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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
Gentiva Health Services, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4335801
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle 2S, Melville, NY 11747-8943
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, as
of October 30, 2003, was 25,949,465.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
- September 28, 2003 and December 29, 2002 3
Consolidated Statements of Operations (Unaudited)
- Three and Nine Months Ended September 28, 2003
and September 29, 2002 4
Consolidated Statements of Cash Flows (Unaudited)
- Nine Months Ended September 28, 2003 and
September 29, 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-27
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30-31
SIGNATURES 32
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 28, 2003 December 29, 2002
------------------ ------------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 104,327 $ 101,241
Receivables, less allowance for doubtful accounts of
$7,656 and $9,032 in 2003 and 2002, respectively 130,307 125,078
Prepaid expenses and other current assets 6,924 10,534
------------------ ------------------
Total current assets 241,558 236,853
Fixed assets, net 12,268 13,025
Other assets 16,050 14,553
------------------ ------------------
Total assets $ 269,876 $ 264,431
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,080 $ 16,865
Payroll and related taxes 9,392 12,377
Medicare liabilities 11,823 11,880
Cost of claims incurred but not reported 30,577 27,899
Obligations under insurance programs 37,665 37,829
Other accrued expenses 25,627 25,664
------------------ ------------------
Total current liabilities 131,164 132,514
Other liabilities 18,141 18,869
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 25,967,198 and 2,597 2,639
26,385,210 shares, respectively
Additional paid-in capital 255,594 263,024
Accumulated deficit (137,620) (152,615)
------------------ ------------------
Total shareholders' equity 120,571 113,048
------------------ ------------------
Total liabilities and shareholders' equity $ 269,876 $ 264,431
================== ==================
See notes to consolidated financial statements.
3
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net revenues $ 199,698 $ 188,443 $ 610,160 $ 576,865
Cost of services sold 130,457 124,898 402,529 392,976
------------- ------------- ------------- -------------
Gross profit 69,241 63,545 207,631 183,889
Selling, general and administrative expenses (62,738) (57,480) (186,332) (219,590)
Depreciation and amortization (1,689) (1,724) (5,164) (5,465)
------------- ------------- ------------- -------------
Operating income (loss) 4,814 4,341 16,135 (41,166)
Interest income, net 93 162 275 741
------------- ------------- ------------- -------------
Income (loss) before income taxes from
continuing operations 4,907 4,503 16,410 (40,425)
Income tax expense 360 1,765 1,415 16,429
------------- ------------- ------------- -------------
Income (loss) from continuing operations 4,547 2,738 14,995 (56,854)
Discontinued operations, net of tax -- (563) -- 191,578
------------- ------------- ------------- -------------
Income before cumulative effect of accounting change 4,547 2,175 14,995 134,724
Cumulative effect of accounting change, net of tax -- 1,392 -- (189,076)
------------- ------------- ------------- -------------
Net income (loss) $ 4,547 $ 3,567 $ 14,995 $ (54,352)
============= ============= ============= =============
Basic earnings per share:
Income (loss) from continuing operations $ 0.18 $ 0.10 $ 0.57 $ (2.18)
Discontinued operations, net of tax -- (0.02) -- 7.34
Cumulative effect of accounting change, net of tax -- 0.06 -- (7.24)
------------- ------------- ------------- -------------
Net income (loss) $ 0.18 $ 0.14 $ 0.57 $ (2.08)
============= ============= ============= =============
Weighted average shares outstanding 25,972 26,365 26,399 26,117
============= ============= ============= =============
Diluted earnings per share:
Income (loss) from continuing operations $ 0.17 $ 0.10 $ 0.55 $ (2.18)
Discontinued operations, net of tax -- (0.02) -- 7.34
Cumulative effect of accounting change, net of tax -- 0.05 -- (7.24)
------------- ------------- ------------- -------------
Net income (loss) $ 0.17 $ 0.13 $ 0.55 $ (2.08)
============= ============= ============= =============
Weighted average shares outstanding 27,098 27,483 27,452 26,117
============= ============= ============= =============
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
----------------------------------------
September 28, 2003 September 29, 2002
------------------ ------------------
OPERATING ACTIVITIES:
Net income (loss) $ 14,995 $ (54,352)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Income from discontinued operations -- (191,578)
Cumulative effect of accounting change -- 189,076
Depreciation and amortization 5,164 5,465
Provision for doubtful accounts 5,544 4,715
Gain on sale / disposal of businesses and fixed assets (217) --
Stock option tender offer -- 21,388
Deferred income taxes -- 15,156
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable (10,773) 798
Prepaid expenses and other current assets 3,682 4,260
Current liabilities (969) 13,883
Change in net assets held for sale -- 3,300
Other, net (1,078) (3,339)
------------------ ------------------
Net cash provided by operating activities 16,348 8,772
------------------ ------------------
INVESTING ACTIVITIES:
Purchase of fixed assets - continuing operations (4,725) (2,382)
Purchase of fixed assets - discontinued operations -- (2,121)
Proceeds from sale of assets / business 200 206,564
Acquisition of businesses (1,300) --
Purchase of short-term investments (14,900) --
Maturities of short-term investments 14,935 --
------------------ ------------------
Net cash (used in) provided by investing activities (5,790) 202,061
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,179 6,902
Repurchases of common stock (9,651) --
Debt issuance costs -- (1,321)
Cash distribution to shareholders -- (203,983)
Payments for stock option tender -- (21,388)
------------------ ------------------
Net cash (used in) financing activities (7,472) (219,790)
------------------ ------------------
Net change in cash, cash equivalents and restricted cash 3,086 (8,957)
Cash, cash equivalents and restricted cash:
Beginning of period 101,241 107,144
------------------ ------------------
End of period $ 104,327 $ 98,187
================== ==================
SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES
In connection with the sale of the Company's Specialty Pharmaceutical Services
business on June 13, 2002, the Company received 5,060,976 shares of common stock
of Accredo Health, Incorporated, which were subsequently distributed to the
shareholders.
See notes to consolidated financial statements.
5
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
-------------------
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides
home health services throughout the United States and delivers a wide range of
services principally through its Gentiva(R) Health Services and CareCentrix(R)
brands ("Home Health Services business").
The accompanying interim consolidated financial statements are
unaudited, but have been prepared by Gentiva pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, include all adjustments necessary for a fair presentation of results
of operations, financial position and cash flows for each period presented.
Results for interim periods are not necessarily indicative of results for a full
year. The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
Cash Equivalents, Restricted Cash and Short-term Investments
The Company considers all investments with an original maturity of
three months or less on their acquisition date to be cash equivalents.
Restricted cash represents segregated cash funds in a trust account designated
as collateral under the Company's insurance programs. The Company, at its
option, may access the cash funds in the trust account by providing equivalent
amounts of alternative security. The Company classifies investments with an
original maturity of more than three months and less than one year on the
acquisition date as short-term investments. Short-term investments are
classified as "held to maturity" investments and are reported at amortized cost
which approximates fair value.
Stock Based Compensation Plans
During the first nine months of fiscal 2003, the Company granted
732,900 stock options to officers, directors and employees under its existing
option plans at an average exercise price of $8.84. At September 28, 2003, there
were 2,725,630 options outstanding at a weighted average exercise price of
$6.16.
The Company has chosen to adopt the disclosure only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting
for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"), and continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under this approach, the
imputed cost of stock option grants and discounts offered under the Company's
Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting
provisions of the individual grants, but not charged to expense.
6
The following table presents net income (loss) and basic and diluted
income (loss) per common share had the Company elected to recognize compensation
cost based on the fair value at the grant dates for stock option awards and
discounts for stock purchases under the Company's ESPP, consistent with the
method prescribed by SFAS 123, as amended by SFAS 148:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss) - as reported $ 4,547 $ 3,567 $ 14,995 $ (54,352)
Add: Stock-based employee compensation expense
included in reported net income (loss), net of tax -- -- -- 12,803
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (343) (406) (1,163) (3,476)
------------- ------------- ------------- -------------
Net income (loss) - pro forma $ 4,204 $ 3,161 $ 13,832 $ (45,025)
============= ============= ============= =============
Basic income (loss) per share - as reported $ 0.18 $ 0.14 $ 0.57 $ (2.08)
Basic income (loss) per share - pro forma $ 0.16 $ 0.12 $ 0.52 $ (1.72)
Diluted income (loss) per share - as reported $ 0.17 $ 0.13 $ 0.55 $ (2.08)
Diluted income (loss) per share - pro forma $ 0.16 $ 0.12 $ 0.50 $ (1.72)
The weighted average fair value of the Company's stock options granted
during the first nine months of fiscal 2003 was $5.24, calculated using the
Black-Scholes option-pricing model. The fair value of options granted in fiscal
2003 was estimated on the date of grant with the following weighted average
assumptions: risk-free interest rate of 3.52 percent; dividend yield of 0
percent; expected lives of six to eight years; and volatility of 60 percent.
2. Background and Basis of Presentation
------------------------------------
On June 13, 2002, the Company sold substantially all of the assets of
its specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo"). See Note 4 to the consolidated financial statements.
The operating results of the SPS business, including corporate expenses
directly attributable to SPS operations, as well as the gain on the sale, net of
transaction costs and related income taxes, are reflected as discontinued
operations in the accompanying consolidated statement of operations for the
three months and nine months ended September 29, 2002. Continuing operations
includes the results of the Home Health Services business, including corporate
expenses that did not directly relate to SPS, as well as restructuring and
special charges.
3. Earnings (Loss) Per Share
-------------------------
Basic and diluted earnings (loss) per share for each period presented
has been computed by dividing net income (loss) by the weighted average number
of shares outstanding for each respective period. The computations of the basic
and diluted per share amounts for the Company's continuing operations were as
follows (in thousands, except per share amounts):
7
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 28, 2003 September 29, 2002 September 28, 2003 September 29, 2002
------------------ ------------------ ------------------ ------------------
Income (loss) from continuing operations $ 4,547 $ 2,738 $ 14,995 $ (56,854)
======================================================================================= ======================================
Basic weighted average
common shares outstanding 25,972 26,365 26,399 26,117
Shares issuable upon the assumed exercise of
stock options and in connection with the ESPP
using the treasury stock method 1,126 1,118 1,053 --
------------------ ------------------ ------------------ ------------------
Diluted weighted average
common shares outstanding 27,098 27,483 27,452 26,117
------------------ ------------------ ------------------ ------------------
======================================================================================= ======================================
Income (loss) from continuing operations
per common share:
Basic $ 0.18 $ 0.10 $ 0.57 $ (2.18)
Diluted $ 0.17 $ 0.10 $ 0.55 $ (2.18)
======================================================================================= ======================================
For the nine months ended September 29, 2002, in accordance with
Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS
128"), the number of common shares used in computing the diluted earnings (loss)
per share for continuing operations was used in determining earnings (loss) per
share for discontinued operations, cumulative effect of accounting change and
net income (loss), even though the impact was antidilutive.
For the nine months ended September 29, 2002, diluted weighted average
common shares outstanding excludes the incremental 1.2 million shares that would
be issued upon the assumed exercise of stock options and in connection with the
ESPP using the treasury stock method, since their inclusion would be
antidilutive on earnings.
4. Acquisition and Disposition of Businesses
-----------------------------------------
Acquisition of First Home Care Business
On March 28, 2003, the Company completed the purchase of certain assets
and the business of First Home Care - Houston, Inc. and FHCH, Inc. pursuant to
an asset purchase agreement for cash consideration of $1.3 million. The purchase
price allocation consisted of goodwill of $1.2 million and assets and other
intangibles of $0.1 million.
Sale of Specialty Pharmaceutical Services Business
On June 13, 2002, the Company consummated the sale of its SPS business
to Accredo (the "SPS Sale"). The SPS Sale was effected pursuant to an asset
purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002,
between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein.
Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired
the SPS business in consideration for:
o the payment to the Company of a cash amount equal to $207.5
million (before a $0.9 million reduction resulting from a
closing net book value adjustment); and
8
o 5,060,976 shares of Accredo common stock.
Based on the closing price of the Accredo common stock on June 13, 2002
($51.89 per share), the value of the stock consideration was $262.6 million.
During the third quarter of fiscal 2002, the Company, in accordance with the
terms of the Asset Purchase Agreement, recorded an adjustment of approximately
($0.9) million to the aggregate proceeds from the sale based on the difference
between the estimated and actual closing net book value of the SPS assets as
reflected in the final closing balance sheet. This adjustment, net of taxes, is
reflected in discontinued operations, in the accompanying consolidated statement
of operations.
In connection with the SPS Sale, the Company's Board of Directors
declared a dividend, payable to shareholders of record on June 13, 2002, of all
the common stock consideration and substantially all the cash consideration
received from Accredo. The cash consideration received by the Company before the
closing net book value adjustment was $207.5 million; however, the amount
distributed to the Company's shareholders was reduced by $3.5 million to $204
million as a holdback for income taxes the Company expected to incur on the
proceeds received in excess of $460 million as detailed in the Company's proxy
statement, dated May 10, 2002. The special dividend, which was delivered to the
distribution agent on June 13, 2002 for payment to the Company's shareholders,
resulted in shareholders of record on the record date receiving $7.76 in cash
and .19253 shares of Accredo common stock (valued at $9.99 per share based on
the June 13, 2002 closing price of $51.89 per share of Accredo common stock) for
each share of Gentiva common stock held. The total value of the special dividend
amounted to $17.75 per share. Cash was paid in lieu of fractional shares.
In connection with the SPS Sale, the Company incurred $16.2 million in
transaction costs which related to investment banking fees, legal and accounting
costs, change in control and other employee related payments and miscellaneous
other costs. SPS revenues and operating results for the periods presented were
as follows (in thousands):
Three Months Ended Nine Months Ended
September 29, 2002 September 29, 2002
------------------ ------------------
Net revenues $ -- $ 323,319
================== ==================
Operating results of discontinued SPS business:
Income before income taxes $ -- $ 11,238
Income tax expense -- (1,313)
------------------ ------------------
Net income -- 9,925
------------------ ------------------
Gain (loss) on disposal of SPS business, including
transaction costs of $16.2 million
for the nine month period (936) 205,355
Income tax benefit (expense) 373 (23,702)
------------------ ------------------
Gain (loss) on disposal, net of tax (563) 181,653
------------------ ------------------
Discontinued operations, net of tax $ (563) $ 191,578
================== ==================
9
5. Restructuring and Other Special Charges
---------------------------------------
During the first nine months of fiscal 2002, the Company recorded
restructuring and other special charges aggregating $46.1 million. These
restructuring and other special charges are further described below.
Restructuring Charges
Business Realignment Activities
The Company recorded charges of $6.8 million during the second quarter
ended June 30, 2002 in connection with a restructuring plan. This plan included
the closing and consolidation of seven field locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's SPS business. These charges included
employee severance of $0.9 million relating to the termination of 115 employees
in field locations and certain corporate and administrative departments, and
future lease payments and other associated costs of $5.9 million resulting
principally from the consolidation of office space at the Company's corporate
headquarters and a change in estimated future lease obligations and other costs
in excess of sublease rentals relating to a lease for a subsidiary of the
Company's former parent company which the Company agreed to assume in connection
with its split-off from its former parent company in March 2000. These charges
are reflected in selling, general and administrative expenses in the
accompanying consolidated statement of operations for the nine months ended
September 29, 2002. As of September 28, 2003, $3.0 million of these charges
remain unpaid, representing lease and other associated costs which will be paid
over the remaining lease terms. These unpaid restructuring charges are reflected
in other accrued expenses in the accompanying consolidated balance sheet as of
September 28, 2003.
Special Charges
Option Tender Offer
During the second quarter ended June 30, 2002, the Company effected a
cash tender offer for all outstanding options to purchase its common stock for
an aggregate option purchase price not to exceed $25 million. In connection with
this tender offer, the Company recorded a charge of $21.4 million during the
second quarter of fiscal 2002, which is reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the nine months ended September 29, 2002.
Settlement Costs
The Company recorded a $7.7 million charge in the second quarter of
fiscal 2002 to reflect settlement costs relating to the Fredrickson v. Olsten
Health Services Corp. and Olsten Corporation lawsuit as well as estimated
settlement costs related to government inquiries regarding cost reporting
procedures concerning contracted nursing and home health aide costs (see Note
9). These costs are reflected in selling, general and administrative costs in
the accompanying consolidated statement of operations for the nine months ended
September 29, 2002.
10
Insurance Costs
The Company recorded a special charge of $6.3 million in the second
quarter of fiscal 2002 related primarily to a refinement in the estimation
process used to determine the Company's actuarially computed workers
compensation and professional liability insurance reserves. This special charge
is reflected in cost of services sold in the accompanying consolidated statement
of operations for the nine months ended September 29, 2002.
Asset Writedowns and Other
The Company recorded charges of $3.8 million in the second quarter of
fiscal 2002, consisting primarily of a write-down of inventory and other assets
associated with home medical equipment used in the Company's nursing operations,
and a write-off of deferred debt issuance costs associated with the terminated
credit facility. The charges are reflected in selling, general and
administrative expenses in the accompanying consolidated statement of operations
for the nine months ended September 29, 2002.
6. Goodwill and Other Intangible Assets ("SFAS 142")
-------------------------------------------------
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which
broadens the criteria for recording intangible assets separate from goodwill.
SFAS 142 requires the use of a non-amortization approach to account for
purchased goodwill and certain intangibles. Under a non-amortization approach,
goodwill and certain intangibles are not amortized into results of operations,
but instead are reviewed for impairment and an impairment charge is recorded in
the periods in which the recorded carrying value of goodwill and certain
intangibles is more than its estimated fair value. The Company adopted SFAS 142
as of the beginning of fiscal 2002. The provisions of SFAS 142 require that a
transitional impairment test be performed as of the beginning of the year the
statement is adopted. The provisions of SFAS 142 also require that a goodwill
impairment test be performed annually or on the occasion of other events that
indicate a potential impairment.
Based on the results of the transitional impairment tests, the Company
determined that an impairment loss relating to goodwill had occurred and
recorded a pre-tax, non-cash charge of $217.3 million as cumulative effect of
accounting change in the accompanying consolidated statement of operations for
the first nine months of fiscal 2002. The Company recorded a deferred tax
benefit of approximately $66 million resulting from this non-cash charge and
increased its tax valuation allowance by the same amount. The deferred tax
benefit was recorded by eliminating a deferred tax liability of approximately
$27 million and recording a deferred tax asset of approximately $39 million.
During the third quarter of fiscal 2002, the Company recorded a tax benefit of
$1.4 million, relating to tax deductible goodwill. The tax benefit is reflected
in cumulative effect of accounting change in the accompanying consolidated
statement of operations. See Note 10 to the consolidated financial statements.
11
7. Revolving Credit Facility and Restricted Cash
---------------------------------------------
The Company's credit facility, which was entered into on June 13, 2002,
as amended on August 7, 2003, as described below, provides up to $55 million in
borrowings, including up to $40 million which is available for letters of
credit. The Company may borrow up to a maximum of 80 percent of the net amount
of eligible accounts receivable, as defined, less any reasonable and customary
reserves, as defined, required by the lender. Borrowing availability under the
credit facility was reduced by $10 million until such quarter in 2003 in which
the trailing 12 month EBITDA, excluding certain restructuring costs and special
charges, as defined, exceeded $15 million. As of March 30, 2003, the trailing 12
month EBITDA threshold was achieved and the availability restriction lifted,
effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the
credit facility was based on the London Interbank Offered Rates (LIBOR) plus
3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the
Company was required to pay a fee equal to 2.5 percent per annum of the
aggregate face amount of outstanding letters of credit. Beginning in 2003, the
applicable margin for the LIBOR borrowing, prime rate borrowing and letter of
credit fees decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25
percent, respectively, provided that the Company's trailing 12 month EBITDA,
excluding certain restructuring costs and special charges, as defined, is in
excess of $20 million. The Company was also subject to an unused line fee equal
to 0.50 percent per annum of the average daily difference between the total
revolving credit facility amount and the total outstanding borrowings and
letters of credit. For 2003, the unused credit line fee decreases to 0.375
percent provided the minimum EBITDA target described above is achieved. The
higher margins and fees are subject to reinstatement in the event that the
Company's trailing 12 month EBITDA falls below $20 million. The Company met this
minimum EBITDA requirement as of March 30, 2003, with the rate reduction
effective June 1, 2003, and continued to meet this requirement as of September
28, 2003.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions,
capital expenditures, stock repurchases and dispositions of assets and other
limitations with respect to the Company's operations. On August 7, 2003, the
Company's credit facility was amended to make covenants relating to acquisitions
and stock repurchases less restrictive, provided that the Company maintains
minimum excess aggregate liquidity, as defined in the amendment, equal to at
least $60 million and to allow for the disposition of certain assets.
The credit facility further provides that if the agreement is
terminated for any reason, the Company must pay an early termination fee equal
to $275,000 if the facility is terminated during the period from June 13, 2003
to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004
to June 12, 2005. There is no fee for termination of the facility subsequent to
June 12, 2005. Loans under the credit facility are collateralized by all of the
Company's tangible and intangible personal property, other than equipment. As of
September 28, 2003, the Company was in compliance with these covenants.
12
Total outstanding letters of credit were approximately $27.6 million at
December 29, 2002 and $20.8 million as of September 28, 2003. The letters of
credit, which expire one year from date of issuance, were issued to guarantee
payments under the Company's workers compensation program and for certain other
commitments. There were no borrowings outstanding under the credit facility as
of September 28, 2003.
During the first nine months of fiscal 2003, the Company entered into a
trust agreement and segregated $17.3 million of cash funds in a trust account to
provide additional collateral and to replace approximately $7 million of letters
of credit and a $5 million surety bond which had been used as collateral under
the Company's insurance programs. These funds are considered restricted cash and
are reported as part of cash, cash equivalents and restricted cash in the
accompanying consolidated balance sheet as of September 28, 2003. Interest on
the funds in the trust account accrues to the Company. The Company, at its
option, may access the cash funds in the trust account by providing equivalent
amounts of alternative security, including letters of credit and surety bonds.
8. Shareholders' Equity
--------------------
Changes in shareholders' equity for the nine months ended September 28,
2003 were as follows (in thousands):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
----------- ----------- ----------- -----------
Balance at December 29, 2002 $ 2,639 $ 263,024 $ (152,615) $ 113,048
Comprehensive income:
Net income -- -- 14,995 14,995
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (635,788 shares) 63 2,116 -- 2,179
Repurchase of common stock at cost (1,053,800 shares) (105) (9,546) -- (9,651)
----------- ----------- ----------- -----------
Balance at September 28, 2003 $ 2,597 $ 255,594 $ (137,620) $ 120,571
=========== =========== =========== ===========
Comprehensive income amounted to $4.5 million and $3.6 million for the
third quarter of fiscal 2003 and fiscal 2002, respectively, and comprehensive
income of $15.0 million and a comprehensive loss of $54.4 million were recorded
for the first nine months of fiscal 2003 and fiscal 2002, respectively.
On May 16, 2003, the Company announced that its Board of Directors had
authorized the Company to repurchase and formally retire up to 1,000,000 shares
of its outstanding common stock. The repurchases were to occur periodically in
the open market or through privately negotiated transactions based on market
conditions and other factors. As of July 23, 2003, the Company had repurchased
the authorized 1,000,000 shares of its common stock at an average cost of $9.08
per share and a total cost of approximately $9.1 million.
13
On August 7, 2003, the Company's Board of Directors authorized the
Company to repurchase and formally retire up to an additional 1,500,000 shares
of its outstanding common stock. The repurchases will occur periodically in the
open market or through privately negotiated transactions based on market
conditions and other factors. As of September 28, 2003, the Company had
repurchased 53,800 shares at an average cost of $10.57 per share and a total
cost of approximately $0.6 million.
9. Legal Matters
-------------
Litigation
In addition to the matters referenced in this Note 9, the Company is
party to certain legal actions arising in the ordinary course of business,
including legal actions arising out of services rendered by its various
operations, personal injury and employment disputes.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002, and discovery has now
commenced. The Company has denied the allegations of wrongdoing in the complaint
and intends to defend itself vigorously in this matter. On May 19, 2003, the
Company filed a motion for summary judgment on the issue of liability. Until
there is a ruling on that motion, the Company is unable to assess the probable
outcome or potential liability, if any, arising from this matter; therefore, a
range of damages, if any, cannot be determined.
Fredrickson v. Olsten Health Services Corp. and Olsten Corporation,
Case No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning
County, Ohio. In November 2000, the jury in this age-discrimination lawsuit
returned a verdict in favor of the plaintiff against Olsten consisting of
$675,000 in compensatory damages, $30 million in punitive damages and an
undetermined amount of attorneys' fees. The jury found that, although Olsten had
lawfully terminated the plaintiff's employment, its failure to transfer or
rehire the plaintiff rendered Olsten liable to the plaintiff. Following
post-trial motion practice by both parties, the trial court, in May 2001, denied
all post-trial motions, and entered judgment for the plaintiff for the full
amount of compensatory and punitive damages, and awarded the plaintiff reduced
attorney's fees of $247,938. In June 2001, defendants timely filed a Notice of
Appeal with the Court of Appeals. This matter has been settled, and settlement
costs were recorded as part of special charges during the second quarter of
fiscal 2002 (see Note 5).
14
Government Matters
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports, which were
filed with the Centers for Medicare and Medicaid Services ("CMS"), and were
subject to audit by the fiscal intermediary engaged by CMS. In connection with
the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary
made certain audit adjustments related to the methodology used by the Company to
allocate a portion of its residual overhead costs. The Company filed cost
reports for years subsequent to 1997 using the fiscal intermediary's
methodology. The Company believed its methodology used to allocate such overhead
costs was accurate and consistent with past practice accepted by the fiscal
intermediary; as such, the Company filed appeals with the Provider Reimbursement
Review Board ("PRRB") concerning this issue with respect to cost reports for the
years 1997, 1998 and 1999. The Company's consolidated financial statements for
the years 1997, 1998 and 1999 had reflected use of the methodology mandated by
the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed
an Administrative Resolution relating to the issues covered by the appeals
pending before the PRRB. Under the terms of the Administrative Resolution, the
fiscal intermediary agreed to reopen and adjust the Company's cost reports for
the years 1997, 1998 and 1999 using a modified version of the methodology used
by the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000. The process for the fiscal intermediary to (i)
reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs
through the issuance of Notices of Program Reimbursement ("NPRs") and (iii) make
appropriate payments to the Company, is not expected to be completed until early
2004. Cost reports relating to years subsequent to 1997 will be reopened after
the process for the 1997 cost reports is completed. The Company believes that
the reopening of and adjustments to its prior years' cost reports may have a
positive impact on its financial position; however, the financial impact of the
implementation of the Administrative Resolution cannot be specifically
determined at this time. To date, the Company has not reflected any anticipated
recovery from the appeals.
On April 17, 2003, the Company received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, Office of
Investigations. The subpoena seeks information regarding the Company's
implementation of prior settlements with the government, the implementation of
the Company's corporate integrity agreements and the Company's treatment on cost
reports of employees engaged in sales and marketing efforts. The Company is
cooperating with the government in responding to the subpoena and has engaged in
discussions with the government regarding the timing and scope of production.
With respect to the cost report issues, the government has preliminarily agreed
to narrow the scope of production to January 1, 1998 through September 30, 2000.
To the Company's knowledge, the government has not filed a complaint against the
Company.
In February 2000, the Company received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, Office of
Investigations. The subpoena related to its agencies' cost reporting procedures
concerning contracted nursing and home health aide costs. This matter has been
15
settled and settlement costs were recorded as part of special charges during the
second quarter of fiscal 2002 (see Note 5).
Indemnifications
Gentiva became an independent, publicly owned company on March 15,
2000, when the common stock of the Company was issued to the stockholders of
Olsten Corporation, a Delaware corporation ("Olsten"), the former parent
corporation of the Company (the "Split-Off"). In connection with the Split-Off,
the Company agreed to assume, to the extent permitted by law, and to indemnify
Olsten for the liabilities, if any, arising out of the home health services
business.
The Company and Accredo have agreed to indemnify each other for
breaches of representations and warranties of such party or the non-fulfillment
of any covenant or agreement of such party in connection with the sale of the
SPS business. The Company has also agreed to indemnify Accredo for the retained
liabilities and for tax liabilities and Accredo has agreed to indemnify the
Company for assumed liabilities and the operation of the SPS business after the
closing of the acquisition. The representations and warranties generally survive
for the period of two years after the closing of the acquisition, except that:
o representations and warranties related to health care
compliance survive for three years after the closing of the
acquisition;
o representations and warranties related to title of the assets
and sufficiency of assets and employees survive for the
applicable statute of limitations period; and
o representations and warranties related to tax matters survive
until thirty days after the expiration of the applicable tax
statute of limitations period, including any extensions of the
applicable period, subject to certain exceptions.
Accredo and the Company generally may recover indemnification for a
breach of a representation or warranty only to the extent a party's claim
exceeds $1 million for any individual claim, or exceeds $5 million in the
aggregate, subject to certain conditions and only up to a maximum amount of $100
million.
These indemnification rights are the exclusive remedy from and after
the closing of the acquisition, except for the right to seek specific
performance of any of the agreements in the related Asset Purchase Agreement, in
any case where a party is guilty of fraud in connection with the acquisition,
and with respect to tax liabilities and obligations.
On May 6, 2003, the Company received correspondence from Accredo giving
the Company notice of Accredo's indemnification rights for any breach under the
Asset Purchase Agreement related to the adequacy of the accounts receivable
reserves in accordance with Section 8.3 of the Asset Purchase Agreement;
however, no breach of a representation or warranty was asserted against the
Company in the correspondence.
16
10. Income Taxes
------------
The Company recorded state income taxes of approximately $0.4 million
and $1.4 million for the third quarter and first nine months ended September 28,
2003. The Company's effective tax rate of approximately 8.6 percent for the
first nine months of fiscal 2003 was lower than the statutory income tax rate
due to the reversal of a portion of the valuation allowance relating to the
realization of tax benefits associated with a net operating loss carryforward
and other net deferred tax assets.
Federal and state income taxes of $1.8 million and $16.4 million were
recorded for the third quarter and first nine months of fiscal 2002 relating to
continuing operations. During the first quarter of fiscal 2002, income tax
expense from continuing operations was $26.9 million which reflects an
additional valuation allowance recorded against certain deferred tax assets in
connection with the adoption of SFAS 142 and the subsequent write-off of
goodwill; the corresponding tax benefit for the same amount was recorded in the
cumulative effect of accounting change line item as reported in the accompanying
consolidated statement of operations during the first nine months of fiscal year
2002.
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
September 28, 2003 December 29, 2002
------------------ ------------------
Deferred tax assets
Reserves and allowances $ 21,639 $ 24,543
Net operating loss and other carryforwards (Federal and state) 5,950 5,993
Intangible assets 30,698 33,202
Depreciation 316 332
Other 200 574
Less: valuation allowance (58,096) (63,892)
------------------ ------------------
Total deferred tax asset 707 752
------------------ ------------------
Deferred tax liabilities
Capitalized software (707) (752)
------------------ ------------------
Total deferred tax liability (707) (752)
------------------ ------------------
Net deferred tax asset (liability) $ -- $ --
================== ==================
At September 28, 2003, the Company had a federal net operating loss
carryforward of $13.4 million, which will begin to expire by 2020. Because of
the uncertainty of the ultimate realization of net deferred tax assets, a
valuation allowance is maintained relating to deferred tax assets that are not
otherwise used to offset deferred tax liabilities. However, if the recent trend
of income continues, it is possible that deferred tax assets will be recognized
in the near term. Therefore, the requirement for a valuation allowance is being
monitored each quarter by management. The benefits associated with approximately
$19.3 million of deferred tax assets related to stock based compensation
deductions, when ultimately realized, will be credited to shareholders' equity.
17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects," "assumes" and similar expressions,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements are based
upon the Company's current plans, expectations and projections about future
events. However, such statements involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company to be materially different from any future results, performance
or achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for health care reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets the Company operates in;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue
associated with major payor sources;
o ability of customers to pay for services;
o a material shift in utilization within capitated agreements;
and
o changes in estimates and judgments associated with critical
accounting policies.
Forward-looking statements are found throughout "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q. The reader should not place
undue reliance on forward-looking statements, which speak only as of the date of
this report. The Company is not obligated to publicly release any revisions to
forward-looking statements to reflect unforeseen or other events after the date
of this report. The Company has provided a detailed discussion of risk factors
in its 2002 Annual Report on Form 10-K and various filings with the Securities
and Exchange Commission. The reader is encouraged to review these risk factors
and filings.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial position. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and related notes included elsewhere in this report.
18
General
- -------
The Company's results of operations are impacted by various regulations
and other matters that are implemented from time to time in its industry, some
of which are described in the Company's Annual Report on Form 10-K for the
fiscal year ended December 29, 2002 and in other filings with the Securities and
Exchange Commission.
Results of Operations
- ---------------------
Revenues
Net revenues increased by $11.3 million, or 6.0 percent to $199.7
million for the quarter ended September 28, 2003 as compared to the quarter
ended September 29, 2002. For the nine months ended September 28, 2003, net
revenues increased by $33.3 million, or 5.8 percent to $610.2 million as
compared to the nine months ended September 29, 2002. Revenue growth in the
third quarter and first nine months of fiscal 2003 was reported in the Medicare
and Commercial Insurance and Other payor categories. Revenue from Medicaid and
Other Government payor sources decreased in the third quarter of fiscal 2003 and
was relative flat for the fiscal 2003 year-to-date period.
For the quarter ended September 28, 2003 as compared to the quarter
ended September 29, 2002, net revenues from Commercial Insurance and Other
payors increased by $8.0 million or 7.5 percent to $115.0 million, Medicare
increased by $4.4 million or 11.2 percent to $44.0 million, and Medicaid and
Other Government payors decreased by $1.2 million or 2.9 percent to $40.7
million.
For the nine months ended September 28, 2003 as compared to the nine
months ended September 29, 2002, net revenues from Commercial Insurance and
Other payors increased by $26.6 million or 8.1 percent to $355.9 million,
Medicare increased by $6.3 million or 5.1 percent to $128.5 million, and
Medicaid and Other Government payors increased by $0.4 million or 0.3 percent to
$125.7 million.
Revenue growth from Commercial Insurance and Other payors was driven by
a combination of pricing and volume increases from existing customers and new
contracts that were signed during the past year. Of the 7.5 percent and 8.1
percent increases in net revenues for the third quarter and first nine months of
2003, new contracts from Commercial Insurance and Other payors accounted for 4.6
percent and 2.9 percent, respectively.
Medicare revenue growth for the third quarter and first nine months of
fiscal 2003 was primarily fueled by increases in episodes serviced of 13.0
percent and 6.5 percent, respectively. In addition, in comparing the first nine
months of fiscal 2003 and 2002, Medicare revenue was positively impacted by (i)
$0.3 million due to a market basket rate increase that became effective for
patients on service on or after October 1, 2003 and (ii) by $2.5 million due to
the absence of a revenue adjustment relating to partial episode payments
("PEPs") that was recorded in the fiscal 2002 year-to-date period.
19
In comparing the fiscal 2003 and 2002 periods, Medicare revenues were
negatively impacted by an overall 4.9 percent reduction in Medicare
reimbursement rates (approximately $2.2 million for the third quarter of fiscal
2003 and $6.3 million for the first nine months of fiscal 2003), which became
effective for Medicare patients beginning in October 2002, and by the
elimination of the rural add-on provision ($0.5 million for the third quarter of
fiscal 2003 and $1.1 million for the first nine months of fiscal 2003) for home
health services, which became effective April 1, 2003.
Medicaid and Other Government revenues decreased for the three months
ended September 28, 2003 due to revenue reductions related to more restrictive
eligibility requirements in some states and lower reimbursement rates in certain
other states. In addition, for both the three months and first nine months of
fiscal 2003, revenues were negatively impacted by the Company's decision to
reduce or terminate its participation in certain low-margin, hourly Medicaid and
state and county programs. Revenues relating to these hourly Medicaid and state
and county programs decreased $2.3 million and $6.4 million as compared to the
third quarter and nine months of fiscal year 2002, respectively. These decreases
were offset somewhat by increases in the intermittent care Medicaid business in
selected states.
Gross Profit
Gross profit was approximately $69.2 million for the third quarter
ended September 28, 2003 and $63.5 million for the quarter ended September 29,
2002. As a percentage of net revenues, gross profit margins increased from 33.7
percent for the quarter ended September 29, 2002, to 34.7 percent for the
quarter ended September 28, 2003. The gross profit margin for the third quarter
of fiscal 2003 was positively impacted by changes in business mix including
increases in Medicare episodes serviced and reductions in certain lower margin
Medicaid and other government programs (1.6 percent), reductions in workers
compensation costs (0.6 percent) and the Medicare market basket rate increase
that became effective for patients on service on or after October 1, 2003 (0.2
percent). These increases were partially offset by an overall 4.9 percent
reduction in Medicare reimbursement rates (approximately $2.2 million, or 1.1
percent), which became effective for Medicare patients beginning in October
2002, and by the elimination of the rural add-on provision ($0.5 million or 0.3
percent) for home health services which became effective April 1, 2003.
Gross profit was approximately $207.6 million for the nine months ended
September 28, 2003 as compared to $183.9 million for the nine months ended
September 29, 2002. As a percentage of net revenues, gross profit margins
increased from 31.9 percent for the nine months ended September 29, 2002, to
34.0 percent for the nine months ended September 28, 2003. Gross profit margins
for the first nine months of fiscal 2003 were positively impacted by an increase
in Medicare episodes serviced and improvements in utilization in both the
commercial insurance business and Medicare (1.0 percent), reductions in workers
compensation costs (0.7 percent), the Medicare market basket rate increase that
became effective for patients on service on or after October 1, 2003 (0.1
percent) and the absence of both a $2.5 million revenue adjustment related to
PEPs (0.4 percent) and the $6.3 million special charge associated with insurance
costs that were recorded in the first nine months of fiscal 2002 (1.1 percent).
These increases were partially offset by an overall 4.9 percent reduction in
Medicare reimbursement rates (approximately $6.3 million or 1.0 percent), which
20
became effective for Medicare patients beginning October 2002, and the
elimination of the rural add-on provision ($1.1 million or 0.2 percent) for home
health services which became effective April 1, 2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation
and amortization, increased $5.2 million to $64.4 million for the quarter ended
September 28, 2003, as compared to $59.2 million for the quarter ended September
29, 2002.
For the nine months ended September 28, 2003, selling, general and
administrative expenses, including depreciation and amortization, decreased
$33.6 million to $191.5 million compared to $225.1 million for the corresponding
period in fiscal 2002. This decrease is related to restructuring and special
charges of $46.1 million, of which approximately $40 million was reflected in
selling, general and administrative expenses in the accompanying consolidated
statements of operations for the nine months ended September 29, 2002. See Note
5 to the consolidated financial statements for further discussion of the
restructuring and special charges. Excluding these special charges, selling,
general and administrative expenses, including depreciation and amortization,
increased $6.2 million for the nine months ended September 28, 2003.
The increase for both the three and nine month periods of fiscal 2003
related to increases in sales and field administrative expenses due to headcount
additions and costs relating to training in connection with the implementation
of provisions of the Healthcare Insurance Portability and Accountability Act of
1996 ("HIPAA") and a new software based scheduling system and, for the nine
month period of fiscal 2003, the completion of the technology refresh program.
These increases were partially offset by reductions in corporate administrative
expenses resulting from restructuring efforts following the SPS Sale in the
second quarter of fiscal year 2002 and settlements of certain matters for less
than amounts previously accrued ($0.4 million).
Interest Income, Net
Net interest income was approximately $0.1 million for the quarter
ended September 28, 2003 and $0.2 million for the quarter ended September 29,
2002. Net interest income represented interest income of approximately $0.3
million for the third quarter of fiscal 2003 and $0.5 million for the third
quarter of fiscal 2002, partially offset by fees relating to the revolving
credit facility and outstanding letters of credit.
Net interest income was approximately $0.3 million for the nine months
ended September 28, 2003 compared to $0.7 million for the nine months ended
September 29, 2002. Net interest income for the first nine months of fiscal
years 2003 and 2002 represented interest income of $1.1 million and $2.0
million, respectively, partially offset by interest expense of $0.8 million and
$1.3 million, respectively.
Interest income declined in the third quarter and first nine months of
fiscal 2003 as compared to the third quarter and first nine months of fiscal
2002 due to a decline in interest rates on cash, cash equivalents and restricted
cash and, to a lesser extent, a decrease in average cash balances during the
period. Interest expense declined in the fiscal 2003 periods due to a reduction
21
in the average outstanding letters of credit, as well as fees associated with
the unused portion of the credit facility.
Income Taxes
The Company recorded state income taxes of approximately $0.4 million
and $1.4 million for the third quarter and first nine months ended September 28,
2003. The Company's effective tax rate of approximately 8.6 percent for the
first nine months of fiscal 2003 was lower than the statutory income tax rate
due to the reversal of a portion of the valuation allowance relating to the
realization of tax benefits associated with a net operating loss carryforward
and other net deferred tax assets. Because of the uncertainty of the ultimate
realization of net deferred tax assets, a valuation allowance is maintained
relating to deferred tax assets that are not otherwise used to offset deferred
tax liabilities. However, if the recent trend of income continues, it is
possible that deferred tax assets will be recognized in the near term.
Therefore, the requirement for a valuation allowance is being monitored each
quarter by management. The Company had a federal net operating loss carryforward
of $13.4 million as of September 28, 2003.
Federal and state income taxes of $1.8 million and $16.4 million were
recorded for the third quarter and first nine months of fiscal 2002 relating to
continuing operations. During the first quarter of fiscal 2002, income tax
expense from continuing operations was $26.9 million, which reflects an
additional valuation allowance recorded against certain deferred tax assets in
connection with the adoption of SFAS 142 and the subsequent write-off of
goodwill; the corresponding tax benefit for the same amount was recorded in the
cumulative effect of accounting change line item as reported in the accompanying
consolidated statement of operations during the first nine months of fiscal year
2002.
The Company recorded a tax benefit of $1.4 million relating to tax
amortization of goodwill for the quarter ended September 29, 2002. The tax
benefit is reflected in cumulative effect of accounting change in the
accompanying consolidated statement of operations.
Net Income (Loss)
For the third quarter of fiscal 2003, net income was $4.5 million, or
$0.17 per diluted share, compared with net income of $3.6 million, or $0.13 per
diluted share, for the corresponding period of 2002. Total Company net income in
the third quarter of fiscal 2002 included income from continuing operations of
$2.7 million, or $0.10 per diluted share, a loss from discontinued operations,
net of tax, of $0.6 million, or $0.02 per diluted share, and income relating to
the cumulative effect of accounting change, net of tax, of $1.4 million, or
$0.05 per diluted share.
For the first nine months of fiscal 2003, net income was $15.0 million,
or $0.55 per diluted share, compared with a net loss of $54.4 million, or $2.08
per share for the first nine months of fiscal 2002. Total Company net loss of
$54.4 million for the first nine months of fiscal 2002 included a loss from
continuing operations of $56.9 million, or $2.18 per share, income from
discontinued operations, net of tax, of $191.6 million, or $7.34 per share, and
a loss relating to the cumulative effect of accounting change, net of tax, of
$189.1 million, or $7.24 per share.
22
The loss from continuing operations during the first nine months of
fiscal 2002 includes $46.1 million in restructuring and special charges. See
Note 5 to the consolidated financial statements.
Discontinued operations reported in the 2002 periods included the
operating results of the SPS business and the gain, net of related transaction
costs and income taxes, associated with the June 13, 2002 sale of the SPS
business to Accredo. The cumulative effect of the accounting change, which
reflects the net write-off of substantially all of the Company's goodwill,
represented the non-cash charge resulting from the adoption of SFAS 142
(Goodwill and Other Intangible Assets) during the first quarter of 2002.
For a discussion of the Company's critical accounting policies, please
refer to Gentiva's fiscal 2002 Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 25, 2003.
Liquidity and Capital Resources
- -------------------------------
Liquidity
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payor arrangements.
Days Sales Outstanding ("DSO") as of September 28, 2003 remained flat
from December 29, 2002 at 59 days. Working capital at September 28, 2003 was
$110 million, an increase of $6 million as compared to $104 million at December
29, 2002, primarily due to:
o a $3 million increase in cash, cash equivalents and restricted
cash;
o a $5 million increase in accounts receivable;
o a $3 million decrease in prepaid expenses and other assets;
and
o a $1 million decrease in current liabilities relating to an
increase in cost of claims incurred but not reported ($3
million), offset by decreases in accounts payable ($1
million), and payroll and related taxes ($3 million).
The Company participates in the Medicare, Medicaid and other federal
and state healthcare programs. Revenue mix by major payor classifications are as
follows:
For the Three Months Ended For the Nine Months Ended
-------------------------------------- --------------------------------------
September 28, 2003 September 29, 2002 September 28, 2003 September 29, 2002
------------------ ------------------ ------------------ ------------------
Medicare 22% 21% 21% 21%
Medicaid and Other Government 20% 22% 21% 22%
Commercial Insurance and Other 58% 57% 58% 57%
------------------ ------------------ ------------------ ------------------
100% 100% 100% 100%
================== ================== ================== ==================
On October 1, 2002, the reduction in home health payment limits
mandated under the Balanced Budget Act of 1997 became effective. The change in
payment limits reduced payments under the Medicare program to home health
23
agencies for open episodes of care on or after October 1, 2002 by approximately
7 percent. Simultaneous with this reduction, market basket rate increases of 2.1
percent adjusted for certain wage indices were also implemented, resulting in an
overall reduction in reimbursement rates of approximately 4.9 percent. In
addition, Medicare reimbursement related to home health services performed in
specifically defined rural areas of the country was further reduced as the ten
percent rural add-on provision for home health services expired as of April 1,
2003. On October 1, 2003, a further market basket rate increase of 3.3 percent
became effective for open episodes of care on or after October 1, 2003. Congress
is currently considering various proposals which could result in changes to
Medicare reimbursement for home health services. In addition, further reductions
in Medicaid reimbursement rates and limitations on eligibility requirements may
also occur.
There are certain standards and regulations that the Company must
adhere to in order to continue to participate in these programs, including
compliance with the Company's corporate integrity agreement. As part of these
standards and regulations, the Company is subject to periodic audits,
examinations and investigations conducted by, or at the direction of,
governmental investigatory and oversight agencies. Periodic and random audits
conducted or directed by these agencies could result in a delay or adjustment to
the amount of reimbursements received under these programs. Violation of the
applicable federal and state health care regulations can result in the Company's
exclusion from participating in these programs and can subject the Company to
substantial civil and/or criminal penalties. The Company believes it is
currently in compliance with these standards and regulations.
The Company is party to a contract with CIGNA Health Corporation
("Cigna"), pursuant to which the Company provides or contracts with third party
providers to provide home nursing services, acute and chronic infusion
therapies, durable medical equipment, and respiratory products and services to
patients insured by Cigna. For the third quarter and first nine months of fiscal
2003, Cigna accounted for approximately 34 percent and 36 percent of the
Company's total net revenues compared to approximately 37 percent and 38 percent
for the third quarter and first nine months of fiscal 2002, respectively. The
Company is in its eighth year of the contract, with the current term ending on
December 31, 2003 and renewing from year to year subject to each party's
termination rights. Historically, the Company and Cigna have each year
renegotiated the contract prior to December 31, and the Company is presently in
negotiations with Cigna with respect to services subsequent to December 31,
2003. While the Company currently expects to reach an agreement with Cigna for
services subsequent to December 31, 2003, the agreement is likely to differ from
the contracts of previous years and could adversely impact Gentiva's actual
financial results for the coming year. If Cigna chose to terminate or not renew
the contract, or to significantly modify its use of the Company's services,
there could be a material adverse effect on the Company's cash flow.
Net revenues generated under capitated agreements with managed care
payors were approximately 16 percent of total net revenues for the third quarter
and first nine months of fiscal 2003 and 17 percent for the third quarter and 16
percent for the first nine months of fiscal 2002. Fee-for-service contracts with
other commercial payors are traditionally one year in term and renewable
automatically on an annual basis, unless terminated by either party.
The Company's credit facility, which was amended on August 7, 2003 as
described below, provides up to $55 million in borrowings, including up to $40
million which is available for letters of credit. The Company may borrow up to a
maximum of 80 percent of the net amount of eligible accounts receivable, as
defined, less any reasonable and customary reserves, as defined, required by the
24
lender. Borrowing availability under the credit facility was reduced by $10
million until such quarter in 2003 in which the trailing 12 month EBITDA,
excluding certain restructuring costs and special charges recorded by the
Company during fiscal 2002, as defined, exceeded $15 million. As of March 30,
2003, the trailing 12 months EBITDA threshold was achieved and the availability
restriction lifted, effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the
credit facility was based on the London Interbank Offered Rates (LIBOR) plus
3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the
Company was required to pay a fee equal to 2.5 percent per annum of the
aggregate face amount of outstanding letters of credit. Beginning in 2003, the
applicable margin for the LIBOR borrowing, prime rate borrowing and letter of
credit fees decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25
percent, respectively, provided that the Company's trailing 12 month EBITDA,
excluding certain restructuring costs and special charges, as defined, is in
excess of $20 million. The Company was also subject to an unused line fee equal
to 0.50 percent per annum of the average daily difference between the total
revolving credit facility amount, as defined, and the total outstanding
borrowings and letters of credit. For 2003, the unused credit line fee decreases
to 0.375 percent provided the minimum EBITDA target described above is achieved.
The higher margins and fees are subject to reinstatement in the event that the
Company's trailing 12 month EBITDA falls below $20 million. The Company met this
minimum EBITDA requirement as of March 30, 2003, with the rate reduction
effective June 1, 2003 and continued to meet this requirement as of September
28, 2003.
Total outstanding letters of credit were $20.8 million as of September
28, 2003. The letters of credit, which expire one year from date of issuance,
were issued to guarantee payments under the Company's workers compensation
program and for certain other commitments. There were no borrowings outstanding
under the credit facility as of September 28, 2003. As of September 28, 2003,
the Company had borrowing capacity under the credit facility, after adjusting
for outstanding letters of credit, of approximately $34 million.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions,
capital expenditures, stock repurchases and dispositions of assets and other
limitations with respect to the Company's operations. On August 7, 2003, the
credit facility was amended to make covenants relating to acquisitions and stock
repurchases less restrictive, provided that the Company maintains minimum excess
aggregate liquidity, as defined in the amendment, equal to at least $60 million
and to allow for the disposition of certain assets.
The credit facility further provides that if the agreement is
terminated for any reason, the Company must pay an early termination fee equal
to $275,000 if the facility is terminated during the period from June 13, 2003
to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004
to June 12, 2005. There is no fee for termination of the facility subsequent to
June 12, 2005. Loans under the credit facility are collateralized by all of the
Company's tangible and intangible personal property, other than equipment.
25
The credit facility includes provisions, which, if not complied with,
could require early payment by the Company. These include customary default
events, such as failure to comply with financial covenants, insolvency events,
non-payment of scheduled payments, acceleration of other financial obligations
and change in control provisions. In addition, these provisions include an
account obligor, whose accounts are more than 25 percent of all accounts of the
Company over the previous 12-month period, canceling or failing to renew its
contract with the Company and ceasing to recognize the Company as an approved
provider of health care services, or the Company revoking the lending agent's
control over its governmental lockbox accounts. The Company does not have any
trigger events in the credit facility that are tied to changes in its credit
rating or stock price. As of September 28, 2003, the Company was in compliance
with these covenants.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk but is substantially self-insured for most
of these claims. The Company recognizes its obligations associated with these
programs in the period the claim is incurred. The Company estimates the cost of
both reported claims and claims incurred but not reported, up to specified
deductible limits, based on its own specific historical claims experience and
current enrollment statistics, industry statistics and other information. Such
estimates and the resulting reserves are reviewed and updated periodically.
The Company is responsible for the cost of individual workers
compensation claims and individual professional liability claims up to $500,000
per incident which occurred prior to March 15, 2002 and $1,000,000 per incident
thereafter. The Company also maintains excess liability coverage relating to
professional liability and casualty claims which provides insurance coverage for
individual claims of up to $25,000,000 in excess of the underlying coverage
limits. Payments under the Company's workers compensation program are guaranteed
by letters of credit and segregated cash balances.
Capital Expenditures
The Company's capital expenditures for the nine months ended September
28, 2003 were $4.7 million as compared to $2.4 million for the same period in
fiscal 2002. The Company intends to make investments and other expenditures to,
among other things, upgrade its computer technology and system infrastructure
and comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2003 will range between $8 million
and $9 million. Management expects that the Company's capital expenditure needs
will be met through operating cash flow and available cash reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents and restricted cash of
approximately $104.3 million as of September 28, 2003. The restricted cash
relates to cash funds of $17.3 million that have been segregated in a trust
account to provide additional collateral and to replace approximately $7 million
of letters of credit and a $5 million surety bond which had been used as
collateral under the Company's insurance programs. Interest on the funds in the
26
trust account accrues to the Company. The Company, at its option, may access the
cash funds in the trust account by providing equivalent amounts of alternative
security, including letters of credit and surety bonds.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through June 2005. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
On May 16, 2003, the Company announced that its Board of Directors had
authorized the Company to repurchase and to formally retire up to 1,000,000
shares of its outstanding common stock. The repurchases were to occur
periodically in the open market or through privately negotiated transactions
based on market conditions and other factors. As of July 23, 2003, the Company
had repurchased all 1,000,000 shares of its common stock at an average cost of
$9.08 per share and at a total cost of approximately $9.1 million. On August 7,
2003, the Company's Board of Directors authorized the Company to repurchase and
formally retire up to an additional 1,500,000 shares of its outstanding common
stock. The repurchases will occur periodically in the open market or through
privately negotiated transactions based on market conditions and other factors.
As of September 28, 2003, the Company had repurchased 53,800 shares at an
average cost of $10.57 per share and a total cost of approximately $0.6 million.
Management expects that the Company's working capital needs for fiscal
2003 will be met through operating cash flow and its existing cash balances. The
Company may also consider other alternative uses of cash including, among other
things, acquisitions, additional share repurchases and cash dividends. These
uses of cash would require the approval of the Company's Board of Directors and
may require the approval of its lender. If cash flows from operations, cash
resources or availability under the credit facility fall below expectations, the
Company may be forced to delay planned capital expenditures, reduce operating
expenses, seek additional financing or consider alternatives designed to enhance
liquidity.
Contractual Obligations and Commercial Commitments
At September 28, 2003, the Company had no long-term debt and no
significant capital lease obligations.
The Company had total letters of credit outstanding under its credit
facility of approximately $27.6 million at December 29, 2002 and $20.8 million
at September 28, 2003. The letters of credit, which expire one year from date of
issuance, are issued to guarantee payments under the Company's workers
compensation program and for certain other commitments. The Company has the
option to renew these letters of credit or set aside cash funds in a segregated
account to satisfy the Company's obligations as further discussed in the
"Liquidity and Capital Resources" section under the section "Cash Resources and
Obligations".
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise. The Company had no
interest rate exposure on fixed rate debt or other market risk at September 28,
2003.
Item 4. Controls and Procedures
-----------------------
Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer are
responsible for establishing and maintaining "disclosure controls and
procedures" (as defined in the Securities Exchange Act of 1934 ("Exchange Act")
Rule 13a-15(e)) for the Company. The Company's Chief Executive Officer and Chief
Financial Officer, after evaluating the effectiveness of the Company's
disclosure controls and procedures as of the end of the period covered by this
quarterly report, as required by Exchange Act Rule 13a-15(b), have concluded
that the Company's disclosure controls and procedures are adequate and effective
in timely alerting them to material information relating to the Company
(including its consolidated subsidiaries) required to be included in its
periodic SEC filings.
Changes in internal control over financial reporting.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter covered by this quarterly report that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting. Based on that evaluation, there has been no such change
during the quarter covered by this quarterly report.
28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 9 to the consolidated financial statements included
in this report for a description of legal matters and pending
legal proceedings, which description is incorporated herein by
reference.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
None.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
In connection with a July 19, 1999 settlement with
various government agencies, Olsten executed a corporate
integrity agreement with the Office of Inspector General of
the Department of Health and Human Services, which will remain
in effect until August 18, 2004. The corporate integrity
agreement applies to the Company's businesses that bill the
federal government health programs directly for services, such
as its nursing brand (but excludes the SPS business), and
focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of
claims. Under the corporate integrity agreement, the Company
is required, for example, to maintain a corporate compliance
officer to develop and implement compliance programs, to
retain an independent review organization to perform annual
reviews and to maintain a compliance program and reporting
systems, as well as to provide certain training to employees.
The Company's compliance program is required to be
implemented for all newly established or acquired business
units if their type of business is covered by the corporate
integrity agreement. Reports under the integrity agreement are
to be filed annually with the Department of Health and Human
Services, Office of Inspector General. After the corporate
integrity agreement expires, the Company is to file a final
annual report with the government. The Company believes it is
in compliance with the corporate integrity agreement and has
timely filed all required reports. If the Company fails to
comply with the terms of its corporate integrity agreement,
the Company will be subject to penalties.
29
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of
Company. (1)
3.2 Certificate of Correction to Certificate of
Incorporation, filed with the Delaware
Secretary of State on July 1, 2002. (2)
3.3 Restated By-Laws of Company. (2)
4.1 Specimen of common stock. (4)
4.2 Form of Certificate of Designation of Series A
Junior Participating Preferred Stock. (1)
4.3 Form of Certificate of Designation of Series A
Cumulative Non-Voting Redeemable Preferred
Stock. (3)
10.1 Amendment dated August 7, 2003 to Consulting
Agreement dated as of July 1, 2002 between Gail
R. Wilensky and Gentiva Health Services (USA),
Inc.*+
10.2 First Amendment and Consent Agreement dated
August 7, 2003 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet
Capital Corporation, as Administrative Agent on
behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding
Corp. and the subsidiaries named therein.*
31.1 Certification of Chief Executive Officer dated
November 5, 2003 pursuant to Rule 13a-14(a).*
31.2 Certification of Chief Financial Officer dated
November 5, 2003 pursuant to Rule 13a-14(a).*
32.1 Certification of Chief Executive Officer dated
November 5, 2003 pursuant to 18 U.S.C. Section
1350.*
32.2 Certification of Chief Financial Officer dated
November 5, 2003 pursuant to 18 U.S.C. Section
1350.*
30
- -------------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement of Company on Form S-4, dated January 19,
2000 (File No. 333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for the
quarterly period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement of Company on Form S-4, dated February 4,
2000 (File No. 333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement of Company on Form S-4, dated February 9,
2000 (File No. 333-88663).
* Filed herewith
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
On August 5, 2003, the Company furnished a report on Form 8-K
(i) furnishing in Item 7 as an exhibit a press release covering the
Company's 2003 second quarter consolidated earnings and (ii) reporting in
Item 12 the issuance of the Company's press release on the subject of its
2003 second quarter consolidated earnings.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
(Registrant)
Date: November 5, 2003 /s/ RONALD A. MALONE
------------------------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: November 5, 2003 /s/ JOHN R. POTAPCHUK
------------------------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
32