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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2005
Commission File No. 1-15669
GENTIVA HEALTH SERVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 36-4335801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common Stock, par value $.10 per share NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in PART III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes [X] No [ ]
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 25, 2004, the last business day of
registrant's most recently completed second fiscal quarter, was $402,788,010
based on the closing price of the Common Stock on the Nasdaq National Market on
such date.
The number of shares outstanding of the registrant's Common Stock, as of
March 4, 2005, was 23,436,656.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant's definitive Proxy
Statement, to be filed not later than 120 days after the end of the fiscal year
covered by this Report, for the registrant's 2005 Annual Meeting of Shareholders
is incorporated by reference into PART III.
PART I
ITEM 1. BUSINESS
Special Caution Regarding Forward-Looking Statements
Certain statements contained in this annual report on Form 10-K,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects," "assumes," "trends" and similar
expressions, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
based upon the Company's current plans, expectations and projections about
future events. However, such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
- general economic and business conditions;
- demographic changes;
- changes in, or failure to comply with, existing governmental
regulations;
- legislative proposals for healthcare reform;
- changes in Medicare and Medicaid reimbursement levels;
- effects of competition in the markets the Company operates in;
- liability and other claims asserted against the Company;
- ability to attract and retain qualified personnel;
- availability and terms of capital;
- loss of significant contracts or reduction in revenues associated
with major payer sources;
- ability of customers to pay for services;
- business disruption due to natural disasters or terrorist acts;
- a material shift in utilization within capitated agreements; and
- changes in estimates and judgments associated with critical
accounting policies.
For a detailed discussion of these and other factors that could cause the
Company's actual results to differ materially from the results contemplated by
the forward-looking statements, please refer to the "Risk Factors" section in
this Item 1, to Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this report. The reader
should not place undue reliance on forward-looking statements, which speak only
as of the date of this report. Except as required under the federal securities
laws and the rules and regulations of the Securities and Exchange Commission
("SEC"), the Company does not have any intention or obligation to publicly
release any revisions to forward-looking statements to reflect unforeseen or
other events after the date of this report. The Company has provided a detailed
discussion of risk factors within this annual report on Form 10-K and various
filings with the SEC. The reader is encouraged to review these risk factors and
filings.
INTRODUCTION
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides home
health services throughout most of the United States. Gentiva was incorporated
in the state of Delaware on August 6, 1999 and became an independent publicly
owned company on March 15, 2000, when the common stock of the Company was issued
to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"),
the former parent corporation of the Company (the "Split-Off"). Prior to the
Split-Off, all of the assets and liabilities of Olsten's health services
business (formerly known as Olsten Health Services) were transferred to the
Company pursuant to a separation agreement and other agreements among Gentiva,
Olsten and Adecco SA ("Adecco").
In October 2000, the Company consummated the sale of its health care
staffing services business and received cash proceeds of $66.5 million. In
November 2000, the Company finalized the sale of its home care nursing services
operations in Canada.
On June 13, 2002, the Company sold substantially all of the assets of its
specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo") and received payment of cash in the
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amount of $207.5 million (before a $0.9 million reduction resulting from a
closing net book value adjustment) and 5,060,976 shares of Accredo common stock
(valued at $262.6 million, based on the closing price of Accredo common stock on
the Nasdaq National Market on June 13, 2002). The cash consideration (less a
holdback of $3.5 million for certain income taxes the Company expected to incur)
and the Accredo common stock were then distributed as a special dividend to the
Company's shareholders.
Information included in this annual report on Form 10-K refers to the
Company's continuing home health services business, unless the context indicates
otherwise.
HOME HEALTH SERVICES
The Company's home health services business is conducted through more than
350 direct service delivery units operating from approximately 250 locations
under its Gentiva(R) brand and through a network of more than 2,000 third-party
provider locations, as well as Gentiva locations, under its CareCentrix(R)
brand. CareCentrix manages home healthcare services for managed care
organizations throughout the United States.
Gentiva operates licensed and Medicare-certified nursing agencies located
in 35 states, substantially all of which are currently accredited by the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO). These agencies
provide various combinations of skilled nursing and therapy services,
paraprofessional nursing services and homemaker services to pediatric, adult and
elder patients. Reimbursement sources include government programs, such as
Medicare and Medicaid, and private sources, such as health insurance plans,
managed care organizations, long term care insurance plans and personal funds.
Gentiva's direct home nursing and therapy operations are organized in five
geographic regions, each staffed with clinical, operational and sales teams.
Regions are further separated into operating areas. Each operating area includes
branch locations through which home healthcare agencies operate. Each agency is
led by a director and is staffed with clinical and administrative support staff
as well as clinical associates who deliver direct patient care. The clinical
associates are employed on either a full-time basis or are paid on a per visit,
per shift, per diem or per hour basis.
CareCentrix operations provide an array of administrative services and
coordinate the delivery of home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services for
managed care organizations and health plans. These administrative services are
coordinated within four regional coordination centers and are delivered through
Gentiva direct home nursing and therapy locations as well as through an
extensive nationwide network of third-party provider locations in all 50 states.
CareCentrix accepts case referrals from a wide variety of sources, verifies
eligibility and benefits and transfers case requirements to the providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data reporting and
analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payer is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payer remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
The Company's home health services business also delivers services to its
customers through other focused specialty programs that include:
- Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from joint
replacement or other major orthopedic surgery;
- Gentiva Safe Strides(SM) Program, which provides therapies for
patients with balance issues who are prone to injury or immobility
as a result of falling; and
- Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based environment.
In addition, Gentiva Rehab Without Walls(R) provides home and
community-based neurorehabilitation therapies for patients with traumatic brain
injury, cerebrovascular accident injury and acquired brain injury, as well as a
number of other complex rehabilitation cases. Of the 13 locations where Gentiva
Rehab Without Walls operates, 11 locations have been accredited by the
Commission on Accreditation of Rehabilitation Facilities ("CARF"). The Company
expects the remaining two locations to apply for accreditation by CARF during
2005.
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The Company also provides consulting services to home health agencies
through its Gentiva Consulting unit. These services include billing and
collection activities, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
PAYERS
Net revenues attributable to major payer sources of reimbursement are as
follows:
2004 2003 2002
---- ---- ----
Medicare 27% 22% 21%
Medicaid and Local Government 18 20 22
Commercial Insurance and Other 55 58 57
--- --- ---
100% 100% 100%
=== === ===
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third-party
providers to provide home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services to
patients insured by Cigna. For fiscal years 2004, 2003 and 2002, Cigna accounted
for approximately 31 percent, 36 percent and 38 percent, respectively, of the
Company's net revenues.
The Company extended its relationship with Cigna by entering into a new
national home healthcare contract effective January 1, 2004, as amended, with
the new contract expiring on December 31, 2006. No other commercial payer
accounts for 10 percent or more of the Company's net revenues. Net revenues from
commercial payers are primarily generated under fee for service contracts, which
are traditionally one year in term and renewable automatically on an annual
basis, unless terminated by either party.
TRADEMARKS
The Company has various trademarks registered with the U.S. Patent and
Trademark Office, including CARECENTRIX(R), GENTIVA(R), GENTIVA and Butterfly
Design(R), LIFESMART(R) and REHAB WITHOUT WALLS(R), or in the process of being
registered with the U.S. Patent and Trademark Office, including CASEMATCH(SM)
and SAFE STRIDES(SM). A federally registered trademark in the United States is
effective for ten years subject only to a required filing and the continued use
of the mark by the Company, with the right of perpetual renewal. A federally
registered trademark provides the presumption of ownership of the mark by the
Company in connection with its goods or services and constitutes constructive
notice throughout the United States of such ownership. Management believes that
the Company's name and trademarks are important to its operations and intends to
continue to renew its trademark registrations.
BUSINESS ENVIRONMENT
Factors that the Company believes have contributed and will contribute to
the development of home health services primarily include recognition that home
health services can be a cost-effective alternative to more expensive
institutional care; aging demographics; changing family structures in which more
aging people will be living alone and may be in need of assistance; increasing
consumer and physician awareness and interest in home health services; the
psychological benefits of recuperating from an illness or accident or receiving
care for a chronic condition in one's own home; and medical and technological
advances that allow more health care procedures and monitoring to be provided at
home.
The Company is actively pursuing relationships with managed care
organizations to secure additional managed care contracts. The Company believes
that its nationwide network of providers, financial resources, and the quality,
range and cost-effectiveness of its services are important factors as it seeks
opportunities in its managed care relationships in a consolidating home health
services industry. In addition, the Company believes that it has the local
relationships, the knowledge of the regional markets in which it operates, and
the cost-effective, comprehensive services and products required to compete
effectively for managed care contracts and
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other referrals. The Company offers the direct and managed provision of care as
a single source, which it believes optimizes utilization.
MARKETING AND SALES
In general, the Company obtains patients and clients through personal and
corporate sales presentations, telephone marketing calls, direct mail
solicitation, referrals from other clients and advertising in a variety of local
and national media, including the Yellow Pages, newspapers, magazines, trade
publications and radio. The Company maintains a dedicated sales force
responsible for generating local, regional and national referrals, as well as an
Internet website (www.gentiva.com) that describes the Company, its services and
products. Marketing efforts also involve personal contact with physicians,
hospital discharge planners and case managers for managed healthcare programs,
such as those involving health maintenance organizations and preferred provider
organizations, insurance company representatives and employers with self-funded
employee health benefit programs.
COMPETITIVE POSITION
The home health services industry in which the Company operates is highly
competitive and fragmented. Home healthcare providers range from facility-based
(hospital, nursing home, rehabilitation facility, government agency) agencies to
independent companies to visiting nurse associations and nurse registries. They
can be not-for-profit organizations or for-profit organizations. In addition,
there are relatively few barriers to entry in some of the home health services
markets in which the Company operates. The Company's primary competitors for its
home healthcare business are hospital-based home health agencies, local home
health agencies and visiting nurse associations. Based on information contained
in the Centers for Medicare & Medicaid Services ("CMS") website, a government
website containing information on the home healthcare market in 2003, the
Company believes its home health services business holds approximately a 2
percent market share. The Company competes with other home healthcare providers
on the basis of availability of personnel, quality and expertise of services and
the value and price of services. The Company believes that it has a favorable
competitive position, attributable mainly to its nationwide network of providers
and the consistently high quality and targeted services it has provided over the
years to its patients, as well as to its screening and evaluation procedures and
training programs for clinical associates who provide direct care to patients.
The Company expects that industry forces will impact it and its
competitors. The Company's competitors will likely strive to improve their
service offerings and price competitiveness. The Company also expects its
competitors to develop new strategic relationships with providers, referral
sources and payers, which could result in increased competition. The
introduction of new and enhanced services, acquisitions and industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's services or price competition, or make the Company's services less
attractive.
SOURCE AND AVAILABILITY OF PERSONNEL
To maximize the cost effectiveness and productivity of clinical
associates, the Company utilizes customized processes and procedures that have
been developed and refined over the years. Personalized matching to recruit and
select applicants who fit the patients' individual needs is achieved through
initial applicant profiles, personal interviews, skill evaluations and
background and reference checks. The Company utilizes its proprietary
CaseMatch(SM) software scheduling program, which gives local Company offices the
ability to identify those clinical associates who can be assigned to patient
cases.
Clinical associates are recruited through a variety of sources, including
advertising in local and national media, job fairs, solicitations on websites,
direct mail and telephone solicitations, as well as referrals obtained directly
from clients and other caregivers. Clinical associates are generally paid on a
per visit, per shift, per hour or per diem basis, or are employed on a full-time
salaried basis. The Company, along with its competitors, is currently
experiencing a shortage of licensed professionals. A continued shortage of
professionals could have a material adverse effect on the Company's business.
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NUMBER OF PERSONS EMPLOYED
At January 2, 2005, the Company employed approximately 3,950 full-time
associates, including approximately 920 salaried clinical associates, compared
to approximately 3,500 full-time associates, including approximately 700
salaried clinical associates, at the end of fiscal 2003. The Company also
employs clinical associates on a temporary basis, as needed, to provide home
health services. In fiscal 2004, the average number of non-salaried clinical
associates employed on a weekly basis in the Company's home health services
business was approximately 10,600, compared to approximately 11,600 in fiscal
2003. The Company believes that its relationships with its employees are
generally good.
OTHER MATTERS
Subsequent to the sale of its specialty pharmaceutical services business
in June 2002, the Company has operated its remaining home health services
business as a single reporting unit. Financial information relating to the home
health services business is found in the consolidated financial statements of
the Company and its subsidiaries which are included in this annual report.
The Company has historically experienced a seasonal decline in the demand
for its home health services during the third fiscal quarter.
For a discussion of certain regulations to which the Company's business is
subject, see "Regulations" under Item 3, "Legal Proceedings," below.
AVAILABLE INFORMATION
The Company's Internet address is www.gentiva.com. The Company makes
available free of charge on or through its Internet website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable
after such material has been filed with, or furnished to, the SEC. The Company
also makes available on or through its website its press releases, an investor
presentation, Section 16 reports and certain corporate governance documents.
RISK FACTORS
This annual report on Form 10-K contains forward-looking statements which
involve a number of risks, uncertainties and assumptions, as discussed in more
detail above under Item 1, "Business - Special Caution Regarding Forward-Looking
Statements." Actual results could differ materially from those discussed in the
forward-looking statements. Factors that could cause actual results to differ
materially include, without limitation, the risk factors discussed below and
elsewhere in this annual report.
RISKS RELATED TO THE COMPANY'S BUSINESS AND INDUSTRY
The Company's growth strategy may not be successful.
The future growth of the Company's business and its future financial
performance will depend on, among other things, its ability to increase its
revenue base through a combination of internal growth and strategic ventures,
including acquisitions. The Company's home health services business experienced
no growth during the fiscal periods from 1998 through 2001. During fiscal 2002,
2003 and 2004, revenue grew 5.3 percent, 5.9 percent and 3.9 percent,
respectively; however, future revenue growth cannot be assured as it is subject
to the effects of competition, various risk factors including the uncertainty of
Medicare, Medicaid and private health insurance reimbursement, the ability to
generate new and retain existing contracts with major payer sources and the
ability to attract and retain qualified personnel.
Competition among home healthcare companies is intense.
The home health services industry is highly competitive. The Company
competes with a variety of other companies in providing home health services,
some of which may have greater financial and other resources and may be more
established in their respective communities. Competing companies may offer newer
or different
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services from those offered by the Company and may thereby attract customers who
are presently receiving the Company's home health services.
The cost of healthcare is funded substantially by government and private
insurance programs. If such funding is reduced or becomes limited or
unavailable to the Company's customers, the Company's business may be
adversely impacted.
Third-party payers include Medicare, Medicaid and private health insurance
providers. Third-party payers are increasingly challenging prices charged for
healthcare services. The Company cannot be assured that its services will be
considered cost-effective by third-party payers, that reimbursement will be
available or that payers' reimbursement policies will not have a material
adverse effect on the Company's ability to sell its services on a profitable
basis, if at all. The Company cannot control reimbursement rates or policies for
a significant portion of its business.
Possible changes in the case mix of patients, as well as payer mix and
payment methodologies, may have a material adverse effect on the Company's
profitability.
The sources and amounts of the Company's patient revenues will be
determined by a number of factors, including the mix of patients and the rates
of reimbursement among payers. Changes in the case mix of the patients as well
as payer mix among private pay, Medicare and Medicaid may significantly affect
the Company's profitability. In particular, any significant increase in the
Company's Medicaid population or decrease in Medicaid payments could have a
material adverse effect on its financial position, results of operations and
cash flow, especially if states operating these programs continue to limit, or
more aggressively seek limits on, reimbursement rates or service levels.
The loss of significant contracts, as well as significant reductions in
members covered under such contracts, could have a material adverse effect
on the Company's financial condition and results of operations.
The Company has entered into service agreements with a number of managed
care organizations to provide, or contracted with third-party providers to
provide, home nursing services, acute and chronic infusion therapies, durable
medical equipment and respiratory products and services to patients insured by
those organizations. One such contract with Cigna accounted for 31 percent of
the Company's total net revenues for the year ended January 2, 2005. The Company
and Cigna entered into a new home healthcare contract effective January 1, 2004
and expiring on December 31, 2006. Under the termination provisions of the
contract, Cigna has the right to terminate the agreement on December 31, 2005,
if it provides 90 days advance written notice to the Company. If the Cigna
contract or any other similar significant contract were to terminate or if there
were a significant decrease in enrolled members, or products and services
covered under the Company's contract with Cigna or any other organization, it
could materially adversely affect the Company's financial condition and results
of operations.
Further consolidation of managed care organizations and other third-party
payers may adversely affect the Company's profits.
Managed care organizations and other third-party payers have continued to
consolidate in order to enhance their ability to influence the delivery of
healthcare services. Consequently, the healthcare needs of a large percentage of
the United States population are increasingly served by a smaller number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
that such organizations terminate the Company as a preferred provider and/or
engage its competitors as a preferred or exclusive provider, the Company's
business could be adversely affected. In addition, private payers, including
managed care payers, could seek to negotiate additional discounted fee
structures or the assumption by healthcare providers of all or a portion of the
financial risk through prepaid capitation arrangements, thereby potentially
reducing the Company's profitability.
The Company and the healthcare industry continue to experience shortages
in qualified home health service employees and management personnel.
The Company competes with other healthcare providers for its employees,
both clinical associates and management personnel. As the demand for home health
services continues to exceed the supply of available and
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qualified staff, the Company and its competitors have been forced to offer more
attractive wage and benefit packages to these professionals. Furthermore, the
competitive arena for this shrinking labor market has created turnover as many
seek to take advantage of the supply of available positions, each offering new
and more attractive wage and benefit packages. In addition to the wage pressures
inherent in this environment, the cost of training new employees amid the
turnover rates has caused added pressure on the Company's operating margins.
An economic downturn, continued deficit spending by the federal government
and state budget pressures may result in a reduction in reimbursement and
covered services.
An economic downturn can have a detrimental effect on revenues.
Historically, these budget pressures have translated into reductions in state
spending. Given that Medicaid outlays are a significant component of state
budgets, the Company can expect continuing cost containment pressures on
Medicaid outlays for the Company's services in the states in which it operates.
In addition, an economic downturn may also impact the number of enrollees in
managed care programs as well as the profitability of managed care companies,
which could result in reduced reimbursement rates.
Deficit spending by the government as the result of adverse developments
in the economy or other reasons could lead to increased pressure to reduce
government expenditures for other purposes, including governmentally funded
programs in which the Company participates, such as Medicare and Medicaid.
The Company may experience disruption to its business and operations from
the effects of natural disasters or terrorist acts.
The occurrence of natural disasters or terrorist acts, and the erosion to
the Company's business caused by such an occurrence, may adversely impact the
Company's profitability. In the affected areas, Company offices may be forced to
close for limited or extended periods of time, and the Company may face a
reduced supply of clinical associates.
The agreement governing the Company's existing revolving credit facility
contains, and future debt agreements may contain, various covenants that
limit the Company's discretion in the operation of its business.
The agreement and instruments governing the Company's existing revolving
credit facility contain, and the agreements and instruments governing its future
debt agreements may contain, various restrictive covenants that, among other
things, require it to comply with or maintain certain financial tests and ratios
and restrict the Company's ability to:
- incur more debt;
- redeem or repurchase stock, pay dividends or make other distributions;
- make certain investments;
- create liens;
- enter into transactions with affiliates;
- make acquisitions;
- merge or consolidate; and
- transfer or sell assets.
In addition, events beyond the Company's control could affect its ability
to comply with and maintain the financial tests and ratios. Any failure by the
Company to comply with or maintain all applicable financial tests and ratios and
to comply with all applicable covenants could result in an event of default with
respect to its existing revolving credit facility or future debt agreements.
This could lead to the acceleration of the maturity of the facility and the
termination of the commitments to make further extension of credit. The Company
has no outstanding debt as of January 2, 2005, but could incur debt in the
future. If the Company were unable to repay debt to its senior lenders, these
lenders could proceed against the collateral securing that debt. Even if the
Company is able to comply with all applicable covenants, the restrictions on its
ability to operate its business at its sole discretion could harm its business
by, among other things, limiting its ability to take advantage of financing,
mergers, acquisitions and other corporate opportunities.
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The Company has risks related to obligations under its insurance programs.
The Company is obligated for certain costs under various insurance
programs, including employee health and welfare, workers compensation and
professional liability. The Company may be subject to workers compensation
claims and lawsuits alleging negligence or other similar legal claims. The
Company maintains various insurance programs to cover these risks with insurance
policies subject to substantial deductibles and retention amounts. The Company
also may be subject to exposure relating to employment law and other related
matters for which the Company does not maintain insurance coverage. The Company
believes that its present insurance coverage and reserves are sufficient to
cover currently estimated exposures; however, there can be no assurance that the
Company will not incur liabilities in excess of recorded reserves or in excess
of its insurance limits.
The Company has risks resulting from the sale of its SPS business.
Certain representations and warranties made by the Company to Accredo
under the asset purchase agreement dated January 2, 2002 continue to survive the
closing of the SPS sale on June 13, 2002. The Company may have indemnification
obligations to Accredo if there is a breach of the surviving representations and
warranties. These indemnification obligations are discussed in more detail below
under Item 3 "Legal Proceedings - Indemnifications." The Company is unable to
predict the amount, if any, that may be required for it to satisfy its
indemnification obligations under the asset purchase agreement should any claims
arise. Should any significant payment be required, the Company may not have
sufficient funds available to satisfy its potential indemnification obligations
or may not be able to obtain the funds on terms satisfactory to the Company, if
at all.
RISKS RELATED TO HEALTHCARE REGULATION
Legislative and regulatory actions resulting in changes in reimbursement
rates or methods of payment from Medicare and Medicaid, or implementation
of other measures to reduce reimbursement for the Company's services, may
have a material adverse effect on its revenues and operating margins.
In fiscal 2004, 45 percent of the Company's net revenues were generated
from Medicare and Medicaid and Local Government programs. The healthcare
industry is experiencing a strong trend toward cost containment, as the
government seeks to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures generally have resulted in reduced rates of reimbursement for services
that the Company provides.
In addition, the timing of payments made under these programs is subject
to regulatory action and governmental budgetary constraints. For certain
Medicaid programs, the time period between submission of claims and payment has
increased. Further, within the statutory framework of the Medicare and Medicaid
programs, there are a substantial number of areas subject to administrative
rulings and interpretations that may further affect payments made under those
programs. Additionally, the federal and state governments may in the future
reduce the funds available under those programs or require more stringent
utilization and quality reviews of providers. Moreover, there can be no
assurances that adjustments from Medicare or Medicaid audits will not have a
material adverse effect on the Company.
The Company conducts business in a heavily regulated industry, and changes
in regulations and violations of regulations may result in increased costs
or sanctions.
The Company's business is subject to extensive federal, state and, in some
cases, local regulation. Compliance with these regulatory requirements, as
interpreted and amended from time to time, can increase operating costs or
reduce revenue and thereby adversely affect the financial viability of the
Company's business. Because these laws are amended from time to time and are
subject to interpretation, the Company cannot predict when and to what extent
liability may arise. Failure to comply with current or future regulatory
requirements could also result in the imposition of various remedies, including
fines, the revocation of licenses or decertification. Unanticipated increases in
operating costs or reductions in revenue could adversely affect the Company's
liquidity.
-8-
The Company is subject to periodic audits and requests for information by
the Medicare and Medicaid programs or government agencies, which have
various rights and remedies against the Company if they assert that the
Company has overcharged the programs or failed to comply with program
requirements.
The operation of the Company's home health services business is subject to
federal and state laws prohibiting fraud by healthcare providers, including laws
containing criminal provisions, which prohibit filing false claims or making
false statements in order to receive payment or obtain certification under
Medicare and Medicaid programs, or failing to refund overpayments or improper
payments. Violation of these criminal provisions is a felony punishable by
imprisonment and/or fines. The Company may also be subject to fines and treble
damage claims if it violates the civil provisions that prohibit knowingly filing
a false claim or knowingly using false statements to obtain payment. State and
federal governments are devoting increased attention and resources to anti-fraud
initiatives against healthcare providers. The Health Insurance Portability and
Accountability Act of 1996 ("HIPAA") and the Balanced Budget Act of 1997 ("BBA")
expanded the penalties for healthcare fraud, including broader provisions for
the exclusion of providers from the Medicare and Medicaid programs.
The Company has established policies and procedures that it believes are
sufficient to ensure that it will operate in substantial compliance with these
anti-fraud and abuse requirements. On April 17, 2003, the Company received a
subpoena from the Department of Health and Human Services, Office of the
Inspector General, Office of Investigations ("OIG"). The subpoena seeks
information regarding the Company's implementation of settlements and corporate
integrity agreements entered into with the government, as well as the Company's
treatment on cost reports of employees engaged in sales and marketing efforts.
With respect to the cost report issues, the government has preliminarily agreed
to narrow the scope of production to the period from January 1, 1998 through
September 30, 2000. On February 17, 2004, the Company received a subpoena from
the U.S. Department of Justice ("DOJ") seeking additional information related to
the matters covered by the OIG subpoena. The Company has provided documents and
other information requested by the OIG and DOJ pursuant to their subpoenas and
similarly intends to cooperate fully with any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint
against the Company. While the Company believes that its business practices are
consistent with Medicare and Medicaid programs criteria, those criteria are
often vague and subject to change and interpretation. The imposition of fines,
criminal penalties or program exclusions could have a material adverse effect on
the Company's financial condition, results of operations and cash flows.
The Company is also subject to federal and state laws that govern
financial and other arrangements between healthcare providers.
These laws often prohibit certain direct and indirect payments or
fee-splitting arrangements between healthcare providers that are designed to
encourage the referral of patients to a particular provider for medical products
and services. Furthermore, some states restrict certain business relationships
between physicians and other providers of healthcare services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. These
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies.
The Company faces additional federal requirements that mandate major
changes in the transmission and retention of health information.
HIPAA was enacted to ensure that employees can retain and at times
transfer their health insurance when they change jobs and to simplify healthcare
administrative processes. The enactment of HIPAA expanded protection of the
privacy and security of personal medical data and required the adoption of
standards for the exchange of electronic health information. Among the standards
that the Secretary of Health and Human Services has adopted pursuant to HIPAA
are standards for electronic transactions and code sets, unique identifiers for
providers, employers, health plans and individuals, security and electronic
signatures, privacy and enforcement. Although HIPAA was intended to ultimately
reduce administrative expenses and burdens faced within the healthcare industry,
the Company believes that implementation of this law has resulted and will
result
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in additional costs. Failure to comply with HIPAA could result in fines and
penalties that could have a material adverse effect on the Company.
RISKS RELATED TO THE COMPANY'S COMMON STOCK
The market price of the Company's common stock may be volatile and
experience substantial fluctuations.
The Company's common stock is traded on the Nasdaq National Market. The
price of the common stock may fluctuate substantially based on a number of
factors, including:
- the Company's operating and financial performance;
- changes, or proposed changes, in government regulations;
- stock market conditions generally and specifically as they relate to
the home health services industry;
- developments in litigation or government investigations;
- changes in financial estimates and recommendations by securities
analysts who follow the Company's stock; and
- economic and political uncertainties in the marketplace generally.
Significant fluctuations in the market price of the Company's common stock
may adversely affect the Company's shareholders.
Provisions in the Company's organizational documents, Delaware law and the
Company's rights agreement could delay or prevent a change in control of
the Company, which could adversely affect the price of the Company's
common stock.
Provisions in the Company's amended and restated certificate of
incorporation and by-laws, anti-takeover provisions of the Delaware General
Corporation Law and the Company's rights agreement could discourage, delay or
prevent an unsolicited change in control of the Company, which could adversely
affect the price of the Company's common stock. These provisions may also have
the effect of making it more difficult for third parties to replace the
Company's current management without the consent of the board of directors.
Provisions in the Company's amended and restated certificate of incorporation
and by-laws that could delay or prevent an unsolicited change in control
include:
- the classification of the board of directors into three classes,
each class serving "staggered" terms of office of three years;
- limitations on the removal of directors so that they may only be
removed for cause;
- the ability of the board of directors to issue up to 25,000,000
shares of preferred stock and to determine the terms, rights and
preferences of the preferred stock without shareholder approval; and
- the prohibition on the right of shareholders to call meetings or act
by written consent and limitations on the right of shareholders to
present proposals or make nominations at shareholder meetings.
Delaware law also imposes restrictions on mergers and other business
combinations between the Company and any holder of 15 percent or more of the
Company's outstanding common stock. In addition, the Company has a rights
agreement that has the effect of deterring take-overs of the Company without the
consent of the board of directors. Generally, once a party acquires 10 percent
or more of the Company's common stock, the rights agreement may cause that
party's ownership interest in the Company to be diluted unless the board of
directors consents to the acquisition.
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ITEM 2. PROPERTIES
The Company's headquarters is leased and is located at 3 Huntington
Quadrangle, Suite 200S, Melville, New York 11747-4627. Other major regional
administrative offices leased by the Company are located in Overland Park,
Kansas; Phoenix, Arizona; Hartford, Connecticut; Tampa, Florida; Endicott, New
York; and Houston, Texas. The Company also maintains leases for other offices
and locations on various terms expiring on various dates.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
In addition to the matters referenced in this Item 3, the Company is party
to certain legal actions arising in the ordinary course of business including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002. The Company denied the
allegations of wrongdoing in the complaint. On May 19, 2003, the Company filed a
motion for summary judgment on the issue of liability. On February 6, 2004, the
court granted partial summary judgment for the Company, dismissing two of the
three claims alleged under the False Claims Act and denying summary judgment for
the Company on the wrongful termination claim. In December 2004, the parties
reached a settlement, and the case was dismissed with prejudice on December 21,
2004.
GOVERNMENT MATTERS
On April 17, 2003, the Company received a subpoena from the Department of
Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG and DOJ pursuant to their subpoenas and similarly intends
to cooperate fully with any future OIG or DOJ information requests. To the
Company's knowledge, the government has not filed a complaint against the
Company.
INDEMNIFICATIONS
In connection with the Split-Off, the Company agreed to assume, to the
extent permitted by law, and to indemnify Olsten for, the liabilities, if any,
arising out of the home health services business.
In addition, the Company and Accredo agreed to indemnify each other for
breaches of representations and warranties of such party or the non-fulfillment
of any covenant or agreement of such party in connection with the sale of the
Company's SPS business to Accredo on June 13, 2002. The Company also agreed to
indemnify Accredo for the retained liabilities and for tax liabilities, and
Accredo agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the transaction. The
representations and warranties generally survived for the period of two years
after the closing of the transaction, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive, including
the survival of representations and warranties related to healthcare compliance
for three years after the closing of the transaction and the survival of
representations and warranties related to tax matters until thirty days after
the expiration of the applicable statute of limitations period, including any
extensions of the applicable period, subject to certain exceptions. Accredo and
the Company generally may recover indemnification for a breach of a
representation or warranty only to the extent a party's claim exceeds $1 million
for any individual claim, or exceeds $5 million in the aggregate, subject to
certain conditions and only up to a maximum amount of $100 million.
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CORPORATE INTEGRITY AGREEMENT
In connection with a July 19, 1999 settlement with various government
agencies, Olsten executed a corporate integrity agreement with the Office of
Inspector General of the Department of Health and Human Services, effective
until August 18, 2004, subject to the Company's filing of a final annual report
with the Department of Health and Human Services, Office of Inspector General,
in form and substance acceptable to the government. The Company has filed a
final annual report and is expecting closure by the government.
The Company believes that it has been in compliance with the corporate
integrity agreement and has timely filed all required reports. If the Company
has failed to comply with the terms of its corporate integrity agreement, the
Company will be subject to penalties. The corporate integrity agreement applies
to the Company's businesses that bill the federal government health programs
directly for services, such as its nursing brand (but excludes the SPS
business), and focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of claims. Under the
corporate integrity agreement, the Company is required, for example, to maintain
a corporate compliance officer to develop and implement compliance programs, to
retain an independent review organization to perform annual reviews and to
maintain a compliance program and reporting systems, as well as to provide
certain training to employees.
REGULATIONS
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
- Medicare, Medicaid, TRICARE (the Department of Defense's managed
healthcare program for military personnel and their families) and
other government-funded reimbursement programs;
- reporting requirements, certification and licensing standards for
certain home health agencies; and
- in some cases, certificate-of-need requirements.
The Company's compliance with these regulations may affect its
participation in Medicare, Medicaid, TRICARE and other federal healthcare
programs. The Company is also subject to a variety of federal and state
regulations which prohibit fraud and abuse in the delivery of healthcare
services. These regulations include, among other things:
- prohibitions against the offering or making of direct or indirect
payments to actual or potential referral sources for obtaining or
influencing patient referrals;
- rules generally prohibiting physicians from making referrals under
Medicare for clinical services to a home health agency with which
the physician or his or her immediate family member has certain
types of financial relationships;
- laws against the filing of false claims; and
- laws against making payment or offering items of value to patients
to induce their self-referral to the provider.
As part of the extensive federal and state regulation of the home health
services business and under the Company's corporate integrity agreement, the
Company is subject to periodic audits, examinations and investigations conducted
by, or at the direction of, governmental investigatory and oversight agencies.
Periodic and random audits conducted or directed by these agencies could result
in a delay in receipt, or an adjustment to the amount of reimbursements due or
received under Medicare, Medicaid, TRICARE and other federal health programs.
Violation of the applicable federal and state healthcare regulations can result
in excluding a healthcare provider from participating in the Medicare, Medicaid
and/or TRICARE programs and can subject the provider to substantial civil and/or
criminal penalties.
On October 1, 2003, a Medicare market basket rate increase of 3.3 percent
became effective for patients on service on or after October 1, 2003. This
increase was reduced by 0.8 percent to 2.5 percent for open episodes of care on
or after April 1, 2004. In addition, Medicare reimbursement was increased 5
percent for the rural add-on related to home health services performed in
specifically defined rural areas of the country, effective April 1,
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2004 for a period of one year, when the rural add-on provision for home health
services was re-established. On October 15, 2004, CMS announced a Medicare
market basket increase of 2.3 percent effective for patients on service on or
after January 1, 2005. In addition, on the same day CMS announced a favorable
change in the fixed dollar ratio formula for receiving outlier payments.
Outliers represent patient cases which exceed the anticipated cost thresholds
established by Medicare and result in increased reimbursement. This change,
which is effective for patients on service on or after January 1, 2005, is
expected to allow a greater number of episodes to qualify for the outlier
payment.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2004.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding each of the
Company's executive officers as of March 4, 2005:
EXECUTIVE POSITION AND OFFICES
NAME OFFICER SINCE AGE WITH THE COMPANY
- -------------------------------- ------------- --- -----------------------------------------
Ronald A. Malone 2000 50 Chief Executive Officer and Chairman of
the Board
Vernon A. Perry, Jr. 1999 53 President and Chief Operating Officer
Christopher L. Anderson 2001 33 Senior Vice President, Audit Services and
Quality Assurance, and Chief Compliance
Officer
Robert Creamer 2002 46 Senior Vice President, Nursing Operations
Mary Morrisey Gabriel 2002 39 Senior Vice President and Chief Marketing
Officer
Stephen B. Paige 2003 57 Senior Vice President and General Counsel
John R. Potapchuk 2001 52 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
The executive officers are elected annually by the board of directors.
RONALD A. MALONE
Mr. Malone has served as chief executive officer and chairman of the board
of the Company since June 2002. He served as executive vice president of the
Company from March 2000 to June 2002. Prior to joining the Company, he served in
various positions with Olsten, including executive vice president of Olsten and
president, Olsten Staffing Services, United States and Canada, from January 1999
to March 2000. From 1994 to December 1998, he served successively as Olsten's
senior vice president, southeast division; senior vice president, operations;
and executive vice president, operations.
VERNON A. PERRY, JR.
Mr. Perry has served as president and chief operating officer of the
Company since June 2002. He served as senior vice president of the Company from
November 1999 to June 2002. From 1996 to 1999, he
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served as senior vice president of CareCentrix for Olsten Health Services. He
joined Olsten in 1994 as vice president for business development.
CHRISTOPHER L. ANDERSON
Mr. Anderson has served as the chief compliance officer of the Company
since March 2000 and as senior vice president, audit services and quality
assurance, of the Company since January 2005. From March 2000 to January 2005,
he served as vice president, audit services and quality assurance, of the
Company. He served as chief compliance officer of Olsten from November 1998 to
March 2000.
ROBERT CREAMER
Mr. Creamer has served as senior vice president, nursing operations, of
the Company since September 2003. From June 2002 to March 2004, he served as the
Company's chief information officer, and from June 2002 to August 2003, he
served as senior vice president, financial operations, of the Company. Prior
thereto he served in various corporate financial management positions with the
Company and Olsten Health Services, including vice president of
finance-CareCentrix, vice president of financial operations and vice president
of finance-Specialty Pharmaceutical Services. He first joined Olsten in 1991.
MARY MORRISEY GABRIEL
Ms. Morrisey Gabriel has served as senior vice president and chief
marketing officer of the Company since February 2005. From July 2002 to February
2005, she served as senior vice president, sales, of the Company. From March
2000 to June 2002, Ms. Morrisey Gabriel served as senior vice president of
National Accounts/North American Sales of Adecco, a staffing services company.
From 1999 to March 2000, she served as Olsten's senior vice president of
national accounts. Prior thereto, Ms. Morrisey Gabriel served in a number of
senior management positions for Olsten.
STEPHEN B. PAIGE
Mr. Paige has served as general counsel of the Company since July 2003 and
as senior vice president of the Company since January 2005. From July 2003 to
January 2005, he served as vice president of the Company. From 1997 to 2002, he
served as senior vice president, general counsel and secretary of General
Semiconductor, Inc., a technology based company. Prior thereto, Mr. Paige served
in senior legal positions with several large healthcare, food ingredient and
consumer product companies.
JOHN R. POTAPCHUK
Mr. Potapchuk has served as senior vice president, chief financial
officer, treasurer and secretary of the Company since June 2002. He served as
vice president of finance and controller of the Company from March 2000 to June
2002. He joined Olsten in 1991 and served in various corporate financial
management positions with Olsten Health Services, including vice president and
operations controller and vice president of finance. Prior to that, Mr.
Potapchuk served in senior management positions for PricewaterhouseCoopers LLP
and Deloitte & Touche.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
The Company's common stock is quoted on the Nasdaq National Market under
the symbol "GTIV".
The following table sets forth the high and low bid information for shares
of the Company's common stock for each quarter during fiscal 2003 and 2004:
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2003 HIGH LOW
- ----------- -------- --------
1st Quarter $ 10.34 $ 8.10
2nd Quarter 9.69 7.44
3rd Quarter 11.94 8.75
4th Quarter 13.59 10.98
2004 HIGH LOW
- ----------- -------- --------
1st Quarter $ 15.90 $ 11.97
2nd Quarter 16.95 14.00
3rd Quarter 16.77 14.46
4th Quarter 17.60 13.68
HOLDERS
As of March 4, 2005, there were approximately 2,550 holders of record of
the Company's common stock including participants in the Company's employee
stock purchase plan, brokerage firms holding the Company's common stock in
"street name" and other nominees.
DIVIDENDS
Except for the special dividend in cash ($7.76) and in kind (0.19253
shares of Accredo common stock) per share of Gentiva common stock paid in June
2002, the Company has never paid any cash dividends on its common stock. Future
payments, if any, of dividends and the amount of the dividends will be
determined by the board of directors from time to time based on the Company's
results of operations, financial condition, cash requirements, future prospects
and other factors deemed relevant, including any substantive change in tax
treatment under the United States Tax Code. In addition, the Company's credit
facility also contains restrictions on the Company's ability to declare and pay
dividends. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ISSUER PURCHASES OF EQUITY SECURITIES (1)
(c) TOTAL NUMBER (d) MAXIMUM NUMBER
(a) TOTAL OF SHARES PURCHASED OF SHARES THAT MAY
NUMBER (b) AVERAGE AS PART OF PUBLICLY YET BE PURCHASED
OF SHARES PRICE PAID ANNOUNCED PLANS UNDER THE PLANS
PERIOD PURCHASED PER SHARE OR PROGRAMS OR PROGRAMS
- ------------------------------ --------- ----------- ------------------- ------------------
October (9/27/04 - 10/24/04) 51,600 $ 16.25 51,600 983,096
November (10/25/04 - 11/21/04) 330,100 $ 15.29 330,100 652,996
December (11/22/04 - 01/02/05) 144,600 $ 16.28 144,600 508,396
--------- ----------- -------
Total 526,300 $ 15.65 526,300
========= =========== =======
(1) On May 26, 2004, the Company announced that its Board of Directors had
authorized the repurchase of up to 1,000,000 shares of its outstanding common
stock. By the end of the period covered by the table, all of such shares had
been repurchased. On August 10, 2004, the Company announced that its Board of
Directors had authorized the repurchase of up to 1,000,000 additional shares of
its outstanding common stock. By the end of the period covered by the table,
491,604 of such shares had been repurchased. See Note 8 to the Company's
consolidated financial statements.
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected historical consolidated financial
data of the Company as of and for each of the fiscal years in the five-year
period ended January 2, 2005. The data has been derived from the Company's
audited consolidated financial statements. The historical consolidated financial
information presents
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the Company's results of operations and financial position as if the Company
were a separate entity from Olsten for all years presented.
In addition, the operating results of the SPS business through the closing
date of the sale to Accredo, including corporate expenses directly attributable
to SPS operations, restructuring and special charges related to the SPS
business, as well as the gain on the sale, net of transaction costs and related
income taxes, are reflected as discontinued operations in the accompanying
consolidated statement of operations for fiscal 2002. Continuing operations
include the results of the home health services business, including corporate
expenses that did not directly relate to SPS, as well as restructuring and
special charges. In addition, for fiscal 2000, continuing operations included
the health care staffing services business and Canadian operations which were
sold during the fourth quarter of fiscal 2000. Results of all prior periods have
been reclassified to conform to this presentation.
The historical financial information may not be indicative of the
Company's future performance and may not necessarily reflect what the financial
position and results of operations of the Company would have been if the Company
was a separate stand-alone entity during all the years presented. The Company's
fiscal year ends on the Sunday nearest to December 31st. The Company's fiscal
year 2004 includes 53 weeks compared to all other fiscal years presented which
include 52 weeks.
FISCAL YEAR ENDED
--------------------------------------------------------------------
(in thousands, except per share amounts) 2004 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
(53 WEEKS)
Statement of Operations Data
Net revenues $ 845,764(1) $ 814,029 $ 768,501 $ 729,577 $ 881,765 (8)
Gross profit 323,929(1) 282,042 247,600 (3) 245,660 273,493 (5)
Selling, general and administrative expenses (285,671) (259,185) (283,540)(3) (266,322)(4) (356,359)(5)
Income (loss) from continuing operations 26,488(1) 56,766 (53,543) (13,910) (49,826)
Discontinued operations, net of tax (6) - - 191,578 34,898 (54,374)(5)
Cumulative effect of accounting change, net of tax (7) - - (187,068) - -
Net income (loss) 26,488(1) 56,766(2) (49,033)(3) 20,988 (4) (104,200)(5)
Basic earnings per share:
Income (loss) from continuing operations $ 1.07 $ 2.16 $ (2.05) $ (0.60) $ (2.41)
Discontinued operations, net of tax - - 7.32 1.50 (2.64)
Cumulative effect of accounting change, net of tax - - (7.14) - -
Net income (loss) 1.07 2.16 (1.87) 0.90 (5.05)
Weighted average shares outstanding - basic 24,724 26,262 26,183 23,186 20,637
Diluted earnings per share:
Income (loss) from continuing operations $ 1.00 $ 2.07 $ (2.05) $ (0.60) $ (2.41)
Discontinued operations, net of tax - - 7.32 1.50 (2.64)
Cumulative effect of accounting change, net of tax - - (7.14) - -
Net income (loss) 1.00 2.07 (1.87) 0.90 (5.05)
Weighted average shares outstanding - diluted 26,365 27,439 26,183 23,186 20,637
Balance Sheet Data (at end of year) (9)
Cash items and short-term investments (10) $ 113,024 $ 117,438 $ 101,241 $ 107,144 $ 452
Working capital 136,605 136,297 104,339 417,949 348,684
Total assets 332,098 342,513 264,431 849,879 805,484
Long-term debt and other securities - - - - 20,000
Shareholder's equity 171,940 177,179 113,048 621,707 566,149
Common shares outstanding 23,722 25,598 26,385 25,639 21,197
Special dividend per common share:
Cash - - $ 7.76 - -
Value of Accredo common stock - - 9.99 - -
(1) Net revenues and gross profit for fiscal 2004 include special items of
$9.4 million related to the favorable settlement of the Company's Medicare
cost report appeals for 1997 and 1998 net of a $1 million revenue
adjustment to reflect an industry wide repayment of certain Medicare
reimbursements. Income from continuing operations and net income include
the Medicare special items noted above and $0.9 million from a pre-tax
gain on the sale of a Canadian investment. Net income for fiscal 2004
reflects an effective tax rate of 34.1 percent, primarily related to
recognition of certain state net operating losses. See Notes 3, 9 and 12
to the Company's consolidated financial statements.
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(2) Net income for fiscal 2003 reflects a tax benefit of $35.0 million
associated with management's decision to reverse the valuation allowance
for deferred tax assets. See Notes 12 and 14 to the Company's consolidated
financial statements.
(3) Net loss in fiscal 2002 reflects restructuring and other special charges
aggregating $46.1 million, of which $6.3 million is recorded in cost of
services sold and $39.8 million is recorded in selling, general and
administrative expenses. See Note 4 to the Company's consolidated
financial statements.
(4) Net income in fiscal 2001 reflects special charges of approximately $3.0
million in connection with the settlement of certain legal matters and for
various other legal costs. These special charges are included in selling,
general and administrative expenses.
(5) Net loss for fiscal 2000 reflects restructuring and other special charges
aggregating $153.2 million, of which $97.0 million related to discontinued
operations and $56.2 million related to continuing operations.
Restructuring and special charges of $8.5 million are included in cost of
services sold and $47.7 million is included in selling, general and
administrative expenses. Net loss for fiscal 2000 also reflects a gain of
$36.7 million relating to the sale of the Company's staffing services
business and Canadian operations.
(6) For fiscal 2002, the Company sold its SPS business to Accredo in
accordance with the asset purchase agreement, dated January 2, 2002, with
the sale completed on June 13, 2002. As such, the Company has reflected
discontinued operations, including the gain on sale, of $191.6 million
during fiscal 2002. Results for all prior years have been reclassified to
conform to this presentation. See Note 3 to the Company's consolidated
financial statements.
(7) For fiscal 2002, the Company adopted the provisions of SFAS 142 "Goodwill
and Other Intangible Assets" and performed a transitional impairment test,
resulting in a non-cash charge of $187.1 million. See Note 2 to the
Company's consolidated financial statements.
(8) Net revenues for fiscal 2000 includes net revenues related to the home
health services business of $736.5 million.
(9) Balance sheet data for fiscal year end 2001 and 2000 includes the assets
of the SPS business, which was sold to Accredo on June 13, 2002.
(10) Cash items and short-term investments includes restricted cash of $22.0
million at fiscal year end 2004, $21.8 million at fiscal year end 2003,
and $35.2 million at fiscal year end 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial position. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and related notes included elsewhere in this report.
OVERVIEW
Gentiva is the nation's largest provider of comprehensive home health
services, based on revenues derived from the provision of skilled home nursing
and therapy services to patients. The Company's home health services business is
conducted through more than 350 direct service delivery units operating from
approximately 250 locations under its Gentiva(R) brand and through a network of
more than 2,000 third-party provider locations, as well as Gentiva locations,
under its CareCentrix(R) brand. CareCentrix manages home healthcare services for
managed care organizations throughout the United States. The Company's services
can be delivered across the United States 24 hours a day, 7 days a week.
Gentiva operates licensed and Medicare-certified nursing agencies located
in 35 states, substantially all of which are currently accredited by the Joint
Commission on Accreditation of Healthcare Organizations. These agencies provide
various combinations of skilled nursing and therapy services, paraprofessional
nursing services and homemaker services to pediatric, adult and elder patients.
Reimbursement sources include government
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programs, such as Medicare and Medicaid, and private sources, such as health
insurance plans, managed care organizations, long term care insurance plans and
personal funds. Gentiva's direct home nursing and therapy operations are
organized in five geographic regions, each staffed with clinical, operational
and sales teams. Regions are further separated into operating areas. Each
operating area includes branch locations through which home healthcare agencies
operate. Each agency is led by a director and is staffed with clinical and
administrative support staff as well as clinical associates who deliver direct
patient care. The clinical associates are employed on either a full-time basis
or are paid on a per visit, per shift, per diem or per hour basis.
CareCentrix operations provide an array of administrative services and
coordinate the delivery of home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services for
managed care organizations and health plans. These administrative services are
coordinated within four regional coordination centers and are delivered through
Gentiva direct home nursing and therapy locations as well as through an
extensive nationwide network of third-party provider locations in all 50 states.
CareCentrix accepts case referrals from a wide variety of sources, verifies
eligibility and benefits and transfers case requirements to the providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data reporting and
analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payer is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payer remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
The Company's home health services business also delivers services to its
customers through other focused business lines that include:
- Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from
joint replacement or other major orthopedic surgery;
- Gentiva Rehab Without Walls(R), which provides home and
community-based therapies for patients with traumatic brain
injury, cerebrovascular accident injury and acquired brain
injury, as well as a number of other complex rehabilitation
cases;
- Gentiva Safe Strides(SM) Program, which provides therapies for
patients with balance issues who are prone to injury or
immobility as a result of falling; and
- Gentiva Cardiopulmonary Program, which helps patients and
their physicians manage heart and lung health in a home-based
environment.
The Company also provides consulting services to home health agencies
through its Gentiva Consulting unit. These services include billing and
collection activities, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
Gentiva's revenues are generated primarily from three major payer sources:
the U.S. Medicare program, Medicaid and other state and county programs, and
commercial insurers. Revenue mix by major payer classifications is as follows:
2004 2003 2002
---- ---- ----
Medicare 27% 22% 21%
Medicaid and Local Government 18 20 22
Commercial Insurance and Other 55 58 57
--- --- ---
100% 100% 100%
=== === ===
The Medicare and Medicaid and related programs are subject to legislative
and other risk factors that can result in fluctuating reimbursement rates for
Gentiva's direct home health services to patients. The commercial insurance
industry is continually seeking ways to control the cost of services to patients
that it
-18-
covers. One of the ways it seeks to control costs is to require greater
efficiencies from its providers, including home health care companies.
Despite these risks, Gentiva believes it can operate effectively in the
current health care climate by increasing its volume of Medicare and commercial
insurance business and implementing new business practices, technologies and
other methods to make the Company a more efficient provider of services. Gentiva
has made a decision to seek more business from the Medicare and commercial
insurance payer groups. For example, in 2004, Gentiva's revenue from its
Medicare and Commercial Insurance and Other (excluding Cigna) payer categories
increased 27.7 percent and 13.5 percent, respectively, from the prior year.
Various states have addressed budget pressures by considering or
implementing reductions in various health care programs, including reductions in
rates or changes in patient eligibility requirements. In addition, the Company
has also decided to taper participation in certain Medicaid and other state and
county programs. As a result, Gentiva's 2004 revenue from this payer category
declined 6.5 percent from the prior year.
Gentiva believes that several marketplace factors can contribute to its
future growth. First, the Company is a leader in a highly fragmented home health
care industry populated by approximately 12,000 providers of varying size and
resources. Second, the cost of a home health care visit to a patient can be
significantly lower than the cost of an average day in a hospital or skilled
nursing institution. And third, the demand for home care is expected to grow,
primarily due to an aging U.S. population. The U.S. Centers for Medicare and
Medicaid Services projects that national home health and durable medical
equipment spending will rise from $71.7 billion in 2005 to $127.5 billion by
2014. The U.S. Census Bureau has projected that the age 65 and older population
will increase more than 50 percent between 2000 and 2020.
The Company expects to capitalize on these positive trends through a
determined set of strategies, as follows: generate growth by focusing on
Medicare and commercial insurance business; continue to develop and expand
specialty programs for incremental revenue growth; focus on clinical associate
recruitment, retention and productivity; and continue technology initiatives
that make Gentiva more efficient and profitable. The Company anticipates
executing these strategies by continuing to expand its sales presence,
developing and marketing its managed care services, making operational
improvements and deploying new technologies, providing employees with leadership
training and instituting retention initiatives, ensuring strong ethics and
corporate governance, and focusing on shareholder value.
Results from these strategies and initiatives are reflected in the
Company's 2004 performance. Gentiva reported 2004 net revenue of $845.8 million,
representing a $31.8 million, or 3.9 percent, increase from the $814.0 million
reported in fiscal year 2003. The increase was due primarily to a rise in the
volume of Medicare and commercial insurance business mentioned above.
During 2004, Gentiva reported positive cash flow from operating activities
of $34.9 million and ended 2004 with cash items, restricted cash and short-term
investments of approximately $113 million, compared to approximately $117
million at the end of 2003. The Company has previously stated that it would
evaluate using its cash primarily for the following purposes: investments
contributing to revenue growth, efficiency and profitability; selective
acquisitions; share repurchases; and the possible future payment of dividends to
shareholders. In 2004, Gentiva repurchased a total of over 2.5 million shares at
an average cost of $15.04 per share, for a total expenditure of over $38.4
million.
Management intends the discussion of the Company's financial condition and
results of operations that follows to provide information that will assist in
understanding the Company's financial statements, the changes in certain key
items in those financial statements from year to year, and the primary factors
that accounted for those changes, as well as how certain accounting principles,
policies and estimates affect its financial statements.
The historical results sections in "Results of Operations" below present a
discussion of the Company's consolidated operating results using the historical
results of Gentiva prepared in accordance with accounting principles generally
accepted in the United States (GAAP) for the fiscal years ended January 2, 2005,
December 28, 2003 and December 29, 2002. The Company's fiscal year 2004 includes
53 weeks compared to fiscal years 2003 and 2002, which include 52 weeks.
-19-
SIGNIFICANT DEVELOPMENTS
On June 13, 2002, the Company sold substantially all of the assets of its
SPS business to Accredo and received payment of cash in the amount of $207.5
million (before a $0.9 million reduction resulting from a closing net book value
adjustment) and 5,060,976 shares of Accredo common stock (valued at $262.6
million, based on the closing price of Accredo common stock on the Nasdaq
National Market on June 13, 2002). The cash consideration, less a holdback of
$3.5 million for certain income taxes the Company expected to incur, and the
Accredo common stock were then distributed as a special dividend to the
Company's shareholders.
The operating results of the SPS business through the closing date of the
sale to Accredo, including corporate expenses directly attributable to SPS
operations, restructuring and special charges related to the SPS business, as
well as the gain on the sale, net of transaction costs and related income taxes,
are reflected as discontinued operations in the accompanying consolidated
statement of operations for fiscal 2002. Continuing operations includes the
results of the home health services business, including corporate expenses that
did not directly relate to SPS, as well as restructuring and special charges.
RESULTS OF OPERATIONS
YEAR ENDED JANUARY 2, 2005 COMPARED TO YEAR ENDED DECEMBER 28, 2003
NET REVENUES
FISCAL YEAR
-------------------------------------
PERCENTAGE
(Dollars in millions) 2004 2003 VARIANCE
---------- ---------- ----------
Medicare $ 228.1 $ 178.7 27.7%
Medicaid and Local Government 154.4 165.1 (6.5)
Commercial Insurance and Other 463.3 470.2 (1.5)
---------- ---------- -------
$ 845.8 $ 814.0 3.9%
========== ========== =======
For fiscal year 2004 as compared to fiscal year 2003, net revenues
increased by $31.8 million to $845.8 million from $814.0 million.
Medicare revenue growth in fiscal year 2004 as compared to fiscal year
2003 was driven by several factors including special items, volume growth, mix
and process enhancement changes and rate increases. Medicare revenue included
special items of $9.4 million for fiscal 2004. Special items represented (i)
$10.4 million recorded and received during fiscal 2004 in settlement of the
Company's appeal filed with the Provider Reimbursement Review Board ("PRRB")
related to the reopening of its 1997 and 1998 cost reports and (ii) a revenue
adjustment of $1.0 million recorded in the fiscal year of 2004 to reflect the
estimated repayment to Medicare in connection with services rendered to certain
patients since the inception of the Prospective Payment Reimbursement System in
October 2000. In connection with the estimated repayments, the CMS has
determined that homecare providers should have received lower reimbursements for
certain services rendered to beneficiaries discharged from inpatient hospitals
within fourteen days immediately preceding admission to home healthcare.
Medicare admissions grew by 13 percent in fiscal 2004 as compared to
fiscal 2003. Medicare revenue was also positively impacted in the fiscal year
2004 by growth in specialty programs, which generally generate higher revenue
per episode than other Medicare services, and by various operational and
clinical process enhancements. Furthermore, Medicare revenue in the fiscal 2004
period as compared to the fiscal 2003 period increased as a result of
reimbursement rate changes, including a 3.3 percent market basket rate increase
that became effective for patients on service on or after October 1, 2003, which
was adjusted downward by 0.8 percent to 2.5 percent effective April 1, 2004, and
a 5 percent rate increase effective April 1, 2004 for the rural add-on related
to home health services performed in specifically defined rural areas of the
country. The rate increases relating to the market basket change and rural
add-on provision represented incremental revenue of $5.7 million for fiscal year
2004.
-20-
Medicaid and Local Government revenue decreased in fiscal year 2004 as
compared to fiscal year 2003 primarily due to a reduction in the Company's
participation in certain low-margin, hourly Medicaid and state and county health
programs, partially offset by an increase in skilled visits within Medicaid
programs. Revenues relating to hourly Medicaid and state and county programs
decreased $13.6 million for fiscal year 2004 as compared to fiscal year 2003.
Revenues relating to skilled visits within Medicaid programs increased $2.9
million for fiscal year 2004.
Commercial Insurance and Other revenue decreased in fiscal year 2004 as
compared to fiscal year 2003 due to a decline in revenue derived from Cigna of
$31.0 million, or 10.7 percent, related to a reduction in the number of enrolled
Cigna members in 2004, and lower revenue as well as related costs resulting from
a change in the Company's delivery model of certain home medical and respiratory
equipment ("HME") products and services. The decline in Cigna revenues was
partially offset by an increase of $24.1 million, or 13.5 percent, for fiscal
year 2004 in non-Cigna, Commercial Insurance and Other revenue driven by unit
volume and pricing increases from existing business as well as new contracts
signed during the past year.
In addition, for the fiscal year 2004, Medicare revenues and Commercial
Insurance and Other revenues were negatively impacted by four hurricanes in the
southeastern United States and net revenues for fiscal year 2004 were positively
impacted by an extra week of activity as compared to fiscal year 2003.
GROSS PROFIT
FISCAL YEAR
--------------------------------------
(Dollars in millions) 2004 2003 VARIANCE
---------- ---------- ----------
Gross profit $ 323.9 $ 282.0 $ 41.9
As a percent of revenue 38.3% 34.6% 3.7%
As a percent of revenues, gross profit margins for the fiscal year 2004
were positively impacted by (i) 1.4 percentage points due to the favorable
change in business mix in which the volume of Medicare business, including
growth in specialty programs, more than offset the anticipated revenue loss in
certain low-margin hourly Medicaid and local government programs, (ii) 1.0
percentage points due to the reconfiguration of the HME provider network
earlier this year, as well as the impact of new CareCentrix contracts and (iii)
0.7 percentage points related to the special items discussed above. The
remaining increase in gross profit percentage can be attributed to several
factors, including the positive Medicare rate changes, lower workers
compensation expense and various operational and clinical process enhancements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses, including depreciation and
amortization, increased $26.5 million, or 10.2 percent, to $285.7 million for
the fiscal year ended January 2, 2005, as compared to $259.2 million for the
fiscal year ended December 28, 2003.
Of the increases in selling, general and administrative expenses,
approximately $5 million related to the extra week of activity in fiscal 2004.
Approximately $8 million of the remaining increase related to field operating
and administrative costs to service incremental revenues, including revenues
from the Company's specialty programs and approximately $4 million related to
higher selling and clinical care coordination expenses. The remaining increases
related to costs associated with the reconfiguration of the Company's
CareCentrix HME provider network (approximately $3 million) and incremental
costs associated with the implementation of the Sarbanes-Oxley requirements,
ongoing information technology initiatives and field development training as
well as a writedown of $1.4 million relating to purchased software for which it
was determined there was minimal future value.
GAIN ON SALE OF CANADIAN INVESTMENT
On March 30, 2004, the Company sold its minority interest in a home care
nursing services business in Canada. The business had been acquired as partial
consideration for the sale of the Company's Canadian
-21-
operations in the fourth quarter of fiscal 2000. In connection with the March
30, 2004 sale, the Company received cash proceeds of $4.1 million in the second
quarter of fiscal 2004 and recorded a gain on sale of approximately $0.9
million, which is reflected in the consolidated statement of income for the
fiscal year ended January 2, 2005.
INTEREST INCOME, NET
Net interest income was approximately $1.0 million for the fiscal year
ended January 2, 2005, and $0.4 million for the fiscal year ended December 28,
2003. Net interest income included interest income of approximately $2.0 million
for fiscal year 2004 and $1.5 million for fiscal year 2003, partially offset by
fees relating to the revolving credit facility and outstanding letters of
credit.
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income from continuing operations before income taxes was approximately
$40.2 million and $23.3 million for the fiscal years ended January 2, 2005 and
December 28, 2003, respectively. For fiscal 2004, income from continuing
operations before income taxes included special items of $9.4 million as
discussed in "Net Revenues" above and a pre-tax gain $0.9 million on the sale of
a Canadian investment.
INCOME TAXES
The Company recorded federal and state income taxes of approximately $13.7
million for fiscal 2004 compared to an income tax benefit of $33.5 million for
fiscal 2003. The difference between the Company's effective tax rate of
approximately 34.1% for fiscal 2004 and the statutory income tax rate was due
primarily to the recognition of certain state net operating loss carryforwards.
Prior to fiscal year 2004, the state tax history of certain subsidiaries
indicated cumulative losses and a lack of state tax audit experience. As a
result, the Company believed there was a remote likelihood that the value of
related state tax loss carryforwards would be realized, and no deferred tax
assets were recorded. During fiscal 2004, these subsidiaries reflected
cumulative income on a state filing basis and certain state tax audits were
settled. The Company performed a review of state net operating loss
carryforwards and recorded a deferred tax asset of $7.0 million in the fourth
quarter of fiscal 2004. A valuation allowance of $4.5 million has been recorded
to recognize that certain state net operating loss carryforwards may expire
before realization. The Company continues to monitor the need for a valuation
allowance for its deferred tax assets based on the realizability of such assets.
The amount of the deferred tax assets considered realizable could be increased
or reduced in the near term if estimates of future taxable income during the
carryforward period are adjusted.
The Company had maintained a valuation allowance for its deferred tax
assets as of December 29, 2002, since the absence of historical pre-tax income
created uncertainty about the Company's ability to realize tax benefits in
future years. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. The remaining valuation allowance was
reversed at the end of fiscal 2003 based on management's belief that it was more
likely than not that all of the Company's net deferred tax assets would be
realized due to the Company's achieved earnings trends and outlook. In this
regard, $44.4 million was recorded as an income tax benefit in fiscal 2003 and
$19.5 million was credited directly to shareholders' equity to reflect the
portion of the valuation allowance associated with stock compensation tax
benefits.
At January 2, 2005, current net deferred tax assets were $23.9 million and
non-current net deferred tax assets were $21.2 million. At January 2, 2005, the
Company had federal tax credit carryforwards of $0.8 million and state net
operating loss carryforwards of $7.0 million.
NET INCOME
The Company recorded net income of $26.5 million or $1.00 per diluted
share in fiscal 2004 compared to net income of $56.8 million or $2.07 per
diluted share in fiscal 2003.
-22-
Net income for fiscal 2004 included special items related to Medicare,
noted in the Net Revenues section above, and a pre-tax gain of $0.9 million on
the sale of the Company's 19.9 percent interest in a Canadian home care company.
See Notes 3 and 9 to the Company's consolidated financial statements.
Net income for fiscal 2004 reflected the positive impact of an effective
tax rate of 34.1 percent due primarily to the recognition of certain state net
operating loss carryforwards, which was lower than the statutory income tax
rate.
YEAR ENDED DECEMBER 28, 2003 COMPARED TO YEAR ENDED DECEMBER 29, 2002
NET REVENUES
FISCAL YEAR
-------------------------------------
PERCENTAGE
(Dollars in millions) 2003 2002 VARIANCE
---------- ---------- ----------
Medicare $ 178.7 $ 162.3 10.1%
Medicaid and Local Government 165.1 167.4 (1.4)
Commercial Insurance and Other 470.2 438.8 7.2
---------- ---------- ---
$ 814.0 $ 768.5 5.9%
========== ========== ===
Net revenues increased by $45.5 million or 5.9 percent to $814.0 million
during fiscal 2003 as compared to $768.5 million during fiscal 2002. For fiscal
year 2003, as compared to fiscal year 2002, net revenues from Medicare increased
by $16.4 million or 10.1 percent to $178.7 million. Commercial Insurance and
Other payer's net revenues increased by $31.4 million or 7.2 percent to $470.2
million and Medicaid and Local Government payer's net revenues decreased $2.3
million or 1.4 percent to $165.1 million.
Medicare revenue growth for fiscal 2003, as compared to fiscal 2002, was
primarily fueled by increases in episodes serviced of 8.7 percent. In addition,
Medicare revenue was positively impacted by (i) $1.6 million due to a 3.3
percent market basket rate increase that became effective for patients on
service on or after October 1, 2003 and (ii) $2.5 million due to the absence of
a revenue adjustment recorded in fiscal 2002 relating to partial episode
payments ("PEPs") and various clinical and operational process changes
implemented in late 2003. In comparing the fiscal year 2003 and 2002 periods,
Medicare revenues were negatively impacted by an overall 4.9 percent reduction
in Medicare reimbursement rates (approximately $6.0 million for fiscal 2003),
which became effective for Medicare patients beginning in October 2002, and by
the elimination of the rural add-on provision ($1.4 million for fiscal 2003) for
home health services, which became effective April 1, 2003.
Revenue growth from Commercial Insurance and Other payers was driven by a
combination of pricing and volume increases from existing customers and new
contracts that were signed during the past year. Of the 7.2 percent increase in
net revenues for fiscal 2003, new contracts from Commercial Insurance and Other
payers accounted for 3.3 percent.
Medicaid and Local Government revenues decreased for fiscal year 2003 due
to revenue reductions related to more restrictive eligibility requirements in
some states and lower reimbursement rates in certain other states. In addition,
for fiscal 2003, revenues were negatively impacted by the Company's decision to
reduce or terminate its participation in certain low-margin, hourly Medicaid and
state and county programs. Revenues relating to these hourly Medicaid and state
and county programs decreased $8.5 million as compared to fiscal year 2002.
These decreases were offset somewhat by increases in the intermittent care
Medicaid business in selected states.
-23-
GROSS PROFIT
FISCAL YEAR
--------------------------------------
(Dollars in millions) 2003 2002 VARIANCE
---------- ---------- ----------
Gross profit $ 282.0 $ 247.6 $ 34.4
As a percent of revenue 34.6% 32.2% 2.4%
Gross profit margins for fiscal 2003, as compared to fiscal 2002, were
positively impacted by an increase in Medicare episodes serviced and
improvements in utilization in both the commercial insurance business and
Medicare (1.6 percent), reductions in insurance costs (0.5 percent), the
Medicare market basket rate increase of 3.3 percent that became effective for
patients on service on or after October 1, 2003 (0.2 percent) and the absence of
both a $2.5 million revenue adjustment related to PEPs (0.3 percent) and the
$6.3 million special charge associated with insurance costs that were recorded
in fiscal 2002 (0.8 percent). These increases were partially offset by an
overall 4.9 percent reduction in Medicare reimbursement rates (approximately
$6.0 million or 0.8 percent), which became effective for Medicare patients
beginning October 2002, and the elimination of the rural add-on provision ($1.4
million or 0.2 percent) for home health services which became effective April 1,
2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal year 2003, selling, general and administrative expenses,
including depreciation and amortization, decreased $24 million or 8.6 percent to
$259 million compared to $283 million for the corresponding period in fiscal
2002. This decrease is related to restructuring and special charges of $46.1
million, of which approximately $40 million was reflected in selling, general
and administrative expenses in the accompanying consolidated statements of
operations for fiscal year 2002. See Note 4 to the consolidated financial
statements for further discussion of the restructuring and special charges.
Excluding these special charges, selling, general and administrative expenses,
including depreciation and amortization, increased $15.4 million for fiscal year
2003.
This increase for fiscal 2003 related to increases in sales and field
administrative expenses due to headcount additions, investments in technology
initiatives and costs relating to training in connection with the implementation
of provisions of the Healthcare Insurance Portability and Accountability Act of
1996 ("HIPAA") and a new software based scheduling system. These increases were
partially offset by reductions in corporate administrative expenses resulting
from restructuring efforts following the sale of the SPS business in the second
quarter of fiscal year 2002. During fiscal 2003, headcount of personnel
dedicated to sales and clinical care coordination efforts increased by
approximately 19 percent while headcount relating to field and administrative
personnel increased by less than 2 percent.
Restructuring and special charges for fiscal year 2002 are summarized and
further described below (in thousands):
Restructuring charges:
Business realignment activities $ 6,813
----------
Special charges:
Option tender offer 21,388
Settlement costs 7,731
Insurance costs 6,300
Asset writedowns and other 3,824
----------
Total special charges 39,243
----------
Total restructuring and special charges $ 46,056
==========
-24-
FISCAL 2002
BUSINESS REALIGNMENT ACTIVITIES
The Company recorded charges of $6.8 million during the second quarter
ended June 30, 2002 in connection with a restructuring plan. This plan included
the closing and consolidation of seven field locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's SPS business. These charges included
employee severance of $0.9 million relating to the termination of 115 employees
in field locations and certain corporate and administrative departments, and
future lease payments and other associated costs of $5.9 million resulting
principally from the consolidation of office space at the Company's corporate
headquarters and a change in estimated future lease obligations and other costs
in excess of sublease rentals relating to a lease for a subsidiary of the
Company's former parent company which the Company agreed to assume in connection
with its Split-Off in March 2000. These charges are reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002. During fiscal year
2002, the Company paid $2.1 million in restructuring costs, leaving
approximately $4.7 million of these restructuring charges unpaid, representing
severance costs of $0.2 million which were to be paid during 2003 and lease and
other associated costs of $4.5 million which will be paid over the remaining
lease terms. During fiscal years 2003 and 2004, the Company paid $2.4 million
and $0.4 million, respectively, in restructuring costs, leaving approximately
$1.9 million of these restructuring charges unpaid, representing lease and other
associated costs which will be paid over the remaining lease terms.
OPTION TENDER OFFER
During the second quarter ended June 30, 2002, the Company effected a cash
tender offer for all outstanding options to purchase its common stock for an
aggregate option purchase price not to exceed $25 million. In connection with
this tender offer, the Company recorded a charge of $21.4 million during the
second quarter of fiscal 2002, which is reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for fiscal year 2002.
SETTLEMENT COSTS
The Company recorded a $7.7 million charge in the second quarter of fiscal
2002 to reflect settlement costs relating to the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation lawsuit as well as estimated settlement
costs related to government inquiries regarding cost reporting procedures
concerning contracted nursing and home health aide costs (see Note 9 to the
consolidated financial statements). These costs are reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for fiscal year 2002.
INSURANCE COSTS
The Company recorded a special charge of $6.3 million in the second
quarter of fiscal 2002 related primarily to a refinement in the estimation
process used to determine the Company's actuarially computed workers
compensation and professional liability insurance reserves. This special charge
is reflected in cost of services sold in the accompanying consolidated statement
of operations for fiscal year 2002.
ASSET WRITEDOWNS AND OTHER
The Company recorded charges of $3.8 million in the second quarter of
fiscal 2002, consisting primarily of a write-down of inventory and other assets
associated with home medical equipment used in the Company's nursing operations,
and a write-off of deferred debt issuance costs associated with the terminated
credit facility. The charges are reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for fiscal year 2002.
-25-
INTEREST INCOME, NET
Net interest income was approximately $0.4 million for fiscal year 2003
and $0.8 million for fiscal year 2002. Net interest income represented interest
income of approximately $1.5 million for fiscal 2003 and $2.4 million for fiscal
2002, partially offset by fees relating to the revolving credit facility and
outstanding letters of credit.
Interest income declined in fiscal 2003 as compared to fiscal 2002 due to
a decline in interest rates on cash, cash equivalents and restricted cash and,
to a lesser extent, a decrease in average cash balances during the year.
Interest expense declined in the fiscal 2003 periods due to reductions in the
average outstanding letters of credit, as well as reductions in fees associated
with the unused portion of the credit facility.
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
Income (loss) from continuing operations before income taxes was
approximately $23.3 million and ($35.1) million for fiscal years ended December
28, 2003 and December 29, 2002, respectively. For fiscal year 2002, loss from
continuing operations before income taxes included restructuring and special
charges of $46.1 million.
INCOME TAXES
The Company recorded an income tax benefit of $33.5 million in fiscal 2003
compared to an income tax expense of $18.4 million in fiscal 2002.
A federal and state tax benefit was recorded in fiscal 2002, relative to
the loss from continuing operations, offset by a $26.8 million provision
associated with the adoption of SFAS No. 142, as discussed in Note 2 to the
consolidated financial statements, and an adjustment of $5.4 million for tax
audit adjustments. As of December 29, 2002, the Company had federal net
operating loss and tax credit carryforwards of $15 million and maintained a full
valuation allowance against its net deferred tax assets of $63.9 million.
Realization of the deferred tax assets is dependent on generating sufficient
taxable income. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. Based on management's belief that it was
more likely than not that all of the Company's net deferred tax assets would be
realized due to the Company's achieved earnings trends and outlook, the
remaining valuation allowance for net deferred tax assets was reversed,
resulting in a tax benefit of $35.0 million recorded in the statement of
operations and an additional credit of $19.5 million relating to the tax
benefits associated with stock compensation was recorded directly to
shareholders' equity. At December 28, 2003, the Company had federal net
operating loss and tax credit carryforwards of $11.8 million. See Note 12 to the
Company's consolidated financial statements.
NET INCOME (LOSS)
The Company recorded net income of $56.8 million or $2.07 per diluted
share in fiscal 2003 compared to a net loss of $49.0 million or ($1.87) per
diluted share in fiscal 2002.
The net loss for fiscal 2002 included a net loss from continuing
operations of $53.5 million or ($2.05) per diluted share, which included $46.1
million of restructuring and special charges, income from discontinued
operations of $191.6 million or $7.32 per diluted share and a net charge of
$187.1 million or ($7.14) per diluted share relating to the cumulative effect of
accounting change for goodwill.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payer arrangements. Net cash provided by operating
activities was $34.9 million in fiscal 2004. In addition, during fiscal 2004 the
Company received cash proceeds of $4.1 million in connection with the sale of
the Company's investment in a Canadian homecare business and $6.7 million in
connection with
-26-
the issuance of common stock. This cash was used to fund capital expenditures of
$12.6 million and repurchase shares of common stock of $38.4 million during
fiscal 2004.
Days Sales Outstanding ("DSO") for the home health services business
decreased 2 days to 57 days at January 2, 2005 as compared to December 28, 2003.
Working capital at January 2, 2005 was $137 million, an increase of $1 million
as compared to $136 million at December 28, 2003, primarily due to:
- a $4 million decrease in cash and cash equivalents, restricted cash
and short-term investments;
- a $1 million decrease in accounts receivable;
- a $3 million decrease in deferred tax assets; and
- a $9 million decrease in current liabilities, primarily driven by
decreases in payroll and related taxes ($4 million), obligations under
insurance programs ($2 million), Medicare liabilities ($3 million),
other accrued expenses ($1 million), and cost of claims incurred but
not reported ($1 million), partially offset by an increase in accounts
payable ($2 million).
The Company participates in the Medicare, Medicaid and other federal and
state healthcare programs. There are certain standards and regulations that the
Company must adhere to in order to continue to participate in these programs,
including compliance with the Company's corporate integrity agreement. As part
of these standards and regulations, the Company is subject to periodic audits,
examinations and investigations conducted by, or at the direction of,
governmental investigatory and oversight agencies. Periodic and random audits
conducted or directed by these agencies could result in a delay or adjustment to
the amount of reimbursements received under these programs. Violation of the
applicable federal and state health care regulations can result in the Company's
exclusion from participating in these programs and can subject the Company to
substantial civil and/or criminal penalties. The Company believes it is
currently in compliance with these standards and regulations.
The Company is party to a contract with Cigna pursuant to which the
Company provides or contracts with third party providers to provide home nursing
services, acute and chronic infusion therapies, durable medical equipment, and
respiratory products and services to patients insured by Cigna. For fiscal years
2004, 2003 and 2002, Cigna accounted for approximately 31 percent, 36 percent
and 38 percent, respectively, of the Company's total net revenues. The Company
extended its relationship with Cigna by entering into a new national home health
care contract, as amended, effective January 1, 2004. The term of the new
contract extends to December 31, 2006, and automatically renews thereafter for
additional one year terms unless terminated. Un