Section 162(m), the Committee shall certify the extent to which any such Qualifying Performance Criteria and any other material terms under such Award have been satisfied (other than in cases where such relate solely to the increase in the value of the Common Stock). To the extent Code Section 162(m) is applicable, the Committee may not in any event increase the amount of compensation payable to a Participant subject to Code Section 162(m) upon the satisfaction of any Qualifying Performance Criteria.
(c) To the extent an Award is intended to qualify under Code Section 162(m), any language in the Award Agreement, Committee resolutions, or other agreements and actions in connection with the Award, to the extent inconsistent with Section 162(m) shall be deemed interpreted and modified to the minimum extent necessary so that such Awards are compliant with Code Section 162(m).
15. | Certain Forfeitures . |
In the event (A) the Participants employment is terminated by the Company for Cause or (B) a Participant or former Participant engages in a Competing Business or in Wrongful Solicitation while in the employ of the Company or a Subsidiary, or during the period of 13 months immediately following termination of such employment, the following rules shall apply:
(a) all Awards then held by the Participant (whether vested or not) shall be forthwith forfeited without payment or other compensation of any kind; provided, however, that the Company shall remit to the Participant the lesser of (i) the amount (if any) such Participant paid for forfeited Awards and (ii) in the case of Restricted Shares or Performance Shares, the Fair Market Value of such Restricted Shares as of the date of termination;
(b) notwithstanding subclause (a), in the event Vested Restricted Shares or vested Performance Shares were disposed of (for or without receipt of value) during the period commencing one year prior to the initial engagement in a Competing Business or in Wrongful Solicitation through the 13-month anniversary of the Participants termination of employment with the Company or a Subsidiary, then, upon written demand by the Company, the Participant or former Participant, as the case may be, shall forthwith remit to the Company the Fair Market Value of such Vested Restricted Shares or vested Performance Shares, as determined on the date of disposition, less the amount (if any) paid by the Participant for such shares; and
(c) in the event Option Shares, Shares obtained pursuant to the exercise of a Stock Appreciation Right or other Shares obtained pursuant to Awards under the Plan (and not described in subparagraph (b)) were disposed of (for or without receipt of value) during the period commencing one year prior to the initial engagement in a Competing Business or in Wrongful Solicitation through the 13-month anniversary of the Participants termination of employment with the Company or a Subsidiary, then, upon written demand by the Company, the Participant or former Participant, as the case may be, shall forthwith remit to the Company the Fair Market Value of such Shares, as determined on the date of disposition, less the Option Price or other amount (if any) paid therefor.
16. | Effect of Certain Corporate Changes and Changes in Control . |
(a) Dilution and Other Adjustments . If the Outstanding shares of Common Stock or other securities of the Company, or both, for which the Award is then exercisable or as to which the Award is to be settled shall at any time be changed or exchanged by declaration of a stock dividend, stock split, combination of shares, extraordinary dividend of cash and/or assets, recapitalization, or reorganization, the Committee may, and if such event occurs after a Change in Control, the Committee shall, appropriately and equitably adjust the number and kind of shares of Common Stock or other securities that are subject to the Plan or subject to any Awards theretofore granted, and the exercise or settlement prices of such Awards, so as to maintain the proportionate number of shares of Common Stock or other securities without changing the aggregate exercise or settlement price.
(b) Change in Control . Unless otherwise provided by the Committee either by the terms of the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of a Change in Control, (i) in the event of a Change in Control where the holders of the Companys Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, Awards not previously vested shall immediately become vested; or (ii) in the event that a Participant, within two years after a Change in Control not described in subsection (i), terminates employment for Good Reason, or is terminated by the Company without Cause, Awards not previously vested shall immediately become vested. Unless otherwise provided by the Committee either by the terms of the Award Agreement applicable to any Award or by resolution adopted prior to the occurrence of a Change in Control, (i) in the event of a Change in Control where the holders of the Companys Common Stock receive cash consideration for their Common Stock in consummation of the Change in Control, any vested and outstanding Award shall, upon the occurrence of such Change in Control, be cancelled in exchange for a payment in cash in an amount based on the Fair Market Value of the shares of Common Stock subject to the Award, less any Option Price, which amount may be zero if applicable; or (ii) in the event of a Change in Control not described in subsection (i) above, any outstanding Award shall, upon the occurrence of such Change in Control, be assumed and continued or an equivalent award substituted by the Companys successor or a parent or subsidiary of such successor.
17. | Miscellaneous . |
(a) No Rights to Grants or Continued Employment or Engagement . No Participant shall have any claim or right to receive grants of Awards under the Plan. Neither the Plan nor any action taken or omitted to be taken hereunder shall be deemed to create or confer on any Participant any right to be retained in the employ or as a director of the Company or any Subsidiary or other Affiliate thereof, or to interfere with or to limit in any way the right of the Company or any Subsidiary or other Affiliate thereof to terminate the employment or other retention of such Participant at any time.
(b) Right of Company to Assign Rights and Delegate Duties . The Company shall have the right to assign any of its rights and delegate any of its duties hereunder to any of its Affiliates. The terms and conditions of any Award under the Plan shall be binding upon and shall inure to the benefit of the personal representatives, heirs, legatees, and permitted successors and assigns of the relevant Participant and the Company.
(c) Tax Withholding . The Company and its Subsidiaries may require the Participant to pay to the Company the amount of any taxes that the Company is required by applicable federal, state, local or other law to withhold with respect to the grant, vesting, or exercise of an Award. The Company shall not be required to issue any shares of Common Stock under the Plan until such obligations are satisfied in full. The Committee may in its sole discretion permit or require a Participant to satisfy all or part of such Participants tax withholding obligations by (1) paying cash to the Company, (2) having the Company
withhold a number of shares of Common Stock that would otherwise be issued to the Participant (or become vested in the case of Restricted Shares), having a Fair Market Value equal to the tax withholding obligations, (3) surrendering a number of shares of Common Stock the Participant already owns, having a Fair Market Value equal to the tax withholding obligations, or (4) entering into such other arrangement as is acceptable to the Committee in its sole discretion. The value of any shares withheld or surrendered may not exceed the employers minimum tax withholding obligation and, to the extent such shares were acquired by the Participant from the Company as compensation, the shares must have been held for the minimum period required by applicable accounting rules to avoid a charge to the Companys earnings for financial reporting purposes. The Company and its Subsidiaries shall also have the right to deduct from any and all cash payments otherwise owed to a Participant any federal, state, local or other taxes required to be withheld with respect to the Participants participation in the Plan.
(d) No Restriction on Right of Company to Effect Corporate Changes . The Plan shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations or other changes in the Companys capital structure or its business, or any merger or consolidation of the Company, or any issue of stock or of options, warrants or rights to purchase stock or of bonds, debentures, preferred or prior preference stocks whose rights are superior to or affect the Common Stock or the rights thereof or that are convertible into or exchangeable for Common Stock, or the dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise.
(e) 1934 Act . Notwithstanding anything contained in the Plan or any Agreement to the contrary, if the consummation of any transaction under the Plan would result in the possible imposition of liability on a Participant pursuant to Section 16(b) of the 1934 Act, the Committee shall have the right, in its sole discretion, but shall not be obligated, to defer such transaction to the extent necessary to avoid such liability.
(f) Securities Laws . Notwithstanding any other provision of the Plan, the Company shall have no obligation to issue or deliver any shares of Common Stock under the Plan or make any other distribution of benefits under the Plan unless, in the judgment of the Committee, such issuance, delivery or distribution would comply with all applicable laws (including, without limitation, the requirements of the 1933 Act and 1934 Act or the laws of any state or foreign jurisdiction) and the applicable requirements of any securities exchange or similar entity.
(g) Severability . If any provision of the Plan or any Award is determined to be invalid, illegal or unenforceable in any jurisdiction, or as to any Person, or would disqualify the Plan or any Award under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or, if it cannot be so construed or deemed amended without, in the Committees determination, materially altering the intent of the Plan or the Award, such provision shall be stricken as to such jurisdiction, person or Award, and the remainder of the Plan and any such Award shall remain in full force and effect.
(h) Vesting .
(i) Notwithstanding anything to the contrary contained in the Plan, a minimum period over which full-value, performance-based awards and full-value, tenure-based awards granted under the Plan may entirely vest shall be set forth in each Agreement, respectively; provided, however, that up to 10% of the shares authorized under the Plan shall not be subject to such restrictions; and, provided, further, that such restrictions shall not affect or otherwise limit any acceleration of vesting pursuant to the Plan or set forth in the applicable Agreement.
(ii) Notwithstanding anything to the contrary contained in the Plan, but subject to Section 15, unless otherwise provided in an applicable Agreement, in the event of a Participants termination of employment or service by reason of Retirement, Permanent Disability or death, such Participants then unvested awards shall automatically become vested, and in the case of Options or SARs, exercisable.
18. | Amendment . |
The Board of Directors may at any time and from time to time alter, amend, suspend, or terminate the Plan in whole or in part. No termination or amendment of the Plan may, without the consent of the Participant to whom any Awards shall previously have been granted, adversely affect the rights of such Participant in such Awards. In addition, no amendment of the Plan shall, without the approval of the stockholders of the Company:
(a) change the class of individuals eligible for awards under the Plan;
(b) increase the maximum number of shares of Common Stock for which Awards may be granted under this Plan;
(c) reduce the price at which Options may be granted below the price provided for in Section 8(a) hereof;
(d) reduce the Option Price of outstanding Options;
(e) cancel an Option or Stock Appreciation Right in exchange for cash when the exercise or grant price per share exceeds the Fair Market Value of one share of Common Stock or take any action with respect to an Option or Stock Appreciation Right that would be treated as a repricing under the rules and regulations of the principal securities exchange on which the Common Stock is traded; or
(f) extend the term of this Plan.
19. | Termination of the Plan . |
The Plan shall continue until terminated by the Board of Directors pursuant to Section 18 or as otherwise set forth in this Plan, and no further Awards shall be made hereunder after the date of such termination. Unless earlier terminated, the Plan shall terminate ten (10) years after the Effective Date (provided the awards granted before that date shall continue in accordance with their terms).
20. | Conditions to Issuance of Shares . |
(a) The Company shall be under no obligation to any Participant to register for offering or resale or to qualify for exemption under the 1933 Act, or to register or qualify under the laws of any state or foreign jurisdiction, any shares of Common Stock, security or interest in a security paid or issued under, or created by, the Plan, or to continue in effect any such registrations or qualifications if made. The Company may issue certificates for shares with such legends and subject to such restrictions on transfer and stop-transfer instructions as the Committee deems necessary or desirable for compliance by the Company with federal, state, and foreign securities laws. The Company may also require such other action or agreement by the Participants as may from time to time be necessary to comply with applicable securities laws.
(b) To the extent the Plan or any instrument evidencing an Award provides for issuance of stock certificates to reflect the issuance of shares of Common Stock, the issuance may be effected on a noncertificated basis, to the extent not prohibited by applicable law or the applicable rules of any stock exchange.
21. | Headings; Number; Gender . |
The headings of sections and subsections herein are included solely for convenience of reference and shall not affect the meaning of any of the provisions of the Plan.
Words used herein in the singular form shall be construed as being used in the plural form, as appropriate in the relevant context, and vice versa. Pronouns used herein of one gender shall be construed as referring to either or both genders, as appropriate in the relevant context.
22. | Limited Waiver . |
The waiver by the Company of any of its rights under the Plan with respect to any Participant, whether express or implied, shall not operate or be construed as a waiver of any other rights the Company has with respect to such Participant or of any of its rights with respect to any other Participant.
23. | Governing Law . |
The Plan and all rights hereunder shall be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania without reference to rules relating to conflicts of law.
24. | Compliance with Code Section 409A . |
(a) This Plan is intended to comply and shall be administered in a manner that is intended to comply with Code Section 409A and shall be construed and interpreted in accordance with such intent. To the extent that an Award or the payment, settlement, or deferral thereof is subject to Code Section 409A, the Award shall be granted, paid, settled, or deferred in a manner that will comply with Code Section 409A, including regulations or other guidance issued with respect thereto, except as otherwise determined by the Committee. Any provision of this Plan that would cause the grant of an Award or the payment, settlement, or deferral thereof to fail to satisfy Code Section 409A shall be amended to comply with Code Section 409A on a timely basis, which may be made on a retroactive basis, in accordance with regulations and other guidance issued under Code Section 409A.
(b) Notwithstanding anything in the Plan to the contrary, the receipt of any benefits under this Plan, subject to Code Section 409A as a result of a termination of employment, shall be subject to satisfaction of the condition precedent that the Participant undergo a separation from service within the meaning of Treas. Reg. § 1.409A-1(h) or any successor thereto. In addition, if a Participant is deemed to be a specified employee within the meaning of that term under Code Section 409A(a)(2)(B), then with regard to any payment or the provisions of any benefit that is required to be delayed pursuant to Code Section 409A(a)(2)(B), such payment or benefit shall not be made or provided prior to the earlier of (i) the expiration of the six month period measured from the date of the Participants separation from service (as such term is defined in Treas. Reg. § 1.409A-1(h)), or (ii) the date of the Participants death (the Delay Period ). Within ten (10) days following the expiration of the Delay Period, all payments and benefits delayed pursuant to this Section (whether they would have otherwise been payable in a single sum or in installments in the absence of such delay) shall be paid or reimbursed to the Participant in a lump sum, and any remaining payments and benefits due under this Plan shall be paid or provided in accordance with the normal payment dates specified for them herein.
25. | Effective Date . |
The Plan shall become effective (the Effective Date ) upon approval by the stockholders of the Company.
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)
I, Daniel P. McCartney, Chief Executive Officer, certify that:
1. | I have reviewed this report on Form 10-Q of Healthcare Services Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures ( as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have; |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants Board of Directors. |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting |
Date: July 27, 2012 |
/s/ Daniel P. McCartney |
|||
Daniel P. McCartney | ||||
Chief Executive Officer (Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(a) OR 15d-14(a)
I, John C. Shea, Chief Financial Officer, certify that:
1. | I have reviewed this report on Form 10-Q of Healthcare Services Group, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures ( as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting ( as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have; |
a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants Board of Directors. |
a) | all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 27, 2012 |
/s/ John C. Shea |
|||
John C. Shea | ||||
Chief Financial Officer (Principal Financial Officer) |
Exhibit 32.1
CERTIFICATIONS PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(b) OR 15d-14(b) AND
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Healthcare Services Group, Inc., a Pennsylvania corporation (the Company) on
Form 10-Q for the quarter ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the
Form 10-Q), I, Daniel P. McCartney, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d); and |
2. | The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company |
/s/ Daniel P. McCartney |
Daniel P. McCartney |
Chief Executive Officer |
(Principal Executive Officer) |
July 27, 2012 |
Exhibit 32.2
CERTIFICATIONS PURSUANT TO SECURITIES EXCHANGE ACT OF 1934
RULE 13a-14(b) OR 15d-14(b) AND
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Healthcare Services Group, Inc., a Pennsylvania corporation (the Company) on
Form 10-Q for the quarter ended June 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the
Form 10-Q), I, John C. Shea, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. | The Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d); and |
2. | The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company. |
/s/ John C. Shea |
John C. Shea |
Chief Financial Officer |
(Principal Financial Officer) |
July 27, 2012 |