SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to_______
Commission file number 1-9848
ALMOST FAMILY, INC. TM
(Exact name of registrant as specified in its charter)
Delaware 061-153720
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
9510 Ormsby Station Road, Suite 300 40223
(Address of principal executive offices) (Zip Code)
(502) 891-1000 (Registrant's
telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X____ No ____.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock $.10 par value
Shares outstanding at August 11, 2003 2,296,527
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2003
and December 31, 2002 3
Consolidated Statements of Income for the Three
Months ended June 30, 2003 and 2002 4
Consolidated Statements of Income for the Six
Months ended June 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the Six
Months ended June 30, 2003 and 2002 6
Notes to Interim Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 25
Item 4. Controls and Procedures 25
Part II. Other Information
Items 1 through 6 26-27
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
June 30, December 31,
ASSETS 2003 2002
------ ------------------- ------------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 719,126 $ 973,534
Accounts receivable - net 15,488,608 17,118,539
Prepaid expenses and other current assets 576,291 602,759
Deferred tax assets 805,677 1,396,306
------------------- ------------------
TOTAL CURRENT ASSETS 17,589,702 20,091,138
PROPERTY AND EQUIPMENT - NET 8,782,548 9,149,782
GOODWILL 6,335,783 6,335,783
DEFERRED TAX ASSETS 212,914 212,914
OTHER ASSETS 253,831 1,010,406
------------------- ------------------
$ 33,174,778 $ 36,800,023
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities $ 8,786,432 $ 9,272,300
Current portion - capital leases and term debt 238,329 352,452
Revolving Credit Facility 11,447,249 -
------------------ -------------------
20,472,010 9,624,752
------------------ -------------------
LONG-TERM LIABILITIES:
Revolving Credit Facility - 14,482,237
Capital leases 1,196,600 882,809
Mortgage and acquisition notes payable 300,000 560,118
Other liabilities 333,891 1,146,023
------------------ -------------------
TOTAL LONG-TERM LIABILITIES 1,830,491 17,071,187
------------------ -------------------
TOTAL LIABILITIES 22,302,501 26,695,939
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (Note 2)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,394,874 and 3,369,674 issued and outstanding 339,490 336,970
Treasury stock, at cost, 1,096,783 and 1,087,383 shares (7,772,048) (7,706,152)
Additional paid-in capital 26,439,304 26,335,863
Accumulated deficit (8,134,469) (8,862,597)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 10,872,277 10,104,084
------------------ -------------------
$ 33,174,778 $ 36,800,023
================== ===================
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
----------------- --- ------------------
June 30, 2003 June 30, 2002
----------------- ------------------
Net revenues $ 21,836,563 $ 20,843,416
Cost of services 17,938,026 17,012,964
General and administrative expenses 1,844,168 1,865,709
Depreciation and amortization expense 605,335 562,228
Provision for uncollectible accounts 468,382 345,113
------------------ ------------------
Income before interest expense and income taxes 980,652 1,057,402
Interest expense (164,554) (179,498)
------------------ ------------------
Income before income taxes 816,098 877,904
Income tax expense 326,439 351,128
------------------ ------------------
Net income $ 489,659 $ 526,776
================== ==================
Earnings per Share - Basic:
Weighted Average Basic Shares 2,296,527 2,499,447
------------------ ------------------
Net income per share $ 0.21 $ 0.21
================== ==================
Earnings per share - Diluted:
Weighted Average Diluted Shares 2,489,466 2,948,255
------------------ ------------------
Net income per share $ 0.20 $ 0.18
================== ==================
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended
--------------------- --- -----------------
June 30, 2003 June 30, 2002
--------------------- -----------------
Net revenues $ 43,354,208 $ 41,393,969
Cost of services 35,967,664 33,683,419
General and administrative expenses 3,749,226 3,703,372
Depreciation and amortization expense 1,231,419 1,053,021
Provision for uncollectible accounts 848,565 693,256
Cost of restatement - 815,794
---------------------- -------------------
Income before interest expense and income taxes 1,557,334 1,445,107
Interest expense (343,787) (399,952)
---------------------- -------------------
Income before income taxes 1,213,547 1,045,155
Income tax expense 485,419 418,062
---------------------- -------------------
Net income $ 728,128 $ 627,093
====================== ===================
Earnings per Share - Basic:
Weighted Average Basic Shares 2,292,996 2,499,254
---------------------- -------------------
Net income per share $ 0.32 $ 0.25
====================== ===================
Earnings per share - Diluted:
Weighted Average Diluted Shares 2,484,763 2,969,291
---------------------- -------------------
Net income per share $ 0.29 $ 0.21
====================== ===================
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six months Ended
-----------------------------------------------
June 30, 2003 June 30, 2002
------------------------ ---------------------
Cash flows from operating activities:
Net income $ 728,128 $ 627,093
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 1,231,419 1,053,021
Deferred income taxes 590,629 132,216
Gain on sale of asset (76,813) -
Provision for uncollectible accounts 848,565 693,256
------------------------ ---------------------
3,321,928 2,505,586
Change in certain net assets:
(Increase) decrease in:
Accounts receivable 781,367 1,092,571
Prepaid expenses and other current assets (52,462) 1,933
Other assets 756,575 103,761
Increase (decrease) in:
Accounts payable and accrued liabilities (456,058) 110,592
Other liabilities (812,131) (38,149)
------------------------ ---------------------
Net cash provided by operating activities 3,539,219 3,776,294
------------------------ ---------------------
Cash flows from investing activities:
Capital expenditures (767,399) (1,062,465)
Cash received from sale of asset 149,469 -
------------------------ ---------------------
Net cash used in investing activities (617,930) (1,062,465)
------------------------ ---------------------
Cash flows from financing activities:
Net revolving credit facility payments (3,034,988) (3,069,355)
Repurchase of common shares (65,896) (53,268)
Proceeds from stock option exercises 76,150 54,600
Principal payments on debt and capital leases (150,963) (170,511)
------------------------ ---------------------
Net cash used in financing activities (3,175,697) (3,238,534)
------------------------ ---------------------
Net decrease in cash and cash equivalents (254,408) (524,705)
Cash and cash equivalents at beginning of period 973,534 1,928,391
------------------------ ---------------------
Cash and cash equivalents at end of period $ 719,126 $ 1,403,686
======================== =====================
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying interim consolidated financial statements for the three and six
months ended June 30, 2003 and 2002 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted pursuant to such rules and regulations. Accordingly, the
reader of this Form 10-Q is referred to the Company's Form 10-K for the year
ended December 31, 2002 for further information. In the opinion of management of
the Company, the accompanying unaudited interim financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position at June 30, 2003 and the results of operations and
cash flows for the three and six month periods ended June 30, 2003 and 2002.
The results of operations for the three and six months ended June 30, 2003 are
not necessarily indicative of the operating results for the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Financial Statement Reclassifications
Certain amounts have been reclassified in the June 2002 financial statements
and related notes in order to conform to the 2003 presentation. Such
reclassifications had no effect on previously reported net income.
2. NET 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.
The ability of payors to meet their obligations depends upon their financial
stability, future legislation and regulatory actions. With the exception of the
matter discussed in Note 7, 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 doubtful accounts
principally consists of management's estimate of amounts that may prove
uncollectible for coverage, eligibility and technical reasons.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Medicare Reimbursement for Visiting Nurse Services
Based on current law and regulation, a Medicare rate increase of approximately
2.2% is scheduled to go into effect on October 1, 2003. However, the Medicare
Prescription Drug legislation currently under consideration in the U.S. Congress
could have a significant impact. The House version would increase reimbursement
by adding a 5% rate add-on for services provided to beneficiaries in rural
areas. The Senate version would eliminate the October 2003 rate increase,
replacing it with a lower increase that would go into effect January 1, 2004.
Additionally, the Senate version would reduce the amount of rate increases in
future years and would establish a beneficiary co-payment for each 60-day
episode of care beginning January 1, 2004. The amount of the co-payment would be
1.5% of the national average per episode reimbursement amount. The Company is
currently unable to predict what changes, if any, will ultimately be made to the
current laws and regulations.
Medicare Reimbursement for Adult Day Care
In addition to the above, the Medicare Prescription Drug legislation versions
also contain two similar provisions that would create a Federal demonstration
project impacting medical adult day care. Both provisions authorize a new
demonstration project that would pay for home health beneficiaries receiving
their treatment in medical adult day care centers. This project would be the
first step toward the industry's goal of accessing Medicare reimbursement.
Medicaid Reimbursement for the Company's Services
Approximately 49% of the Company's revenues are from state Medicaid programs,
virtually all of which are currently facing significant budget issues. The
Medicaid programs in each of the states in which the Company operates are taking
actions or evaluating taking actions to reduce Medicaid expenditures. Among
these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum
time in which payments are paid
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the slowing of the US economy. The Company believes
that these financial issues are cyclical in nature rather than indicative of the
long-term prospect for Medicaid funding of health care services. It is possible
that the actions taken by the stateMedicaid programs could have a significant
unfavorable impact on the Company's results of operations.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. SEGMENT DATA
The Company operates in two reportable business segments: Adult Day Health
Services (ADHS), and Visiting Nurses (VN). Reportable segments have been
identified based upon how management has organized the business by services
provided to customers and the criteria in SFAS 131, "Disclosures about Segments
of an Enterprise and Related Information". The Company's ADHS segment includes
the aggregation of its Adult Day Care (ADC) in-center operations and in-home
personal care operations, both of which provide predominantly long-term health
care and custodial services that enable recipients to avoid nursing home
admission. Sources of reimbursement, reimbursement rates per day and
contribution margins from the Company's ADC and in-home personal care operations
are substantially alike. The Company's VN segment provides skilled medical
services in patients' homes largely to enable recipients to reduce or avoid
periods of hospitalization and/or nursing home care. Approximately 90% of the VN
segment revenues are generated from the Medicare program. VN Medicare revenues
are generated on a per episode basis rather than a fee per visit or day of care.
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has operations in Alabama,
Connecticut, Florida, Indiana, Kentucky, Maryland, Massachusetts, and Ohio.
Three Months Ended June 30, Six Months Ended June 30, (1)
--------------------------- -----------------------------
Net Revenues
Adult day health services $ 14,499,882 $ 13,682,392 $ 28,411,658 $ 26,867,694
Visiting nurses 7,336,681 7,161,024 14,942,550 14,526,275
----------------- --------------- ------------------- -----------------
$ 21,836,563 $ 20,843,416 $ 43,354,208 $ 41,393,969
================= =============== =================== =================
Operating Income
Adult day health services 508,153 596,637 667,024 1,211,314
Visiting nurses 1,037,495 1,034,808 2,007,016 2,158,322
----------------- --------------- ------------------- -----------------
1,545,648 1,631,445 2,674,040 3,369,636
Corporate/unallocated(1) 564,996 574,043 1,116,706 1,924,529
----------------- --------------- ------------------- -----------------
Operating income $ 980,652 $ 1,057,402 $ 1,557,334 $ 1,445,107
================= =============== =================== =================
(1) The six months ended June 30, 2002 includes approximately $816,000 related
to the costs of conducting an investigation of the restatement of the financial
statements.
4. Capitalized Software Development Costs
Consistent with AICPA Statement of Position 98-1, the Company capitalizes the
cost of internally generated computer software developed for the Company's own
use. Software development costs of approximately $230,000 and $280,000 were
capitalized in the three months ended June 30, 2003 and 2002 respectively, and
$530,000 and $560,000 in the six months ended June 2003 and 2002, respectively.
Capitalized software development costs are amortized over a three-year period
following the initial implementation of the software.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. Acquisition of Ohio Home Care Provider
On July 18, 2002, the Company acquired the business and assets of Medlink of
Ohio (Medlink). Medlink is a provider of in-home personal care services with
branch operations in Cleveland and Akron, Ohio.
The purchase price was approximately $3.2 million, $2.9 million of which was
funded from the Company's bank credit facility. The balance was financed with a
three-year note payable to the seller. The acquired operations added
approximately $1.9 and $3.7 million to revenues and $286,000 and $554,000 to
consolidated pre-tax income for the quarter and six months ended June 30, 2003,
respectively.
The unaudited pro forma consolidated results of operations of the Company as if
this acquisition had been made at the beginning of 2002 are as follows:
Three Months Ended Six Months Ended
---------------------- -- ---------------------- ------------------------ -------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
---------------------- ---------------------- ------------------------ -------------------------
Net revenues $ 21,836,563 $ 22,592,971 $ 43,354,208 $ 44,884,510
Net income 489,659 654,260 728,128 868,894
Earnings per share:
Basic $ 0.21 $ 0.26 $ 0.32 $ 0.35
Diluted $ 0.20 $ 0.22 $ 0.29 $ 0.29
6. Revolving Credit Facility
The Company has a $22.5 million credit facility with Bank One Kentucky NA with
an expiration date of June 30, 2004. Because the facility expires within one
year, it has been classified as a current liability in the accompanying balance
sheet as of June 30, 2003. The credit facility bears interest at the bank's
prime rate plus a margin (ranging from 0% to 1.0%, currently 0%) dependent upon
total leverage and is secured by substantially all assets and the stock of the
Company's subsidiaries. The weighted average interest rates were 4.25% and 5.28%
for the quarters ended June 30, 2003 and 2002, respectively, and 4.25% and 5.59%
for the six months ended June 30 ,2003 and 2002, respectively. The interest rate
in effect at June 30, 2003 was 4.00%. The Company pays a commitment fee of 0.5%
per annum on the unused facility balance. Borrowings are available equal to the
greater of: a) a multiple of earnings before interest, taxes, depreciation and
amortization (as defined) or b) an asset based formula, primarily based on
accounts receivable. Borrowings under the facility may be used for working
capital, capital expenditures, acquisitions, development and growth of the
business and other corporate purposes. As of June 30, 2003 the formula permitted
approximately $17.8 million to be used, of which approximately $11.4 million was
outstanding. Additionally, an irrevocable letter of credit, totaling $3.0
million, was outstanding in connection with the Company's self-insurance
programs. Thus, a total of $14.4 million was either outstanding or committed as
of June 30, 2003 while an additional $3.4 million was available for use. The
Company's revolving credit facility is subject to various financial covenants.
As of June 30, 2003, the Company was in compliance with the covenants.
7. Kentucky Transportation Program
Prior to July 1, 2002, the Medicaid program of the Commonwealth of Kentucky
managed its transportation program internally. Effective July 1, 2002 the
Medicaid program contracted with an independent broker (the Broker) for the
management of its transportation reimbursement program in the Louisville KY
area. The Broker then contracted with the Company, among others, for the
provision of transportation services to Medicaid beneficiaries. Company
services pursuant to the contract were limited to transportation of
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Medicaid beneficiaries who also attend the Company's in-center adult day care
programs. The Broker almost immediately began to encounter significant financial
difficulties and has paid the Company for only a small portion of the amounts
due for services rendered. On October 22, 2002, three of the Broker's other
contracted providers filed a motion with the U.S. Bankruptcy Court to liquidate
the Broker under Chapter 7 of the Federal Bankruptcy Code.
In May 2003, the Company, along with a group of other effected providers, filed
suit against the Commonwealth in Franklin Circuit Court seeking payment directly
from the Commonwealth. As of June 30, 2003 and December 31, 2002, the Broker
owed the Company approximately $535,000, which amount is included in accounts
receivable, net on the accompanying balance sheets. Although the Company
currently believes it will be successful in ultimately collecting the amounts
currently due it under this arrangement, there can be no assurance that such
amounts will in fact be collected. Should it become evident in the future that a
material amount will not be collectible, the Company would, at that time, record
an additional provision for uncollectible accounts.
8. Stock-Based Compensation
Stock options are granted under various stock compensation programs to employees
and independent directors. The Company accounts for stock option grants in
accordance with Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." For purposes of pro forma disclosures, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information is as follows.
Three Months Ended Six Month Ended
----------------------------------------------- ---------------------- ------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
----------------------- ----------------------- ---------------------- ------------------------
Net income as reported $ 489,659 $ 526,776 $ 728,128 $ 627,093
Pro forma stock-based
compensation expense, net 16,048 16,850 32,095 33,700
of tax
----------------------- ----------------------- ---------------------- ------------------------
Pro forma net income $ 473,611 $ 509,926 $ 696,033 $ 593,393
======================= ======================= ====================== ========================
Earnings per common share:
Basic - as reported $ 0.21 $ 0.21 $ 0.32 $ 0.25
Basic - pro forma $ 0.21 $ 0.20 $ 0.30 $ 0.24
Diluted - as reported $ 0.20 $ 0.18 $ 0.29 $ 0.21
Diluted - proforma $ 0.19 $ 0.17 $ 0.28 $ 0.20
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
9. Earnings Per Common Share
There were no adjustments required to be made to net income for purposes of
computing basic and diluted earnings per common share in any of the periods
presented. A reconciliation of the weighted average shares outstanding used in
the calculation of basic and diluted earnings per common share is as follows:
Three Months Ended Six Months Ended
------------------------------------ --------------------------------------
June 30, 2003 June 30, 2002 June 30, 2003 June 30, 2002
---------------- ----------------- ---------------- -------------------
Shares used to compute basic
earnings per common share -
weighted average shares
outstanding 2,296,527 2,499,447 2,292,996 2,499,254
Dilutive effect of stock 507,680
options 192,939 448,808 191,767 470,037
---------------- ----------------- ---------------- -------------------
Shares used to compute
diluted earnings per common
share 2,489,466 2,948,255 2,484,763 2,969,291
================ ================= ================ ===================
10. COMMITMENTS AND CONTINGENCIES
Insurance Programs
Self-Insurance Programs. The Company bears significant risk under its
self-insured employee health, automobile and workers' compensation programs. A
brief description of each program is set forth below:
The Company's self-insured employee health program has an excess-loss insurance
policy that reimburses the Company for covered expenses, in excess of a specific
deductible for each covered person and an annual aggregate deductible for all
covered claims. Effective September 1, 2002, the Company moved the management of
the health program from a regional third party administrator to Cigna
Healthcare, a national insurance carrier. Additionally, as of September 1, 2002,
certain changes in the benefits were made and the rates the Company charges
employees for coverage were increased.
Under its automobile and workers' compensation self-insurance programs, the
Company bears risk up to $100,000 per incident and up to an annual aggregate
deductible. The Company carries insurance coverage for amounts in excess of the
$100,000 per incident amount and for amounts in excess of the annual aggregate
deductible. Additionally, the Company also carries umbrella coverage.
The Company records estimated liabilities for its health, automobile, and
workers' compensation self-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
Other Insurance. The Company's properties are covered by casualty insurance
policies. The Company also carries directors and officers, general and
professional liability, and umbrella insurance. The Company's deductible amount
for general and professional claims was $5,000 per claim prior to July 1, 2001
and $25,000 thereafter. The Company's insurance policies would not cover any
award of, or settlement based upon, punitive damages that might be made on
claims in conjunction with these policies.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Company monitors its estimated self-insurance liabilities on a quarterly
basis. As facts change, it may become necessary to make adjustments that could
be material to the Company's results of operations and financial condition.
The Company's insurance coverages were renewed effective April 1, 2003 with the
following changes: 1) the deductible amount for general and professional claims
was increased to $250,000, 2) the deductible amount for workers' compensation
claims was increased to $250,000 (auto remains at $100,000), 3) total premiums,
excluding the Company's exposure to claims and deductibles, for all its
non-health insurance programs increased to approximately $2.5 million for the
contract year ending March 31, 2004 as compared to approximately $1.5 million
for the contract year ended March 31, 2003.
Legal Proceedings
Franklin Case
In April 2000, Franklin Capital Associates L.P. (Franklin) filed suit in
Chancery Court of Williamson County, Tennessee, seeking damages in connection
with registration rights they received in the Company's acquisition of certain
home health operations in February 1991. Following a bench trial, in April 2003
the court issued a ruling in favor of the plaintiffs awarding damages of
$984,970. The Company believes the Court erred both in its finding of liability
and in its determination of the amount of damages. The Company intends to seek
appellate review of the lower court decision. As a part of the appeal the
Company will be required to post a bond, supported by a letter of credit, in the
amount to be specified by the court, until the appeal court issues a review
order. The amount of the letter of credit required is expected to be $1.35
million and it is expected that such letter of credit will be required to be
posted in the Company's quarter ended September 30, 2003. Such a letter of
credit will reduce amounts that would otherwise be available under the Company's
revolving credit facility.
Based on the advice of legal counsel, the Company's management believes that the
damage award by the lower court does not create a "probable" loss as set forth
in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies". Accordingly, no provision for the damages award has been
recorded in the accompanying financial statements. Should the facts and
circumstances change in the future to the extent that such a loss appears
probable, the Company would record a provision at that time.
Based on the advice of legal counsel, the Company's management believes it has
strong grounds for appealing the trial court's decision and intends to
vigorously pursue its appeal. The Company can give no assurance that it will be
successful in its appeal.
Other Claims and Suits
The Company is currently, and from time to time, subject to other claims and
suits arising in the ordinary course of its business, including claims for
damages for personal injuries, some of which seek punitive damages that are not
covered by insurance. In the opinion of management, the ultimate resolution of
any of these other pending claims and legal proceedings will not have a material
effect on the Company's financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Statements - Forward Outlook and Risks
Some of the matters discussed in this filing include forward-looking statements.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "thinks," and similar expressions
are forward-looking statements. The Company cautions investors that any
forward-looking statements made by the Company are not guarantees of future
performance and that actual results may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to, those set forth in the section on Cautionary Statements - Forward
Outlook and Risks in Part I, and the Notes to the Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in the Company's Form 10-K for the year ended December 31, 2002.
Although we believe that these statements are based upon reasonable assumptions,
we can give no assurance that the anticipated results will be achieved. Given
these uncertainties, prospective investors are cautioned not to place undue
reliance on these forward-looking statements. These forward-looking statements
are made as of the date of this filing. We assume no obligation to update or
revise them or provide reasons why actual results may differ.
Critical Accounting Policies
Refer to the "Critical Accounting Policies" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Form 10-K for the year ended December 31, 2002 for a detailed
discussion of the Company's critical accounting policies.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2003 Compared with Three Months Ended June 30, 2002
2003 2002 Change
---------------------------------------------------------------------------
Consolidated Amount % Rev Amount % Rev Amount %
- ------------------------------ --------------- --------------------------- ---------- -------------- ---------
Net revenues ADHS $ 14,499,882 66.4% $ 13,682,392 65.6% $ 817,490 6.0%
VN 7,336,681 33.6% 7,161,024 34.4% 175,657 2.5%
--------------- ---------------- --------------
$ 21,836,563 100.0% $ 20,843,416 100.0% $ 993,147 4.8%
=============== ================ ==============
Operating income ADHS $ 508,153 3.5% $ 596,637 4.4% $ (88,484) -14.8%
VN 1,037,495 14.1% 1,034,808 14.5% 2,687 0.3%
--------------- ---------------- --------------
1,545,648 7.1% 1,631,445 7.8% (85,797) -5.3%
Unallocated corporate expenses 564,996 2.6% 574,043 2.8% (9,047) -1.6%
--------------- ---------------- --------------
Income before interest
expense and income taxes 980,652 4.5% 1,057,402 5.1% (76,750) -7.3%
Interest expense 164,554 0.8% 179,498 0.9% (14,944) -8.3%
Income taxes 326,439 1.5% 351,128 1.7% (24,689) -7.0%
----------------- ------------------ ----------------
Net income $ 489,659 2.2% $ 526,776 2.5% $ (37,117) -7.0%
================= ================== ================
The Company's net revenues grew approximately $1 million or 5%. The acquisition
of Medlink OH accounted for approximately $1.9 million of revenue growth between
periods while other ADHS revenues decreased due to the closure of three adult
day care centers and lower sales volumes in 2003. VN segment revenues grew 2.5%
as volume growth more than offset the revenue effect of a 5.3% Medicare rate
cut. Operating income before unallocated corporate expense decreased from the
same period last year primarily as a result of the lower volumes in ADHS, the
Medicare rate cut and increased staffing costs. The Medlink acquisition added
approximately $286,000 to pre-tax income in the quarter ended June 30, 2003.
The effective income tax rate was approximately 40% of income before income
taxes for 2003 and 2002.
Adult Day Health Services (ADHS) Segment-Three Months
The Company's ADHS segment includes the aggregation of its ADC in-center
operations and in-home personal care operations, both of which provide
predominantly long-term health care and custodial services that enable patients
to avoid nursing home admission. Sources of reimbursement, reimbursement rates
per day and contribution margins from the Company's ADC and personal care
operations are alike.
Three Months Ended June 30,
2003 2002 Change
--------------------------- --------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- --------------- ---------
Net revenues $ 14,499,882 100.0% $ 13,682,392 100.0% $ 817,490 6.0%
Cost of services 12,472,042 86.0% 11,780,366 86.1% 691,676 5.9%
General & administrative 880,895 6.1% 816,558 6.0% 64,337 7.9%
Depreciation & amortization 320,988 2.2% 286,459 2.1% 34,529 12.1%
Uncollectible accounts 317,804 2.2% 202,372 1.5% 115,432 57.0%
---------------- ---------------- ---------------
Operating income $ 508,153 3.5% $ 596,637 4.4% $ (88,484) -14.8%
================ ================ ===============
Admissions 1,067 1,098 (31) -2.8%
Patient months of care 15,323 14,929 394 2.6%
Patient days of care 204,930 189,731 15,199 8.0%
Revenue per patient day $ 70.76 $ 72.11 $ (1.35) -1.9%
ADC in-center averages:
Weekday attendance 1,282 1,335 (53) -4.0%
Center capacity 1,684 1,791 (107) 6.0%
Center occupancy rate 76.1% 74.5% 1.6%
ADHS revenues increased 6.0% to $14.5 million for the three months ended June
30, 2003 from $13.7 million in the same quarter of the prior year for a total
increase of $817,000. The acquisition of Medlink Ohio, an in home personal care
operation, increased revenues approximately $1.9 million. ADHS revenues
excluding the Medlink acquisition: 1) decreased approximately $210,000 due to
the closure of adult day centers in Seymour CT, Mentor OH and Miami FL in late
2002, 2) decreased approximately $248,000 due to reimbursement changes in KY
Medicaid programs enacted in July 2002 and 3) decreased approximately $482,000
due to lower sales volumes in certain in-home personal care business units.
Average revenue per day of care declined slightly due primarily to mix changes.
Occupancy in the adult day care centers was 76.1% of capacity in 2003 and 74.5%
in 2002.
Cost of services and general and administrative expenses as a percent of
revenues were substantially the same in both periods. Depreciation and
amortization increased primarily due to the addition of new guest transportation
vans and investments in information technology.
ADHS Seasonality
The Company's ADHS segment normally experiences seasonality in its operating
results. Specifically, the quarters ended December and March typically generate
lower operating income than the quarters ended June and September as the holiday
season and winter weather tend to temporarily lower ADC in-center attendance.
Visiting Nurse (VN) Segment-Three Months
The Company's VN segment provides skilled medical services in patients' homes to
enable recipients to reduce or avoid periods of hospitalization and/or nursing
home care. Approximately 90% of the VN segment revenues come from the Medicare
program and are generated on a per episode basis rather than a daily fee basis
as in ADHS.
Three Months Ended June 30,
2003 2002 Change
-------------------------- -------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
--------------- ---------- ---------------- --------- ---------------- ---------
Net revenues $ 7,336,681 100.0% $ 7,161,024 100.0% $ 175,657 2.5%
Cost of services 5,465,984 74.5% 5,232,600 73.1% 233,384 4.5%
General & administrative 459,019 6.3% 526,966 7.4% (67,947) -12.9%
Depreciation & amortization 223,605 3.1% 223,910 3.1% (305) -0.1%
Uncollectible accounts 150,578 2.1% 142,740 2.0% 7,838 5.5%
--------------- ---------------- ----------------
Operating income $ 1,037,495 14.1% $ 1,034,808 14.5% $ 2,687 0.3%
=============== ================ ================
Admissions 2,410 2,075 335 16.1%
Patient months of care 6,260 5,584 676 12.1%
Revenue per patient month $ 1,172 $ 1,282 $ (110) -8.6%
A Medicare rate decrease of approximately 5.3% went into effect October 1, 2002.
As a result, revenues for the quarter ended June 30, 2003 were approximately
$370,000 lower than they would have been if that rate cut had not been enacted.
Additionally, effective April 1, 2003 rates for patients served in rural areas
were reduced which lowered revenues by approximately $86,000 for the quarter
ended June 30, 2003. Despite the rate cuts, VN revenues grew by a net $175,657
or 2.5% on admission and patient month growth of nearly 16% and 12%,
respectively. The Company had the same number of agencies in operation in both
periods.
Costs of services, primarily labor and related costs, grew faster than revenue
primarily due to the Medicare rate cut and secondarily due to increased costs of
staffing, particularly for nurses. The decrease in revenue per patient month
resulted primarily from the reimbursement changes described above.
VN Seasonality
The Company's VN segment normally experiences seasonality in its operating
results. Specifically, the VN Segment typically generates lower operating income
in the quarter ended September than in the other quarters due to the seasonality
of senior population in the Company's south Florida markets.
Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002
Consolidated 2003 2002 Change
------------
--------------------------- --------------------------- --------------------------
Amount % Rev Amount % Rev Amount % Rev
---------------- ---------- --------------- ----------- -------------- -----------
Net revenues ADHS $ 28,411,658 65.5% $ 26,867,694 64.9% $ 1,543,964 5.8%
VN 14,942,550 34.5% 14,526,275 35.1% 416,275 2.9%
---------------- --------------- --------------
$ 43,354,208 100.0% $ 41,393,969 100.0% $ 1,960,239 4.7%
================ =============== ==============
Operating income ADHS 667,024 2.3% 1,211,314 4.5% (544,290) -44.9%
VN 2,007,016 13.4% 2,158,322 14.9% (151,306) -7.0%
---------------- --------------- --------------
2,674,040 6.2% 3,369,636 8.1% (695,596) -20.6%
Unallocated corporate expenses 1,116,706 2.6% 1,924,529 4.6% (807,823) -42.0%
---------------- --------------- --------------
Income before interest
expense and income taxes 1,557,334 3.6% 1,445,107 3.5% 112,227 7.8%
Interest expense 343,787 0.8% 399,952 1.0% (56,165) -14.0%
Income taxes 485,419 1.1% 418,062 1.0% 67,357 16.1%
---------------- --------------- --------------
Net income $ 728,128 1.7% $ 627,093 1.5% $ 101,035 16.1%
================ =============== ==============
The Company's net revenues grew approximately $2 million or 6% as a result of
the Medlink acquisition and increased patient volumes in the VN segment,
partially offset by volume reductions in ADHS and reimbursement cuts in both
segments. Operating income before unallocated corporate expense decreased from
the same period last year. As noted in the discussion of quarterly results,
operating income for the six months ended June 30, 2003 was adversely affected
by lower sales volumes in ADHS and the VN Medicare rate cuts. Additionally,
operating income in the six months ended June 30, 2003 was adversely affected by
severe weather in February 2003. Unallocated corporate expenses in the six
months ended June 30, 2002 include approximately $816,000, consisting primarily
of professional fees, related to the cost of conducting an investigation of the
restatement of the Company's financial statements.
The effective income tax rate was approximately 40% of income before income
taxes for 2003 and 2002.
Adult Day Health Services (ADHS) Segment-Six Months
Six Months Ended June 30,
2003 2002 Change
---------------------------- -------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
----------------- ---------- --------------- ---------- --------------- ----------
Net revenues $ 28,411,658 100.0% $ 26,867,694 100.0% $ 1,543,964 5.8%
Cost of services 24,828,195 87.4% 23,135,513 86.1% 1,692,682 7.3%
General & administrative 1,736,938 6.1% 1,598,568 6.0% 138,370 8.7%
Depreciation & amortization 653,429 2.3% 527,856 2.0% 125,573 23.8%
Uncollectible accounts 526,072 1.9% 394,443 1.5% 131,629 33.4%
----------------- --------------- ---------------
Operating income $ 667,024 2.4% $ 1,211,314 4.5% $ (544,290) -44.9%
================= =============== ===============
Admissions 1,981 2,068 (87) -4.2%
Patient months of care 30,571 29,310 1,261 4.3%
Patient days of care 397,530 372,591 24,939 6.7%
Revenue per patient day $ 71.47 $ 72.11 $ (0.64) -0.9%
ADC in-center averages:
Weekday attendance 1,237 1,320 (83) -6.3%
Center capacity 1,691 1,791 (100) -5.6%
Center occupancy rate 73.2% 73.7% -0.5%
ADHS revenues increased 6% to $28.4 million for the six months ended June 30,
2003 from $26.9 million in the same six months of the prior year. The
acquisition of Medlink Ohio, an in-home personal care operation, increased
revenues approximately $3.7 million. ADHS revenues excluding the Medlink
acquisition: 1) decreased approximately $416,000 due to the closure of adult day
centers in Seymour CT, Mentor OH and Miami FL in late 2002, 2) decreased
approximately $565,000 due to reimbursement changes in KY Medicaid programs
enacted in July 2002, 3) decreased approximately $465,000 in adult day centers
in operation in both periods, primarily due to unusually severe winter weather
in February 2003, and 4) decreased approximately $532,000 due to lower sales
volumes in certain in-home personal care business units. Average revenue per day
of care declined about 1% primarily due to reimbursement and mix changes.
Occupancy in the adult day care centers was 73.2% of capacity in the 2003 period
and 73.7% of capacity in the 2002 period.
Cost of services as a percent of revenues increased to 87.4% in 2003 from 86.1%
in 2002 primarily as a result of higher staffing costs in the adult day centers,
reimbursement and mix changes, and decreased adult day care revenues resulting
from unusually severe winter weather in the first three months of 2003. General
and administrative expenses were relatively constant as a percent of revenues.
Depreciation and amortization increased primarily due to the addition of new
guest transportation vans and investments in information technology.
Visiting Nurse (VN) Segment-Six Months
Six Months Ended June 30,
2003 2002 Change
-------------------------- -------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
--------------- ---------- ---------------- --------- ---------------- ---------
Net revenues $ 14,942,550 100.0% $ 14,526,275 100.0% $ 416,275 2.9%
Cost of services 11,139,468 74.6% 10,547,906 72.6% 591,562 5.6%
General & administrative 1,019,503 6.8% 1,080,555 7.4% (61,052) -5.7%
Depreciation & amortization 454,071 3.0% 440,678 3.0% 13,393 3.0%
Uncollectible accounts 322,492 2.2% 298,814 2.1% 23,678 7.9%
--------------- ---------------- ----------------
Operating income $2,007,016 13.4% $ 2,158,322 14.9% $(151,306) -7.0%
=============== ================ ================
Admissions 4,888 4,423 465 10.5%
Patient months of care 12,498 11,487 1,011 8.8%
Revenue per patient month $ 1,196 $ 1,265 $ (69) -5.5%
A Medicare rate decrease of approximately 5.3% went into effect October 1, 2002.
As a result, revenues for the six-months ended June 30, 2003 were approximately
$753,000 lower than they would have been if that rate cut had not been enacted.
Additionally, effective April 1, 2003 rates for patients served in rural areas
were reduced which lowered revenues by approximately $86,000 for the six months
ended June 30, 2003. Despite the rate cuts, VN revenues grew by a net $416,275
or 2.9% on admission and patient month growth of nearly 11% and 9%,
respectively. The Company had the same number of agencies in operation in both
periods.
Costs of services, primarily labor and related costs, grew faster than revenue
primarily due to the Medicare rate cut and secondarily due to increased costs of
staffing, particularly for nurses. The decrease in revenue per patient month
resulted primarily from the reimbursement changes described above.
Insurance Programs
Self-Insurance Programs. The Company bears significant risk under its
self-insured employee health, automobile and workers' compensation programs. A
brief description of each program is set forth below:
The Company's self-insured employee health program has an excess-loss insurance
policy that reimburses the Company for covered expenses, in excess of a specific
deductible for each covered person and an annual aggregate deductible for all
covered claims. Effective September 1, 2002, the Company moved the management of
the health program from a regional third party administrator to Cigna
Healthcare, a national insurance carrier. Additionally, as of September 1, 2002,
certain changes in the benefits were made and the rates the Company charges
employees for coverage were increased.
Under its automobile and workers' compensation self-insurance programs, the
Company bears risk up to $100,000 per incident and up to an annual aggregate
deductible. The Company carries insurance coverage for amounts in excess of the
$100,000 per incident amount and for amounts in excess of the annual aggregate
deductible. Additionally, the Company also carries umbrella coverage.
The Company records estimated liabilities for its health, automobile, and
workers' compensation self-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.
Other Insurance. The Company's properties are covered by casualty insurance
policies. The Company also carries directors and officers, general and
professional liability, and umbrella insurance. The Company's deductible amount
for general and professional claims was $5,000 per claim prior to July 1, 2001
and $25,000 thereafter. The Company's insurance policies would not cover any
award of, or settlement based upon, punitive damages that might be made on
claims in conjunction with these policies.
The Company monitors its estimated self-insurance liabilities on a quarterly
basis. As facts change, it may become necessary to make adjustments that could
be material to the Company's results of operations and financial condition.
The Company's insurance coverages were renewed effective April 1, 2003 with the
following changes: 1) the deductible amount, for general and professional claims
was increased to $250,000, 2) the deductible amount for workers' compensation
claims was increased to $250,000 (auto remains at $100,000), 3) total premiums,
excluding the Company's exposure to claims and deductibles, for all its
non-health insurance programs increased to approximately $2.5 million for the
contract year ending March 31, 2004 as compared to approximately $1.5 million
for the contract year ended March 31, 2003.
Liquidity and Capital Resources
Revolving Credit Facility
The Company has a $22.5 million credit facility with Bank One Kentucky NA with
an expiration date of June 30, 2004. Because the facility expires within one
year, it has been classified as a current liability in the accompanying balance
sheet as of June 30, 2003. The credit facility bears interest at the bank's
prime rate plus a margin (ranging from 0% to 1.0%, currently 0%) dependent upon
total leverage and is secured by substantially all assets and the stock of the
Company's subsidiaries. The weighted average interest rates were 4.25% and 5.28%
for the quarters ended June 30, 2003 and 2002, respectively, and 4.25% and 5.59%
for the six months ended June 30 ,2003 and 2002, respectively. The interest rate
in effect at June 30, 2003 was 4.00%. The Company pays a commitment fee of 0.5%
per annum on the unused facility balance. Borrowings are available equal to the
greater of: a) a multiple of earnings before interest, taxes, depreciation and
amortization (as defined) or b) an asset based formula, primarily based on
accounts receivable. Borrowings under the facility may be used for working
capital, capital expenditures, acquisitions, development and growth of the
business and other corporate purposes. As of June 30, 2003 the formula permitted
approximately $17.8 million to be used, of which approximately $11.4 million was
outstanding. Additionally, an irrevocable letter of credit, totaling $3.0
million, was outstanding in connection with the Company's self-insurance
programs. Thus, a total of $14.4 million was either outstanding or committed as
of June 30, 2003 while an additional $3.4 million was available for use. The
Company's revolving credit facility is subject to various financial covenants.
As of June 30, 2003, the Company was in compliance with the covenants.
With respect to the credit facility and the Company`s availability thereunder:
o The formula used for calculating availability changed for periods
ending on and after July 31, 2003 to a lower multiple of earnings
before interest, taxes, depreciation and amortization that is expected
to lower availability by approximately $1.3 million.
The Company has reduced borrowings through one-time reductions of
accounts receivable of approximately $1.7 million in July and August
2003 from the collection of cost report settlements.
o As discussed in the notes to the financial statements, the Company
expects its appeal of the trial court ruling in the Franklin Capital
Associates, L.P. to require the issuance of a letter of credit in an
amount to be specified by the court, until the appeal court issues a
review order. The amount of the letter of credit required is expected
to be $1.35 million and it is expected that such letter of credit will
be required to be posted in the Company's quarter ended September 30,
2003. Such letter of credit will reduce the amount of borrowings that
would otherwise be available under the credit facility.
The Company believes the facility will be sufficient to fund its operating needs
within the next year. Management is in the process of seeking a replacement
senior credit facility and will also be evaluating other opportunities to raise
capital to fund continued growth and development of the business.
Stock Buy Back Program
In March 2001 the Company's Board of Directors authorized up to $1 million to be
used to acquire shares of the Company's common stock. In April 2001, the Company
initiated a stock repurchase plan in compliance with Rule 10b-18 of the
Securities Exchange Act of 1934. This plan permits purchases to take place
selectively from time to time in open market purchases through a broker or in
privately negotiated transactions. Through June 30, 2003, a total of 90,071
shares have been repurchased under this program, all of which were in open
market purchases. A total of $843,112 has been expended in these purchases for
an average acquisition cost of $9.36 per share. There were no purchases in the
quarter ended June 30, 2003.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the six months
ending June 30, 2003 and 2002 were:
Net Change in Cash and Cash Equivalents 2003 2002
--------------------------------------- --------------------- -------------------
Provided by (used in):
Operating activities $ 3,539,219 $ 3,776,294
Investing activities (617,930) (1,062,465)
Financing activities (3,175,697) (3,238,534)
--------------------- -------------------
Net decrease in cash and cash equivalents $ (254,408) $ (524,705)
===================== ===================
2003
Net cash provided by operating activities resulted principally from current
period income, net of changes in accounts receivable, accounts payable and
accrued expenses. Accounts receivable days revenues outstanding were 65 at June
30, 2003, down from 80 at December 31, 2002 due primarily to the collection of
Medicare cost report settlements. Net cash used in investing activities resulted
principally from improvements in information systems and replacement capital
expenditures in the Company's operations net of cash received from the sale of
an asset. Net cash used by financing activities resulted primarily from net
repayments on the Company's revolving credit facility and payments of capital
lease obligations and term debt.
2002
Net cash provided by operating activities resulted principally from current
period income, net of changes in accounts receivable, accounts payable and
accrued expenses. Accounts receivable days sales outstanding were 71 at June 30,
2002, down from 80 at December 31, 2001 due primarily to the collection of
Medicare cost report settlements. The change in accounts payable and accrued
liabilities consisted principally of reduction of self-insurance liabilities.
Net cash used in investing activities resulted principally from amounts invested
in adult day health services expansion activities and improvements in
information systems. Net cash used by financing activities resulted primarily
from repayments on the Company's credit facility and payment of capital lease
obligations.
Medicare Reimbursement for Visiting Nurse Services
Based on current law and regulation, a Medicare rate increase of approximately
2.2% is scheduled to go into effect on October 1, 2003. However, the Medicare
Prescription Drug legislation currently under consideration in the U.S. Congress
could have a significant impact. The House version would increase reimbursement
by adding a 5% rate add-on for services provided to beneficiaries in rural
areas. The Senate version would eliminate the October 2003 rate increase,
replacing it with a lower increase that would go into effect January 1, 2004.
Additionally, the Senate version would reduce the amount of rate increases in
future years and would establish a beneficiary co-payment for each 60-day
episode of care beginning January 1, 2004. The amount of the co-payment would be
1.5% of the national average per episode reimbursement amount. The Company is
currently unable to predict what changes, if any, will ultimately be made to the
current laws and regulations.
Medicare Reimbursement for Adult Day Care
In addition to the above, the Medicare Prescription Drug legislation versions
also contain two similar provisions that would create a Federal demonstration
project impacting medical adult day care. Both provisions authorize a new
demonstration project that would pay for home health beneficiaries receiving
their treatment in medical adult day care centers. This project would be the
first step toward the industry's goal of accessing Medicare reimbursement. The
Company believes that if this demonstration project is initiated it will offer
significant additional long term development opportunities by providing access
to the Medicare Home Health Benefit.
Medicaid Reimbursement for the Company's Services
Approximately 49% of the Company's revenues are from state Medicaid programs,
virtually all of which are currently facing significant budget issues. The
Medicaid programs in each of the states in which the Company operates are taking
actions or evaluating taking actions to reduce Medicaid expenditures. Among
these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care services
o Slowing payments to providers by increasing the minimum time in which
payments are paid
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the slowing of the US economy. The Company believes
that these financial issues are cyclical in nature rather than indicative of the
long-term prospect for Medicaid funding of health care services. It is possible
that the actions taken by the state Medicaid programs could have a significant
unfavorable impact on the Company's results of operations.
Health Care Reform
The health care industry has experienced, and is expected to continue to
experience, extensive and dynamic change. In addition to economic forces and
regulatory influences, continuing political debate is subjecting the health care
industry to significant reform. Health care reforms have been enacted as
discussed elsewhere in this document. Proposals for additional changes are
continuously formulated by departments of the Federal government, Congress, and
state legislatures.
Government officials can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors. Legislative changes to "balance the budget" and
slow the annual rate of growth of expenditures are expected to continue. Such
future changes may further impact reimbursement. There can be no assurance that
future legislation or regulatory changes will not have a material adverse effect
on the operations of the Company.
Federal and State legislative proposals continue to be introduced that would
impose more limitations on payments to providers of health care services such as
the Company. As discussed above, economic conditions are such that many states
have enacted, or are considering enacting, measures that are designed to reduce
their Medicaid expenditures.
The Company cannot predict what additional government regulations may be enacted
in the future affecting its business or how existing or future laws and
regulations might be interpreted, or whether the Company will be able to comply
with such laws and regulations in its existing or future markets.
Refer to the section on Cautionary Statements - Forward Outlook and Risks in
Part I, and the Notes to the Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Form 10-K for the year ended December 31, 2002 for additional information.
Health Insurance Portability and Accountability Act (HIPAA)
The Health Insurance Portability and Accountability Act (HIPAA) was enacted by
the Federal government on August 12, 1996, and requires organizations to adhere
to certain standards to protect data integrity, confidentiality and
availability. HIPAA also mandates, among other things, that the Department of
Health and Human Services adopt standards for the exchange of electronic health
information in an effort to encourage overall administrative simplification and
enhance the effectiveness and efficiency of the health care industry. Management
has implemented changes in its operations to comply with the privacy aspects of
HIPAA and believes it has achieved compliance by the April 14, 2003 deadline.
The cost of complying with privacy standards is not expected to have a material
effect on the Company's results of operations or financial position. Management
is in the process of implementing changes in its operations to comply with the
electronic transaction and code sets aspects of HIPAA and anticipates that the
Company will be able to fully and timely comply with those requirements.
Independent of HIPAA requirements, the Company has been developing new
information systems with improved functionality to facilitate improved billing
and collection activities, reduced administrative costs and improved management
decision support information. The Company has incorporated the HIPAA mandated
electronic transaction and code sets into this new software.
Regulations with regard to the security components of HIPAA, have only recently
been published. Those regulations are required to be implemented by April 2005.
Management cannot at this time estimate the cost of compliance with the security
regulations.
Impact of Inflation
Management does not believe that inflation has had a material effect on income
during the past several years.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Derivative Instruments
The Company does not use derivative instruments.
Market Risk of Financial Instruments
The Company's primary market risk exposure with regard to financial instruments
is to changes in interest rates.
At June 30, 2003, a hypothetical 100 basis point increase in short-term interest
rates would result in a reduction of approximately $115,000 in annual pre-tax
earnings from continuing operations.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
The Company also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on this evaluation, there has been no such change during the quarter
covered by this report.
Commission File No. 1-9848
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, Franklin Capital Associates L.P. (Franklin) filed suit in
Chancery Court of Williamson County, Tennessee, seeking damages in connection
with registration rights it had received in the Company's acquisition of certain
home health operations in February 1991. Following a bench trial, in April 2003
the court issued a ruling in favor of Franklin awarding damages of $984,970. The
Company believes the Court erred both in its finding of liability and in its
determination of the amount of damages. The Company intends to seek appellate
review of the lower court decision. As a part of the appeal the Company will be
required to post a bond, supported by a letter of credit, in the amount to be
specified by the court, until the appeal court issues a review order. The amount
of the letter of credit required is expected to be $1.35 million and it is
expected that such letter of credit will be required to be posted in the
Company's quarter ended September 30, 2003. Such a letter of credit will reduce
amounts that would otherwise be available under the Company's revolving credit
facility.
Based on the advice of legal counsel, the Company's management believes that the
damage award by the lower court does not create a "probable" loss as set forth
in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies". Accordingly, no provision for the damages award has been
recorded in the accompanying financial statements. Should the facts and
circumstances change in the future to the extent that such a loss appears
probable, the Company would record a provision at that time.
Based on the advice of legal counsel, the Company's management believes it has
strong grounds for appealing the trial court's decision and intends to
vigorously pursue its appeal. The Company can give no assurance that it will be
successful in its appeal.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of stockholders of Almost Family, Inc.
was held on May 12, 2003.
(c) Certain matters voted upon at the meeting and the
votes cast with respect to such matters are as
follows:
Proposals and Vote Tabulations
Votes Cast
Management Proposals For Against Abstain Broker Non-votes
- -----------------------------------------------------------------------------------------------------------------
Approval of the appointment of
Independent auditors for 2003 2,163,511 1,585 660 0
Election of Directors
Director Votes Received Votes Withheld
William B. Yarmuth 2,159,161 6,595
Steven B. Bing 2,069,021 96,735
Donald G. McClinton 2,161,641 4,115
Tyree G. Wilburn 2,161,661 4,095
Jonathan D. Goldberg 2.069,521 96.235
Wayne T. Smith 2,161,241 4,515
W. Earl Reed, III 2,161,261 4,495
Item 5. Other Information
None
Item 6
(a) Exhibits
31.1
Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed (i) a Form 8-K dated May 15, 2003, Item 5,
to report the issuance of a press release announcing its
operating results for the three months ended March 31, 2003,
and (ii) a Form 8-K dated April 11, 2003, Item 5, to report
its intention to appeal a decision entered by the Chancery
Court for Williamson County, Tennessee.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003
ALMOST FAMILY, INC.
BY /s/ William B. Yarmuth
William B. Yarmuth,
Chairman of the Board, President
and Chief Executive Officer
BY /s/ C. Steven Guenthner
C. Steven Guenthner,
Senior Vice President and
Chief Financial Officer