NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Consolidation and Description Of Business

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

The Company was incorporated in Delaware in 1985. Through a predecessor that merged into the Company in 1991, we have been providing health care services, primarily home health care, since 1976. All material intercompany transactions and accounts have been eliminated in consolidation.

Cash and Cash Equivalents

The Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents.

Uninsured deposits at December 31, 2012 and 2011 were approximately $24,515 and $32,436, respectively. These amounts have been deposited with national financial institutions.

Property and Equipment

Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives (generally two to ten years for medical and office equipment and three years for internally developed software). Leasehold improvements are depreciated over the terms of the respective leases (generally three to ten years).

Goodwill and Other Intangible Assets

Goodwill and indefinite lived intangible assets acquired are stated at fair value at the date of acquisition. Subsequent to acquisition, the Company conducts annual reviews for impairment, or more frequently if circumstances indicate impairment may have occurred, under Accounting Standards Codification (ASC) Topic 350, Intangibles — Goodwill and Other. The Company has completed its most recent annual impairment tests as of December 31, 2012 and determined that no impairment existed.

Other intangible assets consist of licenses, certificates of need, noncompete agreements, and trade names. Licenses, certificates of need and trade names have indefinite lives and are not amortized. Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives, such as the cost of non-compete agreements for which their estimated useful life is usually 3 years, beginning after the earn-out period, if any.

The following table summarizes the activity related to our goodwill and other intangible assets for 2012 and 2011:

			Other Intangible Assets
	Goodwill		Certificates of Need and Licenses		Trade Names		Non-compete Agreements			Total
Balances at 12-31-10	$	101,060	$	6,841	$	7,381	$	63		$	14,285
Additions	31,593		2,250		3,040		230			5,520
Amortization	—		—		—		(96		)	(96		)
Balances at 12-31-11	$	132,653	$	9,091	$	10,421	$	197		$	19,709
Additions	208		300		—		30			330
Adjustments	557		—		—		—			—
Amortization	—		—		—		(72		)	(72		)
Balances at 12-31-12	$	133,418	$	9,391	$	10,421	$	155		$	19,967

At December 31, 2012, the Visiting Nurse (VN) segment includes $102,497, $8,781, $7,701 and $8, while the Personal Care (PC) segment includes $30,921, $610, $2,720 and $147 of total goodwill, certificates of need and licenses, trade names and non-compete agreements, respectively. At December 31, 2011, the Visiting Nurse (VN) segment includes $102,207, $8,481, $7,701 and $34, while the Personal Care (PC) segment includes $30,447, $610, $2,720 and $163 of total goodwill, certificates of need and licenses, trade names and non-compete agreements, respectively. Current period adjustments relate to finalization of purchase price for the Company’s August 2011 acquisition of Cambridge Home Health Care Holdings, Inc. (Cambridge Acquisition), while additions pertain to two acquisitions completed during the third quarter of 2012.

Capitalization Policies

Maintenance, repairs and minor replacements are charged to expense as incurred. Major renovations and replacements are capitalized to appropriate property and equipment accounts. Upon sale or retirement of property, the cost and related accumulated depreciation are eliminated from the accounts and the related gain or loss is recognized in income.

The Company capitalizes the cost of internally developed computer software for the Company’s own use. Software development costs of approximately $968, $535 and $513 were capitalized in the years ended December 31, 2012, 2011 and 2010, respectively.

Insurance Programs

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

Malpractice and general patient liability claims for incidents which may give rise to litigation have been asserted against the Company by various claimants. The claims are in various stages of processing and some may ultimately be brought to trial. The Company is aware of incidents that have occurred through December 31, 2012 that may result in the assertion of additional claims. The Company currently carries professional and general liability insurance coverage (on a claims made basis) for this exposure with no deductible. The Company also carries D&O coverage (also on a claims made basis) for potential claims against our directors and officers, including securities actions, with deductibles ranging from $100 to $250 per claim.

The Company records estimated liabilities for its insurance programs based on information provided by the third-party plan administrators, historical claims experience, the life cycle of claims, expected costs of claims incurred but not paid, and expected costs to settle unpaid claims. The Company monitors its estimated insurance-related liabilities and recoveries, if any, on a monthly basis and as required by ASU No. 2010-24, Health Care Entities (Topic 954): Presentation of Insurance Claims and Related Insurance Recoveries, records amounts due under insurance policies in other current assets, while recording the estimated carrier liability in other current liabilities. As facts change, it may become necessary to make adjustments that could be material to the Company’s results of operations and financial condition.

Accounting for Income Taxes

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the Company’s book and tax bases of assets and liabilities and tax carry-forwards using enacted tax rates in effect for the year in which the differences are expected to reverse.

Seasonality

Our VN segment operations located in Florida (which generated approximately 42% of that segment’s revenues in 2011) normally experience higher admissions during the first quarter and lower admissions during the third quarter than in the other quarters due to seasonal population fluctuations.

Net Service Revenues

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

Approximately 71% of the Company’s net service revenues are derived from the Medicare program. Net service revenues are recorded under the Medicare prospective payment program (PPS) based on a 60-day episode payment rate that is subject to adjustment based on certain variables including, but not limited to: (a) changes in the base episode payments established by the Medicare program; (b) adjustments to the base episode payments for case mix and geographic wages; (c) a low utilization payment adjustment (LUPA) if the number of visits was fewer than five; (d) a partial payment if our patient transferred to another provider or we received a patient from another provider before completing the episode; (e) a payment adjustment based upon the level of therapy services required (thresholds set at 6, 14 and 20 visits); (f) an outlier payment if our patient’s care was unusually costly (capped at 10% of total reimbursement); and (g) the number of episodes of care provided to a patient.

At the beginning of each Medicare episode the Company calculates an estimate of the amount of expected reimbursement based on the variables outlined above and recognizes Medicare revenue on an episode-by-episode basis during the course of each episode over its expected number of visits. Over the course of each episode, as changes in the variables become known, adjustments are calculated and recorded as needed to reflect changes in expectations for that episode from those established at the start of the 60 day period until its ultimate outcome at the end of the 60 day period is known.

Substantially all remaining 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 or patient-specific fee schedules for the recording of revenues at the amounts actually expected to be received.

Laws and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation. It is common for issues to arise related to: 1) medical coding, particularly with respect to Medicare, 2) patient eligibility, particularly related to Medicaid, and 3) other reasons unrelated to credit risk, all of which may result in adjustments to recorded revenue amounts. The Company continuously evaluates the potential for revenue adjustments and when appropriate provides allowances for losses based upon the best available information. There is at least a reasonable possibility that recorded estimates could change by material amounts in the near term. Changes in estimates related to prior periods decreased revenues by approximately $75, $215, and $182 in the years ended December 31, 2012, 2011 and 2010, respectively.

Revenue and Receivable Concentrations

The following table sets forth the percent of the Company’s revenues generated from Medicare, state Medicaid programs and other payors for the year ended December 31:

	2012		2011		2010
Medicare	70.7	%	77.1	%	80.9	%
Medicaid & other government programs:
Ohio	13.4	%	8.7	%	4.1	%
Connecticut	6.5	%	6.1	%	6.0	%
Kentucky	2.6	%	2.7	%	3.1	%
Florida	0.5	%	0.6	%	0.7	%
Others	0.3	%	0.4	%	0.6	%
Subtotal	23.3	%	18.5	%	14.5	%
All other payors	6.0	%	4.4	%	4.6	%
Total	100.0	%	100.0	%	100.0	%

Concentrations in the Company’s accounts receivable were as follows as of December 31:

	2012					2011
	Amount			Percent		Amount			Percent
Medicare	$	34,882		59.1	%	$	32,150		58.8	%
Medicaid & other government programs:
Ohio	6,092			10.3	%	7,828			14.3	%
Connecticut	6,081			10.3	%	4,730			8.7	%
Kentucky	2,931			5.0	%	3,387			6.2	%
Others	1,014			1.8	%	1,115			2.0	%
Subtotal	16,118			27.4	%	17,060			31.2	%
All other payors	7,978			13.5	%	5,432			10.0	%
Subtotal	58,978			100.0	%	54,642			100.0	%
Third party payable	(3,771		)			(2,812		)
Allowances	(5,236		)			(6,664		)
Total	$	49,971				$	45,166

At December 31, 2012 and 2011, the Company had $3,771 and $2,812 of payables outstanding primarily related to filed or estimated cost reports with the Kentucky Medicaid program.

The ability of payors to meet their obligations depends upon their financial stability, future legislation and regulatory actions. The Company does not believe there are any significant credit risks associated with receivables from Federal and state third-party reimbursement programs. The allowance for uncollectible accounts principally consists of management’s estimate of amounts that may prove uncollectible for coverage, eligibility and technical reasons.

Payor Mix Concentrations and Related Aging of Accounts Receivable

The approximate breakdown by payor classification as a percent of total accounts receivable, net of contractual allowances, if any, at December 31, 2012 and 2011 is set forth in the following tables:

	2012
Payor	0-90		91-180		181-365		>1 yr.		Total
Medicare	39	%	14	%	5	%	2	%	60	%
Medicaid & Government	20	%	3	%	2	%	2	%	27	%
Self Pay	2	%	1	%	0	%	1	%	4	%
Insurance	4	%	2	%	2	%	1	%	9	%
Total	65	%	20	%	9	%	6	%	100	%

	2011
Payor	0-90		91-180		181-365		>1 yr.		Total
Medicare	41	%	12	%	4	%	1	%	58	%
Medicaid & Government	20	%	4	%	3	%	5	%	32	%
Self Pay	2	%	0	%	0	%	1	%	3	%
Insurance	4	%	1	%	1	%	1	%	7	%
Total	67	%	17	%	8	%	8	%	100	%

Allowance for Uncollectible Accounts by Payor Mix and Related Aging

The Company records an estimated allowance for uncollectible accounts by applying estimated bad debt percentages to its accounts receivable aging. The percentages to be applied by payor type are based on the Company’s historical collection and loss experience. The Company’s effective allowances for uncollectible accounts as a percent of accounts receivable were as follows at December 31, 2012 and 2011:

	2012
Payor	0-90		91-180		181-365		>1 yr.		>2 yrs.
Medicare	0	%	1	%	9	%	100	%	100	%
Medicaid & Government	1	%	11	%	31	%	71	%	100	%
Self Pay	1	%	4	%	34	%	77	%	100	%
Insurance	6	%	17	%	44	%	79	%	100	%
Total	1	%	4	%	23	%	82	%	100	%

	2011
Payor	0-90		91-180		181-365		>1 yr.		>2 yrs.
Medicare	3	%	9	%	29	%	100	%	100	%
Medicaid & Government	1	%	7	%	20	%	89	%	100	%
Self Pay	1	%	5	%	18	%	86	%	100	%
Insurance	2	%	9	%	27	%	95	%	100	%
Total	3	%	9	%	25	%	91	%	100	%

The Company’s allowance for uncollectible accounts at December 31, 2012 and 2011 was approximately $5,236 and $6,664, respectively.

Net Income per Share

Net income per share is presented as a unit of basic shares outstanding and diluted shares outstanding. Diluted shares outstanding is computed based on the weighted average number of common shares and common equivalent shares outstanding. Common equivalent shares result from dilutive stock options and unvested restricted shares. The following table is a reconciliation of basic to diluted shares used in the earnings per share calculation for the year ended December 31:

	2012	2011	2010
Basic weighted average outstanding shares	9,285	9,278	9,123
Dilutive effect of outstanding compensation awards	39	82	229
Diluted weighted average outstanding shares	9,324	9,360	9,352

The assumed conversions to common stock of 218, 125, and 26 of the Company’s outstanding stock options were excluded from the diluted EPS computation in 2012, 2011, and 2010, respectively, because these items, on an individual basis, have an anti-dilutive effect on diluted EPS.

Use of Estimates

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

Financial Statement Reclassifications

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

Stock-Based Compensation

Stock options and restricted stock are granted under various stock compensation programs to employees and independent directors. The Company accounts for such grants in accordance with ASC Topic 718, Compensation — Stock Compensation and amortizes the fair value of awards, after estimated forfeiture, on a straight-line basis over the requisite service periods.

Accounting for Leases

The Company accounts for operating leases using the straight-line rents method, which amortizes contracted total rents due evenly over the lease term.

Advertising Costs

The Company expenses the costs of advertising as incurred. Advertising expense was $316, $370 and $425 for the years ended December 31, 2012, 2011, and 2010, respectively.

Recently Issued Accounting Pronouncements

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

In July 2011, the FASB issued ASU 2011-07, Health Care Entities (Topic 954): Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debts, and the Allowance for Doubtful Accounts for Certain Health Care Entities. Under ASU 2011-07, only health care organizations (HCOs) that do not assess the collectability of a receivable before recognizing revenue will present their provision for bad debt related to patient service revenue as a deduction from revenue on the face of the statement of operations. ASU 2011-07 also requires and expands qualitative and quantitative disclosures about changes in the allowance. For certain HCOs, the guidance may result in the provision for bad debts being presented in two separate lines, a contra-revenue line for bad debts related to patient services and an expense line for bad debts related to all other sources of income. The amendments to the presentation of the provision for bad debts related to patient service revenue in the statement of operations are applied retrospectively to all prior periods presented, while required disclosures are provided prospectively. ASU 2011-07 was effective for the Company beginning January 1, 2012. The adoption of this standard did not impact the consolidated financial statements, as the Company does not recognize significant revenue without assessing a customer’s ability to pay.

In September 2011, the FASB issued ASU 2011-08: Intangibles — Goodwill and Other (Topic 350) which amends current guidance to allow companies to first perform a qualitative assessment to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform the two-step goodwill impairment test required under current accounting standards. ASU 2011-08 was effective for the Company beginning January 1, 2012. The adoption of ASU 2011-08 did not impact the consolidated financial statements.

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