-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UYWzyTraA7OJnBgB0x+AepDotoYquwFU+kkAY+2wnG5ylmi3X8LmXq3deL6pOnm5 lD3uF0HLsRxqOiWysmmMhg== 0001145443-05-002673.txt : 20051117 0001145443-05-002673.hdr.sgml : 20051117 20051114183626 ACCESSION NUMBER: 0001145443-05-002673 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20051002 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENTIVA HEALTH SERVICES INC CENTRAL INDEX KEY: 0001096142 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 364335801 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15669 FILM NUMBER: 051203932 BUSINESS ADDRESS: STREET 1: 3 HUNTINGTON QUADRANGLE 2S CITY: MELVILLE STATE: NY ZIP: 11747-8943 BUSINESS PHONE: 6315017000 MAIL ADDRESS: STREET 1: 3 HUNTINGTON QUADRANGLE 2S CITY: MELVILLE STATE: NY ZIP: 11747-8943 FORMER COMPANY: FORMER CONFORMED NAME: OLSTEN HEALTH SERVICES HOLDING CORP DATE OF NAME CHANGE: 19991001 10-Q 1 d18078_10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 2, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 1-15669 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 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ - Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No ___ - Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes __ No X - The number of shares outstanding of the registrant's Common Stock, as of November 8, 2005, was 22,884,550. INDEX
PART I - FINANCIAL INFORMATION Page No. --- Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) - October 2, 2005 and January 2, 2005 3 Consolidated Statements of Income (Unaudited) - Nine Months Ended October 2, 2005 and September 26, 2004 4 Consolidated Statements of Cash Flows (Unaudited) - Nine Months Ended October 2, 2005 and September 26, 2004 5 Notes to Consolidated Financial Statements (Unaudited) 6-18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 18-40 Item 3. Quantitative and Qualitative Disclosures About Market Risk 40 Item 4. Controls and Procedures 40 PART II - OTHER INFORMATION Item 1. Legal Proceedings 41 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 41 Item 3. Defaults Upon Senior Securities 41 Item 4. Submission of Matters to a Vote of Security Holders 41 Item 5. Other Information 41-42 Item 6. Exhibits 42-43 SIGNATURES 44
PART I - FINANCIAL INFORMATION Item 1. Financial Statements -------------------- Gentiva Health Services, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share and per share amounts) (Unaudited)
October 2, 2005 January 2, 2005 --------- --------- ASSETS Current assets: Cash, cash equivalents and restricted cash $ 52,234 $ 31,924 Short-term investments 42,150 81,100 Receivables, less allowance for doubtful accounts of $8,348 and $7,040 at October 2, 2005 and January 2, 2005, respectively 142,339 132,002 Deferred tax assets 22,894 23,861 Prepaid expenses and other current assets 8,013 6,057 --------- --------- Total current assets 267,630 274,944 Fixed assets, net 20,688 19,687 Deferred tax assets, net 17,792 21,233 Goodwill 6,865 1,325 Other assets 22,896 14,909 --------- --------- Total assets $ 335,871 $ 332,098 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 23,542 $ 25,896 Payroll and related taxes 15,772 9,356 Medicare liabilities 6,864 9,949 Cost of claims incurred but not reported 26,244 27,361 Obligations under insurance programs 32,228 34,660 Other accrued expenses 30,306 31,117 --------- --------- Total current liabilities 134,956 138,339 Other liabilities 19,814 21,819 Shareholders' equity: Common stock, $.10 par value; authorized 100,000,000 shares; issued and outstanding 23,356,750 and 23,722,408 shares at October 2, 2005 and January 2, 2005, respectively 2,336 2,372 Additional paid-in capital 231,100 238,929 Accumulated deficit (52,335) (69,361) --------- --------- Total shareholders' equity 181,101 171,940 --------- --------- Total liabilities and shareholders' equity $ 335,871 $ 332,098 ========= =========
See notes to consolidated financial statements. 3 Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended --------------------------------------- ------------------------------------- October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004 --------- --------- --------- --------- Net revenues $ 219,559 $ 198,070 $ 646,801 $ 620,223 Cost of services sold 138,544 122,539 404,401 383,092 --------- --------- --------- --------- Gross profit 81,015 75,531 242,400 237,131 Selling, general and administrative expenses (72,026) (67,227) (216,443) (201,405) Depreciation and amortization (2,291) (1,756) (5,938) (5,505) --------- --------- --------- --------- Operating income 6,698 6,548 20,019 30,221 Gain on sale of Canadian investment -- -- -- 946 Interest income, net 385 248 1,262 538 --------- --------- --------- --------- Income before income taxes 7,083 6,796 21,281 31,705 Income tax expense (2,832) (2,397) (4,255) (12,111) --------- --------- --------- --------- Net income $ 4,251 $ 4,399 $ 17,026 $ 19,594 ========= ========= ========= ========= Net income per common share: Basic $ 0.18 $ 0.18 $ 0.73 $ 0.78 ========= ========= ========= ========= Diluted $ 0.17 $ 0.17 $ 0.68 $ 0.74 ========= ========= ========= ========= Weighted average shares outstanding: Basic 23,329 24,422 23,349 25,011 ========= ========= ========= ========= Diluted 25,076 26,034 25,018 26,645 ========= ========= ========= =========
See notes to consolidated financial statements. 4 Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Nine Months Ended --------------------------------------- October 2, 2005 September 26, 2004 --------- --------- OPERATING ACTIVITIES: Net income $ 17,026 $ 19,594 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,938 5,505 Provision for doubtful accounts 4,329 4,708 Gain on sale of Canadian investment -- (946) Reversal of tax audit reserves (4,200) -- Deferred income tax expense 4,408 9,743 Changes in assets and liabilities: Accounts receivable (14,666) 945 Prepaid expenses and other current assets (1,856) (1,144) Accounts payable (719) (2,843) Payroll and related taxes 6,416 (2,956) Medicare liabilities (3,085) (145) Cost of claims incurred but not reported (1,117) (2,228) Obligations under insurance programs (2,432) (609) Other accrued expenses (965) (3,321) Other, net 178 657 --------- --------- Net cash provided by operating activities 9,255 26,960 --------- --------- INVESTING ACTIVITIES: Purchase of fixed assets (6,043) (7,607) Proceeds from sale of assets -- 4,123 Acquisition of business (12,059) -- Purchase of short-term investments available-for-sale (125,000) (80,000) Maturities of short-term investments available-for-sale 153,950 25,000 Purchase of short-term investments held to maturity -- (10,000) Maturities of short-term investments held to maturity 10,000 10,000 --------- --------- Net cash provided by (used in) investing activities 20,848 (58,484) --------- --------- FINANCING ACTIVITIES: Proceeds from issuance of common stock 5,650 3,420 Changes in book overdrafts (1,635) 2,300 Repurchases of common stock (13,514) (30,163) Repayment of capital lease obligations (294) (228) --------- --------- Net cash used in financing activities (9,793) (24,671) --------- --------- Net change in cash, cash equivalents and restricted cash 20,310 (56,195) Cash, cash equivalents and restricted cash at beginning of period 31,924 97,438 --------- --------- Cash, cash equivalents and restricted cash at end of period $ 52,234 $ 41,243 ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Income taxes paid, net of refunds $ 701 $ 3,587 ========= ========= SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES: Fixed assets acquired under capital lease $ 151 $ 1,443 ========= =========
See notes to consolidated financial statements. 5 Gentiva Health Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Background and Basis of Presentation ------------------------------------ Gentiva(R) Health Services, Inc. ("Gentiva" or the "Company") provides comprehensive home health services throughout most of the United States through its Home Healthcare Services and CareCentrix(R) operating segments. See Note 12 for a description of the business segments. The accompanying interim consolidated financial statements are unaudited, and have been prepared by Gentiva using accounting principles consistent with those described in the Company's annual report on Form 10-K and pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for each period presented. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements. The interim financial statements do not include all disclosures required by accounting principles generally accepted in the United States of America. 2. Accounting Policies ------------------- Cash, Cash Equivalents and Restricted Cash The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. Restricted cash of $22.0 million at October 2, 2005 and January 2, 2005 primarily represents segregated cash funds in a trust account designated as collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security. Interest on all restricted funds accrues to the Company. Included in cash and cash equivalents are amounts on deposit with financial institutions in excess of $100,000, which is the maximum amount insured by the Federal Deposit Insurance Corporation. Management believes that these financial institutions are viable entities and believes any risk of loss is remote. Short-Term Investments The Company's short-term investments consist primarily of AAA-rated auction rate securities and other debt securities with an original maturity of more than three months and less than one year on the acquisition date in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." Investments in debt securities are classified by individual security into one of three separate categories: available-for-sale, held-to-maturity or trading. 6 Available-for-sale investments are carried on the balance sheet at fair value which for the Company approximates carrying value. Auction rate securities of $42.2 million and $71.1 million at October 2, 2005 and January 2, 2005, respectively, are classified as available-for-sale and are expected to be available to meet the Company's current operational needs and accordingly are classified as short-term investments. The interest rates on auction rate securities are reset to current interest rates periodically, typically 7, 14 and 28 days. Contractual maturities of the auction rate securities exceed ten years. Debt securities which the Company has the intent and ability to hold to maturity are classified as "held-to-maturity" investments and are reported at amortized cost which approximates fair value. Held-to-maturity investments, which have contractual maturities of less than one year, consisted of government agency bonds of $10 million at January 2, 2005. The Company has no investments classified as trading securities. 3. New Accounting Standards ------------------------ In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"). This statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") and supersedes Accounting Principles Board ("APB") Opinion No. 25. SFAS 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for annual periods beginning on or after June 15, 2005, which for the Company is the first quarter of fiscal 2006. The impact of the adoption of SFAS 123(R) on fiscal 2006 results cannot be determined at this time. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections," which replaces APB Opinion No. 20, "Accounting Changes," and supersedes FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements-an amendment of APB Opinion No. 28" ("SFAS 154"). SFAS 154 provides guidance on accounting for and reporting of accounting changes and error corrections. It establishes retrospective application, or the earliest practicable date, as the required method for reporting a change in accounting principle and the reporting of a correction of an error. SFAS 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005, which for the Company is fiscal 2006. The Company does not expect the adoption of SFAS 154 to have a material impact on its consolidated financial statements. 4. Medicare Revenues ----------------- Medicare revenues for the third quarter and first nine months of fiscal 2004 included approximately $1.1 million and $10.1 million, respectively, received in settlement of the Company's appeal filed with the U.S. Provider Relations Review Board ("PRRB") related to 7 the reopening of all of its 1998 and 1997 cost reports. (See Note 10.) In addition, Medicare revenues were reduced by a revenue adjustment of $1 million recorded for the nine months of fiscal 2004 to reflect an estimated repayment to Medicare in connection with services rendered to certain patients since the inception of the Prospective Payment System ("PPS") in October 2000. In connection with the estimated repayment, the Centers for Medicare & Medicaid Services ("CMS") had determined that homecare providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. 5. Acquisitions / Dispositions --------------------------- Heritage Home Care Services Acquisition On May 1, 2005, the Company completed the purchase of certain assets and the operations of Heritage Home Care Services, Inc. ("Heritage"), a Utah-based provider of home healthcare services, and assumed certain liabilities related to contracts and office leases with respect to the period after the closing date, pursuant to an asset purchase agreement, for cash consideration of $11.5 million, exclusive of working capital requirements. In connection with the acquisition, the Company also incurred transaction costs of $0.6 million. Acquisition costs have been recorded as Goodwill ($5.5 million), Fixed Assets and Other Assets ($0.4 million) and identifiable intangible assets ($6.2 million) which are included in Other Assets in the consolidated balance sheet as of October 2, 2005. The Company expects to complete the allocation of the purchase price during the fourth quarter of fiscal 2005 as it finalizes a valuation analysis of the intangible assets acquired. Sale of Canadian Investment On March 30, 2004, the Company sold its minority interest in a home care nursing services business in Canada. The business had been acquired as partial consideration for the sale of the Company's Canadian operations in the fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company received cash proceeds of $4.1 million and recorded a pre-tax gain on sale of approximately $0.9 million, which is reflected in the consolidated statement of income for the nine months ended September 26, 2004. 6. Earnings Per Share ------------------ Basic and diluted earnings per share for each period presented has been computed by dividing net income by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts were as follows (in thousands, except per share amounts): 8
Three Months Ended Nine Months Ended ------------------------------------ ------------------------------------ October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004 --------------- ------------------ --------------- ------------------ Net income $ 4,251 $ 4,399 $17,026 $19,594 - ------------------------------------------------------------------------------ --------------------------- Basic weighted average common shares outstanding 23,329 24,422 23,349 25,011 Shares issuable upon the assumed exercise of stock options and in connection with the employee stock purchase plan using the treasury stock method 1,747 1,612 1,669 1,634 ------ ------ ------ ------ Diluted weighted average common shares outstanding 25,076 26,034 25,018 26,645 ------ ------ ------ ------ - ------------------------------------------------------------------------------ --------------------------- Net income per common share: Basic $ 0.18 $ 0.18 $ 0.73 $ 0.78 Diluted $ 0.17 $ 0.17 $ 0.68 $ 0.74 - ------------------------------------------------------------------------------ ---------------------------
7. Revolving Credit Facility, Restricted Cash and Debt --------------------------------------------------- The Company's credit facility, as amended, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender. At the Company's option, the interest rate on borrowings under the credit facility is based on the London Interbank Offered Rates ("LIBOR") plus 3.0 percent or the lender's prime rate plus 1.0 percent. In addition, the Company is required to pay a fee equal to 2.25 percent per annum of the aggregate face amount of outstanding letters of credit. The Company is also subject to an unused line fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. If the Company's trailing twelve month earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding certain restructuring costs and special charges, falls below $20 million, the applicable margins for LIBOR and prime rate borrowings will increase to 3.25 percent and 1.25 percent, respectively, and the letter of credit and unused line fees will increase to 2.5 percent and 0.50 percent, respectively. The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, May 26, 2004 and April 4, 2005, the credit facility was amended to make covenants relating to acquisitions, stock repurchases and cash dividends less restrictive, provided that the Company maintains minimum aggregate excess liquidity, as defined, equal to at least $60 million, and to allow for the disposition of certain assets. As of October 2, 2005, the Company was in compliance with the covenants in the credit facility, as amended. 9 The credit facility provides that subsequent to June 12, 2005, the Company could terminate the credit facility without incurring an early termination fee. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment. Total outstanding letters of credit were approximately $20.2 million at October 2, 2005 and January 2, 2005. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers' compensation program and for certain other commitments. There were no borrowings outstanding under the credit facility as of October 2, 2005. The Company also had outstanding surety bonds of $1.3 million and $1.0 million at October 2, 2005 and January 2, 2005, respectively. The restricted cash of $22.0 million at October 2, 2005 and January 2, 2005 related primarily to cash funds of $21.8 million that have been segregated in a trust account to provide collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. In addition, restricted cash included $0.2 million on deposit to comply with New York state regulations requiring that one month of revenues generated under capitated agreements in the state be held in escrow. Interest on all restricted funds accrues to the Company. 8. Shareholders' Equity -------------------- Changes in shareholders' equity for the nine months ended October 2, 2005 were as follows (in thousands except share amounts):
Additional Common Paid-in Accumulated Stock Capital Deficit Total --------- --------- --------- --------- Balance at January 2, 2005 $ 2,372 $ 238,929 $ (69,361) $ 171,940 Comprehensive income: Net income -- -- 17,026 17,026 Income tax benefits associated with stock-based compensation -- 1,634 -- 1,634 Issuance of stock upon exercise of stock options and under stock plans for employees and directors (456,442 shares) 46 3,969 -- 4,015 Repurchase of common stock at cost (822,100 shares) (82) (13,432) -- (13,514) --------- --------- --------- --------- Balance at October 2, 2005 $ 2,336 $ 231,100 $ (52,335) $ 181,101 ========= ========= ========= =========
Comprehensive income amounted to $4.3 million and $4.4 million for the third quarter of fiscal 2005 and fiscal 2004, respectively, and $17.0 million and $19.6 million for the first nine months of fiscal 2005 and fiscal 2004, respectively. From May 2003 through October 2, 2005, the Company announced five stock repurchase programs authorized by the Company's Board of Directors, under which the Company 10 could repurchase and retire up to an aggregate of 6,000,000 shares of its outstanding common stock. The repurchases occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. A summary of the status of each share repurchase program through October 2, 2005 follows:
Date Shares Average Program Shares Repurchased Cost per Program Announced Authorized as of October 2, 2005 Total Cost Share Completion Date - --------- ---------- --------------------- ---------- ----- --------------- May 16, 2003 1,000,000 1,000,000 $ 9,082,353 $ 9.08 July 23, 2003 August 7, 2003 1,500,000 1,500,000 20,779,291 13.85 July 8, 2004 May 26, 2004 1,000,000 1,000,000 15,290,952 15.29 October 13, 2004 August 10, 2004 1,000,000 1,000,000 15,890,390 15.89 April 27, 2005 April 14, 2005 1,500,000 313,704 5,295,765 16.88 ------------------------------------------------------------------------ 6,000,000 4,813,704 $66,338,751 $13.78 ========================================================================
A summary of the Company's share repurchase activity follows:
Three Months Ended Nine Months Ended ------------------------------------- --------------------------------------- October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004 --------------- ------------------ --------------- ------------------ Total Numbers of Shares Purchased 65,800 1,011,993 822,100 2,026,840 Total Cost $1,188,771 $15,460,993 $13,513,797 $30,162,959 Average Cost Per Share $ 18.07 $ 15.28 $ 16.44 $ 14.88
As of October 2, 2005, the Company had remaining authorization to repurchase an aggregate of 1,186,296 shares of its outstanding common stock. During the period from October 3, 2005 through November 8, 2005, the Company purchased 487,900 shares of its common stock at an aggregate cost of approximately $7.3 million. 9. Stock-Based Compensation Plans ------------------------------ The Company has chosen to adopt the disclosure only provisions of SFAS 123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"), and continues to account for stock-based compensation using the intrinsic value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. See Note 3, "New Accounting Standards." Stock option grants in fiscal 2004 and prior years fully vest over periods ranging from three to six years. Stock option grants in fiscal 2005 fully vest over a four year period based on a vesting schedule which provides for one-third vesting after years one, three and four. The weighted average fair values of the Company's stock options granted during the first nine months of fiscal 2005 and fiscal 2004, calculated using the Black-Scholes option-pricing model, and other assumptions are as follows: 11
Nine Months Ended ---------------------------------------------- October 2, 2005 September 26, 2004 ------------------- ----------------------- Weighted average fair value of options granted $ 6.13 $ 5.47 Risk-free interest rate 3.73% 3.36% Expected volatility 35% 37% Contractual life 10 years 10 years Expected dividend yield 0% 0%
For stock options granted during the fiscal 2004 and prior periods, the expected life is estimated to be two years following the date all options comprising the grant become fully vested and forfeitures are reflected in the calculation as they occur. For stock options granted during the fiscal 2005 period, the expected life of an option is estimated to be 2.5 years following its vesting date and forfeitures are reflected in the calculation using an estimate based on experience. Pro forma compensation expense is calculated for the fair value of the employee's purchase rights under the ESPP, using the Black-Scholes model. Assumptions for the first nine months of fiscal 2005 and fiscal 2004 are as follows:
Nine Months Ended ------------------------------ ----------------------------- October 2, 2005 September 26, 2004 ------------------------------ ----------------------------- 1st offering 2nd offering 1st offering 2nd offering Period Period Period Period ------ ------ ------ ------ Risk-free interest rate 2.63% 3.32% 1.02% 1.76% Expected volatility 27% 33% 28% 30% Expected life 0.5 years 0.5 years 0.5 years 0.5 years Expected dividend yield 0% 0% 0% 0%
The following table presents net income and basic and diluted income per common share had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
Three Months Ended Nine Months Ended ------------------------------------ ----------------------------------- October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004 --------------- ------------------ --------------- ------------------ Net income - as reported $ 4,251 $ 4,399 $ 17,026 $ 19,594 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax (852) (579) (2,916) (1,834) ---------- ---------- ---------- ---------- Net income - pro forma $ 3,399 $ 3,820 $ 14,110 $ 17,760 ========== ========== ========== ========== Basic income per share - as reported $ 0.18 $ 0.18 $ 0.73 $ 0.78 Basic income per share - pro forma $ 0.15 $ 0.16 $ 0.60 $ 0.71 Diluted income per share - as reported $ 0.17 $ 0.17 $ 0.68 $ 0.74 Diluted income per share - pro forma $ 0.14 $ 0.15 $ 0.56 $ 0.67
During the first nine months of fiscal 2005, the Company granted 942,600 stock options to officers and employees under its existing option plans at an average exercise price of $16.38. At October 2, 2005, there were 3,670,396 options outstanding at a weighted average 12 exercise price of $10.33 per share. During the first nine months of fiscal 2005, the Company issued 103,321 shares of common stock under its ESPP. 10. Legal Matters ------------- Litigation In addition to the matters referenced in this Note 10, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Indemnifications Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off"). In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business. Government Matters PRRB Appeal ----------- The Company's annual cost reports, which were filed with CMS, were subject to audit by the fiscal intermediary engaged by CMS. In connection with the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary's methodology. The Company believed the methodology it used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the PRRB concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company's consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company's cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 were to be reopened after the process for the 1997 cost reports was completed. 13 In February 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1997 cost reports and determined that the adjustment to allowable costs for that year was approximately $9 million. The Company received the funds and recorded the adjustment of $9.0 million as net revenues during the first quarter of fiscal 2004. During the third quarter of fiscal 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1998 cost reports and determined that the adjustment to allowable costs for that year was $1.4 million. The Company received the funds and recorded the adjustment of $1.4 million as net revenues during fiscal 2004, of which $1.1 million was received and recorded in the third quarter of fiscal 2004. The fiscal intermediary is currently in the process of reopening the 1999 cost reports and the Company anticipates completion of the reopening during the fourth quarter of fiscal 2005. The Company expects to receive funds in excess of $5.0 million related to the 1999 cost reports and will record an adjustment to net revenues during the fourth quarter of fiscal 2005 when such gain contingency is realized. The timeframe for resolving all items relating to the 2000 cost reports cannot be determined at this time. Subpoena -------- On April 17, 2003, the Company received a subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations ("OIG"). The subpoena seeks information regarding the Company's implementation of settlements and corporate integrity agreements entered into with the government, as well as the Company's treatment on cost reports of employees engaged in sales and marketing efforts. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to the period from January 1, 1998 through September 30, 2000. On February 17, 2004, the Company received a subpoena from the U.S. Department of Justice ("DOJ") seeking additional information related to the matters covered by the OIG subpoena. The Company has provided documents and other information requested by the OIG and DOJ pursuant to their subpoenas and similarly intends to cooperate fully with any future OIG or DOJ information requests. To the Company's knowledge, the government has not filed a complaint against the Company. 11. Income Taxes ------------ The Company recorded a federal and state income tax provision of $2.8 million for the third quarter of fiscal 2005, of which $1.6 million represented a current tax provision and $1.2 million represented a deferred tax provision. For the nine months ended October 2, 2005, the Company recorded a federal and state income tax provision of $4.3 million representing a current tax benefit of $0.1 million and a deferred tax provision of $4.4 million. The income tax provision for the first nine months of fiscal 2005 included a $4.2 million release of tax reserves related to the favorable resolution of tax audit issues for the years 1997 through 2000. The Company agreed to assume responsibility for these items in connection with its Split-Off from Olsten in March 2000. The difference between the federal statutory income tax rate and the Company's effective rate of 20 percent for the first nine months of fiscal 2005 is primarily due to the release of tax reserves and state taxes. 14 Federal and state income taxes of $2.4 million and $12.1 million were recorded for the third quarter and first nine months of fiscal 2004, respectively. The difference between the federal statutory income tax rate and the Company's effective tax rate of 39 percent was due primarily to state taxes. Deferred tax assets and deferred tax liabilities were as follows (in thousands):
October 2, 2005 January 2, 2005 --------------- --------------- Deferred tax assets Current: Reserves and allowances $ 18,374 $ 19,348 Federal net operating loss and other carryforwards -- 793 State net operating loss 7,027 7,027 Other 1,948 1,148 Less: valuation allowance (4,455) (4,455) -------- -------- Total current deferred tax assets 22,894 23,861 Noncurrent: Intangible assets 22,906 25,772 -------- -------- Total assets 45,800 49,633 -------- -------- Deferred tax liabilities: Noncurrent: Fixed assets (2,627) (2,707) Developed software (1,841) (1,233) Other (646) (599) -------- -------- Total non-current deferred tax liabilities (5,114) (4,539) -------- -------- Net deferred tax assets $ 40,686 $ 45,094 ======== ========
At October 2, 2005, the Company had state net operating loss carryforward benefits of $7.0 million. A valuation allowance of $4.5 million was recorded in fiscal 2004 to recognize that certain state net operating loss carryforwards may expire before realization. 12. Business Segment Information ---------------------------- Commencing in fiscal 2005, the Company identified two business segments for reporting purposes. The Company believes that this presentation aligns the Company's financial reporting with the manner in which the Company has recently commenced to manage its business operations with a focus on the strategic allocation of resources and separate branding strategies between the business segments. The Company's operations involve servicing patients and customers through its two business segments: Home Healthcare Services and CareCentrix. The Home Healthcare Services segment is comprised of direct home nursing and therapy services operations, including specialty programs, Gentiva Rehab Without Walls(R) and Gentiva Consulting. Direct home nursing and therapy services operations are conducted through licensed and Medicare-certified agencies from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services 15 to pediatric, adult and elder patients. The Company's direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include: o Gentiva Orthopedics Program, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery; o Gentiva Safe Strides(SM) Program, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling; and o Gentiva Cardiopulmonary Program, which helps patients and their physicians manage heart and lung health in a home-based environment. Gentiva Rehab Without Walls provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases. The Company also provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding. The CareCentrix segment encompasses Gentiva's ancillary care benefit management and the coordination of integrated homecare services for managed care organizations and health benefit plans. CareCentrix operations provide an array of administrative services and coordinate the delivery of home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services for managed care organizations and health plans. CareCentrix accepts case referrals from a wide variety of sources, verifies eligibility and benefits and transfers case requirements to the providers for services to the patient. CareCentrix provides services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer's enrollees. Corporate expenses consist of costs relating to executive management and corporate and administrative support functions that are not directly attributable to a specific segment. Corporate and administrative support functions represent primarily information services, accounting and reporting, tax compliance, risk management, procurement, marketing, legal and human resource benefits and administration. The Company's senior management evaluates performance and allocates resources based on operating contributions of the reportable segments, which exclude corporate expenses, depreciation, amortization, and interest income, but include revenues and all other costs directly attributable to the specific segment. Intersegment revenues represent Home Healthcare Services segment revenues generated from services provided to the CareCentrix segment. Segment assets represent net accounts receivable associated with segment activities. Intersegment assets represent accounts receivable associated with services provided by the Home Healthcare Services segment to the CareCentrix segment. All other assets are assigned to corporate assets for the benefit of all segments for the purposes of segment disclosure. 16 Segment information about the Company's operations is as follows (in thousands):
Home Healthcare Services CareCentrix Total -------------- --------------- --------- Three months ended October 2, 2005 (unaudited) - ---------------------------------------------- Net revenue - segments $ 139,128 (1) $ 84,569 (2) $ 223,697 ========= ======== Intersegment revenues (4,138) --------- Total net revenue $ 219,559 ========= Operating contribution $ 13,073 (1) $ 6,314 (2) $ 19,387 ========= ======== Corporate expenses (10,398) Depreciation and amortization (2,291) Interest income, net 385 --------- Income before income taxes $ 7,083 ========= Three months ended September 26, 2004 (unaudited) - ------------------------------------------------- Net revenue - segments $ 123,957 (4) $ 79,085 $ 203,042 ========= ======== Intersegment revenues (4,972) --------- Total net revenue $ 198,070 ========= Operating contribution $ 10,177 (4) $ 8,877(2) $ 19,054 ========= ======== Corporate expenses (10,750) Depreciation and amortization (1,756) Interest income, net 248 --------- Income before income taxes $ 6,796 ========= Nine months ended October 2, 2005 (unaudited) - --------------------------------------------- Net revenue - segments $ 409,878 (1) $ 250,572 (2) $ 660,450 ========= ======== Intersegment revenues (13,649) --------- Total net revenue $ 646,801 ========= Operating contribution $ 36,790 (1) $ 20,321 (2) $ 57,111 ========= ======== Corporate expenses (31,154) (3) Depreciation and amortization (5,938) Interest income, net 1,262 --------- Income before income taxes $ 21,281 ========= Segment assets $ 77,842 $ 65,785 $ 143,627 ========= ======== Intersegment assets (1,288) Corporate assets 193,532 --------- Total assets $ 335,871 ========= Nine months ended September 26, 2004 (unaudited) - ------------------------------------------------ Net revenue - segments $ 388,963 (4,5) $ 246,700 $ 635,663 ========= ======== Intersegment revenues (15,440) --------- Total net revenue $ 620,223 ========= Operating contribution $ 45,329 (4,5) $ 23,806(2) $ 69,135 ========= ======== Corporate expenses (33,409) Gain on sale of Canadian Investment 946 Depreciation and amortization (5,505) Interest income, net 538 --------- Income before income taxes $ 31,705 ========= Segment assets $ 68,622 $ 60,337 $ 128,959 ========= ======== Intersegment assets (1,614) Corporate assets 201,401 --------- Total assets $ 328,746 =========
17 (1) During the second quarter of fiscal 2003, CMS initiated a project to recover, over a 24 month period, overpayments to providers relating to partial episode payments ("PEPs") for overlapping episodes of service during the period prior to and through April 2003. PEPs occur if a patient is discharged but readmitted to another agency within the same sixty day period. The Company had established reserves for such PEPs in fiscal 2002 and 2003 based on information available at that time. During the third quarter of fiscal 2005 it was determined that CMS had completed its recovery project resulting in an excess reserve. In connection with this item, Home Healthcare Services segment net revenues and operating contribution for the third quarter and first nine months of fiscal 2005 included a positive adjustment of approximately $0.7 million. (2) For the third quarter and first nine months of fiscal 2005, CareCentrix segment results reflected a revenue adjustment of approximately $1.1 million and a reduction in operating contribution of $0.8 million in connection with a change in estimate relating to certain home healthcare services provided to a managed care customer. For the third quarter and first nine months of fiscal 2004, operating contribution included a positive adjustment of $0.7 million relating to a change in estimated costs payable to providers as the Company completed its reconfiguration of the home medical equipment network. (3) For the nine months ended October 2, 2005, corporate expenses included a credit of approximately $0.8 million relating to a favorable arbitration settlement. (4) The Home Healthcare Services segment Medicare revenues for the third quarter of fiscal 2004 included funds received of approximately $1.1 million related to the $1.4 million settlement of the Company's appeal filed with the PRRB related to the reopening of all of its 1998 cost reports (see Note 10). (5) The Home Healthcare Services segment Medicare revenues for the first nine months of fiscal 2004 included approximately $9.1 million received in settlement of the Company's appeal filed with the PRRB related to the reopening of its 1997 cost reports, net of a revenue adjustment of $1 million to reflect an estimated repayment to Medicare in connection with services rendered to certain patients since the inception of PPS in October 2000. (See Note 10.) The CMS has determined that homecare providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. 13. Subsequent Event ---------------- On October 27, 2005, the Company announced the amendment of its contract and extension of its national relationship with CIGNA Health Corporation ("Cigna") through January 31, 2009. Under the amended contract, CareCentrix will continue to coordinate the provision of direct home nursing and related services through the CareCentrix network of credentialed, third-party providers or through Gentiva's own home healthcare locations, as well as home infusion services and certain other specialty medical equipment solely through the CareCentrix network. Among the specialty equipment to be provided to Cigna members through CareCentrix are insulin pumps, wound suction devices and other products. As Gentiva announced on October 24, 2005, CareCentrix is ending its coordination of respiratory therapy and certain durable medical equipment services to Cigna members as of January 31, 2006. Based on the changes in the Company's arrangement with Cigna, the Company estimates that its fiscal 2006 revenues from Cigna could be up to $40 million lower than revenues anticipated from the Cigna contract in fiscal 2005. Item 2. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- Forward-looking Statements Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: 18 o general economic and business conditions; o demographic changes; o changes in, or failure to comply with, existing governmental regulations; o legislative proposals for healthcare reform; o changes in Medicare and Medicaid reimbursement levels; o effects of competition in the markets in which the Company operates; o liability and other claims asserted against the Company; o ability to attract and retain qualified personnel; o availability and terms of capital; o loss of significant contracts or reduction in revenue associated with major payer sources; o ability of customers to pay for services; o business disruption due to natural disasters or terrorist acts; o a material shift in utilization within capitated agreements; and o changes in estimates and judgments associated with critical accounting policies. Forward-looking statements are found throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its 2004 Annual Report on Form 10-K, as amended, and various filings with the SEC. The reader is encouraged to review these risk factors and filings. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial position. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report. General - ------- The Company's results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company's Annual Report on Form 10-K for the fiscal year ended January 2, 2005, as amended by Form 10-K/A, and in other filings with the SEC. Overview - -------- Gentiva is the nation's largest provider of comprehensive home health services, based on revenues derived from the provision of skilled home nursing and therapy services to patients. The Company's services can be delivered across the United States 24 hours a day, 7 19 days a week. The Company's operations involve servicing patients and customers through its two business segments: Home Healthcare Services and CareCentrix. The Home Healthcare Services segment is comprised of direct home nursing and therapy services operations, including specialty programs, Gentiva Rehab Without Walls and Gentiva Consulting. The Company's Home Healthcare Services segment conducts its business through more than 350 direct service delivery units operating from more than 250 locations under its Gentiva brand. The Company's direct home nursing and therapy services operations are conducted through licensed and Medicare-certified agencies located in 35 states, substantially all of which are currently accredited by the Joint Commission on Accreditation of Healthcare Organizations, from which the Company provides various combinations of skilled nursing and therapy services, paraprofessional nursing services and homemaker services to pediatric, adult and elder patients. Reimbursement sources include government programs, such as Medicare and Medicaid, and private sources, such as health insurance plans, managed care organizations, long term care insurance plans and personal funds. Gentiva's direct home nursing and therapy operations are organized in five geographic regions, each staffed with clinical, operational and sales teams. Regions are further separated into operating areas. Each operating area includes branch locations through which home healthcare agencies operate. Each agency is led by a director and is staffed with clinical and administrative support staff as well as clinical associates who deliver direct patient care. The clinical associates are employed on either a full-time basis or are paid on a per visit, per shift, per diem or per hour basis. The Company's direct home nursing and therapy services operations also deliver services to its customers through focused specialty programs that include: o Gentiva Orthopedic Program, which provides individualized home orthopedic rehabilitation services to patients recovering from joint replacement or other major orthopedic surgery; o Gentiva Safe Strides Program, which provides therapies for patients with balance issues who are prone to injury or immobility as a result of falling; and o Gentiva Cardiopulmonary Program, which helps patients and their physicians manage heart and lung health in a home-based environment. Gentiva Rehab Without Walls provides home and community-based neurorehabilitation therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases. The Company also provides consulting services to home health agencies through its Gentiva Consulting unit. These services include billing and collection activities, on-site agency support and consulting, operational support and individualized strategies for reduction of days sales outstanding. The CareCentrix segment encompasses Gentiva's ancillary care benefit management and coordination of integrated homecare services for managed care organizations and health benefit plans through a network of more than 2,500 third-party provider locations, as well as Gentiva locations, under its CareCentrix brand. CareCentrix operations provide an array of administrative services and coordinate the delivery of home nursing services, acute and 20 chronic infusion therapies, durable medical equipment, and respiratory products and services for managed care organizations and health plans. These administrative services are coordinated within four regional coordination centers and are delivered through Gentiva direct home nursing and therapy locations as well as through an extensive nationwide network of third-party provider locations in all 50 states. CareCentrix accepts case referrals from a wide variety of sources, verifies eligibility and benefits and transfers case requirements to the providers for services to the patient. CareCentrix provides services to its customers, including the fulfillment of case requirements, care management, provider credentialing, eligibility and benefits verification, data reporting and analysis, and coordinated centralized billing for all authorized services provided to the customer's enrollees. Contracts within CareCentrix are structured as fee-for-service, whereby a payer is billed on a per usage basis according to a fee schedule for various services, or as at-risk capitation, whereby the payer remits a monthly payment to the Company based on the number of members enrolled in the health plans under the capitation agreement, subject to certain limitations and coverage guidelines. Significant Developments - ------------------------ On October 27, 2005, the Company announced the amendment of its contract and extension of its national relationship with Cigna through January 31, 2009. Under the amended contract, CareCentrix will continue to coordinate the provision of direct home nursing and related services through the CareCentrix network of credentialed, third-party providers or through Gentiva's own home healthcare locations, as well as home infusion services and certain other specialty medical equipment solely through the CareCentrix network. Among the specialty equipment to be provided to Cigna members through CareCentrix are insulin pumps, wound suction devices and other products. As Gentiva announced on October 24, 2005, CareCentrix is ending its coordination of respiratory therapy and certain durable medical equipment services to Cigna members as of January 31, 2006. Based on the changes in the Company's arrangement with Cigna, the Company estimates that its fiscal 2006 revenues from Cigna could be up to $40 million lower than revenues anticipated from the Cigna contract in fiscal 2005. On September 8, 2005, the Company announced that its contract with TriWest to provide coordination and delivery of homecare services to active and retired military personnel in certain western states will terminate as of November 29, 2005. Net revenues relating to the TriWest contract are expected to range between $20 million and $25 million in fiscal 2005. On May 1, 2005, the Company completed the purchase of certain assets and the operations of Heritage, a Utah-based provider of home healthcare services, and assumed certain liabilities related to contracts and office leases with respect to the period after the closing date, pursuant to an asset purchase agreement, for cash consideration of $11.5 million, exclusive of working capital requirements. In connection with the acquisition, the Company also incurred transaction costs of $0.6 million. Acquisition costs have been recorded as Goodwill ($5.5 million), Fixed Assets and Other Assets ($0.4 million), and identifiable intangible assets ($6.2 million) which are included in Other Assets in the consolidated balance sheet as of October 2, 2005. The Company expects to complete the allocation of the purchase price during the fourth quarter of fiscal 2005 as it finalizes a valuation analysis of the intangible assets acquired. The Heritage 21 operations are expected to increase the Company's annualized revenues by more than $20 million and to be accretive to the Company's fiscal 2005 results. Results of Operations - --------------------- Revenues
(Dollars in millions) Third Quarter Nine Months Ended ------------------------------------- -------------------------------------- Percentage Percentage 2005 2004 Variance 2005 2004 Variance ------ ------ ------ ------ ------ ------ Medicare $ 67.4 $ 52.3 28.7% $194.4 $168.7 15.2% Medicaid and Local Government 37.6 37.7 (0.3%) 112.0 115.9 (3.3%) Commercial Insurance and Other 114.6 108.1 6.1% 340.4 335.6 1.4% ------ ------ ------ ------ ------ ------ $219.6 $198.1 10.9% $646.8 $620.2 4.3% ====== ====== ====== ====== ====== ======
The Company's net revenues increased by $21.5 million, or 10.9 percent, to $219.6 million for the quarter ended October 2, 2005 as compared to the quarter ended September 26, 2004. For the nine months ended October 2, 2005 as compared to the nine months ended September 26, 2004, net revenues increased by $26.6 million, or 4.3 percent, to $646.8 million from $620.2 million. Home Healthcare Services segment revenues are derived from all three payer groups: Medicare, Medicaid and Local Government and Commercial Insurance and Other. CareCentrix segment revenues are derived from the Commercial Insurance and Other payer group only. Medicare revenue growth for the fiscal 2005 periods as compared to the fiscal 2004 periods was driven by several factors including: (i) an increase in admissions, including the Company's specialty programs and exclusive of acquired operations, of approximately 15 percent for the third quarter and 14 percent for the first nine months, (ii) improvement in revenue per admission, (iii) reimbursement rate changes, as noted below and (iv) the impact of the Heritage acquisition, which closed on May 1, 2005 and constituted approximately 6.7 percent of the 28.7 percent increase in Medicare revenue for the third quarter and 3.0 percent of the 15.2 percent increase in Medicare revenue for the first nine months of the year. These positive factors were offset somewhat for the first nine months of the year by the absence of three special items which are described below. Medicare revenue included special items of $1.1 million for the third quarter of fiscal 2004 and $9.1 million for the first nine months of fiscal 2004. Special items represented (i) $1.1 million recorded and received during the third quarter of fiscal 2004 in settlement of the Company's appeal filed with the PRRB related to the reopening of its 1998 cost reports, (ii) $9.0 million received in settlement of the Company's appeal filed with the PRRB related to the reopening of its 1997 cost reports and (iii) a revenue adjustment of $1 million to reflect the estimated repayment to Medicare in connection with services rendered to certain patients since the inception of the PPS in October 2000. In connection with the estimated repayment, CMS had determined that homecare providers should have received lower reimbursements for 22 certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. The reimbursement rate changes included a 2.3 percent market basket increase that became effective for patients on service on or after January 1, 2005, partially offset by the elimination of the 5 percent rate increase related to home health services performed in specifically defined rural areas of the country (rural add-on provision) effective for patients on service on or after April 1, 2005. The rate adjustments relating to the market basket change and rural add-on provision represented incremental revenue of approximately $1.6 million and $4.8 million for the third quarter and first nine months of fiscal 2005, respectively. Medicaid and Local Government revenues decreased for the fiscal 2005 periods as compared to the fiscal 2004 periods, due primarily to a reduction in the Company's participation in certain low-margin Medicaid and state and county programs partially offset by an increase in skilled visits within Medicaid programs. Revenues relating to hourly Medicaid and state and county programs decreased $0.4 million for the third quarter fiscal 2005 and $6.0 million for the first nine months of fiscal 2005, as compared to the corresponding periods of fiscal 2004, while revenues relating to intermittent care visits increased $0.3 million for the third quarter of fiscal 2005 and $2.1 million for the first nine months of fiscal 2005, as compared to the corresponding periods of fiscal 2004. Commercial Insurance and Other revenues increased $6.5 million, or 6.1 percent, for the third quarter of fiscal 2005 and increased $4.8 million, or 1.4 percent for the first nine months, as compared to the third quarter and first nine months of fiscal 2004. Cigna revenues increased by $4.7 million, or 8.0 percent, for the third quarter of fiscal 2005 as compared to the third quarter of fiscal 2004. This increase is due primarily to the addition of Cigna members in five New England states, effective July 1, 2005, as well as higher volume in Cigna's fee-for-service plans. Revenues relating to the Cigna contract for the first nine months of fiscal 2005 declined by $5.4 million, or 2.9 percent, as compared to the first nine months of fiscal 2004, due primarily to a reduction in the number of enrolled Cigna members in 2005 resulting in lower revenues from Cigna's capitated plans, partially offset by the addition of the New England states and volume growth noted above. Non-Cigna, Commercial Insurance and Other revenues increased by $1.8 million, or 3.7 percent, for the third quarter and increased by $10.2 million, or 7.1 percent, for the first nine months of fiscal 2005, as compared to the corresponding periods of fiscal 2004, primarily by increased unit volume from existing business and new contracts signed during the past year, as well as the impact of adding the Heritage operations ($1.2 million for the third quarter and $1.8 million for the first nine months of fiscal 2005). Home Healthcare Services segment revenues increased $15.2 million, or 12.2 percent, from $124.0 million during the third quarter of fiscal 2004 to $139.1 million during the third quarter of fiscal 2005. For the nine months ended October 2, 2005, Home Healthcare Services revenues were $409.9 million, an increase of $20.9 million, or 5.4 percent, from $389.0 million for the first nine months of fiscal 2004. Revenues for the first nine months of fiscal 2004 were positively impacted by the Medicare special items totaling $9.1 million, as discussed above. In addition, for the third quarter and first nine months of fiscal 2004, Medicare revenues and Commercial Insurance and Other revenues were negatively impacted by four hurricanes in the Southeastern United States. 23 CareCentrix segment revenues increased $5.5 million, or 6.9 percent, from $79.1 million during the third quarter of fiscal 2004 to $84.6 million during the third quarter of fiscal 2005. CareCentrix segment revenues for the first nine months of fiscal 2005 were $250.6 million as compared to $246.7 million for the first nine months of fiscal 2004, an increase of $3.9 million, or 1.6 percent. For the third quarter of fiscal 2005, this increase was driven primarily by the addition of Cigna members in five New England states, effective July 1, 2005, and growth in Cigna's fee-for-service plans and, for both the third quarter and first nine months of fiscal 2005, by increases in the non-Cigna Commercial Insurance and Other revenues. Gross Profit
(Dollars in millions) Third Quarter Nine Months ----------------------------------- ------------------------------------- 2005 2004 Variance 2005 2004 Variance ------ ------ -------- ------ ------ -------- Gross profit $ 81.0 $ 75.5 $ 5.5 $242.4 $237.1 $ 5.3 As a percent of revenue 36.9% 38.1% (1.2%) 37.5% 38.2% (0.7%)
As a percentage of revenue, gross profit decreased by 1.2 percentage points in the third quarter of fiscal 2005 and 0.7 percentage points in the first nine months of fiscal 2005 as compared to the corresponding periods of fiscal 2004. The decrease in gross profit margins was primarily attributable to the CareCentrix segment (impact of 1.7 percentage points for the quarter and 0.5 percentage points for the nine month period) and the Medicare special items recorded in the 2004 periods (impact of 0.3 percentage points for the quarter and 0.9 percentage points for the nine month period) offset by improvements in the Home Healthcare Services segment (impact of 0.8 percentage points for the quarter and 0.7 percentage points for the nine month period). The decline in gross profit margins in the fiscal 2005 periods as compared to the fiscal 2004 periods in the CareCentrix segment occurred principally in the third quarter and resulted from (i) a positive adjustment relating to a change in estimated costs in the 2004 period as the Company completed its reconfiguration of the home medical equipment network and (ii) lower margins in the 2005 period due to changes in the Company's arrangements with TriWest. The increase in gross profit margins in the Home Healthcare Services segment resulted from several factors including (i) the favorable change in business mix due to increased volume of Medicare business, including growth from higher margin specialty programs, (ii) increased revenue per Medicare admission in the third quarter of fiscal 2005 as a result of improvements in the training and orientation of full-time clinicians and (iii) rate increases in Medicare and certain non-Medicare business. These increases were offset somewhat by increased direct cost of services including clinician wages, benefits and fuel costs as well as costs relating to orientation, training and productivity as the Company transitions more of its skilled clinical care to a dedicated full-time workforce. 24 Selling, General and Administrative Expenses Selling, general and administrative expenses, including depreciation and amortization, increased $5.3 million to $74.3 million for the quarter ended October 2, 2005, as compared to $69.0 million for the quarter ended September 26, 2004, and $15.5 million to $222.4 million for the nine months ended October 2, 2005, as compared to $206.9 million for the nine months ended September 26, 2004. The increases for the third quarter and the first nine months of fiscal 2005, as compared to the corresponding periods of fiscal 2004, were attributable to (i) field operating costs associated with the Heritage operations following its acquisition in May 2005, (approximately $1.5 million for the third quarter and over $2.5 million for the first nine months of fiscal 2005), (ii) incremental field operating and administrative costs to service increased Medicare volume and develop and manage the Company's growing specialty programs in the Home Healthcare Services segment ($2.5 million for the third quarter and $9.5 million for the first nine months of fiscal 2005), (iii) increased selling and patient care coordination expenses, primarily in the Home Healthcare Services segment ($0.8 million for the third quarter and $3.0 million for the first nine months of fiscal 2005), (iv) severance and other costs relating to the closing of selected Home Healthcare Services branch locations ($0.3 million for both the third quarter and first nine months of fiscal 2005) and (v) incremental costs at the CareCentrix regional coordination centers to service increased unit volume ($0.3 million for the third quarter and $1.0 million for the first nine months of fiscal 2005), as well as, primarily for the first nine months of fiscal 2005, incremental costs relating to the hiring of full-time clinicians and other personnel. These increases were partially offset by lower corporate general and administrative expenses ($0.4 million for the third quarter and $1.3 million for the first nine months of fiscal 2005) and, for the nine month period, a favorable arbitration settlement ($0.8 million). Gain on Sale of Canadian Investment On March 30, 2004, the Company sold its minority interest in a home care nursing services business in Canada. The business had been acquired as partial consideration for the sale of the Company's Canadian operations in the fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company received cash proceeds of $4.1 million and recorded a pre-tax gain on sale of approximately $0.9 million which is reflected in the consolidated statement of income for the nine months ended September 26, 2004. Interest Income, Net Net interest income was $0.4 million for the quarter ended October 2, 2005 and $0.2 million for the quarter ended September 26, 2004. Net interest income included interest income of $0.7 million for the third quarter of fiscal 2005 and $0.5 million for the third quarter of fiscal 2004, partially offset by fees relating to the revolving credit facility and outstanding letters of credit. Net interest income was $1.3 million for the nine months ended October 2, 2005 compared to $0.5 million for the nine months ended September 26, 2004. Net interest income for the first nine months of fiscal years 2005 and 2004 represented interest income of $2.1 million 25 and $1.3 million, respectively, partially offset by fees relating to the revolving credit facility and outstanding letters of credit. Income Taxes The Company recorded a federal and state income tax provision of $2.8 million for the third quarter of fiscal 2005, of which $1.6 million represented a current tax provision and $1.2 million represented a deferred tax provision. For the nine months ended October 2, 2005, the Company recorded a federal and state income tax provision of $4.3 million representing a current tax benefit of $0.1 million and a deferred tax provision of $4.4 million. The income tax provision for the first nine months of fiscal 2005 included a $4.2 million release of tax reserves related to the favorable resolution of tax audit issues for the years 1997 through 2000. The Company agreed to assume responsibility for these items in connection with its Split-Off from Olsten in March 2000. The difference between the federal statutory income tax rate and the Company's effective rate of 20 percent for the first nine months of fiscal 2005 is primarily due to the release of tax reserves and state taxes. Federal and state income taxes of $2.4 million and $12.1 million were recorded for the third quarter and first nine months of fiscal 2004, respectively. The difference between the federal statutory income tax rate and the Company's effective tax rate of 39 percent was due primarily to state taxes. Net Income For the third quarter of fiscal 2005, net income was $4.3 million, or $0.17 per diluted share, compared with net income of $4.4 million, or $0.17 per diluted share, for the corresponding period of 2004. For the first nine months of fiscal 2005, net income was $17.0 million, or $0.68 per diluted share, compared with net income of $19.6 million, or $0.74 per diluted share for the first nine months of fiscal 2004. Net income for the third quarter of fiscal 2004 included a special item related to Medicare, noted under the heading "Revenues" above, which had a net positive impact of $0.7 million, or $0.03 per diluted share. Net income for the first nine months of fiscal 2005 included $4.2 million, or $0.17 per diluted share, relating to the favorable resolution of tax audit issues noted under the heading "Income Taxes" above. Net income for the first nine months of fiscal 2004 included three special items related to Medicare, noted under the heading "Revenues" above, which had a net positive impact of $5.6 million, or $0.22 per diluted share. Net income for the first nine months of fiscal 2004 included a net gain of $0.6 million, or $0.02 per diluted share, on the sale of the Company's minority interest in a home care nursing services business in Canada. See Note 5 to the Company's consolidated financial statements. 26 Liquidity and Capital Resources - ------------------------------- Liquidity The Company's principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under third party commercial or governmental payer arrangements. The Company realized net cash provided by operating activities of $9.3 million in the nine months ended October 2, 2005 as compared to net cash provided by operating activities of $27.0 million in the nine months ended September 26, 2004. The decrease of $17.7 million in net cash provided by operating activities was primarily driven by changes impacting the statement of income, changes in accounts receivable and changes in current liabilities. Cash flow changes impacting the statement of income represent the sum of net income and all adjustments to reconcile net income to net cash provided by operating activities and are summarized as follows:
Nine Months Ended ----------------------------------------------------- October 2, 2005 September 26, 2004 Variance -------- -------- -------- OPERATING ACTIVITIES: Net income $ 17,026 $ 19,594 $ (2,568) Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 5,938 5,505 433 Provision for doubtful accounts 4,329 4,708 (379) Gain on sale of Canadian investment -- (946) 946 Reversal of tax audit reserves (4,200) -- (4,200) Deferred income tax expense 4,408 9,743 (5,335) -------- -------- -------- Total adjustments to reconcile net income $ 27,501 $ 38,604 $(11,103) ======== ======== ========
o The $11.1 million difference is primarily related to the special Medicare item of $9.1 million in cash received in fiscal 2004 in settlement of the Company's appeal with the PRRB in connection with the reopening of all of the Company's 1997 and 1998 cost reports. o See "Results of Operations - Income Taxes" for a discussion of deferred income tax expense and reversal of tax audit reserves. Cash flow from operating activities between the 2004 and 2005 reporting periods was negatively impacted by $15.6 million as a result of changes in accounts receivable of $0.9 million in the 2004 period and ($14.7) million in the 2005 period. The increase in accounts receivable relates primarily to incremental receivables attributable to the TriWest account, for which there were processing delays in adjudicating the Company's claims, and the Heritage operations which were acquired on May 1, 2005. Cash flow from operating activities was positively impacted by $10.2 million as a result of changes in current liabilities of ($12.1) million in the 2004 period and ($1.9) million in the 2005 period. A summary of the changes in current liabilities impacting cash flow from operating activities for the nine month fiscal period ended October 2, 2005 follows: 27
Nine Months Ended ------------------------------------------------------ October 2, 2005 September 26, 2004 Variance ------- -------- -------- OPERATING ACTIVITIES: Changes in current liabilities: Accounts payable $ (719) $ (2,843) $ 2,124 Payroll and related taxes 6,416 (2,956) 9,372 Medicare liabilities (3,085) (145) (2,940) Cost of claims incurred but not reported (1,117) (2,228) 1,111 Obligations under insurance programs (2,432) (609) (1,823) Other accrued expenses (965) (3,321) 2,356 ------- -------- -------- Total changes in current liabilities $(1,902) $(12,102) $ 10,200 ======= ======== ========
The primary driver for the $10.2 million difference results from the timing of payments related to administrative payroll and payroll taxes. The difference of $9.4 million between reporting periods is attributable to the timing of the remittance of administrative payroll and related payroll taxes at October 2, 2005 compared to September 26, 2004. Other changes in current liabilities that impacted cash flow from operating activities include: o Accounts payable which had a positive impact on cash of $2.1 million between the 2004 and 2005 reporting periods primarily related to the timing of payment of normal trade payables. o Medicare liabilities which had a negative impact on cash of $2.9 million between the 2004 and 2005 reporting periods primarily due to recoupments of PEPs by the Company's fiscal intermediary. o Cost of claims incurred but not reported which had a positive impact of $1.1 million between the 2004 and 2005 reporting periods due to lower claims activity resulting from the decline in the number of enrolled Cigna members covered under the capitation arrangement. o Obligations under insurance programs which had a negative impact on cash of $1.8 million between the 2004 and 2005 reporting periods primarily as a result of payments made for workers' compensation claims in excess of incremental workers' compensation costs. The decrease in workers' compensation costs was due to a reduction in the number and severity of workers' compensation claims in recent years. o Other accrued expenses which had a positive impact on cash of $2.4 million between the 2004 and 2005 reporting periods due primarily to an increase in deferred PPS revenue resulting from growth in Medicare revenue. The Company used its operating cash balances to fund the acquisition of Heritage of $12.1 million, including transaction costs, capital expenditures of $6.0 million, and the repurchase of shares of the Company's common stock of $13.5 million during the first nine months of fiscal 2005. Working capital at October 2, 2005 was approximately $133 million, a decrease of $4 million as compared to approximately $137 million at January 2, 2005, primarily due to: o a $19 million decrease in cash, cash equivalents, restricted cash and short-term investments; o a $10 million increase in accounts receivable, as described above in the discussion on net cash provided by operating activities; 28 o a $1 million decrease in deferred tax assets; o a $2 million increase in prepaid expenses and other assets due to prepayments made in connection with the Company's insurance programs; and o a $4 million decrease in current liabilities, consisting of decreases in accounts payable ($2 million), Medicare liabilities ($3 million), cost of claims incurred but not reported ($1 million), obligations under insurance programs ($3 million), and other accrued expenses ($1 million), partially offset by an increase in payroll and related taxes ($6 million). The changes in current liabilities are described above in the discussion on net cash provided by operating activities. Days Sales Outstanding ("DSO") as of October 2, 2005 increased by 2 days from January 2, 2005 to 59 days. The increase in DSO can be attributed to processing delays in adjudicating the Company's claims for payment from TriWest. Accounts receivable attributable to major payer sources of reimbursement are as follows (in thousands):
October 2, 2005 January 2, 2005 -------------------------- -------------------------- Medicare $ 29,885 20% $ 23,848 17% Medicaid and Local Government 25,685 17 20,391 15 Commercial Insurance and Other 88,743 59 88,910 64 Self-Pay 6,374 4 5,893 4 ------------------------- ------------------------- Gross Accounts Receivable 150,687 100% 139,042 100% Less: Allowance for doubtful accounts (8,348) ===== (7,040) ===== --------- --------- Net Accounts Receivable $ 142,339 $ 132,002 ========= =========
The Company participates in Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payer classifications are as follows:
Three Months Ended Nine Months Ended ------------------------------------ ------------------------------------ October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004 ------ ------ ------ ------ Medicare 31% 26% 30% 27% Medicaid and Local Government 17 19 17 19 Commercial Insurance and Other 52 55 53 54 ------ ------ ------ ------ 100% 100% 100% 100% ====== ====== ====== ======
On January 1, 2006, a 2.8 percent Medicare market basket rate increase takes effect for patients on service on or after January 1, 2006. A 2.3 percent Medicare market basket rate increase became effective for patients on service on or after January 1, 2005. In addition, Medicare reimbursement for the rural add-on related to home health services performed in specifically defined rural areas of the country decreased by 5 percent, effective for Medicare patients on service as of April 1, 2005. There are certain standards and regulations that the Company must adhere to in order to continue to participate in these programs. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in the Company's 29 exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes it is currently in compliance with these standards and regulations. The Company is party to a contract, as amended, with Cigna, effective January 1, 2004, pursuant to which the Company currently provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by Cigna. For the third quarter and first nine months of fiscal 2005, Cigna accounted for approximately 29 percent of the Company's total net revenues, compared to approximately 30 percent and 31 percent for the third quarter and first nine months of fiscal 2004, respectively. This decrease reflects the reduction in the number of enrolled Cigna members resulting in lower revenues from Cigna's capitated plans. Effective February 1, 2006, the Company will no longer provide respiratory therapy services and certain durable medical equipment services under its Cigna contract. However, the Company extended its relationship with Cigna by entering into an amendment to its contract on October 27, 2005 relating to the coordination of the provision of direct home nursing and related services, home infusion services and certain other specialty medical equipment. The term of the contract, as now amended, extends to January 31, 2009, and automatically renews thereafter for additional one year terms unless terminated. Under the termination provisions, each party has the right to terminate the agreement on January 31, 2008, under certain conditions, if the party terminating provides written notice to the other party on or before September 1, 2007. Each party also has the right to terminate at the end of each term by providing at least 90 days advance written notice to the other party prior to the start of the new term. If Cigna chose to terminate or not renew the contract, or to significantly modify its use of the Company's services, there could be a material adverse effect on the Company's cash flow. Net revenues generated under capitated arrangements with managed care payers were approximately 11 percent of total net revenues for the third quarter and first nine months of fiscal 2005, and 13 percent and 12 percent for the third quarter and first nine months of fiscal 2004, respectively. The Company's credit facility, as amended, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender. At the Company's option, the interest rate on borrowings under the credit facility is based on LIBOR plus 3.0 percent or the lender's prime rate plus 1.0 percent. In addition, the Company is required to pay a fee equal to 2.25 percent per annum of the aggregate face amount of outstanding letters of credit. The Company is also subject to an unused line fee equal to 0.375 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. If the Company's trailing twelve month earnings before interest, taxes, depreciation and amortization ("EBITDA"), excluding certain restructuring costs and special charges, falls below $20 million, the applicable margins for LIBOR and prime rate borrowings will increase to 3.25 percent and 1.25 percent, respectively, and the letter of credit and unused line fees will increase 30 to 2.5 percent and 0.50 percent, respectively. Total outstanding letters of credit were $20.2 million as of October 2, 2005. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers' compensation program and for certain other commitments. As of October 2, 2005, there were no borrowings outstanding under the credit facility and the Company had borrowing capacity under the credit facility, after adjusting for outstanding letters of credit, of approximately $35 million. The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, May 26, 2004 and April 4, 2005, the credit facility was amended to make covenants relating to acquisitions, stock repurchases and cash dividends less restrictive, provided that the Company maintains minimum aggregate excess liquidity, as defined, equal to at least $60 million, and to allow for the disposition of certain assets. As of October 2, 2005, the Company was in compliance with the covenants in the credit facility, as amended. The credit facility provides that subsequent to June 12, 2005, the Company could terminate the credit facility without incurring an early termination fee. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment. The credit facility includes provisions, which, if not complied with, could require early payment by the Company. These include customary default events, such as failure to comply with financial covenants, insolvency events, non-payment of scheduled payments, acceleration of other financial obligations and change in control provisions. In addition, these provisions include an account obligor, whose accounts are more than 25 percent of all accounts of the Company over the previous 12-month period, canceling or failing to renew its contract with the Company and ceasing to recognize the Company as an approved provider of healthcare services, or the Company revoking the lending agent's control over its governmental lockbox accounts. The Company does not have any trigger events in the credit facility that are tied to changes in its credit rating or stock price. As of October 2, 2005, the Company was in compliance with these provisions. The Company may be subject to workers' compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. Such estimates and the resulting reserves are reviewed and updated periodically. The Company is responsible for the cost of individual workers' compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains 31 excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers' compensation program are guaranteed by letters of credit and segregated restricted cash balances. Capital Expenditures The Company's capital expenditures for the nine months ended October 2, 2005 were $6.0 million as compared to $7.6 million for the same period in fiscal 2004, which excludes equipment capitalized under capital lease obligations of $1.4 million. The Company intends to make investments and other expenditures to, among other things, upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry. In this regard, management expects that capital expenditures for fiscal 2005 will approximate $12.0 million. Management expects that the Company's capital expenditure needs will be met through operating cash flow and available cash reserves. Cash Resources and Obligations The Company had cash, cash equivalents, restricted cash and short-term investments of approximately $94.4 million as of October 2, 2005. The restricted cash of $22.0 million at October 2, 2005 related primarily to cash funds of $21.8 million that have been segregated in a trust account to provide collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. In addition, restricted cash included $0.2 million on deposit to comply with New York state regulations requiring that one month of revenues generated under capitated agreements in the state be held in escrow. Interest on all restricted funds accrues to the Company. The Company anticipates that repayments to Medicare for PEPs and prior year cost report settlements will be made periodically through 2005. These amounts were included in Medicare liabilities in the accompanying consolidated balance sheets. From May 2003 through October 2, 2005, the Company announced five stock repurchase programs authorized by the Company's Board of Directors, under which the Company could repurchase and retire up to an aggregate of 6,000,000 shares of its outstanding common stock. The repurchases occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. During the first nine months of fiscal 2005, the Company repurchased 822,100 shares of its outstanding common stock at an average cost of $16.44 per share and a total cost of approximately $13.5 million. As of October 2, 2005, the Company had remaining authorization to repurchase an aggregate of 1,186,296 shares of its outstanding common stock. During the period from October 3, 2005 through November 8, 2005, the Company purchased 487,900 shares of its common stock at an aggregate cost of approximately $7.3 million. See also Part II, Item 2, of this Form 10-Q. Contractual Obligations and Commercial Commitments At October 2, 2005, the Company had no long-term debt. During the first nine months of fiscal 2004, the Company commenced implementation of a five-year capital lease for 32 equipment. Under the terms of the lease the Company capitalized the equipment at its fair market value of approximately $1.4 million, which approximates the present value of the minimum lease payments. Future minimum rental commitments for all non-cancelable leases and purchase obligations at October 2, 2005 are as follows (in thousands):
Payment due by period ------------------------------------------------------------------- Less than More than Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years - ----------------------- ----- ------ --------- --------- ------- Long-term debt obligations $ -- $ -- $ -- $ -- $ -- Capital lease obligations 1,238 446 703 89 -- Operating lease obligations 50,179 17,886 21,271 9,255 1,767 Purchase obligations -- -- -- -- -- ----------------------------------------------------------------- Total $51,417 $18,332 $21,974 $9,344 $1,767 =================================================================
During the first nine months of fiscal 2005, the Company paid $0.8 million to satisfy future obligations relating to a portion of a lease that the Company agreed to assume in connection with the Split-Off in March 2000. Such amount had been accrued in the Company's financial statements. The Company had total letters of credit outstanding under its credit facility of approximately $20.2 million at October 2, 2005 and January 2, 2005. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers' compensation program and for certain other commitments. The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company's obligations as further discussed above under the heading "Cash Resources and Obligations." The Company also had outstanding surety bonds of $1.3 million and $1.0 million at October 2, 2005 and January 2, 2005, respectively. The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts. Management expects that the Company's working capital needs for fiscal 2005 will be met through operating cash flow and its existing cash balances. The Company may also consider other alternative uses of cash including, among other things, acquisitions, additional share repurchases and cash dividends. These uses of cash may require the approval of the Company's Board of Directors and may require the approval of its lender. If cash flows from operations, cash resources or availability under the credit facility fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity. Stock-Based Compensation In December 2004, FASB issued SFAS 123(R). This statement replaces SFAS No. 123 and supersedes APB 25. SFAS 123(R) requires companies to apply a fair-value-based measurement method in accounting for share-based payment transactions with employees and to record compensation cost for all stock awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. In addition, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested 33 portion of previously granted awards that remain outstanding at the date of adoption. SFAS 123(R) will be effective for annual periods beginning on or after June 15, 2005, which for the Company is the first quarter of fiscal 2006. The Company has currently chosen to adopt the disclosure only provisions of SFAS 123, as amended by SFAS 148, and continues to account for stock-based compensation using the intrinsic value method prescribed in APB 25, and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's ESPP is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. Stock option grants in fiscal 2004 and prior years fully vest over periods ranging from three to six years. Stock option grants in fiscal 2005 fully vest over a four year period based on a vesting schedule which provides for one-third vesting after years one, three and four. The weighted average fair values of the Company's stock options granted during the first nine months of fiscal 2005 and fiscal 2004, calculated using the Black-Scholes option-pricing model, and other assumptions are as follows:
Nine Months Ended ---------------------------------------------- October 2, 2005 September 26, 2004 ------------------- ----------------------- Weighted average fair value of options granted $ 6.13 $ 5.47 Risk-free interest rate 3.73% 3.36% Expected volatility 35% 37% Contractual life 10 years 10 years Expected dividend yield 0% 0%
For stock options granted during the fiscal 2004 and prior periods, the expected life is estimated to be two years following the date all options comprising the grant become fully vested and forfeitures are reflected in the calculation as they occur. For stock options granted during the fiscal 2005 period, the expected life of an option is estimated to be 2.5 years following its vesting date and forfeitures are reflected in the calculation using an estimate based on experience. Pro forma compensation expense is calculated for the fair value of the employee's purchase rights under the ESPP, using the Black-Scholes model. Assumptions for the first nine months of fiscal 2005 and fiscal 2004 are as follows:
Nine Months Ended ------------------------------ ----------------------------- October 2, 2005 September 26, 2004 ------------------------------ ----------------------------- 1st offering 2nd offering 1st offering 2nd offering Period Period Period Period ------ ------ ------ ------ Risk-free interest rate 2.63% 3.32% 1.02% 1.76% Expected volatility 27% 33% 28% 30% Expected life 0.5 years 0.5 years 0.5 years 0.5 years Expected dividend yield 0% 0% 0% 0%
The following table presents net income and basic and diluted income per common share had the Company elected to recognize compensation cost based on the fair value at the 34 grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
Three Months Ended Nine Months Ended ------------------------------------ ----------------------------------- October 2, 2005 September 26, 2004 October 2, 2005 September 26, 2004 --------------- ------------------ --------------- ------------------ Net income - as reported $ 4,251 $ 4,399 $ 17,026 $ 19,594 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax (852) (579) (2,916) (1,834) ---------- ---------- ---------- ---------- Net income - pro forma $ 3,399 $ 3,820 $ 14,110 $ 17,760 ========== ========== ========== ========== Basic income per share - as reported $ 0.18 $ 0.18 $ 0.73 $ 0.78 Basic income per share - pro forma $ 0.15 $ 0.16 $ 0.60 $ 0.71 Diluted income per share - as reported $ 0.17 $ 0.17 $ 0.68 $ 0.74 Diluted income per share - pro forma $ 0.14 $ 0.15 $ 0.56 $ 0.67
Stock-based compensation expense, net of tax, for the nine months ended October 2, 2005, as reflected in the table above, included $270,000 relating to options granted in June 2002 which became fully vested during the second quarter of fiscal 2005. Critical Accounting Policies and Estimates - ------------------------------------------ The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions and select accounting policies that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most critical estimates relate to revenue recognition, the collectibility of accounts receivable and related reserves, the cost of claims incurred but not reported and obligations under insurance programs, which include workers' compensation, professional liability, property and general liability, and employee health and welfare insurance programs. A description of the critical accounting policies and a discussion of the significant estimates and judgments associated with such policies are described below. Revenue Recognition Revenues recognized by the Company are subject to a number of variables which impact both the overall amount of revenue realized as well as the timing of the collection of the related accounts receivable. In each category described below, the impact of the estimate, if applicable, undertaken by the Company with respect to these variables is reflected in net revenues on the consolidated statements of operations. Fee-for-Service Agreements Under fee-for-service agreements with patients and commercial and certain government payers, net revenues are recorded based on net realizable amounts to be received in the period in which the services and products are provided or delivered. Fee-for-service contracts with commercial payers are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party. 35 Under fee-for-service agreements with certain managed care customers, the Company also estimates the revenue related to claims incurred but not reported in situations in which the Company is responsible for care management and patient services are performed by a non-affiliated provider. The estimate of revenue for claims incurred but not reported involves applying a factor based on historical patterns of service utilization and payment trends to the services authorized at each of the Company's regional coordination centers. The Company evaluates the assumptions and judgments used in determining this factor on a quarterly basis utilizing the trailing twelve months of claims payments, and changes in estimated unbilled receivables for claims incurred but not reported are determined based on such evaluation. Changes in estimates are recorded as net revenues in the Company's consolidated statements of operations. Capitated Arrangements The Company has capitated arrangements with certain managed care customers. Under the capitated arrangements, net revenues are recognized based on a predetermined monthly contractual rate for each member of the managed care plan regardless of the volume of services covered by the capitation arrangements. Net revenues generated under capitated arrangements were approximately 12 percent, 16 percent, and 16 percent of total net revenues for fiscal 2004, 2003, and 2002, respectively. Medicare Prospective Payment System Reimbursements ----------------------------------------- Under PPS for Medicare reimbursement, the Company estimates net revenues to be recorded based on a reimbursement rate which varies based on the severity of the patient's condition, service needs and certain other factors. Medicare billings under PPS are initially recognized as deferred revenue and are subsequently amortized into revenue over an average patient treatment period. The process for recognizing revenue to be recorded under the Medicare program is based on certain assumptions and judgments, including the average length of time of each treatment as compared to a standard 60 day episode, the appropriateness of the clinical assessment of each patient at the time of certification and the level of adjustments to the fixed reimbursement rate relating to patients who receive a limited number of visits, have significant changes in condition or are subject to certain other factors during the episode. Revenue is subject to adjustment during this period if there are significant changes in the patient's condition during the treatment period or if the patient is discharged but readmitted to another agency within the same 60 day episodic period. Deferred revenue of approximately $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. Settlement Issues under Interim Payment System ---------------------------------------------- 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 36 annual cost reports which were filed with CMS and were subject to audit by the fiscal intermediary engaged by CMS. The fiscal intermediary has not finalized its audit of the fiscal 2000 cost reports. Furthermore, settled cost reports relating to certain years prior to fiscal 2000 could be subject to reopening of the audit process by the fiscal intermediary. Although management believes that established reserves related to the open fiscal 2000 cost report year are sufficient, it is possible that adjustments resulting from such audits could exceed established reserves and could have a material effect on the Company's financial condition and results of operations. These reserves are reflected in Medicare Liabilities in the accompanying consolidated balance sheets. The Company periodically reviews its established audit reserves for appropriateness and records any adjustments or settlements as net revenues in the Company's consolidated statement of operations. Settlement liabilities are recorded at the time of any probable and reasonably estimable event and any positive settlements are recorded as revenue in the Company's consolidated statements of operations in the period in which such gain contingencies are realized. As discussed further under the heading "Government Matters - PRRB Appeal" in Note 10 to the consolidated financial statements included in this report, the Company received an aggregate of $10.1 million in settlement of the Company's appeal filed with the PRRB related to the reopening of all of its 1997 and 1998 cost reports. Causes and Impact of Change For each of the sources of revenue, the principal variables in addition to those described above which can cause change are (i) an inability to obtain appropriate billing documentation; (ii) an inability to obtain authorizations acceptable to the payer; (iii) utilization of services at levels other than authorized; and (iv) other reasons unrelated to credit risk. Revenue adjustments resulting from differences between estimated and actual reimbursement amounts are recorded as adjustments to net revenues or recorded against allowance for doubtful accounts, depending on the nature of the adjustment. These are determined by Company management and reviewed from time to time, but no less often than quarterly. Each of the variables described here and under each of the various sources of revenue can effect change in the estimates, and it is not possible to predict the degree of change that might be effected by a variation in one or more of the elements described. Billing and Receivables Processing The Company's billing systems record revenues at net expected reimbursement based on established or contracted fee schedules. The systems provide for an initial contractual allowance adjustment from "usual and customary" charges, which is typical for the payers in the healthcare field. The Company records an initial contractual allowance at the time of billing and reduces the Company's revenue to expected reimbursement levels. Changes in contractual allowances, if any, are recorded each month. Changes in contractual allowances have not had a significant impact on results of operations between reporting periods. Accounts receivable attributable to major payer sources of reimbursement are as follows: 37 (Dollars in thousands)
October 2, 2005 January 2, 2005 -------------------------- -------------------------- Medicare $ 29,885 20% $ 23,848 17% Medicaid and Local Government 25,685 17 20,391 15 Commercial Insurance and Other 88,743 59 88,910 64 Self-Pay 6,374 4 5,893 4 ------------------------- ------------------------- Gross Accounts Receivable 150,687 100% 139,042 100% Less: Allowance for doubtful accounts (8,348) ===== (7,040) ===== --------- --------- Net Accounts Receivable $ 142,339 $ 132,002 ========= =========
The Company's estimate of "Collectibility of Accounts Receivable" further outlines other matters considered with respect to the allowance for doubtful accounts. Collectibility of Accounts Receivable The process for estimating the ultimate collection of receivables involves significant assumptions and judgments. The Company believes that its collection and reserve processes, along with the monitoring of its billing processes, help to reduce the risk associated with material revisions to reserve estimates resulting from adverse changes in reimbursement experience, revenue adjustments and billing functions. Collection processes are performed in accordance with the Fair Debt Collections Practices Act and include reviewing aging and cash posting reports, contacting the payers to determine why payment has not been made, resubmission of claims when appropriate and filing appeals with payers for claims that have been denied. The Company's bad debt policy includes escalation procedures and guidelines for write-off of an account, as well as the authorization required, once it is determined that the open account has been worked by the Company's internal collectors and/or collection agencies in accordance with the Company's standard procedures and resolution of the open account through receipt of payment is determined to be remote. The Company reviews each account individually and does not have either a threshold dollar amount or aging period that it uses to trigger a balance write-off, although the Company does have a small balance write-off policy for non-governmental accounts with debit balances under $10. The Company's policy is to bill for patient co-payments and make good faith efforts to collect such amounts. At the end of each reporting period, the Company estimates the amount of outstanding patient co-payments that will not be collected and the amount of outstanding co-payments that may be waived due to financial hardship based on a review of historical trends. This estimate is made as part of the Company's evaluation of the adequacy of its allowance for doubtful accounts. 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 and revenue adjustment trends are integral parts of the estimation process related to determining the valuation allowance for accounts receivable. In addition, the Company assesses the current state of its billing functions on a quarterly basis in order to identify any known collection or reimbursement issues to determine the impact, if any, on its reserve estimates, which involve judgment. Revisions in reserve estimates are recorded as an adjustment to the provi- 38 sion for doubtful accounts which is reflected in selling, general and administrative expenses in the consolidated statements of operations. The allowance for doubtful accounts at January 2, 2005, December 28, 2003 and December 29, 2002 was $7.0 million, $7.9 million and $9.0 million, respectively. Additional information regarding the Company's allowance for doubtful accounts can be found in Schedule II - Valuation and Qualifying Accounts on page F-29 of the Company's 2004 Annual Report on Form 10-K, as amended. Cost of Claims Incurred But Not Reported Under capitated arrangements with managed care customers, the Company estimates the cost of claims incurred but not reported based on applying actuarial assumptions, historical patterns of utilization to authorized levels of service, current enrollment statistics and other information. Under fee-for-service arrangements with managed care customers, the Company also estimates the cost of claims incurred but not reported and the estimated revenue relating thereto in situations in which the Company is responsible for care management and patient services are performed by a non-affiliated provider. The estimate of cost of claims incurred but not reported involves applying a factor based on historical patterns of service utilization and payment trends to the services authorized at each of the Company's regional coordination centers. The Company evaluates the assumptions and judgments used in determining this factor on a quarterly basis utilizing the trailing twelve months of claims payments, and changes in estimated liabilities for cost of claims incurred but not reported are determined based on such evaluation. Because of the variables described above, these estimates will continue to change in the future. Each of the variables described above can effect change in the estimates, and it is not possible to predict the degree of change that might be effected by a variation in one or more of the elements described. Changes to estimates of the cost of claims incurred but not reported are reflected as direct cost in the Company's consolidated statements of operation. Obligations Under Insurance Programs The Company is obligated for certain costs under various insurance programs, including workers' compensation, professional liability, property and general liability, and employee health and welfare. The Company may be subject to workers' compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover this risk with insurance policies subject to substantial deductibles and retention amounts. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The cost of both reported claims and claims incurred but not reported, up to specified deductible limits, have generally been estimated based on historical data, industry statistics, the Company's own home health specific historical claims experience, current enrollment statistics and other information. The Company's estimates of its obligations and the resulting reserves are reviewed and updated from time to time but at least quarterly. The variables which impact this critical estimate include the number, type and severity of claims and the policy deductible limits; therefore, the estimate is sensitive and may well be changed from time to time. Changes in estimates of the Company's workers' com- 39 pensation and professional liability claims are recorded as direct costs in the Company's consolidated statements of operation. 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. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company had no interest rate exposure on fixed rate debt or other market risk at October 2, 2005. Item 4. Controls and Procedures ----------------------- Evaluation of disclosure controls and procedures The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective as of the end of such period to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Changes in internal control over financial reporting As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended October 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. 40 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- See Note 10 to the consolidated financial statements included in this report for a description of legal matters and pending legal proceedings, which description is incorporated herein by reference. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- (c) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number (a) Total of Shares Purchased of Shares that May Number (b) Average as Part of Publicly Yet be Purchased of Shares Price Paid Announced Plans Under the Plans Period Purchased per Share or Programs or Programs ------ --------- --------- ----------- ----------- July (7/04/05 - 7/31/05) 7,500 $ 18.37 7,500 1,244,596 August (8/01/05 - 8/28/05) 800 $ 18.17 800 1,243,796 September (8/29/05 - 10/02/05) 57,500 $ 18.03 57,500 1,186,296 ------ --------- ------ Total 65,800 $ 18.07 65,800 ====== ========= ======
(1) On April 14, 2005, the Company announced that its Board of Directors had authorized the repurchase of up to 1,500,000 shares of its outstanding common stock. By the end of the period covered by the table, 313,704 of such shares had been repurchased. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- Corporate Integrity Agreement In connection with a July 19, 1999 settlement with various government agencies, Olsten executed a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, effective until August 18, 2004, subject to the Company's filing of a final annual report with the Department of Health and Human Services, Office of Inspector General, in form and substance acceptable to the government. The Company has filed a final annual report and is expecting closure by the government. The Company believes that it has been in compliance with the corporate integrity agreement and has timely filed all required reports. If the 41 Company has failed to comply with the terms of its corporate integrity agreement, the Company will be subject to penalties. The corporate integrity agreement applies to the Company's businesses that bill the federal government health programs directly for services, such as its nursing brand, and focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims. Under the corporate integrity agreement, the Company is required, for example, to maintain a corporate compliance officer to develop and implement compliance programs, to retain an independent review organization to perform annual reviews and to maintain a compliance program and reporting systems, as well as to provide certain training to employees. Item 6. Exhibits -------- Exhibit Number Description -------------- ----------- 3.1 Amended and Restated Certificate of Incorporation of Company. (1) 3.2 Certificate of Correction to Certificate of Incorporation, filed with the Delaware Secretary of State on July 1, 2002. (2) 3.3 Amended and Restated By-Laws of Company. (2) 4.1 Specimen of common stock. (4) 4.2 Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (1) 4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3) 10.1 Amendment dated July 15, 2005 to Managed Care Alliance Agreement between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered into as of January 1, 2004.* (confidential treatment requested as to portions of this document) 10.2 Fourth Amendment dated September 29, 2005 to Managed Care Alliance Agreement between CIGNA Health Corporation and Gentiva CareCentrix, Inc. entered into as of January 1, 2004.* 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).* 42 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.* 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.* - --------- (1) Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4 dated January 19, 2000 (File No. 333-88663). (2) Incorporated herein by reference to Form 10-Q of Company for the quarterly period ended June 30, 2002. (3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4 dated February 4, 2000 (File No. 333-88663). (4) Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4 dated February 9, 2000 (File No. 333-88663). * Filed herewith 43 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENTIVA HEALTH SERVICES, INC. (Registrant) Date: November 14, 2005 /s/ Ronald A. Malone -------------------- Ronald A. Malone Chairman and Chief Executive Officer Date: November 14, 2005 /s/ John R. Potapchuk --------------------- John R. Potapchuk Senior Vice President and Chief Financial Officer 44 EX-10.1 2 d18078_ex10-1.txt AMENDMENT TO MANAGED CARE ALLIANCE AGREEMENT THIS AMENDMENT (the "Amendment") is entered into this 15 day of July , 2005 by and between CIGNA Health Corporation, for and on behalf of its affiliates (individually and collectively, "CIGNA"), and Gentiva CareCentrix, Inc. ("MCA"). W I T N E S S E T H WHEREAS, CIGNA and MCA entered into a Managed Care Alliance Agreement which became effective January 1, 2004 (the "Agreement") whereby MCA agreed to provide through its Represented Providers certain health care services to Participants as that term is defined in the Agreement; WHEREAS, in connection with the Medicare Prescription Drug, Improvement and Modernization Act of 2003, as codified in sections 1860D-1 through 1860D-41 of the Social Security Act, CIGNA has submitted to the Centers for Medicare and Medicaid Services ("CMS") an application to become a Part D plan sponsor and offer a Medicare Part D plan as set forth in the Medicare Prescription Drug Benefit Plan Final Rules contained in 42 CFR Parts 422 and 423 ("PDP Final Rules"); WHEREAS, MCA and its Represented Providers have agreed to serve as a provider for CIGNA in connection with such Medicare Part D plan as set forth in this Amendment; WHEREAS, certain provisions are required to be included in the contract between CIGNA and its subcontractors with respect to such Medicare Part D plan as required by CMS and the PDP Final Rules; and WHEREAS, the parties wish to amend the Agreement to reflect the terms and conditions applicable to MCA's and its Represented Providers' participation in CIGNA's Medicare Part D plan and to comply with the requirements of the PDP Final Rules. NOW THEREFORE, CIGNA and MCA agree as follows: 1. This Amendment shall be effective on January 1, 2006. 2. MCA and its Represented Providers agree to participate as a provider for CIGNA in connection with CIGNA's Medicare Part D plan. Such participation shall be governed by the terms and conditions set forth in the Agreement and the Medicare Part D Program Attachment attached hereto and made a part of the Agreement. 3. To the extent that the provisions in the Agreement, including any prior amendments, conflict with the terms of this Amendment (including the exhibits hereto), the terms in this Amendment shall supersede and control. All other terms and conditions of the Agreement, as previously amended, including the Program Attachments and the Exhibits attached thereto, shall remain in full force and effect. Capitalized terms not defined herein but defined in the Agreement shall have the same meaning as defined in the Agreement. 1 IN WITNESS WHEREOF, CIGNA and MCA have caused their duly authorized representatives to execute this Amendment. CIGNA By: _________________________________ Its: _________________________________ Dated: ___________________________________ MCA By: __________________________________ Its: __________________________________ Dated: __________________________________ 2 MEDICARE PART D PROGRAM ATTACHMENT TO MANAGED CARE ALLIANCE AGREEMENT The terms and conditions of this Medicare Part D Program Attachment and the Agreement are applicable to services rendered to Medicare Part D Participants. As used in this Program Attachment, Participant means a Medicare Part D Participant. I. DEFINITIONS Covered Services - for purposes of this Program Attachment, Covered Services means * prescription drugs provided to a Medicare Part D Participant in accordance with a Service Agreement. Medicare Part D Participant - means a Medicare eligible individual who is eligible for Covered Services under Part D, for whom CIGNA receives payment from the Centers for Medicare and Medicaid Services ("CMS"). For purposes of Medicare Part D Participants, all references to Participants in the Agreement and this Program Attachment shall mean Medicare Part D Participants. Part D - means the Medicare Prescription Drug Program established by Section 101 of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (MMA), as codified in sections 1860D-1 through 1860D-41 of the Social Security Act. Part D Plan Sponsor - means a nongovernmental entity that is certified under 42 CFR Part 423 as meeting the requirements and standards that apply to entities that offer Part D prescription drug plans. Negotiated Prices - means prices for Part D drugs that are available to Medicare Part D Participants at the point of administration, and are reduced by those discounts, direct or indirect subsidies, rebates, other prices concessions, and direct or indirect remunerations that CIGNA has elected to pass through to Part D Participants at the point of administration, including dispensing fees. II. SERVICES AND COMPENSATION A. MCA through its Represented Providers shall provide those Covered Services within the scope of Represented Providers' practice that are required by Medicare Part D Participants in accordance with the terms of the Agreement, this Program Attachment and Program Requirements. The rates set forth in this Program Attachment shall be payment in full for such services. MCA and Represented Providers shall apply the correct cost-sharing amount (Medicare Part D Participant Deductibles, Copayments and Coinsurance), including cost-sharing applicable to Medicare Part D Participants who qualify for the Part D low income subsidy. B. As applicable, MCA or Represented Providers shall have and maintain the capability to submit claims to CIGNA for Covered Services to a *. C. At the point of administration or delivery of prescription drugs, MCA through its Represented Providers shall provide the Medicare Part D Participant with the lowest-priced, generically equivalent drug, if one exists for the Medicare Part D Participant's prescription, and shall inform the Medicare Part D Participant of the substitution. D. MCA through its Represented Providers shall implement and maintain up-to-date * for Medicare Part D Participants, including, but not limited to: A. * Confidential Treatment Requested 3 (1) *; and (2) *. E. MCA and Represented Providers shall provide to CIGNA all data on claims, utilization, medication therapy management, and other data required for compliance with Part D Quality Assurance standards, in the manner prescribed by CMS. F. MCA and Represented Providers shall provide Medicare Part D Participants access to Negotiated Prices for Covered Part D drugs included in CIGNA's Part D formulary, at the point of administration. G. MCA and Represented Providers acknowledge and agree that, upon becoming a Part D sponsor, CIGNA will monitor the performance of MCA and its Represented Providers on an ongoing basis. H. If MCA or Represented Providers are owned by or under contract with a long-term care facility to provide prescription drugs to the facility's residents under the terms of the MCA Agreement, MCA and Represented Providers agree to abide by performance and service criteria for long-term care pharmacies as specified by CMS in the attached Exhibit marked "Long Term Care Guidance." I. MCA through its Represented Providers will offer patient counseling services to Medicare Part D Participants when appropriate. J. As applicable, MCA's Represented Providers shall review the prescribed drug therapy prior to dispensing each prescription to a Medicare Part D Participant, which review shall include screening the prescription against information in CIGNA's online system, as applicable, for potential drug therapy problems due to therapeutic duplication, age/gender-related contraindications, over- and under-utilization, drug-drug interactions, incorrect drug dosage or duration of drug therapy, drug-allergy contraindications and clinical abuse/misuse. K. MCA or its Represented Providers shall establish and implement internal medication error identification and reduction systems. L. If CIGNA delegates an activity or responsibility to MCA or its Represented Providers and CIGNA or CMS determines that MCA or its Represented Providers have not performed it satisfactorily, such delegation may be revoked. M. MCA shall by contract require that its Represented Providers abide by the applicable requirements of the Agreement, including this Medicare Part D Program Attachment. MCA's activities with regard to Medicare Part D Participants shall be consistent and comply with CIGNA's contractual obligations as a Part D Plan Sponsor. MCA shall by contract require that the activities of its Represented Providers are consistent and comply with CIGNA's contractual obligations as a Part D Plan Sponsor. MCA's Represented Provider contracts shall include all of the provisions required by applicable law, including but not limited to, the provisions required by the PDP Final Rules. III. COMPLIANCE WITH MEDICARE REQUIREMENTS A. MCA and its Represented Providers shall comply with all applicable state and federal statutory, regulatory and CMS requirements relating to Medicare Part D Participants including, but not limited to, the requirements set forth in the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 ("MMA"), as codified in sections 1860D-1 through 1860D-41 of the Social * Confidential Treatment Requested 4 Security Act (the Act) and the rules and regulations promulgated thereunder, as amended from time to time. To the extent that any such legal requirement is inconsistent with any of the terms and conditions of the Agreement, such legal requirement shall control. MCA and Represented Providers will cooperate and participate in CIGNA's efforts to comply with all applicable statutory, regulatory and CMS requirements relating to Medicare Part D Participants to the extent reasonably requested by CIGNA. The requirements of the Act shall include, but shall not be limited to, the following: (1) MCA and its Represented Providers shall allow CIGNA and any applicable state or federal regulatory authorities, including but not limited to the Department of Health and Human Services, the Comptroller General, CMS, or their designees, to inspect, evaluate and audit MCA's or its Represented Provider's contracts, books, prescription records, documents, papers and other records relating to Medicare Part D Participants, in accordance with 42 CFR 413.505 (i)(2). This right to inspect, evaluate and audit shall extend no less than ten (10) years from the later of i) the final date of the contract period during which CIGNA holds the Part D contract with CMS, or ii) the date of completion of any audit relating to those books and records by the Department of Health and Human Services, the Comptroller General, CMS or their designees; or iii) such other date determined by CMS to be necessary. (2) MCA and its Represented Providers shall abide by all applicable state and federal privacy and security laws and regulations, including the confidentiality and security requirements of 42 C.F.R. 423.136. MCA and its Represented Providers shall abide by all applicable laws and regulations regarding confidentiality and disclosure of medical records, or other health and enrollment information, and shall safeguard the privacy of any information that identifies a particular Medicare Part D Participant. MCA and its Represented Providers shall have and maintain procedures that specify: (a). For what purposes the information is used within MCA and its Represented Providers; and (b). To whom and for what purposes MCA and Represented Providers disclose the information outside of the organization. MCA and Represented Providers shall ensure that medical information is released only in accordance with applicable federal or state law, or under court order or subpoena. MCA's and Represented Providers' records relating to Medicare Part D Participants shall be maintained in an accurate and timely manner as required by applicable laws and regulations. MCA and Represented Providers shall ensure timely access by Medicare Part D Participants to the records and information that pertain to them, in accordance with applicable laws and regulations. (3) Any services or other activity performed by MCA and its Represented Providers under the Agreement shall be consistent with and comply with the obligations of CIGNA under its Part D contract with CMS. B. MCA and its Represented Providers shall not hold any Medicare Part D Participant liable for any fees under Part D that are the legal obligation of CIGNA. MCA and its Represented Providers agree that in no event, including, but not limited to non-payment by CIGNA, CIGNA's insolvency or breach of this Agreement, shall MCA or its Represented Providers bill, charge, collect a deposit from, seek compensation, remuneration or reimbursement from, or have any recourse against Medicare Part D Participants or persons (other than CIGNA) acting on their behalf for Covered Services. This provision shall not prohibit collection of any applicable Copayments, Deductibles or Coinsurance. IV. TERM This Medicare Part D Program Attachment shall be effective for a period of one year from its original effective date, or through December 31, 2006, whichever is longer, and, thereafter, shall 5 automatically continue in effect for successive one year periods, unless terminated pursuant to the Termination provisions of the Agreement. 6 EXHIBIT A Covered Services rendered by MCA's Represented Providers to Medicare Part D Participants shall be reimbursed at the lesser of the applicable rate set forth in Exhibit A to the HMO Program Attachment entitled HMO Program Attachment- Fee For Service Reimbursement For Other Services or the Medicare maximum allowable fee, less any applicable Copayments, Deductibles or Coinsurance amounts: 7 Exhibit Long Term Care Guidance Capitalized terms not defined herein but defined in the Agreement shall have the same meaning as defined in the Agreement. MCAs providing products and services to long term care ("LTC") facilities under the Agreement shall comply with the following minimum Performance and Service Criteria. LTC facilities include skilled nursing facilities as defined under Title XVIII of the Social Security Act (the Act), or a medical institution or nursing facility for which Medicaid makes payment throughout a month as defined under Title XIX of the Act. Performance and Service Criteria for Network LTC Pharmacies. 1. Comprehensive Inventory and Inventory Capacity - MCA must provide a comprehensive inventory of Part D Plan formulary drugs commonly used in the long term care setting. In addition, MCA must provide a secured area for physical storage of drugs, with necessary added security as required by federal and state law for controlled substances. This is not to be interpreted that the MCA will have inventory or security measures outside of the normal business setting. 2. Pharmacy Operations and Prescription Orders - MCA must provide services of a dispensing pharmacist to meet the requirements of pharmacy practice for dispensing prescription drugs to LTC residents, including but not limited to the performance of drug utilization review (DUR). In addition, the MCA pharmacist must conduct DUR to routinely screen for allergies and drug interactions, to identify potential adverse drug reactions, to identify inappropriate drug usage in the LTC population, and to promote cost effective therapy in the LTC setting. The MCA must also be equipped with pharmacy software and systems sufficient to meet the needs of prescription drug ordering and distribution to an LTC facility. Further, the MCA must provide written copies of the MCA's pharmacy procedures manual and said manual must be available at each LTC facility nurses' unit. MCA is also required to provide ongoing in-service training to assure that LTC facility staff are proficient in the MCA's processes for ordering and receiving of medications. MCA must be responsible for return and/or disposal of unused medications following discontinuance, transfer, discharge, or death as permitted by the applicable State Board of Pharmacy. Controlled substances and out of date substances must be disposed of within State and Federal guidelines. 3. Special Packaging - MCA must have the capacity to provide specific drugs in Unit of Use Packaging, Bingo Cards, Cassettes, Unit Dose or other special packaging commonly required by LTC facilities. MCA must have access to, or arrangements with, a vendor to furnish supplies and equipment including but not limited to labels, auxiliary labels, and packing machines for furnishing drugs in such special packaging required by the LTC setting. 8 4. IV Medications - MCA must have the capacity to provide IV medications to the LTC resident as ordered by a qualified medical professional. MCA must have access to specialized facilities for the preparation of IV prescriptions (clean room). Additionally, MCA must have access to or arrangements with a vendor to furnish special equipment and supplies as well as IV trained pharmacists and technicians as required to safely provide IV medications. 5. Compounding /Alternative Forms of Drug Composition - MCA must be capable of providing specialized drug delivery formulations as required for some LTC residents. Specifically, residents unable to swallow or ingest medications through normal routes may require tablets split or crushed or provided in suspensions or gel forms, to facilitate effective drug delivery. 6. Pharmacist On-call Service - MCA must provide on-call, 24 hours a day, 7 days a week service with a qualified pharmacist available for handling calls after hours and to provide medication dispensing available for emergencies, holidays and after hours of normal operations. 7. Delivery Service - MCA must provide for delivery of medications to the LTC facility up to seven days each week (up to three times per day) and in-between regularly scheduled visits. Emergency delivery service must be available 24 hours a day, 7 days a week. Specific delivery arrangements will be determined through an agreement between the MCA and the LTC facility. MCA must provide safe and secure exchange systems for delivery of medication to the LTC facility. In addition, MCA must provide medication cassettes, or other standard delivery systems, that may be exchanged on a routine basis for automatic restocking. The MCA delivery of medication to carts is a part of routine "dispensing". 8. Emergency Boxes - MCA must provide "emergency" supply of medications as required by the facility in compliance with State requirements. 9. Emergency Log Books - MCA must provide a system for logging and charging medication used from emergency/first dose stock. Further, the MCA must maintain a comprehensive record of a resident's medication order and drug administration. 10. Miscellaneous Reports, Forms and Prescription Ordering Supplies - MCA must provide reports, forms and prescription ordering supplies necessary for the delivery of quality pharmacy care in the LTC setting. Such reports, forms and prescription ordering supplies may include, but will not necessarily be limited to, provider order forms, monthly management reports to assist the LTC facility in managing orders, medication administration records, treatment administration records, interim order forms for new prescription orders, and boxes/folders for order storage and reconciliation in the facility. 9 EX-10.2 3 d18078_ex10-2.txt EXHIBIT 10.2 FOURTH AMENDMENT TO MANAGED CARE ALLIANCE AGREEMENT THIS AMENDMENT (the "Amendment") is entered into this 29th day of September, 2005 by and between CIGNA Health Corporation, for and on behalf of its CIGNA Affiliates (individually and collectively, "CIGNA"), and Gentiva CareCentrix, Inc. ("MCA"). W I T N E S S E T H WHEREAS, CIGNA and MCA entered into a Managed Care Alliance Agreement which became effective January 1, 2004 (the "Agreement") whereby MCA agreed to provide or arrange for the provision of certain home health care services to Participants, as that term is defined in the Agreement; WHEREAS, the parties wish to amend certain provisions of the Agreement as set forth below; NOW THEREFORE, CIGNA and MCA agree as follows: 1. This Amendment shall be effective on September 29, 2005. 2. Section III.B. entitled Term of the Agreement shall be replaced in its entirety with the following provision: This Agreement shall be in full force and effect for a three (3) year and one month period terminating on January 31, 2007. Notwithstanding the foregoing, CIGNA may terminate this agreement effective January 31, 2006 by providing MCA with no less than ninety (90) days advance written notice of its intention to terminate this Agreement. If CIGNA does not provide such written notice, then the Agreement shall continue in full force and effect until January 31, 2007. Thereafter, this Agreement shall automatically renew for consecutive one year terms without any further action by either party, unless either party elects not to renew this Agreement by providing at least ninety (90) days advance written notice to the other party, prior to the commencement of the next term. Notwithstanding the expiration or non-renewal of this Agreement pursuant to this Section B., this Agreement shall continue in effect with respect to those Payors covered under Service Agreements in effect as of the end of the term of this Agreement or the notice period, as applicable, but not to exceed twelve months from the effective date of termination or expiration. The parties shall establish capitation rates for year 2005 and 2006 in accordance with the methodology as set forth in Exhibit XXIV. All fee-for-service rates for 2005 and 2006 will be limited to the maximum inflation adjustments set forth in Exhibit XXIV. MCA will provide to CIGNA the information necessary to establish a capitation rate for 2005 and 2006 no later than November 1st of 2004 and 2005, respectively. In the event that the parties are unable to reach an agreement as to new rates for 2006, either party may exercise its right to terminate this Agreement any time after January 31, 2006 by giving notice to the other party at least ninety (90) days in advance of the termination specified in such notice, and the 2005 rates shall continue in force until the effective date of such termination. 3. To the extent that the provisions in the Agreement, including any prior amendments, conflict with the terms of this Amendment (including the exhibits and schedules hereto), the terms in this 1 Amendment shall supersede and control. All other terms and conditions of the Agreement, as previously amended, including the Program Attachments and the Exhibits attached thereto, shall remain the same and in full force and effect. Capitalized terms not defined herein but defined in the Agreement shall have the same meaning as defined in the Agreement. IN WITNESS WHEREOF, CIGNA and MCA have caused their duly authorized representatives to execute this Amendment as of the date first written above. CIGNA HEALTH CORPORATION By: _________________________________ Its: _________________________________ Dated: ___________________________________ GENTIVA CARECENTRIX, INC. By: __________________________________ Its: __________________________________ Dated: ____________________________________ 2 EX-31.1 4 d18078_ex31-1.txt EXHIBIT 31.1 CERTIFICATIONS I, Ronald A. Malone, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ Ronald A. Malone ------------------------------------ Ronald A. Malone Chairman and Chief Executive Officer EX-31.2 5 d18078_ex31-2.txt EXHIBIT 31.2 CERTIFICATIONS I, John R. Potapchuk, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 14, 2005 /s/ John R. Potapchuk -------------------------- John R. Potapchuk Senior Vice President and Chief Financial Officer EX-32.1 6 d18078_ex32-1.txt Furnished (but not filed) as an exhibit to the periodic report identified in the Certification. Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended October 2, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Ronald A. Malone, Chairman and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2005 /s/ Ronald A. Malone -------------------- Ronald A. Malone Chairman and Chief Executive Officer EX-32.2 7 d18078_ex32-2.txt Furnished (but not filed) as an exhibit to the periodic report identified in the Certification. Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended October 2, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, John R. Potapchuk, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 14, 2005 /s/ John R. Potapchuk --------------------- John R. Potapchuk Senior Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----