UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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, 2007
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.
(Exact name of Registrant as specified in its charter)
Delaware 06-1153720
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification Number
9510 Ormsby Station Road, Suite 300, Louisville, Kentucky 40223
(Address of principal executive offices)
(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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 November 14, 2007 5,434,954
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
PART I. FINANCIAL INFORMATION........................................................................................3
Item 1. Consolidated Financial Statements and Supplementary Data (unaudited except December 31, 2006
Consolidated Balance Sheet).................................................................................3
Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006....................................3
Consolidated Statements of Income for the Three Months Ending September 30, 2007 and September 30, 2006.......4
Consolidated Statements of Income for the Nine Months Ending September 30, 2007 and September 30, 2006........5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and September 30, 2006.....6
Notes to Consolidated Financial Statements....................................................................8
Item 2. Managements's Discussion and Analysis of Financial Condition and Results of Operations......................15
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 1A. Risk Factors................................................................................................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........................................................33
Item 5. Other Information...........................................................................................33
Item 6. Exhibits....................................................................................................33
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2007
ASSETS (UNAUDITED) December 31, 2006
-----------------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 591,702 $ 4,125,592
Accounts receivable - net 13,635,342 12,781,866
Prepaid expenses and other current assets 1,341,776 855,021
Deferred tax assets 1,371,769 1,535,639
------------------------- -----------------------
TOTAL CURRENT ASSETS 16,940,589 19,298,118
PROPERTY AND EQUIPMENT - NET 1,484,102 1,516,856
GOODWILL AND OTHER INTANGIBLE ASSETS 32,584,218 32,094,317
DEFERRED TAX ASSETS -- 290,647
OTHER ASSETS 230,252 195,555
------------------------- -----------------------
$ 51,239,161 $ 53,395,493
========================= =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,153,612 $ 3,545,991
Accrued other liabilities 6,812,924 6,267,796
Current portion - capital leases and notes payable 1,246,796 2,321,675
------------------------- -----------------------
TOTAL CURRENT LIABILITIES 11,213,332 12,135,462
------------------------- -----------------------
LONG-TERM LIABILITIES:
Revolving credit facility 4,039,474 8,465,935
Capital leases 28,146 113,892
Notes payable 4,540,000 4,540,000
Long term deferred tax liabilities 341,076 --
Other liabilities 463,559 400,295
------------------------- -----------------------
TOTAL LONG-TERM LIABILITIES 9,412,255 13,520,122
------------------------- -----------------------
TOTAL LIABILITIES 20,625,587 25,655,584
------------------------- -----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.05; authorized
2,000,000 shares; none issued or outstanding -- --
Common stock, par value $0.10; authorized
10,000,000 shares; 7,658,628 and 7,357,620
issued and outstanding 765,462 735,762
Treasury stock, at cost, 2,249,066 shares and
2,245,974 shares (8,203,187) (8,200,095)
Additional paid-in capital 27,380,566 30,067,696
Retained earnings 10,670,733 5,136,546
------------------------- -----------------------
TOTAL STOCKHOLDERS' EQUITY 30,613,574 27,739,909
------------------------- -----------------------
$ 51,239,161 $ 53,395,493
========================= =======================
See accompanying Notes to Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended September 30,
-------------------------------------------------
2007 2006
-------------------------------------------------
Net service revenues $ 32,057,021 $ 22,631,225
Cost of service revenue (excluding amortization and
depreciation) 15,702,077 11,410,430
-------------------- ----------------------
Gross margin 16,354,944 11,220,795
-------------------- ----------------------
General and administrative expenses
Salaries and benefits 8,908,098 6,139,324
Other 4,125,406 3,391,468
-------------------- ----------------------
Total general and administrative expenses: 13,033,504 9,530,792
-------------------- ----------------------
Operating income 3,321,440 1,690,003
Interest income (expense), net (153,480) 33,275
--------------------- ----------------------
Income from continuing operations before income taxes 3,167,960 1,723,278
Income tax expense (1,261,360) (677,507)
--------------------- ------------------------
Net income from continuing operations 1,906,600 1,045,771
Discontinued operations, net of tax of $ 2,348 and
$19,176 (19,977) (19,832)
--------------------- ------------------------
Net income $ 1,886,623 $ 1,025,939
==================== ======================
Per share amounts-basic:
Average shares outstanding 5,434,954 4,823,122
Income from continuing operations $ 0.35 $ 0.21
Loss from discontinued operations (0.01) (0.00)
--------------------- ------------------------
Net income $ 0.34 $ 0.21
==================== ======================
Per share amounts-diluted:
Average shares outstanding 5,614,342 5,308,774
Income from continuing operations $ 0.34 $ 0.19
Loss from discontinued operations (0.00) (0.00)
--------------------- ------------------------
Net income $ 0.34 $ 0.19
==================== ======================
See accompanying Notes to Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended September 30,
-----------------------------------------------
2007 2006
----------------------------------------------
Net service revenues $ 96,716,188 $ 64,692,068
Cost of service revenue (excluding amortization and
depreciation) 46,936,781 33,317,200
------------------- -------------------
Gross margin 49,779,407 31,374,868
------------------- -------------------
General and administrative expenses
Salaries and benefits 26,762,999 17,573,126
Other 13,046,968 9,076,226
------------------- -------------------
Total general and administrative expenses: 39,809,967 26,649,352
------------------- -------------------
Operating income 9,969,440 4,725,516
Interest income (expense), net (650,408) 94,220
--------------------- -------------------
Income from continuing operations before income taxes 9,319,032 4,819,736
Income tax expense (3,711,411) (1,917,433)
--------------------- ---------------------
Net income from continuing operations 5,607,621 2,902,303
Discontinued operations, net of tax of $ 2,348 and $ 19,176 (73,434) (131,924)
--------------------- ---------------------
Net income $ 5,534,187 $ 2,770,379
=================== ===================
Per share amounts-basic:
Average shares outstanding 5,412,407 4,829,744
Income from continuing operations $ 1.03 $ 0.60
Loss from discontinued operations (0.01) (0.03)
--------------------- ---------------------
Net income $ 1.02 $ 0.57
=================== ===================
Per share amounts-diluted:
Average shares outstanding 5,602,917 5,325,084
Income from continuing operations $ 1.00 $ 0.54
Loss from discontinued operations (0.01) (0.02)
--------------------- ---------------------
Net income $ 0.99 $ 0.52
=================== ===================
See accompanying Notes to Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September
-----------------------------------------
2007 2006
-----------------------------------------
Cash flows from operating activities:
Net income $ 5,534,187 $ 2,770,379
Less loss from discontinued operations (73,434 ) (131,924)
--------------- ---------------
Income from continuing operations 5,607,621 2,902,303
Adjustments to reconcile income from continuing operations to
net cash provided by operating activities:
Depreciation and amortization 630,739 846,621
Interest earned on escrowed funds -- 6,696
Provision for uncollectible accounts 833,316 451,679
Stock-based compensation 329,348 --
Deferred income taxes 795,593 (148,185)
--------------- ---------------
8,196,617 4,059,114
Change in certain net assets, net of the effects of acquisitions:
(Increase) decrease in:
Accounts receivable (1,686,792 ) (1,090,710)
Prepaid expenses and other current assets (491,051 ) (178,291)
Other assets (34,697 ) (38,184)
Increase (decrease) in:
Accounts payable and accrued expenses 184,239 (536,401)
--------------- ---------------
Net cash provided by operating activities 6,168,316 2,215,528
--------------- ---------------
Cash flows from investing activities:
Capital expenditures (505,939 ) (729,219)
Acquisitions, net of cash acquired (542,348 ) (3,281,665)
--------------- ---------------
Net cash used in investing activities (1,048,287 ) (4,010,884)
--------------- ---------------
Cash flows from financing activities:
Net revolving credit facility repayments (4,426,462 ) --
Proceeds from stock option exercises 107,187 25,269
Purchase of common stock in connection with option exercises (3,804,883 ) --
Tax benefit from non-qualified stock option exercises 704,294 139,468
Principal payments on capital leases and notes payable (1,160,623 ) (72,481)
--------------- ---------------
Net cash provided by (used in) financing activities (8,580,487 ) 92,256
--------------- ---------------
Cash flows from discontinued operations:
Operating activities (73,434 ) 626,246
Investing activities -- --
Financing activities -- --
--------------- ---------------
Net cash provided by (used in) discontinued operations (73,434 ) 626,246
--------------- ---------------
Net decrease in cash and cash equivalents (3,533,890 ) (1,076,854)
Cash and cash equivalents at beginning of period 4,125,592 6,188,321
--------------- ---------------
Cash and cash equivalents at end of period $ 591,702 $ 5,111,467
=============== ===============
See accompanying Notes to Consolidated Financial Statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements for the three and
nine months ended September 30, 2007 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, 2006 for further information. In the opinion of management of
Almost Family Inc., (the Company), the accompanying unaudited consolidated
financial statements reflect all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the financial position at September 30,
2007 and the results of operations and cash flows for the three and nine month
periods ended September 30, 2007 and 2006.
The results of operations for the three and nine month periods ended September
30, 2007 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 2006 consolidated financial
statements and related notes in order to conform to the 2007 presentation. Such
reclassifications had no effect on previously reported net income.
Stock Split
All share and per share information in the accompanying financial statements and
the notes thereto, and otherwise in this report, have been adjusted to give
effect to the 2-for-1 split in the form of a dividend completed in January 2007.
New Accounting Pronouncement
In September 2006, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 157, Fair Value Measurements. SFAS No. 157 requires companies to
determine fair value based on the price that would be received to sell the
asset or paid to transfer the liability to a market participant. SFAS No.
157 emphasizes that fair value is a market-based measurement; not an
entity-specific measurement. The effective date of SFAS No. 157 will be the
first quarter of 2008. We have not determined the impact, if
any, of adopting SFAS No. 157.
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.
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
Statements of Financial Accounting Standards (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 94% of the VN
segment revenues are generated from the Medicare program while the balance is
generated from Medicaid and private insurance programs.
As noted in our Form 10-K for the year ended December 31, 2006, our VN segment
operations located in Florida normally experience higher admissions during the
March quarter than in the other quarters due to seasonal population
fluctuations. The Company's Florida operations normally experience lower
admissions during the September quarter than in the other quarters also due to
seasonal population fluctuations.
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 72% 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. The Company has service locations in
Florida, Kentucky, Ohio, Connecticut, Massachusetts, Alabama, Illinois and
Missouri (in order of revenue significance).
Three months ended September 30, Nine months ended September 30,
--------------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------------
Net Revenues
Home Health Care
Visiting nurses $ 22,953,803 $ 13,627,142 $ 69,626,718 $ 38,169,315
Personal care 9,103,218 9,004,083 27,089,470 26,522,753
---------------- ------------------- ------------------ ------------------
$ 32,057,021 $ 22,631,225 $ 96,716,188 $ 64,692,068
================ =================== ================== ==================
Operating Income
Home Health Care
Visiting nurses $ 4,517,329 $ 1,919,746 $ 13,802,152 $ 5,810,727
Personal care 887,649 1,220,228 2,301,377 2,645,209
---------------- ------------------- ------------------ ------------------
5,404,978 3,139,974 16,103,529 8,455,936
Unallocated corporate expenses 2,083,538 1,449,971 6,134,089 3,730,420
---------------- ------------------- ------------------ ------------------
Operating income $ 3,321,440 $ 1,690,003 $ 9,969,440 $ 4,725,516
================ =================== ================== ==================
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 $18,000 and $68,000 were
capitalized in the three months ended September 30, 2007 and 2006, respectively,
and $58,000 and $185,000 were capitalized in the nine months ended September 30,
2007 and 2006, respectively. Capitalized software development costs are
amortized over a three-year period following the initial implementation of the
software.
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 7, 2007, with an
expiration date of June 30, 2008. The Company has secured a commitment from JP
Morgan Chase Bank, NA for extension of the facility until June 30, 2010. The
credit facility bears interest at the bank's prime rate plus a margin (ranging
from -0.75% to -0.25%, currently -0.75%) 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 7.43% and 7.17% for the quarters ended
September 30, 2007 and 2006, respectively. 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 four times earnings before interest, taxes,
depreciation and amortization (As Defined EBITDA) or b) an asset based formula,
primarily based on accounts receivable. "As Defined EBITDA" of acquired
operations, up to 50% of base "As Defined EBITDA," may be included in the
availability calculations. 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, 2007, the formula
permitted approximately $22.5 million to be used, of which $4.0 million was
outstanding. The Company has irrevocable letters of credit, totaling $2.9
million outstanding in connection with its self-insurance programs. Thus, a
total of $15.6 million was available for use at September 30, 2007. The
Company's revolving credit facility is subject to various financial covenants.
As of September 30, 2007, the Company was in compliance with the covenants.
Under the most restrictive of its covenants, the Company is required to maintain
minimum net worth of at least $10.5 million.
6. Stock-Based Compensation
On February 12, 2007, the Company issued stock options for 178,000 shares at a
strike price of $19.40 (fair market value on the date of grant) to directors,
members of management and employees under existing plans. Stock option grant
date fair values are determined at the date of grant using a Black-Scholes
option pricing model. The grants issued will vest over four years, with an
expiration date of February 11, 2017. In the quarter ended September 30, 2007 no
options were issued and no option shares were exercised.
Changes in option shares outstanding are summarized as follows:
Shares Wtd. Avg
Ex. Price
----------------------------------
December 31, 2006 614,060 $ 1.83
Granted 183,000 19.40
Exercised (301,008) 2.98
Terminated (170,038) 3.57
-------------
September 30, 2007 326,014 11.78
=============
7. Earnings Per Common Share
There were no adjustments required to be made to net income for purposes of
computing basic and diluted earnings per common share. A reconciliation of the
weighted average shares outstanding used in the calculation of basic and diluted
earnings per common share is as follows:
Three months ended Nine months ended
September 30, September 30,
---------------------------------- ---------------------------------
2007 2006 2007 2006
---------------------------------- ---------------------------------
Shares used to compute
basic earnings per common
share -weighted average
shares outstanding 5,434,954 4,823,122 5,412,407 4,829,744
Dilutive effect of stock
options 179,388 485,652 190,510 495,340
--------------- ------------ -------------- --------------
Shares used to compute
diluted earnings per common
share 5,614,342 5,308,774 5,602,917 5,325,084
=============== ============ ============== ==============
8. Commitments and Contingencies
Insurance Programs
The Company bears significant insurance risk under its large-deductible workers'
compensation insurance program and its self-insured employee health program.
Under the workers' compensation insurance program, the Company bears risk up to
$400,000 per incident. The Company purchases stop-loss insurance for the
employee health plan that places a specific limit, generally $100,000, 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, 2007 that may result in the assertion of additional claims. The
Company currently carries professional and general liability insurance coverage
for this exposure with no deductible. Prior to April 1, 2007 the Company carried
coverage with a deductible per claim of $500,000.
Total premiums, excluding the Company's exposure to claims and deductibles, for
all its non-health insurance programs were approximately $1.2 million for the
contract year ending March 31, 2007. On April 1, 2007, the Company completed its
renewal for the contract year ending March 31, 2008 with total estimated
premiums of $1.1 million.
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.
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.
9. Acquisitions
On January 15, 2007, the Company acquired the fixed assets and business
operations of a Medicare-certified home health agency with two branches located
in Jacksonville, Florida. The total purchase price of $600,000 was paid in cash.
The Company assumed employee paid-time-off liabilities of approximately $32,000
and fixed assets of approximately $19,000. The cash portion of the transaction
was funded from borrowings available on the Company's existing senior credit
facility with JP Morgan Chase Bank, NA. The acquired operations generated net
revenues of approximately $1.3 million in the year ended December 31, 2006.
On December 3, 2006, the Company acquired all the Medicare-certified home health
agencies owned and operated by Mederi, Inc., located in Coconut Grove, Florida.
The total purchase price of $20.4 million was paid $11.7 million in cash,
approximately $3 million or 100,000 shares of Almost Family common stock
(restricted) with the $4 million balance in the form of two notes payable
bearing interest at 6% payable quarterly with the principal due in a balloon
payment two years from the closing date. The Company assumed employee
paid-time-off liabilities of approximately $397,000 and a Medicare liability of
approximately $1.3 million. Additional consideration of up to $5.5 million in
cash may be paid to the seller contingent primarily upon the achievement of
certain revenue targets in the two years following the closing. The cash portion
of the transaction was funded from borrowings available on the Company's
existing senior credit facility with JP Morgan Chase Bank, NA. The acquired
operations generated net revenues of approximately $23.8 million in the year
ended June 30, 2006. The Mederi acquisition significantly expanded the Company's
presence and penetration in the state of Florida and gave the Company new market
presence in the states of Missouri and Illinois.
10. Income Taxes
The Company adopted the provisions of Financial Accounting Standards Board
("FASB") interpretation No. 48, "Accounting for Uncertainty in Income Taxes-an
interpretation of FASB Statement No. 109" (FIN 48), on January 1, 2007. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement 109,
"Accounting for Income Taxes", and prescribes a recognition threshold and
measurement process for financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 also provides
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition.
Based on the Company's evaluation, it has concluded that there are no
significant uncertain tax positions requiring recognition in its financial
statements. The evaluation was performed for the tax years ended December 31,
2003, 2004, 2005, and 2006. For federal tax purposes, the Company is currently
subject to examinations for tax years 2004 and forward while for state purposes,
tax years 2003 and forward, depending on the specific state rules and
regulations. The Internal Revenue Service has completed its examination of the
tax year ending December 31, 2004 with no assessment of any additional tax or
penalty.
The Company may from time to time be assessed interest and penalties by major
tax jurisdictions, although any such assessments historically have been minimal
and immaterial to its financial results. Assessments for interest and/or
penalties are classified in the financial statements as general and
administrative expenses other.
The Company's effective income tax rate for the nine month periods ended
September 30, 2007 and 2006 was approximately 39.8%. This effective rate differs
from the Federal statutory rate of 34% primarily due to state and local taxes,
net of Federal benefit of approximately 5.8%
11. Discontinued Operations
The Company follows the guidance in SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" and, when appropriate, reclassifies operating
units closed, sold, or held for sale out of continuing operations and into
discontinued operations for all periods presented. At the year ended December
31, 2006, the VN segment had one facility that met the criteria to be
reclassified as discontinued operations. During the nine month period ending
September 30, 2007, the PC segment had two facilities that met the criteria to
be reclassified as discontinued operations. These facilities have been
reclassified in this report for all periods presented. Net revenues from
discontinued operations were approximately $15,000 and $315,000 in the quarters
ended September 30, 2007 and 2006, respectively. Net losses from the
discontinued operations were approximately ($20,000) and ($20,000) in the
quarters ended September 30, 2007 and 2006, respectively. Net revenues from
discontinued operations were approximately $177,000 and $894,000 in the nine
month periods ended September 30, 2007 and 2006, respectively. Net losses from
the discontinued operations were approximately ($73,000) and ($132,000) in the
nine month periods ended September 30, 2007 and 2006, respectively. Such amounts
are included in net loss from discontinued operations in the accompanying
financial statements.
12. Subsequent Event
On October 26, 2007 the Company acquired the assets of all the
Medicare-certified home health agencies owned and operated by Quality of Life
Holdings, Inc. (Quality of Life) for an initial purchase price of $10 million,
consisting of $8 million cash, and $2 million (or approximately 101,000 shares)
of Almost Family common stock (restricted). Additional consideration of up to
$6.9 million may be paid contingent primarily upon the achievement of certain
development targets following the closing. The cash portion of the transaction
paid at closing was funded from borrowings available on the Company's existing
senior credit facility with JP Morgan Chase Bank, NA.
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. 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
Certain statements contained in this quarterly report on Form 10-Q, including,
without limitation, statements containing the words "believes," "anticipates,"
"intends," "expects," "assumes," "trends" and similar expressions, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Forward-looking statements are based upon the
Company's current plans, expectations and projections about future events.
However, such statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
the Company to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for healthcare reform;
o changes in Medicare and Medicaid reimbursement levels, including a
possible cut in the 2008 "market basket" increase in home health
reimbursement described herein under the caption "Potential Legislative
Action";
o effects of competition in the markets in which the Company operates;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenues associated with
major payer sources;
o ability of customers to pay for services;
o business disruption due to natural disasters or terrorist acts;
o ability to successfully integrate the operations of acquired
businesses and achieve expected synergies and operating
efficiencies from the acquisition, in each case within expected
time-frames or at all;
o effect on liquidity of the Company's financing
arrangements; and o changes in estimates and judgments associated with
critical accounting policies and estimates.
For a detailed discussion of these and other factors that could cause the
Company's actual results to differ materially from the results contemplated by
the forward-looking statements, please refer to Item 1A. "Risk Factors" and Item
7 "Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's annual report on Form 10-K for year ending December
31, 2006. The reader is encouraged to review these risk factors and filings.
The reader should not place undue reliance on forward-looking statements, which
speak only as of the date of this report. Except as required by law the Company
assumes no responsibility for updating forward-looking statements to reflect
unforeseen or other events after the date of this report.
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, 2006 for a detailed discussion of our
critical accounting policies.
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 94% 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 72% 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, Alabama, Illinois and Missouri (in
order of revenue significance).
Seasonality
As noted in our Form 10-K for the year ended December 31, 2006, our VN segment
operations located in Florida normally experience higher admissions during the
March quarter than in the other quarters due to seasonal population
fluctuations. The Company's Florida operations normally experience lower
admissions during the September quarter than in the other quarters also due to
seasonal population fluctuations.
RESULTS OF OPERATIONS
Three months ended September 30, 2007 compared with three
months ended September 30, 2006
--------------------------------------------------------------------------------
2007 2006 Change
Consolidated Amount % Rev Amount % Rev Amount %
--------------------------------------------------------------------------------
Net revenues:
Visiting Nurse $ 22,953,803 71.6 % $ 13,627,142 60.2% $ 9,326,661 68.4%
Personal Care 9,103,218 28.4 % 9,004,083 39.8% 99,135 1.1%
-------------- -------------- ---------------
$ 32,057,021 100.0 % $ 22,631,225 100.0% $ 9,425,796 41.6%
-------------- -------------- ---------------
Operating income
Visiting Nurse $ 4,517,329 19.7 % $ 1,919,746 14.1% $ 2,597,583 135.3%
Personal Care 887,649 9.8 % 1,220,228 13.6% (332,579) -27.3%
-------------- -------------- -----------------
5,404,978 16.9 % 3,139,974 13.9% 2,265,004 72.1%
-------------- -------------- ---------------
Corporate expense 2,083,538 6.5 % 1,449,971 6.4% 633,567 43.7%
Income before interest expense and
income taxes 3,321,440 10.4 % 1,690,003 7.5% 1,631,437 96.5%
-------------- -------------- ---------------
Interest (income) expense 153,480 0.5 % (33,275) -0.1% 186,755 561.2%
Income taxes 1,261,360 3.9 % 677,507 3.0% 583,853 86.2%
--------------- -------------- ---------------
Net income from continuing operations $ 1,906,600 5.9 % $ 1,045,771 4.6% $ 860,829 82.3%
============== ============== ===============
EBITDA from continuing operations $ 3,502,080 10.9 % $ 1,949,535 8.6% $ 1,570,545 80.6%
Our net revenues increased approximately $9.4 million or 42% with 68% growth in
VN and 1% growth in PC. As further explained below, our VN revenue growth was
driven by a combination of acquisitions, startups and same store growth. VN
operating income grew substantially due to a combination of the acquisitions
completed in 2006 and 2007 as well as a 27% revenue increase in VN markets not
impacted by our acquisitions.
Corporate expenses increased due to additional corporate personnel wages and
incentives associated with our revenue growth and performance, amortization of
stock-based compensation expense in 2007 and higher professional fees related
primarily to accounting and internal control matters required by the Sarbanes
Oxley Act.
Interest expense was incurred on funds borrowed to finance our acquisition
activities.
The effective income tax rate from continuing operations was approximately 39.8%
and 39.3% in 2007 and 2006, respectively.
Visiting Nurse (VN) Segment-Three Months
- ----------------------------------------
Three months ended September 30,
---------------------------------------------------------------------------
2007 2006 Rev Change
Amount % Rev Amount % Amount %
---------------------------------------------------------------------------
Net service revenues $ 22,953,803 100.0% $ 13,627,142 100.0% $ 9,326,661 68.4 %
Cost of service revenue 9,404,135 41.0% 5,581,293 41.0% 3,822,842 68.5 %
-------------- ------------- --------------
Gross margin 13,549,668 59.0% 8,045,849 59.0% 5,503,819 68.4 %
General and administrative
expenses:
Salaries and benefits 6,458,581 28.1% 4,143,665 30.4% 2,314,916 55.9 %
Other 2,573,758 11.2% 1,982,438 14.5% 591,320 29.8 %
-------------- ------------- --------------
Total general and 9,032,339 39.4% 6,126,103 45.0% 2,906,236 47.4 %
administrative expenses:
-------------- ------------- --------------
Operating income $ 4,517,329 19.7% $ 1,919,746 14.1% $ 2,597,583 135.3 %
============== ============= ==============
All payors:
Admissions 6,951 4,686 2,265 48.3 %
Patient months of care 18,453 11,386 7,067 62.1 %
Revenue per patient month $ 1,244 $ 1,197 $ 47 3.9 %
Cost of services per patient
month $ 510 $ 490 $ 19 4.0 %
Billable visits 145,009 90,063 54,946 61.0 %
Average number of locations 47 31 16
Medicare statistics:
Admissions 6,161 4,085 2,076
Medicare revenue % of
total 94% 91 % 3%
The Company completed five separate acquisitions of home health agencies from
the second quarter of 2006 through the first quarter of 2007 that impact
comparability of our operating results.
Due to the significant impact of acquisition activities on VN revenue growth,
the following tables are presented comparing revenue growth by market type for
the quarters ended September 30, 2007 and 2006:
VN Revenue Comparison by Market Type - # of
All VN Operations Mkts 2007 2006 Change Percent
- ---------------------------------------- -------- -------------- -------------- ------------- ----------
Newly acquired markets 13 $ 4,808,639 $ - $ 4,808,639
Markets with in-market acquisitions 9 4,365,921 2,786,125 1,579,796 56.7%
-------- -------------- -------------- -------------
Acquisition related markets 22 9,174,560 2,786,125 6,388,435
Markets with no acquisition impact 25 13,779,243 10,841,017 2,938,226 27.1%
-------- -------------- -------------- -------------
47 $ 22,953,803 $ 13,627,142 $ 9,326,661 68.4%
======== ============== ============== =============
VN revenues grew approximately $9.3 million between years of which 52% came from
newly acquired markets, 17% came in markets with in-market acquisitions and 31%
came from markets with no acquisition impact.
The following table provides a comparison of revenues related specifically to
the Mederi acquisition (excludes all markets not impacted by the Mederi
acquisition):
VN Markets Impacted by Mederi # of Mkts 2007 2006 Change
- --------------------------------------------- ------------ --------------- -------------- ---------------
Newly acquired Mederi markets 12 $ 4,499,093 $ - $ 4,499,093
Mederi markets overlapping Almost
Family Markets 8 3,968,979 2,296,332 1,672,647
------------ --------------- -------------- ---------------
Mederi related markets 20 $ 8,468,072 $ 2,296,332 $ 6,171,740
============ =============== ============== ===============
Markets with acquisitions not related to Mederi generated $706,488 of revenue in
the quarter ended September 30, 2007 as compared to $489,793 in 2006.
Our General and administrative salaries and benefits increased predominantly as
a result of the increase in the average number of locations in operation between
periods (substantially all of which were acquired), increases in wage rates and
the addition of segment management staff driven by our focus on the execution of
our strategic plan to develop the visiting nurse segment. As a percent of
revenue, these costs declined to 39% from 45% primarily due to increased volumes
(admissions), particularly in markets with no acquisition impact.
Personal Care (PC) Segment-Three Months
Three months ended September 30, 2007
--------------------------------------------------------------------------------------
2007 2006 Change
Amount % Rev Amount % Rev Amount %
--------------------------------------------------------------------------------------
Net service revenues $ 9,103,218 100.0% $ 9,004,083 100.0% $ 99,135 1.1%
Cost of service
revenues 6,297,942 69.2% 5,829,137 64.7% 468,805 8.0%
------------- -------------- -------------
Gross margin 2,805,276 30.8% 3,174,946 35.3% (369,670) -11.6%
General and administrative
expenses
Salaries and benefits 1,197,849 13.2% 1,222,069 13.6% (24,220) -2.0%
Other 719,778 7.9% 732,649 8.1% (12,871) -1.8%
------------- -------------- --------------
Total general and administrative 1,917,627 21.1% 1,954,718 21.7% (37,091) -1.9%
expenses
------------- -------------- --------------
Operating income $ 887,649 9.8% $ 1,220,228 13.6% $ (332,579) -27.3%
============= ============== ==============
Admissions 677 627 50 8.0%
Patient months of care 10,316 10,396 (80) -0.8%
Patient days of care 125,213 130,412 (5,199) -4.0%
Billable hours 508,081 530,435 (22,354) -4.2%
Revenue per billable hour $ 17.92 $ 16.97 $ 0.94 -5.5%
PC operating income for the quarter was about $888,000 versus $1,220,000 in the
corresponding period of last year.
Admissions increased slightly from the prior year reflecting a change in the mix
of business. Revenue per billable hour increased due to a combination of rate
increases and changes in the mix of business across payors and locations.
The primary reason for the difference in direct margin between periods was lower
than normal workers compensation claims experience in 2006. General and
Administrative Expenses did not change substantially between periods.
Nine months ended September 30, 2007 compared with nine months
ended September 30, 2006
-----------------------------------------------------------------------------------
2007 2006 Change
Consolidated Nine Months Amount % Rev Amount % Rev Amount %
-----------------------------------------------------------------------------------
Net Service Revenues:
Visiting Nurse $ 69,626,718 72.0% $ 38,169,315 59.0% $ 31,457,403 82.4%
Personal Care 27,089,470 28.0% 26,522,753 41.0% 566,717 2.1%
------------- ------------- -------------
$ 96,716,188 100.0% $ 64,692,068 100.0% $ 32,024,120 49.5%
------------- ------------- -------------
Operating Income
Visiting Nurse $ 13,802,152 4.3% $ 5,810,727 9.0% $ 7,991,425 137.5%
Personal Care 2,301,377 2.4% 2,645,209 4.1% (343,832) -13.0%
------------- ------------- --------------
16,103,529 8,455,936 13.1% 7,647,593 90.4%
Corporate Expense 6,134,089 6.3% 3,730,420 5.8% 2,403,669 64.4%
Income before Interest Expense
and Income Taxes 9,969,440 10.3% 4,725,516 7.3% 5,243,924 111.0%
Interest (Income) Expense 650,408 0.7% (94,220) -0.1% 744,628 -790.3%
Income Taxes 3,711,411 3.8% 1,917,433 3.0% 1,793,978 93.6%
------------- ------------- -------------
Net Income from Continuing $ 5,607,621 5.8% $ 2,902,303 4.5% $ 2,705,318 93.2%
Operations
============= ============= =============
EBITDA from Continuing
Operations $ 10,600,179 11.0% $ 5,572,137 8.6% $ 5,028,042 90.2%
Our net revenues increased approximately $32 million or 50% with 82% growth in
VN and 2% growth in PC. As further explained below, our VN revenue growth was
driven by a combination of acquisitions, startups and same store growth. VN
operating income grew substantially due to a combination of the acquisitions
completed in 2006 and 2007 and due to a 27% revenue increase in VN markets not
impacted by our acquisitions.
Corporate expenses increased due to additional corporate personnel wages and
incentives associated with our revenue growth and performance, amortization of
stock-based compensation expense in 2007 and higher professional fees related
primarily to development activities and accounting and internal control matters
required by the Sarbanes Oxley Act.
Interest expense was incurred on funds borrowed to finance our acquisition
activities.
The effective income tax rate from continuing operations was approximately 39.8%
and 39.8% in 2007 and 2006, respectively.
Visiting Nurse (VN) Segment-Nine Months
Nine months ended September 30,
-----------------------------------------------------------------------------------------
2007 2006 Change
Amount % Rev Amount % Rev Amount %
-----------------------------------------------------------------------------------------
Net Service Revenues $ 69,626,718 100.0 % $ 38,169,315 100.0% $ 31,457,403 82.4 %
Cost of Service Revenues 28,228,532 40.5 % 15,471,866 40.5% 12,756,666 82.5 %
--------------- -------------- ------------------
Gross Margin 41,398,186 59.5 % 22,697,449 59.5% 18,700,737 82.4 %
General and Administrative
Expenses:
Salaries and Benefits 19,398,439 27.9 % 11,682,354 30.6% 7,716,085 66.0 %
Other 8,197,595 11.8 % 5,204,368 13.6% 2,993,227 57.5 %
--------------- -------------- ------------------
Total General and Administrative 27,596,034 39.6 % 16,886,722 44.2% 10,709,312 63.4 %
Expenses:
--------------- -------------- ------------------
Operating Income $ 13,802,152 19.8 % $ 5,810,727 15.2% $ 7,991,425 137.5 %
=============== ============== ==================
All Payors:
Admissions 21,767 13,499 8,268 61.2 %
Patient Months of Care 55,594 32,391 23,203 71.6 %
Revenue per Patient Month $ 1,252 $ 1,178 $ 74.02 6.3 %
Cost of Services per Patient
Month $ 508 $ 478 $ 30.10 6.3 %
Billable Visits 431,626 253,180 178,446 70.5 %
Average Number of Locations 47 29 18
Medicare Statistics:
Admissions 19,536 12,019 7,517 62.5 %
Medicare Revenue % of Total 94 % 92% 2.1 2.3 %
Due to the significant impact of acquisition activities on VN revenue growth,
the following tables are presented comparing revenue growth by market type for
the nine month periods ended September 30, 2007 and 2006:
VN Revenue Comparison by Market Type - # of
All VN Operations Mkts 2007 2006 Change Percent
- ---------------------------------------- -------- -------------- -------------- -------------- ----------
Newly acquired markets 15 $ 17,781,877 $ - $ 17,781,877
Markets with in-market acquisitions 8 13,027,203 7,582,879 5,444,324 71.8%
-------- -------------- -------------- --------------
Acquisition related markets 23 30,809,080 7,582,879 23,226,201
Markets with no acquisition impact 24 38,817,638 30,586,436 8,231,202 26.9%
-------- -------------- -------------- --------------
47 $ 69,626,718 $ 38,169,315 $ 31,457,403 82.4%
======== ============== ============== ==============
VN revenues grew approximately $31.5 million between years of which 57% came
from newly acquired markets, 17% came in markets with in-market acquisitions and
26% came from markets with no acquisition impact.
The following table provides a comparison of revenues related specifically to
the Mederi acquisition (excludes all markets not impacted by the Mederi
acquisition):
VN Markets Impacted by Mederi # of Mkts 2007 2006 Change
- --------------------------------------------- ------------- ----------------- --------------- ---------------
Newly acquired Mederi markets 13 11,595,505 $ - $ 11,595,505
Mederi markets overlapping Almost
Family Markets 7 11,552,911 6,204,023 5,348,888
------------- ----------------- --------------- ---------------
Mederi related markets 20 23,148,416 $ 6,204,023 $ 16,944,393
============= ================= =============== ===============
Markets with acquisitions not related to Mederi generated $7,660,663 of revenue
in the nine months ended September 30, 2007 as compared to $1,378,857 in 2006.
Gross margin remained constant between periods.
Our General and administrative salaries and benefits increased predominantly as
a result of the increase in the average number of locations in operation between
periods (substantially all of which were acquired), increases in wage rates and
the addition of segment management staff driven by our focus on the execution of
our strategic plan to develop the visiting nurse segment. As a percent of
revenue, these costs declined to 40% from 44% primarily due to increased volumes
(admissions), particularly in markets with no acquisition impact.
Personal Care (PC) Segment-Nine Months
Nine months ended September 30, 2007
--------------------------------------------------------------------------------------------
2007 2006 Change
Amount % Rev Amount % Rev Amount %
--------------------------------------------------------------------------------------------
Net Service Revenues $ 27,089,470 100.% $ 26,522,753 100.0% $ 566,717 2.1%
Cost of Service Revenues 18,708,248 69.% 17,845,335 67.4% 862,913 4.8%
--------------- -------------- ---------------
Gross Margin 8,381,222 30.% 8,677,418 32.6% (296,196) -3.4%
General and
Administrative
Expenses:
Salaries and Benefits 3,925,735 14.% 3,875,193 14.6% 50,542 1.3%
Other 2,154,110 8.% 2,157,016 8.1% (2,906) -0.1%
--------------- -------------- ----------------
Total General and 6,079,845 22.% 6,032,209 23.0% 47,636 0.8%
Administrative
Expenses:
--------------- -------------- ---------------
Operating Income $ 2,301,377 8.% $ 2,645,209 9.6% $ (343,832) -13.0%
=============== ============== ================
Admissions 2,058 1,913 145 7.6%
Patient Months of Care 30,805 31,216 (411) -1.3%
Patient Days of Care 371,740 384,224 (12,484) -3.2%
Billable Hours 1,500,014 1,556,182 (56,168) -3.6%
Revenue per Billable Hour $ 18.06 $ 17.04 $ 1.02 6.0%
PC operating income for the nine months was about $2,301,000 versus $2,645,000
in the corresponding period of last year.
Admissions increased about 8% from the prior year while patient months decreased
slightly reflecting a change in the mix of business, particularly in the first
quarter. Revenue per billable hour increased due to a combination of rate
increases and changes in the mix of business across payors and locations.
Direct margin was higher in the nine months ended September 30, 2006 than in
2007 due to lower than normal workers compensation claims experience. General
and Administrative Expenses did not change substantially between periods.
Insurance Programs
We bear significant insurance risk under our large-deductible workers'
compensation insurance program and our self-insured employee health program.
Under the workers' compensation insurance program, we bear risk up to $400,000
per incident. We purchase stop-loss insurance for the employee health plan that
places a specific limit, generally $100,000, 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, 2007
that may result in the assertion of additional claims. We currently carry
professional and general liability insurance coverage for this exposure with no
deductible. Prior to April 1, 2007 we carried coverage with a deductible per
claim of $500,000.
Total premiums, excluding our exposure to claims and deductibles, for all our
non-health insurance programs were approximately $1.2 million for the contract
year ending March 31, 2007. On April 1, 2007, we completed our renewal for the
contract year ending March 31, 2008 with total estimated premiums of $1.1
million.
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.
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 August 7, 2007, with an expiration date
of June 30, 2008 We have secured a commitment from JP Morgan Chase Bank, NA for
extension of the facility through June 30, 2010. The credit facility bears
interest at the bank's prime rate plus a margin (ranging from -0.75% to -0.25%,
currently -0.75%) dependent upon total leverage and is secured by substantially
all assets and the stock of our subsidiaries. The weighted average interest
rates were 7.43% and 7.17% for the quarters ended September 30, 2007 and 2006,
respectively. 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 four
times earnings before interest, taxes, depreciation and amortization (As Defined
EBITDA) or b) an asset based formula, primarily based on accounts receivable.
"As Defined EBITDA" of acquired operations, up to 50% of base "As Defined
EBITDA," may be included in the availability calculations. 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, 2007, the formula permitted approximately $22.5 million to be
used, of which $4.0 million was outstanding. We have irrevocable letters of
credit, totaling $2.9 million outstanding in connection with our self-insurance
programs. Thus, a total of $15.6 million was available for use at September 30,
2007. Our revolving credit facility is subject to various financial covenants.
As of September 30, 2007, 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, 2007 and 2006 were:
Net Change in Cash and Cash Equivalents 2007 2006
- ---------------------------------------
------------------ ------------------
Provided by (used in):
Operating activities $ 6,168,316 $ 2,215,528
Investing activities (1,048,287) (4,010,884)
Financing activities (8,580,487) 92,256
Discontinued operations activities (73,434) 626,246
------------------ ------------------
Net decrease in cash and cash equivalents $ (3,533,890)$ (1,076,854)
================== ==================
2007
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 44 at
September 30, 2007, and 50 at December 31, 2006. The cash used in investing
activities is primarily due to the acquisition completed in January 2007 for
approximately $542,000 and capital expenditures in the amount of $506,000. Net
cash used in financing activities resulted primarily from stock option
exercises, net repayments of the revolving credit facility and the payment of a
note payable from a 2005 acquisition. The Company's stock option plans permit
optionees to have option shares withheld on exercises in lieu of submitting to
the Company the amount necessary for income tax withholdings. Such withholding
of shares in lieu of taxes is shown in the cash flow statement as a repurchase
of shares in the amount of $3.8 million. The Company receives a current tax
deduction for compensation expense subject to IRS limits. Such deductions
related to stock option exercises in the March 2007 quarter, is shown in the
cash flow statement as a cash inflow of approximately of $704,000.
2006
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 45 at
September 30, 2006, and 48 at December 31, 2005. Accrued other liabilities
includes a decrease from payments of historical claims exceeding new claims
experience of approximately $1.0 million. Net cash used in investing activities
resulted principally from acquisitions. Net cash provided by financing
activities resulted primarily from stock option exercises net of capital lease
payments. Cash provided by discontinued operations resulted primarily from the
release of the escrow account related to the ADC divesture and settlement of
insurance liabilities related to the adult day care segment sold in September
2005. Cash flows from operating activities for the nine months ended September
30, 2006 were negatively impacted by approximately $500,000 by a nationwide
two-week suspension of Medicare payments put in place by the Federal government
at the end of its fiscal year.
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.
Medicare Reimbursement Regulations for 2008
In August 2007 the Centers for Medicare & Medicaid Services (CMS) published
final regulations updating and revising the Medicare prospective payment system
for home health (HH-PPS) for 2008 (the "2008 Final Rule"). The 2008 Final Rule
will go into effect on January 1, 2008.
Under the HH-PPS providers are reimbursed on the basis of a 60-day episode
following a formula dependent upon, among other factors, the patient's medical
condition, the number of visits performed in the episode and the locale in which
the patient resides.
The following are the more significant changes included in the 2008 Final Rule:
o A "market basket" rate increase of 3% to the episodic payment rate for 2008.
o A decrease in the episodic payment rate of 2.75% for each of the years
2008 through 2010 and a decrease of 2.71% for 2011 (the "Case Mix Creep
Adjustment"). This rate cut was rationalized by CMS in the regulations
as offsetting coding increases from 1999 through 2005 that CMS believes
are not related to changes in the underlying health of patients.
o The national 60-day episodic payment rate for 2007 was $2,339 and for
2008 will be $2,270, reflecting both the 3% market basket increase and
the 2.75% rate cut described above as well as certain other adjustments
the more significant of which are described below.
o A move from 80 different patient driven coding categories (Home Health
Reimbursement Groups or "HHRG"s) to 153 HHRGs.
o Establishment of eight different break points in therapy visit thresholds
used to determine reimbursement related to therapy
services. In 2008 reimbursement will change at each of the following
visit thresholds: 6, 7, 10, 11, 14, 16, 18 and 20 visits. In 2007 there
was a single threshold at 10 therapy visits.
o A small increase in the reimbursement provided for certain episodes in
which 4 or fewer visits are provided. A corresponding and offsetting
adjustment was made to the national payment rate described above.
o Segregation of the reimbursement for non-routine medical supplies based
on a new formula separate from the national payment rate. A
corresponding and offsetting adjustment was made to the national
payment rate described above.
o A revision in the reimbursement formula provided for certain episodes
in which a high number of visits is required to meet the needs of the
patient. This revision results in a decrease in the amount of
reimbursement for these episodes. A corresponding and offsetting
adjustment was made to the national payment rate described above.
We believe the 2008 Final Rule will have the following implications:
o The Case Mix Creep Adjustment for years 2008-2011 will put downward
pressure on margins in the home health industry and in our Visiting
Nurse segment. The extent of the downward pressure will be influenced
by a number of factors including but not limited to future: wage rate
inflation, transportation costs, demand for and availability of
clinicians, market basket increases and further changes to Medicare
reimbursement made by either CMS or Congress.
o Outcome of the refinements to the case mix formula will be dependent
upon the type and needs of the patients actually seen in 2008, and the
clinical and other aspects of the care plans employed to care for those
patients, all of which may differ from those experienced historically.
o Within the framework of providing the highest quality outcomes for our
patients, we expect to take actions in response to the changing
reimbursement environment with the goal of improving our clinical,
operational and marketing efficiencies.
o We believe the increased complexity of the reimbursement environment,
combined with the long-term effect of the Case Mix Creep Adjustment,
will likely increase the supply of acquisition candidates available to
us.
Potential Legislative Action
Over the course of 2007 there has been legislative activity in both the U.S.
Senate and the U.S. House of Representatives regarding potential changes in
Medicare reimbursement. In this activity Congress has attempted to address a
number of issues including the State Children's Health Insurance Program (SCHIP)
and a scheduled 10% reduction in Medicare payments for physicians currently
scheduled to go into effect in January 2008. To date no changes in the law have
been enacted, but one proposed bill included a cut to the 2008 3% "market
basket" increase in home health reimbursement described in the above discussion
of the 2008 Final Rule.
There continues to be Congressional activity on these topics. We are unable to
predict when, or if, any legislation will ultimately become law or whether any
such legislation, if enacted, will cut any, all or a portion of the 2008 3%
"market basket" increase in home health reimbursement.
Impact of Inflation
Management does not believe that inflation has had a material effect on income
during the past several years.
Non-GAAP Financial Measure
The information provided in the some of the tables use certain non-GAAP
financial measures as defined under Securities and Exchange Commission (SEC)
rules. In accordance with SEC rules, the Company has provided, in the
supplemental information below, a reconciliation of those measures to the most
directly comparable GAAP measures.
EBITDA
EBITDA is defined as income before depreciation and amortization, net interest
expense and income taxes. EBITDA is not a measure of financial performance under
accounting principles generally accepted in the United States of America. It
should not be considered in isolation or as a substitute for net income,
operating income, cash flows from operating, investing or financing activities,
or any other measure calculated in accordance with generally accepted accounting
principles. The items excluded from EBITDA are significant components in
understanding and evaluating financial performance and liquidity. Management
routinely calculates and communicates EBITDA and believes that it is useful to
investors because it is commonly used as an analytical indicator within our
industry to evaluate performance, measure leverage capacity and debt service
ability, and to estimate current or prospective enterprise value. EBITDA is also
used in measurements of borrowing availability and certain covenants contained
in our credit agreement.
The following table sets forth a reconciliation of Continuing Operations
Net Income -- As Adjusted to EBITDA:
Three months ended September 30, Nine months ended September 30,
--------------------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------------------
Net income from continuing 1,906,600 $ 1,045,771 $ 5,607,621 $ 2,902,303
operations $
Add back:
Interest income (expense) 153,480 (33,275) 650,408 (94,220)
Income taxes 1,261,360 677,507 3,711,411 1,917,433
Depreciation and
amortization 198,640 259,532 630,739 846,621
--------------- --------------- --------------- ----------------
Earnings before interest,
income taxes, depreciation
and amortization (EBITDA)
from continuing operations $ 3,502,080 $ 1,949,535 $ 10,600,179 $ 5,572,137
=============== =============== =============== ================
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, 2007, a hypothetical 100 basis point increase in short-term
interest rates would result in a decrease of approximately $40,000 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
None
Item 1A. Risk Factors
Information regarding risk factors appears in our Form 10-K for the year ending
December 31, 2006, under the heading "Special Caution Regarding Forward -
Looking Statements" and in the Form 10-K Part I, Item 1A. Risk Factors. There
have been no material changes from the risk factors previously disclosed in our
Form 10-K.
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
10.1*
Asset Purchase Agreement dated as of October 23, 2007 among (i) the
Registrant, Caretenders Visiting Services of Hernando County, LLC,
Caretenders Visiting Services of Pinellas County, LLC, and Mederi Caretenders
VS of Tampa, LLC, (ii) Quality of Life Holdings, Inc., Quality of Life Home
Health Services, Inc., Quality of Life Home Health Services of Hillsborough,
Inc., and Quality of Life Homecare of Hernando, Inc., and (iii) Michael
Moses, James Heenan and Rosalind M. Heenan, including executed copies of the
following exhibits: (listed omitted schedules will
be furnished supplementally to the SEC upon request):
(A) Assignment and Assumption Agreements dated as
of October 26, 2007, between various parties to
the Agreement.
(B) Confidentiality, Nonsolicitation and
Noncompetition Agreement dated as of October
26, 2007 among (i) the Registrant, Caretenders
Visiting Services of Hernando County, LLC,
Mederi Caretenders VS of Tampa, LLC, and
Caretenders Visiting Services of Pinellas
County, LLC and (ii) Quality of Life Holdings,
Inc., Quality of Life Home Health Services,
Inc., Quality of Life Home Health Services of
Hillsborough, Inc., Quality of Life Homecare of
Hernando, Inc., Michael Moses, James Heenan and
Rosalind M. Heenan;
(C) Registration Rights Agreement dated October 26,
2007 between the Registrant and Quality of Life
Holdings, Inc., and
(D) Stock Pledge Agreement dated as of October 26,
2007 between the Registrant and Quality of Life
Holdings, Inc.
10.2**
Registration Rights Agreement dated October 26, 2007 between
the Registrant and Quality of Life Holdings, Inc.
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.
*Incorporated by reference to Exhibit 10.1 of the Registrant's
Current Report on Form 8-K dated October 26, 2007.
**Incorporated by reference to Exhibit C to Exhibit 10.1 of
the Registrant's Current Report on Form 8-K dated October 26,
2007.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALMOST FAMILY, INC.
Date: November 14, 2007 By /s/ William B. Yarmuth
----------------------
William B. Yarmuth
Chairman of the Board, President & Chief
Executive Officer
By /s/ C. Steven Guenthner
-----------------------
C. Steven Guenthner
Senior Vice President and
Chief Financial Officer