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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2011

OR

For the transition period from                     to                    

Commission file number  001-09848

ALMOST FAMILY, INC.

(Exact name of Registrant as specified in its charter)

9510 Ormsby Station Road, Suite 300, Louisville, Kentucky 40223

(Address of principal executive offices)

(502) 891-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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 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 definition of “accelerated filer, “large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (check one):

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.

Class of Common Stock    $0.10 par value

Shares outstanding at November 4, 2011  9,367,454

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ALMOST FAMILY, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

See accompanying Notes to Consolidated Financial Statements.

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ALMOST FAMILY, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Unless otherwise indicated, all dollars and share amounts are in thousands)

1.             Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements for the three and nine months ended September 30, 2011 and 2010 have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been omitted pursuant to such rules and regulations.  Accordingly, the reader of this Form 10-Q is referred to Almost Family, Inc.’s (the “Company”) Form 10-K for the year ended December 31, 2010 for further information. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position at September 30, 2011, the results of operations for the three and nine month periods ended September 30, 2011 and cash flows for the nine month periods ended September 30, 2011 and 2010.  The results of operations for the three and nine month periods ended September 30, 2011 are not necessarily indicative of the operating results for the year.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Recently Issued Accounting Pronouncements

In August 2010, the FASB issued Accounting Standards Update (“ASU”) 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries.  Under ASU 2010-24, net presentation of insurance recoveries against a related claim liability is not permitted for health care entities.  ASU 2010-24 was effective for the Company January 1, 2011.  The adoption of ASU 2010-24 increased prepaid expenses and other current assets and accrued other liabilities by $2,892 and did not impact the statements of operations or cash flows.

In July 2011, the FASB issued ASU 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities.  Under ASU 2011-07, only health care organizations (HCOs) that do not assess the collectability of a receivable before recognizing revenue will present their provision for bad debt related to patient service revenue as a deduction from revenue on the face of the statement of operations.  ASU 2011-07 also requires and expands qualitative and quantitative disclosures about changes in the allowance.  For certain HCOs, the guidance may result in the provision for bad debts being presented in two separate lines, a contra-revenue line for bad debts related to patient services and a bad debts line for bad debts related to all other sources of income.  ASU 2011-07 is effective for the Company in the first quarter of 2012.  The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations are applied retrospectively to all prior periods presented, while required disclosures are provided prospectively.  The Company is still evaluating the provisions of ASU 2011-07.  However, the adoption of this standard will not impact net income and is not expected to have a material impact on the consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08: Intangibles — Goodwill and Other (Topic 350) which will amend current guidance to allow companies to first perform a qualitative assessment to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill

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impairment test required under current accounting standards. ASU 2011-08 is effective for the Company beginning January 1, 2012, with early adoption permitted. The adoption of ASU 2011-08 is not expected to have a material impact on the Company’s consolidated financial statements.

Financial Statement Reclassifications

Certain amounts have been reclassified in the 2010 consolidated financial statements and related notes in order to conform to the 2011 presentation. Such reclassifications had no effect on previously reported net income.

Discontinued Operations

The Company follows the guidance in Accounting Standards Codification (“ASC”) 205-20, Discontinued Operations and, when appropriate, reclassifies operating units closed, sold or held for sale out of continuing operations and into discontinued operations for all periods presented.  In the quarter ended March 31, 2011, the Company reclassified operating results related to its closed Boston Personal Care business unit into discontinued operations.  For the three and nine month periods ended September 30, 2010, net service revenues were reduced by approximately $519 and $1,473, respectively and net income was reduced by $44 and $129, respectively.  This reclassification did not significantly impact net service revenue or net income for the three and nine month periods ended September 30, 2011.  Because this reclassification had no effect on diluted earnings per share for any period presented, income from discontinued operations is not presented separately on the face of the accompanying statements of income.

2.           Segment Data

The Company has two reportable segments, Visiting Nurse (VN) and Personal Care (PC), and has service locations in Florida, Kentucky, Ohio, Connecticut, New Jersey, Massachusetts, Missouri, Alabama, Illinois, Pennsylvania and Indiana.  Reportable segments have been identified based upon how management has organized the business by services provided to customers and the criteria in ASC 280, Segment Reporting.  The Company does not allocate certain expenses to the reportable segments.  These expenses are included in corporate expenses below.

The VN segment provides skilled medical services in patients’ homes largely to enable recipients to reduce or avoid periods of hospitalization and/or nursing home care. VN Medicare revenues are generated on a per episode basis rather than a fee per visit or day of care. Approximately 92% of the VN segment revenues are generated from the Medicare program while the balance is generated from Medicaid and private insurance programs.

The PC segment services are also provided in patients’ homes. These services (generally provided by paraprofessional staff such as home health aides) are generally of a custodial rather than skilled nature. PC revenues are generated on an hourly basis. Approximately 70% of the PC segment revenues are generated from Medicaid and other government programs while the balance is generated from insurance programs and private pay patients.

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3.             Capitalized Software Development Costs

The Company capitalizes the cost of internally generated computer software developed for the Company’s own use. Software development costs of approximately $104 and $95 were capitalized in the three months ended September 30, 2011 and 2010, respectively and $401 and $409 were capitalized in the nine months ended September 30, 2011 and 2010, respectively. Capitalized software development costs are amortized over a three-year period following the initial implementation of the software.

4.             Goodwill and Other Intangible Assets

Goodwill and other intangible assets acquired are stated at fair value at date of acquisition.  Subsequent to its acquisitions, the Company conducts annual reviews for impairment, or more frequently if circumstances indicate impairment may have occurred.  Other intangible assets consist of certificates of need and licenses, trade names and non-compete agreements.  Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives.  Licenses, provider numbers, certificates of need and trade names have indefinite lives and are reviewed at least annually for possible impairment, or whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.  The Company completed its most recent annual impairment test as of December 31, 2010 and determined that no impairment existed.

The following table summarizes the activity related to goodwill and other intangible assets for 2011:

Of total goodwill, $102,015 and $28,853 relates to the VN segment and the PC segment, respectively. Amortization expense recognized on finite-lived intangible assets for the third quarter of 2011 and 2010 was $26 and $76, respectively, and for the nine months ended September 30, 2011 and 2010 was $70 and $227, respectively.

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5.             Revolving Credit Facility

At September 30, 2011, the Company had a $125 million senior secured revolving credit facility with JP Morgan Chase Bank, NA, as Administrative Agent, Bank of America, as Syndication Agent and certain other lenders (the “Facility”).  The Facility consists of a $125 million credit line with a maturity date of December 2, 2015 and an “accordion” feature providing for potential future expansion of the facility to $175 million.  Borrowings (other than letters of credit) under the credit facility are at either the bank’s prime rate plus a margin (ranging from 1.25% to 2.25%, currently 1.25%) or LIBOR plus a margin (ranging from 2.25% to 3.25%, currently 2.25%).  The margin for prime rate or LIBOR borrowings is determined by the Company’s leverage.  Borrowings under the Facility are secured by a first priority perfected security interest in all tangible and intangible assets of the Company, and all existing and future direct and indirect subsidiaries of the Company, as guarantors.

The weighted average prime rate-based interest rates were 4.50% and 3.25% for the three months ended September 30, 2011 and 2010, respectively.  The weighted average LIBOR rates were 2.55% and 1.99% for the three months ended September 30, 2011 and 2010, respectively.  The Company pays a quarterly commitment fee of 0.30% to 0.50% on the average daily unused facility balance based on leverage. Borrowings are subject to various covenants including a multiple of 3.0 times earnings before interest, income tax, depreciation and amortization (“EBITDA”).  “EBITDA” may include “Acquired EBITDA” from pro-forma acquisitions pursuant to a calculation rider, up to 50% of “Adjusted EBITDA”, as defined.  Borrowings under the Facility may be used for general corporate purposes, including acquisitions. As of September 30, 2011, the formula permitted all $125 million to be used, of which no amounts were outstanding.  The Company had irrevocable letters of credit totaling $5.8 million outstanding in connection with the Company’s self-insurance programs, which resulted in a total of $119.2 million being available for use at September 30, 2011. As of September 30, 2011, the Company was in compliance with the Facility’s various financial covenants. Under the most restrictive of its covenants, the Company was required to maintain minimum net worth of at least $145.2 million at September 30, 2011.  At such date, the Company’s net worth was approximately $200.6 million.

6.             Fair Value Measurements

The Company’s financial instruments consist of cash, accounts receivable, payables and debt instruments.  The carrying values of cash, accounts receivable and payables are considered representative of their respective fair values due to the short-term nature of these instruments.  The fair value of the Company’s debt instruments approximates their carrying values as substantially all of such debt instruments have rates which fluctuate with changes in market rates.  The Company does not have any assets or liabilities carried at fair value that are measured on a recurring basis.

7.             Stock-Based Compensation

The Company issues both restricted share and option awards to employees and non-employee directors.  Restricted share awards cliff vest on the third anniversary, while option share awards vest annually in 25% increments over four years.  At September 30, 2011, the Company had 71 unvested restricted shares with a weighted average grant date fair value of $37.85.  Stock option grant date fair values are determined at the date of grant using a Monte Carlo option valuation model with suboptimal exercise behavior.  Changes in option awards outstanding are summarized as follows:

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8.             Earnings per Common Share

A reconciliation of the weighted average shares outstanding used in the calculation of basic and diluted earnings per common share is as follows:

9.             Commitments and Contingencies

Insurance Programs

The Company bears significant insurance risk under its large-deductible workers’ compensation insurance program and its self-insured employee health program.  Under the workers’ compensation insurance program, the Company bears risk up to $400 per incident, after which stop-loss coverage is maintained.  The Company purchases stop-loss insurance for the employee health plan that places a specific limit, generally $100, on its exposure for any individual covered life.

Malpractice and general patient liability claims for incidents which may give rise to litigation have been asserted against the Company by various claimants.  The claims are in various stages of processing and some may ultimately be brought to trial.  The Company is aware of incidents that have occurred through September 30, 2011 that may result in the assertion of additional claims.  The Company currently carries professional and general liability insurance coverage (on a claims made basis) for this exposure with no deductible.  The Company also carries D&O coverage (also on a claims made basis) for potential claims against the Company’s directors and officers, including certain securities actions, with deductibles ranging from $100 to $250 per claim.

The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, the life cycle of claims, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims.  The Company monitors its estimated insurance-related liabilities and recoveries, if any, on a monthly basis and as required by ASU 2010-24, has recorded amounts due under insurance policies in other current assets, while recording the estimated carrier liability in other current liabilities in the September 30, 2011 Consolidated Balance Sheet.  As facts change, it may become necessary to make adjustments that could be material to the Company’s results of operations and financial condition.

Legal Proceedings & Investigations

The Company is currently, and from time to time, subject to claims and suits arising in the ordinary course of its business, including claims for damages for personal injuries.  In the opinion of management, the ultimate resolution of any of these pending claims and legal proceedings will not have a material effect on the Company’s financial position or results of operations.

In addition, as previously disclosed, the Company is in the process of complying with a civil subpoena from the United States Department of Health and Human Services Office of Inspector General received in December 2009.  The subpoena seeks the production of various business records relating to the Company’s visiting nurse operations in Birmingham, Alabama, which were acquired in July 2006.  The Company has been advised that the subpoena relates to an investigation arising in the context of a False Claims Act qui tam complaint

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containing allegations regarding the Company’s Medicare practices.  The Company has also been advised that a qui tam complaint was filed regarding the Company’s Medicare practices at facilities in Tampa, Florida, which were acquired in October 2007.  This complaint has been transferred to Birmingham, Alabama.  The Company has been advised by its counsel of the following updates: 1) the United States filed a motion to extend its intervention deadlines in both cases,  2) the court denied the motion, and  3) the United States has elected not to intervene at this time however its investigation remains active and it could elect to intervene in the future.  The Company is cooperating fully with these investigations.

On April 27, 2010, The Wall Street Journal published an article exploring the relationship between the Centers for Medicare & Medicaid Services home health payment policies and the utilization rates of certain home health agencies.  Following The Wall Street Journal article, on May 12, 2010, the United States Senate Finance Committee (“the Committee”) sent a letter to each of the publicly traded companies mentioned in the article requesting information including Medicare utilization rates for therapy visits.  The Company cooperated fully with the Senate Finance Committee in providing the requested information.  On October 3, 2011, the Committee issued a report on the findings of its inquiry, which found that, among other things, “…none of the documents provided to the Committee by Almost Family show that executives ever pushed therapists to target thresholds or pursue more profitable clinical regimens.”

Subsequent to the Senate Finance Committee inquiry, on June 30, 2010, the Company received a civil subpoena for documents and notice of investigation from the Securities and Exchange Commission.  The Company is continuing to cooperate with the SEC investigation.

Four derivative complaints have been filed in Jefferson Circuit Court, Kentucky, against the members of the Company’s board of directors and chief financial officer. All four lawsuits name the Company as a nominal defendant.  All of the complaints refer to The Wall Street Journal article and the subsequent governmental investigations and make various allegations that the individual defendants breached duties owed to the Company in connection with Medicare reimbursements for home therapy visits.  The complaints seek damages from each of the individual defendants on behalf of the Company, various corporate governance reforms, and an award of attorneys’ fees and costs.  The Defendants have not filed a responsive pleading.  The Company’s outside directors (and the Company as nominal defendant) filed a motion to stay the proceedings in light of the derivative complaint filed in the U.S. District Court for the Western District of Kentucky (discussed below).  However, dismissal of the federal court action (Huston) mentioned below mooted that motion and it was withdrawn.  Counsel for the Plaintiffs in these suits has until December 15, 2011 to file an amended consolidated complaint or designate an operative complaint.

The suits are titled:  (i) Daniel Himmel, derivatively on behalf of Almost Family, Inc. v. William B. Yarmuth, et al., filed on July 14, 2010, (ii) Jared White, derivatively on behalf of Almost Family, Inc. v. William B. Yarmuth, et al., filed on July 22, 2010, (iii) Norman Cohen, derivatively on behalf of Almost Family, Inc. v. William B. Yarmuth, et al., filed on July 26, 2010, and (iv) Richard Margolis, derivatively on behalf of Almost Family, Inc. v. William B. Yarmuth, et al., filed on July 27, 2010.

A fifth derivative complaint titled Blaze B. Huston, Derivatively and on Behalf of Almost Family, Inc. v. William B. Yarmuth, et al. was filed in the U.S. District Court for the Western District of Kentucky on November 10, 2010, against the members of the Company’s board of directors and its chief financial officer.  The lawsuit names the Company as a nominal defendant.  The complaint refers to The Wall Street Journal article and the subsequent governmental investigations and makes various allegations that the defendants breached duties owed to the Company in connection with Medicare reimbursements for home therapy visits.  The complaint seeks damages from each of the individual defendants on behalf of the Company, various corporate governance reforms, and an award of attorneys’ fees and costs.  All defendants sought dismissal of the complaint on the ground that the Plaintiff failed to make a demand on the board of directors before filing suit.  However, before the Court could rule on that motion to dismiss, counsel for Huston voluntarily dismissed that suit and it was “replaced” by a new suit brought by the same attorneys representing a different derivative plaintiff, Richard Carey, but making the same allegations against the same defendants as in the Huston suite.  Richard W. Carey, Derivatively and on Behalf of Almost Family, Inc. v. William B. Yarmuth, Steven B. Bing, Donald G. McClinton, Tyree G. Wilburn, Jonathan D. Goldberg, W. Earl Reed, III and Henry M. Altman, Jr., U.S. District Court for the Western District of Kentucky, 3:11-CV-163-H.  Defendants have moved to dismiss or stay the Carey suit based upon the federal abstention doctrine which permits the federal court to dismiss or stay a later filed federal action that duplicates allegations made in pending state court proceedings.  The Court granted the motion to stay until a status conference or further order of the Court.

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Four putative class action lawsuits pending against Almost Family in the United States District Court for the Western District of Kentucky were consolidated into a single class action lawsuit entitled In Re Almost Family Securities Litigation.  The consolidated complaint was filed on March 4, 2011.  The complaint refers to The Wall Street Journal article and the subsequent governmental investigations and alleges that the Company, its chief executive officer and chief financial officer violated federal securities laws.  The complaint seeks damages and awards of attorneys’ fees and costs.  The Company and its officers have filed a motion to dismiss the complaint, and the motion has been fully briefed.

Given the current status of these matters, the Company is unable to assess the probable outcome or potential liability, if any, arising from these matters.

10.          Acquisitions

Each acquisition below was completed in pursuit of the Company’s strategy of expanding its operations as a leading provider of home health services in the eastern United States through service base expansion and densification of certain geographic areas.  The acquisitions were accounted for using the purchase method of accounting.  Other general and administrative expenses in Consolidated Statements of Income for the nine months ended September 30, 2011 includes $533 for acquisition costs and $373 for transition costs for the transactions below.

Goodwill recognized from the acquisitions primarily relates to expected contributions of each entity to the overall corporate strategy in addition to synergies and acquired workforce, which are not separable from goodwill.  Goodwill totaling $4.8 million and $25.0 million was allocated to the VN and PC segments, respectively, from the acquisitions below.

On April 1, 2011, the Company acquired the assets of a Medicare-certified home health agency in Cincinnati, Ohio with approximately $5 million in annual revenues for $5.3 million in total consideration consisting of cash and a $1 million note payable.  Fair values of assets acquired were primarily related to goodwill and other intangibles, which are fully deductible for tax purposes.

On August 5, 2011 the Company acquired 100% of the outstanding equity interests of Cambridge Home Health Care Holdings, Inc. (Cambridge) with a cash-free, debt-free balance sheet for an all-cash purchase price of $32.8 million.  Cambridge and its subsidiaries own and operate 37 home health branches with 34 in Ohio and three in western Pennsylvania.  Cambridge’s audited financial statements for the year ended December 31, 2010 reported $38.2 million in revenues of which $33.7 million would be classified in the PC segment and $4.5 million would be classified in the VN segment.

The Company is currently in the process of valuing the assets acquired and liabilities assumed for the Cambridge acquisition, to allocate the purchase price to the individual assets acquired and liabilities assumed.  The preliminary allocation of purchase price included in the current period balance sheet is based on the Company’s current best estimate and is subject to revision based on final determination of fair value.  The following table summarizes the Company’s preliminary fair value estimates of the assets acquired and liabilities assumed:

The Cambridge transaction was a 100% acquisition of stock and accordingly, tax deductible goodwill is limited to $4.5 million.

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11.          Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes.  The Company’s effective income tax rates for the three and nine month periods ended September 30, 2011 and 2010 were approximately 39.4% and 40.0%, respectively.

Certain tax authorities may periodically audit the Company.  Based on the Company’s evaluation, the Company concluded that no significant uncertain tax positions require recognition in the financial statements. Additionally, the Company may from time to time be assessed interest and penalties by tax jurisdictions.  Any such assessments historically have been immaterial to the Company’s financial results and are classified as other general and administrative expenses in the consolidated statements of income.

12.          Subsequent Events

Management has evaluated all events and transactions that occurred after September 30, 2011.  The Company had no material subsequent events requiring recognition in the consolidated financial statements.

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

The Company

Almost Family, Inc. TM and subsidiaries (collectively “Almost Family”) is a leading regional provider of home health nursing services. In this report, the terms “Company,” “we,” “us” or “our” mean Almost Family, Inc. and all subsidiaries included in our consolidated financial statements.

Cautionary Statements - Forward Outlook and Risks

Certain statements contained in this quarterly report on Form 10-Q, including, without limitation, statements containing the words “believes,” “anticipates,” “intends,” “expects,” “assumes,” “trends” and similar expressions, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based upon the Company’s current plans, expectations and projections about future events.  However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These factors include, among others, the following:

·                  general economic and business conditions;

·                  demographic changes;

·                  changes in, or failure to comply with, existing governmental regulations;

·                  legislative proposals for healthcare reform;

·                  changes in Medicare and Medicaid reimbursement levels including the Company’s expectations with regard to the impact of the Medicare 2012 final rule;

·                  effects of competition in the markets in which the Company operates;

·                  liability and other claims asserted against the Company;

·                  potential audits and investigations by government and regulatory agencies, including the impact of any negative publicity or litigation;

·                  ability to attract and retain qualified personnel;

·                  availability and terms of capital;

·                  loss of significant contracts or reduction in revenues associated with major payor sources;

·                  ability of customers to pay for services;

·                  business disruption due to natural disasters or terrorist acts;

·                  ability to successfully integrate the operations of acquired businesses and achieve expected synergies and operating efficiencies from the acquisition, in each case within expected time-frames or at all;

·                  significant deterioration in economic conditions and significant market volatility;

·                  effect on liquidity of the Company’s financing arrangements; and,

·                  changes in estimates and judgments associated with critical accounting policies and estimates.

For a detailed discussion of these and other factors that could cause the Company’s actual results to differ materially from the results contemplated by the forward-looking statements, please refer to Item 1A. “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for year ended December 31, 2010 and this Form 10-Q.  The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report.  Except as required by law, the Company assumes no responsibility for updating forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its Form 10-K and various filings with the Securities and Exchange Commission (“SEC”).  The reader is encouraged to review these risk factors and filings.

Critical Accounting Policies

Refer to the “Critical Accounting Policies” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Form 10-K for the year ended December 31, 2010 for a detailed discussion of our critical accounting policies.

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Operating Segments

We have two reportable segments, Visiting Nurse (VN) and Personal Care (PC), and have service locations in Florida, Kentucky, Ohio, Connecticut, New Jersey Massachusetts, Missouri, Alabama, Illinois, Pennsylvania, and Indiana (in order of revenue significance).  Reportable segments have been identified based upon how management has organized the business by services provided to customers and the criteria in ASC 280, Segment Reporting.

Our VN segment provides skilled medical services in patients’ homes largely to enable recipients to reduce or avoid periods of hospitalization and/or nursing home care.  VN Medicare revenues are generated on a per episode basis rather than a fee per visit or day of care. Approximately 92% of the VN segment revenues are generated from the Medicare program while the balance is generated from Medicaid and private insurance programs.

Our PC segment services are also provided in patients’ homes.  These services (generally provided by paraprofessional staff such as home health aides) are generally of a custodial rather than skilled nature. PC revenues are generated on an hourly basis.  Approximately 70% of the PC segment revenues are generated from Medicaid and other government programs while the balance is generated from insurance programs and private pay patients.

Certain general and administrative expenses incurred at the corporate level have not been allocated to the segments.

Health Care Reform Legislation and Medicare Regulations

The reader is encouraged to review our detailed discussion of Health Care Reform and Medicare Regulations in the similarly titled section in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s annual report on Form 10-K for year ended December 31, 2010 on file with the SEC.  For purposes of the discussion below, the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Affordability Reconciliation Act of 2010 are collectively referred to as the “Legislation.”

In November 2010, CMS released final revisions to Medicare home health reimbursement rates and regulations for 2011.  Among other changes, the rule included:

·                  A “market basket update” rate increase of 2.1%, less 1.0% from the Legislation, minus the 2.5% “outlier provision,” less a 3.79% “case mix creep” adjustment (for an effective rate cut of approximately 5.2%)

·                  Regulations implementing a requirement included in the Legislation for a face-to-face encounter between the patient and the physician ordering home health services (initially to be effective January 1, 2011)

·                  Regulations intended to address concerns over therapy utilization by requiring additional documentation justifying therapy visits based on specific goals, accepted standards of care, and objective and quantifiable measures of patients’ progress towards those goals (effective April 1, 2011)

·                  Revisions to its previously issued “36 Month Rule” which limits the sale or transfer of the Medicare Provider Agreement for any Medicare-certified home health agency that has been in existence for less than 36 months or that has undergone a change of ownership in the last 36 months.  This “36 Month Rule” limitation may reduce the number of home health agencies that otherwise would have been available for acquisition and may limit our ability to successfully pursue our acquisition strategy.

The final rule became effective January 1, 2011.  However, CMS delayed enforcement of face-to-face encounter requirements until April 1, 2011, which was also the effective date for therapy reassessment requirements.  Both requirements are discussed further below.

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As a condition for payment, PPACA mandates that prior to certifying a patient’s eligibility for the home health benefit, the certifying physician must document that he or she, or an allowed non-physician practitioner (“NPP”) has had a face-to-face encounter with the patient.  Under the face-to-face encounter rules, the face-to-face encounter with the patient must occur during a timeframe starting 90 days prior to the home health start of care and ending 30 days after the start of care. Currently, CMS requires the encounter to be composed by the physician in a separate document that may not be combined with the patient’s plan of care which is also certified and signed by the ordering physician.

Under the therapy assessment and reassessment rules, a professional qualified therapist assessment must take place at least once every 30 days during a therapy patient’s course of treatment.  Further and subject to certain exceptions, those patients needing 13 or 19 therapy visits require a qualified therapist to perform the therapy services required, assess the patient, and measure and document effectiveness of the therapy both on the 13th visit and the 19th visit, for all therapy disciplines caring for the patient.

As a condition of payment, documentation regarding both these new rules must be maintained in the home health agency’s patient medical records. These and other regulations driven by implementing the provisions of the PPACA may similarly increase our costs, decrease our revenues, expose us to expanded liability or require us to revise the ways in which we conduct our business. Refer to the results of operations for the impact of these items on revenue, operating and net income for the three and nine month periods ended September 30, 2011.

On October 31, 2011, CMS released the final Medicare home health reimbursement rates and regulations for 2012.  Among other changes, the rule includes:

·                  A “market basket update” rate increase of 1.4%, less a 3.79% “case mix creep” adjustment (for an effective rate cut of approximately 2.31%)

·                  Removal of two hypertension codes from the case-mix system, lowering high therapy episodes payments and recalibrating case-mix weights, all of which are intended to be budget neutral nationwide, however, reimbursement may increase or decrease for individual providers based on their 2012 patient mix

·                  Added clarifications regarding face-to-face regulations to allow physicians who attend to a home health patient in an acute or post-acute setting to inform the certifying physician of their encounters with the patient in order to satisfy the face-to-face encounter requirement

·                  A negative case-mix coding adjustment to the national standardized 60-day episode payment rates for 2013 of 1.32%.

Our preliminary calculations suggest that the 2012 final rule may reasonably be expected to reduce the Company’s Medicare reimbursement for 2012 between 5.0% and 5.5%, as compared to 2011, assuming no changes in the mix of patients the Company serves.  The Company noted that the new rates impact episodes ended on or after January 1, 2012.  Accordingly, revenues and net income for the quarter ended December 31, 2011 will be partially impacted by these rates.

There has been a great deal of legislative and regulatory change enacted or proposed over the last two years and not all implementing regulations have been published.  Additionally, it is reasonable to expect more changes, especially in light of current political debate and the Budget Control Act of 2011 which increased the debt ceiling and created the Joint Select Committee on Deficit Reduction (the “Supercommittee”).  The Supercommittee is working towards its November 23, 2011 deadline for recommendations to Congress with at least $1.5 trillion in deficit reductions over a ten year period.  The Supercommittee is considering many possible sources for the savings, including proposals that implement co-pays for home health care, among other things.

Given the broad and far reaching implications of all these changes, the incomplete nature of these changes, the pace at which the changes are taking place and the prospects for future changes to be made, we cannot predict the ultimate impact, which may be material and adverse, that health care reform efforts and resulting Medicare reimbursement rates will have on our liquidity, our results of operation, the realizability of the carrying amounts of our intangible assets including goodwill or our financial condition.  Further, we are unable to predict what effect, if any, such material adverse effect, if it were to occur, might have on our ability to

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continue to comply with the financial covenants of our revolving credit facility and our ability to continue to access debt capital through that facility.

We may contemplate formulating and taking actions intended to mitigate or otherwise offset some of the negative effects of reimbursement changes.  However, our actions may not ultimately be cost effective or prove successful.

Governmental Inquiries and Shareholder Litigation

See Note 9 to the financial statements and Part II Item 1 of this Form 10-Q for a discussion of certain governmental inquiries and subsequent related litigation.  The Company is unable to predict the outcome of these matters. However, the Company is incurring on-going expenses, net of insurance recoveries, if any, related to responding to these inquiries and complaints.

Seasonality

Our VN segment operations located in Florida normally experience higher admissions during the first quarter and lower admissions during the third quarter than in the other quarters due to seasonal population fluctuations.

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RESULTS OF OPERATIONS

THREE MONTHS

Consolidated

(In thousands)

Results for the third quarter of 2011 included both the impact of a Medicare reimbursement rate cut for 2011 which reduced consolidated and VN segment revenue and pre-tax operating income by $3.8 million and the results of our acquisition of Cambridge Home Health Care, Inc. (Cambridge), which closed on August 5, 2011.

On a consolidated basis, net service revenues increased $1.8 million, or about 2.2%, to $86.2 million in 2011 up from $84.4 million in 2010 due to $6.2 million of revenue from our Cambridge acquisition which was partially offset by the Medicare rate cut in the VN segment.

Operating income before corporate expenses during the third quarter of 2011 declined $5.1 million from the prior year quarter primarily as a result of the Medicare rate cut, performance issues in our Florida VN operations and to a lesser degree operational challenges related to the implementation of new regulatory compliance programs in the VN segment, all of which were partially offset by operating income before corporate expenses from our Cambridge acquisition.  Refer to segment results for further discussion.

Corporate expenses in 2011 included $490 of Cambridge transition and acquisition-related costs, which was partially offset by management incentives in the prior year which did not repeat in 2011 based on year to date 2011 operating results.  The third quarter of 2010 included no costs for transition or acquisition.  Costs to respond to governmental inquiries and resulting litigation, net of anticipated insurance coverage, were consistent at $259 and $258 in 2011 and 2010, respectively.

The effective tax rate was approximately 39.4% in the third quarter of 2011, down from 40.3% in the first half of 2011 and throughout 2010, primarily due to the lowering of our effective tax rate to 40% during the third quarter.  The change in the effective tax rate was primarily driven by a lower state tax rate from the Cambridge acquisition.

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Visiting Nurse Segment

VN segment net service revenues decreased $3.9 million or about 5.3% to $70.2 million in 2011 down from $74.2 million in 2010, primarily due to a $3.8 million Medicare rate cut.  The positive impact of a 4.9% growth in Medicare admissions, 2.6% of which was organic, was offset by a 5.8% decline in recertifications and a $0.5 million revenue allowance for episodes started after April 1, 2011 related to the new face-to-face and therapy reassessment regulations.

Cost of service revenues increased about 2.4%, partially driven by our visit volumes which grew 1.1% and the remainder due to continued disruption in Florida labor cost control during the third quarter resulting from our second quarter management changes in the midst of complying with the new regulatory requirements.  Additionally, higher fuel costs drove increased mileage reimbursement rates and increased our cost of service revenues by $0.2 million as compared to the prior year.

General and administrative salaries and benefits grew by about $1.4 million primarily as a result of new branches in operation, expansion of our sales and marketing work force and higher than normal Florida labor costs.  In the quarter ended September 30, 2011, VN operations in Florida account for approximately 44% of total VN segment revenues.  General and administrative other expenses increased $0.1 million, or 2.1%, from 2010.

As a result, VN segment operating income before corporate expenses declined $6.3 million to $10.3 million from $16.5 million in 2010, while operating income before corporate expenses as a percent of revenues decreased to 14.6% in 2011 from 22.3% in 2010.

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Personal Care Segment