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, 2005
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 by check mark whether the registrant is a shell company (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 ____________, 2005 2,326,690
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION........................................................................................3
Item 1. Financial Statements....................................................................................3
Condensed Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004..........................3
Condensed Consolidated Statements of Income for the Three Months Ending September 30, 2005 and
September 30, 2004 ........................................................................................4
Condensed Consolidated Statements of Income for the Nine Months Ending September 30, 2005 and
September 30, 2004 ........................................................................................5
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2005 and
September 30, 2004 .......................................................................................6
Notes to Condensed Consolidated Financial Statements..........................................................7
Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations.................17
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................30
Item 4. Controls and Procedures................................................................................31
PART II. OTHER INFORMATION..........................................................................................32
Item 1. Legal Proceedings.....................................................................................32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................................32
Item 3. Defaults Upon Senior Securities........................................................................32
Item 4. Submission of Matters to a Vote of Security Holders....................................................32
Item 5. Other Information......................................................................................33
Item 6. Exhibits...............................................................................................34
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2005 2004
------------------- -------------------
(UNAUDITED) (AS RESTATED)
CURRENT ASSETS:
Cash and cash equivalents $ 9,622,680 $ 411,751
Accounts receivable - net 8,861,508 9,815,444
Prepaid expenses and other current assets 722,902 498,844
Deferred tax assets 1,452,690 1,352,000
Net assets of discontinued operations - 2,537,211
------------------- -------------------
TOTAL CURRENT ASSETS $ 20,659,780 14,615,250
------------------- -------------------
CASH HELD IN ESCROW (Note 8) 2,154,241 1,154,241
PROPERTY AND EQUIPMENT - NET 1,291,411 1,561,656
GOODWILL 9,096,505 6,125,501
OTHER ASSETS 122,793 104,786
------------------- -------------------
$ 33,324,730 $ 23,561,434
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,020,500 $ 2,130,935
Accrued other liabilities 3,720,606 3,469,015
Current portion - capital leases and term debt - 300,000
Net Liabilities of discontinued operations 6,137,854 -
------------------ --------------------
TOTAL CURRENT LIABILITIES 11,878,960 5,899,950
------------------ --------------------
LONG-TERM LIABILITIES:
Revolving Credit Facility - 3,769,575
Capital leases 321,443 -
Seller Notes 700,000 -
Deferred tax liabilities 191,357 225,690
Other liabilities 1,589,872 1,519,509
------------------ --------------------
TOTAL LONG-TERM LIABILITIES 2,802,672 5,514,774
------------------ --------------------
TOTAL LIABILITIES 14,681,632 11,414,724
------------------ --------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,430,394 and 3,414,874 issued 343,039 341,490
Treasury stock, at cost, 1,096,783 and 1,096,783 shares (7,772,048) (7,772,048)
Additional paid-in capital 26,658,040 26,548,633
Accumulated income (585,933) (6,971,365)
------------------ --------------------
TOTAL STOCKHOLDERS' EQUITY 18,643,098 12,146,710
------------------ --------------------
$ 33,324,730 $ 23,561,434
================== ====================
See accompanying Notes to Condensed Consolidated Financial Statements
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
------------------ --- ------------------
September 30, September 30,
2005 2004
------------------ ------------------
Net revenues $ 18,508,372 $ 16,035,275
Cost of services 15,536,232 13,245,518
General and administrative expenses 1,769,653 1,580,680
Depreciation and amortization expense 336,531 351,050
Provision for uncollectible accounts 148,453 353,033
-------------------- -------------------
Income from continuing operations before other
income (expense) and income taxes 717,503 504,994
Other income (expense)
Interest expense 70,179 67,475
-------------------- -------------------
Income from continuing operations before income taxes 647,324 437,519
Provision for income taxes 249,867 178,982
-------------------- -------------------
Income from continuing operations 397,457 258,537
Discontinued Operations, Net of Tax (22,082) 146,091
Gain on Sale, Net of Tax 5,003,485 -
-------------------- -------------------
Net income $ 5,378,860 $ 404,628
==================== ===================
Per share amounts-Basic:
Average shares outstanding 2,332,027 2,303,918
Income from continuing operations 0.17 0.11
Income from discontinued operations (0.01) 0.06
Income from gain on sale 2.15 -
-------------------- -------------------
Net income $ 2.31 $ 0.17
==================== ===================
Per share amounts-Diluted:
Average shares outstanding 2,639,214 2,555,930
Income from continuing operations 0.15 0.10
Income from discontinued operations (0.01) 0.06
Income from gain on sale 1.90 -
-------------------- -------------------
Net income 2.04 $ 0.16
==================== ===================
See accompanying Notes to Condensed Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended
------------------ --- ------------------
September 30, September 30,
2005 2004
------------------ ------------------
Net revenues $ 56,243,566 $ 48,875,251
Cost of services 46,249,937 39,688,612
General and administrative expenses 5,525,407 4,777,501
Depreciation and amortization expense 981,570 1,029,005
Provision for uncollectible accounts 685,615 1,029,211
-------------------- -------------------
Income from continuing operations before other
income (expense) and income taxes 2,801,037 2,350,922
Other income (expense)
Interest expense 182,041 244,115
-------------------- -------------------
Income from continuing operations before income taxes 2,618,996 2,106,807
Provision for income taxes 1,015,230 849,354
-------------------- -------------------
Income from continuing operations 1,603,766 1,257,453
Discontinued Operations, Net of Tax (221,819) (156,674)
Gain on Sale, Net of Tax 5,003,485 -
-------------------- -------------------
Net income $ 6,385,432 $ 1,100,779
==================== ===================
Per share amounts-Basic:
Average shares outstanding 2,326,690 2,299,830
Income from continuing operations 0.69 0.55
Income from discontinued operations (0.10) (0.07)
Income from gain on sale 2.15 -
-------------------- -------------------
Net income $ 2.74 $ 0.48
==================== ===================
Per share amounts-Diluted:
Average shares outstanding 2,629,386 2,553,450
Income from continuing operations 0.61 0.49
Income from discontinued operations (0.08) (0.06)
Income from gain on sale 1.90 -
-------------------- -------------------
Net income $ 2.43 $ 0.43
==================== ===================
See accompanying Notes to Condensed Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended
-----------------------------------------
September 30, September 30,
2005 2004
------------------- --------------------
Cash flows from operating activities:
Net income $ 6,385,432 $ 1,100,779
Less income (loss) from discontinued operations 4,781,666 (156,674)
------------------- --------------------
Income from continuing operations 1,603,766 1,257,453
Adjustments to reconcile income from continuing operations to
net cash provided by (used in) operating activities:
Depreciation and amortization 981,570 1,029,005
Provision for uncollectible accounts 685,615 1,029,212
Deferred income taxes (135,023) (1,475)
------------------- --------------------
$ 3,135,928 $ 3,314,194
Change in certain net assets, net of the effects of acquisitions:
(Increase) decrease in:
Accounts receivable 268,320 460,845
Prepaid expenses and other current assets (266,323) 96,558
Other assets (18,007) (4,791)
Increase (decrease) in:
Accounts payable and accrued expenses 204,955 77,319
Other liabilities 70,364 30,941
------------------- --------------------
Net cash provided by operating activities $ 3,395,237 3,975,066
------------------- --------------------
Cash flows from investing activities:
Capital expenditures (347,616) (95,262)
Acquisitions, net of cash acquired (2,271,004) -
------------------- --------------------
Net cash used in investing activities $ (2,618,620) $ (95,262)
------------------- --------------------
Cash flows from financing activities:
Net revolving credit facility borrowings (repayments) (3,769,575) (4,776,772)
Proceeds from stock option exercises 47,156 47,500
Principal payments on capital leases and notes payable (300,000) (185,734)
------------------- --------------------
Net cash provided by (used in) financing activities $ (4,022,419) (4,915,006)
------------------- --------------------
Net cash provided by (used in) continuing operations $ (3,245,802) $ (1,035,202)
------------------- --------------------
Cash Flows from Discontinued Operations
Operating activities (323,134) 635,444
Investing activities 12,963,247 (125,627)
Financing activities (183,382) -
------------------- --------------------
Net cash provided by (used in) discontinued operations 12,456,731 511,677
------------------- --------------------
Net decrease in cash and cash equivalents 9,210,929 (523,525)
Cash and cash equivalents at beginning of period 411,751 883,548
------------------- --------------------
Cash and cash equivalents at end of period $ 9,622,680 $ 360,023
=================== ====================
See accompanying Notes to Condensed Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying condensed consolidated financial statements for the three and
nine months ended September 30, 2005 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, 2004 for further information. In the opinion of management of the
Company, the accompanying unaudited condensed consolidated financial statements
reflect all adjustments (consisting of normal recurring adjustments) necessary
to present fairly the financial position at September 30, 2005 and the results
of operations and cash flows for the nine months ended September 30, 2005 and
2004.
The results of operations for the three and nine months ended September 30,
2005 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 2004 consolidated
financial statements and related notes in order to conform to the 2005
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, and 3) other reasons unrelated
to credit risk, all of which may result in adjustments to recorded revenue
amounts. Management continuously evaluates the potential for revenue adjust-
ments 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
3. Segment Data
The Company has two reportable segments, Visiting Nurse (VN) and Personal Care
(PC). 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."
Visiting Nurse
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 93% of the VN
segment revenues are generated from the Medicare program while the balance is
generated from Medicaid and private insurance programs.
The Medicare program represents a substantial portion of Federal spending and
is subject to frequent changes. It is possible that actions taken by the
Federal government regarding Medicare reimbursement for home health services
could have a significant unfavorable impact on the Company's results of
operations, financial condition and liquidity.
Personal Care
The Company's PC segment services are also provided in patients' homes. These
services (generally provided by paraprofessional staff such as home health
aides) are generally of a custodial rather than skilled nature. PC revenues are
generated on an hourly basis. Approximately 67% 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 Medicaid programs in each of the states in which the Company operates
are taking actions or evaluating taking actions to control the rate of growth
of Medicaid expenditures. It is possible 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.
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has service locations in
Florida, Kentucky, Ohio, Connecticut, Massachusetts, Indiana and Alabama (in
order of revenue significance).
Three months ended September 30, Nine months ended September 30,
------------------- -- ----------------- ---------------- -- -----------------
2005 2004 2005 2004
------------------- ----------------- ---------------- -----------------
Net Revenues
Visiting nurses $ 9,663,903 $ 7,555,941 $ 29,637,290 $ 24,005,398
Personal care 8,844,469 8,479,334 26,606,276 24,869,853
------------------- ----------------- ---------------- ----------------
$ 18,508,372 16,035,275 $ 56,243,566 48,875,251
=================== ================= ================ =================
Operating Income
Visiting nurses $ 1,025,829 $ 1,022,014 $ 4,344,796 $ 4,168,904
Personal care 956,935 720,146 2,691,656 1,968,745
------------------- ----------------- ---------------- -----------------
1,982,764 1,742,160 7,036,452 6,137,649
Unallocated corporate expenses 1,265,261 1,237,166 4,235,415 3,786,727
------------------- ----------------- ---------------- -----------------
Operating income $ 717,503 $ 504,994 $ 2,801,037 $ 2,350,922
=================== ================= ================ =================
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 $57,000 and $50,000 were
capitalized in the three months ended September 30, 2005 and 2004, respectively
and $129,000 and $138,000 were capitalized in the nine months ended September
30, 2005 and 2004, 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
5. Revolving Credit Facility
The Company has a $22.5 million credit facility with JP Morgan Chase Bank, NA
(successor by merger to Bank One, NA), as amended August 11, 2005, with an
expiration date of September 30, 2008. 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
5.72% and 3.97% for the quarters ended September 30, 2005 and 2004,
respectively. The weighted average interest rates were 5.27% and 3.89% for the
nine months ended September 30, 2005 and 2004, respectively. The interest rate
in effect at September 30, 2005 was 6.00%. 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, 2005,
the formula permitted approximately $20.5 million to be used. The Company has an
irrevocable letter of credit, totaling $4.8 million outstanding in connection
with the Company's self-insurance programs. Thus, a total of $15.7 million was
available for use at September 30, 2005. The Company's revolving credit facility
is subject to various financial covenants. As of September 30, 2005, 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 $10.5 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 September 30, Nine months ended September 30,
----------------------------------------- -----------------------------------------
2005 2004 2005 2004
------------------ ------------------- ------------------ -------------------
Net income as reported $ 5,378,860 $ 404,628 $ 6,385,432 $ 1,100,779
Pro forma stock-based comp-
ensation expense, net of tax 1,188 444 4,753 1,331
------------------ ------------------- ------------------ -------------------
Pro forma net income $ 5,377,672 $ 404,184 $ 6,380,679 $ 1,099,448
================== =================== ================== ===================
Earnings per common share:
Basic - as reported $ 2.31 $ 0.17 $ 2.74 $ 0.48
Basic - pro forma $ 2.31 $ 0.17 $ 2.74 $ 0.48
Diluted - as reported $ 2.04 $ 0.16 $ 2.43 $ 0.43
Diluted - proforma $ 2.04 $ 0.16 $ 2.43 $ 0.43
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 September 30, Nine months ended September 30,
------------------- -- ------------------ ------------------- - -------------------
2005 2004 2005 2004
------------------- ------------------ ------------------- -------------------
Shares used to compute basic
earnings per common share -
weighted average shares
outstanding 2,332,027 2,303,918 2,326,690 2,299,830
Dilutive effect of stock options 307,187 252,012 302,696 253,620
------------------- ------------------ ------------------- -------------------
Shares used to compute diluted
earnings per common share 2,639,214 2,555,930 2,629,386 2,553,450
=================== ================== =================== ===================
8. Commitments and Contingencies
Amendment of Previous Financial Reports Related to Contingent Liability Matters
The Company's previous Form 10-K filings for the years ended December 31, 2004
and 2003 disclosed the following three items, all of which, from an accounting
perspective, are characterized as contingent liabilities in accordance with
Statement of Financial Accounting Standards No. 5 "Accounting for Contingent
Liabilities" (SFAS No. 5):
o in April 2003 the Chancery Court of Williamson County, Tennessee,
issued a ruling in favor of Franklin Associates L.P. ("Franklin"),
awarding damages against the Company in the amount of $984,970;
o a Kentucky transportation broker which owes the Company approximately
$535,000 for services provided by the Company's adult day care segment
(sold in September 2005) entered into bankruptcy proceedings in the
fourth quarter of 2002; and
o the expiration of applicable statutes of limitations on tax returns
related to the Company's 2000 fiscal year, in which it sold its product
operations and adopted discontinued operations accounting treatment for
its visiting nurse segment (later reversed), resulted in the recording
in discontinued operations in the Company's 2003 financial statements
of a one-time reduction in estimated tax liabilities of approximately
$854,000.
The Company received a letter from the U.S. Securities and Exchange Commission
following the SEC staff's routine review of the Company's form 10-K/A for the
year ended December 31, 2004, which letter commented on, among other items, the
accounting treatment of these contingent liability matters. In addition, at the
same time, management entered into discussions with Ernst & Young LLP, the
Company's independent auditors for the financial statements for each of the
three years ended December 31, 2004, relating to the accounting treatment for
these litigation matters. Management believed there was a reasonable basis for
its original accounting (which was agreed to by Ernst & Young). Following
detailed discussions with the auditors and the SEC staff, and with the
concurrence of the auditors, the Company has amended the financial statements
for the following non-cash items in order to account for these items as set
forth below. Note that the lawsuit in question is still being aggressively
appealed and the receivable in question is still being pursued for collection:
o With respect to the Franklin litigation, provision of approximately
$1,154,000 (for which there is no related income tax benefit) has been
made as of April 2003 ($984,000 for award of damages) and as of
September 2003 ($170,000 for estimated post-judgment interest). As
previously disclosed, the Company did not record a loss in the period
in which it suffered the trial court loss on the grounds, among others,
that the Company's litigation counsel advised the Company that its
prospects on appeal were strong. The Company's accounting for this case
now follows the principle that any loss at a trial court level creates
a de-facto satisfaction of the "probable of loss" criteria of SFAS No.
5.
o With respect to the Kentucky transportation receivable, provision of
approximately $535,000 has been made as of November 2002 of an
additional allowance for uncollectible accounts for the Kentucky
transportation receivable, and the provision of approximately $106,000
previously recorded in 2004 has been reversed. Thus the net income
effect of this matter is $266,000 after related income tax benefit.
As previously disclosed, the Company did not record a loss in the
period in which the broker filed for bankruptcy on the basis of
management's view that, considering all facts and circumstances of the
receivable, including other avenues for recovery, it was not "probable"
that the Company had incurred a loss. The Company's accounting for this
matter now follows the principle that bankruptcy of a contractual
obligor creates a de-facto satisfaction of the "probable of loss"
criteria of SFAS No. 5 without regard to other avenues of collection
of the receivable.
o The one-time reduction in estimated tax liabilities has been
removed from fiscal 2003 and treated as a reduction in
estimated tax liabilities that should have been recorded instead in
fiscal 2000. In effect the Company has determined that it should have
reversed an excessive reserve for tax liabilities in 2000, rather
than in 2003. The excessive reserve for tax liabilities arose
principally from differences in the estimated income tax provision
recorded in fiscal 2000 and prior and the actual tax liabilities
resulting from the ultimate filing and settlement of the tax returns
for those periods. The restatement has the effect of increasing
beginning retained earnings at January 1, 2002 in the amended
December 31, 2004 Form 10-K/A. In making this restatement, the
Company concluded that its general concern about the adequacy of its
reserve for tax liabilities in 2000 (resulting from complex tax
issues arising from the dispositions in 2000) was inadequately
specific and measurable to justify the maintenance of the reserve.
All related disclosures have been revised to give effect to the new accounting
treatment for these matters. These changes have no effect on previously reported
cash flows. In the event the Company is able to collect a portion of the
Kentucky receivable it would record a gain in the period in which payment is
received. In the event the Company prevails on appeal in the Franklin litigation
(and no further appeal is available), the Company would record a gain in the
period in which the Company prevails. For a more detailed discussion of these
contingencies, refer to the Form 10-K/A filed today.
The following table summarizes changes in reported net income and earnings per
share for each of the three years in the period ended December 31, 2004 as a
result of these changes:
(In thousands except for per share amounts)
2004 2003 2002
----------------- --------------- ------------------
Summary of changes:
Franklin litigation $ - $ (1,154) $ -
Kentucky transportation litigation 106 (1) (534)
Related income tax effect (40) - 203
Reduction in income tax liabilities - (854) -
----------------- --------------- ------------------
Total $ 66 $ (2,009) $ (331)
Net income as previously reported 1,191 2,120 1,345
----------------- --------------- ------------------
Net income as restated $ 1,257 $ 111 $ 1,014
================= =============== ==================
Change in Earnings Per Share:
Basic $ 0.03 $ (0.88) $ (0.14)
Diluted $ 0.03 $ (0.79) $ (0.12)
Retained earnings as previously reported $ 13,567 $ 12,264 $ 10,104
Cumulative effect of restatement (1,420) (1,486) 523
----------------- --------------- ------------------
Retained earnings as restated $ 12,147 $ 10,778 $ 10,627
================= =============== ==================
Change in previously reported cash flows $ - $ - $ -
The Company's loan agreement provides that the provision of a loss for the above
litigation cases will be excluded from financial results for purposes of
calculating borrowing availability or financial covenant compliance.
Insurance Programs
The Company bears significant insurance risk under our 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, 2005 that may result in the assertion of additional claims. The
Company carries insurance coverage for this exposure; however, its deductible
per claim increased from $25,000 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 monthly 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.
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. On March 31, 2005, the
Company completed its renewal for the contract year ending March 31, 2006 with
total estimated premiums of $2.8 million with no changes in coverage or
deductibles. In late July 2005, as a part of its activities to divest of the ADC
operating segment, the Company modified its insurance programs to provide
separate policies for the ADC and home health operations. In conjunction with
those modifications, the Company's deductible per claim for malpractice and
general patient liability claims increased from $250,000 to $500,000.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED 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 (AS RESTATED)
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. 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 (which
consists of $984,970 in damages and $169,271 of estimated post-judgment
interest) in an escrow account with the Tennessee Courts in lieu of a
supersedeas appeal bond until the appeal court issues a decision.
As described in "Amendment of Previous Financial Reports Related to Contingent
Liability Matters" above, the Company has recorded a litigation loss provision
of $1,154,241 in the year ended December 31, 2003. The cash will remain in
escrow until the matter reaches its ultimate resolution.
Despite the recording of a litigation loss provision, 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. The
appeals court heard oral arguments in the case in February 2005 but has given no
indication of when it will issue a ruling. Both the amount of the judgment and
the estimated post-judgment interest are subject to change depending upon the
outcome of the appeal process. In the event the Company prevails on appeal in
the Franklin litigation (and no further appeal is available), the Company would
record a gain in the period in which the Company prevails.
Kentucky Transportation Litigation (AS RESTATED)
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.
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 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 December 31, 2004 and December 31, 2003, the Broker owed us approximately
$535,000, which amount is included in accounts receivable on the accompanying
balance sheets.
As described in "Amendment of Previous Financial Reports Related to
Contingent Liability Matters" above, the Company has recorded a provision for
uncollectible accounts of $535,000 in the year ended December 31, 2002. In the
event the Company is able to collect a portion of the Kentucky receivable it
would gain in the period in which payment is received. This matter relates to
the Company's adult day care segment which was sold on September 30, 2005 and
is now reported as discontinued operations in the accompanying financial
statements.
The Company's loan agreement executed with its lender in March 2004 provides
that the provision for 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.
9. Acquisitions
Consistent with its stated business plan, on April 1, 2005 the Company acquired
all the assets and business operations of a Medicare-certified visiting nurse
agency located in Bradenton, Florida. The total purchase price of $3.2 million
was paid $2.5 million in cash at closing with the $700,000 balance in the form
of a note payable bearing interest at 6% due in its entirety two years after
closing. The Company funded the cash portion of the purchase price with
available borrowings on its revolving credit facility. The acquired operations
generated net revenues of approximately $3.5 million in the year ended December
31, 2004
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition. The Company has not yet
finalized the valuation of intangible assets, thus, the allocation of the
purchase price is subject to refinement.
At April 1, 2005 (rounded to nearest thousands):
Accounts receivable $ 500
Property, plant & equipment 105
Goodwill 2,808
-------
Assets acquired 3,414
Liabilities assumed (61)
-------
Net assets acquired 3,353
=======
The unaudited pro-forma results of operations of the Company as if this
acquisition had been made at the beginning of 2004 are as follows:
Nine Months ended September 30
-------------------------------------------
2005 2004
-------------------- ----------------------
Revenues $ 57,247,532 $ 51,752,865
Income from Continuing
Operations 1,716,135 1,534,307
Earnings Per share
Basic $ 0.74 $ 0.67
Diluted $ 0.65 $ 0.60
10. Sale of ADC Segment
On August 3, 2005, the Company entered into a definitive agreement to divest its
adult day care (ADC) segment. ADC operations are now reported as discontinued
operations.
The purchase price consisted of $13.6 million cash plus assumption of
approximately $1.4 million of debt. In return, Active Services acquired
substantially all the assets and certain working capital liabilities
related to Almost Family's 19 medical adult day care centers which generate
approximately $21.0 million in annual revenues. The transaction closed on
September 30, 2005. The Company reported an after-tax gain on the sale totaling
$5 million.
Revenues of adult day care operations were $5,525,322 and $6,072,459 for the
quarters ended September 30, 2005 and 2004 respectively. Revenues of adult
day care operations were $16,499,085 and $17,508,085 for the nine-months
ended September 30, 2005 and 2004 respectively.
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/A
for the year ended December 31, 2004.
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
restated Form 10-K/A for the year ended December 31, 2004 for a detailed
discussion of our critical accounting policies.
Disposition of ADC Segment
On August 3, 2005, the Company entered into a definitive agreement to divest its
adult day care (ADC) segment. ADC operations are now reported as discontinued
operations.
The purchase price consisted of $13.6 million cash plus assumption of
approximately $1.4 million of debt. In return, Active Services acquired
substantially all the assets and assume certain working capital liabilities
related to Almost Family's 19 medical adult day care centers which generate
approximately $21.0 million in annual revenues. The transaction closed on
September 30, 2005. The Company reported an after-tax gain on the sale totaling
$5 million.
We follow the guidance in SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" and, when appropriate, reclassify operating units closed,
sold, or held for sale out of continuing operations and into discontinued
operations for all periods presented. Net (losses) gains from discontinued ADC
units were ($22,082) and $146,091 in the quarters ending September 30,
2005 and 2004 and ($221,819) and ($156,674) for the nine months ending
September 30, 2005 and 2004, respectively, and such amounts are included in net
loss from discontinued operations in the accompanying financial statements.
Operating Segments
We have two reportable segments, Visiting Nurse (VN) and Personal Care (PC).
Reportable segments have been identified based upon how management has organized
the business by services provided to customers and the criteria in SFAS 131,
"Disclosures about Segments of an Enterprise and Related Information."
The 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 93% of the VN segment revenues are
generated from the Medicare program while the balance is generated from Medicaid
and private insurance programs.
The PC segment services are also provided in patients' homes. These services
(generally provided by paraprofessional staff such as home health aides) are
generally of a custodial rather than skilled nature. PC revenues are generated
on an hourly basis. Approximately 67% 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.
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. We have service locations in Florida,
Kentucky, Ohio, Connecticut, Massachusetts, Indiana and Alabama (in order of
revenue significance).
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 our south Florida markets. Our PC segment generally does
not experience significant seasonality in its operating results.
RESULTS OF OPERATIONS
Three months ended September 30, 2005 Compared with three months ended September 30, 2004
Consolidated 2005 2004 Change
------------
----------------- --------- ------------------ ----------- ---------------- ----------
Amount % Rev Amount % Rev Amount %
----------------- --------- ------------------ ----------- ---------------- ----------
Net revenues:
Visiting Nurse VN $ 9,663,903 52.2% $ 7,555,941 47.1% $ 2,107,962 27.9%
Personal Care PC 8,844,469 47.8% 8,479,334 52.9% 365,135 4.3%
----------------- ------------------ ----------------
$ 18,508,372 100.0% 16,035,275 100.0% $ 2,473,097 15.4%
================= ================== ================
Operating income
Visiting Nurse VN $ 1,025,828 10.6% $ 1,022,014 13.5% $ 3,814 0.4%
Personal Care PC 956,936 10.8% 720,146 8.5% 236,790 32.8%
----------------- ------------------ ----------------
1,982,764 10.7% 1,742,160 10.9% 240,604 13.8%
Unallocated corporate expenses 1,265,261 6.8% 1,237,166 7.7% 28,095 2.2%
----------------- ------------------ ----------------
Income before interest expense
and income taxes 717,503 3.9% 504,994 3.1% 212,509 42.1%
Interest expense 70,179 0.4% 67,475 0.4% 2,704 4.0%
Income taxes 249,867 1.4% 178,982 1.1% 70,885 39.6%
----------------- ------------------ ----------------
Net income $ 397,457 2.1% $ 258,537 1.6% $ 138,920 53.7%
================= ================== ================
Our net revenues increased approximately $2.5 million or 15.4% with 27.9% growth
in VN and 4.3% growth in PC. VN revenue growth was driven by admissions growth
and the acquisition of Bradenton, FL-based "Florida Home Health". VN operating
income included operating losses of about $90,000 from new start-up agencies,
which generated approximately $831,000 in revenues in 2005. PC operating income
increased approximately $237,000 due to increased volumes and lower
administrative expenses.
The effective income tax rate was approximately 38.6% and 40.9% of income before
income taxes in 2005 and 2004, respectively.
Visiting Nurse (VN) Segment-Three Months
Three months ended September 30,
-------------------------- ---------------------------- ------------------------
2005 2004 Change
-------------------------- ---------------------------- ------------------------
Amount % Rev Amount % Rev Amount %
--------------- ---------- ----------------- ---------- -------------- ---------
Net revenues $ 9,663,903 100.0% $ 7,555,941 100.0% $ 2,107,962 27.9%
Cost of services 7,987,100 82.6% 5,924,832 78.4% 2,062,268 34.8%
General & administrative 419,615 4.3% 293,523 3.9% 126,092 43.0%
Depreciation & amortization 211,098 2.2% 204,490 2.7% 6,608 3.2%
Uncollectible accounts 20,261 0.2% 111,082 1.5% (90,821) -81.8%
--------------- ----------------- --------------
Operating income $ 1,025,829 10.6% $ 1,022,014 13.5% 3,815 0.4%
=============== ================= ==============
Admissions 3,504 2,746 758 27.6%
Patient months of care 8,009 6,412 1,597 24.9%
Revenue per patient month $ 1,207 $ 1,178 $ 29 2.5%
Cost of services per patient month $ 997 $ 924 $ 73 7.9%
Billable visits 70,173 59,678 10,495 17.6%
VN revenues grew 28% between years. New VN startup operations opened or acquired
in late 2004 and early 2005 generated approximately $831,000 in revenue and
operating losses of $90,000 in the quarter ended September 30, 2005. The
acquisition of Bradenton, FL-based "Florida Home Health" added approximately
$869,000 in revenues and about $200,000 in operating income. Admissions grew
about 28% over the prior year while patient months increased 25%, reflecting a
reduction in the average length of stay. Revenue per patient month increased
2.5% primarily due to higher Medicare rates between periods and the decreased
length of stay. Operating costs per patient month increased about 8% primarily
due to the effect of startup operations and as a result of increased
administrative expenses, increase in wage rates and employee benefits. General
and administrative expenses increased due to increased wages including the
addition of new regional directors to prepare the segment for future
acquisitions and internal growth. Excluding startups, 2005 operating
income as a percent of revenue was 12.6%. The Company is re-organizing certain
agency and corporate level activities to improve efficiencies and improve
cost controls.
The provision for uncollectible accounts decreased due to the collection of
certain aged accounts for which reserves had previously been provided.
Personal Care (PC) Segment-Three Months
Three months ended September 30,
--------------------------- --------------------------- -------------------------
2005 2004 Change
---------------- ---------- ---------------- ---------- --------------- ---------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- ---------------
Net revenues $ 8,844,469 100.0% $ 8,479,334 100.0% $ 365,135 4.3%
Cost of services 7,549,132 85.4% 7,320,686 86.3% 228,446 3.1%
General & administrative 130,313 1.5% 81,701 1.0% 48,612 59.5%
Depreciation & amortization 80,189 0.9% 114,850 1.4% (34,661) -30.2%
Uncollectible accounts 128,192 1.4% 241,951 2.9% (113,759) -47.0%
---------------- ---------------- ---------------
Operating income $ 956,643 10.8% $ 720,146 8.5% $ 236,497 32.8%
================ ================ ===============
Admissions 579 569 10 1.8%
Patient months of care 10,093 9,106 987 10.8%
Patient days of care 125,190 116,387 8,803 7.6%
Billable hours 460,799 416,595 44,204 10.6%
Revenue per billable hour $ 19.19 $ 20.35 $ (1.16) -5.7%
PC operating income for the quarter was about $957,000 versus $720,000 in the
corresponding period of last year. Revenue increased over 4.3% due to volume
increases. Cost of services as a percent of revenue improved due to the
implementation of improved cost controls and margin monitoring between periods.
General and administrative expenses in total and as a percentage of revenues
increased due to additional management staff, travel and related expenses.
Revenue per billable hour decreased 5.7% due to an increase in business from
Medicaid-Waiver related programs.
Depreciation and amortization decreased due to lower spending for fixed asset
purchases. The provision for uncollectible accounts decreased due to the
collection of certain aged accounts for which reserves had previously been
provided.
Nine months ended September 30, 2005 Compared with Nine months ended
September 30, 2004
Consolidated 2005 2004 Change
------------
---------------- ---------- ------------------ ---------- ---------------- ----------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ------------------ ---------- ---------------- ----------
Net revenues:
Visiting Nurse VN $ 29,637,290 52.7% $ 24,005,398 49.1% $ 5,631,892 23.5%
Personal Care PC 26,606,276 47.3% 24,869,853 50.9% 1,736,423 7.0%
------------------ ---------------- ----------------
56,243,566 100.0% 48,875,251 100.0% 7,368,315 15.1%
================= ================== ================
Operating income
Visiting Nurse VN $ 4,344,796 14.7% $ 4,168,904 17.4% $ 175,892 4.2%
Personal Care PC 2,691,656 16.3% 1,968,745 7.9% 722,911 36.7%
----------------- ---------------- ----------------
7,036,452 4.8% 6,137,649 12.6% 898,803 14.6%
Unallocated corporate expenses 4,235,415 12.5% 3,786,727 7.7% 448,688 11.8%
---------------- ---------------- ----------------
Income before interest expense
and income taxes 2,801,037 7.5% 2,350,922 4.8% 450,115 19.1%
Interest expense 182,041 0.0% 244,115 0.5% (62,074) -25.4%
Income taxes 1,015,230 0.3% $ 849,354 1.7% 165,876 19.5%
--------------- ------------------ ----------------
Net income $ 1,603,766 1.8% $ 1,257,453 2.6% $ 346,313 27.5%
=============== ================== ================
Our net revenues increased approximately $7.4 million or 15% with 24% growth in
VN and 7% growth in PC. VN revenue growth was driven by admissions growth and
the acquisition of Bradenton, FL-based "Florida Home Health". VN operating
income included operating losses of about $455,000 from new VN start-up
agencies, which generated approximately $1.7 million in revenues in 2005. PC
revenue and operating income increased approximately $723,000 due to increased
volumes and lower administrative expenses. Unallocated corporate expenses
increased due to increased incentive provisions partially offset by a decrease
in professional fees related to a 2004 union defense in one of our personal care
locations, and due to higher travel expenditures in 2005.
The effective income tax rate was approximately 38.8% and 40% of income before
income taxes in 2005 and 2004, respectively.
Visiting Nurse (VN) Segment-Nine Months
Nine months ended September 30,
--------------------------- ---------------------------- ------------------------
2005 2004 Change
---------------- ---------- ----------------- ---------- -------------- ---------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ----------------- ---------- -------------- ---------
Net revenues $ 29,637,290 100.0% $ 24,005,398 100.0% $ 5,631,892 23.5%
Cost of services 23,450,347 79.1% 18,004,687 75.0% 5,445,660 30.2%
General & administrative 1,070,608 3.6% 821,471 3.4% 249,137 30.3%
Depreciation & amortization 579,535 2.0% 644,513 2.7% (64,978) -10.1%
Uncollectible accounts 192,004 0.6% 365,823 1.5% (173,819) -47.5%
---------------- ----------------- --------------
Operating income $ 4,344,796 14.7% $ 4,168,904 17.4% $ 175,892 4.2%
================ ================= ==============
Admissions 10,717 8,639 2,078 24.1%
Patient months of care 24,163 19,838 4,325 21.8%
Revenue per patient month $ 1,226 $ 1,210 $ 16 1.4%
Cost of services per patient month $ 970 $ 907 $ 63 6.9%
Billable visits 209,617 188,147 21,470 11.4%
VN revenue grew approximately 24% over the prior year. New VN operations started
in late 2004 and early 2005 generated approximately $1.7 million in revenue and
operating losses of $455,000 in the nine months ended September 30, 2005. The
acquisition of Bradenton, FL-based "Florida Home Health" added approximately
$1.9 million in revenues and about $371,000 in operating income. Admissions grew
about 24% over the prior year while patient months increased 22%, reflecting a
reduction in the average length of stay. Revenue per patient month increased
1.4% primarily due to higher Medicare rates between periods. Operating costs per
patient month increased approximately 7% due to an increase from startup
operations and from higher administrative expenses, wage rates and employee
benefits. General and administrative expenses increased due to increased wages
including the addition of new regional directors to prepare the segment for
future acquisitions and internal growth. Excluding startups, 2005 operating
income as a percent of revenue was 17.2%. The Company is re-organizing certain
agency and corporate level activities to improve operating efficiencies and
improve cost controls.
Depreciation and amortization declined between periods due to a slower rate of
spending on information systems. The provision for uncollectible accounts
decreased due to the collection of certain aged accounts for which reserves had
previously been provided.
Personal Care (PC) Segment-Nine Months
Nine months ended September 30,
--------------------------- --------------------------- -------------------------
2005 2004 Change
---------------- ---------- ---------------- ---------- --------------- ---------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- --------------- --------
Net revenues $ 26,606,276 100.0% $ 24,869,853 100.0% $ 1,736,423 7.0%
Cost of services 22,799,590 85.7% 21,683,924 87.2% 1,115,666 5.1%
General & administrative 355,949 1.3% 264,263 1.1% 91,686 34.8%
Depreciation & amortization 265,470 1.0% 289,533 1.2% (24,063) -8.3%
Uncollectible accounts 493,611 1.9% 663,388 2.7% (169,777) -25.6%
---------------- ---------------- ---------------
Operating income $ 2,691,656 10.1% $ 1,968,745 7.9% $ 722,911 36.7%
================ ================ ===============
Admissions 1,957 1,888 69 3.7%
Patient months of care 29,925 27,244 2,681 9.8%
Patient days of care 368,033 344,020 24,013 7.0%
Billable hours 1,367,010 1,226,326 140,684 11.5%
Revenue per billable hour $ 19.46 $ 20.28 $ (0.82) -4.0%
PC operating income for the nine months was about $2.7 million versus $2.0
million in the corresponding period of last year. Revenue increased
approximately 7% and cost of services increased approximately 5% primarily due
to volume increases. Cost of services as a percent of revenue improved due to
the implementation of improved cost controls and margin monitoring between
periods. Revenue per billable hour increased 0.3% from prior year primarily due
to changes in mix. General and administrative expenses in total and as a
percentage of revenues increased due to additional management staff, travel and
related expenses.
The provision for uncollectible accounts decreased due to the collection of
certain aged accounts for which reserves had previously been provided.
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 our 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, 2005
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however, its deductible per claim increased from
$25,000 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 monthly basis. As facts change, it may become
necessary to make adjustments that could be material to our results of
operations and financial condition.
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 March 31, 2004. On March 31, 2005, we completed our
renewal for the contract year ending March 31, 2006 with total estimated
premiums of $2.8 million with no changes in coverage or deductibles. In late
July 2005, as a part of its activities to divest of the ADC operating segment,
the Company modified its insurance programs to provide separate policies for the
ADC and home health operations. In conjunction with those modifications, the
Company's deductible per claim for malpractice and general patient liability
claims increased from $250,000 to $500,000.
Liquidity and Capital Resources
Revolving Credit Facility
We have a $22.5 million credit facility with JP Morgan Chase Bank, NA (successor
by merger to Bank One, NA), as amended on August 11, 2005, with an expiration
date of September 30, 2008. 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 5.72% and
3.97% for the quarters ended September 30, 2005 and 2004, respectively. The
weighted average interest rates were 5.27% and 3.89% for the nine months ended
September 30, 2005 and 2004, respectively. The interest rate in effect at
September 30, 2005 was 6.00%. 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, 2005, the formula permitted
approximately $20.5 million to be used. We have an irrevocable letter of credit,
totaling $4.8 million outstanding in connection with our self-insurance
programs. Thus, a total of $15.7 million was available for use at September 30,
2005. Our revolving credit facility is subject to various financial covenants.
As of September 30, 2005, 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 $10.5 million.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the nine months
ending September 30, 2005 and 2004 were:
Net Change in Cash and Cash Equivalents 2005 2004
- --------------------------------------- -------------------- --------------
Provided by (used in):
Operating activities $ 3,395,237 $ 3,975,066
Investing activities (2,618,620) (95,262)
Financing activities (4,022,419) (4,915,006)
Discontinued operations activities 12,456,731 511,677
------------------- ---------------
Net (decrease) increase in cash and
cash equivalents $ 9,210,928 $ (523,525)
=================== ===============
2005
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 43 at
September 30, 2005, and 53 at December 31, 2004. The increase in combined
accounts payable and accrued liabilities resulted primarily from an increase in
insurance liabilities, accrued payroll and employee benefits. Net cash used in
investing activities resulted principally from the acquisition of a small home
health agency in Gainesville, Florida and the acquisition of the Bradenton,
FL-based "Florida Home Health" agency. Net cash used in financing activities
resulted primarily from the payoff of our credit facility from the ADC divesture
and reduction of our debt obligations.
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 53 at 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.
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 its 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 (which consists of $984,970
in damages and $169,271 of estimated post-judgment interest) in an escrow
account with the Tennessee Courts in lieu of a supersedeas appeal bond until the
appeal court issues a decision.
As described in Note 8. "Amendment of Previous Financial Reports Related to
Contingent Liability Matters" above, we have recorded a litigation loss
provision of $1,154,241 on a restated basis in the year ended December 31, 2003.
The cash will remain in escrow until the matter reaches its ultimate resolution.
Despite the recording of a litigation loss provision, based on the advice of
legal counsel, we believe we have strong grounds for appealing the trial court's
decision and we intend to vigorously pursue the appeal. We can give no assurance
that we will be successful in our appeal. The appeals court heard oral arguments
in the case in February 2005 but has given no indication of when it will issue a
ruling. Both the amount of the judgment and the estimated post-judgment interest
are subject to change depending upon the outcome of the appeal process. In the
event we prevail on appeal in the Franklin litigation (and no further appeal is
available), we would record a gain in the period in which we prevail.
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. 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 we 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 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 December 31, 2004 and December 31, 2003, the Broker owed us approximately
$535,000.
As described in Note 8. "Amendment of Previous Financial Reports Related
to Contingent Liability Matters" in the notes to the financial statements, we
have recorded a provision for uncollectible accounts of $535,000 on a restated
basis in the year ended December 31, 2002. In the event the we are able to
collect a portion of the Kentucky receivable we would record a gain in the
period in which payment is received.
Our loan agreement executed with our lender in March 2004 provides that the
provision for 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.
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 "Cautionary Statements - Forward Outlook and Risks" 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 were required to be implemented by April 2005. We believe we
are in substantial compliance with the security regulations with no material
impact on our results of operations or financial position.
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, 2005, a hypothetical 100 basis point increase in short-term
interest rates would result in no change to 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 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. The appeals court heard oral arguments in the case in
February 2005 but has given no indication of when it will issue a ruling.
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 the report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2005
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