UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D. C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2009
 OR
 o
    
    TRANSISTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission File Number 0-120152
 HEALTHCARE SERVICES GROUP, INC.
  Pennsylvania
    
    23-2018365(State or other jurisdiction of 
incorporation or organization)
    
    (IRS Employer Identification
number)
 3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania
    
    19020(Address of principal executive office)
    
    (Zip code)
 215-639-4274
  þ o
  o þ
  Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o  o þ




---



##### 



INDEX
 PAGE NO.PART I.
    
    FINANCIAL INFORMATIONItem 1.
    
    Financial Statements (Unaudited)Consolidated Balance Sheets as of
June 30, 2009 and December 31, 2008
    
    
    2Consolidated Statements of Income for the Three
Months Ended June 30, 2009 and June 30, 2008
    
    
    3Consolidated Statements of Income for the Six
Months Ended June 30, 2009 and June 30, 2008
    
    
    4Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2009 and June 30, 2008
    
    
    5Consolidated Statement of Stockholders Equity for
the Six Months Ended June 30, 2009
    
    
    6Notes To Consolidated Financial Statements
    
    
    7  19Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results Of Operations
    
    
    20  35Item 3.
    
    Quantitative and Qualitative Disclosure About Market
Risk
    
    
    36Item 4.
    
    Controls and Procedures
    
    
    36Part II.
    
    Other InformationItem 1.
    
    Legal Proceedings
    
    
    37Item 1A.
    
    Risk Factors
    
    
    37Item 2.
    
    Unregistered Sales of Equity Securities and Use of
Proceeds
    
    
    37Item 3.
    
    Defaults Upon Senior Securities
    
    
    37Item 4.
    
    Submission of Matters to a Vote of Security
Holders
    
    
    37Item 5.
    
    Other Information
    
    
    37Item 6
    
    Exhibits
    
    
    38Signatures
    
    
    39
  -1-




---



##### 



Consolidated Balance Sheets
 (Unaudited)June 30,
    
    
    December 31,2009
    
    
    2008ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    24,539,000
    
    
    $
    37,501,000Marketable securities, at fair value
    
    $
    52,651,000
    
    
    $
    49,414,000Accounts and notes receivable, less allowance for doubtful
accounts of $3,950,000 in 2009 and $3,214,000 in 2008
    
    
    105,689,000
    
    
    
    96,558,000Prepaid income taxes
    
    
    1,239,000
    
    
    
    2,838,000Inventories and supplies
    
    
    16,544,000
    
    
    
    16,079,000Prepaid expenses and other
    
    
    4,769,000
    
    
    
    4,225,000Total current assets
    
    
    205,431,000
    
    
    
    206,615,000PROPERTY AND EQUIPMENT:Laundry and linen equipment installations
    
    
    1,785,000
    
    
    
    1,767,000Housekeeping equipment and office furniture
    
    
    16,347,000
    
    
    
    16,365,000Autos and trucks
    
    
    278,000
    
    
    
    93,00018,410,000
    
    
    
    18,225,000Less accumulated depreciation
    
    
    14,299,000
    
    
    
    14,296,0004,111,000
    
    
    
    3,929,000GOODWILL
    
    
    17,054,000
    
    
    
    15,020,000OTHER INTANGIBLE ASSETS, Less accumulated amortization of
$3,124,000 in 2009 and $2,466,000 in 2008
    
    
    9,776,000
    
    
    
    5,033,000NOTES RECEIVABLE- long term portion, net of discount
    
    
    6,466,000
    
    
    
    3,202,000DEFERRED COMPENSATION FUNDING, at fair value
    
    
    9,157,000
    
    
    
    8,287,000DEFERRED INCOME TAXES- long term portion
    
    
    7,049,000
    
    
    
    6,386,000OTHER NONCURRENT ASSETS
    
    
    68,000
    
    
    
    89,000TOTAL ASSETS
    
    $
    259,112,000
    
    
    $
    248,561,000LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Accounts payable
    
    $
    9,385,000
    
    
    $
    9,301,000Accrued payroll, accrued and withheld payroll taxes
    
    
    15,140,000
    
    
    
    14,365,000Other accrued expenses
    
    
    1,280,000
    
    
    
    679,000Deferred income taxes
    
    
    670,000
    
    
    
    754,000Accrued insurance claims
    
    
    4,385,000
    
    
    
    3,943,000Total current liabilities
    
    
    30,860,000
    
    
    
    29,042,000ACCRUED INSURANCE CLAIMS- long term portion
    
    
    10,233,000
    
    
    
    9,201,000DEFERRED COMPENSATION LIABILITY
    
    
    9,319,000
    
    
    
    8,636,000COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, $.01 par value: 100,000,000 shares authorized,
45,641,000 shares issued in 2009 and 45,563,000 in 2008
    
    
    457,000
    
    
    
    456,000Additional paid in capital
    
    
    90,046,000
    
    
    
    84,421,000Retained earnings
    
    
    138,078,000
    
    
    
    137,741,000Common stock in treasury, at cost, 2,216,000 shares in 2009 and
2,335,000 in 2008
    
    
    (19,881,000
    )
    
    
    (20,936,000
    )Total stockholders equity
    
    
    208,700,000
    
    
    
    201,682,000TOTAL LIABILITITIES AND STOCKHOLDERS EQUITY
    
    $
    259,112,000
    
    
    $
    248,561,000
  -2-




---



##### 



Consolidated Statements of Income  (Unaudited)
 For the Three Months Ended June 30,2009
    
    
    2008Revenues
    
    $
    170,896,000
    
    
    $
    147,918,000Operating costs and expenses:Costs of services provided
    
    
    145,830,000
    
    
    
    127,074,000Selling, general and administrative
    
    
    13,516,000
    
    
    
    10,124,000Other Income :Investment and interest
    
    
    1,157,000
    
    
    
    585,000Income before income taxes
    
    
    12,707,000
    
    
    
    11,305,000Income taxes
    
    
    4,892,000
    
    
    
    4,352,000Net Income
    
    $
    7,815,000
    
    
    $
    6,953,000Basic earnings per Common Share
    
    $
    0.18
    
    
    $
    0.16Diluted earnings per Common Share
    
    $
    0.18
    
    
    $
    0.16Cash dividends per Common Share
    
    $
    0.18
    
    
    $
    0.14Basic weighted average number of
Common Shares outstanding
    
    
    43,537,000
    
    
    
    43,080,000Diluted weighted average number of
Common Shares outstanding
    
    
    44,262,000
    
    
    
    43,962,000
  -3-




---



##### 



Consolidated Statements of Income  (Unaudited)
 For the Six Months Ended June 30,2009
    
    
    2008Revenues
    
    $
    331,305,000
    
    
    $
    295,177,000Operating costs and expenses:Costs of services provided
    
    
    283,722,000
    
    
    
    252,928,000Selling, general and
administrative
    
    
    24,392,000
    
    
    
    20,703,000Other Income :Investment and interest
    
    
    2,094,000
    
    
    
    909,000Income before income taxes
    
    
    25,285,000
    
    
    
    22,455,000Income taxes
    
    
    9,734,000
    
    
    
    8,645,000Net Income
    
    $
    15,551,000
    
    
    $
    13,810,000Basic earnings per Common Share
    
    $
    0.36
    
    
    $
    0.32Diluted earnings per Common Share
    
    $
    0.35
    
    
    $
    0.31Cash dividends per Common Share
    
    $
    0.35
    
    
    $
    0.27Basic weighted average number of
Common Shares outstanding
    
    
    43,497,000
    
    
    
    43,048,000Diluted weighted average number of
Common Shares outstanding
    
    
    44,168,000
    
    
    
    44,088,000
  -4-




---



##### 



Consolidated Statements of Cash Flows
 (Unaudited)For the Six Months EndedJune 30,2009
    
    
    2008Cash flows from operating activities:Net Income
    
    $
    15,551,000
    
    
    $
    13,810,000Adjustments to reconcile net income
to net cash provided by operating activities:Depreciation and amortization
    
    
    1,513,000
    
    
    
    1,494,000Bad debt provision
    
    
    1,450,000
    
    
    
    850,000Deferred income taxes (benefits)
    
    
    (747,000
    )
    
    
    46,000Stock-based compensation expense
    
    
    499,000
    
    
    
    381,000Amortization of premium on marketable securities
    
    
    464,000Unrealized gain on marketable securities
    
    
    (373,000
    )Unrealized loss (gain) on deferred compensation fund
investments
    
    
    (522,000
    )
    
    
    491,000Changes in operating assets and liabilities:Accounts and notes receivable
    
    
    (10,581,000
    )
    
    
    (5,446,000
    )Prepaid income taxes
    
    
    1,599,000
    
    
    
    Inventories and supplies
    
    
    (190,000
    )
    
    
    (290,000
    )Notes receivable- long term portion
    
    
    (3,264,000
    )
    
    
    480,000Deferred compensation funding
    
    
    (348,000
    )
    
    
    134,000Accounts payable and other accrued expenses
    
    
    656,000
    
    
    
    (1,154,000
    )Accrued payroll, accrued and withheld payroll taxes
    
    
    293,000
    
    
    
    1,340,000Accrued insurance claims
    
    
    1,474,000
    
    
    
    (634,000
    )Deferred compensation liability
    
    
    1,037,000
    
    
    
    (435,000
    )Income taxes payable
    
    
    
    
    
    
    (418,000
    )Prepaid expenses and other assets
    
    
    6,552,000
    
    
    
    (1,135,000
    )Net cash provided by operating activities
    
    
    15,063,000
    
    
    
    9,514,000Cash flows from investing activities:Disposals of fixed assets
    
    
    211,000
    
    
    
    82,000Additions to property and equipment
    
    
    (1,064,000
    )
    
    
    (729,000
    )Purchases of marketable securities, net
    
    
    (3,329,000
    )Cash paid for acquisition
    
    
    (4,613,000
    )
    
    
    Net cash used in investing activities
    
    
    (8,795,000
    )
    
    
    (647,000
    )Cash flows from financing activities:Acquisition of treasury stock
    
    
    
    
    
    
    (4,551,000
    )Dividends paid
    
    
    (15,214,000
    )
    
    
    (11,603,000
    )Repayment of debt assumed in acquisition
    
    
    (4,718,000
    )
    
    
    Reissuance of treasury stock pursuant to Dividend Reinvestment
Plan
    
    
    43,000
    
    
    
    31,000Proceeds from the exercise of stock options
    
    
    423,000
    
    
    
    2,407,000Tax benefit from equity compensation plans
    
    
    236,000
    
    
    
    3,135,000Net cash used in financing activities
    
    
    (19,230,000
    )
    
    
    (10,581,000
    )Net decrease in cash and cash equivalents
    
    
    (12,962,000
    )
    
    
    (1,714,000
    )Cash and cash equivalents at beginning of the period
    
    
    37,501,000
    
    
    
    92,461,000Cash and cash equivalents at end of the period
    
    $
    24,539,000
    
    
    $
    90,747,000Supplementary Cash Flow Information:Cash payments for income taxes, net of refunds
    
    $
    8,646,000
    
    
    $
    5,883,000Issuance of 66,000 shares of Common Stock related to acquisition
    
    $
    4,494,000
    
    
    $
    Issuance of 49,000 shares of Common Stock in 2009 and
61,000 shares of Common Stock in 2008 pursuant to
Employee Stock Plans
    
    $
    777,000
    
    
    $
    1,293,000
  -5-




---



##### 



For the Six Months Ended June 30, 2009AdditionalCommon Stock
    
    
    Paid-in
    
    
    Retained
    
    
    Treasury
    
    
    StockholdersShares
    
    
    Amount
    
    
    Capital
    
    
    Earnings
    
    
    Stock
    
    
    EquityBalance, December 31, 2008
    
    
    45,563,000
    
    
    $
    456,000
    
    
    $
    84,421,000
    
    
    $
    137,741,000
    
    
    
    ($20,936,000
    )
    
    $
    201,682,000Net income for the period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15,551,000
    
    
    
    
    
    
    
    15,551,000Exercise of stock options and other stock-based compensation,
net of 2,000 shares tendered for payment
    
    
    78,000
    
    
    
    1,000
    
    
    
    422,000
    
    
    
    
    
    
    
    
    
    
    
    423,000Share-based compensation expense  stock options
    
    
    
    
    
    
    
    
    
    
    354,000
    
    
    
    
    
    
    
    
    
    
    
    354,000Tax benefit arising from Stock Plans transactions
    
    
    
    
    
    
    
    
    
    
    236,000
    
    
    
    
    
    
    
    
    
    
    
    236,000Treasury shares issued for Deferred Compensation Plan
funding and redemptions (21,000 shares)
    
    
    
    
    
    
    
    
    
    
    339,000
    
    
    
    
    
    
    
    15,000
    
    
    
    354,000Shares issued pursuant to Employee Stock Plans (49,000
shares)
    
    
    
    
    
    
    
    
    
    
    351,000
    
    
    
    
    
    
    
    426,000
    
    
    
    777,000Cash dividends  $.35 per common share
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (15,214,000
    )
    
    
    
    
    
    
    (15,214,000
    )Shares issued pursuant to Dividend Reinvestment Plan (3,000 shares)
    
    
    
    
    
    
    
    
    
    
    20,000
    
    
    
    
    
    
    
    23,000
    
    
    
    43,000Shares issued pursuant to acquisition (66,000)
    
    
    
    
    
    
    
    
    
    
    3,903,000
    
    
    
    
    
    
    
    591,000
    
    
    
    4,494,000Balance, June 30, 2009
    
    
    45,641,000
    
    
    $
    457,000
    
    
    $
    90,046,000
    
    
    $
    138,078,000
    
    
    
    ($19,881,000
    )
    
    $
    208,700,000
  -6-




---



##### 



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1   Basis of Reporting
     -7-




---



##### 



Note 2  Fair Value Measurements and Marketable Securities
  As of June 30, 2009Fair Value Measurement Using:SignificantQuoted Prices
    
    Other
    
    Significantin Active
    
    Observable
    
    UnobservableCarrying
    
    
    
    
    
    Markets
    
    Inputs
    
    InputsAmount
    
    Total Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Financial AssetsMarketable Securities
    
    $
    52,651,000
    
    
    $
    52,651,000
    
    
    $
    52,651,000
    
    
    $
    
    
    
    $
    Deferred Compensation
Funding
    
    $
    9,157,000
    
    
    $
    9,157,000
    
    
    $
    9,157,000
    
    
    $
    
    
    
    $
    
 As of December 31, 2008Fair Value Measurement Using:SignificantQuoted Prices
    
    Other
    
    Significantin Active
    
    Observable
    
    UnobservableCarrying
    
    
    
    
    
    Markets
    
    Inputs
    
    InputsAmount
    
    Total Fair Value
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Financial AssetsMarketable Securities
    
    $
    49,414,000
    
    
    $
    49,414,000
    
    
    $
    49,414,000
    
    
    $
    
    
    
    $
    Deferred Compensation
Funding
    
    $
    8,287,000
    
    
    $
    8,287,000
    
    
    $
    8,287,000
    
    
    $
    
    
    
    $
    
  -8-




---



##### 



Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedJune 30, 2009
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueType of security:Marketable Securities
    
    $
    51,132,000
    
    
    $
    1,519,000
    
    
    $
    
    
    
    $
    52,651,000
 Gross
    
    GrossAmortized
    
    Unrealized
    
    Unrealized
    
    EstimatedDecember 31, 2008
    
    Cost
    
    Gains
    
    Losses
    
    Fair ValueType of security:Marketable Securities
    
    $
    48,268,000
    
    
    $
    1,146,000
    
    
    $
    
    
    
    $
    49,414,000
  Note 3   Goodwill and Other Intangible Assets
   Acquisition
    
    
    Amortization ExpenseAmount
    
    
    2ndQuarter
    
    
    Six MonthsCustomer Relationships
    
    $
    12,100,000
    
    
    $
    368,000
    
    
    $
    607,000Non-compete Agreements
    
    
    800,000
    
    
    
    25,000
    
    
    
    50,000Total
    
    $
    12,900,000
    
    
    $
    393,000
    
    
    $
    657,000
 -9-




---



##### 



Customer
    
    Non-CompetePeriod/Year
    
    Relationships
    
    Agreements
    
    TotalJuly 1 to
December 31, 2009
    
    $
    864,000
    
    
    $
    50,000
    
    
    $
    914,0002010
    
    $
    1,729,000
    
    
    $
    100,000
    
    
    $
    1,829,0002011
    
    $
    1,729,000
    
    
    $
    100,000
    
    
    $
    1,829,0002012
    
    $
    1,729,000
    
    
    $
    100,000
    
    
    $
    1,829,0002013
    
    $
    1,410,000
    
    
    $
    100,000
    
    
    $
    1,510,000
  CES
    
    Summit
    
    All other
    
    Total$2,034,000
    
    $
    13,408,000
    
    
    $
    1,612,000
    
    
    $
    17,054,000
  Segment
    
    AmountFood
    
    $
    2,380,000Housekeeping
    
    
    14,674,000Total
    
    $
    17,054,000
 Note 4   Other Contingencies
   -10-




---



##### 



Note 5   Segment Information
 Reportable Operating Segments
   -11-




---



##### 



Housekeeping
    
    Food
    
    Corporate andservices
    
    services
    
    eliminations
    
    TotalQuarter Ended June 30, 2009Revenues
    
    $
    131,484,000
    
    
    $
    39,440,000
    
    
    $
    (28,000
    )
    
    $
    170,896,000Income before income taxes
    
    $
    11,754,000
    
    
    $
    2,007,000
    
    
    $
    (1,054,000
    )(1)
    
    $
    12,707,000Quarter Ended June 30, 2008Revenues
    
    $
    119,952,000
    
    
    $
    27,592,000
    
    
    $
    374,000
    
    
    $
    147,918,000Income before income taxes
    
    $
    11,227,000
    
    
    $
    701,000
    
    
    $
    (623,000
    )(1)
    
    $
    11,305,000Six Months Ended June 30, 2009Revenues
    
    $
    256,936,000
    
    
    $
    74,244,000
    
    
    $
    125,000
    
    
    $
    331,305,000Income before income taxes
    
    $
    25,620,000
    
    
    $
    3,763,000
    
    
    $
    (4,098,000
    )(1)
    
    $
    25,285,000Six Months Ended June 30, 2008Revenues
    
    $
    239,470,000
    
    
    $
    54,833,000
    
    
    $
    874,000
    
    
    $
    295,177,000Income before income taxes
    
    $
    23,043,000
    
    
    $
    1,979,000
    
    
    $
    (2,567,000
    )(1)
    
    $
    22,455,000
 
 (1)
    
    represents primarily corporate office cost and related overhead, as well as
consolidated subsidiarys operations that are not allocated to the reportable segments. Total Revenues from Clients
  For the Quarter Ended June 30,2009
    
    
    2008Housekeeping services
    
    $
    88,412,000
    
    
    $
    82,257,000Laundry and linen services
    
    
    41,834,000
    
    
    
    37,365,000Food Services
    
    
    39,995,000
    
    
    
    27,703,000Maintenance services
and Other
    
    
    655,000
    
    
    
    593,000$
    170,896,000
    
    
    $
    147,918,000
 -12-




---



##### 



For the Six Months Ended June 30,2009
    
    
    2008Housekeeping services
    
    $
    175,142,000
    
    
    $
    164,875,000Laundry and linen services
    
    
    80,740,000
    
    
    
    74,207,000Food Services
    
    
    74,222,000
    
    
    
    55,010,000Maintenance services
and Other
    
    
    1,201,000
    
    
    
    1,085,000$
    331,305,000
    
    
    $
    295,177,000
 Major Client
  2009
    
    2009Six months
    
    2nd quarterTotal revenues
    
    
    13
    %
    
    
    13
    %Housekeeping
    
    
    13
    %
    
    
    13
    %Food
    
    
    12
    %
    
    
    11
    %
 2008
    
    2008Six months
    
    2nd quarterTotal revenues
    
    
    15
    %
    
    
    15
    %Housekeeping
    
    
    14
    %
    
    
    14
    %Food
    
    
    19
    %
    
    
    18
    %
  Note 6   Earnings Per Common Share
  Quarter Ended June 30, 2009Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    7,815,000Basic earnings per
common share
    
    $
    7,815,000
    
    
    
    43,537,000
    
    
    $
    .18Effect of dilutive securities:Options
    
    
    
    
    
    
    725,000Diluted earnings per
common share
    
    $
    7,815,000
    
    
    
    44,262,000
    
    
    $
    .18
 -13-




---



##### 



Quarter Ended June 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    6,953,000Basic earnings per
common share
    
    $
    6,953,000
    
    
    
    43,080,000
    
    
    $
    .16Effect of dilutive securities:Options
    
    
    
    
    
    
    882,000Diluted earnings per
common share
    
    $
    6,953,000
    
    
    
    43,962,000
    
    
    $
    .16
 Six Months Ended June 30, 2009Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    15,551,000Basic earnings per
common share
    
    $
    15,551,000
    
    
    
    43,497,000
    
    
    $
    .36Effect of dilutive securities:Options
    
    
    
    
    
    
    671,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    15,551,000
    
    
    
    44,168,000
    
    
    $
    .35
 Six Months Ended June 30, 2008Income
    
    
    Shares
    
    
    Per-share(Numerator)
    
    
    (Denominator)
    
    
    AmountNet income
    
    $
    13,810,000Basic earnings per
common share
    
    $
    13,810,000
    
    
    
    43,048,000
    
    
    $
    .32Effect of dilutive securities:Options
    
    
    
    
    
    
    1,040,000
    
    
    
    (.01
    )Diluted earnings per
common share
    
    $
    13,810,000
    
    
    
    44,088,000
    
    
    $
    .31
   Note 7  Dividends
  -14-




---



##### 



1st Quarter
    
    2nd QuarterCash dividend per common share
    
    $
    .17
    
    
    $
    .18Total cash dividends paid
    
    $
    7,388,000
    
    
    $
    7,826,000Record date
    
    February 6
    
    April 24Payment date
    
    February 20
    
    May 15
  Note 8  Share-Based Compensation
 Stock Options
  WeightedAverageRemainingWeighted
    
    
    
    
    
    
    Contractual
    
    
    AggregateAverage
    
    
    Number
    
    
    Life
    
    
    IntrinsicPrice
    
    
    of Shares
    
    
    (In Years)
    
    
    ValueOutstanding, January 1, 2009
    
    $
    10.14
    
    
    
    1,896,000Granted
    
    
    15.58
    
    
    
    421,000Cancelled
    
    
    19.35
    
    
    
    (24,000
    )Exercised
    
    
    5.63
    
    
    
    (80,000
    )Outstanding, June 30, 2009
    
    $
    11.24
    
    
    
    2,213,000
    
    
    
    5.46
    
    
    $
    15,772,000Options exercisable as of
June 30, 2009
    
    
    
    
    
    
    1,515,000
    
    
    
    3.78
    
    
    $
    14,820,000
  Options Outstanding
    
    
    Options ExercisableAverage
    
    
    Weighted
    
    
    
    
    
    
    WeightedRemaining
    
    
    Average
    
    
    
    
    
    
    AverageExercise
    
    Number
    
    
    Contractual
    
    
    Exercise
    
    
    Number
    
    
    ExercisePrice Range
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Exercisable
    
    
    Price$1.50 - 2.74
    
    
    189,000
    
    
    
    2.31
    
    
    $
    2.64
    
    
    
    189,000
    
    
    $
    2.643.01 - 5.53
    
    
    584,000
    
    
    
    4.03
    
    
    
    4.78
    
    
    
    584,000
    
    
    
    4.789.10 - 9.10
    
    
    332,000
    
    
    
    5.49
    
    
    
    9.10
    
    
    
    332,000
    
    
    
    9.1013.81 -15.58
    
    
    753,000
    
    
    
    5.91
    
    
    
    14.78
    
    
    
    339,000
    
    
    
    13.81$20.89 -20.89
    
    
    355,000
    
    
    
    8.51
    
    
    
    20.89
    
    
    
    71,000
    
    
    
    20.892,213,000
    
    
    
    5.46
    
    
    $
    11.24
    
    
    
    1,515,000
    
    
    $
    8.24
  -15-




---



##### 



June
    
    June30, 2009
    
    30, 2008Weighted average grant-date fair value of stock options granted:
    
    $
    1,545,000
    
    
    $
    2,237,000Total fair value of stock options vested:
    
    $
    447,000
    
    
    $
    -0-Total pre-tax intrinsic value of stock options exercised:
    
    $
    967,000
    
    
    $
    8,505,000Total pre-tax share-based compensation expense charged
against income:
    
    $
    354,000
    
    
    $
    224,000Total unrecognized compensation expense related to non-vested
options:
    
    $
    2,793,000
    
    
    $
    2,013,000
   2009
    
    2008Risk-free interest rate
    
    
    2.5
    %
    
    
    4.2
    %Expected volatility
    
    
    41.0
    %
    
    
    35.9
    %Weighted average expected life in years
    
    
    6.5
    
    
    
    4.5Dividend yield
    
    
    3.6
    %
    
    
    2.0
    %
 Employee Stock Purchase Plan
  2009
    
    20082nd Quarter
    
    Six Months
    
    2nd Quarter
    
    Six Months$65,000
    
    $145,000
    
    $91,000
    
    $158,000
   -16-




---



##### 



20092nd Quarter
    
    Six MonthsRisk-free interest rate
    
    
    0.2
    %
    
    
    0.2
    %Expected volatility
    
    
    62.9
    %
    
    
    62.9
    %Weighted average expected life (in years)
    
    
    1.0
    
    
    
    1.0Dividend yield
    
    
    3.6
    %
    
    
    3.6
    %
 20082nd Quarter
    
    Six MonthsRisk-free interest rate
    
    
    3.6
    %
    
    
    3.6
    %Expected volatility
    
    
    38.8
    %
    
    
    38.8
    %Weighted average expected life (in years)
    
    
    1.0
    
    
    
    1.0Dividend yield
    
    
    2.0
    %
    
    
    2.0
    %
  Note 9  Related Party Transactions
   Note 10  Income Taxes
   -17-




---



##### 



Note 11  Recently Issued Accounting Pronouncements
     -18-




---



##### 



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




---



##### 



RESULTS OF OPERATIONS
  Overview
        -20-




---



##### 



Consolidated Operations
  Relation to Consolidated RevenuesFor the Quarter Ended
    
    
    For the Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Operating costs and expenses:Costs of services provided
    
    
    85.3
    
    
    
    85.9
    
    
    
    85.6
    
    
    
    85.7Selling, general and
administration
    
    
    7.9
    
    
    
    6.9
    
    
    
    7.4
    
    
    
    7.0Investment and interest income
    
    
    .7
    
    
    
    .4
    
    
    
    .6
    
    
    
    .3Income before income taxes
    
    
    7.5
    
    
    
    7.6
    
    
    
    7.6
    
    
    
    7.6Income taxes
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.9
    
    
    
    2.9Net income
    
    
    4.6
    %
    
    
    4.7
    %
    
    
    4.7
    %
    
    
    4.7
    %
   -21-




---



##### 



2009 Second Quarter Compared with 2008 Second Quarter
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    increase
    
    eliminations
    
    Amount
    
    % increase
    
    Amount
    
    % incrreaseRevenues
    
    $
    170,896,000
    
    
    
    15.5
    %
    
    $
    (28,000
    )
    
    $
    131,484,000
    
    
    
    9.6
    %
    
    $
    39,440,000
    
    
    
    42.9
    %Cost of services provided
    
    
    145,830,000
    
    
    
    14.8
    
    
    
    (11,333,000
    )
    
    
    119,730,000
    
    
    
    10.1
    
    
    
    37,433,000
    
    
    
    39.2Selling, general and
administrative expense
    
    
    13,516,000
    
    
    
    33.5
    
    
    
    13,516,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    1,157,000
    
    
    
    97.6
    
    
    
    1,157,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    12,707,000
    
    
    
    12.4
    %
    
    
    (1,054,000
    )
    
    $
    11,754,000
    
    
    
    4.7
    %
    
    $
    2,007,000
    
    
    
    186.4
    %
 Revenues
 Consolidated
   Reportable Segments
   -22-




---



##### 



Costs of services provided
 Consolidated
  IncrCost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    (Decr)%Bad debt provision
    
    
    .4
    
    
    
    .2
    
    
    
    .2Workers compensation and general
liability insurance
    
    
    3.8
    
    
    
    3.9
    
    
    
    (.1
    )
  Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    82.1
    
    
    
    81.6
    
    
    
    .5Housekeeping supplies
    
    
    6.0
    
    
    
    5.6
    
    
    
    .4Food labor and other labor costs
    
    
    52.4
    
    
    
    53.5
    
    
    
    (1.1
    )Food supplies
    
    
    38.0
    
    
    
    39.9
    
    
    
    (1.9
    )
   -23-




---



##### 



Consolidated Selling, General and Administrative Expense
  Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  -24-




---



##### 



2009 Six Month Period Compared with 2008 Six Month Period
  Reportable SegmentsPercent
    
    Corporate and
    
    Housekeeping
    
    FoodConsolidated
    
    increase
    
    eliminations
    
    Amount
    
    % incr
    
    Amount
    
    % incrRevenues
    
    $
    331,305,000
    
    
    
    12.2
    %
    
    $
    125,000
    
    
    $
    256,936,000
    
    
    
    7.3
    %
    
    $
    74,244,000
    
    
    
    35.4
    %Cost of services provided
    
    
    283,722,000
    
    
    
    12.2
    
    
    
    (18,075,000
    )
    
    
    231,316,000
    
    
    
    6.9
    
    
    
    70,481,000
    
    
    
    33.4Selling, general and
administrative expense
    
    
    24,392,000
    
    
    
    17.8
    
    
    
    24,392,000
    
    
    
    
    
    
    
    
    
    
    
    Investment and interest income
    
    
    2,094,000
    
    
    
    130.2
    
    
    
    2,094,000
    
    
    
    
    
    
    
    
    
    
    
    Income before income taxes
    
    $
    25,285,000
    
    
    
    12.6
    %
    
    
    (4,098,000
    )
    
    $
    25,620,000
    
    
    
    11.2
    %
    
    $
    3,763,000
    
    
    
    90.1
    %
 Revenues
 Consolidated
   Reportable Segments
    Costs of services provided
 Consolidated
  -25-




---



##### 



IncrCost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    (Decr)%Bad debt provision
    
    
    .5
    
    
    
    .3
    
    
    
    .2Workers compensation and general
liability insurance
    
    
    3.8
    
    
    
    3.1
    
    
    
    .7
  Reportable Segments
   Cost of Services Provided-Key Indicators
    
    2009 %
    
    2008 %
    
    Incr (Decr) %Housekeeping labor and other labor costs
    
    
    81.2
    
    
    
    81.3
    
    
    
    (.1
    )Housekeeping supplies
    
    
    6.0
    
    
    
    6.1
    
    
    
    (.1
    )Food labor and other labor costs
    
    
    52.1
    
    
    
    53.6
    
    
    
    (1.5
    )Food supplies
    
    
    39.4
    
    
    
    39.6
    
    
    
    (.2
    )
   Consolidated Selling, General and Administrative Expense
  -26-




---



##### 



Consolidated Investment and Interest Income
  Income before Income Taxes
 Consolidated
  Reportable Segments
   Consolidated Income Taxes
  Consolidated Net Income
  Critical Accounting Policies and Estimates
   -27-




---



##### 



Allowance for Doubtful Accounts
     -28-




---



##### 



Aggregate AccountBalances of Clientsin Bankruptcy orPeriod
    
    In/Pending
    
    Net Write-Offs
    
    Bad Debt
    
    Allowance forEnded
    
    Collection/Litigation
    
    of Client Accounts
    
    Provision
    
    Doubtful AccountsJune 30, 2009
    
    $
    10,334,000
    
    
    $
    714,000
    
    
    $
    1,450,000
    
    
    $
    3,950,000December 31, 2008
    
    $
    8,417,000
    
    
    $
    5,304,000
    
    
    $
    4,234,000
    
    
    $
    3,214,000
   Accrued Insurance Claims
   -29-




---



##### 



Asset Valuations and Review for Potential Impairment
  Liquidity and Capital Resources
  Operating Activities
  -30-




---



##### 



Investing Activities
  Financing Activities
   1st Quarter
    
    2nd QuarterCash dividend per common share
    
    $
    .17
    
    
    $
    .18Total cash dividends paid
    
    $
    7,388,000
    
    
    $
    7,826,000Record date
    
    February 6
    
    April 24Payment date
    
    February 20
    
    May 15
    Line of Credit
   Covenant Description and Requirement
    
    Status at June 30, 2009Commitment coverage ratio: cash and cash
equivalents must equal or exceed outstanding
obligations under the line by a multiple of 2
    
    Commitment coverage is 2.4Tangible net worth: must exceed $160,217,000
    
    Tangible net worth is $181,870,000
  -31-




---



##### 



Accounts and Notes Receivable
    -32-




---



##### 



Insurance Programs
     Capital Expenditures
  -33-




---



##### 



Material Off-Balance Sheet Arrangements
  Effects of Inflation
  -34-




---



##### 



ITEM 3  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
  
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
    Certifications
  -35-




---



##### 



PART II. OTHER INFORMATION
 
 ITEM 1 Legal Proceedings
  
 ITEM 1A. Risk Factors
  
 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 ITEM 3 Defaults under Senior Securities.
  
 ITEM 4. Submission of Matters to a Vote of Security Holders
   Shares votedDirector
    
    FOR
    
    WithheldDaniel P. McCartney
    
    
    26,636,000
    
    
    
    15,168,000Joseph F. McCartney
    
    
    19,512,000
    
    
    
    22,292,000Robert L. Frome
    
    
    25,415,000
    
    
    
    16,389,000Thomas A. Cook
    
    
    25,105,000
    
    
    
    16,699,000Robert J. Moss
    
    
    29,782,000
    
    
    
    12,021,000John M. Briggs
    
    
    38,228,000
    
    
    
    3,575,000Dino D. Ottaviano
    
    
    40,892,000
    
    
    
    912,000
  Shares Voted
    
    Shares Voted
    
    Shares
    
    BrokerFOR
    
    AGAINST
    
    ABSTAINING
    
    Non-votes41,366,000
    
    375,000
    
    62,000
    
    
 
 ITEM 5. Other Information.
  -36-




---



##### 



ITEM 6. 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
 -37-




---



##### 



SIGNATURES
  HEALTHCARE SERVICES GROUP, INC.July 22, 2009
    /s/   Daniel P. McCartneyDate
    DANIEL P. McCARTNEY,Chief Executive OfficerJuly 22, 2009
    /s/ Richard W. HudsonDate
    RICHARD W. HUDSON,Chief Financial Officer and Secretary -38-