UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Amendment No.1)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2005
Commission File No. 1-15669
GENTIVA HEALTH SERVICES, INC.
-----------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 36-4335801
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $.10 per share NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 25, 2004, the last business day of
registrant's most recently completed second fiscal quarter, was $402,788,010
based on the closing price of the Common Stock on the Nasdaq National Market on
such date.
The number of shares outstanding of the registrant's Common Stock, as of
March 4, 2005, was 23,436,656.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant's definitive Proxy
Statement, to be filed not later than 120 days after the end of the fiscal year
covered by this Report, for the registrant's 2005 Annual Meeting of Shareholders
is incorporated by reference into PART III.
EXPLANATORY NOTE
On March 17, 2005, Gentiva Health Services, Inc. ("Gentiva" or the
"Company"), filed its annual report on Form 10-K for the fiscal year ended
January 2, 2005 with the Securities and Exchange Commission. This Amendment No.
1 on Form 10-K/A is being filed solely to correct typographical errors in the
last sentence of the first paragraph of Item 9A and in Item 15(a)(1) in the
table included in Note 3 and in the third table included in Note 12 to the
Company's consolidated financial statements. This amendment includes an updated
consent of the Company's independent registered public accounting firm as well
as updated certifications of Gentiva's chief executive officer and chief
financial officer. Accordingly, pursuant to Rule 12b-15 under the Securities
Exchange Act of 1934, this amendment contains the complete text of Item 9A and
Item 15. Except as described above, no other information in the Form 10-K has
been amended.
ITEM 9A. CONTROLS AND PROCEDURES
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to
include in this annual report on Form 10-K a report on management's assessment
of the effectiveness of the Company's internal control over financial reporting,
as well as an attestation report from the Company's independent registered
public accounting firm on management's assessment of the effectiveness of the
Company's internal control over financial reporting. Management's Report on
Internal Control over Financial Reporting and the related attestation report
from the Company's independent registered public accounting firm are located on
pages F-2 and F-3 - F-4, respectively, of this annual report on Form 10-K and
are incorporated herein by reference.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective as of the end of such period to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter ended January 2, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during such
quarter.
-35-
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
Page No.
-----------
- - Report of Independent Registered Public Accounting Firm..................................... F-3 and F-4
- - Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003..................... F-5
- - Consolidated Statements of Operations for the three years ended January 2, 2005............. F-6
- - Consolidated Statements of Changes in Shareholders' Equity for the three years ended
January 2, 2005............................................................................. F-7
- - Consolidated Statements of Cash Flows for the three years ended January 2, 2005............. F-8
- - Notes to Consolidated Financial Statements.................................................. F-9
-36-
(a)(2) FINANCIAL STATEMENT SCHEDULE
- - Schedule II - Valuation and Qualifying Accounts for the three years ended January 2,
2005........................................................................................ F-29
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Company (1)
3.2 Certificate of Correction to Certificate of Incorporation, filed
with the Delaware Secretary of State on July 1, 2002 (2)
3.3 Amended and Restated By-Laws of Company (2)
4.1 Specimen of common stock (4)
4.2 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock (1)
4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting
Redeemable Preferred Stock (3)
10.1 Separation Agreement dated August 17, 1999 among Olsten Corporation,
Aaronco Corp. and Adecco SA (1)
10.2 Omnibus Amendment No. 1 dated October 7, 1999 by and among Olsten
Corporation, Aaronco Corp., Adecco SA and Olsten Health Services
Holding Corp. (1)
10.3 Omnibus Amendment No. 2 dated January 18, 2000 by and among Olsten
Corporation, Adecco SA, Olsten Health Services Holding Corp., the
Company and Staffing Acquisition Corporation (1)
10.4 Form of Rights Agreement dated March 2, 2000 between the Company and
EquiServe Trust Company, N.A., as rights agent (3)
10.5 Company's Executive Officers Bonus Plan (1)*
10.6 Company's 1999 Stock Incentive Plan (5)*
10.7 Company's 2004 Equity Incentive Plan (6)*
10.8 Company's Stock & Deferred Compensation Plan for Non-Employee
Directors, as amended and restated as of January 1, 2004 (7)*
10.9 Company's Employee Stock Purchase Plan (1)*
10.10 Company's Nonqualified Retirement and Savings Plan and First,
Second, Third and Fourth Amendments thereto (7)*
10.11 Form of Change in Control Agreement with each of Vernon A. Perry,
Jr., John R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel
(2)* (the Change in Control Agreements are identical in substance
for each of the named officers, except that the Change in Control
Agreements for Messrs. Perry, Potapchuk and Creamer provide in
paragraphs 4(ii) and 4(iii), respectively, for a
-37-
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
multiple of "two" in calculating a payment under each officer's
Agreement and for up to two years of continued employee benefits and
the Change in Control Agreement for Mary Morrisey Gabriel provides
in paragraphs 4(ii) and 4(iii), respectively, for a multiple of
"one" in calculating a payment under her Agreement and for up to one
year of continued employee benefits)
10.12 Form of Severance Agreement with each of Vernon A. Perry, Jr., John
R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel (2)* (the
Severance Agreements are identical in substance for each of the
named officers, except that the Severance Agreements for Messrs.
Perry, Potapchuk and Creamer provide in paragraph 1 for payments of
18 months of severance and the Severance Agreement for Ms. Morrisey
Gabriel provides in paragraph 1 for the payment of 12 months of
severance)
10.13 Employment Agreement dated as of March 22, 2004 with Ronald A.
Malone (8)*
10.14 Change in Control Agreement dated as of March 22, 2004 with Ronald
A. Malone (8)*
10.15 Forms of Notices and Agreements covering awards of stock options and
restricted stock under Company's 2004 Equity Incentive Plan (9)*
10.l6 Summary Sheet of Company compensation to non-employee directors,
effective January 1, 2004 (10)*
10.17 Performance goals and criteria for 2005 set under Company's
Executive Officers Bonus Plan (11)*
10.18 Loan and Security Agreement dated June 13, 2002 by and between Fleet
Capital Corporation, as Administrative Agent, on behalf of the
lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva
Health Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (12)
10.19 First Amendment and Consent Agreement dated August 7, 2003 to Loan
and Security Agreement dated June 13, 2002 by and between Fleet
Capital Corporation, as Administrative Agent on behalf of the
lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva
Health Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (13)
10.20 Second Amendment dated November 26, 2003 to Loan and Security
Agreement dated June 13, 2002 by and between Fleet Capital
Corporation, as Administrative Agent on behalf of the lenders named
therein, Fleet Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (7)
10.21 Third Amendment and Joinder dated February 25, 2004 to Loan and
Security Agreement dated June 13, 2002 by and between Fleet Capital
Corporation, as Administrative Agent on behalf of the lenders named
therein, Fleet Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (7)
10.22 Fourth Amendment dated May 26, 2004 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet Capital Corporation, as
Administrative Agent on behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health Services, Inc.,
Gentiva Health Services Holding Corp. and the subsidiaries named
therein (14)
10.23 Asset Purchase Agreement dated as of January 2, 2002 by and between
Accredo Health, Incorporated, the Company and the Sellers named
therein (15)
-38-
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
10.24 Managed Care Alliance Agreement between CIGNA Health Corporation and
Gentiva CareCentrix, Inc. entered into as of January 1, 2004 (7)
(confidential treatment requested as to portions of this document)
10.25 Amendment dated January 1, 2005 to Managed Care Alliance Agreement
between CIGNA Health Corporation and Gentiva CareCentrix, Inc.
entered into as of January 1, 2004 (10) (confidential treatment
requested as to portions of this document)
10.26 Consulting Agreement dated as of July 1, 2002 between Gail R.
Wilensky and Gentiva Health Services (USA), Inc. (16)*
10.27 Amendment dated August 7, 2003 to Consulting Agreement dated as of
July 1, 2002 between Gail R. Wilensky and Gentiva Health Services
(USA), Inc. (13)*
21. List of Subsidiaries of Company (10)
23. Consent of PricewaterhouseCoopers LLP, independent registered public
accounting firm +
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a) +
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a) +
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350 +
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350 +
- ---------------------
(1) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement of Company on Form S-4 dated January 19, 2000 (File No.
333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of Company on Form S-4 dated February 4, 2000 (File No.
333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement of Company on Form S-4 dated February 9, 2000 (File No.
333-88663).
(5) Incorporated herein by reference to Form 10-K of Company for the fiscal
year ended January 2, 2000.
(6) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 8, 2004.
(7) Incorporated herein by reference to Form 10-K of Company for the fiscal
year ended December 28, 2003.
(8) Incorporated herein by reference to Form 10-Q of Company for the quarterly
period ended March 28, 2004.
(9) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended September 26, 2004.
(10) Incorporated by reference to Form 10-K of Company for the fiscal year
ended January 2, 2005.
(11) Incorporated herein by reference to Form 8-K of Company dated February 23,
2005 and filed March 1, 2005.
(12) Incorporated herein by reference to Form 8-K of Company dated June 13,
2002 and filed June 21, 2002.
-39-
(13) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended September 28, 2003.
(14) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended June 27, 2004.
(15) Incorporated herein by reference to definitive Proxy Statement of Company
dated May 10, 2002.
(16) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended March 30, 2003.
* Management contract or compensatory plan or arrangement
+ Filed herewith
-40-
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.
GENTIVA HEALTH SERVICES, INC.
Date: March 25, 2005 By: /s/ John R. Potapchuk
--------------------
John R. Potapchuk
Senior Vice President and Chief Financial Officer
-41-
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
Page No.
-----------
Management's Responsibility for Financial Statements................................................. F-2
Management's Report on Internal Control over Financial Reporting..................................... F-2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.............................................. F-3 and F-4
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003.............................. F-5
Consolidated Statements of Operations for the three years ended January 2, 2005...................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the three years ended
January 2, 2005................................................................................. F-7
Consolidated Statements of Cash Flows for the three years ended January 2, 2005...................... F-8
Notes to Consolidated Financial Statements........................................................... F-9
Schedule II - Valuation and Qualifying Accounts for the three years ended January 2, 2005............ F-29
F-1
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information appearing in this
Report. Management believes that the consolidated financial statements fairly
reflect the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations in
conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements amounts that are based on
estimates and judgments which it believes are reasonable under the
circumstances.
The independent registered public accounting firm audits the Company's
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board and provides an objective, independent review
of the fairness of reported operating results and financial position.
The Board of Directors of the Company has an Audit Committee comprised of
three independent directors. The Audit Committee meets at least quarterly with
financial management, the internal auditors and the independent registered
public accounting firm to review accounting, control, auditing and financial
reporting matters.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of January 2, 2005. Our management's
assessment of the effectiveness of our internal control over financial reporting
as of January 2, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Gentiva Health Services, Inc. and Subsidiaries:
We have completed an integrated audit of Gentiva Health Services, Inc. and
Subsidiaries (the "Company") fiscal 2004 consolidated financial statements and
of their internal control over financial reporting as of January 2, 2005 and
audits of their fiscal 2003 and fiscal 2002 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under item 15(a)(1) of the Form 10-K present fairly, in all
material respects, the financial position of the Company at January 2, 2005 and
December 28, 2003, and the results of their operations and their cash flows for
each of the three years in the period ended January 2, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15 (a)(2) of the Form 10-K presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
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.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
changed the method of accounting for goodwill and other intangibles assets
effective December 31, 2001.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial
reporting as of January 2, 2005 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating
F-3
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
Stamford, Connecticut
March 15, 2005
F-4
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,910 $ 75,688
Restricted cash 22,014 21,750
Short-term investments 81,100 20,000
Receivables, less allowance for doubtful accounts of $7,040 and
$7,936 at fiscal year end 2004 and 2003, respectively 132,002 132,998
Deferred tax assets 23,861 26,464
Prepaid expenses and other current assets 6,057 6,524
--------------- --------------------
Total current assets 274,944 283,424
Fixed assets, net 19,687 15,135
Deferred tax assets, net 21,233 28,025
Other assets 16,234 15,929
--------------- --------------------
Total assets $ 332,098 $ 342,513
=============== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,896 $ 23,504
Payroll and related taxes 9,356 12,932
Medicare liabilities 9,949 12,736
Cost of claims incurred but not reported 27,361 28,525
Obligations under insurance programs 34,660 37,200
Other accrued expenses 31,117 32,230
--------------- --------------------
Total current liabilities 138,339 147,127
Other liabilities 21,819 18,207
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; issued
and outstanding 23,722,408 and 25,598,301 shares, at fiscal year
end 2004 and 2003, respectively 2,372 2,560
Additional paid-in capital 238,929 270,468
Accumulated deficit (69,361) (95,849)
--------------- --------------------
Total shareholders' equity 171,940 177,179
--------------- --------------------
Total liabilities and shareholders' equity $ 332,098 $ 342,513
=============== ====================
See notes to consolidated financial statements.
F-5
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Net revenues $ 845,764 $ 814,029 $ 768,501
Cost of services sold 521,835 531,987 520,901
--------------- ----------------- -----------------
Gross profit 323,929 282,042 247,600
Selling, general and administrative expenses (278,342) (252,334) (276,355)
Depreciation and amortization (7,329) (6,851) (7,185)
--------------- ----------------- -----------------
Operating income (loss) 38,258 22,857 (35,940)
Gain on sale of Canadian investment 946 -- -
Interest income, net 977 441 834
--------------- ----------------- -----------------
Income (loss) from continuing operations before income taxes 40,181 23,298 (35,106)
Income tax (expense) benefit (13,693) 33,468 (18,437)
--------------- ----------------- -----------------
Income (loss) from continuing operations 26,488 56,766 (53,543)
Discontinued operations, net of tax -- -- 191,578
--------------- ----------------- -----------------
Income before cumulative effect of accounting change 26,488 56,766 138,035
Cumulative effect of accounting change, net of tax -- -- (187,068)
--------------- ----------------- -----------------
Net income (loss) $ 26,488 $ 56,766 $ (49,033)
=============== ================= =================
Basic earnings per share:
Income (loss) from continuing operations $ 1.07 $ 2.16 $ (2.05)
Discontinued operations, net of tax -- -- 7.32
Cumulative effect of accounting change, net of tax -- -- (7.14)
--------------- ----------------- -----------------
Net income (loss) $ 1.07 $ 2.16 $ (1.87)
=============== ================= =================
Weighted average shares outstanding 24,724 26,262 26,183
=============== ================= =================
Diluted earnings per share:
Income (loss) from continuing operations $ 1.00 $ 2.07 $ (2.05)
Discontinued operations, net of tax -- -- 7.32
Cumulative effect of accounting change, net of tax -- -- (7.14)
--------------- ----------------- -----------------
Net income (loss) $ 1.00 $ 2.07 $ (1.87)
=============== ================= =================
Weighted average shares outstanding 26,365 27,439 26,183
=============== ================= =================
See notes to consolidated financial statements.
F-6
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 2, 2005
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ------------ ------------ -----------
Balance at December 30, 2001 25,638,794 $ 2,564 $ 722,725 $ (103,582) $ 621,707
Comprehensive loss:
Net loss -- -- -- (49,033) (49,033)
Dividends paid ($17.75 per share) -- -- (466,597) -- (466,597)
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 746,416 75 6,896 -- 6,971
----------- ----------- ------------ ------------ -----------
Balance at December 29, 2002 26,385,210 $ 2,639 $ 263,024 $ (152,615) $ 113,048
Comprehensive income:
Net Income -- -- -- 56,766 56,766
Income tax benefits associated with
stock-based compensation -- -- 19,454 -- 19,454
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 651,555 65 2,271 -- 2,336
Repurchase of common stock at cost (1,438,464) (144) (14,281) -- (14,425)
----------- ----------- ------------ ------------ -----------
Balance at December 28, 2003 25,598,301 $ 2,560 $ 270,468 $ (95,849) $ 177,179
Comprehensive income:
Net Income -- -- -- 26,488 26,488
Income tax benefits associated with
the exercise of non-qualified stock options -- -- 1,535 -- 1,535
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 677,247 68 5,072 -- 5,140
Repurchase of common stock at cost (2,553,140) (256) (38,146) -- (38,402)
----------- ----------- ------------ ------------ -----------
Balance at January 2, 2005 23,722,408 $ 2,372 $ 238,929 $ (69,361) $ 171,940
=========== =========== ============ ============ ===========
See notes to consolidated financial statements.
F-7
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL YEAR ENDED
----------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
OPERATING ACTIVITIES:
Net income (loss) $ 26,488 $ 56,766 $ (49,033)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Income from discontinued operations -- -- (191,578)
Cumulative effect of accounting change -- -- 187,068
Depreciation and amortization 7,329 6,851 7,185
Provision for doubtful accounts 6,722 7,684 4,936
Gain on sale of Canadian investment (946) -- --
Loss (gain) on disposal / writedown of fixed assets 1,361 (209) 951
Stock option tender offer -- -- 21,388
Deferred income tax (benefit) expense 9,114 (35,035) 12,837
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable (5,726) (15,604) 10,281
Prepaid expenses and other current assets 25 3,048 7,825
Current liabilities (10,372) 7,065 6,393
Change in net assets held for sale -- -- 3,300
Other, net 858 137 (3,024)
-------- -------- ---------
Net cash provided by operating activities 34,853 30,703 18,529
-------- -------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets - continuing operations (12,593) (8,777) (4,116)
Purchase of fixed assets - discontinued operations -- -- (2,121)
Proceeds from sale of assets / business 4,123 200 206,564
Acquisition of businesses -- (1,300) --
Purchase of short-term investments available-for-sale (145,950) (10,000) --
Maturities of short-term investments available-for-sale 84,850 -- --
Purchase of short-term investments (10,000) (24,900) --
Maturities of short-term investments 10,000 14,935 --
(Deposits into) withdrawals from restricted cash (264) (21,750) 35,164
-------- -------- ---------
Net cash (used in) provided by investing activities (69,834) (51,592) 235,491
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 6,675 2,336 6,971
Change in book overdrafts 1,223 7,425 --
Repurchases of common stock (38,402) (14,425) --
Repayment of capital lease obligations (293) -- --
Debt issuance costs -- -- (1,321)
Cash distribution to shareholders -- -- (203,983)
Payments for stock option tender -- -- (21,388)
Advance paid to Medicare program -- -- (5,038)
-------- -------- ---------
Net cash used in financing activities (30,797) (4,664) (224,759)
-------- -------- ---------
Net change in cash and cash equivalents (65,778) (25,553) 29,261
Cash and cash equivalents at beginning of period 75,688 101,241 71,980
-------- -------- ---------
Cash and cash equivalents at end of period $ 9,910 $ 75,688 $ 101,241
======== ======== =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
For fiscal year 2004, deferred tax benefits associated with stock compensation
deductions of $1.5 million have been credited to shareholders' equity.
For fiscal year 2003, in connection with the reversal of the valuation
allowance, deferred tax benefits associated with stock compensation deductions
of $19.5 million have been credited to shareholders' equity.
For fiscal year 2002, in connection with the sale of the Company's Specialty
Pharmaceutical Services business on June 13, 2002, the Company received
5,060,976 shares of common stock of Accredo Health, Incorporated, which were
subsequently distributed to the Company's shareholders.
See notes to consolidated financial statements.
F-8
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides
comprehensive home health services throughout most of the United States. Gentiva
was incorporated in the state of Delaware on August 6, 1999 and became an
independent publicly owned company on March 15, 2000, when the common stock of
the Company was issued to the stockholders of Olsten Corporation ("Olsten"), the
former parent corporation of the Company (the "Split-Off"). Continuing
operations for all periods presented comprise the operating results of the home
health services business, including, for fiscal 2002, restructuring and other
special charges as described in Note 4.
On June 13, 2002, the Company sold substantially all of the assets of its
specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo") and issued a special dividend to its shareholders as
further described in Note 3. The operating results of the SPS business through
the closing date of the sale to Accredo, including corporate expenses directly
attributable to SPS operations, restructuring and special charges related to the
SPS business, as well as the gain on the sale, net of transaction costs and
related income taxes, are reflected as discontinued operations in the
accompanying consolidated statement of operations for fiscal 2002.
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" as of the
beginning of fiscal 2002. In connection with this adoption, the Company recorded
a non-cash charge, net of taxes, as a cumulative effect of accounting change in
the accompanying consolidated statement of operations in fiscal 2002 as
described in Note 2.
NOTE 2. SUMMARY OF CRITICAL AND OTHER SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company's fiscal year ends on the Sunday
nearest to December 31st, which was January 2, 2005 for fiscal 2004, December
28, 2003 for fiscal 2003 and December 29, 2002 for fiscal 2002. The Company's
fiscal year 2004 includes 53 weeks compared to fiscal years 2003 and 2002 which
include 52 weeks.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The most critical estimates relate to revenue recognition, the
collectibility of accounts receivable and related reserves, the cost of claims
incurred but not reported, obligations under workers compensation, professional
liability and employee health and welfare insurance programs and Medicare
settlement issues.
A description of the critical and other significant accounting policies
and a discussion of the significant estimates and judgments associated with such
policies are described below.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Under fee-for-service agreements with patients and commercial and certain
government payers, net revenues are recorded based on net realizable amounts to
be received in the period in which the services and
F-9
products are provided or delivered. Fee-for-service contracts with commercial
payers are traditionally one year in term and renewable automatically on an
annual basis, unless terminated by either party.
Under capitated arrangements with certain managed care customers, net
revenues are recognized based on a predetermined monthly contractual rate for
each member of the managed care plan regardless of the volume of services
covered by the capitation arrangement. Net revenues generated under capitated
agreements were approximately 12 percent, 16 percent, and 16 percent of total
net revenues for fiscal 2004, 2003, 2002, respectively.
Under the Prospective Payment System ("PPS") for Medicare reimbursement,
net revenues are recorded based on a reimbursement rate which varies based on
the severity of the patient's condition, service needs and certain other
factors; revenue is recognized ratably over the period in which services are
provided. Revenue is subject to adjustment during this period if there are
significant changes in the patient's condition during the treatment period or if
the patient is discharged but readmitted to another agency within the same 60
day episodic period. Medicare billings under PPS are initially recognized as
deferred revenue and are subsequently amortized into revenue over an average
patient treatment period. The process for recognizing revenue to be recognized
under the Medicare program is based on certain assumptions and judgments,
including the average length of time of each treatment as compared to a standard
60 day episode, the appropriateness of the clinical assessment of each patient
at the time of certification and the level of adjustments to the fixed
reimbursement rate relating to patients who receive a limited number of visits,
have significant changes in condition or are subject to certain other factors
during the episode. Deferred revenue of approximately $5.5 million and $5.2
million relating to the Medicare PPS program was included in other accrued
expenses in the consolidated balance sheets as of January 2, 2005 and December
28, 2003, respectively.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payer and other reasons unrelated to credit
risk. Revenue adjustments are deducted from gross accounts receivable. These
revenue adjustments are based on significant assumptions and judgments which are
determined by Company management based on historical trends. Third party
settlements resulting in recoveries are recognized as net revenues in the period
in which the funds are received.
Net revenues attributable to major payer sources of reimbursement are as
follows:
2004 2003 2002
---- ---- ----
Medicare 27% 22% 21%
Medicaid and Local Government 18 20 22
Commercial Insurance and Other 55 58 57
--- --- ---
100% 100% 100%
=== === ===
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third party
providers to provide home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services to
patients insured by Cigna. For fiscal years 2004, 2003 and 2002, Cigna accounted
for approximately 31 percent, 36 percent and 38 percent, respectively, of the
Company's total net revenues. The Company extended its relationship with Cigna
by entering into a new national home health care contract effective January 1,
2004, as amended, with the new contract expiring on December 31, 2006. No other
commercial payer accounts for 10 percent or more of the Company's net revenues.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
The process for estimating the ultimate collection of receivables,
particularly with respect to fee-for-service arrangements, involves significant
assumptions and judgments. In this regard, the Company has implemented a
standardized approach to estimate and review the collectibility of its
receivables based on accounts receivable aging trends. Historical collection and
payer reimbursement experience is an integral part of the estimation process
related to determining the allowance for doubtful accounts. In addition, the
Company assesses the current state of its billing functions in order to identify
any known collection or reimbursement issues
F-10
to determine the impact, if any, on its reserve estimates, which involve
judgment. Revisions in reserve estimates are recorded as an adjustment to the
provision for doubtful accounts which is reflected in selling, general and
administrative expenses in the consolidated statements of operations. The
Company believes that its collection and reserve processes, along with the
monitoring of its billing processes, help to reduce the risk associated with
material revisions to reserve estimates resulting from adverse changes in
collection, reimbursement experience and billing functions.
COST OF CLAIMS INCURRED BUT NOT REPORTED
Under capitated arrangements with managed care customers, the Company
estimates the cost of claims incurred but not reported based on applying
actuarial assumptions, historical patterns of utilization to authorized levels
of service, current enrollment statistics and other information. Under
fee-for-service arrangements with certain managed care customers, the Company
also estimates the cost of claims incurred but not reported and the estimated
revenue relating thereto in situations in which the Company is responsible for
care management and patient services are performed by a non-affiliated provider.
The estimate of cost of claims incurred but not reported involves
significant assumptions and judgments which relate to and may vary depending on
the services authorized at each of the Company's regional coordination centers,
historical patterns of service utilization and payment trends. These assumptions
and judgments are evaluated on a quarterly basis and changes in estimated
liabilities for costs of claims incurred but not reported are determined based
on such evaluation.
OBLIGATIONS UNDER INSURANCE PROGRAMS
The Company is obligated for certain costs under various insurance
programs, including workers compensation, professional liability and employee
health and welfare.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk with insurance policies subject to
substantial deductibles and retention amounts. The Company recognizes its
obligations associated with these programs in the period the claim is incurred.
The cost of both reported claims and claims incurred but not reported, up to
specified deductible limits, have generally been estimated based on historical
data, industry statistics, the Company's own home health specific historical
claims experience, current enrollment statistics and other information. Such
estimates and the resulting reserves are reviewed and updated periodically.
For the fiscal year ended December 29, 2002, the Company recorded a
special charge of $6.3 million relating primarily to a refinement in the
estimation process used to determine the Company's actuarially computed workers
compensation and professional liability reserves. Management believes that, as a
result of this refinement, sufficient data exists to allow the Company to more
heavily rely on its own home health specific historical claims experience in
determining the Company's estimates of workers compensation and professional
liability reserves. Previously the Company utilized insurance industry actuarial
information, as well as the Company's historical claims experience in developing
reserve estimates.
The Company maintains insurance coverage on individual claims. The Company
is responsible for the cost of individual workers compensation claims and
individual professional liability claims up to $500,000 per incident which
occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The
Company also maintains excess liability coverage relating to professional
liability and casualty claims which provides insurance coverage for individual
claims of up to $25,000,000 in excess of the underlying coverage limits.
Payments under the Company's workers compensation program are guaranteed by
letters of credit and segregated restricted cash balances.
The Company believes that its present insurance coverage and reserves are
sufficient to cover currently estimated exposures, but there can be no assurance
that the Company will not incur liabilities in excess of recorded reserves or in
excess of its insurance limits.
F-11
MEDICARE SETTLEMENT ISSUES
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports which were
filed with the Centers for Medicare and Medicaid Services ("CMS") and were
subject to audit by the fiscal intermediary engaged by CMS. The fiscal
intermediary has not finalized its audit of the fiscal 2000 cost reports.
Furthermore, settled cost reports relating to certain years prior to fiscal 2000
could be subject to reopening of the audit process by the fiscal intermediary.
During fiscal 2004, the Company recorded a revenue adjustment of $1.0
million to reflect an estimated repayment to Medicare in connection with the
services rendered to certain patients since the inception of PPS on October 1,
2000. In connection with the estimated repayment, CMS has determined that home
care providers should have received lower reimbursements for certain services
rendered to beneficiaries discharged from inpatient hospitals within fourteen
days immediately preceding admission to home healthcare. As of January 2, 2005,
Medicare has not finalized the amounts to be repaid for these items. Although
management believes that established reserves, which are included in Medicare
liabilities in the accompanying balance sheets, are sufficient, it is possible
that adjustments resulting from such audits or the finalization of repayments to
Medicare could result in adjustments to the consolidated financial statements
that exceed established reserves.
OTHER SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents. Restricted cash
primarily represents segregated cash funds in a trust account designated as
collateral under the Company's insurance programs. The Company, at its option,
may access the cash funds in the trust account by providing equivalent amounts
of alternative security. Interest on all restricted funds accrues to the
Company. Included in cash and cash equivalents are amounts on deposit with
financial institutions in excess of $100,000, which is the maximum amount
insured by the Federal Deposit Insurance Corporation. Management believes that
these financial institutions are viable entities and believes any risk of loss
is remote.
SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of AAA-rated
auction rate securities and other debt securities with an original maturity of
more than three months and less than one year on the acquisition date in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Investments in debt securities are classified by individual
security into one of three separate categories: available-for-sale,
held-to-maturity or trading.
Available-for-sale investments are carried on the balance sheet at fair
value which for the Company approximates carrying value. Auction rate securities
of $71.1 million and $10.0 million at January 2, 2005 and December 28, 2003,
respectively, are classified as available-for-sale and are available to meet the
Company's current operational needs and accordingly are classified as short-term
investments. The interest rates on auction rate securities are reset to current
interest rates periodically, typically 7, 14 and 28 days. Contractual maturities
of the auction rate securities exceed ten years.
Debt securities which the Company has the intent and ability to hold to
maturity are classified as "held-to-maturity" investments and are reported at
amortized cost which approximates fair value. Held-to-maturity investments,
which have contractual maturities of less than one year, consist of government
agency bonds of $10 million at January 2, 2005 and December 28, 2003.
The Company has no investments classified as trading securities.
F-12
FIXED ASSETS
Fixed assets, including costs of Company developed software, are stated at
cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the life of the lease or the life of the improvement.
GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142")
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens
the criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles are not amortized into results of operations, but
instead are reviewed for impairment and an impairment charge is recorded in the
periods in which the recorded carrying value of goodwill and certain intangibles
is more than its estimated fair value. The Company adopted SFAS 142 as of the
beginning of fiscal 2002. The provisions of SFAS 142 require that a transitional
impairment test be performed as of the beginning of the year the statement is
adopted.
Based on the results of the transitional impairment tests, the Company
determined that an impairment loss relating to goodwill had occurred and
recorded a non-cash charge of $187.1 million, net of a deferred tax benefit of
$30.2 million, as cumulative effect of accounting change in the accompanying
consolidated statement of operations for the fiscal year ended December 29,
2002. The deferred tax benefit was recorded by eliminating a deferred tax
liability of $26.8 million and recording a deferred tax asset of approximately
$39 million, offset by an increase in the tax valuation allowance by the same
amount. During fiscal 2002, the Company also recorded a tax benefit of
approximately $3.4 million relating to tax deductible goodwill. See Note 12 to
the consolidated financial statements.
The provisions of SFAS 142 also require that a goodwill impairment test be
performed annually or on the occasion of other events that indicate a potential
impairment. The annual impairment test of goodwill was performed and indicated
that there was no impairment of goodwill for the fiscal years 2004 and 2003.
Goodwill amounting to $1.2 million was included in Other Assets in the
accompanying consolidated balance sheets as of January 2, 2005 and December 28,
2003.
ACCOUNTING FOR IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS
The Company evaluates the possible impairment of its long-lived assets,
including intangible assets which are amortized pursuant to the provisions of
SFAS 142, under SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). The Company reviews the recoverability of its
long-lived assets when events or changes in circumstances occur that indicate
that the carrying value of the asset may not be recoverable. Evaluation of
possible impairment is based on the Company's ability to recover the asset from
the expected future pretax cash flows (undiscounted and without interest
charges) of the related operations. If the expected undiscounted pretax cash
flows are less than the carrying amount of such asset, an impairment loss is
recognized for the difference between the estimated fair value and carrying
amount of the asset.
BOOK OVERDRAFTS
Book overdrafts, representing cash accounts with negative book balances
for which there exists no legal right of offset with other accounts, are
considered current liabilities. In this regard, book overdrafts of $8.6 million
at January 2, 2005 and $7.4 million at December 28, 2003 were included in
accounts payable in the accompanying consolidated balance sheets.
STOCK-BASED COMPENSATION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148")
encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. In addition, SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, and amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim
F-13
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company has chosen to adopt the disclosure-only provisions of SFAS 148
and continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Under this approach, the imputed cost of stock option grants
and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP")
is disclosed, based on the vesting provisions of the individual grants, but not
charged to expense. See Recent Accounting Pronouncements and Note 11.
EARNINGS PER SHARE
Basic and diluted earnings (loss) per share for each period presented has
been computed by dividing the net income (loss) by the weighted average number
of shares outstanding for each respective period. The computations of the basic
and diluted per share amounts for the Company's continuing operations were as
follows (in thousands, except per share amounts):
FOR THE FISCAL YEAR ENDED
--------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Income (loss) from continuing operations $ 26,488 $ 56,766 $ (53,543)
---------- ---------- ----------
Basic weighted average common
shares outstanding 24,724 26,262 26,183
Shares issuable upon the assumed exercise of
stock options and in connection with the ESPP
using the treasury stock method 1,641 1,177 --
---------- ---------- ----------
Diluted weighted average common
shares outstanding 26,365 27,439 26,183
---------- ---------- ----------
Income (loss) from continuing operations per common share:
Basic $ 1.07 $ 2.16 $ (2.05)
Diluted $ 1.00 $ 2.07 $ (2.05)
---------- ---------- ----------
For fiscal year 2002, in accordance with SFAS No. 128 "Earnings Per
Share," the number of common shares used in computing the diluted earnings
(loss) per share for continuing operations was used for discontinued operations,
cumulative effect of accounting change and net income (loss), even though the
impact was antidilutive.
The computation of diluted earnings (loss) per share from continuing
operations for fiscal year 2002 excluded an incremental 1,592,000 shares that
would be issuable upon the assumed exercise of stock options and in connection
with the ESPP using the treasury stock method, since their inclusion would be
antidilutive on earnings.
INCOME TAXES
The Company uses the asset and liability approach to account for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amounts
of assets and liabilities and their respective tax bases using tax rates in
effect for the year in which the differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced
by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
F-14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Significant differences can
arise between the fair value and carrying amount of financial instruments that
are recognized at historical amounts.
The carrying amounts of the Company's cash and cash equivalents,
restricted cash, short-term investments, accounts receivable, accounts payable
and certain other current liabilities approximate fair value because of their
short maturity.
DEBT ISSUANCE COSTS
The Company amortizes deferred debt issuance costs over the term of its
credit facility.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statements No. 13, and Technical Correction"
("SFAS 145"). SFAS 145 rescinded SFAS No. 4 "Reporting Gains and Losses from
Extinguishment of Debt" ("SFAS 4"), SFAS No. 44 "Accounting for Intangible
Assets of Motor Carriers" ("SFAS 44") and SFAS No. 64 "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements" ("SFAS 64") and amended SFAS No. 13
"Accounting for Leases" ("SFAS 13"). This statement updates, clarifies and
simplifies existing accounting pronouncements. As a result of rescinding SFAS 4
and SFAS 64, the criteria in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" will
be used to determine whether gains and losses from extinguishment of debt
receive extraordinary item treatment. The Company adopted SFAS 145, effective
April 1, 2002. During the fiscal year ended December 29, 2002, the impact of
this adoption resulted in the Company recognizing a write-off of approximately
$1.5 million of deferred debt issuance costs associated with the terminated
credit facility which is reflected in selling, general and administrative
expenses in the accompanying consolidated statement of operations and is further
discussed in Note 4.
RECLASSIFICATIONS
Auction rate securities of $10 million, which were previously classified
in cash and cash equivalents due to their liquidity and pricing reset feature,
have been reflected as short-term investments in the consolidated balance sheet
as of December 28, 2003. This reclassification had no impact on the Company's
financial condition, results of operations or cash flows. Certain other
reclassifications have been made to the 2003 and 2002 consolidated financial
statements to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"). This statement replaces SFAS 123, and supersedes APB
25. SFAS 123(R) requires companies to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and to
record compensation cost for all stock awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. In addition, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. SFAS 123(R) will be
effective for quarterly periods beginning after June 15, 2005, which for the
Company is the third quarter of fiscal 2005. Management estimates that the
adoption of SFAS 123(R) will reduce earnings between $0.06 and $0.08 per diluted
share in the second half of fiscal 2005.
In April 2004, the Emerging Issues Task Force ("EITF") of the FASB
approved EITF Issue 03-06, "Participating Securities and the Two-Class Method
under FAS 128." EITF Issue 03-06 supersedes the guidance in Topic No. D-95,
"Effect of Participating Convertible Securities on the Computation of Basic
Earnings per Share," and requires the use of the two-class method for
participating securities. The two-class method is an earnings allocation formula
that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and
participation rights in undistributed earnings. In addition, EITF Issue 03-06
addresses other forms of participating securities, including options, warrants,
F-15
forwards and other contracts to issue an entity's common stock, with the
exception of stock based compensation subject to the provisions of APB 25 and
SFAS 123. EITF Issue 03-06 is effective for reporting periods beginning after
March 31, 2004 and should be applied by restating previously reported earnings
per share. The adoption of EITF Issue 03-06 did not have a material impact on
the Company's consolidated financial statements.
NOTE 3. DISPOSITIONS
SALE OF CANADIAN INVESTMENT
On March 30, 2004, the Company sold its minority interest in a home care
nursing services business in Canada. The business had been acquired as partial
consideration for the sale of the Company's Canadian operations in the fourth
quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company
received cash proceeds of $4.1 million and recorded a gain on sale of
approximately $0.9 million, which is reflected in the consolidated statement of
operations for year ended January 2, 2005.
SALE OF SPECIALTY PHARMACEUTICAL SERVICES BUSINESS
On June 13, 2002, the Company consummated the sale of its SPS business to
Accredo (the "SPS Sale"). The SPS Sale was effected pursuant to an asset
purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002,
between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein.
Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired
the SPS business in consideration for:
- the payment to the Company of a cash amount equal to $207.5 million
(before a $0.9 million reduction resulting from a closing net book
value adjustment); and
- 5,060,976 shares of Accredo common stock.
Based on the closing price of the Accredo common stock on June 13, 2002
($51.89 per share), the value of the stock consideration was $262.6 million.
In connection with the SPS Sale, the Company's Board of Directors declared
a dividend, payable to shareholders of record on June 13, 2002, of all the
common stock consideration and substantially all the cash consideration received
from Accredo. The cash consideration received by the Company before the closing
net book value adjustment was $207.5 million; however, the amount distributed to
the Company's shareholders was reduced by $3.5 million to $204 million as a
holdback for income taxes the Company expected to incur on the proceeds received
in excess of $460 million as detailed in the Company's proxy statement, dated
May 10, 2002. The special dividend, which was delivered to the distribution
agent on June 13, 2002 for payment to the Company's shareholders, resulted in
shareholders of record on the record date receiving $7.76 in cash and 0.19253
shares of Accredo common stock (valued at $9.99 per share based on the June 13,
2002 closing price of $51.89 per share of Accredo common stock) for each share
of Gentiva common stock held. The total value of the special dividend amounted
to $17.75 per share. Cash was paid in lieu of fractional shares.
In connection with the SPS sale, the Company incurred $16.2 million in
transaction costs which related to investment banking fees, legal and accounting
costs, change in control and other employee related payments and miscellaneous
other costs. SPS revenues and operating results for the fiscal 2002 period
through the closing date of the sale were as follows (in thousands):
F-16
Net revenues $ 323,319
======================
Operating results of discontinued SPS business:
Income before income taxes $ 11,238
Income tax expense (1,313)
----------------------
Net income 9,925
----------------------
Gain on disposal of SPS business, including
transaction costs of $16.2 million for fiscal
year 2002 205,355
Income tax expense (23,702)
----------------------
Gain on disposal, net of tax 181,653
----------------------
Discontinued operations, net of tax $ 191,578
======================
NOTE 4. RESTRUCTURING AND OTHER SPECIAL CHARGES
During fiscal 2002, the Company recorded restructuring and other special
charges aggregating $46.1 million.
FISCAL 2002
BUSINESS REALIGNMENT ACTIVITIES
The Company recorded charges of $6.8 million during the second quarter
ended June 30, 2002 in connection with a restructuring plan. This plan included
the closing and consolidation of seven field locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's SPS business. These charges included
employee severance of $0.9 million relating to the termination of 115 employees
in field locations and certain corporate and administrative departments, and
future lease payments and other associated costs of $5.9 million resulting
principally from the consolidation of office space at the Company's corporate
headquarters and a change in estimated future lease obligations and other costs
in excess of sublease rentals relating to a lease for a subsidiary of the
Company's former parent company which the Company agreed to assume in connection
with its Split-Off in March 2000. These charges were reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002. The major components
of the restructuring charges as well as the activity during fiscal years 2002,
2003 and 2004 were as follows (in thousands):
COMPENSATION
AND SEVERANCE FACILITY LEASE
COSTS AND OTHER COSTS TOTAL
------------- --------------- ------------
FISCAL 2002 CHARGE $ 920 $ 5,893 $ 6,813
Cash expenditures (726) (1,348) (2,074)
---------- ------------ ------------
Balance at December 29, 2002 194 4,545 4,739
Cash expenditures (194) (2,239) (2,433)
---------- ------------ ------------
Balance at December 28, 2003 -- $ 2,306 $ 2,306
Cash expenditures -- (364) (364)
---------- ------------ ------------
Balance at January 2, 2005 -- $ 1,942 $ 1,942
========== ============ ============
The balance of unpaid charges, which will be paid over the remaining lease
terms, was included in other accrued expenses in the consolidated balance
sheets.
F-17
OPTION TENDER OFFER
During the second quarter ended June 30, 2002, the Company effected a cash
tender offer for all outstanding options to purchase its common stock for an
aggregate option purchase price not to exceed $25 million. In connection with
this tender offer, the Company recorded a charge of $21.4 million during the
second quarter of fiscal 2002, which is reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the fiscal year ended December 29, 2002.
SETTLEMENT COSTS
The Company recorded a $7.7 million charge in the second quarter of fiscal
2002 to reflect settlement costs relating to the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation lawsuit as well as estimated settlement
costs related to government inquiries regarding cost reporting procedures
concerning contracted nursing and home health aide costs (see Note 9). These
costs are reflected in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the fiscal year ended
December 29, 2002.
INSURANCE COSTS
The Company recorded a special charge of $6.3 million in the second
quarter of fiscal 2002 related primarily to a refinement in the estimation
process used to determine the Company's actuarially computed workers
compensation and professional liability insurance reserves. This special charge
is reflected in cost of services sold in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002.
ASSET WRITEDOWNS AND OTHER
The Company recorded charges of $3.8 million in the second quarter of
fiscal 2002, consisting primarily of a write-down of inventory and other assets
associated with home medical equipment used in the Company's nursing operations,
and a write-off of deferred debt issuance costs associated with the terminated
credit facility. The charges are reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the fiscal year ended December 29, 2002.
NOTE 5. FIXED ASSETS, NET
(in thousands) USEFUL LIVES JANUARY 2, 2005 DECEMBER 28, 2003
------------ --------------- -----------------
Computer equipment and software 3-5 Years $ 48,122 $ 43,786
Furniture and fixtures 5 Years 22,664 20,031
Buildings and improvements Lease Term 10,452 9,166
Machinery and equipment 5 Years 754 391
-------- --------
81,992 73,374
Less accumulated depreciation (62,305) (58,239)
-------- --------
$ 19,687 $ 15,135
======== ========
Depreciation expense relating to continuing operations was approximately
$7.3 million in fiscal 2004, $6.9 million in fiscal 2003 and $7.2 million in
fiscal 2002.
During the fourth quarter of fiscal 2004, the Company recorded a writedown
of approximately $1.4 million relating to purchased software for which it was
determined there was minimal future value.
NOTE 6. LONG-TERM DEBT
The Company's credit facility, as amended, as described below, provides up
to $55 million in borrowings, including up to $40 million which is available for
letters of credit. The Company may borrow up to a maximum of 80 percent of the
net amount of eligible accounts receivable, as defined, less any reasonable and
customary reserves, as defined, required by the lender.
F-18
At the Company's option, the interest rate on borrowings under the credit
facility is based on the London Interbank Offered Rates (LIBOR) plus 3.0 percent
or the lender's prime rate plus 1.0 percent. In addition, the Company is
required to pay a fee equal to 2.25 percent per annum of the aggregate face
amount of outstanding letters of credit. The Company is also subject to an
unused line fee equal to 0.375 percent per annum of the average daily difference
between the total revolving credit facility amount and the total outstanding
borrowings and letters of credit. If the Company's trailing twelve month
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding certain restructuring costs and special charges, falls below $20
million, the applicable margins for LIBOR and prime rate borrowings will
increase to 3.25 percent and 1.25 percent, respectively, and the letter of
credit and unused line fees will increase to 2.5 percent and 0.50 percent,
respectively. The higher margins and fees were in effect prior to June 1, 2003.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and May 26, 2004, the credit facility was amended to make covenants
relating to acquisitions and stock repurchases less restrictive, provided that
the Company maintains minimum excess aggregate liquidity, as defined in the
amendment, equal to at least $60 million, and to allow for the disposition of
certain assets.
The credit facility further provides that if the agreement is terminated
for any reason, the Company must pay an early termination fee equal to $137,500
if the facility is terminated from June 13, 2004 to June 12, 2005. There is no
fee for termination of the facility subsequent to June 12, 2005. Loans under the
credit facility are collateralized by all of the Company's tangible and
intangible personal property, other than equipment.
Total outstanding letters of credit were approximately $20.2 million at
January 2, 2005 and $20.8 million at December 28, 2003. The letters of credit,
which expire one year from date of issuance, were issued to guarantee payments
under the Company's workers compensation program and for certain other
commitments. There were no borrowings outstanding under the credit facility as
of January 2, 2005. The Company also had outstanding surety bonds of $1.0
million and $0.9 million at January 2, 2005 and December 28, 2003, respectively.
The restricted cash of $22.0 million at January 2, 2005, relates to cash
funds of $21.8 million that have been segregated in a trust account to provide
collateral under the Company's insurance programs. The Company, at its option,
may access the cash funds in the trust account by providing equivalent amounts
of alternative security, including letters of credit and surety bonds. In
addition, restricted cash includes $0.2 million on deposit to comply with New
York state regulations requiring that one month of revenues generated under
capitated agreements in the state be held in escrow. Interest on all restricted
funds accrues to the Company.
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
Net interest income for fiscal years 2004, 2003 and 2002 was approximately
$1.0 million, $0.4 million and $0.8 million, respectively. Net interest income
represented interest income of approximately $2.0 million for fiscal 2004, $1.5
million for fiscal 2003 and $2.4 million for fiscal 2002, partially offset by
fees relating to the revolving credit facility and outstanding letters of
credit.
NOTE 7. CUMULATIVE PREFERRED STOCK
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued
for proceeds of $100,000. Holders of the cumulative preferred stock were
entitled to receive cumulative cash dividends at an annual rate of LIBOR plus 2
percent on the stated liquidation preference of $1,000 per share, payable
quarterly in arrears out of assets legally available for payment of dividends.
The shares of preferred stock that were issued on March 10, 2000 were redeemed
on June 12, 2002 at a redemption price of $1,000 per share.
F-19
NOTE 8. SHAREHOLDERS' EQUITY
The Company's Board of Directors has authorized stock repurchase programs
under which the Company could repurchase and formally retire up to an aggregate
of 4,500,000 shares of its outstanding common stock. A summary of the shares
repurchased under each program follows:
DATE SHARES TOTAL AVERAGE
PROGRAM SHARES REPURCHASED COST COST PER PROGRAM
ANNOUNCED AUTHORIZED AS OF JANUARY 2, 2005 (IN 000'S) SHARE COMPLETION DATE
--------- ---------- --------------------- ---------- ----- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,083 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,500,000 $ 20,779 $ 13.85 July 8, 2004
May 26, 2004 1,000,000 1,000,000 $ 15,291 $ 15.29 October 13, 2004
August 10, 2004 1,000,000 491,604 $ 7,672 $ 15.61
--------- --------- -------- -------
4,500,000 3,991,604 $ 52,825 $ 13.23
========= ========= ======== =======
The repurchases occur periodically in the open market or through privately
negotiated transactions based on market conditions and other factors. During
fiscal 2003, the Company repurchased 1,438,464 shares of its outstanding common
stock at an average cost of $10.03 per share and a total cost of approximately
$14.4 million. During fiscal 2004, the Company repurchased 2,553,140 shares of
its outstanding common stock at an average cost of $15.04 per share and a total
cost of approximately $38.4 million. As of January 2, 2005, the Company had
remaining authorization to repurchase an aggregate of 508,396 shares of its
outstanding common stock. For the period from January 3, 2005 through March 4,
2005, the Company purchased 357,900 shares at an average cost of $15.98 per
share and a total cost of approximately $5.7 million.
NOTE 9. LEGAL MATTERS
LITIGATION
In addition to the matters referenced in this Note 9, the Company is party
to certain legal actions arising in the ordinary course of business including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
The following two legal matters were settled during fiscal years 2004 and
2002, respectively.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002. The Company denied the
allegations of wrongdoing in the complaint. On May 19, 2003, the Company filed a
motion for summary judgment on the issue of liability. On February 6, 2004, the
court granted partial summary judgment for the Company, dismissing two of the
three claims alleged under the False Claims Act and denying summary judgment for
the Company on the wrongful termination claim. In December 2004, the parties
reached a settlement, and the case was dismissed with prejudice on December 21,
2004.
Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case
No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
Ohio. In November 2000, the jury in this age-discrimination lawsuit returned a
verdict in favor of the plaintiff against Olsten consisting of $675,000 in
compensatory damages, $30 million in punitive damages and an undetermined amount
of attorneys' fees. The jury found that, although Olsten had lawfully terminated
the plaintiff's employment, its failure to transfer or rehire the plaintiff
rendered Olsten liable to the plaintiff. Following post-trial motion practice by
both parties, the
F-20
trial court, in May 2001, denied all post-trial motions, and entered judgment
for the plaintiff for the full amount of compensatory and punitive damages, and
awarded the plaintiff reduced attorney's fees of $247,938. In June 2001,
defendants timely filed a Notice of Appeal with the Court of Appeals, and the
Company posted a supersedeas bond for the full amount of the judgment, plus
interest. This matter has been settled, and settlement costs were recorded as
part of special charges during the second quarter of fiscal 2002 (see Note 4).
The supersedeas bond was released and the restricted cash of $35.2 million was
released to the Company in September 2002.
INDEMNIFICATIONS
In connection with the Split-Off, the Company agreed to assume, to the
extent permitted by law, and to indemnify Olsten for, the liabilities, if any,
arising out of the home health services business.
In addition, the Company and Accredo agreed to indemnify each other for
breaches of representations and warranties of such party or the non-fulfillment
of any covenant or agreement of such party in connection with the sale of the
Company's SPS business to Accredo on June 13, 2002. The Company also agreed to
indemnify Accredo for the retained liabilities and for tax liabilities, and
Accredo agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the transaction. The
representations and warranties generally survived for the period of two years
after the closing of the transaction, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive, including
the survival of representations and warranties related to healthcare compliance
for three years after the closing of the transaction and the survival of
representations and warranties related to tax matters until thirty days after
the expiration of the applicable statute of limitations period, including any
extensions of the applicable period, subject to certain exceptions. Accredo and
the Company generally may recover indemnification for a breach of a
representation or warranty only to the extent a party's claim exceeds $1 million
for any individual claim, or exceeds $5 million in the aggregate, subject to
certain conditions and only up to a maximum amount of $100 million.
GOVERNMENT MATTERS
PRRB APPEAL
As further described in the Critical Accounting Policies section in Note
2, the Company's annual cost reports, which were filed with CMS, were subject to
audit by the fiscal intermediary engaged by CMS. In connection with the audit of
the Company's 1997 cost reports, the Medicare fiscal intermediary made certain
audit adjustments related to the methodology used by the Company to allocate a
portion of its residual overhead costs. The Company filed cost reports for years
subsequent to 1997 using the fiscal intermediary's methodology. The Company
believed its methodology used to allocate such overhead costs was accurate and
consistent with past practice accepted by the fiscal intermediary; as such, the
Company filed appeals with the Provider Reimbursement Review Board ("PRRB")
concerning this issue with respect to cost reports for the years 1997, 1998 and
1999. The Company's consolidated financial statements for the years 1997, 1998
and 1999 had reflected use of the methodology mandated by the fiscal
intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed an
Administrative Resolution relating to the issues covered by the appeals pending
before the PRRB. Under the terms of the Administrative Resolution, the fiscal
intermediary agreed to reopen and adjust the Company's cost reports for the
years 1997, 1998 and 1999 using a modified version of the methodology used by
the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000, which are currently under audit. The
Administrative Resolution required that the process to (i) reopen all 1997 cost
reports, (ii) determine the adjustments to allowable costs through the issuance
of Notices of Program Reimbursement and (iii) make appropriate payments to the
Company, be completed in early 2004. Cost reports relating to years subsequent
to 1997 were to be reopened after the process for the 1997 cost reports was
completed.
In February 2004, the fiscal intermediary notified the Company that it had
completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was approximately $9 million. The
Company received the funds and recorded the adjustment of $9.0 million as net
revenues during fiscal 2004.
F-21
During the third quarter of fiscal 2004, the fiscal intermediary notified
the Company that it had completed the reopening of all 1998 cost reports and
determined that the adjustment to allowable costs for that year was $1.4
million. The Company received the funds and recorded the adjustment of $1.4
million as net revenues during fiscal 2004.
Although the Company believes that it will likely recover additional funds
as a result of applying the modified methodology discussed above to cost reports
subsequent to 1998, the settlement amounts cannot be specifically determined
until the reopening or audit of each year's cost reports is completed. The
Company expects the 1999 cost reports to be reopened and completed during 2005.
It is likely that future recoveries for the 1999 year resulting from the
application of the modified methodology required by the Administrative
Resolution will be significantly less than the 1997 settlement but greater than
the 1998 settlement. The timeframe for resolving all items relating to the 2000
cost reports cannot be determined at this time.
SUBPOENAS
On April 17, 2003, the Company received a subpoena from the Department of
Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG and DOJ pursuant to their subpoenas and similarly intends
to cooperate fully with any future OIG or DOJ information requests. To the
Company's knowledge, the government has not filed a complaint against the
Company.
In February 2000, the Company received a document subpoena from the OIG.
The subpoena related to its agencies' cost reporting procedures concerning
contracted nursing and home health aide costs. This matter has been settled and
settlement costs were recorded as part of special charges during the second
quarter of fiscal 2002. (See Note 4).
NOTE 10. COMMITMENTS
The Company rents certain properties under non-cancelable, long-term
operating leases, which expire at various dates. Certain of these leases require
additional payments for taxes, insurance and maintenance and, in many cases,
provide for renewal options. Rent expense under all leases was $16.8 million in
2004, $15.3 million in 2003 and $16.2 million in 2002.
Future minimum rental commitments and sublease rentals for all
non-cancelable leases having an initial or remaining term in excess of one year
at January 2, 2005, are as follows (in thousands):
FISCAL YEAR TOTAL COMMITMENT SUBLEASE RENTALS NET
- ----------- ---------------- ---------------- --------
2005 $ 17,022 $ 821 $ 16,201
2006 13,348 814 12,534
2007 8,486 733 7,753
2008 4,933 87 4,846
2009 3,406 -- 3,406
Thereafter 3,330 -- 3,330
NOTE 11. STOCK PLANS
In 2004, the shareholders of the Company approved the 2004 Equity
Incentive Plan (the "2004 Plan") as a replacement for the 1999 Stock Incentive
Plan (the "1999 Plan"). Under the 2004 Plan, 3.5 million shares of
F-22
common stock plus any remaining shares authorized under the 1999 Plan as to
which awards had not been made are available for grant. The maximum number of
shares of common stock for which grants may be made in any calendar year to any
2004 Plan participant is 500,000. The 2004 Plan permits granting of (i)
incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock, (v) stock units and (vi) cash. The
exercise price of options granted under the 2004 Plan can generally not be less
than the fair market value of the Company's common stock on the date of grant.
As of January 2, 2005, the Company had 3,949,407 shares available for issuance
under the 2004 Plan.
In 1999, the Company adopted the 1999 Plan under which 5 million shares of
common stock were reserved for issuance upon exercise of options thereunder. The
maximum number of shares of common stock for which grants could be made to any
1999 Plan participant in any calendar year was 300,000. These options could be
awarded in the form of incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs"). The option price of an ISO and NQSO could not be less than
100 percent and 85 percent, respectively, of the fair market value at the date
of grant. Effective March 15, 2004, no further options could be awarded under
the 1999 Plan.
In 1999, the Company adopted the Stock & Deferred Compensation Plan for
Non-Employee Directors, which provided for payment of annual retainer fees to
non-employee directors, up to 50 percent of which such directors might elect to
receive in cash and the remainder of which would be paid in the form of shares
of common stock of the Company and also allowed deferral of such payment of
shares until termination of a director's service. The plan was amended and
restated on January 1, 2004 and now provides for the deferral of annual retainer
fees under the plan only into stock units, which are to be paid to non-employee
directors as shares of the Company's common stock following termination of a
director's service. The total number of shares of common stock reserved for
issuance under this plan is 150,000, of which 63,076 shares were available for
future grants as of January 2, 2005. During fiscal 2004, 2003 and 2002, the
Company issued stock units or shares in the amounts of 18,365, 7,575 and
11,928, respectively, under the plan. As of January 2, 2005, 54,611 stock units
were outstanding under the plan.
In 1999, the Company adopted an employee stock purchase plan ("ESPP"). All
employees of the Company, who have been employed for at least eight months and
whose customary employment exceeds twenty hours per week, are eligible to
purchase stock under this plan. The Compensation, Corporate Governance and
Nominating Committee of the Company's Board of Directors administers the plan
and has the power to determine the terms and conditions of each offering of
common stock. The purchase price of the shares under the ESPP is the lesser of
85 percent of the fair market value of the Company's common stock on the first
business day or the last business day of the six month offering period.
Employees may purchase shares having a fair market value of up to $25,000 per
calendar year. The maximum number of shares of common stock that may be sold to
any employee in any offering, however, will generally be 10 percent of that
employee's compensation during the period of the offering. A total of 1,200,000
shares of common stock are reserved for issuance under the employee stock
purchase plan, of which 169,091 shares were available for future issuance as of
January 2, 2005. During fiscal 2004, 2003 and 2002, the Company issued 329,443
shares, 280,664 shares and 166,003 shares, respectively, under the ESPP.
Effective with the sale of the SPS business in June 2002, the Company
commenced a cash tender offer for all of the outstanding options to purchase its
common stock. The tender offer resulted in 1,253,141 options being tendered and
accepted by the Company with 463,829 options remaining outstanding. To preserve
the aggregate intrinsic value of the options, the outstanding options were
converted to new Gentiva options at the ratio of 1 to 3.369, resulting in
converted options of 1,562,646. The exercise price of a new Gentiva stock option
represented 29.7 percent of the corresponding option, pre-conversion.
A summary of Gentiva stock options for fiscal 2004, fiscal 2003 and fiscal
2002 is presented below:
F-23
2004 2003 2002
---------------------------- -------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Options outstanding, beginning of year 2,686,296 $ 6.14 2,549,667 $ 4.75 2,346,600 $ 8.61
Granted 1,035,100 12.93 740,900 8.85 1,152,700 7.54
Exercised (347,804) 4.30 (452,338) 2.12 (665,040) 7.73
Cancelled/forfeitures (159,007) 9.97 (151,933) 7.99 (594,098) 8.52
Tendered options -- -- -- -- (1,253,141) 8.54
Converted to new Gentiva options -- -- -- -- 1,562,646 2.63
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding, end of year 3,214,585 $ 8.33 2,686,296 $ 6.14 2,549,667 $ 4.75
========== ========== ========== ========== ========== ==========
Options exercisable, end of year 1,664,893 $ 6.07 1,345,570 $ 4.07 1,421,567 $ 2.53
========== ========== ========== ========== ========== ==========
The following table summarizes information about Gentiva stock options
outstanding at January 2, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
AT AVERAGE AVERAGE AT AVERAGE
JANUARY 2, EXERCISE REMAINING JANUARY 2, EXERCISE
RANGE OF EXERCISE PRICE 2005 PRICE CONTRACTUAL LIFE 2005 PRICE
- -------------------------- ---------- ------- ---------------- ---------- --------
$1.07 to $1.30 38,487 $ 1.28 3.61 38,487 $ 1.28
$1.65 to $1.74 264,801 1.70 5.19 264,801 1.70
$2.02 to $2.10 30,422 2.06 2.49 30,422 2.06
$3.55 to $3.91 419,778 3.89 5.82 419,778 3.89
$7.50 to $7.50 817,697 7.50 7.45 467,083 7.50
$8.13 to $8.60 59,500 8.46 7.66 42,000 8.44
$8.74 to $9.75 626,300 8.86 8.05 271,847 8.74
$12.70 to $12.87 921,600 12.87 9.00 130,475 12.87
$14.19 to $16.43 36,000 15.27 9.26 -- --
--------- ------- ---- --------- ------
$1.07 to $16.43 3,214,585 $ 8.33 7.55 1,664,893 $ 6.07
========= ======= ==== ========= ======
The Company has chosen to adopt the disclosure only provisions of SFAS 148
and continue to account for stock-based compensation using the intrinsic value
method prescribed in APB 25, and related interpretations. Under this approach,
the cost of restricted stock awards is expensed over their vesting period, while
the imputed cost of stock option grants and discounts offered under the
Company's ESPP is disclosed, based on the vesting provisions of the individual
grants, but not charged to expense.
The weighted average fair values of the Company's stock options granted
during fiscal years 2004, 2003 and 2002, calculated using the Black-Scholes
option pricing model, and other assumptions are as follows:
FISCAL YEAR ENDED
--------------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
Risk-free interest rate 3.36% 3.51% 4.15%
Expected volatility 37% 60% 38%
Expected life 6 years 6 years 5 years
Contractual life 10 years 10 years 10 years
Expected dividend yield 0% 0% 0%
Weighted average fair value
of options granted $ 5.47 $ 5.24 $ 3.02
Pro forma compensation expense is calculated for the fair value of the
employee's purchase rights under the ESPP, using the Black-Scholes model.
Assumptions for fiscal years 2004, 2003 and 2002 are as follows:
F-24
FISCAL YEAR ENDED
----------------------------------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
-------------------------- -------------------------- --------------------------
1ST OFFERING 2ND OFFERING 1ST OFFERING 2ND OFFERING 1ST OFFERING 2ND OFFERING
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
------------ ------------ ------------ ------------ ------------ ------------
Risk-free interest rate: 1.02% 1.76% 1.25% 0.97% 1.89% 1.77%
Expected volatility 28% 30% 32% 29% 60% 60%
Expected life 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years
Expected dividend yield 0% 0% 0% 0% 0% 0%
The following table presents net income (loss) and basic and diluted
earnings (loss) per common share, had the Company elected to recognize
compensation cost based on the fair value at the grant dates for stock option
awards and discounts granted for stock purchases under the Company's ESPP,
consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in
thousands, except per share amounts):
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Net income (loss) - as reported $ 26,488 $ 56,766 $ (49,033)
Add: Stock-based employee compensation
expense included in reported net
income, net of tax -- -- 13,160
Deduct: Total stock-based compensation
expense determined under fair
value based method for all
awards, net of tax (2,442) (1,575) (5,022)
--------------- ---------------- ---------------
Net income (loss) - pro forma $ 24,046 $ 55,191 $ (40,895)
=============== ================ ===============
Basic income (loss) per share - as reported $ 1.07 $ 2.16 $ (1.87)
Basic income (loss) per share - pro forma $ 0.97 $ 2.10 $ (1.56)
Diluted income (loss) per share - as reported $ 1.00 $ 2.07 $ (1.87)
Diluted income (loss) per share - pro forma $ 0.91 $ 2.01 $ (1.56)
On January 3, 2005, the Company issued 922,300 stock options at an
exercise price of $16.38 per share.
NOTE 12. INCOME TAXES
Comparative analyses of the provision (benefit) for income taxes follows
(in thousands):
FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
---------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Current
Federal $ 3,534 $ -- $ 5,600
State and local 1,048 1,567 --
---------------- ---------------- ----------------
4,582 1,567 5,600
---------------- ---------------- ----------------
Deferred
Federal 10,472 (31,875) 10,114
State and local (1,361) (3,160) 2,723
---------------- ---------------- ----------------
9,111 (35,035) 12,837
---------------- ---------------- ----------------
Provision for income taxes $ 13,693 $ (33,468) $ 18,437
================ ================ ================
A reconciliation of the differences between income taxes computed at
federal statutory rate and provisions (benefits) for income taxes for each year
are as follows (in thousands):
F-25
FISCAL YEAR ENDED
-------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Income tax expense (benefit) computed at Federal statutory tax rate $ 14,063 $ 8,162 $(12,287)
State income taxes, net of Federal benefit (5,034) 1,019 (1,770)
Nondeductible meals and entertainment 237 167 155
Income tax audit adjustments -- (177) 5,439
Deferred rate differential -- 1,142 --
Decrease in Federal valuation allowance -- (44,438) --
Valuation allowance adjustment for adoption of SFAS 142 -- -- 26,859
Increase in State valuation allowance 4,455 -- --
Other (28) 657 41
-------- -------- --------
$ 13,693 $(33,468) $ 18,437
======== ======== ========
Deferred tax assets and deferred tax liabilities are as follows (in
thousands):
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- -----------------
Deferred tax assets
Current:
Reserves and allowances $ 19,348 $ 21,290
Federal net operating loss and other carryforwards 793 4,522
State net operating loss 7,027 444
Other 1,148 208
Less: valuation allowance (4,455) --
-------- --------
Total current deferred tax assets 23,861 26,464
Noncurrent:
Intangible assets 25,772 29,085
-------- --------
Total deferred tax assets 49,633 55,549
-------- --------
Deferred tax liabilities:
Current:
Prepaid expenses (599) --
Noncurrent:
Fixed assets (2,707) 23
Developed software (1,233) (1,083)
-------- --------
Total non-current deferred tax liabilities (3,940) (1,060)
-------- --------
Total deferred tax liabilities (4,539) (1,060)
-------- --------
Net deferred tax assets $ 45,094 $ 54,489
======== ========
Prior to fiscal year 2004, the state tax history of certain subsidiaries
indicated cumulative losses and a lack of state tax audit experience. As a
result, the Company believed there was a remote likelihood that the value of
related state tax loss carryforwards would be realized, and no deferred tax
assets were recorded. During fiscal 2004, these subsidiaries reflected
cumulative income on a state filing basis and certain state tax audits were
settled. The Company performed a review of state net operating loss
carryforwards and recorded a deferred tax asset of $7.0 million in the fourth
quarter of fiscal 2004. A valuation allowance of $4.5 million has been recorded
to recognize that certain state net operating loss carryforwards may expire
before realization.
The Company had maintained a valuation allowance for its deferred tax
assets as of December 29, 2002, since the absence of historical pre-tax income
created uncertainty about the Company's ability to realize tax benefits in
future years. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. The remaining valuation allowance was
reversed at the end of fiscal 2003 based on management's belief that it was more
likely than not that all of the Company's net deferred tax assets would be
realized due to the Company's achieved earnings trends
F-26
and outlook. In this regard, $44.4 million was recorded as an income tax benefit
in fiscal 2003 and $19.5 million was credited directly to shareholders' equity
to reflect the portion of the valuation allowance associated with stock
compensation tax benefits.
At January 2, 2005, the Company had federal tax credit carryforwards of
$0.8 million and state net operating loss carryforwards of $7.0 million.
Income tax payments, including payments associated with discontinued
operations, were $3.8 million, $1.6 million and $7.6 million for fiscal years
2004, 2003 and 2002, respectively.
NOTE 13. BENEFIT PLANS FOR PERMANENT EMPLOYEES
The Company maintains qualified and non-qualified defined contribution
retirement plans for its salaried employees, which provide for a partial match
of employee savings under the plans and for discretionary profit-sharing
contributions based on employee compensation. With respect to the Company's
non-qualified defined contribution retirement plan for salaried employees, all
pre-tax contributions, matching contributions and profit sharing contributions
(and the earnings therein) are held in a Rabbi Trust and are subject to the
claims of the general, unsecured creditors of the Company. All post-tax
contributions are held in a secular trust and are not subject to the claims of
the creditors of the Company. The fair value of the assets held in the Rabbi
Trust and the liability to plan participants as January 2, 2005 and December 28,
2003 totaling approximately $12.9 million and $10.0 million, respectively, are
included in other assets and other liabilities on the accompanying consolidated
balance sheets.
Company contributions under the defined contribution plans were
approximately $2.5 million in 2004, $1.8 million in 2003 and $2.0 million in
2002.
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share amounts)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED JANUARY 2, 2005
Net revenues $213,905(1) $208,248 $198,070(3) $225,541(4)
Gross profit 83,262(1) 78,338 75,531(3) 86,798(4)
Net income 9,230(1) 5,965(2) 4,399(3) 6,894(4)
Earnings Per Share:
Net income - basic 0.36 0.24 0.18 0.29
Net income - diluted 0.34 0.22 0.17 0.27
Weighted average shares outstanding:
Basic 25,542 25,068 24,422 23,865
Diluted 27,084 26,818 26,034 25,487
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED DECEMBER 28, 2003
Net revenues $202,016 $208,446 $199,698 $203,869
Gross profit 68,766 69,624 69,241 74,411
Net income 5,201 5,247 4,547 41,771(5)
Earnings Per Share:
Net income - basic 0.19 0.20 0.18 1.62
Net income - diluted 0.19 0.19 0.17 1.53
Weighted average shares outstanding:
Basic 26,696 26,530 25,972 25,852
Diluted 27,772 27,490 27,098 27,225
(1) Net revenues and gross profit for the first quarter of fiscal 2004
include special items of $8.0 million related to the favorable
settlement of the Company's Medicare cost report appeals for 1997
net of a $1 million revenue adjustment to reflect an industry wide
repayment of certain Medicare reimbursements. See Note 9 to the
Company's consolidated financial statements.
F-27
(2) Net income for the second quarter of fiscal 2004 includes $0.9
million relating to a pre-tax gain on the sale of a Canadian
investment. See Note 3 to the Company's consolidated financial
statements.
(3) Net revenues and gross profit for the third quarter of fiscal 2004
include special items of $1.1 million related to the partial
settlement of the Company's Medicare cost report appeals for 1998.
During the third quarter of fiscal 2004, the Company's effective tax
rate was 35.3% due to recognition of certain state net operating
losses. See Notes 9 and 12 to the Company's consolidated financial
statements.
(4) Net revenues and gross profit for the fourth quarter of fiscal 2004
include special items of $0.3 million related to the remaining
settlement of the Company's Medicare cost report appeals for 1998.
During the fourth quarter of fiscal 2004, the Company's effective
tax rate was 18.7% due to recognition of certain state net operating
losses. See Notes 9 and 12 to the Company's consolidated financial
statements.
(5) During the fourth quarter of fiscal 2003, the Company recorded a tax
benefit of $35.0 million associated with management's decision to
reverse the valuation allowance for deferred tax assets. See Note 12
to the Company's consolidated financial statements.
F-28
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JANUARY 2, 2005
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- -------- ---------- ---------
Allowance for Doubtful Accounts:
For the Year Ended January 2, 2005 $ 7,936 $ 6,722 $ (7,618) $ 7,040
For the Year Ended December 28, 2003 9,032 7,684 (8,780) 7,936
For the Year Ended December 29, 2002 10,831 4,936 (6,735) 9,032
Valuation allowance on deferred tax assets:
For the Year Ended January 2, 2005 $ 0 $ 4,455 $ (0) $ 4,455
For the Year Ended December 28, 2003 63,892 0 (63,892) 0
For the Year Ended December 29, 2002 0 63,892 (0) 63,892
F-29