sec document
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF
1934
(AMENDMENT NO. )
Filed by the Registrant /_/
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/_/ Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/_/ Definitive Proxy Statement
/_/ Definitive Additional Materials
/_/ Soliciting Material Under Rule 14a-12
HEALTHCARE SERVICES GROUP, INC.
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(Name of Registrant as Specified in Its Charter)
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HEALTHCARE SERVICES GROUP, INC.
3220 TILLMAN DRIVE
SUITE 300
BENSALEM, PENNSYLVANIA 19020
-------------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
May 22, 2007
-------------------------
To the Shareholders of
HEALTHCARE SERVICES GROUP, INC.
NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of
Healthcare Services Group, Inc. (the "Company") will be held at the Radisson
Hotel of Bucks County, 2400 Old Lincoln Highway, Trevose, Pennsylvania 19047, on
May 22, 2007, at 10:00 A.M., for the following purposes:
(1) To elect eight directors;
(2) To approve an amendment to the Company's Amended and
Restated Articles of Incorporation to increase the aggregate
number of shares of capital stock authorized to be issued by
the Company from 30,000,000 to 100,000,000;
(3) To approve and ratify the selection of Grant Thornton LLP as
the independent registered public accounting firm of the
Company for its current fiscal year ending December 31,
2007; and
(4) To consider and act upon such other business as may properly
come before the Meeting and any adjournment or postponement.
Only shareholders of record at the close of business on April 9, 2007 will
be entitled to notice of and to vote at the Annual Meeting.
PLEASE SIGN AND PROMPTLY MAIL THE ENCLOSED PROXY, WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING, IN ORDER THAT YOUR SHARES MAY BE VOTED FOR YOU. A
RETURN ENVELOPE IS PROVIDED FOR YOUR CONVENIENCE.
By Order of the Board of Directors
DANIEL P. MCCARTNEY
Chairman of the Board and
Chief Executive Officer
Dated: Bensalem, Pennsylvania
April 10, 2007
HEALTHCARE SERVICES GROUP, INC.
3220 TILLMAN DRIVE
SUITE 300
BENSALEM, PENNSYLVANIA 19020
-------------------------
PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
May 22, 2007
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This Proxy Statement is furnished to the Shareholders of Healthcare
Services Group, Inc. (the "Company") in connection with the solicitation by the
Board of Directors of the Company of proxies for the Annual Meeting of
Shareholders (the "Annual Meeting") to be held at the Radisson Hotel of Bucks
County, 2400 Old Lincoln Highway, Trevose, Pennsylvania 19047, on May 22, 2007
at 10:00 A.M. At the Annual Meeting, the shareholders will consider the
following proposals: (1) to elect eight directors; (2) to approve an amendment
to the Company's Amended and Restated Articles of Incorporation to increase the
aggregate number of shares of capital stock authorized to be issued by the
Company from 30,000,000 to 100,000,000; (3) to approve and ratify the selection
of Grant Thornton LLP as the independent registered public accounting firm (the
"Independent Auditors") of the Company for its current fiscal year ending
December 31, 2007; and (4) to consider and act upon such other business as may
properly come before the Annual Meeting and any adjournment or postponement.
This Proxy Statement is being mailed to shareholders on or about April 10,
2007.
PROXIES; VOTING SECURITIES
Only holders of Common Stock of record at the close of business on April
9, 2007 (the "Record Date") are entitled to notice of and to vote at the Annual
Meeting. On the Record Date, there were issued and outstanding approximately
[27,180,000] shares of Common Stock. Each share of Common Stock entitles the
holder thereof to one vote. The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of Common Stock is required to
constitute a quorum at the meeting. Holders of Common Stock are not entitled to
cumulative voting rights.
All shares that are represented by properly executed proxies received
prior to or at the Annual Meeting, and not revoked, will be voted in accordance
with the instructions indicated in such proxies. If no instructions are
indicated with respect to any shares for which properly executed proxies are
received, such proxies will be voted FOR each of the proposals. For purposes of
determining the presence of a quorum for transacting business at the Annual
Meeting, abstentions and broker "non-votes" (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other persons entitled to vote shares on a particular matter
with respect to which the brokers or nominees do not have discretionary power),
if applicable, will be treated as shares that are present but which have not
been voted.
A proxy may be revoked by delivery of a written statement to the Secretary
of the Company stating that the proxy is revoked, by a subsequent proxy executed
by the person executing the prior proxy and presented to the Annual Meeting, or
by voting in person at the Annual Meeting.
All expenses in connection with this solicitation will be borne by the
Company. It is expected that solicitation will be made primarily by mail, but
regular employees or representatives of the Company may also solicit proxies by
telephone, telegraph or in person, without additional compensation, except for
reimbursement of out-of-pocket expenses.
CORPORATE GOVERNANCE
The Company operates within a comprehensive plan of corporate governance
for the purpose of defining responsibilities, setting high standards of
professional and personal conduct and assuring compliance with such
responsibilities and standards. The Company regularly monitors developments in
the area of corporate governance. In July 2002, Congress passed the
Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") which, among other things,
establishes, or provides the basis for, a number of new corporate governance
standards and disclosure requirements. In addition, the NASDAQ Stock Market has
recently finalized changes to its corporate governance and listing requirements.
DIRECTOR INDEPENDENCE
In accordance with these latest developments and the listing
requirements of the NASDAQ Stock Market, a majority of the current members of
the Company's Board of Directors are independent: namely, John M. Briggs,
Robert L. Frome, Robert J. Moss and Barton D. Weisman. The Board of
Directors has also determined that Dino D. Ottaviano, a new nominee to the
Board of Directors, is independent pursuant to the listing requirements of
the NASDAQ Stock Market.
Mr. Barton D. Weisman, a director of the Company, has an ownership
interest in ten nursing homes that have entered into service agreements with the
Company. During the year ended December 31, 2006, these agreements resulted in
gross revenues of approximately $3,351,622 to the Company (less than 1% of the
Company's total revenues). Management believes that the terms of each of the
transactions with the nursing homes described herein are comparable to those
available to unaffiliated third parties.
Mr. Robert L. Frome, a director of the Company, is a member of the law
firm of Olshan Grundman Frome Rosenzweig & Wolosky, LLP, which law firm has been
retained by the Company during the last fiscal year. Fees paid by the Company to
such firm during the year ended December 31, 2006 were less than $120,000.
Additionally, the fees paid by the Company did not exceed 5% of such firm's
total revenues.
Notwithstanding the abovementioned transactions, both Mr. Frome and Mr.
Weisman are independent directors as such term is defined by NASDAQ Rule
4200(a)(15) of the NASDAQ Stock Market listing standards.
CODE OF ETHICS AND BUSINESS CONDUCT
We have also adopted a Code of Ethics and Business Conduct for directors,
officers and employees of the Company. It is intended to promote honest and
ethical conduct, full and accurate reporting and compliance with laws as well as
other matters. A copy of the Code of Ethics and Business Conduct is posted on
our website at WWW.HCSGCORP.COM.
2
PROPOSAL NO. 1
ELECTION OF DIRECTORS
At the Annual Meeting, eight directors of the Company are to be elected,
each to hold office for a term of one year. Unless authority is specifically
withheld, management proxies will be voted FOR the election of the nominees
named below to serve as directors until the next annual meeting of shareholders
and until their successors have been chosen and qualify. Should any nominee not
be a candidate at the time of the Annual Meeting (a situation which is not now
anticipated), proxies will be voted in favor of the remaining nominees and may
also be voted for substitute nominees. If a quorum is present, the candidate or
candidates receiving the highest number of votes will be elected. Brokers that
do not receive instructions are entitled to vote for the election of directors.
The nominees are as follows:
Name, Age, Principal Occupations
for the Past Five Years and Current Director
Public Directorships or Trusteeships Since
------------------------------------ -----
Daniel P. McCartney, 55, Chief Executive Officer and Chairman of the 1977
Board of the Company for more than five years.
Barton D. Weisman, 79, Chairman of the Board of NuVision Management, 1983(2)
LLC (successor company to H.B.A. Corporation and H.B.A.
Management, Inc.) since 2002; President and Chief Executive
Officer of several affiliated companies, which own and/or manage
nursing homes, for more than five years.
Joseph F. McCartney, 52, Divisional Vice President of the Company 1983
for more than five years; brother of Daniel P. McCartney.
Robert L. Frome, Esq., 69, Member of the law firm of Olshan Grundman 1983
Frome Rosenzweig & Wolosky LLP for more than five years; Director
of NuCo2, Inc., Continuum Group A, Inc. and Horizon Wimba, Inc.
Thomas A. Cook, 61, President and Chief Operating Officer of the 1987
Company for more than five years.
Robert J. Moss, Esq., 69, Court Officer of First Judicial District 1992(1)(2)
of Pennsylvania since 2006. President of Moss Associates, a law
firm, for more than four years.
John M. Briggs, CPA, 56, Treasurer, Philadelphia Affiliate of Susan 1993(1)(2)
G. Komen for the Cure since February, 2005; formerly Partner of
Briggs, Bunting & Dougherty, LLP, a registered public accounting
firm for more than five years. Board member of the Capstone Group
of Regulated Investment Funds.
Dino D. Ottaviano, 59, Principal of D20 Marketing, Inc., a provider N/A
of internet productivity tools founded in 2006. Previously
employed for 23 years with Transcontinental Direct (successor to
Communication Concepts, Inc.), a publicly held outsourcing
printer, retiring in 2002 as Vice President of Business
Development.
--------
(1) Member of Nominating, Compensation and Stock Option Committee.
(2) Member of Audit Committee.
THE DIRECTORS RECOMMEND A VOTE "FOR" ALL NOMINEES.
OTHER EXECUTIVE OFFICERS
Name, Age, Principal Occupations
for the Past Five Years and Current
Public Directorships or Trusteeships
------------------------------------
James L. DiStefano, 62, Chief Financial Officer and Treasurer for more than five
years.*
Richard W. Hudson, 59, Vice President of Finance and Secretary for more than
five years.*
--------
* Upon Mr. DiStefano's retirement on [March 31], 2007, Mr. Hudson became Chief
Financial Officer.
3
BOARD OF DIRECTORS AND COMMITTEES
BOARD OF DIRECTORS. The business of the Company is managed under the
direction of the Board of Directors (the "Board"). The Board meets on a
regularly scheduled basis during the Company's fiscal year to review significant
developments affecting the Company and to act on matters requiring Board
approval. It also holds special meetings when an important matter requires Board
action between scheduled meetings. The Board met six times during the 2006
fiscal year. During 2006, each member of the Board participated in at least 75%
of all Board and applicable committee meetings held during the period for which
he was a director or committee member with the exception of Robert Moss who, due
to health reasons in the second and third quarters, attended approximately 50%
of Board and committee meetings. Mr. Moss has since resumed full participation
as a director. Directors are expected to attend all Board meetings and meetings
of committees on which they serve, and each Annual Meeting. In 2006, all seven
of the directors attended the Company's Annual Meeting.
The Board has established an Audit Committee, and a Nominating,
Compensation and Stock Option Committee to devote attention to specific subjects
and to assist it in the discharge of its responsibilities. The functions of
those committees, their current members and the number of meetings held during
2006 with respect to the Audit Committee, and the Nominating, Compensation and
Stock Option Committee are described below:
AUDIT COMMITTEE. The Audit Committee's primary responsibilities, as
described in the Amended and Restated Audit Committee Charter (a copy of which
is appended to this proxy statement as ANNEX A and is available on the Company's
website, WWW.HCSGCORP.COM) include:
(a) appointment, compensation and oversight of the Company's Independent
Auditors, who report directly to the Audit Committee, including (i) prior review
of the Independent Auditor's plan for the annual audit, (ii) pre-approval of
both audit and non-audit services to be provided by the Independent Auditors and
(iii) annual assessment of the qualifications, performance and independence of
the Independent Auditors;
(b) overseeing and monitoring the Company's accounting and financial
reporting processes and internal control system, audits of the Company's
financial statements and the quality and integrity of the financial reports and
other financial information issued by the Company;
(c) providing an open avenue of communication among the Independent
Auditors and financial and other senior management and the Board;
(d) reviewing with management and, where applicable, the Independent
Auditors, prior to release, required annual, quarterly and interim filings by
the Company with the Securities and Exchange Commission and the type and
presentation of information to be included in earnings press releases;
(e) reviewing material issues, and any analyses by management or the
Independent Auditors, concerning accounting principles, financial statement
presentation, the adequacy of the Company's internal controls and significant
financial reporting issues and judgments and the effect of regulatory and
accounting initiatives on the Company's financial statements;
(f) reviewing with the Company's legal counsel any legal matters that
could have a significant effect on the Company's financial statements,
compliance with applicable laws and regulations and inquiries from regulators or
other governmental agencies;
(g) reviewing and approving all related party transactions between the
Company and any director, executive officer, other employee or family member;
(h) reviewing and overseeing compliance with the Company's Code of Ethics
and Business Conduct;
(i) establishing procedures regarding the receipt, retention and treatment
of, and the anonymous submission by employees of the Company of, complaints
regarding the Company's accounting, internal controls or auditing matters; and
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(j) reporting Audit Committee activities to the full Board of Directors
and issuing annual reports to be included in the Company's proxy statement. Each
of Messrs. Moss, Weisman and Briggs are independent Directors as such term is
defined by Rule 4200(a)(15) of the NASDAQ Stock Market listing standards.
Mr. Briggs has been designated the "audit committee financial expert" and
he satisfies the attributes required of "audit committee financial experts"
pursuant to Section 407 of Sarbanes-Oxley. The Audit Committee met six times
during 2006. The report of Audit Committee for the fiscal year ended December
31, 2006 is included herein under "Audit Committee Report" below.
NOMINATING, COMPENSATON AND STOCK OPTION COMMITTEE. The Nominating,
Compensation and Stock Option Committee (composed of Messrs. Briggs & Moss) are
to assist the Board by:
(a) developing and recommending to the Board a set of effective corporate
governance policies and procedures applicable to the Company;
(b) identifying, reviewing and evaluating individuals qualified to become
Board members and recommending that the Board select director nominees for each
annual meeting of the Company's shareholders;
(c) discharging the Board's responsibilities relating to the compensation
of Company executives; and
(d) administering the Company's stock option plans or other equity-based
compensation plans.
Each of Messrs. Briggs and Moss are Independent Directors as such term is
defined by Rule 4200(a)(15) of the NASDAQ Stock Market listing standards. The
Nominating, Compensation and Stock Option Committee met once during 2006.
The Nominating, Compensation and Stock Option Committee has not adopted a
policy or process by which shareholders may make recommendations to the
Committee of candidates to be considered by this Committee for nomination for
election as Directors. The Committee has determined that it is not appropriate
to have such a policy because such recommendations may be informally submitted
to and considered by the Committee under its Charter. Shareholders may make such
recommendations by giving written notice to Healthcare Services Group, Inc.,
3220 Tillman Drive, Suite 300, Bensalem, PA 1902, Attention: Corporate Secretary
either by personal delivery or by United States mail, postage prepaid. The
Charter of the Nominating, Compensation and Stock Option Committee is provided
on the Company's website, www.hcsgcorp.com, and is included as ANNEX B to this
proxy statement. The Committee has not established a formal process for
identifying and evaluating nominees for Director, although generally the
Committee may use multiple sources for identifying and evaluating nominees for
Director, including referrals from current Directors and shareholders. The
Committee has identified certain qualifications it believes an individual should
possess before it recommends such person as a nominee for election to the Board
of Directors. The Committee believes that nominees for Director should possess
the highest personal and professional ethics, integrity, values and judgment and
be committed to representing the long-term interests of the Company's
shareholders. The Committee seeks to ensure that the composition of the Board at
all times adheres to the independence requirements of the NASDAQ Stock Market,
Inc. and reflects a range of talents, skills, and expertise, particularly in the
areas of management, leadership, and experience in the Company's and related
industries, sufficient to provide sound and prudent guidance with respect to the
operations and interests of the Company. See below for the Report of the
Nominating, Compensation and Stock Option Committee regarding executive
compensation.
5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of the Record Date,
regarding the beneficial ownership of Common Stock by each person or group known
by the Company to own: (i) 5% or more of the outstanding shares of Common Stock,
(ii) each director of the Company, (iii) the Named Executive Officers as defined
in Item 402(a)(3) of Regulation S-K and other Executive Officers and (iv) all
current directors and executive officers of the Company as a group. The persons
named in the table have sole voting and investment power with respect to all
shares of Common Stock owned by them, unless otherwise noted.
Amount and
Nature of Percent
Beneficial of
Name and Beneficial Owner or Group (1) (2) Ownership Class (3)
------------------------------------------ --------- ---------
Advisory Research Inc. 2,439,877 (4) 8.8%
Daniel P. McCartney 2,395,321 (5) 8.5%
Wells Capital Management Incorporated 1,965,079 (6) 7.1%
Pequot Capital Management, Inc. 1,666,800 (7) 6.0%
Thomas A. Cook 576,733 (8) 2.0%
Barton D. Weisman 246,685 (9) (17)
James L. DiStefano 146,702 (10) (17)
Joseph F. McCartney 121,918 (11) (17)
John M. Briggs 59,975 (12) (17)
Robert L. Frome 60,251 (13) (17)
Robert J. Moss 49,637 (14) (17)
Richard W. Hudson 40,842 (15) (17)
Dino M. Ottaviano 0 --
Directors and Executive Officers as a group (9 persons) 3,698,064 (16) 12.7%
--------------
(1) The address of all persons is c/o Healthcare Services Group, Inc., 3220
Tillman Drive, Suite 300, Bensalem, PA 19020.
(2) The address of Pequot Capital Management, Inc. is 500 Nyala Farm Road,
Westport, CT 06880. The address of Wells Capital Management Incorporated
is 525 Market
Street, San Francisco, CA 94105
The address of Advisory Research, Inc. is 180 North Stetson Street,
Suite 5500, Chicago, IL 60601
(3) Based on 27,662,000 shares of Common Stock outstanding at the Record
Date.
(4) According to a Schedule 13G filed by Advisory Research Inc. dated February
20, 2007, it has sole dispositive power and sole voting power with respect
to the 2,439,877 shares.
(5) Includes incentive stock options to purchase 90,795 shares and
nonqualified stock options to purchase 422,221 shares all currently
exercisable, and 23,470 shares credited to Mr. McCartney's account (but
unissued) in connection with the Company's Deferred Compensation Plan;
also includes an aggregate of 33,601 shares held by Mr. McCartney's adult
child who shares Mr. McCartney's household. Mr. McCartney disclaims
beneficial ownership of these shares. Mr. McCartney may be deemed to be a
"parent" of and deemed to control the Company, as such terms are defined
for purposes of the Securities Act of 1933, as amended, by virtue of his
position as founder, director, Chief Executive Officer and a principal
shareholder of the Company.
(6) According to a Schedule 13G filed by Wells Fargo & Company dated February
6, 2007, it and Wells Capital Management Incorporated, Wells Fargo Funds
Management, LLC and Wells Fargo Bank, National Association have, in the
aggregate, beneficial ownership of 1,965,079 shares.
(7) According to a Schedule 13G filed by Pequot Capital Management, Inc. dated
February 14, 2007, it has sole dispositive power and sole voting power
with respect to the 1,666,800 shares.
6
(8) Includes incentive stock options to purchase 120,024 shares and
nonqualified stock options to purchase 420,609 shares all currently
exercisable, and 16,852 shares credited to Mr. Cook's account (but
unissued) in connection with the Company's Deferred Compensation Plan.
(9) Includes nonqualified stock options to purchase 79,843 shares, all
currently exercisable; also includes 87,299 shares that Mr. Weisman holds
in a trust of which he and his wife serve as trustees. Mr. Weisman
disclaims beneficial ownership of the shares held in trust.
(10) Includes incentive stock options to purchase 108,939 shares and
nonqualified stock options to purchase 28,003 shares, all currently
exercisable, and 5,741 shares credited to Mr. DiStefano's account (but
unissued) in connection with the Company's Deferred Compensation Plan.
(11) Includes incentive stock options to purchase 39,499 shares and
nonqualified stock options to purchase 28,003 shares, all currently
exercisable, 4,688 shares credited to Mr. McCartney's account (but
unissued) in connection with the Company's Deferred Compensation Plan and
1,920 shares held by Mr. McCartney's minor child.
(12) Includes nonqualified stock options to purchase 26,604 shares, all
currently exercisable.
(13) Includes nonqualified stock options to purchase 53,501 shares, all
currently exercisable.
(14) Represents nonqualified stock options to purchase 49,637 shares, all
currently exercisable.
(15) Includes incentive stock options to purchase 21,604 shares and
nonqualified stock options to purchase 12,849 shares, all currently
exercisable, and 1,111 shares credited to Mr. Hudson's account (but
unissued) in connection with the Company's Deferred Compensation Plan.
(16) Includes 1,502,131 shares underlying options granted to this group. All
options are currently exercisable; also includes 51,862 shares credited to
the accounts of certain executive officers (but unissued) in connection
with the Company's Deferred Compensation Plan.
(17) Less than 1% of the outstanding shares.
7
MANAGEMENT COMPENSATION
COMPENSATION Discussion AND ANALYSIS
COMPENSATION Objectives
We refer to our chief executive officer, the chief financial officer, and
each of our other three most highly compensated executive officers as our named
executive officers. For all named executive officers compensation is intended to
be performance-based. Our Nominating, Compensation and Stock Option Committee
believes that compensation paid to executive officers should be closely aligned
with our performance on both a short-term and long-term basis to create value
for shareholders, and that such compensation should assist us in attracting and
retaining key executives critical to our long-term success.
In establishing compensation for executive officers, the following are the
Nominating, Compensation and Stock Option Committee's objectives:
o Attract and retain individuals of superior ability and managerial
talent;
o Ensure officer compensation is aligned with our corporate strategies,
business objectives and the long-term interests of our shareholders;
and
o Enhance the officers' incentive to increase our stock price and
maximize shareholder value, as well as promote retention of key
people, by providing a portion of total compensation for management in
the form of direct ownership in us through stock options and other
compensatory stock-based plans.
To achieve these objectives, our overall compensation program aims to pay
our named executive officers competitively, consistent with our success and
their contribution to that success. To accomplish this we rely on programs that
provide compensation in the form of both cash and equity. Although our
Nominating, Compensation and Stock Option Committee has not adopted any formal
guidelines for allocating total compensation between cash and equity, the
Nominating, Compensation and Stock Option Committee considers the balance
between providing short-term incentives and long-term parallel investment with
shareholders to align the interests of management with shareholders.
We have not retained a compensation consultant to review our policies and
procedures with respect to executive compensation, although the Nominating,
Compensation and Stock Option Committee may elect to retain such a consultant in
the future if it determines that so doing would be helpful in developing,
implementing or maintaining compensation plans.
The Nominating, Compensation and Stock Option Committee conducts an annual
review of the aggregate level of our executive compensation, as well as the mix
of elements used to compensate our executive officers. In addition, the
Nominating, Compensation and Stock Option Committee has historically taken into
account input from other independent members of our board of directors and, to
the extent available, publicly available data relating to the compensation
practices and policies of other companies within and outside our industry. The
Nominating, Compensation and Stock Option Committee compares our executive
compensation against the compensation paid by these peer companies. While such
comparisons may not always be appropriate as a stand-alone tool for setting
compensation due to the aspects of our business and objectives that may be
unique to us, we generally believe that gathering this information is an
important part of our compensation-related decision-making process.
Although generally we believe that executive base salaries should be
targeted taking into consideration the median of the range of salaries for
executives in similar positions at comparable companies, we recognize that, to
attract, retain and motivate key individuals, such as the named executive
officers, the compensation committee may determine that it is in our best
interests to negotiate total compensation packages with our executive management
8
that may deviate from the general principle of targeting total compensation at
the median level for the peer group. Actual pay for each named executive officer
is determined around this structure, driven by the performance of the executive
over time, as well as our annual performance.
DETERMINATION OF COMPENSATION AWARDS
The compensation of the Chief Executive Officer of the Company is
determined by the Nominating, Compensation and Stock Option Committee. Such
Committee's determinations regarding compensation are based on a number of
factors including, in order of importance:
o Consideration of the operating and financial performance of the
Company, primarily its income before income taxes during the preceding
fiscal year, as compared with prior operating periods;
o Attainment of a level of compensation designed to retain a superior
executive in a highly competitive environment; and
o Consideration of the individual's overall contribution to the Company.
Compensation for the Named Executive Officers (referred to in the summary
compensation table) other than the Chief Executive Officer is determined by the
Nominating, Compensation and Stock Option Committee based upon consultation with
the Chief Executive Officer, taking into account the same factors considered by
the Board in determining the Chief Executive Officer's compensation as described
above. Except as set forth below, the Company has not established a policy with
regard to Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), since the Company has not paid salaried compensation in excess of $1
million per annum to any employee. Under the 1995 Plan, no recipient of options
may be granted options to purchase more than 125,000 shares of Common Stock.
Therefore, compensation received as a result of options granted under the 1995
Plan qualify as "performance-based" for purposes of Section 162(m) of the Code.
In addition, under the 2002 Plan, no recipient of options may be granted options
to purchase more than 50,000 shares of Common Stock in any calendar year.
Therefore, compensation received as a result of options granted under the 2002
Plan, qualify as "performance-based" for purposes of Section 162(m) of the Code
(the options exercised by the Named Executive Officers in fiscal 2006 were
granted under either the 1995 Plan or the 2002 Plan). No stock options were
granted in 2006.
The Company applies a consistent approach to compensation for all
employees, including senior management. This approach is based on the belief
that the achievements of the Company result from the coordinated efforts of all
employees working toward common objectives.
ELEMENTS OF COMPENSATION
BASE SALARY. Base salaries for our executives are established based on the
scope of their responsibilities and individual experience, taking into account
competitive market compensation paid by companies in our industry. Base salaries
are reviewed annually, and adjusted from time to time to realign salaries with
market levels after taking into account individual responsibilities, performance
and experience. Base salaries are also adjusted annually to take into account
performance-based compensation.
PERFORMANCE-BASED COMPENSATION. We structure our annual incentive program
to reward executive officers based on our performance and the individual
executive's contribution to that performance. This allows executive officers to
receive such compensation based on the results that they helped us to achieve in
the previous year. The incentive payment, based upon the Company's prior year
performance, becomes the major portion of the named executive officer's salary
for the following year. Currently, this payment is only made to Mr. Daniel P.
McCartney and Mr. Thomas A. Cook and is based on a rate of 2.3% of the income
before income taxes of the Company in accordance with generally accepted
accounting principles in the fiscal year immediately preceding the year for
which such annual salary is calculated. The Company had previously calculated
this portion of these named executive officers' compensation at a rate of 3%.
Accordingly, total 2006 salary was premised on the 3% rate applied in 2005. The
2007 salary payment will be based on the new 2.3% rate applied to 2006 income
before income taxes. The Company had used the 3% rate for more than 20 years.
The Company believes that the revised 2.3% rate provides an appropriate
9
benchmark upon which to build the compensation for these executives. The 3%
figure was initially selected as it was deemed to be representative of
performance-based compensation for chief executive officers and chief operating
officers, as well as providing for a compensation level which reflects the
performance of the Company. The Company has reduced the rate to 2.3% (of 2006
income) for 2007 purposes, as it believes that this reduced rate is an
appropriate measure by reason of the continued increase in the Company's income
before income taxes. Joseph F. McCartney, as well as all of our other
divisional, regional and district operational managers, is provided with
compensation that is based on achieving certain financial and non-financial
measures attributable to the service locations under his supervision in
conjunction with the goals and objectives of the business plans formulated for
those locations. The incentive level escalates as the number of locations being
managed increases. The Nominating, Compensation and Stock Option Committee
believes that the annual incentive program provides incentives necessary to
retain executive officers and reward them for short-term company performance.
DISCRETIONARY LONG-TERM EQUITY INCENTIVE AWARDS. The Nominating,
Compensation and Stock Option Committee of the Board of Directors is responsible
for determining the individuals who will be granted options, the number of
options each individual will receive, the option price per share, and the
exercise period of each option. Guidelines for the number of stock options
granted to each executive officer are determined using a procedure approved by
the Nominating, Compensation and Stock Option Committee based upon several
factors, including the executive officer's salary grade, performance and the
value of the stock option at the time of grant. We grant options at the fair
market value of the underlying stock on the date of grant.
DEFERRED COMPENSATION PLAN. Since January 1, 2000, we have had a
Supplemental Executive Retirement Plan (the "SERP") for certain key executives
and employees. The SERP is not qualified under section 401 of the Code. Under
the SERP, participants may defer up to 15% of their earned income on a pre-tax
basis. As of the last day of each plan year, each participant will receive a 25%
match of their deferral in our Common Stock based on the then current market
value. SERP participants fully vest in our matching contribution three years
from the first day of the initial year of participation. The income deferred and
our matching contribution are unsecured and subject to the claims of our general
creditors. Under the SERP, we are authorized to issue up to 450,000 shares of
our common stock to our employees. Pursuant to such authorization, we have
275,000 shares available for future grant at December 31, 2006 (after deducting
the 2006 funding of shares delivered in 2007). In the aggregate, since
initiation of the SERP, 175,000 shares (including the 2006 funding of shares
delivered in 2007) held by the trustee are accounted for at cost, as treasury
stock. At December 31, 2006, a total 149,000 of such shares are vested in the
participants' accounts.
EMPLOYEE STOCK PURCHASE PLAN. Since January 1, 2000, we have had a
non-compensatory Employee Stock Purchase Plan ("ESPP") for all eligible
employees. All full-time and certain part-time employees who have completed two
years of continuous service with us are eligible to participate. The ESPP was
implemented through five annual offerings. The first annual offering commenced
on January 1, 2000. On February 12, 2004 (effective January 1, 2004), our Board
of Directors extended the ESPP for an additional eight annual offerings. Annual
offerings commence and terminate on the respective year's first and last
calendar day. Under the ESPP, we are authorized to issue up to 1,800,000 shares
of our common stock to our employees. Furthermore, under the terms of the ESPP,
eligible employees can choose each year to have up to $25,000 of their annual
earnings withheld to purchase our common stock. The purchase price of the stock
is 85% of the lower of its beginning or end of the plan year market price.
OTHER ELEMENTS OF COMPENSATION AND PERQUISITES.
MEDICAL INSURANCE. We provide to each named executive officer, the named
executive officer's spouse and children such health, dental and optical
insurance as we may from time to time make available to our other executives of
the same level of employment. This insurance requires an employee co-payment of
the insurance premium.
LIFE AND DISABILITY INSURANCE. We provide each named executive officer
such disability and/or life insurance as we in our sole discretion may from time
to time make available to our other executive employees of the same level of
employment.
10
AUTOMOBILE ALLOWANCE. We provide each named executive office with an
automobile allowance during the term of the named executive officer's employment
with us as we in our sole discretion may from time to time make available to our
other executive employees of the same level of employment. In lieu of an
automobile allowance, we lease an automobile for Thomas A. Cook.
SPORTING EVENT TICKETS. We obtain season tickets for several Philadelphia
sports teams. Although these tickets are intended to be used for entertaining
clients, unused tickets are made available to employees, including the named
executive officers, for personal use.
SUMMARY COMPENSATION TABLE
The following table sets forth certain information regarding compensation
paid or accrued during the Company's prior fiscal year to the Company's Chief
Executive Officer, Chief Financial Officer and the three highest paid executive
officers whose total salary and bonus exceeded $100,000 in 2006 (the "Named
Executive Officers").
Nonqualified
Deferred
Name and principal Stock Compensation All Other
position Year Salary Bonus Awards Earnings Compensation Total
($) ($) ($) ($) ($) ($)
(a) (b) (c) (d) (e) (h) (i) (j)
-------------------- ----- ------------- ---------- ---------- ------------- ---------------- -----------
Daniel P. McCartney 2006 $ 998,941(1) 0 0 $ 37,474 $ 18,705(2)(3) $1,055,120
Chairman of the
Board and Chief
Executive Officer
Thomas A. Cook 2006 $ 998,070(1) 0 $ 15,368 $ 37,474 $ 23,556(2)(4) $1,074,468
President, Chief
Operating Officer
and Director
James L. DiStefano 2006 $ 213,400 0 $ 3,202 $ 8,022 $ 4,172(2) $ 228,796
Chief Financial
Officer and
Treasurer
Richard W. Hudson 2006 $ 207,900 0 0 $ 7,819 $ 4,172(2) $ 219,891
Vice President
Finance and
Secretary
Joseph F
McCartney 2006 $ 90,090 $ 51,300 $ 8,004 $ 5,329 $ 28,923(2)(5) $ 183,646
Division Vice
President and
Director
------------------
(1) Represents a base salary of $75,000 and 3.0% of 2005 reported income
before income taxes ($30,799,000), all of which was paid in 2006.
(2) Includes automobile allowance, health insurance premiums paid by the
Company and personal use of tickets for sporting events.
(3) Includes automobile allowance of $13,953.
(4) Includes automobile allowance of $15,800.
(5) Includes health insurance premiums paid by the Company of $20,223 and
automobile allowance.
11
GRANT OF PLAN-BASED AWARDS
The following table sets forth information concerning grants of plan-based
awards made by us during the year ended December 31, 2006, to each of the Named
Executive Officers:
Estimated Future Payouts Under Non-
Equity Incentive Plan Awards
Name Threshold Target
(a) ($) ($) Maximum ($)
(c) (d) (e)
----------------------------------------------------
Joseph F. McCartney (1) (1) $84,000
(1) Mr. Joseph McCartney earns performance-based compensation based on the
achievement of stated financial goals and non-financial measures
consistent with the Company's policies applicable to all divisional
managers. He may earn such incentive compensation (bonus) on a total or
pro-rata basis dependent on at which level he achieves the specified
financial and non-financial goals. The Company has not provided a
dollar-value Threshold or Target since, as previously stated, some
required goals are not quantifiable.
NARRATIVE DISCLOSURE TO SUMMARY COMPENSATION TABLE GRANTS OF PLAN-BASED
AWARDS TABLE
The Company has not entered into employment contacts with any of the named
executive officers. No options or other equity-based awards were awarded during
the fiscal year ended December 31, 2006. No previously granted options or other
equity-based awards were re-priced or otherwise materially modified during the
fiscal year ended December 31, 2006.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information concerning the outstanding
equity awards of each of the Named Executive Officers as of December 31, 2006:
OPTION AWARDS
-------------------------------------------------------------------------------------------
Number of Securities
Underlying Unexercised
Options Option Exercise Price
Name (#)Exercisable ($) Option Expiration Date
(a) (b)(1) (e) (f)
------------------- ---------------------- ---------------------- -----------------------
Daniel P. McCartney 57,698 $3.7467 08-21-07
26,681 $3.7467 08-21-07
31,829 $4.0945 12-04-08
15,857 $2.2502 12-06-10
90,387 $4.1111 12-04-11
4,828 $20.7100 12-30-10
20,172 $20.7100 12-30-10
30,177 $13.6533 12-27-14
7,323 $13.6533 12-27-14
12,063 $8.2889 12-26-13
44,189 $8.2889 12-26-13
17,787 $5.6222 12-13-12
38,465 $5.6222 12-13-12
22,113 $4.5222 12-04-11
93,447 $3.3000 12-16-09
Thomas A. Cook 44,441 $2.2502 12-06-10
11,811 $2.2502 12-06-10
33,582 $2.9778 05-10-11
225,000 $4.1111 12-04-11
17,787 $5.6222 12-13-12
12
20,172 $20.7100 12-30-10
4,828 $20.7100 12-30-10
30,177 $13.6533 12-27-14
7,323 $13.6533 12-27-14
44,189 $8.2889 12-26-13
12,063 $8.2889 12-26-13
38,465 $5.6222 12-13-12
50,795 $2.9778 05-10-11
James L. DiStefano 10,125 $3.4089 08-21-07
9,000 $3.7222 12-04-08
22,500 $4.1111 12-04-11
11,250 $2.2502 12-06-10
14,063 $3.0000 12-16-09
4,715 $5.6222 12-13-12
10,439 $8.2889 12-26-13
7,323 $13.6533 12-27-14
5,172 $20.7100 12-30-10
4,828 $20.7100 12-30-10
7,677 $13.6533 12-27-14
12,063 $8.2889 12-26-13
17,787 $5.6222 12-13-12
Richard W. Hudson 7,323 $13.6533 12-27-14
7,677 $13.6533 12-27-14
4,828 $20.7100 12-30-10
9,453 $8.2889 12-26-13
5,172 $20.7100 12-30-10
Joseph F. McCartney 4,715 $5.6222 12-13-12
15,285 $5.6222 12-13-12
10,439 $8.2889 12-26-13
12,063 $8.2889 12-26-13
7,677 $13.6533 12-27-14
5,172 $20.7100 12-30-10
4,828 $20.7100 12-30-10
7,323 $13.6533 12-27-14
(1) All options were fully vested on December 31, 2006.
OPTION EXERCISES AND STOCK VESTED
The following table sets forth information concerning the option exercises
and stock vested of each of the Named Executive Officers during the year ended
December 31, 2006:
OPTION AWARDS
----------------------------------------
Number of Shares Value Realized
Acquired on Exercise on Exercise
Name (#) ($)
(a) (b) (c)
--------------------- ----------------------- ---------------
Joseph F. McCartney 25,003 $432,451
NONQUALIFIED DEFERRED COMPENSATION
The following table sets forth information concerning the non qualified
deferred compensation of each of the Named Executive Officers during the year
ended December 31, 2006:
13
Aggregate
Executive Registrant Aggregate Balance
Contributions Contributions Earnings at Last
in Last FY in Last FY in Last FY FYE
Name ($) ($) ($) ($)
(a) (b) (c) (d) (f)
-------------------- ------------- ------------- ----------- ----------
Daniel P. McCartney 149,726 37,474 318,585 1,635,722
Thomas A. Cook 149,726 37,474 207,730 1,270,669
James L. DiStefano 32,539 8,022 65,462 370,769
Richard W. Hudson 31,133 7,819 13,624 114,078
Joseph F. McCartney 21,519 5,329 56,493 303,863
Since January 1, 2000, we have had a non-compensatory Employee Stock
Purchase Plan ("ESPP") for all eligible employees. All full-time and certain
part-time employees who have completed two years of continuous service with us
are eligible to participate. The ESPP was implemented through five annual
offerings. The first annual offering commenced on January 1, 2000. On February
12, 2004 (effective January 1, 2004), our Board of Directors extended the ESPP
for an additional eight annual offerings. Annual offerings commence and
terminate on the respective year's first and last calendar day. Under the ESPP,
we are authorized to issue up to 1,800,000 shares of our common stock to our
employees. Furthermore, under the terms of the ESPP, eligible employees can
choose each year to have up to $25,000 of their annual earnings withheld to
purchase our common stock. The purchase price of the stock is 85% of the lower
of its beginning or end of the plan year market price. Distributions are only
made upon an employee's termination from the Company.
DIRECTORS' COMPENSATION
Directors who are also our employees are not separately compensated for
their service as directors. Our non-employee directors received the following
aggregate amounts of compensation for the year ended December 31, 2006:
Fees Earned or
Paid in Cash Total
Name ($) ($)
(a) (b) (j)
-------------------- -------------- -------------
Barton D. Weisman(1) $ 5,500 $ 5,500
John M. Briggs (2) $ 41,500 $ 41,500
Robert L. Frome (3) $ 15,000 $ 15,000
Robert J. Moss (4) $ 3,000 $ 3,000
(1) Mr. Weisman had options to purchase 79,843 shares of common stock
outstanding as of December 31, 2006.
(2) Mr. Briggs had options to purchase 32,404 shares of common stock
outstanding as of December 31, 2006.
(3) Mr. Frome had options to purchase 53,501 shares of common stock
outstanding as of December 31, 2006.
(4) Mr. Moss had options to purchase 49,637 shares of common stock outstanding
as of December 31, 2006.
DIRECTORS' FEES
The Company paid each director who is not an employee of the Company $500
for each regular or committee meeting of the Board of Directors attended. Mr.
Frome bills the Company at his customary rates for time spent on behalf of the
Company (whether as a director or in the performance of legal services for the
Company) and is reimbursed for expenses incurred in attending directors'
meetings. Mr. Briggs received a quarterly retainer of $9,000 in respect to his
14
chairmanship of the Audit Committee and serving as the Audit Committee Financial
Expert. The Company did not grant any options to non-employee directors in 2006.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's Directors, executive officers and 10%
shareholders to file with the Securities Exchange Commission ("SEC") and the
Nasdaq Stock Market initial reports of ownership and reports of changes in
ownership of the Company's Common Stock. Directors and executive officers are
required to furnish the Company with copies of all Section 16(a) reports which
they file.
To the Company's knowledge, based solely on review of the copies of these
reports furnished to the Company and written representations that no other
reports were required, during 2006 all Section 16 (a) filing requirements
applicable to its Directors and executive officers were complied with.
SARBANES-OXLEY ACT COMPLIANCE
Sarbanes-Oxley sets forth various requirements for public companies and
directs the SEC to adopt additional rules and regulations.
Currently, the Company believes it is in compliance with all applicable
laws, rules and regulations arising from Sarbanes-Oxley. The Company intends to
comply with all rules and regulations adopted by the SEC pursuant to
Sarbanes-Oxley no later than the time they become applicable to the Company.
15
AUDIT COMMITTEE REPORT
The members of the Audit Committee from January 1, 2006 to December 31,
2006 were Messrs. John M. Briggs, Robert J. Moss and Barton D. Weisman. The
Audit Committee met six times during the fiscal year. The Audit Committee is
responsible for the appointment of the Independent Auditors for each fiscal
year, recommending the discharge of the Independent Auditors to the Board and
confirming the independence of the Independent Auditors. It is also responsible
for: reviewing and approving the scope of the planned audit, the results of the
audit and the Independent Auditors' compensation for performing such audit;
reviewing the Company's audited financial statements; and reviewing and
approving the Company's internal accounting controls and disclosure procedures,
and discussing such controls and procedures with the Independent Auditors.
The Audit Committee adopted an Amended and Restated Audit Committee
Charter on February 12, 2004, a copy of which is available on the Company's
website at www.hcsgcorp.com and is included as ANNEX A to this proxy statement.
The Company's Independent Auditors are responsible for auditing the
financial statements, as well as auditing the Company's internal controls over
financial reporting. The activities of the Audit Committee are in no way
designed to supersede or alter those traditional responsibilities. The Audit
Committee's role does not provide any special assurances with regard to the
Company's financial statements, nor does it involve a professional evaluation of
the quality of the audits performed by the Independent Auditors.
In connection with the audit of the Company's financial statements for the
year ended December 31, 2006, the Audit Committee met with representatives from
Grant Thornton LLP, the Company's Independent Auditors, and the Company's
internal auditor. The Audit Committee reviewed and discussed with Grant Thornton
LLP and the Company's internal auditor, the Company's financial management and
financial structure, as well as the matters relating to the audit required to be
discussed by Statements on Auditing Standards 61 and 90, and Public Company
Accounting Oversight Board Auditing Standard No. 2.
The Audit Committee and Grant Thornton LLP also discussed Grant Thornton
LLP's independence. On November 21, 2006, the Audit Committee received from
Grant Thornton LLP the written disclosures and the letter regarding Grant
Thornton LLP's independence required by Independence Standards Board Standard
No. 1.
In addition, the Audit Committee reviewed and discussed with management
the Company's audited financial statements for the fiscal year ended December
31, 2006, as well as management's assessment of internal controls over financial
reporting.
Based upon the review and discussions described above, the Audit Committee
recommended to the Board of Directors, and the Board of Directors approved, that
the Company's financial statements audited by Grant Thornton LLP, as well as the
audit of the Company's internal controls over financial reporting be included in
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2006.
AUDIT COMMITTEE
John M. Briggs, Chairman
Robert J. Moss
Barton D. Weisman
16
NOMINATING, COMPENSATION AND STOCK OPTION COMMITTEE REPORT
The compensation of the Chief Executive Officer of the Company is
determined by the Nominating, Compensation and Stock Option Committee. Such
Committee's determinations regarding such compensation are based on a number of
factors including, in order of importance:
o Consideration of the operating and financial performance of the
Company, primarily its income before income taxes during the
preceding fiscal year, as compared with prior operating periods;
o Attainment of a level of compensation designed to retain a superior
executive in a highly competitive environment; and
o Consideration of the individual's overall contribution to the Company.
In consultation with the Chief Executive Officer of the Company, the
Nominating, Compensation and Stock Option Committee develops guidelines and
reviews the compensation and performance of the other executive officers of the
Company, as well as any management fees paid by the Company for executive
services, and sets the compensation of the executive officers of the Company
and/or any management fees paid by the Company for executives services. In
addition, the Nominating, Compensation and Stock Option Committee makes
recommendations to the Board of Directors with respect to incentive-compensation
plans and equity-based plans, and establishes criteria for the granting of
options in accordance with such criteria; and administers such plans. The
Nominating, Compensation and Stock Option Committee reviews major organizational
and staffing matters. With respect to director compensation, the Nominating,
Compensation and Stock Option Committee designs a director compensation package
of a reasonable total value based on comparisons with similar firms and aligned
with long-term shareholder interests. Finally, the Nominating, Compensation and
Stock Option Committee reviews director compensation levels and practices, and
recommends, from time to time, changes in such compensation levels and practices
to the Board of Directors with equity ownership in the Company encouraged. The
Nominating, Compensation and Stock Option Committee's charter provides that the
committee shall have the authority to obtain advice and seek assistance from
internal and external legal, accounting and other advisors.
The Nominating, Compensation and Stock Option Committee has reviewed and
discussed the Compensation Discussion and Analysis required by Item 402(b) of
Regulation S-K with management and, based on such review and discussions,
recommended to the Board of Directors that the Compensation Discussion and
Analysis be included in this proxy statement.
NOMINATING, COMPENSATION AND STOCK OPTION COMMITTEE
John M. Briggs
Robert J. Moss
17
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
There were no transactions between any member of the compensation
committee and the Company during the fiscal year ended December 31, 2006. No
member of the compensation committee was an officer or employee of the Company
or any subsidiary of the Company during fiscal 2006.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In addition to the transactions described under "Director Independence,"
the following transactions are also required to be disclosed pursuant to Item
404 of Regulation S-K.
Mr. James Cook, the brother of Thomas Cook (a director of the Company, as
well as it's President and Chief Operating Officer), has an ownership interest
in four nursing homes that have entered into service agreements with the
Company. During the year ended December 31, 2006, these agreements resulted in
gross revenues of approximately $4,443,357 to the Company (less than 1% of the
Company's total revenues). Management believes that the terms of each of the
transactions with the nursing homes described herein are comparable to those
available to unaffiliated third parties.
Mr. Bryan McCartney, the brother of Daniel McCartney (Chairman of the
Board and the Company's Chief Executive Officer), is employed by the Company as
a Senior Vice President. Mr. Bryan McCartney's compensation earned from the
Company during fiscal year 2006 was approximately $525,572. Such compensation
earned by Mr. Bryan McCartney is in accordance with the Company's compensation
plan for all management personnel in similar positions.
Mr. Kevin McCartney, the brother of Daniel McCartney, is employed by the
Company as a Divisional Vice President. Mr. Kevin McCartney's compensation
earned from the Company during fiscal year 2006 was approximately $192,456 (of
which $39,351 represents the value realized on the exercise of stock options).
Such compensation earned by Mr. Kevin McCartney is in accordance with the
Company's compensation plan for all management personnel in similar positions.
Mr. Joseph McCartney, the brother of Daniel McCartney, is employed by the
Company as a Divisional Vice President and serves as a director of the Company.
Mr. Joseph McCartney's compensation earned from the Company, as an employee,
during fiscal year 2006 is described in the Summary Compensation Table, Option
Exercises and Stock Vested Table and Nonqualified Deferred Compensation Table
included herein. Such compensation earned by Mr. Joseph McCartney is in
accordance with the Company's compensation plan for all management personnel in
similar positions. Mr. Joseph McCartney received no compensation from the
Company from his position as a Company director.
PROCEDURES FOR CONTACTING DIRECTORS
The Board of Directors has established a process for shareholders to send
communications to the Board of Directors. Shareholders may communicate with the
board generally or a specific director at any time by writing to: Healthcare
Services Group, Inc., 3220 Tillman Drive, Suite 300, Bensalem, PA 19020,
Attention: Investor Relations. The Company reviews all messages received, and
forwards any message that reasonably appears to be a communication from a
shareholder about a matter of shareholder interest that is intended for
communication to the Board of Directors. Communications are sent as soon as
practicable to the director to whom they are addressed, or if addressed to the
Board of Directors generally, to the chairman of the Nominating, Compensation
and Stock Option Committee. Because other appropriate avenues of communication
exist for matters that are not of shareholder interest, such as general business
complaints or employee grievances, communications that do not relate to matters
of shareholder interest are not forwarded to the Board of Directors.
18
PROPOSAL NO. 2
APPROVAL OF AN AMENDMENT TO THE COMPANY'S RESTATED CERTIFICATE OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED SHARES OF THE COMPANY'S
CAPITAL STOCK
Our Board has recommended that the shareholders approve a proposal to
permit us to amend our Amended and Restated Articles of Incorporation to
increase the number of authorized shares of our capital stock. If our
shareholders approve this proposal, the increase would only become effective
upon the filing of an Articles of Amendment to our Amended and Restated Articles
of Incorporation (the "Articles of Amendment").
On March 7, 2007, the Board of Directors authorized an amendment to the
Company's Amended and Restated Articles of Incorporation to increase the number
of authorized shares of the Company's capital stock from thirty million
(30,000,000) shares to one hundred million (100,000,000) shares, of which all
shares would be designated as Common Stock. The shareholders are being asked to
approve this proposed amendment. The shares of the Company's Common Stock,
including the additional shares proposed for authorization, do not have
preemptive or similar rights.
Under the Company's Amended and Restated Articles of Incorporation, the
Company is authorized to issue up to 30,000,000 shares of Common Stock. On March
7, 2007, the Board of Directors approved and authorized an Amendment to the
Company's Amended and Restated Articles of Incorporation that increases this
maximum number of authorized shares of Common Stock by seventy million
(70,000,000) shares to a total of one hundred million (100,000,000) shares,
subject to approval by the shareholders of the Company. If the shareholders do
not approve the Amendment, then the number of authorized shares of the Company's
Common Stock will remain at 30,000,000.
The purpose of the proposed Amendment is to provide sufficient shares for
future acquisitions, benefit plans, recapitalizations (stock splits or stock
dividends) and other corporate purposes. No such use other than to provide for
an adequate number of shares for issuance pursuant to the Company's stock
compensation plans currently is planned. Once authorized, the additional shares
of Common Stock may be issued by the Board of Directors without further action
by the shareholders, unless such action is required by law or applicable stock
exchange requirements. Accordingly, this solicitation may be the only
opportunity for the shareholders to take action in connection with such
acquisitions, benefit plans, recapitalizations (stock splits or stock dividends)
and other corporate actions. As of the Record Date, [27,500,000] shares of
Common Stock were issued and outstanding. In addition, the Company has reserved
approximately [3,300,000] shares of Common Stock for issuance in connection with
the Company's stock option plans or other employee benefit plans or, pursuant to
shares issuable upon the exercise of approximately [2,400,000] outstanding
incentive and non-qualified options. Consequently, although there is currently a
sufficient number of shares authorized to provide for the issuance of shares to
be issued in connection with outstanding grants, there is an insufficient number
of authorized shares to provide for the issuance of shares in connection with
future grants made pursuant to the Company's stock option plans.
The resolution to be considered by the shareholders at the meeting
reads as follows;
"RESOLVED, that Article 4 of the Amended and Restated Articles of
Incorporation of Healthcare Services Group, Inc., shall be amended and
restated to read in full as follows:
4. The aggregate number of shares of capital stock which the Corporation
shall have authority to issue is 100,000,000 shares of common stock with a
par value of $.01 per share.
FURTHER RESOLVED, that the proper officers of Healthcare Services Group,
Inc. are hereby authorized and directed, after shareholder approval of the
proposed amendment, to execute, under its corporate seal, Articles of
Amendment to the Amended and Restated Articles of Incorporation, and to
file such Articles of Amendment with the Pennsylvania Department of State.
19
FURTHER RESOLVED, that the Board of Directors of Healthcare Services
Group, Inc. may, notwithstanding approval by the shareholders of
Healthcare Services Group, Inc., at any time prior to the filing of the
Articles of Amendment with the Pennsylvania Department of State, terminate
the proposed amendment and all transactions contemplated by or incident
thereto."
PRINCIPAL EFFECTS OF ADDITIONAL AUTHORIZED SHARES
Our Board of Directors believes that it is advisable and in the best
interests of the Company to have available additional authorized but unissued
shares of Common Stock in an amount adequate to provide for the present and
future needs of the Company. The increase in authorized Common Stock will
provide the Company with a sufficient number of shares to provide for the
issuance of shares in connection with future grants made pursuant to the
Company's stock option plans. The issuance of these shares will dilute the
equity interests of existing shareholders. Additional shares also will be
available for issuance from time to time by the Company in the discretion of the
Board of Directors without further shareholder action, except as may be required
under applicable law. These shares may be issued for any proper corporate
purpose including, without limitation, acquiring other businesses in exchange
for shares of common stock, entering into collaborative arrangements with other
companies in which common stock or the right to acquire common stock are part of
the consideration, facilitation of broader ownership of the Common Stock by
effecting a stock split or issuing a stock dividend, raising capital through the
sale of Common Stock or securities convertible into, or exercisable or
exchangeable for, shares of Common Stock, and attracting and retaining valuable
employees by the issuance of additional stock options or restricted stock.
The issuance of the additional shares of Common Stock could have the
effect of diluting earnings per share and book value per share, which could
adversely affect the Company's existing shareholders. Issuing additional shares
of Common Stock may also have the effect of delaying or preventing a change of
control of the Company. The Company's authorized but unissued Common Stock could
be issued in one or more transactions that would make more difficult or costly,
and less likely, a takeover of the Company. The proposed amendment to the
Company's Amended and Restated Articles of Incorporation, is not being
recommended in response to any specific effort of which the Company is aware to
obtain control of the Company and the Board of Directors has no current
intention to use the additional shares of Common Stock in order to impede a
takeover attempt.
DESCRIPTION OF COMMON STOCK
The following statements are brief summaries of certain information
relating to the Common Stock. These summaries do not purport to be complete and
are subject in all respects to the applicable provisions of the Company's
Amended and Restated Articles of Incorporation with respect to certain rights of
the holders of Common Stock.
Each share of Common Stock is entitled to dividends when and as declared
by the Board of Directors out of sources legally available therefor. Each share
of Common Stock is entitled to one vote on all matters. On liquidation, the
holders of Common Stock are entitled to share pro rata in the net assets of the
Company remaining after the payment of creditors. The Board of Directors is
authorized to issue all unissued shares of Common Stock from time to time, as
well as previously issued shares held in treasury, without any further action or
authorization by shareholders. The holders of Common Stock have no preemptive or
conversion rights. The shares of Common Stock presently outstanding are, and the
shares reserved for issuance under existing option plans will be, upon issue,
fully paid and nonassessable.
VOTE REQUIRED
Shareholder approval of this proposal is required under Pennsylvania law.
Unless authority has been withheld the proxy agents intend to vote FOR approval
of the amendment. Approval of the amendment to the Company's Amended and
Restated Articles of Incorporation, as amended increasing the number of
authorized shares of Common Stock by 70,000,000 shares requires the affirmative
vote of the holders of a majority of all outstanding shares. An abstention,
withholding of authority to vote or broker non-vote, therefore, will have the
same legal effect as an "against" vote.
20
The Board of Directors unanimously recommends that you vote "FOR" approval
of the amendment to the Company's Amended and Restated Articles of
Incorporation.
21
PROPOSAL NO. 3
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The accounting firm of Grant Thornton LLP was selected by the Audit
Committee of the Board as the Independent Auditors of the Company for the fiscal
year ending December 31, 2007. Said firm has no other relationship to the
Company. The Board recommends the ratification of the selection of the firm of
Grant Thornton LLP to serve as the Independent Auditors of the Company for the
year ending December 31, 2007. A representative of Grant Thornton LLP, which has
served as the Company's Independent Auditors since December 1992, will be
present at the forthcoming shareholders' meeting with the opportunity to make a
statement if he so desires and such representative will be available to respond
to appropriate questions. The approval of the proposal to ratify the appointment
of Grant Thornton LLP requires the affirmative vote of a majority of the votes
cast by all shareholders represented and entitled to vote thereon. An abstention
or withholding of authority to vote, therefore, will not have the same legal
effect as an "against" vote and will not be counted in determining whether the
proposal has received the required shareholder vote. However, brokers that do
not receive instructions on this proposal are entitled to vote for the selection
of the independent registered public accounting firm.
Fees billed to Company by Grant Thornton LLP during fiscal year 2006:
Audit Fees: Audit fees billed to the Company by Grant Thornton LLP during
the Company's 2006 fiscal year and 2005 fiscal year for audit of the Company's
annual financial statements, reviews of those financial statements included in
the Company's quarterly reports on Form 10-Q, and auditing of the Company's
internal controls over financial reporting totaled approximately $739,000 and
$705,000, respectively.
Audit Related Fees: Audit related fees billed to the Company by Grant
Thornton LLP were approximately $29,000 and $34,000, respectively, during the
Company's 2006 fiscal year and 2005 fiscal years. Such fees were primarily for
assurance and related services related to employee benefit plan audits, and
special procedures required to meet certain regulatory filings' requirements.
Tax Fees: Tax fees billed by Grant Thornton LLP for tax compliance, tax
advice and tax planning totaled approximately $18,000 and $42,000 for the 2006
fiscal year and 2005 fiscal year, respectively.
All Other Fees: There were no other fees billed to the Company by Grant
Thornton LLP during either of the 2006 or 2005 fiscal years.
OTHER MATTERS
So far as is now known, there is no business other than that described
above to be presented for action by the shareholders at the meeting, but it is
intended that the proxies will be exercised upon any other matters and proposals
that may legally come before the meeting, or any adjournment or postponement
thereof, in accordance with the discretion of the persons named therein.
DEADLINE FOR SHAREHOLDER PROPOSALS
To the extent permitted by law, any shareholder proposal intended for
presentation at next year's annual shareholders' meeting must be received in
proper form at the Company's principal office no later than December 11, 2007.
In accordance with and to the extent covered by Rule 14a-4(c)(1) of the
Exchange Act, if the Company is not notified of a shareholder proposal by
February 26, 2008, such proposal will not be included in the proxy statement for
the next year's annual shareholders' meeting and the Company will be permitted
to use its discretionary authority in respect thereof.
22
ANNUAL REPORT
The 2006 Annual Report to Shareholders, including financial statements, is
being mailed herewith. If you do not receive your copy, please advise the
Company and another will be sent to you. Certain information contained in our
Annual Report on Form 10-K for the year ended December 31, 2006, filed on
February 23, 2007, is incorporated by reference to this proxy statement.
By Order of the Board of
Directors,
DANIEL P. MCCARTNEY
Chairman and
Chief Executive Officer
Dated: Bensalem, Pennsylvania
April 10, 2007
A copy of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2006, as filed with the Securities and Exchange Commission,
may be obtained without charge by any shareholder of record on the record date
upon written request addressed to: Secretary, Healthcare Services Group, Inc.,
3220 Tillman Drive, Suite 300, Bensalem, PA 19020 or by visiting the Company's
website at WWW.HCSGCORP.COM.
23
HEALTHCARE SERVICES GROUP, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AT THE RADISSON HOTEL OF BUCKS
COUNTY,
2400 OLD LINCOLN HIGHWAY, TREVOSE, PA 19047 ON MAY 22, 2007 AT 10:00 A.M.
The undersigned, revoking all previous proxies, hereby appoints Daniel P.
McCartney and Thomas A. Cook or either of them, attorneys and proxies with full
power of substitution and with all the powers the undersigned would possess if
personally present, to vote all shares of HEALTHCARE SERVICES GROUP, INC. owned
by the undersigned at the Annual Meeting of Shareholders of said corporation to
be held at the place set forth above, and at any adjournment or postponement
thereof, in the transaction of such business as may properly come before the
meeting or any adjournment or postponement thereof, all as more fully described
in the Proxy Statement, and particularly to vote as designated on the reverse
side.
THE SHARES REPRESENTED HEREBY WILL BE VOTED AS DIRECTED BY THIS PROXY. IF NO
DIRECTION IS MADE THEY WILL BE VOTED FOR THE ELECTION OF THE NOMINATED
DIRECTORS, FOR THE APPROVAL OF THE PROPOSAL TO INCREASE THE AUTHORIZED CAPITAL
AND FOR RATIFICATION OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, ALL
AS RECOMMENDED IN THE PROXY STATEMENT, AND IN ACCORDANCE WITH THE DISCRETION OF
THE PROXIES OR PROXY ON ANY OTHER BUSINESS TRANSACTED AT THE ANNUAL MEETING.
(CONTINUED AND TO BE SIGNED ON THE REVERSE SIDE.)
ANNUAL MEETING OF SHAREHOLDERS OF
HEALTHCARE SERVICES GROUP, INC.
MAY 22, 2007
PROOF #1
Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.
Please detach and mail in the envelope provided.
-----------------------------------------------------------------------------------------------
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE [X]
-----------------------------------------------------------------------------------------------
1. TO ELECT EIGHT DIRECTORS. 2. TO APPROVE AN AMENDMENT
TO THE COMPANY'S AMENDED FOR [ ]
[ ] FOR ALL NOMINEES O Daniel P.McCartney RESTATED ARTICLES OF
O Barton D. Weisman INCORPORATION TO INCREASE AGAINST [ ]
[ ] WITHHOLD AUTHORITY O Joseph F. McCartney THE AGGREGATE NUMBER OF
FOR ALL NOMINEES O Robert L. Frome SHARES OF CAPITAL STOCK ABSTAIN [ ]
O Thomas A. Cook AUTHORIZED TO BE ISSUED
[ ] FOR ALL EXCEPT O Robert J. Moss BY THE COMPANY FROM
(See instructions below) O John M. Briggs 30,000,000 TO 100,000,000.
O Dino M. Ottaviano
3. TO APPROVE AND RATIFY 4. TO CONSIDER AND ACT UPON
THE SELECTION OF GRANT FOR [ ] SUCH OTHER BUSINESS AS FOR [ ]
THORNTON LLP AS THE MAY PROPERLY COME BEFORE
INDEPENDENT REGISTERED AGAINST [ ] THE MEETING AND ANY AGAINST [ ]
PUBLIC ACCOUNTING ADJOURNMENT OR
NOMINEES: FIRM OF THE ABSTAIN [ ] POSTPONEMENT. ABSTAIN [ ]
COMPANY FOR ITS CURRENT
FISCAL YEAR ENDING
DECEMBER 31, 2007.
-------------------------------------------------------
INSTRUCTION: To withhold authority to vote for any
individual nominee(s), mark "FOR ALL
EXCEPT" and fill in the circle next to
each nominee you wish to withhold, as
shown here: O
-------------------------------------------------------
-------------------------------------------------------
To change the address on your account, please check the
box at right and indicate your new address in the
address space above. Please note that changes to the
registered name(s) on the account may not be submitted
via this method. [ ]
-------------------------------------------------------
Signature of Shareholder __________________ Date: ______ Signature of Shareholder ________________
Date: _________
NOTE: Please sign exactly as your name or names appear on this Proxy. When shares are held
jointly, each holder should sign. When signing as executor, administrator, attorney,
trustee or guardian, please give full title as such. If the signer is a corporation, please
sign full corporate name by duly authorized officer, giving full title as such. If signer
is a partnership, please sign in partnership name by authorized person.
Annex A
HEALTHCARE SERVICES GROUP, INC.
AUDIT COMMITTEE CHARTER
PURPOSE OF THE AUDIT COMMITTEE
The Audit Committee (the "Committee") is a committee of the Board of
Directors (the "Board") of Healthcare Services Group, Inc. (the "Company")
established for the purpose of overseeing the accounting and financial reporting
processes of the Company and audits of its financial statements.
The purposes of the Committee shall be to assist the Board in overseeing:
(i) the integrity of the Company's financial statements, (ii) the Company's
compliance with legal and regulatory requirements, (iii) the independent
auditor's qualifications and independence, (iv) the performance of the Company's
independent auditor, and (iv) the Company's system of disclosure controls and
system of internal financial, accounting and legal compliance controls. The
Committee shall also provide an open avenue of communication among the
independent auditors, financial and other senior management and the Board.
The Committee shall oversee the Company's accounting and financial
reporting processes and the quality and integrity of its financial reports and
other financial information provided by the Company to any non-tax governmental
body.
The Committee shall be solely responsible for the appointment,
compensation and oversight of the Company's independent auditors, and the
independent auditors shall report directly to the Committee.
The Committee shall serve as an independent and objective party to monitor
the Company's financial reporting process and internal control system. In
discharging its oversight role, the Committee is empowered to investigate any
matter brought to its attention with full access to all books, records,
facilities and personnel of the Company and to engage, determine funding for,
and obtain advice and assistance from independent counsel and other advisors as
the Committee deems necessary to carry out its duties. The Company shall also
provide funding for ordinary administrative expenses of the Committee that the
Committee deems necessary or appropriate in carrying out its duties.
COMPOSITION AND MEMBERSHIP REQUIREMENTS
The Board shall appoint the Committee and shall designate its Chairman.
The Committee shall consist of at least three independent directors, each of
whom shall satisfy the independence requirements of the Sarbanes-Oxley Act of
2002 and the regulations thereunder (the "Act"), the Securities and Exchange
Commission (the "SEC") and The Nasdaq Stock Market ("Nasdaq"). Without limiting
the foregoing, each appointed director shall be independent of the management of
the Company, both directly and indirectly, and free from any relationship that,
in the opinion of the Board, would interfere with the exercise of his or her
independent judgment as a member of the Committee.
The Committee members shall have working familiarity with basic finance
and accounting practices and have the knowledge and experience required to
fulfill their responsibilities, as specified by Nasdaq requirements. At least
one member of the Committee shall have past employment experience in finance or
accounting, requisite professional certification in accounting, or any other
comparable experience or background that results in that individual's financial
sophistication, including being or having been a chief executive officer, a
chief financial officer or other senior officer with financial oversight
responsibilities and, therefore, shall qualify as a "financial expert," as
contemplated by the Act and SEC and Nasdaq rules. The identity of such member(s)
shall be disclosed in periodic filings as required by the SEC.
February 12, 2004
A-1
COMMITTEE MEETINGS
1. COMMITTEE MEETINGS. The Committee shall meet as a committee at
least quarterly, or more frequently as circumstances require, either in person
or by telephone conference call. The Chairman shall prepare and/or approve an
agenda in advance of each meeting. The agenda should be developed in
consultation with management, other Committee members and independent auditors,
and shall be consistent with this Charter. The Committee shall maintain minutes
of meetings and report to the Board on significant results of its activities.
The Chairman shall also be responsible for leadership of the Committee,
including presiding over the meetings, making Committee assignments and
reporting to the Board. The Chairman shall also maintain regular liaison with
the Chief Executive Officer, Chief Financial Officer and the lead independent
audit partner. If the Chairman is not present at any meeting, the members of the
Committee may designate a Chairman by majority vote of the Committee members.
Meetings should be scheduled to permit appropriate prior review and timely
filing of the Company's interim and year-end financial statements.
2. MEETINGS WITH INDEPENDENT AUDITORS. The Committee shall meet with
the independent auditors prior to the commencement of the audit and to review
the annual financial statements prior to their release and at such other times
that the Chairman may deem necessary or appropriate for any reason, including at
the request of the independent auditors. At the discretion of the Chairman, the
principal accounting officers of the Company may be invited to attend the
meetings of the Committee held with the independent auditors.
3. SEPARATE MEETINGS. Each regularly scheduled meeting may conclude
with an executive session of the Committee, absent members of management, and on
such terms and conditions as the Committee may elect. As part of its job to
foster open communication, the Committee may meet periodically with management
and the independent auditors in separate executive sessions to discuss any
matters that the Committee or either of these groups believe should be discussed
privately.
4. AVAILABILITY. The Committee shall make itself available to meet
with management of the Company to discuss any matters that it or management
deems appropriate, and shall be available to the independent auditors during the
year for consultation purposes.
COMMITTEE RESPONSIBILITIES AND DUTIES
The Committee shall assist the Board in fulfilling the Board's
oversight responsibilities with respect to financial reporting to stockholders
and the SEC, the system of controls that management has established, and the
external audit process, and report the results of its activities to the Board.
The following shall be the principal recurring processes of the
Committee in carrying out its oversight responsibilities. The processes are set
forth as a guide with the understanding that the Committee may supplement them
as appropriate:
1. REVIEW AND OVERSIGHT PROCEDURES.
a. REVIEW OF CHARTER. The Committee shall review and reassess the adequacy of
this Charter at least annually, propose changes to this Charter to the Board for
its approval as necessary, and cause this Charter to be published at least
triennially in accordance with SEC regulations.
b. REVIEW OF FILINGS, FINANCIAL STATEMENTS AND OTHER DISCLOSURES.
i. The Committee shall review with management (including the principal
accounting officers of the Company) and the independent auditors, prior to
release, the filings required to be made by the Company with the SEC on an
annual and quarterly basis, as well as any other required interim reports,
filings or documents that contain financial information about the Company. The
Committee shall specifically review the results of the annual audit of the
Company's consolidated financial statements prior to the filing or distribution
thereof, including the Company's disclosures under "Management's Discussion and
Analysis of Financial Condition and Results of Operations," any appropriate
matters regarding the clarity of the disclosures in such financial statements,
accounting principles, practices and any other matters required to be
February 12, 2004
A-2
communicated to the Committee by the independent auditors under Generally
Accepted Auditing Standards. The Committee shall cause the independent auditors
to conduct a SAS 100 Interim Financial Review prior to each filing of the
Company's Form 10-Q. The Committee shall recommend to the Board whether the
financial statements should be included in the periodic filings of the Company.
ii. The Committee shall review: (a) material issues regarding accounting
principles and financial statement presentations, including any significant
changes in the Company's selection or application of accounting principles, and
material issues as to the adequacy of the Company's internal controls and any
special audit steps adopted in light of material control deficiencies; (b)
analyses prepared by management and/or the independent auditor setting forth
significant financial reporting issues and judgments made in connection with the
preparation of the financial statements, including analyses of the effects on
the financial statements of alternative methods pursuant to Generally Accepted
Accounting Principles ("GAAP"); (c) the effect of regulatory and accounting
initiatives, as well as off-balance sheet structures, on the financial
statements of the Company; and (d) the type and presentation of information to
be included in earnings press releases (paying particular attention to any use
of "pro forma," or "adjusted" non-GAAP, information), as well as review of any
financial information and earnings guidance provided to analysts and rating
agencies.
iii. The Committee shall review analyses and significant findings by the
independent auditors with respect to financial reporting issues and judgments
made in connection therewith, including (a) any material difficulties or
problems with any audit work, (b) any restrictions on the scope of the
independent auditors' activities or access to requested information, (c) any
significant disagreements with management and the independent auditors and any
accounting adjustments noted or proposed by the independent auditors, but not
accepted by management, (d) any communications between the independent auditing
team and the firm's national office respecting material auditing or accounting
issues presented by the engagement, (e) any management or internal control
letter issues raised, or proposed to be raised, by the independent auditors to
the Company, and (f) any major issue as to the adequacy of the Company's
internal controls and specific audit steps adopted in light of material control
deficiencies. After completion of such review, the Committee shall make its
recommendation to the Board.
c. COMMITTEE OVERSIGHT OF ACCOUNTING PERSONNEL. The Committee shall meet from
time to time with the principal accounting officers of the Company to review
accounting policies followed, changes therein, accounting controls, and any
issues that may be raised by the independent auditors. In conformity with the
Company's continuing policy, the accounting officers shall report to the Board
upon submission of the annual and quarterly financial statements of the Company.
d. ANNUAL PERFORMANCE EVALUATION. The Committee shall perform an annual
self-evaluation of its performance.
2. INDEPENDENT AUDITORS.
a. COMMITTEE OVERSIGHT OF INDEPENDENT AUDITORS. The Committee shall have the
sole authority regarding, and shall be directly responsible for, the
appointment, compensation, oversight, termination and replacement of, as well as
funding for, the independent auditors for the purpose of preparing or issuing an
audit report or related work, or any non-audit work, subject, if applicable, to
stockholder ratification. The Committee shall have a clear understanding with
management and the independent auditors that the independent auditors report
directly to the Committee, as representatives of the Company's stockholders.
b. Auditors' Independence. The Committee shall annually request from the
auditors, a formal written statement delineating all relationships between the
auditors and the Company consistent with Independence Standards Board Standard
1, including fees paid by the Company to the auditors, in accordance with the
Act's requirements; review with the auditors all relationships between the
auditors and management of the Company that may impact the objectivity and
independence of the auditor and take, or recommend that the full Board take,
appropriate action to oversee the independence of the outside auditor.
February 12, 2004
A-3
c. AUDIT PLAN. Prior to the commencement of the annual audit, the scope of the
independent auditors' examination and the planning therefor shall be presented
to the Committee by the independent auditors. The Committee shall review the
independent auditors' plan and discuss scope, staffing, locations, reliance upon
management and general audit approach. The Committee should be satisfied that
the audit plan is sufficiently detailed and covers any significant areas of
concern that the Committee may have.
d. PRE-APPROVAL OF THE INDEPENDENT AUDITORS' FEES. The Committee shall review
and pre-approve both audit and non-audit services to be provided by the
independent auditor (other than with respect to the de minimis exceptions
permitted by the Act). This duty may be delegated to one or more designated
members of the Committee with any such pre-approval reported to the Committee at
its next regularly scheduled meeting. Approval of non-audit services shall be
disclosed to investors in periodic reports required by Section 13(a) of the
Securities Exchange Act of 1934.
e. INDEPENDENT AUDITORS' REPORT ON PRACTICES. The independent auditors shall
report promptly to the Committee (a) all critical accounting policies and
practices to be used; (b) all alternative treatments of financial information,
ramifications of such treatment, and the treatment preferred by the auditors;
and (c) all material written communications between the independent audit firm
and Company management. The Committee shall also review any problems with
management and any other matters required to be communicated to the Committee
under Generally Accepted Auditing Standards or applicable rules under or of the
Act, the SEC, Nasdaq, or other regulatory authorities. The independent auditors
shall also report on recently issued and adopted accounting standards, the
Company's compliance therewith, and the effect of unusual or extraordinary
transactions. The independent auditors must discuss their judgments about the
quality and content of the Company's accounting principles with the Committee.
f. QUALITY CONTROL OF THE INDEPENDENT AUDITORS. On an annual basis, the
Committee shall obtain a report from the independent auditors describing (i) the
independent auditors' internal quality-control procedures, and (ii) any material
issues raised by the most recent internal quality-control review, or peer
review, of the firm, or by any inquiry or investigation by governmental or
professional authorities, within the preceding five years, respecting one or
more independent audits carried out by such firm, and any steps taken to deal
with any such issues. The Committee shall then present its conclusions with
respect to the independent auditor to the full Board.
g. ROTATION OF THE INDEPENDENT AUDITORS. The Committee shall annually (i) assess
the qualifications, performance and independence of the auditors and the lead
(or coordinating) audit partner (or other audit partner having primary
responsibility for the audit); and ii) take any actions necessary to ensure the
rotation, not less than every five years, of the audit partner.
h. HIRING POLICIES. The Committee shall confirm that the Company complied with
the Act in the hiring of any employees or former employees of the independent
auditors, after consultation with management.
3. LEGAL COMPLIANCE.
a. LEGAL COMPLIANCE. The Committee shall review with the Company's counsel any
legal matters that could have a significant impact on the Company's financial
statements, compliance with applicable laws and regulations, and inquiries
received from regulators or governmental agencies, including corporate
securities trading policies.
b. REVIEW OF DISCLOSURES BY OFFICERS. The Committee shall review disclosures
made by the Company's principal executive officer and principal financial
officer regarding compliance with their certification obligations under the Act,
including the Company's disclosure controls and procedures and internal controls
for financial reporting.
c. RELATED PARTY TRANSACTIONS. The Committee shall be responsible for reviewing
and approving all related party transactions involving the Company and any
director, executive officer, other employee, or family member thereof.
February 12, 2004
A-4
d. COMMITTEE REVIEW OF CORPORATE POLICIES. The Committee shall review the
Company's policy entitled Standards of Business Conduct, the Company's policy
regarding expense accounts and vehicles (such as cars and airplanes), the
general use of corporate assets and any other Company policies.
e. COMPLIANCE WITH CONFLICTS OF INTERESTS POLICY. The Committee shall, on behalf
of the Board and stockholders of the Company, satisfy itself that the Company's
Standards of Business Conduct policy is strictly adhered to by its officers,
directors and employees.
4. OTHER COMMITTEE ACTIVITIES.
a. EARNINGS RELEASES. The Committee shall discuss earnings releases, prior to
their release to the public, as well as financial information and earnings
guidance provided to analysts and rating agencies.
b. COMPLAINT PROCEDURES. The Committee shall establish procedures for the
receipt, retention and treatment of complaints received by the Company regarding
the Company's accounting, internal accounting controls and auditing matters and
for the confidential, anonymous submissions by employees of the Company of
concerns relating to questionable accounting or auditing matters.
c. COMMITTEE REPORTS. The Committee shall prepare reports to stockholders as
required by the SEC `s proxy rules to be included in the Company's annual proxy
statement.
d. OTHER. The Committee shall have the power and authority to perform any other
activities consistent with this Charter, the Company's by-laws, and governing
law, as the Committee or the Board deems necessary or appropriate.
LIMITATION
Nothing in this Charter is intended to alter in any way the standard
of conduct that applies to any of the directors of the Company under the
Pennsylvania Business Corporation Law, as from time to time amended, and this
Charter does not impose, nor shall it be interpreted to impose, any duty on any
director greater than, or in addition to, the duties or standard established by
the Pennsylvania Business Corporation Law.
February 12, 2004
A-5
Annex B
CHARTER
OF
THE NOMINATING, COMPENSATION AND STOCK OPTION COMMITTEE
OF HEALTHCARE SERVICES GROUP, INC.
A. PURPOSE
The primary objectives of the Nominating, Compensation Committee and
Stock Option Committee (the "Committee") are to assist the Board of Directors
(the "Board") of Healthcare Services Group, Inc. (the "Company") by: (i)
developing and recommending to the Board a set of effective corporate governance
policies and procedures applicable to the Company; (ii) identifying, reviewing
and evaluating individuals qualified to become Board members and recommending
that the Board select director nominees for each annual meeting of the Company's
stockholders; (iii) discharging the Board's responsibilities relating to the
compensation of Company executives; and (iv) administering the Company's stock
option plans or other equity-based compensation plans.
B. ORGANIZATION
The Committee shall consist entirely of independent directors, each of
whom shall satisfy the applicable independence requirements of The Nasdaq Stock
Market and any other regulatory requirements.
Committee members shall be elected by the Board at a meeting of the
Board; members shall serve until their successors shall be duly elected and
qualified. The Board may, at any time, remove any member of the Committee and
fill the vacancy created by such removal. The Committee's chairperson shall be
designated by the full Board, comprising a majority of independent directors, or
the full Committee. The Chairman will report to the Board from time to time, no
less often than annually, on the Committee's activities.
The Committee may form and delegate authority to subcommittees when
appropriate.
C. MEETINGS
The Committee will meet no less than one time per year. Special
meetings may be convened as required. The Committee shall meet in Executive
Session when appropriate. The chairperson of the Committee will preside at each
meeting and, in consultation with the other members of the Committee, will set
the frequency and length of each meeting and the agenda of items to be addressed
at each meeting. The chairperson of the Committee shall ensure that the agenda
for each meeting is circulated to each Committee member in advance of the
meeting.
D. RESPONSIBILITIES
The Committee shall have the power and authority of the Board to
perform the following duties and to fulfill the following responsibilities:
GENERAL
1. Develop principles of corporate governance and recommend them to
the Board for its approval;
2. Review periodically the principles of corporate governance approved
by the Board to ensure that they remain relevant and are complied with;
3. Review periodically the Certificate of Incorporation and By-Laws of
the Company and recommend to the Board changes thereto in respect of good
corporate governance;
B-1
4. Have the authority to obtain advice and assistance from internal or
external legal, accounting or other advisors in connection with the performance
of its duties and responsibilities;
5. In consultation with the Chief Executive Officer, participate in
developing major strategic and financial objectives including the Company's
strategic plan, annual budget and financial goals;
6. Establish a target for director stock ownership;
7. Establish policies for Board access to management;
8. Take such other actions regarding the manner of governance of the
Company, including the adoption of principles of corporate governance, or that
are otherwise within the Committee's scope of duties, from time to time that are
in the best interests of the Company and its stockholders, as the Committee
shall deem appropriate.
BOARD COMPOSITION AND EVALUATION; NOMINATIONS
9. When deemed advisable, identify potential candidates and recommend
for nomination, candidates for membership on the Board. The Committee shall have
the sole authority to retain and terminate any search firm used to identify
candidates for the Board;
10. Gather information on such candidates, conduct inquiries into the
backgrounds and qualifications of such candidates, and conduct interviews and
meetings with such candidates or their references;
11. Make recommendations to the Board regarding overall Board
composition and makeup, including having a majority of independent directors on
the Board;
12. Make recommendations to the Board regarding the composition and
size of the Board, with the goal of ensuring that the Board has the proper
expertise and its membership consists of persons with sufficiently diverse
backgrounds;
13. Make recommendations to the Board with regard to the criteria for
selection of Board members;
14. Assist the Board in planning for continuity on the Board as
existing Board members retire or rotate off the Board;
15. Recommend to the Board an appropriate course of action upon the
resignation of current Board members;
16. Conduct an annual Board evaluation;
DIRECTOR COMPENSATION
17. Design a director compensation package of a reasonable total value
based on comparisons with similar firms and aligned with long-term shareholder
interests;
BOARD COMMITTEE COMPOSITION
18. Periodically review the composition of each Board committee;
19. Recommend to the Board persons to be members of Board committees;
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EXECUTIVE OFFICER SUCCESSION
20. In consultation with the Chief Executive Officer, make
recommendations to the Board with regard to a succession plan for the Chief
Executive Officer in case of his resignation, retirement or death;
21. Assist the Chief Executive Officer in succession planning for
other executive officers;
EXECUTIVE OFFICER COMPENSATION
22. Review and approve, in the absence of the Chief Executive Officer,
corporate goals relevant to the compensation of the Chief Executive Officer,
evaluate the Chief Executive Officer's performance in light of these goals and
objectives, and set the Chief Executive Officer's compensation;
23. Develop an annual report, which describes the Chief Executive
Officer's compensation, other executive officers' compensation and management
fees, if any, paid by the Company for executive services, for inclusion in the
Company's proxy statement, in accordance with applicable rules and regulations;
24. In consultation with the Chief Executive Officer, develop
guidelines and review the compensation and performance of the other executive
officers of the Company, as well as any management fees paid by the Company for
executive services, and set the compensation of the executive officers of the
Company and/or any management fees paid by the Company for executives services;
25. Make recommendations to the Board with respect to
incentive-compensation plans and equity-based plans, and establish criteria for
the granting of options in accordance with such criteria; and administer such
plans;
26. Review major organizational and staffing matters;
27. Review director compensation levels and practices, and recommend,
from time to time, changes in such compensation levels and practices to the
Board with equity ownership in the Company encouraged;
28. Annually review and reassess the adequacy of this Charter and
recommend any proposed changes to the Board for approval;
29. Perform any other activities under this Charter, the Company's
By-laws or governing law as the Committee or the Board deems appropriate.
STOCKHOLDERS
30. Review the procedures and communication plans for stockholder
meetings to ensure that the rights of stockholders are fully protected, that
required information concerning the Company is adequately presented and that the
meetings promote effective communication between the Company and its
stockholders on matters of importance;
31. Recommend to the Board ways and means for the Board and management
of the Company to communicate with stockholders between annual meetings of the
stockholders;
CONFLICTS OF INTEREST
32. Pre-approve consulting agreements with Board members;
33. Approve any actual and potential conflicts of interest a Board
member may have and issue to a Board member having an actual or potential
conflict of interest instructions on how to conduct him/herself in matters that
may pertain to such a conflict; and
34. Adopt and revise, as necessary, a Conflicts of Interest Policy and
oversee its implementation.
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E. COMMITTEE RESOURCES
The Committee shall have the authority to obtain advice and seek assistance from
internal and external legal, accounting and other advisors. The Committee shall
determine
B-4