UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 1, 2006
Commission File No. 1-15669
GENTIVA HEALTH SERVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-4335801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.10 per share NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes_ No X
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
Yes _ No X
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer (as defined in Exchange Act
Rule 12b-2).
Large accelerated filer _ Accelerated filer X Non-accelerated filer _
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2).
Yes _ No X
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of July 3, 2005, the last business day of
registrant's most recently completed second fiscal quarter, was $420,375,493
based on the closing price of the common stock on the Nasdaq National Market on
such date.
The number of shares outstanding of the registrant's common stock, as of
March 9, 2006, was 26,521,756.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant's definitive Proxy
Statement, to be filed not later than 120 days after the end of the fiscal year
covered by this Report, for the registrant's 2006 Annual Meeting of Shareholders
is incorporated by reference into PART III.
PART I
Item 1. Business
As used in this annual report on Form 10-K, the terms "we," "us,"
"our," the "Company" and "Gentiva" refer to Gentiva Health Services, Inc.
Special Caution Regarding Forward-Looking Statements
Certain statements contained in this annual report on Form 10-K,
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. These factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for healthcare reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets 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 revenues associated with
major payer sources;
o ability of customers to pay for services;
o business disruption due to natural disasters or terrorist acts;
o ability to successfully integrate the operations of The Healthfield
Group and achieve expected synergies and operating efficiencies from
the acquisition, in each case within expected time-frames or at all;
o effect on liquidity of the Company's debt service requirements;
o a material shift in utilization within capitated agreements; and
o changes in estimates and judgments associated with critical accounting
policies and estimates.
For a detailed discussion of these and other factors that could cause
the Company's actual results to differ materially from the results contemplated
by the forward-looking statements, please refer to Item 1A. "Risk Factors" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and elsewhere in this report. 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
within this annual report on Form 10-K and various filings with the SEC. The
reader is encouraged to review these risk factors and filings.
Introduction
Gentiva Health Services, Inc. provides comprehensive home health
services throughout most of the United States. Gentiva was incorporated in the
state of Delaware on August 6, 1999 and became an independent publicly owned
company on March 15, 2000.
Information included in this annual report on Form 10-K refers to the
Company's operations conducted through its Home Healthcare Services and
CareCentrix business segments as further described below, unless the context
indicates otherwise.
Recent Developments
1
Healthfield Acquisition
On February 28, 2006, the Company completed the acquisition of The
Healthfield Group, Inc. ("Healthfield"), a leading provider of home healthcare,
hospice and related services with approximately 130 locations primarily in eight
southeastern states, for $454 million in cash and shares of Gentiva common
stock, excluding transaction costs and subject to post-closing adjustments. The
Company funded the purchase price from approximately $370 million of borrowings
under a new senior term loan facility, approximately 3.2 million shares of
Gentiva common stock and the remainder from existing cash balances. A portion of
the purchase price will be used to refinance Healthfield's existing net
indebtedness.
On February 28, 2006, in connection with the Healthfield acquisition,
the Company entered into a Credit Agreement, by and among the Company, as
borrower, Lehman Brothers Inc., as sole lead arranger and sole bookrunner, and
Lehman Commercial Paper Inc., as administrative agent (the "Administrative
Agent") (the "Credit Agreement"). The Credit Agreement provides for an aggregate
borrowing amount of $445.0 million including (i) a seven year term loan of
$370.0 million repayable in quarterly installments of 1% per annum (with the
remaining balance due at maturity on March 13, 2013) and (ii) a six year
revolving credit facility $75.0 million, of which $55.0 million will be
available for the issuance of letters of credit and $10.0 million will be
available for swing line loans. See Note 14 to the consolidated financial
statements included in this report for more information about the Credit
Agreement and related agreements.
Other Significant Events
On March 15, 2000, 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"). Prior to the
Split-Off, all of the assets and liabilities of Olsten's health services
business (formerly known as Olsten Health Services) were transferred to the
Company pursuant to a separation agreement and other agreements among Gentiva,
Olsten and Adecco SA ("Adecco").
In October 2000, the Company consummated the sale of its healthcare
staffing services business and received cash proceeds of $66.5 million. In
November 2000, the Company finalized the sale of its home care nursing services
operations in Canada.
On June 13, 2002, the Company sold substantially all of the assets of
its specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo") and received payment of cash in the amount of $207.5
million (before a $0.9 million reduction resulting from a closing net book value
adjustment) and 5,060,976 shares of Accredo common stock (valued at $262.6
million, based on the closing price of Accredo common stock on the Nasdaq
National Market on June 13, 2002). The cash consideration (less a holdback of
$3.5 million for certain income taxes the Company expected to incur) and the
Accredo common stock were then distributed as a special dividend to the
Company's shareholders.
Business Segments
Commencing in fiscal 2005, the Company identified two business segments
for reporting purposes: Home Healthcare Services and CareCentrix(R). Financial
information with respect to these business segments, including their
contributions to net revenues and operating earnings for each of the three years
in the period ended January 1, 2006, is contained under "Results of Operations"
in Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations"; and in Note 13, "Business Segment Information" to the
Company's consolidated financial statements in Item 8, "Financial Statements and
Supplementary Data."
Home Healthcare Services
The Home Healthcare Services segment is comprised of direct home
nursing and therapy services operations, including the specialty programs
described below as well as Gentiva Consulting. As of January 1, 2006, the
Company's Home Healthcare Services segment conducted its business through more
than 350 direct service delivery units operating from more than 250 locations
under its Gentiva(R) brand.
The Company's direct home nursing and therapy services operations are
conducted through licensed and Medicare-certified agencies located in 35 states,
from which the Company provides various combinations of skilled nursing and
therapy services, paraprofessional nursing services and homemaker services to
pediatric, adult
2
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 also delivers 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 Program(SM), which provides therapies for
patients with balance issues who are prone to injury or immobility
as a result of falling;
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based
environment; and
o Gentiva Rehab Without Walls(R), which 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. All 11 locations where Gentiva Rehab Without
Walls operates have been accredited by the Commission on
Accreditation of Rehabilitation Facilities ("CARF").
The specialty programs are conducted through the Company's licensed and
Medicare-certified agencies, except for Gentiva Rehab Without Walls which
operates from stand-alone branch locations.
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.
CareCentrix
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 3,000
provider locations, including both third-party provider and Gentiva locations,
under its CareCentrix brand.
CareCentrix operations provide an array of administrative services and
coordinate the delivery of home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services for
managed care organizations and health plans. These administrative services are
coordinated within two 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.
Payers
3
Total Company revenue mix by major payer classifications is as follows:
Gentiva Home Healthcare
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2005 2004 2003
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Medicare 31% 27% 22%
Medicaid and Local Government 17 18 20
Commercial Insurance and Other 52 55 58
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100% 100% 100%
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Home Healthcare Services revenue is derived from all major payer
classes. For fiscal 2005, Medicare revenue represented 48 percent, Medicaid and
Local Government revenue represented 27 percent and Commercial Insurance and
Other revenue represented 25 percent of Home Healthcare Services revenue. Net
revenues for CareCentrix were 100 percent attributable to the Commercial
Insurance and Other payer source.
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third-party
providers to provide direct home nursing and related services, home infusion
therapies and certain other specialty medical equipment to patients insured by
Cigna. For fiscal years 2005, 2004 and 2003, Cigna accounted for approximately
29 percent, 31 percent and 36 percent, respectively, of the Company's total net
revenues. No other commercial payer accounts for 10 percent or more of the
Company's total net revenues. Net revenues from commercial payers are primarily
generated under fee for service contracts, which are traditionally one year in
term and renewable automatically on an annual basis, unless terminated by either
party.
On October 27, 2005, the Company completed 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. CareCentrix ended its
coordination of respiratory therapy and certain durable medical equipment
services to Cigna members commencing services after 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 from the Cigna contract in fiscal 2005.
Trademarks
The Company has various trademarks registered with the U.S. Patent and
Trademark Office, including CARECENTRIX(R), GENTIVA(R), GENTIVA AND BUTTERFLY
DESIGN(R), LIFESMART(R) and REHAB WITHOUT WALLS(R), or in the process of being
registered with the U.S. Patent and Trademark Office, including CASEMATCH(SM),
GENTIVA UNIVERSITY (SM), GREAT HEALTHCARE HAS COME HOME (SM), SAFE STRIDES(SM),
CROSS IN CIRCLE DESIGN(SM) and GENTIVA AND CROSS IN CIRCLE DESIGN(SM). A
federally registered trademark in the United States is effective for ten years
subject only to a required filing and the continued use of the mark by the
Company, with the right of perpetual renewal. A federally registered trademark
provides a presumption of validity and ownership of the mark by the Company in
connection with its goods or services and constitutes constructive notice
throughout the United States of such ownership. A registration also provides
nationwide trademark rights as of the filing date of the application. Management
believes that the Company's name and trademarks are important to its operations
and intends to continue to renew its trademark registrations.
Business Environment
Factors that the Company believes have contributed and will contribute
to the development of home health services for both of its business segments
primarily include recognition that home health services can be a cost-effective
alternative to more expensive institutional care; aging demographics; changing
family structures in which more aging people will be living alone and may be in
need of assistance; increasing consumer and physician awareness and interest in
home health services; the psychological benefits of recuperating from an illness
or accident or receiving care for a chronic condition in one's own home; and
medical and technological advances that allow more health care procedures and
monitoring to be provided at home.
The Company is actively pursuing relationships with managed care
organizations to secure additional managed care contracts. The Company believes
that its nationwide network of providers, financial resources, and
4
the quality, range and cost-effectiveness of its services are important factors
as it seeks opportunities in its managed care relationships in a consolidating
home health services industry. In addition, the Company believes that it has the
local relationships, the knowledge of the regional markets in which it operates,
and the cost-effective, comprehensive services and products required to compete
effectively for managed care contracts and other referrals. The Company offers
the direct and managed provision of care as a single source, which it believes
optimizes utilization.
Marketing and Sales
Home Healthcare Services. In general, the Company's home health
services business obtains patients and clients through personal and corporate
sales presentations, telephone marketing calls, direct mail solicitation,
referrals from other clients and advertising in a variety of local and national
media, including the Yellow Pages, newspapers, magazines, trade publications and
radio. The Company maintains a dedicated sales force responsible for generating
local, regional and national referrals, as well as an Internet website
(www.gentiva.com) that describes the Company, its services and products.
Marketing efforts also involve personal contact with physicians, hospital
discharge planners and case managers for managed healthcare programs, such as
those involving health maintenance organizations and preferred provider
organizations, insurance company representatives and employers with self-funded
employee health benefit programs.
CareCentrix. In general, the Company's CareCentrix business obtains
clients through direct sales and marketing efforts into the payer community via
corporate sales presentations, telemarketing for appointments, direct mail,
trade shows and other traditional sales methods. The Company maintains a
dedicated sales force responsible for generating leads on a regional and
national basis as well as an Internet website (www.CareCentrix.com) that
describes the CareCentrix business segment, its services and products. Marketing
efforts also involve direct mail to payers and case managers for commercial
insurance programs. The Company also focuses its efforts on driving sales
through a workforce focus on large account management and pull-through
activities associated with Preferred Provider Organizations ("PPOs") where the
commercial membership has a choice of providers.
Competitive Position
Home Healthcare Services. The home health services industry in which
the Company operates is highly competitive and fragmented. Home healthcare
providers range from facility-based (hospital, nursing home, rehabilitation
facility, government agency) agencies to independent companies to visiting nurse
associations and nurse registries. They can be not-for-profit organizations or
for-profit organizations. In addition, there are relatively few barriers to
entry in some of the home health services markets in which the Company operates.
The Company's primary competitors for its home healthcare business are
hospital-based home health agencies, local home health agencies and visiting
nurse associations. Based on information contained in the Centers for Medicare &
Medicaid Services ("CMS") website, a government website containing information
on the home healthcare market in 2004, the Company believes its home health
services business holds approximately a 2 percent market share. The Company
competes with other home healthcare providers on the basis of availability of
personnel, quality and expertise of services and the value and price of
services. The Company believes that it has a favorable competitive position,
attributable mainly to its nationwide network of providers and the consistently
high quality and targeted services it has provided over the years to its
patients, as well as to its screening and evaluation procedures and training
programs for clinical associates who provide direct care to patients.
The Company expects that industry forces will impact it and its
competitors. The Company's competitors will likely strive to improve their
service offerings and price competitiveness. The Company also expects its
competitors to develop new strategic relationships with providers, referral
sources and payers, which could result in increased competition. The
introduction of new and enhanced services, acquisitions and industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's services or price competition, or make the Company's services less
attractive.
CareCentrix. The ancillary care benefit management field is very
narrowly focused with a few providers dedicated to facilitating these services.
The Company's competitors include direct providers of services as well as
regionally based benefit managers or PPOs that coordinate care directly through
Third Party Administrators ("TPAs") or local home healthcare providers. The
Company competes on the basis of quality and expertise of
5
services and the value and price of services. The Company believes that its
product and service offerings can be attractive to self-insured and the ultimate
payer or those that bear the cost of healthcare directly. The Company believes
that its competitive position is mainly attributable to its nationwide network
of providers and the consistently high quality and targeted services it has
provided over the years to its patients. The Company's competitors will likely
strive to improve their service offerings and price competitiveness. The Company
also expects its competitors to develop new strategic relationships with
providers, referral sources and payers, which could result in increased
competition. The introduction of new and enhanced services, acquisitions and
industry consolidation and the development of strategic relationships by the
Company's competitors could cause a decline in sales or loss of market
acceptance of the Company's services or price competition, or make the Company's
services less attractive.
Source and Availability of Personnel
Home Healthcare Services. To maximize the cost effectiveness and
productivity of clinical associates, the Company utilizes customized processes
and procedures that have been developed and refined over the years. Personalized
matching to recruit and select applicants who fit the patients' individual needs
is achieved through initial applicant profiles, personal interviews, skill
evaluations and background and reference checks. The Company utilizes its
proprietary CaseMatch(SM) software scheduling program, which gives local Company
offices the ability to identify those clinical associates who can be assigned to
patient cases.
Clinical associates are recruited through a variety of sources,
including advertising in local and national media, job fairs, solicitations on
websites, direct mail and telephone solicitations, as well as referrals obtained
directly from clients and other caregivers. Clinical associates are generally
paid on a per visit, per shift, per hour or per diem basis, or are employed on a
full-time salaried basis. The Company, along with its competitors, is currently
experiencing a shortage of licensed professionals. A continued shortage of
professionals could have a material adverse effect on the Company's business.
CareCentrix. In order to serve our customers effectively, the Company
contracts with providers to coordinate care and provide certain Durable Medical
Equipment ("DME"), Home Infusion Therapy ("HIT") and Traditional Home Health
("THH") services. The inability of CareCentrix to maintain its network of
providers to effectively service its customers could have a material adverse
effect on the Company's business.
Number of Persons Employed
At January 1, 2006, the Company employed approximately 4,235 full-time
associates, including approximately 1,230 salaried clinical associates, compared
to approximately 3,950 full-time associates, including approximately 920
salaried clinical associates, at the end of fiscal 2004. The Company also
employs clinical associates on a temporary basis, as needed, to provide home
health services. In fiscal 2005, the average number of non-salaried clinical
associates employed on a weekly basis in the Company's home health services
business was approximately 9,700, compared to approximately 10,600 in fiscal
2004. The Company believes that its relationships with its employees are
generally good.
Government Regulations
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
o Medicare, Medicaid, TRICARE (the Department of Defense's managed
healthcare program for military personnel and their families) and
other government-funded reimbursement programs;
o reporting requirements, certification and licensing standards for
certain home health agencies; and
o in some cases, certificate-of-need requirements.
The Company's compliance with these regulations may affect its
participation in Medicare, Medicaid, TRICARE and other federal healthcare
programs. For example, to participate in the Medicare program, a Medicare
beneficiary must be under the care of a physician, have an intermittent need for
skilled nursing or physical or other therapy care, must be homebound and must
receive home healthcare services from a Medicare approved
6
home healthcare agency. The Company is also subject to a variety of federal and
state regulations which prohibit fraud and abuse in the delivery of healthcare
services. These regulations include, among other things:
o prohibitions against the offering or making of direct or indirect
payments to actual or potential referral sources for obtaining or
influencing patient referrals;
o rules generally prohibiting physicians from making referrals
under Medicare for clinical services to a home health agency with
which the physician or his or her immediate family member has
certain types of financial relationships;
o laws against the filing of false claims; and
o laws against making payment or offering items of value to
patients to induce their self-referral to the provider.
As part of the extensive federal and state regulation of the home
health services business and under the Company's corporate integrity agreement,
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 in receipt, or an adjustment to the amount of
reimbursements due or received under Medicare, Medicaid, TRICARE and other
federal health programs. Violation of the applicable federal and state
healthcare regulations can result in excluding a healthcare provider from
participating in the Medicare, Medicaid and/or TRICARE programs and can subject
the provider to substantial civil and/or criminal penalties.
On January 1, 2005, a Medicare market basket increase of 2.3 percent
became effective for patients on service on or after such date. This increase
was 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 (referred to as the rural add-on provision) effective for patients on
service on or after April 1, 2005. In addition, a favorable change in the fixed
dollar ratio formula for receiving outlier payments became effective for
patients on service on or after January 1, 2005. Outliers represent patient
cases which exceed the anticipated cost thresholds established by Medicare and
result in increased reimbursement. This change has increased the number of
episodes that qualify for the outlier payment. On November 3, 2005, CMS
announced a 2.8 percent increase in home health reimbursement; however, on
February 1, 2006, Congress acted to hold constant existing reimbursement rates
for 2006 (except for a 5 percent rural add-on premium reflected in reimbursement
rates for specifically defined rural areas of the country for 2006.)
Seasonality
The Company has historically experienced a seasonal decline in the
demand for its home health services during the third fiscal quarter.
Available Information
The Company's Internet address is www.gentiva.com. The Company makes
available free of charge on or through its Internet website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable
after such material has been filed with, or furnished to, the SEC. The Company
also makes available on or through its website its press releases, an investor
presentation, Section 16 reports and certain corporate governance documents.
Item 1A. Risk Factors
This annual report on Form 10-K contains forward-looking statements
which involve a number of risks, uncertainties and assumptions, as discussed in
more detail above under Item 1. "Business - Special Caution Regarding
Forward-Looking Statements." Actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause actual
results to differ materially include, without limitation, the risk factors
discussed below and elsewhere in this annual report.
Risks Related to Gentiva's Business and Industry
7
Our growth strategy may not be successful.
The future growth of our business and our future financial performance
will depend on, among other things, our ability to increase our revenue base
through a combination of internal growth and strategic ventures, including
acquisitions. Our home health services business experienced no growth during the
fiscal periods from 1998 through 2001. During fiscal 2003, 2004 and 2005 revenue
grew 5.9 percent, 3.9 percent and 2.7 percent respectively; however, future
revenue growth cannot be assured as it is subject to the effects of competition,
various risk factors including the uncertainty of Medicare, Medicaid and private
health insurance reimbursement, the ability to generate new and retain existing
contracts with major payer sources, the ability to attract and retain qualified
personnel and the ability to integrate effectively and retain the business
acquired by us through our acquisition of Healthfield.
Competition among home healthcare companies is intense.
The home health services industry is highly competitive. We compete
with a variety of other companies in providing home health services, some of
which may have greater financial and other resources and may be more established
in their respective communities. Competing companies may offer newer or
different services from those offered by us and may thereby attract customers
who are presently receiving our home health services.
The cost of healthcare is funded substantially by government and
private insurance programs. If this funding is reduced or becomes
limited or unavailable to our customers, our business may be adversely
impacted.
Third-party payers include Medicare, Medicaid and private health
insurance providers. Third-party payers are increasingly challenging prices
charged for healthcare services. We cannot assure you that our services will be
considered cost-effective by third-party payers, that reimbursement will be
available or that payers' reimbursement policies will not have a material
adverse effect on our ability to sell our services on a profitable basis, if at
all. We cannot control reimbursement rates or policies for a significant portion
of our business.
Possible changes in the case mix of patients, as well as payer mix and
payment methodologies, may have a material adverse effect on our
profitability.
The sources and amounts of our patient revenues will be determined by a
number of factors, including the mix of patients and the rates of reimbursement
among payers. Changes in the case mix of the patients as well as payer mix among
private pay, Medicare and Medicaid may significantly affect our profitability.
In particular, any significant increase in our Medicaid population or decrease
in Medicaid payments could have a material adverse effect on our financial
position, results of operations and cash flow, especially if states operating
these programs continue to limit, or more aggressively seek limits on,
reimbursement rates or service levels.
The loss of significant contracts, as well as significant reductions in
members covered or services provided under these contracts, could have
a material adverse effect on our financial condition and results of
operations.
We have entered into service agreements with a number of managed care
organizations to provide, or contracted 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 those
organizations. One such contract with Cigna accounted for 29 percent of our
total net revenues for the year ended January 1, 2006. We entered into a new
home healthcare contract with Cigna effective January 1, 2004, as amended, and
expiring on January 31, 2007. We subsequently extended that contract to January
31, 2009. Under the termination provisions of the contract, Cigna has the right
to terminate the contract on January 31, 2008, if it provides advance written
notice to us on or before September 1, 2007. If the Cigna contract or any other
similar significant contract were to terminate or if there were a significant
decrease in enrolled members, or products and services covered under our
contract with Cigna or any other organization, our financial condition and
results of operations could be materially adversely affected. 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
from the Cigna contract in fiscal 2005.
On November 29, 2005, the Company's contract with TriWest Healthcare
Alliance ("TriWest") to provide coordination and delivery of homecare services
to active and retired military personnel in certain western states terminated.
Net revenues relating to the TriWest contract represented less than 3 percent of
the Company's total net revenues in fiscal 2005.
Further consolidation of managed care organizations and other
third-party payers may adversely affect our profits.
8
Managed care organizations and other third-party payers have continued
to consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage of
the United States population are increasingly served by a smaller number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
that such organizations terminate us as a preferred provider and/or engage our
competitors as a preferred or exclusive provider, our business could be
adversely affected. In addition, private payers, including managed care payers,
could seek to negotiate additional discounted fee structures or the assumption
by healthcare providers of all or a portion of the financial risk through
prepaid capitation arrangements, thereby potentially reducing our profitability.
Gentiva and the healthcare industry continue to experience shortages in
qualified home health service employees and management personnel.
We compete with other healthcare providers for our employees, both
clinical associates and management personnel. As the demand for home health
services continues to exceed the supply of available and qualified staff, we and
our competitors have been forced to offer more attractive wage and benefit
packages to these professionals. Furthermore, the competitive arena for this
shrinking labor market has created turnover as many seek to take advantage of
the supply of available positions, each offering new and more attractive wage
and benefit packages. In addition to the wage pressures inherent in this
environment, the cost of training new employees amid the turnover rates has
caused added pressure on our operating margins.
An economic downturn, continued deficit spending by the federal
government and state budget pressures may result in a reduction in
reimbursement and covered services.
An economic downturn can have a detrimental effect on revenues.
Historically, state budget pressures have translated into reductions in state
spending. Given that Medicaid outlays are a significant component of state
budgets, we can expect continuing cost containment pressures on Medicaid outlays
for our services in the states in which we operate. In addition, an economic
downturn may also impact the number of enrollees in managed care programs as
well as the profitability of managed care companies, which could result in
reduced reimbursement rates.
The existing federal deficit, as well as deficit spending by the
government as the result of adverse developments in the economy or other
reasons, can lead to continuing increased pressure to reduce government
expenditures for other purposes, including governmentally funded programs in
which we participate, such as Medicare and Medicaid. Such actions in turn may
adversely affect our results of operations.
We may experience disruption to our business and operations from the
effects of natural disasters or terrorist acts.
The occurrence of natural disasters or terrorist acts, and the erosion
to our business caused by such an occurrence, may adversely impact our
profitability. In the affected areas, our offices may be forced to close for
limited or extended periods of time, and we may face a reduced supply of
clinical associates.
The agreement governing our new term loan and revolving credit facility
contains, and future debt agreements may contain, various covenants
that limit our discretion in the operation of our business.
Although we had no outstanding debt as of January 1, 2006, we incurred
debt in the principal amount of $370 million in connection with our acquisition
of Healthfield on February 28, 2006 and may incur additional debt in the future.
The agreement and instruments governing our new term loan and revolving credit
facility contain, and the agreements and instruments governing our future debt
agreements may contain, various restrictive covenants that, among other things,
require us to comply with or maintain certain financial tests and ratios and
restrict our ability to:
o incur more debt;
o redeem or repurchase stock, pay dividends or make other distributions;
o make certain investments;
o create liens;
o enter into transactions with affiliates;
o make acquisitions;
o merge or consolidate;
9
o transfer or sell assets; and
o make fundamental changes in our corporate existence and principal
business.
In addition, events beyond our control could affect our ability to
comply with and maintain the financial tests and ratios. Any failure by us to
comply with or maintain all applicable financial tests and ratios and to comply
with all applicable covenants could result in an event of default with respect
to our new term loan and revolving credit facility or future debt agreements.
This could lead to the acceleration of the maturity of the facility and the
termination of the commitments to make further extensions of credit. If we were
unable to repay debt to our senior lenders, these lenders could proceed against
the collateral securing that debt. Even if we are able to comply with all
applicable covenants, the restrictions on our ability to operate our business at
our sole discretion could harm our business by, among other things, limiting our
ability to take advantage of financing, mergers, acquisitions and other
corporate opportunities.
We have risks related to obligations under our insurance programs.
We are obligated for certain costs under various insurance programs,
including employee health and welfare, workers' compensation and professional
liability. We may be subject to workers' compensation claims and lawsuits
alleging negligence or other similar legal claims. We maintain various insurance
programs to cover these risks with insurance policies subject to substantial
deductibles and retention amounts. We also may be subject to exposure relating
to employment law and other related matters for which we do not maintain
insurance coverage. We believe that our present insurance coverage and reserves
are sufficient to cover currently estimated exposures; however, we cannot assure
you that we will not incur liabilities in excess of recorded reserves or in
excess of our insurance limits.
Risks Related to Gentiva and its Common Stock Following the Healthfield
Acquisition
We may fail to realize the anticipated synergies, cost savings and
other benefits expected from the Healthfield acquisition, which could
adversely affect the value of our common stock after the acquisition.
The Healthfield acquisition involves the integration of two companies
that have previously operated independently. Gentiva and Healthfield entered
into their acquisition agreement with the expectation that the acquisition would
create opportunities to achieve cost synergies and other benefits from operating
the combined businesses of both companies.
The value of our common stock following the acquisition may be affected
by our ability to achieve the benefits expected to result from completion of the
acquisition. Achieving the benefits of the acquisition will depend in part upon
meeting the challenges inherent in the successful combination of two business
enterprises of the size and scope of Gentiva and Healthfield and the possible
resulting diversion of management attention for an extended period of time. We
cannot assure that these challenges will be met or opportunities realized and
that any diversion will not negatively impact our operations following the
acquisition.
Delays encountered in the integration process could have a material
adverse effect upon our revenues, level of expenses, operating results and
financial condition following the acquisition. Although we expect significant
benefits, such as increased cost savings and a meaningful platform in hospice
operations, to result from the acquisition, we cannot assure that Gentiva will
realize any of these anticipated benefits.
We may incur substantial expenses related to the integration of
Healthfield.
Gentiva may incur substantial expenses in connection with the
integration of the business, policies, procedures, operations, technologies and
systems of Healthfield with those of Gentiva. There are a large number of
systems that may be integrated, including information management, purchasing,
operations, accounting and finance, sales, billing, payroll and benefits, fixed
asset and lease administration systems and regulatory compliance. While Gentiva
has assumed that a certain amount of expenses would be incurred, factors beyond
our control could affect the total amount or the timing of all of the expected
integration expenses. These expenses could, particularly in the near term,
exceed the savings that Gentiva expects to achieve from the elimination of
duplicative expenses and the realization of economies of scale and cost and
revenue synergies related to the integration of the businesses following the
acquisition.
Uncertainties associated with the acquisition may cause a loss of
employees.
10
Our success after the acquisition will depend in part upon our ability
to retain key Gentiva employees as well as Healthfield employees. Competition
for qualified personnel can be very intense. In addition, key employees may
depart because of issues relating to the uncertainty and difficulty of
integration or a desire not to remain with Gentiva following the acquisition.
Accordingly, we cannot assure you that Gentiva will be able to retain key
employees to the same extent that it or Healthfield has been able to do so in
the past.
We have incurred significant indebtedness following the acquisition,
which can affect our liquidity.
Gentiva had no outstanding indebtedness at the end of fiscal 2005.
Following the closing of the Healthfield acquisition on February 28, 2006,
Gentiva incurred indebtedness in the amount of $370 million in the form of a
senior term loan. As a result of the increase in debt, demands on Gentiva's cash
resources will increase, which could affect Gentiva's liquidity and, therefore,
could have important effects on an investment in common stock. For example,
while the impact of this increased indebtedness is expected to be addressed by
the combined cash flows of Gentiva and Healthfield, the increased level of
indebtedness could nonetheless create competitive disadvantages for Gentiva
compared to other companies with lower debt levels.
Resales of Gentiva common stock following the acquisition may cause the
market price of the common stock to fall.
As of January 1, 2006, Gentiva had 23,034,954 shares of common stock
outstanding. We issued approximately 3.2 million shares of common stock in
connection with the acquisition. The shares are initially subject to a lock-up
preventing the sale of the shares for nine months following the completion of
the acquisition, and for an additional 12 months following that date, the
holders may only sell up to 50 percent of the shares they hold. We have,
however, given the holders of the shares issued in connection with the
acquisition the right to include their shares in any underwritten registered
offering we undertake, subject to certain conditions and limitations, even if
that offering occurs during the lock-up period. We have also agreed to register
the shares of common stock issued in connection with the acquisition no later
than nine months following the completion of the acquisition. Any significant
resales of these new shares in the public market from time to time could have
the effect of depressing the market price for our common stock.
Risks Related to Healthcare Regulation
Legislative and regulatory actions resulting in changes in
reimbursement rates or methods of payment from Medicare and Medicaid,
or implementation of other measures to reduce reimbursement for our
services, may have a material adverse effect on our revenues and
operating margins.
In fiscal 2005, 48 percent of our total net revenues were generated
from Medicare and Medicaid and Local Government programs. The healthcare
industry is experiencing a strong trend toward cost containment, as the
government seeks to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures generally have resulted in reduced rates of reimbursement for services
that we provide.
In addition, the timing of payments made under these programs is
subject to regulatory action and governmental budgetary constraints. For certain
Medicaid programs, the time period between submission of claims and payment has
increased. Further, within the statutory framework of the Medicare and Medicaid
programs, there are a substantial number of areas subject to administrative
rulings and interpretations that may further affect payments made under those
programs. Additionally, the federal and state governments may in the future
reduce the funds available under those programs or require more stringent
utilization and quality reviews of providers. Moreover, we cannot assure you
that adjustments from Medicare or Medicaid audits will not have a material
adverse effect on us.
We conduct business in a heavily regulated industry, and changes in
regulations and violations of regulations may result in increased costs
or sanctions.
Our business is subject to extensive federal, state and, in some cases,
local regulation. Compliance with these regulatory requirements, as interpreted
and amended from time to time, can increase operating costs or reduce revenue
and thereby adversely affect the financial viability of our business. Because
these laws are amended from time to time and are subject to interpretation, we
cannot predict when and to what extent liability may arise. Failure to comply
with current or future regulatory requirements could also result in the
imposition of
11
various remedies, including fines, the revocation of licenses or
decertification. Unanticipated increases in operating costs or reductions in
revenue could adversely affect our liquidity.
We are subject to periodic audits and requests for information by the
Medicare and Medicaid programs or government agencies, which have
various rights and remedies against us if they assert that we have
overcharged the programs or failed to comply with program requirements.
The operation of our home health services business is subject to
federal and state laws prohibiting fraud by healthcare providers, including laws
containing criminal provisions, which prohibit filing false claims or making
false statements in order to receive payment or obtain certification under
Medicare and Medicaid programs, or failing to refund overpayments or improper
payments. Violation of these criminal provisions is a felony punishable by
imprisonment and/or fines. We may also be subject to fines and treble damage
claims if we violate the civil provisions that prohibit knowingly filing a false
claim or knowingly using false statements to obtain payment. State and federal
governments are devoting increased attention and resources to anti-fraud
initiatives against healthcare providers. The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") and the Balanced Budget Act of 1997 ("BBA")
expanded the penalties for healthcare fraud, including broader provisions for
the exclusion of providers from the Medicare and Medicaid programs.
We have established policies and procedures that we believe are
sufficient to ensure that we will operate in substantial compliance with these
anti-fraud and abuse requirements. On April 17, 2003, we 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 our implementation of settlements and corporate integrity agreements
entered into with the government, as well as our 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, we received a subpoena from the U.S. Department of Justice
("DOJ") seeking additional information related to the matters covered by the OIG
subpoena. We have provided documents and other information requested by the OIG
and DOJ pursuant to their subpoenas and similarly intend to cooperate fully with
any future OIG or DOJ information requests. To our knowledge, the government has
not filed a complaint against us. While we believe that our business practices
are consistent with Medicare and Medicaid programs criteria, those criteria are
often vague and subject to change and interpretation. The imposition of fines,
criminal penalties or program exclusions could have a material adverse effect on
our financial condition, results of operations and cash flows.
We are also subject to federal and state laws that govern financial and
other arrangements between healthcare providers.
These laws often prohibit certain direct and indirect payments or
fee-splitting arrangements between healthcare providers that are designed to
encourage the referral of patients to a particular provider for medical products
and services. Furthermore, some states restrict certain business relationships
between physicians and other providers of healthcare services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. These
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies.
We face additional federal requirements that mandate major changes in
the transmission and retention of health information.
HIPAA was enacted to ensure that employees can retain and at times
transfer their health insurance when they change jobs and to simplify healthcare
administrative processes. The enactment of HIPAA expanded protection of the
privacy and security of personal medical data and required the adoption of
standards for the exchange of electronic health information. Among the standards
that the Secretary of Health and Human Services has adopted pursuant to HIPAA
are standards for electronic transactions and code sets, unique identifiers for
providers, employers, health plans and individuals, security and electronic
signatures, privacy and enforcement. Although HIPAA was intended to ultimately
reduce administrative expenses and burdens faced within the healthcare industry,
we believe that implementation of this law has resulted and will result in
additional costs. Failure to comply with HIPAA could result in fines and
penalties that could have a material adverse effect on us.
12
Risks Related to Our Common Stock
The market price of our common stock may be volatile and experience
substantial fluctuations.
Our common stock is traded on the Nasdaq National Market. The price of
our common stock may fluctuate substantially based on a number of factors,
including:
o our operating and financial performance;
o changes, or proposed changes, in government regulations;
o stock market conditions generally and specifically as they relate
to the home health services industry;
o developments in litigation or government investigations;
o changes in financial estimates and recommendations by securities
analysts who follow our stock; and
o economic and political uncertainties in the marketplace generally.
Significant fluctuations in the market price of our common stock may
adversely affect our shareholders.
Provisions in our organizational documents, Delaware law and our rights
agreement could delay or prevent a change in control of Gentiva, which
could adversely affect the price of our common stock.
Provisions in our amended and restated certificate of incorporation and
by-laws, anti-takeover provisions of the Delaware General Corporation Law and
our rights agreement could discourage, delay or prevent an unsolicited change in
control of Gentiva, which could adversely affect the price of our common stock.
These provisions may also have the effect of making it more difficult for third
parties to replace our current management without the consent of the board of
directors. Provisions in our amended and restated certificate of incorporation
and by-laws that could delay or prevent an unsolicited change in control
include:
o the classification of the board of directors into three classes,
each class serving "staggered" terms of office of three years;
o limitations on the removal of directors so that they may only be
removed for cause;
o the ability of the board of directors to issue up to 25,000,000
shares of preferred stock and to determine the terms, rights and
preferences of the preferred stock without shareholder approval;
and
o the prohibition on the right of shareholders to call meetings or
act by written consent and limitations on the right of
shareholders to present proposals or make nominations at
shareholder meetings.
Delaware law also imposes restrictions on mergers and other business
combinations between us and any holder of 15 percent or more of our outstanding
common stock. In addition, we have a rights agreement that has the effect of
deterring take-overs of Gentiva without the consent of the board of directors.
Generally, once a party acquires 10 percent or more of our common stock, the
rights agreement may cause that party's ownership interest in us to be diluted
unless the board of directors consents to the acquisition.
Other risks related to our common stock are discussed above under the
caption "Risks Related to Gentiva and its Common Stock Following the Healthfield
Acquisition" in this annual report on Form 10-K, and the reader is directed to
that discussion.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company's headquarters is leased and is located at 3 Huntington
Quadrangle, Suite 200S, Melville, New York 11747-4627. Other major regional
administrative offices leased by the Company as of January 1, 2006 are located
in Overland Park, Kansas; Phoenix, Arizona; Hartford, Connecticut; Tampa,
Florida; and Endicott, New York. The Company also maintains leases for other
offices and locations on various terms expiring on various dates.
13
Item 3. Legal Proceedings
Litigation
In addition to the matters referenced in this Item 3, 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.
Government Matters
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.
Indemnifications
Gentiva became an independent, publicly owned company on March 15,
2000, when its common stock was distributed to stockholders of Olsten. 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.
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 awaiting closure by the government.
The Company believes that it has been in compliance with the corporate
integrity agreement and has timely filed all required reports. If the Company
has failed to comply with the terms of its corporate integrity agreement, 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 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2005.
Executive Officers of the Company
The following table sets forth certain information regarding each of
the Company's executive officers as of March 9, 2006:
14
Executive Position and Offices
Name Officer Since Age with the Company
- ---------------------------------------- --------------------- ------- ------------------------------------------
Ronald A. Malone 2000 51 Chief Executive Officer and Chairman of
the Board
John R. Potapchuk 2001 53 Executive Vice President, Chief Financial
Officer and Treasurer
H. Anthony Strange 2006 43 Executive Vice President and President,
Gentiva Home Health
Robert Creamer 2002 47 Senior Vice President, CareCentrix
Mary Morrisey Gabriel 2002 40 Senior Vice President and Chief Marketing
Officer
Stephen B. Paige 2003 58 Senior Vice President, General Counsel,
and Secretary
Brian D. Silva 2006 49 Senior Vice President, Human Resources
John N. Camperlengo 2005 42 Vice President, Deputy General Counsel and
Chief Compliance Officer
The executive officers are elected annually by the board of directors.
Ronald A. Malone
Mr. Malone has served as chief executive officer and chairman of the
board of the Company since June 2002. He served as executive vice president of
the Company from March 2000 to June 2002. Prior to joining the Company, he
served in various positions with Olsten, including executive vice president of
Olsten and president, Olsten Staffing Services, United States and Canada, from
January 1999 to March 2000. From 1994 to December 1998, he served successively
as Olsten's senior vice president, southeast division; senior vice president,
operations; and executive vice president, operations.
John R. Potapchuk
Mr. Potapchuk has served as executive vice president, chief financial
officer and treasurer of the Company since February 2006. He served as senior
vice president, chief financial officer and treasurer of the Company from June
2002 to February 2006. From June 2002 to May 2005, he served as secretary of the
Company. He served as vice president of finance and controller of the Company
from March 2000 to June 2002. He joined Olsten in 1991 and served in various
corporate financial management positions with Olsten Health Services, including
vice president and operations controller and vice president of finance. Prior to
that, Mr. Potapchuk served in senior management positions for
PricewaterhouseCoopers LLP and Deloitte & Touche.
H. Anthony Strange
Mr. Strange has served as executive vice president of the Company and
president of Gentiva Home Health since February 28, 2006. From 2001 to February
2006, Mr. Strange served as president and chief operating officer of The
Healthfield Group, Inc. Mr. Strange joined Healthfield in 1990 and has served in
other roles such as Regional Manager, Vice President of Development and Chief
Operating Officer, until being named President in 2001. Prior to joining
Healthfield, Mr. Strange served in various management roles with Glass Rock Home
Healthcare.
15
Robert Creamer
Mr. Creamer has served as senior vice president, CareCentrix, of the
Company since February 2006. He served as senior vice president, home healthcare
operations, of the Company from May 2005 to February 2006. From September 2003
to May 2005, he served as senior vice president, nursing operations. From June
2002 to March 2004, he served as the Company's chief information officer, and
from June 2002 to August 2003, he served as senior vice president, financial
operations, of the Company. Prior thereto he served in various corporate
financial management positions with the Company and Olsten Health Services,
including vice president of finance-CareCentrix, vice president of financial
operations and vice president of finance-Specialty Pharmaceutical Services. He
first joined Olsten in 1991.
Mary Morrisey Gabriel
Ms. Morrisey Gabriel has served as senior vice president and chief
marketing officer of the Company since February 2005. From July 2002 to February
2005, she served as senior vice president, sales, of the Company. From March
2000 to June 2002, Ms. Morrisey Gabriel served as senior vice president of
National Accounts/North American Sales of Adecco, a staffing services company.
From 1999 to March 2000, she served as Olsten's senior vice president of
national accounts. Prior thereto, Ms. Morrisey Gabriel served in a number of
senior management positions for Olsten.
Stephen B. Paige
Mr. Paige has served as general counsel of the Company since July 2003,
as senior vice president of the Company since January 2005 and as secretary of
the Company since May 2005. From July 2003 to January 2005, he served as vice
president of the Company. From 1997 to 2002, he served as senior vice president,
general counsel and secretary of General Semiconductor, Inc., a technology based
company. Prior thereto, Mr. Paige served in senior legal positions with several
large healthcare, food ingredient and consumer product companies.
Brian D. Silva
Mr. Silva has served as senior vice president, human resources of the
Company since March 2006. From 2002 to February 2006, Mr. Silva served as senior
vice president, human resources and administration and corporate secretary of
Linens 'n Things, Inc. From 1997 to 2002, Mr. Silva served as senior vice
president, human resources and corporate secretary of Linens 'n Things. Mr.
Silva joined Linens 'n Things in September 1995 as vice president, human
resources. Prior to joining Linens 'n Things, Mr. Silva was assistant vice
president, human resources at The Guardian, an insurance and financial services
company, from 1986 to September 1995.
John N. Camperlengo
Mr. Camperlengo has served as vice president, deputy general counsel
and chief compliance officer since October 2005. From February 2005 to October
2005, Mr. Camperlengo served as vice president and deputy general counsel. Mr.
Camperlengo served as assistant vice president and associate general counsel of
the Company from September 2003 to February 2005, as assistant vice president,
legal from July 2002 to September 2003, and senior counsel from September 2000
to July 2002. From 1992 to 2000, Mr. Camperlengo held various legal and
compliance positions with The Prudential Insurance Company of America and its
subsidiaries. Mr. Camperlengo also holds the rank of Lieutenant Colonel in the
US Marine Corps Reserve.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
Market Information
The Company's common stock is quoted on the Nasdaq National Market
under the symbol "GTIV".
The following table sets forth the high and low bid information for
shares of the Company's common stock for each quarter during fiscal 2004 and
2005:
16
2004 High Low
---------------------------------------------------------
1st Quarter $15.90 $11.97
2nd Quarter 16.95 14.00
3rd Quarter 16.77 14.46
4th Quarter 17.60 13.68
2005 High Low
---------------------------------------------------------
1st Quarter $17.47 $15.40
2nd Quarter 20.83 15.85
3rd Quarter 20.67 16.59
4th Quarter 18.41 12.89
Holders
As of March 9, 2006, there were approximately 2,600 holders of record
of the Company's common stock including participants in the Company's employee
stock purchase plan, brokerage firms holding the Company's common stock in
"street name" and other nominees.
Dividends
Except for the special dividend in cash ($7.76) and in kind (0.19253
shares of Accredo common stock) per share of Gentiva common stock paid in June
2002, the Company has never paid any cash dividends on its common stock. Future
payments, if any, of dividends and the amount of the dividends will be
determined by the board of directors from time to time based on the Company's
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant, including any substantive change in tax
treatment under the United States Tax Code. In addition, the Company's new term
loan and credit facility also contain restrictions on the Company's ability to
declare and pay dividends. See Item 7 "Management's Discussion and Analysis of
Financial Condition and Results of Operations".
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
------ --------- --------- ----------- -----------
October (10/03/05-10/30/05) 289,600 $ 15.19 289,600 896,696
November (10/31/05-11/27/05) 213,300 $ 14.97 213,300 683,396
December (11/28/05-01/01/06) - - - 683,396
-------------- -------------- -----------------------
Total 502,900 $ 15.10 502,900
============== ============== =======================
17
(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. As of the end of the
period covered by the table, 816,604 of such shares had been
repurchased. See Note 7 to the Company's consolidated
financial statements.
Item 6. Selected Financial Data
The following table provides selected historical consolidated financial
data of the Company as of and for each of the fiscal years in the five-year
period ended January 1, 2006. The data has been derived from the Company's
audited consolidated financial statements.
Operating results of the SPS business through June 13, 2002, the
closing date of the sale to Accredo, including corporate expenses directly
attributable to SPS operations, restructuring and special charges related to the
SPS business, as well as the gain on the sale, net of transaction costs and
related income taxes, are reflected as discontinued operations in the
accompanying consolidated statement of operations for fiscal 2002 and fiscal
2001. Continuing operations include the results of the Home Healthcare Services
and CareCentrix businesses, including corporate expenses that did not directly
relate to SPS, as well as restructuring and special charges. Results of all
prior periods have been reclassified to conform to this presentation.
The historical financial information may not be indicative of the
Company's future performance and may not necessarily reflect the financial
position and results of operations of the Company had the Company been a
separate stand-alone entity during all the years presented. The Company's fiscal
year ends on the Sunday nearest to December 31st. The Company's fiscal year 2004
includes 53 weeks compared to all other fiscal years presented, which included
52 weeks.
(in thousands, except per share amounts) Fiscal Year
----------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------- ------------- ------------- ------------- ------------
(52 weeks) (53 weeks) (52 weeks) (52 weeks) (52 weeks)
Statement of Operations Data
Net revenues $ 868,843 (1) $ 845,764 (2) $ 814,029 $ 768,501 $ 729,577
Gross profit 326,750 (1) 323,929 (2) 282,042 247,600 (4) 245,660
Selling, general and administrative expenses (296,786) (1) (285,671) (259,185) (283,540) (4) (266,322) (5)
Income (loss) from continuing operations 23,365 (1) 26,488 (2) 56,766 (53,543) (13,910)
Discontinued operations, net of tax (6) - - - 191,578 34,898
Cumulative effect of accounting change, net of tax (7) - - - (187,068) -
Net income (loss) 23,365 (1) 26,488 (2) 56,766 (3) (49,033) (4) 20,988 (5)
Basic earnings per share:
Income (loss) from continuing operations $ 1.00 $ 1.07 $ 2.16 $ (2.05) $ (0.60)
Discontinued operations, net of tax - - - 7.32 1.50
Cumulative effect of accounting change, net of tax - - - (7.14) -
Net income (loss) 1.00 1.07 2.16 (1.87) 0.90
Weighted average shares outstanding - basic 23,267 24,724 26,262 26,183 23,186
Diluted earnings per share:
Income (loss) from continuing operations $ 0.94 $ 1.00 $ 2.07 $ (2.05) $ (0.60)
Discontinued operations, net of tax - - - 7.32 1.50
Cumulative effect of accounting change, net of tax - - - (7.14) -
Net income (loss) 0.94 1.00 2.07 (1.87) 0.90
Weighted average shares outstanding - diluted 24,927 26,365 27,439 26,183 23,186
Balance Sheet Data (at end of year) (8)
Cash items and short-term investments (9) $ 88,367 $ 113,024 $ 117,438 $ 101,241 $ 107,144
Working capital 129,326 134,033 136,297 104,339 417,949
Total assets 326,565 332,098 342,513 264,431 849,879
Shareholder's equity 182,154 171,940 177,179 113,048 621,707
Common shares outstanding 23,035 23,722 25,598 26,385 25,639
Special dividend per common share:
Cash - - - $ 7.76 -
Value of Accredo common stock - - - 9.99 -
(1) Net revenues and gross profit for fiscal 2005 include $3.6 million
associated with the favorable settlement of the Company's Medicare cost
report appeal for 1999. Selling, general and administrative ex-
18
penses include restructuring and other special charges of $0.9 million. See
Note 4 to the Company's consolidated financial statements.
(2) Net revenues and gross profit for fiscal 2004 include special items of
$9.4 million, representing $10.4 million related to the favorable
settlement of the Company's Medicare cost report appeals for 1997 and 1998,
net of a $1 million revenue adjustment to reflect an industry wide
repayment of certain Medicare reimbursements. Income from continuing
operations and net income include the Medicare special items noted above
and $0.9 million from a pre-tax gain on the sale of a Canadian investment.
Net income for fiscal 2004 reflects an effective tax rate of 34.1 percent,
which differs from the Federal statutory tax rate due primarily to the
recognition of certain state net operating losses. See Notes 3, 8 and 12 to
the Company's consolidated financial statements.
(3) Net income for fiscal 2003 reflects a tax benefit of $35.0 million
associated with management's decision to reverse the valuation allowance
for deferred tax assets. See Note 11 to the Company's consolidated
financial statements.
(4) Net loss in fiscal 2002 reflects restructuring and other special charges
aggregating $46.1 million, of which $6.3 million is recorded in cost of
services sold and $39.8 million is recorded in selling, general and
administrative expenses. See Note 4 to the Company's consolidated financial
statements.
(5) Net income in fiscal 2001 reflects special charges of approximately $3.0
million in connection with the settlement of certain legal matters and for
various other legal costs. These special charges are included in selling,
general and administrative expenses.
(6) For fiscal 2002, the Company sold its SPS business to Accredo in accordance
with the asset purchase agreement dated January 2, 2002, with the sale
completed on June 13, 2002. As such, the Company has reflected discontinued
operations, including the gain on sale, of $191.6 million during fiscal
2002. Results for prior years have been reclassified to conform to this
presentation.
(7) For fiscal 2002, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets" and performed a transitional impairment test, resulting
in a non-cash charge of $187.1 million.
(8) Balance sheet data for fiscal year end 2001 includes the assets of the SPS
business, which was sold to Accredo on June 13, 2002.
(9) Cash items and short-term investments includes restricted cash of $22.0
million at fiscal year end 2005 and 2004, $21.8 million at fiscal year end
2003, and $35.2 million at fiscal year end 2001.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
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.
Overview
Gentiva is the nation's largest provider of comprehensive home health
services, based on revenues derived from the provision of skilled home nursing
and therapy services to patients. The Company's services can be delivered across
the United States 24 hours a day, 7 days a week. The Company's operations
involve servicing patients and customers through its two business segments: Home
Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home
nursing and therapy services operations, including the specialty programs
described below as well as Gentiva Consulting. As of January 1, 2006, 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,
from which the Company provides various combinations of skilled nursing and
therapy services, paraprofessional nursing services and homemaker services to
pediatric, adult
19
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 also delivers 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 Program(SM), which provides therapies for
patients with balance issues who are prone to injury or immobility
as a result of falling;
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based
environment; and
o Gentiva Rehab Without Walls(R), which 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 specialty programs are conducted through the Company's licensed and
Medicare-certified agencies, except for Gentiva Rehab Without Walls which
operates from stand-alone branch locations.
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 3,000
locations, including third-party provider and Gentiva locations, under its
CareCentrix brand. CareCentrix operations provide an array of administrative
services and coordinate the delivery of home nursing services, acute and chronic
infusion therapies, durable medical equipment, and respiratory products and
services for managed care organizations and health plans. These administrative
services are coordinated within two 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.
Gentiva's revenues are generated primarily from three major payer
sources: the U.S. Medicare program, Medicaid and Local Government programs, and
commercial insurers. The Medicare and Medicaid and related programs are subject
to legislative and other risk factors that can result in fluctuating
reimbursement rates for Gentiva's direct home health services to patients. The
commercial insurance industry is continually seeking ways to control the cost of
services to patients that it covers. One of the ways it seeks to control costs
is to require greater efficiencies from its providers, including home healthcare
companies.
20
Despite these risks, Gentiva believes it can operate effectively in the
current healthcare climate by increasing its Medicare volume, seeking rate
increases from commercial payers and implementing new business practices,
technologies and other methods to make the Company a more efficient provider of
services. Gentiva has made a decision to seek more business from the Medicare.
For example, in 2005, Gentiva's revenue from Medicare increased 16.5 percent
from the prior year.
Various states have addressed budget pressures by considering or
implementing reductions in various healthcare programs, including reductions in
rates or changes in patient eligibility requirements. In addition, the Company
has also decided to taper participation in certain Medicaid and other state and
county programs. As a result, Gentiva's 2005 revenue from this payer category
declined 3 percent from the prior year.
Gentiva believes that several marketplace factors can contribute to its
future growth. First, the Company is a leader in a highly fragmented home
healthcare industry populated by approximately 12,000 providers of varying size
and resources. Second, the cost of a home healthcare visit to a patient can be
significantly lower than the cost of an average day in a hospital or skilled
nursing institution. And third, the demand for home care is expected to grow,
primarily due to an aging U.S. population. The CMS projects that national home
health and durable medical equipment spending will rise from $78.0 billion in
2006 to $139.9 billion by 2015. The U.S. Census Bureau has projected that the
age 65 and older population will increase more than 50 percent between 2000 and
2020.
The Company expects to capitalize on these positive trends through a
determined set of strategies, as follows: generate increased revenue by growing
Medicare volume and improving commercial insurance pricing; continue to develop
and expand specialty programs for incremental revenue growth; focus on clinical
associate recruitment, retention and productivity; and continue technology
initiatives that could make Gentiva more efficient and profitable. The Company
anticipates executing these strategies by continuing to expand its sales
presence, developing and marketing its managed care services, making operational
improvements and deploying new technologies, providing employees with leadership
training and instituting retention initiatives, ensuring strong ethics and
corporate governance, and focusing on shareholder value.
Results from these strategies and initiatives are reflected in the
Company's 2005 performance. Gentiva reported 2005 net revenue of $868.8 million,
representing a $23.0 million, or 2.7 percent, increase from the $845.8 million
reported in fiscal year 2004. The increase was due primarily to a rise in the
volume of Medicare business mentioned above.
During 2005, Gentiva reported positive cash flow from operating
activities of $21.8 million and ended 2005 with cash and cash equivalents,
restricted cash and short-term investments of approximately $88 million,
compared to approximately $113 million at the end of 2004. The Company has
previously stated that it would evaluate using its cash primarily for the
following purposes: investments contributing to revenue growth, efficiency and
profitability; selective acquisitions; share repurchases; and the possible
future payment of dividends to shareholders. In 2005, Gentiva repurchased a
total of over 1.3 million shares at an average cost of $15.93 per share, for a
total expenditure of over $21.1 million, and completed its $11.5 million
purchase of the operations of Heritage Home Care Services, Inc. ("Heritage"), a
Utah-based provider of home healthcare services.
Management intends the discussion of the Company's financial condition
and results of operations that follows to provide information that will assist
in understanding the Company's financial statements, the changes in certain key
items in those financial statements from year to year, and the primary factors
that accounted for those changes, as well as how certain accounting principles,
policies and estimates affect its financial statements.
Significant Developments
21
Healthfield Acquisition
On February 28, 2006, the Company completed the acquisition of
Healthfield, a leading provider of home healthcare, hospice and related services
with approximately 130 locations primarily in eight southeastern states, for
$454 million in cash and shares of Gentiva common stock, excluding transaction
costs and subject to post-closing adjustments. The Company funded the purchase
price from approximately $370 million of borrowings under a new senior term loan
facility, approximately 3.2 million shares of Gentiva common stock and the
remainder from existing cash balances. A portion of the purchase price will be
used to refinance Healthfield's existing net indebtedness.
The transaction will be accounted for in accordance with the provisions
of Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). Accordingly, Healthfield's results of operations will be included
in the Company's consolidated financial statements from the date of its
acquisition, February 28, 2006. The purchase price will be allocated to the
underlying assets acquired and liabilities assumed based on their estimated fair
values at the date of the acquisition. The Company will determine the estimated
fair values based on independent appraisals, discounted cash flows, quoted
market prices and estimates made by management and an independent valuation
analysis of the intangible assets acquired. To the extent that the purchase
price exceeds the fair value of the net identifiable tangible and intangible
assets acquired, such excess will be allocated to goodwill.
Credit Agreement
On February 28, 2006, in connection with the Healthfield acquisition,
the Company entered into a Credit Agreement, by and among the Company, as
borrower, Lehman Brothers Inc., as sole lead arranger and sole bookrunner, and
Lehman Commercial Paper Inc., as administrative agent.
The Credit Agreement provides for an aggregate borrowing amount of
$445.0 million including (i) a seven year term loan of $370.0 million repayable
in quarterly installments of 1% per annum (with the remaining balance due of
maturity on March 13, 2013) and (ii) a six year revolving credit facility of
$75.0 million, of which $55.0 million will be available for the issuance of
letters of credit and $10.0 million will be available for swing line loans.
There is a pre-approved $25.0 million increase available to the revolving credit
facility. Interest under the Credit Agreement accrues at Base Rate or Eurodollar
Rate (plus 1.25% for Base Rate Loans and 2.25% for Eurodollar Rate Loans) for
the revolving credit facility and at Base Rate or Eurodollar Rate (plus 1.25%
for Base Rate Loans and 2.25% for Eurodollar Rate Loans) for the term loan.
After the completion of two post-closing fiscal quarters, such interest may be
reduced if the Company meets certain reduced leverage targets. Overdue amounts
bear interest at 2% per annum above the applicable rate.
The Credit Agreement requires the Company to meet certain financial
tests, including a consolidated leverage ratio (as defined) and an interest
coverage ratio (as defined). The Credit Agreement also contains additional
covenants which, among other things, require the Company to deliver to the
lenders specified financial information, including annual and quarterly
financial information, and limit the Company's ability to (or to permit any
subsidiaries to), subject to various exceptions and limitations, (i) merge with
other companies, (ii) create liens on its property; (iii) incur debt
obligations; (iv) enter into transactions with affiliates, except on an
arms-length basis; (v) dispose of property; and (vi) pay dividends or acquire
capital stock of the Company or its subsidiaries.
Guarantee and Collateral Agreement
On February 28, 2006, the Company also entered into a Guarantee and
Collateral Agreement, among the Company and certain of its subsidiaries, in
favor of the Administrative Agent (the "Guarantee and Collateral Agreement").
The Guarantee and Collateral Agreement grants a security interest in all
personal property of the Company and its subsidiaries, including stock of its
subsidiaries. The Guarantee and Collateral Agreement also provides for a
guarantee of the Company's obligations under the Credit Agreement by
substantially all subsidiaries of the Company.
Two Alabama properties owned by a subsidiary of Healthfield will be
subject to mortgages dated February 28, 2006.
22
Cigna Agreement
On October 27, 2005, the Company completed 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. CareCentrix ended 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 from the
Cigna contract in fiscal 2005.
TriWest Healthcare Alliance Contract
On November 29, 2005, the Company's contract with TriWest Healthcare
Alliance ("TriWest") to provide coordination and delivery of homecare services
to active and retired military personnel in certain western states terminated.
Net revenues relating to the TriWest contract represented less than 3 percent of
the Company's total net revenues in fiscal 2005.
Heritage Acquisition
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. A valuation analysis of the purchase price
was performed and costs have been recorded as Goodwill ($5.4 million), Fixed
Assets and Other Assets ($0.4 million), and identifiable intangible assets ($6.3
million). For fiscal year 2005, incremental net revenues resulting from the
Heritage acquisition approximated $12.5 million.
Results of Operations
The historical results sections in "Results of Operations" below
present a discussion of the Company's consolidated operating results using the
historical results of Gentiva prepared in accordance with accounting principles
generally accepted in the United States (GAAP) for the fiscal years ended
January 1, 2006, January 2, 2005 and December 28, 2003. The Company's fiscal
year 2004 includes 53 weeks compared to fiscal years 2005 and 2003, which
included 52 weeks.
Year Ended January 1, 2006 Compared to Year Ended January 2, 2005
- -----------------------------------------------------------------
Net Revenues
(Dollars in millions) Fiscal Year
-----------------------------------------
Percentage
2005 2004 Variance
---- ---- --------
(52 weeks) (53 weeks)
Medicare $ 265.8 $ 228.1 16.5%
Medicaid and Local Government 149.7 154.4 (3.0%)
Commercial Insurance and Other 453.3 463.3 (2.2%)
-----------------------------------------
$ 868.8 $ 845.8 2.7%
=========================================
For fiscal year 2005 as compared to fiscal year 2004, net revenues
increased by $23.0 million, or 2.7 percent, to $868.8 million from $845.8
million.
23
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 fiscal 2005 as compared to fiscal 2004 was
driven by several factors, including: (i) an increase in admissions, including
the Company's specialty programs and exclusive of acquired operations, of
approximately 10 percent, (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 4
percent of the 16.5 percent increase in Medicare revenue for fiscal 2005.
These positive factors were reduced by 2.5 percent resulting from a change in
the amount of Medicare special items which are described below.
Medicare revenue included special items of $3.6 million for fiscal 2005
and $9.4 million for fiscal 2004. Special items represented (i) $3.6 million
recorded and received during fiscal 2005 in partial settlement of the Company's
appeal filed with the PRRB related to the reopening of its 1999 cost reports,
(ii) $10.4 million recorded and received during fiscal 2004 in settlement of the
Company's appeal filed with the PRRB related to the reopening of its 1997 and
1998 cost reports, and (iii) a revenue adjustment in fiscal 2004 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 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 (referred to as the 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 $4.3 million for fiscal 2005.
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 $7.0 million for fiscal 2005, as compared to fiscal 2004, while
revenues relating to intermittent care visits increased $2.3 million for fiscal
2005 as compared to fiscal 2004.
Commercial Insurance and Other revenues decreased $10 million, or 2.2
percent, for fiscal 2005 as compared to fiscal 2004. This decrease was primarily
driven by the $10.5 million decline in the revenues of the CareCentrix segment,
as well as the impact of exiting certain unprofitable business as the Company
pursues more favorable commercial pricing in the Home Healthcare Services
segment, partially offset by increases in revenues from the acquired Heritage
operations.
Home Healthcare Services segment revenues increased $29.5 million, or
5.6 percent, from $523.0 million for fiscal 2004 to $552.5 million for fiscal
2005. Revenues for fiscal 2005 and fiscal 2004 were impacted by the Medicare
special items discussed above. In addition, fiscal 2004 and, to a lesser extent,
fiscal 2005 Medicare revenues and Commercial Insurance and Other revenues were
negatively impacted by hurricanes in the Southeastern United States.
CareCentrix segment revenues for fiscal 2005 were $333.0 million as
compared to $343.5 million for fiscal 2004, a decrease of $10.5 million, or 3.1
percent. The decrease was primarily driven by an $8.8 million decline in
revenues related to the Cigna contract due 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 Cigna members in five New
England states, effective July 1, 2005, and volume growth in Cigna's
fee-for-service plans. Non-Cigna revenues decreased by $1.7 million for fiscal
2005, as compared to fiscal 2004, primarily due changes in various commercial
relationships, including the termination of the TriWest contract, effective
November 29, 2005.
Gross Profit
24
(Dollars in millions) Fiscal Year
---------------------------------------
2005 2004 Variance
---- ---- --------
(52 weeks) (53 weeks)
Gross profit $ 326.7 $ 323.9 $ 2.8
As a percent of revenue 37.6% 38.3% (0.7%)
As a percentage of revenue, gross profit decreased by 0.7 percentage
points in fiscal 2005 as compared to fiscal 2004. The decrease in gross profit
margins was primarily attributable to the CareCentrix segment (impact of 0.8
percentage points) and the reduction in Medicare special items recorded in
fiscal 2005 compared to the fiscal 2004 period (impact of 0.4 percentage
points), offset by improvements in the Home Healthcare Services segment (impact
of 0.5 percentage points).
The decline in gross profit margins in fiscal 2005 as compared to
fiscal 2004 in the CareCentrix segment resulted from (i) a positive adjustment
relating to a change in estimated costs in fiscal 2004 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 fiscal 2005 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 insurance costs as well as
costs relating to orientation, training and productivity as the Company
transitions more of its skilled clinical care to a dedicated workforce.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation
and amortization, increased $11.1 million to $296.8 million for the fiscal year
ended January 1, 2006, as compared to $285.7 million for the year ended January
2, 2005.
The increases for fiscal 2005, as compared to fiscal 2004, were
attributable to (i) restructuring and other special items ($0.9 million)
associated with the realignment of the CareCentrix operations in response to
changes in the nature of the services provided to Cigna members and the
acceleration of vesting of options (ii) field operating costs associated with
the Heritage operations following its acquisition in May 2005 (approximately
$4.0 million), (iii) 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 ($6.0 million), (iv)
increased selling and patient care coordination expenses, primarily in the Home
Healthcare Services segment ($3.0 million) and (v) incremental costs associated
with the Company's technology initiatives ($2.5 million), as well as
incremental costs relating to the hiring of full-time clinicians and other
personnel. These increases were partially offset by (i) lower corporate general
and administrative expenses ($3.4 million), (ii) a gain of $1.2 million on the
disposition of an underperforming branch location which is reflected as a credit
in selling, general and administrative expenses and (iii) the absence of a $1.4
million writedown of capitalized software which was recorded during fiscal 2004,
as well as lower costs resulting from 52 weeks of activity in fiscal 2005 as
compared to 53 weeks in fiscal 2004.
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 in the second quarter of fiscal
2004 and recorded a gain on sale of approximately $0.9 million, which is
reflected in the consolidated statement of income for the fiscal year ended
January 2, 2005.
Interest Income, Net
25
Net interest income was approximately $1.9 million for the fiscal year
ended January 1, 2006, and $1.0 million for the fiscal year ended January 2,
2005. Net interest income included interest income of approximately $2.9 million
for fiscal year 2005 and $2.0 million for fiscal year 2004, partially offset by
fees relating to the revolving credit facility and outstanding letters of
credit.
Income before Income Taxes
Income before income taxes was approximately $31.8 million and $40.2
million for the fiscal years ended January 1, 2006 and January 2, 2005,
respectively. For fiscal 2005 income before income taxes included special items
of $3.6 million as discussed in "Net Revenues" above and $0.9 million related to
restructuring and other special items discussed in "Selling, General and
Administrative Expenses" above.
For fiscal 2004, income from continuing operations before income taxes
included special items of $9.4 million as discussed in "Net Revenues" above and
a pre-tax gain of $0.9 million on the sale of a Canadian investment.
Income Taxes
The Company recorded a federal and state income tax provision of $8.5
million for fiscal 2005, representing a current tax benefit of $4.5 million
offset by a deferred tax provision of $13.0 million. The income tax provision
for 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 26.6 percent for
fiscal 2005 is primarily due to the release of tax reserves and state taxes.
During fiscal 2004, the Company recorded a federal and state income tax
provision of $13.7 million, representing a current tax provision of $4.6 million
and a deferred tax provision of $9.1 million. The difference between the
Company's effective rate of approximately 34.1 percent for fiscal 2004 and the
statutory rate was due primarily to state taxes offset by the recognition of
certain state net operating loss carryforwards.
In the fourth quarter of fiscal 2005, the Company transferred the self
insured portion of its workers' compensation and medical malpractice liabilities
to a newly established and wholly-owned captive insurance company. The transfer
resulted in a reduction of deferred tax assets, a reduction in current taxes
payable and the creation of federal and state net operating loss carryforwards.
The captive insurance company may have a future impact on the Company's
effective state tax rate.
Prior to fiscal year 2004, the state tax history of certain
subsidiaries indicated cumulative losses and a lack of state tax audit
experience. As a result, the Company believed there was a remote likelihood
that the value of related state tax loss carryforwards would be realized, and
no deferred tax assets were recorded. During fiscal 2004, these subsidiaries
reflected cumulative income on a state filing basis and certain state tax audits
were settled. The Company performed a review of state net operating loss
carryforwards and recorded a deferred tax asset of $7.0 million and a valuation
allowance of $4.5 million in the fourth quarter of fiscal 2004 to recognize that
certain state net operating loss carryforwards may expire before realization.
The Company continues to monitor the need for a valuation allowance for its
deferred tax assets based on the realizability of such assets. The amount of the
deferred tax assets considered realizable could be increased or reduced in the
near term if estimates of future taxable income during the carryforward period
are adjusted.
At January 1, 2006, current net deferred tax assets were $16.0 million
and non-current net deferred tax assets were $18.1 million. At January 1, 2006,
the Company had federal tax credit carryforwards of $1.3 million and federal net
operating loss carryforwards, which will expire in 2025, of $5.7 million.
Deferred tax assets relating to federal net operating carryforwards approximate
$2.0 million. In addition, the Company had state net operating loss
carryforwards of approximately $142 million, which expire between 2006 and 2013.
Deferred tax assets relating to state net operating loss carryforwards
approximate $6.7 million. A valuation allowance of $4.1 million has been
recorded to reduce the deferred tax asset to its estimated realizable value
since certain state net operating loss carryforwards may expire before
realization.
Net Income
The Company recorded net income of $23.4 million, or $0.94 per diluted
share, in fiscal 2005 compared to net income of $26.5 million, or $1.00 per
diluted share, in fiscal 2004.
Net income for 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 fiscal 2005 also included a special
item related to Medicare of $2.2 million, or $0.09 per diluted share, as
discussed under the
26
heading "Net Revenues" above, and restructuring and other special items of $0.5
million, or $0.02 per diluted share, discussed under the heading "Selling,
General and Administrative Expenses" above. See Note 4 and Note 11 to the
Company's consolidated financial statements.
Net income for fiscal 2004 included three special items related to
Medicare, noted under the heading "Net Revenues" above, which had a net positive
impact of $5.6 million, or $0.22 per diluted share. Net income for 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 3 to the Company's consolidated financial statements.
Net income for fiscal 2004 reflected the positive impact of an
effective tax rate o 34.1 percent, caused primarily by the
recognition of deferred tax assets relating to state net operating loss
carryforwards.
Year Ended January 2, 2005 Compared to Year Ended December 28, 2003
- -------------------------------------------------------------------
Net Revenues
(Dollars in millions) Fiscal Year
-----------------------------------------
Percentage
2004 2003 Variance
---- ---- --------
(53 weeks) (52 weeks)
Medicare $ 228.1 $ 178.7 27.7%
Medicaid and Local Government 154.4 165.1 (6.5%)
Commercial Insurance and Other 463.3 470.2 (1.5%)
-----------------------------------------
$ 845.8 $ 814.0 3.9%
=========================================
For fiscal year 2004 as compared to fiscal year 2003, net revenues
increased by $31.8 million to $845.8 million from $814.0 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 in fiscal year 2004 as compared to fiscal year
2003 was driven by several factors including special items, volume growth, mix
and process enhancement changes and rate increases. Medicare revenue included
special items of $9.4 million for fiscal 2004. Special items represented (i)
$10.4 million recorded and received during fiscal 2004 in settlement of the
Company's appeal filed with the PRRB related to the reopening of its 1997 and
1998 cost reports and (ii) a revenue adjustment of $1.0 million recorded in the
fiscal year of 2004 to reflect the estimated repayment to Medicare in connection
with services rendered to certain patients since the inception of the
Prospective Payment Reimbursement System in October 2000. In connection with the
estimated repayments, 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.
Medicare admissions grew by 13 percent in fiscal 2004 as compared to
fiscal 2003. Medicare revenue was also positively impacted in the fiscal year
2004 by growth in specialty programs, which generally generate higher revenue
per episode than other Medicare services, and by various operational and
clinical process enhancements. Furthermore, Medicare revenue in the fiscal 2004
period as compared to the fiscal 2003 period increased as a result of
reimbursement rate changes, including a 3.3 percent market basket rate increase
that became effective for patients on service on or after October 1, 2003, which
was adjusted downward by 0.8 percent to 2.5 percent effective April 1, 2004, and
a 5 percent rate increase effective April 1, 2004 for the rural add-on related
to home health services performed in specifically defined rural areas of the
country. The rate increases relating to the market basket change and rural
add-on provision represented incremental revenue of $5.7 million for fiscal year
2004.
27
Medicaid and Local Government revenue decreased in fiscal year 2004 as
compared to fiscal year 2003 primarily due to a reduction in the Company's
participation in certain low-margin, hourly Medicaid and state and county health
programs, partially offset by an increase in skilled visits within Medicaid
programs. Revenues relating to hourly Medicaid and state and county programs
decreased $13.6 million for fiscal year 2004 as compared to fiscal year 2003.
Revenues relating to skilled visits within Medicaid programs increased $2.9
million for fiscal year 2004.
Commercial Insurance and Other revenue decreased in fiscal year 2004 as
compared to fiscal year 2003 due to a decline in revenue derived from Cigna of
$31.0 million, or 10.7 percent, related to a reduction in the number of enrolled
Cigna members in 2004, and lower revenue as well as related costs resulting from
a change in the Company's delivery model of certain home medical and respiratory
equipment ("HME") products and services. The decline in Cigna revenues was
partially offset by an increase of $24.1 million, or 13.5 percent, for fiscal
year 2004 in non-Cigna Commercial Insurance and Other revenue driven by unit
volume and pricing increases from existing business as well as new contracts
signed during the past year.
Home Healthcare Services segment revenues increased $38.3 million, or
7.9 percent, from $484.8 million for fiscal 2003 to $523.0 million for fiscal
2004. Revenues for fiscal 2004 were impacted by the Medicare special items
discussed above. In addition, for the fiscal year 2004, Medicare revenues and
Commercial Insurance and Other revenues were negatively impacted by four
hurricanes in the southeastern United States, and net revenues for fiscal year
2004 were positively impacted by an extra week of activity as compared to fiscal
year 2003.
CareCentrix segment revenues for fiscal 2004 were $343.5 million as
compared to $353.0 million for fiscal 2003, a decrease of $9.5 million, or 2.7
percent. The decrease was primarily driven by a $31 million decline in revenues
related to the Cigna contract due to a reduction in the number of enrolled Cigna
members in 2004 resulting in lower revenues from Cigna's capitated plans,
partially offset by an increase of $21.5 million related to unit volume and
pricing increases from existing business as well as new contracts signed during
the past year.
Gross Profit
(Dollars in millions) Fiscal Year
---------------------------------------
2004 2003 Variance
---- ---- --------
Gross profit $ 323.9 $ 282.0 $ 41.9
As a percent of revenue 38.3% 34.6% 3.7%
As a percent of revenues, gross profit margins for fiscal year 2004
were positively impacted by (i) 1.4 percentage points due to the favorable
change in business mix in which the volume of Medicare business, including
growth in specialty programs, more than offset the anticipated revenue loss in
certain low-margin hourly Medicaid and local government programs, (ii) 1.0
percentage point due to the reconfiguration of the HME provider network in
fiscal 2004, as well as the impact of new CareCentrix contracts and (iii) 0.7
percentage points related to the special items discussed above. The remaining
increase in gross profit percentage can be attributed to several factors,
including the positive Medicare rate changes, lower workers compensation expense
and various operational and clinical process enhancements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $26.5 million,
or 10.2 percent, to $285.7 million for the fiscal year ended January 2, 2005, as
compared to $259.2 million for the fiscal year ended December 28, 2003.
Of the increases in selling, general and administrative expenses,
approximately $5 million related to the extra week of activity in fiscal 2004.
Approximately $8 million of the remaining increase related to field operating
and administrative costs to service incremental revenues, including revenues
from the Company's specialty programs, and approximately $4 million related to
higher selling and clinical care coordination expenses. The remaining increases
related to costs associated with the reconfiguration of the Company's
CareCentrix HME pro-
28
vider network (approximately $3 million) and incremental costs associated with
the implementation of the Sarbanes-Oxley requirements, ongoing information
technology initiatives and field development training, as well as a writedown of
$1.4 million relating to purchased software for which the Company determined
there was minimal future value.
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 in the second quarter of fiscal
2004 and recorded a gain on sale of approximately $0.9 million, which is
reflected in the consolidated statement of income for the fiscal year ended
January 2, 2005.
Interest Income, Net
Net interest income was approximately $1.0 million for the fiscal
year ended January 2, 2005, and $0.4 million for the fiscal year ended December
28, 2003. Net interest income included interest income of approximately $2.0
million for fiscal year 2004 and $1.5 million for fiscal year 2003, partially
offset by fees relating to the revolving credit facility and outstanding letters
of credit.
Income before Income Taxes
Income before income taxes was approximately $40.2 million and $23.3
million for the fiscal years ended January 2, 2005 and December 28, 2003,
respectively. For fiscal 2004, income before income taxes included special items
of $9.4 million as discussed in "Net Revenues" above and a pre-tax gain of $0.9
million on the sale of a Canadian investment.
Income Taxes
The Company recorded federal and state income taxes of approximately
$13.7 million for fiscal 2004 compared to an income tax benefit of $33.5 million
for fiscal 2003. The difference between the Company's effective tax rate of
approximately 34.1 percent for fiscal 2004 and the statutory income tax rate was
due primarily to the recognition of certain state net operating loss
carryforwards.
Prior to fiscal year 2004, the state tax history of certain
subsidiaries indicated cumulative losses and a lack of state tax audit
experience. As a result, the Company believed there was a remote likelihood that
the value of related state tax loss carryforwards would be realized, and no
deferred tax assets were recorded. During fiscal 2004, these subsidiaries
reflected cumulative income on a state filing basis and certain state tax audits
were settled. The Company performed a review of state net operating loss
carryforwards and recorded a deferred tax asset of $7.0 million and a valuation
allowance of $4.5 million in the fourth quarter of fiscal 2004 to recognize that
certain state net operating loss carryforwards may expire before realization.
The Company continues to monitor the need for a valuation allowance for its
deferred tax assets based on the realizability of such assets. The amount of
the deferred tax assets considered realizable could be increased or reduced in
the near term if estimates of future taxable income during the carryforward
period are adjusted.
The Company had maintained a valuation allowance for its deferred tax
assets as of December 29, 2002, since the absence of historical pre-tax income
created uncertainty about the Company's ability to realize tax benefits in
future years. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. The remaining valuation allowance was
reversed at the end of fiscal 2003 based on management's belief that it was more
likely than not that all of the Company's net deferred tax assets would be
realized due to the Company's achieved earnings trends and outlook. In this
regard, $44.4 million was recorded as an income tax benefit in fiscal 2003 and
$19.5 million was credited directly to shareholders' equity to reflect the
portion of the valuation allowance associated with stock compensation tax
benefits.
At January 2, 2005, current net deferred tax assets were $21.3 million
and non-current net deferred tax assets were $23.8 million. At January 2, 2005,
the Company had federal tax credit carryforwards of $0.8 million and deferred
tax assets relating to state net operating loss carryforwards of $7.0 million,
reduced by a valuation allowance of $4.5 million.
29
Net Income
The Company recorded net income of $26.5 million, or $1.00 per diluted
share, in fiscal 2004 compared to net income of $56.8 million, or $2.07 per
diluted share, in fiscal 2003.
Net income for fiscal 2004 included special items related to Medicare,
noted in the Net Revenues section above, and a pre-tax gain of $0.9 million on
the sale of the Company's 19.9 percent interest in a Canadian home care company.
See Notes 3 and 8 to the Company's consolidated financial statements.
Net income for fiscal 2004 reflected the positive impact of an
effective tax rate of 34.1 percent, which was lower than the statutory income
tax rate, due primarily to the recognition of certain state net operating loss
carryforwards.
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 $21.8
million for the year ended January 1, 2006 as compared to net cash provided by
operating activities of $36.4 million for the year ended January 2, 2005. The
decrease of $14.6 million in net cash provided by operating activities was
primarily driven by changes impacting the statement of income, changes in
accounts receivable and other assets and changes in current liabilities.
Cash flow impacting the statement of income represents the sum of net
income and all adjustments to reconcile net income to net cash provided by
operating activities and is summarized as follows (in thousands):
Fiscal Year Ended
---------------------- --------------------- ---------------------
January 1, 2006 January 2, 2005 Variance
---------------------- --------------------- ---------------------
(52 weeks) (53 weeks)
OPERATING ACTIVITIES:
Net income $ 23,365 $ 26,488 $ (3,123)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,091 7,329 762
Provision for doubtful accounts 6,172 6,722 (550)
Gain on sale of Canadian investment - (946) 946
Loss on disposal / writedown of fixed assets - 1,361 (1,361)
Reversal of tax audit reserves (4,200) - (4,200)
Deferred income tax expense 12,949 9,111 3,838
---------------------- --------------------- ---------------------
Total cash flow impacting the statement of income $ 46,377 $ 50,065 $ (3,688)
====================== ===================== =====================
o The $3.7 million difference in "Total cash flow impacting the
statement of income" is primarily related to changes in Medicare
special items for which the special Medicare item of $10.4 million
of cash was received and recorded 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,
compared to $3.6 million which was received and recorded in fiscal
2005 in partial settlement of the Company's 1999 appeal, offset
somewhat by reductions in income taxes paid between fiscal 2004
and 2005.
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 $8.1 million as a result of changes in
accounts receivable $5.7 million in the 2004 period and $13.8 million in the
2005 period). The increase in accounts receivable between the 2004 and 2005
period relates primarily to incremental receivables during fiscal 2005
attributable to the TriWest account, for which there were processing delays in
adjudicating the Company's claims, which resulted in an increase in the over 180
days accounts receivable aging for the Commercial Insurance and Other category
and the Heritage operations which were acquired on May 1, 2005. The change in
prepaid expenses and other assets relates primarily to tax refunds which had
not been received at fiscal 2005 year end.
30
Cash flow from operating activities was negatively impacted by $0.6
million as a result of changes in current liabilities of ($8.8) million in the
2004 period and ($9.5) million in the 2005 period. A summary of the changes in
current liabilities impacting cash flow from operating activities for the year
ended January 1, 2006 follows (in thousands):
Fiscal Year Ended
---------------------- --------------------- ---------------------
January 1, 2006 January 2, 2005 Variance
---------------------- --------------------- ---------------------
(52 weeks) (53 weeks)
OPERATING ACTIVITIES:
Changes in current liabilities:
Accounts payable $ (4,773) $ 1,169 $ (5,942)
Payroll and related taxes 421 (3,576) 3,997
Medicare liabilities (2,729) (2,787) 58
Cost of claims incurred but not reported (2,085) (1,164) (921)
Obligations under insurance programs (1,777) (2,540) 763
Other accrued expenses 1,470 61 1,409
---------------------- --------------------- ---------------------
Total changes in current liabilities $(9,473) $ (8,837) $(636)
====================== ===================== =====================
The primary driver for the $0.6 million difference resulting from
changes in current liabilities that impacted cash flow from operating activities
include:
o Accounts payable, which had a negative impact on cash of $5.9
million, and payroll and related taxes, which had a positive
impact of $4.0 million, between the 2004 and 2005 reporting
periods primarily related to the timing of payments.
o Cost of claims incurred but not reported, which had a negative
impact of $0.9 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, for which liability
balances declined in both the 2004 and 2005 reporting periods
primarily as a result of payments made for workers' compensation
claims in excess of incremental workers' compensation costs as the
Company continues to resolve older outstanding claims.
The Company used its operating cash balances to fund the acquisition of
Heritage for $12.1 million, including transaction costs, capital expenditures of
$11.6 million, and the repurchase of shares of the Company's common stock for
$21.1 million during fiscal 2005.
Working capital at January 1, 2006 was approximately $129 million, a
decrease of $5 million as compared to approximately $134 million at January 2,
2005, primarily due to:
o a $25 million decrease in cash, cash equivalents, restricted cash
and short-term investments discussed above;
o an $8 million increase in accounts receivable, as described in the
discussion on net cash provided by operating activities;
o a $5 million decrease in deferred tax assets;
o a $1 million increase in prepaid expenses and other current
assets;
o an $16 million decrease in current liabilities, consisting of
decreases in accounts payable ($12 million), Medicare liabilities
($3 million), cost of claims incurred but not reported ($2
million), and obligations under insurance programs ($2 million),
partially offset by an increase in payroll and related taxes ($1
million) and other accrued expenses ($2 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 January 1, 2006 remained unchanged
from January 2, 2005 at 57 days.
Accounts receivable aging by major payer sources of reimbursement are
as follows:
31
January 1, 2006
============================================================================
Total Current 31-90 days 91-180 days Over 180 days
----- ------- ---------- ----------- -------------
Medicare $ 31,623 $ 15,686 $ 12,198 $ 2,906 $ 833
Medicaid and Local Government 20,383 12,326 5,958 1,425 674
Commercial Insurance and Other 90,624 53,155 18,413 9,303 9,753
Self - Pay 5,662 823 1,165 1,584 2,090
----------------------------------------------------------------------------
Gross Accounts Receivable $148,292 $ 81,990 $ 37,734 $15,218 $13,350
============================================================================
January 2, 2005
============================================================================
Total Current 31-90 days 91-180 days Over 180 days
----- ------- ---------- ----------- -------------
Medicare $ 23,848 $ 11,137 $ 10,102 $ 1,950 $ 659
Medicaid and Local Government 20,391 13,290 5,646 987 468
Commercial Insurance and Other 88,910 56,066 22,864 6,177 3,803
Self - Pay 5,893 819 1,128 1,482 2,464
----------------------------------------------------------------------------
Gross Accounts Receivable $139,042 $ 81,312 $ 39,740 $10,596 $ 7,394
============================================================================
The Company participates in Medicare, Medicaid and other federal and
state healthcare programs. Total Company revenue mix by major payer
classifications is as follows:
---------------------- ----------------------- ----------------------
2005 2004 2003
---------------------- ----------------------- ----------------------
Medicare 31% 27% 22%
Medicaid and Local Government 17 18 20
Commercial Insurance and Other 52 55 58
---------------------- ----------------------- ----------------------
100% 100% 100%
====================== ======================= ======================
Home Healthcare Services revenue is derived from all major payer
classes. For fiscal 2005, Medicare revenue represented 48 percent, Medicaid and
Local Government revenue represented 27 percent and Commercial Insurance and
Other revenue represented 25 percent of Home Healthcare Services revenue. Net
revenues for CareCentrix were 100 percent attributable to the Commercial
Insurance and Other payer source.
On January 1, 2005, a Medicare market basket increase of 2.3 percent
became effective for patients on service on or after such date. This increase
was 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 (referred to as the rural add-on provision) effective for patients on
service on or after April 1, 2005. In addition, a favorable change in the fixed
dollar ratio formula for receiving outlier payments became effective for
patients on service on or after January 1, 2005. Outliers represent patient
cases which exceed the anticipated cost thresholds established by Medicare and
result in increased reimbursement. This change has increased the number of
episodes which qualify for the outlier payment. On November 3, 2005, CMS
announced a 2.8 percent increase in home health reimbursement; however, on
February 1, 2006, Congress acted to hold constant existing reimbursement rates
for 2006 (except for a 5 percent rural add-on premium reflected in reimbursement
rates for specifically defined rural areas of the country for 2006.)
There are certain standards and regulations that the Company must
adhere to in order to continue to participate in these programs. As part of
these standards and regulations, the Company is subject to periodic audits,
examinations and investigations conducted by, or at the direction of,
governmental investigatory and oversight agencies. Periodic and random audits
conducted or directed by these agencies could result in a delay or adjustment to
the amount of reimbursements received under these programs. Violation of the
applicable federal and state health care regulations can result in the Company's
exclusion from participating in these programs and can subject the Company to
substantial civil and/or criminal penalties. The Company believes it is
currently in compliance with these standards and regulations.
The Company is party to a contract, 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 fiscal years 2005, 2004 and 2003,
Cigna accounted for approximately 29 percent, 31 percent and 36 percent,
respectively, of the Company's total net revenues. This year over year decrease
reflects the reduction in the number of enrolled Cigna members resulting in
lower revenues from Cigna's capitated plans. For patients commencing service on
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 subsequent one year term by
providing at least 90 days advance written
32
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.
Prior to February 28, 2006, the Company had a credit facility, as
amended, as described below, that provided up to $55 million in borrowings,
including up to $40 million which was available for letters of credit. The
Company could 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 was 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
was required to pay a fee equal to 2.25 percent per annum of the aggregate face
amount of outstanding letters of credit. The Company was 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, fell below $20
million, the applicable margins for LIBOR and prime rate borrowings would
increase to 3.25 percent and 1.25 percent, respectively, and the letter of
credit and unused line fees would increase to 2.5 percent and 0.50 percent,
respectively.
Total outstanding letters of credit were $20.2 million as of January 1,
2006. 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 January 1, 2006, 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 was scheduled to expire in June 2006, included
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 included
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 and stock
repurchases less restrictive, provided that the Company maintained minimum
excess aggregate liquidity, as defined in the amendment, equal to at least $60
million, and to allow for the disposition of certain assets. As of January 1,
2006, the Company was in compliance with the covenants in the credit facility,
as amended.
The credit facility included provisions, which, if not complied with,
could require early payment by the Company. These included 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 included an
account obligor, whose accounts were 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 health care services, or the Company revoking the lending agent's
control over its governmental lockbox accounts. The Company did not have any
trigger events in the credit facility that were tied to changes in its credit
rating or stock price. As of January 1, 2006, the Company was in compliance with
these provisions.
The credit facility provided that subsequent to June 12, 2005, the
Company could terminate the credit facility without incurring an early
termination fee. The credit facility was terminated on February 28, 2006 and
replaced with a new credit facility that provides up to $75 million in
borrowings, with availability reduced by approximately $20 million for the
issuance of letters of credit at closing. Loans under the new credit facility
are collateralized by all of the Company's tangible and intangible personal
property and are guaranteed by certain subsidiaries of the Company. See Note 14
to the Company's consolidated financial statements.
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
33
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 that 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 that 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.
Additional items that could impact the Company's liquidity are
discussed under "Risk Factors" in Item 1A of this report.
Capital Expenditures
The Company's capital expenditures for the fiscal year 2005 were $11.6
million, as compared to $11.2 million, excluding equipment capitalized under
capital lease obligations of $1.4 million, and $8.8 million for fiscal years
2004 and 2003, respectively. 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 will range between $19
million and $21 million for fiscal 2006. The anticipated increase in capital
expenditures for fiscal 2006 as compared to prior years relates to the inclusion
of Healthfield, as well as continued investment in a new clinical management
system. 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 $88.4 million as of January 1, 2006. The restricted
cash of $22.0 million at January 1, 2006 relates to cash funds of $21.8 million
that have been segregated in a trust account to provide collateral under the
Company's insurance programs. The Company, at its option, may access the cash
funds in the trust account by providing equivalent amounts of alternative
security, including letters of credit and surety bonds. In addition, restricted
cash includes $0.2 million on deposit to comply with New York state regulations
requiring that one month of revenues generated under capitated agreements in the
state be held in escrow. Interest on all restricted funds accrues to the
Company.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through 2006. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
From May 2003 through January 1, 2006, 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 fiscal 2005, the Company repurchased 1,325,000 shares
of its outstanding common stock at an average cost of $15.93 per share and a
total cost of approximately $21.1 million. As of January 1, 2006, the Company
had remaining authorization to repurchase an aggregate of 683,396 shares of its
outstanding common stock. See Note 7 to the Company's consolidated financial
statements.
Contractual Obligations and Commercial Commitments
At January 1, 2006, the Company had no long-term debt. On February 28,
2006, the Company entered into a new Credit Agreement, by and among the Company,
as borrower, Lehman Brothers Inc., as sole lead arranger and sole bookrunner,
and Lehman Commercial Paper Inc., as administrative agent.
The Credit Agreement provides for an aggregate borrowing amount of
$445.0 million including (i) a seven year term loan of $370.0 million repayable
in quarterly installments of 1% per annum (with the remaining balance due at
maturity on March 13, 2013) and (ii) a six year revolving credit facility of
$75.0 million.
During fiscal 2004, the Company commenced implementation of a five-year
capital lease for equipment. Under the terms of the lease, the Company
capitalized the equipment at its fair market value of approximately $1.4
million, which approximates the present value of the minimum lease payments.
Future minimum rental
34
commitments for all non-cancelable leases and purchase obligations at January 1,
2006 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 1,168 431 685 52 -
Operating lease obligations 46,860 16,801 19,586 8,973 1,500
Purchase obligations 700 700 - - -
--------------------------------------------------------------
Total $ 48,728 $ 17,932 $ 20,271 $ 9,025 $ 1,500
==============================================================
During 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. This 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 January 1, 2006 and January 2, 2005.
The letters of credit, which expire one year from date of issuance, are issued
to guarantee payments under the Company's workers compensation program and for
certain other commitments. The Company has the option to renew these letters of
credit or set aside cash funds in a segregated account to satisfy the Company's
obligations as further discussed in the "Liquidity and Capital Resources"
section under the heading "Cash Resources and Obligations." The Company also had
outstanding surety bonds of $2.5 million and $1.0 million at January 1, 2006 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
2006 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 would 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.
Litigation and Government Matters
The Company is a party to certain legal actions and government
investigations. See Item 3, "Legal Proceedings" and Note 8 to the Company's
consolidated financial statements.
Settlement Issues
PRRB Appeal
-----------
As further described in the Critical Accounting Policies section in
Note 2 to the Company's consolidated financial statements, the Company's annual
cost reports, which were filed with CMS, were subject to audit by the fiscal
intermediary engaged by CMS. In connection with the audit of the Company's 1997
cost reports, the Medicare fiscal intermediary made certain audit adjustments
related to the methodology used by the Company to allocate a portion of its
residual overhead costs. The Company filed cost reports for years subsequent to
1997 using the fiscal intermediary's methodology. The Company believed its
methodology used to allocate such overhead costs was accurate and consistent
with past practice accepted by the fiscal intermediary; as such, the Company
filed appeals with the 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,
35
1998 and 1999 using a modified version of the methodology used by the Company
prior to 1997. This modified methodology will also be applied to cost reports
for the year 2000, which are currently under audit. The Administrative
Resolution required that the process to (i) reopen all 1997 cost reports, (ii)
determine the adjustments to allowable costs through the issuance of Notices of
Program Reimbursement and (iii) make appropriate payments to the Company, be
completed in early 2004. Cost reports relating to years subsequent to 1997 were
to be reopened after the process for the 1997 cost reports was completed.
In February 2004, the fiscal intermediary notified the Company that it
had completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was approximately $9 million. The
Company received the funds and recorded the adjustment of $9.0 million as net
revenues during fiscal 2004.
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.
The fiscal intermediary is currently in the process of reopening the
1999 cost reports and the Company anticipates completion of the reopening during
the first quarter of fiscal 2006. The Company expects to receive funds in excess
of $5.5 million related to the 1999 cost reports. The Company received $3.6
million of this amount during the fourth quarter of fiscal 2005 and recorded the
adjustment as net revenues during fiscal 2005.
The timeframe for resolving all items relating to the 2000 cost reports
cannot be determined at this time.
Stock-Based Compensation
Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure and
amendment of Financial Accounting Standards Board ("FASB") Statement No. 123"
("SFAS 148") encourages, but does not require, companies to record compensation
cost for stock-based compensation plans at fair value. In addition, SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation, and
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.
The Company has chosen to adopt the disclosure-only provisions of SFAS
123, as amended by SFAS 148, and continue to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under this approach, the
imputed cost of stock option grants and discounts offered under the Company's
Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting
provisions of the individual grants, but not charged to expense.
The Company has several stock ownership and compensation plans, which
are described more fully in Note 10 to the consolidated financial statements.
The following table presents net income (loss) and basic and diluted earnings
(loss) per common share, had the Company elected to recognize compensation cost
based on the fair value at the grant dates for stock option awards and discounts
granted for stock purchases under the Company's ESPP, consistent with the method
prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share
amounts):
36
For the Fiscal Year Ended
---------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
---------------------- ---------------------- ----------------------
(52 weeks) (53 weeks) (52 weeks)
Net income - as reported $ 23,365 $ 26,488 $ 56,766
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (5,818) (2,442) (1,575)
---------------------- ---------------------- ----------------------
Net income - pro forma $ 17,547 $ 24,046 $ 55,191
====================== ====================== ======================
Basic income per share - as reported $ 1.00 $ 1.07 $ 2.16
Basic income per share - pro forma $ 0.75 $ 0.97 $ 2.10
Diluted income per share - as reported $ 0.94 $ 1.00 $ 2.07
Diluted income per share - pro forma $ 0.70 $ 0.91 $ 2.01
For fiscal 2005, compensation expense in the table above includes $2.3 million
resulting from the acceleration of the vesting of stock options on December 30,
2005.
Goodwill and Other Intangible Assets ("SFAS 142")
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens
the criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles are not amortized into results of operations, but
instead are reviewed for impairment, and an impairment charge is recorded in the
periods in which the recorded carrying value of goodwill and certain intangibles
is more than its estimated fair value. The provisions of SFAS 142 also require
that a goodwill impairment test be performed annually or on the occasion of
other events that indicate a potential impairment. The annual impairment test of
goodwill was performed and indicated that there was no impairment of goodwill
for the fiscal years 2005, 2004 and 2003. Goodwill, amounting to $6.8 million
and $1.3 million was reflected in the accompanying consolidated balance sheets
as of January 1, 2006 and January 2, 2005, respectively.
Recent Accounting Pronouncements
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.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"). This statement replaces SFAS 123, and supersedes APB
25. SFAS 123(R) requires companies to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and to
record compensation cost for all stock awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. In addition, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. SFAS 123(R) allows for
the use of the Black-Scholes valuation model or a lattice option-pricing model
to determine the fair value of such awards. SFAS 123(R) is effective for annual
periods beginning on or after June 15, 2005, which for the Company is the first
quarter of fiscal 2006. Management plans to use the Black-Scholes valuation
model to calculate the fair value of its awards and estimates that the adoption
of SFAS 123(R) will reduce earnings between $0.10 and $0.12 per diluted share in
fiscal 2006.
Impact of Inflation
The Company does not believe that the general level of inflation has
had a material impact on its results of operations during the past three fiscal
years.
37
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 elements
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 elements is reflected in net revenues in the consolidated
statements of income. See further discussion of the elements below under the
heading "Causes and Impact of Change on Revenue."
In addition, these elements can be impacted by the risk factors
described in "Risks Related to the Company's Business and Industry" and "Risks
Related to Healthcare Regulation," which appear in Part I, Item 1A of this
report.
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.
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 12 months of claims payments, and changes
in estimated unbilled receivables for claims incurred but not reported are
determined based on this evaluation. Changes in the estimate are recorded as net
revenues in the Company's consolidated statements of income. There have not been
any material revisions in this estimate for the periods presented in this
filing.
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 11 percent, 12 percent, and 16 percent of total net revenues for
fiscal 2005, 2004 and 2003, 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 is determined using
relevant data, such as the severity of the patient's condition, service needs
and certain other factors, as well as applicable wage indices to give effect to
geographic differences in wage levels. Medicare billings under PPS are initially
recognized as deferred revenue and are subsequently
38
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 $7.4 million and $5.5 million relating to the Medicare PPS program
was included in other accrued expenses in the consolidated balance sheets as of
January 1, 2006 and January 2, 2005, respectively.
There have not been any material revisions in estimates of Medicare
reimbursements under PPS for the periods presented in this filing. During fiscal
2004, however, the Company recorded a revenue adjustment of $1.0 million to
reflect an estimated repayment to Medicare in connection with the services
rendered to certain patients since the inception of PPS on October 1, 2000. In
connection with the estimated repayment, CMS has determined that home care
providers should have received lower reimbursements for certain services
rendered to beneficiaries discharged from inpatient hospitals within fourteen
days immediately preceding admission to home healthcare. As of January 1, 2006,
Medicare has not finalized the amounts to be repaid for these items. Although
management believes that established reserves, which are included in Medicare
liabilities in the accompanying consolidated balance sheets, are sufficient, it
is possible that the finalization of repayments to Medicare relating to these
items could result in adjustments to the consolidated financial statements that
exceed established reserves.
Settlement Issues under Interim Payment System
----------------------------------------------
Prior to October 1, 2000, reimbursement of Medicare home healthcare
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports which were
filed with 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 statements of income.
There have not been any material revisions in established reserves for the
periods presented in this filing.
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 income in the period in which such
gain contingencies are realized. As discussed further under the heading
"Government Matters - PRRB Appeal" in Note 8 to the consolidated financial
statements included in this report, the Company received an aggregate of $10.4
million during fiscal 2004 in settlement of the Company's appeal filed with the
PRRB related to the reopening of all of its 1997 and 1998 cost reports. During
fiscal 2005, the Company received $3.6 million in partial settlement of the PRRB
appeal relating to its 1999 cost reports.
Causes and Impact of Change on Revenue
For each of the sources of revenue, the principal elements in addition
to those described above which can cause change in the amount of revenue to be
realized 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 elements described here and
under each of the various sources of
39
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. While it is not possible to predict the degree of change of
each element, we believe that changes in these elements could cause a change in
estimate which could have a material impact on the consolidated financial
statements. There have not been any material revisions in these estimates for
the periods presented in this filing.
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 been material for the periods presented in this filing.
Accounts receivable attributable to major payer sources of
reimbursement are as follows:
(Dollars in thousands)
January 1, 2006 January 2, 2005
----------------------------------- -------------------------------
Medicare $ 31,623 21% $ 23,848 17%
Medicaid and Local Government 20,383 14 20,391 15
Commercial Insurance and Other 96,286 65 94,803 68
----------------------------------- -------------------------------
Gross Accounts Receivable 148,292 100% 139,042 100%
=============== ============
Less: Allowance for doubtful accounts (8,657) (7,040)
-------------------- -------------------
Net Accounts Receivable $ 139,635 $ 132,002
==================== ===================
The Commercial Insurance and Other payer group included Self-Pay
accounts receivable of $5.7 million and $5.9 million as of January 1, 2006 and
January 2, 2005, respectively.
Accounts Receivable below further outlines other matters considered
with respect to estimating the allowance for doubtful accounts.
Accounts Receivable
Collection Policy
-----------------
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. Collection procedures generally
include follow up contact with the payer at least every 30 days from invoice
date, and a review of collection activity at 90 days to determine continuation
of internal collection activities or potential referral to collection agencies.
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
40
the adequacy of its allowance for doubtful accounts. There have not been any
material revisions in this estimate for the periods presented in this filing.
Accounts Receivable Reserve Methodology
---------------------------------------
The Company has implemented a standardized approach to estimate and
review the collectibility of its receivables based on accounts receivable aging
trends. The Company analyzes historical collection trends, reimbursement
experience and revenue adjustment trends, by major payer groups including
Medicare, Cigna and other payer groups organized by similar type and experience,
as an integral part 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 provision for doubtful accounts,
which is reflected in selling, general and administrative expenses in the
consolidated statements of income. There have not been any material changes in
the estimates for the periods presented in this filing. The allowance for
doubtful accounts at January 1, 2006, January 2, 2005 and December 28, 2003 was
$8.7 million, $7.0 million and $7.9 million, respectively. Additional
information regarding the Company's allowance for doubtful accounts can be found
in Schedule II - Valuation and Qualifying Accounts on page 71 of this report.
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 12 months
of claims payments, and changes in estimated liabilities for cost of claims
incurred but not reported are determined based on this evaluation.
Each of the elements 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. Because of the
elements described above, these estimates may change in the future and could
have a material impact on the Company's consolidated financial statements.
The cost of claims incurred for fiscal years 2005, 2004 and 2003 was
$268.0 million, $269.6 million and $285.9 million, respectively. Differences in
costs between fiscal years relate primarily to changes in business activity in
the Company's CareCentrix operations during the reported periods. Cost of claims
incurred but not reported, including any changes in estimate relating thereto,
are reflected in cost of services sold in the Company's consolidated statements
of income. There have not been any material revisions in estimates of prior year
costs related to cost of claims incurred for the periods presented in this
filing.
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 elements which impact
this critical estimate include the num-
41
ber, type and severity of claims and the policy deductible limits; therefore,
the estimate is sensitive and changes in the estimate could have a material
impact on the Company's consolidated financial statements.
Workers' compensation and professional and general liability costs were
$15.9 million, $14.9 million and $17.5 million for the fiscal years ended
January 1, 2006, January 2, 2005 and December 28, 2003, respectively.
Differences in costs between fiscal years relate primarily to the number and
severity of claims incurred in each reported period. Workers' compensation and
professional liability claims, including any changes in estimate relating
thereto, are recorded primarily in cost of services sold in the Company's
consolidated statements of income. There have not been any material revisions in
estimates of prior year costs for the periods presented in this filing.
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.
The Company provides employee health and welfare benefits under a self
insured program and maintains stop loss coverage for individual claims in excess
of $175,000 for fiscal 2005. For fiscal years ended January 1, 2006, January 2,
2005 and December 28, 2003, employee health and welfare benefit costs were $22.7
million, $19.3 million and $18.0 million, respectively. Differences in costs
between fiscal years relate primarily to increased enrollment and the number and
severity of individual claims incurred in each reported period. Changes in
estimates of the Company's employee health and welfare claims are recorded in
cost of services sold for caregiver associates and in selling, general and
administrative costs for administrative associates in the Company's consolidated
statements of income. There have not been any material revisions in estimates of
prior year costs for the periods presented in this filing.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company had no interest rate exposure on fixed rate debt or other
market risk at January 1, 2006.
Item 8. Financial Statements and Supplementary Data
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
--------
Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005................................ 43
Consolidated Statements of Income for the three years ended January 1, 2006.......................... 44
Consolidated Statements of Changes in Shareholders' Equity for the three years ended January 1, 2006. 45
Consolidated Statements of Cash Flows for the three years ended January 1, 2006...................... 46
Notes to Consolidated Financial Statements .......................................................... 47 - 70
Schedule II - Valuation and Qualifying Accounts for the three years ended January 1, 2006............ 71
42
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
January 1, 2006 January 2, 2005
----------------------- ----------------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,603 $ 9,910
Restricted cash 22,014 22,014
Short-term investments 49,750 81,100
Receivables, less allowance for doubtful accounts of $8,657
and $7,040 at January 1, 2006 and January 2, 2005, respectively 139,635 132,002
Deferred tax assets 15,974 21,289
Prepaid expenses and other current assets 7,816 6,057
----------------------- ----------------------
Total current assets 251,792 272,372
Fixed assets, net 24,969 19,687
Deferred tax assets, net 18,099 23,805
Goodwill 6,763 1,325
Other assets 24,942 14,909
----------------------- ----------------------
Total assets $ 326,565 $ 332,098
======================= ======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,870 $ 25,896
Payroll and related taxes 9,777 9,356
Medicare liabilities 7,220 9,949
Cost of claims incurred but not reported 25,276 27,361
Obligations under insurance programs 32,883 34,660
Other accrued expenses 33,440 31,117
----------------------- ----------------------
Total current liabilities 122,466 138,339
Other liabilities 21,945 21,819
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 23,034,954 and 23,722,408
shares at January 1, 2006 and January 2, 2005, respectively 2,303 2,372
Additional paid-in capital 225,847 238,929
Accumulated deficit (45,996) (69,361)
----------------------- ----------------------
Total shareholders' equity 182,154 171,940
----------------------- ----------------------
Total liabilities and shareholders' equity $ 326,565 $ 332,098
======================= ======================
See notes to consolidated financial statements.
43
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
For the Fiscal Year Ended
-----------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
---------------------- ---------------------- ----------------------
(52 weeks) (53 weeks) (52 weeks)
Net revenues $ 868,843 $ 845,764 $ 814,029
Cost of services sold (excluding depreciation
and amortization) 542,093 521,835 531,987
---------------------- ---------------------- ----------------------
Gross profit 326,750 323,929 282,042
Selling, general and administrative expenses (288,695) (278,342) (252,334)
Depreciation and amortization (8,091) (7,329) (6,851)
---------------------- ---------------------- ----------------------
Operating income 29,964 38,258 22,857
Gain on sale of Canadian investment - 946 -
Interest income, net 1,878 977 441
---------------------- ---------------------- ----------------------
Income before income taxes 31,842 40,181 23,298
Income tax (expense) benefit (8,477) (13,693) 33,468
---------------------- ---------------------- ----------------------
Net income $ 23,365 $ 26,488 $ 56,766
====================== ====================== ======================
Net income per common share:
Basic $ 1.00 $ 1.07 $ 2.16
====================== ====================== ======================
Diluted $ 0.94 $ 1.00 $ 2.07
====================== ====================== ======================
Weighted average shares outstanding:
Basic 23,267 24,724 26,262
====================== ====================== ======================
Diluted 24,927 26,365 27,439
====================== ====================== ======================
See notes to consolidated financial statements.
44
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 1, 2006
(In thousands, except share amounts)
Common Stock Additional
------------------------------- Paid-in Accumulated
Shares Amount Capital Deficit Total
--------------- -------------- -------------- --------------- -------------
Balance at December 29, 2002 26,385,210 $ 2,639 $ 263,024 $ (152,615) $ 113,048
Comprehensive income:
Net Income - - - 56,766 56,766
Income tax benefits associated with
stock-based compensation - - 19,454 - 19,454
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 651,555 65 2,271 - 2,336
Repurchase of common stock at cost (1,438,464) (144) (14,281) - (14,425)
--------------- -------------- -------------- --------------- -------------
Balance at December 28, 2003 25,598,301 $ 2,560 $ 270,468 $ (95,849) $ 177,179
Comprehensive income:
Net Income - - - 26,488 26,488
Income tax benefits associated with
the exercise of non-qualified stock options - - 1,535 - 1,535
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 677,247 68 5,072 - 5,140
Repurchase of common stock at cost (2,553,140) (256) (38,146) - (38,402)
--------------- -------------- -------------- --------------- -------------
Balance at January 2, 2005 23,722,408 $ 2,372 $ 238,929 $ (69,361) $ 171,940
Comprehensive income:
Net Income - - - 23,365 23,365
Income tax benefits associated with
the exercise of non-qualified stock options - - 1,928 - 1,928
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 637,546 64 5,963 - 6,027
Repurchase of common stock at cost (1,325,000) (133) (20,973) - (21,106)
--------------- -------------- -------------- --------------- -------------
Balance at January 1, 2006 23,034,954 $ 2,303 $ 225,847 $ (45,996) $ 182,154
=============== ============== ============== =============== =============
See notes to consolidated financial statements.
45
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Year Ended
-------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
-------------------------------------------------------------------
(52 weeks) (53 weeks) (52 weeks)
OPERATING ACTIVITIES:
Net income $ 23,365 $ 26,488 $ 56,766
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 8,091 7,329 6,851
Provision for doubtful accounts 6,172 6,722 7,684
Gain on sale of Canadian investment - (946) -
Loss (gain) on disposal / writedown of fixed assets - 1,361 (209)
Reversal of tax audit reserves (4,200) - -
Deferred income tax (benefit) expense 12,949 9,111 (35,035)
Changes in assets and liabilities:
Accounts receivable (13,805) (5,726) (15,604)
Prepaid expenses and other current assets (1,759) 25 3,048
Accounts payable (4,773) 1,169 (786)
Payroll and related taxes 421 (3,576) 555
Medicare liabilities (2,729) (2,787) 856
Cost of claims incurred but not reported (2,085) (1,164) 626
Obligations under insurance programs (1,777) (2,540) (629)
Other accrued expenses 1,470 61 6,443
Other, net 450 861 137
--------------------- ---------------------- ----------------------
Net cash provided by operating activities 21,790 36,388 30,703
--------------------- ---------------------- ----------------------
INVESTING ACTIVITIES:
Purchase of fixed assets (11,622) (12,593) (8,777)
Proceeds from sale of assets - 4,123 200
Acquisition of business (12,077) - (1,300)
Purchase of short-term investments available-for-sale (173,050) (145,950) (10,000)
Maturities of short-term investments available-for-sale 194,400 84,850 -
Purchase of short-term investments held to maturity - (10,000) (24,900)
Maturities of short-term investments held to maturity 10,000 10,000 14,935
Deposits into restricted cash - (264) (21,750)
--------------------- ---------------------- ----------------------
Net cash provided by (used in) investing activities 7,651 (69,834) (51,592)
--------------------- ---------------------- ----------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 6,027 5,140 2,336
Changes in book overdrafts (7,253) 1,223 7,425
Repurchases of common stock (21,106) (38,402) (14,425)
Repayment of capital lease obligations (416) (293) -
--------------------- ---------------------- ----------------------
Net cash used in financing activities (22,748) (32,332) (4,664)
--------------------- ---------------------- ----------------------
Net change in cash and cash equivalents 6,693 (65,778) (25,553)
Cash and cash equivalents at beginning of period 9,910 75,688 101,241
--------------------- ---------------------- ----------------------
Cash and cash equivalents at end of period $ 16,603 $ 9,910 $ 75,688
===================== ====================== ======================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Income taxes paid, net of refunds $ 610 $ 3,788 $ 1,623
===================== ====================== ======================
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITY:
Fixed assets acquired under capital lease $ 201 $ 1,443 $ -
====================== ====================== ======================
For fiscal years 2005 and 2004, tax benefits associated with stock compensation
deductions of $1.9 million and $1.5 million, respectively, have been credited to
shareholders' equity.
For fiscal year 2003, in connection with the reversal of the valuation
allowance, deferred tax benefits associated with stock compensation deductions
of $19.5 million have been credited to shareholders' equity.
See notes to consolidated financial statements.
46
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 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 13
for a description of the Company's business segments for fiscal 2005.
On February 28, 2006, the Company completed the acquisition of The
Healthfield Group, Inc. ("Healthfield"), a leading provider of home healthcare,
hospice and related services. In connection with the acquisition, the Company
entered into a $445 million Credit Agreement and a Guarantee and Collateral
Agreement. The impact of the acquisition and the related agreements will be
reflected in the Company's fiscal 2006 results of operations and financial
condition. See Note 14 for additional information.
Gentiva was incorporated in the State of Delaware on August 6, 1999
and became an independent public company on March 15, 2000.
Note 2. Summary of Critical and Other Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant intercompany balances
and transactions have been eliminated. The Company's fiscal year ends on the
Sunday nearest to December 31st, which was January 1, 2006 for fiscal 2005,
January 2, 2005 for fiscal 2004 and December 28, 2003 for fiscal 2003. The
Company's fiscal year 2004 includes 53 weeks compared to fiscal years 2005 and
2003, which included 52 weeks.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The most critical estimates relate to revenue recognition, the
collectibility of accounts receivable and related reserves, the cost of claims
incurred but not reported 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 and other significant accounting policies
and a discussion of the significant estimates and judgments associated with such
policies are described below.
Critical Accounting Policies
Revenue Recognition
Revenues recognized by the Company are subject to a number of elements
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 elements is reflected in net revenues in the consolidated
statements of income. See further discussion of the elements below under the
heading "Causes and Impact of Change on Revenue."
Net revenues by major payer classification are as follows:
47
--------------------------------------------------------
2005 2004 2003
----------------- ----------------- -----------------
Medicare $ 265,830 $ 228,114 $ 178,662
Medicaid and Local Government 149,756 154,388 165,151
Commercial Insurance and Other 453,257 463,262 470,216
----------------- ----------------- -----------------
Total Net Revenues $ 868,843 $ 845,764 $ 814,029
================= ================= =================
Home Healthcare Services net revenues are derived from all major payer
classes. CareCentrix net revenues are 100 percent attributable to the Commercial
Insurance and Other payer source.
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third-party
providers to provide direct home nursing and related services, home infusion
therapies and certain other specialty medical equipment to patients insured by
Cigna. For fiscal years 2005, 2004 and 2003, Cigna accounted for approximately
29 percent, 31 percent and 36 percent, respectively, of the Company's total net
revenues.
No other commercial payer accounts for 10 percent or more of the
Company's total net revenues. Net revenues from commercial payers are primarily
generated under fee for service contracts, which are traditionally one year in
term and renewable automatically on an annual basis, unless terminated by either
party.
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.
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 12 months of claims payments, and changes
in estimated unbilled receivables for claims incurred but not reported are
determined based on this valuation. Changes in the estimate are recorded as net
revenues in the Company's consolidated statements of income. There have not been
any material revisions in this estimate for the periods presented in this
filing.
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 11 percent, 12 percent, and 16 percent of total net revenues for
fiscal 2005, 2004 and 2003, respectively.
Medicare
Prospective Payment System Reimbursements
-----------------------------------------
Under the Prospective Payment System ("PPS") for Medicare
reimbursement, the Company estimates net revenues to be recorded based on a
reimbursement rate which is determined using relevant data, such as the severity
of the patient's condition, service needs and certain other factors, as well as
applicable wage indices to give effect to geographic differences in wage
levels. 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
48
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 $7.4 million and $5.5 million relating
to the Medicare PPS program was included in other accrued expenses in the
consolidated balance sheets as of January 1, 2006 and January 2, 2005,
respectively.
There have not been any material revisions in estimates of Medicare
reimbursements under PPS for the periods presented in this filing. During fiscal
2004, however, the Company recorded a revenue adjustment of $1.0 million to
reflect an estimated repayment to Medicare in connection with the services
rendered to certain patients since the inception of PPS on October 1, 2000. In
connection with the estimated repayment, CMS has determined that home care
providers should have received lower reimbursements for certain services
rendered to beneficiaries discharged from inpatient hospitals within fourteen
days immediately preceding admission to home healthcare. As of January 1, 2006,
Medicare has not finalized the amounts to be repaid for these items. Although
management believes that established reserves, which are included in Medicare
liabilities in the accompanying consolidated balance sheets, are sufficient, it
is possible that the finalization of repayments to Medicare relating to these
items could result in adjustments to the consolidated financial statements that
exceed established reserves.
Settlement Issues under Interim Payment System
----------------------------------------------
Prior to October 1, 2000, reimbursement of Medicare home healthcare
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports which were
filed with the 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 statements of income.
There have not been any material revisions in established reserves for the
periods presented in this filing.
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 income in the period in which such
gain contingencies are realized. As discussed further under the heading
"Government Matters - PRRB Appeal" in Note 8 to the consolidated financial
statements included in this report, the Company received an aggregate of $10.4
million during fiscal 2004 in settlement of the Company's appeal filed with the
PRRB related to the reopening of all of its 1997 and 1998 cost reports. During
fiscal 2005, the Company received $3.6 million in partial settlement of the PRRB
appeal relating to its 1999 cost reports.
Causes and Impact of Change on Revenue
For each of the sources of revenue, the principal elements in addition
to those described above which can cause change in the amount of revenue to be
realized 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 elements 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. While it is not possible
to predict the degree of change of each element, we believe that changes in
these elements could cause a change in estimate which could
49
have a material impact on the consolidated financial statements. There have not
been any material revisions in these estimates for the periods presented in this
filing.
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 been material for the periods presented in this filing.
Accounts receivable attributable to major payer sources of
reimbursement are as follows:
(Dollars in thousands)
January 1, 2006 January 2, 2005
----------------------------------- -------------------------------
Medicare $ 31,623 21% $ 23,848 17%
Medicaid and Local Government 20,383 14 20,391 15
Commercial Insurance and Other 96,286 65 94,803 68
----------------------------------- -------------------------------
Gross Accounts Receivable 148,292 100% 139,042 100%
=============== ============
Less: Allowance for doubtful accounts (8,657) (7,040)
-------------------- -------------------
Net Accounts Receivable $ 139,635 $ 132,002
==================== ===================
The Commercial Insurance and Other payer group included Self-Pay
accounts receivable of $5.7 million and $5.9 million as of January 1, 2006 and
January 2, 2005, respectively.
Accounts Receivable below further outlines other matters considered
with respect to estimating the allowance for doubtful accounts.
Accounts Receivable
Collection Policy
-----------------
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. Collection procedures generally
include follow up contact with the payer at least every 30 days from invoice
date, and a review of collection activity at 90 days to determine continuation
of internal collection activities or potential referral to collection agencies.
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. There have not been any material revisions in this estimate
for the periods presented in this filing.
50
Accounts Receivable Reserve Methodology
---------------------------------------
The Company has implemented a standardized approach to estimate and
review the collectibility of its receivables based on accounts receivable aging
trends. The Company analyzes historical collection trends, reimbursement
experience and revenue adjustment trends, by major payer groups including
Medicare, Cigna and other payer groups organized by similar type and experience,
as an integral part 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 provision for doubtful accounts,
which is reflected in selling, general and administrative expenses in the
consolidated statements of income. There have not been any material changes in
the estimates for the periods presented in this filing. The allowance for
doubtful accounts at January 1, 2006, January 2, 2005 and December 28, 2003 was
$8.7 million, $7.0 million and $7.9 million, respectively. Additional
information regarding the Company's allowance for doubtful accounts can be found
in Schedule II - Valuation and Qualifying Accounts on page 71 of this report.
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 12 months
of claims payments, and changes in estimated liabilities for cost of claims
incurred but not reported are determined based on this evaluation.
Each of the elements 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. Because of the
elements described above, these estimates may change in the future and could
have a material impact on the Company's consolidated financial statements.
The cost of claims incurred for fiscal years 2005, 2004 and 2003 was
$268.0 million, $269.6 million and $285.9 million, respectively. Differences in
costs between fiscal years relate primarily to changes in business activity in
the Company's CareCentrix operations during the reported periods. Cost of claims
incurred but not reported, including any changes in estimate relating thereto,
are reflected in cost of services sold in the Company's consolidated statements
of income. There have not been any material revisions in estimates of prior year
costs related to cost of claims incurred for the periods presented in this
filing.
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 elements which impact
this critical estimate include the number, type and severity of claims and the
policy deductible limits; therefore, the estimate is sensitive and changes in
the estimate could have a material impact on the Company's consolidated
financial statements.
Workers' compensation and professional and general liability costs were
$15.9 million, $14.9 million and $17.5 million for the fiscal years ended
January 1, 2006, January 2, 2005 and December 28, 2003, respec-
51
tively. Differences in costs between fiscal years relate primarily to the number
and severity of claims incurred in each reported period. Workers' compensation
and professional liability claims, including any changes in estimate relating
thereto, are recorded primarily in cost of services sold in the Company's
consolidated statements of income. There have not been any material revisions in
estimates of prior year costs for the periods presented in this filing.
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.
The Company provides employee health and welfare benefits under a self
insured program and maintains stop loss coverage for individual claims in excess
of $175,000 for fiscal 2005. For fiscal years ended January 1, 2006, January 2,
2005 and December 28, 2003, employee health and welfare benefit costs were $22.7
million, $19.3 million and $18.0 million, respectively. Differences in costs
between fiscal years relate primarily to increased enrollment and the number and
severity of individual claims incurred in each reported period. Changes in
estimates of the Company's employee health and welfare claims are recorded in
cost of services sold for caregiver associates and in selling, general and
administrative costs for administrative associates in the Company's consolidated
statements of income. There have not been any material revisions in estimates of
prior year costs for the periods presented in this filing.
Other Significant Accounting Policies
Cash and Cash Equivalents
The Company considers all investments with an original maturity of
three months or less on their acquisition date to be cash equivalents. Cash and
cash equivalents included 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.
Restricted Cash
Restricted cash primarily represents segregated cash funds in a trust
account designated as collateral under the Company's insurance programs. The
Company, at its option, may access the cash funds in the trust account by
providing equivalent amounts of alternative security. Interest on all restricted
funds accrues to the Company.
Short-Term Investments
The Company's short-term investments consist primarily of AAA-rated
auction rate securities and other debt securities with an original maturity of
more than three months and less than one year on the acquisition date in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Investments in debt securities are classified by individual
security into one of three separate categories: available-for-sale,
held-to-maturity or trading.
Available-for-sale investments are carried on the balance sheet at fair
value, which for the Company approximates carrying value. Auction rate
securities of $49.8 million and $71.1 million at January 1, 2006 and January 2,
2005, respectively, are classified as available-for-sale and are available to
meet the Company's current operational needs and accordingly are classified as
short-term investments. The interest rates on auction rate securities are reset
to current interest rates periodically, typically 7, 14 or 28 days. Contractual
maturities of the auction rate securities exceed ten years.
52
Debt securities that the Company has the intent and ability to hold to
maturity are classified as "held-to-maturity" investments and are reported at
amortized cost, which approximates fair value. Held-to-maturity investments,
which have contractual maturities of less than one year, consist of government
agency bonds of $10 million at January 2, 2005. The Company had no
held-to-maturity investments at January 1, 2006.
The Company has no investments classified as trading securities.
Fixed Assets
Fixed assets, including costs of Company developed software, are stated
at cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the life of the lease or the life of the improvement.
Goodwill and Other Intangible Assets ("SFAS 142")
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens
the criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles are not amortized into results of operations, but
instead are reviewed for impairment, and an impairment charge is recorded in the
periods in which the recorded carrying value of goodwill and certain intangibles
is more than its estimated fair value.
The provisions of SFAS 142 also require that a goodwill impairment test
be performed annually or on the occasion of other events that indicate a
potential impairment. The annual impairment test of goodwill was performed and
indicated that there was no impairment of goodwill for the fiscal years 2005,
2004 and 2003. Goodwill, which relates to the Home Healthcare Services segment,
amounted to $6.8 million and $1.3 million at January 1, 2006 and January 2,
2005, respectively.
Identifiable intangible assets were recorded during 2005 in connection
with the acquisition described in Note 3 to the consolidated financial
statements. The carrying amount and accumulated amortization of each category of
identifiable intangible assets as of January 1, 2006 is as follows (in
thousands):
As of January 1, 2006
------------------------------------------------------------
Gross Carrying Accumulated
Amount Amortization Net Balance
------------------- ------------------ ------------------
Amortized intangible assets
Covenants not to compete $ 1,198 $ (173) $ 1,025
Customer lists 3,970 (311) 3,659
------------------- ------------------ ------------------
Subtotal 5,168 (484) 4,684
Unamortized intangible assets:
Trademarks and other $ 1,147 $ - $ 1,147
------------------- ------------------ ------------------
Total intangible assets $ 6,315 $ (484) $ 5,831
=================== ================== ==================
Covenants not to compete and customer lists are amortized over their
estimated useful lives which are five and eight years, respectively. The
estimated amortization expense for each of the five succeeding fiscal years
approximate $740,000 for years 2006 to 2009 and $580,000 in 2010.
Accounting for Impairment and Disposal of Long-Lived Assets
The Company evaluates the possible impairment of its long-lived assets,
including intangible assets which are amortized pursuant to the provisions of
SFAS 142, under SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). The Company reviews the recoverability of its
long-lived assets when events or changes in circumstances occur that indicate
that the carrying value of the asset may not be recoverable. Evaluation of
possible impairment is based on the Company's ability to recover the asset from
the expected future pretax cash flows (undiscounted and without interest
charges) of the related operations. If the expected undiscounted pretax cash
flows are less than the carrying amount of such asset, an impairment loss is
recognized for the difference between the estimated fair value and carrying
amount of the asset.
Book Overdrafts
Book overdrafts, representing cash accounts with negative book balances
for which there exists no legal right of offset with other accounts, are
considered current liabilities. In this regard, book overdrafts of $1.3 million
at January 1, 2006 and $8.6 million at January 2, 2005 were included in accounts
payable in the accompanying consolidated balance sheets.
Stock-Based Compensation Plans
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"),
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148")
encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. In addition, SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, and amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim
53
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company has chosen to adopt the disclosure-only provisions of SFAS
148 and continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Under this approach, the imputed cost of stock option grants
and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP")
is disclosed, based on the vesting provisions of the individual grants, but not
charged to expense. See Recent Accounting Pronouncements and Note 10.
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):
For the Fiscal Year Ended
------------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
------------------------------------------------------------------------
(52 weeks) (53 weeks) (52 weeks)
Net income $ 23,365 $ 26,488 $ 56,766
- --------------------------------------------------------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 23,267 24,724 26,262
Shares issuable upon the assumed exercise
of stock options and in connection
with the employee stock purchase plan using the
treasury stock method 1,660 1,641 1,177
---------------------- ---------------------- ----------------------
Diluted weighted average common
shares outstanding 24,927 26,365 27,439
---------------------- ---------------------- ----------------------
- --------------------------------------------------------------------------------------------------------------------------------
Net income per common share:
Basic $ 1.00 $ 1.07 $ 2.16
Diluted $ 0.94 $ 1.00 $ 2.07
- --------------------------------------------------------------------------------------------------------------------------------
Income Taxes
The Company uses the asset and liability approach to account for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amounts
of assets and liabilities and their respective tax bases using tax rates in
effect for the year in which the differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced
by a valuation allowance if, based on available evidence, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
The Company also establishes an appropriate level of additional provision for
income taxes in the event that certain positions, which are believed to be
supportable, are challenged by tax authorities. These additional provisions are
adjusted in light of changing facts and circumstances. If original filing
positions are upheld under tax audits, the provision for income taxes will
reflect favorable adjustments in the year the positions are upheld.
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Significant differences can
arise between the fair value and carrying amount of financial instruments that
are recognized at historical amounts.
The carrying amount of the Company's cash and cash equivalents,
restricted cash, short-term investments, accounts receivable, accounts payable
and certain other current liabilities approximate fair value because of their
short maturity.
54
Debt Issuance Costs
The Company amortizes deferred debt issuance costs over the term of its
credit facility.
Reclassifications and Revisions
Certain reclassifications have been made to the 2004 and 2003
consolidated financial statements to conform to the current year presentation
including a revision to the consolidated statement of cash flows for fiscal 2004
of approximately $1.5 million from "Financing Activities" to "Operating
Activities" related to income tax benefits associated with the exercise of
non-qualified stock options and a revision of approximately $2.6 million of net
deferred tax assets from current to noncurrent at January 2, 2005.
Recent Accounting Pronouncements
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.
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"). This statement replaces SFAS 123, and supersedes APB
25. SFAS 123(R) requires companies to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and to
record compensation cost for all stock awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. In addition, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. SFAS 123(R) allows for
the use of the Black-Scholes valuation model or a lattice option-pricing model
to determine the fair value of such awards. SFAS 123(R) is effective for annual
periods beginning on or after June 15, 2005, which for the Company is the first
quarter of fiscal 2006. Management plans to use the Black-Scholes valuation
model to calculate the fair value of its awards.
Note 3. 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. A
valuation analysis of the purchase price was performed and costs have been
recorded as Goodwill ($5.4 million), Fixed Assets and Other Assets ($0.4
million), and identifiable intangible assets ($6.3 million). For fiscal year
2005, incremental net revenues resulting from the Heritage acquisition
approximated $12.5 million.
Sale of Canadian Investment
On March 30, 2004, the Company sold its minority interest in a home
care nursing services business in Canada. The business had been acquired as
partial consideration for the sale of the Company's Canadian operations in the
fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the
Company received cash proceeds of $4.1 million and recorded a gain on sale of
approximately $0.9 million, which is reflected in the consolidated statement of
income for year ended January 2, 2005.
55
Note 4. Restructuring and Other Special Charges
During fiscal 2005, the Company recorded restructuring and other
special charges aggregating $0.9 million.
Business Realignment Activities
The Company recorded charges of $0.8 million during the fourth quarter
ended January 1, 2006 in connection with a restructuring plan associated with
its CareCentrix operations. This plan included the closing and consolidation of
two Regional Care Centers in response to changes primarily in the nature of
services provided to Cigna members under a new contract which commenced in early
2006. A portion of the total anticipated charges were reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of income for the fiscal year ended January 1, 2006. The Company expects to
complete this restructuring during the first half of fiscal 2006 and will record
the remaining restructuring charges as incurred. The Company anticipates the
cost of this restructuring will aggregate approximately $2.2 million which
includes compensation and severance costs of $1.8 million and facility lease and
other costs of $0.4 million.
The costs incurred and cash expenditures associated with restructuring
activities during fiscal year 2005 by component were as follows (in thousands):
Compensation and Facility Lease
Severance Costs and Other Costs Total
--------------------- --------------------- ---------------------
Beginning Balance at January 2, 2005 $ - $ - $ -
Charge in 2005 770 19 789
Cash expenditures - (19) (19)
--------------------- --------------------- ---------------------
Ending Balance at January 1, 2006 $ 770 $ - $ 770
===================== ===================== =====================
During fiscal 2003, 2004 and 2005, the Company incurred cash
expenditures of $2.4 million, $0.4 million and $1.2 million, respectively,
primarily associated with facility lease and other costs relating to a
restructuring plan adopted in fiscal 2002. In connection with such restructuring
plan, the Company recorded charges of $6.8 million, of which $0.9 million
related to compensation and severance costs and $5.9 million related to facility
lease and other costs.
The balance of unpaid charges relating to restructuring activities
aggregated $2.0 million at January 1, 2006 and $1.9 million at January 2, 2005,
which was included in other accrued expenses in the consolidated balance sheets.
In addition, during the fourth quarter of fiscal 2005, the Company
recorded a special charge of $122,000 in connection with the decision to
accelerate the vesting of certain stock options. See Note 10 for additional
information.
56
Note 5. Fixed Assets, Net
(in thousands) Useful Lives January 1, 2006 January 2, 2005
--------------- ---------------------- -----------------------
Computer equipment and software 3-5 Years $ 56,907 $ 48,122
Furniture and fixtures 5 Years 24,488 22,664
Leasehold improvements Lease Term 11,931 10,452
Machinery and equipment 5 Years 1,986 754
---------------------- -----------------------
95,312 81,992
Less accumulated depreciation (70,343) (62,305)
---------------------- -----------------------
$ 24,969 $ 19,687
====================== =======================
Depreciation expense was approximately $7.6 million in fiscal 2005,
$7.3 million in fiscal 2004 and $6.9 million in fiscal 2003.
During the fourth quarter of fiscal 2004, the Company recorded a
writedown of approximately $1.4 million relating to purchased software for which
it was determined there was minimal future value.
Note 6. Long-Term Debt
Prior to February 28, 2006, the Company had a credit facility, as
amended, as described below, that provided up to $55 million in borrowings,
including up to $40 million which was available for letters of credit. The
Company could 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 was 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
was required to pay a fee equal to 2.25 percent per annum of the aggregate face
amount of outstanding letters of credit. The Company was 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, fell below $20
million, the applicable margins for LIBOR and prime rate borrowings would
increase to 3.25 percent and 1.25 percent, respectively, and the letter of
credit and unused line fees would increase to 2.5 percent and 0.50 percent,
respectively. The higher margins and fees were in effect prior to June 1, 2003.
The credit facility, which was scheduled to expire in June 2006,
included 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
included 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 and stock
repurchases less restrictive, provided that the Company maintained minimum
excess aggregate liquidity, as defined in the amendment, equal to at least $60
million, and to allow for the disposition of certain assets. As of January 1,
2006, the Company was in compliance with the covenants in the credit facility,
as amended.
The credit facility provided that subsequent to June 12, 2005, the
Company could terminate the credit facility without incurring an early
termination fee. The credit facility was terminated on February 28, 2006 and
replaced with a new credit agreement that provides for a $370 million seven year
term loan and a $75 million six year revolving credit facility which are further
described under the heading "Credit Agreement" in Note 14 to the consolidated
financial statements.
Total outstanding letters of credit were approximately $20.2 million at
January 1, 2006 and at 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 January 1, 2006
and January 2, 2005. The Company also had outstanding surety bonds of
$2.5 million and $1.0 million at January 1, 2006 and January 2, 2005,
respectively.
57
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
Net interest income for fiscal years 2005, 2004 and 2003 was
approximately $1.9 million, $1.0 million and $0.4 million, respectively. Net
interest income represented interest income of approximately $2.9 million for
fiscal 2005, $2.0 million for fiscal 2004 and $1.5 million for fiscal 2003,
partially offset by fees relating to the revolving credit facility and
outstanding letters of credit.
Note 7. Shareholders' Equity
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock").
Since May 2003, the Company has 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. A summary of the shares repurchased under each program
follows:
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of January 1, 2006 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 1,500,000 816,604 12,888,237 15.78
-------------------------------------------------------------------------
6,000,000 5,316,604 $ 73,931,223 $ 13.91
=========================================================================
During the past three fiscal years, the number of shares of common
stock repurchased by the Company, total cost of share repurchases and average
cost per share were as follows:
Average
Shares Cost per
Repurchased Total Cost Share
----------- ------------ -----
Fiscal 2003 1,438,464 $ 14,423,557 $ 10.03
Fiscal 2004 2,553,140 38,401,397 15.04
Fiscal 2005 1,325,000 21,106,269 15.93
---------------------------------------------------
Total 5,316,604 $ 73,931,223 $ 13.91
===================================================
The repurchases have occurred periodically in the open market or
through privately negotiated transactions based on market conditions and other
factors. As of January 1, 2006, the Company had remaining authorization to
repurchase an aggregate of 683,396 shares of its outstanding common stock.
Note 8. Legal Matters
Litigation
In addition to the matters referenced in this Note 8, the Company is
party to certain legal actions arising in the ordinary course of business
including legal actions arising out of services rendered by its various
operations, personal injury and employment disputes.
The following legal matter was settled during fiscal year 2004.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
-----------------------------------------------------------------------
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff
58
claimed that infusion pumps delivered to patients did not supply the full amount
of medication, allegedly resulting in substandard care. Based on a review of the
court's docket sheet, the plaintiff filed a complaint under seal in March 2001.
In October 2001, the United States government filed a notice with the court
declining to intervene in this matter, and on October 24, 2001, the court
ordered that the seal be lifted. The Company filed its responsive pleading on
February 25, 2002. The Company denied the allegations of wrongdoing in the
complaint. On May 19, 2003, the Company filed a motion for summary judgment on
the issue of liability. On February 6, 2004, the court granted partial summary
judgment for the Company, dismissing two of the three claims alleged under the
False Claims Act and denying summary judgment for the Company on the wrongful
termination claim. In December 2004, the parties reached a settlement, and the
case was dismissed with prejudice on December 21, 2004. The amount of the
settlement was not material.
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, including tax liabilities for periods prior to the Split-Off date. See
Note 11 to the consolidated financial statements.
Government Matters
PRRB Appeal
-----------
As further described in the Critical Accounting Policies section in
Note 2, the Company's annual cost reports, which were filed with CMS, were
subject to audit by the fiscal intermediary engaged by CMS. In connection with
the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary
made certain audit adjustments related to the methodology used by the Company to
allocate a portion of its residual overhead costs. The Company filed cost
reports for years subsequent to 1997 using the fiscal intermediary's
methodology. The Company believed 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.
In February 2004, the fiscal intermediary notified the Company that it
had completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was approximately $9 million. The
Company received the funds and recorded the adjustment of $9.0 million as net
revenues during fiscal 2004.
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.
The fiscal intermediary is currently in the process of reopening the
1999 cost reports and the Company anticipates completion of the reopening during
the first quarter of fiscal 2006. The Company expects to receive funds in excess
of $5.5 million related to the 1999 cost reports. Of the total amount,
approximately $3.6 million was received and recorded as net revenues during
fiscal 2005.
59
The time frame for resolving all items relating to the 2000 cost
reports cannot be determined at this time.
Subpoenas
---------
On April 17, 2003, the Company received a subpoena from the Department
of Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG and DOJ pursuant to their subpoenas and similarly intends
to cooperate fully with any future OIG or DOJ information requests. To the
Company's knowledge, the government has not filed a complaint against the
Company.
Note 9. Commitments
The Company rents certain properties under non-cancelable, long-term
operating leases, which expire at various dates. Certain of these leases require
additional payments for taxes, insurance and maintenance and, in many cases,
provide for renewal options. Rent expense under all leases was $18.0 million in
2005, $16.8 million in 2004 and $15.3 million in 2003.
Future minimum rental commitments and sublease rentals for all
non-cancelable leases having an initial or remaining term in excess of one year
at January 1, 2006 are as follows (in thousands):
Fiscal Year Total Commitment Sublease Rentals Net
- ---------------------- --------------------- ------------------- ---------------
2006 $17,566 $765 $16,801
2007 12,428 701 11,727
2008 7,954 95 7,859
2009 5,940 8 5,932
2010 3,046 5 3,041
Thereafter 1,500 - 1,500
See Note 14 for information about the Company's commitments following
the acquisition of Healthfield.
Note 10. Stock Plans
In 2004, the shareholders of the Company approved the 2004 Equity
Incentive Plan (the "2004 Plan") as a replacement for the 1999 Stock Incentive
Plan (the "1999 Plan"). Under the 2004 Plan, 3.5 million shares of common stock
plus any remaining shares authorized under the 1999 Plan as to which awards had
not been made are available for grant. The maximum number of shares of common
stock for which grants may be made in any calendar year to any 2004 Plan
participant is 500,000. The 2004 Plan permits the grant of (i) incentive stock
options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv)
restricted stock, (v) stock units and (vi) cash. The exercise price of options
granted under the 2004 Plan can generally not be less than the fair market value
of the Company's common stock on the date of grant. As of January 1, 2006, the
Company had 3,182,457 shares available for issuance under the 2004 Plan.
In 1999, the Company adopted the Stock & Deferred Compensation Plan for
Non-Employee Directors, which provided for payment of annual retainer fees to
non-employee directors, up to 50 percent of which such directors might elect to
receive in cash and the remainder of which would be paid in the form of shares
of common stock of the Company, and also allowed deferral of such payment of
shares until termination of a director's service. The plan was amended and
restated on January 1, 2004 and now provides for the deferral of annual retainer
fees under the plan only into stock units, which are to be paid to non-employee
directors as shares of the
60
Company's common stock following termination of a director's service. The total
number of shares of common stock reserved for issuance under this plan is
150,000, of which 47,313 shares were available for future grants as of January
1, 2006. During fiscal 2005, 2004 and 2003, the Company issued stock units or
shares in the amounts of 15,763, 18,365 and 7,575, respectively, under the plan.
As of January 1, 2006, 67,392 stock units were outstanding under the plan.
In 1999, the Company adopted an employee stock purchase plan ("ESPP").
All employees of the Company, who have been employed for 60 days or more prior
to the beginning of an offering period and who customarily work at least twenty
hours per week are eligible to purchase stock under this plan. The Compensation,
Corporate Governance and Nominating Committee of the Company's Board of
Directors administers the plan and has the power to determine the terms and
conditions of each offering of common stock. The purchase price of the shares
under the ESPP is the lesser of 85 percent of the fair market value of the
Company's common stock on the first business day or the last business day of the
six month offering period. Employees may purchase shares having a fair market
value of up to $25,000 per calendar year. The maximum number of shares of common
stock that may be sold to any employee in any offering, however, will generally
be 10 percent of that employee's compensation during the period of the offering.
The Company's Board of Directors approved an amendment of the ESPP, effective
February 24, 2005, subject to shareholder approval which was obtained on May 6,
2005, to, among other things, increase the aggregate number of shares of Gentiva
common stock available for issuance under the Company's ESPP by 1,200,000
shares, to a total of 2,400,000 shares, of which 1,147,770 shares were available
for future issuance as of January 1, 2006. During fiscal 2005, 2004 and 2003,
the Company issued 221,317 shares, 329,443 shares and 280,664 shares,
respectively, under the ESPP.
A summary of Gentiva stock options for fiscal 2005, fiscal 2004 and
fiscal 2003 is presented below:
2005 2004 2003
-------------------------------- ------------------------------ -----------------------------
Weighted Weighted Weighted
Stock average Stock average Stock average
Options exercise price Options exercise price Options exercise price
------------- ----------------- ------------- ----------------- ------------- ---------------
Options outstanding, beginning of year 3,214,585 $ 8.33 2,686,296 $ 6.14 2,549,667 $ 4.75
Granted 950,600 16.39 1,035,100 12.93 740,900 8.85
Exercised (413,247) 6.54 (347,804) 4.30 (452,338) 2.12
Cancelled/forfeitures (183,650) 14.29 (159,007) 9.97 (151,933) 7.99
------------- ----------------- ------------- ----------------- ------------- ---------------
Options outstanding, end of year 3,568,288 $ 10.38 3,214,585 $ 8.33 2,686,296 $ 6.14
============= ================= ============= ================= ============= ===============
Options exercisable, end of year 2,585,161 $ 8.42 1,664,893 $ 6.07 1,345,570 $ 4.07
============= ================= ============= ================= ============= ===============
The following table summarizes information about Gentiva stock options
outstanding at January 1, 2006:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Number Weighted Weighted Number Weighted
at average average at average
January 1, exercise remaining January 1, exercise
Range of exercise price 2006 price contractual life 2006 price
- -------------------------- --------------- ------------ ----------------- --------------- ------------
$1.07 to $1.74 211,876 $ 1.69 3.99 211,876 $ 1.69
$2.02 to $3.91 399,306 3.78 4.15 399,306 3.78
$7.50 to $7.50 683,371 7.50 6.19 683,371 7.50
$8.13 to $8.74 491,001 8.72 6.82 384,174 8.71
$9.45 to $12.87 901,934 12.58 7.96 901,934 12.58
$15.24 to $18.27 880,800 16.38 9.03 4,500 15.77
--------------- ------------ ----------------- --------------- ------------
$1.07 to $18.27 3,568,288 $ 10.38 7.07 2,585,161 $ 8.42
=============== ============ ================= =============== ============
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. Prior to the acceleration of vesting of certain stock
options effective as of December 30, 2005, as discussed in more detail below,
stock option grants that were awarded in fiscal 2004 and prior years were
scheduled to fully vest over periods ranging from three to six years.
As of January 3, 2006, an additional 385,394 outstanding options become
exercisable, resulting in a total of 2,970,555 exercisable options with a
weighted average exercise price of $9.17 as of that date.
61
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.
The weighted average fair values of the Company's stock options granted
during fiscal years 2005, 2004 and 2003, calculated using the Black-Scholes
option pricing model, and other assumptions are as follows:
Fiscal Year Ended
--------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
--------------------------------------------------------------------
Weighted average fair value
of options granted $ 6.13 $ 5.47 $ 5.24
Risk-free interest rate 3.73% 3.36% 3.51%
Expected volatility 35% 37% 60%
Contractual life 10 years 10 years 10 years
Expected dividend yield 0% 0% 0%
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. 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 were originally scheduled to become fully vested and
forfeitures are reflected in the calculation as they occur.
Pro forma compensation expense is calculated for the fair value of the
employee's purchase rights under the ESPP, using the Black-Scholes model.
Assumptions for fiscal years 2005, 2004 and 2003 are as follows:
Fiscal Year Ended
-------------------------------------------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
-------------------------------- --------------------------------- ----------------------------------
1st Offering 2nd Offering 1st Offering 2nd Offering 1st Offering 2nd Offering
Period Period Period Period Period Period
------------ ------------ ------------ ------------ ------------ ------------
Risk-free interest rate 2.63% 3.32% 1.02% 1.76% 1.25% 0.97%
Expected volatility 27% 33% 28% 30% 32% 29%
Expected life 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years
Expected dividend yield 0% 0% 0% 0% 0% 0%
The following table presents net income and basic and diluted earnings
per common share, had the Company elected to recognize compensation cost based
on the fair value at the grant dates for stock option awards and discounts
granted for stock purchases under the Company's ESPP, consistent with the method
prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share
amounts):
For the Fiscal Year Ended
---------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
---------------------- ---------------------- ----------------------
(52 weeks) (53 weeks) (52 weeks)
Net income - as reported $ 23,365 $ 26,488 $ 56,766
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (5,818) (2,442) (1,575)
---------------------- ---------------------- ----------------------
Net income - pro forma $ 17,547 $ 24,046 $ 55,191
====================== ====================== ======================
Basic income per share - as reported $ 1.00 $ 1.07 $ 2.16
Basic income per share - pro forma $ 0.75 $ 0.97 $ 2.10
Diluted income per share - as reported $ 0.94 $ 1.00 $ 2.07
Diluted income per share - pro forma $ 0.70 $ 0.91 $ 2.01
On December 15, 2005, the Compensation, Corporate Governance and
Nominating Committee of the Board of Directors of the Company approved the
acceleration of vesting of stock options exercisable for approximately 716,000
shares of the Company's common stock under the Company's 1999 Stock Incentive
Plan, so that the options became fully vested and exercisable as of the close of
business on December 30, 2005. The other terms of the options remain unchanged.
The affected options, which represented approximately 20 percent of the
62
Company's total outstanding options, were granted from June 14, 2002 through
January 27, 2004 and have exercise prices that range from $7.50 to 12.87 per
share and a weighted average exercise price of $11.08 per share. These options
include approximately 393,000 options held by the executive officers of the
Company. Of the options subject to accelerated vesting, approximately 52 percent
had original vesting dates between January 27, 2006 and January 3, 2007 and
approximately 37 percent had original vesting dates between January 27, 2007 and
December 31, 2007, with the remainder vesting after December 31, 2007.
Accelerating the vesting of these options eliminates the future
compensation expense that the Company would have otherwise recognized in its
consolidated statements of income with respect to these options when SFAS 123R
became effective. SFAS 123R became effective for the Company on January 2, 2006,
and requires that compensation expense associated with stock options be
recognized in the Company's consolidated statements of income, instead of as
previously presented, on a pro-forma basis within a footnote disclosure included
in the Company's consolidated financial statements. The future compensation
expense that is eliminated as a result of the acceleration of the vesting of
these options is approximately $2.3 million on an after tax basis. This expense
is included as a component of the $5.8 million of total stock-based compensation
expense for the fiscal year ended January 1, 2006 that is reflected in the
pro-forma table above.
Income before income taxes for fiscal year 2005 included a charge of
$122,000, representing the estimated benefit of accelerating the vesting of
options granted to individuals who might otherwise terminate and forfeit the
benefit of such options prior to their original vesting date.
Note 11. Income Taxes
Comparative analyses of the provision (benefit) for income taxes
follows (in thousands):
Fiscal Year Ended
-----------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
--------------------- --------------------- ---------------------
(52 weeks) (53 weeks) (52 weeks)
Current
Federal $ (4,796) $ 3,534 $ -
State and local 324 1,048 1,567
--------------------- --------------------- ---------------------
(4,472) 4,582 1,567
--------------------- --------------------- ---------------------
Deferred
Federal 11,362 10,472 (31,875)
State and local 1,587 (1,361) (3,160)
--------------------- --------------------- ---------------------
12,949 9,111 (35,035)
--------------------- --------------------- ---------------------
Income tax expense (benefit) $ 8,477 $ 13,693 $ (33,468)
===================== ===================== =====================
A reconciliation of the differences between income taxes computed at
federal statutory rate and provisions (benefits) for income taxes for each year
are as follows (in thousands):
Fiscal Year Ended
----------------------------------------------------------------------
January 1, 2006 January 2, 2005 December 28, 2003
----------------------- ---------------------- ---------------------
(52 weeks) (53 weeks) (52 weeks)
Income tax expense computed at Federal statutory tax rate $ 11,145 $ 14,063 $ 8,162
State income taxes, net of Federal benefit 1,759 (5,034) 1,019
Nondeductible meals and entertainment 194 237 167
Tax exempt interest (341) - -
Release of tax reserve (4,200) - (177)
Deferred rate differential - - 1,142
Decrease in Federal valuation allowance - - (44,438)
Increase in State valuation allowance - 4,455 -
Other (80) (28) 657
----------------------- ---------------------- ---------------------
Income tax expense (benefit) $ 8,477 $ 13,693 $ (33,468)
======================= ====================== =====================
The Company recorded federal and state income taxes of approximately
$8.5 million for fiscal 2005 compared to $13.7 million for fiscal 2004. The
difference between the effective rate of 26.6 percent for fiscal 2005 and the
statutory rate was due primarily to the release of $4.2 million of tax reserves
related to the favorable
63
resolution of tax audit issues for the years 1997 through 2000. The Company
agreed to assume responsibility for these items in connection with the Split-Off
from Olsten in March 2000.
The difference between the Company's effective rate of approximately
34.1 percent for fiscal 2004 and the statutory rate was due primarily to state
taxes offset by the recognition of certain state net operating loss
carryforwards.
For fiscal 2003, the Company recorded an income tax benefit instead of
income tax expense at the statutory rate due to the utilization and reversal of
tax valuation allowances offset somewhat by state income taxes and various other
items. The Company had maintained a valuation allowance for its deferred tax
assets as of December 29, 2002, since the absence of historical pre-tax income
created uncertainty about the Company's ability to realize tax benefits in
future years. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. The remaining valuation allowance was
reversed at the end of fiscal 2003 based on management's belief that it was more
likely than not that all of the Company's net deferred tax assets would be
realized due to the Company's achieved earnings trends and outlook. In this
regard, $44.4 million was recorded as an income tax benefit in fiscal 2003 and
$19.5 million was credited directly to shareholders' equity to reflect the
portion of the valuation allowance associated with stock compensation tax
benefits.
Deferred tax assets and deferred tax liabilities are as follows (in
thousands):
January 1, 2006 January 2, 2005
---------------------- ----------------------
Deferred tax assets
Current:
Reserves and allowances $ 10,477 $ 19,348
Federal net operating loss and other carryforwards 3,325 793
Other 2,172 1,148
---------------------- ----------------------
Total current deferred tax assets 15,974 21,289
Noncurrent:
Intangible assets 22,074 25,772
State net operating loss 6,657 7,027
Less: valuation allowance (4,124) (4,455)
---------------------- ----------------------
Total noncurrent deferred tax assets 24,607 28,344
---------------------- ----------------------
Total assets 40,581 49,633
---------------------- ----------------------
Deferred tax liabilities:
Noncurrent:
Fixed assets (2,375) (2,707)
Developed software (3,504) (1,233)
Other (629) (599)
---------------------- ----------------------
Total non-current deferred tax liabilities (6,508) (4,539)
---------------------- ----------------------
Net deferred tax assets $ 34,073 $ 45,094
====================== ======================
In the fourth quarter of fiscal 2005, the Company transferred the self
insured portion of its workers' compensation and medical malpractice liabilities
to a newly established and wholly-owned captive insurance company. The transfer
resulted in a reduction of deferred tax assets, a reduction in current taxes
payable and the creation of federal and state net operating loss carryforwards.
The captive insurance company may have a future impact on the Company's
effective state tax rate.
Prior to fiscal year 2004, the state tax history of certain
subsidiaries indicated cumulative losses and a lack of state tax audit
experience. As a result, the Company believed there was a remote likelihood that
the value of related state tax loss carryforwards would be realized, and no
deferred tax assets were recorded. During fiscal 2004, these subsidiaries
reflected cumulative income on a state filing basis and certain state tax audits
were settled. The Company performed a review of state net operating loss
carryforwards and recorded a deferred tax asset of $7.0 million and a valuation
allowance of $4.5 million in the fourth quarter of fiscal 2004.
At January 1, 2006, the Company had federal tax credit carryforwards of
$1.3 million and federal net operating loss carryforwards, which will expire in
2025, of $5.7 million. Deferred tax assets relating to the federal net operating
carryforwards approximate $2.0 million. In addition, the Company had state net
operating loss carryforwards of approximately $142 million, which expire between
2006 and 2013. Deferred tax assets relating to the state net operating loss
carryforwards approximate $6.7 million. A valuation allowance of $4.1 million
has been recorded to reduce the deferred tax asset to its estimated realizable
value since certain state net operating loss carryforwards may expire before
realization.
64
Note 12. Benefit Plans for Permanent Employees
The Company maintains qualified and non-qualified defined contribution
retirement plans for its salaried employees, which provide for a partial match
of employee savings under the plans and for discretionary profit-sharing
contributions based on employee compensation. With respect to the Company's
non-qualified defined contribution retirement plan for salaried employees, all
pre-tax contributions, matching contributions and profit sharing contributions
(and the earnings therein) are held in a Rabbi Trust and are subject to the
claims of the general, unsecured creditors of the Company. All post-tax
contributions are held in a secular trust and are not subject to the claims of
the creditors of the Company. The fair value of the assets held in the Rabbi
Trust and the liability to plan participants as of January 1, 2006 and January
2, 2005 totaling approximately $16.0 million and $12.9 million, respectively,
are included in other assets and other liabilities on the accompanying
consolidated balance sheets.
Company contributions under the defined contribution plans were
approximately $2.5 million in 2005, $2.5 million in 2004 and $1.8 million in
2003.
Note 13. 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 the specialty programs
described below, as well as Gentiva Consulting.
Direct home nursing and therapy services operations are conducted
through licensed and Medicare-certified agencies from which the Company provides
various combinations of skilled nursing and therapy services, paraprofessional
nursing services and homemaker services to pediatric, adult and elder patients.
The Company also delivers 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;
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based
environment; and
o Gentiva Rehab Without Walls(R), which 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.
65
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.
Segment information about the Company's operations is as follows (in
thousands):
66
Home Healthcare
Services CareCentrix Total
---------------------- ---------------------- ------------------------
Twelve months ended January 1, 2006
- -----------------------------------
Net revenue - segments $ 552,516 (1) $ 333,010 (2) $ 885,526
====================== ======================
Intersegment revenues (16,683)
------------------------
Total net revenue $ 868,843
========================
Operating contribution $ 54,531 (1) $ 26,006 (2) $ 80,537
====================== ======================
Corporate expenses (42,482)(3)
Depreciation and amortization (8,091)
Interest income, net 1,878
------------------------
Income before income taxes $ 31,842
========================
Segment assets $ 72,920 $ 67,466 $ 140,386
====================== ======================
Intersegment assets (752)
Corporate assets 186,931
------------------------
Total assets $ 326,565
========================
Twelve months ended January 2, 2005
- -----------------------------------
Net revenue - segments $ 523,017 (4) $ 343,541 $ 866,558
====================== ======================
Intersegment revenues (20,794)
------------------------
Total net revenue $ 845,764
========================
Operating contribution $ 56,069 (4) $ 36,783 $ 92,852
====================== ======================
Corporate expenses (47,265)
Gain on sale of Canadian Investment 946
Depreciation and amortization (7,329)
Interest income, net 977
------------------------
Income before income taxes $ 40,181
========================
Segment assets $ 66,914 $ 66,047 $ 132,961
====================== ======================
Intersegment assets (958)
Corporate assets 200,095
------------------------
Total assets $ 332,098
========================
Twelve months ended December 28, 2003
- -------------------------------------
Net revenue - segments $ 484,739 $ 353,052 $ 837,791
====================== ======================
Intersegment revenues (23,762)
------------------------
Total net revenue $ 814,029
========================
Operating contribution $ 37,280 $ 32,034 $ 69,314
====================== ======================
Corporate expenses (39,606)
Depreciation and amortization (6,851)
Interest income, net 441
------------------------
Income before income taxes $ 23,298
========================
Segment assets $ 70,712 $ 64,132 $ 134,844
====================== ======================
Intersegment assets (1,844)
Corporate assets 209,513
------------------------
Total assets $ 342,513
========================
(1) For fiscal 2005, Home Healthcare Services segment net revenues and
operating contribution include $3.6 million associated with the
favorable settlement of the Company's Medicare cost report appeal for
1999.
In addition, operating contribution reflects a $1.2 million gain
relating to a disposition of an underperforming location.
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 re-
67
serve. In connection with this item, Home Healthcare Services segment
net revenues and operating contribution for fiscal 2005 included a
positive adjustment of approximately $0.7 million.
(2) For 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 and $0.8 million related to restructuring charges. For 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 fiscal year ended January 1, 2006, corporate expenses included
a credit of approximately $0.8 million relating to a favorable
arbitration settlement and a charge of $0.1 million in connection with
the decision to accelerate the vesting of certain stock options. See
Note 10 for additional information.
(4) For fiscal 2004, Home Healthcare Services segment net revenues and
operating contribution included special items of $9.4 million,
representing $10.4 million received in settlement of the Company's
appeal filed with the PRRB related to the reopening of its 1998 and
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 8.) 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.
Note 14. Subsequent Events
Healthfield Acquisition
On February 28, 2006, the Company completed the acquisition of 100% of
the equity interest of Healthfield, a leading provider of home healthcare,
hospice and related services with approximately 130 locations primarily in eight
southeastern states, for $454 million in cash and shares of Gentiva common
stock, excluding transaction costs and subject to post-closing adjustments.
Management funded the purchase price from approximately $370 million of
borrowings under a new senior term loan facility, approximately 3.2 million
shares of Gentiva common stock and the remainder from existing cash balances. A
portion of the purchase price will be used to refinance Healthfield's existing
net indebtedness.
The Company acquired Healthfield to strengthen and expand its presence
in the Southeast United States which has favorable demographic trends and
includes important Certificate of Need states, diversify the Company's business
mix, provide a meaningful platform into hospice, provide expansion into new
business lines such as DME, respiratory and infusion and expand its current
specialty programs.
The transaction will be accounted for in accordance with the provisions
of Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"). Accordingly, Healthfield's results of operations will be included
in the Company's consolidated financial statements from the date of its
acquisition, February 28, 2006. The purchase price will be allocated to the
underlying assets acquired and liabilities assumed based on their estimated fair
values at the date of the acquisition. The Company will determine the estimated
fair values based on independent appraisals, discounted cash flows, quoted
market prices and estimates made by management and an independent valuation
analysis of the intangible assets acquired. To the extent that the purchase
price exceeds the fair value of the net identifiable tangible and intangible
assets acquired, such excess will be allocated to goodwill.
Credit Agreement
On February 28, 2006, the Company entered into a Credit Agreement, by
and among the Company, as borrower, Lehman Brothers Inc., as sole lead arranger
and sole bookrunner, and Lehman Commercial Paper Inc., as administrative agent.
The Credit Agreement provides for an aggregate borrowing amount of
$445.0 million of senior secured credit facilities consisting of (i) a seven
year term loan of $370.0 million repayable in quarterly installments of
68
1% per annum (with the remaining balance due at maturity on March 13, 2013) and
(ii) a six year revolving credit facility of $75.0 million, of which $55.0
million will be available for the issuance of letters of credit and $10.0
million will be available for swing line loans. There is a pre-approved $25.0
million increase available to the revolving credit facility. Interest under the
Credit Agreement accrues at Base Rate or Eurodollar Rate (plus 1.25% for Base
Rate Loans and 2.25% for Eurodollar Rate Loans) for the revolving credit
facility and at Base Rate or Eurodollar Rate (plus 1.25% for Base Rate Loans and
2.25% for Eurodollar Rate Loans) for the term loan. After the completion of two
post-closing fiscal quarters, such interest may be reduced if the Company meets
certain reduced leverage targets. Overdue amounts bear interest at 2% per annum
above the applicable rate.
The Credit Agreement requires the Company to meet certain financial
tests, including a consolidated leverage ratio (as defined) and an interest
coverage ratio (as defined). The Credit Agreement also contains additional
covenants which, among other things, require the Company to deliver to the
lenders specified financial information, including annual and quarterly
financial information, and limit the Company's ability to (or to permit any
subsidiaries to), subject to various exceptions and limitations, (i) merge with
other companies, (ii) create liens on its property; (iii) incur debt
obligations; (iv) enter into transactions with affiliates, except on an
arms-length basis; (v) dispose of property; and (vi) pay dividends or acquire
capital stock of the Company or its subsidiaries.
Guarantee and Collateral Agreement
On February 28, 2006, the Company also entered into a Guarantee and
Collateral Agreement, among the Company and certain of its subsidiaries, in
favor of the Administrative Agent (the "Guarantee and Collateral Agreement").
The Guarantee and Collateral Agreement grants a security interest in all
personal property of the Company and its subsidiaries, including stock of its
subsidiaries. The Guarantee and Collateral Agreement also provides for a
guarantee of the Company's obligations under the Credit Agreement by
substantially all subsidiaries of the Company.
Two Alabama properties owned by a subsidiary of Healthfield will be
subject to mortgages dated February 28, 2006.
Note 15. Quarterly Financial Information (Unaudited)
(in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
Year ended January 1, 2006 (52 weeks)
Net revenues $ 207,107 $ 220,135 $ 219,559 $ 222,042 (2)
Gross profit 79,878 81,507 81,015 84,350 (2)
Net income 4,125 8,650 (1) 4,251 6,339 (2)
Earnings Per Share:
Net income - basic 0.18 0.37 0.18 0.28
Net income - diluted 0.17 0.35 0.17 0.26
Weighted average shares outstanding:
Basic 23,445 23,271 23,329 23,021
Diluted 25,003 24,935 25,076 24,401
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------------- --------------- --------------- ---------------
Year ended January 2, 2005 (53 weeks)
Net revenues $ 213,905 (3) $ 208,248 $ 198,070 (5) $ 225,541 (6)
Gross profit 83,262 (3) 78,338 75,531 (5) 86,798 (6)
Net income 9,230 (3) 5,965 (4) 4,399 (5) 6,894 (6)
Earnings Per Share:
Net income - basic 0.36 0.24 0.18 0.29
Net income - diluted 0.34 0.22 0.17 0.27
Weighted average shares outstanding:
Basic 25,542 25,068 24,422 23,865
Diluted 27,084 26,818 26,034 25,487
69
(1) Net income for the second quarter of fiscal 2005 includes a tax benefit
of $4.2 million associated with the release of tax reserves related to
the favorable resolution of tax audit issues for the years 1997 through
2000. During the second quarter the Company's effective tax rate was
10% due to the release of tax reserves and state taxes. See Note 11 to
the Company's consolidated financial statements.
(2) For the fourth quarter of fiscal 2005, net revenues and gross profit
include special items of $3.6 million related to the partial settlement
of the Company's Medicare cost report appeals for 1999. Net income
includes a pre-tax charge of $0.9 million related to restructuring and
other special items. See Notes 4 and 8 to the Company's consolidated
financial statements.
(3) Net revenues and gross profit for the first quarter of fiscal 2004
include special items of $8.0 million, representing $9.0 million
related to the favorable settlement of the Company's Medicare cost
report appeals for 1997 net of a $1.0 million revenue adjustment to
reflect an industry wide repayment of certain Medicare reimbursements.
See Note 8 to the Company's consolidated financial statements.
(4) Net income for the second quarter of fiscal 2004 includes $0.9 million
relating to a pre-tax gain on the sale of a Canadian investment. See
Note 3 to the Company's consolidated financial statements.
(5) Net revenues and gross profit for the third quarter of fiscal 2004
include special items of $1.1 million related to the partial settlement
of the Company's Medicare cost report appeals for 1998. During the
third quarter of fiscal 2004, the Company's effective tax rate was
35.3% due to recognition of certain state net operating losses. See
Notes 8 and 11 to the Company's consolidated financial statements.
(6) Net revenues and gross profit for the fourth quarter of fiscal 2004
include special items of $0.3 million related to the remaining
settlement of the Company's Medicare cost report appeals for 1998.
During the fourth quarter of fiscal 2004, the Company's effective tax
rate was 18.7% due to recognition of certain state net operating
losses. See Notes 8 and 11 to the Company's consolidated financial
statements.
70
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JANUARY 1, 2006
(in thousands)
Additions
Balance at charged to Balance
beginning of costs and at end
period expenses Deductions of period
------------- ----------- ---------- ---------
Allowance for Doubtful Accounts:
For the Year Ended January 1, 2006 $7,040 $6,422 $(4,805) $8,657
For the Year Ended January 2, 2005 7,936 6,722 (7,618) 7,040
For the Year Ended December 28, 2003 9,032 7,684 (8,780) 7,936
Valuation allowance on deferred tax assets:
For the Year Ended January 1, 2006 $4,455 $0 $(331) $4,124
For the Year Ended January 2, 2005 0 4,455 (0) 4,455
For the Year Ended December 28, 2003 (a) 63,892 0 (63,892) 0
(a) For fiscal year 2003, $44.4 million was recorded as an income tax
benefit in fiscal 2003 and $19.5 million was credited directly to
shareholders' equity to reflect the portion of the valuation allowance
associated with stock compensation tax benefits. See Note 11 to the
Company's consolidated financial statements.
71
Management's Responsibility for Financial Statements
Management is responsible for the preparation of the Company's
consolidated financial statements and related information appearing in this
Report. Management believes that the consolidated financial statements fairly
reflect the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations
in conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements amounts that are based on
estimates and judgments which it believes are reasonable under the
circumstances.
The independent registered public accounting firm audits the Company's
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board and provides an objective, independent review
of the fairness of reported operating results and financial position.
The Board of Directors of the Company has an Audit Committee comprised
of three independent directors. The Audit Committee meets at least quarterly
with financial management, the internal auditors and the independent registered
public accounting firm to review accounting, control, auditing and financial
reporting matters.
Management's Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. We have excluded Heritage Home Care Services, Inc. ("Heritage") from
our assessment of internal control over financial reporting as of January 1,
2006 because it was acquired by the Company in a purchase business combination
during 2005. Total net revenues of Heritage represent approximately 2 percent of
the related consolidated financial statement amount for the year ended January
1, 2006. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of January 1, 2006. Our management's
assessment of the effectiveness of our internal control over financial reporting
as of January 1, 2006 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report
appearing on pages 73 and 74, which expresses unqualified opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting as of January 1, 2006.
72
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Gentiva Health Services, Inc. and Subsidiaries:
We have completed integrated audits of Gentiva Health Services, Inc. and
Subsidiaries (the "Company") fiscal 2005 and 2004 consolidated financial
statements and of their internal control over financial reporting as of January
1, 2006, and an audit of their fiscal 2003 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
- ------------------------------------------------------------------
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under Item 15(a)(1) of the Form 10-K present fairly, in all
material respects, the financial position of the Company at January 1, 2006 and
January 2, 2005, and the results of their operations and their cash flows for
each of the three years in the period ended January 1, 2006 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
- -----------------------------------------
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial
reporting as of January 1, 2006 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 1, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
73
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded Heritage Home Care Services, Inc.
("Heritage") from its assessment of internal control over financial reporting as
of January 1, 2006 because it was acquired by the Company in a purchase business
combination during 2005. We have also excluded Heritage from our audit of
internal control over financial reporting. Heritage revenues represent
approximately 2 percent of the related consolidated financial statement amount
for the year ended January 1, 2006.
/s/ PricewaterhouseCoopers LLP
New York, New York
March 17, 2006
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There have been no such changes or disagreements.
Item 9A. Controls and Procedures
Section 404 of the Sarbanes-Oxley Act of 2002 requires management to
include in this annual report on Form 10-K a report on management's assessment
of the effectiveness of the Company's internal control over financial reporting,
as well as an attestation report from the Company's independent registered
public accounting firm on management's assessment of the effectiveness of the
Company's internal control over financial reporting. Management's Report on
Internal Control over Financial Reporting and the related attestation report
from the Company's independent registered public accounting firm are located on
pages 72 and 73-74, respectively, of this annual report on Form 10-K and are
incorporated herein by reference.
Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective as of the end of such period to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Changes in internal control over financial reporting.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter ended January 1, 2006 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.
Item 9B. Other Information
None.
74
PART III
Item 10. Directors and Executive Officers of the Registrant
Information required by this item regarding the directors of the
Company is incorporated herein by reference to information under the captions
"Proposal 2 Election of Directors" and "Board of Directors and Committees" to be
contained in the Company's Proxy Statement to be filed with the SEC with regard
to the Company's 2006 Annual Meeting of Shareholders ("2006 Proxy Statement").
See also the information regarding executive officers of the Company at the end
of PART I hereof, which is incorporated herein by reference.
Certain other information required by this item is incorporated herein
by reference to information under the caption "Section 16(a) Beneficial
Ownership Reporting Compliance" to be contained in the Company's 2006 Proxy
Statement.
The Company has adopted a Code of Ethics for Senior Financial Officers
("Code of Ethics") that applies to the Company's Chief Executive Officer, Chief
Financial Officer and Principal Accounting Officer or Controller. A copy of the
Code of Ethics is posted on the Company's Internet website www.gentiva.com under
the "Investor Relations" section. In the event that the Company makes any
amendment to, or grants any waiver from, a provision of the Code of Ethics that
requires disclosure under applicable SEC rules, the Company intends to disclose
such amendment or waiver on its website.
Item 11. Executive Compensation
Information required by this item concerning executive compensation and
compensation of directors is incorporated herein by reference to information
under the captions "Executive Compensation" and "Board of Directors and
Committees," respectively, to be contained in the Company's 2006 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
Information required by this item regarding the security ownership of
certain beneficial owners and management of the Company is incorporated herein
by reference to information under the caption "Security Ownership of Certain
Beneficial Owners and Management" to be contained in the Company's 2006 Proxy
Statement.
Certain other information required by this item regarding securities
authorized for issuance under the Company's equity compensation plans is
incorporated herein by reference to information under the caption "Equity
Compensation Plan Information" to be contained in the Company's 2006 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions
Information required by this item regarding certain relationships and
related transactions between the Company and its directors, executive officers
and greater than 5 percent beneficial owners is incorporated herein by reference
to information under the caption "Certain Relationships and Related
Transactions" to be contained in the Company's 2006 Proxy Statement.
Item 14. Principal Accountant Fees and Services
Information regarding principal accountant fees and services is
incorporated herein by reference to information under the caption "Proposal 3
Appointment of Independent Registered Public Accounting Firm" to be contained in
the Company's 2006 Proxy Statement.
PART IV
75
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements
Page No.
--------
|X| Consolidated Balance Sheets as of January 1, 2006 and January 2, 2005....................... 43
|X| Consolidated Statements of Income for the three years ended January 1, 2006................. 44
|X| Consolidated Statements of Changes in Shareholders' Equity for the three
years ended January 1, 2006................................................................. 45
|X| Consolidated Statements of Cash Flows for the three years ended January 1, 2006............. 46
|X| Notes to Consolidated Financial Statements.................................................. 47 - 70
(a)(2) Financial Statement Schedule
|X| Schedule II - Valuation and Qualifying Accounts for the three years ended January 1, 2006...... 71
(a)(3) Exhibit
Exhibit
Number Description
- ------ -----------
3.1 Amended and Restated Certificate of Incorporation of Company (1)
3.2 Certificate of Correction to Certificate of Incorporation, filed with
the Delaware Secretary of State on July 1, 2002 (2)
3.3 Amended and Restated By-Laws of Company (2)
4.1 Specimen of Common Stock (4)
4.2 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock (1)
4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting
Redeemable Preferred Stock (3)
10.1 Separation Agreement dated August 17, 1999 among Olsten Corporation,
Aaronco Corp. and Adecco SA (1)
10.2 Omnibus Amendment No. 1 dated October 7, 1999 by and among Olsten
Corporation, Aaronco Corp., Adecco SA and Olsten Health Services
Holding Corp. (1)
10.3 Omnibus Amendment No. 2 dated January 18, 2000 by and among Olsten
Corporation, Adecco SA, Olsten Health Services Holding Corp., the
Company and Staffing Acquisition Corporation (1)
10.4 Form of Rights Agreement dated March 2, 2000 between the Company and
EquiServe Trust Company, N.A., as rights agent (3)
10.5 Executive Officers Bonus Plan, as amended (5)*
76
Exhibit
Number Description
- ------ -----------
10.6 1999 Stock Incentive Plan (6)*
10.7 2004 Equity Incentive Plan (7)*
10.8 Stock & Deferred Compensation Plan for Non-Employee Directors, as
amended and restated as of January 1, 2004 (8)*
10.9 Amendment No. 1 to Stock & Deferred Compensation Plan for Non-Employee
Directors, as amended and restated as of January 1, 2004 (9)*
10.10 Employee Stock Purchase Plan, as amended (10)*
10.11 Nonqualified Retirement and Savings Plan and First, Second, Third and
Fourth Amendments thereto (8)*
10.12 Form of Amended and Restated Change in Control Agreement with each of
Vernon A. Perry, Jr., John R. Potapchuk, Robert Creamer, Mary Morrisey
Gabriel and Stephen B. Paige (9)*
10.13 Form of Severance Agreement with each of Vernon A. Perry, Jr., John R.
Potapchuk, Robert Creamer, Mary Morrisey Gabriel and Stephen B. Paige
(2)* (the Severance Agreements are identical in substance for each of
the named officers, except that the Severance Agreement for Mr. Perry
provided, and the Severance Agreements for Messrs. Potapchuk and
Creamer provide, in paragraph 1 for payments of 18 months of severance
and the Severance Agreements for Ms. Morrisey Gabriel and Mr. Paige
provide in paragraph 1 for the payment of 12 months of severance)
10.14 Employment Agreement dated as of March 22, 2004 with Ronald A. Malone
(11)*
10.15 Change in Control Agreement dated as of March 22, 2004 with Ronald A.
Malone (11)*
10.16 Forms of Notices and Agreements covering awards of stock options and
restricted stock under Company's 2004 Equity Incentive Plan (12)*
10.l7 Summary Sheet of Company compensation to non-employee directors,
effective May 6, 2005 (9)*
10.18 Loan and Security Agreement dated June 13, 2002 by and between Fleet
Capital Corporation, as Administrative Agent, on behalf of the lenders
named therein, Fleet Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (13)
10.19 First Amendment and Consent Agreement dated August 7, 2003 to Loan and
Security Agreement dated June 13, 2002 by and between Fleet Capital
Corporation, as Administrative Agent on behalf of the lenders named
therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services,
Inc., Gentiva Health Services Holding Corp. and the subsidiaries named
therein (14)
10.20 Second Amendment dated November 26, 2003 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet Capital Corporation, as
Administrative Agent on behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva
Health Services Holding Corp. and the subsidiaries named therein (8)
10.21 Third Amendment and Joinder dated February 25, 2004 to Loan and
Security Agreement dated June 13, 2002 by and between Fleet Capital
Corporation, as Administrative Agent on behalf of the lenders named
therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services,
Inc., Gentiva Health Services Holding Corp. and the subsidiaries named
therein (8)
77
Exhibit
Number Description
- ------ -----------
10.22 Fourth Amendment dated May 26, 2004 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet Capital Corporation, as
Administrative Agent on behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva
Health Services Holding Corp. and the subsidiaries named therein (15)
10.23 Fifth Amendment dated April 4, 2005 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet Capital Corporation, as
Administrative Agent on behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva
Health Services Holding Corp. and the subsidiaries named therein (9)
10.24 Asset Purchase Agreement dated as of January 2, 2002 by and between
Accredo Health, Incorporated, the Company and the Sellers named
therein (13)
10.25 Managed Care Alliance Agreement between CIGNA Health Corporation and
Gentiva CareCentrix, Inc. entered into as of January 1, 2004 (7)
(confidential treatment requested as to portions of this document)
10.26 Amendment dated January 1, 2005 to Managed Care Alliance Agreement
between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered
into as of January 1, 2004 (17) (confidential treatment requested as
to portions of this document)
10.27 Second Amendment dated May 9, 2005 to Managed Care Alliance Agreement
between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered
into as of January 1, 2004 (18) (confidential treatment requested as
to portions of this document)
10.28 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 (19) (confidential treatment requested as
to portions of this document) 10.29 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 (19)
10.30 Fifth Amendment dated October 27, 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) +
10.31 Sixth Amendment dated January 25, 2006 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) +
10.32 Agreement and Plan of Merger dated as of January 4, 2006 by and among
Gentiva Health Services, Inc., Tara Acquisition Sub Corp., The
Healthfield Group, Inc., Rodney D. Windley as representative of
certain Securityholders of The Healthfield Group, Inc., and the
Securityholders named therein (20)
10.33 Credit Agreement, dated as of February 28, 2006, by and among Gentiva
Health Services, Inc., as borrower, Lehman Brothers Inc., as sole lead
arranger and sole bookrunner, and Lehman Commercial Paper Inc., as
administrative agent. (21)
10.34 Guarantee and Collateral Agreement, dated as of February 28, 2006,
among Gentiva Health Services, Inc. and certain of its Subsidiaries,
in favor of Lehman Commercial Paper Inc., as administrative agent. (21)
78
Exhibit
Number Description
- ------ -----------
10.35 Registration Rights Agreement, dated as of February 28, 2006, by and
among Gentiva Health Services, Inc. Rodney D. Windley, as the
representative of the Stockholders of Gentiva Health Services, Inc.
listed therein. (21)
10.36 Confidentiality, Non-Competition and Intellectual Property Agreement,
dated as of February 28, 2006, by and among Gentiva Health Services,
Inc., The Healthfield Group, Inc. and Rodney D. Windley. (21)
21.1 List of Subsidiaries of Company +
23.1 Consent of PricewaterhouseCoopers LLP, independent registered public
accounting firm +
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) +
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) +
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350 +
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350 +
- ---------------------
(1) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement of Company on Form S-4 dated January 19, 2000 (File No.
333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of Company on Form S-4 dated February 4, 2000 (File No.
333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement of Company on Form S-4 dated February 9, 2000 (File No.
333-88663).
(5) Incorporated herein by reference to Appendix A to definitive Proxy
Statement of Company dated April 6, 2005.
(6) Incorporated herein by reference to Form 10-K of Company for the fiscal
year ended January 2, 2000.
(7) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 8, 2004.
(8) Incorporated herein by reference to Form 10-K of Company for the fiscal
year ended December 28, 2003.
(9) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended April 3, 2005.
(10) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 6, 2005.
(11) Incorporated herein by reference to Form 10-Q of Company for the quarterly
period ended March 28, 2004.
(12) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended September 26, 2004.
(13) Incorporated herein by reference to Form 8-K of Company dated June 13,
2002 and filed June 21, 2002.
(14) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended September 28, 2003.
(15) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended June 27, 2004.
(16) Incorporated herein by reference to definitive Proxy Statement of Company
dated May 10, 2002.
(17) Incorporated by reference to Form 10-K, as amended, of Company for the
fiscal year ended January 2, 2005.
79
(18) Incorporated by reference to Form 10-Q of Company for the quarterly period
ended July 3, 2005.
(19) Incorporated by reference to Form 10-Q of Company for the quarterly period
ended October 2, 2005.
(20) Incorporated herein by reference to Form 8-K of Company dated January 4,
2006 and filed January 5, 2006.
(21) Incorporated herein by reference to Form 8-K of Company dated March 3,
2006 and filed March 3, 2006.
* Management contract or compensatory plan or arrangement
+ Filed herewith
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
Date: March 17, 2006 By: /s/ Ronald A. Malone
---------------------------------
Ronald A. Malone
Chief Executive Officer and Chairman of the Board
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 17, 2006 By: /s/ Ronald A. Malone
---------------------------------
Ronald A. Malone
Chief Executive Officer and Chairman of the
Board and Director (Principal Executive Officer)
Date: March 17, 2006 By: /s/ John R. Potapchuk
---------------------------------
John R. Potapchuk
Executive Vice President, Chief Financial Officer,
and Treasurer (Principal Financial and Accounting
Officer)
Date: March 17, 2006 By: /s/ Victor F. Ganzi
---------------------------------
Victor F. Ganzi
Director
Date: March 17, 2006 By: /s/ Stuart R. Levine
---------------------------------
Stuart R. Levine
Director
Date: March 17, 2006 By: /s/ Mary O'Neil Mundinger
---------------------------------
Mary O'Neil Mundinger
Director
Date: March 17, 2006 By: /s/ Stuart Olsten
---------------------------------
Stuart Olsten
Director
Date: March 17, 2006 By: /s/ Raymond S. Troubh
---------------------------------
Raymond S. Troubh
Director
Date: March 17, 2006 By: /s/ Josh S. Weston
---------------------------------
Josh S. Weston
Director
Date: March 17, 2006 By: /s/ Gail R. Wilensky
---------------------------------
Gail R. Wilensky
Director
Date: March , 2006 By:
---------------------------------
Rodney D. Windley
Director
81