##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE 
SECURITIES EXCHANGE ACT OF 1934
 For Quarter Ended March 31, 2010
 Commission File Number 0-12015
 HEALTHCARE SERVICES GROUP, INC.
  Pennsylvania
    
    23-2018365(State or other jurisdiction of
    
    (IRS Employer Identification number)incorporation or organization)
 3220
Tillman Drive-Suite 300, Bensalem, Pennsylvania 19020
  215-639-4274
 þ o
 YES þ NO o
 Rule 12b-2
 Large accelerated filer þ
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller Reporting Company o
 o þ




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##### 



INDEX
 PAGE NO.PART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009
    
    
    2Consolidated Statements of Income for the Three Months Ended March 31, 2010 and March 31, 2009
    
    
    3Consolidated Statements of Cash Flows for the Three Months ended March 31, 2010 and March 31, 2009
    
    
    4Consolidated
Statement of Stockholders Equity and Comprehensive Income for the Three Months Ended March 31, 2010
    
    
    5Notes To Consolidated Financial Statements
    
    
    6  17Item 2. Managements Discussion and Analysis of Financial Condition and Results Of Operations
    
    
    18  31Item 3. Quantitative and Qualitative Disclosure About Market Risk
    
    
    32Item 4. Controls and Procedures
    
    
    32PART II. Other InformationItem 1. Legal Proceedings
    
    
    33Item 1A. Risk Factors
    
    
    33Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    33Item 3. Defaults Upon Senior Securities
    
    
    33Item 4. (Removed and Reserved)
    
    
    33Item 5. Other Information
    
    
    33Item 6. Exhibits
    
    
    33Signatures
    
    
    34Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   -1-




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Consolidated Balance Sheets
 (Unaudited)March 31, 2010
    
    
    December 31, 2009AssetsCurrent Assets:Cash and cash equivalents
    
    $
    28,648,000
    
    
    $
    31,301,000Marketable securities, at fair value
    
    
    43,901,000
    
    
    
    52,648,000Accounts and notes receivable, less allowance for doubtful accounts of $4,796,000 in 2010 and $4,640,000 in 2009
    
    
    105,065,000
    
    
    
    104,356,000Inventories and supplies
    
    
    17,456,000
    
    
    
    16,974,000Deferred income taxes
    
    
    391,000
    
    
    
    115,000Prepaid expenses and other
    
    
    5,900,000
    
    
    
    6,776,000Total current assets
    
    
    201,361,000
    
    
    
    212,170,000Property and Equipment:Laundry and linen equipment installations
    
    
    1,733,000
    
    
    
    1,695,000Housekeeping equipment and office furniture
    
    
    17,470,000
    
    
    
    16,905,000Autos and trucks
    
    
    278,000
    
    
    
    278,00019,481,000
    
    
    
    18,878,000Less accumulated depreciation
    
    
    14,907,000
    
    
    
    14,487,0004,574,000
    
    
    
    4,391,000GOODWILL, Less accumulated amortization of $1,743,000 in 2010 and 2009
    
    
    16,955,000
    
    
    
    17,087,000OTHER INTANGIBLE ASSETS, Less accumulated amortization of $4,535,000 in 2010 and $4,038,000 in 2009
    
    
    8,665,000
    
    
    
    8,862,000NOTES RECEIVABLE  long term portion, net of discount
    
    
    5,080,000
    
    
    
    4,623,000DEFERRED COMPENSATION FUNDING, at fair value
    
    
    11,553,000
    
    
    
    10,783,000DEFERRED INCOME TAXES  long term portion
    
    
    8,481,000
    
    
    
    7,907,000OTHER NONCURRENT ASSETS
    
    
    68,000
    
    
    
    69,000TOTAL ASSETS
    
    $
    256,737,000
    
    
    $
    265,892,000Liabilities and Stockholders EquityCurrent Liabilities:Accounts payable
    
    $
    8,074,000
    
    
    $
    9,134,000Accrued payroll, accrued and withheld payroll taxes
    
    
    6,374,000
    
    
    
    17,647,000Other accrued expenses
    
    
    2,629,000
    
    
    
    3,057,000Income taxes payable
    
    
    724,000
    
    
    
    35,000Accrued insurance claims
    
    
    5,161,000
    
    
    
    4,844,000Total current liabilities
    
    
    22,962,000
    
    
    
    34,717,000ACCRUED INSURANCE CLAIMS  long term portion
    
    
    12,042,000
    
    
    
    11,302,000DEFERRED COMPENSATION LIABILITY
    
    
    11,680,000
    
    
    
    11,099,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value, 100,000,000 shares authorized, 45,926,000 shares issued in 2010 and 45,792,000 shares in 2009
    
    
    459,000
    
    
    
    458,000Additional paid-in capital
    
    
    94,960,000
    
    
    
    92,339,000Retained earnings
    
    
    134,040,000
    
    
    
    135,837,000Accumulated other comprehensive loss, net of taxes
    
    
    (60,000
    )Common stock in treasury, at cost, 2,154,000 shares in 2010 and 2,211,000 shares in 2009
    
    
    (19,346,000
    )
    
    
    (19,860,000
    )Total Stockholders Equity
    
    
    210,053,000
    
    
    
    208,774,000TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    256,737,000
    
    
    $
    265,892,000
   -2-




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Consolidated Statements of Income  (Unaudited)
 For the Three Months Ended March 31,2010
    
    
    2009Revenues
    
    $
    183,801,000
    
    
    $
    160,409,000Operating costs and expenses:Costs of services provided
    
    
    158,573,000
    
    
    
    137,892,000Selling, general and administrative
    
    
    13,901,000
    
    
    
    10,876,000Other Income:Investment and interest
    
    
    750,000
    
    
    
    937,000Income before income taxes
    
    
    12,077,000
    
    
    
    12,578,000Income taxes
    
    
    4,649,000
    
    
    
    4,842,000Net Income
    
    $
    7,428,000
    
    
    $
    7,736,000Basic earnings per common share
    
    $
    0.17
    
    
    $
    0.18Diluted earnings per common share
    
    $
    0.17
    
    
    $
    0.18Cash dividends per common share
    
    $
    0.21
    
    
    $
    0.17Basic weighted average number of common shares outstanding
    
    
    43,899,000
    
    
    
    43,457,000Diluted weighted average number of common shares outstanding
    
    
    44,659,000
    
    
    
    44,073,000
   -3-




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Consolidated Statements of Cash Flows
 (Unaudited)For the Three Months
Ended March 31,2010
    
    
    2009Cash flows from operating activities:Net Income
    
    $
    7,428,000
    
    
    $
    7,736,000Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    923,000
    
    
    
    692,000Bad debt provision
    
    
    600,000
    
    
    
    700,000Deferred income tax benefits
    
    
    (850,000
    )
    
    
    (273,000
    )Stock-based compensation expense
    
    
    264,000
    
    
    
    257,000Amortization of premium on marketable securities
    
    
    230,000
    
    
    
    230,000Unrealized
(gain)  loss on marketable securities
    
    
    597,000
    
    
    
    (645,000
    )Unrealized (gain) loss on deferred compensation fund investments
    
    
    (394,000
    )
    
    
    258,000Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (1,310,000
    )
    
    
    (2,356,000
    )Inventories and supplies
    
    
    (481,000
    )
    
    
    669,000Notes receivable  long term portion
    
    
    (457,000
    )
    
    
    (2,404,000
    )Deferred compensation funding
    
    
    (375,000
    )
    
    
    (225,000
    )Accounts payable and other accrued expenses
    
    
    (1,169,000
    )
    
    
    396,000Accrued payroll, accrued and withheld payroll taxes
    
    
    (10,619,000
    )
    
    
    7,149,000Accrued insurance claims
    
    
    1,057,000
    
    
    
    800,000Deferred compensation liability
    
    
    898,000
    
    
    
    53,000Income taxes payable
    
    
    689,000
    
    
    
    4,931,000Prepaid expenses and other assets
    
    
    708,000
    
    
    
    (1,026,000
    )Net cash provided by (used in) operating activities
    
    
    (2,261,000
    )
    
    
    16,942,000Cash flows from investing activities:Disposals of fixed assets
    
    
    6,000
    
    
    
    15,000Additions to property and equipment
    
    
    (614,000
    )
    
    
    (419,000
    )Purchases of marketable securities, net
    
    
    (14,623,000
    )
    
    
    (2,778,000
    )Sales of marketable securities, net
    
    
    22,481,000
    
    
    
    660,000Net cash provided by (used in) investing activities
    
    
    7,250,000
    
    
    
    (2,522,000
    )Cash flows from financing activities:Dividends paid
    
    
    (9,225,000
    )
    
    
    (7,388,000
    )Reissuance of treasury stock pursuant to Dividend Reinvestment Plan
    
    
    27,000
    
    
    
    21,000Tax benefits (expense) transactions in equity compensation plans
    
    
    708,000
    
    
    
    (96,000
    )Proceeds from the exercise of stock options
    
    
    848,000
    
    
    
    18,000Net cash used in financing activities
    
    
    (7,642,000
    )
    
    
    (7,445,000
    )Net increase (decrease) in cash and cash equivalents
    
    
    (2,653,000
    )
    
    
    6,975,000Cash and cash equivalents at beginning of the period
    
    
    31,301,000
    
    
    
    37,501,000Cash and cash equivalents at end of the period
    
    $
    28,648,000
    
    
    $
    44,476,000Supplementary Cash Flow Information:Income taxes cash payments, net of refunds
    
    $
    4,103,000
    
    
    $
    281,000Issuance of 49,000 shares of Common Stock in both 2010 and 2009 pursuant to Employee Stock Plans
    
    $
    1,047,000
    
    
    $
    777,000
   -4-




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Consolidated Statements of Stockholders Equity and Comprehensive Income
(Unaudited)
 For the Three Months Ended March 31, 2010Additional
    
    
    Accumulated Other
    
    
    TotalCommon Stock
    
    
    Paid-in
    
    
    Comprehensive
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance, December 31, 2009
    
    
    45,792,000
    
    
    $
    458,000
    
    
    $
    92,339,000
    
    
    $
    
    
    
    $
    135,837,000
    
    
    $
    (19,860,000
    )
    
    $
    208,774,000Comprehensive income:Net income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,428,000
    
    
    
    
    
    
    
    7,428,000Unrealized
loss on available for sale marketable securities, net of taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (60,000
    )
    
    
    
    
    
    
    
    
    
    
    (60,000
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,368,000Exercise of stock options and other stock-based compensation, net of 2,000 shares tendered for payment
    
    
    134,000
    
    
    
    1,000
    
    
    
    838,000
    
    
    
    
    
    
    
    
    
    
    
    9,000
    
    
    
    848,000Tax benefit arising from stock option transactions
    
    
    
    
    
    
    
    
    
    
    708,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    708,000Share-based compensation expense  stock options
    
    
    
    
    
    
    
    
    
    
    190,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    190,000Treasury shares issued for Deferred Compensation Plan funding and redemptions (6,000 shares)
    
    
    
    
    
    
    
    
    
    
    260,000
    
    
    
    
    
    
    
    
    
    
    
    56,000
    
    
    
    316,000Shares issued pursuant to Employee Stock Plans (49,000 shares)
    
    
    
    
    
    
    
    
    
    
    609,000
    
    
    
    
    
    
    
    
    
    
    
    438,000
    
    
    
    1,047,000Cash dividends  $.21 per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (9,225,000
    )
    
    
    
    
    
    
    (9,225,000
    )Shares issued pursuant to Dividend Reinvestment Plan (1,000 shares)
    
    
    
    
    
    
    
    
    
    
    16,000
    
    
    
    
    
    
    
    
    
    
    
    11,000
    
    
    
    27,000Balance, March 31, 2010
    
    
    45,926,000
    
    
    $
    459,000
    
    
    $
    94,960,000
    
    
    $
    (60,000
    )
    
    $
    134,040,000
    
    
    $
    (19,346,000
    )
    
    $
    210,053,000
   -5-




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Basis of Reporting
       -6-




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Note 2  Acquisition
  Note 3  Goodwill and Other Intangible Assets
   Housekeeping
    
    
    DietarySegment
    
    
    Segment
    
    
    TotalBalance as of December 31, 2009
    
    $
    14,913,000
    
    
    $
    2,174,000
    
    
    $
    17,087,000Goodwill adjusted for final
purchase price adjustments
    
    
    (19,000
    )
    
    
    (113,000
    )
    
    
    (132,000
    )Balance as of March 31, 2010
    
    $
    14,894,000
    
    
    $
    2,061,000
    
    
    $
    16,955,000
   -7-




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March 31,
    
    
    December 31,2010
    
    
    2009Customer Relationships
    
    $
    12,400,000
    
    
    $
    12,100,000Non-compete Agreements
    
    
    800,000
    
    
    
    800,000Total other intangibles, gross
    
    $
    13,200,000
    
    
    $
    12,900,000Less accumulated amortization
    
    
    (4,535,000
    )
    
    
    (4,038,000
    )Other intangibles, net
    
    $
    8,665,000
    
    
    $
    8,862,000
  Customer
    
    
    Non-CompetePeriod/Year
    
    Relationships
    
    
    Agreements
    
    
    TotalApril 1 to December 31, 2010
    
    $
    1,350,000
    
    
    $
    75,000
    
    
    $
    1,425,0002011
    
    $
    1,771,000
    
    
    $
    100,000
    
    
    $
    1,871,0002012
    
    $
    1,771,000
    
    
    $
    100,000
    
    
    $
    1,871,0002013
    
    $
    1,452,000
    
    
    $
    100,000
    
    
    $
    1,552,0002014
    
    $
    814,000
    
    
    $
    67,000
    
    
    $
    881,0002015
    
    $
    814,000
    
    
    $
    
    
    
    $
    814,000
  Note 4  Fair Value Measurements and Marketable Securities
   -8-




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As of March 31, 2010Fair Value Measurement Using:Quoted Prices
    
    
    
    
    
    
    Significantin Active
    
    
    Significant Other
    
    
    UnobservableMarkets
    
    
    Observable Inputs
    
    
    InputsCarrying Amount
    
    
    Total Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Financial AssetsMarketable securitiesMunicipal bonds
    
    $
    43,901,000
    
    
    $
    43,901,000
    
    
    $
    
    
    
    $
    43,901,000
    
    
    $
    Equity securities  Deferred comp fund
    
    $
    11,553,000
    
    
    $
    11,553,000
    
    
    $
    7,740,000
    
    
    $
    3,813,000
    
    
    $
    
 As of December 31, 2009Fair Value Measurement Using:Quoted Prices
    
    
    
    
    
    
    Significantin Active
    
    
    Significant Other
    
    
    UnobservableMarkets
    
    
    Observable Inputs
    
    
    InputsCarrying Amount
    
    
    Total Fair Value
    
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)Financial AssetsMarketable securitiesMunicipal bonds
    
    $
    52,648,000
    
    
    $
    52,648,000
    
    
    $
    
    
    
    $
    52,648,000
    
    
    $
    Equity securities  Deferred comp fund
    
    $
    10,783,000
    
    
    $
    10,783,000
    
    
    $
    7,195,000
    
    
    $
    3,588,000
    
    
    $
    
  Gross
    
    
    Gross
    
    
    
    
    
    
    Other-than-Unrealized
    
    
    Unrealized
    
    
    Estimated Fair
    
    
    temporaryMarch 31, 2010
    

Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    ImpairmentsType of security:Municipal bonds
    
    $
    33,254,000
    
    
    $
    1,054,000
    
    
    $
    
    
    
    $
    34,308,000
    
    
    $
    Municipal bonds  Available for Sale
    
    
    9,653,000
    
    
    
    
    
    
    
    (60,000
    )
    
    
    9,593,000
    
    
    
    Total debt securities
    
    $
    42,907,000
    
    
    $
    1,054,000
    
    
    $
    (60,000
    )
    
    $
    43,901,000
    
    
    $
    
 Gross
    
    
    Gross
    
    
    
    
    
    
    Other-than-Unrealized
    
    
    Unrealized
    
    
    Estimated Fair
    
    
    temporaryDecember 31, 2009
    

Amortized Cost
    
    
    Gains
    
    
    Losses
    
    
    Value
    
    
    ImpairmentsType of security:Municipal bonds
    
    $
    50,997,000
    
    
    $
    1,651,000
    
    
    $
    
    
    
    $
    52,648,000
    
    
    $
    Municipal bonds  Available for Sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total debt securities
    
    $
    50,997,000
    
    
    $
    1,651,000
    
    
    $
    
    
    
    $
    52,648,000
    
    
    $
    
  -9-




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Contractual maturity:
    
    March 31, 2010
    
    
    December 31, 2009Maturing in one year or less
    
    $
    33,000
    
    
    $
    Maturing after one year through three years
    
    
    2,215,000
    
    
    
    Maturing after three years
    
    
    7,345,000
    
    
    
    Total available for sale debt securities
    
    $
    9,593,000
    
    
    $
    
 Note 5  Other Contingencies
      -10-




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Note 6  Segment Information
 Reportable Operating Segments
    -11-




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Housekeeping
    
    
    
    
    
    
    Corporate andServices
    
    
    Dietary Services
    
    
    Eliminations
    
    
    TotalQuarter Ended March 31, 2010Revenues
    
    $
    140,896,000
    
    
    $
    42,954,000
    
    
    $
    (49,000
    )(1)
    
    $
    183,801,000Income before income taxes
    
    
    14,858,000
    
    
    
    2,190,000
    
    
    
    (4,971,000
    )(1)
    
    
    12,077,000Quarter Ended March 31, 2009Revenues
    
    $
    123,913,000
    
    
    $
    34,359,000
    
    
    $
    2,137,000
    (1)
    
    $
    160,409,000Income before income taxes
    
    
    12,327,000
    
    
    
    1,312,000
    
    
    
    (1,061,000
    )(1)
    
    
    12,578,000
 (1)
    
    represents primarily corporate office cost and related overhead, recording of
transactions at the reportable segment level which use methods other than generally
acceptable accounting principles and consolidated subsidiaries operating expenses that are
not allocated to the reportable segments, net of investment and interest income. Total Revenues from Clients
  Quarter Ended March 31,2010
    
    
    2009Housekeeping services
    
    $
    94,655,000
    
    
    $
    86,730,000Laundry and linen services
    
    
    45,535,000
    
    
    
    38,906,000Dietary services
    
    
    43,087,000
    
    
    
    34,227,000Maintenance services and other
    
    
    524,000
    
    
    
    546,000$
    183,801,000
    
    
    $
    160,409,000
 Major Client
  Quarter Ended March 31,2010
    
    
    2009Total revenues
    
    
    11
    %
    
    
    14
    %Housekeeping
    
    
    12
    %
    
    
    14
    %Dietary services
    
    
    10
    %
    
    
    13
    %
  -12-




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Note 7  Earnings Per Common Share
  Quarter ended March 31, 2010Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    7,428,000Basic earnings per common share
    
    $
    7,428,000
    
    
    
    43,899,000
    
    
    $
    .17Effect of dilutive securitiesOptions
    
    
    
    
    
    
    760,000Diluted earnings per common share
    
    $
    7,428,000
    
    
    
    44,659,000
    
    
    $
    .17
 Quarter ended March 31, 2009Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    7,736,000Basic earnings per common share
    
    $
    7,736,000
    
    
    
    43,457,000
    
    
    $
    .18Effect of dilutive securitiesOptions
    
    
    
    
    
    
    616,000Diluted earnings per common share
    
    $
    7,736,000
    
    
    
    44,073,000
    
    
    $
    .18
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Note 8  Dividends
  Note 9  Share-Based Compensation
 Stock Options
  WeightedAverageWeighted
    
    
    
    
    
    
    Remaining
    
    
    AggregateAverage
    
    
    Number of
    
    
    Contractual
    
    
    IntrinsicPrice
    
    
    Shares
    
    
    Life (In Years)
    
    
    ValueOutstanding, January 1, 2010
    
    $
    11.33
    
    
    
    2,049,000Granted
    
    
    21.46
    
    
    
    445,000Cancelled
    
    
    17.37
    
    
    
    (4,000
    )Exercised
    
    
    6.47
    
    
    
    (137,000
    )Outstanding, March 31, 2010
    
    $
    13.51
    
    
    
    2,353,000
    
    
    
    5.91
    
    
    $
    20,999,000Options exercisable as of March 31, 2010
    
    
    
    
    
    
    1,373,000
    
    
    
    3.70
    
    
    $
    18,008,000
  Options Outstanding
    
    

Options ExercisableAverageRemaining
    
    
    Weighted
    
    
    
    
    
    
    WeightedNumber
    
    
    Contractual
    
    
    Average
    
    
    Number
    
    
    AverageExercise Price Range
    
    Outstanding
    
    
    Life
    
    
    Exercise price
    
    
    Exercisable
    
    
    Exercise Price$1.50  2.74
    
    
    163,000
    
    
    
    1.65
    
    
    $
    2.70
    
    
    
    163,000
    
    
    $
    2.703.01  5.53
    
    
    466,000
    
    
    
    3.30
    
    
    
    4.84
    
    
    
    466,000
    
    
    
    4.849.10  9.10
    
    
    275,000
    
    
    
    4.74
    
    
    
    9.10
    
    
    
    275,000
    
    
    
    9.1013.81  15.58
    
    
    655,000
    
    
    
    5.71
    
    
    
    14.90
    
    
    
    330,000
    
    
    
    14.23$20.89  21.46
    
    
    794,000
    
    
    
    8.88
    
    
    
    21.21
    
    
    
    139,000
    
    
    
    20.892,353,000
    
    
    
    5.91
    
    
    $
    13.51
    
    
    
    1,373,000
    
    
    $
    9.32
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March 31, 2010
    
    
    March 31, 2009Weighted average grant-date fair value of stock options granted:
    
    $
    2,176,000
    
    
    $
    1,545,000Total fair value of stock options vested:
    
    $
    681,000
    
    
    $
    447,000Total intrinsic value of stock options exercised:
    
    $
    2,048,000
    
    
    $
    122,000Total pre-tax stock-based compensation expense charged against income:
    
    $
    190,000
    
    
    $
    177,000Total unrecognized compensation expense related to non-vested options:
    
    $
    4,181,000
    
    
    $
    2,970,000
   2010
    
    
    2009Risk-free interest rate
    
    
    2.5
    %
    
    
    2.5
    %Expected volatility
    
    
    42.1
    %
    
    
    41.0
    %Weighted average expected life in years
    
    
    4.5
    
    
    
    4.5Dividend yield
    
    
    3.5
    %
    
    
    3.6
    %
 Employee Stock Purchase Plan
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##### Table of Contents



2010
    
    
    2009Risk-free interest rate
    
    
    0.2
    %
    
    
    0.2
    %Expected volatility
    
    
    34.0
    %
    
    
    62.9
    %Weighted average expected life in years
    
    
    1.0
    
    
    
    1.0Dividend yield
    
    
    3.5
    %
    
    
    3.6
    %
  Note 10  Related Party Transactions
   Note 11 Income Taxes
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Note 12  Recently Issued Accounting Pronouncements
    Note 13  Subsequent Event
   -17-




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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 Cautionary Statement Regarding Forward Looking Statements
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RESULTS OF OPERATIONS
  Overview
       -19-




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Consolidated Operations
  Relation to Consolidated RevenuesFor the Quarter Ended March 31,2010
    
    
    2009Revenues
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    86.3
    
    
    
    86.0Selling, general and administrative
    
    
    7.6
    
    
    
    6.8Investment and interest
    
    
    0.4
    
    
    
    0.6Income before income taxes
    
    
    6.5
    
    
    
    7.8Income taxes
    
    
    2.5
    
    
    
    3.0Net Income
    
    
    4.0
    %
    
    
    4.8
    %
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2010 First Quarter Compared with 2009 First Quarter
  Reportable Segments% inc./
    
    
    Corporate and
    
    
    Housekeeping
    
    
    
    
    
    
    DietaryConsolidated
    
    
    (dec.)
    
    
    Eliminations
    
    
    Amount
    
    
    % inc.
    
    
    Amount
    
    
    % inc.Revenues
    
    $
    183,801,000
    
    
    
    14.6
    %
    
    $
    (49,000
    )
    
    $
    140,896,000
    
    
    
    13.7
    %
    
    $
    42,954,000
    
    
    
    25.0
    %Cost of services provided
    
    
    158,573,000
    
    
    
    15.0
    
    
    
    (8,229,000
    )
    
    
    126,038,000
    
    
    
    13.0
    
    
    
    40,764,000
    
    
    
    23.4Selling, general and
administrative
    
    
    13,901,000
    
    
    
    27.8
    
    
    
    13,901,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    750,000
    
    
    
    (20.0
    )
    
    
    750,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    12,077,000
    
    
    
    (4.0
    )%
    
    
    (4,971,000
    )
    
    $
    14,858,000
    
    
    
    20.5
    %
    
    $
    2,190,000
    
    
    
    66.9
    %
 Revenues
 Consolidated
   Reportable Segments
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Costs of services provided
 Consolidated
  Cost of Services Provided-Key Indicators
    

2010 %
    
    

2009 %
    
    

(Decr) %Bad debt provision
    
    
    0.3
    
    
    
    0.4
    
    
    
    (0.1
    )Workers compensation and general liability insurance
    
    
    3.7
    
    
    
    3.8
    
    
    
    (0.1
    )
  Reportable Segments
   Cost of Services Provided-Key Indicators
    

2010 %
    
    

2009 %
    
    

Incr (Decr) %Housekeeping labor and other labor costs
    
    
    80.3
    
    
    
    81.2
    
    
    
    (0.9
    )Housekeeping supplies
    
    
    6.6
    
    
    
    6.2
    
    
    
    0.4Dietary labor and other labor costs
    
    
    53.1
    
    
    
    52.5
    
    
    
    0.6Dietary supplies
    
    
    39.1
    
    
    
    41.5
    
    
    
    (2.4
    )
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Consolidated Selling, General and Administrative Expense
 Quarter endedMarch 31, 2010
    
    
    March 31, 2009
    
    
    % GrowthSelling, general and administrative expense w/o
deferred compensation change
    
    (a)
    
    $
    13,507,000
    
    
    $
    11,134,000
    
    
    
    21.3
    %Gain/(Loss) Deferred Compensation fund
    
    
    
    
    394,000
    
    
    
    (258,000
    )
    
    
    252.7
    %Consolidated selling, general and administrative expense
    
    (b)
    
    $
    13,901,000
    
    
    $
    10,876,000
    
    
    
    27.8
    %
 (a)
    
    Selling, general and administrative expense excluding the
change in the market value of the Deferred Compensation Fund.(b)
    
    Consolidated selling, general and administrative expense reported for the period
presented.  Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
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Consolidated Income Taxes
  Consolidated Net Income
  Critical Accounting Policies and Estimates
    Allowance for Doubtful Accounts
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Aggregate Accountof Balances of Clientsin Bankruptcy or in/or
    
    
    
    
    
    
    
    
    
    
    Allowance forPending Collection/
    
    
    Net Write-offs of
    
    
    Bad Debt
    
    
    DoubtfulPeriod Ended
    
    Litigation
    
    
    Client Accounts
    
    
    Provision
    
    
    AccountsMarch 31, 2010
    
    $
    10,058,000
    
    
    $
    444,000
    
    
    $
    600,000
    
    
    $
    4,796,000December 31, 2009
    
    
    9,874,000
    
    
    
    978,000
    
    
    
    2,404,000
    
    
    
    4,640,000
    -26-




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Accrued Insurance Claims
    Asset Valuations and Review for Potential Impairment
   -27-




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Liquidity and Capital Resources
  Operating Activities
  Investing Activities
  Financing Activities
    -28-




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##### Table of Contents



Line of Credit
   Covenant Description and Requirement
    
    Status at March 31, 2010Commitment coverage ratio: cash and cash
equivalents plus marketable securities must equal
or exceed outstanding obligations under the line
by a multiple of 2
    
    
    2.05Tangible net work: must exceed $171,000,000
    
    $
    184,000,000
  Accounts and Notes Receivable
   -29-




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-30-




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Insurance Programs
     Capital Expenditures
  Material Off-Balance Sheet Arrangements
  Effects of Inflation
   -31-




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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
   
 ITEM 4. CONTROLS AND PROCEDURES.
 Evaluation of Disclosure Controls and Procedures
    Certifications
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PART II. OTHER INFORMATION
 
 ITEM
1 Legal Proceedings.
  
 ITEM
1A. Risk Factors.
 Form 10-K
 
 ITEM
2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 ITEM 3 Defaults under Senior Securities.
  
 ITEM
4. (Removed and Reserved).
 
 ITEM 5. Other Information.
 a)
    
    On January 4, 2010, certain executive officers and directors were granted stock options
for 108,000 shares, in the aggregate, at the then current fair market value of $21.46 per
share.
 ITEM
6. Exhibits.
 b)
    
    Exhibits -
 31.1
    
    
    Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200231.2
    
    
    Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
    
    
    Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 135032.2
    
    
    Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
  -33-




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SIGNATURES
  HEALTHCARE SERVICES GROUP, INC.April 19, 2010

Date
    
    /s/ Daniel P. McCartney

DANIEL P. McCARTNEY, Chief
Executive OfficerApril 19, 2010

Date
    
    /s/ Richard W. Hudson

RICHARD W. HUDSON, Chief
Financial Officer and Secretary
  -34-