UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
(Amendment No. 2)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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 001-09848
ALMOST FAMILY, INC. TM
(Exact name of registrant as specified in its charter)
Delaware 061-153720
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
9510 Ormsby Station Road, Suite 300 40223
(Address of principal executive offices) (Zip Code)
(502) 891-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ____ No_X_.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock $.10 par value
Shares outstanding at May 13, 2005 2,319,027
The purpose of this Amendment No. 2 is to reflect in the financial statements
for the covered period, the restatements announced by the Company on November
14, 2005.
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q/A
INDEX
PART I. FINANCIAL INFORMATION........................................................................................3
Item 1. Financial Statements....................................................................................3
Consolidated Balance Sheets as of March 31, 2005 and December 31, 2004........................................3
Consolidated Statements of Income for the Three Months Ending March 31, 2005 and March 31, 2004...............4
Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2005 and March 31, 2004............5
Notes to Interim Consolidated Financial Statements............................................................6
Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations.................15
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................26
Item 4. Controls and Procedures................................................................................27
PART II. OTHER INFORMATION..........................................................................................28
Item 1. Legal Proceedings.....................................................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................................28
Item 3. Defaults Upon Senior Securities........................................................................28
Item 4. Submission of Matters to a Vote of Security Holders....................................................28
Item 5. Other Information......................................................................................28
Item 6. Exhibits...............................................................................................29
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(AS RESTATED)
March 31, December 31,
ASSETS 2005 (1) 2004 (1)
------
------------------- -------------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 443,284 $ 423,031
Accounts receivable - net 12,048,800 12,362,682
Prepaid expenses and other current assets 754,162 654,650
Deferred tax assets 1,330,979 1,352,000
Net assets of discontinued operations 162,940 122,503
------------------- -------------------
TOTAL CURRENT ASSETS 14,740,165 14,914,866
------------------- -------------------
CASH HELD IN ESCROW (Note 8) 1,154,241 1,154,241
PROPERTY AND EQUIPMENT - NET 4,582,018 5,106,628
GOODWILL 6,610,085 6,449,310
OTHER ASSETS 174,963 171,045
------------------- -------------------
$ 27,261,472 $ 27,796,090
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,163,867 $ 3,260,747
Accrued other liabilities 7,140,081 4,823,157
Current portion - capital leases and term debt 579,699 577,785
------------------ --------------------
$ 9,883,647 8,661,689
------------------ --------------------
LONG-TERM LIABILITIES:
Revolving Credit Facility 1,802,208 3,769,575
Capital leases 1,237,567 1,312,750
Deferred tax liabilities 105,183 225,690
Other liabilities 1,684,598 1,679,676
------------------ --------------------
TOTAL LONG-TERM LIABILITIES 4,829,556 6,987,691
------------------ --------------------
TOTAL LIABILITIES 14,713,203 15,649,380
------------------ --------------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,417,474 and 3,414,874 issued 341,740 341,490
Treasury stock, at cost, 1,096,783 and 1,096,783 shares (7,772,048) (7,772,048)
Additional paid-in capital 26,566,009 26,548,634
Accumulated deficit (6,587,432) (6,971,366)
------------------ --------------------
TOTAL STOCKHOLDERS' EQUITY 12,548,269 12,146,710
------------------ --------------------
$ 27,261,472 $ 27,796,090
================== ====================
(1) Where appropriate, amounts for these periods have been restated as discussed
in Note 8 to the financial statements.
See accompanying notes to interim consolidated financial statements
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
------------------ --- ------------------
March 31, 2005 March 31, 2004
------------------ ------------------
Net revenues $ 23,519,134 $ 21,468,416
Cost of services 19,778,020 18,037,440
General and administrative expenses 1,979,610 1,551,069
Depreciation and amortization expense 604,491 604,153
Provision for uncollectible accounts 364,699 574,491
-------------------- -------------------
Income from continuing operations before other
income (expense) and income taxes 792,314 701,263
Other income (expense)
Interest expense (91,207) (144,843)
Facility gains - 6,420
-------------------- -------------------
Income from continuing operations before income taxes 701,107 562,840
Provision for income taxes 280,443 225,136
-------------------- -------------------
Income from continuing operations 420,664 337,704
Income (loss) from discontinued operations, net of tax (36,730) (36,341)
-------------------- -------------------
Net income $ 383,934 $ 301,363
==================== ===================
Per share amounts-Basic:
Average shares outstanding 2,316,741 2,296,527
Income from continuing operations $ 0.18 $ 0.15
Income (loss) from discontinued operations (0.01) (0.02)
-------------------- -------------------
Net income $ 0.17 $ 0.13
==================== ===================
Per share amounts-Diluted:
Average shares outstanding 2,622,067 2,556,781
Income from continuing operations $ 0.16 $ 0.13
Income (loss) from discontinued operations (0.01) (0.01)
-------------------- -------------------
Net income $ 0.15 $ 0.12
==================== ===================
See accompanying notes to interim consolidated
financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
-----------------------------------------
March 31, 2005 March 31, 2004
------------------- --------------------
Cash flows from operating activities:
Net income $ 383,934 $ 301,363
Less income (loss) from discontinued operations (36,730) (36,341)
------------------- --------------------
Income from continuing operations 420,664 337,704
Adjustments to reconcile income from continuing operations to
net cash provided by /(used in)operating activities:
Depreciation and amortization 604,491 604,153
Provision for uncollectible accounts 364,699 574,491
Loss on sale of assets - (6,420)
Deferred income taxes (99,486) (83,172)
------------------- --------------------
1,290,368 1,426,756
Change in certain net assets, net of the effects of acquisitions:
(Increase) decrease in:
Accounts receivable (50,817) (529,409)
Prepaid expenses and other current assets (113,705) 29,006
Other assets (3,918) 11,621
Increase (decrease) in:
Accounts payable and accrued expenses 1,230,294 517,083
Other liabilities 4,923 11,032
------------------- --------------------
Net cash provided by/(used in) operating activities $ 2,357,145 $ 1,466,089
------------------- --------------------
Cash flows from investing activities:
Capital expenditures (65,688) (143,462)
Cash received from sale of assets - 6,420
Acquisitions, net of cash acquired (160,776) -
------------------- --------------------
Net cash provided by/(used in) investing activities $ (226,464) $ (137,042)
------------------- --------------------
Cash flows from financing activities:
Net revolving credit facility borrowings (repayments) (1,967,367) (1,350,636)
Proceeds from stock option exercises 7,375 -
Principal payments on capital leases and notes payable (73,269) (62,585)
------------------- --------------------
Net cash provided by/(used in) financing activities $ (2,033,261) $ (1,413,221)
------------------- --------------------
Net cash provided by/(used in) continuing operations $ 97,420 $ (84,174)
------------------- --------------------
Cash Flows From Discontinued Operations:
Operating activities (77,167) 67,281
Investing activities - (3,123)
Financing activities - -
------------------- --------------------
Net cash by/(used in) discontinued operations $ (77,167) $ 64,158
------------------- --------------------
Net decrease in cash and cash equivalents 20,253 (20,016)
Cash and cash equivalents at beginning of period 423,031 895,743
------------------- --------------------
Cash and cash equivalents at end of period $ 443,284 $ 875,726
=================== ====================
See accompanying notes to interim consolidated
financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying interim consolidated financial statements for the three months
ended March 31, 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 interim consolidated financial statements reflect all
adjustments (consisting of normal recurring adjustments) necessary to present
fairly the financial position at March 31, 2005 and the results of operations
and cash flows for the three months ended March 31, 2005 and 2004.
The results of operations for the three months ended March 31, 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 March 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) the determination of cost-reimbursed revenues, 2) medical coding,
particularly with respect to Medicare, 3) patient eligibility, particularly
related to Medicaid, and 4) other reasons unrelated to credit risk, all of
which may result in adjustments to recorded revenue amounts. Management
continuously evaluates the potential for revenue adjustments and when
appropriate provides allowances for losses based upon the best available
information. There is at least a reasonable possibility that recorded estimates
could change by material amounts in the near term.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Approximately 45.4% of the Company's 2005 revenues were derived from state
Medicaid and other government programs, most of which are currently facing
significant budget issues. Approximately 46.6% of revenues in the quarter ended
March 31, 2004 were derived from state Medicaid and other government programs.
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. Among these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum time in which
payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are because the number of
Medicaid beneficiaries and their related expenditures are growing at a faster
rate than the government's revenue. Medicaid is consuming a greater percentage
of the budget. This issue is exacerbated when revenues slow in a slowing
economy. 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.
3. Segment Data
The Company operates in two service line groups: Home Health Care and Adult Day
Care (ADC). The Home Health Care group consists of two reportable segments,
Visiting Nurse (VN) and Personal Care (PC) while the ADC service line is also a
separate reportable segment. Reportable segments have been identified based upon
how management has organized the business by services provided to customers and
the criteria in SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information."
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 92% of the VN
segment revenues are generated from the Medicare program while the balance is
generated from Medicaid and private insurance programs.
The Company's PC segment services are also provided in patients' homes. These
services (generally provided by 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 64% of the PC segment revenues are
generated from Medicaid and other government programs while the balance is
generated from insurance programs and private pay patients.
The Company's ADC segment provides adult day care to disabled or frail adults
who require some care or supervision, but who do not require intensive medical
attention and/or wish not to live in a nursing home or other inpatient
institution. These services are provided in the Company's facilities. ADC
revenues are usually generated on a per day of care basis. Approximately 87% of
the ADC segment revenues are generated from Medicaid and other government
programs while the balance is generated from insurance programs and private pay
patients.
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has service locations in
Florida, Kentucky, Ohio, Maryland, Connecticut, Massachusetts, Indiana and
Alabama (in order of revenue significance).
Three months ended March 31,
--------------------------------------
2005 2004
------------------- -----------------
Net Revenues
Home Health Care
Visiting nurses $ 9,655,519 $ 8,341,410
Personal care 8,756,432 8,101,892
------------------- -----------------
18,411,951 16,443,302
Adult day care 5,107,183 5,025,114
------------------- -----------------
$ 23,519,134 $ 21,468,416
=================== =================
Operating Income
Home Health Care
Visiting nurses $ 1,617,748 $ 1,508,177
Personal care 694,055 706,670
------------------- -----------------
2,311,803 2,214,847
Adult day care 229,680 (141,448)
------------------- -----------------
2,541,483 2,073,399
Unallocated corporate expenses 1,749,169 1,372,136
------------------- -----------------
Operating income $ 792,314 $ 701,263
=================== =================
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 $3,000 and $41,000 were
capitalized in the three months ended March 31, 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 INTERIM CONSOLIDATED FINANCIAL STATEMENTS
5. Revolving Credit Facility
The Company has a $22.5 million credit facility with Bank One Kentucky NA with
an expiration date of June 30, 2006. The credit facility bears interest at the
bank's prime rate plus a margin (ranging from -0.75% to -0.25%, currently -0.5%)
dependent upon total leverage and is secured by substantially all assets and the
stock of the Company's subsidiaries. The weighted average interest rates were
4.73% and 4.00% for the quarters ended March 31, 2005 and 2004, respectively.
The interest rate in effect at March 31, 2005 was 5.00%. 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 March 31, 2005, the
formula permitted approximately $18 million to be used, of which approximately
$1.8 million was outstanding. Additionally, an irrevocable letter of credit,
totaling $4.2 million, was outstanding in connection with the Company's
self-insurance programs. Thus, a total of $6 million was either outstanding or
committed as of March 31, 2005 while an additional $12 million was available for
use. The Company's revolving credit facility is subject to various financial
covenants. As of March 31, 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 $10,500,000.
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
March 31, 2005 March 31, 2004
------------------ ------------------
Net income as reported $ 383,934 $ 301,363
Pro forma stock-based compensation
expense, net of tax 1,188 444
------------------ ------------------
Pro forma net income $ 382,745 $ 300,919
================== ==================
Earnings per common share:
Basic - as reported $ 0.17 $ 0.13
Basic - pro forma $ 0.17 $ 0.13
Diluted - as reported $ 0.15 $ 0.12
Diluted - proforma $ 0.15 $ 0.12
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
March 31, 2005 March 31, 2004
------------------- ------------------
Shares used to compute basic
earnings per common share -
weighted average shares
outstanding 2,316,741 2,296,527
Dilutive effect of stock options 305,326 260,254
------------------- ------------------
Shares used to compute diluted
earnings per common share 2,622,067 2,556,781
=================== ==================
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 our 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 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 circum-
stances 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.
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.
The restatement for 2004 impacted the fourth quarter only. Thus these
restatements impact the balance sheets included herein but have no impact on
results of operations or cash flows for any period presented herein.
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
March 31, 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. The Company recently
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.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of its business, including claims for damages for
personal injuries. In the opinion of management, the ultimate resolution of any
of these pending claims and legal proceedings will not have a material effect on
the Company's financial position or results of operations.
Franklin Litigation (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. The Company is seeking appellate review of the lower court decision. As
a part of the appeal, the Company was required to post cash of $1,154,241 (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 the Company
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 record
a 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.
The Company's loan agreement executed with its lender in March 2004 provides
that the provision for a 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
On March 29, 2005 the Company entered into an agreement to purchase a
Medicare-certified visiting nurse agency located in Bradenton, Florida. On April
1, 2005 the Company acquired all the assets and business operations of this
agency. 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company
Almost Family, Inc. TM and subsidiaries (collectively "Almost Family") is a
leading regional provider of home health nursing services and adult day health
services. In this report, the terms "Company", "we", "us" or "our" mean Almost
Family, Inc. and all subsidiaries included in our consolidated financial
statements.
Cautionary Statements - Forward Outlook and Risks
Some of the matters discussed in this filing include forward-looking statements.
Statements that are predictive in nature, that depend upon or refer to future
events or conditions or that include words such as "expects," "anticipates,"
"intends," "plans," "believes," "estimates," "thinks," and similar expressions
are forward-looking statements. We caution investors that any forward-looking
statements made by us are not guarantees of future performance and that actual
results may differ materially from those in the forward-looking statements as a
result of various factors including, but not limited to, those set forth in the
section on Cautionary Statements - Forward Outlook and Risks in Part I, and the
Notes to the Consolidated Financial Statements and Management's Discussion and
Analysis of Financial Condition and Results of Operations, in our Form 10-K for
the year ended December 31, 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
Form 10-K for the year ended December 31, 2004 for a detailed discussion of our
critical accounting policies.
Operating Segments
We operate in two service line groups: Home Health Care and Adult Day Care
(ADC). The Home Health Care group consists of two reportable segments, Visiting
Nurse (VN) and Personal Care (PC) while the ADC service line is also a separate
reportable segment. Reportable segments have been identified based upon how we
have 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 92% 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 64% 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 ADC segment provides adult day care to disabled or frail adults who require
some care or supervision, but who do not require intensive medical attention
and/or wish not to live in a nursing home or other inpatient institution. These
services are provided in the Company's facilities. ADC revenues are usually
generated on a per day of care basis. Approximately 87% of the ADC segment
revenues are generated from Medicaid and other government programs while the
balance is generated from insurance programs and private pay patients.
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, Maryland, 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 the Company's south Florida markets. Our PC segment
generally does not experience significant seasonality in its operating results.
In our ADC segment, the quarters ended December and March typically generate
lower operating income than the quarters ended June and September as the holiday
season and winter weather tend to temporarily lower ADC in-center attendance.
RESULTS OF OPERATIONS
Three months ended March 31, 2005 Compared with three months ended March 31,
2004
Consolidated 2005 2004 Change
------------
---------------- ---------- ------------------ ----------- --------------- ----------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ------------------ ----------- --------------- ----------
Net revenues:
Home Health Care VN $ 9,655,519 41.1% $ 8,341,410 38.9% $ 1,314,109 15.8%
PC 8,756,432 37.2% 8,101,892 37.7% 654,540 8.1%
--------------- ------------------ ---------------
18,411,951 78.3% 16,443,302 76.6% 1,968,649 12.0%
Adult Day Care 5,107,183 21.7% 5,025,114 23.4% 82,069 1.6%
--------------- ------------------ ---------------
$ 23,519,134 100.0% $ 21,468,416 100.0% $ 2,050,718 9.6%
=============== ================== ===============
Operating income
Home Health Care VN $ 1,617,748 16.8% $ 1,508,177 18.1% $ 109,571 7.3%
PC 694,055 7.9% 706,670 8.7% (12,615) -1.8%
--------------- ------------------ ---------------
2,311,803 12.6% 2,214,847 13.5% 96,956 4.4%
Adult Day Care 229,680 4.5% (141,448) -2.8% 371,128 -262.4%
--------------- ------------------ ---------------
2,541,483 10.8% 2,073,399 9.7% 468,084 22.6%
Unallocated corporate expenses 1,749,169 7.4% 1,372,136 6.4% 377,033 27.5%
--------------- ------------------ ---------------
Income before interest expense
and income taxes 792,314 3.4% 701,263 3.3% 91,051 13.0%
Facility gains (losses) - 0.0% 6,420 0.0% (6,420) -100.0%
Interest expense 91,207 0.4% 144,843 0.7% (53,636) -37.0%
Income taxes 280,443 1.2% 225,136 1.0% 55,307 24.6%
--------------- ------------------ ---------------
Net income $ 420,664 1.8% $ 337,704 1.6% $ 82,960 24.6%
=============== ================== ===============
Our net revenues increased approximately $2.1 million or 10% with 16% growth in
VN, and 8% growth in PC and 2% growth in ADC. VN revenue growth was driven by
admissions growth as we continue to execute our strategic plan and to increase
our focus on this segment. As discussed below, VN operating income included
operating losses of about $227,000 from new start-up agencies. ADC operating
income improved significantly due to operating cost reductions in light of
limited reimbursement increases from state Medicaid programs. Unallocated
corporate expenses increased due to 1) an incentive provision of $170,000 in
2005 and 2) the incurrence of about $120,000 in professional fees related to the
successful defense of an employment related lawsuit and certain costs associated
with an abandoned acquisition opportunity.
The effective income tax rate was approximately 40% of income before income
taxes in both 2005 and 2004.
Visiting Nurse (VN) Segment-Three Months
Three months ended March 31,
------------------------ ---------------------------- --------------------------
2005 2004 Change
------------------------ ---------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
------------- ---------- ---------------- ----------- --------------- ----------
Net revenues $ 9,655,519 100.0% $ 8,341,410 100.0% $ 1,314,109 15.8%
Cost of services 7,498,371 77.7% 6,202,418 74.4% 1,295,953 20.9%
General & administrative 287,085 3.0% 272,179 3.3% 14,906 5.5%
Depreciation & amortization 177,793 1.8% 225,461 2.7% (47,668) -21.1%
Uncollectible accounts 74,522 0.8% 133,175 1.6% (58,653) -44.0%
------------- ---------------- ---------------
Operating income $ 1,617,748 16.8% $ 1,508,177 18.1% $ 109,571 7.3%
============= ================ ===============
Admissions 3,351 2,972 379 12.8%
Patient months of care 7,436 6,661 775 11.6%
Revenue per patient month $ 1,298 $ 1,252 $ 46 3.7%
Cost of services per patient month $ 1,008 $ 931 $ 77 8.3%
Billable visits 65,199 63,909 1,290 2.0%
VN operating income for the quarter was approximately $1.6 million versus $1.5
million last year. New VN operations started in late 2004 and early 2005
generated approximately $280,000 in revenue and operating losses of $227,000 in
the quarter ended March 31, 2005. Excluding these start-up operations operating
income grew 22%. Admissions grew about 12.8% over the prior year while patient
months increased 11.6%, reflecting a reduction in the average length of stay.
Revenue per patient month increased 3.7% primarily due to higher Medicare rates
between periods. Operating costs per patient month increased about 8.3%
primarily as a result of the startup operations. Excluding startups, operating
costs per patient month increased about 4.0% due primarily to wage rates.
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-Three Months
Three months ended March 31,
--------------------------- --------------------------- -------------------------
2005 2004 Change
---------------- ---------- ---------------- ---------- --------------- ---------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- -------------------------
Net revenues $ 8,756,432 100.0% $ 8,101,892 100.0% $ 654,540 8.1%
Cost of services 7,668,228 87.6% 7,018,021 86.6% 650,207 9.3%
General & administrative 109,140 1.2% 86,554 1.1% 22,586 26.1%
Depreciation & amortization 98,955 1.1% 83,562 1.0% 15,393 18.4%
Uncollectible accounts 186,054 2.1% 207,085 2.6% (21,031) -10.2%
---------------- ---------------- ---------------
Operating income $ 694,055 7.9% $ 706,670 8.7% $ (12,615) -1.8%
================ ================ ===============
Admissions 749 703 46 6.5%
Patient months of care 9,879 8,967 912 10.2%
Patient days of care 119,273 112,592 6,681 5.9%
Billable hours 504,367 448,153 56,214 12.5%
Revenue per billable hour $ 17.36 $ 18.08 $ (0.72) -4.0%
PC operating income for the quarter was about $694,000 versus $707,000 in the
corresponding period of last year. Revenue increased over 8% due to volume
increases. Revenue per billable hour decreased 4% from prior year primarily due
to changes in mix. Certain of our PC markets experienced inordinate declines in
volumes, while others experienced volume growth. Significant volume declines in
two particular markets were more than offset by volume growth in certain other
lower margin markets. These changes in our business resulted in aggregate cost
of services growing faster than aggregate revenues. Additionally, workers
compensation expenses in our Ohio markets increased about $64,000 due to
increased premium rates. General and administrative expenses in total and as a
percentage of revenues increased due to additional management staff, travel and
related expenses.
Depreciation and amortization increased due to investments in information
systems. The provision for uncollectible accounts decreased due to the
collection of certain aged accounts for which reserves had previously been
provided.
Adult Day Care (ADC) Segment-Three Months
Three months ended March 31,
---------------------------- ---------------------------- -------------------------
2005 2004 Change
---------------- ----------- ---------------- ----------- --------------- ---------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ---------------- ----------- -------------------------
Net revenues $ 5,107,183 100.0% $ 5,025,114 100.0% $ 82,069 1.6%
Cost of services 4,236,122 82.9% 4,458,876 88.7% (222,754) -5.0%
General & administrative 255,279 5.0% 210,001 4.2% 45,278 21.6%
Depreciation & amortization 281,979 5.5% 263,454 5.2% 18,525 7.0%
Uncollectible accounts 104,123 2.0% 234,231 4.7% (130,108) -55.5%
---------------- ---------------- ---------------
Operating income $ 229,680 4.5% $ (141,448) -2.8% $ 371,128 -262.4%
================ ================ ===============
Admissions 227 267 (40) -15.0%
Patients months of care 4,735 4,803 (68) -1.4%
Patient days of care 72,214 71,800 414 0.6%
Revenue per patient day $ 70.72 $ 69.99 $ 0.73 1.0%
ADC in-center averages:
Weekday attendance 1,011 993 18 1.8%
Center capacity 1,324 1,387 (63) -4.5%
Center occupancy rate 76.4% 71.6% 4.8% 6.7%
ADC patient days of care increased from the prior year due to increased
attendance in the centers. Revenue per day increased about 1.0% primarily due to
a rate increase in Maryland. Operating income increased due to a higher
occupancy percentage and lower operating costs.
Cost of services decreased between period due to improved staffing controls,
reductions in the size of the vehicle fleet, and efforts to consolidate centers
and reduce facility operating expenses in light of limited reimbursement rate
increases.
General and administrative expenses increased by about $45,000 as a result of an
increase in salaries, incentives and travel. The provision for uncollectible
accounts decreased due to the collection of certain aged accounts, particularly
in Maryland, 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 its self-insured employee health
program. Under its automobile insurance program, we bear risk up to $100,000 per
incident. Under the workers' compensation insurance program, we bear risk up to
$250,000 per incident. We purchase stop-loss insurance for the employee health
plan that places a specific limit, generally $150,000, on its exposure for any
individual covered life.
Malpractice and general patient liability claims for incidents which may give
rise to litigation have been asserted against us by various claimants. The
claims are in various stages of processing and some may ultimately be brought to
trial. We are aware of incidents that have occurred through March 31, 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. The Company recently 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.
Liquidity and Capital Resources
Revolving Credit Facility
We have a $22.5 million credit facility with Bank One Kentucky NA with an
expiration date of June 30, 2006. The credit facility bears interest at the
bank's prime rate plus a margin (ranging from -0.75% to -0.25%, currently -0.5%)
dependent upon total leverage and is secured by substantially all assets and the
stock of our subsidiaries. The weighted average interest rates were 4.73% and
4.00% for the quarters ended March 31, 2005 and 2004, respectively. The interest
rate in effect at March 31, 2005 was 5%. We pay a commitment fee of 0.25% per
annum on the unused facility balance. Borrowings are available equal to the
greater of: a) a multiple of earnings before interest, taxes, depreciation 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 March 31, 2005, the formula
permitted approximately $18 million to be used, of which approximately $1.8
million was outstanding. Additionally, an irrevocable letter of credit, totaling
$4.2 million, was outstanding in connection with our self-insurance programs.
Thus, a total of $6 million was either outstanding or committed as of March 31,
2005, while an additional $12 million was available for use. Our revolving
credit facility is subject to various financial covenants. As of March 31, 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
$10,500,000.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the three months
ending March 31, 2005 and 2004 were:
Net Change in Cash and Cash Equivalents 2005 2004
- --------------------------------------- ------------------ ---------------
Provided by (used in):
Operating activities $ 2,357,145 $ 1,466,089
Investing activities (226,464) (137,042)
Financing activities (2,033,261) (1,413,221)
Discontinued operations activities (77,167) 64,158
------------------- ----------------
Net (decrease) increase in cash and
cash equivalents $ 20,253 (20,017)
=================== ================
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 49 at March
31, 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. Net cash used in financing activities resulted
primarily from repayments on our credit facility and payment of capital lease
and 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 63 at March
31, 2004, down from 64 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" in the notes to the financial statements, 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 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.
Medicaid Dependence
Approximately 45.4% of our revenues are derived from state Medicaid and other
government programs, virtually all of which are currently facing significant
budget issues. Approximately 46.6% of our revenues in the quarter ended March
31, 2004 were derived from state Medicaid and other government programs. The
Medicaid programs in each of the states in which we operate are taking actions
or evaluating taking actions to reduce Medicaid expenditures. Among these
actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum time in
which payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the condition of the US economy. We believe that these
financial issues are cyclical in nature rather than indicative of the long-term
prospect for Medicaid funding of health care services. It is possible however,
that the actions taken by the state Medicaid programs in the future could have a
significant unfavorable impact on our results of operations, financial condition
and liquidity.
Health Care Reform
The health care industry has experienced, and is expected to continue to
experience, extensive and dynamic change. In addition to economic forces and
regulatory influences, continuing political debate is subjecting the health care
industry to significant reform. Health care reforms have been enacted as
discussed elsewhere in this document. Proposals for additional changes are
continuously formulated by departments of the Federal government, Congress, and
state legislatures.
Government officials can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors. Legislative changes to "balance the budget" and
slow the annual rate of growth of expenditures are expected to continue. Such
future changes may further impact our reimbursement. There can be no assurance
that future legislation or regulatory changes will not have a material adverse
effect on our operations.
Federal and State legislative proposals continue to be introduced that would
impose more limitations on payments to providers of health care services such as
us. Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures.
We cannot predict what additional government regulations may be enacted in the
future affecting our business or how existing or future laws and regulations
might be interpreted, or whether we will be able to comply with such laws and
regulations in our existing or future markets.
Refer to the sections on "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 March 31, 2005, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of approximately $18,000 in annual
pre-tax earnings.
ITEM 4. CONTROLS AND PROCEDURES.
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. Based on the foregoing, the Company's Chief
Executive Officer and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective, in all material respects, to
ensure that information required to be disclosed in the reports the Company
files and submits under the Exchange Act is recorded, processed, summarized and
reported as and when required.
The Company also conducted an evaluation of internal control over financial
reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
Based on this evaluation, there has been no such change during the quarter
covered by this report.
Commission File No. 1-9848
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
In April 2000, Franklin Capital Associates L.P. (Franklin) filed suit in
Chancery Court of Williamson County, Tennessee, seeking damages in connection
with registration rights they received in the Company's acquisition of certain
home health operations in February 1991. Following a bench trial, in April 2003
the court issued a ruling in favor of the plaintiffs awarding damages of
$984,970. The Company believes the Court erred both in its finding of liability
and in its determination of the amount of damages. We are seeking appellate
review of the lower court decision. As a part of the appeal, the Company was
required to post cash of $1,154,241 in an escrow account with the Tennessee
Courts in lieu of a supersedeas appeal bond until the appeal court issues a
decision. This cash is reflected as "Cash held in escrow" in the accompanying
balance sheet and will remain in escrow until the matter reaches its ultimate
resolution.
Based on the advice of legal counsel, the Company's management believes 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
2.1
Asset Purchase Agreement dated as of March 29, 2005, by and
among (i) Caretenders Visiting Services of District 6, LLC,
(ii) Manatee Memorial Hospital, L.P., and (iii) Almost Family,
Inc. (schedules have been omitted but will be furnished
supplementally to the SEC upon request) (exhibit previously
filed with the Form 10-Q/A submitted on May 13, 2005).
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 Amendment No. 2 to 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