Edgar Filing: HEALTHCARE SERVICES GROUP INC

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 (Amendment No. )

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Healthcare Services Group, Inc.
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(Name of Registrant as Specified in Its Charter)

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(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

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HEALTHCARE SERVICES GROUP, INC.
3220 Tillman Drive
Suite 300
Bensalem, Pennsylvania 19020

--------------------

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

May 27, 2003

--------------------

To the Shareholders of
HEALTHCARE SERVICES GROUP, INC.

NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of Healthcare
Services Group, Inc. (the "Company") will be held at the Radisson Hotel of
Bucks County, 2400 Old Lincoln Highway, Trevose, Pennsylvania 19047, on May
27, 2003, at 10:00 A.M., for the following purposes:

1. To elect seven directors;

2. To approve an amendment to the Company's 2002 Stock Option Plan
increasing the total number of shares of the Company's Common
Stock available for issuance thereunder from 500,000 shares to
1,050,000 shares;

3. To approve and ratify the selection of Grant Thornton LLP as the
independent certified public accountants of the Company for its
current fiscal year ending December 31, 2003; and

4. To consider and act upon such other business as may properly come
before the meeting.

Only shareholders of record at the close of business on April 18, 2003 will
be entitled to notice of and to vote at the Annual Meeting.

Please sign and promptly mail the enclosed proxy, whether or not you expect
to attend the Meeting, in order that your shares may be voted for you. A
return envelope is provided for your convenience.

By Order of the Board of Directors

DANIEL P. MCCARTNEY
Chairman of the Board and
Chief Executive Officer

Dated: Bensalem, Pennsylvania
April 21, 2003

HEALTHCARE SERVICES GROUP, INC.
3220 Tillman Drive
Suite 300
Bensalem, Pennsylvania 19020

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PROXY STATEMENT
FOR
ANNUAL MEETING OF SHAREHOLDERS
May 27, 2003

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This Proxy Statement is furnished to the Shareholders of Healthcare Services
Group, Inc. (the "Company") in connection with the solicitation by the Board
of Directors of the Company of proxies for the Annual Meeting of Shareholders
(the "Annual Meeting") to be held at the Radisson Hotel of Bucks County, 2400
Old Lincoln Highway, Trevose, Pennsylvania 19047, on May 27, 2003 at 10:00
A.M. At the Annual Meeting, the shareholders will consider the following
proposals: (1) to elect seven directors; (2) to approve an amendment to the
Company's 2002 Stock Option Plan (the "2002 Plan") increasing the total number
of shares of the Company's Common Stock, $.01 par value (the "Common Stock")
available for issuance thereunder from 500,000 shares to 1,050,000 shares; (3)
to approve and ratify the selection of Grant Thornton LLP as the independent
certified public accountants of the Company for its current fiscal year ending
December 31, 2003; and (4) to consider and act upon such other business as may
properly come before the Annual Meeting.

This Proxy Statement is being mailed to shareholders on or about April 21,
2003.

PROXIES; VOTING SECURITIES

Only holders of Common Stock $.01 par value (the "Common Stock") of record
at the close of business on April 18, 2003 (the "Record Date") are entitled to
notice of and to vote at the Annual Meeting. On the Record Date, there were
issued and outstanding approximately 11,210,521 shares of Common Stock. Each
share of Common Stock entitles the holder thereof to one vote. The presence,
in person or by proxy, of the holders of a majority of the outstanding shares
of Common Stock is required to constitute a quorum at the meeting. Holders of
Common Stock are not entitled to cumulative voting rights.

All shares that are represented by properly executed proxies received prior
to or at the Annual Meeting, and not revoked, will be voted in accordance with
the instructions indicated in such proxies. If no instructions are indicated
with respect to any shares for which properly executed proxies are received,
such proxies will be voted FOR each of the proposals. For purposes of
determining the presence of a quorum for transacting business at the Annual
Meeting, abstentions and broker "non-votes" (i.e., proxies from brokers or
nominees indicating that such persons have not received instructions from the
beneficial owner or other persons entitled to vote shares on a particular
matter with respect to which the brokers or nominees do not have discretionary
power), if applicable, will be treated as shares that are present but which
have not been voted.

A proxy may be revoked by delivery of a written statement to the Secretary
of the Company stating that the proxy is revoked, by a subsequent proxy
executed by the person executing the prior proxy and presented to the Annual
Meeting, or by voting in person at the Annual Meeting.

All expenses in connection with this solicitation will be borne by the
Company. It is expected that solicitation will be made primarily by mail, but
regular employees or representatives of the Company may also solicit proxies
by telephone, telegraph or in person, without additional compensation, except
for reimbursement of out-of-pocket expenses.

PROPOSAL NO. 1
ELECTION OF DIRECTORS

At the Annual Meeting, seven directors of the Company are to be elected,
each to hold office for a term of one year. Unless authority is specifically
withheld, management proxies will be voted FOR the election of the nominees
named below to serve as directors until the next annual meeting of
shareholders and until their successors have been chosen and qualify. Should
any nominee not be a candidate at the time of the Annual Meeting (a situation
which is not now anticipated), proxies will be voted in favor of the remaining
nominees and may also be voted for substitute nominees. If a quorum is
present, the candidate or candidates receiving the highest number of votes
will be elected directors. Brokers that do not receive instructions are
entitled to vote for the election of directors.

The nominees are as follows:

Name, Age, Principal Occupations
for the past five years and Current
Public Directorships or Trusteeships Director
------------------------------------- Since
--------

Daniel P. McCartney, 51, Chief Executive Officer and Chairman of the
Board for more than five years..................................... 1977
Barton D. Weisman, 75, Chairman of the Board of Millennium Health
Systems, LLC since 2002, successor company to H.B.A. Corporation
and H.B.A. Management, Inc.; President and Chief Executive Officer
of H.B.A. Corporation and H.B.A. Management, Inc., Florida based
companies which own and/or manage nursing homes, for more than five
years.............................................................. 1983(2)
Joseph F. McCartney, 48, Divisional Vice President of the Company
for more than five years; brother of Daniel P. McCartney........... 1983
Robert L. Frome, Esq., 65, Member of the law firm of Olshan Grundman
Frome Rosenzweig & Wolosky LLP for more than five years; Director
of NuCo2, Inc. and Paradigm Medical Industries, Inc................ 1983
Thomas A. Cook, 57, President and Chief Operating Officer of the
Company for more than five years................................... 1987
Robert J. Moss, Esq., 64, President, Moss Associates, a law firm,
for more than five years........................................... 1992(1)(2)
John M. Briggs, CPA, 52, Partner of the certified public accounting
firm of Briggs, Bunting & Dougherty, LLP for more than five years;. 1993(1)(2)

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(1) Member of Stock Option and Compensation Committee.
(2) Member of Audit Committee.

The Directors recommend a vote FOR all nominees.

BOARD OF DIRECTORS AND COMMITTEES

The business of the Company is managed under the direction of the Board of
Directors. The Board meets on a regularly scheduled basis during the Company's
fiscal year to review significant developments affecting the Company and to
act on matters requiring Board approval. It also holds special meetings when
an important matter requires Board action between scheduled meetings. The
Board of Directors met five times during the 2002 fiscal year. During 2002,
each member of the Board participated in at least 75% of all Board and
applicable committee meetings held during the period for which he was
director.

The Board of Directors has established an Audit and a Stock Option and
Compensation committee to devote attention to specific subjects and to assist
it in the discharge of its responsibilities. The functions of those
committees, their current members and the number of meetings held during 2002
with respect to the Audit and Stock Option and Compensation committee are
described below:

AUDIT COMMITTEE. The Audit Committee recommends to the Board of Directors
the appointment of the firm selected to be independent certified public
accountants for the Company and monitors the performance of such firm;
reviews and approves the scope of the annual audit and quarterly reviews and
evaluates problem areas having a potential financial impact on the Company
which may be brought to its attention by management, the independent public
accountants or the Board of Directors; and evaluates all public financial
reporting documents of the Company. Messrs. Robert J. Moss, Barton D.
Weisman and John M. Briggs are currently members of the Audit Committee.
Each of Messrs. Moss, Weisman and Briggs are independent Directors as such
term is defined by Rule 4200(a)(15) of the Nasdaq Stock Market listing
standards. Mr. Briggs has been designated the "audit committee financial
expert" and he satisfies the attributes required of "audit committee
financial experts" pursuant to Section 407 of the Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley"). The Audit Committee met five times during 2002. The
report of Audit Committee for the fiscal year ended December 31, 2002 is
included herein under "Audit Committee Report".

STOCK OPTION AND COMPENSATION COMMITTEE. The Stock Option and
Compensation Committee (composed of non-employee directors) recommends to
the Board of Directors compensation for the Company's key employees and
administers the Company's 2002 Plan, as well as the 1996 Non-Employee
Directors' Plan, as amended and restated as of October 28, 1997, and options
which may be granted outside of such Plans. With respect to grants to
employees under the 2002 Plan, the Stock Option and Compensation Committee
(effective April 14, 2003 composed of Messrs. Briggs and Moss) has the power
to determine from time to time the individuals to whom options shall be
granted, the number of shares to be covered by each option and the time or
times at which options shall be granted. Each of Messrs. Briggs and Moss are
Independent Directors as such term is defined by Rule 4200(a)(15) of the
NASDAQ Stock Market listing standards. The Stock Option and Compensation
Committee met twice during 2002.

The Company does not have a nominating or an executive committee. The
functions customarily attributable to these committees are performed by the
Board of Directors as a whole.

PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWNERSHIP

The following table sets forth information as of April 18, 2003, regarding
the beneficial ownership of Common Stock by each person known by the Company
to own 5% or more of the outstanding shares of Common Stock, each director of
the Company, the Company's executive officers as defined in Item 402(a)(3) of
Regulation S-K and the directors and executive officers of the Company as a
group. The persons named in the table have sole voting and investment power
with respect to all shares of Common Stock owned by them, unless otherwise
noted.

Amount and
Nature of Percent
Name and Beneficial Owner or Group (1) Beneficial of
-------------------------------------- Ownership Class
---------- -------

Lord, Abbett & Co. .................................. 1,319,209(2) 11.8%
Daniel P. McCartney ................................. 1,173,918(3) 10.3%
Pequot Capital Management, Inc. ..................... 1,041,100(4) 9.3%
Dimensional Fund Advisors Inc. ...................... 742,308(5) 6.6%
Strong Capital Management, Inc ...................... 618,644(6) 5.5%
Thomas A. Cook ...................................... 343,694(7) 3.0%
Barton D. Weisman ................................... 113,285(8) 1.0%
Brian M. Waters ..................................... 91,397(9) (16)
Joseph F. McCartney ................................. 81,297(10) (16)
James L. DiStefano .................................. 42,112(11) (16)
John M. Briggs ...................................... 36,800(12) (16)
Robert L. Frome ..................................... 32,660(13) (16)
Robert J. Moss ...................................... 21,455(14) (16)
Directors and Executive Officers as a group (11
persons) ............................................ 1,987,213(15) 16.4%

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(1) The address of Lord, Abbett & Co. is 90 Hudson Street, Jersey City, NJ
07302. The address of Daniel P. McCartney is 3220 Tillman Drive, Suite
300, Bensalem, PA 19020. The address of Pequot Capital Management, Inc.
is 500 Nyala Farm Road, Westport, CT 06880. The address of Dimensional
Fund Advisors Inc. ("Dimensional") is 1299 Ocean Avenue 11th Floor, Santa
Monica, CA 90401. The address of Strong Capital Management, Inc. is 100
Heritage Reserve, Menomonee Falls, WI 53051.

(2) According to a Schedule 13G filed by Lord, Abbett & Co., dated January
31, 2003, it has sole voting power and dispositive power with respect to
the 1,319,209 shares.

(3) Includes incentive stock options to purchase 71,866 shares and
nonqualified stock options to purchase 145,634 shares all exercisable
within sixty days of April 18, 2003 and 6,403 shares credited to Mr.
McCartney's account (but unissued) in connection with the Company's
Deferred Compensation Plan. Also includes an aggregate of 2,500 shares
that Mr. McCartney holds as a co-trustee for the benefit of his child.
Mr. McCartney disclaims beneficial ownership of these shares. Mr.
McCartney may be deemed to be a "parent" of and deemed to control the
Company, as such terms are defined for purposes of the Securities Act of
1933, as amended (the "Securities Act"), by virtue of his position as
founder, director, Chief Executive Officer and a principal shareholder of
the Company.

(4) According to a Schedule 13G filed by Pequot Capital Management, Inc.
dated February 14, 2003, it has sole voting power and dispositive power
with respect to the 1,041,100 shares.

(5) According to a Schedule 13G filed by Dimensional, dated February 3, 2003,
Dimensional, a registered investment advisor, may be deemed to have
beneficial ownership of 742,308 shares of the Company's Common Stock as
of December 31, 2002 all of which shares are held in portfolios of DFA
Investment Dimensions Group Inc., a registered investment company, or in
series of the DFA Investment Trust Company, a Delaware business trust, or
the DFA Group Trust and DFA Participation Group Trust, investment
vehicles for qualified employee benefit plans, for all of which
Dimensional serves as investment manager. Dimensional disclaims
beneficial ownership of all such shares.

(6) According to a Schedule 13G filed jointly by Strong Capital Management,
Inc., and Richard S. Strong dated February 6, 2003, Strong Capital
Management, Inc. and Richard Strong have shared dispositive power with
respect to 618,644 shares (of which it has shared voting power with
respect to 616,894 shares). Richard S. Strong is the Chairman of the
Board of Strong Capital Management, Inc.

(7) Includes incentive stock options to purchase 82,378 shares and
nonqualified stock options to purchase 252,622 shares all exercisable
within sixty days of April 18, 2003 and 3,633 shares credited to Mr.
Cook's account (but unissued) in connection with the Company's Deferred
Compensation Plan.

(8) Includes nonqualified stock options to purchase 32,435 shares, all
exercisable within sixty days of April 18, 2003.

(9) Includes incentive stock options to purchase 65,873 shares and
nonqualified stock options to purchase 20,127 shares, all exercisable
within sixty days of April 18, 2003.

(10) Includes incentive stock options to purchase 64,837 shares and
nonqualified stock options to purchase 15,163 shares, all exercisable
within sixty days of April 18, 2003 and 1,297 shares credited to Mr.
McCartney's account (but unissued) in connection with the Company's
Deferred Compensation Plan.

(11) Includes incentive stock options to purchase 37,655 shares and
nonqualified stock options to purchase 2,095 shares, all exercisable
within sixty days of April 18, 2003 and 1,579 shares credited to Mr.
DiStefano's account (but unissued) in connection with the Company's
Deferred Compensation Plan.

(12) Includes nonqualified stock options to purchase 24,950 shares, all
exercisable within sixty days of April 18, 2003.

(13) Includes nonqualified stock options to purchase 32,435 shares, all
exercisable within sixty days of April 18, 2003.

(14) Represents nonqualified stock options to purchase 21,455 shares, all
exercisable within sixty days of April 18, 2003.

(15) Includes 920,025 shares underlying options granted to said group of
persons which includes presently exercisable options to purchase 50,500
shares held by executive officers who are not specifically identified in
the Principal Stockholders and Management Ownership table above. All
options are exercisable within sixty days of April 18, 2003. Also
includes 12,912 shares credited to the accounts of certain executive
officers (but unissued) in connection with the Company's Deferred
Compensation Plan.

(16) Less than 1% of the outstanding shares.

Directors' Fees

The Company paid each director who is not an employee of the Company $500
for each regular or committee meeting of the Board of Directors attended. Mr.
Frome bills the Company at his customary rates for time spent on behalf of the
Company (whether as a director or in the performance of legal services for the
Company) and is reimbursed for expenses incurred in attending directors'
meetings. The Company also granted options to non-employee directors to
purchase an aggregate of 24,950 shares of Common Stock during the year ended
December 31, 2002 pursuant to the 1996 Non-Employee Directors' Plan, as
amended and restated as of October 28, 1997.

MANAGEMENT COMPENSATION

Summary Compensation Table

The following table sets forth certain information regarding compensation
paid or accrued during each of the Company's last three fiscal years to the
Company's Chief Executive Officer and the four highest paid executive officers
whose total salary and bonus exceeded $100,000 in 2002 (the "Named Executive
Officers").

Long Term Compensation
----------------------------------
Awards Payouts
----------------------- -------
Annual Compensation
-------------------------------- Securities
Restricted Underlying
Name and Principal Fiscal Other Annual Stock Options/ LTIP All Other
Positions Year Salary Bonus Compensation Awards SARs(1) Payouts Compensation
-------------------------------- ------ -------- ----- ------------ ---------- ---------- ------- ------------

Daniel P. McCartney 2002 $573,050 0 $35,443 0 25,000 0 0
Chairman of the 2001 501,163 0 32,743 0 50,000 0 0
Board and Chief 2000 489,201 0 32,641 0 25,000 0 0
Executive Officer

Thomas A. Cook, 2002 $573,050 0 $21,490 0 25,000 0 0
President, Chief 2001 501,163 0 14,314 0 137,500 0 0
Operating Officer 2000 489,201 0 6,675 0 25,000 0 0
and Director

Brian M. Waters 2002 $185,645 0 $15,663 0 10,000 0 0
Vice President -- 2001 179,706 0 15,117 0 31,000 0 0
Operations 2000 164,000 0 8,700 0 10,000 0 0

James L. DiStefano 2002 $158,173 0 $ 5,933 0 10,000 0 0
Chief Financial Officer 2001 146,539 0 5,500 0 10,000 0 0
and Treasurer 2000 136,690 0 3,761 0 5,000 0 0

Joseph F. McCartney 2002 $155,966 0 $14,425 0 10,000 0 0
Divisional Vice 2001 130,084 0 11,955 0 22,000 0 0
President and Director 2000 139,737 0 12,155 0 8,000 0 0

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(1) Options to acquire shares of Common Stock. The Company has not awarded
any SAR's (Stock Appreciation Rights).

EQUITY COMPENSATION PLAN INFORMATION

The following table provides certain information with respect to all of the
Company's equity compensation plans and grants made outside of any plans in
effect as of April 18, 2003:

Number of securities
Number of securities to be Weighted-average remaining available for
Issued upon exercise of exercise price of future issuance under equity
outstanding options, outstanding options, compensation plans (excluding
warrants and rights warrants and rights Securities reflected in column (a))
Plan Category (a) (b) (c)
--------------------------------------- -------------------------- -------------------- -----------------------------------

Equity compensation plans approved
by security holders................... 1,585,563(1) $8.73 1,088,466(2)
Equity compensation plans not
approved by security holders.......... N/A N/A N/A
-------------------------- -------------------- -----------------------------------
1,585,563 $8.73 1,088,466

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(1) Represents shares of Common Stock issuable upon exercise of outstanding
options granted under the 2002 Plan, 1996 Non-employee Director Stock
Option Plan, as amended and restated as of October 28, 1997 (the "1996
Plan") or 1995 Incentive and Non-qualified Stock Option Plan (the "1995
Plan").

(2) Includes options to purchase 344,777 shares available for future grant
under the Company's 2002 Plan, 1996 Plan or 1995 Plan. Also includes
713,180 and 30,509 shares available for issuance under the Company's 1999
Employee Stock Purchase Plan and 1999 Deferred Compensation Plan ,
respectively (collectively, the "1999 Plans"). Treasury shares will be
issued under the 1999 Plans. In addition, if the proposal to approve the
amendment to the 2002 Plan is approved, an additional 550,000 shares will
be available for issuance.

Option Grants During 2002 Fiscal Year

The following table provides information related to options to purchase
Common Stock granted to the Named Executive Officers during fiscal 2002.

Potential
Realizable Value
at Assumed
Annual Rates of
Stock Price
Appreciation for
Individual Grants Option Term (1)
-----------------------------------------------------------------------------------------------------------------------------------
% of Total
Options
Options Granted to Exercise
Granted Employees in Price
Name (#) (2) Fiscal Year ($/Sh) (2) Expiration Date 5% 10%
------------------------------------------------- ------- ------------ ---------- --------------- -------- --------

Daniel P. McCartney .............................. 25,000 7.90% $12.65 (3) Dec. 13, 2012 $198,888 $504,021
Thomas A. Cook ................................... 25,000 7.90% 12.65 (3) Dec. 13, 2012 198,888 504,021
Brian M. Waters .................................. 10,000 3.16% 12.65 (3) Dec. 13, 2012 79,555 201,608
James L. DiStefano ............................... 10,000 3.16% 12.65 (3) Dec. 13, 2012 79,555 201,608
Joseph F. McCartney .............................. 10,000 3.16% 12.65 (3) Dec. 13, 2012 79,555 201,608

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(1) The potential realizable value portion of the foregoing table illustrates
value that might be realized upon exercise of the options immediately
prior to the expiration of their term, assuming the specified compounded
rates of appreciation on the Common Stock over the term of the options.
These numbers do not take into account provisions of certain options
providing for termination of the option following termination of
employment, nontransferability or differences in vesting periods.
Regardless of the theoretical value of an option, its ultimate value will
depend on the market value of the Common Stock at a future date, and that
value will depend on a variety of factors, including the overall
condition of the stock market and the

Company's results of operations and financial condition. There can be no
assurance that the values reflected in this table will be achieved.

(2) The option exercise price may be paid in shares of Common Stock owned by
the Named Executive Officer for more than six months (based on the Fair
Market Value of the Stock on the trading day before the Option is
exercised), in cash, or a combination of any of the foregoing, as
determined by the Stock Option and Compensation Committee.

(3) The exercise price was the market value (i.e., closing market price) of
the Common Stock on the date of grant.

Aggregated Option Exercises During 2002 Fiscal Year and Fiscal Year End Option
Values

The following table provides information related to the exercise of options
and the number and value of options held at fiscal year end by each of the
Named Executive Officers. (The Company does not have any outstanding stock
appreciation rights.)

Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Value Options at FY-End(#) at FY-End ($)(2)
Acquired on Realized --------------------------- ---------------------------
Name Exercise (#) ($)(1) Exercisable Unexercisable Exercisable Unerercisable
----------------------------------------- ------------ -------- ----------- ------------- ----------- -------------

Daniel P. McCartney ...................... -- -- 192,500 25,000 $ 948,124 $9,750
Thomas A. Cook ........................... 18,000 92,765 310,000 25,000 1,668,830 9,750
Brian M. Waters .......................... -- -- 76,000 10,000 425,615 3,900
James L. DiStefano ....................... -- -- 29,750 10,000 159,923 3,900
Joseph F. McCartney ...................... -- -- 70,000 10,000 405,356 3,900

---------------

(1) Value realized is calculated by multiplying the shares acquired upon
exercise by the difference between the option exercise price and the fair
market value of the common stock on the date of exercise. The options
exercised by Mr. Cook had been held by him for 10 years.

(2) The closing price of the Common Stock as reported by the Nasdaq National
Market System on December 31, 2002 was $13.04. Value is calculated by
multiplying the number of shares underlying the option by the difference
between the option exercise price and $13.04.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the Company's Directors, executive officers and 10% stockholders to file with
the Securities Exchange Commission ("SEC") and the Nasdaq Stock Market initial
reports of ownership and reports of changes in ownership of the Company's
Common Stock. Directors and executive officers are required to furnish the
Company with copies of all Section 16(a) reports they file.

To the Company's knowledge, based solely on review of the copies of these
reports furnished to the Company and written representations that no other
reports were required, during 2002 all Section 16 (a) filing requirements
applicable to its Directors and executive officers were complied with except for
the failure to file on Form 4 (a) the crediting of shares (although as yet
unissued) to the accounts of Daniel McCartney, Thomas Cook, Joseph F. McCartney
and James DiStefano of 6,403, 3,633, 1,297 and 1,579 shares on December 31,
2002, respectively, pursuant to the Company's 1999 Deferred Compensation Plan
and (b) the sale of 2,000 shares in April 2002 by John Briggs, a Director of the
Company. These failures were inadvertent and, as soon as the oversights were
discovered, the transactions were promptly reported.

Sarbanes-Oxley Act Compliance

Sarbanes-Oxley sets forth various new requirements for public companies and
directs the SEC to adopt additional rules and regulations.

Currently, the Company believes it is in compliance with all applicable
laws, rules and regulations arising from Sarbanes-Oxley. A number of the SEC
rules and regulations are not yet effective as regards the Company. The
Company intends to comply with all rules and regulations adopted by the SEC
pursuant to Sarbanes-Oxley no later than the time they become applicable to
the Company.

AUDIT COMMITTEE REPORT

The members of the Audit Committee from January 1, 2002 to December 31, 2002
were Messrs. John M. Briggs, Robert J. Moss and Barton D. Weisman. The Audit
Committee met five times during the fiscal year. The Audit Committee is
responsible for considering management's recommendation of independent
certified public accountants for each fiscal year, recommending the
appointment or discharge of independent accountants to the board of directors
and confirming the independence of the accountants. It is also responsible
for: reviewing and approving the scope of the planned audit, the results of
the audit and the accountants' compensation for performing such audit;
reviewing the Company's audited financial statements; and reviewing and
approving the Company's internal accounting controls and discussing such
controls with the independent accountants.

The Audit Committee adopted a written charter during fiscal 2000, a copy of
which was attached to the Company's 2001 proxy statement as Exhibit A.

The Company's independent auditors are responsible for auditing the
financial statements. The activities of the Committee are in no way designed
to supersede or alter those traditional responsibilities. The Committee's role
does not provide any special assurances with regard to the Company's financial
statements, nor does it involve a professional evaluation of the quality of
the audits performed by the independent auditors.

In connection with the audit of Healthcare Services Group, Inc.'s financial
statements for the year ended December 31, 2002, the Audit Committee met with
representatives from Grant Thornton LLP, the Company's independent auditors.
The Audit Committee reviewed and discussed with Grant Thornton LLP the
Company's financial management and financial structure, as well as the matters
relating to the audit required to be discussed by Statements on Auditing
Standards 61 and 90.

The Audit Committee and Grant Thornton LLP also discussed Grant Thornton
LLP's independence. On January 13, 2003, the Audit Committee received from
Grant Thornton LLP the written disclosures and the letter regarding Grant
Thornton LLP's independence required by Independence Standards Board Standard
No. 1.

In addition, the Audit Committee reviewed and discussed with management the
Company's audited financial statements for the fiscal year ended December 31,
2002.

Based upon the review and discussions described above, the Audit Committee
recommended to the Board of Directors that the Company's financial statements
audited by Grant Thornton LLP be included in the Company's Annual Report on
Form 10-K for the fiscal year ended December 31, 2002.

February 12, 2003

John M. Briggs
Robert J. Moss
Barton D. Weisman

STOCK PERFORMANCE GRAPH

The following graph compares the total cumulative return (assuming dividends
are reinvested) on the Common Stock during the five fiscal years ended
December 31, 2002 with the cumulative total return on the S&P 500 Index and
the S&P Healthcare Industry -- Miscellaneous Services Group Index.
[graphic]

[GRAPH OMITTED]

INDEXED RETURNS
Years Ending

Base
Period
Company Dec 97 Dec 98 Dec 99 Dec 00 Dec 01 Dec 02
-----------------------------------------------------------------------------------------------------------

HEALTHCARE SERVICES GROUP 100 108.42 83.17 75.74 122.98 154.93
S&P 500 INDEX 100 128.58 155.63 141.46 124.65 97.10
HEALTHCARE DISTRIBUTORS & SERVICES 100 153.88 63.59 117.76 117.11 100.45

Report of the Stock Option and Compensation Committee on Executive
Compensation
Effective April 1, 2003, the compensation of the Chief Executive Officer of
the Company is determined by the Stock Option and Compensation Committee. The
Committee's determinations regarding such compensation are based on a number
of factors including, in order of importance:

o Consideration of the operating and financial performance of the
Company, primarily its income before income taxes during the preceding
fiscal year, as compared with prior operating periods;

o Attainment of a level of compensation designed to retain a superior
executive in a highly competitive environment; and

o Consideration of the individual's overall contribution to the Company.

Compensation for Company executive officers (referred to in the summary
compensation table) other than the Chief Executive Officer is determined by
the Stock Option and Compensation Committee based upon consultation with the
Chief Executive Officer, taking into account the same factors considered by
the Board in determining the Chief Executive Officer's compensation as
described above. Except as set forth below, the Company has not established a
policy with regard to Section 162(m) of the Internal Revenue Code of 1986, as
amended (the "Code"), since the Company has not and does not currently
anticipate paying compensation in excess of $1 million per annum to any
employee. Under the 1995 Employee Plan no recipient of options may be granted
options to purchase more than 125,000 shares of Common Stock. Therefore,
compensation received as a

result of options granted under the 1995 Employee Plan qualify as
"performance-based" for purposes of Section 162(m) of the Code.

In addition, under the 2002 Stock Option Plan, no recipient of options may
be granted options to purchase more than 50,000 shares of Common Stock in any
calendar year. Therefore, compensation received as a result of options granted
under the 2002 Stock Option Plan, qualify as "performance-based" for purposes
of Section 162(m) of the Code.

The Company applies a consistent approach to compensation for all employees,
including senior management. This approach is based on the belief that the
achievements of the Company result from the coordinated efforts of all
employees working toward common objectives.

Mr. Daniel P. McCartney and Mr. Thomas A. Cook each received annual base
salaries of $227,000 for the year ending December 31, 2002 and an additional
3% of the income from operations before income taxes of the Company
attributable to the fiscal year immediately preceding the year for which his
annual salary is calculated. Their compensation will be similarly determined
with respect to the calendar year ending December 31, 2003.

April 14, 2003
Stock Option and Compensation Committee
John M. Briggs
Robert J. Moss

Interlocks and Insider Participation and Other Matters

Mr. Barton D. Weisman, a director of the Company, has an ownership interest
in ten nursing homes that have entered into service agreements with the
Company. During the year ended December 31, 2002, these agreements resulted in
gross revenues of approximately $3,540,000 to the Company (approximately 1% of
the Company's total revenues). Additionally, at December 31, 2002, such
nursing homes, in the aggregate, had outstanding accounts receivable of the
Company of approximately $464,000. Management believes that the terms of each
of the transactions with the nursing homes described herein are comparable to
those available to unaffiliated third parties.

Mr. Robert L. Frome, a director of the Company, is a member of the law firm
of Olshan Grundman Frome Rosenzweig & Wolosky, LLP, which law firm has been
retained by the Company during the last fiscal year. Fees received from the
Company by such firm during the last fiscal year did not exceed 5% of such
firm's revenues.

PROPOSAL NO. 2 - APPROVAL OF THE AMENDMENT TO THE 2002 STOCK OPTION PLAN

A majority of the Company's shareholders approved the Company's 2002 Plan at
the 2002 Annual Meeting, which provided that options may be granted with
respect to 500,000 shares of Common Stock. As of the Record Date, options to
purchase 155,295 shares of Common Stock had been granted under the 2002 Plan.
In April 2003, the Board of Directors voted to increase the authorized number
of shares available for issuance under the 2002 Plan from 500,000 to 1,050,000
shares of Common Stock, an increase of less than 5% of the Company's
outstanding shares of Common Stock. The 2002 Plan has been amended and
restated to include this increased amount of reserved shares, as well as
certain other immaterial administrative amendments. The 2002 Plan enables the
Company to remain competitive and provide sufficient equity incentives to
attract and retain highly-qualified and experienced employees, directors,
consultants and advisors to the Company and encourages the sense of
proprietorship and stimulates the active interest of such persons in the
development and financial success of the Company and its subsidiaries. The
Board of Directors believes that approval of the amendment to the 2002 Plan is
in the Company's best interest because the availability of an adequate reserve
of shares under the 2002 Plan is an important factor in attracting, motivating
and retaining qualified officers, employees, directors and consultants
essential to the Company's success and in aligning their long-term interests
with those of the shareholders.

Summary of Amended 2002 Stock Option Plan

Each option granted pursuant to the 2002 Plan shall be designated at the
time of grant as either an "incentive stock option" or as a "nonqualified
stock option." A summary of the significant provisions of the 2002 Plan is set
forth below. This discussion of the 2002 Plan is qualified in its entirety by
reference to the 2002 Plan. If this

proposal is approved by the Company's shareholders, the first sentence of
Section 4 of the 2002 Plan shall be amended to read in its entirety as
follows: "Subject to adjustment as provided in Section 7 hereof, a total of
1,050,000 shares of the Company's Common Stock, $.01 par value per share (the
"Stock), shall be subject to the Plan."

In addition, the 2002 Plan has been amended by the Company's Board of
Directors to provide that the terms, provisions, conditions and limitations of
the 2002 Plan shall be construed and interpreted consistent with the
provisions or rules and regulations of (i) the principal national securities
exchange or automated quotation system on which the shares of the Company's
Common Stock are listed or traded and (ii) Sarbanes-Oxley.

Administration of the Plan

The 2002 Plan is administered by a Committee consisting of two or more
directors who are "Non-Employee Directors" (as such term is defined in
Exchange Act Rule 16b-3) and "Outside Directors" (as such term is defined in
Section 162(m) of the Code) (the "Committee"). The Committee determines to
whom among those eligible, and the time or times at which, options will be
granted, the number of shares to be subject to options, the duration of
options, any conditions to the exercise of options, and the manner in and
price at which options may be exercised. In making such determinations, the
Committee may take into account the nature and period of service of eligible
persons, their level of compensation, their past, present and potential
contributions to the Company and such other factors as the Committee in its
discretion deems relevant.

The Board of Directors is authorized to amend, suspend or terminate the 2002
Plan, except that it is not authorized without shareholder approval (except
with regard to adjustments resulting from changes in capitalization) to (i)
materially increase the number of shares that may be issued under the 2002
Plan; (ii) materially increase the benefits accruing to the option holders
under the 2002 Plan; (iii) materially modify the requirements as to
eligibility for participation in the 2002 Plan; (iv) decrease the exercise
price of an option to less than 100% of the Fair Market Value per share of
Common Stock on the date of grant thereof, or (v) extend the term of any
option beyond that provided for in Section 5 of the 2002 Plan.

Unless the 2002 Plan is terminated earlier by the Board of Directors, it
will terminate on May 21, 2012.

Common Stock Subject to the 2002 Plan

The 2002 Plan provides that options may be granted with respect to 1,050,000
shares of Common Stock, which includes the additional 550,000 shares of Common
Stock referred to in the amendment to the 2002 Plan. The maximum number of
shares of stock that can be subject to options granted under the 2002 Plan to
any individual in any calendar year shall not exceed 50,000. In the event of
any merger, reorganization, consolidation, recapitalization, stock dividend,
or other change in corporate structure affecting the Common Stock of the
Company, the Committee shall have the discretion to make an appropriate and
equitable adjustment in the number and kind of shares reserved for issuance
under the 2002 Plan and in the number and option price of shares subject to
outstanding options granted under the 2002 Plan, to the end that (a) the
aggregate intrinsic value of the award is not increased and (b) the ratio of
the exercise price per share to market value is not reduced. If any option
expires or terminates for any reason, without having been exercised in full,
the unpurchased shares subject to such option will be available again for the
purposes of the 2002 Plan.

Participation

Any employee, officer or director of, and any consultant or advisor to, the
Company or any of its subsidiaries shall be eligible to receive stock options
under the 2002 Plan. Only employees of the Company or its subsidiaries shall
be eligible to receive incentive stock options.

Option Price

The exercise price of each option is determined by the Committee, but may
not be less than 100% of the Fair Market Value (as defined in the 2002 Plan)
of the shares of Common Stock covered by the option on the date the option is
granted. If an incentive stock option is to be granted to an employee who owns
over 10% of the total

combined voting power of all classes of the Company's capital stock, then the
exercise price may not be less than 110% of the Fair Market Value of the
Common Stock covered by the option on the date the option is granted.

Term of Options

The Committee shall, in its discretion, fix the term of each option,
provided that the maximum term of each option shall be 10 years. Incentive
stock options granted to an employee who owns over 10% of the total combined
voting power of all classes of stock of the Company shall expire not more than
five years after the date of grant. The 2002 Plan provides for the earlier
expiration of options of a participant in the event of certain terminations of
employment or engagement.

Restrictions on Transfer and Exercise

Generally, an option may not be transferred or assigned other than by will
or the laws of descent and distribution and, during the lifetime of the option
holder, may be exercised solely by him. The aggregate Fair Market Value
(determined at the time the incentive stock option is granted) of the shares
as to which an employee may first exercise incentive stock options in any one
calendar year under all incentive stock option plans of the Company and its
subsidiaries may not exceed $100,000. The Committee may impose any other
conditions to exercise as it deems appropriate.

Registration of Shares

The Company has filed a registration statements under the Securities Act
with respect to 500,000 shares of Common Stock issued or to be issued upon
exercise of options granted or to be granted under the 2002 Plan. The Company
intends to file a registration statement under the Securities Act with respect
to the additional Common Stock issuable pursuant to the 2002 Plan subsequent
to the approval of the amendment to the 2002 Plan by the Company's
shareholders.

Regulatory Compliance

In all cases, the terms, provisions, conditions and limitations of the 2002
Plan shall be construed and interpreted consistent with the provisions or
rules and regulations of (i) Rule 16b-3 of the Securities Exchange Act of
1934, as amended (ii) the principal national securities exchange or automated
quotation system on which the shares of the Company's Common Stock are listed
or traded and (iii) Sarbanes-Oxley.

Tax Treatment of Incentive Stock Options

In general, no taxable income for Federal income tax purposes will be
recognized by an option holder upon receipt or exercise of an incentive stock
option and the Company will not then be entitled to any tax deduction.
Assuming that the option holder does not dispose of the option shares before
the later of (i) two years after the date of grant or (ii) one year after the
exercise of the option, upon any such disposition, the option holder will
recognize capital gain equal to the difference between the sale price on
disposition and the exercise price.

If, however, the option holder disposes of his option shares prior to the
expiration of the required holding period, he will recognize ordinary income
for Federal income tax purposes in the year of disposition equal to the lesser
of (i) the difference between the fair market value of the shares at date of
exercise and the exercise price, or (ii) the difference between the sale price
upon disposition and the exercise price. Any additional gain on such
disqualifying disposition will be treated as capital gain. In addition, if
such a disqualifying disposition is made by the option holder, the Company
will be entitled to a deduction equal to the amount of ordinary income
recognized by the option holder provided such amount constitutes an ordinary
and reasonable expense of the Company.

Tax Treatment of Nonqualified Stock Options

No taxable income will be recognized by an option holder upon receipt of a
nonqualified stock option, and the Company will not be entitled to a tax
deduction for such grant.

Upon the exercise of a nonqualified stock option, the option holder will
include in taxable income for Federal income tax purposes the excess in value
on the date of exercise of the shares acquired upon exercise of

the nonqualified stock option over the exercise price. Upon a subsequent sale
of the shares, the option holder will derive short-term or long-term gain or
loss, depending upon the option holder's holding period for the shares,
commencing upon the exercise of the option, and upon the subsequent
appreciation or depreciation in the value of the shares.

The Company generally will be entitled to a corresponding deduction at the
time that the participant is required to include the value of the shares in
his income.

Withholding of Tax

The Company is permitted to deduct and withhold amounts required to satisfy
its withholding tax liabilities with respect to its employees.

Option Grants

As of the Record Date, options to purchase 155,295 shares of Common Stock
had been granted pursuant to the 2002 Plan. During the fiscal year ended
December 31, 2002 and through the Record Date, options to purchase shares of
Common Stock have been granted pursuant to the 2002 Plan to (i) the chief
executive officer, (ii) all current executive officers as a group, (iii) all
non-employee Directors as a group, and (iv) all employees, including all
current officers who are not executive officers, as a group, as follows:

Name
---- Exercise Price Number of Options
-------------- -----------------

Daniel P. McCartney, Chief Executive
Officer................................. $12.65 25,000
Executive Officer Group(1) ............... 12.65 77,905
Non-Employee Directors ................... 12.65 24,950
Non-Executive Officer Employee Group ..... 12.21 47,450

---------------
(1) Includes Daniel P. McCartney, Thomas A. Cook, Joseph F. McCartney, Brian
M. Waters, James L. DiStefano, Thomas B. Carpenter and Richard W. Hudson.

Required Vote

The affirmative vote of the holders of a majority of the Common Stock
present (in person or by proxy) and voting is required for approval of the
amendment to the 2002 Plan. An abstention, a specific withholding of authority
to vote or a "broker non-vote" by a registered holder will not be counted in
determining whether the proposal has received the requisite stockholder vote.

Recommendation of the Board of Directors

The Board recommends a vote "FOR" approval of the amendment to the 2002
Plan.

PROPOSAL NO. 3
INDEPENDENT PUBLIC ACCOUNTANTS

The accounting firm of Grant Thornton LLP was selected by the Audit
Committee of the Board of Directors as the independent public accountants of
the Company for the fiscal year ending December 31, 2003. Said firm has no
other relationship to the Company. The Board of Directors recommends the
ratification of the selection of the firm of Grant Thornton LLP to serve as
the independent public accountants of the Company for the year ending December
31, 2003. A representative of Grant Thornton LLP, which has served as the
Company's independent public accountants since December 1992, will be present
at the forthcoming shareholders' meeting with the opportunity to make a
statement if he so desires and such representative will be available to
respond to appropriate questions. The approval of the proposal to ratify the
appointment of Grant Thornton LLP requires the affirmative vote of a majority
of the votes cast by all shareholders represented and entitled to vote
thereon. An abstention or withholding of authority to vote, therefore, will
not have the same legal effect as an "against" vote and will not be counted in
determining whether the proposal has received the required shareholder vote.
However, brokers that do not receive instructions on this proposal are
entitled to vote for the selection of the independent public accountants.

Fees billed to Company by Grant Thornton LLP during Fiscal 2002-

Audit Fees:

Audit fees billed to the Company by Grant Thornton LLP during the Company's
2002 fiscal year for audit of the Company's annual financial statements and
reviews of those financial statements included in the Company's quarterly
reports on Form 10-Q totaled approximately $301,000.

Financial Information Systems Design and Implementation Fees: $0

The Company did not engage Grant Thornton LLP to provide advice to the
Company regarding financial information systems design and implementation
during the fiscal year ended December 31, 2002.

All Other Fees:

Fees billed to the Company by Grant Thornton LLP during the Company's 2002
fiscal year for all other services rendered to the Company, including tax
related services totaled approximately $49,000.

The Audit Committee of the Board of Directors considered whether Grant
Thornton LLP's provision of the services covered above under "All Other Fees"
is compatible with maintaining Grant Thornton LLP's independence.

OTHER MATTERS

So far as is now known, there is no business other than that described above
to be presented for action by the shareholders at the meeting, but it is
intended that the proxies will be exercised upon any other matters and
proposals that may legally come before the meeting, or any adjournment
thereof, in accordance with the discretion of the persons named therein.

DEADLINE FOR SHAREHOLDER PROPOSALS

To the extent permitted by law, any shareholder proposal intended for
presentation at next year's annual shareholders' meeting must be received in
proper form at the Company's principal office no later than December 22, 2003.

In accordance with and to the extent covered by Rule 14a-4(c)(1) of the
Securities Exchange Act of 1934, as amended, if the Company is not notified of
a shareholder proposal by March 7, 2004, such proposal will not be included in
the proxy statement for the next year's annual shareholders' meeting and the
Company will be permitted to use its discretionary authority in respect
thereof.

ANNUAL REPORT

The 2002 Annual Report to Shareholders, including financial statements, is
being mailed herewith. If you do not receive your copy please advise the
Company and another will be sent to you.

By Order of the Board of Directors,

DANIEL P. MCCARTNEY
Chairman and
Chief Executive Officer

Dated: Bensalem, Pennsylvania
April 21, 2003

A copy of the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2002, as filed with the Securities and Exchange Commission, may
be obtained without charge by any shareholder of record on the record date
upon written request addressed to: Secretary, Healthcare Services Group, Inc.,
3220 Tillman Drive, Suite 300, Bensalem, PA 19020.

ANNUAL MEETING OF SHAREHOLDERS OF

HEALTHCARE SERVICES GROUP, INC.

May 27, 2003

Please date, sign and mail
your proxy card in the
envelope provided as soon
as possible.

Please detach and mail in the envelope provided.

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| |
| PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE /X/ |
------------------------------------------------------------------------------------------------------------------------------------

FOR AGAINST ABSTAIN
1. TO ELECT SEVEN DIRECTORS; 2. TO APPROVE AN AMENDMENT TO THE COMPANY'S / / / / / /
2002 STOCK OPTION PLAN INCREASING THE
NOMINEES: TOTAL NUMBER OF SHARES OF THE COMPANY'S COMMON STOCK
/ / FOR ALL NOMINEES o Daniel P. McCartney AVAILABLE FOR ISSUANCE THEREUNDER FROM 500,000 SHARES
o Barton D. Weisman TO 1,050,000 SHARES.
/ / WITHHOLD AUTHORITY o Joseph F. McCartney
FOR ALL NOMINEES o Robert L. Frome 3. TO APPROVE AND RATIFY THE SELECTION OF / / / / / /
o Thomas A. Cook GRANT THORNTON LLP AS THE INDEPENDENT
/ / FOR ALL EXCEPT o Robert J. Moss PUBLIC ACCOUNTANTS OF THE COMPANY FOR
(See instructions below) o John M. Briggs ITS CURRENT FISCAL YEAR ENDING DECEMBER 31, 2003.

4. In their discretion, upon such other matters as may properly
come before the Meeting.

INSTRUCTION: To withhold authority to vote for any individual
------------ nominee(s), mark "FOR ALL EXCEPT" and fill in the
circle next to each nominee you wish to withhold,
as shown here: o
----------------------------------------------------------------------

----------------------------------------------------------------------
To change the address on your account, please check the box at
right and indicate your new address in the address space above. / /
Please note that changes to the registered name(s) on the account
may not be submitted via this method.
----------------------------------------------------------------------

Signature of Shareholder________________________ Date:____________ Signature of Shareholder_____________________ Date:____________

Note: Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When
signing as executor, administrator, attorney, trustee or guardian, please give full title as such. If the signer is a
corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a
partnership, please sign in partnership name by authorized person.

HEALTHCARE SERVICES GROUP, INC.
PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

Annual Meeting of Shareholders to be held at The Radisson Hotel of Bucks County,
2400 Old Lincoln Highway, Trevose, PA 19047 on May 27, 2003 at 10:00 A.M.

The undersigned, revoking all previous proxies, hereby appoints Daniel P.
McCartney and Thomas A. Cook or either of them, attorneys and proxies with full
power of substitution and with all the powers the undersigned would possess if
personally present, to vote all shares of HEALTHCARE SERVICES GROUP, INC. owned
by the undersigned at the Annual Meeting of Shareholders of said corporation to
be held at the place set forth above, and at any adjournment thereof, in the
transaction of such business as may properly come before the meeting or any
adjournment thereof, all as more fully described in the Proxy Statement, and
particularly to vote as designated on the reverse side.

THE SHARES REPRESENTED HEREBY WILL BE VOTED AS DIRECTED BY THIS PROXY, IF
NO DIRECTION IS MADE THEY WILL BE VOTED FOR THE ELECTION OF THE NOMINATED
DIRECTORS, FOR APPROVAL OF THE AMENDMENT TO THE 2002 STOCK OPTION PLAN, AND FOR
RATIFICATION OF THE INDEPENDENT PUBLIC ACCOUNTANTS, ALL AS RECOMMENDED IN THE
PROXY STATEMENT, AND IN ACCORDANCE WITH THE DISCRETION OF THE PROXIES OR PROXY
ON ANY OTHER BUSINESS TRANSACTED AT THE ANNUAL MEETING.

(Continued and to be signed on the reverse side)