-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FwYTbzOjZwc/YaqCgtmpEf03SRnERKF8WoAGNXpTB/8COvxqSvynw0gSxn5oPsGK m4AfGqh0iZk+TU45GnhZiA== 0001019056-04-000650.txt : 20040504 0001019056-04-000650.hdr.sgml : 20040504 20040504121527 ACCESSION NUMBER: 0001019056-04-000650 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20040328 FILED AS OF DATE: 20040504 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GENTIVA HEALTH SERVICES INC CENTRAL INDEX KEY: 0001096142 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOME HEALTH CARE SERVICES [8082] IRS NUMBER: 364335801 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15669 FILM NUMBER: 04776316 BUSINESS ADDRESS: STREET 1: 3 HUNTINGTON QUADRANGLE 2S CITY: MELVILLE STATE: NY ZIP: 11747-8943 BUSINESS PHONE: 6315017000 MAIL ADDRESS: STREET 1: 3 HUNTINGTON QUADRANGLE 2S CITY: MELVILLE STATE: NY ZIP: 11747-8943 FORMER COMPANY: FORMER CONFORMED NAME: OLSTEN HEALTH SERVICES HOLDING CORP DATE OF NAME CHANGE: 19991001 10-Q 1 gentiva_q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 28, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 1-15669 Gentiva Health Services, Inc. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-4335801 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3 Huntington Quadrangle, Suite 200S, Melville, NY 11747-4627 ------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (631) 501-7000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] The number of shares outstanding of the registrant's Common Stock, as of April 28, 2004, was 25,268,741. INDEX PART I - FINANCIAL INFORMATION Page No. -------- Item 1. Financial Statements Consolidated Balance Sheets (Unaudited) - March 28, 2004 and December 28, 2003 3 Consolidated Statements of Income (Unaudited) - Three Months Ended March 28, 2004 and March 30, 2003 4 Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended March 28, 2004 and March 30, 2003 5 Notes to Consolidated Financial Statements (Unaudited) 6-15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15-24 Item 3. Quantitative and Qualitative Disclosures about Market Risk 24 Item 4. Controls and Procedures 24-25 PART II - OTHER INFORMATION Item 1. Legal Proceedings 26 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities 26 Item 3. Defaults Upon Senior Securities 26 Item 4. Submission of Matters to a Vote of Security Holders 26 Item 5. Other Information 26-27 Item 6. Exhibits and Reports on Form 8-K 27-28 SIGNATURES 29 PART I - FINANCIAL INFORMATION Item 1. Financial Statements -------------------- Gentiva Health Services, Inc. and Subsidiaries Consolidated Balance Sheets (In thousands, except share amounts) (Unaudited)
March 28, 2004 December 28, 2003 ----------------- ----------------- ASSETS Current assets: Cash, cash equivalents and restricted cash $ 111,110 $ 100,013 Short-term investments -- 10,000 Receivables, less allowance for doubtful accounts of $8,523 and $7,936 in 2004 and 2003, respectively 138,127 132,998 Deferred tax assets 22,311 26,464 Prepaid expenses and other current assets 8,275 6,524 ----------------- ----------------- Total current assets 279,823 275,999 Fixed assets, net 18,082 15,135 Deferred tax assets, net 27,006 28,025 Other assets 16,447 15,929 ----------------- ----------------- Total assets $ 341,358 $ 335,088 ================= ================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 19,559 $ 16,079 Payroll and related taxes 12,120 12,932 Medicare liabilities 13,178 12,736 Cost of claims incurred but not reported 27,897 28,525 Obligations under insurance programs 36,708 37,200 Other accrued expenses 30,473 32,230 ----------------- ----------------- Total current liabilities 139,935 139,702 Other liabilities 19,805 18,207 Shareholders' equity: Common stock, $.10 par value; authorized 100,000,000 shares; issued and outstanding 25,309,160 and 25,598,301 shares in 2004 and 2003, respectively 2,531 2,560 Additional paid-in capital 265,706 270,468 Accumulated deficit (86,619) (95,849) ----------------- ----------------- Total shareholders' equity 181,618 177,179 ----------------- ----------------- Total liabilities and shareholders' equity $ 341,358 $ 335,088 ================= =================
See notes to consolidated financial statements. 3 Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Income (In thousands, except per share amounts) (Unaudited)
Three Months Ended -------------------------------------- March 28, 2004 March 30, 2003 ----------------- ----------------- Net revenues $ 213,905 $ 202,016 Cost of services sold 130,643 133,250 ----------------- ----------------- Gross profit 83,262 68,766 Selling, general and administrative expenses (66,369) (61,253) Depreciation and amortization (1,845) (1,745) ----------------- ----------------- Operating income 15,048 5,768 Interest income, net 82 43 ----------------- ----------------- Income before income taxes 15,130 5,811 Income tax expense 5,900 610 ----------------- ----------------- Net income $ 9,230 $ 5,201 ================= ================= Net income per common share: Basic $ 0.36 $ 0.19 ================= ================= Diluted $ 0.34 $ 0.19 ================= ================= Weighted average shares outstanding: Basic 25,542 26,696 ================= ================= Diluted 27,084 27,752 ================= =================
See notes to consolidated financial statements. 4 Gentiva Health Services, Inc. and Subsidiaries Consolidated Statements of Cash Flows (In thousands) (Unaudited)
Three Months Ended ------------------------------------ March 28, 2004 March 30, 2003 ---------------- ---------------- OPERATING ACTIVITIES: Net income $ 9,230 $ 5,201 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 1,845 1,745 Provision for doubtful accounts 2,047 2,031 Gain on sale / disposal of businesses and fixed assets -- (191) Deferred income tax expense 5,172 -- Changes in assets and liabilities, net of acquisitions/divestitures Accounts receivable (7,176) (5,359) Prepaid expenses and other current assets (1,743) 3,723 Current liabilities (8) 518 Other, net (13) (5) ---------------- ---------------- Net cash provided by operating activities 9,354 7,663 ---------------- ---------------- INVESTING ACTIVITIES: Purchase of fixed assets (3,370) (2,487) Proceeds from sale of assets / business -- 200 Acquisition of businesses -- (1,300) Purchase of short-term investments -- (10,000) Maturities of short-term investments 10,000 -- ---------------- ---------------- Net cash provided by (used in) investing activities 6,630 (13,587) ---------------- ---------------- FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,039 714 Repurchases of common stock (5,830) -- Repayment of capital lease obligations (96) -- ---------------- ---------------- Net cash (used in) provided by financing activities (4,887) 714 ---------------- ---------------- Net change in cash, cash equivalents and restricted cash 11,097 (5,210) Cash, cash equivalents and restricted cash at beginning of period 100,013 101,241 ---------------- ---------------- Cash, cash equivalents and restricted cash at end of period $ 111,110 $ 96,031 ================ ================ Supplemental Schedule of Non Cash Investing and Financing Activities Fixed assets acquired under capital lease $ 1,443 $ -- ================ ================
See notes to consolidated financial statements. 5 Gentiva Health Services, Inc. and Subsidiaries Notes to Consolidated Financial Statements (Unaudited) 1. Background and Basis of Presentation ------------------------------------ Gentiva Health Services, Inc. ("Gentiva" or the "Company") provides home health services throughout most of the United States principally through its Gentiva(R) Health Services and CareCentrix(R) brands ("Home Health Services business"). The accompanying interim consolidated financial statements are unaudited, but have been prepared by Gentiva pursuant to the rules and regulations of the Securities and Exchange Commission and, in the opinion of management, include all adjustments necessary for a fair presentation of results of operations, financial position and cash flows for each period presented. Results for interim periods are not necessarily indicative of results for a full year. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. 2. New Accounting Standards ------------------------ In January 2003, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 46, "Consolidation of Variable Interest Entities," as revised in December 2003 ("FIN 46"). FIN 46 provides guidance on the identification of entities for which control is achieved through means other than through voting rights, known as "variable interest entities" ("VIEs"), and requires a VIE to be consolidated by a company if that company is subject to a majority of the risk of loss from the VIE's activities or entitled to receive a majority of the entity's residual returns or both. Historically, entities generally were not consolidated unless the entity was controlled through voting interests. FIN 46 also requires disclosures about VIEs that a company is not required to consolidate but in which it has a significant variable interest. The consolidation requirements of FIN 46 will apply to VIEs as of March 28, 2004 for the Company. As of March 28, 2004, the Company did not have any VIE subject to the consolidation requirements of FIN 46. 3. Medicare Revenues ----------------- Medicare revenues for the first quarter of fiscal 2004 included approximately $9 million received in settlement of the Company's appeal filed with the U.S. Provider Reimbursement Review Board ("PRRB") related to the reopening of all of its 1997 cost reports (see Note 9), net of a revenue adjustment of $1 million to reflect an estimated repayment to Medicare in connection with services rendered to certain patients since the inception of the Prospective Payment Reimbursement System ("PPS") in October 2000. The Centers for Medicare & Medicaid Services has recently determined that homecare providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. 6 4. Earnings Per Share ------------------ Basic and diluted earnings per share for each period presented has been computed by dividing net income by the weighted average number of shares outstanding for each respective period. The computations of the basic and diluted per share amounts were as follows (in thousands, except per share amounts): Three Months Ended ----------------------------------- March 28, 2004 March 30, 2003 ---------------- ---------------- Net income $ 9,230 $ 5,201 ================================================================================ Basic weighted average common shares outstanding 25,542 26,696 Shares issuable upon the assumed exercise of stock options and in connection with the employee stock purchase plan using the treasury stock method 1,542 1,056 ---------------- ---------------- Diluted weighted average common shares outstanding 27,084 27,752 ---------------- ---------------- ================================================================================ Net income per common share: Basic $ 0.36 $ 0.19 Diluted $ 0.34 $ 0.19 ================================================================================ 5. Acquisition ----------- Acquisition of First Home Care Business On March 28, 2003, the Company completed the purchase of certain assets and the business of First Home Care - Houston, Inc. and FHCH, Inc. pursuant to an asset purchase agreement for cash consideration of $1.3 million. The purchase price allocation consisted of goodwill of $1.2 million and assets and other intangibles of $0.1 million. 6. Revolving Credit Facility, Restricted Cash and Debt --------------------------------------------------- The Company's credit facility, which was entered into on June 13, 2002, as amended, as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender. Borrowing availability under the credit facility was reduced by $10 million until such quarter in 2003 in which the trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, exceeded $15 million. As of March 30, 2003, the trailing 12 month EBITDA threshold was achieved and the availability restriction lifted, effective June 1, 2003. 7 At the Company's option, the interest rate on borrowings under the credit facility was based on the London Interbank Offered Rates (LIBOR) plus 3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the Company was required to pay a fee equal to 2.5 percent per annum of the aggregate face amount of outstanding letters of credit. Beginning in 2003, the applicable margins for the LIBOR borrowing, prime rate borrowing and letter of credit fees decreased by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent, respectively, provided that the Company's trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, is in excess of $20 million. The Company was also subject to an unused line fee equal to 0.50 percent per annum of the average daily difference between the total revolving credit facility amount and the total outstanding borrowings and letters of credit. Beginning in 2003, the unused credit line fee decreased to 0.375 percent provided the minimum EBITDA target described above is achieved. The higher margins and fees are subject to reinstatement in the event that the Company's trailing 12 month EBITDA falls below $20 million. The Company met this minimum EBITDA requirement as of March 30, 2003, with the rate reduction effective June 1, 2003, and continued to meet this requirement as of March 28, 2004. The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, the Company's credit facility was amended to make covenants relating to acquisitions and stock repurchases less restrictive, provided that the Company maintains minimum excess aggregate liquidity, as defined in the amendment, equal to at least $60 million and to allow for the disposition of certain assets. As of March 28, 2004, the Company was in compliance with the covenants in the credit facility, as amended. The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to $275,000 if the facility is terminated during the period from June 13, 2003 to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004 to June 12, 2005. There is no fee for termination of the facility subsequent to June 12, 2005. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment. Total outstanding letters of credit were approximately $20.7 million as of March 28, 2004 and $20.8 million at December 28, 2003. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. There were no borrowings outstanding under the credit facility as of March 28, 2004. The Company has entered into a trust agreement and segregated $21.8 million of cash funds in a trust account for use as collateral under the Company's insurance programs. These funds are reported as restricted cash in the accompanying consolidated balance sheets. Interest on the funds in the trust account accrues to the Company. The Company, at its option, 8 may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. During the first quarter of fiscal 2004, the Company commenced implementation of a five year capital lease for certain equipment. The Company reported capital lease assets of approximately $1.4 million in fixed assets, net, current obligation of capital leases of $0.3 million in other accrued expenses and long-term capital lease obligations of $1.1 million in other liabilities, in the accompanying consolidated balance sheet as of March 28, 2004. 7. Shareholders' Equity -------------------- Changes in shareholders' equity for the three months ended March 28, 2004 were as follows (in thousands):
Additional Common Paid-in Accumulated Stock Capital Deficit Total ------------ ------------ ------------ ------------ Balance at December 28, 2003 $ 2,560 $ 270,468 $ (95,849) $ 177,179 Comprehensive income: Net income -- -- 9,230 9,230 Issuance of stock upon exercise of stock options and under stock plans for employees and directors (139,106 shares) 14 1,025 -- 1,039 Repurchase of common stock at cost (428,247 shares) (43) (5,787) -- (5,830) ------------ ------------ ------------ ------------ Balance at March 28, 2004 $ 2,531 $ 265,706 $ (86,619) $ 181,618 ============ ============ ============ ============
Comprehensive income amounted to $9.2 million and $5.2 million for the first quarter of fiscal 2004 and fiscal 2003, respectively. On May 16, 2003 and August 7, 2003, the Company's Board of Directors authorized two stock repurchase programs under which the Company could repurchase and formally retire up to an aggregate of 2,500,000 shares of its outstanding common stock. The repurchases will occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. As of July 23, 2003, the Company had completed the purchase of 1,000,000 shares authorized under the first stock repurchase program. During the first quarter of fiscal 2004, the Company repurchased 428,247 shares of its outstanding common stock at an average cost of $13.61 per share and a total cost of approximately $5.8 million. As of March 28, 2004, the Company had repurchased an aggregate of 1,866,711 shares at an average cost of $10.85 per share and a total cost of approximately $20.3 million. 8. Stock Options ------------- The Company has chosen to adopt the disclosure only provisions of Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), as amended by SFAS No. 148, "Accounting for Stock-Based Compensa- 9 tion - Transition and Disclosure - an amendment of FASB Statement No. 123" ("SFAS 148"), and continues to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under this approach, the imputed cost of stock option grants and discounts offered under the Company's Employee Stock Purchase Plan ("ESPP") is disclosed, based on the vesting provisions of the individual grants, but not charged to expense. The weighted average fair values of the Company's stock options granted during the first quarter of fiscal 2004 and fiscal 2003, calculated using the Black-Scholes option-pricing model, and other assumptions are as follows: Three Months Ended ------------------------------------- March 28, 2004 March 30, 2003 -------------- -------------- Risk-free interest rate 3.36% 3.51% Expected volatility 60% 60% Expected life 6 years 6 years Contractual life 10 years 10 years Expected dividend yield 0% 0% Weighted average fair value of options granted $ 7.63 $ 5.24 Pro forma compensation expense is calculated for the fair value of the employee's purchase rights under the ESPP, using the Black-Scholes model. Assumptions for the first quarter of fiscal 2004 and fiscal 2003 are as follows: Three Months Ended ------------------------------------- March 28, 2004 March 30, 2003 -------------- -------------- Risk-free interest rate 1.02% 1.25% Expected volatility 28% 32% Expected life 0.5 years 0.5 years Expected dividend yield 0% 0% The following table presents net income and basic and diluted income per common share had the Company elected to recognize compensation cost based on the fair value at the grant dates for stock option awards and discounts for stock purchases under the Company's ESPP, consistent with the method prescribed by SFAS 123, as amended by SFAS 148 (in thousands, except per share amounts): 10
Three Months Ended ------------------------------------ March 28, 2004 March 30, 2003 ---------------- ---------------- Net income - as reported $ 9,230 $ 5,201 Deduct: Total stock-based compensation expense determined under fair value based method for all awards, net of tax (695) (565) ---------------- ---------------- Net income - pro forma $ 8,535 $ 4,636 ================ ================ Basic income per share - as reported $ 0.36 $ 0.19 Basic income per share - pro forma $ 0.33 $ 0.17 Diluted income per share - as reported $ 0.34 $ 0.19 Diluted income per share - pro forma $ 0.32 $ 0.17
During the first quarter of fiscal 2004, the Company granted 1,022,100 stock options to officers, directors and employees under its existing option plans at an average exercise price of $12.93. At March 28, 2004, there were 3,658,429 options outstanding at a weighted average exercise price of $8.16 per share. 9. Legal Matters ------------- Litigation In addition to the matters referenced in this Note 9, the Company is party to certain legal actions arising in the ordinary course of business, including legal actions arising out of services rendered by its various operations, personal injury and employment disputes. Cooper v. Gentiva CareCentrix, Inc. t/a/d/b/a/ Gentiva Health Services, U.S. District Court (W.D. Penn), Civil Action No. 01-0508. On January 2, 2002, this amended complaint was served on the Company alleging that the defendant submitted false claims to the government for payment in violation of the Federal False Claims Act, 31 U.S.C. 3729 et seq., and that the defendant had wrongfully terminated the plaintiff. The plaintiff claimed that infusion pumps delivered to patients did not supply the full amount of medication, allegedly resulting in substandard care. Based on a review of the court's docket sheet, the plaintiff filed a complaint under seal in March 2001. In October 2001, the United States government filed a notice with the court declining to intervene in this matter, and on October 24, 2001, the court ordered that the seal be lifted. The Company filed its responsive pleading on February 25, 2002, and discovery has now commenced. The Company has denied the allegations of wrongdoing in the complaint and is defending itself vigorously in this matter. On May 19, 2003, the Company filed a motion for summary judgment on the issue of liability. On February 6, 2004, the court granted partial summary judgment for the Company, dismissing two of the three claims alleged under the False Claims Act and denying summary judgment for the Company on the wrongful termination claim. The parties are completing discovery; therefore, the Company cannot determine a range of damages, if any, at this time. 11 Government Matters PRRB Appeal ----------- Prior to October 1, 2000, reimbursement of Medicare home care nursing services was based on reasonable, allowable costs incurred in providing services to eligible beneficiaries subject to both per visit and per beneficiary limits in accordance with the Interim Payment System established through the Balanced Budget Act of 1997. These costs were reported in annual cost reports, which were filed with the Centers for Medicare & Medicaid Services ("CMS"), and were subject to audit by the fiscal intermediary engaged by CMS. In connection with the audit of the Company's 1997 cost reports, the Medicare fiscal intermediary made certain audit adjustments related to the methodology used by the Company to allocate a portion of its residual overhead costs. The Company filed cost reports for years subsequent to 1997 using the fiscal intermediary's methodology. The Company believed its methodology used to allocate such overhead costs was accurate and consistent with past practice accepted by the fiscal intermediary; as such, the Company filed appeals with the Provider Reimbursement Review Board ("PRRB") concerning this issue with respect to cost reports for the years 1997, 1998 and 1999. The Company's consolidated financial statements for the years 1997, 1998 and 1999 had reflected use of the methodology mandated by the fiscal intermediary. In June 2003, the Company and its Medicare fiscal intermediary signed an Administrative Resolution relating to the issues covered by the appeals pending before the PRRB. Under the terms of the Administrative Resolution, the fiscal intermediary agreed to reopen and adjust the Company's cost reports for the years 1997, 1998 and 1999 using a modified version of the methodology used by the Company prior to 1997. This modified methodology will also be applied to cost reports for the year 2000, which are currently under audit. The Administrative Resolution required that the process to (i) reopen all 1997 cost reports, (ii) determine the adjustments to allowable costs through the issuance of Notices of Program Reimbursement ("NPRs") and (iii) make appropriate payments to the Company, be completed in early 2004. Cost reports relating to years subsequent to 1997 will be reopened after the process for the 1997 cost reports is completed. On February 17, 2004, the fiscal intermediary notified the Company that it had completed the reopening of all 1997 cost reports and determined that the adjustment to allowable costs for that year was $9.0 million. As of March 28, 2004, the Company had received the funds and recorded the adjustment of $9.0 million as net revenues for the first quarter of fiscal 2004. Although the Company believes that it will likely recover additional funds as a result of applying the modified methodology discussed above to cost reports subsequent to 1997, the settlement amounts cannot be specifically determined until the reopening or audit of each year's cost reports is completed. This is not expected to occur until the second half of fiscal 2004 or fiscal 2005. However, in view of changes in reimbursement and the Company's operations in periods subsequent to 1997, it is likely that any future recoveries relating to any cost report year from 1998 to 2000 will be significantly less than the 1997 settlement. 12 Subpoena -------- On April 17, 2003, the Company received a subpoena from the Department of Health and Human Services, Office of the Inspector General, Office of Investigations ("OIG"). The subpoena seeks information regarding the Company's implementation of settlements and corporate integrity agreements entered into with the government, as well as, the Company's treatment on cost reports of employees engaged in sales and marketing efforts. With respect to the cost report issues, the government has preliminarily agreed to narrow the scope of production to the period from January 1, 1998 through September 30, 2000. On February 17, 2004, the Company received a subpoena from the U.S. Department of Justice ("DOJ") seeking additional information related to the matters covered by the OIG subpoena. The Company has provided documents and other information requested by the OIG pursuant to its subpoena and similarly intends to cooperate fully with the DOJ subpoena, as well as any future OIG or DOJ information requests. To the Company's knowledge, the government has not filed a complaint against the Company. Indemnifications Gentiva became an independent, publicly owned company on March 15, 2000, when the common stock of the Company was issued to the stockholders of Olsten Corporation, a Delaware corporation ("Olsten"), the former parent corporation of the Company (the "Split-Off"). In connection with the Split-Off, the Company agreed to assume, to the extent permitted by law, and to indemnify Olsten for, the liabilities, if any, arising out of the home health services business. In addition, the Company and Accredo Health, Incorporated ("Accredo") have agreed to indemnify each other for breaches of representations and warranties of such party or the non-fulfillment of any covenant or agreement of such party in connection with the sale of the Company's Specialty Pharmaceutical Services ("SPS") business to Accredo on June 13, 2002. The Company has also agreed to indemnify Accredo for the retained liabilities and for tax liabilities and Accredo has agreed to indemnify the Company for assumed liabilities and the operation of the SPS business after the closing of the acquisition. The representations and warranties generally survive for the period of two years after the closing of the acquisition, which occurred on June 13, 2002, except that: o representations and warranties related to health care compliance survive for three years after the closing of the acquisition; o representations and warranties related to title of the assets and sufficiency of assets and employees survive for the applicable statute of limitations period; and o representations and warranties related to tax matters survive until thirty days after the expiration of the applicable tax statute of limitations period, including any extensions of the applicable period, subject to certain exceptions. Accredo and the Company generally may recover indemnification for a breach of a representation or warranty only to the extent a party's claim exceeds $1 million for any individual claim, or exceeds $5 million in the aggregate, subject to certain conditions and only up to a maximum amount of $100 million. 13 These indemnification rights are the exclusive remedy from and after the closing of the acquisition, except for the right to seek specific performance of any of the agreements in the related asset purchase agreement, in any case where a party is guilty of fraud in connection with the acquisition, and with respect to tax liabilities and obligations. On May 6, 2003, the Company received correspondence from Accredo giving the Company notice of Accredo's indemnification rights for any breach under the asset purchase agreement related to the adequacy of the accounts receivable reserves in accordance with section 8.3 of the asset purchase agreement; however, no breach of a representation or warranty was asserted against the Company in the correspondence. 10. Income Taxes ------------ The Company recorded federal and state income taxes of approximately $5.9 million for the first quarter ended March 28, 2004, of which $0.7 million represented a current provision and $5.2 million represented a deferred tax provision. The difference between the federal statutory income tax rate and the Company's effective tax rate of 39 percent is due primarily to state taxes. State income taxes and federal alternative minimum taxes of $0.6 million were recorded for the first quarter of fiscal 2003. The Company's effective tax rate of approximately 10.5 percent was lower than the statutory income tax rate due to the impact of a valuation allowance offsetting the realization of tax benefits associated with the net operating loss carryforward and other deferred tax assets. Deferred tax assets and deferred tax liabilities were as follows (in thousands):
Three Months Ended ------------------------------------ March 28, 2004 December 28, 2003 ---------------- ---------------- Deferred tax assets - current Reserves and allowances $ 20,921 $ 21,290 Net operating loss and other carryforwards (Federal and state) 998 4,966 Other 392 208 ---------------- ---------------- Total current deferred tax assets 22,311 26,464 Deferred tax assets - non-current Intangible assets 28,264 29,085 Depreciation 81 23 Capitalized software (1,339) (1,083) ---------------- ---------------- Total non-current deferred tax assets (net) 27,006 28,025 Net deferred tax assets $ 49,317 $ 54,489 ================ ================
As of March 28, 2004, the Company's tax credit carryforwards for income tax purposes were approximately $1.0 million. Net operating losses of approximately $11 million were utilized in the first quarter of fiscal 2004 to offset taxable income. 14 11. Subsequent Event ---------------- On March 30, 2004, the Company sold its minority interest in a home care nursing services business in Canada. The business had been acquired as partial consideration for the sale of the Company's Canadian operations in the fourth quarter of fiscal 2000. In connection with the sale of the minority interest, the Company received cash proceeds of $4.1 million and will record a gain on sale of approximately $0.9 million in the second quarter of fiscal 2004. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------------------------------------- Forward-looking Statements Certain statements contained in this Quarterly Report on Form 10-Q, including, without limitation, statements containing the words "believes," "anticipates," "intends," "expects," "assumes," "trends" and similar expressions, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are based upon the Company's current plans, expectations and projections about future events. However, such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: o general economic and business conditions; o demographic changes; o changes in, or failure to comply with, existing governmental regulations; o legislative proposals for health care reform; o changes in Medicare and Medicaid reimbursement levels; o effects of competition in the markets the Company operates in; o liability and other claims asserted against the Company; o ability to attract and retain qualified personnel; o availability and terms of capital; o loss of significant contracts or reduction in revenue associated with major payor sources; o ability of customers to pay for services; o a material shift in utilization within capitated agreements; and o changes in estimates and judgments associated with critical accounting policies. Forward-looking statements are found throughout "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this Quarterly Report on Form 10-Q. The reader should not place undue reliance on forward-looking statements, which speak only as of the date of this report. Except as required under the federal securities laws and the rules and regulations of the Securities and Exchange Commission ("SEC"), the Company does not have any intention or obligation to publicly release any revisions to forward-looking statements to reflect unforeseen or other events after the date of this 15 report. The Company has provided a detailed discussion of risk factors in its 2003 Annual Report on Form 10-K and various filings with the SEC. The reader is encouraged to review these risk factors and filings. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's results of operations and financial position. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and related notes included elsewhere in this report. General - ------- The Company's results of operations are impacted by various regulations and other matters that are implemented from time to time in its industry, some of which are described in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2003 and in other filings with the SEC. For a discussion of the Company's critical accounting policies, please refer to Note 2 of Notes to Consolidated Financial Statements in the Company's 2003 Annual Report on Form 10-K. Overview - -------- Gentiva is the nation's largest provider of comprehensive home health services, based on the amount of revenues derived from the provision of skilled home nursing services to patients. The Company generates revenues and profits primarily by providing patients with direct home health care services, including specialty services and neuro-rehabilitation services; by delivering national, regional and local administrative services to managed care organizations and self-insured employers; and by providing home health care consulting services to independent and hospital-based home health agencies. Gentiva's direct home health services to patients include skilled nursing; physical, occupational, speech and neuro-rehabilitation therapy services; social work; nutrition; disease management education and help with daily living activities, as well as other therapies and services. The Company's specialty services involve physical therapist-led orthopedic rehabilitation services for patients who have had joint replacements or other major orthopedic surgery, and therapies for patients with balance issues who are prone to injury or immobility as a result of falling. Gentiva is also piloting similar specialty programs for cardiopulmonary and wound care services that are expected to be launched during 2004. The Company's neuro-rehabilitation services, known as Rehab Without Walls(R), provide home and community-based therapies for patients with traumatic brain injury, cerebrovascular accident injury and acquired brain injury, as well as a number of other complex rehabilitation cases. Gentiva's national, regional and local administrative services for managed care organizations and self-insured employers -- provided through its CareCentrix(R) business unit -- include central access, care coordination, utilization management, and claims processing. The Company is capable of coordinating a wide range of home care services, including traditional 16 home nursing, chronic and acute infusion therapies, and durable medical and respiratory equipment, to member patients of these managed care organizations. Consulting services to home health agencies are delivered primarily by the Company's Gentiva Business Services unit. These services include billing and collection activities, web-based caregiver training and credentialing, on-site agency support and consulting, operational support, and individualized strategies for reduction of days sales outstanding. The Company's services can be delivered across the United States 24 hours a day, 7 days a week. Direct home health services to patients are delivered through more than 350 owned and operated direct service delivery units in approximately 250 locations in 35 states. Administrative services for managed care organizations and self-insured employers are coordinated within four regional coordination centers. Home care services provided to member patients of these organizations are delivered through Company-owned and third-party credentialed provider locations covering the continental United States. Results of Operations - --------------------- Revenues Net revenues increased by $11.9 million, or 5.9 percent to $213.9 million for the quarter ended March 28, 2004 as compared to the quarter ended March 30, 2003. Revenue growth in the first quarter of fiscal 2004 was reported in Medicare, while revenue from Medicaid and Other Government and Commercial Insurance and Other payor categories decreased in the first quarter of fiscal 2004. For the quarter ended March 28, 2004 as compared to the quarter ended March 30, 2003, net revenues from Medicare increased by $20.0 million or 47.1 percent to $62.6 million, Commercial Insurance and Other payors decreased by $5.0 million or 4.2 percent to $112.1 million, and Medicaid and Other Government payors decreased by $3.2 million or 7.5 percent to $39.2 million. Medicare revenues were impacted by two special items which contributed $8.0 million, or 18.8 percent of the Medicare revenue growth, in the first quarter of fiscal 2004. The special items represented (i) approximately $9 million received in settlement of the Company's appeal filed with the PRRB related to the reopening of all of its 1997 cost reports and (ii) a revenue adjustment of $1 million to reflect the estimated repayment to Medicare in connection with services rendered to certain patients since the inception of the Prospective Payment Reimbursement System in October 2000. The Centers for Medicare & Medicaid Services has recently determined that homecare providers should have received lower reimbursements for certain services rendered to beneficiaries discharged from inpatient hospitals within fourteen days immediately preceding admission to home healthcare. Medicare revenue growth for the first quarter of fiscal 2004 was also fueled by increases in admissions of approximately 20 percent, the 3.3 percent market basket rate increase that became effective for patients on service on or after October 1, 2003, as well as various operational and clinical process enhancements. The market basket rate increase represented $1.4 million in incremental revenue in the first quarter of fiscal 2004. 17 Commercial Insurance and Other revenues decreased $5.0 million or 4.2 percent for the first quarter of 2004, primarily due to a decline in revenue derived from CIGNA Health Corporation ("CIGNA"). The CIGNA revenue decline of $12.3 million, or 16.0 percent, compared to the first quarter of fiscal 2003, was caused by a reduction in the number of enrolled CIGNA members in 2004, and lower revenue and related costs resulting from a change in the Company's delivery model of certain home medical equipment ("HME") products and services. The revenue decrease was partially offset by an increase of $7.3 million, or 18.1 percent, in non-CIGNA, Commercial Insurance and Other revenue driven by unit volume and pricing increases from existing business, as well as new contracts signed during the past year. Medicaid and Other Government revenues decreased for the three months ended March 28, 2004 due to revenue reductions related to more restrictive eligibility requirements, lower authorized services per beneficiary and lower reimbursement rates in various states in which the Company operates, as well as the Company's decision to reduce its participation in certain low-margin, hourly Medicaid and state and county programs. Revenues relating to hourly and intermittent care Medicaid and state and county programs decreased $2.7 million and $0.5 million, respectively, as compared to the first quarter of fiscal year 2003. Gross Profit Gross profit was approximately $83.3 million for the first quarter ended March 28, 2004 and $68.8 million for the quarter ended March 30, 2003. As a percentage of net revenues, gross profit margins increased from 34.0 percent for the quarter ended March 30, 2003, to 38.9 percent for the quarter ended March 28, 2004. During the first quarter of fiscal 2004, the two special items had a net positive impact of 2.3 percent on gross profit margins. The remaining increase in gross margin percentage was due to improved rates in both Medicare and managed care contracts, as well as a favorable change in business mix in which volume growth of Medicare business more that offset the anticipated revenue loss in certain low-margin Medicaid and local government programs, as well as in the CIGNA business. Selling, General and Administrative Expenses Selling, general and administrative expenses, including depreciation and amortization, increased $5.2 million to $68.2 million for the quarter ended March 28, 2004, as compared to $63.0 million for the quarter ended March 30, 2003. The increase for the first quarter of fiscal 2004 related to (i) increases in field operating and administrative costs to service incremental revenues, including revenues from the Company's specialty programs ($2.6 million), (ii) increased sales and clinical care coordination expenses ($1.1 million) and (iii) incremental costs associated with the retooling of the Company's CareCentrix network of HME providers and various information technology strategic initiatives ($1.5 million). 18 Interest Income, Net Net interest income was approximately $0.1 million for the quarter ended March 28, 2004, and $43 thousand for the quarter ended March 30, 2003. Net interest income included interest income of approximately $0.4 million for the first quarter of fiscal 2004 and $0.3 million for the first quarter of fiscal 2003, partially offset by fees relating to the revolving credit facility and outstanding letters of credit. Income Taxes The Company recorded federal and state income taxes of approximately $5.9 million for the first quarter ended March 28, 2004, of which $0.7 million represented a current provision and $5.2 million represented a deferred tax provision. The difference between the federal statutory income tax rate and the Company's effective tax rate of 39 percent is due primarily to state taxes. State income taxes and federal alternative minimum taxes of $0.6 million were recorded for the first quarter of fiscal 2003. The Company's effective tax rate of approximately 10.5 percent was lower than the statutory income tax rate due to the impact of a valuation allowance offsetting the realization of tax benefits associated with the net operating loss carryforward and other deferred tax assets. Net Income For the first quarter of fiscal 2004, net income was $9.2 million, or $0.34 per diluted share, compared with net income of $5.2 million, or $0.19 per diluted share, for the corresponding period of 2003. Net income for the first quarter of fiscal 2004 included two special items related to Medicare, noted in the Revenues section above, which had a net positive impact of $4.9 million, or $0.18 per diluted share. Net income for the first quarter of fiscal 2003 reflected the positive impact of a lower effective income tax rate of 10.5 percent. Liquidity and Capital Resources - ------------------------------- Liquidity The Company's principal source of liquidity is the collection of its accounts receivable. For healthcare services, the Company grants credit without collateral to its patients, most of whom are insured under third party commercial or governmental payor arrangements. Net cash provided by operating activities for the quarter ended March 28, 2004 was $9.4 million and was used to fund capital expenditures of $3.4 million and repurchase shares of the Company's common stock of $5.8 million during the quarter. Days Sales Outstanding ("DSO") as of March 28, 2004 remained flat from December 28, 2003 at 59 days. Working capital at March 28, 2004 was approximately $140 million, an increase of $4 million as compared to approximately $136 million at December 28, 2003, primarily due to: 19 o a $1 million increase in cash, cash equivalents, restricted cash and investments; o a $5 million increase in accounts receivable; o a $2 million increase in prepaid expenses and other assets; and o a $4 million decrease in deferred tax assets. The Company participates in the Medicare, Medicaid and other federal and state healthcare programs. Revenue mix by major payor classifications are as follows: Three Months Ended ------------------------------------ March 28, 2004 March 30, 2003 ---------------- ---------------- Medicare 29% 21% Medicaid and Other Government 18 21 Commercial Insurance and Other 53 58 ---------------- ---------------- 100% 100% ================ ================ On October 1, 2003, a 3.3 percent market basket rate increase became effective for patients on service on or after October 1, 2003. Effective April 1, 2004, this increase was reduced by 0.8 percent to 2.5 percent for open episodes of care on or after April 1, 2004. In addition, Medicare reimbursement was increased 5 percent for the rural add-on related to home health services performed in specifically defined rural areas of the country, effective April 1, 2004. These two reimbursement changes are not expected to have a material effect on Company results for the remainder of 2004. There are certain standards and regulations that the Company must adhere to in order to continue to participate in these programs, including compliance with the Company's corporate integrity agreement. As part of these standards and regulations, the Company is subject to periodic audits, examinations and investigations conducted by, or at the direction of, governmental investigatory and oversight agencies. Periodic and random audits conducted or directed by these agencies could result in a delay or adjustment to the amount of reimbursements received under these programs. Violation of the applicable federal and state health care regulations can result in the Company's exclusion from participating in these programs and can subject the Company to substantial civil and/or criminal penalties. The Company believes it is currently in compliance with these standards and regulations. The Company is party to a contract with CIGNA, pursuant to which the Company provides or contracts with third party providers to provide home nursing services, acute and chronic infusion therapies, durable medical equipment, and respiratory products and services to patients insured by CIGNA. For the first quarter of fiscal 2004, CIGNA accounted for approximately 30 percent of the Company's total net revenues compared to approximately 38 percent for the first quarter of fiscal 2003. The Company has extended its relationship with CIGNA by entering into a new national home health care contract, effective January 1, 2004. The term of the new contract extends to December 31, 2006, and automatically renews thereafter for additional one year terms unless terminated. Under the termination provisions, CIGNA has the right to terminate the agreement on December 31, 2005 if it provides 90 days 20 advance written notice to the Company, and each party has the right to terminate at the end of each term thereafter by providing at least 90 days advance written notice prior to the start of the new term. If CIGNA chose to terminate or not renew the contract, or to significantly modify its use of the Company's services, there could be a material adverse effect on the Company's cash flow. Net revenues generated under capitated agreements with managed care payors were approximately 12 percent of total net revenues for the first quarter of fiscal 2004 and 16 percent for the first quarter of fiscal 2003. Fee-for-service contracts with other commercial payors are traditionally one year in term and renewable automatically on an annual basis, unless terminated by either party. The Company's credit facility, which was amended on August 7, 2003 as described below, provides up to $55 million in borrowings, including up to $40 million which is available for letters of credit. The Company may borrow up to a maximum of 80 percent of the net amount of eligible accounts receivable, as defined, less any reasonable and customary reserves, as defined, required by the lender. Borrowing availability under the credit facility was reduced by $10 million until such quarter in 2003 in which the trailing 12 month EBITDA, excluding certain restructuring costs and special charges recorded by the Company during fiscal 2002, as defined, exceeded $15 million. As of March 30, 2003, the trailing 12 months EBITDA threshold was achieved and the availability restriction lifted, effective June 1, 2003. At the Company's option, the interest rate on borrowings under the credit facility was based on the London Interbank Offered Rates (LIBOR) plus 3.25 percent or the lender's prime rate plus 1.25 percent. In addition, the Company was required to pay a fee equal to 2.5 percent per annum of the aggregate face amount of outstanding letters of credit. Beginning in 2003, the applicable margins for the LIBOR borrowing, prime rate borrowing and letter of credit fees decreased by 0.25 percent to 3.0 percent, 1.0 percent, and 2.25 percent, respectively, provided that the Company's trailing 12 month EBITDA, excluding certain restructuring costs and special charges, as defined, is in excess of $20 million. The Company was also subject to an unused line fee equal to 0.50 percent per annum of the average daily difference between the total revolving credit facility amount, as defined, and the total outstanding borrowings and letters of credit. Beginning in 2003, the unused credit line fee decreased to 0.375 percent provided the minimum EBITDA target described above is achieved. The higher margins and fees are subject to reinstatement in the event that the Company's trailing 12 month EBITDA falls below $20 million. The Company met this minimum EBITDA requirement as of March 30, 2003, with the rate reduction effective June 1, 2003 and continued to meet this requirement as of March 28, 2004. Total outstanding letters of credit were $20.7 million as of March 28, 2004. The letters of credit, which expire one year from date of issuance, were issued to guarantee payments under the Company's workers compensation program and for certain other commitments. As of March 28, 2004, there were no borrowings outstanding under the credit facility and the Company had borrowing capacity under the credit facility, after adjusting for outstanding letters of credit, of approximately $34 million. The credit facility, which expires in June 2006, includes certain covenants requiring the Company to maintain a minimum tangible net worth of $101.6 million, minimum 21 EBITDA, as defined, and a minimum fixed charge coverage ratio, as defined. Other covenants in the credit facility include limitation on mergers, consolidations, acquisitions, indebtedness, liens, distributions including dividends, capital expenditures, stock repurchases and dispositions of assets and other limitations with respect to the Company's operations. On August 7, 2003, the credit facility was amended to make covenants relating to acquisitions and stock repurchases less restrictive, provided that the Company maintains minimum excess aggregate liquidity, as defined in the amendment, equal to at least $60 million and to allow for the disposition of certain assets. As of March 28, 2004, the Company was in compliance with the covenants in the credit facility, as amended. The credit facility further provides that if the agreement is terminated for any reason, the Company must pay an early termination fee equal to $275,000 if the facility is terminated during the period from June 13, 2003 to June 12, 2004 and $137,500 if the facility is terminated from June 13, 2004 to June 12, 2005. There is no fee for termination of the facility subsequent to June 12, 2005. Loans under the credit facility are collateralized by all of the Company's tangible and intangible personal property, other than equipment. The credit facility includes provisions, which, if not complied with, could require early payment by the Company. These include customary default events, such as failure to comply with financial covenants, insolvency events, non-payment of scheduled payments, acceleration of other financial obligations and change in control provisions. In addition, these provisions include an account obligor, whose accounts are more than 25 percent of all accounts of the Company over the previous 12-month period, canceling or failing to renew its contract with the Company and ceasing to recognize the Company as an approved provider of health care services, or the Company revoking the lending agent's control over its governmental lockbox accounts. The Company does not have any trigger events in the credit facility that are tied to changes in its credit rating or stock price. As of March 28, 2004, the Company was in compliance with these provisions. The Company may be subject to workers compensation claims and lawsuits alleging negligence or other similar legal claims. The Company maintains various insurance programs to cover this risk but is substantially self-insured for most of these claims. The Company recognizes its obligations associated with these programs in the period the claim is incurred. The Company estimates the cost of both reported claims and claims incurred but not reported, up to specified deductible limits, based on its own specific historical claims experience and current enrollment statistics, industry statistics and other information. Such estimates and the resulting reserves are reviewed and updated periodically. The Company is responsible for the cost of individual workers compensation claims and individual professional liability claims up to $500,000 per incident which occurred prior to March 15, 2002 and $1,000,000 per incident thereafter. The Company also maintains excess liability coverage relating to professional liability and casualty claims which provides insurance coverage for individual claims of up to $25,000,000 in excess of the underlying coverage limits. Payments under the Company's workers compensation program are guaranteed by letters of credit and segregated restricted cash balances. 22 Capital Expenditures The Company's capital expenditures for the three months ended March 28, 2004 were $3.4 million, excluding equipment capitalized under capital lease obligations of $1.4 million, as compared to $2.5 million for the same period in fiscal 2003. The Company intends to make investments and other expenditures to, among other things, upgrade its computer technology and system infrastructure and comply with regulatory changes in the industry. In this regard, management expects that capital expenditures for fiscal 2004 will range between $12.0 million and $13.5 million. Management expects that the Company's capital expenditure needs will be met through operating cash flow and available cash reserves. Cash Resources and Obligations The Company had cash, cash equivalents and restricted cash of approximately $111.1 million as of March 28, 2004. The restricted cash relates to cash funds of $21.8 million that have been segregated in a trust account to provide additional collateral under the Company's insurance programs. Interest on the funds in the trust account accrues to the Company. The Company, at its option, may access the cash funds in the trust account by providing equivalent amounts of alternative security, including letters of credit and surety bonds. The Company anticipates that repayments to Medicare for partial episode payments and prior year cost report settlements will be made periodically through June 2005. These amounts are reflected as Medicare liabilities in the accompanying consolidated balance sheets. On May 16, 2003 and August 7, 2003, the Company's Board of Directors authorized two stock repurchase programs under which the Company could repurchase and formally retire up to an aggregate of 2,500,000 shares of its outstanding common stock. The repurchases will occur periodically in the open market or through privately negotiated transactions based on market conditions and other factors. As of July 23, 2003, the Company had completed the purchase of 1,000,000 shares authorized under the first stock repurchase program. During the first quarter of fiscal 2004, the Company repurchased 428,247 shares of its outstanding common stock at an average cost of $13.61 per share and a total cost of approximately $5.8 million. As of March 28, 2004, the Company had repurchased an aggregate of 1,866,711 shares at an average cost of $10.85 per share and a total cost of approximately $20.3 million. See also Part II, Item 2, of this Form 10-Q. Contractual Obligations and Commercial Commitments At March 28, 2004, the Company had no long-term debt. During the first quarter of fiscal 2004, the Company commenced implementation of a five year capital lease for equipment. Under the terms of the lease the Company capitalized the equipment at its fair market value of approximately $1.4 million, which approximates the present value of the minimum lease payments. Future minimum rental commitments for all non-cancelable leases and purchase obligations at March 28, 2004, are as follows (in thousands): 23
Payment due by period --------------------------------------------------------- Less than More than Contractual Obligations Total 1 year 1-3 years 4-5 years 5 years ----------------------- --------- --------- --------- --------- --------- Long-term debt obligations $ -- $ -- $ -- $ -- $ -- Capital lease obligations 1,348 264 570 514 -- Operating lease obligations 60,452 19,463 26,085 9,580 5,324 Purchase obligations 505 505 -- -- -- --------------------------------------------------------- Total $ 62,305 $ 20,232 $ 26,655 $ 10,094 $ 5,324 =========================================================
The Company had total letters of credit outstanding under its credit facility of approximately $20.7 million at March 28, 2004 and $20.8 million at December 28, 2003. The letters of credit, which expire one year from date of issuance, are issued to guarantee payments under the Company's workers compensation program and for certain other commitments. The Company has the option to renew these letters of credit or set aside cash funds in a segregated account to satisfy the Company's obligations, as further discussed above under the caption "Cash Resources and Obligations". The Company has no other off-balance sheet arrangements and has not entered into any transactions involving unconsolidated, limited purpose entities or commodity contracts. Management expects that the Company's working capital needs for fiscal 2004 will be met through operating cash flow and its existing cash balances. The Company may also consider other alternative uses of cash including, among other things, acquisitions, additional share repurchases and cash dividends. These uses of cash would require the approval of the Company's Board of Directors and may require the approval of its lender. If cash flows from operations, cash resources or availability under the credit facility fall below expectations, the Company may be forced to delay planned capital expenditures, reduce operating expenses, seek additional financing or consider alternatives designed to enhance liquidity. Item 3. Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Generally, the fair market value of fixed rate debt will increase as interest rates fall and decrease as interest rates rise. The Company had no interest rate exposure on fixed rate debt or other market risk at March 28, 2004. Item 4. Controls and Procedures ----------------------- Evaluation of disclosure controls and procedures. The Company's Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 ("Exchange Act") Rule 13a-15(e)) as of the end of the period covered by this report. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are adequate and effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within required time periods. 24 Changes in internal control over financial reporting. As required by the Exchange Act Rule 13a-15(d), the Company's Chief Executive Officer and Chief Financial Officer evaluated the Company's internal control over financial reporting to determine whether any change occurred during the quarter ended March 28, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. Based on that evaluation, there has been no such change during such quarter. 25 PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- See Note 9 to the consolidated financial statements included in this report for a description of legal matters and pending legal proceedings, which description is incorporated herein by reference. Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities -------------------------------------------------------------- (e) Issuer Purchases of Equity Securities (1)
(c) Total Number (d) Maximum Number (a) Total of Shares Purchased of Shares that May Number (b) Average as Part of Publicly Yet be Purchased of Shares Price Paid Announced Plans Under the Plans Period Purchased per Share or Programs or Programs ------ ----------- ----------- ----------- ----------- January (12/29/03 - 1/25/04) 92,747 $ 12.96 92,747 968,789 February (1/26/04 - 2/22/04) 106,400 $ 12.61 106,400 862,389 March (2/23/04 - 3/28/04) 229,100 $ 14.34 229,100 633,289 ----------- ----------- ----------- Total 428,247 $ 13.61 428,247 =========== =========== ===========
(1) On August 7, 2003, the Company announced that its Board of Directors had authorized the repurchase of up to 1,500,000 shares of its outstanding common stock. Item 3. Defaults Upon Senior Securities ------------------------------- None. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None. Item 5. Other Information ----------------- In connection with a July 19, 1999 settlement with various government agencies, Olsten executed a corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, which will remain in effect until August 18, 2004. The corporate integrity agreement applies to the Company's businesses that bill the federal government health programs directly for services, such as its nursing brand (but excludes the SPS business), and focuses on issues and training related to cost report preparation, contracting, medical necessity and billing of claims. Under the corporate integrity agreement, the Company is required, for example, to maintain a corporate compliance officer to develop and implement compliance programs, to retain 26 an independent review organization to perform annual reviews and to maintain a compliance program and reporting systems, as well as to provide certain training to employees. The Company's compliance program is required to be implemented for all newly established or acquired business units if their type of business is covered by the corporate integrity agreement. Reports under the integrity agreement are to be filed annually with the Department of Health and Human Services, Office of Inspector General. After the corporate integrity agreement expires, the Company is to file a final annual report with the government. The Company believes it is in compliance with the corporate integrity agreement and has timely filed all required reports. If the Company fails to comply with the terms of its corporate integrity agreement, the Company will be subject to penalties. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibit Number Description -------------- ----------- 3.1 Restated Certificate of Incorporation of Company. (1) 3.2 Certificate of Correction to Certificate of Incorporation, filed with the Delaware Secretary of State on July 1, 2002. (2) 3.3 Restated By-Laws of Company. (2) 4.1 Specimen of common stock. (4) 4.2 Form of Certificate of Designation of Series A Junior Participating Preferred Stock. (1) 4.3 Form of Certificate of Designation of Series A Cumulative Non-Voting Redeemable Preferred Stock. (3) 10.1 Employment Agreement dated as of March 22, 2004 with Ronald A. Malone*+ 10.2 Change in Control Agreement dated March 22, 2004 with Ronald A. Malone*+ 31.1 Certification of Chief Executive Officer dated May 4, 2004 pursuant to Rule 13a-14(a).* 31.2 Certification of Chief Financial Officer dated May 4, 2004 pursuant to Rule 13a-14(a).* 27 32.1 Certification of Chief Executive Officer dated May 4, 2004 pursuant to 18 U.S.C. Section 1350.* 32.2 Certification of Chief Financial Officer dated May 4, 2004 pursuant to 18 U.S.C. Section 1350.* - -------------- (1) Incorporated herein by reference to Amendment No. 2 to the Registration Statement of Company on Form S-4 dated January 19, 2000 (File No. 333-88663). (2) Incorporated herein by reference to Form 10-Q of Company for the quarterly period ended June 30, 2002. (3) Incorporated herein by reference to Amendment No. 3 to the Registration Statement of Company on Form S-4 dated February 4, 2000 (File No. 333-88663). (4) Incorporated herein by reference to Amendment No. 4 to the Registration Statement of Company on Form S-4 dated February 9, 2000 (File No. 333-88663). * Filed herewith + Management contract or compensatory plan or arrangement. (b) Reports on Form 8-K ------------------- On February 10, 2004, the Company furnished a report on Form 8-K (i) furnishing in Item 7 as an exhibit a press release covering the Company's 2003 fourth quarter and full year consolidated earnings and (ii) reporting in Item 12 the issuance of the Company's press release on the subject of its 2003 fourth quarter and full year consolidated earnings. 28 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GENTIVA HEALTH SERVICES, INC. (Registrant) Date: May 4, 2004 /s/ RONALD A. MALONE ------------------------------------- Ronald A. Malone Chairman and Chief Executive Officer Date: May 4, 2004 /s/ JOHN R. POTAPCHUK ------------------------------------- John R. Potapchuk Senior Vice President and Chief Financial Officer 29 EX-10.1 2 ex10_1.txt EXHIBIT 10.1 EXHIBIT 10.1 EMPLOYMENT AGREEMENT -------------------- EMPLOYMENT AGREEMENT, dated as of March 22, 2004, by and between GENTIVA HEALTH SERVICES, INC., a Delaware corporation (the "Company"), and RONALD A. MALONE ("Executive"). WITNESSETH: ---------- WHEREAS, the Company desires that Executive continue to serve as Chairman and Chief Executive Officer of the Company and Executive is willing to continue to serve in that capacity; WHEREAS, the Company and Executive wish to enter into a new agreement embodying the terms of his continued employment as Chairman and Chief Executive Officer (the "Agreement"); and NOW, THEREFORE, in consideration of the mutual covenants herein contained, the Company and Executive hereby agree as follows: 1. Employment. Upon the terms and subject to the conditions of this Agreement, the Company hereby agrees to employ Executive and Executive hereby agrees to his employment by the Company until the fourth anniversary of the Effective Date (as defined below) of this Agreement unless this Agreement is extended or sooner terminated as set forth herein. The period during which Executive is employed pursuant to this Agreement shall be referred to as the "Employment Period." The Employment Period shall be extended automatically for consecutive periods of one year unless either party shall provide notice to the other of its intention not to so extend, such notice to be given not less than six months prior to the end of the initial four year term or any extension thereof, as the case may be. 2. Position and Duties. ------------------- (a) Position. During the Employment Period, Executive shall serve as Chairman and Chief Executive Officer of the Company and shall be nominated for election, and if so elected, shall serve as a member of the Board of Directors of the Company (the "Board"). In addition, Executive shall serve in such other position or positions with the Company and its subsidiaries commensurate with his position and experience, as the Board shall from time to time specify. Subject to Section 5 hereof, the Executive's services will be performed principally in Melville, New York or such other location in the New York metropolitan area at which the principal office of the Company may be relocated. Executive acknowledges that the nature of his duties shall require reasonable domestic travel from time to time. (b) Duties. During the Employment Period, Executive shall have the duties, responsibilities and obligations customarily assigned to individuals serving as the chairman and chief executive officer of comparable companies, and such other duties, responsibilities and obligations as the Board shall from time to time specify. Executive shall devote his full time to the services required of him hereunder, except for vacation time and reasonable periods of absence due to sickness, personal injury or other disability, and shall use his best efforts, judgment, skill and energy to perform such services in a manner consonant with the duties of his position and to improve and advance the business and interests of the Company and its subsidiaries. Nothing contained in this Section 2 shall preclude Executive from (i) serving on the board of directors of any business corporation, unless such service would be contrary to applicable law, with prior approval from the Board, (ii) serving on the board of, or working for, any charitable or community organization, or (iii) pursuing his personal financial and legal affairs, so long as such activities, individually or collectively, do not interfere with the performance of Executive's duties hereunder or violate any of the provisions of Section 6 hereof. 3. Compensation. ------------ (a) Base Salary. During the Employment Period, the Company shall pay Executive a base salary at the annual rate of $525,000 per annum. The annual base salary payable under this section shall be reduced, however, to the extent Executive elects to defer such salary under the terms of any deferred compensation or savings plan or arrangement maintained or established by the Company or any other arrangement acceptable to the Company. The Board (or the appropriate committee of the Board) shall annually review Executive's base salary in light of competitive practices, the base salaries paid to other executive officers of the Company and the performance of Executive and the Company, and may, in its discretion, increase such base salary by an amount it determines to be appropriate. Any such increase shall not reduce or limit any other obligation of the Company hereunder. Executive's base salary (as set forth or as may be increased from time to time) shall not be reduced, except that Executive's base salary may be reduced in proportion to comparable reductions in the base salaries of the Company's other executive officers (as determined for purposes of Section 16(b) of the Securities Exchange Act of 1934, as amended). Executive's annual base salary payable hereunder, as it may be increased from time to time and without reduction for any amounts deferred as described above, is referred to herein as "Base Salary." The Company shall pay Executive the portion of his Base Salary not deferred in accordance with the Company's payroll practices applicable to its other executive officers. (b) Annual Bonus. For each fiscal year ending during the Employment Period, Executive shall have the opportunity to receive an annual bonus ("Annual Target Bonus Opportunity"), based on the achievement of target levels of performance, equal to 100% of his Base Salary, so long as Executive is -2- employed on the last day of the fiscal-year. Depending on actual results as measured against the performance objectives established, Executive's actual bonus payment may range from zero to a maximum of 150% (or such other greater amount as determined by the Board or a committee thereof) of Executive's Base Salary for each full fiscal year during the Employment Period. In the event the Employment Period is not extended due to the Company's giving a notice of nonextension pursuant to Section 1 above, the Company shall pay Executive a bonus payment for the final fiscal year of such Employment Period of no less than a pro rata amount equal to the number of months during which Executive was employed multiplied by Executive's Annual Target Bonus Opportunity for the year. The actual bonus, if any, payable for any such year shall be determined in accordance with the terms of the Company's Executive Officers' Bonus Plan (the "Annual Plan") or any successor plan, based upon the performance of the Company and/or Executive against target objectives established under such Annual Plan. The determination of whether and to what extent the requisite performance objectives have been met shall be made by the Board or the Board committee responsible for administering the Annual Plan, whose determination shall be final. Subject to Executive's election to defer all or a portion of any annual bonus payable hereunder pursuant to the terms of any deferred compensation or savings plan or arrangement maintained or established by the Company, any annual bonus payable under this Section 3(b) shall be paid to Executive in accordance with the terms of the Annual Plan, provided, however, that, regardless of the terms of such Annual Plan, Executive shall have the right to defer payment of up to that portion of his annual bonus which, when coupled with any portion of his Base Salary deferred for the same year of service, does not exceed 50% (or such greater percentage as the Company shall permit) of the sum of his Base Salary and his annual bonus, provided, however, any portion of Executive's annual bonus which would not be deductible to the Company pursuant to the provisions of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), shall be deferred. Unless Executive shall otherwise elect a different payment date or dates or a different number of payments, any portion of Executive's annual bonus and/or Base Salary which is deferred in accordance with this Section 3 (whether at Executive's election or by reason of Section 162(m)) shall be payable to Executive in a single lump sum as soon as practicable following the end of the Employment Period for any reason and shall be credited with interest, on a compounded basis, on the last day of each calendar quarter, at 1% above the prime rate (as reported in The Wall Street Journal, Eastern Edition), as in effect on the first day of each such calendar quarter. Any election by Executive to change the timing of the distribution of the deferred amounts and/or the number of payments to be made shall be made in writing in a calendar year prior to the date payment is to be made, and shall only be effective if Executive completes at least six months' additional service as an employee following the date any such election is filed with the Secretary of the Company. -3- 4. Benefits, Perquisites and Expenses. ---------------------------------- (a) Benefits. During the Employment Period, Executive shall be eligible to participate in (i) each welfare benefit plan sponsored or maintained by the Company, including, without limitation, each group life, hospitalization, medical, dental, health, accident or disability insurance or similar plan or program of the Company, and (ii) each pension, retirement, deferred compensation, savings or employee stock purchase plan sponsored or maintained by the Company, and (iii) to the extent of any awards made from time to time by the Board committee administering the plan, each stock option, restricted stock, stock bonus or similar equity-based compensation plan sponsored or maintained by the Company, in each case, whether now existing or established hereafter, and (iv) any other plans sponsored or maintained by the Company in which other executive officers are eligible to participate, to the extent that Executive is eligible to participate in any such plan under the generally applicable provisions thereof. Nothing in this Section 4(a) shall limit the Company's right to amend or terminate any such plan in accordance with the procedures set forth therein. (b) Perquisites. During the Employment Period, Executive shall be entitled to at least four weeks' paid vacation annually and shall also be entitled to receive such perquisites as are generally provided to other executive officers of the Company in accordance with the then current policies and practices of the Company. (c) Business Expenses. During the Employment Period, the Company shall pay or reimburse Executive for all reasonable expenses incurred or paid by Executive in the performance of Executive's duties hereunder, upon presentation of expense statements or vouchers and such other information as the Company may require and in accordance with the generally applicable policies and procedures of the Company. (d) Indemnification. The Company shall defend Executive, indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action arising from or out of Executive's good faith performance as an officer, director or employee of the Company or any of its subsidiaries or in any other capacity, including any fiduciary capacity, in which Executive serves at the request of the Company to the maximum extent permitted by applicable law and the Company's Restated Certificate of Incorporation and By-Laws. Such obligations shall include payment of all fees, costs and expenses, including attorney's fees, incurred or to be incurred as a result of such claim, loss or cause of action. The Company shall also maintain D&O insurance for the benefit of Executive with the same coverage, limits; terms and conditions as maintained for other directors and officers of the Company. 5. Termination of Employment. ------------------------- (a) Early Termination of the Employment Period. Notwithstanding Section 1, the Employment Period shall end upon the earliest to occur of (i) a termination of Executive's employment on account of Executive's death, (ii) a -4- termination due to Executive's Disability, (iii) Termination for Cause, (iv) a Termination Without Cause, or (v) a Termination for Good Reason. (b) Benefits Payable Upon Early Termination. Following the end of the Employment Period pursuant to Section 5(a), Executive (or, in the event of his death, his surviving spouse, if any, or his estate) shall be paid the type or types of compensation determined to be payable in accordance with the following table at the times established pursuant to Section 5(c): Severance Additional Earned Salary Vested Benefits Benefits Benefits ------------- --------------- ----------- ------------- Termination due Payable Payable Not payable Available to death Termination due Payable Payable Not payable Available to Disability Termination for Payable Payable Not payable Not available Cause Termination for Payable Payable Payable Available Good Reason Termination Payable Payable Payable Available Without Cause In the event that his employment terminates due to death, his widow will receive six months base compensation to be paid in a lump sum as soon as practical but in no event more than 10 days following the end of his Employment Period. (c) Timing of Payments. Earned Salary shall be paid in cash in a single lump sum as soon as practicable, but in no event more than 10 days following the end of the Employment Period, unless otherwise agreed to in writing by Executive. Vested Benefits shall be payable in accordance with the terms of the plan, policy, practice, program, contract or agreement under which such benefits have been awarded or accrued. Severance Benefits shall be paid in a single lump sum cash payment as soon as practicable, but in no event later than 10 days after the Executive's termination, unless otherwise agreed to in writing by Executive. Additional Benefits shall be provided or made available at the times specified below as to each such Additional Benefit. -5- (d) Definitions. For purposes of Sections 5 and 6, capitalized terms have the following meanings: "Additional Benefits" means, if Executive's employment terminates due to death or in a Termination due to Disability, the benefits described in subclause (i) below, or if the Executive's employment is terminated in a Termination Without Cause or a Termination for Good Reason, the benefits described in subclauses (i), (ii) and (iii): (i) All of the Executive's benefits accrued under any pension, retirement, savings and deferred compensation plans of the Company shall become vested in full; provided, however, that to the extent such accelerated vesting of benefits cannot be provided under one or more of such plans consistent with applicable provisions of the Code, such benefits shall be paid to the Executive in a lump sum within 10 days after the end of the Employment Period outside the applicable plan; (ii) Executive (and, to the extent applicable, his dependents) will be entitled to continue participation in all of the Company's medical, dental and vision care plans (the "Health Benefit Plans"), until the 24 month anniversary (or, in the case of a "Termination for Good Reason" (as defined below) due to clause (E) of such definition, the 18 month anniversary) of the end of the Employment Period; provided that Executive's participation in the Company's Health Benefit Plans shall cease on any earlier date that Executive becomes eligible for comparable benefits from a subsequent employer. Executive's participation in the Health Benefit Plans will be on the same terms and conditions (including, without limitation, any contributions that would have been required from Executive) that would have applied had Executive continued to be employed by the Company. To the extent any such benefits cannot be provided under the terms of the applicable plan, policy or program, the Company shall provide a comparable benefit under another plan or from the Company's general assets; and (iii) In the case of any options to purchase Company stock or other equity-based awards granted to Executive by the Company after the Effective Date of this Agreement, the portion (if any) of such stock options or awards that would have become exercisable or vested solely due to his continued employment if the Executive's employment by the Company had continued for an additional two years shall become exercisable or vested at the time of termination of the Executive's employment. "Disability" means long-term disability within the meaning of the Company's long-term disability plan or program, or, in the absence of such a plan or program, as defined in Section 22 of the Code. "Earned Salary" means any Base Salary earned, but unpaid, for services rendered to the Company on or prior to the date on which the Employment Period ends pursuant to Section 5(a) (other than Base Salary deferred pursuant to Executive's election, as provided in Section 3(a) of (b) hereof). -6- "Severance Benefits" means an amount equal to two (2) times (or, in the case of a "Termination for Good Reason" (as defined below) due to clause (E) of such definition, one and one half (1.5) times) the sum of (i) the Executive's Base Salary, and (ii) the Executive's Annual Target Bonus Oppportunity for the year of termination; provided, however, that Severance Benefits shall not be payable under this Agreement to the Executive if the termination of the Executive's employment results in the payment of severance benefits under the Executive's Change in Control Agreement with the Company dated of even date herewith. "Termination for Cause" means a termination of Executive's employment by the Company due to (i) Executive's conviction of a felony or (ii) any act of willful fraud, dishonesty or moral turpitude. "Termination for Good Reason" means a termination of Executive's employment by Executive (i) within 90 days following (A) a material diminution in Executive's positions, duties and responsibilities from those described in Section 2 hereof, (B) the removal of Executive from, or the failure to re-elect Executive as a member of, the Board, (C) a reduction in Executive's annual Base Salary (other than any reduction therein which is in proportion to reductions in the base salaries of all of the Company's executive officers, as contemplated by Section 3(a) hereof, unless, however, such proportionate reduction exceeds 20% of Executive's Base Salary), (D) a decision by the Company without the written consent of Executive to relocate its principal office more than 40 miles from Melville, New York, (E) the Company giving Executive notice of nonextension in accordance with Section 1 above at least six months in advance of the end of the initial four year term, or (F) a material breach by the Company of any other provision of this Agreement. "Termination Without Cause" means any termination of Executive's employment by the Company other than a Termination for Cause, a Termination on account of Executive's death, or a Termination due to Executive's Disability. "Vested Benefits" means amounts which are vested or which Executive is otherwise entitled to receive under the terms of or in accordance with any plan, policy, practice or program of, or any contract or agreement with, the Company or any of its subsidiaries, at or subsequent to the end of the Employment Period without regard to the performance by Executive of further services or the resolution of a contingency. (e) Full Discharge of Company Obligations. Except as expressly provided in the last sentence of this Section 5(e), the amounts payable to Executive pursuant to this Section 5 following termination of his employment (including amounts payable with respect to Vested Benefits) shall be in full and complete satisfaction of Executive's rights under this Agreement and any other -7- claims he may have in respect of his employment by the Company or any of its subsidiaries. Such amounts shall constitute liquidated damages with respect to any and all such rights and claims and, upon Executive's receipt of such amounts, the Company shall be released and discharged from any and all liability to Executive in connection with this Agreement or otherwise in connection with Executive's employment with the Company and its subsidiaries. Executive shall execute a release following termination of his employment, in form and substance satisfactory to the Company (but not inconsistent with the terms of this Agreement), as a prior condition to the receipt of the benefits payable pursuant to this Section 5. Nothing in this Section 5(e) shall be construed to release the Company from its commitment to indemnify Executive and hold Executive harmless from and against any claim, loss or cause of action as described in Section 4(d). 6. Noncompetition and Confidentiality. By and in consideration of the Base Salary and miscellaneous benefits to be provided by the Company hereunder, including particularly the severance arrangements set forth herein, Executive agrees that: (a) Noncompetition. Executive acknowledges that the Company and its subsidiaries conduct business throughout the United States and the District of Columbia and that his duties to Company relate to some or all of these territories and to some or all business lines of the Company. During the Employment Period and during the twenty-four (24) month period following the end of the Employment Period, Executive shall not directly or indirectly: (i) perform or provide any services to any individual or business which is engaged in the type of business(es) similar to the type of business(es) conducted by the Company or any of its subsidiaries; and/or (ii) own, manage, operate, control, be employed by, participate in, provide services or financial assistance to, or be connected in any manner with, the ownership, management, operation or control of any business which directly competes with Company or any of its subsidiaries or engages in the type of business(es) principally conducted by the Company or any of its subsidiaries, except that Executive may own for investment purposes up to 1% of the capital stock of any such company whose stock is publicly traded. (b) Confidentiality. Except as may be required by the lawful order of a court or agency of competent jurisdiction, or applicable law, or except to the extent that Executive has express authorization from the Company, Executive agrees to keep secret and confidential indefinitely all non-public information (including, without limitation, information regarding litigation and pending litigation and any information that may be subject to attorney-client privilege) concerning the Company, its subsidiaries and affiliates (collectively, the "Company Group") which was acquired by or disclosed to Executive during the course of Executive's employment with the Company, and not to disclose the same, either directly or indirectly, to any other person, firm, or business entity, or to use it in any way. Such non-public information shall include, but not be limited to, the following: (i) Confidential and proprietary information which the Company Group has compiled to identify, develop and -8- service its clients and customers, including "negative research" to identify those entities who have not subscribed to the services of the Company and its subsidiaries; (ii) information which the Company Group has compiled concerning the operations of the clients and customers of the Company and its subsidiaries, including key contacts within the clients' and customers' business, familiarity with special needs and customer characteristics, workers' compensation information, billing rates, profit margins, sales volumes, and other sensitive financial information; and (iii) information which the Company Group has compiled concerning the employees and labor force at the Company and its subsidiaries, including compilations of their names, addresses, job skills, employment histories and employment records to the extent such information constitutes a "trade secret" of the Company under applicable law and is not otherwise readily available to the general public. Upon termination of Executive's employment, Executive shall promptly deliver to the Company all materials of a confidential nature relating to the business of the Company and its subsidiaries and which are Executive's possession or control. To the extent that Executive obtained information on behalf of the Company or any subsidiary or affiliate that may be subject to attorney-client privilege, Executive shall take reasonable steps to maintain the confidentiality of such information and to preserve such privilege. (c) Non-Solicitation of Employees. During the Employment Period and the two-year period following the end of the Employment Period, Executive shall not directly or indirectly, for his own benefit or that of any other person, offer any employment in a similar field or business association to any of the Company's employees, agents or representatives or suggest or in any way encourage, any of the Company's employees, agents or representatives to terminate their employment or business association with the Company. For purposes of this subparagraph, the term "employees, agents or representatives" includes only individuals who are or were employees, agents or representatives of the Company during the six month period ending at the end of the Employment Period. (d) Non-Solicitation of Clients and Customers. During the Employment Period and the twenty-four (24) month period following the end of the Employment Period, Executive shall not solicit or accept for Executive's own benefit or the benefit of any other person any of the Company's customers and/or clients with a view to selling or providing any product or service competitive with any product or service sold or provided or identified as a product that will be sold or provided within the aforesaid twenty-four (24) month period by the Company. For the purposes of this Section 6(d), the term "customers" and/or clients shall include any person or entity to whom the Company has sold, -9- provided or been obligated to provide, any service or product, or who has otherwise received any service or benefit from the Company within the last 24 months or within the 24-month period preceding the date Executive's employment terminates. (e) Company Property. Except as expressly provided herein, promptly following the end of the Employment Period, Executive shall return to the Company all property of the Company. (f) Injunctive Relief and Other Remedies with Respect to Covenants. Executive acknowledges and agrees that the covenants and obligations of Executive with respect to noncompetition, nonsolicitation, confidentiality and Company property, relate to special, unique and extraordinary matters and that a violation of any of the terms of such covenants and obligations may cause the Company irreparable injury for which adequate remedies are not available at law. Therefore, Executive agrees that the Company shall be entitled to seek an injunction, restraining order or such other equitable relief (without the requirement to post bond) restraining Executive from committing any violation of the covenants and obligations contained in this Section 6. This remedy is in addition to any other rights and remedies the Company may have at law or in equity. 7. Miscellaneous. ------------- (a) Effective Date. This Agreement shall become effective for all purposes on the date set forth above (the "Effective Date"). (b) Survival. Sections 4(d) relating to indemnification, 5 (relating to early termination), 6 (relating to noncompetition, nonsolicitation and confidentiality), 7(c) (relating to arbitration), 7(d) (relating to binding effect) and 7(n) (relating to governing law) shall survive the termination hereof. (c) Arbitration. Any dispute or controversy arising under or in connection with this Agreement shall be resolved by binding arbitration. This arbitration shall be held in New York City and except to the extent inconsistent with this Agreement, shall be conducted in accordance with the Expedited Employment Arbitration Rules of the American Arbitration Association then in effect at the time of the arbitration, and otherwise in accordance with principles which would be applied by a court of law or equity. Executive shall be entitled to discovery in any such proceeding. All fees, costs and expenses of the arbitration, with the exception of Executive's attorney's fees, costs and expenses, shall be borne by the Company. The arbitrator shall be acceptable to both the Company and Executive. If the parties cannot agree on an acceptable arbitrator, the dispute shall he held by a panel of three arbitrators, one appointed by each of the parties and the third appointed by the other two arbitrators. The arbitrator(s) shall not have the power to commit substantive errors of law, legal reasoning or fact, shall set forth their factual and legal -10- reasoning in any award or determination, and any such award or determination may be vacated or corrected as a result. (d) Binding Effect. This Agreement shall be binding on, and shall inure to the benefit of, the Company and any person or entity that succeeds to the interest of the Company (regardless of whether such succession does or does not occur by operation of law) by reason of the sale of all or a portion of the Company's stock, a merger, consolidation or reorganization involving the Company or unless the Company otherwise elects in writing, a sale of the assets of the business of the Company (or portion thereof) in which Executive performs a majority of his services. This Agreement shall also inure to the benefit of Executive's heirs, executors, administrators and legal representatives. (e) Assignment. Except as provided under Section 7(d), neither this Agreement nor any of the rights or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. (f) Entire Agreement. This Agreement, together with the Change in Control Agreement between the Company and the Executive of even date herewith, constitute the entire agreement between the parties hereto with respect to the matters referred to herein. No other agreement (other than awards made in accordance with the terms of one of the Company's applicable compensatory plans, programs or arrangements) relating to the terms of Executive's employment by the Company, oral or otherwise, including, without limitation, the Severance Letter dated March 14, 2000, the Employment Agreement dated as of June 10, 2002, and the Change in Control Agreements dated March 15, 2000 and June 14, 2002, between the Executive and the Company, shall be binding between the parties. The Company and the Executive acknowledge that both parties have signed or will sign contemporaneously with this Agreement a new and separate Change in Control Agreement, and that the terms of such Change in Control Agreement are not superseded by this Agreement and may be enforced notwithstanding any terms of this Agreement to the contrary. There are no promises, representations, inducements or statements between the parties other than those that are expressly contained herein. Executive acknowledges that he is entering into this Agreement of his own free will and accord, and with no duress, that he has read this Agreement and that he understands it and its legal consequences. (g) Severability; Reformation. In the event that one or more of the provisions of this Agreement shall become invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not be affected thereby. In the event that any of the provisions of Section 6 hereof are not enforceable in accordance with their terms, Executive and the Company agree that such provisions shall be reformed to make such Section enforceable in a manner which provides the Company the maximum rights permitted at law. -11- (h) Waiver. Waiver by any party hereto of any breach or default by the other party of any of the terms of this Agreement shall not operate as a waiver of any other breach or default, whether similar to or different from the breach or default waived. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its or his rights hereunder on any occasion or series of occasions. (i) Notices. Any notice required or desired to be delivered under this Agreement shall be in writing and shall be delivered personally, by courier service, by certified mail, return receipt requested, or by telecopy and shall be effective upon actual receipt by the party to which such notice shall be directed, and shall be addressed as follows (or to such other address as the party entitled to notice shall hereafter designate in accordance with the terms hereof): If to the Company: Gentiva Health Services, Inc. 3 Huntington Quadrangle 2S Melville, NY 11747 Attention: General Counsel If to Executive: Ronald A. Malone 6 Target Rock Drive Lloyd Harbor, NY 11743 (j) Amendments. This Agreement may not be altered, modified or amended except by a written instrument signed by each of the parties hereto. (k) Headings. Headings to paragraphs in this Agreement are for the convenience of the parties only and are not intended to be part of or to affect the meaning or interpretation hereof. (l) Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument. -12- (m) Withholding. Any payments provided for herein shall be reduced by any amounts required to be withheld by the Company from time to time under applicable Federal, State or local income tax laws or similar statutes then in effect. (n) Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws thereof. [Next Page is Signature Page] -13- IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed as of the day and year first above written. GENTIVA HEALTH SERVICES, INC. By: /s/ STUART R. LEVINE ---------------------------------- Stuart R. Levine, Chairman, Compensation, Corporate Governance and Nominating Committee of the Board of Directors /s/ RONALD A. MALONE ---------------------------------- Ronald A. Malone -14- EX-10.2 3 ex10_2.txt EXHIBIT 10.2 EXHIBIT 10.2 CHANGE IN CONTROL AGREEMENT --------------------------- Agreement, made this 22nd day of March, 2004, by and between Gentiva Health Services, Inc., a Delaware corporation (the "Company"), and Ronald A. Malone (the "Executive"). WHEREAS, the Executive is a key employee of the Company; and WHEREAS, the Board of Directors of the Company (the "Board") considers the maintenance of a sound management to be essential to protecting and enhancing the best interests of the Company and its stockholders and recognizes that the possibility of a change in control raises uncertainty and questions among key employees and may result in the departure or distraction of such key employees to the detriment of the Company and its stockholders; and WHEREAS, the Board wishes to assure that it will have the continued dedication of the Executive and the availability of his or her advice and counsel, notwithstanding the possibility, threat or occurrence of a bid to take over control of the Company, and to induce the Executive to remain in the employ of the Company; and WHEREAS, the Executive and the Company previously entered into a Change in Control Agreement dated June 14, 2002; and WHEREAS, the Executive and the Company wish to amend and restate the Change in Control Agreement as set forth herein; and WHEREAS, the Executive is willing to continue to serve the Company taking into account the provisions of this Agreement; NOW, THEREFORE, in consideration of the foregoing, and the respective covenants and agreements of the parties herein contained, the parties agree as follows: 1. Operation and Term of Agreement. This Agreement shall commence on the date set forth above and shall terminate on the fourth anniversary of such date unless this Agreement is extended or terminated earlier, in either case as set forth below; provided, however, that after a Change in Control of the Company during the term of this Agreement, this Agreement shall remain in effect until all of the obligations of the parties hereunder are satisfied and the Protection Period has expired. The term of this Agreement shall be extended automatically for consecutive periods of one year unless either party shall provide notice to the other of its intention not to so extend, such notice to be given not less than six months prior to the end of the initial four year term or any extension thereof, as the case may be. Notwithstanding the foregoing, prior to a Change in Control this Agreement shall immediately terminate upon termination of the Executive's employment, except in the case of such termination under circumstances set forth in the last paragraph of Section 4 below. 2. Change in Control; Protection Period. A "Change in Control" shall be deemed to occur on the date that any of the following events occur: (a) any person or persons acting together which would constitute a "group" for purposes of Section 13(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act") (other than the Company or any subsidiary and other than Permitted Holders) shall beneficially own (as defined in Rule 13d-3 of the Exchange Act), directly or indirectly, at least 25% of the total voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board; (b) either (i) Current Directors (as herein defined) shall cease for any reason to constitute at least a majority of the members of the Board (for these purposes, a "Current Director" shall mean any member of the Board as of the date hereof, and any successor of a Current Director whose election, or nomination for election by the Company's shareholders, was approved by at least two-thirds of the Current Directors then on the Board) or (ii) at any meeting of the shareholders of the Company called for the purpose of electing directors, a majority of the persons nominated by the Board for election as directors shall fail to be elected; (c) consummation of (i) a plan of complete liquidation of the Company, or (ii) a merger or consolidation of the Company (A) in which the Company is not the continuing or surviving corporation (other than a consolidation or merger with a wholly owned subsidiary of the Company in which all shares of common stock of the Company (the "Common Stock") outstanding immediately prior to the effectiveness thereof are changed into common stock of the subsidiary) or (B) pursuant to which the Common Stock is converted into cash, securities or other property, except a consolidation or merger of the Company in which the holders of the Common Stock immediately prior to the consolidation or merger have, directly or indirectly, at least a majority of the common stock of the continuing or surviving corporation immediately after such consolidation or merger or in which the Board immediately prior to the merger or consolidation would, immediately after the merger or consolidation, constitute a majority of the board of directors of the continuing or surviving corporation; or (d) consummation of a sale or other disposition (in one transaction or a series of transactions) of all or substantially all of the assets of the Company. For purposes of this Section 2 under this Agreement, "Permitted Holders" shall mean Miriam Olsten, Stuart Olsten, and Cheryl Olsten, and each of their spouses, their lineal descendants and their estates and their Affiliates -2- or Associates (as defined in Rule 12b-2 of the Exchange Act) (collectively the "Olsten Stockholders"), so long as the Olsten Stockholders beneficially own 20% or less of the voting power of all classes of capital stock of the Company entitled to vote generally in the election of the Board. A "Protection Period" shall be the period beginning on the date of a Change in Control and ending on the third anniversary of the date on which the Change in Control occurs. 3. Termination Following Change in Control. The Executive shall be entitled to the benefits provided in Section 4 hereof upon any termination of his or her employment with the Company within a Protection Period, except a termination of employment (a) because of his or her death, (b) because of a "Disability," (c) by the Company for "Cause," or (d) by the Executive other than for "Good Reason." (i) Disability. The Executive's employment shall be deemed to have terminated because of a "Disability" if the Executive applies for and is determined to be eligible to receive disability benefits under the Company's long-term disability plan or program, or, in the absence of such a plan or program, as defined in Section 22 of the Internal Revenue Code of 1986, as amended (the "Code"). (ii) Cause. Termination by the Company of the Executive's employment for "Cause" shall mean termination due to (A) the Executive's conviction of a felony, or (B) any act of willful fraud, dishonesty or moral turpitude. (iii) Without Cause. The Company may terminate the employment of the Executive without Cause during a Protection Period only by giving the Executive written notice of termination to that effect. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given (or such later date as may be specified in such notice), and the benefits set forth in Section 4 hereof shall be provided to the Executive. (iv) Good Reason. Termination of employment by the Executive for "Good Reason" shall mean termination: (A) if there has occurred a reduction by the Company in the Executive's annual base salary (other than any reduction therein which is in proportion to reductions in the base salaries of all of the Company's executive officers, unless, however, such proportionate reduction exceeds 20% of the Executive's annual base salary); (B) if without the Executive's written consent, the Company has required the Executive to be relocated anywhere in excess of forty (40) miles from the Executive's office location in -3- Melville, New York, except for required travel on the business of the Company; (C) if there has occurred a failure by the Company to maintain plans providing benefits not materially less favorable than those provided by any benefit or compensation plan (including, without limitation, any incentive compensation plan, bonus plan or program, retirement, pension or savings plan, stock option plan, restricted stock plan, life insurance plan, health and dental plan and disability plan) in which the Executive is participating immediately before the beginning of the Protection Period, or if the Company has taken any action which would adversely affect the Executive's participation in or reduce the Executive's benefits (other than stock option or restricted stock grants) under any of such plans or deprive the Executive of any material fringe benefit enjoyed by the Executive immediately before the beginning of the Protection Period, or if the Company has failed to provide the Executive with the number of paid vacation days to which he or she would be entitled in accordance with the normal vacation policy of the Company as in effect immediately before the beginning of the Protection Period; provided, however, that a reduction in benefits under the Company's tax-qualified retirement, pension or savings plans or its life insurance plan, health and dental plan, disability plans or other insurance plans which reduction applies equally to all participants in the plans and has a de minimis effect on the Executive shall not constitute "Good Reason" for termination by the Executive; (D) a material diminution in the Executive's positions, duties and responsibilities from those described in Section 2 of the Executive's Employment Agreement with the Company dated of even date herewith; (E) if the Company has failed to obtain the assumption of the obligations contained in this Agreement by any successor as contemplated in Section 9(c) hereof; or (F) if there occurs any purported termination of the Executive's employment by the Company without Cause which is not effected pursuant to a written notice of termination as described in subsection (iii) above. The Executive shall exercise his or her right to terminate employment for Good Reason by giving the Company a written notice of termination specifying in reasonable detail the circumstances constituting such Good Reason. In that event, the Executive's employment shall terminate on the last day of the month in which such notice is given. A termination of employment by the Executive within a Protection Period shall be for Good Reason if one of the occurrences specified in this subsection (iv) shall have occurred, notwithstanding that the Executive -4- may have other reasons for terminating employment, including employment by another employer which the Executive desires to accept. 4. Benefits Upon Termination Within Protection Period. If, within a Protection Period, the Executive's employment by the Company shall be terminated (a) by the Company not for Cause and not due to the Executive's death or Disability, or (b) by the Executive for Good Reason, the Executive shall be entitled to the benefits provided for below (and the Executive shall not be entitled to severance benefits otherwise payable under the Executive's Employment Agreement with the Company or under any other severance plan or policy of the Company): (i) The Company shall pay to the Executive through the date of the Executive's termination of employment salary at the rate then in effect, together with salary in lieu of vacation accrued to the date on which his employment terminates, in accordance with the standard payroll practices of the Company; (ii) The Company shall pay to the Executive an amount in cash equal to two and one half (2.5) times the sum of (A) the Executive's annual base salary in effect immediately prior to the date of the Executive's termination of employment or the date of the Change in Control (whichever is higher), and (B) the higher of (x) the Executive's target annual bonus for the year that includes the date of the Executive's termination of employment or (y) the Executive's target annual bonus for the year that includes the date of the Change in Control; and such payment shall be made in a lump sum within 10 business days after the date of such termination of employment; (iii) The Company shall continue to cover the Executive and his or her dependents under, or provide the Executive and his or her dependents with insurance coverage no less favorable than, the Company's life, disability, health, dental or other employee welfare benefit plans or programs (as in effect on the day immediately preceding the Protection Period or, at the option of the Executive, on the date of termination of his or her employment) for a period equal to the lesser of (x) two years following the date of termination or (y) until the Executive is provided by another employer with benefits substantially comparable to the benefits provided by such plans or programs, provided, however, that the provision of this benefit shall be contingent upon the cooperation of the Executive (or his or her dependent, as applicable) in any reasonable request by the Company to facilitate the provision of such benefit, including responding to questionnaires and submitting to minimally intrusive medical examinations; (iv) All options to purchase Company stock held by the Executive and all restricted shares of Company stock, restricted Company share units and other equity-based compensation awards held by the Executive shall become immediately vested in full upon such termination of -5- employment, and all such stock options shall be exercisable for three years following such termination of employment (but not beyond the original full term of the stock option); and (v) All of the Executive's benefits accrued under the pension, retirement, savings and deferred compensation plans of the Company shall become vested in full; provided, however, that to the extent such accelerated vesting of benefits cannot be provided under one or more of such plans consistent with applicable provisions of the Internal Revenue Code of 1986, as amended, such benefits shall be paid to the Executive in a lump sum within 10 days after termination of employment outside the applicable plan. Anything in this Agreement to the contrary notwithstanding, the Executive shall be entitled to the benefits described in this Section 4, if the Executive's employment with the Company is terminated by the Company (other than for Cause) within one year prior to the date on which a Change in Control occurs, and it is reasonably demonstrated that such termination (i) was at the request of a third party who has taken steps reasonably calculated or intended to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control. In such event, amounts will be payable hereunder only following the Change in Control. 5. Non-exclusivity of Rights. Except as expressly set forth herein, this Agreement shall not prevent or limit the Executive's continuing or future participation in any benefit, bonus, incentive or other plans, practices, policies or programs provided by the Company or any of its subsidiaries and for which the Executive may qualify, nor shall it limit or otherwise affect such rights as the Executive may have under any stock option or other agreements with the Company or any of its subsidiaries. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, practice, policy or program of the Company or any of its subsidiaries at or subsequent to the date of termination of the Executive's employment shall be payable in accordance with such plan, practice, policy or program. 6. Full-Settlement; Legal Expenses. The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement. The Company agrees to pay, upon written demand therefor by the Executive, all legal fees and expenses which the Executive may reasonably incur as a result of any dispute or contest by or with the Company or others regarding the validity or enforceability of, or liability under, any provision of this Agreement (including as a result of any contest by the Executive about the amount of any payment hereunder) if the Executive substantially prevails in the dispute or contest, plus in each case interest at the applicable Federal rate provided for in Section 7872(f)(2) of the Code. In any such action brought by the Executive for damages or to enforce any provisions of this Agreement, the Executive shall -6- be entitled to seek both legal and equitable relief and remedies, including, without limitation, specific performance of the Company's obligations hereunder, in his or her sole discretion. 7. Excise Tax Gross-Up. ------------------- (a) Anything in this Agreement to the contrary notwithstanding, in the event it shall be determined that any payment, award, benefit or distribution (including, without limitation, the acceleration of any payment, award, distribution or benefit), by the Company or any of its affiliates to or for the benefit of the Executive (whether pursuant to the terms of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 7) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any corresponding provisions of state or local tax law, or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any Excise Tax, income tax or employment tax) imposed upon the Gross-Up Payment and any interest or penalties imposed with respect to such taxes, the Executive retains from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 7(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the portion of the Payments that would be treated as "parachute payments" under Section 280G of the Code does not exceed by more than $25,000 the greatest amount (the "Safe Harbor Amount") that could be paid to the Executive such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-up Payment shall be made to the Executive and the amounts payable under this Agreement shall be reduced so that the Payments, in the aggregate, are reduced to the Safe Harbor Amount. The reduction of the amounts payable hereunder, if applicable, shall be made by first reducing the payments under Section 4(ii), unless an alternative method of reduction is elected by the Executive prior to the effective date of the event that triggers the Payments. For purposes of reducing the payments to the Safe Harbor Amount, only amounts payable under this Agreement (and no other Payments) shall be reduced. If the reduction of the amounts payable under this Agreement would not result in a reduction of the Payments to the Safe Harbor Amount, no amounts payable under this Agreement shall be reduced pursuant to this Section 7. (b) Subject to the provisions of Section 7(c), all determinations required to be made under this Section 7, including the determination of whether a Gross-Up Payment is required and of the amount of any such Gross-up Payment, shall be made by the outside firm of auditors regularly used by the Company to audit its financial statements at the time of the Change in Control (the "Accounting Firm"), which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days after the receipt of notice from the Company that the Executive has received a Payment, or such earlier time as is requested by the Company. The initial Gross-Up Payment, if -7- any, as determined pursuant to this Section 7(b), shall be paid to the Executive (or for the benefit of the Executive to the extent of the Company's withholding obligation with respect to applicable taxes) no later than the later of (i) the due date for the payment of any Excise Tax, and (ii) the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm meeting the requirements of this Section 7(b) shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 7(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. The fees and disbursements of the Accounting Firm shall be paid by the Company. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of a Gross-Up Payment. Such notification shall be given as soon as practicable but not later than ten business days after the Executive receives written notice of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all fees, costs and expenses (including additional interest and penalties, and reasonable attorneys' fees) incurred in connection with such contest and shall indemnify -8- and hold the Executive harmless, on an after-tax basis, for any Excise Tax, income tax or employment tax, including interest and penalties with respect thereto, imposed as a result of such representation and payment of fees, costs and expenses. Without limitation on the foregoing provisions of this Section 7(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax, income tax or employment tax, including interest or penalties with respect thereto, imposed with respect to such advance; and further provided that any extension of the statute of limitations relating to the payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 7(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 7(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 8. Confidential Information. The Executive shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company or any of its subsidiaries, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its subsidiaries and which has not become public knowledge (other than by acts of the Executive or his or her representatives in violation of this Agreement). After the date of termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company, communicate or divulge any such information, knowledge or data to anyone other than the Company and -9- those designated by it. In no event shall an asserted violation of the provisions of this Section 8 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 9. Successors. ---------- (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's heirs, executors, administrators, legal representatives or successor(s) in interest. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law or otherwise. 10. Miscellaneous. ------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York, without reference to principles of conflict of laws thereof. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: ------------------- Ronald A. Malone 6 Target Rock Road Lloyd Harbor, NY 11743 -10- If to the Company: ----------------- Gentiva Health Services, Inc. 3 Huntington Quadrangle, Suite 200S Melville, NY 11747 Attention: Chairman, Compensation, Corporate Governance and Nominating Committee of the Board of Directors or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's failure to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (f) This Agreement contains the entire understanding of the Company and the Executive with respect to the subject matter hereof but, except as specifically provided in Section 4 hereof does not supersede or override the provisions of (i) any stock option, employee benefit or other plan, program, policy or practice in which Executive is a participant or under which the Executive is a beneficiary, or (ii) the Employment Agreement of even date herewith between the Executive and the Company; provided, however, that this Agreement does supersede and replace any prior severance agreement and change in control agreements between the Company and the Executive, including specifically all such agreements entered into by the Executive and the Company as of March 14, 2000 and those entered into on June 14, 2002. [Next Page is Signature Page] -11- IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed as of the day and year first above written. /s/ RONALD A. MALONE ------------------------------------------ Name: Ronald A. Malone GENTIVA HEALTH SERVICES, INC. By: /s/ STUART R. LEVINE ------------------------------------------ Name: Stuart R. Levine Title: Chairman, Compensation, Corporate Governance and Nominating Committee of the Board of Directors -12- EX-31.1 4 ex31_1.txt EXHIBIT 31.1 EXHIBIT 31.1 CERTIFICATIONS I, Ronald A. Malone, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 4, 2004 /s/ RONALD A. MALONE ------------------------------------ Ronald A. Malone Chairman and Chief Executive Officer 2 EX-31.2 5 ex31_2.txt EXHIBIT 31.2 EXHIBIT 31.2 CERTIFICATIONS I, John R. Potapchuk, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Gentiva Health Services, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 4, 2004 /s/ JOHN R. POTAPCHUK ------------------------- John R. Potapchuk Senior Vice President and Chief Financial Officer 2 EX-32.1 6 ex32_1.txt EXHIBIT 32.1 Furnished (but not filed) as an exhibit to the periodic report identified in the Certification. Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended March 28, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Ronald A. Malone, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 4, 2004 /s/ RONALD A. MALONE -------------------------- Ronald A. Malone Chief Executive Officer EX-32.2 7 ex32_2.txt EXHIBIT 32.2 Furnished (but not filed) as an exhibit to the periodic report identified in the Certification. Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Gentiva Health Services, Inc. (the "Company") on Form 10-Q for the period ended March 28, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, John R. Potapchuk, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: May 4, 2004 /s/ JOHN R. POTAPCHUK ----------------------------- John R. Potapchuk Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----