October 26, 2005
Mr. Jim B. Rosenberg, Senior Assistant Chief Accountant
Division of Corporation Finance -CF/AD1
United States Securities and Exchange Commission
100 F Street, N.E
Washington, D.C. 20549-6010
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 October 7, 2005 for the corporation and filing listed above. We very much
appreciate the Staff's continued attention to this matter and its
professionalism in working through with us both in writing and on the phone the
issues that concern the Staff.
Critical Accounting Policies
SEC Comment #1.:
In addition to the proposed disclosures provided in your response to our
comments 2a, 2d and 3, please also provide us proposed disclosure regarding the
percentages (based on type and age) used to estimate the allowance for
uncollectible accounts.
Management's Response to SEC Comment #1.
Allowance for Uncollectible Accounts by Payor Mix and Related Aging
The Company records an estimated allowance for uncollectible accounts by
applying estimated bad debt percentages to its accounts receivable agings. The
percentages to be applied by payor type are based on the Company's historical
collection and loss experience. The Company's effective allowances for bad debt
percentages were as follows:
As of December 31, 2004: Percent of Accounts Receivable
- -------------------------------------------------------------------------------
>1yr
Payor 0-120 121-365 <2yrs >2yrs
- -------------------------------------------------------------------------------
Medicare 5% 25% 100% 100%
Medicaid & Government 1% 16% 71% 100%
Self Pay 7% 19% 69% 100%
Insurance 1% 14% 72% 100%
Total 2% 17% 70% 100%
As of December 31, 2003: Percent of Accounts Receivable
- --------------------------------------------------------------------------------
>1yr
Payor 0-120 121-365 <2yrs >2yrs
- --------------------------------------------------------------------------------
Medicare 6% 25% 100% 100%
Medicaid & Government 2% 9% 68% 100%
Self Pay 7% 25% 67% 100%
Insurance 2% 13% 71% 100%
Total 3% 13% 69% 100%
SEC Comment #2.:
We noted your response to our comment 2c and we reissue our comment. We believe
materiality should also be assessed on income from operations.
Management's Response to SEC Comment #2.
Changes in Contractual Allowance Estimates Pertaining to Prior Periods
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. Changes in estimates related to prior period
contractual allowances were $82,000, $72,000, and $103,000 in the years ended
December 31, 2004, 2003 and 2002, respectively.
SEC Comment #3.:
With regards to your response to our comment 2e, you presented proposed
disclosure showing two tables for the year ended December 31, 2003. In one of
the tables we did not note any provision related to self pay. Please revise your
proposed disclosure to clarify or explain why there is no self pay.
Management's Response to SEC Comment #3.
In my discussion with Sasha Parikh on October 17, 2005, it appeared that Ms.
Parikh was reading from a table that was garbled or erroneous, perhaps due to a
file transmission error of some kind. In any event the response should have been
as follows:
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 >2yrs Total
- --------------------------------------------------------------------------------
Medicare 10% -% -% -% 10%
Medicaid & Government 48% 8% 9% 1% 66%
Self Pay 4% 3% 3% 1% 11%
Insurance 8% 4% 1% -% 13%
Total 69% 15% 13% 2% 100%
As of December 31, 2003: Percent of Accounts Receivable
- --------------------------------------------------------------------------------
>1yr
Payor 0-120 121-365 <2yrs >2yrs Total
- --------------------------------------------------------------------------------
Medicare 11% 1% -% -% 12%
Medicaid & Government 47% 11% 7% -% 65%
Self Pay 8% 2% 2% -% 12%
Insurance 7% 3% 1% -% 11%
Total 73% 17% 10% -% 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 despite increasing sales over that time frame. Days sales outstanding
declined to 54 days at December 31, 2004 from 64 days at December 31, 2003 and
74 days at December 31, 2002.
SEC Comment #4.:
Note 6. Income Taxes
4. Refer to your response to our comment 4. We note that you subsequently
decided not to discontinue the Visiting Nurse segment. Please tell us why the
decision not to discontinue the segment would not have been reflected in the
deferred tax liability.
In a phone conversation with Sasha Parikh, subsequent to the staff's letter
dated October 7, 2005, Ms. Parikh further clarified the question as asking why
the one-time reduction in the estimated tax liabilities of $854,000 was not
recorded at the same time the decision was made not to discontinue the Visiting
Nurse segment.
Management's Response to SEC Comment #4.
As indicated in our 10K and in our previous response on this matter, the income
tax credit resulted from the combination of the sale our product operations and
one-time losses recorded related to a formal plan of disposition of the VN
segment. The product operations were sold and the initial VN plan of disposition
was adopted in our 2000 fiscal year during which the initial loss and related
income tax effects were recorded.
In our December 2001 fiscal year when the decision to retain the VN segment was
made, we reversed the remaining VN segment disposal loss charge and the
estimated related amount of income tax benefit was also reversed at that time.
Accordingly, the decision not to discontinue the segment was reflected in the
income tax accounting in the fiscal year in which that decision was made.
As also indicated in our previous response, given the complexities involved and
the exposure to challenge upon tax return audit, the Company determined that a
separate amount of tax reserves were necessary until the expiration of the
statute of limitations. It was the expiration of the statute of limitations,
rather than anything related to the decision to retain the VN segment that
triggered the one-time income tax credit of $854,000 recorded in 2003.
SEC Comment #5:
We noted your response to our comment #5. Tell us why a ruling against the
Company would not constitute a probable loss that should be recorded as a loss.
Management Response to SEC Comment #5:
Management of the Company continues to believe, based on the considerations
described in our letter dated September 8, 2005, that the Company correctly
treated the loss contingency of the Franklin litigation in accordance with
generally accepted accounting principles. We have asked Bruce Coolidge of Wilmer
Cutler Pickering Hale and Dorr LLP to supplement our response to the Staff's
comment #5. I understand that Mr. Coolidge is sending that supplemental response
to you today.
SEC Comment #6:
We noted your response to our comment 6 and we reissue our comment. Of the
four avenues of pursuit you discussed, we noted the following;
o the first avenue was dismissed by the lower court and was subsequently
denied your appeal for review by the Kentucky Supreme Court;
o the second avenue provides no guarantee that you would receive anything
in bankruptcy proceedings and if so, only partial payment;
o the third avenue limits you to $200,000 in damages; and
o the forth avenue is based on implied assurance and not any contractual
stipulation. In addition, the State Department of Transportation funds
could be depleted again in the future by the time a ruling is given.
Based on the above, please tell why a greater portion if not the entire
balance was not provided for as a bad debt expense.
Management Response to SEC Comment #6:
In general, the answer to the question posed by the Staff is that two of the
four issues that lead the Staff to question the carrying value of the receivable
concern events that occurred after the balance sheet date of December 31, 2004.
As the Staff is well aware, facts that become known after the balance sheet date
do not by themselves raise an issue as to the accuracy of the carrying value of
an asset at the balance sheet date.
As of the date of the Company's December 31, 2004 balance sheet, the Company had
a total outstanding receivable related to CTG of approximately $535,000, against
which it had established and reported a reserve of $106,000, primarily for the
legal costs of collecting the receivable. I address separately each of the four
factors listed by the Staff in its question. In thus treating the factors
separately, I should nevertheless emphasize that management considered all
factors together, as of December 31, 2004, in making its determination
concerning the unrecoverable portion of the receivable. As of the date of the
issuance of the December 31, 2004 balance sheet, the Company's appeal to the
Kentucky Supreme Court for discretionary review of the lower court's ruling was
still pending. If successful, this avenue of pursuit for the collection of the
account receivable would have resulted in the Company's recovery of the full
amount of the account receivable. As described in the Company's letter to you
dated September 8, 2005, management believed that it had a substantial prospect
of prevailing on appeal. After December 31, 2004, in the third quarter of 2005,
the Company's appeal was dismissed and management believes that it can no longer
appropriately consider the prospect of reversal on appeal as a factor in
determining the carrying value of the receivable. We note, however, that a
principal ground of dismissal of the Company's action was that the same claims
are being pursued by the Broker directly against the State, and that any
recovery by the Broker would likely result in a substantial payment to the
Company as a creditor of the Broker.
With respect to the second avenue, we have no reason to believe that the Broker
will not be successful with its claim against the State in U.S. Bankruptcy
Court. As the Company and the other affected providers represent the substantial
majority of creditor's claims against the estate, if the Broker is successful in
U.S. Bankruptcy Court, the Company believes that it will recover substantially
the net recorded balance of the account receivable.
As to the third avenue of pursuit, if this avenue is the only successful avenue
for the Company, we believe that our recovery would be limited to $200,000 and
have previously disclosed that fact. We agree with the Staff that in the absence
of other avenues of relief, the prospect of relief through the claims process
would not have justified the carrying value of more than $400,000 (net of the
related reserve).
With respect to the fourth avenue, given the facts and circumstances and the
prior political precedent, we believed at the time of the preparation of the
December 31, 2004 balance sheet that a recovery of the account receivable
through political means was possible. As of the balance sheet date, the Company
considered this factor, in combination with the other three factors, to support
the carrying value of the receivable. In management's view, the absence of a
contractual relationship between the State of Kentucky and the Company did not
compel the conclusion that the state was unlikely to pay the receivable,
particularly in light of past precedent.
Since the balance sheet date of December 31, 2004, the Company sold the line of
business to which the receivable related. As a result, the Company now lacks the
ability to provide transportation services necessary to the state in the future,
and management therefore has concluded that the Company no longer has persuasive
equitable arguments for state repayment of the debt. Given the circumstances as
they presently exist, as noted in our response dated September 8, 2005, the
Company anticipates that it will, in its financial statements for the quarter
ended September 30, 2005, record as a change in estimate a provision for all or
a portion of the remaining net receivable.
At the conclusion of my telephone conversation with Ms. Parikh on October 17,
2005, Ms. Parikh raised a question concerning the materiality of the CTG
receivable to the Company's reported results of operations in 2004. In the
Company's view, the impact of a different treatment of the CTG receivable as of
December 31, 2004, would not have been material to investors. First, the Company
fully disclosed all risks of non-collection of the receivable at Note 9 to the
financial statements for the year ended December 31, 2004 (as well as in
numerous quarterly reports on Form 10Q). Second, for the reasons discussed
above, even if the Staff concluded that as of today the receivable should be
written off entirely, the facts available to management as of December 31, 2004,
would not have warranted the assignment of a zero dollar carrying value to the
receivable, but only some smaller amount than the current carrying value. Third,
the after-tax effect of even a full write-down is about $250,000 on an after-tax
basis, compared with total 2004 after-tax profits of $1.5 million. Finally, the
operating line of business that generated the receivable has been sold and will
be reclassified to discontinued operations in all future reports; it thus cannot
have any impact on income from continuing operations and is in no way material
to the Company's results of operations, financial condition, or liquidity. We
note incidentally that the Company's senior credit facility excludes
consideration of the CTG receivable from all covenant and borrowing capacity
calculations.
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.
If you have any questions, please do not hesitate to contact me at 502-891-1000.
Sincerely,
/s/ C. Steven Guenthner
------------------------
C. Steven Guenthner
Sr. Vice President &
Chief Financial Officer
Attachment
WILMER CUTLER PICKERING
HALE and DOOR LLP
Bruce E. Coolidge
2445 M Street NW
Washington, DC 20037
202-663-6376
202-663-6363/fax
bruce.coolidge@wilmerhale.com
October 28, 2005
Via First Class Mail and Facsimile to (202) 772-9217
Mr. Jim B. Rosenberg, Senior Assistant Chief Accountant
Division of Corporation Finance - CF/AD1
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, DC 20549-6010
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:
I am writing to you at the request of Steve Guenthner, the chief
financial officer of my firm's client Almost Family, Inc. in connection with the
company's response to your letter to Mr. Guenthner dated October 7, 2005. As you
undoubtedly assume, I am not an accountant. Neither I nor my law firm has been
previously involved in the Franklin litigation that is the subject of this
letter. My knowledge of the facts and legal issues in that matter is based
exclusively on a review of correspondence between the Staff and my client
concerning the litigation, the disclosures concerning the litigation made in the
company's annual report on Form 10-K for the year ended December 31, 2004, and
recent discussions with management of the company and the company's litigation
counsel, Frost Brown Todd LLC. This letter has been reviewed by Mr. Guenthner,
who has confirmed to me the accuracy of all statements in the letter concerning
the beliefs and positions of management of Almost Family. I understand that Mr.
Guenthner is today sending to you by facsimile a letter responding to those
aspects of your October 7, 2005, letter that are not addressed below.
As discussed in detail in the company's response dated September 8,
2005, and in a subsequent telephone call between Mr. Guenthner and Sasha Parikh
(in which I participated), management believes that company's financial
statements appropriately treated the loss contingency at issue in the Franklin
litigation. As I believe Ms. Parikh agreed in that call, there is no disclosure
issue concerning that loss contingency because the company's financial
statements included extensive footnote disclosure concerning the litigation, the
loss at the trial court level, the amount of the trial court judgment, the cash
amount posted by the company in an escrow account with the court as security in
lieu of an appeal bond, and the company's conclusion that it should not record a
provision in 2004 because it did not believe the loss to be probable as of the
balance sheet date.
It would not be useful to repeat the extensive discussion in the
company's response dated September 8, which attempted to set forth in detail the
factual circumstances underlying the Franklin litigation and the authoritative
accounting guidance that management believed to govern the issue whether or not
an accrual in the amount of the trial court judgment was necessary or
appropriate under SFAS 5. The point that seems to warrant emphasis is that we
cannot see, either under the applicable accounting literature, or otherwise, a
basis for the Staff's implicit conclusion that generally accepted accounting
rules require accrual of a loss in the amount of a trial court judgment in every
case. With all due respect for the Staff's informal guidance on this point, as
articulated by Ms. Parikh in our telephone conversation, a rule that requires
accrual in every case where there is a trial court judgment seems simply wrong.
We readily concede the point that most trial court judgments are either
affirmed or at least affirmed in part on appeal. But to base a universally
applicable accounting rule on that observation seems inconsistent with the
authoritative accounting guidance cited in the company's September 8 letter,
including the requirement that management consider all of the facts and
circumstances surrounding a particular lawsuit. In this case, the company based
its appeal primarily on the contention that the trial court applied an erroneous
standard of law. Courts of appeal typically grant very substantial deference to
factual findings of trial courts, and due to that deference reversals on appeal
based on erroneous factual findings by the trial court are relatively
infrequent. Appellate courts similarly give deference to trial courts (under an
abuse of discretion standard) where the trial court has ruled on an issue that
is legally confided to the discretion of the trial judge. But such deference to
the trial court is not applicable where the appellant raises an issue of law, as
to which courts of appeal typically apply a standard of review "de novo" -- in
other words, without granting any deference to the legal conclusion of the trial
court. Unless the Staff takes the view that the legal conclusion of the trial
court in this particular case is probably correct, there simply is no good basis
for the Staff's implicit conclusion that the judgment of the trial court will
probably be affirmed on appeal, and thus no apparent basis for an accrual under
generally accepted accounting principles as management understands them.
Whatever the Staff's general experience and views on the likelihood of
reversal on appeal, we respectfully submit that it is inappropriate, and
inconsistent with SFAS 5, to adopt a one-size-fits-all rule for loss
contingencies in circumstances like those present here. In this instance, the
company relies on, and has submitted to the Staff, an opinion of counsel who is
an experienced appellate lawyer and a partner in a preeminent law firm, has
represented the company throughout the litigation, and is the person most
familiar with both the facts and law at issue in the case. As explained in
detail in that letter, the issue on appeal is whether the Tennessee trial court
erred when it adopted as the law of Tennessee a rule concerning the meaning of a
"best efforts" contract that is inconsistent with the rule applied in a majority
of other jurisdictions. Given the lack of any precedent in Tennessee on that
legal question, the absence of any obligation of the appeals court to defer to
the view of the trial court, and the fact that the trial court adopted a
minority rule, we frankly cannot understand how the Staff can make the judgment,
in effect, that the company will probably lose on appeal. The opinion of the
company's litigation counsel, moreover, addresses the precise question that
management believed it was obligated to consider under applicable accounting
standards. The Frost Brown Todd letter states:
In our opinion, it is not "probable" that the Company will lose this
appeal and it is therefore not "probable" that the Company will
ultimately incur a loss from the contingency of this pending
litigation.
Unless it was "probable" as of December 31, 2004, that the company
would ultimately incur a loss -- contrary to the conclusion of the letter just
quoted -- the company should not have accrued a loss in the amount of the
judgment at the trial court level. The Staff has not raised any question whether
counsel to the company, in rendering this opinion, has acted professionally and
independently -- nor does management, or its litigation counsel, believe that
the Staff reasonably could raise such a question. Because we assume the Staff
has no independent knowledge of either the factual or legal issues involved in
the Franklin case, and because we cannot imagine that the Staff wishes to
substitute its judgment for that of management and the company's counsel,
management continues to believe that the company's financial statements as of
December 31, 2004, accurately treated the loss contingency threatened by the
Franklin litigation. In reaching its judgment, management recognized that it may
not rely exclusively on the advice of counsel in reporting the company's results
of operations, and the extended discussion in the September 8 letter makes it
apparent that management did not do so.
I look forward to discussing these issues with the Staff at its
earliest convenience. Please do not hesitate to contact me if you have any
questions.
Sincerely,
/s/ Bruce E. Coolidge
---------------------
Bruce E. Coolidge