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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________to_______
Commission file number 1-9848
ALMOST FAMILY, INC. TM
(Exact name of registrant as specified in its charter)
Delaware 061-153720
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
9510 Ormsby Station Road, Suite 300 40223
(Address of principal executive offices) (Zip Code)
(502) 891-1000 (Registrant's
telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No ____.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes ____ No_X_.
Indicate 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 12, 2003 2,296,527
ALMOST FAMILY, INC. AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
and December 31, 2002 3
Consolidated Statements of Income for the Three
Months ended September 30, 2003 and 2002 4
Consolidated Statements of Income for the Nine
Months ended September 30, 2003 and 2002 5
Consolidated Statements of Cash Flows for the Nine
Months ended September 30, 2003 and 2002 6
Notes to Interim Consolidated Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-25
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 26
Item 4. Controls and Procedures 26
Part II. Other Information
Items 1 through 6 27-28
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
September 30, December 31,
ASSETS 2003 2002
------
------------------- ------------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 590,880 $ 973,534
Accounts receivable - net 14,555,328 17,118,539
Prepaid expenses and other current assets 675,261 602,759
Deferred tax assets 1,166,720 1,396,306
------------------- ------------------
TOTAL CURRENT ASSETS 16,988,189 20,091,138
CASH HELD IN ESCROW (Note 10) 1,154,241 -
PROPERTY AND EQUIPMENT - NET 8,616,483 9,149,782
GOODWILL 6,335,783 6,335,783
DEFERRED TAX ASSETS - 212,914
OTHER ASSETS 260,137 1,010,406
------------------- ------------------
$ 33,354,833 $ 36,800,023
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,922,577 $ 2,711,970
Accrued other liabilities 6,768,836 6,560,330
Current portion - capital leases and term debt 228,915 352,452
Revolving Credit Facility 11,429,216 -
------------------ -------------------
20,349,544 9,624,752
------------------ -------------------
LONG-TERM LIABILITIES:
Revolving Credit Facility - 14,482,237
Capital leases 1,141,473 882,809
Mortgage and acquisition notes payable 300,000 560,118
Deferred tax liabilities 63,231 -
Other liabilities 344,962 1,146,023
------------------ -------------------
TOTAL LONG-TERM LIABILITIES 1,849,666 17,071,187
------------------ -------------------
TOTAL LIABILITIES 22,199,210 26,695,939
------------------ -------------------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,394,874 and 3,369,674 issued 339,490 336,970
Treasury stock, at cost, 1,096,783 and 1,087,383 shares (7,772,048) (7,706,152)
Additional paid-in capital 26,439,304 26,335,863
Accumulated deficit (7,851,123) (8,862,597)
------------------ -------------------
TOTAL STOCKHOLDERS' EQUITY 11,155,623 10,104,084
------------------ -------------------
$ 33,354,833 $ 36,800,023
================== ===================
See accompanying notes to interim consolidated financial statements
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
----------------- --- ------------------
September 30, September 30,
2003 2002
----------------- ------------------
Net revenues $ 21,649,757 $ 21,908,806
Cost of services 18,157,144 18,256,946
General and administrative expenses 1,895,038 1,933,077
Depreciation and amortization expense 588,468 570,554
Provision for uncollectible accounts 381,613 366,765
------------------ ------------------
Income before interest expense and income taxes 627,494 781,464
Interest expense 155,250 212,111
------------------ ------------------
Income before income taxes 472,244 569,353
Income tax expense 188,898 228,226
------------------ ------------------
Net income $ 283,346 $ 341,127
================== ==================
Earnings per common share:
Basic $ 0.12 $ 0.14
Diluted $ 0.11 $ 0.12
Weighted average shares outstanding:
Basic 2,296,527 2,397,563
Diluted 2,555,081 2,812,119
See accompanying notes to interim consolidated
financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine Months Ended
----------------------------------------------
September 30, 2003 September 30, 2002
--------------------- --------------------
Net revenues $ 65,003,964 $ 63,302,774
Cost of services 54,124,807 51,940,365
General and administrative expenses 5,644,264 5,636,449
Depreciation and amortization expense 1,819,888 1,623,574
Provision for uncollectible accounts 1,230,177 1,060,021
Cost of restatement - 815,794
---------------------- -------------------
Income before interest expense and income taxes 2,184,828 2,226,571
Interest expense 499,037 612,063
---------------------- -------------------
Income before income taxes 1,685,791 1,614,508
Income tax expense 674,317 646,288
---------------------- -------------------
Net income $ 1,011,474 $ 968,220
====================== ===================
Earnings per common share:
Basic $ 0.44 $ 0.39
Diluted $ 0.40 $ 0.33
Weighted average shares outstanding:
Basic 2,294,182 2,464,858
Diluted 2,524,060 2,913,739
See accompanying notes to interim consolidated financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
-----------------------------------------------
September 30, 2003 September 30, 2002
------------------------ ---------------------
Cash flows from operating activities:
Net income $ 1,011,474 $ 968,220
Adjustments to reconcile net income to net cash
provided
by operating activities:
Depreciation and amortization 1,819,888 1,623,574
Deferred income taxes 505,731 91,622
Gain on sale of asset (76,813) -
Provision for uncollectible accounts 1,230,177 1,060,021
------------------------ ---------------------
4,490,457 3,743,437
Change in certain net assets, net of effects of business acquisition:
(Increase) decrease in:
Accounts receivable 1,333,033 591,812
Prepaid expenses and other current assets (184,126) 287,190
Other assets 750,269 143,013
Increase (decrease) in:
Accounts payable and accrued liabilities (551,074) 282,695
Other liabilities (801,061) (68,196)
------------------------ ---------------------
Net cash provided by operating activities 5,037,498 4,979,951
------------------------ ---------------------
Cash flows from investing activities:
Cash held in escrow (1,154,241) -
Capital expenditures (1,157,108) (1,751,318)
Cash received from sale of asset 149,469 -
Acquisition of business - (2,874,513)
------------------------ ---------------------
Net cash used in investing activities (2,161,880) (4,625,831)
------------------------ ---------------------
Cash flows from financing activities:
Net revolving credit facility (payments) borrowings (3,053,021) 1,259,549
Repurchase of common shares (65,896) (1,874,484)
Proceeds from stock option exercises 76,150 89,418
Principal payments on debt and capital leases (215,505) (253,571)
------------------------ ---------------------
Net cash used in financing activities (3,258,272) (779,088)
------------------------ ---------------------
Net decrease in cash and cash equivalents (382,654) (424,968)
Cash and cash equivalents at beginning of period 973,534 1,928,391
------------------------ ---------------------
Cash and cash equivalents at end of period $ 590,880 $ 1,503,423
======================== =====================
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 and
nine months ended September 30, 2003 and 2002 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 the Company's Form 10-K
for the year ended December 31, 2002 for further information. In the opinion of
management of the Company, the accompanying unaudited interim financial
statements reflect all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the financial position at September 30, 2003 and the
results of operations and cash flows for the three and nine month periods ended
September 30, 2003 and 2002.
The results of operations for the three and nine months ended September 30,
2003 are not necessarily indicative of the operating results for the year.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Financial Statement Reclassifications
Certain amounts have been reclassified in the September 2002 financial
statements and related notes in order to conform to the 2003 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.
The ability of payors to meet their obligations depends upon their financial
stability, future legislation and regulatory actions. With the exception of the
matter discussed in Note 7, the Company does not believe there are any
significant credit risks associated with receivables from Federal and state
third-party reimbursement programs. The allowance for doubtful accounts
principally consists of management's estimate of amounts that may prove
uncollectible for coverage, eligibility and technical reasons.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Medicare Reimbursement for Visiting Nurse Services
A Medicare rate increase of approximately 2.2% went into effect for Visiting
Nurse services on October 1, 2003. However, the Medicare Prescription Drug
legislation currently under consideration in the U.S. Congress could have a
significant impact. House and Senate versions passed in the last session of
Congress have reportedly been reconciled in conference, and if passed would
provide a 5% rural rate add-on and eliminate the proposed beneficiary
co-payment. The Company is currently unable to predict what changes, if any,
will ultimately be made to the current laws and regulations and accordingly what
impact such changes might have on the Company's results of operations, financial
condition or liquidity.
Medicaid Reimbursement for the Company's Services
Approximately 49% of the Company's revenues are from state Medicaid programs,
virtually all of which are currently facing significant budget issues. The
Medicaid programs in each of the states in which the Company operates 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 paid 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 slowing
of the US economy. The Company believes 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 the Company's results of operations, financial condition and
liquidity.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
3. Segment Data
The Company operates in two reportable business segments: Adult Day Health
Services (ADHS), and Visiting Nurses (VN). 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 ADHS segment includes
the aggregation of its Adult Day Care (ADC) in-center operations and in-home
personal care operations, both of which provide predominantly long-term health
care and custodial services that enable recipients to avoid nursing home
admission. Sources of reimbursement, reimbursement rates per day and
contribution margins from the Company's ADC and in-home personal care operations
are substantially alike. 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. Approximately 90% of the VN
segment revenues are generated from the Medicare program. VN Medicare revenues
are generated on a per episode basis rather than a fee per visit or day of care.
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has operations in Alabama,
Connecticut, Florida, Indiana, Kentucky, Maryland, Massachusetts, and Ohio.
Three Months Ended September 30, Nine Months Ended September 30,(1)
----------------- -- --------------- ------------------- -- -----------------
2003 2002 2003 2002
----------------- --------------- ------------------- -----------------
Net Revenues
Adult day health services $ 14,729,433 $ 15,164,663 $ 43,141,091 $ 42,032,355
Visiting nurses 6,920,324 6,744,143 21,862,873 21,270,419
----------------- --------------- ------------------- -----------------
$ 21,649,757 $ 21,908,806 $ 65,003,964 $ 63,302,774
================= =============== =================== =================
Operating Income
Adult day health services 779,380 756,841 1,446,404 1,968,155
Visiting nurses 417,445 617,711 2,424,460 2,776,033
----------------- --------------- ------------------- -----------------
1,196,825 1,374,552 3,870,864 4,744,188
Corporate/unallocated(1) 569,331 593,088 1,686,036 2,517,617
----------------- --------------- ------------------- -----------------
Operating income $ 627,494 $ 781,464 $ 2,184,828 $ 2,226,571
================= =============== =================== =================
(1) The nine months ended September 30, 2002 includes approximately $816,000
related to the costs of conducting an investigation of the restatement of the
financial statements.
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 $243,000 and $489,000 were
capitalized in the three months ended September 30, 2003 and 2002, respectively,
and $773,000 and $1,069,000 in the nine months ended September 2003 and 2002,
respectively. Capitalized software development costs are amortized over a
three-year period following the initial implementation of the software.
5. Acquisition of Ohio Home Care Provider
On July 18, 2002, the Company acquired the business and assets of Medlink of
Ohio (Medlink). Medlink is a provider of in-home personal care services with
branch operations in Cleveland and Akron, Ohio.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The purchase price was approximately $3.2 million, $2.9 million of which was
funded from the Company's bank credit facility. The balance was financed with a
three-year note payable to the seller. The acquired operations added
approximately $489,000 and $4.2 million to revenues and $87,000 and $641,000 to
consolidated pre-tax income for the quarter and nine months ended September 30,
2003, respectively.
The unaudited pro forma consolidated results of operations of the Company as if
this acquisition had been made at the beginning of 2002 are as follows:
Three Months Ended Nine Months Ended
---------------------- -- --------------------- ---------------------- --- ---------------------
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
---------------------- --------------------- ---------------------- ---------------------
Net revenues $ 21,649,757 $ 22,298,872 $ 65,003,964 $ 67,695,061
Net income 283,346 370,539 1,011,474 1,272,090
Earnings per share:
Basic $ 0.12 $ 0.15 $ 0.44 $ 0.52
Diluted $ 0.11 $ 0.13 $ 0.40 $ 0.44
6. Revolving Credit Facility
The Company has a $22.5 million credit facility with Bank One Kentucky NA with
an expiration date of June 30, 2004. Because the facility expires within one
year, it has been classified as a current liability in the accompanying balance
sheet as of September 30, 2003. The credit facility bears interest at the bank's
prime rate plus a margin (ranging from 0% to 1.0%, currently 0%) 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% and 4.75%
for the quarters ended September 30, 2003 and 2002, respectively, and 4.18% and
5.26% for the nine months ended September 30, 2003 and 2002, respectively. The
interest rate in effect at September 30, 2003 was 4.00%. The Company pays a
commitment fee of 0.5% per annum on the unused facility balance. Borrowings are
available equal to the greater of: a) a multiple of earnings before interest,
taxes, depreciation and amortization (as defined) or b) an asset based formula,
primarily based on accounts receivable. Borrowings under the facility may be
used for working capital, capital expenditures, acquisitions, development and
growth of the business and other corporate purposes. As of September 30, 2003
the formula permitted approximately $17.1 million to be used, of which
approximately $11.4 million was outstanding. Additionally, an irrevocable letter
of credit, totaling $3.6 million, was outstanding in connection with the
Company's self-insurance programs. Thus, a total of $15 million was either
outstanding or committed as of September 30, 2003 while an additional $2.1
million was available for use. The Company's revolving credit facility is
subject to various financial covenants. As of September 30, 2003, the Company
was in compliance with the covenants.
7. Kentucky Transportation Program
Prior to July 1, 2002, the Medicaid program of the Commonwealth of Kentucky (the
Commonwealth) managed its transportation program internally. Effective July 1,
2002 the Medicaid program contracted with an independent broker (the Broker) for
the management of its transportation reimbursement program in the Louisville KY
area. The Broker then contracted with the Company, among others, for the
provision of transportation services to Medicaid beneficiaries. Company services
pursuant to the contract were limited to transportation of Medicaid
beneficiaries who also attend the Company's in-center adult day care programs.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Broker almost immediately began to encounter significant financial
difficulties and has 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 U.S. Bankruptcy Court to liquidate
the Broker under Chapter 7 of the Federal Bankruptcy Code. On November 25, 2002
the Broker voluntarily chose to convert their bankruptcy status to a Chapter 11
voluntary reorganization.
In May 2003, the Company, along with a group of other effected providers, 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 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. As of September 30,
2003 and December 31, 2002, the Broker owed the Company approximately $535,000,
which amount is included in "Accounts receivable - net" on the accompanying
balance sheets. Although the Company currently believes it will be successful in
ultimately collecting the amounts due under this arrangement, there can be no
assurance that such amounts will in fact be collected. Should it become evident
in the future that a material amount will not be collectible, the Company would,
at that time, record an additional provision for uncollectible accounts.
8. 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. The Company's pro forma information is as follows.
Three Months Ended Nine Months Ended
-------------------- --- ------------------- ------------------- --- --------------------
September 30, 2003 September 30, 2002 September 30, 2003 September 30, 2002
-------------------- ------------------- ------------------- --------------------
Net income as reported $ 283,346 $ 341,127 $ 1,011,474 $ 968,220
Pro forma stock-based
compensation expense,
net of tax 16,048 48,143
16,850 50,550
-------------------- ------------------- ------------------- --------------------
Pro forma net income $ 267,298 $ 324,277 $ 963,331 $ 917,670
==================== =================== =================== ====================
Earnings per common share:
Basic - as reported $ 0.12 $ 0.14 $ 0.44 $ 0.39
Basic - pro forma $ 0.12 $ 0.14 $ 0.42 $ 0.37
Diluted - as reported $ 0.11 $ 0.12 $ 0.40 $ 0.33
Diluted - pro forma $ 0.10 $ 0.12 $ 0.38 $ 0.31
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
9. 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 in any of the periods
presented. 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, September 30, September 30, 2002
2003 2002 2003
---------------- ----------------- ----------------- -------------------
Shares used to compute basic
earnings per common share -
weighted average shares
outstanding 2,296,527 2,397,563 2,294,182 2,464,858
Dilutive effect of stock
options 258,554 414,556 229,878 448,881
---------------- ----------------- ----------------- -------------------
Shares used to compute
diluted earnings per common
share 2,555,081 2,812,119 2,524,060 2,913,739
================ ================= ================= ===================
10. COMMITMENTS AND CONTINGENCIES
Insurance Programs
Self-Insurance Programs. The Company bears significant risk under its
self-insured employee health, automobile and workers' compensation programs. A
brief description of each program is set forth below:
The Company's self-insured employee health program has an excess-loss insurance
policy that reimburses the Company for covered expenses, in excess of a specific
deductible for each covered person. Cigna Healthcare, a national insurance
carrier, is the third party administrator.
Under its automobile and workers' compensation self-insurance programs, the
Company bears risk up to $100,000 per incident and up to an annual aggregate
deductible. The Company carries insurance coverage for amounts in excess of the
$100,000 per incident amount and for amounts in excess of the annual aggregate
deductible. Additionally, the Company also carries umbrella coverage.
The Company records estimated liabilities for its health, automobile, and
workers' compensation self-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.
Other Insurance. The Company's properties are covered by casualty insurance
policies. The Company also carries directors and officers, general and
professional liability, and umbrella insurance. The Company's deductible amount
for general and professional claims was $5,000 per claim prior to July 1, 2001
and $25,000 thereafter. The Company's insurance policies would not cover any
award of, or settlement based upon, punitive damages that might be made on
claims in conjunction with these policies.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The Company monitors its estimated self-insurance liabilities on a quarterly
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.
The Company's insurance coverages were renewed effective April 1, 2003 with the
following changes: 1) the deductible amount for general and professional claims
was increased to $250,000, 2) the deductible amount for workers' compensation
claims was increased to $250,000 (auto remains at $100,000), and 3) total
premiums, excluding the Company's exposure to claims and deductibles, for all
its non-health insurance programs increased to approximately $2.5 million for
the contract year ending March 31, 2004 as compared to approximately $1.5
million for the contract year ended March 31, 2003.
Legal Proceedings
Franklin Case
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. 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 in an escrow account with the
Tennessee Courts in lieu of a supersedeas appeal bond until the appeal court
issues a review order. 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 that the
damage award by the lower court does not create a "probable" loss as set forth
in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." Accordingly, no provision for the damages award has been
recorded in the accompanying financial statements. Should the facts and
circumstances change in the future to the extent that such a loss appears
probable, the Company would record a provision at that time.
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.
Other Claims and Suits
The Company is currently, and from time to time, subject to other claims and
suits arising in the ordinary course of its business, including claims for
damages for personal injuries, some of which seek punitive damages that are not
covered by insurance. In the opinion of management, the ultimate resolution of
any of these other pending claims and legal proceedings will not have a material
effect on the Company's financial position or results of operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Company cautions investors that any
forward-looking statements made by the Company 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 Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations, in the Company's Form 10-K for the year ended December 31, 2002.
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 the
Form 10-K for the year ended December 31, 2002 for a detailed discussion of the
Company's critical accounting policies.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2003 Compared with Three Months Ended September
30, 2002
Consolidated 2003 2002 Change
------------
--------------------------- -------------------------- ------------------------
Amount % Rev Amount % Rev Amount %
--------------- ----------- --------------- ---------- -------------- ---------
Net revenues ADHS $14,729,433 68.0% $ 15,164,663 69.2% $ (435,230) -2.9%
VN 6,920,324 32.0% 6,744,143 30.8% 176,181 2.6%
--------------- --------------- --------------
$21,649,757 100.0% $ 21,908,806 100.0% $ (259,049) -1.2%
=============== =============== ==============
Operating income ADHS $ 779,380 5.3% $ 756,841 5.0% $ 22,539 3.0%
VN 417,445 6.0% 617,711 9.2% (200,266) -32.4%
--------------- --------------- --------------
1,196,825 5.5% 1,374,552 6.3% (177,727) -13.0%
Unallocated corporate expenses 569,331 2.6% 593,088 2.7% (23,757) -4.0%
--------------- --------------- --------------
Income before interest expense and
income taxes 627,494 2.9% 781,464 3.6% (153,970) -19.7%
Interest expense 155,250 0.7% 212,111 1.0% (56,861) -26.8%
Income taxes 188,898 0.9% 228,226 1.0% (39,328) -17.2%
--------------- --------------- --------------
Net income $ 283,346 1.3% $ 341,127 1.6% $ (57,781) -17.0%
=============== =============== ==============
The Company's net revenues decreased approximately $259,000 or 1.2%. The
acquisition of Medlink OH accounted for approximately $489,000 of revenue growth
between periods while other ADHS revenues decreased due to the closure of
certain operations and lower sales volumes in 2003. VN segment revenues grew
2.6% as volume growth more than offset the revenue effect of a 5.3% Medicare
rate cut effective October 1, 2002. Operating income before unallocated
corporate expense decreased from the same period last year primarily as a result
of the lower volumes in ADHS, the Medicare rate cut and increased staffing
costs. The Medlink acquisition added approximately $87,000 to pre-tax income in
the quarter ended September 30, 2003.
The effective income tax rate was approximately 40% of income before income
taxes for 2003 and 2002.
Adult Day Health Services (ADHS) Segment-Three Months
The Company's ADHS segment includes the aggregation of its ADC in-center
operations and in-home personal care operations, both of which provide
predominantly long-term health care and custodial services that enable patients
to avoid nursing home admission. Sources of reimbursement, reimbursement rates
per day and contribution margins from the Company's ADC and personal care
operations are alike.
Three Months Ended September 30,
--------------------------- --------------------------- -------------------------
2003 2002 Change
--------------------------- --------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ---------- ---------------- ---------- --------------- ---------
Net revenues $ 14,729,433 100.0% $ 15,164,663 100.0% $ (435,230) -2.9%
Cost of services 12,537,679 85.1% 13,036,919 86.0% (499,240) -3.8%
General & administrative 835,783 5.7% 853,989 5.6% (18,206) -2.1%
Depreciation & amortization 322,977 2.2% 281,810 1.9% 41,167 14.6%
Uncollectible accounts 253,614 1.7% 235,104 1.6% 18,510 7.9%
---------------- ---------------- ---------------
Operating income $ 779,380 5.3% $ 756,841 5.0% $ 22,539 3.0%
================ ================ ===============
Admissions 863 977 (114) -11.7%
Patient months of care 15,201 15,790 (589) -3.7%
Patient days of care 204,726 207,733 (3,007) -1.4%
Revenue per patient day $ 71.95 $ 73.00 $ (1.05) -1.4%
ADC in-center averages:
Weekday attendance 1,271 1,321 (50) -3.8%
Center capacity 1,670 1,791 (121) -6.8%
Center occupancy rate 76.1% 73.7% 2.4% 3.2%
ADHS revenues decreased 2.9% to $14.7 million for the three months ended
September 30, 2003 from $15.2 million in the same quarter of the prior year for
a total decrease of $435,000. The acquisition of Medlink Ohio, an in home
personal care operation, increased revenues approximately $489,000. ADHS
revenues excluding the Medlink acquisition: 1) decreased approximately $600,000
due to the closure of certain adult day centers and one personal care operation,
2) decreased approximately $700,000 due to lower volumes in Kentucky adult day
centers and personal care operations primarily due to Kentucky Medicaid program
cut-backs and, 3) increased approximately $333,000 primarily due to higher sales
volumes in the non-Kentucky operations. Average revenue per day of care declined
slightly due primarily to mix changes. Occupancy in the adult day care centers
was 76.1% of capacity in 2003 as compared to 73.7% in 2002.
Cost of services declined 3.8% on a reduction in days sold of 1.4% due to 1) the
closure of operations, 2) improved controls over staffing costs and 3) lower
vehicle insurance claims. General and administrative expenses as a percent of
revenues were substantially the same in both periods. Depreciation and
amortization increased primarily due to the addition of new guest transportation
vans and investments in information technology.
ADHS Seasonality
The Company's ADHS segment normally experiences seasonality in its operating
results. Specifically, 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.
Visiting Nurse (VN) Segment-Three Months
The Company's VN segment provides skilled medical services in patients' homes to
enable recipients to reduce or avoid periods of hospitalization and/or nursing
home care. Approximately 90% of the VN segment revenues come from the Medicare
program and are generated on a per episode basis rather than a daily fee basis
as in ADHS.
Three Months Ended September 30,
------------------------ -------------------------- --------------------------
2003 2002 Change
------------------------ -------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
------------- ---------- ---------------- --------- ---------------- ---------
Net revenues $ 6,920,324 100.0% $ 6,744,143 100.0% $ 176,181 2.6%
Cost of services 5,619,465 81.2% 5,220,027 77.4% 399,438 7.7%
General & administrative 552,581 8.0% 532,767 7.9% 19,814 3.7%
Depreciation & amortization 202,834 3.0% 241,977 3.6% (39,143) -16.2%
Uncollectible accounts 127,999 1.9% 131,661 2.0% (3,662) -2.8%
------------- ---------------- ----------------
Operating income 417,445 6.0% $ 617,711 9.2% $ (200,266) -32.4%
============= ================ ================
Admissions 2,241 2,092 149 7.1%
Patient months of care 5,934 5,424 510 9.4%
Revenue per patient month $ 1,166 $ 1,243 $ (77) -6.2%
Cost of services per patient month $ 947 $ 962 $ (15) -1.6%
A Medicare rate decrease of approximately 5.3% went into effect October 1, 2002.
As a result, revenues for the quarter ended September 30, 2003 were
approximately $350,000 lower than they would have been if that rate cut had not
been enacted. Additionally, effective April 1, 2003, Medicare rates for patients
served in rural areas were reduced which lowered revenues by approximately
$84,000 for the quarter ended September 30, 2003. Despite the rate cuts, VN
revenues grew by a net $176,181 or 2.6% on admission and patient month growth of
nearly 7% and 9%, respectively. The Company had the same number of agencies in
operation in both periods.
Cost of services as a percentage of revenue is higher in 2003 than 2002
primarily due to the Medicare rate cut. Cost of services per patient month
decreased 1.6% primarily as a result of lower employee benefit costs. The
decrease in revenue per patient month resulted primarily from the reimbursement
changes described above.
VN Seasonality
The Company's 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.
Nine Months Ended September 30, 2003 Compared with Nine Months Ended September 30, 2002
Consolidated 2003 2002 Change
------------
--------------------------- --------------------------- ----------------------------
Amount % Rev Amount % Rev Amount % Rev
---------------- ---------- --------------- ----------- --------------- ------------
Net revenues ADHS $ 43,141,091 66.4% $ 42,032,355 66.4% $ 1,108,736 2.6%
VN 21,862,873 33.6% 21,270,419 33.6% 592,454 2.8%
---------------- --------------- ---------------
$ 65,003,964 100.0% $ 63,302,774 100.0% $ 1,701,190 2.7%
================ =============== ===============
Operating income ADHS $ 1,446,404 3.4% $ 1,968,155 4.7% $ (521,751) -26.5%
VN 2,424,460 11.1% 2,776,033 13.1% (351,573) -12.7%
---------------- --------------- ---------------
3,870,864 6.0% 4,744,188 7.5% (873,324) -18.4%
Unallocated corporate expenses 1,686,036 2.6% 2,517,617 4.0% (831,581) -33.0%
---------------- --------------- ---------------
Income before interest expense
and income taxes 2,184,828 3.4% 2,226,571 3.5% (41,743) -1.9%
Interest expense 499,037 0.8% 612,063 1.0% (113,026) -18.5%
Income taxes 674,317 1.0% 646,288 1.0% 28,029 4.3%
---------------- --------------- ---------------
Net income $ 1,011,474 1.6% $ 968,220 1.5% $ 43,254 4.5%
================ =============== ===============
The Company's net revenues grew approximately $1.7 million or 2.7% as a result
of the Medlink acquisition and increased patient volumes in the VN segment,
partially offset by volume reductions in ADHS and reimbursement cuts in both
segments. Operating income before unallocated corporate expense decreased from
the same period last year. As noted in the discussion of quarterly results,
operating income for the nine months ended September 30, 2003 was adversely
affected by lower sales volumes in ADHS and the VN Medicare rate cuts.
Additionally, operating income in the nine months ended September 30, 2003 was
adversely affected by severe weather in February 2003. Unallocated corporate
expenses in the nine months ended September 30, 2002 include approximately
$816,000, consisting primarily of professional fees, related to the cost of
conducting an investigation of the restatement of the Company's financial
statements. Interest expense declined due to lower average balances outstanding
and due to lower interest rates.
The effective income tax rate was approximately 40% of income before income
taxes for 2003 and 2002.
Adult Day Health Services (ADHS) Segment-Nine Months
Nine Months Ended September 30,
---------------------------- -------------------------- --------------------------
2003 2002 Change
---------------------------- -------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
----------------- ---------- --------------- ---------- --------------- ----------
Net revenues $ 43,141,091 100.0% $ 42,032,355 100.0% $ 1,108,736 2.6%
Cost of services 37,365,874 86.6% 36,172,431 86.0% 1,193,443 3.3%
General & administrative 2,572,721 6.0% 2,452,557 5.6% 120,164 4.9%
Depreciation & amortization 976,405 2.3% 809,666 1.9% 166,739 20.6%
Uncollectible accounts 779,687 1.8% 629,546 1.5% 150,141 23.9%
----------------- --------------- ---------------
Operating income $ 1,446,404 3.4% $ 1,968,155 4.9% $ (521,751) -26.5%
================= =============== ===============
Admissions 2,844 3,045 (201) -6.6%
Patient months of care 45,772 45,100 672 1.5%
Patient days of care 602,256 580,324 21,932 3.8%
Revenue per patient day $ 71.63 $ 72.43 $ (0.80) -1.1%
ADC in-center averages:
Weekday attendance 1,248 1,320 (72) -5.5%
Center capacity 1,662 1,791 (129) -7.2%
Center occupancy rate 75.1% 73.7% 1.4% 1.9%
ADHS revenues increased 2.6% to $43.1 million for the nine months ended
September 30, 2003 from $42 million in the nine months of the prior year. The
acquisition of Medlink Ohio, an in-home personal care operation, increased
revenues approximately $4.2 million. ADHS revenues excluding the Medlink
acquisition: 1) decreased approximately $1.3 million due to the closure of
certain adult day centers and one personal care operation, 2) decreased
approximately $2.1 million due to lower sales volumes in Kentucky
adult day centers and personal care operations primarily due to Kentucky
Medicaid program cut-backs, 3) decreased approximately $465,000 in adult day
centers in operation in both periods, primarily due to unusually severe winter
weather in February 2003, and 4) increased approximately $733,000 due to higher
sales volumes in the non-Kentucky operations. Average revenue per day of care
declined about 1% primarily due to reimbursement and mix changes. Occupancy in
the adult day care centers was 75.1% of capacity in the 2003 period as compared
to 73.7% in the 2002 period.
Cost of services as a percent of revenues increased to 86.6% in 2003 from 86% in
2002 primarily as a result of higher staffing costs in the adult day centers,
reimbursement and mix changes, and decreased adult day care revenues resulting
from the impact of weather in 2003 as described above. General and
administrative expenses were relatively constant as a percent of revenues.
Depreciation and amortization increased primarily due to the addition of new
guest transportation vans and investments in information technology.
Visiting Nurse (VN) Segment-Nine Months
Nine Months Ended September 30,
-------------------------- --------------------------- -----------------------
2003 2002 Change
-------------------------- --------------------------- -----------------------
--------------- ---------- ---------------- ---------- ------------- ---------
Amount % Rev Amount % Rev Amount %
--------------- ---------- ---------------- ---------- ------------- ---------
Net revenues $ 21,862,873 100.0% $ 21,270,419 100.0% $ 592,454 2.8%
Cost of services 16,758,932 76.7% 15,767,933 74.1% 990,999 6.3%
General & administrative 1,572,085 7.2% 1,613,323 7.6% (41,238) -2.6%
Depreciation & amortization 656,905 3.0% 682,655 3.2% (25,750) -3.8%
Uncollectible accounts 450,491 2.1% 430,475 2.0% 20,016 4.7%
--------------- ---------------- -------------
Operating income $ 2,424,460 11.1% $ 2,776,033 13.0% $ (351,573) -12.7%
=============== ================ =============
Admissions 7,129 6,515 614 9.4%
Patient months of care 18,432 16,911 1,521 9.0%
Revenue per patient month $ 1,186 $ 1,258 $ (72) -5.7%
Cost of services per patient month $ 909 $ 932 $ (23) -2.5%
A Medicare rate decrease of approximately 5.3% went into effect October 1, 2002.
As a result, revenues for the nine-months ended September 30, 2003 were
approximately $1.1 million lower than they would have been if that rate cut had
not been enacted. Additionally, effective April 1, 2003 Medicare rates for
patients served in rural areas were reduced which lowered revenues by
approximately $176,000 for the nine months ended September 30, 2003. Despite the
rate cuts, VN revenues grew by a net $592,454 or 2.8% on admission and patient
month growth of nearly 9.4% and 9%, respectively. The Company had the same
number of agencies in operation in both periods.
Costs of services as a percentage of revenue is higher in 2003 than 2002
primarily due to the Medicare rate cut. Cost of services per patient month
decreased 2.5% primarily as a result of lower employee benefit costs. The
decrease in revenue per patient month resulted primarily from the reimbursement
changes described above.
Insurance Programs
Self-Insurance Programs. The Company bears significant risk under its
self-insured employee health, automobile and workers' compensation programs. A
brief description of each program is set forth below:
The Company's self-insured employee health program has an excess-loss insurance
policy that reimburses the Company for covered expenses, in excess of a specific
deductible for each covered person. Cigna Healthcare, a national insurance
carrier, is the third party administrator.
Under its automobile and workers' compensation self-insurance programs, the
Company bears risk up to $100,000 per incident and up to an annual aggregate
deductible. The Company carries insurance coverage for amounts in excess of the
$100,000 per incident amount and for amounts in excess of the annual aggregate
deductible. Additionally, the Company also carries umbrella coverage.
The Company records estimated liabilities for its health, automobile, and
workers' compensation self-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.
Other Insurance. The Company's properties are covered by casualty insurance
policies. The Company also carries directors and officers, general and
professional liability, and umbrella insurance. The Company's deductible amount
for general and professional claims was $5,000 per claim prior to July 1, 2001
and $25,000 thereafter. The Company's insurance policies would not cover any
award of, or settlement based upon, punitive damages that might be made on
claims in conjunction with these policies.
The Company monitors its estimated self-insurance liabilities on a quarterly
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.
The Company's insurance coverages were renewed effective April 1, 2003 with the
following changes: 1) the deductible amount for general and professional claims
was increased to $250,000, 2) the deductible amount for workers' compensation
claims was increased to $250,000 (auto remains at $100,000), and 3) total
premiums, excluding the Company's exposure to claims and deductibles, for all
its non-health insurance programs increased to approximately $2.5 million for
the contract year ending March 31, 2004 as compared to approximately $1.5
million for the contract year ended March 31, 2003.
Liquidity and Capital Resources
Revolving Credit Facility
The Company has a $22.5 million credit facility with Bank One Kentucky NA with
an expiration date of June 30, 2004. Because the facility expires within one
year, it has been classified as a current liability in the accompanying balance
sheet as of September 30, 2003. The credit facility bears interest at the bank's
prime rate plus a margin (ranging from 0% to 1.0%, currently 0%) 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% and 4.75%
for the quarters ended September 30, 2003 and 2002, respectively, and 4.18% and
5.26% for the nine months ended September 30, 2003 and 2002, respectively. The
interest rate in effect at September 30, 2003 was 4.00%. The Company pays a
commitment fee of 0.5% per annum on the unused facility balance. Borrowings are
available equal to the greater of: a) a multiple of earnings before interest,
taxes, depreciation and amortization (as defined) or b) an asset based formula,
primarily based on accounts receivable. Borrowings under the facility may be
used for working capital, capital expenditures, acquisitions, development and
growth of the business and other corporate purposes. As of September 30, 2003
the formula permitted approximately $17.1 million to be used, of which
approximately $11.4 million was outstanding. Additionally, an irrevocable letter
of credit, totaling $3.6 million, was outstanding in connection with the
Company's self-insurance programs. Thus, a total of $15 million was either
outstanding or committed as of September 30, 2003 while an additional $2.1
million was available for use. The Company's revolving credit facility is
subject to various financial covenants. As of September 30, 2003, the Company
was in compliance with the covenants.
Management is in the process of seeking a replacement senior credit facility and
will also be evaluating other opportunities to raise capital to fund continued
growth and development of the business.
Stock Buy Back Program
In March 2001 the Company's Board of Directors authorized up to $1 million to be
used to acquire shares of the Company's common stock. In April 2001, the Company
initiated a stock repurchase plan in compliance with Rule 10b-18 of the
Securities Exchange Act of 1934. This plan permits purchases to take place
selectively from time to time in open market purchases through a broker or in
privately negotiated transactions. Through September 30, 2003, a total of
106,771 shares have been repurchased under this program, all of which were in
open market purchases. A total of $957,030 has been expended in these purchases
for an average acquisition cost of $8.96 per share. There were no purchases in
the quarter ended September 30, 2003.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the nine months
ending September 30, 2003 and 2002 were:
Net Change in Cash and Cash Equivalents 2003 2002
---------------------------------------
--------------------- -------------------
Provided by (used in):
Operating activities $ 5,037,498 $ 4,979,951
Investing activities (2,161,880) (4,625,831)
Financing activities (3,258,272) (779,088)
--------------------- -------------------
Net decrease in cash and cash equivalents $ (382,654) $ (424,968)
===================== ===================
2003
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 61 at
September 30, 2003, down from 69 at December 31, 2002 due primarily to the
collection of Medicare cost report settlements. Net cash used in investing
activities resulted principally from the posting of the supersedeas appeal bond
in the Franklin litigation, improvements in information systems and replacement
capital expenditures in the Company's operations net of cash received from the
sale of an asset. Net cash used by financing activities resulted primarily from
net repayments on the Company's revolving credit facility and payments of
capital lease obligations and term debt.
2002
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 sales outstanding were 70 at
September 30, 2002, down from 80 at December 31, 2001 due primarily to the
collection of Medicare cost report settlements. The Medlink acquisition
increased Accounts Receivable by $1.8 million at September 30, 2002 as delays in
Medicaid processing normally encountered due to a change in ownership caused a
temporary interruption in cash receipts. Normal cash processing resumed
subsequent to September 30, 2002. Excluding the effects of Medlink, days sales
outstanding at September 30, 2002 were 67. Net cash used in investing activities
resulted principally from the cash paid in the acquisition of Medlink and from
improvements in information systems. Net cash used by financing activities
resulted primarily from the redemption of common shares and payments of capital
lease obligations net of borrowings on the Company's credit facility.
Legal Proceedings
Franklin Case
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. 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 in an escrow account with the
Tennessee Courts in lieu of a supersedeas appeal bond until the appeal court
issues a review order. 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 that the
damage award by the lower court does not create a "probable" loss as set forth
in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." Accordingly, no provision for the damages award has been
recorded in the accompanying financial statements. Should the facts and
circumstances change in the future to the extent that such a loss appears
probable, the Company would record a provision at that time.
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.
Other Claims and Suits
The Company is currently, and from time to time, subject to other claims and
suits arising in the ordinary course of its business, including claims for
damages for personal injuries, some of which seek punitive damages that are not
covered by insurance. In the opinion of management, the ultimate resolution of
any of these other pending claims and legal proceedings will not have a material
effect on the Company's financial position or results of operations.
Kentucky Transportation Program
Prior to July 1, 2002, the Medicaid program of the Commonwealth of Kentucky (the
Commonwealth) managed its transportation program internally. Effective July 1,
2002 the Medicaid program contracted with an independent broker (the Broker) for
the management of its transportation reimbursement program in the Louisville KY
area. The Broker then contracted with the Company, among others, for the
provision of transportation services to Medicaid beneficiaries. Company services
pursuant to the contract were limited to transportation of Medicaid
beneficiaries who also attend the Company's in-center adult day care programs.
The Broker almost immediately began to encounter significant financial
difficulties and has 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 U.S. Bankruptcy Court to liquidate
the Broker under Chapter 7 of the Federal Bankruptcy Code. On November 25, 2002,
the Broker voluntarily chose to convert their bankruptcy status to a Chapter 11
voluntary reorganization.
In May 2003, the Company, along with a group of other effected providers, 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 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. As of September 30,
2003 and December 31, 2002, the Broker owed the Company approximately $535,000,
which amount is included in accounts receivable, net on the accompanying balance
sheets. Although the Company currently believes it will be successful in
ultimately collecting the amounts currently due it under this arrangement, there
can be no assurance that such amounts will in fact be collected. Should it
become evident in the future that a material amount will not be collectible, the
Company would, at that time, record an additional provision for uncollectible
accounts.
Medicare Reimbursement for Visiting Nurse Services
A Medicare rate increase of approximately 2.2% went into effect for Visiting
Nurse services on October 1, 2003. However, the Medicare Prescription Drug
legislation currently under consideration in the U.S. Congress could have a
significant impact. House and Senate versions passed in the last session of
Congress have reportedly been reconciled in conference, and if passed would
provide a 5% rural rate add-on and eliminate the proposed beneficiary
co-payment. The Company is currently unable to predict what changes, if any,
will ultimately be made to the current laws and regulations and accordingly what
impact such changes might have on the Company's results of operations, financial
condition or liquidity.
Medicare Reimbursement for Adult Day Care
In addition to the above, the Medicare Prescription Drug legislation versions
also contain two similar provisions that would create a Federal demonstration
project impacting medical adult day care. Both provisions authorize a new
demonstration project that would pay for home health beneficiaries receiving
their treatment in medical adult day care centers. This project would be the
first step toward the industry's goal of accessing Medicare reimbursement. The
Company believes that if this demonstration project is initiated it will offer
significant additional long-term development opportunities by providing access
to the Medicare Home Health Benefit.
Medicaid Reimbursement for the Company's Services
Approximately 49% of the Company's revenues are from state Medicaid programs,
virtually all of which are currently facing significant budget issues. The
Medicaid programs in each of the states in which the Company operates 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 paid 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 slowing
of the US economy. The Company believes 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 that the actions taken by the state
Medicaid programs could have a significant unfavorable impact on the Company's
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 reimbursement. There can be no assurance that
future legislation or regulatory changes will not have a material adverse effect
on the operations of the Company.
Federal and State legislative proposals continue to be introduced that would
impose more limitations on payments to providers of health care services such as
the Company. As discussed above, economic conditions are such that many states
have enacted, or are considering enacting, measures that are designed to reduce
their Medicaid expenditures.
The Company cannot predict what additional government regulations may be enacted
in the future affecting its business or how existing or future laws and
regulations might be interpreted, or whether the Company will be able to comply
with such laws and regulations in its existing or future markets.
Refer to the section on Cautionary Statements - Forward Outlook and Risks in
Part I, and the Notes to the Financial Statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Form 10-K for the year ended December 31, 2002 for additional information.
Health Insurance Portability and Accountability Act (HIPAA)
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. Management
implemented changes in its operations to comply with the privacy aspects of
HIPAA and believes it is in compliance. The cost of complying with privacy
standards is not expected to have a material effect on the Company's results of
operations or financial position. Management is in the process of implementing
changes in its operations to comply with the electronic transaction and code
sets aspects of HIPAA and anticipates that the Company will be able to fully and
timely comply with those requirements. Independent of HIPAA requirements, the
Company has been developing new information systems with improved functionality
to facilitate improved billing and collection activities, reduced administrative
costs and improved management decision support information. The Company has
incorporated the HIPAA mandated electronic transaction and code sets into this
new software.
Regulations with regard to the security components of HIPAA, have only recently
been published. Those regulations are required to be implemented by April 2005.
Management cannot at this time estimate the cost of compliance with the security
regulations.
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
The Company's primary market risk exposure with regard to financial instruments
is to changes in interest rates.
At September 30, 2003, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of approximately $115,000 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. 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 in an escrow account with the
Tennessee Courts in lieu of a supersedeas appeal bond until the appeal court
issues a review order. 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 that the
damage award by the lower court does not create a "probable" loss as set forth
in Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies." Accordingly, no provision for the damages award has been
recorded in the accompanying financial statements. Should the facts and
circumstances change in the future to the extent that such a loss appears
probable, the Company would record a provision at that time.
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.
Item 2. Changes in Securities
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
(a) Exhibits
31.1
Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2
Certifications of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32
Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated August 14, 2003, Item 12,
to report the issuance of a press release announcing its
operating results for the three months ended June 30, 2003.
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.
Date: November 14, 2003
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
Exhibit 31.1
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, William B. Yarmuth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Almost Family, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) All significant deficiencies in the design or operation of internal
controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize
and report financial data; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: November 14, 2003
BY /s/ William B. Yarmuth
William B. Yarmuth
Chairman of the Board, President &
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT
I, C. Steven Guenthner, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Almost Family, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be
designed under our supervision, to ensure that material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of
registrant's board of directors:
(a) All significant deficiencies in the design or operation of internal
controls over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize
and report financial data; and
(b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls over financial reporting.
Date: November 14, 2003
BY /s/ C. Steven Guenthner
C. Steven Guenthner
Senior Vice President &
Chief Financial Officer
Exhibit 32
CERTIFICATIONS OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
(AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002)
In connection with the Quarterly Report of Almost Family, Inc. (the
"Company") on Form 10-Q for the period ended September 30, 2003, as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), the
undersigned, the Chief Executive Officer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, that:
(1) The Report fully complies with the requirements of Section
13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in
all material respects, the financial condition and results of
operations of the Company.
Date: November 14, 2003 By /s/ William B. Yarmuth
----------------- ------------------------
William B. Yarmuth
Chairman of the Board, President & Chief
Executive Officer
Date: November 14, 2003 By /s/ C. Steven Guenthner
----------------- -------------------------
C. Steven Guenthner
Senior Vice President & Chief
Financial Officer
A signed copy of this original statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff on request.