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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 2003
Commission File No. 1-15669
GENTIVA HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 36-433-5801
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle 2S, Melville, New York 11747-8943
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, par value $.10 per NASDAQ
share
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in PART III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes X_ No __
The aggregate market value of the registrant's Common Stock held by
non-affiliates of the registrant as of June 27, 2003, the last business day of
registrant's most recently completed second fiscal quarter, was $225,337,941
based on the closing price of the Common Stock on the Nasdaq National Market on
such date.
The number of shares outstanding of the registrant's Common Stock, as
of February 26, 2004, was 25,528,593.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant's definitive
Proxy Statement, to be filed not later than 120 days after the end of the fiscal
year covered by this Report, for the registrant's 2004 Annual Meeting of
Shareholders is incorporated by reference into PART III.
PART I
ITEM 1. BUSINESS
SPECIAL CAUTION REGARDING FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K,
INCLUDING, WITHOUT LIMITATION, STATEMENTS CONTAINING THE WORDS "BELIEVES,"
"ANTICIPATES," "INTENDS," "EXPECTS," "ASSUMES," "TRENDS" AND SIMILAR
EXPRESSIONS, CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE
PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS ARE
BASED UPON THE COMPANY'S CURRENT PLANS, EXPECTATIONS AND PROJECTIONS ABOUT
FUTURE EVENTS. HOWEVER, SUCH STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS,
UNCERTAINTIES AND OTHER FACTORS THAT MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE
OR ACHIEVEMENTS OF THE COMPANY TO BE MATERIALLY DIFFERENT FROM ANY FUTURE
RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENTS. SUCH FACTORS INCLUDE, AMONG OTHERS, THE FOLLOWING:
o GENERAL ECONOMIC AND BUSINESS CONDITIONS;
o DEMOGRAPHIC CHANGES;
o CHANGES IN, OR FAILURE TO COMPLY WITH, EXISTING GOVERNMENTAL
REGULATIONS;
o LEGISLATIVE PROPOSALS FOR HEALTH CARE REFORM;
o CHANGES IN MEDICARE AND MEDICAID REIMBURSEMENT LEVELS;
o EFFECTS OF COMPETITION IN THE MARKETS THE COMPANY OPERATES IN;
o LIABILITY AND OTHER CLAIMS ASSERTED AGAINST THE COMPANY;
o ABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL;
o AVAILABILITY AND TERMS OF CAPITAL;
o LOSS OF SIGNIFICANT CONTRACTS OR REDUCTION IN REVENUE ASSOCIATED
WITH MAJOR PAYOR SOURCES;
o ABILITY OF CUSTOMERS TO PAY FOR SERVICES;
o A MATERIAL SHIFT IN UTILIZATION WITHIN CAPITATED AGREEMENTS; AND
o CHANGES IN ESTIMATES AND JUDGMENTS ASSOCIATED WITH CRITICAL
ACCOUNTING POLICIES.
FOR A DETAILED DISCUSSION OF THESE AND OTHER FACTORS THAT COULD CAUSE
THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE RESULTS CONTEMPLATED
BY THE FORWARD-LOOKING STATEMENTS, PLEASE REFER TO THE "RISK FACTORS" SECTION IN
THIS ITEM 1, TO "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS" AND ELSEWHERE IN THIS REPORT. THE READER
SHOULD NOT PLACE UNDUE RELIANCE ON FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY
AS OF THE DATE OF THIS REPORT. EXCEPT AS REQUIRED UNDER THE FEDERAL SECURITIES
LAWS AND THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION
("SEC"), THE COMPANY DOES NOT HAVE ANY INTENTION OR OBLIGATION TO PUBLICLY
RELEASE ANY REVISIONS TO FORWARD-LOOKING STATEMENTS TO REFLECT UNFORESEEN OR
OTHER EVENTS AFTER THE DATE OF THIS REPORT. THE COMPANY HAS PROVIDED A DETAILED
DISCUSSION OF RISK FACTORS WITHIN THIS ANNUAL REPORT ON FORM 10-K AND VARIOUS
FILINGS WITH THE SEC. THE READER IS ENCOURAGED TO REVIEW THESE RISK FACTORS AND
FILINGS.
INTRODUCTION
Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides
home health services throughout most of the United States. Gentiva was
incorporated in the state of Delaware on August 6, 1999 and 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"). Prior to the Split-Off, all of the assets and liabilities of
Olsten's health services business (formerly known as Olsten Health Services)
were transferred to the Company pursuant to a separation agreement and other
agreements among Gentiva, Olsten and Adecco SA ("Adecco").
On June 13, 2002, the Company sold substantially all of the assets of
its specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo") and received payment of cash in the amount of $207.5
million (before a $0.9 million reduction resulting from a closing net book value
adjustment) and 5,060,976 shares of Accredo common stock (valued at $262.6
million, based on the closing price of Accredo common stock on the Nasdaq
National Market on June 13, 2002). The cash consideration (less a holdback of
$3.5 million for certain income taxes the Company expected to incur) and the
Accredo common stock were then distributed as a special dividend to the
Company's shareholders.
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Information included in this annual report on Form 10-K refers to the
Company's continuing home health services business, unless the context indicates
otherwise.
HOME HEALTH SERVICES
The Company's home health services business is conducted through more
than 350 direct service delivery units and delivers a wide range of services
principally through its Gentiva(R) Health Services and CareCentrix(R) brands.
The Company operates licensed and Medicare-certified nursing agencies
located in 35 states, substantially all of which are currently accredited by the
Joint Commission on Accreditation of Healthcare Organizations (JCAHO). These
agencies provide various combinations of skilled nursing and therapy services,
paraprofessional nursing services and homemaker services to pediatric, adult and
elder patients. Reimbursement sources include government programs, such as
Medicare and Medicaid, and private sources, such as health insurance plans,
managed care organizations, long term care insurance plans and personal funds.
The Company's nursing operations are organized in five geographic regions, each
staffed with clinical, operational and sales teams. Regions are further
separated into operating areas. Each operating area includes branch locations
through which nursing agencies operate. Each agency is led by a director and is
staffed with clinical and administrative support staff as well as caregivers who
deliver direct patient care. The caregivers are employed on either a full-time
basis or are paid on a per visit, per shift, per diem or per hour basis.
The Company's CareCentrix operations provide an array of
administrative services and coordinate the delivery of home nursing services,
acute and chronic infusion therapies, durable medical equipment, and respiratory
products and services for managed care organizations and health plans. These
administrative services are coordinated within four regional coordination
centers and are delivered through the Company's nursing locations as well as
through an extensive nationwide network of third-party provider locations
credentialed by the Company (nearly 1,900 at December 28, 2003). CareCentrix
accepts case referrals from a wide variety of sources, verifies eligibility and
benefits and transfers case requirements to the credentialed providers for
services to the patient. CareCentrix provides services to its customers,
including the fulfillment of case requirements, care management, provider
credentialing, eligibility and benefits verification, data reporting and
analysis, and coordinated centralized billing for all authorized services
provided to the customer's enrollees. Contracts within CareCentrix are
structured as fee-for-service, whereby a payor is billed on a per usage basis
according to a fee schedule for various services, or as at-risk capitation,
whereby the payor remits a monthly payment to the Company based on the number of
members enrolled in the health plans under the capitation agreement, subject to
certain limitations and coverage guidelines.
The Company's home health services business also delivers services to
its customers through other focused business brands that include Gentiva
Orthopedic Services, a program which provides individualized home orthopedic
rehabilitation services to patients recovering from joint replacement or other
major orthopedic surgery, and Rehab Without Walls(R), which provides home and
community-based therapies for patients with traumatic brain injury,
cerebrovascular accident injury and acquired brain injury, as well as a number
of other complex rehabilitation cases. Other specialty services, including
therapies for patients with balance issues who are prone to injury or immobility
as a result of falling, are in various stages of development.
The Company also provides consulting services to home health agencies
through its Gentiva Business Services unit. These services include billing and
collection activities, web-based caregiver training and credentialing, on-site
agency support and consulting, operational support and individualized strategies
for reduction of days sales outstanding.
PAYORS
Net revenues attributable to major payor sources of reimbursement are
as follows:
FISCAL YEAR
----------------------------
2003 2002 2001
-------- -------- --------
Medicare 22% 21% 21%
Medicaid and Other Government 20 22 23
Commercial Insurance and Other 58 57 56
---- ---- ----
100% 100% 100%
==== ==== ====
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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 fiscal years 2003, 2002 and 2001, Cigna accounted
for approximately 36 percent, 38 percent and 36 percent, respectively, of the
Company's net revenues.
The Company has extended its relationship with Cigna by entering into
a new national home health care contract effective January 1, 2004, with the new
contract expiring on December 31, 2006. No other commercial payor accounts for
10 percent or more of the Company's net revenues. Net revenues from commercial
payors are primarily generated under fee for service contracts which are
traditionally one year in term and renewable automatically on an annual basis,
unless terminated by either party.
TRADEMARKS
The Company has various trademarks registered with the U.S. Patent and
Trademark Office, including CARECENTRIX(R), GENTIVA(R), GENTIVA and Butterfly
Design(R) , LIFESMART(R) and REHAB WITHOUT WALLS(R), or otherwise in use by the
Company, including CASEMATCH(SM) and SAFE STRIDES(SM). A federally registered
trademark in the United States is effective for ten years subject only to a
required filing and the continued use of the mark by the Company, with the right
of perpetual renewal. A federally registered trademark provides the presumption
of ownership of the mark by the Company in connection with its goods or services
and constitutes constructive notice throughout the United States of such
ownership. Management believes that the Company's name and trademarks are
important to its operations and intends to continue to renew its trademark
registrations.
BUSINESS ENVIRONMENT
Factors that the Company believes have contributed and will contribute
to the development of home health services primarily include recognition that
home health services can be a cost-effective alternative to more expensive
institutional care; aging demographics; increasing consumer awareness and
interest in home health services; the psychological benefits of recuperating
from an illness or accident or receiving care for a chronic condition in one's
own home; and advanced technology that allows more health care procedures to be
provided at home.
The Company is actively pursuing relationships with managed care
organizations to secure additional managed care contracts. The Company believes
that its nationwide network of providers, financial resources, and the quality,
range and cost-effectiveness of its services are important factors as it seeks
opportunities in its managed care relationships in a consolidating home health
services industry. In addition, the Company believes that it has the local
relationships, the knowledge of the regional markets in which it operates, and
the cost-effective, comprehensive services and products required to compete
effectively for managed care contracts and other referrals. The Company offers
the direct and managed provision of care as a single source, which it believes
optimizes utilization.
MARKETING AND SALES
In general, the Company obtains patients and clients through personal
and corporate sales presentations, telephone marketing calls, direct mail
solicitation, referrals from other clients and advertising in a variety of local
and national media, including the Yellow Pages, newspapers, magazines, trade
publications and radio. The Company also maintains an Internet website
(www.gentiva.com) that describes the Company, its services and products.
Marketing efforts also involve personal contact with physicians, hospital
discharge planners, and case managers for managed health care programs, such as
those involving health maintenance organizations and preferred provider
organizations, insurance company representatives and employers with self-funded
employee health benefit programs.
COMPETITIVE POSITION
The home health services industry in which the Company operates is
highly competitive and fragmented. Home health care providers range from
facility-based (hospital, nursing home, rehabilitation facility, government
agency) agencies to independent companies to visiting nurse associations and
nurse registries. They can be not-for-profit organizations or for-profit
organizations. In addition, there are relatively few barriers to
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entry in some of the home health services markets in which the Company operates.
The Company's primary competitors for its home health nursing business are
hospital-based home health agencies, local home health agencies and visiting
nurse associations. Based on information contained in the Center for Medicare
and Medicaid Services website, a government website containing information on
the home health care market in 2002, the Company believes its home health
services business holds approximately a 2 percent to 3 percent market share. The
Company competes with other home health care providers on the basis of
availability of personnel, quality and expertise of services and the value and
price of services. The Company believes that it has a favorable competitive
position, attributable mainly to its nationwide network of providers and the
consistently high quality and targeted services it has provided over the years
to its patients, as well as to its screening and evaluation procedures and
training programs for caregivers.
The Company expects that industry forces will impact it and its
competitors. The Company's competitors will likely strive to improve their
service offerings and price competitiveness. The Company also expects its
competitors to develop new strategic relationships with providers, referral
sources and payors, which could result in increased competition. The
introduction of new and enhanced services, acquisitions and industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's services or price competition, or make the Company's services less
attractive.
SOURCE AND AVAILABILITY OF PERSONNEL
To maximize the cost effectiveness and productivity of caregivers, the
Company utilizes customized processes and procedures that have been developed
and refined over the years. Personalized matching to recruit and select
applicants who fit the patients' individual needs is achieved through initial
applicant profiles, personal interviews, skill evaluations and background and
reference checks. In 2003, the Company launched its proprietary CaseMatch(SM)
software scheduling program that gives local Company offices the ability to
identify instantly those caregivers who can be assigned to patient cases.
Caregivers are recruited through a variety of sources, including
advertising in local and national media, job fairs, solicitations on websites,
direct mail and telephone solicitations, as well as referrals obtained directly
from clients and other caregivers. Caregivers are generally paid on a per visit,
per shift, per hour or per diem basis, or are employed on a full-time salaried
basis. The Company, along with its competitors, is currently experiencing a
shortage of licensed professionals. A continued shortage of professionals could
have a material adverse effect on the Company's business.
NUMBER OF PERSONS EMPLOYED
At December 28, 2003, the Company had approximately 3,500 full-time
employees, including approximately 700 salaried caregivers. The Company also
employs caregivers on a temporary basis, as needed, to provide home health
services. In fiscal 2003, the average number of non-salaried caregivers employed
on a weekly basis in its home health services business was approximately 11,600.
The Company believes that its relationships with its employees are generally
good.
OTHER MATTERS
Subsequent to the sale of its specialty pharmaceutical services
business in June 2002, the Company has operated its remaining home health
services business as a single reporting unit. Financial information relating to
the home health services business is found in the consolidated financial
statements of the Company and its subsidiaries which are included in this annual
report.
The Company has historically experienced a seasonal decline in the
demand for its home health services during the third fiscal quarter.
For a discussion of certain regulations to which the Company's
business is subject, see "Regulations" under Item 3, "Legal Proceedings," below.
AVAILABLE INFORMATION
The Company's Internet address is www.gentiva.com. The Company makes
available free of charge on or through its Internet website its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15(d) of the
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Securities Exchange Act of 1934, as soon as reasonably practicable after such
material has been filed with, or furnished to, the SEC. The Company also makes
available on or through its website its press releases, an investor
presentation, Section 16 reports and certain corporate governance documents.
RISK FACTORS
THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD-LOOKING STATEMENTS
WHICH INVOLVE A NUMBER OF RISKS, UNCERTAINTIES AND ASSUMPTIONS. ACTUAL RESULTS
COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING STATEMENTS.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY INCLUDE, WITHOUT
LIMITATION, THE RISK FACTORS DISCUSSED BELOW AND ELSEWHERE IN THIS ANNUAL
REPORT.
RISKS RELATED TO THE COMPANY'S BUSINESS AND INDUSTRY
THE COMPANY'S GROWTH STRATEGY MAY NOT BE SUCCESSFUL.
The future growth of the Company's business and its future financial
performance will depend on, among other things, its ability to increase its
revenue base through a combination of internal growth and strategic ventures,
including acquisitions. The Company's home health services business experienced
no growth during the fiscal periods from 1998 through 2001. During fiscal 2002
and 2003, revenue from the Company's home health services business grew 5.3
percent and 5.9 percent, respectively; however, future revenue growth cannot be
assured as it is subject to the effects of competition, various risk factors
including the uncertainty of Medicare, Medicaid, and private health insurance
reimbursement, the ability to generate new and retain existing contracts with
major payor sources and the ability to attract and retain qualified personnel.
COMPETITION AMONG HOME HEALTH CARE COMPANIES IS INTENSE.
The home health services industry is highly competitive. The Company
competes with a variety of other companies in providing home health services,
some of which may have greater financial and other resources and may be more
established in their respective communities. Competing companies may offer newer
or different services from those offered by the Company and may thereby attract
customers who are presently receiving the Company's home health services.
THE COST OF HEALTH CARE IS FUNDED SUBSTANTIALLY BY GOVERNMENT AND
PRIVATE INSURANCE PROGRAMS. IF SUCH FUNDING IS REDUCED OR BECOMES
LIMITED OR UNAVAILABLE TO THE COMPANY'S CUSTOMERS, THE COMPANY'S
BUSINESS MAY BE ADVERSELY IMPACTED.
Third-party payors include Medicare, Medicaid and private health
insurance providers. Third-party payors are increasingly challenging prices
charged for health care services. The Company cannot be assured that its
services will be considered cost-effective by third-party payors, that
reimbursement will be available, or that payors' reimbursement policies will not
have a material adverse effect on the Company's ability to sell its services on
a profitable basis, if at all. The Company cannot control reimbursement rates or
policies for a significant portion of its business.
POSSIBLE CHANGES IN THE CASE MIX OF PATIENTS, AS WELL AS PAYOR MIX AND
PAYMENT METHODOLOGIES, MAY HAVE A MATERIAL ADVERSE EFFECT ON THE
COMPANY'S PROFITABILITY.
The sources and amounts of the Company's patient revenues will be
determined by a number of factors, including the mix of patients and the rates
of reimbursement among payors. Changes in the case mix of the patients as well
as payor mix among private pay, Medicare and Medicaid may significantly affect
the Company's profitability. In particular, any significant increase in the
Company's Medicaid population or decrease in Medicaid payments could have a
material adverse effect on its financial position, results of operations and
cash flow, especially if states operating these programs continue to limit, or
more aggressively seek limits on reimbursement rates or service levels.
THE LOSS OF SIGNIFICANT CONTRACTS, AS WELL AS SIGNIFICANT REDUCTIONS
IN MEMBERS COVERED UNDER SUCH CONTRACTS, COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Company has entered into service agreements with a number of
managed care organizations to provide, or contracted 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
those organizations. One such contract with Cigna accounted for 36 percent of
the Company's total net revenues for the year
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ended December 28, 2003. The Company and Cigna entered into a new home health
care contract effective January 1, 2004 and expiring on December 31, 2006. Under
the termination provisions of the contract, Cigna has the right to terminate the
agreement on December 31, 2005, if it provides 90 days advance written notice to
the Company. If the Cigna contract or any other similar significant contract
were to terminate or if there was a significant decrease in enrolled members
covered under the Company's contract with Cigna or any other organization, it
could materially adversely affect the Company's financial condition and results
of operations.
FURTHER CONSOLIDATION OF MANAGED CARE ORGANIZATIONS AND OTHER
THIRD-PARTY PAYORS MAY ADVERSELY AFFECT THE COMPANY'S PROFITS.
Managed care organizations and other third-party payors have continued
to consolidate in order to enhance their ability to influence the delivery of
health care services. Consequently, the health care needs of a large percentage
of the United States population are increasingly served by a smaller number of
managed care organizations. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
that such organizations terminate the Company as a preferred provider and/or
engage its competitors as a preferred or exclusive provider, the Company's
business could be adversely affected. In addition, private payors, including
managed care payors, could seek to negotiate additional discounted fee
structures or the assumption by health care providers of all or a portion of the
financial risk through prepaid capitation arrangements, thereby potentially
reducing the Company's profitability.
THE COMPANY AND THE HEALTH CARE INDUSTRY CONTINUE TO EXPERIENCE
SHORTAGES IN QUALIFIED HOME HEALTH SERVICE CAREGIVERS.
The Company competes with other health care providers for its
employees. As the demand for home health services continues to exceed the supply
of available and qualified staff, the Company and its competitors have been
forced to offer more attractive wage and benefit packages to these
professionals. Furthermore, the competitive arena for this shrinking labor
market has created turnover as many seek to take advantage of the supply of
available positions, each offering new and more attractive wage and benefit
packages. In addition to the wage pressures inherent in this environment, the
cost of training new employees amid the turnover rates has caused added pressure
on the Company's operating margins.
AN ECONOMIC DOWNTURN, CONTINUED DEFICIT SPENDING BY THE FEDERAL
GOVERNMENT AND STATE BUDGET PRESSURES MAY RESULT IN A REDUCTION IN
REIMBURSEMENT AND COVERED SERVICES.
An economic downturn can have a detrimental effect on state revenues.
Historically, these budget pressures have translated into reductions in state
spending. Given that Medicaid outlays are a significant component of state
budgets, the Company can expect continuing cost containment pressures on
Medicaid outlays for the Company's services in the states in which it operates.
In addition, an economic downturn may also impact the number of enrollees in
managed care programs as well as the profitability of managed care companies,
which could result in reduced reimbursement rates.
Deficit spending by the government as the result of adverse
developments in the economy could lead to increased pressure to reduce
government expenditures for other purposes, including governmentally funded
programs in which the Company participates, such as Medicare and Medicaid.
THE AGREEMENT GOVERNING THE COMPANY'S EXISTING REVOLVING CREDIT
FACILITY CONTAINS, AND FUTURE DEBT AGREEMENTS MAY CONTAIN, VARIOUS
COVENANTS THAT LIMIT THE COMPANY'S DISCRETION IN THE OPERATION OF ITS
BUSINESS.
The agreement and instruments governing the Company's existing
revolving credit facility contain, and the agreements and instruments governing
its future debt agreements may contain, various restrictive covenants that,
among other things, require it to comply with or maintain certain financial
tests and ratios and restrict the Company's ability to:
o incur more debt;
o pay dividends, redeem stock or make other distributions;
o make certain investments;
o create liens;
o enter into transactions with affiliates;
o make acquisitions;
o merge or consolidate; and
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o transfer or sell assets.
In addition, events beyond the Company's control could affect its
ability to comply with and maintain the financial tests and ratios. Any failure
by the Company to comply with or maintain all applicable financial tests and
ratios and to comply with all applicable covenants could result in an event of
default with respect to its existing revolving credit facility or future debt
agreements. This could lead to the acceleration of the maturity of the facility
and the termination of the commitments to make further extension of credit. The
Company has no outstanding debt as of December 28, 2003, but could incur debt in
the future. If the Company were unable to repay debt to its senior lenders,
these lenders could proceed against the collateral securing that debt. Even if
the Company is able to comply with all applicable covenants, the restrictions on
its ability to operate its business at its sole discretion could harm its
business by, among other things, limiting its ability to take advantage of
financing, mergers, acquisitions and other corporate opportunities.
THE COMPANY HAS RISKS RELATED TO OBLIGATIONS UNDER ITS INSURANCE
PROGRAMS.
The Company is obligated for certain costs under various insurance
programs, including employee health and welfare, workers compensation and
professional liability. 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 these risks but is
substantially self-insured for most of these claims. The Company also may be
subject to exposure relating to employment law and other related matters for
which the Company does not maintain insurance coverage. The Company believes
that its present insurance coverage and reserves are sufficient to cover
currently estimated exposures; however, there can be no assurance that the
Company will not incur liabilities in excess of recorded reserves or in excess
of its insurance limits.
THE COMPANY HAS RISKS RESULTING FROM THE SALE OF ITS SPS BUSINESS.
The Company has agreed to indemnify Accredo for losses suffered or
incurred by Accredo and its affiliates arising from the retained liabilities of
the Company, breaches of the Company's representations, warranties, covenants or
agreements under the asset purchase agreement between the Company and Accredo
dated January 2, 2002, or agreements delivered pursuant thereto, failure to
deliver good, valid and marketable title to the assets of the SPS business, and
specified tax liabilities of the Company, including those related to the
Company's Split-Off from Olsten. The liabilities retained by the Company include
litigation and causes of action arising prior to the closing of the sale of the
SPS business. These indemnification obligations are discussed in more detail
below under Item 3 "Legal Proceedings - Indemnifications." The Company is unable
to predict the amount, if any, that may be required for it to satisfy its
indemnification obligations under the asset purchase agreement should any claims
arise. Should any significant payment be required, the Company may not have
sufficient funds available to satisfy its potential indemnification obligations
or may not be able to obtain the funds on terms satisfactory to the Company, if
at all.
In addition, with the sale of the SPS business, the Company is no
longer able to deliver specialty pharmaceutical services, including the
distribution of chronic drugs and therapies and the provision of acute infusion
services, directly to payors and managed care providers, but will need to depend
fully on subcontracts with third parties, including Accredo. As a result, the
Company may be more susceptible to fluctuations in volume and in the prices it
pays to third parties for those services. These fluctuations in pricing may add
to the cost of providing the services and, as a result, adversely impact the
Company's profitability.
RISKS RELATED TO HEALTH CARE REGULATION
LEGISLATIVE AND REGULATORY ACTIONS RESULTING IN CHANGES IN
REIMBURSEMENT RATES OR METHODS OF PAYMENT FROM MEDICARE AND MEDICAID,
OR IMPLEMENTATION OF OTHER MEASURES TO REDUCE REIMBURSEMENT FOR THE
COMPANY'S SERVICES, MAY HAVE A MATERIAL ADVERSE EFFECT ON ITS REVENUES
AND OPERATING MARGINS.
In fiscal 2003, 42 percent of the Company's net revenues were
generated from Medicare, and Medicaid and Other Government programs. The health
care industry is experiencing a strong trend toward cost containment, as the
government seeks to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with providers. These cost containment
measures generally have resulted in reduced rates of reimbursement for services
that the Company provides.
In addition, the timing of payments made under these programs is
subject to regulatory action and governmental budgetary constraints. For certain
Medicaid programs, the time period between submission of claims and payment has
increased. Further, within the statutory framework of the Medicare and Medicaid
programs,
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there are a substantial number of areas subject to administrative rulings and
interpretations that may further affect payments made under those programs.
Additionally, the federal and state governments may in the future reduce the
funds available under those programs or require more stringent utilization and
quality reviews of providers. Moreover, there can be no assurances that
adjustments from Medicare or Medicaid audits will not have a material adverse
effect on the Company.
The Benefits Improvement and Protection Act of 2000 mandates a phase
out of intergovernmental transfer transactions by states whereby states inflate
the payments to certain public facilities to increase federal matching funds.
This action may reduce federal support for a number of state Medicaid plans. The
reduced federal payments may adversely affect aggregate available funds, thereby
requiring states to reduce payments to all providers. The Company operates in
several of the states that will experience a contraction of federal matching
funds. With the repeal of the federal payment standards, there can be no
assurances that budget constraints or other factors will not cause states to
reduce Medicaid reimbursement or that payments will be made on a timely basis,
thereby adversely affecting payments made under these Medicaid programs.
THE COMPANY CONDUCTS BUSINESS IN A HEAVILY REGULATED INDUSTRY, AND
CHANGES IN REGULATIONS AND VIOLATIONS OF REGULATIONS MAY RESULT IN
INCREASED COSTS OR SANCTIONS.
The Company's business is subject to extensive federal, state and, in
some cases, local regulation. Compliance with these regulatory requirements, as
interpreted and amended from time to time, can increase operating costs or
reduce revenue and thereby adversely affect the financial viability of the
Company's business. Because these laws are amended from time to time and are
subject to interpretation, the Company cannot predict when and to what extent
liability may arise. Failure to comply with current or future regulatory
requirements could also result in the imposition of various remedies, including
fines, the revocation of licenses or decertification. Unanticipated increases in
operating costs or reductions in revenue could adversely affect the Company's
liquidity.
THE COMPANY IS SUBJECT TO PERIODIC AUDITS AND REQUESTS FOR INFORMATION
BY THE MEDICARE AND MEDICAID PROGRAMS OR GOVERNMENT AGENCIES, WHICH
HAVE VARIOUS RIGHTS AND REMEDIES AGAINST THE COMPANY IF THEY ASSERT
THAT THE COMPANY HAS OVERCHARGED THE PROGRAMS OR FAILED TO COMPLY WITH
PROGRAM REQUIREMENTS.
The operation of the Company's home health services business is
subject to federal and state laws prohibiting fraud by health care providers,
including laws containing criminal provisions, which prohibit filing false
claims or making false statements in order to receive payment or obtain
certification under Medicare and Medicaid programs, or failing to refund
overpayments or improper payments. Violation of these criminal provisions is a
felony punishable by imprisonment and/or fines. The Company may also be subject
to fines and treble damage claims if it violates the civil provisions that
prohibit knowingly filing a false claim or knowingly using false statements to
obtain payment. State and federal governments are devoting increased attention
and resources to anti-fraud initiatives against health care providers. The
Health Insurance Portability and Accountability Act of 1996 ("HIPAA") and the
Balanced Budget Act of 1997 ("BBA") expanded the penalties for health care
fraud, including broader provisions for the exclusion of providers from the
Medicare and Medicaid programs.
The Company has established policies and procedures that it believes
are sufficient to ensure that it will operate in substantial compliance with
these anti-fraud and abuse requirements, including the Company's Corporate
Integrity Agreement. On April 17, 2003, the Company received a subpoena from the
Department of Health and Human Services, Office of the Inspector General, Office
of Investigations ("OIG"). The subpoena seeks information regarding the
Company's implementation of settlements and corporate integrity agreements
entered into with the government, as well as the Company's treatment on cost
reports of employees engaged in sales and marketing efforts. With respect to the
cost report issues, the government has preliminarily agreed to narrow the scope
of production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG pursuant to its subpoena and similarly intends to cooperate
fully with the DOJ subpoena as well as any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint
against the Company. While the Company believes that its business practices are
consistent with Medicare and Medicaid programs criteria, those criteria are
often vague and subject to change and interpretation. The imposition of fines,
criminal penalties or program exclusions could have a material adverse effect on
the Company's financial condition, results of operations and cash flows.
- 8 -
THE COMPANY IS ALSO SUBJECT TO FEDERAL AND STATE LAWS THAT GOVERN
FINANCIAL AND OTHER ARRANGEMENTS BETWEEN HEALTH CARE PROVIDERS.
These laws often prohibit certain direct and indirect payments or
fee-splitting arrangements between health care providers that are designed to
encourage the referral of patients to a particular provider for medical products
and services. Furthermore, some states restrict certain business relationships
between physicians and other providers of health care services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs and civil and criminal penalties. These
laws vary from state to state, are often vague and have seldom been interpreted
by the courts or regulatory agencies.
THE COMPANY FACES ADDITIONAL FEDERAL REQUIREMENTS THAT MANDATE MAJOR
CHANGES IN THE TRANSMISSION AND RETENTION OF HEALTH INFORMATION.
HIPAA was enacted to ensure that employees can retain and at times
transfer their health insurance when they change jobs and to simplify health
care administrative processes. The enactment of HIPAA expanded protection of the
privacy and security of personal medical data and required the adoption of
standards for the exchange of electronic health information. Among the standards
that the Secretary of Health and Human Services has adopted pursuant to HIPAA
are standards for electronic transactions and code sets, unique identifiers for
providers, employers, health plans and individuals, security and electronic
signatures, privacy and enforcement. Although HIPAA was intended to ultimately
reduce administrative expenses and burdens faced within the health care
industry, the Company believes that implementation of this law will result in
additional costs. Failure to comply with HIPAA could result in fines and
penalties that could have a material adverse effect on the Company.
ITEM 2. PROPERTIES
The Company's headquarters is leased and is located at 3 Huntington
Quadrangle 2S, Melville, New York 11747-8943. Other major regional
administrative offices leased by the Company are located in Overland Park,
Kansas; Phoenix, Arizona; Hartford, Connecticut; Tampa, Florida; Endicott, New
York; and Houston, Texas. The Company also maintains leases for other offices
and locations on various terms expiring on various dates.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION
In addition to the matters referenced in this Item 3, the Company is
party to certain legal actions arising in the ordinary course of business
including legal actions arising out of services rendered by its various
operations, personal injury and employment disputes.
COOPER V. GENTIVA CARECENTRIX, INC. t/a/d/b/a/ GENTIVA HEALTH
SERVICES, U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January
2, 2002, this amended complaint was served on the Company alleging that the
defendant submitted false claims to the government for payment in violation of
the Federal False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had
wrongfully terminated the plaintiff. The plaintiff claimed that infusion pumps
delivered to patients did not supply the full amount of medication, allegedly
resulting in substandard care. Based on a review of the court's docket sheet,
the plaintiff filed a complaint under seal in March 2001. In October 2001, the
United States government filed a notice with the court declining to intervene in
this matter, and on October 24, 2001, the court ordered that the seal be lifted.
The Company filed its responsive pleading on February 25, 2002, and discovery
has now commenced. The Company has denied the allegations of wrongdoing in the
complaint and is defending itself vigorously in this matter. On May 19, 2003,
the Company filed a motion for summary judgment on the issue of liability. On
February 6, 2004, the court granted partial summary judgment for the Company,
dismissing two of the three claims alleged under the False Claims Act and
denying summary judgment for the Company on the wrongful termination claim. The
parties are completing discovery; therefore, the Company cannot determine a
range of damages, if any, at this time.
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GOVERNMENT MATTERS
On April 17, 2003, the Company received a subpoena from the Department
of Health and Human Services, Office of the Inspector General, Office of
Investigations ("OIG"). The subpoena seeks information regarding the Company's
implementation of settlements and corporate integrity agreements entered into
with the government, as well as the Company's treatment on cost reports of
employees engaged in sales and marketing efforts. With respect to the cost
report issues, the government has preliminarily agreed to narrow the scope of
production to the period from January 1, 1998 through September 30, 2000. On
February 17, 2004, the Company received a subpoena from the U.S. Department of
Justice ("DOJ") seeking additional information related to the matters covered by
the OIG subpoena. The Company has provided documents and other information
requested by the OIG pursuant to its subpoena and similarly intends to cooperate
fully with the DOJ subpoena as well as any future OIG or DOJ information
requests. To the Company's knowledge, the government has not filed a complaint
against the Company.
INDEMNIFICATIONS
In connection with the Split-Off, the Company agreed to assume, to the
extent permitted by law, and to indemnify Olsten for, the liabilities, if any,
arising out of the home health services business.
In addition, the Company and Accredo 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, which occurred on June 13, 2002, except that:
o representations and warranties related to health care
compliance survive for three years after the closing of the
acquisition;
o representations and warranties related to title of the
assets and sufficiency of assets and employees survive for
the applicable statute of limitations period; and
o representations and warranties related to tax matters
survive until thirty days after the expiration of the
applicable tax statute of limitations period, including any
extensions of the applicable period, subject to certain
exceptions.
Accredo and the Company generally may recover indemnification for a
breach of a representation or warranty only to the extent a party's claim
exceeds $1 million for any individual claim, or exceeds $5 million in the
aggregate, subject to certain conditions and only up to a maximum amount of $100
million.
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.
CORPORATE INTEGRITY AGREEMENT
In connection with a July 19, 1999 settlement with various government
agencies, Olsten executed a corporate integrity agreement with the Office of
Inspector General of the Department of Health and Human Services, 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.
- 10 -
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 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.
REGULATIONS
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
o Medicare, Medicaid, TRICARE (the Department of Defense's managed
health care program for military personnel and their families)
and other government-funded reimbursement programs;
o reporting requirements, certification and licensing standards for
certain home health agencies; and
o in some cases, certificate-of-need requirements.
The Company's compliance with these regulations may affect its
participation in Medicare, Medicaid, TRICARE and other federal health care
programs. The Company is also subject to a variety of federal and state
regulations which prohibit fraud and abuse in the delivery of health care
services. These regulations include, among other things:
o prohibitions against the offering or making of direct or indirect
payments to actual or potential referral sources for obtaining or
influencing patient referrals;
o rules against physicians making referrals under Medicare for
clinical services to a home health agency with which the
physician or his or her immediate family member has certain types
of financial relationships;
o laws against the filing of false claims; and
o laws against making payment or offering items of value to
patients to induce their self-referral to the provider.
As part of the extensive federal and state regulation of the home
health services business and under the Company's corporate integrity agreement,
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 in receipt, or an adjustment to the amount of
reimbursements due or received under Medicare, Medicaid, TRICARE and other
federal health programs. Violation of the applicable federal and state health
care regulations can result in excluding a health care provider from
participating in the Medicare, Medicaid and/or TRICARE programs and can subject
the provider to substantial civil and/or criminal penalties.
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 market basket rate increase of 3.3 percent became
effective for open episodes of care as of or after that date. The market basket
rate will be reduced 0.8 percent for open episodes of care on or after April 1,
2004. Furthermore, the Medicare reimbursement related to home health services
performed in specifically defined rural areas of the country will increase by 5
percent for a one year period, effective April 1, 2004.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of fiscal 2003.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth certain information regarding each of
the Company's executive officers as of February 26, 2004:
EXECUTIVE POSITION AND OFFICES
NAME OFFICER SINCE AGE WITH THE COMPANY
- ----------------------- ------------- --- ------------------------------------------
Ronald A. Malone 2000 49 Chief Executive Officer and Chairman of
the Board
Vernon A. Perry, Jr. 1999 52 President and Chief Operating Officer
Robert Creamer 2002 45 Senior Vice President, Nursing Operations,
and Chief Information Officer
Mary Morrisey Gabriel 2002 38 Senior Vice President, Sales
John R. Potapchuk 2001 51 Senior Vice President, Chief Financial
Officer, Treasurer and Secretary
Christopher L. Anderson 2001 32 Vice President, Audit Services and Quality
Assurance, and Chief Compliance Officer
Stephen B. Paige 2003 56 Vice President and General Counsel
The executive officers are elected annually by the board of directors.
RONALD A. MALONE
Mr. Malone has served as chief executive officer and chairman of the
board of the Company since June 2002. He served as executive vice president of
the Company from March 2000 to June 2002. Prior to joining the Company, he
served in various positions with Olsten, including executive vice president of
Olsten and president, Olsten Staffing Services, United States and Canada, from
January 1999 to March 2000. From 1994 to December 1998, he served successively
as Olsten's senior vice president, southeast division; senior vice president,
operations; and executive vice president, operations.
VERNON A. PERRY, JR.
Mr. Perry has served as president and chief operating officer of the
Company since June 2002. He served as senior vice president of the Company from
November 1999 to June 2002. From 1996 to 1999, he served as senior vice
president of CareCentrix for Olsten Health Services. He joined Olsten in 1994 as
vice president for business development.
ROBERT CREAMER
Mr. Creamer has served as senior vice president, nursing operations,
of the Company since September 2003 and as the Company's chief information
officer since June 2002. From June 2002 to August 2003, he served as senior vice
president, financial operations, of the Company. Prior thereto he served in
various corporate financial management positions with the Company and Olsten
Health Services, including vice president of finance-CareCentrix, vice president
of financial operations and vice president of finance - Specialty Pharmaceutical
Services. He first joined Olsten in 1991.
- 12 -
MARY MORRISEY GABRIEL
Ms. Morrisey Gabriel has served as senior vice president, sales, of
the Company since July 2002. From March 2000 to June 2002, Ms. Morrisey Gabriel
served as senior vice president of National Accounts/North American Sales of
Adecco, a staffing services company. From 1999 to March 2000, she served as
Olsten's senior vice president of national accounts.
JOHN R. POTAPCHUK
Mr. Potapchuk has served as senior vice president, chief financial
officer, treasurer and secretary of the Company since June 2002. He served as
vice president of finance and controller of the Company from March 2000 to June
2002. He joined Olsten in 1991 and served in various corporate financial
management positions with Olsten Health Services, including vice president and
operations controller and vice president of finance. Prior to that, Mr.
Potapchuk served in senior management positions for PricewaterhouseCoopers LLP
and Deloitte & Touche.
CHRISTOPHER L. ANDERSON
Mr. Anderson has served as the chief compliance officer and vice
president of audit services and quality assurance of the Company since March
2000. He served as chief compliance officer of Olsten from November 1998 to
March 2000.
STEPHEN B. PAIGE
Mr. Paige has served as vice president and general counsel of the
Company since July 2003. From 1997 to 2002, he served as senior vice president,
general counsel and secretary of General Semiconductor, Inc., a technology based
company. Prior thereto, Mr. Paige served in senior legal positions with several
large health care, food ingredient and consumer product companies.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
The Company's common stock is quoted on the Nasdaq National Market
under the symbol "GTIV".
The following table sets forth the high and low bid information for
shares of the Company's common stock for each quarter during fiscal 2002 and
2003:
2002 (1) HIGH LOW
-------------------------------
1st Quarter $25.39 $20.65
2nd Quarter 27.55 7.90
3rd Quarter 9.29 6.72
4th Quarter 8.86 7.10
2003 HIGH LOW
-------------------------------
1st Quarter $10.34 $ 8.10
2nd Quarter 9.69 7.44
3rd Quarter 11.94 8.75
4th Quarter 13.59 10.98
(1) On June 13, 2002, the Company paid a special dividend to its
shareholders consisting of $7.76 cash and 0.19253 shares of Accredo
common stock per share of Gentiva common stock (valued at $9.99 per
- 13 -
share based on the June 13, 2002 closing price of $51.89 per share of
Accredo common stock) following the sale of the Company's SPS business
to Accredo. The total value of the special dividend amounted to $17.75
per share.
HOLDERS
As of February 26, 2004, there were approximately 2,300 holders of
record of the Company's common stock including participants in the Company's
employee stock purchase plan, brokerage firms holding the Company's common stock
in "street name" and other nominees.
DIVIDENDS
Except for the special dividend in cash ($7.76) and in kind (0.19253
shares of Accredo common stock) per share of Gentiva common stock paid in June
2002, the Company has never paid any cash dividends on its common stock. Any
future payments of dividends and the amount of the dividends will be determined
by the board of directors from time to time based on the Company's results of
operations, financial condition, cash requirements, future prospects and other
factors deemed relevant by the Company's board of directors, including any
substantive change in tax treatment under the United States Tax Code. In
addition, the Company's credit facility also contains restrictions on the
Company's ability to declare and pay dividends. See Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 6. SELECTED FINANCIAL DATA
The following table provides selected historical consolidated
financial data of the Company as of and for each of the fiscal years in the
five-year period ended December 28, 2003. The data has been derived from the
Company's audited consolidated financial statements. The historical consolidated
financial information presents the Company's results of operations and financial
position as if the Company were a separate entity from Olsten for all years
presented.
In addition, the operating results of the SPS business through the
closing date of the sale to Accredo, including corporate expenses directly
attributable to SPS operations, restructuring and special charges related to the
SPS business, 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 statements of operations. 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. In addition, for fiscal 2000 and 1999, continuing operations
included the health care staffing services business and Canadian operations
which were sold during the fourth quarter of fiscal 2000. Results of all prior
periods have been reclassified to conform to this presentation.
The historical financial information may not be indicative of the
Company's future performance and may not necessarily reflect what the financial
position and results of operations of the Company would have been if the Company
was a separate stand-alone entity during all the years presented.
- 14 -
(in thousands, except per share amounts) FISCAL YEAR ENDED
-----------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA
Net revenues $ 814,029 $ 768,501 $ 729,577 $ 881,765 (8) $ 879,295 (8)
Gross profit 282,042 247,600 (2) 245,660 273,493 (4) 285,402
Selling, general and administrative expenses (259,185) (283,540)(2) (266,322)(3) (356,359)(4) (342,755)(5)
Income (loss) from continuing operations 56,766 (53,543) (13,910) (49,826) (41,077)
Discontinued operations, net of tax (6) - 191,578 34,898 (54,374)(4) 25,991
Cumulative effect of accounting change, net of tax (7) - (187,068) - - -
Net income (loss) 56,766(1) (49,033)(2) 20,988 (3) (104,200)(4) (15,086)(5)
Diluted earnings per share:
Income (loss) from continuing operations $ 2.07 $ (2.05) $ (0.60) $ (2.41) $ (2.02)
Discontinued operations, net of tax - 7.32 1.50 (2.64) 1.28
Cumulative effect of accounting change, net of tax - (7.14) - - -
Net income (loss) 2.07 (1.87) 0.90 (5.05) (0.74)
Weighted average shares outstanding - diluted 27,439 26,183 23,186 20,637 20,345 (9)
BALANCE SHEET DATA (AT END OF YEAR) (10)
Cash items and short-term investments (11) $ 110,013 $ 101,241 $ 107,144 $ 452 $ 2,942
Working capital 136,297 104,339 417,949 348,684 438,536
Total assets 335,088 264,431 849,879 805,484 1,063,015
Long-term debt and other securities - - - 20,000 78,562
Shareholders' equity 177,179 113,048 621,707 566,149 705,291
Common shares outstanding 25,598 26,385 25,639 21,197 20,345 (9)
SPECIAL DIVIDEND PER COMMON SHARE:
Cash - $ 7.76 - - -
Value of Accredo common stock - 9.99 - - -
(1) Net income for fiscal 2003 reflects a tax benefit of $35.0 million
associated with management's decision to reverse the valuation
allowance for deferred tax assets. See Notes 12 and 14 to the
Company's consolidated financial statements.
(2) Net loss in fiscal 2002 reflects restructuring and other special
charges aggregating $46.1 million, of which $6.3 million is recorded
in cost of services sold and $39.8 million is recorded in selling,
general and administrative expenses. See Note 4 to the Company's
consolidated financial statements.
(3) Net income in fiscal 2001 reflects special charges of approximately
$3.0 million in connection with the settlement of the GILE V. OLSTEN
CORPORATION, ET AL. and the STATE OF INDIANA V. QUANTUM HEALTH
RESOURCES, INC. AND OLSTEN HEALTH SERVICES, Inc. lawsuits and for
various other legal costs. These special charges are included in
selling, general and administrative expenses. See Note 4 to the
Company's consolidated financial statements.
(4) Net loss for fiscal 2000 reflects restructuring and other special
charges aggregating $153.2 million, of which $97.0 million related to
discontinued operations and $56.2 million related to continuing
operations. Restructuring and special charges of $8.5 million are
included in cost of services sold and $47.7 million is included in
selling, general and administrative expenses. Net loss for fiscal 2000
also reflects a gain of $36.7 million relating to the sale of the
Company's staffing services business and Canadian operations.
(5) Net loss for fiscal 1999 reflects a restructuring charge of $15.2
million for the realignment of business units as part of a new
restructuring plan. This charge is included in selling, general and
administrative expenses.
(6) For fiscal 2002, the Company sold its SPS business to Accredo in
accordance with the asset purchase agreement, dated January 2, 2002,
with the sale completed on June 13, 2002. As such, the Company has
reflected discontinued operations, including the gain on sale, of
$191.6 million during fiscal 2002. Results for all prior years have
been reclassified to conform to this presentation. See Note 3 to the
Company's consolidated financial statements.
(7) For fiscal 2002, the Company adopted the provisions of SFAS 142
"Goodwill and Other Intangible Assets" and performed a transitional
impairment test, resulting in a non-cash charge of $187.1 million. See
Note 2 to the Company's consolidated financial statements.
(8) Net revenues for fiscal 2000 and 1999 includes net revenues related to
the home health services business of $736.5 million and $727.2
million, respectively.
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(9) Diluted earnings per share and the weighted average shares outstanding
for fiscal year 1999 and common shares outstanding at fiscal year end
1999 have been computed based on 20,345,029 shares of common stock.
Such amount is based on the number of shares of the Company's common
stock issued on March 15, 2000, the date of the split-off. See Note 1
to the Company's consolidated financial statements.
(10) Balance sheet data for fiscal year end 2001, 2000, and 1999 includes
the assets of the SPS business, which was sold to Accredo on June 13,
2002.
(11) Cash items and short-term investments includes restricted cash of
$21.8 million at fiscal year end 2003 and $35.2 million at fiscal year
end 2001.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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.
OVERVIEW
Gentiva is the nation's largest home health care company, based on the
amount of revenues derived from the provision of skilled home nursing services
to patients. The Company generates revenues and profits primarily by providing
patients with direct home health care services, including specialty services and
neuro-rehabilitation services; by delivering national, regional and local
administrative services to managed care organizations and self-insured
employers; and by providing home health care consulting services to independent
and hospital-based home health agencies.
Gentiva's direct home health services to patients include skilled
nursing; physical, occupational, speech and neuro-rehabilitation therapy
services; social work; nutrition; disease management education and help with
daily living activities, as well as other therapies and services. The Company's
specialty services involve physical therapist-led orthopedic rehabilitation
services for patients who have had joint replacements or other major orthopedic
surgery, as well as, commencing in 2003, therapies for patients with balance
issues who are prone to injury or immobility as a result of falling. Gentiva is
also piloting similar specialty programs for cardiopulmonary and wound care
services that are expected to be launched during 2004. The Company's
neuro-rehabilitation services, known as Rehab Without Walls(R), provide home and
community-based therapies for patients with traumatic brain injury,
cerebrovascular accident injury and acquired brain injury, as well as a number
of other complex rehabilitation cases.
Gentiva's national, regional and local administrative services for
managed care organizations and self-insured employers -- provided through its
CareCentrix(R) business unit -- include central access, care coordination,
utilization management, and claims processing. The Company is capable of
coordinating a wide range of home care services, including traditional home
nursing, chronic and acute infusion therapies, and durable medical and
respiratory equipment to member patients of these managed care organizations.
Consulting services to home health agencies are delivered primarily by
the Company's Gentiva Business Services unit. These services include billing and
collection activities, web-based caregiver training and credentialing, on-site
agency support and consulting, operational support, and individualized
strategies for reduction of days sales outstanding.
The Company's services can be delivered across the United States 24
hours a day, 7 days a week. Direct home health services to patients are
delivered through more than 350 owned and operated direct service delivery units
in approximately 250 locations in 35 states. Administrative services for managed
care organizations and self-insured employers are coordinated within four
regional coordination centers. Home care services provided to member patients of
these organizations are delivered through Company-owned and nearly 1,900
third-party credentialed provider locations covering the continental United
States.
Gentiva's revenues are generated primarily from three major payor
sources: the U.S. Medicare program, Medicaid and other state and county
programs, and commercial insurers. Revenue mix by major payor classifications
are as follows:
- 16 -
FISCAL YEAR
----------------------------
2003 2002 2001
-------- -------- --------
Medicare 22% 21% 21%
Medicaid and Other Government 20 22 23
Commercial Insurance and Other 58 57 56
---- ---- ----
100% 100% 100%
==== ==== ====
The Medicare and Medicaid and related programs are subject to
legislative and other risk factors that can result in fluctuating reimbursement
rates for Gentiva's direct home health services to patients. The commercial
insurance industry is continually seeking ways to control the cost of services
to patients that it covers. One of the ways it seeks to control costs is to
require greater efficiencies from its providers, including home health care
companies.
Despite these risks, Gentiva believes it can operate effectively in
the current health care climate by increasing its volume of Medicare and
commercial insurance business and implementing new business practices,
technologies and other methods to make the Company an even more efficient
provider of services. In fact, Gentiva has made a strategic decision to seek
more business from the Medicare and commercial insurance payor groups. For
example, in 2003, Gentiva's revenue from its Medicare and Commercial Insurance
and Other payor categories increased 10.1 percent and 7.2 percent, respectively,
from the prior year.
Various states have addressed budget pressures by considering or
implementing reductions in various health care programs, including reductions in
rates or changes in patient eligibility requirements. In addition, the Company
has also decided to taper participation in certain Medicaid and other state and
county programs. As a result, Gentiva's 2003 revenue from this payor category
declined 1.3 percent from the prior year.
Gentiva believes that several marketplace factors can contribute to
its future growth. First, the Company is a leader in a highly fragmented home
health care industry populated by approximately 12,000 providers of varying size
and resources. Second, the cost of a home health care visit to a patient can be
significantly lower than the cost of an average day in a hospital or skilled
nursing institution. And third, the demand for home care is expected to grow,
primarily due to an aging U.S. population. The U.S. Centers for Medicare and
Medicaid Services projects that national home health and durable medical
equipment spending will rise from $62.5 billion in 2004 to $103.7 billion by
2012. The U.S. Census Bureau has estimated that the age 65 and older population
will increase more than 50 percent between 2000 and 2020.
The Company expects to capitalize on these positive trends through a
determined set of strategies, as follows: generate balanced growth by focusing
on Medicare and Commercial Insurance business; continue to develop and expand
specialty services for incremental revenue growth; focus on caregiver
recruitment, retention and productivity; and launch technology initiatives that
make Gentiva more efficient and profitable. The Company anticipates executing
these strategies by continuing to expand its sales presence, developing and
marketing its managed care services, making operational improvements and
deploying new technologies, providing employees with leadership training and
instituting retention initiatives, ensuring strong ethics and corporate
governance, and focusing on shareholder value.
Results from these strategies and initiatives began to appear in the
Company's 2003 performance. Gentiva reported 2003 net revenue of $814.0 million,
representing a $45.5 million or 5.9 percent increase from the $768.5 million
reported in fiscal year 2002. The increase was due primarily to a rise in the
volume of Medicare and commercial insurance business mentioned above. Net income
for fiscal 2003 was $56.8 million, or $2.07 per diluted share, which included a
tax benefit of $1.28 per diluted share related to the reversal of a tax
valuation allowance discussed later in this annual report. This compares to a
loss of $49.0 million, or $1.87 per diluted share, including restructuring and
special charges, for the corresponding period of 2002.
During 2003, Gentiva reported positive cash flow from operating
activities of $30.7 million and increased its balance of cash items, restricted
cash and short-term investments at the end of the year to approximately $110
million, compared to approximately $101 million at the end of 2002. The Company
has previously stated that it would evaluate using its cash primarily for the
following purposes: investments contributing to revenue growth, efficiency and
profitability; selective acquisitions; share repurchases; and the possible
future payment of dividends to shareholders. In 2003, Gentiva repurchased a
total of over 1.4 million shares at an average cost of $10.03 per share, for a
total expenditure of over $14.4 million.
- 17 -
Management intends the discussion of the Company's financial condition
and results of operations that follows to provide information that will assist
in understanding the Company's financial statements, the changes in certain key
items in those financial statements from year to year, and the primary factors
that accounted for those changes, as well as how certain accounting principles,
policies and estimates affect its financial statements.
The historical results sections in "Results of Operations" below
present a discussion of the Company's consolidated operating results using the
historical results of Gentiva prepared in accordance with accounting principles
generally accepted in the United States (GAAP) for the fiscal years ended
December 28, 2003, December 29, 2002 and December 30, 2001.
SIGNIFICANT DEVELOPMENTS
On June 13, 2002, the Company sold substantially all of the assets of
its specialty pharmaceutical services ("SPS") business to Accredo Health,
Incorporated ("Accredo") and received payment of cash in the amount of $207.5
million (before a $0.9 million reduction resulting from a closing net book value
adjustment) and 5,060,976 shares of Accredo common stock (valued at $262.6
million, based on the closing price of Accredo common stock on the Nasdaq
National Market on June 13, 2002). The cash consideration, less a holdback of
$3.5 million for certain income taxes the Company expected to incur, and the
Accredo common stock were then distributed as a special dividend to the
Company's shareholders.
The operating results of the SPS business through the closing date of
the sale to Accredo, including corporate expenses directly attributable to SPS
operations, restructuring and special charges related to the SPS business, 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
statements of operations. 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.
YEAR ENDED DECEMBER 28, 2003 COMPARED TO YEAR ENDED DECEMBER 29, 2002
RESULTS OF OPERATIONS
REVENUES
Net revenues increased by $45 million or 5.9 percent to $814 million
during fiscal 2003 as compared to $769 million during fiscal 2002. For fiscal
year 2003, as compared to fiscal year 2002, net revenues from Medicare increased
by $16.4 million or 10.1 percent to $178.7 million. Commercial Insurance and
Other payors net revenues increased by $31.4 million or 7.2 percent to $470.2
million and Medicaid and Other Government payors net revenues decreased $2.3
million or 1.3 percent to $165.2 million.
Medicare revenue growth for fiscal 2003, as compared to fiscal 2002,
was primarily fueled by increases in episodes serviced of 8.7 percent. In
addition, Medicare revenue was positively impacted by (i) $1.6 million due to a
3.3 percent market basket rate increase that became effective for patients on
service on or after October 1, 2003 and (ii) $2.5 million due to the absence of
a revenue adjustment recorded in fiscal 2002 relating to partial episode
payments ("PEPs") as well as various clinical and operational process changes
implemented in late 2003. In comparing the fiscal year 2003 and 2002 periods,
Medicare revenues were negatively impacted by an overall 4.9 percent reduction
in Medicare reimbursement rates (approximately $6.0 million for fiscal 2003),
which became effective for Medicare patients beginning in October 2002, and by
the elimination of the rural add-on provision ($1.4 million for fiscal 2003) for
home health services, which became effective April 1, 2003.
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 7.2 percent increase in
net revenues for fiscal 2003, new contracts from Commercial Insurance and Other
payors accounted for 3.3 percent.
Medicaid and Other Government revenues decreased for fiscal year 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 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 $8.5 million as compared to
fiscal
- 18 -
year 2002. These decreases were offset somewhat by increases in the intermittent
care Medicaid business in selected states.
GROSS PROFIT
Gross profit was approximately $282 million for fiscal year 2003
compared to $248 million for fiscal year 2002. As a percentage of net revenues,
gross profit margins increased from 32.2 percent for fiscal year 2002 to 34.6
percent for fiscal year 2003.
Gross profit margins for fiscal 2003 as compared to fiscal 2002, were
positively impacted by an increase in Medicare episodes serviced and
improvements in utilization in both the commercial insurance business and
Medicare (1.6 percent), reductions in insurance costs (0.5 percent), the
Medicare market basket rate increase of 3.3 percent that became effective for
patients on service on or after October 1, 2003 (0.2 percent) and the absence of
both a $2.5 million revenue adjustment related to PEPs (0.3 percent) and the
$6.3 million special charge associated with insurance costs that were recorded
in fiscal 2002 (0.8 percent). These increases were partially offset by an
overall 4.9 percent reduction in Medicare reimbursement rates (approximately
$6.0 million or 0.8 percent), which became effective for Medicare patients
beginning October 2002, and the elimination of the rural add-on provision ($1.4
million or 0.2 percent) for home health services which became effective April 1,
2003.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For fiscal year 2003, selling, general and administrative expenses,
including depreciation and amortization, decreased $24 million or 8.6 percent to
$259 million compared to $283 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 statement of
operations for fiscal year 2002. See Note 4 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 $15.4 million for fiscal year
2003.
This increase for fiscal 2003 related to increases in sales and field
administrative expenses due to headcount additions, investments in technology
initiatives 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. These increases were
partially offset by reductions in corporate administrative expenses resulting
from restructuring efforts following the sale of the SPS business in the second
quarter of fiscal year 2002. During fiscal 2003, headcount of personnel
dedicated to sales and clinical care coordination efforts increased by
approximately 19 percent while headcount relating to field and administrative
personnel increased by less than 2 percent.
Restructuring and special charges for fiscal year 2002 are summarized
and further described below (in thousands):
FISCAL YEAR ENDED
DECEMBER 29, 2002
-----------------
Restructuring charges:
Business realignment activities $ 6,813
--------
Special charges:
Option tender offer 21,388
Settlement costs 7,731
Insurance costs 6,300
Asset writedowns and other 3,824
--------
Total special charges 39,243
--------
Total restructuring and special charges $ 46,056
========
- 19 -
FISCAL 2002
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 in March 2000. These charges are reflected in selling,
general and administrative expenses in the accompanying consolidated statement
of operations for the fiscal year ended December 29, 2002 During fiscal year
2002, the Company paid $2.1 million in restructuring costs, leaving
approximately $4.7 million of these restructuring charges unpaid, representing
severance costs of $0.2 million which were to be paid during 2003 and lease and
other associated costs of $4.5 million which will be paid over the remaining
lease terms. During fiscal year 2003, the Company paid $2.4 million in
restructuring costs, leaving approximately $2.3 million of these restructuring
charges unpaid, representing lease and other associated costs which will be paid
over the remaining lease terms.
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 fiscal year 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
to the consolidated financial statements). These costs are reflected in selling,
general and administrative costs in the accompanying consolidated statement of
operations for fiscal year 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 fiscal year 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 fiscal year 2002.
INTEREST INCOME, NET
Net interest income was approximately $0.4 million for fiscal year
2003 and $0.8 million for fiscal year 2002. Net interest income represented
interest income of approximately $1.5 million for fiscal 2003 and $2.4
- 20 -
million for fiscal 2002, partially offset by fees relating to the revolving
credit facility and outstanding letters of credit.
Interest income declined in fiscal 2003 as compared to 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 year.
Interest expense declined in the fiscal 2003 periods due to reductions in the
average outstanding letters of credit, as well as reductions in fees associated
with the unused portion of the credit facility.
INCOME TAXES
The Company recorded an income tax benefit of $33.5 million in fiscal
2003 compared to an income tax expense of $18.4 million in fiscal 2002.
A federal and state tax benefit was recorded in fiscal 2002, relative
to the loss from continuing operations, offset by a $26.8 million provision
associated with the adoption of SFAS No. 142, as discussed in Note 2 to the
consolidated financial statements, and an adjustment of $5.4 million for tax
audit adjustments. As of December 29, 2002, the Company had federal net
operating loss and tax credit carryforwards of $15 million and maintained a full
valuation allowance against its net deferred tax assets of $63.9 million.
Realization of the deferred tax assets is dependent on generating sufficient
taxable income. During the interim periods of fiscal 2003, a portion of the
valuation allowance ($9.4 million) was utilized to offset a corresponding
decrease in net deferred tax assets. Based on management`s belief that it is
more likely than not that all of the Company's net deferred tax assets will be
realized due to the Company's achieved earnings trends and outlook, the
remaining valuation allowance for net deferred tax assets was reversed resulting
in a tax benefit of $35.0 million recorded in the statement of operations and an
additional credit of $19.5 million relating to the tax benefits associated with
stock compensation was recorded directly to shareholders' equity. At December
28, 2003, current net deferred tax assets were $26.5 million and non-current net
deferred tax assets were $28.0 million. At December 28, 2003, the Company had
federal net operating loss and tax credit carryforwards of $11.8 million. See
Note 12 to the Company's consolidated financial statements.
NET INCOME (LOSS)
The Company recorded net income of $56.8 million or $2.07 per diluted
share in fiscal 2003 compared to a net loss of $49.0 million or ($1.87) per
diluted share in fiscal 2002.
The net loss for fiscal 2002 included a net loss from continuing
operations of $53.5 million or ($2.05) per diluted share, which included $46.1
million of restructuring and special charges, income from discontinued
operations of $191.6 million or $7.32 per diluted share and a net charge of
$187.1 million or ($7.14) per diluted share relating to the cumulative effect of
accounting change for goodwill.
- 21 -
YEAR ENDED DECEMBER 29, 2002 COMPARED TO YEAR ENDED DECEMBER 30, 2001
RESULTS OF OPERATIONS
REVENUES
Net revenues increased by $39 million or 5.3 percent to $769 million
during fiscal 2002 as compared to $730 million during fiscal 2001. This increase
was driven by a combination of increased rates to Commercial Insurance and Other
and certain Medicaid and Other Government payors, increased volume in nursing
patient admissions and an increase in the number of Preferred Provider
Organization enrollees served by the Company's CareCentrix unit, partially
offset by a 4.9 percent net reduction in Medicare reimbursement rates, which
became effective in October 2002.
For fiscal year 2002, as compared to fiscal year 2001, net revenues
from Medicare increased by $9.7 million or 6.3 percent to $162.3 million.
Commercial Insurance and Other payors net revenues increased by $30 million or
7.3 percent to $438.8 million and Medicaid and Other Government payors net
revenues decreased $0.7 million or 0.4 percent to $167.4 million.
GROSS PROFIT
Gross profit was approximately $248 million for fiscal year 2002
compared to $246 million for fiscal year 2001. As a percentage of net revenues,
gross profit margins decreased from 33.7 percent for fiscal year 2001 to 32.2
percent for fiscal year 2002.
The decrease in margin was primarily related to a $6.3 million special
charge relating principally to a refinement in the estimation process used to
determine the Company's actuarially computed workers compensation and
professional liability insurance reserves (see Note 4 to the consolidated
financial statements). This special charge had a negative impact on gross profit
margins of 0.8 percent. In addition to the special charge, the Company also
recorded a revenue adjustment of $2.5 million, which had a 0.3 percent negative
impact on margins, related to a change in the estimated amount of the repayment
to Medicare for partial episode payments ("PEPs") from the inception of the
Prospective Payment System of reimbursement ("PPS") in October 2000 through June
30, 2002. The 4.9 percent net reduction in Medicare reimbursement rates, which
became effective in October 2002, had a negative impact of approximately $2.0
million, or 0.3 percent, on gross profit margins for fiscal year 2002. The
remaining net decrease in gross margin percentage was attributable to various
other factors, including training costs associated with orientation of
additional full-time caregivers, increased insurance costs and changes in
business mix due to growth in the CareCentrix business, which generates a lower
gross margin but also requires lower administrative costs to service the
business, offset by increased rates to Commercial Insurance and Other and
certain Medicaid and Other Government payors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased $17 million or
6.5 percent to $283 million during fiscal 2002 compared to $266 million during
fiscal 2001. These increases were driven by restructuring and special charges of
$46.1 million during the second quarter ended June 30, 2002, of which
approximately $40 million was reflected in selling, general and administrative
expenses in the accompanying consolidated statement of operations for the fiscal
year ended December 29, 2002, as compared to $3 million of special charges which
were reflected in the consolidated statement of operations for the fiscal year
ended December 30, 2001. These net increases were offset by reductions in
amortization expense ($10 million) due to the implementation of SFAS No. 142 and
net reductions ($10 million) in field and corporate administration expenses as a
result of restructuring efforts and improvements in processes and technology,
partially offset by an increase in selling expenses.
- 22 -
FISCAL 2002
For a further discussion on restructuring and special charges for the
fiscal year ended December 29, 2002, see management's discussion above on
"Selling, General and Administrative Expenses" and "Fiscal 2002," under "Results
of Operations" for the "Year Ended December 28, 2003 Compared to Year Ended
December 29, 2002."
FISCAL 2001
SETTLEMENT COSTS
The Company recorded special charges of approximately $3.0 million
during fiscal 2001 in connection with the settlement of the GILE V. OLSTEN
CORPORATION, ET AL., and the STATE OF INDIANA V. QUANTUM HEALTH RESOURCES, INC.
AND OLSTEN HEALTH SERVICES, INC. lawsuits and for various other legal costs.
These legal matters are further discussed in Note 9 to the consolidated
financial statements. These special charges are reflected in selling, general
and administrative expenses in the accompanying consolidated statement of
operations for fiscal year 2001.
INTEREST EXPENSE, NET
Net interest income (expense) was approximately $0.8 million and
($0.1) million in fiscal 2002 and 2001, respectively. Net interest income for
fiscal 2002 primarily represented interest earned on investments of $2.4 million
offset by fees relating to the revolving credit facility and outstanding letters
of credit. Net interest expense for fiscal 2001 primarily represented fees
relating to the revolving credit facility and outstanding letters of credit and,
for the first half of fiscal 2001, the 10 percent convertible preferred trust
securities, which were redeemed in the third quarter of fiscal 2001, offset by
interest income of approximately $2.8 million.
INCOME TAXES
Income tax expense was $18.4 million in fiscal 2002 compared to an
income tax benefit of $6.8 million in fiscal 2001. A federal and state tax
benefit was recorded in fiscal 2002, relative to the loss from continuing
operations, offset by a $26.8 million provision associated with the adoption of
SFAS No. 142, as discussed in Note 2 to the consolidated financial statements,
and an adjustment of $5.4 million for tax audit adjustments. The Company had a
federal net operating loss carryforward at December 30, 2001 of $89.7 million
that was used in part to offset the gain from the sale of the SPS division. As
of December 29, 2002, the Company had a federal net operating loss carryforward
of $15 million. Net deferred tax assets were $63.9 million at December 29, 2002
and $27 million at December 30, 2001. The increase in deferred tax assets
relates primarily to the adoption of SFAS 142 offset by utilization of a portion
of the federal net operating loss during 2002. At December 29, 2002, the Company
had maintained a full valuation allowance against its net deferred tax asset.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income. See Note 12 to the Company's consolidated financial statements.
NET INCOME (LOSS)
The Company recorded a net loss of $49.0 million or ($1.87) per
diluted share in fiscal 2002 compared to net income of $21.0 million or $0.90
per diluted share in fiscal 2001. The net loss for fiscal 2002 includes a net
loss from continuing operations of $53.5 million or ($2.05) per diluted share,
which included $46.1 million of restructuring and special charges, income from
discontinued operations of $191.6 million or $7.32 per diluted share and a net
charge of $187.1 million or ($7.14) per diluted share relating to the cumulative
effect of accounting change for goodwill. Net income for fiscal 2001 includes a
net loss from continuing operations of $13.9 million or ($0.60) per diluted
share, including special charges, and income from discontinued operations of
$34.9 million or $1.50 per diluted share.
- 23 -
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
The Company's principal source of liquidity is the collection of its
accounts receivable. For healthcare services, the Company grants credit without
collateral to its patients, most of whom are insured under third party
commercial or governmental payor arrangements. Net cash provided by operating
activities increased $12.2 million to $30.7 million in fiscal 2003. This cash
was used to fund capital expenditures of $8.8 million and repurchase shares of
common stock of $14.4 million during fiscal 2003.
Days Sales Outstanding ("DSO") for the home health services business
remained flat at 59 days at December 28, 2003 as compared to December 29, 2002.
Working capital at December 28, 2003 was $136 million, an increase of $32
million as compared to $104 million at December 29, 2002, primarily due to:
o a $9 million increase in cash and cash equivalents, restricted
cash and short-term investments;
o a $8 million increase in accounts receivable;
o a $26 million increase in deferred tax assets relating to the
Company's reversal of the deferred tax asset valuation allowance
as further described in Note 12 to the Company's consolidated
financial statements;
o a $3 million decrease in prepaid expenses and other assets; and
o a $7 million increase in current liabilities, primarily driven by
increases in other accrued expenses ($7 million), cost of claims
incurred but not reported ($1 million), and Medicare liabilities
($1 million), partially offset by a decrease in accounts payable
($1 million) and obligations under insurance programs ($1
million).
The Company participates in the Medicare, Medicaid and other federal
and state healthcare programs. 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 fiscal years 2003, 2002 and 2001, Cigna accounted
for approximately 36 percent, 38 percent and 36 percent, respectively, of the
Company's total net revenues. The Company has extended its relationship with
Cigna by entering into a new national home health care contract, effective
January 1, 2004. The term of the new contract extends to December 31, 2006, and
automatically renews thereafter for additional one year terms unless terminated.
Under the termination provisions, Cigna has the right to terminate the agreement
on December 31, 2005 if it provides 90 days advance written notice to the
Company, and each party has the right to terminate at the end of each term
thereafter by providing at least 90 days advance written notice prior to the
start of the new term. If Cigna chose to terminate or not renew the contract, or
to significantly modify its use of the Company's services, there could be a
material adverse effect on the Company's cash flow.
The Company's credit facility, which was entered into on June 13,
2002, as amended, as described below, provides up to $55 million in borrowings,
including up to $40 million which is available for letters of credit. The
Company may borrow up to a maximum of 80 percent of the net amount of eligible
accounts receivable, as defined, less any reasonable and customary reserves, as
defined, required by the lender. Borrowing availability under the credit
facility was reduced by $10 million until such quarter in 2003 in which the
trailing 12 month EBITDA, excluding certain restructuring costs and special
charges recorded by the Company during
- 24 -
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 decreases by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25
percent, respectively, provided that the Company's trailing 12 month EBITDA,
excluding certain restructuring costs and special charges, as defined, is in
excess of $20 million. The Company was also subject to an unused line fee equal
to 0.50 percent per annum of the average daily difference between the total
revolving credit facility amount, as defined, and the total outstanding
borrowings and letters of credit. Beginning in 2003, the unused credit line fee
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
December 28, 2003.
Total outstanding letters of credit were $20.8 million as of December
28, 2003. The letters of credit, which expire one year from date of issuance,
were issued to guarantee payments under the Company's workers compensation
program and for certain other commitments. As of December 28, 2003, there were
no borrowings outstanding under the credit facility and the Company had
borrowing capacity under the credit facility, after adjusting for outstanding
letters of credit, of approximately $34 million.
The credit facility, which expires in June 2006, includes certain
covenants requiring the Company to maintain a minimum tangible net worth of
$101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage
ratio, as defined. Other covenants in the credit facility include limitation on
mergers, consolidations, acquisitions, indebtedness, liens, distributions
including dividends, capital expenditures, stock repurchases and dispositions of
assets and other limitations with respect to the Company's operations. On August
7, 2003, the credit facility was amended to make covenants relating to
acquisitions and stock repurchases less restrictive, provided that the Company
maintains minimum excess aggregate liquidity, as defined in the amendment, equal
to at least $60 million, and to allow for the disposition of certain assets.
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 December 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
- 25 -
the underlying coverage limits. Payments under the Company's workers
compensation program are guaranteed by letters of credit and segregated
restricted cash balances.
Additional items that could impact the Company's liquidity are
discussed under "Risk Factors" in Item 1 of this annual report on Form 10-K.
CAPITAL EXPENDITURES
The Company's capital expenditures from continuing operations for the
fiscal years 2003, 2002 and 2001 were $8.8 million, $4.1 million and $3.9
million, respectively. The Company intends to make investments and other
expenditures to, among other things, upgrade its computer technology and system
infrastructure. In this regard, management expects that capital expenditures
will range between $12 million and $13.5 million for fiscal 2004. Management
expects that the Company's capital expenditure needs will be met through
operating cash flow and available cash reserves.
CASH RESOURCES AND OBLIGATIONS
The Company had cash, cash equivalents, restricted cash and short-term
investments of approximately $110.0 million as of December 28, 2003. The
restricted cash relates to cash funds of $21.8 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 December 28, 2003, the Company had repurchased 438,464 shares at an
average cost of $12.18 per share and a total cost of approximately $5.3 million.
For the period from December 29, 2003 through February 26, 2004, the Company
purchased 199,147 shares at an average cost of $12.77 per share and a total cost
of approximately $2.5 million.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
At December 28, 2003, the Company had no long-term debt and no
significant capital lease obligations. Future minimum rental commitments for all
non-cancelable leases and purchase obligations at December 28, 2003, are as
follows (in thousands):
PAYMENT DUE BY PERIOD
---------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS
----------------------- -------- --------- --------- --------- ---------
Long-term debt obligations $ - $ - $ - $ - $ -
Capital lease obligations - - - - -
Operating lease