UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 26, 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
October 28, 2004, was 24,020,922.
INDEX
PART I - FINANCIAL INFORMATION Page No.
--------
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited) -
September 26, 2004 and December 28, 2003 3
Consolidated Statements of Income (Unaudited) -
Three and Nine Months Ended September 26, 2004
and September 28, 2003 4
Consolidated Statements of Cash Flows (Unaudited)
- Nine Months Ended September 26, 2004 and September 28, 2003 5
Notes to Consolidated Financial Statements (Unaudited) 6-14
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 14-25
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
Item 4. Controls and Procedures 25-26
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 27
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27-28
Item 6. Exhibits 28-29
SIGNATURES 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 26, 2004 December 28, 2003
------------------ -----------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 96,518 $ 100,013
Short-term investments 10,000 10,000
Receivables, less allowance for doubtful accounts of
$7,687 and $7,936 in 2004 and 2003, respectively 127,345 132,998
Deferred tax assets 21,667 26,464
Prepaid expenses and other current assets 7,227 6,524
--------- ---------
Total current assets 262,757 275,999
Fixed assets, net 18,457 15,135
Deferred tax assets, net 22,798 28,025
Other assets 15,009 15,929
--------- ---------
Total assets $ 319,021 $ 335,088
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 13,236 $ 16,079
Payroll and related taxes 9,976 12,932
Medicare liabilities 12,591 12,736
Cost of claims incurred but not reported 26,297 28,525
Obligations under insurance programs 36,591 37,200
Other accrued expenses 29,772 32,230
--------- ---------
Total current liabilities 128,463 139,702
Other liabilities 20,528 18,207
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 24,079,522 and
25,598,301 shares in 2004 and 2003, respectively 2,408 2,560
Additional paid-in capital 243,877 270,468
Accumulated deficit (76,255) (95,849)
--------- ---------
Total shareholders' equity 170,030 177,179
--------- ---------
Total liabilities and shareholders' equity $ 319,021 $ 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 Nine Months Ended
-------------------------------------- ---------------------------------------
September 26, 2004 September 28, 2003 September 26, 2004 September 28, 2003
------------------ ------------------ ------------------ ------------------
Net revenues $ 198,070 $ 199,698 $ 620,223 $ 610,160
Cost of services sold 122,539 130,457 383,092 402,529
--------- --------- --------- ---------
Gross profit 75,531 69,241 237,131 207,631
Selling, general and administrative expenses (67,227) (62,738) (201,405) (186,332)
Depreciation and amortization (1,756) (1,689) (5,505) (5,164)
--------- --------- --------- ---------
Operating income 6,548 4,814 30,221 16,135
Gain on sale of Canadian investment -- -- 946 --
Interest income, net 248 93 538 275
--------- --------- --------- ---------
Income before income taxes 6,796 4,907 31,705 16,410
Income tax expense (2,397) (360) (12,111) (1,415)
--------- --------- --------- ---------
Net income $ 4,399 $ 4,547 $ 19,594 $ 14,995
========= ========= ========= =========
Net income per common share:
Basic $ 0.18 $ 0.18 $ 0.78 $ 0.57
========= ========= ========= =========
Diluted $ 0.17 $ 0.17 $ 0.74 $ 0.55
========= ========= ========= =========
Weighted average shares outstanding:
Basic 24,422 25,972 25,011 26,399
========= ========= ========= =========
Diluted 26,034 27,098 26,645 27,452
========= ========= ========= =========
See notes to consolidated financial statements.
4
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
-----------------------------------------
September 26, 2004 September 28, 2003
------------------ ------------------
OPERATING ACTIVITIES:
Net income $ 19,594 $ 14,995
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization 5,505 5,164
Provision for doubtful accounts 4,708 5,544
Gain on sale of Canadian investment (946) --
Deferred income tax expense 9,743 --
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable 945 (10,773)
Prepaid expenses and other current assets (1,144) 3,682
Current liabilities (12,102) (969)
Other, net 657 (1,295)
-------- ---------
Net cash provided by operating activities 26,960 16,348
-------- ---------
INVESTING ACTIVITIES:
Purchase of fixed assets (7,607) (4,725)
Proceeds from sale of assets 4,123 200
Acquisition of businesses -- (1,300)
Purchase of short-term investments (10,000) (14,900)
Maturities of short-term investments 10,000 14,935
-------- ---------
Net cash used in investing activities (3,484) (5,790)
-------- ---------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 3,420 2,179
Repurchases of common stock (30,163) (9,651)
Repayment of capital lease obligations (228) --
-------- ---------
Net cash used in financing activities (26,971) (7,472)
-------- ---------
Net change in cash, cash equivalents and restricted cash (3,495) 3,086
Cash, cash equivalents and restricted cash at beginning of period 100,013 101,241
-------- ---------
Cash, cash equivalents and restricted cash at end of period $ 96,518 $ 104,327
======== =========
Supplemental Cash Flow Information
Income taxes paid, net of refunds $ 3,587 $ 1,972
======== =========
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 the United States principally through its Gentiva(R)
Health Services and CareCentrix(R) brands.
The accompanying interim consolidated financial statements are unaudited,
but have been prepared by Gentiva pursuant to the rules and regulations of the
Securities and Exchange Commission and, in the opinion of management, include
all adjustments necessary for a fair presentation of results of operations,
financial position and cash flows for each period presented. Results for interim
periods are not necessarily indicative of results for a full year. The year-end
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America.
2. Cash Equivalents, Restricted Cash and Short-term Investments
The Company considers all investments with an original maturity of three
months or less on their acquisition date to be cash equivalents. Restricted cash
of $21.8 million at September 26, 2004 and December 28, 2003 represented
segregated cash funds in a trust account designated as 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. The
Company classifies investments with an original maturity of more than three
months and less than one year on the acquisition date as short-term investments.
Short-term investments are classified as "held to maturity" investments and are
reported at amortized cost which approximates fair value.
3. Medicare Revenues
Medicare revenues for the third quarter of fiscal 2004 included funds
received of approximately $1.1 million related to the $1.4 million settlement of
the Company's appeal filed with the U.S. Provider Reimbursement Review Board
("PRRB") related to the reopening of all of its 1998 cost reports. See Note 9.
Medicare revenues for the first nine months of fiscal 2004 included
approximately $10.1 million received in settlement of the Company's appeals
filed with the PRRB related to the reopening of all of its 1997 and 1998 cost
reports, net of a revenue adjustment of $1 million to reflect an estimated
repayment to Medicare in connection with services rendered to certain patients
since the inception of the Prospective Payment Reimbursement System ("PPS") in
October 2000. In connection with the estimated repayment, the Centers for
Medicare & Medicaid Services ("CMS") has determined that home care providers
should have
6
received lower reimbursements for certain services rendered to beneficiaries
discharged from inpatient hospitals within fourteen days immediately preceding
admission to home healthcare.
4. Earnings Per Share
Basic and diluted earnings per share for each period presented have been
computed by dividing net income by the weighted average number of shares
outstanding for each respective period. The computations of the basic and
diluted per share amounts were as follows (in thousands, except per share
amounts):
Three Months Ended Nine Months Ended
-------------------------------------- ---------------------------------------
September 26, 2004 September 28, 2003 September 26, 2004 September 28, 2003
------------------ ------------------ ------------------ ------------------
Net income $ 4,399 $ 4,547 $ 19,594 $ 14,995
================================================================================ =======================================
Basic weighted average common
shares outstanding 24,422 25,972 25,011 26,399
Shares issuable upon the assumed
exercise of stock options and in
connection with the employee stock
purchase plan using the
treasury stock method 1,612 1,126 1,634 1,053
-------- -------- -------- --------
Diluted weighted average common
shares outstanding 26,034 27,098 26,645 27,452
-------- -------- -------- --------
================================================================================ =======================================
Net income per common share:
Basic $ 0.18 $ 0.18 $ 0.78 $ 0.57
Diluted $ 0.17 $ 0.17 $ 0.74 $ 0.55
================================================================================ =======================================
5. Disposition
On March 30, 2004, the Company sold its minority interest in a home care
nursing services business in Canada. The business had been acquired as partial
consideration for the sale of the Company's Canadian operations in the fourth
quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company
received cash proceeds of $4.1 million in the second quarter of fiscal 2004 and
recorded a gain on sale of approximately $0.9 million which is reflected in the
consolidated statement of income for the nine months ended September 26, 2004.
6. Revolving Credit Facility and Debt
The Company's credit facility, which was entered into on June 13, 2002, as
amended, as described below, provides up to $55 million in borrowings, including
up to $40 million which is available for letters of credit. The Company may
borrow up to a maximum of 80 percent of the net amount of eligible accounts
receivable, as defined, less any reasonable and customary reserves, as defined,
required by the lender.
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
7
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 higher margins and
fees were in effect prior to June 1, 2003.
The credit facility, which expires in June 2006, includes certain covenants
requiring the Company to maintain a minimum tangible net worth of $101.6
million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio,
as defined. Other covenants in the credit facility include limitations on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and on May 26, 2004, the Company's credit facility was amended to make
covenants relating to acquisitions and stock repurchases less restrictive,
provided that the Company maintains minimum excess aggregate liquidity, as
defined, equal to at least $60 million and to allow for the disposition of
certain assets. As of September 26, 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 in the period from June 13, 2004 to June 12, 2005, the Company
must pay an early termination fee equal to $137,500. 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 as of
September 26, 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 September 26, 2004.
During the first nine months of fiscal 2004, the Company commenced
implementation of a five-year capital lease for certain equipment. In connection
with this lease, the Company recorded capital lease assets of approximately $1.4
million in fixed assets, net, current obligation of capital leases of $0.3
million in other accrued expenses and long-term capital lease obligations of
$1.1 million in other liabilities.
7. Shareholders' Equity
Changes in shareholders' equity for the nine months ended September 26,
2004 were as follows (in thousands):
8
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
------- ---------- ----------- ---------
Balance at December 28, 2003 $ 2,560 $ 270,468 $ (95,849) $ 177,179
Comprehensive income:
Net income -- -- 19,594 19,594
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (508,061 shares) 51 3,369 -- 3,420
Repurchase of common stock at cost (2,026,840 shares) (203) (29,960) -- (30,163)
------- --------- --------- ---------
Balance at September 26, 2004 $ 2,408 $ 243,877 $ (76,255) $ 170,030
======= ========= ========= =========
Comprehensive income amounted to $4.4 million and $4.5 million for the
third quarter of fiscal 2004 and fiscal 2003, respectively, and $19.6 million
and $15.0 million for the first nine months of fiscal 2004 and fiscal 2003,
respectively.
The Company's Board of Directors has authorized stock repurchase programs
under which the Company could repurchase and formally retire up to an aggregate
of 4,500,000 shares of its outstanding common stock. A summary of the shares
repurchased under each program follows:
Date Shares Average
Program Shares Repurchased Cost per Program
Announced Authorized as of September 26, 2004 Total Cost Share Completion Date
----------- ---------- ------------------------ ---------- ----- ---------------
May 16, 2003 1,000,000 1,000,000 $ 9,082,353 $ 9.08 July 23, 2003
August 7, 2003 1,500,000 1,500,000 $ 20,779,291 $ 13.85 July 8, 2004
May 26, 2004 1,000,000 965,304 $ 14,724,872 $ 15.25 October 13, 2004
August 10, 2004 1,000,000 -- $ -- $ --
-------------------------------------------------------------------------
4,500,000 3,465,304 $ 44,586,516 $ 12.87
=========================================================================
Repurchases occur periodically in the open market or through privately
negotiated transactions based on market conditions and other factors. During the
third quarter and first nine months of fiscal 2004, the Company repurchased
1,011,993 and 2,026,840 shares, respectively, at an average cost per share of
$15.28 and $14.88, respectively. As of September 26, 2004, the Company had
remaining authorization to repurchase an aggregate of 1,034,696 shares of its
outstanding common stock.
During the period from September 27, 2004 to October 28, 2004, the Company
repurchased an additional 59,100 shares of common stock at a cost of $1.0
million, representing an average cost of $16.29 per share.
8. Stock Plans
In 2004, the shareholders of the Company approved the 2004 Equity Incentive
Plan (the "2004 Plan") as a replacement for the 1999 Stock Incentive Plan (the
"1999 Plan"). Under the 2004 Plan, 3.5 million shares of common stock plus any
remaining shares authorized under the 1999 Plan are available for grant. The
maximum number of shares of common stock for which grants may be made in any
calendar year to any employee, consultant or director
9
is 500,000. The 2004 Plan permits granting of (i) incentive stock options, (ii)
non-qualified stock options, (iii) stock appreciation rights, (iv) restricted
stock, (v) stock units and (vi) cash. The exercise price of options granted
under the 2004 Plan can generally not be less than the fair market value of the
Company's common stock on the date of grant. As of September 26, 2004, the
Company had 3,929,207 shares available for issuance under the 2004 Plan.
The Company has chosen to adopt the disclosure only provisions of Statement
of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123" ("SFAS 148"), and continues to account for stock-based
compensation using the intrinsic value method prescribed in Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25"), and related interpretations. Under this approach, the
imputed cost of stock option grants and discounts offered under the Company's
Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting
provisions of the individual grants, but not charged to expense.
The weighted average fair values of the Company's stock options granted
during the first nine months of fiscal 2004 and fiscal 2003, calculated using
the Black-Scholes option-pricing model, and other assumptions are as follows:
Nine Months Ended
---------------------------------------
September 26, 2004 September 28, 2003
------------------ ------------------
Risk-free interest rate 3.36% 3.52%
Expected volatility 60% 60%
Expected life 6 to 8 years 6 to 8 years
Contractual life 10 years 10 years
Expected dividend yield 0% 0%
Weighted average fair value
of options granted $ 7.65 $ 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 nine months of fiscal 2004 and fiscal 2003 are as
follows:
Nine Months Ended
-------------------------------------------------------------
September 26, 2004 September 28, 2003
------------------------------ ----------------------------
1st offering 2nd offering 1st offering 2nd offering
Period Period Period Period
------ ------ ------ ------
Risk-free interest rate 1.02% 1.76% 1.25% 0.97%
Expected volatility 28% 30% 32% 29%
Expected life 0.5 years 0.5 years 0.5 years 0.5 years
Expected dividend yield 0% 0% 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 Nine Months Ended
---------------------------------------- ---------------------------------------
September 26, 2004 September 28, 2003 September 26, 2004 September 28, 2003
------------------ ------------------ ------------------ ------------------
Net income - as reported $ 4,399 $ 4,547 $ 19,594 $ 14,995
Deduct: Total stock-based
compensation expense
determined under fair
value based method for
all awards, net of tax (753) (343) (2,165) (1,163)
------- ------- -------- --------
Net income - pro forma $ 3,646 $ 4,204 $ 17,429 $ 13,832
======= ======= ======== ========
Basic income per share - as reported $ 0.18 $ 0.18 $ 0.78 $ 0.57
Basic income per share - pro forma $ 0.15 $ 0.16 $ 0.70 $ 0.52
Diluted income per share - as reported $ 0.17 $ 0.17 $ 0.74 $ 0.55
Diluted income per share - pro forma $ 0.14 $ 0.16 $ 0.65 $ 0.50
During the third quarter of fiscal 2004, the Company issued 110,279 shares
under its ESPP relating to the first offering period. During the first nine
months of fiscal 2004, the Company granted 1,030,100 stock options to officers,
directors and employees under its existing option plans at an average exercise
price of $12.95. At September 26, 2004, there were 3,320,338 options outstanding
at a weighted average exercise price of $8.22 per share.
9. Legal Matters
Litigation
In addition to the matters referenced in this Note 9, the Company is party
to certain legal actions arising in the ordinary course of business, including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services,
U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002,
this amended complaint was served on the Company alleging that the defendant
submitted false claims to the government for payment in violation of the Federal
False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully
terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to
patients did not supply the full amount of medication, allegedly resulting in
substandard care. Based on a review of the court's docket sheet, the plaintiff
filed a complaint under seal in March 2001. In October 2001, the United States
government filed a notice with the court declining to intervene in this matter,
and on October 24, 2001, the court ordered that the seal be lifted. The Company
filed its responsive pleading on February 25, 2002, and discovery has commenced.
The Company has denied the allegations of wrongdoing in the complaint and is
defending itself vigorously in this matter. On May 19, 2003, the Company filed a
motion for summary judgment on the issue of liability. On February 6, 2004, the
court granted partial summary judgment for the Company, dismissing two of the
three claims alleged under the False Claims Act and denying summary judgment for
the Company on the wrongful termination claim. The parties are completing
discovery; therefore, the Company cannot determine a range of damages, if any,
at this time.
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 CMS, and were subject to audit by the fiscal intermediary engaged
by CMS. In connection with the audit of the Company's 1997 cost reports, the
Medicare fiscal intermediary made certain audit adjustments related to the
methodology used by the Company to allocate a portion of its residual overhead
costs. The Company filed cost reports for years subsequent to 1997 using the
fiscal intermediary's methodology. The Company believed its methodology used to
allocate such overhead costs was accurate and consistent with past practice
accepted by the fiscal intermediary; as such, the Company filed appeals with the
PRRB concerning this issue with respect to cost reports for the years 1997, 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.
During the third quarter of 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. As of September 26, 2004, the Company had received and recorded $1.1
million of the adjustment as net revenues for the third quarter of fiscal 2004.
During the fourth quarter of 2004, the Company expects to receive the remaining
funds of $0.3 million and record the adjustment as net revenues in the
consolidated financial statements.
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
12
year's cost reports is completed. The reopening of the 1999 cost reports and the
audit of the 2000 cost reports are not expected to be completed before 2005. It
is likely that future recoveries for either 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.
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 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.
Indemnifications
Gentiva became an independent, publicly owned company on March 15, 2000,
when the common stock of the Company was issued to the stockholders of Olsten
Corporation, a Delaware corporation ("Olsten"), the former parent corporation of
the Company (the "Split-Off"). In connection with the Split-Off, the Company
agreed to assume, to the extent permitted by law, and to indemnify Olsten for,
the liabilities, if any, arising out of the home health services business.
In addition, the Company and Accredo Health, Incorporated ("Accredo")
agreed to indemnify each other for breaches of representations and warranties of
such party or the non-fulfillment of any covenant or agreement of such party in
connection with the sale of the Company's Specialty Pharmaceutical Services
("SPS") business to Accredo on June 13, 2002. The Company also agreed to
indemnify Accredo for the retained liabilities and for tax liabilities and
Accredo agreed to indemnify the Company for assumed liabilities and the
operation of the SPS business after the closing of the acquisition. The
representations and warranties generally survived for the period of two years
after the closing of the acquisition, which period expired on June 13, 2004.
Certain representations and warranties, however, continue to survive, including
the survival of representations and warranties related to health care compliance
for three years after the closing of the acquisition and the survival of
representations and warranties related to tax matters until thirty days after
the expiration of the applicable statute of limitations period, including any
extensions of the applicable period, subject to certain exceptions. Accredo and
the Company generally may recover indemnification for a breach of a
representation or warranty only to the extent a party's claim exceeds $1 million
for any individual claim, or exceeds $5 million in the aggregate, subject to
certain conditions and only up to a maximum amount of $100 million.
13
10. Income Taxes
The Company recorded federal and state income taxes of approximately $2.4
million for the third quarter ended September 26, 2004, of which $0.1 million
represented a current provision and $2.3 million represented a deferred tax
provision. For the nine months ended September 26, 2004, the Company recorded a
federal and state tax provision of $12.1 million, representing a current
provision of $2.4 million and a deferred provision of $9.7 million. The
differences between the Company's effective tax rates of approximately 35.3% for
the third quarter of fiscal 2004 and 38.2% for the first nine months of fiscal
2004 and the statutory income tax rate were due primarily to state income taxes,
net of federal benefit. During the third quarter of fiscal 2004, the Company
determined that sufficient state taxable income had been generated to recognize
a certain amount of prior year state net operating losses resulting in a lower
effective state income tax rate for the first nine months of fiscal 2004.
State income taxes and federal alternative minimum taxes of $0.4 million
and $1.4 million were recorded for the third quarter and first nine months of
fiscal 2003, respectively. The Company's effective tax rates of approximately
7.3 percent for the third quarter of fiscal 2003 and 8.6 percent for the first
nine months of fiscal 2003 were lower than the statutory income tax rate due to
the impact of a valuation allowance offsetting the realization of tax benefits
associated with the Company's net operating loss carryforward and other deferred
tax assets.
Deferred tax assets and deferred tax liabilities were as follows (in
thousands):
------------------ -----------------
September 26, 2004 December 28, 2003
------------------ -----------------
Deferred tax assets - current
Reserves and allowances $ 20,358 $ 21,290
Net operating loss and other carryforwards
(federal and state) 444 4,966
Other 865 208
-------- --------
Total current deferred tax assets 21,667 26,464
Deferred tax assets - non-current
Amortization of intangible assets 26,623 29,085
Depreciation of fixed assets (1,718) 23
Developed software (1,787) (1,083)
Other (320) --
-------- --------
Total non-current deferred tax assets (net) 22,798 28,025
Net deferred tax assets $ 44,465 $ 54,489
======== ========
As of September 26, 2004, the Company's tax credit carryforwards for income
tax purposes were approximately $0.4 million.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-looking Statements
14
Certain statements contained in this Quarterly Report on Form 10-Q,
including, without limitation, statements containing the words "believes,"
"anticipates," "intends," "expects," "assumes," "trends" and similar
expressions, constitute "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Forward-looking statements are
based upon the Company's current plans, expectations and projections about
future events. However, such statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for health care reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets in which the Company operates;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue associated with
major payer sources;
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 to
forward-looking statements to reflect unforeseen or other events after the date
of this report. The Company has provided a detailed discussion of risk factors
in its 2003 Annual Report on Form 10-K and various filings with the SEC. The
reader is encouraged to review these risk factors and filings.
The following discussion and analysis provides information which management
believes is relevant to an assessment and understanding of the Company's results
of operations and financial position. This discussion and analysis should be
read in conjunction with the Company's consolidated financial statements and
related notes included elsewhere in this report.
General
The Company's results of operations are impacted by various regulations and
other matters that are implemented from time to time in its industry, some of
which are described in
15
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 (i) home health care services on a direct basis to
patients, including specialty services and neuro-rehabilitation services; (ii)
home health care services on an indirect basis through the delivery of national,
regional and local administrative services to managed care organizations and
self-insured employers; and (iii) home health care consulting services to
independent and hospital-based home health agencies.
Gentiva's direct home health care 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 a similar
specialty program for cardiopulmonary services and expects to launch this
program during the fourth quarter of 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 indirect home health care services represented by national,
regional and local administrative services for managed care organizations and
self-insured employers -- provided through its CareCentrix(R) business unit --
include central access, care coordination, utilization management and claims
processing. The Company is capable of coordinating a wide range of home care
services, including traditional home nursing, chronic and acute infusion
therapies and durable medical and respiratory equipment, to member patients of
these managed care organizations.
Consulting services to home health agencies are delivered primarily by the
Company's Gentiva Consulting (formerly Gentiva Business Services) unit. These
services include billing and collection activities, web-based caregiver training
and credentialing, on-site agency support and consulting, operational support
and individualized strategies for reduction of days sales outstanding.
The Company's services can be delivered across the United States 24 hours a
day, 7 days a week. Direct home health services to patients are delivered
through more than 350 owned and operated direct service delivery units in
approximately 250 locations in 35 states, including over 40 locations in
Florida. Administrative services for managed care organizations and self-insured
employers are coordinated within four regional coordination centers.
16
Home care services provided to member patients of these organizations are
delivered through Company-owned and third-party credentialed provider locations
covering the United States.
Results of Operations
Net Revenues
(Dollars in millions) Third Quarter Nine Months
------------------------------ ----------------------------------
Percentage Percentage
2004 2003 Variance 2004 2003 Variance
---- ---- -------- ---- ---- --------
Medicare $ 52.3 $ 44.0 18.9% $ 168.7 $ 128.5 31.3%
Medicaid and local government 38.0 40.7 (6.6) 116.2 125.7 (7.6)
Commercial insurance and other 107.8 115.0 (6.3) 335.3 356.0 (5.8)
----------------------------- ----------------------------------
$ 198.1 $ 199.7 (0.8%) $ 620.2 $ 610.2 1.6%
============================= ==================================
For the quarter ended September 26, 2004 as compared to the quarter ended
September 28, 2003, net revenues declined by $1.6 million to $198.1 million from
$199.7 million. Net revenues increased by $10.0 million to $620.2 million for
the first nine months of fiscal 2004 as compared to $610.2 million for the first
nine months of fiscal 2003
Medicare revenue growth in the fiscal 2004 periods as compared to the
fiscal 2003 periods was driven by several factors including special items,
volume growth, mix and process enhancement changes and rate increases. Medicare
revenue included special items of $1.1 million for the third quarter of fiscal
2004 and $9.1 million for the first nine months of 2004. Special items
represented (i) $1.1 million recorded and received during the third quarter of
2004 in settlement of the Company's appeal filed with the PRRB related to the
reopening of its 1998 cost reports, (ii) $9.0 million recorded and received
during the first quarter of fiscal 2004 in settlement of the Company's appeal
filed with the PRRB related to the reopening of its 1997 cost reports and (iii)
a revenue adjustment of $1.0 million recorded in the first quarter of 2004 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 admissions grew by 9 percent in the third quarter and 14 percent
in the first nine months of fiscal 2004 as compared to the corresponding periods
of fiscal 2003. Medicare revenue was also positively impacted in the fiscal 2004
periods by growth in specialty services, which generally generate a higher
revenue per episode than other Medicare services, and by various operational and
clinical process enhancements. Furthermore, Medicare revenue in the fiscal 2004
periods as compared to the fiscal 2003 periods increased as a result of
reimbursement rate changes, including a 3.3 percent market basket rate increase
that became effective for patients on service on or after October 1, 2003, which
was adjusted downward by 0.8 percent to 2.5 percent effective April 1, 2004, and
a 5 percent rate increase effective April 1, 2004 for the rural add-on related
to home health services performed in specifically defined rural areas of the
country. The rate increases relating to the market basket change and rural
17
add-on provision represented incremental revenue of $1.3 million and $3.9
million for the third quarter and first nine months of fiscal 2004,
respectively.
Medicaid and local government revenue decreased, in the fiscal 2004 periods
as compared to the fiscal 2003 periods, primarily due to a reduction in the
Company's participation in certain low-margin, hourly Medicaid and state and
county health programs, 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 and $10.6 million for the third quarter and
first nine months of fiscal 2004, respectively, as compared to the corresponding
periods of fiscal 2003. Revenues relating to skilled visits within Medicaid
programs increased $1.1 million for both the third quarter and first nine months
of fiscal 2004.
Commercial insurance and other revenue decreased, in the fiscal 2004
periods as compared to the fiscal 2003 periods, due to a decline in revenue
derived from CIGNA Health Corporation ("CIGNA") of $8.7 million, or 12.7
percent, and $31.0 million, or 13.9 percent, for the third quarter and first
nine months, respectively, related to a reduction in the number of enrolled
CIGNA members in 2004, and lower revenue as well as related costs resulting from
a change in the Company's delivery model of certain home medical and respiratory
equipment ("HME") products and services. The decline in CIGNA revenues was
partially offset by an increase of $1.5 million, or 3.2 percent, and $10.3
million, or 7.8 percent, for the third quarter and first nine months of fiscal
2004, respectively, in non-CIGNA, Commercial insurance and other revenue driven
by unit volume and pricing increases from existing business as well as new
contracts signed during the past year.
In addition, for the third quarter and the first nine months of fiscal
2004, Medicare revenues and Commercial insurance and other revenues were
negatively impacted by four hurricanes in the southeastern United States.
18
Gross Profit
(Dollars in millions) Third Quarter Nine Months
--------------------------- --------------------------------
2004 2003 Variance 2004 2003 Variance
---- ---- -------- ---- ---- --------
Gross profit $ 75.5 $ 69.2 $ 6.3 $ 237.1 $ 207.6 $ 29.5
As a percent of revenue 38.1% 34.7% 3.4% 38.2% 34.0% 4.2%
As a percent of revenues, gross profit margins for the third quarter and
first nine months of fiscal 2004 were positively impacted by (i) 1.3 and 1.5
percentage points, respectively, due to the favorable change in business mix, in
which the volume of Medicare business including growth in specialty programs,
more than offset the anticipated revenue loss in certain low-margin hourly
Medicaid and local government programs, (ii) 1.3 and 1.0 percentage points,
respectively, due to the reconfiguration of the HME provider network earlier
this year, as well as the impact of new CareCentrix contracts and (iii) 0.3 and
0.9 percentage points, respectively, related to the special items discussed
above. The remaining increase in gross profit percentage can be attributed to
several factors, including the positive Medicare rate changes, lower workers
compensation expense and various operational and clinical process enhancements.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation and
amortization, increased $4.6 million to $69.0 million for the quarter ended
September 26, 2004, as compared to $64.4 million for the quarter ended September
28, 2003 and $15.4 million to $206.9 million for the nine months ended September
26, 2004.
Of the increases in selling, general and administrative expenses, including
depreciation and amortization, for both the quarter and the nine month periods,
nearly one-half related to increases in field operating and administrative costs
to service incremental revenues, including revenues from the Company's specialty
programs. The remaining increases related to (i) higher selling and clinical
care coordination expenses, (ii) incremental costs associated with the
implementation of the Sarbanes-Oxley requirements, ongoing information
technology initiatives and field development training and (iii) costs associated
with the reconfiguration of the Company's CareCentrix HME provider network.
Gain on Sale of Canadian Investment
On March 30, 2004, the Company sold its minority interest in a home care
nursing services business in Canada. The business had been acquired as partial
consideration for the sale of the Company's Canadian operations in the fourth
quarter of fiscal 2000. In connection with the March 30, 2004 sale, the Company
received cash proceeds of $4.1 million in the second quarter of fiscal 2004 and
recorded a gain on sale of approximately $0.9 million which is reflected in the
consolidated statement of income for the nine months ended September 26, 2004.
Interest Income, Net
19
Net interest income was approximately $0.2 million for the quarter ended
September 26, 2004, and $0.1 million for the quarter ended September 28, 2003.
Net interest income included interest income of approximately $0.5 million for
the third quarter of fiscal 2004 and $0.4 million for the third quarter of
fiscal 2003, partially offset by fees relating to the revolving credit facility
and outstanding letters of credit.
Net interest income was approximately $0.5 million for the nine months
ended September 26, 2004 compared to $0.3 million for the nine months ended
September 28, 2003. Net interest income for the first nine months of fiscal
years 2004 and 2003 represented interest income of $1.3 million and $1.1
million, respectively, partially offset by interest expense of $0.8 million in
both the fiscal 2004 and fiscal 2003 nine month periods.
Income Taxes
The Company recorded federal and state income taxes of approximately $2.4
million for the third quarter ended September 26, 2004, of which $0.1 million
represented a current provision and $2.3 million represented a deferred tax
provision. For the nine months ended September 26, 2004, the Company recorded a
federal and state tax provision of $12.1 million, representing a current
provision of $2.4 million and a deferred provision of $9.7 million. The
differences between the Company's effective tax rates of approximately 35.3% for
the third quarter of fiscal 2004 and 38.2% for the first nine months of fiscal
2004 and the statutory income tax rate were due primarily to state income taxes,
net of federal benefit. During the third quarter of fiscal 2004, the Company
determined that sufficient state taxable income had been generated to recognize
a certain amount of prior year state net operating losses resulting in a lower
effective state income tax rate for the first nine months of fiscal 2004.
Additional information regarding the value of state net operating losses may
result in an adjustment in the Company's effective tax rate in the fourth
quarter of fiscal 2004.
State income taxes and federal alternative minimum taxes of $0.4 million
and $1.4 million were recorded for the third quarter and first nine months of
fiscal 2003, respectively. The Company's effective tax rates of approximately
7.3 percent for the third quarter of fiscal 2003 and 8.6 percent for the first
nine months of fiscal 2003 were lower than the statutory income tax rate due to
the impact of a valuation allowance offsetting the realization of tax benefits
associated with the net operating loss carryforward and other deferred tax
assets.
Net Income
For the third quarter of fiscal 2004, net income was $4.4 million, or $0.17
per diluted share, compared with net income of $4.5 million, or $0.17 per
diluted share, for the corresponding period of 2003. For the first nine months
of fiscal 2004, net income was $19.6 million, or $0.74 per diluted share,
compared with net income of $15.0 million, or $0.55 per diluted share for the
first nine months of fiscal 2003.
Net income included special items related to Medicare, noted in the Net
Revenues section above, which had a net positive impact of $0.7 million or $0.03
per diluted share for the third quarter of fiscal 2004 and $5.6 million or $0.22
per diluted share for the first nine months of fiscal 2004. In addition, net
income for the first nine months of fiscal 2004 included a net gain of $0.6
million, or $0.02 per diluted share, on the sale of the Company's 19.9 percent
interest in a Canadian home care company. See Note 5 to the Company's
consolidated financial statements.
20
Net income for the third quarter and first nine months of fiscal 2003
reflected the positive impact of lower effective tax rates of 7.3 percent and
8.6 percent, respectively.
Liquidity and Capital Resources
Liquidity
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payer arrangements. Net cash provided by operating
activities for the nine months ended September 26, 2004 was $27.0 million. In
addition, during the first nine months of 2004 the Company received cash
proceeds of $4.1 million in connection with the sale of the Company's investment
in a Canadian homecare business and $3.4 million in connection with the issuance
of common stock. These cash resources were primarily used to fund capital
expenditures of $7.6 million and repurchase shares of the Company's common stock
of $30.2 million during the first nine months of fiscal 2004.
Days Sales Outstanding ("DSO") was 59 days as of September 26, 2004 and
December 28, 2003, respectively. Working capital at September 26, 2004 was
approximately $134 million, a decrease of $2 million as compared to
approximately $136 million at December 28, 2003, primarily due to:
o a $3 million decrease in cash;
o a $6 million decrease in accounts receivable;
o a $5 million decrease in deferred tax assets;
o a $1 million increase in prepaid expenses and other assets; and
o an $11 million decrease in current liabilities for accounts payable
($3 million), obligations under insurance programs ($1 million), other
current liabilities ($4 million), and payroll ($3 million).
The Company participates in the Medicare, Medicaid and other federal and
state healthcare programs. Revenue mix by major payer classifications is as
follows:
Three Months Ended Nine Months Ended
---------------------------------------- ---------------------------------------
September 26, 2004 September 28, 2003 September 26, 2004 September 28, 2003
------------------ ------------------ ------------------ ------------------
Medicare 26% 22% 27% 21%
Medicaid and local government 19% 20% 19% 21%
Commercial insurance and other 55% 58% 54% 58%
------------------ ------------------ ------------------ ------------------
100% 100% 100% 100%
================== ================== ================== ==================
On October 1, 2003, a 3.3 percent Medicare market basket rate increase
became effective for patients on service on or after October 1, 2003. Effective
April 1, 2004, this increase was reduced by 0.8 percent to 2.5 percent for open
episodes of care on or after April 1, 2004. In addition, Medicare reimbursement
was increased 5 percent for the rural add-on related to home health services
performed in specifically defined rural areas of the country, effective April 1,
2004 for a period of one year. On October 15, 2004, CMS announced a Medicare
market basket rate increase of 2.3 percent effective for patients on service on
or after January 1, 2005. In addition, on the same day CMS announced a change in
the fixed dollar ratio formula
21
for receiving outlier payments. Outliers represent patient cases which exceed
the anticipated cost thresholds established by Medicare and result in increased
reimbursement. This change, which is effective for patients on service on or
after January 1, 2005, is expected to allow for a greater number of episodes to
qualify for the outlier payment.
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, home medical equipment and
respiratory products and services to patients insured by CIGNA. For the third
quarter and first nine months of fiscal 2004, CIGNA accounted for approximately
30 percent and 31 percent of the Company's total net revenues, respectively,
compared to approximately 34 percent and 36 percent for the third quarter and
first nine months of fiscal 2003, respectively. The Company extended its
relationship with CIGNA by entering into a new national home health care
contract, effective January 1, 2004. The term of the new contract extends to
December 31, 2006, and automatically renews thereafter for additional one year
terms unless terminated. Under the termination provisions, CIGNA has the right
to terminate the agreement on December 31, 2005 if it provides 90 days advance
written notice to the Company, and each party has the right to terminate at the
end of each term thereafter by providing at least 90 days advance written notice
prior to the start of the new term. If CIGNA chose to terminate or not renew the
contract, or to significantly modify its use of the Company's services, there
could be a material adverse effect on the Company's cash flow.
Net revenues generated under capitated agreements with managed care payers
were approximately 13 percent of total net revenues for the third quarter and 12
percent for the first nine months of fiscal 2004, respectively, and 16 percent
for the third quarter and first nine months of fiscal 2003. Fee-for-service
contracts with other commercial payers are traditionally one year in term and
renewable automatically on an annual basis, unless terminated by either party.
The Company's credit facility, which was amended on August 7, 2003 and May
26, 2004 as described below, provides up to $55 million in borrowings, including
up to $40 million which is available for letters of credit. The Company may
borrow up to a maximum of 80 percent of the net amount of eligible accounts
receivable, as defined, less any reasonable and customary reserves, as defined,
required by the lender.
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
22
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 higher margins and fees were in effect prior to
June 1, 2003.
Total outstanding letters of credit were $20.2 million as of September 26,
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 September 26, 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 $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 limitations on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003 and May 26, 2004, the credit facility was amended to make covenants
relating to acquisitions and stock repurchases less restrictive, provided that
the Company maintains minimum excess aggregate liquidity, as defined, equal to
at least $60 million and to allow for the disposition of certain assets. As of
September 26, 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 in the period from June 13, 2004 to June 12, 2005, the Company
must pay an early termination fee equal to $137,500. 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 September 26, 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
23
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.
Capital Expenditures
The Company's capital expenditures for the nine months ended September 26,
2004 were $7.6 million, excluding equipment capitalized under capital lease
obligations of $1.4 million, as compared to $4.7 million for the same period in
fiscal 2003. The Company intends to make investments and other expenditures to,
among other things, upgrade its computer technology and systems infrastructure
and comply with regulatory changes in the industry. In this regard, management
expects that capital expenditures for fiscal 2004 will range between $10.0
million and $12.0 million. Management expects that the Company's capital
expenditure needs will be met through operating cash flow and available cash
reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents, restricted cash and short-term
investments of approximately $106.5 million as of September 26, 2004. The
restricted cash relates to cash funds of $21.8 million that have been segregated
in a trust account to provide additional collateral under the Company's
insurance programs. Interest on the funds in the trust account accrues to the
Company. The Company, at its option, may access the cash funds in the trust
account by providing equivalent amounts of alternative security, including
letters of credit and surety bonds.
The Company anticipates that repayments to Medicare for partial episode
payments and prior year cost report settlements will be made periodically
through 2005. These amounts are reflected as Medicare liabilities in the
accompanying consolidated balance sheets.
The Company's Board of Directors has authorized stock repurchase programs
under which the Company could repurchase and formally retire up to an aggregate
of 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 nine months of
fiscal 2004, the Company repurchased 2,026,840 shares of its outstanding common
stock at an average cost of $14.88 per share and a total cost of approximately
$30.2 million. As of September 26, 2004, the Company had remaining authorization
to repurchase an aggregate of 1,034,696 shares of its outstanding common stock.
See also Note 7 and Part II, Item 2, of this Form 10-Q.
24
Contractual Obligations and Commercial Commitments
At September 26, 2004, the Company had no long-term debt. During the first
nine months of fiscal 2004, the Company commenced implementation of a five-year
capital lease for equipment. Under the terms of the lease, the Company
capitalized the equipment at its fair market value of approximately $1.4
million, which approximates the present value of the minimum lease payments.
Future minimum rental commitments for all non-cancelable leases and purchase
obligations at September 26, 2004, are as follows (in thousands):
Payment due by period
----------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years
----------------------- ----- ------ --------- --------- -------
Long-term debt obligations $ -- $ -- $ -- $ -- $ --
Capital lease obligations 1,222 271 589 362 --
Operating lease obligations 54,042 18,083 23,434 8,527 3,998
Purchase obligations -- -- -- -- --
----------------------------------------------------------
Total $ 55,264 $ 18,354 $ 24,023 $ 8,889 $ 3,998
==========================================================
The Company had total letters of credit outstanding under its credit
facility of approximately $20.2 million at September 26, 2004 and $20.8 million
at December 28, 2003. The letters of credit, which expire one year from the date
of issuance, were issued to guarantee payments under the Company's workers
compensation program and for certain other commitments. The Company has the
option to renew these letters of credit or set aside cash funds in a segregated
account to satisfy the Company's obligations, as further discussed above under
the caption "Cash Resources and Obligations".
The Company has no other off-balance sheet arrangements and has not entered
into any transactions involving unconsolidated, limited purpose entities or
commodity contracts.
Management expects that the Company's working capital needs for fiscal 2004
will be met through operating cash flow and its existing cash balances. The
Company may also consider other alternative uses of cash including, among other
things, acquisitions, additional share repurchases and cash dividends. These
uses of cash would require the approval of the Company's Board of Directors and
may require the approval of its lender. If cash flows from operations, cash
resources or availability under the credit facility fall below expectations, the
Company may be forced to delay planned capital expenditures, reduce operating
expenses, seek additional financing or consider alternatives designed to enhance
liquidity.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise. The Company had no
interest rate exposure on fixed rate debt or other market risk at September 26,
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
25
(as defined in the Securities Exchange Act of 1934, as amended ("Exchange Act")
Rule 13a-15(e)) as of the end of the period covered by this report. Based on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that the Company's disclosure controls and procedures are
adequate and effective to ensure that information required to be disclosed by
the Company in reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within required time periods.
Changes in internal control over financial reporting.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief
Executive Officer and Chief Financial Officer evaluated the Company's internal
control over financial reporting to determine whether any change occurred during
the quarter ended September 26, 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.
26
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
------ --------- --------- ----------- -----------
July (6/28/04 - 7/25/04) 460,700 $ 15.46 460,700 585,989
August (7/26/04 - 8/22/04) 296,300 $ 15.04 296,300 1,289,689
September (8/23/04 - 9/26/04) 254,993 $ 15.22 254,993 1,034,696
--------- ------- ---------
Total 1,011,993 $ 15.28 1,011,993
========= ======= =========
(1) On August 7, 2003, the Company announced that its Board of
Directors had authorized the repurchase of up to 1,500,000 shares of
its outstanding common stock. By the end of the period covered by the
table, all of such shares had been repurchased. On May 26, 2004, the
Company announced that its Board of Directors had authorized the
repurchase of up to 1,000,000 additional shares of its outstanding
common stock. By the end of the period covered by the table, 965,304
of such shares had been repurchased. On August 10, 2004, the Company
announced that its Board of Directors had authorized the repurchase of
up to 1,000,000 additional shares of its outstanding common stock.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
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 remains in effect 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.
27
The Company has filed a final annual report and is expecting closure
by the government.
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.
Item 6. Exhibits
--------
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 Forms of Notices and Agreements covering awards of stock options and
restricted stock under the Company's 2004 Equity Incentive Plan.*+
31.1 Certification of Chief Executive Officer dated November 3, 2004 pursuant to
Rule 13a-14(a).*
31.2 Certification of Chief Financial Officer dated November 3, 2004 pursuant to
Rule 13a-14(a).*
32.1 Certification of Chief Executive Officer dated November 3, 2004 pursuant to
18 U.S.C. Section 1350.*
28
32.2 Certification of Chief Financial Officer dated November 3, 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.
29
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
(Registrant)
Date: November 3, 2004 /s/ Ronald A. Malone
--------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: November 3, 2004 /s/ John R. Potapchuk
---------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
30