August 26, 2005
Mr. Jim B. Rosenberg, Senior Assistant Chief Accountant
Division of Corporation Finance
United States Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Almost Family, Inc.
Form 10-K for the fiscal year ended December 31, 2004 Filed
March 31, 2005
File No. 1-09848
Dear Mr. Rosenberg;
The following responses are to the questions contained in your correspondence
dated July 22, 2005 for the corporation and filing listed above.
Prior to reviewing our responses to your review comments we ask that you note
the following development that will impact the Company's Form 10-K disclosures
going forward:
Sale of Adult Day Care Segment and Implications on Disclosures
On August 3, 2005, after receipt of your letter of comment and prior to the
drafting of this response, the Company entered into a definitive agreement for
the sale of its Adult Day Care (ADC) operating segment. The transaction is
structured as a sale of all of the assets and substantially all of the
liabilities of the ADC segment. It is expected to close on or about September
30, 2005. The segment is being sold for $13.6 million in cash plus assumption of
approximately $1.5 million in capital lease obligations. The Company expects to
report a gain on the transaction of between $5 million and $6 million.
The ADC segment is one of three operating segments the Company currently
operates. It generated approximately 24% of the Company's revenues for the
fiscal year ended December 31, 2004. Management plans to file on Form 8-K the
appropriate pro-forma financial information required for the sale of a
significant segment of its business.
In the third quarter of 2005, the ADC segment will be reclassified to
"discontinued operations" with the Company's two remaining segments as
continuing operations. Given this significant change in the Company's business
and the impact it has on management's view of the materiality of certain
disclosures, management expects to significantly revise the disclosures made
throughout the Form 10-K for the fiscal year ending December 31, 2005.
Specifically, the absence of the ADC segment will increase the relative
materiality of the other two operating segments, and management anticipates
expanding its disclosures relating to those segments, particularly those
relating to revenues and receivables in the VN segment.
SEC COMMENTS AND THE COMPANY'S RESPONSES
SEC Comment #1.:
Form 10-K for Fiscal Year Ended December 31, 2004
Management's Discussion and Analysis of Financial Condition and Results of
Operations Overview
With regards to your VN segment revenues, you indicate that VN Medicare revenues
are generated on a per episode basis rather than a fee per visit or day of care.
Please provide us in disclosure-type format how you recognize revenue on a per
episode basis in order to evaluate your accounting and disclosure in your
financial statements.
Management's Response to SEC Comment #1.
VN Medicare Episode Revenue Recognition
Prospectively, management would anticipate making disclosures such as the
following:
Since October 2000, with the implementation of PPS, the Company has been paid by
Medicare based on episodes of care. The Centers for Medicare & Medicaid Services
(CMS) establishes the base rate for home health agencies covering a 60-day
episode for each beneficiary. The basic national payment rate of approximately
$2,300 per episode is adjusted for the health condition and care needs of each
beneficiary, as well as for the geographic differences in wages across the
country. Payment rates are also adjusted for situations that require care in
excess of thresholds established by CMS, or in situations where a significant
change in the beneficiary's condition has occurred, or if a beneficiary changes
home health agencies during an episode. Also, in situations where only four or
fewer visits are provided during an episode, reimbursement is earned on a per
visit basis.
At the start of each episode, the Company prepares a patient plan of care for
each patient which outlines the visit frequency and disciplines that are
expected to meet the patient's needs. Revenue is then recorded on a pro-rata
basis based on the types of visits incurred as services are provided to the
patient over the course of the 60 day episode.
Critical Accounting Policies
Receivable and Revenue Recognition
Please provide us the following disclosures in disclosure-type format to help us
evaluate the adequacy of your disclosure:
SEC Comment #2.a.:
State if your billing system generates contractual adjustments based on fee
schedules for the patient's insurance plan for each patient encounter or if an
estimate of contractual allowances is made. If an estimate is made, state what
factors are considered in determining the estimate.
Management's Response to SEC Comment #2.a.
Recognition of Contractual Allowances
Approximately 99% of the Company's revenues are earned on a "fee for service"
basis. For all services provided, the Company uses either payor-specific or
patient-specific fee schedules for the recording of revenues at the amounts
actually expected to be received. Accordingly, prior period contractual
allowances for each of the past three years have been insignificant (not more
than 0.1% of revenues).
SEC Comment #2.b.:
Your policy for collecting co-payments.
Management's Response to SEC Comment #2.b.
Co-payments
Unlike many healthcare providers, very few of the Company's payor sources
require patient co-payments. Approximately 0.2% of the Company's revenues are
derived from co-payments.
SEC Comment #2.c.:
For each period presented, quantify the amount of changes in estimates of prior
period contractual adjustments that you recorded during the current period. For
example for 2004 this amount would represent the amount of the difference
between estimates of contractual allowances for services provided in 2003 and
the amount of the new estimate or settlement amount that was recorded during
2004.
Management's Response to SEC Comment #2.c.
Changes in Contractual Allowance Estimates Pertaining to Prior Periods
See response to SEC Comment #2.b. which ends:
"... prior period contractual allowances for each of the past three years have
been insignificant (not more than 0.1% of revenues)."
SEC Comment #2.d.:
Quantify the reasonably possible effects that a change in estimate of unsettled
amounts from 3rd party payors as of the latest balance sheet date could have on
financial position and operations.
Management's Response to SEC Comment #2.d.
Reasonably Possible Effect of a Change in Estimate of Unsettled Amounts from
Third Party Payors
For each of the past three fiscal years, substantially all of the Company's
revenues were earned on a "fee for service" basis. However, prior to October
2000 for Medicare and July 2001 for Kentucky Medicaid, a significant portion of
the Company's revenues were cost-reimbursed. The settlement period for
cost-reimbursed revenues can be several years long. Accordingly, at December 31,
2004 and 2003, the Company had approximately $525,000 and $1,960,000 of net
receivables outstanding specifically related to filed or estimated cost reports.
The difference between the December 2003 and 2004 balances resulted entirely
from cash collections on settled cost reports, which settlements were consistent
with the Company's recorded balance for those so settled.
Reserves have been established for those issues management believes might result
in an unfavorable settlement.
SEC Comment #2.e.:
In a comparative tabular format, the payor mix concentrations and related aging
of accounts receivable. The aging schedule may be based on management's own
reporting criteria (i.e. unbilled, less than 30 days, 30 to 60 days etc.) or
some other reasonable presentation. At a minimum, the disclosure should indicate
the past due amounts and a breakdown by payor classification (i.e. Medicare,
Medicaid, Managed care and other, and Self-pay). We would expect Self-pay to be
separately classified from any other grouping. If your billing system does not
have the capacity to provide an aging schedule of your receivables, clarify how
this affects your ability to estimate your allowance for bad debts.
Management's Response to SEC Comment #2.e.
Payor Mix Concentrations and Related Aging of Accounts Receivable
The approximate breakdown of accounts receivable by payor classification as of
December 31, 2004 and 2003 is set forth in the following tables:
As of December 31, 2004: Percent of Accounts Receivable
- -----------------------------------------------------------------------------------------------------
>1yr
Payor 0-120 121-365 <2yrs Total
- -----------------------------------------------------------------------------------------------------
Medicare 17% -% -% 17%
Medicaid & Government 36% 8% 10% 54%
Self Pay 9% 3% 5% 17%
Insurance 7% 4% 1% 12%
- ------------------------------------------------------------------------------------------------------
Total 69% 15% 16% 100%
- ------------------------------------------------------------------------------------------------------
As of December 31, 2003: Percent of Accounts Receivable
- ------------------------------------------------------------------------------------------------------
>1yr
Payor 0-120 121-365 <2yrs Total
- ------------------------------------------------------------------------------------------------------
Medicare 13% 1% -1% 13%
Medicaid & Government 42% 11% 6% 59%
Self Pay 9% 2% 5% 16%
Insurance 8% 3% 1% 12%
- -------------------------------------------------------------------------------------------------------
Total 72% 17% 11% 100%
- -------------------------------------------------------------------------------------------------------
The balance sheet as of December 31, 2004 reflects a 13% decrease in net
accounts receivable from December 31, 2003 and a 22% decrease from December 31,
2002. Revenues for the year ended December 31, 2004 were 7% higher than revenues
for the year ended December 31, 2002. Days sales outstanding declined from 74
days at December 31, 2002 to 64 days at December 31, 2003 and 54 days at
December 31, 2004.
SEC Comment #2.f.:
If you have amounts that are pending approval from third party payors (i.e.
Medicaid Pending), the balances of such amounts, where they have been classified
in your aging buckets, and what payor classification they have been grouped
with. If amounts are classified outside of self-pay, clarify us why this
classification is appropriate, and disclose the historical percentage of amounts
that get reclassified into self-pay.
Management's Response to SEC Comment #2.e.
Medicaid (Third Party) Pending Patients
The Company, by policy, does not accept patients that are pending approval from
Medicaid or other third party payors.
SEC Comment #3:
Please provide us, in disclosure-type format, the steps you take in collecting
accounts receivable, your policy with respect to determining when a receivable
is recorded as a bad debt, and when a write off is recorded including the
threshold (amount and age) for account balance write-offs.
Management's Response to SEC Comment #3.
AR Collection Process and Allowance For Uncollectible Accounts
The Company utilizes its centralized HIPAA transaction set compliant computer
system for the billing and collection of accounts receivable. Personnel in the
Company's local market service office locations enter all billing transactions
and applicable information. The majority of the Company's revenues are billed
electronically to Medicare, state Medicaid programs, and a variety of other
state and county government programs. The balance is generally billed on paper
claims by personnel in the Company's centralized patient accounts receivable
department. Resubmission of denied claims and collection follow-up efforts on
unpaid claims are performed by a combination of service office and central
patient accounts receivable personnel using the Company's claims management
computer system.
The vast majority of the Company's receivables are collected in a relatively
short period of time resulting in the Company's low days sales outstanding in
receivables. However, many of the Company's payor sources require significant
amounts of time for collection; receivables past 120 days or even past 1 year do
not necessarily indicate a claim is uncollectible. The Company's policy is to
systematically pursue all accounts for collection and to write-off accounts only
when all reasonable efforts to collect them have been exhausted. The Company
uses historical collection results and its judgment to establish percentages
(based upon the type and age of the receivable) utilized in the estimation of
the allowance uncollectible accounts.
SEC Comment #4.:
Note 6. Income Taxes
Please provide us a detailed analysis of the basis for the one-time reduction in
the estimated tax liabilities of $854,000.
Management's Response to SEC Comment #4.
The Company's Form 10-K for the fiscal year ended March 31, 2000 included the
following disclosure:
"As part of a formal plan of separation, the Company on
November 12, 1999 sold its product operations (consisting of
infusion therapy and respiratory and medical equipment
businesses) to Lincare Holdings, Inc. in an asset sale for
$14.5 million and is pursuing available strategic alternatives
to complete the separation of its visiting nurse operations.
Proceeds from the sale were used to repay obligations
outstanding under the Company's bank line of credit. As a
result of the operational separations, the Company recorded a
one-time net of tax loss of approximately $5 million or
($1.60) in the quarter ended September 30, 1999. This charge
reduced the book value of the operations to their expected net
realizable value, provides for losses on fulfilling certain
obligations and close down costs and includes the estimated
future operating results of the visiting nurse operations
prior to separation. These changes have been accounted for as
discontinued operations in the accompanying financial
statements.
The estimated loss on disposal of discontinued operations
reflected in the accompanying financial statements includes
management's estimate of the results of operating the visiting
nurse segment prior to disposal and the estimated financial
results of such disposal based on information currently
available. The form and timing of the implementation of a
Medicare Prospective Payment System for home care (PPS) may
have a material impact on the disposal value of the visiting
nurse operations." (1)
The operations being discontinued operated in several different legal entities
and in several different state and local jurisdictions. In recording the tax
benefit related to the one-time charge, the Company recognized the potential for
challenges upon audit by state or local tax jurisdictions related to allocation
of the gains and losses to the various legal entities, the timing of the
deductibility of certain accrued losses, the timing of the deductibility of
certain assets and liabilities and the related effect of all these on state and
local loss carry-backs and carry-forwards. Accordingly, the Company
appropriately made estimates about the effective state and local tax rates that
it used to record the related discontinued operations income tax benefit
according to SFAS 109.
The Company believes that all positions taken by it in the filing of the tax
returns for that year were appropriate. However, given the complexities involved
and the exposure to challenge upon tax return audit, the Company determined that
the tax reserves were necessary until expiration of the statute of limitations.
The three year statute of limitations for the audit of the tax returns expired
on January 15, 2004 at which time it was evident that a change in the estimated
state and local tax rates should be recorded. The Company then recorded a
one-time credit to tax provision pertaining to discontinued operations totaling
approximately $854,000 to release the balance of the recorded tax liability.
(1) Note that the 1999 "plan of disposal for its visiting nurse segment" was
subsequently reversed by the Company's Board of Directors following the
implementation of the Medicare PPS reimbursement system for home health care.
SEC Comment #5.:
Note 9. Commitments and Contingencies
Legal Proceedings
Please tell us why you believe a ruling in favor for the plaintiff in the
Franklin litigation case would not require an accrual under SFAS 5.
Management's Response to SEC Comment #3.
Franklin Litigation
The Company is in continuing discussions with its auditors, legal counsel and
audit committee concerning this issue and expects that its response will be
forthcoming.
SEC Comment #6.:
We note that you have a receivable from a broker that is in Chapter 7 bankruptcy
proceedings. Please tell us why you have not written off the entire accounts
receivable balance.
Management's Response to SEC Comment #6.
The Company is in continuing discussions with its auditors, legal counsel and
audit committee concerning this issue and expects that its response will be
forthcoming.
Requested Acknowledgement
Almost Family, Inc. acknowledges the Company is responsible for the adequacy and
accuracy of the disclosure in the filing; and staff comments or changes to
disclosure in response to staff comments do not foreclose the Commission from
taking any action with respect to the filing; and the Company may not assert
staff comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
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If you have any questions, please do not hesitate to contact me at 502-891-1000.
Sincerely,
/s/ C. Steven Guenthner
-----------------------
C. Steven Guenthner
Senior Vice President &
Chief Financial Officer