UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 28, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 1-15669
Delaware 36-4335801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
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Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
The number of shares outstanding of the registrant's Common Stock, as of October 30, 2003, was 25,949,465.
INDEX
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets (Unaudited)
- September 28, 2003 and December 29, 2002 3
Consolidated Statements of Operations (Unaudited)
- Three and Nine Months Ended September 28, 2003
and September 29, 2002 4
Consolidated Statements of Cash Flows (Unaudited)
- Nine Months Ended September 28, 2003 and
September 29, 2002 5
Notes to Consolidated Financial Statements (Unaudited) 6-17
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 18-27
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 28
Item 4. Controls and Procedures 28
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
Item 3. Defaults Upon Senior Securities 29
Item 4. Submission of Matters to a Vote of Security Holders 29
Item 5. Other Information 29
Item 6. Exhibits and Reports on Form 8-K 30-31
SIGNATURES 32
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PART I - FINANCIAL INFORMATION
Gentiva Health Services, Inc. and Subsidiaries Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
September 28, 2003 December 29, 2002
------------------ ------------------
ASSETS
Current assets:
Cash, cash equivalents and restricted cash $ 104,327 $ 101,241
Receivables, less allowance for doubtful accounts of
$7,656 and $9,032 in 2003 and 2002, respectively 130,307 125,078
Prepaid expenses and other current assets 6,924 10,534
------------------ ------------------
Total current assets 241,558 236,853
Fixed assets, net 12,268 13,025
Other assets 16,050 14,553
------------------ ------------------
Total assets $ 269,876 $ 264,431
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 16,080 $ 16,865
Payroll and related taxes 9,392 12,377
Medicare liabilities 11,823 11,880
Cost of claims incurred but not reported 30,577 27,899
Obligations under insurance programs 37,665 37,829
Other accrued expenses 25,627 25,664
------------------ ------------------
Total current liabilities 131,164 132,514
Other liabilities 18,141 18,869
Shareholders' equity:
Common stock, $.10 par value; authorized 100,000,000
shares; issued and outstanding 25,967,198 and 2,597 2,639
26,385,210 shares, respectively
Additional paid-in capital 255,594 263,024
Accumulated deficit (137,620) (152,615)
------------------ ------------------
Total shareholders' equity 120,571 113,048
------------------ ------------------
Total liabilities and shareholders' equity $ 269,876 $ 264,431
================== ==================
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See notes to consolidated financial statements.
Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net revenues $ 199,698 $ 188,443 $ 610,160 $ 576,865
Cost of services sold 130,457 124,898 402,529 392,976
------------- ------------- ------------- -------------
Gross profit 69,241 63,545 207,631 183,889
Selling, general and administrative expenses (62,738) (57,480) (186,332) (219,590)
Depreciation and amortization (1,689) (1,724) (5,164) (5,465)
------------- ------------- ------------- -------------
Operating income (loss) 4,814 4,341 16,135 (41,166)
Interest income, net 93 162 275 741
------------- ------------- ------------- -------------
Income (loss) before income taxes from
continuing operations 4,907 4,503 16,410 (40,425)
Income tax expense 360 1,765 1,415 16,429
------------- ------------- ------------- -------------
Income (loss) from continuing operations 4,547 2,738 14,995 (56,854)
Discontinued operations, net of tax -- (563) -- 191,578
------------- ------------- ------------- -------------
Income before cumulative effect of accounting change 4,547 2,175 14,995 134,724
Cumulative effect of accounting change, net of tax -- 1,392 -- (189,076)
------------- ------------- ------------- -------------
Net income (loss) $ 4,547 $ 3,567 $ 14,995 $ (54,352)
============= ============= ============= =============
Basic earnings per share:
Income (loss) from continuing operations $ 0.18 $ 0.10 $ 0.57 $ (2.18)
Discontinued operations, net of tax -- (0.02) -- 7.34
Cumulative effect of accounting change, net of tax -- 0.06 -- (7.24)
------------- ------------- ------------- -------------
Net income (loss) $ 0.18 $ 0.14 $ 0.57 $ (2.08)
============= ============= ============= =============
Weighted average shares outstanding 25,972 26,365 26,399 26,117
============= ============= ============= =============
Diluted earnings per share:
Income (loss) from continuing operations $ 0.17 $ 0.10 $ 0.55 $ (2.18)
Discontinued operations, net of tax -- (0.02) -- 7.34
Cumulative effect of accounting change, net of tax -- 0.05 -- (7.24)
------------- ------------- ------------- -------------
Net income (loss) $ 0.17 $ 0.13 $ 0.55 $ (2.08)
============= ============= ============= =============
Weighted average shares outstanding 27,098 27,483 27,452 26,117
============= ============= ============= =============
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See notes to consolidated financial statements.
Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
----------------------------------------
September 28, 2003 September 29, 2002
------------------ ------------------
OPERATING ACTIVITIES:
Net income (loss) $ 14,995 $ (54,352)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Income from discontinued operations -- (191,578)
Cumulative effect of accounting change -- 189,076
Depreciation and amortization 5,164 5,465
Provision for doubtful accounts 5,544 4,715
Gain on sale / disposal of businesses and fixed assets (217) --
Stock option tender offer -- 21,388
Deferred income taxes -- 15,156
Changes in assets and liabilities, net of acquisitions/divestitures
Accounts receivable (10,773) 798
Prepaid expenses and other current assets 3,682 4,260
Current liabilities (969) 13,883
Change in net assets held for sale -- 3,300
Other, net (1,078) (3,339)
------------------ ------------------
Net cash provided by operating activities 16,348 8,772
------------------ ------------------
INVESTING ACTIVITIES:
Purchase of fixed assets - continuing operations (4,725) (2,382)
Purchase of fixed assets - discontinued operations -- (2,121)
Proceeds from sale of assets / business 200 206,564
Acquisition of businesses (1,300) --
Purchase of short-term investments (14,900) --
Maturities of short-term investments 14,935 --
------------------ ------------------
Net cash (used in) provided by investing activities (5,790) 202,061
------------------ ------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 2,179 6,902
Repurchases of common stock (9,651) --
Debt issuance costs -- (1,321)
Cash distribution to shareholders -- (203,983)
Payments for stock option tender -- (21,388)
------------------ ------------------
Net cash (used in) financing activities (7,472) (219,790)
------------------ ------------------
Net change in cash, cash equivalents and restricted cash 3,086 (8,957)
Cash, cash equivalents and restricted cash:
Beginning of period 101,241 107,144
------------------ ------------------
End of period $ 104,327 $ 98,187
================== ==================
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SUPPLEMENTAL SCHEDULE OF NON CASH INVESTING AND FINANCING ACTIVITIES In connection with the sale of the Company's Specialty Pharmaceutical Services business on June 13, 2002, the Company received 5,060,976 shares of common stock of Accredo Health, Incorporated, which were subsequently distributed to the shareholders.
See notes to consolidated financial statements.
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides home health services throughout the United States and delivers a wide range of services principally through its Gentiva(R) Health Services and CareCentrix(R) brands ("Home Health Services business").
The accompanying interim consolidated financial statements are unaudited, but have been prepared by Gentiva pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for each period presented. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
Cash Equivalents, Restricted Cash and Short-term Investments
The Company considers all investments with an original maturity of three months or less on their acquisition date to be cash equivalents. Restricted cash represents segregated cash funds in a trust account designated as collateral under the Company's insurance programs. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security. The Company classifies investments with an original maturity of more than three months and less than one year on the acquisition date as short-term investments. Short-term investments are classified as "held to maturity" investments and are reported at amortized cost which approximates fair value.
Stock Based Compensation Plans
During the first nine months of fiscal 2003, the Company granted 732,900 stock options to officers, directors and employees under its existing option plans at an average exercise price of $8.84. At September 28, 2003, there were 2,725,630 options outstanding at a weighted average exercise price of $6.16.
The Company has chosen to adopt the disclosure only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"), and continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of the individual grants, but not charged to expense.
The following table presents net income (loss) and basic and diluted income (loss) per common share had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148:
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
September 28, September 29, September 28, September 29,
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net income (loss) - as reported $ 4,547 $ 3,567 $ 14,995 $ (54,352)
Add: Stock-based employee compensation expense
included in reported net income (loss), net of tax -- -- -- 12,803
Deduct: Total stock-based compensation expense
determined under fair value based method for
all awards, net of tax (343) (406) (1,163) (3,476)
------------- ------------- ------------- -------------
Net income (loss) - pro forma $ 4,204 $ 3,161 $ 13,832 $ (45,025)
============= ============= ============= =============
Basic income (loss) per share - as reported $ 0.18 $ 0.14 $ 0.57 $ (2.08)
Basic income (loss) per share - pro forma $ 0.16 $ 0.12 $ 0.52 $ (1.72)
Diluted income (loss) per share - as reported $ 0.17 $ 0.13 $ 0.55 $ (2.08)
Diluted income (loss) per share - pro forma $ 0.16 $ 0.12 $ 0.50 $ (1.72)
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The weighted average fair value of the Company's stock options granted during the first nine months of fiscal 2003 was $5.24, calculated using the Black-Scholes option-pricing model. The fair value of options granted in fiscal 2003 was estimated on the date of grant with the following weighted average assumptions: risk-free interest rate of 3.52 percent; dividend yield of 0 percent; expected lives of six to eight years; and volatility of 60 percent.
On June 13, 2002, the Company sold substantially all of the assets of its specialty pharmaceutical services ("SPS") business to Accredo Health, Incorporated ("Accredo"). See Note 4 to the consolidated financial statements.
The operating results of the SPS business, including corporate expenses directly attributable to SPS operations, as well as the gain on the sale, net of transaction costs and related income taxes, are reflected as discontinued operations in the accompanying consolidated statement of operations for the three months and nine months ended September 29, 2002. Continuing operations includes the results of the Home Health Services business, including corporate expenses that did not directly relate to SPS, as well as restructuring and special charges.
Basic and diluted earnings (loss) per share for each period presented has been computed by dividing net income (loss) by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts for the Company's continuing operations were as follows (in thousands, except per share amounts):
Three Months Ended Nine Months Ended
-------------------------------------- --------------------------------------
September 28, 2003 September 29, 2002 September 28, 2003 September 29, 2002
------------------ ------------------ ------------------ ------------------
Income (loss) from continuing operations $ 4,547 $ 2,738 $ 14,995 $ (56,854)
======================================================================================= ======================================
Basic weighted average
common shares outstanding 25,972 26,365 26,399 26,117
Shares issuable upon the assumed exercise of
stock options and in connection with the ESPP
using the treasury stock method 1,126 1,118 1,053 --
------------------ ------------------ ------------------ ------------------
Diluted weighted average
common shares outstanding 27,098 27,483 27,452 26,117
------------------ ------------------ ------------------ ------------------
======================================================================================= ======================================
Income (loss) from continuing operations
per common share:
Basic $ 0.18 $ 0.10 $ 0.57 $ (2.18)
Diluted $ 0.17 $ 0.10 $ 0.55 $ (2.18)
======================================================================================= ======================================
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For the nine months ended September 29, 2002, in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128"), the number of common shares used in computing the diluted earnings (loss) per share for continuing operations was used in determining earnings (loss) per share for discontinued operations, cumulative effect of accounting change and net income (loss), even though the impact was antidilutive.
For the nine months ended September 29, 2002, diluted weighted average common shares outstanding excludes the incremental 1.2 million shares that would be issued upon the assumed exercise of stock options and in connection with the ESPP using the treasury stock method, since their inclusion would be antidilutive on earnings.
Acquisition of First Home Care Business
On March 28, 2003, the Company completed the purchase of certain assets and the business of First Home Care - Houston, Inc. and FHCH, Inc. pursuant to an asset purchase agreement for cash consideration of $1.3 million. The purchase price allocation consisted of goodwill of $1.2 million and assets and other intangibles of $0.1 million.
Sale of Specialty Pharmaceutical Services Business
On June 13, 2002, the Company consummated the sale of its SPS business to Accredo (the "SPS Sale"). The SPS Sale was effected pursuant to an asset purchase agreement (the "Asset Purchase Agreement") dated January 2, 2002, between Gentiva, Accredo and certain of Gentiva's subsidiaries named therein.
Pursuant to the terms of the Asset Purchase Agreement, Accredo acquired the SPS business in consideration for:
o the payment to the Company of a cash amount equal to $207.5 million (before a $0.9 million reduction resulting from a closing net book value adjustment); and
o 5,060,976 shares of Accredo common stock.
Based on the closing price of the Accredo common stock on June 13, 2002 ($51.89 per share), the value of the stock consideration was $262.6 million. During the third quarter of fiscal 2002, the Company, in accordance with the terms of the Asset Purchase Agreement, recorded an adjustment of approximately ($0.9) million to the aggregate proceeds from the sale based on the difference between the estimated and actual closing net book value of the SPS assets as reflected in the final closing balance sheet. This adjustment, net of taxes, is reflected in discontinued operations, in the accompanying consolidated statement of operations.
In connection with the SPS Sale, the Company's Board of Directors declared a dividend, payable to shareholders of record on June 13, 2002, of all the common stock consideration and substantially all the cash consideration received from Accredo. The cash consideration received by the Company before the closing net book value adjustment was $207.5 million; however, the amount distributed to the Company's shareholders was reduced by $3.5 million to $204 million as a holdback for income taxes the Company expected to incur on the proceeds received in excess of $460 million as detailed in the Company's proxy statement, dated May 10, 2002. The special dividend, which was delivered to the distribution agent on June 13, 2002 for payment to the Company's shareholders, resulted in shareholders of record on the record date receiving $7.76 in cash and .19253 shares of Accredo common stock (valued at $9.99 per share based on the June 13, 2002 closing price of $51.89 per share of Accredo common stock) for each share of Gentiva common stock held. The total value of the special dividend amounted to $17.75 per share. Cash was paid in lieu of fractional shares.
In connection with the SPS Sale, the Company incurred $16.2 million in transaction costs which related to investment banking fees, legal and accounting costs, change in control and other employee related payments and miscellaneous other costs. SPS revenues and operating results for the periods presented were as follows (in thousands):
Three Months Ended Nine Months Ended
September 29, 2002 September 29, 2002
------------------ ------------------
Net revenues $ -- $ 323,319
================== ==================
Operating results of discontinued SPS business:
Income before income taxes $ -- $ 11,238
Income tax expense -- (1,313)
------------------ ------------------
Net income -- 9,925
------------------ ------------------
Gain (loss) on disposal of SPS business, including
transaction costs of $16.2 million
for the nine month period (936) 205,355
Income tax benefit (expense) 373 (23,702)
------------------ ------------------
Gain (loss) on disposal, net of tax (563) 181,653
------------------ ------------------
Discontinued operations, net of tax $ (563) $ 191,578
================== ==================
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During the first nine months of fiscal 2002, the Company recorded restructuring and other special charges aggregating $46.1 million. These restructuring and other special charges are further described below.
Restructuring Charges
Business Realignment Activities
The Company recorded charges of $6.8 million during the second quarter ended June 30, 2002 in connection with a restructuring plan. This plan included the closing and consolidation of seven field locations and the realignment and consolidation of certain corporate and administrative support functions due primarily to the sale of the Company's SPS business. These charges included employee severance of $0.9 million relating to the termination of 115 employees in field locations and certain corporate and administrative departments, and future lease payments and other associated costs of $5.9 million resulting principally from the consolidation of office space at the Company's corporate headquarters and a change in estimated future lease obligations and other costs in excess of sublease rentals relating to a lease for a subsidiary of the Company's former parent company which the Company agreed to assume in connection with its split-off from its former parent company in March 2000. These charges are reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the nine months ended September 29, 2002. As of September 28, 2003, $3.0 million of these charges remain unpaid, representing lease and other associated costs which will be paid over the remaining lease terms. These unpaid restructuring charges are reflected in other accrued expenses in the accompanying consolidated balance sheet as of September 28, 2003.
Special Charges
Option Tender Offer
During the second quarter ended June 30, 2002, the Company effected a cash tender offer for all outstanding options to purchase its common stock for an aggregate option purchase price not to exceed $25 million. In connection with this tender offer, the Company recorded a charge of $21.4 million during the second quarter of fiscal 2002, which is reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the nine months ended September 29, 2002.
Settlement Costs
The Company recorded a $7.7 million charge in the second quarter of
fiscal 2002 to reflect settlement costs relating to the Fredrickson v. Olsten
Health Services Corp. and Olsten Corporation lawsuit as well as estimated
settlement costs related to government inquiries regarding cost reporting
procedures concerning contracted nursing and home health aide costs (see Note
9). These costs are reflected in selling, general and administrative costs in
the accompanying consolidated statement of operations for the nine months ended
September 29, 2002.
Insurance Costs
The Company recorded a special charge of $6.3 million in the second quarter of fiscal 2002 related primarily to a refinement in the estimation process used to determine the Company's actuarially computed workers compensation and professional liability insurance reserves. This special charge is reflected in cost of services sold in the accompanying consolidated statement of operations for the nine months ended September 29, 2002.
Asset Writedowns and Other
The Company recorded charges of $3.8 million in the second quarter of fiscal 2002, consisting primarily of a write-down of inventory and other assets associated with home medical equipment used in the Company's nursing operations, and a write-off of deferred debt issuance costs associated with the terminated credit facility. The charges are reflected in selling, general and administrative expenses in the accompanying consolidated statement of operations for the nine months ended September 29, 2002.
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which broadens the criteria for recording intangible assets separate from goodwill. SFAS 142 requires the use of a non-amortization approach to account for purchased goodwill and certain intangibles. Under a non-amortization approach, goodwill and certain intangibles are not amortized into results of operations, but instead are reviewed for impairment and an impairment charge is recorded in the periods in which the recorded carrying value of goodwill and certain intangibles is more than its estimated fair value. The Company adopted SFAS 142 as of the beginning of fiscal 2002. The provisions of SFAS 142 require that a transitional impairment test be performed as of the beginning of the year the statement is adopted. The provisions of SFAS 142 also require that a goodwill impairment test be performed annually or on the occasion of other events that indicate a potential impairment.
Based on the results of the transitional impairment tests, the Company determined that an impairment loss relating to goodwill had occurred and recorded a pre-tax, non-cash charge of $217.3 million as cumulative effect of accounting change in the accompanying consolidated statement of operations for the first nine months of fiscal 2002. The Company recorded a deferred tax benefit of approximately $66 million resulting from this non-cash charge and increased its tax valuation allowance by the same amount. The deferred tax benefit was recorded by eliminating a deferred tax liability of approximately $27 million and recording a deferred tax asset of approximately $39 million. During the third quarter of fiscal 2002, the Company recorded a tax benefit of $1.4 million, relating to tax deductible goodwill. The tax benefit is reflected in cumulative effect of accounting change in the accompanying consolidated statement of operations. See Note 10 to the consolidated financial statements.
The Company's credit facility, which was entered into on June 13, 2002, as amended on August 7, 2003, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender. Borrowing availability under the credit facility was reduced by $10 million until such quarter in 2003 in which the trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, exceeded $15 million. As of March 30, 2003, the trailing 12 month EBITDA threshold was achieved and the availability restriction lifted, effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the credit facility was based on the London Interbank Offered Rates (LIBOR) plus 3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the Company was required to pay a fee equal to 2.5 percent per annum of the aggregate face amount of outstanding letters of credit. Beginning in 2003, the applicable margin for the LIBOR borrowing, prime rate borrowing and letter of credit fees decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent, respectively, provided that the Company's trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, is in excess of $20 million. The Company was also subject to an unused line fee equal to 0.50 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. For 2003, the unused credit line fee decreases to 0.375 percent provided the minimum EBITDA target described above is achieved. The higher margins and fees are subject to reinstatement in the event that the Company's trailing 12 month EBITDA falls below $20 million. The Company met this minimum EBITDA requirement as of March 30, 2003, with the rate reduction effective June 1, 2003, and continued to meet this requirement as of September 28, 2003.
The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, the Company's credit facility was amended to make covenants relating to acquisitions and stock repurchases less restrictive, provided that the Company maintains minimum excess aggregate liquidity, as defined in the amendment, equal to at least $60 million and to allow for the disposition of certain assets.
The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to $275,000 if the facility is terminated during the period from June 13, 2003 to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004 to June 12, 2005. There is no fee for termination of the facility subsequent to June 12, 2005. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment. As of September 28, 2003, the Company was in compliance with these covenants.
Total outstanding letters of credit were approximately $27.6 million at December 29, 2002 and $20.8 million as of September 28, 2003. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. There were no borrowings outstanding under the credit facility as of September 28, 2003.
During the first nine months of fiscal 2003, the Company entered into a trust agreement and segregated $17.3 million of cash funds in a trust account to provide additional collateral and to replace approximately $7 million of letters of credit and a $5 million surety bond which had been used as collateral under the Company's insurance programs. These funds are considered restricted cash and are reported as part of cash, cash equivalents and restricted cash in the accompanying consolidated balance sheet as of September 28, 2003. Interest on the funds in the trust account accrues to the Company. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds.
Changes in shareholders' equity for the nine months ended September 28, 2003 were as follows (in thousands):
Additional
Common Paid-in Accumulated
Stock Capital Deficit Total
----------- ----------- ----------- -----------
Balance at December 29, 2002 $ 2,639 $ 263,024 $ (152,615) $ 113,048
Comprehensive income:
Net income -- -- 14,995 14,995
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors (635,788 shares) 63 2,116 -- 2,179
Repurchase of common stock at cost (1,053,800 shares) (105) (9,546) -- (9,651)
----------- ----------- ----------- -----------
Balance at September 28, 2003 $ 2,597 $ 255,594 $ (137,620) $ 120,571
=========== =========== =========== ===========
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Comprehensive income amounted to $4.5 million and $3.6 million for the third quarter of fiscal 2003 and fiscal 2002, respectively, and comprehensive income of $15.0 million and a comprehensive loss of $54.4 million were recorded for the first nine months of fiscal 2003 and fiscal 2002, respectively.
On May 16, 2003, the Company announced that its Board of Directors had authorized the Company to repurchase and formally retire up to 1,000,000 shares of its outstanding common stock. The repurchases were to occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. As of July 23, 2003, the Company had repurchased the authorized 1,000,000 shares of its common stock at an average cost of $9.08 per share and a total cost of approximately $9.1 million.
On August 7, 2003, the Company's Board of Directors authorized the Company to repurchase and formally retire up to an additional 1,500,000 shares of its outstanding common stock. The repurchases will occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. As of September 28, 2003, the Company had repurchased 53,800 shares at an average cost of $10.57 per share and a total cost of approximately $0.6 million.
Litigation
In addition to the matters referenced in this Note 9, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes.
Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002, this amended complaint was served on the Company alleging that the defendant submitted false claims to the government for payment in violation of the Federal False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to patients did not supply the full amount of medication, allegedly resulting in substandard care. Based on a review of the court's docket sheet, the plaintiff filed a complaint under seal in March 2001. In October 2001, the United States government filed a notice with the court declining to intervene in this matter, and on October 24, 2001, the court ordered that the seal be lifted. The Company filed its responsive pleading on February 25, 2002, and discovery has now commenced. The Company has denied the allegations of wrongdoing in the complaint and intends to defend itself vigorously in this matter. On May 19, 2003, the Company filed a motion for summary judgment on the issue of liability. Until there is a ruling on that motion, the Company is unable to assess the probable outcome or potential liability, if any, arising from this matter; therefore, a range of damages, if any, cannot be determined.
Fredrickson v. Olsten Health Services Corp. and Olsten Corporation, Case No. 01C.A.116, Court of Appeals, Seventh Appellate District, Mahoning County, Ohio. In November 2000, the jury in this age-discrimination lawsuit returned a verdict in favor of the plaintiff against Olsten consisting of $675,000 in compensatory damages, $30 million in punitive damages and an undetermined amount of attorneys' fees. The jury found that, although Olsten had lawfully terminated the plaintiff's employment, its failure to transfer or rehire the plaintiff rendered Olsten liable to the plaintiff. Following post-trial motion practice by both parties, the trial court, in May 2001, denied all post-trial motions, and entered judgment for the plaintiff for the full amount of compensatory and punitive damages, and awarded the plaintiff reduced attorney's fees of $247,938. In June 2001, defendants timely filed a Notice of Appeal with the Court of Appeals. This matter has been settled, and settlement costs were recorded as part of special charges during the second quarter of fiscal 2002 (see Note 5).
Government Matters
Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System established through the Balanced Budget Act of 1997. These costs were reported in annual cost reports, which were filed with the Centers for Medicare and Medicaid Services ("CMS"), and were subject to audit by the fiscal intermediary engaged by CMS. In connection with the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary's methodology. The Company believed its methodology used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board ("PRRB") concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company's consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary.
In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company's cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000. The process for the fiscal intermediary to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement ("NPRs") and (iii) make appropriate payments to the Company, is not expected to be completed until early 2004. Cost reports relating to years subsequent to 1997 will be reopened after the process for the 1997 cost reports is completed. The Company believes that the reopening of and adjustments to its prior years' cost reports may have a positive impact on its financial position; however, the financial impact of the implementation of the Administrative Resolution cannot be specifically determined at this time. To date, the Company has not reflected any anticipated recovery from the appeals.
On April 17, 2003, the Company received a document subpoena from the Department of Health and Human Services, Office of Inspector General, Office of Investigations. The subpoena seeks information regarding the Company's implementation of prior settlements with the government, the implementation of the Company's corporate integrity agreements and the Company's treatment on cost reports of employees engaged in sales and marketing efforts. The Company is cooperating with the government in responding to the subpoena and has engaged in discussions with the government regarding the timing and scope of production. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to January 1, 1998 through September 30, 2000. To the Company's knowledge, the government has not filed a complaint against the Company.
In February 2000, the Company received a document subpoena from the Department of Health and Human Services, Office of Inspector General, Office of Investigations. The subpoena related to its agencies' cost reporting procedures concerning contracted nursing and home health aide costs. This matter has been
settled and settlement costs were recorded as part of special charges during the second quarter of fiscal 2002 (see Note 5).
Indemnifications
Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off"). In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for the liabilities, if any, arising out of the home health services business.
The Company and Accredo have agreed to indemnify each other for breaches of representations and warranties of such party or the non-fulfillment of any covenant or agreement of such party in connection with the sale of the SPS business. The Company has also agreed to indemnify Accredo for the retained liabilities and for tax liabilities and Accredo has agreed to indemnify the Company for assumed liabilities and the operation of the SPS business after the closing of the acquisition. The representations and warranties generally survive for the period of two years after the closing of the acquisition, except that:
o representations and warranties related to health care compliance survive for three years after the closing of the acquisition;
o representations and warranties related to title of the assets and sufficiency of assets and employees survive for the applicable statute of limitations period; and
o representations and warranties related to tax matters survive until thirty days after the expiration of the applicable tax statute of limitations period, including any extensions of the applicable period, subject to certain exceptions.
Accredo and the Company generally may recover indemnification for a breach of a representation or warranty only to the extent a party's claim exceeds $1 million for any individual claim, or exceeds $5 million in the aggregate, subject to certain conditions and only up to a maximum amount of $100 million.
These indemnification rights are the exclusive remedy from and after the closing of the acquisition, except for the right to seek specific performance of any of the agreements in the related Asset Purchase Agreement, in any case where a party is guilty of fraud in connection with the acquisition, and with respect to tax liabilities and obligations.
On May 6, 2003, the Company received correspondence from Accredo giving the Company notice of Accredo's indemnification rights for any breach under the Asset Purchase Agreement related to the adequacy of the accounts receivable reserves in accordance with Section 8.3 of the Asset Purchase Agreement; however, no breach of a representation or warranty was asserted against the Company in the correspondence.
The Company recorded state income taxes of approximately $0.4 million and $1.4 million for the third quarter and first nine months ended September 28, 2003. The Company's effective tax rate of approximately 8.6 percent for the first nine months of fiscal 2003 was lower than the statutory income tax rate due to the reversal of a portion of the valuation allowance relating to the realization of tax benefits associated with a net operating loss carryforward and other net deferred tax assets.
Federal and state income taxes of $1.8 million and $16.4 million were recorded for the third quarter and first nine months of fiscal 2002 relating to continuing operations. During the first quarter of fiscal 2002, income tax expense from continuing operations was $26.9 million which reflects an additional valuation allowance recorded against certain deferred tax assets in connection with the adoption of SFAS 142 and the subsequent write-off of goodwill; the corresponding tax benefit for the same amount was recorded in the cumulative effect of accounting change line item as reported in the accompanying consolidated statement of operations during the first nine months of fiscal year 2002.
Deferred tax assets and deferred tax liabilities were as follows (in thousands):
September 28, 2003 December 29, 2002
------------------ ------------------
Deferred tax assets
Reserves and allowances $ 21,639 $ 24,543
Net operating loss and other carryforwards (Federal and state) 5,950 5,993
Intangible assets 30,698 33,202
Depreciation 316 332
Other 200 574
Less: valuation allowance (58,096) (63,892)
------------------ ------------------
Total deferred tax asset 707 752
------------------ ------------------
Deferred tax liabilities
Capitalized software (707) (752)
------------------ ------------------
Total deferred tax liability (707) (752)
------------------ ------------------
Net deferred tax asset (liability) $ -- $ --
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At September 28, 2003, the Company had a federal net operating loss carryforward of $13.4 million, which will begin to expire by 2020. Because of the uncertainty of the ultimate realization of net deferred tax assets, a valuation allowance is maintained relating to deferred tax assets that are not otherwise used to offset deferred tax liabilities. However, if the recent trend of income continues, it is possible that deferred tax assets will be recognized in the near term. Therefore, the requirement for a valuation allowance is being monitored each quarter by management. The benefits associated with approximately $19.3 million of deferred tax assets related to stock based compensation deductions, when ultimately realized, will be credited to shareholders' equity.
Forward-looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following:
o general economic and business conditions;
o demographic changes;
o changes in, or failure to comply with, existing governmental
regulations;
o legislative proposals for health care reform;
o changes in Medicare and Medicaid reimbursement levels;
o effects of competition in the markets the Company operates in;
o liability and other claims asserted against the Company;
o ability to attract and retain qualified personnel;
o availability and terms of capital;
o loss of significant contracts or reduction in revenue
associated with major payor sources;
o ability of customers to pay for services;
o a material shift in utilization within capitated agreements;
and
o changes in estimates and judgments associated with critical
accounting policies.
Forward-looking statements are found throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. The Company is not obligated to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this report. The Company has provided a detailed discussion of risk factors in its 2002 Annual Report on Form 10-K and various filings with the Securities and Exchange Commission. The reader is encouraged to review these risk factors and filings.
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial position. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report.
The Company's results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company's Annual Report on Form 10-K for the fiscal year ended December 29, 2002 and in other filings with the Securities and Exchange Commission.
Revenues
Net revenues increased by $11.3 million, or 6.0 percent to $199.7 million for the quarter ended September 28, 2003 as compared to the quarter ended September 29, 2002. For the nine months ended September 28, 2003, net revenues increased by $33.3 million, or 5.8 percent to $610.2 million as compared to the nine months ended September 29, 2002. Revenue growth in the third quarter and first nine months of fiscal 2003 was reported in the Medicare and Commercial Insurance and Other payor categories. Revenue from Medicaid and Other Government payor sources decreased in the third quarter of fiscal 2003 and was relative flat for the fiscal 2003 year-to-date period.
For the quarter ended September 28, 2003 as compared to the quarter ended September 29, 2002, net revenues from Commercial Insurance and Other payors increased by $8.0 million or 7.5 percent to $115.0 million, Medicare increased by $4.4 million or 11.2 percent to $44.0 million, and Medicaid and Other Government payors decreased by $1.2 million or 2.9 percent to $40.7 million.
For the nine months ended September 28, 2003 as compared to the nine months ended September 29, 2002, net revenues from Commercial Insurance and Other payors increased by $26.6 million or 8.1 percent to $355.9 million, Medicare increased by $6.3 million or 5.1 percent to $128.5 million, and Medicaid and Other Government payors increased by $0.4 million or 0.3 percent to $125.7 million.
Revenue growth from Commercial Insurance and Other payors was driven by a combination of pricing and volume increases from existing customers and new contracts that were signed during the past year. Of the 7.5 percent and 8.1 percent increases in net revenues for the third quarter and first nine months of 2003, new contracts from Commercial Insurance and Other payors accounted for 4.6 percent and 2.9 percent, respectively.
Medicare revenue growth for the third quarter and first nine months of fiscal 2003 was primarily fueled by increases in episodes serviced of 13.0 percent and 6.5 percent, respectively. In addition, in comparing the first nine months of fiscal 2003 and 2002, Medicare revenue was positively impacted by (i) $0.3 million due to a market basket rate increase that became effective for patients on service on or after October 1, 2003 and (ii) by $2.5 million due to the absence of a revenue adjustment relating to partial episode payments ("PEPs") that was recorded in the fiscal 2002 year-to-date period.
In comparing the fiscal 2003 and 2002 periods, Medicare revenues were negatively impacted by an overall 4.9 percent reduction in Medicare reimbursement rates (approximately $2.2 million for the third quarter of fiscal 2003 and $6.3 million for the first nine months of fiscal 2003), which became effective for Medicare patients beginning in October 2002, and by the elimination of the rural add-on provision ($0.5 million for the third quarter of fiscal 2003 and $1.1 million for the first nine months of fiscal 2003) for home health services, which became effective April 1, 2003.
Medicaid and Other Government revenues decreased for the three months ended September 28, 2003 due to revenue reductions related to more restrictive eligibility requirements in some states and lower reimbursement rates in certain other states. In addition, for both the three months and first nine months of fiscal 2003, revenues were negatively impacted by the Company's decision to reduce or terminate its participation in certain low-margin, hourly Medicaid and state and county programs. Revenues relating to these hourly Medicaid and state and county programs decreased $2.3 million and $6.4 million as compared to the third quarter and nine months of fiscal year 2002, respectively. These decreases were offset somewhat by increases in the intermittent care Medicaid business in selected states.
Gross Profit
Gross profit was approximately $69.2 million for the third quarter ended September 28, 2003 and $63.5 million for the quarter ended September 29, 2002. As a percentage of net revenues, gross profit margins increased from 33.7 percent for the quarter ended September 29, 2002, to 34.7 percent for the quarter ended September 28, 2003. The gross profit margin for the third quarter of fiscal 2003 was positively impacted by changes in business mix including increases in Medicare episodes serviced and reductions in certain lower margin Medicaid and other government programs (1.6 percent), reductions in workers compensation costs (0.6 percent) and the Medicare market basket rate increase that became effective for patients on service on or after October 1, 2003 (0.2 percent). These increases were partially offset by an overall 4.9 percent reduction in Medicare reimbursement rates (approximately $2.2 million, or 1.1 percent), which became effective for Medicare patients beginning in October 2002, and by the elimination of the rural add-on provision ($0.5 million or 0.3 percent) for home health services which became effective April 1, 2003.
Gross profit was approximately $207.6 million for the nine months ended September 28, 2003 as compared to $183.9 million for the nine months ended September 29, 2002. As a percentage of net revenues, gross profit margins increased from 31.9 percent for the nine months ended September 29, 2002, to 34.0 percent for the nine months ended September 28, 2003. Gross profit margins for the first nine months of fiscal 2003 were positively impacted by an increase in Medicare episodes serviced and improvements in utilization in both the commercial insurance business and Medicare (1.0 percent), reductions in workers compensation costs (0.7 percent), the Medicare market basket rate increase that became effective for patients on service on or after October 1, 2003 (0.1 percent) and the absence of both a $2.5 million revenue adjustment related to PEPs (0.4 percent) and the $6.3 million special charge associated with insurance costs that were recorded in the first nine months of fiscal 2002 (1.1 percent). These increases were partially offset by an overall 4.9 percent reduction in Medicare reimbursement rates (approximately $6.3 million or 1.0 percent), which
became effective for Medicare patients beginning October 2002, and the elimination of the rural add-on provision ($1.1 million or 0.2 percent) for home health services which became effective April 1, 2003.
Selling, General and Administrative Expenses
Selling, general and administrative expenses, including depreciation and amortization, increased $5.2 million to $64.4 million for the quarter ended September 28, 2003, as compared to $59.2 million for the quarter ended September 29, 2002.
For the nine months ended September 28, 2003, selling, general and administrative expenses, including depreciation and amortization, decreased $33.6 million to $191.5 million compared to $225.1 million for the corresponding period in fiscal 2002. This decrease is related to restructuring and special charges of $46.1 million, of which approximately $40 million was reflected in selling, general and administrative expenses in the accompanying consolidated statements of operations for the nine months ended September 29, 2002. See Note 5 to the consolidated financial statements for further discussion of the restructuring and special charges. Excluding these special charges, selling, general and administrative expenses, including depreciation and amortization, increased $6.2 million for the nine months ended September 28, 2003.
The increase for both the three and nine month periods of fiscal 2003 related to increases in sales and field administrative expenses due to headcount additions and costs relating to training in connection with the implementation of provisions of the Healthcare Insurance Portability and Accountability Act of 1996 ("HIPAA") and a new software based scheduling system and, for the nine month period of fiscal 2003, the completion of the technology refresh program. These increases were partially offset by reductions in corporate administrative expenses resulting from restructuring efforts following the SPS Sale in the second quarter of fiscal year 2002 and settlements of certain matters for less than amounts previously accrued ($0.4 million).
Interest Income, Net
Net interest income was approximately $0.1 million for the quarter ended September 28, 2003 and $0.2 million for the quarter ended September 29, 2002. Net interest income represented interest income of approximately $0.3 million for the third quarter of fiscal 2003 and $0.5 million for the third quarter of fiscal 2002, partially offset by fees relating to the revolving credit facility and outstanding letters of credit.
Net interest income was approximately $0.3 million for the nine months ended September 28, 2003 compared to $0.7 million for the nine months ended September 29, 2002. Net interest income for the first nine months of fiscal years 2003 and 2002 represented interest income of $1.1 million and $2.0 million, respectively, partially offset by interest expense of $0.8 million and $1.3 million, respectively.
Interest income declined in the third quarter and first nine months of fiscal 2003 as compared to the third quarter and first nine months of fiscal 2002 due to a decline in interest rates on cash, cash equivalents and restricted cash and, to a lesser extent, a decrease in average cash balances during the period. Interest expense declined in the fiscal 2003 periods due to a reduction
in the average outstanding letters of credit, as well as fees associated with the unused portion of the credit facility.
Income Taxes
The Company recorded state income taxes of approximately $0.4 million and $1.4 million for the third quarter and first nine months ended September 28, 2003. The Company's effective tax rate of approximately 8.6 percent for the first nine months of fiscal 2003 was lower than the statutory income tax rate due to the reversal of a portion of the valuation allowance relating to the realization of tax benefits associated with a net operating loss carryforward and other net deferred tax assets. Because of the uncertainty of the ultimate realization of net deferred tax assets, a valuation allowance is maintained relating to deferred tax assets that are not otherwise used to offset deferred tax liabilities. However, if the recent trend of income continues, it is possible that deferred tax assets will be recognized in the near term. Therefore, the requirement for a valuation allowance is being monitored each quarter by management. The Company had a federal net operating loss carryforward of $13.4 million as of September 28, 2003.
Federal and state income taxes of $1.8 million and $16.4 million were recorded for the third quarter and first nine months of fiscal 2002 relating to continuing operations. During the first quarter of fiscal 2002, income tax expense from continuing operations was $26.9 million, which reflects an additional valuation allowance recorded against certain deferred tax assets in connection with the adoption of SFAS 142 and the subsequent write-off of goodwill; the corresponding tax benefit for the same amount was recorded in the cumulative effect of accounting change line item as reported in the accompanying consolidated statement of operations during the first nine months of fiscal year 2002.
The Company recorded a tax benefit of $1.4 million relating to tax amortization of goodwill for the quarter ended September 29, 2002. The tax benefit is reflected in cumulative effect of accounting change in the accompanying consolidated statement of operations.
Net Income (Loss)
For the third quarter of fiscal 2003, net income was $4.5 million, or $0.17 per diluted share, compared with net income of $3.6 million, or $0.13 per diluted share, for the corresponding period of 2002. Total Company net income in the third quarter of fiscal 2002 included income from continuing operations of $2.7 million, or $0.10 per diluted share, a loss from discontinued operations, net of tax, of $0.6 million, or $0.02 per diluted share, and income relating to the cumulative effect of accounting change, net of tax, of $1.4 million, or $0.05 per diluted share.
For the first nine months of fiscal 2003, net income was $15.0 million, or $0.55 per diluted share, compared with a net loss of $54.4 million, or $2.08 per share for the first nine months of fiscal 2002. Total Company net loss of $54.4 million for the first nine months of fiscal 2002 included a loss from continuing operations of $56.9 million, or $2.18 per share, income from discontinued operations, net of tax, of $191.6 million, or $7.34 per share, and a loss relating to the cumulative effect of accounting change, net of tax, of $189.1 million, or $7.24 per share.
The loss from continuing operations during the first nine months of fiscal 2002 includes $46.1 million in restructuring and special charges. See Note 5 to the consolidated financial statements.
Discontinued operations reported in the 2002 periods included the operating results of the SPS business and the gain, net of related transaction costs and income taxes, associated with the June 13, 2002 sale of the SPS business to Accredo. The cumulative effect of the accounting change, which reflects the net write-off of substantially all of the Company's goodwill, represented the non-cash charge resulting from the adoption of SFAS 142 (Goodwill and Other Intangible Assets) during the first quarter of 2002.
For a discussion of the Company's critical accounting policies, please refer to Gentiva's fiscal 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 25, 2003.
Liquidity
The Company's principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under third party commercial or governmental payor arrangements.
Days Sales Outstanding ("DSO") as of September 28, 2003 remained flat from December 29, 2002 at 59 days. Working capital at September 28, 2003 was $110 million, an increase of $6 million as compared to $104 million at December 29, 2002, primarily due to:
o a $3 million increase in cash, cash equivalents and restricted cash;
o a $5 million increase in accounts receivable;
o a $3 million decrease in prepaid expenses and other assets; and
o a $1 million decrease in current liabilities relating to an increase in cost of claims incurred but not reported ($3 million), offset by decreases in accounts payable ($1 million), and payroll and related taxes ($3 million).
The Company participates in the Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payor classifications are as follows:
For the Three Months Ended For the Nine Months Ended
-------------------------------------- --------------------------------------
September 28, 2003 September 29, 2002 September 28, 2003 September 29, 2002
------------------ ------------------ ------------------ ------------------
Medicare 22% 21% 21% 21%
Medicaid and Other Government 20% 22% 21% 22%
Commercial Insurance and Other 58% 57% 58% 57%
------------------ ------------------ ------------------ ------------------
100% 100% 100% 100%
================== ================== ================== ==================
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On October 1, 2002, the reduction in home health payment limits mandated under the Balanced Budget Act of 1997 became effective. The change in payment limits reduced payments under the Medicare program to home health
agencies for open episodes of care on or after October 1, 2002 by approximately 7 percent. Simultaneous with this reduction, market basket rate increases of 2.1 percent adjusted for certain wage indices were also implemented, resulting in an overall reduction in reimbursement rates of approximately 4.9 percent. In addition, Medicare reimbursement related to home health services performed in specifically defined rural areas of the country was further reduced as the ten percent rural add-on provision for home health services expired as of April 1, 2003. On October 1, 2003, a further market basket rate increase of 3.3 percent became effective for open episodes of care on or after October 1, 2003. Congress is currently considering various proposals which could result in changes to Medicare reimbursement for home health services. In addition, further reductions in Medicaid reimbursement rates and limitations on eligibility requirements may also occur.
There are certain standards and regulations that the Company must adhere to in order to continue to participate in these programs, including compliance with the Company's corporate integrity agreement. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in the Company's exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes it is currently in compliance with these standards and regulations.
The Company is party to a contract with CIGNA Health Corporation ("Cigna"), pursuant to which the Company provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by Cigna. For the third quarter and first nine months of fiscal 2003, Cigna accounted for approximately 34 percent and 36 percent of the Company's total net revenues compared to approximately 37 percent and 38 percent for the third quarter and first nine months of fiscal 2002, respectively. The Company is in its eighth year of the contract, with the current term ending on December 31, 2003 and renewing from year to year subject to each party's termination rights. Historically, the Company and Cigna have each year renegotiated the contract prior to December 31, and the Company is presently in negotiations with Cigna with respect to services subsequent to December 31, 2003. While the Company currently expects to reach an agreement with Cigna for services subsequent to December 31, 2003, the agreement is likely to differ from the contracts of previous years and could adversely impact Gentiva's actual financial results for the coming year. If Cigna chose to terminate or not renew the contract, or to significantly modify its use of the Company's services, there could be a material adverse effect on the Company's cash flow.
Net revenues generated under capitated agreements with managed care payors were approximately 16 percent of total net revenues for the third quarter and first nine months of fiscal 2003 and 17 percent for the third quarter and 16 percent for the first nine months of fiscal 2002. Fee-for-service contracts with other commercial payors are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party.
The Company's credit facility, which was amended on August 7, 2003 as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the
lender. Borrowing availability under the credit facility was reduced by $10 million until such quarter in 2003 in which the trailing 12 month EBITDA, excluding certain restructuring costs and special charges recorded by the Company during fiscal 2002, as defined, exceeded $15 million. As of March 30, 2003, the trailing 12 months EBITDA threshold was achieved and the availability restriction lifted, effective June 1, 2003.
At the Company's option, the interest rate on borrowings under the credit facility was based on the London Interbank Offered Rates (LIBOR) plus 3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the Company was required to pay a fee equal to 2.5 percent per annum of the aggregate face amount of outstanding letters of credit. Beginning in 2003, the applicable margin for the LIBOR borrowing, prime rate borrowing and letter of credit fees decrease by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent, respectively, provided that the Company's trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, is in excess of $20 million. The Company was also subject to an unused line fee equal to 0.50 percent per annum of the average daily difference between the total revolving credit facility amount, as defined, and the total outstanding borrowings and letters of credit. For 2003, the unused credit line fee decreases to 0.375 percent provided the minimum EBITDA target described above is achieved. The higher margins and fees are subject to reinstatement in the event that the Company's trailing 12 month EBITDA falls below $20 million. The Company met this minimum EBITDA requirement as of March 30, 2003, with the rate reduction effective June 1, 2003 and continued to meet this requirement as of September 28, 2003.
Total outstanding letters of credit were $20.8 million as of September 28, 2003. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. There were no borrowings outstanding under the credit facility as of September 28, 2003. As of September 28, 2003, the Company had borrowing capacity under the credit facility, after adjusting for outstanding letters of credit, of approximately $34 million.
The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, the credit facility was amended to make covenants relating to acquisitions and stock repurchases less restrictive, provided that the Company maintains minimum excess aggregate liquidity, as defined in the amendment, equal to at least $60 million and to allow for the disposition of certain assets.
The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to $275,000 if the facility is terminated during the period from June 13, 2003 to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004 to June 12, 2005. There is no fee for termination of the facility subsequent to June 12, 2005. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment.
The credit facility includes provisions, which, if not complied with, could require early payment by the Company. These include customary default events, such as failure to comply with financial covenants, insolvency events, non-payment of scheduled payments, acceleration of other financial obligations and change in control provisions. In addition, these provisions include an account obligor, whose accounts are more than 25 percent of all accounts of the Company over the previous 12-month period, canceling or failing to renew its contract with the Company and ceasing to recognize the Company as an approved provider of health care services, or the Company revoking the lending agent's control over its governmental lockbox accounts. The Company does not have any trigger events in the credit facility that are tied to changes in its credit rating or stock price. As of September 28, 2003, the Company was in compliance with these covenants.
The Company may be subject to workers compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover this risk but is substantially self-insured for most of these claims. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. Such estimates and the resulting reserves are reviewed and updated periodically.
The Company is responsible for the cost of individual workers compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers compensation program are guaranteed by letters of credit and segregated cash balances.
Capital Expenditures
The Company's capital expenditures for the nine months ended September 28, 2003 were $4.7 million as compared to $2.4 million for the same period in fiscal 2002. The Company intends to make investments and other expenditures to, among other things, upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry. In this regard, management expects that capital expenditures for fiscal 2003 will range between $8 million and $9 million. Management expects that the Company's capital expenditure needs will be met through operating cash flow and available cash reserves.
Cash Resources and Obligations
The Company had cash, cash equivalents and restricted cash of approximately $104.3 million as of September 28, 2003. The restricted cash relates to cash funds of $17.3 million that have been segregated in a trust account to provide additional collateral and to replace approximately $7 million of letters of credit and a $5 million surety bond which had been used as collateral under the Company's insurance programs. Interest on the funds in the
trust account accrues to the Company. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds.
The Company anticipates that repayments to Medicare for partial episode payments and prior year cost report settlements will be made periodically through June 2005. These amounts are reflected as Medicare liabilities in the accompanying consolidated balance sheets.
On May 16, 2003, the Company announced that its Board of Directors had authorized the Company to repurchase and to formally retire up to 1,000,000 shares of its outstanding common stock. The repurchases were to occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. As of July 23, 2003, the Company had repurchased all 1,000,000 shares of its common stock at an average cost of $9.08 per share and at a total cost of approximately $9.1 million. On August 7, 2003, the Company's Board of Directors authorized the Company to repurchase and formally retire up to an additional 1,500,000 shares of its outstanding common stock. The repurchases will occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. As of September 28, 2003, the Company had repurchased 53,800 shares at an average cost of $10.57 per share and a total cost of approximately $0.6 million.
Management expects that the Company's working capital needs for fiscal 2003 will be met through operating cash flow and its existing cash balances. The Company may also consider other alternative uses of cash including, among other things, acquisitions, additional share repurchases and cash dividends. These uses of cash would require the approval of the Company's Board of Directors and may require the approval of its lender. If cash flows from operations, cash resources or availability under the credit facility fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity.
Contractual Obligations and Commercial Commitments
At September 28, 2003, the Company had no long-term debt and no significant capital lease obligations.
The Company had total letters of credit outstanding under its credit facility of approximately $27.6 million at December 29, 2002 and $20.8 million at September 28, 2003. The letters of credit, which expire one year from date of issuance, are issued to guarantee payments under the Company's workers compensation program and for certain other commitments. The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company's obligations as further discussed in the "Liquidity and Capital Resources" section under the section "Cash Resources and Obligations".
The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts.
Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company had no interest rate exposure on fixed rate debt or other market risk at September 28, 2003.
Evaluation of disclosure controls and procedures.
The Company's Chief Executive Officer and Chief Financial Officer are responsible for establishing and maintaining "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e)) for the Company. The Company's Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this quarterly report, as required by Exchange Act Rule 13a-15(b), have concluded that the Company's disclosure controls and procedures are adequate and effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in its periodic SEC filings.
Changes in internal control over financial reporting.
As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter covered by this quarterly report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this quarterly report.
PART II - OTHER INFORMATION
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.
None.
None.
None.
In connection with a July 19, 1999 settlement with various government agencies, Olsten executed a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, which will remain in effect until August 18, 2004. The corporate integrity agreement applies to the Company's businesses that bill the federal government health programs directly for services, such as its nursing brand (but excludes the SPS business), and focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims. Under the corporate integrity agreement, the Company is required, for example, to maintain a corporate compliance officer to develop and implement compliance programs, to retain an independent review organization to perform annual reviews and to maintain a compliance program and reporting systems, as well as to provide certain training to employees.
The Company's compliance program is required to be implemented for all newly established or acquired business units if their type of business is covered by the corporate integrity agreement. Reports under the integrity agreement are to be filed annually with the Department of Health and Human Services, Office of Inspector General. After the corporate integrity agreement expires, the Company is to file a final annual report with the government. The Company believes it is in compliance with the corporate integrity agreement and has timely filed all required reports. If the Company fails to comply with the terms of its corporate integrity agreement, the Company will be subject to penalties.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibit Number Description
-------------- -----------
3.1 Restated Certificate of Incorporation of
Company. (1)
3.2 Certificate of Correction to Certificate of
Incorporation, filed with the Delaware
Secretary of State on July 1, 2002. (2)
3.3 Restated By-Laws of Company. (2)
4.1 Specimen of common stock. (4)
4.2 Form of Certificate of Designation of Series A
Junior Participating Preferred Stock. (1)
4.3 Form of Certificate of Designation of Series A
Cumulative Non-Voting Redeemable Preferred
Stock. (3)
10.1 Amendment dated August 7, 2003 to Consulting
Agreement dated as of July 1, 2002 between Gail
R. Wilensky and Gentiva Health Services (USA),
Inc.*+
10.2 First Amendment and Consent Agreement dated
August 7, 2003 to Loan and Security Agreement
dated June 13, 2002 by and between Fleet
Capital Corporation, as Administrative Agent on
behalf of the lenders named therein, Fleet
Securities, Inc., as Arranger, Gentiva Health
Services, Inc., Gentiva Health Services Holding
Corp. and the subsidiaries named therein.*
31.1 Certification of Chief Executive Officer dated
November 5, 2003 pursuant to Rule 13a-14(a).*
31.2 Certification of Chief Financial Officer dated
November 5, 2003 pursuant to Rule 13a-14(a).*
32.1 Certification of Chief Executive Officer dated
November 5, 2003 pursuant to 18 U.S.C. Section
1350.*
32.2 Certification of Chief Financial Officer dated
November 5, 2003 pursuant to 18 U.S.C. Section
1350.*
30
|
-------------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement of Company on Form S-4, dated January 19,
2000 (File No. 333-88663).
(2) Incorporated herein by reference to Form 10-Q of Company for the
quarterly period ended June 30, 2002.
(3) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement of Company on Form S-4, dated February 4,
2000 (File No. 333-88663).
(4) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement of Company on Form S-4, dated February 9,
2000 (File No. 333-88663).
|
* Filed herewith
+ Management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K
-------------------
On August 5, 2003, the Company furnished a report on Form 8-K
(i) furnishing in Item 7 as an exhibit a press release covering the
Company's 2003 second quarter consolidated earnings and (ii) reporting in
Item 12 the issuance of the Company's press release on the subject of its
2003 second quarter consolidated earnings.
|
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
(Registrant)
Date: November 5, 2003 /s/ RONALD A. MALONE
------------------------------------
Ronald A. Malone
Chairman and Chief Executive Officer
Date: November 5, 2003 /s/ JOHN R. POTAPCHUK
------------------------------------
John R. Potapchuk
Senior Vice President and
Chief Financial Officer
|
EXHIBIT 10.1
CONSULTING AGREEMENT
AMENDMENT
The Consulting Agreement dated July 1, 2002 ("Agreement") by and between Gail R. Wilensky, an individual ("Consultant") and Gentiva Health Services (U.S.A.), Inc. a Delaware corporation ("Gentiva"), with its principal place of business in Melville, New York is amended as follows:
WHEREAS, Gentiva and Consultant desire to extend the Agreement for one year, subject to the same terms and conditions;
WHEREAS, Gentiva's Board of Directors approved the extension of the Agreement on August 7, 2003;
NOW THEREFORE, in consideration of the premises and the mutual covenants and agreements herein contained, the parties hereby agree as follows:
Section 1.2 of the Agreement is amended as follows:
"The term of this Agreement shall be extended for one (1) year commencing on June 1, 2003 (the "Effective Date") and expiring on May 31, 2004. This Agreement may be further extended only in writing upon the mutual agreement of the parties."
IN WITNESS WHEREOF, the parties have duly executed this instrument on August 7, 2003.
CONSULTANT GENTIVA HEALTH SERVICES (USA), INC.
_____________________ By: ___________________________
Dr. Gail Wilensky Ronald A. Malone
Chief Executive Officer
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EXHIBIT 10.2
This FIRST AMENDMENT AND CONSENT AGREEMENT TO LOAN AND SECURITY AGREEMENT ("Amendment") is made this 7th day of August, 2003 by and among the lending institutions listed in Annex I to the Loan Agreement (as defined below) (each a "Lender", and collectively, "Lenders"), Fleet Capital Corporation, a Rhode Island corporation with an office at 200 Glastonbury Boulevard, Glastonbury, CT 06033, as administrative agent for the Lenders ("Agent"), and Gentiva Health Services, Inc., a Delaware corporation with its chief executive office at 3 Huntington Quadrangle 2S, Melville, NY 11747 (the "Company"), Gentiva Health Services Holding Corp., a Delaware corporation with its chief executive office at 3 Huntington Quadrangle 2S, Melville, NY 11747 ("GHS"), and each of the Subsidiary Borrowing Corporations listed on the signature pages hereto, each with a state of incorporation and chief executive office as listed on the exhibits to the Loan Agreement (each of the Company, GHS and each Subsidiary Borrowing Corporation, a "Borrower," and collectively, "Borrowers").
A. Borrowers, Agent and Lenders are parties to a certain Loan and Security Agreement dated June 13, 2002 (as it may heretofore have been or may herein or hereafter be modified, amended, restated or replaced from time to time, the "Loan Agreement") pursuant to which Borrowers established certain financing arrangements with Lenders including a Revolving Credit Loan facility and a Letter of Credit facility. The Loan Agreement and all instruments, documents and agreements executed in connection therewith or related thereto are referred to herein collectively as the "Existing Loan Documents." All capitalized terms not otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement.
B. Borrowers have advised Agent and Lenders that Borrowers wish to sell and dispose of all of the equity interests in Bayshore Health Group, a Canadian entity ("Bayshore"), that are currently owned by any one or more of the Borrowers, and Borrowers have requested that Agent and Lenders give their consent to such sale and disposition. Agent and Lenders have agreed to consent to such sale and disposition on the terms and conditions and according to the provisions of this Amendment.
C. Borrowers, Agent and Lenders have agreed that certain modifications should be made to the terms and provisions of the Loan Agreement on the terms and conditions and according to the provisions of this Amendment.
NOW, THEREFORE, with the foregoing Background incorporated by reference and made a part hereof and intending to be legally bound, the parties agree as follows:
1. Consent to Sale of Equity Interests in Bayshore. Upon the satisfaction of the Effectiveness Conditions (as defined below), Agent and Lenders shall be deemed to have consented to the sale and disposition by Borrowers of all of the equity interests in Bayshore owned by any one or more of the Borrowers. Agent and Lenders agree that this sale and disposition by Borrowers shall be permitted notwithstanding the prohibitions regarding sales and dispositions of Property contained in subsection 8.2.9 of the Loan Agreement, and Agent and Lenders further agree that the fair market value of the equity interests in Bayshore disposed of by the Borrowers through this sale shall not be included in any calculation of the aggregate amount of the fair market value of dispositions of Property by the Borrowers during fiscal year 2003 for the purpose of determining Borrowers' compliance with the provisions of subsection 8.2.9(iii).
2. Amendments to Loan Agreement. Upon the satisfaction of the Effectiveness Conditions, the Loan Agreement shall be amended as follows:
(a). Amendment to Permitted Loans Covenant. Subsection 8.2.2 of the Loan Agreement shall be amended by deleting clause (c) thereto in its entirety and replacing it as follows:
(c) any indebtedness arising in favor of any one or more of the Borrowers in connection with sale by one or more of the Borrowers of all of the equity interests owned by such Borrowers in Bayshore Health Group, a Canadian entity, which sale was approved pursuant to the First Amendment and Consent Agreement to Loan and Security Agreement executed among Agent, Lenders and Borrowers (provided that, no other loans from Borrowers to Bayshore Health Group shall be permitted hereunder).
(b). Addition of New Definition of "Aggregate Excess Liquidity". Appendix A of the Loan Agreement shall be amended by adding the following new definition to such Appendix A in the appropriate alphabetical place:
"Aggregate Excess Liquidity - as of any date of calculation, an
amount equal to the sum of (A) the Borrowing Base as of such date
plus (B) Borrowers' cash and liquid marketable investments and
short-term investments on hand as reflected on the consolidated
balance sheets of Borrowers as of such date, less (C) the sum of
(i) the aggregate amount of all Loans and the LC Amount outstanding
as of such date plus (ii) all sums due and owing to trade creditors
as of such date which remain outstanding beyond normal trade terms,
or special terms granted by trade creditors, plus (iii) any
reserves against the Borrowing Base permitted by subsection 1.1.1
hereof existing as of such date."
(c). Addition of New Definition of "Permitted Stock Repurchase". Appendix A of the Loan Agreement shall be amended by adding the following new definition to such Appendix A in the appropriate alphabetical place:
"Permitted Stock Repurchase - any share repurchase of the capital stock of the Company, provided that (i) the aggregate amount of all such stock repurchases calculated from and after August 7, 2003 (and exclusive of the amount of any stock repurchases by the
Company prior to such date) shall not exceed Twenty-Five Million Dollars ($25,000,000.00), (ii) both prior and after giving effect to any such stock repurchase, no Default or Event of Default shall exist and (iii) both prior to and immediately after giving effect to any such stock repurchase, and at all times during each of the next two fiscal quarters ending immediately after the date of any such stock repurchase, Borrowers shall have an Aggregate Excess Liquidity of at least Sixty Million Dollars ($60,000,000.00), and the financial information reported in the Form 10-K/10-Q reports filed by the Company with the Securities and Exchange Commission for each such two fiscal quarters shall reflect compliance as of the end of each such fiscal quarter with the forgoing Aggregate Excess Liquidity covenant. The quarterly Compliance Certificate provided by Borrowers at the end of each such fiscal quarter shall include a certification with supporting calculations as to whether or not Borrowers are in compliance with the Aggregate Excess Liquidity covenant set forth in the preceding sentence."
(d). Amendment to Definition of "Permitted Acquisition". The first sentence of the definition of "Permitted Acquisition" in Appendix A to the Loan Agreement shall be deleted in its entirety and replaced as follows:
"any acquisition transaction whereby any Borrower shall acquire all or substantially all of the assets of another Person or shall acquire all of the capital stock or other equity interests of another Person and/or merge or consolidate with another Person, provided that (i) the value of each such acquisition shall not exceed Three Million Dollars ($3,000,000.00), (ii) the aggregate value of all such acquisition transactions which have occurred since the Closing Date shall not exceed Twenty Million Dollars ($20,000,000.00), (iii) both prior and after giving effect to any such acquisition transaction, no Default or Event of Default shall exist, and (iv) both prior to and immediately after giving effect to any such acquisition transaction, and at all times during each of the next two fiscal quarters ending immediately after the date of any such acquisition transaction, Borrowers shall have an Aggregate Excess Liquidity of at least Sixty Million Dollars ($60,000,000.00), and the financial information reported in the Form 10-K/10-Q reports filed by the Company with the Securities and Exchange Commission for each such two fiscal quarters shall reflect compliance as of the end of each such fiscal quarter with the forgoing Aggregate Excess Liquidity covenant. The quarterly Compliance Certificate provided by Borrowers at the end of each such fiscal quarter shall include a certification with supporting calculations as to whether or not Borrowers are in compliance with the Aggregate Excess Liquidity covenant set forth in the preceding sentence."
(e). Amendment to Definition of "Restricted Investment". The definition of "Restricted Investment" in Appendix A to the Loan Agreement shall be amended by adding the following new clause (viii) to the end thereof:
"(viii) investments made in connection with any Permitted Stock Repurchase."
(f). Amendment of Form of Compliance Certificate. EXHIBIT B to the Loan Agreement entitled COMPLIANCE CERTIFICATE shall be amended by deleting it in its entirety and replacing it with the revised EXHIBIT B attached hereto.
(g). Amendment of Form of Borrowing Base Certificate. EXHIBIT C to the Loan Agreement entitled BORROWING BASE CERTIFICATE shall be amended by deleting it in its entirety and replacing it with the revised EXHIBIT C attached hereto.
(h). Amendment to Adjusted Net Earnings from Operations Add Back. The second bullet point item on EXHIBIT J to the Loan Agreement entitled ADJUSTED NET EARNINGS FROM OPERATIONS ADD BACK shall be deleted in its entirety and replaced as follows:
"Any loss or expense arising from any Special Charges relating to any Permitted Stock Repurchases."
3. Amendment and Consent Fee. Borrowers covenants and agrees that, in consideration for the consent and accommodations provided for herein, Borrowers shall pay to Agent for the ratable benefit of the Lender a fee of Twenty-Seven Thousand Five Hundred Dollars ($27,500.00) (the "Amendment and Consent Fee"), which fee shall be due and payable and fully earned and non-refundable on the date of the execution of this Amendment.
4. Representations and Warranties. To induce Agent and Lenders to enter into this Amendment, each Borrower warrants, represents and covenants to Agent and Lenders that:
(i). All warranties and representations made to Agent and Lenders under the Loan Agreement and the other Existing Loan Documents are true and correct as to the date hereof.
(ii). The execution and delivery by each Borrower of this Amendment and the performance by it of the transactions herein contemplated (i) are and will be within its powers, (ii) have been authorized by all necessary corporate actions and will not contravene any provision of the certificate or articles of incorporation or bylaws or other similar corporate governance documents of such Borrower, and (iii) are not and will not be in contravention of any order of any court or other agency of government, of law or any other indenture, agreement or undertaking to which such Borrower is a party or by which the property of such Borrower is bound, or be in conflict with, result in a breach of, or constitute (with due notice and/or lapse of time, if applicable)
a default under any such indenture, agreement or undertaking or result in the imposition of any lien, charge or encumbrance of any nature on any of the properties of such Borrower.
(iii). This Amendment and any assignment, instrument, document, or agreement executed and delivered in connection herewith, will be valid and binding on and enforceable against each Borrower in accordance with its respective terms.
(iv). Both prior to and after giving effect to this Amendment, no Default or Event of Default exists under the Loan Agreement or any of the other Existing Loan Documents.
(v). No authorization or approval or other action by, and no notice to or filing with, any governmental authority or other regulatory body is required in connection with the due execution, delivery and performance by any Borrower of this Amendment or the performance by such Borrower of the Loan Agreement, as amended hereby.
(vi). The name, office and signature of the officer(s) of each Borrower signing this Amendment have previously been certified to Agent in the incumbency and signature certificates of such Borrower heretofore delivered to Agent.
5. Confirmation of Security Interest. To secure the prompt payment and performance to Agent and Lenders of the Obligations and satisfaction by Borrowers of all covenants and undertakings contained in the Loan Agreement and other Existing Loan Documents, each Borrower hereby reconfirms the grant to Agent, for the ratable benefit of Lenders, of a continuing security interest in and Lien upon all of the Collateral owned by such Borrower, whether now owned or existing or hereafter created, acquired or arising and wherever located, given to Agent by such Borrower under the Existing Loan Documents. Each such Borrower hereby confirms and agrees that all such security interests and liens granted to Agent under the Existing Loan Documents continue in full force and effect and shall continue to secure the Obligations. All Collateral remains free and clear of any liens other than liens in favor of Agent, except for Permitted Liens. Nothing herein contained is intended to in any way impair or limit the validity, priority and extent of Agent's existing security interest in and liens upon the Collateral.
6. Effectiveness Conditions. This Amendment shall be effective upon completion of the following conditions precedent (the "Effectiveness Conditions"):
(a). Execution and delivery of this Amendment by all parties hereto;
(b). To the extent that the name, office and signature of the officer(s) of any Borrower or Subsidiary Guarantor signing this Amendment or any of the certificates or other documents contemplated hereby do not currently appear in the incumbency and signature certificates of such Borrower or Subsidiary Guarantor heretofore delivered to Agent, Agent shall have received, in form and substance satisfactory to it, certificates as to the incumbency and signature of such officer(s); and
(c). Payment of the Amendment and Consent Fee and all fees and expenses of Agent (including legal expenses) incurred in relation to the preparation and execution of this Amendment.
7. Ratification of Existing Loan Documents. Except as expressly set forth herein, all of the terms and conditions of the Loan Agreement and the other Existing Loan Documents are hereby ratified and confirmed and continue unchanged and in full force and effect. All references to the Loan Agreement shall mean the Loan Agreement as modified by this Amendment.
8. Amendment as Loan Document. Borrowers hereby acknowledge and agree that this Amendment constitutes a "Loan Document" under the Loan Agreement. Accordingly, it shall be an Event of Default under the Loan Agreement if (i) any representation or warranty made by Borrowers under or in connection with this Amendment shall have been untrue, false or misleading in any material respect when made, or (ii) Borrowers shall fail to perform or observe any term, covenant or agreement contained in this Amendment.
9. Reaffirmation by Guarantors. Each Subsidiary Guarantor acknowledges and agrees that the execution, delivery and performance of this Amendment by Agent, Lenders and Borrowers, and the carrying out of the provisions hereof and the consummation of all transactions contemplated hereunder, including without limitation the consents granted and amendments to the Loan Agreement provided for hereunder, shall not affect or in any way diminish or modify the obligations of each of them under the Subsidiary Guaranty and Surety Agreement executed by Subsidiary Guarantors as of June 13, 2002 or any other Existing Loan Document to which such Subsidiary Guarantor is a party, and each Subsidiary Guarantor acknowledges and affirms its obligations under the Subsidiary Guaranty and Surety Agreement and the other Existing Loan Documents.
10. Governing Law. THIS AMENDMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN NEW YORK. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO ITS OTHERWISE APPLICABLE CONFLICTS OF LAWS RULES.
11. Waiver of Jury Trial. EACH BORROWER AND EACH SUBSIDIARY GUARANTOR WAIVES THE RIGHT TO TRIAL BY JURY (WHICH EACH LENDER AND AGENT HEREBY ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING OUT OF OR RELATED TO ANY OF THIS AMENDMENT. EACH BORROWER AND EACH SUBSIDIARY GUARANTOR WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVER WITH ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
12. Successors and Assigns. This Amendment, along with each of the Existing Loan Documents, shall be binding upon and shall benefit Agent, Lenders, Borrowers and Subsidiary Guarantors and their respective successors and permitted assigns (as and if permitted under the Loan Agreement).
13. Counterparts. This Amendment may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute one and the same respective agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the parties hereto have duly executed this First Amendment and Consent Agreement to Loan and Security Agreement as of the date first written above.
GENTIVA HEALTH SERVICES, INC.
By:______________________________
Name: John R. Potapchuk
Title: Senior Vice President and Chief
Financial Officer
GENTIVA HEALTH SERVICES HOLDING CORP.
By:______________________________ Name: John R. Potapchuk Title: Treasurer BORROWING SUBSIDIARY CORPORATIONS: --------------------------------- GENTIVA CARECENTRIX, INC. GENTIVA CARECENTRIX (AREA ONE) CORP. GENTIVA CARECENTRIX (AREA TWO) CORP. GENTIVA CARECENTRIX (AREA THREE) CORP. GENTIVA CERTIFIED HEALTHCARE CORP. GENTIVA HEALTH SERVICES (CERTIFIED), INC. GENTIVA HEALTH SERVICES (USA), INC. |
GENTIVA SERVICES OF NEW YORK, INC.
NEW YORK HEALTHCARE SERVICES, INC.
OHS SERVICE CORP.
QC-MEDI NEW YORK, INC.
QUALITY CARE - USA, INC.
QUALITY MANAGED CARE, INC.
By:______________________________
Name: John R. Potapchuk
Title: Treasurer
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
[Borrowers Signature Page to First Amendment to June 2002 Loan Agreement]
COMMONWEALTH HOME CARE, INC.
KIMBERLY HOME HEALTH CARE, INC.
PARTNERSFIRST MANAGEMENT, INC.
QUANTUM CARE NETWORK, INC.
QUANTUM HEALTH RESOURCES, INC.
THE I.V. CLINIC, INC.
THE I.V. CLINIC II, INC.
THE I.V. CLINIC III, INC.
By:________________________________
Name: John R. Potapchuk
Title: Treasurer
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
[Subsidiary Guarantors Signature Page to First Amendment to June 2002 Loan Agreement]
FLEET CAPITAL CORPORATION,
as Agent
By:______________________________
Name: Adam Seiden
Title: Vice President
FLEET CAPITAL CORPORATION,
By:______________________________
Name: Adam Seiden
Title: Vice President
SIEMENS FINANCIAL SERVICES, INC.
By:______________________________
Name:
Title:
HFG HEALTHCO-4 LLC
By:______________________________
Name:
Title:
[Agent and Lenders Signature Page to First Amendment to June 2002 Loan Agreement]
EXHIBIT 31.1
CERTIFICATIONS
I, Ronald A. Malone, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 5, 2003
/s/ RONALD A. MALONE
------------------------------------
Ronald A. Malone
Chairman and Chief Executive Officer
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EXHIBIT 31.2
CERTIFICATIONS
I, John R. Potapchuk, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: November 5, 2003
/s/ JOHN R. POTAPCHUK
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John R. Potapchuk
Senior Vice President and
Chief Financial Officer
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Furnished (but not filed) as an exhibit to the periodic report identified in the Certification.
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald A. Malone, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 5, 2003 /s/ RONALD A. MALONE
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Ronald A. Malone
Chief Executive Officer
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Furnished (but not filed) as an exhibit to the periodic report identified in the Certification.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended September 28, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Potapchuk, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: November 5, 2003 /s/ JOHN R. POTAPCHUK
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John R. Potapchuk
Chief Financial Officer
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