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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 2, 2005
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 whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 25, 2004, the last business day of
registrant's most recently completed second fiscal quarter, was $402,788,010
based on the closing price of the Common Stock on the Nasdaq National Market on
such date.
The number of shares outstanding of the registrant's Common Stock, as of
March 4, 2005, was 23,436,656.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant's definitive Proxy
Statement, to be filed not later than 120 days after the end of the fiscal year
covered by this Report, for the registrant's 2005 Annual Meeting of Shareholders
is incorporated by reference into PART III.
PART I
ITEM 1. BUSINESS
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. Such factors include, among others, the following:
- general economic and business conditions;
- demographic changes;
- changes in, or failure to comply with, existing governmental
regulations;
- legislative proposals for healthcare reform;
- changes in Medicare and Medicaid reimbursement levels;
- effects of competition in the markets the Company operates in;
- liability and other claims asserted against the Company;
- ability to attract and retain qualified personnel;
- availability and terms of capital;
- loss of significant contracts or reduction in revenues associated
with major payer sources;
- ability of customers to pay for services;
- business disruption due to natural disasters or terrorist acts;
- a material shift in utilization within capitated agreements; and
- changes in estimates and judgments associated with critical
accounting policies.
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 the "Risk Factors" section in
this Item 1, to 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. ("Gentiva" or the "Company") provides home
health services throughout most of the United States. Gentiva was incorporated
in the state of Delaware on August 6, 1999 and became an independent publicly
owned company on March 15, 2000, when the common stock of the Company was issued
to the stockholders of Olsten Corporation, 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 health care
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
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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.
Information included in this annual report on Form 10-K refers to the
Company's continuing home health services business, unless the context indicates
otherwise.
HOME HEALTH SERVICES
The Company's home health services business is conducted through more than
350 direct service delivery units operating from approximately 250 locations
under its Gentiva(R) brand and through a network of more than 2,000 third-party
provider locations, as well as Gentiva locations, under its CareCentrix(R)
brand. CareCentrix manages home healthcare services for managed care
organizations throughout the United States.
Gentiva operates licensed and Medicare-certified nursing agencies located
in 35 states, substantially all of which are currently accredited by the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO). These agencies
provide various combinations of skilled nursing and therapy services,
paraprofessional nursing services and homemaker services to pediatric, adult and
elder patients. Reimbursement sources include government programs, such as
Medicare and Medicaid, and private sources, such as health insurance plans,
managed care organizations, long term care insurance plans and personal funds.
Gentiva's direct home nursing and therapy operations are organized in five
geographic regions, each staffed with clinical, operational and sales teams.
Regions are further separated into operating areas. Each operating area includes
branch locations through which home healthcare agencies operate. Each agency is
led by a director and is staffed with clinical and administrative support staff
as well as clinical associates who deliver direct patient care. The clinical
associates are employed on either a full-time basis or are paid on a per visit,
per shift, per diem or per hour basis.
CareCentrix operations provide an array of administrative services and
coordinate the delivery of home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services for
managed care organizations and health plans. These administrative services are
coordinated within four regional coordination centers and are delivered through
Gentiva direct home nursing and therapy locations as well as through an
extensive nationwide network of third-party provider locations in all 50 states.
CareCentrix accepts case referrals from a wide variety of sources, verifies
eligibility and benefits and transfers case requirements to the providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data reporting and
analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payer is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payer remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
The Company's home health services business also delivers services to its
customers through other focused specialty programs that include:
- Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from joint
replacement or other major orthopedic surgery;
- Gentiva Safe Strides(SM) Program, which provides therapies for
patients with balance issues who are prone to injury or immobility
as a result of falling; and
- Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based environment.
In addition, Gentiva Rehab Without Walls(R) 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. Of the 13 locations where Gentiva
Rehab Without Walls operates, 11 locations have been accredited by the
Commission on Accreditation of Rehabilitation Facilities ("CARF"). The Company
expects the remaining two locations to apply for accreditation by CARF during
2005.
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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.
PAYERS
Net revenues attributable to major payer sources of reimbursement are as
follows:
2004 2003 2002
---- ---- ----
Medicare 27% 22% 21%
Medicaid and Local Government 18 20 22
Commercial Insurance and Other 55 58 57
--- --- ---
100% 100% 100%
=== === ===
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third-party
providers to provide home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services to
patients insured by Cigna. For fiscal years 2004, 2003 and 2002, Cigna accounted
for approximately 31 percent, 36 percent and 38 percent, respectively, of the
Company's net revenues.
The Company extended its relationship with Cigna by entering into a new
national home healthcare contract effective January 1, 2004, as amended, with
the new contract expiring on December 31, 2006. No other commercial payer
accounts for 10 percent or more of the Company's net revenues. 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.
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)
and SAFE STRIDES(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 the presumption of 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. 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 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 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
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other referrals. The Company offers the direct and managed provision of care as
a single source, which it believes optimizes utilization.
MARKETING AND SALES
In general, the Company 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.
COMPETITIVE POSITION
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 2003, 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.
SOURCE AND AVAILABILITY OF PERSONNEL
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.
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NUMBER OF PERSONS EMPLOYED
At January 2, 2005, the Company employed approximately 3,950 full-time
associates, including approximately 920 salaried clinical associates, compared
to approximately 3,500 full-time associates, including approximately 700
salaried clinical associates, at the end of fiscal 2003. The Company also
employs clinical associates on a temporary basis, as needed, to provide home
health services. In fiscal 2004, the average number of non-salaried clinical
associates employed on a weekly basis in the Company's home health services
business was approximately 10,600, compared to approximately 11,600 in fiscal
2003. The Company believes that its relationships with its employees are
generally good.
OTHER MATTERS
Subsequent to the sale of its specialty pharmaceutical services business
in June 2002, the Company has operated its remaining home health services
business as a single reporting unit. Financial information relating to the home
health services business is found in the consolidated financial statements of
the Company and its subsidiaries which are included in this annual report.
The Company has historically experienced a seasonal decline in the demand
for its home health services during the third fiscal quarter.
For a discussion of certain regulations to which the Company's business is
subject, see "Regulations" under Item 3, "Legal Proceedings," below.
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.
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 THE COMPANY'S BUSINESS AND INDUSTRY
The Company's growth strategy may not be successful.
The future growth of the Company's business and its future financial
performance will depend on, among other things, its ability to increase its
revenue base through a combination of internal growth and strategic ventures,
including acquisitions. The Company's home health services business experienced
no growth during the fiscal periods from 1998 through 2001. During fiscal 2002,
2003 and 2004, revenue grew 5.3 percent, 5.9 percent and 3.9 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 and the
ability to attract and retain qualified personnel.
Competition among home healthcare companies is intense.
The home health services industry is highly competitive. The Company
competes 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
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services from those offered by the Company and may thereby attract customers who
are presently receiving the Company's home health services.
The cost of healthcare is funded substantially by government and private
insurance programs. If such funding is reduced or becomes limited or
unavailable to the Company's customers, the Company's 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. The Company cannot be assured that its 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 the Company's ability to sell its services on a profitable
basis, if at all. The Company cannot control reimbursement rates or policies for
a significant portion of its business.
Possible changes in the case mix of patients, as well as payer mix and
payment methodologies, may have a material adverse effect on the Company's
profitability.
The sources and amounts of the Company's 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
the Company's profitability. In particular, any significant increase in the
Company's Medicaid population or decrease in Medicaid payments could have a
material adverse effect on its 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 under such contracts, could have a material adverse effect
on the Company's financial condition and results of operations.
The Company has 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 31 percent of
the Company's total net revenues for the year ended January 2, 2005. The Company
and Cigna entered into a new home healthcare contract effective January 1, 2004
and expiring on December 31, 2006. Under the termination provisions of the
contract, Cigna has the right to terminate the agreement on December 31, 2005,
if it provides 90 days advance written notice to the Company. 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 the Company's contract with Cigna or any other organization, it
could materially adversely affect the Company's financial condition and results
of operations.
Further consolidation of managed care organizations and other third-party
payers may adversely affect the Company's profits.
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 the Company as a preferred provider and/or
engage its competitors as a preferred or exclusive provider, the Company's
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 the Company's profitability.
The Company and the healthcare industry continue to experience shortages
in qualified home health service employees and management personnel.
The Company competes with other healthcare providers for its employees,
both clinical associates and management personnel. As the demand for home health
services continues to exceed the supply of available and
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qualified staff, the Company and its 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 the Company's 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, these budget pressures have translated into reductions in state
spending. Given that Medicaid outlays are a significant component of state
budgets, the Company can expect continuing cost containment pressures on
Medicaid outlays for the Company's services in the states in which it operates.
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.
Deficit spending by the government as the result of adverse developments
in the economy or other reasons could lead to increased pressure to reduce
government expenditures for other purposes, including governmentally funded
programs in which the Company participates, such as Medicare and Medicaid.
The Company may experience disruption to its business and operations from
the effects of natural disasters or terrorist acts.
The occurrence of natural disasters or terrorist acts, and the erosion to
the Company's business caused by such an occurrence, may adversely impact the
Company's profitability. In the affected areas, Company offices may be forced to
close for limited or extended periods of time, and the Company may face a
reduced supply of clinical associates.
The agreement governing the Company's existing revolving credit facility
contains, and future debt agreements may contain, various covenants that
limit the Company's discretion in the operation of its business.
The agreement and instruments governing the Company's existing revolving
credit facility contain, and the agreements and instruments governing its future
debt agreements may contain, various restrictive covenants that, among other
things, require it to comply with or maintain certain financial tests and ratios
and restrict the Company's ability to:
- incur more debt;
- redeem or repurchase stock, pay dividends or make other distributions;
- make certain investments;
- create liens;
- enter into transactions with affiliates;
- make acquisitions;
- merge or consolidate; and
- transfer or sell assets.
In addition, events beyond the Company's control could affect its ability
to comply with and maintain the financial tests and ratios. Any failure by the
Company 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 its existing 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 extension of credit. The Company
has no outstanding debt as of January 2, 2005, but could incur debt in the
future. If the Company were unable to repay debt to its senior lenders, these
lenders could proceed against the collateral securing that debt. Even if the
Company is able to comply with all applicable covenants, the restrictions on its
ability to operate its business at its sole discretion could harm its business
by, among other things, limiting its ability to take advantage of financing,
mergers, acquisitions and other corporate opportunities.
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The Company has risks related to obligations under its insurance programs.
The Company is obligated for certain costs under various insurance
programs, including employee health and welfare, workers compensation and
professional liability. 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
also may be subject to exposure relating to employment law and other related
matters for which the Company does not maintain insurance coverage. The Company
believes that its present insurance coverage and reserves are sufficient to
cover currently estimated exposures; however, 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 has risks resulting from the sale of its SPS business.
Certain representations and warranties made by the Company to Accredo
under the asset purchase agreement dated January 2, 2002 continue to survive the
closing of the SPS sale on June 13, 2002. The Company may have indemnification
obligations to Accredo if there is a breach of the surviving representations and
warranties. These indemnification obligations are discussed in more detail below
under Item 3 "Legal Proceedings - Indemnifications." The Company is unable to
predict the amount, if any, that may be required for it to satisfy its
indemnification obligations under the asset purchase agreement should any claims
arise. Should any significant payment be required, the Company may not have
sufficient funds available to satisfy its potential indemnification obligations
or may not be able to obtain the funds on terms satisfactory to the Company, if
at all.
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 the Company's services, may
have a material adverse effect on its revenues and operating margins.
In fiscal 2004, 45 percent of the Company's 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 the Company provides.
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, there can be no
assurances that adjustments from Medicare or Medicaid audits will not have a
material adverse effect on the Company.
The Company conducts business in a heavily regulated industry, and changes
in regulations and violations of regulations may result in increased costs
or sanctions.
The Company's 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 the
Company's business. Because these laws are amended from time to time and are
subject to interpretation, the Company 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 various remedies, including
fines, the revocation of licenses or decertification. Unanticipated increases in
operating costs or reductions in revenue could adversely affect the Company's
liquidity.
-8-
The Company is subject to periodic audits and requests for information by
the Medicare and Medicaid programs or government agencies, which have
various rights and remedies against the Company if they assert that the
Company has overcharged the programs or failed to comply with program
requirements.
The operation of the Company's 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. The Company may also be subject to fines and treble
damage claims if it violates 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.
The Company has established policies and procedures that it believes are
sufficient to ensure that it will operate in substantial compliance with these
anti-fraud and abuse requirements. 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. While the Company believes that its 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
the Company's financial condition, results of operations and cash flows.
The Company is 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.
The Company faces 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,
the Company believes that implementation of this law has resulted and will
result
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in additional costs. Failure to comply with HIPAA could result in fines and
penalties that could have a material adverse effect on the Company.
RISKS RELATED TO THE COMPANY'S COMMON STOCK
The market price of the Company's common stock may be volatile and
experience substantial fluctuations.
The Company's common stock is traded on the Nasdaq National Market. The
price of the common stock may fluctuate substantially based on a number of
factors, including:
- the Company's operating and financial performance;
- changes, or proposed changes, in government regulations;
- stock market conditions generally and specifically as they relate to
the home health services industry;
- developments in litigation or government investigations;
- changes in financial estimates and recommendations by securities
analysts who follow the Company's stock; and
- economic and political uncertainties in the marketplace generally.
Significant fluctuations in the market price of the Company's common stock
may adversely affect the Company's shareholders.
Provisions in the Company's organizational documents, Delaware law and the
Company's rights agreement could delay or prevent a change in control of
the Company, which could adversely affect the price of the Company's
common stock.
Provisions in the Company's amended and restated certificate of
incorporation and by-laws, anti-takeover provisions of the Delaware General
Corporation Law and the Company's rights agreement could discourage, delay or
prevent an unsolicited change in control of the Company, which could adversely
affect the price of the Company's common stock. These provisions may also have
the effect of making it more difficult for third parties to replace the
Company's current management without the consent of the board of directors.
Provisions in the Company's amended and restated certificate of incorporation
and by-laws that could delay or prevent an unsolicited change in control
include:
- the classification of the board of directors into three classes,
each class serving "staggered" terms of office of three years;
- limitations on the removal of directors so that they may only be
removed for cause;
- 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
- 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 the Company and any holder of 15 percent or more of the
Company's outstanding common stock. In addition, the Company has a rights
agreement that has the effect of deterring take-overs of the Company without the
consent of the board of directors. Generally, once a party acquires 10 percent
or more of the Company's common stock, the rights agreement may cause that
party's ownership interest in the Company to be diluted unless the board of
directors consents to the acquisition.
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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 are located in Overland Park,
Kansas; Phoenix, Arizona; Hartford, Connecticut; Tampa, Florida; Endicott, New
York; and Houston, Texas. The Company also maintains leases for other offices
and locations on various terms expiring on various dates.
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.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002. The Company denied the
allegations of wrongdoing in the complaint. On May 19, 2003, the Company filed a
motion for summary judgment on the issue of liability. On February 6, 2004, the
court granted partial summary judgment for the Company, dismissing two of the
three claims alleged under the False Claims Act and denying summary judgment for
the Company on the wrongful termination claim. In December 2004, the parties
reached a settlement, and the case was dismissed with prejudice on December 21,
2004.
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
In connection with the Split-Off, the Company agreed to assume, to the
extent permitted by law, and to indemnify Olsten for, the liabilities, if any,
arising out of the home health services business.
In addition, the Company and Accredo agreed to indemnify each other for
breaches of representations and warranties of such party or the non-fulfillment
of any covenant or agreement of such party in connection with the sale of the
Company's SPS business to Accredo on June 13, 2002. The Company also agreed to
indemnify Accredo for the retained liabilities and for tax liabilities, and
Accredo agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the transaction. The
representations and warranties generally survived for the period of two years
after the closing of the transaction, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive, including
the survival of representations and warranties related to healthcare compliance
for three years after the closing of the transaction and the survival of
representations and warranties related to tax matters until thirty days after
the expiration of the applicable statute of limitations period, including any
extensions of the applicable period, subject to certain exceptions. Accredo and
the Company generally may recover indemnification for a breach of a
representation or warranty only to the extent a party's claim exceeds $1 million
for any individual claim, or exceeds $5 million in the aggregate, subject to
certain conditions and only up to a maximum amount of $100 million.
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CORPORATE INTEGRITY AGREEMENT
In connection with a July 19, 1999 settlement with various government
agencies, Olsten executed a corporate integrity agreement with the Office of
Inspector General of the Department of Health and Human Services, effective
until August 18, 2004, subject to the Company's filing of a final annual report
with the Department of Health and Human Services, Office of Inspector General,
in form and substance acceptable to the government. The Company has filed a
final annual report and is expecting closure by the government.
The Company believes that it has been in compliance with the corporate
integrity agreement and has timely filed all required reports. If the Company
has failed to comply with the terms of its corporate integrity agreement, the
Company will be subject to penalties. The corporate integrity agreement applies
to the Company's businesses that bill the federal government health programs
directly for services, such as its nursing brand (but excludes the SPS
business), and focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of claims. Under the
corporate integrity agreement, the Company is required, for example, to maintain
a corporate compliance officer to develop and implement compliance programs, to
retain an independent review organization to perform annual reviews and to
maintain a compliance program and reporting systems, as well as to provide
certain training to employees.
REGULATIONS
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
- Medicare, Medicaid, TRICARE (the Department of Defense's managed
healthcare program for military personnel and their families) and
other government-funded reimbursement programs;
- reporting requirements, certification and licensing standards for
certain home health agencies; and
- 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. 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:
- prohibitions against the offering or making of direct or indirect
payments to actual or potential referral sources for obtaining or
influencing patient referrals;
- 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;
- laws against the filing of false claims; and
- 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 October 1, 2003, a Medicare market basket rate increase of 3.3 percent
became effective for patients on service on or after October 1, 2003. This
increase was reduced by 0.8 percent to 2.5 percent for open episodes of care on
or after April 1, 2004. In addition, Medicare reimbursement was increased 5
percent for the rural add-on related to home health services performed in
specifically defined rural areas of the country, effective April 1,
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2004 for a period of one year, when the rural add-on provision for home health
services was re-established. On October 15, 2004, CMS announced a Medicare
market basket increase of 2.3 percent effective for patients on service on or
after January 1, 2005. In addition, on the same day CMS announced a favorable
change in the fixed dollar ratio formula for receiving outlier payments.
Outliers represent patient cases which exceed the anticipated cost thresholds
established by Medicare and result in increased reimbursement. This change,
which is effective for patients on service on or after January 1, 2005, is
expected to allow a greater number of episodes to qualify for the outlier
payment.
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 2004.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding each of the
Company's executive officers as of March 4, 2005:
EXECUTIVE POSITION AND OFFICES
NAME OFFICER SINCE AGE WITH THE COMPANY
- -------------------------------- ------------- --- -----------------------------------------
Ronald A. Malone 2000 50 Chief Executive Officer and Chairman of
the Board
Vernon A. Perry, Jr. 1999 53 President and Chief Operating Officer
Christopher L. Anderson 2001 33 Senior Vice President, Audit Services and
Quality Assurance, and Chief Compliance
Officer
Robert Creamer 2002 46 Senior Vice President, Nursing Operations
Mary Morrisey Gabriel 2002 39 Senior Vice President and Chief Marketing
Officer
Stephen B. Paige 2003 57 Senior Vice President and General Counsel
John R. Potapchuk 2001 52 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
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.
VERNON A. PERRY, JR.
Mr. Perry has served as president and chief operating officer of the
Company since June 2002. He served as senior vice president of the Company from
November 1999 to June 2002. From 1996 to 1999, he
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served as senior vice president of CareCentrix for Olsten Health Services. He
joined Olsten in 1994 as vice president for business development.
CHRISTOPHER L. ANDERSON
Mr. Anderson has served as the chief compliance officer of the Company
since March 2000 and as senior vice president, audit services and quality
assurance, of the Company since January 2005. From March 2000 to January 2005,
he served as vice president, audit services and quality assurance, of the
Company. He served as chief compliance officer of Olsten from November 1998 to
March 2000.
ROBERT CREAMER
Mr. Creamer has served as senior vice president, nursing operations, of
the Company since September 2003. 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 and
as senior vice president of the Company since January 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.
JOHN R. POTAPCHUK
Mr. Potapchuk has served as senior vice president, chief financial
officer, treasurer and secretary of the Company since June 2002. 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.
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 2003 and 2004:
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2003 HIGH LOW
- ----------- -------- --------
1st Quarter $ 10.34 $ 8.10
2nd Quarter 9.69 7.44
3rd Quarter 11.94 8.75
4th Quarter 13.59 10.98
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
HOLDERS
As of March 4, 2005, there were approximately 2,550 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 credit
facility also contains 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 (9/27/04 - 10/24/04) 51,600 $ 16.25 51,600 983,096
November (10/25/04 - 11/21/04) 330,100 $ 15.29 330,100 652,996
December (11/22/04 - 01/02/05) 144,600 $ 16.28 144,600 508,396
--------- ----------- -------
Total 526,300 $ 15.65 526,300
========= =========== =======
(1) On May 26, 2004, the Company announced that its Board of Directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
stock. By the end of the period covered by the table, all of such shares had
been repurchased. On August 10, 2004, the Company announced that its Board of
Directors had authorized the repurchase of up to 1,000,000 additional shares of
its outstanding common stock. By the end of the period covered by the table,
491,604 of such shares had been repurchased. See Note 8 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 2, 2005. The data has been derived from the Company's
audited consolidated financial statements. The historical consolidated financial
information presents
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the Company's results of operations and financial position as if the Company
were a separate entity from Olsten for all years presented.
In addition, the operating results of the SPS business through the closing
date of the sale to Accredo, including corporate expenses directly attributable
to SPS operations, restructuring and special charges related to the SPS
business, as well as the gain on the sale, net of transaction costs and related
income taxes, are reflected as discontinued operations in the accompanying
consolidated statement of operations for fiscal 2002. Continuing operations
include the results of the home health services business, including corporate
expenses that did not directly relate to SPS, as well as restructuring and
special charges. In addition, for fiscal 2000, continuing operations included
the health care staffing services business and Canadian operations which were
sold during the fourth quarter of fiscal 2000. 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 what the financial
position and results of operations of the Company would have been if the Company
was 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
include 52 weeks.
FISCAL YEAR ENDED
--------------------------------------------------------------------
(in thousands, except per share amounts) 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(53 WEEKS)
Statement of Operations Data
Net revenues $ 845,764(1) $ 814,029 $ 768,501 $ 729,577 $ 881,765 (8)
Gross profit 323,929(1) 282,042 247,600 (3) 245,660 273,493 (5)
Selling, general and administrative expenses (285,671) (259,185) (283,540)(3) (266,322)(4) (356,359)(5)
Income (loss) from continuing operations 26,488(1) 56,766 (53,543) (13,910) (49,826)
Discontinued operations, net of tax (6) - - 191,578 34,898 (54,374)(5)
Cumulative effect of accounting change, net of tax (7) - - (187,068) - -
Net income (loss) 26,488(1) 56,766(2) (49,033)(3) 20,988 (4) (104,200)(5)
Basic earnings per share:
Income (loss) from continuing operations $ 1.07 $ 2.16 $ (2.05) $ (0.60) $ (2.41)
Discontinued operations, net of tax - - 7.32 1.50 (2.64)
Cumulative effect of accounting change, net of tax - - (7.14) - -
Net income (loss) 1.07 2.16 (1.87) 0.90 (5.05)
Weighted average shares outstanding - basic 24,724 26,262 26,183 23,186 20,637
Diluted earnings per share:
Income (loss) from continuing operations $ 1.00 $ 2.07 $ (2.05) $ (0.60) $ (2.41)
Discontinued operations, net of tax - - 7.32 1.50 (2.64)
Cumulative effect of accounting change, net of tax - - (7.14) - -
Net income (loss) 1.00 2.07 (1.87) 0.90 (5.05)
Weighted average shares outstanding - diluted 26,365 27,439 26,183 23,186 20,637
Balance Sheet Data (at end of year) (9)
Cash items and short-term investments (10) $ 113,024 $ 117,438 $ 101,241 $ 107,144 $ 452
Working capital 136,605 136,297 104,339 417,949 348,684
Total assets 332,098 342,513 264,431 849,879 805,484
Long-term debt and other securities - - - - 20,000
Shareholder's equity 171,940 177,179 113,048 621,707 566,149
Common shares outstanding 23,722 25,598 26,385 25,639 21,197
Special dividend per common share:
Cash - - $ 7.76 - -
Value of Accredo common stock - - 9.99 - -
(1) Net revenues and gross profit for fiscal 2004 include special items of
$9.4 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, primarily related to
recognition of certain state net operating losses. See Notes 3, 9 and 12
to the Company's consolidated financial statements.
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(2) 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 Notes 12 and 14 to the Company's consolidated
financial statements.
(3) 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.
(4) 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.
(5) Net loss for fiscal 2000 reflects restructuring and other special charges
aggregating $153.2 million, of which $97.0 million related to discontinued
operations and $56.2 million related to continuing operations.
Restructuring and special charges of $8.5 million are included in cost of
services sold and $47.7 million is included in selling, general and
administrative expenses. Net loss for fiscal 2000 also reflects a gain of
$36.7 million relating to the sale of the Company's staffing services
business and Canadian operations.
(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 all prior years have been reclassified to
conform to this presentation. See Note 3 to the Company's consolidated
financial statements.
(7) For fiscal 2002, the Company adopted the provisions of SFAS 142 "Goodwill
and Other Intangible Assets" and performed a transitional impairment test,
resulting in a non-cash charge of $187.1 million. See Note 2 to the
Company's consolidated financial statements.
(8) Net revenues for fiscal 2000 includes net revenues related to the home
health services business of $736.5 million.
(9) Balance sheet data for fiscal year end 2001 and 2000 includes the assets
of the SPS business, which was sold to Accredo on June 13, 2002.
(10) Cash items and short-term investments includes restricted cash of $22.0
million at fiscal year end 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 home health services business is
conducted through more than 350 direct service delivery units operating from
approximately 250 locations under its Gentiva(R) brand and through a network of
more than 2,000 third-party provider locations, as well as Gentiva locations,
under its CareCentrix(R) brand. CareCentrix manages home healthcare services for
managed care organizations throughout the United States. The Company's services
can be delivered across the United States 24 hours a day, 7 days a week.
Gentiva operates licensed and Medicare-certified nursing agencies located
in 35 states, substantially all of which are currently accredited by the Joint
Commission on Accreditation of Healthcare Organizations. These agencies provide
various combinations of skilled nursing and therapy services, paraprofessional
nursing services and homemaker services to pediatric, adult and elder patients.
Reimbursement sources include government
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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.
CareCentrix operations provide an array of administrative services and
coordinate the delivery of home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services for
managed care organizations and health plans. These administrative services are
coordinated within four regional coordination centers and are delivered through
Gentiva direct home nursing and therapy locations as well as through an
extensive nationwide network of third-party provider locations in all 50 states.
CareCentrix accepts case referrals from a wide variety of sources, verifies
eligibility and benefits and transfers case requirements to the providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data reporting and
analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payer is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payer remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
The Company's home health services business also delivers services to its
customers through other focused business lines that include:
- Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from
joint replacement or other major orthopedic surgery;
- Gentiva Rehab Without Walls(R), which provides home and
community-based therapies for patients with traumatic brain
injury, cerebrovascular accident injury and acquired brain
injury, as well as a number of other complex rehabilitation
cases;
- Gentiva Safe Strides(SM) Program, which provides therapies for
patients with balance issues who are prone to injury or
immobility as a result of falling; and
- Gentiva Cardiopulmonary Program, which helps patients and
their physicians manage heart and lung health in a home-based
environment.
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.
Gentiva's revenues are generated primarily from three major payer sources:
the U.S. Medicare program, Medicaid and other state and county programs, and
commercial insurers. Revenue mix by major payer classifications is as follows:
2004 2003 2002
---- ---- ----
Medicare 27% 22% 21%
Medicaid and Local Government 18 20 22
Commercial Insurance and Other 55 58 57
--- --- ---
100% 100% 100%
=== === ===
The 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
-18-
covers. One of the ways it seeks to control costs is to require greater
efficiencies from its providers, including home health care companies.
Despite these risks, Gentiva believes it can operate effectively in the
current health care climate by increasing its volume of Medicare and commercial
insurance business 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 and commercial
insurance payer groups. For example, in 2004, Gentiva's revenue from its
Medicare and Commercial Insurance and Other (excluding Cigna) payer categories
increased 27.7 percent and 13.5 percent, respectively, from the prior year.
Various states have addressed budget pressures by considering or
implementing reductions in various health care 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 2004 revenue from this payer category
declined 6.5 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 health
care industry populated by approximately 12,000 providers of varying size and
resources. Second, the cost of a home health care 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 U.S. Centers for Medicare and
Medicaid Services projects that national home health and durable medical
equipment spending will rise from $71.7 billion in 2005 to $127.5 billion by
2014. 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 growth by focusing on
Medicare and commercial insurance business; continue to develop and expand
specialty programs for incremental revenue growth; focus on clinical associate
recruitment, retention and productivity; and continue technology initiatives
that 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 2004 performance. Gentiva reported 2004 net revenue of $845.8 million,
representing a $31.8 million, or 3.9 percent, increase from the $814.0 million
reported in fiscal year 2003. The increase was due primarily to a rise in the
volume of Medicare and commercial insurance business mentioned above.
During 2004, Gentiva reported positive cash flow from operating activities
of $34.9 million and ended 2004 with cash items, restricted cash and short-term
investments of approximately $113 million, compared to approximately $117
million at the end of 2003. 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 2004, Gentiva repurchased a total of over 2.5 million shares at
an average cost of $15.04 per share, for a total expenditure of over $38.4
million.
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.
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 2, 2005,
December 28, 2003 and December 29, 2002. The Company's fiscal year 2004 includes
53 weeks compared to fiscal years 2003 and 2002, which include 52 weeks.
-19-
SIGNIFICANT DEVELOPMENTS
On June 13, 2002, the Company sold substantially all of the assets of its
SPS business to 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.
The operating results of the SPS business through the closing date of the
sale to Accredo, including corporate expenses directly attributable to SPS
operations, restructuring and special charges related to the SPS business, as
well as the gain on the sale, net of transaction costs and related income taxes,
are reflected as discontinued operations in the accompanying consolidated
statement of operations for fiscal 2002. Continuing operations includes the
results of the home health services business, including corporate expenses that
did not directly relate to SPS, as well as restructuring and special charges.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 2, 2005 COMPARED TO YEAR ENDED DECEMBER 28, 2003
NET REVENUES
FISCAL YEAR
-------------------------------------
PERCENTAGE
(Dollars in millions) 2004 2003 VARIANCE
---------- ---------- ----------
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.
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 Provider Reimbursement Review Board ("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.
-20-
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.
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.
GROSS PROFIT
FISCAL YEAR
--------------------------------------
(Dollars in millions) 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 the 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 points due to the reconfiguration of the HME provider network
earlier this year, 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, including depreciation and
amortization, 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 provider 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 it
was 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
-21-
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 FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations 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 from continuing
operations before income taxes included special items of $9.4 million as
discussed in "Net Revenues" above and a pre-tax gain $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% 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 in the fourth
quarter of fiscal 2004. A valuation allowance of $4.5 million has been recorded
to recognize that certain state net operating loss carryforwards may expire
before realization. The Company 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 $23.9 million and
non-current net deferred tax assets were $21.2 million. At January 2, 2005, the
Company had federal tax credit carryforwards of $0.8 million and state net
operating loss carryforwards of $7.0 million.
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.
-22-
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 9 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 due primarily to the recognition of certain state net
operating loss carryforwards, which was lower than the statutory income tax
rate.
YEAR ENDED DECEMBER 28, 2003 COMPARED TO YEAR ENDED DECEMBER 29, 2002
NET REVENUES
FISCAL YEAR
-------------------------------------
PERCENTAGE
(Dollars in millions) 2003 2002 VARIANCE
---------- ---------- ----------
Medicare $ 178.7 $ 162.3 10.1%
Medicaid and Local Government 165.1 167.4 (1.4)
Commercial Insurance and Other 470.2 438.8 7.2
---------- ---------- ---
$ 814.0 $ 768.5 5.9%
========== ========== ===
Net revenues increased by $45.5 million or 5.9 percent to $814.0 million
during fiscal 2003 as compared to $768.5 million during fiscal 2002. For fiscal
year 2003, as compared to fiscal year 2002, net revenues from Medicare increased
by $16.4 million or 10.1 percent to $178.7 million. Commercial Insurance and
Other payer's net revenues increased by $31.4 million or 7.2 percent to $470.2
million and Medicaid and Local Government payer's net revenues decreased $2.3
million or 1.4 percent to $165.1 million.
Medicare revenue growth for fiscal 2003, as compared to fiscal 2002, was
primarily fueled by increases in episodes serviced of 8.7 percent. In addition,
Medicare revenue was positively impacted by (i) $1.6 million due to a 3.3
percent market basket rate increase that became effective for patients on
service on or after October 1, 2003 and (ii) $2.5 million due to the absence of
a revenue adjustment recorded in fiscal 2002 relating to partial episode
payments ("PEPs") and various clinical and operational process changes
implemented in late 2003. In comparing the fiscal year 2003 and 2002 periods,
Medicare revenues were negatively impacted by an overall 4.9 percent reduction
in Medicare reimbursement rates (approximately $6.0 million for fiscal 2003),
which became effective for Medicare patients beginning in October 2002, and by
the elimination of the rural add-on provision ($1.4 million for fiscal 2003) for
home health services, which became effective April 1, 2003.
Revenue growth from Commercial Insurance and Other payers was driven by a
combination of pricing and volume increases from existing customers and new
contracts that were signed during the past year. Of the 7.2 percent increase in
net revenues for fiscal 2003, new contracts from Commercial Insurance and Other
payers accounted for 3.3 percent.
Medicaid and Local Government revenues decreased for fiscal year 2003 due
to revenue reductions related to more restrictive eligibility requirements in
some states and lower reimbursement rates in certain other states. In addition,
for fiscal 2003, revenues were negatively impacted by the Company's decision to
reduce or terminate its participation in certain low-margin, hourly Medicaid and
state and county programs. Revenues relating to these hourly Medicaid and state
and county programs decreased $8.5 million as compared to fiscal year 2002.
These decreases were offset somewhat by increases in the intermittent care
Medicaid business in selected states.
-23-
GROSS PROFIT
FISCAL YEAR
--------------------------------------
(Dollars in millions) 2003 2002 VARIANCE
---------- ---------- ----------
Gross profit $ 282.0 $ 247.6 $ 34.4
As a percent of revenue 34.6% 32.2% 2.4%
Gross profit margins for fiscal 2003, as compared to fiscal 2002, were
positively impacted by an increase in Medicare episodes serviced and
improvements in utilization in both the commercial insurance business and
Medicare (1.6 percent), reductions in insurance costs (0.5 percent), the
Medicare market basket rate increase of 3.3 percent that became effective for
patients on service on or after October 1, 2003 (0.2 percent) and the absence of
both a $2.5 million revenue adjustment related to PEPs (0.3 percent) and the
$6.3 million special charge associated with insurance costs that were recorded
in fiscal 2002 (0.8 percent). These increases were partially offset by an
overall 4.9 percent reduction in Medicare reimbursement rates (approximately
$6.0 million or 0.8 percent), which became effective for Medicare patients
beginning October 2002, and the elimination of the rural add-on provision ($1.4
million or 0.2 percent) for home health services which became effective April 1,
2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal year 2003, selling, general and administrative expenses,
including depreciation and amortization, decreased $24 million or 8.6 percent to
$259 million compared to $283 million for the corresponding period in fiscal
2002. This decrease is related to restructuring and special charges of $46.1
million, of which approximately $40 million was reflected in selling, general
and administrative expenses in the accompanying consolidated statements of
operations for fiscal year 2002. See Note 4 to the consolidated financial
statements for further discussion of the restructuring and special charges.
Excluding these special charges, selling, general and administrative expenses,
including depreciation and amortization, increased $15.4 million for fiscal year
2003.
This increase for fiscal 2003 related to increases in sales and field
administrative expenses due to headcount additions, investments in technology
initiatives and costs relating to training in connection with the implementation
of provisions of the Healthcare Insurance Portability and Accountability Act of
1996 ("HIPAA") and a new software based scheduling system. These increases were
partially offset by reductions in corporate administrative expenses resulting
from restructuring efforts following the sale of the SPS business in the second
quarter of fiscal year 2002. During fiscal 2003, headcount of personnel
dedicated to sales and clinical care coordination efforts increased by
approximately 19 percent while headcount relating to field and administrative
personnel increased by less than 2 percent.
Restructuring and special charges for fiscal year 2002 are summarized and
further described below (in thousands):
Restructuring charges:
Business realignment activities $ 6,813
----------
Special charges:
Option tender offer 21,388
Settlement costs 7,731
Insurance costs 6,300
Asset writedowns and other 3,824
----------
Total special charges 39,243
----------
Total restructuring and special charges $ 46,056
==========
-24-
FISCAL 2002
BUSINESS REALIGNMENT ACTIVITIES
The Company recorded charges of $6.8 million during the second quarter
ended June 30, 2002 in connection with a restructuring plan. This plan included
the closing and consolidation of seven field locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's SPS business. These charges included
employee severance of $0.9 million relating to the termination of 115 employees
in field locations and certain corporate and administrative departments, and
future lease payments and other associated costs of $5.9 million resulting
principally from the consolidation of office space at the Company's corporate
headquarters and a change in estimated future lease obligations and other costs
in excess of sublease rentals relating to a lease for a subsidiary of the
Company's former parent company which the Company agreed to assume in connection
with its Split-Off in March 2000. These charges are reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002. During fiscal year
2002, the Company paid $2.1 million in restructuring costs, leaving
approximately $4.7 million of these restructuring charges unpaid, representing
severance costs of $0.2 million which were to be paid during 2003 and lease and
other associated costs of $4.5 million which will be paid over the remaining
lease terms. During fiscal years 2003 and 2004, the Company paid $2.4 million
and $0.4 million, respectively, in restructuring costs, leaving approximately
$1.9 million of these restructuring charges unpaid, representing lease and other
associated costs which will be paid over the remaining lease terms.
OPTION TENDER OFFER
During the second quarter ended June 30, 2002, the Company effected a cash
tender offer for all outstanding options to purchase its common stock for an
aggregate option purchase price not to exceed $25 million. In connection with
this tender offer, the Company recorded a charge of $21.4 million during the
second quarter of fiscal 2002, which is reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for fiscal year 2002.
SETTLEMENT COSTS
The Company recorded a $7.7 million charge in the second quarter of fiscal
2002 to reflect settlement costs relating to the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation lawsuit as well as estimated settlement
costs related to government inquiries regarding cost reporting procedures
concerning contracted nursing and home health aide costs (see Note 9 to the
consolidated financial statements). These costs are reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for fiscal year 2002.
INSURANCE COSTS
The Company recorded a special charge of $6.3 million in the second
quarter of fiscal 2002 related primarily to a refinement in the estimation
process used to determine the Company's actuarially computed workers
compensation and professional liability insurance reserves. This special charge
is reflected in cost of services sold in the accompanying consolidated statement
of operations for fiscal year 2002.
ASSET WRITEDOWNS AND OTHER
The Company recorded charges of $3.8 million in the second quarter of
fiscal 2002, consisting primarily of a write-down of inventory and other assets
associated with home medical equipment used in the Company's nursing operations,
and a write-off of deferred debt issuance costs associated with the terminated
credit facility. The charges are reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for fiscal year 2002.
-25-
INTEREST INCOME, NET
Net interest income was approximately $0.4 million for fiscal year 2003
and $0.8 million for fiscal year 2002. Net interest income represented interest
income of approximately $1.5 million for fiscal 2003 and $2.4 million for fiscal
2002, partially offset by fees relating to the revolving credit facility and
outstanding letters of credit.
Interest income declined in fiscal 2003 as compared to fiscal 2002 due to
a decline in interest rates on cash, cash equivalents and restricted cash and,
to a lesser extent, a decrease in average cash balances during the year.
Interest expense declined in the fiscal 2003 periods due to reductions in the
average outstanding letters of credit, as well as reductions in fees associated
with the unused portion of the credit facility.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income (loss) from continuing operations before income taxes was
approximately $23.3 million and ($35.1) million for fiscal years ended December
28, 2003 and December 29, 2002, respectively. For fiscal year 2002, loss from
continuing operations before income taxes included restructuring and special
charges of $46.1 million.
INCOME TAXES
The Company recorded an income tax benefit of $33.5 million in fiscal 2003
compared to an income tax expense of $18.4 million in fiscal 2002.
A federal and state tax benefit was recorded in fiscal 2002, relative to
the loss from continuing operations, offset by a $26.8 million provision
associated with the adoption of SFAS No. 142, as discussed in Note 2 to the
consolidated financial statements, and an adjustment of $5.4 million for tax
audit adjustments. As of December 29, 2002, the Company had federal net
operating loss and tax credit carryforwards of $15 million and maintained a full
valuation allowance against its net deferred tax assets of $63.9 million.
Realization of the deferred tax assets is dependent on generating sufficient
taxable income. 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. 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, the
remaining valuation allowance for net deferred tax assets was reversed,
resulting in a tax benefit of $35.0 million recorded in the statement of
operations and an additional credit of $19.5 million relating to the tax
benefits associated with stock compensation was recorded directly to
shareholders' equity. At December 28, 2003, the Company had federal net
operating loss and tax credit carryforwards of $11.8 million. See Note 12 to the
Company's consolidated financial statements.
NET INCOME (LOSS)
The Company recorded net income of $56.8 million or $2.07 per diluted
share in fiscal 2003 compared to a net loss of $49.0 million or ($1.87) per
diluted share in fiscal 2002.
The net loss for fiscal 2002 included a net loss from continuing
operations of $53.5 million or ($2.05) per diluted share, which included $46.1
million of restructuring and special charges, income from discontinued
operations of $191.6 million or $7.32 per diluted share and a net charge of
$187.1 million or ($7.14) per diluted share relating to the cumulative effect of
accounting change for goodwill.
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. Net cash provided by operating
activities was $34.9 million in fiscal 2004. In addition, during fiscal 2004 the
Company received cash proceeds of $4.1 million in connection with the sale of
the Company's investment in a Canadian homecare business and $6.7 million in
connection with
-26-
the issuance of common stock. This cash was used to fund capital expenditures of
$12.6 million and repurchase shares of common stock of $38.4 million during
fiscal 2004.
Days Sales Outstanding ("DSO") for the home health services business
decreased 2 days to 57 days at January 2, 2005 as compared to December 28, 2003.
Working capital at January 2, 2005 was $137 million, an increase of $1 million
as compared to $136 million at December 28, 2003, primarily due to:
- a $4 million decrease in cash and cash equivalents, restricted cash
and short-term investments;
- a $1 million decrease in accounts receivable;
- a $3 million decrease in deferred tax assets; and
- a $9 million decrease in current liabilities, primarily driven by
decreases in payroll and related taxes ($4 million), obligations under
insurance programs ($2 million), Medicare liabilities ($3 million),
other accrued expenses ($1 million), and cost of claims incurred but
not reported ($1 million), partially offset by an increase in accounts
payable ($2 million).
The Company participates in the Medicare, Medicaid and other federal and
state healthcare programs. There are certain standards and regulations that the
Company must adhere to in order to continue to participate in these programs,
including compliance with the Company's corporate integrity agreement. As part
of these standards and regulations, the Company is subject to periodic audits,
examinations and investigations conducted by, or at the direction of,
governmental investigatory and oversight agencies. Periodic and random audits
conducted or directed by these agencies could result in a delay or adjustment to
the amount of reimbursements received under these programs. Violation of the
applicable federal and state health care regulations can result in the Company's
exclusion from participating in these programs and can subject the Company to
substantial civil and/or criminal penalties. The Company believes it is
currently in compliance with these standards and regulations.
The Company is party to a contract with Cigna pursuant to which the
Company provides or contracts with third party providers to provide home nursing
services, acute and chronic infusion therapies, durable medical equipment, and
respiratory products and services to patients insured by Cigna. For fiscal years
2004, 2003 and 2002, Cigna accounted for approximately 31 percent, 36 percent
and 38 percent, respectively, of the Company's total net revenues. The Company
extended its relationship with Cigna by entering into a new national home health
care contract, as amended, effective January 1, 2004. The term of the new
contract extends to December 31, 2006, and automatically renews thereafter for
additional one year terms unless terminated. Under the termination provisions,
Cigna has the right to terminate the agreement on December 31, 2005 if it
provides 90 days advance written notice to the Company, and each party has the
right to terminate at the end of each term thereafter by providing at least 90
days advance written notice prior to the start of the new term. If Cigna chose
to terminate or not renew the contract, or to significantly modify its use of
the Company's services, there could be a material adverse effect on the
Company's cash flow.
The Company's credit facility, as amended, as described below, provides up
to $55 million in borrowings, including up to $40 million which is available for
letters of credit. The Company may borrow up to a maximum of 80 percent of the
net amount of eligible accounts receivable, as defined, less any reasonable and
customary reserves, as defined, required by the lender.
At the Company's option, the interest rate on borrowings under the credit
facility is based on the London Interbank Offered Rates (LIBOR) plus 3.0 percent
or the lender's prime rate plus 1.0 percent. In addition, the Company is
required to pay a fee equal to 2.25 percent per annum of the aggregate face
amount of outstanding letters of credit. The Company is also subject to an
unused line fee equal to 0.375 percent per annum of the average daily difference
between the total revolving credit facility amount and the total outstanding
borrowings and letters of credit. If the Company's trailing twelve month
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding certain restructuring costs and special charges, falls below $20
million, the applicable margins for LIBOR and prime rate borrowings will
increase to 3.25 percent and 1.25 percent, respectively, and the letter of
credit and unused line fees will increase to 2.5 percent and 0.50 percent,
respectively.
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Total outstanding letters of credit were $20.2 million as of 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. As of January 2, 2005, there were no
borrowings outstanding under the credit facility and the Company had borrowing
capacity under the credit facility, after adjusting for outstanding letters of
credit, of approximately $35 million.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and May 26, 2004, the credit facility was amended to make covenants
relating to acquisitions and stock repurchases less restrictive, provided that
the Company maintains minimum excess aggregate liquidity, as defined in the
amendment, equal to at least $60 million, and to allow for the disposition of
certain assets. As of January 2, 2005, the Company was in compliance with the
covenants in the credit facility, as amended.
The credit facility further provides that if the agreement is terminated
for any reason, the Company must pay an early termination fee equal to $137,500
if the facility is terminated from June 13, 2004 to June 12, 2005. There is no
fee for termination of the facility subsequent to June 12, 2005. Loans under the
credit facility are collateralized by all of the Company's tangible and
intangible personal property, other than equipment.
The credit facility includes provisions, which, if not complied with,
could require early payment by the Company. These include customary default
events, such as failure to comply with financial covenants, insolvency events,
non-payment of scheduled payments, acceleration of other financial obligations
and change in control provisions. In addition, these provisions include an
account obligor, whose accounts are more than 25 percent of all accounts of the
Company over the previous 12-month period, canceling or failing to renew its
contract with the Company and ceasing to recognize the Company as an approved
provider of health care services, or the Company revoking the lending agent's
control over its governmental lockbox accounts. The Company does not have any
trigger events in the credit facility that are tied to changes in its credit
rating or stock price. As of January 2, 2005, the Company was in compliance with
these provisions.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk with insurance policies subject to
substantial deductibles and retention amounts. The Company recognizes its
obligations associated with these programs in the period the claim is incurred.
The Company estimates the cost of both reported claims and claims incurred but
not reported, up to specified deductible limits, based on its own specific
historical claims experience and current enrollment statistics, industry
statistics and other information. Such estimates and the resulting reserves are
reviewed and updated periodically.
The Company is responsible for the cost of individual workers compensation
claims and individual professional liability claims up to $500,000 per incident
which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter.
The Company also maintains excess liability coverage relating to professional
liability and casualty claims which provides insurance coverage for individual
claims of up to $25,000,000 in excess of the underlying coverage limits.
Payments under the Company's workers compensation program are guaranteed by
letters of credit and segregated restricted cash balances.
Additional items that could impact the Company's liquidity are discussed
under "Risk Factors" in Item 1 of this annual report on Form 10-K.
CAPITAL EXPENDITURES
The Company's capital expenditures from continuing operations for the
fiscal year 2004 were $11.2 million, excluding equipment capitalized under
capital lease obligations of $1.4 million, as compared to $8.8 million and $4.1
million for fiscal years 2003 and 2002, 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 $12 million and $14 million for fiscal 2005. Management
expects that the Company's capital expenditure needs will be met through
operating cash flow and available cash reserves.
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CASH RESOURCES AND OBLIGATIONS
The Company had cash, cash equivalents, restricted cash and short-term
investments of approximately $113.0 million as of January 2, 2005. The
restricted cash of $22.0 million at January 2, 2005, relates to cash funds of
$21.8 million that have been segregated in a trust account to provide collateral
under the Company's insurance programs. The Company, at its option, may access
the cash funds in the trust account by providing equivalent amounts of
alternative security, including letters of credit and surety bonds. In addition,
restricted cash includes $0.2 million on deposit to comply with New York state
regulations requiring that one month of revenues generated under capitated
agreements in the state be held in escrow. Interest on all restricted funds
accrues to the Company.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through 2005. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
The Company's Board of Directors has authorized stock repurchase programs
under which the Company could repurchase and formally retire up to an aggregate
of 4,500,000 shares of its outstanding common stock. The repurchases occur
periodically in the open market or through privately negotiated transactions
based on market conditions and other factors. During fiscal 2004, the Company
repurchased 2,553,140 shares of its outstanding common stock at an average cost
of $15.04 per share and a total cost of approximately $38.4 million. As of
January 2, 2005, the Company had remaining authorization to repurchase an
aggregate of 508,396 shares of its outstanding common stock. For the period from
January 3, 2005 through March 4, 2005, the Company purchased 357,900 shares at
an average cost of $15.98 per share and a total cost of approximately $5.7
million. See Note 8 to the Company's consolidated financial statements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At January 2, 2005, the Company had no long-term debt. 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 commitments for all
non-cancelable leases and purchase obligations at January 2, 2005 are as follows
(in thousands):
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
------------ ------------ ------------ ------------ ------------
Long-term debt obligations $ - $ - $ - $ - $ -
Capital lease obligations 1,150 274 288 303 285
Operating lease obligations 50,525 17,022 21,834 8,339 3,330
Purchase obligations - - - - -
------------ ------------ ------------ ------------ ------------
Total $ 51,675 $ 17,296 $ 22,122 $ 8,642 $ 3,615
============ ============ ============ ============ ============
The Company had total letters of credit outstanding under its credit
facility of approximately $20.8 million at December 28, 2003 and $20.2 million
at 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 $1.0 million and
$0.9 million at January 2, 2005 and December 28, 2003, respectively.
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
Management expects that the Company's working capital needs for fiscal
2005 will be met through operating cash flow and its existing cash balances. The
Company may also consider other alternative uses of cash including, among other
things, acquisitions, additional share repurchases and cash dividends. These
uses of
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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 9 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 Provider Reimbursement Review Board ("PRRB") concerning
this issue with respect to cost reports for the years 1997, 1998 and 1999. The
Company's consolidated financial statements for the years 1997, 1998 and 1999
had reflected use of the methodology mandated by the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed an
Administrative Resolution relating to the issues covered by the appeals pending
before the PRRB. Under the terms of the Administrative Resolution, the fiscal
intermediary agreed to reopen and adjust the Company's cost reports for the
years 1997, 1998 and 1999 using a modified version of the methodology used by
the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000, which are currently under audit. The
Administrative Resolution required that the process to (i) reopen all 1997 cost
reports, (ii) determine the adjustments to allowable costs through the issuance
of Notices of Program Reimbursement and (iii) make appropriate payments to the
Company, be completed in early 2004. Cost reports relating to years subsequent
to 1997 were to be reopened after the process for the 1997 cost reports was
completed.
In February 2004, the fiscal intermediary notified the Company that it had
completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was approximately $9 million. The
Company received the funds and recorded the adjustment of $9.0 million as net
revenues during fiscal 2004.
During the third quarter of fiscal 2004, the fiscal intermediary notified
the Company that it had completed the reopening of all 1998 cost reports and
determined that the adjustment to allowable costs for that year was $1.4
million. The Company received the funds and recorded the adjustment of $1.4
million as net revenues during fiscal 2004.
Although the Company believes that it will likely recover additional funds
as a result of applying the modified methodology discussed above to cost reports
subsequent to 1998, the settlement amounts cannot be specifically determined
until the reopening or audit of each year's cost reports is completed. The
Company expects the 1999 cost reports to be reopened and completed during 2005.
It is likely that future recoveries for the 1999 year resulting from the
application of the modified methodology required by the Administrative
Resolution will be significantly less than the 1997 settlement but greater than
the 1998 settlement. The timeframe for resolving all items relating to the 2000
cost reports cannot be determined at this time.
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.
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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 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 11 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):
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Net income (loss) - as reported $ 26,488 $ 56,766 $ (49,033)
Add: Stock-based employee compensation expense included in reported net
income, net of tax - - 13,160
Deduct: Total stock-based compensation expense determined under fair
value based method for all awards, net of tax (2,442) (1,575) (5,022)
--------------- --------------- ---------------
Net income (loss) - pro forma 24,046 55,191 (40,895)
=============== =============== ===============
Basic income (loss) per share - as reported $ 1.07 $ 2.16 $ (1.87)
Basic income (loss) per share - pro forma $ 0.97 $ 2.10 $ (1.56)
Diluted income (loss) per share - as reported $ 1.00 $ 2.07 $ (1.87)
Diluted income (loss) per share - pro forma $ 0.91 $ 2.01 $ (1.56)
GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142")
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Other Intangible
Assets" ("SFAS 142"), which broadens the criteria for recording intangible
assets separate from goodwill. SFAS 142 requires the use of a non-amortization
approach to account for purchased goodwill and certain intangibles. Under a
non-amortization approach, goodwill and certain intangibles are not amortized
into results of operations, but instead are reviewed for impairment and an
impairment charge is recorded in the periods in which the recorded carrying
value of goodwill and certain intangibles is more than its estimated fair value.
The Company adopted SFAS 142 as of the beginning of fiscal 2002. The provisions
of SFAS 142 require that a transitional impairment test be performed as of the
beginning of the year the statement is adopted.
Based on the results of the transitional impairment tests, the Company
determined that an impairment loss relating to goodwill had occurred and
recorded a non-cash charge of $187.1 million, net of a deferred tax benefit of
$30.2 million, as a cumulative effect of an accounting change in the
accompanying consolidated statement of operations for the fiscal year ended
December 29, 2002. The deferred tax benefit was recorded by eliminating a
deferred tax liability of $26.8 million and recording a deferred tax asset of
approximately $39 million, offset by an increase in the tax valuation allowance
by the same amount. During fiscal 2002, the Company also recorded a tax benefit
of approximately $3.4 million relating to tax deductible goodwill. See Note 12
to the consolidated financial statements.
-31-
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 as of January 2, 2005. Goodwill
amounting to $1.2 million was included in Other Assets in the accompanying
consolidated balance sheets as of January 2, 2005 and December 28, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"). This statement replaces SFAS 123, and supersedes APB
25. SFAS 123(R) requires companies to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and to
record compensation cost for all stock awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. In addition, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. SFAS 123(R) will be
effective for quarterly periods beginning after June 15, 2005, which for the
Company is the third quarter of fiscal 2005. Management estimates that the
adoption of SFAS 123(R) will reduce earnings between $0.06 and $0.08 per diluted
share in the second half of fiscal 2005.
In April 2004, the Emerging Issues Task Force ("EITF") of the FASB
approved EITF Issue 03-06, "Participating Securities and the Two-Class Method
under FAS 128." EITF Issue 03-06 supersedes the guidance in Topic No. D-95,
"Effect of Participating Convertible Securities on the Computation of Basic
Earnings per Share," and requires the use of the two-class method for
participating securities. The two-class method is an earnings allocation formula
that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and
participation rights in undistributed earnings. In addition, EITF Issue 03-06
addresses other forms of participating securities, including options, warrants,
forwards and other contracts to issue an entity's common stock, with the
exception of stock based compensation subject to the provisions of APB 25 and
SFAS 123. EITF Issue 03-06 is effective for reporting periods beginning after
March 31, 2004 and should be applied by restating previously reported earnings
per share. The adoption of EITF Issue 03-06 did not have a material impact on
the Company's consolidated financial statements.
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.
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, obligations under workers
compensation, professional liability and employee health and welfare insurance
programs and Medicare settlement issues. 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
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 capitated arrangements with certain managed care customers, net
revenues are recognized based on a predetermined monthly contractual rate for
each member of the managed care plan regardless of the volume
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of services covered by the capitation arrangement. Net revenues generated under
capitated agreements were approximately 12 percent, 16 percent, and 16 percent
of total net revenues for fiscal 2004, 2003, and 2002, respectively.
Under the Prospective Payment System ("PPS") for Medicare reimbursement,
net revenues are recorded based on a reimbursement rate which varies based on
the severity of the patient's condition, service needs and certain other
factors; revenue is recognized ratably over the period in which services are
provided. Revenue is subject to adjustment during this period if there are
significant changes in the patient's condition during the treatment period or if
the patient is discharged but readmitted to another agency within the same 60
day episodic period. Medicare billings under PPS are initially recognized as
deferred revenue and are subsequently amortized into revenue over an average
patient treatment period. The process for recognizing revenue to be recognized
under the Medicare program is based on certain assumptions and judgments,
including the average length of time of each treatment as compared to a standard
60 day episode, the appropriateness of the clinical assessment of each patient
at the time of certification and the level of adjustments to the fixed
reimbursement rate relating to patients who receive a limited number of visits,
have significant changes in condition or are subject to certain other factors
during the episode. Deferred revenue of approximately $5.5 million and $5.2
million relating to the Medicare PPS program was included in other accrued
expenses in the consolidated balance sheets as of January 2, 2005 and December
28, 2003, respectively.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payer and other reasons unrelated to credit
risk. Revenue adjustments are deducted from gross accounts receivable. These
revenue adjustments are based on significant assumptions and judgments which are
determined by Company management based on historical trends. Third party
settlements resulting in recoveries are recognized as net revenues in the period
in which the funds are received.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
The process for estimating the ultimate collection of receivables,
particularly with respect to fee-for-service arrangements, involves significant
assumptions and judgments. In this regard, the Company has implemented a
standardized approach to estimate and review the collectibility of its
receivables based on accounts receivable aging trends. Historical collection and
payer reimbursement experience is an integral part of the estimation process
related to determining the allowance for doubtful accounts. In addition, the
Company assesses the current state of its billing functions in order to identify
any known collection or reimbursement issues to determine the impact, if any, on
its reserve estimates, which involve judgment. Revisions in reserve estimates
are recorded as an adjustment to the provision for doubtful accounts which is
reflected in selling, general and administrative expenses in the consolidated
statements of operations. The Company believes that its collection and reserve
processes, along with the monitoring of its billing processes, help to reduce
the risk associated with material revisions to reserve estimates resulting from
adverse changes in collection, reimbursement experience and billing functions.
COST OF CLAIMS INCURRED BUT NOT REPORTED
Under capitated arrangements with managed care customers, the Company
estimates the cost of claims incurred but not reported based on applying
actuarial assumptions, historical patterns of utilization to authorized levels
of service, current enrollment statistics and other information. Under
fee-for-service arrangements with certain managed care customers, the Company
also estimates the cost of claims incurred but not reported and the estimated
revenue relating thereto in situations in which the Company is responsible for
care management and patient services are performed by a non-affiliated provider.
The estimate of cost of claims incurred but not reported involves
significant assumptions and judgments which relate to and may vary depending on
the services authorized at each of the Company's regional coordination centers,
historical patterns of service utilization and payment trends. These assumptions
and judgments are evaluated on a quarterly basis and changes in estimated
liabilities for costs of claims incurred but not reported are determined based
on such evaluation.
-33-
OBLIGATIONS UNDER INSURANCE PROGRAMS
The Company is obligated for certain costs under various insurance
programs, including workers compensation and professional liability and employee
health and welfare.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk with insurance policies subject to
substantial deductibles and retention amounts. The Company recognizes its
obligations associated with these programs in the period the claim is incurred.
The cost of both reported claims and claims incurred but not reported, up to
specified deductible limits, have generally been estimated based on historical
data, industry statistics, the Company's own home health specific historical
claims experience, current enrollment statistics and other information. Such
estimates and the resulting reserves are reviewed and updated periodically.
For the fiscal year ended December 29, 2002, the Company recorded a
special charge of $6.3 million relating primarily to a refinement in the
estimation process used to determine the Company's actuarially computed workers
compensation and professional liability reserves. Management believes that, as a
result of this refinement, sufficient data exists to allow the Company to more
heavily rely on its own home health specific historical claims experience in
determining the Company's estimates of workers compensation and professional
liability reserves. Previously the Company utilized insurance industry actuarial
information, as well as the Company's historical claims experience in developing
reserve estimates.
The Company maintains insurance coverage on individual claims. The Company
is responsible for the cost of individual workers compensation claims and
individual professional liability claims up to $500,000 per incident which
occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The
Company also maintains excess liability coverage relating to professional
liability and casualty claims which provides insurance coverage for individual
claims of up to $25,000,000 in excess of the underlying coverage limits.
Payments under the Company's workers compensation program are guaranteed by
letters of credit and segregated restricted cash balances. As of January 2,
2005, the Company has segregated cash funds of $21.8 million as collateral under
the Company's workers compensation program. Interest on the funds in the trust
account accrues to the Company.
The Company, at its option, may terminate the trust agreement by providing
equivalent amounts of alternative security allowed under the program, including
letters of credit and surety bonds. 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.
MEDICARE SETTLEMENT ISSUES
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports which were
filed with the 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 are
sufficient, it is possible that adjustments resulting from such audits could
result in adjustments to the consolidated financial statements that exceed
established reserves.
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 2, 2005.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedule set
forth in Part IV, Item 15 (a) (1) and (2) of this report are incorporated by
reference into this Item 8.
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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 F-3 and F-4 of this annual report on Form 10-K and are incorporated herein
by reference.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective as of the end of such period to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter ended January 2, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during such
quarter.
ITEM 9B. OTHER INFORMATION
None.
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
1 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 2005 Annual Meeting of Shareholders ("2005 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 2005 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 its 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
-35-
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 2005 Proxy
Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 2005 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 2005 Proxy
Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no such relationships or transactions.
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 2
Appointment of Independent Auditors" to be contained in the Company's 2005 Proxy
Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) FINANCIAL STATEMENTS
Page No.
-----------
- - Report of Independent Registered Public Accounting Firm..................................... F-3 and F-4
- - Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003..................... F-5
- - Consolidated Statements of Operations for the three years ended January 2, 2005............. F-6
- - Consolidated Statements of Changes in Shareholders' Equity for the three years ended
January 2, 2005............................................................................. F-7
- - Consolidated Statements of Cash Flows for the three years ended January 2, 2005............. F-8
- - Notes to Consolidated Financial Statements.................................................. F-9
-36-
(a)(2) FINANCIAL STATEMENT SCHEDULE
- - Schedule II - Valuation and Qualifying Accounts for the three years ended January 2,
2005........................................................................................ F-29
(a)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
3.1 Amended and Restated Certificate of Incorporation of Company (1)
3.2 Certificate of Correction to Certificate of Incorporation, filed
with the Delaware Secretary of State on July 1, 2002 (2)
3.3 Amended and Restated By-Laws of Company (2)
4.1 Specimen of common stock (4)
4.2 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock (1)
4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting
Redeemable Preferred Stock (3)
10.1 Separation Agreement dated August 17, 1999 among Olsten Corporation,
Aaronco Corp. and Adecco SA (1)
10.2 Omnibus Amendment No. 1 dated October 7, 1999 by and among Olsten
Corporation, Aaronco Corp., Adecco SA and Olsten Health Services
Holding Corp. (1)
10.3 Omnibus Amendment No. 2 dated January 18, 2000 by and among Olsten
Corporation, Adecco SA, Olsten Health Services Holding Corp., the
Company and Staffing Acquisition Corporation (1)
10.4 Form of Rights Agreement dated March 2, 2000 between the Company and
EquiServe Trust Company, N.A., as rights agent (3)
10.5 Company's Executive Officers Bonus Plan (1)*
10.6 Company's 1999 Stock Incentive Plan (5)*
10.7 Company's 2004 Equity Incentive Plan (6)*
10.8 Company's Stock & Deferred Compensation Plan for Non-Employee
Directors, as amended and restated as of January 1, 2004 (7)*
10.9 Company's Employee Stock Purchase Plan (1)*
10.10 Company's Nonqualified Retirement and Savings Plan and First,
Second, Third and Fourth Amendments thereto (7)*
10.11 Form of Change in Control Agreement with each of Vernon A. Perry,
Jr., John R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel
(2)* (the Change in Control Agreements are identical in substance
for each of the named officers, except that the Change in Control
Agreements for Messrs. Perry, Potapchuk and Creamer provide in
paragraphs 4(ii) and 4(iii), respectively, for a
-37-
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
multiple of "two" in calculating a payment under each officer's
Agreement and for up to two years of continued employee benefits and
the Change in Control Agreement for Mary Morrisey Gabriel provides
in paragraphs 4(ii) and 4(iii), respectively, for a multiple of
"one" in calculating a payment under her Agreement and for up to one
year of continued employee benefits)
10.12 Form of Severance Agreement with each of Vernon A. Perry, Jr., John
R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel (2)* (the
Severance Agreements are identical in substance for each of the
named officers, except that the Severance Agreements for Messrs.
Perry, Potapchuk and Creamer provide in paragraph 1 for payments of
18 months of severance and the Severance Agreement for Ms. Morrisey
Gabriel provides in paragraph 1 for the payment of 12 months of
severance)
10.13 Employment Agreement dated as of March 22, 2004 with Ronald A.
Malone (8)*
10.14 Change in Control Agreement dated as of March 22, 2004 with Ronald
A. Malone (8)*
10.15 Forms of Notices and Agreements covering awards of stock options and
restricted stock under Company's 2004 Equity Incentive Plan (9)*
10.l6 Summary Sheet of Company compensation to non-employee directors,
effective January 1, 2004 +*
10.17 Performance goals and criteria for 2005 set under Company's
Executive Officers Bonus Plan (10)*
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 (11)
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 (12)
10.20 Second Amendment dated November 26, 2003 to Loan and Security
Agreement dated June 13, 2002 by and between Fleet Capital
Corporation, as Administrative Agent on behalf of the lenders named
therein, Fleet Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (7)
10.21 Third Amendment and Joinder dated February 25, 2004 to Loan and
Security Agreement dated June 13, 2002 by and between Fleet Capital
Corporation, as Administrative Agent on behalf of the lenders named
therein, Fleet Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding Corp. and the
subsidiaries named therein (7)
10.22 Fourth Amendment dated May 26, 2004 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet Capital Corporation, as
Administrative Agent on behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health Services, Inc.,
Gentiva Health Services Holding Corp. and the subsidiaries named
therein (13)
10.23 Asset Purchase Agreement dated as of January 2, 2002 by and between
Accredo Health, Incorporated, the Company and the Sellers named
therein (14)
-38-
EXHIBIT
NUMBER DESCRIPTION
- ------- --------------------------------------------------------------------
10.24 Managed Care Alliance Agreement between CIGNA Health Corporation and
Gentiva CareCentrix, Inc. entered into as of January 1, 2004 (7)
(confidential treatment requested as to portions of this document)
10.25 Amendment dated January 1, 2005 to Managed Care Alliance Agreement
between CIGNA Health Corporation and Gentiva CareCentrix, Inc.
entered into as of January 1, 2004 + (confidential treatment
requested as to portions of this document)
10.26 Consulting Agreement dated as of July 1, 2002 between Gail R.
Wilensky and Gentiva Health Services (USA), Inc. (15)*
10.27 Amendment dated August 7, 2003 to Consulting Agreement dated as of
July 1, 2002 between Gail R. Wilensky and Gentiva Health Services
(USA), Inc. (12)*
21. List of Subsidiaries of Company +
23. Consent of PricewaterhouseCoopers LLP, independent registered public
accounting firm +
31.1 Certification of Chief Executive Officer dated March 17, 2005
pursuant to Rule 13a-14(a) +
31.2 Certification of Chief Financial Officer dated March 17, 2005
pursuant to Rule 13a-14(a) +
32.1 Certification of Chief Executive Officer dated March 17, 2005
pursuant to 18 U.S.C. Section 1350 +
32.2 Certification of Chief Financial Officer dated March 17, 2005
pursuant to 18 U.S.C. Section 1350 +
- ---------------------
(1) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement of Company on Form S-4 dated January 19, 2000 (File No.
333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of Company on Form S-4 dated February 4, 2000 (File No.
333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement of Company on Form S-4 dated February 9, 2000 (File No.
333-88663).
(5) Incorporated herein by reference to Form 10-K of Company for the fiscal
year ended January 2, 2000.
(6) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 8, 2004.
(7) Incorporated herein by reference to Form 10-K of Company for the fiscal
year ended December 28, 2003.
(8) Incorporated herein by reference to Form 10-Q of Company for the quarterly
period ended March 28, 2004.
(9) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended September 26, 2004.
(10) Incorporated herein by reference to Form 8-K of Company dated February 23,
2005 and filed March 1, 2005.
(11) Incorporated herein by reference to Form 8-K of Company dated June 13,
2002 and filed June 21, 2002.
-39-
(12) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended September 28, 2003.
(13) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended June 27, 2004.
(14) Incorporated herein by reference to definitive Proxy Statement of Company
dated May 10, 2002.
(15) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended March 30, 2003.
* Management contract or compensatory plan or arrangement
+ Filed herewith
-40-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
Date: March 17, 2005 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, 2005 By: /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chief Executive Officer and Chairman of the
Board and Director (Principal Executive Officer)
Date: March 17, 2005 By: /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President, Chief Financial Officer,
Treasurer and Secretary (Principal Financial and
Accounting Officer)
Date: March 17, 2005 By: /s/ Edward A. Blechschmidt
--------------------------
Edward A. Blechschmidt
Director
Date: March 17, 2005 By: /s/ Victor F. Ganzi
-------------------
Victor F. Ganzi
Director
Date: March 17, 2005 By: /s/ Stuart R. Levine
--------------------
Stuart R. Levine
Director
Date: March 17, 2005 By: /s/ Mary O'Neil Mundinger
-------------------------
Mary O'Neil Mundinger
Director
Date: March 17, 2005 By: /s/ Stuart Olsten
-----------------
Stuart Olsten
Director
Date: March 17, 2005 By: /s/ Raymond S. Troubh
---------------------
Raymond S. Troubh
Director
Date: March 17, 2005 By: /s/ Josh S. Weston
------------------
Josh S. Weston
Director
Date: March 17, 2005 By: /s/ Gail R. Wilensky
--------------------
Gail R. Wilensky
Director
-41-
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
Page No.
-----------
Management's Responsibility for Financial Statements................................................. F-2
Management's Report on Internal Control over Financial Reporting..................................... F-2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm.............................................. F-3 and F-4
Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003.............................. F-5
Consolidated Statements of Operations for the three years ended January 2, 2005...................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the three years ended
January 2, 2005................................................................................. F-7
Consolidated Statements of Cash Flows for the three years ended January 2, 2005...................... F-8
Notes to Consolidated Financial Statements........................................................... F-9
Schedule II - Valuation and Qualifying Accounts for the three years ended January 2, 2005............ F-29
F-1
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation of the Company's
consolidated financial statements and related information appearing in this
Report. Management believes that the consolidated financial statements fairly
reflect the form and substance of transactions and that the financial statements
reasonably present the Company's financial position and results of operations in
conformity with generally accepted accounting principles. Management also has
included in the Company's financial statements amounts that are based on
estimates and judgments which it believes are reasonable under the
circumstances.
The independent registered public accounting firm audits the Company's
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board and provides an objective, independent review
of the fairness of reported operating results and financial position.
The Board of Directors of the Company has an Audit Committee comprised of
three independent directors. The Audit Committee meets at least quarterly with
financial management, the internal auditors and the independent registered
public accounting firm to review accounting, control, auditing and financial
reporting matters.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of our
management, including our principal executive officer and principal financial
officer, we conducted an evaluation of the effectiveness of our internal control
over financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of January 2, 2005. Our management's
assessment of the effectiveness of our internal control over financial reporting
as of January 2, 2005 has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
is included herein.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Gentiva Health Services, Inc. and Subsidiaries:
We have completed an integrated audit of Gentiva Health Services, Inc. and
Subsidiaries (the "Company") fiscal 2004 consolidated financial statements and
of their internal control over financial reporting as of January 2, 2005 and
audits of their fiscal 2003 and fiscal 2002 consolidated financial statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the accompanying consolidated financial statements listed in the
index appearing under item 15(a)(1) of the Form 10-K present fairly, in all
material respects, the financial position of the Company at January 2, 2005 and
December 28, 2003, and the results of their operations and their cash flows for
each of the three years in the period ended January 2, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15 (a)(2) of the Form 10-K presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
changed the method of accounting for goodwill and other intangibles assets
effective December 31, 2001.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting appearing under
Item 9A, that the Company maintained effective internal control over financial
reporting as of January 2, 2005 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 2, 2005, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating
F-3
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
consider necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
- ---------------------------------
Stamford, Connecticut
March 15, 2005
F-4
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- --------------------
ASSETS
Current assets:
Cash and cash equivalents $ 9,910 $ 75,688
Restricted cash 22,014 21,750
Short-term investments 81,100 20,000
Receivables, less allowance for doubtful accounts of $7,040 and
$7,936 at fiscal year end 2004 and 2003, respectively 132,002 132,998
Deferred tax assets 23,861 26,464
Prepaid expenses and other current assets 6,057 6,524
--------------- --------------------
Total current assets 274,944 283,424
Fixed assets, net 19,687 15,135
Deferred tax assets, net 21,233 28,025
Other assets 16,234 15,929
--------------- --------------------
Total assets $ 332,098 $ 342,513
=============== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,896 $ 23,504
Payroll and related taxes 9,356 12,932
Medicare liabilities 9,949 12,736
Cost of claims incurred but not reported 27,361 28,525
Obligations under insurance programs 34,660 37,200
Other accrued expenses 31,117 32,230
--------------- --------------------
Total current liabilities 138,339 147,127
Other liabilities 21,819 18,207
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000 shares; issued
and outstanding 23,722,408 and 25,598,301 shares, at fiscal year
end 2004 and 2003, respectively 2,372 2,560
Additional paid-in capital 238,929 270,468
Accumulated deficit (69,361) (95,849)
--------------- --------------------
Total shareholders' equity 171,940 177,179
--------------- --------------------
Total liabilities and shareholders' equity $ 332,098 $ 342,513
=============== ====================
See notes to consolidated financial statements.
F-5
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Net revenues $ 845,764 $ 814,029 $ 768,501
Cost of services sold 521,835 531,987 520,901
--------------- ----------------- -----------------
Gross profit 323,929 282,042 247,600
Selling, general and administrative expenses (278,342) (252,334) (276,355)
Depreciation and amortization (7,329) (6,851) (7,185)
--------------- ----------------- -----------------
Operating income (loss) 38,258 22,857 (35,940)
Gain on sale of Canadian investment 946 -- -
Interest income, net 977 441 834
--------------- ----------------- -----------------
Income (loss) from continuing operations before income taxes 40,181 23,298 (35,106)
Income tax (expense) benefit (13,693) 33,468 (18,437)
--------------- ----------------- -----------------
Income (loss) from continuing operations 26,488 56,766 (53,543)
Discontinued operations, net of tax -- -- 191,578
--------------- ----------------- -----------------
Income before cumulative effect of accounting change 26,488 56,766 138,035
Cumulative effect of accounting change, net of tax -- -- (187,068)
--------------- ----------------- -----------------
Net income (loss) $ 26,488 $ 56,766 $ (49,033)
=============== ================= =================
Basic earnings per share:
Income (loss) from continuing operations $ 1.07 $ 2.16 $ (2.05)
Discontinued operations, net of tax -- -- 7.32
Cumulative effect of accounting change, net of tax -- -- (7.14)
--------------- ----------------- -----------------
Net income (loss) $ 1.07 $ 2.16 $ (1.87)
=============== ================= =================
Weighted average shares outstanding 24,724 26,262 26,183
=============== ================= =================
Diluted earnings per share:
Income (loss) from continuing operations $ 1.00 $ 2.07 $ (2.05)
Discontinued operations, net of tax -- -- 7.32
Cumulative effect of accounting change, net of tax -- -- (7.14)
--------------- ----------------- -----------------
Net income (loss) $ 1.00 $ 2.07 $ (1.87)
=============== ================= =================
Weighted average shares outstanding 26,365 27,439 26,183
=============== ================= =================
See notes to consolidated financial statements.
F-6
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED JANUARY 2, 2005
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL
-------------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- ----------- ------------ ------------ -----------
Balance at December 30, 2001 25,638,794 $ 2,564 $ 722,725 $ (103,582) $ 621,707
Comprehensive loss:
Net loss -- -- -- (49,033) (49,033)
Dividends paid ($17.75 per share) -- -- (466,597) -- (466,597)
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 746,416 75 6,896 -- 6,971
----------- ----------- ------------ ------------ -----------
Balance at December 29, 2002 26,385,210 $ 2,639 $ 263,024 $ (152,615) $ 113,048
Comprehensive income:
Net Income -- -- -- 56,766 56,766
Income tax benefits associated with
stock-based compensation -- -- 19,454 -- 19,454
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 651,555 65 2,271 -- 2,336
Repurchase of common stock at cost (1,438,464) (144) (14,281) -- (14,425)
----------- ----------- ------------ ------------ -----------
Balance at December 28, 2003 25,598,301 $ 2,560 $ 270,468 $ (95,849) $ 177,179
Comprehensive income:
Net Income -- -- -- 26,488 26,488
Income tax benefits associated with
the exercise of non-qualified stock options -- -- 1,535 -- 1,535
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 677,247 68 5,072 -- 5,140
Repurchase of common stock at cost (2,553,140) (256) (38,146) -- (38,402)
----------- ----------- ------------ ------------ -----------
Balance at January 2, 2005 23,722,408 $ 2,372 $ 238,929 $ (69,361) $ 171,940
=========== =========== ============ ============ ===========
See notes to consolidated financial statements.
F-7
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FISCAL YEAR ENDED
----------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
OPERATING ACTIVITIES:
Net income (loss) $ 26,488 $ 56,766 $ (49,033)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Income from discontinued operations -- -- (191,578)
Cumulative effect of accounting change -- -- 187,068
Depreciation and amortization 7,329 6,851 7,185
Provision for doubtful accounts 6,722 7,684 4,936
Gain on sale of Canadian investment (946) -- --
Loss (gain) on disposal / writedown of fixed assets 1,361 (209) 951
Stock option tender offer -- -- 21,388
Deferred income tax (benefit) expense 9,114 (35,035) 12,837
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable (5,726) (15,604) 10,281
Prepaid expenses and other current assets 25 3,048 7,825
Current liabilities (10,372) 7,065 6,393
Change in net assets held for sale -- -- 3,300
Other, net 858 137 (3,024)
-------- -------- ---------
Net cash provided by operating activities 34,853 30,703 18,529
-------- -------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets - continuing operations (12,593) (8,777) (4,116)
Purchase of fixed assets - discontinued operations -- -- (2,121)
Proceeds from sale of assets / business 4,123 200 206,564
Acquisition of businesses -- (1,300) --
Purchase of short-term investments available-for-sale (145,950) (10,000) --
Maturities of short-term investments available-for-sale 84,850 -- --
Purchase of short-term investments (10,000) (24,900) --
Maturities of short-term investments 10,000 14,935 --
(Deposits into) withdrawals from restricted cash (264) (21,750) 35,164
-------- -------- ---------
Net cash (used in) provided by investing activities (69,834) (51,592) 235,491
-------- -------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 6,675 2,336 6,971
Change in book overdrafts 1,223 7,425 --
Repurchases of common stock (38,402) (14,425) --
Repayment of capital lease obligations (293) -- --
Debt issuance costs -- -- (1,321)
Cash distribution to shareholders -- -- (203,983)
Payments for stock option tender -- -- (21,388)
Advance paid to Medicare program -- -- (5,038)
-------- -------- ---------
Net cash used in financing activities (30,797) (4,664) (224,759)
-------- -------- ---------
Net change in cash and cash equivalents (65,778) (25,553) 29,261
Cash and cash equivalents at beginning of period 75,688 101,241 71,980
-------- -------- ---------
Cash and cash equivalents at end of period $ 9,910 $ 75,688 $ 101,241
======== ======== =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
For fiscal year 2004, deferred tax benefits associated with stock compensation
deductions of $1.5 million have been credited to shareholders' equity.
For fiscal year 2003, in connection with the reversal of the valuation
allowance, deferred tax benefits associated with stock compensation deductions
of $19.5 million have been credited to shareholders' equity.
For fiscal year 2002, in connection with the sale of the Company's Specialty
Pharmaceutical Services business on June 13, 2002, the Company received
5,060,976 shares of common stock of Accredo Health, Incorporated, which were
subsequently distributed to the Company's shareholders.
See notes to consolidated financial statements.
F-8
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BACKGROUND AND BASIS OF PRESENTATION
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides
comprehensive home health services throughout most of the United States. Gentiva
was incorporated in the state of Delaware on August 6, 1999 and became an
independent publicly owned company on March 15, 2000, when the common stock of
the Company was issued to the stockholders of Olsten Corporation ("Olsten"), the
former parent corporation of the Company (the "Split-Off"). Continuing
operations for all periods presented comprise the operating results of the home
health services business, including, for fiscal 2002, restructuring and other
special charges as described in Note 4.
On June 13, 2002, the Company sold substantially all of the assets of its
specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo") and issued a special dividend to its shareholders as
further described in Note 3. The operating results of the SPS business through
the closing date of the sale to Accredo, including corporate expenses directly
attributable to SPS operations, restructuring and special charges related to the
SPS business, as well as the gain on the sale, net of transaction costs and
related income taxes, are reflected as discontinued operations in the
accompanying consolidated statement of operations for fiscal 2002.
The Company adopted the provisions of Statement of Financial Accounting
Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" as of the
beginning of fiscal 2002. In connection with this adoption, the Company recorded
a non-cash charge, net of taxes, as a cumulative effect of accounting change in
the accompanying consolidated statement of operations in fiscal 2002 as
described in Note 2.
NOTE 2. SUMMARY OF CRITICAL AND OTHER SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company's fiscal year ends on the Sunday
nearest to December 31st, which was January 2, 2005 for fiscal 2004, December
28, 2003 for fiscal 2003 and December 29, 2002 for fiscal 2002. The Company's
fiscal year 2004 includes 53 weeks compared to fiscal years 2003 and 2002 which
include 52 weeks.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions and select accounting policies that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
The most critical estimates relate to revenue recognition, the
collectibility of accounts receivable and related reserves, the cost of claims
incurred but not reported, obligations under workers compensation, professional
liability and employee health and welfare insurance programs and Medicare
settlement issues.
A description of the critical and other significant accounting policies
and a discussion of the significant estimates and judgments associated with such
policies are described below.
CRITICAL ACCOUNTING POLICIES
REVENUE RECOGNITION
Under fee-for-service agreements with patients and commercial and certain
government payers, net revenues are recorded based on net realizable amounts to
be received in the period in which the services and
F-9
products are provided or delivered. Fee-for-service contracts with commercial
payers are traditionally one year in term and renewable automatically on an
annual basis, unless terminated by either party.
Under capitated arrangements with certain managed care customers, net
revenues are recognized based on a predetermined monthly contractual rate for
each member of the managed care plan regardless of the volume of services
covered by the capitation arrangement. Net revenues generated under capitated
agreements were approximately 12 percent, 16 percent, and 16 percent of total
net revenues for fiscal 2004, 2003, 2002, respectively.
Under the Prospective Payment System ("PPS") for Medicare reimbursement,
net revenues are recorded based on a reimbursement rate which varies based on
the severity of the patient's condition, service needs and certain other
factors; revenue is recognized ratably over the period in which services are
provided. Revenue is subject to adjustment during this period if there are
significant changes in the patient's condition during the treatment period or if
the patient is discharged but readmitted to another agency within the same 60
day episodic period. Medicare billings under PPS are initially recognized as
deferred revenue and are subsequently amortized into revenue over an average
patient treatment period. The process for recognizing revenue to be recognized
under the Medicare program is based on certain assumptions and judgments,
including the average length of time of each treatment as compared to a standard
60 day episode, the appropriateness of the clinical assessment of each patient
at the time of certification and the level of adjustments to the fixed
reimbursement rate relating to patients who receive a limited number of visits,
have significant changes in condition or are subject to certain other factors
during the episode. Deferred revenue of approximately $5.5 million and $5.2
million relating to the Medicare PPS program was included in other accrued
expenses in the consolidated balance sheets as of January 2, 2005 and December
28, 2003, respectively.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payer and other reasons unrelated to credit
risk. Revenue adjustments are deducted from gross accounts receivable. These
revenue adjustments are based on significant assumptions and judgments which are
determined by Company management based on historical trends. Third party
settlements resulting in recoveries are recognized as net revenues in the period
in which the funds are received.
Net revenues attributable to major payer sources of reimbursement are as
follows:
2004 2003 2002
---- ---- ----
Medicare 27% 22% 21%
Medicaid and Local Government 18 20 22
Commercial Insurance and Other 55 58 57
--- --- ---
100% 100% 100%
=== === ===
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third party
providers to provide home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services to
patients insured by Cigna. For fiscal years 2004, 2003 and 2002, Cigna accounted
for approximately 31 percent, 36 percent and 38 percent, respectively, of the
Company's total net revenues. The Company extended its relationship with Cigna
by entering into a new national home health care contract effective January 1,
2004, as amended, with the new contract expiring on December 31, 2006. No other
commercial payer accounts for 10 percent or more of the Company's net revenues.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
The process for estimating the ultimate collection of receivables,
particularly with respect to fee-for-service arrangements, involves significant
assumptions and judgments. In this regard, the Company has implemented a
standardized approach to estimate and review the collectibility of its
receivables based on accounts receivable aging trends. Historical collection and
payer reimbursement experience is an integral part of the estimation process
related to determining the allowance for doubtful accounts. In addition, the
Company assesses the current state of its billing functions in order to identify
any known collection or reimbursement issues
F-10
to determine the impact, if any, on its reserve estimates, which involve
judgment. Revisions in reserve estimates are recorded as an adjustment to the
provision for doubtful accounts which is reflected in selling, general and
administrative expenses in the consolidated statements of operations. The
Company believes that its collection and reserve processes, along with the
monitoring of its billing processes, help to reduce the risk associated with
material revisions to reserve estimates resulting from adverse changes in
collection, reimbursement experience and billing functions.
COST OF CLAIMS INCURRED BUT NOT REPORTED
Under capitated arrangements with managed care customers, the Company
estimates the cost of claims incurred but not reported based on applying
actuarial assumptions, historical patterns of utilization to authorized levels
of service, current enrollment statistics and other information. Under
fee-for-service arrangements with certain managed care customers, the Company
also estimates the cost of claims incurred but not reported and the estimated
revenue relating thereto in situations in which the Company is responsible for
care management and patient services are performed by a non-affiliated provider.
The estimate of cost of claims incurred but not reported involves
significant assumptions and judgments which relate to and may vary depending on
the services authorized at each of the Company's regional coordination centers,
historical patterns of service utilization and payment trends. These assumptions
and judgments are evaluated on a quarterly basis and changes in estimated
liabilities for costs of claims incurred but not reported are determined based
on such evaluation.
OBLIGATIONS UNDER INSURANCE PROGRAMS
The Company is obligated for certain costs under various insurance
programs, including workers compensation, professional liability and employee
health and welfare.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk with insurance policies subject to
substantial deductibles and retention amounts. The Company recognizes its
obligations associated with these programs in the period the claim is incurred.
The cost of both reported claims and claims incurred but not reported, up to
specified deductible limits, have generally been estimated based on historical
data, industry statistics, the Company's own home health specific historical
claims experience, current enrollment statistics and other information. Such
estimates and the resulting reserves are reviewed and updated periodically.
For the fiscal year ended December 29, 2002, the Company recorded a
special charge of $6.3 million relating primarily to a refinement in the
estimation process used to determine the Company's actuarially computed workers
compensation and professional liability reserves. Management believes that, as a
result of this refinement, sufficient data exists to allow the Company to more
heavily rely on its own home health specific historical claims experience in
determining the Company's estimates of workers compensation and professional
liability reserves. Previously the Company utilized insurance industry actuarial
information, as well as the Company's historical claims experience in developing
reserve estimates.
The Company maintains insurance coverage on individual claims. The Company
is responsible for the cost of individual workers compensation claims and
individual professional liability claims up to $500,000 per incident which
occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The
Company also maintains excess liability coverage relating to professional
liability and casualty claims which provides insurance coverage for individual
claims of up to $25,000,000 in excess of the underlying coverage limits.
Payments under the Company's workers compensation program are guaranteed by
letters of credit and segregated restricted cash balances.
The Company believes that its present insurance coverage and reserves are
sufficient to cover currently estimated exposures, but there can be no assurance
that the Company will not incur liabilities in excess of recorded reserves or in
excess of its insurance limits.
F-11
MEDICARE SETTLEMENT ISSUES
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports which were
filed with the Centers for Medicare and Medicaid Services ("CMS") and were
subject to audit by the fiscal intermediary engaged by CMS. The fiscal
intermediary has not finalized its audit of the fiscal 2000 cost reports.
Furthermore, settled cost reports relating to certain years prior to fiscal 2000
could be subject to reopening of the audit process by the fiscal intermediary.
During fiscal 2004, the Company recorded a revenue adjustment of $1.0
million to reflect an estimated repayment to Medicare in connection with the
services rendered to certain patients since the inception of PPS on October 1,
2000. In connection with the estimated repayment, CMS has determined that home
care providers should have received lower reimbursements for certain services
rendered to beneficiaries discharged from inpatient hospitals within fourteen
days immediately preceding admission to home healthcare. As of January 2, 2005,
Medicare has not finalized the amounts to be repaid for these items. Although
management believes that established reserves, which are included in Medicare
liabilities in the accompanying balance sheets, are sufficient, it is possible
that adjustments resulting from such audits or the finalization of repayments to
Medicare could result in adjustments to the consolidated financial statements
that exceed established reserves.
OTHER SIGNIFICANT ACCOUNTING POLICIES
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents. Restricted cash
primarily represents segregated cash funds in a trust account designated as
collateral under the Company's insurance programs. The Company, at its option,
may access the cash funds in the trust account by providing equivalent amounts
of alternative security. Interest on all restricted funds accrues to the
Company. Included in cash and cash equivalents are amounts on deposit with
financial institutions in excess of $100,000, which is the maximum amount
insured by the Federal Deposit Insurance Corporation. Management believes that
these financial institutions are viable entities and believes any risk of loss
is remote.
SHORT-TERM INVESTMENTS
The Company's short-term investments consist primarily of AAA-rated
auction rate securities and other debt securities with an original maturity of
more than three months and less than one year on the acquisition date in
accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Investments in debt securities are classified by individual
security into one of three separate categories: available-for-sale,
held-to-maturity or trading.
Available-for-sale investments are carried on the balance sheet at fair
value which for the Company approximates carrying value. Auction rate securities
of $71.1 million and $10.0 million at January 2, 2005 and December 28, 2003,
respectively, are classified as available-for-sale and are available to meet the
Company's current operational needs and accordingly are classified as short-term
investments. The interest rates on auction rate securities are reset to current
interest rates periodically, typically 7, 14 and 28 days. Contractual maturities
of the auction rate securities exceed ten years.
Debt securities which the Company has the intent and ability to hold to
maturity are classified as "held-to-maturity" investments and are reported at
amortized cost which approximates fair value. Held-to-maturity investments,
which have contractual maturities of less than one year, consist of government
agency bonds of $10 million at January 2, 2005 and December 28, 2003.
The Company has no investments classified as trading securities.
F-12
FIXED ASSETS
Fixed assets, including costs of Company developed software, are stated at
cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the life of the lease or the life of the improvement.
GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142")
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens
the criteria for recording intangible assets separate from goodwill. SFAS 142
requires the use of a non-amortization approach to account for purchased
goodwill and certain intangibles. Under a non-amortization approach, goodwill
and certain intangibles are not amortized into results of operations, but
instead are reviewed for impairment and an impairment charge is recorded in the
periods in which the recorded carrying value of goodwill and certain intangibles
is more than its estimated fair value. The Company adopted SFAS 142 as of the
beginning of fiscal 2002. The provisions of SFAS 142 require that a transitional
impairment test be performed as of the beginning of the year the statement is
adopted.
Based on the results of the transitional impairment tests, the Company
determined that an impairment loss relating to goodwill had occurred and
recorded a non-cash charge of $187.1 million, net of a deferred tax benefit of
$30.2 million, as cumulative effect of accounting change in the accompanying
consolidated statement of operations for the fiscal year ended December 29,
2002. The deferred tax benefit was recorded by eliminating a deferred tax
liability of $26.8 million and recording a deferred tax asset of approximately
$39 million, offset by an increase in the tax valuation allowance by the same
amount. During fiscal 2002, the Company also recorded a tax benefit of
approximately $3.4 million relating to tax deductible goodwill. See Note 12 to
the consolidated financial statements.
The provisions of SFAS 142 also require that a goodwill impairment test be
performed annually or on the occasion of other events that indicate a potential
impairment. The annual impairment test of goodwill was performed and indicated
that there was no impairment of goodwill for the fiscal years 2004 and 2003.
Goodwill amounting to $1.2 million was included in Other Assets in the
accompanying consolidated balance sheets as of January 2, 2005 and December 28,
2003.
ACCOUNTING FOR IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS
The Company evaluates the possible impairment of its long-lived assets,
including intangible assets which are amortized pursuant to the provisions of
SFAS 142, under SFAS No. 144, "Accounting for Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"). The Company reviews the recoverability of its
long-lived assets when events or changes in circumstances occur that indicate
that the carrying value of the asset may not be recoverable. Evaluation of
possible impairment is based on the Company's ability to recover the asset from
the expected future pretax cash flows (undiscounted and without interest
charges) of the related operations. If the expected undiscounted pretax cash
flows are less than the carrying amount of such asset, an impairment loss is
recognized for the difference between the estimated fair value and carrying
amount of the asset.
BOOK OVERDRAFTS
Book overdrafts, representing cash accounts with negative book balances
for which there exists no legal right of offset with other accounts, are
considered current liabilities. In this regard, book overdrafts of $8.6 million
at January 2, 2005 and $7.4 million at December 28, 2003 were included in
accounts payable in the accompanying consolidated balance sheets.
STOCK-BASED COMPENSATION PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition
and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148")
encourages, but does not require, companies to record compensation cost for
stock-based compensation plans at fair value. In addition, SFAS 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation, and amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim
F-13
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The Company has chosen to adopt the disclosure-only provisions of SFAS 148
and continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Under this approach, the imputed cost of stock option grants
and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP")
is disclosed, based on the vesting provisions of the individual grants, but not
charged to expense. See Recent Accounting Pronouncements and Note 11.
EARNINGS PER SHARE
Basic and diluted earnings (loss) per share for each period presented has
been computed by dividing the net income (loss) by the weighted average number
of shares outstanding for each respective period. The computations of the basic
and diluted per share amounts for the Company's continuing operations were as
follows (in thousands, except per share amounts):
FOR THE FISCAL YEAR ENDED
--------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Income (loss) from continuing operations $ 26,488 $ 56,766 $ (53,543)
---------- ---------- ----------
Basic weighted average common
shares outstanding 24,724 26,262 26,183
Shares issuable upon the assumed exercise of
stock options and in connection with the ESPP
using the treasury stock method 1,641 1,177 --
---------- ---------- ----------
Diluted weighted average common
shares outstanding 26,365 27,439 26,183
---------- ---------- ----------
Income (loss) from continuing operations per common share:
Basic $ 1.07 $ 2.16 $ (2.05)
Diluted $ 1.00 $ 2.07 $ (2.05)
---------- ---------- ----------
For fiscal year 2002, in accordance with SFAS No. 128 "Earnings Per
Share," the number of common shares used in computing the diluted earnings
(loss) per share for continuing operations was used for discontinued operations,
cumulative effect of accounting change and net income (loss), even though the
impact was antidilutive.
The computation of diluted earnings (loss) per share from continuing
operations for fiscal year 2002 excluded an incremental 1,592,000 shares that
would be issuable upon the assumed exercise of stock options and in connection
with the ESPP using the treasury stock method, since their inclusion would be
antidilutive on earnings.
INCOME TAXES
The Company uses the asset and liability approach to account for income
taxes. Under this method, deferred tax assets and liabilities are recognized for
the expected future tax consequences of differences between the carrying amounts
of assets and liabilities and their respective tax bases using tax rates in
effect for the year in which the differences are expected to reverse. The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in
income in the period when the change is enacted. Deferred tax assets are reduced
by a valuation allowance if, based on the weight of available evidence, it is
more likely than not that some portion or all of the deferred tax assets will
not be realized.
F-14
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument represents the amount at which
the instrument could be exchanged in a current transaction between willing
parties, other than in a forced sale or liquidation. Significant differences can
arise between the fair value and carrying amount of financial instruments that
are recognized at historical amounts.
The carrying amounts of the Company's cash and cash equivalents,
restricted cash, short-term investments, accounts receivable, accounts payable
and certain other current liabilities approximate fair value because of their
short maturity.
DEBT ISSUANCE COSTS
The Company amortizes deferred debt issuance costs over the term of its
credit facility.
In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statements No. 13, and Technical Correction"
("SFAS 145"). SFAS 145 rescinded SFAS No. 4 "Reporting Gains and Losses from
Extinguishment of Debt" ("SFAS 4"), SFAS No. 44 "Accounting for Intangible
Assets of Motor Carriers" ("SFAS 44") and SFAS No. 64 "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements" ("SFAS 64") and amended SFAS No. 13
"Accounting for Leases" ("SFAS 13"). This statement updates, clarifies and
simplifies existing accounting pronouncements. As a result of rescinding SFAS 4
and SFAS 64, the criteria in APB Opinion No. 30 "Reporting the Results of
Operations-Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" will
be used to determine whether gains and losses from extinguishment of debt
receive extraordinary item treatment. The Company adopted SFAS 145, effective
April 1, 2002. During the fiscal year ended December 29, 2002, the impact of
this adoption resulted in the Company recognizing a write-off of approximately
$1.5 million of deferred debt issuance costs associated with the terminated
credit facility which is reflected in selling, general and administrative
expenses in the accompanying consolidated statement of operations and is further
discussed in Note 4.
RECLASSIFICATIONS
Auction rate securities of $10 million, which were previously classified
in cash and cash equivalents due to their liquidity and pricing reset feature,
have been reflected as short-term investments in the consolidated balance sheet
as of December 28, 2003. This reclassification had no impact on the Company's
financial condition, results of operations or cash flows. Certain other
reclassifications have been made to the 2003 and 2002 consolidated financial
statements to conform to the current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based
Payment" ("SFAS 123(R)"). This statement replaces SFAS 123, and supersedes APB
25. SFAS 123(R) requires companies to apply a fair-value-based measurement
method in accounting for share-based payment transactions with employees and to
record compensation cost for all stock awards granted after the required
effective date and to awards modified, repurchased, or cancelled after that
date. In addition, the Company is required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted
awards that remain outstanding at the date of adoption. SFAS 123(R) will be
effective for quarterly periods beginning after June 15, 2005, which for the
Company is the third quarter of fiscal 2005. Management estimates that the
adoption of SFAS 123(R) will reduce earnings between $0.06 and $0.08 per diluted
share in the second half of fiscal 2005.
In April 2004, the Emerging Issues Task Force ("EITF") of the FASB
approved EITF Issue 03-06, "Participating Securities and the Two-Class Method
under FAS 128." EITF Issue 03-06 supersedes the guidance in Topic No. D-95,
"Effect of Participating Convertible Securities on the Computation of Basic
Earnings per Share," and requires the use of the two-class method for
participating securities. The two-class method is an earnings allocation formula
that determines earnings per share for each class of common stock and
participating security according to dividends declared (or accumulated) and
participation rights in undistributed earnings. In addition, EITF Issue 03-06
addresses other forms of participating securities, including options, warrants,
F-15
forwards and other contracts to issue an entity's common stock, with the
exception of stock based compensation subject to the provisions of APB 25 and
SFAS 123. EITF Issue 03-06 is effective for reporting periods beginning after
March 31, 2004 and should be applied by restating previously reported earnings
per share. The adoption of EITF Issue 03-06 did not have a material impact on
the Company's consolidated financial statements.
NOTE 3. DISPOSITIONS
SALE OF CANADIAN INVESTMENT
On March 30, 2004, the Company sold its minority interest in a home care
nursing services business in Canada. The business had been acquired as partial
consideration for the sale of the Company's Canadian operations in the fourth
quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company
received cash proceeds of $4.1 million and recorded a gain on sale of
approximately $0.9 million, which is reflected in the consolidated statement of
operations for year ended January 2, 2005.
SALE OF SPECIALTY PHARMACEUTICAL SERVICES BUSINESS
On June 13, 2002, the Company consummated the sale of its SPS business to
Accredo (the "SPS Sale"). The SPS Sale was effected pursuant to an asset
purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002,
between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein.
Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired
the SPS business in consideration for:
- the payment to the Company of a cash amount equal to $207.5 million
(before a $0.9 million reduction resulting from a closing net book
value adjustment); and
- 5,060,976 shares of Accredo common stock.
Based on the closing price of the Accredo common stock on June 13, 2002
($51.89 per share), the value of the stock consideration was $262.6 million.
In connection with the SPS Sale, the Company's Board of Directors declared
a dividend, payable to shareholders of record on June 13, 2002, of all the
common stock consideration and substantially all the cash consideration received
from Accredo. The cash consideration received by the Company before the closing
net book value adjustment was $207.5 million; however, the amount distributed to
the Company's shareholders was reduced by $3.5 million to $204 million as a
holdback for income taxes the Company expected to incur on the proceeds received
in excess of $460 million as detailed in the Company's proxy statement, dated
May 10, 2002. The special dividend, which was delivered to the distribution
agent on June 13, 2002 for payment to the Company's shareholders, resulted in
shareholders of record on the record date receiving $7.76 in cash and 0.19253
shares of Accredo common stock (valued at $9.99 per share based on the June 13,
2002 closing price of $51.89 per share of Accredo common stock) for each share
of Gentiva common stock held. The total value of the special dividend amounted
to $17.75 per share. Cash was paid in lieu of fractional shares.
In connection with the SPS sale, the Company incurred $16.2 million in
transaction costs which related to investment banking fees, legal and accounting
costs, change in control and other employee related payments and miscellaneous
other costs. SPS revenues and operating results for the fiscal 2002 period
through the closing date of the sale were as follows (in thousands):
F-16
Restructuring charges:
Business realignment activities $ 6,813
--------
Special charges:
Option tender offer 21,388
Settlement costs 7,731
Insurance costs 6,300
Asset writedowns and other 3,824
--------
Total special charges 39,243
--------
Total restructuring and special charges $ 46,056
========
NOTE 4. RESTRUCTURING AND OTHER SPECIAL CHARGES
During fiscal 2002, the Company recorded restructuring and other special
charges aggregating $46.1 million.
FISCAL 2002
BUSINESS REALIGNMENT ACTIVITIES
The Company recorded charges of $6.8 million during the second quarter
ended June 30, 2002 in connection with a restructuring plan. This plan included
the closing and consolidation of seven field locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's SPS business. These charges included
employee severance of $0.9 million relating to the termination of 115 employees
in field locations and certain corporate and administrative departments, and
future lease payments and other associated costs of $5.9 million resulting
principally from the consolidation of office space at the Company's corporate
headquarters and a change in estimated future lease obligations and other costs
in excess of sublease rentals relating to a lease for a subsidiary of the
Company's former parent company which the Company agreed to assume in connection
with its Split-Off in March 2000. These charges were reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002. The major components
of the restructuring charges as well as the activity during fiscal years 2002,
2003 and 2004 were as follows (in thousands):
COMPENSATION
AND SEVERANCE FACILITY LEASE
COSTS AND OTHER COSTS TOTAL
------------- --------------- ------------
FISCAL 2002 CHARGE $ 920 $ 5,893 $ 6,813
Cash expenditures (726) (1,348) (2,074)
---------- ------------ ------------
Balance at December 29, 2002 194 4,545 4,739
Cash expenditures (194) (2,239) (2,433)
---------- ------------ ------------
Balance at December 28, 2003 -- $ 2,306 $ 2,306
Cash expenditures -- (364) (364)
---------- ------------ ------------
Balance at January 2, 2005 -- $ 1,942 $ 1,942
========== ============ ============
The balance of unpaid charges, which will be paid over the remaining lease
terms, was included in other accrued expenses in the consolidated balance
sheets.
F-17
OPTION TENDER OFFER
During the second quarter ended June 30, 2002, the Company effected a cash
tender offer for all outstanding options to purchase its common stock for an
aggregate option purchase price not to exceed $25 million. In connection with
this tender offer, the Company recorded a charge of $21.4 million during the
second quarter of fiscal 2002, which is reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the fiscal year ended December 29, 2002.
SETTLEMENT COSTS
The Company recorded a $7.7 million charge in the second quarter of fiscal
2002 to reflect settlement costs relating to the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation lawsuit as well as estimated settlement
costs related to government inquiries regarding cost reporting procedures
concerning contracted nursing and home health aide costs (see Note 9). These
costs are reflected in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the fiscal year ended
December 29, 2002.
INSURANCE COSTS
The Company recorded a special charge of $6.3 million in the second
quarter of fiscal 2002 related primarily to a refinement in the estimation
process used to determine the Company's actuarially computed workers
compensation and professional liability insurance reserves. This special charge
is reflected in cost of services sold in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002.
ASSET WRITEDOWNS AND OTHER
The Company recorded charges of $3.8 million in the second quarter of
fiscal 2002, consisting primarily of a write-down of inventory and other assets
associated with home medical equipment used in the Company's nursing operations,
and a write-off of deferred debt issuance costs associated with the terminated
credit facility. The charges are reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the fiscal year ended December 29, 2002.
NOTE 5. FIXED ASSETS, NET
(in thousands) USEFUL LIVES JANUARY 2, 2005 DECEMBER 28, 2003
------------ --------------- -----------------
Computer equipment and software 3-5 Years $ 48,122 $ 43,786
Furniture and fixtures 5 Years 22,664 20,031
Buildings and improvements Lease Term 10,452 9,166
Machinery and equipment 5 Years 754 391
-------- --------
81,992 73,374
Less accumulated depreciation (62,305) (58,239)
-------- --------
$ 19,687 $ 15,135
======== ========
Depreciation expense relating to continuing operations was approximately
$7.3 million in fiscal 2004, $6.9 million in fiscal 2003 and $7.2 million in
fiscal 2002.
During the fourth quarter of fiscal 2004, the Company recorded a writedown
of approximately $1.4 million relating to purchased software for which it was
determined there was minimal future value.
NOTE 6. LONG-TERM DEBT
The Company's credit facility, as amended, as described below, provides up
to $55 million in borrowings, including up to $40 million which is available for
letters of credit. The Company may borrow up to a maximum of 80 percent of the
net amount of eligible accounts receivable, as defined, less any reasonable and
customary reserves, as defined, required by the lender.
F-18
At the Company's option, the interest rate on borrowings under the credit
facility is based on the London Interbank Offered Rates (LIBOR) plus 3.0 percent
or the lender's prime rate plus 1.0 percent. In addition, the Company is
required to pay a fee equal to 2.25 percent per annum of the aggregate face
amount of outstanding letters of credit. The Company is also subject to an
unused line fee equal to 0.375 percent per annum of the average daily difference
between the total revolving credit facility amount and the total outstanding
borrowings and letters of credit. If the Company's trailing twelve month
earnings before interest, taxes, depreciation and amortization ("EBITDA"),
excluding certain restructuring costs and special charges, falls below $20
million, the applicable margins for LIBOR and prime rate borrowings will
increase to 3.25 percent and 1.25 percent, respectively, and the letter of
credit and unused line fees will increase to 2.5 percent and 0.50 percent,
respectively. The higher margins and fees were in effect prior to June 1, 2003.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and May 26, 2004, the credit facility was amended to make covenants
relating to acquisitions and stock repurchases less restrictive, provided that
the Company maintains minimum excess aggregate liquidity, as defined in the
amendment, equal to at least $60 million, and to allow for the disposition of
certain assets.
The credit facility further provides that if the agreement is terminated
for any reason, the Company must pay an early termination fee equal to $137,500
if the facility is terminated from June 13, 2004 to June 12, 2005. There is no
fee for termination of the facility subsequent to June 12, 2005. Loans under the
credit facility are collateralized by all of the Company's tangible and
intangible personal property, other than equipment.
Total outstanding letters of credit were approximately $20.2 million at
January 2, 2005 and $20.8 million at December 28, 2003. The letters of credit,
which expire one year from date of issuance, were issued to guarantee payments
under the Company's workers compensation program and for certain other
commitments. There were no borrowings outstanding under the credit facility as
of January 2, 2005. The Company also had outstanding surety bonds of $1.0
million and $0.9 million at January 2, 2005 and December 28, 2003, respectively.
The restricted cash of $22.0 million at January 2, 2005, relates to cash
funds of $21.8 million that have been segregated in a trust account to provide
collateral under the Company's insurance programs. The Company, at its option,
may access the cash funds in the trust account by providing equivalent amounts
of alternative security, including letters of credit and surety bonds. In
addition, restricted cash includes $0.2 million on deposit to comply with New
York state regulations requiring that one month of revenues generated under
capitated agreements in the state be held in escrow. Interest on all restricted
funds accrues to the Company.
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
Net interest income for fiscal years 2004, 2003 and 2002 was approximately
$1.0 million, $0.4 million and $0.8 million, respectively. Net interest income
represented interest income of approximately $2.0 million for fiscal 2004, $1.5
million for fiscal 2003 and $2.4 million for fiscal 2002, partially offset by
fees relating to the revolving credit facility and outstanding letters of
credit.
NOTE 7. CUMULATIVE PREFERRED STOCK
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued
for proceeds of $100,000. Holders of the cumulative preferred stock were
entitled to receive cumulative cash dividends at an annual rate of LIBOR plus 2
percent on the stated liquidation preference of $1,000 per share, payable
quarterly in arrears out of assets legally available for payment of dividends.
The shares of preferred stock that were issued on March 10, 2000 were redeemed
on June 12, 2002 at a redemption price of $1,000 per share.
F-19
NOTE 8. SHAREHOLDERS' EQUITY
The Company's Board of Directors has authorized stock repurchase programs
under which the Company could repurchase and formally retire up to an aggregate
of 4,500,000 shares of its outstanding common stock. A summary of the shares
repurchased under each program follows:
DATE SHARES TOTAL AVERAGE
PROGRAM SHARES REPURCHASED COST COST PER PROGRAM
ANNOUNCED AUTHORIZED AS OF JANUARY 2, 2005 (IN 000'S) SHARE COMPLETION DATE
--------- ---------- --------------------- ---------- ----- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,083 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,500,000 $ 20,779 $ 13.85 July 8, 2004
May 26, 2004 1,000,000 1,000,000 $ 15,291 $ 15.29 October 13, 2004
August 10, 2004 1,000,000 491,604 $ 7,672 $ 15.61
--------- --------- -------- -------
4,500,000 3,991,604 $ 52,825 $ 13.23
========= ========= ======== =======
The repurchases occur periodically in the open market or through privately
negotiated transactions based on market conditions and other factors. During
fiscal 2003, the Company repurchased 1,438,464 shares of its outstanding common
stock at an average cost of $10.03 per share and a total cost of approximately
$14.4 million. During fiscal 2004, the Company repurchased 2,553,140 shares of
its outstanding common stock at an average cost of $15.04 per share and a total
cost of approximately $38.4 million. As of January 2, 2005, the Company had
remaining authorization to repurchase an aggregate of 508,396 shares of its
outstanding common stock. For the period from January 3, 2005 through March 4,
2005, the Company purchased 357,900 shares at an average cost of $15.98 per
share and a total cost of approximately $5.7 million.
NOTE 9. LEGAL MATTERS
LITIGATION
In addition to the matters referenced in this Note 9, the Company is party
to certain legal actions arising in the ordinary course of business including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
The following two legal matters were settled during fiscal years 2004 and
2002, respectively.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002. The Company denied the
allegations of wrongdoing in the complaint. On May 19, 2003, the Company filed a
motion for summary judgment on the issue of liability. On February 6, 2004, the
court granted partial summary judgment for the Company, dismissing two of the
three claims alleged under the False Claims Act and denying summary judgment for
the Company on the wrongful termination claim. In December 2004, the parties
reached a settlement, and the case was dismissed with prejudice on December 21,
2004.
Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case
No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County,
Ohio. In November 2000, the jury in this age-discrimination lawsuit returned a
verdict in favor of the plaintiff against Olsten consisting of $675,000 in
compensatory damages, $30 million in punitive damages and an undetermined amount
of attorneys' fees. The jury found that, although Olsten had lawfully terminated
the plaintiff's employment, its failure to transfer or rehire the plaintiff
rendered Olsten liable to the plaintiff. Following post-trial motion practice by
both parties, the
F-20
trial court, in May 2001, denied all post-trial motions, and entered judgment
for the plaintiff for the full amount of compensatory and punitive damages, and
awarded the plaintiff reduced attorney's fees of $247,938. In June 2001,
defendants timely filed a Notice of Appeal with the Court of Appeals, and the
Company posted a supersedeas bond for the full amount of the judgment, plus
interest. This matter has been settled, and settlement costs were recorded as
part of special charges during the second quarter of fiscal 2002 (see Note 4).
The supersedeas bond was released and the restricted cash of $35.2 million was
released to the Company in September 2002.
INDEMNIFICATIONS
In connection with the Split-Off, the Company agreed to assume, to the
extent permitted by law, and to indemnify Olsten for, the liabilities, if any,
arising out of the home health services business.
In addition, the Company and Accredo agreed to indemnify each other for
breaches of representations and warranties of such party or the non-fulfillment
of any covenant or agreement of such party in connection with the sale of the
Company's SPS business to Accredo on June 13, 2002. The Company also agreed to
indemnify Accredo for the retained liabilities and for tax liabilities, and
Accredo agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the transaction. The
representations and warranties generally survived for the period of two years
after the closing of the transaction, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive, including
the survival of representations and warranties related to healthcare compliance
for three years after the closing of the transaction and the survival of
representations and warranties related to tax matters until thirty days after
the expiration of the applicable statute of limitations period, including any
extensions of the applicable period, subject to certain exceptions. Accredo and
the Company generally may recover indemnification for a breach of a
representation or warranty only to the extent a party's claim exceeds $1 million
for any individual claim, or exceeds $5 million in the aggregate, subject to
certain conditions and only up to a maximum amount of $100 million.
GOVERNMENT MATTERS
PRRB APPEAL
As further described in the Critical Accounting Policies section in Note
2, the Company's annual cost reports, which were filed with CMS, were subject to
audit by the fiscal intermediary engaged by CMS. In connection with the audit of
the Company's 1997 cost reports, the Medicare fiscal intermediary made certain
audit adjustments related to the methodology used by the Company to allocate a
portion of its residual overhead costs. The Company filed cost reports for years
subsequent to 1997 using the fiscal intermediary's methodology. The Company
believed its methodology used to allocate such overhead costs was accurate and
consistent with past practice accepted by the fiscal intermediary; as such, the
Company filed appeals with the Provider Reimbursement Review Board ("PRRB")
concerning this issue with respect to cost reports for the years 1997, 1998 and
1999. The Company's consolidated financial statements for the years 1997, 1998
and 1999 had reflected use of the methodology mandated by the fiscal
intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed an
Administrative Resolution relating to the issues covered by the appeals pending
before the PRRB. Under the terms of the Administrative Resolution, the fiscal
intermediary agreed to reopen and adjust the Company's cost reports for the
years 1997, 1998 and 1999 using a modified version of the methodology used by
the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000, which are currently under audit. The
Administrative Resolution required that the process to (i) reopen all 1997 cost
reports, (ii) determine the adjustments to allowable costs through the issuance
of Notices of Program Reimbursement and (iii) make appropriate payments to the
Company, be completed in early 2004. Cost reports relating to years subsequent
to 1997 were to be reopened after the process for the 1997 cost reports was
completed.
In February 2004, the fiscal intermediary notified the Company that it had
completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was approximately $9 million. The
Company received the funds and recorded the adjustment of $9.0 million as net
revenues during fiscal 2004.
F-21
During the third quarter of fiscal 2004, the fiscal intermediary notified
the Company that it had completed the reopening of all 1998 cost reports and
determined that the adjustment to allowable costs for that year was $1.4
million. The Company received the funds and recorded the adjustment of $1.4
million as net revenues during fiscal 2004.
Although the Company believes that it will likely recover additional funds
as a result of applying the modified methodology discussed above to cost reports
subsequent to 1998, the settlement amounts cannot be specifically determined
until the reopening or audit of each year's cost reports is completed. The
Company expects the 1999 cost reports to be reopened and completed during 2005.
It is likely that future recoveries for the 1999 year resulting from the
application of the modified methodology required by the Administrative
Resolution will be significantly less than the 1997 settlement but greater than
the 1998 settlement. The timeframe for resolving all items relating to the 2000
cost reports cannot be determined at this time.
SUBPOENAS
On April 17, 2003, the Company received a subpoena from the Department of
Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG and DOJ pursuant to their subpoenas and similarly intends
to cooperate fully with any future OIG or DOJ information requests. To the
Company's knowledge, the government has not filed a complaint against the
Company.
In February 2000, the Company received a document subpoena from the OIG.
The subpoena related to its agencies' cost reporting procedures concerning
contracted nursing and home health aide costs. This matter has been settled and
settlement costs were recorded as part of special charges during the second
quarter of fiscal 2002. (See Note 4).
NOTE 10. COMMITMENTS
The Company rents certain properties under non-cancelable, long-term
operating leases, which expire at various dates. Certain of these leases require
additional payments for taxes, insurance and maintenance and, in many cases,
provide for renewal options. Rent expense under all leases was $16.8 million in
2004, $15.3 million in 2003 and $16.2 million in 2002.
Future minimum rental commitments and sublease rentals for all
non-cancelable leases having an initial or remaining term in excess of one year
at January 2, 2005, are as follows (in thousands):
FISCAL YEAR TOTAL COMMITMENT SUBLEASE RENTALS NET
- ----------- ---------------- ---------------- --------
2005 $ 17,022 $ 821 $ 16,201
2006 13,348 814 12,534
2007 8,486 733 7,753
2008 4,933 87 4,846
2009 3,406 -- 3,406
Thereafter 3,330 -- 3,330
NOTE 11. STOCK PLANS
In 2004, the shareholders of the Company approved the 2004 Equity
Incentive Plan (the "2004 Plan") as a replacement for the 1999 Stock Incentive
Plan (the "1999 Plan"). Under the 2004 Plan, 3.5 million shares of
F-22
common stock plus any remaining shares authorized under the 1999 Plan as to
which awards had not been made are available for grant. The maximum number of
shares of common stock for which grants may be made in any calendar year to any
2004 Plan participant is 500,000. The 2004 Plan permits granting of (i)
incentive stock options, (ii) non-qualified stock options, (iii) stock
appreciation rights, (iv) restricted stock, (v) stock units and (vi) cash. The
exercise price of options granted under the 2004 Plan can generally not be less
than the fair market value of the Company's common stock on the date of grant.
As of January 2, 2005, the Company had 3,949,407 shares available for issuance
under the 2004 Plan.
In 1999, the Company adopted the 1999 Plan under which 5 million shares of
common stock were reserved for issuance upon exercise of options thereunder. The
maximum number of shares of common stock for which grants could be made to any
1999 Plan participant in any calendar year was 300,000. These options could be
awarded in the form of incentive stock options ("ISOs") or non-qualified stock
options ("NQSOs"). The option price of an ISO and NQSO could not be less than
100 percent and 85 percent, respectively, of the fair market value at the date
of grant. Effective March 15, 2004, no further options could be awarded under
the 1999 Plan.
In 1999, the Company adopted the Stock & Deferred Compensation Plan for
Non-Employee Directors, which provided for payment of annual retainer fees to
non-employee directors, up to 50 percent of which such directors might elect to
receive in cash and the remainder of which would be paid in the form of shares
of common stock of the Company and also allowed deferral of such payment of
shares until termination of a director's service. The plan was amended and
restated on January 1, 2004 and now provides for the deferral of annual retainer
fees under the plan only into stock units, which are to be paid to non-employee
directors as shares of the Company's common stock following termination of a
director's service. The total number of shares of common stock reserved for
issuance under this plan is 150,000, of which 63,076 shares were available for
future grants as of January 2, 2005. During fiscal 2004, 2003 and 2002, the
Company issued stock units or shares in the amounts of 18,365, 7,575 and
11,928, respectively, under the plan. As of January 2, 2005, 54,611 stock units
were outstanding under the plan.
In 1999, the Company adopted an employee stock purchase plan ("ESPP"). All
employees of the Company, who have been employed for at least eight months and
whose customary employment exceeds twenty hours per week, are eligible to
purchase stock under this plan. The Compensation, Corporate Governance and
Nominating Committee of the Company's Board of Directors administers the plan
and has the power to determine the terms and conditions of each offering of
common stock. The purchase price of the shares under the ESPP is the lesser of
85 percent of the fair market value of the Company's common stock on the first
business day or the last business day of the six month offering period.
Employees may purchase shares having a fair market value of up to $25,000 per
calendar year. The maximum number of shares of common stock that may be sold to
any employee in any offering, however, will generally be 10 percent of that
employee's compensation during the period of the offering. A total of 1,200,000
shares of common stock are reserved for issuance under the employee stock
purchase plan, of which 169,091 shares were available for future issuance as of
January 2, 2005. During fiscal 2004, 2003 and 2002, the Company issued 329,443
shares, 280,664 shares and 166,003 shares, respectively, under the ESPP.
Effective with the sale of the SPS business in June 2002, the Company
commenced a cash tender offer for all of the outstanding options to purchase its
common stock. The tender offer resulted in 1,253,141 options being tendered and
accepted by the Company with 463,829 options remaining outstanding. To preserve
the aggregate intrinsic value of the options, the outstanding options were
converted to new Gentiva options at the ratio of 1 to 3.369, resulting in
converted options of 1,562,646. The exercise price of a new Gentiva stock option
represented 29.7 percent of the corresponding option, pre-conversion.
A summary of Gentiva stock options for fiscal 2004, fiscal 2003 and fiscal
2002 is presented below:
F-23
2004 2003 2002
---------------------------- -------------------------- ------------------------------
WEIGHTED WEIGHTED WEIGHTED
STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
Options outstanding, beginning of year 2,686,296 $ 6.14 2,549,667 $ 4.75 2,346,600 $ 8.61
Granted 1,035,100 12.93 740,900 8.85 1,152,700 7.54
Exercised (347,804) 4.30 (452,338) 2.12 (665,040) 7.73
Cancelled/forfeitures (159,007) 9.97 (151,933) 7.99 (594,098) 8.52
Tendered options -- -- -- -- (1,253,141) 8.54
Converted to new Gentiva options -- -- -- -- 1,562,646 2.63
---------- ---------- ---------- ---------- ---------- ----------
Options outstanding, end of year 3,214,585 $ 8.33 2,686,296 $ 6.14 2,549,667 $ 4.75
========== ========== ========== ========== ========== ==========
Options exercisable, end of year 1,664,893 $ 6.07 1,345,570 $ 4.07 1,421,567 $ 2.53
========== ========== ========== ========== ========== ==========
The following table summarizes information about Gentiva stock options
outstanding at January 2, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ------------------------
NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED
AT AVERAGE AVERAGE AT AVERAGE
JANUARY 2, EXERCISE REMAINING JANUARY 2, EXERCISE
RANGE OF EXERCISE PRICE 2005 PRICE CONTRACTUAL LIFE 2005 PRICE
- -------------------------- ---------- ------- ---------------- ---------- --------
$1.07 to $1.30 38,487 $ 1.28 3.61 38,487 $ 1.28
$1.65 to $1.74 264,801 1.70 5.19 264,801 1.70
$2.02 to $2.10 30,422 2.06 2.49 30,422 2.06
$3.55 to $3.91 419,778 3.89 5.82 419,778 3.89
$7.50 to $7.50 817,697 7.50 7.45 467,083 7.50
$8.13 to $8.60 59,500 8.46 7.66 42,000 8.44
$8.74 to $9.75 626,300 8.86 8.05 271,847 8.74
$12.70 to $12.87 921,600 12.87 9.00 130,475 12.87
$14.19 to $16.43 36,000 15.27 9.26 -- --
--------- ------- ---- --------- ------
$1.07 to $16.43 3,214,585 $ 8.33 7.55 1,664,893 $ 6.07
========= ======= ==== ========= ======
The Company has chosen to adopt the disclosure only provisions of SFAS 148
and continue to account for stock-based compensation using the intrinsic value
method prescribed in APB 25, and related interpretations. Under this approach,
the cost of restricted stock awards is expensed over their vesting period, while
the imputed cost of stock option grants and discounts offered under the
Company's ESPP is disclosed, based on the vesting provisions of the individual
grants, but not charged to expense.
The weighted average fair values of the Company's stock options granted
during fiscal years 2004, 2003 and 2002, calculated using the Black-Scholes
option pricing model, and other assumptions are as follows:
FISCAL YEAR ENDED
--------------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
Risk-free interest rate 3.36% 3.51% 4.15%
Expected volatility 37% 60% 38%
Expected life 6 years 6 years 5 years
Contractual life 10 years 10 years 10 years
Expected dividend yield 0% 0% 0%
Weighted average fair value
of options granted $ 5.47 $ 5.24 $ 3.02
Pro forma compensation expense is calculated for the fair value of the
employee's purchase rights under the ESPP, using the Black-Scholes model.
Assumptions for fiscal years 2004, 2003 and 2002 are as follows:
F-24
FISCAL YEAR ENDED
----------------------------------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
-------------------------- -------------------------- --------------------------
1ST OFFERING 2ND OFFERING 1ST OFFERING 2ND OFFERING 1ST OFFERING 2ND OFFERING
PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD
------------ ------------ ------------ ------------ ------------ ------------
Risk-free interest rate: 1.02% 1.76% 1.25% 0.97% 1.89% 1.77%
Expected volatility 28% 30% 32% 29% 60% 60%
Expected life 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years
Expected dividend yield 0% 0% 0% 0% 0% 0%
The following table presents net income (loss) and basic and diluted
earnings (loss) per common share, had the Company elected to recognize
compensation cost based on the fair value at the grant dates for stock option
awards and discounts granted for stock purchases under the Company's ESPP,
consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in
thousands, except per share amounts):
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Net income (loss) - as reported $ 26,488 $ 56,766 $ (49,033)
Add: Stock-based employee compensation
expense included in reported net
income, net of tax -- -- 13,160
Deduct: Total stock-based compensation
expense determined under fair
value based method for all
awards, net of tax (2,442) (1,575) (5,022)
--------------- ---------------- ---------------
Net income (loss) - pro forma $ 24,046 $ 55,191 $ (40,895)
=============== ================ ===============
Basic income (loss) per share - as reported $ 1.07 $ 2.16 $ (1.87)
Basic income (loss) per share - pro forma $ 0.97 $ 2.10 $ (1.56)
Diluted income (loss) per share - as reported $ 1.00 $ 2.07 $ (1.87)
Diluted income (loss) per share - pro forma $ 0.91 $ 2.01 $ (1.56)
On January 3, 2005, the Company issued 922,300 stock options at an
exercise price of $16.38 per share.
NOTE 12. INCOME TAXES
Comparative analyses of the provision (benefit) for income taxes follows
(in thousands):
FISCAL YEAR ENDED
---------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
---------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Current
Federal $ 3,534 $ -- $ 5,600
State and local 1,048 1,567 --
---------------- ---------------- ----------------
4,582 1,567 5,600
---------------- ---------------- ----------------
Deferred
Federal 10,472 (31,875) 10,114
State and local (1,361) (3,160) 2,723
---------------- ---------------- ----------------
9,111 (35,035) 12,837
---------------- ---------------- ----------------
Provision for income taxes $ 13,693 $ (33,468) $ 18,437
================ ================ ================
A reconciliation of the differences between income taxes computed at
federal statutory rate and provisions (benefits) for income taxes for each year
are as follows (in thousands):
F-25
FISCAL YEAR ENDED
-------------------------------------------------------
JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002
--------------- ----------------- -----------------
(53 WEEKS) (52 WEEKS) (52 WEEKS)
Income tax expense (benefit) computed at Federal statutory tax rate $ 14,063 $ 8,162 $(12,287)
State income taxes, net of Federal benefit (5,034) 1,019 (1,770)
Nondeductible meals and entertainment 237 167 155
Income tax audit adjustments -- (177) 5,439
Deferred rate differential -- 1,142 --
Decrease in Federal valuation allowance -- (44,438) --
Valuation allowance adjustment for adoption of SFAS 142 -- -- 26,859
Increase in State valuation allowance 4,455 -- --
Other (28) 657 41
-------- -------- --------
$ 13,693 $(33,468) $ 18,437
======== ======== ========
Deferred tax assets and deferred tax liabilities are as follows (in
thousands):
JANUARY 2, 2005 DECEMBER 28, 2003
--------------- -----------------
Deferred tax assets
Current:
Reserves and allowances $ 19,348 $ 21,290
Federal net operating loss and other carryforwards 793 4,522
State net operating loss 7,027 444
Other 1,148 208
Less: valuation allowance (4,455) --
-------- --------
Total current deferred tax assets 23,861 26,464
-------- --------
Noncurrent:
Intangible assets 25,772 29,085
-------- --------
Total deferred tax assets 49,633 55,549
Deferred tax liabilities:
Current:
Prepaid expenses (599) --
Noncurrent:
Fixed assets (2,707) 23
Developed software (1,233) (1,083)
-------- --------
Total non-current deferred tax assets, net (3,940) (1,060)
-------- --------
Total deferred tax liabilities (4,539) (1,060)
-------- --------
Net deferred tax assets $ 45,094 $ 54,489
======== ========
Prior to fiscal year 2004, the state tax history of certain subsidiaries
indicated cumulative losses and a lack of state tax audit experience. As a
result, the Company believed there was a remote likelihood that the value of
related state tax loss carryforwards would be realized, and no deferred tax
assets were recorded. During fiscal 2004, these subsidiaries reflected
cumulative income on a state filing basis and certain state tax audits were
settled. The Company performed a review of state net operating loss
carryforwards and recorded a deferred tax asset of $7.0 million in the fourth
quarter of fiscal 2004. A valuation allowance of $4.5 million has been recorded
to recognize that certain state net operating loss carryforwards may expire
before realization.
The Company had maintained a valuation allowance for its deferred tax
assets as of December 29, 2002, since the absence of historical pre-tax income
created uncertainty about the Company's ability to realize tax benefits in
future years. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. The remaining valuation allowance was
reversed at the end of fiscal 2003 based on management's belief that it was more
likely than not that all of the Company's net deferred tax assets would be
realized due to the Company's achieved earnings trends
F-26
and outlook. In this regard, $44.4 million was recorded as an income tax benefit
in fiscal 2003 and $19.5 million was credited directly to shareholders' equity
to reflect the portion of the valuation allowance associated with stock
compensation tax benefits.
At January 2, 2005, the Company had federal tax credit carryforwards of
$0.8 million and state net operating loss carryforwards of $7.0 million.
Income tax payments, including payments associated with discontinued
operations, were $3.8 million, $1.6 million and $7.6 million for fiscal years
2004, 2003 and 2002, respectively.
NOTE 13. BENEFIT PLANS FOR PERMANENT EMPLOYEES
The Company maintains qualified and non-qualified defined contribution
retirement plans for its salaried employees, which provide for a partial match
of employee savings under the plans and for discretionary profit-sharing
contributions based on employee compensation. With respect to the Company's
non-qualified defined contribution retirement plan for salaried employees, all
pre-tax contributions, matching contributions and profit sharing contributions
(and the earnings therein) are held in a Rabbi Trust and are subject to the
claims of the general, unsecured creditors of the Company. All post-tax
contributions are held in a secular trust and are not subject to the claims of
the creditors of the Company. The fair value of the assets held in the Rabbi
Trust and the liability to plan participants as January 2, 2005 and December 28,
2003 totaling approximately $12.9 million and $10.0 million, respectively, are
included in other assets and other liabilities on the accompanying consolidated
balance sheets.
Company contributions under the defined contribution plans were
approximately $2.5 million in 2004, $1.8 million in 2003 and $2.0 million in
2002.
NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(in thousands, except per share amounts)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED JANUARY 2, 2005
Net revenues $213,905(1) $208,248 $198,070(3) $225,541(4)
Gross profit 83,262(1) 78,338 75,531(3) 86,798(4)
Net income 9,230(1) 5,965(2) 4,399(3) 6,894(4)
Earnings Per Share:
Net income - basic 0.36 0.24 0.18 0.29
Net income - diluted 0.34 0.22 0.17 0.27
Weighted average shares outstanding:
Basic 25,542 25,068 24,422 23,865
Diluted 27,084 26,818 26,034 25,487
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
YEAR ENDED DECEMBER 28, 2003
Net revenues $202,016 $208,446 $199,698 $203,869
Gross profit 68,766 69,624 69,241 74,411
Net income 5,201 5,247 4,547 41,771(5)
Earnings Per Share:
Net income - basic 0.19 0.20 0.18 1.62
Net income - diluted 0.19 0.19 0.17 1.53
Weighted average shares outstanding:
Basic 26,696 26,530 25,972 25,852
Diluted 27,772 27,490 27,098 27,225
(1) Net revenues and gross profit for the first quarter of fiscal 2004
include special items of $8.0 million related to the favorable
settlement of the Company's Medicare cost report appeals for 1997
net of a $1 million revenue adjustment to reflect an industry wide
repayment of certain Medicare reimbursements. See Note 9 to the
Company's consolidated financial statements.
F-27
(2) Net income for the second quarter of fiscal 2004 includes $0.9
million relating to a pre-tax gain on the sale of a Canadian
investment. See Note 3 to the Company's consolidated financial
statements.
(3) Net revenues and gross profit for the third quarter of fiscal 2004
include special items of $1.1 million related to the partial
settlement of the Company's Medicare cost report appeals for 1998.
During the third quarter of fiscal 2004, the Company's effective tax
rate was 35.3% due to recognition of certain state net operating
losses. See Notes 9 and 12 to the Company's consolidated financial
statements.
(4) Net revenues and gross profit for the fourth quarter of fiscal 2004
include special items of $0.3 million related to the remaining
settlement of the Company's Medicare cost report appeals for 1998.
During the fourth quarter of fiscal 2004, the Company's effective
tax rate was 18.7% due to recognition of certain state net operating
losses. See Notes 9 and 12 to the Company's consolidated financial
statements.
(5) During the fourth quarter of fiscal 2003, the Company recorded a tax
benefit of $35.0 million associated with management's decision to
reverse the valuation allowance for deferred tax assets. See Note 12
to the Company's consolidated financial statements.
F-28
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JANUARY 2, 2005
(IN THOUSANDS)
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
--------- -------- ---------- ---------
Allowance for Doubtful Accounts:
For the Year Ended January 2, 2005 $ 7,936 $ 6,722 $ (7,618) $ 7,040
For the Year Ended December 28, 2003 9,032 7,684 (8,780) 7,936
For the Year Ended December 29, 2002 10,831 4,936 (6,735) 9,032
Valuation allowance on deferred tax assets:
For the Year Ended January 2, 2005 $ 0 $ 4,455 $ (0) $ 4,455
For the Year Ended December 28, 2003 63,892 0 (63,892) 0
For the Year Ended December 29, 2002 0 63,892 (0) 63,892
F-29