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 June 27, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
Gentiva Health Services, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4335801
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, as
of July 28, 2004, was 24,500,887.
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - June
27, 2004 and December 28, 2003 3
Consolidated Statements of Income (Unaudited)
- Three and Six Months Ended June 27, 2004 and
June 29, 2003 4
Consolidated Statements of Cash Flows (Unaudited)
- Six Months Ended June 27, 2004 and June 29, 2003 5
Notes to Consolidated Financial Statements
(Unaudited) 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14-24
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24
Item 4. Controls and Procedures 25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26-27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28-29
SIGNATURES 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
June 27, 2004 December 28, 2003
----------------- -----------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 101,104 $ 100,013
Short-term investments 10,000 10,000
Receivables, less allowance for doubtful accounts of
$8,340 and $7,936 in 2004 and 2003, respectively 133,778 132,998
Deferred tax assets 23,210 26,464
Prepaid expenses and other current assets 7,890 6,524
----------------- -----------------
Total current assets 275,982 275,999
Fixed assets, net 18,121 15,135
Deferred tax assets, net 23,631 28,025
Other assets 14,885 15,929
----------------- -----------------
Total assets $ 332,619 $ 335,088
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,205 $ 16,079
Payroll and related taxes 13,845 12,932
Medicare liabilities 13,331 12,736
Cost of claims incurred but not reported 28,287 28,525
Obligations under insurance programs 36,583 37,200
Other accrued expenses 28,742 32,230
----------------- -----------------
Total current liabilities 132,993 139,702
Other liabilities 20,375 18,207
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 24,858,605 and
25,598,301 shares in 2004 and 2003, respectively 2,486 2,560
Additional paid-in capital 257,419 270,468
Accumulated deficit (80,654) (95,849)
----------------- -----------------
Total shareholders' equity 179,251 177,179
----------------- -----------------
Total liabilities and shareholders' equity $ 332,619 $ 335,088
================= =================
See notes to consolidated financial statements.
3
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
Net revenues $ 208,248 $ 208,446 $ 422,153 $ 410,462
Cost of services sold 129,910 138,822 260,553 272,072
------------- ------------- ------------- -------------
Gross profit 78,338 69,624 161,600 138,390
Selling, general and administrative expenses (67,809) (62,341) (134,178) (123,594)
Depreciation and amortization (1,904) (1,730) (3,749) (3,475)
------------- ------------- ------------- -------------
Operating income 8,625 5,553 23,673 11,321
Gain on sale of Canadian investment 946 -- 946 --
Interest income, net 208 139 290 182
------------- ------------- ------------- -------------
Income before income taxes 9,779 5,692 24,909 11,503
Income tax expense (3,814) (445) (9,714) (1,055)
------------- ------------- ------------- -------------
Net income $ 5,965 $ 5,247 $ 15,195 $ 10,448
============= ============= ============= =============
Net income per common share:
Basic $ 0.24 $ 0.20 $ 0.60 $ 0.39
============= ============= ============= =============
Diluted $ 0.22 $ 0.19 $ 0.56 $ 0.38
============= ============= ============= =============
Weighted average shares outstanding:
Basic 25,068 26,530 25,305 26,613
============= ============= ============= =============
Diluted 26,818 27,490 26,967 27,635
============= ============= ============= =============
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
------------------------------
June 27, 2004 June 29, 2003
------------- -------------
OPERATING ACTIVITIES:
Net income $ 15,195 $ 10,448
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 3,749 3,475
Provision for doubtful accounts 3,414 3,608
Gain on sale of Canadian investment (946) --
Deferred income tax expense 7,433 --
Changes in assets and liabilities, net of acquisitions / divestitures
Accounts receivable (4,194) (11,569)
Prepaid expenses and other current assets (1,616) 1,613
Current liabilities (7,458) 6,358
Other, net 169 (1,200)
------------- -------------
Net cash provided by operating activities 15,746 12,733
------------- -------------
INVESTING ACTIVITIES:
Purchase of fixed assets (5,493) (3,928)
Proceeds from sale of assets 4,123 200
Acquisition of businesses -- (1,300)
Purchase of short-term investments (10,000) (14,900)
Maturities of short-term investments 10,000 10,035
------------- -------------
Net cash used in investing activities (1,370) (9,893)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,579 822
Repurchases of common stock (14,702) (7,857)
Repayment of capital lease obligations (162) --
------------- -------------
Net cash used in financing activities (13,285) (7,035)
------------- -------------
Net change in cash, cash equivalents and restricted cash 1,091 (4,195)
Cash, cash equivalents and restricted cash at beginning of period 100,013 101,241
------------- -------------
Cash, cash equivalents and restricted cash at end of period $ 101,104 $ 97,046
============= =============
Supplemental cash flow information
Income taxes paid, net of refunds $ 3,534 $ 744
============= =============
Supplemental Schedule of Non-Cash Investing and Financing Activities
Fixed assets acquired under capital lease $ 1,443 $ --
============= =============
See notes to consolidated financial statements.
5
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
------------------------------------
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides
home health services throughout most of the United States principally through
its Gentiva(R) Health Services and CareCentrix(R) brands.
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.
2. 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 of $21.8 million at June 27, 2004 and December 28, 2003
represented segregated cash funds in a trust account designated as collateral
under the Company's insurance programs. Interest in 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. 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.
3. Medicare Revenues
-----------------
Medicare revenues for the first six months of fiscal 2004 included
approximately $9 million received in settlement of the Company's appeal filed
with the U.S. Provider Reimbursement Review Board ("PRRB") related to the
reopening of all of its 1997 cost reports (see Note 9), net of a revenue
adjustment of $1 million to reflect an estimated repayment to Medicare in
connection with services rendered to certain patients since the inception of the
Prospective Payment Reimbursement System ("PPS") in October 2000. In connection
with the estimated repayment, the Centers for Medicare & Medicaid Services
("CMS") has determined that home care providers should have received lower
reimbursements for certain services rendered to beneficiaries discharged from
inpatient hospitals within fourteen days immediately preceding admission to home
healthcare.
6
4. Earnings Per Share
------------------
Basic and diluted earnings per share for each period presented have
been computed by dividing net income by the weighted average number of shares
outstanding for each respective period. The computations of the basic and
diluted per share amounts were as follows (in thousands, except per share
amounts):
Three Months Ended Six Months Ended
----------------------------- -----------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
Net income $ 5,965 $ 5,247 $ 15,195 $ 10,448
============================================================================ =============================
Basic weighted average common
shares outstanding 25,068 26,530 25,305 26,613
Shares issuable upon the assumed exercise of
stock options and in connection with the
employee stock purchase plan using the
treasury stock method 1,750 960 1,662 1,022
------------- ------------- ------------- -------------
Diluted weighted average common
shares outstanding 26,818 27,490 26,967 27,635
------------- ------------- ------------- -------------
============================================================================ =============================
Net income per common share:
Basic $ 0.24 $ 0.20 $ 0.60 $ 0.39
Diluted $ 0.22 $ 0.19 $ 0.56 $ 0.38
============================================================================ =============================
5. Disposition
-----------
On March 30, 2004, the Company sold its minority interest in a home
care nursing services business in Canada. The business had been acquired as
partial consideration for the sale of the Company's Canadian operations in the
fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the
Company received cash proceeds of $4.1 million and recorded a gain on sale of
approximately $0.9 million in the second quarter of fiscal 2004.
6. Revolving Credit Facility and Debt
----------------------------------
The Company's credit facility, which was entered into on June 13, 2002,
as amended, as described below, provides up to $55 million in borrowings,
including up to $40 million which is available for letters of credit. The
Company may borrow up to a maximum of 80 percent of the net amount of eligible
accounts receivable, as defined, less any reasonable and customary reserves, as
defined, required by the lender. 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 margins for the LIBOR borrowing, prime rate borrowing and letter of
7
credit fees decreased 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, was 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. Beginning in 2003, the unused credit line fee decreased to
0.375 percent provided the minimum EBITDA target described above was 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 June 27,
2004.
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 limitations on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and on May 26, 2004, 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, equal to at least $60 million and to allow for the disposition of
certain assets. As of June 27, 2004, the Company was in compliance with the
covenants in the credit facility, as amended.
The credit facility further provides that if the agreement is
terminated for any reason, the Company must pay an early termination fee equal
to $137,500 in the period from June 13, 2004 to June 12, 2005. There is no fee
for termination of the facility subsequent to June 12, 2005. Loans under the
credit facility are collateralized by all of the Company's tangible and
intangible personal property, other than equipment.
Total outstanding letters of credit were approximately $20.7 million as
of June 27, 2004 and $20.8 million at December 28, 2003. The letters of credit,
which expire one year from date of issuance, were issued to guarantee payments
under the Company's workers compensation program and for certain other
commitments. There were no borrowings outstanding under the credit facility as
of June 27, 2004.
During the first six months of fiscal 2004, the Company commenced
implementation of a five-year capital lease for certain equipment. In connection
with this lease, the Company recorded capital lease assets of approximately $1.4
million in fixed assets, net, current obligation of capital leases of $0.3
million in other accrued expenses and long-term capital lease obligations of
$1.1 million in other liabilities.
7. Shareholders' Equity
--------------------
Changes in shareholders' equity for the six months ended June 27, 2004
were as follows (in thousands):
8
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------------ ------------ ------------ ------------
Balance at December 28, 2003 $ 2,560 $ 270,468 $ (95,849) $ 177,179
Comprehensive income:
Net income -- -- 15,195 15,195
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (275,151 shares) 28 1,551 -- 1,579
Repurchase of common stock at cost (1,014,847 shares) (102) (14,600) -- (14,702)
------------ ------------ ------------ ------------
Balance at June 27, 2004 $ 2,486 $ 257,419 $ (80,654) $ 179,251
============ ============ ============ ============
Comprehensive income amounted to $6.0 million and $5.2 million for
the second quarter of fiscal 2004 and fiscal 2003, respectively, and $15.2
million and $10.4 million for the first six months of fiscal 2004 and fiscal
2003, respectively.
The Company's Board of Directors has authorized stock repurchase
programs under which the Company could repurchase and formally retire up to an
aggregate of 3,500,000 shares of its outstanding common stock. A summary of the
shares repurchased under each program follows:
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of June 27, 2004 Total Cost Share Completion Date
-------------- ---------- ------------------- ------------ -------- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,082,353 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,453,311 $ 20,043,169 $ 13.79 July 8, 2004
May 26, 2004 1,000,000 -- $ -- $ --
-----------------------------------------------------------
3,500,000 2,453,311 $ 29,125,522 $ 11.87
===========================================================
The repurchases will occur periodically in the open market or through
privately negotiated transactions based on market conditions and other factors.
During the second quarter and first six months of fiscal 2004, the Company
repurchased 586,600 and 1,014,847 shares, respectively. As of June 27, 2004, the
Company had remaining authorization to repurchase an aggregate of 1,046,689
shares of its outstanding common stock.
During the period from June 28, 2004 to July 28, 2004, the Company
repurchased an additional 503,200 shares of stock at a cost of $7.8 million,
representing an average cost of $15.42 per share.
8. Stock Options
-------------
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 Compensa-
9
tion - 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.
The weighted average fair values of the Company's stock options granted
during the first six months of fiscal 2004 and fiscal 2003, calculated using the
Black-Scholes option-pricing model, and other assumptions are as follows:
Six Months Ended
-----------------------------------
June 27, 2004 June 29, 2003
------------- -------------
Risk-free interest rate 3.36% 3.60%
Expected volatility 60% 60%
Expected life 6 to 8 years 6 to 8 years
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
Weighted average fair value
of options granted $ 7.64 $ 5.22
Pro forma compensation expense is calculated for the fair value of the
employee's purchase rights under the ESPP, using the Black-Scholes model.
Assumptions for the first six months of fiscal 2004 and fiscal 2003 are as
follows:
Six Months Ended
-----------------------------------
June 27, 2004 June 29, 2003
------------- -------------
Risk-free interest rate 1.02% 1.25%
Expected volatility 28% 32%
Expected life 0.5 years 0.5 years
Expected dividend yield 0% 0%
The following table presents net income and basic and diluted income
per common share had the Company elected to recognize compensation cost based on
the fair value at the grant dates for stock option awards and discounts for
stock purchases under the Company's ESPP, consistent with the method prescribed
by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
Net income - as reported $ 5,965 $ 5,247 $ 15,195 $ 10,448
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (717) (470) (1,412) (820)
------------- ------------- ------------- -------------
Net income - pro forma $ 5,248 $ 4,777 $ 13,783 $ 9,628
============= ============= ============= =============
Basic income per share - as reported $ 0.24 $ 0.20 $ 0.60 $ 0.39
Basic income per share - pro forma $ 0.21 $ 0.18 $ 0.54 $ 0.36
Diluted income per share - as reported $ 0.22 $ 0.19 $ 0.56 $ 0.38
Diluted income per share - pro forma $ 0.20 $ 0.17 $ 0.51 $ 0.35
10
During the first six months of fiscal 2004, the Company granted
1,030,100 stock options to officers, directors and employees under its existing
option plans at an average exercise price of $12.94. At June 27, 2004, there
were 3,522,984 options outstanding at a weighted average exercise price of $8.15
per share.
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 commenced.
The Company has denied the allegations of wrongdoing in the complaint and is
defending itself vigorously in this matter. On May 19, 2003, the Company filed a
motion for summary judgment on the issue of liability. On February 6, 2004, the
court granted partial summary judgment for the Company, dismissing two of the
three claims alleged under the False Claims Act and denying summary judgment for
the Company on the wrongful termination claim. The parties are completing
discovery; therefore, the Company cannot determine a range of damages, if any,
at this time.
Government Matters
PRRB Appeal
-----------
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 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
PRRB concerning this issue with respect to cost reports for the years 1997,
11
1998 and 1999. The Company's consolidated financial statements for the years
1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal
intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed
an Administrative Resolution relating to the issues covered by the appeals
pending before the PRRB. Under the terms of the Administrative Resolution, the
fiscal intermediary agreed to reopen and adjust the Company's cost reports for
the years 1997, 1998 and 1999 using a modified version of the methodology used
by the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000, which are currently under audit. The
Administrative Resolution required that the process to (i) reopen all 1997 cost
reports, (ii) determine the adjustments to allowable costs through the issuance
of Notices of Program Reimbursement ("NPRs") and (iii) make appropriate payments
to the Company, be completed in early 2004. Cost reports relating to years
subsequent to 1997 will be reopened after the process for the 1997 cost reports
is completed.
On February 17, 2004, the fiscal intermediary notified the Company that
it had completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was $9.0 million. As of March 28,
2004, the Company had received the funds and recorded the adjustment of $9.0
million as net revenues for the first quarter of fiscal 2004.
Although the Company believes that it will likely recover additional
funds as a result of applying the modified methodology discussed above to cost
reports subsequent to 1997, the settlement amounts cannot be specifically
determined until the reopening or audit of each year's cost reports is
completed. The Company expects that the reopening of the 1998 cost reports will
be completed during the second half of fiscal 2004. The reopening or audit of
the cost reports for the years 1999 and 2000 is not expected to be completed
before 2005. In view of changes in reimbursement and the Company's operations in
periods subsequent to 1997, it is likely that any future recoveries relating to
any cost report year from 1998 to 2000 will be significantly less than the 1997
settlement.
Subpoena
--------
On April 17, 2003, the Company received a subpoena from the Department
of Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG pursuant to its subpoena and similarly intends to cooperate
fully with the DOJ subpoena, as well as any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint
against the Company.
12
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.
In addition, the Company and Accredo Health, Incorporated ("Accredo")
agreed to indemnify each other for breaches of representations and warranties of
such party or the non-fulfillment of any covenant or agreement of such party in
connection with the sale of the Company's Specialty Pharmaceutical Services
("SPS") business to Accredo on June 13, 2002. The Company also agreed to
indemnify Accredo for the retained liabilities and for tax liabilities and
Accredo agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the acquisition. The
representations and warranties generally survived for the period of two years
after the closing of the acquisition, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive,
including the survival of representations and warranties related to health care
compliance for three years after the closing of the acquisition and the survival
of representations and warranties related to tax matters until thirty days after
the expiration of the applicable statute of limitations period, including any
extensions of the applicable period, subject to certain exceptions. Accredo and
the Company generally may recover indemnification for a breach of a
representation or warranty only to the extent a party's claim exceeds $1 million
for any individual claim, or exceeds $5 million in the aggregate, subject to
certain conditions and only up to a maximum amount of $100 million.
10. Income Taxes
------------
The Company recorded federal and state income taxes of approximately
$3.8 million for the second quarter ended June 27, 2004, of which $1.6 million
represented a current provision and $2.2 million represented a deferred tax
provision. For the six months ended June 27, 2004, the Company recorded a
federal and state tax provision of $9.7 million, representing a current
provision of $2.3 million and a deferred provision of $7.4 million. The
difference between the federal statutory income tax rate and the Company's
effective tax rate of 39 percent is due primarily to state taxes.
State income taxes and federal alternative minimum taxes of $0.4 and
$1.1 million were recorded for the second quarter and first six months of fiscal
2003, respectively. The Company's effective tax rates of approximately 7.8
percent for the second quarter and 9.2 percent for the first six months of
fiscal 2003, were lower than the statutory income tax rate due to the impact of
a valuation allowance offsetting the realization of tax benefits associated with
the Company's net operating loss carryforward and other deferred tax assets.
13
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
--------------------------------------
June 27, 2004 December 28, 2003
----------------- -----------------
Deferred tax assets - current
Reserves and allowances $ 20,516 $ 21,290
Net operating loss and other carryforwards (Federal and state) 1,967 4,966
Other 727 208
----------------- -----------------
Total current deferred tax assets 23,210 26,464
Deferred tax assets - non-current
Amortization of intangible assets 27,444 29,085
Depreciation of fixed assets (1,756) 23
Developed software (1,667) (1,083)
Other (390) --
----------------- -----------------
Total non-current deferred tax assets (net) 23,631 28,025
Net deferred tax assets $ 46,841 $ 54,489
================= =================
As of June 27, 2004, the Company's tax credit carryforwards for income
tax purposes were approximately $2.0 million.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects," "assumes," "trends" and similar
expressions, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
based upon the Company's current plans, expectations and projections about
future events. However, such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
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 in which the Company
operates;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue
associated with major payer sources;
14
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. Except as required under the federal securities laws and the rules
and regulations of the Securities and Exchange Commission ("SEC"), the Company
does not have any intention or obligation to publicly release any revisions to
forward-looking statements to reflect unforeseen or other events after the date
of this report. The Company has provided a detailed discussion of risk factors
in its 2003 Annual Report on Form 10-K and various filings with the SEC. The
reader is encouraged to review these risk factors and filings.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial position. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and related notes included elsewhere in this report.
General
- -------
The Company's results of operations are impacted by various regulations
and other matters that are implemented from time to time in its industry, some
of which are described in the Company's Annual Report on Form 10-K for the
fiscal year ended December 28, 2003 and in other filings with the SEC.
For a discussion of the Company's critical accounting policies, please
refer to Note 2 of Notes to Consolidated Financial Statements in the Company's
2003 Annual Report on Form 10-K.
Overview
- --------
Gentiva is the nation's largest provider of comprehensive home health
services, based on the amount of revenues derived from the provision of skilled
home nursing services to patients. The Company generates revenues and profits
primarily by providing patients with direct home health care services, including
specialty services and neuro-rehabilitation services; by delivering national,
regional and local administrative services to managed care organizations and
self-insured employers; and by providing home health care consulting services to
independent and hospital-based home health agencies.
Gentiva's direct home health services to patients include skilled
nursing; physical, occupational, speech and neuro-rehabilitation therapy
services; social work; nutrition; disease management education and help with
daily living activities, as well as other therapies and services. The Company's
specialty services involve physical therapist-led orthopedic rehabilitation
services for patients who have had joint replacements or other major orthopedic
surgery,
15
and therapies for patients with balance issues who are prone to injury or
immobility as a result of falling. Gentiva is also piloting a similar specialty
program for cardiopulmonary services and expects to launch this program during
the second half of fiscal 2004. The Company's neuro-rehabilitation services,
known as Rehab Without Walls(R), provide home and community-based therapies for
patients with traumatic brain injury, cerebrovascular accident injury and
acquired brain injury, as well as a number of other complex rehabilitation
cases.
Gentiva's national, regional and local administrative services for
managed care organizations and self-insured employers -- provided through its
CareCentrix(R) business unit -- include central access, care coordination,
utilization management and claims processing. The Company is capable of
coordinating a wide range of home care services, including traditional home
nursing, chronic and acute infusion therapies and durable medical and
respiratory equipment, to member patients of these managed care organizations.
Consulting services to home health agencies are delivered primarily by
the Company's Gentiva Consulting (formerly Gentiva Business Services) unit.
These services include billing and collection activities, web-based caregiver
training and credentialing, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
The Company's services can be delivered across the United States 24
hours a day, 7 days a week. Direct home health services to patients are
delivered through more than 350 owned and operated direct service delivery units
in approximately 250 locations in 35 states. Administrative services for managed
care organizations and self-insured employers are coordinated within four
regional coordination centers. Home care services provided to member patients of
these organizations are delivered through Company-owned and third-party
credentialed provider locations covering the continental United States.
Results of Operations
- ---------------------
Net Revenues
(Dollars in millions) Second Quarter Six Months
-------------------------------- -------------------------------
Percentage Percentage
2004 2003 Variance 2004 2003 Variance
-------- -------- -------- -------- -------- --------
Medicare $ 53.8 $ 42.0 28.3% $ 116.4 $ 84.5 37.8%
Medicaid and other government 39.0 42.7 (8.7) 78.2 85.0 (8.0)
Commercial insurance and other 115.4 123.7 (6.7) 227.6 241.0 (5.6)
---------------------------------- --------------------------------
$ 208.2 $ 208.4 (0.1%) $ 422.2 $ 410.5 2.9%
================================== ================================
For the quarter ended June 27, 2004 as compared to the quarter ended
June 29, 2003, net revenues declined by $0.2 million to $208.2 million from
$208.4 million. Net revenues increased by $11.7 million to $422.2 million for
the first six months of fiscal 2004 as compared to $410.5 million for the first
six months of fiscal 2003.
Medicare revenue growth, in the fiscal 2004 periods as compared to the
fiscal 2003 periods, was driven by several factors including: (i) an increase in
admissions of 13 percent for the second quarter and 17 percent for the first six
months, (ii) growth in specialty services
16
which generally generate a higher revenue per episode than other Medicare
services, (iii) a 3.3 percent market basket rate increase that became effective
for patients on service on or after October 1, 2003, which was adjusted downward
by 0.8 percent to 2.5 percent effective April 1, 2004, (iv) a 5 percent rate
increase effective April 1, 2004 for the rural add-on related to home health
services performed in specifically defined rural areas of the country, and (v)
various operational and clinical process enhancements. The rate increases
relating to the market basket change and rural add-on provision represented
incremental revenue of $1.3 million and $2.7 million for the second quarter and
first six months of fiscal 2004, respectively.
In addition, for the first six months of fiscal 2004, Medicare revenues
were impacted by two special items which contributed $8.0 million of the
Medicare increase. The special items represented (i) approximately $9 million
received in settlement of the Company's appeal filed with the PRRB related to
the reopening of all of its 1997 cost reports and (ii) a revenue adjustment of
$1.0 million to reflect the estimated repayment to Medicare in connection with
services rendered to certain patients since the inception of the Prospective
Payment Reimbursement System in October 2000. In connection with the estimated
repayments, the CMS has recently determined that homecare providers should have
received lower reimbursements for certain services rendered to beneficiaries
discharged from inpatient hospitals within fourteen days immediately preceding
admission to home healthcare.
Medicaid and other government revenue decreased, in the fiscal 2004
periods as compared to the fiscal 2003 periods, primarily due to a reduction in
the Company's participation in certain low-margin, hourly Medicaid and state and
county health programs. Revenues relating to hourly Medicaid and state and
county programs decreased $3.7 million and $6.4 million for the second quarter
and first six months of fiscal 2004, respectively, as compared to the
corresponding periods of fiscal 2003.
Commercial insurance and other revenue decreased, in the fiscal 2004
periods as compared to the fiscal 2003 periods, due to a decline in revenue
derived from CIGNA Health Corporation ("CIGNA") of $9.9 million, or 12.8
percent, and $22.2 million, or 14.4 percent, for the second quarter and first
six months, respectively, related to a reduction in the number of enrolled CIGNA
members in 2004, and lower revenue as well as related costs resulting from a
change in the Company's delivery model of certain durable medical and
respiratory equipment ("HME") products and services. The decline in CIGNA
revenues was partially offset by an increase of $1.5 million, or 3.2 percent,
and $8.7 million, or 10.0 percent, for the second quarter and first six months
of fiscal 2004, respectively, in non-CIGNA, Commercial insurance and other
revenue driven by unit volume and pricing increases from existing business as
well as new contracts signed during the past year.
Gross Profit
(Dollars in millions) Second Quarter Six Months
-------------------------------- --------------------------------
2004 2003 Variance 2004 2003 Variance
-------- -------- -------- -------- -------- --------
Gross profit $ 78.3 $ 69.6 $ 8.7 $ 161.6 $ 138.4 $ 23.2
As a percent of revenue 37.6% 33.4% 4.2% 38.3% 33.7% 4.6%
17
As a percent of revenues, gross profit margins were positively impacted
by 1.2 percentage points for the first six months of fiscal 2004 due to the two
special items discussed above. Approximately one-half of the increase in gross
profit margins in the second quarter and one-half of the remaining increase for
the first six months of fiscal 2004 was due to a favorable change in business
mix in which volume growth of Medicare business more than offset the anticipated
revenue loss in certain low-margin Medicaid and local government programs, as
well as in the CIGNA business. The balance of the gross margin percentage
increase resulted from improved rates in both Medicare and managed care
contracts, reduced workers compensation expenses and growth in the Company's
specialty programs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation
and amortization, increased $5.6 million to $69.7 million for the quarter ended
June 27, 2004, as compared to $64.1 million for the quarter ended June 29, 2003
and $10.9 million to $137.9 million for the six months ended June 27, 2004.
Approximately one-third of the increases in selling, general and
administrative expenses, including depreciation and amortization, related to
increases in field operating and administrative costs to service incremental
revenues, including revenues from the Company's specialty programs. The
remaining increases related to (i) increased sales and clinical care
coordination expenses, (ii) incremental costs associated with both strategic and
other information technology initiatives, (iii) costs associated with the
reconfiguration of the Company's CareCentrix network of HME providers and (iv)
various other costs.
Gain on Sale of Canadian Investment
On March 30, 2004, the Company sold its minority interest in a home
care nursing services business in Canada. The business had been acquired as
partial consideration for the sale of the Company's Canadian operations in the
fourth quarter of fiscal 2000. In connection with the March 30, 2004 sale, the
Company received cash proceeds of $4.1 million and recorded a gain on sale of
approximately $0.9 million in the second quarter of fiscal 2004.
Interest Income, Net
Net interest income was approximately $0.2 million for the quarter
ended June 27, 2004, and $0.1 million for the quarter ended June 29, 2003. Net
interest income included interest income of approximately $0.5 million for the
second quarter of fiscal 2004 and $0.4 million for the second quarter of fiscal
2003, 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 six months
ended June 27, 2004 compared to $0.2 million for the six months ended June 29,
2003. Net interest income for the first six months of fiscal years 2004 and 2003
represented interest income of $0.8 million and $0.7 million, respectively,
partially offset by interest expense of $0.5 million in both the fiscal 2004 and
fiscal 2003 six month periods.
18
Income Taxes
The Company recorded federal and state income taxes of approximately
$3.8 million for the second quarter ended June 27, 2004, of which $1.6 million
represented a current provision and $2.2 million represented a deferred tax
provision. For the six months ended June 27, 2004, the Company recorded a
federal and state tax provision of $9.7 million, representing a current
provision of $2.3 million and a deferred provision of $7.4 million. The
difference between the federal statutory income tax rate and the Company's
effective tax rate of 39 percent is due primarily to state taxes.
State income taxes and federal alternative minimum taxes of $0.4 and
$1.1 million were recorded for the second quarter and first six months of fiscal
2003, respectively. The Company's effective tax rate of approximately 7.8
percent for the second quarter and 9.2 percent for the first six months of
fiscal 2003 was lower than the statutory income tax rate due to the impact of a
valuation allowance offsetting the realization of tax benefits associated with
the net operating loss carryforward and other deferred tax assets.
Net Income
For the second quarter of fiscal 2004, net income was $6.0 million, or
$0.22 per diluted share, compared with net income of $5.2 million, or $0.19 per
diluted share, for the corresponding period of 2003.
For the first six months of fiscal 2004, net income was $15.2 million,
or $0.56 per diluted share, compared with net income of $10.4 million, or $0.38
per diluted share for the first six months of fiscal 2003. Net income for the
first six months of fiscal 2004 included two special items related to Medicare,
noted in the Net Revenues section above, which had a net positive impact of $4.9
million, or $0.18 per diluted share.
Net income for both the second quarter and first six months of fiscal
2004 included a net gain of $0.6 million, or $0.02 per diluted share, on the
sale of the Company's 19.9 percent interest in a Canadian home care company. See
Note 5 to the Company's consolidated financial statements.
Net income for the second quarter and first six months of fiscal 2003
reflected the positive impact of lower effective tax rates of 7.8 percent and
9.2 percent, respectively.
Liquidity and Capital Resources
- -------------------------------
Liquidity
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payer arrangements. Net cash provided by operating
activities for the six months ended June 27, 2004 was $15.7 million. In
addition, the Company received cash proceeds of $4.1 million during the second
quarter of 2004 in connection with the sale of the Company's investment in a
Canadian home-
19
care business. These cash resources were primarily used to fund capital
expenditures of $5.5 million and repurchase shares of the Company's common stock
of $14.7 million during the first six months of fiscal 2004.
Days Sales Outstanding ("DSO") as of June 27, 2004, decreased by 1 day
to 58 days, from December 28, 2003. Working capital at June 27, 2004 was
approximately $143 million, an increase of $7 million as compared to
approximately $136 million at December 28, 2003, primarily due to:
o a $1 million increase in cash;
o a $1 million increase in accounts receivable;
o a $1 million increase in prepaid expenses and other assets;
and
o a $7 million decrease in current liabilities for accounts
payable ($4 million), obligations under insurance programs ($1
million), other current liabilities ($4 million), net of
increases in payroll ($1 million) and Medicare liabilities ($1
million); offset by a $3 million decrease in deferred tax
assets.
The Company participates in the Medicare, Medicaid and other federal
and state healthcare programs. Revenue mix by major payer classifications is as
follows:
Three Months Ended Six Months Ended
------------------------------ ------------------------------
June 27, 2004 June 29, 2003 June 27, 2004 June 29, 2003
------------- ------------- ------------- -------------
Medicare 26% 20% 28% 21%
Medicaid and other government 19 21 19 21
Commercial insurance and other 55 59 53 58
------------- ------------- ------------- -------------
100% 100% 100% 100%
============= ============= ============= =============
On October 1, 2003, a 3.3 percent Medicare market basket rate increase
became effective for patients on service on or after October 1, 2003. Effective
April 1, 2004, this increase was reduced by 0.8 percent to 2.5 percent for open
episodes of care on or after April 1, 2004. In addition, Medicare reimbursement
was increased 5 percent for the rural add-on related to home health services
performed in specifically defined rural areas of the country, effective April 1,
2004. These two reimbursement changes are not expected to have a material effect
on Company results for the remainder of 2004.
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.
20
The Company is party to a contract with 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 second
quarter and first six months of fiscal 2004, CIGNA accounted for approximately
32 percent and 31 percent of the Company's total net revenues, respectively,
compared to approximately 37 percent and 38 percent for the second quarter and
first six months of fiscal 2003, respectively. The Company extended its
relationship with CIGNA by entering into a new national home health care
contract, effective January 1, 2004. The term of the new contract extends to
December 31, 2006, and automatically renews thereafter for additional one year
terms unless terminated. Under the termination provisions, CIGNA has the right
to terminate the agreement on December 31, 2005 if it provides 90 days advance
written notice to the Company, and each party has the right to terminate at the
end of each term thereafter by providing at least 90 days advance written notice
prior to the start of the new term. If CIGNA chose to terminate or not renew the
contract, or to significantly modify its use of the Company's services, there
could be a material adverse effect on the Company's cash flow.
Net revenues generated under capitated agreements with managed care
payers were approximately 12 percent of total net revenues for the second
quarter and first six months of fiscal 2004, and 15 percent and 16 percent for
the second quarter and first six months of fiscal 2003, respectively.
Fee-for-service contracts with other commercial payers 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 and
May 26, 2004 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 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 margins for the LIBOR borrowing, prime rate borrowing and letter of
credit fees decreased 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, was 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. Beginning in 2003, the unused credit line fee
decreased to 0.375 percent provided the minimum EBITDA target described above
was achieved.
21
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 June 27,
2004.
Total outstanding letters of credit were $20.7 million as of June 27,
2004. The letters of credit, which expire one year from date of issuance, were
issued to guarantee payments under the Company's workers compensation program
and for certain other commitments. As of June 27, 2004, there were no borrowings
outstanding under the credit facility and the Company had borrowing capacity
under the credit facility, after adjusting for outstanding letters of credit, of
approximately $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 limitations on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and May 26, 2004, the credit facility was amended to make covenants
relating to acquisitions and stock repurchases less restrictive, provided that
the Company maintains minimum excess aggregate liquidity, as defined, equal to
at least $60 million and to allow for the disposition of certain assets. As of
June 27, 2004, the Company was in compliance with the covenants in the credit
facility, as amended.
The credit facility further provides that if the agreement is
terminated for any reason, the Company must pay an early termination fee equal
to $137,500 in the period 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.
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 June 27, 2004, the Company was in compliance with
these provisions.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover 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
cur-
22
rent 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 restricted cash balances.
Capital Expenditures
The Company's capital expenditures for the six months ended June 27,
2004 were $5.5 million, excluding equipment capitalized under capital lease
obligations of $1.4 million, as compared to $3.9 million for the same period in
fiscal 2003. The Company intends to make investments and other expenditures to,
among other things, upgrade its computer technology and systems infrastructure
and comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2004 will range between $9.0
million and $12.0 million. Management expects that the Company's capital
expenditure needs will be met through operating cash flow and available cash
reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents, restricted cash and short-term
investments of approximately $111.1 million as of June 27, 2004. The restricted
cash relates to cash funds of $21.8 million that have been segregated in a trust
account to provide additional collateral under the Company's insurance programs.
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.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through 2005. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
The Company's Board of Directors has authorized stock repurchase
programs under which the Company could repurchase and formally retire up to an
aggregate of 3,500,000 shares of its outstanding common stock. The repurchases
occur periodically in the open market or through privately negotiated
transactions based on market conditions and other factors. During the first six
months of fiscal 2004, the Company repurchased 1,014,847 shares of its
outstanding common stock at an average cost of $14.49 per share and a total cost
of approximately $14.7 million. As of June 27, 2004, the Company had remaining
authorization to repurchase an aggregate of 1,046,689 shares of its outstanding
common stock. During the period from June 28, 2003 to July 28, 2004, the Company
repurchased an additional 503,200 shares of common stock at a cost of $7.8
million, representing an average cost of $15.42 per share. See also Note 7 and
Part II, Item 2, of this Form 10-Q.
23
Contractual Obligations and Commercial Commitments
At June 27, 2004, the Company had no long-term debt. During the first
six months of fiscal 2004, the Company commenced implementation of a five-year
capital lease for equipment. Under the terms of the lease, the Company
capitalized the equipment at its fair market value of approximately $1.4
million, which approximates the present value of the minimum lease payments.
Future minimum rental commitments for all non-cancelable leases and purchase
obligations at June 27, 2004, are as follows (in thousands):
Payment due by period
---------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
----------------------- --------- --------- --------- --------- ---------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations 1,283 268 577 438 --
Operating lease obligations 57,811 18,832 25,269 9,083 4,627
Purchase obligations 400 400 -- -- --
---------------------------------------------------------
Total $ 59,494 $ 19,500 $ 25,846 $ 9,521 $ 4,627
=========================================================
The Company had total letters of credit outstanding under its credit
facility of approximately $20.7 million at June 27, 2004 and $20.8 million at
December 28, 2003. The letters of credit, which expire one year from the date of
issuance, were issued to guarantee payments under the Company's workers
compensation program and for certain other commitments. The Company has the
option to renew these letters of credit or set aside cash funds in a segregated
account to satisfy the Company's obligations, as further discussed above under
the caption "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.
Management expects that the Company's working capital needs for fiscal
2004 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.
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 June 27, 2004.
24
Item 4. Controls and Procedures
-----------------------
Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934, as amended ("Exchange Act") Rule 13a-15(e)) as of the end of the period
covered by this report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are adequate and effective to ensure that information
required to be disclosed by the Company in reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
required time periods.
Changes in internal control over financial reporting.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter ended June 27, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during such
quarter.
25
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, Use of Proceeds and Issuer Purchases of
Equity Securities
--------------------------------------------------------------
(e) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number
(a) Total of Shares Purchased of Shares that May
Number (b) Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs or Programs
------ --------- ---------- ----------- -----------
April (3/29/04 - 4/25/04) 60,000 $ 15.61 60,000 573,289
May (4/26/04 - 5/23/04) 425,600 $ 14.88 425,600 147,689
June (5/24/04 - 6/27/04) 101,000 $ 15.85 101,000 1,046,689
--------------- -------------- -------------------
Total 586,600 $ 15.12 586,600
=============== ============== ===================
(1) On August 7, 2003, the Company announced that its Board
of Directors had authorized the repurchase of up to 1,500,000
shares of its outstanding common stock. By the end of the
period covered by the table, 1,453,311 of such shares had been
repurchased. On May 26, 2004, the Company announced that its
Board of Directors had authorized the repurchase of up to
1,000,000 additional shares of its outstanding common stock.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The Annual Meeting of Shareholders was held on May 14, 2004.
(c) i) The following individuals were elected as Class I
directors by votes as follows:
--------------------------------------------------------------
Name Votes FOR Votes WITHHELD
---- --------- --------------
--------------------------------------------------------------
Victor F. Ganzi 21,256,760 548,622
--------------------------------------------------------------
Josh S. Weston 19,742,515 2,062,907
--------------------------------------------------------------
Gail R. Wilensky 21,594,731 210,691
--------------------------------------------------------------
26
ii) The proposal to ratify and approve the appointment of
PricewaterhouseCoopers LLP as independent auditors of
the Company for 2004 was approved by votes as follows:
--------------------------------------------------------------
FOR: 21,245,654
--------------------------------------------------------------
AGAINST: 535,175
--------------------------------------------------------------
ABSTAIN: 24,593
--------------------------------------------------------------
BROKER NONVOTES: 0
--------------------------------------------------------------
iii) The proposal to approve the Company's 2004 Equity
Incentive Plan was approved by votes as follows:
--------------------------------------------------------------
FOR: 11,222,140
--------------------------------------------------------------
AGAINST: 4,902,148
--------------------------------------------------------------
ABSTAIN: 318,668
--------------------------------------------------------------
BROKER NONVOTES: 5,362,466
--------------------------------------------------------------
Item 5. Other Information
-----------------
(a) 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 corporate 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.
27
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 Company's 2004 Equity Incentive Plan. (5) +
10.2 Fourth Amendment dated May 26, 2004 to Loan
and Security Agreement dated June 13, 2002,
by and between Fleet Capital Corporation, as
Administrative Agent on behalf of 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 August 4, 2004 pursuant to Rule
13a-14(a).*
31.2 Certification of Chief Financial Officer
dated August 4, 2004 pursuant to Rule
13a-14(a).*
32.1 Certification of Chief Executive Officer
dated August 4, 2004 pursuant to 18 U.S.C.
Section 1350.*
32.2 Certification of Chief Financial Officer
dated August 4, 2004 pursuant to 18 U.S.C.
Section 1350.*
- --------------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement of Company on Form S-4 dated January 19,
2000 (File No. 333-88663).
28
(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).
(5) Incorporated herein by reference to Appendix B to the Definitive
Proxy Statement on Schedule 14A of Company dated April 8, 2004.
* Filed herewith.
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
On April 29, 2004, the Company furnished a report on Form 8-K
(i) furnishing in Item 7 as an exhibit a press release covering the
Company's 2004 first quarter consolidated earnings and (ii) reporting
in Item 12 the issuance of the Company's press release on the subject
of its 2004 first quarter consolidated earnings.
29
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: August 4, 2004 /s/ RONALD A. MALONE
------------------------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: August 4, 2004 /s/ JOHN R. POTAPCHUK
------------------------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
30