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 March 28, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
Gentiva Health Services, Inc.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-4335801
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, as
of April 28, 2004, was 25,268,741.
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) - March
28, 2004 and December 28, 2003 3
Consolidated Statements of Income (Unaudited) -
Three Months Ended March 28, 2004 and March 30,
2003 4
Consolidated Statements of Cash Flows (Unaudited)
- Three Months Ended March 28, 2004 and March 30,
2003 5
Notes to Consolidated Financial Statements
(Unaudited) 6-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-24
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 24
Item 4. Controls and Procedures 24-25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities 26
Item 3. Defaults Upon Senior Securities 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26-27
Item 6. Exhibits and Reports on Form 8-K 27-28
SIGNATURES 29
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
March 28, 2004 December 28, 2003
----------------- -----------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 111,110 $ 100,013
Short-term investments -- 10,000
Receivables, less allowance for doubtful accounts of
$8,523 and $7,936 in 2004 and 2003, respectively 138,127 132,998
Deferred tax assets 22,311 26,464
Prepaid expenses and other current assets 8,275 6,524
----------------- -----------------
Total current assets 279,823 275,999
Fixed assets, net 18,082 15,135
Deferred tax assets, net 27,006 28,025
Other assets 16,447 15,929
----------------- -----------------
Total assets $ 341,358 $ 335,088
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 19,559 $ 16,079
Payroll and related taxes 12,120 12,932
Medicare liabilities 13,178 12,736
Cost of claims incurred but not reported 27,897 28,525
Obligations under insurance programs 36,708 37,200
Other accrued expenses 30,473 32,230
----------------- -----------------
Total current liabilities 139,935 139,702
Other liabilities 19,805 18,207
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 25,309,160 and
25,598,301 shares in 2004 and 2003, respectively 2,531 2,560
Additional paid-in capital 265,706 270,468
Accumulated deficit (86,619) (95,849)
----------------- -----------------
Total shareholders' equity 181,618 177,179
----------------- -----------------
Total liabilities and shareholders' equity $ 341,358 $ 335,088
================= =================
See notes to consolidated financial statements.
3
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended
--------------------------------------
March 28, 2004 March 30, 2003
----------------- -----------------
Net revenues $ 213,905 $ 202,016
Cost of services sold 130,643 133,250
----------------- -----------------
Gross profit 83,262 68,766
Selling, general and administrative expenses (66,369) (61,253)
Depreciation and amortization (1,845) (1,745)
----------------- -----------------
Operating income 15,048 5,768
Interest income, net 82 43
----------------- -----------------
Income before income taxes 15,130 5,811
Income tax expense 5,900 610
----------------- -----------------
Net income $ 9,230 $ 5,201
================= =================
Net income per common share:
Basic $ 0.36 $ 0.19
================= =================
Diluted $ 0.34 $ 0.19
================= =================
Weighted average shares outstanding:
Basic 25,542 26,696
================= =================
Diluted 27,084 27,752
================= =================
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Three Months Ended
------------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
OPERATING ACTIVITIES:
Net income $ 9,230 $ 5,201
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 1,845 1,745
Provision for doubtful accounts 2,047 2,031
Gain on sale / disposal of businesses and fixed assets -- (191)
Deferred income tax expense 5,172 --
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable (7,176) (5,359)
Prepaid expenses and other current assets (1,743) 3,723
Current liabilities (8) 518
Other, net (13) (5)
---------------- ----------------
Net cash provided by operating activities 9,354 7,663
---------------- ----------------
INVESTING ACTIVITIES:
Purchase of fixed assets (3,370) (2,487)
Proceeds from sale of assets / business -- 200
Acquisition of businesses -- (1,300)
Purchase of short-term investments -- (10,000)
Maturities of short-term investments 10,000 --
---------------- ----------------
Net cash provided by (used in) investing activities 6,630 (13,587)
---------------- ----------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,039 714
Repurchases of common stock (5,830) --
Repayment of capital lease obligations (96) --
---------------- ----------------
Net cash (used in) provided by financing activities (4,887) 714
---------------- ----------------
Net change in cash, cash equivalents and restricted cash 11,097 (5,210)
Cash, cash equivalents and restricted cash at beginning of period 100,013 101,241
---------------- ----------------
Cash, cash equivalents and restricted cash at end of period $ 111,110 $ 96,031
================ ================
Supplemental Schedule of Non Cash Investing and Financing Activities
Fixed assets acquired under capital lease $ 1,443 $ --
================ ================
See notes to consolidated financial statements.
5
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Background and Basis of Presentation
------------------------------------
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides
home health services throughout most of the United States principally through
its Gentiva(R) Health Services and CareCentrix(R) brands ("Home Health Services
business").
The accompanying interim consolidated financial statements are
unaudited, but have been prepared by Gentiva pursuant to the rules and
regulations of the Securities and Exchange Commission and, in the opinion of
management, include all adjustments necessary for a fair presentation of results
of operations, financial position and cash flows for each period presented.
Results for interim periods are not necessarily indicative of results for a full
year. The year-end balance sheet data was derived from audited financial
statements, but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
2. New Accounting Standards
------------------------
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest Entities," as
revised in December 2003 ("FIN 46"). FIN 46 provides guidance on the
identification of entities for which control is achieved through means other
than through voting rights, known as "variable interest entities" ("VIEs"), and
requires a VIE to be consolidated by a company if that company is subject to a
majority of the risk of loss from the VIE's activities or entitled to receive a
majority of the entity's residual returns or both. Historically, entities
generally were not consolidated unless the entity was controlled through voting
interests. FIN 46 also requires disclosures about VIEs that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 will apply to VIEs as of March 28, 2004 for
the Company. As of March 28, 2004, the Company did not have any VIE subject to
the consolidation requirements of FIN 46.
3. 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 U.S. Provider Reimbursement Review Board ("PRRB") related to the
reopening of all of its 1997 cost reports (see Note 9), net of a revenue
adjustment of $1 million to reflect an estimated repayment to Medicare in
connection with services rendered to certain patients since the inception of the
Prospective Payment Reimbursement System ("PPS") in October 2000. The Centers
for Medicare & Medicaid Services has recently determined that homecare providers
should have received lower reimbursements for certain services rendered to
beneficiaries discharged from inpatient hospitals within fourteen days
immediately preceding admission to home healthcare.
6
4. 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):
Three Months Ended
-----------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
Net income $ 9,230 $ 5,201
================================================================================
Basic weighted average common
shares outstanding 25,542 26,696
Shares issuable upon the assumed exercise of
stock options and in connection with the
employee stock purchase plan using the
treasury stock method 1,542 1,056
---------------- ----------------
Diluted weighted average common
shares outstanding 27,084 27,752
---------------- ----------------
================================================================================
Net income per common share:
Basic $ 0.36 $ 0.19
Diluted $ 0.34 $ 0.19
================================================================================
5. Acquisition
-----------
Acquisition of First Home Care Business
On March 28, 2003, the Company completed the purchase of certain assets
and the business of First Home Care - Houston, Inc. and FHCH, Inc. pursuant to
an asset purchase agreement for cash consideration of $1.3 million. The purchase
price allocation consisted of goodwill of $1.2 million and assets and other
intangibles of $0.1 million.
6. Revolving Credit Facility, Restricted Cash and Debt
---------------------------------------------------
The Company's credit facility, which was entered into on June 13, 2002,
as amended, as described below, provides up to $55 million in borrowings,
including up to $40 million which is available for letters of credit. The
Company may borrow up to a maximum of 80 percent of the net amount of eligible
accounts receivable, as defined, less any reasonable and customary reserves, as
defined, required by the lender. Borrowing availability under the credit
facility was reduced by $10 million until such quarter in 2003 in which the
trailing 12 month EBITDA, excluding certain restructuring costs and special
charges, as defined, exceeded $15 million. As of March 30, 2003, the trailing 12
month EBITDA threshold was achieved and the availability restriction lifted,
effective June 1, 2003.
7
At the Company's option, the interest rate on borrowings under the
credit facility was based on the London Interbank Offered Rates (LIBOR) plus
3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the
Company was required to pay a fee equal to 2.5 percent per annum of the
aggregate face amount of outstanding letters of credit. Beginning in 2003, the
applicable margins for the LIBOR borrowing, prime rate borrowing and letter of
credit fees decreased by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25
percent, respectively, provided that the Company's trailing 12 month EBITDA,
excluding certain restructuring costs and special charges, as defined, is in
excess of $20 million. The Company was also subject to an unused line fee equal
to 0.50 percent per annum of the average daily difference between the total
revolving credit facility amount and the total outstanding borrowings and
letters of credit. Beginning in 2003, the unused credit line fee decreased to
0.375 percent provided the minimum EBITDA target described above is achieved.
The higher margins and fees are subject to reinstatement in the event that the
Company's trailing 12 month EBITDA falls below $20 million. The Company met this
minimum EBITDA requirement as of March 30, 2003, with the rate reduction
effective June 1, 2003, and continued to meet this requirement as of March 28,
2004.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include 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, the Company's credit facility was amended to make covenants relating to
acquisitions and stock repurchases less restrictive, provided that the Company
maintains minimum excess aggregate liquidity, as defined in the amendment, equal
to at least $60 million and to allow for the disposition of certain assets. As
of March 28, 2004, the Company was in compliance with the covenants in the
credit facility, as amended.
The credit facility further provides that if the agreement is
terminated for any reason, the Company must pay an early termination fee equal
to $275,000 if the facility is terminated during the period from June 13, 2003
to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004
to June 12, 2005. There is no fee for termination of the facility subsequent to
June 12, 2005. Loans under the credit facility are collateralized by all of the
Company's tangible and intangible personal property, other than equipment.
Total outstanding letters of credit were approximately $20.7 million as
of March 28, 2004 and $20.8 million at December 28, 2003. The letters of credit,
which expire one year from date of issuance, were issued to guarantee payments
under the Company's workers compensation program and for certain other
commitments. There were no borrowings outstanding under the credit facility as
of March 28, 2004.
The Company has entered into a trust agreement and segregated $21.8
million of cash funds in a trust account for use as collateral under the
Company's insurance programs. These funds are reported as restricted cash in the
accompanying consolidated balance sheets. Interest on the funds in the trust
account accrues to the Company. The Company, at its option,
8
may access the cash funds in the trust account by providing equivalent amounts
of alternative security, including letters of credit and surety bonds.
During the first quarter of fiscal 2004, the Company commenced
implementation of a five year capital lease for certain equipment. The Company
reported capital lease assets of approximately $1.4 million in fixed assets,
net, current obligation of capital leases of $0.3 million in other accrued
expenses and long-term capital lease obligations of $1.1 million in other
liabilities, in the accompanying consolidated balance sheet as of March 28,
2004.
7. Shareholders' Equity
--------------------
Changes in shareholders' equity for the three months ended March 28,
2004 were as follows (in thousands):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------------ ------------ ------------ ------------
Balance at December 28, 2003 $ 2,560 $ 270,468 $ (95,849) $ 177,179
Comprehensive income:
Net income -- -- 9,230 9,230
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (139,106 shares) 14 1,025 -- 1,039
Repurchase of common stock at cost (428,247 shares) (43) (5,787) -- (5,830)
------------ ------------ ------------ ------------
Balance at March 28, 2004 $ 2,531 $ 265,706 $ (86,619) $ 181,618
============ ============ ============ ============
Comprehensive income amounted to $9.2 million and $5.2 million for the
first quarter of fiscal 2004 and fiscal 2003, respectively.
On May 16, 2003 and August 7, 2003, the Company's Board of Directors
authorized two stock repurchase programs under which the Company could
repurchase and formally retire up to an aggregate of 2,500,000 shares of its
outstanding common stock. The repurchases will occur periodically in the open
market or through privately negotiated transactions based on market conditions
and other factors. As of July 23, 2003, the Company had completed the purchase
of 1,000,000 shares authorized under the first stock repurchase program. 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 March 28, 2004, the Company had repurchased
an aggregate of 1,866,711 shares at an average cost of $10.85 per share and a
total cost of approximately $20.3 million.
8. Stock Options
-------------
The Company has chosen to adopt the disclosure only provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting
for Stock-Based Compensa-
9
tion - Transition and Disclosure - an amendment of FASB Statement No. 123"
("SFAS 148"), and continues to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations. Under this approach, the imputed cost of stock option grants
and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP")
is disclosed, based on the vesting provisions of the individual grants, but not
charged to expense.
The weighted average fair values of the Company's stock options granted
during the first quarter of fiscal 2004 and fiscal 2003, calculated using the
Black-Scholes option-pricing model, and other assumptions are as follows:
Three Months Ended
-------------------------------------
March 28, 2004 March 30, 2003
-------------- --------------
Risk-free interest rate 3.36% 3.51%
Expected volatility 60% 60%
Expected life 6 years 6 years
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
Weighted average fair value
of options granted $ 7.63 $ 5.24
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 2004 and fiscal 2003 are as follows:
Three Months Ended
-------------------------------------
March 28, 2004 March 30, 2003
-------------- --------------
Risk-free interest rate 1.02% 1.25%
Expected volatility 28% 32%
Expected life 0.5 years 0.5 years
Expected dividend yield 0% 0%
The following table presents net income and basic and diluted income
per common share had the Company elected to recognize compensation cost based on
the fair value at the grant dates for stock option awards and discounts for
stock purchases under the Company's ESPP, consistent with the method prescribed
by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts):
10
Three Months Ended
------------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
Net income - as reported $ 9,230 $ 5,201
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (695) (565)
---------------- ----------------
Net income - pro forma $ 8,535 $ 4,636
================ ================
Basic income per share - as reported $ 0.36 $ 0.19
Basic income per share - pro forma $ 0.33 $ 0.17
Diluted income per share - as reported $ 0.34 $ 0.19
Diluted income per share - pro forma $ 0.32 $ 0.17
During the first quarter of fiscal 2004, the Company granted 1,022,100
stock options to officers, directors and employees under its existing option
plans at an average exercise price of $12.93. At March 28, 2004, there were
3,658,429 options outstanding at a weighted average exercise price of $8.16 per
share.
9. Legal Matters
-------------
Litigation
In addition to the matters referenced in this Note 9, the Company is
party to certain legal actions arising in the ordinary course of business,
including legal actions arising out of services rendered by its various
operations, personal injury and employment disputes.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002, and discovery has now
commenced. The Company has denied the allegations of wrongdoing in the complaint
and is defending itself vigorously in this matter. On May 19, 2003, the Company
filed a motion for summary judgment on the issue of liability. On February 6,
2004, the court granted partial summary judgment for the Company, dismissing two
of the three claims alleged under the False Claims Act and denying summary
judgment for the Company on the wrongful termination claim. The parties are
completing discovery; therefore, the Company cannot determine a range of
damages, if any, at this time.
11
Government Matters
PRRB Appeal
-----------
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System established through the Balanced
Budget Act of 1997. These costs were reported in annual cost reports, which were
filed with the Centers for Medicare & Medicaid Services ("CMS"), and were
subject to audit by the fiscal intermediary engaged by CMS. In connection with
the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary
made certain audit adjustments related to the methodology used by the Company to
allocate a portion of its residual overhead costs. The Company filed cost
reports for years subsequent to 1997 using the fiscal intermediary's
methodology. The Company believed its methodology used to allocate such overhead
costs was accurate and consistent with past practice accepted by the fiscal
intermediary; as such, the Company filed appeals with the Provider Reimbursement
Review Board ("PRRB") concerning this issue with respect to cost reports for the
years 1997, 1998 and 1999. The Company's consolidated financial statements for
the years 1997, 1998 and 1999 had reflected use of the methodology mandated by
the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed
an Administrative Resolution relating to the issues covered by the appeals
pending before the PRRB. Under the terms of the Administrative Resolution, the
fiscal intermediary agreed to reopen and adjust the Company's cost reports for
the years 1997, 1998 and 1999 using a modified version of the methodology used
by the Company prior to 1997. This modified methodology will also be applied to
cost reports for the year 2000, which are currently under audit. The
Administrative Resolution required that the process to (i) reopen all 1997 cost
reports, (ii) determine the adjustments to allowable costs through the issuance
of Notices of Program Reimbursement ("NPRs") and (iii) make appropriate payments
to the Company, be completed in early 2004. Cost reports relating to years
subsequent to 1997 will be reopened after the process for the 1997 cost reports
is completed.
On February 17, 2004, the fiscal intermediary notified the Company that
it had completed the reopening of all 1997 cost reports and determined that the
adjustment to allowable costs for that year was $9.0 million. As of March 28,
2004, the Company had received the funds and recorded the adjustment of $9.0
million as net revenues for the first quarter of fiscal 2004.
Although the Company believes that it will likely recover additional
funds as a result of applying the modified methodology discussed above to cost
reports subsequent to 1997, the settlement amounts cannot be specifically
determined until the reopening or audit of each year's cost reports is
completed. This is not expected to occur until the second half of fiscal 2004 or
fiscal 2005. However, in view of changes in reimbursement and the Company's
operations in periods subsequent to 1997, it is likely that any future
recoveries relating to any cost report year from 1998 to 2000 will be
significantly less than the 1997 settlement.
12
Subpoena
--------
On April 17, 2003, the Company received a subpoena from the Department
of Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as, the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG pursuant to its subpoena and similarly intends to cooperate
fully with the DOJ subpoena, as well as any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint
against the Company.
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")
have agreed to indemnify each other for breaches of representations and
warranties of such party or the non-fulfillment of any covenant or agreement of
such party in connection with the sale of the Company's Specialty Pharmaceutical
Services ("SPS") business to Accredo on June 13, 2002. The Company has also
agreed to indemnify Accredo for the retained liabilities and for tax liabilities
and Accredo has agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the acquisition. The
representations and warranties generally survive for the period of two years
after the closing of the acquisition, which occurred on June 13, 2002, except
that:
o representations and warranties related to health care compliance
survive for three years after the closing of the acquisition;
o representations and warranties related to title of the assets and
sufficiency of assets and employees survive for the applicable
statute of limitations period; and
o representations and warranties related to tax matters survive
until thirty days after the expiration of the applicable tax
statute of limitations period, including any extensions of the
applicable period, subject to certain exceptions.
Accredo and the Company generally may recover indemnification for a
breach of a representation or warranty only to the extent a party's claim
exceeds $1 million for any individual claim, or exceeds $5 million in the
aggregate, subject to certain conditions and only up to a maximum amount of $100
million.
13
These indemnification rights are the exclusive remedy from and after
the closing of the acquisition, except for the right to seek specific
performance of any of the agreements in the related asset purchase agreement, in
any case where a party is guilty of fraud in connection with the acquisition,
and with respect to tax liabilities and obligations.
On May 6, 2003, the Company received correspondence from Accredo giving
the Company notice of Accredo's indemnification rights for any breach under the
asset purchase agreement related to the adequacy of the accounts receivable
reserves in accordance with section 8.3 of the asset purchase agreement;
however, no breach of a representation or warranty was asserted against the
Company in the correspondence.
10. Income Taxes
------------
The Company recorded federal and state income taxes of approximately
$5.9 million for the first quarter ended March 28, 2004, 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 percent is due primarily to state taxes.
State income taxes and federal alternative minimum taxes of $0.6
million were recorded for the first quarter of fiscal 2003. The Company's
effective tax rate of approximately 10.5 percent was lower than the statutory
income tax rate due to the impact of a valuation allowance offsetting the
realization of tax benefits associated with the net operating loss carryforward
and other deferred tax assets.
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
Three Months Ended
------------------------------------
March 28, 2004 December 28, 2003
---------------- ----------------
Deferred tax assets - current
Reserves and allowances $ 20,921 $ 21,290
Net operating loss and other carryforwards (Federal and state) 998 4,966
Other 392 208
---------------- ----------------
Total current deferred tax assets 22,311 26,464
Deferred tax assets - non-current
Intangible assets 28,264 29,085
Depreciation 81 23
Capitalized software (1,339) (1,083)
---------------- ----------------
Total non-current deferred tax assets (net) 27,006 28,025
Net deferred tax assets $ 49,317 $ 54,489
================ ================
As of March 28, 2004, the Company's tax credit carryforwards for income
tax purposes were approximately $1.0 million. Net operating losses of
approximately $11 million were utilized in the first quarter of fiscal 2004 to
offset taxable income.
14
11. Subsequent Event
----------------
On March 30, 2004, the Company sold its minority interest in a home
care nursing services business in Canada. The business had been acquired as
partial consideration for the sale of the Company's Canadian operations in the
fourth quarter of fiscal 2000. In connection with the sale of the minority
interest, the Company received cash proceeds of $4.1 million and will record a
gain on sale of approximately $0.9 million in the second quarter of fiscal 2004.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
-----------------------------------------------------------
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects," "assumes," "trends" and similar
expressions, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
based upon the Company's current plans, expectations and projections about
future events. However, such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for health care reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets the Company operates in;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue associated
with major payor sources;
o ability of customers to pay for services;
o a material shift in utilization within capitated agreements; and
o changes in estimates and judgments associated with critical
accounting policies.
Forward-looking statements are found throughout "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Quarterly Report on Form 10-Q. The reader should not place
undue reliance on forward-looking statements, which speak only as of the date of
this report. Except as required under the federal securities laws and the rules
and regulations of the Securities and Exchange Commission ("SEC"), the Company
does not have any intention or obligation to publicly release any revisions to
forward-looking statements to reflect unforeseen or other events after the date
of this
15
report. The Company has provided a detailed discussion of risk factors in its
2003 Annual Report on Form 10-K and various filings with the SEC. The reader is
encouraged to review these risk factors and filings.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's results of operations and financial position. This discussion and
analysis should be read in conjunction with the Company's consolidated financial
statements and related notes included elsewhere in this report.
General
- -------
The Company's results of operations are impacted by various
regulations and other matters that are implemented from time to time in its
industry, some of which are described in the Company's Annual Report on Form
10-K for the fiscal year ended December 28, 2003 and in other filings with the
SEC.
For a discussion of the Company's critical accounting policies, please
refer to Note 2 of Notes to Consolidated Financial Statements in the Company's
2003 Annual Report on Form 10-K.
Overview
- --------
Gentiva is the nation's largest provider of comprehensive home health
services, based on the amount of revenues derived from the provision of skilled
home nursing services to patients. The Company generates revenues and profits
primarily by providing patients with direct home health care services, including
specialty services and neuro-rehabilitation services; by delivering national,
regional and local administrative services to managed care organizations and
self-insured employers; and by providing home health care consulting services to
independent and hospital-based home health agencies.
Gentiva's direct home health services to patients include skilled
nursing; physical, occupational, speech and neuro-rehabilitation therapy
services; social work; nutrition; disease management education and help with
daily living activities, as well as other therapies and services. The Company's
specialty services involve physical therapist-led orthopedic rehabilitation
services for patients who have had joint replacements or other major orthopedic
surgery, and therapies for patients with balance issues who are prone to injury
or immobility as a result of falling. Gentiva is also piloting similar specialty
programs for cardiopulmonary and wound care services that are expected to be
launched during 2004. The Company's neuro-rehabilitation services, known as
Rehab Without Walls(R), provide home and community-based therapies for patients
with traumatic brain injury, cerebrovascular accident injury and acquired brain
injury, as well as a number of other complex rehabilitation cases.
Gentiva's national, regional and local administrative services for
managed care organizations and self-insured employers -- provided through its
CareCentrix(R) business unit -- include central access, care coordination,
utilization management, and claims processing. The Company is capable of
coordinating a wide range of home care services, including traditional
16
home nursing, chronic and acute infusion therapies, and durable medical and
respiratory equipment, to member patients of these managed care organizations.
Consulting services to home health agencies are delivered primarily by
the Company's Gentiva Business Services unit. These services include billing and
collection activities, web-based caregiver training and credentialing, on-site
agency support and consulting, operational support, and individualized
strategies for reduction of days sales outstanding.
The Company's services can be delivered across the United States 24
hours a day, 7 days a week. Direct home health services to patients are
delivered through more than 350 owned and operated direct service delivery units
in approximately 250 locations in 35 states. Administrative services for managed
care organizations and self-insured employers are coordinated within four
regional coordination centers. Home care services provided to member patients of
these organizations are delivered through Company-owned and third-party
credentialed provider locations covering the continental United States.
Results of Operations
- ---------------------
Revenues
Net revenues increased by $11.9 million, or 5.9 percent to
$213.9 million for the quarter ended March 28, 2004 as compared to the quarter
ended March 30, 2003. Revenue growth in the first quarter of fiscal 2004 was
reported in Medicare, while revenue from Medicaid and Other Government and
Commercial Insurance and Other payor categories decreased in the first quarter
of fiscal 2004.
For the quarter ended March 28, 2004 as compared to the quarter ended
March 30, 2003, net revenues from Medicare increased by $20.0 million or 47.1
percent to $62.6 million, Commercial Insurance and Other payors decreased by
$5.0 million or 4.2 percent to $112.1 million, and Medicaid and Other Government
payors decreased by $3.2 million or 7.5 percent to $39.2 million.
Medicare revenues were impacted by two special items which contributed
$8.0 million, or 18.8 percent of the Medicare revenue growth, in the first
quarter of fiscal 2004. 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. The Centers for
Medicare & Medicaid Services has recently determined that homecare providers
should have received lower reimbursements for certain services rendered to
beneficiaries discharged from inpatient hospitals within fourteen days
immediately preceding admission to home healthcare.
Medicare revenue growth for the first quarter of fiscal 2004 was also
fueled by increases in admissions of approximately 20 percent, the 3.3 percent
market basket rate increase that became effective for patients on service on or
after October 1, 2003, as well as various operational and clinical process
enhancements. The market basket rate increase represented $1.4 million in
incremental revenue in the first quarter of fiscal 2004.
17
Commercial Insurance and Other revenues decreased $5.0 million or 4.2
percent for the first quarter of 2004, primarily due to a decline in revenue
derived from CIGNA Health Corporation ("CIGNA"). The CIGNA revenue decline of
$12.3 million, or 16.0 percent, compared to the first quarter of fiscal 2003,
was caused by a reduction in the number of enrolled CIGNA members in 2004, and
lower revenue and related costs resulting from a change in the Company's
delivery model of certain home medical equipment ("HME") products and services.
The revenue decrease was partially offset by an increase of $7.3 million, or
18.1 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.
Medicaid and Other Government revenues decreased for the three months
ended March 28, 2004 due to revenue reductions related to more restrictive
eligibility requirements, lower authorized services per beneficiary and lower
reimbursement rates in various states in which the Company operates, as well as
the Company's decision to reduce its participation in certain low-margin, hourly
Medicaid and state and county programs. Revenues relating to hourly and
intermittent care Medicaid and state and county programs decreased $2.7 million
and $0.5 million, respectively, as compared to the first quarter of fiscal year
2003.
Gross Profit
Gross profit was approximately $83.3 million for the first quarter
ended March 28, 2004 and $68.8 million for the quarter ended March 30, 2003. As
a percentage of net revenues, gross profit margins increased from 34.0 percent
for the quarter ended March 30, 2003, to 38.9 percent for the quarter ended
March 28, 2004.
During the first quarter of fiscal 2004, the two special items had a
net positive impact of 2.3 percent on gross profit margins. The remaining
increase in gross margin percentage was due to improved rates in both Medicare
and managed care contracts, as well as a favorable change in business mix in
which volume growth of Medicare business more that offset the anticipated
revenue loss in certain low-margin Medicaid and local government programs, as
well as in the CIGNA business.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation
and amortization, increased $5.2 million to $68.2 million for the quarter ended
March 28, 2004, as compared to $63.0 million for the quarter ended March 30,
2003.
The increase for the first quarter of fiscal 2004 related to (i)
increases in field operating and administrative costs to service incremental
revenues, including revenues from the Company's specialty programs ($2.6
million), (ii) increased sales and clinical care coordination expenses ($1.1
million) and (iii) incremental costs associated with the retooling of the
Company's CareCentrix network of HME providers and various information
technology strategic initiatives ($1.5 million).
18
Interest Income, Net
Net interest income was approximately $0.1 million for the quarter
ended March 28, 2004, and $43 thousand for the quarter ended March 30, 2003. Net
interest income included interest income of approximately $0.4 million for the
first quarter of fiscal 2004 and $0.3 million for the first quarter of fiscal
2003, 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
$5.9 million for the first quarter ended March 28, 2004, 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 percent is due primarily to state taxes.
State income taxes and federal alternative minimum taxes of $0.6
million were recorded for the first quarter of fiscal 2003. The Company's
effective tax rate of approximately 10.5 percent was lower than the statutory
income tax rate due to the impact of a valuation allowance offsetting the
realization of tax benefits associated with the net operating loss carryforward
and other deferred tax assets.
Net Income
For the first quarter of fiscal 2004, net income was $9.2 million, or
$0.34 per diluted share, compared with net income of $5.2 million, or $0.19 per
diluted share, for the corresponding period of 2003. 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. Net income for the first quarter of fiscal 2003
reflected the positive impact of a lower effective income tax rate of 10.5
percent.
Liquidity and Capital Resources
- -------------------------------
Liquidity
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payor arrangements. Net cash provided by operating
activities for the quarter ended March 28, 2004 was $9.4 million and was used to
fund capital expenditures of $3.4 million and repurchase shares of the Company's
common stock of $5.8 million during the quarter.
Days Sales Outstanding ("DSO") as of March 28, 2004 remained flat from
December 28, 2003 at 59 days. Working capital at March 28, 2004 was
approximately $140 million, an increase of $4 million as compared to
approximately $136 million at December 28, 2003, primarily due to:
19
o a $1 million increase in cash, cash equivalents, restricted cash
and investments;
o a $5 million increase in accounts receivable;
o a $2 million increase in prepaid expenses and other assets; and
o a $4 million decrease in deferred tax assets.
The Company participates in the Medicare, Medicaid and other federal
and state healthcare programs. Revenue mix by major payor classifications are as
follows:
Three Months Ended
------------------------------------
March 28, 2004 March 30, 2003
---------------- ----------------
Medicare 29% 21%
Medicaid and Other Government 18 21
Commercial Insurance and Other 53 58
---------------- ----------------
100% 100%
================ ================
On October 1, 2003, a 3.3 percent market basket rate increase became
effective for patients on service on or after October 1, 2003. Effective April
1, 2004, this increase was reduced by 0.8 percent to 2.5 percent for open
episodes of care on or after April 1, 2004. In addition, Medicare reimbursement
was increased 5 percent for the rural add-on related to home health services
performed in specifically defined rural areas of the country, effective April 1,
2004. These two reimbursement changes are not expected to have a material effect
on Company results for the remainder of 2004.
There are certain standards and regulations that the Company must
adhere to in order to continue to participate in these programs, including
compliance with the Company's corporate integrity agreement. As part of these
standards and regulations, the Company is subject to periodic audits,
examinations and investigations conducted by, or at the direction of,
governmental investigatory and oversight agencies. Periodic and random audits
conducted or directed by these agencies could result in a delay or adjustment to
the amount of reimbursements received under these programs. Violation of the
applicable federal and state health care regulations can result in the Company's
exclusion from participating in these programs and can subject the Company to
substantial civil and/or criminal penalties. The Company believes it is
currently in compliance with these standards and regulations.
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 2004, CIGNA accounted for approximately 30 percent of the
Company's total net revenues compared to approximately 38 percent for the first
quarter of fiscal 2003. The Company has extended its relationship with CIGNA by
entering into a new national home health care contract, effective January 1,
2004. The term of the new contract extends to December 31, 2006, and
automatically renews thereafter for additional one year terms unless terminated.
Under the termination provisions, CIGNA has the right to terminate the agreement
on December 31, 2005 if it provides 90 days
20
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
payors were approximately 12 percent of total net revenues for the first quarter
of fiscal 2004 and 16 percent for the first quarter of fiscal 2003.
Fee-for-service contracts with other commercial payors are traditionally one
year in term and renewable automatically on an annual basis, unless terminated
by either party.
The Company's credit facility, which was amended on August 7, 2003 as
described below, provides up to $55 million in borrowings, including up to $40
million which is available for letters of credit. The Company may borrow up to a
maximum of 80 percent of the net amount of eligible accounts receivable, as
defined, less any reasonable and customary reserves, as defined, required by the
lender. Borrowing availability under the credit facility was reduced by $10
million until such quarter in 2003 in which the trailing 12 month EBITDA,
excluding certain restructuring costs and special charges recorded by the
Company during fiscal 2002, as defined, exceeded $15 million. As of March 30,
2003, the trailing 12 months EBITDA threshold was achieved and the availability
restriction lifted, effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the
credit facility was based on the London Interbank Offered Rates (LIBOR) plus
3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the
Company was required to pay a fee equal to 2.5 percent per annum of the
aggregate face amount of outstanding letters of credit. Beginning in 2003, the
applicable margins for the LIBOR borrowing, prime rate borrowing and letter of
credit fees decreased by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25
percent, respectively, provided that the Company's trailing 12 month EBITDA,
excluding certain restructuring costs and special charges, as defined, is in
excess of $20 million. The Company was also subject to an unused line fee equal
to 0.50 percent per annum of the average daily difference between the total
revolving credit facility amount, as defined, and the total outstanding
borrowings and letters of credit. Beginning in 2003, the unused credit line fee
decreased to 0.375 percent provided the minimum EBITDA target described above is
achieved. The higher margins and fees are subject to reinstatement in the event
that the Company's trailing 12 month EBITDA falls below $20 million. The Company
met this minimum EBITDA requirement as of March 30, 2003, with the rate
reduction effective June 1, 2003 and continued to meet this requirement as of
March 28, 2004.
Total outstanding letters of credit were $20.7 million as of March 28,
2004. The letters of credit, which expire one year from date of issuance, were
issued to guarantee payments under the Company's workers compensation program
and for certain other commitments. As of March 28, 2004, there were no
borrowings outstanding under the credit facility and the Company had borrowing
capacity under the credit facility, after adjusting for outstanding letters of
credit, of approximately $34 million.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum
21
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, the credit facility
was amended to make covenants relating to acquisitions and stock repurchases
less restrictive, provided that the Company maintains minimum excess aggregate
liquidity, as defined in the amendment, equal to at least $60 million and to
allow for the disposition of certain assets. As of March 28, 2004, the Company
was in compliance with the covenants in the credit facility, as amended.
The credit facility further provides that if the agreement is
terminated for any reason, the Company must pay an early termination fee equal
to $275,000 if the facility is terminated during the period from June 13, 2003
to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004
to June 12, 2005. There is no fee for termination of the facility subsequent to
June 12, 2005. Loans under the credit facility are collateralized by all of the
Company's tangible and intangible personal property, other than equipment.
The credit facility includes provisions, which, if not complied with,
could require early payment by the Company. These include customary default
events, such as failure to comply with financial covenants, insolvency events,
non-payment of scheduled payments, acceleration of other financial obligations
and change in control provisions. In addition, these provisions include an
account obligor, whose accounts are more than 25 percent of all accounts of the
Company over the previous 12-month period, canceling or failing to renew its
contract with the Company and ceasing to recognize the Company as an approved
provider of health care services, or the Company revoking the lending agent's
control over its governmental lockbox accounts. The Company does not have any
trigger events in the credit facility that are tied to changes in its credit
rating or stock price. As of March 28, 2004, the Company was in compliance with
these provisions.
The Company may be subject to workers compensation claims and lawsuits
alleging negligence or other similar legal claims. The Company maintains various
insurance programs to cover this risk but is substantially self-insured for most
of these claims. The Company recognizes its obligations associated with these
programs in the period the claim is incurred. The Company estimates the cost of
both reported claims and claims incurred but not reported, up to specified
deductible limits, based on its own specific historical claims experience and
current enrollment statistics, industry statistics and other information. Such
estimates and the resulting reserves are reviewed and updated periodically.
The Company is responsible for the cost of individual workers
compensation claims and individual professional liability claims up to $500,000
per incident which occurred prior to March 15, 2002 and $1,000,000 per incident
thereafter. The Company also maintains excess liability coverage relating to
professional liability and casualty claims which provides insurance coverage for
individual claims of up to $25,000,000 in excess of the underlying coverage
limits. Payments under the Company's workers compensation program are guaranteed
by letters of credit and segregated restricted cash balances.
22
Capital Expenditures
The Company's capital expenditures for the three months ended March 28,
2004 were $3.4 million, excluding equipment capitalized under capital lease
obligations of $1.4 million, as compared to $2.5 million for the same period in
fiscal 2003. The Company intends to make investments and other expenditures to,
among other things, upgrade its computer technology and system infrastructure
and comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2004 will range between $12.0
million and $13.5 million. Management expects that the Company's capital
expenditure needs will be met through operating cash flow and available cash
reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents and restricted cash of
approximately $111.1 million as of March 28, 2004. The restricted cash relates
to cash funds of $21.8 million that have been segregated in a trust account to
provide additional collateral under the Company's insurance programs. Interest
on the funds in the trust account accrues to the Company. The Company, at its
option, may access the cash funds in the trust account by providing equivalent
amounts of alternative security, including letters of credit and surety bonds.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through June 2005. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
On May 16, 2003 and August 7, 2003, the Company's Board of Directors
authorized two stock repurchase programs under which the Company could
repurchase and formally retire up to an aggregate of 2,500,000 shares of its
outstanding common stock. The repurchases will occur periodically in the open
market or through privately negotiated transactions based on market conditions
and other factors. As of July 23, 2003, the Company had completed the purchase
of 1,000,000 shares authorized under the first stock repurchase program. 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 March 28, 2004, the Company had repurchased
an aggregate of 1,866,711 shares at an average cost of $10.85 per share and a
total cost of approximately $20.3 million. See also Part II, Item 2, of this
Form 10-Q.
Contractual Obligations and Commercial Commitments
At March 28, 2004, 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 March 28, 2004, are as follows (in thousands):
23
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 1,348 264 570 514 --
Operating lease obligations 60,452 19,463 26,085 9,580 5,324
Purchase obligations 505 505 -- -- --
---------------------------------------------------------
Total $ 62,305 $ 20,232 $ 26,655 $ 10,094 $ 5,324
=========================================================
The Company had total letters of credit outstanding under its credit
facility of approximately $20.7 million at March 28, 2004 and $20.8 million at
December 28, 2003. The letters of credit, which expire one year from date of
issuance, are issued to guarantee payments under the Company's workers
compensation program and for certain other commitments. The Company has the
option to renew these letters of credit or set aside cash funds in a segregated
account to satisfy the Company's obligations, as further discussed above under
the caption "Cash Resources and Obligations".
The Company has no other off-balance sheet arrangements and has not
entered into any transactions involving unconsolidated, limited purpose entities
or commodity contracts.
Management expects that the Company's working capital needs for fiscal
2004 will be met through operating cash flow and its existing cash balances. The
Company may also consider other alternative uses of cash including, among other
things, acquisitions, additional share repurchases and cash dividends. These
uses of cash would require the approval of the Company's Board of Directors and
may require the approval of its lender. If cash flows from operations, cash
resources or availability under the credit facility fall below expectations, the
Company may be forced to delay planned capital expenditures, reduce operating
expenses, seek additional financing or consider alternatives designed to enhance
liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise. The Company had no
interest rate exposure on fixed rate debt or other market risk at March 28,
2004.
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 adequate and effective to ensure that information required to
be disclosed by the Company in reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within required
time periods.
24
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 March 28, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting. Based on that evaluation, there has been no such change during such
quarter.
25
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See Note 9 to the consolidated financial statements
included in this report for a description of legal matters and
pending legal proceedings, which description is incorporated
herein by reference.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of
Equity Securities
--------------------------------------------------------------
(e) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number
(a) Total of Shares Purchased of Shares that May
Number (b) Average as Part of Publicly Yet be Purchased
of Shares Price Paid Announced Plans Under the Plans
Period Purchased per Share or Programs or Programs
------ ----------- ----------- ----------- -----------
January (12/29/03 - 1/25/04) 92,747 $ 12.96 92,747 968,789
February (1/26/04 - 2/22/04) 106,400 $ 12.61 106,400 862,389
March (2/23/04 - 3/28/04) 229,100 $ 14.34 229,100 633,289
----------- ----------- -----------
Total 428,247 $ 13.61 428,247
=========== =========== ===========
(1) On August 7, 2003, the Company announced that its Board
of Directors had authorized the repurchase of up to 1,500,000
shares of its outstanding common stock.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
Item 5. Other Information
-----------------
In connection with a July 19, 1999 settlement with
various government agencies, Olsten executed a corporate
integrity agreement with the Office of Inspector General of
the Department of Health and Human Services, which will remain
in effect until August 18, 2004. The corporate integrity
agreement applies to the Company's businesses that bill the
federal government health programs directly for services, such
as its nursing brand (but excludes the SPS business), and
focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of
claims. Under the corporate integrity agreement, the Company
is required, for example, to maintain a corporate compliance
officer to develop and implement compliance programs, to
retain
26
an independent review organization to perform annual reviews
and to maintain a compliance program and reporting systems, as
well as to provide certain training to employees.
The Company's compliance program is required to be
implemented for all newly established or acquired business
units if their type of business is covered by the corporate
integrity agreement. Reports under the integrity agreement are
to be filed annually with the Department of Health and Human
Services, Office of Inspector General. After the corporate
integrity agreement expires, the Company is to file a final
annual report with the government. The Company believes it is
in compliance with the corporate integrity agreement and has
timely filed all required reports. If the Company fails to
comply with the terms of its corporate integrity agreement,
the Company will be subject to penalties.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of
Company. (1)
3.2 Certificate of Correction to Certificate
of Incorporation, filed with the Delaware
Secretary of State on July 1, 2002. (2)
3.3 Restated By-Laws of Company. (2)
4.1 Specimen of common stock. (4)
4.2 Form of Certificate of Designation of
Series A Junior Participating Preferred
Stock. (1)
4.3 Form of Certificate of Designation of
Series A Cumulative Non-Voting Redeemable
Preferred Stock. (3)
10.1 Employment Agreement dated as of March
22, 2004 with Ronald A. Malone*+
10.2 Change in Control Agreement dated March
22, 2004 with Ronald A. Malone*+
31.1 Certification of Chief Executive Officer
dated May 4, 2004 pursuant to Rule
13a-14(a).*
31.2 Certification of Chief Financial Officer
dated May 4, 2004 pursuant to Rule
13a-14(a).*
27
32.1 Certification of Chief Executive Officer
dated May 4, 2004 pursuant to 18 U.S.C.
Section 1350.*
32.2 Certification of Chief Financial Officer
dated May 4, 2004 pursuant to 18 U.S.C.
Section 1350.*
- --------------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement of Company on Form S-4 dated January
19, 2000 (File No. 333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for
the quarterly period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement of Company on Form S-4 dated February
4, 2000 (File No. 333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement of Company on Form S-4 dated February
9, 2000 (File No. 333-88663).
* Filed herewith
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
On February 10, 2004, the Company furnished a report on Form
8-K (i) furnishing in Item 7 as an exhibit a press release covering the
Company's 2003 fourth quarter and full year consolidated earnings and
(ii) reporting in Item 12 the issuance of the Company's press release
on the subject of its 2003 fourth quarter and full year consolidated
earnings.
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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 4, 2004 /s/ RONALD A. MALONE
-------------------------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: May 4, 2004 /s/ JOHN R. POTAPCHUK
-------------------------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
29