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 September 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 November 12, 2004 2,299,830
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information................................................3
Item 1. Financial Statements............................................3
Consolidated Balance Sheets as of September 30, 2004 and
December 31, 2003...............................................3
Consolidated Statements of Income for the Three Months Ending
September 30, 2004 and September 30, 2003.......................4
Consolidated Statements of Income for the Nine Months Ending
September 30, 2004 and September 30, 2003.......................5
Consolidated Statements of Cash Flows for the Nine months ended
September 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. Unregistered Sales of Equity Securities and Use of Proceeds....31
Item 3. Defaults Upon Senior Securities................................31
Item 4. Submission of Matters to a Vote of Security Holders............31
Item 5. Other Information..............................................31
Item 6. Exhibits.......................................................32
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2004 2004
------------------- -------------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 372,058 $ 897,443
Accounts receivable - net 13,382,580 15,334,659
Prepaid expenses and other current assets 790,459 740,228
Deferred tax assets 821,590 863,611
------------------- -------------------
TOTAL CURRENT ASSETS 15,366,687 17,835,941
CASH HELD IN ESCROW (Note 8) 1,154,241 1,154,241
PROPERTY AND EQUIPMENT - NET 6,434,618 7,519,506
GOODWILL 6,335,783 6,335,783
OTHER ASSETS 184,741 195,589
------------------- -------------------
$ 29,476,070 $ 33,041,060
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,216,360 $ 2,376,045
Accrued other liabilities 5,503,225 5,481,130
Current portion - capital leases and term debt 575,957 225,578
------------------ --------------------
8,295,542 8,082,753
------------------ --------------------
LONG-TERM LIABILITIES:
Revolving Credit Facility 6,114,651 10,891,423
Capital leases 1,219,710 1,085,178
Acquisition notes payable - 300,000
Deferred tax liabilities 17,832 61,328
Other liabilities 386,974 356,032
------------------ --------------------
TOTAL LONG-TERM LIABILITIES 7,739,167 12,693,961
------------------ --------------------
TOTAL LIABILITIES 16,034,709 20,776,714
------------------ --------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,409,874 and 3,394,874 issued 340,990 339,490
Treasury stock, at cost, 1,096,783 and 1,096,783 shares (7,772,048) (7,772,048)
Additional paid-in capital 26,514,144 26,439,304
Accumulated deficit (5,641,725) (6,742,400)
------------------ --------------------
TOTAL STOCKHOLDERS' EQUITY 13,441,361 12,264,346
------------------ --------------------
$ 29,476,070 $ 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
------------------------------------
September 30, September 30,
2004 2003
--------------- ----------------
Net revenues $ 22,107,734 $ 21,649,757
Cost of services 18,525,200 18,157,144
General and administrative expenses 1,601,603 1,895,047
Depreciation and amortization expense 653,225 588,468
Provision for uncollectible accounts 522,807 381,613
----------------- ----------------
Income before interest expense and
income taxes 804,899 627,485
Other income (expense)
Interest expense (113,228) (155,241)
Facility gains (losses) - -
------------------ ---------------
Income before income taxes 691,671 472,244
Income tax expense 287,044 188,898
------------------ ---------------
Net income $ 404,627 $ 283,346
================= ===============
Net income per common share:
Basic $ 0.18 $ 0.12
Diluted $ 0.16 $ 0.11
Weighted average shares outstanding:
Basic 2,303,918 2,296,527
Diluted 2,555,930 2,555,081
See accompanying notes to interim consolidated financial
statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
---------------------------------------
September 30, September 30,
2004 2003
------------------ ------------------
Net revenues $ 66,383,335 $ 65,003,964
Cost of services 55,858,775 54,112,025
General and administrative expenses 4,848,981 5,647,489
Depreciation and amortization expense 1,908,637 1,819,888
Provision for uncollectible accounts 1,537,859 1,230,177
----------------- -----------------
Income before interest expense and income taxes 2,229,083 2,194,385
Other income (expense)
Interest expense (381,187) (496,885)
Facility gains (losses) 3,854 (11,709)
----------------- -----------------
Income before income taxes 1,851,750 1,685,791
Income tax expense 751,075 674,317
------------------ -----------------
Net income $ 1,100,675 $ 1,011,474
================== =================
Net income per common share:
Basic $ 0.48 $ 0.44
Diluted $ 0.43 $ 0.40
Weighted average shares outstanding:
Basic 2,299,830 2,294,182
Diluted 2,553,450 2,524,060
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
------------------------------------------------
September 30, 2004 September 30, 2003
------------------------ ----------------------
Cash flows from operating activities:
Net income $ 1,100,675 $ 1,011,474
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization 1,908,637 1,819,888
Deferred income taxes (1,474) 505,731
Gain on sale of asset (3,854) 11,709
Provision for uncollectible accounts 1,537,859 1,230,177
------------------------ ----------------------
4,541,843 4,578,979
Change in certain net assets:
(Increase) decrease in:
Accounts receivable 414,220 1,333,033
Prepaid expenses and other current assets (50,230) (184,126)
Other assets 10,848 750,269
Increase (decrease) in:
Accounts payable and accrued liabilities (108,751) (551,074)
Other liabilities 30,941 (801,061)
------------------------ ----------------------
Net cash provided by operating activities 4,838,871 5,126,020
------------------------ ----------------------
Cash flows from investing activities:
Cash held in escrow - (1,154,241)
Capital expenditures (453,104) (1,245,630)
Cash received from sale of asset 3,854 149,469
------------------------ ----------------------
Net cash used in investing activities (449,250) (2,250,402)
------------------------ ----------------------
Cash flows from financing activities:
Net revolving credit facility (payments) borrowings (4,776,772) (3,053,021)
Repurchase of common shares - (65,896)
Proceeds from stock option exercises 47,500 76,150
Principal payments on debt and capital leases (185,734) (215,505)
------------------------ ----------------------
Net cash used in financing activities (4,915,006) (3,258,272)
------------------------ ----------------------
Net (decrease) increase in cash and cash equivalents (525,385) (382,654)
Cash and cash equivalents at beginning of period 897,443 973,534
------------------------ ----------------------
Cash and cash equivalents at end of period $ 372,058 $ 590,880
======================== ======================
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
nine months ended September 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 September 30, 2004 and the results
of operations and cash flows for the nine months ended September 30, 2004 and
2003.
The results of operations for the three and nine months ended September 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 September 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
Kentucky, Florida, Ohio, Maryland, Connecticut, Massachusetts, Indiana and
Alabama (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 September 30, Nine Month Ended September 30,
------------------------------------------------------------------------------
2004 2003 2004 2003
------------------ --------------- --------------- ---------------
Net Revenues
Home Health Care
Visiting nurses $ 7,555,941 $ 6,920,323 $ 24,005,398 $ 21,862,873
Personal care 8,479,334 8,056,132 24,869,853 24,038,168
------------------ --------------- --------------- ---------------
16,035,275 14,976,455 48,875,251 45,901,041
Adult day care 6,072,459 6,673,302 17,508,084 19,102,923
------------------ --------------- --------------- ---------------
$ 22,107,734 $ 21,649,757 $ 66,383,335 $ 65,003,964
================== =============== =============== ===============
Operating Income
Home Health Care
Visiting nurses $ 870,372 $ 705,766 $ 3,684,187 $ 3,127,274
Personal care 883,563 913,512 2,429,857 2,890,521
------------------ --------------- --------------- ---------------
1,753,935 1,619,278 6,114,044 6,017,795
Adult day care 626,469 668,753 858,924 980,656
------------------ --------------- --------------- ---------------
2,380,404 2,288,031 6,972,968 6,998,451
Unallocated corporate expenses 1,575,505 1,660,546 4,743,885 4,804,066
------------------ --------------- --------------- ---------------
Operating income $ 804,899 $ 627,485 $ 2,229,083 $ 2,194,385
================== =============== =============== ===============
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 $50,000 and $243,000 were
capitalized in the three months ended September 30, 2004 and 2003, respectively,
and $138,000 and $773,000 in the nine months ending September 30, 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 3.97% and 4.00% for the quarters ended
September 30, 2004 and 2003, respectively, and 3.89% and 4.18% for the nine
months ended September 30, 2004 and 2003, respectively. The interest rate in
effect at September 30, 2004 was 4.25%. 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 September 30, 2004,
the formula permitted approximately $17.4 million to be used, of which
approximately $6.1 million was outstanding. Additionally, an irrevocable letter
of credit, totaling $4.2 million, was outstanding in connection with the
Company's self-insurance programs. Thus, a total of $10.3 million was either
outstanding or committed as of September 30, 2004 while an additional $7.1
million was available for use. The Company's revolving credit facility is
subject to various financial covenants. As of September 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.
The Company received from the Kentucky Medicaid program $1.4 million in
collection of three year old cost report receivables in late August 2004. In
October 2004 the Company completed the sale-lease back of its only real estate
parcel and received the net proceeds of approximately $1.1 million. As of
October 31, 2004, the balance outstanding on the credit facility was
approximately $3.9 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 Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------------ ----------------- ------------------ -----------------
Net income as reported $ 404,627 $ 283,346 $ 1,100,675 $ 1,011,474
Pro forma stock-based com-
pensation expense, net of tax 444 16,048 1,331 48,143
------------------ ----------------- ------------------ -----------------
Pro forma net income $ 404,183 $ 267,298 $ 1,099,344 $ 963,331
================== ================= ================== =================
Earnings per common share:
Basic - as reported $ 0.18 $ 0.12 $ 0.48 $ 0.44
Basic - pro forma $ 0.18 $ 0.12 $ 0.48 $ 0.42
Diluted - as reported $ 0.16 $ 0.11 $ 0.43 $ 0.40
Diluted - proforma $ 0.16 $ 0.10 $ 0.43 $ 0.38
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 Nine Months Ended
September 30, September 30, September 30, September 30,
2004 2003 2004 2003
------------------- ------------------ ------------------ ------------------
Shares used to compute basic
earnings per common share -
weighted average shares
outstanding 2,303,918 2,296,527 2,299,830 2,294,182
Dilutive effect of stock options 252,012 258,554 253,620 229,878
------------------- ------------------ ------------------ ------------------
Shares used to compute diluted
earnings per common share 2,555,930 2,555,081 2,553,450 2,524,060
=================== ================== ================== ==================
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
September 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. On March 3,
2003, the Broker reconverted its case to a Chapter 7 liquidation proceeding.
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 (since the group did not have a direct contract with the
Commonwealth) 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. On September 24, 2004 the
appeals court affirmed the lower court's decision. In its decision, the Court
indicated that the Company could pursue its claim at the Kentucky Board of
Claims; such a claim would be limited to $200,000 in damages.
On June 26, 2004 a lawsuit was filed on behalf of the bankruptcy estate against
the Commonwealth of Kentucky. The case alleges that the state misrepresented
material facts about the contract that it signed with the Transportation Broker.
The suit alleges that the Commonwealth intentionally under-funded the contract
with the bankrupt Broker. Unlike the group of affected providers in the
Franklin Court proceeding discussed above, the Broker did have a direct contract
with the Commonwealth.
As of September 30, 2004 and December 31, 2003, the Broker owed the Company
approximately $535,000, which amount is included in accounts receivable, net on
the accompanying balance sheets. Based on discussions with legal counsel, the
Company estimates that it will be able to recover approximately 80% of the claim
if the lawsuit is successful. Accordingly, the Company has established a
collectibility reserve of approximately $106,000 against the receivable in this
case. Although the Company currently believes it will be successful in
ultimately collecting the amounts currently due 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 the Company executed with its lender in March 2004
provides that the loss of either or both of the above litigation cases will be
excluded from 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
Kentucky, Florida, Ohio, Maryland, Connecticut, Massachusetts, Indiana and
Alabama (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 addition to normal Florida seasonality, the Company experienced a decline in
pre-tax income of approximately $180,000 directly related to four hurricanes
impacting the VN segment in the State of Florida in the quarter ended September
30, 2004.
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 September 30, 2004 Compared with Three Months Ended September 30, 2003
Consolidated 2004 2003 Change
-------------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
-------------------------------------------------------------------------------------
Net revenues:
Home Health Care VN $ 7,555,941 34.2% $ 6,920,323 32.0% $ 635,618 9.2%
PC 8,479,334 38.4% 8,056,132 37.2% 423,202 5.3%
---------------- ------------------ ---------------
16,035,275 72.5% 14,976,455 69.2% 1,058,820 7.1%
Adult Day Care 6,072,459 27.5% 6,673,302 30.8% (600,843) -9.0%
---------------- ------------------ ---------------
$ 22,107,734 100.0% $ 21,649,757 100.0% $ 457,977 2.1%
================ ================== ===============
Operating income
Home Health Care VN $ 870,372 11.5% $ 705,766 10.2% $ 164,606 23.3%
PC 883,563 10.4% 913,512 11.3% (29,949) -3.3%
---------------- ------------------ ---------------
1,753,935 10.9% 1,619,278 10.8% 134,657 8.3%
Adult Day Care 626,469 10.3% 668,753 10.0% (42,284) -6.3%
---------------- ------------------ ---------------
2,380,404 10.8% 2,288,031 10.6% 92,373 4.0%
Unallocated corporate expenses 1,575,505 7.1% 1,660,546 7.7% (85,041) -5.1%
---------------- ------------------ ---------------
Income before interest expense
and income taxes 804,899 3.6% 627,485 2.9% 177,414 28.3%
Facility gains (losses) - 0.0% - 0.0% - 0.0%
Interest expense 113,228 0.5% 155,241 0.7% (42,013) -27.1%
Income taxes 287,044 1.3% 188,898 0.9% 98,146 52.0%
---------------- ------------------ ---------------
Net income $ 404,627 1.8% $ 283,346 1.3% $ 121,281 42.8%
================ ================== ===============
Our VN operations revenues and operating income grew significantly during the
quarter offsetting lower performance in the ADC segment. Our net revenues
increased approximately $458,000 or 2.1% with about 9% growth in VN, and 5%
growth in PC offsetting a 9% decline in ADC. ADC centers closed in late 2003
accounted for approximately $617,000 of ADC revenue decline.
Four hurricanes hit the State of Florida in the quarter ended September 30,
2004. These hurricanes had the effect of reducing 2004 VN segment operating
income by approximately $180,000, and net income and basic earnings per share by
approximately $108,000 and $0.05 per share respectively.
The effective income tax rate was approximately 41% of income before income
taxes for 2004 compared to 40% in 2003.
Visiting Nurse (VN) Segment-Three Months
Three Months Ended September 30,
------------------------------------------------------------------------------
2004 2003 Change
------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
------------------------------------------------------------------------------
Net revenues $ 7,555,941 100.0% $ 6,920,323 100.0% $ 635,618 9.2%
Cost of services 6,076,474 80.4% 5,557,355 80.3% 519,119 9.3%
General & administrative 489,537 6.5% 522,114 7.5% (32,577) -6.2%
Depreciation & amortization 8,476 0.1% 7,089 0.1% 1,387 19.6%
Uncollectible accounts 111,082 1.5% 127,999 1.8% (16,917) -13.2%
------------- ---------------- ---------------
Operating income $ 870,372 11.5% $ 705,766 10.2% $ 164,606 23.3%
============= ================ ===============
Admissions 2,434 2,241 193 8.6%
Patient months of care 6,412 5,934 478 8.1%
Revenue per patient month $ 1,178.41 $ 1,166.22 $ 12.19 1.0%
Cost of services per patient month $ 947.67 $ 936.53 $ 11.14 1.2%
Billable visits 59,678 56,189 3,489 6.2%
VN contribution for the quarter was approximately $870,000 versus $706,000 last
year, despite the effect of Florida hurricanes which lowered operating income by
approximately $180,000 in the 2004 quarter. Admissions grew about 9% over the
prior year while patient months increased 8%, reflecting a reduction in the
average length of stay. Revenue per patient month increased 1.0% primarily due
to higher Medicare rates between periods. Operating costs per patient month
increased about 1.2% 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 startup agencies contributed approximately $350,000 of revenues and
approximately $68,000 of operating income in the quarter ended September 30,
2004.
Personal Care (PC) Segment-Three Months
Three Months Ended September 30,
-------------------------------------------------------------------------------
2004 2003 Change
-------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
-------------------------------------------------------------------------------
Net revenues $ 8,479,334 100.0% $ 8,056,132 100.0% $ 423,202 5.3%
Cost of services 7,260,197 85.6% 6,885,088 85.5% 375,109 5.4%
General & administrative 82,068 1.0% 72,747 0.9% 9,321 12.8%
Depreciation & amortization 11,555 0.1% 10,450 0.1% 1,105 10.6%
Uncollectible accounts 241,951 2.9% 174,335 2.2% 67,616 38.8%
---------------- ---------------- ---------------
Operating income $ 883,563 10.4% $ 913,512 11.3% $ (29,949) -3.3%
================ ================ ===============
Admissions 569 556 13 2.3%
Patient months of care 9,106 9,134 (28) -0.3%
Patient days of care 116,387 110,516 5,871 5.3%
Billable hours 467,051 438,376 28,675 6.5%
Revenue per billable hour $ 18.16 $ 18.38 $ (0.22) -1.2%
PC contribution for the quarter was about $884,000 versus $914,000 last year.
Revenue per billable hour decreased 1.2% 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 September 30,
---------------------------------------------------------------------------------
2004 2003 Change
---------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
---------------------------------------------------------------------------------
Net revenues $ 6,072,459 100.0% $ 6,673,302 100.0% $ (600,843) -9.0%
Cost of services 4,856,945 80.0% 5,301,262 79.4% (444,317) -8.4%
General & administrative 196,843 3.2% 407,377 6.1% (210,534) -51.7%
Depreciation & amortization 222,428 3.7% 216,631 3.2% 5,797 2.7%
Uncollectible accounts 169,774 2.8% 79,279 1.2% 90,495 114.1%
---------------- ---------------- ---------------
Operating income $ 626,469 10.3% $ 668,753 10.0% $ (42,284) -6.3%
================ ================ ===============
Admissions 288 307 (19) -6.2%
Patients months of care 5,780 6,067 (287) -4.7%
Patient days of care 87,520 94,210 (6,690) -7.1%
Revenue per patient day $ 69.38 $ 70.83 $ (1.45) -2.0%
ADC in-center averages:
Weekday attendance 1,181 1,271 (90) -7.1%
Center capacity 1,576 1,810 (234) -12.9%
Center occupancy rate 74.9% 70.2% 4.7% 6.7%
ADC patient days of care decreased from the prior year due to the closure of
certain centers. The closure of four centers reduced days sold by 9,065 or 9.6%.
On a same-store basis, days sold increased 2,375 or about 3.0%. We believe the
increase in same-store days sold is a result of a loosening of restrictions on
patient authorizations by the Kentucky and Maryland Medicaid programs following
previously over-restrictive attempts to constrain Medicaid expenditures. Revenue
per day declined about 2% due to lower Kentucky Medicaid transportation rates
and mix changes which more than offset a 2.7% rate increase from Maryland
Medicaid effective July 1, 2004.
Operating income for the quarter included $62,000 of losses on stores
no longer in operation as of October 1, 2004. General and administrative
expenses declined by over $210,000 as a result of down-sizing actions we took
over the course of 2003 and 2004.
Nine Months Ended September 30, 2004 compared with Nine Months Ended September 30, 2003
Consolidated 2004 2003 Change
------------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
------------------------------------------------------------------------------------
Net revenues:
Home Health Care VN $ 24,005,398 36.2% $ 21,862,873 33.6% $ 2,142,525 9.8%
PC 24,869,853 37.5% 24,038,168 37.0% 831,685 3.5%
---------------- ------------------ --------------
48,875,251 73.6% 45,901,041 70.6% 2,974,210 6.5%
Adult Day Care 17,508,084 26.4% 19,102,923 29.4% (1,594,839) -8.3%
---------------- ------------------ --------------
$ 66,383,335 100.0% $ 65,003,964 100.0% $ 1,379,371 2.1%
================ ================== ==============
Operating income
Home Health Care VN $ 3,684,187 15.3% $ 3,127,274 14.3% $ 556,913 17.8%
PC 2,429,857 9.8% 2,890,521 12.0% (460,664) -15.9%
---------------- ------------------ --------------
6,114,044 12.5% 6,017,795 13.1% 96,249 1.6%
Adult Day Care 858,924 4.9% 980,656 5.1% (121,732) -12.4%
---------------- ------------------ --------------
6,972,968 10.5% 6,998,451 10.8% (25,483) -0.4%
Unallocated corporate expenses 4,743,885 7.1% 4,804,066 7.4% (60,181) -1.3%
---------------- ------------------ --------------
Income before interest expense
and income taxes 2,229,083 3.4% 2,194,385 3.4% 34,698 1.6%
Facility gains (losses) 3,854 0.0% (11,709) 0.0% 15,563 -132.9%
Interest expense 381,187 0.6% 496,885 0.8% (115,698) -23.3%
Income taxes 751,075 1.1% 674,317 1.0% 76,758 11.4%
---------------- ------------------ --------------
Net income $ 1,100,675 1.7% $ 1,011,474 1.6% $ 89,201 8.8%
================ ================== ==============
Our VN operations revenues and operating income grew significantly during the
nine months offsetting lower performance in the ADC segment. Our net revenues
increased approximately $1.4 million or 2.1% with about 10.0% growth in VN, and
over 3% growth in PC offsetting a 8% decline in ADC. ADC centers closed in late
2003 and 2004 accounted for approximately $1.4 million of the ADC revenue
decline.
As discussed previously, four hurricanes hit the State of Florida in the quarter
ended September 30, 2004. These hurricanes had the effect of reducing 2004 VN
operating income by approximately $180,000, and net income and basic earnings
per share by approximately $108,000 and $0.05 per share respectively.
The effective income tax rate was approximately 41% of income before income
taxes for 2004 compared to 40% in 2003.
Visiting Nurse (VN) Segment-Nine Months
Nine Months Ended September 30,
------------------------------------------------------------------------------
2004 2003 Change
------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
------------------------------------------------------------------------------
Net revenues $ 24,005,398 100.0% $ 21,862,873 100.0% $ 2,142,525 9.8%
Cost of services 18,489,404 77.0% 16,677,325 76.3% 1,812,079 10.9%
General & administrative 1,443,290 6.0% 1,539,631 7.0% (96,341) -6.3%
Depreciation & amortization 22,694 0.1% 68,152 0.3% (45,458) -66.7%
Uncollectible accounts 365,823 1.5% 450,491 2.1% (84,668) -18.8%
-------------- ---------------- ---------------
Operating income $ 3,684,187 15.3% $ 3,127,274 14.3% $ 556,913 17.8%
============== ================ ===============
Admissions 7,811 7,129 682 9.6%
Patient months of care 19,838 18,432 1,406 7.6%
Revenue per patient month $ 1,210.07 $ 1,186.14 $ 23.93 2.0%
Cost of services per patient month
$ 932.02 $ 904.80 $ 27.22 3.0%
Billable visits 188,147 176,148 11,999 6.8%
VN contribution for the nine months ended September 30, 2004 was $3.6 million
versus $3.1 million last year despite the effect of Florida hurricanes which
lowered 2004 operating income by approximately $180,000. Admissions
grew about 10% over the prior year while patient months increased 7% reflecting
a reduction in the average length of stay. Revenue per patient month increased
about 2.0% primarily due to higher Medicare rates between periods. Operating
costs per patient month also increased about 3% 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 contributed revenues of
approximately $700,000 and operating income of approximately $70,000 in the nine
months ended September 2004.
Personal Care (PC) Segment-Nine Months
Nine Months Ended September 30,
-------------------------------------------------------------------------------
2004 2003 Change
-------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
-------------------------------------------------------------------------------
Net revenues $ 24,869,853 100.0% $ 24,038,168 100.0% $ 831,685 3.5%
Cost of services 21,476,330 86.4% 20,589,661 85.7% 886,669 4.3%
General & administrative 265,309 1.1% 148,036 0.6% 117,273 79.2%
Depreciation & amortization 34,969 0.1% 32,364 0.1% 2,605 8.0%
Uncollectible accounts 663,388 2.7% 377,586 1.6% 285,802 75.7%
---------------- ---------------- ---------------
Operating income $ 2,429,857 9.8% $ 2,890,521 12.0% $ (460,664) -15.9%
================ ================ ===============
Admissions 1,888 1,986 (98) -4.9%
Patient months of care 27,244 27,648 (404) -1.5%
Patient days of care 344,020 330,176 13,844 4.2%
Billable hours 1,378,608 1,319,365 59,243 4.5%
Revenue per billable hour $ 18.04 $ 18.22 $ (0.18) -1.0%
PC contribution for the nine months ended September 30, 2004 was about $2.4
million versus $2.8 million in 2003. 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 1.0% 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 nine months ended
September 30, 2004 was higher than in the nine months of the prior year
primarily due to an unusually low provision for uncollectible accounts in the
prior year.
Adult Day Care (ADC) Segment-Nine Months
Nine Months Ended September 30,
---------------------------------------------------------------------------------
2004 2003 Change
---------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
---------------------------------------------------------------------------------
Net revenues $ 17,508,084 100.0% $ 19,102,923 100.0% $ (1,594,839) -8.3%
Cost of services 14,849,881 84.8% 15,652,684 81.9% (802,803) -5.1%
General & administrative 639,255 3.7% 1,409,451 7.4% (770,196) -54.6%
Depreciation & amortization 651,376 3.7% 658,031 3.4% (6,655) -1.0%
Uncollectible accounts 508,648 2.9% 402,101 2.1% 106,547 26.5%
---------------- ---------------- ---------------
Operating income $ 858,924 4.9% $ 980,656 5.1% $ (121,732) -12.4%
================ ================ ===============
Admissions 953 858 95 11.1%
Patients months of care 17,007 18,124 (1,117) -6.2%
Patient days of care 253,956 272,080 (18,124) -6.7%
Revenue per patient day $ 68.94 $ 70.21 $ (1.27) -1.8%
ADC in-center averages:
Weekday attendance 1,162 1,248 (86) -6.9%
Center capacity 1,563 1,802 (239) -13.3%
Center occupancy rate 74.4% 69.3% 5.1% 7.3%
ADC patient days of care decreased from the prior year due to the closure of
certain centers during 2003 and 2004. The closure of four centers reduced days
sold by 20,886 or 7.7%. Revenue per day declined about 1.8% primarily due to mix
changes and lower Kentucky Medicaid transportation rates. As a result, on a same
store basis revenues declined $184,000, mostly in the first quarter of 2004.
Operating income in 2004 included $199,000 of losses on stores no longer in
operation as of October 1, 2004. General and administrative expenses declined by
over $770,000 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 September 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 September 30, 2004.
Liquidity and Capital Resources
Revolving Credit Facility
In March 2004, the 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 3.97% and 4.00% for the quarters ended September 30, 2004
and 2003, respectively, and 3.89% and 4.18% for the nine months ended September
30, 2004 and 2003, respectively. The interest rate in effect at September 30,
2004 was 4.25%. 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 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 September 30, 2004 the formula permitted approximately
$17.4 million to be used, of which approximately $6.1 million was outstanding.
Additionally, an irrevocable letter of credit, totaling $4.2 million, was
outstanding in connection with our self-insurance programs. Thus, a total of
$10.3 million was either outstanding or committed as of September 30, 2004 while
an additional $7.1 million was available for use. Our revolving credit facility
is subject to various financial covenants. As of September 30, 2004, the we were
in compliance with the covenants. Under the most restrictive of our covenants,
we are required to maintain minimum net worth of at least $10,500,000.
We received from the Kentucky Medicaid program $1.4 million in collection of
three year old cost report receivables in late August 2004. In October 2004 we
completed the sale-lease back of our only real estate parcel and received the
net proceeds of approximately $1.1 million. As of October 31, 2004, the balance
outstanding on the credit facility was approximately $3.9 million.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the nine months
ending September 30, 2004 and 2003 were:
Net Change in Cash and Cash Equivalents 2004 2003
--------------------------------------- --------------------- -------------------
Provided by (used in):
Operating activities $ 4,838,871 $ 5,126,020
Investing activities (449,250) (2,250,402)
Financing activities (4,915,006) (3,258,272)
--------------------- -------------------
Net (decrease) increase in cash and cash equivalents $ (525,385) $ (382,654)
===================== ===================
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 55 at
September 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 61 at
September 30, 2003, down from 69 at December 31, 2002 due primarily to the
collection of Medicare cost report settlements. Net cash used in investing
activities resulted principally from the posting of the supersedeas appeal bond
in the Franklin litigation, 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.
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 its bankruptcy status to a Chapter 11 voluntary reorganization. On
March 3, 2003, the Broker reconverted its case to a Chapter 7 liquidation
proceeding.
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 (since the group did not have a direct contract with the
Commonwealth) and filed a motion to dismiss the lawsuit on that basis. 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. On
September 24, 2004 the appeals court affirmed the lower court's decision. In its
decision, the Court indicated that we could pursue our claim at the Kentucky
Board of Claims; such a claim would be limited to $200,000 in damages.
On June 26, 2004 a lawsuit was filed on behalf of the bankruptcy estate against
the Commonwealth of Kentucky. The case alleges that the state misrepresented
material facts about the contract that it signed with the Transportation Broker.
The suit alleges that the Commonwealth intentionally under-funded the contract
with the bankrupt Broker. Unlike the group of affected providers in the
Franklin Circuit Court proceeding discussed above, the Broker did have a
direct contract with the Commonwealth.
As of September 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. Based on discussions with legal counsel, we
estimate that we will be able to recover approximately 80% of the claim if the
lawsuit is successful. Accordingly, we have established a collectibility reserve
of approximately $106,000 against the receivable in this case. 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.
The loan agreement we 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 September 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. Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
31.1
Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1
Certifications of Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2
Certifications of Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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: November 12, 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