10-K/A 1 d16677_10-k.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Amendment No.1) [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. ----------------------------- (Exact name of registrant as specified in its charter) DELAWARE 36-4335801 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 501-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- 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. EXPLANATORY NOTE On March 17, 2005, Gentiva Health Services, Inc. ("Gentiva" or the "Company"), filed its annual report on Form 10-K for the fiscal year ended January 2, 2005 with the Securities and Exchange Commission. This Amendment No. 1 on Form 10-K/A is being filed solely to correct typographical errors in the last sentence of the first paragraph of Item 9A and in Item 15(a)(1) in the table included in Note 3 and in the third table included in Note 12 to the Company's consolidated financial statements. This amendment includes an updated consent of the Company's independent registered public accounting firm as well as updated certifications of Gentiva's chief executive officer and chief financial officer. Accordingly, pursuant to Rule 12b-15 under the Securities Exchange Act of 1934, this amendment contains the complete text of Item 9A and Item 15. Except as described above, no other information in the Form 10-K has been amended. ITEM 9A. CONTROLS AND PROCEDURES Section 404 of the Sarbanes-Oxley Act of 2002 requires management to include in this annual report on Form 10-K a report on management's assessment of the effectiveness of the Company's internal control over financial reporting, as well as an attestation report from the Company's independent registered public accounting firm on management's assessment of the effectiveness of the Company's internal control over financial reporting. Management's Report on Internal Control over Financial Reporting and the related attestation report from the Company's independent registered public accounting firm are located on pages F-2 and F-3 - F-4, respectively, of this annual report on Form 10-K and are incorporated herein by reference. EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of the end of such period to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended January 2, 2005 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter. -35- ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a)(1) FINANCIAL STATEMENTS
Page No. ----------- - Report of Independent Registered Public Accounting Firm..................................... F-3 and F-4 - Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003..................... F-5 - Consolidated Statements of Operations for the three years ended January 2, 2005............. F-6 - Consolidated Statements of Changes in Shareholders' Equity for the three years ended January 2, 2005............................................................................. F-7 - Consolidated Statements of Cash Flows for the three years ended January 2, 2005............. F-8 - Notes to Consolidated Financial Statements.................................................. F-9
-36- (a)(2) FINANCIAL STATEMENT SCHEDULE - Schedule II - Valuation and Qualifying Accounts for the three years ended January 2, 2005........................................................................................ F-29
(a)(3) EXHIBITS
EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------- 3.1 Amended and Restated Certificate of Incorporation of Company (1) 3.2 Certificate of Correction to Certificate of Incorporation, filed with the Delaware Secretary of State on July 1, 2002 (2) 3.3 Amended and Restated By-Laws of Company (2) 4.1 Specimen of common stock (4) 4.2 Form of Certificate of Designation of Series A Junior Participating Preferred Stock (1) 4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock (3) 10.1 Separation Agreement dated August 17, 1999 among Olsten Corporation, Aaronco Corp. and Adecco SA (1) 10.2 Omnibus Amendment No. 1 dated October 7, 1999 by and among Olsten Corporation, Aaronco Corp., Adecco SA and Olsten Health Services Holding Corp. (1) 10.3 Omnibus Amendment No. 2 dated January 18, 2000 by and among Olsten Corporation, Adecco SA, Olsten Health Services Holding Corp., the Company and Staffing Acquisition Corporation (1) 10.4 Form of Rights Agreement dated March 2, 2000 between the Company and EquiServe Trust Company, N.A., as rights agent (3) 10.5 Company's Executive Officers Bonus Plan (1)* 10.6 Company's 1999 Stock Incentive Plan (5)* 10.7 Company's 2004 Equity Incentive Plan (6)* 10.8 Company's Stock & Deferred Compensation Plan for Non-Employee Directors, as amended and restated as of January 1, 2004 (7)* 10.9 Company's Employee Stock Purchase Plan (1)* 10.10 Company's Nonqualified Retirement and Savings Plan and First, Second, Third and Fourth Amendments thereto (7)* 10.11 Form of Change in Control Agreement with each of Vernon A. Perry, Jr., John R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel (2)* (the Change in Control Agreements are identical in substance for each of the named officers, except that the Change in Control Agreements for Messrs. Perry, Potapchuk and Creamer provide in paragraphs 4(ii) and 4(iii), respectively, for a
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EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------- multiple of "two" in calculating a payment under each officer's Agreement and for up to two years of continued employee benefits and the Change in Control Agreement for Mary Morrisey Gabriel provides in paragraphs 4(ii) and 4(iii), respectively, for a multiple of "one" in calculating a payment under her Agreement and for up to one year of continued employee benefits) 10.12 Form of Severance Agreement with each of Vernon A. Perry, Jr., John R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel (2)* (the Severance Agreements are identical in substance for each of the named officers, except that the Severance Agreements for Messrs. Perry, Potapchuk and Creamer provide in paragraph 1 for payments of 18 months of severance and the Severance Agreement for Ms. Morrisey Gabriel provides in paragraph 1 for the payment of 12 months of severance) 10.13 Employment Agreement dated as of March 22, 2004 with Ronald A. Malone (8)* 10.14 Change in Control Agreement dated as of March 22, 2004 with Ronald A. Malone (8)* 10.15 Forms of Notices and Agreements covering awards of stock options and restricted stock under Company's 2004 Equity Incentive Plan (9)* 10.l6 Summary Sheet of Company compensation to non-employee directors, effective January 1, 2004 (10)* 10.17 Performance goals and criteria for 2005 set under Company's Executive Officers Bonus Plan (11)* 10.18 Loan and Security Agreement dated June 13, 2002 by and between Fleet Capital Corporation, as Administrative Agent, on behalf of the lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva Health Services Holding Corp. and the subsidiaries named therein (12) 10.19 First Amendment and Consent Agreement dated August 7, 2003 to Loan and Security Agreement dated June 13, 2002 by and between Fleet Capital Corporation, as Administrative Agent on behalf of the lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva Health Services Holding Corp. and the subsidiaries named therein (13) 10.20 Second Amendment dated November 26, 2003 to Loan and Security Agreement dated June 13, 2002 by and between Fleet Capital Corporation, as Administrative Agent on behalf of the lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva Health Services Holding Corp. and the subsidiaries named therein (7) 10.21 Third Amendment and Joinder dated February 25, 2004 to Loan and Security Agreement dated June 13, 2002 by and between Fleet Capital Corporation, as Administrative Agent on behalf of the lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva Health Services Holding Corp. and the subsidiaries named therein (7) 10.22 Fourth Amendment dated May 26, 2004 to Loan and Security Agreement dated June 13, 2002 by and between Fleet Capital Corporation, as Administrative Agent on behalf of the lenders named therein, Fleet Securities, Inc., as Arranger, Gentiva Health Services, Inc., Gentiva Health Services Holding Corp. and the subsidiaries named therein (14) 10.23 Asset Purchase Agreement dated as of January 2, 2002 by and between Accredo Health, Incorporated, the Company and the Sellers named therein (15)
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EXHIBIT NUMBER DESCRIPTION ------- -------------------------------------------------------------------- 10.24 Managed Care Alliance Agreement between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered into as of January 1, 2004 (7) (confidential treatment requested as to portions of this document) 10.25 Amendment dated January 1, 2005 to Managed Care Alliance Agreement between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered into as of January 1, 2004 (10) (confidential treatment requested as to portions of this document) 10.26 Consulting Agreement dated as of July 1, 2002 between Gail R. Wilensky and Gentiva Health Services (USA), Inc. (16)* 10.27 Amendment dated August 7, 2003 to Consulting Agreement dated as of July 1, 2002 between Gail R. Wilensky and Gentiva Health Services (USA), Inc. (13)* 21. List of Subsidiaries of Company (10) 23. Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm + 31.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) + 31.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) + 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 + 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 +
--------------------- (1) Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4 dated January 19, 2000 (File No. 333-88663). (2) Incorporated herein by reference to Form 10-Q of Company for quarterly period ended June 30, 2002. (3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4 dated February 4, 2000 (File No. 333-88663). (4) Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4 dated February 9, 2000 (File No. 333-88663). (5) Incorporated herein by reference to Form 10-K of Company for the fiscal year ended January 2, 2000. (6) Incorporated herein by reference to Appendix B to definitive Proxy Statement of Company dated April 8, 2004. (7) Incorporated herein by reference to Form 10-K of Company for the fiscal year ended December 28, 2003. (8) Incorporated herein by reference to Form 10-Q of Company for the quarterly period ended March 28, 2004. (9) Incorporated herein by reference to Form 10-Q of Company for quarterly period ended September 26, 2004. (10) Incorporated by reference to Form 10-K of Company for the fiscal year ended January 2, 2005. (11) Incorporated herein by reference to Form 8-K of Company dated February 23, 2005 and filed March 1, 2005. (12) Incorporated herein by reference to Form 8-K of Company dated June 13, 2002 and filed June 21, 2002. -39- (13) Incorporated herein by reference to Form 10-Q of Company for quarterly period ended September 28, 2003. (14) Incorporated herein by reference to Form 10-Q of Company for quarterly period ended June 27, 2004. (15) Incorporated herein by reference to definitive Proxy Statement of Company dated May 10, 2002. (16) Incorporated herein by reference to Form 10-Q of Company for quarterly period ended March 30, 2003. * Management contract or compensatory plan or arrangement + Filed herewith -40- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. GENTIVA HEALTH SERVICES, INC. Date: March 25, 2005 By: /s/ John R. Potapchuk -------------------- John R. Potapchuk Senior Vice President and Chief Financial Officer -41- GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
Page No. ----------- Management's Responsibility for Financial Statements................................................. F-2 Management's Report on Internal Control over Financial Reporting..................................... F-2 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm.............................................. F-3 and F-4 Consolidated Balance Sheets as of January 2, 2005 and December 28, 2003.............................. F-5 Consolidated Statements of Operations for the three years ended January 2, 2005...................... F-6 Consolidated Statements of Changes in Shareholders' Equity for the three years ended January 2, 2005................................................................................. F-7 Consolidated Statements of Cash Flows for the three years ended January 2, 2005...................... F-8 Notes to Consolidated Financial Statements........................................................... F-9 Schedule II - Valuation and Qualifying Accounts for the three years ended January 2, 2005............ F-29
F-1 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation of the Company's consolidated financial statements and related information appearing in this Report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company's financial position and results of operations in conformity with generally accepted accounting principles. Management also has included in the Company's financial statements amounts that are based on estimates and judgments which it believes are reasonable under the circumstances. The independent registered public accounting firm audits the Company's consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board and provides an objective, independent review of the fairness of reported operating results and financial position. The Board of Directors of the Company has an Audit Committee comprised of three independent directors. The Audit Committee meets at least quarterly with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters. MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework, our management concluded that our internal control over financial reporting was effective as of January 2, 2005. Our management's assessment of the effectiveness of our internal control over financial reporting as of January 2, 2005 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein. F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Gentiva Health Services, Inc. and Subsidiaries: We have completed an integrated audit of Gentiva Health Services, Inc. and Subsidiaries (the "Company") fiscal 2004 consolidated financial statements and of their internal control over financial reporting as of January 2, 2005 and audits of their fiscal 2003 and fiscal 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below. Consolidated financial statements and financial statement schedule In our opinion, the accompanying consolidated financial statements listed in the index appearing under item 15(a)(1) of the Form 10-K present fairly, in all material respects, the financial position of the Company at January 2, 2005 and December 28, 2003, and the results of their operations and their cash flows for each of the three years in the period ended January 2, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15 (a)(2) of the Form 10-K presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 2 to the consolidated financial statements, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which changed the method of accounting for goodwill and other intangibles assets effective December 31, 2001. Internal control over financial reporting Also, in our opinion, management's assessment, included in the accompanying Management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of January 2, 2005 based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 2, 2005, based on criteria established in Internal Control - Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating F-3 management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP --------------------------------- Stamford, Connecticut March 15, 2005 F-4 GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JANUARY 2, 2005 DECEMBER 28, 2003 --------------- -------------------- ASSETS Current assets: Cash and cash equivalents $ 9,910 $ 75,688 Restricted cash 22,014 21,750 Short-term investments 81,100 20,000 Receivables, less allowance for doubtful accounts of $7,040 and $7,936 at fiscal year end 2004 and 2003, respectively 132,002 132,998 Deferred tax assets 23,861 26,464 Prepaid expenses and other current assets 6,057 6,524 --------------- -------------------- Total current assets 274,944 283,424 Fixed assets, net 19,687 15,135 Deferred tax assets, net 21,233 28,025 Other assets 16,234 15,929 --------------- -------------------- Total assets $ 332,098 $ 342,513 =============== ==================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 25,896 $ 23,504 Payroll and related taxes 9,356 12,932 Medicare liabilities 9,949 12,736 Cost of claims incurred but not reported 27,361 28,525 Obligations under insurance programs 34,660 37,200 Other accrued expenses 31,117 32,230 --------------- -------------------- Total current liabilities 138,339 147,127 Other liabilities 21,819 18,207 Shareholders' equity: Common stock, $.10 par value; authorized 100,000,000 shares; issued and outstanding 23,722,408 and 25,598,301 shares, at fiscal year end 2004 and 2003, respectively 2,372 2,560 Additional paid-in capital 238,929 270,468 Accumulated deficit (69,361) (95,849) --------------- -------------------- Total shareholders' equity 171,940 177,179 --------------- -------------------- Total liabilities and shareholders' equity $ 332,098 $ 342,513 =============== ====================
See notes to consolidated financial statements. F-5 GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE FISCAL YEAR ENDED --------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 --------------- ----------------- ----------------- (53 WEEKS) (52 WEEKS) (52 WEEKS) Net revenues $ 845,764 $ 814,029 $ 768,501 Cost of services sold 521,835 531,987 520,901 --------------- ----------------- ----------------- Gross profit 323,929 282,042 247,600 Selling, general and administrative expenses (278,342) (252,334) (276,355) Depreciation and amortization (7,329) (6,851) (7,185) --------------- ----------------- ----------------- Operating income (loss) 38,258 22,857 (35,940) Gain on sale of Canadian investment 946 -- - Interest income, net 977 441 834 --------------- ----------------- ----------------- Income (loss) from continuing operations before income taxes 40,181 23,298 (35,106) Income tax (expense) benefit (13,693) 33,468 (18,437) --------------- ----------------- ----------------- Income (loss) from continuing operations 26,488 56,766 (53,543) Discontinued operations, net of tax -- -- 191,578 --------------- ----------------- ----------------- Income before cumulative effect of accounting change 26,488 56,766 138,035 Cumulative effect of accounting change, net of tax -- -- (187,068) --------------- ----------------- ----------------- Net income (loss) $ 26,488 $ 56,766 $ (49,033) =============== ================= ================= Basic earnings per share: Income (loss) from continuing operations $ 1.07 $ 2.16 $ (2.05) Discontinued operations, net of tax -- -- 7.32 Cumulative effect of accounting change, net of tax -- -- (7.14) --------------- ----------------- ----------------- Net income (loss) $ 1.07 $ 2.16 $ (1.87) =============== ================= ================= Weighted average shares outstanding 24,724 26,262 26,183 =============== ================= ================= Diluted earnings per share: Income (loss) from continuing operations $ 1.00 $ 2.07 $ (2.05) Discontinued operations, net of tax -- -- 7.32 Cumulative effect of accounting change, net of tax -- -- (7.14) --------------- ----------------- ----------------- Net income (loss) $ 1.00 $ 2.07 $ (1.87) =============== ================= ================= Weighted average shares outstanding 26,365 27,439 26,183 =============== ================= =================
See notes to consolidated financial statements. F-6 GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE THREE YEARS ENDED JANUARY 2, 2005 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ADDITIONAL -------------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL ----------- ----------- ------------ ------------ ----------- Balance at December 30, 2001 25,638,794 $ 2,564 $ 722,725 $ (103,582) $ 621,707 Comprehensive loss: Net loss -- -- -- (49,033) (49,033) Dividends paid ($17.75 per share) -- -- (466,597) -- (466,597) Issuance of stock upon exercise of stock options and under stock plans for employees and directors 746,416 75 6,896 -- 6,971 ----------- ----------- ------------ ------------ ----------- Balance at December 29, 2002 26,385,210 $ 2,639 $ 263,024 $ (152,615) $ 113,048 Comprehensive income: Net Income -- -- -- 56,766 56,766 Income tax benefits associated with stock-based compensation -- -- 19,454 -- 19,454 Issuance of stock upon exercise of stock options and under stock plans for employees and directors 651,555 65 2,271 -- 2,336 Repurchase of common stock at cost (1,438,464) (144) (14,281) -- (14,425) ----------- ----------- ------------ ------------ ----------- Balance at December 28, 2003 25,598,301 $ 2,560 $ 270,468 $ (95,849) $ 177,179 Comprehensive income: Net Income -- -- -- 26,488 26,488 Income tax benefits associated with the exercise of non-qualified stock options -- -- 1,535 -- 1,535 Issuance of stock upon exercise of stock options and under stock plans for employees and directors 677,247 68 5,072 -- 5,140 Repurchase of common stock at cost (2,553,140) (256) (38,146) -- (38,402) ----------- ----------- ------------ ------------ ----------- Balance at January 2, 2005 23,722,408 $ 2,372 $ 238,929 $ (69,361) $ 171,940 =========== =========== ============ ============ ===========
See notes to consolidated financial statements. F-7 GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE FISCAL YEAR ENDED ---------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 --------------- ----------------- ----------------- (53 WEEKS) (52 WEEKS) (52 WEEKS) OPERATING ACTIVITIES: Net income (loss) $ 26,488 $ 56,766 $ (49,033) Adjustments to reconcile net income (loss) to net cash provided by operating activities Income from discontinued operations -- -- (191,578) Cumulative effect of accounting change -- -- 187,068 Depreciation and amortization 7,329 6,851 7,185 Provision for doubtful accounts 6,722 7,684 4,936 Gain on sale of Canadian investment (946) -- -- Loss (gain) on disposal / writedown of fixed assets 1,361 (209) 951 Stock option tender offer -- -- 21,388 Deferred income tax (benefit) expense 9,114 (35,035) 12,837 Changes in assets and liabilities, net of acquisitions/divestitures Accounts receivable (5,726) (15,604) 10,281 Prepaid expenses and other current assets 25 3,048 7,825 Current liabilities (10,372) 7,065 6,393 Change in net assets held for sale -- -- 3,300 Other, net 858 137 (3,024) -------- -------- --------- Net cash provided by operating activities 34,853 30,703 18,529 -------- -------- --------- INVESTING ACTIVITIES: Purchase of fixed assets - continuing operations (12,593) (8,777) (4,116) Purchase of fixed assets - discontinued operations -- -- (2,121) Proceeds from sale of assets / business 4,123 200 206,564 Acquisition of businesses -- (1,300) -- Purchase of short-term investments available-for-sale (145,950) (10,000) -- Maturities of short-term investments available-for-sale 84,850 -- -- Purchase of short-term investments (10,000) (24,900) -- Maturities of short-term investments 10,000 14,935 -- (Deposits into) withdrawals from restricted cash (264) (21,750) 35,164 -------- -------- --------- Net cash (used in) provided by investing activities (69,834) (51,592) 235,491 -------- -------- --------- FINANCING ACTIVITIES: Proceeds from issuance of common stock 6,675 2,336 6,971 Change in book overdrafts 1,223 7,425 -- Repurchases of common stock (38,402) (14,425) -- Repayment of capital lease obligations (293) -- -- Debt issuance costs -- -- (1,321) Cash distribution to shareholders -- -- (203,983) Payments for stock option tender -- -- (21,388) Advance paid to Medicare program -- -- (5,038) -------- -------- --------- Net cash used in financing activities (30,797) (4,664) (224,759) -------- -------- --------- Net change in cash and cash equivalents (65,778) (25,553) 29,261 Cash and cash equivalents at beginning of period 75,688 101,241 71,980 -------- -------- --------- Cash and cash equivalents at end of period $ 9,910 $ 75,688 $ 101,241 ======== ======== =========
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES For fiscal year 2004, deferred tax benefits associated with stock compensation deductions of $1.5 million have been credited to shareholders' equity. For fiscal year 2003, in connection with the reversal of the valuation allowance, deferred tax benefits associated with stock compensation deductions of $19.5 million have been credited to shareholders' equity. For fiscal year 2002, in connection with the sale of the Company's Specialty Pharmaceutical Services business on June 13, 2002, the Company received 5,060,976 shares of common stock of Accredo Health, Incorporated, which were subsequently distributed to the Company's shareholders. See notes to consolidated financial statements. F-8 GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. BACKGROUND AND BASIS OF PRESENTATION Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides comprehensive home health services throughout most of the United States. Gentiva was incorporated in the state of Delaware on August 6, 1999 and became an independent publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off"). Continuing operations for all periods presented comprise the operating results of the home health services business, including, for fiscal 2002, restructuring and other special charges as described in Note 4. On June 13, 2002, the Company sold substantially all of the assets of its specialty pharmaceutical services ("SPS") business to Accredo Health, Incorporated ("Accredo") and issued a special dividend to its shareholders as further described in Note 3. The operating results of the SPS business through the closing date of the sale to Accredo, including corporate expenses directly attributable to SPS operations, restructuring and special charges related to the SPS business, as well as the gain on the sale, net of transaction costs and related income taxes, are reflected as discontinued operations in the accompanying consolidated statement of operations for fiscal 2002. The Company adopted the provisions of Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" as of the beginning of fiscal 2002. In connection with this adoption, the Company recorded a non-cash charge, net of taxes, as a cumulative effect of accounting change in the accompanying consolidated statement of operations in fiscal 2002 as described in Note 2. NOTE 2. SUMMARY OF CRITICAL AND OTHER SIGNIFICANT ACCOUNTING POLICIES CONSOLIDATION The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. The Company's fiscal year ends on the Sunday nearest to December 31st, which was January 2, 2005 for fiscal 2004, December 28, 2003 for fiscal 2003 and December 29, 2002 for fiscal 2002. The Company's fiscal year 2004 includes 53 weeks compared to fiscal years 2003 and 2002 which include 52 weeks. ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most critical estimates relate to revenue recognition, the collectibility of accounts receivable and related reserves, the cost of claims incurred but not reported, obligations under workers compensation, professional liability and employee health and welfare insurance programs and Medicare settlement issues. A description of the critical and other significant accounting policies and a discussion of the significant estimates and judgments associated with such policies are described below. CRITICAL ACCOUNTING POLICIES REVENUE RECOGNITION Under fee-for-service agreements with patients and commercial and certain government payers, net revenues are recorded based on net realizable amounts to be received in the period in which the services and F-9 products are provided or delivered. Fee-for-service contracts with commercial payers are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party. Under capitated arrangements with certain managed care customers, net revenues are recognized based on a predetermined monthly contractual rate for each member of the managed care plan regardless of the volume of services covered by the capitation arrangement. Net revenues generated under capitated agreements were approximately 12 percent, 16 percent, and 16 percent of total net revenues for fiscal 2004, 2003, 2002, respectively. Under the Prospective Payment System ("PPS") for Medicare reimbursement, net revenues are recorded based on a reimbursement rate which varies based on the severity of the patient's condition, service needs and certain other factors; revenue is recognized ratably over the period in which services are provided. Revenue is subject to adjustment during this period if there are significant changes in the patient's condition during the treatment period or if the patient is discharged but readmitted to another agency within the same 60 day episodic period. Medicare billings under PPS are initially recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period. The process for recognizing revenue to be recognized under the Medicare program is based on certain assumptions and judgments, including the average length of time of each treatment as compared to a standard 60 day episode, the appropriateness of the clinical assessment of each patient at the time of certification and the level of adjustments to the fixed reimbursement rate relating to patients who receive a limited number of visits, have significant changes in condition or are subject to certain other factors during the episode. Deferred revenue of approximately $5.5 million and $5.2 million relating to the Medicare PPS program was included in other accrued expenses in the consolidated balance sheets as of January 2, 2005 and December 28, 2003, respectively. Revenue adjustments result from differences between estimated and actual reimbursement amounts, an inability to obtain appropriate billing documentation or authorizations acceptable to the payer and other reasons unrelated to credit risk. Revenue adjustments are deducted from gross accounts receivable. These revenue adjustments are based on significant assumptions and judgments which are determined by Company management based on historical trends. Third party settlements resulting in recoveries are recognized as net revenues in the period in which the funds are received. Net revenues attributable to major payer sources of reimbursement are as follows:
2004 2003 2002 ---- ---- ---- Medicare 27% 22% 21% Medicaid and Local Government 18 20 22 Commercial Insurance and Other 55 58 57 --- --- --- 100% 100% 100% === === ===
The Company is party to a contract with CIGNA Health Corporation ("Cigna"), pursuant to which the Company provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by Cigna. For fiscal years 2004, 2003 and 2002, Cigna accounted for approximately 31 percent, 36 percent and 38 percent, respectively, of the Company's total net revenues. The Company extended its relationship with Cigna by entering into a new national home health care contract effective January 1, 2004, as amended, with the new contract expiring on December 31, 2006. No other commercial payer accounts for 10 percent or more of the Company's net revenues. COLLECTIBILITY OF ACCOUNTS RECEIVABLE The process for estimating the ultimate collection of receivables, particularly with respect to fee-for-service arrangements, involves significant assumptions and judgments. In this regard, the Company has implemented a standardized approach to estimate and review the collectibility of its receivables based on accounts receivable aging trends. Historical collection and payer reimbursement experience is an integral part of the estimation process related to determining the allowance for doubtful accounts. In addition, the Company assesses the current state of its billing functions in order to identify any known collection or reimbursement issues F-10 to determine the impact, if any, on its reserve estimates, which involve judgment. Revisions in reserve estimates are recorded as an adjustment to the provision for doubtful accounts which is reflected in selling, general and administrative expenses in the consolidated statements of operations. The Company believes that its collection and reserve processes, along with the monitoring of its billing processes, help to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in collection, reimbursement experience and billing functions. COST OF CLAIMS INCURRED BUT NOT REPORTED Under capitated arrangements with managed care customers, the Company estimates the cost of claims incurred but not reported based on applying actuarial assumptions, historical patterns of utilization to authorized levels of service, current enrollment statistics and other information. Under fee-for-service arrangements with certain managed care customers, the Company also estimates the cost of claims incurred but not reported and the estimated revenue relating thereto in situations in which the Company is responsible for care management and patient services are performed by a non-affiliated provider. The estimate of cost of claims incurred but not reported involves significant assumptions and judgments which relate to and may vary depending on the services authorized at each of the Company's regional coordination centers, historical patterns of service utilization and payment trends. These assumptions and judgments are evaluated on a quarterly basis and changes in estimated liabilities for costs of claims incurred but not reported are determined based on such evaluation. OBLIGATIONS UNDER INSURANCE PROGRAMS The Company is obligated for certain costs under various insurance programs, including workers compensation, professional liability and employee health and welfare. The Company may be subject to workers compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover this risk with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The cost of both reported claims and claims incurred but not reported, up to specified deductible limits, have generally been estimated based on historical data, industry statistics, the Company's own home health specific historical claims experience, current enrollment statistics and other information. Such estimates and the resulting reserves are reviewed and updated periodically. For the fiscal year ended December 29, 2002, the Company recorded a special charge of $6.3 million relating primarily to a refinement in the estimation process used to determine the Company's actuarially computed workers compensation and professional liability reserves. Management believes that, as a result of this refinement, sufficient data exists to allow the Company to more heavily rely on its own home health specific historical claims experience in determining the Company's estimates of workers compensation and professional liability reserves. Previously the Company utilized insurance industry actuarial information, as well as the Company's historical claims experience in developing reserve estimates. The Company maintains insurance coverage on individual claims. The Company is responsible for the cost of individual workers compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers compensation program are guaranteed by letters of credit and segregated restricted cash balances. The Company believes that its present insurance coverage and reserves are sufficient to cover currently estimated exposures, but there can be no assurance that the Company will not incur liabilities in excess of recorded reserves or in excess of its insurance limits. F-11 MEDICARE SETTLEMENT ISSUES Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System established through the Balanced Budget Act of 1997. These costs were reported in annual cost reports which were filed with the Centers for Medicare and Medicaid Services ("CMS") and were subject to audit by the fiscal intermediary engaged by CMS. The fiscal intermediary has not finalized its audit of the fiscal 2000 cost reports. Furthermore, settled cost reports relating to certain years prior to fiscal 2000 could be subject to reopening of the audit process by the fiscal intermediary. During fiscal 2004, the Company recorded a revenue adjustment of $1.0 million to reflect an estimated repayment to Medicare in connection with the services rendered to certain patients since the inception of PPS on October 1, 2000. In connection with the estimated repayment, CMS has determined that home care providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. As of January 2, 2005, Medicare has not finalized the amounts to be repaid for these items. Although management believes that established reserves, which are included in Medicare liabilities in the accompanying balance sheets, are sufficient, it is possible that adjustments resulting from such audits or the finalization of repayments to Medicare could result in adjustments to the consolidated financial statements that exceed established reserves. OTHER SIGNIFICANT ACCOUNTING POLICIES CASH, CASH EQUIVALENTS AND RESTRICTED CASH The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. Restricted cash primarily represents segregated cash funds in a trust account designated as collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security. Interest on all restricted funds accrues to the Company. Included in cash and cash equivalents are amounts on deposit with financial institutions in excess of $100,000, which is the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these financial institutions are viable entities and believes any risk of loss is remote. SHORT-TERM INVESTMENTS The Company's short-term investments consist primarily of AAA-rated auction rate securities and other debt securities with an original maturity of more than three months and less than one year on the acquisition date in accordance with SFAS No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Investments in debt securities are classified by individual security into one of three separate categories: available-for-sale, held-to-maturity or trading. Available-for-sale investments are carried on the balance sheet at fair value which for the Company approximates carrying value. Auction rate securities of $71.1 million and $10.0 million at January 2, 2005 and December 28, 2003, respectively, are classified as available-for-sale and are available to meet the Company's current operational needs and accordingly are classified as short-term investments. The interest rates on auction rate securities are reset to current interest rates periodically, typically 7, 14 and 28 days. Contractual maturities of the auction rate securities exceed ten years. Debt securities which the Company has the intent and ability to hold to maturity are classified as "held-to-maturity" investments and are reported at amortized cost which approximates fair value. Held-to-maturity investments, which have contractual maturities of less than one year, consist of government agency bonds of $10 million at January 2, 2005 and December 28, 2003. The Company has no investments classified as trading securities. F-12 FIXED ASSETS Fixed assets, including costs of Company developed software, are stated at cost and depreciated over the estimated useful lives of the assets using the straight-line method. Leasehold improvements are amortized over the shorter of the life of the lease or the life of the improvement. GOODWILL AND OTHER INTANGIBLE ASSETS ("SFAS 142") In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the criteria for recording intangible assets separate from goodwill. SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill and certain intangibles is more than its estimated fair value. The Company adopted SFAS 142 as of the beginning of fiscal 2002. The provisions of SFAS 142 require that a transitional impairment test be performed as of the beginning of the year the statement is adopted. Based on the results of the transitional impairment tests, the Company determined that an impairment loss relating to goodwill had occurred and recorded a non-cash charge of $187.1 million, net of a deferred tax benefit of $30.2 million, as cumulative effect of accounting change in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002. The deferred tax benefit was recorded by eliminating a deferred tax liability of $26.8 million and recording a deferred tax asset of approximately $39 million, offset by an increase in the tax valuation allowance by the same amount. During fiscal 2002, the Company also recorded a tax benefit of approximately $3.4 million relating to tax deductible goodwill. See Note 12 to the consolidated financial statements. The provisions of SFAS 142 also require that a goodwill impairment test be performed annually or on the occasion of other events that indicate a potential impairment. The annual impairment test of goodwill was performed and indicated that there was no impairment of goodwill for the fiscal years 2004 and 2003. Goodwill amounting to $1.2 million was included in Other Assets in the accompanying consolidated balance sheets as of January 2, 2005 and December 28, 2003. ACCOUNTING FOR IMPAIRMENT AND DISPOSAL OF LONG-LIVED ASSETS The Company evaluates the possible impairment of its long-lived assets, including intangible assets which are amortized pursuant to the provisions of SFAS 142, under SFAS No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS 144"). The Company reviews the recoverability of its long-lived assets when events or changes in circumstances occur that indicate that the carrying value of the asset may not be recoverable. Evaluation of possible impairment is based on the Company's ability to recover the asset from the expected future pretax cash flows (undiscounted and without interest charges) of the related operations. If the expected undiscounted pretax cash flows are less than the carrying amount of such asset, an impairment loss is recognized for the difference between the estimated fair value and carrying amount of the asset. BOOK OVERDRAFTS Book overdrafts, representing cash accounts with negative book balances for which there exists no legal right of offset with other accounts, are considered current liabilities. In this regard, book overdrafts of $8.6 million at January 2, 2005 and $7.4 million at December 28, 2003 were included in accounts payable in the accompanying consolidated balance sheets. STOCK-BASED COMPENSATION PLANS SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148") encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. In addition, SFAS 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation, and amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim F-13 financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company has chosen to adopt the disclosure-only provisions of SFAS 148 and continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. See Recent Accounting Pronouncements and Note 11. EARNINGS PER SHARE Basic and diluted earnings (loss) per share for each period presented has been computed by dividing the net income (loss) by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts for the Company's continuing operations were as follows (in thousands, except per share amounts):
FOR THE FISCAL YEAR ENDED -------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 --------------- ----------------- ----------------- (53 WEEKS) (52 WEEKS) (52 WEEKS) Income (loss) from continuing operations $ 26,488 $ 56,766 $ (53,543) ---------- ---------- ---------- Basic weighted average common shares outstanding 24,724 26,262 26,183 Shares issuable upon the assumed exercise of stock options and in connection with the ESPP using the treasury stock method 1,641 1,177 -- ---------- ---------- ---------- Diluted weighted average common shares outstanding 26,365 27,439 26,183 ---------- ---------- ---------- Income (loss) from continuing operations per common share: Basic $ 1.07 $ 2.16 $ (2.05) Diluted $ 1.00 $ 2.07 $ (2.05) ---------- ---------- ----------
For fiscal year 2002, in accordance with SFAS No. 128 "Earnings Per Share," the number of common shares used in computing the diluted earnings (loss) per share for continuing operations was used for discontinued operations, cumulative effect of accounting change and net income (loss), even though the impact was antidilutive. The computation of diluted earnings (loss) per share from continuing operations for fiscal year 2002 excluded an incremental 1,592,000 shares that would be issuable upon the assumed exercise of stock options and in connection with the ESPP using the treasury stock method, since their inclusion would be antidilutive on earnings. INCOME TAXES The Company uses the asset and liability approach to account for income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of differences between the carrying amounts of assets and liabilities and their respective tax bases using tax rates in effect for the year in which the differences are expected to reverse. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period when the change is enacted. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. F-14 FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of a financial instrument represents the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Significant differences can arise between the fair value and carrying amount of financial instruments that are recognized at historical amounts. The carrying amounts of the Company's cash and cash equivalents, restricted cash, short-term investments, accounts receivable, accounts payable and certain other current liabilities approximate fair value because of their short maturity. DEBT ISSUANCE COSTS The Company amortizes deferred debt issuance costs over the term of its credit facility. In April 2002, the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statements No. 13, and Technical Correction" ("SFAS 145"). SFAS 145 rescinded SFAS No. 4 "Reporting Gains and Losses from Extinguishment of Debt" ("SFAS 4"), SFAS No. 44 "Accounting for Intangible Assets of Motor Carriers" ("SFAS 44") and SFAS No. 64 "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements" ("SFAS 64") and amended SFAS No. 13 "Accounting for Leases" ("SFAS 13"). This statement updates, clarifies and simplifies existing accounting pronouncements. As a result of rescinding SFAS 4 and SFAS 64, the criteria in APB Opinion No. 30 "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" will be used to determine whether gains and losses from extinguishment of debt receive extraordinary item treatment. The Company adopted SFAS 145, effective April 1, 2002. During the fiscal year ended December 29, 2002, the impact of this adoption resulted in the Company recognizing a write-off of approximately $1.5 million of deferred debt issuance costs associated with the terminated credit facility which is reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations and is further discussed in Note 4. RECLASSIFICATIONS Auction rate securities of $10 million, which were previously classified in cash and cash equivalents due to their liquidity and pricing reset feature, have been reflected as short-term investments in the consolidated balance sheet as of December 28, 2003. This reclassification had no impact on the Company's financial condition, results of operations or cash flows. Certain other reclassifications have been made to the 2003 and 2002 consolidated financial statements to conform to the current year presentation. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"). This statement replaces SFAS 123, and supersedes APB 25. SFAS 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for quarterly periods beginning after June 15, 2005, which for the Company is the third quarter of fiscal 2005. Management estimates that the adoption of SFAS 123(R) will reduce earnings between $0.06 and $0.08 per diluted share in the second half of fiscal 2005. In April 2004, the Emerging Issues Task Force ("EITF") of the FASB approved EITF Issue 03-06, "Participating Securities and the Two-Class Method under FAS 128." EITF Issue 03-06 supersedes the guidance in Topic No. D-95, "Effect of Participating Convertible Securities on the Computation of Basic Earnings per Share," and requires the use of the two-class method for participating securities. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. In addition, EITF Issue 03-06 addresses other forms of participating securities, including options, warrants, F-15 forwards and other contracts to issue an entity's common stock, with the exception of stock based compensation subject to the provisions of APB 25 and SFAS 123. EITF Issue 03-06 is effective for reporting periods beginning after March 31, 2004 and should be applied by restating previously reported earnings per share. The adoption of EITF Issue 03-06 did not have a material impact on the Company's consolidated financial statements. NOTE 3. DISPOSITIONS SALE OF CANADIAN INVESTMENT On March 30, 2004, the Company sold its minority interest in a home care nursing services business in Canada. The business had been acquired as partial consideration for the sale of the Company's Canadian operations in the fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company received cash proceeds of $4.1 million and recorded a gain on sale of approximately $0.9 million, which is reflected in the consolidated statement of operations for year ended January 2, 2005. SALE OF SPECIALTY PHARMACEUTICAL SERVICES BUSINESS On June 13, 2002, the Company consummated the sale of its SPS business to Accredo (the "SPS Sale"). The SPS Sale was effected pursuant to an asset purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002, between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein. Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired the SPS business in consideration for: - the payment to the Company of a cash amount equal to $207.5 million (before a $0.9 million reduction resulting from a closing net book value adjustment); and - 5,060,976 shares of Accredo common stock. Based on the closing price of the Accredo common stock on June 13, 2002 ($51.89 per share), the value of the stock consideration was $262.6 million. In connection with the SPS Sale, the Company's Board of Directors declared a dividend, payable to shareholders of record on June 13, 2002, of all the common stock consideration and substantially all the cash consideration received from Accredo. The cash consideration received by the Company before the closing net book value adjustment was $207.5 million; however, the amount distributed to the Company's shareholders was reduced by $3.5 million to $204 million as a holdback for income taxes the Company expected to incur on the proceeds received in excess of $460 million as detailed in the Company's proxy statement, dated May 10, 2002. The special dividend, which was delivered to the distribution agent on June 13, 2002 for payment to the Company's shareholders, resulted in shareholders of record on the record date receiving $7.76 in cash and 0.19253 shares of Accredo common stock (valued at $9.99 per share based on the June 13, 2002 closing price of $51.89 per share of Accredo common stock) for each share of Gentiva common stock held. The total value of the special dividend amounted to $17.75 per share. Cash was paid in lieu of fractional shares. In connection with the SPS sale, the Company incurred $16.2 million in transaction costs which related to investment banking fees, legal and accounting costs, change in control and other employee related payments and miscellaneous other costs. SPS revenues and operating results for the fiscal 2002 period through the closing date of the sale were as follows (in thousands): F-16
Net revenues $ 323,319 ====================== Operating results of discontinued SPS business: Income before income taxes $ 11,238 Income tax expense (1,313) ---------------------- Net income 9,925 ---------------------- Gain on disposal of SPS business, including transaction costs of $16.2 million for fiscal year 2002 205,355 Income tax expense (23,702) ---------------------- Gain on disposal, net of tax 181,653 ---------------------- Discontinued operations, net of tax $ 191,578 ======================
NOTE 4. RESTRUCTURING AND OTHER SPECIAL CHARGES During fiscal 2002, the Company recorded restructuring and other special charges aggregating $46.1 million. FISCAL 2002 BUSINESS REALIGNMENT ACTIVITIES The Company recorded charges of $6.8 million during the second quarter ended June 30, 2002 in connection with a restructuring plan. This plan included the closing and consolidation of seven field locations and the realignment and consolidation of certain corporate and administrative support functions due primarily to the sale of the Company's SPS business. These charges included employee severance of $0.9 million relating to the termination of 115 employees in field locations and certain corporate and administrative departments, and future lease payments and other associated costs of $5.9 million resulting principally from the consolidation of office space at the Company's corporate headquarters and a change in estimated future lease obligations and other costs in excess of sublease rentals relating to a lease for a subsidiary of the Company's former parent company which the Company agreed to assume in connection with its Split-Off in March 2000. These charges were reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002. The major components of the restructuring charges as well as the activity during fiscal years 2002, 2003 and 2004 were as follows (in thousands):
COMPENSATION AND SEVERANCE FACILITY LEASE COSTS AND OTHER COSTS TOTAL ------------- --------------- ------------ FISCAL 2002 CHARGE $ 920 $ 5,893 $ 6,813 Cash expenditures (726) (1,348) (2,074) ---------- ------------ ------------ Balance at December 29, 2002 194 4,545 4,739 Cash expenditures (194) (2,239) (2,433) ---------- ------------ ------------ Balance at December 28, 2003 -- $ 2,306 $ 2,306 Cash expenditures -- (364) (364) ---------- ------------ ------------ Balance at January 2, 2005 -- $ 1,942 $ 1,942 ========== ============ ============
The balance of unpaid charges, which will be paid over the remaining lease terms, was included in other accrued expenses in the consolidated balance sheets. F-17 OPTION TENDER OFFER During the second quarter ended June 30, 2002, the Company effected a cash tender offer for all outstanding options to purchase its common stock for an aggregate option purchase price not to exceed $25 million. In connection with this tender offer, the Company recorded a charge of $21.4 million during the second quarter of fiscal 2002, which is reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002. SETTLEMENT COSTS The Company recorded a $7.7 million charge in the second quarter of fiscal 2002 to reflect settlement costs relating to the Fredrickson v. Olsten Health Services Corp. and Olsten Corporation lawsuit as well as estimated settlement costs related to government inquiries regarding cost reporting procedures concerning contracted nursing and home health aide costs (see Note 9). These costs are reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002. INSURANCE COSTS The Company recorded a special charge of $6.3 million in the second quarter of fiscal 2002 related primarily to a refinement in the estimation process used to determine the Company's actuarially computed workers compensation and professional liability insurance reserves. This special charge is reflected in cost of services sold in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002. ASSET WRITEDOWNS AND OTHER The Company recorded charges of $3.8 million in the second quarter of fiscal 2002, consisting primarily of a write-down of inventory and other assets associated with home medical equipment used in the Company's nursing operations, and a write-off of deferred debt issuance costs associated with the terminated credit facility. The charges are reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the fiscal year ended December 29, 2002. NOTE 5. FIXED ASSETS, NET
(in thousands) USEFUL LIVES JANUARY 2, 2005 DECEMBER 28, 2003 ------------ --------------- ----------------- Computer equipment and software 3-5 Years $ 48,122 $ 43,786 Furniture and fixtures 5 Years 22,664 20,031 Buildings and improvements Lease Term 10,452 9,166 Machinery and equipment 5 Years 754 391 -------- -------- 81,992 73,374 Less accumulated depreciation (62,305) (58,239) -------- -------- $ 19,687 $ 15,135 ======== ========
Depreciation expense relating to continuing operations was approximately $7.3 million in fiscal 2004, $6.9 million in fiscal 2003 and $7.2 million in fiscal 2002. During the fourth quarter of fiscal 2004, the Company recorded a writedown of approximately $1.4 million relating to purchased software for which it was determined there was minimal future value. NOTE 6. LONG-TERM DEBT The Company's credit facility, as amended, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender. F-18 At the Company's option, the interest rate on borrowings under the credit facility is based on the London Interbank Offered Rates (LIBOR) plus 3.0 percent or the lender's prime rate plus 1.0 percent. In addition, the Company is required to pay a fee equal to 2.25 percent per annum of the aggregate face amount of outstanding letters of credit. The Company is also subject to an unused line fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. If the Company's trailing twelve month earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding certain restructuring costs and special charges, falls below $20 million, the applicable margins for LIBOR and prime rate borrowings will increase to 3.25 percent and 1.25 percent, respectively, and the letter of credit and unused line fees will increase to 2.5 percent and 0.50 percent, respectively. The higher margins and fees were in effect prior to June 1, 2003. The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003 and May 26, 2004, the credit facility was amended to make covenants relating to acquisitions and stock repurchases less restrictive, provided that the Company maintains minimum excess aggregate liquidity, as defined in the amendment, equal to at least $60 million, and to allow for the disposition of certain assets. The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to $137,500 if the facility is terminated from June 13, 2004 to June 12, 2005. There is no fee for termination of the facility subsequent to June 12, 2005. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment. Total outstanding letters of credit were approximately $20.2 million at January 2, 2005 and $20.8 million at December 28, 2003. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. There were no borrowings outstanding under the credit facility as of January 2, 2005. The Company also had outstanding surety bonds of $1.0 million and $0.9 million at January 2, 2005 and December 28, 2003, respectively. The restricted cash of $22.0 million at January 2, 2005, relates to cash funds of $21.8 million that have been segregated in a trust account to provide collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. In addition, restricted cash includes $0.2 million on deposit to comply with New York state regulations requiring that one month of revenues generated under capitated agreements in the state be held in escrow. Interest on all restricted funds accrues to the Company. The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts. Net interest income for fiscal years 2004, 2003 and 2002 was approximately $1.0 million, $0.4 million and $0.8 million, respectively. Net interest income represented interest income of approximately $2.0 million for fiscal 2004, $1.5 million for fiscal 2003 and $2.4 million for fiscal 2002, partially offset by fees relating to the revolving credit facility and outstanding letters of credit. NOTE 7. CUMULATIVE PREFERRED STOCK The Company's authorized capital stock includes 25,000,000 shares of preferred stock, $.01 par value, of which 1,000 shares have been designated Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued for proceeds of $100,000. Holders of the cumulative preferred stock were entitled to receive cumulative cash dividends at an annual rate of LIBOR plus 2 percent on the stated liquidation preference of $1,000 per share, payable quarterly in arrears out of assets legally available for payment of dividends. The shares of preferred stock that were issued on March 10, 2000 were redeemed on June 12, 2002 at a redemption price of $1,000 per share. F-19 NOTE 8. SHAREHOLDERS' EQUITY The Company's Board of Directors has authorized stock repurchase programs under which the Company could repurchase and formally retire up to an aggregate of 4,500,000 shares of its outstanding common stock. A summary of the shares repurchased under each program follows:
DATE SHARES TOTAL AVERAGE PROGRAM SHARES REPURCHASED COST COST PER PROGRAM ANNOUNCED AUTHORIZED AS OF JANUARY 2, 2005 (IN 000'S) SHARE COMPLETION DATE --------- ---------- --------------------- ---------- ----- --------------- May 16, 2003 1,000,000 1,000,000 $ 9,083 $ 9.08 July 23, 2003 August 7, 2003 1,500,000 1,500,000 $ 20,779 $ 13.85 July 8, 2004 May 26, 2004 1,000,000 1,000,000 $ 15,291 $ 15.29 October 13, 2004 August 10, 2004 1,000,000 491,604 $ 7,672 $ 15.61 --------- --------- -------- ------- 4,500,000 3,991,604 $ 52,825 $ 13.23 ========= ========= ======== =======
The repurchases occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. During fiscal 2003, the Company repurchased 1,438,464 shares of its outstanding common stock at an average cost of $10.03 per share and a total cost of approximately $14.4 million. During fiscal 2004, the Company repurchased 2,553,140 shares of its outstanding common stock at an average cost of $15.04 per share and a total cost of approximately $38.4 million. As of January 2, 2005, the Company had remaining authorization to repurchase an aggregate of 508,396 shares of its outstanding common stock. For the period from January 3, 2005 through March 4, 2005, the Company purchased 357,900 shares at an average cost of $15.98 per share and a total cost of approximately $5.7 million. NOTE 9. LEGAL MATTERS LITIGATION In addition to the matters referenced in this Note 9, the Company is party to certain legal actions arising in the ordinary course of business including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. The following two legal matters were settled during fiscal years 2004 and 2002, respectively. Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002, this amended complaint was served on the Company alleging that the defendant submitted false claims to the government for payment in violation of the Federal False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to patients did not supply the full amount of medication, allegedly resulting in substandard care. Based on a review of the court's docket sheet, the plaintiff filed a complaint under seal in March 2001. In October 2001, the United States government filed a notice with the court declining to intervene in this matter, and on October 24, 2001, the court ordered that the seal be lifted. The Company filed its responsive pleading on February 25, 2002. The Company denied the allegations of wrongdoing in the complaint. On May 19, 2003, the Company filed a motion for summary judgment on the issue of liability. On February 6, 2004, the court granted partial summary judgment for the Company, dismissing two of the three claims alleged under the False Claims Act and denying summary judgment for the Company on the wrongful termination claim. In December 2004, the parties reached a settlement, and the case was dismissed with prejudice on December 21, 2004. Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County, Ohio. In November 2000, the jury in this age-discrimination lawsuit returned a verdict in favor of the plaintiff against Olsten consisting of $675,000 in compensatory damages, $30 million in punitive damages and an undetermined amount of attorneys' fees. The jury found that, although Olsten had lawfully terminated the plaintiff's employment, its failure to transfer or rehire the plaintiff rendered Olsten liable to the plaintiff. Following post-trial motion practice by both parties, the F-20 trial court, in May 2001, denied all post-trial motions, and entered judgment for the plaintiff for the full amount of compensatory and punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938. In June 2001, defendants timely filed a Notice of Appeal with the Court of Appeals, and the Company posted a supersedeas bond for the full amount of the judgment, plus interest. This matter has been settled, and settlement costs were recorded as part of special charges during the second quarter of fiscal 2002 (see Note 4). The supersedeas bond was released and the restricted cash of $35.2 million was released to the Company in September 2002. INDEMNIFICATIONS In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business. In addition, the Company and Accredo agreed to indemnify each other for breaches of representations and warranties of such party or the non-fulfillment of any covenant or agreement of such party in connection with the sale of the Company's SPS business to Accredo on June 13, 2002. The Company also agreed to indemnify Accredo for the retained liabilities and for tax liabilities, and Accredo agreed to indemnify the Company for assumed liabilities and the operation of the SPS business after the closing of the transaction. The representations and warranties generally survived for the period of two years after the closing of the transaction, which period expired on June 13, 2004. Certain representations and warranties, however, continue to survive, including the survival of representations and warranties related to healthcare compliance for three years after the closing of the transaction and the survival of representations and warranties related to tax matters until thirty days after the expiration of the applicable statute of limitations period, including any extensions of the applicable period, subject to certain exceptions. Accredo and the Company generally may recover indemnification for a breach of a representation or warranty only to the extent a party's claim exceeds $1 million for any individual claim, or exceeds $5 million in the aggregate, subject to certain conditions and only up to a maximum amount of $100 million. GOVERNMENT MATTERS PRRB APPEAL As further described in the Critical Accounting Policies section in Note 2, the Company's annual cost reports, which were filed with CMS, were subject to audit by the fiscal intermediary engaged by CMS. In connection with the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary's methodology. The Company believed its methodology used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board ("PRRB") concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company's consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company's cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed. In February 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1997 cost reports and determined that the adjustment to allowable costs for that year was approximately $9 million. The Company received the funds and recorded the adjustment of $9.0 million as net revenues during fiscal 2004. F-21 During the third quarter of fiscal 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1998 cost reports and determined that the adjustment to allowable costs for that year was $1.4 million. The Company received the funds and recorded the adjustment of $1.4 million as net revenues during fiscal 2004. Although the Company believes that it will likely recover additional funds as a result of applying the modified methodology discussed above to cost reports subsequent to 1998, the settlement amounts cannot be specifically determined until the reopening or audit of each year's cost reports is completed. The Company expects the 1999 cost reports to be reopened and completed during 2005. It is likely that future recoveries for the 1999 year resulting from the application of the modified methodology required by the Administrative Resolution will be significantly less than the 1997 settlement but greater than the 1998 settlement. The timeframe for resolving all items relating to the 2000 cost reports cannot be determined at this time. SUBPOENAS On April 17, 2003, the Company received a subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations ("OIG"). The subpoena seeks information regarding the Company's implementation of settlements and corporate integrity agreements entered into with the government, as well as the Company's treatment on cost reports of employees engaged in sales and marketing efforts. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to the period from January 1, 1998 through September 30, 2000. On February 17, 2004, the Company received a subpoena from the U.S. Department of Justice ("DOJ") seeking additional information related to the matters covered by the OIG subpoena. The Company has provided documents and other information requested by the OIG and DOJ pursuant to their subpoenas and similarly intends to cooperate fully with any future OIG or DOJ information requests. To the Company's knowledge, the government has not filed a complaint against the Company. In February 2000, the Company received a document subpoena from the OIG. The subpoena related to its agencies' cost reporting procedures concerning contracted nursing and home health aide costs. This matter has been settled and settlement costs were recorded as part of special charges during the second quarter of fiscal 2002. (See Note 4). NOTE 10. COMMITMENTS The Company rents certain properties under non-cancelable, long-term operating leases, which expire at various dates. Certain of these leases require additional payments for taxes, insurance and maintenance and, in many cases, provide for renewal options. Rent expense under all leases was $16.8 million in 2004, $15.3 million in 2003 and $16.2 million in 2002. Future minimum rental commitments and sublease rentals for all non-cancelable leases having an initial or remaining term in excess of one year at January 2, 2005, are as follows (in thousands):
FISCAL YEAR TOTAL COMMITMENT SUBLEASE RENTALS NET ----------- ---------------- ---------------- -------- 2005 $ 17,022 $ 821 $ 16,201 2006 13,348 814 12,534 2007 8,486 733 7,753 2008 4,933 87 4,846 2009 3,406 -- 3,406 Thereafter 3,330 -- 3,330
NOTE 11. STOCK PLANS In 2004, the shareholders of the Company approved the 2004 Equity Incentive Plan (the "2004 Plan") as a replacement for the 1999 Stock Incentive Plan (the "1999 Plan"). Under the 2004 Plan, 3.5 million shares of F-22 common stock plus any remaining shares authorized under the 1999 Plan as to which awards had not been made are available for grant. The maximum number of shares of common stock for which grants may be made in any calendar year to any 2004 Plan participant is 500,000. The 2004 Plan permits granting of (i) incentive stock options, (ii) non-qualified stock options, (iii) stock appreciation rights, (iv) restricted stock, (v) stock units and (vi) cash. The exercise price of options granted under the 2004 Plan can generally not be less than the fair market value of the Company's common stock on the date of grant. As of January 2, 2005, the Company had 3,949,407 shares available for issuance under the 2004 Plan. In 1999, the Company adopted the 1999 Plan under which 5 million shares of common stock were reserved for issuance upon exercise of options thereunder. The maximum number of shares of common stock for which grants could be made to any 1999 Plan participant in any calendar year was 300,000. These options could be awarded in the form of incentive stock options ("ISOs") or non-qualified stock options ("NQSOs"). The option price of an ISO and NQSO could not be less than 100 percent and 85 percent, respectively, of the fair market value at the date of grant. Effective March 15, 2004, no further options could be awarded under the 1999 Plan. In 1999, the Company adopted the Stock & Deferred Compensation Plan for Non-Employee Directors, which provided for payment of annual retainer fees to non-employee directors, up to 50 percent of which such directors might elect to receive in cash and the remainder of which would be paid in the form of shares of common stock of the Company and also allowed deferral of such payment of shares until termination of a director's service. The plan was amended and restated on January 1, 2004 and now provides for the deferral of annual retainer fees under the plan only into stock units, which are to be paid to non-employee directors as shares of the Company's common stock following termination of a director's service. The total number of shares of common stock reserved for issuance under this plan is 150,000, of which 63,076 shares were available for future grants as of January 2, 2005. During fiscal 2004, 2003 and 2002, the Company issued stock units or shares in the amounts of 18,365, 7,575 and 11,928, respectively, under the plan. As of January 2, 2005, 54,611 stock units were outstanding under the plan. In 1999, the Company adopted an employee stock purchase plan ("ESPP"). All employees of the Company, who have been employed for at least eight months and whose customary employment exceeds twenty hours per week, are eligible to purchase stock under this plan. The Compensation, Corporate Governance and Nominating Committee of the Company's Board of Directors administers the plan and has the power to determine the terms and conditions of each offering of common stock. The purchase price of the shares under the ESPP is the lesser of 85 percent of the fair market value of the Company's common stock on the first business day or the last business day of the six month offering period. Employees may purchase shares having a fair market value of up to $25,000 per calendar year. The maximum number of shares of common stock that may be sold to any employee in any offering, however, will generally be 10 percent of that employee's compensation during the period of the offering. A total of 1,200,000 shares of common stock are reserved for issuance under the employee stock purchase plan, of which 169,091 shares were available for future issuance as of January 2, 2005. During fiscal 2004, 2003 and 2002, the Company issued 329,443 shares, 280,664 shares and 166,003 shares, respectively, under the ESPP. Effective with the sale of the SPS business in June 2002, the Company commenced a cash tender offer for all of the outstanding options to purchase its common stock. The tender offer resulted in 1,253,141 options being tendered and accepted by the Company with 463,829 options remaining outstanding. To preserve the aggregate intrinsic value of the options, the outstanding options were converted to new Gentiva options at the ratio of 1 to 3.369, resulting in converted options of 1,562,646. The exercise price of a new Gentiva stock option represented 29.7 percent of the corresponding option, pre-conversion. A summary of Gentiva stock options for fiscal 2004, fiscal 2003 and fiscal 2002 is presented below: F-23
2004 2003 2002 ---------------------------- -------------------------- ------------------------------ WEIGHTED WEIGHTED WEIGHTED STOCK AVERAGE STOCK AVERAGE STOCK AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- -------------- ------- -------------- ------- -------------- Options outstanding, beginning of year 2,686,296 $ 6.14 2,549,667 $ 4.75 2,346,600 $ 8.61 Granted 1,035,100 12.93 740,900 8.85 1,152,700 7.54 Exercised (347,804) 4.30 (452,338) 2.12 (665,040) 7.73 Cancelled/forfeitures (159,007) 9.97 (151,933) 7.99 (594,098) 8.52 Tendered options -- -- -- -- (1,253,141) 8.54 Converted to new Gentiva options -- -- -- -- 1,562,646 2.63 ---------- ---------- ---------- ---------- ---------- ---------- Options outstanding, end of year 3,214,585 $ 8.33 2,686,296 $ 6.14 2,549,667 $ 4.75 ========== ========== ========== ========== ========== ========== Options exercisable, end of year 1,664,893 $ 6.07 1,345,570 $ 4.07 1,421,567 $ 2.53 ========== ========== ========== ========== ========== ==========
The following table summarizes information about Gentiva stock options outstanding at January 2, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------- ------------------------ NUMBER WEIGHTED WEIGHTED NUMBER WEIGHTED AT AVERAGE AVERAGE AT AVERAGE JANUARY 2, EXERCISE REMAINING JANUARY 2, EXERCISE RANGE OF EXERCISE PRICE 2005 PRICE CONTRACTUAL LIFE 2005 PRICE -------------------------- ---------- ------- ---------------- ---------- -------- $1.07 to $1.30 38,487 $ 1.28 3.61 38,487 $ 1.28 $1.65 to $1.74 264,801 1.70 5.19 264,801 1.70 $2.02 to $2.10 30,422 2.06 2.49 30,422 2.06 $3.55 to $3.91 419,778 3.89 5.82 419,778 3.89 $7.50 to $7.50 817,697 7.50 7.45 467,083 7.50 $8.13 to $8.60 59,500 8.46 7.66 42,000 8.44 $8.74 to $9.75 626,300 8.86 8.05 271,847 8.74 $12.70 to $12.87 921,600 12.87 9.00 130,475 12.87 $14.19 to $16.43 36,000 15.27 9.26 -- -- --------- ------- ---- --------- ------ $1.07 to $16.43 3,214,585 $ 8.33 7.55 1,664,893 $ 6.07 ========= ======= ==== ========= ======
The Company has chosen to adopt the disclosure only provisions of SFAS 148 and continue to account for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations. Under this approach, the cost of restricted stock awards is expensed over their vesting period, while the imputed cost of stock option grants and discounts offered under the Company's ESPP is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. The weighted average fair values of the Company's stock options granted during fiscal years 2004, 2003 and 2002, calculated using the Black-Scholes option pricing model, and other assumptions are as follows:
FISCAL YEAR ENDED -------------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 --------------- ----------------- ----------------- Risk-free interest rate 3.36% 3.51% 4.15% Expected volatility 37% 60% 38% Expected life 6 years 6 years 5 years Contractual life 10 years 10 years 10 years Expected dividend yield 0% 0% 0% Weighted average fair value of options granted $ 5.47 $ 5.24 $ 3.02
Pro forma compensation expense is calculated for the fair value of the employee's purchase rights under the ESPP, using the Black-Scholes model. Assumptions for fiscal years 2004, 2003 and 2002 are as follows: F-24
FISCAL YEAR ENDED ---------------------------------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 -------------------------- -------------------------- -------------------------- 1ST OFFERING 2ND OFFERING 1ST OFFERING 2ND OFFERING 1ST OFFERING 2ND OFFERING PERIOD PERIOD PERIOD PERIOD PERIOD PERIOD ------------ ------------ ------------ ------------ ------------ ------------ Risk-free interest rate: 1.02% 1.76% 1.25% 0.97% 1.89% 1.77% Expected volatility 28% 30% 32% 29% 60% 60% Expected life 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years 0.5 years Expected dividend yield 0% 0% 0% 0% 0% 0%
The following table presents net income (loss) and basic and diluted earnings (loss) per common share, had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts granted for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
FISCAL YEAR ENDED ------------------------------------------------------ JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 --------------- ----------------- ----------------- (53 WEEKS) (52 WEEKS) (52 WEEKS) Net income (loss) - as reported $ 26,488 $ 56,766 $ (49,033) Add: Stock-based employee compensation expense included in reported net income, net of tax -- -- 13,160 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax (2,442) (1,575) (5,022) --------------- ---------------- --------------- Net income (loss) - pro forma $ 24,046 $ 55,191 $ (40,895) =============== ================ =============== Basic income (loss) per share - as reported $ 1.07 $ 2.16 $ (1.87) Basic income (loss) per share - pro forma $ 0.97 $ 2.10 $ (1.56) Diluted income (loss) per share - as reported $ 1.00 $ 2.07 $ (1.87) Diluted income (loss) per share - pro forma $ 0.91 $ 2.01 $ (1.56)
On January 3, 2005, the Company issued 922,300 stock options at an exercise price of $16.38 per share. NOTE 12. INCOME TAXES Comparative analyses of the provision (benefit) for income taxes follows (in thousands):
FISCAL YEAR ENDED --------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 ---------------- ----------------- ----------------- (53 WEEKS) (52 WEEKS) (52 WEEKS) Current Federal $ 3,534 $ -- $ 5,600 State and local 1,048 1,567 -- ---------------- ---------------- ---------------- 4,582 1,567 5,600 ---------------- ---------------- ---------------- Deferred Federal 10,472 (31,875) 10,114 State and local (1,361) (3,160) 2,723 ---------------- ---------------- ---------------- 9,111 (35,035) 12,837 ---------------- ---------------- ---------------- Provision for income taxes $ 13,693 $ (33,468) $ 18,437 ================ ================ ================
A reconciliation of the differences between income taxes computed at federal statutory rate and provisions (benefits) for income taxes for each year are as follows (in thousands): F-25
FISCAL YEAR ENDED ------------------------------------------------------- JANUARY 2, 2005 DECEMBER 28, 2003 DECEMBER 29, 2002 --------------- ----------------- ----------------- (53 WEEKS) (52 WEEKS) (52 WEEKS) Income tax expense (benefit) computed at Federal statutory tax rate $ 14,063 $ 8,162 $(12,287) State income taxes, net of Federal benefit (5,034) 1,019 (1,770) Nondeductible meals and entertainment 237 167 155 Income tax audit adjustments -- (177) 5,439 Deferred rate differential -- 1,142 -- Decrease in Federal valuation allowance -- (44,438) -- Valuation allowance adjustment for adoption of SFAS 142 -- -- 26,859 Increase in State valuation allowance 4,455 -- -- Other (28) 657 41 -------- -------- -------- $ 13,693 $(33,468) $ 18,437 ======== ======== ========
Deferred tax assets and deferred tax liabilities are as follows (in thousands):
JANUARY 2, 2005 DECEMBER 28, 2003 --------------- ----------------- Deferred tax assets Current: Reserves and allowances $ 19,348 $ 21,290 Federal net operating loss and other carryforwards 793 4,522 State net operating loss 7,027 444 Other 1,148 208 Less: valuation allowance (4,455) -- -------- -------- Total current deferred tax assets 23,861 26,464 Noncurrent: Intangible assets 25,772 29,085 -------- -------- Total deferred tax assets 49,633 55,549 -------- -------- Deferred tax liabilities: Current: Prepaid expenses (599) -- Noncurrent: Fixed assets (2,707) 23 Developed software (1,233) (1,083) -------- -------- Total non-current deferred tax liabilities (3,940) (1,060) -------- -------- Total deferred tax liabilities (4,539) (1,060) -------- -------- Net deferred tax assets $ 45,094 $ 54,489 ======== ========
Prior to fiscal year 2004, the state tax history of certain subsidiaries indicated cumulative losses and a lack of state tax audit experience. As a result, the Company believed there was a remote likelihood that the value of related state tax loss carryforwards would be realized, and no deferred tax assets were recorded. During fiscal 2004, these subsidiaries reflected cumulative income on a state filing basis and certain state tax audits were settled. The Company performed a review of state net operating loss carryforwards and recorded a deferred tax asset of $7.0 million in the fourth quarter of fiscal 2004. A valuation allowance of $4.5 million has been recorded to recognize that certain state net operating loss carryforwards may expire before realization. The Company had maintained a valuation allowance for its deferred tax assets as of December 29, 2002, since the absence of historical pre-tax income created uncertainty about the Company's ability to realize tax benefits in future years. During the interim periods of fiscal 2003, a portion of the valuation allowance ($9.4 million) was utilized to offset a corresponding decrease in net deferred tax assets. The remaining valuation allowance was reversed at the end of fiscal 2003 based on management's belief that it was more likely than not that all of the Company's net deferred tax assets would be realized due to the Company's achieved earnings trends F-26 and outlook. In this regard, $44.4 million was recorded as an income tax benefit in fiscal 2003 and $19.5 million was credited directly to shareholders' equity to reflect the portion of the valuation allowance associated with stock compensation tax benefits. At January 2, 2005, the Company had federal tax credit carryforwards of $0.8 million and state net operating loss carryforwards of $7.0 million. Income tax payments, including payments associated with discontinued operations, were $3.8 million, $1.6 million and $7.6 million for fiscal years 2004, 2003 and 2002, respectively. NOTE 13. BENEFIT PLANS FOR PERMANENT EMPLOYEES The Company maintains qualified and non-qualified defined contribution retirement plans for its salaried employees, which provide for a partial match of employee savings under the plans and for discretionary profit-sharing contributions based on employee compensation. With respect to the Company's non-qualified defined contribution retirement plan for salaried employees, all pre-tax contributions, matching contributions and profit sharing contributions (and the earnings therein) are held in a Rabbi Trust and are subject to the claims of the general, unsecured creditors of the Company. All post-tax contributions are held in a secular trust and are not subject to the claims of the creditors of the Company. The fair value of the assets held in the Rabbi Trust and the liability to plan participants as January 2, 2005 and December 28, 2003 totaling approximately $12.9 million and $10.0 million, respectively, are included in other assets and other liabilities on the accompanying consolidated balance sheets. Company contributions under the defined contribution plans were approximately $2.5 million in 2004, $1.8 million in 2003 and $2.0 million in 2002. NOTE 14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (in thousands, except per share amounts)
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- YEAR ENDED JANUARY 2, 2005 Net revenues $213,905(1) $208,248 $198,070(3) $225,541(4) Gross profit 83,262(1) 78,338 75,531(3) 86,798(4) Net income 9,230(1) 5,965(2) 4,399(3) 6,894(4) Earnings Per Share: Net income - basic 0.36 0.24 0.18 0.29 Net income - diluted 0.34 0.22 0.17 0.27 Weighted average shares outstanding: Basic 25,542 25,068 24,422 23,865 Diluted 27,084 26,818 26,034 25,487
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- YEAR ENDED DECEMBER 28, 2003 Net revenues $202,016 $208,446 $199,698 $203,869 Gross profit 68,766 69,624 69,241 74,411 Net income 5,201 5,247 4,547 41,771(5) Earnings Per Share: Net income - basic 0.19 0.20 0.18 1.62 Net income - diluted 0.19 0.19 0.17 1.53 Weighted average shares outstanding: Basic 26,696 26,530 25,972 25,852 Diluted 27,772 27,490 27,098 27,225
(1) Net revenues and gross profit for the first quarter of fiscal 2004 include special items of $8.0 million related to the favorable settlement of the Company's Medicare cost report appeals for 1997 net of a $1 million revenue adjustment to reflect an industry wide repayment of certain Medicare reimbursements. See Note 9 to the Company's consolidated financial statements. F-27 (2) Net income for the second quarter of fiscal 2004 includes $0.9 million relating to a pre-tax gain on the sale of a Canadian investment. See Note 3 to the Company's consolidated financial statements. (3) Net revenues and gross profit for the third quarter of fiscal 2004 include special items of $1.1 million related to the partial settlement of the Company's Medicare cost report appeals for 1998. During the third quarter of fiscal 2004, the Company's effective tax rate was 35.3% due to recognition of certain state net operating losses. See Notes 9 and 12 to the Company's consolidated financial statements. (4) Net revenues and gross profit for the fourth quarter of fiscal 2004 include special items of $0.3 million related to the remaining settlement of the Company's Medicare cost report appeals for 1998. During the fourth quarter of fiscal 2004, the Company's effective tax rate was 18.7% due to recognition of certain state net operating losses. See Notes 9 and 12 to the Company's consolidated financial statements. (5) During the fourth quarter of fiscal 2003, the Company recorded a tax benefit of $35.0 million associated with management's decision to reverse the valuation allowance for deferred tax assets. See Note 12 to the Company's consolidated financial statements. F-28 GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS FOR THE THREE YEARS ENDED JANUARY 2, 2005 (IN THOUSANDS)
ADDITIONS BALANCE AT CHARGED TO BALANCE BEGINNING COSTS AND AT END OF PERIOD EXPENSES DEDUCTIONS OF PERIOD --------- -------- ---------- --------- Allowance for Doubtful Accounts: For the Year Ended January 2, 2005 $ 7,936 $ 6,722 $ (7,618) $ 7,040 For the Year Ended December 28, 2003 9,032 7,684 (8,780) 7,936 For the Year Ended December 29, 2002 10,831 4,936 (6,735) 9,032 Valuation allowance on deferred tax assets: For the Year Ended January 2, 2005 $ 0 $ 4,455 $ (0) $ 4,455 For the Year Ended December 28, 2003 63,892 0 (63,892) 0 For the Year Ended December 29, 2002 0 63,892 (0) 63,892
F-29