e10vk
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
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(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended
September 30, 2006
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File
No. 000-50118
VistaCare, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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06-1521534
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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4800 North Scottsdale
Road,
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Suite 5000
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Scottsdale, Arizona
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85251
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(Address of principal executive
offices)
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(Zip
Code)
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(480) 648-4545
(Registrants telephone
number, including area code)
Securities
Registered Pursuant to Section 12(b) of the Act:
Class A Common Stock, $0.01 par value per
share
Securities
Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
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 þ No
o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in the definitive proxy
statement incorporated by reference into Part III of this
Form 10-K. o
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
Act). Yes o No þ
The aggregate market value of the Registrants Class A
Common Stock, held by non-affiliates, based on the closing price
(as reported by Nasdaq $15.50) of such Class A Common Stock
on the last business day of the Registrants most recently
completed second fiscal quarter (March 31, 2006) was
approximately $255,742,824. For purposes of this calculation,
the Registrant has excluded the market value of all common stock
beneficially owned by all executive officers and directors of
the Registrant.
As of December 11, 2006, there were outstanding
16,622,702 shares of the Registrants Class A
Common Stock, $0.01 par value per share.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrants 2007
Annual Meeting of Stockholders are incorporated herein by
reference in Part III of this
Form 10-K
to the extent stated herein.
PART I
VistaCare, Inc. (VistaCare, Company or we or similar
pronoun), is a Delaware corporation providing 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
patients home or other residence of choice, such as a
nursing home or assisted living community, or in a hospital or
inpatient unit. Inpatient services are provided by VistaCare at
its inpatient 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.
On August 18, 2004, VistaCares Board of Directors
changed the Companys fiscal year-end from December 31
to September 30. The financial results reported by the
Company in this Annual Report on
Form 10-K
relate to the twelve-month fiscal year ended September 30,
2006, the twelve-month fiscal year ended September 30,
2005, and the nine-month transitional period ended
September 30, 2004. In order to compare the financial
information for the twelve months ended September 30, 2005
in Managements Discussion and Analysis of Financial
Condition and Results of Operations to a like fiscal period, we
prepared financial information for the twelve months ended
September 30, 2004, which includes the nine-month
transitional period ended September 30, 2004, and the three
months ended December 31, 2003 as reported in the
Companys
Form 10-Q
for the three months ended December 31, 2003.
Overview
of Our Business
We are a leading provider of hospice services in the United
States. Through interdisciplinary teams of physicians, nurses,
home health aides, social workers, spiritual and other
counselors and volunteers, we provide care primarily designed to
reduce pain and enhance the quality of life of terminally ill
patients, most commonly in their home or other residence of
choice. Our mission is to provide superior and financially
responsible care for the physical, spiritual and emotional needs
of our patients and their families, while maintaining a
supportive environment for our employees.
We have grown rapidly since commencing operations in 1995. By
the end of 1997, our operations consisted of seven programs in
four states. In 1998, we completed two significant acquisitions
that increased our census from approximately 350 patients
to approximately 1,750 patients. Since then, we have nearly
tripled our patient census primarily through what we refer to as
organic program growth, or growth at programs that existed prior
to the beginning of the most recent fiscal year cited. As of
September 30, 2006, we had 56 hospice programs and five
in-patient units serving patients in 14 states with a
census of approximately 5,200 patients.
Our operations are built around a mission-oriented philosophy
that emphasizes superior care and open access to our services.
We believe our high care standards, distinctive service
philosophy and expertise in care management help us develop
strong relationships with the medical and consumer communities
we serve and give us a competitive advantage in obtaining
patient referrals.
During the twelve months ended September 30, 2006 we opened
three new in-patient units. On February 8, 2006, VistaCare
and Emory Healthcare announced the opening of a 28-bed hospice
in-patient unit operated by VistaCare at the Bud Terrace Wesley
Woods Skilled Nursing Facility to enhance the depth and scope of
end-of-life
care services in the Atlanta, Georgia metropolitan area and
throughout the Emory Healthcare system. On January 10,
2006, we opened a 16-bed in-patient unit in Evansville, Indiana
at Trilogy Health Systems River Pointe Health Campus. On
June 8, 2006, we admitted our first patient to a 16-bed
in-patient unit we opened in Lubbock, Texas at the Carillon
Senior Living Campus.
Indiana
Program Decertification and Recertification
On October 17, 2005, we were notified by the Centers for
Medicare and Medicaid Services (CMS) 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 termination also impacted our
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Terre Haute, Indiana program since the two programs shared 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. The terminations limited our reimbursement (for services
provided to patients being served on the effective date of
termination) and no reimbursement was available for any services
to patients admitted into the affected programs after the date
of termination. We took steps to allow the patients and families
of the affected programs to remain under our care. Some patients
transferred to another of our Indiana programs, some patients
transferred to competitor programs, and we continued to serve
some patients at the Indianapolis and Terre Haute programs
without the expectation of reimbursement. We appealed the
termination determination. With no admission of liability or
fault on our part and no admission of error or fault by CMS, on
July 5, 2006 a settlement was reached in order to avoid the
unnecessary expense of litigation and arrive at a final
resolution of the matter. Under the terms of the settlement, CMS
agreed to modify the effective date of the termination to
December 27, 2005 and we agreed to dismiss our appeal. As a
result of the settlement, during the fourth quarter of fiscal
year 2006 we billed and collected on $0.8 million in
invoices related to reimbursable services provided to patients
through January 26, 2006.
We applied to separate Terre Haute from Indianapoliss
provider number, and were approved for a separate provider
number for Terre Haute as of March 7, 2006. From
November 15, 2005 to March 6, 2006, due to the
termination of our Medicare and Medicaid provider agreements as
discussed above, we could not admit new patients to our Terre
Haute program but we continued to provide care for existing
patients without the expectation of receiving reimbursement. We
began receiving reimbursement for Medicare and Medicaid services
for our patients transferred to our new Terre Haute provider
number as of March 7, 2006. This transfer of patients,
which has been as seamless as possible to the patients and
families, was a time consuming process of discharging the
patient from one provider number and admitting the same patient
through a standard admission process at the new provider number.
These Terre Haute patient transfers were processed over several
weeks and by the end of April 2006, all patients were
transferred to the new provider number.
Following the decertification action discussed above, in order
to continue to serve the Indianapolis community, we applied for
permission to relocate our Bloomington, Indiana program to
Indianapolis, which relocation was approved by the Indiana State
Department of Health on November 11, 2005. We also
requested that our Bloomington office be approved as an
alternative delivery site (ADS) for the program that
had been relocated to Indianapolis. We also received approval
for the Bloomington office to become an ADS for the relocated
program. In early March, 2006, we began to admit new
Indianapolis and Bloomington patients. Due to the relocation,
the Indianapolis program received a Medicare certification
survey. There were no significant findings as a result of the
survey, and our plan of correction was accepted June 30,
2006.
Our operating results throughout Indiana were 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 of these costs and other costs
associated with our recertification efforts, and our inability
to admit new patients to our Terre Haute program between
October 15, 2005 and March 7, 2006, our twelve months
ended September 30, 2006 pre-tax earnings performance was
negatively impacted by approximately $7.2 million compared
to the twelve months ended September 30, 2005. The loss
primarily consisted of $8.8 million for our estimated lost
revenues due to our inability to maintain the programs at
historical levels. This loss in revenue was partially offset by
lower expenses of approximately $2.6 million, primarily due
to lower payroll. In addition, we incurred approximately
$1.0 million for legal, training, and travel costs related
to the certification matters.
Availability
of SEC Reports and Our Code of Ethics
We maintain a website with the address www.vistacare.com. We are
not including the information contained on our website as a part
of, or incorporating it by reference into, this Annual Report on
Form 10-K.
We make available free of charge through our website our Annual
Report on
Form 10-K,
Quarterly Reports on
Form 10-Q,
Current Reports on
Form 8-K,
proxy statements for our shareholder meetings, and amendments to
these reports, as soon as reasonably practicable after we
electronically file such material with, or furnish such material
to, the Securities and Exchange Commission. Information relating
to our corporate governance, including our Code of Business
Conduct and Ethics for
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our employees, officers and directors and information concerning
Board Committees, including Committee Charters, is also
available on our website at www.vistacare.com under the
Investor Relations Corporate Governance
captions. We will provide any of the foregoing information free
of charge upon written request to Investor Relations, VistaCare,
Inc., 4800 North Scottsdale Road,
Suite 5000, Scottsdale, Arizona 85251. Reports of our
executive officers, directors and any other persons required to
file securities ownership reports under Section 16(a) of
the Securities Exchange Act of 1934 are also available through
our website under the Investor Relations
Corporate Governance More Recent SEC
Filings Click Here for Section 16 Filings
captions.
Overview
of the Hospice Care Industry
Development
of the Industry
Over the past century, care for terminally ill patients in the
United States focused primarily on curative treatment, with only
secondary regard for patient comfort and immediate quality of
life concerns. The 1960s and 1970s saw the emergence of a grass
roots movement in the United States that advocated a shift in
attitude from strictly providing curative care for terminally
ill patients to providing a greater degree of physical,
emotional and spiritual comfort and care for patients and their
families at the
end-of-life.
Hospice programs were developed to provide these services.
According to the National Hospice and Palliative Care
Organization (NHPCO), since the 1970s, hospice care in the
United States has grown into a multi-billion dollar segment of
medical services that served more than 1.2 million patients
in 2005 through more than 4,100 hospice care programs in the
United States and its territories. (Source: NHPCO
Facts & Figures 2005 Findings)
Funding
Hospice Care: Medicare, Medicaid and Other Sources
Today, Medicare is the largest payor for hospice services. To
receive Medicare payment for hospice services, the hospice
medical director and, if the patient has one, the patients
attending physician, must certify that the patient has a life
expectancy of six months or less if the illness runs its normal
course. Hospice care is also covered by most private insurance
plans, and 45 states and the District of Columbia provide
hospice coverage to their Medicaid beneficiaries.
The Medicare hospice benefit covers four distinct levels of
care, each of which is subject to a different per diem
reimbursement rate. The table below sets forth a brief
description of each of the four levels of care and the base
Medicare per diem reimbursement rates in effect for the periods
indicated:
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Base Medicare per Diem
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Reimbursement Rates
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October 1, 2005
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October 1, 2004
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Through
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Through
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September 30,
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September 30,
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Level of Care
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Care Description
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2006
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2005
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Routine Home Care
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Provided through visits by members
of the interdisciplinary team to the patients home or
other residence
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$
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126.49
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$
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121.98
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General Inpatient Care
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Provided in a hospital or other
inpatient facility when pain or other symptoms cannot be managed
effectively in a home setting
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$
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562.69
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$
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542.61
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Continuous Home Care
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Provided in the patients home
or other residence to manage acute pain or other medical
symptoms for a minimum of eight hours per day, with nursing care
accounting for at least half of the care provided
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$
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738.26
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$
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711.92
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Respite Inpatient Care
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Provided for up to five days in a
hospital or other inpatient facility to relieve the
patients family or other caregivers
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$
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130.85
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$
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126.18
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These reimbursement rates are Medicares base rates which
are adjusted based on local salary levels. In 2005, routine home
care services accounted for 96.4% of all Medicare hospice days
while general inpatient care services,
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continuous home care services and respite inpatient care
services accounted for 2.9%, 0.5%, and 0.2% of Medicare hospice
days, respectively. Effective each October 1, and
occasionally at other times, Medicare establishes new base
hospice care reimbursement rates. The table below sets forth the
Medicare hospice base reimbursement rate increases since
October 1, 2001:
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Percentage Increase in
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Effective Date of Rate Increase
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Medicare Hospice Base Rates
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October 1, 2002
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3.4
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%
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October 1, 2003
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3.4
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October 1, 2004
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3.3
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October 1, 2005
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3.7
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October 1, 2006
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3.4
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%
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Medicaid reimbursement rates and hospice care coverage rates for
private insurance plans tend to approximate Medicare rates.
Market
Opportunity
We believe the hospice care industry is poised for substantial
growth over the next several years due to the following factors:
Awareness and Acceptance of Hospice Care Services is
Expanding. There has been expanding awareness and
acceptance of hospice care among the general population
evidenced by:
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the number of patients receiving hospice care has increased from
approximately 0.3 million in 1992 to approximately
1.2 million in 2005 (Source: NHPCO Facts and
Figures 2005 Findings);
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the number of hospice programs increased by 159% between 1990
and 2005 (Source: NHPCO 2006 Facts and Figures); and
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a significant percentage of commercial insurers now provide
coverage for hospice care services.
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Hospice Care Provides Significant Cost Savings and Higher
Patient and Family Satisfaction Over Traditional
Care. Recent estimates by CMS have concluded that
the cost of care for hospice patients is substantially less than
the cost of care for similarly situated patients receiving
traditional medical services, often in high acuity settings such
as hospitals. Reasons for those cost savings include:
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hospice care patients in long-term care facilities are
hospitalized fewer days in their last month of life than
long-term care facility residents not enrolled in hospice
programs, according to a March 2000 report commissioned by the
United States Department of Health and Human Services (HHS);
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hospice care patients are often transitioned from expensive
treatments, such as chemotherapy and radiation, to less
expensive forms of palliative care; and
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hospice care patients generally require less emergency care,
which typically involves costly transportation, paramedics,
emergency room and other charges.
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family and patient surveys, such as the Family Evaluation of
Hospice Care (FEHC) survey, and testimonials all support the
conclusion that patient and family satisfaction with hospice
services is much higher compared to traditional care.
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We believe that government and other payors will continue to
encourage and support the use of hospice care because of such
cost savings.
The American Population is Aging. In 2005, 81%
of our patients were over the age of 65 at the time of
admission. Data from the United States Census Bureau indicate
that this segment of the American population is expected to grow
at a rate three times greater than the rate of the general
population between 2002 and 2022. According to the United States
Census Bureau, the number of Americans over the age of 65 will
increase from 35.0 million in 2000 to 71.5 million in
2030. Also, according to recent estimates by CMS, the
U.S. population is expected to age rapidly through 2030,
when 19.6% of the population will be over 65, compared with
12.4% in 2000.
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We expect that as this segment of the population grows, the
demand for
end-of-life
services, including hospice care, will increase accordingly.
Hospice Services Are Underutilized. Although
the number of hospice patients has increased rapidly in recent
years, we believe that a significant number of hospice-eligible
patients do not take advantage of hospice care. According to our
internal estimates, approximately 40% to 45% of the
2.5 million U.S. hospice eligible patients currently
utilize the hospice benefit. NHPCO estimates that a great
majority of hospice eligible patients have not yet received
information about hospice care. A study by The National Hospice
Foundation concluded that 80% of Americans were not aware that
hospice care can be provided in the home and 90% did not know
that hospice care is covered by Medicare. We believe that the
following factors contribute to the current underutilization of
hospice care:
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resistance to or misunderstanding of the benefits of hospice
care; and
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restrictive eligibility criteria on the part of some hospice
care providers, including denying enrollment to patients who
wish to continue to maintain certain forms of aggressive
treatment or patients who do not have a principal caregiver.
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We believe that as awareness and acceptance of hospice care
grows and hospice programs develop a reputation for consistent,
high quality care, utilization of hospice services will increase.
Industry
Consolidation and Government Initiatives
In addition to favorable industry growth conditions, we believe
that consolidation in the hospice care industry will provide
opportunities for us to grow our business. Based on the
NHPCOs industry data, approximately 68% of the hospice
programs in 2005 were local,
not-for-profit
hospice programs. Privately funded programs accounted for 27% of
the hospice programs in 2005, an increase of more than 20% since
2001 and the remaining 5% was comprised of government sponsored
hospice programs. Demanding market conditions are making it
difficult for smaller providers to offer cost-effective, quality
care. We believe that the fragmented hospice care industry is
poised for consolidation and that large, well-managed hospice
providers are best positioned to affiliate with or consolidate
smaller hospice care providers.
Notwithstanding the recent increase in awareness and acceptance
of hospice care, we believe that most Americans still lack a
basic understanding of the benefits that hospice care offers and
are unaware that Medicare, Medicaid and private insurers provide
coverage for hospice care. In an effort to increase awareness
and acceptance, medical societies, patient advocacy groups,
private foundations and the hospice care industry have all
undertaken campaigns in recent years to educate physicians and
the public about the benefits of hospice care. In March 2003,
CMS published an article urging physicians to raise awareness of
hospice care among their patients and to recommend hospice care
to qualified beneficiaries.
Our
Competitive Strengths
We believe a number of factors differentiate us from our
competitors and provide us with important competitive advantages.
We Benefit from Being One of the Nations Largest
Hospice Care Providers. As a result of having a
patient census among the highest of all hospice providers in the
United States, we are able to negotiate volume discounts on the
purchase of pharmaceuticals, durable medical equipment and
medical supplies, enter into favorable contracts with private
insurers and pharmacy benefit managers and to spread certain
fixed expenses, such as corporate overhead, information
technology and marketing, over a large patient population. In
addition, the geographic scope of our operations gives us a
competitive advantage in developing referral relationships with
national and regional nursing home and assisted living companies
who, we believe, often seek the administrative and service
consistency benefits resulting from working with a limited
number of providers.
We Have Implemented a Highly Effective Pharmacy Cost Control
System. Pharmaceuticals represent our second
largest category of patient care expenses. To manage this
expense, we have developed and implemented a comprehensive
pharmacy cost management system. This system has allowed us to
achieve an average daily
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pharmacy cost per patient that is significantly lower than the
industry average. Our pharmacy cost management system involves:
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a flexible, proprietary, disease and symptom-specific drug
formulary that emphasizes the use of generic drugs, if as
effective as the brand-name alternative;
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the use of our proprietary software applications to streamline
the enrollment of our patients into a nationwide network of
pharmacies;
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the commitment of our clinical staff in working with our
patients and families to assure the most appropriate plan of
care in the most cost effective manner; and
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an education program for our physicians and nurses that
emphasizes both clinical and cost effectiveness.
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We Provide Open Access to Hospice-Eligible
Patients. Our service philosophy is to provide
hospice care to all adult patients who are eligible to receive
hospice care under Medicare guidelines, regardless of the
complexity of their illness. We call this philosophy open
access. In a May 2002 report to Congress, the Medical
Payment Advisory Commission (MedPAC) concluded that many
patients who meet Medicare hospice eligibility requirements
currently have problems accessing hospice care because of
restrictive admission criteria on the part of some hospice care
providers. Operating with an open access philosophy enables us
to remove these barriers to hospice care access and to achieve
important competitive advantages, including:
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Building Strong relationships with our referral
sources. We believe that our open access service
philosophy helps us build strong relationships with our referral
sources because we will accept all hospice-eligible adult
patients referred to us; and
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Greater utilization of our services, resulting in lower
direct care expenses. Patient care expenses are
generally higher during the initial and latter days of care. In
the initial days of care, expenses tend to be higher because of
the initial purchases of pharmaceuticals, medical equipment and
supplies and the administrative expenses of determining the
patients hospice eligibility, registering the patient and
organizing the plan of care. In the latter days of care,
expenses tend to be higher because patients generally require
more services, especially pharmaceuticals and nursing care, due
to their deteriorating medical condition. Therefore, when we
increase the number of days a patient stays in our care, we
increase the number of lower cost days over which our expenses
are spread although extensively longer stays can have the
benefit reduced if the Medicare Cap limitation commences. Our
open access philosophy involves a commitment on the part of all
our staff to encourage patients to use our services, and
referral sources to refer patients, at the earliest stage of
hospice eligibility.
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We Have an Experienced Management Team. We
have assembled a management team at both the corporate and
program level with the clinical, operating, regulatory and
business experience to grow our company and operate it
profitably. Our senior clinical, compliance and operations
executives have an average of 11 years experience in the
hospice care industry.
Our
Business Strategy
We intend to enhance our position as a market leader in the
hospice care industry by pursuing the following strategies:
Continue
to Drive Census Growth at Existing Programs
An important aspect of our growth strategy involves increasing
patient census within our existing programs. Existing programs
are those that existed prior to the beginning of the fiscal
year. Since the end of 1998, following the completion of our
last material acquisition, through September 30, 2006, we
grew our existing program patient
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census by approximately 217%, from 1,579 to 5,006 patients.
We intend to continue to increase our existing program growth by:
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Continuing to provide superior quality of
care. We have driven our existing program growth
to date largely through word of mouth
recommendations based on the quality of our care. Consistent
with our mission, we will continue to focus our efforts on
providing superior care to our patients and their families;
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Building relationships that enhance our presence in local
markets. We intend to increase our presence in
local markets by fostering relationships with physicians,
discharge planners, local faith-based and other community
organizations and their leaders, through advocacy and by
providing educational workshops on hospice care and other
end-of-life
issues;
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Focusing on our formal marketing
initiatives. We continue to focus our
company-wide marketing program on expanding awareness and
acceptance of hospice care and increasing our market share. As
mentioned above, our existing program census has experienced
substantial growth. We believe that a continued commitment to
these initiatives will help us to continue growing; and
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Building relationships with national and regional nursing
homes, assisted living communities and managed care
organizations. By building relationships with
nursing home chains, assisted living providers, and managed care
organizations, we hope to develop steady referral sources that
have the ability to provide multiple referrals on an on-going
basis.
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Effectively
Manage Our Operating and SG&A Expenses
In recent years, the annual per-beneficiary Medicare Cap on
reimbursement has negatively impacted our revenues and operating
results. In addition, we have worked to reduce and better
control our patient care and SG&A expense in 2006 and will
continue to focus on this in the future. We are committed to
controlling our expenses and making more predictable our
exposure to Medicare Cap liabilities by:
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focusing on patient mix at Medicare Cap affected programs by
focused marketing to specific referral sources, such as
hospitals, that are more likely to refer patients with shorter
lengths of stay;
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maximizing admissions and readmissions;
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expanding our patient census in markets that we have the
opportunity to expand our market share in; and
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implementing programs to reduce labor, patient care and SG&A
expenses and to maintain high quality patient care efficiently
in the future.
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Focus
on Developing and Supporting our Employees
We are committed to maintaining a superior work environment
consisting of competitive compensation, proper staffing, useful
management tools and extensive internal training. All of our
full-time employees participate in a performance-based incentive
compensation program that rewards them based on a combination of
factors including quality of care, compliance, profitability and
census growth. We analyze current data from each of our programs
in order to adjust staffing levels in response to or in
anticipation of fluctuations in patient census so that we can
minimize staff turnover. We are also in the process of
developing technology tools designed to reduce administrative
paperwork and enable our clinical staff to focus on patient
care. Our turnover rate has decreased from 37.4% for the year
ended September 30, 2005 to 33.0% for the year ended
September 30, 2006. We calculate turnover rates on a
quarterly basis by dividing the number of terminated employees
by the total number of employees employed during a quarter.
Turnover for the trailing twelve months is derived by dividing
the total terminated employees in the previous four quarters by
the average number of employees employed during the previous
four quarters.
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Grow
Market Share through New Program Development and Selective
Acquisitions
We intend to expand our services in existing and new markets.
Factors we consider when examining expansion opportunities
include the following:
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hospice utilization and the number of eligible beneficiaries in
the community who are not receiving hospice care;
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proximity to our existing programs and our ability to leverage
our local resources through regional density;
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existing competition;
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the potential profitability of the new hospice market;
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the regulatory environment; and
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the potential to leverage our existing patient care and SG&A
infrastructure and better manage our Medicare Cap expense.
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For an explanation of Medicare Cap, see Program Limits on
Hospice Care Payments below under the caption
Government Regulation, Overview of Government
Payments.
After we identify a market that fits our criteria for expansion,
we may choose to develop or acquire a new hospice program or
enter into a strategic alliance with an existing hospice
program. If a potential new market is located within the
geographical coverage area of an existing programs
Medicare provider certification, we may establish an Alternative
Delivery Site (ADS). Alternate Delivery Sites are
newly developed sites that operate under the provider number of
an existing program, providing a more accelerated and
cost-effective development process and in some locations,
helping mitigate Medicare Cap expense. Because small, non-urban,
not-for-profit
hospice providers dominate the United States hospice care
industry, and because demanding market conditions have made it
more difficult for small providers to offer cost-effective
quality care, we believe that there will be opportunities for us
to acquire or enter into strategic alliances with existing
programs. We believe that because of the quality of our care,
our management capabilities and our dedication to open access,
smaller hospice programs, including
not-for-profit
providers, may look favorably on combining their operations with
ours.
In markets where there are no suitable acquisition or strategic
alliance opportunities, we may develop a new program. When we
develop a new program, we first deploy a small staff and acquire
necessary office space, and begin to develop referral sources
and obtain contracts. We acquire appropriate licensure, admit a
small number of patients and request a Medicare certification
survey. Following Medicare certification, we employ recruiting,
training, community education and marketing efforts to build
census.
Hospice care usage by Medicare beneficiaries in non-urban areas
has increased dramatically in recent years. A significant
portion of our current business involves providing care in these
areas. We plan to continue to focus on building market share in
both the urban and the non-urban markets in which we currently
operate and in new non-urban markets on the outskirts of major
metropolitan areas. We find these markets particularly
attractive because:
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we tend to encounter less competition from larger healthcare
institutions devoted to aggressive curative care;
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we are able to develop a dominant market share by quickly
building relationships and brand identity with local referral
sources; and
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we can begin to develop a regional market presence to better
service similarly located multi-program referral sources, such
as hospital, nursing home and assisted living companies.
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Our
Services
We provide a full range of hospice services, from pain and
symptom control to emotional and spiritual support, tailored to
the individual needs of our patients and their families. Each
patient who enrolls in one of our programs is assigned an
interdisciplinary care team consisting of, depending on the
patients needs, a physician, a nurse, a home health aide,
a social worker, occupational, physical and speech pathology
therapists, a spiritual counselor, a dietary
10
counselor, a volunteer, and a bereavement coordinator. Below is
a list of the key services that may be provided based on the
patients plan of care:
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pain and symptom management;
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emotional and spiritual support;
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nursing;
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personal care by home health aides;
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social services counseling;
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spiritual counseling;
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physician services;
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bereavement counseling for 13 months after the
patients death;
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dietary counseling;
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homemaker services;
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medical equipment and supplies;
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medications;
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special palliative modalities such as radiation therapy,
chemotherapy and infusion therapy;
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inpatient and respite care;
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physical, occupational and speech therapy; and
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diagnostic testing.
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Hospice services are provided predominately in the
patients home or other residence of choice, such as a
nursing home or assisted living community, or in a hospital or
inpatient unit. Inpatient services are provided by VistaCare at
its inpatient 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.
Marketing
and Referral Relationships
The primary focus of our marketing activities is on increasing
patient referrals from existing referral sources and
establishing new referral sources. Our referral sources include:
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hospitals;
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physicians;
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nursing homes;
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assisted living communities;
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managed care companies;
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community social service organizations;
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religious organizations;
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patients and families; and
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home health care organizations.
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Historically, we have dedicated relatively few resources to
formal marketing activities. Most of our referrals have been the
result of word of mouth among referral sources about
the high quality of our care. Beginning in 2002, we implemented
a standardized marketing strategy. A key element of our current
marketing strategy is
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training our professional relations representatives and
providing them with the tools to communicate effectively to a
variety of different types of referral sources, including
referral sources with which an individual professional relations
representative may not have had significant prior experience.
Each of our hospice care programs has a marketing team led by
the programs executive director who directs at least one
director of professional relations. A program typically employs
between two and three professional relations representatives. At
September 30, 2006, we employed 130 professional relations
representatives company-wide. Consistent with our belief that
marketing is a team effort, each programs marketing team
is supported by other program employees, including admissions
coordinators, patient care managers, medical directors,
chaplains, social workers, counselors and nurses. Each
professional relations representative seeks to develop patient
referral sources located in the representatives territory
by regularly calling on those referral sources and educating
them regarding our services and hospice care generally. Our
professional relations representatives along with
our clinical staff provide feedback to those sources
regarding the status of referred patients, as appropriate. Our
marketing efforts also include educational seminars for
physicians and hospital personnel and community-based events.
Information
Technology
We believe that high levels of automation and technology are
essential to maintain our competitive position, and we continue
to invest responsibly and cost-effectively in computer hardware,
software applications and networks to enhance our financial,
operational, clinical, and compliance performance. In an effort
to ensure we are using the appropriate technology for our
industry, we will continue to compare our proprietary
applications against all commercially available applications,
which will include an Electronic Medical Record system. In 2006
we requested a proposal for a patient care management and
reimbursement billing system to replace our current proprietary
system. We are currently evaluating the proposals received and
will likely make a decision in fiscal 2007 whether to select a
new system or develop an enhanced version of our currently used
system.
Compliance
We have a strong commitment to operating our business in a
manner that adheres to all regulatory requirements, internal
company policies and procedures and our corporate philosophy. We
have adopted a proactive approach to compliance that includes:
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developing information systems that allow us to continuously
monitor our performance in key areas;
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performing internal compliance audits;
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enhancing a continuous quality improvement process designed to
ensure regulatory compliance and improve patient care;
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implementing a field-based, clinical education and training team.
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Education
and Training
As we continually strive to deliver quality patient care, we
understand that our most valuable asset is our people. As a
result, we continue to build an education and training program
that focuses on the changing needs of our employees, utilizes
adult learning theory, has multiple delivery methods and
integrates with the requirements of our operating units. In
partnership with leadership, we believe this dynamic approach
will support increased employee development and satisfaction,
ensuring consistent, superior care of our patients and families.
Competition
Hospice care in the United States is competitive. The hospice
care industry is highly fragmented and we compete with a large
number of organizations, some of which have significantly
greater financial and marketing resources than we have and we
compete with
not-for-profit
hospice programs that have strong ties to local medical
communities. Based on industry data published by the NHPCO,
approximately 68% of existing hospice programs in 2005 were
charity funded or
not-for-profit
hospice programs. Privately funded or for-profit programs
comprised
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approximately 27% of existing hospice programs in 2005. We also
compete with other multi-program hospice companies including
Odyssey Healthcare Inc. and Chemed Corporations subsidiary
VITAS Healthcare Corporation.
In addition, we compete with a number of hospitals, nursing
homes, home health agencies and other health care providers that
offer home care to patients who are terminally ill, or market
palliative care and hospice-like programs. In
addition, various health care companies have diversified into
the hospice market, including Beverly Enterprises, Inc. and
Manor Care, Inc.
As demonstrated by the growth of hospice programs from 3,300 in
2003, to 4,160 in 2005, relatively few barriers to entry exist
in most hospice service markets. Accordingly, other companies
that are not currently providing hospice care may enter these
markets or expand the variety of services they offer to include
hospice care.
Insurance
We are covered by a general liability insurance policy on an
occurrence basis with limits of $1.0 million per occurrence
and $3.0 million in the aggregate. We are also covered by a
healthcare professional liability insurance policy on a
claims-made basis with limits of $1.0 million for each
medical incident and $3.0 million in the aggregate. We
maintain workers compensation coverage at the statutory limits
and an employers liability policy with a $1.0 million
limit, both with a $250,000 deductible per occurrence. We also
maintain a policy insuring hired and non-owned automobiles with
a $1.0 million limit of liability and a $1.0 million
deductible. In addition, we maintain umbrella coverage with a
limit of $10.0 million excess over the general,
professional, hired and non-owned automobile and employers
liability policies. We have not experienced any uninsured health
care negligence losses.
Government
Regulation
General
As a provider of healthcare services, we are subject to
extensive federal, state and local statutes and regulations.
These laws and regulations significantly affect the way in which
we operate our business. For example, we must comply with laws
relating to hospice care eligibility, the development and
maintenance of plans of care, and the coordination of services
with nursing homes or assisted living facilities where many of
our patients live. In addition, each state in which we operate
has its own licensing requirements with which we must comply.
We also must comply with regulations and conditions of
participation to be eligible to receive payments from various
federal and state government-sponsored healthcare programs, such
as Medicare and Medicaid. Medicare is a federally funded and
administered health insurance program, primarily for individuals
entitled to Social Security benefits who are 65 years of
age or older or who are disabled. Medicaid is a medical
assistance program, jointly funded by the states and the federal
government and administered by the states, that provides certain
medical and psychiatric care services to qualifying low-income
persons. States are not required to provide Medicaid coverage
for hospice services, but 45 states and the District of
Columbia currently do so. All 14 states in which we
currently operate offer coverage for hospice services under
their Medicaid programs. States that provide a Medicaid hospice
benefit may limit the days for which hospice service will be
covered, establish pre-authorization processes that can deny or
delay access to hospice care, or establish Medicaid managed care
programs that include only limited forms of hospice care
coverage.
In the future, we may choose to provide hospice care services in
one of the few states that do not provide Medicaid coverage for
hospice services.
Medicare
Conditions of Participation for Hospice Programs
Federal regulations established as part of the Medicare program
require that every hospice program continue to satisfy various
conditions of participation to be certified and receive payment
for the services it provides. Compliance with the conditions of
participation is monitored by state survey agencies designated
by the Medicare program. In some cases, failure to comply with
the conditions may result in payment denials, the imposition of
fines or penalties, or the implementation of a corrective action
plan. In extreme cases or cases where there is a history of
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repeat violations, a state survey agency may recommend a
suspension of new admissions to the program or termination of
the program in its entirety.
The Medicare conditions of participation for hospice programs
include the following:
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General Provisions. Each hospice must be
primarily engaged in provision of hospice services.
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Governing Body. Each hospice must have a
governing body that assumes full responsibility for the policies
and the overall operation of the hospice and for ensuring that
all services are provided in a manner consistent with accepted
standards of practice. The governing body must designate one
individual who is responsible for the
day-to-day
administrative operations of the hospice;
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Medical Director. Each hospice must have a
medical director who is a physician and who assumes
responsibility for overseeing the medical component of the
hospices patient care program;
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Professional Management of Non-Core
Services. A hospice may arrange to have non-core
services such as therapy services, home health aide services,
medical supplies or drugs provided by a non-employee or outside
entity. If the hospice elects to use an independent contractor
to provide non-core services, however, the hospice must retain
professional management responsibility for the arranged services
and ensure that the services are furnished in a safe and
effective manner by qualified personnel, and in accordance with
the patients plan of care;
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Plan of Care. The patients attending
physician, the medical director or designated hospice physician,
and the interdisciplinary team must establish an individualized
written plan of care prior to providing care to any hospice
patient. The plan must assess the patients needs and
identify services to be provided to meet those needs and must be
reviewed and updated at specified intervals;
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Continuation of Care. A hospice may not
discontinue or reduce care provided to a Medicare beneficiary if
the individual becomes unable to pay for that care;
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Informed Consent. The hospice must obtain the
informed consent of the hospice patient, or the patients
representative that specifies the type of care services that may
be provided as hospice care;
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Training. A hospice must provide ongoing
training for its employees;
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Quality Assurance. A hospice must conduct
ongoing and comprehensive self-assessments of the quality and
appropriateness of care it provides and that its contractors
provide under arrangements to hospice patients;
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Interdisciplinary Team. A hospice must
designate an interdisciplinary team to provide or supervise
hospice care services. The interdisciplinary team develops and
updates plans of care, and establishes policies governing the
day-to-day
provision of hospice services. The team must include at least a
physician, registered nurse, social worker and spiritual or
other counselor. A registered nurse must be designated to
coordinate the plan of care;
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Volunteers. Hospice programs are required to
recruit and train volunteers to provide patient care services or
administrative services. Volunteer services must be provided in
an amount equal to at least five percent of the total patient
care hours provided by all paid hospice employees and contract
staff;
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Licensure. Each hospice and all hospice
personnel must be licensed, certified or registered in
accordance with applicable federal, state and local laws and
regulations;
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Central Clinical Records. Hospice programs
must maintain clinical records for each hospice patient and the
records must be organized in such a way that they may be easily
retrieved. The clinical records must be complete and accurate
and protected against loss, destruction and unauthorized use;
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Furnishing of Core Services. Substantially all
nursing, social work and counseling services must be provided
directly by hospice employees meeting specific educational and
professional standards. During periods of peak patient loads or
under extraordinary circumstances, the hospice may be permitted
to use
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contract workers, but the hospice must agree in writing to
maintain professional, financial and administrative
responsibility for the services provided by those individuals or
entities;
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Nursing Services. Hospice must provide nursing
services by or under the direction of a registered nurse;
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Medical Social Services. Services provided by
a social worker must be provided under the direction of a
physician;
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Physician Services. Hospice physicians must
provide services for the palliation and management of the
terminal illness and related conditions as well as meet the
general medical needs to the extent the needs are not met by the
attending physician;
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Counseling Services. Services must be
available to the patient and family and include bereavement,
dietary, spiritual and any other counseling;
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Furnishing of Other Services. Physical,
occupational and speech pathology must be available;
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Home Health Aide and Homemaker
Services. Services must be available to meet the
needs of the patients;
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Medical Supplies. Medical supplies and
medications must be provided as needed for the palliation and
management of the terminal condition; and
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Short Term Inpatient Care. Inpatient care must
be available for pain control and symptom management. It can be
provided in a hospice inpatient facility or under contract in a
hospital or skilled nursing facility.
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Surveys
and Audits
Hospice programs are subject to periodic survey by federal and
state governmental authorities to ensure compliance with various
licensing and certification requirements. Regulators conduct
periodic surveys of hospice programs and provide reports
containing statements of deficiencies for alleged failure to
comply with various regulatory requirements. Survey reports and
statements of deficiencies are common in the healthcare
industry. In most cases, the hospice program and reviewing
agency will agree upon the steps to be taken to bring the
hospice into compliance with applicable regulatory requirements.
In some cases, however, a state or federal agency may take a
number of adverse actions against a hospice provider, including:
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the imposition of fines;
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temporary suspension of admission of new patients to the
hospices service;
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de-certification from participation in the Medicare or Medicaid
programs; or
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revocation of the hospices license.
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Under the various applicable regulations, if the reviewing
agency takes adverse action against a hospice provider, the
provider has the opportunity to appeal the agency decision. The
hospice provider is generally required to exhaust its
administrative remedies before being able to challenge the
adverse action in court. While the appeal is being pursued, the
hospice provider typically is not reimbursed for services to
patients.
Billing Audits/Claims Reviews. Medicare fiscal
intermediaries and other payors periodically conduct pre-payment
or post-payment medical reviews or other audits of our claims.
In order to conduct these reviews, the payor requests
documentation from us and then reviews that documentation to
determine compliance with applicable rules and regulations,
including the eligibility of patients to receive hospice
benefits, the appropriateness of the care provided to those
patients, and the documentation of that care. Historically, we
have had a certain number of claims denied as a result of these
reviews.
Certificate/Determination of Need Laws and Other
Restrictions. Approximately 14 states
continue to have certificate/determination of need laws that
seek to limit the number or size of hospice care providers.
These states require some form of state agency review or
approval before a hospice may add new services or undertake
significant capital expenditures. Approval under these
certificate of need laws is generally conditioned on the showing
of a demonstrable need for services in the community. In the
future we may seek to develop or acquire hospice programs in
states having certificate of need laws. To the extent that state
agencies require us to obtain a
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certificate of need or other similar approvals to expand
services at our existing hospice programs or to make
acquisitions or develop hospice programs in new or existing
geographic markets, our plans could be adversely affected by a
failure to obtain a certificate or approval.
Limitations on For-Profit Ownership. A few
states have laws that restrict the development and expansion of
for-profit hospice programs. For example, Florida does not
permit the operation of a hospice by a for-profit corporation
unless it was operated in that capacity on or before
July 1, 1978, although the law might permit us to purchase
a grandfathered for-profit hospice and continue to operate it.
New York law states that a hospice cannot be owned by a
corporation that has another corporation as a stockholder. These
types of state law restrictions could affect our ability to
expand into New York or Florida, or other locations with similar
restrictions.
Limits on the Acquisition or Conversion of Non-Profit Health
Care Corporations. An increasing number of states
require government review, public hearings,
and/or
government approval of transactions in which a for-profit entity
proposes to purchase or otherwise assume the operations of a
non-profit healthcare facility or insurer. Heightened scrutiny
of these transactions may significantly increase the expenses
associated with future acquisitions of non-profit hospice
programs in some states, otherwise increase the difficulty in
completing those acquisitions, or prevent them entirely. We
cannot assure you that we will not encounter regulatory or
governmental obstacles in connection with our acquisition of
non-profit hospice programs in the future.
Professional Licensure and Participation
Agreements. Many of our employees are subject to
federal and state laws and regulations governing the ethics and
practice of their chosen profession, including physicians,
physical, speech and occupational therapists, social workers,
home health aides, pharmacists and nurses. In addition, those
professionals who are eligible to participate in the Medicare,
Medicaid or other federal health care programs as individuals
must not have been excluded from participation in those programs
at any time.
Overview
of Government Payments General
Payments from Medicare and Medicaid are subject to legislative
and regulatory changes and are susceptible to budgetary
pressures. Our revenues and profitability are therefore subject
to the effect of those changes and to possible reductions in
coverage or payment rates by private third-party payors. For the
years ended September 30, 2006 and September 30, 2005,
approximately 97% and 97%, respectively, of our net patient
revenues was attributable to Medicare and Medicaid payments. As
a result, any changes in the regulatory, payment or enforcement
landscape may significantly affect our operations.
Overview
of Government Payments Medicare
Medicare Eligibility Criteria. To receive
Medicare payment for hospice services, the hospice medical
director and, if the patient has one, the patients
attending physician, must certify that the patient has a life
expectancy of six months or less if the illness runs its normal
course. This determination is made based on the physicians
clinical judgment. Due to the uncertainty of such prognoses,
however, it is likely that some percentage of our patients will
not pass away within six months of entering the hospice program.
The Medicare program (among other third-party payors) recognizes
that terminal illnesses often do not follow an entirely
predictable course, and therefore, the hospice benefit remains
available to beneficiaries as long as the hospice physician or
the patients attending physician continues to certify that
the patients life expectancy remains six months or less.
Specifically, the Medicare hospice benefit provides for two
initial
90-day
benefit periods followed by an unlimited number of
60-day
periods. A Medicare beneficiary may revoke his or her election
of the Medicare hospice benefit at any time and resume receiving
regular Medicare benefits. The patient may elect the hospice
benefit again at a later date so long as he or she remains
eligible.
Levels of Care. Medicare pays for hospice
services on a prospective payment system basis under which we
receive an established payment for each day that we provide
hospice services to a Medicare beneficiary, depending upon the
level of service provided. These rates are then subject to
annual adjustments for inflation and may also be adjusted based
upon the location where the services are provided due to
variability in labor expenses the greatest
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single expense for hospice programs. The rate we receive will
vary depending on which of the following four levels of care is
being provided to the beneficiary:
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Routine Home Care. We are paid the routine
home care rate for each day that a patient is in our program and
is not receiving one of the other levels of care or when a
patient is receiving hospital care for a condition that is not
related to his or her terminal illness. We are paid the same
daily rate regardless of the volume or intensity of the services
provided to the patient and his or her family.
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General Inpatient Care. General inpatient care
is provided when a patient requires inpatient services for a
short period for pain control or symptom management that
typically cannot be provided in other settings. General
inpatient care services must be provided in a contracted
Medicare or Medicaid certified hospital or long-term care
facility or at a freestanding inpatient hospice unit with the
required registered nurse staffing.
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Continuous Home Care. Continuous home care is
provided only during periods of crisis when a hospice patient
requires predominantly nursing care to achieve palliation or
management of acute medical problems in the patients
residence. Medicare requires that at least eight hours of
services be provided (licensed nursing care must be provided for
at least half of the time) within a single day in order to
qualify for reimbursement under the continuous home care
provisions. While the Medicare published continuous home care
rates are daily rates, Medicare actually pays for continuous
home care services on an hourly basis. This hourly rate can be
obtained by dividing the daily rate by 24.
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Respite Care. Respite care permits a hospice
patient to receive services on an inpatient basis for a short
period of time in order to relieve the patients family or
other caregivers from the demands of caring for the patient. We
can receive payment for respite care provided to a patient for
up to five consecutive days at a time on an occasional basis.
Any additional consecutive days of respite care will be
reimbursed at the routine home care rate.
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Program Limits on Hospice Care
Payments. Medicare payments for hospice services
are subject to two additional limits or Caps, both
of which are assessed on a provider-wide basis. Within our
business, we have 37 separate provider numbers for Medicare
Cap purposes, each of which includes one or more of our 56
programs.
The first of these two Caps applies only to Medicare inpatient
services. Specifically, if the number of hospice program
provided to Medicare beneficiaries exceeds 20% of the total days
of hospice care such program provides to all patients for an
annual period beginning September 28, the days in excess of
the 20% figure may be reimbursed only at the routine home care
rate. None of VistaCares hospice programs exceeded the
payment limits on inpatient services in the last three Cap years.
The second Cap is a limit on the total amount of Medicare
payments that will be made to each of our programs operating
under distinct provider numbers. This Medicare Cap amount is the
aggregate limitation on reimbursement on a per beneficiary
basis, and is revised annually to account for inflation. The
Medicare Cap year for establishing a limit on the total amount
paid to a provider begins on November 1 of each year and
ends on October 31 of the following year. The Medicare Cap
amount for any given year is usually announced by CMS during the
month of August of that Medicare Cap year. As a result, a
provider must estimate the Medicare Cap amount for approximately
nine or ten months during the current Medicare Cap year based
upon the prior years Medicare Cap amount and an
anticipated inflation factor. For the Medicare Cap year ended
October 31, 2006, the Medicare Cap was $20,585.39 per
beneficiary. Medicare and Medicaid currently provide for an
annual adjustment of the various hospice payment rates based on
the increase or decrease of the Medical Care Services category
as published by the Consumer Price Index. These hospice rate
increases have historically been less than actual inflation.
Compliance with the Medicare Cap is not determined on the basis
of an individual beneficiarys experience, but is measured
by calculating the total Medicare payments received under a
given provider number with respect to services provided to all
Medicare hospice care beneficiaries served within the provider
number between each November 1 and October 31 of the
following year (the Medicare Cap year). The result
is then compared with the product of the Medicare Cap amount and
the number of Medicare beneficiaries electing hospice care for
the first time from that hospice provider during the relevant
period (September 28 of each year and September 27 of the
following year). There are further negative adjustments for the
Medicare Cap calculation to the extent any of our first time
beneficiaries are later admitted for hospice care to another
provider, and there are also positive adjustments for
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beneficiaries with a previous hospice election in another
providers program who are admitted to one of our hospice
providers. Those adjustments are pro-rated based on days of
service. If actual Medicare reimbursements paid to the provider
during the Medicare Cap year exceed the Medicare Cap amount
calculated, Medicare requires that we repay the difference to
Medicare.
For the Medicare Cap year ended October 31, 2005, CMS
announced on August 26, 2005 that the Medicare Cap was
$19,777.51 per beneficiary. This Medicare Cap amount for
2005 was lower than the Company had estimated prior to the CMS
announcement in August 2005. VistaCare, as did other hospice
providers, had calculated its financial accounting during 2005
based upon the expectation that published 2004 Medicare Cap
amount would be increased by an estimated inflation factor. As
is described below, the 2005 rate was considerably less than
what providers had expected, due to CMS indicating in August
2005 that the published 2004 Medicare amount was incorrect. As a
result, VistaCare (and other hospice providers) announced in
August 2005 that there would be additional charges recorded in
2005 due to the adverse impact on revenues of the lower than
expected 2005 Medicare Cap amount.
In the same August 26, 2005 CMS transmittal, CMS announced
CMS has determined that the hospice Medicare Cap amount of
the Medicare Cap year ending October 31, 2004, was
incorrectly computed. That transmittal indicated that
additional instructions regarding this will be published
in a separate transmittal. As of December 8, 2006,
CMS had not published a corrected amount or provided any
additional instructions. Management has determined that
CMS error in computing the rate was due to CMS using a
different medical inflation index in 2003 and 2004 to compute
the Medicare Cap amount, than was used in prior years.
Therefore, both the 2004 Medicare Cap amount and the 2003
Medicare Cap amount previously published by CMS have the
potential of being retroactively corrected. The potential
financial impact, should this occur, has been recorded in our
financial statements.
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 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.
Our estimate is based on a projection model that forecasts the
annual amount we could be required to repay Medicare based upon
the programs actual historical program specific
admissions, discharge rate, pro-ration of patient days and
average length of stay data.
Key projection model assumptions include:
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CMS will calculate the hospice Medicare Cap amount in a manner
consistent with prior years;
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our fiscal intermediary will calculate our Medicare Cap
liability in a manner consistent with prior years; and
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our Medicare Cap expense is incurred ratably throughout the
Medicare fiscal year and therefore our estimate of such expense
should be recorded ratably over the corresponding periods of our
fiscal year.
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The Company believes that there are no realistic alternative
assumptions upon which to estimate Medicare Cap expense.
Throughout the year, we review our operating experience and
previous year assessment and adjust our estimates of potential
Medicare Cap liability from the projection model.
The accuracy of our estimates is affected by many factors,
including:
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the actual number of Medicare beneficiary patient admissions and
discharges and the dates of occurrence of each;
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the average length of stay within each provider number, with
those provider groups having patients averaging over
180 days most likely to generate Medicare Cap exposure;
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fluctuations in weekly enrollment
and/or
discharges;
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our success in implementing corrective measures;
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possible enrollment of beneficiaries in our providers who,
without our knowledge, may have previously elected Medicare
hospice coverage through another hospice provider and whose
Medicare Cap amount is prorated for the days of service for the
previous hospice admission;
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the possible enrollment of beneficiaries with another hospice
provider who had been on previous hospice service with one of
our own hospice providers and whose Medicare Cap amount is
prorated between the providers for the days of service for the
subsequent hospice admission;
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fiscal intermediary disallowances of certain beneficiaries and
changes in calculation methodology;
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uncertainty surrounding length of patient stay in various
patient groups, particularly with respect to non-oncology
patients; and
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the fact that we are not advised of the Medicare Cap per
beneficiary reimbursement amount that will be used by Medicare
to calculate our Medicare Cap exposure until the end of the
Medicare Cap year, requiring us to use an estimate of that
amount throughout the year.
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Between 2002 and 2005, certain of our hospice programs operating
under a maximum of nine of our hospice provider numbers exceeded
the Medicare Cap amount during any one of those Medicare Cap
years. As a result, we were required to repay a portion of
payments previously received from Medicare. We actively monitor
the Medicare Cap amount at each of our programs and seek to
implement corrective measures as necessary. We maintain what we
believe are adequate reserves in the event that we exceed the
Medicare Cap in any given fiscal year. We cannot assure you that
one or more of our hospice programs will not exceed the Medicare
Cap amount in the future.
Medicare Managed Care Programs. The Medicare
program has entered into contracts with managed care companies
to provide a managed care benefit to those Medicare
beneficiaries who wish to participate in managed care programs,
commonly referred to as Medicare HMOs, Medicare + Choice or
Medicare Advantage Plans risk products. We provide hospice care
to Medicare beneficiaries who participate in these managed care
programs. Our payments for services provided to Medicare
beneficiaries enrolled in Medicare HMO programs are processed in
the same way and at the same rates as those of Medicare
beneficiaries who are not in Medicare HMOs. Under current
Medicare policy, Medicare pays the hospice directly for services
provided to Medicare HMO, Medicare + Choice or risk product
patients and then reduces the standard per member per month
payment that the managed care program receives.
Adjustments to Payment Rates and Payment
Methodology. In the last several years there have
been a number of adjustments to the base rates paid by Medicare
for all four levels of hospice services. Specifically, the
Balanced Budget Act of 1997 (BBA of 1997), Balanced
Budget Refinement Act of 1999 (BBRA of 1999), and
Medicare, Medicaid and SCHIP Benefits Improvement and Protection
Act of 2000 (BIPA 2000), have all modified hospice
payment rates in recent fiscal years. The Medicare fiscal year
begins on October 1 of each year and runs through
September 30 of the following year. Most recently, the base
Medicare payment rates were increased an additional 3.7%,
effective October 1, 2005, and 3.3% effective
October 1, 2004.
It is possible that there will be further modifications to the
rate structure under which Medicare certified hospice programs
are currently paid. In a May 2002 report to Congress, MedPAC
recommended that the Secretary for the Department of Health and
Human Services review the adequacy of hospice payment rates to
ensure that the rates are adequate given the realities of the
expenses associated with providing hospice services in
todays market, and further recommended that the Secretary
consider the possibility of moving to a case-mix adjusted
payment system or create a separate payment mechanism to deal
with more costly patients who present with unusually complex
cases or cases requiring significantly more intensive services
than the average patient.
Sequential Billing. The Center for Medicare
and Medicaid Services has implemented a process known as
sequential billing that prevents hospice programs from billing a
period of service for a patient before the prior billed period
has been reimbursed. This billing process can negatively impact
a hospice programs cash flow when pre-payment audits or
medical reviews are ongoing, or lost or incorrect bills are
encountered.
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Overview
of Government Payments Medicaid
Medicaid Coverage and Reimbursement. State
Medicaid programs are another source of our net patient
revenues. Medicaid is a state-administered program financed by
state funds and matching federal funds to provide medical
assistance to the indigent and certain other eligible persons.
For those states that elect to provide a hospice benefit, the
care must be provided by a Medicare-certified hospice, and the
scope of hospice services available must include at least all of
the services provided under the Medicare hospice benefit. Most
of the states providing a Medicaid hospice benefit pay us at
rates equal to or greater than the rates provided under Medicare
and those rates are calculated using the same methodology as
Medicare. States maintain flexibility to establish their own
hospice election procedures and to limit the number and duration
of benefit periods for which they will pay for hospice services.
Nursing Home Residents. For patients receiving
nursing home care under state Medicaid programs in states other
than Arizona, Oklahoma and Pennsylvania, who elect hospice care
under Medicare or Medicaid, we contract with nursing homes for
the nursing homes provision to patients of room and board
services. In those states, the applicable Medicaid program must
pay us, in addition to the applicable Medicare or Medicaid
hospice daily or hourly rate, an amount equal to no more than
95% of the Medicaid daily nursing home rate for room and board
services furnished to the patient by the nursing home. Under our
standard nursing home contracts, we pay the nursing home for
these room and board services at predetermined contract rates,
between 95% and 100% of the full Medicaid per diem nursing home
rate. In Arizona, Oklahoma and Pennsylvania, the Medicaid
program pays the nursing home directly for these expenses or has
created a Medicaid managed care program that either reduces or
eliminates this room and board payment.
Other
Healthcare Regulations
Federal and State Anti-Kickback Laws and Safe Harbor
Provisions. The federal anti-kickback law makes
it a felony to knowingly and willfully offer, pay, solicit or
receive any form of remuneration in exchange for referring,
recommending, arranging, purchasing, leasing or ordering items
or services covered by a federal health care program including
Medicare or Medicaid. The anti-kickback prohibitions apply
regardless of whether the remuneration is provided directly or
indirectly, in cash or in kind. Although the anti-kickback
statute does not prohibit all financial transactions or
relationships that providers of healthcare items or services may
have with each other, interpretations of the law have been very
broad. Under current law, courts and federal regulatory
authorities have stated that this law is violated if even one
purpose (as opposed to the sole or primary purpose) of the
arrangement is to induce referrals.
Violations of the anti-kickback law carry potentially severe
penalties including imprisonment of up to five years, criminal
fines of up to $25,000 per act, civil money penalties of up
to $50,000 per act, and additional damages of up to three
times the amounts claimed or remuneration offered or paid.
Federal law also authorizes exclusion from the Medicare and
Medicaid programs for violations of the anti-kickback statute.
Statutory and regulatory safe harbors protect various practices
and relationships, such as bona fide employment relationships,
contracts for the rental of space or equipment, personal service
arrangements and management contracts, from enforcement action
when certain conditions are met. The safe harbor regulations,
however, do not comprehensively describe all lawful
relationships between healthcare providers and referral sources,
and the failure of an arrangement to satisfy all of the
requirements of a particular safe harbor does not mean that the
arrangement is unlawful. Many states, including some states
where we do business, have adopted similar prohibitions against
payments that are intended to induce referrals of patients,
regardless of the source of payment. Some of these state laws
lack explicit safe harbors that may be available
under federal law. Sanctions under these state anti-remuneration
laws may include civil money penalties, license suspension or
revocation, exclusion from Medicare or Medicaid, and criminal
fines or imprisonment. Little precedent exists regarding the
interpretation or enforcement of these statutes.
We contract with a significant number of healthcare providers,
practitioners and vendors such as physicians, hospitals, nursing
homes, and pharmacies, and arrange for these individuals or
entities to provide services to our patients. Some of these
individuals or entities may refer, or be in a position to refer,
patients to us, and we may refer, or be in a position to refer,
patients to these individuals or entities. We believe that our
contracts and arrangements
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with providers, practitioners and suppliers are not in violation
of applicable anti-kickback or related laws. We cannot assure
you, however, that these laws will ultimately be interpreted in
a manner consistent with our practices.
HIPAA Anti-Fraud Provisions. Portions of the
Health Insurance Portability and Accountability Act of 1996
(HIPAA) permit the imposition of civil monetary
penalties in cases involving violations of the anti-kickback
statute or contracting with excluded providers. In addition,
HIPAA created new statutes making it a federal felony to engage
in fraud, theft, embezzlement or the making of false statements
with respect to healthcare benefit programs, which include
private, as well as government programs. In addition, for the
first time, federal enforcement officials have the ability to
exclude from the Medicare and Medicaid programs any investors,
officers and managing employees associated with business
entities that have committed healthcare fraud, even if the
investor, officer or employee had no actual knowledge of the
fraud.
OIG Fraud Alerts, Advisory Opinions and Other Program
Guidance. Congress established the Office of
Inspector General, Department of Health and Human Services
(OIG) to, among other things, identify and eliminate
fraud, abuse and waste in HHS programs. To identify and resolve
such problems, the OIG conducts audits, investigations and
inspections across the country and issues public pronouncements
identifying practices that may be subject to heightened
scrutiny. On occasion, the OIG has issued audit reports, fraud
alerts and advisory opinions regarding hospice practices, which
might be susceptible to fraud or abuse. The OIG also issued
voluntary Compliance Program Guidance for Hospices in September
1999. We cannot predict what, if any, changes may be implemented
in coverage, reimbursement or enforcement policies as a result
of these OIG reviews and recommendations.
Federal False Claims Acts. This federal law
includes several criminal and civil false claims provisions,
which provide that knowingly submitting claims for items or
services that were not provided as represented may result in the
imposition of multiple damages, administrative civil money
penalties, criminal fines, imprisonment
and/or
exclusion from participation in federally funded healthcare
programs, including Medicare and Medicaid. In addition, the OIG
may impose extensive and costly corporate integrity requirements
upon a healthcare provider that is the subject of a false claims
judgment or settlement. These requirements may include the
creation of a formal compliance program, the appointment of a
government monitor, and the imposition of the annual reporting
requirements and audits conducted by an independent review
organization to monitor compliance with the terms of the
agreement and relevant laws and regulations.
The Civil False Claims Act prohibits the known filing of a false
claim or the known use of false statements to obtain payments.
Penalties for violations include fines ranging from $5,500 to
$11,000, plus treble damages, for each claim filed. Provisions
in the Civil False Claims Act also permit individuals to bring
actions against individuals or businesses in the name of the
government as so called qui tam relators. If a qui
tam relators claim is successful, he or she is entitled to
share in the governments recovery.
State False Claims Laws. At least
10 states and the District of Columbia, including
Massachusetts, Nevada and Texas, where we currently do business,
have adopted state false claims laws that mirror to some degree
the federal false claims laws. While these statutes vary in
scope and effect, the penalties for violating these false claims
laws include administrative, civil
and/or
criminal fines and penalties, imprisonment and the imposition of
multiple damages.
The Stark Law and State Physician Self-Referral
Laws. Section 1877 of the Social Security
Act, commonly known as the Stark Law, prohibits
physicians from referring Medicare or Medicaid patients for
designated health services to entities in which they
hold an ownership or investment interest or with whom they have
a compensation arrangement, subject to a number of statutory or
regulatory exceptions. Penalties for violating the Stark Law are
severe, and include:
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denial of payment;
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civil monetary penalties of $15,000 per referral or
$1,000,000 for circumvention schemes;
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assessments equal to 200.0% of the dollar value of each such
service provided; and
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exclusion from the Medicare and Medicaid programs.
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Hospice care itself is not specifically listed as a designated
health service; however, a number of the services that we
provide including physical therapy, pharmacy services and
certain infusion therapies are among the services identified as
designated health services for purposes of the self-referral
laws. We cannot assure you that future regulatory changes will
not result in hospice services becoming subject to the Stark
Laws ownership, investment or compensation prohibitions.
Many states where we operate have laws similar to the Stark Law,
but with broader effect because they apply regardless of the
source of payment for care. Penalties similar to those listed
above as well the loss of state licensure may be imposed in the
event of a violation of these state self-referral laws. Little
precedent exists regarding the interpretation or enforcement of
these statutes.
Civil Monetary Penalties. The Civil Monetary
Penalties Statute provides that civil penalties ranging between
$10,000 and $50,000 per claim or act may be imposed on any
person or entity that knowingly submits improperly filed claims
for federal health benefits, or makes payments to induce a
beneficiary or provider to reduce or limit the use of health
care services or to use a particular provider or supplier. Civil
monetary penalties may be imposed for violations of the
anti-kickback statute and for the failure to return known
overpayments, among other things.
Prohibition on Employing or Contracting with Excluded
Providers. Federal law and regulations prohibit
Medicare and Medicaid providers, including hospice programs,
from submitting claims for items or services or their related
expenses if an individual or entity that has been excluded or
debarred from participation in federal health care programs
furnished those items or services. The OIG maintains lists of
excluded persons and entities. Nonetheless, it is possible that
we might unknowingly bill for services provided by an excluded
person or entity with whom we contract. The penalty for
contracting with an excluded provider may range from civil
monetary penalties of $50,000 and damages of up to three times
the amount of payment that was inappropriately received.
Corporate Practice of Medicine and Fee
Splitting. Most states have laws that restrict or
prohibit anyone other than a licensed physician, including
business entities such as corporations, from employing
physicians
and/or
prohibit payments or fee-splitting arrangements between
physicians and corporations or unlicensed individuals. While the
laws vary from state to state, penalties for violating such laws
may include civil or criminal penalties, the forced
restructuring or termination of business arrangements or in rare
cases the loss of the physicians license to practice
medicine. These laws have been subject to only limited
interpretation by the courts or regulatory bodies.
We employ or contract with physicians to provide medical
direction and patient care services to our patients. We have
made efforts to structure those arrangements in compliance with
the applicable laws and regulations. Despite these efforts,
however, we cannot assure you that agency officials charged with
enforcing these laws will not interpret our physician contracts
as violating the relevant laws or regulations described above.
Future determinations or interpretations by individual states
with corporate practice of medicine or fee splitting
restrictions may force us to restructure our arrangements with
physicians in those locations.
Health Information Practices. Portions of
HIPAA were enacted to develop national standards for the
electronic exchange of health information. To accomplish this,
the U.S. Department of Health & Human Services
(HHS) was directed to develop rules for
standardizing electronic transmission of health care information
and to protect its security and privacy. The privacy and
security rules now apply to health information, regardless of
the form in which it is maintained (e.g., electronic, paper,
oral). Under these rules, health care providers, health plans
and clearinghouses are now required to (a) conduct specific
transactions using uniform code sets, (b) comply with a
variety of requirements concerning their use and disclosure of
individuals protected health information,
(c) establish detailed internal procedures to protect
health information and (d) enter into business associate
contracts with individuals or companies who use or disclose
health information on their behalf. HIPAAs requirements
with regard to privacy and confidentiality became effective in
April 2003. HIPAA requirements standardizing electronic
transactions between health plans, providers and clearinghouses
became effective in October 2003. We were in full compliance
with these regulations by the April 21, 2005 deadline.
Compliance with these rules has required costly changes and we
expect to incur additional expenses in the future for continued
compliance with these regulations. Sanctions for failing to
comply with the HIPAA privacy rules could include civil monetary
penalties of $100 per incident, up to a maximum of
$25,000 per person, per year, per standard. The final rule
also provides for criminal penalties of up to $50,000 and one
year in prison for knowingly and improperly obtaining or
disclosing protected health information, up to $100,000 and five
years in prison for obtaining protected health information under
false
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pretenses, and up to $250,000 and ten years in prison for
obtaining or disclosing protected health information with the
intent to sell, transfer or use such information for commercial
advantage, personal gain or malicious harm.
Our
Employees
As of September 30, 2006, we had 2,319 full time employees
and 452 part-time employees. None of our employees are
covered by collective bargaining agreements. We believe that our
relations with our employees are positive and reflective of our
overall culture of compassion and caring.
Investing in our common stock involves a degree of risk. You
should carefully consider the material risk factors listed below
and all other information contained in this Report before
investing in our common stock. You should also keep these risk
factors in mind when you read the forward-looking statements.
The risks and uncertainties described below are not the only
ones facing us. Additional risks and uncertainties that we are
unaware of, or that we currently deem immaterial, also may
become important factors that affect us.
If any of the following risks occur, our business, our quarterly
and annual operating results or our financial condition could be
materially and adversely affected. In that case, the market
price of our common stock could decline or become substantially
volatile, and you could lose some or all of your investment.
We are
dependent on payments from Medicare and Medicaid. Changes in the
rates or methods governing these payments for our services could
adversely affect our net patient revenue and
profitability.
Approximately 97% of our net patient revenue for the year ended
September 30, 2006 consisted of payments from Medicare and
Medicaid programs. Because we generally receive fixed payments
for our hospice care services based on the level of care
provided to our hospice patients, we are at risk for the cost of
services provided to our hospice patients. We cannot assure you
that Medicare and Medicaid will continue to pay for hospice care
in the same manner or in the same amount that they currently
pay. Reductions in amounts paid by government programs for our
services or changes in methods or regulations governing
payments, which would likely result in similar changes by
private third-party payors, could adversely affect our net
patient revenue and profitability.
Our
profitability may be adversely affected by limitations on
Medicare payments.
Overall Medicare payments to our hospice providers are subject
to an annual Medicare Cap amount, which for the twelve months
ended October 31, 2006 was $20,585.39 per beneficiary.
Compliance with the Medicare Cap is measured by calculating the
annual Medicare payments received under a Medicare provider
number with respect to services provided to all Medicare hospice
care beneficiaries in the program or programs covered by that
provider number during the Medicare regulation year and
comparing the result with the product of the annual Medicare Cap
amount and the number of Medicare beneficiaries electing hospice
care for the first time from that program or programs during
that year. There is a further negative adjustment for the
Medicare Cap calculation to the extent our first time
beneficiaries are later admitted to another provider and also a
positive adjustment for a beneficiary with a previous hospice
election admitted to one of our providers, each pro-rated based
on days of service. We reflected as a reduction to net patient
revenue of approximately $6.8 million in the year ended
September 30, 2006 and $11.9 million in the year ended
September 30, 2005, as a result of estimated reimbursements
in excess of the annual Medicare Cap in those and previous
periods. Our ability to comply with this limitation depends on a
number of factors relating to the hospice program or programs
under a given Medicare provider number, including the rate at
which our patient census increases, the average length of stay
and the mix in level of care. Our profitability may be adversely
affected if, in the future, we are unable to comply with this
and other Medicare payment limitations.
If our
expenses were to increase more rapidly than the fixed payment
adjustments we receive from Medicare and Medicaid for our
hospice services, our profitability could be negatively
impacted.
We generally receive fixed payments for our hospice services
based on the level of care that we provide to patients and their
families. Accordingly, our profitability is largely dependent on
our ability to manage expenses of providing hospice services and
to maintain a patient base with a sufficiently long length of
stay to attain
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profitability. We are susceptible to situations, particularly
because of our open access philosophy, where we may
be referred a disproportionate share of patients requiring more
intensive care and therefore more expensive care than other
providers. Although Medicare and Medicaid currently provide for
an annual adjustment of the various hospice payment rates based
on inflation and other economic factors, these hospice care
increases have historically been less than actual inflation. If
these annual adjustments were eliminated or reduced, or if our
expenses of providing hospice services, over one-half of which
consist of labor expenses, increase more than the annual
adjustment, our profitability could be negatively impacted. In
addition, cost pressures resulting from shorter patient lengths
of stay and the use of more expensive forms of palliative care,
including drugs and drug delivery systems, could negatively
impact our profitability.
We may
be adversely affected by governmental decisions regarding our
nursing home patients.
For our patients receiving nursing home care under certain state
Medicaid programs, the applicable Medicaid program pays us an
amount equal to no more than 95% of the Medicaid per diem
nursing home rate for room and board services
furnished to the patient by the nursing home in addition to the
applicable Medicare or Medicaid hospice per diem payment.
We in turn, are generally obligated to pay the nursing home for
these room and board services at a rate between 95% and 100% of
the full Medicaid per diem nursing home rate. In the past, we
have experienced situations where both the Medicaid program and
VistaCare have paid a nursing home for the same room and board
service and the Medicaid program has imposed on us the burden of
recovering the amount we previously paid to the nursing home.
There can be no assurance that these situations will not recur
in the future or that, if they do, we will be able to fully
recover from the nursing home.
In addition, many of our patients residing in nursing homes are
eligible for both Medicare and Medicaid benefits. In these
cases, the patients state Medicaid program pays their
nursing home room and board charges and Medicare pays their
hospice services benefit. In the past, the government has
questioned whether the reimbursement levels for these
dual-eligible hospice patients as well as for Medicare-only
patients living in nursing homes may be excessive. Specifically,
the government has expressed concerns that hospice programs may
provide fewer services to patients who reside in nursing homes
than to patients living in other settings, due to the presence
of the nursing homes own staff to address problems that
might otherwise be handled by hospice personnel. Since hospice
programs are paid a fixed daily amount, regardless of the volume
or duration of services provided, the government is concerned
that by shifting the responsibility and cost for certain patient
care or counseling services to the nursing home, hospice
programs may inappropriately increase their profitability. In
the case of these dual-eligible patients, the governments
concern is that the cost of providing both the room and board
and hospice services may be significantly less than the combined
reimbursement paid to the nursing homes and hospice programs as
a result of the overlap in services.
From time to time, there have been legislative proposals to
reduce or eliminate Medicare reimbursement for hospice patients
residing in nursing homes and to require nursing homes to
provide
end-of-life
care, or alternatively to reduce or eliminate the Medicaid
reimbursement of room and board services provided to hospice
patients. The likelihood of this type of charge may be greater
when the federal and state governments experience budgetary
shortfalls. If any such proposal were adopted, it could
significantly affect our ability to obtain referrals from and
continue to serve patients residing in nursing homes.
Medical
reviews and audits by governmental and private payors could
result in material payment recoupments and payment denials,
which could negatively impact our business.
Medicare fiscal intermediaries and other payors periodically
conduct pre-payment or post-payment medical reviews or other
audits of our reimbursement claims. In order to conduct these
reviews, the payor requests documentation from us and then
reviews that documentation to determine compliance with
applicable rules and regulations, including the eligibility of
patients to receive hospice benefits, the appropriateness of the
care provided to those patients, and the documentation of that
care. We cannot predict whether medical reviews or similar
audits by federal or state agencies or commercial payors of our
hospice programs reimbursement claims will result in
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material recoupments or denials, which could have a material
adverse effect on our financial condition and results of
operations.
We
have a limited history of profitability and may incur
substantial net losses in the future.
We recorded a net loss of $11.7 million for the year ended
September 30, 2006, and a net loss of $2.3 million for
the year ended September 30, 2005 and we had an accumulated
deficit of $32.5 million at September 30, 2006. We
cannot assure you that we will operate profitably in the future.
In addition, we may experience significant
quarter-to-quarter
variations in operating results. We are pursuing a growth
strategy focused primarily on organic program growth, but also
involving the development of new hospice programs, the
development of new in-patient units, and acquisitions of other
hospice programs. Our growth strategy may involve, among other
things, increased marketing expenses, significant cash
expenditures, debt incurrence and other expenses that could
negatively impact our profitability on a quarterly and an annual
basis. Our net patient revenue could be adversely impacted by a
number of factors including, in particular, reductions in
Medicare payment rates and patient lengths of stay, which may
not be within our control. In addition, our profitability could
be adversely impacted by the impairment of long-term assets such
as goodwill and deferred taxes.
If we
are unable to attract qualified nurses and other healthcare
professionals at reasonable costs, it could limit our ability to
grow, increase our operating expenses and negatively impact our
business.
We rely significantly on our ability to attract and retain
qualified nurses and other healthcare professionals who possess
the skills, experience and licenses necessary to meet the
Medicare certification requirements and the requirements of the
hospitals, nursing homes and other healthcare facilities with
which we work. We compete for qualified nurses and other
healthcare professionals with hospitals, nursing homes, other
hospices and other healthcare organizations. Currently, there is
a shortage of qualified nurses in most areas of the United
States. Competition for nursing personnel is increasing, and
nurses salaries and benefits have risen.
Our ability to attract and retain qualified nurses and other
healthcare professionals depends on several factors, including
our ability to provide attractive assignments and competitive
benefits and wages. We cannot assure you that we will be
successful in any of these areas. Because we operate in a fixed
reimbursement environment, increases in the wages and benefits
that we must provide to attract and retain qualified nurses and
other healthcare professionals or increases in our reliance on
contract nurses or temporary healthcare professionals could
negatively affect our profitability. We may be unable to
continue to increase the number of qualified nurses and other
healthcare professionals that we recruit, decreasing the
potential for growth of our business. Moreover, if we are unable
to attract and retain qualified nurses and other healthcare
professionals, we may have to limit the number of patients for
whom we can provide hospice care in order to maintain the
quality of our hospice services.
We may
not be able to attract and retain a sufficient number of
volunteers to grow our business or maintain our Medicare
certification.
Medicare requires certified hospice programs to recruit and
train volunteers to provide patient care services or
administrative services. Volunteer services must be provided in
an amount equal to at least five percent of the total patient
care hours provided by all paid hospice employees and contract
staff of a hospice program. If we are unable to attract and
retain volunteers, it could limit our potential for growth and
our hospice programs could lose their Medicare certifications,
which would make those hospice programs ineligible for Medicare
reimbursement.
If we
fail to cultivate new or maintain established relationships with
existing patient referral sources, our net patient revenue may
decline.
Our success is heavily dependent on referrals from physicians,
nursing homes, assisted living communities, hospitals, managed
care companies, insurance companies and other patient referral
sources in the communities that our hospice programs serve.
Since we and many of our referral sources are dependent upon
Medicare, we are limited in our ability to engage in business
practices that are commonplace among referring businesses in
other industries such as referral fees, or bonuses and long-term
exclusive contracts.
25
Our growth and profitability depends significantly on our
ability to establish and maintain close working relationships
with patient referral sources and to increase awareness and
acceptance of hospice care by our referral sources and their
patients. We cannot assure you that we will be able to maintain
our existing referral source relationships or that we will be
able to develop and maintain new relationships in existing or
new markets. Our loss of existing relationships or our failure
to develop new relationships could adversely affect our ability
to expand our operations and operate profitably. Moreover, we
cannot assure you that awareness or acceptance of hospice care
will increase.
Our
growth strategy may not be successful, which could adversely
impact our growth and profitability.
The primary focus of our growth strategy is organic program
growth. To achieve this growth, we intend to increase our
marketing efforts and other expenditures. If our resources are
not deployed effectively and we do not achieve the organic
program growth we seek, it could adversely impact our
profitability.
Our growth strategy also involves the development of new hospice
programs. When we develop new hospice programs, we first engage
a small staff and obtain office space, contracts and referral
sources, while obtaining state licensure and Medicare
certification. Following Medicare certification, we spend
significant management and financial resources in an effort to
increase patient census of that program. This aspect of our
growth strategy may not be successful, which could adversely
impact our growth and profitability. In this regard, we cannot
assure you that we will be able to:
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identify markets that meet our selection criteria for new
hospice programs;
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hire and retain a qualified management team to operate each of
our new hospice programs;
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manage a large and geographically diverse group of hospice
programs;
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become Medicare and Medicaid certified and licensed in new
markets in a timely manner;
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generate sufficient hospice admissions in new markets to operate
profitably in these new markets; and
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compete effectively with existing hospice programs in new
markets.
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Competition
for acquisition opportunities may restrict our future growth by
limiting our ability to make acquisitions at reasonable
valuations.
In addition to organic program growth and the development of new
programs, our business strategy includes increasing our market
share and presence in the hospice care industry through
strategic acquisitions of companies that complement or enhance
our business. We have historically faced competition for
acquisitions. In the future, this could limit our ability to
grow by acquisitions or could raise the prices of potential
acquisition targets and make them less attractive to us.
Our
ability to grow through acquisitions may be limited by
increasing government oversight and review of sales of
not-for-profit
healthcare providers.
According to the National Hospice and Palliative Care
Organization, approximately 68% of hospice programs in the
United States in 2005 were
not-for-profit
programs. Accordingly, it is likely that a substantial number of
acquisition opportunities will involve hospice programs operated
by
not-for-profit
entities. In recent years, several states have increased review
and oversight of transactions involving the sale of healthcare
facilities by
not-for-profit
entities. Although the level of oversight varies from state to
state, the current trend is to provide for increased
governmental review, and in some cases, approval of transactions
in which a
not-for-profit
entity sells a healthcare facility or business to a for profit
entity. This increased scrutiny may increase the difficulty of
completing or prevent the completion of acquisitions in some
states in the future.
26
As
with our past acquisitions, we may face difficulties integrating
businesses that we may acquire in the future. Our efforts to
acquire other businesses may be unsuccessful, involve
significant cash expenditures or expose us to unforeseen
liabilities.
Our 1998 acquisitions, which were closed nearly simultaneously,
increased our patient census approximately five-fold and
presented significant integration difficulties. Due to the size
and complexity of these transactions, immediately following the
transactions, our resources available for integration efforts
were limited. In time, as we were able to focus on the
integration of the acquired businesses, we spent substantial
resources on projects such as:
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implementing consistent billing and payroll systems across a
large number of new programs;
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instituting standard procedures for ordering pharmaceuticals,
medical equipment and supplies; and
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re-training staff from the acquired businesses to complete our
standard claim documentation properly and to conform to our
service philosophy and internal compliance procedures;
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Our future acquisitions could require that we spend significant
resources on some of the same types of projects. In addition,
our future acquisitions could present other challenges such as:
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potential loss of key employees or referral sources of acquired
businesses;
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potential difficulties in obtaining required regulatory
approvals; and
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assumption of liabilities and exposure to unforeseen liabilities
of acquired businesses, including liabilities for their failure
to comply with healthcare regulations.
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Our future acquisitions may also involve significant cash
expenditures, debt incurrence and integration expenses that
could have a material adverse effect on our financial condition
and results of operations. Any acquisition may ultimately have a
negative impact on our business and financial condition.
If any
of our hospice programs fail to comply with the Medicare
conditions of participation, that hospice program could lose its
Medicare certification, thereby adversely affecting our net
patient revenue and profitability.
Each of our hospice programs must comply with the extensive
conditions of participation to remain certified under Medicare
guidelines. If any of our hospice programs fail to meet any of
the Medicare conditions of participation, that hospice program
may receive a notice of deficiency from a state surveyor
designated by Medicare to measure the hospice programs
level of compliance. The notice may require the hospice program
to prepare a plan of correction and undertake other steps to
ensure future compliance with the conditions of participation.
If a hospice program fails to correct the deficiency or develop
an adequate plan of correction, the hospice program may be
required to suspend admissions or may have its Medicare or
Medicaid provider agreement terminated. We cannot assure you
that we will not lose our Medicare certification at one or more
of our other hospice programs in the future. Any such loss could
adversely affect our net patient revenue and profitability as
well as our reputation within the hospice care industry.
We may
not be able to compete successfully against other hospice care
providers, and competitive pressures may limit our ability to
maintain or increase our market position and adversely affect
our profitability.
Hospice care in the United States is competitive. In many areas
in which we maintain hospice programs, we compete with a large
number of organizations, including:
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community-based hospice providers;
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national and regional companies;
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hospital-based hospice and palliative care programs;
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nursing homes; and
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home health agencies.
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27
Our largest competitors include Vitas Healthcare Corporation (a
subsidiary of Chemed Corporation), Odyssey Healthcare,
Inc., Manor Care, Inc. and Beverly Enterprises, Inc.
Some of our current and potential competitors have or may obtain
significantly greater financial and marketing resources than we
have or may obtain. Various healthcare companies have
diversified into the hospice market. Relatively few regulatory
barriers to entry exist in our local markets. Accordingly, other
companies, including hospitals and other healthcare
organizations that are not currently providing hospice care, may
expand their services to include hospice care. We may encounter
increased competition in the future that could negatively impact
patient referrals to us, limit our ability to maintain or
increase our market position and adversely affect our
profitability.
A
significant reduction in the carrying value of our goodwill
could have a materially adverse effect on our
profitability.
A substantial portion of our total assets consists of intangible
assets, primarily goodwill. Goodwill, net of accumulated
amortization, accounted for approximately 20% of our total
assets as of September 30, 2006. Effective January 1,
2002, we adopted Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets. As a
result, we no longer amortize goodwill and long-lived intangible
assets. Instead, we review them at least annually to determine
whether they have become impaired. If they have become impaired,
we charge the impairment as an expense in the period in which
the impairment occurred. Any event, which results in the
significant impairment of our goodwill, such as closure of a
hospice program or sustained operating losses, could have a
materially adverse effect on our profitability.
We are
dependent on the proper functioning of our information systems
to efficiently manage our business.
We are dependent on the proper functioning of our information
systems in operating our business. Critical information systems
used in daily operations maintain patient information, perform
billing and accounts receivable functions, process payments, as
well as retain other financial and operational data. Our
information systems are vulnerable to fire, storm, flood, power
loss, telecommunications failures, physical or software
break-ins and similar events. If our information systems fail or
are otherwise unavailable, these functions would have to be
performed manually, which could impact our ability to identify
business opportunities quickly, to maintain billing and clinical
records reliably, to pay our staff in a timely fashion and to
bill for services efficiently.
We may
experience difficulties in transitioning to a new software
system, which may result in delays and errors in billing for our
services.
We are considering upgrading our internally developed patient
tracking, billing and accounts receivable system with an
enterprise software package which will help align our Company
for future growth. Every new system implementation comes with
inherent risk factors. Our ability to track patient data is
critical to providing high quality patient care. Accurate
billing is crucial to reimbursement from third-party payors. If
any unforeseen problems emerge in connection with our migration
to the new billing software, billing delays and errors may
occur, which could significantly increase the time it takes for
us to collect payments from payors and in some cases our ability
to collect the payments at all. Any such increase in collection
time or inability to collect could have a materially adverse
effect on our cash flows and results of operations.
A
material write-off of our capitalized software development costs
and costs and problems related to the implementation of new
software applications could have a materially adverse effect on
our profitability.
As of September 30, 2006, our capitalized software
development costs, net of amortization, were approximately
$1.6 million, most of which related to the development of
CareNation, our proprietary software platform, and related
application modules. If one or more of the application modules
do not function as anticipated, we may be required to write off
a significant amount of capitalized software development costs
and we may experience significant disruptions in our operations,
all of which could have a material adverse effect on our
profitability. In addition, the expenses associated with
training our employees to use these new applications effectively
and errors
28
arising from being unfamiliar with the new applications could
have a materially adverse effect on our operations and
profitability.
We
operate in a regulated industry and changes in regulations or
violations of regulations may result in increased expenses or
sanctions that could reduce our revenues and
profitability.
The healthcare industry is subject to extensive and complex
federal and state laws and regulations related to professional
licensure, conduct of operations, payment for services and
payment for referrals. If we fail to comply with the laws and
regulations that are directly applicable to our business, we
could suffer civil
and/or
criminal penalties, be subject to injunctions or cease and
desist orders or become ineligible to receive government program
payments.
In recent years, Congress and some state legislatures have
introduced an increasing number of proposals to make significant
changes in the United States healthcare system. Changes in law
and regulatory interpretations could reduce our net patient
revenue and profitability. Recently, there have been heightened
coordinated civil and criminal enforcement efforts by both
federal and state government agencies relating to the healthcare
industry. There has also been an increase in the filing of
actions by private individuals on behalf of the federal
government against healthcare companies alleging the filing of
false or fraudulent healthcare claims. This heightened
enforcement activity increases our potential exposure to
damaging lawsuits, investigations and other enforcement actions.
Any such action could distract our management and adversely
affect our business reputation and profitability.
In the future, different interpretations or enforcement of laws,
rules and regulations governing the healthcare industry could
subject our current business practices to allegations of
impropriety or illegality or could require us to make changes in
our operations and personnel and distract our management. If we
fail to comply with these extensive laws and government
regulations, we could become ineligible to receive government
program payments, suffer civil and criminal penalties or be
required to make significant changes to our operations. In
addition, we could be forced to expend considerable resources
responding to an investigation or other enforcement action under
these laws or regulations.
Many
states have certificate of need laws or other regulatory
provisions that may adversely impact our ability to expand into
new markets and thereby limit our ability to grow and increase
our net patient revenue.
Many states have enacted certificate of need laws that require
prior state approval to open new healthcare facilities or expand
services at existing facilities. Currently, 12 states have
certificate of need laws that apply to hospice programs. Those
laws require some form of state agency review or approval before
a hospice may add new services or undertake significant capital
expenditures. In addition, two states in which we do not
currently operate, Florida and New York, have additional
barriers to entry. Florida places restrictions on the ability of
for-profit corporations to own and operate hospices, and New
York places restrictions on the corporate ownership of hospices.
Accordingly, our ability to operate in Florida and New York and
the states with certificate of need laws is restricted. The laws
in these states could affect our ability to expand into new
markets and to expand our services and facilities into existing
markets.
To
comply with new laws and regulations regarding the
security & confidentiality of patient medical
information, we may be required to expend substantial sums on
acquiring and implementing new information systems, which could
negatively impact our profitability.
There are currently numerous legislative and regulatory
initiatives at both the state and federal levels that address
patient privacy concerns. In particular, the Health Insurance
Portability and Accountability Act of 1996, or HIPAA, contains
provisions that required us to implement new systems and
business procedures designed to protect the privacy and security
of each of our hospice patients individual health
information. Final regulations addressing the security of
patient health information were modified and published in final
form on February 20, 2003. We were in compliance with these
regulations by the April 21, 2005 deadline. Compliance with
these rules has required
29
costly changes and we expect to incur additional expenses in the
future for continued compliance with these regulations, which
could negatively impact our profitability.
Our
net patient revenue and profitability may be constrained by cost
containment initiatives undertaken by payors.
Initiatives undertaken by private insurers, managed care
companies and federal and state governments to contain
healthcare costs may affect the profitability of our hospice
programs. We have a number of contractual arrangements with
private insurers and managed care companies to provide hospice
care for a fixed fee. These payors often attempt to control
healthcare costs by contracting with hospices and other
healthcare providers to obtain services on a discounted basis.
We believe that this trend may continue and may limit payments
for healthcare services, including hospice services in the
future. In addition, there may be changes made to the Medicare
programs Medicare HMO component, which could result in
managed care companies becoming financially responsible for
providing hospice care. Currently, Medicare pays for hospice
services outside of the Medicare HMO per-member per-month fee so
that managed care companies do not absorb the cost of providing
these services. If such changes were to occur, a greater
percentage of our net patient revenue could come from managed
care companies and these companies would be further incentivized
to reduce hospice costs. As managed care companies attempt to
control hospice-related costs, they could reduce payments to us
for hospice services. In addition, states, many of which are
operating under significant budgetary pressures, may seek to
reduce hospice payments under their Medicaid programs or
Medicaid managed care programs may opt not to continue providing
hospice coverage. These developments could negatively impact our
net patient revenue and profitability.
Professional
and general liability claims may have an adverse effect on us
either because our insurance coverage may be inadequate to cover
the losses or because claims against us, regardless of merit or
eventual outcome, may adversely affect our reputation, our
ability to obtain patient referrals or our ability to expand our
business.
In recent years, participants in the healthcare industry have
become subject to an increasing number of lawsuits, including
allegations of medical malpractice. Many of these lawsuits
involve large claims and substantial defense costs.
We are covered by a general liability insurance policy on an
occurrence basis with limits of $1.0 million per occurrence
and $3.0 million in the aggregate. VistaCare is also
covered by a healthcare professional liability insurance policy
on a claims-made basis with limits of $1.0 million for each
medical incident and $3.0 million in the aggregate.
VistaCare maintains workers compensation coverage at the
statutory limits and an employers liability policy with a
$1.0 million limit, both with a $250,000 deductible per
occurrence. We also maintain a policy insuring hired and
non-owned automobiles with a $1.0 million limit of
liability and a $1.0 million deductible. In addition,
VistaCare maintains umbrella coverage with a limit of
$10.0 million excess over the general, professional, hired
and non-owned automobile and employers liability policies.
VistaCare has not experienced any uninsured health care
negligence losses.
Nevertheless, some risks and liabilities, including claims for
punitive damages or claims based on the actions of third
parties, may not be covered by insurance. In addition, we cannot
assure you that our coverage will be adequate to cover potential
losses. While we have generally been able to obtain liability
insurance in the past, insurance can be expensive and may not be
available in the future on terms acceptable to us, or at all.
Moreover, claims, regardless of their merit or eventual outcome,
may also adversely affect our reputation, our ability to obtain
patient referrals or our ability to expand our business, as well
as divert management resources from the operation of our
business.
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Item 1B.
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Unresolved
Staff Comments
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None
30
Forward-Looking
Statements
This annual report on
Form 10-K
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 managements 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 have included
important factors in the cautionary statements above under the
heading Risk Factors in Item 1A that we
believe could cause our actual results to differ materially from
the forward-looking statements we make. We do not intend to
update publicly any forward-looking statements, whether as a
result of new information, future events or otherwise.
Our principal executive office is located in a
49,700 square foot leased facility located in Scottsdale,
Arizona. The lease for this facility expires in 2010 and does
not have an option to extend for additional years.
As of September 30, 2006, we operated 56 hospice care
programs and five inpatient units, serving patients in
14 states from leased program offices. We believe that our
properties are adequate for our current business needs. In
addition, we believe that additional or alternative space will
be available as needed in the future on commercially reasonable
terms. With the exception of our principal executive office
lease, we have no material operating leases.
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Item 3.
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Legal
Proceedings
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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 Companys 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 Companys August
2004 announcement of its 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. On
June 16, 2006, the Company entered into a settlement
agreement with the plaintiffs, agreeing to pay $4.6 million
to settle this case, all of which is being paid by insurance.
The Court granted final approval of the settlement on
September 29, 2006, and the case has been dismissed with
prejudice.
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. On August 30, 2006, the Court
granted the defendants motion to dismiss, and the case was
dismissed with prejudice. The plaintiffs have filed a notice of
appeal with the United States Ninth Circuit Court of Appeals. As
of the date of this report, no briefing schedule has been
established. If the plaintiffs pursue their appeal, the
defendants will continue to vigorously oppose the appeal and
defend the case.
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 managements 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 and on our results of operations for the
period in which the effect becomes reasonably estimable.
31
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Item 4.
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Submission
of Matters to a Vote of Security Holders
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During the fourth quarter of 2006, there were no matters
submitted to a vote of security holders.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Set forth below is information concerning our executive officers
as of September 30, 2006.
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Name
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Age
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Position
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Richard R. Slager
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52
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Chairman of the Board of
Directors, President and Chief Executive Officer
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Henry Hirvela
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55
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Chief Financial Officer
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Stephen Lewis
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60
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Senior Vice President and General
Counsel
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James T. Robinson
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46
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Chief Marketing Officer
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Todd Cote, MD
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45
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Chief Medical Officer
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Roseanne Berry, MS, R.N
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51
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Chief Compliance Officer
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John C. Crisci
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Chief People Officer
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Richard R. Slager has served as our Chief Executive
Officer and a member of our board of directors since
May 2001. He has served as our President since September
2006 and from May 2001 until January 2005. He became the
Chairman of our board of directors in August 2003. From June
1999 until May 2001, he was Chairman of the board of directors
and Chief Executive Officer of SilverAge LLC, an entrepreneurial
online monitoring and interactive technical company for seniors.
In May 1989, Mr. Slager founded Karrington Health, Inc., an
assisted living provider, and served as Chairman of the board of
directors and Chief Executive Officer of Karrington Health, Inc.
until May 1998 when it was acquired by Sunrise Assisted Living.
Henry Hirvela has served as our Chief Financial Officer
since March 2006. Prior to this engagement, Mr. Hirvela
founded Phoenix Management Partners, LLC in September 2002,
during which time he served as President and CEO of Vigilant
Systems, Inc, developed Ironwood Golf Group LLC in March 2003,
and served as Chairman and Director for Three-Five Systems,
Inc., an electronic manufacturing services company, from
February 2003 to September 2006. From 1996 to 2000,
Mr. Hirvela served as Vice President and Chief Financial
Officer for Scottsdale-based Allied Waste Industries, Inc. Prior
to this, Mr. Hirvela held a variety of management positions
with Bank of America, Texas Eastern Corporation and
Browning-Ferris Industries.
Stephen Lewis has served as one of our Senior Vice
Presidents since May 2002 and as our General Counsel since
November 2001. From December 1999 until November 2001, he served
as Assistant Director, Office of General Services of the Ohio
Department of Insurance. From August 1993 until June 1999,
Mr. Lewis served as Vice President of Development and
General Counsel for Karrington Health, Inc., a publicly traded
assisted living provider. From August 1986 until December 1992,
he served as Vice President and General Counsel of
VOCA Corporation, a developer and operator of residential
facilities for persons with mental retardation and developmental
disabilities. From November 1974 until August 1986,
Mr. Lewis was a practicing attorney with the law firm of
Topper, Alloway, Goodman, DeLeone & Duffy, which merged
with Benesch, Friedlander, Coplan & Aronoff in January
1986.
James T. Robinson was appointed as our Chief Marketing
Officer (CMO) and Executive Vice President of
Marketing in May 2006. In his role as CMO, Mr. Robinson has
assumed leadership of our sales, marketing, marketing
communications and strategic planning. From May 1997 until May
2006, Mr. Robinson served at HealthBanks, Inc. as its
President and Chief Executive Officer. Prior to HealthBanks, he
served as Vice President of Marketing, Sales, and Business
Development for Avicenna Systems Corporation (now part of
WebMD), an Internet health information
start-up
company he co-founded and sold in 1996. Mr. Robinson also
has held a variety of sales and marketing management positions
with St. Jude Medical, Inc., Hewlett Packard Medical Systems,
and the Xerox Corporation.
Todd Cote, MD became our Chief Medical Officer in January
2006. From January 2003 until December 2005, he served as Chief
Medical Officer for The Connecticut Hospice, Inc. From December
2000 until December 2002, he was Medical Director for Assisted
Home Hospice in Ventura, California. From January 1998 until
November 2000, he served as Co-Medical Director/Team Physician
for VITAS Innovative Hospice Care in San Diego,
32
California. In addition, from March 2004 until December 2005, he
was a clinical instructor for the Yale School of Medicine, and
from October 2003 until December 2005, he was an associate
clinical professor for the University of Connecticut School of
Medicine.
Roseanne Berry MS, R.N. helped found VistaCare in July
1995 and has served as our Chief Compliance Officer since
January 2001, responsible for developing, implementing and
monitoring activities to ensure quality services are delivered
and that the overall maintenance of regulatory compliance issues
are met. She is a seasoned hospice professional, and served for
several years in management positions at Hospice Family Care
prior to helping found VistaCare. Ms. Berry also spent
eight years serving in management positions in home health, home
infusion and medical equipment for Samaritan Home Health
Services.
John C. Crisci has served as our Vice President of People
since May 2003, with responsibility for the strategic direction
and innovation of human resource activities throughout our
company nationwide. From April 2001 until May 2003,
Mr. Crisci led the human resources organization for
Southwest Airlines western region. Previously,
Mr. Crisci held senior-level positions at Velocity Express,
Cemex USA and America West Airlines.
There are no family relationships among any of our executive
officers and directors.
PART II
|
|
Item 5.
|
Market
for Registrants Common Stock, Related Stockholder Matters
and Issuer Purchases of Equity Securities
|
Market
for Our Common Stock
Our Class A Common Stock, $0.01 par value per share,
which we refer to as our common stock, has been quoted on the
Nasdaq National Market under the symbol VSTA since
December 18, 2002. Prior to that time there was no public
market for our common stock. At December 11, 2006, there
were approximately 81 record holders of our common stock and the
closing sale price of our common stock as reported on the Nasdaq
National Market was $12.84 per share. The following table
sets forth the high and low sales prices per share of our common
stock for the period indicated, as reported on the Nasdaq
National Market:
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
First Quarter
(10/1/2005-12/31/2005)
|
|
$
|
14.33
|
|
|
$
|
11.52
|
|
Second Quarter (1/1/2006-3/31/2006)
|
|
$
|
15.91
|
|
|
$
|
12.79
|
|
Third Quarter (4/1/2006-6/30/2006)
|
|
$
|
15.37
|
|
|
$
|
11.47
|
|
Fourth Quarter (7/1/2006-9/30/2006)
|
|
$
|
13.82
|
|
|
$
|
10.40
|
|
Closing price at
September 29, 2006
|
|
|
|
|
|
|
|
|
$10.40
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
First Quarter
(10/1/2004-12/31/2004)
|
|
$
|
18.20
|
|
|
$
|
12.06
|
|
Second Quarter (1/1/2005-3/31/2005)
|
|
$
|
21.03
|
|
|
$
|
14.28
|
|
Third Quarter (4/1/2005-6/30/2005)
|
|
$
|
20.82
|
|
|
$
|
15.40
|
|
Fourth Quarter (7/1/2005-9/30/2005)
|
|
$
|
24.00
|
|
|
$
|
13.75
|
|
Closing price at
September 30, 2005
|
|
|
|
|
|
|
|
|
$14.47
|
|
|
|
|
Dividends
We have never declared or paid any cash dividends on our capital
stock and do not anticipate paying cash dividends in the
foreseeable future. We are prohibited under our credit facility
from paying any dividends if there is a default under the
facility or if the payment of any dividends would result in
default. We currently intend to retain future earnings, if any,
to fund the expansion of our business.
33
Recent
Sales of Unregistered Securities
We did not sell any equity securities in fiscal year 2006 that
were not registered under the Securities Act of 1933.
Repurchases
of Common Stock
We did not repurchase any shares of our common stock during
fiscal year 2006.
34
|
|
Item 6.
|
Selected
Financial Data
|
SELECTED
CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected financial data set forth below should be read in
conjunction with our consolidated financial statements and the
notes to those statements and Managements Discussion
and Analysis of Financial Condition and Results of
Operations, appearing elsewhere in this report. The
consolidated statement of operations data for the years ended
December 31, 2002 and 2003 and the consolidated balance
sheet data as of December 31, 2002 and 2003, and as of
September 30, 2004, are derived from our audited financial
statements not included in this report. The consolidated
statement of operations data for the years ended
September 30, 2006 and 2005, and for the nine-month
transitional period ended September 30, 2004, and the
consolidated balance sheet data as of September 30, 2006
and 2005 are derived from our audited financial statements
included elsewhere in this report. The historical results of
operations are not necessarily indicative of the operating
results to be expected in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
September 30
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue
|
|
$
|
235,993
|
|
|
$
|
225,432
|
|
|
$
|
150,436
|
|
|
$
|
191,656
|
|
|
$
|
132,947
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient care
|
|
|
152,879
|
|
|
|
147,211
|
|
|
|
100,096
|
|
|
|
114,631
|
|
|
|
79,752
|
|
Sales, general and administrative
|
|
|
84,198
|
|
|
|
77,237
|
|
|
|
54,116
|
|
|
|
55,784
|
|
|
|
42,962
|
|
Depreciation and amortization
|
|
|
4,948
|
|
|
|
4,604
|
|
|
|
3,005
|
|
|
|
1,963
|
|
|
|
1,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
242,025
|
|
|
|
229,052
|
|
|
|
157,217
|
|
|
|
172,378
|
|
|
|
124,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(6,032
|
)
|
|
|
(3,620
|
)
|
|
|
(6,781
|
)
|
|
|
19,278
|
|
|
|
8,884
|
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,460
|
|
|
|
1,212
|
|
|
|
364
|
|
|
|
391
|
|
|
|
25
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
|
|
|
|
(68
|
)
|
|
|
(126
|
)
|
|
|
(935
|
)
|
Other expense
|
|
|
(454
|
)
|
|
|
(661
|
)
|
|
|
(48
|
)
|
|
|
(82
|
)
|
|
|
(137
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income
taxes
|
|
|
(5,027
|
)
|
|
|
(3,069
|
)
|
|
|
(6,533
|
)
|
|
|
19,461
|
|
|
|
7,837
|
|
Income tax expense (benefit)
|
|
|
6,624
|
|
|
|
(812
|
)
|
|
|
(2,301
|
)
|
|
|
4,256
|
|
|
|
281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(11,651
|
)
|
|
|
(2,257
|
)
|
|
|
(4,232
|
)
|
|
|
15,205
|
|
|
|
7,556
|
|
Accrued preferred stock
dividends(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,052
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income to stockholders
|
|
$
|
(11,651
|
)
|
|
$
|
(2,257
|
)
|
|
$
|
(4,232
|
)
|
|
$
|
15,205
|
|
|
$
|
3,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.71
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
0.97
|
|
|
$
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
(0.71
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
$
|
0.89
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,406
|
|
|
|
16,316
|
|
|
|
16,082
|
|
|
|
15,707
|
|
|
|
5,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,406
|
|
|
|
16,316
|
|
|
|
16,082
|
|
|
|
17,038
|
|
|
|
6,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects accrued dividends on the Series B Preferred Stock,
Series C Preferred Stock and the Series D Preferred
Stock at the rate of 10% per annum, compounded
semi-annually. The preferred stock converted into common stock
upon the closing of our initial public offering in 2002, and the
accrued preferred stock dividends, which were not payable in the
event of a conversion into common stock, were reclassified as
additional
paid-in-capital.
The preferred stock dividend is included in accumulated deficit. |
35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(9,394
|
)
|
|
$
|
(22
|
)
|
|
$
|
17,385
|
|
|
$
|
12,417
|
|
|
$
|
6,142
|
|
Net cash provided by (used in)
investing activities
|
|
$
|
4,565
|
|
|
$
|
(3,855
|
)
|
|
$
|
(4,313
|
)
|
|
$
|
(38,515
|
)
|
|
$
|
(6,008
|
)
|
Net cash provided by financing
activities
|
|
$
|
450
|
|
|
$
|
1,152
|
|
|
$
|
1,287
|
|
|
$
|
1,322
|
|
|
$
|
37,587
|
|
Net (decrease) increase in cash
|
|
$
|
(4,379
|
)
|
|
$
|
(2,725
|
)
|
|
$
|
14,359
|
|
|
$
|
(24,776
|
)
|
|
$
|
37,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30,
|
|
|
As of December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,583
|
|
|
$
|
25,962
|
|
|
$
|
28,687
|
|
|
$
|
14,328
|
|
|
$
|
61,852
|
|
Working capital
|
|
|
43,465
|
|
|
|
52,213
|
|
|
|
58,741
|
|
|
|
59,920
|
|
|
|
41,502
|
|
Total assets
|
|
|
119,792
|
|
|
|
136,436
|
|
|
|
137,792
|
|
|
|
122,221
|
|
|
|
94,943
|
|
Capital lease obligations,
including current portion
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
|
88
|
|
|
|
82
|
|
Long-term debt, including current
portion
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250
|
|
Accumulated deficit
|
|
|
(32,452
|
)
|
|
|
(20,801
|
)
|
|
|
(18,544
|
)
|
|
|
(14,312
|
)
|
|
|
(29,517
|
)
|
Total stockholders equity
|
|
|
78,092
|
|
|
|
86,862
|
|
|
|
87,527
|
|
|
|
88,076
|
|
|
|
69,247
|
|
36
VISTACARE,
INC.
HIGHLIGHTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
September 30, 2004
|
|
|
|
(Dollars in millions, except per day/per diem and per
beneficiary)
|
|
|
Patient Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Daily Census (ADC)
|
|
|
5,218
|
|
|
|
5,376
|
|
|
|
5,225
|
|
Ending census on last day of period
|
|
|
5,256
|
|
|
|
5,510
|
|
|
|
5,304
|
|
Patient days
|
|
|
1,904,667
|
|
|
|
1,962,098
|
|
|
|
1,431,766
|
|
In-patient days (general in-patient)
|
|
|
21,753
|
|
|
|
17,335
|
|
|
|
12,676
|
|
Admissions
|
|
|
17,006
|
|
|
|
17,574
|
|
|
|
11,545
|
|
Diagnosis mix of admitted patients:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancer
|
|
|
32
|
%
|
|
|
31
|
%
|
|
|
32
|
%
|
Alzheimers/Dementia
|
|
|
12
|
%
|
|
|
11
|
%
|
|
|
11
|
%
|
Heart disease
|
|
|
19
|
%
|
|
|
18
|
%
|
|
|
18
|
%
|
Respiratory
|
|
|
9
|
%
|
|
|
9
|
%
|
|
|
8
|
%
|
Failure to thrive/Rapid decline
|
|
|
21
|
%
|
|
|
23
|
%
|
|
|
23
|
%
|
All other
|
|
|
7
|
%
|
|
|
8
|
%
|
|
|
8
|
%
|
Discharges
|
|
|
17,233
|
|
|
|
17,382
|
|
|
|
11,261
|
|
Average length of stay on
discharged patients
|
|
|
110
|
|
|
|
113
|
|
|
|
115
|
|
Median length of stay on discharged
patients
|
|
|
30
|
|
|
|
31
|
|
|
|
34
|
|
Program site
Statistics:
|
|
|
|
|
|
|
|
|
|
|
|
|
Programs
|
|
|
56
|
|
|
|
58
|
|
|
|
45
|
|
In-patient units (included within a
program)
|
|
|
5
|
|
|
|
2
|
|
|
|
1
|
|
Medicare provider numbers
|
|
|
37
|
|
|
|
37
|
|
|
|
35
|
|
Programs by ADC size
|
|
|
|
|
|
|
|
|
|
|
|
|
0-60 ADC
|
|
|
23
|
|
|
|
21
|
|
|
|
7
|
|
61-100
ADC
|
|
|
16
|
|
|
|
15
|
|
|
|
10
|
|
100-200
ADC
|
|
|
13
|
|
|
|
16
|
|
|
|
21
|
|
200+ ADC
|
|
|
4
|
|
|
|
6
|
|
|
|
7
|
|
Net patient revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue
|
|
$
|
236.0
|
|
|
$
|
225.4
|
|
|
$
|
150.4
|
|
Net patient revenue per day of care
|
|
$
|
124
|
|
|
$
|
115
|
|
|
$
|
105
|
|
Patient revenue payor %
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare
|
|
|
92.2
|
%
|
|
|
92.5
|
%
|
|
|
93.1
|
%
|
Medicaid
|
|
|
4.4
|
%
|
|
|
4.6
|
%
|
|
|
4.1
|
%
|
Private insurers and managed care
|
|
|
3.4
|
%
|
|
|
2.9
|
%
|
|
|
2.8
|
%
|
Level of
care % of patient revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Routine home care
|
|
|
94.1
|
%
|
|
|
95.4
|
%
|
|
|
95.7
|
%
|
General in-patient care
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
|
|
3.8
|
%
|
Continuous home care
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.4
|
%
|
Respite in-patient care
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Level of care base Medicare per
diem reimbursement rates in effect:
|
|
|
|
|
|
|
|
|
|
|
|
|
Routine home care
|
|
$
|
126.49
|
|
|
$
|
121.98
|
|
|
$
|
118.08
|
|
General in-patient care
|
|
$
|
562.69
|
|
|
$
|
542.61
|
|
|
$
|
525.28
|
|
Continuous home care
|
|
$
|
738.26
|
|
|
$
|
711.92
|
|
|
$
|
689.18
|
|
Respite in-patient care
|
|
$
|
130.85
|
|
|
$
|
126.18
|
|
|
$
|
122.15
|
|
Increase in base rates
|
|
|
3.7
|
%
|
|
|
3.3
|
%
|
|
|
3.4
|
%
|
Hospice Medicare Cap per beneficiary
|
|
$
|
20,585.39
|
|
|
$
|
19,777.51
|
|
|
$
|
19,635.67
|
|
Accrued Medicare Cap liability(1)
|
|
$
|
9.8
|
|
|
$
|
18.1
|
|
|
$
|
19.6
|
|
Estimated Medicare Cap reductions
to revenue
|
|
$
|
6.8
|
|
|
$
|
11.9
|
|
|
$
|
14.8
|
|
Medicare Cap paid
|
|
$
|
(15.0
|
)
|
|
$
|
(13.4
|
)
|
|
$
|
(1.1
|
)
|
Allowance for denials reserve
|
|
$
|
2.2
|
|
|
$
|
3.1
|
|
|
$
|
5.9
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing home expenses
|
|
$
|
48.8
|
|
|
$
|
53.1
|
|
|
$
|
34.3
|
|
Nursing home revenues
|
|
$
|
(44.4
|
)
|
|
$
|
(47.9
|
)
|
|
$
|
(30.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nursing home costs, net
|
|
$
|
4.4
|
|
|
$
|
5.2
|
|
|
$
|
3.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We have not received any of the assessment letters for our
fiscal year ended September 30, 2006 as of the date of this
report. |
37
Glossary
As used in this report, the following terms have the meanings
indicated.
Admissions: New admissions including
re-admissions.
Average Daily Census (ADC): Total patient days
for all patients divided by the number of days during the period.
Average length of stay: Total days of care for
patients discharged during the period divided by the total
patients discharged.
Discharges: Total patients deceased or
discharged from service.
In-patient days: Total patient days in an
acute care facility (hospital based or company owned).
In-patient unit: Patient care provided in a
hospital or other facility when pain and other symptoms cannot
be managed effectively in a home setting. In the in-patient
units we operate, we care for our own patients and a limited
number of other hospice providers patients. In some of our
programs we contract with other in-patient units to provide care
for our patients.
Median length of stay: The midpoint of the
patients total days of service that were discharged during
the period.
Medicare Cap: The limitation on overall
aggregate payments made to a hospice for services provided to
Medicare beneficiaries during a Cap period that begins
November 1 and ends October 31 each year, assessed on
an individual provider number basis.
Medicare Cap Calculation: A calculation made
by the Medicare fiscal intermediary pursuant to applicable
Medicare regulations to determine whether a hospice provider has
received payments in excess of the Medicare Cap. The total
Medicare payments received under a given provider number for
services provided to all Medicare hospice care beneficiaries
served within the provider number between each November 1
and October 31 is determined (Total Payments).
The number of Medicare beneficiaries admitted (adjusted for the
portion of time served or expected to be served by another
provider pro-ration) at each hospice provider
between September 28 of each year and September 27 of the
following year (Beneficiaries). The number of
Beneficiaries is multiplied by the per beneficiary Cap amount
for the applicable cap period (Cap Amount). If the
Total Payments are greater than the Cap Amount, the provider
refunds the difference.
Patient Day: A day we provide service to a
patient.
Program: A separate hospice location operated
under the same management as other company hospices.
Provider number: Unique identifiers assigned
by Medicare and Medicaid to their providers. Multiple programs
can share the same Medicare provider number.
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
Overview
During the year ended September 30, 2006, we developed one
new licensed and Medicare certified hospice program, and opened
three new inpatient units, which are combined with existing
hospice programs. We also consolidated our four Utah programs
into two, and closed one location in the Midwest. As of
September 30, 2006, we were operating 56 programs under 37
Medicare provider numbers, including five hospice inpatient
units, serving approximately 5,218 patients in
14 states.
For the year ended September 30, 2006, our net patient
revenue was $236.0 million, as compared to
$225.4 million for the year ended September 30, 2005.
Due to Medicare Cap estimated liabilities, which covers Medicare
Cap obligations for our Medicare provider numbers, our net
patient revenue for the year ended September 30, 2006 was
reduced by $6.8 million, as compared to a reduction of
$11.9 million in the fiscal year ended September 30,
2005. The $6.8 million reduction to net patient revenue for
Medicare Cap includes accruals or adjustments of
$5.7 million for patient dates during 2006;
$0.2 million for the 2003 Medicare Cap year revised
38
assessments received in 2006; $0.2 million for the 2004
Medicare Cap year estimated revised assessments for 2004;
$0.5 million for the 2005 Medicare Cap year higher
assessments than accrued received in 2006 and $0.2 million
for the 2005 Medicare Cap year estimated revised assessments.
See Item 1., Business, Government Regulations,
Overview of Government Payments Medicare, Program
Limits on Hospice Care Payments.
For the year ended September 30, 2006, we recorded a net
loss of $11.7 million, as compared to net loss of
$2.3 million during the year ended September 30, 2005.
Our business has been positively impacted from regular increases
in Medicare hospice reimbursement base rates, including the two
most recent increases effective October 1, 2005 and
October 1, 2004, of 3.7% and 3.3%, respectively, over the
base rates then in effect. These increases have been partially
offset by increases in patient care labor expense, sales,
general and administrative expenses and new program development
expense. During the twelve months ended September 30, 2006,
our net income was negatively impacted by lost revenue related
to the decertification of one of our Medicare provider numbers
in the state of Indiana. For the year ended September 30,
2006, we estimate our pre-tax earnings performance was
negatively impacted by $7.2 million due to this
decertification. (Refer to the Current and Subsequent Events
section below for a more detailed description of our Indiana
business during 2006.)
Our net loss of $11.7 million for the year ended
September 30, 2006 was due in a large part to our increased
tax expense for the year. During the fourth quarter ended
September 30, 2006, the Company assessed the recoverability
of its deferred tax asset. As a result of that review, the
Company was required to record a valuation allowance of
$8.3 million during the quarter and year ended
September 30, 2006 for all of its deferred tax assets less
the deferred tax liabilities expected to reverse and become
taxable income.
Change in
Year End
On August 18, 2004, VistaCares Board of Directors
changed the Companys fiscal year-end from December 31
to September 30. The financial results now being reported
by the Company relate to the twelve-month fiscal years ended
September 30, 2006 and 2005, and the nine-month
transitional period ended September 30, 2004. In order to
compare the financial information for the twelve months ended
September 30, 2005 in Managements Discussion and
Analysis of Financial Condition and Results of Operations to a
like fiscal period, we prepared financial information for the
twelve months ended September 30, 2004, which includes the
nine-month transitional period ended September 30, 2004,
and the three months ended December 31, 2003 as reported in
the Companys
Form 10-Q
for the three months ended December 31, 2003 (see charts
below).
Critical
Accounting Policies and Significant Estimates
To understand our financial position and results of operations,
you should read carefully the description of our significant
accounting policies set forth in Note 1 of Notes To
Consolidated Financial Statements included in Item 8 of
this report. You should also be aware that application of our
significant accounting policies requires that we make certain
judgments and estimates, which are subject to an inherent degree
of uncertainty.
Net
Patient Revenue
Net patient revenue is the amount we believe we are entitled to
collect for our services, adjusted as described below. The
amount varies depending on the level of care, the payor and the
geographic area where the services are rendered. We derive net
patient revenue from billings to Medicare, Medicaid, private
insurers, managed care providers, patients and others. We
operate under arrangements with those payors pursuant to which
they reimburse us for services we provide to hospice eligible
patients they cover, subject only to our submission of adequate
and timely claim documentation. Our patient intake process
screens patients for hospice eligibility and identifies whether
their care will be covered by Medicare, Medicaid, private
insurance, managed care or self-pay. We recognize patient
revenues once the patients hospice eligibility has been
certified by a physician, the patients coverage from a
payment source has been verified and services have been provided
to that patient. Net patient revenue includes adjustments for
charity care, estimated payment denials (which VistaCare
experiences from time to time for reasons such as its failure to
submit complete and accurate claim documentation, its failure to
provide timely written physician certifications as to patient
eligibility, or the payor deems the patient ineligible for
insurance coverage), contractual adjustments, amounts VistaCare
estimates it could be required to repay to Medicare, such as
39
payments that VistaCare would be required to make in the event
that any of its programs exceed the annual Medicare Cap, and
subsequent changes to initial level of care determinations.
Our patient revenues are primarily determined by the number of
billable patient days, the level of care provided and
reimbursement rates. The number of billable patient days is a
function of the number of patients admitted to our programs and
the number of days that those patients remain in our care
(length of stay, based upon patient discharges during the
period). Our average length of stay on discharged patients was
approximately 110 days for the year ended
September 30, 2006. We believe we exceed the industry
average on average length of stay and we attribute this to
several factors. First, compared to hospice industry averages,
we have a relatively high percentage of non-cancer patients,
though in line with total cancer deaths in the country and in
line with the Medicare decedent diagnosis mix. Non-cancer
patients typically have a longer average length of stay than
cancer patients. Second, we believe that our open access
philosophy and our efforts to educate referral sources about
hospice care encourages earlier election of patients to hospice
care. Finally, a significant amount of our patient census is in
rural markets, where access to intensive health care services,
hospitals or other alternative health care services for
hospice-eligible patients is more inconvenient than in more
urban areas. Our median length of stay, based upon patient
discharges during the period, was 30 days for the year
ended September 30, 2006.
Net patient revenue includes adjustments for:
|
|
|
|
|
estimated repayments to Medicare, if any of our programs exceed
the annual Medicare Cap, as described under the heading
Medicare Cap in Note 1 of the Notes to the
Consolidated Financial Statements included elsewhere in this
Report; and
|
|
|
|
estimated payment denials, contractual adjustments and
subsequent changes to initial level of care determinations,
under the heading Denials and Contract Adjustments
in Note 1 of the Notes to the Consolidated Financial
Statements included elsewhere in this Report.
|
We recorded reductions to net patient revenue for exceeding the
annual Medicare Cap of $6.8 million, $11.9 million,
and $14.8 million for the year ended September 30,
2006, the year ended September 30, 2005 and the nine-month
transitional period ended September 30, 2004, respectively.
As of the date of this Report, we have received and paid, on an
inception to date basis, assessment letters for exceeding the
annual Medicare Cap totaling $1.1 million for programs in
the 2002 Medicare Cap year, $7.7 million for programs in
the 2003 Medicare Cap year, $12.0 million for programs in
the 2004 Medicare Cap year and $8.7 million for the
programs in the 2005 Medicare Cap year. Any further assessments
for prior years could result in adjustment in the fiscal year in
which the assessment is received to reflect the difference
between the actual assessment and the estimate previously
recorded. As of September 30, 2006 and 2005, respectively,
our accrued expenses included $9.8 million and
$18.1 million for Medicare Cap accrued liability.
We adjust our estimates for payment denials from time to time
based on our billing and collection experience, and payor mix.
We estimate such adjustments to net patient revenue based on
significant historical experience utilizing our centralized
billing and collection department, which continually monitors
the factors that could potentially result in a change in payment
denial experience. We recorded reductions to net patient revenue
for estimated payment denials (excluding room and board charges
which are recorded in nursing home costs, net),
contractual adjustments (such as differences in payments by
commercial payors) and subsequent changes to initial level of
care determinations (made retroactively by our staff after
initial admission) of $1.4 million for the year ended
September 30, 2006, $2.9 million for the year ended
September 30, 2005, and $3.8 million for the
nine-month transitional period ended September 30, 2004. As
of September 30, 2006 and September 30, 2005, the
allowance for denials on patient accounts receivable and room
and board was $2.2 million and $3.1 million,
respectively. Any adjustments to net patient revenue for changes
in estimates, based on historical trends, are made only in the
current period.
Medicare and Medicaid reimbursements account for approximately
97% of our net patient revenue for each of the three periods
ended September 30, 2006, September 30, 2005 and
September 30, 2004, respectively. Whether Medicare or
Medicaid continues to provide reimbursement for hospice care is
dependent upon governmental policies.
40
The table below sets forth the percentage of our net patient
revenue derived from Medicare, Medicaid, private insurers and
managed care payors for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
Payors
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Medicare
|
|
|
92.2
|
%
|
|
|
92.5
|
%
|
|
|
93.1
|
%
|
Medicaid
|
|
|
4.4
|
%
|
|
|
4.6
|
%
|
|
|
4.1
|
%
|
Private insurers and managed care
|
|
|
3.4
|
%
|
|
|
2.9
|
%
|
|
|
2.8
|
%
|
Medicare, Medicaid, most private insurers and managed care
providers pay for hospice care at a daily or hourly rate that
varies depending on the level of care provided. The table below
sets forth the percentage of our net patient revenue generated
under each of the four Medicare levels of care for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
Level of Care
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Routine home care
|
|
|
94.1
|
%
|
|
|
95.4
|
%
|
|
|
95.7
|
%
|
General inpatient care
|
|
|
4.9
|
%
|
|
|
3.7
|
%
|
|
|
3.8
|
%
|
Continuous home care
|
|
|
0.8
|
%
|
|
|
0.7
|
%
|
|
|
0.4
|
%
|
Respite inpatient care
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
|
|
0.1
|
%
|
Historically, effective each October 1, Medicare adjusts
its base hospice care reimbursement rates for the Medicare year
beginning that date, based on inflation and other economic
factors. The Medicare base rates are typically announced in
August for the then current Medicare year. The Medicare base
rates were increased 3.7% effective October 1, 2005
(announced during August 2004) and 3.3% effective
October 1, 2004 (announced August 2003), over the base
rates then in effect. These increases have favorably impacted
our net patient revenues. Medicares base rates are subject
to regional adjustments based on local wage levels. These
regional adjustments are not necessarily proportional to
adjustments in the national average base rate.
Medicaid reimbursement rates and hospice care coverage rates for
private insurers and managed care plans generally tend to
approximate Medicare rates.
Because we generally receive fixed payments for our hospice care
services based on the level of care provided to our hospice
patients, we are at risk for the cost of services provided to
our hospice patients. We cannot assure that Medicare, Medicaid
and private insurers will continue to pay for hospice care in
the same manner or in the same amount that they currently pay.
Reductions in amounts paid by government programs for our
services or changes in methods or regulations governing
payments, which would likely result in similar changes by
private third-party payors, could adversely affect our net
patient revenue and profitability.
Laws and regulations governing the Medicare and Medicaid program
are complex and subject to interpretation. We believe that we
are in compliance with all applicable laws and regulations and
are not aware of any pending or threatened investigations
involving allegations of potential wrongdoing, which would have
a material impact on our consolidated financial condition or
results of operations. Compliance with such laws and regulations
can be subject to future government review and interpretation as
well as significant regulatory action including fines, penalties
and exclusion from the Medicare and Medicaid programs.
Medicare
Cap Liability
Our 56 hospice programs operate under 37 Medicare provider
numbers with certain programs collectively operating as a single
provider. Each of our 37 hospice providers is subject to the
annual Medicare Cap. Medicare Cap rules potentially limit the
reimbursement we receive when average lengths of stay exceed
certain levels on a program by program basis. This Cap amount is
revised annually to account for inflation. For the twelve-month
period ended September 30, 2006, the annual hospice benefit
Cap was $20,585.39 per beneficiary. While the Medicare Cap
is explained in more detail elsewhere herein, in general we are
limited on a program by program basis to the annual Cap amount
on a per patient equivalent basis.
41
We actively monitor each of our programs to determine whether
they are likely to exceed the Medicare Cap. If we determine that
a program is likely to exceed the Cap, we attempt to institute
corrective action, such as a change in patient mix. However, to
the extent we believe our corrective action will not be
successful, we estimate the amount that we could be required to
repay to Medicare and accrue that amount as a reduction to net
patient revenue. Throughout the year, we review our operating
experience and adjust our estimate of potential Medicare Cap
liability. The accuracy of our estimates is affected by many
factors, including:
|
|
|
|
|
the actual number of Medicare beneficiary patient admissions and
discharges and the dates of occurrence of each;
|
|
|
|
the average length of stay within each provider number, with
those provider groups having patients averaging over
180 days most likely to generate Medicare Cap exposure;
|
|
|
|
our success in implementing corrective measures;
|
|
|
|
possible enrollment of beneficiaries in our providers who,
without our knowledge, may have previously elected Medicare
hospice coverage through another hospice provider and whose
Medicare Cap amount is prorated for the days of service for the
previous hospice admission;
|
|
|
|
the possible enrollment of beneficiaries with another hospice
provider who had been on previous hospice service with one of
our own hospice providers and whose Medicare Cap amount is
prorated between the providers for the days of service for the
subsequent hospice admission;
|
|
|
|
fiscal intermediary disallowances of certain beneficiaries and
changes in calculation methodology;
|
|
|
|
uncertainty surrounding length of patient stay in various
patient groups, particularly with respect to non-oncology
patients; and
|
|
|
|
the fact that we are not advised of the Medicare Cap per
beneficiary reimbursement amount that will be used by Medicare
to calculate our Medicare Cap exposure until the end of the
Medicare Cap year, requiring us to use an estimate of that
amount throughout the year.
|
Although we make every effort to record an accurate estimate for
Medicare Cap liability, actual assessments of certain of our
providers differed from our estimates previously recorded for
the Medicare Cap years ended October 2003, 2004 and 2005. The
difference between our estimates and the actual assessment for
the Medicare Cap years 2003, 2004 and 2005 were due to our
fiscal intermediary (FI) disallowing certain
beneficiaries. The disallowed beneficiaries were patients who
received care with another hospice provider and also to activity
that took place subsequent to the end of the respective Medicare
Cap year, that was not known or knowable until actual
assessments were made, approximately eleven to twelve months
later. Activity that took place subsequent to the end of the
2003, 2004 and 2005 Medicare Cap year included (i) patients
who received care with another hospice provider;
(ii) patients who were initially billed to commercial
insurance companies and we later determined that Medicare should
have been billed; and (iii) to a lesser degree, due to
minimal changes in the level of care recorded, which was
discovered after the close of the fiscal year end. Of the
$1.6 million in 2003, the ($1.2) million in 2004 and
the $0.5 million in 2005 that represented a difference
between estimates and actual assessment for letters received
from our FI between June and October 2004 for the 2003 Medicare
Cap year, between August and November 2005 for the 2004 Medicare
Cap year, and between August and September 2006 for the 2005
Medicare Cap years $1.2 million in 2003,
($1.2) million in 2004 and $0.4 million in 2005
related to certain technical disqualification of claims and the
pro-ration of service dates for patients and $0.4 million
in 2003, ($0.0) million in 2004 and $0.1 million in
2005 related to patients who were initially billed to commercial
insurance companies or to changes in the level of care, all of
which were recorded during our fiscal nine months ended and our
fiscal year ended September 30, 2004, 2005 and 2006.
Estimated Medicare Cap obligations are subject to several
variables which can cause our estimates for the ultimate
obligation to vary. Our obligation is further impacted by the
actions of patients who leave our program and enroll in another.
On a quarterly basis the Company reviews its estimates for this
obligation and makes changes in estimates as new information
becomes available. This can include matters such as intermediary
audit results and changing admission and discharge trends as we
go through each year.
42
Adjustments
to Net Patient Revenue for Estimated Payment
Denials
Approximately 97% of our net patient revenue is derived from
Medicare and Medicaid programs. The balance of our net patient
revenue is derived primarily from private insurers and managed
care programs. We operate under arrangements with these payors
pursuant to which they reimburse us for services we provide to
hospice-eligible patients they cover, subject only to our
submission of adequate and timely claim documentation. In some
cases, these payors deny our claims for reimbursement if, for
example, our claim documentation is incomplete or contains
incorrect patient information, the payor deems the patient
ineligible for insurance coverage or we have failed to provide
timely written physician certifications as to patient
eligibility.
We adjust our net patient revenue to the extent we estimate to
what magnitude these payors may deny our claims. This estimate
is based on historical trends and is subject to change based on
information we receive or data we compile concerning factors
such as our historical experience of claim denials by payor
class, the strength and reliability of our internal billing
practices and controls and regulatory changes in the environment.
We recorded reductions to net patient revenue for estimated
payment denials (excluding room and board charges which are
recorded in nursing home costs, net), contractual
adjustments (such as differences in payments by commercial
payors) and subsequent changes to initial level of care
determinations (made retroactively by our staff after initial
admission). We base our allowance levels on assessments of
historical charge-off history and an analysis of our aged
accounts receivable. The allowance varies as our charge-off
experiences change either favorably or adversely.
Expenses
We recognize expenses as incurred. Our primary expenses include
those we classify as either patient care expenses or sales,
general and administrative expenses.
Patient care expenses consist primarily of salaries, benefits,
payroll taxes and travel expenses associated with our hospice
care providers. Patient care expenses also include the cost of
pharmaceuticals, durable medical equipment, medical supplies,
inpatient unit expenses, nursing home costs and purchased
services such as ambulance, infusion and radiology. We incur
in-patient unit expenses primarily through per diem charge
arrangements with hospitals and skilled nursing facilities,
where we provide our services at facilities not owned by us. We
currently operate five in-patient units, an increase of three
in-patient units since September 30, 2005.
Patient length of stay impacts our patient care expenses as a
percentage of net patient revenue. Patient care expenses are
generally higher following the initial admission and during the
latter days of care for a patient. In the initial days of care,
expenses tend to be higher because of the initial purchases of
pharmaceuticals, medical equipment and supplies and the
administrative expenses of determining the patients
hospice eligibility, registering the patient and organizing the
plan of care. In the latter days of care, expenses tend to be
higher because patients generally require more services, such as
pharmaceuticals and nursing care, due to their deteriorating
medical condition. Accordingly, if lengths of stay decline,
those higher expenses are spread over fewer days of care, which
increases patient care expenses as a percentage of net patient
revenue and negatively impacts profitability. Patient care
expenses are also impacted by the geographic concentration of
patients. Labor expenses, which represent the single largest
category of patient care expenses, tend to be less if patients
are geographically concentrated and hospice care providers are
required to spend less time traveling and can care for more
patients.
For patients receiving nursing home care under state Medicaid
programs in states other than Arizona, Oklahoma and
Pennsylvania, who elect hospice care under Medicare or Medicaid,
we contract with nursing homes for the nursing homes
provision of room and board services. In these states, the
applicable Medicaid program must pay us, in addition to the
applicable Medicare or Medicaid hospice daily or hourly rate, an
amount equal to no more than 95% of the Medicaid daily nursing
home rate for room and board services furnished to the patient
by the nursing home. Under our standard nursing home contracts,
we pay the nursing home for these room and board services at
predetermined contract rates, between 95% and 100% of the full
Medicaid per diem nursing home rate. In Arizona, Oklahoma and
Pennsylvania, the Medicaid program pays the nursing home
directly for these expenses or has created a Medicaid managed
care program that either reduces or eliminates this room and
board payment.
43
Nursing home expenses totaled approximately $48.8 million,
$53.1 million and $34.3 million for the year ended
September 30, 2006, the year ended September 30, 2005,
and for the nine-month transitional period ended
September 30, 2004, respectively. Nursing home revenues
totaled approximately $44.4 million, $47.9 million and
$30.9 million for the year ended September 30, 2006,
the year ended September 30, 2005, and for the nine-month
transitional period ended September 30, 2004, respectively.
Revenues are less than the expenses due to provisions for
estimated uncollectible amounts and differences in nursing home
contracted rates. We account for the difference between the
amount we pay the nursing home and the amount we receive from
Medicaid (net of estimated room and board reimbursement claim
denials) as patient care expenses. We refer to this difference
as nursing home costs, net. Our nursing home costs,
net, were $4.4 million, $5.2 million and
$3.4 million for the year ended September 30, 2006,
the year ended September 30, 2005, and for the nine-month
transitional period ended September 30, 2004, respectively.
Sales, general and administrative 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.
Stock-Based
Compensation
Prior to October 1, 2005 the Company followed the guidance
of Accounting Principles Board Opinion No. 25 (APB
No. 25) related to the accounting treatment of
stock-based compensation. In accordance with APB No. 25 and
related interpretations, if an employee stock option is granted
or modified with an exercise price which is less than the deemed
fair value of the underlying stock, the difference is treated as
a compensation charge for the intrinsic value that must be
recognized ratably over the vesting period for the option.
During the twelve months ended September 30, 2005 and the
nine month transitional period ended September 30, 2004,
the Company expensed approximately $0.3 million and
$0.2 million, respectively, as stock-based deferred
compensation due to options granted and restricted stock at less
than the deemed fair value. Compensation expense recognized in
the year ended September 30, 2005 and the nine-month
transitional period ended September 30, 2004 related to
this stock based deferred compensation was recorded in sales,
general and administrative expense in the accompanying
Consolidated Statement of Operations.
On May 4, 2005, the Companys Board of Directors
approved accelerating the vesting of 613,624
out-of-the
money stock options for executive officers and non executive
officers to avoid recording compensation expense on these
options under SFAS 123(R), which the Company adopted on
October 1, 2005. The Company believed these
out-of-the
money options were not providing the intended financial
incentives to employees, and as such did not deem it appropriate
to record compensation expense related to these options. Under
SFAS 123, a modified award requires a new measurement of
compensation cost as the excess, if any, of the fair value of
the modified award over the fair value of the original award
immediately before its terms are modified. Since there is no
further service requirement for these stock options, the excess
of the compensation cost for these options measured at the
modification date, less amounts previously expensed on a
pro-forma basis, resulted in an increase to pro-forma
compensation expense of $2.9 million net of tax impact for
the year ended September 30, 2005.
The acceleration of these options eliminated future compensation
expense that the Company would otherwise recognize in its
statement of operations with respect to these options upon the
effectiveness of SFAS No. 123(R) (Share-Based
Payment). The acceleration of stock option vesting requires a
new measurement date. However, while the modification may allow
the employees to vest in options that could have been forfeited
pursuant to the options original terms (i.e., termination prior
to vesting), no future compensation expense will result since
the options were
out-of-the-money
at the new measurement date. The maximum future expense that was
eliminated was approximately $4.6 million. This amount is
properly reflected in the pro-forma footnote disclosure in our
fiscal 2005 financial statements, as permitted under the
transition guidance provided by the Financial Accounting
Standards Board.
Effective October 1, 2005, the Company adopted the fair
value recognition provisions of Financial Accounting Standards
Board (FASB) Statement No. 123(R)
(FAS No. 123R) Share-Based Payment,
which requires companies to measure and recognize compensation
expense for all share-based payments at fair value. The Company
adopted this accounting treatment on the modified prospective
basis. During the twelve months ended
44
September 30, 2006, the Company recognized approximately
$2.4 million in expense related to stock-based compensation
which is approximately $2.1 million more than the Company
would have recognized as compensation expense following the
guidance of APB No. 25. Beginning in the current fiscal
year, compensation expense related to share-based awards is
generally amortized over the vesting period with 10% recorded as
patient care expense and 90% recorded in sales, general and
administrative expense in the accompanying Consolidated
Statement of Operations. As of September 30, 2006, there
was $5.7 million of unrecognized compensation cost related
to nonvested share-based compensation arrangements granted under
all Company plans. That cost is expected to be recognized over a
weighted-average period of 3.8 years.
Goodwill
and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards
No. 142, (SFAS No. 142)
Goodwill and Other Intangible Assets, goodwill is no
longer amortized, but instead is assessed for impairment at
least annually. Other intangible assets with a finite useful
life are amortized over their useful life.
Goodwill remaining on our balance sheet was $24.0 million
as of September 30, 2006 and September 30, 2005. Prior
to 2002, we were amortizing the goodwill from our acquisitions
over 30 years. After implementation of
SFAS No. 142 in 2002, we no longer amortize goodwill.
We conduct a review in the fourth quarter of each fiscal year,
or more often if events or circumstances arise that indicate the
fair market value of such goodwill may have materially declined.
Such events or circumstances could include a significant
under-performance of our acquired business relative to
historical or projected operating results, significant negative
industry trends, and significant changes in regulations
governing hospice reimbursements from Medicare and state
Medicaid program.
To determine the fair value of our goodwill for our single
reporting unit, we make estimates using our market
capitalization for our reporting unit since it comprises the
Company. In the event we determine that the value of our
goodwill has become impaired, we are required to write down the
value of the goodwill to its fair value on our balance sheet and
to reflect the extent of the impairment as an expense on our
statements of operations. We have determined that no impairment
of goodwill existed as of September 30, 2006.
Capitalized
Software Development Costs
We have capitalized certain internal costs related to the
development of software used in our business. We capitalize all
qualifying internal expenses incurred during the application
development stage. Costs incurred during the preliminary project
stage and post-implementation/operation stages are expensed as
incurred. We amortize the capitalized software development costs
related to particular software over a three-year period
commencing when that software is substantially complete and
ready for its intended use. Capitalized software development
costs as of September 30, 2006 related to our billing
software to date. We began amortizing the development costs
related to our billing software in the fourth quarter of 2003.
As of September 30, 2006 and September 30, 2005, our
total capitalized software development costs, net of
amortization, was approximately $1.6 million and
$3.4 million, respectively.
Deferred
Tax Assets
The Company is required to assess the recoverability of its
deferred tax assets based on the more likely than
not criteria prescribed under SFAS 109. In performing
this assessment, management considers all positive evidence
available for the recovery of the assets which includes the
following sources in the order of their persuasiveness;
i) future taxable temporary differences, ii) loss
carryback availability, iii) tax planning strategies; and
iv) expected future operating income. When a Company has
incurred cumulative losses for a three year period, it would be
rare to consider expected future operating income as sufficient
evidence for not recording a valuation allowance. The operating
loss for 2006 resulted in the Company moving from a cumulative
profit position to a cumulative loss position for the most
recent three year period ended September 30, 2006. As a
result, the Company recorded a valuation allowance of
$8.3 million during the quarter and year ended
September 30, 2006 for all of its deferred tax assets, less
the deferred tax liabilities expected to reverse and become
taxable income. This resulted in the Company having a net
deferred tax liability of $1.1 million relating primarily
to its tax deductible goodwill that is being amortized over
15 years given that its reversal is indeterminate.
45
Current
and Subsequent Events
On October 17, 2005, we were notified by the Centers for
Medicare and Medicaid Services (CMS) 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 termination also impacted our Terre Haute, Indiana
program since the two programs shared 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. The
terminations limited our reimbursement (for services provided to
patients being served on the effective date of termination) and
no reimbursement was available for any services to patients
admitted into the affected programs after the date of
termination. We took steps to allow the patients and families of
the affected programs to remain under our care. Some patients
transferred to another of our Indiana programs, some patients
transferred to competitor programs, and we continued to serve
some patients at the Indianapolis and Terre Haute programs
without the expectation of reimbursement. We appealed the
termination determination. With no admission of liability or
fault on our part and no admission of error or fault by CMS, on
July 5, 2006 a settlement was reached in order to avoid the
unnecessary expense of litigation and arrive at a final
resolution of the matter. Under the terms of the settlement, CMS
agreed to modify the effective date of the termination to
December 27, 2005 and we agreed to dismiss our appeal. As a
result of the settlement, during the fourth quarter of fiscal
year 2006 we billed and collected on $0.8 million in
invoices related to reimbursable services provided to patients
through January 26, 2006.
We applied to separate Terre Haute from Indianapoliss
provider number, and were approved for a separate provider
number for Terre Haute as of March 7, 2006. From
November 15, 2005 to March 6, 2006, due to the
termination of our Medicare and Medicaid provider agreements as
discussed above, we could not admit new patients to our Terre
Haute program but we continued to provide care for existing
patients without the expectation of receiving reimbursement. We
began receiving reimbursement for Medicare and Medicaid services
for our patients transferred to our new Terre Haute provider
number as of March 7, 2006. This transfer of patients,
which has been as seamless as possible to the patients and
families, was a time consuming process of discharging the
patient from one provider number and admitting the same patient
through a standard admission process at the new provider number.
These Terre Haute patient transfers were processed over several
weeks and by the end of April 2006, all patients were
transferred to the new provider number.
Following the decertification action discussed above, in order
to continue to serve the Indianapolis community, we applied for
permission to relocate our Bloomington, Indiana program to
Indianapolis, which relocation was approved by the Indiana State
Department of Health on November 11, 2005. We also
requested that our Bloomington office be approved as an
alternative delivery site (ADS) for the program that
had been relocated to Indianapolis. We also received approval
for the Bloomington office to become an ADS for the relocated
program. In early March, 2006, we began to admit new
Indianapolis and Bloomington patients. Due to the relocation,
the Indianapolis program received a Medicare certification
survey. There were no significant findings as a result of the
survey, and our plan of correction was accepted June 30,
2006.
Our operating results throughout Indiana were 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 of these costs and other costs
associated with our recertification efforts, and our inability
to admit new patients to our Terre Haute program between
October 15, 2005 and March 7, 2006, our twelve months
ended September 30, 2006 pre-tax earnings performance was
negatively impacted by approximately $7.2 million compared
to the twelve months ended September 30, 2005. The loss
primarily consisted of $8.8 million for our estimated lost
revenues due to our inability to maintain the programs at
historical levels. This loss in revenue was partially offset by
lower expenses of approximately $2.6 million, primarily due
to lower payroll. In addition, we incurred approximately
$1.0 million for legal, training, and travel costs related
to the certification matters.
On October 6, 2006 the sale of VistaCares Cincinnati
program to In Home Health, Inc. was finalized. The
$1.2 million sale included the hospice license number,
Medicare Provider number, select contracts, all personal
property and all client lists. VistaCare intends to record the
gain on the sale of Cincinnati in the first quarter of 2007
46
for approximately $1.1 million. No amounts were shown as
assets held for sale in our financial statements for the year
ended September 30, 2006 because the amounts involved were
immaterial. Also, we do not believe this transaction will have a
material impact on our future results of operations, financial
position or cash flows.
Results
of Operations
On August 18, 2004, VistaCares Board of Directors
changed the Companys fiscal year-end from December 31
to September 30. The financial results reported by the
Company in this report relate to the twelve-month fiscal year
ended September 30, 2006, the twelve-month fiscal year
ended September 30, 2005, and the nine-month transitional
period ended September 30, 2004. In order to compare the
financial information for the twelve months ended
September 30, 2005 in Managements Discussion and
Analysis of Financial Condition and Results of Operations to a
like fiscal period, we prepared financial information for the
twelve months ended September 30, 2004, which includes the
nine-month transitional period ended September 30, 2004,
and the three months ended December 31, 2003 as reported in
the Companys
Form 10-Q
for the three months ended December 31, 2003. The following
table contains financial information for comparative twelve
month periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
Twelve Months
|
|
|
Twelve Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue
|
|
$
|
235,993
|
|
|
$
|
225,432
|
|
|
$
|
203,999
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient care
|
|
|
152,879
|
|
|
|
147,211
|
|
|
|
132,369
|
|
Sales, general and administrative
|
|
|
84,198
|
|
|
|
77,237
|
|
|
|
68,579
|
|
Depreciation and amortization
|
|
|
4,948
|
|
|
|
4,604
|
|
|
|
3,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
242,025
|
|
|
|
229,052
|
|
|
|
204,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,032
|
)
|
|
|
(3,620
|
)
|
|
|
(807
|
)
|
Non-operating income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,460
|
|
|
|
1,212
|
|
|
|
459
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
|
|
|
|
(78
|
)
|
Other expense
|
|
|
(454
|
)
|
|
|
(661
|
)
|
|
|
(61
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income before income
taxes
|
|
|
(5,027
|
)
|
|
|
(3,069
|
)
|
|
|
(487
|
)
|
Income tax expense (benefit)
|
|
|
6,624
|
|
|
|
(812
|
)
|
|
|
(987
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(11,651
|
)
|
|
$
|
(2,257
|
)
|
|
$
|
500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months
|
|
|
Twelve Months
|
|
|
Twelve Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
$
|
(9,394
|
)
|
|
$
|
(22
|
)
|
|
$
|
20,607
|
|
Net cash provided by (used in)
investing activities
|
|
$
|
4,565
|
|
|
$
|
(3,855
|
)
|
|
$
|
(6,137
|
)
|
Net cash provided by financing
activities
|
|
$
|
450
|
|
|
$
|
1,152
|
|
|
$
|
2,845
|
|
Net (decrease) increase in cash
|
|
$
|
(4,379
|
)
|
|
$
|
(2,725
|
)
|
|
$
|
17,315
|
|
47
The following table sets forth selected consolidated financial
information as a percentage of net patient revenues for the
periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net patient revenue
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient care:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and payroll
taxes
|
|
|
42.4
|
%
|
|
|
41.9
|
%
|
|
|
40.7
|
%
|
Pharmaceuticals
|
|
|
5.0
|
%
|
|
|
4.9
|
%
|
|
|
5.4
|
%
|
Durable medical equipment and
supplies
|
|
|
4.8
|
%
|
|
|
5.1
|
%
|
|
|
5.3
|
%
|
Other (including inpatient
arrangements, nursing home costs, net, purchased services and
travel)
|
|
|
12.5
|
%
|
|
|
13.4
|
%
|
|
|
13.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total patient care
|
|
|
64.7
|
%
|
|
|
65.3
|
%
|
|
|
64.8
|
%
|
Sales, general and administrative:
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries, benefits and payroll
taxes
|
|
|
20.7
|
%
|
|
|
20.5
|
%
|
|
|
19.6
|
%
|
Office leases
|
|
|
2.9
|
%
|
|
|
2.7
|
%
|
|
|
2.4
|
%
|
Other (including severance,
travel, marketing and charitable contributions)
|
|
|
12.1
|
%
|
|
|
11.1
|
%
|
|
|
11.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales, general and
administrative
|
|
|
35.7
|
%
|
|
|
34.3
|
%
|
|
|
33.7
|
%
|
Depreciation and amortization
|
|
|
2.1
|
%
|
|
|
2.0
|
%
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(2.5
|
)%
|
|
|
(1.6
|
)%
|
|
|
(0.5
|
)%
|
Non-operating income
|
|
|
0.4
|
%
|
|
|
0.2
|
%
|
|
|
0.2
|
%
|
Income tax expense (benefit)
|
|
|
2.8
|
%
|
|
|
(0.4
|
)%
|
|
|
(0.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
|
(4.9
|
)%
|
|
|
(1.0
|
)%
|
|
|
0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, 2006, Compared to Year Ended
September 30, 2005.
Net
Patient Revenue
Net patient revenue increased $10.6 million, or 4.7%, to
$236.0 million for the year ended September 30, 2006
from $225.4 million for the year ended September 30,
2005. Net patient revenue per day of care increased to
approximately $124 per day for the year ended
September 30, 2006 from approximately $115 per day for
the year ended September 30, 2005. The overall increases in
net patient revenue were due to:
|
|
|
|
|
the 3.7% Medicare reimbursement rate increase effective
October 1, 2005;
|
|
|
|
lower revenue reductions for Medicare Cap accrual of
$6.8 million for the year ended September 30, 2006,
compared to $11.9 million for the year ended
September 30, 2005;
|
|
|
|
lower revenue reductions for allowance for denials and
contractual adjustments of $1.4 million for the year ended
September 30, 2006, compared to $2.9 million for the
year ended September 30, 2005; and
|
|
|
|
change in level of care mix general in-patient level
of care was 4.9% for the year ended September 30, 2006 and
3.7% for the year ended September 30, 2005, which resulted
in a higher per day reimbursement rate.
|
The effect of the increases noted above was partially offset by
decreases in patient service days, which decreased by 2.9% to
1,904,667 for the year ended September 30, 2006 from
1,962,098 for the year ended September 30, 2005.
48
The $6.8 million reduction to net patient revenue for
Medicare Cap for the year ended September 30, 2006 includes
the following estimated accruals or adjustments:
|
|
|
|
|
$5.7 million for patient service dates during the 2006
Medicare Cap year, including pro-ration for estimated services
that these 2006 patients may receive from other
non-VistaCare hospice programs;
|
|
|
|
$0.5 million for a 2006 change in estimate with respect to
net patient revenue to increase estimated Medicare Cap accruals
that were previously recorded at lower amounts than actual
assessment letters received from our FI in 2006 for the 2005
Medicare regulatory year;
|
|
|
|
$0.2 million for the 2003 Medicare Cap year for revised
assessments received in 2006;
|
|
|
|
$0.2 million for the 2004 Medicare Cap year for estimated
revised assessments; and
|
|
|
|
$0.2 million for the 2005 Medicare Cap year for estimated
revised assessments.
|
The following table summarizes our revenue reductions, as of
September 30, 2006, by the year in which the estimated
amounts were known for each program year in which we have
experienced Medicare Cap reductions to net patient revenue (in
millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
Medicare Cap Reductions to Revenue and Assessments
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Estimated Medicare Cap recorded as
a reduction of patient revenue
|
|
$
|
6.8
|
(1)
|
|
$
|
11.9
|
|
|
$
|
14.8
|
(3)
|
Actual Medicare Cap assessment
received
|
|
|
|
|
|
|
8.7
|
(2)
|
|
|
12.0
|
|
|
|
|
(1) |
|
As of September 30, 2006, we have received our assessment
letters pertaining to our fiscal year 2005. Medicare Cap
accruals recorded include all of the detailed items above. |
|
(2) |
|
We have received and paid the assessment letters for our fiscal
year 2005. The Centers for Medicare and Medicaid Services
(CMS) issued a transmittal on August 26, 2005
indicating that the hospice Cap amount for the Cap year
ended October 31, 2004, was incorrectly computed.
Included in the $11.9 million of expense are charges of
$2.7 million relating to 2004 and $1.1 million
relating to 2003, which have not been assessed and are included
in the Medicare Cap Accrual at September 30, 2006 relating
to this matter. |
|
(3) |
|
Includes $1.6 million for assessment letters received in
2004 for the 2003 Medicare Cap year and represents the recorded
Medicare Cap accruals for the nine-month transitional period
ended September 30, 2004. |
As further discussed in Note 1 of Notes to Consolidated
Financial Statements included elsewhere in this Report, our
estimates assume factors controlled and determined by our fiscal
intermediary and our estimates are affected by many other
factors.
We recorded reductions to net patient revenue (excluding room
and board charges which are recorded in nursing home
costs, net) 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 our staff after initial
admission) of $1.4 million for the year ended
September 30, 2006, $2.9 million for the year ended
September 30, 2005, and $3.8 million for the
nine-month transitional period ended September 30, 2004,
respectively. As of September 30, 2006 and
September 30, 2005, the allowance for denials on patient
accounts receivable and room and board was $2.2 million and
$3.1 million, respectively. The decrease in our allowances
was primarily due to continued favorable trends in our
collection rate. Any adjustments to net patient revenue for
changes in estimates, based on historical trends, are made only
in the current period.
Our average daily census (ADC) of patients decreased 2.9% to
5,218 for the year ended September 30, 2006 from 5,376 for
the year ended September 30, 2005. This decrease was
attributable to approximately 73,768 lost days in ADC related to
the termination of our Indianapolis hospice program on
October 15, 2005, which terminated our ability to admit
patients and receive reimbursement for our Indianapolis and
Terre Haute sites (refer to the Current and Subsequent Events
Section above), causing a decrease in patient admissions to
17,006 patients in the year ended September 30, 2006,
as compared to 17,574 patients in the year ended
September 30, 2005. This was partially attributable to a
decline in average length of stay to 110 days for the year
ended September 30, 2006, from 113 days for the year
ended September 30, 2005. At 110 days, our average
length of stay is higher than the industry average
49
and is due in part to our relatively high mix of non-cancer
patients, by hospice industry standards, though in line with
total cancer deaths in the U.S. We believe that non-cancer
patients generally have a higher average length of stay than
cancer patients.
Patient
Care Expenses
Patient care expenses increased $5.7 million, or 3.9%, to
$152.9 million for the year ended September 30, 2006
from $147.2 million for the year ended September 30,
2005. The increases in patient care expenses primarily related
to the opening of one new program and three new in-patient units
during the year ended September 30, 2006. As a percentage
of net patient revenue, patient care expense decreased to 64.7%
for the year ended September 30, 2006, from 65.3% for the
year ended September 30, 2005. The improvement in patient
care expenses as a percentage of revenue related to the 3.7%
Medicare reimbursement increase effective October 1, 2005.
Also, the reductions to net patient revenue related to
allowances from denials and Medicare Cap accrual were
$1.5 million and $5.1 million lower during the year
ended September 30, 2006 when compared to the same
reductions to net patient revenue for the year ended
September 30, 2005. Additionally, we believe part of the
increase is due to shorter median length of stays during the
2006 period than during the corresponding period in 2005 as
patient care expenses tend to be higher at the beginning and end
of a patients length of stay. The increase in patient care
expenses for salaries, benefits, and payroll taxes of hospice
care providers was $5.6 million for the year ended
September 30, 2006, compared to the year ended
September 30, 2005 primarily related to annual market and
merit increases. Additionally, pharmaceuticals, durable medical
equipment and other patient care expenses increased by
$0.9 million for the year ended September 30, 2006, as
compared to the year ended September 30, 2005. These
increases were offset by a reduction in net room and board
expenses of $0.8 million for the year ended
September 30, 2006, as compared to the year ended
September 30, 2005.
Sales,
General and Administrative Expenses
Sales, general and administrative expenses
(SG&A) increased $7.0 million, or 9.1%, to
$84.2 million for the year ended September 30, 2006
from $77.2 million for the year ended September 30,
2005. As a percentage of net patient revenue, SG&A expenses
increased to 35.7% for the year ended September 30, 2006
from 34.3% for the year ended September 30, 2005.
We recorded an increase in salaries, benefits and payroll taxes
of $2.6 million for the year ended September 30, 2006
which was due primarily to additional stock-based compensation
expense of $1.9 million related to the Companys
implementation of FAS 123R, additional expense of
$0.5 million related to employee insurance and
$0.1 million in additional workers compensation
expense. The remaining increase in SG&A of $4.4 million
for the year ended September 30, 2006 resulted primarily
from higher rent expense, travel expense, severance costs, bonus
expense, and legal expense.
Depreciation
and Amortization
Depreciation and amortization expense increased
$0.3 million, or 6.5%, to $4.9 million in the year
ended September 30, 2006 from $4.6 million in the year
ended September 30, 2005. The increase was primarily due to
depreciation related to leasehold improvements on our five
in-patient units, additional equipment purchases placed into
service and the amortization of an intangible asset related to a
covenant not to compete.
Non-Operating
Income
Non-operating income for the year ended September 30, 2006
was $1.0 million, compared to non-operating income for the
year ended September 30, 2005 of $0.5 million. The
increase was due to higher interest income on available cash
balances and reduced losses on disposal of fixed assets.
Income
Tax
For the year ended September 30, 2006, we recorded
$6.6 million of income tax expense as compared to
$0.8 million of taxable benefit for the year ended
September 30, 2005.
50
The Company is required to assess the recoverability of its
deferred tax assets based on the more likely than
not criteria prescribed under SFAS 109. In performing
this assessment, management considers all positive evidence
available for the recovery of the assets which includes the
following sources in the order of their persuasiveness;
i) future taxable temporary differences, ii) loss
carryback availability, iii) tax planning strategies; and
iv) expected future operating income. When a Company has
incurred cumulative losses for a three year period, it would be
rare to consider expected future operating income as sufficient
evidence for not recording a valuation allowance. The operating
loss for 2006 resulted in the Company moving from a cumulative
profit position to a cumulative loss position for the most
recent three year period ended September 30, 2006. As a
result, the Company recorded a valuation allowance of
$8.3 million during the quarter and year ended
September 30, 2006 for all of its deferred tax assets, less
the deferred tax liabilities expected to reverse and become
taxable income. This resulted in the Company having a net
deferred tax liability of $1.1 million relating primarily
to its tax deductible goodwill that is being amortized over
15 years given that its reversal is indeterminate.
The effective tax rate for the year ended September 30,
2005 was comprised of tax benefits estimated at a 39% rate and
adjustments totaling $0.4 million. The adjustments were due
to higher effective state rates related to our legal structure.
Year
Ended September 30, 2005, Compared to Twelve Months Ended
September 30, 2004.
Net
Patient Revenues
Net patient revenues increased $21.4 million, or 10.5%, to
$225.4 million for the year ended September 30, 2005
from $204.0 million for the twelve months ended
September 30, 2004. Net patient revenue per day of care
increased to approximately $115 per day for the year ended
September 30, 2005 from approximately $107 per day for
the twelve months ended September 30, 2004. The overall
increases in net patient revenue were due to:
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|
|
|
|
increases in patient service days, which increased by 2.7% to
1,962,098 for the year ended September 30, 2005 from
1,909,740 for the twelve months ended September 30, 2004;
|
|
|
|
the 3.3% Medicare reimbursement rate increase effective
October 1, 2004; and
|
|
|
|
lower revenue reductions for Medicare Cap accrual of
$11.9 million for the year ended September 30, 2005,
compared to $17.9 million for the twelve months ended
September 30, 2004.
|
The $11.9 million reduction to net patient revenue for
Medicare Cap for the year ended September 30, 2005 includes
the following estimated accruals or adjustments:
|
|
|
|
|
$6.6 million for patient service dates during the 2005
Medicare Cap year, including pro-ration for estimated services
that these 2005 patients may receive from other
non-VistaCare hospice programs;
|
|
|
|
Approximately $1.6 million resulting from CMSs lower
than expected inflation adjustment in respect of the per
beneficiary reimbursement or Medicare Cap amount for the 2005
Medicare Cap year as a result of CMS incorrectly computing the
per beneficiary Medicare Cap amount used by all hospice
providers for the 2004 Medicare Cap year. On August 26,
2005, CMS issued its transmittal 663, publishing the final
Medicare Cap amount of $19,777.51 for the 2005 Medicare Cap year
(i.e., the Medicare Cap year ended October 31,
2005) and indicated that the Cap amount for the 2004
Medicare Cap year (i.e., the Medicare Cap year ended
October 31, 2004) was incorrectly computed;
|
|
|
|
$2.7 million for a 2005 change in estimate with respect to
2004 to reflect CMSs August 26, 2005 transmittal
indicating that the hospice Cap amount for the Cap year
ending October 31, 2004, was incorrectly computed;
|
|
|
|
$1.1 million for a 2005 change in estimate with respect to
2003 based on our assumption that the hospice Cap amount for the
Cap year ending October 31, 2003, was incorrectly computed
in the same manner as the Cap year ending October 31, 2004;
|
|
|
|
$1.1 million for a 2005 change in estimate with respect to
a re-assessment received from our Fiscal Intermediary
(FI) in April 2005 for the 2002 Medicare Cap year.
The FI had previously issued a zero assessment for 2002; and
|
51
|
|
|
|
|
($1.2) million for a 2005 change in estimate with respect
to net patient revenue to reverse estimated Medicare Cap
accruals that were greater than actual assessment letters
received from our FI in 2005 for the 2004 Medicare regulatory
year.
|
As further discussed in Note 1 to The Consolidated
Financial Statements, our estimates assume factors controlled by
our fiscal intermediary and our estimates are affected by many
other factors.
We recorded reductions to net patient revenue (excluding room
and board charges, which are recorded in nursing home
costs, net 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 our staff after initial
admission) of $2.9 million for the year ended
September 30, 2005 and $4.0 million for the twelve
months ended September 30, 2004, respectively. As of
September 30, 2005 and September 30, 2004, the
allowance for denials on patient accounts receivable and room
and board was $3.1 million and $5.9 million,
respectively. The decrease in our allowances was primarily due
to a change in our charge-off practices whereby we have
accelerated the timing of the charge-off. Any adjustments to net
patient revenue for changes in estimates, based on historical
trends, are made only in the current period.
Our average daily census of patients increased 3.0% to 5,376 for
the year ended September 30, 2005 from 5,218 for the twelve
months ended September 30, 2004. This increase was
attributable to 13 new programs and two acquisitions, causing an
increase in patient admissions from 17,574 patients in the
year ended September 30, 2005, as compared to
15,576 patients in the twelve months ended
September 30, 2004. This was partially offset by a decline
in the average length of stay to 113 days for the year
ended September 30, 2005, from 115 days for the
twelve-months ended September 30, 2004. At 113 days,
our average length of stay is significantly higher than the
industry average and is due in part to our relatively high mix
of non-cancer patients, by hospice industry standards, though in
line with total cancer deaths in the U.S. We believe that
non-cancer patients generally have a higher average length of
stay than cancer patients.
Patient
Care Expenses
Patient care expenses increased $14.8 million, or 11.2%, to
$147.2 million for the year ended September 30, 2005
from $132.4 million for the twelve months ended
September 30, 2004. As a percentage of net patient revenue,
patient care expense increased to 65.3% for the year ended
September 30, 2005, from 64.8% for the twelve months ended
September 30, 2004. We believe that increased investments
in our new programs during 2005, will lead to improve future
earnings growth. These investments, however, contributed to the
increased patient care expenses in the initial months of the new
programs. New programs initially operate at a lower census and
consequently reflect higher patient care expenses. Additionally,
we believe part of the increase is due to shorter median length
of stays during 2005 periods than during the corresponding
periods in 2004. The increase in patient care expenses for
salaries, benefits, and payroll taxes of hospice care providers
was $11.4 million for the year ended September 30,
2005, compared to the twelve months ended September 30,
2004. Additionally, pharmaceuticals, durable medical equipment
and other patient care expenses increased by $3.4 million
for the year ended September 30, 2005, as compared to the
twelve months ending September 30, 2004. These increases
were partially offset by a reduction in net room and board
expenses of $0.5 million for the year ended
September 30, 2005, as compared to the twelve months ended
September 30, 2004.
Sales,
General and Administrative Expenses
Sales, general and administrative expenses (SG&A) increased
$8.6 million, or 12.5%, to $77.2 million for the year
ended September 30, 2005 from $68.6 million for the
twelve months ended September 30, 2004. As a percentage of
net patient revenue, SG&A expenses slightly increased to
34.3% for the year ended September 30, 2005 from 33.7% for
the twelve months ended September 30, 2004.
The increases in SG&A expenses were due to additional
development of new programs, and the internal implementation
expenses of Sarbanes-Oxley and HIPAA. We recorded an increase in
salaries, benefits and payroll taxes of $6.3 million for
the year ended September 30, 2005. We also recorded slight
increases in sales bonuses, professional service fees (SOX404),
office supplies and severance costs. The remaining increase of
$2.4 million for
52
the year ended September 30, 2005 resulted from higher rent
expense and office relocation costs, primarily due to new leases
for new programs.
Depreciation
and Amortization
Depreciation and amortization expense increased
$0.7 million, or 17.9%, to $4.6 million in the year
ended September 30, 2005 from $3.9 million in the
twelve months ended September 30, 2004. The increase was
primarily due to additional equipment purchases placed into
service and the amortization of $2.2 million of capitalized
software development expenses associated with our billing system.
Non-Operating
Income
Non-operating income for the year ended September 30, 2005
was $0.5 million, compared to non-operating income for
twelve months ended September 30, 2004 of
$0.3 million. The increase was due primarily to higher
interest income on available cash balances.
Income
Tax
For the year ended September 30, 2005, we recorded
$0.8 million of income tax benefit as compared to a
$1.0 million of taxable benefit for the twelve months ended
September 30, 2004.
The effective tax rate for the year ended September 30,
2005 was comprised of tax benefits estimated at a 39% rate and
adjustments totaling $0.4 million. The adjustments were due
to higher effective state rates related to our legal structure.
Conversely, the rate for the twelve months ended
September 30, 2004 was also comprised of a tax benefit
estimated at our 39% rate but reflected an additional
$0.1 million in tax relating to rate changes and other
permanent tax adjustments.
Liquidity
and Capital Resources
Overview
of Liquidity
We expect that our principal liquidity requirements will be for
working capital, the development of new hospice programs, the
development of new in-patient units, the acquisition of other
hospice programs and 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.
We raised net proceeds of $48.1 million from our initial
public offering of common stock in December 2002. We used the
net proceeds to repay debt of $11.0 million, with the
balance invested in short-term investments. As of
September 30, 2006, we had cash and cash equivalents and
short-term investments of $40.7 million, working capital of
approximately $43.5 million and the ability to borrow up to
$50.0 million under our revolving credit and term loan
facility based on borrowing base calculations, subject to lender
approval and certain other restrictions as described in more
detail below.
Year
ended September 30, 2006 compared to year ended
September 30, 2005
Net cash used in operating activities for the year ended
September 30, 2006 was $9.4 million as compared to
$22,000 in cash used in operating activities for the year ended
September 30, 2005. The increase in cash used was primarily
due to an increase in net loss; net loss for the year ended
September 30, 2006 was $11.7 million and
$2.3 million for the year ended September 30, 2005.
Net cash provided by investing activities was $4.6 million
for the year ended September 30, 2006 as compared to net
cash used in investing activities of $3.9 million for the
year ended September 30, 2005. In the year ended
September 30, 2006, sales of short term investments, net of
short term investments purchased, provided
53
approximately $2.5 million more in cash than similar
transactions in the year ended September 30, 2005. Also, in
the year ended September 30, 2005, approximately
$4.9 million in cash was used to fund the acquisitions of
the Prayer of Jabez Hospice and the Lovelace Sandia Hospice. No
such acquisitions were completed in the year ended
September 30, 2006.
Net cash provided by financing activities was $0.5 million
and $1.2 million for the year ended September 30, 2006
and for the year ended September 30, 2005, respectively.
Cash provided by financing activities principally resulted from
the exercise of employee stock options and employee stock
purchases.
Year
ended September 30, 2005 compared to the twelve months
ended September 30, 2004
Net cash used in operating activities for the year ended
September 30, 2005 was $22,000, as compared to cash
provided by operating activities of $20.6 million for the
twelve months ended September 30, 2004. This decrease in
cash provided was primarily due to an increase of
$13.4 million related to the repayment of Medicare Cap
assessments, of which approximately $6.4 million was paid
through withholdings in account receivable reimbursements by
Medicare and $7.0 million that we paid in cash.
Net cash used in investing activities was $3.9 million and
$6.1 million for the year ended September 30, 2005 and
the twelve months September 30, 2004, respectively. These
cash uses related primarily to the acquisitions of the Prayer of
Jabez Hospice and the Lovelace Sandia Hospice, the purchase of
computer and office equipment for new programs being developed,
and the continued investment in internally developed software
and its implementation. These uses were partially offset by
short-term investments sold.
Net cash provided by financing activities was $1.2 and
$2.8 million for the year ended September 30, 2005 and
for the twelve months ended September 30, 2004,
respectively. Cash provided by financing activities principally
resulted from the exercise of employee stock options and
employee stock purchases.
The
nine-month transitional period ended September 30,
2004
Net cash provided by operating activities for the nine-month
transitional period ended September 30, 2004 was
$17.4 million, despite a net loss of $4.2 million, due
to an increase of $14.8 million in accrued Medicare Cap
liability, an increase in our accounts payable and accrued
expenses of $2.2 million and a decrease in our patient
accounts receivable of $6.9 million.
Net cash used in investing activities was $4.3 million for
the nine-month transitional period ended September 30,
2004. This was due primarily to the investment in internally
developed software and capital expenditures.
Net cash provided by financing activities was $1.3 million
for the nine-month transitional period ended September 30,
2004, which resulted from the exercise of employee stock options.
Factors
Affecting Liquidity and Capital Resources
Debt
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 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) 85.0% 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. No borrowings
were made under the credit facility during the 2006 fiscal year
and as of September 30, 2006, there was no balance
outstanding on the revolving line of credit or on the term loan.
54
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 would
require a lender waiver and we would need to complete certain
administrative procedures in order to borrow under the current
terms of the credit facility.
Medicare
Cap
Overall Medicare payments to our hospice providers are subject
to the annual Medicare Cap. If we are found by Medicare to have
exceeded the annual Medicare Cap, Medicare will require that we
reimburse for payments made to us in excess of the annual
Medicare Cap. We were required to make reimbursements for
payments received in excess of the Medicare Cap either through
cash payments or reductions of accounts receivables, of
$15.0 million during the year ended September 30,
2006, $13.4 million during the year ended
September 30, 2005, and $1.1 million during the
nine-month transitional period ended September 30, 2004,
$0.0 million during the fiscal year ended December 31,
2003, $1.1 million during the fiscal year ended
December 31, 2002, $0.5 million during the fiscal year
ended December 31, 2001, and $0.1 million during the
fiscal year ended December 31, 2000 for exceeding the
annual Medicare Cap. As of the date of this report, we had not
yet been assessed for exceeding the Medicare Cap for the 2006
Medicare Cap. As of September 30, 2006 and
September 30, 2005, respectively, our accrued expenses
included $9.8 million and $18.1 million for Medicare
Cap accrued liability.
Miscellaneous
During the year ended September 30, 2005 the Company
underwent a New Mexico Gross Receipts tax audit relating to the
taxable years ended 1998 to 2004. The New Mexico Taxation and
Revenue Department assessed the Company approximately
$0.5 million of tax and interest and we accrued the expense
in fiscal 2005. We paid this amount during the year ended
September 30, 2006.
For the year ended September 30, 2006, VistaCare has
recorded a liability relating to the settlement of approximately
$0.7 million of Medicaid related disputes. This amount will
be paid in fiscal 2007.
Contractual
Obligations
The following table summarizes our significant contractual
obligations at September 30, 2006, and the effect such
obligations are expected to have on our liquidity and cash flows
in future periods. The total excludes amounts already recorded
on our balance sheet as current liabilities as of
September 30, 2006 (in thousands):
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Payments Due by Period
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Within
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1-3
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3-5
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After
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Contractual Obligation
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Total
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1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
Operating lease obligations
|
|
|
25,359
|
|
|
|
7,195
|
|
|
|
12,446
|
|
|
|
5,617
|
|
|
|
101
|
|
The expected timing of payment of the obligations discussed
above is estimated based on current information. Timing of
payments and actual amounts may be different depending on the
time of receipt of goods or services or charges to
agreed-upon
amounts for some obligations.
For the purpose of this table, contracted obligations for
purchase commitments relating to goods and services are defined
as agreements that are enforceable and legally binding on
VistaCare and that specify all significant terms, including
fixed or minimum quantities to purchase and approximate timing
of the transaction.
Off
Balance Sheet Arrangements
None.
55
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 and our short-term investments generally are
variable rate or contain interest reset features, which causes
their face value to be relatively stable.
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 materially adversely affect our net
patient revenues 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.
Recent
Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. This Statement replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and
reporting of a change in accounting principle. This Statement
applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement
in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be
followed. The provisions of SFAS No. 154 are effective
for fiscal years beginning after December 15, 2005. The
Company does not expect the adoption of SFAS No. 154
in fiscal 2007 to have a material impact on its results of
operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes,
and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. This Interpretation is
effective for fiscal years beginning after December 15,
2006. The Company is currently in the process of assessing what
impact FIN 48 may have on its results of operations,
financial position and cash flows.
56
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, this Statement
does not require any new fair value measurements. This Statement
is effective for financial statements issued for fiscal years
beginning after November 15, 2007, and interim periods
within those fiscal years. The Company is currently evaluating
the impact of the provisions of SFAS No. 157.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 108 regarding the process of
quantifying financial statement misstatements.
SAB No. 108 states that registrants should use
both a balance sheet approach and an income statement approach
when quantifying and evaluating materiality of a misstatement.
The interpretations in SAB No. 108 contain guidance on
correcting errors under the dual approach as well as provide
transition guidance for correcting errors. This interpretation
does not change the requirements within SFAS No. 154
for the correction of an error in financial statements.
SAB No. 108 is effective for annual financial
statements covering the first fiscal year ending after
November 15, 2006. The Company will be required to adopt
this interpretation for its fiscal year ending 2007.
|
|
Item 7A.
|
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.
57
|
|
Item 8.
|
Financial
Statements and Supplementary Data
|
MANAGEMENTS
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for the preparation, integrity and
fair presentation of the consolidated financial statements and
notes to the consolidated financial statements. The financial
statements were prepared in accordance with accounting
principles generally accepted in the United States and include
certain amounts based on managements judgment and best
estimates. Other financial information presented is consistent
with the financial statements.
Management is also responsible for establishing and maintaining
adequate internal control over financial reporting as defined in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act of 1934. Our internal control
over financial reporting is designed under the supervision of
our principal executive and financial officers in order 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. Our internal control over financial
reporting includes those policies and procedures that:
(i) Pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the
transactions and dispositions of our assets;
(ii) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being
made only in accordance with authorizations of our management
and directors; and
(iii) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition
of our assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Companys
internal control over financial reporting as of
September 30, 2006. In making this assessment, management
used the criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO).
Based on our assessment and those criteria, management believes
that the Company maintained effective internal control over
financial reporting as of September 30, 2006.
The Companys independent registered public accounting
firm, Ernst & Young LLP, has issued an attestation
report on managements assessment of the Companys
internal control over financial reporting. That report appears
on page 59 of this Report and expresses unqualified
opinions on managements assessment and on the
effectiveness of the Companys internal control over
financial reporting.
58
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of VistaCare, Inc.
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control over
Financial Reporting, that VistaCare, Inc. maintained effective
internal control over financial reporting as of
September, 30, 2006, based on criteria established in
Internal Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). VistaCares management is responsible
for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of
internal control over financial reporting. Our responsibility is
to express an opinion on managements assessment and an
opinion on the effectiveness of the companys internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that VistaCare,
Inc. maintained effective internal control over financial
reporting as of September 30, 2006, is fairly stated, in
all material respects, based on the COSO criteria. Also, in our
opinion, VistaCare, Inc. maintained, in all material respects,
effective internal control over financial reporting as of
September 30, 2006, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of VistaCare, Inc. as of
September 30, 2006 and 2005, and the related consolidated
statements of operations, changes in stockholders equity,
and cash flows for each of the two years in the period ended
September 30, 2006 and 2005, and for the nine month period
ended September 30, 2004 of VistaCare Inc. and our report
dated December 11, 2006 expressed an unqualified opinion
thereon.
Phoenix, Arizona
December 11, 2006
59
Report of
Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of VistaCare, Inc.
We have audited the accompanying consolidated balance sheets of
VistaCare, Inc. as of September 30, 2006 and 2005, and the
related consolidated statements of operations, changes in
stockholders equity, and cash flows for each of the two
years in the period ended September 30, 2006 and 2005, and
for the nine month period ended September 30, 2004. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of VistaCare, Inc. at September 30, 2006
and 2005, and the consolidated results of their operations and
their cash flows for each of the two years in the period ended
September 30, 2006 and 2005, and for the nine months ended
September 30, 2004, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of VistaCare, Inc.s internal control over
financial reporting as of September 30, 2006, based on
criteria established in Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated December 11, 2006,
expressed an unqualified opinion thereon.
As discussed in Note 1 to the consolidated financial
statements, effective October 1, 2005, the Company adopted
the provisions of Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based
Payment.
Phoenix, Arizona
December 11, 2006
60
VISTACARE,
INC.
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(In thousands, except
|
|
|
|
share information)
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
21,583
|
|
|
$
|
25,962
|
|
Short-term investments
|
|
|
19,148
|
|
|
|
27,413
|
|
Patient accounts receivable (net
of allowance for denials of $1,502 and $1,594 at
September 30, 2006 and 2005, respectively)
|
|
|
27,600
|
|
|
|
20,202
|
|
Patient accounts
receivable room & board (net of allowance
for denials of $692 and $1,527 at September 30, 2006 and
2005, respectively)
|
|
|
9,662
|
|
|
|
9,149
|
|
Prepaid expenses and other current
assets
|
|
|
4,653
|
|
|
|
3,811
|
|
Tax receivable
|
|
|
1,375
|
|
|
|
4,329
|
|
Deferred tax assets
|
|
|
|
|
|
|
8,501
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
84,021
|
|
|
|
99,367
|
|
Fixed assets, net
|
|
|
6,409
|
|
|
|
5,757
|
|
Goodwill
|
|
|
24,002
|
|
|
|
24,002
|
|
Other assets
|
|
|
5,360
|
|
|
|
7,310
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
119,792
|
|
|
$
|
136,436
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,591
|
|
|
$
|
1,445
|
|
Accrued expenses and other current
liabilities
|
|
|
28,116
|
|
|
|
27,652
|
|
Accrued Medicare Cap
|
|
|
9,849
|
|
|
|
18,057
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
40,556
|
|
|
|
47,154
|
|
Deferred tax liability-non-current
|
|
|
1,144
|
|
|
|
2,420
|
|
Stockholders equity:
|
|
|
|
|
|
|
|
|
Class A Common Stock,
$0.01 par value; authorized 33,000,000 shares;
16,610,500 and 16,391,529 shares issued and outstanding at
September 30, 2006 and 2005, respectively
|
|
|
166
|
|
|
|
164
|
|
Additional paid-in capital
|
|
|
110,378
|
|
|
|
108,054
|
|
Deferred compensation
|
|
|
|
|
|
|
(555
|
)
|
Accumulated deficit
|
|
|
(32,452
|
)
|
|
|
(20,801
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
78,092
|
|
|
|
86,862
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
stockholders equity
|
|
$
|
119,792
|
|
|
$
|
136,436
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
61
VISTACARE,
INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands, except per share information)
|
|
|
Net patient revenue
|
|
$
|
235,993
|
|
|
$
|
225,432
|
|
|
$
|
150,436
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient care
|
|
|
152,879
|
|
|
|
147,211
|
|
|
|
100,096
|
|
Sales, general and administrative
|
|
|
84,198
|
|
|
|
77,237
|
|
|
|
54,116
|
|
Depreciation
|
|
|
2,365
|
|
|
|
1,959
|
|
|
|
1,198
|
|
Amortization
|
|
|
2,583
|
|
|
|
2,645
|
|
|
|
1,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating
expenses
|
|
|
242,025
|
|
|
|
229,052
|
|
|
|
157,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(6,032
|
)
|
|
|
(3,620
|
)
|
|
|
(6,781
|
)
|
Non-operating income
(expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
1,460
|
|
|
|
1,212
|
|
|
|
364
|
|
Interest expense
|
|
|
(1
|
)
|
|
|
|
|
|
|
(68
|
)
|
Other expense
|
|
|
(454
|
)
|
|
|
(661
|
)
|
|
|
(48
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-operating income,
net
|
|
|
1,005
|
|
|
|
551
|
|
|
|
248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income
taxes
|
|
|
(5,027
|
)
|
|
|
(3,069
|
)
|
|
|
(6,533
|
)
|
Income tax expense
(benefit)
|
|
|
6,624
|
|
|
|
(812
|
)
|
|
|
(2,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,651
|
)
|
|
$
|
(2,257
|
)
|
|
$
|
(4,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss per share
|
|
$
|
(0.71
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss per share
|
|
$
|
(0.71
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,406
|
|
|
|
16,316
|
|
|
|
16,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
16,406
|
|
|
|
16,316
|
|
|
|
16,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
62
VISTACARE,
INC.
CONSOLIDATED
STATEMENTS OF CHANGES IN
STOCKHOLDERS
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Deferred
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Compensation
|
|
|
Deficit
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance December 31,
2003
|
|
|
15,967
|
|
|
|
159
|
|
|
|
103,253
|
|
|
|
(1,024
|
)
|
|
|
(14,312
|
)
|
|
|
88,076
|
|
Exercise of stock options
|
|
|
242
|
|
|
|
3
|
|
|
|
1,367
|
|
|
|
|
|
|
|
|
|
|
|
1,370
|
|
Deferred compensation related to
canceled stock options
|
|
|
|
|
|
|
|
|
|
|
(91
|
)
|
|
|
91
|
|
|
|
|
|
|
|
|
|
Tax effect of stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
2,074
|
|
|
|
|
|
|
|
|
|
|
|
2,074
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
239
|
|
|
|
|
|
|
|
239
|
|
Restricted stock grant
|
|
|
|
|
|
|
|
|
|
|
481
|
|
|
|
(481
|
)
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,232
|
)
|
|
|
(4,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30,
2004
|
|
|
16,209
|
|
|
|
162
|
|
|
|
107,084
|
|
|
|
(1,175
|
)
|
|
|
(18,544
|
)
|
|
|
87,527
|
|
Exercise of stock options
|
|
|
147
|
|
|
|
2
|
|
|
|
726
|
|
|
|
|
|
|
|
|
|
|
|
728
|
|
Restricted stock activity
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred compensation related to
canceled stock options
|
|
|
|
|
|
|
|
|
|
|
(316
|
)
|
|
|
316
|
|
|
|
|
|
|
|
|
|
Tax effect of stock option
exercises
|
|
|
|
|
|
|
|
|
|
|
136
|
|
|
|
|
|
|
|
|
|
|
|
136
|
|
Amortization of deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
304
|
|
|
|
|
|
|
|
304
|
|
Employee stock purchase
|
|
|
21
|
|
|
|
|
|
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
424
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,257
|
)
|
|
|
(2,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30,
2005
|
|
|
16,392
|
|
|
$
|
164
|
|
|
$
|
108,054
|
|
|
$
|
(555
|
)
|
|
$
|
(20,801
|
)
|
|
$
|
86,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of stock options
|
|
|
40
|
|
|
|
|
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
195
|
|
Restricted stock activity
|
|
|
155
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation
|
|
|
|
|
|
|
|
|
|
|
2,431
|
|
|
|
|
|
|
|
|
|
|
|
2,431
|
|
Accounting change reclassification
|
|
|
|
|
|
|
|
|
|
|
(555
|
)
|
|
|
555
|
|
|
|
|
|
|
|
|
|
Employee stock purchase
|
|
|
23
|
|
|
|
|
|
|
|
255
|
|
|
|
|
|
|
|
|
|
|
|
255
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,651
|
)
|
|
|
(11,651
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30,
2006
|
|
|
16,610
|
|
|
$
|
166
|
|
|
$
|
110,378
|
|
|
$
|
|
|
|
$
|
(32,452
|
)
|
|
$
|
78,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
63
VISTACARE,
INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Operating activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,651
|
)
|
|
$
|
(2,257
|
)
|
|
$
|
(4,232
|
)
|
Adjustments to reconcile net loss
to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,365
|
|
|
|
1,959
|
|
|
|
1,198
|
|
Amortization
|
|
|
2,583
|
|
|
|
2,645
|
|
|
|
1,807
|
|
Share-based compensation
|
|
|
2,431
|
|
|
|
304
|
|
|
|
239
|
|
Deferred income tax expense
(benefit)
|
|
|
7,224
|
|
|
|
819
|
|
|
|
(4,810
|
)
|
Loss on disposal of assets
|
|
|
270
|
|
|
|
480
|
|
|
|
|
|
Tax benefit of stock option
exercises
|
|
|
|
|
|
|
136
|
|
|
|
2,074
|
|
Changes in operating assets and
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patient accounts receivable, net
|
|
|
(7,911
|
)
|
|
|
(9,416
|
)
|
|
|
6,921
|
|
Prepaid expenses and other
|
|
|
1,898
|
|
|
|
(1,722
|
)
|
|
|
(2,739
|
)
|
Payment of Medicare Cap assessment
|
|
|
(14,996
|
)
|
|
|
(7,045
|
)
|
|
|
|
|
Increase in accrual for Medicare
Cap
|
|
|
6,788
|
|
|
|
11,868
|
|
|
|
14,771
|
|
Accounts payable, accrued expenses
and other liabilities
|
|
|
1,605
|
|
|
|
2,207
|
|
|
|
2,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
operating activities
|
|
|
(9,394
|
)
|
|
|
(22
|
)
|
|
|
17,385
|
|
Investing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term investments purchased
|
|
|
(12,291
|
)
|
|
|
(23,740
|
)
|
|
|
(141,282
|
)
|
Short-term investments sold
|
|
|
20,540
|
|
|
|
29,492
|
|
|
|
140,982
|
|
Acquisition
|
|
|
|
|
|
|
(4,868
|
)
|
|
|
|
|
Purchases of equipment
|
|
|
(3,174
|
)
|
|
|
(2,769
|
)
|
|
|
(2,055
|
)
|
Internally developed software
expenditures
|
|
|
(464
|
)
|
|
|
(913
|
)
|
|
|
(1,051
|
)
|
Increase in other assets
|
|
|
(46
|
)
|
|
|
(1,057
|
)
|
|
|
(907
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities
|
|
|
4,565
|
|
|
|
(3,855
|
)
|
|
|
(4,313
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net payments on debt
|
|
|
|
|
|
|
|
|
|
|
(83
|
)
|
Proceeds from issuance of common
stock from exercise of stock options and employee stock purchases
|
|
|
450
|
|
|
|
1,152
|
|
|
|
1,370
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing
activities
|
|
|
450
|
|
|
|
1,152
|
|
|
|
1,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(4,379
|
)
|
|
|
(2,725
|
)
|
|
|
14,359
|
|
Cash and cash equivalents,
beginning of period
|
|
|
25,962
|
|
|
|
28,687
|
|
|
|
14,328
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
period
|
|
$
|
21,583
|
|
|
$
|
25,962
|
|
|
$
|
28,687
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and short-term investments,
end of period
|
|
$
|
40,731
|
|
|
$
|
53,375
|
|
|
$
|
61,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow data
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare Cap liability paid
through receivables reductions
|
|
$
|
|
|
|
$
|
6,349
|
|
|
$
|
1,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
64
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
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 patients home
or other residence of choice, such as a nursing home or assisted
living community, or in a hospital or inpatient unit. Inpatient
services are provided by VistaCare at its inpatient 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.
|
|
1.
|
SIGNIFICANT
ACCOUNTING POLICIES
|
Change
in Year End
On August 18, 2004, VistaCares Board of Directors
changed the Companys fiscal year-end from December 31
to September 30. The results reported by the Company in
this Report relate to the twelve-month fiscal years ended
September 30, 2006 and September 30, 2005 and the
nine-month transitional period ended September 30, 2004.
Basis
of Presentation
The accompanying 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.
Reclassifications
Certain amounts in the prior years financial statements
have been reclassified to conform to the current year
presentation. This has no impact on previously reported results
of operations or cash flow.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
Fair
Value of Financial Instruments
VistaCares cash and cash equivalents, short-term
investments and patient accounts receivable represent financial
instruments as defined by Statement of Financial Accounting
Standards No. 107, Disclosures About Fair Value of
Financial Instruments. The carrying value of these financial
instruments is a reasonable approximation of fair value.
Cash
and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
a maturity of the investments being for a period of three months
or less when purchased. Cash equivalents are carried at cost,
which approximates fair value.
Short-Term
Investments
VistaCare accounts for investments under Statement of Financial
Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Investments. VistaCares
investments are classified as
available-for-sale.
VistaCare defines short-term investments as income yielding
securities that can be converted into cash. Short-term
investments include tax-exempt auction rate securities that have
interest rate resets approximately every 30 days subject to
the availability of orders, while the underlying securities are
often long-term bonds up to and exceeding
65
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
20 years, there has historically been an active and liquid
market. Those investments are carried at fair value, which
approximates cost. Interest income amounted to
$1.5 million, $1.2 million and $0.4 million for
the years ended September 30, 2006, and September 30,
2005, and for the nine-month transitional period ended
September 30, 2004, respectively; and are included in
interest income in the accompanying Consolidated Statements of
Operations. The investments are comprised of tax-exempt auction
rate securities (primarily municipal bonds) and have a rating of
AAA or Aaa.
Patient
Accounts Receivable
VistaCare receives payment for services provided to patients
from third-party payors including federal and state governments
under the Medicare and Medicaid programs and private insurance
companies. Approximately 92% and 89% of VistaCares
accounts receivable were from Medicare and Medicaid as of the
year ended September 30, 2006 and the year ended
September 30, 2005, respectively. VistaCare also receives
reimbursements from state Medicaid programs for room and board
services provided at contracted nursing homes (see Nursing
Home Costs below).
Fixed
Assets
Fixed assets consist of equipment, furniture, fixtures,
construction in progress and leasehold improvements, which are
recorded at cost. Equipment acquired with acquisitions is
recorded at estimated fair value on the date of acquisition.
Unfinished construction projects are capitalized in construction
in progress, until completion, then the costs are moved to the
appropriate fixed asset category and depreciated. Depreciation
is calculated on the straight-line method over the estimated
useful lives of depreciable assets, typically five years.
Leasehold improvements are capitalized and amortized using the
straight-line method over the lesser of the terms of the leases
or the estimated useful lives of the assets. Repairs and
maintenance are charged to operations in the period incurred.
Capitalized
Software Development Expenses
We have capitalized certain internal costs related to the
development of software used in our business. We capitalize all
qualifying internal expenses incurred during the application
development stage. Costs incurred during the preliminary project
stage and post-implementation/operation stages are expensed as
incurred. We amortize the capitalized software development costs
related to particular software over a three-year period
commencing when that software is substantially complete and
ready for its intended use. Capitalized software development
costs as of September 30, 2006 related to our billing
software. We began amortizing the development costs related to
our billing software in the fourth quarter of 2003. During 2005
we performed a review of elements of capitalized costs and
recorded a loss on disposal of $0.2 million for portions no
longer used. Beginning with October 1, 2006 we will no
longer capitalize costs associated with our billing software
since the nature of future cost incurred with respect to the
billing system are expected to be more of a maintenance nature.
Amortization of capitalized software totaled $2.1 million,
$2.2 million and $1.3 million for the year ended
September 30, 2006, the year ended September 30, 2005
and the nine-month transitional period ended September 30,
2004, respectively.
Acquisition
We purchased Lovelace Sandia Hospice in Albuquerque, New Mexico
on September 18, 2005 for a total acquisition price of
$4.6 million. With this acquisition, we assumed
responsibility for all Lovelace Sandia Hospice operations in the
Albuquerque area. As part of the acquisition, we entered into a
five-year lease on the 11-bed inpatient unit at the Albuquerque
Regional Medical Center. We will provide home-based and
inpatient hospice care for all eligible patients in the region,
which includes patients from Albuquerque Regional Medical
Center, Lovelace Medical Center, West Mesa Medical Center,
Lovelace Sandia Health Systems Womens Hospital and
Rehabilitation Hospital of New Mexico. For the Lovelace Sandia
Hospice acquisition, approximately $3.2 million of the
purchase price was allocated to goodwill and $1.4 million
of the purchase price was allocated to covenant not to
66
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compete, which is an intangible asset that is being amortized
over five years. The acquisition was an acquisition of an
operating business and was structured as an asset purchase,
therefore the intangible asset and goodwill are deductible over
15 years for income tax purposes.
Goodwill
and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards
No. 142, (SFAS No. 142)
Goodwill and Other Intangible Assets, goodwill is no
longer amortized, but instead is assessed for impairment at
least annually. Other intangible assets with a finite useful
life are amortized over their useful life.
Goodwill remaining on our balance sheet was $24.0 million
at September 30, 2006 and September 30, 2005. Prior to
2002, we were amortizing the goodwill from our acquisitions over
30 years. After implementation of SFAS No. 142 in
2002, we no longer amortize goodwill. We conduct a review in the
fourth quarter of each fiscal year, or more often if events or
circumstances arise that indicate the fair market value of such
goodwill may have materially declined. Such events or
circumstances could include a significant under-performance of
the related reporting unit relative to historical or projected
operating results, significant negative industry trends and
significant changes in regulations governing hospice
reimbursements from Medicare and state Medicaid program.
To determine the fair value of our goodwill for our single
reporting unit, we make estimates using our market
capitalization for our reporting unit since it comprises the
Company. In the event we determine that the value of our
goodwill has become impaired, we are required to write down the
value of the goodwill to its fair value on our balance sheets
and to reflect the extent of the impairment as an expense on our
statements of operations. We have determined that no impairment
of goodwill existed as of September 30, 2006.
Other intangible assets relate to $1.4 million of the
purchase price of the Lovelace Sandia Hospice acquisition which
was allocated to covenant not to compete. The unamortized
balance of this intangible asset was $1.1 million and
$1.4 million at September 30, 2006 and
September 30, 2005, respectively. Total amortization
expense related to this intangible asset was $280,000 and
$35,000 for the year ended September 30, 2006 and year
ended September 30, 2005, respectively. This intangible
asset is being amortized over five years. The $1.1 million
unamortized balance will be expensed over the next four fiscal
years.
Net
Patient Revenue
Net patient revenue is the amount VistaCare believes we are
entitled to collect for our services in accordance with
SAB 101 and 104, adjusted as described below. The amount
varies depending on the level of care, the payor and the
geographic area where the services are rendered. We derive net
patient revenue from billings to Medicare, Medicaid, private
insurers, managed care providers, patients and others. We
operate under arrangements with those payors pursuant to which
they reimburse us for services we provide to hospice eligible
patients they cover, subject only to our submission of adequate
and timely claim documentation. Our patient intake process
screens patients for hospice eligibility and identifies whether
their care will be covered by Medicare, Medicaid, private
insurance, managed care or self-pay. We recognize patient
revenues once a physician has verified the patients
hospice eligibility, the patients coverage from a payment
source has been verified and services have been provided to that
patient. Net patient revenue includes adjustments for charity
care and estimated payment denials (which VistaCare experiences
from time to time for reasons such as its failure to submit
complete and accurate claim documentation, its failure to
provide timely written physician certifications or
recertifications as to patient eligibility, or the payor deems
the patient ineligible for insurance coverage), contractual
adjustments, amounts VistaCare estimates it could be required to
repay to Medicare, such as payments that VistaCare would be
required to make in the event that any of its programs exceed
the annual Medicare Cap, and subsequent changes to initial level
of care determinations.
67
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Medicare
Cap
We recorded reductions to net patient revenue for exceeding the
annual Medicare Cap of $6.8 million for the year ended
September 30, 2006, $11.9 million for the year ended
September 30, 2005 and $14.8 million for the
nine-month transitional period ended September 30, 2004.
The $6.8 million reduction to net patient revenue for
Medicare Cap for the year ended September 30, 2006 includes
the following estimated accruals or adjustments:
|
|
|
|
|
$5.7 million for patient service dates during the 2006
Medicare Cap year, including pro-ration for estimated services
that these 2006 patients may receive from other
non-VistaCare hospice programs;
|
|
|
|
$0.5 million for a 2006 change in estimate to increase
estimated Medicare Cap accruals that were previously recorded at
lower amounts than actual assessment letters received from our
fiscal intermediary (FI) in 2006 for the 2005
Medicare regulatory year;
|
|
|
|
$0.2 million for the 2003 Medicare Cap year for revised
assessments received in 2006;
|
|
|
|
$0.2 million for the 2004 Medicare Cap year for estimated
revised assessments; and
|
|
|
|
$0.2 million for the 2005 Medicare Cap year for estimated
revised assessments.
|
The following table summarizes our revenue reductions, as of
September 30, 2006, by the year in which the estimated
amounts were known for each program year in which we have
experienced Medicare Cap reductions (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
Medicare Cap Reductions to Revenue and Assessments
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Estimated Medicare Cap recorded as
a reduction of patient revenue
|
|
$
|
6.8
|
(1)
|
|
$
|
11.9
|
|
|
$
|
14.8
|
(3)
|
Actual Medicare Cap assessment
received
|
|
|
|
|
|
|
8.7
|
(2)
|
|
|
12.0
|
|
|
|
|
(1) |
|
As of September 30, 2006, we have received all of our
assessment letters pertaining to our fiscal year 2005. Medicare
Cap accruals recorded include all of the detailed items above. |
|
(2) |
|
We have received and paid the assessment letters for our fiscal
year 2005. The Centers for Medicare and Medicaid Services
(CMS) issued a transmittal on August 26, 2005
indicating that the hospice Cap amount for the Cap year
ended October 31, 2004, was incorrectly computed.
Included in the $11.9 million of expense are charges of
$2.7 million relating to 2004 and $1.1 million
relating to 2003, which have not been assessed and are included
in the Medicare Cap accrual at September 30, 2006 relating
to this matter. |
|
(3) |
|
Includes $1.6 million for assessment letters received in
2004 for the 2003 Medicare Cap year and represents the recorded
Medicare Cap accruals for the nine-month transitional period
ended September 30, 2004. |
Denials
and Contractual Adjustments
We adjust our estimates for payment denials from time to time
based on our billing and collection experience, and payor mix.
VistaCare estimates such adjustments to net patient revenue
based on significant historical experience utilizing our
centralized billing and collection department, which continually
monitors the factors that could potentially result in a change
in charge denial experience. 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 $1.4 million for the year ended
September 30, 2006, $2.9 million for the year ended
September 30, 2005, and $3.8 million for the
nine-month transitional period ended September 30, 2004. As
of September 30, 2006 and September 30, 2005, the
allowance for denials on patient accounts receivable and
room & board was
68
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
$2.2 million and $3.1 million, respectively. Any
adjustments to net patient revenue for changes in estimates,
based on historical trends, are made in the period in which the
indicators of the need for the change occur.
Medicare and Medicaid reimbursements accounted for approximately
92% and 5% of our net patient revenue for the year ended
September 30, 2006 and 93% and 4% of our net patient
revenue for the year ended September 30, 2005 and the
nine-month transitional period ended September 30, 2004,
respectively. The balance of our net patient revenue in all
periods was from private insurers and Managed Care. Whether
Medicare or Medicaid continues to provide reimbursement for
hospice care is dependent upon governmental policies.
Charity
Care
VistaCare provides care at no cost to patients who are not
eligible for insurance coverage and meet certain financial need
criteria established by VistaCare. Charity care totaled
approximately $2.7 million, $2.0 million and
$1.5 million for the years ended September 30, 2006
and 2005, and for the nine-month transitional period ended
September 30, 2004, respectively. Since VistaCare does not
pursue collection of amounts determined to qualify as charity
care, these amounts are not recorded in net patient revenue.
Expenses VistaCare incurs in providing charity care are recorded
as patient care expenses.
Expenses
We recognize expenses as incurred. Our primary expenses include
patient care expenses, nursing home costs, sales, general and
administrative expenses, advertising expenses, income taxes and
insurance.
Patient
Care Expenses
Patient care expenses consist primarily of salaries, benefits,
payroll taxes and travel expenses associated with our hospice
care providers. Patient care expenses also include the cost of
pharmaceuticals, durable medical equipment, medical supplies,
inpatient unit expenses, nursing home costs and purchased
services such as ambulance, infusion and radiology. We incur
inpatient unit expenses primarily through per diem charge
arrangements with hospitals and skilled nursing facilities where
we provide our services. We currently operate five inpatient
units.
Nursing
Home Costs
For patients receiving nursing home care under state Medicaid
programs who elect hospice care in states other than Arizona,
Oklahoma and Pennsylvania, who elect hospice care under Medicare
or Medicaid, VistaCare contracts with nursing homes for the
nursing homes provision of room and board services. In
these states, the applicable Medicaid program must pay
VistaCare, in addition to the applicable Medicare or Medicaid
hospice daily or hourly rate, an amount equal to generally no
more than 95% of the Medicaid daily nursing home rate for room
and board services furnished to the patient by the nursing home.
Under VistaCares standard nursing home contracts,
VistaCare pays the nursing home for these room and board
services at predetermined contract rates, between 95% and 100%
of the full Medicaid allowable per diem nursing home rate. In
Arizona, Oklahoma and Pennsylvania, the Medicaid program pays
the nursing home directly for these expenses or has created a
Medicaid managed care program that either reduces or eliminates
this room and board payment. Effective July 1, 2005, South
Carolina switched from paying the nursing home directly to
paying VistaCare the daily nursing home rate for room and board
services.
Nursing home expenses totaled approximately $48.8 million,
$53.1 million and $34.3 million for the years ended
September 30, 2006 and 2005, and for the nine-month
transitional period ended September 30, 2004, respectively.
Nursing home revenues totaled approximately $44.4 million,
$47.9 million and $30.9 million for the years ended
September 30, 2006 and 2005, and for the nine-month
transitional period ended September 30, 2004, respectively.
Revenues are less than the expenses due to provisions for
estimated uncollectible amounts and
69
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
differences in nursing home contracted rates. We account for the
difference between the amount we pay the nursing home and the
amount we receive from Medicaid (net of estimated room and board
reimbursement claim denials) as patient care expenses. We refer
to this difference as nursing home costs, net. Our
nursing home costs, net, were $4.4 million,
$5.2 million and $3.4 million for the years ended
September 30, 2006 and 2005, and for the nine-month
transitional period ended September 30, 2004, respectively.
Sales,
General and Administrative Expenses
Sales, general and administrative 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 and professional
services, which are expensed as the services are rendered.
Advertising
Expenses
VistaCare expenses all advertising expenses as incurred, which
totaled approximately $3.3 million, $3.2 million and
$2.8 million for the years ended September 30, 2006
and 2005, and for the nine-month transitional period ended
September 30, 2004, respectively.
Insurance
We are covered by a general liability insurance policy on an
occurrence basis with limits of $1.0 million per occurrence
and $3.0 million in the aggregate. We are also covered by a
healthcare professional liability insurance policy on a
claims-made basis with limits of $1.0 million for each
medical incident and $3.0 million in the aggregate. We
maintain workers compensation coverage at the statutory limits
and an employers liability policy with a $1.0 million
limit, both with a $250,000 deductible per occurrence. We also
maintain a policy insuring hired and non-owned automobiles with
a $1.0 million limit of liability and a $1.0 million
deductible. In addition, we maintain umbrella coverage with a
limit of $10.0 million excess over the general,
professional, hired and non-owned automobile and employers
liability policies. We have not experienced any uninsured health
care negligence losses.
We had retrospective workers compensation insurance policies for
the policy periods beginning March 31, 2002 and 2003 and as
of September 30, 2006, we have a deposit of
$0.1 million with the insurance company for future losses
associated with these periods. This amount is included in other
assets on our balance sheet.
For the policy periods beginning March 31, 2004, 2005, and
2006, VistaCare has a high deductible plan that required
VistaCare to fund $2.4 million, $1.5 million and
$1.6 million to a depleting cash fund balance during 2004,
2005, and 2006, respectively. As of September 30, 2006,
VistaCare has recorded, as other assets on our balance sheet,
$1.0 million and $0.7 million related to the 2004 and
2006 policy periods associated with the depleting cash fund
balances. We have recorded approximately $0.8 million in
payment deficiencies related to the 2005 policy period in
accrued expenses on our balance sheet as of September 30,
2006.
Stock-Based
Compensation
Prior to October 1, 2005, the Company accounted for
stock-based compensation plans under the measurement and
recognition provisions of Accounting Principles Board Opinion
No. 25 (APB No. 25), Accounting for Stock Issued to
Employees and related interpretations, as permitted by
Statement of Financial Accounting Standards No. 123
(SFAS 123), Accounting for Stock-Based
Compensation. Under APB Opinion No. 25, if the exercise
price of VistaCares stock options equaled or exceeded the
estimated fair value of the underlying stock on the dates of
grant, no compensation expense was recognized. However, if the
exercise prices of VistaCares stock options were less than
the estimated fair value, on the date of grant, then
compensation expense was recognized for the difference over the
related vesting periods. Stock options granted at less than
estimated fair value resulted in
70
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
compensation expense of $0.3 million and $0.2 million
for the year ended September 30, 2005 and for the
nine-month transitional period ended September 30, 2004,
respectively.
If compensation for options granted under VistaCares stock
options plans prior to October 1, 2005 had been determined
based on the deemed fair value at the grant date consistent with
the method provided under SFAS 123, then VistaCares
net loss would have been as indicated in the pro forma table
below (in thousands, except per share related information) (See
Note 7 for further discussion of VistaCares stock-
based employee compensation).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net loss:
|
|
|
|
|
|
|
|
|
As reported:
|
|
$
|
(2,257
|
)
|
|
$
|
(4,232
|
)
|
Deduct total stock-based
compensation expense determined under fair value method for all
awards, net of tax impact
|
|
|
(4,254
|
)
|
|
|
(1,412
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
(6,511
|
)
|
|
$
|
(5,644
|
)
|
|
|
|
|
|
|
|
|
|
Basic net loss per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
Pro forma
|
|
|
(0.40
|
)
|
|
|
(0.35
|
)
|
Diluted net loss per share:
|
|
|
|
|
|
|
|
|
As reported
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
Pro forma
|
|
|
(0.40
|
)
|
|
|
(0.35
|
)
|
Weighted average shares used in
computation:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
16,316
|
|
|
|
16,082
|
|
Diluted
|
|
|
16,316
|
|
|
|
16,082
|
|
There was a $4.8 million pre-tax increase in pro forma
stock based compensation expense in the third quarter of fiscal
2005 related to the early vesting of
out-of-the
money employee stock options.
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) the 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 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) the modified retrospective method
which includes the requirements of the modified prospective
method described above, but permits companies to restate based
on the amounts previously recognized under
SFAS No. 123 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 recorded approximately
$2.4 million in stock based compensation expense during the
year ended September 30, 2006. The Company calculates the
fair value of stock options using the Black-Scholes model.
Results for prior periods have not been restated.
71
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Earnings
Per Share
Basic net (loss) income per common share is computed by dividing
net (loss) income by the weighted average number of common
shares outstanding during the period. Diluted net (loss) income
per common share is computed by dividing net (loss) income by
the weighted average number of shares outstanding during the
period plus the effect of potentially dilutive securities,
including outstanding warrants and employee stock options (using
the treasury stock method). The effects of certain stock options
are excluded from the determination of the weighted average
common shares for diluted earnings per share in each of the
periods presented as the effects were anitdilutive or the
exercise price for the outstanding options exceeded the average
market price for the Companys common stock. Accordingly,
for the years ended September 30, 2006 and 2005, and for
the nine-month transitional period ended September 30,
2004, approximately 2.5 million, 2.6 million and
2.4 million shares, respectively, related to stock options
are excluded from the computation of diluted earnings per share.
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 basis
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. VistaCare assesses the
recoverability of deferred tax assets and provides a valuation
reserve when it is no longer more likely than not that the
assets will be recovered. As a result of the Companys
assessment of the recoverability of its deferred tax asset, the
Company recorded a valuation allowance of $8.3 million
during the quarter and year ended September 30, 2006.
Recent
Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections a
replacement of APB Opinion No. 20 and FASB Statement
No. 3. This Statement replaces APB Opinion
No. 20, Accounting Changes, and FASB Statement No. 3,
Reporting Accounting Changes in Interim Financial Statements,
and changes the requirements for the accounting for and
reporting of a change in accounting principle. This Statement
applies to all voluntary changes in accounting principle. It
also applies to changes required by an accounting pronouncement
in the unusual instance that the pronouncement does not include
specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be
followed. The provisions of SFAS No. 154 are effective
for fiscal years beginning after December 15, 2005. The
Company does not expect the adoption of SFAS No. 154
in fiscal 2007 to have a material impact on its results of
operations or financial position.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes an
Interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprises financial statements in accordance with FASB
Statement No. 109, Accounting for Income Taxes,
and prescribes a recognition threshold and measurement attribute
for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. This Interpretation is
effective for fiscal years beginning after December 15,
2006. The Company is currently in the process of assessing what
impact FIN 48 may have on its results of operations,
financial position and cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands
disclosures about fair value measurements. This Statement
applies under other accounting pronouncements that require or
permit fair value measurements, the Board having previously
concluded in those accounting pronouncements that fair value is
the relevant measurement attribute. Accordingly, this Statement
does not require any new
72
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fair value measurements. This Statement is effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. The Company is currently evaluating the impact of the
provisions of SFAS No. 157.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 108 regarding the process of
quantifying financial statement misstatements.
SAB No. 108 states that registrants should use
both a balance sheet approach and an income statement approach
when quantifying and evaluating materiality of a misstatement.
The interpretations in SAB No. 108 contain guidance on
correcting errors under the dual approach as well as provide
transition guidance for correcting errors. This interpretation
does not change the requirements within SFAS No. 154
for the correction of an error in financial statements.
SAB No. 108 is effective for annual financial
statements covering the first fiscal year ending after
November 15, 2006. The Company will be required to adopt
this interpretation for its fiscal year ending 2007.
A summary of fixed assets follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Equipment
|
|
$
|
10,004
|
|
|
$
|
9,249
|
|
Leasehold improvements
|
|
|
3,305
|
|
|
|
1,449
|
|
Furniture and fixtures
|
|
|
3,001
|
|
|
|
2,515
|
|
Construction in progress
|
|
|
|
|
|
|
278
|
|
|
|
|
|
|
|
|
|
|
Total fixed assets
|
|
|
16,310
|
|
|
|
13,491
|
|
Accumulated depreciation
|
|
|
(9,901
|
)
|
|
|
(7,734
|
)
|
|
|
|
|
|
|
|
|
|
Fixed assets, net
|
|
$
|
6,409
|
|
|
$
|
5,757
|
|
|
|
|
|
|
|
|
|
|
A summary of other assets follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Workers compensation,
deposits
|
|
$
|
1,746
|
|
|
$
|
1,842
|
|
Internally developed software, net
of allowance of $6,259 and $4,209 as of September 30, 2006
and September 30, 2005, respectively
|
|
|
1,563
|
|
|
|
3,380
|
|
Covenant-not-to-compete,
net of amortization of $315 and $35 as of September 30,
2006 and September 30, 2005
|
|
|
1,085
|
|
|
|
1,365
|
|
Refundable deposits
|
|
|
408
|
|
|
|
415
|
|
Computer software, net of
allowance of $2,263 and $2,035 as of September 30, 2006 and
September 30, 2005, respectively
|
|
|
143
|
|
|
|
273
|
|
Employer owned life insurance
|
|
|
235
|
|
|
|
|
|
Other
|
|
|
180
|
|
|
|
35
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
5,360
|
|
|
$
|
7,310
|
|
|
|
|
|
|
|
|
|
|
73
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
4.
|
Accrued
Expenses and Other Current Liabilities
|
A summary of accrued expenses and other current liabilities
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
Patient care expenses
|
|
$
|
10,674
|
|
|
$
|
13,186
|
|
Salaries and payroll taxes
|
|
|
5,723
|
|
|
|
4,888
|
|
Accrued administrative expenses
|
|
|
4,412
|
|
|
|
2,318
|
|
Accrued workers compensation
|
|
|
3,133
|
|
|
|
1,395
|
|
Accrued paid-time-off
|
|
|
2,080
|
|
|
|
2,115
|
|
Self-insured health expenses
|
|
|
1,749
|
|
|
|
3,011
|
|
Accrued taxes
|
|
|
345
|
|
|
|
739
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other
current liabilities
|
|
$
|
28,116
|
|
|
$
|
27,652
|
|
|
|
|
|
|
|
|
|
|
The Company is required to assess the recoverability of its
deferred tax assets based on the more likely than
not criteria prescribed under SFAS 109. In performing
this assessment, management considers all positive evidence
available for the recovery of the assets which includes the
following sources in the order of their persuasiveness;
i) future taxable temporary differences, ii) loss
carryback availability, iii) tax planning strategies; and
iv) expected future operating income. When a Company has
incurred cumulative losses for a three year period, it would be
rare to consider expected future operating income as sufficient
evidence for not recording a valuation allowance. The operating
loss for 2006 resulted in the Company moving from a cumulative
profit position to a cumulative loss position for the most
recent three year period ended September 30, 2006. As a
result, the Company recorded a valuation allowance of
$8.3 million during the quarter and year ended
September 30, 2006 for all of its deferred tax assets, less
the deferred tax liabilities expected to reverse and become
taxable income. This resulted in the Company having a net
deferred tax liability of $1.1 million relating primarily
to its tax deductible goodwill that is being amortized over
15 years given that its reversal is indeterminate.
The components of income tax (benefit) expense follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Current taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(569
|
)
|
|
$
|
(2,268
|
)
|
|
$
|
2,207
|
|
State
|
|
|
(31
|
)
|
|
|
647
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current income tax (benefit)
expense
|
|
$
|
(600
|
)
|
|
$
|
(1,621
|
)
|
|
$
|
2,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
6,200
|
|
|
|
1,007
|
|
|
|
(4,070
|
)
|
State
|
|
|
1,024
|
|
|
|
(198
|
)
|
|
|
(740
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense
(benefit)
|
|
|
7,224
|
|
|
|
809
|
|
|
|
(4,810
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
6,624
|
|
|
$
|
(812
|
)
|
|
$
|
(2,301
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The reconciliation of income tax (benefit) expense computed at
the federal statutory tax rate to income tax (benefit) expense
recorded is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
September 30, 2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Tax (benefit) expense at statutory
rate
|
|
$
|
(1,709
|
)
|
|
|
34
|
%
|
|
$
|
(1,044
|
)
|
|
|
34
|
%
|
|
$
|
(2,287
|
)
|
|
|
(35
|
)%
|
State taxes, net of federal benefit
|
|
|
(9
|
)
|
|
|
0
|
%
|
|
|
297
|
|
|
|
(9
|
)%
|
|
|
(285
|
)
|
|
|
(4
|
)%
|
Change in valuation allowance
|
|
|
8,227
|
|
|
|
(164
|
)%
|
|
|
|
|
|
|
0
|
%
|
|
|
|
|
|
|
0
|
%
|
Effect of permanent items
|
|
|
115
|
|
|
|
(2
|
)%
|
|
|
(81
|
)
|
|
|
3
|
%
|
|
|
114
|
|
|
|
2
|
%
|
Other
|
|
|
0
|
|
|
|
0
|
%
|
|
|
16
|
|
|
|
(2
|
)%
|
|
|
157
|
|
|
|
2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
6,624
|
|
|
|
(132
|
)%
|
|
$
|
(812
|
)
|
|
|
26
|
%
|
|
$
|
(2,301
|
)
|
|
|
(35
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes reflect the tax effect of temporary
differences between the carrying amounts of asset and
liabilities for financial reporting purposes and the amounts
used for income tax purposes at the enacted rate. A summary of
deferred tax assets and liabilities follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2006
|
|
|
September 30, 2005
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Current
|
|
|
Long-term
|
|
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for denials
|
|
$
|
831
|
|
|
$
|
|
|
|
$
|
1,211
|
|
|
$
|
|
|
Accrued expenses
|
|
|
1,013
|
|
|
|
|
|
|
|
515
|
|
|
|
|
|
Medicare Cap accrual
|
|
|
3,670
|
|
|
|
|
|
|
|
6,504
|
|
|
|
|
|
Workers compensation accrual
|
|
|
1,099
|
|
|
|
|
|
|
|
271
|
|
|
|
|
|
Other carryforwards and credits
|
|
|
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
Stock based compensation
|
|
|
|
|
|
|
981
|
|
|
|
|
|
|
|
325
|
|
Net operating loss
|
|
|
|
|
|
|
1,574
|
|
|
|
|
|
|
|
208
|
|
Valuation allowance
|
|
|
(6,613
|
)
|
|
|
(1,677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,001
|
|
|
|
8,501
|
|
|
|
533
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax deductible goodwill
|
|
|
|
|
|
|
(1,144
|
)
|
|
|
|
|
|
|
(962
|
)
|
Depreciation and amortization
|
|
|
|
|
|
|
(453
|
)
|
|
|
|
|
|
|
(810
|
)
|
Software development expenses
|
|
|
|
|
|
|
(548
|
)
|
|
|
|
|
|
|
(1,181
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax (liabilities)
asset
|
|
$
|
|
|
|
$
|
(1,144
|
)
|
|
$
|
8,501
|
|
|
$
|
(2,420
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We are estimating a $5.6 million Federal taxable loss for
the year ended September 30, 2006. The tax effect of the
net operating loss carryback portion of this loss is classified
as a current benefit and the anticipated refund is included in
the taxes receivable account given that the Company has
sufficient income in prior years to carry back that portion of
the loss for a refund. As of September 30, 2006 the Company
has additional net operating loss carryforwards for federal
purposes of $3.0 million and state income tax purposes of
approximately $10.6 million, which expire beginning in 2026
and 2011 respectively.
Cash payments for income taxes were approximately
$0.4 million, $0.9 million and $4.2 million
during the years ended September 30, 2006 and 2005 and for
the nine-month transitional period ended September 30,
2004, respectively.
75
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 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) 85.0% 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. No borrowings
were made under the credit facility during the fiscal year and
as of September 30, 2006, 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 would
require a lender waiver and we would need to complete certain
administrative procedures in order to borrow under the current
terms of the credit facility.
|
|
7.
|
Stock
Based Compensation
|
Prior to October 1, 2005, the Company accounted for stock
based compensation under the measurement and recognition
provisions of APB Opinion No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, as permitted
by Financial Accounting Standards Board (FASB) Statement
No. 123, Accounting for Stock-Based Compensation. Under APB
Opinion No. 25, stock options granted to employees and
directors at market required no recognition of compensation cost.
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) the 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 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) the modified retrospective method
which includes the requirements of the modified prospective
method described above, but permits companies to restate based
on the amounts previously recognized under
SFAS No. 123 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). Results for prior periods have not
been restated.
At September 30, 2006, the Company had two active
share-based compensation plans. Stock option awards granted from
these plans are granted at the fair market value (i.e., the
closing price of the stock on the NASDAQ Global Market) on the
date of grant, and vest over a period determined at the time the
options are granted, ranging from immediate vesting to seven
years graded vesting, and generally have a maximum term of ten
years. 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 sales, general and
administrative expenses in our
76
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Consolidated Statements of Operations. When options are
exercised, new shares of the Companys Class A common
stock are issued under these share-based compensation plans. A
total of 4.3 million shares are authorized for issuance
under these plans.
1998
Stock Option Plan
In 1998, VistaCare established a qualified and nonqualified
stock option plan (the 1998 Plan) whereby options to purchase
shares of VistaCares common stock are granted at a price
equal to the estimated fair value of the stock at the date of
the grant as determined by the Board of Directors. A total of
4.0 million shares of common stock are reserved for
issuance under the 1998 Plan. The options granted under the 1998
Plan typically vest over a three, five or seven-year period.
In accordance with Accounting Principles Board Opinion
No. 25 and its related interpretations which the Company
followed prior to October 1, 2005, certain options were
deemed to be subject to compensation charges. VistaCare recorded
deferred compensation in connection with the grant of stock
options to employees for the year ended September 30, 2005,
and for the nine-month transitional period ended
September 30, 2004 as follows:
|
|
|
|
|
For options granted in November 2001, February 2002, May 2002,
and August 2002, the fair value on the grant dates, as
determined by VistaCares board of directors, was
approximately $3.75, $3.75, $6.25 and $12.50, respectively. In
connection with VistaCares IPO, VistaCare determined that
the estimated deemed fair value of its common stock for
accounting purposes to be $5.35, $7.75, $10.33 and $13.75 as of
November 2001, February 2002, May 2002 and August 2002,
respectively. The compensation charge for these options results
from the differential between the exercise price and deemed fair
market value at the time of grant;
|
|
|
|
In November 2002, 320,000 stock options were granted to
VistaCares Chief Executive Officer with an exercise price
of $12.50 per share. The shares subject to the option vest
on September 30, 2012. However, if the average closing
price of VistaCares common stock during specified periods
exceeds specified thresholds (which increase over time), the
vesting of the option will be accelerated with respect to a
portion of the shares covered by the option. These options are
subject to a variable accounting charge until all options vest
and as a result of this determination, the Compensation
Committee of VistaCares Board of Directors modified the
vesting period so as to accelerate the vesting period to
February 24, 2003; and
|
|
|
|
In August of 2004, VistaCare granted 30,000 shares of
restricted stock to two executive officers at no cost, which
would have caused the Company to recognize $0.5 million in
compensation expense ratably over the four-year vesting period
if those executive officers remained employed throughout the
vesting period. Subsequently, both executive officers
employment with VistaCare was terminated and the
30,000 shares of restricted stock awarded to them in August
of 2004 were canceled. As a result of the awards being canceled,
no additional compensation expense will be recorded related to
these restricted shares.
|
These stock option grants resulted in deferred compensation
expense of $0.3 million and $0.2 million for the year
ended September 30, 2005 and for the nine-month
transitional period ended September 30, 2004, respectively.
The tax benefit realized related to this compensation expense
was $0.1 million and $0.1 million for the year ended
September 30, 2005 and the nine-month transitional period
ended September 30, 2004, respectively.
On May 4, 2005, the Companys Board of Directors
approved accelerating the vesting of 613,624
out-of-the
money stock options for executive officers and non executive
officers to avoid recording compensation expense on these
options under SFAS 123(R), which the Company adopted on
October 1, 2005. The Company believed these
out-of-the
money options were not providing the intended financial
incentives to employees, and as such did not deem it appropriate
to record compensation expense related to these options. Under
SFAS 123, a modified award requires a new measurement of
compensation cost as the excess, if any, of the fair value of
the modified award over the fair value of the original award
immediately before its terms are modified. Since there is no
further service requirement for these stock options, the excess
of the compensation cost for these options measured at the
77
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
modification date, less amounts previously expensed on a
pro-forma basis, resulted in an increase to pro-forma
compensation expense of $2.9 million net of tax impact for
the year ended September 30, 2005.
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
|
Accelerated
|
|
|
Price per
|
|
Holder of Non-Qualified Stock Options
|
|
Options
|
|
|
Share
|
|
|
Executive Officers as of
May 4, 2005:
|
|
|
|
|
|
|
|
|
Hughes, Carla
|
|
|
60,000
|
|
|
$
|
34.09
|
|
Lewis, Stephen
|
|
|
15,000
|
|
|
|
34.09
|
|
Watson, Ron
|
|
|
32,000
|
|
|
|
36.20
|
|
Berry, Roseanne
|
|
|
25,000
|
|
|
|
34.09
|
|
Steging, Jon
|
|
|
16,000
|
|
|
|
36.25
|
|
Crisci, John
|
|
|
16,000
|
|
|
|
23.41
|
|
Crisci, John
|
|
|
15,000
|
|
|
|
34.09
|
|
|
|
|
|
|
|
|
|
|
All executive officers as a group
(weighted average exercise price)
|
|
|
179,000
|
|
|
$
|
33.71
|
|
All other employees (weighted
average exercise price)
|
|
|
434,624
|
|
|
$
|
28.06
|
|
|
|
|
|
|
|
|
|
|
Total (weighted average exercise
price)
|
|
|
613,624
|
|
|
$
|
29.71
|
|
|
|
|
|
|
|
|
|
|
The acceleration of these options eliminated future compensation
expense that the Company would otherwise recognize in its
statement of operations with respect to these options upon the
effectiveness of SFAS No. 123(R) (Share-Based
Payment). The acceleration of stock option vesting requires a
new measurement date. However, while the modification may allow
the employees to vest in options that could have been forfeited
pursuant to the options original terms (i.e., termination prior
to vesting), no future compensation expense will result since
the options were
out-of-the-money
at the new measurement date. The maximum future expense that was
eliminated was approximately $4.6 million. This amount is
properly reflected in the pro-forma footnote disclosure in our
fiscal 2005 financial statements, as permitted under the
transition guidance provided by the Financial Accounting
Standards Board.
2002
Non-Employee Director Stock Option Plan
In 2002, VistaCare established a Non-Employee Director Stock
Option Plan, or the director plan, which authorizes the grant of
options to purchase up to 300,000 shares of common stock to
non-employee directors. Under the director plan, each future
non-employee director will be granted a stock option to purchase
20,000 shares of common stock on the date he or she is
first elected to VistaCares board of directors. Since
2003, each non-employee director has been granted an option to
purchase 10,000 shares of VistaCare common stock, provided
that he or she attended at least 75% of the meetings of the
board of directors in the preceding year or any board committee
on which he or she served. The exercise price for all options
granted under the director plan would be equal to the fair
market value of the common stock on the date of grant. Each
option granted under the director plan would be immediately
exercisable in full. Each option will expire on the earlier of
10 years from the date of grant or on the first anniversary
of the date on which the optionee ceases to be a director.
Share
Based Compensation Assumptions and Values
The fair value of each stock option award is estimated on the
date of the grant using the Black-Scholes option pricing model.
The Company historically has not paid any dividends and does not
anticipate paying any dividends in the future. The expected
stock price volatility is based on historical trading of the
Companys stock. The risk-free interest rate is based on
the U.S. treasury security rate in effect as of the date of
grant. The expected term of options
78
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
is an average of the contractual terms and vesting periods, and
historical data, respectively. The fair value of each stock
option award was estimated with the following assumptions:
|
|
|
|
|
|
|
|
|
Year Ended
|
|
Year Ended
|
|
Nine Months Ended
|
|
|
September 30,
|
|
September 30,
|
|
September 30,
|
|
|
2006
|
|
2005
|
|
2004
|
|
Expected dividend yield
|
|
0.0%
|
|
0.0%
|
|
0.0%
|
Expected stock price volatility
|
|
48% to 51%
|
|
55%
|
|
38% to 52%
|
Weighted-average stock price
volatility
|
|
50%
|
|
55%
|
|
45%
|
Risk-free interest rate range
|
|
3.9% to 5.2%
|
|
2.8% to 3.6%
|
|
3.0% to 6.0%
|
Expected term (in years)
|
|
7.5
|
|
5.0
|
|
5.0
|
A summary of stock option activity under all Company plans as of
September 30, 2006, and changes during the year ended
September 30, 2006 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares Under Option
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
Options outstanding at
December 31, 2003
|
|
|
1,798,826
|
|
|
$
|
9.36
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
983,086
|
|
|
|
27.12
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(242,100
|
)
|
|
|
5.60
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(75,568
|
)
|
|
|
18.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at
September 30, 2004
|
|
|
2,464,244
|
|
|
$
|
12.09
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
715,200
|
|
|
|
16.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(146,370
|
)
|
|
|
4.97
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(394,260
|
)
|
|
|
18.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2005
|
|
|
2,638,814
|
|
|
$
|
16.72
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
392,800
|
|
|
|
13.80
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(39,449
|
)
|
|
|
4.95
|
|
|
|
|
|
|
|
|
|
Terminated/expired
|
|
|
(631,188
|
)
|
|
|
19.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30,
2006
|
|
|
2,360,977
|
|
|
$
|
15.60
|
|
|
|
7.8
|
|
|
$
|
3.5 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of fully vested stock options expected to vest, as of
September 30, 2006 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Contractual Term
|
|
|
Intrinsic Value
|
|
|
Outstanding
|
|
|
2,248,325
|
|
|
$
|
13.98
|
|
|
|
8.2
|
|
|
$
|
3.5 million
|
|
Exercisable
|
|
|
1,811,345
|
|
|
$
|
16.09
|
|
|
|
7.3
|
|
|
$
|
3.3 million
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted-average grant-date fair value of options granted
during the years ended September 30, 2006 and 2005 and for
the nine-month transitional period ended September 30, 2004
was $7.93, $7.14 and $6.81, respectively. The total intrinsic
value of options exercised during the years ended
September 30, 2006 and 2005 and for the nine-month
transitional period ended September 30, 2004 was
$0.3 million, $1.7 million, and $0.8 million,
respectively.
79
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
A summary of the status of the Companys restricted
nonvested shares as of September 30, 2006, and changes
during the year ended September 30, 2006, is presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
Nonvested Shares
|
|
Shares
|
|
|
Fair Value
|
|
|
Nonvested at December 31, 2003
|
|
|
|
|
|
$
|
|
|
Granted
|
|
|
30,000
|
|
|
|
16.00
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
|
|
|
|
|
|
Nonvested at September 30,
2004
|
|
|
30,000
|
|
|
$
|
16.00
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(15,000
|
)
|
|
$
|
16.00
|
|
Nonvested at September 30,
2005
|
|
|
15,000
|
|
|
$
|
16.00
|
|
Granted
|
|
|
187,000
|
|
|
|
13.32
|
|
Vested
|
|
|
(3,600
|
)
|
|
|
12.79
|
|
Forfeited
|
|
|
(31,800
|
)
|
|
|
14.39
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 30,
2006
|
|
|
166,600
|
|
|
$
|
13.37
|
|
Total compensation costs for share-based awards for the fiscal
year ended September 30, 2006 totaled approximately
$2.4 million. The tax benefit realized related to this
compensation expense was $0.5 million, which was offset by
a valuation allowance. As of September 30, 2006, there was
$5.7 million of total unrecognized compensation cost
related to nonvested share-based compensation arrangements
granted under all Company plans. That cost is expected to be
recognized over a weighted-average period of 3.8 years. The
total fair value of shares vested during the years ended
September 30, 2006 and 2005 and the nine-month transitional
period ended September 30, 2004 was $2.4 million,
$9.1 million and $0.7 million, respectively.
The adoption of SFAS No. 123(R) increased the
Companys loss before income tax expense by approximately
$2.1 million and increased its net loss by approximately
$1.7 million for the twelve months ended September 30,
2006. The basic and diluted net loss per share for the year
ended September 30, 2006 would have been $0.60 if the
Company had not adopted SFAS No. 123(R), compared to
the reported basic and diluted net loss per share of $0.71.
During the year ended September 30, 2006 the Companys
cash flow from operations and financing activities were not
affected by the adoption of SFAS No. 123(R).
The adoption of SFAS No. 123(R) by the Company has
caused management to revaluate our equity compensation program
for employees and non-employee directors. Subsequent to the
adoption of SFAS 123(R) the Company has begun to grant more
restricted shares and less stock options due to managements
belief that restricted shares provide a higher level of
incentives to employees and non- employee directors than stock
options.
2002
Employee Stock Purchase Plan
In 2002, VistaCare established an Employee Stock Purchase Plan,
or the purchase plan, provides for the issuance of up to
200,000 shares of VistaCare common stock to participating
employees.
All VistaCare employees, including directors who are employees,
and all employees of any participating subsidiaries, whose
customary employment is more than 20 hours per week for
more than five months in a calendar year are eligible to
participate in the purchase plan. Employees who would
immediately, after the grant, own five percent or more of the
total combined voting power or value of all classes of stock of
the Company or any of its
80
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
subsidiaries, as defined, may not participate. Those
participating may purchase shares at the lesser of 85% of the
full market value at the first or last day of the offering
period.
The purchase plan will be implemented through a series of
offerings, the dates of which shall be established from time to
time by VistaCares board of directors. Participating
employees may purchase shares under the purchase plan through
periodic payroll deductions, lump sum payments, or both. The
purchase price of the shares in each offering period will be 85%
of the closing price per share of the common stock on either the
first or last day of the offering period, whichever is lower.
VistaCare maintains a qualified plan under Section 401(k)
of the Internal Revenue Code of 1986. Under the 401(k) plan, a
participant may contribute a maximum of 70% of his or her
pre-tax earnings through payroll deductions, up to the
statutorily prescribed annual limit. The percentage elected by
more highly compensated participants may be required to be
lower. In addition, at the discretion of VistaCares Board
of Directors, VistaCare may make discretionary matching
and/or
profit-sharing contributions into the 401(k) plans for eligible
employees. For the years ended September 30, 2006 and 2005,
and for the nine-month transitional period ended
September 30, 2004, VistaCare made a discretionary matching
contribution to the 401(k) plan of approximately
$0.4 million, $0.4 million and $0.1 million,
respectively.
|
|
9.
|
Minimum
Lease Payments
|
VistaCare conducts a major part of its operations from leased
facilities, which include five in-patient units and office
space. The leases, which have varying terms, the latest of which
expires in 2011, are classified as operating leases. Payments
under operating leases are recognized as rent expense on a
straight-line basis over the term of the related lease. The
difference between the rent expense recognized for financial
reporting purposes and the actual payments made in accordance
with the lease agreements is recognized as a deferred rent
liability. We also lease copier equipment. The copier leases
have varying terms, the latest of which expires in 2010.
Total rent expense was $6.5 million, $5.7 million and
$3.5 million for the years ended September 30, 2006
and 2005 and for the nine-month transitional period ended
September 30, 2004, respectively.
Future minimum rental payments under non-cancelable leases with
terms in excess of one year as of September 30, 2006,
follows (in thousands):
|
|
|
|
|
2007
|
|
|
7,195
|
|
2008
|
|
|
6,582
|
|
2009
|
|
|
5,864
|
|
2010
|
|
|
4,339
|
|
2011
|
|
|
1,278
|
|
Thereafter
|
|
|
101
|
|
|
|
|
|
|
|
|
$
|
25,359
|
|
|
|
|
|
|
|
|
10.
|
Related
Party Transactions
|
During 2005, with the approval of the Board of Directors, the
Company agreed to purchase the home of its chief operating
officer who joined the Company during 2005. The Board of
Directors approved the purchase of the home because they
believed the chief operating officer would be able to focus more
attention on his current responsibilities. The company resold
the home in less than a month for approximately $40,000 less
than the original purchase price for which the company recorded
a loss on disposal of approximately $40,000. There were no other
significant related party transactions.
81
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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 Companys 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 Companys August
2004 announcement of its 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. On
June 16, 2006, the Company entered into a settlement
agreement with the plaintiffs, agreeing to pay $4.6 million
to settle this case, all of which is being paid by insurance.
The Court granted final approval of the settlement on
September 29, 2006, and the case has been dismissed with
prejudice.
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. On August 30, 2006, the Court
granted the defendants motion to dismiss, and the case was
dismissed with prejudice. The plaintiffs have filed a notice of
appeal with the United States Ninth Circuit Court of Appeals. As
of the date of this report, no briefing schedule has been
established. If the plaintiffs pursue their appeal, the
defendants will continue to vigorously oppose the appeal and
defend the case.
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 legal proceedings section,
individually or in aggregate, will not have a material adverse
impact on our financial position, results of operations or cash
flows, the litigation and other claims that we face are subject
to inherent uncertainties and managements 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
or cash flows for the period in which the effect becomes
reasonably estimable.
82
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The following table presents the calculation of basic and
diluted net loss per common share (in thousands, except per
share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Numerator
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(11,651
|
)
|
|
$
|
(2,257
|
)
|
|
$
|
(4,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic net loss per
share weighted average shares
|
|
|
16,406
|
|
|
|
16,316
|
|
|
|
16,082
|
|
Effect of dilutive securities
employee stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted net loss
per share adjusted weighted average shares and
assumed conversion
|
|
|
16,406
|
|
|
|
16,316
|
|
|
|
16,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net loss to stockholders
|
|
$
|
(0.71
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net loss to stockholders
|
|
$
|
(0.71
|
)
|
|
$
|
(0.14
|
)
|
|
$
|
(0.26
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effects of certain stock options are excluded from the
determination of the weighted average common shares for diluted
earnings per share in each of the periods presented as the
effects were antidilutive or the exercise price for the
outstanding options exceeded the average market price for the
Companys common stock. Accordingly, for the years ended
September 30, 2006 and 2005, and for the nine-month
transitional period ended September 30, 2004, approximately
2.5 million, 2.6 million and 2.4 million shares,
respectively, related to stock options are excluded from the
computation of diluted earnings per share.
|
|
13.
|
Allowance
for Denials
|
The allowance for denials for patient accounts receivable
(including room and board charges) is as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
Year Ended
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Balance, beginning of year
|
|
$
|
3,121
|
|
|
$
|
5,885
|
|
|
$
|
6,050
|
|
Provision for denials (reflected
as a reduction to revenue)
|
|
|
3,370
|
|
|
|
6,215
|
|
|
|
6,241
|
|
Less write-offs, net of recoveries
|
|
|
(4,297
|
)
|
|
|
(8,979
|
)
|
|
|
(6,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
2,194
|
|
|
$
|
3,121
|
|
|
$
|
5,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
14.
|
Unaudited
Quarterly Financial Information
|
The following table sets forth certain unaudited quarterly
financial information for the years ended September 30,
2006 and 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
Fiscal year ended
September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue
|
|
$
|
59,673
|
|
|
$
|
55,888
|
|
|
$
|
59,914
|
|
|
$
|
60,518
|
|
|
$
|
235,993
|
|
Gross profit
|
|
|
23,752
|
|
|
|
18,571
|
|
|
|
21,699
|
|
|
|
19,092
|
|
|
|
83,114
|
|
Net income (loss)
|
|
|
1,467
|
|
|
|
(2,016
|
)
|
|
|
(193
|
)
|
|
|
(10,909
|
)
|
|
|
(11,651
|
)
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
Diluted
|
|
$
|
0.09
|
|
|
$
|
(0.12
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.66
|
)
|
|
$
|
(0.71
|
)
|
Fiscal year ended
September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net patient revenue
|
|
$
|
56,615
|
|
|
$
|
57,456
|
|
|
$
|
57,476
|
|
|
$
|
53,885
|
|
|
$
|
225,432
|
|
Gross profit
|
|
|
21,507
|
|
|
|
22,131
|
|
|
|
21,363
|
|
|
|
13,220
|
|
|
|
78,221
|
|
Net income (loss)
|
|
|
708
|
|
|
|
1,131
|
|
|
|
980
|
|
|
|
(5,076
|
)
|
|
|
(2,257
|
)
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.14
|
)
|
Diluted
|
|
$
|
0.04
|
|
|
$
|
0.07
|
|
|
$
|
0.06
|
|
|
$
|
(0.31
|
)
|
|
$
|
(0.14
|
)
|
During the fourth quarter ended September 30, 2006
VistaCare had a change in estimate of approximately
$2.1 million related to an increase in Medicare Cap
accrual. The increase in the Medicare Cap accrual was due to
unfavorable trends in fourth quarter admissions and more adverse
than historical impact of prorations on second time admissions
per the 2005 Cap assessment letters, which resulted in an
increase in Medicare Cap expense for both the 2005 and 2006
Medicare Cap year. During the fourth quarter ended
September 30, 2006, the Company assessed the recoverability
of its deferred tax asset. As a result of that review, the
Company was required to record a valuation allowance of
$8.3 million during the quarter and year ended
September 30, 2006 for all of its deferred tax assets, less
the deferred tax liabilities expected to reverse and become
taxable income.
During the fourth quarter ended September 30, 2005, the
Company recorded charges for changes in estimate principally
relating to an increase in Medicare Cap accrual of
$5.3 million, of which, approximately, $1.1 million
and $2.7 million related to an increase for the 2003 and
2004 Medicare Cap year due to an error in the calculation by
Medicare of the per beneficiary rate (refer to Note 17
Contingent Liabilities). We also recorded a $1.1 million
favorable adjustment for reduced allowance for denials accruals.
VistaCare determined that no purchase commitments existed as of
September 30, 2006 that the Company had not accounted for.
Medicare
and Medicaid Regulation
Medicare payments for hospice services are subject to two
additional limits or Caps, both of which are
assessed on a provider-wide basis. Within our business, we have
37 separate provider numbers for Medicare Cap purposes, each of
which include one or more of our 56 programs.
84
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The first of these two Caps applies only to Medicare inpatient
services. Specifically, if the number of inpatient care days of
any hospice program provided to Medicare beneficiaries exceeds
20% of the total days of hospice care such program provides to
all patients for an annual period beginning September 28,
the days in excess of the 20% figure may be reimbursed only at
the routine home care rate. None of VistaCares hospice
programs exceeded the payment limits on inpatient services in
the year ended September 30, 2006, year ended
September 30, 2005 and nine-month transitional period ended
September 30, 2004.
The second Cap is a limit on the total amount of Medicare
payments that will be made to each of our programs operating
under distinct provider numbers. This Medicare Cap amount is the
aggregate limitation on reimbursement per beneficiary, and is
revised annually to account for inflation. The Medicare Cap year
for establishing the total amount paid to a provider begins on
November 1 of each year and ends on October 31 of the
following year. The Medicare Cap amount for any given year is
usually announced by CMS during the month of August of that
Medicare Cap year. As a result, a provider must estimate the
Medicare Cap amount for approximately nine or ten months during
the current Medicare Cap year based upon the prior years
Medicare Cap amount and an anticipated inflation factor. For the
Medicare year ended October 31, 2006, the Medicare Cap was
$20,585.39 per beneficiary. Medicare and Medicaid currently
provide for an annual adjustment of the various hospice payment
rates based on the increase or decrease of the Medical Care
Services category as published by the Consumer Price Index.
These hospice rate increases have historically been less than
actual inflation. Compliance with the Medicare Cap is not
determined on the basis of an individual beneficiarys
experience, but is measured by calculating the total Medicare
payments received under a given provider number with respect to
services provided to all Medicare hospice care beneficiaries
served within the provider number between each November 1
and October 31 of the following year (the Medicare
Cap year). The result is then compared with the product of
the Medicare Cap amount and the number of Medicare beneficiaries
electing hospice care for the first time from that hospice
provider during the relevant period (September 28 of each year
and September 27 of the following year). There are further
negative adjustments for the Medicare Cap calculation to the
extent any of our first time beneficiaries are later admitted
for hospice care to another provider and, there are also
positive adjustments for beneficiaries with a previous hospice
election who are admitted to one of our hospice providers. Those
adjustments are pro-rated based on days of service. If actual
Medicare reimbursements paid to the provider during the Medicare
Cap year exceed the Medicare Cap amount calculated, Medicare
requires that we repay the difference to Medicare.
On October 17, 2005, we were notified by the Centers for
Medicare and Medicaid Services (CMS) 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 termination also impacted our Terre Haute, Indiana
program since the two programs shared 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. The
terminations limited our reimbursement (for services provided to
patients being served on the effective date of termination) and
no reimbursement was available for any services to patients
admitted into the affected programs after the date of
termination. We took steps to allow the patients and families of
the affected programs to remain under our care. Some patients
transferred to another of our Indiana programs, some patients
transferred to competitor programs, and we continued to serve
some patients at the Indianapolis and Terre Haute programs
without the expectation of reimbursement. We appealed the
termination determination. With no admission of liability or
fault on our part and no admission of error or fault by CMS, on
July 5, 2006 a settlement was reached in order to avoid the
unnecessary expense of litigation and arrive at a final
resolution of the matter. Under the terms of the settlement, CMS
agreed to modify the effective date of the termination to
December 27, 2005 and we agreed to dismiss our appeal. As a
result of the settlement, during the fourth quarter of fiscal
year 2006 we billed and collected on $0.8 million in
invoices related to reimbursable services provided to patients
through January 26, 2006.
We applied to separate Terre Haute from Indianapoliss
provider number, and were approved for a separate provider
number for Terre Haute as of March 7, 2006. From
November 15, 2005 to March 6, 2006, due to the
termination of our Medicare and Medicaid provider agreements as
discussed above, we could not admit new patients to our Terre
Haute program but we continued to provide care for existing
patients without the expectation of
85
VISTACARE,
INC.
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
receiving reimbursement. We began receiving reimbursement for
Medicare and Medicaid services for our patients transferred to
our new Terre Haute provider number as of March 7, 2006.
This transfer of patients, which has been as seamless as
possible to the patients and families, was a time consuming
process of discharging the patient from one provider number and
admitting the same patient through a standard admission process
at the new provider number. These Terre Haute patient transfers
were processed over several weeks and by the end of April 2006,
all patients were transferred to the new provider number.
Following the decertification action discussed above, in order
to continue to serve the Indianapolis community, we applied for
permission to relocate our Bloomington, Indiana program to
Indianapolis, which relocation was approved by the Indiana State
Department of Health on November 11, 2005. We also
requested that our Bloomington office be approved as an
alternative delivery site (ADS) for the program that
had been relocated to Indianapolis. We also received approval
for the Bloomington office to become an ADS for the relocated
program. In early March, 2006, we began to admit new
Indianapolis and Bloomington patients. Due to the relocation,
the Indianapolis program received a Medicare certification
survey. There were no significant findings as a result of the
survey, and our plan of correction was accepted June 30,
2006.
Our operating results throughout Indiana were negatively
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. Our revenue was negatively impacted
by our inability to admit new patients to our Terre Haute
program between October 15, 2005 and March 7, 2006.
The revenue loss was partially offset by lower expenses
primarily due to lower payroll. In addition, we incurred
additional expense for legal, training, and travel costs related
to the certification matters.
|
|
17.
|
Contingent
Liabilities
|
During the 12 months ended September 30, 2005
VistaCare recorded an increase to the Medicare Cap accrual of
approximately $1.1 million and $2.7 million for the
2003 and 2004 Medicare Cap years. This increase in Medicare cap
accrual (reduction to net patient revenue) was related to CMS
publishing a statement that there was an error in their
computation of the Medicare Cap per beneficiary limit for these
years, which would lower the previously calculated per
beneficiary limits. VistaCare management recorded the increases
in the Medicare Cap liability related to these errors after
receiving a transmittal from CMS dated August 26, 2005
notifying management of the error. The transmittal indicated
that additional instructions related to the resolution of the
error would be published in a separate transmittal. As of
December 8, 2006 CMS has not published an update to the
original transmittal, but due to the uncertainty surrounding the
eventual resolution of this issue and the fact that CMS has the
ability to restate the per beneficiary rate, management believes
that as of September 30, 2006 it is necessary to maintain
the accrual of $1.1 million and $2.7 million for the
2003 and 2004 Medicare Cap year.
For the year-ended September 30, 2006, VistaCare has
recorded a liability relating to the settlement of approximately
$0.7 million, of Medicaid related disputes.
On October 6, 2006 the sale of VistaCares Cincinnati
program to In Home Health, Inc. was finalized. The
$1.2 million sale included the hospice license number,
Medicare Provider number, select contracts, all personal
property and all client lists. VistaCare intends to record the
gain on the sale of Cincinnati in the first quarter of 2007 for
approximately $1.1 million. No amounts were shown as assets
held for sale in our financial statements for the year ended
September 30, 2006 because the amounts involved were
immaterial. Also, we do not believe this transaction will have a
material impact on our future results of operations, financial
position or cash flows.
86
|
|
Item 9.
|
Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
|
Not applicable.
|
|
Item 9A.
|
Controls
and Procedures
|
(a) Evaluation of Disclosure Controls and
Procedures. Our management, with the
participation of our Chief Executive Officer, or CEO, and
Chief Financial Officer, or 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 of 1934) as of
September 30, 2006. 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 September 30, 2006, 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, particularly during the period in
which this report was being prepared and (2) effective, in
that they provide reasonable assurance that information required
to be disclosed by us in the reports that we file or furnish
under the Securities Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in
the Securities Exchange Commissions rules and forms.
(b) Changes in Internal Controls. No
change in internal control over financial reporting (as defined
in
Rules 13a-15(f)
and
15d-15(f)
under the Securities Exchange Act) occurred during the fiscal
quarter ended September 30, 2006 that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
|
|
Item 9B.
|
Other
Information
|
Not applicable.
PART III
Some of the information required by this Part III will be
included in the definitive proxy statement for our 2007 Annual
Meeting of Stockholders, which for purposes of this report we
refer to as our annual proxy statement. We plan to submit our
annual proxy statement to the Securities and Exchange Commission
not later than 120 days after the end of the fiscal year
covered by this report. That information is incorporated into
this Part III by reference.
|
|
Item 10.
|
Directors,
Executive Officers of the Registrant and Corporate
Governance
|
Certain information required by this item is contained under the
heading Executive Officers of the Registrant in
Part I of this Annual Report on
Form 10-K,
and the remainder is contained in our annual proxy statement
under the heading Election of Directors and is
incorporated herein by reference. Information relating to
certain filings on Forms 3, 4, and 5 is contained in
our annual proxy statement under the heading
Section 16(a) Beneficial Ownership Reporting
Compliance, and is incorporated herein by reference.
Information required by this item pursuant to Items 401(h),
401(i), and 401(j) of
Regulation S-K
relating to an audit committee financial expert, the
identification of the audit committee of our board of directors
and procedures of security holders to recommend nominees to our
board of directors is contained in our annual proxy statement
under the heading Corporate Governance and is
incorporated herein by reference.
Information required by this item and our code of ethics is
incorporated by reference from the discussion under the heading
Corporate Governance in our proxy statement for our
2007 annual meeting of shareholders. We intend to satisfy the
disclosure requirement under Item 5.05 of
Form 8-K
regarding any amendment to, or waiver from, a provision of our
Code of Conduct by posting such information on our website, at
www.vistacare.com.
87
|
|
Item 11.
|
Executive
Compensation
|
Information required by this Item is incorporated by reference
to our annual proxy statement under the Captions
Compensation of Non-Employee Directors and
Executive Compensation.
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
|
Information required by this Item is incorporated by reference
to our annual proxy statement under the headings Security
Ownership of Certain Beneficial Owners and Management and
Securities Authorized for Issuance under Equity
Compensation Plans.
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
Information required by this Item is incorporated by reference
to our annual proxy statement under the heading Certain
Relationships and Related Transactions.
|
|
Item 14.
|
Principal
Accounting Fees and Services
|
Information required by this Item is incorporated by reference
to our annual proxy statement under the heading Fees Paid
to Ernst & Young LLP.
PART IV
|
|
Item 15.
|
Exhibit
and Financial Statement Schedules
|
(a) The following are filed as part of this report:
(1) Financial Statements
The following consolidated financial statements are included in
Item 8:
|
|
|
|
|
Managements Report on Internal Control Over Financial
Reporting;
|
|
|
|
Reports of Independent Registered Public Accounting Firm;
|
|
|
|
Consolidated Balance Sheets at September 30, 2006 and 2005;
|
|
|
|
Consolidated Statements of Operations for the years ended
September 30, 2006 and 2005, and for the nine-month
transitional period ended September 30, 2004;
|
|
|
|
Consolidated Statements of Changes in Stockholders Equity
for the years ended September 30, 2006 and 2005, and for
the nine-month transitional period ended September 30,
2004; and
|
|
|
|
Consolidated Statements of Cash Flows for the years ended
September 30, 2006 and 2005,and for the nine-month
transitional period ended September 30, 2004.
|
(2) Financial Statement Schedules
All financial statement schedules are omitted because the
required information is not present or not present in sufficient
amounts to require submission of the schedule or because the
information is reflected in the consolidated financial
statements or the notes thereto.
(3) Exhibits
The exhibits listed in the Exhibit Index immediately
preceding such exhibits are filed as part of this report.
(b) Not applicable
88
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VistaCare, Inc.
|
|
|
|
|
By: /s/ Richard
R. Slager
|
Richard R. Slager
President and Chief Executive Officer
Dated: December 14, 2006
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below on December 14,
2006 by the following persons on behalf of the registrant and in
the capacities indicated.
|
|
|
|
|
Signature
|
|
Title
|
|
/s/ Richard
R. Slager
Richard
R. Slager
|
|
President and Chief Executive
Officer
(principal executive officer),
Chairman of the Board of Directors
|
|
|
|
/s/ HENRY
L. HIRVELA
Henry
L. Hirvela
|
|
Chief Financial Officer
(principal financial and accounting officer)
|
|
|
|
/s/ Pete
A. Klisares
Pete
A. Klisares
|
|
Director
|
|
|
|
/s/ James
C. Crews
James
C. Crews
|
|
Director
|
|
|
|
/s/ Perry
G. Fine, MD
Perry
G. Fine, MD
|
|
Director
|
|
|
|
/s/ Jack
A. Henry
Jack
A. Henry
|
|
Director
|
|
|
|
/s/ Geneva
B. Johnson
Geneva
B. Johnson
|
|
Director
|
|
|
|
/s/ Jon
Donnell
Jon
Donnell
|
|
Director
|
89
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Exhibit
|
|
|
3
|
.03*
|
|
Fourth Amended and Restated
Certificate of Incorporation of VistaCare, Inc.
|
|
3
|
.04
|
|
Amended and Restated By-Laws of
VistaCare, Inc. (effective as of August 18, 2004). (Filed
as Exhibit 3.2 to the Registrants Current Report on
Form 8-K
dated August 20, 2004 (and filed with the Commission on
such date) and incorporated herein by reference.)
|
|
4
|
.01*
|
|
Specimen certificate for shares of
VistaCare, Inc. common stock.
|
|
4
|
.02
|
|
Rights Agreement, dated as of
August 18, 2004, between VistaCare, Inc. and Equiserve
Trust Company, N.A., as Rights Agent. (Filed as Exhibit 1
to the Registrants
Form 8-A
Registration Statement, dated August 20, 2004 (and filed
with the Commission on such date), and incorporated herein by
reference.)
|
|
4
|
.03
|
|
First Amendment to Rights
Agreement, dated as of March 16, 2005, between VistaCare,
Inc. and Equiserve Trust Company, N.A., as Rights Agent. (Filed
as Exhibit 1 to the Registrants Amendment No. 1 to
Form 8-A
Registration Statement, dated March 16, 2005 (and filed
with the Commission on March 17, 2005), and incorporated
herein by reference.)
|
|
10
|
.01
|
|
1998 Stock Option Plan, as
amended, restated and adopted by the Board of Directors on
April 12, 2004 and subsequently approved by the
stockholders at the 2004 annual meeting of stockholders. (Filed
as Exhibit 10.01 to the Registrants Annual Report on
Form 10-K
for the year ended September 30, 2005 and incorporated
herein by reference.)
|
|
10
|
.02*
|
|
2002 Employee Stock Purchase Plan.
|
|
10
|
.03*
|
|
2002 Non-Employee Director Stock
Option Plan, as amended and restated November 11, 2002.
|
|
10
|
.04*
|
|
Employee Bonus Plan.
|
|
10
|
.17*
|
|
Form of Indemnification Agreement
between VistaCare, Inc. and its directors and officers.
|
|
10
|
.27*
|
|
Key Employee Sale Bonus Plan.
|
|
10
|
.28*+
|
|
Management Agreement dated as of
October 9, 2002 by and between VistaCare, Inc. and
Richard R. Slager.
|
|
10
|
.31*+
|
|
Management Agreement dated as of
October 9, 2002 by and between VistaCare, Inc. and Stephen
Lewis.
|
|
10
|
.37*+
|
|
Nonstatutory Stock Option
Agreement dated November 20, 2002 by and between VistaCare,
Inc. and Richard R. Slager.
|
|
10
|
.38
|
|
Lease Agreement dated
January 16, 2003 by and between Anchor-Forum
Portales I, LLC and VistaCare, Inc. (Filed as
Exhibit 10.38 to the Registrants Annual Report on
Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference.)
|
|
10
|
.43
|
|
Second Amended and Restated Loan
and Security Agreement, dated as of December 23, 2004, by
and among VistaCare, Inc. and its subsidiaries and Healthcare
Business Credit Corporation. (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated December 29, 2004 (and filed with the Commission on
such date) and incorporated herein by reference.)
|
|
10
|
.44
|
|
Deferred Compensation Plan, as
amended effective January 1, 2004. (Filed as
Exhibit 10.44 to the Registrants Annual Report on
Form 10-K
for the year ended September 30, 2005 and incorporated
herein by reference.)
|
|
10
|
.45
|
|
First Amendment to the VistaCare,
Inc. 1998 Stock Option Plan, effective as of August 10,
2004. (Filed as Exhibit 10.45 to the Registrants
Annual Report on
Form 10-K
for the year ended September 30, 2005 and incorporated
herein by reference.)
|
|
10
|
.46+
|
|
Amended and Restated Management
Agreement, dated as of August 23, 2006, by and between
VistaCare, Inc. and Richard R. Slager. (Filed as
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
dated September 18, 2006 (and filed with the Commission on
such date) and incorporated herein by reference.)
|
|
10
|
.47+
|
|
Employment Offer Letter, dated
March 22, 2006, by and between VistaCare, Inc. and Henry
L. Hirvela. (Filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated March 28, 2006 (and filed with the Commission on such
date) and incorporated herein by reference.)
|
90
|
|
|
|
|
Exhibit
|
|
|
No.
|
|
Exhibit
|
|
|
10
|
.48+
|
|
Management Agreement, dated as of
March 24, 2006, by and between VistaCare, Inc. and Henry
L. Hirvela. (Filed as Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
dated March 28, 2006 (and filed with the Commission on such
date) and incorporated herein by reference.)
|
|
10
|
.49
|
|
Form of Restricted Stock Award
Agreement. (Filed as Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
dated November 27, 2006 (and filed with the Commission on
such date) and incorporated herein by reference.)
|
|
10
|
.50+
|
|
Amendment to Management Agreement,
dated as of June 29, 2006, by and between VistaCare, Inc.
and Ronald F. Watson.
|
|
10
|
.51+
|
|
Management Agreement, dated as of
June 24, 2005, by and between VistaCare, Inc. and John
Crisci
|
|
10
|
.52+
|
|
Management Agreement, dated as of
February 22, 2006, by and between VistaCare, Inc. and
Todd R. Coté
|
|
10
|
.53+
|
|
Management Agreement, dated as of
August 29, 2006, by and between VistaCare, Inc. and
Roseanne Berry
|
|
14
|
.01
|
|
VistaCare, Inc. Code of Business
Conduct and Ethics, as revised July 2005. (Filed as
Exhibit 14.01 to the Registrants Annual Report on
Form 10-K
for the year ended September 30, 2005 and incorporated
herein by reference.)
|
|
21
|
.01*
|
|
Subsidiaries of the Registrant.
|
|
23
|
.01
|
|
Consent of Independent Registered
Public Accounting Firm.
|
|
31
|
.1
|
|
Certification of the Chief
Executive Officer pursuant to Exchange Act
Rules 13a-14
and 15d-14.
|
|
31
|
.2
|
|
Certification of the Chief
Financial Officer pursuant to Exchange Act
Rules 13a-14
and 15d-14.
|
|
32
|
.1
|
|
Certification of the Chief
Executive Officer pursuant to 18 U.S.C. Section 1350.
|
|
32
|
.2
|
|
Certification of the Chief
Financial Officer pursuant to 18 U.S.C. Section 1350.
|
|
|
|
* |
|
Previously filed with the Securities and Exchange Commission as
an exhibit to the Registrants Registration Statement on
Form S-1
(Registration
No. 333-98033)
dated August 13, 2002, or an amendment thereto, and
incorporated herein by reference to the same exhibit number. |
|
+ |
|
Management contracts and compensatory plan or arrangements
required to be filed pursuant to Item 15(b) of
Form 10-K. |
|
|
|
Filed herewith. |
91