UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File 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
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes _X_ No __
The number of shares outstanding of the registrant's Common Stock, as of
August 3, 2005, was 23,284,625.
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - July 3, 2005 and January 2, 2005 3
Consolidated Statements of Income (Unaudited) - Six Months Ended July 3,
2005 and June 27, 2004 4
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended July
3, 2005 and June 27, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6-18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19-32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
Item 4. Controls and Procedures 32-33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33-34
Item 5. Other Information 34-35
Item 6. Exhibits 35
SIGNATURES 36
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
July 3, January 2,
2005 2005
--------- ---------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 36,645 $ 31,924
Short-term investments 46,750 81,100
Receivables, less allowance for doubtful accounts of $8,271
and $7,040 at July 3, 2005 and January 2, 2005, respectively 142,424 132,002
Deferred tax assets 23,134 23,861
Prepaid expenses and other current assets 7,882 6,057
--------- ---------
Total current assets 256,835 274,944
Fixed assets, net 19,951 19,687
Deferred tax assets, net 18,723 21,233
Goodwill 10,613 1,325
Other assets 18,518 14,909
--------- ---------
Total assets $ 324,640 $ 332,098
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,462 $ 25,896
Payroll and related taxes 10,413 9,356
Medicare liabilities 8,545 9,949
Cost of claims incurred but not reported 25,881 27,361
Obligations under insurance programs 32,506 34,660
Other accrued expenses 26,707 31,117
--------- ---------
Total current liabilities 129,514 138,339
Other liabilities 18,945 21,819
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 23,263,724 and 23,722,408
shares at July 3, 2005 and January 2, 2005, respectively 2,326 2,372
Additional paid-in capital 230,441 238,929
Accumulated deficit (56,586) (69,361)
--------- ---------
Total shareholders' equity 176,181 171,940
--------- ---------
Total liabilities and shareholders' equity $ 324,640 $ 332,098
========= =========
See notes to consolidated financial statements.
3
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
---------------------- ----------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
--------- --------- --------- ---------
Net revenues $ 220,135 $ 208,248 $ 427,242 $ 422,153
Cost of services sold 138,628 129,910 265,857 260,553
--------- --------- --------- ---------
Gross profit 81,507 78,338 161,385 161,600
Selling, general and administrative expenses (72,658) (67,809) (144,417) (134,178)
Depreciation and amortization (1,911) (1,904) (3,647) (3,749)
--------- --------- --------- ---------
Operating income 6,938 8,625 13,321 23,673
Gain on sale of Canadian investment -- 946 -- 946
Interest income, net 414 208 877 290
--------- --------- --------- ---------
Income before income taxes 7,352 9,779 14,198 24,909
Income tax benefit (expense) 1,298 (3,814) (1,423) (9,714)
--------- --------- --------- ---------
Net income $ 8,650 $ 5,965 $ 12,775 $ 15,195
========= ========= ========= =========
Net income per common share:
Basic $ 0.37 $ 0.24 $ 0.55 $ 0.60
========= ========= ========= =========
Diluted $ 0.35 $ 0.22 $ 0.51 $ 0.56
========= ========= ========= =========
Weighted average shares outstanding:
Basic 23,271 25,068 23,358 25,305
========= ========= ========= =========
Diluted 24,935 26,818 24,981 26,967
========= ========= ========= =========
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
------------------------------
July 3, June 27,
2005 2004
--------- ---------
OPERATING ACTIVITIES:
Net income $ 12,775 $ 15,195
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,647 3,749
Provision for doubtful accounts 3,154 3,414
Gain on sale of Canadian investment -- (946)
Reversal of tax audit reserves (4,200) --
Deferred income tax expense 3,237 7,433
Changes in assets and liabilities:
Accounts receivable (13,576) (4,194)
Prepaid expenses and other current assets (1,677) (1,616)
Current liabilities (13,564) (7,479)
Other, net 33 169
--------- ---------
Net cash (used in) provided by operating activities (10,171) 15,725
--------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets (3,294) (5,493)
Proceeds from sale of assets -- 4,123
Acquisition of business (12,040) --
Purchase of short-term investments available-for-sale (106,900) (25,000)
Maturities of short-term investments available-for-sale 131,250 5,000
Purchase of short-term investments held to maturity -- (10,000)
Maturities of short-term investments held to maturity 10,000 10,000
--------- ---------
Net cash provided by (used in) investing activities 19,016 (21,370)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,791 1,579
Changes in book overdrafts 4,586 (2,557)
Repurchases of common stock (12,325) (14,702)
Repayment of capital lease obligations (176) (162)
--------- ---------
Net cash used in financing activities (4,124) (15,842)
--------- ---------
Net change in cash, cash equivalents and restricted cash 4,721 (21,487)
Cash, cash equivalents and restricted cash at beginning of period 31,924 97,438
--------- ---------
Cash, cash equivalents and restricted cash at end of period $ 36,645 $ 75,951
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds $ 491 $ 3,534
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES:
Fixed assets acquired under capital lease $ 151 $ 1,443
========= =========
See notes to consolidated financial statements.
5
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Gentiva(R) Health Services, Inc. ("Gentiva" or the "Company") provides
comprehensive home health services throughout most of the United States through
its Home Healthcare Services and CareCentrix(R) operating segments. See Note 12
for a description of the business segments.
The accompanying interim consolidated financial statements are unaudited,
and have been prepared by Gentiva using accounting principles consistent with
those described in the Company's annual report on Form 10-K and pursuant to the
rules and regulations of the Securities and Exchange Commission and, in the
opinion of management, include all adjustments necessary for a fair presentation
of results of operations, financial position and cash flows for each period
presented. Results for interim periods are not necessarily indicative of results
for a full year. The year-end balance sheet data was derived from audited
financial statements. The interim financial statements do not include all
disclosures required by accounting principles generally accepted in the United
States of America.
2. 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
of $22.0 million at July 3, 2005 and January 2, 2005 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
Statement of Financial Accounting Standards ("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 $46.8 million and $71.1
6
million at July 3, 2005 and January 2, 2005, respectively, are classified as
available-for-sale and are expected to be 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, consisted of government
agency bonds of $10 million at January 2, 2005.
The Company has no investments classified as trading securities.
3. New Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"). This statement
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123")
and supersedes Accounting Principles Board ("APB") Opinion No. 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 annual
periods beginning on or after June 15, 2005, which for the Company is the first
quarter of fiscal 2006. The impact of the adoption of SFAS 123(R) on fiscal 2006
results cannot be determined at this time.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and
supersedes FASB Statement No. 3, "Reporting Accounting Changes in Interim
Financial Statements-an amendment of APB Opinion No. 28" ("SFAS 154"). SFAS 154
provides guidance on accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the earliest
practicable date, as the required method for reporting a change in accounting
principle and the reporting of a correction of an error. SFAS 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005, which for the Company is fiscal 2006. The Company does
not expect the adoption of SFAS 154 to have a material impact on its
consolidated financial statements.
4. Medicare Revenues
Medicare revenues for the first six months of fiscal 2004 included
approximately $9 million received in settlement of the Company's appeal filed
with the Provider Reimbursement Review Board ("PRRB") related to the reopening
of all of its 1997 cost reports (see Note 10), net of a revenue adjustment of $1
million to reflect an estimated repayment to Medicare in connection with
services rendered to certain patients since the inception of the Prospective
7
Payment Reimbursement System ("PPS") in October 2000. The Centers for Medicare &
Medicaid Services ("CMS") has determined that homecare 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.
5. Acquisitions / Dispositions
Heritage Home Care Services Acquisition
On May 1, 2005, the Company completed the purchase of certain assets and
the operations of Heritage Home Care Services, Inc. ("Heritage"), a Utah-based
provider of home healthcare services, and assumed certain liabilities related to
contracts and office leases with respect to the period after the closing date,
pursuant to an asset purchase agreement, for cash consideration of $11.5
million, exclusive of working capital requirements. In connection with the
acquisition, the Company also incurred transaction costs of $0.5 million.
Acquisition costs have been recorded as goodwill ($9.6 million) and identifiable
intangible assets ($2.4 million) which are included in Other Assets in the
consolidated balance sheet as of July 3, 2005. The allocation of the purchase
price is subject to adjustment as the Company is undertaking a valuation
analysis of the intangible assets acquired.
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 in the second quarter of fiscal 2004.
6. Earnings Per Share
Basic and diluted earnings per share for each period presented has been
computed by dividing net income by the weighted average number of shares
outstanding for each respective period. The computations of the basic and
diluted per share amounts were as follows (in thousands, except per share
amounts):
Three Months Ended Six Months Ended
------------------------ ------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- ------- -------
Net income $ 8,650 $ 5,965 $12,775 $15,195
==================================================================================================================================
Basic weighted average common
shares outstanding 23,271 25,068 23,358 25,305
Shares issuable upon the assumed exercise of
stock options and in connection with the
employee stock purchase plan using the
treasury stock method 1,664 1,750 1,623 1,662
------- ------- ------- -------
Diluted weighted average common
shares outstanding 24,935 26,818 24,981 26,967
------- ------- ------- -------
==================================================================================================================================
Net income per common share:
Basic $ 0.37 $ 0.24 $ 0.55 $ 0.60
Diluted $ 0.35 $ 0.22 $ 0.51 $ 0.56
==================================================================================================================================
8
7. Revolving Credit Facility, Restricted Cash and 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.
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 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, May 26, 2004 and April 4, 2005, the credit facility was amended to make
covenants relating to acquisitions, stock repurchases and cash dividends less
restrictive, provided that the Company maintains minimum aggregate excess
liquidity, as defined, equal to at least $60 million, and to allow for the
disposition of certain assets. As of July 3, 2005, the Company was in compliance
with the covenants in the credit facility, as amended.
The credit facility provides that subsequent to June 12, 2005, the Company
could terminate the credit facility without incurring an early termination fee.
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
July 3, 2005 and January 2, 2005. 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 July 3, 2005. The Company
also had outstanding surety bonds of $1.3 million and $1.0 million at July 3,
2005 and January 2, 2005, respectively.
The restricted cash of $22.0 million at July 3, 2005 and January 2, 2005 related
primarily to cash funds of $21.8 million that have been segregated in a trust
account to provide collateral under the Company's
9
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 included $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.
8. Shareholders' Equity
Changes in shareholders' equity for the six months ended July 3, 2005 were
as follows (in thousands except share amounts):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
--------- --------- --------- ---------
Balance at January 2, 2005 $ 2,372 $ 238,929 $ (69,361) $ 171,940
Comprehensive income:
Net income -- -- 12,775 12,775
Income tax benefits associated with
stock-based compensation -- 776 -- 776
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (297,616 shares) 29 2,986 -- 3,015
Repurchase of common stock at cost (756,300 shares) (75) (12,250) -- (12,325)
--------- --------- --------- ---------
Balance at July 3, 2005 $ 2,326 $ 230,441 $ (56,586) $ 176,181
========= ========= ========= =========
Comprehensive income amounted to $8.7 million and $6.0 million for the
second quarter of fiscal 2005 and fiscal 2004, respectively, and $12.8 million
and $15.2 million for the first six months of fiscal 2005 and fiscal 2004,
respectively.
From May 2003 through July 3, 2005, the Company announced five stock
repurchase programs, authorized by the Company's Board of Directors, under which
the Company could repurchase and retire up to an aggregate of 6,000,000 shares
of its outstanding common stock. The repurchases occur periodically in the open
market or through privately negotiated transactions based on market conditions
and other factors. A summary of the status of each share repurchase program
through July 3, 2005 follows:
10
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of July 3, 2005 Total Cost Share Completion Date
--------- ---------- ------------------ ---------- ----- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,082,353 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,500,000 20,779,291 13.85 July 8, 2004
May 26, 2004 1,000,000 1,000,000 15,290,952 15.29 October 13, 2004
August 10, 2004 1,000,000 1,000,000 15,890,390 15.89 April 27, 2005
April 14, 2005 1,500,000 247,904 4,106,995 16.57
-----------------------------------------------------------------
6,000,000 4,747,904 65,149,981 $ 13.72
=================================================================
A summary of the Company's share repurchase activity follows:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Total Numbers of Shares Purchased 283,800 586,600 756,300 1,014,847
Total Cost $ 4,742,603 $ 8,871,923 $ 12,325,027 $ 14,701,966
Average Cost Per Share $ 16.71 $ 15.12 $ 16.30 $ 14.49
As of July 3, 2005, the Company had remaining authorization to repurchase
an aggregate of 1,252,096 shares of its outstanding common stock.
9. Stock-Based Compensation Plans
The Company has chosen to adopt the disclosure only provisions of 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"), and continues to account for stock-based compensation using the intrinsic
value method prescribed in 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 Note 3 "New
Accounting Standards."
Stock option grants in fiscal 2004 and prior years fully vest over periods
ranging from three to six years. Stock option grants in fiscal 2005 fully vest
over a four year period based on a vesting schedule which provides for one-third
vesting after years one, three and four.
The weighted average fair values of the Company's stock options granted
during the first six months of fiscal 2005 and fiscal 2004, calculated using the
Black-Scholes option-pricing model, and other assumptions are as follows:
11
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Weighted average fair value
of options granted $ 6.12 $ 5.47
Risk-free interest rate 3.73% 3.36%
Expected volatility 35% 37%
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
For stock options granted during the fiscal 2004 period, the expected life
is estimated to be two years following the date all options comprising the grant
become fully vested and forfeitures are reflected in the calculation as they
occur. For stock options granted during the fiscal 2005 period, the expected
life of an option is estimated to be 2.5 years following its vesting date and
forfeitures are reflected in the calculation using an estimate based on
experience.
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 the first six months of fiscal 2005 and fiscal 2004 are as
follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Risk-free interest rate 2.63% 1.02%
Expected volatility 27% 28%
Expected life 0.5 years 0.5 years
Expected dividend yield 0% 0%
The following table presents net income and basic and diluted income 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 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):
Three Months Ended Six Months Ended
------------------------ -------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- -------- --------
Net income - as reported $ 8,650 $ 5,965 $ 12,775 $ 15,195
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of tax (1,024) (717) (2,064) (1,412)
------- ------- -------- --------
Net income - pro forma $ 7,626 $ 5,248 $ 10,711 $ 13,783
======= ======= ======== ========
Basic income per share - as reported $ 0.37 $ 0.24 $ 0.55 $ 0.60
Basic income per share - pro forma $ 0.33 $ 0.21 $ 0.46 $ 0.54
Diluted income per share - as reported $ 0.35 $ 0.22 $ 0.51 $ 0.56
Diluted income per share - pro forma $ 0.31 $ 0.20 $ 0.43 $ 0.51
During the first six months of fiscal 2005, the Company granted 939,500
stock options to officers and employees under its existing option plans at an
average exercise price of $16.37. At July 3, 2005, there were 3,915,397 options
outstanding at a weighted average exercise price of $10.23 per share. During the
first six months of fiscal 2005, the Company issued 103,321 shares of common
stock under its ESPP.
12
10. Legal Matters
Litigation
In addition to the matters referenced in this Note 10, 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.
Indemnifications
Gentiva 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, a Delaware corporation ("Olsten"), the former parent corporation of
the Company (the "Split-Off"). 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 Health, Incorporated ("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 Specialty Pharmaceutical Services
("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. The
representations and warranties related to healthcare compliance survived for the
period of three years after the closing of the transaction, which period expired
on June 13, 2005. Certain representations and warranties, however, continue to
survive, including 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
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 the methodology it 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 PRRB concerning
this issue with respect to cost reports for the years 1997, 1998 and 1999. The
Company's consolidated financial statements for the
13
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 the first quarter of fiscal 2004.
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 the
second half of 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.
Subpoena
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
14
requests. To the Company's knowledge, the government has not filed a complaint
against the Company.
11. Income Taxes
The Company recorded federal and state income tax benefits of $1.3 million
for the second quarter of fiscal 2005, of which $3.3 million represented a
current tax benefit and $2.0 million represented a deferred tax provision. For
the six months ended July 3, 2005, the Company recorded a federal and state tax
provision of $1.4 million representing a current tax benefit of $1.8 million and
a deferred tax provision of $3.2 million. The income tax benefit recorded in the
second quarter of fiscal 2005 included a $4.2 million release of tax reserves
related to the favorable resolution of tax audit issues for the years 1997
through 2000. The Company had agreed to assume responsibility for these items in
connection with its Split-Off from Olsten in March 2000. The difference between
the federal statutory income tax rate and the Company's effective rate of 10
percent for the first six months is primarily due to the release of tax
reserves and state taxes.
Federal and state income taxes of $3.8 million and $9.7 million were
recorded for the second quarter and first six months of fiscal 2004,
respectively. The difference between the federal statutory income tax rate and
the Company's effective tax rate of 39 percent was due primarily to state taxes.
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
July 3, January 2,
2005 2005
-------- --------
Deferred tax assets
Current:
Reserves and allowances $ 18,503 $ 19,348
Federal net operating loss and other carryforwards 523 793
State net operating loss 7,027 7,027
Other 1,536 1,148
Less: valuation allowance (4,455) (4,455)
-------- --------
Total current deferred tax assets 23,134 23,861
Noncurrent:
Intangible assets 23,711 25,772
-------- --------
Total assets 46,845 49,633
Deferred tax liabilities:
Noncurrent:
Fixed assets (2,730) (2,707)
Developed software (1,561) (1,233)
Other (696) (599)
-------- --------
Total non-current deferred tax liabilities (4,987) (4,539)
-------- --------
Net deferred tax assets $ 41,858 $ 45,094
======== ========
At July 3, 2005, the Company had federal tax credit carryforwards of $0.5
million and state net operating loss carryforward benefits of $7.0 million.
15
12. Business Segment Information
Commencing in fiscal 2005, the Company identified two business segments for
reporting purposes. The Company believes that this presentation aligns the
Company's financial reporting with the manner in which the Company has recently
commenced to manage its business operations with a focus on the strategic
allocation of resources and separate branding strategies between the business
segments. The Company's operations involve servicing patients and customers
through its two business segments: Home Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home nursing
and therapy services operations, including specialty programs, Gentiva Rehab
Without Walls(R) and Gentiva Consulting.
Direct home nursing and therapy services operations are conducted through
licensed and Medicare-certified agencies from which the Company provides various
combinations of skilled nursing and therapy services, paraprofessional nursing
services and homemaker services to pediatric, adult and elder patients. The
Company's direct home nursing and therapy services operations also deliver
services to its customers through focused specialty programs that include:
o Gentiva Orthopedics Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from joint
replacement or other major orthopedic surgery;
o Gentiva Safe Strides(SM) Program, which provides therapies for
patients with balance issues who are prone to injury or immobility as
a result of falling; and
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based environment.
Gentiva Rehab Without Walls provides home and community-based
neurorehabilitation therapies for patients with traumatic brain injury,
cerebrovascular accident injury and acquired brain injury, as well as a number
of other complex rehabilitation cases.
The Company also provides consulting services to home health agencies
through its Gentiva Consulting unit. These services include billing and
collection activities, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
The CareCentrix segment encompasses Gentiva's ancillary care benefit
management and the coordination of integrated homecare services for managed care
organizations and health benefit plans. CareCentrix operations provide an array
of administrative services and coordinate the delivery of home nursing services,
acute and chronic infusion therapies, durable medical equipment, and respiratory
products and services for managed care organizations and health plans.
CareCentrix accepts case referrals from a wide variety of sources, verifies
eligibility and benefits and transfers case requirements to the providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data
16
reporting and analysis, and coordinated centralized billing for all authorized
services provided to the customer's enrollees.
Corporate expenses consist of costs relating to executive management and
corporate and administrative support functions that are not directly
attributable to a specific segment. Corporate and administrative support
functions represent primarily information services, accounting and reporting,
tax compliance, risk management, procurement, marketing, legal and human
resource benefits and administration. For the six months ended July 3, 2005,
corporate expenses also included a credit of approximately $0.8 million relating
to a favorable arbitration settlement.
The Company's senior management evaluates performance and allocates
resources based on operating contributions of the reportable segments, which
exclude corporate expenses, depreciation, amortization, and interest income, but
include revenues and all other costs directly attributable to the specific
segment. Intersegment revenues represent Home Healthcare Services segment
revenues generated from services provided to the CareCentrix segment. Segment
assets represent net accounts receivable associated with segment activities.
Intersegment assets represent accounts receivable associated with services
provided by the Home Healthcare Services segment to the CareCentrix segment. All
other assets are assigned to corporate assets for the benefit of all segments
for the purposes of segment disclosure.
Segment information about the Company's operations is as follows (in
thousands):
17
Home Healthcare
Services CareCentrix Total
-------- ----------- -----
Three months ended July 3, 2005 (unaudited)
- -------------------------------------------
Net revenue - segments $ 137,667 $ 87,069 $ 224,736
========= ========
Intersegment revenues (4,601)
---------
Total net revenue $ 220,135
=========
Operating contribution $ 12,111 $ 7,165 $ 19,276
========= ========
Corporate expenses (10,427)
Depreciation and amortization (1,911)
Interest income, net 414
---------
Income before income taxes $ 7,352
=========
Three months ended June 27, 2004 (unaudited)
- --------------------------------------------
Net revenue - segments $ 127,801 $ 85,492 $ 213,293
========= ========
Intersegment revenues (5,045)
---------
Total net revenue $ 208,248
=========
Operating contribution $ 13,901 $ 8,515 $ 22,416
========= ========
Corporate expenses (11,887)
Gain on sale of Canadian investment 946
Depreciation and amortization (1,904)
Interest income, net 208
---------
Income before income taxes $ 9,779
=========
Six months ended July 3, 2005 (unaudited)
- -----------------------------------------
Net revenue - segments $ 270,750 $166,003 $ 436,753
========= ========
Intersegment revenues (9,511)
---------
Total net revenue $ 427,242
=========
Operating contribution $ 23,717 $ 14,007 $ 37,724
========= ========
Corporate expenses (20,756)
Depreciation and amortization (3,647)
Interest income, net 877
---------
Income before income taxes $ 14,198
=========
Segment assets $ 75,218 $ 68,706 $ 143,924
========= ========
Intersegment assets (1,500)
Corporate assets 182,216
---------
Total assets $ 324,640
=========
Six months ended June 27, 2004 (unaudited)
- ------------------------------------------
Net revenue - segments $ 265,006 $167,615 $ 432,621
========= ========
Intersegment revenues (10,468)
---------
Total net revenue $ 422,153
=========
Operating contribution $ 35,152 $ 14,929 $ 50,081
========= ========
Corporate expenses (22,659)
Gain on sale of Canadian investment 946
Depreciation and amortization (3,749)
Interest income, net 290
---------
Income before income taxes $ 24,909
=========
Segment assets $ 71,459 $ 64,095 $ 135,554
========= ========
Intersegment assets (1,776)
Corporate assets 203,689
---------
Total assets $ 337,467
=========
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects," "assumes," "trends" and similar
expressions, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
based upon the Company's current plans, expectations and projections about
future events. However, such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for healthcare reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets the Company operates in;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue associated with
major payer sources;
o ability of customers to pay for services;
o business disruption due to natural disasters or terrorist acts;
o a material shift in utilization within capitated agreements; and
o changes in estimates and judgments associated with critical accounting
policies.
Forward-looking statements are found throughout "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and elsewhere in
this Quarterly Report on Form 10-Q. The reader should not place undue reliance
on forward-looking statements, which speak only as of the date of this report.
Except as required under the federal securities laws and the rules and
regulations of the Securities and Exchange Commission ("SEC"), the Company does
not have any intention or obligation to publicly release any revisions to
forward-looking statements to reflect unforeseen or other events after the date
of this report. The Company has provided a detailed discussion of risk factors
in its 2004 Annual Report on Form 10-K, as amended, and various filings with the
SEC. The reader is encouraged to review these risk factors and filings.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial position. This discussion and analysis should be
read in conjunction with the
19
Company's consolidated financial statements and related notes included elsewhere
in this report.
General
The Company's results of operations are impacted by various regulations and
other matters that are implemented from time to time in its industry, some of
which are described in the Company's Annual Report on Form 10-K for the fiscal
year ended January 2, 2005, as amended by Form 10-K/A, and in other filings with
the SEC.
For a discussion of the Company's critical accounting policies, please
refer to Note 2 of Notes to Consolidated Financial Statements in the Company's
2004 Annual Report on Form 10-K, as amended.
Overview
Gentiva is the nation's largest provider of comprehensive home health
services, based on revenues derived from the provision of skilled home nursing
and therapy services to patients. The Company's services can be delivered across
the United States 24 hours a day, 7 days a week. The Company's operations
involve servicing patients and customers through its two business segments: Home
Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home nursing
and therapy services operations, including specialty programs, Gentiva Rehab
Without Walls and Gentiva Consulting. The Company's Home Healthcare Services
segment conducts its business through more than 350 direct service delivery
units operating from more than 250 locations under its Gentiva brand.
Direct home nursing and therapy services operations are conducted through
licensed and Medicare-certified agencies located in 35 states, substantially all
of which are currently accredited by the Joint Commission on Accreditation of
Healthcare Organizations, from which the Company provides various combinations
of skilled nursing and therapy services, paraprofessional nursing services and
homemaker services to pediatric, adult and elder patients. Reimbursement sources
include government programs, such as Medicare and Medicaid, and private sources,
such as health insurance plans, managed care organizations, long term care
insurance plans and personal funds. Gentiva's direct home nursing and therapy
operations are organized in five geographic regions, each staffed with clinical,
operational and sales teams. Regions are further separated into operating areas.
Each operating area includes branch locations through which home healthcare
agencies operate. Each agency is led by a director and is staffed with clinical
and administrative support staff as well as clinical associates who deliver
direct patient care. The clinical associates are employed on either a full-time
basis or are paid on a per visit, per shift, per diem or per hour basis.
The Company's direct home nursing and therapy services operations also
deliver services to its customers through focused specialty programs that
include:
20
o Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from joint
replacement or other major orthopedic surgery;
o Gentiva Safe Strides Program, which provides therapies for patients
with balance issues who are prone to injury or immobility as a result
of falling; and
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based environment.
Gentiva Rehab Without Walls provides home and community-based
neurorehabilitation therapies for patients with traumatic brain injury,
cerebrovascular accident injury and acquired brain injury, as well as a number
of other complex rehabilitation cases.
The Company also provides consulting services to home health agencies
through its Gentiva Consulting unit. These services include billing and
collection activities, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
The CareCentrix segment encompasses Gentiva's ancillary care benefit
management and coordination of integrated homecare services for managed care
organizations and health benefit plans through a network of more than 2,500
third-party provider locations, as well as Gentiva locations, under its
CareCentrix brand. CareCentrix operations provide an array of administrative
services and coordinate the delivery of home nursing services, acute and chronic
infusion therapies, durable medical equipment, and respiratory products and
services for managed care organizations and health plans. These administrative
services are coordinated within four regional coordination centers and are
delivered through Gentiva direct home nursing and therapy locations as well as
through an extensive nationwide network of third-party provider locations in all
50 states. CareCentrix accepts case referrals from a wide variety of sources,
verifies eligibility and benefits and transfers case requirements to the
providers for services to the patient. CareCentrix provides services to its
customers, including the fulfillment of case requirements, care management,
provider credentialing, eligibility and benefits verification, data reporting
and analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payer is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payer remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
Significant Development
On May 1, 2005, the Company completed the purchase of certain assets and
the operations of Heritage Home Care Services, Inc. ("Heritage"), a Utah-based
provider of home healthcare services, and assumed certain liabilities related to
contracts and office leases with respect to the period after the closing date,
pursuant to an asset purchase agreement, for cash consideration of $11.5
million, exclusive of working capital requirements. In connection with the
acquisition, the Company also incurred transaction costs of $0.5 million.
Acquisition
21
costs have been recorded as goodwill ($9.6 million) and identifiable intangible
assets ($2.4 million) which are included in Other Assets in the consolidated
balance sheet as of July 3, 2005. The allocation of the purchase price is
subject to adjustment as the Company is undertaking a valuation analysis of the
intangible assets acquired.
The Heritage operations are expected to increase the Company's annualized
revenues by more than $20 million and to be accretive to the Company's fiscal
2005 results.
Results of Operations
Revenues
(Dollars in millions) Second Quarter First Six Months
--------------------------------- ------------------------------
Percentage Percentage
2005 2004 Variance 2005 2004 Variance
---- ---- -------- ---- ---- --------
Medicare $ 65.3 $ 53.8 21.3% $ 127.0 $ 116.4 9.1%
Medicaid and Local Government 37.8 39.0 (3.1%) 74.4 78.2 (4.8%)
Commercial Insurance and Other 117.0 115.4 1.4% 225.8 227.6 (0.8%)
--------------------------------- ------------------------------
$ 220.1 $ 208.2 5.7% $ 427.2 $ 422.2 1.2%
================================= ==============================
The Company's net revenues increased by $11.9 million, or 5.7 percent, to
$220.1 million for the quarter ended July 3, 2005 as compared to the quarter
ended June 27, 2004. For the six months ended July 3, 2005 as compared to the
six months ended June 27, 2004, net revenues increased by $5.0 million, or 1.2
percent, to $427.2 million from $422.2 million.
Home Healthcare Services segment revenues are derived from all three payer
groups: Medicare, Medicaid and Local Government and Commercial Insurance and
Other. CareCentrix segment revenues are derived from the Commercial Insurance
and Other payer group only.
Medicare revenue growth for the fiscal 2005 periods as compared to the
fiscal 2004 periods was driven by several factors including: (i) an increase in
admissions, including the Company's specialty programs and exclusive of acquired
operations, of 14.6 percent for the second quarter and 14.1 percent for the
first six months, (ii) reimbursement rate changes, as noted below and (iii) the
impact of the Heritage acquisition, which closed on May 1, 2005 and constituted
approximately 4.7 percent of the 21.3 percent increase in Medicare revenue for
the second quarter and 2.3 percent of the 9.1 percent increase in Medicare
revenue for the first six months of the year. These positive factors were offset
somewhat for the first six months of the year by the absence of two special
items which are described below.
The reimbursement rate changes included a 2.3 percent market basket
increase that became effective for patients on service on or after January 1,
2005, partially offset by the elimination of the 5 percent rate increase related
to home health services performed in specifically defined rural areas of the
country (rural add-on provision) effective for patients on service on or after
April 1, 2005. The rate increases relating to the market basket change and rural
add-on provision represented incremental revenue of approximately $1.2 million
and $2.8 million for the second quarter and first six months of fiscal 2005,
respectively.
22
Medicare revenues for the first six months of fiscal 2004 were positively
impacted by two special items of approximately $8.0 million as compared to the
first six months of fiscal 2005. The special items represented (i) approximately
$9 million received in settlement of the Company's appeal filed with the PRRB
related to the reopening of all of its 1997 cost reports and (ii) a revenue
adjustment of $1 million to reflect the estimated repayment to Medicare in
connection with services rendered to certain patients since the inception of the
Prospective Payment Reimbursement System in October 2000. In connection with the
estimated repayments, CMS has determined that homecare 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.
Medicaid and Local Government revenues decreased for the fiscal 2005
periods as compared to the fiscal 2004 periods, due primarily to a reduction in
the Company's participation in certain low-margin Medicaid and state and county
programs partially offset by an increase in skilled visits within Medicaid
programs. Revenues relating to hourly Medicaid and state and county programs
decreased $1.7 million for the second quarter fiscal 2005 and $5.5 million for
the first six months of fiscal 2005, while revenues relating to intermittent
care visits increased $0.6 million for the second quarter of fiscal 2005 and
$1.8 million for the first six months of fiscal 2005, as compared to the
corresponding periods of fiscal 2004.
Commercial Insurance and Other revenues increased $1.6 million, or 1.4
percent, for the second quarter of fiscal 2005 and decreased $1.8 million for
the first six months, as compared to the second quarter and first six months of
fiscal 2004. CIGNA Health Corporation ("Cigna") revenues declined by $2.5
million, or 3.7 percent, and $10.2 million, or 7.8 percent, as compared to the
second quarter and first six months of fiscal 2004, respectively. This decline
was due primarily to a reduction in the number of enrolled Cigna members in 2005
resulting in lower revenues from Cigna's capitated plans, partially offset by
volume increases from Cigna Preferred Provider Organization ("PPO") plans. The
Cigna revenue decrease was offset by an increase of $4.1 million, or 8.5
percent, for the second quarter and partially offset by an increase of $8.4
million, or 8.8 percent, for the first six months of fiscal 2005, in non-Cigna,
Commercial Insurance and Other revenues primarily by unit volume and pricing
increases from existing business, as well as new contracts signed during the
past year and the impact of adding the Heritage operations.
Home Healthcare Services segment revenues increased $9.9 million, or 7.7
percent, from $127.8 million during the second quarter of fiscal 2004 to $137.7
million during the second quarter of fiscal 2005. For the six months ended July
3, 2005, Home Healthcare Services revenues were $270.7 million, an increase of
$5.7 million, or 2.2 percent, from $265.0 million for the first six months of
fiscal 2004. Revenues for the first six months of fiscal 2004 were positively
impacted by the Medicare special items totaling $8.0 million, as discussed
above.
CareCentrix segment revenues increased $1.6 million, or 1.8 percent, from
$85.5 million during the second quarter of fiscal 2004 to $87.1 million during
the second quarter of fiscal 2005. CareCentrix segment revenues for the first
six months of fiscal 2005 were $166.0 million as compared to $167.6 million for
the first six months of fiscal 2004, a decline of $1.6 million, or 1.0 percent.
This decrease was driven primarily by a decline in revenues from
Cigna partially offset by growth in revenues from other managed care customers.
23
Gross Profit
(Dollars in millions) Second Quarter First Six Months
------------------------------ ------------------------------
2005 2004 Variance 2005 2004 Variance
---- ---- -------- ---- ---- --------
Gross profit $ 81.5 $ 78.3 $ 3.2 $ 161.4 $ 161.6 $ (0.2)
As a percent of revenue 37.0% 37.6% (0.6%) 37.8% 38.3% (0.5%)
Gross profit margins in both the second quarter and first six months of
fiscal 2005 were negatively impacted by costs for orientation, training and
benefits associated with the deployment of recently-hired clinicians as the
Company transitions more of its skilled clinical care to a dedicated, full time
workforce. In this regard, during the second quarter and first six months of
fiscal 2005, the Company increased its full time clinicians by 113 associates
and 256 associates, respectively, of which 67 associates were hired in
connection with the Heritage acquisition in May 2005. These increases compare to
net increases of 46 and 64 associates in the second quarter and first six months
of fiscal 2004, respectively. The Company anticipates that it will continue its
strategy of hiring full time clinicians throughout fiscal 2005.
Gross margins in both the second quarter and first six months of fiscal
2005 were positively impacted by a favorable change in business mix in the Home
Healthcare Services segment in which the increased volume of Medicare business,
including growth from higher margin specialty programs, more than offset (i) the
anticipated revenue loss in certain lower margin Medicaid and local government
programs and (ii) in the CareCentix segment, the negative impact of changes in
the complement of services provided to certain customers.
For the first six months of fiscal 2004, the Medicare special items
discussed above had a net positive impact of $8.0 million, or 1.2 percentage
points, on gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation and
amortization, increased $4.9 million to $74.6 million for the quarter ended July
3, 2005, as compared to $69.7 million for the quarter ended June 27, 2004, and
$10.1 million to $148.0 million for the six months ended July 3, 2005, as
compared to $137.9 million for the six months ended June 27, 2004.
The increases for the second quarter and the first six months of fiscal
2005, as compared to the corresponding periods of fiscal 2004, were attributable
to (i) over $1.0 million of field operating costs associated with the Heritage
operations following its acquisition in May 2005, (ii) incremental field
operating and administrative costs to service increased Medicare volume and
develop and manage the Company's growing specialty programs in the Home
Healthcare Services segment ($3.5 million for the second quarter and $7.0
million for the first six months of 2005) and (iii) increased selling and
patient care coordination expenses, primarily in the Home Healthcare Services
segment ($1.2 million for the second quarter and $2.3 million for the first six
months of 2005) as well as incremental costs relating primarily to the hiring
and orientation of full time clinicians and other personnel. These increases
were
24
partially offset by lower corporate general and administrative expenses ($1.5
million for the second quarter and $1.1 million for the first six months of
2005) and for the six month period, a favorable arbitration settlement ($0.8
million).
Gain on 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 in the second quarter of fiscal 2004.
Interest Income, Net
Net interest income was $0.4 million for the quarter ended July 3, 2005,
and $0.2 million for the quarter ended June 27, 2004. Net interest income
included interest income of $0.7 million for the second quarter of fiscal 2005
and $0.5 million for the second quarter of fiscal 2004, partially offset by fees
relating to the revolving credit facility and outstanding letters of credit.
Net interest income was $0.9 million for the six months ended July 3, 2005
compared to $0.3 million for the six months ended June 27, 2004. Net interest
income for the first six months of fiscal years 2005 and 2004 represented
interest income of $1.4 million and $0.8 million, respectively, partially offset
by fees relating to the revolving credit facility and outstanding letters of
credit.
Income Taxes
The Company recorded federal and state income tax benefits of $1.3 million
for the second quarter of fiscal 2005, of which $3.3 million represented a
current tax benefit and $2.0 million represented a deferred tax provision. For
the six months ended July 3, 2005, the Company recorded a federal and state tax
provision of $1.4 million representing a current tax benefit of $1.8 million and
a deferred tax provision of $3.2 million. The income tax benefit recorded in the
second quarter of fiscal 2005 included a $4.2 million release of tax reserves
related to the favorable resolution of tax audit issues for the years 1997
through 2000. The Company had agreed to assume responsibility for these items in
connection with its Split-Off from Olsten in March 2000. The difference between
the federal statutory income tax rate and the Company's effective rate of 10
percent for the first six months is primarily due to the release of
tax reserves and state taxes.
Federal and state income taxes of $3.8 million and $9.7 million were
recorded for the second quarter and first six months of fiscal 2004,
respectively. The difference between the federal statutory income tax rate and
the Company's effective tax rate of 39 percent was due primarily to state taxes.
Net Income
For the second quarter of fiscal 2005, net income was $8.7 million, or
$0.35 per diluted share, compared with net income of $6.0 million, or $0.22 per
diluted share, for the corresponding period of 2004.
25
For the first six months of fiscal 2005, net income was $12.8 million, or
$0.51 per diluted share, compared with net income of $15.2 million, or $0.56 per
diluted share for the first six months of fiscal 2004.
Net income for the second quarter and the first six months of fiscal 2005
included $4.2 million, or $0.17 per diluted share, relating to the favorable
resolution of tax audit issues noted in the Income Taxes section above. Net
income for the first six months of fiscal 2004 included two special items
related to Medicare, noted in the Revenues section above, which had a net
positive impact of $4.9 million, or $0.18 per diluted share. Net income for both
the second quarter and first six months of fiscal 2004 included a net gain of
$0.6 million, or $0.02 per diluted share, on the sale of the Company's minority
interest in a home care nursing services business in Canada. See Note 5 to the
Company's consolidated financial statements.
Liquidity and Capital Resources
Liquidity
The Company's principal source of liquidity is the collection of its accounts
receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payer arrangements. The Company used its operating
cash balances to fund the acquisition of Heritage of $11.5 million, initial
working capital needs of Heritage of over $3.5 million, transaction costs
relating to the acquisition of $0.5 million, capital expenditures of $3.3
million, and the repurchase of shares of the Company's common stock of $12.3
million during the first six months of fiscal 2005.
Days Sales Outstanding ("DSO") as of July 3, 2005 increased 2 days from
January 2, 2005 to 59 days. The increase in DSO can be attributed to processing
delays in adjudicating the Company's claims for payment from TriWest Healthcare
Alliance("TriWest").
Working capital at July 3, 2005 was approximately $127 million, a decrease
of $10 million as compared to approximately $137 million at January 2, 2005,
primarily due to:
o a $30 million decrease in cash, cash equivalents, restricted cash and
short-term investments;
o a $10 million increase in accounts receivable;
o a $1 million decrease in deferred tax assets;
o a $2 million increase in prepaid expenses and other assets; and
o a $9 million decrease in current liabilities, consisting of decreases
in Medicare liabilities ($2 million), cost of claims incurred but not
reported ($2 million), obligations under insurance programs ($2
million), and other accrued expenses ($4 million), partially offset by
an increase in payroll and related taxes ($1 million).
The increase in accounts receivable related primarily to incremental
receivables relating to the TriWest account, as noted above, and the Heritage
operations which were acquired on May 1, 2005. As of July 3, 2005, the Company
had not received approval notifications
26
from CMS which would allow the Company to bill Medicare for services relating to
the acquired business. Such notifications were received in late July 2005.
The Company participates in the Medicare, Medicaid and other federal and
state healthcare programs. Revenue mix by major payer classifications are as
follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- -------- ------- --------
Medicare 30% 26% 30% 28%
Medicaid and Local Government 17 19 17 19
Commercial Insurance and Other 53 55 53 53
--- --- --- ---
100% 100% 100% 100%
=== === === ===
On January 1, 2005, a 2.3 percent market basket rate increase became
effective for patients on service on or after January 1, 2005. In addition,
Medicare reimbursement for the rural add-on related to home health services
performed in specifically defined rural areas of the country decreased by 5
percent, effective for Medicare patients on service as of April 1, 2005. There
are certain standards and regulations that the Company must adhere to in order
to continue to participate in these programs. As part of these standards and
regulations, the Company is subject to periodic audits, examinations and
investigations conducted by, or at the direction of, governmental investigatory
and oversight agencies. Periodic and random audits conducted or directed by
these agencies could result in a delay or adjustment to the amount of
reimbursements received under these programs. Violation of the applicable
federal and state health care regulations can result in the Company's exclusion
from participating in these programs and can subject the Company to substantial
civil and/or criminal penalties. The Company believes it is currently in
compliance with these standards and regulations.
The Company is party to a contract with 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 the second
quarter and first six months of fiscal 2005, Cigna accounted for approximately
29 percent and 28 percent of the Company's total net revenues, respectively,
compared to approximately 32 percent and 31 percent for the second quarter and
first six months of fiscal 2004, respectively. This decrease reflects the
reduction in the number of enrolled Cigna members resulting in lower revenues
from Cigna's capitated plans. The Company extended its relationship with Cigna
by entering into a new national home health care contract, as amended, effective
January 1, 2004. The term of the new contract extends to December 31, 2006, and
automatically renews thereafter for additional one year terms unless terminated.
Under the termination provisions, Cigna has the right to terminate the agreement
on December 31, 2005 if it provides 90 days advance written notice to the
Company, and each party has the right to terminate at the end of each term
thereafter by providing at least 90 days advance written notice prior to the
start of the new term. If Cigna chose to terminate or not renew the contract, or
to significantly modify its use of the Company's services, there could be a
material adverse effect on the Company's cash flow.
Net revenues generated under capitated agreements with managed care payers
were approximately 10 percent and 11 percent of total net revenues for the
second quarter and first
27
six months of fiscal 2005, respectively, and 12 percent for the second quarter
and first six months of fiscal 2004. Fee-for-service contracts with other
commercial payers are traditionally one year in term and renewable automatically
on an annual basis, unless terminated by either party.
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.
At the Company's option, the interest rate on borrowings under the credit
facility is based on 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. Total outstanding letters of credit were $20.2
million as of July 3, 2005. 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. As of July 3, 2005,
there were no borrowings outstanding under the credit facility and the Company
had borrowing capacity under the credit facility, after adjusting for
outstanding letters of credit, of approximately $35 million.
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, May 26, 2004 and April 4, 2005, the credit facility was amended to make
covenants relating to acquisitions, stock repurchases and cash dividends less
restrictive, provided that the Company maintains minimum aggregate excess
liquidity, as defined, equal to at least $60 million, and to allow for the
disposition of certain assets. As of July 3, 2005, the Company was in compliance
with the covenants in the credit facility, as amended.
The credit facility provides that subsequent to June 12, 2005, the Company
could terminate the credit facility without incurring an early termination fee.
Loans under the credit facility are collateralized by all of the Company's
tangible and intangible personal property, other than equipment.
The credit facility includes provisions, which, if not complied with, could
require early payment by the Company. These include customary default events,
such as failure to comply with financial covenants, insolvency events,
non-payment of scheduled payments, acceleration
28
of other financial obligations and change in control provisions. In addition,
these provisions include an account obligor, whose accounts are more than 25
percent of all accounts of the Company over the previous 12-month period,
canceling or failing to renew its contract with the Company and ceasing to
recognize the Company as an approved provider of healthcare services, or the
Company revoking the lending agent's control over its governmental lockbox
accounts. The Company does not have any trigger events in the credit facility
that are tied to changes in its credit rating or stock price. As of July 3,
2005, the Company was in compliance with these provisions.
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 Company estimates the cost of both reported claims and claims incurred but
not reported, up to specified deductible limits, based on its own specific
historical claims experience and current enrollment statistics, industry
statistics and other information. Such estimates and the resulting reserves are
reviewed and updated periodically.
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.
Capital Expenditures
The Company's capital expenditures for the six months ended July 3, 2005
were $3.3 million as compared to $5.5 million for the same period in fiscal
2004, which excludes equipment capitalized under capital lease obligations of
$1.4 million. The Company intends to make investments and other expenditures to,
among other things, upgrade its computer technology and system infrastructure
and comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2005 will range between $12.0
million and $14.0 million. Management expects that the Company's capital
expenditure needs will be met through operating cash flow and available cash
reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents, restricted cash and short-term
investments of approximately $83.4 million as of July 3, 2005. The restricted
cash of $22.0 million at July 3, 2005, related primarily 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 included $0.2 million on deposit to comply with New York state regulations
requiring that one month of revenues
29
generated under capitated agreements in the state be held in escrow. Interest on
all restricted funds accrues to the Company.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through 2005. These amounts were reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
From May 2003 through July 3, 2005, the Company announced five stock
repurchase programs, authorized by the Company's Board of Directors, under which
the Company could repurchase and retire up to an aggregate of 6,000,000 shares
of its outstanding common stock. The repurchases occur periodically in the open
market or through privately negotiated transactions based on market conditions
and other factors. During the first six months of fiscal 2005, the Company
repurchased 756,300 shares of its outstanding common stock at an average cost of
$16.30 per share and a total cost of approximately $12.3 million. As of July 3,
2005, the Company had remaining authorization to repurchase an aggregate of
1,252,096 shares of its outstanding common stock. See also Part II, Item 2, of
this Form 10-Q.
Contractual Obligations and Commercial Commitments
At July 3, 2005, the Company had no long-term debt. During the first six
months of fiscal 2004, the Company commenced implementation of a five-year
capital lease for equipment. Under the terms of the lease the Company
capitalized the equipment at its fair market value of approximately $1.4
million, which approximates the present value of the minimum lease payments.
Future minimum rental commitments for all non-cancelable leases and purchase
obligations at July 3, 2005, are as follows (in thousands):
Payment due by period
---------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- ----- ------ --------- --------- -------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations 1,356 462 717 177 --
Operating lease obligations 51,931 17,803 22,067 9,878 2,183
Purchase obligations -- -- -- -- --
-----------------------------------------------------------
Total $53,287 $18,265 $22,784 $10,055 $ 2,183
===========================================================
During the second quarter of fiscal 2005, the Company paid $0.8 million to
satisfy future obligations relating to a portion of a lease that the Company
agreed to assume in connection with the Split-Off in March 2000. Such amount
had been accrued in the Company's financial statements.
The Company had total letters of credit outstanding under its credit
facility of approximately $20.2 million at July 3, 2005 and January 2, 2005. The
letters of credit, which expire one year from date of issuance, are issued to
guarantee payments under the Company's workers compensation program and for
certain other commitments. The Company has the option to renew these letters of
credit or set aside cash funds in a segregated account to satisfy the Company's
obligations as further discussed above under the heading "Cash Resources and
Obligations." The Company also had outstanding surety bonds of $1.3 million and
$1.0 million at July 3, 2005 and January 2, 2005, respectively.
The Company has no other off-balance sheet arrangements and has not entered
into any transactions involving unconsolidated, limited purpose entities or
commodity contracts.
Management expects that the Company's working capital needs for fiscal 2005
will be met through operating cash flow and its existing cash balances. The
Company may also consider
30
other alternative uses of cash including, among other things, acquisitions,
additional share repurchases and cash dividends. These uses of cash may require
the approval of the Company's Board of Directors and may require the approval of
its lender. If cash flows from operations, cash resources or availability under
the credit facility fall below expectations, the Company may be forced to delay
planned capital expenditures, reduce operating expenses, seek additional
financing or consider alternatives designed to enhance liquidity.
Stock-Based Compensation
In December 2004, FASB issued SFAS 123(R). This statement replaces SFAS No.
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 annual periods beginning on or after
June 15, 2005, which for the Company is the first quarter of fiscal 2006.
The Company has currently chosen to adopt the disclosure only provisions of
SFAS 123, as amended by SFAS 148, and continues to account for stock-based
compensation using the intrinsic value method prescribed in APB 25, and related
interpretations. Under this approach, 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.
Stock option grants in fiscal 2004 and prior years fully vest over periods
ranging from three to six years. Stock option grants in fiscal 2005 fully vest
over a four year period based on a vesting schedule which provides for one-third
vesting after years one, three and four.
The weighted average fair values of the Company's stock options granted
during the first six months of fiscal 2005 and fiscal 2004, calculated using the
Black-Scholes option-pricing model, and other assumptions are as follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Weighted average fair value
of options granted $ 6.12 $ 5.47
Risk-free interest rate 3.73% 3.36%
Expected volatility 35% 37%
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
For stock options granted during the fiscal 2004 period, the expected life
is estimated to be two years following the date all options comprising the grant
become fully vested and forfeitures are reflected in the calculation as they
occur. For stock options granted during the fiscal 2005 period, the expected
life of an option is estimated to be 2.5 years following its vesting date and
forfeitures are reflected in the calculation using an estimate based on
experience.
31
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 the first six months of fiscal 2005 and fiscal 2004 are as
follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Risk-free interest rate 2.63% 1.02%
Expected volatility 27% 28%
Expected life 0.5 years 0.5 years
Expected dividend yield 0% 0%
The following table presents net income and basic and diluted income
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 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):
Three Months Ended Six Months Ended
------------------------ -------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- -------- --------
Net income - as reported $ 8,650 $ 5,965 $ 12,775 $ 15,195
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of tax (1,024) (717) (2,064) (1,412)
------- ------- -------- --------
Net income - pro forma $ 7,626 $ 5,248 $ 10,711 $ 13,783
======= ======= ======== ========
Basic income per share - as reported $ 0.37 $ 0.24 $ 0.55 $ 0.60
Basic income per share - pro forma $ 0.33 $ 0.21 $ 0.46 $ 0.54
Diluted income per share - as reported $ 0.35 $ 0.22 $ 0.51 $ 0.56
Diluted income per share - pro forma $ 0.31 $ 0.20 $ 0.43 $ 0.51
Stock-based compensation expense, net of tax, for the six months ended
July 3, 2005 as reflected in the table above included $270,000 relating to
options granted in June 2002 which became fully vested during the second
quarter of fiscal 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise. The Company had no
interest rate exposure on fixed rate debt or other market risk at July 3, 2005.
Item 4. Controls and Procedures
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.
32
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 July 3, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 to the consolidated financial statements included in
this report for a description of legal matters and pending legal
proceedings, which description is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number
(a) Total of Shares Purchased of Shares that May
Number (b) Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs or Programs
------ --------- --------- ----------- -----------
April (4/04/05 - 5/01/05) 37,200 $ 17.74 37,200 1,498,696
May (5/02/05 - 5/29/05) 98,100 $ 16.53 98,100 1,400,596
June (5/30/05 - 7/03/05) 148,500 $ 16.58 148,500 1,252,096
------- ------- -------
Total 283,800 $ 16.71 283,800
======= ======= =======
(1) On August 10, 2004, the Company announced that its Board of
Directors had authorized the repurchase of up to 1,000,000 shares of
its outstanding common stock. By the end of the period covered by the
table, all of such shares had been repurchased. On April 14, 2005, the
Company announced that its Board of Directors had authorized the
repurchase of up to 1,500,000 additional shares of its outstanding
common stock. By the end of the period covered by the table, 247,904
of such shares had been repurchased.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 6, 2005.
(c) i) The following individuals were elected as Class II directors by
votes as follows:
33
------------------------------------------------------------------
Name Votes FOR Votes WITHHELD
------------------------------------------------------------------
Ronald A. Malone 22,094,534 157,907
------------------------------------------------------------------
Raymond S. Troubh 18,913,135 3,339,306
------------------------------------------------------------------
ii) The proposal to ratify and approve the appointment of
PricewaterhouseCoopers LLP as independent registered public
accounting firm of the Company for 2005 was approved by votes as
follows:
------------------------------------------------------------------
FOR: 22,143,532
------------------------------------------------------------------
AGAINST: 81,741
------------------------------------------------------------------
ABSTAIN: 27,168
------------------------------------------------------------------
BROKER NONVOTES: 0
------------------------------------------------------------------
iii) The proposal to approve the Company's Executive Officers Bonus
Plan, as amended, was approved by votes as follows:
------------------------------------------------------------------
FOR: 17,284,970
------------------------------------------------------------------
AGAINST: 486,894
------------------------------------------------------------------
ABSTAIN: 122,911
------------------------------------------------------------------
BROKER NONVOTES: 4,357,666
------------------------------------------------------------------
iv) The proposal to approve the Company's Employee Stock Purchase
Plan, as amended, was approved by votes as follows:
------------------------------------------------------------------
FOR: 16,604,496
------------------------------------------------------------------
AGAINST: 1,018,664
------------------------------------------------------------------
ABSTAIN: 271,615
------------------------------------------------------------------
BROKER NONVOTES: 4,357,666
------------------------------------------------------------------
Item 5. Other Information
Corporate Integrity Agreement
In connection with a July 19, 1999 settlement with various
government agencies, Olsten executed a corporate integrity agreement
with the Office of Inspector General of the Department of Health and
Human Services, effective until August 18, 2004, subject to the
Company's filing of a final annual report with the Department of
Health and Human Services, Office of Inspector General, in form and
substance acceptable to the government. The Company has filed a final
annual report and is expecting closure by the government.
The Company believes that it has been in compliance with the
corporate integrity agreement and has timely filed all required
reports. If the Company has failed to comply with the terms of its
corporate integrity agreement,
34
the Company will be subject to penalties. The corporate integrity
agreement applies to the Company's businesses that bill the federal
government health programs directly for services, such as its nursing
brand (but excludes the SPS business), and focuses on issues and
training related to cost report preparation, contracting, medical
necessity and billing of claims. Under the corporate integrity
agreement, the Company is required, for example, to maintain a
corporate compliance officer to develop and implement compliance
programs, to retain an independent review organization to perform
annual reviews and to maintain a compliance program and reporting
systems, as well as to provide certain training to employees.
Item 6. 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 Second Amendment dated May 9, 2005 to Managed Care Alliance Agreement
between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered into
as of January 1, 2004* (confidential treatment requested as to portions of
this document)
10.2 Executive Officers Bonus Plan, as amended. (5)+
10.3 Employee Stock Purchase Plan, as amended. (6)+
10.4 Summary Sheet of Company Compensation to Non-Employee Directors, effective
May 6, 2005. (7)+
10.5 Amendment No. 1 dated as of May 6, 2005 to Stock & Deferred Compensation
Plan for Non-Employee Directors, as amended and restated as of January 1,
2004. (7)+
10.6 Form of Amended and Restated Change in Control Agreement with each of
Vernon A. Perry, Jr., John R. Potapchuk, Robert Creamer and Mary
Morrisey-Gabriel. (7)+
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 the 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 Appendix A to definitive Proxy
Statement of Company dated April 6, 2005.
(6) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 6, 2005.
(7) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended April 3, 2005.
* Filed herewith
+ Management contract or compensatory plan or arrangement
35
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
(Registrant)
Date: August 8, 2005 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: August 8, 2005 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
36