HEALTHCARE SERVICES GROUP INC (Form: 10-Q, Received: 10/22/2012 16:18:46)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(MARK ONE)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2012

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 0-12015

HEALTHCARE SERVICES GROUP, INC.

(Exact name of registrant as specified in its charter)


Pennsylvania		23-2018365
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification number)

3220 Tillman Drive-Suite 300, Bensalem, Pennsylvania		19020
(Address of principal executive office)		(Zip code)

Registrant’s telephone number, including area code: 215-639-4274

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ¨ NO x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. Common Stock, $.01 Par Value: 67,734,000 shares outstanding as of October 17, 2012.

INDEX


	PAGE NO.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Consolidated Balance Sheets as of September 30, 2012 and December 31, 2011		2

Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2012 and 2011		3

Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011		4

Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2012		5

Notes To Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results Of Operations		19

Item 3. Quantitative and Qualitative Disclosure About Market Risk		33

Item 4. Controls and Procedures		33

Part II. OTHER INFORMATION		34

Item 1. Legal Proceedings		34

Item 1A. Risk Factors		34

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3. Defaults Upon Senior Securities		34

Item 4. Mine Safety Disclosures		34

Item 5. Other Information		34

Item 6. Exhibits		34

Signatures		35

Exhibit 10.1

Exhibit 31.1

Exhibit 31.2

Exhibit 32.1

Exhibit 32.2

EX-101 XBRL Instance Document

EX-101 XBRL Taxonomy Extension Schema Document

EX-101 XBRL Taxonomy Calculation Linkbase Document

EX-101 XBRL Taxonomy Extension Definition Linkbase Document

EX-101 XBRL Taxonomy Labels Linkbase Document

EX-101 XBRL Taxonomy Presentation Linkbase Document

-1-

Consolidated Balance Sheets


	(Unaudited) September 30, 2012			December 31, 2011
ASSETS
Current assets:
Cash and cash equivalents	$	53,176,000		$	38,639,000
Marketable securities, at fair value		21,354,000			31,337,000
Accounts and notes receivable, less allowance for doubtful accounts of $3,939,000 in 2012 and $4,506,000 in 2011		137,369,000			130,744,000
Inventories and supplies		27,409,000			25,144,000
Prepaid income taxes		—			405,000
Prepaid expenses and other		9,787,000			5,852,000

Total current assets		249,095,000			232,121,000
Property and equipment:
Laundry and linen equipment installations		2,248,000			2,100,000
Housekeeping equipment and office furniture		25,560,000			24,277,000
Autos and trucks		325,000			299,000

		28,133,000			26,676,000
Less accumulated depreciation		17,869,000			16,913,000

		10,264,000			9,763,000
GOODWILL		16,955,000			16,955,000
OTHER INTANGIBLE ASSETS, less accumulated amortization of $9,535,000 in 2012 and $7,909,000 in 2011		5,746,000			7,372,000
NOTES RECEIVABLE — long term portion, net		2,885,000			1,483,000
DEFERRED COMPENSATION FUNDING, at fair value		17,113,000			13,780,000
DEFERRED INCOME TAXES — long term portion		10,740,000			8,181,000
OTHER NONCURRENT ASSETS		38,000			40,000

TOTAL ASSETS	$	312,836,000		$	289,695,000


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	25,677,000		$	10,650,000
Accrued payroll, accrued and withheld payroll taxes		16,468,000			26,833,000
Other accrued expenses		2,256,000			1,657,000
Income taxes payable		3,196,000			—
Deferred income taxes		632,000			951,000
Accrued insurance claims		6,751,000			5,296,000

Total current liabilities		54,980,000			45,387,000
ACCRUED INSURANCE CLAIMS — long term portion		15,753,000			12,358,000
DEFERRED COMPENSATION LIABILITY		17,586,000			14,224,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Common stock, $.01 par value; 100,000,000 shares authorized; 69,911,000 shares issued in 2012 and 69,473,000 shares in 2011		699,000			695,000
Additional paid-in capital		111,318,000			105,727,000
Retained earnings		125,471,000			126,921,000
Accumulated other comprehensive income, net of taxes		171,000			343,000
Common stock in treasury, at cost, 2,210,000 shares in 2012 and 2,684,000 shares in 2011		(13,142,000	)		(15,960,000	)

Total stockholders’ equity		224,517,000			217,726,000

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	312,836,000		$	289,695,000

See accompanying notes

-2-

Consolidated Statements of Comprehensive Income

(Unaudited)


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,
	2012		2011			2012			2011

Revenues	$	272,681,000	$	218,929,000		$	800,396,000		$	638,826,000
Operating costs and expenses:
Costs of services provided		234,281,000		188,041,000			691,982,000			549,768,000
Selling, general and administrative		20,789,000		14,344,000			60,295,000			46,635,000
Other income (loss):
Investment and interest		962,000		(1,355,000	)		2,520,000			(178,000	)


Income before income taxes		18,573,000		15,189,000			50,639,000			42,245,000

Income taxes		7,056,000		5,193,000			19,223,000			14,654,000


Net income	$	11,517,000	$	9,996,000		$	31,416,000		$	27,591,000


Per share data:

Basic earnings per common share	$	0.17	$	0.15		$	0.47		$	0.41


Diluted earnings per common share	$	0.17	$	0.15		$	0.46		$	0.41


Cash dividends per common share	$	0.16	$	0.16		$	0.49		$	0.47


Weighted average number of common shares outstanding:

Basic		67,651,000		66,710,000			67,344,000			66,544,000


Diluted		68,635,000		67,530,000			68,316,000			67,510,000


Comprehensive income:

Net income	$	11,517,000	$	9,996,000		$	31,416,000		$	27,591,000
Other comprehensive income:
Unrealized gain/(loss) on available for sale marketable securities, net of taxes		18,000		76,000			(172,000	)		451,000

Total comprehensive income	$	11,535,000	$	10,072,000		$	31,244,000		$	28,042,000

See accompanying notes

-3-

Consolidated Statements of Cash Flows

(Unaudited)


	For the Nine Months Ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	31,416,000		$	27,591,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		3,773,000			3,123,000
Bad debt provision		1,750,000			2,100,000
Deferred income tax benefits		(2,990,000	)		(774,000	)
Share-based compensation expense		1,699,000			1,630,000
Amortization of premium on marketable securities		496,000			735,000
Unrealized loss on marketable securities		82,000			377,000
Unrealized (gain) loss on deferred compensation fund investments		(1,712,000	)		984,000
Changes in operating assets and liabilities:
Accounts and notes receivable		(9,776,000	)		(8,354,000	)
Prepaid income taxes		405,000			2,843,000
Inventories and supplies		(2,264,000	)		(1,582,000	)
Prepaid expenses and other assets		(3,936,000	)		(1,177,000	)
Deferred compensation funding		(1,621,000	)		(1,291,000	)
Accounts payable and other accrued expenses		15,623,000			(1,664,000	)
Accrued payroll, accrued and withheld payroll taxes		(9,386,000	)		(8,484,000	)
Accrued insurance claims		4,850,000			2,623,000
Deferred compensation liability		3,814,000			707,000
Income taxes payable		3,196,000			—

Net cash provided by operating activities		35,419,000			19,387,000

Cash flows from investing activities:
Disposals of fixed assets		19,000			20,000
Additions to property and equipment		(2,668,000	)		(4,431,000	)
Purchases of marketable securities, net		(8,745,000	)		(17,276,000	)
Sales of marketable securities, net		18,090,000			18,877,000
Cash paid for acquisition		—			(1,000,000	)

Net cash provided (used) by investing activities		6,696,000			(3,810,000	)

Cash flows from financing activities:
Dividends paid		(32,866,000	)		(31,494,000	)
Reissuance of treasury stock pursuant to Dividend Reinvestment Plan		89,000			98,000
Tax benefits arising from stock option transactions		1,289,000			1,175,000
Proceeds from the exercise of stock options		3,910,000			2,080,000

Net cash used in financing activities		(27,578,000	)		(28,141,000	)


Net increase/(decrease) in cash and cash equivalents		14,537,000			(12,564,000	)

Cash and cash equivalents at beginning of the period		38,639,000			39,692,000


Cash and cash equivalents at end of the period	$	53,176,000		$	27,128,000


Supplementary Cash Flow Information:
Income taxes cash payments, net of refunds	$	17,416,000		$	11,440,000


Issuance of 70,000 and 76,000 shares in 2012 and 2011, respectively, of Common Stock pursuant to Employee Stock Plans	$	1,250,000		$	1,233,000

See accompanying notes

-4-

Consolidated Statement of Stockholders’ Equity (Unaudited)


	For the Nine Months Ended September 30, 2012
	Common Stock Shares		Amount		Additional Paid-in Capital			Total Retained Earnings			Accumulated Other Comprehensive Income			Treasury Stock			Stockholders’ Equity
Balance, December 31, 2011		69,473,000	$	695,000	$	105,727,000		$	126,921,000		$	343,000		$	(15,960,000	)	$	217,726,000

Net income									31,416,000									31,416,000
Unrealized loss on available for sale marketable securities, net of $118,000 of taxes												(172,000	)					(172,000	)


Comprehensive income																		31,244,000

Exercise of stock options and other share-based compensation, net of 13,000 shares tendered for payment		368,000		3,000		3,497,000									410,000			3,910,000

Tax benefit arising from stock option transactions						1,289,000												1,289,000

Share-based compensation expense — stock options						1,423,000												1,423,000

Treasury shares issued for Deferred Compensation Plan funding and redemptions (10,000 shares)						394,000									58,000			452,000

Shares issued pursuant to Employee Stock Plans		70,000		1,000		1,278,000									(29,000	)		1,250,000

Cash dividends — $.49 per common share									(32,866,000	)								(32,866,000	)

Shares issued pursuant to Dividend Reinvestment Plan (4,000 shares)						62,000									27,000			89,000

Shares issued pursuant to acquisition (396,000 shares)						(2,352,000	)								2,352,000			—

Balance, September 30, 2012		69,911,000	$	699,000	$	111,318,000		$	125,471,000		$	171,000		$	(13,142,000	)	$	224,517,000

See accompanying notes.

-5-

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – Basis of Reporting

The accompanying financial statements are unaudited and do not include certain information and note disclosures required by accounting principles generally accepted in the United States for complete financial statements. However, in our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. The balance sheet shown in this report as of December 31, 2011 has been derived from, and does not include, all the disclosures contained in the financial statements for the year ended December 31, 2011. The financial statements should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011. The results of operations for the three and nine month periods ended September 30, 2012 are not necessarily indicative of the results that may be expected for the full fiscal year.

As of September 30, 2012, we operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (“Huntingdon”) and Healthcare Staff Leasing Solutions, LLC (“Staff Leasing”). Huntingdon invests our cash and cash equivalents and manages our portfolio of marketable securities. Staff Leasing is an entity formed in 2011 to offer professional employer organization (“PEO”) services to potential clients in the health care industry. As of September 30, 2012, we have entered into PEO service contracts in certain states.

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), we make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates are used for, but not limited to, our allowance for doubtful accounts, accrued insurance claims, asset valuations and review for potential impairment, share-based compensation, and deferred income taxes. The estimates are based upon various factors including current and historical trends, as well as other pertinent industry and regulatory authority information. We regularly evaluate this information to determine if it is necessary to update the basis for our estimates and to compensate for known changes.

Inventories and supplies include housekeeping and, linen and laundry supplies, as well as dietary provisions and supplies. Inventories and supplies are stated at cost to approximate a first-in, first-out (FIFO) basis. Linen supplies are amortized over a 24 month period.

Revenues are recorded net of sales taxes.

Certain amounts have been reclassified for consistent presentation.

Note 2 – Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets acquired of businesses and is not amortized. Goodwill is evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value. The goodwill associated with the 2009 acquisition of Contract Environmental Services, Inc. (“CES”) is deductible for tax purposes over a fifteen year period.

Goodwill by reportable operating segment, as described in Note 5 herein, was approximately $14,894,000 and $2,061,000 for Housekeeping and Dietary as of September 30, 2012 and December 31, 2011, respectively.

-6-

The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful life (between 7 and 8 years). The following table sets forth the amounts of our identifiable intangible assets subject to amortization, which were acquired in acquisitions.


	September 30, 2012		December 31, 2011
Customer relationships	$	14,481,000	$	14,481,000
Non-compete agreements		800,000		800,000

Total other intangibles, gross	$	15,281,000	$	15,281,000
Less accumulated amortization		9,535,000		7,909,000

Other intangibles, net	$	5,746,000	$	7,372,000

The customer relationships have a weighted-average amortization period of seven years and the non-compete agreements have a weighted-average amortization period of eight years. The following table sets forth the estimated amortization expense for intangibles subject to amortization for the balance of 2012 and the subsequent five fiscal years:


Period/Year	Customer Relationships		Non-Compete Agreements		Total
October 1 to December 31, 2012	$	517,000	$	25,000	$	542,000
2013		1,750,000		100,000		1,850,000
2014		1,112,000		67,000		1,179,000
2015		1,112,000		—		1,112,000
2016		569,000		—		569,000
2017		297,000		—		297,000
Thereafter		197,000		—		197,000

Amortization expense for the three and nine month periods ended September 30, 2012 was $542,000 and $1,626,000, respectively, and for the three and nine month periods ended September 30, 2011 was $492,000 and $1,428,000, respectively.

Note 3 – Fair Value Measurements and Marketable Securities

We, in accordance with U.S. GAAP, define fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). Effective January 1, 2008, we elected the fair value option for certain of our marketable securities purchased since such adoption. Management initially elected the fair value option for certain of our marketable securities because it views such investment securities as highly liquid and available to be drawn upon for working capital purposes making them similar to cash and cash equivalents. Accordingly, for such investments, we record net unrealized gain or loss in the other income (loss) - investment and interest caption in our consolidated statements of comprehensive income. We have not elected the fair value option for marketable securities acquired after December 31, 2009. Although these assets continue to be highly liquid and available, we do not believe these assets are representative of our operating activities. These assets are representative of our investing activities, and they will be available for future needs of the Company to support its current and projected growth.

-7-

Certain of our assets and liabilities are reported at fair value in the accompanying balance sheets. Such assets and liabilities include cash and cash equivalents, marketable securities, accounts and notes receivable, accounts payable, income taxes payable and other accrued expenses. The following tables provide fair value measurement information for our marketable securities and deferred compensation fund investment assets as of September 30, 2012 and December 31, 2011.


	Carrying Amount		Total Fair Value		Quoted Prices in Active Markets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	Fair Value Measurements
Financial Assets:	As of September 30, 2012
Marketable securities
Municipal bonds	$	21,354,000	$	21,354,000	$	—	$	21,354,000	$	—
Equity securities - Deferred comp fund
Money Market	$	3,456,000	$	3,456,000	$	—	$	3,456,000	$	—
Large Cap Value		3,344,000		3,344,000		3,344,000		—		—
Large Cap Growth		2,682,000		2,682,000		2,682,000		—		—
Fixed income		1,903,000		1,903,000		1,903,000		—		—
Small Cap Value		1,484,000		1,484,000		1,484,000		—		—
Balanced and Lifestyle		1,223,000		1,223,000		1,223,000		—		—
Speciality		947,000		947,000		947,000		—		—
Large Cap Blend		843,000		843,000		843,000		—		—
International		735,000		735,000		735,000		—		—
Mid Cap Growth		358,000		358,000		358,000		—		—
Small Cap Growth		70,000		70,000		70,000		—		—
Mid Cap Value		68,000		68,000		68,000		—		—

Equity securities - Deferred comp fund	$	17,113,000	$	17,113,000	$	13,657,000	$	3,456,000	$	—


	As of December 31, 2011
Marketable securities
Municipal bonds	$	31,337,000	$	31,337,000	$	—	$	31,337,000	$	—
Equity securities - Deferred comp fund
Money Market	$	3,029,000	$	3,029,000	$	—	$	3,029,000	$	—
Large Cap Value		2,716,000		2,716,000		2,716,000		—		—
Large Cap Growth		2,184,000		2,184,000		2,184,000		—		—
Small Cap Value		1,244,000		1,244,000		1,244,000		—		—
Fixed Income		1,429,000		1,429,000		1,429,000		—		—
Specialty		832,000		832,000		832,000		—		—
Balanced and Lifestyle		814,000		814,000		814,000		—		—
International		562,000		562,000		562,000		—		—
Large Cap Blend		500,000		500,000		500,000		—		—
Mid Cap Growth		363,000		363,000		363,000		—		—
Mid Cap Value		54,000		54,000		54,000		—		—
Small Cap Growth		53,000		53,000		53,000		—		—

Equity securities - Deferred comp fund	$	13,780,000	$	13,780,000	$	10,751,000	$	3,029,000	$	—

-8-

The fair value of the municipal bonds is measured using pricing service data from an external provider. The fair value of equity investments in the funded deferred compensation plan are valued (Level 1) based on quoted market prices. The money market fund in the funded deferred compensation plan is valued (Level 2) at the net asset value (“NAV”) of the shares held by the plan at the end of the period. As a practical expedient, fair value of our money market fund is valued at the NAV as determined by the custodian of the fund. The money market fund includes short-term United States dollar denominated money-market instruments. The money market fund can be redeemed at its NAV on its measurement date as there are no significant restrictions on the ability of participants to sell this investment.

For the nine month period ended September 30, 2012, the other income (loss) - investment and interest caption on our consolidated statements of comprehensive income includes unrealized losses from marketable securities of $82,000 for investments recorded under the fair value option. There were no gains or losses for the three month period ended September 30, 2012 as there were no investments recorded under the fair value option.

For the three and nine month periods ended September 30, 2011, the other income (loss) - investment and interest caption on our consolidated statements of income includes unrealized losses from marketable securities of $125,000 and $377,000, respectively, for investments recorded under the fair value option.


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Other-than- temporary Impairments
September 30, 2012
Type of security:
Municipal bonds - available for sale	$	21,070,000	$	284,000	$	—		$	21,354,000	$	—

Total debt securities	$	21,070,000	$	284,000	$	—		$	21,354,000	$	—


December 31, 2011
Type of security:
Municipal bonds	$	2,167,000	$	82,000	$	—		$	2,249,000	$	—
Municipal bonds - available for sale		28,745,000		352,000		(9,000	)		29,088,000		—

Total debt securities	$	30,912,000	$	434,000	$	(9,000	)	$	31,337,000	$	—

For the three and nine month periods ended September 30, 2012, we received total proceeds of $1,100,000 and $15,971,000 respectively, from sales of available for sale municipal bonds. There were no realized gains from the sale of available for sale municipal bonds for the three month period ended September 30, 2012. The sales of available for sale municipal bonds for the nine months ended September 30, 2012 resulted in realized gains of $224,000 recorded in other income (loss), investment and interest caption on our statement of comprehensive income. The basis for the sale of these securities was a specific identification of each bond sold during this period.

For the three and nine month periods ended September 30, 2011, we received total proceeds of $3,134,000 and $5,760,000 respectively, from sales of available for sale municipal bonds. These sales resulted in realized gains of $48,000 and $50,000 recorded in other income (loss), investment and interest caption on our statement of comprehensive income for the three and nine month periods ended September 30, 2011, respectively. The basis for the sale of these securities was a specific identification of each bond sold during this period.

-9-

Set forth below are contractual maturities of total debt securities held at September 30, 2012 and December 31, 2011.


	As of September 30, 2012
Contractual maturity:	Municipal Bonds		Municipal Bonds - Available for Sale		Total Debt Securities
Maturing in one year or less	$	—	$	4,381,000	$	4,381,000
Maturing after one year through three years		—		11,094,000		11,094,000
Maturing after three years		—		5,879,000		5,879,000

Total debt securities	$	—	$	21,354,000	$	21,354,000


	As of December 31, 2011
Contractual maturity:	Municipal Bonds		Municipal Bonds - Available for Sale		Total Debt Securities
Maturing in one year or less	$	34,000	$	4,100,000	$	4,134,000
Maturing after one year through three years		2,215,000		18,874,000		21,089,000
Maturing after three years		—		6,114,000		6,114,000

Total debt securities	$	2,249,000	$	29,088,000	$	31,337,000

Note 4 – Other Contingencies

We have a $57,000,000 bank line of credit on which we may draw to meet short-term liquidity requirements in excess of internally generated cash flow. Amounts drawn under the line of credit are payable upon demand. At September 30, 2012, there were no borrowings under the line of credit. However, at such date, we had outstanding a $40,420,000 irrevocable standby letter of credit which relates to payment obligations under our insurance programs. As a result of the letter of credit, the amount available under the line of credit was reduced by $40,420,000 at September 30, 2012. The line of credit requires us to satisfy two financial covenants. We are in compliance with the financial covenants at September 30, 2012 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on June 30, 2013. We believe the line of credit will be renewed at that time.

We provide our services in 48 states and we are subject to numerous local taxing jurisdictions within those states. Consequently, the taxability of our services is subject to various interpretations within these jurisdictions. In the ordinary course of business, a jurisdiction may contest our reporting positions with respect to the application of its tax code to our services, which may result in additional tax liabilities.

We have tax matters with various taxing authorities. Because of the uncertainties related to both the probable outcomes and amount of probable assessments due, we are unable to make a reasonable estimate of liability. We do not expect the resolution of any of these matters, taken individually or in the aggregate, to have a material adverse effect on our consolidated financial position or results of operations based on our best estimate of the outcomes of such matters.

We are also subject to various claims and legal actions in the ordinary course of business. Some of these matters include payroll and employee-related matters and examinations by governmental agencies. As we become aware of such claims and legal actions, we provide accruals if the exposures are probable and estimable. If an adverse outcome of such claims and legal actions is reasonably possible, we assess materiality and provide such financial disclosure, as appropriate. We believe that these matters, taken individually or in the aggregate, would not have a material adverse effect on our financial position or results of operations.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, comprehensive health care legislation under the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (together, the “Act”) was signed into law in March 2010. The Act will significantly impact the governmental healthcare programs which our clients participate, and reimbursements received thereunder from governmental or third-party payors. In July 2011, Centers for Medicare and Medicaid Services (“CMS”) issued a final rule that reduced Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. This rule was effective as of October 1, 2011. Furthermore, in the coming year, new proposals or additional changes in existing regulations could be made to the Act and/or CMS could propose additional reimbursement reductions which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some

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state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying or foregoing those increases. A few states have indicated it is possible they will run out of cash to pay Medicaid providers, including nursing homes. In addition, certain state governors have recently stated that they will reject Federal Medicaid assistance under the Act. Any negative changes in our clients’ reimbursements may negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect until such time as these laws are fully implemented and CMS and other agencies issue applicable regulations or guidance.

Note 5 – Segment Information

Reportable Operating Segments

We manage and evaluate our operations in two reportable segments: Housekeeping (housekeeping, laundry, linen and other services), and Dietary (dietary department services). Although both segments serve the same client base and share many operational similarities, they are managed separately due to distinct differences in the type of service provided, as well as the specialized expertise required of the professional management personnel responsible for delivering the respective segment’s services. We consider the various services provided within each reportable segment to comprise an identifiable reportable operating segment since such services are rendered pursuant to a single service agreement, specific to that reportable segment, as well as the fact that the delivery of the respective reportable segment’s services are managed by the same management personnel of the particular reportable segment.

The Company’s accounting policies for the segments are generally the same as the Company’s significant accounting policies. Differences between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles. There are certain inventories and supplies that are primarily expensed when incurred within the operating segments, while they are capitalized for the consolidated financial statements. As discussed, most corporate expense is not allocated to the operating segments, and such expenses include corporate salary and benefit costs, bad debt expense, certain legal costs, information technology costs, depreciation, amortization of finite lived intangibles, share based compensation costs and other corporate specific costs. Additionally, there are allocations for workers compensation and general liability expense within the operating segments that differ from our actual expense recorded for U.S. GAAP. Additionally, included in the differences between the reportable segments’ operating results and other disclosed data are amounts attributable to Huntingdon, our investment holding company subsidiary. Huntingdon does not transact any business with the reportable segments. Segment amounts disclosed are prior to any elimination entries made in consolidation.

Housekeeping provides services in Canada, although essentially all of its revenues and net income, 99% in both categories, are earned in one geographic area, the United States. Dietary provides services solely in the United States.

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	Housekeeping Services		Dietary Services		Corporate and Eliminations			Total
Three Months Ended September 30, 2012
Revenues	$	186,182,000	$	86,377,000	$	122,000	⁽¹⁾	$	272,681,000
Income before income taxes		17,318,000		4,882,000		(3,627,000	) ⁽¹⁾		18,573,000

Three Months Ended September 30, 2011
Revenues	$	164,095,000	$	54,582,000	$	252,000	⁽¹⁾	$	218,929,000
Income before income taxes		14,707,000		2,663,000		(2,181,000	) ⁽¹⁾		15,189,000

Nine Months Ended September 30, 2012
Revenues	$	550,579,000	$	249,658,000	$	159,000	⁽¹⁾	$	800,396,000
Income before income taxes		52,445,000		13,556,000		(15,362,000	) ⁽¹⁾		50,639,000

Nine Months Ended September 30, 2011
Revenues	$	479,238,000	$	159,136,000	$	452,000	⁽¹⁾	$	638,826,000
Income before income taxes		48,097,000		8,653,000		(14,505,000	) ⁽¹⁾		42,245,000

⁽¹⁾

Represents primarily corporate office cost and related overhead, recording of transactions at the reportable segment level which use methods other than U.S. GAAP and consolidated subsidiaries’ operating expenses that are not allocated to the reportable segments, net of investment and interest income.

Total Consolidated Revenues from Clients

The following revenues earned from clients are reported in accordance with U.S. GAAP and differ from segment revenues reported above due to the inclusion of adjustments used for segment reporting purposes by management. We earned total revenues from clients in the following service categories:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2012		2011		2012		2011
Housekeeping services	$	124,049,000	$	110,620,000	$	367,599,000	$	323,082,000
Laundry and linen services		60,846,000		52,991,000		179,621,000		154,431,000
Dietary services		86,528,000		54,784,000		249,735,000		159,556,000
Maintenance services and other		1,258,000		534,000		3,441,000		1,757,000

	$	272,681,000	$	218,929,000	$	800,396,000	$	638,826,000

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Major Client

We have one client, a nursing home chain (“Major Client”), which accounted for the respective percentages of our revenues as detailed below:


	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Total revenues		7	%		9	%		7	%		9	%
Housekeeping		9	%		10	%		9	%		11	%
Dietary services		3	%		5	%		3	%		5	%

Additionally, at both September 30, 2012 and December 31, 2011, amounts due from such client represented less than 1% of our accounts receivable balance. The loss of such client, or a significant reduction in revenues from such client, would have a material adverse effect on the results of operations of our two operating segments. In addition, if such client changes its payment terms it may increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

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Note 6 – Earnings Per Common Share

A reconciliation of the numerator and denominator of basic and diluted earnings per common share is as follows:


	Three months ended September 30, 2012
	Income (Numerator)		Shares (Denominator)		Per-share Amount

Net income	$	11,517,000


Basic earnings per common share	$	11,517,000		67,651,000	$	.17

Effect of dilutive securities:
Options				984,000		—


Diluted earnings per common share	$	11,517,000		68,635,000	$	.17


	Three months ended September 30, 2011
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	9,996,000

Basic earnings per common share	$	9,996,000		66,710,000	$	.15
Effect of dilutive securities:
Options				820,000		—

Diluted earnings per common share	$	9,996,000		67,530,000	$	.15


	Nine Months ended September 30, 2012
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	31,416,000

Basic earnings per common share	$	31,416,000		67,344,000	$	.47
Effect of dilutive securities:
Options				972,000		(.01	)

Diluted earnings per common share	$	31,416,000		68,316,000	$	.46


	Nine Months ended September 30, 2011
	Income (Numerator)		Shares (Denominator)		Per-share Amount
Net income	$	27,591,000

Basic earnings per common share	$	27,591,000		66,544,000	$	.41
Effect of dilutive securities:
Options				966,000		—

Diluted earnings per common share	$	27,591,000		67,510,000	$	.41

Options to purchase 507,000 and 559,000 shares of common stock having an average exercise price of $17.50 per common share were outstanding during the three and nine month periods ended September 30, 2012 but not included in the computation of diluted earnings per common share because the exercise prices of the options were greater than the average market price of the common shares, and therefore, would be antidilutive.

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Options to purchase 1,001,000 and 501,000 shares of common stock having an average exercise price of approximately $15.22 and $16.09 per common share, respectively, were outstanding during the three and nine month periods ended September 30, 2011 but not included in the computation of diluted earnings per common share because the exercise price of those options were greater than the average market price of the common shares, and therefore, would be anti-dilutive.

Note 7 – Dividends

During the nine month period ended September 30, 2012, we paid regular quarterly cash dividends approximating $32,866,000 as follows:


	Quarter ended
	March 31, 2012		June 30, 2012		September 30, 2012
Cash dividend per common share	$	.16125	$	.16250	$	.16375
Total cash dividends paid	$	10,847,000	$	10,956,000	$	11,063,000
Record date		February 24		April 27		July 27
Payment date		March 26		May 18		August 24

Additionally, on October 9, 2012, our Board of Directors declared a regular cash dividend of $.1650 per common share to be paid on November 30, 2012 to shareholders of record as of October 26, 2012.

Note 8 – Share-Based Compensation

Stock Options

During the nine months ended September 30, 2012, the stock option activity under our 2002 Stock Option Plan, 1995 Incentive and Non-Qualified Stock Option Plan for key employees, and 1996 Non-Employee Director’s Stock Option Plan (collectively the “Stock Option Plans”), was as follows:


	Weighted Average Exercise Price		Number of Shares			Weighted Average Remaining Contractual Life (In Years)		Aggregate Intrinsic Value

Outstanding, January 1, 2012	$	10.97		2,912,000

Granted		17.50		601,000

Cancelled		14.33		(73,000	)

Exercised		9.40		(443,000	)

Outstanding, September 30, 2012	$	12.43		2,997,000			6.15	$	31,265,000


Options exercisable as of September 30, 2012				1,359,000			3.95	$	18,961,000

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The weighted average fair value per share of options granted during the 2012 and 2011 nine month periods ended September 30 was $4.74 and $3.26, respectively. The following table summarizes information about stock options outstanding at September 30, 2012.


	Options Outstanding								Options Exercisable
Exercise Price Range	Number Outstanding		Average Remaining Contractual Life		Weighted Average Exercise Price Per Share		Number Exercisable		Weighted Average Exercise Price

$ 2.41 - 3.68		399,000		0.85	$	3.24		399,000	$	3.24

6.07		267,000		2.24		6.07		267,000		6.07

10.39		410,000		6.27		10.39		196,000		10.39

13.93 - 14.31		869,000		6.49		14.16		420,000		14.09

$16.11 - 17.50		1,052,000		8.83		16.89		77,000		16.11

		2,997,000		6.15	$	12.43		1,359,000	$	8.90

Other information pertaining to option activity during the nine month periods ended September 30, 2012 and 2011 was as follows:


	September 30, 2012		September 30, 2011
Weighted average grant-date fair value of stock options granted:	$	2,438,000	$	1,477,000
Total fair value of stock options vested:	$	1,870,000	$	1,015,000
Total intrinsic value of stock options exercised:	$	5,026,000	$	4,736,000
Total pre-tax share-based compensation expense charged against income:	$	1,423,000	$	1,402,000
Total unrecognized compensation expense related to non-vested options:	$	4,473,000	$	4,015,000

Under our Stock Option Plans at September 30, 2012, in addition to the 2,997,000 shares issuable pursuant to outstanding option grants, an additional 3,338,000 shares of our Common Stock are available for future grants. Such 3,338,000 shares consist of 1,338,000 shares from our Stock Option Plans that were rolled into our recently approved 2012 Equity Incentive Plan (the “2012 Plan”) plus an additional 2,000,000 shares that are contained in the 2012 Plan. Options outstanding and exercisable were granted at stock option prices which were not less than the fair market value of our Common Stock on the date the options were granted and no option has a term in excess of ten years. Additionally, with the exception of the options granted in years 2008 through 2012, options vested and became exercisable either on the date of grant or commencing nine months after the option grant date. The options granted in 2008 through 2012 become vested and exercisable ratably over a five year period on each anniversary date of the option grant.

At September 30, 2012, the total unrecognized compensation expense related to non-vested options, as reported above, was expected to be recognized through the fourth quarter of 2016 for the options granted in 2012 and the fourth quarter of 2015 for the options granted in 2011. The fair value of options granted in 2012 and 2011 was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:


	September 30, 2012			September 30, 2011
Risk-free interest rate		1.3	%		2.6	%
Expected volatility		39.2	%		27.4	%
Weighted average expected life in years		6.8			7.4
Dividend yield		3.6	%		3.7	%

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Employee Stock Purchase Plan

Total pre-tax share-based compensation expense charged against income for the nine month periods ended September 30, 2012 and 2011 for options granted under our Employee Stock Purchase Plan (“ESPP”) was $276,000 and $228,000, respectively. It is estimated, at this time, that the expense attributable to such share-based payments in the fourth quarter of 2012 will approximate the amount recorded in the 2012 first, second and third quarters. However, such future expense related to our ESPP will be impacted by, and be dependent on the change in our stock price over the remaining period up to the December 31, 2012 measurement date.

Such expense was estimated on the date of grant using the Black-Scholes valuation model with the following weighted average assumptions:


	September 30, 2012			September 30, 2011
Risk-free interest rate		0.19	%		0.04	%
Expected volatility		36.5	%		25.0	%
Weighted average expected life in years		1.0			1.0
Dividend yield		3.6	%		3.7	%

We may issue new common stock or re-issue common stock from treasury to satisfy our obligations under any of our share-based compensation plans.

Note 9 – Related Party Transactions

A director is a member of a law firm which was retained by us. In each of the nine month periods ended September 30, 2012 and 2011, fees received from us by such firm did not exceed $120,000. Additionally, such fees did not exceed, in either nine month period, 5% of such firm’s revenues.

Note 10 – Income Taxes

For the nine month period ended September 30, 2012, our effective tax rate was approximately 38%, an increase from the 35% effective tax rate for the comparable 2011 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to a decrease in expected tax credits realized for 2012 compared to previous fiscal periods. The Company received credits in 2011 related to the Work Opportunity Tax Credit (“WOTC”) program but this program has not yet been renewed in 2012. The Company will continue to receive additional credits related to prior periods but will not have the benefit of credits for 2012 new hires unless the program is renewed. Additionally, the Company realized significant tax credits during 2011 from the New Hire Retention Credit, a one-time general business credit at the Federal level that was authorized by the Hiring Incentives to Restore Employment Act of 2011. The new hire retention credit allowed an employer a credit of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. The Company earned a significant amount of new hire retention credits for the nine month period ended September 30, 2011, but did not earn additional amounts in 2012 as the credit expired at December 31, 2011. If the WOTC program is renewed retroactive to the beginning of 2012, our effective tax rate could be reduced below the current 38%.

We account for income taxes using the asset and liability method, which results in recognizing income tax expense based on the amount of income taxes payable or refundable for the current year. Additionally, we evaluate regularly the tax positions taken or expected to be taken resulting from financial statement recognition of certain items. Based on our evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. Our evaluation was performed for the tax years ended December 31, 2008 through 2011 (with regard to U.S. federal income tax returns) and December 31, 2007 through 2011 (with regard to various state and local income tax returns), the tax years which remain subject to examination by major tax jurisdictions as of September 30, 2012.

We may from time to time be assessed interest or penalties by taxing jurisdictions, although any such assessments historically have been minimal and immaterial to our financial results. When we have received an assessment for interest and/or penalties, it has been classified in the financial statements as selling, general and administrative expense.

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Note 11 – Recently Issued Accounting Pronouncements

In July 2012, the Financial Accounting Standards Board (“FASB”) amended the guidance which allows an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If an entity concludes, based on an evaluation of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform the qualitative impairment test for that asset. The objective of this amended guidance is to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. This amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The Company adopted this guidance on October 1, 2012. The amendment did not have an impact on the Company’s consolidated results of operations, cash flows, or financial position.

Note 12 – Subsequent Event

We evaluated all subsequent events through the date this Form 10-Q is being filed with the SEC. We believe there were no events or transactions occurring during this subsequent event reporting period which require recognition or disclosure in the financial statements.

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ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Cautionary Statement Regarding Forward Looking Statements

This report and documents incorporated by reference into this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”), as amended, which are not historical facts but rather are based on current expectations, estimates and projections about our business and industry, our beliefs and assumptions. Words such as “believes,” “anticipates,” “plans,” “expects,” “will,” “goal,” and similar expressions are intended to identify forward-looking statements. The inclusion of forward-looking statements should not be regarded as a representation by us that any of our plans will be achieved. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Such forward-looking information is also subject to various risks and uncertainties. Such risks and uncertainties include, but are not limited to, risks arising from our providing services exclusively to the health care industry, primarily providers of long-term care; credit and collection risks associated with this industry; from having several significant clients who each individually contributed at least 3% with one as high as 7% to our total consolidated revenues in the three and/or nine month period ended September 30, 2012; our claims experience related to workers’ compensation and general liability insurance; the effects of changes in, or interpretations of laws and regulations governing the industry, our workforce and services provided, including state and local regulations pertaining to the taxability of our services; and the risk factors described in Part I of our Form 10-K for the fiscal year ended December 31, 2011 under “Government Regulation of Clients,” “Competition” and “Service Agreements/Collections,” and under Item IA “Risk Factors” in our Form 10-K for the fiscal year ended December 31, 2011. Many of our clients’ revenues are highly contingent on Medicare, Medicaid and other payors’ reimbursement funding rates, which Congress and related agencies have affected through the enactment of a number of major laws and regulations during the past decade, including the March 2010 enactment of the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010. Most recently, in July 2011, the United States Center for Medicare Services (“CMS”) issued final rulings which, among other things, reduced (effective October 1, 2011) Medicare payments to nursing centers by 11.1% and changed the reimbursement for the provision of group rehabilitation therapy services to Medicare beneficiaries. Currently, the U.S. Congress is considering further changes or revising legislation relating to health care in the United States which, among other initiatives, may impose cost containment measures impacting our clients. These enacted laws, proposed laws and forthcoming regulations have significantly altered, or threaten to significantly alter, overall government reimbursement funding rates and mechanisms. The overall effect of these laws and trends in the long-term care industry has affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed-upon payment terms. These factors, in addition to delays in payments from clients, have resulted in, and could continue to result in, significant additional bad debts in the near future. Additionally, our operating results would be adversely affected if unexpected increases in the costs of labor and labor-related costs, materials, supplies and equipment used in performing services could not be passed on to our clients.

In addition, we believe that to improve our financial performance we must continue to obtain service agreements with new clients, provide new services to existing clients, achieve modest price increases on current service agreements with existing clients and maintain internal cost reduction strategies at our various operational levels. Furthermore, we believe that our ability to sustain the internal development of managerial personnel is an important factor impacting future operating results and successfully executing projected growth strategies.

RESULTS OF OPERATIONS

The following discussion is intended to provide the reader with information that will be helpful in understanding our financial statements including the changes in certain key items in comparing financial statements period to period. We also intend to provide the primary factors that accounted for those changes, as well as a summary of how certain accounting principles affect our financial statements. In addition, we are providing information about the financial results of our two operating segments to further assist in understanding how these segments and their results affect our consolidated results of operations. This discussion should be read in conjunction with our financial statements as of September 30, 2012 and December 31, 2011 and the periods then ended and the notes accompanying those financial statements.

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Overview

We provide management, administrative and operating expertise and services to the housekeeping, laundry, linen, facility maintenance and dietary service departments of the health care industry, including nursing homes, retirement complexes, rehabilitation centers and hospitals located throughout the United States. We believe that we are the largest provider of housekeeping and laundry management services to the long-term care industry in the United States, rendering such services to over 3,000 facilities in 48 states as of September 30, 2012. Although we do not directly participate in any government reimbursement programs, our clients’ reimbursements are subject to government regulation. Therefore, clients are directly affected by any legislation relating to Medicare and Medicaid reimbursement programs.

We primarily provide our services pursuant to full service agreements with our clients. In such agreements, we are responsible for the day to day management of the department managers and hourly employees located at our clients’ facilities. We also provide services on the basis of a management-only agreement for a very limited number of clients. Our agreements with clients typically provide for renewable one year service terms, cancelable by either party upon 30 to 90 days’ notice after the initial 90-day period.

We are organized into two reportable segments; housekeeping, laundry, linen and other services (“Housekeeping”), and dietary department services (“Dietary”). At September 30, 2012, Housekeeping is being provided at essentially all of our over 3,000 client facilities, generating approximately 69% or $550,661,000 of the total revenues for the nine month period ended September 30, 2012. Dietary is being provided to over 650 client facilities at September 30, 2012 and contributed approximately 31% or $249,735,000 to the nine month period ended September 30, 2012 total revenues.

Housekeeping consists of managing the client’s housekeeping department which is principally responsible for the cleaning, disinfecting and sanitizing of patient rooms and common areas of a client’s facility, as well as the laundering and processing of the personal clothing belonging to the facility’s patients. Also within the scope of this segment’s service is the responsibility for laundering and processing of the bed linens, uniforms and other assorted linen items utilized by a client facility.

Dietary consists of managing the client’s dietary department which is principally responsible for food purchasing, meal preparation and providing dietician consulting professional services, which includes the development of a menu that meets the patient’s dietary needs.

We currently operate two wholly-owned subsidiaries, Huntingdon Holdings, Inc. (“Huntingdon”) and Healthcare Staff Leasing Solutions, LLC (“Staff Leasing”). Huntingdon invests our cash and cash equivalents and manages our portfolio of marketable securities. Staff Leasing is an entity formed in 2011 to offer professional employer organization (“PEO”) services to potential clients in the health care industry. As of September 30, 2012, we have entered into PEO service contracts in two states.

Consolidated Operations

The following table sets forth, for the periods indicated, the percentage which certain items bear to consolidated revenues:


	Relation to Consolidated Revenues
	For the Quarter Ended September 30,						For the Nine Month Period Ended September 30,
	2012			2011			2012			2011
Revenues		100.0	%		100.0	%		100.0	%		100.0	%
Operating costs and expenses:
Costs of services provided		85.9	%		85.9	%		86.5	%		86.1	%
Selling, general and administrative		7.6	%		6.6	%		7.5	%		7.3	%
Investment and interest		0.4	%		(0.6	)%		0.3	%		0.0	%

Income before income taxes		6.9	%		6.9	%		6.3	%		6.6	%
Income taxes		2.6	%		2.3	%		2.4	%		2.3	%

Net income		4.3	%		4.6	%		3.9	%		4.3	%

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Housekeeping is our largest and core reportable segment, representing approximately 68% and 69% of consolidated revenues for the three and nine months ended September 30, 2012, respectively. Dietary revenues represented approximately 32% and 31% of consolidated revenues for the three and nine months ended September 30, 2012, respectively.

Although there can be no assurance thereof, we believe that for the remainder of 2012, Dietary’s revenues, as a percentage of consolidated revenues, may increase from its’ respective percentages previously noted. Furthermore, we expect the sources of organic growth for the remainder of 2012 for the respective operating segments will be primarily the same as historically experienced. Accordingly, although there can be no assurance thereof, the growth in Dietary is expected to come from our current Housekeeping client base, while growth in Housekeeping will primarily come from obtaining new clients.

2012 Third Quarter Compared with 2011 Third Quarter

The following table sets forth 2012 third quarter income statement key components that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared to 2011 third quarter amounts. The difference between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles.


	Quarter Ended September 30, 2012
	Consolidated		% inc./ (decr.)			Corporate and Eliminations			Housekeeping Amount		% inc.			Dietary Amount		% inc.
Revenues	$	272,681,000		24.6	%	$	122,000		$	186,182,000		13.5	%	$	86,377,000		58.3	%
Cost of services provided		234,281,000		24.6			(16,078,000	)		168,864,000		13.0			81,495,000		57.0
Selling, general and administrative		20,789,000		44.9			20,789,000			—		—			—		—
Investment and interest income		962,000		(171.0	)		962,000			—		—			—		—
Income before income taxes	$	18,573,000		22.3	%	$	(3,627,000	)	$	17,318,000		17.8	%	$	4,882,000		83.3	%

Revenues

Consolidated

Consolidated revenues increased 24.6% to $272,681,000 in the 2012 third quarter compared to $218,929,000 in the 2011 third quarter as a result of the factors discussed below under Reportable Segments.

We have one Major Client that accounted for approximately 7% and 9%, respectively, of consolidated revenues in the three months ended September 30, 2012 and 2011, respectively. Additionally, we have several other significant clients who each individually contributed at least 3% to our total consolidated revenues for the three months ended September 30, 2012. The loss of one or more of these clients would have a material adverse effect on the results of operations of our two operating segments. In addition, if such clients changed their payment terms, it would increase our accounts receivable balance and could have a material adverse effect on our cash flows and cash and cash equivalents.

Reportable Segments

Housekeeping’s 13.5% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients.

Dietary’s 58.3% net growth in reportable segment revenues is primarily a result of providing this service to a greater number of existing Housekeeping clients.

We derived 9% and 3%, respectively, of Housekeeping and Dietary’s 2012 third quarter revenues from our Major Client.

Costs of services provided

Consolidated

Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues for the 2012 third quarter remained constant at 85.9% compared to the corresponding 2011 quarter. The following table provides a comparison of the primary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance. In addition, see the discussion below on Reportable Segments which provides additional details to explain the increase in consolidated costs of services provided.

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	Quarter Ended September 30,
Cost of Services Provided-Key Indicators as a % of Revenue	2012		2011		Inc (Decr)%
Bad debt provision		0.1		0.3		(0.2	)
Workers’ compensation and general liability insurance		3.2		3.0		0.2

The bad debt provision decreased primarily due to our assessment of the collectability of our receivables, along with the overall increase in revenues, which increased at a much more significant rate than our receivables for the three month period ended September 30, 2012 as compared to 2011.

The workers’ compensation and general liability insurance expense has increased primarily due to less favorable claims’ experience during the three months ended September 30, 2012 compared to the comparable 2011 period.

Reportable Segments

Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the 2012 and 2011 third quarter decreased to 90.7% from 91.0%. Cost of services provided for Dietary, as a percentage of Dietary revenues, for the 2012 third quarter decreased to 94.3% from 95.1% in the corresponding 2011 quarter.

The following table provides a comparison of the primary cost of services provided-key indicators, as a percentage of the respective segment’s revenues, which we manage on a reportable segment basis in evaluating our financial performance:


	Quarter Ended September 30,
Cost of Services Provided-Key Indicators as a % of Revenue	2012		2011		Inc (Decr)%
Housekeeping labor and other labor costs		80.5		81.1		(0.6	)
Housekeeping supplies		8.0		7.2		0.8
Dietary labor and other labor costs		52.6		52.6		0.0
Dietary supplies		38.9		39.3		(0.4	)

Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, decreased due to increased efficiencies in managing these costs at the facility level. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in linen supplies due to the growth in laundry and linen revenue compared to overall Housekeeping revenues. Additionally, we have added more clients where we provide a greater amount of supplies under the terms of our service agreements compared to what we have historically provided to our client base.

Dietary labor and other labor costs, as a percentage of Dietary revenues, remained constant compared to prior year. The decrease in Dietary supplies, as a percentage of Dietary revenues, is a result of more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.

Consolidated Selling, General and Administrative Expense


			Quarter Ended September 30,
			2012		2011			$ Change		% Inc (Decr)
Selling, general and administrative expense w/o deferred compensation change	(a	)	$	20,014,000	$	15,875,000		$	4,139,000		26.1	%

Gain (loss) of deferred compensation fund				775,000		(1,531,000	)		2,306,000		(150.6	)%


Consolidated selling, general and administrative expense	(b	)	$	20,789,000	$	14,344,000		$	6,445,000		44.9	%

(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.

Although our growth in consolidated revenues was 24.6%, 2012 third quarter selling, general and administrative expenses excluding the change in the deferred compensation fund increased $4,139,000 or 26.1% compared to the 2011 third quarter. Consequently, 2012 third quarter selling, general and administrative expenses (excluding impact of deferred compensation fund), as a percentage of consolidated revenues, remained constant at 7.3% compared to the 2011 third quarter.

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Consolidated Investment and Interest Income

Investment and interest income, as a percentage of consolidated revenues, increased to 0.4% in the 2012 third quarter compared to (0.6%) in the 2011 third quarter. The net increase is primarily due to the investment gain related to the change in the deferred compensation fund during the quarter ended September 30, 2012 versus the investment loss related to the change in the deferred compensation fund during the comparable period in 2011.

Income before Income Taxes

Consolidated

As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for the 2012 third quarter remained constant at 6.9%, as a percentage of consolidated revenues, compared to the 2011 third quarter.

Reportable Segments

Housekeeping’s increase in income before income taxes is primarily attributable to the key indicators discussed above and, specifically the increase in reportable segment revenues, as well as the slight decrease in labor and labor related costs, partially offset by the increased cost of housekeeping supplies.

Dietary’s increased income before income taxes is primarily attributable to the increase in reportable segment revenues and decrease in dietary supplies, partially offset by the increase in labor and labor related costs.

Consolidated Income Taxes

For the quarter ended September 30, 2012, our effective tax rate was approximately 38%, an increase from the approximately 34% effective tax rate for the comparable 2011 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to a decrease in expected tax credits realized for 2012 compared to previous fiscal periods. The Company received credits in 2011 related to the Work Opportunity Tax Credit (“WOTC”) program but this program has not yet been renewed in 2012. The Company will continue to receive additional credits related to prior periods but will not have the benefit of credits for 2012 new hires unless the program is renewed. Additionally, the Company realized significant tax credits during 2011 from the New Hire Retention Credit, a one-time general business credit at the Federal level authorized by the Hiring Incentives to Restore Employment Act of 2011. The new hire retention credit allowed an employer a credit of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. The Company earned a significant amount of new hire retention credits for the quarter ended September 30, 2011, but did not earn additional amounts in 2012 as the credit expired at December 31, 2011. If the WOTC program is renewed retroactive to the beginning of 2012, our effective tax rate could be reduced below the current 38%.

Consolidated Net Income

As a result of the matters discussed above, consolidated net income for the 2012 third quarter decreased to 4.3%, as a percentage of consolidated revenues, compared to 4.6% in the 2011 third quarter.

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2012 Nine Month Period Compared with 2011 Nine Month Period

The following table sets forth the income statement key components for the nine month period ended September 30, 2012 that we use to evaluate our financial performance on a consolidated and reportable segment basis, as well as the percentage increases of each compared to the corresponding 2011 nine month period. The difference between the reportable segments’ operating results and other disclosed data and our consolidated financial statements relate primarily to corporate level transactions and recording of transactions at the reportable segment level which use methods other than generally accepted accounting principles.


	Nine Month Period Ended September 30, 2012
	Consolidated		% inc./ (decr.)			Corporate and Eliminations			Housekeeping Amount		% inc			Dietary Amount		% inc.
Revenues	$	800,396,000		25.3	%	$	159,000		$	550,579,000		14.9	%	$	249,658,000		56.9	%
Cost of services provided		691,982,000		25.9			(42,254,000	)		498,134,000		15.5			236,102,000		56.9
Selling, general and administrative		60,295,000		29.3			60,295,000			—		—			—		—
Investment and interest income		2,520,000		(1,515.7	)		2,520,000			—		—			—		—
Income before income taxes	$	50,639,000		19.9	%	$	(15,362,000	)	$	52,445,000		9.0	%	$	13,556,000		56.7	%

Revenues

Consolidated

Consolidated revenues increased 25.3% to $800,396,000 in the nine month period ended September 30, 2012 compared to $638,826,000 in the corresponding period in 2011 as a result of the factors discussed below under Reportable Segments.

We have one Major Client that accounted for approximately 7% and 9%, respectively, of consolidated revenues in the nine month periods ended September 30, 2012 and 2011, respectively. Additionally, we have several other significant clients who each individually contributed at least 3% to our total consolidated revenues for the nine months ended September 30, 2012. The loss of one or more of these clients would have a material adverse effect on the results of operations of our two operating segments. In addition, if such clients changed their payment terms, it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

Reportable Segments

Housekeeping’s 14.9% net growth in reportable segment revenues resulted primarily from an increase in revenues attributable to service agreements entered into with new clients.

Dietary’s 56.9% net growth in reportable segment revenues is primarily a result of providing this service to a greater number of existing Housekeeping clients.

We derived 9% and 3%, respectively, of Housekeeping and Dietary’s revenues for the nine month period ended September 30, 2012 from our Major Client.

Costs of services provided

Consolidated

Cost of services provided, on a consolidated basis, as a percentage of consolidated revenues for the nine months ended September 30, 2012 increased to 86.5% from 86.1% in the corresponding 2011 period. The following table provides a comparison of the primary cost of services provided-key indicators that we manage on a consolidated basis in evaluating our financial performance. In addition, see the discussion below on Reportable Segments which provides additional details to explain the increase in consolidated costs of services provided.


	Nine Months Ended September 30,
Cost of Services Provided-Key Indicators as a % of Revenue	2012		2011		Decr%
Bad debt provision		0.2		0.3		(0.1	)
Workers’ compensation and general liability insurance		3.4		3.5		(0.1	)

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The bad debt provision decreased primarily due to the prior year write-off of amounts owed from certain nursing homes that concluded their bankruptcy proceedings during the nine months ended September 30, 2011.

The workers’ compensation and general liability insurance expense decreased primarily due to the overall increase in Dietary revenue and the reduced proportion of labor costs as a percentage of revenue.

Reportable Segments

Cost of services provided for Housekeeping, as a percentage of Housekeeping revenues, for the nine month period ended September 30, 2012 increased to 90.5% from 90.0% compared to the corresponding 2011 period. Cost of services provided for Dietary, as a percentage of Dietary revenues, for the nine month period ended September 30, 2012 remained constant at 94.9% compared to prior year.


	Nine Months Ended September 30,
Cost of Services Provided-Key Indicators as a % of Revenue	2012		2011		% Inc (Decr)
Housekeeping labor and other labor costs		80.3		80.2		0.1
Housekeeping supplies		7.8		7.1		0.7
Dietary labor and other labor costs		52.6		52.2		0.4
Dietary supplies		39.1		39.3		(0.2	)

The increase in Housekeeping labor and other labor costs, as a percentage of Housekeeping revenues, resulted primarily from inefficiencies recognized in managing labor at the facility level. The increase in Housekeeping supplies, as a percentage of Housekeeping revenues, resulted primarily from an increase in linen supplies due to the growth in laundry and linen revenue compared to overall Housekeeping revenues. Additionally, we have added more clients where we provide a greater amount of supplies under the terms of our service agreements as compared to what we have historically provided to our client base.

The increase in Dietary labor and other labor costs, as a percentage of Dietary revenues, resulted from reduced efficiencies in managing these costs at the facility level. The decrease in Dietary supplies, as a percentage of Dietary revenues, is a result of more favorable vendor pricing programs obtained through further consolidation of dietary supply vendors.

Consolidated Selling, General and Administrative Expense


			Nine Months Ended September 30,
			2012		2011			$ Change		% Inc (Decr)
Selling, general and administrative expense w/o deferred compensation change	(a	)	$	58,583,000	$	47,619,000		$	10,964,000		23.0	%
Gain (loss) of deferred compensation fund				1,712,000		(984,000	)		2,696,000		(274.0	)%

Consolidated selling, general and administrative expense	(b	)	$	60,295,000	$	46,635,000		$	13,660,000		29.3	%

(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.

Although our growth in consolidated revenues was 25.3%, selling, general and administrative expenses for the nine months ended September 30, 2012 excluding the change in the deferred compensation fund increased $10,964,000 or 23.0% compared to the corresponding 2011 period. Consequently, selling, general and administrative expenses (excluding impact of the deferred compensation fund), as a percentage of consolidated revenues, decreased to 7.3% for the nine months ended September 30, 2012 as compared to 7.5% in the corresponding 2011 period. This decrease resulted primarily from the decrease in our payroll and payroll related expenses, travel related costs and professional fees as a percentage of revenues. The decrease in payroll and payroll related costs resulted from the improved leverage of our existing management structure to support the increased revenue.

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Consolidated Investment and Interest Income

Investment and interest income, as a percentage of consolidated revenues, increased to 0.3% in the nine months ended September 30, 2012 compared to less than 0.1% in the corresponding 2011 period. The net increase is primarily due to the investment gain related to the change in the deferred compensation fund during the nine month period ended September 30, 2012 versus the investment loss related to the change in the deferred compensation fund during the comparable period in 2011.

Income before Income Taxes

Consolidated

As a result of the discussion above related to revenues and expenses, consolidated income before income taxes for the nine month period ended September 30, 2012 decreased to 6.3%, as a percentage of consolidated revenues, compared to 6.6% in the corresponding 2011 period.

Reportable Segments

Housekeeping’s increase in income before income taxes is primarily attributable to the key indicators discussed above and, specifically the increase in reportable segment revenues, partially offset by the increase in labor and labor related costs.

Dietary’s increase in income before income taxes is primarily attributable to the increase in reportable segment revenues, and decrease in dietary supplies, partially offset by the increase in labor and labor related costs.

Consolidated Income Taxes

For the nine month period ended September 30, 2012, our effective tax rate was approximately 38%, an increase from the 35% effective tax rate for the comparable 2011 period. Such differences between the effective tax rates and the applicable U.S. federal statutory rate arise primarily from the effect of state and local income taxes and tax credits available to the Company. The increase in the effective tax rate is primarily due to a decrease in expected tax credits realized for 2012 compared to previous fiscal periods. The Company received credits in 2011 related to the Work Opportunity Tax Credit (“WOTC”) program but this program has not yet been renewed in 2012. The Company will continue to receive additional credits related to prior periods but will not have the benefit of credits for 2012 new hires unless the program is renewed. Additionally, the Company realized significant tax credits during 2011 from the New Hire Retention Credit, a one-time general business credit at the Federal level that was authorized by the Hiring Incentives to Restore Employment Act of 2011. The new hire retention credit allowed an employer a credit of up to $1,000 for each eligible worker that was retained for at least 52 consecutive weeks of qualified employment. The Company earned a significant amount of new hire retention credits for the nine month period ended September 30, 2011, but did not earn additional amounts in 2012 as the credit expired. If the WOTC program is renewed retroactive to the beginning of the year in 2012, our effective tax rate could be reduced below the current 38%.

Consolidated Net Income

As a result of the matters discussed above, consolidated net income for the nine month period ended September 30, 2012 decreased to 3.9%, as a percentage of consolidated revenues, compared to 4.3% in the corresponding 2011 period.

Critical Accounting Policies and Estimates

The preparation of financial statements in accordance with accounting standards generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

We consider the policies discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on our judgment. Therefore, it should be noted that financial reporting results rely on estimating the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies and estimates are described in the following paragraphs. For these estimates, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. Any such adjustments or revisions to estimates could result in material differences to previously reported amounts.

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The policies discussed below are not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting standards generally accepted in the United States, with no need for our judgment in their application. There are also areas in which our judgment in selecting another available alternative would not produce a materially different result. See our audited consolidated financial statements and notes thereto which are included in our Annual Report on Form 10-K for the year ended December 31, 2011, which contain accounting policies and estimates and other disclosures required by accounting principles generally accepted in the United States.

Allowance for Doubtful Accounts

The Allowance for Doubtful Accounts (the “Allowance”) is established as losses are estimated to have occurred through a provision for bad debts charged to earnings. The Allowance is evaluated based on our periodic review of accounts and notes receivable and is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

In accordance with the risk of extending credit, we regularly evaluate our accounts and notes receivable for impairment or loss of value and when appropriate, will provide in our Allowance for such receivables. We generally follow a policy of reserving for receivables due from clients in bankruptcy, clients with which we are in litigation for collection and other slow paying clients. The reserve is based upon our estimates of ultimate collectability. Correspondingly, once our recovery of a receivable is typically determined through litigation, bankruptcy proceedings or negotiation to be less than the recorded amount on our balance sheet, we will charge-off the applicable amount to the Allowance.

Our methodology for the Allowance is based upon a risk-based evaluation of accounts and notes receivable associated with a client’s ability to make payments. Such Allowance generally consists of an initial amount established based upon criteria generally applied if and when a client account files bankruptcy, is placed for collection/litigation and/or is considered to be pending collection/litigation. The initial Allowance is adjusted either higher or lower when additional information is available to permit a more accurate estimate of the collectability of an account.

Summarized below for the nine month period ended September 30, 2012 and year ended December 31, 2011 are the aggregate account balances for the Allowance criteria noted above, net write-offs of client accounts, bad debt provision and allowance for doubtful accounts.


Period Ended	Aggregate Account of Balances of Clients in Bankruptcy or in/or Pending Collection/ Litigation		Net Write-offs of Client Accounts		Bad Debt Provision		Allowance for Doubtful Accounts
September 30, 2012	$	6,396,000	$	2,317,000	$	1,750,000		$3,939,000
December 31, 2011		7,784,000		2,013,000		2,450,000		4,506,000

At September 30, 2012, we identified accounts totaling $6,396,000 that require an Allowance based on potential impairment or loss of value. An Allowance totaling $3,939,000 was provided for these accounts at such date. Actual collections of these accounts could differ from that which we currently estimate. If our actual collection experience is 5% less than our estimate, the related increase to our Allowance would decrease net income by $56,000.

Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends, as more fully discussed under Liquidity and Capital Resources below, and as further described in our 2011 Annual Report on Form 10-K in Part I Item 1A under “Risk Factors”, and Part 1 Item 1 under “Government Regulation of Clients” and “Service Agreements/Collections”, change in such a manner as to negatively impact the cash flows of our clients. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.

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Accrued Insurance Claims

We currently have a Paid Loss Retrospective Insurance Plan for general liability and workers’ compensation insurance, which comprise approximately 25% of our liabilities at September 30, 2012. Our accounting for this plan is affected by various uncertainties because we must make assumptions and apply judgment to estimate the ultimate cost to settle reported claims and claims incurred but not reported as of the balance sheet date. We address these uncertainties by regularly evaluating our claims’ pay-out experience, present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims estimate. Our evaluations are based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our claims experience and/or industry trends result in an unfavorable change resulting from, among other factors, the severity levels of reported claims and medical cost inflation, as compared to historical claim trends, it would have an adverse effect on our results of operations and financial condition. Under these plans, predetermined loss limits are arranged with an insurance company to limit both our per-occurrence cash outlay and annual insurance plan cost.

For workers’ compensation, we record a reserve based on the present value of estimated future cost of claims and related expenses that have been reported but not settled, including an estimate of claims incurred but not reported that are developed as a result of a review of our historical data and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period. Reducing the discount factor by 1% would reduce net income for the nine months ended September 30, 2012 by approximately $37,000. Additionally, reducing the estimated payout period by six months would result in an approximate $86,000 reduction in net income.

For general liability, we record a reserve for the estimated ultimate amounts to be paid for known claims. The estimated ultimate reserve amount recorded is derived from the estimated claim reserves provided by our insurance carrier reduced by an historical experience factor.

Asset Valuations and Review for Potential Impairment

We review our fixed assets, goodwill and other intangible assets at least annually or whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. This review requires that we make assumptions regarding the value of these assets and the changes in circumstances that would affect the carrying value of these assets. If such analysis indicates that a possible impairment may exist, we are then required to estimate the fair value of the asset and, as deemed appropriate, expense all or a portion of the asset. The determination of fair value includes numerous uncertainties, such as the impact of competition on future value. We believe that we have made reasonable estimates and judgments in determining whether our long-term assets have been impaired; however, if there is a material change in the assumptions used in our determination of fair value or if there is a material change in economic conditions or circumstances influencing fair value, we could be required to recognize certain impairment charges in the future. As a result of our most recent reviews, no changes in asset values were required.

Income Taxes

Deferred income taxes are recognized for the tax consequences related to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes at each year-end, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is established when necessary based on the weight of available evidence, if it is considered more likely than not that all or some portion of the deferred tax assets will not be realized. Income tax expense is the sum of current income tax plus the change in deferred tax assets and liabilities.

We are subject to income taxes in the United States and numerous state and local jurisdictions. The determination of the income tax provision is an inherently complex process, requiring management to interpret continually changing regulations and to make certain significant judgments. Our assumptions, judgments and estimates relative to the amount of deferred income taxes take into account scheduled reversals of deferred tax liabilities, recent financial operations, estimates of the amount of future taxable income and available tax planning strategies. Actual operating results in future years could render our current assumptions, judgments and estimates inaccurate. No assurance can be given that the final tax outcome of these matters will not be different from that which is reflected in the Company’s historical income tax provisions and accruals. The Company adjusts these items in light of changing facts and circumstances. To the extent that the final tax outcome of these matters is different than the amounts recorded, such differences could have a material effect on the income tax provisions or benefits in the periods in which such determinations are made.

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Liquidity and Capital Resources

At September 30, 2012, we had cash and cash equivalents, and marketable securities of $74,530,000 and working capital of $194,115,000 compared to December 31, 2011 cash and cash equivalents, and marketable securities of $69,976,000 and working capital of $186,734,000. We view our cash and cash equivalents, and marketable securities as our principal measure of liquidity. Our current ratio at September 30, 2012 decreased to 4.5 to 1 compared to 5.1 to 1 at December 31, 2011. This decrease resulted primarily from the increase in our accounts payable and income taxes payable which were partially offset by the increase in cash and cash equivalents and marketable securities and prepaid expenses and other current assets, and the decrease in accrued payroll. On an historical basis, our operations have generally produced consistent cash flow and have required limited capital resources. We believe our current and near term cash flow positions will enable us to fund our continued anticipated growth.

Operating Activities

The net cash provided by our operating activities was $35,419,000 for the nine month period ended September 30, 2012. The principal sources of net cash flows from operating activities for the nine month period ended September 30, 2012 were net income, and non-cash charges to operations for bad debt provisions, depreciation and amortization. Additionally, operating activities’ cash flows increased by $27,888,000 as a result of the increase in accounts payable and other accrued expenses, accrued insurance claims, deferred compensation liability and income taxes (net) for the nine month period. These operating cash inflows were offset primarily by the cash outflow of $26,983,000 related to the increase in the total accounts and notes receivables, inventories and supplies and prepaid expenses primarily due to the revenue growth experienced in this period along with the decreases in accrued payroll and related payroll taxes and the increased in deferred compensation funding.

Investing Activities

Our principal source of cash in investing activities for the nine month period ended September 30, 2012 was $9,345,000 from the net sales less purchases of marketable securities. The net sales of marketable securities were used to increase the Company’s available cash to support the increased business in the fourth quarter of 2011 and the nine months ended September 30, 2012. Additionally, we expended $2,668,000 for the purchase of housekeeping equipment, computer software and equipment, and laundry equipment installations. Under our current plans, which are subject to revision upon further review, it is our intention to spend an aggregate of $1,000,000 to $2,000,000 during the remainder of 2012 for such capital expenditures.

Financing Activities

During the nine month period ended September 30, 2012, we paid regular quarterly cash dividends approximating $32,866,000 as follows:


	Quarter ended
	March 31, 2012		June 30, 2012		September 30, 2012
Cash dividend per common share	$	.16125	$	.16250	$	.16375
Total cash dividends paid	$	10,847,000	$	10,956,000	$	11,063,000
Record date		February 24		April 27		July 27
Payment date		March 26		May 18		August 24

On October 9, 2012, our Board of Directors declared a regular cash dividend of $.1650 per common share to be paid on November 30, 2012 to shareholders of record as of October 26, 2012.

Operating cash flows exceeded dividend payments for the nine months ended September 30, 2012. Our Board of Directors reviews our dividend policy on a quarterly basis. Although there can be no assurance that we will continue to pay dividends or the amount of the dividend, we expect to continue to pay a regular quarterly cash dividend. In connection with the establishment of our dividend policy, we adopted a Dividend Reinvestment Plan in 2003.

During the nine months ended September 30, 2012, we received proceeds of $3,910,000 from the exercise of stock options by employees. Additionally, as a result of deductions derived from the stock option exercises, we recognized an income tax benefit of $1,289,000.

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Line of Credit

The line of credit requires us to satisfy two financial covenants on a quarterly basis. Such covenants, and their respective status at September 30, 2012, were as follows:


Covenant Description and Requirement	Status at September 30, 2012
Commitment coverage ratio: cash and cash equivalents plus marketable securities must equal or exceed outstanding obligations under the line by a multiple of 1.00		1.84
Tangible net worth: must exceed $159,078,000	$	201,816,000

As noted above, we complied with the financial covenants at September 30, 2012 and expect to continue to remain in compliance with such financial covenants. This line of credit expires on September 30, 2013. We believe the line of credit will be renewed at that time.

Accounts and Notes Receivable

We expend considerable effort to collect the amounts due for our services on the terms agreed upon with our clients. Many of our clients participate in programs funded by federal and state governmental agencies which historically have encountered delays in making payments to its program participants. Congress has enacted a number of laws during the past decade that have significantly altered, or may alter, overall government reimbursement for nursing home services. Because our clients’ revenues are generally dependent on Medicare and Medicaid reimbursement funding rates and mechanisms, the overall effect of these laws and trends in the long term care industry have affected and could adversely affect the liquidity of our clients, resulting in their inability to make payments to us on agreed upon payment terms. These factors, in addition to delays in payments from clients, have resulted in and could continue to result in significant additional bad debts in the near future. Whenever possible, when a client falls behind in making agreed-upon payments, we convert the unpaid accounts receivable to interest bearing promissory notes. The promissory notes receivable provide a means by which to further evidence the amounts owed and provide a definitive repayment plan and therefore may ultimately enhance our ability to collect the amounts due. At September 30, 2012 and December 31, 2011, we had $7,760,000 and $6,693,000, net of reserves, respectively, of such promissory notes outstanding. Additionally, we consider restructuring service agreements from full service to management-only service in the case of certain clients experiencing financial difficulties. We believe that such restructurings may provide us with a means to maintain a relationship with the client while at the same time minimizing collection exposure.

As a result of the current economic crisis, many states have significant budget deficits. State Medicaid programs are experiencing increased demand, and with lower revenues than projected, they have fewer resources to support their Medicaid programs. In addition, in March 2010, comprehensive health care reform legislation was signed into law. The Act will significantly impact the governmental healthcare programs our clients participate in, and reimbursements received there under from governmental or third-party payors. Furthermore, in the coming year, new proposals or additional changes in existing regulations could be made under the Act which could directly impact the governmental reimbursement programs in which our clients participate. As a result, some state Medicaid programs are reconsidering previously approved increases in nursing home reimbursement or are considering delaying those increases. A few states have indicated they may run out of cash to pay Medicaid providers, including nursing homes. In addition, certain state governors have recently stated that they will reject Federal Medicaid assistance under the Act. Any negative changes in our clients’ reimbursements would negatively impact our results of operations. Although we are currently evaluating the Act’s effect on our client base, we may not know the full effect until such a time as these laws are fully implemented and the Centers for Medicare and Medicaid Services and other agencies issue applicable regulations or guidance.

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We have had varying collection experience with respect to our accounts and notes receivable. When contractual terms are not met, we generally encounter difficulty in collecting amounts due from certain of our clients. Therefore, we have sometimes been required to extend the period of payment for certain clients beyond contractual terms. These clients include those who have terminated service agreements and slow payers experiencing financial difficulties. In order to provide for these collection problems and the general risk associated with the granting of credit terms, we have recorded bad debt provisions (in an Allowance for Doubtful Accounts) of $1,750,000 and $2,100,000 for the nine months ended September 30, 2012 and 2011, respectively. These provisions represent approximately 0.2% and 0.3% as a percentage of total revenues for such respective periods. In making our credit evaluations, in addition to analyzing and anticipating, where possible, the specific cases described above, we consider the general collection risk associated with trends in the long-term care industry. We also establish credit limits, perform ongoing credit evaluation and monitor accounts to minimize the risk of loss. Notwithstanding our efforts to minimize credit risk exposure, our clients could be adversely affected if future industry trends change in such a manner as to negatively impact their cash flows. If our clients experience a negative impact in their cash flows, it would have a material adverse effect on our results of operations and financial condition.

At September 30, 2012, amounts due from our Major Client represented less than 1% of our accounts receivable balance. If such client changes its payment terms, it would increase our accounts receivable balance and have a material adverse effect on our cash flows and cash and cash equivalents.

Insurance Programs

We self-insure or carry a high deductible, and therefore retain a substantial portion of the risk associated with the expected losses under our general liability and workers compensation programs. Under our insurance plans for general liability and workers’ compensation, predetermined loss limits are arranged with our insurance company to limit both our per occurrence cash outlay and annual insurance plan cost.

For workers’ compensation, we record a reserve based on the present value of future payments, including an estimate of claims incurred but not reported, that are developed as a result of a review of our historical data and open claims. The present value of the payout is determined by applying an 8% discount factor against the estimated value of the claims over the estimated remaining pay-out period.

We regularly evaluate our claims’ pay-out experience, present value factor and other factors related to the nature of specific claims in arriving at the basis for our accrued insurance claims’ estimate. Our evaluation is based primarily on current information derived from reviewing our claims experience and industry trends. In the event that our claims experience and/or industry trends result in an unfavorable change, it would have an adverse effect on our consolidated results of operations, financial condition and cash flows.

Capital Expenditures

The level of capital expenditures is generally dependent on the number of new clients obtained. Such capital expenditures primarily consist of housekeeping equipment purchases, laundry and linen equipment installations, and computer hardware and software. Although we have no specific material commitments for capital expenditures through the end of calendar year 2012, we estimate that for the remainder of 2012 we will have capital expenditures of approximately $1,000,000 to $2,000,000 in connection with housekeeping equipment purchases and laundry and linen equipment installations in our clients’ facilities, as well as expenditures relating to internal data processing hardware and software requirements. We believe that our cash from operations, existing cash and cash equivalents balance and credit line will be adequate for the foreseeable future to satisfy the needs of our operations and to fund our anticipated growth. However, should these sources not be sufficient, we would seek to obtain necessary working capital from such sources as long-term debt or equity financing.

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Material Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements, other than our irrevocable standby letter of credit previously discussed.

Effects of Inflation

Although there can be no assurance thereof, we believe that in most instances we will be able to recover increases in costs attributable to inflation by passing through such cost increases to our clients.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

At September 30, 2012 and December 31, 2011, we had $74,530,000 and $69,976,000, respectively, in cash, cash equivalents and marketable securities. In accordance with U.S. GAAP, the fair value of all of our cash, cash equivalents and marketable securities is determined based on “Level 1” or “Level 2” inputs, which consist of quoted prices whose value is based upon quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. We place our cash investments in instruments that meet credit quality standards, as specified in our investment policy guidelines.

Investments in both fixed rate and floating rate investments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to an increase in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if there is a decline in the fair value of our investments.

ITEM 4.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls are procedures that are designed with the objective of ensuring that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”), such as this Form 10-Q, is reported in accordance with Securities and Exchange Commission (“SEC”) rules. Disclosure controls are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Based on their evaluation as of September 30, 2012, pursuant to Exchange Act Rule 13a-15(b), our management, including our Chief Executive Officer and Chief Financial Officer, believe our disclosure controls and procedures (as defined in Exchange Act 13a-15(e) are effective.

In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by our management, including our Chief Executive Officer and Chief Financial Officer, no changes during the quarter ended September 30, 2012, were identified that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Certifications

Certifications of the Principal Executive Officer and Principal Financial Officer regarding, among other items, disclosure controls and procedures are included as exhibits to this Form 10-Q.

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PART II. OTHER INFORMATION

ITEM 1.

Legal Proceedings.

Not Applicable

ITEM 1A.

Risk Factors

There has been no material change in the risk factors set forth in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011.

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Not Applicable.

ITEM 3.

Defaults under Senior Securities.

Not Applicable.

ITEM 4.

Mine Safety Disclosures

Not Applicable.

ITEM 5.

Other Information.

Not Applicable.

ITEM 6.

Exhibits

Exhibits -


10.1(1)		Healthcare Services Group, Inc. Amended and Restated Deferred Compensation Plan*

31.1		Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

32.2		Certification of Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

EX-101		XBRL Instance Document

EX-101		XBRL Taxonomy Extension Schema Document

EX-101		XBRL Taxonomy Calculation Linkbase Document

EX-101		XBRL Taxonomy Extension Definition Linkbase Document

EX-101		XBRL Taxonomy Labels Linkbase Document

EX-101		XBRL Taxonomy Presentation Linkbase Document

*	Filed herewith.

(1)	Indicates a management plan or compensatory plan or arrangement.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


						HEALTHCARE SERVICES GROUP, INC.

October 22, 2012						/s/ Daniel P. McCartney
Date						DANIEL P. McCARTNEY,
						Chief Executive Officer (Principal Executive Officer)

October 22, 2012						/s/ John C. Shea
Date						JOHN C. SHEA,
						Chief Financial Officer and Secretary (Principal Financial and Accounting Officer)

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Exhibit 10.1

HEALTHCARE SERVICES GROUP, INC.

AMENDED AND RESTATED

DEFERRED COMPENSATION PLAN

ARTICLE 1.

STATEMENT OF PURPOSE

Section 1.1 General Purpose.

The purpose of the Healthcare Services Group, Inc. Amended and Restated Deferred Compensation Plan as set forth herein and as the same may hereafter be amended (the “Plan”), is to secure and retain the services of a select group of management or highly compensated employees (the “Key Employees”) of Healthcare Services Group, Inc. (the “Company”) and its “Affiliates” (as hereinafter defined and, together with the Company, the “Employer”), and to provide additional retirement benefits to these Key Employees who have devoted extraordinary energies to the Employer.

Section 1.2 Effective Date .

The Plan, as amended and restated, shall (except as otherwise provided herein) be effective with respect to amounts deferred hereunder as of January 1, 2013 (the “Effective Date”) and thereafter. The Plan was previously amended and restated effective January 1, 2009 to incorporate the changes required under Section 409A of the “Code” (as hereinafter defined) (the “409A Effective Date”). For amounts deferred under the Plan as of January 1, 2005 and prior to the 409A Effective Date, the Plan shall be operated in good faith compliance with Section 409A of the Code, including, as applicable, IRS Notice 2005-1 and the Proposed Treasury Regulations issued with respect to Section 409A of the Code on October 4, 2005 (for taxable years beginning prior to January 1, 2008). The original effective date of the Plan is January 1, 2000.

Section 1.3 Internal Revenue Code and ERISA;

General Creditor Status of Participants.

(a)

Tax Qualification under the Internal Revenue Code.

It is intended that the Plan not be a tax-qualified plan under Section 401(a) or Section 403(a) of the Internal Revenue Code of 1986, as amended (the “Code”).

(b)

Status under the Employee Retirement Income Security Act of 1974.

It is intended that the Plan be entitled to all statutory and regulatory exemptions under the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) applicable to unfunded plans maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.

(c)

Creditor Status of Participants.

It is intended that all benefits be paid from the general assets of the Company, that benefits accrued under the Plan be unfunded for ERISA and Code purposes until paid, and that, as to unpaid accrued benefits under the Plan, each Participant is an unsecured general creditor of the Company.

ARTICLE 2.

DEFINITIONS

Section 2.1 “ Account ” means the entire interest of the Participant in the Plan.

Section 2.2 “ Affiliate ” means any and all persons with whom or with which the Company would be considered a single employer under Section 414(b) or (c) of the Code, applied by using the “at least 80%” ownership threshold set forth in Sections 1563(a)(1), (2) and (3) and Treasury Regulation Section 1.414(c)-2, respectively, instead of the “at least 50%” ownership threshold set forth in Treasury Regulation Section 1.409A-1(h)(3).

Section 2.3 “ Age ” means the chronological age (in years) attained by the Employee at the most recent past anniversary of the date of his or her birth.

Section 2.4 “ Beneficiary ” means the person, persons or entity entitled to receive benefits by reason of the death of a Participant under the Plan.

Section 2.5 “ Board ” means the Board of Directors of the Company.

Section 2.6 “ Code ” means the Internal Revenue Code of 1986, as amended, and successor statutes of similar purpose. A reference to any specific Section of the Code shall be a reference to the same or similar text if that Section is renumbered or redesignated and a reference to one or more Sections of a successor statute addressing the same or parallel concepts.

Section 2.7 “ Committee ” means the committee appointed by the Board, consisting of three (3) or more individuals, which shall be responsible for the administration of the Plan. Members of the Committee may be Participants and may be members of the Board.

Section 2.8 “ Deferral Year ” means a Plan Year with respect to which a Salary Deferral Election applies. Notwithstanding any provision of this Plan to the contrary, a Deferral Year must be a Plan Year with respect to which a Participant provides services to the Employer.

Section 2.9 “ Disability ” (including any words of similar import) means the condition under which the Participant (i) is unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (ii) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, receiving income replacement benefits for a period of not less than 3 months under an accident and health plan covering employees of the Employer.

Section 2.10 “ Earnings ” means an Employee’s total W-2 compensation earned with respect to services rendered to or on behalf of the Employer, exclusive of income attributable to the exercise of stock options and the receipt of automobile allowances. Notwithstanding the foregoing, effective for Deferral Years beginning on or after January 1, 2009, “Earnings” means

the sum of an Employee’s (i) base salary (exclusive of income attributable to the exercise of stock options and the receipt of automobile allowances), payable to the Employee during the Deferral Year in respect of services performed during Deferral Year, in accordance with the Employer’s normal payroll practices, and (ii) incentive compensation, payable to the Employee (A) as of June 30 of the Deferral Year in respect of services performed during the first quarter of the Deferral Year, (B) as of December 31 of the Deferral Year, in respect of services performed during the second and third quarters of the Deferral Year and (C) as of January 31 of the Plan Year immediately following the Deferral Year, in respect of services performed during the fourth quarter of the Deferral Year. Nothing contained herein shall be construed by any party as requiring the Employer to pay any incentive compensation to any Employee for any Deferral Year, and the decision to do so shall be made by the Committee in its sole and absolute discretion.

Section 2.11 “ Employee ” means a person having a common law employer/employee relationship with the Employer. The term shall not include persons characterized by the Employer as “independent contractors,” “leased employees” or “consultants,” regardless of whether such persons may be characterized for income or payroll tax withholding or liability, worker’s compensation payments or unemployment compensation premium calculations by the IRS or other governmental authority.

Section 2.12 “ Employment Termination Date ” means the date on which the Participant sustains a Separation from Service.

Section 2.13 “ IRS ” means the Internal Revenue Service.

Section 2.14 “ Key Employee ” means an Employee selected for participation in the Plan by the Committee and who is employed in any of the following executive or management capacities:

(a) Corporate executive and corporate management personnel;

(b) Divisional and Regional Managers; and

Section 2.15 “ Plan ” means the Healthcare Services Group, Inc. Amended and Restated Deferred Compensation as set forth herein, and as the same may hereafter be amended.

Section 2.16 “ Participant ” means a Key Employee who is eligible to participate in the Plan.

Section 2.17 “ Plan Administrator ” means the Committee.

Section 2.18 “ Plan Year ” means the calendar year.

Section 2.19 “ Retirement ” means a Participant’s Separation from Service on or after attaining age 60. Effective for Deferral Years after 2012, “Retirement” shall mean a Participant’s Separation from Service on or after attaining age 55.

Section 2.20 “ Salary Deferral Election ” means an election by a Participant to defer a portion of his or her Earnings for a given Deferral Year, pursuant to an election to do so in accordance with the provisions of Section 4.1 hereof.

Section 2.21 “ Separation from Service ” means the death, Retirement or Termination of Employment of the Participant. For purposes of this Section 2.21,

(a) the employment relationship is treated as remaining intact while the Participant is on military leave, sick leave or other bona fide leave of absence if the period does not exceed six months, or if longer, so long as the individual retains a right to reemployment with any member of the Employer under an applicable statute or by contract;

(b) a leave of absence constitutes a bona fide leave of absence only if there is a reasonable expectation that the Participant will return to perform services for any member of the Employer; and

(c) if the period of leave exceeds six months and the Participant does not retain a right to reemployment under an applicable statute or by contract, the employment relationship is deemed to terminate on the first date immediately following such six-month period.

Section 2.22 “ Scheduled Distribution ” means a payment scheduled to be made on a date certain (on or about February 15) while the Participant is still employed by the Employer. A Scheduled Distribution shall be available to Participants for Salary Deferral Elections effective on or after January 1, 2013.

Section 2.23 “ Specified Employee ” means a Participant who, as of the date of his or her Separation from Service, is a key employee of any member of the Employer the stock of which is publicly traded on an established securities market (within the meaning of Treasury Regulation Section 1.897-1(m)) or otherwise. For purposes of this Section 2.22,

(a) a Participant is a key employee if such Participant meets the requirements of Section 416(i)(1)(A)(i), (ii) or (iii) of the Code (applied in accordance with the regulations thereunder and disregarding Section 416(i)(5)) at any time during the 12-month period ending on a Specified Employee Identification Date;

(b) if a Participant is a key employee as of a Specified Employee Identification Date, he or she is treated as a key employee under the Plan for the entire 12-month period beginning on the Specified Employee Effective Date; and

(c) for purposes of identifying a Specified Employee by applying the requirements of Section 416(i)(1)(A)(i), (ii) and (iii) of the Code, the definition of compensation under Treasury Regulation Section 1.415(c)-2(a) is used, applied as if the Company were not using any safe harbor provided in Treasury Regulation Section 1.415(c)-2(d), were not using any of the elective special timing rules provided in Treasury Regulation Section 1.415(c)-2(e), and were not using any of the elective special rules provided in Treasury Regulation Section 1.415(c)-2(g). Notwithstanding the foregoing, the Company may elect to use any available definition of compensation under Section 415 of the Code and the Treasury regulations

thereunder, including any available safe harbor and any available election under the timing rules or special rules, provided that the definition is applied consistently to all employees of the Employer for purposes of identifying Specified Employees. However, once a list of Specified Employees has become effective, the Employer shall be prohibited from changing the definition of compensation for purposes of identifying Specified Employees for the period with respect to which such list is effective.

Section 2.24 “ Specified Employee Effective Date ” means April 1 ^st immediately following the Specified Employee Identification Date.

Section 2.25 “ Specified Employee Identification Date ” means December 31 ^st .

Section 2.26 “ Stock ” means the voting common stock of HCSG, $0.01 par value per share.

Section 2.27 “ Termination of Employment ” means the Participant’s termination of employment with the Employer for any reason other than death or Retirement, including on account of Disability, where the Participant and the Employer reasonably anticipate either that no further services would be performed by the Participant for the Employer after a certain date or that the level of bona fide services that the Participant would perform after such date (whether as an employee or independent contractor) would permanently decrease to no more than 20% of the average level of bona fide services performed over the immediately preceding 36-month period (or full period of services to the Employer if less than 36 months). For purposes of this Section 2.26, periods during which the Participant is on an unpaid leave of absence are disregarded (including for purposes of determining the relevant 36-month period), and periods during which the Participant is on a paid bona fide leave of absence are treated as periods during which the Participant provided services at the level which the Participant would have been required to perform the services to receive the compensation if not on a bona fide leave of absence.

Section 2.28 “ Trust ” means the trust established by the Company with Bank of America, N.A., as trustee (“Trustee”), pursuant to that certain Trust Agreement dated as of October 18, 2012, as amended or amended and restated from time to time (the “Trust Agreement”), for the purpose of receiving contributions from the Company and retaining such contributions (and the proceeds thereof from investments, including the proceeds of any life insurance policies owned by the trust, if any) as a source of funds to assist the Company in meeting its obligation to provide benefits under the Plan.

Section 2.29 “ Valuation Date ” means mean any day on which the New York Stock Exchange or any successor to its business is open for trading, or such other date as may be designated by the Committee.

Section 2.30 “ Valuation Funds ” means the funds selected by the Committee and listed on the attached Exhibit “A,” to be used as earnings indices described in Section 4.3. The Valuation Funds so listed on Exhibit “A” are subject to change from time to time as the Committee, in its sole discretion, deems necessary or appropriate. No provision of this Plan shall be construed as giving any Participant an interest in any of these Valuation Funds, nor shall any provision require the Employer or the Trustee to make any investment in any such funds.

Section 2.31 “ Vesting Date ” means the date specified in Section 4.2(b) that a Participant becomes fully vested in the Stock allocated to that Participant’s Account pursuant to Section 4.2(a).

ARTICLE 3.

PARTICIPATION

Section 3.1 Eligibility .

Participation in the Plan shall be strictly limited to Key Employees.

Section 3.2 Commencement of Participation.

Each Key Employee employed by the Employer on the original effective date set forth in Section 1.2 hereof and who elects to participate in the Plan shall become a Participant as of such date. Every other Key Employee shall become a participant on the first day of the Plan Year coincident or next following the date such individual became a Key Employee.

Section 3.3 Cessation of Participation.

Each Participant shall remain a Participant until the later to occur of:

(a) his or her Employment Termination Date; or

(b) the date on which he or she receives a distribution of the entire balance of his or her Account, so that he or she then has no remaining balance in his or her Account.

ARTICLE 4.

ELECTION OF DEFERRALS,

INVESTMENT OF DEFERRAL, PAYMENT OF BENEFITS

Section 4.1 Election of Deferral.

(a) General Rule . Each year, every Participant may irrevocably elect to defer the receipt of up to twenty-five percent (25%) of his or her Earnings payable for any Deferral Year, in respect of services to be performed by the Participant for the Employer for such Deferral Year, by filing a Salary Deferral Election with the Plan Administrator prior to the end of the Plan Year immediately preceding the Deferral for the applicable Deferral Year. Such Salary Deferral Election shall apply to both base salary and incentive compensation. For avoidance of doubt, a Participant shall not have the ability to designate a different percentage to be deferred with respect to either element of Earnings for any given Deferral Year. A Salary Deferral Election shall be in the manner prescribed by the Plan Administrator.

(b) Initial Deferral Election . Notwithstanding Section 4.1(a) of the Plan, in the case of the first Plan Year during which a Key Employee becomes eligible to

participate in the Plan, the Key Employee may file a Salary Deferral Election with the Plan Administrator within 30 days after the date on which he or she becomes so eligible, with respect to Earnings paid for services to be performed during such Plan Year (the initial Deferral Year) after the effective date of the Salary Deferral Election contained therein.

(c) Vesting of Earnings . The portion of a Participant’s Account attributable to any Salary Deferral Election shall be fully vested as of the date on which the applicable Earnings are credited to such Account.

(d) Termination of Salary Deferral Election for a Given Deferral Year . A Participant’s obligation to defer Earnings under a given Salary Deferral Election will terminate as of December 31 of each year.

Section 4.2 Employer Matching.

(a) Allocation Rules . The Company shall contribute and allocate to each Participant’s Account, as of the last day of each Deferral Year, the number of full shares of Stock obtained by dividing an amount equal to twenty-five percent (25%) of the first fifteen percent (15%) of Earnings deferred by the Participant for such Deferral Year (the “Deferral Year”) pursuant to the election described in Section 4.1, by the Market Price of the Stock on the last day of the Deferral Year. For this purpose Market Price shall mean the closing price of the Stock on the last day of the Deferral Year or if there was no trading of the Stock on such date, the closing price on the nearest prior business day on which trading occurred on a recognized securities exchange. Notwithstanding the foregoing, stock certificates in respect of allocations under this Section 4.2(a) shall be credited to the Account no later than January 31st of the Plan Year immediately following the Deferral Year. To be eligible to receive an allocation of Stock pursuant to this Section 4.2(a), a Participant must be employed by the Employer on the last day of the Deferral Year.

(b) Each Key Employee who becomes eligible and elects to participate in the Plan shall have a fully vested nonforfeitable interest in the Stock allocated to his or her Account, if still employed by the Employer, on the last day of the Plan Year which commences on or after the third anniversary of the first day of the first Plan Year in which a Key Employee elects to make contributions to the Plan. In the event a Participant’s experiences a Separation from Service for any reason other than death, Disability or Retirement prior to the Participant’s Vesting Date, all Stock previously allocated to such Participant’s Account shall be forfeited and held by the Trustee to be allocated in subsequent years pursuant to Section 4.2(a) hereof.

Section 4.3 Investment of Deferrals and Matching Contributions.

(a) Except as otherwise provided under Section 4.2(a) with respect to Stock certificates, the Company shall contribute to the Trust all amounts deferred and contributed hereunder within ten (10) business days of the date such amounts would otherwise have been paid to a Participant pursuant to the Company’s standard payroll practices. All amounts contributed to the Trust and the earnings thereon shall be held by the trustee of the Trust and invested in accordance with the terms of the Trust Agreement. Without in any way limiting the generality of the foregoing, and subject to such limitations as may from time to time be required by law or imposed by the Committee, and subject further to such operating rules and

procedures as may be imposed from time to time by the Committee, each Participant may express to the Committee a preference as to how the portion of the Participant’s Account attributable to Earnings (the “Earnings Sub-Account”) should be constructively invested among the Valuation Funds. Such preference shall designate the percentage of the Participant’s Earnings Sub-Account which is requested to be constructively invested in each Valuation Fund.

(b) A Participant’s expression of investment preference shall be made telephonically, via the recordkeeper’s telephone voice response system, or electronically, via the recordkeeper’s Internet web access system, each as established by the recordkeeper, at the Employer’s direction, for the purpose of recording the Participant’s investment elections among the Valuation Funds. Such investment elections shall serve merely as earnings indices for the Participant’s Account, and neither the Employer nor the Committee nor the Trustee shall be obligated to follow such elections. The Employer shall not be obligated to invest any funds in connection with this Plan, including, but not limited, with respect to distributions under Section 4.4, 4.5 and 4.6 hereof.

(c) Whether or not a Participant’s investment preferences are followed with respect to actual investments, the Participant’s Earnings Sub-Account will be credited with earnings or losses as follows. As of each Valuation Date, the net earnings or losses (as defined below) of each Valuation Fund since the preceding Valuation Date shall be allocated among all Earnings Sub-Accounts in accordance with the preferences indicated by each Participant as though the Earnings Sub-Accounts had been invested in the Valuation Fund in accordance with each Participant’s indicated preference. For purposes of this allocation, the Earnings Sub-Account of each Participant will consist of the balance of the Earnings Sub-Account as of the preceding Valuation Date, adjusted: (i) by adding thereto the Participant deferrals made since the preceding Valuation Date and (ii) by subtracting therefrom all distributions made to the Participant or to a Beneficiary or Beneficiaries.

(d) For purposes of this Section 4.3, the Earnings Sub-Account shall include the cash value of dividends (“Dividend Equivalents”) declared by the Company on the Stock allocated to a Participant’s Account. Such Dividend Equivalents, to the extent declared, shall be allocated to the purchase additional shares of Stock, in a manner determined by the Committee in its sole discretion, as of the end of each calendar quarter within a Plan Year.

Section 4.4 Payment of Benefits.

(a) Initial Deferral Elections .

(i) Subject to the vesting requirements contained herein, the Plan Administrator shall direct the Trustee of the Trust to pay the Participant, in a single lump sum within ninety (90) days following the Employment Termination Date, the portion of the Participant’s Account that consists of Participant deferrals allocated to the Earnings Sub-Account prior to the end of the 2009 Deferral Year (together with any earnings, losses, or Dividend Equivalents thereon pursuant to Section 4.3) and shares of Stock contributed by the Company prior to the end of the 2009 Deferral Year, valued as of the applicable Valuation Date.

(ii) For each Deferral Year after 2009 and prior to 2013, a Participant shall designate the time and form of distribution of Participant deferrals allocated to

the Earnings Sub-Account during each such Deferral Year (together with any earnings, losses, or Dividend Equivalents thereon pursuant to Section 4.3) and shares of Stock contributed by the Company during each such Deferral Year, pursuant to an irrevocable written distribution election filed by the Participant (in the manner prescribed by the Plan Administrator) prior to the commencement of each such Deferral Year, and, subject to the vesting requirements contained herein, the Plan Administrator shall direct the Trustee to reimburse the Company so that it may pay the Participant such amounts pursuant to such distribution election(s), valued as of the applicable Valuation Date. Each such distribution election shall apply to the subsequent Deferral Year unless and until the Participant files a new distribution election for the forthcoming Deferral Year; provided, however, that if the Participant never files a distribution election, all such amounts shall be paid in a single lump sum within ninety (90) days following the Participant’s Employment Termination Date. Such distribution election(s) shall allow the Participant to choose to have such amounts distributed either (1upon a Scheduled Distribution while employed with the Company (2) within ninety (90) days following the Retirement. In the event the Participant terminates employment prior to reaching Retirement, the Participant shall receive a lump sum payment for amounts deferred after January 1, 2013

(iii) For each Deferral Year after 2012, a Participant shall designate the time and form of distribution of Participant deferrals allocated to the Earnings Sub-Account during each such Deferral Year (together with any earnings, losses, or Dividend Equivalents thereon pursuant to Section 4.3) and shares of Stock contributed by the Company during each such Deferral Year, pursuant to an irrevocable distribution election filed by the Participant (in the manner prescribed by the Plan Administrator) prior to the commencement of each such Deferral Year, and, subject to the vesting requirements contained herein, the Plan Administrator shall direct the Trustee of the Trust to pay to the Company the amount necessary to pay the Participant such amounts pursuant to such distribution election(s), valued as of the applicable Valuation Date. Each such distribution election shall apply to the subsequent Deferral Year unless and until the Participant files a new distribution election for the forthcoming Deferral Year; provided, however, that if the Participant never files a distribution election, all such amounts shall be paid in a single lump sum within ninety (90) days following the Participant’s Employment Termination Date. Such distribution election(s) shall allow the Participant to choose to have such amounts distributed either:

after a five (5) year deferral period, a Scheduled Distribution of such that the amounts will be distributed in the February that follows the fifth anniversary of the first day of the Deferral Year in a single lump sum or five (5) substantially equivalent annual installments (as elected);

within ninety (90) days following the Participant’s Retirement in a lump sum or up to five (5) substantially equivalent annual installments (as elected),

within ninety (90) days following the date of the Participant’s Employment Termination Date in a single lump sum;

provided, however, that if the Participant undergoes a Separation from Service (other than on account of Retirement), all remaining payments due to the Participant shall be paid in a single lump sum within ninety (90) days following the Participant’s Employment Termination Date.

(iv) With respect to the Earnings Sub-Account, on the payment date (or each payment date in the case of annual installments) set forth in this Section 4.4(a), Trust investments, which may or may not include any Valuation Funds, shall be liquidated on a pro-rata basis (regardless of whether or not a Participant’s investment preferences were followed with respect to actual investments), in an amount equal to such portion of the Account that is to be paid on such date(s). The Earnings Sub-Account shall be distributed in cash. Shares of Stock allocated to a Participant’s Account shall be distributed in-kind.

(v) For purposes of this Section 4.4(a), each installment payment shall be treated as a series of separate payments and shall be determined by dividing the Account balance as of the Valuation Date by the remaining number of installment payments.

(b) Subsequent Deferral Election . For amounts with respect to each Deferral Year after 2012, a Participant may delay the timing of a previously-scheduled payment or may change the form of a payment only if such subsequent deferral election meets all of the following requirements:

(i) the subsequent deferral election shall not take effect until at least 12 months after the date on which it is made;

(ii) the election must be made at least 12 months prior to the date the payment is scheduled to be made. For installment payments, the election must be made at least 12 months prior to the date the first payment in such installment was scheduled to be made; and

(iii) the subsequent deferral election must delay the payment for at least five years from the date the payment would otherwise have been made. For installment payments, the delay is measured from the date the first payment was scheduled to be made.

(c) Specified Employees . Notwithstanding any provision of this Plan to the contrary, if the Participant is considered a Specified Employee at Separation from Service under such procedures as established by the Company in accordance with Code Section 409A, benefit distributions under Section 4.4(a) that are made upon Separation from Service may not, to the extent required by Code Section 409A, commence prior to the earlier of the date of the Participant’s death or the expiration of the six-month period measured from the date of the Participant’s Separation from Service; provided that to the extent permitted by Code Section 409A, only payments scheduled to be paid during the first six (6) months after the date of such Separation from Service shall be delayed and such delayed payments shall be paid in a single sum on the first day of the seventh month following the date of such Separation from Service.

Section 4.5 Early Distribution of Benefits.

A Participant may request a distribution due to Unforeseeable Emergency by submitting a written request to the Plan Administrator accompanied by evidence to demonstrate that the circumstances being experienced qualify as an Unforeseeable Emergency. The Plan Administrator shall have the authority to require such evidence as it deems necessary to

determine if a distribution is warranted. If an application for a hardship distribution due to an Unforeseeable Emergency is approved, the distribution shall be limited to amounts contributed by the Participant to the Plan pursuant to Section 4.1 (and the earnings thereon) and shall be further limited to an amount sufficient to meet the emergency, plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution. The allowed distribution shall be payable in a single lump sum in cash as soon as possible after approval of such distribution, but in any event within ninety (90) days after the occurrence of the Unforeseeable Emergency, with the exact date of such payment to be determined by the Plan Administrator in its sole discretion. For purposes of making any such payment, the Account shall be valued as of the applicable Valuation Date, and the Participant shall direct the Trustee to liquidate Trust investments (regardless of whether or not a Participant’s investment preferences were followed with respect to actual investments), which may or may not include any Valuation Funds, in an amount equal to such portion. In the event the Participant fails to direct the Trustee as provided in the preceding sentence, on the payment date, Trust investments, which may or may not include any Valuation Funds, shall be liquidated on a pro-rata basis (regardless of whether or not a Participant’s investment preferences were followed with respect to actual investments), in an amount equal to such portion. The Earnings Sub-Account shall be distributed in cash. Shares of Stock allocated to a Participant’s Account shall be distributed in-kind. As used herein, “Unforeseeable Emergency” shall mean (i) a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, a Beneficiary, or the Participant’s dependent (as defined in Section 152 of the Code, without regard to Section 152(b)(1), (b)(2) and (d)(1)(B)), (ii) loss of the Participant’s property due to casualty (including the need to rebuild a home following damage to a home not otherwise covered by insurance, for example, not as a result of a natural disaster), or (iii) other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant, which may include, if applicable, (x) the imminent foreclosure of or eviction from the Participant’s primary residence, (y) the need to pay for medical expenses, including non-refundable deductibles, as well as the costs of prescription drug medication, and (z) the need to pay for the funeral expenses of the Participant’s spouse, a Beneficiary or the Participant’s dependent (as defined in Section 152 of the Code, without regard to Section 152(b)(1), (b)(2) and (d)(1)(B)). Except as otherwise provided in clause (iii) of the immediately preceding sentence, the purchase of a home and the payment of college tuition are not Unforeseeable Emergencies. In the event of any such withdrawal and distribution during any Plan Year as a result of an Unforeseeable Emergency, the Participant’s Salary Deferral Election for such Plan Year shall be deemed automatically revoked for such Plan Year. This section shall be interpreted in a manner consistent with Section 409A of the Code. The circumstances that will constitute an “Unforeseeable Emergency” will depend upon the facts of each case, but, in any event, payment may not be made if such hardship is or may be relieved:

(a) Through reimbursement or compensation by insurance or otherwise;

(b) By liquidation of the Participant’s assets, to the extent that liquidation of such assets would not itself cause severe financial hardship, or

Where a payment is made to a Specified Employee on account of the occurrence of an Unforeseeable Emergency, the payment need not be delayed because the Specified Employee has a Separation from Service after incurring the Unforeseeable Emergency.

Section 4.6 No Acceleration of Retirement Benefit or Termination Benefit . Neither a Participant nor the Employer may accelerate the time or schedule of any payment scheduled to be made under the Plan. Notwithstanding the foregoing, the time or schedule of any payment may be accelerated in any of the following circumstances:

(a) Domestic Relations Orders . The Plan Administrator may accelerate the time or schedule of a payment under the Plan to an individual other than the Participant, or a payment under the Plan may be made to an individual other than the Participant, to the extent necessary to fulfill a domestic relations order (as defined in Section 414(p)(1)(B) of the Code). Any such payment reflecting an assigned percentage of the Participant’s Account as of a date certain shall be construed as requiring such assignment to be calculated with reference to such date, or, if administratively preferable to the Committee in its sole and absolute discretion, the last day of the month in which such date certain occurs (the “Assignment Date”). For purposes of making any distribution under this Section 4.6(a), if the domestic relations order provides that earnings and losses shall be taken into account from the Assignment Date through the date of distribution or any earlier date, the Account, for distribution purposes, shall be valued as of the applicable Valuation Date; and if the domestic relations order does not provide that earnings and losses shall be taken into account, or affirmatively provides that earnings and losses shall not be taken into account, the value of the Account as of the Assignment Date shall be the value of the Account for distribution purposes;

(b) Payment of Employment Taxes . The Plan Administrator may accelerate the time or schedule of a payment under the Plan, or a payment may be made under the Plan, to (x) pay the Federal Insurance Contributions Act (“FICA”) tax imposed under Section 3101, 3121(a) or 3121(v)(2) of the Code or (y) pay the income tax at the source on wages imposed under Section 3401 of the Code or the corresponding withholding provisions of applicable state, local or foreign tax laws. However, the total payment under this clause (ii) may not exceed the aggregate of the FICA amount and the income tax withholding related to the FICA amount Payment shall be based on the value of the Account as of the applicable Valuation Date; or

(c) Payment Upon Income Inclusion Under Section 409A . The Plan Administrator may accelerate the time or schedule of a payment under the Plan, or a payment may be made under the Plan, at any time that the Plan fails to meet the requirements of Section 409A of the Code and the Final Regulations. Such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Section 409A of the Code and the Treasury Regulations promulgated thereunder. Payment shall be based on the value of the Account as of the applicable Valuation Date.

For purposes of making any payment under this Section 4.6, the following rules shall apply: the Participant shall direct the Trustee to liquidate Trust investments (regardless of whether or not a Participant’s investment preferences were followed with respect to actual investments), which may or may not include any Valuation Funds, in an amount equal to such portion of the Account. In the event the Participant fails to direct the Trustee as provided in the preceding sentence, on the payment date, Trust investments, which may or may not include any Valuation Funds, shall

be liquidated on a pro-rata basis (regardless of whether or not a Participant’s investment preferences were followed with respect to actual investments), in an amount equal to such portion. The Earnings Sub-Account shall be distributed in cash. Shares of Stock allocated to a Participant’s Account shall be distributed in-kind.

ARTICLE 5.

BENEFICIARY DESIGNATIONS

Section 5.1 Designation by Participant.

Each Participant shall have the right to designate one or more primary Beneficiaries and one or more contingent Beneficiaries to receive the amount represented by his or her Account in the event of his or her death. Beneficiary designation(s) shall be made in the manner as may be prescribed by the Plan Administrator. The Participant shall have the right to revoke or change Beneficiary designations from time to time, and each such change shall constitute a revocation of all prior designations. No Beneficiary designation shall be effective unless in writing and delivered to the Plan Administrator prior to the death of the Participant. Any such Beneficiary designation shall be subordinate to any court order applicable to the Participant’s interest in the Plan.

Section 5.2 Default Provision.

If a Participant dies without having designated a Beneficiary, or if no such designated Beneficiary survives the Participant, any benefit payable by reason of the death of the Participant shall be payable to his or her surviving spouse, or, if there is no surviving spouse, to his or her surviving children, in equal shares. If the Participant dies with no surviving spouse or children, any benefit shall be paid to the Participant’s estate.

ARTICLE 6.

PLAN ADMINISTRATION

Section 6.1 Authority and Delegation.

In general, affairs of the Plan shall be administered by the Plan Administrator subject to the supervision and review of the Board. However, the Plan Administrator has the right, but not the obligation, to delegate any of its duties and authorities hereunder to any person or persons not disabled, as a matter of law, to perform such duties or to exercise such authorities. The Plan Administrator shall provide written reports to the Board, no less frequently than annually, concerning the operation of the Plan and Trust since the date of the last report.

Section 6.2 Duties, Responsibilities and Authority of the Plan Administrator.

The Plan Administrator shall have the following duties and the authority to take such actions as are reasonably necessary and desirable to discharge the same:

(a) to maintain and preserve records relating to each Participant and each Beneficiary;

(b) to recommend to the Board what sums, if any, should be contributed to the Plan;

(c) to prepare and to furnish to each Participant and to others entitled to receive the same, all information and notices required under Federal law or the provisions of the Plan;

(d) to prepare and file or publish and distribute, as required by law, all returns, reports, notices, descriptions and other information required under law to be so filed or published and distributed;

(e) to construe all provisions of the Plan, to correct any defect therein, and to supply any omissions therefrom, as more fully described in Section 6.4 of the Plan;

(f) to arrange for bonding, if necessary;

(g) to determine eligibility for benefits and to provide procedures for the appeal of denied claims for benefits;

(h) to determine whether any court order, including a domestic relations order described in Section 414(p)(1)(B) of the Code, is applicable to the interest of the Participant under the Plan and to take such action as is appropriate in connection with such order;

(i) to solicit, receive, retain and act upon Beneficiary designations and other communications received from the Participant and others;

(j) to promulgate such policies, procedures and rules of general and specific application as the Plan Administrator, in its discretion, deems necessary or desirable to administer the Plan and to further the purposes for which it exists, and from time to time to change such policies, procedures and rules;

(k) to publish forms to be used in connection with the administration of the Plan and to determine the circumstances in which the use of such forms will be required;

(l) to determine whether or not the consent of any person is required in connection with the exercise of any rights or privileges under the Plan and to withhold action pending the receipt of such consent where required;

(m) to delegate to qualified persons or entities such of its ministerial duties as it sees fits to so delegate and to rescind such delegations; provided, however, that the Plan Administrator shall remain responsible for the authorized acts of the delegatees;

(n) to provide the trustees of the Trust with the information required pursuant to the Trust Agreement; and

(o) to exercise such other powers and discharge such other duties and responsibilities as are specified in the Plan as being within the province of the Plan Administrator.

Section 6.3 Reporting and Disclosure.

The Plan Administrator shall keep all individual and group records relating to each Participant, his or her Beneficiary (or Beneficiaries) and others having an interest in his or her benefits under the Plan and the Trust and all other records as may be necessary or desirable, in the judgment of the Plan Administrator, for the proper operation of the Plan. Such records shall be made available for examination and copying by the Participant and his or her Beneficiary (or Beneficiaries); provided, however, that each Participant and representative shall have the right to see or copy only those records pertaining to such person and those records and documents of general application.

Section 6.4 Construction of the Plan.

The Plan Administrator shall take such steps as are considered necessary and appropriate to remedy any inequity that results from incorrect information received or communicated in good faith or as the consequence of an administrative error. The Plan Administrator shall interpret the Plan and shall determine the questions arising thereunder in the administration, interpretation and application of the Plan. The Plan Administrator shall reconcile any inconsistency under the Plan and shall supply any omissions with respect to the Plan. Subject to Section 7.3, all such corrections, reconciliations, interpretations and supplied omissions shall be final and binding on all parties.

Section 6.5 Engagement of Assistants and Advisers.

The Company shall have the right to engage the services of such persons and organizations as it, in its sole discretion, deems necessary or advisable to facilitate the operation of the Plan and the accomplishment of its purposes.

Section 6.6 Bonding.

HCSG shall arrange for such bonding as is required by law, but no bonding in excess of the amount required by law shall be required under the Plan or the Trust.

Section 6.7 Discretion.

The Plan Administrator shall have the greatest lawful degree of discretion in the administration and construction of the Plan. The manner in which the Plan is administered or construed shall not be guided by, and there shall be no precedential value ascribed to, the manner in which the Plan was administered or construed at an earlier date, nor shall the manner in which any plan, fund, program or arrangement similar to the Plan be considered precedential to the manner in which the Plan is to be administered or construed.

ARTICLE 7.

CLAIMS AND REVIEW

Section 7.1 Claims Procedure.

If the Participant or the Participant’s Beneficiary (hereinafter the “Claimant”) is denied all or a portion of an expected benefit under the Plan for any reason, he or she may file a claim with the Committee. The Committee shall notify the Claimant within thirty (30) days of allowance or denial of the claim. The notice of the Committee’s decision shall be in writing, sent by mail to Claimant’s last known address, and, if a denial of the claim, shall contain the following information: the specific reasons for the denial; specific reference to pertinent provisions of the Plan on which the denial is based; if applicable, a description of any additional information or material necessary to perfect the claim and an explanation of why such information or material is necessary; and an explanation of the review process.

Section 7.2 Request for Review.

A Claimant is entitled to request a review by the Board of any denial of his or her claim by the Committee. The request for review must be submitted to the Board in writing within sixty (60) days of receipt of the notice of the denial. Absent a request for review within the sixty (60) day period, the claim will be deemed to be conclusively denied.

Section 7.3 Review Procedure.

The Claimant or his or her representative shall be entitled to review all pertinent documents and to submit issues and comments in writing to the Board. The Board in their sole discretion may afford the Claimant a hearing. The Board shall render a review decision in writing within sixty (60) days after receipt of a request for a review. The Claimant shall receive written notice of the Board’s review decision, which shall contain specific reasons for the decision with references to the pertinent provisions of the Plan.

Section 7.4 Disability Claims Review Procedure.

(a) Initial Claim .

A Claimant may make a claim for benefit under the Plan or request a specific interpretation or ruling under the Plan regarding such Claimant’s status as a Participant with a Disability by submitting a written claim for benefits to the Committee.

If such claim is denied, in whole or in part, the Committee shall provide the Claimant with written notification of such adverse benefit determination within 45 days after the receipt of the claim. This time period may be extended twice by 30 days (for a total of 60 days) if the Committee both determines that such an extension is necessary due to matters beyond the control of the Plan and notifies the Claimant of the circumstances requiring the extension of time and the date by which the Committee expects to render a decision. Any such notification shall be made prior to the expiration of the initial 45-day or 30-day period, as applicable.

If such an extension is necessary due to the Claimant’s failure to submit the information necessary to decide the claim, the notice of extension shall specifically describe the required information, and the Claimant shall be afforded at least 45 days within which to provide the specified information. If the Claimant delivers the requested information within the time specified, any 30-day extension period shall begin after the claimant has provided that information. If the Claimant fails to deliver the requested information within the time specified, the Committee may decide the claim without that information.

A Claimant may file any claim himself or herself or may designate another person as his or her “authorized representative” by notifying the Committee in writing of that person’s designation. In that case, all subsequent notices are provided to claimant through his or her authorized representative and decisions concerning that claim shall be given to that representative.

Any written notice of adverse benefit determination shall include the following information:

(i) the specific reason or reasons for the denial;

(ii) reference to the specific Plan provisions on which the determination is based;

(iii) a description of any additional material or information necessary for the claimant to seek review and an explanation of why such material or information is necessary;

(iv) a description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the Claimant’s right to bring legal action in federal court under the federal pension law known as ERISA, if the Claimant’s claim on review is denied; and

(v) disclosure of any internal rule, guideline, protocol or similar criterion relied on in making the adverse determination.

Any failure of the Committee to respond to the Claimant’s claim for benefit within the allotted time period, including extensions, shall be deemed to be a denial of such claim by all parties.

(b) Appeal of Denied Claim .

If a Claimant’s claim is denied or a Claimant or his or her authorized representative has not received a response within the initial 45-day period or extended 30-day or 60-day period, as applicable, the Claimant or his or her authorized representative, as applicable, may request a review by notice given in writing to the Committee. A Claimant or his or her authorized representative, as applicable, shall have at least 180 days after the receipt of the denial notice to appeal the denial.

In connection with a Claimant’s or authorized representative’s right to appeal the Committee’s initial determination regarding the claim, the Claimant or authorized representative, as applicable, also:

(i) may review pertinent documents and submit issues and comments in writing;

(ii) is entitled to have the review of the adverse benefit determination take into account all new information, whether or not presented or available at the initial determination. No deference will be afforded to the initial determination;

(iii) will be given the opportunity to submit written comments, documents, records, or any other information relevant to the claim;

(iv) will, upon request and free of charge, be provided with reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits, including all documents defined by applicable U.S. Department of Labor regulations;

(v) is entitled to have the review conducted by a person different from the person who made the initial determination and such person will not be the original decision maker’s subordinate;

(vi) is entitled to be given a review that takes into account all comments, documents, records, and other information submitted by the Claimant or authorized representative, as applicable, relating to the claim, regardless of whether such information was submitted or considered in the initial benefit determination;

(vii) is entitled to, in the case of a claim denied on the grounds of a medical judgment, have Committee consult with a health professional with appropriate training and experience. The health care professional who is consulted on appeal will not be the individual, if any, who was consulted during the initial determination or a subordinate; and

(viii) if the advice of a medical or vocational expert was obtained by the Committee in connection with the denial of the claim, will be provided with the names of each such expert, regardless of whether the advice was relied upon.

The Committee normally shall issue a decision on an appealed claim involving a Disability determination not later than 45 days following receipt of the written appeal. If the Committee determines that special circumstances require an extension of time for a decision on review, the review period may be extended by an additional 45 days (90 days in total). The Committee shall notify the Claimant or authorized representative, as applicable, in writing if an additional 45 day extension is needed. Any such notice shall be delivered prior to the expiration of the initial 45 day period and shall describe the special circumstances requiring the extension and set forth the date by which the Committee expects the claim to be decided.

If an extension is necessary due to a Claimant’s or authorized representative’s, as applicable, failure to submit the information necessary to decide the appeal,

the notice of extension will specifically describe the required information, and the Claimant or authorized representative, as applicable, will be afforded at least 45 days to provide the specified information. If the Claimant or authorized representative, as applicable, delivers the requested information within the time specified, the 45 day extension of the appeal period will begin after such information has been provided. If the Claimant or authorized representative, as applicable, fails to deliver the requested information within the time specified, the Committee may decide the appeal without that information.

Following a denial of a claim on review, the Committee will provide the Claimant or authorized representative, as applicable, with a written notice containing the following information:

(i) the specific reason or reasons for the denial;

(ii) references to the specific Plan provisions on which the denial is based;

(iii) a statement disclosing any internal rule, guideline, protocol or similar criterion relied on in making the adverse determination;

(iv) a statement that the claimant or authorized representative, as applicable, is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records, and other information relevant to the claim for benefits, including documents not relied upon in deciding the appeal. For this purpose a document is considered “relevant” if it (1) was relied upon in making the benefit determination on the claim; (2) was submitted, considered, or generated in the course of deciding the claim, whether or not relied upon in deciding the claim; (3) demonstrates compliance with the administrative processes and safeguards designed to ensure that benefit claims are decided in accordance with governing Plan documents and that Plan provisions have been applied consistently with respect to similarly situated claimants; or (4) constitutes a statement of policy or guidance with respect to the Plan concerning the denied treatment option or benefit for the Claimant’s diagnosis, without regard to whether such statement was relied upon in deciding the benefit;

(v) a statement describing any voluntary appeal procedures offered by the Plan and the Claimant’s or authorized representative’s, as applicable, right to obtain the information about such procedures, and right to bring an action in federal court under federal law; and (1) if an internal rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination, the specific rule, guideline, protocol, or other similar criterion; or a statement that such rule, guideline, protocol, or other similar criterion was relied upon in making the adverse determination; (2) if the denial is based on a medical necessity or experimental treatment or similar exclusion or limit an explanation of the scientific or clinical judgment for the determination, applying the terms of the Plan to the Claimant’s medical circumstances; and (3) a statement as follows: ‘You and your plan may have other voluntary alternative dispute resolution options, such as mediation. One way to find out what may be available is to contact your local U.S. Department of Labor Office and your State insurance regulatory agency;’ and

(vi) a statement describing the Claimant’s or authorized representative’s, as applicable, right to bring an action in federal court under Section 502(a) of ERISA with respect to such denial of benefits.

ARTICLE 8.

PLAN AMENDMENT AND TERMINATION

Section 8.1 Amendment.

The provisions of the Plan may be amended at any time and from time to time by the Board or any subcommittee thereof or any officer of the Company to whom the Board has delegated such authority. Any such amendment shall be by written instrument, shall be communicated to the Participants, and shall not deprive the Participant of any benefit previously earned or accrued as of the date of the proposed amendment.

Section 8.2 Plan Termination.

(a) The Company reserves the right to terminate the Plan in whole or in part at any time and without notice to any person or entity. Notwithstanding the foregoing, no such termination shall deprive the Participant of any benefit earned or accrued as of the date of the proposed termination. Subject to Section 8.2(b), in the event of any such termination, the Trustee shall distribute Plan benefits at the time specified for payment of such benefits to the Participant or his or her designated Beneficiary in accordance with Section 4.4 or Section 4.5, as the case may be. A termination of the Plan shall be duly authorized by the Board or any subcommittee thereof or any officer of the Company to whom the Board has delegated such authority. Upon a termination of the Plan for any reason, each Participant shall become fully vested in all of the Stock contributed and allocated to his or her Account pursuant to Section 4.2(a).

(b) In the event of a Change In Control (hereinafter defined), the Plan may be terminated and, within the ninety (90) days following the Change In Control, the unpaid Account balances of all Participants shall be distributed in a single lump sum. For purposes of this subparagraph, the Plan will be treated as terminated as a result of a Change In Control only if all substantially similar arrangements sponsored by the Company are also terminated, so that the Participants of the Plan and participants of any similar plan receive all amounts of compensation deferred under such arrangements within 12 months of the termination date. A “Change In Control” shall occur on the date upon which:

(i) any one person, or more than one person acting as a group (as determined under Treas. Reg. 1.409A-3(i)(5)(v)(B)), acquires (or has acquired during the 12 month period ending on the date of the most recent acquisition by such person or persons) ownership of securities of the Company representing 35% or more of the combined voting power of the Company’s then outstanding securities;

(ii) a majority of the members of the Board is replaced during any 12-month period by Directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election; or

(iii) any one person, or more than one person acting as a group (as determined under Treas. Reg. 1.409A-3(i)(5)(v)(B)), acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or persons) assets from the Company that have an aggregate gross fair market value equal to or more than 40 percent of the aggregate gross fair market value of all of the assets of the Company immediately prior to such acquisition or acquisitions. For this purpose, “gross fair market value” means the value of the assets of the Company, or the value of the assets being disposed of, without regard to any liabilities associated with such assets.

ARTICLE 9.

MISCELLANEOUS PROVISIONS

Section 9.1 Non-alienation of Benefits.

None of the payments, benefits or rights of the Participant or any Beneficiary shall be subject to any claim of any creditor other than the Company, and, in particular, to the fullest extent permitted by law, all such payments, benefits and rights shall be free from attachment, garnishment, trustee’s process or any other legal or equitable process available to any creditor of the Participant or any Beneficiary of the Participant other than the Company. Neither the Participant nor any Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber or assign any of the benefits or payments which he or she may expect to receive, contingently or otherwise, under the Plan or the Trust, except that the Participant may designate one or more Beneficiaries as hereinabove provided. Notwithstanding the foregoing, effective as of the 409A Effective Date, the Trustee, if requested by the Company, or the Company may make “payment” (as defined in this Section 9.1) to an individual who is not a Participant to the extent such payment is required under the terms of a domestic relations order within the meaning of Section 414(p)(1)(B) of the Code (a “Domestic Relations Order”). Without in any way limiting the generality of the foregoing, the making of any payment by the Trustee or the Company, as applicable, to an individual who is not a Participant, if made pursuant to the terms of a Domestic Relations Order, shall be construed by all parties as exempt from the prohibitions against anticipation, assignment, alienation, encumbrance, attachment, garnishment, levy, execution or other legal or equitable process contained herein, but only to the extent required to implement the terms of such Domestic Relations Order with respect to such payment. For purposes of this Section 9.1, “payment” shall be limited to (i) an actual distribution of cash, in respect of the Participant’s Earnings Sub-Account, (ii) an in-kind distribution of shares of Stock and (iii), solely for purposes of effectuating a payment described in (i) or (ii), a transfer on the books and records of the Plan of beneficial ownership of all or a portion of the Participant’s benefits under the Plan to the individual(s) identified in the Domestic Relations Order. Under no circumstances shall the Plan permit any individual(s) identified in a Domestic Relations Order to maintain an Account hereunder.

Section 9.2 Terms of Employment.

Neither the establishment of the Plan nor any modification thereof, nor the creation of any fund, Trust or account, nor the admission of any person to participation in the Plan, nor the payment of any benefits shall be construed as giving any Employee the right to be retained in the service of the Employer; and each Employee shall remain subject to retention in the employ of Employer and to discharge from such employ to the same extent and on the same conditions as if the Plan was never adopted.

Section 9.3 Severability of Provisions.

If any provision of the Plan is found by a court of competent jurisdiction to be unlawful or unenforceable, such provision shall be deemed null and void, and the balance of the Plan shall continue in full force and effect, as if such unlawful or unenforceable provision had not been included.

Section 9.4 Effect on Other Parties.

The Plan as set forth herein, and as amended from time to time, shall be binding upon the heirs, executors, administrators, successors, assigns and other personal representatives of the Participant.

Section 9.5 Headings and Captions.

The headings and captions herein are provided for reference and convenience only, shall not be considered part of the Plan and shall not be employed in the construction of the Plan.

Section 9.6 Gender and Number.

All provisions in the Plan are intended to be gender-neutral. Accordingly, except where otherwise clearly indicated by context, the masculine, feminine and neuter form of any word shall include all other gender-designating forms, the singular shall include the plural and vice-versa.

Section 9.7 Payments to Legally Incapacitated Persons.

Any benefit payable to or for the benefit of a minor, an incompetent person or other person incapable of effectively receipting therefor shall be deemed paid when paid to such person’s guardian or to the party providing or reasonably appearing to provide for the care of such person, and such payments shall fully discharge the payor, the Plan Administrator, the Employer and all other parties with respect thereto.

Section 9.8 Reliance on Data and Consents.

The Employer, the Plan Administrator and all other person or entities associated with the operation of the Plan and the provision of benefits under the Plan, may reasonably rely on the veracity, the accuracy and the completeness of all data provided by the Participant, his or her Beneficiary (or Beneficiaries), and his or her representatives, including, without limitation, data with respect to age, health and marital status. Furthermore, the Employer and the Plan Administrator with respect to the Plan may reasonably rely on all

consents and designations filed under the Plan, regardless of by whom filed, without duty to inquire into the genuineness of any such consent or designation. None of the aforementioned persons or entities associated with the operation of the Plan, or the benefits provided under the Plan shall have any duty to inquire into any such data, and all may rely on such data being current to the date of presentation, it being the duty of Participants, Beneficiaries and their respective representatives to advise appropriate parties of any change in such data.

Section 9.9 Entire Agreement.

This instrument shall constitute the entire agreement among the parties with respect to the subject matter hereof, and shall supersede all previous understandings on the subject.

Section 9.10 Controlling-Law.

The Plan shall be construed and enforced according to the law of the Commonwealth of Pennsylvania to the extent not preempted by Federal law, which shall otherwise control.

This Amended and Restated Deferred Compensation Plan is hereby approved and adopted this 18th day of October, 2012.


HEALTHCARE SERVICES GROUP, INC.

BY:		/s/ John C. Shea
		Chief Financial Officer and Secretary

EXHIBIT “A”

VALUATION FUNDS

Effective as of the Effective Date, the Valuation Funds under the Plan shall include the following:

American Funds Euro Pacific Growth

BlackRock Equity Dividend Fund

BlackRock Global Allocation Fund

Delaware Emerging Markets Fund

ING Real Estate Fund

Ivy High Income Fund

JP Morgan Government Bond Fund

JP Morgan Large Cap Growth Fund

Nuveen Santa Barbara Dividend Growth Fund

10.

PIMCO Commodity Real Return Strategy Fund

11.

PIMCO Real Return Fund

12.

PIMCO Total Return Fund

13.

Principal MdCap Blend Fund

14.

Templeton Global Bond Fund

15.

Wells Fargo Adv Small Cap Value Fund

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO SECURITIES EXCHANGE ACT OF 1934

RULE 13a-14(a) OR 15d-14(a)

I, Daniel P. McCartney, Chief Executive Officer, certify that:

I have reviewed this report on Form 10-Q of Healthcare Services Group, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s Board of Directors.

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO SECURITIES EXCHANGE ACT OF 1934

RULE 13a-14(a) OR 15d-14(a)

I, John C. Shea, Chief Financial Officer, certify that:

I have reviewed this report on Form 10-Q of Healthcare Services Group, Inc.;

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Exhibit 32.1

CERTIFICATIONS PURSUANT TO SECURITIES EXCHANGE ACT OF 1934

RULE 13a-14(b) OR 15d-14(b) AND

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Healthcare Services Group, Inc., a Pennsylvania corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, Daniel P. McCartney, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d); and

2.	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company

/s/ Daniel P. McCartney

Daniel P. McCartney

Chief Executive Officer

(Principal Executive Officer)

October 22, 2012

Exhibit 32.2

CERTIFICATIONS PURSUANT TO SECURITIES EXCHANGE ACT OF 1934

RULE 13a-14(b) OR 15d-14(b) AND

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Healthcare Services Group, Inc., a Pennsylvania corporation (the “Company”) on Form 10-Q for the quarter ended September 30, 2012 as filed with the Securities and Exchange Commission on the date hereof (the “Form 10-Q”), I, John C. Shea, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1.	The Form 10-Q fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d); and

2.	The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company

/s/ John C. Shea

John C. Shea

Chief Financial Officer

(Principal Financial Officer)

October 22, 2012

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