e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 |
For the quarterly period ended December 31, 2005
OR
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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. 000-50118
VistaCare, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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06-1521534
(I.R.S. Employer Identification No.) |
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4800 North Scottsdale Road,
Suite 5000
Scottsdale, Arizona
(Address of principal executive offices)
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85251
(Zip code) |
(480) 648-4545
(Registrant’s telephone number, including area code)
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, as amended (the “Exchange Act”),
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. þ
Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated
filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer þ Non-accelerated filer
o
Indicate
by check mark whether the registrant is a shell Company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
As of February 6, 2005, there were outstanding 16,392,143 shares of the issuer’s Class A
Common Stock, $0.01 par value per share.
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements.
VISTACARE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share information)
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December 31, |
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September 30, |
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2005 |
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2005 |
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(unaudited) |
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(note 1) |
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ASSETS
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Current assets: |
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Cash and cash equivalents |
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$ |
13,686 |
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$ |
25,962 |
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Short-term investments |
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27,573 |
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27,413 |
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Patient accounts receivable (net of
allowance for denials of $2,001 and
$1,594 at December 31, 2005 and
September 30, 2005, respectively) |
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28,953 |
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20,202 |
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Patient accounts receivable — room &
board (net of allowance for denials of
$1,138 and $1,527 at December 31, 2005
and September 30, 2005, respectively) |
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4,650 |
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9,149 |
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Prepaid expenses |
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4,904 |
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3,811 |
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Tax receivable |
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4,271 |
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4,329 |
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Deferred tax assets |
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9,666 |
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8,826 |
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Total current assets |
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93,703 |
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99,692 |
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Fixed assets, net |
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7,046 |
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5,757 |
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Goodwill |
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24,002 |
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24,002 |
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Other assets |
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6,986 |
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7,310 |
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Total assets |
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$ |
131,737 |
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$ |
136,761 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities: |
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Accounts payable |
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$ |
34 |
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$ |
1,445 |
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Accrued
Medicare Cap |
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13,161 |
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18,057 |
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Accrued expenses |
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25,064 |
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27,652 |
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Total current liabilities |
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38,259 |
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47,154 |
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Deferred tax liability-non-current |
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4,555 |
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2,745 |
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Stockholders’ equity: |
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Class A Common Stock, $0.01 par value;
authorized 33,000,000 shares;
16,392,143 and 16,376,529 shares
issued and outstanding at December 31,
2005 and September 30, 2005,
respectively |
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164 |
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164 |
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Additional paid-in capital |
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108,093 |
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108,054 |
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Deferred compensation |
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— |
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(555 |
) |
Accumulated deficit |
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(19,334 |
) |
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(20,801 |
) |
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Total stockholders’ equity |
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88,923 |
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86,862 |
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Total liabilities and stockholders’ equity |
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$ |
131,737 |
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$ |
136,761 |
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See accompanying notes to consolidated financial statements.
3
VISTACARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(in thousands, except per share information)
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Three Months Ended |
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December 31, |
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2005 |
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2004 |
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Net patient revenue |
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$ |
59,673 |
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$ |
56,615 |
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Operating expenses: |
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Patient care expenses |
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35,921 |
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35,108 |
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Sales, general and administrative expenses |
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20,197 |
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19,321 |
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Depreciation |
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614 |
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452 |
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Amortization |
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648 |
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603 |
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Total operating expenses |
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57,380 |
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55,484 |
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Operating income |
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2,293 |
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1,131 |
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Non-operating income (expense): |
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Interest income |
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309 |
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217 |
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Interest expense |
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— |
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(7 |
) |
Other expense |
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(94 |
) |
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(177 |
) |
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Total non-operating income |
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215 |
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33 |
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Net income before income taxes |
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2,508 |
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1,164 |
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Income tax expense |
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1,041 |
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456 |
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Net income |
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$ |
1,467 |
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$ |
708 |
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Net income per common share: |
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Basic net income per common share |
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$ |
0.09 |
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$ |
0.04 |
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Diluted net income per common share |
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$ |
0.09 |
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$ |
0.04 |
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Weighted average shares outstanding: |
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Basic |
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16,381 |
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16,214 |
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Diluted |
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16,738 |
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16,814 |
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See accompanying notes to consolidated financial statements.
4
VISTACARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
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Three Months Ended |
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December 31, |
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2005 |
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2004 |
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Operating activities |
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Net income |
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$ |
1,467 |
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$ |
708 |
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Adjustments to reconcile net income to net cash used
in operating activities: |
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Depreciation |
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614 |
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|
452 |
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Amortization |
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|
648 |
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603 |
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Share-based compensation |
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454 |
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103 |
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Deferred income tax expense (benefit) |
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970 |
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(163 |
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Loss on disposal of assets |
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16 |
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132 |
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Changes in operating assets and liabilities: |
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Patient accounts receivable, net |
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(4,251 |
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2,862 |
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Prepaid expenses and other |
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(1,035 |
) |
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(237 |
) |
Payment of Medicare Cap assessments — decrease in
accrued Medicare Cap |
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(6,121 |
) |
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(4,938 |
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Increase in accrual for Medicare Cap |
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1,225 |
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1,500 |
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Accounts payable and accrued expenses |
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(3,999 |
) |
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(4,047 |
) |
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Net cash used in operating activities |
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(10,012 |
) |
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(3,025 |
) |
Investing activities |
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Short-term investments purchased |
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(1,801 |
) |
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(14,254 |
) |
Short-term investments sold |
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1,641 |
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4,105 |
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Purchases of equipment |
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(1,977 |
) |
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(717 |
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Internally developed software expenditures |
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(112 |
) |
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(436 |
) |
Increase in other assets |
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(154 |
) |
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(271 |
) |
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Net cash used in investing activities |
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(2,403 |
) |
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(11,573 |
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Financing activities |
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Proceeds from issuance of common stock from exercise
of stock options and employee stock purchase plan |
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139 |
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|
122 |
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Net cash provided by financing activities |
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139 |
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122 |
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Net decrease in cash |
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(12,276 |
) |
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(14,476 |
) |
Cash and cash equivalents, beginning of period |
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25,962 |
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28,687 |
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Cash and cash equivalents, end of period |
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$ |
13,686 |
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$ |
14,211 |
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Cash and short-term investments, end of period |
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$ |
41,259 |
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$ |
57,525 |
|
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|
|
|
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See accompanying notes to consolidated financial statements.
5
VISTACARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2005
Description of Business
VistaCare, Inc. (VistaCare, Company or “we” or similar pronoun), is a Delaware corporation
providing medical care designed to address the physical, emotional, and spiritual needs of patients
with a terminal illness and the support of their family members. Hospice services are provided
predominately in the patient’s home or other residence of choice, such as a nursing home or
assisted living facility, or in a hospital or in-patient unit.
VistaCare provides in-patient services at its in-patient units and through leased beds at unrelated hospitals and skilled nursing
facilities on a per diem basis. VistaCare provides services in Alabama, Arizona, Colorado, Georgia,
Indiana, Massachusetts, New Mexico, Nevada, Ohio, Oklahoma, Pennsylvania, South Carolina, Texas and
Utah.
The
accompanying interim consolidated financial statements of VistaCare have been
prepared in conformity with U.S. generally accepted accounting principles, consistent in all
material respects with those applied in the Company’s Annual
Report on Form 10-K for the fiscal year
ended September 30, 2005 (“fiscal 2005”), except for the adoption of Statement of Financial
Accounting Standards No. 123(R), “Share-Based Payment”
(“SFAS No. 123(R)”) — See Note 1.
1. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements include accounts of VistaCare and
its wholly owned subsidiaries: VistaCare USA, Inc., Vista Hospice Care, Inc., and FHI Health
Services, Inc. (including its wholly-owned subsidiaries). Intercompany transactions and balances
have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered necessary,
consisting of normal recurring accruals, for a fair presentation have been included. Operating
results for the three months ended December 31, 2005 are not necessarily indicative of the results
that may be expected for the fiscal year ending September 30, 2006.
The balance sheet at September 30, 2005 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in VistaCare, Inc.’s Form 10-K for
the year ended September 30, 2005.
Per Share Information
Basic net income per common share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per common share is
computed by dividing net income by the weighed average number of shares outstanding during the
period plus the effect of potentially dilutive securities, including shares and employee stock
options of 16.7 million shares and 16.8 million shares for three months ended December 31, 2005 and
December 31, 2004, respectively. The effect of dilutive securities not included because they would
have been antidilutive were 2.0 million shares and 1.2 million shares for the three months ended
December 31, 2005 and December 31, 2004, respectively.
6
Stock Based Compensation
At December 31, 2005, the Company had two active share-based employee compensation plans.
Stock option awards granted from these plans are granted at the fair market value on the date of
grant, and vest over a period determined at the time the options are granted, ranging from one to
five years, and generally have a maximum term of ten years. When options are exercised, new shares
of the Company’s Class A common stock are issued.
Prior
to October 1, 2005, the Company accounted for the plans under the measurement and
recognition provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related
Interpretations, as permitted by FASB Statement No. 123, Accounting for Stock-Based Compensation.
Under APB Opinion No. 25, stock options granted at market required no recognition of compensation
cost and a share-based compensation proforma disclosure regarding the proforma effect on net
earnings assuming compensation cost had been recognized in accordance with Statement of Financial
Accounting Standard No. 123 Stock-Based Compensation.
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Three Months Ended |
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December 31, |
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2004 |
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Net income to common stockholders: |
|
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As reported: |
|
$ |
708 |
|
Deduct total stock-based employee compensation
expense determined under fair value method for
all awards, net of tax impact |
|
|
(812 |
) |
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Pro forma net loss to common stockholders |
|
$ |
(104 |
) |
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Basic net income (loss) per common share: |
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As reported |
|
$ |
0.04 |
|
Pro forma |
|
|
(0.01 |
) |
Diluted net income (loss) per common share: |
|
|
|
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As reported |
|
$ |
0.04 |
|
Pro forma |
|
|
(0.01 |
) |
Weighted average shares used in computation: |
|
|
|
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Basic |
|
|
16,214 |
|
Diluted |
|
|
16,814 |
|
Effective October 1, 2005, the Company adopted the fair value recognition provisions of FASB
Statement No. 123(R), Share-Based Payment (SFAS No. 123(R)), which requires companies to measure
and recognize compensation expense for all share-based payments at fair value. SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions using APB Opinion No.
25, and generally requires that such transactions be accounted for using prescribed
fair-value-based methods. SFAS No. 123(R) permits public companies to adopt its requirements using
one of two methods: (a) a “modified prospective” method in which compensation costs are recognized
beginning with the effective date based on the requirements of SFAS No. 123(R) for all share-based
payments granted or modified after the effective date, and based on the requirements of SFAS No.
123(R) for all awards granted to employees prior to the effective date of SFAS No. 123(R) that remain
unvested on the effective date or (b) a “modified retrospective” method which includes the
requirements of the modified prospective method described above, but also permits companies to
restate based on the amounts previously recognized under SFAS
No. 123(R) for purposes of pro forma
disclosures either for all periods presented or prior interim periods of the year of adoption.
Effective October 1, 2005, the Company adopted SFAS No. 123(R) using the modified prospective
method. Other than certain options previously issued at an amount
determined to be below fair value for financial accounting purposes, no share-based employee compensation cost has been reflected
in net income prior to the adoption of SFAS No. 123(R). The Company calculates the fair value of
stock options using the Black-Scholes model. Results for prior periods have not been restated.
The adoption of SFAS No. 123(R) reduced income before income tax expense for the three months
ended December 31, 2005 by approximately $0.4 million and reduced net income for the three months
ended December 31, 2005 by approximately $0.3 million. Basic and diluted net income per common
share for the three months ended December 31, 2005 would have been $0.12 and $0.12, respectively,
if the Company had not adopted SFAS No. 123(R), compared to reported basic and diluted net income per
common share of $0.09 and $0.09, respectively. The total value of the stock options awards and
stock options granted and stock options that were deemed to be granted in the money using
regression analysis after the Company became publicly traded is expensed ratably over the service
period of the employees receiving the awards. As of December 31, 2005, total unrecognized
compensation cost related to stock option awards was approximately $5.9 million and the related
weighted-average period over which it is expected to be recognized is approximately 2.6 years.
7
Prior to the adoption of SFAS No. 123(R), the Company presented all benefits of tax deductions
resulting from the exercise of share-based compensation as operating cash flows in the Statement of
Cash Flows. SFAS No. 123(R) requires the benefits of tax deductions in excess of the compensation
cost recognized for those options (excess tax benefits) to be
classified as financing cash flows. Such amounts were immaterial for
the company during the three months ended December 31, 2005.
Compensation expense related to share-based awards is generally amortized over the
vesting period with 10% recorded as patient care expenses and 90% recorded in selling, general &
administrative expenses in the consolidated statements of operations.
A Summary of stock options within the Company’s share-based
compensation plans and changes for the three months ended December 31, 2005 is as follows:
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Number of |
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Weighted |
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Weighted Average |
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Aggregate |
|
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Shares Under |
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|
Average |
|
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Remaining |
|
|
Intrinsic |
|
| |
|
Option |
|
|
Exercise Price |
|
|
Contractual Term |
|
|
Value |
|
Balance at September 30, 2005 |
|
|
2,638,814 |
|
|
$ |
16.72 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
42,300 |
|
|
|
12.48 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(4,800 |
) |
|
|
3.80 |
|
|
|
|
|
|
|
|
|
Terminated/expired |
|
|
(120,208 |
) |
|
|
24.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
2,556,106 |
|
|
$ |
16.33 |
|
|
|
7.49 |
|
|
|
(8,669,148 |
) |
The
intrinsic value of options exercised during the three months ended
December 5, 2005 was
$0.1 million. Options exercisable under the Company’s
share-based compensation plans at December 31,
2005 were 1.6 million shares with an average exercise price of $18.02, an average remaining contractual
term of 7 years, and an aggregate intrinsic value of
$(12.9) million. Cash received by the Company
related to the exercise of options during the three months ended December 31, 2005 amounted to
$0.1 million.
A summary of restricted stock activity within the Company’s share-based compensation plans and
changes for the three months ended December 31, 2005 is as follows:
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Weighted- |
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| |
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Average |
|
| |
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|
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|
|
Grant-Date |
|
| Nonvested
Shares |
|
Shares |
|
|
Fair
Value |
|
Nonvested at September 30, 2005 |
|
|
15,000 |
|
|
$ |
16.00 |
|
Granted |
|
|
97,000 |
|
|
$ |
12.99 |
|
Vested |
|
|
0 |
|
|
$ |
— |
|
Forfeited |
|
|
0 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
Nonvested at December 31, 2005 |
|
|
112,000 |
|
|
$ |
13.70 |
|
|
|
|
|
|
|
|
The total fair value of restricted shares vested during the three months ended December 31, 2005
and December 31, 2004 was $0.0 million and $0.0 million, respectively.
The fair value of each stock option award is estimated on the date of the grant using the
Black-Scholes option pricing model with the following assumptions:
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|
|
|
| |
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Three Months Ended |
|
Three Months Ended |
| |
|
December 31, 2005 |
|
December 31, 2004 |
Expected dividend yield |
|
0.0% |
|
0.0% |
Expected stock price volatility |
|
0.51 |
|
0.55 |
Risk-free interest rate |
|
3.94% |
|
3.64% |
Expected life of options |
|
7.5 years |
|
5 years |
The risk-free interest rate is based on the U.S. treasury security rate in effect as of the
date of grant. The expected lives of options for the three months
ended December 31, 2005 and December 31, 2004
is an average of the contractual terms and vesting periods, and historical data, respectively.
The weighted average fair value of stock options granted during the three months ended
December 31, 2005 and December 31, 2004 was $7.32 and $7.14, respectively.
The expected stock price volatility is based on historical data of the Company.
Income Taxes
VistaCare accounts for income taxes under the liability method as required by Financial
Accounting Standards Board Statement No. 109, Accounting for Income Taxes. Under the liability
method, deferred taxes are determined based on temporary differences between financial statement
and tax bases of assets and liabilities existing at each balance sheet date using enacted tax rates
for years in which the related taxes are expected to be paid or recovered.
8
Reclassifications
Certain amounts have been reclassified to conform to the current presentation.
2. Fixed Assets
A summary of fixed assets follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2005 |
|
Equipment |
|
$ |
9,644 |
|
|
$ |
9,249 |
|
Furniture and fixtures |
|
|
2,799 |
|
|
|
2,515 |
|
Leasehold improvements |
|
|
1,800 |
|
|
|
1,449 |
|
Construction in progress |
|
|
1,133 |
|
|
|
278 |
|
|
|
|
|
|
|
|
Total fixed assets |
|
|
15,376 |
|
|
|
13,491 |
|
Less accumulated depreciation |
|
|
(8,330 |
) |
|
|
(7,734 |
) |
|
|
|
|
|
|
|
Net fixed assets |
|
$ |
7,046 |
|
|
$ |
5,757 |
|
|
|
|
|
|
|
|
3. Other Assets
A summary of other assets follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2005 |
|
Internally developed software, net of amortization of $4,692 and $4,209 as of
December 31, 2005 and
September 30, 2005, respectively |
|
$ |
2,976 |
|
|
$ |
3,380 |
|
Workers’ compensation, restricted cash |
|
|
1,409 |
|
|
|
1,842 |
|
Covenant-not-to compete, net of amortization of $105 and $35 as of December 31, 2005 and
September 30, 2005, respectively |
|
|
1,295 |
|
|
|
1,365 |
|
Refundable deposits |
|
|
419 |
|
|
|
415 |
|
Computer software, net of amortization of $2,106 and $2,035 as of December 31, 2005 and
September 30, 2005, respectively |
|
|
269 |
|
|
|
273 |
|
Other |
|
|
618 |
|
|
|
35 |
|
|
|
|
|
|
|
|
Total other assets |
|
$ |
6,986 |
|
|
$ |
7,310 |
|
|
|
|
|
|
|
|
4. Accrued Expenses
A summary of accrued expenses follows (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
September 30, |
|
| |
|
2005 |
|
|
2005 |
|
Patient care expenses |
|
$ |
12,743 |
|
|
$ |
13,186 |
|
Administrative expenses |
|
|
4,807 |
|
|
|
3,713 |
|
Salaries and payroll taxes |
|
|
2,866 |
|
|
|
4,888 |
|
Paid time-off |
|
|
2,154 |
|
|
|
2,115 |
|
Self-insurance health expenses |
|
|
1,644 |
|
|
|
3,011 |
|
Taxes |
|
|
850 |
|
|
|
739 |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
25,064 |
|
|
$ |
27,652 |
|
|
|
|
|
|
|
|
5. Long-Term Debt
In December 2004, VistaCare renewed a $30.0 million revolving line of credit and entered into
a $20.0 million term loan (credit facility). The credit facility is collateralized by substantially
all of VistaCare’s assets including cash, accounts receivable and equipment. Loans under the
revolving line of credit bear interest at an annual rate equal to the one-month London Interbank
Borrowing Rate in effect from time to time plus 3.0-5.0%. Accrued interest under the revolving line
of credit is due weekly.
Under the revolving line of credit, VistaCare may borrow, repay and re-borrow an amount equal
to the lesser of: (i) $30.0 million or (ii) 85% of the net value of eligible accounts receivable.
Under the term loan, borrowings are based on allowable total indebtedness based on a multiplier of
cash flow as defined in the loan agreement. The maturity date of the credit facility is December
22, 2009. As of December 31, 2005, there was no balance outstanding on the revolving line of credit
or on the term loan.
9
The credit facility contains certain customary covenants including those that restrict the
ability of VistaCare to incur additional indebtedness, pay dividends under certain circumstances,
permit liens on property or assets, make capital expenditures, make certain investments, and prepay
or redeem debt or amend certain agreements relating to outstanding indebtedness. The Company was in
compliance with the financial debt service coverage covenants as of December 31, 2005.
6. Related Party Transactions
On September 27, 2005, the Board of Directors, at a special meeting, agreed to aid in the
relocation of Mr. David Elliot, Chief Operating Officer, to the Phoenix, Arizona metropolitan area
by purchasing Mr. Elliot’s house in Minnesota for $940,000. The purchase price was based on three
independent real estate appraisals. An agreement for the sale of the house to the Company was
executed on October 11, 2005. Pursuant to the terms of this agreement, if the house sold for less
than $940,000, Mr. Elliot was to pay the Company the difference between $940,000 and the sales
price. On December 15, 2005, the Company closed on the house sale to an unrelated third party for
$900,000. Mr. Elliot has agreed to reimburse the Company for the difference of approximately
$40,000 by March 31, 2006.
7. Litigation
Between August and September 2004, approximately five complaints were filed individually and
on behalf of all others similarly situated in the United States District Court for the District of
Arizona against the Company and two of our officers alleging violations of the federal securities
laws arising out of declines in the Company’s stock price in 2004. Specifically, the complaints
alleged claims in connection with various statements and purported omissions to the public and to
the securities markets relating to the Company’s August 2004 announcement of our decision to accrue
an increased amount for the quarter ended June 30, 2004 for potential liability due to the Medicare
Cap on reimbursement for hospice services. The five lawsuits were consolidated in April 2005. The
consolidated case is in the early stages of discovery. The Company intends to vigorously defend
the lawsuit. No assurances can be made that the Company will be successful in defense of such
claims. If the Company is not successful in defense of such claims, we could be forced to make
significant payments to the class of stockholders set forth in the consolidated complaint and their
lawyers, and such payments could have a material adverse effect on our business, financial
condition, results of operations and cash flows if not covered by our insurance carrier. Even if such claims
are not successful, the litigation could result in substantial costs and divert management’s
attention and resources, which could adversely affect our business,
results of operations, financial position and cash flows.
Between August and September 2004, two shareholders filed separate derivative lawsuits
purportedly on behalf of the Company against several present and former officers and members of the
Board of Directors of the Company in the United States District Court for the District of Arizona.
The two derivative complaints, which have been consolidated, allege breaches of fiduciary duties,
abuse of control, mismanagement, waste of corporate assets and unjust enrichment, as a result of
the same activities alleged in the lawsuits discussed above. The derivative complaint seeks
attorney fees and the payment of damages to the Company. As of the date of this report, the
defendants filed a motion to dismiss and no discovery has occurred.
We are also subject to a variety of other claims and suits that arise from time to time in the
ordinary course of our business. While management currently believes that resolving all of the
matters discussed in Note 7, individually or in aggregate, will not have a material adverse impact
on our financial position or our results of operations, the litigation and other claims that we
face are subject to inherent uncertainties and management’s view of these matters may change in the
future. Should an unfavorable final outcome occur, there exists the possibility of a material
adverse impact on our financial position, results of operations and
cash flows for the period in which the effect becomes probable and reasonably estimable.
8. Dilutive Securities
The following table presents the calculation of basic and diluted net income (loss) per common
share (in thousands, except per share information):
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Numerator |
|
|
|
|
|
|
|
|
Net income |
|
$ |
1,467 |
|
|
$ |
708 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
Denominator
for basic net income per common share — weighted average shares |
|
|
16,381 |
|
|
|
16,214 |
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
Employee stock options |
|
|
358 |
|
|
|
600 |
|
|
|
|
|
|
|
|
10
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
| |
|
December 31, |
|
| |
|
2005 |
|
|
2004 |
|
Denominator
for diluted net income per common share — adjusted weighted
average shares and assumed conversion |
|
|
16,738 |
|
|
|
16,814 |
|
|
|
|
|
|
|
|
| |
Net income per common share: |
|
|
|
|
|
|
|
|
Basic net income to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
Diluted net income to common stockholders |
|
$ |
0.09 |
|
|
$ |
0.04 |
|
11
VISTACARE, INC.
HIGHLIGHTS
(dollars in millions, except as noted)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
|
|
Three Months Ended |
|
|
Twelve Months Ended |
|
| |
|
December 31, 2005 |
|
|
December 31, 2004 |
|
|
September 30, 2005 |
|
Patient Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Census (ADC) |
|
|
5,313 |
|
|
|
5,318 |
|
|
|
5,376 |
|
Ending census on last day of period |
|
|
5,130 |
|
|
|
5,329 |
|
|
|
5,510 |
|
Patient days |
|
|
488,784 |
|
|
|
489,225 |
|
|
|
1,960,638 |
|
In-patient days (general in-patient) |
|
|
5,016 |
|
|
|
4,597 |
|
|
|
17,335 |
|
Admissions |
|
|
3,996 |
|
|
|
4,314 |
|
|
|
17,275 |
|
Diagnosis mix of admitted patients: |
|
|
|
|
|
|
|
|
|
|
|
|
Cancer |
|
|
33 |
% |
|
|
32 |
% |
|
|
31 |
% |
Alzheimers/Dementia |
|
|
13 |
% |
|
|
11 |
% |
|
|
11 |
% |
Heart disease |
|
|
18 |
% |
|
|
18 |
% |
|
|
18 |
% |
Respiratory |
|
|
9 |
% |
|
|
8 |
% |
|
|
9 |
% |
Failure to thrive/Rapid decline |
|
|
19 |
% |
|
|
23 |
% |
|
|
23 |
% |
All other |
|
|
8 |
% |
|
|
8 |
% |
|
|
8 |
% |
Discharges |
|
|
4,344 |
|
|
|
4,232 |
|
|
|
17,382 |
|
Average length of stay on discharged patients |
|
|
115 |
|
|
|
114 |
|
|
|
113 |
|
Median length of stay on discharged patients |
|
|
34 |
|
|
|
31 |
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Program site Statistics: |
|
|
|
|
|
|
|
|
|
|
|
|
Programs |
|
|
58 |
|
|
|
48 |
|
|
|
58 |
|
In-patient units (included within a program) |
|
|
2 |
|
|
|
1 |
|
|
|
2 |
|
Medicare provider numbers |
|
|
36 |
|
|
|
36 |
|
|
|
37 |
|
Programs by ADC size
|
|
|
|
|
|
|
|
|
|
|
|
|
0-60
ADC |
|
|
22 |
|
|
|
9 |
|
|
|
21 |
|
61-100 ADC |
|
|
17 |
|
|
|
14 |
|
|
|
15 |
|
100-200 ADC |
|
|
13 |
|
|
|
20 |
|
|
|
16 |
|
200+ ADC |
|
|
6 |
|
|
|
5 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue |
|
$ |
59.7 |
|
|
$ |
56.6 |
|
|
$ |
225.4 |
|
Net patient revenue per day of care |
|
$ |
122.08 |
|
|
$ |
115.72 |
|
|
$ |
114.89 |
|
Patient revenue payor % |
|
|
|
|
|
|
|
|
|
|
|
|
Medicare |
|
|
92.5 |
% |
|
|
93.3 |
% |
|
|
92.5 |
% |
Medicaid |
|
|
4.7 |
% |
|
|
3.8 |
% |
|
|
4.6 |
% |
Private insurers and managed care |
|
|
2.8 |
% |
|
|
2.9 |
% |
|
|
2.9 |
% |
Level of care % of patient revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Routine home care |
|
|
94.7 |
% |
|
|
95.5 |
% |
|
|
95.4 |
% |
General in-patient care |
|
|
4.5 |
% |
|
|
3.8 |
% |
|
|
3.7 |
% |
Continuous home care |
|
|
0.6 |
% |
|
|
0.5 |
% |
|
|
0.7 |
% |
Respite in-patient care |
|
|
0.2 |
% |
|
|
0.2 |
% |
|
|
0.2 |
% |
Level of care base Medicare per diem reimbursement rates
in effect: |
|
|
|
|
|
|
|
|
|
|
|
|
Routine home care |
|
$ |
126.49 |
|
|
$ |
121.98 |
|
|
$ |
121.98 |
|
General in-patient care |
|
$ |
562.69 |
|
|
$ |
542.61 |
|
|
$ |
542.61 |
|
Continuous home care |
|
$ |
738.26 |
|
|
$ |
711.92 |
|
|
$ |
711.92 |
|
Respite in-patient care |
|
$ |
130.85 |
|
|
$ |
126.18 |
|
|
$ |
126.18 |
|
Increase in base rates |
|
|
3.7 |
% |
|
|
3.3 |
% |
|
|
3.3 |
% |
Hospice Medicare Cap per beneficiary |
|
Not yet released |
|
$ |
19,777.51 |
|
|
$ |
19,777.51 |
|
Medicare Cap
liability |
|
$ |
13.2 |
|
|
$ |
16.1 |
|
|
$ |
18.1 |
|
Estimated Medicare Cap reductions to patient revenues (1) |
|
$ |
1.2 |
|
|
$ |
1.5 |
|
|
$ |
11.9 |
|
Medicare Cap paid |
|
$ |
(6.1 |
) |
|
$ |
(4.9 |
) |
|
$ |
(13.4 |
) |
Estimated payment denials |
|
$ |
0.8 |
|
|
$ |
1.3 |
|
|
$ |
6.2 |
|
Allowance
for denials reserve |
|
$ |
3.1 |
|
|
$ |
5.9 |
|
|
$ |
3.1 |
|
| |
Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Nursing home expenses |
|
$ |
11.9 |
|
|
$ |
11.3 |
|
|
$ |
53.1 |
|
Nursing home revenues |
|
$ |
(11.3 |
) |
|
$ |
(10.5 |
) |
|
$ |
(47.9 |
) |
Nursing home costs, net |
|
$ |
0.6 |
|
|
$ |
0.8 |
|
|
$ |
5.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
We have not received any assessment letters for our fiscal year 2005. |
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
We are currently operating 58 hospice programs under 36 Medicare provider numbers including
two in-patient units, serving approximately 5,130 patients in 14 states. During fiscal year 2006,
we are planning to develop new programs and in-patient units. Our net patient revenue increased to
$59.7 million for the three months ended December 31, 2005, from $56.6 million for the three months
ended December 31, 2004. Due to Medicare Cap estimated liabilities, our net patient revenue for the
three months ended December 31, 2005 was reduced by $1.2 million, as compared to a reduction of
$1.5 million for the three months ended December 31, 2004. As of December 31, 2005, our accrued
expenses included $13.2 million for the Medicare Cap accrued liability.
For the three months ended December 31, 2005, we recorded net income of $1.5 million, as
compared to net income of $0.7 million for the three months ended December 31, 2004. Our net income
was positively impacted by a 3.7% increase in Medicare hospice reimbursement rates effective
October 1, 2005, a 9% increase in in-patient days, which have a
higher per diem rate, to 5,016 days compared to 4,597 days for the
three months ended December 31, 2004 and $0.8 million after tax
change in estimate related to our health insurance further decline in
claim experience and lag time for employee healthcare costs. Our net income was negatively impacted by increases in
patient care labor expense, increases in sales, general and administrative expense, and new program
and in-patient unit development costs, and $0.3 million after tax for
the adoption of FASB Statement No. 123(R) Share-Based Payment (SFAS
No. 123(R)).
Critical Accounting Policy Update
Adoption of SFAS No. 123(R)
Effective October 1, 2005, the Company adopted SFAS No. 123(R), Share-Based Payment. This new
accounting standard requires all stock-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their fair values. The Company
adopted this accounting treatment on the modified prospective basis. Prior to the adoption of SFAS No. 123(R), the
Company accounted for share-based payments to employees under APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. Accordingly, stock-based compensation was
included as pro forma disclosure in the financial statement footnotes. For the three months ended
December 31, 2005 and December 31, 2004, respectively, we included $0.5 million and $0.1 million of
share-based compensation expense in our sales, general & administrative expenses and patient care
expenses.
Current and Subsequent Events
On October 17, 2005, we were notified by the Centers for Medicare and Medicaid Services that
as a result of surveys conducted by the Indiana State Department of Health, the Medicare provider
agreement for our Indianapolis hospice program was being terminated effective October 15, 2005. The
determination also impacted our Terre Haute program since the two programs share a Medicare
provider number. Since a hospice provider must be certified in the Medicare program to participate
in the Indiana Medicaid program, on October 20, 2005, we were similarly notified that our
Indianapolis and Terre Haute programs were terminated as Medicaid providers effective October 15,
2005. We have filed appeals, but the decisions limit reimbursement (for services provided to
patients being served on the effective date of termination) to up to 30 days following the
effective date and no reimbursement will be made for any services to patients admitted into the
effected programs after the date of termination. We have taken steps to allow the patients and
families of the effected programs to remain under our care. Some patients transferred to another of
our Indiana programs, some patients transferred to competitor programs, and we have continued to
serve some patients at the Indianapolis and Terre Haute programs without reimbursement.
We
have taken steps to separate Terre Haute from Indianapolis’s
provider number. We have applied for a separate
provider number for Terre Haute and have obtained a provisional license effective November 18,
2005. We also underwent a state and federal survey, on January 20, 2006, which began the reasonable
assurance period that we expect to conclude with a final survey by the end of February. Meanwhile,
we cannot yet admit patients and, since November 15, have cared for patients at our cost. Upon
successful completion of state surveys and certification by CMS, we will again commence receiving
reimbursement for Medicare and Medicaid services for our existing patients. At December 31, 2005,
we were providing hospice services to approximately 108 patients in the Terre Haute program.
Also we have relocated our Bloomington, Indiana program to Indianapolis, Indiana. Recently we
began to slowly admit new
13
Bloomington-based patients, with the expectation that we will begin to
accept Indianapolis patients on a case-by-case basis in the later part of February. Moving the
Bloomington provider number to Indianapolis will result in a program survey, which we expect to be
completed by the end of February. During the same timeframe, we anticipate our submission for an
Alternative Delivery Site (ADS) designation for Bloomington to be approved.
An additional challenge in the first quarter, and currently in the second quarter, is the fact
that our operating results throughout Indiana have been impacted by the need to devote leadership
and program team resources to implement and convert to a new documentation system that is intended
to better meet the preferences of the Indiana State Department of Health. As a result, our
operating performance throughout our six sites in Indiana, which combined, has been one of our most
successful markets, will be impacted throughout the second quarter.
As a result of these costs and other costs associated with our recertification efforts, our
current inability to admit new patients to our Terre Haute program, and only the recent start of
admitting a small number of patients to our Indianapolis/Bloomington program, our first quarter
performance was negatively impacted by approximately $0.6 million. During the second quarter, we
expect the full quarter impact of these issues to result in a larger
combined loss at our Indiana programs.
We consolidated our four Utah programs into two programs. On December 16, 2005, we combined
our patients from our Lehi, Utah program with our Salt Lake City,
Utah program. On February 1, 2006 we consolidated our Logan, Utah program into our Ogden, Utah program.
In both cases, we were able to execute the transition with no impact on patient care, while
reducing operating expenses and estimated Cap exposure.
On February 8, 2006, VistaCare and Emory Healthcare announced the approval and opening of a
28-bed hospice in-patient unit, in an effort to enhance the depth and scope of end-of-life care
services in the Atlanta metropolitan area and throughout the Emory Healthcare system. This
inpatient unit was still under construction as of December 31, 2005, accordingly construction costs
were recorded as leasehold improvements and will be amortized over the lease.
Currently, we have two additional in-patient units under development, one in Evansville at
Trilogy Health Systems’ River Pointe Health Campus, and one being developed in Lubbock at the
Carillon Senior Living Campus.
On January 3, 2006, Todd Cote, MD, age 45, assumed the role of Chief Medical Officer. Dr. Cote
most recently served as Chief Medical Officer for The Connecticut Hospice, Inc., clinical
instructor for the Yale School of Medicine, and associate clinical professor for the University of
Connecticut School of Medicine. In his new role, Dr. Cote is responsible for the medical leadership
of VistaCare’s hospice operations, including more than 100 program and area medical directors and
the daily care of more than 5,000 patients.
14
Results of Operations
The following table sets forth selected consolidated financial information as a
percentage of net patient revenue for the periods indicated:
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended |
| |
|
December 31, |
| |
|
2005 |
|
2004 |
Net patient revenue |
|
|
100 |
% |
|
|
100 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
Patient care expenses: |
|
|
|
|
|
|
|
|
Salaries, benefits and payroll taxes |
|
|
38.8 |
% |
|
|
41.3 |
% |
Pharmaceuticals |
|
|
4.7 |
% |
|
|
4.5 |
% |
Durable medical equipment |
|
|
4.7 |
% |
|
|
5.3 |
% |
Other (including in-patient arrangements,
nursing home costs, net, purchased services, travel and
supplies) |
|
|
12.0 |
% |
|
|
11.0 |
% |
|
|
|
|
|
|
|
|
|
Total patient care expenses |
|
|
60.2 |
% |
|
|
62.1 |
% |
Sales, general and administrative expenses: |
|
|
|
|
|
|
|
|
Salaries, benefits and payroll taxes |
|
|
19.3 |
% |
|
|
21.0 |
% |
Office leases |
|
|
2.8 |
% |
|
|
2.4 |
% |
Other (including severance, travel, marketing
and charitable
contributions) |
|
|
11.8 |
% |
|
|
10.7 |
% |
|
|
|
|
|
|
|
|
|
Total sales, general and administrative expenses |
|
|
33.9 |
% |
|
|
34.1 |
% |
Depreciation and amortization |
|
|
2.1 |
% |
|
|
1.9 |
% |
|
|
|
|
|
|
|
|
|
Operating income |
|
|
3.8 |
% |
|
|
1.9 |
% |
Non-operating income |
|
|
0.4 |
% |
|
|
0.1 |
% |
Income tax expense |
|
|
1.7 |
% |
|
|
0.8 |
% |
|
|
|
|
|
|
|
|
|
Net income |
|
|
2.5 |
% |
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
Three Months Ended December 31, 2005, Compared to Three Months Ended December 31, 2004
Net Patient Revenue
Net patient revenue is primarily the amount we are entitled to collect for our services,
determined by the number of billable patient days dependent on the level of care, the payor and the
geographic area adjusted for estimated Medicare Cap and estimated payment denials. Net patient
revenue increased $3.1 million, or 5.5%, to $59.7 million for the three months ended December 31,
2005, compared to $56.6 million for the three months ended December 31, 2004. Net patient revenue
per day of care increased to approximately $122 per day for the three months ended December 31,
2005 from approximately $116 per day for the three months ended December 31, 2004. Overall
increases in net patient revenue were due to:
| |
• |
|
Medicare reimbursement rate increase of 3.7% effective October 1, 2005; |
| |
| |
• |
|
an increase in in-patient days, which have a higher per diem
rate, to 5,016 days for the three months ended December 31, 2005, from 4,597 days for the three
months ended December 31, 2004; and |
| |
| |
• |
|
lower Medicare Cap provision of $1.2 million for the three months ended December 31,
2005, compared to $1.5 million for the three months ended December 31, 2004. |
These
increases were partially offset by a negative impact of approximately
$1.7 million as a result of the
decertification of our Indianapolis, Indiana program, which also impacted our Terre Haute program
since the two programs share a Medicare provider number and our
Bloomington and Seymour programs where some of our patients were
transferred, as discussed further under the heading
“Current and Subsequent Events” in Management’s Discussion and Analysis of Financial Condition and
Results of Operations included in this report.
We are subject to Medicare Cap limits based on the total amount of Medicare payments that will
be made to each of our provider numbers. We actively monitor each of our programs, by provider
number, as to their program specific admission, discharge rate and average length of stay data in
an attempt to determine whether they have the potential to exceed the annual Medicare Cap. When we
determine that a provider number has the potential to exceed the annual Medicare Cap based upon
trends, we attempt to institute corrective action, such as a change in patient mix or increase in
patient admissions. However, to the extent we believe our corrective
15
action will not avoid a
Medicare Cap charge, we estimate the amount that we could be required to repay Medicare following
the end of the Medicare Cap year, and accrue that amount in proportion to the number of months that
have elapsed in the Medicare Cap year as a reduction to net patient revenue.
We recorded reductions to net patient revenue of $1.2 million and $1.5 million for the three months
ended December 31, 2005 and December 31, 2004,
respectively, for the estimated cost of exceeding the annual Medicare Cap.
The $1.2 million reduction to net patient revenue for Medicare Cap for the three months ended
December 31, 2005 represents a quarter of the total estimated accrual for patient service dates
during 2006, including pro-ration for estimated services that these 2006 patients may receive from
other hospice programs. As of December 31, 2005 and September 30, 2005, respectively, our accrued
expenses included $13.2 million and $18.1 million for Medicare Cap accrued liability.
We recorded reductions to net patient revenue for estimated payment denials, contractual
adjustments (such as differences in payments by commercial payors) and subsequent changes to
initial level of care determinations (made retroactively by VistaCare staff after initial
admission) of $0.8 million and $1.3 million for the three months ended December 31, 2005 and
December 31, 2004, respectively. The allowance for denials on patient accounts receivable and room
and board was $3.1 million at both December 31, 2005 and September 30, 2005, respectively.
Patient Care Expenses
Patient care expenses consist primarily of salaries, benefits, payroll taxes and mileage
costs associated with patient care and direct patient care expenses for pharmaceuticals,
durable medical equipment, medical supplies, in-patient facilities, nursing home costs and to a
lesser degree purchased services such as ambulance, infusion and radiology. Patient care expenses
increased $0.8 million, or 2%, to $35.9 million for the three months ended December 31, 2005 from
$35.1 million for the three months ended December 31, 2004. As a percentage of net patient
revenue, patient care expenses decreased to 60.2% for the three months ended December 31, 2005 from
62.1% for the three months ended December 31, 2004.
The increase in patient care expenses relates to the higher in-patient expenses of $0.6
million, higher mileage reimbursements of $0.4 million and an increase in pharmaceuticals of $0.3
million, partially offset by a decrease in durable medical equipment of $0.1 million for the three
months ended December 31, 2005, as compared to the three months ended December 31, 2004.
Additionally, salaries, benefits, and payroll taxes of hospice care providers decreased by $0.2
million for the three months ended December 31, 2005 compared to the three months ended December
31, 2004, due to lower health insurance expenses of $ 0.9 million
relating to a change in estimate related to our further decline in claim experience
and reimbursement lag time, which was partially offset by higher
salaries and share-based compensation.
These patient care expense increases were partially offset by a reduction in net room and
board expenses of $0.2 million for the three months ended December 31, 2005 verses the three months
ended December 31, 2004. Nursing home expenses totaled approximately $11.9 million and $11.3
million for the three months ended December 31, 2005 and December 31, 2004, respectively. Nursing
home revenues totaled approximately $11.3 million and $10.5 million for the three months ended
December 31, 2005 and December 31, 2004, respectively. Our nursing home costs, net, were $0.6
million and $0.8 million for the three months ended December 31, 2005 and December 31, 2004,
respectively.
Sales, General and Administrative Expenses
Sales, general and administrative (SG&A) expenses primarily include salaries, payroll taxes,
benefits and travel expenses associated with our staff not directly involved with patient care,
bonuses for all employees, marketing, office leases, professional services and sales and use taxes.
SG&A expenses increased $0.9 million, or 5%, to $20.2 million for the three months ended December
31, 2005 from $19.3 million for the three months ended December 31, 2004. As a percentage of net
patient revenue, SG&A expenses decreased slightly to 33.9% for the three months ended December 31,
2005 and from 34.1% for the three months ended December 31, 2004.
The increases in SG&A expenses were due to the implementation expenses of the Sarbanes-Oxley
Act of 2002, rent expenses, software expenses, legal expenses and audit expenses. These increases in SG&A expenses
were partially offset by lower salaries, benefits and payroll taxes of $0.4 million for the three months ended December 31, 2005, due to lower health
insurance expenses of $0.4 million relating to a change in estimate related to our further decline in claim experience and lag time, which was
partially offset by higher share-based compensation.
16
Depreciation
Depreciation is calculated on the straight-line method for equipment, computers, leasehold
improvements and furniture and fixtures. Depreciation expense increased slightly, due to asset
requirements of our new programs added during 2005, to $0.6 million from $0.5 million for the three
months ended December 31, 2005 and December 31, 2004, respectively.
Amortization
Amortization is calculated over a three year period for capitalized software and capitalized
software development and a five year period for an acquisition related covenant not to compete.
Amortization was $0.6 million for both of the three months ended December 31, 2005 and December 31,
2004, respectively.
Non-Operating Income
Non-operating income primarily relates to interest income net of other expenses.
Non-operating income was $0.2 million and $0.1 million for the three months ended December 31, 2005
and December 31, 2004, respectively.
Income Tax
We record income taxes under the liability method as required by Financial Accounting
Standards Board Statement No. 109, Accounting for Income Taxes. For the three months ended
December 31, 2005, our income tax expense was $1.0 million as compared to $0.5 million for the
three months ended December 31, 2004.
The
effective rate for the three months ended December 31, 2005 and
December 31, 2004 was 41.5% and 39%, respectively. The increase
in our effective rate for December 31, 2005 was comprised of
increases in permanent tax adjustments for 2005 and other state tax
adjustments. Conversely, our
expense rate for December 31, 2004 was only comprised of tax at our estimated 39% rate.
Liquidity and Capital Resources
Our principal liquidity requirements have been for working capital and capital expenditures.
We have financed these requirements primarily with cash flow from operations. We raised net
proceeds of $48.1 million from our initial public offering in December 2002 of common stock. We
used the net proceeds to repay debt of $11.0 million, with the balance invested in short-term
investments. As of December 31, 2005, we had cash and cash equivalents and short-term investments
of $41.3 million, working capital of approximately $55.4 million and the ability to borrow up to
$50.0 million depending on eligible receivables under our revolving credit and term loan facility
described below.
Net
cash used in operating activities for the three months ended December 31, 2005 was $10.0
million as compared to cash used of $3.0 million for the three months ended December 31, 2004.
This increase in cash used was primarily due to the increase in patients accounts receivable
due to $6.2 million in revenue billed after the quarter close
due to a CMS change that no longer allows a third billing cycle
during a month, and from the payment of $6.1 million for 2004
Medicare Cap assessments. The decrease is partially offset by higher net income for the three
months ended December 31, 2005 as compared to the three months ended December 31, 2004.
Net cash used in investing activities was $2.4 million and $11.6 million for the three months
ended December 31, 2005 and December 31, 2004, respectively. These cash uses related primarily to
the purchase of computer and office equipment for new programs being developed, offset by decreases in the
purchases of short-term investments.
Net cash provided by financing activities was $0.1 million for both of the three months ended
December 31, 2005 and December 31, 2004, respectively. Cash provided by financing activities
principally resulted from the exercise of employee stock options and employee stock purchases.
In December 2004, we renewed a $30.0 million revolving line of credit and entered into a $20.0
million term loan (credit facility). The credit facility is collateralized by substantially all of
our assets including cash, accounts receivable and equipment. Loans under the revolving line of
credit bear interest at an annual rate equal to the one-month London Interbank Borrowing Rate in
effect from
17
time to time plus 3.0-5.0%. Accrued interest under the revolving line of credit is due
weekly.
Under the revolving line of credit, we may borrow, repay and re-borrow an amount equal to the
lesser of: (i) $30.0 million or (ii) 85% of the net value of eligible accounts receivable. Under
the term loan, borrowings are based on allowable total indebtedness based on a multiplier of cash
flow as defined in the loan agreement. The maturity date of the credit facility is December 22,
2009. As of December 31, 2005, there was no balance outstanding on the revolving line of credit or
on the term loan.
The credit facility contains certain customary covenants including those that restrict our
ability to incur additional indebtedness, pay dividends under certain circumstances, permit liens
on property or assets, make capital expenditures, make certain investments, and prepay or redeem
debt or amend certain agreements relating to outstanding indebtedness. We were in compliance with
the financial debt service coverage covenants as of December 31, 2005.
We expect that our principal liquidity requirements will be for working capital, the
development of new hospice programs, and new in-patient units, the acquisition of other hospice
programs and for capital expenditures. We expect that our existing funds, cash flows from
operations and borrowing capacity under our credit agreement will be sufficient to fund our
principal liquidity requirements for at least the next twelve months. Our future liquidity
requirements and the adequacy of our available funds will depend on many factors, including payment
for our services, regulatory changes and compliance
with new regulations, expense levels, future development of new hospice programs, future
development of new in-patient units, acquisitions of other hospice programs and capital
expenditures.
Interest Rate and Foreign Exchange Risk
Interest Rate Risk
We do not expect our cash flow to be affected, to any significant degree by a sudden change in
market interest rates. We have not implemented a strategy to manage interest rate market risk
because we do not believe that our exposure to this risk is material at this time. We invest excess
cash balances in money market accounts with average maturities of less than 90 days.
Foreign Exchange
We operate our business within the United States and execute all transactions in U.S. dollars.
Payment, Legislative and Regulatory Changes
We are highly dependent on payments from the Medicare and Medicaid programs. These programs
are subject to statutory and regulatory changes, possible retroactive and prospective rate
adjustments, administrative rulings, rate freezes and funding reductions. Reductions in amounts
paid by these programs for our services or changes in methods or regulations governing payments for
our services could have a materially adverse affect on our net patient revenue and profitability.
Inflation
The healthcare industry is labor intensive. Wages and other expenses increase during periods of
inflation and labor shortages in the marketplace. In addition, suppliers pass along rising costs to
us in the form of higher prices. We have implemented control measures designed to curb increases in
operating expenses; however, we cannot predict our ability to cover or offset future cost
increases.
Forward-Looking Statements
This quarterly report on Form 10-Q contains or incorporates forward-looking statements within
the meaning of section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange
Act of 1934. These forward-looking statements are based on current expectations, estimates,
forecasts and projections about the industry and markets in which we operate and management’s
beliefs and assumptions. In addition, other written or oral statements that constitute
forward-looking statements may be made by or on our behalf. Words such as “expect,” “anticipate,”
“intend,” “plan,” “believe,” “seek,” “estimate,” “expectations,” “forecast,” “goal,” “hope” and
similar variations of such words or similar expressions are intended to identify such
forward-looking
statements. These statements are not guarantees of future performance and involve certain
risks, uncertainties and assumptions that are difficult to predict. We do not intend to update
publicly any forward-looking statements, whether as a result of new information, future events or
otherwise.
18
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Market risk represents the risk of loss that may affect us due to adverse changes in financial
market prices and rates. We have not entered into derivative or hedging transactions to manage any
market risk. We do not believe that our exposure to market risk is material at this time.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures.
Our management, with the participation of our Chief Executive Officer (CEO) and Interim Chief
Financial Officer (CFO) evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) as of December 31,
2005. In designing and evaluating our disclosure controls and procedures, our management recognized
that any controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving their objectives, and our management necessarily applied its
judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on
this evaluation, our CEO and CFO concluded that, as of December 31, 2005, our disclosure controls
and procedures were (1) designed to ensure that material information relating to us, including our
consolidated subsidiaries, is made known to our CEO and CFO by others within those entities to
allow timely decisions regarding required disclosure and (2) effective, in that they provide
reasonable assurance that information required to be disclosed by us in the reports that we file or
submit under the Securities Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the Securities Exchange Commission’s rules and forms.
(b) Changes in Internal Controls.
There have been no changes in our internal controls over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) that occurred during the period
covered by this report that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
19
PART II — OTHER INFORMATION
Item 1. Legal Proceedings.
Between August and September 2004, approximately five complaints were filed individually and
on behalf of all others similarly situated in the United States District Court for the District of
Arizona against us and two of our officers alleging violations of the federal securities laws
arising out of declines in our stock price in 2004. Specifically, the complaints alleged claims in
connection with various statements and purported omissions to the public and to the securities
markets relating to our August 2004 announcement of our decision to accrue an increased amount for
the quarter ended June 30, 2004 for potential liability due to the Medicare Cap on reimbursement
for hospice services. The five lawsuits were consolidated in April 2005. The consolidated case is
in the early stages of discovery. We intend to vigorously defend the lawsuit. No assurances can be
made that we will be successful in defense of such claims. If we are not successful in defense of
such claims, we could be forced to make significant payments to the class of stockholders set forth
in the consolidated complaint and their lawyers, and such payments could have a material adverse
effect on our business, financial condition, results of operations and cash flows if not covered by our
insurance carrier. Even if such claims are not successful, the litigation could result in
substantial costs and divert management’s attention and resources, which could adversely affect our
business, results of operations, financial position and cash flows.
Between August and September 2004, two shareholders filed separate derivative lawsuits
purportedly on behalf of the Company against several present and former officers and members of our
Board of Directors in the United States District Court for the District of Arizona. The two
derivative complaints, which have been consolidated, allege breaches of fiduciary duties, abuse of
control, mismanagement, waste of corporate assets and unjust enrichment, as a result of the same
activities alleged in the lawsuits discussed above. The derivative complaint seeks attorney fees
and the payment of damages to the Company. As of the date of this report, the defendants filed a
motion to dismiss and no discovery has occurred.
We are also subject to a variety of other claims and suits that arise from time to time in the
ordinary course of our business. While management currently believes that resolving all of the
matters discussed in this Item 3, individually or in aggregate, will not have a material adverse
impact on our financial position or our results of operations, the litigation and other claims that
we face are subject to inherent uncertainties and management’s view of these matters may change in
the future. Should an unfavorable final outcome to occur, there exists the possibility of a
material adverse impact on our financial position, results of operations and cash flows for the period
in which the effect becomes probable and reasonably estimable.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(a) Sales of Unregistered Securities. None.
(b) Use of Proceeds from Registered Securities. On December 23, 2002, we completed an initial
public offering of shares of our Class A common stock. The shares were registered under the
Securities Act of 1933 on a registration statement on Form S-1 (Registration No. 333-98033), which
was declared effective by the Securities and Exchange Commission on December 17, 2002. Our net
proceeds from the offering were $48.1 million, which we used to repay debt of $11.0 million, with
the balance invested in short-term investments. None of the offering proceeds were used in the
three-months ended December 31, 2005.
(c) Repurchases of Securities. We did not repurchase any of our securities during the three
months ended December 31, 2005.
(d) Restrictions Upon the Payment of Dividends. We are prohibited under our credit facility
from paying any cash dividends if there is a default under the facility or if the payment of any
cash dividends would result in default.
20
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits.
Exhibits: The exhibits listed in the Exhibit Index immediately preceding such exhibits are
filed as part of this report.
21
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.
| |
|
|
|
|
|
|
VISTACARE, INC. |
|
|
|
|
|
|
|
|
|
By: /s/ Richard R. Slager |
|
|
|
|
|
|
|
Date: February 9, 2006
|
|
Richard R. Slager |
|
|
|
|
President and Chief Executive Officer
|
|
|
|
|
|
|
|
|
|
By: /s/ Jon A. Steging |
|
|
|
|
|
|
|
Date: February 9, 2006
|
|
Jon A. Steging |
|
|
|
|
Interim Chief Financial Officer |
|
|
|
|
(Principal Financial Officer) |
|
|
22
EXHIBIT INDEX
| |
|
|
| Exhibit |
|
|
| Number |
|
Description |
31.1
|
|
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. |
|
|
|
31.2
|
|
Certification pursuant to Exchange Act Rules 13a-14 and 15d-14 of the Interim Chief Financial
Officer. |
|
|
|
32.1
|
|
Certification pursuant to 18 U.S.C. Section 1350 of the Chief Executive Officer. |
|
|
|
32.2
|
|
Certification pursuant to 18 U.S.C. Section 1350 of the Interim Chief Financial Officer. |
23