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 April 3, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
Gentiva Health Services, Inc.
-----------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4335801
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes X No
--- ---
The number of shares outstanding of the registrant's Common Stock, as
of May 6, 2005, was 23,340,813.
INDEX
PART I - FINANCIAL INFORMATION Page
No.
------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - April 3, 2005 and
January 2, 2005 3
Consolidated Statements of Income (Unaudited) - Three
Months Ended April 3, 2005 and March 28, 2004 4
Consolidated Statements of Cash Flows (Unaudited) - Three
Months Ended April 3, 2005 and March 28, 2004 5
Notes to Consolidated Financial Statements (Unaudited) 6-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17-29
Item 3. Quantitative and Qualitative Disclosures about Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 30
Item 3. Defaults Upon Senior Securities 30
Item 4. Submission of Matters to a Vote of Security Holders 30
Item 5. Other Information 30-35
Item 6. Exhibits 36-37
SIGNATURES 38
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
April 3, 2005 January 2, 2005
------------- ---------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 78,572 $ 31,924
Short-term investments 25,000 81,100
Receivables, less allowance for doubtful accounts of $7,239
and $7,040 at April 3, 2005 and January 2, 2005, respectively 137,045 132,002
Deferred tax assets 23,329 23,861
Prepaid expenses and other current assets 7,946 6,057
--------- ---------
Total current assets 271,892 274,944
Fixed assets, net 19,182 19,687
Deferred tax assets, net 20,545 21,233
Other assets 16,520 16,234
--------- ---------
Total assets $ 328,139 $ 332,098
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 23,385 $ 25,896
Payroll and related taxes 16,521 9,356
Medicare liabilities 8,589 9,949
Cost of claims incurred but not reported 25,512 27,361
Obligations under insurance programs 34,229 34,660
Other accrued expenses 28,358 31,117
--------- ---------
Total current liabilities 136,594 138,339
Other liabilities 21,977 21,819
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 23,342,663 and 23,722,408
shares at April 3, 2005 and January 2, 2005, respectively 2,334 2,372
Additional paid-in capital 232,470 238,929
Accumulated deficit (65,236) (69,361)
--------- ---------
Total shareholders' equity 169,568 171,940
--------- ---------
Total liabilities and shareholders' equity $ 328,139 $ 332,098
========= =========
See notes to consolidated financial statements.
3
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Net revenues $ 207,107 $ 213,905
Cost of services sold 127,229 130,643
--------- ---------
Gross profit 79,878 83,262
Selling, general and administrative expenses (71,759) (66,369)
Depreciation and amortization (1,736) (1,845)
--------- ---------
Operating income 6,383 15,048
Interest income, net 463 82
--------- ---------
Income before income taxes 6,846 15,130
Income tax expense (2,721) (5,900)
--------- ---------
Net income $ 4,125 $ 9,230
========= =========
Net income per common share:
Basic $ 0.18 $ 0.36
========= =========
Diluted $ 0.17 $ 0.34
========= =========
Weighted average shares outstanding:
Basic 23,445 25,542
========= =========
Diluted 24,892 27,084
========= =========
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
-------------------------------
April 3, 2005 March 28, 2004
------------- --------------
OPERATING ACTIVITIES:
Net income $ 4,125 $ 9,230
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 1,736 1,845
Provision for doubtful accounts 1,495 2,047
Deferred income tax expense 1,220 5,172
Changes in assets and liabilities:
Accounts receivable (6,538) (7,176)
Prepaid expenses and other current assets (1,889) (1,743)
Current liabilities (388) (8)
Other, net (61) (13)
-------- --------
Net cash (used in) provided by operating activities (300) 9,354
-------- --------
INVESTING ACTIVITIES:
Purchase of fixed assets (1,230) (3,370)
Purchase of short-term investments available-for-sale (40,400) (20,000)
Maturities of short-term investments available-for-sale 96,500 --
Maturities of short-term investments held to maturity -- 10,000
-------- --------
Net cash provided by (used in) investing activities 54,870 (13,370)
-------- --------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,085 1,039
Changes in book overdrafts (1,358) (825)
Repurchases of common stock (7,582) (5,830)
Repayment of capital lease obligations (67) (96)
-------- --------
Net cash used in financing activities (7,922) (5,712)
-------- --------
Net change in cash, cash equivalents and restricted cash 46,648 (9,728)
Cash, cash equivalents and restricted cash at beginning of period 31,924 97,438
-------- --------
Cash, cash equivalents and restricted cash at end of period $ 78,572 $ 87,710
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid, net of refunds $ 344 $ 172
======== ========
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(R) Health Services, Inc. ("Gentiva" or the "Company") provides
comprehensive home health services throughout most of the United States through
its Home Healthcare Services and CareCentrix(R) operating segments. See Note 11
for a description of the business segments.
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. Accounting Policies
Cash, Cash Equivalents and Restricted Cash
The Company considers all investments with an original maturity of
three months or less on their acquisition date to be cash equivalents.
Restricted cash of $22.0 million at April 3, 2005 and January 2, 2005 primarily
represents segregated cash funds in a trust account designated as collateral
under the Company's insurance programs. The Company, at its option, may access
the cash funds in the trust account by providing equivalent amounts of
alternative security. Interest on all restricted funds accrues to the Company.
Included in cash and cash equivalents are amounts on deposit with financial
institutions in excess of $100,000, which is the maximum amount insured by the
Federal Deposit Insurance Corporation. Management believes that these financial
institutions are viable entities and believes any risk of loss is remote.
Short-Term Investments
The Company's short-term investments consist primarily of AAA-rated
auction rate securities and other debt securities with an original maturity of
more than three months and less than one year on the acquisition date in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Investments
in debt securities are classified by individual security into one of three
separate categories: available-for-sale, held-to-maturity or trading.
Available-for-sale investments are carried on the balance sheet at fair
value which for the Company approximates carrying value. Auction rate securities
of $15.0 million and $71.1 million at April 3, 2005 and January 2, 2005,
respectively, are classified as available-for-sale
6
and are available to meet the Company's current operational needs and
accordingly are classified as short-term investments. The interest rates on
auction rate securities are reset to current interest rates periodically,
typically 7, 14 and 28 days. Contractual maturities of the auction rate
securities exceed ten years.
Debt securities which the Company has the intent and ability to hold to
maturity are classified as "held-to-maturity" investments and are reported at
amortized cost which approximates fair value. Held-to-maturity investments,
which have contractual maturities of less than one year, consist of government
agency bonds of $10 million at April 3, 2005 and January 2, 2005.
The Company has no investments classified as trading securities.
3. New Accounting Standards
In December 2004, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 123 (Revised), "Share-Based Payment" ("SFAS 123(R)"). This
statement replaces SFAS No. 123, "Accounting for Stock-Based Compensation"
("SFAS 123") and supersedes Accounting Principles Board ("APB") Opinion No. 25.
SFAS 123(R) requires companies to apply a fair-value-based measurement method in
accounting for share-based payment transactions with employees and to record
compensation cost for all stock awards granted after the required effective date
and to awards modified, repurchased, or cancelled after that date. In addition,
the Company is required to record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that
remain outstanding at the date of adoption. SFAS 123(R) will be effective for
annual periods beginning on or after June 15, 2005, which for the Company is the
first quarter of fiscal 2006. The impact of the adoption of SFAS 123(R) on
fiscal 2006 results cannot be determined at this time.
4. Medicare Revenues
Medicare revenues for the first quarter of fiscal 2004 included
approximately $9 million received in settlement of the Company's appeal filed
with the 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. The Centers for Medicare &
Medicaid Services ("CMS") has determined that homecare providers should have
received lower reimbursements for certain services rendered to beneficiaries
discharged from inpatient hospitals within fourteen days immediately preceding
admission to home healthcare.
5. Earnings Per Share
Basic and diluted earnings per share for each period presented has been
computed by dividing net income by the weighted average number of shares
outstanding for each respective period. The computations of the basic and
diluted per share amounts were as follows (in thousands, except per share
amounts):
7
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Net income $ 4,125 $ 9,230
- --------------------------------------------------------------------------------
Basic weighted average common
shares outstanding 23,445 25,542
Shares issuable upon the assumed exercise of
stock options and in connection with the
employee stock purchase plan using the
treasury stock method 1,447 1,542
---------- ----------
Diluted weighted average common
shares outstanding 24,892 27,084
---------- ----------
- --------------------------------------------------------------------------------
Net income per common share:
Basic $ 0.18 $ 0.36
Diluted $ 0.17 $ 0.34
- --------------------------------------------------------------------------------
6. Revolving Credit Facility, Restricted Cash and Debt
The Company's credit facility, as amended, as described below, provides
up to $55 million in borrowings, including up to $40 million which is available
for letters of credit. The Company may borrow up to a maximum of 80 percent of
the net amount of eligible accounts receivable, as defined, less any reasonable
and customary reserves, as defined, required by the lender.
At the Company's option, the interest rate on borrowings under the
credit facility is based on the London Interbank Offered Rates ("LIBOR") plus
3.0 percent or the lender's prime rate plus 1.0 percent. In addition, the
Company is required to pay a fee equal to 2.25 percent per annum of the
aggregate face amount of outstanding letters of credit. The Company is also
subject to an unused line fee equal to 0.375 percent per annum of the average
daily difference between the total revolving credit facility amount and the
total outstanding borrowings and letters of credit. If the Company's trailing
twelve month earnings before interest, taxes, depreciation and amortization
("EBITDA"), excluding certain restructuring costs and special charges, falls
below $20 million, the applicable margins for LIBOR and prime rate borrowings
will increase to 3.25 percent and 1.25 percent, respectively, and the letter of
credit and unused line fees will increase to 2.5 percent and 0.50 percent,
respectively.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003, May 26, 2004 and April 4, 2005, the credit facility was amended to make
covenants
8
relating to acquisitions, stock repurchases and cash dividends less restrictive,
provided that the Company maintains minimum aggregate excess liquidity, as
defined, equal to at least $60 million, and to allow for the disposition of
certain assets. As of April 3, 2005, 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 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.
Total outstanding letters of credit were approximately $20.2 million at
April 3, 2005 and January 2, 2005. The letters of credit, which expire one year
from date of issuance, were issued to guarantee payments under the Company's
workers compensation program and for certain other commitments. There were no
borrowings outstanding under the credit facility as of April 3, 2005. The
Company also had outstanding surety bonds of $1.2 million and $1.0 million at
April 3, 2005 and January 2, 2005, respectively.
The restricted cash of $22.0 million at April 3, 2005 relates to cash
funds of $21.8 million that have been segregated in a trust account to provide
collateral under the Company's insurance programs. The Company, at its option,
may access the cash funds in the trust account by providing equivalent amounts
of alternative security, including letters of credit and surety bonds. In
addition, restricted cash includes $0.2 million on deposit to comply with New
York state regulations requiring that one month of revenues generated under
capitated agreements in the state be held in escrow. Interest on all restricted
funds accrues to the Company.
7. Shareholders' Equity
Changes in shareholders' equity for the three months ended April 3,
2005 were as follows (in thousands except share amounts):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
-- ---- --------- --------- --------- ---------
Balance at January 2, 2005 $ 2,372 $ 238,929 $ (69,361) $ 171,940
Comprehensive income:
Net income -- -- 4,125 4,125
Income tax benefits associated with
stock-based compensation -- 390 -- 390
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (92,755 shares) 9 686 -- 695
Repurchase of common stock at cost (472,500 shares) (47) (7,535) -- (7,582)
--------- --------- --------- ---------
Balance at April 3, 2005 $ 2,334 $ 232,470 $ (65,236) $ 169,568
========= ========= ========= =========
9
Comprehensive income amounted to $4.1 million and $9.2 million for the
first quarter of fiscal 2005 and fiscal 2004, respectively.
From May 2003 through April 3, 2005, the Company announced four stock
repurchase programs, authorized by the Company's Board of Directors, under which
the Company could repurchase and retire up to an aggregate of 4,500,000 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. A summary of the status of each share repurchase program
through April 3, 2005 follows:
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of April 3, 2005 Total Cost Share Completion Date
- --------- ---------- ------------------- ---------- ----- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,082,353 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,500,000 20,779,291 13.85 July 8, 2004
May 26, 2004 1,000,000 1,000,000 15,290,952 15.29 October 13, 2004
August 10, 2004 1,000,000 964,104 15,254,782 15.82
---------------------------------------------------------------
4,500,000 4,464,104 $60,407,378 $ 13.53
===============================================================
During the first quarter of fiscal 2005, the Company repurchased
472,500 shares of its outstanding common stock at an average cost of $16.05 per
share and a total cost of approximately $7.6 million. During the first quarter
of fiscal 2004, the Company repurchased 428,247 shares of its outstanding common
stock at an average cost of $13.61 per share and a total cost of approximately
$5.8 million. As of April 3, 2005, the Company had remaining authorization to
repurchase an aggregate of 35,896 shares of its outstanding common stock and
completed the repurchase of these shares as of April 27, 2005.
On April 14, 2005, the Company announced a new stock repurchase
program, authorized by its Board of Directors, under which the Company could
repurchase and retire up to an additional 1,500,000 shares of its outstanding
common stock.
8. Stock-Based Compensation Plans
The Company has chosen to adopt the disclosure only provisions of SFAS
123, as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS
148"), and continues to account for stock-based compensation using the intrinsic
value method prescribed in APB Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under this approach, the
imputed cost of stock option grants and discounts offered under the Company's
Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting
provisions of the individual grants, but not charged to expense. See Note 3 "New
Accounting Standards."
Stock option grants in fiscal 2004 and prior years fully vest over
periods ranging from three to six years. Stock option grants in fiscal 2005
fully vest over a four year period based on a vesting schedule which provides
for one-third vesting after years one, three and four.
10
The weighted average fair values of the Company's stock options granted
during the first quarter of fiscal 2005 and fiscal 2004, calculated using the
Black-Scholes option-pricing model, and other assumptions are as follows:
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Weighted average fair value
of options granted $ 6.12 $ 5.46
Risk-free interest rate 3.73% 3.36%
Expected volatility 35% 37%
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
For stock options granted during the fiscal 2004 period, the expected
life is estimated to be two years following the date all options comprising the
grant become fully vested and forfeitures are reflected in the calculation as
they occur. For stock options granted during the fiscal 2005 period, the
expected life of an option is estimated to be 2.5 years following its vesting
date and forfeitures are reflected in the calculation using an estimate based on
experience.
Pro forma compensation expense is calculated for the fair value of the
employee's purchase rights under the ESPP, using the Black-Scholes model.
Assumptions for the first quarter of fiscal 2005 and fiscal 2004 are as follows:
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Risk-free interest rate 2.63% 1.02%
Expected volatility 27% 28%
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
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Net income - as reported $ 4,125 $ 9,230
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (1,040) (695)
--------- ---------
Net income - pro forma $ 3,085 $ 8,535
========= =========
Basic income per share - as reported $ 0.18 $ 0.36
Basic income per share - pro forma $ 0.13 $ 0.33
Diluted income per share - as reported $ 0.17 $ 0.34
Diluted income per share - pro forma $ 0.12 $ 0.32
11
During the first quarter of fiscal 2005, the Company granted 939,500
stock options to officers and employees under its existing option plans at an
average exercise price of $16.37. At April 3, 2005, there were 4,043,330 options
outstanding at a weighted average exercise price of $10.21 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.
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 transaction. The
representations and warranties generally survived for the period of two years
after the closing of the transaction, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive, including
the survival of representations and warranties related to healthcare compliance
for three years after the closing of the transaction 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.
Government Matters
PRRB Appeal
The Company's annual cost reports, which were filed with CMS, were
subject to audit by the fiscal intermediary engaged by CMS. In connection with
the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary
made certain audit adjustments related to
12
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, 1998 and 1999. The Company's consolidated financial
statements for the years 1997, 1998 and 1999 had reflected use of the
methodology mandated by the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed
an Administrative Resolution relating to the issues covered by the appeals
pending before the PRRB. Under the terms of the Administrative Resolution, the
fiscal intermediary agreed to reopen and adjust the Company's cost reports for
the years 1997, 1998 and 1999 using a modified version of the methodology used
by the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000, which are currently under audit. The
Administrative Resolution required that the process to (i) reopen all 1997 cost
reports, (ii) determine the adjustments to allowable costs through the issuance
of Notices of Program Reimbursement and (iii) make appropriate payments to the
Company, be completed in early 2004. Cost reports relating to years subsequent
to 1997 were to be reopened after the process for the 1997 cost reports was
completed.
In February 2004, the fiscal intermediary notified the Company that it
had completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was approximately $9 million. The
Company received the funds and recorded the adjustment of $9.0 million as net
revenues during the first quarter of fiscal 2004.
During the third quarter of fiscal 2004, the fiscal intermediary
notified the Company that it had completed the reopening of all 1998 cost
reports and determined that the adjustment to allowable costs for that year was
$1.4 million. The Company received the funds and recorded the adjustment of $1.4
million as net revenues during fiscal 2004.
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 1998, the settlement amounts cannot be specifically
determined until the reopening or audit of each year's cost reports is
completed. The Company expects the 1999 cost reports to be reopened and
completed during 2005. It is likely that future recoveries for the 1999 year
resulting from the application of the modified methodology required by the
Administrative Resolution will be significantly less than the 1997 settlement
but greater than the 1998 settlement. The timeframe for resolving all items
relating to the 2000 cost reports cannot be determined at this time.
Subpoena
On April 17, 2003, the Company received a subpoena from the Department
of Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect
13
to the cost report issues, the government has preliminarily agreed to narrow the
scope of production to the period from January 1, 1998 through September 30,
2000. On February 17, 2004, the Company received a subpoena from the U.S.
Department of Justice ("DOJ") seeking additional information related to the
matters covered by the OIG subpoena. The Company has provided documents and
other information requested by the OIG and DOJ pursuant to their subpoenas and
similarly intends to cooperate fully with any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint
against the Company.
10. Income Taxes
The Company recorded federal and state income taxes of approximately $2.7
million for the first quarter of fiscal 2005, of which $1.5 million represented
a current provision and $1.2 million represented a deferred tax provision. For
the first quarter of fiscal 2004, state income taxes and federal alternative
minimum taxes of $5.9 million were recorded, of which $0.7 million represented a
current provision and $5.2 million represented a deferred tax provision. The
difference between the federal statutory income tax rate and the Company's
effective tax rate of 39.7 percent for the fiscal 2005 period and 39.0 percent
for the fiscal 2004 period is due primarily to state taxes.
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
April 3, 2005 January 2, 2005
------------- ---------------
Deferred tax assets
Current:
Reserves and allowances $ 19,195 $ 19,348
Federal net operating loss and other carryforwards 224 793
State net operating loss 7,027 7,027
Other 1,338 1,148
Less: valuation allowance (4,455) (4,455)
-------- --------
Total current deferred tax assets 23,329 23,861
-------- --------
Noncurrent:
Intangible assets 24,952 25,772
-------- --------
Total deferred tax assets 48,281 49,633
Deferred tax liabilities:
Noncurrent:
Fixed assets (2,517) (2,707)
Developed software (1,291) (1,233)
Other (599) (599)
-------- --------
Total non-current deferred tax liabilities (4,407) (4,539)
-------- --------
Net deferred tax assets $ 43,874 $ 45,094
======== ========
At April 3, 2005, the Company had federal tax credit carryforwards of
$0.2 million and state net operating loss carryforward benefits of $7.0 million.
11. Business Segment Information
Commencing in fiscal 2005, the Company identified two business segments
for reporting purposes. The Company believes that the new presentation aligns
the Company's financial reporting with the manner in which the Company has
recently commenced to manage its
14
business operations with a focus on the strategic allocation of resources and
separate branding strategies between the business segments. The Company's
operations involve servicing patients and customers through its two business
segments: Home Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home
nursing and therapy services operations, including specialty programs, Gentiva
Rehab Without Walls(R) and Gentiva Consulting.
Direct home nursing and therapy services operations are conducted
through licensed and Medicare-certified agencies from which the Company provides
various combinations of skilled nursing and therapy services, paraprofessional
nursing services and homemaker services to pediatric, adult and elder patients.
The Company's direct home nursing and therapy services operations also deliver
services to its customers through focused specialty programs that include:
o Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from
joint replacement or other major orthopedic surgery;
o Gentiva Safe Strides(SM) Program, which provides therapies for
patients with balance issues who are prone to injury or
immobility as a result of falling; and
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based
environment.
Gentiva Rehab Without Walls provides home and community-based
neurorehabilitation therapies for patients with traumatic brain injury,
cerebrovascular accident injury and acquired brain injury, as well as a number
of other complex rehabilitation cases.
The Company also provides consulting services to home health agencies
through its Gentiva Consulting unit. These services include billing and
collection activities, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
The CareCentrix segment encompasses Gentiva's ancillary care benefit
management and the coordination of integrated homecare services for managed care
organizations and health benefit plans. CareCentrix operations provide an array
of administrative services and coordinate the delivery of home nursing services,
acute and chronic infusion therapies, durable medical equipment, and respiratory
products and services for managed care organizations and health plans.
CareCentrix accepts case referrals from a wide variety of sources, verifies
eligibility and benefits and transfers case requirements to the providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data reporting and
analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees.
Corporate expenses consist of costs relating to executive management
and corporate and administrative support functions that are not directly
attributable to a specific segment. Corporate and administrative support
functions represent primarily information services, accounting and reporting,
tax compliance, risk management, procurement, marketing, legal and
15
human resource benefits and administration. For the three months ended April 3,
2005, corporate expenses also included a credit of approximately $0.8 million
relating to a favorable arbitration settlement.
The Company's senior management evaluates performance and allocates
resources based on operating contributions of the reportable segments, which
exclude corporate expenses, depreciation, amortization, and interest income, but
include revenues and all other costs directly attributable to the specific
segment. Intersegment revenues represent Home Healthcare Services segment
revenues generated from services provided to the CareCentrix segment. Segment
assets represent net accounts receivable associated with segment activities.
Intersegment assets represent accounts receivable associated with services
provided by the Home Healthcare Services segment to the CareCentrix segment. All
other assets are assigned to corporate assets for the benefit of all segments
for the purposes of segment disclosure.
Segment information about the Company's operations is as follows (in
thousands):
Home Healthcare
Services CareCentrix Total
-------- ----------- -----
Three months ended April 3, 2005 (unaudited)
- --------------------------------------------
Net revenue - segments $133,083 $ 78,934 $ 212,017
======== ========
Intersegment revenues (4,910)
----------
Total net revenue $ 207,107
==========
Operating contribution $ 11,606 $ 6,842 $ 18,448
======== ========
Corporate expenses (10,329)
Depreciation and amortization (1,736)
Interest income, net 463
----------
Income before income taxes $ 6,846
==========
Segment assets $ 70,989 $ 67,640 $ 138,629
======== ========
Intersegment assets (1,584)
Corporate assets 191,094
----------
Total assets $ 328,139
==========
Three months ended March 28, 2004 (unaudited)
- ---------------------------------------------
Net revenue - segments $137,205 $ 82,123 $ 219,328
======== ========
Intersegment revenues (5,423)
----------
Total net revenue $ 213,905
==========
Operating contribution $ 21,251 $ 6,414 $ 27,665
======== ========
Corporate expenses (10,772)
Depreciation and amortization (1,845)
Interest income, net 82
----------
Income before income taxes $ 15,130
==========
Segment assets $ 74,648 $ 65,717 $ 140,365
======== ========
Intersegment assets (2,238)
Corporate assets 209,831
----------
Total assets $ 347,958
==========
16
12. Subsequent Event
Heritage Home Care Services Acquisition
On May 1, 2005, the Company completed the purchase of certain assets
and the home health operations of Heritage Home Care Services, Inc. pursuant to
an asset purchase agreement for cash consideration of $11.5 million, exclusive
of working capital requirements and transaction costs.
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 healthcare 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 payer sources;
o ability of customers to pay for services;
o business disruption due to natural disasters or terrorist acts;
o a material shift in utilization within capitated agreements; and
o changes in estimates and judgments associated with critical
accounting policies.
Forward-looking statements are found throughout "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q. The reader should not place
undue reliance on forward-looking statements, which speak only as of the date of
this report. Except as required under the federal securities laws and the rules
and regulations of the Securities and Exchange Commission ("SEC"), the Company
does not have any intention or obligation to publicly release any revisions
17
to forward-looking statements to reflect unforeseen or other events after the
date of this report. The Company has provided a detailed discussion of risk
factors in its 2004 Annual Report on Form 10-K, as amended, and various filings
with the SEC. The reader is encouraged to review these risk factors and filings.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial position. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and related notes included elsewhere in this report.
General
The Company's results of operations are impacted by various regulations
and other matters that are implemented from time to time in its industry, some
of which are described in the Company's Annual Report on Form 10-K for the
fiscal year ended January 2, 2005, as amended by Form 10-K/A, and in other
filings with the SEC.
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
2004 Annual Report on Form 10-K, as amended.
Overview
Gentiva is the nation's largest provider of comprehensive home health
services, based on revenues derived from the provision of skilled home nursing
and therapy services to patients. The Company's services can be delivered across
the United States 24 hours a day, 7 days a week. The Company's operations
involve servicing patients and customers through its two business segments: Home
Healthcare Services and CareCentrix.
The Home Healthcare Services segment is comprised of direct home
nursing and therapy services operations, including specialty programs, Gentiva
Rehab Without Walls and Gentiva Consulting. The Company's Home Healthcare
Services segment conducts its business through more than 350 direct service
delivery units operating from approximately 250 locations under its Gentiva
brand.
Direct home nursing and therapy services operations are conducted
through licensed and Medicare-certified agencies located in 35 states,
substantially all of which are currently accredited by the Joint Commission on
Accreditation of Healthcare Organizations, from which the Company provides
various combinations of skilled nursing and therapy services, paraprofessional
nursing services and homemaker services to pediatric, adult and elder patients.
Reimbursement sources include government programs, such as Medicare and
Medicaid, and private sources, such as health insurance plans, managed care
organizations, long term care insurance plans and personal funds. Gentiva's
direct home nursing and therapy operations are organized in five geographic
regions, each staffed with clinical, operational and sales teams. Regions are
further separated into operating areas. Each operating area includes branch
locations through which home healthcare agencies operate. Each agency is led by
a
18
director and is staffed with clinical and administrative support staff as well
as clinical associates who deliver direct patient care. The clinical associates
are employed on either a full-time basis or are paid on a per visit, per shift,
per diem or per hour basis.
The Company's direct home nursing and therapy services operations also
deliver services to its customers through focused specialty programs that
include:
o Gentiva Orthopedic Program, which provides individualized home
orthopedic rehabilitation services to patients recovering from
joint replacement or other major orthopedic surgery;
o Gentiva Safe Strides Program, which provides therapies for
patients with balance issues who are prone to injury or
immobility as a result of falling; and
o Gentiva Cardiopulmonary Program, which helps patients and their
physicians manage heart and lung health in a home-based
environment.
Gentiva Rehab Without Walls provides home and community-based
neurorehabilitation therapies for patients with traumatic brain injury,
cerebrovascular accident injury and acquired brain injury, as well as a number
of other complex rehabilitation cases.
The Company also provides consulting services to home health agencies
through its Gentiva Consulting unit. These services include billing and
collection activities, on-site agency support and consulting, operational
support and individualized strategies for reduction of days sales outstanding.
The CareCentrix segment encompasses Gentiva's ancillary care benefit
management and coordination of integrated homecare services for managed care
organizations and health benefit plans through a network of more than 2,000
third-party provider locations, as well as Gentiva locations, under its
CareCentrix brand. CareCentrix operations provide an array of administrative
services and coordinate the delivery of home nursing services, acute and chronic
infusion therapies, durable medical equipment, and respiratory products and
services for managed care organizations and health plans. These administrative
services are coordinated within four regional coordination centers and are
delivered through Gentiva direct home nursing and therapy locations as well as
through an extensive nationwide network of third-party provider locations in all
50 states. CareCentrix accepts case referrals from a wide variety of sources,
verifies eligibility and benefits and transfers case requirements to the
providers for services to the patient. CareCentrix provides services to its
customers, including the fulfillment of case requirements, care management,
provider credentialing, eligibility and benefits verification, data reporting
and analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payer is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payer remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
19
Results of Operations
Revenues
(Dollars in millions) First Quarter
----------------------------------------
Percentage
2005 2004 Variance
---- ---- ----------
Medicare $ 61.8 $ 62.6 (1.3%)
Medicaid and Local Government 36.6 39.2 (6.4)
Commercial Insurance and Other 108.7 112.1 (3.1)
--------------------------------------
$207.1 $213.9 (3.2%)
======================================
The Company's net revenues decreased by $6.8 million, or 3.2 percent,
to $207.1 million for the quarter ended April 3, 2005 as compared to the quarter
ended March 28, 2004.
Home Healthcare Services segment revenues are derived from all three
payer groups: Medicare, Medicaid and Local Government and Commercial Insurance
and Other. CareCentrix segment revenues are derived from the Commercial
Insurance and Other payer group only.
Medicare revenues for the first quarter of fiscal 2004 were positively
impacted by two special items of approximately $8.0 million as compared to the
first quarter of fiscal 2005. 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 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 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.
Medicare revenues for the first quarter of 2005 were positively
impacted by a 13.7 percent increase in admissions as compared to the first
quarter of fiscal 2004 and by reimbursement rate changes. The rate changes
included a 2.3 percent market basket increase that became effective for patients
on service on or after January 1, 2005, and a 5 percent rate increase related to
home health services performed in specifically defined rural areas of the
country (rural add-on provision) for episodes of service that were completed
prior to April 1, 2005. The rural add-on provision was eliminated effective for
patients on service on or after April 1, 2005. The rate increases relating
to the market basket change and rural add-on provision represented incremental
revenue of approximately $1.6 million for the first quarter of fiscal 2005. The
positive impact of increased admissions and reimbursement rate increases was
partially mitigated by lower revenue per admission.
Medicaid and Local Government revenues decreased $2.6 million, or 6.4
percent, for the three months ended April 3, 2005, as compared to the three
months ended March 28, 2004, due to a reduction in the Company's participation
in certain low-margin Medicaid and state and county programs partially offset by
an increase in skilled visits within Medicaid programs. Revenues relating to
hourly Medicaid and state and county programs decreased $3.8 million
20
while revenue relating to intermittent care visits increased $1.2 million as
compared to the first quarter of fiscal year 2004.
Commercial Insurance and Other revenues decreased $3.4 million, or 3.1
percent, for the first quarter of fiscal 2005, as compared to the first quarter
of fiscal 2004, primarily due to a decline in revenue derived from CIGNA Health
Corporation ("Cigna"). The Cigna revenue decline of $7.8 million, or 12.0
percent, compared to the first quarter of fiscal 2004, was caused by a reduction
in the number of enrolled Cigna members in 2005 resulting in lower revenues from
Cigna's capitated plans. The revenue decrease was partially offset by an
increase of $4.3 million, or 9.1 percent, 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.
Home Healthcare Services segment revenues declined $4.1 million, or 3.0
percent, from $137.2 million during the first quarter of fiscal 2004 to $133.1
million during the first quarter of fiscal 2005. This decline was primarily due
to $8.0 million of special items related to Medicare that positively impacted
the first quarter of fiscal 2004.
CareCentrix segment revenues decreased $3.2 million, or 3.9 percent,
from $82.1 million during the first quarter of fiscal 2004 to $78.9 million
during the first quarter of fiscal 2005. This decrease was partially driven by
$7.8 million in lower revenues from Cigna offset by increases in revenues from
TriWest Healthcare Alliance and other managed care customers.
Gross Profit
(Dollars in millions) First Quarter
----------------------------------------
2005 2004 Variance
---- ---- --------
Gross profit $79.9 $83.3 $ (3.4)
As a percent of revenue 38.6% 38.9% (0.3%)
During the first quarter of fiscal 2005, gross margins were positively
impacted by (i) 1.3 percentage points due to a favorable change in business mix
in the Home Healthcare Services segment in which the volume of Medicare
business, including growth from higher margin specialty programs, more than
offset the anticipated revenue loss in certain low margin Medicaid and local
government programs and (ii) 0.7 percentage points due to the reconfiguration of
the home medical equipment ("HME") provider network and new contracts in the
CareCentrix segment.
Gross margins were also positively impacted by increased Medicare
reimbursement rates and lower workers compensation and insurance expenses; these
positive changes were offset by the cost of orientation and training of full
time clinicians hired during the first quarter of fiscal 2005 and, in certain
markets, lower than anticipated Medicare revenue per admission. During the first
quarter of fiscal 2005, the Company increased its full time clinicians by 143
people as compared to a net increase of 17 in the first quarter of fiscal 2004.
The Company anticipates that it will continue its strategy of hiring full time
clinicians throughout fiscal 2005.
21
For the first quarter of fiscal 2004, the Medicare special items
discussed above had a net positive impact of $8.0 million or 2.3 percentage
points on gross profit margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation
and amortization, increased $5.3 million to $73.5 million for the quarter ended
April 3, 2005, as compared to $68.2 million for the quarter ended March 28,
2004.
The increase for the first quarter of fiscal 2005 is attributable to
(i) incremental field operating and administrative costs to service increased
Medicare volume and develop and manage growing specialty programs in the Home
Healthcare Services segment ($3 million), (ii) increased selling and clinical
care coordination expenses, primarily in the Home Healthcare Services segment
($1 million), (iii) increased costs associated with changes to the CareCentrix
HME provider network ($1 million) and (iv) various travel and recruiting costs
related to the hiring and orientation of full-time clinicians and field
personnel ($1.3 million), partially offset by a favorable arbitration settlement
($0.8 million).
Interest Income, Net
Net interest income was approximately $0.5 million for the quarter
ended April 3, 2005, and $0.1 million for the quarter ended March 28, 2004. Net
interest income included interest income of approximately $0.7 million for the
first quarter of fiscal 2005 and $0.4 million for the first quarter of fiscal
2004, partially offset by fees relating to the revolving credit facility and
outstanding letters of credit.
Income Taxes
The Company recorded federal and state income taxes of approximately
$2.7 million for the first quarter ended April 3, 2005, of which $1.5 million
represented a current provision and $1.2 million represented a deferred tax
provision. The difference between the federal statutory income tax rate and the
Company's effective tax rate of 39.7 percent is due primarily to state taxes.
State income taxes and federal alternative minimum taxes of $5.9
million were recorded for the first quarter of fiscal 2004.
Net Income
For the first quarter of fiscal 2005, net income was $4.1 million, or
$0.17 per diluted share, compared with net income of $9.2 million, or $0.34 per
diluted share, for the corresponding period of 2004. Net income for the first
quarter of fiscal 2004 included two special items related to Medicare, noted in
the Revenues section above, which had a net positive impact of $4.9 million, or
$0.18 per diluted share.
22
Liquidity and Capital Resources
Liquidity
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payer arrangements. The Company used its operating
cash balances to fund capital expenditures of $1.2 million and repurchase shares
of the Company's common stock of $7.6 million during the quarter.
Days Sales Outstanding ("DSO") as of April 3, 2005 increased 3 days
from January 2, 2005 to 60 days. The increase in DSO can be attributed to
processing delays in adjudicating the Company's claims for payment to TriWest
Healthcare Alliance.
Working capital at April 3, 2005 was approximately $135 million, a
decrease of $2 million as compared to approximately $137 million at January 2,
2005, primarily due to:
o a $9 million decrease in cash, cash equivalents, restricted cash and
short-term investments;
o a $5 million increase in accounts receivable;
o a $1 million decrease in deferred tax assets;
o a $2 million increase in prepaid expenses and other assets; and
o an $1 million decrease in current liabilities for accounts payable
($3 million), Medicare liabilities ($1 million), cost of claims
incurred but not reported ($2 million), and other accrued expenses
($2 million), offset by an increase in payroll and related taxes ($7
million).
The Company participates in the Medicare, Medicaid and other federal
and state healthcare programs. Revenue mix by major payer classifications are as
follows:
Three Months Ended
---------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Medicare 30% 29%
Medicaid and Local Government 18 18
Commercial Insurance and Other 52 53
------- -------
100% 100%
======= =======
On January 1, 2005, a 2.3 percent market basket rate increase became
effective for patients on service on or after January 1, 2005. In addition,
Medicare reimbursement for the rural add-on related to home health services
performed in specifically defined rural areas of the country decreased by 5
percent, effective for Medicare patients on service as of April 1, 2005. There
are certain standards and regulations that the Company must adhere to in order
to continue to participate in these programs. As part of these standards and
regulations, the Company is subject to periodic audits, examinations and
investigations conducted by, or at the direction of, governmental investigatory
and oversight agencies. Periodic and random audits conducted or directed by
these agencies could result in a delay or adjustment to the amount of
23
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 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 first
quarter of fiscal 2005, Cigna accounted for approximately 27 percent of the
Company's total net revenues compared to approximately 30 percent for the first
quarter of fiscal 2004. This decrease in revenue reflects the reduction in the
number of enrolled Cigna members resulting in lower revenues from Cigna's
capitated plans. The Company extended its relationship with Cigna by entering
into a new national home health care contract, as amended, 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 11 percent of total net revenues for the first quarter
of fiscal 2005 and 12 percent for the first quarter of fiscal 2004.
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, as amended, as described below, provides
up to $55 million in borrowings, including up to $40 million which is available
for letters of credit. The Company may borrow up to a maximum of 80 percent of
the net amount of eligible accounts receivable, as defined, less any reasonable
and customary reserves, as defined, required by the lender.
At the Company's option, the interest rate on borrowings under the
credit facility is based on LIBOR plus 3.0 percent or the lender's prime rate
plus 1.0 percent. In addition, the Company is required to pay a fee equal to
2.25 percent per annum of the aggregate face amount of outstanding letters of
credit. The Company is also subject to an unused line fee equal to 0.375 percent
per annum of the average daily difference between the total revolving credit
facility amount and the total outstanding borrowings and letters of credit. If
the Company's trailing twelve month earnings before interest, taxes,
depreciation and amortization ("EBITDA"), excluding certain restructuring costs
and special charges, falls below $20 million, the applicable margins for LIBOR
and prime rate borrowings will increase to 3.25 percent and 1.25 percent,
respectively, and the letter of credit and unused line fees will increase to 2.5
percent and 0.50 percent, respectively. Total outstanding letters of credit were
$20.2 million as of April 3, 2005. The letters of credit, which expire one year
from date of issuance, were issued to guarantee payments under the Company's
workers compensation
24
program and for certain other commitments. As of April 3, 2005, there were no
borrowings outstanding under the credit facility and the Company had borrowing
capacity under the credit facility, after adjusting for outstanding letters of
credit, of approximately $35 million.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003, May 26, 2004 and April 4, 2005, the credit facility was amended to make
covenants relating to acquisitions, stock repurchases and cash dividends less
restrictive, provided that the Company maintains minimum aggregate excess
liquidity, as defined, equal to at least $60 million and to allow for the
disposition of certain assets. As of April 3, 2005, 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 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.
The credit facility includes provisions, which, if not complied with,
could require early payment by the Company. These include customary default
events, such as failure to comply with financial covenants, insolvency events,
non-payment of scheduled payments, acceleration of other financial obligations
and change in control provisions. In addition, these provisions include an
account obligor, whose accounts are more than 25 percent of all accounts of the
Company over the previous 12-month period, canceling or failing to renew its
contract with the Company and ceasing to recognize the Company as an approved
provider of healthcare services, or the Company revoking the lending agent's
control over its governmental lockbox accounts. The Company does not have any
trigger events in the credit facility that are tied to changes in its credit
rating or stock price. As of April 3, 2005, the Company was in compliance with
these provisions.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk with insurance policies subject to
substantial deductibles and retention amounts. The Company recognizes its
obligations associated with these programs in the period the claim is incurred.
The 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
25
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 three months ended April 3,
2005 were $1.2 million as compared to $3.4 million for the same period in fiscal
2004, which excludes equipment capitalized under capital lease obligations of
$1.4 million. The Company intends to make investments and other expenditures to,
among other things, upgrade its computer technology and system infrastructure
and comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2005 will range between $12.0
million and $14.0 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 $103.6 million as of April 3, 2005. The restricted
cash of $22.0 million at April 3, 2005, relates to cash funds of $21.8 million
that have been segregated in a trust account to provide collateral under the
Company's insurance programs. The Company, at its option, may access the cash
funds in the trust account by providing equivalent amounts of alternative
security, including letters of credit and surety bonds. In addition, restricted
cash includes $0.2 million on deposit to comply with New York state regulations
requiring that one month of revenues generated under capitated agreements in the
state be held in escrow. Interest on all restricted funds accrues to the
Company.
The Company anticipates that repayments to Medicare for 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.
From May 2003 through April 3, 2005, the Company announced four stock
repurchase programs, authorized by its Board of Directors, under which the
Company could repurchase and retire up to an aggregate of 4,500,000 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 quarter of fiscal 2005, the Company
repurchased 472,500 shares of its outstanding common stock at an average cost of
$16.05 per share and a total cost of approximately $7.6 million. As of April 3,
2005, the Company had remaining authorization to repurchase an aggregate of
35,896 shares of its outstanding common stock and completed the repurchase of
these shares as of April 27, 2005.
On April 14, 2005, the Company announced a new stock repurchase
program, authorized by its Board of Directors, under which the Company could
repurchase and retire up to an additional 1,500,000 shares of its outstanding
common stock. See also Part II, Item 2, of this Form 10-Q.
26
Contractual Obligations and Commercial Commitments
At April 3, 2005, the Company had no long-term debt. During the first
quarter 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 April 3, 2005, are as follows (in thousands):
Payment due by period
---------------------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
- ----------------------- ----- ------ --------- --------- -------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations 1,084 278 599 207 --
Operating lease obligations 52,414 17,757 22,670 9,301 2,686
Purchase obligations -- -- -- -- --
---------------------------------------------------------------------------
Total $53,498 $18,035 $23,269 $ 9,508 $ 2,686
===========================================================================
The Company had total letters of credit outstanding under its credit
facility of approximately $20.2 million at April 3, 2005 and January 2, 2005.
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 above under the heading "Cash Resources and
Obligations." The Company also had outstanding surety bonds of $1.2 million and
$1.0 million at April 3, 2005 and January 2, 2005, respectively.
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
Management expects that the Company's working capital needs for fiscal
2005 will be met through operating cash flow and its existing cash balances. The
Company may also consider other alternative uses of cash including, among other
things, acquisitions, additional share repurchases and cash dividends. These
uses of cash 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.
Stock-Based Compensation
In December 2004, FASB issued SFAS 123(R). This statement replaces SFAS
No.123 and supersedes APB 25. SFAS 123(R) requires companies to apply a
fair-value-based measurement method in accounting for share-based payment
transactions with employees and to record compensation cost for all stock awards
granted after the required effective date and to awards modified, repurchased,
or cancelled after that date. In addition, the Company is required to record
compensation expense (as previous awards continue to vest) for the unvested
portion of previously granted awards that remain outstanding at the date of
adoption.
27
SFAS 123(R) will be effective for annual periods beginning on or after June 15,
2005, which for the Company is the first quarter of fiscal 2006.
The Company has currently chosen to adopt the disclosure only
provisions of SFAS 123, as amended by SFAS 148, and continues to account for
stock-based compensation using the intrinsic value method prescribed in APB 25,
and related interpretations. Under this approach, the imputed cost of stock
option grants and discounts offered under the Company's ESPP is disclosed, based
on the vesting provisions of the individual grants, but not charged to expense.
Stock option grants in fiscal 2004 and prior years fully vest over
periods ranging from three to six years. Stock option grants in fiscal 2005
fully vest over a four year period based on a vesting schedule which provides
for one-third vesting after years one, three and four.
The weighted average fair values of the Company's stock options granted
during the first quarter of fiscal 2005 and fiscal 2004, calculated using the
Black-Scholes option-pricing model, and other assumptions are as follows:
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Weighted average fair value
of options granted $ 6.12 $ 5.46
Risk-free interest rate 3.73% 3.36%
Expected volatility 35% 37%
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
For stock options granted during the fiscal 2004 period, the expected
life is estimated to be two years following the date all options comprising the
grant become fully vested and forfeitures are reflected in the calculation as
they occur. For stock options granted during the fiscal 2005 period, the
expected life of an option is estimated to be 2.5 years following its vesting
date and forfeitures are reflected in the calculation using an estimate based on
experience.
Pro forma compensation expense is calculated for the fair value of the
employee's purchase rights under the ESPP, using the Black-Scholes model.
Assumptions for the first quarter of fiscal 2005 and fiscal 2004 are as follows:
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Risk-free interest rate 2.63% 1.02%
Expected volatility 27% 28%
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
28
ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148
(in thousands, except per share amounts):
Three Months Ended
--------------------------------
April 3, 2005 March 28, 2004
------------- --------------
Net income - as reported $ 4,125 $ 9,230
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (1,040) (695)
--------- ---------
Net income - pro forma $ 3,085 $ 8,535
========= =========
Basic income per share - as reported $ 0.18 $ 0.36
Basic income per share - pro forma $ 0.13 $ 0.33
Diluted income per share - as reported $ 0.17 $ 0.34
Diluted income per share - pro forma $ 0.12 $ 0.32
Stock-based compensation expense, net of tax, for the three months
ended April 3, 2005 and March 28, 2004 as reflected in the table above included
$160,000 relating to options granted in June 2002 which become fully vested
during the second quarter of fiscal 2005.
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 April 3, 2005.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
The Company's Chief Executive Officer and Chief Financial Officer have
evaluated the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in the Securities Exchange Act of
1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by
this report. Based on that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that the Company's disclosure controls
and procedures are effective as of the end of such period to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SEC's rules and forms.
Changes in internal control over financial reporting
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter ended April 3, 2005 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during such
quarter.
29
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. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number
(a) Total of Shares Purchased of Shares that May
Number (b) Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs or Programs
------ --------- --------- ----------- -----------
January (1/03/05 - 1/30/05) 299,700 $15.88 299,700 208,696
February (1/31/05 - 2/27/05) 49,000 $16.46 49,000 159,696
March (2/28/05 - 4/03/05) 123,800 $16.28 123,800 35,896
------- ------ -------
Total 472,500 $16.05 472,500
======= ====== =======
(1) On August 10, 2004, the Company announced that its
Board of Directors had authorized the repurchase of up to
1,000,000 shares of its outstanding common stock. By the end
of the period covered by the table, 964,104 of such shares had
been repurchased. On April 14, 2005, the Company announced
that its Board of Directors had authorized the repurchase of
up to 1,500,000 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
None.
Item 5. Other Information
Corporate Integrity Agreement
In connection with a July 19, 1999 settlement with
various government agencies, Olsten executed a corporate
integrity agreement with the Office of Inspector General of
the Department of Health and Human Services, effective until
August 18, 2004, subject to the Company's filing of a final
annual report with the Department of Health and Human
Services, Office of Inspector General, in form and substance
acceptable to the government. The Company has filed a final
annual report and is expecting closure by the government.
30
The Company believes that it has been in compliance
with the corporate integrity agreement and has timely filed
all required reports. If the Company has failed to comply with
the terms of its corporate integrity agreement, the Company
will be subject to penalties. The corporate integrity
agreement applies to the Company's businesses that bill the
federal government health programs directly for services, such
as its nursing brand (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.
Approval of Gentiva Health Services, Inc. Executive
Officers Bonus Plan, as Amended
On May 6, 2005, Gentiva's shareholders approved the
Executive Officers Bonus Plan (the "Bonus Plan"), as amended,
effective January 1, 2005, to provide executive officers of
Gentiva with an opportunity to earn annual bonus compensation
as an incentive and reward for their leadership, ability and
exceptional services.
The Bonus Plan is currently administered by the
Compensation, Corporate Governance and Nominating Committee
(the "Committee"). The Committee has broad authority to
administer the Bonus Plan and make any determinations
necessary under the Bonus Plan, including, but not limited to,
authority to establish performance goals, select participants,
authorize payment of bonuses, determine rules and regulations,
and interpret the plan. Pursuant to the amendment of the Bonus
Plan, the Committee may also correct defects, supply omissions
and reconcile inconsistencies or conflicts, and make
determinations regarding awards intended to satisfy the
performance-based compensation exception under Section 162(m)
of the Internal Revenue Code of 1986, as amended (the "Code").
As amended, the Bonus Plan also provides that, with respect to
certain awards, the Bonus Plan will be administered,
interpreted and construed in compliance with Section 409A of
the Code and regulations issued thereunder.
The amount of any annual bonus granted to an
executive for any fiscal year will be based on the achievement
of performance goals determined by the Committee, but may not
be greater than the lesser of 200% of such executive's annual
base salary or $2.5 million. Pursuant to the amendment to the
Bonus Plan, the Committee may specify target bonus levels as
well as various factors based upon which an amount less than
or more than the target award will be payable, may establish
additional restrictions or conditions on awards in its
discretion, and may reduce awards based on such factors or
conditions as it deems relevant. The performance criteria for
awards under the Bonus Plan are:
31
appreciation in share value, total shareholder return,
earnings per share, operating income, net income, pro forma
net income, return on equity, return on designated assets,
return on capital, economic value added, earnings, revenues,
expenses, operating profit margin, operating cash flow, gross
profit margin, net profit margin, employee turnover, employee
headcount, labor costs, customer service, and accounts
receivable, and a new criterion added under the amendment,
market share.
To the extent consistent with Section 162(m) of the
Code, the amended Bonus Plan permits the Committee to make
adjustments to awards to take into account any of the
following events that occur during a fiscal year: the
impairment of tangible or intangible assets; litigation or
claim judgments or settlements; the effect of changes in tax
law, accounting principles or other such laws or provisions
affecting reported results; accruals for reorganization and
restructuring programs, including, but not limited to,
reductions in force and early retirement incentives; currency
fluctuations; and any extraordinary, unusual, infrequent or
non-recurring items.
Under the terms of the Bonus Plan, any executive
officer of Gentiva may be selected by the Committee to
participate in the Bonus Plan for a given fiscal year. An
annual bonus (if any) to any executive participating in the
Bonus Plan for a fiscal year will be paid in a single lump sum
in cash as soon as practicable after the end of the fiscal
year (but not later than two and one-half months after the end
of the fiscal year), after certification by the Committee that
the performance goals have been satisfied. However, the
Committee may determine that all or a portion of an
executive's annual bonus for a fiscal year will be payable to
such executive upon his death, disability, or termination of
employment with Gentiva or upon a change of control of
Gentiva, during the fiscal year. The Board of Directors may
amend or terminate the Bonus Plan at any time.
The foregoing description of the Bonus Plan, as
amended, is qualified in its entirety by reference to the
applicable provisions of the plan as filed as Exhibit 10.2
hereto. More information about the amended Bonus Plan, as well
as the full text of the plan, can also be found in the
Company's definitive Proxy Statement, as filed with the
Securities and Exchange Commission on April 6, 2005.
Approval of the Gentiva Health Services, Inc. Employee
Stock Purchase Plan, as Amended
On May 6, 2005, Gentiva's shareholders approved an
amendment of the Gentiva Health Services, Inc. Employee Stock
Purchase Plan ("ESPP"), effective February 24, 2005, to
increase the aggregate number of shares of Gentiva common
stock available for issuance under the ESPP by 1,200,000
shares, to a total of 2,400,000 shares. The amended ESPP also
contains a technical change to clarify the eligibility
provisions for certain employees.
32
The ESPP is currently administered by the
Compensation, Corporate Governance and Nominating Committee.
Among other powers, the Committee has the power to interpret
the ESPP, to determine the terms and conditions of each
offering of stock, and to adopt and revise rules, guidelines
and practices governing the ESPP. The ESPP is designed to
qualify as an "employee stock purchase plan" under Section 423
of the Code, and allows participating employees to purchase
Gentiva common stock up to 10% of the employee's compensation
(or such lesser amount as the Committee determines). Employee
contributions may be credited with interest if determined by
the Committee, but no interest is currently credited. Upon
termination of employment, the employee's participation ceases
and the employee's outstanding contributions are refunded.
The ESPP provides for consecutive six month offering
periods (or other periods of not more than 27 months as
determined by the Committee) under which participating
employees can elect to have amounts withheld from their total
compensation during the offering period and applied to
purchase Gentiva common stock at the end of the offering
period. Unless otherwise determined by the Committee before an
offering period, the purchase price will be 85% of the fair
market value (average of highest and lowest sales prices) of
Gentiva common stock at either the beginning or end of the
offering period, whichever is less. At the end of the offering
period, the employee's contributions are automatically applied
to purchase stock, and any excess amount in the employee's
account after making the purchase is refunded.
Under the ESPP as originally adopted, employees of
Gentiva or any of its subsidiaries who were employed for at
least 8 months were eligible to participate in the ESPP,
except that employees whose customary employment was 20 hours
or less per week were excluded. Under the ESPP as amended,
employees of Gentiva or any of its subsidiaries who are
employed for 60 days or more prior to the beginning of an
offering period and who customarily work at least 20 hours per
week are eligible to participate in the ESPP.
Unless otherwise determined by the Committee, the
maximum number of shares that may be purchased by an employee
in any offering is 5,000 shares. In addition, a participant's
right to purchase stock under the ESPP cannot accrue at a rate
in excess of $25,000 per calendar year (based on the value at
the beginning of the applicable offering periods). The
offering period may be suspended or accelerated by the
Committee if required by law or deemed to be in Gentiva's best
interests, such as upon a change of control. The ESPP will
terminate when all shares authorized to be issued under it
have been exhausted, and the Board of Directors may amend or
discontinue the ESPP at any time.
The foregoing description of the ESPP, as amended, is
qualified in its entirety by reference to the applicable
provisions of the plan as filed as Exhibit 10.3 hereto. More
information about the amended ESPP, as well as the full
33
text of the plan, can also be found in the Company's
definitive Proxy Statement, as filed with the Securities and
Exchange Commission on April 6, 2005.
Non-Employee Director Compensation
On May 6, 2005, the Company's Board of Directors set
the compensation of the Board's non-employee directors as
follows, effective May 6, 2005: annual cash retainer, $25,000;
annual deferred stock unit award, $40,000 value; Board meeting
attendance, $2,500 per meeting ($750 if attendance by
telephone); committee meeting attendance, $2,500 per meeting
($750 if attendance by telephone); committee chairperson
annual retainer, $5,000 ($15,000 for chairperson of Audit
Committee); and Lead Director annual retainer, $15,000.
Amendment No. 1 to Stock & Deferred Compensation Plan
for Non-Employee Directors, as Amended and Restated
On May 6, 2005, the Company's Board of Directors
approved Amendment No. 1 to the Company's Stock & Deferred
Compensation Plan for Non-Employee Directors, as amended and
restated as of January 1, 2004 ("DSU Plan"), to increase the
portion of each non-employee director's annual retainer fee to
be deferred into units under the DSU Plan from $30,000 to
$40,000 annually, beginning with the Company's Annual Meeting
of Shareholders held on May 6, 2005. The units are deferred
and credited quarterly to a non-employee director's account
under the DSU Plan. A copy of Amendment No.1 is filed as
Exhibit 10.5 hereto.
Amended and Restated Change in Control Agreements with
Certain Named Executive Officers
On May 6, 2005, Gentiva's Board of Directors approved
amended and restated Change in Control Agreements
("Replacement CIC Agreements") with each of the following
named executive officers ("NEOs"): Vernon A. Perry, Jr., John
R. Potapchuk, Robert Creamer and Mary Morrisey Gabriel. The
Replacement CIC Agreements are effective May 6, 2005 and have
a term of three years (or until all obligations are
satisfied). The Replacement CIC Agreements amend and restate
each NEO's existing change in control agreement, which
otherwise would have expired on June 13, 2005.
The Replacement CIC Agreements generally provide
benefits in the event of a change in control of Gentiva if the
NEO's employment is terminated by Gentiva not for cause or by
the NEO for good reason and the termination is within three
years after a change in control, or if the NEO is terminated
by Gentiva without cause within one year before a change in
control, if in connection with the change in control. The
Replacement CIC Agreements expand the definition of a for
"cause" termination of the NEO by Gentiva to include
conviction of the NEO for a felony and any act by the NEO of
willful fraud, dishonesty or moral turpitude (in addition to
the NEO's willful failure to substantially perform duties and
the NEO's willful conduct that is demonstrably and
34
materially injurious to Gentiva, as provided under the
existing agreements). In addition, the Replacement CIC
Agreements modify the definition of termination of employment
by the NEO for "good reason" in several respects. The existing
agreements permit termination for good reason upon reduction
of base salary (other than a general salary reduction for
salaried employees of not more than 10%), relocation more than
50 miles, reduction in employee benefits from those in effect
prior to the change in control except where there is a de
minimis effect on the NEO, assignment of inconsistent duties,
failure of a successor to assume the agreement, or a
termination by Gentiva without cause that does not satisfy
certain notice provisions. The Replacement CIC Agreements
modify these criteria to increase the maximum salary reduction
permitted without allowing termination for good reason to 20%,
decrease the relocation limit to 40 miles, and consider any
reduction of benefit plans on an aggregate basis, with no good
reason occurring if there is less than 10% reduction in
aggregate benefits.
Benefits conferred under the Replacement CIC
Agreements generally include a cash payment equal to two times
the sum of the NEO's annual base salary and the higher of (x)
the NEO's target annual bonus for the year that includes the
date of the NEO's termination of employment or (y) the average
annual bonus of the NEO for the three prior years (existing
agreements provide for target annual bonus for the year of
termination or the year of the change in control, with no
averaging), as well as continued employee benefits for two
years following such termination of employment or until the
NEO obtains comparable benefits from another employer. Ms.
Morrisey Gabriel's benefits under her existing agreement
reflect one year's salary, bonus and benefits, and are
increased to two years under her Replacement CIC Agreement.
The NEOs' existing agreements also provide for immediate
vesting of any stock options held by the NEO, extension of the
options' exercise period for up to one year after termination
of employment, and full vesting of retirement and deferred
compensation benefits. The Replacement CIC Agreements expand
this provision to provide immediate vesting of all
equity-based compensation.
As provided under the existing agreements, the
Replacement CIC Agreements provide that under certain
circumstances the NEO's benefits could be reduced in order to
avoid excise taxes, and Gentiva will pay an NEO's legal fees
if he or she prevails in a dispute with Gentiva relating to
the agreement. In addition, the Replacement CIC Agreements
provide that Gentiva and the NEO will negotiate in good faith
to make any changes to the agreements needed to comply with
Section 409A of the Code and regulations issued thereunder.
The foregoing description of the Replacement CIC
Agreements, as amended and restated, is qualified in its
entirety by reference to the applicable provisions of the form
of Amended and Restated Change in Control Agreement with each
of the NEOs as filed as Exhibit 10.6 hereto.
35
Item 6. Exhibits
---------
Exhibit Number Description
-------------- -----------
3.1 Amended and Restated Certificate of Incorporation of
Company. (1)
3.2 Certificate of Correction to Certificate of
Incorporation, filed with the Delaware Secretary of
State on July 1, 2002. (2)
3.3 Amended and Restated By-Laws of Company. (2)
4.1 Specimen of common stock. (4)
4.2 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock. (1)
4.3 Form of Certificate of Designation of Series A
Cumulative Non-Voting Redeemable Preferred Stock. (3)
10.1 Fifth Amendment dated April 4, 2005 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.*
10.2 Executive Officers Bonus Plan, as amended. (5)+
10.3 Employee Stock Purchase Plan, as amended. (6)+
10.4 Summary Sheet of Company Compensation to Non-Employee
Directors, effective May 6, 2005.*+
10.5 Amendment No.1 to Stock & Deferred Compensation Plan
for Non-Employee Directors, as amended and restated as
of January 1, 2004.*+
10.6 Form of Amended and Restated Change in Control
Agreement with each of Vernon A. Perry, Jr., John R.
Potapchuk, Robert Creamer and Mary Morrisey-Gabriel.*+
31.1 Certification of Chief Executive Officer pursuant to
Rule 13a-14(a).*
36
31.2 Certification of Chief Financial Officer pursuant to
Rule 13a-14(a).*
32.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350.*
32.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350.*
-------------
(1) Incorporated herein by reference to Amendment No. 2 to the Registration
Statement of Company on Form S-4 dated January 19, 2000 (File No.
333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for the
quarterly period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the Registration
Statement of Company on Form S-4 dated February 4, 2000 (File No.
333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the Registration
Statement of Company on Form S-4 dated February 9, 2000 (File No.
333-88663).
(5) Incorporated herein by reference to Appendix A to definitive Proxy
Statement of Company dated April 6, 2005.
(6) Incorporated herein by reference to Appendix B to definitive Proxy
Statement of Company dated April 6, 2005.
* Filed herewith
+ Management contract or compensatory plan or arrangement
37
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: May 12, 2005 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: May 12, 2005 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
38