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 October 2, 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 ___
-
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes __ No X
-
The number of shares outstanding of the registrant's Common Stock, as
of November 8, 2005, was 22,884,550.
INDEX
PART I - FINANCIAL INFORMATION Page
No.
---
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - October 2, 2005
and January 2, 2005 3
Consolidated Statements of Income (Unaudited) - Nine Months
Ended October 2, 2005 and September 26, 2004 4
Consolidated Statements of Cash Flows (Unaudited) - Nine
Months Ended October 2, 2005 and September 26, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6-18
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-40
Item 3. Quantitative and Qualitative Disclosures About Market Risk 40
Item 4. Controls and Procedures 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 41
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41
Item 3. Defaults Upon Senior Securities 41
Item 4. Submission of Matters to a Vote of Security Holders 41
Item 5. Other Information 41-42
Item 6. Exhibits 42-43
SIGNATURES 44
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)
October 2, 2005 January 2, 2005
--------- ---------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 52,234 $ 31,924
Short-term investments 42,150 81,100
Receivables, less allowance for doubtful accounts of $8,348
and $7,040 at October 2, 2005 and January 2, 2005, respectively 142,339 132,002
Deferred tax assets 22,894 23,861
Prepaid expenses and other current assets 8,013 6,057
--------- ---------
Total current assets 267,630 274,944
Fixed assets, net 20,688 19,687
Deferred tax assets, net 17,792 21,233
Goodwill 6,865 1,325
Other assets 22,896 14,909
--------- ---------
Total assets $ 335,871 $ 332,098
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,542 $ 25,896
Payroll and related taxes 15,772 9,356
Medicare liabilities 6,864 9,949
Cost of claims incurred but not reported 26,244 27,361
Obligations under insurance programs 32,228 34,660
Other accrued expenses 30,306 31,117
--------- ---------
Total current liabilities 134,956 138,339
Other liabilities 19,814 21,819
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 23,356,750 and 23,722,408
shares at October 2, 2005 and January 2, 2005, respectively 2,336 2,372
Additional paid-in capital 231,100 238,929
Accumulated deficit (52,335) (69,361)
--------- ---------
Total shareholders' equity 181,101 171,940
--------- ---------
Total liabilities and shareholders' equity $ 335,871 $ 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 Nine Months Ended
--------------------------------------- -------------------------------------
October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004
--------- --------- --------- ---------
Net revenues $ 219,559 $ 198,070 $ 646,801 $ 620,223
Cost of services sold 138,544 122,539 404,401 383,092
--------- --------- --------- ---------
Gross profit 81,015 75,531 242,400 237,131
Selling, general and administrative expenses (72,026) (67,227) (216,443) (201,405)
Depreciation and amortization (2,291) (1,756) (5,938) (5,505)
--------- --------- --------- ---------
Operating income 6,698 6,548 20,019 30,221
Gain on sale of Canadian investment -- -- -- 946
Interest income, net 385 248 1,262 538
--------- --------- --------- ---------
Income before income taxes 7,083 6,796 21,281 31,705
Income tax expense (2,832) (2,397) (4,255) (12,111)
--------- --------- --------- ---------
Net income $ 4,251 $ 4,399 $ 17,026 $ 19,594
========= ========= ========= =========
Net income per common share:
Basic $ 0.18 $ 0.18 $ 0.73 $ 0.78
========= ========= ========= =========
Diluted $ 0.17 $ 0.17 $ 0.68 $ 0.74
========= ========= ========= =========
Weighted average shares outstanding:
Basic 23,329 24,422 23,349 25,011
========= ========= ========= =========
Diluted 25,076 26,034 25,018 26,645
========= ========= ========= =========
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
---------------------------------------
October 2, 2005 September 26, 2004
--------- ---------
OPERATING ACTIVITIES:
Net income $ 17,026 $ 19,594
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,938 5,505
Provision for doubtful accounts 4,329 4,708
Gain on sale of Canadian investment -- (946)
Reversal of tax audit reserves (4,200) --
Deferred income tax expense 4,408 9,743
Changes in assets and liabilities:
Accounts receivable (14,666) 945
Prepaid expenses and other current assets (1,856) (1,144)
Accounts payable (719) (2,843)
Payroll and related taxes 6,416 (2,956)
Medicare liabilities (3,085) (145)
Cost of claims incurred but not reported (1,117) (2,228)
Obligations under insurance programs (2,432) (609)
Other accrued expenses (965) (3,321)
Other, net 178 657
--------- ---------
Net cash provided by operating activities 9,255 26,960
--------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets (6,043) (7,607)
Proceeds from sale of assets -- 4,123
Acquisition of business (12,059) --
Purchase of short-term investments available-for-sale (125,000) (80,000)
Maturities of short-term investments available-for-sale 153,950 25,000
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 20,848 (58,484)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 5,650 3,420
Changes in book overdrafts (1,635) 2,300
Repurchases of common stock (13,514) (30,163)
Repayment of capital lease obligations (294) (228)
--------- ---------
Net cash used in financing activities (9,793) (24,671)
--------- ---------
Net change in cash, cash equivalents and restricted cash 20,310 (56,195)
Cash, cash equivalents and restricted cash at beginning of period 31,924 97,438
--------- ---------
Cash, cash equivalents and restricted cash at end of period $ 52,234 $ 41,243
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds $ 701 $ 3,587
========= =========
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 October 2, 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.
6
Available-for-sale investments are carried on the balance sheet at fair
value which for the Company approximates carrying value. Auction rate securities
of $42.2 million and $71.1 million at October 2, 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 third quarter and first nine months of fiscal
2004 included approximately $1.1 million and $10.1 million, respectively,
received in settlement of the Company's appeal filed with the U.S. Provider
Relations Review Board ("PRRB") related to
7
the reopening of all of its 1998 and 1997 cost reports. (See Note 10.) In
addition, Medicare revenues were reduced by a revenue adjustment of $1 million
recorded for the nine months of fiscal 2004 to reflect an estimated repayment to
Medicare in connection with services rendered to certain patients since the
inception of the Prospective Payment System ("PPS") in October 2000. In
connection with the estimated repayment, the Centers for Medicare & Medicaid
Services ("CMS") had 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 $0.6 million.
Acquisition costs have been recorded as Goodwill ($5.5 million), Fixed Assets
and Other Assets ($0.4 million) and identifiable intangible assets ($6.2
million) which are included in Other Assets in the consolidated balance sheet as
of October 2, 2005. The Company expects to complete the allocation of the
purchase price during the fourth quarter of fiscal 2005 as it finalizes 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 pre-tax gain on
sale of approximately $0.9 million, which is reflected in the consolidated
statement of income for the nine months ended September 26, 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):
8
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004
--------------- ------------------ --------------- ------------------
Net income $ 4,251 $ 4,399 $17,026 $19,594
- ------------------------------------------------------------------------------ ---------------------------
Basic weighted average common
shares outstanding 23,329 24,422 23,349 25,011
Shares issuable upon the assumed exercise of
stock options and in connection with the
employee stock purchase plan using the
treasury stock method 1,747 1,612 1,669 1,634
------ ------ ------ ------
Diluted weighted average common
shares outstanding 25,076 26,034 25,018 26,645
------ ------ ------ ------
- ------------------------------------------------------------------------------ ---------------------------
Net income per common share:
Basic $ 0.18 $ 0.18 $ 0.73 $ 0.78
Diluted $ 0.17 $ 0.17 $ 0.68 $ 0.74
- ------------------------------------------------------------------------------ ---------------------------
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 October 2, 2005, the Company was in
compliance with the covenants in the credit facility, as amended.
9
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
October 2, 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 October 2, 2005.
The Company also had outstanding surety bonds of $1.3 million and $1.0 million
at October 2, 2005 and January 2, 2005, respectively.
The restricted cash of $22.0 million at October 2, 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 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 nine months ended October 2,
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 -- -- 17,026 17,026
Income tax benefits associated with
stock-based compensation -- 1,634 -- 1,634
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (456,442 shares) 46 3,969 -- 4,015
Repurchase of common stock at cost (822,100 shares) (82) (13,432) -- (13,514)
--------- --------- --------- ---------
Balance at October 2, 2005 $ 2,336 $ 231,100 $ (52,335) $ 181,101
========= ========= ========= =========
Comprehensive income amounted to $4.3 million and $4.4 million for the
third quarter of fiscal 2005 and fiscal 2004, respectively, and $17.0 million
and $19.6 million for the first nine months of fiscal 2005 and fiscal 2004,
respectively.
From May 2003 through October 2, 2005, the Company announced five stock
repurchase programs authorized by the Company's Board of Directors, under which
the Company
10
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
October 2, 2005 follows:
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of October 2, 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 1,500,000 313,704 5,295,765 16.88
------------------------------------------------------------------------
6,000,000 4,813,704 $66,338,751 $13.78
========================================================================
A summary of the Company's share repurchase activity follows:
Three Months Ended Nine Months Ended
------------------------------------- ---------------------------------------
October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004
--------------- ------------------ --------------- ------------------
Total Numbers of Shares Purchased 65,800 1,011,993 822,100 2,026,840
Total Cost $1,188,771 $15,460,993 $13,513,797 $30,162,959
Average Cost Per Share $ 18.07 $ 15.28 $ 16.44 $ 14.88
As of October 2, 2005, the Company had remaining authorization to
repurchase an aggregate of 1,186,296 shares of its outstanding common stock.
During the period from October 3, 2005 through November 8, 2005, the Company
purchased 487,900 shares of its common stock at an aggregate cost of
approximately $7.3 million.
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 nine months of fiscal 2005 and fiscal 2004, calculated using
the Black-Scholes option-pricing model, and other assumptions are as follows:
11
Nine Months Ended
----------------------------------------------
October 2, 2005 September 26, 2004
------------------- -----------------------
Weighted average fair value
of options granted $ 6.13 $ 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 and prior periods, 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 nine months of fiscal 2005 and fiscal 2004 are as
follows:
Nine Months Ended
------------------------------ -----------------------------
October 2, 2005 September 26, 2004
------------------------------ -----------------------------
1st offering 2nd offering 1st offering 2nd offering
Period Period Period Period
------ ------ ------ ------
Risk-free interest rate 2.63% 3.32% 1.02% 1.76%
Expected volatility 27% 33% 28% 30%
Expected life 0.5 years 0.5 years 0.5 years 0.5 years
Expected dividend yield 0% 0% 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 Nine Months Ended
------------------------------------ -----------------------------------
October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004
--------------- ------------------ --------------- ------------------
Net income - as reported $ 4,251 $ 4,399 $ 17,026 $ 19,594
Deduct: Total stock-based compensation expense
determined under fair value based
method for all awards, net of tax (852) (579) (2,916) (1,834)
---------- ---------- ---------- ----------
Net income - pro forma $ 3,399 $ 3,820 $ 14,110 $ 17,760
========== ========== ========== ==========
Basic income per share - as reported $ 0.18 $ 0.18 $ 0.73 $ 0.78
Basic income per share - pro forma $ 0.15 $ 0.16 $ 0.60 $ 0.71
Diluted income per share - as reported $ 0.17 $ 0.17 $ 0.68 $ 0.74
Diluted income per share - pro forma $ 0.14 $ 0.15 $ 0.56 $ 0.67
During the first nine months of fiscal 2005, the Company granted
942,600 stock options to officers and employees under its existing option plans
at an average exercise price of $16.38. At October 2, 2005, there were 3,670,396
options outstanding at a weighted average
12
exercise price of $10.33 per share. During the first nine months of fiscal 2005,
the Company issued 103,321 shares of common stock under its ESPP.
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.
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 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.
13
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, of which $1.1 million was received
and recorded in the third quarter of fiscal 2004.
The fiscal intermediary is currently in the process of reopening the
1999 cost reports and the Company anticipates completion of the reopening during
the fourth quarter of fiscal 2005. The Company expects to receive funds in
excess of $5.0 million related to the 1999 cost reports and will record an
adjustment to net revenues during the fourth quarter of fiscal 2005 when such
gain contingency is realized. 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 requests. To the
Company's knowledge, the government has not filed a complaint against the
Company.
11. Income Taxes
------------
The Company recorded a federal and state income tax provision of $2.8
million for the third quarter of fiscal 2005, of which $1.6 million represented
a current tax provision and $1.2 million represented a deferred tax provision.
For the nine months ended October 2, 2005, the Company recorded a federal and
state income tax provision of $4.3 million representing a current tax benefit of
$0.1 million and a deferred tax provision of $4.4 million. The income tax
provision for the first nine months 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 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 20 percent for the first nine months of fiscal 2005 is
primarily due to the release of tax reserves and state taxes.
14
Federal and state income taxes of $2.4 million and $12.1 million were
recorded for the third quarter and first nine 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):
October 2, 2005 January 2, 2005
--------------- ---------------
Deferred tax assets
Current:
Reserves and allowances $ 18,374 $ 19,348
Federal net operating loss and other carryforwards -- 793
State net operating loss 7,027 7,027
Other 1,948 1,148
Less: valuation allowance (4,455) (4,455)
-------- --------
Total current deferred tax assets 22,894 23,861
Noncurrent:
Intangible assets 22,906 25,772
-------- --------
Total assets 45,800 49,633
-------- --------
Deferred tax liabilities:
Noncurrent:
Fixed assets (2,627) (2,707)
Developed software (1,841) (1,233)
Other (646) (599)
-------- --------
Total non-current deferred tax liabilities (5,114) (4,539)
-------- --------
Net deferred tax assets $ 40,686 $ 45,094
======== ========
At October 2, 2005, the Company had state net operating loss
carryforward benefits of $7.0 million. A valuation allowance of $4.5 million was
recorded in fiscal 2004 to recognize that certain state net operating loss
carryforwards may expire before realization.
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
15
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 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. 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.
16
Segment information about the Company's operations is as follows (in
thousands):
Home
Healthcare
Services CareCentrix Total
-------------- --------------- ---------
Three months ended October 2, 2005 (unaudited)
- ----------------------------------------------
Net revenue - segments $ 139,128 (1) $ 84,569 (2) $ 223,697
========= ========
Intersegment revenues (4,138)
---------
Total net revenue $ 219,559
=========
Operating contribution $ 13,073 (1) $ 6,314 (2) $ 19,387
========= ========
Corporate expenses (10,398)
Depreciation and amortization (2,291)
Interest income, net 385
---------
Income before income taxes $ 7,083
=========
Three months ended September 26, 2004 (unaudited)
- -------------------------------------------------
Net revenue - segments $ 123,957 (4) $ 79,085 $ 203,042
========= ========
Intersegment revenues (4,972)
---------
Total net revenue $ 198,070
=========
Operating contribution $ 10,177 (4) $ 8,877(2) $ 19,054
========= ========
Corporate expenses (10,750)
Depreciation and amortization (1,756)
Interest income, net 248
---------
Income before income taxes $ 6,796
=========
Nine months ended October 2, 2005 (unaudited)
- ---------------------------------------------
Net revenue - segments $ 409,878 (1) $ 250,572 (2) $ 660,450
========= ========
Intersegment revenues (13,649)
---------
Total net revenue $ 646,801
=========
Operating contribution $ 36,790 (1) $ 20,321 (2) $ 57,111
========= ========
Corporate expenses (31,154) (3)
Depreciation and amortization (5,938)
Interest income, net 1,262
---------
Income before income taxes $ 21,281
=========
Segment assets $ 77,842 $ 65,785 $ 143,627
========= ========
Intersegment assets (1,288)
Corporate assets 193,532
---------
Total assets $ 335,871
=========
Nine months ended September 26, 2004 (unaudited)
- ------------------------------------------------
Net revenue - segments $ 388,963 (4,5) $ 246,700 $ 635,663
========= ========
Intersegment revenues (15,440)
---------
Total net revenue $ 620,223
=========
Operating contribution $ 45,329 (4,5) $ 23,806(2) $ 69,135
========= ========
Corporate expenses (33,409)
Gain on sale of Canadian Investment 946
Depreciation and amortization (5,505)
Interest income, net 538
---------
Income before income taxes $ 31,705
=========
Segment assets $ 68,622 $ 60,337 $ 128,959
========= ========
Intersegment assets (1,614)
Corporate assets 201,401
---------
Total assets $ 328,746
=========
17
(1) During the second quarter of fiscal 2003, CMS initiated a project to
recover, over a 24 month period, overpayments to providers relating to
partial episode payments ("PEPs") for overlapping episodes of service
during the period prior to and through April 2003. PEPs occur if a
patient is discharged but readmitted to another agency within the same
sixty day period. The Company had established reserves for such PEPs in
fiscal 2002 and 2003 based on information available at that time. During
the third quarter of fiscal 2005 it was determined that CMS had
completed its recovery project resulting in an excess reserve. In
connection with this item, Home Healthcare Services segment net revenues
and operating contribution for the third quarter and first nine months
of fiscal 2005 included a positive adjustment of approximately $0.7
million.
(2) For the third quarter and first nine months of fiscal 2005, CareCentrix
segment results reflected a revenue adjustment of approximately $1.1
million and a reduction in operating contribution of $0.8 million in
connection with a change in estimate relating to certain home healthcare
services provided to a managed care customer. For the third quarter and
first nine months of fiscal 2004, operating contribution included a
positive adjustment of $0.7 million relating to a change in estimated
costs payable to providers as the Company completed its reconfiguration
of the home medical equipment network.
(3) For the nine months ended October 2, 2005, corporate expenses included a
credit of approximately $0.8 million relating to a favorable arbitration
settlement.
(4) The Home Healthcare Services segment Medicare revenues for the third
quarter of fiscal 2004 included funds received of approximately $1.1
million related to the $1.4 million settlement of the Company's appeal
filed with the PRRB related to the reopening of all of its 1998 cost
reports (see Note 10).
(5) The Home Healthcare Services segment Medicare revenues for the first
nine months of fiscal 2004 included approximately $9.1 million received
in settlement of the Company's appeal filed with the PRRB related to the
reopening of its 1997 cost reports, 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 PPS in
October 2000. (See Note 10.) The 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.
13. Subsequent Event
----------------
On October 27, 2005, the Company announced the amendment of its
contract and extension of its national relationship with CIGNA Health
Corporation ("Cigna") through January 31, 2009. Under the amended contract,
CareCentrix will continue to coordinate the provision of direct home nursing and
related services through the CareCentrix network of credentialed, third-party
providers or through Gentiva's own home healthcare locations, as well as home
infusion services and certain other specialty medical equipment solely through
the CareCentrix network. Among the specialty equipment to be provided to Cigna
members through CareCentrix are insulin pumps, wound suction devices and other
products. As Gentiva announced on October 24, 2005, CareCentrix is ending its
coordination of respiratory therapy and certain durable medical equipment
services to Cigna members as of January 31, 2006. Based on the changes in the
Company's arrangement with Cigna, the Company estimates that its fiscal 2006
revenues from Cigna could be up to $40 million lower than revenues anticipated
from the Cigna contract in fiscal 2005.
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:
18
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 in which the Company
operates;
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 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.
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
19
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.
The Company's 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:
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
20
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 Developments
- ------------------------
On October 27, 2005, the Company announced the amendment of its
contract and extension of its national relationship with Cigna through January
31, 2009. Under the amended contract, CareCentrix will continue to coordinate
the provision of direct home nursing and related services through the
CareCentrix network of credentialed, third-party providers or through Gentiva's
own home healthcare locations, as well as home infusion services and certain
other specialty medical equipment solely through the CareCentrix network. Among
the specialty equipment to be provided to Cigna members through CareCentrix are
insulin pumps, wound suction devices and other products. As Gentiva announced on
October 24, 2005, CareCentrix is ending its coordination of respiratory therapy
and certain durable medical equipment services to Cigna members as of January
31, 2006. Based on the changes in the Company's arrangement with Cigna, the
Company estimates that its fiscal 2006 revenues from Cigna could be up to $40
million lower than revenues anticipated from the Cigna contract in fiscal 2005.
On September 8, 2005, the Company announced that its contract with
TriWest to provide coordination and delivery of homecare services to active and
retired military personnel in certain western states will terminate as of
November 29, 2005. Net revenues relating to the TriWest contract are expected to
range between $20 million and $25 million in fiscal 2005.
On May 1, 2005, the Company completed the purchase of certain assets
and the operations of 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 $0.6 million. Acquisition costs have been recorded as
Goodwill ($5.5 million), Fixed Assets and Other Assets ($0.4 million), and
identifiable intangible assets ($6.2 million) which are included in Other Assets
in the consolidated balance sheet as of October 2, 2005. The Company expects to
complete the allocation of the purchase price during the fourth quarter of
fiscal 2005 as it finalizes a valuation analysis of the intangible assets
acquired. The Heritage
21
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) Third Quarter Nine Months Ended
------------------------------------- --------------------------------------
Percentage Percentage
2005 2004 Variance 2005 2004 Variance
------ ------ ------ ------ ------ ------
Medicare $ 67.4 $ 52.3 28.7% $194.4 $168.7 15.2%
Medicaid and Local Government 37.6 37.7 (0.3%) 112.0 115.9 (3.3%)
Commercial Insurance and Other 114.6 108.1 6.1% 340.4 335.6 1.4%
------ ------ ------ ------ ------ ------
$219.6 $198.1 10.9% $646.8 $620.2 4.3%
====== ====== ====== ====== ====== ======
The Company's net revenues increased by $21.5 million, or 10.9
percent, to $219.6 million for the quarter ended October 2, 2005 as compared to
the quarter ended September 26, 2004. For the nine months ended October 2, 2005
as compared to the nine months ended September 26, 2004, net revenues increased
by $26.6 million, or 4.3 percent, to $646.8 million from $620.2 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 approximately 15 percent for the third quarter and 14 percent for
the first nine months, (ii) improvement in revenue per admission, (iii)
reimbursement rate changes, as noted below and (iv) the impact of the Heritage
acquisition, which closed on May 1, 2005 and constituted approximately 6.7
percent of the 28.7 percent increase in Medicare revenue for the third quarter
and 3.0 percent of the 15.2 percent increase in Medicare revenue for the first
nine months of the year. These positive factors were offset somewhat for the
first nine months of the year by the absence of three special items which are
described below.
Medicare revenue included special items of $1.1 million for the third
quarter of fiscal 2004 and $9.1 million for the first nine months of fiscal
2004. Special items represented (i) $1.1 million recorded and received during
the third quarter of fiscal 2004 in settlement of the Company's appeal filed
with the PRRB related to the reopening of its 1998 cost reports, (ii) $9.0
million received in settlement of the Company's appeal filed with the PRRB
related to the reopening of its 1997 cost reports and (iii) 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 PPS in October
2000. In connection with the estimated repayment, CMS had determined that
homecare providers should have received lower reimbursements for
22
certain services rendered to beneficiaries discharged from inpatient hospitals
within fourteen days immediately preceding admission to home healthcare.
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 adjustments relating to the market basket change and
rural add-on provision represented incremental revenue of approximately $1.6
million and $4.8 million for the third quarter and first nine months of fiscal
2005, respectively.
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 $0.4 million for the third quarter fiscal 2005 and $6.0 million for
the first nine months of fiscal 2005, as compared to the corresponding periods
of fiscal 2004, while revenues relating to intermittent care visits increased
$0.3 million for the third quarter of fiscal 2005 and $2.1 million for the first
nine months of fiscal 2005, as compared to the corresponding periods of fiscal
2004.
Commercial Insurance and Other revenues increased $6.5 million, or 6.1
percent, for the third quarter of fiscal 2005 and increased $4.8 million, or 1.4
percent for the first nine months, as compared to the third quarter and first
nine months of fiscal 2004. Cigna revenues increased by $4.7 million, or 8.0
percent, for the third quarter of fiscal 2005 as compared to the third quarter
of fiscal 2004. This increase is due primarily to the addition of Cigna members
in five New England states, effective July 1, 2005, as well as higher volume in
Cigna's fee-for-service plans. Revenues relating to the Cigna contract for the
first nine months of fiscal 2005 declined by $5.4 million, or 2.9 percent, as
compared to the first nine months of fiscal 2004, 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 the addition of the New England
states and volume growth noted above. Non-Cigna, Commercial Insurance and Other
revenues increased by $1.8 million, or 3.7 percent, for the third quarter and
increased by $10.2 million, or 7.1 percent, for the first nine months of fiscal
2005, as compared to the corresponding periods of fiscal 2004, primarily by
increased unit volume from existing business and new contracts signed during the
past year, as well as the impact of adding the Heritage operations ($1.2 million
for the third quarter and $1.8 million for the first nine months of fiscal
2005).
Home Healthcare Services segment revenues increased $15.2 million, or
12.2 percent, from $124.0 million during the third quarter of fiscal 2004 to
$139.1 million during the third quarter of fiscal 2005. For the nine months
ended October 2, 2005, Home Healthcare Services revenues were $409.9 million, an
increase of $20.9 million, or 5.4 percent, from $389.0 million for the first
nine months of fiscal 2004. Revenues for the first nine months of fiscal 2004
were positively impacted by the Medicare special items totaling $9.1 million, as
discussed above. In addition, for the third quarter and first nine months of
fiscal 2004, Medicare revenues and Commercial Insurance and Other revenues were
negatively impacted by four hurricanes in the Southeastern United States.
23
CareCentrix segment revenues increased $5.5 million, or 6.9 percent,
from $79.1 million during the third quarter of fiscal 2004 to $84.6 million
during the third quarter of fiscal 2005. CareCentrix segment revenues for the
first nine months of fiscal 2005 were $250.6 million as compared to $246.7
million for the first nine months of fiscal 2004, an increase of $3.9 million,
or 1.6 percent. For the third quarter of fiscal 2005, this increase was driven
primarily by the addition of Cigna members in five New England states, effective
July 1, 2005, and growth in Cigna's fee-for-service plans and, for both the
third quarter and first nine months of fiscal 2005, by increases in the
non-Cigna Commercial Insurance and Other revenues.
Gross Profit
(Dollars in millions) Third Quarter Nine Months
----------------------------------- -------------------------------------
2005 2004 Variance 2005 2004 Variance
------ ------ -------- ------ ------ --------
Gross profit $ 81.0 $ 75.5 $ 5.5 $242.4 $237.1 $ 5.3
As a percent of revenue 36.9% 38.1% (1.2%) 37.5% 38.2% (0.7%)
As a percentage of revenue, gross profit decreased by 1.2 percentage
points in the third quarter of fiscal 2005 and 0.7 percentage points in the
first nine months of fiscal 2005 as compared to the corresponding periods of
fiscal 2004. The decrease in gross profit margins was primarily attributable to
the CareCentrix segment (impact of 1.7 percentage points for the quarter and
0.5 percentage points for the nine month period) and the Medicare special items
recorded in the 2004 periods (impact of 0.3 percentage points for the quarter
and 0.9 percentage points for the nine month period) offset by improvements in
the Home Healthcare Services segment (impact of 0.8 percentage points for the
quarter and 0.7 percentage points for the nine month period).
The decline in gross profit margins in the fiscal 2005 periods as
compared to the fiscal 2004 periods in the CareCentrix segment occurred
principally in the third quarter and resulted from (i) a positive adjustment
relating to a change in estimated costs in the 2004 period as the Company
completed its reconfiguration of the home medical equipment network and (ii)
lower margins in the 2005 period due to changes in the Company's arrangements
with TriWest.
The increase in gross profit margins in the Home Healthcare Services
segment resulted from several factors including (i) the favorable change in
business mix due to increased volume of Medicare business, including growth from
higher margin specialty programs, (ii) increased revenue per Medicare admission
in the third quarter of fiscal 2005 as a result of improvements in the training
and orientation of full-time clinicians and (iii) rate increases in Medicare and
certain non-Medicare business. These increases were offset somewhat by increased
direct cost of services including clinician wages, benefits and fuel costs as
well as costs relating to orientation, training and productivity as the Company
transitions more of its skilled clinical care to a dedicated full-time
workforce.
24
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation
and amortization, increased $5.3 million to $74.3 million for the quarter ended
October 2, 2005, as compared to $69.0 million for the quarter ended September
26, 2004, and $15.5 million to $222.4 million for the nine months ended October
2, 2005, as compared to $206.9 million for the nine months ended September 26,
2004.
The increases for the third quarter and the first nine months of fiscal
2005, as compared to the corresponding periods of fiscal 2004, were attributable
to (i) field operating costs associated with the Heritage operations following
its acquisition in May 2005, (approximately $1.5 million for the third quarter
and over $2.5 million for the first nine months of fiscal 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 ($2.5 million for the third quarter and
$9.5 million for the first nine months of fiscal 2005), (iii) increased selling
and patient care coordination expenses, primarily in the Home Healthcare
Services segment ($0.8 million for the third quarter and $3.0 million for the
first nine months of fiscal 2005), (iv) severance and other costs relating to
the closing of selected Home Healthcare Services branch locations ($0.3 million
for both the third quarter and first nine months of fiscal 2005) and (v)
incremental costs at the CareCentrix regional coordination centers to service
increased unit volume ($0.3 million for the third quarter and $1.0 million for
the first nine months of fiscal 2005), as well as, primarily for the first nine
months of fiscal 2005, incremental costs relating to the hiring of full-time
clinicians and other personnel. These increases were partially offset by lower
corporate general and administrative expenses ($0.4 million for the third
quarter and $1.3 million for the first nine months of fiscal 2005) and, for the
nine 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 pre-tax gain on
sale of approximately $0.9 million which is reflected in the consolidated
statement of income for the nine months ended September 26, 2004.
Interest Income, Net
Net interest income was $0.4 million for the quarter ended October
2, 2005 and $0.2 million for the quarter ended September 26, 2004. Net interest
income included interest income of $0.7 million for the third quarter of fiscal
2005 and $0.5 million for the third quarter of fiscal 2004, partially offset by
fees relating to the revolving credit facility and outstanding letters of
credit.
Net interest income was $1.3 million for the nine months ended October
2, 2005 compared to $0.5 million for the nine months ended September 26, 2004.
Net interest income for the first nine months of fiscal years 2005 and 2004
represented interest income of $2.1 million
25
and $1.3 million, respectively, partially offset by fees relating to the
revolving credit facility and outstanding letters of credit.
Income Taxes
The Company recorded a federal and state income tax provision of $2.8
million for the third quarter of fiscal 2005, of which $1.6 million represented
a current tax provision and $1.2 million represented a deferred tax provision.
For the nine months ended October 2, 2005, the Company recorded a federal and
state income tax provision of $4.3 million representing a current tax benefit of
$0.1 million and a deferred tax provision of $4.4 million. The income tax
provision for the first nine months 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 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 20 percent for the first nine months of fiscal 2005 is
primarily due to the release of tax reserves and state taxes.
Federal and state income taxes of $2.4 million and $12.1 million were
recorded for the third quarter and first nine 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 third quarter of fiscal 2005, net income was $4.3 million, or
$0.17 per diluted share, compared with net income of $4.4 million, or $0.17 per
diluted share, for the corresponding period of 2004.
For the first nine months of fiscal 2005, net income was $17.0 million,
or $0.68 per diluted share, compared with net income of $19.6 million, or $0.74
per diluted share for the first nine months of fiscal 2004.
Net income for the third quarter of fiscal 2004 included a special item
related to Medicare, noted under the heading "Revenues" above, which had a net
positive impact of $0.7 million, or $0.03 per diluted share.
Net income for the first nine months of fiscal 2005 included $4.2
million, or $0.17 per diluted share, relating to the favorable resolution of tax
audit issues noted under the heading "Income Taxes" above. Net income for the
first nine months of fiscal 2004 included three special items related to
Medicare, noted under the heading "Revenues" above, which had a net positive
impact of $5.6 million, or $0.22 per diluted share. Net income for the first
nine 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.
26
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 realized net cash provided by operating activities of $9.3
million in the nine months ended October 2, 2005 as compared to net cash
provided by operating activities of $27.0 million in the nine months ended
September 26, 2004. The decrease of $17.7 million in net cash provided by
operating activities was primarily driven by changes impacting the statement of
income, changes in accounts receivable and changes in current liabilities.
Cash flow changes impacting the statement of income represent the sum
of net income and all adjustments to reconcile net income to net cash provided
by operating activities and are summarized as follows:
Nine Months Ended
-----------------------------------------------------
October 2, 2005 September 26, 2004 Variance
-------- -------- --------
OPERATING ACTIVITIES:
Net income $ 17,026 $ 19,594 $ (2,568)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 5,938 5,505 433
Provision for doubtful accounts 4,329 4,708 (379)
Gain on sale of Canadian investment -- (946) 946
Reversal of tax audit reserves (4,200) -- (4,200)
Deferred income tax expense 4,408 9,743 (5,335)
-------- -------- --------
Total adjustments to reconcile net income $ 27,501 $ 38,604 $(11,103)
======== ======== ========
o The $11.1 million difference is primarily related to the special
Medicare item of $9.1 million in cash received in fiscal 2004 in
settlement of the Company's appeal with the PRRB in connection
with the reopening of all of the Company's 1997 and 1998 cost
reports.
o See "Results of Operations - Income Taxes" for a discussion of
deferred income tax expense and reversal of tax audit reserves.
Cash flow from operating activities between the 2004 and 2005 reporting
periods was negatively impacted by $15.6 million as a result of changes in
accounts receivable of $0.9 million in the 2004 period and ($14.7) million in
the 2005 period. The increase in accounts receivable relates primarily to
incremental receivables attributable to the TriWest account, for which there
were processing delays in adjudicating the Company's claims, and the Heritage
operations which were acquired on May 1, 2005.
Cash flow from operating activities was positively impacted by $10.2
million as a result of changes in current liabilities of ($12.1) million in the
2004 period and ($1.9) million in the 2005 period. A summary of the changes in
current liabilities impacting cash flow from operating activities for the nine
month fiscal period ended October 2, 2005 follows:
27
Nine Months Ended
------------------------------------------------------
October 2, 2005 September 26, 2004 Variance
------- -------- --------
OPERATING ACTIVITIES:
Changes in current liabilities:
Accounts payable $ (719) $ (2,843) $ 2,124
Payroll and related taxes 6,416 (2,956) 9,372
Medicare liabilities (3,085) (145) (2,940)
Cost of claims incurred but not reported (1,117) (2,228) 1,111
Obligations under insurance programs (2,432) (609) (1,823)
Other accrued expenses (965) (3,321) 2,356
------- -------- --------
Total changes in current liabilities $(1,902) $(12,102) $ 10,200
======= ======== ========
The primary driver for the $10.2 million difference results from the
timing of payments related to administrative payroll and payroll taxes. The
difference of $9.4 million between reporting periods is attributable to the
timing of the remittance of administrative payroll and related payroll taxes at
October 2, 2005 compared to September 26, 2004. Other changes in current
liabilities that impacted cash flow from operating activities include:
o Accounts payable which had a positive impact on cash of $2.1
million between the 2004 and 2005 reporting periods primarily
related to the timing of payment of normal trade payables.
o Medicare liabilities which had a negative impact on cash of $2.9
million between the 2004 and 2005 reporting periods primarily due
to recoupments of PEPs by the Company's fiscal intermediary.
o Cost of claims incurred but not reported which had a positive
impact of $1.1 million between the 2004 and 2005 reporting periods
due to lower claims activity resulting from the decline in the
number of enrolled Cigna members covered under the capitation
arrangement.
o Obligations under insurance programs which had a negative impact on
cash of $1.8 million between the 2004 and 2005 reporting periods
primarily as a result of payments made for workers' compensation
claims in excess of incremental workers' compensation costs. The
decrease in workers' compensation costs was due to a reduction in
the number and severity of workers' compensation claims in recent
years.
o Other accrued expenses which had a positive impact on cash of $2.4
million between the 2004 and 2005 reporting periods due primarily
to an increase in deferred PPS revenue resulting from growth in
Medicare revenue.
The Company used its operating cash balances to fund the acquisition of
Heritage of $12.1 million, including transaction costs, capital expenditures of
$6.0 million, and the repurchase of shares of the Company's common stock of
$13.5 million during the first nine months of fiscal 2005.
Working capital at October 2, 2005 was approximately $133 million, a
decrease of $4 million as compared to approximately $137 million at January 2,
2005, primarily due to:
o a $19 million decrease in cash, cash equivalents, restricted cash
and short-term investments;
o a $10 million increase in accounts receivable, as described above
in the discussion on net cash provided by operating activities;
28
o a $1 million decrease in deferred tax assets;
o a $2 million increase in prepaid expenses and other assets due to
prepayments made in connection with the Company's insurance
programs; and
o a $4 million decrease in current liabilities, consisting of
decreases in accounts payable ($2 million), Medicare liabilities
($3 million), cost of claims incurred but not reported ($1
million), obligations under insurance programs ($3 million), and
other accrued expenses ($1 million), partially offset by an
increase in payroll and related taxes ($6 million). The changes in
current liabilities are described above in the discussion on net
cash provided by operating activities.
Days Sales Outstanding ("DSO") as of October 2, 2005 increased by 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.
Accounts receivable attributable to major payer sources of
reimbursement are as follows (in thousands):
October 2, 2005 January 2, 2005
-------------------------- --------------------------
Medicare $ 29,885 20% $ 23,848 17%
Medicaid and Local Government 25,685 17 20,391 15
Commercial Insurance and Other 88,743 59 88,910 64
Self-Pay 6,374 4 5,893 4
------------------------- -------------------------
Gross Accounts Receivable 150,687 100% 139,042 100%
Less: Allowance for doubtful accounts (8,348) ===== (7,040) =====
--------- ---------
Net Accounts Receivable $ 142,339 $ 132,002
========= =========
The Company participates in Medicare, Medicaid and other federal and
state healthcare programs. Revenue mix by major payer classifications are as
follows:
Three Months Ended Nine Months Ended
------------------------------------ ------------------------------------
October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004
------ ------ ------ ------
Medicare 31% 26% 30% 27%
Medicaid and Local Government 17 19 17 19
Commercial Insurance and Other 52 55 53 54
------ ------ ------ ------
100% 100% 100% 100%
====== ====== ====== ======
On January 1, 2006, a 2.8 percent Medicare market basket rate increase
takes effect for patients on service on or after January 1, 2006. A 2.3 percent
Medicare 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
29
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, as amended, with Cigna, effective
January 1, 2004, pursuant to which the Company currently 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 third quarter and first nine
months of fiscal 2005, Cigna accounted for approximately 29 percent of the
Company's total net revenues, compared to approximately 30 percent and 31
percent for the third quarter and first nine 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.
Effective February 1, 2006, the Company will no longer provide respiratory
therapy services and certain durable medical equipment services under its Cigna
contract. However, the Company extended its relationship with Cigna by entering
into an amendment to its contract on October 27, 2005 relating to the
coordination of the provision of direct home nursing and related services, home
infusion services and certain other specialty medical equipment. The term of the
contract, as now amended, extends to January 31, 2009, and automatically renews
thereafter for additional one year terms unless terminated. Under the
termination provisions, each party has the right to terminate the agreement on
January 31, 2008, under certain conditions, if the party terminating provides
written notice to the other party on or before September 1, 2007. Each party
also has the right to terminate at the end of each term by providing at least 90
days advance written notice to the other party 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 arrangements with managed care
payers were approximately 11 percent of total net revenues for the third quarter
and first nine months of fiscal 2005, and 13 percent and 12 percent for the
third quarter and first nine months of fiscal 2004, respectively.
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
30
to 2.5 percent and 0.50 percent, respectively. Total outstanding letters of
credit were $20.2 million as of October 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.
As of October 2, 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 October 2, 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 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 October 2, 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 these risks 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
31
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 nine months ended October 2,
2005 were $6.0 million as compared to $7.6 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 approximate $12.0
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 $94.4 million as of October 2, 2005. The restricted
cash of $22.0 million at October 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 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.
The Company anticipates that repayments to Medicare for PEPs and prior
year cost report settlements will be made periodically through 2005. These
amounts were included in Medicare liabilities in the accompanying consolidated
balance sheets.
From May 2003 through October 2, 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 nine months of fiscal 2005, the Company
repurchased 822,100 shares of its outstanding common stock at an average cost of
$16.44 per share and a total cost of approximately $13.5 million. As of October
2, 2005, the Company had remaining authorization to repurchase an aggregate of
1,186,296 shares of its outstanding common stock. During the period from October
3, 2005 through November 8, 2005, the Company purchased 487,900 shares of its
common stock at an aggregate cost of approximately $7.3 million. See also Part
II, Item 2, of this Form 10-Q.
Contractual Obligations and Commercial Commitments
At October 2, 2005, the Company had no long-term debt. During the first
nine months of fiscal 2004, the Company commenced implementation of a five-year
capital lease for
32
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 October 2, 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 1,238 446 703 89 --
Operating lease obligations 50,179 17,886 21,271 9,255 1,767
Purchase obligations -- -- -- -- --
-----------------------------------------------------------------
Total $51,417 $18,332 $21,974 $9,344 $1,767
=================================================================
During the first nine months 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 October 2, 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. 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 October 2, 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 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
33
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 nine months of fiscal 2005 and fiscal 2004, calculated using
the Black-Scholes option-pricing model, and other assumptions are as follows:
Nine Months Ended
----------------------------------------------
October 2, 2005 September 26, 2004
------------------- -----------------------
Weighted average fair value
of options granted $ 6.13 $ 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 and prior periods, 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 nine months of fiscal 2005 and fiscal 2004 are as
follows:
Nine Months Ended
------------------------------ -----------------------------
October 2, 2005 September 26, 2004
------------------------------ -----------------------------
1st offering 2nd offering 1st offering 2nd offering
Period Period Period Period
------ ------ ------ ------
Risk-free interest rate 2.63% 3.32% 1.02% 1.76%
Expected volatility 27% 33% 28% 30%
Expected life 0.5 years 0.5 years 0.5 years 0.5 years
Expected dividend yield 0% 0% 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
34
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 Nine Months Ended
------------------------------------ -----------------------------------
October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004
--------------- ------------------ --------------- ------------------
Net income - as reported $ 4,251 $ 4,399 $ 17,026 $ 19,594
Deduct: Total stock-based compensation expense
determined under fair value based
method for all awards, net of tax (852) (579) (2,916) (1,834)
---------- ---------- ---------- ----------
Net income - pro forma $ 3,399 $ 3,820 $ 14,110 $ 17,760
========== ========== ========== ==========
Basic income per share - as reported $ 0.18 $ 0.18 $ 0.73 $ 0.78
Basic income per share - pro forma $ 0.15 $ 0.16 $ 0.60 $ 0.71
Diluted income per share - as reported $ 0.17 $ 0.17 $ 0.68 $ 0.74
Diluted income per share - pro forma $ 0.14 $ 0.15 $ 0.56 $ 0.67
Stock-based compensation expense, net of tax, for the nine months ended
October 2, 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.
Critical Accounting Policies and Estimates
- ------------------------------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates. The most critical estimates relate to revenue
recognition, the collectibility of accounts receivable and related reserves, the
cost of claims incurred but not reported and obligations under insurance
programs, which include workers' compensation, professional liability, property
and general liability, and employee health and welfare insurance programs. A
description of the critical accounting policies and a discussion of the
significant estimates and judgments associated with such policies are described
below.
Revenue Recognition
Revenues recognized by the Company are subject to a number of variables
which impact both the overall amount of revenue realized as well as the timing
of the collection of the related accounts receivable. In each category described
below, the impact of the estimate, if applicable, undertaken by the Company with
respect to these variables is reflected in net revenues on the consolidated
statements of operations.
Fee-for-Service Agreements
Under fee-for-service agreements with patients and commercial and
certain government payers, net revenues are recorded based on net realizable
amounts to be received in the period in which the services and products are
provided or delivered. Fee-for-service contracts with commercial payers are
traditionally one year in term and renewable automatically on an annual basis,
unless terminated by either party.
35
Under fee-for-service agreements with certain managed care customers,
the Company also estimates the revenue related to claims incurred but not
reported in situations in which the Company is responsible for care management
and patient services are performed by a non-affiliated provider. The estimate of
revenue for claims incurred but not reported involves applying a factor based on
historical patterns of service utilization and payment trends to the services
authorized at each of the Company's regional coordination centers. The Company
evaluates the assumptions and judgments used in determining this factor on a
quarterly basis utilizing the trailing twelve months of claims payments, and
changes in estimated unbilled receivables for claims incurred but not reported
are determined based on such evaluation. Changes in estimates are recorded as
net revenues in the Company's consolidated statements of operations.
Capitated Arrangements
The Company has capitated arrangements with certain managed care
customers. Under the capitated arrangements, net revenues are recognized based
on a predetermined monthly contractual rate for each member of the managed care
plan regardless of the volume of services covered by the capitation
arrangements. Net revenues generated under capitated arrangements were
approximately 12 percent, 16 percent, and 16 percent of total net revenues for
fiscal 2004, 2003, and 2002, respectively.
Medicare
Prospective Payment System Reimbursements
-----------------------------------------
Under PPS for Medicare reimbursement, the Company estimates net
revenues to be recorded based on a reimbursement rate which varies based on the
severity of the patient's condition, service needs and certain other factors.
Medicare billings under PPS are initially recognized as deferred revenue and are
subsequently amortized into revenue over an average patient treatment period.
The process for recognizing revenue to be recorded under the Medicare program is
based on certain assumptions and judgments, including the average length of time
of each treatment as compared to a standard 60 day episode, the appropriateness
of the clinical assessment of each patient at the time of certification and the
level of adjustments to the fixed reimbursement rate relating to patients who
receive a limited number of visits, have significant changes in condition or are
subject to certain other factors during the episode. Revenue is subject to
adjustment during this period if there are significant changes in the patient's
condition during the treatment period or if the patient is discharged but
readmitted to another agency within the same 60 day episodic period. Deferred
revenue of approximately $5.5 million and $5.2 million relating to the Medicare
PPS program was included in other accrued expenses in the consolidated balance
sheets as of January 2, 2005 and December 28, 2003, respectively.
Settlement Issues under Interim Payment System
----------------------------------------------
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in
36
annual cost reports which were filed with CMS and were subject to audit by the
fiscal intermediary engaged by CMS. The fiscal intermediary has not finalized
its audit of the fiscal 2000 cost reports. Furthermore, settled cost reports
relating to certain years prior to fiscal 2000 could be subject to reopening of
the audit process by the fiscal intermediary. Although management believes that
established reserves related to the open fiscal 2000 cost report year are
sufficient, it is possible that adjustments resulting from such audits could
exceed established reserves and could have a material effect on the Company's
financial condition and results of operations. These reserves are reflected in
Medicare Liabilities in the accompanying consolidated balance sheets. The
Company periodically reviews its established audit reserves for appropriateness
and records any adjustments or settlements as net revenues in the Company's
consolidated statement of operations. Settlement liabilities are recorded at the
time of any probable and reasonably estimable event and any positive settlements
are recorded as revenue in the Company's consolidated statements of operations
in the period in which such gain contingencies are realized. As discussed
further under the heading "Government Matters - PRRB Appeal" in Note 10 to the
consolidated financial statements included in this report, the Company received
an aggregate of $10.1 million in settlement of the Company's appeal filed with
the PRRB related to the reopening of all of its 1997 and 1998 cost reports.
Causes and Impact of Change
For each of the sources of revenue, the principal variables in addition
to those described above which can cause change are (i) an inability to obtain
appropriate billing documentation; (ii) an inability to obtain authorizations
acceptable to the payer; (iii) utilization of services at levels other than
authorized; and (iv) other reasons unrelated to credit risk. Revenue adjustments
resulting from differences between estimated and actual reimbursement amounts
are recorded as adjustments to net revenues or recorded against allowance for
doubtful accounts, depending on the nature of the adjustment. These are
determined by Company management and reviewed from time to time, but no less
often than quarterly. Each of the variables described here and under each of the
various sources of revenue can effect change in the estimates, and it is not
possible to predict the degree of change that might be effected by a variation
in one or more of the elements described.
Billing and Receivables Processing
The Company's billing systems record revenues at net expected
reimbursement based on established or contracted fee schedules. The systems
provide for an initial contractual allowance adjustment from "usual and
customary" charges, which is typical for the payers in the healthcare field. The
Company records an initial contractual allowance at the time of billing and
reduces the Company's revenue to expected reimbursement levels. Changes in
contractual allowances, if any, are recorded each month. Changes in contractual
allowances have not had a significant impact on results of operations between
reporting periods.
Accounts receivable attributable to major payer sources of
reimbursement are as follows:
37
(Dollars in thousands)
October 2, 2005 January 2, 2005
-------------------------- --------------------------
Medicare $ 29,885 20% $ 23,848 17%
Medicaid and Local Government 25,685 17 20,391 15
Commercial Insurance and Other 88,743 59 88,910 64
Self-Pay 6,374 4 5,893 4
------------------------- -------------------------
Gross Accounts Receivable 150,687 100% 139,042 100%
Less: Allowance for doubtful accounts (8,348) ===== (7,040) =====
--------- ---------
Net Accounts Receivable $ 142,339 $ 132,002
========= =========
The Company's estimate of "Collectibility of Accounts Receivable"
further outlines other matters considered with respect to the allowance for
doubtful accounts.
Collectibility of Accounts Receivable
The process for estimating the ultimate collection of receivables
involves significant assumptions and judgments. The Company believes that its
collection and reserve processes, along with the monitoring of its billing
processes, help to reduce the risk associated with material revisions to reserve
estimates resulting from adverse changes in reimbursement experience, revenue
adjustments and billing functions. Collection processes are performed in
accordance with the Fair Debt Collections Practices Act and include reviewing
aging and cash posting reports, contacting the payers to determine why payment
has not been made, resubmission of claims when appropriate and filing appeals
with payers for claims that have been denied. The Company's bad debt policy
includes escalation procedures and guidelines for write-off of an account, as
well as the authorization required, once it is determined that the open account
has been worked by the Company's internal collectors and/or collection agencies
in accordance with the Company's standard procedures and resolution of the open
account through receipt of payment is determined to be remote. The Company
reviews each account individually and does not have either a threshold dollar
amount or aging period that it uses to trigger a balance write-off, although the
Company does have a small balance write-off policy for non-governmental accounts
with debit balances under $10.
The Company's policy is to bill for patient co-payments and make good
faith efforts to collect such amounts. At the end of each reporting period, the
Company estimates the amount of outstanding patient co-payments that will not be
collected and the amount of outstanding co-payments that may be waived due to
financial hardship based on a review of historical trends. This estimate is made
as part of the Company's evaluation of the adequacy of its allowance for
doubtful accounts.
The Company has implemented a standardized approach to estimate and
review the collectibility of its receivables based on accounts receivable aging
trends. Historical collection and payer reimbursement experience and revenue
adjustment trends are integral parts of the estimation process related to
determining the valuation allowance for accounts receivable. In addition, the
Company assesses the current state of its billing functions on a quarterly basis
in order to identify any known collection or reimbursement issues to determine
the impact, if any, on its reserve estimates, which involve judgment. Revisions
in reserve estimates are recorded as an adjustment to the provi-
38
sion for doubtful accounts which is reflected in selling, general and
administrative expenses in the consolidated statements of operations. The
allowance for doubtful accounts at January 2, 2005, December 28, 2003 and
December 29, 2002 was $7.0 million, $7.9 million and $9.0 million, respectively.
Additional information regarding the Company's allowance for doubtful accounts
can be found in Schedule II - Valuation and Qualifying Accounts on page F-29 of
the Company's 2004 Annual Report on Form 10-K, as amended.
Cost of Claims Incurred But Not Reported
Under capitated arrangements with managed care customers, the Company
estimates the cost of claims incurred but not reported based on applying
actuarial assumptions, historical patterns of utilization to authorized levels
of service, current enrollment statistics and other information. Under
fee-for-service arrangements with managed care customers, the Company also
estimates the cost of claims incurred but not reported and the estimated revenue
relating thereto in situations in which the Company is responsible for care
management and patient services are performed by a non-affiliated provider.
The estimate of cost of claims incurred but not reported involves
applying a factor based on historical patterns of service utilization and
payment trends to the services authorized at each of the Company's regional
coordination centers. The Company evaluates the assumptions and judgments used
in determining this factor on a quarterly basis utilizing the trailing twelve
months of claims payments, and changes in estimated liabilities for cost of
claims incurred but not reported are determined based on such evaluation.
Because of the variables described above, these estimates will continue
to change in the future. Each of the variables described above can effect change
in the estimates, and it is not possible to predict the degree of change that
might be effected by a variation in one or more of the elements described.
Changes to estimates of the cost of claims incurred but not reported are
reflected as direct cost in the Company's consolidated statements of operation.
Obligations Under Insurance Programs
The Company is obligated for certain costs under various insurance
programs, including workers' compensation, professional liability, property and
general liability, and employee health and welfare.
The Company may be subject to workers' compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk with insurance policies subject to
substantial deductibles and retention amounts. The Company recognizes its
obligations associated with these programs in the period the claim is incurred.
The cost of both reported claims and claims incurred but not reported, up to
specified deductible limits, have generally been estimated based on historical
data, industry statistics, the Company's own home health specific historical
claims experience, current enrollment statistics and other information. The
Company's estimates of its obligations and the resulting reserves are reviewed
and updated from time to time but at least quarterly. The variables which impact
this critical estimate include the number, type and severity of claims and the
policy deductible limits; therefore, the estimate is sensitive and may well be
changed from time to time. Changes in estimates of the Company's workers'
com-
39
pensation and professional liability claims are recorded as direct costs in the
Company's consolidated statements of operation.
The Company maintains insurance coverage on individual claims. The
Company is responsible for the cost of individual workers' compensation claims
and individual professional liability claims up to $500,000 per incident which
occurred prior to March 15, 2002, and $1,000,000 per incident thereafter. The
Company also maintains excess liability coverage relating to professional
liability and casualty claims which provides insurance coverage for individual
claims of up to $25,000,000 in excess of the underlying coverage limits.
Payments under the Company's workers' compensation program are guaranteed by
letters of credit and segregated restricted cash balances. The Company believes
that its present insurance coverage and reserves are sufficient to cover
currently estimated exposures, but there can be no assurance that the Company
will not incur liabilities in excess of recorded reserves or in excess of its
insurance limits.
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 October 2,
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.
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 October 2, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during such
quarter.
40
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
------ --------- --------- ----------- -----------
July (7/04/05 - 7/31/05) 7,500 $ 18.37 7,500 1,244,596
August (8/01/05 - 8/28/05) 800 $ 18.17 800 1,243,796
September (8/29/05 - 10/02/05) 57,500 $ 18.03 57,500 1,186,296
------ --------- ------
Total 65,800 $ 18.07 65,800
====== ========= ======
(1) On April 14, 2005, the Company announced that its Board of
Directors had authorized the repurchase of up to 1,500,000 shares
of its outstanding common stock. By the end of the period covered
by the table, 313,704 of such shares had been repurchased.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
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
41
Company has failed to comply with the terms of its corporate
integrity agreement, 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, 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 Amendment dated July 15, 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 Fourth Amendment dated September 29, 2005 to Managed
Care Alliance Agreement between CIGNA Health
Corporation and Gentiva CareCentrix, Inc. entered
into as of January 1, 2004.*
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).*
42
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).
* Filed herewith
43
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: November 14, 2005 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: November 14, 2005 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
44