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UNITED STATES
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, 2004
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 incorporation (IRS Employer Identification No.)
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 Which Registered
Common Stock, par value $.10 per share NASDAQ SmallCap System
Preferred Stock Purchase Rights
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. ______
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, 2004 was approximately $14,597,000 (based on
the last sale price of a share of the common stock as of June 30, 2004 ($8.45),
as reported by the NASDAQ SmallCap System). As of March 28, 2005, 2,316,527
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 16, 2005, 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...............................................17
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.........................................37
Item 8. Financial Statements and Supplementary Data........................................................38
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............61
Item 9A. Controls and Procedures............................................................................61
Item 9B. Other Information..................................................................................61
PART III..........................................................................................................62
Item 10. Directors and Executive Officers of the Registrant.................................................62
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...................................................................................................63
PART IV...........................................................................................................64
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................................64
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 care. 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 Florida, Kentucky, Ohio, Maryland, Connecticut,
Massachusetts, Indiana and Alabama (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 from continuing operations in the year ended December
31, 2004. Unless otherwise indicated, the financial information included in Part
I is for continuing operations.
How We Are Currently Organized and Operate
We operate in two service line groups: Home Health Care and Adult Day Care
(ADC). The Home Health Care group consists of two reportable segments, Visiting
Nurse (VN) and Personal Care (PC) while the ADC service line is also a separate
reportable segment. Reportable segments have been identified based upon how we
have organized the business by services provided to customers and the criteria
in SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information." We follow the guidance in SFAS 144 "Accounting for the Impairment
or Disposal of Long-Lived Assets" and, when appropriate, reclassify operating
units closed, sold, or held for sale out of continuing operations and into
discontinued operations for all periods presented.
Our VN segment provides skilled medical services in patients' homes largely to
enable recipients to reduce or avoid periods of hospitalization and/or nursing
home care. VN Medicare revenues are generated on a per episode basis rather than
a fee per visit or day of care. Approximately 91% of the VN segment revenues are
generated from the Medicare program while the balance is generated from Medicaid
and private insurance programs.
Our PC segment services are also provided in patients' homes. These services
(generally provided by paraprofessional staff such as home health aides) are
generally of a custodial rather than skilled nature. PC revenues are generated
on an hourly basis. Approximately 65% of the PC segment revenues are generated
from Medicaid and other government programs while the balance is generated from
insurance programs and private pay patients.
Our ADC segment provides professional, high quality adult day care to disabled
or frail adults who require some care or supervision, but who do not require
intensive medical attention and/or wish not to live in a nursing home or other
inpatient institution. These services are provided in our facilities. ADC
revenues are usually generated on a per day of care basis. Approximately 85% of
the ADC segment revenues are generated from Medicaid and other government
programs while the balance is generated from insurance programs and private pay
patients.
Additional financial information about our segments can be found at Note 11 of
our consolidated financial statements and related notes included elsewhere in
this Form 10-K.
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 constituents' needs for health care services within the
constraints of the specific government's fiscal budgets.
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 Personal Care and Adult Day Care 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
through the startup of new agencies; 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 (VN)
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 thirteen (13) Medicare-certified home health agencies with a total of
twenty-four (24) locations. In the year ended December 31, 2004, approximately
91% 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 members (primarily home health aides)
also provide care to these patients.
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.
Personal Care Services (PC)
Our PC segment services are also provided in patients' homes. These services
(generally provided by para-professional staff such as home health aides) are
generally of a custodial rather than skilled nature. PC revenues are generated
on an hourly basis. We currently operate nineteen (19) personal care locations.
Adult Day Care (ADC)
Our adult day care centers provide professional, high quality adult day care to
disabled or frail adults who require some care or supervision, but who do not
require intensive medical attention and/or wish not to live in a nursing home or
other inpatient institution. 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 among the
three largest providers in the country when measured in terms of adult day care
center revenues and days of patient care.
Our adult day care 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. 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 care
patients receive care both at home and in our facilities. We currently operate
twenty (20) adult day care centers.
Our ADC 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.
As of December 31, 2004, 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 -
Northern KY (metro 1 1 -
Cincinnati)
Bardstown - 1 -
Frankfort 1 - -
Indiana:
Evansville 1 - 1
Ohio:
Cincinnati - 1 1
Columbus - 1 1
Cleveland 2 - 2
Akron 1 - 1
Youngstown 1 - -
Massachusetts:
Boston 1 - -
Connecticut:
Stamford - - 1
Middlebury/Waterbury - 1 1
Danbury - - 1
West Haven - - 1
Bridgeport - - 1
Maryland:
Baltimore area - 8 -
Alabama:
Birmingham - - 1
Florida:
Fort Lauderdale 1 - 1
Port St. Lucie 1 - -
Vero Beach 1 - -
West Palm Beach - 1 1
Fort Myers 1 1 1
Sarasota 1 - 1
Port Charlotte 1 - -
Naples 1 - 1
Melbourne 1 - -
Bradenton 1 - -
Titusville 1 - -
Orlando 1
--------------- ------------- ----------------
Total 24 20 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 Year Ended
Payor Group December 31, 2004 31, 2003 December 31, 2002
---------------------------------------------------------- ----------------------- -----------------------------
Medicare 33.8% 30.9% 30.9%
Medicaid and other Government
Programs 52.0% 47.7% 50.4%
Insurance and private pay 14.2% 21.4% 18.7%
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 52% of our 2004 revenues were derived from state
Medicaid and other government programs, most 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 control the rate
of growth of Medicaid expenditures. Among these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care services
o Slowing payments to providers by increasing the minimum time in
which payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are because the number of
Medicaid beneficiaries and their related expenditures are growing at a faster
rate than the government's revenue. Medicaid is consuming a greater percentage
of the budget. This issue is exacerbated when revenues slow in a slowing
economy. 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. Additionally, we believe our services offer the lowest cost
alternative to institutional care and are a part of the solution to the states'
Medicaid financing problems. 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 ADC
segment or Personal Care 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.
During 2004, we acquired one visiting nurse operation. This operation added to
our market presence in Florida. No pro forma financial information has been
provided as the acquisition was 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 $13 billion. To our best knowledge, no individual provider has
more than 2% share of the national market.
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 care and personal care industries are likewise highly competitive
but fragmented. Competitors include: other adult day care 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 daycare's
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.
A Medicare rate increase of approximately 2.2% went into effect for our Visiting
Nurse operations on October 1, 2003. Medicare rate changes during 2004 were
insignificant. A Medicare rate increase of approximately 3.0% went into effect
on January 1, 2005. Additionally, under existing law and regulation, on April 1,
2005 there will be an effective Medicare rate reduction of approximately 0.7%
for the Company's agencies related to reimbursement for patients living in rural
areas. Medicare rates will change 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 minus 0.8% per year.
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 or from which they receive financial benefit.
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 implemented changes in our operations to
comply with the electronic transaction and code sets aspects of HIPAA and we
believe we are in compliance 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 were published in
2003. Those regulations are required to be implemented by April 2005. We believe
we will be in substantial compliance with the security regulations, with no
material impact on our results of operations or financial position.
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, 2004
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however our deductible per claim increased from
$25,000 to $250,000 effective April 1, 2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated insurance-
related liabilities on a monthly basis. As facts change, it may become
necessary to make adjustments that could be material to our results of
operations and financial condition.
We believe that our present insurance coverage is adequate. As part of our
on-going risk management and cost control efforts, we continually seek
alternatives that might provide a different balance of cost and risk, including
potentially accepting additional self-insurance risk in lieu of higher premium
costs.
Employees and Labor Relations
As of December 31, 2004 we had approximately 3,600 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.
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 in the year
ended March 31, 2001 and $363,000 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.
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 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.
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. As a result we terminated the use of discontinued
operations accounting treatment for the Visiting Nurse segment.
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 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, due to the expiration of various statutory limitations pertaining to
the tax year (1999) in which we sold our product operations.
Discontinued Operations in Adult Day Care
We follow the guidance in SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" and, when appropriate, reclassify operating units closed,
sold, or held for sale out of continuing operations and into discontinued
operations for all periods presented. Several ADC units closed, sold or held for
sale have been reclassified in our financial statements as further explained in
the notes to the financial statements and management's discussion and analysis
of financial condition and results of operation.
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. A Medicare rate increase
of approximately 2.2% went into effect for our Visiting Nurse operations on
October 1, 2003. Medicare rate changes during 2004 were insignificant. A
Medicare rate increase of approximately 3.0% went into effect on January 1,
2005. Additionally, under existing law and regulation, on April 1, 2005 there
will be an effective Medicare rate reduction of approximately 0.7% for the
Company's agencies related to reimbursement for patients living in rural areas.
Medicare rates will change 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 minus 0.8% per year.
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 care. 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.
In addition, different interpretations or enforcement of laws and regulations
governing the healthcare industry could require us to make changes in our
programs, personnel, services, increase our operating expenses and distract our
management. If we fail to comply with these extensive laws and regulations, we
could become ineligible to receive government program payments, be required to
make repayment of certain payments, suffer civil and criminal penalties or be
required to make significant changes to our operations. In addition, we could be
forced to expend considerable resources responding to an investigation or other
enforcement action under these laws or regulations.
Recently, there have been heightened and coordinated civil and criminal
enforcement efforts by both federal and state government agencies relating to
the healthcare industry. There has also been an increase in the filing of
actions by private individuals on behalf of the federal government against
healthcare companies alleging the filing of false or fraudulent Medicare or
Medicaid claims. This heightened enforcement activity increases our potential
exposure to damaging lawsuits, investigations and other enforcement actions. Any
such action could distract our management and adversely affect our business
reputation and profitability.
f) Medicaid Concentration and Regulation Changes
We have a significant dependence on state Medicaid reimbursement programs. For
the year ended December 31, 2004, approximately 12.8%, 12.3%, 12.2%, 2.8%, 2.0%
4.8%, 0.8% and 0.1% of our revenues were generated from Medicaid reimbursement
programs in the states of Ohio, Maryland, Kentucky, Florida, Massachusetts,
Connecticut, Indiana and Alabama, respectively.
Approximately 52% of our 2004 revenues were derived from state Medicaid and
other government programs, most 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 control the rate of growth of
Medicaid expenditures. Among these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care
services
o Slowing payments to providers by increasing the minimum time in
which payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are because the number of
Medicaid beneficiaries and their related expenditures are growing at a faster
rate than the government's revenue. Medicaid is consuming a greater percentage
of the budget. This issue is exacerbated when revenues slow in a slowing
economy. It is possible that the actions taken by the state Medicaid programs in
the future could have a significant unfavorable impact on our results of
operations, financial condition and liquidity.
g) Third Party Reimbursement
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 and claims
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, 2004
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however our deductible per claim increased from
$25,000 to $250,000 effective April 1, 2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a monthly basis. As facts change, it may become
necessary to make adjustments that could be material to our results of
operations and financial condition.
Claims, regardless of their merit or eventual outcome, may also adversely affect
our reputation, our ability to obtain patient referrals or our ability to expand
our business, and divert management resources from the operation of our
business.
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.
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.
k) Availability of health care professionals at reasonable costs
Competition for skilled employees is intense, and the process of locating and
recruiting skilled employees with the combination of qualifications and
attributes required to effectively care for elderly patients in a residential
setting can be difficult and lengthy. In addition, there is currently a
nationwide shortage of qualified nurses and therapists, which could increase
the wages and benefits necessary to recruit and retain nurses and therapists
for our VN operations. Because we operate in a fixed reimbursement environment,
increases in the wages and benefits that we must provide to recruit and retain
qualified nurses and therapists could negatively impact our profitability. We
cannot assure you that we will be successful in attracting, retaining or
training personnel for nursing, management, marketing, operations, and other
functions. Our business could be disrupted and our growth and profitability
negatively impacted if we are unable to attract and retain skilled employees.
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 67 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 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 decision. This cash is reflected as "Cash held
in escrow" in the accompanying balance sheet and will remain in escrow until the
matter reaches its ultimate resolution.
Based on the advice of legal counsel, the Company 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. The appeals court heard oral arguments in the case in February 2005 but
has given no indication of when it will issue a ruling.
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
its bankruptcy status to a Chapter 11 voluntary reorganization. On March 3,
2003, the Broker reconverted its case to a Chapter 7 liquidation proceeding.
In May 2003, along with a group of other affected providers, the Company filed
suit against the Commonwealth in Franklin Circuit Court seeking payment directly
from the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity (since the group did not have a direct contract with the
Commonwealth) and filed a motion to dismiss the lawsuit. In July 2003, a hearing
on the motion to dismiss was held and at the judge's request written briefs were
filed before the judge would make a decision. In August 2003, the motion to
dismiss was granted and after discussion with legal counsel, an appeal of this
decision was made to the Kentucky Court of Appeals. On September 24, 2004 the
appeals court affirmed the lower court's decision. In its decision, the Court
indicated that the Company could pursue its claim at the Kentucky Board of
Claims; such a claim would be limited to $200,000 in damages.
On June 26, 2004 a lawsuit was filed on behalf of the bankruptcy estate against
the Commonwealth of Kentucky. The case alleges that the state misrepresented
material facts about the contract that it signed with the Broker. The suit
alleges that the Commonwealth intentionally under-funded the contract with the
bankrupt Broker. Unlike the group of affected providers in the Franklin Circuit
Court proceeding discussed above, the Broker did have a direct contract with the
Commonwealth.
As of December 31, 2004 and December 31, 2003, the Broker owed the Company
approximately $535,000, which amount is included in accounts receivable, net on
the accompanying balance sheets. Based on discussions with legal counsel, the
Company estimates that it will be able to recover approximately 80% of the claim
if the lawsuit is successful. Accordingly, the Company has established a
collectibility reserve of approximately $106,000 against the receivable in this
case. 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 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 2004.
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
-------------- ---- ----
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
March 31, 2004 $ 9.00 $ 8.00
June 30, 2004 $ 8.45 $ 7.90
September 30, 2004 $ 8.60 $ 7.42
December 31, 2004 $ 14.45 $ 8.02
On March 21, 2005, the last reported sale price for the common stock reported by
NASDAQ was $13.94 and there were approximately 429 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
As of December 31, 2004, shares of common stock authorized for issuance under
our equity compensation plans are summarized in the following table. See note 7
to the consolidated financial statements for a description of the plans.
- ----------------------------------------- ------------------------ --------------------- ----------------------------
Weighted-Average
Plan Category Shares to Be Issued Option Exercise Shares Available for
Upon Exercise Price Future Grants
- ----------------------------------------- ------------------------ --------------------- ----------------------------
Plans approved by shareholders 526,000 $ 3.20 425,993
Plans not approved by shareholders - - -
- ----------------------------------------- ------------------------ --------------------- ----------------------------
Total 526,000 $ 3.20 425,993
- ----------------------------------------- ------------------------ --------------------- ----------------------------
We did not repurchase any shares of our common stock during 2004.
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.
Year Ended Nine Months
Year Ended Year Ended Year Ended December 31 Ended December Year Ended
(Dollar amounts in 000's December 31, December 31, December 31, 2001 31, March 31,
except per share data) 2004 2003 2002 (unaudited) 2001 2001
---------------------------------------------------------------------------------------------------
Results of operations data:
Net revenues $ 86,827 $ 83,260 $ 80,952 $ 74,456 $ 55,937 $ 71,144
Income (loss) from:
Continuing operations $ 1,530 $ 1,425 $ 1,666 $ 2,759 $ 2,230 $ 854
Discontinued operations (339) 695 (321) 1,001 1,098 426
---------------------------------------------------------------------------------------------------
Net income (loss) $ 1,191 $ 2,120 $ 1,345 $ 3,761 $ 3,328 $ 1,278
===================================================================================================
Per share:
Basic:
Number of shares
(in 000's) 2,303 2,295 2,416 2,646 2,478 3,146
Income (loss) from:
Continuing operations $ 0.66 $ 0.62 $ 0.69 $ 1.04 $ 0.90 $ 0.27
Discontinued operations (0.14) 0.30 (0.13) 0.38 0.44 0.13
---------------------------------------------------------------------------------------------------
Net income (loss) $ 0.52 $ 0.92 $ 0.56 $ 1.42 $ 1.34 $ 0.40
===================================================================================================
Diluted:
Number of shares
(in 000's) 2,567 2,539 2,720 3,077 2,909 3,307
Income (loss) from:
Continuing operations $ 0.60 $ 0.56 $ 0.61 $ 0.90 $ 0.77 $ 0.26
Discontinued operations (0.14) 0.27 (0.12) 0.32 0.37 0.12
---------------------------------------------------------------------------------------------------
Net income (loss) $ 0.46 $ 0.84 $ 0.49 $ 1.22 $ 1.14 $ 0.38
===================================================================================================
December December December December March
Balance sheet data as of: 2004 2003 2002 2001 2001
-------------- --------------- -------------- -----------------------------
Working capital $ 6,519 $ 10,069 $ 11,109 $ 12,581 $ 9,741
Total assets 28,062 32,101 35,354 34,103 33,984
Long-term liabilities 5,833 12,694 17,071 14,847 13,482
Total liabilities 14,495 19,837 25,250 23,721 26,726
Stockholders' equity 13,567 12,264 10,104 10,381 7,258
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We operate in two service line groups: Home Health Care and Adult Day Care
(ADC). The Home Health Care group consists of two reportable segments, Visiting
Nurse (VN) and Personal Care (PC) while the ADC service line is also a separate
reportable segment. Reportable segments have been identified based upon how we
have organized the business by services provided to customers and the criteria
in SFAS 131, "Disclosures about Segments of an Enterprise and Related
Information."
Our VN segment provides skilled medical services in patients' homes largely to
enable recipients to reduce or avoid periods of hospitalization and/or nursing
home care. VN Medicare revenues are generated on a per episode basis rather than
a fee per visit or day of care. Approximately 91% of the VN segment revenues are
generated from the Medicare program while the balance is generated from Medicaid
and private insurance programs.
Our PC segment services are also provided in patients' homes. These services
(generally provided by para-professional staff such as home health aides) are
generally of a custodial rather than skilled nature. PC revenues are generated
on an hourly basis. Approximately 65% of the PC segment revenues are generated
from Medicaid and other government programs while the balance is generated from
insurance programs and private pay patients.
Our ADC segment provides professional, high quality adult day care to disabled
or frail adults who require some care or supervision, but who do not require
intensive medical attention and/or wish not to live in a nursing home or other
inpatient institution. These services are provided in our physical facilities.
ADC revenues are usually generated on a per day of care basis. Approximately 85%
of the ADC segment revenues are generated from Medicaid and other government
programs while the balance is generated from insurance programs and private pay
patients.
The presentation of the Company's operations in three segments differs from its
previous reporting of two segments due to a reorganization of the way in which
the Company manages its business and in the way in which information is
reported, both of which resulted from refinements in the Company's business plan
adopted in early 2004. Segment data for previous periods have been restated to
conform to the new reporting structure.
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 Personal Care and Adult Day Care 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
through the startup of new agencies; 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, 2004
that may result in the assertion of additional claims. We carry insurance
coverage for this exposure; however, our deductible per claim increased from
$25,000 to $250,000 effective April 1, 2003.
We record estimated liabilities for our insurance programs based on information
provided by the third-party plan administrators, historical claims experience,
the life cycle of claims, expected costs of claims incurred but not paid, and
expected costs to settle unpaid claims. We monitor our estimated
insurance-related liabilities on a monthly basis. As facts change, it may become
necessary to make adjustments that could be material to our results of
operations and financial condition.
We believe that our present insurance coverage is adequate. As part of our
on-going risk management and cost control efforts, we continually seek
alternatives that might provide a different balance of cost and risk, 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, 2004; 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 2004 and 2003 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, 2004, we have net deferred tax assets of approximately
$963,000. The net deferred tax asset is composed of approximately $226,000 of
long-term deferred tax liabilities and $1,189,000 of long-term deferred tax
assets. 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, 2004. However, there can be no assurances that we
will meet our expectations of future taxable income.
During the year ended December 31, 2003, 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 2004, 2003, and 2002 included
a reduction of previously recorded valuation allowances of approximately
$21,000, $96,000, and $73,000 respectively. 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, 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.
ADC Segment
Our ADC 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.
RESULTS OF OPERATIONS
Continuing Operations
Year Ended December 31, 2004 Compared with Year Ended December 31, 2003
Year Ended
- --------------------------------------------------------------------------------------------
Consolidated December 2004 December 2003 Change
- --------------------------------------------------------------------------------------------
Amount % Rev Amount % Rev Amount %
- --------------------------------------------------------------------------------------------
Net Revenues:
Home Health Care:
Visiting nurses $ 32,227,614 37.1% $ 29,375,519 35.3% $2,852,095 9.7%
Personal care 33,542,824 38.6% 32,266,965 38.8% 1,275,859 4.0%
------------ ---------- ----------
65,770,438 75.7% 61,642,484 74.0% 4,127,954 6.7%
Adult day care 21,056,742 24.3% 21,617,259 26.0% (560,517) -2.6%
------------ ---------- ----------
$ 86,827,180 100.0% $ 83,259,743 100.0% $3,567,437 4.3%
============ ============ ===========
Operating income:
Home Health Care
Visiting nurses $ 4,671,221 14.5% $ 4,281,189 14.6% $ 390,032 9.1%
Personal care 3,036,043 9.1% 3,786,610 12.4% (750,567)-16.6%
------------ ----------- -----------
7,707,264 11.7% 8,067,799 13.4% (360,535) -3.3%
Adult day care 1,087,575 5.2% 1,068,178 5.9% 19,397 8.1%
------------ ----------- ----------
8,794,839 10.1% 9,135,977 11.5% (341,138) -1.8%
Unallocated corporate
expense 5,788,721 6.7% 6,194,977 7.9% (406,256) -3.5%
------------ ----------- -----------
3,006,118 3.5% 2,941,000 3.5% 65,118 2.2%
Facility gains/(losses) (43,363) NM (104,489) -0.1% 61,126 -58.5%
Interest expense 447,038 0.5% 658,867 0.8% (211,829)-32.2%
Income taxes 985,821 1.1% 752,920 0.9% 232,901 30.9%
------------ ------------ -------------
Income from continuing
operations $ 1,529,896 1.8% $ 1,424,724 1.7% $ 105,172 7.4%
============ ============ =============
NM=Not Meaningful
Our net revenues increased approximately $3.6 million or 4.3% with 9.7% growth
in VN, and 4% growth in PC offsetting a 2.6% decline in ADC. VN revenue growth
was driven by admissions growth as we continue to execute our strategic plan and
increase our focus on this segment. The decline in ADC revenue resulted from
lower attendance in our facilities due to market conditions including state
Medicaid program efforts to constrain the rate of growth in spending.
VN operating income grew on the increases in admissions and revenues. PC
operating income declined due to shifts in the mix of our business, increased
general and administrative costs and increased provision for uncollectible
accounts. ADC operating income increased slightly due to lower general and
administrative costs resulting from staff reductions and our reorganization of
segment management in early 2004. Refer to the discussion of each segment below.
In the quarter ended September 30, 2004 four hurricanes hit the State of
Florida. These hurricanes had the effect of reducing 2004 VN operating income by
approximately $180,000, and net income by approximately $108,000. The effective
income tax rate was approximately 39.2% of income before income taxes for 2004
compared to 34.6% in 2003.
The tax provision from continuing operations for 2003 included a credit of
$96,000 or $0.04 per diluted share related to the elimination of a valuation
allowance on certain state tax net operating loss carry-forwards.
Visiting Nurse Segment-Year Ended December 31, 2004 and 2003
Approximately 91% of the VN segment revenues are generated from the Medicare
program while the balance is generated from Medicaid and private insurance
programs. 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 2004 December 2003 Change
---------------------------- ---------------------------- --------------------------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ------------------- -------- ---------------- ---------
Net revenues $ 32,227,614 100.0% $ 29,375,519 100.0% $ 2,852,095 9.7%
Cost of services 25,158,098 78.1% 22,382,927 76.2% 2,775,171 12.4%
General and administrative 1,057,075 3.3% 1,280,511 4.4% (223,436) -17.4%
Depreciation and Amortization 842,389 2.6% 860,478 2.9% (18,089) -2.1%
Uncollectible accounts 498,831 1.5% 570,414 1.9% (71,583) -12.5%
---------------- ------------------- ----------------
Operating income $ 4,671,221 14.5% $ 4,281,189 14.6% $ 390,032 9.1%
================ =================== ================
Admissions 11,540 10,536 1,004 9.5%
Patient months of care 26,481 24,493 1,988 8.1%
Revenue per patient month $ 1,217 $ 1,199 $ 18 1.5%
Cost of services per patient month $ 950 $ 914 $ 36 3.9%
Billable Visits 249,937 235,375 14,562 6.2%
VN contribution for the year ended December 31, 2004 was $4.6 million versus
$4.2 million last year despite the effect of Florida hurricanes which lowered
2004 operating income by approximately $180,000. Admissions grew about 9.5% over
the prior year while patient months increased 8.1% reflecting a reduction in the
average length of stay. Revenue per patient month increased about 1.5% primarily
due to higher Medicare rates between periods.
Operating costs per patient month also increased about 4% due to increased
staffing and insurance costs. In March 2004, the Company received Medicare
certification for a new start-up agency in Melbourne FL. In April 2004, the
Company received Medicare certification for a new start-up agency in Bradenton
FL. These operations contributed revenues of approximately $1.2 million and
operating income of approximately $134,000 in the year ended December 2004. In
the quarter ended December 31, 2004, the Company purchased a startup agency in
Orlando, Florida and started Medicare operations in Cleveland, Akron and
Youngstown, Ohio. These operations contributed revenues of approximately $37,000
and operating losses of approximately $184,000.
General and administrative expenses declined due to staff reductions and the
reorganization of segment operations in early 2004.
Personal Care (PC) Segment-Year Ended December 31, 2004 and 2003
Approximately 65% of the PC segment revenues are generated from Medicaid and
other government programs while the balance is generated from insurance programs
and private pay patients.
Year Ended
---------------------------- ----------------------------- -------------------------
December 2004 December 2003 Change
---------------------------- ----------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ------------------- --------- --------------- ---------
Net revenues $ 33,542,824 100.0% $ 32,266,965 100.0% $ 1,275,859 4.0%
Cost of services 28,982,440 86.4% 27,429,394 85.0% 1,553,046 5.7%
General and administrative 349,451 1.0% 222,911 0.7% 126,540 56.8%
Depreciation and
Amortization 346,956 1.0% 257,668 0.8% 89,288 34.7%
Uncollectible accounts 827,934 2.5% 570,382 1.8% 257,552 45.2%
---------------- ------------------- ---------------
Operating income $ 3,036,043 9.1% $ 3,786,610 11.7% $ (750,567) -19.8%
================ =================== ===============
Admissions 2,560 2,529 31 1.2%
Patient months of care 36,760 36,577 183 0.5%
Patient days of care 464,611 441,732 22,879 5.2%
Billable hours 1,870,638 1,764,047 106,591 6.0%
Revenue per billable hour $ 17.93 $ 18.29 $ (0.36) -2.0%
PC contribution for the year ended December 31, 2004 was about $3 million versus
$3.7 million in 2003. Patient days and billable hours both increased reflecting
increased utilization of services per patient. Revenue per billable hour
decreased 2.0% from prior year primarily due to changes in mix. Certain of our
PC markets experienced inordinate declines in volumes, while others experienced
volume growth. Significant volume declines in two particular markets were more
than offset by volume growth in certain other lower margin markets. These
changes in our business resulted in aggregate cost of services growing faster
than aggregate revenues.
General administrative expenses in total and as a percentage of revenues
increased due to our management reorganization which added staff to the PC
management team. Our provision for uncollectible accounts in PC in the year
ended December 31, 2004 was higher than the prior year primarily due to an
increasing difficulty being experienced in the collection of accounts from
certain state Medicaid programs.
Depreciation and amortization increased due to investments made in information
systems.
Adult Day Care (ADC) Segment-Year Ended December 31, 2004 and 2003 (Continuing
Operations)
Approximately 85% of the ADC segment revenues are generated from Medicaid and
other government programs while the balance is generated from insurance programs
and private pay patients. The operating results set forth in the following table
include continuing operations only.
Year Ended
----------------------------- ---------------------------- -------------------------
December 2004 December 2003 Change
----------------------------- ---------------------------- -------------------------
Amount % Rev Amount % Rev Amount %
----------------- ----------- ------------------ --------- ---------------- --------
Net revenues $ 21,056,742 100.0% $ 21,617,259 100.0% $ (560,517) -2.6%
Cost of services 17,573,386 83.5% 17,451,470 80.7% 121,916 0.7%
General and administrative 821,437 3.9% 1,730,458 8.0% (909,021) -52.5%
Depreciation and
Amortization 1,091,003 5.2% 946,737 4.4% 144,266 15.2%
Uncollectible accounts 483,341 2.3% 420,416 1.9% 62,925 15.0%
----------------- ------------------ ----------------
Operating income $ 1,087,575 5.2% $ 1,068,178 4.9% $ 19,397 1.8%
================= ================== ================
Admissions 973 846 127 15.0%
Patients served 19,507 19,461 46 0.2%
Patient days of care 300,129 303,008 (2,879) -1.0%
Revenue per patient day $ 70.16 $ 71.34 $ (1.18) -1.7%
ADC in-center averages:
Average weekday attendance 1,027 1,033 (6) -0.6%
Center capacity 1,404 1,390 14 1.0%
Center occupancy rate 73.2% 74.3% -1.1% -1.5%
Revenue per day declined about 1.7% primarily due to payor and service mix
changes and lower Kentucky Medicaid transportation rates. Patient days of care
declined due to lower attendance in our facilities. We believe that the lower
attendance is related primarily to market conditions including state Medicaid
program efforts to constrain the rate of growth in spending.
Cost of services grew 0.7% despite volume declines primarily due to increases in
wage rates and benefit costs and increases in facility costs.
General and administrative expenses declined due to staff reductions and the
reorganization of segment operations in early 2004. Depreciation and
amortization increased due to investments in information systems and
transportation vehicles.
Year Ended December 31, 2003 Compared with Year Ended December 31, 2002
Year Ended
Consolidated -------------------------------------------------------------------------------------------
------------ December 2003 December 2002 Change
Amount % Rev Amount % Rev Amount %
-------------------------------------------------------------------------------------------
Net Revenues:
Home Health Care:
Visiting nurses $ 29,375,519 35.3% $ 28,799,296 35.6% $ 576,223 2.0%
Personal care 32,266,965 38.8% 29,928,685 37.0% 2,338,280 7.8%
------------------- ------------------- -----------------
61,642,484 74.0% 58,727,981 72.5% 2,914,503 5.0%
26.0%
Adult day care 21,617,259 22,224,469 27.5% (607,210) -2.7%
------------------- ------------------- -----------------
$ 83,259,743 100.0% $ 80,952,450 100.0% 2,307,293 2.9%
=================== =================== =================
Operating income:
Home Health Care
Visiting nurses $ 4,281,189 14.6% $ 4,996,141 17.3% $ (714,952) -14.3%
Personal care 3,786,610 11.7% 3,596,130 12.0% 190,480 5.3%
------------------- ------------------- ----------------
8,067,799 13.1% 8,592,272 14.6% (524,473) -6.1%
Adult day care 1,068,178 4.9% 1,733,608 7.8% (665,430) -38.4%
------------------- ------------------- -----------------
9,135,977 11.0% 10,325,880 12.8% (1,189,903) -11.5%
Unallocated corporate expense 6,194,977 7.4% 6,876,276 8.5% (681,299) -9.9%
------------------- ------------------- -----------------
2,941,000 3.5% 3,449,603 4.3% (508,603) -14.7%
Facility gains/(losses) (104,489) -0.1% - 0.0% (104,489) NM
Interest expense 658,867 0.8% 788,915 1.0% (130,048) -16.5%
Income taxes 752,920 0.9% 994,725 1.2% (241,805) -24.3%
------------------- ------------------- -----------------
Income from continuing operations $ 1,424,724 1.7% $ 1,665,963 2.1% $ (241,239) 14.5%
=================== =================== ====== ==================
Our net revenues for the year ended December 31, 2003 grew approximately $2.3
million or 2.9% 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 Personal Care. A variety of other factors led
to Personal Care revenue decreases, the most significant factor being the impact
of spending reductions in the Kentucky Medicaid program, as described in the
Personal Care 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 Personal Care. 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.
The facility losses incurred in 2003 resulted 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 34.6%
of income before income taxes for 2003 as compared to an effective income tax
rate of approximately 37.4% 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
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 22,382,927 76.2% 20,912,330 72.6% 1,470,597 7.0%
General and administrative 1,280,512 4.4% 1,290,706 4.5% (10,195) -0.8%
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 $ 4,281,189 14.6% $ 4,996,141 17.3% $ (714,952) -14.3%
================ =================== ================
Admissions 10,536 9,815 721 7.3%
Patient months of care 24,493 22,865 1,628 7.1%
Revenue per patient month $ 1,199 $ 1,259 $ (60) -4.8%
Cost of services per patient month $ 914 $ 915 $ (1) -0.1%
Billable Visits 235,375 229,977 5,398 2.3%
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 7.3% and 7.1%, respectively. We had the same number of agencies
in operation in both periods.
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 was
substantially unchanged 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.
Personal Care Segment-Year Ended December 31, 2003 and 2002
Year Ended
----------------------------- ---------------------------- -------------------------
December 2003 December 2002 Change
----------------- ----------- ------------------ --------- ---------------- --------
Amount % Rev Amount % Rev Amount %
----------------- ----------- ------------------ --------- ---------------- --------
Net revenues $ 32,266,965 100.0% $ 29,928,685 100.0% $ 2,338,280 7.8%
Cost of services 27,429,394 85.0% 25,549,162 85.4% 1,880,232 7.4%
General and administrative 222,911 0.7% 143,434 0.5% 79,477 55.4%
Depreciation and
Amortization 257,668 0.8% 156,253 0.5% 101,414 64.9%
Uncollectible accounts 570,382 1.8% 483,705 1.6% 86,677 17.9%
----------------- ------------------ ----------------
Operating income $ 3,786,610 11.7% $ 3,596,130 12.0% $ 190,480 5.3%
================= ================== ================
Admissions 2,529 2,490 39 1.6%
Patient months of care 36,577 35,171 1,406 4.0%
Patient days of care 441,732 398,913 42,819 10.7%
Billable hours 1,764,047 1,575,996 188,051 11.9%
Revenue per billable hour $ 18.29 $ 18.99 $ (0.70) -3.7%
Our personal care revenues increased 7.8% to $32.3 million in 2003 from $29.9
million in 2002 Our mid-2002 acquisition of Medlink Ohio, increased our revenues
approximately $4,342,000. Personal care revenues excluding the Medlink
acquisition, decreased approximately $2,000,000 due to lower sales volumes in
Kentucky personal care operations primarily due to Kentucky Medicaid program
cut-backs. Average revenue per billable hour declined slightly due primarily to
mix changes.
General administrative costs increased due to the addition of segment management
personnel. The provision for uncollectible accounts increased due to the aging
of certain accounts due to increased difficulties and extended payment time
frames from some state Medicaid programs.
Adult Day Care Segment - Year Ended December 31, 2003 and 2002
Year Ended
---------------------------- ---------------------------- -------------------------
December 2003 December 2002 Change
---------------- ----------- ------------------- -------- ---------------- --------
Amount % Rev Amount % Rev Amount %
---------------- ----------- ------------------- -------- ---------------- --------
Net revenues $ 21,617,259 100.0% $ 22,224,469 100.0% $ (607,210) -2.7%
Cost of services 17,451,470 80.7% 17,354,243 78.1% 97,227 0.6%
General and administrative 1,730,456 8.0% 1,970,334 8.9% (239,878) -12.2%
Depreciation and
Amortization 946,737 4.4% 758,241 3.4% 188,497 24.9%
Uncollectible accounts 420,416 1.9% 408,043 1.8% 12,373 3.0%
---------------- ------------------- ----------------
Operating income $ 1,068,178 4.9% $ 1,733,608 7.8% $ (665,430) -38.4%
================ =================== ================
Admissions 846 1,099 (253) -23.0%
Patients served 19,461 19,708 (247) -1.3%
Patient days of care 303,008 311,199 (8,191) -2.6%
Revenue per patient day $ 71.34 $ 71.42 $ (0.08) -0.1%
ADC in-center averages:
Average weekday attendance 1,033 1,038 (5) -0.5%
Center capacity 1,390 1,377 13 0.9%
Center occupancy rate 74.3% 75.4% -1.1% -1.5%
Our Adult Day Care revenues decreased 2.7% to $21.6 million in 2003 from $22.2
million in 2002 primarily due to lower sales volumes in Kentucky adult day
center operations primarily due to Kentucky Medicaid program cut-backs. Average
revenue per day of care declined slightly due primarily to mix changes.
Occupancy in the adult day care centers was 74.3% of capacity in 2003 as
compared to 75.4% in 2002. Depreciation and amortization increased due to the
addition of new guest transportation vans and investments in information
technology.
Liquidity and Capital Resources
Revolving Credit Facility. In March 2004, we renewed our $22.5 million credit
facility with Bank One Kentucky NA with a new expiration date of June 30, 2006.
The credit facility bears interest at the bank's prime rate plus a margin
(ranging from -0.75% to -0.25%, currently -0.5%) dependent upon total leverage
and is secured by substantially all assets and the stock of our subsidiaries.
The weighted average interest rates were 4.41% and 4.00% for the quarters ended
December 31, 2004 and 2003, respectively, and 3.97% and 4.14% for the year ended
December 31, 2004 and 2003, respectively. The interest rate in effect at
December 31, 2004 was 4.50%. We pay a commitment fee of 0.25% per annum on the
unused facility balance. Borrowings are available equal to the greater of: a) a
multiple of earnings before interest, taxes, depreciation and amortization (as
defined) or b) an asset based formula, primarily based on accounts receivable.
Borrowings under the facility may be used for working capital, capital
expenditures, acquisitions, development and growth of the business and other
corporate purposes. As of December 31, 2004 the formula permitted approximately
$17.8 million to be used, of which approximately $3.8 million was outstanding.
Additionally, an irrevocable letter of credit, totaling $4.2 million, was
outstanding in connection with our self-insurance programs. Thus, a total of $8
million was either outstanding or committed as of December 31, 2004 while an
additional $9.8 million was available for use. Our revolving credit facility is
subject to various financial covenants. As of December 31, 2004, 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.
Collection of Cost Report Receivables and Sale Lease-back. We received $1.4
million from the Kentucky Medicaid program in collection of three year old cost
report receivables in late August 2004. In October 2004 we completed the
sale-lease back of our only real estate parcel and received the net proceeds of
approximately $1.1 million. The sale lease-back generated a deferred pre-tax
gain of approximately $123,000 which is being amortized against rent expense
over the initial term of the lease. The cash generated from these actions was
used to reduce outstanding borrowings on the credit facility.
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.
During the year ended December 31, 2004, there were no shares repurchased under
this program.
Cash Flows
Key elements to the Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 were as follows:
Year Ended Year Ended Year Ended
December 31, December 31, 2003 December 31, 2002
Net Change in Cash and Cash Equivalents 2004
-------------------- ------------------- --------------------
Provided by (used in):
Operating activities $ 6,909,873 $ 5,931,906 $ 5,161,107
Investing activities 374,205 (2,132,358) (5,472,605)
Financing activities (7,329,838) (3,792,403) (355,514)
Discontinued operations activities (426,952) (81,536) (287,595)
-------------------- ------------------- --------------------
Net decrease in cash and cash
Equivalents $ (472,712) $ (74,391) $ (954,607)
==================== =================== ====================
Year Ended December 31, 2004
Net cash provided by operating activities resulted principally from our current
period income, net of changes in accounts receivable, accounts payable and
accrued expenses. Most of the decrease in accounts receivable resulted from cost
report settlements. Days sales outstanding were approximately 53 and 64 at
December 31, 2004 and 2003, respectively. The increase in accounts payable and
accrued liabilities resulted primarily from the timing of payments. Net cash
used in investing activities resulted principally from cash received from sale
of assets partially offset by capital expenditures. 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, 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
care 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.
Contractual Obligations. The following table provides information about the
payment dates of our contractual obligations at December 31, 2004, excluding
current liabilities except for the current portion of long-term debt (amounts in
thousands):
2005 2006 2007 2008 2009 Thereafter Total
------------ ------------- ------------ ------------ -------------- ------------ ------------
Revolving credit facility $ - $ 3,770 $ - $ - $ - - $ 3,770
Capital lease obligations 371 546 359 300 166 130 1,872
Notes payable 310 - - - - - 310
Operating leases 2,906 2,285 1,862 1,554 941 989 10,537
------------ ------------- ------------ ------------ -------------- ------------ ------------
Total $ 3,587 $ 6,601 $ 2,221 $ 1,854 $ 1,107 $ 1,119 $ 16,489
============ ============= ============ ============ ============== ============ ============
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 $4.2 million at
December 31, 2004, 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. On March 29, 2005 the Company entered into an agreement
to acquire all the assets and business operations of a Medicare-certified
visiting nurse agency located in Bradenton, Florida. The total purchase price of
$3.2 million will be paid $2.5 million in cash at closing (expected to be April
1, 2005) with the $700,000 balance in the form of a note payable bearing
interest at 6% due in its entirety two years after closing. The Company will
fund the cash portion of the purchase price with available borrowings on its
revolving credit facility. The acquired operations generated net revenues of
approximately $3.5 million in the year ended December 31, 2004.
We currently have no other 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, 2004 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 monthly 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 decision. This cash is reflected as "Cash held in escrow" in the
accompanying balance sheet and will remain in escrow until the matter reaches
its ultimate resolution.
Based on the advice of legal counsel, 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 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. The
appeals court heard oral arguments in the case in February 2005 but has given no
indication of when it will issue a ruling.
Kentucky Transportation Litigation
Prior to July 1, 2002, the Commonwealth of Kentucky managed its Medicaid
transportation program internally. Effective July 1, 2002 the Commonwealth
contracted with an independent broker (the Broker) for the management of the
program in the Louisville KY area. The Broker then contracted with us, among
others, for the provision of transportation services to Medicaid beneficiaries.
Our services pursuant to the contract were limited to transportation of Medicaid
beneficiaries who also attended our in-center adult day care programs. The
Broker almost immediately began to encounter significant financial difficulties
and paid us for only a small portion of the amounts due for services rendered.
On October 22, 2002, three of the Broker's other contracted providers filed a
motion with the US Bankruptcy Court to liquidate the Broker under Chapter 7 of
the Federal Bankruptcy Code. On November 25, 2002, the Broker voluntarily chose
to convert its bankruptcy status to a Chapter 11 voluntary reorganization. On
March 3, 2003, the Broker reconverted its case to a Chapter 7 liquidation
proceeding.
In May 2003, along with a group of other affected providers, we filed suit
against the Commonwealth in Franklin Circuit Court seeking payment directly from
the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity (since the group did not have a direct contract with the
Commonwealth) and filed a motion to dismiss the lawsuit. In July 2003, a hearing
on the motion to dismiss was held and at the judge's request written briefs were
filed before the judge would make a decision. In August 2003, the motion to
dismiss was granted and after discussion with legal counsel, an appeal of this
decision was made to the Kentucky Court of Appeals. On September 24, 2004 the
appeals court affirmed the lower court's decision. In its decision, the Court
indicated that we could pursue its claim at the Kentucky Board of Claims; such a
claim would be limited to $200,000 in damages.
On June 26, 2004 a lawsuit was filed on behalf of the bankruptcy estate against
the Commonwealth of Kentucky. The case alleges that the state misrepresented
material facts about the contract that it signed with the Transportation Broker.
The suit alleges that the Commonwealth intentionally under-funded the contract
with the bankrupt Broker. Unlike the group of affected providers in the Franklin
Circuit Court proceeding discussed above, the Broker did have a direct contract
with the Commonwealth.
As of December 31, 2004 and December 31, 2003, the Broker owed us approximately
$535,000, which amount is included in accounts receivable, net on the
accompanying balance sheets. Based on discussions with legal counsel, we
estimate that we will be able to recover approximately 80% of the claim if the
lawsuit is successful. Accordingly, we have established a collectibility reserve
of approximately $106,000 against the receivable in this case. 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 senior credit facility agreement provides that the loss of either or both of
the above litigation cases will be excluded from financial results for purposes
of calculating borrowing availability or financial covenant compliance.
Medicaid Dependence
We have a significant dependence on state Medicaid reimbursement programs. For
the year ended December 31, 2004, approximately 12.8%, 12.3%, 12.2%, 2.8%, 2.0%
4.8%, 0.8% and 0.1% of our revenues were generated from Medicaid reimbursement
programs in the states of Ohio, Maryland, Kentucky, Florida, Massachusetts,
Connecticut, Indiana and Alabama, respectively.
Approximately 52% of our 2004 revenues were derived from state Medicaid and
other government programs, most 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 control the rate of growth of
Medicaid expenditures. Among these actions are the following:
o Redefining eligibility standards for Medicaid coverage
o Redefining coverage criteria for home and community based care services
o Slowing payments to providers by increasing the minimum time in
which payments are made
o Limiting reimbursement rate increases
o Changing regulations under which providers must operate
The actions being taken and/or being considered are because the number of
Medicaid beneficiaries and their related expenditures are growing at a faster
rate than the government's revenue. Medicaid is consuming a greater percentage
of the budget. This issue is exacerbated when revenues slow in a slowing
economy. 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. Additionally, we believe our services offer the lowest cost
alternative to institutional care and are a part of the solution to the states'
Medicaid financing problems. 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. 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 implemented changes in our operations to
comply with the electronic transaction and code sets aspects of HIPAA and we
believe we are in compliance 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 were published in
2003. Those regulations are required to be implemented by April 2005. We believe
we will be in compliance with the security regulations, with no material impact
on our results of operations or financial position.
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 due to the expiration of various statutory limitations pertaining to
the tax year 1999 in which we sold our product operations.
We follow the guidance in SFAS 144 "Accounting for the Impairment or Disposal of
Long-Lived Assets" and, when appropriate, reclassify operating units closed,
sold, or held for sale out of continuing operations and into discontinued
operations for all periods presented. Several ADC units closed, sold or held for
sale have been reclassified in our financial statements as further explained in
the notes to the financial statements. Revenues from discontinued ADC units were
approximately $2.2 million, $3.6 million and $4.8 million in the years ended
December 31, 2004, 2003 and 2002 respectively. Net losses from discontinued ADC
units were approximately ($339,000), ($158,000) and ($321,000) in the years
ended December 31, 2004, 2003 and 2002 respectively, and such amounts are
included in net loss from discontinued operations in the accompanying financial
statements.
In the three years ended December 31, 2004, no operating units in the VN or PC
segments met the criteria to be reclassified as discontinued 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, 2004, a hypothetical 100 basis point increase in short-term
interest rates would result in a reduction of approximately $95,000 in annual
pre-tax earnings.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ALMOST FAMILY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
--------------------------------------------------------
Net revenues $ 86,827,180 $ 83,259,743 $ 80,952,450
Cost of services 73,097,205 68,857,816 65,470,647
General and administrative expenses 6,454,289 7,487,829 7,604,921
Cost of restatement - - 815,794
Depreciation and amortization expense 2,459,463 2,411,886 2,004,227
Provision for uncollectible accounts 1,810,105 1,561,212 1,607,258
---------------- ------------------- -----------------
Income from continuing operations before other
income (expense) and income taxes 3,006,118 2,941,000 3,449,603
Other income (expense):
Interest expense (447,038) (658,867) (788,915)
Facility losses (43,363) (104,489) -
---------------- ------------------- -----------------
Income from continuing operations before income taxes 2,515,717 2,177,644 2,660,688
Provision for income taxes 985,821 752,920 994,725
---------------- ------------------- -----------------
Income from continuing operations 1,529,896 1,424,724 1,665,963
Income (loss) from discontinued operations, net of tax (338,641) 695,473 (321,050)
---------------- ------------------- -----------------
Net income $ 1,191,255 $ 2,120,197 $ 1,344,913
================ =================== =================
Per share amounts-Basic:
Average shares outstanding 2,303,267 2,294,771 2,416,224
Income from continuing operations $ 0.66 $ 0.62 $ 0.69
Income (loss) from discontinued operations (0.15) 0.30 (0.13)
---------------- ------------------- -----------------
Net income $ 0.52 $ 0.92 $ 0.56
================ =================== =================
Per share amounts-Diluted:
Average shares outstanding 2,567,468 2,538,871 2,719,809
Income from continuing operations $ 0.60 $ 0.56 $ 0.61
Income (loss) from discontinued operations (0.13) 0.27 (0.12)
---------------- ------------------- -----------------
Net income $ 0.46 $ 0.84 $ 0.49
================ =================== =================
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, 2004 December 31, 2003
------------------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 423,031 $ 895,743
Accounts receivable - net 12,791,682 14,682,338
Prepaid expenses and other current assets 654,650 736,255
Deferred tax assets 1,188,980 863,611
Net assets of discontinued operations 122,503 34,193
------------------- -------------------
TOTAL CURRENT ASSETS 15,180,846 17,212,140
CASH HELD IN ESCROW 1,154,241 1,154,241
PROPERTY AND EQUIPMENT - NET 5,106,628 7,223,989
GOODWILL 6,449,310 6,335,783
OTHER ASSETS 171,045 174,739
------------------- -------------------
$ 28,062,070 $ 32,100,892
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 3,260,747 $ 2,292,995
Accrued liabilities 4,823,157 4,624,012
Current portion - capital leases and notes payable 577,785 225,578
------------------ ------------------
8,661,689 7,142,585
------------------ ------------------
LONG-TERM LIABILITIES:
Revolving credit facility 3,769,575 10,891,423
Capital leases 1,312,750 1,085,178
Notes payable - 300,000
Deferred tax liabilities 225,690 61,328
Other liabilities 525,435 356,032
------------------ ------------------
TOTAL LONG-TERM LIABILITIES 5,833,450 12,693,961
------------------ ------------------
TOTAL LIABILITIES 14,495,139 19,836,546
------------------ ------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, par value $0.10; authorized 10,000,000 shares;
3,414,874 and 3,394,874 issued, respectively 341,490 339,490
Treasury stock, at cost, 1,096,783 shares (7,772,048) (7,772,048)
Additional paid-in capital 26,548,634 26,439,304
Accumulated deficit (5,551,145) (6,742,400)
------------------ ------------------
TOTAL STOCKHOLDERS' EQUITY 13,566,931 12,264,346
------------------ ------------------
$ 28,062,070 $ 32,100,892
================== ==================
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, 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 ,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 29,811
non-qualified stock options 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
Options Exercised 20,000 2,000 66,750 68,750
Tax benefit from exercise of
non-qualified stock options 42,580 42,580
Net Income 1,191,255 1,191,255
------------- ------------ ----------- -------------- --------------- ----------------- ------------
Balance, December 31, 2004 3,414,874 $ 341,490 1,096,783 $ (7,772,048) $ 26,548,634 $ (5,551,145) $ 13,566,931
============= ============ =========== ============== =============== ================= ============
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
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
2004 2003 2002
---------------- ----------------- ----------------
Cash flows from operating activities:
Net income $ 1,191,255 $ 2,120,197 $ 1,344,913
Less income (loss) from discontinued operations (338,641) 695,473 (321,050)
---------------- ----------------- ----------------
Income from continuing operations 1,529,896 1,424,724 1,665,963
Adjustments to reconcile income from continuing operations to
net cash provided by /(used in)operating activities:
Depreciation and amortization 2,459,463 2,411,886 2,004,227
Provision for uncollectible accounts 1,810,105 1,561,212 1,607,258
Loss on sale of assets 43,363 104,489 -
Deferred income taxes (161,007) 806,937 298,722
----------------- ----------------- ----------------
5,681,821 6,309,249 5,576,170
Change in certain net assets, net of the effects of acquisitions:
(Increase) decrease in:
Accounts receivable 80,551 84,359 (462,839)
Prepaid expenses and other current assets 81,607 (270,883) 317,299
Other assets 3,694 799,127 214,725
Increase (decrease) in:
Accounts payable and accrued expenses 1,029,056 (199,957) (560,135)
Other liabilities 33,145 (789,990) 75,886
---------------- ----------------- ----------------
Net cash provided by/(used in) operating activities 6,909,873 5,931,906 5,161,107
---------------- ----------------- ----------------
Cash flows from investing activities:
Cash held in escrow - (1,154,241) -
Capital expenditures (560,017) (1,664,109) (2,523,028)
Cash received from sale of assets 1,047,749 685,992 -
Acquisitions, net of cash acquired (113,527) - (2,949,577)
---------------- ----------------- ----------------
Net cash provided by/(used in) investing activities 374,205 (2,132,358) (5,472,605)
---------------- ----------------- ----------------
Cash flows from financing activities:
Net revolving credit facility borrowings (repayments) (7,121,848) (3,590,814) 1,895,705
Repurchase of common shares - (65,896)
(1,922,555)
Proceeds from stock option exercises 68,750 76,150 142,107
Principal payments on capital leases and notes payable (276,740) (211,843) (470,771)
---------------- ----------------- ----------------
Net cash used in financing activities (7,329,838) (3,792,403) (355,514)
---------------- ----------------- ----------------
Net cash used in discontinued operations (426,952) (81,536) (287,595)
---------------- ----------------- ----------------
Net decrease in cash and cash equivalents (472,712) (74,391) (954,607)
Cash and cash equivalents at beginning of period 895,743 970,134 1,924,741
---------------- ----------------- ----------------
Cash and cash equivalents at end of period $ 423,031 $ 895,743 $ 970,134
================ ================= ================
Supplemental disclosures of cash flow information:
Cash payment of interest, net of amounts capitalized $ 517,000 $ 703,000 $ 822,000
Cash payment of taxes $ 993,000 $ 42,000 $ 465,000
Summary of non-cash investing activities:
Capital expenditures financed under capital leases $ 556,520 $ 392,012 $ 373,833
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 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, 2004, and December 31, 2003 were
approximately $423,000 and $896,000, 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
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 2004 and 2003 and concluded that no
impairment exists.
There was an addition to the Company's goodwill of $113,527 for the fiscal year
ended December 31, 2004 for the one acquisition. Accumulated goodwill
amortization at December 31, 2004 and 2003 was approximately $4 million.
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, 2004
and 2003.
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 $218,000,
$922,000 and $1,381,000 were capitalized in the years ended December 31, 2004
and 2003 and 2002, respectively.
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.
Approximately 52% of the Company's 2004 revenues were derived from state
Medicaid and other government programs, some of which are currently facing
significant budget issues. It is possible that the actions taken by the
state Medicaid programs in the future could have a significant unfavorable
impact on the Company's results of operations, financial condition and
liquidity.
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 31, 2004 December 31, 2003
-------------------------------------------
Medicare 33.8% 31.8%
Medicaid & other government programs:
Ohio 12.8% 11.8%
Maryland 12.3% 13.3%
Kentucky 12.2% 13.5%
Connecticut 4.8% 4.4%
Florida 2.8% 3.3%
Massachusetts 2.0% 2.9%
Indiana 0.8% 1.0%
-------------- --------------
Alabama 0.1% 0.2%
-------------- --------------
Subtotal 47.9% 50.4%
-------------- --------------
All other payers 18.3% 17.8%
-------------- --------------
Total 100.0% 100.0%
============== ==============
Concentrations in the Company's accounts receivable were as follows:
As of December 31, 2004 As of December 31, 2003
------------------------------------- ----------------------------------
Amount Percent Amount Percent
----------------------- ------------- ----------------- --------------
Medicare $ 2,380,099 18.1% $ 1,757,663 10.3%
----------------------- ------------- ----------------- --------------
Medicaid & other government programs:
Kentucky 3,473,950 12.4% 4,829,308 28.3%
Ohio 2,224,726 9.4% 1,911,246 11.2%
Connecticut 1,134,986 6.9% 1,109,205 6.5%
Maryland 919,234 5.2% 904,429 5.3%
Indiana 680,984 3.0% 767,912 4.5%
Massachusetts 465,797 2.8% 529,005 3.1%
Alabama 9,916 0.0% - -%
Florida 498,608 1.6% 273,035 1.6%
----------------------- ------------- ----------------- --------------
Subtotal 9,408,202 41.3% 10,324,140 60.5%
----------------------- ------------- ----------------- --------------
All other payers 3,628,060 40.6% 4,982,890 29.2%
----------------------- ------------- ----------------- --------------
Subtotal 15,416,359 100.0% 17,064,693 100.0%
Allowance for uncollectible accounts (2,624,677) (2,382,355)
----------------------- -----------------
$ 12,791,682 $ 14,682,338
======================= =================
At December 31, 2004 and 2003, the Company had approximately $525,000 and
$1,960,000 of net receivables outstanding specifically related to filed or
estimated cost reports. Of these amounts, approximately $5,000 and $1,826,000,
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:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31,
2002
----------------------------------------------------
Basic weighted average outstanding shares 2,303,267 2,294,771 2,416,224
Add-common equivalent shares representing
shares issuable upon exercise of dilutive
options 264,201 244,100 303,585
-----------------------------------------------------
Diluted weighted average number of shares at
year end 2,567,468 2,538,871 2,719,809
=====================================================
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, 2003 financial
statements and related notes in order to conform to the 2004 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,
2004, 2003 and 2002 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 Year Ended
31, 2004 December 31, 2003 December 31,
2002
--------------------- -------------------- -----------------------
Net income, as reported: $ 1,191,255 $ 2,120,197 $ 1,344,913
Pro forma stock-based
compensation expense, net of
tax 710 41,808 67,722
--------------------- -------------------- -----------------------
Pro forma net income $ 1,190,545 $ 2,078,389 $ 1,277,191
===================== ==================== =======================
Pro forma earnings per share:
Basic $ 0.52 $ 0.91 $ 0.53
Diluted $ 0.46 $ 0.82 $ 0.47
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising expense
was $98,033, $131,721 and $146,218 for the years ended December 31, 2004, 2003,
and 2002, respectively.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB published a revision of FASB Statement No. 123.
"Accounting for Equity Based Compensation". FASB 123 focuses primarily on
accounting for transactions in which an entity obtains employee services in
share-based payment transactions. This Statement requires a public entity to
measure the cost of employee services received in exchange for an award of
equity instruments based on the grant-date fair value of the award (with limited
exceptions). That cost will be recognized over the period during which an
employee is required to provide service in exchange for the award--the requisite
service period (usually the vesting period). No compensation cost is recognized
for equity instruments for which employees do not render the requisite service.
Employee share purchase plans will not result in recognition of compensation
cost if certain conditions are met; those conditions are much the same as the
related conditions in Statement 123. The grant-date fair value of employee share
options and similar instruments will be estimated using option-pricing models
adjusted for the unique characteristics of those instruments (unless observable
market prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will be
recognized in an amount equal to the excess of the fair value of the modified
award over the fair value of the original award immediately before the
modification. Excess tax benefits, as defined by this Statement, will be
recognized as an addition to paid-in capital. Cash retained as a result of those
excess tax benefits will be presented in the statement of cash flows as
financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will be
recognized as income tax expense unless there are excess tax benefits from
previous awards remaining in paid-in capital to which it can be offset. The
notes to financial statements of both public and nonpublic entities will
disclose information to assist users of financial information to understand the
nature of share-based payment transactions and the effects of those transactions
on the financial statements. If the Company had adopted this statement during
2004 it would have had an immaterial effect on results of operations and
financial condition.
DISCONTINUED OPERATIONS
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, due to the expiration of various statutory limitations
pertaining to the tax year in which the Company sold its product operations in
1999.
DISCONTINUED ADULT DAY CARE OPERATIONS
The Company follows the guidance in SFAS 144 "Accounting for the Impairment or
Disposal of Long-Lived Assets" and, when appropriate, reclassifies operating
units closed, sold, or held for sale out of continuing operations and into
discontinued operations for all periods presented. Several ADC segment units
closed, sold, or held for sale, have been reclassified in the financial
statements. These units were either closed or sold by the Company due to their
financial performance. Revenues from discontinued ADC units were approximately
$2.2 million, $3.6 million and $4.8 million in the years ended December 31,
2004, 2003 and 2002 respectively. Net losses from discontinued ADC units were
approximately ($339,000), ($158,000) and ($321,000) in the years ended December
31, 2004, 2003 and 2002 respectively, and such amounts are included in net loss
from discontinued operations in the accompanying financial statements.
In the three years ended December 31, 2004, no operating units in the VN or PC
segments met the criteria to be reclassified as discontinued operations.
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. The
Company implemented changes in its operations to comply with the privacy aspects
of HIPAA and it believes it is in compliance. The Company does not expect the
cost of complying with privacy standards to have a material effect on its
results of operations or financial position. The Company implemented changes in
its operations to comply with the electronic transaction and code sets aspects
of HIPAA and believes it is in compliance with those requirements. Independent
of HIPAA requirements, the Company has been developing new information systems
with improved functionality to facilitate improved billing and collection
activities, reduced administrative costs and improved 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 were published in
2003. Those regulations are required to be implemented by April 2005. We believe
we will be in compliance with the security regulations, with no material impact
on our results of operations or financial position.
NOTE 3 - ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31, December 31,
2004 2003
------------------- -----------------
Wages and employee benefits $ 1,470,091 $ 1,813,763
Insurance accruals 2,018,890 2,766,764
Accrued taxes 1,142,018 (254,349)
Accrued professional fees and other 192,158 297,834
------------------- -----------------
$ 4,823,157 $ 4,624,012
=================== =================
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment, including equipment under capital leases, consist of the
following:
December 31, December 31,
2004 2003
-------------------- ------------------
Land $ - $ 150,000
Buildings and improvements - 684,263
Leasehold improvements 4,079,485 4,280,706
Medical equipment 651,133 620,690
Computer equipment and software 9,476,161 9,187,538
Office and other equipment 2,960,686 2,844,925
Transportation equipment 3,899,052 3,279,169
-------------------- --------------------
21,066,517 21,047,291
Less accumulated depreciation (15,959,889) (13,823,302)
-------------------- -------------------
$ 5,106,628 $ 7,223,989
==================== ===================
Depreciation and amortization expense (including amortization on assets held
under capital leases) was $2,459,463 and $2,411,886 for the years ended December
31, 2004 and 2003, 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 with a new expiration date of
June 30, 2006. The credit facility bears interest at the bank's prime rate plus
a margin (ranging from -0.75% to -0.25%, currently -0.5%) dependent upon total
leverage and is secured by substantially all assets and the stock of the
Company's subsidiaries. The weighted average interest rates were 4.41% and 4.00%
for the quarters ended December 31, 2004 and 2003, respectively, and 3.97% and
4.14% for the year ended December 31, 2004 and 2003, respectively. The interest
rate in effect at December 31, 2004 was 4.50%. The Company pays a commitment fee
of 0.25% per annum on the unused facility balance. Borrowings are available
equal to the greater of: a) a multiple of earnings before interest, taxes,
depreciation and amortization (as defined) or b) an asset based formula,
primarily based on accounts receivable. Borrowings under the facility may be
used for working capital, capital expenditures, acquisitions, development and
growth of the business and other corporate purposes. As of December 31, 2004 the
formula permitted approximately $17.8 million to be used, of which approximately
$3.8 million was outstanding. Additionally, an irrevocable letter of credit,
totaling $4.2 million, was outstanding in connection with the Company's
self-insurance programs. Thus, a total of $8 million was either outstanding or
committed as of December 31, 2004 while an additional $9.8 million was available
for use. The Company's revolving credit facility is subject to various financial
covenants. As of December 31, 2004, the Company was in compliance with the
covenants. Under the most restrictive of its covenants, the Company is required
to maintain minimum net worth of at least $10,500,000.
The Company received $1.4 million from the Kentucky Medicaid program in
collection of three year old cost report receivables in late August 2004. In
October 2004 the Company completed the sale-lease back of its only real estate
parcel and received the net proceeds of approximately $1.1 million. The sale
lease-back generated a deferred pre-tax gain of approximately $123,000 which is
being amortized against rent expense over the initial term of the lease. The
cash generated from these actions was used to reduce outstanding borrowings on
the credit facility.
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,
2004 2003
--------------------- -------------------
Deferred tax assets
Nondeductible reserves and
allowances $ 491,000 $ 171,000
Intangibles 955,000 1,214,000
Insurance accruals 744,000 718,000
Net operating loss carryforwards 725,000 838,000
--------------------- -------------------
2,915,000 2,941,000
Valuation allowance (557,000) (639,000)
--------------------- -------------------
2,358,000 2,302,000
Deferred tax liabilities
Accelerated depreciation (1,395,000) (1,500,000)
--------------------- -------------------
Net deferred tax assets $ 963,000 $ 802,000
===================== ===================
Deferred tax assets (liabilities) are reflected in the accompanying balance
sheets as:
Current $ 1,189,000 $ 864,000
Long-term (226,000) (62,000)
--------------------- -------------------
Net deferred tax assets $ 963,000 $ 802,000
===================== ===================
The Company has state and local net operating loss carryforwards of
approximately $17.9 million which expire on various dates through 2016.
Provision (benefit) for income taxes consists of the following:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31,
2002
-------------------- ------------------- ------------------
Federal - current $ 1,088,000 $ 29,000 $ (27,000)
State and local - current 179,000 22,000 43,000
Deferred (281,000) 702,000 979,000
-------------------- ------------------- ------------------
$ 986,000 $ 753,000 $ 995,000
==================== =================== ==================
Shown in the accompanying statements of income as:
Continuing operations $ 986,000 $ 753,000 $ 995,000
Discontinued operations 30,000 (956,000) (207,000)
-------------------- ------------------- ------------------
$ 1,016,000 $ (203,000) $ 788,000
==================== =================== ==================
A reconciliation of the statutory to the effective rate of the Company (for
continuing operations only) is as follows:
Year Ended December Year Ended December Year Ended
31, 2004 31, 2003 December 31, 2002
----------------------- ---------------------- -----------------------
Tax provision using statutory rate 34.0% 34.0% 34.0%
Valuation allowance (0.5%) (0.8%) (2.7%)
State and local taxes, net of Federal benefit 5.0% (0.6%) 4.0%
Other, net 0.7% 2.0% 2.1%
------------------------- -------------------- -----------------------
Tax provision for continuing operations 39.2% 34.6% 37.4%
======================= ====================== =======================
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, 2004.
During the year ended December 31, 2004, 2003 and 2002, 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 $21,000, $96,000 and $73,000, 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, 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, 2004, 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,
2004, options for 360,493 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, 2004, all option shares
available under this plan have been granted and options for 73,500 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,
officers and directors. The Board of Directors determines the amount and terms
of the options, which cannot exceed ten years. As of December 31, 2004, options
for 51,507 shares had been granted and were outstanding under this plan. Shares
available for future grant amount to 425,993 shares at December 31, 2004.
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
Granted - -
Exercised (20,000) 3.44
Terminated (17,500) 9.54
-------------
December 31, 2004 526,000 3.20
=============
The following table details exercisable options and related information:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
------------------ ------------------- -------------------
Exercisable at end of year 524,750 502,375 493,325
Weighted average exercise price $ 3.18 $ 3.20 $ 2.98
Weighted average fair value
of options granted during the year $ - $ - $ 0.69
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.: risk-free
interest rates of 5.72%, expected volatility of approximately 50%, expected
lives of 9.30years, and no expected dividend yields, respectively.
The following table summarizes information about stock options outstanding at
December 31, 2004:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------- -----------------------------------
Outstanding Wtd. Avg. Exercisable
Range of As of Remaining Wt. Avg. As of Wt. Avg.
Ex. Price December 31, 2004 Contractual Life Ex. Price December 31, 2004 Ex. Price
----------------- ------------------ ------------------- -------------- ------------------ -------------
$2.19-2.50 175,000 1.79 $2.19 75,000 $2.19
$2.50 - 3.00 136,500 8.96 $2.63 336,500 $2.98
Over $3.00 214,500 3.27 $4.38 113,250 $4.42
------------------ ------------------
$2.19 - $10.59 526,000 4.25 $3.20 524,750 $3.18
================== ==================
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, 2004, 56,237 shares have been allocated in deferred accounts,
4,311 have been issued to previous Directors and 39,452 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 PLAN
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.
The Company's retirement plan expense was approximately $74,000, $5,000 and
$83,000 for the years ended December 31, 2004, 2003, and 2002.
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 $3,499,264, $3,836,727 and $4,094,982 for years ended December 31,
2004, 2003 and 2002. At December 31, 2004 the minimum rental payments under
these leases were as follows:
2005 $ 2,905,911
2006 2,284,834
2007 1,862,332
2008 1,554,107
2009 940,762
Thereafter 988,830
------------------
$ 10,536,766
==================
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 $2.6 million and $2.1
million with accumulated depreciation of approximately $989,000 and $677,000 as
of December 31, 2004 and 2003, respectively.
The Company has an unsecured $300,000 note payable to a seller bearing interest
at 6% per annum at December 31, 2004 due July 2005.
Future minimum lease payments and principal and interest payments on the term
debt are as follows:
Capital Acquisition
Year Ending December 31, Leases Note Payable Total
------------------ ------------------ -------------------
2005 $ 371,415 $ 309,900 $ 681,315
2006 546,050 - 546,050
2007 358,848 - 358,848
2008 300,224 - 300,224
2009 166,402 - 166,402
Thereafter 129,828 129,828
------------------ ------------------ -------------------
1,872,767 309,900 2,182,667
Less: amount
Representing Interes (282,232) (9,900) (292,132)
------------------ ------------------ -------------------
Present value of minimum
lease/principal payments 1,590,535 300,000 1,890,535
Less: current portion 277,785 300,000 577,785
------------------ ------------------ -------------------
$ 1,312,750 $ - $ 1,312,750
================== ================== ===================
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, 2004 that may result in the assertion of additional claims. The
Company carries insurance coverage for this exposure; however, its deductible
per claim increased from $25,000 to $250,000 effective April 1, 2003.
The Company records estimated liabilities for its insurance programs based on
information provided by the third-party plan administrators, historical claims
experience, the life cycle of claims, expected costs of claims incurred but not
paid, and expected costs to settle unpaid claims. The Company monitors its
estimated insurance-related liabilities on a monthly basis. As facts change, it
may become necessary to make adjustments that could be material to the Company's
results of operations and financial condition.
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 decision. This cash is reflected as "Cash held
in escrow" in the accompanying balance sheet and will remain in escrow until the
matter reaches its ultimate resolution.
Based on the advice of legal counsel, the Company 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. The appeals court heard oral arguments in the case in February 2005 but
has given no indication of when it will issue a ruling.
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
its bankruptcy status to a Chapter 11 voluntary reorganization. On March 3,
2003, the Broker reconverted its case to a Chapter 7 liquidation proceeding.
In May 2003, along with a group of other affected providers, the Company filed
suit against the Commonwealth in Franklin Circuit Court seeking payment directly
from the Commonwealth. The Commonwealth objected to the lawsuit on the basis of
sovereign immunity (since the group did not have a direct contract with the
Commonwealth) and filed a motion to dismiss the lawsuit. In July 2003, a hearing
on the motion to dismiss was held and at the judge's request written briefs were
filed before the judge would make a decision. In August 2003, the motion to
dismiss was granted and after discussion with legal counsel, an appeal of this
decision was made to the Kentucky Court of Appeals. On September 24, 2004 the
appeals court affirmed the lower court's decision. In its decision, the Court
indicated that the Company could pursue its claim at the Kentucky Board of
Claims; such a claim would be limited to $200,000 in damages.
On June 26, 2004 a lawsuit was filed on behalf of the bankruptcy estate against
the Commonwealth of Kentucky. The case alleges that the state misrepresented
material facts about the contract that it signed with the Transportation Broker.
The suit alleges that the Commonwealth intentionally under-funded the contract
with the bankrupt Broker. Unlike the group of affected providers in the Franklin
Circuit Court proceeding discussed above, the Broker did have a direct contract
with the Commonwealth.
As of December 31, 2004 and December 31, 2003, the Broker owed the Company
approximately $535,000, which amount is included in accounts receivable, net on
the accompanying balance sheets. Based on discussions with legal counsel, the
Company estimates that it will be able to recover approximately 80% of the claim
if the lawsuit is successful. Accordingly, the Company has established a
collectibility reserve of approximately $106,000 against the receivable in this
case. 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 financial results for purposes of calculating borrowing availability or
financial covenant compliance.
NOTE 10 - STOCK REPURCHASES
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. There were no stock repurchases in the
year ended December 31, 2004.
NOTE 11 - SEGMENT DATA
The Company operates in two service line groups: Home Health Care and Adult Day
Care (ADC). The Home Health Care group consists of two reportable segments,
Visiting Nurse (VN) and Personal Care (PC) while the ADC service line is also a
separate reportable segment. Reportable segments have been identified based upon
how management has organized the business by services provided to customers and
the criteria in SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information."
The Company's VN segment provides skilled medical services in patients' homes
largely to enable recipients to reduce or avoid periods of hospitalization
and/or nursing home care. VN Medicare revenues are generated on a per episode
basis rather than a fee per visit or day of care. Approximately 91% of the VN
segment revenues are generated from the Medicare program while the balance is
generated from Medicaid and private insurance programs.
The Company's PC segment services are also provided in patients' homes. These
services (generally provided by paraprofessional staff such as home health
aides) are generally of a custodial rather than skilled nature. PC revenues are
generated on an hourly basis. Approximately 65% of the PC segment revenues are
generated from Medicaid and other government programs while the balance is
generated from insurance programs and private pay patients.
The Company's ADC segment provides adult day care to disabled or frail adults
who require some care or supervision, but who do not require intensive medical
attention and/or wish not to live in a nursing home or other inpatient
institution. These services are provided in the Company's facilities.
ADC revenues are usually generated on a per day of care basis. Approximately 85%
of the ADC segment revenues are generated from Medicaid and other government
programs while the balance is generated from insurance programs and private pay
patients.
Certain general and administrative expenses incurred at the corporate level have
not been allocated to the segments. The Company has service locations in
Florida, Kentucky, Ohio, Maryland, Connecticut, Massachusetts, Indiana and
Alabama (in order of revenue significance).
The presentation of the Company's operations in three segments differs from its
previous reporting of two segments due to a reorganization of the way in which
the Company manages its business and in the way in which information is
reported, both of which resulted from refinements in the Company's business plan
adopted in early 2004. Segment data for previous periods have been restated to
conform to the new reporting structure.
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
- ----------------------------------------- ------------------- --------------------- ---------------------
Net revenues
Visiting nurses $ 32,227,614 $ 29,375,519 $ 28,799,296
Personal care 33,542,824 32,266,965 29,928,685
Adult day health services 21,056,742 21,617,259 22,224,469
------------------- ------------------ -------------------
$ 86,827,180 $ 83,259,742 $ 80,952,450
=================== ================== ===================
Operating income (loss)
Visiting nurses $ 4,671,221 $ 4,281,189 $ 4,996,141
Personal care 3,036,043 3,786,610 3,596,130
Adult day health services 1,087,575 1,068,178 1,733,608
Corporate/Unallocated (5,788,721) (6,194,977) (6,876,276)
------------------- ------------------ -------------------
$ 3,006,118 $ 2,941,000 $ 3,449,603
=================== ================== ===================
Identifiable assets
Visiting nurses $ 4,340,804 $ 3,643,137 $ 7,485,349
Personal care 9,071,086 11,173,701 10,006,128
Adult day health services 6,447,087 7,912,285 8,396,458
Corporate/Unallocated 8,203,093 9,371,769 9,466,085
------------------- ------------------ -------------------
$ 28,062,070 $ 32,100,892 $ 35,354,020
=================== ================== ===================
Identifiable liabilities
Visiting nurses $ 1,994,746 $ 1,169,886 $ 1,516,395
Personal care 2,900,642 972,131 1,569,330
Adult day health services 4,174,775 12,702,934 15,896,736
Corporate/Unallocated 5,424,976 4,991,595 6,267,475
------------------- ------------------ -------------------
$ 14,495,139 $ 19,836,546 $ 25,249,936
=================== ================== ===================
Capital expenditures
Visiting nurses $ 68,517 $ 500,323 $ 514,315
Personal care 5,615 377,042 74,092
Adult day health services 184,043 435,680 222,255
Corporate/Unallocated 301,842 351,064 1,712,366
------------------- ------------------ -------------------
$ 560,017 $ 1,664,109 $ 2,523,028
=================== ================== ===================
Depreciation and amortization
Visiting nurses $ 842,389 $ 860,478 $ 884,608
Personal care 346,956 257,668 156,253
Adult day health services 1,091,003 946,737 758,241
Corporate/Unallocated 179,116 347,004 205,125
------------------- ------------------ -------------------
$ 2,459,463 $ 2,411,886 $ 2,004,227
=================== ================== ===================
NOTE 12 - QUARTERLY FINANCIAL DATA-- (UNAUDITED)
Summarized quarterly financial data for the years ended December 31, 2004 and
2003 are as follows (in thousands except per share data):
Year Ended December 31, 2004 Year Ended December 31, 2003
-------------------------------------------------- ----------------------------------------------------
Dec. 31, Sept. 30, June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
2004 2004 2004 2004 2003 2003 2003 2003
-------------------------------------------------- ----------------------------------------------------
Net Revenues $ 22,179 $ 21,478 $ 21,702 $ 21,468 $ 21,051 $ 20,712 $ 20,883 $ 20,614
Gross Profit 3,262 3,532 3,504 3,431 3,513 3,484 3,868 3,536
Income from
continuing 347 412 428 342 318 304 492 310
operations
Income from discontinued
operations (256) (7) (34) (41) 791 (21) (3) (71)
Net income 91 405 394 301 1,109 283 489 239
Income
from
continuing operations
Basic $ 0.16 $ 0.18 $ 0.19 $ 0.15 $ 0.15 $ 0.13 $ 0.21 $ 0.13
Diluted $ 0.14 $ 0.16 $ 0.17 $ 0.13 $ 0.13 $ 0.12 $ 0.20 $ 0.13
Income
from
discontinued operations
Basic $ (0.12) $ - $ (0.01) $ (0.02) $ 0.34 $ (0.01) $ - $ (0.03)
Diluted $ (0.11) $ - $ (0.01) $ (0.02) $ 0.30 $ (0.01) $ - $ (0.03)
Net income
per share
Basic $ 0.04 $ 0.18 $ 0.17 $ 0.13 $ 0.48 $ 0.12 $ 0.21 $ 0.10
Diluted $ 0.03 $ 0.16 $ 0.15 $ 0.12 $ 0.43 $ 0.11 $ 0.20 $ 0.10
In the quarter ended December 31, 2004, the Company recorded in income from
discontinued operations a one-time reduction in estimated tax liabilities of
approximately $854,000, due to the expiration of various statutory limitations
pertaining to the tax year in which the Company sold its product operations.
NOTE 13 - SUBSEQUENT EVENTS
On March 29, 2005 the Company entered into an agreement to acquire all the
assets and business operations of a Medicare-certified visiting nurse agency
located in Bradenton, Florida. The total purchase price of $3.2 million will be
paid $2.5 million in cash at closing (expected to be April 1, 2005) with the
$700,000 balance in the form of a note payable bearing interest at 6% due in its
entirety two years after closing. The Company will fund the cash portion of the
purchase price with available borrowings on its revolving credit facility. The
acquired operations generated net revenues of approximately $3.5 million in the
year ended December 31, 2004.
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, 2004 and 2003, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
three 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.
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. We were not engaged to perform an audit of the
Company's internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company's
internal control over financial reporting. Accordingly we express no such
opinion. An audit also includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
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, 2004 and 2003, and the consolidated
results of their operations and their cash flows for the three years then ended
in conformity with U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule when considered in relation to
the 2004, 2003 and 2002 basic consolidated financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
/S/ERNST & YOUNG LLP
Louisville, Kentucky
March 18, 2005, except for Note 13, as to which the date is
March 30, 2005
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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, 2004. 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, 2004. There were no changes in the Company's
internal control over financial reporting during the fourth quarter of 2004 that
has materially affected, or is reasonably likely to materially affect, such
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
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, 2004, 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) 52 Chairman of the Board President
and Chief Executive Officer
C. Steven Guenthner (2) 44 Senior Vice President and
Chief Financial Officer
Mary A. Yarmuth (3) 58 Senior Vice President
P. Todd Lyles (4) 43 Senior Vice President
Anne T. Liechty (5) 52 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, 2004, 2003 and 2002 38
Consolidated Balance Sheets - December 31, 2004 and 2003 39
Consolidated Statements of Cash Flows for the years ended
December 31, 2004, 2003 and 2002 41
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 2004, 2003 and 2002 40
Notes to Consolidated Financial Statements 42
Report of Independent Auditors 60
2. Index to Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts 68
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:
Number Description of Exhibit
3.1 Certificate of Incorporation, as amended, of the Registrant
(incorporated by reference to Exhibit No. 3.1 of the Registrant's
Annual Report on Form 10-K for the year ended March 31, 1997)
3.2 Amended and Restated Bylaws of the Registrant (incorporated by
reference to Exhibit 3 of the Registrant's Current Report on Form 8-K
dated February 1, 1999)
4.1 Stockholder Protection Rights Agreement dated February 1, 1999,
between the Registrant and Reliance Trust Company (incorporated by
reference to Exhibit 4 to the Registrant's Current Report on Form 8-K
dated February 1, 1999)
4.2 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 (incorporated by references to the
Registrant's Registration Statement on Form S-8 Reg. No. 33-81124)
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 (incorporated by reference to the
Registrant's report on Form 10-K for the year ended December 31, 2003)
10.10 2000 Stock Option Plan (incorporated by reference to the Registrant's
Registration Statement on Form S-8 Reg. No. 333-88744)
10.11 Non-Employee Director Deferred Compensation Plan
10.12 1993 Non-Employee Directors Stock Option Plan (incorporated by
reference to the Registrant's Registration Statement on Form S-8 Reg.
No. 333-881100)
21* List of Subsidiaries of Almost Family, Inc.
23.1* Consent of Ernst & Young LLP
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.
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 31, 2005
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 28, 2005
- -------------------------------------------------------------------------------
William B. Yarmuth Date
Director
S/Donald G. McClinton March 28, 2005
- --------------------------------------------------------------------------------
Donald G. McClinton Date
Director
S/Steven B. Bing March 28, 2005
- --------------------------------------------------------------------------------
Steven B. Bing Date
Director
S/Tyree Wilburn March 28, 2005
- --------------------------------------------------------------------------------
Tyree Wilburn Date
Director
S/Jonathan Goldberg March 28, 2005
- --------------------------------------------------------------------------------
Jonathan Goldberg Date
Director
S/Wayne T. Smith March 28, 2005
- --------------------------------------------------------------------------------
Wayne T. Smith Date
Director
S/W. Earl Reed, III March 28, 2005
- --------------------------------------------------------------------------------
W. Earl Reed, III Date
Director
S/Henry M. Altman, Jr. March 28, 2005
- --------------------------------------------------------------------------------
Henry M. Altman, Jr.
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, 2004 $ 2,382,355 $ 1,810,105 - $ 1,567,783 $ 2,624,678
Year ended December 31, 2003 $ 2,282,757 $ 1,561,212 - $ 1,461,615 $ 2,382,355
Year ended December 31, 2002 $ 2,359,657 $ 1,607,258 - $ 1,684,158 $ 2,282,757
(1) Charged to bad debt expense.
(2) Write-off of accounts.