UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 3, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
Delaware 36-4335801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes _X_ No __
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes _X_ No __
The number of shares outstanding of the registrant's Common Stock, as of August 3, 2005, was 23,284,625.
INDEX
PART I - FINANCIAL INFORMATION Page No.
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Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - July 3, 2005 and January 2, 2005 3
Consolidated Statements of Income (Unaudited) - Six Months Ended July 3,
2005 and June 27, 2004 4
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended July
3, 2005 and June 27, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6-18
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 19-32
Item 3. Quantitative and Qualitative Disclosures about Market Risk 32
Item 4. Controls and Procedures 32-33
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33-34
Item 5. Other Information 34-35
Item 6. Exhibits 35
SIGNATURES 36
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Gentiva Health Services, Inc. and Subsidiaries Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
July 3, January 2,
2005 2005
--------- ---------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 36,645 $ 31,924
Short-term investments 46,750 81,100
Receivables, less allowance for doubtful accounts of $8,271
and $7,040 at July 3, 2005 and January 2, 2005, respectively 142,424 132,002
Deferred tax assets 23,134 23,861
Prepaid expenses and other current assets 7,882 6,057
--------- ---------
Total current assets 256,835 274,944
Fixed assets, net 19,951 19,687
Deferred tax assets, net 18,723 21,233
Goodwill 10,613 1,325
Other assets 18,518 14,909
--------- ---------
Total assets $ 324,640 $ 332,098
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 25,462 $ 25,896
Payroll and related taxes 10,413 9,356
Medicare liabilities 8,545 9,949
Cost of claims incurred but not reported 25,881 27,361
Obligations under insurance programs 32,506 34,660
Other accrued expenses 26,707 31,117
--------- ---------
Total current liabilities 129,514 138,339
Other liabilities 18,945 21,819
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 23,263,724 and 23,722,408
shares at July 3, 2005 and January 2, 2005, respectively 2,326 2,372
Additional paid-in capital 230,441 238,929
Accumulated deficit (56,586) (69,361)
--------- ---------
Total shareholders' equity 176,181 171,940
--------- ---------
Total liabilities and shareholders' equity $ 324,640 $ 332,098
========= =========
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See notes to consolidated financial statements.
Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
---------------------- ----------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
--------- --------- --------- ---------
Net revenues $ 220,135 $ 208,248 $ 427,242 $ 422,153
Cost of services sold 138,628 129,910 265,857 260,553
--------- --------- --------- ---------
Gross profit 81,507 78,338 161,385 161,600
Selling, general and administrative expenses (72,658) (67,809) (144,417) (134,178)
Depreciation and amortization (1,911) (1,904) (3,647) (3,749)
--------- --------- --------- ---------
Operating income 6,938 8,625 13,321 23,673
Gain on sale of Canadian investment -- 946 -- 946
Interest income, net 414 208 877 290
--------- --------- --------- ---------
Income before income taxes 7,352 9,779 14,198 24,909
Income tax benefit (expense) 1,298 (3,814) (1,423) (9,714)
--------- --------- --------- ---------
Net income $ 8,650 $ 5,965 $ 12,775 $ 15,195
========= ========= ========= =========
Net income per common share:
Basic $ 0.37 $ 0.24 $ 0.55 $ 0.60
========= ========= ========= =========
Diluted $ 0.35 $ 0.22 $ 0.51 $ 0.56
========= ========= ========= =========
Weighted average shares outstanding:
Basic 23,271 25,068 23,358 25,305
========= ========= ========= =========
Diluted 24,935 26,818 24,981 26,967
========= ========= ========= =========
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See notes to consolidated financial statements.
Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
------------------------------
July 3, June 27,
2005 2004
--------- ---------
OPERATING ACTIVITIES:
Net income $ 12,775 $ 15,195
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 3,647 3,749
Provision for doubtful accounts 3,154 3,414
Gain on sale of Canadian investment -- (946)
Reversal of tax audit reserves (4,200) --
Deferred income tax expense 3,237 7,433
Changes in assets and liabilities:
Accounts receivable (13,576) (4,194)
Prepaid expenses and other current assets (1,677) (1,616)
Current liabilities (13,564) (7,479)
Other, net 33 169
--------- ---------
Net cash (used in) provided by operating activities (10,171) 15,725
--------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets (3,294) (5,493)
Proceeds from sale of assets -- 4,123
Acquisition of business (12,040) --
Purchase of short-term investments available-for-sale (106,900) (25,000)
Maturities of short-term investments available-for-sale 131,250 5,000
Purchase of short-term investments held to maturity -- (10,000)
Maturities of short-term investments held to maturity 10,000 10,000
--------- ---------
Net cash provided by (used in) investing activities 19,016 (21,370)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,791 1,579
Changes in book overdrafts 4,586 (2,557)
Repurchases of common stock (12,325) (14,702)
Repayment of capital lease obligations (176) (162)
--------- ---------
Net cash used in financing activities (4,124) (15,842)
--------- ---------
Net change in cash, cash equivalents and restricted cash 4,721 (21,487)
Cash, cash equivalents and restricted cash at beginning of period 31,924 97,438
--------- ---------
Cash, cash equivalents and restricted cash at end of period $ 36,645 $ 75,951
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds $ 491 $ 3,534
========= =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING
AND FINANCING ACTIVITIES:
Fixed assets acquired under capital lease $ 151 $ 1,443
========= =========
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See notes to consolidated financial statements.
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
Gentiva(R) Health Services, Inc. ("Gentiva" or the "Company") provides comprehensive home health services throughout most of the United States through its Home Healthcare Services and CareCentrix(R) operating segments. See Note 12 for a description of the business segments.
The accompanying interim consolidated financial statements are unaudited, and have been prepared by Gentiva using accounting principles consistent with those described in the Company's annual report on Form 10-K and pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for each period presented. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements. The interim financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America.
2. Accounting Policies
Cash, Cash Equivalents and Restricted Cash
The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. Restricted cash of $22.0 million at July 3, 2005 and January 2, 2005 primarily represents segregated cash funds in a trust account designated as collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security. Interest on all restricted funds accrues to the Company. Included in cash and cash equivalents are amounts on deposit with financial institutions in excess of $100,000, which is the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these financial institutions are viable entities and believes any risk of loss is remote.
Short-Term Investments
The Company's short-term investments consist primarily of AAA-rated auction rate securities and other debt securities with an original maturity of more than three months and less than one year on the acquisition date in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Investments in debt securities are classified by individual security into one of three separate categories: available-for-sale, held-to-maturity or trading.
Available-for-sale investments are carried on the balance sheet at fair value which for the Company approximates carrying value. Auction rate securities of $46.8 million and $71.1
million at July 3, 2005 and January 2, 2005, respectively, are classified as available-for-sale and are expected to be available to meet the Company's current operational needs and accordingly are classified as short-term investments. The interest rates on auction rate securities are reset to current interest rates periodically, typically 7, 14 and 28 days. Contractual maturities of the auction rate securities exceed ten years.
Debt securities which the Company has the intent and ability to hold to maturity are classified as "held-to-maturity" investments and are reported at amortized cost which approximates fair value. Held-to-maturity investments, which have contractual maturities of less than one year, consisted of government agency bonds of $10 million at January 2, 2005.
The Company has no investments classified as trading securities.
3. New Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"). This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes Accounting Principles Board ("APB") Opinion No. 25. SFAS 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for annual periods beginning on or after June 15, 2005, which for the Company is the first quarter of fiscal 2006. The impact of the adoption of SFAS 123(R) on fiscal 2006 results cannot be determined at this time.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and supersedes FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements-an amendment of APB Opinion No. 28" ("SFAS 154"). SFAS 154 provides guidance on accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, which for the Company is fiscal 2006. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated financial statements.
4. Medicare Revenues
Medicare revenues for the first six months of fiscal 2004 included approximately $9 million received in settlement of the Company's appeal filed with the Provider Reimbursement Review Board ("PRRB") related to the reopening of all of its 1997 cost reports (see Note 10), net of a revenue adjustment of $1 million to reflect an estimated repayment to Medicare in connection with services rendered to certain patients since the inception of the Prospective
Payment Reimbursement System ("PPS") in October 2000. The Centers for Medicare & Medicaid Services ("CMS") has determined that homecare providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare.
5. Acquisitions / Dispositions
Heritage Home Care Services Acquisition
On May 1, 2005, the Company completed the purchase of certain assets and the operations of Heritage Home Care Services, Inc. ("Heritage"), a Utah-based provider of home healthcare services, and assumed certain liabilities related to contracts and office leases with respect to the period after the closing date, pursuant to an asset purchase agreement, for cash consideration of $11.5 million, exclusive of working capital requirements. In connection with the acquisition, the Company also incurred transaction costs of $0.5 million. Acquisition costs have been recorded as goodwill ($9.6 million) and identifiable intangible assets ($2.4 million) which are included in Other Assets in the consolidated balance sheet as of July 3, 2005. The allocation of the purchase price is subject to adjustment as the Company is undertaking a valuation analysis of the intangible assets acquired.
Sale of Canadian Investment
On March 30, 2004, the Company sold its minority interest in a home care nursing services business in Canada. The business had been acquired as partial consideration for the sale of the Company's Canadian operations in the fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company received cash proceeds of $4.1 million and recorded a gain on sale of approximately $0.9 million in the second quarter of fiscal 2004.
6. Earnings Per Share
Basic and diluted earnings per share for each period presented has been computed by dividing net income by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts were as follows (in thousands, except per share amounts):
Three Months Ended Six Months Ended
------------------------ ------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- ------- -------
Net income $ 8,650 $ 5,965 $12,775 $15,195
==================================================================================================================================
Basic weighted average common
shares outstanding 23,271 25,068 23,358 25,305
Shares issuable upon the assumed exercise of
stock options and in connection with the
employee stock purchase plan using the
treasury stock method 1,664 1,750 1,623 1,662
------- ------- ------- -------
Diluted weighted average common
shares outstanding 24,935 26,818 24,981 26,967
------- ------- ------- -------
==================================================================================================================================
Net income per common share:
Basic $ 0.37 $ 0.24 $ 0.55 $ 0.60
Diluted $ 0.35 $ 0.22 $ 0.51 $ 0.56
==================================================================================================================================
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7. Revolving Credit Facility, Restricted Cash and Debt
The Company's credit facility, as amended, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender.
At the Company's option, the interest rate on borrowings under the credit facility is based on the London Interbank Offered Rates ("LIBOR") plus 3.0 percent or the lender's prime rate plus 1.0 percent. In addition, the Company is required to pay a fee equal to 2.25 percent per annum of the aggregate face amount of outstanding letters of credit. The Company is also subject to an unused line fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. If the Company's trailing twelve month earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding certain restructuring costs and special charges, falls below $20 million, the applicable margins for LIBOR and prime rate borrowings will increase to 3.25 percent and 1.25 percent, respectively, and the letter of credit and unused line fees will increase to 2.5 percent and 0.50 percent, respectively.
The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, May 26, 2004 and April 4, 2005, the credit facility was amended to make covenants relating to acquisitions, stock repurchases and cash dividends less restrictive, provided that the Company maintains minimum aggregate excess liquidity, as defined, equal to at least $60 million, and to allow for the disposition of certain assets. As of July 3, 2005, the Company was in compliance with the covenants in the credit facility, as amended.
The credit facility provides that subsequent to June 12, 2005, the Company could terminate the credit facility without incurring an early termination fee. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment.
Total outstanding letters of credit were approximately $20.2 million at July 3, 2005 and January 2, 2005. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. There were no borrowings outstanding under the credit facility as of July 3, 2005. The Company also had outstanding surety bonds of $1.3 million and $1.0 million at July 3, 2005 and January 2, 2005, respectively.
The restricted cash of $22.0 million at July 3, 2005 and January 2, 2005 related primarily to cash funds of $21.8 million that have been segregated in a trust account to provide collateral under the Company's
insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. In addition, restricted cash included $0.2 million on deposit to comply with New York state regulations requiring that one month of revenues generated under capitated agreements in the state be held in escrow. Interest on all restricted funds accrues to the Company.
8. Shareholders' Equity
Changes in shareholders' equity for the six months ended July 3, 2005 were as follows (in thousands except share amounts):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
--------- --------- --------- ---------
Balance at January 2, 2005 $ 2,372 $ 238,929 $ (69,361) $ 171,940
Comprehensive income:
Net income -- -- 12,775 12,775
Income tax benefits associated with
stock-based compensation -- 776 -- 776
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (297,616 shares) 29 2,986 -- 3,015
Repurchase of common stock at cost (756,300 shares) (75) (12,250) -- (12,325)
--------- --------- --------- ---------
Balance at July 3, 2005 $ 2,326 $ 230,441 $ (56,586) $ 176,181
========= ========= ========= =========
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Comprehensive income amounted to $8.7 million and $6.0 million for the second quarter of fiscal 2005 and fiscal 2004, respectively, and $12.8 million and $15.2 million for the first six months of fiscal 2005 and fiscal 2004, respectively.
From May 2003 through July 3, 2005, the Company announced five stock repurchase programs, authorized by the Company's Board of Directors, under which the Company could repurchase and retire up to an aggregate of 6,000,000 shares of its outstanding common stock. The repurchases occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. A summary of the status of each share repurchase program through July 3, 2005 follows:
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of July 3, 2005 Total Cost Share Completion Date
--------- ---------- ------------------ ---------- ----- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,082,353 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,500,000 20,779,291 13.85 July 8, 2004
May 26, 2004 1,000,000 1,000,000 15,290,952 15.29 October 13, 2004
August 10, 2004 1,000,000 1,000,000 15,890,390 15.89 April 27, 2005
April 14, 2005 1,500,000 247,904 4,106,995 16.57
-----------------------------------------------------------------
6,000,000 4,747,904 65,149,981 $ 13.72
=================================================================
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A summary of the Company's share repurchase activity follows:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Total Numbers of Shares Purchased 283,800 586,600 756,300 1,014,847
Total Cost $ 4,742,603 $ 8,871,923 $ 12,325,027 $ 14,701,966
Average Cost Per Share $ 16.71 $ 15.12 $ 16.30 $ 14.49
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As of July 3, 2005, the Company had remaining authorization to repurchase an aggregate of 1,252,096 shares of its outstanding common stock.
9. Stock-Based Compensation Plans
The Company has chosen to adopt the disclosure only provisions of SFAS 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"), and continues to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. See Note 3 "New Accounting Standards."
Stock option grants in fiscal 2004 and prior years fully vest over periods ranging from three to six years. Stock option grants in fiscal 2005 fully vest over a four year period based on a vesting schedule which provides for one-third vesting after years one, three and four.
The weighted average fair values of the Company's stock options granted during the first six months of fiscal 2005 and fiscal 2004, calculated using the Black-Scholes option-pricing model, and other assumptions are as follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Weighted average fair value
of options granted $ 6.12 $ 5.47
Risk-free interest rate 3.73% 3.36%
Expected volatility 35% 37%
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
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For stock options granted during the fiscal 2004 period, the expected life is estimated to be two years following the date all options comprising the grant become fully vested and forfeitures are reflected in the calculation as they occur. For stock options granted during the fiscal 2005 period, the expected life of an option is estimated to be 2.5 years following its vesting date and forfeitures are reflected in the calculation using an estimate based on experience.
Pro forma compensation expense is calculated for the fair value of the employee's purchase rights under the ESPP, using the Black-Scholes model. Assumptions for the first six months of fiscal 2005 and fiscal 2004 are as follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Risk-free interest rate 2.63% 1.02%
Expected volatility 27% 28%
Expected life 0.5 years 0.5 years
Expected dividend yield 0% 0%
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The following table presents net income and basic and diluted income per common share had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
Three Months Ended Six Months Ended
------------------------ -------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- -------- --------
Net income - as reported $ 8,650 $ 5,965 $ 12,775 $ 15,195
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of tax (1,024) (717) (2,064) (1,412)
------- ------- -------- --------
Net income - pro forma $ 7,626 $ 5,248 $ 10,711 $ 13,783
======= ======= ======== ========
Basic income per share - as reported $ 0.37 $ 0.24 $ 0.55 $ 0.60
Basic income per share - pro forma $ 0.33 $ 0.21 $ 0.46 $ 0.54
Diluted income per share - as reported $ 0.35 $ 0.22 $ 0.51 $ 0.56
Diluted income per share - pro forma $ 0.31 $ 0.20 $ 0.43 $ 0.51
|
During the first six months of fiscal 2005, the Company granted 939,500 stock options to officers and employees under its existing option plans at an average exercise price of $16.37. At July 3, 2005, there were 3,915,397 options outstanding at a weighted average exercise price of $10.23 per share. During the first six months of fiscal 2005, the Company issued 103,321 shares of common stock under its ESPP.
10. Legal Matters
Litigation
In addition to the matters referenced in this Note 10, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes.
Indemnifications
Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off"). In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business.
In addition, the Company and Accredo Health, Incorporated ("Accredo") agreed to indemnify each other for breaches of representations and warranties of such party or the non-fulfillment of any covenant or agreement of such party in connection with the sale of the Company's Specialty Pharmaceutical Services ("SPS") business to Accredo on June 13, 2002. The Company also agreed to indemnify Accredo for the retained liabilities and for tax liabilities, and Accredo agreed to indemnify the Company for assumed liabilities and the operation of the SPS business after the closing of the transaction. The representations and warranties generally survived for the period of two years after the closing of the transaction, which period expired on June 13, 2004. The representations and warranties related to healthcare compliance survived for the period of three years after the closing of the transaction, which period expired on June 13, 2005. Certain representations and warranties, however, continue to survive, including the survival of representations and warranties related to tax matters until thirty days after the expiration of the applicable statute of limitations period, including any extensions of the applicable period, subject to certain exceptions. Accredo and the Company generally may recover indemnification for a breach of a representation or warranty only to the extent a party's claim exceeds $1 million for any individual claim, or exceeds $5 million in the aggregate, subject to certain conditions and only up to a maximum amount of $100 million.
Government Matters
PRRB Appeal
The Company's annual cost reports, which were filed with CMS, were subject to audit by the fiscal intermediary engaged by CMS. In connection with the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary's methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the PRRB concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company's consolidated financial statements for the
years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company's cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed.
In February 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1997 cost reports and determined that the adjustment to allowable costs for that year was approximately $9 million. The Company received the funds and recorded the adjustment of $9.0 million as net revenues during the first quarter of fiscal 2004.
During the third quarter of fiscal 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1998 cost reports and determined that the adjustment to allowable costs for that year was $1.4 million. The Company received the funds and recorded the adjustment of $1.4 million as net revenues during fiscal 2004.
Although the Company believes that it will likely recover additional funds as a result of applying the modified methodology discussed above to cost reports subsequent to 1998, the settlement amounts cannot be specifically determined until the reopening or audit of each year's cost reports is completed. The Company expects the 1999 cost reports to be reopened and completed during the second half of 2005. It is likely that future recoveries for the 1999 year resulting from the application of the modified methodology required by the Administrative Resolution will be significantly less than the 1997 settlement but greater than the 1998 settlement. The timeframe for resolving all items relating to the 2000 cost reports cannot be determined at this time.
Subpoena
On April 17, 2003, the Company received a subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations ("OIG"). The subpoena seeks information regarding the Company's implementation of settlements and corporate integrity agreements entered into with the government, as well as the Company's treatment on cost reports of employees engaged in sales and marketing efforts. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to the period from January 1, 1998 through September 30, 2000. On February 17, 2004, the Company received a subpoena from the U.S. Department of Justice ("DOJ") seeking additional information related to the matters covered by the OIG subpoena. The Company has provided documents and other information requested by the OIG and DOJ pursuant to their subpoenas and similarly intends to cooperate fully with any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint against the Company.
11. Income Taxes
The Company recorded federal and state income tax benefits of $1.3 million for the second quarter of fiscal 2005, of which $3.3 million represented a current tax benefit and $2.0 million represented a deferred tax provision. For the six months ended July 3, 2005, the Company recorded a federal and state tax provision of $1.4 million representing a current tax benefit of $1.8 million and a deferred tax provision of $3.2 million. The income tax benefit recorded in the second quarter of fiscal 2005 included a $4.2 million release of tax reserves related to the favorable resolution of tax audit issues for the years 1997 through 2000. The Company had agreed to assume responsibility for these items in connection with its Split-Off from Olsten in March 2000. The difference between the federal statutory income tax rate and the Company's effective rate of 10 percent for the first six months is primarily due to the release of tax reserves and state taxes.
Federal and state income taxes of $3.8 million and $9.7 million were recorded for the second quarter and first six months of fiscal 2004, respectively. The difference between the federal statutory income tax rate and the Company's effective tax rate of 39 percent was due primarily to state taxes.
Deferred tax assets and deferred tax liabilities were as follows (in thousands):
July 3, January 2,
2005 2005
-------- --------
Deferred tax assets
Current:
Reserves and allowances $ 18,503 $ 19,348
Federal net operating loss and other carryforwards 523 793
State net operating loss 7,027 7,027
Other 1,536 1,148
Less: valuation allowance (4,455) (4,455)
-------- --------
Total current deferred tax assets 23,134 23,861
Noncurrent:
Intangible assets 23,711 25,772
-------- --------
Total assets 46,845 49,633
Deferred tax liabilities:
Noncurrent:
Fixed assets (2,730) (2,707)
Developed software (1,561) (1,233)
Other (696) (599)
-------- --------
Total non-current deferred tax liabilities (4,987) (4,539)
-------- --------
Net deferred tax assets $ 41,858 $ 45,094
======== ========
|
At July 3, 2005, the Company had federal tax credit carryforwards of $0.5 million and state net operating loss carryforward benefits of $7.0 million.
12. Business Segment Information
Commencing in fiscal 2005, the Company identified two business segments for reporting purposes. The Company believes that this presentation aligns the Company's financial reporting with the manner in which the Company has recently commenced to manage its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments. The Company's operations involve servicing patients and customers through its two business segments: Home Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home nursing and therapy services operations, including specialty programs, Gentiva Rehab Without Walls(R) and Gentiva Consulting.
Direct home nursing and therapy services operations are conducted through licensed and Medicare-certified agencies from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services to pediatric, adult and elder patients. The Company's direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:
o Gentiva Orthopedics Program, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery;
o Gentiva Safe Strides(SM) Program, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling; and
o Gentiva Cardiopulmonary Program, which helps patients and their physicians manage heart and lung health in a home-based environment.
Gentiva Rehab Without Walls provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.
The Company also provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding.
The CareCentrix segment encompasses Gentiva's ancillary care benefit management and the coordination of integrated homecare services for managed care organizations and health benefit plans. CareCentrix operations provide an array of administrative services and coordinate the delivery of home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services for managed care organizations and health plans. CareCentrix accepts case referrals from a wide variety of sources, verifies eligibility and benefits and transfers case requirements to the providers for services to the patient. CareCentrix provides services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data
reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer's enrollees.
Corporate expenses consist of costs relating to executive management and corporate and administrative support functions that are not directly attributable to a specific segment. Corporate and administrative support functions represent primarily information services, accounting and reporting, tax compliance, risk management, procurement, marketing, legal and human resource benefits and administration. For the six months ended July 3, 2005, corporate expenses also included a credit of approximately $0.8 million relating to a favorable arbitration settlement.
The Company's senior management evaluates performance and allocates resources based on operating contributions of the reportable segments, which exclude corporate expenses, depreciation, amortization, and interest income, but include revenues and all other costs directly attributable to the specific segment. Intersegment revenues represent Home Healthcare Services segment revenues generated from services provided to the CareCentrix segment. Segment assets represent net accounts receivable associated with segment activities. Intersegment assets represent accounts receivable associated with services provided by the Home Healthcare Services segment to the CareCentrix segment. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure.
Segment information about the Company's operations is as follows (in thousands):
Home Healthcare
Services CareCentrix Total
-------- ----------- -----
Three months ended July 3, 2005 (unaudited)
-------------------------------------------
Net revenue - segments $ 137,667 $ 87,069 $ 224,736
========= ========
Intersegment revenues (4,601)
---------
Total net revenue $ 220,135
=========
Operating contribution $ 12,111 $ 7,165 $ 19,276
========= ========
Corporate expenses (10,427)
Depreciation and amortization (1,911)
Interest income, net 414
---------
Income before income taxes $ 7,352
=========
Three months ended June 27, 2004 (unaudited)
--------------------------------------------
Net revenue - segments $ 127,801 $ 85,492 $ 213,293
========= ========
Intersegment revenues (5,045)
---------
Total net revenue $ 208,248
=========
Operating contribution $ 13,901 $ 8,515 $ 22,416
========= ========
Corporate expenses (11,887)
Gain on sale of Canadian investment 946
Depreciation and amortization (1,904)
Interest income, net 208
---------
Income before income taxes $ 9,779
=========
Six months ended July 3, 2005 (unaudited)
-----------------------------------------
Net revenue - segments $ 270,750 $166,003 $ 436,753
========= ========
Intersegment revenues (9,511)
---------
Total net revenue $ 427,242
=========
Operating contribution $ 23,717 $ 14,007 $ 37,724
========= ========
Corporate expenses (20,756)
Depreciation and amortization (3,647)
Interest income, net 877
---------
Income before income taxes $ 14,198
=========
Segment assets $ 75,218 $ 68,706 $ 143,924
========= ========
Intersegment assets (1,500)
Corporate assets 182,216
---------
Total assets $ 324,640
=========
Six months ended June 27, 2004 (unaudited)
------------------------------------------
Net revenue - segments $ 265,006 $167,615 $ 432,621
========= ========
Intersegment revenues (10,468)
---------
Total net revenue $ 422,153
=========
Operating contribution $ 35,152 $ 14,929 $ 50,081
========= ========
Corporate expenses (22,659)
Gain on sale of Canadian investment 946
Depreciation and amortization (3,749)
Interest income, net 290
---------
Income before income taxes $ 24,909
=========
Segment assets $ 71,459 $ 64,095 $ 135,554
========= ========
Intersegment assets (1,776)
Corporate assets 203,689
---------
Total assets $ 337,467
=========
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for healthcare reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets the Company operates in;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue associated with
major payer sources;
o ability of customers to pay for services;
o business disruption due to natural disasters or terrorist acts;
o a material shift in utilization within capitated agreements; and
o changes in estimates and judgments associated with critical accounting
policies.
Forward-looking statements are found throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its 2004 Annual Report on Form 10-K, as amended, and various filings with the SEC. The reader is encouraged to review these risk factors and filings.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial position. This discussion and analysis should be read in conjunction with the
Company's consolidated financial statements and related notes included elsewhere in this report.
General
The Company's results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2005, as amended by Form 10-K/A, and in other filings with the SEC.
For a discussion of the Company's critical accounting policies, please refer to Note 2 of Notes to Consolidated Financial Statements in the Company's 2004 Annual Report on Form 10-K, as amended.
Overview
Gentiva is the nation's largest provider of comprehensive home health services, based on revenues derived from the provision of skilled home nursing and therapy services to patients. The Company's services can be delivered across the United States 24 hours a day, 7 days a week. The Company's operations involve servicing patients and customers through its two business segments: Home Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home nursing and therapy services operations, including specialty programs, Gentiva Rehab Without Walls and Gentiva Consulting. The Company's Home Healthcare Services segment conducts its business through more than 350 direct service delivery units operating from more than 250 locations under its Gentiva brand.
Direct home nursing and therapy services operations are conducted through licensed and Medicare-certified agencies located in 35 states, substantially all of which are currently accredited by the Joint Commission on Accreditation of Healthcare Organizations, from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services to pediatric, adult and elder patients. Reimbursement sources include government programs, such as Medicare and Medicaid, and private sources, such as health insurance plans, managed care organizations, long term care insurance plans and personal funds. Gentiva's direct home nursing and therapy operations are organized in five geographic regions, each staffed with clinical, operational and sales teams. Regions are further separated into operating areas. Each operating area includes branch locations through which home healthcare agencies operate. Each agency is led by a director and is staffed with clinical and administrative support staff as well as clinical associates who deliver direct patient care. The clinical associates are employed on either a full-time basis or are paid on a per visit, per shift, per diem or per hour basis.
The Company's direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include:
o Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from joint
replacement or other major orthopedic surgery;
o Gentiva Safe Strides Program, which provides therapies for patients
with balance issues who are prone to injury or immobility as a result
of falling; and
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based environment.
Gentiva Rehab Without Walls provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases.
The Company also provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding.
The CareCentrix segment encompasses Gentiva's ancillary care benefit management and coordination of integrated homecare services for managed care organizations and health benefit plans through a network of more than 2,500 third-party provider locations, as well as Gentiva locations, under its CareCentrix brand. CareCentrix operations provide an array of administrative services and coordinate the delivery of home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services for managed care organizations and health plans. These administrative services are coordinated within four regional coordination centers and are delivered through Gentiva direct home nursing and therapy locations as well as through an extensive nationwide network of third-party provider locations in all 50 states. CareCentrix accepts case referrals from a wide variety of sources, verifies eligibility and benefits and transfers case requirements to the providers for services to the patient. CareCentrix provides services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer's enrollees. Contracts within CareCentrix are structured as fee-for-service, whereby a payer is billed on a per usage basis according to a fee schedule for various services, or as at-risk capitation, whereby the payer remits a monthly payment to the Company based on the number of members enrolled in the health plans under the capitation agreement, subject to certain limitations and coverage guidelines.
Significant Development
On May 1, 2005, the Company completed the purchase of certain assets and the operations of Heritage Home Care Services, Inc. ("Heritage"), a Utah-based provider of home healthcare services, and assumed certain liabilities related to contracts and office leases with respect to the period after the closing date, pursuant to an asset purchase agreement, for cash consideration of $11.5 million, exclusive of working capital requirements. In connection with the acquisition, the Company also incurred transaction costs of $0.5 million. Acquisition
costs have been recorded as goodwill ($9.6 million) and identifiable intangible assets ($2.4 million) which are included in Other Assets in the consolidated balance sheet as of July 3, 2005. The allocation of the purchase price is subject to adjustment as the Company is undertaking a valuation analysis of the intangible assets acquired.
The Heritage operations are expected to increase the Company's annualized revenues by more than $20 million and to be accretive to the Company's fiscal 2005 results.
Results of Operations
Revenues
(Dollars in millions) Second Quarter First Six Months
--------------------------------- ------------------------------
Percentage Percentage
2005 2004 Variance 2005 2004 Variance
---- ---- -------- ---- ---- --------
Medicare $ 65.3 $ 53.8 21.3% $ 127.0 $ 116.4 9.1%
Medicaid and Local Government 37.8 39.0 (3.1%) 74.4 78.2 (4.8%)
Commercial Insurance and Other 117.0 115.4 1.4% 225.8 227.6 (0.8%)
--------------------------------- ------------------------------
$ 220.1 $ 208.2 5.7% $ 427.2 $ 422.2 1.2%
================================= ==============================
|
The Company's net revenues increased by $11.9 million, or 5.7 percent, to $220.1 million for the quarter ended July 3, 2005 as compared to the quarter ended June 27, 2004. For the six months ended July 3, 2005 as compared to the six months ended June 27, 2004, net revenues increased by $5.0 million, or 1.2 percent, to $427.2 million from $422.2 million.
Home Healthcare Services segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. CareCentrix segment revenues are derived from the Commercial Insurance and Other payer group only.
Medicare revenue growth for the fiscal 2005 periods as compared to the fiscal 2004 periods was driven by several factors including: (i) an increase in admissions, including the Company's specialty programs and exclusive of acquired operations, of 14.6 percent for the second quarter and 14.1 percent for the first six months, (ii) reimbursement rate changes, as noted below and (iii) the impact of the Heritage acquisition, which closed on May 1, 2005 and constituted approximately 4.7 percent of the 21.3 percent increase in Medicare revenue for the second quarter and 2.3 percent of the 9.1 percent increase in Medicare revenue for the first six months of the year. These positive factors were offset somewhat for the first six months of the year by the absence of two special items which are described below.
The reimbursement rate changes included a 2.3 percent market basket increase that became effective for patients on service on or after January 1, 2005, partially offset by the elimination of the 5 percent rate increase related to home health services performed in specifically defined rural areas of the country (rural add-on provision) effective for patients on service on or after April 1, 2005. The rate increases relating to the market basket change and rural add-on provision represented incremental revenue of approximately $1.2 million and $2.8 million for the second quarter and first six months of fiscal 2005, respectively.
Medicare revenues for the first six months of fiscal 2004 were positively impacted by two special items of approximately $8.0 million as compared to the first six months of fiscal 2005. The special items represented (i) approximately $9 million received in settlement of the Company's appeal filed with the PRRB related to the reopening of all of its 1997 cost reports and (ii) a revenue adjustment of $1 million to reflect the estimated repayment to Medicare in connection with services rendered to certain patients since the inception of the Prospective Payment Reimbursement System in October 2000. In connection with the estimated repayments, CMS has determined that homecare providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare.
Medicaid and Local Government revenues decreased for the fiscal 2005 periods as compared to the fiscal 2004 periods, due primarily to a reduction in the Company's participation in certain low-margin Medicaid and state and county programs partially offset by an increase in skilled visits within Medicaid programs. Revenues relating to hourly Medicaid and state and county programs decreased $1.7 million for the second quarter fiscal 2005 and $5.5 million for the first six months of fiscal 2005, while revenues relating to intermittent care visits increased $0.6 million for the second quarter of fiscal 2005 and $1.8 million for the first six months of fiscal 2005, as compared to the corresponding periods of fiscal 2004.
Commercial Insurance and Other revenues increased $1.6 million, or 1.4 percent, for the second quarter of fiscal 2005 and decreased $1.8 million for the first six months, as compared to the second quarter and first six months of fiscal 2004. CIGNA Health Corporation ("Cigna") revenues declined by $2.5 million, or 3.7 percent, and $10.2 million, or 7.8 percent, as compared to the second quarter and first six months of fiscal 2004, respectively. This decline was due primarily to a reduction in the number of enrolled Cigna members in 2005 resulting in lower revenues from Cigna's capitated plans, partially offset by volume increases from Cigna Preferred Provider Organization ("PPO") plans. The Cigna revenue decrease was offset by an increase of $4.1 million, or 8.5 percent, for the second quarter and partially offset by an increase of $8.4 million, or 8.8 percent, for the first six months of fiscal 2005, in non-Cigna, Commercial Insurance and Other revenues primarily by unit volume and pricing increases from existing business, as well as new contracts signed during the past year and the impact of adding the Heritage operations.
Home Healthcare Services segment revenues increased $9.9 million, or 7.7 percent, from $127.8 million during the second quarter of fiscal 2004 to $137.7 million during the second quarter of fiscal 2005. For the six months ended July 3, 2005, Home Healthcare Services revenues were $270.7 million, an increase of $5.7 million, or 2.2 percent, from $265.0 million for the first six months of fiscal 2004. Revenues for the first six months of fiscal 2004 were positively impacted by the Medicare special items totaling $8.0 million, as discussed above.
CareCentrix segment revenues increased $1.6 million, or 1.8 percent, from $85.5 million during the second quarter of fiscal 2004 to $87.1 million during the second quarter of fiscal 2005. CareCentrix segment revenues for the first six months of fiscal 2005 were $166.0 million as compared to $167.6 million for the first six months of fiscal 2004, a decline of $1.6 million, or 1.0 percent. This decrease was driven primarily by a decline in revenues from Cigna partially offset by growth in revenues from other managed care customers.
Gross Profit
(Dollars in millions) Second Quarter First Six Months
------------------------------ ------------------------------
2005 2004 Variance 2005 2004 Variance
---- ---- -------- ---- ---- --------
Gross profit $ 81.5 $ 78.3 $ 3.2 $ 161.4 $ 161.6 $ (0.2)
As a percent of revenue 37.0% 37.6% (0.6%) 37.8% 38.3% (0.5%)
|
Gross profit margins in both the second quarter and first six months of fiscal 2005 were negatively impacted by costs for orientation, training and benefits associated with the deployment of recently-hired clinicians as the Company transitions more of its skilled clinical care to a dedicated, full time workforce. In this regard, during the second quarter and first six months of fiscal 2005, the Company increased its full time clinicians by 113 associates and 256 associates, respectively, of which 67 associates were hired in connection with the Heritage acquisition in May 2005. These increases compare to net increases of 46 and 64 associates in the second quarter and first six months of fiscal 2004, respectively. The Company anticipates that it will continue its strategy of hiring full time clinicians throughout fiscal 2005.
Gross margins in both the second quarter and first six months of fiscal 2005 were positively impacted by a favorable change in business mix in the Home Healthcare Services segment in which the increased volume of Medicare business, including growth from higher margin specialty programs, more than offset (i) the anticipated revenue loss in certain lower margin Medicaid and local government programs and (ii) in the CareCentix segment, the negative impact of changes in the complement of services provided to certain customers.
For the first six months of fiscal 2004, the Medicare special items discussed above had a net positive impact of $8.0 million, or 1.2 percentage points, on gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation and amortization, increased $4.9 million to $74.6 million for the quarter ended July 3, 2005, as compared to $69.7 million for the quarter ended June 27, 2004, and $10.1 million to $148.0 million for the six months ended July 3, 2005, as compared to $137.9 million for the six months ended June 27, 2004.
The increases for the second quarter and the first six months of fiscal 2005, as compared to the corresponding periods of fiscal 2004, were attributable to (i) over $1.0 million of field operating costs associated with the Heritage operations following its acquisition in May 2005, (ii) incremental field operating and administrative costs to service increased Medicare volume and develop and manage the Company's growing specialty programs in the Home Healthcare Services segment ($3.5 million for the second quarter and $7.0 million for the first six months of 2005) and (iii) increased selling and patient care coordination expenses, primarily in the Home Healthcare Services segment ($1.2 million for the second quarter and $2.3 million for the first six months of 2005) as well as incremental costs relating primarily to the hiring and orientation of full time clinicians and other personnel. These increases were
partially offset by lower corporate general and administrative expenses ($1.5 million for the second quarter and $1.1 million for the first six months of 2005) and for the six month period, a favorable arbitration settlement ($0.8 million).
Gain on Sale of Canadian Investment
On March 30, 2004, the Company sold its minority interest in a home care nursing services business in Canada. The business had been acquired as partial consideration for the sale of the Company's Canadian operations in the fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company received cash proceeds of $4.1 million and recorded a gain on sale of approximately $0.9 million in the second quarter of fiscal 2004.
Interest Income, Net
Net interest income was $0.4 million for the quarter ended July 3, 2005, and $0.2 million for the quarter ended June 27, 2004. Net interest income included interest income of $0.7 million for the second quarter of fiscal 2005 and $0.5 million for the second quarter of fiscal 2004, partially offset by fees relating to the revolving credit facility and outstanding letters of credit.
Net interest income was $0.9 million for the six months ended July 3, 2005 compared to $0.3 million for the six months ended June 27, 2004. Net interest income for the first six months of fiscal years 2005 and 2004 represented interest income of $1.4 million and $0.8 million, respectively, partially offset by fees relating to the revolving credit facility and outstanding letters of credit.
Income Taxes
The Company recorded federal and state income tax benefits of $1.3 million for the second quarter of fiscal 2005, of which $3.3 million represented a current tax benefit and $2.0 million represented a deferred tax provision. For the six months ended July 3, 2005, the Company recorded a federal and state tax provision of $1.4 million representing a current tax benefit of $1.8 million and a deferred tax provision of $3.2 million. The income tax benefit recorded in the second quarter of fiscal 2005 included a $4.2 million release of tax reserves related to the favorable resolution of tax audit issues for the years 1997 through 2000. The Company had agreed to assume responsibility for these items in connection with its Split-Off from Olsten in March 2000. The difference between the federal statutory income tax rate and the Company's effective rate of 10 percent for the first six months is primarily due to the release of tax reserves and state taxes.
Federal and state income taxes of $3.8 million and $9.7 million were recorded for the second quarter and first six months of fiscal 2004, respectively. The difference between the federal statutory income tax rate and the Company's effective tax rate of 39 percent was due primarily to state taxes.
Net Income
For the second quarter of fiscal 2005, net income was $8.7 million, or $0.35 per diluted share, compared with net income of $6.0 million, or $0.22 per diluted share, for the corresponding period of 2004.
For the first six months of fiscal 2005, net income was $12.8 million, or $0.51 per diluted share, compared with net income of $15.2 million, or $0.56 per diluted share for the first six months of fiscal 2004.
Net income for the second quarter and the first six months of fiscal 2005 included $4.2 million, or $0.17 per diluted share, relating to the favorable resolution of tax audit issues noted in the Income Taxes section above. Net income for the first six months of fiscal 2004 included two special items related to Medicare, noted in the Revenues section above, which had a net positive impact of $4.9 million, or $0.18 per diluted share. Net income for both the second quarter and first six months of fiscal 2004 included a net gain of $0.6 million, or $0.02 per diluted share, on the sale of the Company's minority interest in a home care nursing services business in Canada. See Note 5 to the Company's consolidated financial statements.
Liquidity and Capital Resources
Liquidity
The Company's principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under third party commercial or governmental payer arrangements. The Company used its operating cash balances to fund the acquisition of Heritage of $11.5 million, initial working capital needs of Heritage of over $3.5 million, transaction costs relating to the acquisition of $0.5 million, capital expenditures of $3.3 million, and the repurchase of shares of the Company's common stock of $12.3 million during the first six months of fiscal 2005.
Days Sales Outstanding ("DSO") as of July 3, 2005 increased 2 days from January 2, 2005 to 59 days. The increase in DSO can be attributed to processing delays in adjudicating the Company's claims for payment from TriWest Healthcare Alliance("TriWest").
Working capital at July 3, 2005 was approximately $127 million, a decrease of $10 million as compared to approximately $137 million at January 2, 2005, primarily due to:
o a $30 million decrease in cash, cash equivalents, restricted cash and short-term investments;
o a $10 million increase in accounts receivable;
o a $1 million decrease in deferred tax assets;
o a $2 million increase in prepaid expenses and other assets; and
o a $9 million decrease in current liabilities, consisting of decreases in Medicare liabilities ($2 million), cost of claims incurred but not reported ($2 million), obligations under insurance programs ($2 million), and other accrued expenses ($4 million), partially offset by an increase in payroll and related taxes ($1 million).
The increase in accounts receivable related primarily to incremental receivables relating to the TriWest account, as noted above, and the Heritage operations which were acquired on May 1, 2005. As of July 3, 2005, the Company had not received approval notifications
from CMS which would allow the Company to bill Medicare for services relating to the acquired business. Such notifications were received in late July 2005.
The Company participates in the Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payer classifications are as follows:
Three Months Ended Six Months Ended
------------------------ ------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- -------- ------- --------
Medicare 30% 26% 30% 28%
Medicaid and Local Government 17 19 17 19
Commercial Insurance and Other 53 55 53 53
--- --- --- ---
100% 100% 100% 100%
=== === === ===
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On January 1, 2005, a 2.3 percent market basket rate increase became effective for patients on service on or after January 1, 2005. In addition, Medicare reimbursement for the rural add-on related to home health services performed in specifically defined rural areas of the country decreased by 5 percent, effective for Medicare patients on service as of April 1, 2005. There are certain standards and regulations that the Company must adhere to in order to continue to participate in these programs. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in the Company's exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes it is currently in compliance with these standards and regulations.
The Company is party to a contract with Cigna pursuant to which the Company provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by Cigna. For the second quarter and first six months of fiscal 2005, Cigna accounted for approximately 29 percent and 28 percent of the Company's total net revenues, respectively, compared to approximately 32 percent and 31 percent for the second quarter and first six months of fiscal 2004, respectively. This decrease reflects the reduction in the number of enrolled Cigna members resulting in lower revenues from Cigna's capitated plans. The Company extended its relationship with Cigna by entering into a new national home health care contract, as amended, effective January 1, 2004. The term of the new contract extends to December 31, 2006, and automatically renews thereafter for additional one year terms unless terminated. Under the termination provisions, Cigna has the right to terminate the agreement on December 31, 2005 if it provides 90 days advance written notice to the Company, and each party has the right to terminate at the end of each term thereafter by providing at least 90 days advance written notice prior to the start of the new term. If Cigna chose to terminate or not renew the contract, or to significantly modify its use of the Company's services, there could be a material adverse effect on the Company's cash flow.
Net revenues generated under capitated agreements with managed care payers were approximately 10 percent and 11 percent of total net revenues for the second quarter and first
six months of fiscal 2005, respectively, and 12 percent for the second quarter and first six months of fiscal 2004. Fee-for-service contracts with other commercial payers are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party.
The Company's credit facility, as amended, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender.
At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR plus 3.0 percent or the lender's prime rate plus 1.0 percent. In addition, the Company is required to pay a fee equal to 2.25 percent per annum of the aggregate face amount of outstanding letters of credit. The Company is also subject to an unused line fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. If the Company's trailing twelve month earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding certain restructuring costs and special charges, falls below $20 million, the applicable margins for LIBOR and prime rate borrowings will increase to 3.25 percent and 1.25 percent, respectively, and the letter of credit and unused line fees will increase to 2.5 percent and 0.50 percent, respectively. Total outstanding letters of credit were $20.2 million as of July 3, 2005. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. As of July 3, 2005, there were no borrowings outstanding under the credit facility and the Company had borrowing capacity under the credit facility, after adjusting for outstanding letters of credit, of approximately $35 million.
The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, May 26, 2004 and April 4, 2005, the credit facility was amended to make covenants relating to acquisitions, stock repurchases and cash dividends less restrictive, provided that the Company maintains minimum aggregate excess liquidity, as defined, equal to at least $60 million, and to allow for the disposition of certain assets. As of July 3, 2005, the Company was in compliance with the covenants in the credit facility, as amended.
The credit facility provides that subsequent to June 12, 2005, the Company could terminate the credit facility without incurring an early termination fee. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment.
The credit facility includes provisions, which, if not complied with, could require early payment by the Company. These include customary default events, such as failure to comply with financial covenants, insolvency events, non-payment of scheduled payments, acceleration
of other financial obligations and change in control provisions. In addition, these provisions include an account obligor, whose accounts are more than 25 percent of all accounts of the Company over the previous 12-month period, canceling or failing to renew its contract with the Company and ceasing to recognize the Company as an approved provider of healthcare services, or the Company revoking the lending agent's control over its governmental lockbox accounts. The Company does not have any trigger events in the credit facility that are tied to changes in its credit rating or stock price. As of July 3, 2005, the Company was in compliance with these provisions.
The Company may be subject to workers compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover this risk with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. Such estimates and the resulting reserves are reviewed and updated periodically.
The Company is responsible for the cost of individual workers compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers compensation program are guaranteed by letters of credit and segregated restricted cash balances.
Capital Expenditures
The Company's capital expenditures for the six months ended July 3, 2005 were $3.3 million as compared to $5.5 million for the same period in fiscal 2004, which excludes equipment capitalized under capital lease obligations of $1.4 million. The Company intends to make investments and other expenditures to, among other things, upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry. In this regard, management expects that capital expenditures for fiscal 2005 will range between $12.0 million and $14.0 million. Management expects that the Company's capital expenditure needs will be met through operating cash flow and available cash reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents, restricted cash and short-term investments of approximately $83.4 million as of July 3, 2005. The restricted cash of $22.0 million at July 3, 2005, related primarily to cash funds of $21.8 million that have been segregated in a trust account to provide collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. In addition, restricted cash included $0.2 million on deposit to comply with New York state regulations requiring that one month of revenues
generated under capitated agreements in the state be held in escrow. Interest on all restricted funds accrues to the Company.
The Company anticipates that repayments to Medicare for partial episode payments and prior year cost report settlements will be made periodically through 2005. These amounts were reflected as Medicare liabilities in the accompanying consolidated balance sheets.
From May 2003 through July 3, 2005, the Company announced five stock repurchase programs, authorized by the Company's Board of Directors, under which the Company could repurchase and retire up to an aggregate of 6,000,000 shares of its outstanding common stock. The repurchases occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. During the first six months of fiscal 2005, the Company repurchased 756,300 shares of its outstanding common stock at an average cost of $16.30 per share and a total cost of approximately $12.3 million. As of July 3, 2005, the Company had remaining authorization to repurchase an aggregate of 1,252,096 shares of its outstanding common stock. See also Part II, Item 2, of this Form 10-Q.
Contractual Obligations and Commercial Commitments
At July 3, 2005, the Company had no long-term debt. During the first six months of fiscal 2004, the Company commenced implementation of a five-year capital lease for equipment. Under the terms of the lease the Company capitalized the equipment at its fair market value of approximately $1.4 million, which approximates the present value of the minimum lease payments. Future minimum rental commitments for all non-cancelable leases and purchase obligations at July 3, 2005, are as follows (in thousands):
Payment due by period
---------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
----------------------- ----- ------ --------- --------- -------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations 1,356 462 717 177 --
Operating lease obligations 51,931 17,803 22,067 9,878 2,183
Purchase obligations -- -- -- -- --
-----------------------------------------------------------
Total $53,287 $18,265 $22,784 $10,055 $ 2,183
===========================================================
|
During the second quarter of fiscal 2005, the Company paid $0.8 million to satisfy future obligations relating to a portion of a lease that the Company agreed to assume in connection with the Split-Off in March 2000. Such amount had been accrued in the Company's financial statements.
The Company had total letters of credit outstanding under its credit facility of approximately $20.2 million at July 3, 2005 and January 2, 2005. The letters of credit, which expire one year from date of issuance, are issued to guarantee payments under the Company's workers compensation program and for certain other commitments. The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company's obligations as further discussed above under the heading "Cash Resources and Obligations." The Company also had outstanding surety bonds of $1.3 million and $1.0 million at July 3, 2005 and January 2, 2005, respectively.
The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
Management expects that the Company's working capital needs for fiscal 2005 will be met through operating cash flow and its existing cash balances. The Company may also consider
other alternative uses of cash including, among other things, acquisitions, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company's Board of Directors and may require the approval of its lender. If cash flows from operations, cash resources or availability under the credit facility fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity.
Stock-Based Compensation
In December 2004, FASB issued SFAS 123(R). This statement replaces SFAS No. 123 and supersedes APB 25. SFAS 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for annual periods beginning on or after June 15, 2005, which for the Company is the first quarter of fiscal 2006.
The Company has currently chosen to adopt the disclosure only provisions of SFAS 123, as amended by SFAS 148, and continues to account for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's ESPP is disclosed, based on the vesting provisions of the individual grants, but not charged to expense.
Stock option grants in fiscal 2004 and prior years fully vest over periods ranging from three to six years. Stock option grants in fiscal 2005 fully vest over a four year period based on a vesting schedule which provides for one-third vesting after years one, three and four.
The weighted average fair values of the Company's stock options granted during the first six months of fiscal 2005 and fiscal 2004, calculated using the Black-Scholes option-pricing model, and other assumptions are as follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Weighted average fair value
of options granted $ 6.12 $ 5.47
Risk-free interest rate 3.73% 3.36%
Expected volatility 35% 37%
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
|
For stock options granted during the fiscal 2004 period, the expected life is estimated to be two years following the date all options comprising the grant become fully vested and forfeitures are reflected in the calculation as they occur. For stock options granted during the fiscal 2005 period, the expected life of an option is estimated to be 2.5 years following its vesting date and forfeitures are reflected in the calculation using an estimate based on experience.
Pro forma compensation expense is calculated for the fair value of the employee's purchase rights under the ESPP, using the Black-Scholes model. Assumptions for the first six months of fiscal 2005 and fiscal 2004 are as follows:
Six Months Ended
---------------------------
July 3, June 27,
2005 2004
---- ----
Risk-free interest rate 2.63% 1.02%
Expected volatility 27% 28%
Expected life 0.5 years 0.5 years
Expected dividend yield 0% 0%
|
The following table presents net income and basic and diluted income per common share had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
Three Months Ended Six Months Ended
------------------------ -------------------------
July 3, June 27, July 3, June 27,
2005 2004 2005 2004
------- ------- -------- --------
Net income - as reported $ 8,650 $ 5,965 $ 12,775 $ 15,195
Deduct: Total stock-based compensation expense
determined under fair value based method
for all awards, net of tax (1,024) (717) (2,064) (1,412)
------- ------- -------- --------
Net income - pro forma $ 7,626 $ 5,248 $ 10,711 $ 13,783
======= ======= ======== ========
Basic income per share - as reported $ 0.37 $ 0.24 $ 0.55 $ 0.60
Basic income per share - pro forma $ 0.33 $ 0.21 $ 0.46 $ 0.54
Diluted income per share - as reported $ 0.35 $ 0.22 $ 0.51 $ 0.56
Diluted income per share - pro forma $ 0.31 $ 0.20 $ 0.43 $ 0.51
|
Stock-based compensation expense, net of tax, for the six months ended July 3, 2005 as reflected in the table above included $270,000 relating to options granted in June 2002 which became fully vested during the second quarter of fiscal 2005.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company had no interest rate exposure on fixed rate debt or other market risk at July 3, 2005.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of the end of such period to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms.
Changes in internal control over financial reporting
As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended July 3, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
See Note 10 to the consolidated financial statements included in this report for a description of legal matters and pending legal proceedings, which description is incorporated herein by reference.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number
(a) Total of Shares Purchased of Shares that May
Number (b) Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs or Programs
------ --------- --------- ----------- -----------
April (4/04/05 - 5/01/05) 37,200 $ 17.74 37,200 1,498,696
May (5/02/05 - 5/29/05) 98,100 $ 16.53 98,100 1,400,596
June (5/30/05 - 7/03/05) 148,500 $ 16.58 148,500 1,252,096
------- ------- -------
Total 283,800 $ 16.71 283,800
======= ======= =======
|
(1) On August 10, 2004, the Company announced that its Board of Directors had authorized the repurchase of up to 1,000,000 shares of its outstanding common stock. By the end of the period covered by the table, all of such shares had been repurchased. On April 14, 2005, the Company announced that its Board of Directors had authorized the repurchase of up to 1,500,000 additional shares of its outstanding common stock. By the end of the period covered by the table, 247,904 of such shares had been repurchased.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Shareholders was held on May 6, 2005.
(c) i) The following individuals were elected as Class II directors by votes as follows:
------------------------------------------------------------------ Name Votes FOR Votes WITHHELD ------------------------------------------------------------------ Ronald A. Malone 22,094,534 157,907 ------------------------------------------------------------------ Raymond S. Troubh 18,913,135 3,339,306 ------------------------------------------------------------------ |
ii) The proposal to ratify and approve the appointment of PricewaterhouseCoopers LLP as independent registered public accounting firm of the Company for 2005 was approved by votes as follows:
------------------------------------------------------------------ FOR: 22,143,532 ------------------------------------------------------------------ AGAINST: 81,741 ------------------------------------------------------------------ ABSTAIN: 27,168 ------------------------------------------------------------------ BROKER NONVOTES: 0 ------------------------------------------------------------------ |
iii) The proposal to approve the Company's Executive Officers Bonus Plan, as amended, was approved by votes as follows:
------------------------------------------------------------------ FOR: 17,284,970 ------------------------------------------------------------------ AGAINST: 486,894 ------------------------------------------------------------------ ABSTAIN: 122,911 ------------------------------------------------------------------ BROKER NONVOTES: 4,357,666 ------------------------------------------------------------------ |
iv) The proposal to approve the Company's Employee Stock Purchase Plan, as amended, was approved by votes as follows:
------------------------------------------------------------------ FOR: 16,604,496 ------------------------------------------------------------------ AGAINST: 1,018,664 ------------------------------------------------------------------ ABSTAIN: 271,615 ------------------------------------------------------------------ BROKER NONVOTES: 4,357,666 ------------------------------------------------------------------ |
Item 5. Other Information
Corporate Integrity Agreement
In connection with a July 19, 1999 settlement with various government agencies, Olsten executed a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, effective until August 18, 2004, subject to the Company's filing of a final annual report with the Department of Health and Human Services, Office of Inspector General, in form and substance acceptable to the government. The Company has filed a final annual report and is expecting closure by the government.
The Company believes that it has been in compliance with the corporate integrity agreement and has timely filed all required reports. If the Company has failed to comply with the terms of its corporate integrity agreement,
the Company will be subject to penalties. The corporate integrity agreement applies to the Company's businesses that bill the federal government health programs directly for services, such as its nursing brand (but excludes the SPS business), and focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims. Under the corporate integrity agreement, the Company is required, for example, to maintain a corporate compliance officer to develop and implement compliance programs, to retain an independent review organization to perform annual reviews and to maintain a compliance program and reporting systems, as well as to provide certain training to employees.
Item 6. Exhibits
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Certificate of Incorporation of Company. (1)
3.2 Certificate of Correction to Certificate of Incorporation, filed with the
Delaware Secretary of State on July 1, 2002. (2)
3.3 Amended and Restated By-Laws of Company. (2)
4.1 Specimen of common stock. (4)
4.2 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock. (1)
4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting
Redeemable Preferred Stock. (3)
10.1 Second Amendment dated May 9, 2005 to Managed Care Alliance Agreement
between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered into
as of January 1, 2004* (confidential treatment requested as to portions of
this document)
10.2 Executive Officers Bonus Plan, as amended. (5)+
10.3 Employee Stock Purchase Plan, as amended. (6)+
10.4 Summary Sheet of Company Compensation to Non-Employee Directors, effective
May 6, 2005. (7)+
10.5 Amendment No. 1 dated as of May 6, 2005 to Stock & Deferred Compensation
Plan for Non-Employee Directors, as amended and restated as of January 1,
2004. (7)+
10.6 Form of Amended and Restated Change in Control Agreement with each of
Vernon A. Perry, Jr., John R. Potapchuk, Robert Creamer and Mary
Morrisey-Gabriel. (7)+
31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a).*
31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a).*
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350.*
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section
1350.*
|
(1) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement of Company on Form S-4 dated January 19, 2000 (File No.
333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for the quarterly
period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of Company on Form S-4 dated February 4, 2000 (File No.
333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement of Company on Form S-4 dated February 9, 2000 (File No.
333-88663).
(5) Incorporated herein by reference to Appendix A to definitive Proxy
Statement of Company dated April 6, 2005.
(6) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 6, 2005.
(7) Incorporated herein by reference to Form 10-Q of Company for quarterly
period ended April 3, 2005.
* Filed herewith
+ Management contract or compensatory plan or arrangement
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
(Registrant)
Date: August 8, 2005 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: August 8, 2005 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
|
SECOND AMENDMENT TO
MANAGED CARE ALLIANCE AGREEMENT
THIS AMENDMENT (the "Amendment") is entered into this 9th day of May, 2005 by and between CIGNA Health Corporation, for and on behalf of its CIGNA Affiliates (individually and collectively, "CIGNA"), and Gentiva CareCentrix, Inc. ("MCA").
W I T N E S S E T H
WHEREAS, CIGNA and MCA entered into a Managed Care Alliance Agreement which became effective January 1, 2004 (the "Agreement") whereby MCA agreed to provide or arrange for the provision of certain home health care services to Participants, as that term is defined in the Agreement;
WHEREAS, the parties wish to amend certain provisions of the Agreement as set forth below;
NOW THEREFORE, CIGNA and MCA agree as follows:
1. Effective July 1, 2005, the Agreement is amended to extend to CIGNA's Massachusetts, Maine, New Hampshire, Rhode Island and Vermont markets.
2. Effective July 1, 2005, the Agreement is amended to add Exhibit XXV - CIGNA NEW ENGLAND, attached hereto.
3. The parties agree that Paragraph 10 of the Amendment to the Agreement dated January 1, 2005 is null and void as of the effective date of such Amendment and shall have no force and effect.
To the extent that the provisions in the Agreement, including any prior amendments, conflict with the terms of this Amendment (including the exhibits and schedules hereto), the terms in this Amendment shall supersede and control. All other terms and conditions of the Agreement, as previously amended, including the Program Attachments and the Exhibits attached thereto, shall remain the same and in full force and effect. Capitalized terms not defined herein but defined in the Agreement shall have the same meaning as defined in the Agreement.
This Amendment shall take effect commencing on April 15, 2005
IN WITNESS WHEREOF, CIGNA and MCA have caused their duly authorized representatives to execute this Amendment as of the date first written above.
CIGNA HEALTH CORPORATION
GENTIVA CARECENTRIX, INC.
By:
-------------------------------------
Its: President and COO
-------------------------------------
Dated:
-------------------------------------
|
EXHIBIT XXV
CIGNA NEW ENGLAND
Effective July 1, 2005, the Agreement shall extend to CIGNA's Massachusetts, Maine, New Hampshire, Rhode Island and Vermont (collectively "New England") markets. The terms and conditions of the Agreement, including the applicable Program Attachments, shall apply to Covered Services provided to Participants in New England ("CIGNA New England Participants") except as otherwise provided in this Amendment.
A. Transition of Existing Patients/Provider Issues
Effective July 1, 2005, MCA is responsible for the coordination of all new Covered Home Care Services for CIGNA New England Participants. CIGNA will direct Participating Providers, and coordinators of home care, and CIGNA Health Facilitation Center personnel to utilize MCA as the sole source of Covered Home Care Services for CIGNA New England Participants.
No later than April 1, 2005, CIGNA and MCA agree to cooperate in good faith to establish a transition plan for CIGNA New England Participants. As part of that plan:
o A process to identify CIGNA New England Participants for
transition, as may be required, will be developed. This process
will include CIGNA requesting active CIGNA New England
Participant patient lists from all Participating Providers of
Covered Home Care Services in New England and authorizing MCA to
contact those Participating Providers on behalf of CIGNA. Best
efforts shall be made to produce an initial listing of CIGNA New
England Participants subject to transition, with periodic updates
with additional CIGNA New England Participant names identified
over the April to June 2005 time period.
o CIGNA will provide each CIGNA New England Participant identified
for transition with a transition notice as required by state
regulations as soon as practicable following the issuance of the
initial or subsequent transition listings. MCA and Represented
Providers will be responsible for patient transition activities
subsequent to notice from CIGNA.
o MCA will contact all Represented Providers and notify them of the
requirement to cease all billings to CIGNA for all Covered Home
Care Services and commence billing for such Covered Home Care
Services through MCA.
Further, CIGNA will:
o Terminate or suspend any direct agreements with any CIGNA New England Participating Provider of Covered Home Care Services for HMO, Gatekeeper and PPO Program Plans, effective June 30, 2005.
B. Compensation and Billing.
CIGNA and MCA agree that the terms and conditions applicable to the compensation portions of the Agreement, Exhibits, the applicable Program Attachments and rate schedules shall be applicable to Covered Home Care Services provided to CIGNA New England Participants, except as otherwise provided in this Amendment.
Notwithstanding the capitation rate set forth in the Agreement, should the Baseline PMPM as calculated in Section C below entitled "Baseline PMPM Rate" be below * PMPM, then the capitation rate for CIGNA New England HMO Program and Gatekeeper Program Participants will be the Baseline PMPM as defined
*Confidential Treatment Requested
and calculated in Section C below * (the "NE CAP PMPM") per member per month effective July 1, 2005. The NE CAP PMPM rate shall be effective from July 1, 2005 up to and including December 31, 2005. The NE CAP PMPM rate will be allocated among the existing HMO Program and Gatekeeper Program membership based on the weighted average of membership within each Program.
If the Baseline PMPM is at or above *, then the NE CAP PMPM shall be * for the term of this Amendment.
Between June 1, 2005 and June 30, 2005, MCA shall be reimbursed for all Covered Home Care Services at the existing fee-for-service rates applicable to each Program. CIGNA and MCA agree to Amend the Agreement under: (1) Exhibit A to the HMO Program Attachment - Fee For Service, Reimbursement For Other Services, Rate Area Designations; (2) Exhibit A to the PPO & Indemnity Program Attachment, Reimbursement For Other Services, Rate Area Designations; and (3) Exhibit A to Gatekeeper Program Attachment - Fee For Service, Reimbursement For Other Services, Rate Area Designations to identify Massachusetts and Rhode Island as Rate Area and Rate Designation*.
C. Baseline PMPM Rate.
Attachment 1 Identified TINS contains a listing of Tax Identification Numbers (TINs) for those providers that have historically provided Covered Home Care Services to CIGNA New England Participants. Each TIN is designated on Attachment 1 as either "*" or "*". Attachment 2 Master List of HCPCs represents a listing of Covered Home Care Services provided to CIGNA New England Participants. On Attachment 2, each HCPC is designated as "*" services or "*" services.
No later than *, CIGNA shall provide MCA with a "* Report" for CIGNA New England Participants covered under Commercial HMO, Gatekeeper FlexCare and Open Access/Open Access Plus plans (the "CIGNA New England Managed Care Participants") which will detail any * which meets all of the criteria listed below for the purpose of establishing the Baseline PMPM:
HCPC code on the Master List of HCPCs
Date of Service (*)
* date (*)
The * Report shall include the following fields:
Provider TIN
Provider Name
Product Code
HCPC Code
*
*
Date of Service
Diagnosis Code
*
Member ID
MCA shall conduct a review of the * Report. Any Provider TIN(s) that appear on the * Report but do not appear on Attachment 1 Identified TINS will be reviewed and designated, as may be mutually agreed upon based on previously agreed definitions of setting, as either "*" (*) or "*" (*). Attachment 1 will then be amended to reflect the additional TINs. Any TIN on the * Report with a TIN designated as "*" will not be considered in determining the Baseline PMPM. However, should additional information become available to
*Confidential Treatment Requested
appropriately categorize a provider which either has no TIN and/or no provider name as *, such provider may be redefined.
The "*" shall be the sum of services on the * Report which meets the criteria below:
TINs with a designation "*"
HCPCs with a designation "*" services
Service rendered to CIGNA New England Managed Care Participant
No later than *, CIGNA will provide a report of its monthly membership of CIGNA New England Managed Care Participants for the period *. The "Baseline Membership" will be the summation of this monthly membership for the defined period. The Baseline PMPM shall be determined using the following:
D. Monthly Reporting
Commencing in *, for services provided on or after *, CIGNA will provide MCA with a monthly report detailing any * to CIGNA New England Participants that contained a HCPC code listed on Attachment 2 (the "Leakage Report") no later than the * day of each month, excluding month one (*). The Leakage Report shall contain the following information:
Provider TIN
Provider Name
Product Code
HCPC Code
*
*
Date of Service
*
Diagnosis Code
Member ID
Covered lives for the preceding month.
Should a monthly Leakage Report not be received within * day of the * day of the month following the month that is the subject of the Leakage Report, then for the purposes of the Reconciliation detailed in section E, any * by CIGNA in the calendar month that is the subject of the delayed Leakage Report*. For example, if the * Leakage Report *
E. Reconciliation.
No later than *, CIGNA shall provide MCA with a "Period Close Leakage Report" for the CIGNA New England Participants which will detail any * which meets all of the criteria listed below:
HCPC code on the Master List of HCPCs;
Dates of Service (*); and,
* date *
The Period Close Leakage Report shall include the following fields:
*Confidential Treatment Requested
Provider TIN
Provider Name
Product Code
HCPC Code
*
*
Date of Service
*
Diagnosis Code
Member ID
The parties acknowledge and agree that in the event of CIGNA's inability to provide a Period Close Leakage Report to MCA no later than *.
The Leakage PMPM shall be calculated as follows:
MCA shall conduct a review of the Period Close Leakage Report. Any Provider TIN(s) that appear on the Period Close Leakage Report but do not appear on Attachment 1 Identified TINS will be reviewed and designated, as may be mutually agreed upon based on previously agreed definitions of setting, as either "*" or "*". Attachment 1 will then be amended to reflect the additional TINs. Any TIN on the Period Close Leakage Report with a TIN designated as "*" will not be considered in determining the Leakage PMPM.
The * shall be the sum of services on the "Period Close Leakage Report" which meets the criteria below:
TINs with a designation "*"
HCPCs with a designation "*" services
Services rendered to CIGNA New England Managed Care Participants
Effective PMPM
The * Baseline Membership will be the sum of the monthly membership for CIGNA New England Managed Care Participants for each month during the period *. The * Baseline Membership shall include all months in this time period whether or not CIGNA * Leakage Report *
The Effective PMPM will be the sum of:
1. *
2. *;
3. *"*"; and,
4. * as set forth in this Section E.
Divided by:
The * Baseline Membership
F. Leakage Reconciliation
If the * exceeds the *, then * will be entitled to * (1) * or (2) *. If the
* is less than the *, no * is due *. The parties acknowledge and agree that
the reconciliation process outlined in this Amendment shall be the
exclusive and sole recourse available to * New England Managed Care
Participants.
*Confidential Treatment Requested
G. Cost Reconciliation to *
a. If the * is less than the *, then the variance shall be called the *. For example, if the *.
b. No later than *, MCA will calculate an Actual PMPM as being the * which meet the following criteria:
Dates of Service (*)
* date (*)
* under the capitated arrangement for sevices meeting guidelines for
CIGNA New England Participants covered under HMO Program and
Gatekeeper Program plans
The Cost PMPM is calculated as the NE CAP PMPM less *.
In the event that the * exceeds the *, then * will occur. * shall be entitled to *, but in no event shall that * exceed the value of the *. For example, the NE CAP PMPM is * and Cost PMPM is *, then MCA shall be entitled to (*) and would have no recourse for the remaining *. Example 2: *. Example 3, the NE CAP PMPM is *, then MCA shall be entitled to * and would have no recourse for the remaining *.
c. * will * through an adjustment to the * for * New England Participants covered under HMO Program and Gatekeeper Program plans for the * or, in the event that the *.
*Confidential Treatment Requested
Attachment 1 - Identified TINS
-------------------------------------------------------------------------------------------------------- TIN (Formatted) Provider Name (As provided by CHC) Exhibit Designation -------------------------------------------------------------------------------------------------------- * * * -------------------------------------------------------------------------------------------------------- |
*Confidential Treatment Requested
Attachment 2 - Master List of HCPCs
--------------------------------------------- HCPC Exhibit Designation --------------------------------------------- * * --------------------------------------------- |
EXHIBIT 31.1
CERTIFICATIONS
I, Ronald A. Malone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 8, 2005
/s/ Ronald A. Malone
------------------------------
Ronald A. Malone
Chairman and Chief Executive
Officer
|
EXHIBIT 31.2
CERTIFICATIONS
I, John R. Potapchuk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 8, 2005
/s/ John R. Potapchuk
-------------------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
|
Furnished (but not filed) as an exhibit to the periodic report identified in the Certification.
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Gentiva Health Services, Inc.
(the "Company") on Form 10-Q for the period ended July 3, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald
A. Malone, Chairman and Chief Executive Officer of the Company, certify,
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2005 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive
Officer
|
Furnished (but not filed) as an exhibit to the periodic report identified in the Certification.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended July 3, 2005 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Potapchuk, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: August 8, 2005 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
|