-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ec2YGoVSMx4+SIiyuE2eyBgDJJLaf4/eQqegLOU9QOsylLk+7LeXD67VfgLYhajl d6X1wx5OtIFTuo5brYRvFg== 0000921895-97-000875.txt : 19971117 0000921895-97-000875.hdr.sgml : 19971117 ACCESSION NUMBER: 0000921895-97-000875 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: HEALTHCARE SERVICES GROUP INC CENTRAL INDEX KEY: 0000731012 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-TO DWELLINGS & OTHER BUILDINGS [7340] IRS NUMBER: 232018365 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-12015 FILM NUMBER: 97721322 BUSINESS ADDRESS: STREET 1: 2643 HUNTINGDON PIKE CITY: HUNTINGDON VALLEY STATE: PA ZIP: 19006 BUSINESS PHONE: 2159381661 MAIL ADDRESS: STREET 1: 2643 HUNTINGDON PIKEE CITY: HUNTINGDON VALLEY STATE: PA ZIP: 19006 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1997 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 (IRS Employer Identification incorporation or organization) number) 2643 Huntingdon Pike, Huntingdon Valley, Pennsylvania 19006 - ------------------------------------------------------------------------------ (Address of principal executive office) (Zip code) Registrant's telephone number, including area code: 215-938-1661 --------------- Indicate 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 past 90 days. YES /X/ NO / / Number of shares of common stock, issued and outstanding as of November 7, 1997 is 7,524,653. Total of 15 Pages INDEX PART I. FINANCIAL INFORMATION PAGE NO. Balance Sheets as of September 30, 1997 and December 31, 1996 2 Statements of Income for the Three Months Ended September 30, 1997 and 1996 3 Statements of Income for the Nine Months Ended September 30, 1997 and 1996 4 Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 5 Notes to Financial Statements 6 to 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 9 to 12 PART II. OTHER INFORMATION 13 SIGNATURES 14 - 1 - HEALTHCARE SERVICES GROUP, INC. Balance Sheets
September 30, December 31, 1997 1996 (Unaudited) (Audited) ----------------- ------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 19,351,574 $ 22,677,290 Accounts and notes receivable, less allowance for doubtful accounts of $4,187,000 in 1997 and $3,812,000 in 1996 36,546,154 33,318,730 Inventories and supplies 7,411,189 7,392,507 Deferred income taxes 810,366 620,024 Prepaid expenses and other 2,457,772 2,102,330 -------------- ------------ Total current assets 66,577,055 66,110,881 PROPERTY AND EQUIPMENT: Laundry and linen equipment installations 10,944,978 11,322,459 Housekeeping equipment and office furniture 8,507,551 7,534,025 Autos and trucks 178,006 178,006 -------------- ------------ 19,630,535 19,034,490 Less accumulated depreciation 13,861,346 12,821,500 -------------- ------------ 5,769,189 6,212,990 COST IN EXCESS OF FAIR VALUE OF NET ASSETS ACQUIRED less accumulated amortization of $1,285,753 in 1997 and $1,205,036 in 1996 2,069,723 2,150,440 DEFERRED INCOME TAXES 1,079,451 1,272,765 OTHER NONCURRENT ASSETS 10,654,036 10,698,571 -------------- ------------ $ 86,149,454 $ 86,445,647 ============== ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 3,447,335 $ 4,106,094 Accrued payroll, accrued and withheld payroll taxes 5,771,245 2,954,099 Other accrued expenses 711,282 810,785 Income taxes payable 1,544,258 53,139 Accrued insurance claims 846,273 752,450 -------------- ------------ Total current liabilities 12,320,393 8,676,567 ACCRUED INSURANCE CLAIMS 3,183,597 2,830,647 COMMITMENTS AND CONTINGENCIES (Notes 2 and 3) STOCKHOLDERS' EQUITY: Common stock, $.01 par value: 15,000,000 shares authorized, 7,389,063 shares issued and outstanding in 1997 and 8,090,663 in 1996 73,891 80,907 Additional paid in capital 26,395,858 34,603,813 Retained earnings 44,175,715 40,253,713 -------------- ------------ Total stockholders' equity 70,645,464 74,938,433 -------------- ------------ $ 86,149,454 $ 86,445,647 ============== ============
See accompanying notes. -2- HEALTHCARE SERVICES GROUP, INC. Income Statements (Unaudited)
For the Three Months Ended September 30, ------------------------------ 1997 1996 ------------ ------------ Revenues $ 47,209,073 $ 41,342,483 Operating costs and expenses: Cost of services provided 40,078,568 35,631,791 Selling, general and administrative 4,259,971 3,137,780 Other income: Interest income 257,903 265,865 ------------ ------------- Income before income taxes 3,128,437 2,838,777 Income taxes 1,273,000 1,163,000 ------------ ------------- Net income $ 1,855,437 $ 1,675,777 ============ ============= Earnings per common share (Note 4) $ 0.25 $ 0.21 ============ ============= Weighted average number of common shares outstanding 7,524,629 8,108,189 ============ =============
See accompanying notes. -3- HEALTHCARE SERVICES GROUP, INC. Statements of Income (Unaudited)
For the Nine Months Ended September 30, --------------------------------- 1997 1996 ------------ -------------- Revenues $134,160,823 $121,589,907 Operating costs and expenses: Cost of services provided 114,190,260 103,766,687 Selling, general and administrative 11,787,683 9,478,957 Other income (expense): Settlement of civil litigation (Note 3) (1,800,000) Interest income 1,099,123 662,197 ------------ ------------ Income before income taxes 7,482,003 9,006,460 Income taxes 3,560,000 3,693,000 ------------ ------------ Net income $ 3,922,003 $ 5,313,460 ============ ============ Earnings per common share (Note 4) $ 0.51 $ 0.65 ============ ============ Weighted average number of common shares outstanding 7,753,940 8,130,861 ============ ============
See accompanying notes. -4- HEALTHCARE SERVICES GROUP, INC. Statements of Cash Flows (Unaudited)
For the Nine Months Ended September 30, -------------------------- 1997 1996 ---------- -------- Cash flows from operating activities: Net Income $ 3,922,002 $ 5,313,460 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,598,078 1,598,856 Bad debt provision 1,125,000 1,725,000 Deferred income taxes (benefits) 2,972 (94,978) Tax benefit of stock option transactions 51,784 Changes in operating assets and liabilities: Accounts and notes receivable (4,352,424) (3,290,009) Prepaid income taxes 1,466,184 Inventories and supplies (18,682) (145,323) Changes to long term notes receivable (114,509) (1,090,186) Accounts payable and other accrued expenses (758,263) (1,409,151) Accrued payroll, accrued and withheld payroll taxes 2,817,145 2,386,839 Accrued insurance claims 446,773 984,799 Income taxes payable 1,491,119 454,174 Prepaid expenses and other assets (196,399) (465,808) ------------ ------------ Net cash provided by operating activities 6,014,596 7,433,857 ------------ ------------- Cash flows from investing activities: Disposals of fixed assets 162,452 294,620 Additions to property and equipment (1,236,009) (1,877,065) ------------ ------------- Net cash used in investing activities (1,073,557) (1,582,445) ------------ ------------- Cash flows from financing activities: Purchase of treasury stock (9,147,680) (528,975) Proceeds from the exercise of stock options 880,925 91,725 ------------ ------------- Net cash used in financing activities (8,266,755) (437,250) ------------ -------------- Net increase (decrease) in cash and cash equivalents (3,325,716) 5,414,162 Cash and cash equivalents at beginning of the year 22,677,290 16,335,886 ------------ ----------- Cash and cash equivalents at end of the period $19,351,574 $21,750,048 =========== ===========
See accompanying notes. -5- NOTES TO 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 generally accepted accounting principles for complete financial statements. However, in the opinion of the Company, all adjustments considered necessary for a fair presentation have been included. The balance sheet shown in this report as of December 31, 1996 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 1996. The financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. The results of operations for the three and nine month periods ended September 30, 1997 and 1996 are not necessarily indicative of the results that may be expected for the full fiscal year. Note 2 - Other Contingencies The Company has a $13,000,000 bank line of credit on which it may draw to meet short-term liquidity requirements in excess of internally generated cash flow. This line expires on September 30, 1998. Amounts drawn under the line are payable upon demand. At both September 30, 1997 and December 31, 1996, there were no borrowings under the line. However at September 30, 1997 and December 31, 1996, the Company had outstanding approximately $11,200,000 and $8,000,000, respectively of irrevocable standby letters of credit, which primarily relate to payment obligations under the Company's insurance program. As a result of letters of credit issued, the amount available under the line was reduced by approximately $11,200,000 at September 30, 1997 and $8,000,000 at December 31, 1996. On October 28, 1997 the Company's Board of Directors authorized the future purchase of up to 600,000 shares of its common stock on the open market. The shares are to be purchased from time to time as determined by the Company. The Company is also involved in miscellaneous claims and litigation arising in the ordinary course of business. The Company believes that these matters, taken individually or in the aggregate, would not have a material adverse impact on the Company's financial position or results of operations. - 6 - Note 3 - Provision for Estimated Cost Related to SEC Inquiry and Other Matters On July 24, 1997 the Company and the U.S. Attorney for the Eastern District of Pennsylvania reached a settlement of the pending civil litigation commenced by the United States Attorney on or about May 24, 1996. This litigation was a result of and arose from (1) payments made by the Company for supplies which were allegedly furnished to clients of the Company and the actions of the Company after the payments were made and (2) payments made to certain clients of the Company in connection with the purchase of laundry installations from those clients. All claims described in the complaint were settled through the payment in July, 1997 of $1,225,000 to the United States government. The Company and its officers denied all allegations, and all allegations against the Company and its officers were dismissed with prejudice. The monetary impact of this settlement plus estimated related legal costs of $575,000, amounting to approximately $1,800,000 was accrued at June 30, 1997 and reduced the net income for the nine month period ended September 30, 1997 by $1,577,000 or $.21 per common share. The Company has not recorded an income tax benefit in the accompanying financial statements for the settlement payment of $1,225,000 and therefore the effective tax rate of 47.6% for the nine month period ended September 30, 1997 is in excess of the statutory rate. On March 21, 1996 the Staff of the SEC informed the Company that the SEC had accepted a settlement pertaining to certain allegations of violations of the Federal securities laws by the Company and certain of its officers with respect to periods ended on or before March 31, 1992. A settlement was concluded on October 16, 1996 when a final judgment, upon consent, was entered in the United States District Court for the Eastern District of Pennsylvania (96 Civ.6464) based on a complaint filed by the Securities and Exchange Commission against the Company, two of its executive officers and one former officer, without admission or denial of the allegations of the complaint by any parties. The action had alleged violations of certain Federal securities laws, including anti-fraud, reporting, internal controls and books and records provisions thereof by the Company and such officers. The claims included alleged violations of Section 10b of the Exchange Act, Rule 10b-5 thereunder, Section 13a of the Exchange Act and Rules 13a-1, 13a-13 and 12b-20. The Company and such officers are permanently enjoined from violating certain provisions of the Federal Securities laws, and the Company and these individuals were required to pay civil penalties aggregating approximately $850,000, which was paid in December, 1996. The Company agreed to indemnify its officers with respect to their payment obligations. The estimated monetary impact of this settlement plus related legal costs have been reflected in the December 31, 1995 financial statements. - 7 - During 1995, the Company anticipated that it would incur a significant amount of legal and related costs in connection with these matters. The Company incurred approximately $950,000 of costs in 1995 and estimated that the additional costs which could be incurred in connection with these matters would be in a range of approximately $2,150,000 to $3,500,000 and accordingly accrued as of December 31, 1995 the estimated low range of this liability. The result of this $3,100,000 provision was to reduce 1995 net income by approximately $2,321,000 or $.28 per common share. Note 4 - New Accounting Pronouncement In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, Earnings per Share, which is effective for financial statements for both interim and annual periods ending after December 15, 1997. The new standard eliminates primary and fully diluted earnings per common share and requires presentation of basic and, if applicable, diluted earnings per common share. Basic earnings per common share is computed by dividing income available to common shareholders by the weighted-average common shares outstanding for the period. Diluted earnings per common share reflects the weighted-average common shares outstanding and dilutive potential common shares, such as stock options. The adoption of this new standard is not expected to have a material impact on the disclosure of earnings per common share in the financial statements. -8- PART I. ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and notes thereto. RESULTS OF OPERATIONS Revenues for the third quarter of 1997 increased by 14.2% over revenues in the corresponding 1996 quarter. Revenues for the nine months ended September 30, 1997 increased by 10.3% over the corresponding 1996 period. The following factors contributed to the increase in revenues: service agreements with new clients in existing geographic areas increased revenues by 16.9% for the third quarter and 13.3% for the nine month period; providing new services to existing clients increased revenues 7.2% for the third quarter and 4.7% for the nine month period; and cancellations and other minor changes decreased revenues 9.9% for the third quarter and 7.7% for the nine month period. Cost of services provided as a percentage of revenues decreased to 84.9% for the third quarter of 1997 from 86.2% in the corresponding 1996 quarter. In addition, cost of services as a percentage of revenue decreased to 85.1% for the nine month period ending September 30, 1997 from 85.3% in the same 1996 period. The primary factors affecting specific variations in the 1997 third quarter and nine month periods' cost of services provided as a percentage of revenue and their effects on the respective 1.3% and .2% decreases are as follows: in the third quarter an increase of 2.8% in supplies expense; offsetting this increase was a decrease of 1.6% in the cost of labor and a 1.3% decrease in workers' compensation, general liability and other insurance costs; in the nine month period a 1.2% increase in supplies expense; and offsetting this increase was a decrease of .9% in the allowance for doubtful accounts and other reserves. -9- Selling, general and administrative expenses as a percentage of revenue increased in the third quarter of 1997 to 9.0% as compared to 7.6% in the corresponding 1996 three month period. During the nine month period ending September 30, 1997 selling general & administrative expenses as a percentage of revenue increased to 8.8% as compared to 7.8% in the corresponding 1996 period. The three and nine month increases are primarily attributable to additional costs associated with the expansion of the divisional and regional staffs, as well as the costs of installing a new computerized financial reporting system. The Company estimated in the second quarter of 1997 that it would incur approximately $1,800,000 of additional legal and related costs in connection with the settlement of the previously pending governmental civil lawsuit and accordingly established a provision in this amount for this purpose ( see Note 3 - - Provision for Estimated Cost Related to SEC Inquiry and Other Matters ). The Company has not recorded an income tax benefit in the accompanying financial statements for the settlement payment of $1,225,000 and therefore the effective tax rates of 47.6% for the nine month period ended September 30, 1997 is in excess of the statutory rate. Interest income increased in the nine month period ending September 30, 1997 compared to the same 1996 period principally due to higher average cash balances. The interest income decrease in the third quarter of 1997, as compared to the first and second quarters of 1997 was primarily attributable to reduced cash balances resulting from the Company's expenditure of approximately $9,100,000 for a common stock buy-back which occurred during the first six months of 1997. Liquidity and Capital Resources At September 30, 1997 the Company had working capital and cash of $54,256,662 and $19,351,574 respectively which represents a 6% and 15% decrease as compared to December 31, 1996 working capital and cash of $57,434,314 and $22,677,290, respectively. The decline is primarily a result of the Company's expending approximately $9,100,000 for open market purchases of 802,000 shares of its common stock. As a result of the stock buy-back and the timing of payroll payments, the Company's current ratio at September 30, 1997 decreased to 5.4 to 1 compared to 7.6 to 1 at December 31, 1996. The net cash provided by the Company's operating activities was $6,014,596 and $7,433,857 for the nine month periods ended September 30, 1997 and 1996, respectively. The principle source of cash flows from operating activities for the nine month periods ended September 30, 1997 and 1996 was net income, timing of payments for payroll, payroll related taxes and income taxes, depreciation and amortization and charges to operations for bad debt provisions, as well as a reduction in prepaid income taxes in 1996. The operating activity that used the largest amount of cash was a $4,466,933 and $4,380,195 increase in accounts and current and long term notes receivable at September 30, 1997 and 1996, respectively. The increase in these amounts resulted primarily from the growth in the Company's revenues. - 10 - The Company's principle use of cash in investing activities for the nine month periods ended September 30, 1997 and 1996 is the purchase of housekeeping equipment and laundry equipment installations. The Company expends considerable effort to collect the amounts due for its services on the terms agreed upon with its clients. Many of the Company's clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Whenever possible, when a client falls behind in making agreed-upon payments, the Company converts the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan, which therefore may enhance the ultimate collectibility of the amounts due. In some instances the Company obtains a security interest in certain of the debtors' assets. The Company encounters difficulty in collecting amounts due from certain of its clients, including those in bankruptcy, those which have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, the Company has increased its bad debt provision by $1,125,000 in the nine month period ending September 30, 1997. In making its evaluation, in addition to analyzing and anticipating, where possible, the specific cases described above, management considers the general collection risk associated with trends in the healthcare industry. The Company has a $13,000,000 bank line of credit on which it may draw to meet short-term liquidity requirements in excess of internally generated cash flow. The bank line expires on September 30, 1998. The Company anticipates that this credit line will be continued. Amounts drawn under the line are payable on demand. At September 30, 1997, there were no borrowings under the line. However, at such date, the amount available under the line had been reduced by approximately $11,200,000 as a result of contingent liabilities of the Company to the lender relating to letters of credit issued for the Company (See Note 2 of Notes to Financial Statements). In accordance with the Company's previously announced authorizations to purchase its outstanding common stock, the Company expended approximately $9,100,000 to purchase 802,000 shares of its common stock between March 6, 1997 and April 25, 1997 at an average price of $11.41 per share. The Company remains authorized to purchase approximately 100,000 shares pursuant to previous Board of Directors' actions. Additionally, on October 28, 1997 the Company's Board of Directors authorized the future purchase of up to an additional 600,000 shares of its common stock on the open market. - 11 - The level of capital expenditures by the Company is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment and laundry and linen equipment installations. Although the Company has no specific material commitments for capital expenditures during calendar year 1997, it estimates that it will incur capital expenditures of approximately $2,000,000 during this year in connection with housekeeping equipment and laundry and linen equipment installations in its clients' facilities, as well as hardware and software expenditures relating to the implementation of a new computerized financial reporting system. The Company believes that its cash from operations, existing balances and available credit line will be adequate for the foreseeable future to satisfy the needs of its operations and to fund its continued growth. However, if the need arose, the Company would seek to obtain capital from such sources as long-term debt or equity financing. Effects of Inflation All of the Company's service agreements allow it to pass through to its clients increases in the cost of labor resulting from new wage agreements. The Company believes that it will be able to recover increases in costs attributable to inflation by continuing to pass through cost increases to its clients. Forward Looking Statements/Risk Factors Certain matters discussed in this report may include forward-looking statements that are subject to risks and uncertainties that could cause actual results or objectives to differ materially from those projected. Such risks and uncertainties include, but are not limited to, risks arising from the Company providing its services exclusively to the healthcare industry, credit and collection risks associated with this industry. Additionally, the Company's operating results would be adversely effected if unexpected increases in the costs of labor, materials, supplies and equipment used in performing its services could not be passed on to clients. In addition, the Company believes that in order to improve its financial performance it must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at the various operational levels of the Company. Additionally, the Company believes that its ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies. - 12 - PART II. Other Information Item 1. Legal Proceedings. Not Applicable Item 2. Changes in Securities. Not Applicable Item 3. Defaults under Senior Securities. Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information. a) None Item 6. Exhibits and Reports on Form 8-K. a) Exhibits - 10.6 - Amended Restated 1996 Non-Employee Directors' Stock Option Plan 27 - Financial data schedule b) Reports on Form 8-K - None - 13 - SIGNATURES 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. November 14, 1997 /s/ Daniel P. McCartney - -------------------------------- ---------------------------------- Date DANIEL P. McCARTNEY, Chief Executive Officer November 14, 1997 /s/ Thomas A. Cook - ----------------- --------------------------------- Date THOMAS A. COOK, President and Chief Operating Officer November 14, 1997 /s/ James L. DiStefano - ----------------- --------------------------------- Date JAMES L. DiSTEFANO, Chief Financial Officer and Treasurer November 14, 1997 /s/ Richard W. Hudson - ----------------- -------------------------------- Date RICHARD W. HUDSON, Vice President-Finance, Secretary and Chief Accounting Officer - 14 - EX-10.6 2 AMENDED RESTATED 1996 NON-EMPLOYEE DIRECTORS' AMENDED AND RESTATED AS OF OCTOBER 28, 1997 HEALTHCARE SERVICES GROUP, INC. 1996 NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN ARTICLE I PURPOSE The purpose of the Healthcare Services Group, Inc. 1996 Non- Employee Directors' Stock Option Plan (the "Plan") is to secure for Healthcare Services Group, Inc. (the "Company") and its shareholders the benefits arising from stock ownership by its non-employee Directors. The Plan will provide a means whereby such Directors may purchase shares of the common stock, $.01 par value, of Healthcare Services Group, Inc. pursuant to options granted in accordance with the Plan. ARTICLE II DEFINITIONS The following capitalized terms used in the Plan shall have the respective meanings set forth in this Article: 2.1 "Committee" shall mean the Stock Option Committee of the Board of Directors of the Company, which shall consist of at least two Non-Employee Directors (as defined below) of the Board of Directors of the Company. 2.2 "Chairman" shall mean the duly appointed Chairman of any standing Committee of the Board. 2.3 "Company" shall mean Healthcare Services Group, Inc. and any of its subsidiaries. 2.4 "Director" shall mean any person who is a member of the Board of Directors of the Company. 2.5 "Eligible Director" shall mean any director that is not an employee of the Company. 2.6 "Exercise Price" shall mean the price per Share at which an Option may be exercised. 2.7 "Fair Market Value" shall be determined by taking the average of the closing sale prices of the Company's publicly traded Shares on the 10 business days up to and including the Grant Date on the national securities exchange on which the Shares are listed (if the Shares are so listed) or on the Nasdaq Stock Market System (if the Shares are regularly quoted on the Nasdaq Stock Market System), or, if not so listed or regularly quoted, the mean between the closing bid and asked prices of publicly traded Shares in the OTC Bulletin Board, or, if such bid and asked prices shall not be available, as reported by any nationally recognized quotation service selected by the Company. 2.8 "Non-Employee Director" shall mean any Non-Employee Director as defined in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). 2.9 "Option" shall mean an Option to purchase Shares granted pursuant to the Plan. 2.10 "Option Agreement" shall mean the written agreement described in Article VI herein. 2.11 "Permanent Disability" shall mean the condition of an Eligible Director who is unable to participate as a member of the Board by reason of any medically determined physical or mental impairment which can be expected to result in death or which can be expected to last for a continuous period of not less than twelve (12) months. 2.12 "Purchase Price" shall be the Exercise Price multiplied by the number of whole Shares with respect to which an Option may be exercised. 2.13 "Shares" shall mean shares of common stock, $.01 par value, of the Company. ARTICLE III ADMINISTRATION 3.1 General. All grants of options hereunder shall be made in the discretion of the Committee and in accordance with the provisions of Section 5.1 hereof. 3.2 Powers of the Committee. The Committee shall have authority to adopt only such rules and regulations and to make all such other determinations not inconsistent with the Plan and as it deems necessary for the administration of the Plan. ARTICLE IV SHARES SUBJECT TO PLAN Subject to adjustment in accordance with Article IX, an aggregate of 200,000 Shares are reserved for issuance under this Plan. Shares sold under this Plan may be either authorized, but unissued Shares or reacquired Shares. If an Option, or any portion thereof, shall expire or terminate for any reason without -2- having been exercised in full, the unpurchased Shares covered by such Option shall be available for future grants of Options. ARTICLE V GRANTS 5.1 Grants of Options. Subject to the express provisions of the Plan, the Committee shall have the authority, in its discretion, to determine the Eligible Directors to whom the Options shall be granted, the number of Shares which shall be subject to each Option, the purchase price of each Share which shall be subject to each Option, the period(s) during which such Options shall be exercisable (whether in whole or in part), and the other terms and provisions thereof. In determining the Eligible Directors to whom Options shall be granted and the number of Shares for which Options shall be granted, the Committee shall consider, among other factors, the length of service of the Eligible Director and the amount of earnings of the Company. 5.2 Determination Final. The determination of the Committee on matters referred to in this Article V shall be final. 5.3 Compliance with Rule 16b-3. The terms for the grant of Options to an Eligible Director may only be changed if permitted under Rule 16b-3 of the Exchange Act, and accordingly the grant of Options may not be changed or otherwise modified more than once in any six month period, other than to comport with changes in the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), the Employee Retirement Income Security Act of 1974, as amended (the "Employee Retirement Income Security Act"), or the rules thereunder. ARTICLE VI TERMS OF OPTION Each Option shall be evidenced by a written Option Agreement executed by the Company and the Eligible Director which shall specify the Grant Date, the number of Shares subject to the Option, the Exercise Price and shall also include or incorporate by reference the substance of all of the following provisions and such other provisions consistent with this Plan as the Board may determine. 6.1 Term. The term of the Option shall be five (5) years from the Grant Date of each Option, subject to earlier termination in accordance with Articles VI and X. -3- 6.2 Restriction on Exercise. Options shall be exercisable as follows: all Shares purchasable under an Option shall be exercisable commencing six months and one day after the Grant Date. No Option shall be exercisable until more than six months have elapsed from the Grant Date. In the case the Eligible Director's status as Director terminates as a result of the Eligible Director's death or Permanent Disability, the Eligible Director or his or her estate or a person who acquired the right to exercise the Option by bequest or inheritance may exercise the Option, but only within twelve months following the date of death or termination due to Permanent Disability, and only to the extent that the Eligible Director was entitled to exercise the Option on the date of death or termination due to Permanent Disability (but in no event later than the expiration of its five year term). 6.3 Exercise Price. The Exercise Price for each Share subject to an Option shall be the Fair Market Value of the Share as determined in Section 2.8 herein. 6.4 Manner of Exercise. An Option shall be exercised in accordance with its terms, by delivery of a written notice of exercise to the Company and payment of the full purchase price of the Shares being purchased. An Eligible Director may exercise an Option with respect to all or less than all of the Shares for which the Option may then be exercised, but an Eligible Director must exercise the Option in full Shares. 6.5 Payment. The Purchase Price of Shares purchased pursuant to an Option or portion thereof, may be paid: (a) in United States dollars, in cash or by check, bank draft or money order payable to the Company, (b) by delivery of Shares already owned by an Eligible Director with an aggregate Fair Market Value on the date of exercise equal to the Purchase Price, subject to the provisions of Section 16(b) of the Exchange Act. 6.6 Options shall be transferable (other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined by the Internal Revenue Code or Title I of the Employee Retirement Income Security Act of 1986, as amended, or the rules and regulations promulgated thereunder) to the extent authorized by the Committee in respect of a particular grant. 6.7 Termination of Membership on the Board. If an Eligible Director's membership on the Board terminates for any reason, an Option vested on the date of termination may be exercised in whole or in part at any time within one (1) year after the date -4- of such termination (but in no event after the term of the Option expires) and shall thereafter terminate. ARTICLE VII GOVERNMENT AND OTHER REGULATIONS 7.1 Delivery of Shares. The obligation of the Company to issue or transfer and deliver Shares for exercised Options under the Plan shall be subject to all applicable laws, regulations, rules, orders and approvals which shall then be in effect. 7.2 Holding of Stock After Exercise of Option. The Option Agreement shall provide that the Eligible Director, by accepting such Option, represents and agrees, for the Eligible Director and his permitted transferees hereunder that none of the Shares purchased upon exercise of the Option shall be acquired with a view to any sale, transfer or distribution of the Shares in violation of the Securities Act of 1933, as amended (the "Act"), and the person exercising an Option shall furnish evidence satisfactory to that Company to that effect, including an indemnification of the Company in the event of any violation of the Act by such person. Notwithstanding the foregoing, the Company in its sole discretion may register under the Act the Shares issuable upon exercise of the Options under the Plan. ARTICLE VIII CONDITIONS UPON ISSUANCE Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the Act, as amended, the rules and regulations promulgated thereunder, state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of counsel for the Company with respect to such compliance. ARTICLE IX ADJUSTMENTS 9.1 Proportionate Adjustments. If the outstanding Shares are increased, decreased, changed into or exchanged into a different number or kind of Shares or securities of the Company through reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar transaction, an appropriate and proportionate adjustment shall be made by the Committee or the Board of Directors to the maximum -5- number and kind of Shares as to which Options may be granted under this Plan. A corresponding adjustment changing the number or kind of Shares allocated to unexercised Options or portions thereof, which shall have been granted prior to any such change, shall likewise be made. Any such adjustment in the outstanding Options shall be made without change in the Purchase Price applicable to the unexercised portion of the Option with a corresponding adjustment in the Exercise Price of the Shares covered by the Option. Notwithstanding the foregoing, there shall be no adjustment for the issuance of Shares on conversion of notes, preferred stock or exercise of warrants or Shares issued by the Board of Directors for such consideration as the Board of Directors deems appropriate. 9.2 Reorganization, etc. Notwithstanding any other provision in Article VI hereof, upon the dissolution or liquidation of the Company, or upon a reorganization, merger or consolidation of the Company with one or more corporations as a result of which the Company is not the surviving corporation, or upon a sale of substantially all of the property or more than 80% of the then outstanding Shares of the Company to another corporation, the Company shall give to each Eligible Director at the time of adoption of the plan for liquidation, dissolution, merger or sale either (1) a reasonable time thereafter within which to exercise the Option in its entirety prior to the effective date of such liquidation or dissolution, merger or sale, or (2) the right to exercise the Option as to an equivalent number of Shares of stock of the corporation succeeding the Company or acquiring its business by reason of such liquidation, dissolution, merger, consolidation or reorganization. ARTICLE X AMENDMENT OR TERMINATION OF PLAN 10.1 Amendments. Subject to Section 5.3 hereof, the Board of Directors may at any time amend or revise the terms of the Plan, provided also no such amendment or revision shall, unless appropriate shareholder approval of such amendment or revision is obtained: (a) increase the maximum number of Shares which may be sold pursuant to Options granted under the Plan, except as permitted under the provisions of Article IX; (b) change the minimum Exercise Price set forth in Article VI; (c) increase the maximum term of Options provided for in Article VI; or -6- (d) permit the granting of Options to any one other than as provided in Article V. 10.2 Termination. The Board of Directors at any time may suspend or terminate this Plan. This Plan, unless sooner terminated, shall terminate on December 31, 2000. No Option may be granted under this Plan while this Plan is suspended or after it is terminated. 10.3 Consent of Holder. No amendment, suspension or termination of the Plan shall, without the consent of the holder of Options, alter or impair any rights or obligations under any Option theretofore granted under the Plan. ARTICLE XI MISCELLANEOUS PROVISIONS 11.1 Privilege of Stock Ownership. No Eligible Director entitled to exercise any Option granted under the Plan shall have any of the rights or privileges of a shareholder of the Company with respect to any Shares issuable upon exercise of an Option until certificates representing the Shares shall have been issued and delivered. 11.2 Plan Expenses. Any expenses incurred in the administration of the Plan shall be borne by the Company. 11.3 Use of Proceeds. Payments received from an Eligible Director upon the exercise of Options shall be used for general corporate purposes of the Company. 11.4 Governing Law. The Plan has been adopted under the laws of the Commonwealth of Pennsylvania. The Plan and all Options which may be granted hereunder and all matters related thereto, shall be governed by and construed and enforceable in accordance with the laws of the Commonwealth of Pennsylvania as it then exists. ARTICLE XII SHAREHOLDER APPROVAL This Plan is subject to approval, at a duly held shareholders' meeting within twelve (12) months after the date the Board approves this Plan, by the affirmative vote of holders of a majority of the voting Shares of the Company represented in person or by proxy and entitled to vote at the meeting. Options may be granted, but not exercised, before such shareholder approval is obtained, and no Options granted hereunder shall be effective unless and until the shareholders of the Company -7- approve the Plan. If the shareholders fail to approve the Plan within the required time period, any Options granted under this Plan shall be void, and no additional Options may thereafter be granted. -8- EX-27 3 FINANCIAL DATA SCHEDULE
5 3-MOS DEC-31-1996 SEP-30-1997 19,351,574 0 40,733,154 4,187,000 7,411,189 66,577,055 19,630,535 13,861,346 86,149,454 12,320,393 0 73,891 0 0 70,571,573 86,149,454 0 134,160,823 114,190,260 125,977,943 0 1,800,000 0 7,482,003 3,560,000 3,922,003 0 0 0 3,922,003 .51 .51
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