SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 2000
Commission File No. 1-15669
Gentiva Health Services, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-433-5801
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle 2S, Melville, NY 11747-8943
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
175 Broad Hollow Road, Melville, New York 11747-8905
(Former name and former address, if
changed since last report)
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
The number of shares outstanding of the Registrant's Common Stock, as of
October 1, 2000, was 20,809,333.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Interim Financial Statements
Consolidated Balance Sheets - October 1, 2000
(Unaudited) and January 2, 2000 2
Consolidated
Statements of Operations (Unaudited) - Three and Nine
Months Ended October 1, 2000 and October 3, 1999 3
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended October 1, 2000 and October 3, 1999 4
Notes to Consolidated Financial Statements
(Unaudited) 5-18
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19-29
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 30-31
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 31-32
Item 2. Change in Securities and Use of Proceeds 32-33
Item 3. Defaults Upon Senior Securities 33
Item 4. Submission of Matters to a Vote of Security Holders 33
Item 5. Other Information 33-34
Item 6. Exhibits and Reports on Form 8-K 35-37
SIGNATURES 38
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
--------------------
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
(Unaudited)
October 1, 2000 January 2, 2000
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents $ 3,106 $ 2,942
Receivables, less allowance for doubtful 447,493 575,460
accounts of $112,070 and $36,759, respectively
Inventories 72,908 93,218
Prepaid expenses and other current assets 38,000 87,611
--------------- --------------
Total current assets 561,507 759,231
Fixed Assets, Net 42,487 51,809
Intangible Assets, Net 236,643 250,297
Other Assets 12,980 1,678
--------------- --------------
Total assets $ 853,617 $ 1,063,015
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of long-term debt $ 75,690 $ 78,562
Accounts payable 85,838 114,197
Accrued expenses 46,390 76,746
Payroll and related taxes 20,426 20,020
Insurance costs 29,732 31,170
--------------- --------------
Total current liabilities 258,076 320,695
Other Liabilities 40,662 37,029
Gentiva - Obligated Mandatorily Redeemable Convertible
Securities of a Subsidiary Holding Solely Gentiva Debentures 20,000 -
Shareholders' Equity:
Common stock, $.10 par value; authorized 100,000,000 shares;
issued and outstanding 20,809,333 and 20,345,029 shares, 2,081 2,035
respectively
Additional paid-in capital 686,201 725,998
Accumulated deficit (150,451) (20,370)
Accumulated other comprehensive loss (2,952) (2,372)
--------------- --------------
Total shareholders' equity 534,879 705,291
--------------- --------------
Total liabilities and shareholders' equity $ 853,617 $ 1,063,015
=============== ==============
See notes to consolidated financial statements.
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Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
October 1, October 3, October 1, October 3,
2000 1999 2000 1999
------------- ------------- ------------- ---------------
Net revenues $ 380,325 $ 377,312 $ 1,148,202 $ 1,118,045
Cost of services sold 262,160 252,234 772,911 740,051
------------- ------------- -------------- --------------
Gross Profit 118,165 125,078 375,291 377,994
Selling, general and administrative expenses 245,930 123,200 496,247 380,627
Interest expense, net 2,270 4,251 8,618 12,808
------------- ------------- -------------- --------------
Income (loss) before income taxes (130,035) (2,373) (129,574) (15,441)
Income tax expense (benefit) 311 108 507 (2,589)
------------- ------------- -------------- --------------
Net income (loss) $ (130,346) $ (2,481) $ (130,081) $ (12,852)
============== ============= =============== =============
Net income (loss) per share:
Basic and diluted $ (6.30) $ (0.12) $ (6.34) $ (0.63)
============== ============= =============== =============
Average shares outstanding:
Basic and diluted 20,705 20,345 20,521 20,345
============== ============= =============== =============
See notes to consolidated financial statements.
-3-
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------------------
October 1, 2000 October 3, 1999
---------------- ---------------
OPERATING ACTIVITIES:
Net income (loss) $ (130,081) $ (12,852)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Depreciation and amortization 24,307 25,798
Provision for doubtful accounts 136,408 24,334
Write-off of goodwill 5,200 -
Changes in assets and liabilities, net of effect from acquisitions:
Accounts receivable (30,441) (110,058)
Inventories 22,110 801
Prepaid expenses and other current assets 89 -
Current liabilities (52,147) (46,056)
Other, net 2,698 2,680
--------------- -------------
Net cash used in operating activities (21,857) (115,353)
--------------- -------------
INVESTING ACTIVITIES:
Purchase of fixed assets (4,778) (15,625)
Acquisitions of businesses, net of cash acquired - (1,655)
--------------- -------------
Net cash used in investing activities (4,778) (17,280)
--------------- -------------
FINANCING ACTIVITIES:
Issuance of mandatorily redeemable securities 20,100 -
Net transactions with Olsten 5,226 139,522
Increase in book overdrafts 4,400 -
Retirement of debt (9,525) (7,688)
Proceeds from revolving credit facility 7,128 -
Debt issuance costs (2,657) -
Proceeds from stock options 2,127 -
--------------- -------------
Net cash provided by financing activities 26,799 131,834
--------------- -------------
Net increase (decrease) in cash and cash equivalents 164 (799)
Cash and cash equivalents at beginning of period 2,942 799
--------------- -------------
Cash and cash equivalents at end of period $ 3,106 $ -
=============== =============
See notes to consolidated financial statements.
-4-
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The accompanying interim consolidated financial statements are unaudited,
but have been prepared by Gentiva Health Services, Inc. (the "Company") 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 generally accepted accounting principles.
The preparation of financial statements in conformity with generally accepted
accounting principals requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. The
most significant estimates relate to the collectibility of accounts receivable.
Actual results could differ from those estimates.
2. Background and Basis of Presentation
On March 15, 2000, the Company was split-off (the "split-off") from Olsten
Corporation ("Olsten") through the issuance of all of the Company's shares of
common stock to Olsten's shareholders and the Company became an independent,
publicly-owned company. Prior thereto, the Company operated Olsten's health
services business as a wholly-owned subsidiary of Olsten. The accompanying
interim consolidated financial statements reflect the results of operations,
financial position and cash flows of the Company as if it were a separate entity
for all periods presented. The consolidated financial statements have been
prepared using the historical basis in the assets and liabilities and historical
results of operations related to the Company.
The Company's selling, general and administrative expenses included a
management fee of approximately $1.3 million for the third quarter of fiscal
1999 and $0.9 million and $3.8 million for the first nine months of fiscal 2000
and 1999, respectively. This fee represented an allocation of certain general
corporate overhead expenses related to Olsten's corporate headquarters.
Management believes the allocations related to general corporate overhead
expenses are reasonable; however, the costs of these items deemed to be charged
to the Company are not necessarily indicative of the costs that would have been
incurred if the Company had been a stand-alone entity during the period for
which such expenses were allocated. Subsequent to the split-off, the Company has
begun to perform these functions using its own resources or purchased services
and the Company has been responsible for the costs and expenses associated with
the management of a public corporation.
Net interest expense as presented in the consolidated statements of
operations included net interest expense of approximately $3.2 million for the
third quarter of fiscal 1999 and $2.7 million and $9.7 million for the first
nine months of fiscal 2000 and 1999, respectively, relat-
-5-
ing to the intercompany balances with Olsten. Such intercompany balances have
been reflected as a contribution to capital at January 2, 2000 and as of the
split-off date.
3. Earnings per Share
Basic and diluted net income (loss) per share for the fiscal 2000 periods
has been computed using the weighted average number of shares outstanding. Such
amount is based on 20,345,029 shares of common stock, representing the number of
shares of the Company's stock issued on the split-off date, adjusted to reflect
464,304 shares of common stock issued during the nine month period ended October
1, 2000 in connection with the exercise of stock options. The computation of
dilutive net income per share excludes the effect of any shares issuable upon
the conversion of (1) the 4 3/4 convertible subordinated debentures which
matured and were retired on October 2, 2000 (without any such conversion), (2)
the $20 million of 10% convertible trust preferred securities and (3) the
exercise of approximately 0.9 million stock options since their inclusion would
have had an antidilutive effect on earnings.
Basic and diluted net income (loss) per share for the fiscal 1999 periods
have been computed based solely on the shares of the Company's stock issued on
the split-off date.
4. Special Charges
During the three months and nine months ended October 1, 2000, the Company
recorded special charges aggregating $132.0 million and $139.0 million,
respectively. Charges during the fiscal 2000 periods are summarized and further
described below (dollars in thousands):
Three Nine
Months Months
-------------------- --------------------
Bad Debt/Receivables Write-Off $ 112,000 $ 112,000
Settlement costs 7,200 7,400
Goodwill impairment 5,200 5,200
Split-off/transition costs 4,100
Name change and other 1,225 3,916
-------------------- --------------------
Subtotal included in selling,
general and administrative
expenses 125,625 132,616
Inventory/System Issues 6,400 6,400
-------------------- --------------------
Total $ 132,025 $ 139,106
==================== ====================
As of October 1, 2000, a valuation allowance of approximately $51 million
has been established for the deferred tax asset generated from the charges
described above because of the uncertainty of the ultimate realization of the
net deferred tax asset.
-6-
Bad Debt/Receivables Write-Off
During 2000 the Company launched several initiatives including (i) changes
to systems, operational processes and procedures in its contracting, delivery,
billing and collection and inventory management units, (ii) development of
numerous enhancements to the billing and collection system, and (iii) hiring of
external consultants to pursue focused collection efforts on specific aged
accounts receivable.
In the third quarter of 2000, management analyzed the results of these
activities and concluded that certain receivables previously thought to be
collectible were uncollectible. Moreover, management determined that the
Company's resources would be more effectively redirected to the collection of
more current balances. As a result, management has developed estimates for
collection rates of its existing accounts receivable balances based on aging
category and business line.
In connection with these activities, the Company recorded an incremental
provision for doubtful accounts of $112 million, which is reflected in selling,
general and administrative expenses in the accompanying statements of
operations.
In addition, the Company recognized revenues of $5.0 million relating to an
adjustment to estimated revenue accruals and increased a provision for
doubtful accounts by a corresponding amount.
Inventory/System Issues
An adjustment of $6.4 million was recorded in cost of services sold for
estimated obsolescence, shrinkage of inventory and changes in cost estimates
arising from the systems conversion and asset verification and physical
inventory procedures which were performed during the third quarter of fiscal
2000.
Settlement Costs
The Company also recorded a $7.2 million charge in the third quarter of
fiscal 2000 to reflect estimated settlement costs in excess of insurance
coverage relating to class action securities and derivative lawsuits the
obligations for which was assumed by the Company from Olsten under an
indemnification provision in connection with the split-off, as well as estimated
settlement costs related to government inquiries in New Mexico and North
Carolina (and discussed in Item 1. Legal Proceedings below).
As a result of their participation in a mediation process supervised by a
third-party mediator, the parties to the Class Action and the Derivative Lawsuit
(as defined in Item 1. Legal Proceedings below) recently agreed in principle to
settle both lawsuits for the aggregate sum of $25 million. The Company's
insurers have agreed to contribute $18 million of the settlement sum and the
Company has agreed to contribute the remaining $7 million. The settlement
reached by the parties is subject to, among other things, the parties' execution
of formal settlement agreements and obtaining the approval of the respective
courts before which the Class Action and the Derivative Lawsuit are pending.
In August 2000, the Company entered into a settlement agreement with
government agencies participating in the New Mexico investigation referred to in
Item 5 - Other Information. Under the terms of this agreement, the Company paid
these government agencies
-7-
$650,000, of which $150,000 and $400,000 were recorded during the three months
and nine months ended October 1, 2000, respectively. The Company has also
recorded $50,000 in estimated settlement costs in connection with the government
inquiry in North Carolina referred to in Item 5 - Other Information.
The charges are reflected in selling, general and administrative expenses
in the accompanying statements of operations for the fiscal 2000 periods. As of
October 1, 2000, approximately $7.0 million of these charges remain unpaid.
Goodwill Impairment
In October 2000, the Company announced that it had entered into an
agreement to sell its home care nursing services operations in Canada. The
consideration for the sale includes a minority equity interest in the acquirer
and cash in amounts to be determined based on the net working capital. Net
revenues relating to the Canadian operations approximated $29 million during the
first nine months of fiscal 2000. The transaction is expected to be consummated
during the fourth quarter of fiscal 2000.
As a result of this agreement, management determined that an impairment of
goodwill had occurred and, as such, the Company recorded a charge of $5.2
million in selling, general and administrative expenses for the three and nine
months ended July 2, 2000.
Split-off/Transition Costs
Non-recurring charges of $4.1 million were incurred during the nine months
ended October 1, 2000 to reflect obligations resulting from the Company's
split-off from Olsten and transition costs associated with the establishment of
the Company as an independent, publicly-owned entity. These non-recurring
charges included change of control, compensation and benefit payments of $3.6
million made to certain former employees of the Company and Olsten and a current
executive officer of the Company, including approximately $1.0 million which is
based on Olsten's methodology for allocating general corporate overhead expenses
as discussed in Note 7, and transition costs of $0.5 million relating to
registration costs, professional fees and other items. Substantially all amounts
were paid as of October 1, 2000.
Name Change and Other
Special charges of approximately $1.2 million in the third quarter and $3.9
million in the first nine months of fiscal 2000 were incurred in connection with
the change of the Company's name to Gentiva Health Services, Inc. These special
charges primarily consisted of costs incurred and paid for consulting fees,
promotional items and advertising.
In the quarter ended April 4, 1999, the Company recorded a special charge
aggregating $16.7 million. This charge was for the realignment of business units
as part of a new restructuring plan, including compensation and severance costs
of $5 million to be paid to operational support staff, branch administrative
personnel and management, asset write-offs of $6.5
-8-
million related primarily to fixed assets being disposed of in offices being
closed and facilities being consolidated, as well as fixed assets and goodwill
attributable to the Company's exit from certain business previously acquired but
not within the Company's strategic objectives, and integration costs of $5.2
million, primarily related to obligations under lease agreements for offices and
other facilities being closed. Substantially all of the closures and
consolidations of facilities and expected terminations had occurred by January
2, 2000. These activities resulted in lower costs than originally estimated and,
as a result, the Company recognized a benefit of $1.5 million in the fourth
quarter of fiscal 1999 to reflect this change in estimate. Approximately $0.9
million of this special charge remains unpaid as of October 1, 2000,
representing compensation and severance costs of $0.2 million and integration
costs of $0.7 million.
5. Long-Term Debt
On March 13, 2000, the Company entered into a credit facility, which was
subsequently amended on September 15, 2000, and which provides for up to $150
million in borrowings, including up to $30 million which is available for
letters of credit. The Company may borrow up to a maximum of 80 percent of
eligible accounts receivable, as defined. At the Company's option, the interest
rate on borrowings under the credit facility is based on the London Interbank
Offered Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus 0.25
percent.
At October 1, 2000, outstanding borrowings and standby letters of credit
under the credit facility approximated $7.1 million and $20.7 million,
respectively. Current portion of long-term debt as of October 1, 2000 also
included $68.6 million of 4 3/4 percent convertible subordinated debentures
which were retired, together with accrued interest of approximately $1.6
million, on October 2, 2000 (the first business day after maturity) with
additional borrowings from the credit facility. Borrowings under the credit
facility were subsequently repaid in late October 2000 upon receipt of proceeds
from the sale of the staffing services business as well as cash flow from
operations.
In June 2000, $10 million of the debentures were retired at 95.25 percent
of the principal amount, resulting in a gain of $475,000. In January 1999, $7.7
million of the debentures were retired at 88.5 percent of the principal amount,
resulting in a gain of approximately $900,000.
The credit facility, which expires in 2004, includes certain covenants
requiring the Company to maintain a minimum tangible net worth and minimum
earnings before interest, taxes, depreciation and amortization and provides
limitations on certain other activities. Loans under the credit facility are
collateralized by all of the Company's tangible and intangible personal
property, other than equipment. As of October 1, 2000, the Company was in
non-compliance of the minimum tangible net worth covenant under the credit
facility as a result of the special charges recorded during the third quarter of
fiscal 2000. The Company is in discussions with its lenders and, based on such
discussions (including a verbal approval by the
-9-
agent, which is also a lender), the Company expects to receive an executed
waiver and an amendment of the tangible net worth provision of the credit
facility. As a result, the outstanding borrowings under the credit facility
have been classified in current liabilities as of October 1, 2000. The
Company's borrowing capacity under the credit facility, which approximated
$106 million at October 1, 2000, was not significantly affected by the
special charges since most of such charges did not impact eligible accounts
receivable or its current non-compliance with the net worth provision of the
credit facility.
6. Mandatorily Redeemable Securities
On March 15, 2000, certain of the Company's and Olsten's directors,
officers and management and other related parties and other investors purchased
$20 million of 10 percent convertible trust preferred securities issued by a
trust, of which the Company owns all the common equity. The convertible trust
preferred securities are mandatorily redeemable five years from issuance at a
declining premium over face amount. Upon a change of control, as defined, the
holders of convertible trust preferred securities may require the trust to
purchase these securities at 100 percent of their face amount. Dividends are
payable quarterly in cash at the rate of 10 percent per annum, but the trust may
defer dividend payments for up to a total of twenty quarters, in which case
dividends will accrue. The convertible trust preferred securities are
convertible into the Company's common stock at a conversion price of $9.319219.
Such conversion price is 17.5 percent above the average closing price of the
Company's common stock during the ten trading days following the earnings
announcement of the first quarter 2000 results in accordance with the trust
agreement.
Simultaneously with, and in connection with, the issuance by the trust of
the convertible trust preferred securities, the Company issued to the trust $20
million of its 10 percent convertible subordinated debentures. The convertible
subordinated debentures have the same terms as the convertible trust preferred
securities, including, but not limited to, maturity, interest, conversion and
redemption price.
The trust, which issued the convertible trust preferred securities is a
special purpose trust. The trust's operations are limited to issuing the
convertible trust preferred securities and holding the Company's convertible
subordinated debentures. The trust may pay dividends only to the extent that the
Company pays interest on its convertible subordinated debentures.
In March 2000, the Company also issued 100 shares of Series A Cumulative
Non-voting Redeemable Preferred Stock for proceeds of $100,000. Such amount is
included in other liabilities in the consolidated balance sheet at October 1,
2000.
7. Shareholders' Equity
Changes in shareholders' equity during the nine months ended October 1,
2000 were as follows (in thousands):
-10-
Accumulated
Additional Other
Common Paid-in Accumulated Comprehensive
Stock Capital Deficit Loss Total
---------- ------------ ------------ ------------- ------------
Balance at January 2, 2000 $ 2,035 $ 725,998 $ (20,370) $ (2,372) $ 705,291
Comprehensive income:
Net income and cumulative
translation adjustment (130,081) (580) (130,661)
True-up payment made by Olsten 8,851 8,851
Obligations assumed in connection
with the split-off, net of tax (1,029) (1,029)
benefit
Transfer to Olsten of tax benefits
relating to net operating losses (49,700) (49,700)
Issuance of stock upon exercise
of stock options 46 2,081 2,127
---------- ------------ ------------ ------------- ------------
Balance at October 1, 2000 $ 2,081 $ 686,201 $ (150,451) $ (2,952) $ 534,879
========== ============ ============ ============= ============
See Note 8 for a description of the true-up payment made by Olsten.
Under the terms of the separation agreement relating to the split-off, the
Company assumed the obligation for the funding of liabilities of the
non-qualified supplemental executive retirement plan for certain of its
employees and former employees of Olsten. During the first quarter of 2000,
payments of $12.1 million were made under this program; these payments exceeded
assets of the plan which were transferred to the Company by $3.6 million due
primarily to benefits paid to former Olsten employees and a current executive
officer of the Company. Furthermore, the Company also assumed excise tax
obligations of approximately $0.8 million for a former executive officer of
Olsten (and current executive officer of the Company). Approximately $1.0
million of the aggregate net obligations of $4.4 million were included in
non-recurring and special charges in the consolidated statements of operations
based on Olsten's allocation methodology for general corporate overhead
expenses. The remaining $3.4 million associated with these obligations was
charged directly to additional paid-in capital.
In addition, under the terms of the separation agreement, the Company also
agreed to assume a lease for an Olsten subsidiary, that was unrelated to the
operation of the Company, commencing September 2000. In this connection, the
present value of future lease obligations and other costs exceed estimated
sublease rentals by $1.7 million. Such amount was charged directly to additional
paid-in capital during the first quarter of 2000.
An estimated tax benefit of $4.1 million relating to the aforementioned
obligations was credited to additional paid-in capital.
In accordance with the tax sharing agreement governing the split-off, any
net operating losses generated up to the split-off were to be transferred and
utilized by Olsten. Accordingly, on March 15, 2000 the Company transferred
approximately $49.7 million of tax benefits re-
-11-
lating to those net operating losses to Olsten. Such amount is reflected as a
reduction of additional paid-in capital during the first six months of fiscal
2000.
Total comprehensive loss amounted to $131.0 million and $2.5 million during
the third quarter of fiscal 2000 and 1999, respectively, and $130.7 million and
$12.8 million during the first nine months of fiscal 2000 and 1999,
respectively.
8. Transactions with Olsten
Net transactions with Olsten, included in shareholders' equity, include the
accumulated excess of cash outlays made on the Company's behalf and management
fees charged to the Company by Olsten over cash receipts generated by the
Company through March 15, 2000. In accordance with the terms of the separation
agreement, intercompany balances at October 31, 1999 of approximately $507
million have been contributed to the Company's capital in their entirety.
Pursuant to the terms described in the separation agreement, the Company was to
receive approximately $32 million in cash (referred to as the true-up amount) on
or prior to the split-off date. Approximately $23.1 million of the true-up
amount was received by the Company prior to January 2, 2000; the remaining $8.9
million was received by the Company during the first quarter of fiscal 2000.
Following the split-off, the Company paid Olsten approximately $13 million
to settle the intercompany account balance, which primarily related to advances
for management fees, additional borrowings and interest expense on intercompany
balances.
9. Business Segment Information
The Company operates in the United States and Canada, servicing patients
and customers through the following business segments: Specialty Pharmaceutical
Services, Home Care Nursing Services and Staffing Services. These segments are
briefly described below.
Specialty Pharmaceutical Services includes (i) the distribution of drugs
and other biological and pharmaceutical products and professional support
services for individuals with chronic diseases, such as hemophilia, primary
pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the
administration of antibiotics, chemotherapy, nutrients and other medications for
patients with acute or episodic disease states and (iii) distribution services
for pharmaceutical, biotechnology and medical service firms.
Home Care Nursing Services includes (i) professional and paraprofessional
services, including skilled nursing, rehabilitation and other therapies, home
health aide and personal care services, to individuals with acute illnesses,
long-term chronic health conditions, permanent disabilities, terminal illnesses
or post-procedural needs and (ii) care management and coordination for managed
care organizations and self-insured employees.
Staffing Services includes (i) services to institutional, occupational and
alternate site health care organizations by providing health care professionals
to meet supplemental staffing
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needs and (ii) clinical support services for pharmaceutical and biotechnology
firms. As discussed in Note 10, the health care staffing services business was
sold on October 27, 2000. Net revenues for this business as a percentage of net
revenues for the total Staffing Services segment was approximately 83 percent
for the fiscal 2000 periods and 78 percent for the fiscal 1999 periods. The
information set forth below and in this report does not reflect the Company's
sale of the health care staffing services business.
The Company and its cheif decision makers evaluate performance and allocate
resources based on operating contributions of the reportable segments, which
excludes corporate expenses, depreciation, amortization and interest expense,
but includes revenues and all other costs directly attributable to the specific
segment. Identifiable assets of the segments reflect net accounts receivable and
inventories associated with segment activities. All other assets are assigned to
the Company for the benefit of all segments.
Information about the Company's operations is as follows (in thousands):
Specialty Home Care
Pharmaceutical Nursing Staffing
Services Services Services Total
-------------- ------------ ------------ ----------
Three months ended October 1, 2000
Net revenues $ 188,155 $ 151,892 $ 40,278 $ 380,325
============== ============ ============ ==========
Operating contribution before special charges $ 22,490 $ 7,111 $ 3,674 $ 33,275
Special charges attributable to segments (99,400) (19,200) (118,600)
-------------- ------------ ------------ ----------
Operating contribution (loss) $ (76,910) $ (12,089) $ 3,674 (85,325)
============== ============ ============
Special charges attributable to corporate (13,425)
Corporate expenses (21,168)
----------
Earnings (loss) before interest expense,
taxes, depreciation and amortization (119,918)
Depreciation and amortization (7,847)
Interest expense, net (2,270)
----------
Loss before income taxes $ (130,035)
==========
Three months ended October 3, 1999
Net revenues $ 176,092 $ 168,787 $ 32,433 $ 377,312
============= ============ ============ ==========
Operating contribution $ 21,689 $ 5,998 $ 2,499 $ 30,186
============= ============ ============ ==========
Corporate expenses (19,916)
----------
Earnings before interest expense, taxes,
depreciation and amortization 10,270
Depreciation and amortization (8,392)
Interest expense, net (4,251)
----------
Loss before income taxes $ (2,373)
==========
Nine months ended October 1, 2000
Net revenues $ 554,017 $ 480,813 $ 113,372 $1,148,202
============ ============ =========== ==========
Operating contribution before special charges $ 71,047 $ 25,448 $ 9,444 $ 105,939
Special charges attributable to segments (99,400) (19,200) - (118,600)
------------ ------------ ----------- ----------
-13-
Specialty Home Care
Pharmaceutical Nursing Staffing
Services Services Services Total
-------------- ------------ ------------ ----------
Operating contribution (loss) $ (28,353) $ 6,248 $ 9,444 (12,661)
============== ============ ============ ==========
Special charges attributable to corporate (20,416)
Corporate expenses (63,572)
----------
Earnings (loss) before interest expense,
taxes, depreciation and amortization (96,649)
Depreciation and amortization (24,307)
Interest expense, net (8,618)
----------
Loss before income taxes $ (129,574)
==========
Segment assets $ 347,480 $ 147,234 $ 25,687 $ 520,401
============= ============ ============ ==========
Nine months ended October 1, 1999
Net revenues $ 517,906 $ 507,296 $ 92,843 $1,118,045
============= ============ ============ ==========
Operating contribution before special charges $ 77,609 $ 20,219 $ 7,401 $ 105,229
Special charges (1,730) (14,590) (380) (16,700)
------------- ------------ ------------ ----------
Operating contribution (loss) $ 75,879 $ 5,629 $ 7,021 88,529
============= ============ ============ ==========
Corporate expenses (65,364)
----------
Earnings before interest expense, taxes,
depreciation and amortization 23,165
Depreciation and amortization (25,798)
Interest expense, net (12,808)
----------
Loss before income taxes $ (15,441)
==========
Segment assets $ 391,220 $ 210,128 $ 23,353 $ 624,701
============= ============ ============ ==========
10. Subsequent Events
On October 27, 2000, the Company consummated the sale of its health care
staffing services business and received cash proceeds of $66.5 million. These
proceeds may be adjusted (upward or downward) in accordance with the purchase
and sale agreement based on, among other things, the final closing balance
sheet. In October 2000, the Company announced that it had entered into an
agreement to sell its home care nursing services operations in Canada. The
consideration for the sale includes a minority equity interest in the acquirer
and cash in amounts to be determined based on net working capital. The Company
also announced its decision to close or consolidate twelve nursing services
branches and restructure certain corporate and administrative activities. During
the fourth quarter of fiscal 2000, management of the Company expects to record a
net gain of between $30 million and $40 million relating to these transactions.
11. Contingencies
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. Management
does not view any of these actions as likely to result in an uninsured award
that would be material to the Company.
-14-
In addition, there is presently pending in the U.S. District Court for the
Eastern District of New York a purported class action filed by some Olsten
stockholders against Olsten and some of its directors and officers, captioned In
re Olsten Corporation Securities Litigation, No. 97-5056 (the "Class Action").
The Class Action asserts claims for violations of the Securities Act and the
Securities Exchange Act, including claims that the directors and officers of
Olsten misrepresented information to stockholders relating to the government
investigations into Olsten's health services business described in Item 5 -
Other Information. There is also pending in the Delaware Chancery Court a
purported derivative lawsuit filed by some Olsten stockholders against some
directors and officers of Olsten (and Olsten, as nominal defendant), captioned
Rubin v. May, No. 17135-NC (the "Derivative Lawsuit"). This Derivative Lawsuit
alleges that the Olsten directors and officers breached their fiduciary duties
to stockholders in connection with the Class Action and the below-described
government investigations. As a result of their participation in a mediation
process supervised by a third-party mediator, the parties to the Class Action
and the Derivative Lawsuit recently agreed in principle to settle both lawsuits
for the aggregate sum of $25 million. The Company's insurers have agreed to
contribute $18 million of the settlement sum and the Company has agreed to
contribute the remaining $7 million. The settlement reached by the parties is
subject to, among other things, the parties' execution of formal settlement
agreements and obtaining the approval of the respective courts before which the
Class Action and the Derivative Lawsuit are pending.
In July 1999, the Indiana Attorney General's Office filed a lawsuit against
Olsten in Indiana Superior Court, captioned State of Indiana v. Quantum Health
Resources, Inc. and Olsten Health Services, Inc., No. 49D029907CP001011,
alleging that Olsten was overpaid by Medicaid, failed to properly disclose
information to Medicaid and engaged in improper billing. The parties are
engaging in discussions in an attempt to resolve this matter.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly") initiated
three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare
Corp. ("Columbia/HCA") with which Kimberly had management services agreements to
provide services to the hospitals' home health agencies. The basis for each of
the arbitrations is that Columbia/HCA sold the home health agencies without
assigning the management services
-15-
agreements and, as a result, Columbia/HCA has breached the management services
agreements. In response to the arbitrations, Columbia/HCA has asserted that the
arbitration be consolidated and stayed, in part based upon its alleged claims
against Kimberly for breach of contract, and requested indemnity and possibly
return of management fees. Columbia/HCA has not yet formally presented these
claims in the arbitrations or other legal proceedings, and has not yet
quantified the claims. The parties agreed to suspend the proceedings until
January 2001.
On June 23, 2000, the Company was served with a Complaint in a purported
class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S.
District Court for the Middle District of Tennessee (the "Tennessee Lawsuit").
The Company was served with an Amended Complaint in the Tennessee Lawsuit on
July 21, 2000. The Amended Complaint, which names as defendants Columbia/HCA,
Columbia Homecare Group, Olsten Health Management a/k/a Hospital Contract
Management Services (one of the Company's subsidiaries) and Olsten Corporation,
alleges, among other things, that the defendants' business practices in
connection with the home health care patient referrals during the 1994 and 1996
time period violated provisions of Federal antitrust laws, the Racketeer
Influenced and Corrupt Organizations Act, the Tennessee Consumer Protection Act,
and the common law of Tennessee, Texas, Georgia and Florida. The Complaint seeks
unspecified compensatory damages, punitive damages, treble damages and
attorneys' fees on behalf of a proposed class of home healthcare companies
and/or agencies which conducted business in Tennessee, Texas, Florida and/or
Georgia and allegedly lost business or property due to defendants' business
practices. In September, 2000, the defendants filed a motion to dismiss the
Amended Complaint which remains pending before the Court. Because the Tennessee
Lawsuit is in a relatively preliminary stage, the Company is unable at this time
to assess the probable outcome of or potential liability arising from such
lawsuit.
Furthermore, in connection with the split-off, the Company agreed to
assume, to the extent permitted by law, and indemnify Olsten for, the above
lawsuits and arbitration proceedings, together with any other liabilities
arising out of the health services business before or after the split-off,
including any such liabilities arising after the split-off in connection with
the government investigations described below.
On January 28, 1999, Olsten announced that it had been advised by the
United States Attorney's Office for the District of New Mexico ("New Mexico U.S.
Attorney's Office") that it had dropped its criminal investigation into
allegations of improper billing and fraud against various federally funded
medical assistance programs by Quantum during the period between January 1992
and April 1997. By letter dated February 1, 1999, the New Mexico U.S. Attorney's
Office advised Olsten that, having ended its criminal inquiry, the Office had
referred the Quantum matter to its Affirmative Civil Enforcement Section. On
August 30, 2000, the Company entered into a settlement agreement with all
government agencies participating in the New Mexico U.S Attorney's Civil Office
investigation. Under the terms of the Agreement, the Company paid the government
$650,000, but denied all wrongdoing.
-16-
In early December 1999, Olsten received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. After preliminary discussions with the Office of Inspector
General, the Company believes the subpoena relates to an investigation of
possible overpayments to it by the Medicare program. In early February 2000, the
Company received a document subpoena from the Department of Health and Human
Services, Office of Inspector General, and Office of Investigations. The Company
believes the subpoena relates to its agencies' cost reporting procedures
concerning contracted nursing and home health aide costs. The Company has
provided and continues to provide the Office of Inspector General with the
requested documents and continues to cooperate fully with its investigations. At
this time, the Company is unable to assess the probable outcome or potential
liability, if any, arising from these subpoenas. The Company believes that it is
possible that one or more of these investigations may be triggered by lawsuits
under federal or state whistle blower statutes against Olsten or the Company.
The North Carolina Attorney General's Office has raised questions as to the
eligibility of a certain class of the Company's patients to receive
Medicaid-reimbursed home health services. The Company is in current negotiations
with the Office to resolve this inquiry.
-17-
In October 1998, in connection with its settlement of a government
investigation into the health care practices of Quantum Health Resources (a
subsidiary of the Company) for a period prior to 1997, Olsten executed a
corporate integrity agreement with the U.S. Department of Justice, the Office of
Inspector General of the U.S. Department of Health and Human Services, the U.S.
Secretary of Defense (for the CHAMPUS/Tricare Program) and the Attorneys General
for the States of New York and Oklahoma that will be in effect until December
31, 2001. Also, in connection with the July 19, 1999 settlement with various
government agencies, Olsten executed a separate 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. Under each of the
corporate integrity agreements, the Company is, for example, required:
o to maintain a corporate compliance officer to develop and implement
compliance programs;
o to retain an independent review organization to perform annual
reviews; and
o to maintain a compliance program and reporting systems, as well as
provide certain training to employees.
The October 1998 corporate integrity agreement applies to the Company's
specialty pharmaceutical services business and focuses on the training and
billing of blood factor products for hemophiliacs. The July 19, 1999 corporate
integrity agreement applies to the Company's businesses that bill the federal
government health programs directly for services, such as its home care nursing
business (but excluding the specialty pharmaceutical services business). That
corporate integrity agreement focuses on issues and training related to cost
report preparation, contracting, medical necessity and billing of claims.
The Company's compliance program will be implemented for all newly
established or acquired business units if their type of business is covered by
the corporate integrity agreements. Reports under each integrity agreement are
to be filed annually with the Department of Health and Human Services, Office of
Inspector General. After each corporate integrity agreement expires, the Company
is to file a final annual report with the government. If the Company fails to
comply with the terms of either of its corporate integrity agreements, the
Company will be subject to penalties ranging from $1,500 to $2,500 for each day
of the breach.
In March 2000, Gentiva was notified by the U.S. Department of Justice that,
in light of the Adecco/Olsten merger and the split-off of Gentiva as an
independent public company, the Company has been substituted for Olsten in
connection with the civil settlement and corporate integrity agreements
referenced in this Item 5-Other Information section.
-18-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
On March 15, 2000, the Company was split-off from Olsten Corporation
("Olsten") through the issuance of all of the Company's shares of common stock
to Olsten's shareholders and the Company became an independent, publicly-owned
company. Prior thereto, the Company operated Olsten's health services business
as a wholly-owned subsidiary of Olsten. The accompanying interim consolidated
financial statements reflect the results of operations, financial position and
cash flows of the Company as if it were a separate entity for all periods
presented prior to March 15, 2000
The historical financial information may not be indicative of future
performance and may not necessarily reflect what the Company's financial
position and results of operations would have been if it were a separate
stand-alone entity during the periods prior to March 15, 2000. As an
independent company, the Company has incurred additional legal, risk
management, tax, treasury, human resources and administrative and other
expenses that it did not incur as a wholly-owned subsidiary of Olsten. The
consolidated financial statements have been prepared using the historical
basis in the assets and liabilities and historical results of operations
related to the Company. The historical financial information does not reflect
the matters described in Note 10.
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 January 2, 2000.
Results of Operations
Revenues
Net revenues increased by $3 million or 0.8 percent to $380 million during
the third quarter of fiscal 2000 as compared to the third quarter of fiscal 1999
driven by growth in Specialty Pharmaceutical Services of $12 million or 6.9
percent and Staffing Services of $8 million or 24.2 percent. These increases
were partially offset by a $17 million or 10.0 percent decrease in net revenues
in Home Care Nursing Services.
-19-
For the first nine months of fiscal 2000, net revenues increased by $30
million or 2.7 percent to $1.148 billion as compared to net revenues of $1.118
billion during the first nine months of fiscal 1999. Net revenue growth resulted
from increases in Specialty Pharmaceutical Services of $36 million or 7.0
percent and Staffing Services of $20 million or 22.1 percent offset by a
decrease of $26 million or 5.2 percent in Home Care Nursing Services.
In the Specialty Pharmaceutical Services business, revenue growth in both
the third quarter and the nine month period for fiscal 2000 was attributable to
volume increases in the pulmonary hypertension therapy Flolan(R) and the
nutrition support therapies such as Total Parental Nutrition (TPN). In
addition, the Company recognized revenues of $5.0 million relating to an
adjustment to estimated revenue accruals and increased a provision for
doubtful accounts by a corresponding amount. The revenue growth in these
therapies, however, was negatively impacted by some product shortages of
recombinant coagulation therapy, which is used in the treatment of
hemophilia, and the Bayer Corporation's decision last year to begin directly
distributing Prolastin(R), an intravenous therapy used in the treatment of
the hereditary disorder Alpha 1 Antitrypsin Deficiency. Staffing Services
revenue growth during both the third quarter and the nine month period for
fiscal 2000 reflects volume and rate increases due to strong market demand
created by industry growth and a shortage of full time employees in the
institutional, occupational and alternate site health care organizations
serviced by the Staffing Services business. The decline in Home Care Nursing
Services revenue during both the third quarter and the nine month period for
fiscal 2000 was attributable to the adoption of new clinical protocols as
part of the transition to the new Medicare reimbursement system which became
effective on October 1, 2000 as well as to the continued shortage of nursing
and caregiver personnel in certain parts of the country and the impact of the
closing of certain home care nursing branches during 1999.
Gross Profit
Gross profit margins, as a percentage of net revenues, decreased from 33.2
percent in the fiscal 1999 third quarter to 31.1 percent in the third quarter of
fiscal 2000 and from 33.8 percent in the first nine months of fiscal 1999 to
32.7 percent in the first nine months of fiscal 2000. Of the total decrease in
margins, 1.7 percent for the third quarter and 0.5 percent for the nine months
can be attributed to the special charge associated with the inventory
adjustment of $6.4 million which was recorded in the three month and nine
month periods of fiscal 2000. The remaining decrease in margins was primarily
attributable to a change in business mix reflecting growth in the lower
margin Staffing Services business and higher costs attributable to certain
biological and pharmaceutical products in the Specialty Pharmaceutical
Services business due to product shortages, partly offset by productivity
enhancements and rate increases in Home Care Nursing Services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $246 million
during the third quarter of fiscal 2000 as compared to $123 million during the
third quarter of fiscal 1999 due to special charges of $125.6 million as well as
increases in health insurance costs offset somewhat by the impact of efficiency
improvement efforts in Home Care Nursing Services and corporate administrative
support departments and the closing of certain home care nursing branches.
For the first nine months of fiscal 2000, selling, general and
administrative expenses were $496 million as compared to $381 million for the
first nine months of fiscal 1999. This increase resulted from a change in the
amount of special charges affecting selling, general and administrative expenses
from $16.7 million in the fiscal 1999 period to $132.6 million in the fiscal
2000 period offset somewhat by the impact of efficiency improvement efforts and
the closing of home care nursing branches.
-20-
Bad Debt/Receivables Write-Off
During 2000 the Company launched several initiatives including (i) changes
to systems, operational processes and procedures in its contracting, delivery,
billing and collection and inventory management units, (ii) development of
numerous enhancements to the billing and collection system, and (iii) hiring of
external consultants to pursue focused collection efforts on specific aged
accounts receivable.
In the third quarter of 2000, management analyzed the results of these
activities and concluded that certain receivables previously thought to be
collectible were uncollectible. Moreover, management determined that the
Company's resources would be more effectively redirected to the collection of
more current balances. As a result, management has developed estimates for
collection rates of its existing accounts receivable balances based on aging
category and business line.
In connection with these activities, the Company recorded an incremental
provision for doubtful accounts of $112 million, which is reflected in selling,
general and administrative expenses in the accompanying statements of
operations.
In addition, the Company recognized revenues of $5.0 million relating to an
adjustment to estimated revenue accruals and increased a provision for
doubtful accounts by a corresponding amount.
Settlement Costs
The Company also recorded a $7.2 million charge in the third quarter of
fiscal 2000 to reflect estimated settlement costs in excess of insurance
coverage relating to class action securities and derivative lawsuits the
obligations for which was assumed by the Company from Olsten under an
indemnification provision in connection with the split-off, as well as estimated
settlement costs related to government inquiries in New Mexico and North
Carolina (and discussed in Item 1. Legal Proceedings below).
As a result of their participation in a mediation process supervised by a
third-party mediator, the parties to the Class Action and the Derivative Lawsuit
(as defined in Item 1. Legal Proceedings below) recently agreed in principle to
settle both lawsuits for the aggregate sum of $25 million. The Company's
insurers have agreed to contribute $18 million of the settlement sum and the
Company has agreed to contribute the remaining $7 million. The settlement
reached by the parties is subject to, among other things, the parties' execution
of formal settlement agreements and obtaining the approval of the respective
courts before which the Class Action and the Derivative Lawsuit are pending.
In August 2000, the Company entered into a settlement agreement with
government agencies participating in the New Mexico investigation referred to in
Item 5 - Other Information. Under the terms of this agreement, the Company paid
these government agencies
-21-
$650,000, of which $150,000 and $400,000 were recorded during the three months
and nine months ended October 1, 2000, respectively. The Company has also
recorded $50,000 in estimated settlement costs in connection with the government
inquiry in North Carolina referred to in Item 5 - Other Information.
The charges are reflected in selling, general and administrative expenses
in the accompanying statements of operations for the fiscal 2000 periods. As of
October 1, 2000, approximately $7.0 million of these charges remain unpaid.
Goodwill Impairment
In October 2000, the Company announced that it had entered into an
agreement to sell its home care nursing services operations in Canada. The
consideration for the sale includes a minority equity interest in the acquirer
and cash in amounts to be determined based on the net working capital. Net
revenues relating to the Canadian operations approximated $29 million during the
first nine months of fiscal 2000. The transaction is expected to be consummated
during the fourth quarter of fiscal 2000.
As a result of this agreement, management determined that an impairment of
goodwill had occurred and, as such, the Company recorded a charge of $5.2
million in selling, general and administrative expenses for the three and nine
months ended July 2, 2000.
Split-off/Transition Costs
Non-recurring charges of $4.1 million were incurred during the nine months
ended October 1, 2000 to reflect obligations resulting from the Company's
split-off from Olsten and transition costs associated with the establishment of
the Company as an independent, publicly-owned entity. These non-recurring
charges included change of control, compensation and benefit payments of $3.6
million made to certain former employees of the Company and Olsten and a current
executive officer of the Company, including approximately $1.0 million which is
based on Olsten's methodology for allocating general corporate overhead expenses
as discussed in Note 7, and transition costs of $0.5 million relating to
registration costs, professional fees and other items. Substantially all amounts
were paid as of October 1, 2000.
Name Change and Other
Special charges of approximately $1.2 million in the third quarter and $3.9
million in the first nine months of fiscal 2000 were incurred in connection with
the change of the Company's name to Gentiva Health Services, Inc. These special
charges primarily consisted of costs incurred and paid for consulting fees,
promotional items and advertising.
In the quarter ended April 4, 1999, the Company recorded a special charge
aggregating $16.7 million. This charge was for the realignment of business units
as part of a new restructuring plan, including compensation and severance costs
of $5 million to be paid to operational support staff, branch administrative
personnel and management, asset write-offs of $6.5 million related primarily to
fixed assets being disposed of in offices being closed and facilities being
consolidated, as well as fixed assets and goodwill attributable to the Company's
exit from certain business previously acquired but not within the Company's
strategic objectives, and integration costs of $5.2 million, primarily related
to obligations under lease agreements for offices and other facilities being
closed. Substantially all of the closures and consolidations of facilities and
expected terminations occurred by January 2, 2000. These activities resulted in
lower costs than originally estimated and, as a result, the Company recognized a
benefit of $1.5 million in the fourth quarter of fiscal 1999 to reflect this
change in estimate.
-22-
Excluding the effects of special charges recorded in the periods as
described above, selling, general and administrative expenses as a percentage of
net revenues were 31.6 percent and 32.7 percent during the third quarters of
fiscal 2000 and 1999, respectively, and 31.7 percent and 32.5 percent during the
first nine months of fiscal 2000 and 1999, respectively.
Interest Expense, Net
Interest expense, net was approximately $2.3 million and $4.3 million in
the third quarters of fiscal 2000 and 1999, respectively, and $8.6 million and
$12.8 million during the first nine months of fiscal 2000 and 1999,
respectively. Interest expense, net represented primarily interest on the
outstanding 4 3/4 percent convertible subordinated debentures during each
period, net intercompany borrowings with Olsten for the fiscal 1999 periods and
the period from January 3, 2000 to March 15, 2000 and interest on borrowings
under the credit facility and the mandatorily redeemable securities subsequent
to March 15, 2000.
Income Taxes
Income tax expense consists of taxes relating to Canada and certain state
jurisdictions. The Company has estimated net operating loss carryforwards (NOLs)
of approximately $129
-23-
million as of October 1, 2000. Because of the uncertainty of ultimate
realization of the net deferred tax asset, the Company has established a
valuation allowance of approximately $51 million for the deferred tax asset that
is not otherwise used to offset deferred tax liabilities. The valuation
allowance had the effect of reducing the Company's effective tax rate for the
fiscal 2000 periods. The Company expects its effective tax rate to be below 10
percent until such time as the NOLs are utilized.
Liquidity and Capital Resources
Prior to the split-off, the Company relied on cash flow from operations and
advances from Olsten to meet the requirements of its operating and investing
activities. In the past, when liquidity needs exceeded cash flow, Olsten
provided the necessary funds. In accordance with the separation agreement
governing the split-off, the Company received approximately $32 million in cash
(referred to as the true-up amount), including $8.9 million prior to the March
15, 2000 split-off date. Following the split-off, the Company paid Olsten
approximately $13 million to settle the intercompany account balance, which
related primarily to management fees, additional advances and interest expense
on intercompany balances. Furthermore, in connection with the split-off the
Company assumed certain liabilities, including a supplemental executive
retirement plan and excise tax obligations for former Olsten employees and the
office lease obligations for an Olsten subsidiary. As of March 15, 2000, the
Company had acquired third party financing, as described below, to meet its
funding requirements.
The Company received $20 million of proceeds from the issuance by Gentiva
Trust, a Delaware statutory trust (the "Trust"), of 10% convertible trust
preferred securities on March 15, 2000. The Company owns all the common equity
in the Trust. The Trust's only asset is the 10% convertible subordinated
debentures of the Company.
On March 13, 2000, the Company entered into a credit facility, which was
subsequently amended on September 15, 2000, and which provides for up to $150
million in borrowings, including up to $30 million which is available for
letters of credit. The Company may borrow up to 80 percent of eligible accounts
receivable, as defined. As of October 1, 2000, borrowings under the credit
facility aggregated $7.1 million and there were approximately $20.7 million of
standby letters of credit outstanding. Current portion of long-term debt as of
October 1, 2000 included $68.6 million of 4 3/4 percent convertible subordinated
debentures which were retired, together with accrued interest of approximately
$1.6 million, on October 2, 2000 (the first business day after maturity) with
borrowings from the credit facility. In June 2000, the Company retired $10
million of the debentures at 95.25 percent of the principal amount, resulting in
a gain of $475,000.
On October 27, 2000, the Company consummated the sale of its health care
staffing services business and received cash proceeds of $66.5 million. These
proceeds may be adjusted (upward or downward) in accordance with the purchase
and sale agreement, based upon, among other things, the final closing balance
sheet. In late October 2000, the Company used proceeds from the sale of its
health care staffing services business and cash flow from
-24-
operations to repay all borrowings under its credit facility. As of November 14,
2000, the Company had no outstanding borrowings under its credit facility.
The credit facility, which expires in 2004, includes covenants requiring
the Company to maintain a minimum tangible net worth and minimum earnings before
interest, taxes, depreciation and amortization. Other covenants in the credit
facility include: limitations on mergers, consolidations, acquisitions,
indebtedness, liens, capital expenditures and disposition of assets and other
limitations with respect to the Company's operations. The interest rate on
borrowings under the credit facility is based on the London Interbank Offered
Rate (LIBOR) plus 2.5 percent or the lender's prime rate plus 0.25 percent. As
of October 1, 2000, the Company was in non-compliance of the minimum tangible
net worth covenant under the credit facility as a result of the special charges
recorded during the third quarter. The Company is in discussions with its
lenders and, based on such discussions (including verbal approval by the
administrative agent, which is also a lender), the Company expects to receive an
executed waiver and an amendment of the tangible net worth provision of the
credit facility. As a result, the outstanding borrowings under the credit
facility have been classified in current liabilities as of October 1, 2000.
The Company's borrowing capacity under the credit facility, which
approximated $106 million at October 1, 2000, was not significantly affected
by the special charges since most of such charges did not impact eligible
accounts receivable.
Working capital at October 1, 2000 was $379 million, a decrease of $60
million versus $439 million at January 2, 2000. Net receivables increased by $29
million in the first quarter of fiscal 2000, predominantly due to conversion
issues resulting from the implementation of and transition to a new billing
system for the Specialty Pharmaceutical Services business. Net receivables
remained stable during the second quarter and aggregated $604 million at July 2,
2000. Net receivables decreased by $157 million during the third quarter and
aggregated $447 million at October 1, 2000 as a result of the increase in the
provision for doubtful accounts as discussed above and improved cash
collections. The Company will continue to make investments in billing and
accounts receivable systems and has restructured its contracting, delivery,
billing and collection units in an effort to improve cash flow from operations.
In this regard, the Company used $41.9 million of cash in operating activities
during the first quarter of fiscal 2000; in the second and third quarters of
fiscal 2000, the Company generated $0.4 million and $19.6 million, respectively,
of cash from operating activities.
Management believes cash flows from operations, borrowings available under
the credit facility and other financing options will be adequate to support the
ongoing operations and to meet debt service requirements for the foreseeable
future. The Company intends to make investments and other expenditures to, among
other things, upgrade its computer technology and system infrastructure and
relocate its headquarters. If cash flows from operations 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 for operations.
11. Contingencies
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. Management
does not view any of these actions as likely to result in an uninsured award
that would be material to the Company.
-25-
In addition, there is presently pending in the U.S. District Court for the
Eastern District of New York a purported class action filed by some Olsten
stockholders against Olsten and some of its directors and officers, captioned In
re Olsten Corporation Securities Litigation, No. 97-5056 (the "Class Action").
The Class Action asserts claims for violations of the Securities Act and the
Securities Exchange Act, including claims that the directors and officers of
Olsten misrepresented information to stockholders relating to the government
investigations into Olsten's health services business described in Item 5 -
Other Information. There is also pending in the Delaware Chancery Court a
purported derivative lawsuit filed by some Olsten stockholders against some
directors and officers of Olsten (and Olsten, as nominal defendant), captioned
Rubin v. May, No. 17135-NC (the "Derivative Lawsuit"). This Derivative Lawsuit
alleges that the Olsten directors and officers breached their fiduciary duties
to stockholders in connection with the Class Action and the below-described
government investigations. As a result of their participation in a mediation
process supervised by a third-party mediator, the parties to the Class Action
and the Derivative Lawsuit recently agreed in principle to settle both lawsuits
for the aggregate sum of $25 million. The Company's insurers have agreed to
contribute $18 million of the settlement sum and the Company has agreed to
contribute the remaining $7 million. The settlement reached by the parties is
subject to, among other things, the parties' execution of formal settlement
agreements and obtaining the approval of the respective courts before which the
Class Action and the Derivative Lawsuit are pending.
In July 1999, the Indiana Attorney General's Office filed a lawsuit against
Olsten in Indiana Superior Court, captioned State of Indiana v. Quantum Health
Resources, Inc. and Olsten Health Services, Inc., No. 49D029907CP001011,
alleging that Olsten was overpaid by Medicaid, failed to properly disclose
information to Medicaid and engaged in improper billing. The parties are
engaging in discussions in an attempt to resolve this matter.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly") initiated
three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare
Corp. ("Columbia/HCA") with which Kimberly had management services agreements to
provide services to the hospitals' home health agencies. The basis for each of
the arbitrations is that Columbia/HCA sold the home health agencies without
assigning the management services
-26-
agreements and, as a result, Columbia/HCA has breached the management services
agreements. In response to the arbitrations, Columbia/HCA has asserted that the
arbitration be consolidated and stayed, in part based upon its alleged claims
against Kimberly for breach of contract, and requested indemnity and possibly
return of management fees. Columbia/HCA has not yet formally presented these
claims in the arbitrations or other legal proceedings, and has not yet
quantified the claims. The parties agreed to suspend the proceedings until
January 2001.
On June 23, 2000, the Company was served with a Complaint in a purported
class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S.
District Court for the Middle District of Tennessee (the "Tennessee Lawsuit").
The Company was served with an Amended Complaint in the Tennessee Lawsuit on
July 21, 2000. The Amended Complaint, which names as defendants Columbia/HCA,
Columbia Homecare Group, Olsten Health Management a/k/a Hospital Contract
Management Services (one of the Company's subsidiaries) and Olsten Corporation,
alleges, among other things, that the defendants' business practices in
connection with the home health care patient referrals during the 1994 and 1996
time period violated provisions of Federal antitrust laws, the Racketeer
Influenced and Corrupt Organizations Act, the Tennessee Consumer Protection Act,
and the common law of Tennessee, Texas, Georgia and Florida. The Complaint seeks
unspecified compensatory damages, punitive damages, treble damages and
attorneys' fees on behalf of a proposed class of home healthcare companies
and/or agencies which conducted business in Tennessee, Texas, Florida and/or
Georgia and allegedly lost business or property due to defendants' business
practices. In September, 2000, the defendants filed a motion to dismiss the
Amended Complaint which remains pending before the Court. Because the Tennessee
Lawsuit is in a relatively preliminary stage, the Company is unable at this time
to assess the probable outcome of or potential liability arising from such
lawsuit.
Furthermore, in connection with the split-off, the Company agreed to
assume, to the extent permitted by law, and indemnify Olsten for, the above
lawsuits and arbitration proceedings, together with any other liabilities
arising out of the health services business before or after the split-off,
including any such liabilities arising after the split-off in connection with
the government investigations described below.
On January 28, 1999, Olsten announced that it had been advised by the
United States Attorney's Office for the District of New Mexico ("New Mexico U.S.
Attorney's Office") that it had dropped its criminal investigation into
allegations of improper billing and fraud against various federally funded
medical assistance programs by Quantum during the period between January 1992
and April 1997. By letter dated February 1, 1999, the New Mexico U.S. Attorney's
Office advised Olsten that, having ended its criminal inquiry, the Office had
referred the Quantum matter to its Affirmative Civil Enforcement Section. On
August 30, 2000, the Company entered into a settlement agreement with all
government agencies participating in the New Mexico U.S Attorney's Civil Office
investigation. Under the terms of the Agreement, the Company paid the government
$650,000, but denied all wrongdoing.
-27-
In early December 1999, Olsten received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. After preliminary discussions with the Office of Inspector
General, the Company believes the subpoena relates to an investigation of
possible overpayments to it by the Medicare program. In early February 2000, the
Company received a document subpoena from the Department of Health and Human
Services, Office of Inspector General, and Office of Investigations. The Company
believes the subpoena relates to its agencies' cost reporting procedures
concerning contracted nursing and home health aide costs. The Company has
provided and continues to provide the Office of Inspector General with the
requested documents and continues to cooperate fully with its investigations. At
this time, the Company is unable to assess the probable outcome or potential
liability, if any, arising from these subpoenas. The Company believes that it is
possible that one or more of these investigations may be triggered by lawsuits
under federal or state whistle blower statutes against Olsten or the Company.
The North Carolina Attorney General's Office has raised questions as to the
eligibility of a certain class of the Company's patients to receive
Medicaid-reimbursed home health services. The Company is in current negotiations
with the Office to resolve this inquiry.
-28-
In October 1998, in connection with its settlement of a government
investigation into the health care practices of Quantum Health Resources (a
subsidiary of the Company) for a period prior to 1997, Olsten executed a
corporate integrity agreement with the U.S. Department of Justice, the Office of
Inspector General of the U.S. Department of Health and Human Services, the U.S.
Secretary of Defense (for the CHAMPUS/Tricare Program) and the Attorneys General
for the States of New York and Oklahoma that will be in effect until December
31, 2001. Also, in connection with the July 19, 1999 settlement with various
government agencies, Olsten executed a separate 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. Under each of the
corporate integrity agreements, the Company is, for example, required:
o to maintain a corporate compliance officer to develop and implement
compliance programs;
o to retain an independent review organization to perform annual
reviews; and
o to maintain a compliance program and reporting systems, as well as
provide certain training to employees.
The October 1998 corporate integrity agreement applies to the Company's
specialty pharmaceutical services business and focuses on the training and
billing of blood factor products for hemophiliacs. The July 19, 1999 corporate
integrity agreement applies to the Company's businesses that bill the federal
government health programs directly for services, such as its home care nursing
business (but excluding the specialty pharmaceutical services business). That
corporate integrity agreement focuses on issues and training related to cost
report preparation, contracting, medical necessity and billing of claims.
The Company's compliance program will be implemented for all newly
established or acquired business units if their type of business is covered by
the corporate integrity agreements. Reports under each integrity agreement are
to be filed annually with the Department of Health and Human Services, Office of
Inspector General. After each corporate integrity agreement expires, the Company
is to file a final annual report with the government. If the Company fails to
comply with the terms of either of its corporate integrity agreements, the
Company will be subject to penalties ranging from $1,500 to $2,500 for each day
of the breach.
In March 2000, Gentiva was notified by the U.S. Department of Justice that,
in light of the Adecco/Olsten merger and the split-off of Gentiva as an
independent public company, the Company has been substituted for Olsten in
connection with the civil settlement and corporate integrity agreements
referenced in this Item 5-Other Information section.
-29-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to market risk for changes in interest rates related
primarily to the fair value of its fixed rate 4 3/4 percent convertible
subordinated debentures. These debentures were retired at maturity on October 2,
2000. Generally, the fair market value of fixed rate debt will increase as
interest rates fall and decrease as interest rates rise.
Based on the overall interest rate exposure on the Company's fixed rate
borrowings at October 1, 2000, a 10 percent change in market interest rates
would not have a material effect on the fair value of the Company's debt.
Based on variable rate debt levels, a 10 percent change in market interest
rates (90 basis points on a weighted average) would have less than a 1 percent
impact on the Company's interest expense, net.
Other than intercompany transactions between the Company and its Canadian
subsidiary, the Company generally does not have any transactions that are
denominated in a currency other than the functional currency applicable to each
entity.
Although currency fluctuations impact the Company's reported results of
operations, such fluctuations generally do not affect the Company's cash flow or
result in actual economic gains or losses. Each of the Company's subsidiaries
derives revenues and incurs expenses primarily within a single country and,
consequently, does not generally incur currency risks in connection with the
conduct of normal business operations. Fluctuations in currency exchange rates
may also impact the shareholders' equity of the Company. The assets and
liabilities of the Company's Canadian subsidiary are translated into U.S.
dollars at the exchange rates in effect at the balance sheet date. Revenues and
expenses are translated into U.S. dollars at the weighted average exchange rate
for the quarter. The resulting translation adjustments are recorded in
shareholders' equity as accumulated other comprehensive income (loss).
Foreign exchange gains and losses have not been significant. The Company
does not engage in hedging activities. The Company did not hold any derivative
instruments at October 1, 2000.
OTHER:
INFORMATION CONTAINED HEREIN, OTHER THAN HISTORICAL INFORMATION, SHOULD BE
CONSIDERED FORWARD-LOOKING AND IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES.
FOR INSTANCE, THE COMPANY'S STRATEGIES AND OPERATIONS INVOLVE RISKS OF
COMPETITION, CHANGING MARKET CONDITIONS, CHANGES IN LAWS AND REGULATIONS
AFFECTING THE COMPANY'S INDUSTRIES AND NUMEROUS OTHER FACTORS DISCUSSED IN THIS
DOCUMENT AND IN OTHER COMPANY FILINGS WITH THE SECURITIES
-30-
AND EXCHANGE COMMISSION. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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. Management
does not view any of these actions as likely to result in an uninsured award
that would be material to the Company.
In addition, there is presently pending in the U.S. District Court for the
Eastern District of New York a purported class action filed by some Olsten
stockholders against Olsten and some of its directors and officers, captioned In
re Olsten Corporation Securities Litigation, No. 97-5056 (the "Class Action").
The Class Action asserts claims for violations of the Securities Act and the
Securities Exchange Act, including claims that the directors and officers of
Olsten misrepresented information to stockholders relating to the government
investigations into Olsten's health services business described in Item 5 -
Other Information. There is also pending in the Delaware Chancery Court a
purported derivative lawsuit filed by some Olsten stockholders against some
directors and officers of Olsten (and Olsten, as nominal defendant), captioned
Rubin v. May, No. 17135-NC (the "Derivative Lawsuit"). This Derivative Lawsuit
alleges that the Olsten directors and officers breached their fiduciary duties
to stockholders in connection with the Class Action and the below-described
government investigations. As a result of their participation in a mediation
process supervised by a third-party mediator, the parties to the Class Action
and the Derivative Lawsuit recently agreed in principle to settle both lawsuits
for the aggregate sum of $25 million. The Company's insurers have agreed to
contribute $18 million of the settlement sum and the Company has agreed to
contribute the remaining $7 million. The settlement reached by the parties is
subject to, among other things, the parties' execution of formal settlement
agreements and obtaining the approval of the respective courts before which the
Class Action and the Derivative Lawsuit are pending.
In July 1999, the Indiana Attorney General's Office filed a lawsuit against
Olsten in Indiana Superior Court, captioned State of Indiana v. Quantum Health
Resources, Inc. and Olsten Health Services, Inc., No. 49D029907CP001011,
alleging that Olsten was overpaid by Medicaid, failed to properly disclose
information to Medicaid and engaged in improper billing. The parties are
engaging in discussions in an attempt to resolve this matter.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly") initiated
three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare
Corp. ("Columbia/HCA") with which Kimberly had management services agreements to
provide services to the hospitals' home health agencies. The basis for each of
the arbitrations is that Columbia/HCA sold the home health agencies without
assigning the management services
-31-
agreements and, as a result, Columbia/HCA has breached the management services
agreements. In response to the arbitrations, Columbia/HCA has asserted that the
arbitration be consolidated and stayed, in part based upon its alleged claims
against Kimberly for breach of contract, and requested indemnity and possibly
return of management fees. Columbia/HCA has not yet formally presented these
claims in the arbitrations or other legal proceedings, and has not yet
quantified the claims. The parties agreed to suspend the proceedings until
January 2001.
On June 23, 2000, the Company was served with a Complaint in a purported
class action lawsuit filed by Ultimate Home Health Care Inc. in the U.S.
District Court for the Middle District of Tennessee (the "Tennessee Lawsuit").
The Company was served with an Amended Complaint in the Tennessee Lawsuit on
July 21, 2000. The Amended Complaint, which names as defendants Columbia/HCA,
Columbia Homecare Group, Olsten Health Management a/k/a Hospital Contract
Management Services (one of the Company's subsidiaries) and Olsten Corporation,
alleges, among other things, that the defendants' business practices in
connection with the home health care patient referrals during the 1994 and 1996
time period violated provisions of Federal antitrust laws, the Racketeer
Influenced and Corrupt Organizations Act, the Tennessee Consumer Protection Act,
and the common law of Tennessee, Texas, Georgia and Florida. The Complaint seeks
unspecified compensatory damages, punitive damages, treble damages and
attorneys' fees on behalf of a proposed class of home healthcare companies
and/or agencies which conducted business in Tennessee, Texas, Florida and/or
Georgia and allegedly lost business or property due to defendants' business
practices. In September, 2000, the defendants filed a motion to dismiss the
Amended Complaint which remains pending before the Court. Because the Tennessee
Lawsuit is in a relatively preliminary stage, the Company is unable at this time
to assess the probable outcome of or potential liability arising from such
lawsuit.
Furthermore, in connection with the split-off, the Company agreed to
assume, to the extent permitted by law, and indemnify Olsten for, the above
lawsuits and arbitration proceedings, together with any other liabilities
arising out of the health services business before or after the split-off,
including any such liabilities arising after the split-off in connection with
the government investigations described below.
Reference is made to the descriptions of legal proceedings in the Company's
Annual Report on Form 10-K for the year ended January 2, 2000.
Item 2. Change in Securities and Use of Proceeds
In March 2000, the Company sold 100 shares of its Series A Cumulative
Non-Voting Redeemable Preferred Stock in exchange for services in the amount of
$100,000. In March 2000, a subsidiary trust of the Company issued $20 million of
10% convertible trust preferred securities to certain of the Company's and
Olsten's directors, officers and management, other related parties and other
investors. The trust used the $20 million of gross proceeds to purchase $20
million of the Company's 10% Convertible Subordinated Debentures. The Com-
-32-
pany used the net proceeds of the transaction to pay Olsten the amount owed for
the intercompany balance and for other corporate purposes. The above issuances
were made in reliance on the exemption from registration provided in Section
4(2) of the Securities Act.
Reference is made to the notes to the Consolidated Financial Statement in
this Form 10-Q for a further description of the above securities.
Item 3. Defaults Upon Senior Securities
None. Reference is made to Note 5 of Item 1.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
On January 28, 1999, Olsten announced that it had been advised by the
United States Attorney's Office for the District of New Mexico ("New Mexico U.S.
Attorney's Office") that it had dropped its criminal investigation into
allegations of improper billing and fraud against various federally funded
medical assistance programs by Quantum during the period between January 1992
and April 1997. By letter dated February 1, 1999, the New Mexico U.S. Attorney's
Office advised Olsten that, having ended its criminal inquiry, the Office had
referred the Quantum matter to its Affirmative Civil Enforcement Section. On
August 30, 2000, the Company entered into a settlement agreement with all
government agencies participating in the New Mexico U.S Attorney's Civil Office
investigation. Under the terms of the Agreement, the Company paid the government
$650,000, but denied all wrongdoing.
In early December 1999, Olsten received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, and Office
of Investigations. After preliminary discussions with the Office of Inspector
General, the Company believes the subpoena relates to an investigation of
possible overpayments to it by the Medicare program. In early February 2000, the
Company received a document subpoena from the Department of Health and Human
Services, Office of Inspector General, and Office of Investigations. The Company
believes the subpoena relates to its agencies' cost reporting procedures
concerning contracted nursing and home health aide costs. The Company has
provided and continues to provide the Office of Inspector General with the
requested documents and continues to cooperate fully with its investigations. At
this time, the Company is unable to assess the probable outcome or potential
liability, if any, arising from these subpoenas. The Company believes that it is
possible that one or more of these investigations may be triggered by lawsuits
under federal or state whistle blower statutes against Olsten or the Company.
The North Carolina Attorney General's Office has raised questions as to the
eligibility of a certain class of the Company's patients to receive
Medicaid-reimbursed home health services. The Company is in current negotiations
with the Office to resolve this inquiry.
-33-
In October 1998, in connection with its settlement of a government
investigation into the health care practices of Quantum Health Resources (a
subsidiary of the Company) for a period prior to 1997, Olsten executed a
corporate integrity agreement with the U.S. Department of Justice, the Office of
Inspector General of the U.S. Department of Health and Human Services, the U.S.
Secretary of Defense (for the CHAMPUS/Tricare Program) and the Attorneys General
for the States of New York and Oklahoma that will be in effect until December
31, 2001. Also, in connection with the July 19, 1999 settlement with various
government agencies, Olsten executed a separate 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. Under each of the
corporate integrity agreements, the Company is, for example, required:
o to maintain a corporate compliance officer to develop and implement
compliance programs;
o to retain an independent review organization to perform annual
reviews; and
o to maintain a compliance program and reporting systems, as well as
provide certain training to employees.
The October 1998 corporate integrity agreement applies to the Company's
specialty pharmaceutical services business and focuses on the training and
billing of blood factor products for hemophiliacs. The July 19, 1999 corporate
integrity agreement applies to the Company's businesses that bill the federal
government health programs directly for services, such as its home care nursing
business (but excluding the specialty pharmaceutical services business). That
corporate integrity agreement focuses on issues and training related to cost
report preparation, contracting, medical necessity and billing of claims.
The Company's compliance program will be implemented for all newly
established or acquired business units if their type of business is covered by
the corporate integrity agreements. Reports under each integrity agreement are
to be filed annually with the Department of Health and Human Services, Office of
Inspector General. After each corporate integrity agreement expires, the Company
is to file a final annual report with the government. If the Company fails to
comply with the terms of either of its corporate integrity agreements, the
Company will be subject to penalties ranging from $1,500 to $2,500 for each day
of the breach.
In March 2000, Gentiva was notified by the U.S. Department of Justice that,
in light of the Adecco/Olsten merger and the split-off of Gentiva as an
independent public company, the Company has been substituted for Olsten in
connection with the civil settlement and corporate integrity agreements
referenced in this Item 5-Other Information section.
Reference is made to the full descriptions of government investigations in
the Company's Annual Report on the Form 10-K for the year ended January 2, 2000.
-34-
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
3.1 Restated Certificate of Incorporation of Company. (1)
3.2 Restated By-Laws of Company. (1)
4.1 Specimen of common stock. (3)
4.2 Indenture dated October 8, 1993, between Quantum Health
Resources Inc. and First Trust National Association, as
Trustee. (1)
4.3 Supplemental Indenture dated June 28, 1996, between
Quantum Health Resources Inc. and First Trust National
Association, as Trustee. (1)
4.4 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock. (2)
4.5 Form of Certificate of Designation of Series A Cumulative
Non-Voting Redeemable Preferred Stock. (2)
4.6 Second Supplemental Indenture dated March 15, 2000,
between Quantum Health Resources, Inc. and U.S. Bank
Trust National Association (formerly known as First Trust
National Association) as Trustee. (5)
4.7 Trust Agreement among the Company, Wilmington Trust
Company, the Administrative Trustees named therein and
the holders from time to time of the convertible trust
preferred securities dated March 9, 2000. (5)
4.8 Indenture between the Company and Wilmington Trust
Company dated March 15, 2000. (5)
10.1 Separation Agreement dated August 17, 1999, among Olsten
Corporation, Aaronco Corp. and Adecco SA. (1)
10.2 Omnibus Amendment No. 1 dated October 7, 1999, by and
among Olsten Corporation, Aaronco Corp., Adecco SA and
Olsten Health Services Holding Corp. (1)
10.3 Form of Rights Agreement dated March 2, 2000 between the
Registrant and Equiserve Limited Partnership, as rights
agent. (1)
10.4 Company's Executive Officers Bonus Plan. (1)
10.5 Company's 1999 Stock Incentive Plan. (5)
10.6 Company's stock & Deferred Compensation Plan for
Non-Employee Directors. (5)
10.7 Company's Employee Stock Purchase Plan. (1)
10.8 Omnibus Amendment No. 2 dated January 18, 2000, by and
among Olsten Corporation, Adecco SA, Olsten Health
Services Holding Corp., the Company and Staffing
Acquisition Corporation. (1)
-35-
10.9 Loan and Security Agreement by and between Fleet Capital
Corp., on behalf of the lenders named therein, the
Company, Olsten Health Services Holding Corp. and the
subsidiaries named therein, dated March 13, 2000. (5)
10.10 Form of Employment Agreement with Edward A. Blechschmidt.
(2)
10.11 Form of Change of Control Agreement with Executive
Officers of Company. (5)
10.12 Form of Change in Control Agreement with Edward A.
Blechschmidt. (5)
10.13 Form of Severance Agreement with Executive Officers of
Company. (2)
10.14 Amendment No. 1 dated June 30, 2000 to Trust Agreement
among the Company, Wilmington Trust Company, the
Administrative Trustees named therein and the holders
from time to time of the convertible trust preferred
securities. (6)
10.15 Amendment No. 1 dated June 30, 2000 to Indenture between
the Company and Wilmington Trust Company. (6)
10.16 First Amendment and Consent Agreement dated September 15,
2000 to the Loan Agreement by and among the lending
institutions named therein, Fleet Capital Corporation,
the Company, Olsten Health Services Holding Corp. and the
subsidiaries named therein.
10.17 Purchase and Sale Agreement dated August 25, 2000 by and
between the Company and Intelistaf Group, Inc. (formerly
known as GS Acquisition Co.)
21.1 List of Subsidiaries of Company. (2)
27 Financial Data Schedule.
(1) Incorporated herein by reference to Amendment No. 2 to
the Registration Statement on Form S-4, dated January 20,
2000 (File No. 333-88663).
(2) Incorporated herein by reference to Amendment No. 3 to
the Registration Statement on Form S-4, dated February 4,
2000 (File No. 333-88663).
(3) Incorporated herein by reference to Amendment No. 4 to
the Registration Statement on Form S-4, dated February 9,
2000 (File No. 333-88663).
(4) Incorporated herein by reference to the Post-Effective
Amendment No. 1 on Form S-8 to Form S-4 dated March 27,
2000 (File No. 333-88663).
(5) Incorporated herein by reference to the Form 10-K for the
Registrant for the Fiscal Year ended January 2, 2000.
(6) Incorporated herein by reference to Form 10-Q for the
Regis-
-36-
trant for the period ended July 2, 2000.
(b) Reports on Form 8-K
Registrant filed a report on Form 8-K dated August 25, 2000, related to the
sale of its health care staffing services business.
Exhibit Index
Exhibit Description
27 Financial Data Schedule
-37-
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.
Date: November 16, 2000 /s/ Edward A. Blechschmidt
---------------------------
Edward A. Blechschmidt
President and Chief Executive
Officer
Date: November 16, 2000 /s/ John J. Collura
----------------------------------
John J. Collura
Executive Vice President,
Chief Financial Officer and
Treasurer
-38-