Almost Family 10Q 2010 Q3 Quarterly report

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, 2010

¨ 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)

_____________

Delaware		06-1153720
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

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 ¨.

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 ¨ 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):

Large accelerated filer ¨

Accelerated filer x

Non-accelerated filer ¨

Smaller Reporting Company ¨

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 October 27, 2010 9,240,903

ALMOST FAMILY, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I.- FINANCIAL INFORMATION
Item 1.	Financial Statements. Consolidated Financial Statements and Supplementary Data (unaudited except December 31, 2009 Consolidated Balance Sheet)	3

	Consolidated Balance Sheets as of September 30, 2010 and December 31, 2009	3

	Consolidated Statements of Income for the Three Months Ended September 30, 2010 and September 30, 2009	4

	Consolidated Statements of Income for the Nine months Ended September 30, 2010 and September 30, 2009	5

	Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2010 and September 30, 2009	6

	Notes to Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	28

Item 4.	Controls and Procedures	28
PART II. - OTHER INFORMATION
Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33

Item 3.	Defaults Upon Senior Securities	33

Item 4.	(Removed and Reserved)	33

Item 5.	Other Information	33

Item 6.	Exhibits	33

SIGNATURES

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands)

	September 30, 2010
ASSETS	(UNAUDITED)			December 31, 2009
CURRENT ASSETS:
Cash and cash equivalents	$	41,643		$	19,389
Accounts receivable - net		38,905			35,121
Prepaid expenses and other current assets		3,098			2,544
Deferred tax assets		8,787			7,786
TOTAL CURRENT ASSETS		92,433			64,840

PROPERTY AND EQUIPMENT - NET		4,506			4,291
GOODWILL		100,609			99,133
OTHER INTANGIBLE ASSETS		14,311			14,538
OTHER ASSETS		576			587
	$	212,435		$	183,389

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable	$	4,423		$	3,360
Accrued other liabilities		21,680			20,076
Current portion - capital leases and notes payable		1,618			1,836
TOTAL CURRENT LIABILITIES		27,721			25,272

LONG-TERM LIABILITIES:

Capital lease obligations		-			40
Notes payable		1,300			2,800
Deferred tax liabilities		7,587			5,258
Other liabilities		806			1,042
TOTAL LONG-TERM LIABILITIES		9,693			9,140
TOTAL LIABILITIES		37,414			34,412

STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.05; authorized
2,000 shares; none issued or outstanding		-			-
Common stock, par value $0.10; authorized
25,000; 9,251 and 9,151
issued and outstanding		925			915
Treasury stock, at cost, 2 and 0 shares		(70	)		-
Additional paid-in capital		96,844			94,465
Retained earnings		77,322			53,597
TOTAL STOCKHOLDERS' EQUITY		175,021			148,977
	$	212,435		$	183,389

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)

	Three Months Ended September 30,
	2010			2009
Net service revenues	$	84,897		$	76,294
Cost of service revenues (excluding depreciation and amortization)		39,131			35,779
Gross margin		45,766			40,515
General and administrative expenses:
Salaries and benefits		22,874			20,800
Other		9,599			9,380
Total general and administrative expenses		32,473			30,180
Operating income		13,293			10,335
Interest expense, net		(60	)		(156	)
Income from continuing operations before income taxes		13,233			10,179
Income tax expense		(5,281	)		(3,985	)
Net income from continuing operations		7,952			6,194
Discontinued operations, net of tax benefits of $8 and $18		(12	)		(28	)
Net income	$	7,940		$	6,166

Per share amounts-basic:
Average shares outstanding		9,143			8,282
Income from continued operations	$	0.87		$	0.75
Loss from discontinued operations		-			-
Net income	$	0.87		$	0.75

Per share amounts-diluted:
Average shares outstanding		9,343			8,457
Income from continued operations	$	0.85		$	0.73
Loss from discontinued operations		-			-
Net income	$	0.85		$	0.73

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except per share data)

	Nine Months Ended September 30,
	2010			2009
Net service revenues	$	252,281		$	219,828
Cost of service revenues (excluding depreciation and amortization)		115,347			102,492
Gross margin		136,934			117,336
General and administrative expenses:
Salaries and benefits		68,067			60,472
Other		28,960			26,842
Total general and administrative expenses		97,027			87,314
Operating income		39,907			30,022
Interest expense, net		(210	)		(673	)
Income from continuing operations before income taxes		39,697			29,349
Income tax expense		(15,932	)		(11,513	)
Net income from continuing operations		23,765			17,836
Discontinued operations, net of tax benefits of $27 and $52		(39	)		(80	)
Net income	$	23,726		$	17,756

Per share amounts-basic:
Average shares outstanding		9,101			8,164
Income from continued operations	$	2.61		$	2.18
Loss from discontinued operations		-			-
Net income	$	2.61		$	2.18

Per share amounts-diluted:
Average shares outstanding		9,354			8,318
Income from continued operations	$	2.54		$	2.14
Loss from discontinued operations		-			-
Net income	$	2.54		$	2.14

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

ALMOST FAMILY, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)	Nine Months Ended September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	23,726		$	17,756
Loss from discontinued operations		(39	)		(80	)
Income from continuing operations		23,765			17,836
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization		2,102			1,753
Provision for uncollectible accounts		2,592			3,164
Stock-based compensation		1,308			1,219
Gain from sale of asset		(2	)		-
Deferred income taxes		1,327			(658	)
		31,092			23,314
Change in certain net assets and liabilities, net of the effects of acquisitions:
(Increase) decrease in:
Accounts receivable		(6,376	)		(6,643	)
Prepaid expenses and other current assets		(692	)		46
Other assets		11			(58	)
Increase (decrease) in:
Accounts payable and accrued expenses		3,281			(23	)
Net cash provided by operating activities		27,316			16,636

Cash flows from investing activities:
Capital expenditures		(1,963	)		(1,245	)
Cash proceeds from sale of asset		13			-
Acquisitions, net of cash acquired		(2,326	)		(6,406	)
Net cash used in investing activities		(4,276	)		(7,651	)

Cash flows from financing activities:
Net revolving credit facility repayments		-			(23,998	)
Proceeds from exercise of stock options		381			84
Purchase of common stock in connection with exercise of stock options		(628	)		(6	)
Tax benefit from exercise of non-qualified stock options		1,258			211
Net proceeds from issuance of common stock		-			27,967
Principal payments on capital leases and notes payable		(1,758	)		(4,392	)
Net cash used in financing activities		(747	)		(134	)

Cash flows from discontinued operations:
Operating activities		(39	)		(80	)
Investing activities		-			-
Financing activities		-			-
Net cash used in discontinued operations		(39	)		(80	)

Net increase in cash and cash equivalents		22,254			8,771
Cash and cash equivalents at beginning of period		19,389			1,301
Cash and cash equivalents at end of period	$	41,643		$	10,072

Summary of non-cash investing and financing activities:
Value of stock withheld in lieu of payroll taxes	$	628		$	6
Acquisitions funded by notes payable	$	-		$	1,200

See accompanying Notes to Consolidated Financial Statements.

Table of Contents

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, 2010 and 2009 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 our Form 10-K for the year ended December 31, 2009 for further information. In the opinion of management of Almost Family, Inc., (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, 2010 and the results of operations for the three and nine month periods and cash flows for the nine month period ended September 30, 2010 and 2009.

The results of operations for the three and nine month periods ended September 30, 2010 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.

Financial Statement Reclassifications

Certain amounts have been reclassified in the 2009 consolidated financial statements and related notes in order to conform to the 2010 presentation. Such reclassifications had no effect on previously reported net income.

Cost of Legal Proceedings

The Company accounts for costs in connection with legal proceedings as such costs are incurred, net of estimated insurance recoveries deemed probable, if any. Net amounts are included in other general and administrative expenses in the consolidated statements of income.

2. Net Service Revenues

The Company is paid for its services primarily by federal and state third-party reimbursement programs, commercial insurance companies and patients. Revenues are recorded at established rates in the period during which the services are rendered. Appropriate allowances to give recognition to third party payment arrangements are recorded when the services are rendered.

Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. From time to time issues may arise related to: 1) medical coding, particularly with respect to Medicare, 2) patient eligibility, particularly

Table of Contents

related to Medicaid, and 3) other matters unrelated to credit risk, all of which may result in adjustments to recorded revenue amounts. Management evaluates the potential for revenue adjustments and when appropriate provides allowances for losses based upon the best available information. There is at least a reasonable possibility that recorded estimates could change by material amounts in the near term.

3. Segment Data

The Company has two reportable segments, Visiting Nurse (VN) and Personal Care (PC). 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 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 69% 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.

The Company has service locations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania and Indiana.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
	Amount		Amount		Amount		Amount
Net service revenues:
Visiting Nurse	$	74,155	$	65,739	$	220,643	$	188,444
Personal Care		10,742		10,555		31,638		31,385
	$	84,897	$	76,294	$	252,281	$	219,829
Operating income before corporate expenses:
Visiting Nurse	$	16,536	$	13,413	$	50,118	$	39,070
Personal Care		1,475		1,287		4,222		3,630
		18,011		14,700		54,340		42,700
Corporate expenses		4,718		4,365		14,433		12,678
Operating income		13,293		10,335		39,907		30,022
Interest expense, net		60		156		210		673
Income tax expense		5,281		3,985		15,932		11,513
Net income from continuing operations	$	7,952	$	6,194	$	23,765	$	17,836

EBITDA from continuing operations	$	14,466	$	11,384	$	43,317	$	32,994

4. 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 $95 and $64 were capitalized in the three months ended September 30, 2010 and 2009, respectively

Table of Contents

and $409 and $72 were capitalized in the nine months ended September 30, 2010 and 2009, respectively. Capitalized software development costs are amortized over a three-year period following the initial implementation of the software.

5. 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. The Company completed its most recent annual impairment test as of December 31, 2009 and determined that no impairment existed.

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 not amortized. The Company reviews other intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable.

The following table summarizes the activity related to goodwill and other intangible assets, net for 2010:

			Other Intangible Assets
	Goodwill		Certificates of Need and licenses		Trade Names		Non-compete Agreements			Total
Balances at 12-31-09	$	99,133	$	6,591	$	7,581	$	366		$	14,538
Additions		1,476		-		-		-			-

Amortization		-		-		-		(227	)		(227	)
Balances at 9-30-10	$	100,609	$	6,591	$	7,581	$	139		$	14,311

Of total goodwill, $96,782 and $3,827 relates to the Visiting Nurse segment and the Personal Care segment, respectively. Amortization expense recognized on finite-lived intangible assets for the third quarter of 2010 and 2009 was $76 and $71, respectively.. Amortization expense recognized for the nine months ended September 30, 2010 and 2009 was $227 and $223, respectively.

6. Revolving Credit Facility

At September 30, 2010, the Company had a $75 million senior secured revolving credit facility with JP Morgan Chase Bank, NA, as Administrative Agent, Fifth Third Bank, as Syndication Agent and certain other lenders. The facility consists of a $75 million credit line with a maturity date of July 15, 2011 and an “accordion” feature providing for potential future expansion of the facility to $100 million. Borrowings (other than letters of credit) under the credit facility are at either the bank’s prime rate plus a margin (ranging from 0.00% to 1.00%, currently 0.00%) or LIBOR plus a margin (ranging from 1.60% to 2.60%, currently 1.60%). The margin for prime rate or LIBOR borrowings is determined by the Company’s leverage. Borrowings under the Agreement are secured by a fi rst 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 3.25% for the quarters ended September 30, 2010 and 2009. The weighted average LIBOR rate was 1.87% and 2.10% for the third quarter of 2010 and 2009, respectively. The Company pays a commitment fee of 0.25% per annum on the unused facility balance. Borrowings are available equal to a multiple of 3.0 times earnings before interest, taxes, depreciation and amortization (“EBITDA”). “EBITDA” may include “Acquired EBITDA” from proforma acquisitions

Table of Contents

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, 2010, the formula permitted all $75 million to be used, of which no amounts were outstanding. The Company has irrevocable letters of credit, totaling $6.9 million outstanding in connection with its self-insurance programs. Thus, a total of $68.1 million was available for use at September 30, 2010. The Company’s revolving credit facility is subject to various financial covenants. As of September 30, 2010, the Company was in compliance with the covenants. Under the most restrictive of its covenants, the Company was required to maintain minimum net worth of at least $158.0 million at September 30, 2010 . At such date, the Company’s net worth was approximately $175.0 million.

7. 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.

Fair value is based on the price that would be received to sell the asset or paid to transfer the liability to a market participant. Fair value is a market-based measurement, not an entity-specific measurement.

Assets and liabilities carried at fair value are classified and disclosed in one of the following categories:

·	Level 1: Quoted market prices in active markets for identical assets or liabilities.

·	Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

·	Level 3: Unobservable inputs that are not corroborated by market data.

The Company does not have any assets or liabilities carried at fair value that are measured on a recurring basis.

8. Stock-Based Compensation

Stock option grant date fair values are determined at the date of grant using a Monte Carlo option valuation model with suboptimal exercise behavior. Employee options vest ratably over 4 years. There were no stock option grants in the quarter or nine months ended September 30, 2010.

Changes in option shares outstanding are summarized as follows:

	Shares			Wtd Avg Ex. Price
December 31, 2009		430		$	18.87

Granted		-			-
Exercised		(92	)		4.87
Terminated		(20	)		(26.33	)
September 30, 2010		318		$	22.48

In the nine months ended September 30, 2010, the Company awarded 23 restricted shares of Common Stock with a value of $964 pursuant to the Company’s 2007 Stock and Incentive Compensation Plan. These awards vest ratably over 3 years.

Table of Contents

9. 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:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2010	2009	2010	2009
Basic weighted average outstanding shares	9,143	8,282	9,101	8,164
Add common equivalent shares representing shares issuable upon exercise of dilutive awards	200	175	253	154
Diluted weighted average number of shares	9,343	8,457	9,354	8,318

10. Equity Issuances

On August 5, 2009, the Company entered into a Distribution Agreement with J.P. Morgan Securities Inc. According to the provisions of this Agreement, the Company could offer and sell from time to time up to 1,600 shares of common stock having an aggregate offering price of up to $50 million through J.P. Morgan, as distribution agent. Sales of stock were made by means of ordinary brokers’ transactions on the Nasdaq Global Select Market at market prices. The Company issued 967 of our shares of common stock pursuant to this Agreement. The Distribution Agreement terminated June 30, 2010 with no additional shares issued.

11. Commitments and Contingencies

Insurance Programs

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

The Company records estimated liabilities for our 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 our estimated insurance-related liabilities on a monthly basis. As facts change, it may become necessary to make adjustments that could be material to our results of operations and financial condition. Malpractice and general patient liability claims for incidents which may give rise to litigation have been asserted against us 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, 2010 that may result in the assertion of additional claims. The Company currently carries professional, general liability, and directors & officers insurance coverage for exposures with various levels of deductibles.

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.

Table of Contents

The Company is currently the subject of a number of civil investigations and private lawsuits relating to its Medicare-reimbursed operations. Many of these appear to be similar to investigations and claims relating to other providers of home health services. The following paragraphs briefly describe the current status of such matters, all of which remain at a preliminary stage.

As previously disclosed in the Company’s Form 10-K for the year ended December 31, 2009, 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 and which generated approximately 2% of the Company’s consolidated revenues in 2009. The Company has been advised that the subpoena relates to an investigation arising in the context of a False Claims Act qui tam complaint containing allegations regarding the Company’s Medicare practices. The Company is cooperating fully with this investig ation.

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 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 is cooperating fully with the Senate Finance Committee regarding the requested information.

Subsequently, on June 30, 2010, the Company received a civil subpoena for documents and notice of investigation from the Securities and Exchange Commission. The subpoena seeks documents related to the Company’s home health care services and operations, including reimbursements under the Medicare home health prospective payment system, since January 1, 2000. The Company is cooperating fully with the SEC regarding the document request.

Four derivative complaints have been filed in Jefferson Circuit Court, Kentucky, against the members of the Company’s board of directors and its 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 Company is reviewing the complaints and has not yet filed a resp onsive pleading.

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.

Four putative class action lawsuits have been filed in the U.S. District Court for the Western District of Kentucky. The complaints refer to The Wall Street Journal article and the subsequent governmental investigations and allege that the Company, its chief executive officer and chief financial officer violated federal securities laws. The complaints seek damages and awards of attorneys’ fees and costs. The actions are now awaiting designation of a lead plaintiff and filing of a consolidated complaint after which the Company will file a responsive pleading.

The suits are titled: (i) City of Livonia Employees Retirement System v. Almost Family, Inc., et al., filed on August 3, 2010, (ii) Kandi Sterling v. Almost Family, Inc., et al., filed on August 10, 2010, (iii) Blaze B. Huston v. Almost Family, Inc., et al., filed on August 16, 2010, and (iv) Peter Barcia, Individually and on Behalf of All Others Similarly Situated v. Almost Family, Inc., et al., filed on September 7, 2010.

Table of Contents

12. Acquisitions

There were no new acquisitions during the quarter ended September 30, 2010; however, amounts due under earn-out contingent consideration clauses from an acquisition were settled in 2010 which resulted in cash payments $2.3 million and additions to goodwill of $1.5 million in the third quarter. The remainder was accrued to goodwill in the fourth quarter of 2009.

13. Income Taxes

The Company accounts for income taxes in accordance with ASC 740, Income Taxes. The Company’s effective income tax rate from continuing operations for the three month period ended September 30, 2010 and 2009 was 39.9% and 39.2%, respectively and 40.1% and 39.2% for the nine month period ended September 30, 2010 and 2009, respectively. The increase is primarily attributable to increases in state and local tax and a decrease in federal tax credits.

Certain tax authorities may periodically audit the Company. Based on the Company’s evaluation, we have concluded that there are no significant uncertain tax positions requiring recognition in our 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.

14. Discontinued Operations

The Company reclassifies operating units closed, sold, or held for sale out of continuing operations and into discontinued operations for all periods presented. During the three month period ending September 30, 2010, one PC facility met the criteria to be classified as discontinued operations, and thus has been classified as discontinued operations for all periods presented. Net revenue from discontinued operations was approximately zero and $319 in the quarters ended September 30, 2010 and 2009, respectively. Net losses from the discontinued operations were approximately $12 and $28 in the quarters ended September 30, 2010 and 2009, respectively. Net revenue from discontinued operations was approximately $5 and $843 in the nine month period ended September 30, 2010 and 2009, respectively.&# 160; Net losses from the discontinued operations were approximately $39 and $80 in the nine month period ended September 30, 2010 and 2009, respectively. Such amounts are included in net loss from discontinued operations in the consolidated statements of income and cash flows, as applicable.

15. Subsequent Events

Management has evaluated all events and transactions that occurred after September 30, 2010. The Company had no material subsequent events requiring recognition in the consolidated financial statements or any non-recognized subsequent events requiring disclosure.

Table of Contents

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 b y 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 payer 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, 2009 and this Form 10-Q. The reader is encouraged to review these risk factors and filings.

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.

Table of Contents

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, 2009 for a detailed discussion of our critical accounting policies. Additionally, the Company added the following critical accounting policy:

Cost of Legal Proceedings

Operating Segments

We have two reportable segments, Visiting Nurse (VN) and Personal Care (PC). 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 69% 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.

We have service locations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois, Pennsylvania, and Indiana (in order of pro forma revenue significance).

Health Care Reform Legislation and Medicare Regulations

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act (PPACA), and on March 30, 2010, the President signed the Health Care and Education Affordability Reconciliation Act of 2010. These “acts” are collectively referred to below as the “Legislation.” Many of the provisions of the Legislation do not take effect for an extended period of time and most will require the publication of implementing regulations and/or the issuance of programmatic guidelines. Additionally, very often, sweeping new legislation is followed by subsequent legislation to address previously unanticipated consequences, or to further define provisions that were too vague to implement based on the language of the original legislation. In our view it is reasonable to ex pect this to occur over the next few years.

Among other things, the Legislation as it currently exists:

·	Reduces Medicare reimbursement rates for home health care services we provide to our patients. While implications on rates for years 2011-2013 appear clear, implications on rates are significantly less clear for years 2014-2017 in which the rebasing described below is to occur.

·	Imposes new requirements on employer-sponsored health plans including expanding eligibility of employees and dependants, which may increase the cost of providing such benefits.

Table of Contents

·	Includes enhanced program integrity provisions, provider billing limitations, provider overpayment notification requirements and overpayment recoupment capabilities for the Centers for Medicare and Medicaid Services (CMS).

·	Includes a number of other provisions that could reasonably be expected to have an impact on our business.

As a result of the broad scope of the Legislation, the significant changes it will effect in the healthcare industry and society generally, and the complexity of the technical issues it addresses, we are unable to predict, at this time, all the ramifications the Legislation and the (as yet unreleased) implementing regulations may have on our business as a health care provider or a sponsor of an employee health insurance benefit plan. The Legislation and implementing regulations and programmatic guidelines could have a material adverse impact on our results of operations or financial condition in ways not currently anticipated by us.

Additionally, we may be unable to take actions to mitigate any or all of the negative implications of the Legislation and implementing regulations or programmatic guidelines.

Some of the more significant changes to home health reimbursement included in the Legislation, as it currently exists, are as follows:

·	A “Market Basket Update” reduction of 1% per year in each of 2011, 2012, and 2013 which will reduce our annual cost inflation updates. CMS market basket updates are to reflect price inflation experienced by health care providers.

·	A 3% “Rural Rate Add-on” effective April 1, 2010 through December 2015. Approximately 8% of our Medicare patients live in rural areas.

A 10% “Outlier Cap” which limits the amount of “outlier” reimbursement a provider may receive to 10% of total reimbursement. Less than 1% of our revenue would be considered “outlier” reimbursement. Home health agencies receive additional or “outlier” payments for 60-day home health episodes of care which carry unusually high costs.

A “Rebasing” of rates phased in over four years from 2014 through 2017. These provisions require CMS to recalculate or “rebase” home health reimbursement to more closely align with the costs of providing care. Any reduction in reimbursement rates resulting from “rebasing” cannot exceed 3.5% per year in each of the four phase-in years. There are certain requirements for the Medicare Payment Advisory Commission (“MedPac”) and the HHS Secretary to assess and report on the impact of rebasing on access and quality of care. Home health reimbursement rates have not been “rebased” since the inception of the prospective payment system in October 1, 2000. Accordingly, we cannot predict the impact this “rebasing” work may have when it is completed three years from now.

·	Beginning in 2015, an annual “Productivity” adjustment, estimated to result in a 1% per year payment reduction.

Broader policy changes are contained in the Health Care Reform Legislation, that seek to expand access to affordable health insurance. The legislative changes will affect provider operations in addition to payments. For example, the Legislation includes a requirement that physicians ordering home health services document a face-to-face encounter with the patient. The Legislation also includes a number of pilot programs, demonstration projects and studies, the results of which could lead to alternative health care delivery and payment systems. The President is charged with appointing a 15-member Independent Medicare Advisory Board (“IMAB”) empowered to recommend changes to the President and Congress to reduce the growth of Medicare spending.

Independent of the Legislation, CMS when establishing Medicare rates for 2010 included a “market basket update” rate increase of 2.0% plus a 2.5% “outlier policy” adjustment minus a 2.75% “case mix creep” adjustment.

Table of Contents

Independent of the Legislation, in March 2010, the Medicare Payment Advisory Commission (MedPac) issued its annual report to the Congress on Medicare Payment Policy in which it makes specific recommendations for payment policy changes for all categories of providers including home health. Its recommendations for 2011 regarding home health include elimination of the market basket update, consideration of stronger program controls including some that may impact how rebasing is implemented, and a study to identify categories of patients who are likely to receive the greatest benefit from home health care. We are unable to predict whether, or in what form, the Congress or CMS might implement MedPac’s recommendations.

Independent of the Legislation, effective January 1, 2010, CMS implemented a prohibition of 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 (including as small as a 5% change) 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.

On July 16, 2010 CMS released proposed revisions to Medicare home health reimbursement rates and regulations for 2011. Among other changes, the proposed rules include:

·	A “market basket update” rate increase of 2.4%, 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 4.75%)

·	Removing two diagnosis codes related to hypertension from inclusion in the calculation of case-weight which may reasonably be expected to reduce reimbursement in addition to the case mix creep adjustment.

·	Regulations implementing a requirement included in the Legislation for a face-to-face encounter between the patient and the physician ordering home health services

·	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

·	Revisions to its previously issued “36 Month Rule”

The proposed rules are subject to further change by CMS. Final rules are expected to be published later in 2010 and become effective January 1, 2011.

There has been a great deal of legislative and regulatory change enacted or proposed in the last several months and, as indicated above, not all implementing regulations have been published. Additionally, as also indicated above it is reasonable to expect more changes. Management is currently working to evaluate the implications of these changes and to develop appropriate courses of action for the Company.

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 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 the proposed reimbursement changes. These actions may include any or all of the following:

Attempting to increase our revenues by: investing more resources in sales and marketing activities, development of diagnosis related specialty programs and increasing our educational programs regarding the value of home health to drive admission growth, establishing startup branch operations to expand our service territories, and acquisitions of underperforming providers with strong referral relationships,

Table of Contents

Attempting to reduce our costs by: developing a more efficient delivery model, increasing the productivity standards for our staff, optimizing the appropriate use of different levels of professional staff, limiting or eliminating the growth in wage rates, limiting or reducing the size of our work force, closing unprofitable branch operations and accelerating our efforts to evaluate the use of various technological approaches to the delivery of patient care,

·	Evaluating the potential implications of health care reform on our employee benefit plans, and possible changes we may need to make to our plans, and

·	Potentially other actions we deem appropriate.

Although we will attempt to mitigate or otherwise offset the negative effect of health care reform on our reimbursement revenue and our employee benefit plans, our actions may not ultimately be cost effective or prove successful.

Governmental Inquiries and Shareholder Litigation

See Note 11 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 may incur on-going expenses, net of insurance recoveries, if any, related to responding to these inquiries and complaints.

Seasonality

Our Visiting Nurse 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.

Table of Contents

RESULTS OF OPERATIONS

THREE MONTHS

Consolidated

(In thousands)

	Three Months ended September 30,
	2010					2009					Change
	Amount		% Rev			Amount		% Rev			Amount			%
Net service revenues:
Visiting Nurse	$	74,155		87.3	%	$	65,739		86.2	%	$	8,416			12.8	%
Personal Care		10,742		12.7	%		10,555		13.8	%		187			1.8	%
	$	84,897		100.0	%	$	76,294		100.0	%	$	8,603			11.3	%
Operating income before corporate expenses:
Visiting Nurse	$	16,536		22.3	%	$	13,413		20.4	%	$	3,123			23.3	%
Personal Care		1,475		13.7	%		1,287		12.2	%		188			14.6	%
		18,011		21.2	%		14,700		19.3	%		3,311			22.5	%
Corporate expenses		4,718		5.6	%		4,365		5.7	%		353			8.1	%
Operating income		13,293		15.7	%		10,335		13.5	%		2,958			28.6	%
Interest expense, net		60		0.1	%		156		0.2	%		(96	)		-61.5	%
Income tax expense		5,281		6.2	%		3,985		5.2	%		1,296			32.5	%
Net income from continuing operations	$	7,952		9.4	%	$	6,194		8.1	%	$	1,758			28.4	%

EBITDA from continuing operations	$	14,466		17.0	%	$	11,384		14.9	%	$	3,082			27.1	%

On a consolidated basis, our third quarter 2010 net service revenues increased over 11% to approximately $85 million compared to $76 million in the third quarter of 2009. All of our revenue growth in the quarter was organic, primarily driven by nearly 13% growth in our VN segment.

Operating income as a percent of revenue increased to 15.7% in the third quarter of 2010 from 13.5% in 2009, primarily due to the organic revenue growth in the VN segment which included an approximate 2% rate increase from Medicare in 2010. Corporate expenses included $0.2 million in professional fees, net of insurance recoveries, associated with the matters described in Legal Proceedings in the notes to the financial statements and in Part II Item 1.

Interest expense declined substantially as we used the proceeds from our 2009 equity offering to repay amounts outstanding under our bank credit facility. We had no outstanding borrowings on our line of credit as of September 30, 2010. The effective income tax rate from continuing operations remained consistent at approximately 39.9% in 2010 and 39.2% in 2009.

Table of Contents

Visiting Nurse (VN) Segment

	Three Months Ended September 30,
(In thousands, except for statistics)	2010					2009					Change
	Amount		% Rev			Amount		% Rev			Amount			%
Net service revenues	$	74,155		100.0	%	$	65,739		100.0	%	$	8,416			12.8	%
Cost of service revenues		32,049		43.2	%		28,769		43.8	%		3,280			11.4	%
Gross margin		42,106		56.8	%		36,970		56.2	%		5,136			13.9	%
General and administrative expenses:
Salaries and benefits		19,253		26.0	%		17,158		26.1	%		2,095			12.2	%
Other		6,317		8.5	%		6,399		9.7	%		(82	)		-1.3	%
Total general and administrative expenses		25,570		34.5	%		23,557		35.8	%		2,013			8.5	%
Operating income	$	16,536		22.3	%	$	13,413		20.4	%	$	3,123			23.3	%

Average number of locations		88					82					6			7.3	%

All payors:
Patients Months		51,382					47,744					3,638			7.6	%
Admissions		14,359					12,878					1,481			11.5	%
Billable Visits		469,992					416,328					53,664			12.9	%

Medicare Statisitics:
Revenue (in thousands)	$	67,786		91.4	%	$	59,381		90.3	%	$	8,405			14.2	%
Billable visits		394,668					360,681					33,987			9.4	%
Admissions		13,030					11,616					1,414			12.2	%
Episodes		21,763					19,479					2,284			11.7	%

Revenue per completed episode	$	3,156				$	3,002				$	154			5.1	%
Visits per episode		18.1					17.8					0.3			1.7	%

Net service revenues in the visiting nurse segment for the third quarter of 2010 rose 12.8% to approximately $74 million. The $8 million increase was solely the result of organic revenue growth. Revenue per completed episode increased approximately 5% over 2009 due to the 2010 Medicare rate increases and due to an increase in the acuity level of the patients we served. The increase in the acuity level of patients served is also reflected in an increase in average number of visits per episode.

Gross margin increased to 56.8% in 2010 from 56.2% in 2009 primarily due to increases in Medicare reimbursement rates. Other general and administrative expenses declined from 2009 levels primarily due to lower bad debts resulting from improved collections. Additionally, total general and administrative expenses as a percent of revenue declined to approximately 34.5% from 35.8% primarily due to expenses being spread over a larger revenue base.

Table of Contents

Personal Care (PC) Segment

	Three Months Ended September 30,
(In thousands, except for statistics)	2010					2009					Change
	Amount		% Rev			Amount		% Rev			Amount			%
Net service revenues	$	10,742		100.0	%	$	10,555		100.0	%	$	187			1.8	%
Cost of service revenues		7,082		65.9	%		7,009		66.4	%		73			1.0	%
Gross margin		3,660		34.1	%		3,546		33.6	%		114			3.2	%
General and administrative expenses:
Salaries and benefits		1,345		12.5	%		1,352		12.8	%		(7	)		-0.5	%
Other		840		7.8	%		907		8.6	%		(67	)		-7.4	%
Total general and administrative expenses		2,185		20.3	%		2,259		21.4	%		(74	)		-3.3	%
Operating income	$	1,475		13.7	%	$	1,287		12.2	%	$	188			14.6	%

Average number of locations		23					23					-			0.0	%

Admissions		710					804					(94	)		-11.7	%
Patient months of care		11,645					11,822					(177	)		-1.5	%
Patient days of care		154,565					152,272					2,293			1.5	%
Billable hours		581,171					590,662					(9,491	)		-1.6	%
Revenue per billable hour	$	18.48				$	17.87				$	0.61			3.4	%

The increase in gross margin and operating income as a percent of revenue in our PC segment was a result of management actions to improve cost controls and the efficiency of our operations. While admissions growth is constrained to some degree by challenged Medicaid programs in the states we serve, net service revenues in the PC segment for the third quarter improved slightly to $10.7 million. Revenue per billable hour increased primarily as a result of mix changes across the states we serve. General and administrative expenses did not change materially.

Table of Contents

NINE MONTHS

Consolidated

	Nine Months Ended September 30,
	2010					2009					Change
	Amount		% Rev			Amount		% Rev			Amount			%
Net service revenues:
Visiting Nurse	$	220,643		87.5	%	$	188,444		85.7	%	$	32,199			17.1	%
Personal Care		31,638		12.5	%		31,385		14.3	%		253			0.8	%
	$	252,281		100.0	%	$	219,829		100.0	%	$	32,452			14.8	%
Operating income before corporate expenses:
Visiting Nurse	$	50,118		22.7	%	$	39,070		20.7	%	$	11,048			28.3	%
Personal Care		4,222		13.3	%		3,630		11.6	%		592			16.3	%
		54,340		21.5	%		42,700		19.4	%		11,640			27.3	%
Corporate expenses		14,433		5.7	%		12,678		5.8	%		1,755			13.8	%
Operating income		39,907		15.8	%		30,022		13.7	%		9,885			32.9	%
Interest expense, net		210		0.1	%		673		0.3	%		(463	)		-68.8	%
Income tax expense		15,932		6.3	%		11,513		5.2	%		4,419			38.4	%
Net income from continuing operations	$	23,765		9.4	%	$	17,836		8.1	%	$	5,929			33.2	%

EBITDA from continuing operations	$	43,317		17.2	%	$	32,994		15.0	%	$	10,323			31.3	%

On a consolidated basis, our year to date 2010 net service revenues increased about 15% to approximately $252 million compared to $219 million in the same period of 2009. Organic revenue growth was approximately $30 million or approximately 95% of our total growth, while acquisitions provided the balance of the increase at approximately $2 million.

Operating income as a percent of revenue increased to 15.8% in 2010 from 13.7% in 2009, primarily due to 16% organic revenue growth in the VN segment which included an approximate 2% rate increase from Medicare in 2010. Corporate expenses included $0.5 million in professional fees, net of insurance recoveries, associated with the matters described in Legal Proceedings in the notes to the financial statements and in Part II Item 1.

Interest expense declined substantially as we used operating cash flows and the proceeds from a 2009 equity offering to repay amounts outstanding under our bank credit facility. We had no outstanding borrowings on our line of credit as of September 30, 2010. The effective income tax rate from continuing operations was approximately 40.1% in 2010 and 39.2% in 2009, with the increase due to state and local tax increases and a decrease in federal tax credits.

Table of Contents

Visiting Nurse (VN) Segment

	Nine Months Ended September 30,
(In thousands, except for statistics)	2010					2009					Change
	Amount		% Rev			Amount		% Rev			Amount		%
Net service revenues	$	220,643		100.0	%	$	188,444		100.0	%	$	32,199		17.1	%
Cost of service revenues		94,331		42.8	%		81,443		43.2	%		12,888		15.8	%
Gross margin		126,312		57.2	%		107,001		56.8	%		19,311		18.0	%
General and administrative expenses:
Salaries and benefits		56,954		25.8	%		49,258		26.1	%		7,696		15.6	%
Other		19,240		8.7	%		18,673		9.9	%		567		3.0	%
Total general and administrative expenses		76,194		34.5	%		67,931		36.0	%		8,263		12.2	%
Operating income	$	50,118		22.7	%	$	39,070		20.7	%	$	11,048		28.3	%

Average number of locations		86					78					8		10.3	%

All payors:
Patients Months		153,753					137,805					15,948		11.6	%
Admissions		43,436					38,532					4,904		12.7	%
Billable Visits		1,407,168					1,194,139					213,029		17.8	%

Medicare Statisitics:
Revenue (in thousands)	$	202,290		91.7	%	$	169,098		89.7	%	$	33,192		19.6	%
Billable visits		1,177,389					1,025,210					152,179		14.8	%
Admissions		39,390					34,968					4,422		12.6	%
Episodes		64,042					56,703					7,339		12.9	%

Revenue per completed episode	$	3,139				$	2,943				$	196		6.7	%
Visits per episode		18.0					17.5					0.5		2.9	%

Net service revenues in the visiting nurse segment for year to date 2010 rose $32 million, or 17.1%, to approximately $221 million due to organic growth of approximately $30 million with the remainder from acquired operations. Our VN organic revenue growth rate was 16.3% for the nine months ended September 30, 2010. Revenue per completed episode increased approximately 6.7% over 2009 due to 2010 Medicare rate increases and due to an increase in the acuity level of the patients we served. The increase in the acuity level of patients served is also reflected in the increase in average number of visits per episode.

Gross margin increased to 57.2% in 2010 from 56.8% in 2009 primarily due to the aforementioned rate increases. Other general and administrative expenses declined from the prior year due to lower bad debts. Additionally, total general and administrative expenses as a percent of revenue declined to approximately 34.5% from 36.0% primarily due to expenses being spread over a larger revenue base.

Table of Contents

Personal Care (PC) Segment

	Nine Months Ended September 30,
(In thousands, except for statistics)	2010					2009					Change
	Amount		% Rev			Amount		% Rev			Amount			%
Net service revenues	$	31,638		100.0	%	$	31,385		100.0	%	$	253			0.8	%
Cost of service revenues		21,015		66.4	%		21,211		67.6	%		(196	)		-0.9	%
Gross margin		10,623		33.6	%		10,174		32.4	%		449			4.4	%
General and administrative expenses:
Salaries and benefits		4,046		12.8	%		4,068		13.0	%		(22	)		-0.5	%
Other		2,355		7.4	%		2,476		7.9	%		(121	)		-4.9	%
Total general and administrative expenses		6,401		20.2	%		6,544		20.9	%		(143	)		-2.2	%
Operating income	$	4,222		13.3	%	$	3,630		11.6	%	$	592			16.3	%

Average number of locations		23					23					-			0.0	%

Admissions		2,295					2,445					(150	)		-6.1	%
Patient months of care		35,275					35,340					(65	)		-0.2	%
Patient days of care		456,188					448,331					7,857			1.8	%
Billable hours		1,735,586					1,756,498					(20,912	)		-1.2	%
Revenue per billable hour	$	18.23				$	17.87				$	0.36			2.0	%

The increase in gross margin and operating income as a percent of revenue in our Personal Care segment was a result of management actions to improve cost controls and the efficiency of our operations. While admissions growth is constrained to some degree by challenged Medicaid programs in the states we serve, net service revenues in the segment for 2010 improved to $31.6 million. Revenue per billable hour increased primarily as a result of mix changes across the states we serve. General and administrative expenses did not change materially.

Insurance Programs

We bear significant insurance risk under our large-deductible workers’ compensation insurance program and our self-insured employee health program. Under the workers’ compensation insurance program, we bear risk up to $400,000 per incident. We purchase stop-loss insurance for the employee health plan that places a specific limit, generally $100,000, on our exposure for any individual covered life.

We record estimated liabilities for our 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. We monitor our estimated insurance-related liabilities on a monthly basis. As facts change, it may become necessary to make adjustments that could be material to our results of operations and financial condition.

Malpractice and general patient liability claims for incidents which may give rise to litigation have been asserted against us by various claimants. The claims are in various stages of processing and some may ultimately be brought to trial. We are aware of incidents that have occurred through September 30, 2010 that may result in the assertion of additional claims. We currently carry professional, general liability, and directors & officers insurance coverage for our exposures with various levels of deductibles.

Table of Contents

Liquidity and Capital Resources

Equity Distribution Program

Revolving Credit Facility

The weighted average prime rate-based interest rate was 3.25% for the quarters ended September 30, 2010 and 2009, respectively. The weighted average LIBOR rate was 1.87% and 2.10% for the third quarter of 2010 and 2009, respectively. The Company pays a commitment fee of 0.25% per annum on the unused facility balance. Borrowings are available equal to a multiple of 3.0 times earnings before interest, taxes, depreciation and amortization (“EBITDA”). “EBITDA” may include “Acquired EBITDA” from proforma 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, 2010, the formula permitted all $75 million to be used, of which no amounts were outstanding. The Company has irrevocable letters of credit, totaling $6.9 million outstanding in connection with its self-insurance programs. Thus, a total of $68.1 million was available for use at September 30, 2010. The Company’s revolving credit facility is subject to various financial covenants. As of September 30, 2010, the Company was in compliance with the covenants. Under the most restrictive of its covenants, the Company was required to maintain minimum net worth of at least $158.0 million at September 30, 2010. At such date, the Company’s net worth was approximately $175.0 million.

We believe that this facility plus cash on hand will be sufficient to fund our operating needs for at least the next year. We will continue to evaluate additional capital, including possible debt and equity investments in the Company, to support a more rapid development of the business than would be possible with internal funds.

Table of Contents

Cash Flows

Key elements to the Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 were:

Net Change in Cash and Cash Equivalents	2010			2009
Provided by (used in):
Operating activities	$	27,316		$	16,636
Investing activities		(4,276	)		(7,651	)
Financing activities		(747	)		(134	)
Discontinued operations activities		(39	)		(80	)
Net increase in cash and cash equivalents	$	22,254		$	8,771

2010

Net cash provided by operating activities resulted primarily from current period income of $23.7 million, net of changes in accounts receivable, accounts payable and accrued expenses. Accounts receivable days revenues outstanding were 42 at September 30, 2010, 44 at June 30, 2010 and 41 at December 31, 2009. The cash used in investing activities is primarily due to additional amounts paid under earn-out agreements entered into in conjunction with our historical acquisitions and capital expenditures of $2.0 million. Net cash used in financing activities resulted primarily from the tax benefit of stock option exercises and payment of $1.8 million on capital leases and notes payable. The Company’s stock option plans permit optionees to have option shares withheld on exercises in lieu of su bmitting to the Company the amount necessary for income tax withholdings. Such withholding of shares in lieu of taxes is shown in the cash flow as a repurchase of shares in the amount of $628. The Company receives a current tax deduction for compensation expense subject to IRS limits. Such deductions related to stock option exercises in 2010 are shown in the cash flow statement as a financing cash inflow of approximately $1.3 million.

2009

Net cash provided by operating activities resulted primarily from current period income of $17.8 million, net of changes in accounts receivable, accounts payable and accrued expenses. Accounts receivable days revenues outstanding were 46 at September 30, 2009 and 48 at December 31, 2008. The cash used in investing activities is primarily due to the final payment of purchase price of $2.8 million from the 2006 Mederi acquisition, $3.6 million for current period acquisition and capital expenditures of $1.4 million. Net cash used in financing activities was due primarily to satisfaction of a $4 million note payable from the 2006 Mederi acquisition, net proceeds from the sale of common stock of $28 million and net repayment of $24 million on our credit facility.

Impact of Inflation

Management does not believe that inflation has had a material effect on income during the past several years.

Non-GAAP Financial Measure

The information provided in some of the tables use certain non-GAAP financial measures as defined under Securities and Exchange Commission (“SEC”) rules. In accordance with SEC rules, the Company has provided, in the supplemental information below, a reconciliation of those measures to the most directly comparable GAAP measures.

EBITDA

EBITDA is defined as income before depreciation and amortization, net interest expense and income taxes. EBITDA is not a measure of financial performance under U.S generally accepted accounting principles. It should not be considered in isolation or as a substitute for net income, operating income, cash flows from operating, investing or financing activities, or any other measure calculated in accordance with generally accepted accounting principles. The items excluded from EBITDA are

Table of Contents

significant components in understanding and evaluating financial performance and liquidity. Management routinely calculates and communicates EBITDA and believes that it is useful to investors because it is commonly used as an analytical indicator within our industry to evaluate performance, measure leverage capacity and debt service ability, and to estimate current or prospective enterprise value. EBITDA is also used in certain covenants contained in our credit agreement.

The following table sets forth a reconciliation of Net Income from Continuing Operations to EBITDA:

ALMOST FAMILY, INC. AND SUBSIDIARIES
RECONCILIATION OF EBITDA
(In thousands)

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010		2009		2010		2009
Net income from continuing operations	$	7,952	$	6,194	$	23,765	$	17,836
Add back:
Interest expense		60		156		210		673
Income tax expense		5,281		3,985		15,932		11,513
Depreciation and amortization		736		601		2,102		1,753
Amortization of stock-based compensation		437		447		1,308		1,219
Earnings before interest, income taxes, depreciation and amortization (EBITDA) from continuing operations	$	14,466	$	11,383	$	43,317	$	32,994

Table of Contents

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivative Instruments

The Company does not use derivative instruments.

Market Risk of Financial Instruments

Our primary market risk exposure with regard to financial instruments is to changes in interest rates on long-term obligations.

At September 30, 2010, the Company had no outstanding amounts on its revolving credit facility and, therefore, a hypothetical 100 basis point increase in short-term interest rates would have no impact on annual pre-tax earnings due to higher interest expense.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures – As of September 30, 2010, the Company’s management, with participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures as defined in Exchange Act Rules 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2010.

Changes in Internal Control Over Financial Reporting - There were no changes in the Company’s internal control over financial reporting during the third quarter of 2010, that have materially affected, or are reasonably likely to materially affect, Almost Family, Inc.’s internal control over financial reporting.

Table of Contents

Commission File No. 1-9848

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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. On May 12, 2010, following The Wall Street Journal article, the United States Senate Finance 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 is cooperating fully with the Senate Finance Committee regarding the requested information.

Table of Contents

ITEM 1A. RISK FACTORS

Information regarding risk factors appears in our Form 10-K for the year ending December 31, 2009, under the heading “Special Caution Regarding Forward – Looking Statements” and in the Form 10-K Part I, Item 1A. Risk Factors. Except as set forth below, there have been no material changes from the risk factors previously disclosed in our Form 10-K.

The Health Care Reform Legislation and implementing regulations could have a material adverse impact on our results of operations or financial condition in ways not currently anticipated by us.

On March 23, 2010, President Obama signed the Patient Protection and Affordable Care Act, and on March 30, 2010, the President signed the Health Care and Education Affordability Reconciliation Act of 2010. These “acts” are collectively referred to below as the “Legislation.” Many of the provisions of the Legislation do not take effect for an extended period of time and most will require the publication of implementing regulations and/or the issuance of programmatic guidelines. Additionally, very often, sweeping new legislation is followed by subsequent legislation to address previously unanticipated consequences, or to further define provisions that were too vague to implement based on the language of the original legislation. In our view it is reasonable to expect thi s to occur over the next few years.

Among other things, the Legislation as it currently exists:

·	Reduces Medicare reimbursement rates for home health care services we provide to our patients. While implications on rates for years 2011-2013 appear clear, implications on rates are significantly less clear for years 2014-2017 in which rebasing is to occur.

·	Imposes new requirements on employer-sponsored health plans including expanding eligibility of employees and dependants, which may increase the cost of providing such benefits.

·	Includes enhanced program integrity provisions, provider billing limitations, provider overpayment notification requirements and overpayment recoupment capabilities for CMS.

·	Includes a number of other provisions that could reasonably be expected to have an impact on our business.

Additionally, we may be unable to take actions to mitigate any or all of the negative implications of the Legislation and implementing regulations or programmatic guidelines.

Recent Governmental Inquiries into home health utilization and associated subsequent related litigation could have a material adverse impact on our business.

Refer to Part II Item 1. Legal Proceedings.

Given the preliminary stage of the Senate Finance Committee inquiry, the subpoenas and investigations, and the litigation described above, we are unable to assess the probable outcome or potential liability, if any, arising from these matters. Additional investigations by other government agencies may be initiated for which we could incur fines or other losses. Additionally, these inquiries could result in additional substantive actions from either a legislative or regulatory perspective that could have a material adverse effect on our results of operations or financial condition.

Table of Contents

As described in more detail in our Form 10-K, our success depends significantly on referrals from physicians, hospitals and other patient referral sources in the communities that our home care agencies serve as well as on our ability to maintain good relationships with these referral sources. As also described in our Form 10-K, we rely significantly on our ability to attract and retain caregivers who possess the skills, experience, and licenses necessary to meet the needs of our patients. Negative publicity resulting from the recent governmental inquires and subsequent related litigation could impact our ability to obtain referrals of patients from our referral sources, attract new referral sources, retain our employees and/or attract new employees or impact us in other ways that we cannot currently predict. The loss of referrals, referral sources and/or employees, an impaired ability to attract new referrals, referral sources and/or employees or other implications we cannot currently predict could have a material adverse effect on our results of operations or financial condition.

Additionally, the expenses associated with responding to these governmental inquiries and subsequent related litigation could have a material adverse effect on our results of operation or financial condition.

Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

31.1

Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley

Act of 2002.

31.2

Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley

Act of 2002.

32.1

Certifications of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

Certifications of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Table of Contents

SIGNATURES

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

	ALMOST FAMILY, INC.

Date October 28, 2010	By:	/s/ William B. Yarmuth
		William B. Yarmuth
		Chairman of the Board, President & Chief Executive Officer


	By:	/s/ C. Steven Guenthner
		C. Steven Guenthner
		Senior Vice President and
		Chief Financial Officer (Principal Financial Officer)

Table of Contents

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

Almost Family (AFAM) Inactive 10-Q2010 Q3 Quarterly report

Content analysis