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 March 31, 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
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(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 May 7, 1997 is
7,308,993 shares.
<PAGE>
INDEX
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PART I. FINANCIAL INFORMATION PAGE NO.
- ------- --------------------- --------
Balance Sheets as of March 31, 1997 and
December 31, 1996 2
Statements of Income for the Three Months
ended March 31, 1997 and 1996 3
Statements of Cash Flows for the Three Months
ended March 31, 1997 and 1996 4
Notes to Financial Statements 5 - 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 8 - 11
PART II. OTHER INFORMATION 12
-----------------
SIGNATURES 13
Exhibit Index E-1
- 1 -
<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited) (Audited)
----------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 23,208,378 $ 22,677,290
Accounts and notes receivable, less allowance
for doubtful accounts of $3,812,000
in 1997 and in 1996 35,390,805 33,318,730
Inventories and supplies 7,415,551 7,392,507
Deferred income taxes 663,193 620,024
Prepaid expenses and other 2,430,340 2,102,330
------------ ------------
Total current assets 69,108,267 66,110,881
PROPERTY AND EQUIPMENT:
Laundry and linen equipment installations 10,841,439 11,322,459
Housekeeping equipment and office
furniture 7,818,089 7,534,025
Autos and trucks 178,006 178,006
------------ ------------
18,837,534 19,034,490
Less accumulated depreciation 12,832,460 12,821,500
------------ ------------
6,005,074 6,212,990
COST IN EXCESS OF FAIR VALUE OF NET
ASSETS ACQUIRED less accumulated
amortization of $1,231,942 in 1997 and
$1,205,036 in 1996 2,123,534 2,150,440
DEFERRED INCOME TAXES 1,433,084 1,272,765
OTHER NONCURRENT ASSETS 10,898,530 10,698,571
------------ ------------
$ 89,568,489 $ 86,445,647
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,035,016 $ 4,106,094
Accrued payroll, accrued and withheld payroll taxes 4,971,063 2,954,099
Other accrued expenses 236,100 810,785
Income taxes payable 1,478,920 53,139
Accrued insurance claims 858,779 752,450
------------ ------------
Total current liabilities 9,579,878 8,676,567
ACCRUED INSURANCE CLAIMS 3,230,644 2,830,647
COMMITMENTS AND CONTINGENCIES (Notes 2 and 3)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value: 15,000,000
shares authorized, 8,090,243 shares
issued in 1997 and 8,090,663 in 1996 80,902 80,907
Additional paid in capital 34,570,989 34,603,813
Retained earnings 42,106,076 40,253,713
Total stockholders' equity 76,757,967 74,938,433
$ 89,568,489 $ 86,445,647
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Income Statements
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
Revenues $ 41,414,490 $ 39,410,651
Operating costs and expenses:
Cost of services provided 35,271,313 33,570,692
Selling, general and administrative 3,507,038 3,013,349
Other income :
Interest income 481,224 191,165
------------ ------------
Income before income taxes 3,117,363 3,017,775
Income taxes 1,265,000 1,237,000
------------ ------------
Net income $ 1,852,363 $ 1,780,775
============ ============
Earnings per common share (Note 4) $ 0.23 $ 0.22
============ ============
Weighted average number of common
shares outstanding 8,210,542 8,164,995
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
HEALTHCARE SERVICES GROUP, INC.
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31,
------------ ------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,852,363 $ 1,780,775
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 465,806 620,457
Bad debt provision 375,000 600,060
Deferred income taxes (benefits) (203,488) (81,000)
Tax benefit of stock option transactions 2,807
Changes in operating assets and liabilities:
Accounts and notes receivable (2,447,075) (2,996,806)
Prepaid income taxes 1,247,641
Inventories and supplies (23,044) 82,903
Changes to long term notes receivable (279,856) 302,069
Accounts payable and other accrued expenses (2,645,764) (1,910,202)
Accrued payroll, accrued and withheld payroll
taxes 2,016,963 2,234,091
Accrued insurance claims 506,325 276,244
Income taxes payable 1,425,781
Prepaid expenses and other assets (248,114) (333,168)
------------ ------------
Net cash provided by operating activities 797,704 1,823,064
------------ ------------
Cash flows from investing activities:
Disposals of fixed assets 69,730
Additions to property and equipment (300,713) (596,237)
------------ ------------
Net cash used in investing activities (230,983) (596,237)
------------ ------------
Cash flows from financing activities:
Purchase of treasury stock (174,744) (240,700)
Proceeds from the exercise of stock options 139,111 4,425
------------ ------------
Net cash used in financing activities (35,633) (236,275)
------------ ------------
Net increase in cash and cash equivalents 531,088 990,552
Cash and cash equivalents at beginning of the year 22,677,290 16,335,886
------------ ------------
Cash and cash equivalents at end of the period $ 23,208,378 $ 17,326,438
============ ============
</TABLE>
See accompanying notes.
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<PAGE>
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 months ended March
31, 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, that expires on June 30, 1997. The Company anticipates that this credit
line will be continued. Amounts drawn under the line are payable upon demand. At
both March 31, 1997 and December 31, 1996, there were no borrowings under the
line. However at March 31, 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 March 31, 1997 and $8,000,000 December 31, 1996.
The Company is also involved in miscellaneous claims and litigations
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.
Note 3 - Provision for Estimated Cost Related to SEC Inquiry and Other Matters
On March 21, 1996 the Staff of the SEC informed the Company that the
SEC has 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
- 5 -
<PAGE>
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 the current officers with respect to their payment
obligations. The estimated monetary impact of this settlement plus related legal
costs have been reflected in the accompanying financial statements.
In addition, on or about May 24, 1996 the United States Attorney for
the Eastern District of Pennsylvania filed a civil action against the Company.
This pending litigation is primarily a result of and arises 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.
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 may 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. Due to the uncertainty as to the costs
remaining to be incurred relating to the United States Attorney civil action
described above, the Company may incur additional legal and related costs in
excess of the remaining amounts recorded ( $50,000 at March 31, 1997) in the
accompanying financial statements. The ultimate outcome of this matter is
uncertain and the amount of any additional liability which might finally exist
cannot reasonably be estimated at this time.
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
-6-
<PAGE>
standard eliminates primary and fully diluted earnings per common share and
requires presentation of basic and if applicable diluted earnings pre 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.
-7-
<PAGE>
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 first quarter of 1997 increased by 5.1% over revenues
in the corresponding 1996 quarter. The following factors contributed to the
increase in first quarter revenues: service agreements with new clients in
existing geographic areas increased revenues by 17.1%; service agreements with
new clients in new geographical areas increased revenues 1.2%; and cancellations
and other minor changes decreased revenues 13.2%.
Cost of services provided as a percentage of revenues remained at 85.2%
for the first quarter of 1997 as compared to the corresponding 1996 quarter.
Although the cost of services as a percentage of revenue reflected no change in
the aggregate, the primary factors affecting specific variations in the 1997
first quarter as compared to the 1996 first quarter are as follows: an increase
of .8% in workers' compensation, general liability and other insurance costs and
a .8% increase in the cost of labor; and offsetting these increases was a .6%
decrease in the allowance for doubtful accounts; a .5% decrease in depreciation;
and a .5% decrease in housekeeping, laundry and linen supply costs.
Selling, general and administrative expenses as a percentage of revenue
increased in the first quarter of 1997 to 8.5% as compared to 7.6% in the
corresponding 1996 quarter. The increase is 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.
-8-
<PAGE>
The Company presently anticipates that it will incur a significant
amount of additional legal and related costs in connection with the pending
governmental civil lawsuit and related investigations and accordingly has
established a provision for this purpose ( see Note 3 - Provision for Estimated
Cost Related to SEC Inquiry and Other Matters ).
Liquidity and Capital Resources
At March 31, 1997 the Company had working capital of $59,528,389 which
represents a 4% increase over December 31, 1996 working capital of $57,434,314.
Working capital continues to grow primarily as a result of higher accounts and
notes receivable attributable to the Company's 5.1% increase in revenues for the
three months ending March 31, 1997. The Company's current ratio at March 31,
1997 decreased to 7.2 to 1 compared to 7.6 to 1 at December 31, 1996.
The net cash provided by the Company's operating activities was
$797,704 for the three month period ended March 31, 1997. The components of
working capital that required the largest amount of cash were: a $2,447,075
increase in accounts and notes receivable and a $2,645,764 decrease in accounts
payable and other accrued expenses. The increase in accounts and notes
receivable resulted primarily from the growth in the Company's revenues. The
increased use of cash associated with accounts payable and other accrued
expenses resulted primarily from the timing of payments to vendors.
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 $375,000 in the first quarter of 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 long-term care industry.
-9-
<PAGE>
The Company has a $13,000,000 bank line of credit on which it may draw
to meet short-term liquidity requirements in excess of internally generated cash
flow, that expires on June 30, 1997. The Company anticipates that this credit
line will be continued. Amounts drawn under the line are payable on demand. At
March 31, 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).
At March 31, 1997, the Company had $23,208,378 of cash and cash
equivalents, which it views as its principal measure of liquidity.
In accordance with the Company's previously announced authorizations to
purchase its outstanding common stock, the Company expended approximately
$9,000,000 to purchase 786,000 shares of its common stock between April 3 and
April 25, 1997 at an average price of $11.42 per share. The Company remains
authorized by the Board of Directors to purchase an additional 100,000 shares.
The level of capital expenditures by the Company is generally dependent
on the number of new clients obtained. Such capital expenditures primarily
consist of housekeeping equipment and laundry and linen equipment installations.
Although the Company has no specific material commitments for capital
expenditures through the end of calendar year 1997, it estimates that it will
incur capital expenditures of approximately $2,000,000 during this period 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.
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<PAGE>
Forward Looking Statements/Risk Factors
Certain matters discussed may include forward-looking statements that
are subject to risks and uncertainties that could cause actual results or
objectives to differ materially from those projected. Such risks and
uncertainties include, but are not limited to, risks arising from the Company
providing its services exclusively to the healthcare industry, credit and
collection risks associated with this industry, unexpected increases in the
costs of labor, materials, supplies and equipment used in performing its
services and risks arising from pending litigation referred to in Note 3 of the
Notes to Financial Statements including the possibility of increased legal and
other costs.
In addition, the Company believes that to improve its future 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 in respect of projected growth strategies.
Effects of Inflation
All of the Company's service agreements allow it to pass through to its
clients increases in the cost of labor resulting from new wage agreements. The
Company believes that it will be able to recover increases in costs attributable
to inflation by continuing to pass through cost increases to its clients.
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<PAGE>
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
10.1 Amended and Restated 1996 Non-Employee Directors' Stock
Option Plan.
10.2 Amended and Restated 1995 Directors' Stock Option Plan.
10.3 Amended and Restated 1995 Incentive and Nonqualified
Stock Option Plan for Key Employees.
10.4 Amended and Restated 1991 Incentive Stock Option Plan.
27 Financial Data Schedule.
b) Reports on Form 8-K - None
- 12 -
<PAGE>
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.
-------------------------------
May 13, 1997 /s/ Daniel P. McCartney
- ------------------------------- -------------------------------
Date DANIEL P. McCARTNEY, Chief
Executive Officer
May 13, 1997 /s/ Thomas A. Cook
- ------------------------------- -------------------------------
Date THOMAS A. COOK, President and
Chief Operating Officer
May 13, 1997 /s/ James L. DiStefano
- ------------------------------- -------------------------------
Date JAMES L. DiSTEFANO, Chief Financial
Officer and Treasurer
May 13, 1997 /s/ Richard W. Hudson
- ------------------------------- -------------------------------
Date RICHARD W. HUDSON, Vice
President-Finance, Secretary and Chief
Accounting Officer
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<PAGE>
EXHIBIT INDEX
Number Description
- ------ -----------
10.1 Amended and Restated 1996 Non-Employee Directors' Stock Option Plan.
10.2 Amended and Restated 1995 Directors' Stock Option Plan.
10.3 Amended and Restated 1995 Incentive and Nonqualified Stock Option
Plan for Key Employees.
10.4 Amended and Restated 1991 Incentive Stock Option Plan.
27 Financial Data Schedule.
E-1
AMENDED AND RESTATED
AS OF OCTOBER 1, 1996
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 "Annual Grant Date" shall mean, with respect to Eligible Directors
who serve on the Board of Directors December 5, 1996 and December 5 of each
calendar year after 1996 during the term of the Plan or the nearest preceding
business day if December 5 falls on a weekend or holiday.
2.2 "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.
2.3 "Chairman" shall mean the duly appointed Chairman of any standing
Committee of the Board.
2.4 "Company" shall mean Healthcare Services Group, Inc. and any of its
subsidiaries.
2.5 "Director" shall mean any person who is a member of the Board of
Directors of the Company.
2.6 "Eligible Director" shall mean any director that is not an employee
of the Company.
2.7 "Exercise Price" shall mean the price per Share at which an Option
may be exercised.
<PAGE>
2.8 "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.
2.9 "Grant Date" shall mean the Initial Grant Date or the Annual Grant
Date.
2.10 "Initial Grant Date" shall mean with respect to each Eligible
Director who is first elected as a member of the Board after June 4, 1996, the
date of his or her appointment by the Board of Directors to fill a vacancy or
the date of election by the shareholders.
2.11 "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").
2.12 "Option" shall mean an Option to purchase Shares granted pursuant
to the Plan.
2.13 "Option Agreement" shall mean the written agreement described in
Article VI herein.
2.14 "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.
2.15 "Purchase Price" shall be the Exercise Price multiplied by the
number of whole Shares with respect to which an Option may be exercised.
2.16 "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 automatic and
non-discretionary and shall be made in strict accordance with the provisions
hereof.
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<PAGE>
3.2 Limited 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 particularly the requirements
of Rule 16b-3(c)(2) of the Exchange Act as may be 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
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 Initial Grant. On the Initial Grant Date, each Eligible Director
shall receive the grant of an option to purchase 5,000 Shares.
5.2 Annual Grants. On each Annual Grant Date, each Eligible Director
shall receive the grant of an option to purchase 5,000 Shares.
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 formula for 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.
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<PAGE>
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.
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.
-4-
<PAGE>
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 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
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<PAGE>
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 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;
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<PAGE>
(c) increase the maximum term of Options provided for in Article VI; or
(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
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<PAGE>
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 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.
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AMENDED AND RESTATED
AS OF OCTOBER 1, 1996
HEALTHCARE SERVICES GROUP, INC.
1995 DIRECTORS' STOCK OPTION PLAN
ARTICLE I
PURPOSE
The purpose of the Healthcare Services Group, Inc. 1995 Directors'
Stock Option Plan (the "Plan") is to secure for Healthcare Services Group, Inc.
and its stockholders the benefits arising from stock ownership by its 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 Corporation, Healthcare Services Group, Inc., which shall
consist of two or more "non-employee directors" within the meaning of Rule 16b-3
promulgated under the Securities Exchange Act of 1934, as amended and in
accordance with the express provisions of this Plan.
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 be any Director 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 mean the closing price of publicly traded
Shares on the national securities exchange on which Shares are listed (if the
Shares are so listed) or on the Nasdaq Stock Market System (if the Shares are
regularly quoted on
<PAGE>
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
over-the-counter market Electronic 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 "Option" shall mean an Option to purchase Shares granted pursuant
to the Plan.
2.9 "Option Agreement" shall mean the written agreement described in
Article VI herein.
2.10 "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.
2.11 "Purchase Price" shall be the Exercise Price multiplied by the
number of whole Shares with respect to which an Option may be exercised.
2.12 "Shares" shall mean shares of common stock, $.01 par value, of the
Company.
ARTICLE III
ADMINISTRATION
3.1 General. This Plan shall be administered by the Committee in
accordance with the express provisions of this Plan.
3.2 Powers of the Committee. The Committee shall have full and complete
authority to adopt such rules and regulations and to make all such other
determinations not inconsistent with the Plan as may be necessary for the
administration of the Plan.
ARTICLE IV
SHARES SUBJECT TO PLAN
Subject to adjustment in accordance with Article IX, an aggregate of
150,000 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
having been exercised in full, the unpurchased Shares covered by such Option
shall be available for future grants of Options.
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<PAGE>
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 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 this Article V shall be final.
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.
6.2 Restriction on Exercise. Options shall be exercisable at such time
or times and subject to such terms and conditions as shall be determined by the
Board at grant, provided, however, that except in the case of the Eligible
Director's death or Permanent Disability, upon which events the Option will
become immediately exercisable, unless a longer vesting period is otherwise
determined by the Committee at grant, Options shall be exercisable as follows:
one-half of the aggregate Shares purchasable under an Option shall be
exercisable commencing one year after the Grant Date and an additional one-half
of the Shares purchasable under an Option shall be exercisable commencing two
years after the Grant Date. The Board may waive such installment exercise
provision at any time in whole or in part based on performance and/or such other
factors as the Board may determine in its sole discretion, provided, however,
that no
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<PAGE>
Option shall be exercisable until more than six months have elapsed from the
Grant Date.
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 2.7
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; or
(b) by delivery of Shares already owned by an Eligible
Director (for a period of at least six months) with an aggregate Fair Market
Value on the date of exercise equal to the Purchase Price.
6.6 Transferability. 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 of 1986, as it may from
time to time be amended 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 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.
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<PAGE>
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
WITHHOLDING TAX
The Company may in its discretion, require an Eligible Director to pay
to the Company, at the time of exercise of an Option an amount that the Company
deems necessary to satisfy its obligations to withhold federal, state or local
income or other taxes (which for purposes of this Article includes an Eligible
Director's FICA obligation) incurred by reason of such exercise. When the
exercise of an Option does not give rise to the obligation to withhold federal
income taxes on the date of exercise, the Company may, in its discretion,
require an Eligible Director to place Shares purchased under the Option in
escrow for the benefit of the Company until such time as federal income tax
withholding is required on amounts included in the Eligible Director's gross
income as a result of the exercise of an Option. At such time, the Company, in
its discretion, may require an Eligible Director to pay to the Company an amount
that the Company deems necessary to satisfy its obligation to withhold federal,
state or local taxes incurred by reason of the exercise of the Option, in which
case the Shares will be released from escrow upon such payment by an Eligible
Director.
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 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
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<PAGE>
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
for such consideration as the Board 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 or agreement 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 in its entirety 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. The Board may at any time amend or revise the terms of
the Plan, provided no such amendment or revision shall, unless appropriate
stockholder 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;
or
(c) permit the granting of Options to any one other than as
provided in Article V.
10.2 Termination. The Board at any time may suspend or terminate this
Plan. This Plan, unless sooner terminated, shall terminate on the tenth
anniversary of its adoption by the Board. No Option may be granted under this
Plan while this Plan is suspended or after it is terminated.
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<PAGE>
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 stockholder 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
STOCKHOLDER APPROVAL
This Plan is subject to approval, at a duly held stockholders' 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 stockholder approval is obtained.
If the stockholders 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 hereunder.
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AMENDED AND RESTATED
AS OF OCTOBER 1, 1996
1995 INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
FOR KEY EMPLOYEES OF
HEALTHCARE SERVICES GROUP, INC.
1. Purpose of the Plan
This 1995 Incentive and Nonqualified Stock Option Plan (the "Plan") is
intended as an incentive, to retain in the employ of Healthcare Services Group,
Inc. (the "Company") and any Subsidiary of the Company (within the meaning of
Section 424(f) of the Internal Revenue Code of 1986, as amended (the "Code"),
persons of training, experience and ability, to attract new employees whose
services are considered valuable, to encourage the sense of proprietorship and
to stimulate the active interest of such persons in the development and
financial success of the Company and its Subsidiaries.
It is further intended that certain options granted pursuant to the
Plan shall constitute incentive stock options within the meaning of Section 422
of the Code ("Incentive Options") while certain other options granted pursuant
to the Plan shall be nonqualified stock options ("Nonqualified Options").
Incentive Options and the Nonqualified Options are hereinafter referred to
collectively as "Options".
2. Administration of the Plan
The Board of Directors of the Company (the "Board") shall appoint and
maintain as administrator of the Plan a Committee (the "Committee") consisting
of at least two "non-employee directors" within the meaning of Rule 16b-3 of the
Securities and Exchange Commission ("Rule 16b-3") promulgated under the
Securities Exchange Act of 1934, as amended (the "Act"), as from time to time in
effect and shall qualify as "outside directors" within the meaning of Section
162(m) of the Internal Revenue Code. The members of the Committee shall serve at
the pleasure of the Board.
The Committee, subject to Section 3 hereof, shall have full power and
authority to designate recipients of Options, to determine the terms and
conditions of respective Option agreements (which need not be identical) and to
interpret the provisions and supervise the administration of the Plan. Subject
to Section 7 hereof, the Committee shall have the authority, without limitation,
to designate which Options granted under the Plan shall be Incentive Options and
which shall be Nonqualified Options. To the extent any Option does not qualify
as an Incentive Option, it shall constitute a separate Nonqualified Option.
Notwithstanding any provision in the Plan to the
<PAGE>
contrary, Options may be granted under the Plan to any member of the Committee
during the term of his membership on the Committee, subject to approval of the
Board of Directors or the Audit Committee thereof.
Subject to the provisions of the Plan, the Committee shall interpret
the Plan and all Options granted under the Plan, shall make such rules as it
deems necessary for the proper administration of the Plan, shall make all other
determinations necessary or advisable for the administration of the Plan and
shall correct any defects or supply any omission or reconcile any inconsistency
in the Plan or in any Options granted under the Plan in the manner and to the
extent that the Committee deems desirable to carry the Plan or any Options into
effect. The act or determination of a majority of the Committee shall be deemed
to be the act or determination of the Committee and any decision reduced to
writing and signed by all of the members of the Committee shall be fully
effective as if it had been made by a majority at a meeting duly held. Subject
to the provisions of the Plan, any action taken or determination made by the
Committee pursuant to this and the other paragraphs of the Plan shall be
conclusive on all parties.
3. Designation of Optionees.
The persons eligible for participation in the Plan as recipients of
Options ("Optionees") shall include only full-time key employees of the Company
or any Subsidiary. In selecting Optionees, and in determining the number of
shares to be covered by each Option granted to Optionees, the Committee may
consider the office or position held by the Optionee, the Optionee's degree of
responsibility for and contribution to the growth and success of the Company or
any Subsidiary, the Optionee's length of service, age, promotions, potential and
any other factors which the Committee may consider relevant. An employee who has
been granted an Option hereunder may be granted an additional Option or Options,
if the Committee shall so determine. Notwithstanding the preceding sentence or
anything contained in the Plan to the contrary, no recipient of options may be
granted options to purchase in excess of 125,000 shares of common stock
authorized to be issued under the Plan.
4. Stock Reserved for the Plan.
Subject to adjustment as provided in Section 7 hereof, a total of five
hundred thousand (500,000) shares of common stock, $.01 par value ("Stock"), of
the Company shall be subject to the Plan. The shares of Stock subject to the
Plan shall consist of unissued shares or previously issued shares reacquired and
held by the Company or any Subsidiary of the Company, and such amount of shares
of Stock shall be and is hereby reserved for such purpose. Any of such shares of
Stock which may remain unsold and
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<PAGE>
which are not subject to outstanding Options at the termination of the Plan
shall cease to be reserved for the purpose of the Plan, but until termination of
the Plan the Company shall at all times reserve a sufficient number of shares of
Stock to meet the requirements of the Plan. Should any Option expire or be
cancelled prior to its exercise in full or should the number of shares of Stock
to be delivered upon the exercise in full of an Option be reduced for any
reason, the shares of Stock theretofore subject to such Option may again be
subject to an Option under the Plan.
5. Terms and Conditions of Options.
Options granted under the Plan shall be subject to the following
conditions and shall contain such additional terms and conditions, not
inconsistent with the terms of the Plan, as the Committee shall deem desirable:
(a) Option Price. The purchase price of each share of Stock purchasable
under an Option shall be determined by the Committee at the time of grant but
shall not be less than 100% of the fair market value of such share of Stock on
the date the Option is granted in the case of an Incentive Option and not less
than 100% of the fair market value of such share of Stock on the date the Option
is granted in the case of a Non-Qualified Option; provided, however, that with
respect to an Incentive Option, in the case of an Optionee who, at the time such
Option is granted, owns (within the meaning of Section 424(d) of the Code) more
than 10% of the total combined voting power of all classes of stock of the
Company or of any Subsidiary, then the purchase price per share of Stock shall
be at least 110% of the Fair Market Value (as defined below) per share of Stock
at the time of grant. The exercise price for each incentive stock option shall
be subject to adjustment as provided in Section 7 below. The fair market value
("Fair Market Value") means the closing price of publicly traded shares of Stock
on the national securities exchange on which shares of Stock are listed, (if the
shares of Stock are so listed) or on the NASDAQ Stock Market System (if the
shares of Stock 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 of Stock in the over-the-counter market, or, if
such bid and asked prices shall not be available, as reported by any nationally
recognized quotation service selected by the Company, or as determined by the
Committee in a manner consistent with the provisions of the Code.
(b) Option Term. The term of each Option shall be fixed by the
Committee, but no Option shall be exercisable more than ten years after the date
such Option is granted; provided, however, that in the case of an Optionee who,
at the time such Option is granted, owns more than 10% of the total combined
voting power of
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<PAGE>
all classes of stock of the Company or any Subsidiary, then such Option shall
not be exercisable with respect to any of the shares subject to such Option
later than the date which is five years after the date of grant.
(c) Exercisability. Subject to paragraph (j) of this Section 5, Options
shall be exercisable at such time or times and subject to such terms and
conditions as shall be determined by the Committee at grant, provided, however,
that except as provided in paragraphs (f) and (g) of this Section 5, unless a
shorter or longer vesting period is otherwise determined by the Committee at
grant, Options shall be exercisable as follows: up to one-half (1/2) of the
aggregate shares of Stock purchasable under an Option shall be exercisable
commencing one year after the date of grant and an additional one-half (1/2) of
the aggregate initial shares of Stock purchasable under an Option shall be
exercisable commencing two years after the date of grant. The Committee may
waive such installment exercise provision at any time in whole or in part based
on performance and/or such other factors as the Committee may determine in its
sole discretion, provided, however, no Option shall be exercisable until more
than six months have elapsed from the date of grant of such Option.
(d) Method of Exercise. Options may be exercised in whole or in part at
any time during the option period, by giving written notice to the Company
specifying the number of shares to be purchased, accompanied by payment in full
of the purchase price, in cash, by check or such other instrument as may be
acceptable to the Committee. As determined by the Committee, in its sole
discretion, at or after grant, payment in full or in part may also be made in
the form of Stock owned by the Optionee for at least six months (based on the
Fair Market Value of the Stock on the trading day before the Option is
exercised); provided, however, that if such Stock was issued pursuant to the
exercise of an Incentive Option under the Plan, the holding requirements for
such Stock under the Code shall first have been satisfied. An Optionee shall
have the rights to dividends or other rights of a stockholder with respect to
shares subject to the Option after (i) the Optionee has given written notice of
exercise and has paid in full for such shares and (ii) becomes a stockholder of
record.
(e) Transferability. An Incentive Option granted hereunder shall not be
transferable otherwise than by will, the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code, or
Title I of the Employee Retirement Income Security Act of 1986, as amended, or
the rules and regulations promulgated thereunder. Any Incentive Option granted
hereunder shall be exercisable, during the lifetime of the holder, only by such
holder or by such holder's guardian or legal representative. Nonqualified
Options
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<PAGE>
may be transferable only to the extent authorized by the Committee in respect of
a particular grant.
(f) Termination by Death. Unless otherwise determined by the Committee
at grant, if any Optionee's employment with the Company or any Subsidiary
terminates by reason of death, the Option may thereafter be immediately
exercised, to the extent then exercisable (or on such accelerated basis as the
Committee shall determine at or after grant), by the legal representative of the
estate or by the legatee of the Optionee under the will of the Optionee, for a
period of one year from the date of such death or until the expiration of the
stated term of such Option as provided under the Plan, whichever period is
shorter.
(g) Termination by Reason of Disability. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with the Company or any
Subsidiary terminates by reason of total and permanent disability as determined
under the Company's long term disability policy ("Disability"), any Option held
by such Optionee may thereafter be exercised, to the extent it was exercisable
at the time of termination due to Disability (or on such accelerated basis as
the Committee shall determine at or after grant), but may not be exercised after
three months from the date of such termination of employment or the expiration
of the stated term of such Option, whichever period is shorter.
(h) Termination by Reason of Retirement. Unless otherwise determined by
the Committee at grant, if any Optionee's employment with the Company or any
Subsidiary terminates by reason of Normal or Early Retirement (as such terms are
defined below), any Option held by such Optionee may thereafter be exercised to
the extent it was exercisable at the time of such Retirement (as defined below)
(or on such accelerated basis as the Committee shall determine at or after
grant), but may not be exercised after three months from the date of such
termination of employment or the expiration of the stated term of such Option,
whichever period is shorter.
For purposes of this paragraph (h), Normal Retirement shall mean
retirement from active employment with the Company or any Subsidiary on or after
the normal retirement date specified in the applicable Company or Subsidiary
pension plan or if no such pension plan, age 65. Early Retirement shall mean
retirement from active employment with the Company or any Subsidiary pursuant to
the early retirement provisions of the applicable Company or Subsidiary pension
plan or if no such pension plan, age 55. Retirement shall mean Normal or Early
Retirement.
(i) Other Termination. Unless otherwise determined by the Committee at
grant, if any Optionee's employment with the Company or any Subsidiary
terminates for any reason other than death, Disability or Retirement, the Option
shall thereupon terminate,
-5-
<PAGE>
except that the exercisable portion of any Option which was exercisable on the
date of such termination of employment may be exercised for the lesser of three
months from the date of termination or the balance of such Option's term if the
Optionee's employment with the Company or any Subsidiary is involuntarily
terminated by the Optionee's employer without Cause. Cause shall mean a felony
conviction or the failure of an Optionee to contest prosecution for a felony or
an Optionee's willful misconduct or dishonesty, any of which is deemed by the
Committee or the Board of Directors to be harmful to the business or reputation
of the Company or any Subsidiary. The transfer of an Optionee from the employ of
the Company to a Subsidiary, or vice versa, or from one Subsidiary to another,
shall not be deemed to constitute a termination of employment for purposes of
the Plan.
(j) Limit on Value of Incentive Option. The aggregate Fair Market
Value, determined as of the date the Option is granted, of the Stock for which
Incentive Options are exercisable for the first time by any Optionee during any
calendar year under the Plan (and/or any other stock option plans of the Company
or any Subsidiary) shall not exceed $100,000.
(k) Transfer of Incentive Option Shares. The stock option agreement
evidencing any Incentive Options granted under this Plan shall provide that if
the Optionee makes a disposition, within the meaning of Section 424(c) of the
Code and regulations promulgated thereunder, of any share or shares of Stock
issued to him pursuant to his exercise of an Incentive Option granted under the
Plan within the two-year period commencing on the day after the date of the
grant of such Incentive Option or within a one-year period commencing on the day
after the date of transfer of the share or shares to him pursuant to the
exercise of such Incentive Option, he shall, within ten days of such
disposition, notify the Company thereof and immediately deliver to the Company
any amount of federal income tax withholding required by law.
6. Term of Plan.
No Option shall be granted pursuant to the Plan on or after the tenth
anniversary of the date the Plan is approved by the Board, but Options granted
may extend beyond that date.
7. Capital Change of the Company.
In the event of any merger, reorganization, consolidation,
recapitalization, stock dividend, or other change in corporate structure
affecting the Stock, the Committee shall make an appropriate and equitable
adjustment in the number and kind of shares reserved for issuance under the Plan
and in the number and option price of shares subject to outstanding Options
granted under the Plan, to the end that after such event each Optionee's
-6-
<PAGE>
proportionate interest shall be maintained as immediately before the occurrence
of such event. 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 for such consideration as the Board deems
appropriate.
8. Purchase for Investment.
Unless the Options and shares covered by the Plan have been registered
under the Securities Act of 1933, as amended, or the Company has determined that
such registration is unnecessary, each person exercising an Option under the
Plan may be required by the Company to give a representation in writing that he
is acquiring the shares for his own account for investment and not with a view
to, or for sale in connection with, the distribution of any part thereof.
9. Taxes.
The Company may make such provisions as it may deem appropriate,
consistent with applicable law, in connection with any Options granted under the
Plan with respect to the withholding of any taxes or any other tax matters.
10. Effective Date of Plan.
The Plan shall be effective on the date it is approved by the Board,
provided however that the Plan shall be subject to subsequent approval by
majority vote of a quorum of the Company's stockholders present and voting at a
meeting held within one (1) year from the date approved by the Board. Options
may be granted, but not exercised, before such stockholder approval is obtained.
If the stockholders 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 hereunder.
11. Amendment and Termination.
The Board may amend, suspend, or terminate the Plan, except that no
amendment shall be made which would impair the right of any Optionee under any
Option theretofore granted without his consent, and except that no amendment
shall be made which, without the approval of the stockholders would:
(a) materially increase the number of shares which may be issued under
the Plan, except as is provided in Section 7;
(b) materially increase the benefits accruing to the Optionees under
the Plan;
-7-
<PAGE>
(c) materially modify the requirements as to eligibility for
participation in the Plan;
(d) decrease the Option exercise price to less than 100% of the Fair
Market Value on the date of grant thereof.
The Committee may amend the terms of any Option theretofore granted,
prospectively or retroactively, but no such amendment shall impair the rights of
any Optionee without his consent. The Committee may also substitute new Options
for previously granted Options, including options granted under other plans
applicable to the participant and previously granted Options having higher
option prices, upon such terms as the Committee may deem appropriate.
12. Reorganization etc.
Notwithstanding any other provisions in Section 5 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 Common
Stock of the Company to another corporation, the Company shall give to each
Optionee at the time of adoption of the plan or agreement 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 in its entirety as to an equivalent number of shares of Common Stock of
the corporation succeeding the Company or acquiring its business by reason of
such liquidation, dissolution, merger, consolidation or reorganization.
13. Government Regulations.
The Plan, and the granting and exercise of Options hereunder, and the
obligation of the Company to sell and deliver shares under such Options, shall
be subject to all applicable laws, rules and regulations, and to such approvals
by any governmental agencies or national securities exchanges as may be
required.
14. General Provisions.
(a) Certificates. All certificates for shares of Stock delivered under
the Plan shall be subject to such stock transfer orders and other restrictions
as the Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange or
trading system upon which the Stock is then listed, and any applicable Federal
or state securities law, and the Committee may cause a
-8-
<PAGE>
legend or legends to be placed on any such certificates to make appropriate
reference to such restrictions.
(b) Employment Matters. The adoption of the Plan shall not confer upon
any Optionee of the Company or any Subsidiary, any right to continued employment
(or, in case the Optionee is also a director, continued retention as a director)
with the Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or any Subsidiary to terminate the
employment of any of its employees at any time.
(c) Limitation of Liability. No member of the Board or the Committee,
or any officer or employee of the Company acting on behalf of the Board or the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Board or the Committee and each and any officer or employee of
the Company acting on their behalf shall, to the extent permitted by law, be
fully indemnified and protected by the Company in respect of any such action,
determination or interpretation.
(d) Registration of Options. Notwithstanding any other provision in the
Plan, no Option may be exercised unless and until the Stock to be issued upon
the exercise thereof has been registered under the Securities Act of 1933 and
applicable state securities laws, or are, in the opinion of counsel to the
Company, exempt from such registration. The Company shall not be under any
obligation to register under applicable federal or state securities laws any
Stock to be issued upon the exercise of an Option granted hereunder, or to
comply with an appropriate exemption from registration under such laws in order
to permit the exercise of an Option and the issuance and sale of the Stock
subject to such Option; however, the Company may in its sole discretion register
such Stock at such time as the Company shall determine. If the Company chooses
to comply with such an exemption from registration, the Stock issued under the
Plan may, at the direction of the Committee, bear an appropriate restrictive
legend restricting the transfer or pledge of the Stock represented thereby, and
the Committee may also give appropriate stop-transfer instructions to the
transfer agent to the Company.
15. Withholding.
To enable optionees to satisfy tax withholding obligations relating to
non-qualified stock options, in lieu of cash payment the Committee may provide
that optionees may elect to have the Company withhold from an option exercise,
or separately surrender, shares of Common Stock.
16. Rule 16b-3 Compliance.
-9-
<PAGE>
The Company intends that the Plan meet the requirements of Rule 16b-3
and that transactions of the type specified in subparagraphs (c) and (f) of Rule
16b-3 by officers of the Company (whether or not they are directors) pursuant to
the Plan will be exempt from the operation of Section 16(b) of the Act. In all
cases, the terms, provisions, conditions and limitations of the Plan shall be
construed and interpreted consistent with the Company's intent as stated in this
Section 16.
-10-
AMENDED AND RESTATED
AS OF OCTOBER 1, 1996
HEALTHCARE SERVICES GROUP, INC.
INCENTIVE STOCK OPTION PLAN
1. Purpose. The purpose of this Stock Option Plan (the "Plan") is to
promote the interests of Healthcare Services Group, Inc. (the "Company") and its
shareholders by providing a means by which the Company shall be able to attract
and retain key employees and provide such personnel with an opportunity to
participate in the growth of the Company. The Plan provides for the grant, in
accordance with its terms, of incentive stock options ("ISO's") to purchase the
Company's common shares, par value $.01 (the "Common Shares" or "Shares"), in
strict conformity with the manner provided for in Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code") (and successor provisions of the
law) (ISO's may be hereinafter referred to as "Options".)
2. Administration. A committee, the members of which shall consist of
one or more non-employee directors, within the meaning of Rule 16b-3 ("Rule
16b-3") of the Securities and Exchange Commission promulgated under the
Securities Exchange Act of 1934, as amended (the "Act"), as from time to time in
effect, of the Company (the "Members") to be known as the Option Committee (the
"Committee") shall administer and interpret this Plan. The directors of the
Company shall appoint the Committee, and from time to time may by express vote
limit the power of the Committee and may remove members of the Committee or add
members thereto. Vacancies on the Committee, however caused, shall be filled by
action of the directors of the Company. The Committee may hold meetings at such
times and places as it determines. A majority of the Members shall constitute a
quorum, and the acts of a majority of the Members present at any meeting at
which a quorum is present, or acts approved in writing by a majority of the
members, shall be the acts of the Committee. The Committee's interpretation and
construction of any provisions of the Plan or any ISO granted under it shall be
final. No Member shall be eligible to participate in this Plan.
3. Eligibility. The Committee may at any time and from time to time
after April 30, 1991, but before September 1, 1998, grant an ISO to any person
while he is employed by the Company as an officer or key employee. A person who
serves merely as a director shall not be considered to be employed as an officer
or key employee, but a person employed as an officer or key employee of the
Company shall not lose the benefits of that status merely by serving also as a
director. Employment by a parent or a subsidiary of the Company as an officer or
key employee of such
<PAGE>
parent or subsidiary shall be deemed employment by the Company for the purposes
of this Paragraph 3.
Subject to the terms, provisions and conditions of this Plan, the
Committee shall have exclusive jurisdiction (a) to select the persons eligible
hereunder to be granted Options (it being understood that more than one Option
may be granted to the same person), (b) to determine the number of Shares
subject to each Option, (c) to determine the time or times when the Options will
be granted, (d) to determine the option price of the Shares subject to each
Option, which price shall be not less than the minimum specified in Paragraphs
(c) and (j) of Section 5 of this Plan, (e) to determine the time or times when
each Option may be exercised within the limits stated in this Plan, and (f) to
prescribe the form, which shall be consistent with this Plan, of the instruments
evidencing any Options granted under this Plan.
4. Shares. Except as adjusted under Section 6 or under Section 14
hereof, the stock subject to the Options shall be Common Shares, and the total
number of Common Shares on which Options may be granted under this Plan shall
not exceed in the aggregate 339,266 Shares. If any outstanding Option under this
Plan expires or is terminated for any reason before the end of the period during
which Options may be granted, the number of Shares allocable to the unexercised
portion of such Option may again be subjected to Options under this Plan within
the above limits.
5. Terms and Conditions of Options. In no event shall the Company
become obligated with respect to any purported grant of an Option or any
purported agreement to grant an Option to any person, except pursuant to a
written agreement delivered to such person and conforming with this Section.
Until and as the Directors of the Company otherwise determine, any such
agreements shall be in such form as the Committee shall from time to time
determine, and in any event such agreements shall comply with, and be subject
to, the following terms and conditions:
(a) Medium and Time of Payment. The option price shall be
payable in United States dollars upon the exercise of the Option and
may be paid in cash, by certified check, or by bank draft.
(b) Number of Shares. The agreement shall state the total
number of Shares subject to the Option to which it pertains.
(c) Option Price. Subject to the term of subparagraph (j)
below, the minimum Option price shall be the fair market value of the
Shares subject to the Option on the date of the granting of the Option.
-2-
<PAGE>
(d) Term of Option. The term of any Option granted hereunder
shall expire before the tenth anniversary of the grant of the Option.
(e) Date Options Granted. No Option shall be granted hereunder
after the expiration of a period of ten years from adoption of the Plan
by the Board of Directors.
(f) Date of Exercise. Each agreement shall state when and to
what extent the Option may be exercised, and an Option may be made
exercisable in whole or in part at any time and from time to time
within the term of the Options, subject to the limitations of
subparagraph (g) below concerning termination of employment and such
other limitations as the Committee may impose.
(g) Termination-of Employment. If the employment of the
grantee of an ISO by the Company terminates, the ISO must terminate
within three months after such termination of employment unless the
optionee dies during such employment or within such three months. The
agreement may provide that in the event of such death the ISO shall be
exercisable for a specified period which may extend as much as one year
after such death. Nothing in this paragraph shall be construed to
permit exercise of the ISO after its term.
(h) Rights of a Shareholder. An Optionee shall have no rights
as a shareholder with respect to Shares covered by his Option until the
date of the issuance of a certificate therefor to him and only after
such Shares are fully paid for.
(i) Prior Outstanding ISO's. An agreement to grant an ISO
shall state that the ISO granted thereby shall not to any extent be
exercisable while there is outstanding any prior ISO relating to the
same class of stock, which option was granted to the optionee to
purchase either stock in the employer of the optionee or in any
corporation which, at the time of granting the ISO, is a parent or
subsidiary corporation of such employer, or stock in a predecessor
trust or corporation of the employer or any such corporation.
(j) Ten Percent Shareholders. No ISO shall be granted pursuant
to this Plan to individuals owning Shares representing more than 10
percent of the total combined voting power of all classes of stock of
the employer of the optionee or in any corporation which, at the time
of granting the ISO, is a parent or subsidiary corporation of such
employer, unless at the time such ISO is granted the exercise price of
the ISO is at least 110 percent of the fair market value of the stock
subject to the ISO and such
-3-
<PAGE>
ISO is not exercisable after the expiration of five (5) years from the
date such ISO is granted.
(k) Limitation on Fair Market Value of Underlying Stock. The
stock as to which any employee may be granted ISO's in any calendar
year (under all stock option plans which qualify under Section 422 of
the Code of the employer of the optionee or in any corporation which,
at the time of granting the ISO, is a parent or subsidiary corporation
of such employer) shall not exceed $100,000 in value (to be determined
as of the date of grant) plus any unused limit carryover as defined and
computed under the provisions of Section 422(c) of the Code.
(l) Application of Funds. The proceeds received by the Company
from the sale of Common Shares pursuant to Options will be used for the
general purposes of its business.
6. Capital Adjustment. An agreement may provide that the Option granted
pursuant to the agreement shall continue notwithstanding any change or exchange
of the shares of option stock into or for a different number and/or kind of
common shares of the Company or of a corporation or other successor which
succeeds to the business of the Company or becomes its parent or subsidiary,
whether or not such change or exchange results from a recapitalization,
split-up, corporate merger, consolidation or separation, acquisition of property
for stock, stock dividends, issuance of stock rights, liquidation, or otherwise,
provided however, that the option shall terminate if and when the business
conducted by the employer of the optionee (or any successor employer) is
substantially terminated upon its liquidation. The agreement may further provide
that in the event of such a change or exchange, an appropriate adjustment shall
be made in the number and/or kind of shares subject to the Option and/or in
their per-share Option price, and that, with respect to ISO's, in a transaction
to which Section 424(a) of the Code is applicable, the foregoing may be
accomplished thereunder by assumption of the ISO or by the substitution of
another stock option. In the alternative, the agreement may provide for no
adjustment or may provide for adjustments only in specified circumstances which
do not include all the foregoing and it may limit the extent of the adjustment.
In no case shall the making of any such change, exchange, substitution or
assumption and related adjustment give the holder of the option additional
benefits which he did not have under the old Option, and the excess of the
aggregate fair market value of the shares subject to the Option immediately
after such change, exchange, substitution or assumption and adjustment shall not
be greater than such excess of the fair market value of the shares subject to
the Option immediately before. Adjustment of the number of shares subject to the
Option shall not make the Option become exercisable as to a fractional
-4-
<PAGE>
share. Subject to the foregoing limitations, the terms of any such adjustment
shall be determined by the Committee and such determination made in good faith
shall be final, provided, with respect to ISO's, that if pursuant to said
Section 424(a) another corporation or other successor assumes the ISO or
substitutes another, its determination of the terms made in good faith shall be
final.
7. Assignability. An ISO granted hereunder shall not be transferable
otherwise than by will, the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code, or Title I of the
Employee Retirement Income Security Act of 1986, as amended, or the rules and
regulations promulgated thereunder. Any ISO granted hereunder shall be
exercisable, during the lifetime of the holder, only by such holder or by such
holder's guardian or legal representative.
8. Investment Agreement. Each optionee shall agree that if he acquires
Shares pursuant to the exercise of an Option granted hereunder, that he shall
acquire such Shares for investment and not with a view to distribution of the
Shares as that term is used in the Securities Act of 1933, as amended, unless,
in the opinion of counsel to the Company, such distribution is in compliance
with, or exempt from, the registration and prospectus requirements of that Act,
and he shall agree to sign an agreement to such effect at the time of exercising
the Option as a condition precedent to the exercise of the Option.
9. Conditions to Issuance of Shares. No Common Shares (or common shares
of the Company's successor) shall be sold or issued pursuant to Options issued
under this Plan unless and until said Shares (or such common shares) shall have
been approved for listing (subject to notice of issuance) on all stock
exchanges, if any, on which other Shares of the Company (or common shares of its
successor) are listed and unless and until all necessary consents and approvals
of public authorities have been obtained and other legal requirements met, with
respect to said Shares (or common shares), and all grants under this Plan shall
be subject to such conditions.
10. Other Provisions. Any agreement authorized under this Plan shall
contain such other provisions as the Committee shall deem advisable.
11. No Obligation to Exercise Option. The granting of an Option shall
impose no obligation upon the optionee to exercise such Option.
12. Continuance of Employment. This Plan shall not impose any
obligation on the Company to continue the employment of any grantee of an ISO.
-5-
<PAGE>
13. Effective Date. This Plan shall become effective upon adoption by
the Board of Directors.
14. Continuity of Plan. This Plan shall continue in effect
notwithstanding any change or exchange of the shares of the option stock into or
for a different number and/or kind of shares in the Company whether or not such
change or exchange results from a recapitalization, split-up, stock dividend,
issuance of stock rights, or otherwise. In the event of such a change or
exchange, and in the event of an adjustment in the number of shares which may be
subject to Options, the balance which may be subject to Options outstanding and
exercised Options shall be similarly adjusted, and such adjustment must be
within the limits by which the Code and regulations thereunder permit adjustment
to be made without requiring shareholder approval to insure compliance with
Section 422(b)(1) of the Code or successor provision of the law.
15. Meaning of Terms. As used in this Plan and in any agreement
hereunder, in the absence of clear indication otherwise, the terms "parent",
"subsidiary", "predecessor", "corporation" and "outstanding" shall have the same
meanings as in Sections 422 and 424 of the Code. For the purpose of paragraphs
5(f) and 5(g) above and agreements incorporating the same, the employee's
employment shall include employment by a corporation which is a parent or a
subsidiary of the Company, and employment by a corporation which in a
transaction to which Section 424(a) of the Code or a successor provision of law
is applicable, assumes the ISO or issues an option in substitution for it, or by
a parent or a subsidiary of such an assuming or issuing corporation; and a
transfer of employment between the Company and such a corporation shall not
terminate the ISO under paragraph 5(g).
16. Conformance With Section 422. All ISO's granted pursuant to this
Plan shall be granted in a manner strictly conforming with the requirements set
forth in Section 422 of the Code so that the ISO's will qualify as incentive
stock options under Section 422 of the Code.
17. Rule 16b-3 Compliance.
The Company intends that the Plan meet the requirements of Rule 16b-3
and that transactions of the type specified in subparagraphs (c) and (f) of Rule
16b-3 by officers of the Company (whether or not they are directors) pursuant to
the Plan will be exempt from the operation of Section 16(b) of the Act. In all
cases, the terms, provisions, conditions and limitations of the Plan shall be
construed and interpreted consistent with the Company's intent as stated in this
Section 17.
-6-
<PAGE>
18. Shareholder Approval. This Plan shall be subject to approval by the
shareholders of the Company.
19. Amendment. After this Plan has been approved the shareholders of
the Company, it may be amended by the directors of the Company in any respect
approved by the shareholders, or by the directors without shareholder approval
if the directors are advised by counsel that the amendment does not require
further shareholder approval for the purpose of preserving the status of any ISO
granted hereunder as an "incentive stock option" as that term is defined in
Section 422 of the Code.
-7-
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 23,208,378
<SECURITIES> 0
<RECEIVABLES> 39,202,805
<ALLOWANCES> 3,812,000
<INVENTORY> 7,415,551
<CURRENT-ASSETS> 69,108,267
<PP&E> 18,837,534
<DEPRECIATION> 12,832,460
<TOTAL-ASSETS> 89,568,489
<CURRENT-LIABILITIES> 9,579,878
<BONDS> 0
0
0
<COMMON> 80,902
<OTHER-SE> 76,677,065
<TOTAL-LIABILITY-AND-EQUITY> 89,568,489
<SALES> 0
<TOTAL-REVENUES> 41,414,490
<CGS> 35,271,313
<TOTAL-COSTS> 38,778,351
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,117,363
<INCOME-TAX> 1,265,000
<INCOME-CONTINUING> 1,852,363
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,852,363
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.23
</TABLE>
