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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

OR

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

For the transition period from                       to                       

Commission file number  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.  Yesx No o.

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 o.

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 o 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 2, 2012  9,331,269

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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 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, 2012 and 2011 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, 2011 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, 2012, the results of operations for the three and nine month periods ended September 30, 2012 and cash flows for the nine month periods ended September 30, 2012 and 2011.  The results of operations for the three and nine month periods ended September 30, 2012 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 May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. (ASU) 2011-04, Fair Value Measurements (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in US GAAP and IFRS.  The amendments in ASU 2011-04 change the wording used to describe many of the requirements in U.S. Generally Accepted Accounting Principles (GAAP) for measuring fair value and for disclosing information about fair value measurements.  ASU 2011-04 was effective for the Company beginning January 1, 2012.  The adoption of ASU 2011-04 did not impact the consolidated financial statements.

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 an expense line for bad debts related to all other sources of income.  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.  ASU 2011-07 was effective for the Company beginning January 1, 2012.  The adoption of this standard did not impact the consolidated financial statements, as the Company does not recognize significant revenue without assessing a customer’s ability to pay.

In September 2011, the FASB issued ASU 2011-08: Intangibles — Goodwill and Other (Topic 350) which amends 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

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goodwill impairment test required under current accounting standards. ASU 2011-08 was effective for the Company beginning January 1, 2012.  The adoption of ASU 2011-08 did not impact the consolidated financial statements.

In July 2012, the FASB issued ASU 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment intended to simplify how an entity tests indefinite-lived assets other than goodwill for impairment by providing entities with an option to perform a qualitative assessment to determine whether further impairment testing is necessary.  ASU 2012-02 will be effective for the Company’s calendar year beginning January 1, 2013 and early adoption is permitted.  The Company does not anticipate the adoption will have a material impact on its consolidated financial position or results of operations.

Financial Statement Reclassifications

Certain amounts have been reclassified in the 2011 consolidated financial statements and related notes in order to conform to the 2012 presentation. Such reclassifications had no effect on previously reported net income.

2.                                      Segment Data

The Company has two reportable segments, Visiting Nurse (VN) and Personal Care (PC), which provide services in Florida, Ohio, Kentucky, 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 91% 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 86% 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 $188 and $104 were capitalized in the three months ended September 30, 2012 and 2011, respectively and $465 and $401 were capitalized in the nine months ended September 30, 2012 and 2011, 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, 2011 and determined that no impairment existed.

The following table summarizes the activity related to goodwill and other intangible assets for 2012:

Of total goodwill, $102,497 and $30,919 relates to the VN segment and the PC segment, respectively.  Current period adjustments relate to finalization of purchase price for the Company’s August 2011 acquisition of Cambridge Home Health Care Holdings, Inc. (Cambridge Acquisition), while additions pertain to two acquisitions completed during the third quarter of 2012.  Amortization expense recognized on finite-lived intangible assets for the third quarter of 2012 and 2011 was $19 and $26, respectively, and for the nine months ended September 30, 2012 and 2011 was $52 and $70, respectively.

5.                                      Revolving Credit Facility

At September 30, 2012, 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 rate was 4.50% for both the three and nine months ended September 30, 2012 and 2011.  The weighted average LIBOR rates were 2.72% and 2.59% for the three months ended September 30, 2012 and 2011, 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

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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, 2012, the formula permitted $105 million to be used, of which no amounts were outstanding.  The Company had irrevocable letters of credit totaling $6.4 million outstanding in connection with the Company’s self-insurance programs, which resulted in a total of $98.6 million being available for use at September 30, 2012. As of September 30, 2012, 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 $154.7 million at September 30, 2012.  At such date, the Company’s net worth was approximately $219.0 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.  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 awards outstanding are summarized as follows:

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:

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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, 2012 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.  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, after discussions with legal counsel, the ultimate resolution of any of these ordinary course pending claims and legal proceedings will not have a material effect on the Company’s financial position or results of operations.

As previously disclosed, the Company received a notice of investigation and a civil subpoena for documents from the Securities and Exchange Commission in June 2010.  The Company and its officers and directors responded to additional document requests from the SEC Staff in the fall of 2011.  In January 2012, the Staff took testimony of certain officers and directors primarily with respect to their sales of common stock of the Company during May 2010.  On November 2, 2012, the Company and those affected executive officers and members of its Board of Directors were notified by the SEC Staff that it has concluded its investigation and does not intend to recommend enforcement action to the Commission.

As previously disclosed, four derivative complaints were filed in Jefferson Circuit Court, Kentucky, against the members of the Company’s board of directors and chief financial officer. All four lawsuits named the Company as a nominal defendant and were consolidated into a single action.  All of the complaints and the resulting consolidated complaint refer to an April 27, 2010 The Wall Street Journal article and the subsequent governmental investigations.  On February 13, 2012, the independent directors filed a motion to dismiss the complaint.  On October 2, 2012, the Court entered an order granting the motion to dismiss and dismissing the complaint with prejudice. On November 1, 2012, the plaintiffs filed an appeal of the Court’s ruling with the Kentucky Court of Appeals.

As previously disclosed, a fifth derivative complaint involving Richard W. Carey was filed in U.S. District Court for the Western District of Kentucky.  The lawsuit names the Company as a nominal defendant and is substantially duplicative of the derivative complaint pending in the Jefferson Circuit Court.  The Court granted the defendants’ motion to stay the lawsuit pending further order of the Court.

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The Company is unable to assess the probable outcome or potential liability, if any, arising from these unresolved matters.

10.                               Acquisitions

During the three months ended September 30, 2012, the Company finalized the purchase accounting for the Cambridge Acquisition, which was completed in August, 2011.  Changes to the allocation of the purchase price since December 31, 2011 include a decrease in the fair value of receivables acquired of $555 with a corresponding increase to goodwill.  During the quarter ended September 30, 2012, the Company completed two small acquisitions to expand existing VN and PC segment operations.

11.                               Income Taxes

The Company accounts for income taxes in accordance with Accounting Standards Codification (ASC) 740, Income Taxes.  The Company’s effective income tax rates for the three and nine month periods ended September 30, 2012 and 2011 were approximately 39.5% and 39.4%, respectively, and 39.0% and 39.4%, respectively.  The change in rate for the nine month period for 2012 was primarily due to a one-time benefit resulting from the release of a valuation allowance in conjunction with tax planning strategies completed during the first quarter of 2012.

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, 2012.  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;

·                  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, 2011 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 Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Form 10-K for the year ended December 31, 2011 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), which provide services in Florida, Ohio, Kentucky, 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 91% 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 86% 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, 2011 and quarterly report on Form 10-Q for the quarter ended June 30, 2012 on file with the SEC.

On November 2, 2012, CMS issued the final rule for 2013 home health payment rates (2013 Final Rule). Among other changes, the 2013 Final Rule includes:

·                  A 2.3% Market Basket Index (MBI) update,

·                  A 1% reduction required under the Affordable Care Act, and

·                  A 1.32% case mix creep reduction.

Absent further changes, based on current law, which includes a 2% cut specified in the Budget Control Act of 2011 commonly referred to as “sequestration”, and the 2013 Final Rule, we expect our 2013 Medicare episodic rate reduction to range from 2.0% to 2.5%.

Governmental Inquiries and Shareholder Litigation

See Note 9 to the consolidated financial statements and Part II Item 1 “Legal Proceedings” 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 may incur 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.

Possible Impact of Hurricane Sandy

Approximately 25% of our VN segment operations are located in the northeastern U.S. (New Jersey, Connecticut and Massachusetts), areas impacted by Hurricane Sandy which struck in late October 2012. While we are currently unable to predict to the extent, if any, it is reasonable to expect that this significant weather event may have a detrimental impact on our operating results for the quarter and thus the year ending December 31, 2012.

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RESULTS OF OPERATIONS

THREE MONTHS

Consolidated

(In thousands)

Results for the third quarter of 2012 included both the impact of a Medicare reimbursement rate cut for 2012 which reduced consolidated and VN segment revenue and pre-tax operating income by $2.7 million and a full quarter of results for our acquisition of Cambridge Home Health Care Holdings, Inc. (Cambridge Acquisition), which closed on August 5, 2011.  The Cambridge Acquisition increased third quarter 2012 consolidated net service revenue by $1.9 million, primarily in our PC segment.

Operating income before corporate expenses during the third quarter of 2012 decreased from the prior year quarter primarily as a result of the VN segment’s Medicare rate cut and lower Medicare volume.  Refer to VN segment results for further discussion.

Corporate expenses as a percent of revenue increased slightly to 5.8% from 5.6% in the prior year primarily due to the impact on revenue of the VN segment’s rate cut.  Corporate expenses in 2012 and 2011 included $0.3 million and $0.5 million, respectively, for transition and acquisition-related costs.  The third quarter of 2012 and 2011 included zero and $0.3 million, respectively, for costs to respond to governmental inquiries and resulting litigation, net of anticipated insurance coverage.

The effective tax rate was approximately 39.5% in the third quarter of 2012, which was substantially consistent with the 39.4% for the third quarter of 2011.

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Visiting Nurse Segment

(1)  Episodic data which includes Medicare Advantage plans that pay episodically

VN segment net service revenues decreased $4.0 million or about 5.7% to $65.9 million in 2012 down from $69.9 million in 2011, primarily due to a $2.7 million Medicare rate cut with the remainder due to a decline in both Medicare admissions, which was primarily driven by a shift of certain Medicare Advantage payors from episodic to per visit payment.  This shift, which represented about half of the Company’s Medicare Advantage episodic business, reduced revenue and operating income by $0.8 million and $0.5 million, respectively.  Traditional Medicare admissions increased approximately 1% in 2012 over 2011.

Cost of service revenues declined $1.1 million, as a result of focused efforts to drive operational efficiencies in addition to lower Medicare volumes.  General and administrative salaries and benefits decreased by about $1.8 million, or 8.8%, primarily as a result of a focused effort to reduce labor and other costs relative to patients served.

As a result, VN segment operating income before corporate expenses declined $1.3 million to $8.9 million from $10.2 million in 2011, while operating income before corporate expenses as a percent of revenues decreased to 13.5% in 2012 from 14.6% in 2011.

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Personal Care Segment

Our PC segment’s third quarter of 2012 results include a full quarter of operations for our Cambridge Acquisition, which was effective August 5, 2011 and drove increases in net service revenues and gross margin of $2.1 million and $0.4 million, respectively.  The third quarter of 2011 included only 2 months of Cambridge results.

Organic growth increased net service revenues by $0.8 million, while cost of service revenues as a percentage of net service revenues increased to 67.6% in the third quarter of 2012 from 65.8% in 2011 primarily due to changes in business mix related to the Cambridge Acquisition.

Salary and benefits in general and administrative expenses as a percent of net service revenue increased 0.7% to 12.8% in 2012 from 12.1% in 2011 primarily due to the Cambridge Acquisition.  Other general and administrative expenses as a percentage of net service revenue declined to 5.0% in 2012 from 5.7% in 2011 primarily due to lower bad debt expense.

As a result, PC segment operating income before corporate expenses increased to $2.8 million from $2.7 million in 2011, while operating income before corporate expenses as a percent of revenues decreased to 14.7% in 2012 from 16.5% in 2011.

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RESULTS OF OPERATIONS

NINE MONTHS

Consolidated

(In thousands)