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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

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**x****  ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES****EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 31,2009**

** **

**OR**

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

** **

**For thetransition period from                      to                        **

 

**Commission  file number 001-09848**

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****

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**ALMOST FAMILY, INC.**

(Exact name ofRegistrant as specified in its charter)

 

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

 

**9510 OrmsbyStation Road, Suite 300,****Louisville, Kentucky40223**

(Address of principal executiveoffices)

 

**(502) 891-1000**

(Registrant’s telephone number,including area code)

 

**Not Applicable**

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

 
|   | Securities registered pursuant to Section 12(b) of the Act |   |
|--------|----------------------------------------------------------------------|--------|
|   | ** **                                                           |   |
|   | **Title of Each Class**                                              |   |
|   | Common  Stock, par value $.10 per share                              |   |
|   |                                                                 |   |
|   | **Name of Each  Exchange on Which Registered:**                      |   |
|   | NASDAQ  Global Select Market                                         |   |

 

Securitiesregistered pursuant to Section 12(g) of the Act: ** None**

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  Yes o  No x

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Exchange Act.   Yes o  No x

 

Indicate by checkmark whether the Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x  No o

 

Indicate by checkmark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of thischapter) during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files).  Yes o  No o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of regulation S-Kis not contained herein, and will not be contained, to the best of theRegistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large  accelerated filer o               |   | Accelerated  filer x          |
|-----------------------------------------------|--------|------------------------------------|
|                                          |   |                               |
| Non-accelerated  filer o                 |   | Smaller  reporting company  o |
| (Do not check if a smaller reporting company) |   |                               |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act) Yes [  ]  No [X]

1

As of June 30, 2009, the aggregate marketvalue of the registrant’s common stock held by non-affiliates of the registrantwas $190,961,586 based on the last sale price of a share of the common stock asof June 30, 2009 ($26.60), as reported by the NASDAQ Global Market.

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                               |   | **Outstanding at February 23, 2010** |
|-----------------------------------------|--------|-------------------------------------------|
| Common Stock, $.10 par  value per share |   | 9,154,303 Shares                          |

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The definitive proxystatement relating to the registrant’s Annual Meeting of Stockholders isincorporated by reference in Part III to the extent described therein.

 

 

 

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**TABLE OF CONTENTS**

 
| **PART I**  |                                                                                                                  | **5**  |
|------------------|-----------------------------------------------------------------------------------------------------------------------|--------|
|             |                                                                                                                  |   |
| *Item  1.*       | *Business*                                                                                                            | *5*    |
|             |                                                                                                                  |   |
| *Item 1A.*       | *Risk Factors*                                                                                                        | *13*   |
|             |                                                                                                                  |   |
| *Item 1B.*       | *Unresolved  Staff Comments*                                                                                          | *22*   |
|             |                                                                                                                  |   |
| *Item 2.*        | *Properties*                                                                                                          | *22*   |
|             |                                                                                                                  |   |
| *Item 3.*        | *Legal Proceedings*                                                                                                   | *22*   |
|             |                                                                                                                  |   |
| *Item 4.*        | *Submission of Matters to a Vote of Security Holders*                                                                 | *22*   |
|             |                                                                                                                  |   |
| **PART II** |                                                                                                                  | **23** |
|             |                                                                                                                  |   |
| *Item 5.*        | *Market for  Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases  of Equity Securities* | *23*   |
|             |                                                                                                                  |   |
| *Item 6.*        | *Selected Financial  Data*                                                                                            | *23*   |
|             |                                                                                                                  |   |
| *Item 7.*        | *Management’s  Discussion and Analysis of Financial Condition and Results of Operations*                         | *25*   |
|             |                                                                                                                  |   |
| *Item 7A.*       | *Quantitative  and Qualitative Disclosures about Market Risk*                                                         | *41*   |
|             |                                                                                                                  |   |
| *Item 8.*        | *Financial  Statements and Supplementary Data*                                                                        | *42*   |
|             |                                                                                                                  |   |
| *Item 9.*        | *Changes in and Disagreements with  Accountants on Accounting and Financial Disclosure*                               | *66*   |
|             |                                                                                                                  |   |
| *Item 9A.*       | *Controls and Procedures*                                                                                             | *66*   |
|             |                                                                                                                  |   |
| *Item 9B.*       | *Other Information*                                                                                                   | *66*   |

 

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| **PART III** |                                                                                                                                                                                                                                                                         | **67** |
|-------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|              |                                                                                                                                                                                                                                                                         |   |
| *Item 10.*        | *Directors, Executive Officers and  Corporate Governance*                                                                                                                                                                                                                    | *67*   |
|              |                                                                                                                                                                                                                                                                         |   |
| * *          | *Items  11, 12, 13 and 14. Executive Compensation; Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters; Certain  Relationships and Related Transactions; and Director Independence; and  Principal Accountant Fees and Services* | *68*   |
|              |                                                                                                                                                                                                                                                                         |   |
| **PART IV**  |                                                                                                                                                                                                                                                                         | **69** |
|              |                                                                                                                                                                                                                                                                         |   |
| *Item 15.*        | *Exhibits and Financial Statement  Schedules*                                                                                                                                                                                                                                | *69*   |
|                   |                                                                                                                                                                                                                                                                              |        |  |  |

 

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In this report,the terms “Company,” “we,” “us” or “our” mean Almost Family, Inc. and allsubsidiaries included in our consolidated financial statements.

 

**SpecialCaution Regarding Forward-Looking Statements**

 

Certain statementscontained in this annual report on Form 10-K, including, withoutlimitation, statements containing the words “believes,” “anticipates,” “intends,”“expects,” “assumes,” “trends” and similar expressions, constitute “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995. Forward-looking statements are based upon the Company’s current plans,expectations and projections about future events.  However, such statements involve known andunknown risks, uncertainties and other factors that may cause the actualresults, performance or achievements of the Company to be materially differentfrom any future results, performance or achievements expressed or implied bysuch forward-looking statements. These factors include, among others, thefollowing:

 

·                  general economic and business conditions;

·                  demographic changes;

·                  changes in, or failure to comply with, existinggovernmental regulations;

·                  legislative proposals for healthcare reform;

·                  changes in Medicare and Medicaid reimbursement levels

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

·                  liability and other claims asserted against theCompany;

·                  potential audits and investigations by government andregulatory agencies

·                  ability to attract and retain qualified personnel;

·                  availability and terms of capital;

·                  loss of significant contracts or reduction in revenuesassociated with major payer sources;

·                  ability of customers to pay for services;

·                  business disruption due to natural disasters orterrorist acts;

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

·                  significant deterioration in economic conditions andsignificant market volatility;

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

·                  changes in estimates and judgments associated withcritical accounting policies and estimates.

 

For a detaileddiscussion of these and other factors that could cause the Company’s actualresults to differ materially from the results contemplated by theforward-looking statements, please refer to Item 1A. “Risk Factors” and Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andelsewhere in this report.  The readershould not place undue reliance on forward-looking statements, which speak onlyas of the date of this report. Except as required under the federal securitieslaws and the rules and regulations of the Securities and ExchangeCommission (“SEC”), the Company does not intend to publicly release anyrevisions to forward-looking statements to reflect unforeseen or other eventsafter the date of this report.  TheCompany has provided a detailed discussion of risk factors within this annualreport on Form 10-K and various filings with the SEC.  The reader is encouraged to review these riskfactors and filings.

 

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**PART I**

 

**ITEM1.  BUSINESS**

 

**Introduction**

 

*AlmostFamily, Inc.**TM* and subsidiaries (collectively “*Almost Family*”) is a leading, regionally focused provider ofhome health services.  We have servicelocations in Florida, Kentucky, Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois,Pennsylvania and Indiana (in order of revenue significance).

 

We wereincorporated in Delaware in 1985. Through a predecessor merged into the Company in 1991, we have beenproviding health care services, primarily home health care, since 1976.  On January 31, 2000, we changed theCompany’s name to *Almost Family, Inc.* fromCaretenders ® HealthCorp. We reported approximately $298 million of revenues from continuingoperations in the year ended December 31, 2009.  Unless otherwise indicated, the financialinformation included in Part I is for continuing operations.

 

**Website Access to Our Reports**

 

Our annual reports on Form 10-K, quarterly reports on Form 10-Q,current reports on Form 8-K, and all amendments to those reports areavailable free of charge on our website at www.almostfamily.com as soon asreasonably practicable after such material is electronically filed with orfurnished to the Securities and Exchange Commission.  Also, copies of our annual report will bemade available, free of charge, upon written request. Information contained onAlmost Family’s website is not part of this annual report on Form 10-K andis not incorporated by reference in this document.

 

**How WeAre Currently Organized and Operate**

 

The Company has two reportable segments,Visiting Nurse (VN) and Personal Care (PC). Reportable segments have been identified based upon how management hasorganized the business by services provided to customers and the criteria inAccounting Standards Codification (ASC) Topic 280, Segment Reporting, (formerlyStatement of Financial Accounting Standards (SFAS) No. 131).

 

OurVN segment provides a comprehensive range of Medicare-certified home healthnursing services to patients in need of recuperative care, typically followinga period of hospitalization or care in another type of inpatient facility. Ourservices are often provided to patients in lieu of additional care in othersettings, such as long term acute care hospitals, inpatient rehabilitationhospitals or skilled nursing facilities. Our nurses, therapists, medical social workers and home health aideswork closely with patients and their families to design and implement anindividualized treatment response to a physician-prescribed plan of care.  We also offer specialty programs based onlocal needs, such as our Frail Elderly Care Management, Optimum BalanceProgram, Cardiocare Program, Orthopedic Program and Urology Program.  VN Medicare revenues are generated on a perepisode basis rather than a fee per visit or hourly basis.  Approximately 90% of the VN segment revenuesare generated from the Medicare program while the balance is generated fromMedicaid and private insurance programs.

 

OurPC segment provides services in patients’ homes on an as-needed, hourly, orlive-in basis. These services include personal care, medication management,meal preparation, caregiver respite and homemaking. Our services are oftenprovided to patients who would otherwise be admitted to skilled nursingfacilities for long term custodial care. PC revenues are generated on an hourly basis.  Approximately 67% of the PC segment revenuesare generated from Medicaid and other government programs while the balance isgenerated from insurance programs and private pay patients.

 

Additional financial information about oursegments can be found in Note 11 of our consolidated financial statements andrelated notes included elsewhere in this Form 10-K.

 

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**Our Viewon Reimbursement and Diversification of Risk**

 

Our Company ishighly dependent on government reimbursement programs which pay for themajority of the services we provide to our patients.  Reimbursement under these programs, primarilyMedicare and Medicaid, is subject to frequent changes as policy makers balanceconstituents’ needs for health care services within the constraints of thespecific government’s fiscal budgets.

 

We believe that animportant key to our historical success and to our future success is ourability to adapt our operations to meet changes in reimbursement as theyoccur.  One important way in which wehave achieved this adaptability in the past, and in which we plan to achieve itin the future, is to maintain some level of diversification in our businessmix.

 

The execution ofour business plan will place primary emphasis on the development of ourVisiting Nurse operations.  Our PersonalCare operation will help us maintain a level of diversification ofreimbursement risk that we believe is appropriate.

 

**OurBusiness Plan**

 

Our future successdepends on our ability to execute our business plan.  Over the next three to five years we will tryto accomplish the following:

 

·                  Generate meaningful same store sales growth through the focusedprovision of high quality services and attending to the needs of our patients;

 

·                  Expand the significance of our Visiting Nurse, Medicare-based, homehealth services by selectively acquiring other quality providers, and throughthe startup of new agencies; and

 

·                  Expand our capital base through both earnings performance and byseeking additional capital investments in our Company.

 

**Overview of Our Services**

 

***VisitingNurse Services (VN)***

 

Our Visiting Nurseservices consist primarily of the provision of skilled in-home medical servicesto patients in need of short-term recuperative health care.  Our patients are referred to us by theirphysicians or upon discharge from a hospital or other type of in-patientfacility.  We operate forty-two (42)Medicare-certified home health agencies with a total of eighty-five (85)locations.  In the year ended December 31,2009, approximately 90% of our visiting nurse segment revenues were derivedfrom the Federal Medicare program.

 

Our Visiting Nursesegment provides a comprehensive range of Medicare-certified home healthnursing services.  We also receivepayment from Medicaid and private insurance companies.  Our professional staff includes registerednurses, licensed practical nurses, physical, speech and occupationaltherapists, and medical social workers. They monitor medical treatment plans prescribed by physicians.  Our professional staff is subject to statelicensing requirements in the particular states in which they practice.  Para-professional staff members (primarilyhome health aides) also provide care to these patients.

 

Our Visiting Nurse segment operations located in Florida normallyexperience higher admissions during the first quarter and lower admissionsduring the third quarter than in the other quarters due to seasonal populationfluctuations.

 

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***Personal Care Services (PC)***

 

Our PC segmentservices are also provided in patients’ homes. These services (generally provided by para-professional staff such ashome health aides) are generally of a custodial rather than skilled nature.  PC revenues are generated on an hourlybasis.  We currently operate twenty-three(23) personal care locations.

 

As of December 31, 2009, our operating locations were as follows:

 
| ** **              | ** ** | **Visiting Nurse** | ** ** | **Personal Care** | ** ** |
|-------------------------|------------|--------------------|------------|-------------------|------------|
| **Geographic Clusters** | ** ** | **Branches**       | ** ** | **Branches**      | ** ** |
| ** **              |       |               |       | *** ***      |       |
| **Southeast:**          |       |               |       | *** ***      |       |
| *Florida*               |       | 42                 |       | 7                 |       |
| *Alabama*               |       | 2                  |       | —            |       |
| ** **              |       |               |       | *** ***      |       |
| **Northeast**           |       |               |       | *** ***      |       |
| *Connecticut*           |       | 5                  |       | 7                 |       |
| *New Jersey*            |       | 3                  |       | —            |       |
| *Massachusetts*         |       | 2                  |       | 1                 |       |
| *Pennsylvania*          |       | 1                  |       | —            |       |
| * *                |       |               |       | *** ***      |       |
| **Midwest**             |       |               |       | *** ***      |       |
| *Kentucky*              |       | 15                 |       | 4                 |       |
| *Ohio*                  |       | 7                  |       | 4                 |       |
| *Missouri*              |       | 3                  |       | —            |       |
| *Illinois*              |       | 3                  |       | —            |       |
| *Indiana*               |       | 2                  |       | —            |       |
| **Total**               |       | 85                 |       | 23                |       |

 

**Compensationfor Services**

 

We are compensatedfor our services by (i) Medicare (Visiting Nurse only), (ii) Medicaid,(iii) other third party payors (e.g. insurance companies and othersources), and (iv) private pay (paid by personal funds).  The rates of reimbursement we receive fromMedicare, Medicaid and Other Government programs are generally dictated bythose programs.  In determining chargerates for goods and services provided to our other customers, we evaluateseveral factors including cost and market competition.  We sometimes negotiate contract rates withthird party providers such as insurance companies.

 

Our reliance ongovernment sponsored reimbursement programs makes us vulnerable to possiblelegislative and administrative regulations and budget cut-backs that couldadversely affect the number of persons eligible for such programs, the amountof allowed reimbursements or other aspects of the program, any of which couldmaterially affect us.  In addition, lossof certification or qualification under Medicare or Medicaid programs couldmaterially affect our ability to effectively market our services.

 

The followingtable sets forth our revenues from continuing operations derived from eachmajor class of payor during the indicated periods (by percentage of netrevenues):

 
| **Payor Group**                        | ** ** | **Year Ended  December 31, 2009** | ** ** | **Year Ended December 31,  2008** | ** ** | **Year Ended  December 31, 2007** | ** ** |
|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|----------------------------------------|------------|
| Medicare                               |       | 77.3                                   | %          | 74.2                                   | %          | 68.1                                   | %          |
| Medicaid and Other Government Programs |       | 17.0                                   | %          | 18.4                                   | %          | 23.3                                   | %          |
| Insurance and private pay              |       | 5.7                                    | %          | 7.4                                    | %          | 8.6                                    | %          |

 

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Medicare revenuesare earned only in our VN segment where they account for 90% of segmentrevenues.  Historical changes in paymentsources are primarily a result of changes in the types of customers we attract.

 

See “GovernmentRegulation” and “Risk Factors.”  We willmonitor the effects of such items and may consider modifications to ourexpansion and development strategy when and if necessary.

 

**Acquisitions**

 

The Company has completed several acquisitions over the past two fiscalyears and will continue to acquire other quality providers ofMedicare-certified home health services. We may consider acquisitions of businesses that provide health careservices similar to those we currently offer in our Personal Care segment butwe expect most of our acquisition activity to be focused on Visiting Nurseoperations.

 

Factors which may affect future acquisition decisions include, but arenot limited to, the quality and potential profitability of the business underconsideration, and our profitability and ability to finance the transaction.

 

***Acquisitions During 2009***

 

On June 1, 2009, the Company acquired the assets of theMedicare-certified home health agencies affiliated with Florida-based CentralFlorida Health Alliance (CFHA), a two-hospital health care company system withhome health branches in Leesburg and The Villages for a purchase price of $5.2million, consisting of $4.0 million in cash and a $1.2 million promissorynote.  The cash portion of thetransaction was funded from borrowings available on the Company’s existingsenior credit facility with JP Morgan Chase Bank, NA.

 

***Acquisitions During 2008***

 

During 2008 the Company acquired 11 visiting nurse branchlocations.  These operations added to ourmarket presence in Florida, Connecticut and Ohio and gave us market presence inNew Jersey and Pennsylvania.

 

OnNovember 26, 2008, the Company acquired the Kentucky Certificate of Needand home health license of the Medicare-certified health agency formerlyoperated by Hardin Memorial Hospital.

 

OnNovember 14, 2008, the Company acquired the assets of theMedicare-certified home health agency owned by Fairfield Medical Center inOhio.  The agency generated approximately$1.2 million of Medicare revenues in 2007.

 

On August 1,2008, the Company acquired the stock of Patient Care, Inc. (“Patient Care”).  Patient Care and its subsidiaries own andoperate eight Medicare-certified home health agency locations in New Jersey,Connecticut, and Pennsylvania.  In 2007,Patient Care’s annual revenues were approximately $47.8 million. The totalpurchase price for the stock was $45.2 million in cash, reduced by a workingcapital adjustment of $4.4 million for a net purchase price of $40.8million.  The Company also provided aninsurer of Patient Care a $4.7 million letter of credit as collateral for itslarge-deductible workers compensation exposure. The cash portion of the transaction paid at closing plus the letter ofcredit was funded from the Company’s existing cash and borrowings available onthe Company’s senior credit facility with JP Morgan Chase Bank, NA.

 

On March 26, 2008, the Company acquired the fixed assets of allthe home health agencies owned by Apex Home Healthcare Services, LLC (“ApexHome Healthcare”), the assets of the healthcare rehabilitation business ownedby Apex Health and Rehab Center LLC, the assets of the healthcare staffing businessowned by Apex Healthcare Solutions, LLC and the assets of the home carephysician practice owned by Apex House Call Doctors, LLC for a purchase priceof $16.1 million, consisting of $12.1 million in cash, two promissory notestotaling $3 million plus $1 million in value of Almost Family common stock(47,619 shares-restricted). The cash portion of the transaction was funded fromborrowings available on the Company’s senior credit facility with JP MorganChase Bank, NA. Apex’s annual revenues were approximately $16.2 million in2007.

 

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**Competition, Marketing and Customers**

 

The visiting nurse industry is highly competitive and fragmented.  Competitors include larger publicly heldcompanies such as Amedisys, Inc. (NasdaqGS: AMED), Gentiva Health Services, Inc.(NasdaqGS: GTIV), LHC Group, Inc. (NasdaqGS: LHCG) and numerous privatelyheld multi-site home care companies, privately held single-site agencies and asignificant number of hospital-based agencies. Competition for customers at thelocal market level is very fragmented and market specific.  Generally, each local market has its owncompetitive profile and no one competitor has significant market share acrossall our markets.  To the best of ourknowledge, no individual provider has more than 3% share of the nationalmarket.

 

We believe the primary competitive factors are quality of service andreputation among referral sources. However, competitors are increasinglyfocusing attention on providing alternative site health care services.  We market our services through our sitemanagers and marketing staff.  Theseindividuals contact referral sources in their areas to market ourservices.  Major referral sourcesinclude: physicians, hospital discharge planners, Offices on Aging, socialworkers, and group living facilities.  Wealso utilize consumer-direct sales, marketing and advertising programs designedto attract customers.

 

The personal care industry is likewise highly competitive andfragmented.  Competitors include homehealth providers, senior adult associations, and the private hiring ofcaregivers.  We market our servicesprimarily through our site managers, and we compete by offering a high qualityof care and by helping families identify and access solutions for care.

 

**Government Regulation**

 

***Overview***

 

The health care industry has experienced, and is expected to continueto experience, extensive and dynamic change. In addition to economic forces andregulatory influences, continuing political debate is subjecting the healthcare industry to significant reform. Health care reforms have been enacted asdiscussed elsewhere in this document and proposals for additional changes arecontinuously formulated by departments of the Federal government, Congress, andstate legislatures.

 

We expect government officials to continue to review and assessalternative health care delivery systems and payment methodologies. Changes inthe law or new interpretations of existing laws may have a dramatic effect onthe definition of permissible or impermissible activities, the relative cost ofdoing business, and the methods and amounts of payments for medical care byboth governmental and other payors.  Weexpect legislative changes intended to “balance the budget” and slow the annualrate of growth of Medicare and Medicaid to continue. Such future changes mayfurther impact reimbursement for our services. There can be no assurance thatfuture legislation or regulatory changes will not have a material adverseeffect on our operations.

 

***Medicare Rates***

 

OnOctober 1, 2000, Medicare implemented the Prospective Payment System (“PPS”)and began paying providers of home health care at fixed, predetermined ratesfor services and supplies bundled into 60-day episodes of home health care. Anepisode of home health care spans a 60-day period, starting with the first daya billable visit is furnished to a Medicare beneficiary and ending 60 days later.If a patient is still in treatment on the 60th day a newepisode begins on the 61st day regardless of whether a billable visit isrendered on that day and ends 60 days later. The first day of a consecutiveepisode, therefore, is not necessarily the new episode’s first billable visit.A base episode payment is established by the Medicare Program through federallegislation for all episodes of care ended on or after the applicable timeperiods detailed below:

 

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| **Period**                                           | ** ** | **Base episode  Payment (1)** | ** ** |
|------------------------------------------------------|------------|-------------------------------|------------|
| January 1, 2007 through December 31,  2007 |       | $                             | 2,339      |   |
| January 1, 2008 through December 31,  2008 |       | $                             | 2,270      |   |
| January 1, 2009 through December 31,  2009 |       | $                             | 2,272      |   |
| January 1, 2010 through December 31,  2010 |       | $                             | 2,313      |   |

 

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(1)           The actual episodepayment rates, as presented in the table vary, depending on the home healthresource groups (“HHRGs”) to which Medicare patients are assigned and the perepisode payment is typically reduced or increased by such factors as thepatient’s clinical, functional, and services utilization characteristics. 

 

UnderPPS for Medicare reimbursement, we record net revenues based on a reimbursementrate that varies based on the severity of the patient’s condition, serviceneeds and other related factors. We record net revenues as services arerendered to patients over the 60-day episode period. At the end of each month,a portion of our revenue is estimated for episodes in progress.

 

Medicarereimbursement on an episodic basis, is subject to change if the actual numberof therapy visits differs from the number anticipated at the start of care orif the patient is discharged but readmitted to another agency within the same60-day episodic period.  Our revenuerecognition under the Medicare reimbursement program is based on certainvariables including, but not limited, to: (i) changes in the base episodepayments established by the Medicare Program; (ii) adjustments to the baseepisode payments for partial episodes and for other factors, such as case mix,geographic wages, low utilization and intervening events; and, (iii) recoveriesof overpayments. Adjustments to revenue result from differences between estimatedand actual reimbursement amounts, an inability to obtain appropriate billingdocumentation or authorizations acceptable to the payor and other reasonsunrelated to credit risk.  We recognizeMedicare revenue on an episode-by-episode basis during the course of eachepisode over its expected number of visits.

 

InOctober 2009 the Centers for Medicare & Medicaid Services (“CMS”)published regulations specifying Medicare home health reimbursement rates for2010.  Medicare rates for 2010 include a “marketbasket update” rate increase of 2.0% plus a 2.5% “outlier policy” adjustmentless a 2.75% “case mix creep” adjustment. Accordingly, 2010 Medicare rates are about 1.75% higher than in 2009.

 

Refer to the “Risk Factors” below, the “Notes to the Consolidated FinancialStatements” and “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” for additional information.

 

***MedicaidReimbursement***

 

As shown in “Compensationfor Services” above, approximately 17% of our 2009 revenues were derived fromstate Medicaid and Other Government Programs, many of which currently facesignificant budget issues.  The financialcondition of the Medicaid programs in each of the states in which we operate iscyclical and many may be expected from time to time to take actions or evaluatetaking actions to control the rate of growth of Medicaid expenditures.  Among these actions are the following:

 

·        redefining eligibility standards forMedicaid coverage

·        redefining coverage criteria for homeand community based care services

·        slowing payments to providers byincreasing the minimum time in which payments are made

·        limiting reimbursement rate increases

·        increased utilization of self-directedcare alternatives

·        shifting beneficiaries from traditionalcoverage to Medicaid managed care providers

·        changing regulations under whichproviders must operate.

 

The actions thatmight be taken or considered are because the number of Medicaid beneficiariesand their related expenditures are growing at a faster rate than the government’srevenue.  Medicaid is consuming a greaterpercentage of states’ budget.  This issueis exacerbated when revenues slow in a slowing economy.  We believe

 

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that thesefinancial issues are cyclical in nature rather than indicative of the long-termprospect for Medicaid funding of health care services.  Additionally, we believe our services offerthe lowest cost alternative to institutional care and are a part of thesolution to the states’ Medicaid financing problems.  It is possible that actions taken by thestate Medicaid programs in the future could have a significant unfavorableimpact on our results of operations, financial condition and liquidity.

 

***Permits and Licensure***

 

Many statesrequire companies providing certain health care services to be licensed as homehealth agencies. In addition, certain health care practitioners employed by usrequire state licensure and/or registration and must comply with laws andregulations governing standards of practice. The failure to obtain, renew or maintainany of the required regulatory approvals or licenses could adversely affect ourbusiness. We believe we are currently licensed appropriately where required bythe laws of the states in which we operate. There can be no assurance that either the states or the Federalgovernment will not impose additional regulations upon our activities whichmight adversely affect our results of operations, financial condition, orliquidity.

 

***Certificates of Need***

 

Certain statesrequire companies providing health care services to obtain a certificate ofneed issued by a state health-planning agency. Where required by law, we have obtained certificates of need from thosestates. There can be no assurance that we will be able to obtain anycertificates of need which may be required in the future if we expand the scopeof our services or if state laws change to impose additional certificate ofneed requirements, and any attempt to obtain additional certificates of needwill cause us to incur certain expenses.

 

***Other Regulations***

 

A series of lawsand regulations dating back to the Omnibus Budget Reconciliation Act of 1987 (“OBRA1987”) and through the Medicare Prescription Drug Bill of 2003 have beenenacted and apply to us. Changes in applicable laws and regulations haveoccurred from time to time since OBRA 1987 including reimbursement reductionsand changes to payment rules.  Changesare also expected to occur continuously for the foreseeable future.

 

As a provider ofservices under Medicare and Medicaid programs, we are subject to the Medicareand Medicaid anti-kickback statute, also known as the “fraud and abuse law.”This law prohibits any bribe, kickback, rebate or remuneration of any kind inreturn for, or as an inducement for, the referral of Medicare or Medicaid patients.We may also be affected by the Federal physician self-referral prohibition,known as the “Stark” law, which, with certain exceptions, prohibits physiciansfrom referring patients to entities in which they have a financial interest orfrom which they receive financial benefit. Many states in which we operate have adopted similar self-referral laws,as well as laws that prohibit certain direct or indirect payments orfee-splitting arrangements between health care providers, if such arrangementsare designed to induce or to encourage the referral of patients to a particularprovider.

 

Health care is anarea of extensive and dynamic regulatory change. Changes in laws or regulationsor new interpretations of existing laws or regulations can have a dramaticeffect on our permissible activities, the relative costs associated with ourdoing business, and the amount and availability of reimbursement we receivefrom government and third-party payors. Furthermore, we will be required tocomply with applicable regulations in each new state in which we desire toprovide services.

 

As a result of theHealth Insurance Portability and Accountability Act of 1996 and otherlegislative and administrative initiatives, Federal and state enforcementefforts against the health care industry have increased dramatically,subjecting all health care providers to increased risk of scrutiny andincreased compliance costs.

 

We are subject toroutine and periodic surveys, audits and investigations by various governmentalagencies.  We believe that we are inmaterial compliance with applicable laws. However, we are unable to predictwhat additional government regulations, if any, affecting our business may beenacted in the future, how existing or future laws

 

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and regulationsmight be interpreted or whether we will be able to comply with such laws andregulations either in the markets in which we presently conduct, or wish tocommence, business.

 

**InsurancePrograms and Costs**

 

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

 

Malpracticeand general patient liability claims for incidents which may give rise tolitigation have been asserted against us by various claimants.  The claims are in various stages ofprocessing and some may ultimately be brought to trial.  We are aware of incidents that have occurredthrough December 31, 2009 that may result in the assertion of additionalclaims.  We currently carry professionaland general liability insurance coverage for this exposure with nodeductible.  Prior to April 1, 2007we carried coverage with a deductible per claim of $500,000.

 

Totalpremiums, excluding our exposure to claims and deductibles, for all ournon-health insurance programs were approximately $1,263,000 for the contractyear ending March 31, 2009.  On April 1,2009, we completed our renewal for the contract year ending March 31, 2010with total estimated premiums of $1,316,000.

 

Werecord estimated liabilities for our insurance programs based on informationprovided by the third-party plan administrators, historical claims experience,the life cycle of claims, expected costs of claims incurred but not paid, andexpected costs to settle unpaid claims. We monitor our estimated insurance-related liabilities on a monthlybasis.  As facts change, it may becomenecessary to make adjustments that could be material to our results ofoperations and financial condition.

 

We believe thatour present insurance coverage is adequate. As part of our on-going risk management and cost control efforts, wecontinually seek alternatives that might provide a different balance of costand risk, including potentially accepting additional self-insurance risk inlieu of higher premium costs.

 

**Executive Officers**

 

See Part III, Item 10 of this Form 10-Kfor information about the company’s executive officers.

 

**Employees and Labor Relations**

 

As of December 31,2009 we had approximately 6,123 employees. None of our employees are represented by a labor organization.  We believe our relationship with ouremployees is satisfactory.

 

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**ITEM1A.  RISK FACTORS**

 

***Described below and elsewhere in this report are risks,uncertainties and other factors that can adversely affect our business, resultsof operations, cash flow, liquidity or financial condition.  Investing in our common stock involves adegree of risk. You should consider carefully the following risks, as well asother information in this filing and the incorporated documents before investingin our common stock.***

 

**Risks Related to Our Industry**

 

***Health Care Reform Efforts Currently Underway in Congress***

 

TheUS Congress has been pursuing a comprehensive reform of the US health caresystem since early 2009.  In late 2009,the US House of Representatives and the Senate passed separate measures eitherof which, if enacted, would reduce home health reimbursement rates.  Due to recent political developments it isunclear if any attempts will be made to reconcile differences in the two bills,to pass either of the two bills or to start anew with new legislation, orwhether comprehensive reform efforts will be abandoned entirely.  On February 22, 2010, the Presidentannounced his own proposal which we believe mirrors the Senate plan as itrelates to home healthcare. Should such legislation ultimately be passed byboth houses of Congress it would then be submitted to the President for hissignature before becoming law.  In theevent that comprehensive health care reform is not passed into law, the Congressand the President could still enact legislation that could impact the Company’sreimbursement rates.

 

Therecan be no assurance that comprehensive health care reform, or other legislationimpacting the Company’s reimbursement rates, in any form will or will not bepassed into law.  Accordingly, theCompany is unable to predict what impact the ultimate Federal budget or theCongress’ consideration of comprehensive health care reform or reimbursementrates might have on our financial condition, our results of operations or therealizability of the carrying amount of our assets, in particular intangibleassets including goodwill.  We may beunable to take actions to mitigate any of whatever negative reimbursement changesmight ultimately be enacted.  The reimbursementchanges ultimately enacted could have a material and adverse effect on ourliquidity, results of operations and financial position.  Further provisions of any ultimate healthcare reform may impact the health insurance benefits we currently offer or maybe required to offer our employees which could also have a material and adverseeffect on our liquidity, results of operations and financial position.

 

Atthis point, we are unable to predict what actions Congress may take in passinghealth care reform or the changes to the Federal budget for 2010.  The implications on the potential budget for2011, which would actually be passed some time during 2010, are even lesspredictable.

 

Wecan provide you with no assurance that the ultimate outcome of health carereform efforts and/or the Federal budget and resulting Medicare reimbursementrates will not have a material adverse effect on our liquidity, our results ofoperation, the realizability of the carrying amounts of our intangible assetsincluding goodwill or our financial condition. Further, we are unable to predict what effect, if any, such materialadverse effect, if it were to occur, might have on our ability to continue tocomply with the financial covenants of our revolving credit facility and ourability to continue to access debt capital through that facility.

 

***The current crisis in world-wide economies and credit and financialmarkets may adversely affect our future results of operations and financialcondition, as well as our ability to access credit and capital.***

 

Aswidely reported, global capital and credit markets have been experiencingextreme disruptions and turmoil for over 12 months, including the bankruptcy,failure, collapse or sale of various financial institutions and an unprecedentedlevel of intervention from the United States federal government. This hasresulted in severely diminished liquidity and credit availability, declines inconsumer confidence, declines in economic growth, increases in unemploymentrates, and uncertainty about economic stability. There can be no assurance thatthere will not be further deterioration in credit and financial markets andconfidence in economic conditions. While the

 

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ultimateoutcome of these events cannot be predicted, it may have a material adverseaffect on the Company. The current crisis may cause budget deficits or otherreductions in reimbursement by Medicare, Medicaid and other third-party payorswhich may result in decreased revenue growth and a decrease in ourprofitability. Our contractors and suppliers may also be negatively impacted bythese conditions and our ability to provide patient care at a lower cost maydiminish and reduce our profitability. The continuing disruption in the creditand capital markets may restrict our access to capital. As a result, ourability to incur additional indebtedness to fund operations and acquisitions maybe constrained. If the economic conditions continue to deteriorate or do notimprove, our results of operations or financial condition could be materiallyand adversely affected.

 

***Our profitability depends principally onthe level of government-mandated payment rates. Reductions in rates, or rateincreases that do not cover cost increases, may adversely affect our business.***

 

Wegenerally receive fixed payments from Medicare for our services based on thelevel of care that we provide patients. Consequently, our profitability largelydepends upon our ability to manage the cost of providing services. Althoughcurrent Medicare legislation provides for an annual adjustment of the variouspayment rates based on the increase or decrease of the medical care expenditurecategory of the Consumer Price Index, these Medicare payment rate increases maybe less than actual inflation or could be eliminated or reduced in any givenyear.  Consequently, if our cost ofproviding services, which consists primarily of labor costs, is greater thanthe current Medicare payment rate, our profitability would be negativelyimpacted.

 

***If any of our agencies fail to comply withthe conditions of participation in the Medicare program, that agency could beterminated from the Medicare program, which would adversely affect our netpatient service revenue and profitability.***

 

Eachof our home care agencies must comply with the extensive conditions ofparticipation in the Medicare program. If any of our agencies fail to meet anyof the Medicare conditions of participation, that agency may receive a noticeof deficiency from the applicable state surveyor. If that agency then fails toinstitute a plan of correction to correct the deficiency within the correctionperiod provided by the state surveyor, that agency could be terminated from theMedicare program. Any termination of one or more of our home care agencies fromthe Medicare program for failure to satisfy the program’s conditions ofparticipation could adversely affect our net service revenue and profitability.

 

***We are subject to extensive governmentregulation, audits and investigations. Any changes to the laws and regulationsgoverning our business, or the interpretation and enforcement of those laws orregulations, could cause us to modify our operations and could negativelyimpact our operating results.***

 

Thefederal government and the states in which we operate regulate our industryextensively. The laws and regulations governing our operations, along with theterms of participation in various government programs, regulate how we dobusiness, the services we offer, and our interactions with patients and thepublic. These laws and regulations, and their interpretations, are subject tofrequent change. Changes in existing laws and regulations, or theirinterpretations, or the enactment of new laws or regulations could reduce ourprofitability by:

 

·                  increasing our liability;

·                  increasing our administrative and othercosts;

·                  increasing or decreasing mandated services;

·                  forcing us to restructure our relationshipswith referral sources and providers; or

·                  requiring us to implement additional ordifferent programs and systems.

 

Inaddition, we are subject to various routine and non-routine governmentalreviews, audits, and investigations. For example, we are in the process ofcomplying with a civil subpoena from the United States Department of Health andHuman Services Office of Inspector General we received in December 2009.  The subpoena seeks the production of variousbusiness records relating to our visiting nurse operations in Birmingham,Alabama, which we acquired in July 2006 and which generated approximately2% of our consolidated revenues in 2009. Due to the limited information we currently have about the nature andstatus of this matter and the preliminary posture of the request, we cannotpredict the timing or eventual outcome of this matter.

 

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Violationof the laws governing our operations, or changes in interpretations of thoselaws, could result in the imposition of fines, civil or criminal penalties, thetermination of our rights to participate in federal and state-sponsoredprograms, and the suspension or revocation of our licenses. If we becomesubject to material fines or if other sanctions or other corrective actions areimposed on us, we might suffer a substantial reduction in profitability.

 

***If we are unable to maintain relationshipswith existing patient referral sources or to establish new referral sources,our growth and profitability could be adversely affected.***

 

Oursuccess depends significantly on referrals from physicians, hospitals and otherpatient referral sources in the communities that our home care agencies serve,as well as on our ability to maintain good relationships with these referralsources. Our referral sources are not contractually obligated to refer homecare patients to us and may refer their patients to other providers. Our growthand profitability depend on our ability to establish and maintain close workingrelationships with these patient referral sources and to increase awareness andacceptance of the benefits of home care by our referral sources and their patients.We cannot assure you that we will be able to maintain our existing referralsource relationships or that we will be able to develop and maintain newrelationships in existing or new markets. Our loss of, or failure to maintain,existing relationships or our failure to develop new relationships couldadversely affect our ability to expand our operations and operate profitably.

 

***We are subject to federal and state lawsthat govern our financial relationships with physicians and other healthcareproviders, including potential or current referral sources.***

 

Weare required to comply with federal and state laws, generally referred to as “anti-kickbacklaws,” that prohibit certain direct and indirect payments or fee-splittingarrangements between healthcare providers that are designed to encourage thereferral of patients to a particular provider for medical services. In additionto enacting anti-kickback laws, some of the states in which we operate haveenacted laws prohibiting certain business relationships between physicians andother providers of healthcare services. We currently have contractualrelationships with certain physicians who provide consulting services to ourcompany. Many of these physicians are current or potential referral sources.Although we believe our physician consultant arrangements currently comply withstate and federal anti-kickback laws and state laws regulating relationshipsbetween healthcare providers, we cannot assure you that courts or regulatoryagencies will not interpret these laws in ways that will implicate ourphysician consultant arrangements. Violations of anti-kickback and similar lawscould lead to fines or sanctions that may have a material adverse effect on ouroperations.

 

***We may be subject to substantial malpracticeor other similar claims.***

 

Theservices we offer involve an inherent risk of professional liability andrelated substantial damage awards. On any given day, we have several hundrednurses and therapists and other direct care personnel driving to and from patients’homes where they deliver medical and other care. Due to the nature of ourbusiness, we and the caregivers who provide services on our behalf may be thesubject of medical malpractice claims. These caregivers could be considered ouragents, and, as a result, we could be held liable for their medical negligence.We cannot predict the effect that any claims of this nature, regardless oftheir ultimate outcome, could have on our business or reputation or on ourability to attract and retain patients and employees. We maintain malpracticeliability insurance and are responsible for amounts in excess of the limits ofour coverage.

 

***Delays in reimbursement may cause liquidityproblems.***

 

Ourbusiness is characterized by delays in reimbursement from the time we provideservices to the time we receive reimbursement or payment for these services. Ifwe have information system problems or issues that arise with Medicare, we mayencounter delays in our payment cycle. Such a timing delay may cause workingcapital shortages. Working capital management, including prompt and diligentbilling and collection, is an important factor in our results of operations andliquidity. We cannot assure you that system problems, Medicare issues orindustry trends will not extend our collection period, adversely impact ourworking capital, or that our working

 

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capitalmanagement procedures will successfully negate this risk.  There are often timing delays when attemptingto collect funds from Medicaid programs. We cannot assure you that delays inreceiving reimbursement or payments from these programs will not adverselyimpact our working capital.

 

***Our industry is highly competitive.***

 

Ourhome health care agencies compete with local and regional home health carecompanies, hospitals, nursing homes, and other businesses that provide homenursing services, some of which are large established companies that havesignificantly greater resources than we do. Our primary competition comes fromlocal companies in each of our markets, and these privately-owned orhospital-owned health care providers vary by region and market. We competebased on the availability of personnel; the quality, expertise, and value ofour services; and in select instances, on the price of our services. Increasedcompetition in the future from existing competitors or new entrants may limitour ability to maintain or increase our market share. We cannot assure you thatwe will be able to compete successfully against current or future competitorsor that competitive pressures will not have a material adverse impact on ourbusiness, financial condition, or results of operations.

 

Someof our existing and potential new competitors may enjoy greater namerecognition and greater financial, technical, and marketing resources than wedo. This may permit our competitors to devote greater resources than we can tothe development and promotion of services. These competitors may undertake morefar-reaching and effective marketing campaigns and may offer more attractiveopportunities to existing and potential employees and services to referralsources.

 

Weexpect our competitors to develop new strategic relationships with providers,referral sources, and payors, which could result in increased competition. Theintroduction of new and enhanced service offerings, in combination withindustry consolidation and the development of strategic relationships by ourcompetitors, could cause a decline in revenue or loss of market acceptance ofour services or make our services less attractive. Additionally, we competewith a number of non-profit organizations that can finance acquisitions andcapital expenditures on a tax-exempt basis or receive charitable contributionsthat are unavailable to us.

 

Weexpect that industry forces will continue to have an impact on our business andthat of our competitors. In recent years, the health care industry has undergonesignificant changes driven by efforts to reduce costs, and we expect these costcontainment measures to continue in the future. Frequent regulatory changes inour industry, including reductions in reimbursement rates and changes inservices covered, have increased competition among home health care providers.If we are unable to react competitively to new developments, our operatingresults may suffer.

 

***A shortage of qualified registered nursingstaff, physical therapists, occupational therapists and other caregivers couldadversely affect our ability to attract, train and retain qualified personneland could increase operating costs.***

 

Werely significantly on our ability to attract and retain caregivers who possessthe skills, experience, and licenses necessary to meet the requirements of ourpatients.  We compete for personnel withother providers of home nursing services. Our ability to attract and retain caregivers depends on several factors,including our ability to provide these caregivers with attractive assignmentsand competitive benefits and salaries. We cannot assure you that we will succeed in any of these areas.  In addition, there are occasional shortagesof qualified healthcare personnel in some of the markets in which weoperate.  As a result, we may face highercosts of attracting caregivers and providing them with attractive benefitpackages than we originally anticipated and, if that occurs, our profitabilitycould decline.  Finally, although this iscurrently not a significant factor in our existing markets, if we expand ouroperations into geographic areas where healthcare providers have historicallyunionized, we cannot assure you that the negotiation of collective bargainingagreements will not have a negative effect on our ability to timely andsuccessfully recruit qualified personnel. Generally, if we are unable to attract and retain caregivers, thequality of our services may decline, and we could lose patients and referralsources.

 

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**Risks Related to Our Business**

 

***We depend on Medicare for the largestportion of our revenues.***

 

Forthe years ended December 31, 2009, 2008 and 2007, we received 77%, 74% and68%, respectively, of our revenue from Medicare.  Further, the acquisitions completed by us in2009, 2008 and 2007 substantially increase our dependence on Medicarereimbursement.  Reductions in Medicarereimbursement could have an adverse impact on our profitability. Suchreductions in payments to us could be caused by:

 

·                  administrative or legislative changes to thebase episode rate;

·                  the elimination or reduction of annual rateincreases based on medical inflation;

·                  the imposition by Medicare of co-payments orother mechanisms shifting responsibility for a portion of payment tobeneficiaries;

·                  adjustments to the relative components of thewage index;

·                  changes to our case mix or therapythresholds; or

·                  other adverse changes to the way we are paidfor delivering our services.

 

Ournon-Medicare revenues and profitability also are affected by the continuingefforts of third-party payors to contain or reduce the costs of health care bylowering reimbursement rates, narrowing the scope of covered services,increasing case management review of services, and negotiating reduced contractpricing.  Any changes in reimbursementlevels from these third-party payor sources and any changes in applicablegovernment regulations could have a material adverse effect on our revenues andprofitability.  We can provide noassurance that we will continue to maintain the current payor or revenue mix.

 

Our reliance on government sponsored reimbursement programs such as Medicare and Medicaid makes us vulnerable to possible legislative and administrative regulations and budget cut-backs that could adversely affect the number of persons eligible for such programs, the amount of allowed reimbursements or other aspects of the programs, any of which could materially affect us.  In addition, loss of certification or qualification under Medicare or Medicaid programs could materially affect our ability to effectively market our services.

 

***We have a significant dependence on state Medicaid reimbursement programs******.***

 

For the year ended December 31, 2009, approximately 7.5%, 4.4% and 3.1% of our revenues were generated from Medicaid reimbursement programs in the states of Connecticut, Ohio and Kentucky, respectively.

 

Approximately 17% of our 2009 revenues were derived from state Medicaid and other government programs, many of which currently face significant budget issues. The financial condition of the Medicaid programs in each of the states in which we operate is cyclical and many may be expected from time to time to take actions or evaluate taking actions to control the rate of growth of Medicaid expenditures. Among these actions are the following:

 

·        redefining eligibility standards forMedicaid coverage

·        redefining coverage criteria for homeand community based care services

·        slowing payments to providers byincreasing the minimum time in which payments are made

·        limiting reimbursement rate increases

·        increased utilization of self-directedcare alternatives

·        shifting beneficiaries from traditionalcoverage to Medicaid managed care providers

·        changing regulations under whichproviders must operate

 

States may be expected to address these issues because the number of Medicaid beneficiaries and their related expenditures are growing at a faster rate than the government’s revenue. Medicaid is consuming a greater percentage of states’ budgets.  This issue is exacerbated when revenues slow in a slowing economy. We believe that these financial issues are cyclical in nature rather than indicative of the long-term prospect for Medicaid funding of health care services. Additionally, we believe our services offer the lowest cost alternative to institutional care and are a part of the solution to the states’ Medicaid financing problems. It is possible, however, that the actions taken by the state Medicaid programs in the future could have a significant unfavorable impact on our results of operations, financial condition and liquidity.

 

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***Migration of our Medicare beneficiarypatients to Medicare managed care providers could negatively impact ouroperating results.***

 

Historically,we have generated a substantial portion of our revenue from the Medicarefee-for-service market. Under the Medicare Prescription Drug Improvement andModernization Act of December 2003 (“MMA”), however, the United StatesCongress allocated significant additional funds and other incentives toMedicare managed care providers in order to promote greater participation inthose plans by Medicare beneficiaries. If these increased funding levels have theintended result, the size of the potential Medicare fee-for-service marketcould decline, thereby reducing the size of our potential patient population,which could cause our operating results to suffer.

 

***Our growth strategy depends on our abilityto manage growing and changing operations.***

 

Ourbusiness plan calls for significant growth in our business over the nextseveral years.  This growth will placesignificant demands on our management systems, internal controls, and financialand professional resources. In addition, we will need to further develop ourfinancial controls and reporting systems to accommodate future growth. Thiscould require us to incur expenses for hiring additional qualified personnel,retaining professionals to assist in developing the appropriate controlsystems, and expanding our information technology infrastructure. Our inabilityto manage growth effectively could have a material adverse effect on ourfinancial results.

 

***Our growth strategy depends on our abilityto develop and to acquire additional agencies on favorable terms and tointegrate and operate these agencies effectively. If we are unable to do so,our future growth and operating results could be negatively impacted.***

 

Development*.*We expect tocontinue to open agencies in our existing and new markets. Our new agencygrowth, however, will depend on several factors, including our ability to:

 

·                  obtain locations for agencies in marketswhere need exists;

·                  identify and hire a sufficient number ofsales personnel and appropriately trained home care and other health careprofessionals;

·                  obtain adequate financing to fund growth; and

·                  operate successfully under applicablegovernment regulations.

 

Acquisitions*.*We are focusingsignificant time and resources on the acquisition of home healthcare providers,or of certain of their assets, in targeted markets. We may be unable toidentify, negotiate, and complete suitable acquisition opportunities onreasonable terms. We may incur future liabilities related to acquisitions.Should any of the following problems, or others, occur as a result of ouracquisition strategy, the impact could be material:

 

·                  difficulties integrating personnel fromacquired entities and other corporate cultures into our business;

·                  difficulties integrating information systems;

·                  the potential loss of key employees orreferral sources of acquired companies or a reduction in patient referrals byhospitals from which we have acquired home health care agencies;

·                  the assumption of liabilities and exposure toundisclosed liabilities of acquired companies;

·                  the acquisition of an agency with undisclosedcompliance problems;

·                  the diversion of management attention fromexisting operations;

·                  difficulties in recouping partial episodepayments and other types of misdirected payments for services from the previousowners; or

·                  an unsuccessful claim for indemnificationrights from previous owners for acts or omissions arising prior to the date ofacquisition.

 

EffectiveJanuary 1, 2010, the Centers for Medicare and Medicaid Services (CMS)implemented a prohibition of the sale or transfer of the Medicare ProviderAgreement for any Medicare-certified home health agency that has been inexistence for less than 36 months or that has undergone a change of ownershipin the last 36 months.  This limitationmay reduce the number of home health agencies that otherwise would have beenavailable for acquisition and may limit our ability to successfully pursue ouracquisition strategy.

 

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***We may require additional capital to pursueour acquisition strategy.***

 

AtDecember 31, 2009, we had cash and cash equivalents of approximately $19.4million and additional borrowing capacity of approximately $69.1 million.  Based on our current plan of operations,including acquisitions, we cannot assure you that this amount will besufficient to support our current growth strategies.  We cannot readily predict the timing, size,and success of our acquisition efforts and the associated capitalcommitments.  If we do not have sufficientcash resources, our growth could be limited unless we obtain additional equityor debt financing.  In December 2008,we filed a $150.0 million shelf registration statement with the availabilityfor the issuance of any combination of common stock, preferred stock, warrantsand debt securities.  The registrationstatement became effective December 12, 2008, and on August 5, 2009,we entered into a Distribution Agreement to offer and sell from time to time upto 1,600,000 shares of common stock having an aggregate offering price of up to$50 million through a distribution agent. In 2009, we issued 967,556 of ourshares of common stock and as of December 31, 2009, a maximum of 632,444shares remain available for sale subject to a maximum additional value limit ofapproximately $22 million.  At somefuture point we may elect to issue additional equity or debt securities inconjunction with raising capital or completing an acquisition.  We cannot assure you that such issuances willnot be dilutive to existing shareholders.

 

***Our business depends on our informationsystems. Our inability to effectively integrate, manage, and keep secure ourinformation systems could disrupt our operations.***

 

Ourbusiness depends on effective and secure information systems that assist us in,among other things, monitoring utilization and other cost factors, processingclaims, reporting financial results, measuring outcomes and quality of care,managing regulatory compliance controls, and maintaining operationalefficiencies.  These systems includesoftware developed in-house and systems provided by external contractors andother service providers.  To the extentthat these external contractors or other service providers become insolvent orfail to support the software or systems, our operations could be negativelyaffected.  Our agencies also depend uponour information systems for accounting, billing, collections, risk management,quality assurance, payroll, and other information.  If we experience a reduction in theperformance, reliability, or availability of our information systems, ouroperations and ability to produce timely and accurate reports could beadversely affected.

 

Ourinformation systems and applications require continual maintenance, upgrading,and enhancement to meet our operational needs. Our acquisition activity requires transitions and integration of variousinformation systems.  We regularlyupgrade and expand our information systems’ capabilities.  If we experience difficulties with thetransition and integration of information systems or are unable to implement,maintain, or expand our systems properly, we could suffer from, among otherthings, operational disruptions, regulatory problems, and increases inadministrative expenses.

 

Ourbusiness requires the secure transmission of confidential information overpublic networks.  Advances in computercapabilities, new discoveries in the field of cryptography or other events ordevelopments could result in compromises or breaches of our security systemsand patient data stored in our information systems.  Anyone who circumvents our security measurescould misappropriate our confidential information or cause interruptions in ourservices or operations.  The Internet isa public network, and data is sent over this network from many sources.  In the past, computer viruses or softwareprograms that disable or impair computers have been distributed and haverapidly spread over the Internet.  Computerviruses could be introduced into our systems, or those of our providers orregulators, which could disrupt our operations or make our systems inaccessibleto our providers or regulators.  We maybe required to expend significant capital and other resources to protectagainst the threat of security breaches or to alleviate problems caused bybreaches.  Our security measures may beinadequate to prevent security breaches, and our business operations would benegatively impacted by cancellation of contracts and loss of patients ifsecurity breaches are not prevented.

 

Further,our information systems are vulnerable to damage or interruption from fire,flood, natural disaster, power loss, telecommunications failure, break-ins andsimilar events.  A failure to restore ourinformation systems after the occurrence of any of these events could have amaterial adverse effect on our business, financial condition and results ofoperations.  Because of the confidentialhealth information we store and transmit, loss of electronically-

 

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storedinformation for any reason could expose us to a risk of regulatory action,litigation, possible liability and loss.

 

***Our clinical software system has beendeveloped in-house. Failure of, or problems with, our system could harm ourbusiness and operating results.***

 

Wehave developed and utilize a proprietary clinical software system to collectassessment data, log patient visits, generate medical orders, and monitor treatmentsand outcomes in accordance with established medical standards.  The system integrates billing and collectionsfunctionality as well as accounting, human resource, payroll, and employeebenefits programs provided by third parties. Problems with, or the failure of, our technology and systems couldnegatively impact data capture, billing, collections, and management andreporting capabilities.  Any suchproblems or failures could adversely affect our operations and reputation,result in significant costs to us, and impair our ability to provide ourservices in the future.  The costsincurred in correcting any errors or problems may be substantial and couldadversely affect our profitability.

 

***We depend on outside software providers.***

 

Wedepend on the proper functioning and availability of our information systems inoperating our business, some of which are provided by outside softwareproviders.  These information systems andapplications require continual maintenance, upgrading, and enhancement to meetour operational needs.  If our providersare unable to maintain or expand our information systems properly, we couldsuffer from operational disruptions and an increase in administrative expenses,among other things.

 

***Our insurance liability coverage may not besufficient for our business needs.***

 

We bear significant insurance risk under our large-deductible workers’compensation insurance program and our self-insured employee healthprogram.  Under our workers’ compensationinsurance program, we bear risk up to $400,000 per incident. We purchasestop-loss insurance for our employee health plan that places a specific limit,generally $100,000, on our exposure for any individual covered life.  However, we cannot assure you that claimswill not be made in the future in excess of the limits of such insurance, ifany, nor can we assure you that any such claims, if successful and in excess ofsuch limits, will not have a material adverse effect on our ability to conductbusiness or on our assets.  Our insurancecoverage also includes fire, property damage, and general liability withvarying limits.  Although we maintaininsurance consistent with industry practice, we cannot assure you that theinsurance we maintain will satisfy claims made against us.  In addition, as a result of operating in thehome healthcare industry, our business entails an inherent risk of claims,losses and potential lawsuits alleging employee accidents that may occur in apatient’s home.  Finally, we cannotassure you that insurance coverage will continue to be available to us atcommercially reasonable rates, in adequate amounts or on satisfactoryterms.  Any claims made against us,regardless of their merit or eventual outcome, could damage our reputation andbusiness.

 

***We have established reserves for Medicareand Medicaid liabilities that may be payable by us in the future. Theseliabilities may be subject to audit or further review, and we may oweadditional amounts beyond what we expect and have reserved.***

 

The Company is paid for its services primarily by Federal and statethird-party reimbursement programs, commercial insurance companies, andpatients. Revenues are recorded at established rates in the period during whichthe services are rendered.  Appropriateallowances to give recognition to third party payment arrangements are recordedwhen the services are rendered.

 

Lawsand regulations governing the Medicare and Medicaid programs are extremelycomplex and subject to interpretation. It is common for issues to arise related to: 1) medical coding,particularly with respect to Medicare, 2) patient eligibility, particularlyrelated to Medicaid; and 3) other reasons unrelated to credit risk, all ofwhich may result in adjustments to recorded revenue amounts.  Management continuously evaluates thepotential for revenue adjustments and when appropriate provides allowances forlosses based upon the best available information.  There is at least a reasonable possibilitythat recorded estimates could change by material amounts in the near term.

 

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***We depend on the services of our executiveofficers and other key employees.***

 

Oursuccess depends upon the continued employment of certain members of our seniormanagement team, including our Chairman and Chief Executive Officer, William B.Yarmuth, and our other named executive officers.  We also depend upon the continued employmentof the individuals that manage several of our key functional areas, includingoperations, business development, accounting, finance, human resources,marketing, information systems, contracting and compliance.  The departure of any member of our seniormanagement team may materially adversely affect our operations.

 

***Our operations could be affected by naturaldisasters.***

 

Asubstantial number of our agencies are located in Florida, increasing ourexposure to hurricanes and other natural disasters.  The occurrence of natural disasters in themarkets in which we operate could not only affect the day-to-day operations ofour agencies, but also could disrupt our relationships with patients, employeesand referral sources located in the affected areas.  In addition, any episode of care that is notcompleted due to the impact of a natural disaster will generally result inlower revenue for the episode.  We cannotassure you that hurricanes or other natural disasters will not have a materialadverse impact on our business, financial condition or results of operations inthe future.

 

**Risks Related to Ownership of Our Common Stock**

 

***The price of our common stock may bevolatile and this may adversely affect our stockholders.***

 

Theprice at which our common stock trades may be volatile. The stock market hasfrom time to time experienced significant price and volume fluctuations thathave affected the market prices of securities, particularly securities ofhealth care companies. The market price of our common stock may be influencedby many factors, including:

 

·                  our operating and financial performance;

·                  variances in our quarterly financial resultscompared to expectations;

·                  the depth and liquidity of the market for ourcommon stock;

·                  future sales of common stock or theperception that sales could occur;

·                  investor perception of our business and ourprospects;

·                  developments relating to litigation orgovernmental investigations;

·                  changes or proposed changes in health carelaws or regulations or enforcement of these laws and regulations, orannouncements relating to these matters; or

·                  general economic and stock market conditions

 

Inaddition, the stock market in general has experienced price and volumefluctuations that have often been unrelated or disproportionate to theoperating performance of health care provider companies. These broad market andindustry factors may materially reduce the market price of our common stock,regardless of our operating performance. In the past, securities class-actionlitigation has often been brought against companies following periods ofvolatility in the market price of their respective securities. We may becomeinvolved in this type of litigation in the future. Litigation of this type isoften expensive to defend and may divert our management team’s attention aswell as resources from the operation of our business.

 

***Sales of substantial amounts of our commonstock, or the availability of those shares for future sale, could adverselyaffect our stock price and limit our ability to raise capital.***

 

AtDecember 31, 2009, 9,150,672 shares of our common stock wereoutstanding.  In 2007, we established the2007 Stock and Incentive Compensation Plan for the benefit of employees anddirectors providing for the issuance of up to 500,000 shares of commonstock.  Moreover, as of December 31,2009, 695,938 shares of our common stock remained reserved for issuancepursuant to our incentive compensation plans and 300,000 shares of our commonstock reserved for issuance pursuant to our employee stock purchase plan.  The market price of our common stock coulddecline as a result of sales of substantial amounts of our common stock to thepublic or the perception that substantial sales could occur.  These sales also may make it more difficultfor us to sell common stock in the future to raise capital.

 

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***We do not anticipate paying dividends onour common stock in the foreseeable future, and you should not expect toreceive dividends on shares of our common stock.***

 

Wedo not pay dividends and intend to retain all future earnings to finance thecontinued growth and development of our business.  In addition, we do not anticipate paying cashdividends on our common stock in the foreseeable future.  Any future payment of cash dividends willdepend upon our financial condition, capital requirements, earnings, and otherfactors deemed relevant by our board of directors.

 

***Our Board of Directors may useanti-takeover provisions or issue stock to discourage control contests.***

 

Wehave implemented anti-takeover provisions or provisions that could have ananti-takeover effect, including advance notice requirements for directornominations and stockholder proposals. These provisions, and others that theBoard of Directors may adopt hereafter, may discourage offers to acquire us andmay permit our Board of Directors to choose not to entertain offers to purchaseus, even if such offers include a substantial premium to the market price ofour stock.   Therefore, our stockholdersmay be deprived of opportunities to profit from a sale of control.

 

**ITEM 1B.   UNRESOLVED STAFF COMMENTS**

 

None.

 

**ITEM 2.   PROPERTIES**

 

Our executive offices are located in Louisville, Kentucky in approximately25,000 square feet of space leased from an unaffiliated party.

 

We have 137 real estate leases ranging from approximately 100 to 35,000square feet of space in their respective locations.  See “Item 1. Business — Operating Segments”and Note 9 to our audited consolidated financial statements.  We believe that our facilities are adequateto meet our current needs, and that additional or substitute facilities will beavailable if needed.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

From time to time, we are subject to various legal actions arising inthe ordinary course of our business, including claims for damages for personalinjuries.  In our opinion the ultimateresolution of any of these pending claims and legal proceedings will not have amaterial effect on our financial position or results of operations.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of our security holders during thefourth quarter of fiscal 2009.

 

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** **

**PART II**

 

**ITEM 5.  MARKET FOR THEREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES**

 

Our common stock is traded on the NASDAQ Global Select market under thesymbol “AFAM”  Set forth below are thehigh and low sale prices for the common stock for the periods indicated asreported by NASDAQ:

 

**ClosingCommon Stock Prices**

 
| **Quarter Ended:**      | ** ** | **High** | ** ** | **Low** | ** ** |
|-------------------------|------------|----------|------------|---------|------------|
| March 31, 2008     |       | $        | 22.48      |    | $          | 18.67 |   |
| June 30, 2008      |       | 27.07    |       | 17.00   |       |
| September 30, 2008 |       | 45.87    |       | 25.77   |       |
| December 31, 2008  |       | 51.47    |       | 33.11   |       |
| March 31, 2009     |       | 47.32    |       | 15.10   |       |
| June 30, 2009      |       | 31.61    |       | 20.40   |       |
| September 30, 2009 |       | 31.82    |       | 23.46   |       |
| December 31, 2009  |       | 41.84    |       | 29.03   |       |
|                         |            |          |            |         |            |  |  |

 

On February 23, 2010, the last reported saleprice for the common stock reported by NASDAQ was $36.68 and there wereapproximately 374 holders of record of our common stock.  No cash dividends have been paid by us duringthe periods indicated above.  We do notpresently intend to pay dividends on our common stock and will retain ourearnings for future operations and the growth of our business.

 

**ITEM6.  SELECTED FINANCIAL DATA**

 

The followingtable sets forth selected financial information derived from the consolidated financialstatements of the Company for the periods and at the dates indicated.  The information is qualified in its entiretyby and should be read in conjunction with the consolidated financial statementsand related notes included elsewhere in this and prior year Form 10-Ks.

 

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| ** **                               | ** ** | **Year Ended December 31,** | ** ** |
|------------------------------------------|------------|----------------------------------|------------|
| **(In thousands except per share data)** | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Results of operations data:**          | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net  revenues                            |       | $                                | 297,849    |   | $ | 211,517 |   | $ | 130,907 |   | $ | 88,706 |   | $ | 71,980 |   |
| Income(loss)  from                       |       |                             |       |   |   |   |   |   |   |   |   |
| Continuing  operations                   |       | $                                | 24,689     |   | $ | 16,397 |   | $ | 7,789 |   | $ | 4,263 |   | $ | 2,873 |   |
| Discontinued  operations                 |       | (125                             | )          | (104 | ) | (185 | ) | (24 | ) | 4,995 |   |
| Net  income                              |       | $                                | 24,564     |   | $ | 16,293 |   | $ | 7,604 |   | $ | 4,239 |   | $ | 7,868 |   |
|                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Per  share:                              |       |                             |       |   |   |   |   |   |   |   |   |
| Basic:                                   |       |                             |       |   |   |   |   |   |   |   |   |
| Number  of shares                        |       | 8,372                            |       | 7,369 |   | 5,436 |   | 4,854 |   | 4,675 |   |
| Income  (loss) from:                     |       |                             |       |   |   |   |   |   |   |   |   |
| Continuing  operations                   |       | $                                | 2.95       |   | $ | 2.23 |   | $ | 1.43 |   | $ | 0.88 |   | $ | 0.61 |   |
| Discontinued  operations                 |       | (0.02                            | )          | (0.02 | ) | (0.03 | ) | (0.01 | ) | 1.07 |   |
| Net  income                              |       | $                                | 2.93       |   | $ | 2.21 |   | $ | 1.40 |   | $ | 0.87 |   | $ | 1.68 |   |
|                                     |       |                             |       |   |   |   |   |   |   |   |   |
| Diluted:                                 |       |                             |       |   |   |   |   |   |   |   |   |
| Number  of shares                        |       | 8,589                            |       | 7,572 |   | 5,600 |   | 5,327 |   | 5,219 |   |
| Income  (loss) from:                     |       |                             |       |   |   |   |   |   |   |   |   |
| Continuing  operations                   |       | $                                | 2.87       |   | $ | 2.17 |   | $ | 1.39 |   | $ | 0.80 |   | $ | 0.55 |   |
| Discontinued  operations                 |       | (0.01                            | )          | (0.01 | ) | (0.03 | ) | (0.00 | ) | 0.96 |   |
| Net  income                              |       | $                                | 2.86       |   | $ | 2.16 |   | $ | 1.36 |   | $ | 0.80 |   | $ | 1.51 |   |

 

----

(1) All shareand per share information has been adjusted to reflect a 2-for-1 common stocksplit completed in January 2007.

 
| ** **                 | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| **Balance sheet data**     | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Working  capital           |       | $                                | 39,568     |   | $ | 11,082 |   | $ | 5,505 |   | $ | 7,163 |   | $ | 10,553 |   |
| Total  assets              |       | 183,389                          |       | 157,097 |   | 67,360 |   | 53,395 |   | 30,543 |   |
| Long  term liabilities     |       | 9,140                            |       | 29,902 |   | 17,552 |   | 13,520 |   | 1,568 |   |
| Total  liabilities         |       | 34,412                           |       | 62,314 |   | 32,518 |   | 25,656 |   | 10,408 |   |
| Shareholders’  equity |       | 148,977                          |       | 94,783 |   | 34,842 |   | 27,740 |   | 20,135 |   |
|                            |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**OVERVIEW**

 

The Company has two reportable segments,Visiting Nurse (VN) and Personal Care (PC). Reportable segments have been identified based upon how management hasorganized the business by services provided to customers and the criteria inASC Topic 280, Segment Reporting (formerly SFAS No. 131).

 

Our VN segment provides skilled medicalservices in patients’ homes largely to enable recipients to reduce or avoidperiods of hospitalization and/or nursing home care.  VN Medicare revenues are generated on a perepisode basis rather than a fee per visit or an hourly basis.  90% of the VN segment revenues are generatedfrom the Medicare program while the balance is generated from Medicaid andprivate insurance programs.

 

Our PC segment services are also provided inpatients’ homes.  These services(generally provided by paraprofessional staff such as home health aides) aregenerally of a custodial rather than skilled nature.  PC revenues are typically generated on anhourly basis.  67% of the PC segmentrevenues are generated from Medicaid and other government programs while thebalance is generated from insurance programs and private pay patients.

 

**Our Viewon Reimbursement and Diversification of Risk**

 

Our Company ishighly dependent on government reimbursement programs which pay for themajority of the services we provide to our patients.  Reimbursement under these programs, primarilyMedicare and Medicaid, is subject to frequent changes as policy makers balancetheir own needs to meet the health care needs of constituents while also meetingtheir fiscal objectives.

 

We believe that animportant key to our historical success and to our future success is ourability to adapt our operations to meet changes in reimbursement as theyoccur.  One important way in which wehave achieved this adaptability in the past, and in which we plan to achieve itin the future, is to maintain some level of diversification in our businessmix.

 

The execution ofour business plan emphasizes our VN operations. Our PC operations will help usmaintain a level of diversification of reimbursement risk that we believe isappropriate.

 

**OurBusiness Plan**

 

Our future successdepends on our ability to execute our business plan.  Over the next three to five years we will tryto accomplish the following:

 

·                  Generate meaningful same store sales growth through the focusedprovision of high quality services and attending to the needs of our patients;

 

·                  Expand the significance of our Visiting Nurse, Medicare-based, homehealth services by selectively acquiring other quality providers and throughthe startup of new agencies; and

 

·                  Expand our capital base through both earnings performance and byseeking additional capital investments in our Company.

 

**HealthCare Reform Efforts Currently Underway in Congress**

 

TheUS Congress has been pursuing a comprehensive reform of the US health caresystem since early 2009.  In late 2009,the US House of Representatives and the Senate passed separate measures eitherof which, if enacted, would reduce home health reimbursement rates.  Due to recent political developments it isunclear if any attempts will be made to reconcile differences in the two bills,to pass either of the two bills or to start anew with new legislation, orwhether comprehensive reform efforts will be abandoned entirely.  On February 22, 2010, the Presidentannounced his own proposal which we believe mirrors the Senate plan as it 

 

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relatesto home healthcare.  Should such legislationultimately be passed by both houses of Congress it would then be submitted tothe President for his signature before becoming law.  In the event that comprehensive health carereform is not passed into law, the Congress and the President could still enactlegislation that could impact the Company’s reimbursement rates.

 

Independentof these legislative developments, on January 1, 2010 the Centers forMedicare and Medicaid Services (CMS) implemented final regulations for Medicarereimbursement for home health services which increased our Medicarereimbursement rates for 2010 by about 1.75%. Unless prospectively orretrospectively changed by legislative action, these new rates will remain ineffect for the balance of 2010.

 

Therecan be no assurance that comprehensive health care reform, or other legislationimpacting the Company’s reimbursement rates, in any form will or will not bepassed into law.  Accordingly, theCompany is unable to predict what impact the ultimate Federal budget or theCongress’ consideration of comprehensive health care reform, or reimbursementrates, might have on our financial condition, our results of operations or therealizability of the carrying amount of our assets, in particular intangibleassets including goodwill.  We may beunable to take actions to mitigate any of whatever negative reimbursementchanges might ultimately be enacted.  Thereimbursement changes ultimately enacted could have a material and adverseeffect on our liquidity, results of operations and financial position.  Further provisions of any ultimate healthcare reform may impact the health insurance benefits we currently offer or maybe required to offer our employees which could also have a material and adverseeffect on our liquidity, results of operations and financial position.

 

Itis reasonable to expect that the proposed changes, if enacted, might have amore immediate and negative impact on those providers generating lower marginsthan us, with more leverage relative to earnings than us, with less capitalresources than us, or with less ability to adapt their operations.  Certain aspects of the proposed legislationappear to align with the 2009 report of the Medicare Payment AdvisoryCommission (MedPac).  MedPac suggests, inconnection with its recommendation for a rebasing or recalculation of homehealth reimbursement rates for 2011, that such change may result in someagencies exiting Medicare.  Based on thisand our own interpretation of the potential implications of such a rebasing webelieve that the proposal, if enacted, may result in a contraction of thenumber of home health providers.  In theevent of such a contraction in the number of providers, we believe thesurviving providers may benefit from a higher rate of admissions growth than wouldhave otherwise occurred.  Those survivingproviders may earn incremental margins on those higher admissions that mayserve to offset a portion of the rate reduction from the Medicare program.  However, there can be no assurance that wewill be successful in attracting such higher admissions.

 

Itis also reasonable to expect that the proposed rate cuts, if enacted, willpresent additional opportunities for us to make acquisitions of other providersat valuations and on terms that are attractive to us and enable us to spreadour segment and unallocated corporate overhead expenses across a largerbusiness base.  However there can be noassurance that we will be successful in making such acquisitions.

 

Atthis point, we are unable to predict what actions Congress may take in passinghealth care reform or changes to the Federal budget for 2010.  The implications on the potential budget for2011, which would actually be passed some time during 2010, are even lesspredictable.

 

Wecan provide you with no assurance that the ultimate outcome of health carereform efforts and/or the Federal budget and resulting Medicare reimbursementrates will not have a material adverse effect on our liquidity, our results ofoperation, the realizability of the carrying amounts of our intangible assetsincluding goodwill or our financial condition. Further, we are unable to predict what effect, if any, such materialadverse effect, if it were to occur, might have on our ability to continue tocomply with the financial covenants of our revolving credit facility and ourability to continue to access debt capital through that facility.

 

Weare currently formulating actions intended to mitigate or otherwise offset someof the negative effects of the proposed reimbursement changes.  These actions may include any or all of thefollowing:

 

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·                  Attempting to increase ourrevenues by: investing more resources in sales and marketing activities todrive admission growth, establishing startup branch operations to expand ourservice territories, and acquisitions of underperforming providers with strongreferral relationships,

·                  Attempting to reduce ourcosts by: developing a more efficient delivery model, increasing theproductivity standards for our staff, limiting or eliminating the growth inwage rates, limiting or reducing the size of our work force, closingunprofitable branch operations and accelerating our efforts to evaluate the useof various technological approaches to the delivery of patient care,

·                  Evaluating the potentialimplications of health care reform proposals on our employee benefit plans andpossible changes we may need to make to our plans should the reform proposalsbecome law, and

·                  Potentially other actions wedeem appropriate.

 

Althoughwe will attempt to mitigate or otherwise offset the negative effect of healthcare reform on our reimbursement and our employee benefit plans, there can beno assurance that our actions will ultimately be cost effective or provesuccessful.

 

**Critical Accounting Policies**

 

The accompanying consolidated financial statements have been preparedin conformity with accounting principles generally accepted in the UnitedStates. When more than one accounting principle, or the method of itsapplication, is generally accepted, we select the principle or method that isappropriate in the specific circumstances. Application of these accountingprinciples requires us to make estimates about the future resolution ofexisting uncertainties; as a result, actual results could differ from theseestimates. We evaluate our estimates, including those related to revenuerecognition, collectability of accounts receivable, insurance reserves,litigation, goodwill, intangibles and contingencies on an on-going basis.  We base these estimates on our historicalexperience and other assumptions that we believe are appropriate under thecircumstances.  In preparing thesefinancial statements, we have made our best estimates and judgments of theamounts and disclosures included in the financial statements.

 

***Receivables and Revenue Recognition***

 

We recognizerevenues when patient services are provided. Our receivables and revenues arestated at amounts estimated by us to be their net realizable values. TheCompany is paid for its services primarily by Federal and state third-partyreimbursement programs, commercial insurance companies, and patients. Revenuesare recorded at established rates in the period during which the services arerendered.  Appropriate allowances to giverecognition to third party payment arrangements are recorded when the servicesare rendered.

 

Laws and regulationsgoverning the Medicare and Medicaid programs are extremely complex and subjectto interpretation.  It is common forissues to arise related to: 1) medical coding, particularly with respect toMedicare, 2) patient eligibility, particularly related to Medicaid, and 3)other reasons unrelated to credit risk, all of which may result in adjustmentsto recorded revenue amounts.  Managementcontinuously evaluates the potential for revenue adjustments and whenappropriate provides allowances for losses based upon the best availableinformation.  There is at least areasonable possibility that recorded estimates could change by material amountsin the near term.

 

We report accounts receivable net of estimated allowances for doubtfulaccounts and adjustments. Accounts receivable consist primarily of amounts duefrom third-party payors and patients. We evaluate the collectability of ouraccounts receivable based on certain factors, such as payor types, historicalcollection trends and aging categories. We calculate our reserve for bad debtsbased on the length of time that the receivables are past due.  The percentage applied to the receivablebalances in the various aging categories is based on historical collectionexperience, business and economic conditions and reimbursement trends.

 

Medicarereimbursement on an episodic basis, is subject to change if the actual numberof therapy visits differs from the number anticipated at the start of care orif the patient is discharged but readmitted to another agency within the same60-day episodic period.  Our revenuerecognition under the Medicare reimbursement program is based on certainvariables including, but not limited, to: (i) changes in the base episodepayments established by

 

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theMedicare Program; (ii) adjustments to the base episode payments forpartial episodes and for other factors, such as case mix, geographic wages, lowutilization and intervening events; and, (iii) recoveries of overpayments.Adjustments to revenue result from differences between estimated and actualreimbursement amounts, an inability to obtain appropriate billing documentationor authorizations acceptable to the payor and other reasons unrelated to creditrisk.  We recognize Medicare revenue onan episode-by-episode basis during the course of each episode over its expectednumber of visits.

 

***Insurance Programs***

 

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

 

Malpracticeand general patient liability claims for incidents which may give rise tolitigation have been asserted against us by various claimants.  The claims are in various stages ofprocessing and some may ultimately be brought to trial.  We are aware of incidents that have occurredthrough December 31, 2009 that may result in the assertion of additionalclaims.  We currently carry professional andgeneral liability insurance coverage for this exposure with no deductible.

 

Werecord estimated liabilities for our insurance programs based on informationprovided by the third-party plan administrators, historical claims experience,the life cycle of claims, expected costs of claims incurred but not paid, andexpected costs to settle unpaid claims. We monitor our estimated insurance-related liabilities on a monthlybasis.  As facts change, it may becomenecessary to make adjustments that could be material to our results ofoperations and financial condition.

 

***Goodwill and Other Intangible Assets***

 

Intangible assets are stated at fair value at the time of acquisitionand goodwill represents the excess cost over the fair value of net assetsacquired and liabilities assumed. Definite lived intangible assets are amortized on a straight-line basisover the estimated useful life of the asset. Goodwill and indefinite-livedassets are not amortized.  We performimpairment tests of goodwill and indefinite lived assets as required by ASC350, Intangibles - Goodwill and Other (formerly SFAS No. 142). Theimpairment analysis requires numerous subjective assumptions and estimates todetermine fair value of the respective reporting units.  We estimate the fair value of the relatedreporting units using a combined market approach (guideline company and similartransaction method) and income approach (discounted cash flow analysis).  These models are based on our projections offuture revenues and operating costs and are reconciled to our consolidatedmarket capitalization.  The cash flowforecasts are adjusted by an appropriate discount rate based on our weightedaverage cost of capital as well as the weighted average cost of capital ofother market participants of 15.5% and a terminal growth rate of 3.0%.  A 200 basis point change in either assumption(either individually or in the aggregate) would not result in any impairment ofour goodwill balances.  As of December 31,2009, we completed our impairment review and determined that no impairmentcharge was required.  Future Medicare andMedicaid reimbursement rates, admissions, volumes, our liquidity and otherfactors may have a significant impact on our business and required the recognitionof impairment charges in the future.

 

***Accounting for Income Taxes***

 

As of December 31, 2009, we have net deferred tax assets ofapproximately $2,528,000.  The netdeferred tax asset is composed of approximately $7,786,000 of current deferredtax assets and approximately $5,258,000 of long-term deferred taxliabilities.  We have provided avaluation allowance against certain deferred tax assets based upon ourestimation of realizability of those assets through future taxable income.  This valuation allowance was based in largepart on our history of generating operating income or losses in individual taxlocales and expectations for the future. Our ability to generate the expected amounts of taxable income fromfuture operations is dependent upon general economic conditions, competitive pressureson revenues and margins and legislation and regulation at all levels ofgovernment. We have considered the above factors in reaching our conclusionthat it is

 

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more likely than not that future taxable income will be sufficient tofully utilize the net deferred tax assets (net of the valuation allowance) asof December 31, 2009.

 

***Seasonality***

 

Our Visiting Nurse segment operations located in Florida normallyexperience higher admissions during the first quarter and lower admissionsduring the third quarter than in the other quarters due to seasonal populationfluctuations.

 

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**RESULTS OF OPERATIONS**

 

**Continuing Operations**

**Year Ended December 31, 2009 Compared with Year Ended December 31,2008**

**(In thousands)**

 
| **Consolidated**                             | ** ** | **2009**   | ** ** | **2008**  | ** ** | **Change** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                                   | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  service revenues:                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Visiting  Nurse                              |       | $          | 256,060    |      | 86.0       | %          | $          | 172,977 |   | 81.8 | % | $ | 83,083 |   | 48.0 | % |
| Personal  Care                               |       | 41,789     |       | 14.0      | %          | 38,540     |       | 18.2 | % | 3,249 |   | 8.4 | % |
|                                         |       | $          | 297,849    |      | 100.0      | %          | $          | 211,517 |   | 100.0 | % | $ | 86,332 |   | 40.8 | % |
| Operating  income before corporate expenses: |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Visiting  Nurse                              |       | $          | 53,755     |      | 21.0       | %          | $          | 36,645 |   | 21.2 | % | $ | 17,110 |   | 46.7 | % |
| Personal  Care                               |       | 5,166      |       | 12.4      | %          | 3,770      |       | 9.8 | % | 1,396 |   | 37.0 | % |
|                                         |       | 58,921     |       | 19.8      | %          | 40,415     |       | 19.1 | % | 18,506 |   | 45.8 | % |
| Corporate  expenses                          |       | 16,846     |       | 5.7       | %          | 12,216     |       | 5.8 | % | 4,630 |   | 37.9 | % |
| EBIT                                         |       | 42,075     |       | 14.1      | %          | 28,199     |       | 13.3 | % | 13,876 |   | 49.2 | % |
| Interest  expense, net                       |       | 803        |       | 0.3       | %          | 1,147      |       | 0.5 | % | (344 | ) | -30.0 | % |
| Income  tax expense                          |       | 16,583     |       | 5.6       | %          | 10,655     |       | 5.0 | % | 5,928 |   | 55.6 | % |
| Net  income from continuing operations       |       | $          | 24,689     |      | 8.3        | %          | $          | 16,397 |   | 7.8 | % | $ | 8,292 |   | 50.6 | % |
|                                         |       |       |       |      |       |       |       |   |   |   |   |   |   |
| EBITDA  from continuing operations (1)       |       | $          | 45,831     |      | 15.4       | %          | $          | 30,217 |   | 14.3 | % | $ | 15,614 |   | 51.7 | % |

 

On a consolidated basis, our 2009 net service revenues increased 40.8%to approximately $298 million compared to $212 million in 2008.  Organic revenue growth was approximately $42million or 48.9% of our total growth, while acquisitions provided the balanceof the increase of approximately $44 million.

 

Operating income as a percent of revenues increased to 14.1% in 2009versus 13.3% in 2008 based primarily on our ability to leverage our existinginfrastructure over a larger revenue base. Net income from continuing operations for 2009 was $24.7 million or$2.87 per diluted share compared to $16.4 million or $2.17 per diluted share in2008.

 

Interest expense was incurred on funds borrowed to finance ouracquisitions.  The weighted prime ratebased interest rates were 3.47% and 4.86% in 2009 and 2008, respectively.  The weighted average LIBOR-based rate was2.26% in 2009.

 

The effective income tax rate from continuing operations wasapproximately 40.2% in 2009 and 39.4% in 2008 primarily due to changes in thelevel of non-deductible expenses and changes in the mix of taxable income bystates between periods.

 

----

(1)  See page 40 for discussion of EBITDA.

 

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**Visiting Nurse Segment-Year EndedDecember 31, 2009 and 2008**

 

Approximately 90% of the VN segment revenueswere generated from the Medicare program while the balance was generated fromMedicaid and private insurance programs. In addition to our focus on operating income from the Visiting Nursesegment, we also measure this segment’s performance in terms of admissions,patient months of care, revenue per patient month and cost of services perpatient month. (In thousands except statistical information.)

** **
| ** **                                 | ** ** | **2009**   | ** ** | **2008**  | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                                 | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  service revenues                      |       | $          | 256,060    |      | 100.0      | %          | $          | 172,977 |   | 100.0 | % | $ | 83,083 |   | 48.0 | % |
| Cost  of service revenues                  |       | 110,661    |       | 43.2      | %          | 71,900     |       | 41.6 | % | 38,761 |   | 53.9 | % |
| Gross  margin                              |       | 145,399    |       | 56.8      | %          | 101,077    |       | 58.4 | % | 44,322 |   | 43.8 | % |
| General  and administrative expenses:      |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Salaries  and benefits                     |       | 67,075     |       | 26.2      | %          | 45,584     |       | 26.4 | % | 21,491 |   | 47.1 | % |
| Other                                      |       | 24,569     |       | 9.6       | %          | 18,848     |       | 10.9 | % | 5,721 |   | 30.4 | % |
| Total  general and administrative expenses |       | 91,644     |       | 35.8      | %          | 64,432     |       | 37.2 | % | 27,212 |   | 42.2 | % |
| Operating  income                          |       | $          | 53,755     |      | 21.0       | %          | $          | 36,645 |   | 21.2 | % | $ | 17,110 |   | 46.7 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Average  number of locations               |       | 78         |       |      |       | 62         |       |   |   | 16 |   | 25.8 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| **All payors:**                            |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Patients  Months                           |       | 185,959    |       |      |       | 131,027    |       |   |   | 54,932 |   | 41.9 | % |
| Admissions                                 |       | 52,029     |       |      |       | 39,691     |       |   |   | 12,338 |   | 31.1 | % |
| Billable  Visits                           |       | 1,712,480  |       |      |       | 1,088,339  |       |   |   | 624,141 |   | 57.3 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| **Medicare Statisitics:**                  |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Revenue  (in thousands)                    |       | $          | 230,383    |      | 90.0       | %          | $          | 156,892 |   | 90.7 | % | $ | 73,491 |   | 46.8 | % |
| Billable  visits                           |       | 1,395,001  |       |      |       | 952,191    |       |   |   | 442,810 |   | 46.5 | % |
| Admissions                                 |       | 47,110     |       |      |       | 36,200     |       |   |   | 10,910 |   | 30.1 | % |
| Episodes                                   |       | 76,436     |       |      |       | 53,692     |       |   |   | 22,744 |   | 42.4 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Revenue  per completed episode             |       | $          | 2,974      |      |       |       | $          | 2,855 |   |   |   | $ | 119 |   | 4.2 | % |
| Visits  per episode                        |       | 17.7       |       |      |       | 17.3       |       |   |   | 0.4 |   | 2.3 | % |

 

Net servicerevenues in the visiting nurse segment for 2009 rose 48.0% to approximately$256 million.  The $83 million increasecame from a combination of organic growth of about $39 million and fromacquired operations of approximately $44 million.  Our VN organic revenue growth rate was 28.7%for 2009.  The Patient Care acquisitioncontributed revenues of $52 million in 2009 compared to $20 million in2008.  Revenue per completed episodeincreased 4.2% over 2008 due to an increase in the acuity level and changes inthe geographic mix of the patients we served. The increase in the acuity level of patients served is also reflected inthe increase in average number of visits per episode.

 

Gross margindecreased to 56.8% in 2009 from 58.4% in 2008 due to the effect of flatMedicare reimbursement rates and continuing increases in direct care wages andmileage reimbursement.  Total general andadministrative expenses as a percent of revenue declined to 35.8% from 37.2% asadditional volumes and branches spread general and administrative expenses overa larger revenue base.

 

Operating incomebefore corporate expense in the VN segment for 2009 increased 46.7% toapproximately $54 million from approximately $37 million in 2008.

 

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**PersonalCare (PC)****Segment-Year Ended December 31, 2009 and2008**

 

Approximately 67% of the PC segment revenues were generated fromMedicaid and other government programs while the balance is generated frominsurance programs and private pay patients. (In thousands except statistical information.)

 
| ** **                                 | ** ** | **2009**   | ** ** | **2008**  | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                                 | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  service revenues                      |       | $          | 41,789     |      | 100.0      | %          | $          | 38,540 |   | 100.0 | % | $ | 3,249 |   | 8.4 | % |
| Cost  of service revenues                  |       | 28,066     |       | 67.2      | %          | 26,347     |       | 68.4 | % | 1,719 |   | 6.5 | % |
| Gross  margin                              |       | 13,723     |       | 32.8      | %          | 12,193     |       | 31.6 | % | 1,530 |   | 12.5 | % |
| General  and administrative expenses:      |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Salaries  and benefits                     |       | 5,305      |       | 12.7      | %          | 5,229      |       | 13.6 | % | 76 |   | 1.5 | % |
| Other                                      |       | 3,252      |       | 7.8       | %          | 3,194      |       | 8.3 | % | 58 |   | 1.8 | % |
| Total  general and administrative expenses |       | 8,557      |       | 20.5      | %          | 8,423      |       | 21.9 | % | 134 |   | 1.6 | % |
| Operating  income                          |       | $          | 5,166      |      | 12.4       | %          | $          | 3,770 |   | 9.8 | % | $ | 1,396 |   | 37.0 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Average  number of locations               |       | 22         |       |      |       | 22         |       |   |   | — |   | 0.0 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Admissions                                 |       | 3,219      |       |      |       | 3,457      |       |   |   | (238 | ) | -6.9 | % |
| Patient  months of care                    |       | 47,147     |       |      |       | 43,378     |       |   |   | 3,769 |   | 8.7 | % |
| Patient  days of care                      |       | 607,760    |       |      |       | 550,208    |       |   |   | 57,552 |   | 10.5 | % |
| Billable  hours                            |       | 2,282,560  |       |      |       | 2,074,229  |       |   |   | 208,331 |   | 10.0 | % |
| Revenue  per billable hour                 |       | $          | 18.31      |      |       |       | $          | 18.58 |   |   |   | $ | (0.27 | ) | -1.5 | % |

 

Net servicerevenues in the personal care segment for 2009 increased 8.4% to approximately$42 million from approximately $38 million in 2008 based on increased volumeoffset by lower pricing and slightly lower direct costs per unit ofservice.  Gross margin as a percentage ofrevenue improved 1.2% to 32.8% in 2009 from 31.6% in 2008 due to improvedcontrol over direct care staff pay rates and overtime.  General and administrative expense as apercent of revenues decreased primarily due to expenses being spread over alarger revenue base.  Operating incomebefore corporate expense in the PC segment was $5.2 million in 2009 and $3.8million in 2008.

 

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**Continuing Operations**

**YearEnded December 31, 2008 Compared with Year Ended December 31, 2007**

**(inthousands)**

 
| **Consolidated**                             | ** ** | **2008**   | ** ** | **2007**  | ** ** | **Change** | ** ** |
|----------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                                   | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  service revenues:                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Visiting  Nurse                              |       | $          | 172,977    |      | 81.8       | %          | $          | 96,187 |   | 73.5 | % | $ | 76,790 |   | 79.8 | % |
| Personal  Care                               |       | 38,540     |       | 18.2      | %          | 34,720     |       | 26.5 | % | 3,820 |   | 11.0 | % |
|                                         |       | $          | 211,517    |      | 100.0      | %          | $          | 130,907 |   | 100.0 | % | $ | 80,610 |   | 61.6 | % |
| Operating  income before corporate expenses: |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Visiting  Nurse                              |       | $          | 36,645     |      | 21.2       | %          | $          | 18,382 |   | 19.1 | % | $ | 18,263 |   | 99.4 | % |
| Personal  Care                               |       | 3,770      |       | 9.8       | %          | 3,358      |       | 9.7 | % | 412 |   | 12.3 | % |
|                                         |       | 40,415     |       | 19.1      | %          | 21,740     |       | 16.6 | % | 18,675 |   | 85.9 | % |
| Corporate  expenses                          |       | 12,216     |       | 5.8       | %          | 7,842      |       | 6.0 | % | 4,374 |   | 55.8 | % |
| EBIT                                         |       | 28,199     |       | 13.3      | %          | 13,898     |       | 10.6 | % | 14,301 |   | 102.9 | % |
| Interest  expense, net                       |       | 1,147      |       | 0.5       | %          | 837        |       | 0.6 | % | 310 |   | 37.0 | % |
| Income  tax expense                          |       | 10,655     |       | 5.0       | %          | 5,272      |       | 4.0 | % | 5,383 |   | 102.1 | % |
| Net  income from continuing operations       |       | $          | 16,397     |      | 7.8        | %          | $          | 7,789 |   | 6.0 | % | $ | 8,608 |   | 110.5 | % |
|                                         |       |       |       |      |       |       |       |   |   |   |   |   |   |
| EBITDA  from continuing operations           |       | $          | 30,217     |      | 14.3       | %          | $          | 15,102 |   | 11.5 | % | $ | 15,115 |   | 100.1 | % |

 

On a consolidated basis, our 2008 net revenues increased approximately$80.6 million or 61.6% with 79.8% growth in VN and 11.0% growth in PC.  VN revenue growth was driven by acquisitions,admissions growth, and start-up operations. Acquired VN operations contributed approximately $47.4 million ofrevenue in 2008.  Our organic Medicarerevenue growth rate in 2008 was 36% compared to 27% in 2007.

 

Operating income for 2008increased to 13.3% of revenue versus 10.6% in 2007 based on our ability to leverageour existing infrastructure over a larger revenue base.  Income from continuing operations for 2008was approximately $16.4 million or $2.17 per diluted share compared toapproximately $7.8 million or $1.39 per diluted share in 2007 on 35% more sharesoutstanding.

 

Interest expense is higher due to increased usage of the revolving lineof credit for acquisitions in 2008.  Theincrease was partially offset by lower interest rates.  Our effective interest rate on our bankcredit facility was 4.9% in 2008 and 7.5% in 2007.

 

The effective income tax rate from continuing operations wasapproximately 39.4% for the year ended December 31, 2008 and 40.3% in2007.

 

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**Visiting Nurse Segment-Year Ended December 31, 2008 and 2007**

 

Approximately 91% of the VN segment revenues were generated from theMedicare program while the balance was generated from Medicaid and privateinsurance programs.

 
| ** **                                 | ** ** | **2008**   | ** ** | **2007**  | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                                 | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  service revenues                      |       | $          | 172,977    |      | 100.0      | %          | $          | 96,187 |   | 100.0 | % | $ | 76,790 |   | 79.8 | % |
| Cost  of service revenues                  |       | 71,900     |       | 41.6      | %          | 39,123     |       | 40.7 | % | 32,777 |   | 83.8 | % |
| Gross  margin                              |       | 101,077    |       | 58.4      | %          | 57,064     |       | 59.3 | % | 44,013 |   | 77.1 | % |
| General  and administrative expenses:      |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Salaries  and benefits                     |       | 45,584     |       | 26.4      | %          | 26,796     |       | 27.9 | % | 18,788 |   | 70.1 | % |
| Other                                      |       | 18,848     |       | 10.9      | %          | 11,886     |       | 12.4 | % | 6,962 |   | 58.6 | % |
| Total  general and administrative expenses |       | 64,432     |       | 37.2      | %          | 38,682     |       | 40.2 | % | 25,750 |   | 66.6 | % |
| Operating  income                          |       | $          | 36,645     |      | 21.2       | %          | $          | 18,382 |   | 19.1 | % | $ | 18,263 |   | 99.4 | % |
|                                       |       |            |       |      |       |       |       |   |   |   |   |   |   |
| Average  number of locations               |       | 62         |       |      |       | 47         |       |   |   | 15 |   | 31.9 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| **All payors:**                            |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Patients  Months                           |       | 131,027    |       |      |       | 76,678     |       |   |   | 54,349 |   | 70.9 | % |
| Admissions                                 |       | 39,691     |       |      |       | 29,338     |       |   |   | 10,353 |   | 35.3 | % |
| Billable  Visits                           |       | 1,088,339  |       |      |       | 600,913    |       |   |   | 487,426 |   | 81.1 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| **Medicare Statisitics:**                  |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Revenue  (in thousands)                    |       | $          | 156,892    |      | 90.7       | %          | $          | 89,120 |   | 92.7 | % | $ | 67,772 |   | 76.0 | % |
| Billable  visits                           |       | 952,191    |       |      |       | 545,732    |       |   |   | 406,459 |   | 74.5 | % |
| Admissions                                 |       | 36,200     |       |      |       | 26,199     |       |   |   | 10,001 |   | 38.2 | % |
| Episodes                                   |       | 53,692     |       |      |       | 33,169     |       |   |   | 20,523 |   | 61.9 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Revenue  per completed episode             |       | $          | 2,855      |      |       |       | $          | 2,631 |   |   |   | $ | 224 |   | 8.5 | % |
| Visits  per episode                        |       | 17.3       |       |      |       | 16.0       |       |   |   | 1.3 |   | 8.1 | % |

 

Netservice revenues in the visiting nurse segment for 2008 rose 79.8% to $173.0million.  The $76.8 million increase camefrom a combination of organic growth of $32.7 million and acquired operationsof $44.1 million.  VN organic revenuegrowth rate was 36.0% for 2008.  ThePatient Care acquisition, completed August 1, 2008, contributed $19.6million in revenue for the year.  Revenue per completed episode increasedabout 9% over 2007 due to an increase in the acuity level and changes in thegeographic mix of the patients we served. The increase in the acuity level of patients served is also reflected inthe increase in the average number of visits per episode.

 

Grossmargin decreased from 59.3% in 2007 to 58.4% in 2008 due to the effect of flatMedicare reimbursement rates and continuing increases in direct care wages andmileage reimbursement.  Our general andadministrative salaries and benefits increased predominantly as a result of theincrease in the average number of locations in operation between periods (bothde novo and acquisition), increases in wage rates and the addition of segmentmanagement staff driven by our focus on the execution of our strategic plan todevelop the visiting nurse segment. However, total general and administrative expenses as a percent ofrevenue declined from 40.2% to approximately 37.2% as additional volumes andbranches spread general and administrative expenses over a larger revenue base.

 

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**Personal Care Segment-Year Ended December 31, 2008 and 2007**

 

Approximately 74%of the PC segment revenues were generated from Medicaid and other governmentprograms while the balance is generated from insurance programs and private paypatients.

 
| ** **                                 | ** ** | **2008**   | ** ** | **2007**  | ** ** | **Change** | ** ** |
|--------------------------------------------|------------|------------|------------|-----------|------------|------------|------------|
| ** **                                 | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **% Rev** | ** ** | **Amount** | ** ** | **%** | ** ** |
| Net  service revenues                      |       | $          | 38,540     |      | 100.0      | %          | $          | 34,720 |   | 100.0 | % | $ | 3,820 |   | 11.0 | % |
| Cost  of service revenues                  |       | 26,347     |       | 68.4      | %          | 23,982     |       | 69.1 | % | 2,365 |   | 9.9 | % |
| Gross  margin                              |       | 12,193     |       | 31.6      | %          | 10,738     |       | 30.9 | % | 1,455 |   | 13.6 | % |
| General  and administrative expenses:      |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Salaries  and benefits                     |       | 5,229      |       | 13.6      | %          | 4,833      |       | 13.9 | % | 396 |   | 8.2 | % |
| Other                                      |       | 3,194      |       | 8.3       | %          | 2,547      |       | 7.3 | % | 647 |   | 25.4 | % |
| Total  general and administrative expenses |       | 8,423      |       | 21.9      | %          | 7,380      |       | 21.3 | % | 1,043 |   | 14.1 | % |
| Operating  income                          |       | $          | 3,770      |      | 9.8        | %          | $          | 3,358 |   | 9.7 | % | $ | 412 |   | 12.3 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Average  number of locations               |       | 22         |       |      |       | 22         |       |   |   | — |   | 0.0 | % |
|                                       |       |       |       |      |       |       |       |   |   |   |   |   |   |
| Admissions                                 |       | 3,457      |       |      |       | 3,407      |       |   |   | 50 |   | 1.5 | % |
| Patient  months of care                    |       | 43,378     |       |      |       | 41,157     |       |   |   | 2,221 |   | 5.4 | % |
| Patient  days of care                      |       | 550,208    |       |      |       | 516,412    |       |   |   | 33,796 |   | 6.5 | % |
| Billable  hours                            |       | 2,074,229  |       |      |       | 1,966,932  |       |   |   | 107,297 |   | 5.5 | % |
| Revenue  per billable hour                 |       | $          | 18.58      |      |       |       | $          | 17.65 |   |   |   | $ | 0.93 |   | 5.3 | % |

 

Net servicerevenues in the personal care segment for 2008 increased just over 11% to $38.5million from $34.7 million in the same period of last year primarily onincreased volume.  Volumes increased on1.5% admission growth combined with increased utilization of services perpatient and a small price increase.  Aprice increase resulting from changes in the mix of business as well as rateincreases from certain state Medicaid programs is also reflected in the 0.7%increase in gross margin percent. General and administrative salaries and benefits as a percent of revenuedecreased due to the increase in volumes partially offset by increased workerscompensation expenses.  Other general andadministrative expenses increased primarily due to an increase in bad debtexpense.  The PC operating income grew 12%for 2008 grew to $3.8 million from $3.4 million in 2007.

 

***Liquidity and Capital Resources***

 

We believe that a certain amount of debt has an appropriate place inour overall capital structure and it is not our strategy to eliminate all debtfinancing.  We believe that our cash flowfrom operations and borrowing capacity on our bank credit facility, describedbelow, will be sufficient to cover operating needs, future capital expenditurerequirements and scheduled debt payments of miscellaneous small borrowingarrangements and capitalized leases.  Inaddition, it is likely that we will pursue growth from acquisitions,partnerships and other ventures that would be funded from excess cash fromoperations, credit available under the bank credit agreement and other financing arrangements that are normallyavailable in the marketplace.

 

In the second quarter of 2008, the Companysold 2,512,500 shares of common stock in a public offering for proceeds of$41.8 million after deducting the underwriting discounts and offeringexpenses.  In conjunction with the stockoffering, the Company retired all of its outstanding Treasury Stock.

 

In December 2008, theCompany filed a shelf registration statement to provide for the issuance of upto $150 million of any combination of common stock, preferred stock, warrantsand debt securities.

 

On August 5, 2009, weentered into a Distribution Agreement with J.P. Morgan Securities Inc.  According to the provisions of thisAgreement, we may offer and sell from time to time up to 1,600,000 shares ofcommon stock

 

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having an aggregate offeringprice of up to $50 million through J.P. Morgan, as distribution agent.  Sales of stock will be made by means ofordinary brokers’ transactions on the Nasdaq Global Select Market at marketprices, or as otherwise agreed between us and J.P. Morgan.  Under the terms of this Agreement, we alsomay sell shares of common stock to J.P. Morgan as principal for its own accountat a price agreed upon at the time of the sale. Any sale of shares of common stock to J.P. Morgan as principal would bepursuant to the terms of a separate agreement that would be entered intobetween us and J.P. Morgan.

 

This Agreement provides usthe right, but not the obligation, to sell shares of common stock in thefuture, at prices we deem appropriate. We retain at all times complete control over the amount and timing ofeach sale, and we will designate the maximum number of shares of common stockto be sold through J.P. Morgan, on a daily basis or otherwise as we and J.P.Morgan agree.  J.P. Morgan will then usecommercially reasonable efforts to sell, as our distribution agent and on ourbehalf, all of the designated shares of common stock.  We may instruct J.P. Morgan not to sellshares of common stock if the sales cannot be effected at or above the pricedesignated by us in any such instruction. Either we or J.P. Morgan may suspend the offering of shares of commonstock pursuant to the Agreement upon proper notice and subject to otherconditions.

 

During the third quarter of2009, we issued 967,556 of our shares of common stock pursuant to thisAgreement.  After commissions of $719thousand, we received net proceeds of approximately $28.0 million for theissuance of these shares of common stock, and we used the proceeds to reducethe borrowings under our bank credit facility. As of December 31, 2009 a maximum of 632,444 shares remainavailable for sale subject to a maximum additional value limit of approximately$22 million.

 

**Revolving Credit Facility**

 

At December 31, 2009, the Company had a $75million senior secured revolving credit facility with JP Morgan Chase Bank, NA,as Administrative Agent, Fifth Third Bank, as Syndication Agent and certainother lenders.  The facility consists ofa $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 $100million.  Borrowings (other than lettersof credit) under the credit facility are at either the bank’s prime rateplus a margin (ranging from 0.00% to 1.00%, currently 0.00%) or LIBOR plus a margin (ranging from 1.60% to2.60%, currently 1.60%).  The margin forprime rate or LIBOR borrowings is determined by the Company’s leverage.  Borrowings under the Agreement aresecured by a first priority perfected security interest in all tangible andintangible assets of the Company, and all existing and future direct andindirect subsidiaries of the Company as guarantors.

 

Theweighted average prime rate-based interest rates were 3.47% and 4.86% for theyear ended December 31, 2009 and 2008, respectively.  The weighted average LIBOR rate was 2.26% for2009.  The Company pays a commitment feeof 0.25% per annum on the unused facility balance. Borrowings are availableequal to a multiple of 3.0 times earnings before interest, taxes, depreciationand amortization (“EBITDA”). “EBITDA” may include “Acquired EBITDA” fromproforma acquisitions pursuant to a calculation rider, up to 50% of “AdjustedEBITDA”, as defined. Borrowings under the facility may be used for generalcorporate purposes, including acquisitions. As of December 31, 2009, theformula permitted all $75 million to be used, of which no amounts wereoutstanding. The Company has irrevocable letters of credit, totaling $5.9million outstanding in connection with its self-insurance programs. Thus, atotal of $69.1 million was available for use at December 31, 2009. TheCompany’s revolving credit facility is subject to various financial covenants.As of December 31, 2009, the Company was in compliance with the covenants.Under the most restrictive of its covenants, the Company was required tomaintain minimum net worth of at least $139.0 million at December 31,2009.  At such date the Company’s networth was approximately $149.0 million.

 

The Company believes that this facility willbe sufficient to fund its operating needs for at least the next year.  The Company will continue to evaluateadditional capital, including possible debt and equity investments in theCompany, to support a more rapid development of the business than would be possiblewith internal funds.

 

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Cash Flows

 

Key elements tothe Consolidated Statements of Cash Flows for the years ended December 31,2009, 2008 and 2007 were as follows (in thousands):

 
| **Net Change in Cash and Cash Equivalents** | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Provided  by (used in):                     |       |     |       |     |       |     |       |
| Operating  activities                       |       | $        | 27,224     |     | $          | 9,459    |       | $ | 7,336 |   |
| Investing  activities                       |       | (8,644   | )          | (61,273  | )          | (9,658   | )          |
| Financing  activities                       |       | (248     | )          | 52,627   |       | (1,265   | )          |
| Discontinued  operations activities         |       | (125     | )          | (104     | )          | (66      | )          |
| Net  increase in cash and cash equivalents  |       | $        | 18,207     |     | $          | 709      |       | $ | (3,653 | ) |

 

***2009 Compared to 2008***

 

Net cash provided byoperating activities resulted primarily from current period income of $24.7million, net of changes in accounts receivable, accounts payable and accruedexpenses.  Accounts receivable daysrevenues outstanding were 41 at December 31, 2009 and 48 at December 31,2008.

 

The cash used ininvesting activities is primarily due to the final payment of purchase price of$2.8 million from the 2006 Mederi acquisition, $3.6 million for a currentperiod acquisition and capital expenditures of $2.1 million.

 

Net cash used infinancing activities resulted from satisfaction of a $4 million note payablefrom 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.

 

***2008 Compared to 2007***

 

Net cash provided by operatingactivities resulted principally from current period income of $16.3 million,net of changes in accounts receivable, accounts payable and accruedexpenses.  Accounts receivable daysrevenues outstanding were 48 at December 31, 2008 and 44 at December 31,2007 primarily due to a longer average length of stay in the VN segment as aresult of higher acuity patients that we serve. Cash flows from operating activities were reduced by a $14.3 millionincrease in accounts receivable.  Thefour day increase in days revenue outstanding accounted for approximately $3million while the balance of $11 million resulted from organic revenuegrowth.  The increase in accounts payableand prepaid expenses and other current assets was primarily due to ourincreased volume of business.

 

Thecash used in investing activities is primarily due to the Apex Home Healthcareacquisition ($12.1 million) completed in March 2008 and the Patient Careacquisition ($40.8 million) in August 2008.

 

Netcash provided by financing activities resulted primarily from the $41.8 millionstock offering in April 2008 and $11.6 million of additional borrowings onour credit facility.

 

**Medicare Reimbursement**

 

OnOctober 30, 2009 the Centers for Medicare and Medicaid Services (CMS)published final regulations for Medicare reimbursement for home healthservices, which went into effect on January 1, 2010 and would increase ourMedicare reimbursement rates for 2010 by about 1.75%.

 

**MedicaidReimbursement**

 

We have asignificant dependence on state Medicaid reimbursement programs.  For the year ended December 31, 2009,approximately 7.5%, 4.4%, 3.1%, 0.7%, 0.6%, 0.4%, 0.1% and 0.1% of our revenueswere generated from Medicaid reimbursement programs in the states ofConnecticut, Ohio, Kentucky, Massachusetts, Florida, New Jersey, Indiana, andPennsylvania, respectively.  The state ofOhio Medicaid Program has implemented a 3% rate reduction across the boardbeginning January 1, 2010 and Connecticut has initiated a 15% patientliability for 

 

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Medicare/Medicaiddual eligible recipients which the state collects directly from the patientsalong with pending legislation to reduce the overall spend for Home andCommunity Based services by $10M in fiscal year 2011.

 

**Acquisitions**

 

The Company has completed several acquisitions over the past two fiscalyears and will continue to actively seek to acquire other quality providers ofMedicare-certified home health services like our current Visiting Nurse segmentoperations. We may consider acquisitions of businesses that provide health careservices similar to those we currently offer in our Personal Care segment butwe expect most of our acquisition activity to be focused on Visiting Nurseoperations.

 

Factors which may affect future acquisition decisions include, but arenot limited to, the quality and potential profitability of the business underconsideration, potential regulatory limitations and our profitability andability to finance the transaction.

 

***Acquisitions During 2009***

 

During 2009 we acquired 2 visiting nurse branch locations.  We funded this acquisition by issuing a $1.2million promissory note at 6% interest and using existing cash and our seniorcredit facility with JP Morgan Chase Bank, NA to make cash payment of $4.0million.

 

***Acquisitions During 2008***

 

During 2008 we acquired 11 visiting nurse branch locations.  These operations added to our market presencein Florida, Connecticut, Ohio and Kentucky and gave us market presence in NewJersey and Pennsylvania.

 

We funded these acquisitions by issuing $1.0 million in Almost Familyrestricted stock, issuing $3.1 million in promissory notes at 6% interest, andusing existing cash and our senior credit facility with JP Morgan Chase Bank,NA to make cash payments of $54.3 million and provide a $4.7 million letter ofcredit as collateral for Patient Care, Inc.’s large-deductible workerscompensation exposure.

 

**Contractual Obligations**.

 

The following table provides information about the payment dates of ourcontractual obligations at December 31, 2009, excluding currentliabilities except for the current portion of long-term debt and additionalconsideration on acquisitions (in thousands):

 
| ** **                                | ** ** | **2010** | ** ** | **2011** | ** ** | **2012** | ** ** | **2013** | ** ** | **2014** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|----------|------------|----------|------------|----------|------------|-----------|------------|
| Revolving  credit facility                |       | $        | —     |     | $          | —   |       | $        | —     |     | $          | —    |       | $ | — |   | $ | — |   |
| Capital  lease obligations                |       | 330      |       | 56       |       | —   |       | —   |       | —   |       | 386       |       |
| Additional  consideration on acquisitions |       | 850      |       | —   |       | —   |       | —   |       | —   |       | 850       |       |
| Notes  payable                            |       | 1,500    |       | 1,600    |       | 1,200    |       | —   |       | —   |       | 4,300     |       |
| Operating  leases                         |       | 4,787    |       | 3,439    |       | 2,000    |       | 896      |       | 236      |       | 11,358    |       |
| Total                                     |       | $        | 7,467      |     | $          | 5,095    |       | $        | 3,200      |     | $          | 896       |       | $ | 236 |   | $ | 16,894 |   |

 

**Commitmentsand Contingencies**

 

***Lettersof Credit.***  We have outstanding letters of credittotaling $5.9 million at December 31, 2009, which benefit our third-partyinsurer/administrators for our self-insurance programs.  The amount of such insurance program lettersof credit is subject to negotiation annually upon renewal and may vary in thefuture based upon such negotiation, our historical claims experience andexpected future claims.  It is reasonableto expect that the amount of the letter of credit will increase in the future,however, we are unable to predict to what degree.

 

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We currently have no obligations related to acquisitionagreements.  However, we periodicallyseek acquisition candidates and may reasonably be expected to enter intoacquisitions in the future.

 

***Generaland Professional Liability.***  Malpracticeand general patient liability claims for incidents which may give rise tolitigation have been asserted against us by various claimants.  The claims are in various stages ofprocessing and some may ultimately be brought to trial.  We also know of incidents that have occurredthrough December 31, 2009 that may result in the assertion of additionalclaims.  We carry insurance coverage forthis exposure with no deductible.

 

**HealthCare Reform**

 

The health careindustry has experienced, and is expected to continue to experience, extensiveand dynamic change. In addition to economic forces and regulatory influences,continuing political debate is subjecting the health care industry tosignificant reform. Health care reforms have been enacted as discussedelsewhere in this document.  Proposalsfor additional changes are continuously formulated by departments of theFederal government, Congress, and state legislatures.

 

Governmentofficials can be expected to continue to review and assess alternative healthcare delivery systems and payment methodologies. Changes in the law or newinterpretations of existing laws may have a dramatic effect on the definitionof permissible or impermissible activities, the relative cost of doingbusiness, and the methods and amounts of payments for medical care by bothgovernmental and other payors. Legislative changes to “balance the budget” and slow the annual rate ofgrowth of expenditures are expected to continue. Such future changes mayfurther impact our reimbursement. There can be no assurance that futurelegislation or regulatory changes will not have a material adverse effect onour operations.

 

Federal and Statelegislative proposals continue to be introduced that would impose morelimitations on payments to providers of health care services such as us.  Many states have enacted, or are consideringenacting, measures that are designed to reduce their Medicaid expenditures.

 

We cannot predictwhat additional government regulations may be enacted in the future affectingour business or how existing or future laws and regulations might beinterpreted, or whether we will be able to comply with such laws andregulations in our existing or future markets.

 

**DiscontinuedOperations**

 

We follow the guidance in ASC Topic 360,Property, Plant and Equipment, and, when appropriate, reclassify operatingunits closed, sold, or held for sale out of continuing operations and intodiscontinued operations for all periods presented.  During 2009 we had one personal care facilitythat met the criteria to be reclassified as discontinued operations and during2008 we had no facilities that met the criteria to be reclassified asdiscontinued operations.  For all theyears presented in this report, these facilities have been reclassified.  Net losses from the discontinued operationswere approximately $125, $104 and $185 in the years ended December 31,2009, 2008 and 2007 respectively, and such amounts are included in net lossfrom discontinued operations in the accompanying financial statements.

 

**Impact of Inflation**

 

Wedo not believe that inflation has had a material effect on income during thepast several years.

 

**Non-GAAP Financial Measure**

 

The information provided in the some of the tables use certain non-GAAPfinancial measures as defined under Securities and Exchange Commission (SEC)rules.  In accordance with SEC rules, theCompany has provided, in the supplemental information and the footnotes to thetables, a reconciliation of those measures to the most directly comparable GAAPmeasures.

 

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**EBITDA:**

 

EBITDA is defined as income from continuing operations beforedepreciation and amortization, net interest expense and income taxes. EBITDA isnot a measure of financial performance under accounting principles generallyaccepted in the United States of America. It should not be considered in isolation or as a substitute for netincome, operating income, cash flows from operating, investing or financingactivities, or any other measure calculated in accordance with generallyaccepted accounting principles.  Theitems excluded from EBITDA are significant components in understanding andevaluating financial performance and liquidity. Management routinely calculates and communicates EBITDA and believesthat it is useful to investors because it is commonly used as an analyticalindicator within our industry to evaluate performance, measure leveragecapacity and debt service ability, and to estimate current or prospectiveenterprise value. EBITDA is also used in certain covenants contained in ourcredit agreement.

 

The following table sets forth a reconciliation of net income fromcontinuing operations to EBITDA (in thousands):

 
| ** **                                                                                                  | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                  | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  income from continuing operations                                                                      |       | $                                | 24,689     |   | $ | 16,397 |   | $ | 7,789 |   |
| Add  back:                                                                                                  |       |                             |       |   |   |   |   |
| Interest  expense                                                                                           |       | 803                              |       | 1,147 |   | 837 |   |
| Income  tax expense                                                                                         |       | 16,583                           |       | 10,655 |   | 5,272 |   |
| Depreciation  and amortization                                                                              |       | 2,385                            |       | 1,330 |   | 842 |   |
| Amortization  of stock-based compensation                                                                   |       | 1,371                            |       | 688 |   | 363 |   |
| Earnings  before interest, income taxes, depreciation and amortization (EBITDA) from  continuing operations |       | $                                | 45,831     |   | $ | 30,217 |   | $ | 15,103 |   |
|                                                                                                        |       |                             |       |   |   |   |   |

 

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**ITEM 7A.Quantitative and Qualitative Disclosures About Market Risk**

 

***DerivativeInstruments***

 

We do not usederivative instruments.

 

***MarketRisk of Financial Instruments***

 

Our primary marketrisk exposure with regard to financial instruments is to changes in interestrates.

 

AtDecember 31, 2009, the Company had no outstanding amounts on its revolvingcredit facility and, therefore, a hypothetical 100 basis point increase inshort-term interest rates would have no impact on annual pre-tax earnings dueto higher interest expense.

 

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** **

**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

***ALMOST FAMILY, INC.*****AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

**(In thousands, except per share data)**

** **
| ** **                                                          | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                          | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net  service revenues                                               |       | $                                | 297,849    |   | $ | 211,517 |   | $ | 130,907 |   |
| Cost  of service revenues (excluding depreciation and amortization) |       | 138,565                          |       | 98,246 |   | 63,087 |   |
| Gross  margin                                                       |       | 159,284                          |       | 113,271 |   | 67,820 |   |
| General  and administrative expenses:                               |       |                             |       |   |   |   |   |
| Salaries  and benefits                                              |       | 81,589                           |       | 57,996 |   | 35,765 |   |
| Other                                                               |       | 35,620                           |       | 27,076 |   | 18,157 |   |
| Total  general and administrative expenses                          |       | 117,209                          |       | 85,072 |   | 53,922 |   |
| Operating  income                                                   |       | 42,075                           |       | 28,199 |   | 13,898 |   |
| Interest  expense, net                                              |       | (803                             | )          | (1,147 | ) | (837 | ) |
| Income  from continuing operations before income taxes              |       | 41,272                           |       | 27,052 |   | 13,061 |   |
| Income  tax expense                                                 |       | (16,583                          | )          | (10,655 | ) | (5,272 | ) |
| Net  income from continuing operations                              |       | 24,689                           |       | 16,397 |   | 7,789 |   |
| Discontinued  operations, net of tax benefits of $81, $70 and $138  |       | (125                             | )          | (104 | ) | (185 | ) |
| Net  income                                                         |       | $                                | 24,564     |   | $ | 16,293 |   | $ | 7,604 |   |
|                                                                |       |                             |       |   |   |   |   |
| Per  share amounts-basic:                                           |       |                             |       |   |   |   |   |
| Average  shares outstanding                                         |       | 8,372                            |       | 7,369 |   | 5,436 |   |
| Income  from continued operations                                   |       | $                                | 2.95       |   | $ | 2.23 |   | $ | 1.43 |   |
| Loss  from discontinued operations                                  |       | (0.02                            | )          | (0.02 | ) | (0.03 | ) |
| Net  income                                                         |       | $                                | 2.93       |   | $ | 2.21 |   | $ | 1.40 |   |
|                                                                |       |                             |       |   |   |   |   |
| Per  share amounts-diluted:                                         |       |                             |       |   |   |   |   |
| Average  shares outstanding                                         |       | 8,589                            |       | 7,572 |   | 5,600 |   |
| Income  from continued operations                                   |       | $                                | 2.87       |   | $ | 2.17 |   | $ | 1.39 |   |
| Loss  from discontinued operations                                  |       | (0.01                            | )          | (0.01 | ) | (0.03 | ) |
| Net  income                                                         |       | $                                | 2.86       |   | $ | 2.16 |   | $ | 1.36 |   |

 

The accompanyingnotes to consolidated financial statements are an integral part of thesefinancial statements.

 

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***ALMOST FAMILY, INC.*****AND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

**(In thousands)**

** **
| ** **                                                                                  | ** ** | **As of December 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                  | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| **ASSETS**                                                                                  |       |                        |       |   |   |
| CURRENT  ASSETS:                                                                            |       |                        |       |   |   |
| Cash  and cash equivalents                                                                  |       | $                           | 19,389     |   | $ | 1,182 |   |
| Accounts  receivable - net                                                                  |       | 35,121                      |       | 34,760 |   |
| Prepaid  expenses and other current assets                                                  |       | 2,544                       |       | 3,114 |   |
| Deferred  tax assets                                                                        |       | 7,786                       |       | 4,438 |   |
| TOTAL  CURRENT ASSETS                                                                       |       | 64,840                      |       | 43,494 |   |
|                                                                                        |       |                        |       |   |   |
| PROPERTY  AND EQUIPMENT - NET                                                               |       | 4,291                       |       | 4,199 |   |
|                                                                                        |       |                        |       |   |   |
| GOODWILL                                                                                    |       | 99,133                      |       | 92,170 |   |
|                                                                                        |       |                        |       |   |   |
| OTHER  INTANGIBLE ASSETS                                                                    |       | 14,538                      |       | 16,715 |   |
|                                                                                        |       |                        |       |   |   |
| OTHER  ASSETS                                                                               |       | 587                         |       | 519 |   |
|                                                                                        |       | $                           | 183,389    |   | $ | 157,097 |   |
|                                                                                        |       |                        |       |   |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                              |       |                        |       |   |   |
|  CURRENT LIABILITIES:                                                                  |       |                        |       |   |   |
| Accounts  payable                                                                           |       | $                           | 3,360      |   | $ | 5,321 |   |
| Accrued  other liabilities                                                                  |       | 20,076                      |       | 22,317 |   |
| Current  portion - capital leases and notes payable                                         |       | 1,836                       |       | 4,774 |   |
| TOTAL  CURRENT LIABILITIES                                                                  |       | 25,272                      |       | 32,412 |   |
|                                                                                        |       |                        |       |   |   |
| LONG-TERM  LIABILITIES:                                                                     |       |                        |       |   |   |
| Revolving  credit facility                                                                  |       | —                      |       | 23,998 |   |
| Capital  lease obligations                                                                  |       | 40                          |       | 111 |   |
| Notes  payable                                                                              |       | 2,800                       |       | 3,100 |   |
| Deferred  tax liabilities                                                                   |       | 5,258                       |       | 1,216 |   |
| Other  liabilities                                                                          |       | 1,042                       |       | 1,477 |   |
| TOTAL  LONG-TERM LIABILITIES                                                                |       | 9,140                       |       | 29,902 |   |
| TOTAL  LIABILITIES                                                                          |       | 34,412                      |       | 62,314 |   |
|                                                                                        |       |                        |       |   |   |
| 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; 9,151 and 8,137

issued  and outstanding |       | 915                         |       | 814 |   |
| Additional  paid-in capital                                                                 |       | 94,465                      |       | 64,936 |   |
| Retained  earnings                                                                          |       | 53,597                      |       | 29,033 |   |
| TOTAL  STOCKHOLDERS’ EQUITY                                                            |       | 148,977                     |       | 94,783 |   |
|                                                                                        |       | $                           | 183,389    |   | $ | 157,097 |   |

 

The accompanying notes to consolidated financialstatements are an integral part of these financial statements.

 

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***ALMOST FAMILY, INC.*****AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY(1)**

**(In thousands)**

** **
| ** **                                                 | ** ** | ** **       | ** ** | ** **         | ** ** | ** **  | ** ** | ** **   | ** ** | **Additional**         | ** ** | ** **   | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|------------------|------------|--------------------|------------|-------------|------------|--------------|------------|------------------------|------------|--------------|------------|------------|------------|
| ** **                                                 | ** ** | **Common Stock** | ** ** | **Treasury Stock** | ** ** | **Paid-in** | ** ** | **Retained** | ** ** | **Stockholders’** | ** ** |
| ** **                                                 | ** ** | **Shares**       | ** ** | **Amount**         | ** ** | **Shares**  | ** ** | **Amount**   | ** ** | **Capital**            | ** ** | **Earnings** | ** ** | **Equity** | ** ** |
| **Balance, December 31, 2006**                        |       | 7,357            |       | $                  | 736        |        | (2,266     | )            | $          | (8,201                 | )          | $            | 30,068     |       | $          | 5,136 |   | $ | 27,740 |   |
| Options exercised, net of shares surrendered or  withheld  |       | 350              |       | 35                 |       | (31         | )          | (678         | )          | (2,926                 | )          | —       |       | (3,569     | )          |
| Stock-based compensation                                   |       |             |       |               |       | —      |       | —       |       | 363                    |       | —       |       | 363        |       |
| Stock provided in acquisitions                             |       | 101              |       | 10                 |       | —      |       | —       |       | 1,990                  |       | —       |       | 2,000      |       |
| Tax benefit from exercise of non- qualified stock  options |       | —           |       | —             |       | —      |       | —       |       | 704                    |       | —       |       | 704        |       |
| Net income                                                 |       | —           |       | —             |       | —      |       | —       |       | —                 |       | 7,604        |       | 7,604      |       |
| **Balance, December 31, 2007**                        |       | 7,808            |       | $                  | 781        |        | (2,297     | )            | $          | (8,879                 | )          | $            | 30,199     |       | $          | 12,740 |   | $ | 34,842 |   |
| Options exercised, net of shares surrendered or  withheld  |       | 11               |       | 1                  |       | —      |       | —       |       | 52                     |       | —       |       | 53         |       |
| Stock-based compensation                                   |       | 34               |       | 3                  |       | —      |       | —       |       | 685                    |       | —       |       | 688        |       |
| Stock provided in acquisitions                             |       | 48               |       | 5                  |       | —      |       | —       |       | 995                    |       | —       |       | 1,000      |       |
| Tax benefit from exercise of non- qualified stock  options |       | —           |       | —             |       | —      |       | —       |       | 86                     |       | —       |       | 86         |       |
| Stock offering                                             |       | 2,512            |       | 251                |       | —      |       | —       |       | 41,570                 |       | —       |       | 41,821     |       |
| Retirement of Treasury Stock                               |       | (2,297           | )          | (230               | )          | 2,297       |       | 8,879        |       | (8,649                 | )          | —       |       | —     |       |
| Net income                                                 |       | —           |       | —             |       | —      |       | —       |       | —                 |       | 16,293       |       | 16,293     |       |
| **Balance, December 31, 2008**                        |       | 8,116            |       | $                  | 814        |        | —     |         | $          | —                 |       | $            | 64,938     |       | $          | 29,033 |   | $ | 94,783 |   |
| Options exercised, net of shares surrendered or  withheld  |       | 20               |       | 2                  |       | —      |       | —       |       | 98                     |       | —       |       | 100        |       |
| Stock-based compensation                                   |       | 47               |       | 5                  |       | —      |       | —       |       | 1,366                  |       | —       |       | 1,371      |       |
| Tax benefit from exercise of non- qualified stock  options |       | —           |       | —             |       | —      |       | —       |       | 203                    |       | —       |       | 203        |       |
| Stock offering                                             |       | 968              |       | 97                 |       | —      |       | —       |       | 27,860                 |       | —       |       | 27,957     |       |
| Net income                                                 |       | —           |       | —             |       | —      |       | —       |       | —                 |       | 24,564       |       | 24,564     |       |
| **Balance, December 31, 2009**                        |       | 9,151            |       | $                  | 915        |        | —     |         | $          | —                 |       | $            | 94,465     |       | $          | 53,597 |   | $ | 148,977 |   |

 

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(1) All shareand related information has been adjusted to reflect a 2-for-1 common stocksplit completed in January 2007.

 

The accompanying notes to consolidated financialstatements are an integral part of these financial statements.

 

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***ALMOST FAMILY, INC.*****AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**(inthousands)**

 
| ** **                                                                                                | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                                | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** |   |
| Cash flows from operating activities:                                                                     |       |                             |       |   |   |   |   |
| Net income                                                                                                |       | $                                | 24,564     |   | $ | 16,293 |   | $ | 7,604 |   |
| Loss from discontinued operations                                                                         |       | (125                             | )          | (104 | ) | (184 | ) |
| Income from continuing operations                                                                         |       | 24,689                           |       | 16,397 |   | 7,788 |   |
| Adjustments to reconcile income from continuing  operations to net cash provided by operating activities: |       |                             |       |   |   |   |   |
| Depreciation and amortization                                                                             |       | 2,385                            |       | 1,330 |   | 842 |   |
| Provision for uncollectible accounts                                                                      |       | 3,762                            |       | 2,963 |   | 1,543 |   |
| Stock-based compensation                                                                                  |       | 1,371                            |       | 688 |   | 363 |   |
| Deferred income taxes                                                                                     |       | 695                              |       | 1,364 |   | 911 |   |
|                                                                                                      |       | 32,902                           |       | 22,742 |   | 11,447 |   |
| Change in certain net assets and liabilities, net  of the effects of acquisitions:                        |       |                             |       |   |   |   |   |
| (Increase) decrease in:                                                                                   |       |                             |       |   |   |   |   |
| Accounts receivable                                                                                       |       | (3,958                           | )          | (14,282 | ) | (4,782 | ) |
| Prepaid expenses and other current assets                                                                 |       | 570                              |       | (993 | ) | (298 | ) |
| Other assets                                                                                              |       | (69                              | )          | (34 | ) | (79 | ) |
| Increase (decrease) in:                                                                                   |       |                             |       |   |   |   |   |
| Accounts payable and accrued expenses                                                                     |       | (2,221                           | )          | 2,026 |   | 1,048 |   |
| Net cash provided by operating activities                                                                 |       | 27,224                           |       | 9,459 |   | 7,336 |   |
|                                                                                                      |       |                             |       |   |   |   |   |
| Cash flows from investing activities:                                                                     |       |                             |       |   |   |   |   |
| Capital expenditures                                                                                      |       | (2,134                           | )          | (1,476 | ) | (583 | ) |
| Acquisitions, net of cash acquired                                                                        |       | (6,510                           | )          | (59,797 | ) | (9,075 | ) |
| Net cash used in investing activities                                                                     |       | (8,644                           | )          | (61,273 | ) | (9,658 | ) |
|                                                                                                      |       |                             |       |   |   |   |   |
| Cash flows from financing activities:                                                                     |       |                             |       |   |   |   |   |
| Net revolving credit facility (repayments)  borrowings                                                    |       | (23,998                          | )          | 11,611 |   | 3,922 |   |
| Proceeds from stock option exercises                                                                      |       | 100                              |       | 53 |   | 78 |   |
| Purchase of common stock in connection with stock  options                                                |       | —                           |       | — |   | (3,646 | ) |
| Tax benefit from non-qualified stock option  exercises                                                    |       | 203                              |       | 86 |   | 704 |   |
| Proceeds from stock offering, net                                                                         |       | 27,957                           |       | 41,821 |   | — |   |
| Principal payments on capital leases and notes  payable                                                   |       | (4,510                           | )          | (944 | ) | (2,323 | ) |
| Net cash (used in) provided by financing activities                                                       |       | (248                             | )          | 52,627 |   | (1,265 | ) |
|                                                                                                      |       |                             |       |   |   |   |   |
| Cash flows from discontinued operations:                                                                  |       |                             |       |   |   |   |   |
| Operating activities                                                                                      |       | (125                             | )          | (104 | ) | (323 | ) |
| Investing activities                                                                                      |       | —                           |       | — |   | 257 |   |
| Financing activities                                                                                      |       | —                           |       | — |   | — |   |
| Net cash used in discontinued operations                                                                  |       | (125                             | )          | (104 | ) | (66 | ) |
|                                                                                                      |       |                             |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                                                     |       | 18,207                           |       | 709 |   | (3,653 | ) |
| Cash and cash equivalents at beginning of period                                                          |       | 1,182                            |       | 473 |   | 4,126 |   |
| Cash and cash equivalents at end of period                                                                |       | $                                | 19,389     |   | $ | 1,182 |   | $ | 473 |   |
|                                                                                                      |       |                             |       |   |   |   |   |
| **Supplemental disclosures of cash  flow information:**                                                   |       |                             |       |   |   |   |   |
| Cash payment of interest, net of amounts  capitalized                                                     |       | $                                | 1,133      |   | $ | 871 |   | $ | 915 |   |
| Cash payment of taxes                                                                                     |       | $                                | 14,175     |   | $ | 9,308 |   | $ | 3,176 |   |
|                                                                                                      |       |                             |       |   |   |   |   |
| **Summary of non-cash investing and  financing activities:**                                              |       |                             |       |   |   |   |   |
| Capital expenditures financed under capital leases                                                        |       | $                                | —     |   | $ | 967 |   | $ | — |   |
| Acquisitions funded by notes payable                                                                      |       | $                                | 1,200      |   | $ | 3,100 |   | $ | — |   |
| Acquisitions funded by stock                                                                              |       | $                                | —     |   | $ | 1,000 |   | $ | 2,000 |   |
| Value of stock withheld in lieu of payroll taxes                                                          |       | $                                | 14         |   | $ | 7 |   | $ | 3,725 |   |

 

The accompanying notes to consolidated financial statementsare an integral part of these financial statements.

 

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***ALMOSTFAMILY, INC.*****AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unless otherwise indicated all dollar and shareamounts are in thousands)**

 

**NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

 

**BASIS OF CONSOLIDATION AND DESCRIPTION OF BUSINESS**

 

The consolidatedfinancial statements include the accounts of *AlmostFamily, Inc.*(a Delaware corporation) and its wholly-ownedsubsidiaries (collectively “*Almost Family*”or the “Company”). The Company is a leading, regionally focused provider ofhome health services and has service locations in Florida, Kentucky,Connecticut, New Jersey, Ohio, Massachusetts, Alabama, Missouri, Illinois,Pennsylvania and Indiana (in order of revenue significance).

 

The Company wasincorporated in Delaware in 1985. Through a predecessor that merged into the Company in 1991, we have beenproviding health care services, primarily home health care, since 1976.  On January 31, 2000, we changed theCompany’s name to *Almost Family, Inc.* fromCaretenders HealthCorp.  All materialintercompany transactions and accounts have been eliminated in consolidation.

 

**CASH AND CASH EQUIVALENTS**

 

The Companyconsiders all highly liquid debt instruments purchased with an originalmaturity of three months or less to be cash equivalents.

 

Uninsured deposits at December 31, 2009, and 2008 wereapproximately $18,804 and $271, respectively. These amounts have been deposited with national financial institutions.

 

**PROPERTY AND EQUIPMENT**

 

Property andequipment are stated at cost. Depreciation is computed using the straight-linemethod over the estimated useful lives. The estimated useful lives of depreciable assets are as follows:

 
| ** **                    | ** ** | **Estimated Useful Life in Years** | ** ** |
|-------------------------------|------------|------------------------------------|------------|
| Leasehold improvements        |       | 3 -10                              |       |
| Medical equipment             |       | 2 - 10                             |       |
| Office and other equipment    |       | 3 – 10                        |       |
| Transportation equipment      |       | 3 – 5                         |       |
| Internally generated software |       | 3                                  |       |

 

**GOODWILL AND OTHER INTANGIBLE ASSETS**

 

The goodwill andindefinite lived intangible assets acquired are stated at cost.  Subsequent to its acquisitions, the Companyconducts annual reviews for impairment, or more frequently if circumstancesindicate impairment may have occurred, under ASC Topic 350, Intangibles —Goodwill and Other (formerly FASB Statement No. 142, “Goodwill and OtherIntangible Assets”).  The Companyhas completed its most recent annual impairment test as of December 31,2009 and has determined that no impairment exists.

 

Otherintangible assets consist of licenses, certificates of need, non-competeagreements, and trade name.  Definite-lived intangible assets areamortized on a straight-line basis over their estimated usefullives.  For entities acquired in 2008, the licenses, certificates ofneed, certificates of need and trade names have indefinite lives and are notamortized. The cost of non-compete agreements are amortized over the life ofthe agreement, usually 3 years, beginning after earn out period.  TheCompany reviews definite-lived intangible assets for possible impairmentwhenever events or changes in circumstances indicate that carrying amounts maynot be recoverable.

 

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Thefollowing table summarizes the activity related to our goodwill and otherintangible assets for 2009 and 2008

 
| ** **            | ** ** | **Other Intangible Assets** | ** ** |
|-----------------------|------------|-----------------------------|------------|
| ** **            | ** ** | **Goodwill**                | ** ** | **Certificates of   Need and   licenses** | ** ** | **Trade Name** | ** ** | **Non-compete   Agreements** | ** ** | **Total** | ** ** |
| Balances  at 12-31-07 |       | $                           | 42,667     |   | $ | 2,159 |   | $ | 167 |   | $ | 162 |   | $ | 2,488 |   |
| Additions             |       | 49,503                      |       | 5,242 |   | 8,505 |   | 670 |   | 14,417 |   |
| Amortization          |       | —                      |       | (11 | ) | (21 | ) | (158 | ) | (190 | ) |
| Balances  at 12-31-08 |       | 92,170                      |       | 7,390 |   | 8,651 |   | 674 |   | 16,715 |   |
| Additions             |       | 5,209                       |       | 300 |   | 200 |   |   |   | 500 |   |
| Reclassifications  *  |       | 1,754                       |       | (1,099 | ) | (1,270 | ) | (10 | ) | (2,379 | ) |
| Amortization          |       | —                      |       | — |   | — |   | (298 | ) | (298 | ) |
| Balances  at 12-31-09 |       | $                           | 99,133     |   | $ | 6,591 |   | $ | 7,581 |   | $ | 366 |   | $ | 14,538 |   |

 

----

* Relates to finalizationof purchase accounting for Patient Care, Inc.

 

Oftotal goodwill, $95,306 relates the Visiting Nurse segment and $3,827 relatesto the Personal Care segment.  Alladditions and reclassifications in 2009 and 2008 pertain to the Visiting Nursesegment.

 

**CAPITALIZATION POLICIES**

 

Maintenance, repairs and minor replacements are charged to expense asincurred.  Major renovations andreplacements are capitalized to appropriate property and equipmentaccounts.  Upon sale or retirement ofproperty, the cost and related accumulated depreciation are eliminated from theaccounts and the related gain or loss is recognized in income.

 

The Company capitalizes the cost of internally developed computersoftware for the Company’s own use. Software development costs of approximately $293, $30 and $101 werecapitalized in the years ended December 31, 2009 and 2008 and 2007,respectively.

 

**INSURANCEPROGRAMS**

 

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

 

Malpracticeand general patient liability claims for incidents which may give rise tolitigation have been asserted against the Company by various claimants.  The claims are in various stages ofprocessing and some may ultimately be brought to trial.  The Company is aware of incidents that haveoccurred through December 31, 2009 that may result in the assertion ofadditional claims.  The Company currentlycarries professional and general liability insurance coverage for this exposurewith no deductible.  Prior to April 1,2007 the Company carried coverage with a deductible per claim of $500.

 

TheCompany records estimated liabilities for its insurance programs based oninformation provided by the third-party plan administrators, historical claimsexperience, the life cycle of claims, expected costs of claims incurred but notpaid, and expected costs to settle unpaid claims.  The Company monitors its estimatedinsurance-related liabilities on a monthly basis.  As facts change, it may become necessary tomake adjustments that could be material to the Company’s results of operationsand financial condition.

 

**ACCOUNTING FOR INCOME TAXES**

 

The Companyrecognizes deferred tax assets and liabilities for the expected future taxconsequences of events that have been included in the financial statements ortax returns.  Under this method, deferredtax assets and liabilities 

 

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are determinedbased on the difference between the Company’s book and tax bases of assets andliabilities and tax carryforwards using enacted tax rates in effect for theyear in which the differences are expected to reverse.

 

**SEASONALITY**

 

Our Visiting Nurse segment operations located in Florida normallyexperience higher admissions during the first quarter and lower admissionsduring the third quarter than in the other quarters due to seasonal populationfluctuations.

 

**NET SERVICE REVENUES**

 

The Company is paid for its services primarily by Federal and statethird-party reimbursement programs, commercial insurance companies, andpatients. Revenues are recorded at established rates in the period during whichthe services are rendered.  Appropriate allowancesto give recognition to third party payment arrangements are recorded when theservices are rendered.

 

Laws andregulations governing the Medicare and Medicaid programs are extremely complexand subject to interpretation.  It iscommon for issues to arise related to: 1) medical coding, particularly withrespect to Medicare, 2) patient eligibility, particularly related to Medicaid,and 3) other reasons unrelated to credit risk, all of which may result inadjustments to recorded revenue amounts. The Company continuously evaluates the potential for revenue adjustmentsand when appropriate provides allowances for losses based upon the bestavailable information.  There is at leasta reasonable possibility that recorded estimates could change by materialamounts in the near term.

 

***Changes in Contractual Allowance EstimatesPertaining to Prior Periods***

 

Approximately 23% of the Company’s revenues are earned on a per visit,hour or unit basis (as opposed to episodic). For all services provided, the Company uses either payor-specific orpatient-specific fee schedules for the recording of revenues at the amountsactually expected to be received. Changes in estimates related to prior period contractual allowancesdecreased revenues by $88, $265, and $127 in the years ended December 31,2009, 2008 and 2007, respectively.

 

Approximately 17% of the Company’s 2009 revenues were derived fromstate Medicaid and other government programs, some of which are currentlyfacing significant budget issues.  It ispossible that the actions taken by the state Medicaid programs in the futurecould have a significant unfavorable impact on the Company’s results ofoperations, financial condition and liquidity.

 

***Revenue and Receivable Concentrations***

 

The following table sets forth the percent of the Company’s revenues generatedfrom Medicare, state Medicaid programs and other payors:

 
| ** **                                      | ** ** | **Year Ended December 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Medicare                                        |       | 77.3                             | %          | 74.2 | % | 68.1 | % |
| Medicaid &  other government programs: |       |                             |       |   |   |   |   |
| Connecticut                                     |       | 7.5                              | %          | 6.4 | % | 5.0 | % |
| Ohio                                            |       | 4.4                              | %          | 5.1 | % | 8.4 | % |
| Kentucky                                        |       | 3.1                              | %          | 4.4 | % | 6.6 | % |
| Massachusetts                                   |       | 0.7                              | %          | 1.2 | % | 1.6 | % |
| Florida                                         |       | 0.6                              | %          | 0.8 | % | 1.2 | % |
| Others                                          |       | 0.7                              | %          | 0.5 | % | 0.5 | % |
| Subtotal                                        |       | 17.0                             | %          | 18.4 | % | 23.3 | % |
| All  other payors                               |       | 5.7                              | %          | 7.4 | % | 8.6 | % |
| Total                                           |       | 100.0                            | %          | 100.0 | % | 100.0 | % |

 

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Concentrations inthe Company’s accounts receivable were as follows:

** **
| ** **                                      | ** ** | **As of December 31, 2009** | ** ** | **As of December 31, 2008** | ** ** |
|-------------------------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                                      | ** ** | **Amount**                       | ** ** | **Percent**                      | ** ** | **Amount** | ** ** | **Percent** | ** ** |
| Medicare                                        |       | $                                | 28,306     |                             | 68.0       | % | $ | 24,661 |   | 62.9 | % |
| Medicaid &  other government programs: |       |                             |       |                             |       |   |   |   |   |
| Connecticut                                     |       | 5,431                            |       | 13.0                             | %          | 4,140 |   | 10.6 | % |
| Kentucky                                        |       | 1,799                            |       | 4.3                              | %          | 2,598 |   | 6.6 | % |
| Ohio                                            |       | 1,493                            |       | 3.6                              | %          | 1,410 |   | 3.6 | % |
| Florida                                         |       | 1,194                            |       | 2.9                              | %          | 1,159 |   | 3.0 | % |
| Massachusetts                                   |       | 1,005                            |       | 2.4                              | %          | 612 |   | 1.6 | % |
| Others                                          |       | 230                              |       | 0.6                              | %          | 89 |   | 0.2 | % |
| Kentucky  Medicaid Payable                      |       | (2,324                           | )          | -5.6                             | %          | (841 | ) | -2.1 | % |
| Subtotal                                        |       | 8,828                            |       | 21.2                             | %          | 9,167 |   | 23.4 | % |
| All  other payors                               |       | 4,521                            |       | 10.9                             | %          | 5,350 |   | 13.7 | % |
| Subtotal                                        |       | 41,655                           |       | 100.0                            | %          | 39,178 |   | 100.0 | % |
| Allowance  for uncollectiable accounts          |       | (6,534                           | )          |                             |       | (4,418 | ) |   |   |
| Total                                           |       | $                                | 35,121     |                             |       |   | $ | 34,760 |   |   |   |

 

At December 31,2009 and 2008, the Company had approximately $2,324 and $841 of payablesoutstanding specifically related to filed or estimated cost reports with the KentuckyMedicaid program.

 

The ability ofpayors to meet their obligations depends upon their financial stability, futurelegislation and regulatory actions.  TheCompany does not believe there are any significant credit risks associated withreceivables from Federal and state third-party reimbursement programs. Theallowance for doubtful accounts principally consists of management’s estimateof amounts that may prove uncollectible for coverage, eligibility and technicalreasons.

 

**Payor Mix Concentrations and Related Aging of AccountsReceivable**

 

The approximate breakdown of accounts receivable by payorclassification as of December 31, 2009 and 2008 is set forth in thefollowing tables:

 

**As ofDecember 31, 2009:**

 
| ** **                      | ** ** | **Percent  of Accounts Receivable** | ** ** |
|---------------------------------|------------|-------------------------------------|------------|
| **Payor**                       | ** ** | **0-90**                            | ** ** | **91-180** | ** ** | **181-365** | ** ** | **>1 yr.** | ** ** | **Total** | ** ** |
| Medicare                        |       | 50                                  | %          | 8 | % | 3 | % | 3 | % | 64 | % |
| Medicaid &  Government |       | 17                                  | %          | 3 | % | 3 | % | 3 | % | 26 | % |
| Self  Pay                       |       | 1                                   | %          | 0 | % | 0 | % | 1 | % | 2 | % |
| Insurance                       |       | 3                                   | %          | 1 | % | 2 | % | 2 | % | 8 | % |
| Total                           |       | 71                                  | %          | 12 | % | 8 | % | 9 | % | 100 | % |

 

**As of December 31, 2008:**

 
| ** **                      | ** ** | **Percent of Accounts Receivable** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| **Payor**                       | ** ** | **0-90**                           | ** ** | **91-180** | ** ** | **181-365** | ** ** | **>1 yr.** | ** ** | **Total** | ** ** |
| Medicare                        |       | 46                                 | %          | 10 | % | 7 | % | 0 | % | 63 | % |
| Medicaid &  Government |       | 18                                 | %          | 4 | % | 2 | % | 0 | % | 24 | % |
| Self  Pay                       |       | 2                                  | %          | 0 | % | 1 | % | 0 | % | 3 | % |
| Insurance                       |       | 4                                  | %          | 2 | % | 2 | % | 2 | % | 10 | % |
| Total                           |       | 70                                 | %          | 16 | % | 12 | % | 2 | % | 100 | % |

 

The balance sheet as of December 31, 2009 reflects a 1% increasein net accounts receivable from December 31, 2008.  The balance sheet as of December 31,2008 reflects a 105% increase from December 31, 2007 due to acquiredaccounts receivable purchase over that time frame.  Days sales outstanding decreased to 41 daysat December 31, 2009 from 48 days at December 31, 2008 and 44 days atDecember 31, 2007.

 

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**Allowance for Uncollectible Accounts by Payor Mix andRelated Aging**

 

The Company records an estimated allowance for uncollectible accountsby applying estimated bad debt percentages to its accounts receivableaging.  The percentages to be applied bypayor type are based on the Company’s historical collection and lossexperience.  The Company’s effectiveallowances for bad debt were as follows:

 

**Asof December 31, 2009:**

 
| ** **                      | ** ** | **Percent of Accounts Receivable** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| **Payor**                       | ** ** | **0-90**                           | ** ** | **91-180** | ** ** | **181-365** | ** ** | **>1 yr.** | ** ** | **>2 yrs.** | ** ** |
| Medicare                        |       | 3                                  | %          | 10 | % | 59 | % | 100 | % | 100 | % |
| Medicaid &  Government |       | 2                                  | %          | 6 | % | 27 | % | 82 | % | 100 | % |
| Self  Pay                       |       | 1                                  | %          | 6 | % | 25 | % | 78 | % | 100 | % |
| Insurance                       |       | 4                                  | %          | 9 | % | 51 | % | 98 | % | 100 | % |
| Total                           |       | 2                                  | %          | 9 | % | 43 | % | 93 | % | 100 | % |

 

**As of December 31, 2008:**

 
| ** **                      | ** ** | **Percent of Accounts Receivable** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| **Payor**                       | ** ** | **0-90**                           | ** ** | **91-180** | ** ** | **181-365** | ** ** | **>1 yr.** | ** ** | **>2 yrs.** | ** ** |
| Medicare                        |       | 3                                  | %          | 10 | % | 20 | % | 28 | % | 100 | % |
| Medicaid &  Government |       | 2                                  | %          | 6 | % | 12 | % | 80 | % | 100 | % |
| Self  Pay                       |       | 1                                  | %          | 6 | % | 5 | % | 79 | % | 100 | % |
| Insurance                       |       | 2                                  | %          | 9 | % | 32 | % | 99 | % | 100 | % |
| Total                           |       | 2                                  | %          | 9 | % | 20 | % | 96 | % | 100 | % |

 

The Company’sprovision for uncollectible accounts for the years ended December 31,2009, 2008 and 2007 was approximately $3,762, $2,963 and $1,543, respectively.

 

**STOCKSPLIT**

 

All share and pershare information in the accompanying financial statements and the notesthereto have been adjusted to give effect to the 2-for-1 split in the form of adividend completed in January 2007.

 

**NETINCOME PER SHARE**

 

Net income pershare is presented as a unit of basic shares outstanding and diluted sharesoutstanding.  Diluted shares outstandingis computed based on the weighted average number of common shares and commonequivalent shares outstanding.  Commonequivalent shares result from dilutive stock options.  The following table is a reconciliation ofbasic to diluted shares used in the earnings per share calculation

 
| ** **                                                                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                   | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Basic weighted average outstanding shares                                                    |       | 8,372                            |       | 7,369 |   | 5,436 |   |
| Add common equivalent shares representing shares  issuable upon exercise of dilutive options |       | 217                              |       | 203 |   | 164 |   |
| Diluted weighted average number of shares at year  end                                       |       | 8,589                            |       | 7,572 |   | 5,600 |   |

 

**USE OF ESTIMATES**

 

The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and reported amounts of revenues and expenses duringthe reporting period.  Actual resultscould differ from those estimates.

 

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**FINANCIAL STATEMENT RECLASSIFICATIONS**

 

Certain prior period amounts and data have been reclassified in thefinancial statements and related notes in order to conform to the 2009presentation.  Such reclassifications hadno effect on previously reported net income.

 

**STOCK-BASED COMPENSATION**

 

Stock options and restricted stock aregranted under various stock compensation programs to employees and independentdirectors.  The Company accounts forstock option grants in accordance with ASC Topic 718, Compensation — StockCompensation (formerly FASB Statement No. 123R, “Share-Based Payment”).

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

In June 2009, the FASB confirmed the “FASBAccounting Standards Codification” (ASC) as the single source of authoritativenongovernmental U.S. GAAP.  The ASC doesnot change current U.S. GAAP, but instead simplifies user access to allauthoritative U.S. GAAP by providing authoritative literature related to aparticular topic in one place.  Allexisting accounting standard documents have been superseded and all otheraccounting literature not included in the ASC is considerednonauthoritative.  We adopted the ASC asof July 1, 2009, which did not impact our financial position, results ofoperations, or cash flows.

 

In December 2007, the FASB issued ASC 805, Business Combinations(formerly SFAS No. 141R).  ASC 805provides guidance to improve the relevance, representational faithfulness, andcomparability of the information that a reporting entity provides in itsfinancial reports about its business combinations and its effects.  ASC 805 establishes principles andrequirements for how the acquirer recognizes and measures in its financialstatements the identifiable assets acquired, liabilities assumed, the goodwillacquired and determines what information to disclose to enable users of thefinancial statements to evaluate the nature and financial effects of thebusiness combination.  ASC 805 waseffective for acquisitions beginning in our fiscal year beginning January 1,2009 and earlier application is prohibited. The adoption of this standard did not have a material impact on theCompany’s consolidated financial statements.

 

In December 2007, the FASB issued ASC 810, Consolidation,(formerly SFAS No. 160)  ASC 810requires all entities to report noncontrolling (minority) interests insubsidiaries as equity in the consolidated financial statements, but separatefrom the equity of the parent company. The statement further requires that consolidated net income be reportedat amounts attributable to the parent and the noncontrolling interest, ratherthan expensing the income attributable to the minority interest holder.  This statement also requires that companiesprovide sufficient disclosures to clearly identify and distinguish between theinterests of the parent company and the interests of the noncontrolling owners,including a disclosure on the face of the consolidated statements for incomeattributable to the noncontrolling interest holder.  This statement was effective for the fiscalyears beginning on or after December 15, 2008 or our first quarter of 2009.  The adoption of this statement had nosignificant impact on the Company’s consolidated financial statements.

 

In April 2008, the FASB issued FASB Staff Position (“FSP”) No. 142-3,Determination of the Useful Life of Intangible Assets.  This FSP amends the factors that should beconsidered in developing renewal or extension assumption used to determine theuseful life of a recognized intangible asset under ASC 350, Goodwill and OtherIntangible Assets (formerly SFAS No. 142). This FSP is effective for fiscal years beginning after December 15,2008.  The adoption of this statement hadno significant impact on the Company’s consolidated financial statements.

 

InApril 2009, the FASB issued ASC 825, Financial Instruments (formerly FSP No. 107-1and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about FairValue of Financial Instruments.”) This topic requires disclosures about the fair value of instruments in interim aswell as in annual financial statements. ASC 825 was effective for interimreporting periods ending after June 15, 2009.  The Company adopted ASC 825 for the periodending June 30, 2009.

 

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InMay 2009, the FASB issued ASC 855, Subsequent Events, (formerly SFAS No. 165,“Subsequent Events”).  ASC 855establishes general standards for accounting and disclosure of events thatoccur after the balance sheet date but before financial statements are issuedor are available to be issued.  ASC 855was effective for interim or annual financial periods ending after June 15,2009.  The Company adopted ASC 855 forthe period ending June 30, 2009 requiring additional footnote disclosure.

 

**ADVERTISING COSTS**

 

The Company expenses the costs of advertising as incurred.  Advertising expense was $364, $254 and $190for the years ended December 31, 2009, 2008, and 2007, respectively.

 

**DISCONTINUED OPERATIONS**

 

The Company follows the guidance in ASC Topic 360, Property, Plant andEquipment, and when appropriate, reclassifies operating units closed, sold, orheld for sale out of continuing operations and into discontinued operations forall periods presented.

 

**NOTE 2 - ACCRUED LIABILITIES**

 

Accrued liabilities consist of the following (in thousands):

 
| ** **                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| ** **                             | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Wages  and employee benefits           |       | $                           | 9,381      |   | $ | 9,067 |   |
| Insurance  accruals                    |       | 5,612                       |       | 5,361 |   |
| Accrued  taxes                         |       | 1,503                       |       | 336 |   |
| Accrued  professional fees and other   |       | 2,730                       |       | 4,673 |   |
| Acquisition  contingent considerations |       | 850                         |       | 2,880 |   |
|                                   |       | $                           | 20,076     |   | $ | 22,317 |   |

 

**NOTE 3 -PROPERTY AND EQUIPMENT**

 

Property andequipment, including equipment under capital leases, consist of the following(in thousands):

 
| ** **                       | ** ** | **2009** | ** **  | **2008** | ** ** |
|----------------------------------|------------|----------|-------------|----------|------------|
| Leasehold  improvements          |       | $        | 590         |     | $          | 1,613 |   |
| Medical  equipment               |       | 579      |        | 514      |       |
| Computer  equipment and software |       | 8,662    |        | 12,803   |       |
| Office  and other equipment      |       | 2,375    |        | 2,475    |       |
|                             |       | 12,206   |        | 17,405   |       |
| Less  accumulated depreciation   |       | (7,915   | )           | (13,206  | )          |
|                             |       | $        |  4,291 |     | $          | 4,199 |   |

 

Depreciation andamortization expense (including amortization of assets held under capitalleases) is recorded in General & Administrative - Other and was$2,385, $1,330 and $842 for the years ended December 31, 2009, 2008 and2007, respectively.

 

**NOTE 4 - REVOLVING CREDIT FACILITY**

 

At December 31, 2009, the Company had a $75million senior secured revolving credit facility with JP Morgan Chase Bank, NA,as Administrative Agent, Fifth Third Bank, as Syndication Agent and certainother lenders.  The facility consists ofa $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 $100million.  Borrowings (other than lettersof credit) under the credit facility are at either the bank’s prime rateplus a margin (ranging from 0.00% to 1.00%, currently 

 

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0.00%)or LIBOR plus a margin (ranging from1.60% to 2.60%, currently 1.60%).  Themargin for prime rate or LIBOR borrowings is determined by the Company’sleverage.  Borrowings under the Agreementare secured by a first priority perfected security interest in alltangible and intangible assets of the Company, and all existing and futuredirect and indirect subsidiaries of the Company as guarantors.

 

Theweighted average prime rate-based interest rates were 3.47% and 4.86% for theyear ended December 31, 2009 and 2008, respectively.  The weighted average LIBOR rate was 2.26% for2009.  The Company pays a commitment feeof 0.25% per annum on the unused facility balance. Borrowings are availableequal to a multiple of 3.0 times earnings before interest, taxes, depreciationand amortization (“EBITDA”). “EBITDA” may include “Acquired EBITDA” fromproforma acquisitions pursuant to a calculation rider, up to 50% of “AdjustedEBITDA”, as defined. Borrowings under the facility may be used for generalcorporate purposes, including acquisitions. As of December 31, 2009, theformula permitted all $75 million to be used, of which no amounts wereoutstanding. The Company has irrevocable letters of credit totaling $5.9million outstanding in connection with its self-insurance programs. Thus, atotal of $69.1 million was available for use at December 31, 2009. TheCompany’s revolving credit facility is subject to various financial covenants.As of December 31, 2009, the Company was in compliance with the covenants.Under the most restrictive of its covenants, the Company was required to maintainminimum net worth of at least $139.0 million at December 31, 2009.  At such date the Company’s net worth wasapproximately $149.0 million.

 

**NOTE 5 — FAIR VALUE MEASUREMENTS**

 

The Company’sfinancial instruments consist of cash, accounts receivable, payables and debtinstruments.  The book values of cash,accounts receivable and payables are considered representative of theirrespective fair values.  The fair valueof the Company’s debt instruments approximates their carrying values assubstantially all of such debt instruments have rates which fluctuate withchanges in market rates.

 

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

 

Inthe first quarter of 2008, the Company adopted FASB ASC 820 (ASC 820), “FairValue Measurements and Disclosures” (formerly referenced as FASB Standard No. 157,“Fair Value Measurements”), which defines fair value, establishes guidelinesfor measuring fair value and expands disclosures regarding fair valuemeasurements with respect to financial assets and liabilities.  During the first quarter of 2009, the Companyadopted ASC 820 with respect to non-financial assets and liabilities.  This new accounting standard does not requireany new fair value measurements.

 

ASC820 requires that assets and liabilities carried at fair value be classifiedand disclosed in one of the following categories:

 

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

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

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

 

Asof December 31, 2009, the Company does not have any assets or liabilitiescarried at fair value that are measured on a recurring basis.

 

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**NOTE 6 - INCOME TAXES**

 

The principal taxcarryforwards and temporary differences were as follows (in thousands):

 
| ** **                                                                             | ** ** | **As of December 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                             | ** ** | **2009**                    | ** ** | **2008** | ** ** |
| Current  deferred tax assets                                                           |       |                        |       |   |   |
| Non-deductible  reserves and allowances                                                |       | $                           | 5,111      |   | $ | 2,383 |   |
| Insurance  accruals                                                                    |       | 2,107                       |       | 1,902 |   |
| Net  operating loss carryforwards                                                      |       | 1,510                       |       | 2,875 |   |
|                                                                                   |       | 8,728                       |       | 7,160 |   |
| Valuation  allowance                                                                   |       | (942                        | )          | (2,722 | ) |
| Deferred  tax assets                                                                   |       | 7,786                       |       | 4,438 |   |
|                                                                                   |       |                        |       |   |   |
| Non-current  deferred tax liabilities                                                  |       |                        |       |   |   |
| Intangibles                                                                            |       | (6,469                      | )          | (4,488 | ) |
| Accelerated  depreciation                                                              |       | (770                        | )          | (304 | ) |
| Nondeductible  reserves and allowances                                                 |       | 750                         |       | 1,304 |   |
| Net  operating loss carryforwards                                                      |       | 1,231                       |       | 2,272 |   |
| Deferred  tax liabilities                                                              |       | (5,258                      | )          | (1,216 | ) |
| Net  deferred tax assets                                                               |       | $                           | 2,528      |   | $ | 3,222 |   |
|                                                                                   |       |                        |       |   |   |
| Deferred  tax assets (liabilities) are reflected in the accompanying balance sheet as: |       |                        |       |   |   |
| Current  assets                                                                        |       | 7,786                       |       | 4,438 |   |
| Long-term  liabilities                                                                 |       | (5,258                      | )          | (1,216 | ) |
| Net  deferred tax assets                                                               |       | $                           | 2,528      |   | $ | 3,222 |   |

 

The Company hasapproximately $3.5 million of federal net operating losses to carry forwardrelated to the 2008 acquisition of Patient Care, Inc. and itssubsidiaries.  These net operating losscarryforwards, if not used to offset future taxable income, will expire from2025 to 2026.  The utilization of theseloss carryforwards is subject to an annual limit of approximately $2.1 million.

 

During 2009 thevaluation allowance decreased by $1.8 million, of which $479 thousand wasreleased due to a change in expected realizability of deferred tax assets forstates operating loss carryforwards.  Theadditional change was primarily generated by the utilization and expiration ofstate net operating loss carryforwards upon which a valuation allowance had beenpreviously placed on the related deferred tax assets.

 

State operatingloss carryforwards totaling $27.6 million at December 31, 2009 are beingcarried forward in jurisdictions where we are permitted to use tax losses fromprior periods to reduce future taxable income. If not used to offset future taxable income, these losses will expirebetween 2010 and 2029.  Due touncertainty regarding our ability to use some of the carryforwards, a valuationallowance has been established on $16.8 million of state net operating losscarryforwards.  Based on our historicalrecord of producing taxable income and expectations for the future, we haveconcluded that future operating income will be sufficient to give rise totaxable income sufficient to utilize the remaining state net operating losscarryforwards.

 

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Provision(benefit) recorded for income taxes consists of the following (in thousands):

 
| ** **                                          | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal  - current                                  |       | $        | 13,208     |     | $          | 7,304    |       | $ | 3,714 |   |
| State  and local - current                          |       | 2,570    |       | 1,316    |       | 854      |       |
| Deferred                                            |       | 724      |       | 1,964    |       | 566      |       |
|                                                |       | $        | 16,502     |     | $          | 10,584   |       | $ | 5,134 |   |
|                                                |       |     |       |     |       |     |       |
| Shown  in the accompanying statements of income as: |       |     |       |     |       |     |       |
| Continuing  operations                              |       | 16,583   |       | 10,654   |       | 5,272    |       |
| Discontinued  operations                            |       | (81      | )          | (70      | )          | (138     | )          |
|                                                |       | $        | 16,502     |     | $          | 10,584   |       | $ | 5,134 |   |

 

A reconciliationof the statutory to the effective rate of the Company is as follows:

 
| ** **                                     | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Tax  provision using statutory rate            |       | 35.0     | %          | 35.0     | %          | 34.0     | %          |
| State  and local taxes, net of Federal benefit |       | 7.3      | %          | 4.0      | %          | 4.9      | %          |
| Valuation  allowance                           |       | -4.2     | %          | 0.0      | %          | 1.4      | %          |
| Other,  net                                    |       | 2.1      | %          | 0.4      | %          | 0.0      | %          |
| Tax  provision for continuing operations       |       | 40.2     | %          | 39.4     | %          | 40.3     | %          |

 

The Company hasprovided a valuation allowance against certain net deferred tax assets basedupon management’s estimation of realizability of those assets through futuretaxable income.  This valuation allowancewas based in large part on the Company’s history of generating operating incomeor losses in individual tax locales and expectations for the future.  The Company’s ability to generate theexpected amounts of taxable income from future operations to realize itsrecorded net deferred tax assets is dependent upon general economic conditions,competitive pressures on revenues and margins and legislation and regulation atall levels of government.  There can beno assurances that the Company will meet its expectations of future taxableincome.  However, management hasconsidered the above factors in reaching its conclusion that it is more likelythan not that future taxable income will be sufficient to realize the netdeferred tax assets (net of valuation allowance) as of December 31, 2009.

 

Based on the Company’sevaluation, it has concluded that there are no significant uncertain taxpositions requiring recognition in its financial statements. The evaluation wasperformed for the tax years ended December 31, 2004, through 2009. Forfederal tax purposes, the Company is currently subject to examinations for taxyears 2005 through 2008 while for state purposes, tax years 2004 and forwardare subject to examination, depending on the specific state rules andregulations. The Internal Revenue Service has completed its examination of thetax year ended December 31, 2006.

 

The Company may from time totime be assessed interest and penalties by major tax jurisdictions, althoughany such assessments historically have been minimal and immaterial to itsfinancial results. Assessments for interest and/or penalties are classified inthe financial statements as general and administrative expenses other**.**

 

**NOTE 7 —****STOCKHOLDERS’EQUITY**

 

***Employee Stock Option Plans***

 

The Company has the following stock option plans:

 

1.             The Company has a1993 Stock Option Plan for Non-employee Directors which provided for thegranting of options to purchase up to 240 shares of the Company’s common stockto directors who are not employees.  Eachnewly elected director or any director who did not possess options to purchase20 shares of the Company’s common stock was automatically granted options topurchase 20 shares of common stock under this plan at an exercise price basedon the market price as of the date of grant. As of December 31, 2009, all option shares available under thisplan have been granted and options for 44 shares were outstanding under thisplan.

 

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2.             The Company has a2000 Employee Stock Option Plan which initially provided for options topurchase up to 1,000 shares of the Company’s common stock to key employees,officers and directors.  The Board ofDirectors determines the amount and terms of the options, which cannot exceedten years.  As of December 31, 2009,options for 221 shares had been granted and were outstanding under thisplan.  There are no shares available forfuture grant.

 

3.             TheCompany has a 2007Stock and Incentive Compensation Plan which provides for stock awards up to 500shares of the Company’s common stock to employees, non-employee directors orindependent contractors, with a maximum number of full value restricted shareawards up to 200.  The Board of Directorsdetermines the amount and terms of the options, which cannot exceed tenyears.  As of December 31, 2009,options for 165 shares had been granted and were outstanding under this plan.In addition, 81 restricted shares were awarded. Shares available for future grant amounted to 245 shares at December 31,2009.

 

Changes in optionshares outstanding are summarized as follows:

 
| ** **              | ** ** | **Shares** | ** ** | **Wtd Avg   Ex. Price** | ** ** |
|-------------------------|------------|------------|------------|-------------------------|------------|
| December 31,  2006 |       | 614        |       | $                       | 1.83       |   |
|                    |       |       |       |                    |       |
| Granted                 |       | 187        |       | 19.50                   |       |
| Exercised               |       | (471       | )          | 6.31                    |       |
| Terminated              |       | (13        | )          | 19.40                   |       |
| December 31,  2007 |       | 317        |       | $                       | 11.87      |   |
|                    |       |       |       |                    |       |
| Granted                 |       | 90         |       | 23.43                   |       |
| Exercised               |       | (11        | )          | 5.50                    |       |
| Terminated              |       | (22        | )          | 20.82                   |       |
| December 31,  2008 |       | 374        |       | $                       | 14.24      |   |
|                    |       |       |       |                    |       |
| Granted                 |       | 85         |       | 35.14                   |       |
| Exercised               |       | (20        | )          | 5.59                    |       |
| Terminated              |       | (9         | )          | (20.05                  | )          |
| December 31,  2009 |       | 430        |       | $                       | 18.87      |   |

 

The followingtable details exercisable options and related information:

 
| ** **                                                      | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                      | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| Exerciable  at end of year                                      |       | 210                              |       | 173 |   | 187 |   |
| Weighted  average price                                         |       | $                                | 10.50      |   | $ | 6.39 |   | $ | 6.54 |   |
|                                                            |       |                             |       |   |   |   |   |
| Weighted  average fair value of options granted during the year |       | $                                | 17.16      |   | $ | 9.89 |   | $ | 8.54 |   |

 

Beginning in 2007,the fair value of each option award is estimated on the date of grant using theMonte Carlo option valuation model with suboptimal exercise behavior. Prior to2007, the fair value of each option award was estimated on the date of grantusing the Black-Scholes option pricing model. The Monte Carlo model placesgreater emphasis on market evidence and predicts more realistic results becauseit considers open form information including volatility, employee exercisebehaviors and turnover.  The followingassumptions were used in determining the fair value of option awards for 2009:

 

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| **Grant date** | ** ** | **Equivalent interest  rate** | ** ** | **Equivalent volatility** | ** ** | **Implied expected  lives** | ** ** | **Expected lives** | ** ** |
|----------------|------------|-------------------------------|------------|---------------------------|------------|-----------------------------|------------|--------------------|------------|
| February, 2009 |       | 2.60                          | %          | 61.05                     | %          | 4.4 years                   |       | 5.1 years          |       |
| December, 2009 |       | 3.05                          | %          | 41.47                     | %          | 2.9 years                   |       | 5.4 years          |       |

 

As of December 31,2009, there was $3,292 of total unrecognized compensation cost, after estimatedfor forfeitures, related to unvested share-based compensation granted under theplans.  That cost is expected to berecognized over a weighted-average period of 3.27 years.  The total fair value of option shares vestedwas $1,020 and $399 during the years ended December 31, 2009 and 2008,respectively.

 

The followingtable summarizes information about stock options outstanding at December 31,2009:

 
| **Options  Outstanding**        | ** ** | **Options Exercisable**                            | ** ** |
|---------------------------------|------------|----------------------------------------------------|------------|
| **Range of   Exercise   Price** | ** ** | **Outstanding   as of   December 31,   2009** | ** ** | **Wtd. Avg.   Remaining   Contractual   Life** | ** ** | **Wtd. Avg.   Exercise   Price** | ** ** | **Exercisable   as of   December 31,   2009** | ** ** | **Wtd. Avg.   Exercise   Price** | ** ** |
| $                               | 1.31-2.50  |                                               | 97         |   | 0.57 |   | $ | 2.09 |   | 97 |   | $ | 2.09 |   |
| $                               | 2.51-3.00  |                                               | —     |   | — |   | $ | — |   | — |   | $ | — |   |
| Over $3.00                      |       | 334                                                |       | 7.97 |   | $ | 23.75 |   | 113 |   | $ | 17.74 |   |
| $                               | 1.31-44.00 |                                               | 431        |   | 6.44 |   | $ | 18.87 |   | 210 |   | $ | 10.50 |   |

 

***EmployeeStock Purchase Plan***

 

The company has an Employee Stock Purchase Plan (2009 ESPP) which willprovide employees of the Company and its subsidiaries with an opportunity toparticipate in the growth of the Company and to further align the interest ofthe employees with the interests of the Company through the purchase of sharesof the Company’s Common Stock.  Under the2009 ESPP, 300 shares of the Company’s Common Stock have been authorized forissuance.  As of December 31, 2009all 300 shares remain available.

 

***DirectorsDeferred Compensation Plan***

 

The Company has aNon-Employee Directors Deferred Compensation Plan which allows Directors toelect to receive fees for Board services in the form of shares of the Company’scommon stock.  The Plan authorized 200shares for such use.  As of December 31,2009, 94 shares have been allocated in deferred accounts, 35 have been issuedto previous Directors and 70 remain available for future allocation.  Allocated shares are to be issued toDirectors when they cease to be Directors or upon a change in control.  Directors’ fees are expensed as incurredwhether paid in cash or deferred into the Plan.

 

**NOTE 8 — RETIREMENT PLAN**

 

The Company administers a 401(k) defined contribution retirementplan for the benefit of the majority of its employees, who have completed 90days of service and been credited with 1,000 hours of service as defined by theplan agreement.  The Company matchescontributions in an amount equal to one-quarter of the first 5% of eachparticipant’s contribution to the plan. 401(k) assets are held by an independent trustee, are not assets ofthe Company, and accordingly are not reflected in the Company’s balance sheets.

 

The Company’s retirement plan expense was approximately $422, $162 and$193 for the years ended December 31, 2009, 2008, and 2007, respectively.

 

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**NOTE 9 - COMMITMENTS AND CONTINGENCIES**

 

***OperatingLeases***

 

The Company leasescertain real estate, office space, and equipment under non-cancelable operatingleases expiring at various dates through 2014 and which contain various renewaland escalation clauses.  Rent expenseamounted to approximately $6,407, $5,032 and $3,197 for years ended December 31,2009, 2008 and 2007, respectively.  At December 31,2009 the minimum rental payments under these leases were as follows (inthousands):

 
| 2010  |   | $     | 4,787  |   |
|-------|--------|-------|--------|--------|
| 2011  |   | 3,439 |   |
| 2012  |   | 2,000 |   |
| 2013  |   | 896   |   |
| 2014  |   | 236   |   |
| Total |   | $     | 11,358 |   |

 

***CapitalLeases and Term Debt***

 

The Company hascertain assets, primarily computer equipment, under capital leases.  The leases include interest of approximately10.4% per annum. Capital leases have a term life of three (3) years.Assets held under capital lease are carried at cost of approximately $967 withaccumulated depreciation of approximately $456 as of December 31, 2009.

 

The Company hasfive unsecured notes payable totaling $4.3 million to sellers bearing interestat 6% per annum at March 2010, March 2011, November 2011 and June 2012.

 

Future minimumlease payments and principal and interest payments on the term debt are asfollows (in thousands):

 
| **Year Ending December 31,**                  | ** ** | **Capital   Leases** | ** ** | **Acquisition   Notes Payable** | ** ** | **Total** | ** ** |
|----------------------------------------------------|------------|----------------------|------------|---------------------------------|------------|-----------|------------|
| 2010                                               |       | $                    | 330        |                            | $          | 1,500     |       | $ | 1,830 |   |
| 2011                                               |       | 56                   |       | 1,600                           |       | 1,656     |       |
| 2012                                               |       | —               |       | 1,200                           |       | 1,200     |       |
| 2013                                               |       | —               |       | —                          |       | —    |       |
| 2014                                               |       | —               |       | —                          |       | —    |       |
|                                               |       | 386                  |       | 4,300                           |       | 4,686     |       |
| Less:  amount representing interest                |       | (10                  | )          | —                          |       | (10       | )          |
| Present  value of minimum lease/principal payments |       | 376                  |       | 4,300                           |       | 4,676     |       |
| Less:  current portion                             |       | 336                  |       | 1,500                           |       | 1,836     |       |
|                                               |       | $                    | 40         |                            | $          | 2,800     |       | $ | 2,840 |   |

 

***LegalProceedings***

 

The Company iscurrently, and from time to time, subject to claims and suits arising in theordinary course of its business, including claims for damages for personalinjuries.  In the opinion of management,the ultimate resolution of any of these pending claims and legal proceedingswill not have a material effect on the Company’s financial position or results ofoperations.

 

**NOTE 10 —STOCK TRANSACTIONS**

 

In the second quarter of 2008, the Companysold 2,513 shares of common stock in a public offering for proceeds of $41.8million after deducting the underwriting discounts and offering expenses.  In conjunction with the stock offering, theCompany retired all of its outstanding Treasury Stock.

 

In December 2008, theCompany filed a shelf registration statement to provide for the issuance of upto $150 

 

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million of any combinationof common stock, preferred stock, warrants and debt securities.

 

On August 5, 2009, theCompany entered into a Distribution Agreement with J.P. Morgan SecuritiesInc.  According to the provisions of thisAgreement, the Company may offer and sell from time to time up to 1,600 sharesof common stock having an aggregate offering price of up to $50 million throughJ.P. Morgan, as distribution agent.  Salesof stock will be made by means of ordinary brokers’ transactions on the NasdaqGlobal Select Market at market prices, or as otherwise agreed between theCompany and J.P. Morgan.  Under the termsof this Agreement, the Company also may sell shares of common stock to J.P.Morgan as principal for its own account at a price agreed upon at the time ofthe sale.  Any sale of shares of commonstock to J.P. Morgan as principal would be pursuant to the terms of a separateagreement that would be entered into between the Company and J.P. Morgan.

 

This Agreement provides theCompany the right, but not the obligation, to sell shares of common stock inthe future, at prices the Company deems appropriate.  The Company retains at all times completecontrol over the amount and timing of each sale and the Company will designatethe maximum number of shares of common stock to be sold through J.P. Morgan, ona daily basis or otherwise as the Company and J.P. Morgan agree.  J.P. Morgan will then use commerciallyreasonable efforts to sell, as the Company distribution agent and on theCompany’s behalf, all of the designated shares of common stock.  The Company may instruct J.P. Morgan not tosell shares of common stock if the sales cannot be effected at or above theprice designated by the Company in any such instruction.  Either the Company or J.P. Morgan may suspendthe offering of shares of common stock pursuant to the Agreement upon propernotice and subject to other conditions.

 

During the third quarter of2009, the Company issued 968 of the Company’s shares of common stock pursuantto this Agreement.  After commissions of$719, the Company received net proceeds of approximately $28.0 million for theissuance of these shares of common stock, and the Company used the proceeds toreduce the borrowings under the Company’s bank credit facility.  As of December 31, 2009 a maximum of 632shares remain available for sale subject to a maximum additional value limit ofapproximately $22 million.

 

**NOTE 11 —SEGMENT DATA**

 

The Company has two reportable segments,Visiting Nurse (VN) and Personal Care (PC). Reportable segments have been identified based upon how management hasorganized the business by services provided to customers and the criteria inASC Topic 280, Segment Reporting. The Company does not allocate certaincorporate expenses to the reportable segments. These expenses are included in Corporate below. The Company evaluatesthe performance of its business segments based upon operating income fromcontinuing operations. Intercompany transactions between segments areeliminated.

 

The Company’s VN segment provides skilledmedical services in patients’ homes largely to enable recipients to reduce oravoid periods of hospitalization and/or nursing home care.  VN Medicare revenues are generated on a perepisode basis rather than a fee per visit or day of care.  Approximately 90% of the VN segment revenuesare generated from the Medicare program while the balance is generated fromMedicaid and private insurance programs.

 

The Company’s PC segment services are alsoprovided in patients’ homes.  Theseservices (generally provided by paraprofessional staff such as home healthaides) are generally of a custodial rather than skilled nature.  PC revenues are generated on an hourly basis.  Approximately 67% of the PC segment revenuesare generated from Medicaid and other government programs while the balance isgenerated from insurance programs and private pay patients.

 

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| ** **                        | ** ** | **Year Ended December 31,** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| **(In  thousands)**               | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Net revenues**                  |       |                             |       |   |   |   |   |
| Visiting  Nurses                  |       | $                                | 256,060    |   | $ | 172,977 |   | $ | 96,187 |   |
| Personal  Care                    |       | 41,789                           |       | 38,540 |   | 34,720 |   |
|                              |       | $                                | 297,849    |   | $ | 211,517 |   | $ | 130,907 |   |
|                              |       |                             |       |   |   |   |   |
| **Operating income (loss)**       |       |                             |       |   |   |   |   |
| Visiting  Nurses                  |       | $                                | 53,755     |   | $ | 36,645 |   | $ | 18,382 |   |
| Personal  Care                    |       | 5,166                            |       | 3,770 |   | 3,358 |   |
| Corporate                         |       | (16,846                          | )          | (12,216 | ) | (7,842 | ) |
|                              |       | $                                | 42,075     |   | $ | 28,199 |   | $ | 13,898 |   |
|                              |       |                             |       |   |   |   |   |
| **Identifiable assets**           |       |                             |       |   |   |   |   |
| Visiting  Nurses                  |       | $                                | 142,364    |   | $ | 134,877 |   | $ | 53,600 |   |
| Personal  Care                    |       | 14,897                           |       | 15,563 |   | 9,656 |   |
| Corporate                         |       | 26,128                           |       | 6,657 |   | 4,104 |   |
|                              |       | $                                | 183,389    |   | $ | 157,097 |   | $ | 67,360 |   |
|                              |       |                             |       |   |   |   |   |
| **Identifiable liabilities**      |       |                             |       |   |   |   |   |
| Visiting  Nurses                  |       | $                                | 12,048     |   | $ | 15,237 |   | $ | 14,011 |   |
| Personal  Care                    |       | 3,375                            |       | 2,106 |   | 1,846 |   |
| Corporate                         |       | 18,989                           |       | 44,971 |   | 16,662 |   |
|                              |       | $                                | 34,412     |   | $ | 62,314 |   | $ | 32,519 |   |
|                              |       |                             |       |   |   |   |   |
| **Capital expenditures**          |       |                             |       |   |   |   |   |
| Visiting  Nurses                  |       | $                                | 884        |   | $ | 597 |   | $ | 189 |   |
| Personal  Care                    |       | 52                               |       | 52 |   | 33 |   |
| Corporate                         |       | 1,198                            |       | 827 |   | 358 |   |
|                              |       | $                                | 2,134      |   | $ | 1,476 |   | $ | 583 |   |
|                              |       |                             |       |   |   |   |   |
| **Depreciation and amortization** |       |                             |       |   |   |   |   |
| Visiting  Nurses                  |       | $                                | 1,076      |   | $ | 671 |   | $ | 222 |   |
| Personal  Care                    |       | 30                               |       | 22 |   | 13 |   |
| Corporate                         |       | 1,279                            |       | 637 |   | 607 |   |
|                              |       | $                                | 2,385      |   | $ | 1,330 |   | $ | 842 |   |

 

**NOTE 12 —DISCONTINUED OPERATIONS**

 

During 2009, we had one personal carefacility that met the criteria to be reclassified as discontinued operationsand during 2008 we had no facilities that met the criteria to be reclassifiedas discontinued operations.  For all theyears presented in this report, these facilities have been reclassified.  Net losses from the discontinued operationswere approximately $125, $104 and $185 in the years ended December 31,2009, 2008 and 2007 respectively, and such amounts are included in net lossfrom discontinued operations in the accompanying financial statements.

 

**NOTE 13 — ACQUISITIONS**

 

Eachof the following acquisitions were completed in order to pursue the Company’sstrategy of expanding its visiting nurse operations in the eastern UnitedStates by expanding its service base and enhancing its position in certaingeographic areas as a leading provider of home health services.  The purchase price of each acquisition wasdetermined based on the Company’s analysis of comparable acquisitions andexpected cash flows.  Goodwill generatedfrom the acquisitions was recognized given the expected contributions of eachacquisition to the overall corporate strategy. Each of the acquisitions completed was accounted for as a purchase andare included in the Company’s financial statements from the respectiveacquisition date.  All goodwill generatedin the transactions below is expected to be deductible for tax purposes.

 

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***Acquisitions During 2009***

 

On June 1, 2009, the Company acquired the assets of theMedicare-certified home health agencies affiliated with Florida-based CentralFlorida Health Alliance (CFHA), a two-hospital health care company system withhome health branches in Leesburg and The Villages for a purchase price of $5.2million, consisting of $4.0 million in cash and a $1.2 million promissory noteat 6% interest.  The cash portion of thetransaction was funded from borrowings available on the Company’s existingsenior credit facility with JP Morgan Chase Bank, NA.

 

***Acquisitions During 2008***

 

During 2008 the Company acquired 11 visiting nurse branchlocations.  These operations added to ourmarket presence in Florida, Connecticut and Ohio and gave us market presence inNew Jersey and Pennsylvania.

 

OnNovember 26, 2008, the Company acquired the Kentucky Certificate of Needand home health license of the Medicare-certified health agency formerlyoperated by Hardin Memorial Hospital.

 

OnNovember 14, 2008, the Company acquired the assets of theMedicare-certified home health agency owned by Fairfield Medical Center inOhio.

 

On August 1,2008, the Company acquired the stock of Patient Care, Inc. (“Patient Care”).  Patient Care and its subsidiaries own andoperate eight Medicare-certified home health agency locations in New Jersey,Connecticut, and Pennsylvania.

 

The total PatientCare purchase price for the stock was $45.2 million in cash, reduced by aworking capital adjustment of $4.5 million for a net purchase price of $40.8million.  The Company also provided aninsurer of Patient Care a $4.7 million letter of credit as collateral for itslarge-deductible workers compensation exposure. The cash portion of the transaction paid at closing plus the letter ofcredit was funded from the Company’s existing cash and borrowings available onthe Company’s senior credit facility with JP Morgan Chase Bank, NA.

 

The Company has finalized the purchaseaccounting for the Patient Care acquisition, resulting in a reduction in otherintangible assets of approximately $2.4 million, a reduction of other accruedliabilities of $625 and an increase to goodwill of $1.8 million.

 

OnMarch 26, 2008, the Company acquired the fixed assets of all the homehealth agencies owned by Apex Home Healthcare Services, LLC (“Apex HomeHealthcare”), the assets of the healthcare rehabilitation business owned byApex Health and Rehab Center LLC, the assets of the healthcare staffingbusiness owned by Apex Healthcare Solutions, LLC and the assets of the homecare physician practice owned by Apex House Call Doctors, LLC for a purchaseprice of $16.1 million, consisting of $12.1 million in cash, two promissorynotes totaling $3 million plus $1 million in value of Almost Family, Inc.common stock (48 shares-restricted). The cash portion of the transaction wasfunded from borrowings available on the Company’s senior credit facility withJP Morgan Chase Bank, NA.

 

The Company has finalized the purchase accountingfor the Apex Home Healthcare acquisition with no material change to theallocation of the purchase price to the acquired assets and liabilities.

 

The unaudited pro forma results of operations of the Company as if theApex Home Healthcare and Patient Care acquisitions had been made at thebeginning of 2007 are as follows (in thousands):

 

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| ** **          | ** ** | **Twelve months ended December 31,** | ** ** |
|---------------------|------------|-------------------------------------------|------------|
| ** **          | ** ** | **2008**                                  | ** ** | **2007** | ** ** |
| Revenues            |       | $                                         | 244,701    |   | $ | 193,347 |   |
| Net  Income         |       | $                                         | 16,518     |   | $ | 4,377 |   |
|                |       |                                      |       |   |   |
| Earnings  per share |       |                                      |       |   |   |
| Basic               |       | $                                         | 2.24       |   | $ | 0.80 |   |
| Diluted             |       | $                                         | 2.18       |   | $ | 0.77 |   |

 

The pro forma information presented above ispresented for illustrative purposes only and may not be indicative of theresults of operations that would have actually occurred if the transactiondescribed had been completed as of the beginning of 2007.  In addition, future results may varysignificantly from the results reflected in such information.

 

**NOTE 14 - QUARTERLY FINANCIAL DATA— (UNAUDITED)**

 

Summarized quarterly financial data for the years ended December 31,2009 and 2008 are as follows (in thousands except per share data):

 
| ** **                                     | ** ** | **Year Ended December 31, 2009** | ** ** | **Year Ended December 31, 2008** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **Dec. 31**                      | ** ** | **Sept. 30**                          | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sept. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** |
| Net  service revenues                          |       | $                                     | 78,020     |                                  | $          | 76,294 |   | $ | 74,593 |   | $ | 68,941 |   | $ | 65,895 |   | $ | 58,437 |   | $ | 48,436 |   | $ | 38,749 |   |
| Gross  Margin                                  |       | 41,948                                |       | 40,515                                |       | 40,096 |   | 36,725 |   | 35,644 |   | 31,484 |   | 25,828 |   | 20,315 |   |
| Income  from continuing operations             |       | 6,853                                 |       | 6,194                                 |       | 6,049 |   | 5,593 |   | 5,182 |   | 4,784 |   | 3,880 |   | 2,552 |   |
| Income  (loss) from discontinued operations    |       | (45                                   | )          | (28                                   | )          | (55 | ) | 2 |   | 15 |   | (79 | ) | (19 | ) | (21 | ) |
| Net  income                                    |       | $                                     | 6,808      |                                  | $          | 6,166 |   | $ | 5,994 |   | $ | 5,595 |   | $ | 5,197 |   | $ | 4,705 |   | $ | 3,861 |   | $ | 2,531 |   |
|                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Average shares outstanding**                 |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |       | 9,058                                 |       | 8,281                                 |       | 8,176 |   | 8,152 |   | 8,137 |   | 8,137 |   | 7,643 |   | 5,542 |   |
| Diluted                                        |       | 9,308                                 |       | 8,448                                 |       | 8,389 |   | 8,281 |   | 8,368 |   | 8,357 |   | 7,809 |   | 5,700 |   |
|                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income from continuing operations**          |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |       | $                                     | 0.76       |                                  | $          | 0.75 |   | $ | 0.74 |   | $ | 0.69 |   | $ | 0.64 |   | $ | 0.59 |   | $ | 0.51 |   | $ | 0.46 |   |
| Diluted                                        |       | $                                     | 0.74       |                                  | $          | 0.73 |   | $ | 0.72 |   | $ | 0.68 |   | $ | 0.62 |   | $ | 0.57 |   | $ | 0.50 |   | $ | 0.45 |   |
|                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income (loss) from discontinued operations** |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |       | $                                     | (0.01      | )                                     | $          | — |   | $ | (0.01 | ) | $ | — |   | $ | — |   | $ | (0.01 | ) | $ | — |   | $ | — |   |
| Diluted                                        |       | $                                     | (0.01      | )                                     | $          | — |   | $ | (0.01 | ) | $ | — |   | $ | — |   | $ | (0.01 | ) | $ | — |   | $ | — |   |
|                                           |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net income per share**                       |       |                                  |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Basic                                          |       | $                                     | 0.75       |                                  | $          | 0.75 |   | $ | 0.73 |   | $ | 0.69 |   | $ | 0.64 |   | $ | 0.58 |   | $ | 0.51 |   | $ | 0.46 |   |
| Diluted                                        |       | $                                     | 0.73       |                                  | $          | 0.73 |   | $ | 0.71 |   | $ | 0.68 |   | $ | 0.62 |   | $ | 0.56 |   | $ | 0.50 |   | $ | 0.45 |   |

 

**NOTE 15 — SUBSEQUENT EVENTS**

 

Management has evaluated all events and transactions that occurredafter December 31, 2009 through February 24, 2010, the date ofissuance of the financial statements. During this period, the Company had no material subsequent eventsrequiring recognition in the consolidated financial statements or anynon-recognized subsequent events requiring disclosure.

 

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**Report of Independent Registered Public Accounting Firm**

 

TheBoard of Directors and Shareholders of Almost Family, Inc.

 

Wehave audited the accompanying consolidated balance sheets of Almost Family, Inc.and subsidiaries as of December 31, 2009 and 2008, and the relatedconsolidated statements of income, stockholders’ equity, and cash flows foreach of the three years in the period ended December 31, 2009. Our auditsalso included the financial statement schedule listed in the Index at Item15(a). These financial statements and schedule are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements and schedule based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit alsoincludes assessing the accounting principles used and significant estimatesmade by management, as well as evaluating the overall financial statementpresentation. We believe that our audits provide a reasonable basis for ouropinion.

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the consolidated financial position of Almost Family, Inc.and subsidiaries at December 31, 2009 and 2008, and the consolidatedresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2009, in conformity with U.S. generallyaccepted accounting principles. Also, in our opinion, the related financialstatement schedule, when considered in relation to the basic financialstatements taken as a whole, presents fairly in all material respects theinformation set forth therein.

 

Wealso have audited, in accordance with the standards of the Public CompanyAccounting Oversight Board (United States), Almost Family, Inc. andsubsidiaries’ internal control over financial reporting as of December 31,2009, based on criteria established in Internal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commissionand our report dated February 24, 2010 expressed an unqualified opinionthereon.

 
| /s/  Ernst & Young, LLP |   |
|----------------------------------|--------|
|                             |   |
|                             |   |
| Louisville,  Kentucky            |   |
| February 24,  2010          |   |

 

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**Management’sReport on Internal Control over Financial Reporting**

 

The consolidatedfinancial statements appearing in this Annual Report have been prepared bymanagement that is responsible for their preparation, integrity and fairpresentation. The statements have been prepared in accordance with U. S.generally accepted accounting principles, which requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes.

 

Our management is responsiblefor establishing and maintaining adequate internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) of theSecurities Exchange Act of 1934, as amended). Our internal control system wasdesigned to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes inaccordance with generally accepted accounting principles.

 

All internal controlsystems, no matter how well designed, have inherent limitations. Therefore,even those systems determined to be effective can provide only reasonableassurance with respect to financial statement preparation and presentation.Further, because of changes in conditions, the effectiveness of an internalcontrol system may vary over time.

 

Under the supervision andwith the participation of our management, including our Chief Executive Officer(CEO) and Chief Financial Officer (CFO), we conducted an evaluation of theeffectiveness of our internal control over financial reporting as of December 31,2009 based on the framework in*InternalControl — Integrated Framework* issued by the Committee of SponsoringOrganizations of the Treadway Commission (COSO). Based on that evaluation, our management concludedour internal control over financial reporting was effective based on thecriteria described above as of December 31, 2009.

 

Ernst & YoungLLP, an independent registered public accounting firm, has audited and reportedon the consolidated financial statements of Almost Family, Inc. and on theeffectiveness of our internal control over financial reporting. The reports ofErnst & Young LLP are contained in this Annual Report.

** **
| /s/ William B. Yarmuth                 |   | /s/ C. Steven Guenthner |
|----------------------------------------|--------|-------------------------|
| William B. Yarmuth                     |   | C. Steven Guenthner     |
| President and Chief  Executive Officer |   | Chief Financial Officer |
|                                   |   |                    |
| Date: February 24,  2010          |   | February 24, 2010  |

 

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**Report of Independent RegisteredPublic Accounting Firm**

 

TheBoard of Directors and Shareholders of Almost Family, Inc.

 

Wehave audited Almost Family, Inc. and subsidiaries’ internal control offinancial reporting as of December 31, 2009, based on criteria establishedin Internal Control — Integrated Framework issued by the Committee ofSponsoring Organizations of the Treadway Commission (the COSO criteria).  Almost Family, Inc. and subsidiaries’management is responsible for maintaining effective internal control overfinancial reporting, and for its assessment of the effectiveness of internalcontrol over financial reporting included in the accompanying Management’sReport on Internal Control over Financial Reporting.  Our responsibility is to express an opinionon the company’s internal control over financial reporting based on our audit.

 

Weconducted our audit in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtainreasonable assurance about whether effective internal control over financialreporting was maintained in all material respects.  Our audit included obtaining an understandingof internal control over financial reporting, assessing the risk that amaterial weakness exists, testing and evaluating the design and operatingeffectiveness of internal control based on the assessed risk, and performingsuch other procedures as we considered necessary in the circumstances.  We believe that our audit provides areasonable basis for our opinion.

 

Acompany’s internal control over financial reporting is a process designed toprovide reasonable assurance regarding the reliability of financial reportingand the preparation of financial statements for external purposes in accordancewith generally accepted accounting principles. A company’s internal control over financial reporting includes thosepolicies and procedures that (1) pertain to the maintenance of recordsthat, in reasonable detail, accurately and fairly reflect the transactions anddispositions of the assets of the company; (2) provide reasonableassurance that transactions are recorded as necessary to permit preparation offinancial statements in accordance with generally accepted accountingprinciples, and that receipts and expenditures of the company are being madeonly in accordance with authorizations of management and directors of thecompany; and (3) provide reasonable assurance regarding prevention ortimely detection of unauthorized acquisition, use, or disposition of thecompany’s assets that could have a material effect on the financial statements.

 

Becauseof its inherent limitations, internal control over financial reporting may notprevent or detect misstatements.  Also,projections of any evaluation of effectiveness to future periods are subject tothe risk that controls may become inadequate because of changes in conditions,or that the degree of compliance with the policies or procedures maydeteriorate.

 

Inour opinion, Almost Family, Inc. and subsidiaries maintained, in allmaterial respects, effective internal control over financial reporting as of December 31,2009, based on the COSO criteria.

 

Wealso have audited, in accordance with the standards of the Public Company AccountingOversight Board (United States), the consolidated balance sheets of AlmostFamily, Inc. and subsidiaries as of December 31, 2009 and 2008, andthe related consolidated statements of income, stockholders’ equity, and cashflows for each of the three years in the period ended December 31, 2009 ofAlmost Family, Inc. and subsidiaries and our report dated  February 24, 2010 expressed anunqualified opinion thereon.

 
| /s/  Ernst & Young, LLP |   |
|----------------------------------|--------|
|                             |   |
| Louisville,  Kentucky            |   |
| February 24,  2010          |   |

 

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**ITEM 9.* *CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.  CONTROLS AND PROCEDURES**

 

*Disclosure Controls andProcedures* — As of December 31, 2009, the Company’smanagement, with participation of the Company’s Chief Executive Officer andChief Financial Officer, evaluated the effectiveness of the Company’sdisclosure controls and procedures as defined in Exchange Act Rules 13a-15(e) and15d-15(e).  Based on that evaluation, theChief Executive Officer and Chief Financial Officer concluded that the Company’sdisclosure controls and procedures were effective as of December 31, 2009.

 

*Internal Control* — Pursuant to Section 404 of theSarbanes-Oxley Act of 2002, we have included a report that provides management’sassessment of our internal control over financial reporting as part of thisAnnual Report on Form 10-K for the year ended December 31, 2009.  Management’s report is included in Item 8 ofthis report under the caption entitled “Management’s Report on Internal ControlOver Financial Reporting,” and is incorporated herein by reference.  Our independent registered public accounting firmhas issued an attestation report on the effectiveness of our internal controlover financial reporting.  Thisattestation report is included in item 8 of this report under the captionentitled “Report of Independent Registered Public Accounting Firm” and isincorporated herein by reference.

 

*Changes in InternalControl Over Financial Reporting*- There were no changes inthe Company’s internal control over financial reporting during the fourthquarter of 2009, that have materially affected, or are reasonably likely tomaterially affect, Almost Family, Inc.’s internal control over financialreporting.

 

**ITEM 9B.  OTHER INFORMATION**

 

On February 22, 2010, the Board of Directors set the date forthe 2010 annual meeting of stockholders of May 3, 2010, with a recorddate of March 19, 2010. The meeting will be held at the Company’soffices at 9510 Ormsby Station Road, Suite 300, Louisville, Kentucky.

 

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**PART III**

 

**ITEM 10.  DIRECTORS,EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE**

 

The informationrequired by this Item is set forth in the Registrant’s definitive proxystatement to be filed with the Commission no later than 120 days after December 31,2009, except for the information regarding executive officers of theCompany.  The information required bythis Item contained in such definitive proxy statement is incorporated hereinby reference.

 

The followingtable sets forth certain information with respect to the Company’s executiveofficers.

 
| **Name**                 | ** ** | **Age** | ** ** | **Position with the Company**                              |
|--------------------------|------------|---------|------------|------------------------------------------------------------|
| William B. Yarmuth (1)   |       | 57      |       | Chairman of the Board Presidentand Chief Executive Officer |
| C. Steven Guenthner (2)  |       | 49      |       | Senior Vice President andChief Financial Officer           |
| P. Todd Lyles (3)        |       | 48      |       | Senior Vice President — Administration                |
| Anne T. Liechty (4)      |       | 57      |       | Senior Vice President - Operations                         |
| Phyllis D. Montville (5) |       | 61      |       | Senior Vice President — Operations                    |
| Cathy S. Newhouse (6)    |       | 48      |       | Senior Vice President — Sales and Clinical Programs   |
| Carla J. Hengst (7)      |       | 54      |       | Vice President — PC Operations                        |

 

Executive officersof the Company are elected by the Board of Directors for one year and serve atthe pleasure of the Board of Directors with the exception of William B. Yarmuthwho has an employment agreement with the Company.  There are no family relationships between anydirector or executive officer.

 

----

(1)                                  William B. Yarmuth has been a director ofthe Company since 1991, when the Company acquired National Health Industries (“National”),where Mr. Yarmuth was Chairman, President and Chief ExecutiveOfficer.  After the acquisition, Mr. Yarmuthbecame the President and Chief Operating Officer of the Company.  Mr. Yarmuth became Chairman and CEO in1992.  He was Chairman of the Board,President and Chief Executive Officer of National from 1981 to 1991.

 

(2)                                  C. Steven Guenthner has been Senior VicePresident and Chief Financial Officer of the Company since 1992.  From 1983 through 1992 Mr. Guenthner wasemployed as a C.P.A. with Arthur Andersen LLP. Prior to joining the Company he served as a Senior Manager in the firm’sAccounting and Audit division specializing in mergers and acquisitions, publiccompanies and the healthcare industry.

 

(3)                                  P. Todd Lyles joined the Company asSenior Vice President Planning and Development in October 1997 and nowserves as Senior Vice President — Administration.  Prior to joining the Company Mr. Lyleswas Vice President Development for the Kentucky Division of Columbia/HCA, aposition he had held since 1993.  Mr. Lylesexperience also includes 8 years with Humana Inc. in various financial andhospital management positions.

 

(4)                                  Anne T. Liechty became Senior VicePresident — VN Operations in 2001.  Ms. Liechtyhas been employed by the Company since 1986 in various capacities includingVice President of Operations for the Company’s VN segment and its Productsegment.

 

(5)                                  Phyllis Montville became Senior VicePresident — Operations in 2007.  Ms. Montvillecame to the company in 2006 as Vice President of VN Operations in Florida.  She has 23 years experience in home caremanagement, most of which is in the Florida market.  Ms. Montville owned and operated her ownfranchise for 10 years.  She started inthe home care field as a branch manager and home care nurse.

 

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(6)                                  Cathy Newhousebecame Senior Vice President — Sales and Clinical Programs in 2008 afterjoining the Company in 2007 as Vice President of Clinical Programs.  She has over 25 years experience in home caremanagement focused on business development. Prior experience includes more than 20 years in progressive leadershiproles at Gentiva.  Her last positionthere was Vice President of Specialty Programs.

 

(7)                                  Carla J. Hengstjoined the Company in June of 2008 as Vice President and now serves as theVice                  President ofPersonal Care Operations.  Prior tojoining the Company, Ms. Hengst was a Vice             Presidentof Operations for US Medical Management for two years.  Ms. Hengst’s experience also        includes 17 years with Gentiva HealthServices in various management positions.

 

**Code ofEthics and Business Conduct**

 

The Company hasadopted a Code of Ethics and Business Conduct that applies to all itsdirectors, officers (including its chief executive officer, chief financialofficer, chief accounting officer and any person performing similar functions)and employees.  The Company has made theCode of Ethics and Business Conduct available on its website atwww.almostfamily.com.

 

**ITEMS 11, 12, 13 and 14.   EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE; AND PRINCIPAL ACCOUNTANT FEESAND SERVICES**

 

The Registrantintends to file a definitive proxy statement with the Commission pursuant toRegulation 14A (17 CFR 240.14a) not later than 120 days after the close of thefiscal year covered by this report. In accordance with General Instruction G(3) toForm 10-K, the information called for by Items 11, 12, 13 and 14 isincorporated herein by reference to the definitive proxy statement.  Neither the report on Executive Compensationnor the performance graph included in the Company’s proxy statement shall bedeemed incorporated herein by reference.

 

**Equity Compensation Plans**

 

As of December 31, 2009, shares of common stock authorized forissuance under our equity compensation plans are summarized in the followingtable.  See note 7 to the consolidatedfinancial statements for a description of the plans.  The table below is furnished pursuant to item12.

 
| **Plan Category**                   | ** ** | **Shares to be  Issued Upon  Exercise** | ** ** | **Weighted  Average Option  Exercise Price** | ** ** | **Shares  Available for  Future Grants** | ** ** |
|-------------------------------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|------------------------------------------|------------|
|                                |       |                                    |       |                                         |       |                                     |       |
| Plans  approved by shareholders     |       | 431                                     |       | $                                            | 18.87      |                                     | 245        |   |
| Plans  not approved by shareholders |       | —                                  |       | —                                       |       | —                                   |       |
|                                |       |                                    |       |                                         |       |                                     |       |
| Total                               |       | 431                                     |       | $                                            | 18.87      |                                     | 245        |   |

 

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**PART IV**

 
| **Item 15.** | **EXHIBITS  AND FINANCIAL STATEMENT SCHEDULES**                                                                                                                                           | ** **           |
|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------|
| ** **   | ** **                                                                                                                                                                                | **Page Number** |
| (a)          | The following  items are filed as part of this report:                                                                                                                                    |                 |
|         |                                                                                                                                                                                      |                 |
| ** **   | 1.   Index  to Consolidated Financial Statements                                                                                                                           |                 |
|         |                                                                                                                                                                                      |                 |
|         | Consolidated Statements of Income for the years ended  December 31, 2009, 2008 and 2007                                                                                              | 42                   |
|         | Consolidated Balance Sheets — December 31, 2009  and 2008                                                                                                                       | 43                   |
|         | Consolidated Statements of Stockholders’ Equity for  the years ended December 31, 2009, 2008 and 2007                                                                           | 44                   |
|         | Consolidated Statements of Cash Flows for the years  ended December 31, 2009, 2008 and 2007                                                                                          | 45                   |
|         | Notes to Consolidated Financial Statements                                                                                                                                                | 46                   |
|         | Report of Independent Registered Public Accounting  Firm                                                                                                                                  | 65                   |
|         |                                                                                                                                                                                      |                 |
|         | 2.   Index  to Financial Statement Schedule                                                                                                                                |                 |
|         |                                                                                                                                                                                      |                 |
|         | Schedule II — Valuation and Qualifying Accounts                                                                                                                                      | 74                   |
|         |                                                                                                                                                                                      |                 |
|         | All other Schedules have been omitted because they  are either not required, not applicable or,the information has otherwise been  supplied in the financial statements or notes thereto. |                 |
|         |                                                                                                                                                                                      |                 |
| (b)          | Exhibits  required to be filed by Item 601 of Regulation S-K are set forth below:                                                                                                         |                 |

 

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| **Number** | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                       |
|------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.1        |       | Certificate of  Incorporation, as amended, of the Registrant (incorporated by reference to  Exhibit No. 3.1 of the Registrant’s Annual Report on Form 10-K  for the year ended March 31, 1997 and Exhibit 3.1 of the  Registrant’s Quarterly Report Form 10-Q for the quarter ended  September 30, 2008)                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 3.2        |       | Amended and  Restated Bylaws of the Registrant (incorporated by reference to  Exhibit 3 of the Registrant’s Current Report on Form 8-K dated  November 12, 2007)                                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 4.1        |       | Other Debt  Instruments — copies of other debt instruments for which the total debt is  less than 10% of assets will be furnished to the Commission upon request.                                                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.1+      |       | Nonqualified  Stock Option Plan, as amended (incorporated by reference to the Registrant’s  Registration Statement on Form S-8 Reg. No. 33-20815).                                                                                                                                                                                                                                                |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.2+      |       | Supplemental  Nonqualified Stock Option Plan (incorporated by reference to  Exhibit 19.4 to the Registrant’s Report on Form 10-Q for the  Quarter Ended November 30, 1987 Commission File No. 15342).                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.3+      |       | Incentive Stock  Option Plan, as amended (incorporated by reference to the Registrant’s  Registration Statement on Form S-8 Reg. No. 33-20815).                                                                                                                                                                                                                                                   |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.4+      |       | Amendment to the  Senior Service Corporation 1987 Nonqualified Stock Option Plan (incorporated  by reference to Exhibit 19.3 to the Registrant’s Report on  Form 10-Q for the quarter ended November 30, 1989).                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.5+      |       | 1991 Long-Term  Incentive Plan (incorporated by references to the Registrant’s Registration  Statement on Form S-8 Reg. No. 33-81124).                                                                                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.6+      |       | Employment  Agreement, dated January 1, 1996, between the Company and William B.  Yarmuth (incorporated by reference to the Registrant’s report on  Form 10-K for the year ended March 31, 1996).                                                                                                                                                                                            |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.7       |       | Loan Agreement  between the Company and Bank One, KY (incorporated by reference to the  Registrant’s report on Form 10-K for the year ended March 31,  2001).                                                                                                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.8       |       | Third Amendment  to Loan Agreement between the Company and Bank One, NA, dated March 23,  2004 (incorporated by reference to the Registrant’s report on Form 10-K  for the year ended December 31, 2003)                                                                                                                                                                                     |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.9       |       | Fourth Amendment  to Loan Documents dated as of August 11, 2005, by and between  (i) Almost Family, Inc., (ii) each of the subsidiaries of AFI  that is party to the Agreement, and (iii) JP Morgan Chase Bank, N.A.  (successor by merger to Bank One N.A.). (incorporated by reference to the  Registrant’s report on Form 10-Q for the quarter ended June 30,  2005). |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.10      |       | Fifth Amendment  to Loan Documents dated as of December 4, 2007, by and between  (i) Almost Family, Inc., (ii) each of the subsidiaries of  Almost Family, Inc. that is party to the Amendment, and (iii) JP  Morgan Chase Bank, N.A. (successor by merger to Bank One N.A.).                                                                                                      |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.11+     |       | 2007 Stock and  Incentive Compensation Plan (incorporated by reference to Appendix A of the  Definitive Proxy Statement on Schedule 14A as filed on June 25, 2007).                                                                                                                                                                                                                                         |
|       |       |                                                                                                                                                                                                                                                                                                                                                                                                             |
| 10.12+     |       | 2000 Stock  Option Plan (incorporated by reference to the Registrant’s Registration  Statement on Form S-8 Reg. No. 333-88744).                                                                                                                                                                                                                                                                   |

 

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| 10.13*+ |   | Amended and  Restated Non-Employee Directors Deferred Compensation Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|---------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.14+  |   | 1993  Non-Employee Directors Stock Option Plan (incorporated by reference to the  Registrant’s Registration Statement on Form S-8 Reg.  No. 333-881100).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.15+  |   | Forms of Stock  Option Agreements and Restricted Stock Award Agreement pursuant to 2007 Stock  and Incentive Plan (incorporated by reference to the Registrant’s report on  Form 10-K for the year ended December 31, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.16   |   | Stock Purchase Agreement dated as of June 18, 2008 among  (i) the Registrant, (ii) PCI Holding Corp. and (iii) National  Home Care, Inc. (solely in its capacity as the Seller Representative),  including executed copies of the following exhibits: (incorporated by  reference to Exhibit 10.1 of the Registrant’s Quarterly Report on form  10-Q for the quarter ended June 30, 2008) (listed omitted attachments  and schedules will be furnished supplementally to the SEC upon request):                                                                                                                                                                                        |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (A)     |   | Assumption and Indemnification Agreement dated as of June 18,  2008, by and among (i) PCI Holding Corp., (ii) Patient  Care, Inc., (iii) National Home Care, Inc., (iv) Patient  Care, Inc. — Illinois, (v) Patient Care Medical Services, Inc.  — Ohio, (vi) Georgia Nursing Services, Inc., (vii) Patient  Care Massachusetts, Inc., (viii) E.C. Solutions, Inc.,  (ix) Patient Care Florida, Inc., (x) Patient Care Medical  Services, Inc., (xi) Priority Care, Inc., (xii) Patient  Care Pennsylvania, Inc., (xiii) Patient Care New Jersey, Inc.,  and (xiv) the Registrant; |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (B-1)   |   | Consulting Agreement dated as of June 18, 2008 among  (i) the Registrant, (ii) Robert Nixon, and (iii) Nixco, LLC  (omitted);                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (B-2)   |   | Nonsolicitation and Noncompetition Agreement dated June 18, 2008  among (i) the Registrant and Patient Care and (ii) Robert Nixon and  Nixco LLC (omitted),                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (C)     |   | Release Agreements dated as of June 18, 2008 by and between  (i) Robert Nixon, Elias Nemnom, and Raymond Rasa, respectively, and  (ii) Patient Care, Patient Care Medical Services, Inc., Priority  Care, Inc., Patient Care Pennsylvania, Inc., Patient Care New  Jersey, Inc.;                                                                                                                                                                                                                                                                                                                                                                                                            |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (D)     |   | Escrow Agreement dated June 18, 2008 among the Registrant, PCI  Holding Corp., National Home Care, Inc., and JPMorgan Chase Bank,  National Association;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (E)     |   | Form of Seller Counsel Opinion Letter; and                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (F)     |   | Form of Buyer Counsel Opinion Letter.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.17   |   | Credit Agreement, dated as of July 15, 2008 among Almost  Family, Inc., the lenders party thereto, JPMorgan Chase Bank, N.A. as  Administrative Agent and Fifth Third Bank as Syndication Agent. (Except for  Schedule 5.09, schedules have been omitted. Almost Family undertakes to  furnish supplemental copies of any of the omitted schedules upon request by  the Securities and Exchange Commission.) (Incorporated by reference to  Exhibit 10.1 of the Registrant’s Current Report on Form 8-K dated  July 15, 2008.)                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| 10.18+  |   | Amendment dated  January 1, 2009 to Employment Agreement effective January 1, 1996,  between the Registrant and William B. Yarmuth (incorporated by reference to  the Registrant’s report on Form 10-K for the year ended  December 31, 2008).                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

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| 10.19+ |   | Amendment to  Amended and Restated 2000 Stock Option Plan dated January 1, 2009  (incorporated by reference to the Registrant’s report on Form 10-K for  the year ended December 31, 2008). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                            |
| 10.20  |   | Almost Family, Inc. 2009 Employee Stock Purchase Plan  (incorporated by reference to Appendix A of the Definitive Proxy Statement on  Schedule 14A as filed on July 1, 2009).                         |
|   |   |                                                                                                                                                                                                            |
| 21*    |   | List of  Subsidiaries of Almost Family, Inc.                                                                                                                                                               |
|   |   |                                                                                                                                                                                                            |
| 23.1*  |   | Consent of  Ernst & Young LLP                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                            |
| 31.1*  |   | Certification of  Chief Executive Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                        |
|   |   |                                                                                                                                                                                                            |
| 31.2*  |   | Certification of  Chief Financial Officer pursuant to Rule 13a-14(a) and  Rule 15d-14(a) of the Securities Exchange Act, as amended.                                                        |
|   |   |                                                                                                                                                                                                            |
| 32.1*  |   | Certification of Chief Executive Officer pursuant to 18 U.S.C 1350,  as adopted pursuant tosection 906 of the Sarbanes Oxley Act of 2002.                                                                       |
|   |   |                                                                                                                                                                                                            |
| 32.2*  |   | Certification of Chief Financial Officer pursuant to 18 U.S.C 1350,  as adopted pursuant to section 906 of the Sarbanes Oxley Act of 2002.                                                                      |

 

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*****Denotes filed herein.

+Denotescompensatory plan or management contract.

 

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 

*ALMOSTFAMILY, INC.*

February 24,2010

 
| /S/ William B.  Yarmuth                                        |   | February 24,  2010 |   |
|----------------------------------------------------------------|--------|-------------------------|--------|
|   William B. Yarmuth                                 |   |                    |   |
|   Chairman,  Chief Executive Officer and President   |   |                    |   |
|                                                           |   |                    |   |
| /S/ C. Steven  Guenthner                                       |   | February 24,  2010 |   |
|   C.  Steven Guenthner                               |   |                    |   |
|   Senior  Vice President and Chief Financial Officer |   |                    |   |
|   (Principal  Financial Officer)                     |   |                    |   |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons in the capacities and on the datesindicated:

 
| **Signature** | ** **                     | **Title** | ** **                                                      | **Date** |
|---------------|--------------------------------|-----------|-----------------------------------------------------------------|----------|
|          |                           |      |                                                            |     |   |
| By:           | /s/ William B.  Yarmuth        |      | Director, Chief Executive Officer and President                 |     | February 24, 2010 |
|          | William B.  Yarmuth            |      | (principal executive officer)                                   |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ C. Steven  Guenthner       |      | Senior Vice President and Chief Financial Officer               |     | February 24, 2010 |
|          | C. Steven  Guenthner           |      | (principal financial officer and principal  accounting officer) |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ Steven B.  Bing            |      | Director                                                        |     | February 24, 2010 |
|          | Steven B. Bing                 |      |                                                            |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ Donald G.  McClinton       |      | Director                                                        |     | February 24, 2010 |
|          | Donald G.  McClinton           |      |                                                            |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ Tyree G.  Wilburn          |      | Director                                                        |     | February 24, 2010 |
|          | Tyree G. Wilburn               |      |                                                            |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ Jonathan D.  Goldberg      |      | Director                                                        |     | February 24, 2010 |
|          | Jonathan D. Goldberg           |      |                                                            |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ W. Earl Reed, III     |      | Director                                                        |     | February 24, 2010 |
|          | W. Earl Reed, III         |      |                                                            |     |   |
|          |                           |      |                                                            |     |   |
| By:           | /s/ Henry M.  Altman, Jr. |      | Director                                                        |     | February 24, 2010 |
|          | Henry M. Altman, Jr.      |      |                                                            |     |   |

 

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***ALMOSTFAMILY, INC.*****AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**SCHEDULEII**

**(Inthousands)**

 
| ** **                         | ** ** | **Col. A**                          | ** ** | **Col. B**                               | ** ** | **Col. C**                           | ** ** | **Col. D**          | ** ** | **Col. E**                     | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------------------------------------|------------|--------------------------------------|------------|---------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | ** **                          | ** ** | **Additions**                            | ** ** | ** **                           | ** ** | ** **          | ** ** |
| **Description**                    | ** ** | **Balance at  Beginning of Period** | ** ** | **(1)  Charged to  Costs and  Expenses** | ** ** | **(2)  Charged to  Other  Accounts** | ** ** | **(3)  Deductions** | ** ** | **Balance at  End of  Period** | ** ** |
|                               |       |                                |       |                                     |       |                                 |       |                |       |                           |       |
| **Allowance for bad debts:**       |       |                                |       |                                     |       |                                 |       |                |       |                           |       |
| Year  Ended December 31, 2009 |       | $                                   | 4,418      |                                     | $          | 3,762                                |       | $                   | 155        |                           | $          | 1,801 |   | $ | 6,534 |   |
|                               |       |                                |       |                                     |       |                                 |       |                |       |                           |       |
| Year  Ended December 31, 2008 |       | 3,006                               |       | 2,963                                    |       | 392                                  |       | 1,943               |       | 4,418                          |       |
|                               |       |                                |       |                                     |       |                                 |       |                |       |                           |       |
| Year  Ended December 31, 2007 |       | 2,101                               |       | 1,543                                    |       | 958                                  |       | 1,596               |       | 3,006                          |       |
|                                    |            |                                     |            |                                          |            |                                      |            |                     |            |                                |            |  |  |  |  |  |

 

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(1)          Charged to bad debt expense.

(2)          Acquired Bad Debt Reserves.

(3)          Write-off of accounts.

 

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