UNITED STATES
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, 2004
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ____ No_X_.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock $.10 par value
Shares outstanding at August 2, 2004 2,298,999
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information........................................................................................3
Item 1. Financial Statements....................................................................................3
Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003.........................................3
Consolidated Statements of Income for the Three Months Ending June 30, 2004 and June 30, 2003.................4
Consolidated Statements of Income for the Six Months Ending June 30, 2004 and June 30, 2003...................5
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2004 and 2003.........................6
Notes to Interim Consolidated Financial Statements............................................................7
Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations.................14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................29
Item 4. Controls and Procedures................................................................................30
Part II. Other Information..........................................................................................31
Item 1. Legal Proceedings.....................................................................................31
Item 2. . Changes in Securities.................................................................................31
Item 3. . Defaults Upon Senior Securities.......................................................................31
Item 4. . Submission of Matters to a Vote of Security Holder....................................................31
Item 5. . Other Information.....................................................................................32
Item 6. . Exhibits..............................................................................................33
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2003
ASSETS 2004
------------------- -------------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 510,154 $ 897,443
Accounts receivable - net 15,613,608 15,334,659
Prepaid expenses and other current assets 623,939 740,228
Deferred tax assets 943,013 863,611
------------------- -------------------
TOTAL CURRENT ASSETS 17,690,714 17,835,941
CASH HELD IN ESCROW (Note 8) 1,154,241 1,154,241
PROPERTY AND EQUIPMENT - NET 6,622,941 7,519,506
GOODWILL 6,335,783 6,335,783
OTHER ASSETS 190,754 195,589
------------------- -------------------
$ 31,994,433 $ 33,041,060
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,250,022 $ 2,376,045
Accrued other liabilities 5,397,486 5,481,130
Current portion - capital leases and term debt 227,146 225,578
------------------ --------------------
7,874,654 8,082,753
------------------ --------------------
LONG-TERM LIABILITIES:
Revolving Credit Facility 9,431,624 10,891,423
Capital leases 963,491 1,085,178
Acquisition notes payable 300,000 300,000
Deferred tax liabilities 57,558 61,328
Other liabilities 378,123 356,032
------------------ --------------------
TOTAL LONG-TERM LIABILITIES 11,130,796 12,693,961
------------------ --------------------
TOTAL LIABILITIES 19,005,450 20,776,714
------------------ --------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,399,874 and 3,394,874 issued 339,990 339,490
Treasury stock, at cost, 1,096,783 and 1,096,783 shares (7,772,048) (7,772,048)
Additional paid-in capital 26,467,394 26,439,304
Accumulated deficit (6,046,353) (6,742,400)
------------------ --------------------
TOTAL STOCKHOLDERS' EQUITY 12,988,983 12,264,346
------------------ --------------------
$ 31,994,433 $ 33,041,060
================== ====================
See accompanying notes to interim consolidated financial statements
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
------------------ ------------------
June 30, 2004 June 30, 2003
------------------ ------------------
Net revenues $ 22,290,857 $ 21,836,563
Cost of services 18,760,103 17,923,249
General and administrative expenses 1,696,307 1,840,704
Depreciation and amortization expense 630,129 605,335
Provision for uncollectible accounts 420,828 468,382
-------------------- -------------------
Income before interest expense and income taxes 783,490 998,893
Other income (expense)
Interest expense (123,116) (168,481)
Facility gains (losses) (2,566) (14,314)
-------------------- -------------------
Income before income taxes 657,808 816,098
Income tax expense 263,123 326,439
-------------------- -------------------
Net income $ 394,685 $ 489,659
==================== ===================
Net income per common share:
Basic $ 0.17 $ 0.21
Diluted $ 0.15 $ 0.20
Weighted average shares outstanding:
Basic 2,299,000 2,296,527
Diluted 2,552,978 2,489,466
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Six Months Ended
------------------ --- ------------------
June 30, 2004 June 30, 2003
------------------ ------------------
Net revenues $ 44,275,601 $ 43,354,208
Cost of services 37,333,574 35,954,881
General and administrative expenses 3,247,378 3,752,443
Depreciation and amortization expense 1,255,413 1,231,419
Provision for uncollectible accounts 1,015,052 848,565
-------------------- -------------------
Income before interest expense and income taxes 1,424,184 1,566,900
Other income (expense)
Interest expense (267,959) (341,644)
Facility gains (losses) 3,854 (11,709)
-------------------- -------------------
Income before income taxes 1,160,079 1,213,547
Income tax expense 464,032 485,419
-------------------- -------------------
Net income $ 696,047 $ 728,128
==================== ===================
Net income per common share:
Basic $ 0.30 $ 0.32
Diluted $ 0.27 $ 0.29
Weighted average shares outstanding:
Basic 2,297,763 2,292,996
Diluted 2,553,915 2,484,763
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, 2004 June 30, 2003
------------------------ ---------------------
Cash flows from operating activities:
Net income $ 696,047 $ 728,128
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 1,255,413 1,231,419
Deferred income taxes (83,172) 590,629
Gain on sale of asset (6,420) (76,813)
Provision for uncollectible accounts 1,015,052 848,565
------------------------ ---------------------
2,876,920 3,321,928
Change in certain net assets:
(Increase) decrease in:
Accounts receivable (1,294,001) 781,367
Prepaid expenses and other current assets 116,289 (52,462)
Other assets 4,834 756,575
Increase (decrease) in:
Accounts payable and accrued liabilities (202,328) (456,058)
Other liabilities 22,091 (812,131)
------------------------ ---------------------
Net cash provided by operating activities 1,523,805 3,539,219
------------------------ ---------------------
Cash flows from investing activities:
Capital expenditures (358,847) (767,399)
Cash received from sale of asset 6,420 149,469
------------------------ ---------------------
Net cash used in investing activities (352,427) (617,930)
------------------------ ---------------------
Cash flows from financing activities:
Net revolving credit facility (payments) borrowings (1,459,798) (3,034,988)
Repurchase of common shares - (65,896)
Proceeds from stock option exercises 21,250 76,150
Principal payments on debt and capital leases (120,119) (150,963)
------------------------ ---------------------
Net cash used in financing activities (1,558,667) (3,175,697)
------------------------ ---------------------
Net (decrease) increase in cash and cash equivalents (387,289) (254,408)
Cash and cash equivalents at beginning of period 897,443 973,534
------------------------ ---------------------
Cash and cash equivalents at end of period $ 510,154 $ 719,126
======================== =====================
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, 2004 have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States
have been omitted pursuant to such rules and regulations. Accordingly, the
reader of this Form 10-Q is referred to our Form 10-K for the year ended
December 31, 2003 for further information. In the opinion of management of the
Company, the accompanying unaudited interim consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the financial position at June 30, 2004 and the results of
operations and cash flows for the six months ended June 30, 2004 and 2003.
The results of operations for the three and six months ended June 30, 2004 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 2003 consolidated financial
statements and related notes in order to conform to the 2004 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.
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, 3) the determination of
cost-reimbursed revenues, and 4) other reasons unrelated to credit risk, all of
which may result in adjustments to recorded revenue amounts. Management
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.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Approximately 51% of the Company's revenues were derived from state Medicaid and
other government 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 made
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 condition 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
however, that the actions taken by the state Medicaid programs in the future
could have a significant unfavorable impact on the Company's results of
operations, financial condition and liquidity.
3. Segment Data
The Company operates in two service line groups: Home Health Care and Adult Day
Care (ADC). The Home Health Care group consists of two reportable segments,
Visiting Nurse (VN) and Personal Care (PC) while the ADC service line is also a
separate reportable segment. 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."
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has service locations in
Florida, Kentucky, Ohio, Maryland, Connecticut, Massachusetts, Alabama and
Indiana (in order of revenue significance).
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. VN Medicare revenues are generated on a per episode
basis rather than a fee per visit or day of care. Approximately 90% of the VN
segment revenues are generated from the Medicare program while the balance is
generated from Medicaid and private insurance programs.
The Company's PC segment services are also provided in patients' homes. These
services (generally provided by para-professional staff such as home health
aides) are generally of a custodial rather than skilled nature. PC revenues are
generated on an hourly basis. Approximately 65% of the PC segment revenues are
generated from Medicaid and other government programs while the balance is
generated from insurance programs and private pay patients.
The Company's ADC segment provides professional, high quality adult day health
services to disabled or frail adults who require some care or supervision, but
who do not require intensive medical attention and/or wish not to live in a
nursing home or other inpatient institution. These services are provided in the
Company's physical facilities. ADC revenues are usually generated on a per day
of care basis. Approximately 85% of the ADC segment revenues are generated from
Medicaid and other government programs while the balance is generated from
insurance programs and private pay patients.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The presentation of the Company's operations in three segments differs from its
previous reporting of two segments due to a reorganization of the way in which
the Company manages its business and in the way in which information is
reported, both of which resulted from refinements in the Company's business plan
adopted in the quarter ended March 31, 2004. Segment data for previous periods
have been restated to conform to the new reporting structure.
Three Months Ended June 30, Six Month Ended June 30,
---------------------------------------------------------------------------
2004 2003 2004 2003
----------------- --------------- --------------- ---------------
----------------- --------------- --------------- ---------------
Net Revenues
Home Health Care
Visiting nurses $ 8,108,047 $ 7,336,681 $ 16,449,457 $ 14,942,550
Personal care 8,288,627 7,987,994 16,390,519 15,982,036
----------------- --------------- --------------- ---------------
16,396,674 15,324,675 32,839,976 30,924,586
Adult day care 5,894,183 6,511,888 11,435,625 12,429,622
----------------- --------------- --------------- ---------------
$ 22,290,857 $ 21,836,563 $ 44,275,601 $ 43,354,208
================= =============== =============== ===============
Operating Income
Home Health Care
Visiting nurses $ 1,305,639 $ 1,151,774 $ 2,813,815 $ 2,421,508
Personal care 768,089 952,146 1,546,294 1,977,009
----------------- --------------- --------------- ---------------
2,073,728 2,103,920 4,360,109 4,398,517
Adult day care 366,644 439,748 232,455 311,904
----------------- --------------- --------------- ---------------
2,440,372 2,543,668 4,592,564 4,710,421
Unallocated corporate expenses 1,656,882 1,544,775 3,168,380 3,143,521
----------------- --------------- --------------- ---------------
Operating income $ 783,490 $ 998,893 $ 1,424,184 $ 1,566,900
================= =============== =============== ===============
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 $46,000 and $230,000 were
capitalized in the three months ended June 30, 2004 and 2003, respectively, and
$88,000 and $530,000 in the six months ending June 2004 and 2003, 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. Revolving Credit Facility
In March 2004, the Company renewed its $22.5 million credit facility with Bank
One Kentucky NA with a new expiration date of June 30, 2006. The credit facility
bears interest at the bank's prime rate plus a margin (ranging from -0.75% to
- -0.25%, currently -0.5%) 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 3.77% and 4.25% for the quarters ended June
30, 2004 and 2003, respectively, and 3.86% and 4.25% for the six months ended
June 30, 2004 and 2003, respectively. The interest rate in effect at June 30,
2004 was 3.5%. The Company pays a commitment fee of 0.25% 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, 2004 the formula permitted approximately
$16.6 million to be used, of which approximately $9.4 million was outstanding.
Additionally, an irrevocable letter of credit, totaling $3.6 million, was
outstanding in connection with the Company's self-insurance programs. Thus, a
total of $13.0 million was either outstanding or committed as of June 30, 2004
while an additional $3.6 million was available for use. The Company's revolving
credit facility is subject to various financial covenants. As of June 30, 2004,
the Company was in compliance with the covenants. Under the most restrictive of
the Company's covenants, the Company is required to maintain minimum net worth
of at least $10,500,000.
In July 2004 the irrevocable letter of credit related to the Company's self
insurance programs was increased to $4.2 million.
6. 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. Pro forma information is as follows.
Three Months Ended Six Months Ended
June 30, 2004 June 30, 2003 June 30, 2004 June 30, 2003
-------------------- -------------------- ------------------ ------------------
Net income as reported $ 394,685 $ 489,659 $ 696,047 $ 728,128
Pro forma stock-based compensation
expense, net of tax 444 16,048 887 32,095
-------------------- -------------------- ------------------ ------------------
Pro forma net income $ 394,241 $ 473,611 $ 695,160 $ 696,033
==================== ==================== ================== ==================
Earnings per common share:
Basic - as reported $ 0.17 $ 0.21 $ 0.30 $ 0.32
Basic - pro forma $ 0.17 $ 0.21 $ 0.30 $ 0.30
Diluted - as reported $ 0.15 $ 0.20 $ 0.27 $ 0.29
Diluted - proforma $ 0.15 $ 0.19 $ 0.27 $ 0.28
7. 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. 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, 2004 June 31, 2003 June 31, 2004 June 31, 2003
------------------- ------------------- ------------------ ------------------
Shares used to compute basic
earnings per common share -
weighted average shares
outstanding 2,299,000 2,296,527 2,297,763 2,292,996
Dilutive effect of stock options 253,978 192,939 256,152 191,767
------------------- ------------------- ------------------ ------------------
Shares used to compute diluted
earnings per common share 2,552,978 2,489,466 2,553,915 2,484,763
=================== =================== ================== ==================
8. Commitments and Contingencies
Insurance Programs
The Company bears significant insurance risk under its large-deductible
automobile and workers' compensation insurance programs and its self-insured
employee health program. Under its automobile insurance program, the Company
bears risk up to $100,000 per incident. Under the workers' compensation
insurance program, the Company bears risk up to $250,000 per incident. The
Company purchases stop-loss insurance for the employee health plan that places a
specific limit, generally $150,000, 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
June 30, 2004 that may result in the assertion of additional claims. The Company
carries insurance coverage for this exposure; however, its deductible per claim
increased from $5,000 to $25,000 effective July 1, 2001 and to $250,000
effective April 1, 2003.
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 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 believes that its present insurance coverage is adequate. The
Company believes that the design of its insurance programs and the levels of its
deductibles and stop-loss limits are currently appropriate given market
conditions. However, they do make the Company's claims expenses and thus its
total insurance costs more susceptible to material volatility in the short term
than would be the case in a fully insured environment.
The Company continues to contemplate alternatives available in the management of
total insurance costs including potentially accepting additional self-insurance
claims risk in lieu of higher premium costs.
Total premiums, excluding the Company's exposure to claims and deductibles, for
all its non-health insurance programs increased to approximately $3.5 million
for the contract year ending March 31, 2005 as compared to approximately $2.8
million for the contract year ended March 31, 2004.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of its business, including claims for damages for
personal injuries. In the opinion of management, the ultimate resolution of any
of these pending claims and legal proceedings will not have a material effect on
the Company's financial position or results of operations.
Franklin Litigation
On January 26, 1994 Franklin Capital Associates L.P. (Franklin), Aetna Life and
Casualty Company and Aetna Casualty and Surety Company shareholders, who at one
time held approximately 320,000 shares of the Company's common stock
(approximately 13% of shares outstanding), filed suit in Chancery Court of
Williamson County, Tennessee claiming unspecified damages not to exceed three
million dollars in connection with registration rights they received in the
Company's acquisition of certain home health operations in February 1991. The
1994 suit alleged that the Company failed to use its best efforts to register
the shares held by the plaintiffs as required by the merger agreement. The
Company settled with both Aetna parties shortly before the case went to trial in
February 2000. In mid-trial Franklin voluntarily withdrew its complaint
reserving its legal rights to bring a new suit as allowed under Tennessee law.
In April 2000, Franklin re-filed its lawsuit. The second trial took place in
February 2003. 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 is seeking appellate review of the lower court decision. As
a part of the appeal, the Company was required to post cash of $1,154,241 in an
escrow account with the Tennessee Courts in lieu of a supersedeas appeal bond
until the appeal court issues a decision. This cash is reflected as "Cash held
in escrow" in the accompanying balance sheet and will remain in escrow until the
matter reaches its ultimate resolution.
Based on the advice of legal counsel, the Company 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 believes it has strong grounds
for appealing the trial court's decision and it intends to vigorously pursue its
appeal. The Company can give no assurance that it will be successful in its
appeal.
Kentucky Transportation Litigation
Prior to July 1, 2002, the Commonwealth of Kentucky managed its Medicaid
transportation program internally. Effective July 1, 2002 the Commonwealth
contracted with an independent broker (the Broker) for the management of the
program in the Louisville KY area. The Broker then contracted with the Company,
among others, for the provision of transportation services to Medicaid
beneficiaries. The Company's services pursuant to the contract were limited to
transportation of Medicaid beneficiaries who also attended the Company's
in-center adult day care programs. The Broker almost immediately began to
encounter significant financial difficulties and 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 US
Bankruptcy Court to liquidate the Broker under Chapter 7 of the Federal
Bankruptcy Code. On November 25, 2002, the Broker voluntarily chose to convert
its bankruptcy status to a Chapter 11 voluntary reorganization.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
In May 2003, along with a group of other affected providers, the Company filed
suit against the Commonwealth in Franklin Circuit Court seeking payment directly
from the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity and filed a motion to dismiss the lawsuit. In July 2003, a
hearing on the motion to dismiss was held and at the judge's request written
briefs were filed before the judge would make a decision. In August 2003, the
motion to dismiss was granted and after discussion with legal counsel, an appeal
of this decision was made to the Kentucky Court of Appeals. As of December 31,
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 us 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 will, at that time, record an additional provision for uncollectible
accounts.
The Company's loan agreement executed with its lender in March 2004 provides
that the loss of either or both of the above litigation cases will be excluded
from the Company's financial results for purposes of calculating borrowing
availability or financial covenant compliance.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company
Almost Family, Inc. TM and subsidiaries (collectively "Almost Family") is a
leading regional provider of home health nursing services and adult day health
services. In this report, the terms "Company", "we", "us" or "our" mean Almost
Family, Inc. and all subsidiaries included in our consolidated financial
statements.
Cautionary Statements - Forward Outlook and Risks
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. We caution investors that any forward-looking
statements made by us 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 Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations, in our Form 10-K for
the year ended December 31, 2003.
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 our
Form 10-K for the year ended December 31, 2003 for a detailed discussion of our
critical accounting policies.
Operating Segments
We operate in two service line groups: Home Health Care and Adult Day Care
(ADC). Our Home Health Care group consists of two reportable segments, Visiting
Nurse (VN) and Personal Care (PC) while the ADC service line is also a separate
reportable segment. 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."
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has service locations in
Florida, Kentucky, Ohio, Maryland, Connecticut, Massachusetts, Alabama and
Indiana (in order of revenue significance).
Our VN segment provides skilled medical services in patients' homes largely to
enable recipients to reduce or avoid periods of hospitalization and/or nursing
home care. VN Medicare revenues are generated on a per episode basis rather than
a fee per visit or day of care. Approximately 90% of the VN segment revenues are
generated from the Medicare program while the balance is generated from Medicaid
and private insurance programs.
Our PC segment services are also provided in our patients' homes. These services
(generally provided by para-professional staff such as home health aides) are
generally of a custodial rather than skilled nature. PC revenues are generated
on an hourly basis. Approximately 65% of the PC segment revenues are generated
from Medicaid and other government programs while the balance is generated from
insurance programs and private pay patients.
Our ADC segment provides professional, high quality adult day health services to
disabled or frail adults who require some care or supervision, but who do not
require intensive medical attention and/or wish not to live in a nursing home or
other inpatient institution. These services are provided in the Company's
physical facilities. ADC revenues are usually generated on a per day of care
basis. Approximately 85% of the ADC segment revenues are generated from Medicaid
and other government programs while the balance is generated from insurance
programs and private pay patients.
Seasonality
Our 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. Our PC segment
generally does not experience significant seasonality in its operating results.
In our ADC segment, 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.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003
Consolidated 2004 2003 Change
------------
--------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
--------------------------------------------------------------------------------
Net revenues:
Home Health Care VN $ 8,108,047 36.4% $ 7,336,681 33.6% $ 771,366 10.5%
PC 8,288,627 37.2% 7,987,994 36.6% 300,633 3.8%
---------------- ------------------ ---------------
16,396,674 73.6% 15,324,675 70.2% 1,071,999 7.0%
Adult Day Care 5,894,183 26.4% 6,511,888 29.8% (617,705) -9.5%
---------------- ------------------ ---------------
$22,290,857 100.0% $ 21,836,563 100.0% $ 454,294 2.1%
================ ================== ===============
Operating income
Home Health Care VN $ 1,305,639 16.1% $ 1,151,774 15.7% $ 153,865 13.4%
PC 768,089 9.3% 952,146 11.9% (184,057) -19.3%
---------------- ------------------ ---------------
2,073,728 12.6% 2,103,920 13.7% (30,192) -1.4%
Adult Day Care 366,644 6.2% 439,748 6.8% (73,104) -16.6%
---------------- ------------------ ---------------
2,440,372 10.9% 2,543,668 11.6% (103,296) -4.1%
Unallocated corporate expenses 1,656,882 7.4% 1,544,775 7.1% 112,107 7.3%
---------------- ------------------ ---------------
Income before interest expense
and income taxes 783,490 3.5% 998,893 4.6% (215,403) -21.6%
Facility gains (losses) (2,566) 0.0% (14,314) -0.1% 11,748 -82.1%
Interest expense 123,116 0.6% 168,481 0.8% (45,365) -26.9%
Income taxes 263,123 1.2% 326,439 1.5% (63,316) -19.4%
---------------- ------------------ ---------------
Net income $ 394,685 1.8% $ 489,659 2.2% $ (94,974) -19.4%
================ ================== ===============
Our VN operations revenues and operating income grew significantly during the
quarter offsetting lower performance in the ADC segment. Our net revenues
increased approximately $454,000 or 2.1% with over 10% growth in VN, and 4%
growth in PC offsetting a 10% decline in ADC. ADC centers closed in late 2003
accounted for approximately $382,000 of the ADC revenue decline.
The effective income tax rate was approximately 40% of income before income
taxes for 2004 and 2003.
Insurance costs continue to affect the profitability of our operations. Total
insurance costs, including employee health, workers compensation, automobile,
property, general liability and professional liability, including claims and
premiums were 8.2% of revenues in 2004 as compared to 7.5% of revenues in 2003.
Unallocated corporate expenses in the quarter ended June 30, 2004 included
$104,000 of costs of a successful union defense in one of the Company's personal
care locations.
Visiting Nurse (VN) Segment-Three Months
Three Months Ended June 30,
------------------------- ---------------------------- -------------------------
2004 2003 Change
------------------------- ---------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
------------- ----------- ---------------- ----------- --------------- ---------
Net revenues $ 8,108,047 100.0% $ 7,336,681 100.0% $ 771,366 10.5%
Cost of services 6,210,511 76.6% 5,507,979 75.1% 702,532 12.8%
General & administrative 462,807 5.7% 497,238 6.8% (34,431) -6.9%
Depreciation & amortization 7,524 0.1% 29,112 0.4% (21,588) -74.2%
Uncollectible accounts 121,566 1.5% 150,578 2.1% (29,012) -19.3%
------------- ---------------- ---------------
Operating income $ 1,305,639 16.1% $ 1,151,774 15.7% $ 153,865 13.4%
============= ================ ===============
Admissions 2,653 2,410 243 10.1%
Patient months of care 6,765 6,260 505 8.1%
Revenue per patient month $ 1,199 $ 1,172 $ 27 2.3%
Cost of services per patient month $ 918 $ 880 $ 38 4.3%
Billable visits 64,560 59,801 4,759 8.0%
VN contribution for the quarter was $1.3 million versus $1.2 million last year.
Admissions grew about 10% over the prior year while patient months increased 8%
reflecting a reduction in the average length of stay. Visits grew at the same
rate as patient months reflecting no change in utilization. Revenue per patient
month increased 2.3% primarily due to higher Medicare rates between periods.
Operating costs per patient month increased about 4% as increased staffing and
insurance costs were only partially offset by increased volumes. In March 2004,
we received Medicare certification for a new start-up agency in Melbourne FL. In
April 2004, we received Medicare certification for a new start-up agency in
Bradenton FL. These operations had no material effect on operating results for
the quarter ended June 30, 2004.
Personal Care (PC) Segment-Three Months
Three Months Ended June 30
--------------------------- --------------------------- -------------------------
2004 2003 Change
--------------------------- --------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- --------------- ---------
Net revenues $ 8,288,627 100.0% $ 7,987,994 100.0% $ 300,633 3.8%
Cost of services 7,198,111 86.8% 6,807,764 85.2% 390,347 5.7%
General & administrative 96,386 1.2% 46,101 0.6% 50,285 109.1%
Depreciation & amortization 11,689 0.1% 10,590 0.1% 1,099 10.4%
Uncollectible accounts 214,352 2.6% 171,393 2.1% 42,959 25.1%
---------------- ---------------- ---------------
Operating income $ 768,089 9.3% $ 952,146 11.9% $ (184,057) -19.3%
================ ================ ===============
Admissions 616 785 (169) -21.5%
Patient months of care 9,171 9,246 (75) -0.8%
Patient days of care 115,041 111,006 4,035 3.6%
Billable hours 463,404 439,309 24,095 5.5%
Revenue per billable hour $ 17.89 $ 18.18 $ (0.29) -1.6%
PC contribution for the quarter was about $768,000 versus $952,000 last year.
Patient days and billable hours both increased despite a decline in admissions
reflecting increased length of stay and increased utilization of services per
patient. Revenue per billable hour decreased 1.6% from prior year primarily due
to changes in mix. General and administrative expenses in total and as a
percentage of revenues increased due to our management reorganization which
added staff to the PC management team.
Adult Day Care (ADC) Segment-Three Months
Three Months Ended June 30 ,
---------------------------- ---------------------------- -------------------------
2004 2003 Change
---------------------------- ---------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ---------------- ----------- --------------- ---------
Net revenues $ 5,894,183 100.0% $ 6,511,888 100.0% $ (617,705) -9.5%
Cost of services 4,998,027 84.8% 5,244,963 80.5% (246,936) -4.7%
General & administrative 229,815 3.9% 464,208 7.1% (234,393) -50.5%
Depreciation & amortization 214,787 3.6% 216,558 3.3% (1,771) -0.8%
Uncollectible accounts 84,910 1.4% 146,411 2.2% (61,501) -42.0%
---------------- ---------------- ---------------
Operating income $ 366,644 6.2% $ 439,748 6.8% $ (73,104) -16.6%
================ ================ ===============
Admissions 357 282 75 26.6%
Patients months of care 5,701 6,077 (376) -6.2%
Patient days of care 86,180 93,924 (7,744) -8.2%
Revenue per patient day $ 68.39 $ 69.33 $ (0.94) -1.4%
ADC in-center averages:
Weekday attendance 1,189 1,282 (93) -7.3%
Center capacity 1,564 1,804 (240) -13.3%
Center occupancy rate 76.0% 71.1% 4.9% 6.9%
ADC days sold decreased from the prior year largely due to the closure of
certain centers. The closure of centers located in Frankfort KY, Evansville IN,
and Lanham MD reduced days sold by 5,849 or 6.2%. On a same-store basis, days
sold decreased 1,895 or about 2.2%. We believe the decline in same-store days
sold is a result of efforts by the Kentucky and Maryland Medicaid programs to
constrain Medicaid expenditures. Revenue per day declined about 1.4% due to
lower Kentucky Medicaid transportation rates. As a result, on a same store basis
revenues declined $236,000. Late in the quarter ended June 30, 2004, we closed
our Towson MD center.
ADC operating income was unfavorably impacted by lower days sold and decreased
KY reimbursement rates, partially offset by lower general and administrative
expenses. Operating income in 2004 included $103,000 of losses on stores no
longer in operation as of July 1, 2004.
General and administrative expenses declined by over $234,000 as a result of
down-sizing actions we took over the course of 2003 and 2004.
Effective July 1, 2004, the Maryland Medicaid program implemented a rate
increase of 2.7%. Approximately 48% of our ADC segment revenues were
derived from the Maryland Medicaid program in the quarter ended June 30, 2004.
Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003
Consolidated 2004 2003 Change
------------
---------------- ---------- ------------------ ----------- -------------- -----------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ------------------ ----------- -------------- -----------
Net revenues:
Home Health Care VN $ 16,449,457 37.2% $ 14,942,550 34.5% $ 1,506,907 10.1%
PC 16,390,519 37.0% 15,982,036 36.9% 408,483 2.6%
---------------- ------------------ --------------
32,839,976 74.2% 30,924,586 71.3% 1,915,390 6.2%
Adult Day Care 11,435,625 25.8% 12,429,622 28.7% (993,997) -8.0%
---------------- ------------------ --------------
$ 44,275,601 100.0% $ 43,354,208 100.0% $ 921,393 2.1%
================ ================== ==============
Operating income
Home Health Care VN $ 2,813,815 17.1% $ 2,421,508 16.2% $ 392,307 16.2%
PC 1,546,294 9.4% 1,977,009 12.4% (430,715) -21.8%
---------------- ------------------ --------------
4,360,109 13.3% 4,398,517 14.2% (38,408) -0.9%
Adult Day Care 232,455 2.0% 311,904 2.5% (79,449) -25.5%
---------------- ------------------ --------------
4,592,564 10.4% 4,710,421 10.9% (117,857) -2.5%
Unallocated corporate expenses 3,168,380 7.2% 3,143,521 7.3% 24,859 0.8%
---------------- ------------------ --------------
Income before interest expense
and income taxes 1,424,184 3.2% 1,566,900 3.6% (142,716) -9.1%
Facility gains (losses) 3,854 0.0% (11,709) 0.0% 15,563 -132.9%
Interest expense 267,959 0.6% 341,644 0.8% (73,685) -21.6%
ncome taxes 464,032 1.0% 485,419 1.1% (21,387) -4.4%
---------------- ------------------ --------------
Net income $ 696,047 1.6% $ 728,128 1.7% $ (32,081) -4.4%
================ ================== ==============
Our VN operations revenues and operating income grew significantly during the
six months offsetting lower performance in the ADC segment. Our net revenues
increased approximately $921,000 or 2.1% with over 10% growth in VN, and 3%
growth in PC offsetting a 8% decline in ADC. ADC centers closed in late 2003
accounted for approximately $760,000 of the ADC revenue decline.
The effective income tax rate was approximately 40% of income before income
taxes for 2004 and 2003.
As noted in the quarterly discussion, insurance costs continue to affect the
profitability of our operations. Total insurance costs, including employee
health, workers compensation, automobile, property, general liability and
professional liability, including claims and premiums were 7.7% of revenues in
2004 as compared to 7.1% of revenues in 2003.
Visiting Nurse (VN) Segment-Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003
------------------------- ---------------------------- -------------------------
2004 2003 Change
------------------------- ---------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
-------------- ---------- ---------------- ----------- --------------- ---------
Net revenues $ 16,449,457 100.0% $ 14,942,550 100.0% $ 1,506,907 10.1%
Cost of services 12,412,930 75.5% 11,119,969 74.4% 1,292,961 11.6%
General & administrative 953,753 5.8% 1,017,517 6.8% (63,764) -6.3%
Depreciation & amortization 14,218 0.1% 61,064 0.4% (46,846) -76.7%
Uncollectible accounts 254,741 1.5% 322,492 2.2% (67,751) -21.0%
-------------- ---------------- ---------------
Operating income $ 2,813,815 17.1% $ 2,421,508 16.2% $ 392,307 16.2%
============== ================ ===============
Admissions 5,377 4,888 489 10.0%
Patient months of care 13,426 12,498 928 7.4%
Revenue per patient month $ 1,225 $ 1,196 $ 29 2.5%
Cost of services per patient month $ 925 $ 890 $ 35 3.9%
Billable visits 128,469 119,959 8,510 7.1%
VN contribution for the six months ended June 30, 2004 was $2.8 million versus
$2.4 million last year. Admissions grew about 10% over the prior year while
patient months increased 7% reflecting a reduction in the average length of
stay. Visits grew at about the same rate as patient month reflecting no
significant change in utilization. Revenue per patient month increased about
2.5% primarily due to higher Medicare rates between periods. Operating costs per
patient month also increased about 4% as increased staffing and insurance costs
were only partially offset by increased volumes. In March 2004, the Company
received Medicare certification for a new start-up agency in Melbourne FL. In
April 2004, the Company received Medicare certification for a new start-up
agency in Bradenton FL. These operations had no material effect on operating
results for the quarter ended June 30, 2004.
Personal Care (PC) Segment-Six Months
Six Months Ended June 30
--------------------------- --------------------------- -------------------------
2004 2003 Change
--------------------------- --------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- --------------- ---------
Net revenues $ 16,390,519 100.0% $ 15,982,036 100.0% $ 408,483 2.6%
Cost of services 14,216,133 86.7% 13,704,574 85.7% 511,560 3.7%
General & administrative 183,241 1.1% 75,289 0.5% 107,952 143.4%
Depreciation & amortization 23,414 0.1% 21,914 0.1% 1,500 6.8%
Uncollectible accounts 421,437 2.6% 203,250 1.3% 218,187 107.3%
---------------- ---------------- ---------------
Operating income $ 1,546,294 9.4% $ 1,977,009 12.4% $ (430,715) -21.8%
================ ================ ===============
Admissions 1,319 1,430 (111) -7.8%
Patient months of care 18,138 18,514 (376) -2.0%
Patient days of care 227,633 219,660 7,973 3.6%
Billable hours 911,557 880,989 30,568 3.5%
Revenue per billable hour $ 17.98 $ 18.14 $ (0.16) -0.9%
PC contribution for the six months ended June 30, 2004 was about $1.5 million
versus $2.0 million last year. Patient days and billable hours both increased
despite a decline in admissions reflecting increased length of stay and
increased utilization of services per patient. Revenue per billable hour
decreased 0.9% from prior year primarily due to changes in mix. General
administrative expenses in total and as a percentage of revenues increased due
to our management reorganization which added staff to the PC management team.
Our provision for uncollectible accounts in PC in the six months ended June 30,
2004 was lower than in the six months of the prior year primarily due to an
unusually low provision for uncollectible accounts in the prior year.
Adult Day Care (ADC) Segment-Six Months
Six Months Ended June 30
---------------------------- ---------------------------- -------------------------
2004 2003 Change
---------------------------- ---------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ---------------- ----------- --------------- ---------
Net revenues $ 11,435,625 100.0% $ 12,429,622 100.0% $ (993,997) -8.0%
Cost of services 9,992,937 87.4% 10,351,422 83.3% (358,485) -3.5%
General & administrative 442,411 3.9% 1,002,075 8.1% (559,664) -55.9%
Depreciation & amortization 428,948 3.8% 441,399 3.6% (12,451) -2.8%
Uncollectible accounts 338,874 3.0% 322,822 2.6% 16,052 5.0%
---------------- ---------------- ---------------
Operating income $ 232,455 2.0% $ 311,904 2.5% $ (79,449) -25.5%
================ ================ ===============
Admissions 665 551 114 20.7%
Patients months of care 11,227 12,057 (830) -6.9%
Patient days of care 166,436 177,870 (11,434) -6.4%
Revenue per patient day $ 68.71 $ 69.88 $ (1.17) -1.7%
ADC in-center averages:
Weekday attendance 1,153 1,237 (84) -6.8%
Center capacity 1,557 1,797 (240) -13.4%
Center occupancy rate 74.1% 68.8% 5.3% 7.6%
ADC days sold decreased from the prior year due to the closure of certain
centers during 2003. The closure of centers located in Frankfort KY, Evansville
IN, and Lanham MD reduced days sold by 11,365 or 6.4%. Revenue per day declined
about 1.7% due to lower Kentucky Medicaid transportation rates. As a result, on
a same store basis revenues declined $237,000.
ADC operating income was unfavorably impacted by lower days sold and decreased
KY reimbursement rates, partially offset by lower general and administrative
expenses. Operating income in 2004 included $132,000 of losses on stores no
longer in operation as of July 1, 2004.
General and administrative expenses declined by over $560,000 as a result of
down-sizing actions we took over the course of 2003 and 2004.
Insurance Programs
We bear significant insurance risk under our large-deductible automobile and
workers' compensation insurance programs and our self-insured employee health
program. Under our automobile insurance program, we bear risk up to $100,000 per
incident. Under the workers' compensation insurance program, we bear risk up to
$250,000 per incident. We purchase stop-loss insurance for the employee health
plan that places a specific limit, generally $150,000, 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 us by various claimants. The
claims are in various stages of processing and some may ultimately be brought to
trial. We are aware of incidents that have occurred through June 30, 2004 that
may result in the assertion of additional claims. We carry insurance coverage
for this exposure; however, our deductible per claim increased from $5,000 to
$25,000 effective July 1, 2001 and to $250,000 effective April 1, 2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a quarterly basis. As facts change, it may
become necessary to make adjustments that could be material to the results of
operations and financial condition.
We believe that our present insurance coverage is adequate. We believe that the
design of our insurance programs and the levels of our deductibles and stop-loss
limits are currently appropriate given market conditions. However, they do make
our claims expenses and thus our total insurance costs more susceptible to
material volatility in the short term than would be the case in a fully insured
environment.
We continue to contemplate alternatives available in the management of total
insurance costs including potentially accepting additional self-insurance claims
risk in lieu of higher premium costs.
Total premiums, excluding our exposure to claims and deductibles, for all our
non-health insurance programs increased to approximately $3.5 million for the
contract year ending March 31, 2005 as compared to approximately $2.8 million
for the contract year ended June 30, 2004.
Liquidity and Capital Resources
Revolving Credit Facility
In March 2004 we renewed our $22.5 million credit facility with Bank One
Kentucky NA with a new expiration date of June 30, 2006. The credit facility
bears interest at the bank's prime rate plus a margin (ranging from -0.75% to
- -0.25%, currently -0.5%) dependent upon total leverage and is secured by
substantially all assets and the stock of our subsidiaries. The weighted average
interest rates were 3.77% and 4.25% for the quarters ended June 30, 2004 and
2003, respectively, and 3.86% and 4.25% for the six months ended June 30, 2004
and 2003, respectively. The interest rate in effect at June 30, 2004 was 3.5%.
We pay a commitment fee of 0.25% per annum on the unused facility balance.
Borrowings are available equal to the greater of: a) a multiple of earnings
before interest, taxes, depreciation amortization (as defined) or b) an asset
based formula, primarily based on accounts receivable. Borrowings under our
facility may be used for working capital, capital expenditures, acquisitions,
development and growth of the business and other corporate purposes. As of June
30, 2004 the formula permitted approximately $16.6 million to be used, of which
approximately $9.4 million was outstanding. Additionally, an irrevocable letter
of credit, totaling $3.6 million, was outstanding in connection with our
self-insurance programs. Thus, a total of $13.0 million was either outstanding
or committed as of June 30, 2004 while an additional $3.6 million was available
for use. Our revolving credit facility is subject to various financial
covenants. As of June 30, 2004, we were in compliance with our covenants. Under
the most restrictive of our covenants, we are required to maintain minimum net
worth of at least $10,500,000.
In July 2004 the irrevocable letter of credit related to our self insurance
programs was increased to $4.2 million.
We have been notified by the Kentucky Medicaid program that we will receive
approximately $1.4 million in collection of three year old cost report
receivables in late August 2004. Additionally, we have a contract for the sale-
lease back of our only real estate parcel that is expected to close in August
2004, the net proceeds of which is expected to be approximately $1 million.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the six months
ending June 30, 2004 and 2003 were:
Net Change in Cash and Cash Equivalents 2004 2003
- --------------------------------------- ------------------ -----------------
Provided by (used in):
Operating activities $ 1,523,805 $ 3,539,219
Investing activities (352,427) (617,930)
Financing activities (1,558,667) 3,175,697)
------------------- -----------------
Net (decrease) increase in cash and cash $ (387,289) $ (254,408)
equivalents =================== =================
2004
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 64 at June
30, 2004, and December 31, 2003. The increase in combined accounts payable and
accrued liabilities resulted primarily from an increase in tax liabilities and
employee benefits. Net cash used in investing activities resulted principally
from improvements in our information systems. Net cash used in financing
activities resulted primarily from repayments on our credit facility and payment
of capital lease and debt obligations.
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 payment of capital
lease obligations and term debt.
Other Litigation.
Franklin Litigation
On January 26, 1994 Franklin Capital Associates L.P. (Franklin), Aetna Life and
Casualty Company and Aetna Casualty and Surety Company shareholders, who at one
time held approximately 320,000 shares of our common stock (approximately 13% of
shares outstanding), filed suit in Chancery Court of Williamson County,
Tennessee claiming unspecified damages not to exceed three million dollars in
connection with registration rights they received in our acquisition of certain
home health operations in February 1991. The 1994 suit alleged that we failed to
use our best efforts to register the shares held by the plaintiffs as required
by the merger agreement. We settled with both Aetna parties shortly before the
case went to trial in February 2000. In mid-trial Franklin voluntarily withdrew
its complaint reserving its legal rights to bring a new suit as allowed under
Tennessee law. In April 2000, Franklin re-filed its lawsuit. The second trial
took place in February 2003. In April 2003 the court issued a ruling in favor of
the plaintiffs awarding damages of $984,970. We believe the Court erred both in
its finding of liability and in its determination of the amount of damages. We
are seeking appellate review of the lower court decision. As a part of the
appeal, we were required to post cash of $1,154,241 in an escrow account with
the Tennessee Courts in lieu of a supersedeas appeal bond until the appeal court
issues a decision. This cash is reflected as "Cash held in escrow" in the
accompanying balance sheet and will remain in escrow until the matter reaches
its ultimate resolution.
Based on the advice of our legal counsel, we believe 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, we would record a
provision at that time.
Based on the advice of our legal counsel, we believe we have strong grounds for
appealing the trial court's decision and we intend to vigorously pursue our
appeal. We can give no assurance that we will be successful in our appeal.
Kentucky Transportation Litigation
Prior to July 1, 2002, the Commonwealth of Kentucky managed its Medicaid
transportation program internally. Effective July 1, 2002 the Commonwealth
contracted with an independent broker (the Broker) for the management of the
program in the Louisville KY area. The Broker then contracted with us, among
others, for the provision of transportation services to Medicaid beneficiaries.
Our services pursuant to the contract were limited to transportation of Medicaid
beneficiaries who also attended our in-center adult day care programs. The
Broker almost immediately began to encounter significant financial difficulties
and paid us 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 US Bankruptcy Court to liquidate the Broker under Chapter 7 of
the Federal Bankruptcy Code. On November 25, 2002, the Broker voluntarily chose
to convert their bankruptcy status to a Chapter 11, voluntary reorganization.
In May 2003, along with a group of other affected providers, we filed suit
against the Commonwealth in Franklin Circuit Court seeking payment directly from
the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity and filed a motion to dismiss the lawsuit. In July 2003, a
hearing on the motion to dismiss was held and at the judge's request written
briefs were filed before the judge would make a decision. In August 2003, the
motion to dismiss was granted and after discussion with legal counsel, an appeal
of this decision was made to the Kentucky Court of Appeals. As of June 30, 2004
and December 31, 2003, the Broker owed us approximately $535,000, which amount
is included in accounts receivable, net on the accompanying balance sheets.
Although we currently believe we will be successful in ultimately collecting the
amounts currently due us 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, we will, at that time, record an
additional provision for uncollectible accounts.
Our loan agreement executed with our lender in March 2004 provides that the loss
of either or both of the above litigation cases will be excluded from our
financial results for purposes of calculating borrowing availability or
financial covenant compliance.
Medicaid Dependence
Approximately 51% of our revenues are from state Medicaid and other government
programs, virtually all of which are currently facing significant budget issues.
The Medicaid programs in each of the states in which we operate 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 made
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 condition of the US 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. 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.
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 our reimbursement. There can be no assurance
that future legislation or regulatory changes will not have a material adverse
effect on our operations.
Federal and State legislative proposals continue to be introduced that would
impose more limitations on payments to providers of health care services such as
us. Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures.
We cannot predict what additional government regulations may be enacted in the
future affecting our business or how existing or future laws and regulations
might be interpreted, or whether we will be able to comply with such laws and
regulations in our existing or future markets.
Refer to the sections on "Reimbursement Changes and Cautionary Statements -
Forward Outlook and Risks" in Part I, and the "Notes to the Consolidated
Financial Statements" and elsewhere in this "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for additional
information.
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. We
implemented changes in our operations to comply with the privacy aspects of
HIPAA and we believe we are in compliance. The cost of complying with privacy
standards is not expected to have a material effect on our results of operations
or financial position. We are in the process of implementing changes in our
operations to comply with the electronic transaction and code sets aspects of
HIPAA and we anticipate that we will be able to fully and timely comply with
those requirements. Independent of HIPAA requirements, we have been developing
new information systems with improved functionality to facilitate improved
billing and collection activities, reduced administrative costs and improved
decision support information. We have incorporated the HIPAA mandated electronic
transaction and code sets into the design of 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. We 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
Our primary market risk exposure with regard to financial instruments is to
changes in interest rates.
At June 30, 2004, a hypothetical 100 basis point increase in short-term interest
rates would result in a reduction of approximately $95,000 in annual pre-tax
earnings.
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 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. We are seeking appellate
review of the lower court decision. As a part of the appeal, the Company was
required to post cash of $1,154,241 in an escrow account with the Tennessee
Courts in lieu of a supersedeas appeal bond until the appeal court issues a
decision. This cash is reflected as "Cash held in escrow" in the accompanying
balance sheet and will remain in escrow until the matter reaches its ultimate
resolution.
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 regular annual meeting of the stockholders of Almost
Family, Inc. was held in Louisville, Kentucky on May 24,
2004, for the purpose of voting on the proposal described
below.
(b) Proxies for the meeting were solicited pursuant to Section
14(a) of the Securities Exchange Act of 1934 and there was
no solicitation in opposition to management's nominees for
directors. All of the management's nominees for directors
were elected as set for the in clause (c) below.
c) Two proposals were submitted to a vote of security holders
as follows:
(1) The stockholders approved the election of the
following persons as directors of the Company:
Name For Withheld
- --------------------- ------------------- ----------------
William B. Yarmuth 2,023,829 14,187
Steven B. Bing 2,023,789 14,227
Donald G. McClinton 2,023,989 14,027
Tyree G. Wilburn 2,024,029 13,987
Jonathan D. Goldberg 2,024,029 13,987
Wayne T. Smith 2,024,029 13,987
W. Earl Reed, III 2,023,989 14,027
(2) The stockholders approved the proposal to ratify
the appointment of Ernst & Young LLP as
independent auditors for the fiscal year ending
December 31, 2004 as follows:
For Against Abstain Broker Non-Votes
- ---------------- ----------------- ---------------- --------------------
2,023,703 13,783 530 0
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.
32.1
Certifications of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2
Certifications of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated May 14, 2004, Item 12, to
report the issuance of a press release announcing its
operating results for the three months ended March 31, 2004.
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 16, 2004
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