| GENTIVA HEALTH SERVICES INC Item 1A Risk Factors This annual report on Form 10-K contains forward-looking statements which involve a number of risks, uncertainties and assumptions, as discussed in more detail above under Item 1 |
| Actual results could differ materially from those discussed in the forward-looking statements |
| Factors that could cause actual results to differ materially include, without limitation, the risk factors discussed below and elsewhere in this annual report |
| Risks Related to Gentivaapstas Business and Industry 7 Our growth strategy may not be successful |
| The future growth of our business and our future financial performance will depend on, among other things, our ability to increase our revenue base through a combination of internal growth and strategic ventures, including acquisitions |
| Our home health services business experienced no growth during the fiscal periods from 1998 through 2001 |
| During fiscal 2003, 2004 and 2005 revenue grew 5dtta9 percent, 3dtta9 percent and 2dtta7 percent respectively; however, future revenue growth cannot be assured as it is subject to the effects of competition, various risk factors including the uncertainty of Medicare, Medicaid and private health insurance reimbursement, the ability to generate new and retain existing contracts with major payer sources, the ability to attract and retain qualified personnel and the ability to integrate effectively and retain the business acquired by us through our acquisition of Healthfield |
| Competition among home healthcare companies is intense |
| The home health services industry is highly competitive |
| We compete with a variety of other companies in providing home health services, some of which may have greater financial and other resources and may be more established in their respective communities |
| Competing companies may offer newer or different services from those offered by us and may thereby attract customers who are presently receiving our home health services |
| The cost of healthcare is funded substantially by government and private insurance programs |
| If this funding is reduced or becomes limited or unavailable to our customers, our business may be adversely impacted |
| Third-party payers include Medicare, Medicaid and private health insurance providers |
| Third-party payers are increasingly challenging prices charged for healthcare services |
| We cannot assure you that our services will be considered cost-effective by third-party payers, that reimbursement will be available or that payers &apos reimbursement policies will not have a material adverse effect on our ability to sell our services on a profitable basis, if at all |
| We cannot control reimbursement rates or policies for a significant portion of our business |
| Possible changes in the case mix of patients, as well as payer mix and payment methodologies, may have a material adverse effect on our profitability |
| The sources and amounts of our patient revenues will be determined by a number of factors, including the mix of patients and the rates of reimbursement among payers |
| Changes in the case mix of the patients as well as payer mix among private pay, Medicare and Medicaid may significantly affect our profitability |
| In particular, any significant increase in our Medicaid population or decrease in Medicaid payments could have a material adverse effect on our financial position, results of operations and cash flow, especially if states operating these programs continue to limit, or more aggressively seek limits on, reimbursement rates or service levels |
| The loss of significant contracts, as well as significant reductions in members covered or services provided under these contracts, could have a material adverse effect on our financial condition and results of operations |
| We have entered into service agreements with a number of managed care organizations to provide, or contracted with third-party providers to provide, home nursing services, acute and chronic infusion therapies, durable medical equipment and respiratory products and services to patients insured by those organizations |
| One such contract with Cigna accounted for 29 percent of our total net revenues for the year ended January 1, 2006 |
| We entered into a new home healthcare contract with Cigna effective January 1, 2004, as amended, and expiring on January 31, 2007 |
| We subsequently extended that contract to January 31, 2009 |
| Under the termination provisions of the contract, Cigna has the right to terminate the contract on January 31, 2008, if it provides advance written notice to us on or before September 1, 2007 |
| If the Cigna contract or any other similar significant contract were to terminate or if there were a significant decrease in enrolled members, or products and services covered under our contract with Cigna or any other organization, our financial condition and results of operations could be materially adversely affected |
| Based on the changes in the Companyapstas arrangement with Cigna, the Company estimates that its fiscal 2006 revenues from Cigna could be up to dlra40 million lower than revenues from the Cigna contract in fiscal 2005 |
| On November 29, 2005, the Companyapstas contract with TriWest Healthcare Alliance ( "e TriWest "e ) to provide coordination and delivery of homecare services to active and retired military personnel in certain western states terminated |
| Net revenues relating to the TriWest contract represented less than 3 percent of the Companyapstas total net revenues in fiscal 2005 |
| Further consolidation of managed care organizations and other third-party payers may adversely affect our profits |
| 8 Managed care organizations and other third-party payers have continued to consolidate in order to enhance their ability to influence the delivery of healthcare services |
| Consequently, the healthcare needs of a large percentage of the United States population are increasingly served by a smaller number of managed care organizations |
| These organizations generally enter into service agreements with a limited number of providers for needed services |
| To the extent that such organizations terminate us as a preferred provider and/or engage our competitors as a preferred or exclusive provider, our business could be adversely affected |
| In addition, private payers, including managed care payers, could seek to negotiate additional discounted fee structures or the assumption by healthcare providers of all or a portion of the financial risk through prepaid capitation arrangements, thereby potentially reducing our profitability |
| Gentiva and the healthcare industry continue to experience shortages in qualified home health service employees and management personnel |
| We compete with other healthcare providers for our employees, both clinical associates and management personnel |
| As the demand for home health services continues to exceed the supply of available and qualified staff, we and our competitors have been forced to offer more attractive wage and benefit packages to these professionals |
| Furthermore, the competitive arena for this shrinking labor market has created turnover as many seek to take advantage of the supply of available positions, each offering new and more attractive wage and benefit packages |
| In addition to the wage pressures inherent in this environment, the cost of training new employees amid the turnover rates has caused added pressure on our operating margins |
| An economic downturn, continued deficit spending by the federal government and state budget pressures may result in a reduction in reimbursement and covered services |
| An economic downturn can have a detrimental effect on revenues |
| Historically, state budget pressures have translated into reductions in state spending |
| Given that Medicaid outlays are a significant component of state budgets, we can expect continuing cost containment pressures on Medicaid outlays for our services in the states in which we operate |
| In addition, an economic downturn may also impact the number of enrollees in managed care programs as well as the profitability of managed care companies, which could result in reduced reimbursement rates |
| The existing federal deficit, as well as deficit spending by the government as the result of adverse developments in the economy or other reasons, can lead to continuing increased pressure to reduce government expenditures for other purposes, including governmentally funded programs in which we participate, such as Medicare and Medicaid |
| Such actions in turn may adversely affect our results of operations |
| We may experience disruption to our business and operations from the effects of natural disasters or terrorist acts |
| The occurrence of natural disasters or terrorist acts, and the erosion to our business caused by such an occurrence, may adversely impact our profitability |
| In the affected areas, our offices may be forced to close for limited or extended periods of time, and we may face a reduced supply of clinical associates |
| The agreement governing our new term loan and revolving credit facility contains, and future debt agreements may contain, various covenants that limit our discretion in the operation of our business |
| Although we had no outstanding debt as of January 1, 2006, we incurred debt in the principal amount of dlra370 million in connection with our acquisition of Healthfield on February 28, 2006 and may incur additional debt in the future |
| The agreement and instruments governing our new term loan and revolving credit facility contain, and the agreements and instruments governing our future debt agreements may contain, various restrictive covenants that, among other things, require us to comply with or maintain certain financial tests and ratios and restrict our ability to: o incur more debt; o redeem or repurchase stock, pay dividends or make other distributions; o make certain investments; o create liens; o enter into transactions with affiliates; o make acquisitions; o merge or consolidate; 9 o transfer or sell assets; and o make fundamental changes in our corporate existence and principal business |
| In addition, events beyond our control could affect our ability to comply with and maintain the financial tests and ratios |
| Any failure by us to comply with or maintain all applicable financial tests and ratios and to comply with all applicable covenants could result in an event of default with respect to our new term loan and revolving credit facility or future debt agreements |
| This could lead to the acceleration of the maturity of the facility and the termination of the commitments to make further extensions of credit |
| If we were unable to repay debt to our senior lenders, these lenders could proceed against the collateral securing that debt |
| Even if we are able to comply with all applicable covenants, the restrictions on our ability to operate our business at our sole discretion could harm our business by, among other things, limiting our ability to take advantage of financing, mergers, acquisitions and other corporate opportunities |
| We have risks related to obligations under our insurance programs |
| We are obligated for certain costs under various insurance programs, including employee health and welfare, workers &apos compensation and professional liability |
| We may be subject to workers &apos compensation claims and lawsuits alleging negligence or other similar legal claims |
| We maintain various insurance programs to cover these risks with insurance policies subject to substantial deductibles and retention amounts |
| We also may be subject to exposure relating to employment law and other related matters for which we do not maintain insurance coverage |
| We believe that our present insurance coverage and reserves are sufficient to cover currently estimated exposures; however, we cannot assure you that we will not incur liabilities in excess of recorded reserves or in excess of our insurance limits |
| Risks Related to Gentiva and its Common Stock Following the Healthfield Acquisition We may fail to realize the anticipated synergies, cost savings and other benefits expected from the Healthfield acquisition, which could adversely affect the value of our common stock after the acquisition |
| The Healthfield acquisition involves the integration of two companies that have previously operated independently |
| Gentiva and Healthfield entered into their acquisition agreement with the expectation that the acquisition would create opportunities to achieve cost synergies and other benefits from operating the combined businesses of both companies |
| The value of our common stock following the acquisition may be affected by our ability to achieve the benefits expected to result from completion of the acquisition |
| Achieving the benefits of the acquisition will depend in part upon meeting the challenges inherent in the successful combination of two business enterprises of the size and scope of Gentiva and Healthfield and the possible resulting diversion of management attention for an extended period of time |
| We cannot assure that these challenges will be met or opportunities realized and that any diversion will not negatively impact our operations following the acquisition |
| Delays encountered in the integration process could have a material adverse effect upon our revenues, level of expenses, operating results and financial condition following the acquisition |
| Although we expect significant benefits, such as increased cost savings and a meaningful platform in hospice operations, to result from the acquisition, we cannot assure that Gentiva will realize any of these anticipated benefits |
| We may incur substantial expenses related to the integration of Healthfield |
| Gentiva may incur substantial expenses in connection with the integration of the business, policies, procedures, operations, technologies and systems of Healthfield with those of Gentiva |
| There are a large number of systems that may be integrated, including information management, purchasing, operations, accounting and finance, sales, billing, payroll and benefits, fixed asset and lease administration systems and regulatory compliance |
| While Gentiva has assumed that a certain amount of expenses would be incurred, factors beyond our control could affect the total amount or the timing of all of the expected integration expenses |
| These expenses could, particularly in the near term, exceed the savings that Gentiva expects to achieve from the elimination of duplicative expenses and the realization of economies of scale and cost and revenue synergies related to the integration of the businesses following the acquisition |
| Uncertainties associated with the acquisition may cause a loss of employees |
| 10 Our success after the acquisition will depend in part upon our ability to retain key Gentiva employees as well as Healthfield employees |
| Competition for qualified personnel can be very intense |
| In addition, key employees may depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with Gentiva following the acquisition |
| Accordingly, we cannot assure you that Gentiva will be able to retain key employees to the same extent that it or Healthfield has been able to do so in the past |
| We have incurred significant indebtedness following the acquisition, which can affect our liquidity |
| Gentiva had no outstanding indebtedness at the end of fiscal 2005 |
| Following the closing of the Healthfield acquisition on February 28, 2006, Gentiva incurred indebtedness in the amount of dlra370 million in the form of a senior term loan |
| As a result of the increase in debt, demands on Gentivaapstas cash resources will increase, which could affect Gentivaapstas liquidity and, therefore, could have important effects on an investment in common stock |
| For example, while the impact of this increased indebtedness is expected to be addressed by the combined cash flows of Gentiva and Healthfield, the increased level of indebtedness could nonetheless create competitive disadvantages for Gentiva compared to other companies with lower debt levels |
| Resales of Gentiva common stock following the acquisition may cause the market price of the common stock to fall |
| As of January 1, 2006, Gentiva had 23cmam034cmam954 shares of common stock outstanding |
| We issued approximately 3dtta2 million shares of common stock in connection with the acquisition |
| The shares are initially subject to a lock-up preventing the sale of the shares for nine months following the completion of the acquisition, and for an additional 12 months following that date, the holders may only sell up to 50 percent of the shares they hold |
| We have, however, given the holders of the shares issued in connection with the acquisition the right to include their shares in any underwritten registered offering we undertake, subject to certain conditions and limitations, even if that offering occurs during the lock-up period |
| We have also agreed to register the shares of common stock issued in connection with the acquisition no later than nine months following the completion of the acquisition |
| Any significant resales of these new shares in the public market from time to time could have the effect of depressing the market price for our common stock |
| Risks Related to Healthcare Regulation Legislative and regulatory actions resulting in changes in reimbursement rates or methods of payment from Medicare and Medicaid, or implementation of other measures to reduce reimbursement for our services, may have a material adverse effect on our revenues and operating margins |
| In fiscal 2005, 48 percent of our total net revenues were generated from Medicare and Medicaid and Local Government programs |
| The healthcare industry is experiencing a strong trend toward cost containment, as the government seeks to impose lower reimbursement and utilization rates and negotiate reduced payment schedules with providers |
| These cost containment measures generally have resulted in reduced rates of reimbursement for services that we provide |
| In addition, the timing of payments made under these programs is subject to regulatory action and governmental budgetary constraints |
| For certain Medicaid programs, the time period between submission of claims and payment has increased |
| Further, within the statutory framework of the Medicare and Medicaid programs, there are a substantial number of areas subject to administrative rulings and interpretations that may further affect payments made under those programs |
| Additionally, the federal and state governments may in the future reduce the funds available under those programs or require more stringent utilization and quality reviews of providers |
| Moreover, we cannot assure you that adjustments from Medicare or Medicaid audits will not have a material adverse effect on us |
| We conduct business in a heavily regulated industry, and changes in regulations and violations of regulations may result in increased costs or sanctions |
| Our business is subject to extensive federal, state and, in some cases, local regulation |
| Compliance with these regulatory requirements, as interpreted and amended from time to time, can increase operating costs or reduce revenue and thereby adversely affect the financial viability of our business |
| Because these laws are amended from time to time and are subject to interpretation, we cannot predict when and to what extent liability may arise |
| Failure to comply with current or future regulatory requirements could also result in the imposition of 11 various remedies, including fines, the revocation of licenses or decertification |
| Unanticipated increases in operating costs or reductions in revenue could adversely affect our liquidity |
| We are subject to periodic audits and requests for information by the Medicare and Medicaid programs or government agencies, which have various rights and remedies against us if they assert that we have overcharged the programs or failed to comply with program requirements |
| The operation of our home health services business is subject to federal and state laws prohibiting fraud by healthcare providers, including laws containing criminal provisions, which prohibit filing false claims or making false statements in order to receive payment or obtain certification under Medicare and Medicaid programs, or failing to refund overpayments or improper payments |
| Violation of these criminal provisions is a felony punishable by imprisonment and/or fines |
| We may also be subject to fines and treble damage claims if we violate the civil provisions that prohibit knowingly filing a false claim or knowingly using false statements to obtain payment |
| State and federal governments are devoting increased attention and resources to anti-fraud initiatives against healthcare providers |
| The Health Insurance Portability and Accountability Act of 1996 ( "e HIPAA "e ) and the Balanced Budget Act of 1997 ( "e BBA "e ) expanded the penalties for healthcare fraud, including broader provisions for the exclusion of providers from the Medicare and Medicaid programs |
| We have established policies and procedures that we believe are sufficient to ensure that we will operate in substantial compliance with these anti-fraud and abuse requirements |
| The subpoena seeks information regarding our implementation of settlements and corporate integrity agreements entered into with the government, as well as our 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, we received a subpoena from the US Department of Justice ( "e DOJ "e ) seeking additional information related to the matters covered by the OIG subpoena |
| We have provided documents and other information requested by the OIG and DOJ pursuant to their subpoenas and similarly intend to cooperate fully with any future OIG or DOJ information requests |
| To our knowledge, the government has not filed a complaint against us |
| While we believe that our business practices are consistent with Medicare and Medicaid programs criteria, those criteria are often vague and subject to change and interpretation |
| The imposition of fines, criminal penalties or program exclusions could have a material adverse effect on our financial condition, results of operations and cash flows |
| We are also subject to federal and state laws that govern financial and other arrangements between healthcare providers |
| These laws often prohibit certain direct and indirect payments or fee-splitting arrangements between healthcare providers that are designed to encourage the referral of patients to a particular provider for medical products and services |
| Furthermore, some states restrict certain business relationships between physicians and other providers of healthcare services |
| Many states prohibit business corporations from providing, or holding themselves out as a provider of, medical care |
| Possible sanctions for violation of any of these restrictions or prohibitions include loss of licensure or eligibility to participate in reimbursement programs and civil and criminal penalties |
| These laws vary from state to state, are often vague and have seldom been interpreted by the courts or regulatory agencies |
| We face additional federal requirements that mandate major changes in the transmission and retention of health information |
| HIPAA was enacted to ensure that employees can retain and at times transfer their health insurance when they change jobs and to simplify healthcare administrative processes |
| The enactment of HIPAA expanded protection of the privacy and security of personal medical data and required the adoption of standards for the exchange of electronic health information |
| Among the standards that the Secretary of Health and Human Services has adopted pursuant to HIPAA are standards for electronic transactions and code sets, unique identifiers for providers, employers, health plans and individuals, security and electronic signatures, privacy and enforcement |
| Although HIPAA was intended to ultimately reduce administrative expenses and burdens faced within the healthcare industry, we believe that implementation of this law has resulted and will result in additional costs |
| 12 Risks Related to Our Common Stock The market price of our common stock may be volatile and experience substantial fluctuations |
| Our common stock is traded on the Nasdaq National Market |
| The price of our common stock may fluctuate substantially based on a number of factors, including: o our operating and financial performance; o changes, or proposed changes, in government regulations; o stock market conditions generally and specifically as they relate to the home health services industry; o developments in litigation or government investigations; o changes in financial estimates and recommendations by securities analysts who follow our stock; and o economic and political uncertainties in the marketplace generally |
| Significant fluctuations in the market price of our common stock may adversely affect our shareholders |
| Provisions in our organizational documents, Delaware law and our rights agreement could delay or prevent a change in control of Gentiva, which could adversely affect the price of our common stock |
| Provisions in our amended and restated certificate of incorporation and by-laws, anti-takeover provisions of the Delaware General Corporation Law and our rights agreement could discourage, delay or prevent an unsolicited change in control of Gentiva, which could adversely affect the price of our common stock |
| These provisions may also have the effect of making it more difficult for third parties to replace our current management without the consent of the board of directors |
| Provisions in our amended and restated certificate of incorporation and by-laws that could delay or prevent an unsolicited change in control include: o the classification of the board of directors into three classes, each class serving "e staggered "e terms of office of three years; o limitations on the removal of directors so that they may only be removed for cause; o the ability of the board of directors to issue up to 25cmam000cmam000 shares of preferred stock and to determine the terms, rights and preferences of the preferred stock without shareholder approval; and o the prohibition on the right of shareholders to call meetings or act by written consent and limitations on the right of shareholders to present proposals or make nominations at shareholder meetings |
| Delaware law also imposes restrictions on mergers and other business combinations between us and any holder of 15 percent or more of our outstanding common stock |
| In addition, we have a rights agreement that has the effect of deterring take-overs of Gentiva without the consent of the board of directors |
| Generally, once a party acquires 10 percent or more of our common stock, the rights agreement may cause that partyapstas ownership interest in us to be diluted unless the board of directors consents to the acquisition |
| Other risks related to our common stock are discussed above under the caption "e Risks Related to Gentiva and its Common Stock Following the Healthfield Acquisition "e in this annual report on Form 10-K, and the reader is directed to that discussion |