SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
/ X / ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2003
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-09848
ALMOST FAMILY, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1153720
(State or other jurisdiction of (IRS Employer
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)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on
Common Stock, par value $.10 per share Which Registered
Preferred Stock Purchase Rights NASDAQ SmallCap System
Indicate by check mark whether the Registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities 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 if disclosure of delinquent filers pursuant to Item 405
of regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. ____X__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes ___ No__X__.
The aggregate market value of Registrant's Common Stock held by non-affiliates
of the Registrant as of June 30, 2003 was approximately $17,798,000 (based on
the last sale price of a share of the common stock as of June 30, 2003 ($7.75),
as reported by the NASDAQ SmallCap System). As of March 24, 2004, 2,296,527
shares of the Registrant's Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant's Annual Meeting of
Stockholders, to be held May 24, 2004, is incorporated by reference in Part III
to the extent described therein.
TABLE OF CONTENTS
PART I ............................................................................................3
Item 1. Business....................................................................................3
Item 2. Properties.................................................................................15
Item 3. Legal Proceedings..........................................................................15
Item 4. Submission of Matters to a Vote of Security Holders.......................................16
PART II ...........................................................................................17
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.........................................................................17
Item 6. Selected Financial Data....................................................................18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......19
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.................................34
Item 8. Financial Statements and Supplementary Data................................................35
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......59
Item 9A. Controls and Procedures....................................................................59
PART III ...........................................................................................60
Item 10. Directors and Executive Officers of the Registrant.........................................60
Items 11, 12, 13 and 14 Executive Compensation; Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters; Certain Relationships and Related Transactions; and
Principal Accountant Fees and Services......................................................61
PART IV ...........................................................................................62
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................62
PART I
ITEM 1. BUSINESS
Almost Family, Inc. TM and subsidiaries (collectively "Almost Family") is a
leading regional provider of home health nursing services and adult day health
services. In this report, the terms "Company", "we", "us" or "our" mean Almost
Family, Inc. and all subsidiaries included in our consolidated financial
statements. We have service locations in Kentucky, Florida, Maryland, Ohio,
Connecticut, Massachusetts, Alabama and Indiana (in order of revenue
significance).
We were incorporated in Delaware in 1985. Through a predecessor merged into the
Company in 1991 we have been providing health care services, primarily home
health care, since 1976. On January 31, 2000, we changed the Company's name to
Almost Family, Inc. from Caretenders (R) HealthCorp. We reported approximately
$87 million of revenues in the year ended December 31, 2003.
How We Are Currently Organized and Operate
We currently operate in two reportable business segments: Visiting Nurses and
Adult Day Health Services (ADHS). We present financial information for our two
operating segments in Note 12 to our consolidated financial statements.
Our Visiting Nurse 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 our Visiting Nurse segment
revenues are generated from the Medicare program, which is the Federal
government's health insurance program covering most US citizens over age 65. Our
Medicare revenues are generated on a per episode basis rather than a fee per
visit or day of care.
Our ADHS segment is made up of our ADC in-center operations and in-home personal
care operations (also referred to as "personal care"), both of which
predominantly provide 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 our ADC and personal
care operations are substantially alike. A majority of our revenues in the ADHS
segment are derived from Medicaid programs which are funded and administered by
states in conjunction with Federal oversight. Medicaid programs generally
provide health insurance coverage to low income aged and/or disabled persons.
As we move forward in the execution of our business plan, we may change the way
in which we are organized and operate.
Our View on Reimbursement and Diversification of Risk
Our Company is highly dependent on government reimbursement programs which pay
for the majority of the services we provide to our patients. Reimbursement under
these programs, primarily Medicare and Medicaid, is subject to frequent changes
as policy makers balance their own needs to meet the health care needs of
constituents while also meeting their fiscal objectives.
We believe that an important key to our historical success and to our future
success is our ability to adapt our operations to meet changes in reimbursement
as they occur. One important way in which we have achieved this adaptability in
the past, and in which we plan to achieve it in the future, is to maintain some
level of diversification in our business mix.
The execution of our business plan will increase the emphasis we place on our
Visiting Nurse operations. Our Adult Day Health Services operations will help us
maintain a level of diversification of reimbursement risk that we believe is
appropriate.
Our Business Plan
Our future success depends on our ability to execute our business plan. Over the
next three to five years we will try to accomplish the following:
o Generate meaningful same store sales growth through the focused
provision of high quality services and attending to the needs of our
patients;
o Expand the significance of our Visiting Nurse, Medicare-based, home
health services by selectively acquiring other quality providers; and
o Expand our capital base through both earnings performance and by
seeking additional capital investments in our Company.
Based on our business plan, we expect our Visiting Nurse revenues to grow from
under one-third of total revenues to about one-half of total revenues sometime
in the next three to five years.
Overview of Our Services
Visiting Nurse Services
Our Visiting Nurse services consist primarily of the provision of skilled
in-home medical services to patients in need of short-term recuperative health
care. A majority of our patients receive this care immediately following a
period of hospitalization or care in another type of in-patient facility. We
operate eight (8) Medicare-certified home health agencies with a total of
nineteen (19) locations. In the year ended December 31, 2003, approximately 90%
of our visiting nurse segment revenues were derived from the Federal Medicare
program.
Our Visiting Nurse segment, which uses the trade name "CaretendersTM", provides
a comprehensive range of Medicare-certified home health nursing services. We
also receive payment from Medicaid and private insurance companies. Our
professional staff includes registered nurses, licensed practical nurses,
physical, speech and occupational therapists, and medical social workers. They
monitor medical treatment plans prescribed by physicians. Our professional staff
is subject to state licensing requirements in the particular states in which
they practice. Para-professional staff, primarily home health aides, also
provide care to these patients.
Adult Day Health Services
Our adult day health centers, also referred to as "Adult Day Care" centers,
provide professional, high quality adult day health services to disabled or
frail adults who require some care or supervision, but who do not require
intensive medical attention and/or wish not to live in a nursing home or other
inpatient institution. Our average center has capacity for over 60 guests per
day. Some of our centers operate seven days a week. We also provide
transportation services to and from our centers. We believe we are either the
largest or second largest provider in the country when measured in terms of
adult day care center revenues and days of patient care.
Our adult day health centers offer a range of therapeutic and medical services
designed to promote the independence of our participants and provide respite to
their families and caregivers. Our on-site staff nurses administer medications
and give attention to medical care. We also provide (i) a light breakfast, a hot
lunch, and an afternoon snack; (ii) highly structured, individualized and
creative activity programs which include recreation, education, field trips,
sports, crafts, music and group conversations; and (iii) family counseling for
our participants. We currently operate twenty-two (22) adult day care centers.
In addition to services provided in our adult day care facilities, some adult
day health services, referred to as "Personal Care", are also provided in our
patients' homes. These services (generally provided by para-professional staff
such as home health aides) are very similar in nature to the care provided in
our facilities. This diversified service offering allows the patient and/or his
or her family the flexibility to select the venue (or combination of venues) of
care that is appropriate for them. Many Almost Family, Inc. adult day health
patients receive care both at home and in our facilities. We currently operate
nineteen (19) personal care locations.
As of December 31, 2003, we provided services through operating units in the
following locations:
Visiting Nurse Adult Day Personal Care
Locations Branches Care Centers Branches
--------------------------- ----------------------- ----------------------- ----------------------
Kentucky:
Louisville 1 2 1
Lebanon Junction 1 - -
Lexington 1 1 1
Elizabethtown 1 1 -
Owensboro 1 1 1
Northern KY (metro 1 1 -
Cincinnati)
Bardstown - 1 -
Frankfort 1 - -
Indiana:
Evansville 1 - 1
Ohio:
Cincinnati - 1 1
Columbus - 1 1
Cleveland - - 3
Massachusetts:
Boston 1 - -
Connecticut:
Stamford - - 1
Middlebury/Waterbury - 1 -
Danbury - 1 1
West Haven - - 1
Bridgeport - - 1
Maryland:
Baltimore area - 9 -
Alabama:
Birmingham - - 1
Florida:
Fort Lauderdale 1 - 1
Port St. Lucie 1 - -
Vero Beach 1 - -
West Palm Beach 1 1 1
Fort Myers 1 1 1
Sarasota 1 - 1
Port Charlotte 1 - -
Naples 1 - 1
----------------------- ----------------------- ----------------------
Total 17 22 19
======================= ======================= ======================
Compensation for Services
We are compensated for our services by (i) Medicare (Visiting Nurse only), (ii)
Medicaid (iii) other third party payors (e.g. insurance companies and other
sources), and (iv) private pay (paid by personal funds).
The rates of reimbursement we receive from Medicare, Medicaid and Other
Government programs are generally dictated by those programs. In determining
charge rates for goods and services provided to our other customers, we evaluate
several factors including cost and market competition. We sometimes negotiate
contract rates with third party providers such as insurance companies.
Our reliance on government sponsored reimbursement programs makes us vulnerable
to possible legislative and administrative regulations and budget cut-backs that
could adversely affect the number of persons eligible for such programs, the
amount of allowed reimbursements or other aspects of the program, any of which
could materially affect us. In addition, loss of certification or qualification
under Medicare or Medicaid programs could materially affect our ability to
effectively market our services.
The following table sets forth our revenues derived from each major class of
payor during the indicated periods (by percentage of net revenues):
Year Ended Year Ended December Nine Months Ended
Payor Group December 31, 2003 31, 2002 December 31, 2001
--------------------------------------- --------------------- ---------------------- ----------------------------
Medicare 30.5% 29.7% 29.2%
Medicaid and other Government
Programs 51.4% 48.8% 51.5%
Insurance and private pay 18.1% 21.5% 19.3%
Historical changes in payment sources are primarily a result of the impact of
changes in the types of customers we attract.
Our business plan calls for us to increase our payor mix to about 50% Medicare
over the next three to five years with a corresponding decrease in the
percentage of revenue derived from Medicaid and Other Government Programs.
As shown above, approximately 51% of our 2003 revenues were derived from state
Medicaid and other government programs, virtually all of which are currently
facing significant budget issues. The Medicaid programs in each of the states in
which we operate are taking actions or evaluating taking actions to reduce
Medicaid expenditures. Among these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum time in which
payments are made o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the slowing of the US economy. We believe that these
financial issues are cyclical in nature rather than indicative of the long-term
prospect for Medicaid funding of health care services. It is possible however,
that the actions taken by the state Medicaid programs in the future could have a
significant unfavorable impact on our results of operations, financial condition
and liquidity.
See "Government Regulation" and "Cautionary Statements - Forward Outlook and
Risks". We will monitor the effects of such items and may consider modifications
to our expansion and development strategy when and if necessary.
Acquisitions
Over the next three to five years we will actively seek to acquire quality
providers of Medicare-certified home health services like our current Visiting
Nurse segment operations. We may consider acquisitions of businesses that
provide health care services similar to those we currently offer in our ADHS
segment but we expect most of our acquisition activity to be focused on Visiting
Nurse operations.
Factors which may affect future acquisition decisions include the quality and
potential profitability of the business under consideration, and our
profitability and ability to finance the transaction.
In July 2002, we completed the acquisition of 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. The acquired operations give us
significant market presence in the northeast Ohio area, and are included in our
Adult Day Health Services Segment. The purchase price of this acquisition was
approximately $3.2 million, $2.9 million of which was funded from our bank
credit facility. The balance was financed with a three-year note payable to the
seller.
The following table summarizes the approximate fair values of the assets
acquired and liabilities assumed at the date of the Medlink acquisition (rounded
to nearest thousands):
Accounts receivable $ 698,000
Property and equipment 35,000
Goodwill 2,552,000
----------------
Assets acquired 3,285,000
Liabilities assumed (39,000)
----------------
Net assets acquired $ 3,246,000
================
Our unaudited pro forma consolidated results of operations as if this
acquisition had been made at the beginning of 2001 are as follows:
Year Ended December 31,
------------------ -- -------------------
2002 2001
------------------ -------------------
Revenues $ 89,260,078 $ 85,282,640
Net Income 1,624,350 4,016,577
Earnings per share:
Basic $ 0.67 $ 1.52
Diluted $ 0.60 $ 1.31
During 1998, we completed transactions to acquire two personal care and two
visiting nurse operations. These operations added to our market presence in
Florida and Connecticut. During each of the years ended March 31, 1999, 2000 and
2001 we acquired one adult day care center. No pro forma financial information
has been provided as the acquisitions, individually and in the aggregate, were
not significant compared to our existing operations.
Competition, Marketing and Customers
The visiting nurse industry is highly competitive and fragmented. Competitors
include larger publicly held companies such as Gentiva (NasdaqNM:GTIV) and
Amedisys (NasdaqNM:AMED) numerous privately held multi-site home care companies,
privately held single-site agencies and a significant number of hospital-based
agencies. In some locations, county health departments operate home health
agencies. Competition for customers at the local market level is very fragmented
and market specific. Generally each local market has its own competitive profile
and no one competitor has significant market share across all our markets. The
Federal Centers for Medicare and Medicaid Services (CMS, formerly HCFA)
estimates total national annual Medicare home health spending of approximately
$11 billion. To our best knowledge, no individual provider has more than 2%
market share.
We believe the primary competitive factors are quality of service and reputation
among referral sources. However, competitors are increasingly focusing attention
on providing alternative site health care services. We market our services
through our site managers and marketing staff. These individuals contact
referral sources in their areas to market our services. Major referral sources
include: physicians, hospital discharge planners, Offices on Aging, social
workers, and group living facilities. We also utilize consumer-direct sales,
marketing and advertising programs designed to attract customers.
The adult day health services industry is likewise highly competitive but
fragmented. Competitors include: other adult day health centers, ancillary
programs provided by nursing homes and hospitals, other government-financed
facilities, assisted living and retirement communities, home health providers
and senior adult associations. We compete by offering a high quality of care and
by helping families identify and access solutions for care. Adult day health
services' competitive advantages include member activity programs, superior
facilities and transportation services.
Government Regulation
Overview
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 and proposals for additional changes are
continuously formulated by departments of the Federal government, Congress, and
state legislatures.
We expect government officials 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. We expect legislative changes to "balance the
budget" and slow the annual rate of growth of Medicare and Medicaid to continue.
Such future changes may further impact reimbursement for our services. There can
be no assurance that future legislation or regulatory changes will not have a
material adverse effect on our operations.
Medicare Rates
A Medicare rate decrease of approximately 5.3% went into effect October 1, 2002.
If the rate cut had been in effect for the entire year ended December 31, 2002,
our revenues would have been lower by approximately $718,000. A Medicare rate
increase of approximately 2.2% went into effect for our Visiting Nurse
operations on October 1, 2003. Additionally, under existing law and regulation,
Medicare rates will change April 1, 2004 and each January 1 thereafter, based on
a statutory formula the intent of which is to cause reimbursement rates to
reflect changes in the costs of providing services. We currently expect the
impact of the April 1, 2004 rate change to be insignificant.
Refer to the "Cautionary Statements - Forward Outlook and Risks" below, the
"Notes to the Consolidated Financial Statements" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" for additional
information.
Medicare Adult Day Care Demonstration Project
The Medicare Prescription Drug Bill of 2003 established a demonstration project
(the Project) which will allow Medicare Home Health beneficiaries to elect to
receive a portion of their home health plan of care in a licensed or certified
medical adult day care center. The Project is intended to demonstrate whether
the integration of adult day care services into home health care plans of
treatment will result in better patient outcomes at a lower cost to the program.
We will seek to be an active participant in this demonstration project.
Permits and Licensure
Many states require companies providing certain health care services to be
licensed as home health agencies or adult day care centers. In addition, certain
health care practitioners employed by us require state licensure and/or
registration and must comply with laws and regulations governing standards of
practice. The failure to obtain, renew or maintain any of the required
regulatory approvals or licenses could adversely affect our business. We believe
we are currently licensed appropriately where required by the laws of the states
in which we operate. There can be no assurance that either the states or the
Federal government will not impose additional regulations upon our activities
which might adversely affect our results of operations, financial condition, or
liquidity.
Certificates of Need
Certain states require companies providing health care services to obtain a
certificate of need issued by a state health-planning agency. Where required by
law, we have obtained certificates of need from those states. There can be no
assurance that we will be able to obtain any certificates of need which may be
required in the future if we expand the scope of our services or if state laws
change to impose additional certificate of need requirements, and any attempt to
obtain additional certificates of need will cause us to incur certain expenses.
Other Regulations
A series of laws and regulations dating back to the Omnibus Budget
Reconciliation Act of 1987 ("OBRA 1987") and through the Medicare Prescription
Drug Bill of 2003 have been enacted and apply to us. Changes in applicable laws
and regulations have occurred from time to time since OBRA 1987 including
reimbursement reductions and changes to payment rules. Changes are also expected
to occur continuously for the foreseeable future.
As a provider of services under Medicare and Medicaid programs, we are subject
to the Medicare and Medicaid anti-kickback statute, also known as the "fraud and
abuse law." This law prohibits any bribe, kickback, rebate or remuneration of
any kind in return for, or as an inducement for, the referral of Medicare or
Medicaid patients. We may also be affected by the Federal physician
self-referral prohibition, known as the "Stark" law, which, with certain
exceptions, prohibits physicians from referring patients to entities in which
they have a financial interest. Many states in which we operate have adopted
similar self-referral laws, as well as laws that prohibit certain direct or
indirect payments or fee-splitting arrangements between health care providers,
if such arrangements are designed to induce or to encourage the referral of
patients to a particular provider.
Health care is an area of extensive and dynamic regulatory change. Changes in
laws or regulations or new interpretations of existing laws or regulations can
have a dramatic effect on our permissible activities, the relative costs
associated with our doing business, and the amount and availability of
reimbursement we receive from government and third-party payors. Furthermore, we
will be required to comply with applicable regulations in each new state in
which we desire to provide services.
As a result of the Health Insurance Portability and Accountability Act of 1996
and other legislative and administrative initiatives, Federal and state
enforcement efforts against the health care industry have increased
dramatically, subjecting all health care providers to increased risk of scrutiny
and increased compliance costs.
We are subject to routine and periodic surveys and audits by various
governmental agencies. We believe that we are in material compliance with
applicable laws. However, we are unable to predict what additional government
regulations, if any, affecting our business may be enacted in the future, how
existing or future laws and regulations might be interpreted or whether we will
be able to comply with such laws and regulations either in the markets in which
we presently conduct, or wish to commence, business.
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. We
implemented changes in our operations to comply with the privacy aspects of
HIPAA and we believe we are in compliance. We do not expect the cost of
complying with privacy standards to have a material effect on our results of
operations or financial position. We are in the process of implementing changes
in our operations to comply with the electronic transaction and code sets
aspects of HIPAA and we anticipate that we will be able to fully and timely
comply with those requirements. Independent of HIPAA requirements, we have been
developing new information systems with improved functionality to facilitate
improved billing and collection activities, reduced administrative costs and
improved decision support information. We have incorporated the HIPAA mandated
electronic transaction and code sets into the design of this new software.
Regulations with regard to the security components of HIPAA have only recently
been published. Those regulations are required to be implemented by April 2005.
We cannot at this time estimate the cost of compliance with the security
regulations.
Insurance Programs and Costs
We bear significant insurance risk under our large-deductible automobile and
workers' compensation insurance programs and our self-insured employee health
program. Under our automobile insurance program, we bear risk up to $100,000 per
incident. Under our workers' compensation insurance program, we bear risk up to
$250,000 per incident. We purchase stop-loss insurance for our employee health
plan that places a specific limit, generally $150,000, on our exposure for any
individual covered life.
Malpractice and general patient liability claims for incidents which may give
rise to litigation have been asserted against us by various claimants. The
claims are in various stages of processing and some may ultimately be brought to
trial. We also know of incidents that have occurred through December 31, 2003
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however our deductible per claim increased from
$5,000 to $25,000 effective July 1, 2001 and to $250,000 effective April 1,
2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a quarterly basis. As facts change, it may
become necessary to make adjustments that could be material to our results of
operations and financial condition.
We believe that our present insurance coverage is adequate. However, due to
insurance market conditions, we expect to bear significant cost increases and
higher deductibles upon renewal on April 1, 2004. We are currently contemplating
alternatives including potentially accepting additional self-insurance risk in
lieu of higher premium costs.
Employees and Labor Relations
As of December 31, 2003 we had approximately 3,500 employees. None of our
employees are represented by a labor organization. We believe our relationship
with our employees is satisfactory.
Change in Fiscal Year End
In September 2001, we changed our fiscal year end from March 31 to December 31
effective December 31, 2001. The accompanying financial statements included
herein present information for the year ended December 31, 2003, the year ended
December 31, 2002, and the nine months ended December 31, 2001 pursuant to the
Securities Exchange Act of 1934.
Restatement of Financial Statements
We reported in our Form 10-K for the nine months ended December 2001, that as a
result of accounting errors, we restated our previously issued financial
statements for the fiscal years ended March 31, 2001 and March 31, 2000, and our
previously issued financial results for the quarterly periods in those fiscal
years and the quarterly periods ended June 30 and September 30, 2001. Our
previously reported net income was reduced by approximately $934,000 or $0.28
per diluted share in the year ended March 31, 2001 and $363,000 or $0.12 per
diluted share in the year ended March 31, 2000. In the quarter ended March 31,
2002, we recorded approximately $816,000 (pre-tax) related to the cost of
conducting our investigation into this matter, consisting primarily of
professional fees. It is possible that we could incur additional costs related
to the investigation in future periods.
Discontinued Operations and Decision to Retain Visiting Nurse Operations
As part of a formal plan of separation, in November 1999 we sold our product
operations (consisting of infusion therapy and respiratory and medical equipment
businesses) to Lincare Holdings, Inc. in an asset sale for $14.5 million. We
also announced that we would pursue available strategic alternatives to complete
the separation of our Visiting Nurse operations. We used the proceeds from the
sale to repay obligations outstanding under our bank line of credit. As a result
of the operational separations, we recorded a one-time net of tax charge of
approximately $5 million or ($1.60 per share) in 1999. That charge reduced the
book value of these operations to their expected net realizable value, provided
for losses on fulfilling certain obligations and close-down costs, and included
the estimated future operating results of the Visiting Nurse operations prior to
separation. As a result of those actions, we accounted for our Visiting Nurse
operations as discontinued operations in our financial statements for periods
reported from September 1999 through June 2001.
We incurred losses operating this division prior to the implementation of
Medicare's Prospective Payment System (PPS) in October 2000 and made substantial
payments for the release of certain lease obligations and for other costs.
During that same time-frame we closed 3 of our then 11 operating Visiting Nurse
agencies. We continued to operate the remaining 8 agencies located in Kentucky
(4), Florida (3) and Massachusetts.
On September 14, 2001, our Board of Directors voted to terminate our previously
adopted plan of disposition for our Visiting Nurse operations. This decision
followed a period of extensive analysis and evaluation of numerous alternatives
for the business unit. In the Board's judgment, given the significant external
and internal changes that had taken place with regard to the future prospects of
our Visiting Nurse segment, retaining the Visiting Nurse segment was the best
option available to maximize shareholder value. As a result of our Board of
Directors' decision, we terminated the use of discontinued operations accounting
treatment for the Visiting Nurse segment. Visiting Nurse segment results are now
reported as an on-going part of our continuing operations for all periods
presented.
As a result of the decision to retain our Visiting Nurse segment, we recorded,
in the nine-months ended December 31, 2001, a one-time after-tax gain of
approximately $1.1 million, or $0.37 per diluted share, resulting from the
reversal of the remainder of accounting reserves we originally recorded at the
time we adopted discontinued operations accounting treatment for this segment.
During the year ended December 31, 2003, we recorded in income from discontinued
operations a one-time reduction in estimated tax liabilities of approximately
$854,000 or $0.34 per diluted share, due to the expiration of various statutory
limitations pertaining to the tax year (1999) in which we sold our product
operations.
Cautionary Statements - Forward Outlook and Risks
Information provided herein by us contains, and from time to time we may
disseminate material and make statements which may contain, "forward-looking"
information, as that term is defined by the Private Securities Litigation Reform
Act of 1995 (the "Act"). These cautionary statements are being made pursuant to
the provisions of the Act and with the intention of obtaining the benefits of
"safe harbor" provisions of the Act. We caution investors that any
forward-looking statements made by us are not guarantees of future performance,
and that our actual results may differ materially from those in the
forward-looking statements as a result of various factors including, but not
limited to, the following:
a) Visiting Nurse Operations Medicare Reimbursement Rates
Medicare reimbursement is subject to frequent change. A Medicare rate decrease
of approximately 5.3% went into effect October 1, 2002. If the rate cut had been
in effect for the entire year ended December 31, 2002, our revenues would have
been lower by approximately $718,000 in that year. A Medicare rate increase of
approximately 2.2% went into effect for Visiting Nurse services on October 1,
2003.
Under existing law and regulation, our Medicare rates will change April 1, 2004
and each January 1 thereafter, based on a statutory formula the intent of which
is to cause reimbursement rates to reflect changes in the costs of providing
services. We currently expect the April 1, 2004 rate change to be insignificant.
There can be no assurance that Medicare laws, regulations and reimbursement
rates will not be changed in an adverse way in the future.
b) Our Ability to Grow Same Store Sales
An important part of our success is dependent upon our ability to generate same
store sales growth. We compete with numerous well-established competitors which
have substantially greater financial resources than us. Competitors are
increasingly focusing attention on providing alternative site health care
services, specifically on adult day health services. Such increasing competition
may adversely affect revenues and profitability of our operations. While we
believe, based on current facts and circumstances, that we will be able to do
so, we may not be able to generate the targeted sales growth.
c) Acquisitions
We seek to establish and increase market share through acquisitions in existing
and new markets, particularly in our Visiting Nurse segment. We evaluate
potential acquisition candidates that will complement or expand our current
services. In attempting to make acquisitions, we compete with other providers,
some of which have greater financial resources than us. We currently believe
that acquisition candidates meeting the criteria of our acquisition strategy
will continue to be identified in the future and certain of these candidates
will be acquired by us. However, there can be no assurance that suitable
acquisitions will continue to be identified or that acquisitions can be
consummated on acceptable terms. See separate Cautionary Statement regarding
financing.
d) Financing
Our ability to pursue our strategic plan is dependent upon our ability to obtain
financing on satisfactory terms and conditions. If we are unable to obtain
satisfactory financing it would have an adverse impact on our liquidity and our
ability to execute our development plans. We are subject to certain restrictive
covenants under our bank financing arrangement. There can be no assurance that
we will remain in compliance with these covenants in future periods.
e) Regulation and Reform
Legislative proposals are continually introduced or proposed in Congress and in
state legislatures that would effect major changes in the health care system,
either nationally or at the state level. However, we cannot predict whether any
of the proposals will be adopted, and if adopted, no assurance can be given that
the implementation of such reforms will not have a material impact on our
operations.
f) Medicaid Concentration, Including Kentucky Budget and Regulation Changes
We have a significant dependence on state Medicaid reimbursement programs. For
the year ended December 31, 2003, approximately 13.5%, 12.0%, 11.7%, 5.9%, 3.2%,
2.8% and 2.1% of our revenues were generated from Medicaid reimbursement
programs in the states of Maryland, Ohio, Kentucky, Connecticut, Florida,
Massachusetts and Indiana, respectively.
Approximately 51% of our revenues are from state Medicaid and Other Government
programs, virtually all of which are currently facing significant budget issues.
The Medicaid programs in each of the states in which we operate are taking
actions or evaluating taking actions to reduce Medicaid expenditures. Among
these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum time in
which payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the slowing of the US economy. We believe that these
financial issues are cyclical in nature rather than indicative of the long-term
prospect for Medicaid funding of health care services. It is possible that the
actions taken by the state Medicaid programs in the future could have a
significant unfavorable impact on our results of operations, financial condition
and liquidity.
g) Insurance
We derive substantial portions of our revenues from third-party payors,
including government reimbursement programs such as Medicare, Medicaid and
non-government sources such as commercial insurance companies, HMOs, PPOs and
contract services. These payors continuously seek ways to limit payments to
health care providers. There can be no assurance that payments under these
programs will be sufficient to cover the costs of providing patients care. We
cannot predict whether and what additional proposals or cost containment
measures will be adopted or, if adopted, what effect, if any, such proposals
might have on our operations.
h) Insurance
We believe our present insurance coverage is adequate. However, there can be no
assurance that such insurance will be available, or, if available, that such
insurance will be either adequate to cover our liabilities or available at
affordable rates. In addition, increasing insurance costs, and the increasing
unwillingness of insurance companies to insure against certain types of losses,
raise some questions as to whether we will be able to obtain or continue our
present insurance coverage. The inability to obtain adequate insurance coverage
at affordable rates, or a loss of existing coverage, could have a material
effect on us. We are exposed to insurance risk under our automobile, workers'
compensation and medical self-insurance programs. Accordingly, our future
operating costs are subject to changes in these programs.
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 also know of incidents that have occurred through December 31, 2003
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however our deductible per claim increased from
$5,000 to $25,000 effective July 1, 2001 and to $250,000 effective April 1,
2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a quarterly basis. As facts change, it may
become necessary to make adjustments that could be material to our results of
operations and financial condition.
i) Inclement Weather
We provide our services to individuals in home and community settings. Due to
our geographic concentrations, severe weather such as snow and hurricanes may
hinder our ability to provide our services and can impact our operating results,
particularly in Maryland and the New England states.
j) Revenues Subject to Adjustment
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.
Website Access to Our Reports
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, and all amendments to those reports are available free of charge on
our website at www.almost-family.com as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and
Exchange Commission.
Also, copies of our annual report will be made available, free of charge, upon
written request.
ITEM 2. PROPERTIES
Our executive offices are located in Louisville, Kentucky in approximately
25,000 square feet of space leased from an unaffiliated party.
We have 44 real estate leases ranging from approximately 200 to 24,000 square
feet of space in their respective locations. See "Item 1. Business - Operating
Segments" and Note 9 to our audited consolidated financial statements. We
believe that our facilities are adequate to meet our current needs, and that
additional or substitute facilities will be available if needed.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we are subject to claims and suits arising in the ordinary
course of our business, including claims for damages for personal injuries. In
our opinion the ultimate resolution of any of these pending claims and legal
proceedings will not have a material effect on our financial position or results
of operations.
Franklin Litigation
On January 26, 1994 Franklin Capital Associates L.P. (Franklin), Aetna Life and
Casualty Company and Aetna Casualty and Surety Company shareholders, who at one
time held approximately 320,000 shares of our common stock (approximately 13% of
shares outstanding), filed suit in Chancery Court of Williamson County,
Tennessee claiming unspecified damages not to exceed three million dollars in
connection with registration rights they received in our acquisition of certain
home health operations in February 1991. The 1994 suit alleged that we failed to
use our best efforts to register the shares held by the plaintiffs as required
by the merger agreement. We settled with both Aetna parties shortly before the
case went to trial in February 2000. In mid-trial Franklin voluntarily withdrew
its complaint reserving its legal rights to bring a new suit as allowed under
Tennessee law. In April 2000, Franklin re-filed its lawsuit. The second trial
took place in February 2003. In April 2003 the court issued a ruling in favor of
the plaintiffs awarding damages of $984,970. We believe the Court erred both in
its finding of liability and in its determination of the amount of damages. We
are seeking appellate review of the lower court decision. As a part of the
appeal, we were required to post cash of $1,154,241 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 our legal counsel, we believe 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, we would record a
provision at that time.
Based on the advice of our legal counsel, we believe we have strong grounds for
appealing the trial court's decision and we intend to vigorously pursue our
appeal. We can give no assurance that we will be successful in our appeal.
Kentucky Transportation Litigation
Prior to July 1, 2002, the Commonwealth of Kentucky managed its Medicaid
transportation program internally. Effective July 1, 2002 the Commonwealth
contracted with an independent broker (the Broker) for the management of the
program in the Louisville KY area. The Broker then contracted with us, among
others, for the provision of transportation services to Medicaid beneficiaries.
Our services pursuant to the contract were limited to transportation of Medicaid
beneficiaries who also attended our in-center adult day care programs. The
Broker almost immediately began to encounter significant financial difficulties
and paid us for only a small portion of the amounts due for services rendered.
On October 22, 2002, three of the Broker's other contracted providers filed a
motion with the US Bankruptcy Court to liquidate the Broker under Chapter 7 of
the Federal Bankruptcy Code. On November 25, 2002, the Broker voluntarily chose
to convert their bankruptcy status to a Chapter 11, voluntary reorganization.
In May 2003, along with a group of other affected providers, we filed suit
against the Commonwealth in Franklin Circuit Court seeking payment directly from
the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity 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 December 31,
2003 and December 31, 2002, the Broker owed us approximately $535,000, which
amount is included in accounts receivable, net on the accompanying balance
sheets. Although we currently believe we will be successful in ultimately
collecting the amounts currently due us 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, we will, at that
time, record an additional provision for uncollectible accounts.
Our loan agreement executed with our lender in March 2004 provides that the loss
of either or both of the above litigation cases will be excluded from our
financial results for purposes of calculating borrowing availability or
financial covenant compliance.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth
quarter of fiscal 2003.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED
STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the NASDAQ SmallCap System. The stock is traded
under the symbol "AFAM" (formerly CTND). Set forth below are the high and low
sale prices for the common stock for the periods indicated reported by NASDAQ:
Closing Common Stock Prices
Quarter Ended: High Low
-------------- ---- ---
June 30, 2000 $3.00 $2.19
September 30, 2000 $4.28 $2.19
December 31, 2000 $5.25 $3.47
March 31, 2001 $6.13 $3.50
June 30, 2001 $7.75 $5.77
September 30, 2001 $11.00 $7.90
December 31, 2001 $16.30 $9.20
March 31, 2002 $16.42 $9.20
June 30, 2002 $11.75 $9.79
September 30, 2002 $11.63 $7.15
December 31, 2002 $7.47 $4.75
March 31, 2003 $7.26 $4.08
June 30, 2003 $7.80 $4.36
September 30, 2003 $8.60 $7.55
December 31, 2003 $9.46 $7.70
On March 23, 2004, the last reported sale price for the Common Stock reported by
NASDAQ was $8.12 and there were approximately 477 holders of record of our
Common Stock. No cash dividends have been paid by us during the periods
indicated above. We do not presently intend to pay dividends on our common stock
and will retain our earnings for future operations and the growth of our
business.
Equity Compensation Plans
The information required by this part of Item 5 is incorporated herein by
reference from our Proxy Statement for the Annual Meeting of Stockholders
scheduled to be held on May 24, 2004 appearing under the caption "Executive
Compensation Plan Table" of such Proxy Statement.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from the
consolidated financial statements of the Company for the periods and at the
dates indicated. The information is qualified in its entirety by and should be
read in conjunction with the consolidated financial statements and related notes
included elsewhere in this and prior year Form 10-Ks.
Consolidated Selected Financial Information
Year Ended Nine Months
Year Ended Year Ended December 31, Ended Year Ended March Year Ended
(Dollar amounts in 000's December 31, December 31, 2001 December 31, 31, March 31,
except per share data) 2003 2002 (unaudited) 2001 2001 2000
-------------------------------------------------- ------------------------------------------------
Results of operations data:
Net revenues $ 86,899 $ 85,770 $ 79,306 $ 59,754 $ 75,455 $ 79,343
Income (loss) from:
Continuing operations $ 1,266 $ 1,345 $ 2,674 $ 2,241 $ 541 $ (3,391)
Discontinued operations 854 - 1,087 1,087 737 (1,715)
-------------------------------------------------- ------------------------------------------------
Net income (loss) $ 2,120 $ 1,345 $ 3,761 $ 3,328 $ 1,278 $ (5,106)
================================================== ================================================
Per share:
Basic:
Number of shares 2,295 2,416 2,646 2,478 3,146 3,124
Income (loss) from:
Continuing operations $ 0.55 $ 0.56 $ 1.01 $ 0.90 $ 0.17 $ (1.08)
Discontinued operations 0.37 - 0.41 0.44 0.23 (0.55)
-------------------------------------------------- ------------------------------------------------
Net income (loss) $ 0.92 $ 0.56 $ 1.42 $ 1.34 $ 0.40 $ (1.63)
================================================== ================================================
Diluted:
Number of shares 2,539 2,720 3,077 2,909 3,307 3,124
Income (loss) from:
Continuing operations $ 0.50 $ 0.49 $ 0.87 $ 0.77 $ 0.16 $ (1.08)
Discontinued operations 0.34 - 0.35 0.37 0.22 (0.55)
-------------------------------------------------- ------------------------------------------------
Net income (loss) $ 0.84 $ 0.49 $ 1.22 $ 1.14 $ 0.38 $ (1.63)
================================================== ================================================
December2003 December December March March
Balance sheet data as of: 2002 2001 2001 2000
-------------- --------------- -------------- --------------- --------------
Working capital $ 9,753 $ 10,466 $ 11,963 $ 9,741 $ 5,511
Total assets 33,041 36,800 35,877 33,984 28,392
Long-term liabilities 12,694 17,071 14,847 13,482 4,777
Total liabilities 20,777 26,696 25,495 26,726 17,603
Stockholders' equity 12,264 10,104 10,381 7,258 10,790
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OVERVIEW
We currently operate in two reportable business segments: Visiting Nurses and
Adult Day Health Services (ADHS). We present financial information for our two
operating segments in Note 12 to our consolidated financial statements.
Our Visiting Nurse 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 our Visiting Nurse segment
revenues are generated from the Medicare program, which is the Federal
government's health insurance program covering most US citizens over age 65. Our
Medicare revenues are generated on a per episode basis rather than a fee per
visit or day of care.
Our ADHS segment is made up of our ADC in-center operations and in-home personal
care operations (also referred to as "personal care"), both of which
predominantly provide 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 our ADC and personal
care operations are substantially alike. A majority of our revenues in the ADHS
segment are derived from Medicaid programs which are funded and administered by
states in conjunction with Federal oversight. Medicaid programs generally
provide health insurance coverage to low income aged and/or disabled persons.
As we move forward in the execution of our business plan, we may change the way
in which we are organized and operate.
Our View on Reimbursement and Diversification of Risk
Our Company is highly dependent on government reimbursement programs which pay
for the majority of the services we provide to our patients. Reimbursement under
these programs, primarily Medicare and Medicaid, is subject to frequent changes
as policy makers balance their own needs to meet the health care needs of
constituents while also meeting their fiscal objectives.
We believe that an important key to our historical success and to our future
success is our ability to adapt our operations to meet changes in reimbursement
as they occur. One important way in which we have achieved this adaptability in
the past, and in which we plan to achieve it in the future, is to maintain some
level of diversification in our business mix.
The execution of our business plan will increase the emphasis we place on our
Visiting Nurse operations. Our Adult Day Health Services operations will help us
maintain a level of diversification of reimbursement risk that we believe is
appropriate.
Our Business Plan
Our future success depends on our ability to execute our business plan. Over the
next three to five years we will try to accomplish the following:
o Generate meaningful same store sales growth through the focused
provision of high quality services and attending to the needs of our
patients;
o Expand the significance of our Visiting Nurse, Medicare-based, home
health services by selectively acquiring other quality providers; and
o Expand our capital base through both earnings performance and by
seeking additional capital investments in our Company.
Based on our business plan, we expect our Visiting Nurse revenues to grow from
under one-third of total revenues to about one-half of total revenues sometime
in the next three to five years.
Critical Accounting Policies
The accompanying consolidated financial statements have been prepared in
conformity with accounting principles generally accepted in the United States.
When more than one accounting principle, or the method of its application, is
generally accepted, we select the principle or method that is appropriate in the
specific circumstances. Application of these accounting principles requires us
to make estimates about the future resolution of existing uncertainties; as a
result, actual results could differ from these estimates. In preparing these
financial statements, we have made our best estimates and judgments of the
amounts and disclosures included in the financial statements, giving due regard
to materiality.
Receivables and Revenue Recognition
We recognize revenues when patient services are provided. Our receivables and
revenues are stated at amounts estimated by us to be their net realizable
values. 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.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on certain
factors, such as payor types, historical collection trends and aging categories.
We calculate our reserve for bad debts based on the length of time that the
receivables are past due. The percentage applied to the receivable balances in
the various aging categories is based on historical collection experience.
Insurance Programs
We bear significant insurance risk under our large-deductible automobile and
workers' compensation insurance programs and our self-insured employee health
program. Under our automobile insurance program, we bear risk up to $100,000 per
incident. Under our workers' compensation insurance program, we bear risk up to
$250,000 per incident. We purchase stop-loss insurance for our employee health
plan that places a specific limit, generally $150,000, on our exposure for any
individual covered life.
Malpractice and general patient liability claims for incidents which may give
rise to litigation have been asserted against us by various claimants. The
claims are in various stages of processing and some may ultimately be brought to
trial. We also know of incidents that have occurred through December 31, 2003
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however, our deductible per claim increased from
$5,000 to $25,000 effective July 1, 2001 and to $250,000 effective April 1,
2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a quarterly basis. As facts change, it may
become necessary to make adjustments that could be material to our results of
operations and financial condition.
We believe that our present insurance coverage is adequate. However, due to
insurance market conditions, we expect to bear significant cost increases and
higher deductibles upon renewal on April 1, 2004. We are currently contemplating
alternatives including potentially accepting additional self-insurance risk in
lieu of higher premium costs.
Impairment of Property, Equipment and Intangible Assets
We evaluate our property and equipment and intangible assets on a periodic basis
to determine if facts and circumstances suggest that the assets may be impaired
or the estimated useful life of the assets may need to be changed. We consider
internal and external factors of the individual facility or asset, including
changes in the regulatory environment, changes in national health care trends,
current period cash flow loss combined with a history of cash flow losses and
local market developments. If these factors and the projected undiscounted cash
flow of the facility or asset over the asset's remaining life indicate that the
carrying value of the asset will not be recovered, the carrying value will be
adjusted to its fair value if it is lower. There were no impairment charges
recorded during the year ended December 31, 2003; however, if the projections or
our assumptions change in the future, we may be required to record impairment
charges not previously recorded for our assets.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" (SFAS 141) and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements established new accounting and
reporting standards for business combinations and associated goodwill and
intangible assets. SFAS 141 eliminated the pooling of interest method of
accounting and amortization of goodwill for business combinations initiated
after June 30, 2001. SFAS 142, effective January 1, 2002, requires that goodwill
and intangible assets with indefinite useful lives can no longer be amortized,
but instead must be tested for impairment at least annually. We completed the
required initial test for impairment upon adoption in 2002 and concluded that no
impairment exists. In addition, we completed the required annual tests for
impairment in 2003 and 2002 and concluded that no impairment exists.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 142). This statement supercedes SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and the accounting and reporting provisions for APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS 144 requires that one accounting model be used
for long-lived assets to be disposed of by sale, whether previously held and
used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. We adopted SFAS 144 on January
1, 2002, and there was no effect on our financial position and results of
operations.
Accounting for Income Taxes
As of December 31, 2003, we have net deferred tax assets of approximately
$802,000. The net deferred tax asset is composed of approximately $863,000 of
long-term deferred tax assets and $61,000 of long-term deferred tax liabilities.
We have provided a valuation allowance against certain net deferred tax assets
based upon our estimation of realizability of those assets through future
taxable income. This valuation was based in large part on our history of
generating operating income or losses in individual tax locales and expectations
for the future. Our ability to generate the expected amounts of taxable income
from future operations is dependent upon general economic conditions,
competitive pressures on revenues and margins and legislation and regulation at
all levels of government. We have considered the above factors in reaching our
conclusion that it is more likely than not that future taxable income will be
sufficient to fully utilize the net deferred tax assets (net of the valuation
allowance) as of December 31, 2003. However, there can be no assurances that we
will meet our expectations of future taxable income.
During the year ended December 31, 2003, we recorded in income from discontinued
operations, a one-time reduction in estimated tax liabilities of approximately
$854,000 or $0.34 per diluted share, due to the expiration of various statutory
limitations pertaining to the tax year 1999 in which we sold our product
operations.
Seasonality
Visiting Nurse Segment
Our Visiting Nurse segment operations located in Florida normally experience
higher admissions during the March quarter than in the other quarters due to
seasonal population fluctuations.
ADHS Segment
Our 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,
particularly in Maryland and Connecticut.
RESULTS OF OPERATIONS
Continuing Operations
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Year Ended
------------------------------ ----------------------------- ---------------------------
Consolidated December 2003 December 2002 Change
------------
------------------------------ ----------------------------- ---------------------------
Amount % Amount % Amount %
Rev Rev
-------------------- --------- ------------------- --------- ---------------- ----------
Net revenues:
VN $ 29,375,519 33.8% $ 28,799,296 33.6% $ 576,223 2.0%
ADHS 57,523,646 66.2% 56,970,241 66.4% 553,405 1.0%
-------------------- ------------------- ----------------
$ 86,899,165 100.0% $ 85,769,537 100.0% $ 1,129,628 1.3%
==================== =================== ================
Operating income:
VN $ 3,215,975 11.0% $ 3,828,551 13.3% $ (612,576) -16.0%
ADHS 1,758,149 3.1% 2,227,442 3.9% (469,293) -21.1%
-------------------- ------------------ ----------------
4,974,124 5.7% 6,055,993 7.1% (1,081,869) -17.9%
Unallocated corporate expense 2,272,593 2.6% 3,109,675 3.6% (837,082) -26.9%
-------------------- ------------------ ----------------
2,701,531 3.1% 2,946,318 (244,787) -8.3%
Facility losses 123,785 0.1% - - 123,785 NM
Interest expense 661,019 0.8% 813,555 1.0% (152,536) -18.7%
Income taxes 650,676 0.7% 787,850 0.9% (137,174) -17.4%
-------------------- ------------------- ----------------
Income from continuing operations $ 1,266,051 1.5% $ 1,344,913 1.6% $ (78,862) -5.9%
==================== =================== ================
NM=Not Meaningful
Our net revenues for the year ended December 31, 2003 grew approximately $1.1
million or 1.3% over the year ended December 31, 2002 despite the impact of
Medicare rate cuts as described in the Visiting Nurse segment discussion below.
Our Visiting Nurse segment revenues grew primarily due to increased patient
volumes of about 7%. Our acquisition of Medlink OH accounted for approximately
$4.3 million of revenue growth in ADHS. A variety of other factors led to ADHS
revenue decreases, the most significant factor being the impact of spending
reductions in the Kentucky Medicaid program, as described in the ADHS segment
discussion below. Operating income before unallocated corporate expense
decreased from the same period last year primarily as a result of the Visiting
Nurse Medicare rate cut and spending reductions in the Kentucky Medicaid program
in ADHS. Unallocated corporate expenses in 2002 included approximately $816,000,
consisting primarily of professional fees, related to the cost of conducting our
investigation into the restatement of our financial statements as disclosed in
our Form 10-K for the nine months ended December 31, 2001. It is possible that
additional costs related to the investigation may be incurred in future periods.
Interest expense in 2003 was lower than in 2002 as a result of lower interest
rates and lower average borrowings.
In the year ending December 2003 we closed adult day care centers located in
Frankfort KY, Evansville IN, and Lanham MD. In December 2002, we closed adult
day care centers located in Seymour CT, Mentor OH, and Miami FL. Those centers
generated after-tax operating losses of approximately $206,000 ($0.08 per
diluted share) and $198,000 ($0.07 per diluted share) in the years ended
December 31, 2003 and 2002, respectively. The closing of these centers had a
total property loss of $19,296. The remaining property losses resulted primarily
from the sale of our building in Ft. Myers, FL for a net loss of $13,362 and a
leasehold improvement loss of $91,127 related to the relocation of our Owensboro
ADC center.
Our effective income tax rate for continuing operations was approximately 34% of
income before income taxes for 2003 as compared to an effective income tax rate
of approximately 37% for 2002. The lower tax rate in 2003 is primarily a result
of changes in the distribution of taxable income and losses in the various state
and local jurisdictions in which we operate.
Visiting Nurse Segment-Year Ended December 31, 2003 and 2002
Our Visiting Nurse 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 Visiting Nurse segment revenues come
from the Medicare program and are generated on a per episode basis rather than a
daily fee basis as in ADHS. In addition to our focus on operating income from
the Visiting Nurse segment, we also measure this segment's performance in terms
of admissions, patient months of care, revenue per patient month and cost of
services per patient month.
Year Ended
---------------------------- ---------------------------- --------------------------
December 2003 December 2002 Change
---------------------------- ---------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ------------------- -------- ---------------- ---------
Net revenues $ 29,375,519 100.0% $ 28,799,296 100.0% $ 576,223 2.0%
Cost of services 22,613,870 76.9% 21,221,242 73.7% 1,392,628 6.6%
General and administrative 2,114,782 7.2% 2,149,384 7.5% (34,602) -1.6%
Depreciation and
Amortization 860,478 2.9% 884,608 3.1% (24,130) -2.7%
Uncollectible accounts 570,414 1.9% 715,511 2.5% (145,097) -20.3%
---------------- ------------------- ----------------
Operating income $ 3,215,975 11.0% $ 3,828,551 13.3% $ (612,576) -16.0%
================ =================== ================
Admissions 9,481 8,895 586 6.6%
Patient months of care 24,493 22,865 1,628 7.1%
Revenue per patient month $ 1,199 $ 1,260 $ (61) -4.8%
Cost of services per patient month $ 923 $ 928 $ (5) -0.5%
We received a Medicare rate decrease of approximately 5.3% which went into
effect October 1, 2002, thus reducing revenue per patient month. Had that rate
cut gone into effect on January 1, 2002 revenues for 2002 would have been lower
by approximately $718,000. Additionally, effective April 1, 2003, our Medicare
rates for patients served in rural areas were reduced which lowered revenues by
approximately $264,000 for the year ended December 31, 2003. In October 2003
Medicare rates were increased by 2.2%. Despite the net effective rate cuts, our
Visiting Nurse revenues grew by a net $576,223 or 2.0% on admission and patient
month growth of 6.6% and 7.1%, respectively. We had the same number of agencies
in operation in both periods.
Under existing law and regulation, Medicare rates will change April 1, 2004 and
each January 1 thereafter, based on a statutory formula the intent of which is
to cause reimbursement rates to reflect changes in the costs of providing
services. We currently expect the impact of the April 1, 2004 rate change to be
insignificant.
Our cost of services as a percentage of revenue was higher in 2003 than 2002
primarily due to the Medicare rate cut. Cost of services per patient month
decreased slightly less than 1% as higher patient volume offset increases in
professional nursing costs. Our decrease in revenue per patient month resulted
primarily from the reimbursement changes described above.
Adult Day Health Services (ADHS) Segment-Year Ended December 31, 2003 and 2002
Our ADHS segment is made up of our ADC in-center operations and in-home personal
care operations, both of which predominantly provide long-term health care and
custodial services that enable patients to avoid nursing home admission. Our
sources of reimbursement, reimbursement rates per day and contribution margins
from our ADC and our in-home personal care operations are substantially alike.
In addition to our focus on operating income from the ADHS segment, we also
measure this segment's performance in terms of admissions, patient months of
care, revenue per patient day and ADC center occupancy levels.
Year Ended
----------------------------- -------------------------------- ----------------------------------
December 2003 December 2002 Change
----------------------------- -------------------------------- ----------------------------------
% %
Amount Rev Amount Rev Amount %
------------------- --------- ---------------------- --------- ----------------------- ----------
Net revenues $ 57,523,646 100.0% $ 56,970,241 100.0% $ 553,405 1.0%
Cost of services 49,941,544 86.8% 49,368,310 86.7% 573,234 1.2%
General and administrative 3,416,790 5.9% 3,299,153 5.8% 117,637 3.6%
Depreciation and
amortization 1,366,913 2.4% 1,130,099 2.0% 236,814 21.0%
Uncollectible accounts 1,040,250 1.8% 945,237 1.7% 95,013 10.1%
------------------- ---------------------- -----------------------
Operating income $ 1,758,149 3.1% $ 2,227,442 3.9% $ (469,293) -21.1%
=================== ====================== =======================
Admissions 3,627 3,982 (355) -8.9%
Patients months of care 60,644 60,810 (166) -0.3%
Patient days of care 803,128 785,577 17,551 2.2%
Revenue per patient day $ 71.62 $ 72.52 $ (0.90) -1.2%
ADC in-center
Avg. weekday attendance 1,244 1,304 (60) -4.6%
Avg. center capacity 1,664 1,791 (127) -7.1%
Average occupancy 74.8% 72.8% 2.0% 2.7%
Our ADHS revenues increased 1.0% to $57.5 million in 2003 from $57.0 million in
2002 Our mid-2002 acquisition of Medlink Ohio, an in-home personal care
operation, increased our revenues approximately $4,342,000. ADHS revenues
excluding the Medlink acquisition: 1) decreased approximately $2,451,000 due to
lower sales volumes in Kentucky adult day centers and personal care operations
primarily due to Kentucky Medicaid program cut-backs, 2) decreased approximately
$1,756,000 due to the closure of certain adult day centers and one personal care
operation, and 3) increased approximately $418,000 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 74.8% of capacity in 2003 as compared to 72.8% in 2002.
Our cost of services and general and administrative expenses as a percent of
revenues was essentially unchanged. Depreciation and amortization increased due
to the addition of new guest transportation vans and investments in information
technology.
In the year ending December 2003 we closed adult day care centers located in
Frankfort KY, Evansville IN, and Lanham MD. In December 2002, we closed adult
day care centers located in Seymour CT, Mentor OH, and Miami FL. These centers
generated after-tax operating losses of approximately $193,000 ($0.08 per
diluted share) and $198,000 ($0.07 per diluted share) in the years ended
December 31, 2003 and 2002, respectively.
Year Ended December 31, 2002 Compared with Unaudited Year Ended December 31, 2001 and the Nine Months Ended December 31,
2001
Year Ended
------------------------ ------------------------- -----------------------------------------------------
December 2001 Nine Months Ended
Consolidated December 2002 (unaudited) Change December 2001
------------------------ ------------------------- --------------------------- --------------------------
Amount % Rev Amount % Rev Amount % Amount %
-------------- --------- --------------- --------- ----------------- --------- --------------- ----------
Net revenues:
VN $ 28,799,296 33.6% $ 27,859,182 35.1% $ 940,114 3.4% $ 21,043,917 35.2%
ADHS
56,970,241 66.4% 51,447,232 64.9% 5,523,009 10.7% 38,709,644 64.8%
-------------- --------------- ----------------- ---------------
$ 85,769,537 100.0% $ 79,306,414 100.0% $ 6,463,123 8.1% $ 59,753,561 100.0%
============== =============== ================= ===============
Operating income:
VN $ 3,828,551 13.3% $ 3,774,342 13.6% $ 54,209 1.4% $ 3,190,514 15.2%
ADHS 2,227,442 3.9% 3,847,080 7.5% (1,619,638) -42.1% 2,928,096 7.6%
-------------- --------------- ----------------- ---------------
6,055,993 7.1% 7,621,422 9.6% (1,565,429) -20.5% 6,118,610 10.2%
Unallocated
corporate expense 3,109,675 3.6% 2,045,057 2.6% 1,064,618 52.1% 1,542,712 2.6%
-------------- --------------- ----------------- ---------------
2,946,318 3.4% 5,576,365 7.0% (2,630,047) -47.2% 4,575,898 7.7%
Interest expense 813,555 1.0% 896,339 1.1% (82,784) -9.2% 712,003 1.2%
Income taxes 787,850 0.9% 2,006,474 2.5% (1,218,624) -60.7% 1,622,831 2.7%
-------------- --------------- ----------------- ---------------
Income from continuing
operations $ 1,344,913 1.6% $ 2,673,552 3.4$ $ (1,328,639) -49.7% $ 2,241,064 3.8%
============== =============== ================= ===============
The commentary that follows explains the comparison of our results for the year
ended December 31, 2002 to our unaudited results for the year ended December 31,
2001. The explanations set forth below consider the comparisons of our
percentage of revenue information shown above for the year ended December 31,
2001 and the nine months ended December 31, 2001.
Our net revenues for the year ended December 31, 2002 grew $6.5 million or 8.1%
over the year ended December 31, 2001. Our Visiting Nurse segment revenues grew
primarily due to increased patient volumes. A Medicare rate decrease of
approximately 5.3% went into effect October 1, 2002. As a result, our revenues
for the year ended December 31, 2002 were approximately $348,000 lower than they
would have been if the rate cut had not been enacted. Our acquisition of Medlink
OH accounted for approximately $3.7 million of the revenue growth between
periods with the balance of ADHS revenue growth coming primarily from our adult
day care (ADC) in-center volume growth. Our operating income before unallocated
corporate expense decreased from the same period last year primarily as a result
of increased insurance costs and increased labor costs in both segments. We also
incurred additional costs as a result of increased staffing for training,
auditing, information systems and compliance programs. The Medlink acquisition
added approximately $345,000 to our pre-tax income in the year ended December
31, 2002. Unallocated corporate expenses in 2002 included approximately
$816,000, consisting primarily of professional fees, related to the cost of
conducting our investigation into the restatement of our financial statements as
disclosed in our Form 10-K for the nine months ended December 31, 2001. It is
possible that additional costs related to the investigation may be incurred in
future periods. Our interest expense in 2002 was lower than in 2001 primarily as
a result of lower interest rates.
In December 2002, we closed adult day care centers located in Seymour CT, Mentor
OH, and Miami FL. These centers generated after-tax operating losses of
approximately $198,000 ($0.07 per diluted share) and $135,000 ($0.05 per diluted
share) in the years ended December 31, 2002 and 2001, respectively.
Our effective income tax rate was approximately 37% of income before income
taxes for 2002 as compared to an effective income tax rate of approximately 43%
for 2001. The lower tax rate in 2002 is a result of changes in the distribution
of taxable income and losses in the various state and local jurisdictions in
which we operate.
Visiting Nurse Segment-Year Ended December 31, 2002 and 2001 (Unaudited) and the
Nine Months Ended March 31, 2001
Year Ended
-------------------------- ------------------------- ----------------------------------------------
December 2001 Nine Months Ended
December 2002 (unaudited) Change December 2001
-------------------------- ------------------------- ----------------------------------------------
Amount % Rev Amount % Rev Amount % Amount %
--------------- ---------- --------------- --------- --------------- ------- ----------------- ----
Net revenues $ 28,799,296 100.0% $ 27,859,182 100.0% $ 940,114 3.4% $ 21,043,917 100.0%
Cost of services 21,221,242 73.7% 20,528,923 73.7% 692,318 3.4% 15,401,130 73.2%
General and administrative 2,149,384 7.5% 2,210,303 7.9% (60,919) 2.8% 1,436,452 6.8%
Depreciation & amortization 884,608 3.1% 765,237 2.7% 119,371 15.6% 544,259 2.6%
Uncollectible accounts 715,511 2.5% 580,376 2.1% 135,135 23.3% 471,562 2.2%
--------------- --------------- --------------- ----------------
Operating income (loss) $ 3,828,551 13.3% $ 3,774,342 13.5% $ (54,209) -1.4% $ 3,190,514 15.2%
=============== =============== =============== ================
Admissions 8,895 8,289 606 7.3% 6,068
Patient months of care 22,865 22,477 389 1.7% 16,371
Revenue per patient month $ 1,260 $ 1,239 $ 21 1.7% $ 1,285
Cost of services per patient
month $ 928 $ 913 $ 15 1.6% $ 941
Our Visiting Nurse revenues increased 3.4% to $28.8 million in 2002 from $27.8
million in 2001. Our average revenue per patient month of care increased about
1.6% over the December 2001 period as a result of mix changes and the net effect
of a 5% Medicare rate increase which went into effect October 2001 and a 5.3%
rate decrease which went into effect October 1, 2002. Our costs of services,
primarily labor and related costs, grew at approximately the same rate as our
revenues. We incurred increased general and administrative and depreciation
costs due to increased staffing, and our continued investment in information
systems. We generated 7% more admissions in 2002 than in 2001 while our patient
months of care increased about 2% due to a shorter average length of stay.
As a result, of the Medicare rate decrease of approximately 5.3% which went into
effect October 1, 2002, our revenues for the year ended December 31, 2002 were
approximately $348,000 lower than they would have been if the rate cut had not
been enacted. If the rate cut had been in effect for the entire year ended
December 31, 2002, our revenues would have been lower by approximately $718,000.
Effective July 1, 2002, the Commonwealth of Kentucky changed its reimbursement
program for in-home health services (skilled). Prior to July 1, 2002, the
services had been reimbursed on a cost-based system. Effective July 1, 2002
services are now reimbursed on a fee per unit of service basis at a rate lower
than the historical reimbursement rates. The net effect of the reimbursement
change was to lower our Visiting Nurse segment operating income by approximately
$98,000 in the year ended December 31, 2002.
Adult Day Health Services Segment - Year Ended December 31, 2002 and 2001
(Unaudited) and the Nine Months Ended December 31, 2001
Year Ended
------------------------ ---------------------------- ---------------------------------------------
December 2001 Nine Months Ended
December 2002 (unaudited) Change December 2001
------------------------ ---------------------------- ------------------------ --------------------
% % % Rev
Amount Rev Amount Rev Amount % Amount
-------------- --------- ------------------ --------- -------------- --------- --------------- -----
Net revenues $ 56,970,241 100.0% $ 51,447,232 100.0% $ 5,523,009 10.7%$ 38,709,644 100.0%
Cost of services 49,368,310 86.7% 43,812,778 85.2% 5,555,532 12.7% 32,739,103 84.6%
General and administrative 3,299,153 5.8% 2,511,118 4.9% 788,035 31.4% 1,978,221 5.1%
Depreciation and amortization 1,130,099 2.0% 718,101 1.4% 411,998 57.4% 647,029 1.7%
Uncollectible accounts 945,237 1.7% 558,155 1.1% 387,082 69.4% 417,195 1.1%
-------------- ------------------ --------------- ----------------
Operating income $ 2,227,442 3.9% $ 3,847,080 7.5% $ (1,619,638) -42.1%$ 2,928,096 7.6%
============== ================== =============== ================
Admissions 3,982 4,456 (474) -10.6% 3,364
Patients months of care 60,810 56,255 4,555 8.1% 42,509
Patient days of care 785,577 712,621 72,956 10.2% 538,918
Revenue per patient day $ 72.52 $ 72.19 $ 0.33 0.5% $ 71.83
ADC in-center
Avg. weekday attendance 1,304 1,228 76 6.2% 1,244
Avg. center capacity 1,791 1,685 106 6.3% 1,689
Average occupancy 72.8% 72.9% -0.1% 73.7%
Our ADHS revenues increased 10.7% to $57.0 million in 2002 from $51.4 million in
2001. Our acquisition of Medlink Ohio, an in-home personal care operation,
accounted for approximately $3.7 million of the increase. The remainder of the
increase was generated predominantly from increased ADC in-center volumes. Our
average revenue per day of care increased about 0.5% over the December 2001
period as a result of mix changes and higher reimbursement rates. Occupancy in
our adult day care centers was 72.8% of capacity in 2002 and 72.9% of capacity
in 2001. Our average capacity increased with the addition of new centers in
Kentucky and Florida during 2001 which slightly more than offset the capacity
closed. In December 2002, we closed centers located in Seymour CT, Mentor OH,
and Miami FL. These centers generated pre-tax operating losses of approximately
$313,000 and $224,000 in the years ended December 31, 2002 and 2001,
respectively. As of December 31, 2002, our total system capacity was 1,791
guests per day.
Our cost of services as a percent of revenues increased to 86.7% in 2002 from
85.2% in 2001 primarily as a result of increased insurance costs and higher
staffing costs in our adult day centers. Our general and administrative expenses
increased significantly with the addition of staff support for training,
auditing, information systems and compliance programs. Depreciation and
amortization increased primarily due to our addition of new guest transportation
vans and investments in information technology. We establish an allowance for
uncollectible accounts based on our estimate of probable collection losses.
Effective July 1, 2002, the Commonwealth of Kentucky changed its reimbursement
program for in-home personal care services (non-skilled). Prior to July 1, 2002,
the services had been reimbursed on a cost-based system. From July 1, 2002
forward, services provided are reimbursed on a fee per unit of service basis at
a rate lower than the historical reimbursement rates. We have implemented
changes to our operations designed to reduce operating costs. As a result of the
net effect of these reimbursement and cost changes, our ADHS segment operating
income for the year ended December 31, 2002 was approximately $140,000 lower
than it would have been if such changes had not taken place.
Liquidity and Capital Resources
Revolving Credit Facility. In March 2004, we renewed our $22.5 million credit
facility with Bank One Kentucky NA. The renewed facility expires June 30, 2006.
The credit facility bears interest at the bank's prime rate adjusted for a
margin (ranging from -0.75% to -0.25%, currently -0.5%) dependent upon total
leverage and is secured by substantially all assets and the stock of our
subsidiaries. The weighted average interest rates in effect under the preceding
facility were 4.1%, 5.0% and 7.3% for the year ended December 31, 2003, the year
ended December 31, 2002 and the nine months ended December 31, 2001,
respectively. The interest rate in effect at December 31, 2003 was 4.0%. We will
pay a commitment fee of 0.25% per annum on the unused facility balance (0.5% on
the preceding facility). Borrowings under both the preceding and the new
facility 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 December 31, 2003 the formula permitted approximately $16.8 million to be
used, of which approximately $10.9 million was outstanding. Additionally, an
irrevocable letter of credit totaling $3.5 million, was outstanding in
connection with our self-insurance programs. Thus, a total of $14.4 million was
either outstanding or committed as of December 31, 2003 while an additional $2.4
million was available for use. Our revolving credit facility is subject to
various financial covenants. As of December 31, 2003, we were in compliance with
the covenants. Under the most restrictive of our covenants, we are required to
maintain minimum net worth of at least $10,500,000.
We believe that this facility will be sufficient to fund our operating needs for
at least the next year. We will continue to evaluate additional capital,
including possible debt and equity investments in us, to support a more rapid
development of the business than would be possible with internal funds.
Stock and Warrant Redemption. In March 2001, we redeemed 748,501 shares of
common stock and a warrant to purchase 200,000 shares of common stock (at an
exercise price of $12.50 per share). Our cost of redemption totaled
approximately $5.1 million. On August 19, 2002, we redeemed 210,100 shares of
our common stock from a private investor at a total cost of approximately $1.5
million.
On-Going Stock Buy Back Program. In March 2001, following the Stock and Warrant
Redemption discussed above, our Board of Directors authorized up to an
additional $1 million to be used to acquire shares of our common stock. In April
2001, we 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. During the nine months ending December 31,
2001 a total of 57,400 shares were repurchased under this program, a total of
$516,678 was expended for an average acquisition cost of $9.00. During the year
ended December 31, 2002 a total of 39,971 shares were repurchased for a total of
$374,456 and an average acquisition cost of $9.37 per share. During the year
ended December 31, 2003, a total of 9,400 shares were repurchased under this
program, all of which were in open market purchases. A total of $65,896 was
expended on these purchases for an average acquisition cost of $7.01 per share.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the years ended
December 31, 2003 and December 31, 2002 and nine months ended December 31, 2001
were:
Net Change in Cash and Cash Equivalents Year Ended Year
- --------------------------------------- December 31, Year Ended Nine Months Ended
2003 December 31, 2002 December 31, 2001
-------------------- ----------------- ---------------------
Provided by (used in):
Operating activities $ 5,754,455 $ 5,006,854 $ 1,173,330
Investing activities (1,974,849) (5,669,491) (2,088,473)
Financing activities (3,855,697) (292,220) 345,943
-------------------- ------------------- --------------------
Net decrease in cash and cash
equivalents $ (76,091) $ (954,857) $ (569,200)
==================== =================== ====================
Year Ended December 31, 2003
Net cash provided by operating activities resulted principally from our current
period income, net of changes in accounts receivable, accounts payable and
accrued expenses. Substantially all the decrease in accounts receivable resulted
from Medicare cost report settlements. Days sales outstanding were approximately
64 and 73 at December 31, 2003 and 2002, respectively. The decrease in accounts
payable and accrued liabilities resulted primarily from a lower liability under
our self-insured employee health program. This lower liability resulted from a)
an intentional acceleration of the claims payment process and b) lower employee
participation due to an increase in required employee contributions. The
decrease in other assets and liabilities is principally the result of the
discontinuation and payout of the deferred compensation plan. Net cash used in
investing activities resulted principally from improvements in our information
systems and a cash bond of $1.1 million posted in a litigation appeal, partially
offset by cash received from sale of assets. Net cash used in financing
activities resulted primarily from repayments on our credit facility and payment
of capital lease and debt obligations.
Year Ended December 31, 2002
Net cash provided by operating activities resulted principally from our current
period income, net of changes in accounts receivable, accounts payable and
accrued expenses. Substantially all the increase in accounts receivable resulted
from revenue growth. Days sales outstanding were approximately 73 and 82 at
December 31, 2002 and 2001, respectively. The decrease in accounts payable and
accrued liabilities resulted primarily from a lower liability under our
self-insured employee health program. This lower liability resulted from a) an
intentional acceleration of the claims payment process and b) lower employee
participation due to an increase in required employee contributions. Net cash
used in investing activities resulted principally from amounts invested in the
acquisition of Medlink Ohio, improvements in information systems and adult day
health services expansion activities. Net cash used by financing activities
resulted primarily from borrowings on our credit facility offset by payment of
capital lease and debt obligations and repurchases of our common stock, net of
proceeds from stock option exercises.
Nine Months Ended December 31, 2001
Net cash provided by operating activities resulted principally from our current
period income, net of changes in accounts receivable, accounts payable and
accrued expenses. Substantially all the increase in accounts receivable resulted
from revenue growth. Days sales outstanding were approximately 81 at both
December 31, 2001 and March 31, 2001. Substantially all the decrease in accounts
payable and accrued liabilities resulted from the reversal of the remainder of
accounting reserves originally recorded at the time discontinued operations
accounting treatment was adopted for the Visiting Nurse segment which is
included in the income from discontinued operations. Net cash used in investing
activities resulted principally from amounts invested in adult day health
services expansion activities and improvements in information systems. Net cash
used by financing activities resulted primarily from borrowings on our credit
facility, payment of capital lease and debt obligations, repurchases of our
common stock, and proceeds from stock option exercises.
Contractual Obligations. The following table provides information about the
payment dates of our contractual obligations at December 31, 2003, excluding
current liabilities except for the current portion of long-term debt (amounts in
thousands):
2004 2005 2006 2007 2008 Thereafter Total
------------ ------------- ------------ ------------ -------------- ------------ -------------
Revolving credit facility $ - $ - $ 10,891 $ - $ - - $ 10,891
Capital lease obligations 303 291 291 291 260 117 1,553
Notes payable 18 315 - - - - 333
Operating leases 2,989 2,315 1,617 1,210 1,012 1,029 10,172
------------ ------------- ------------ ------------ -------------- ------------ -------------
Total $ 3,310 $ 2,921 $ 12,799 $ 1,501 $ 1,272 $ 1,146 $ 22,949
============ ============= ============ ============ ============== ============ =============
We believe that a certain amount of debt has an appropriate place in our overall
capital structure and it is not our strategy to eliminate all debt financing. We
believe that our cash flow from operations, and borrowing capacity on our bank
credit facility will be sufficient to cover operating needs, future capital
expenditure requirements and scheduled debt payments of miscellaneous small
borrowing arrangements and capitalized leases. In addition, it is likely that we
will pursue growth from acquisitions, partnerships and other ventures that would
be funded from excess cash from operations, credit available under the bank
credit agreement and other financing arrangements that are normally available in
the marketplace.
Commitments and Contingencies
Letter of Credit. We have an outstanding letter of credit of $3.5 million at
December 31, 2003, which benefits our third-party insurer/administrator for our
automobile and workers' compensation self-insurance programs. The amount of such
insurance program letter of credit is subject to negotiation annually upon
renewal and may vary in the future based upon such negotiation, our historical
claims experience and expected future claims. It is reasonable to expect that
the amount of the letter of credit will increase in the future, however, we are
unable to predict to what degree.
Acquisition Agreements. We currently have no obligations related to acquisition
agreements. However, we periodically seek acquisition candidates and may
reasonably be expected to enter into acquisitions in the future.
General and Professional Liability. 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 also know of incidents that have
occurred through December 31, 2003 that may result in the assertion of
additional claims. We carry insurance coverage for this exposure; however our
deductible per claim increased from $5,000 to $25,000 effective July 1, 2001 and
to $250,000 effective April 1, 2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a quarterly basis. As facts change, it may
become necessary to make adjustments that could be material to our results of
operations and financial condition.
Other Litigation.
Franklin Litigation
On January 26, 1994 Franklin Capital Associates L.P. (Franklin), Aetna Life and
Casualty Company and Aetna Casualty and Surety Company shareholders, who at one
time held approximately 320,000 shares of our common stock (approximately 13% of
shares outstanding), filed suit in Chancery Court of Williamson County,
Tennessee claiming unspecified damages not to exceed three million dollars in
connection with registration rights they received in our acquisition of certain
home health operations in February 1991. The 1994 suit alleged that we failed to
use our best efforts to register the shares held by the plaintiffs as required
by the merger agreement. We settled with both Aetna parties shortly before the
case went to trial in February 2000. In mid-trial Franklin voluntarily withdrew
its complaint reserving its legal rights to bring a new suit as allowed under
Tennessee law. In April 2000, Franklin re-filed its lawsuit. The second trial
took place in February 2003. In April 2003 the court issued a ruling in favor of
the plaintiffs awarding damages of $984,970. We believe the Court erred both in
its finding of liability and in its determination of the amount of damages. We
are seeking appellate review of the lower court decision. As a part of the
appeal, we were required to post cash of $1,154,241 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 our legal counsel, we believe 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, we would record a
provision at that time.
Based on the advice of our legal counsel, we believe we have strong grounds for
appealing the trial court's decision and we intend to vigorously pursue our
appeal. We can give no assurance that we will be successful in our appeal.
Kentucky Transportation Litigation
Prior to July 1, 2002, the Commonwealth of Kentucky managed its Medicaid
transportation program internally. Effective July 1, 2002 the Commonwealth
contracted with an independent broker (the Broker) for the management of the
program in the Louisville KY area. The Broker then contracted with us, among
others, for the provision of transportation services to Medicaid beneficiaries.
Our services pursuant to the contract were limited to transportation of Medicaid
beneficiaries who also attended our in-center adult day care programs. The
Broker almost immediately began to encounter significant financial difficulties
and paid us for only a small portion of the amounts due for services rendered.
On October 22, 2002, three of the Broker's other contracted providers filed a
motion with the US Bankruptcy Court to liquidate the Broker under Chapter 7 of
the Federal Bankruptcy Code. On November 25, 2002, the Broker voluntarily chose
to convert their bankruptcy status to a Chapter 11, voluntary reorganization.
In May 2003, along with a group of other affected providers, we filed suit
against the Commonwealth in Franklin Circuit Court seeking payment directly from
the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity 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 December 31,
2003 and December 31, 2002, the Broker owed us approximately $535,000, which
amount is included in accounts receivable, net on the accompanying balance
sheets. Although we currently believe we will be successful in ultimately
collecting the amounts currently due us 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, we will, at that
time, record an additional provision for uncollectible accounts.
Our loan agreement executed with our lender in March 2004 provides that the loss
of either or both of the above litigation cases will be excluded from our
financial results for purposes of calculating borrowing availability or
financial covenant compliance.
Medicaid Dependence
We have a significant dependence on state Medicaid reimbursement programs. For
the year ended December 31, 2003, approximately 13.5%, 12.0%, 11.7%, 5.9%, 3.2%,
2.8% and 2.1% of our revenues were generated from Medicaid reimbursement
programs in the states of Maryland, Ohio, Kentucky, Connecticut, Florida,
Massachusetts and Indiana, respectively.
Approximately 51% of our revenues are from state Medicaid and other government
programs, virtually all of which are currently facing significant budget issues.
The Medicaid programs in each of the states in which we operate are taking
actions or evaluating taking actions to reduce Medicaid expenditures. Among
these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum time in
which payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the slowing of the US economy. We believe that these
financial issues are cyclical in nature rather than indicative of the long-term
prospect for Medicaid funding of health care services. It is possible however,
that the actions taken by the state Medicaid programs in the future could have a
significant unfavorable impact on our results of operations, financial condition
and liquidity.
Health Care Reform
The health care industry has experienced, and is expected to continue to
experience, extensive and dynamic change. In addition to economic forces and
regulatory influences, continuing political debate is subjecting the health care
industry to significant reform. Health care reforms have been enacted as
discussed elsewhere in this document. Proposals for additional changes are
continuously formulated by departments of the Federal government, Congress, and
state legislatures.
Government officials can be expected to continue to review and assess
alternative health care delivery systems and payment methodologies. Changes in
the law or new interpretations of existing laws may have a dramatic effect on
the definition of permissible or impermissible activities, the relative cost of
doing business, and the methods and amounts of payments for medical care by both
governmental and other payors. Legislative changes to "balance the budget" and
slow the annual rate of growth of expenditures are expected to continue. Such
future changes may further impact our reimbursement. There can be no assurance
that future legislation or regulatory changes will not have a material adverse
effect on our operations.
Federal and State legislative proposals continue to be introduced that would
impose more limitations on payments to providers of health care services such as
us. Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures.
We cannot predict what additional government regulations may be enacted in the
future affecting our business or how existing or future laws and regulations
might be interpreted, or whether we will be able to comply with such laws and
regulations in our existing or future markets.
Refer to the sections on "Reimbursement Changes and Cautionary Statements -
Forward Outlook and Risks" in Part I, 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.
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. We
implemented changes in our operations to comply with the privacy aspects of
HIPAA and we believe we are in compliance. The cost of complying with privacy
standards is not expected to have a material effect on our results of operations
or financial position. We are in the process of implementing changes in our
operations to comply with the electronic transaction and code sets aspects of
HIPAA and we anticipate that we will be able to fully and timely comply with
those requirements. Independent of HIPAA requirements, we have been developing
new information systems with improved functionality to facilitate improved
billing and collection activities, reduced administrative costs and improved
decision support information. We have incorporated the HIPAA mandated electronic
transaction and code sets into the design of this new software.
Regulations with regard to the security components of HIPAA, have only recently
been published. Those regulations are required to be implemented by April 2005.
We cannot at this time estimate the cost of compliance with the security
regulations.
Discontinued Operations
During the year ended December 31, 2003, we recorded in income from discontinued
operations a one-time reduction in estimated tax liabilities of approximately
$854,000 or $0.34 per diluted share, due to the expiration of various statutory
limitations pertaining to the tax year 1999 in which we sold our product
operations.
Impact of Inflation
We do not believe that inflation has had a material effect on income during the
past several years.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Derivative Instruments
We do 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 December 31, 2003, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of approximately $109,000 in annual
pre-tax earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Year Ended
Year Ended Year Ended Ended December
December December 31, December 31, 2001
31, 2003 2002 31, 2001 (unaudited)
----------------------------------------------------------------------
Net revenues $ 86,899,165 $ 85,769,537 $ 59,753,561 $ 79,306,414
Cost of services 72,555,416 70,589,552 48,140,233 64,341,701
General and administrative expenses 7,485,677 7,580,281 4,878,469 6,697,630
Cost of restatement - 815,794 - -
Depreciation and amortization expense 2,545,877 2,176,844 1,270,204 1,552,187
Provision for uncollectible accounts 1,610,664 1,660,748 888,757 1,138,531
---------------- ------------------- ---------------- --------------
Income from continuing operations before other
income (expense) and income taxes 2,701,531 2,946,318 4,575,898 5,576,365
Other income (expense):
Interest expense (661,019) (813,555) (712,003) (896,339)
Facility losses (123,785) - - -
---------------- ------------------- ---------------- --------------
Income from continuing operations before income taxes 1,916,727 2,132,763 3,863,895 4,680,026
Provision for income taxes 650,676 787,850 1,622,831 2,006,474
---------------- ------------------- ---------------- --------------
Income from continuing operations 1,266,051 1,344,913 2,241,064 2,673,552
Income from discontinued operations
Gain from reversal of previously recorded tax accrual in
2003 and disposal charge of $1,782,350 net of income taxes
of $695,000 in 2001 854,146 - 1,087,350 1,087,350
---------------- ------------------- ---------------- --------------
Net income $ 2,120,197 $ 1,344,913 $ 3,328,414 $ 3,760,902
================ =================== ================ ==============
Per share amounts-Basic:
Average shares outstanding 2,294,771 2,416,224 2,478,000 2,646,177
Income from continuing operations $ 0.55 $ 0.56 $ 0.90 $ 1.01
Income from discontinued operations 0.37 - 0.44 0.41
---------------- ------------------- ---------------- --------------
Net income $ 0.92 $ 0.56 $ 1.34 $ 1.42
================ =================== ================ ==============
Per share amounts-Diluted:
Average shares outstanding 2,538,871 2,719,809 2,909,285 3,077,462
Income from continuing operations $ 0.50 $ 0.49 $ 0.77 $ 0.87
Income from discontinued operations 0.34 - 0.37 0.35
---------------- ------------------- ---------------- --------------
Net income $ 0.84 $ 0.49 $ 1.14 $ 1.22
================ =================== ================ ==============
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS December 31, 2003 December 31, 2002
------
------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 897,443 $ 973,534
Accounts receivable - net 15,334,659 17,118,539
Prepaid expenses and other current assets 740,228 602,759
Deferred tax assets 863,611 1,396,306
------------------- -------------------
TOTAL CURRENT ASSETS 17,835,941 20,091,138
CASH HELD IN ESCROW 1,154,241 -
PROPERTY AND EQUIPMENT - NET 7,519,506 9,149,782
GOODWILL 6,335,783 6,335,783
DEFERRED TAX ASSETS - 212,914
OTHER ASSETS 195,589 1,010,406
------------------- -------------------
$ 33,041,060 $ 36,800,023
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,376,045 $ 2,711,970
Accrued liabilities 5,481,130 6,560,330
Current portion - capital leases and notes payable 225,578 352,452
------------------ ------------------
8,082,753 9,624,752
------------------ ------------------
LONG-TERM LIABILITIES:
Revolving credit facility 10,891,423 14,482,237
Capital leases 1,085,178 882,809
Notes payable 300,000 560,118
Deferred tax liabilities 61,328 -
Other liabilities 356,032 1,146,023
------------------ ------------------
TOTAL LONG-TERM LIABILITIES 12,693,961 17,071,187
------------------ ------------------
TOTAL LIABILITIES 20,776,714 26,695,939
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,394,874 and 3,369,674 issued, respectively 339,490 336,970
Treasury stock, at cost, 1,096,783 and 1,087,383 shares,
respectively (7,772,048) (7,706,152)
Additional paid-in capital 26,439,304 26,335,863
Accumulated deficit (6,742,400) (8,862,597)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 12,264,346 10,104,084
------------------ ------------------
$ 33,041,060 $ 36,800,023
================== ==================
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Additional Total
Common Stock Treasury Stock Paid-in Accumulated Stockholders'
--------------------------- ---------------------------
Shares Amount Shares Amount Capital Deficit Equity
------------- ------------ ----------- -------------- --------------- ----------------- ------------
Balance, March 31, 2001 3,289,974 $ 329,000 779,912 $ (5,266,919) $ 25,731,726 $ (13,535,924) $ 7,257,883
Options Exercised 27,900 2,790 77,973 80,763
Repurchased Shares 57,400 (516,678) (516,678)
Tax benefit from exercise of
non-qualified stock options 231,029 231,029
Net Income 3,328,414 3,328,414
------------- ------------ ----------- -------------- --------------- ----------------- ------------
Balance, December 31, 2001 3,317,874 331,790 837,312 (5,783,597) 26,040,728 (10,207,510) 10,381,411
Options Exercised 51,800 5,180 136,927 142,107
Repurchased Shares 250,071 (1,922,555) (1,922,555)
Tax benefit from exercise of
non-qualified stock options 158,208 158,208
Net Income 1,344,913 1,344,913
------------- ------------ ----------- -------------- --------------- ----------------- ------------
Balance, December 31, 2002 3,369,674 336,970 1,087,383 (7,706,152) 26,335,863 (8,862,597) 10,104,084
Options Exercised 25,200 2,520 73,630 76,150
Repurchased Shares 9,400 (65,896) (65,896)
Tax benefit from exercise of
non-qualified stock options 29,811 29,811
Net Income 2,120,197 2,120,197
------------- ------------ ----------- -------------- --------------- ----------------- ------------
Balance, December 31, 2003 3,394,874 $ 339,490 1,096,783 $ (7,772,048) $ 26,439,304 $ (6,742,400) $ 12,264,346
============= ============ =========== ============== =============== ================= ============
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months
Year Ended Year Ended Ended
December 31, December 31, December 31,
2003 2002 2001
---------------- ----------------- ---------------
Cash flows from operating activities:
Net income $ 2,120,197 $ 1,344,913 $ 3,328,414
Less income from discontinued operations 854,146 - 1,087,350
---------------- ----------------- ---------------
Income from continuing operations 1,266,051 1,344,913 2,241,064
Adjustments to reconcile income from continuing operations to net cash
provided by operating activities:
Depreciation and amortization 2,545,877 2,176,844 1,270,204
Provision for uncollectible accounts 1,610,664 1,660,748 888,757
Loss on sale of assets 123,785 - -
Deferred income taxes 806,937 456,930 1,027,291
---------------- ----------------- ---------------
6,353,314 5,639,435 5,427,316
Change in certain net assets, net of the effects of acquisitions:
(Increase) decrease in:
Accounts receivable 180,716 (183,865) (2,060,042)
Prepaid expenses and other current assets (273,235) 337,406 (144,372)
Other assets 814,817 214,141 (370,830)
Increase (decrease) in:
Accounts payable and accrued expenses (531,167) (1,076,149) (1,977,800)
Other liabilities (789,990) 75,886 299,058
---------------- ----------------- ---------------
Net cash provided by operating activities 5,754,455 5,006,854 1,173,330
---------------- ----------------- ---------------
Cash flows from investing activities:
Cash held in escrow (1,154,241) - -
Capital expenditures (1,506,600) (2,738,779) (2,088,473)
Cash received from sale of assets 685,992 - -
Acquisitions, net of cash acquired - (2,930,712) -
---------------- ----------------- ---------------
Net cash used in investing activities (1,974,849) (5,669,491) (2,088,473)
---------------- ----------------- ---------------
Cash flows from financing activities:
Net revolving credit facility borrowings (repayments) (3,590,814) 1,895,705 795,894
Repurchase of common shares (65,896) (1,922,555) (516,678)
Proceeds from stock option exercises 76,150 142,107 311,792
Principal payments on capital leases and notes payable (275,137) (407,477) (245,065)
---------------- ----------------- ---------------
Net cash provided by (used in) financing activities (3,855,697) (292,220) 345,943
---------------- ----------------- ---------------
Net decrease in cash and cash equivalents (76,091) (954,857) (569,200)
Cash and cash equivalents at beginning of period 973,534 1,928,391 2,497,591
---------------- ----------------- ---------------
Cash and cash equivalents at end of period $ 897,443 $ 973,534 $ 1,928,391
================ ================= ===============
Supplemental disclosures of cash flow information:
Cash payment of interest, net of amounts capitalized $ 703,000 $ 822,000 $ 653,000
Cash payment of taxes $ 42,000 $ 465,000 $ 1,412,000
Summary of non-cash investing activities:
Capital expenditures financed under capital leases $ 392,012 $ 373,833 $ 841,961
Acquisition note payable $ - $ 300,000 $ -
The accompanying notes to consolidated financial statements are an integral
part of these financial statements.
ALMOST FAMILY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF CONSOLIDATION AND DESCRIPTION OF BUSINESS
The consolidated financial statements include the accounts of Almost Family,
Inc. (a Delaware corporation) and its wholly-owned subsidiaries (collectively
"Almost Family" or the "Company"). The Company provides alternatives for seniors
and other adults with special needs and their families who wish to avoid nursing
home placement as long as possible and remain independent, through its network
of adult day care centers and ancillary services. The Company also operates a
chain of Medicare-certified home health agencies under the trade name
"CaretendersTM". The Company has operations in Alabama, Connecticut, Florida,
Indiana, Kentucky, Maryland, Massachusetts, and Ohio. All material intercompany
transactions and accounts have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents.
Uninsured deposits at December 31, 2003, and December 31, 2002 were
approximately $897,000 and $973,000, respectively. These amounts have been
deposited with national financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives. The estimated useful lives
of depreciable assets are as follows:
Estimated
Useful Life
In Years
Buildings and improvements 30
Leasehold improvements 3-10
Medical equipment 2-10
Office and other equipment 3-10
Transportation equipment 3-5
Internally generated software 3
GOODWILL
The goodwill acquired is stated at cost. Subsequent to its acquisitions, the
Company evaluates whether events and circumstances have occurred that indicate
the remaining estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill may not be recoverable. When factors indicate that
goodwill should be evaluated for possible impairment, the Company utilizes
appropriate methods in measuring whether or not the goodwill is recoverable.
In July 2001, the Financial Accounting Standards Board (FASB) issued SFAS No.
141, "Business Combinations" (SFAS 141) and SFAS No. 142, "Goodwill and Other
Intangible Assets" (SFAS 142). These statements established new accounting and
reporting standards for business combinations and associated goodwill and
intangible assets. SFAS 141 eliminated the pooling of interest method of
accounting and amortization of goodwill for business combinations initiated
after June 30, 2001. SFAS 142, adopted by the Company January 1, 2002, requires
that goodwill and intangible assets with indefinite useful lives can no longer
be amortized, but instead must be tested for impairment at least annually. The
Company completed the required initial test for impairment upon adoption in 2002
and concluded that no impairment exists. In addition, the Company has completed
the required annual tests for impairment in 2003 and 2002 and concluded that no
impairment exists. If the Company had accounted for its goodwill under SFAS No.
142 for all periods presented, the Company's net income and income per share
would have been as follows:
Nine Months
Year Ended Year Ended Ended
December 31, 2003 December 31, 2002 December 31, 2001
-------------------------------------------------------
Net income as reported $ 2,120,197 $ 1,344,913 $ 3,328,414
Add back:
Goodwill amortization, net of tax - - 65,540
-----------------------------------------------------
Adjusted net income $ 2,120,197 $ 1,344,913 $ 3,393,954
=====================================================
Basic earnings per share:
Net income as reported $ 0.92 $ 0.56 $ 1.34
Add back:
Goodwill amortization, net of tax - - 0.03
-----------------------------------------------------
Adjusted net income $ 0.92 $ 0.56 $ 1.37
=====================================================
Diluted earnings per share:
Net income as reported $ 0.84 $ 0.49 $ 1.14
Add back:
Goodwill amortization, net of tax - - 0.03
-----------------------------------------------------
Adjusted net income $ 0.84 $ 0.49 $ 1.17
=====================================================
There were no changes in the Company's goodwill for the fiscal year ended
December 31, 2003. Accumulated goodwill amortization at December 31, 2003 and
2002 was approximately $2 million. Goodwill acquired in 2002 amounted to
$2,552,335 (see Note 11).
LONG-LIVED ASSETS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This statement superceded SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of", and the accounting and reporting provisions for APB Opinion No.
30, "Reporting Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions". SFAS No. 144 requires that one accounting model be
used for long-lived assets to be disposed of by sale, whether previously held
and used or newly acquired, and it broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted SFAS No.
144 on January 1, 2002 and there was no effect on the financial position and
results of operations of the Company during the years ended December 31, 2003
and 2002.
CAPITALIZATION POLICIES
Maintenance, repairs and minor replacements are charged to expense as incurred.
Major renovations and replacements are capitalized to appropriate property and
equipment accounts. Upon sale or retirement of property, the cost and related
accumulated depreciation are eliminated from the accounts and the related gain
or loss is recognized in income.
Construction costs incurred to ready a project for its intended use are
capitalized for major development projects and are amortized over the lives of
the related assets. 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 $922,000,
$1,381,000 and $911,000 were capitalized in the years ended December 31, 2003
and 2002 and the nine months ended December 31, 2001, respectively. Capitalized
software costs for the year ended December 31, 2003 and 2002 included $19,821
and $26,520 of capitalized interest expense, respectively. Capitalized software
development costs are amortized over a three-year period following the initial
implementation of the software.
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.
As shown below, approximately 51% of the Company's 2003 revenues were derived
from state Medicaid and Other Government 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 made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are in response to declines in
state tax revenues due to the 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.
The following table sets forth the percent of the Company's revenues generated
from Medicare, state Medicaid programs and other payors:
Year Ended Year Ended December Nine Months Ended
December 31, 2003 31, 2002 December 31, 2001
----------------------- --------------------- -----------------------
Medicare 30.5% 29.7% 29.2%
Medicaid & other government programs:
Maryland 13.5% 13.7% 16.0%
Ohio 12.0% 5.3% 3.7%
Kentucky 11.7% 17.0% 17.1%
Connecticut 5.9% 5.9% 6.3%
Florida 3.2% 2.9% 1.9%
Massachusetts 2.8% 2.9% 2.9%
Indiana 2.1% 1.1% 3.6%
Alabama 0.2% - -
----------------------- --------------------- -----------------------
Subtotal 51.4% 48.8% 51.5%
All other payers 18.1% 21.5% 19.3%
----------------------- --------------------- -----------------------
Total 100.0% 100.0% 100.0%
======================= ===================== =======================
Concentrations in the Company's accounts receivable were as follows:
As of December 31, 2003 As of December 31, 2002
------------------------------------- ----------------------------------
Amount Percent Amount Percent
----------------------- ------------- ----------------- --------------
Medicare $ 1,835,359 10.3% $ 4,845,084 24.9%
----------------------- ------------- ----------------- --------------
Medicaid & other government programs: 5,056,515 28.3% 5,211,503 26.8%
Kentucky
Ohio 2,002,294 11.2% 1,904,768 9.8%
Connecticut 1,170,776 6.5% 1,125,538 5.8%
Maryland 946,057 5.3% 847,290 4.4%
Indiana 801,700 4.5% 984,321 5.1%
Massachusetts 557,759 3.1% 677,862 3.5%
Florida 285,963 1.6% 429,567 2.2%
----------------------- ------------- ----------------- --------------
Subtotal 10,821,064 60.5% 11,180,849 57.6%
All other payers 5,218,086 29.2% 3,401,962 17.5%
----------------------- ------------- ----------------- --------------
Subtotal 17,874,509 100.0% 19,427,895 100.0%
Allowance for uncollectible accounts (2,539,850) (2,309,356)
----------------------- -----------------
$ 15,334,659 $ 17,118,539
======================= =================
At December 31, 2003 and 2002, the Company had approximately $1,960,000 and
$4,491,000 of net receivables outstanding specifically related to filed or
estimated cost reports. Of these amounts, approximately $1,826,000 and
$2,271,000, respectively, were due from the Kentucky Medicaid program.
The ability of payors to meet their obligations depends upon their financial
stability, future legislation and regulatory actions. 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.
NET INCOME PER SHARE
Net income per share is presented as a unit of basic shares outstanding and
diluted shares outstanding. Diluted shares outstanding is computed based on the
weighted average number of common shares and common equivalent shares
outstanding. Common equivalent shares result from dilutive stock options. The
following table is a reconciliation of basic to diluted shares used in the
earnings per share calculation:
Nine Months
Year Ended Year Ended Ended
December 31, 2003 December 31, 2002 December 31, 2001
------------------------------------------------------
Basic weighted average outstanding shares 2,294,771 2,416,224 2,478,000
Add-common equivalent shares representing
shares issuable upon exercise of dilutive
options 244,100 303,585 431,285
-----------------------------------------------------
Diluted weighted average number of shares at
year end 2,538,871 2,719,809 2,909,285
=====================================================
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. Refer also to "NET
REVENUES" above and to Note 2 -- "HEALTHCARE REFORM LEGISLATION, REGULATIONS AND
MARKET CONDITIONS".
FINANCIAL STATEMENT RECLASSIFICATIONS
Certain amounts have been reclassified in the December 31, 2002 financial
statements and related notes in order to conform to the 2003 presentation. Such
reclassifications had no effect on previously reported net income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable,
payables and debt instruments. The book values of cash, accounts receivable and
payables are considered representative of their respective fair values. The fair
value of the Company's debt instruments approximates their carrying values as
substantially all of such debt has rates which fluctuate with changes in market
rates.
STOCK-BASED COMPENSATION
The Company applies APB Opinion 25 and related interpretations in accounting for
its stock option plans. In 1995, Statement of Financial Accounting Standards No.
123 "Accounting for Stock-Based Compensation" (SFAS No. 123) was issued and, if
fully adopted, changes the method of recognition of costs on plans similar to
the Company's. The Company adopted the disclosure-only provisions of SFAS No.
123. Accordingly, no compensation cost has been recognized for the Company's
stock option grants since options granted have been at exercise prices at least
equal to fair value of the Company's common stock at the grant date.
Had compensation cost for stock option grants been determined based upon the
fair value at the grant date for the awards in the years ended December 31, 2003
and 2002 and the nine months ended December 31, 2001 consistent with the
provisions of SFAS 123, the effect on net income and earnings per share would
have been reduced to the following pro forma amounts:
Year Ended December Year Ended Nine Months Ended
31, 2003 December 31, 2002 December 31, 2001
--------------------- -------------------- -----------------------
Net income, as reported: $ 2,120,197 $ 1,344,913 $ 3,328,414
Pro forma stock-based
compensation expense, net of
tax 41,808 67,722 60,959
--------------------- -------------------- -----------------------
Pro forma net income $ 2,078,389 $ 1,277,191 $ 3,267,455
===================== ==================== =======================
Pro forma earnings per share:
Basic $ 0.91 $ 0.53 $ 1.32
Diluted $ 0.82 $ 0.47 $ 1.12
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising expense
was $131,721, $146,218 and $193,280 for the year ended December 31, 2003, the
year ended December 31, 2002 and the nine months ended December 31, 2001,
respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued Statement of Financial Accounting Standard No.
146, "Accounting for Costs Associated With Exit or Disposal Activities," (SFAS
No. 146) which is effective for exit or disposal activities that are initiated
after December 31, 2002. SFAS No. 146 nullifies EITF Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized at fair value when the liability is incurred. A
commitment to an exit or disposal plan no longer will be sufficient basis for
recording a liability for those activities. The Company has adopted SFAS No. 146
in 2003 with no immediate impact on the Company's financial condition or results
of operations, however, should the Company have future exit or disposal
activities, SFAS No.146 would apply to the accounting for those activities.
Discontinued operations and Decision to Retain VN Operations
As reported in the Company's Form 10-K for the nine months ended December 31,
2001, the Company in September 2001 terminated its previously adopted plan of
disposition for its Visiting Nurse (VN) operations. This decision followed a
period of extensive analysis and evaluation of numerous alternatives for the
business unit. In the Board's judgment, given the significant external and
internal changes that have taken place with regard to the future prospects of
the VN segment, retaining the VN segment was the best option available to
maximize shareholder value. In the accompanying financial statements, the
Company, in accordance with applicable accounting rules, terminated the use of
discontinued operations accounting treatment for the VN segment. VN segment
results are now reported as an on-going part of the continuing operations of the
Company for all periods presented.
As a result of the decision to retain its VN segment, the Company recorded, in
the nine months ended December 31, 2001, a one-time after-tax gain of
approximately $1.1 million, or $0.37 per diluted share, resulting from the
reversal of the remainder of accounting reserves originally recorded at the time
discontinued operations accounting treatment was adopted for this segment.
During the year ended December 31, 2003, the Company recorded in income from
discontinued operations a one-time reduction in estimated tax liabilities of
approximately $854,000 or $0.34 per diluted share, due to the expiration of
various statutory limitations pertaining to the tax year in which the Company
sold its product operations in 1999.
Change in Fiscal Year End
In September 2001, the Company changed its fiscal year end from March 31 to
December 31 effective December 31, 2001. Pursuant to the Securities Exchange Act
of 1934, the accompanying audited financial statements included herein present
information for the years ended December 31, 2003 and 2002, and the nine months
ended December 31, 2001.
NOTE 2 - HEALTHCARE REFORM LEGISLATION, REGULATIONS AND MARKET CONDITIONS
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 and
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.
State legislative proposals continue to be introduced that would impose more
limitations on payments to providers of health care services such as the
Company. 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.
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
is in the process of implementing changes in its operations to comply with the
privacy and electronic transaction and code sets aspects of HIPAA and
anticipates that the Company will be able to fully and timely comply with those
requirements. 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. 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 the design of 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.
NOTE 3 - ACCRUED LIABILITIES
Accounts payable and accrued expenses consist of the following:
December 31, December 31,
2003 2002
------------------- -----------------
Wages and employee benefits $ 1,849,773 $ 2,308,313
Insurance accruals 2,766,763 2,781,557
Accrued taxes 608,344 895,740
Accrued professional fees and other 256,250 574,720
------------------- -----------------
$ 5,481,130 $ 6,560,330
=================== =================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of the
following:
December 31, 2003 December 31,
2002
-------------------- ------------------
Land $ 150,000 $ 450,000
Buildings and improvements 684,263 1,463,603
Leasehold improvements 4,524,810 4,740,948
Medical equipment 664,390 660,729
Computer equipment and software 9,195,059 8,119,040
Office and other equipment 2,968,051 2,878,420
Transportation equipment 3,897,047 3,433,934
-------------------- ------------------
22,083,620 21,746,674
Less accumulated depreciation (14,564,114) (12,596,892)
-------------------- ------------------
$ 7,519,506 $ 9,149,782
==================== ==================
Depreciation expense (including depreciation on assets held under capital
leases) was $2,327,397, $2,069,319 and $1,117,621 for the years ended December
31, 2003 and 2002 and the nine months ended December 31, 2001, respectively.
NOTE 5 - REVOLVING CREDIT FACILITY
Revolving Credit Facility. In March 2004, the Company renewed its $22.5 million
credit facility with Bank One Kentucky NA. The renewed facility expires June 30,
2006. The credit facility bears interest at the bank's prime rate adjusted for a
margin (ranging from -0.75% to -0.25%, currently -0.5%) dependent upon total
leverage and is secured by substantially all assets and the stock of the
Company's subsidiaries. The weighted average interest rates in effect under the
preceding facility were 4.1%, 5.0% and 7.3% for the years ended December 31,
2003 and 2002 and the nine months ended December 31, 2001, respectively. The
interest rate in effect at December 31, 2003 was 4.0%. The Company will pay a
commitment fee of 0.25% per annum on the unused facility balance (0.5% on the
preceding facility). Borrowings under both the preceding and the new facility
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 December 31, 2003 the formula permitted approximately $16.8 million to be
used, of which approximately $10.9 million was outstanding. Additionally, an
irrevocable letter of credit, totaling $3.5 million, was outstanding in
connection with the Company's self-insurance programs. Thus, a total of $14.4
million was either outstanding or committed as of December 31, 2003 while an
additional $2.4 million was available for use. The Company's revolving credit
facility is subject to various financial covenants. As of December 31, 2003, the
Company was in compliance with the covenants. Under the most restrictive of the
Company's covenants, net worth of $10,500,000 must be maintained.
NOTE 6 - INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax assets and
liabilities are determined based on the difference between the Company's book
and tax bases of assets and liabilities and tax carryforwards using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The principal tax carryforwards and temporary differences were as follows:
December 31, December 31,
2003 2002
--------------------- ------------------
Deferred tax assets
Nondeductible reserves and
allowances $ 171,000 $ 664,000
Intangibles 1,214,000 1,488,000
Insurance accruals 718,000 811,000
Net operating loss carryforwards 838,000 768,000
--------------------- ------------------
2,941,000 3,731,000
Valuation allowance (639,000) (701,000)
--------------------- ------------------
2,302,000 3,030,000
Deferred tax liabilities
Accelerated depreciation (1,500,000) (1,421,000)
--------------------- ------------------
Net deferred tax assets $ 802,000 $ 1,609,000
===================== ==================
Deferred tax assets (liabilities) are reflected in the accompanying balance
sheets as:
Current $ 864,000 $ 1,396,000
Long-term (62,000) 213,000
--------------------- ------------------
Net deferred tax assets $ 802,000 $ 1,609,000
===================== ==================
The Company has state and local net operating loss carryforwards of
approximately $16.7 million which expire on various dates through 2016.
Provision (benefit) for income taxes consists of the following:
Nine Months Ended
Year Ended Year Ended December 31,
December 31, 2003 December 31, 2002 2001
-------------------- ------------------- ------------------
Federal - current $ (927,000) $ (234,000) $ 895,000
State and local - current 22,000 43,000 254,000
Deferred 702,000 979,000 1,169,000
-------------------- ------------------- ------------------
$ (203,000) $ 788,000 $ 2,318,000
==================== =================== ==================
Shown in the accompanying statements of income as:
Continuing operations $ 651,000 $ 788,000 $ 1,623,000
Discontinued operations (854,000) - 695,000
-------------------- ------------------- ------------------
$ (203,000) $ 788,000 $ 2,318,000
==================== =================== ==================
A reconciliation of the statutory to the effective rate of the Company (for
continuing operations only) is as follows:
Nine Months
Year Ended Year Ended Ended
December 31, 2003 December 31, 2002 December 31, 2001
----------------------- --------------------- ---------------------
Tax provision using statutory rate 34.0% 34.0% 34.0%
Goodwill -% -% 0.6%
Valuation allowance (0.7%) (3.4%) (1.2%)
State and local taxes, net of Federal benefit (1.0%) 5.0% 6.4%
Other, net 1.6% 1.4% 2.2%
----------------------- --------------------- -----------------------
Tax provision for continuing operations 33.9% 37.0% 42.0%
======================= ===================== =======================
The Company has provided a valuation allowance against certain net deferred tax
assets based upon management's estimation of realizability of those assets
through future taxable income. This valuation was based in large part on the
Company's history of generating operating income or losses in individual tax
locales and expectations for the future. The Company's ability to generate the
expected amounts of taxable income from future operations to realize its
recorded net deferred tax assets is dependent upon general economic conditions,
competitive pressures on revenues and margins and legislation and regulation at
all levels of government. There can be no assurances that the Company will meet
its expectations of future taxable income. However, management has considered
the above factors in reaching its conclusion that it is more likely than not
that future taxable income will be sufficient to realize the net deferred tax
assets as of December 31, 2003.
During the year ended December 31, 2003, the year ended December 31, 2002 and
the nine months ended December 31, 2001, based on changes in facts and
circumstances, favorable changes occurred in the Company's expectations with
regard to the generation of future taxable income in certain tax jurisdictions.
Accordingly, the state and local tax provision for these periods include a
reduction of previously recorded valuation allowances of approximately $96,000,
$73,000 and $47,000, respectively.
During the year ended December 31, 2003, the Company recorded in income from
discontinued operations a one-time reduction in estimated tax liabilities of
approximately $854,000 or $0.34 per diluted share, due to the expiration of
various statutory limitations pertaining to the tax year in which the Company
sold its product operations.
NOTE 7 - Stockholders' Equity
Employee Stock Option Plans
The Company has the following stock option plans:
1. The Company has a Nonqualified Stock Option Plan which provided for the
granting of options to key employees, officers, and directors, to purchase up to
220,000 shares of the Company's common stock. The period of time for granting
options under this plan has expired. As of December 31, 2003, options for 40,500
shares were outstanding under this plan.
2. The Company has a 1991 Long-term Incentive Nonqualified Stock Option Plan
which provided for the granting of options to purchase up to 500,000 shares of
the Company's common stock to key employees, officers, and directors. The period
of time for granting options under this plan has expired. As of December 31,
2003, options for 370,493 shares were outstanding under this plan.
3. The Company has a 1993 Stock Option Plan for Non-employee Directors which
provided for the granting of options to purchase up to 120,000 shares of the
Company's common stock to directors who are not employees. Each newly elected
director or any director who did not possess options to purchase 10,000 shares
of the Company's common stock were automatically granted options to purchase
10,000 shares of common stock under this plan at an exercise price based on the
market price as of the date of grant. As of December 31, 2003, all option shares
available under this plan have been granted and options for 83,500 shares were
outstanding under this plan.
4. The Company has a 2000 Stock Option Plan which provides for options to
purchase up to 500,000 shares of the Company's common stock to key employees and
officers. The Board of Directors determines the amount and terms of the options,
which cannot exceed ten years. As of December 31, 2003, options for 69,007
shares had been granted and were outstanding under this plan. Shares available
for future grant amount to 425,993 shares at December 31, 2003.
Changes in qualified options, non-qualified options and supplemental
non-qualified options outstanding are summarized as follows:
Wtd. Avg
Shares Ex. Price
------------- ---------------
March 31, 2001 692,900 $ 3.11
Granted 10,000 8.75
Exercised (27,900) 2.60
Terminated (7,500) 4.25
-------------
December 31, 2001 667,500 3.06
Granted 12,500 10.51
Exercised (51,800) 2.80
Terminated - -
-------------
December 31, 2002 628,200 3.38
Granted - -
Exercised (25,200) 3.02
Terminated (39,500) 3.26
-------------
December 31, 2003 563,500 3.40
=============
The following table details exercisable options and related information:
Year Ended Year Ended Nine Months Ended
December 31, 2003 December 31, 2002 December 31, 2001
------------------ ------------------- -------------------
Exercisable at end of year 502,375 493,325 425,250
Weighted average exercise price $ 3.20 $ 2.98 $ 2.76
Weighted average fair value
of options granted during the year $ - $ 0.69 $ 0.68
The fair value of each option award is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for awards in the year ended December 31, 2002 and the nine
months ended December 31, 2001: risk-free interest rates of 5.72% and 5.40%,
expected volatility of approximately 50% and 50%, expected lives of 9.30 and
9.57 years, and no expected dividend yields, respectively. There were no grants
of options in fiscal 2003.
The following table summarizes information about stock options outstanding at
December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -----------------------------------
Outstanding Wtd. Avg. Exercisable
Range of As of Remaining Wt. Avg. As of Wt. Avg.
Ex. Price December 31, 2003 Contractual Life Ex. Price December 31, 2003 Ex. Price
----------------- ------------------ ------------------- -------------- ------------------ -------------
$2.19-2.50 175,000 5.17 $2.19 175,000 $2.19
$2.50 - 3.00 146,500 2.33 $2.63 146,500 $2.63
Over $3.00 242,000 7.17 $4.74 180,875 $4.63
------------------ ------------------
$2.19 - $10.59 563,500 5.29 $3.40 502,375 $3.20
================== ==================
Shareholders Rights Plan
On February 1, 1999 the Company implemented a shareholder protection rights
plan. One right was distributed as a dividend on each share of common stock of
the Company held of record as of the close of business on February 16, 1999.
Subject to the terms and conditions of the plan, the rights will be exercisable
only if a person or group acquires beneficial ownership of 20% or more of the
Company's common stock or announces a tender or exchange offer upon consummation
of which, such person or group would beneficially own 20% or more of the common
stock of the Company. If the rights are triggered, then each right not owned by
the acquiring person or group entitles its holder to purchase shares of Company
common stock at the right's current exercise price, having a value of twice the
right's exercise price. The Company may redeem the rights at any time until the
close of business on the tenth business day following an announcement by the
Company that an acquiring person or group has become the beneficial owner of 20%
or more of the Company's common stock.
Directors Deferred Compensation Plan
The Company has a Non-Employee Directors Deferred Compensation Plan which allows
Directors to elect to receive fees for Board services in the form of shares of
the Company's common stock. The Plan authorized 100,000 shares for such use. As
of December 31, 2003, 46,952 shares have been allocated in deferred accounts,
11,356 have been issued to previous Directors and 41,692 remain available for
future allocation. Allocated shares are to be issued to Directors when they
cease to be Directors or upon a change in control. Directors' fees are expensed
as incurred whether paid in cash or deferred into the Plan.
NOTE 8 - RETIREMENT PLANS
The Company administers a 401 (k) defined contribution retirement plan for the
benefit of the majority of its employees, who have completed 90 days of service
and been credited with 1,000 hours of service as defined by the plan agreement.
The Company matches contributions in an amount equal to one-quarter of the first
10% of each participant's contribution to the plan. 401 (k) assets are held by
an independent trustee, are not assets of the Company, and accordingly are not
reflected in the Company's balance sheets.
Prior to February 2003, the Company administered a "rabbi trust" Executive
Retirement Plan (ERP) for highly-compensated employees who, under IRS rules,
were not eligible to participate in the 401 (k) plan. The Company matched
contributions in an amount equal to one-quarter of the first 10% of each
participant's contribution to the plan. ERP assets were assets of the Company
until distributed to the employees following retirement or termination of
employment. As of December 31, 2002, ERP assets of approximately $762,000 and
liabilities of $916,000 are reflected in the Company's balance sheets. In
February 2003, the ERP was terminated and amounts due to participants were paid
out at the time of termination.
The Company's expense for both retirement plans was approximately $5,000,
$83,000 and $102,000 for the years ended December 31, 2003 and 2002, and the
nine months ended December 31, 2001, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain real estate, office space, vehicles and equipment
under non-cancelable operating leases expiring at various dates through 2010 and
which contain various renewal and escalation clauses. Rent expense amounted to
approximately $3,836,727 and $4,094,986 for years ended December 31, 2003 and
2002 and $2,982,784 for the nine months ended December 31, 2001. At December 31,
2003 the minimum rental payments under these leases were as follows:
2004 $ 2,988,818
2005 2,315,490
2006 1,616,751
2007 1,209,974
2008 1,011,524
Thereafter 1,029,223
------------------
$ 10,171,780
==================
Capital Leases and Term Debt
The Company has certain assets, primarily vehicles, under capital leases. The
leases include interest of approximately 7.0% per annum. Assets held under
capital leases are carried at cost of approximately $2.1 million and $1.7
million with accumulated depreciation of approximately $677,000 and $376,000 as
of December 31, 2003 and 2002, respectively.
As described in Note 11, the Company has an unsecured $300,000 note payable to a
seller bearing interest at 6% per annum at December 31, 2003. During 2003 a
mortgage on a parcel of real property, having a balance of $307,198 as of
December 31, 2002 was paid off when the property was sold.
Future minimum lease payments and principal and interest payments on the term
debt are as follows:
Capital Acquisition
Year Ending December 31, Lease Note Payable Total
------------------ ------------------ -------------------
2004 $ 302,896 $ 18,000 $ 320,896
2005 291,439 314,600 606,039
2006 291,439 - 291,439
2007 291,439 - 291,439
2008 259,663 - 259,663
Thereafter 116,474 116,474
------------------ ------------------ -------------------
1,553,350 332,600 1,885,950
Less: amount representing
Interest (242,594) (32,600) (275,194)
------------------ ------------------ -------------------
Present value of minimum
lease/principal payments 1,310,756 300,000 1,610,756
Less: current portion 225,578 - 225,578
------------------ ------------------ -------------------
$ 1,085,178 $ 300,000 $ 1,385,178
================== ================== ===================
Insurance Programs
The Company bears significant insurance risk under our large-deductible
automobile and workers' compensation insurance programs and its self-insured
employee health program. Under its automobile insurance program, the Company
bears risk up to $100,000 per incident. Under the workers' compensation
insurance program, the Company bears risk up to $250,000 per incident. The
Company purchases stop-loss insurance for the employee health plan that places a
specific limit, generally $150,000, on its exposure for any individual covered
life.
Malpractice and general patient liability claims for incidents which may give
rise to litigation have been asserted against the Company by various claimants.
The claims are in various stages of processing and some may ultimately be
brought to trial. The Company is aware of incidents that have occurred through
December 31, 2003 that may result in the assertion of additional claims. The
Company carries insurance coverage for this exposure; however, its deductible
per claim increased from $5,000 to $25,000 effective July 1, 2001 and to
$250,000 effective April 1, 2003.
The Company records estimated liabilities for its insurance programs based on
information provided by the third-party plan administrators, historical claims
experience, the life cycle of claims, expected costs of claims incurred but not
paid, and expected costs to settle unpaid claims. The Company monitors its
estimated insurance-related liabilities on a 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 believes that its present insurance coverage is adequate. However,
due to insurance market conditions, the Company expects to bear significant cost
increases and higher deductibles upon renewal on April 1, 2004. The Company is
currently contemplating alternatives including potentially accepting additional
self-insurance risk in lieu of higher premium costs.
Legal Proceedings
The Company is currently, and from time to time, subject to claims and suits
arising in the ordinary course of its business, including claims for damages for
personal injuries. In the opinion of management, the ultimate resolution of any
of these pending claims and legal proceedings will not have a material effect on
the Company's financial position or results of operations.
Franklin Litigation
On January 26, 1994 Franklin Capital Associates L.P. (Franklin), Aetna Life and
Casualty Company and Aetna Casualty and Surety Company shareholders, who at one
time held approximately 320,000 shares of the Company's common stock
(approximately 13% of shares outstanding), filed suit in Chancery Court of
Williamson County, Tennessee claiming unspecified damages not to exceed three
million dollars in connection with registration rights they received in the
Company's acquisition of certain home health operations in February 1991. The
1994 suit alleged that the Company failed to use its best efforts to register
the shares held by the plaintiffs as required by the merger agreement. The
Company settled with both Aetna parties shortly before the case went to trial in
February 2000. In mid-trial Franklin voluntarily withdrew its complaint
reserving its legal rights to bring a new suit as allowed under Tennessee law.
In April 2000, Franklin re-filed its lawsuit. The second trial took place in
February 2003. In April 2003 the court issued a ruling in favor of the
plaintiffs awarding damages of $984,970. The Company believes the Court erred
both in its finding of liability and in its determination of the amount of
damages. The Company is seeking appellate review of the lower court decision. As
a part of the appeal, the Company was required to post cash of $1,154,241 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 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 believes it has strong grounds
for appealing the trial court's decision and it intends to vigorously pursue its
appeal. The Company can give no assurance that it will be successful in its
appeal.
Kentucky Transportation Litigation
Prior to July 1, 2002, the Commonwealth of Kentucky managed its Medicaid
transportation program internally. Effective July 1, 2002 the Commonwealth
contracted with an independent broker (the Broker) for the management of the
program in the Louisville KY area. The Broker then contracted with the Company,
among others, for the provision of transportation services to Medicaid
beneficiaries. The Company's services pursuant to the contract were limited to
transportation of Medicaid beneficiaries who also attended the Company's
in-center adult day care programs. The Broker almost immediately began to
encounter significant financial difficulties and paid the Company for only a
small portion of the amounts due for services rendered. On October 22, 2002,
three of the Broker's other contracted providers filed a motion with the US
Bankruptcy Court to liquidate the Broker under Chapter 7 of the Federal
Bankruptcy Code. On November 25, 2002, the Broker voluntarily chose to convert
their bankruptcy status to a Chapter 11 voluntary reorganization.
In May 2003, along with a group of other affected providers, the Company filed
suit against the Commonwealth in Franklin Circuit Court seeking payment directly
from the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity 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 December 31,
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 us 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 will, at that time, record an additional provision for uncollectible
accounts.
The Company's loan agreement executed with its lender in March 2004 provides
that the loss of either or both of the above litigation cases will be excluded
from the Company's financial results for purposes of calculating borrowing
availability or financial covenant compliance.
NOTE 10 - STOCK AND WARRANT REDEMPTION
During the year ended December 31, 2003, the Company purchased 9,400 shares of
its common stock in open market purchases for a total cost of approximately
$66,000. On August 19, 2002, the Company redeemed 210,100 shares of its common
stock from a private investor at a total cost of approximately $1.5 million.
During the year ended December 31, 2002, the Company also purchased an
additional 39,971 shares of its common stock in open market purchases for a
total cost of approximately $374,000. During the nine months ended December 31,
2001, a total of 57,400 shares were purchased in open market purchases for a
total cost of approximately $517,000.
NOTE 11 -- ACQUISITION
On July 18, 2002, the Company completed the acquisition of 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. The acquired
operations, which currently generate approximately $6 million of revenues
annually, give the Company significant market presence in the northeast Ohio
area, and are included in the Company's Adult Day Health Services Segment.
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 $3.7 million to revenues and $345,000 to the consolidated pre-tax
income from the acquisition date through December 31, 2002.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition:
Accounts receivable $ 698,000
Property and equipment 35,000
Goodwill 2,552,000
----------------
Assets acquired 3,285,000
Liabilities assumed (39,000)
----------------
Net assets acquired $ 3,246,000
================
The unaudited pro forma consolidated results of operations of the Company as if
this acquisition had been made at the beginning of 2001 are as follows:
Year Ended December 31,
------------------ -- -------------------
2002 2001
------------------ -------------------
Revenues $ 89,260,078 $ 85,282,640
Net Income 1,624,350 4,016,577
Earnings per share:
Basic $ 0.67 $ 1.52
Diluted $ 0.60 $ 1.31
NOTE 12 - SEGMENT DATA
The Company operates in two reportable business segments: Visiting Nurses and
Adult Day Health Services. 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 Visiting Nurse 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 Visiting Nurse segment revenues are generated from the Medicare program.
Visiting Nurse Medicare revenues are generated on a per episode basis rather
than a fee per visit or day of care. 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 recipients 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 substantially alike.
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.
Nine Months
Year Ended Year Ended Ended
December 31, 2003 December 31, 2002 December 31, 2001
-------------------------------- ------------------- --- ------------------- -- --------------------
Net revenues
Visiting nurses $ 29,375,519 $ 28,799,296 $ 21,043,917
Adult day health services 57,523,646 56,970,241 38,709,644
------------------- ------------------- --------------------
$ 86,899,165 $ 85,769,537 $ 59,753,561
=================== =================== ====================
Operating income (loss)
Visiting nurses $ 3,215,975 $ 3,828,551 $ 3,190,514
Adult day health services 1,758,149 2,227,442 2,928,096
Corporate/Unallocated (2,272,593) (3,109,675) (1,542,712)
------------------- ------------------- --------------------
$ 2,701,531 $ 2,946,318 $ 4,575,898
=================== =================== ====================
Identifiable assets
Visiting nurses $ 7,793,517 $ 11,351,794 $ 11,116,605
Adult day health services 17,725,281 19,595,876 16,834,795
Corporate/Unallocated 7,522,262 5,852,353 7,925,248
------------------- ------------------- --------------------
$ 33,041,060 $ 36,800,023 $ 35,876,648
=================== =================== ====================
Identifiable liabilities
Visiting nurses $ 13,183,071 $ 10,283,596 $ 11,230,945
Adult day health services 6,511,245 14,519,278 12,704,474
Corporate/Unallocated 1,082,398 1,893,065 1,559,818
------------------- ------------------- --------------------
$ 20,776,714 $ 26,695,939 $ 25,495,237
=================== =================== ====================
Capital expenditures
Visiting nurses $ 500,323 $ 514,315 $ 566,085
Adult day health services 454,882 670,180 1,493,615
Corporate/Unallocated 551,395 1,554,284 28,773
------------------- ------------------- --------------------
$ 1,506,600 $ 2,738,779 $ 2,088,473
=================== =================== ====================
Depreciation and amortization
Visiting nurses $ 860,478 $ 884,608 $ 544,259
Adult day health services 1,366,913 1,130,099 647,029
Corporate/Unallocated 318,486 162,137 78,916
------------------- ------------------- --------------------
$ 2,545,877 $ 2,176,844 $ 1,270,204
=================== =================== ====================
NOTE 13 - QUARTERLY FINANCIAL DATA-- (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 2003 and
2002 are as follows (in thousands except per share data):
Year Ended December 31, 2003 Year Ended December 31, 2002
-------------------------------------------------- ----------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2003 2003 2003 2003 2002 2002 2002 2002
-------------------------------------------------- ----------------------------------------------------
Net Revenues $ 21,895 $ 21,650 $ 21,837 $ 21,518 $ 22,467 $ 21,909 $ 20,843 $ 20,551
Gross Profit 3,452 3,493 3,899 3,501 3,819 3,652 3,829 3,880
Income from
continuing 255 283 490 238 377 341 527 100
operations
Income from discontinued
operations 854 - - - - - - -
Net income 1,109 283 490 238 377 341 527 100
Income
from
continuing operations
Basic $ 0.11 $ 0.12 $ 0.21 $ 0.10 $ 0.17 $ 0.14 $ 0.21 $ 0.04
Diluted $ 0.10 $ 0.11 $ 0.20 $ 0.10 $ 0.15 $ 0.12 $ 0.18 $ 0.03
Income
from
discontinued operations
Basic $ 0.37 $ - $ - $ - $ - $ - $ - $ -
Diluted $ 0.33 $ - $ - $ - $ - $ - $ - $ -
Net income
per share
Basic $ 0.48 $ 0.12 $ 0.21 $ 0.10 $ 0.17 $ 0.14 $ 0.21 $ 0.04
Diluted $ 0.43 $ 0.11 $ 0.20 $ 0.10 $ 0.15 $ 0.12 $ 0.18 $ 0.03
In the quarter ended March 31, 2002, the Company recorded approximately $816,000
(pre-tax) related to the cost, consisting primarily of professional fees, of
conducting an investigation into the restatement of the Company's financial
statements. Additional costs related to this matter may be incurred in future
periods. Refer to the Company's annual report on Form 10-K for the nine months
ended December 31, 2001 for additional information.
In the quarter ended December 31, 2003, the Company recorded in income from
discontinued operations a one-time reduction in estimated tax liabilities of
approximately $854,000 or $0.34 per diluted share, due to the expiration of
various statutory limitations pertaining to the tax year in which the Company
sold its product operations.
Report of Independent Auditors
Board of Directors and Stockholders
Almost Family, Inc.
We have audited the accompanying consolidated balance sheets of Almost Family,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. Our audits also included the financial statement schedule
listed in the index at Item 15(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and schedule based on our audits. The
financial statements of Almost Family, Inc. and subsidiaries and financial
statement schedule for the nine months ended December 31, 2001 were audited by
other auditors, who have ceased operations, whose report dated March 28, 2002,
expressed an unqualified opinion on those statements and schedule.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Almost Family,
Inc. and subsidiaries at December 31, 2003 and 2002, and the consolidated
results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States.
Also, in our opinion, the related financial statement schedule when considered
in relation to the 2003 and 2002 basic consolidated financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
As discussed in Note 1, in 2002 the Company changed its method of accounting for
goodwill.
As discussed above, the financial statements of the Company for the nine months
ended December 31, 2001 were audited by other auditors who have ceased
operations. As discussed in Note 1, these financial statements have been revised
to include the transitional disclosures required by Statement of Financial
Accounting Standards (Statement) No. 142, "Goodwill and Other Intangible
Assets," which was adopted by the Company as of January 1, 2002. Our audit
procedures with respect to the disclosures in Note 1 with respect to 2001
included (a) agreeing the previously reported net income to the previously
issued financial statements and the adjustments to reported net income
representing amortization expense (including any related tax effects) recognized
in 2001 related to goodwill to the Company's underlying records
obtained from management, and (b) testing the mathematical accuracy of the
reconciliation of adjusted net income to reported net income. In our opinion,
the disclosures for 2001 in Note 1 are appropriate. However, we were not engaged
to audit, review, or apply any procedures to the 2001 financial statements of
the Company other than with respect to such adjustments related to Note 1, and
accordingly, we do not express an opinion or any other form of assurance on the
2001 financial statements taken as a whole.
ERNST & YOUNG LLP
Louisville, Kentucky
March 19, 2004
These Reports Have Not Been Reissued By Arthur Andersen LLP as Arthur Andersen
LLP Ceased Operations In August 2002.
The Following Reports Are Copies of the Previously Issued Arthur Andersen LLP
Reports.
Report of Independent Public Accountants
To the Stockholders of Almost Family, Inc.:
We have audited the accompanying consolidated balance sheets of Almost Family,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 2001 and March
31, 2001 (as restated--see Note 1) and the related consolidated STATEMENTS OF
INCOME, stockholders' equity, and cash flows for the nine months ended December
31, 2001 and for the two years in the period ended March 31, 2001 (as
restated--see Note 1). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Almost Family, Inc. and
subsidiaries as of December 31, 2001 and March 31, 2001, and the results of
their operations and their cash flows for the nine months ended December 31,
2001 and for the two years in the period ended March 31, 2001 in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 28, 2002
Report of Independent Public Accountants
To the Stockholders of Almost Family, Inc.:
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
Financial Statement Schedule is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Louisville, Kentucky
March 28, 2002
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 21, 2002 on the recommendation of the Audit Committee, the Board of
Directors appointed Ernst & Young LLP ("Ernst & Young ") as the Corporation's
independent auditors for the 2002 fiscal year, replacing Arthur Andersen LLP
("Arthur Andersen").
Arthur Andersen's report on the financial statements for the fiscal period
preceding dismissal contained no adverse opinion or disclaimer of opinion and
were not qualified or modified as to uncertainty, audit scope or accounting
principles. During the fiscal period and interim period preceding the dismissal,
there were no disagreements with Arthur Andersen on any matter of accounting
principles or practices, financial statement disclosure, or audit scope or
procedure.
ITEM 9A. CONTROLS AND PROCEDURES
The Company's management, with participation of the Company's Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of the
Company's disclosure controls and procedures as of December 31, 2003. Based on
the evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures were
effective as of December 31, 2003. There were no changes in the Company's
internal control over financial reporting during the fourth quarter of 2003 that
has materially affected, or is reasonably likely to materially affect, such
internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is set forth in the Registrant's
definitive proxy statement to be filed with the Commission no later than 120
days after December 31, 2003, except for the information regarding executive
officers of the Company. The information required by this Item contained in such
definitive proxy statement is incorporated herein by reference.
The following table sets forth certain information with respect to the Company's
executive officers.
Name Age Position with the Company
- ----------------------------------------------------------------------------
William B. Yarmuth (1) 51 Chairman of the Board President
and Chief Executive Officer
C. Steven Guenthner (2) 43 Senior Vice President and
Chief Financial Officer
Mary A. Yarmuth (3) 57 Senior Vice President
P. Todd Lyles (4) 42 Senior Vice President
Anne T. Liechty (5) 51 Senior Vice President
Executive officers of the Company are elected by the Board of Directors for one
year and serve at the pleasure of the Board of Directors with the exception of
William B. Yarmuth who has an employment agreement with the Company. Mary A.
Yarmuth is married to William B. Yarmuth. There are no other family
relationships between any director or executive officer.
(1) William B. Yarmuth has been a director of the Company since 1991, when
the Company acquired National Health Industries ("National"), where Mr.
Yarmuth was Chairman, President and Chief Executive Officer. After the
acquisition, Mr. Yarmuth became the President and Chief Operating
Officer of the Company. Mr. Yarmuth became Chairman and CEO in 1992. He
was Chairman of the Board, President and Chief Executive Officer of
National from 1981 to 1991.
(2) C. Steven Guenthner has been Senior Vice President and Chief Financial
Officer of the Company since 1992. From 1983 through 1992 Mr. Guenthner
was employed as a C.P.A. with Arthur Andersen LLP. Prior to joining the
Company he served as a Senior Manager in the firm's Accounting and
Audit division specializing in mergers and acquisitions, public
companies and the healthcare industry.
(3) Mary A. Yarmuth has served as Senior Vice President of the Company
since 1991. From 1985 to 1991 Ms. Yarmuth served as President of the
Company's Nursing Division. Ms. Yarmuth joined National in 1978.
(4) P. Todd Lyles joined the Company as Senior Vice President Planning and
Development in October 1997 and now serves as Senior Vice President -
Administration. Prior to joining the Company Mr. Lyles was Vice
President Development for the Kentucky Division of Columbia/HCA, a
position he had held since 1993. Mr. Lyles experience also includes 8
years with Humana Inc. in various financial and hospital management
positions.
(5) Anne T. Liechty became Senior Vice President - VN Operations in 2001.
Ms. Liechty has been employed by the Company since 1986 in various
capacities including Vice President of Operations for the Company's VN
segment and its Product segment.
Code of Ethics and Business Conduct
The Company has adopted a Code of Ethics and Business Conduct that applies to
all its directors, officers (including its chief executive officer, chief
financial officer, chief accounting officer and any person performing similar
functions) and employees. The Company has made the Code of Ethics and Business
Conduct available on its website at www.almost-family.com.
ITEMS 11, 12, 13 and 14. EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS; CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS; AND PRINCIPAL ACCOUNTANT FEES AND
SERVICES
The Registrant intends to file a definitive proxy statement with the Commission
pursuant to Regulation 14A (17 CFR 240.14a) not later than 120 days after the
close of the fiscal year covered by this report. In accordance with General
Instruction G(3) to Form 10-K, the information called for by Items 11, 12, 13
and 14 is incorporated herein by reference to the definitive proxy statement.
Neither the report on Executive Compensation nor the performance graph included
in the Company's proxy statement shall be deemed incorporated herein by
reference.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
Page Number
(a) The following items are filed as part of this report:
1. Index to Consolidated Financial Statements
Consolidated Statements of Income for the years ended December
31, 2003 and 2002, the nine months ended December 31, 2001 and
the year ended December 31, 2001 (unaudited) 34
Consolidated Balance Sheets - December 31, 2003 and 2002 35
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2003
and 2002 and the nine months ended December 31, 2001 36
Consolidated Statements of Cash Flows for the years ended December 31, 2003
and 2002 and the nine months ended December 31, 2001 37
Notes to Consolidated Financial Statements 38
Report of Independent Auditors 57
Reports of Independent Public Accounts 58
2. Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 65
All other Schedules have been omitted because they are either not
required, not applicable or, the information has otherwise been
supplied in the financial statements or notes thereto.
3. Exhibits required to be filed by Item 601 of Regulation S-K, and by Item 15 (c) below:
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation, as amended
3.2 Amended and Restated By-laws
4.1 Other Debt Instruments -- copies of other debt instruments for
which the total debt is less than 10% of assets will be
furnished to the Commission upon request.
10.1 Nonqualified Stock Option Plan, as amended (incorporated
by reference to the Registrant's
Registration Statement on Form S-8 Reg. No. 33-20815)
10.2 Supplemental Nonqualified Stock Option Plan (incorporated by
reference to Exhibit 19.4 to the Registrant's Report on Form
10-Q for the Quarter Ended November 30, 1987 Commission File
No.
15342)
10.3 Incentive Stock Option Plan, as amended (incorporated
by reference to the Registrant's
Registration Statement on Form S-8 Reg. No. 33-20815)
10.4 Amendment to the Senior Service Corporation 1987 Nonqualified
Stock Option Plan (incorporated by reference to Exhibit 19.3
to the Registrant's Report on Form 10-Q for the quarter ended
November 30, 1989)
10.5 1991 Long-Term Incentive Plan
10.6 Employment Agreement, dated January 1, 1996, between the
Company and William B. Yarmuth (incorporated by reference to
the Registrant's report on Form 10K for the year ended March
31, 1996).
10.7 Loan Agreement between the Company and Bank One, KY
(incorporated by reference to the Registrant's report on Form
10K for the year ended March 31, 2001).
10.8 Asset Purchase Agreement between the Company and Medlink of
Ohio, Inc. (incorporated by reference to the Registrant's
report on Form 10K for the year ended December 31, 2002)
10.9* Third Amendment to Loan Agreement between the Company and Bank
One, NA, dated March 23, 2004
21* List of Subsidiaries of Almost Family, Inc.
23.1* Consent of Ernst & Young LLP
23.2* Information regarding consent of Arthur Andersen
31.1* Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
31.2* Certification of Chief Executive Officer pursuant to Rule
13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act,
as amended.
32.1* Certification of Chief Executive Officer pursuant to
18 U.S.C 1350, as adopted pursuant to section 906 of the
Sarbanes Oxley Act of 2002.
32.2* Certification of Chief Financial Officer pursuant to
18 U.S.C 1350, as adopted pursuant to section 906 of the
Sarbanes Oxley Act of 2002.
*Denotes filed herein.
(b) Reports on Form 8-K
The Company filed a Form 8-K dated November 14, 2003 Item 12 to
report the issuance of a press release announcing its operating
results for the three months ended September 30, 2003
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
March 26, 2004
S/ William B. Yarmuth
- -----------------------
William B. Yarmuth
Chairman, President and Chief Executive Officer
S/ C. Steven Guenthner
- -----------------------
C. Steven Guenthner
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated:
S/ William B. Yarmuth March 26, 2004
- --------------------------------------------------------------------------------
William B. Yarmuth Date
Director
S/ Donald G. McClinton March 24, 2004
- --------------------------------------------------------------------------------
Donald G. McClinton Date
Director
S/ Steven B. Bing March 24, 2004
- --------------------------------------------------------------------------------
Steven B. Bing Date
Director
S/ Tyree Wilburn March 24, 2004
- --------------------------------------------------------------------------------
Tyree Wilburn Date
Director
S/ Jonathan Goldberg March 24, 2004
- --------------------------------------------------------------------------------
Jonathan Goldberg Date
Director
S/ Wayne T. Smith March 24, 2004
- --------------------------------------------------------------------------------
Wayne T. Smith Date
Director
S/ W. Earl Reed, III March 24, 2004
- --------------------------------------------------------------------------------
W. Earl Reed, III Date
Director
ALMOST FAMILY, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
------------------------------
(1)
Balance at Charged to Charged to
Beginning of Costs Other (2) Balance at
Description Period and Expenses Accounts Deductions End of Period
- --------------------------------------------------------------------------- ------------- --------------- ----------------
Allowance for bad debts:
Year Ended December 31, 2003 $ 2,309,356 $ 1,610,664 - $ 1,380,170 $ 2,539,850
Year ended December 31, 2002 $ 2,420,252 $ 1,660,748 - $ 1,771,644 $ 2,309,356
Nine months ended December 31, 2001 $ 1,883,120 $ 888,757 - $ 351,625 $ 2,420,252
(1) Charged to bad debt expense.
(2) Write-off of accounts.