SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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, New York 11747-8943
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.10 per share NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the registrant's common equity (Common Stock)
held by non-affiliates of the registrant as of March 23, 2001 was $351,163,599
based on the closing price of the Common Stock on The Nasdaq National Market on
such date.
The number of shares outstanding of the registrant's Common Stock, as of
March 23, 2001, was 21,952,715.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information to be included in the registrant's definitive Proxy
Statement, to be filed not later than 120 days after the end of the fiscal year
covered by this Report, for registrant's 2001 Annual Meeting of Shareholders is
incorporated by reference into PART III hereof.
Information contained in this Report, other than historical information,
should be considered forward-looking and is subject to various risk factors and
uncertainties. For instance, the Company's strategies and operations involve
risks of competition, changing market conditions, changes in laws and
regulations affecting it and the health care industry and numerous other factors
discussed in this Report and in the registrant's filings with the Securities and
Exchange Commission. Accordingly, actual results may differ materially from
those in any forward-looking statements.
PART I
Item 1. Business.
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Introduction
Gentiva Health Services, Inc. ("Gentiva" or the "Company") became an
independent publicly owned company on March 15, 2000, when all of the common
stock of the Company was issued to the stockholders of Olsten Corporation, a
Delaware corporation ("Olsten"), the former parent corporation of the Company
(the "Split-Off"). Prior to the Split-Off, all of the assets and liabilities of
Olsten's health services business (formerly known as Olsten Health Services)
were transferred to the Company pursuant to a separation agreement and other
agreements between Gentiva, Olsten and Adecco SA ("Adecco"). Gentiva was
incorporated in the state of Delaware on August 6, 1999.
The Company operates its health services business in the United States
and provides specialty pharmaceutical services (including infusion therapy and
distribution services) and home health care services.
Specialty Pharmaceutical Services
The Company's specialty pharmaceutical services business is coordinated
through its network of 39 pharmacies across the United States and generally
includes:
o 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;
o the administration of antibiotics, chemotherapy, nutrients and other
medications for patients with acute or episodic disease states;
o marketing and distribution services for pharmaceutical, biotechnology
and medical service firms; and
o delivery, management and administration of its products in the home
setting and evaluation of equipment needs of the patient.
The specialty pharmaceutical services business provides a wide range of
home infusion therapies. Home infusion therapy involves the administration of
medications intravenously (into veins), subcutaneously (under the skin),
intramuscularly (into muscle), intraecally or epidurally
(via spinal routes) or through feeding tubes into the digestive tract. Infusion
therapy often begins during hospitalization of a patient and continues in the
home environment.
The Company's specialty pharmaceutical services business also addresses
therapeutic, socioeconomic, psychosocial and professional support needs for
individuals with some of the following rare, chronic diseases:
o Hemophilia, which is a hereditary bleeding disorder in which a plasma
protein, known as factor, necessary for normal blood clotting, is
either missing or dysfunctional. Hemophilia is treated by
intravenously infusing anti-hemophilic factor, consisting of factor
concentrates and sterile water, to replace deficient clotting factor.
This disease is diagnosed at birth and has no known cure, but
hemophiliacs can lead relatively long and healthy lives with proper
treatment.
o Primary pulmonary hypertension, which is a chronic pulmonary disease
for which there is no known cure. This disease is treated by the
infusion of Flolan, which is an epoprostenol sodium product, for a
patient's lifetime or until the patient receives a lung transplant.
o Immunodeficiency/autoimmune disorders, which are a classification of
chronic disorders arising when the body's immune system fails to
produce sufficient antibodies to protect against infection. These
disorders include multiple sclerosis, myasthenia gravis and lupus.
These disorders are generally incurable, but the symptoms can be
treated with a therapy consisting of intravenous immune globulin
prepared from human plasma (IVIG).
o Growth disorders, which result from damage to or malformation of
either the hypothalamus or the pituitary gland. This disorder is
treated by injecting growth hormone therapy into the patient.
Some of the Company's other significant specialty pharmaceutical services
also include:
o Antibiotic therapies, which are the infusion of antibiotic medications
into a patient's bloodstream. These medications are typically used to
treat a variety of serious infections and diseases.
o Total Parenteral Nutrition (TPN), which is the long-term provision of
nutrients for patients with chronic gastrointestinal conditions. These
nutrients are infused through surgically implanted central vein
catheters or through peripherally inserted central catheters. Enteral
nutrition is the infusion of nutrients through a feeding tube inserted
directly into a patient's digestive tract. This long-term therapy is
prescribed for patients who are unable to eat and drink normally.
o Chemotherapy, which is the infusion of drugs in a patient's
bloodstream to treat various forms of cancer.
o Pain management, which involves the infusion of certain drugs into the
bloodstream of patients suffering from acute or chronic pain.
o Wholesale distribution of various pharmaceutical products.
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Home Health Care Services
The Company's home health care services business is conducted through more
than 275 locations, of which 98% are accredited by the Joint Commission on
Accreditation of Healthcare Organizations (JCAHO). These locations offer a broad
range of services including:
o General skilled nursing care that is provided by registered nurses and
licensed practical nurses who assess the appropriateness of home
health care, including the family and home environment for patients,
and perform clinical procedures and instruct the patient and family
regarding necessary treatments. Patients receiving this care typically
include stabilized post-operative patients in recovery at home,
patients who are acutely ill but who do not require hospitalization
and patients who are chronically or terminally ill.
o Pediatric services consisting of nursing services specializing in care
for children.
o Rehabilitation services consisting of programs and services that
address a wide range of neurologic and orthopedic diagnoses, including
head or traumatic brain injuries, spinal cord injuries and other
complex rehabilitation cases.
o Other therapy services that consist of physical, occupational, speech
and respiratory therapy to patients recovering from strokes, traumas
or certain surgeries, services for high-risk pregnancies, post-partum
care, mental health care, AIDS therapy and various medical social
services.
o Disease management and wound care programs that are administered by
nurses who provide specialty care regimens to patients in their home.
These nurses instruct patients and their families in the
self-administration of some therapies and procedures, such as
infection control, emergency procedures and the proper handling and
usage of medication, medical supplies and equipment as well as teach
disease state management programs at home to patients with asthma,
diabetes and other illnesses.
o Home health aide care that involves basic patient care from taking
temperatures and blood pressure to assisting with daily living
activities. The Company's home health aides must pass certain
competency tests and are supervised by registered nurses.
o Personal care services consisting of homemaker services which are
provided to the elderly or the disabled. These services may include
housekeeping, shopping and assistance with personal hygiene, dressing
and meals.
Through four regional centers in the United States, the Company provides
care management and coordination for managed care customers desiring referrals,
centralized intake and billing claims adjustment, utilization review, quality
assurance and data reporting and analysis.
Staffing Services
On October 27, 2000, the Company sold its staffing services business to a
company formed by InteliStaf Holdings, Inc. and the Carlyle Group and received
$66.5 million, subject to
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certain post closing adjustments. The Company's staffing services business
provided services to institutions and occupational and alternate site healthcare
organizations by providing health care professionals to meet supplemental
staffing needs. The Company retained certain business relating to the conduct
of clinical trials, research projects, educational programs and the promotion
and launching of drugs and devices.
Canadian Operations
On November 20, 2000, the Company sold its home health operations in Canada
to Bayshore Health Group for cash plus a 19.9% interest in Bayshore.
Payors
In fiscal years 2000 and 1999, approximately 63 percent and 64 percent,
respectively, of the Company's revenues were attributable to commercial pay
sources, 21 percent and 20 percent, respectively, of the Company's revenues were
attributable to Medicaid reimbursement, state reimbursed programs and other
state/county funding programs, and 16 percent and 16 percent, respectively, of
the Company's revenues were attributable to Medicare reimbursement. In fiscal
years 2000 and 1999, Cigna Healthcare accounted for approximately 15 percent and
11 percent, respectively, of revenues. The Company has renewed its contract with
Cigna Healthcare for the sixth consecutive year, with the current contract
expiring on December 31, 2001, with an option to renew. Except for these payors,
no other payor accounts for 10 percent or more of the Company's revenues. The
revenues from commercial payors are primarily generated under fee for service
contracts which are traditionally one year in term and renewable automatically
on an annual basis, unless terminated by either party. In all instances,
revenues include staffing services revenues.
Source and Availability of Personnel
Specialty pharmaceutical services. Employees are generally full-time,
salaried personnel and include licensed professionals, such as pharmacists and
nurses. Employees are recruited through various means, including advertising in
local and national media, job fairs and solicitations on web sites. The Company
believes that the specialty pharmaceutical services industry, as a whole, is
experiencing some shortage of pharmacists. However, the Company has been able to
recruit personnel successfully under current economic conditions.
Home health care services. To maximize the cost effectiveness and
productivity of caregivers, the Company utilizes customized systems and
procedures that have been developed and refined over the years. Personalized
matching to recruit and select applicants who fit the patients' individual needs
is achieved through initial applicant profiles, personal interviews, skill
evaluations and background and reference checks. Caregivers are recruited
through a variety of sources, including advertising in local and national media,
job fairs, solicitations on web sites, direct mail and telephone solicitations,
as well as referrals obtained directly from clients and other caregivers.
Caregivers are generally paid on a per visit basis or on an hourly basis for
time actually worked. The Company also employs full-time, salaried caregivers.
In certain areas of the United States, the Company, along with its competitors,
is currently experiencing a shortage of licensed professionals. A continued
shortage of professionals could have a material adverse effect on the Company's
business.
Trademarks
The Company has various trademarks registered with the U.S. Patent and
Trademark Office, including REHAB WITHOUT WALLS(R) and CHRONICARE(R) or in the
process of being registered with the U.S. Patent and Trademark Office, including
CARECENTRIX(SM), CARE YOU CAN COUNT ON(SM) and GENTIVA(SM). In addition, the
Company had a royalty-
4
free license from Olsten which permitted the Company to use, until March 15,
2001, some trademarks, service marks and names that were not transferred to the
Company in the Split-Off, including OLSTEN(R). Since the Split-Off, the Company
has developed and intends to continue to develop its Gentiva name and its health
services business trademarks.
Business Environment
Specialty pharmaceutical services. The specialty pharmaceutical services
industry has been and is fueled by significant developments of new drugs and
therapies by biotechnology and pharmaceutical manufacturers. Many of these drugs
and therapies require specialized storage, distribution and handling by
specialty pharmaceutical services companies. In addition, the complexity of
these therapies often requires properly trained nurses and pharmacists to
administer and monitor the therapies for the patients. The Company believes that
these factors will continue to spur the growth of this industry.
Home health care services. Factors that the Company believes have
contributed and will contribute to the development of home health care in
particular include recognition that home health care can be a cost-effective
alternative to lengthy, more expensive institutional care; an aging population;
increasing consumer awareness and interest in home health care; the
psychological benefits of recuperating from an illness or accident in one's own
home; and advanced technology that allows more health care procedures to be
provided at home.
The Company is actively pursuing relationships with managed care
organizations. The Company believes that its nationwide office network,
financial resources and the quality, range and cost-effectiveness of its
services are important factors as it seeks opportunities in its managed care
relationships in a consolidating home health care industry. The Company offers
the direct and managed provision of care as a single source, thereby optimizing
utilization.
Marketing and Sales
Specialty pharmaceutical services. The Company seeks to grow its specialty
pharmaceutical services through a business development team which is responsible
for tracking new biological drugs and negotiating distribution arrangements for
those drugs. The Company also supports its sales efforts of pharmaceuticals with
sales representatives who market the Company's services directly to hospitals,
physician groups, and managed care.
Home health care services. In general, the Company obtains clients through
personal and corporate sales presentations, telephone marketing calls, direct
mail solicitation, referrals from other clients and advertising in a variety of
local and national media, including the Yellow Pages, newspapers, magazines,
trade publications and television. The Company also maintains an Internet web
site that describes the Company, its services and products. Marketing efforts
also involve personal contact with case managers for managed health care
programs, such as those involving health maintenance organizations and preferred
provider organizations, insurance company representatives and employers with
self-funded employee health benefit programs. The Company does not seek
reimbursement from government payors for unallowable marketing and sales
expenses.
The Company expects managed care contracts will generate an increasing
number of referrals as the penetration of managed care accelerates in its
markets. The Company believes that it has the local relationships, the knowledge
of the regional markets in which it operates, and the cost-effective,
comprehensive services and products required to compete effectively for managed
care contracts and other referrals.
The Company believes that its success in furnishing caregivers is based,
among other factors, on its reputation for quality and local market expertise
combined with the resources of
5
an extensive office network. The Company also empowers its branch directors with
a high level of responsibility, providing strong incentives to manage the
business effectively at the local level, one of the central ingredients in a
business where relationships are vital to success.
Competitive Position
Specialty pharmaceutical services. The specialty pharmaceutical services
business is highly competitive. Companies engaged in this business include
national chain pharmacies, mail order pharmacies, hospital-based pharmacies and
specialty pharmaceutical distributors. The Company's primary national
competitors are Caremark RX, Inc. (CTS), Accredo Health, Incorporated and
Priority Healthcare Corporation. The Company believes that it currently has
approximately an 11% market share in specialty pharmaceutical services.
Competition is based on quality of care and service offerings, as well as upon
patient and referral source relationships, price and reputation.
Home health care services. The segments of the home health care industry in
which the Company operates are also highly competitive and fragmented. Home
health care nursing providers range from facility-based (hospital, nursing home,
rehabilitation facility, government agency) agencies to independent companies to
visiting nurse associations and nurse registries. They can be not-for-profit
organizations or for-profit organizations. In addition, there are relatively few
barriers to entry in some segments of the home health care market in which the
Company operates. The Company's primary competitors for its home health care
nursing services business are hospital-based home health agencies and visiting
nurse associations. The Company holds the number one market position in home
health care nursing, which it believes to be currently approximately a 2% market
share. The Company believes that no other entity holds more than a 1% share in
home health care nursing. The Company competes with other home health care
providers on the basis of availability of personnel, quality and expertise of
services and the value and price of services. The Company believes that it has a
favorable competitive position, attributable mainly to its widespread office
network and the consistently high quality and targeted services it has provided
over the years to its patients, as well as to its screening and evaluation
procedures and training programs for caregivers.
The Company expects that industry forces will impact it and its
competitors. The Company's competitors will likely strive to improve their
service offerings and price competitiveness. The Company also expects its
competitors to develop new strategic relationships with providers, referral
sources and payors, which could result in increased competition. The
introduction of new and enhanced services, acquisitions and industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's services or price competition, or make the Company's services less
attractive.
Number of Persons Employed
At December 31, 2000, the Company had approximately 4,350 full-time
administrative staff and 450 full-time caregivers. The Company also employs
caregivers on a temporary basis, as needed, to provide home health care
services. In fiscal 2000, the average number of temporary caregivers employed on
a weekly basis was approximately 16,500. The Company believes that its
relationships with its employees are generally good. The Company believes that
it maintains insurance coverages that are adequate for the purpose of its
business.
The Services' Employees International Union, Local 880 filed a
representation petition with the National Labor Relations Board (NLRB) in August
1999 covering three home health services offices in Chicago, Illinois with about
700 caregivers. Two elections have been held at which employees voted against
the representation. Following the most recent election in June
6
2000, the union filed objections to the vote, which the NLRB Hearing Officer
rejected. The union has appealed that decision, and if it prevails on appeal
another election will be held.
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For a discussion of certain regulations to which the Company's business is
subject, see "Regulations" under Item 3, PART I below.
Selected financial information relating to the Company's industry segments
is found in Note 14 of Notes to Consolidated Financial Statements of the Company
and its subsidiaries, which are included in this Report.
Item 2. Properties.
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The Company headquarters is leased and is located at 3 Huntington
Quadrangle 2S, Melville, New York 11747-8943. Other major regional
administrative offices leased by the Company are located in Overland Park,
Kansas and Tampa, Florida. The Company also maintains leases for other offices
and locations on various terms expiring on various dates. Prior to November 15,
2000, the Company leased its corporate headquarters space at 175 Broad Hollow
Road, Melville, New York from Olsten.
Item 3. Legal Proceedings.
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Litigation
In addition to the matters referenced in this Item 3, the Company is party
to certain legal actions arising in the ordinary course of business including
legal actions arising out of services rendered by its various operations,
personal injury and employment disputes.
In late 2000, after engaging in a mediation conducted by a third-party
mediator, the parties to the previously disclosed Class Action (In re Olsten
Corporation Securities Litigation, No. 97-CV-5056 (DRH), U.S. District Court for
the Eastern District of New York) and Derivative Lawsuit (Rubin v. May, No.
17135-NC, Delaware Chancery Court) reached an agreement in principle to settle
both lawsuits for the aggregate sum of $25 million. Finalization of the proposed
settlement is subject to the approval of the respective courts before which the
Class Action and the Derivative Lawsuit are pending. The Company's insurers have
funded $18 million of the proposed settlement sum; the $7 million balance was
funded by the Company, in each case subject to return of funds if the settlement
is not approved.
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 alleged violations
predate Olsten's acquisition of Quantum Health Resources in June 1996. The
lawsuit seeks unspecified monetary damages, double or treble damages, penalties
and investigative costs. The parties are engaging in discussions in an attempt
to resolve this matter.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of
the Company's subsidiaries, initiated three arbitration proceedings against
hospitals owned by
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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 agreements and,
as a result, Columbia/HCA has breached the management services agreements. In
response to the arbitrations, Columbia/HCA has asserted that the arbitrations 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.
Currently pending before one of the arbitrators is Columbia/HCA's request to
consolidate the proceedings, which Kimberly has opposed. There has been no other
development in this matter.
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, captioned Ultimate Home
Health Care, Inc. v. Columbia/HCA Healthcare Corp., No. 3-00-0560, (the
"Tennessee Lawsuit"). The Company was served with an Amended Complaint in the
Tennessee Lawsuit on July 21, 2000, 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.
The Amended Complaint alleges, among other things, that the defendants' business
practices in connection with home health care patient referrals between 1994 and
1996 violated provisions of Federal antitrust laws, the Racketeer Influenced and
Corrupt Organizations Act (RICO), the Tennessee Consumer Protection Act (TCPA),
and state common law. The Amended 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. In September 2000, the
defendants filed a motion to dismiss the Amended Complaint, and by an order
dated January 21, 2001, the Court dismissed plaintiffs' RICO and state common
law tort claims. The Court also held that the plaintiffs had properly pleaded
the antitrust, TCPA and civil conspiracy claims and allowed those claims to
proceed to discovery. 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.
On November 22, 2000, the jury in an age-discrimination lawsuit commenced
in 1998, captioned Fredrickson v. Olsten Health Services Corp. and Olsten
Corporation, Case No. 98 CV 1937, Court of Common Pleas, Mahoning County, Ohio
(the "Fredrickson Lawsuit"), returned a verdict in favor of the plaintiff
against Olsten consisting of $675,000 in compensatory damages, $30 million in
punitive damages and an undetermined amount of attorneys' fees. The jury found
that, although Olsten had lawfully terminated the plaintiff's employment, its
failure to transfer or rehire the plaintiff rendered Olsten liable to the
plaintiff. In vigorously contesting the verdict and judgment, the defendants
posted a bond ordered by the trial court in the amount of $675,000 and filed
with that court several post-trial motions, including a motion seeking the entry
of judgment in the defendants' favor notwithstanding the verdict or, in the
alternative, a new trial or a remittitur of the punitive damages award. The
plaintiff has filed post-trial motions in connection with the entry of the
judgment and the amount of the bond posted by defendants. A hearing before the
trial court on the parties' respective post-trial motions was held on March 23,
2001. The decision on the hearing is pending.
Furthermore, in connection with the Split-Off, the Company agreed to
assume, to the extent permitted by law, the liabilities, if any, arising out of
(and to indemnify Olsten for) the above lawsuits and arbitration proceedings and
other liabilities arising out of the health services
8
business, including any such liabilities arising after the Split-Off in
connection with the government investigations described below.
Government Investigations
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 both of these investigations may have been triggered by
lawsuits under federal or state whistle blower statutes against Olsten or the
Company.
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. 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.
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. The July 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).
This corporate integrity agreement focuses on issues and training related to
cost report preparation, contracting, medical necessity and billing of claims.
Under each of the corporate integrity agreements, the Company is required,
for example, to maintain a corporate compliance officer to develop and implement
compliance programs, to retain an independent review organization to perform
annual reviews and to maintain a compliance program and reporting systems, as
well as provide certain training to employees.
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. The Company is in
compliance with both corporate integrity agreements and has timely filed all
required reports. If the Company fails to comply with the terms of either of its
corporate integrity agreements, the
9
Company will be subject to penalties.
On August 30, 2000, the Company entered into a settlement agreement with
all government agencies participating in the New Mexico United States Attorney's
civil office investigation of certain billing practices by Quantum Health
Resources during the period between January 1992 and April 1997. Under the terms
of this agreement, the Company paid the government $650,000 but denied all
wrongdoing.
In December 2000, the Company resolved an inquiry by the North Carolina
Attorney General's Office as to the eligibility of a certain class of the
Company's patients to receive Medicaid-reimbursed home health services. The
Company paid $50,000 in settlement without any admission of liability and was
given a full release.
Regulations
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
o Medicare, Medicaid, CHAMPUS and other government-funded reimbursement
programs;
o reporting requirements, certification and licensing standards for
certain home health agencies; and
o in some cases, certificate-of-need and pharmacy-licensing
requirements.
The Company's compliance with these regulations may affect its
participation in Medicare, Medicaid, CHAMPUS and other federal health care
programs. The Company is also subject to a variety of federal and state
regulations which prohibit fraud and abuse in the delivery of health care
services. These regulations include, among other things:
o prohibitions against the offering or making of direct or indirect
payments for the referral of patients;
o rules against physicians making referrals under Medicare for clinical
services to a home health agency with which the physician has certain
types of financial relationship; and
o laws against the filing of false claims.
As part of the extensive federal and state regulation of the home health
care business and under the Company's corporate integrity agreements, the
Company is subject to periodic audits, examinations and investigations conducted
by, or at the direction of, governmental investigatory and oversight agencies.
Violation of the applicable federal and state health care regulations can result
in excluding a health care provider from participating in the Medicare, Medicaid
and/or CHAMPUS programs and can subject the provider to substantial civil and/or
criminal penalties.
Periodic and random audits conducted by intermediaries may result in a
delay in receipt, or an adjustment to the amounts of reimbursement due or
received under Medicare, Medicaid, CHAMPUS and other federal health care
programs. The Company received notices of program reimbursement from its
Medicare fiscal intermediary indicating that the intermediary disagreed with the
Company's methodology of allocating a portion of its residual overhead in its
1997 and 1998 Medicare cost reports. The intermediary completed its audit,
finalized such cost reports and withheld reimbursement to the Company relating
to this issue. The Company believes its
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methodology used to allocate such overhead cost was accurate and consistent with
past practice accepted by the fiscal intermediary and has filed appeals of this
decision with the Provider Reimbursement Review Board. The Company is unable to
predict the outcome of these appeals. However, the Company has made appropriate
provision for the disallowance of such cost in its consolidated financial
statements.
Item 4. Submission of Matters to a Vote of Security Holders.
---------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 2000.
Item 4(a). Executive Officers of the Company.
---------------------------------
The following table sets forth certain information regarding each of the
Company's executive officers as of March 23, 2001:
Executive Officer Position and Offices with
Name Since Age the Company
---- ----------------- --- --------------------------
Edward A. Blechschmidt 1999 48 President, Chief Executive
Officer and Chairman of the
Board of Directors
John J. Collura 1999 54 Executive Vice President,
Chief Financial Officer and
Treasurer
Ronald A. Malone 2000 46 Executive Vice President
and President, Home Health
Division
Robert J. Nixon 1999 44 Executive Vice President
and President, Specialty
Pharmaceutical Division
Richard C. Christmas 1999 46 Senior Vice President and
Chief Information Officer
E. Rodney Hornbake, M.D. 2000 50 Senior Vice President and
Chief Medical Officer
Patricia C. Ma 1999 39 Senior Vice President,
General Counsel and
Secretary
Vernon A. Perry 1999 49 Senior Vice President -
Nursing Services
David C. Silver 2000 58 Senior Vice President -
Human Resources
The executive officers are elected annually by the Board of Directors.
Edward A. Blechschmidt
Mr. Blechschmidt has served as president, chief executive officer and
chairman of the board of directors of the Company since November 1999. He served
as the chief executive officer and a director of Olsten from February 1999 until
March 2000. He was also the president of Olsten from October 1998 until March
2000 and served as the chief operating officer of Olsten from October 1998 to
February 1999. From August 1996 to October 1998 he was president and chief
executive officer of Siemens Nixdorf Americas, an information technology
company. From January 1996 to July 1996 he was senior vice president and chief
financial officer of Unisys Corporation, a provider of information technology
and consulting services.
11
John J. Collura
Mr. Collura has served as the executive vice president, chief financial
officer and treasurer of the Company since November 1999. He served as senior
vice president and chief financial officer of Olsten Health Services from 1998
to March 2000. From 1996 to 1998, Mr. Collura was corporate director of
financial and business development operations of Partners Healthcare, an
integrated health care delivery system. From 1995 to 1996, Mr. Collura was the
chief operating officer of the Port Authority of New York and New Jersey.
Ronald A. Malone
Mr. Malone has served as executive vice president of the Company since
March 2000. Prior to joining the Company, he served in various positions with
Olsten, including executive vice president of Olsten and president, Olsten
Staffing Services, United States and Canada, from January 1999 to March 2000.
From 1994 to December 1998, he served successively as Olsten's senior vice
president, southeast division; senior vice president, operations; and executive
vice president, operations.
Robert J. Nixon
Mr. Nixon has served as executive vice president of the Company since
November 1999. He had been a member of Olsten Health Services' senior management
team since joining Olsten in 1994, serving in various capacities, including as a
senior vice president.
Richard C. Christmas
Mr. Christmas has served as senior vice president of the Company since
November 1999. He joined Olsten in 1992 and has served as regional director,
area vice president and project manager-vice president for a business and
technology reengineering project for Olsten.
E. Rodney Hornbake, M.D.
Dr. Hornbake has served as senior vice president and chief medical officer
of the Company since March 2000, having joined the Company in November 1999.
Prior to that, Dr. Hornbake served as vice president and medical director of the
North Shore-LIJ Health System in New York. Prior to that, Dr. Hornbake was chief
medical officer for Aetna Professional Management Corporation and chief of
medicine for the Park Ridge Health System in New York.
Patricia C. Ma
Ms. Ma has served as the Company's senior vice president, general counsel
and secretary since November 1999. She joined Olsten in June 1994. Since 1998
she served as general counsel and vice president of Olsten Health Services. From
1994 to 1998, Ms. Ma served in various legal positions with Olsten Health
Services, including vice president, assistant general counsel, assistant vice
president and senior counsel.
Vernon A. Perry, Jr.
Mr. Perry has served as senior vice president of the Company since November
1999. He joined Olsten in 1994. From 1996 to 1999, he served as senior vice
president of network management for Olsten Health Services. From 1994 to 1996,
he served as vice president of business development, primarily responsible for
the health services business development.
12
David C. Silver
Mr. Silver has served as senior vice president of the Company since March
2000. He joined Olsten in 1998 as director, human resources planning and
development and in April 1999 became vice president, human resources for
Olsten's staffing services business. Prior to joining Olsten he held senior
Human Resources positions with the Bank of Tokyo, Supermarkets General
Corporation, Chase Manhattan Bank and Amerada Hess. From 1989 to 1998 he served
as president of a human resources consulting firm delivering organizational
change, leadership development and general human resources consulting services.
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
Matters.
------------------------------------------------------------------------
Market Information
As of March 16, 2000, the Company's Common Stock has been quoted on The
Nasdaq National Market under the symbol "GTIV". Prior thereto, there was no
established public trading market for shares of the Company's Common Stock.
The following table sets forth the high and low bid information and quarter
close for shares of the Company's Common Stock for each quarter during fiscal
2000:
High Low Close
---- --- -----
1st Quarter (beginning $ 7.25 $ 5.25 $ 7.1562
March 16)
2nd Quarter 10.00 6.1875 8.125
3rd Quarter 14.00 7.625 12.750
4th Quarter 14.375 10.1875 13.375
Holders
As of March 23, 2001 there were approximately 1,750 holders of record of
the Company's common stock (including brokerage firms holding the Company's
Common Stock in "street name" and other nominees).
Dividends
The Company does not expect to pay any dividends on its Common Stock for
the foreseeable future. Any future payments of dividends and the amount of the
dividends will be determined by the board of directors from time to time based
on the Company's results of operations, financial condition, cash requirements,
future prospects and other factors deemed relevant by the Company's board of
directors.
In addition, some of the Company's debt instruments and other agreements
also contain restrictions of the Company's ability to declare and pay dividends.
See Item 7, PART II.
13
Item 6. Selected Financial Data.
The following table provides selected historical consolidated financial
data of the Company as of and for each of the fiscal years in the five-year
period ended December 31, 2000. The data has been derived from the Company's
audited consolidated financial statements. The historical consolidated financial
information presents the Company's results of operations and financial position
as if the Company was a separate entity from Olsten for all years presented. The
historical financial information may not be indicative of the Company's future
performance and may not necessarily reflect what the financial position and
results of operations of the Company would have been if the Company was a
separate stand-alone entity during the years presented.
Fiscal Year Ended
--------------------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ------------ ------------ ------------ ------------
(53 weeks)
(In thousands except for share amount)
--------------------------------------------------------------------------
Statement of Operations Data
Net revenues................... $1,374,353 $1,433,854 $1,330,303 $1,489,822 $1,506,644
Gross profit................... 511,940 520,586 421,407 505,426 485,000
Selling, general and
administrative expenses........ 421,222 460,254 552,528 509,658 615,198
Net income (loss).............. (2,877)(1) 26,847 (101,465)(2) (15,086)(3)
(104,200) (4)
Net income (loss) per share (5) (.14) 1.32 (4.99) (.74) (5.05)
Average shares outstanding (5). 20,345 20,345 20,345 20,345 20,637
Balance Sheet Data (at end of year)
Working capital................ $334,512 $346,135 $367,915 $438,536 $ 348,684
Total assets................... 785,341 783,478 945,738 1,063,105 805,484
Long-term debt and other securities 86,250 86,250 86,250 -- 20,000
Shareholders' equity........... 541,737 530,270 561,859 705,291 566,149
(1) Net loss in fiscal 1996 reflects merger, integration and other special
pre-tax charges totaling approximately $75 million. These charges resulted
from acquisition of Quantum for $39 million; $30 million of charges for
allowances for a change in the methodology used by Medicare for computing
reimbursements in prior years related to the Company's home health care
business; and Quantum's charge of $5.5 million related to the settlement of
shareholder litigation.
(2) Net loss in fiscal 1998 reflects restructuring and other special pre-tax
charges totaling approximately $122 million. These charges resulted from
$66 million related to the restructuring of the Company's businesses and a
special charge of $56 million for the settlement of two federal
investigations. These provisions include a reduction in revenues of $14
million, a charge to cost of sales of $15 million and $93 million in
selling, general and administrative expenses. See Note 4 to the Company's
Consolidated Financial Statements.
(3) Net loss for fiscal 1999 reflects a restructuring pre-tax charge of $15.2
million for the realignment of business units as part of a new
restructuring plan. This charge is included in selling, general and
administrative expenses. See Note 4 to the Company's Consolidated Financial
Statements.
(4) Net loss for fiscal 2000 reflects restructuring and other special charges
aggregating $153.2 million, of which $14.9 million is recorded in cost of
services sold and $138.3 million is included in selling, general and
administrative expenses. See Note 4 to the Company's Consolidated Financial
Statements. Net loss for fiscal 2000 also reflects a gain of $36.7
14
million relating to the sale of the Company's staffing services business
and Canadian operations. See Note 3 to the Company's Consolidated Financial
Statements.
(5) Historical earnings per share and the average shares outstanding for each
of the fiscal years 1996, 1997, 1998 and 1999 have been computed based on
20,345,029 shares of common stock. Such amount is based on the number of
shares of the Company's common stock issued on March 15, 2000, the date of
the split-off. Pursuant to the terms of the split-off, shareholders of
Olsten received .25 shares of Gentiva Health Services common stock for each
share of Olsten common stock or Class B common stock that they owned. See
Note 2 to the Company's Consolidated Financial Statements.
Item 7. 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 consolidated financial
statements reflect the financial position, results of operations 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
of assets and liabilities and historical results of operations related to the
Company.
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 Company provides specialty pharmaceutical services and home health care
through its caregivers, including licensed health care personnel, such as
registered nurses and pharmacists. The Company offers a broad range of services,
including:
treatments for patients with chronic diseases;
intravenous and oral administration of drugs, nutrients and other
solutions;
skilled nursing care;
pediatric/maternal care programs;
rehabilitation and other therapies;
disease management programs; and
home health aide and personal services care.
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System (the "IPS") established through
the Balanced Budget Act of 1997. These costs are reported in annual cost reports
which are filed with the Medicare fiscal intermediary and are subject to audit.
Effective October 1, 2000, the IPS was replaced by a Prospective Payment System
("PPS") for Medicare home care reimbursement. Under PPS, the
15
Company is eligible to receive a fixed reimbursement which covers a specified
treatment period for each patient. The reimbursement rate is established based
on a clinical assessment of the severity of the patient's condition, service
needs and certain other factors. The rate is subject to adjustment if there are
significant changes in the patient's condition during the specified treatment
period. Net revenues attributable to the Medicare program as a percentage of
total consolidated net revenues were 16 percent in fiscal 2000 and 1999 and 14
percent in fiscal 1998.
Results of Operations
Revenues
During fiscal 2000, net revenues increased by $17 million or 1.1 percent to
$1.507 billion as compared to net revenues of $1.490 billion during fiscal 1999.
New revenue growth resulted from increases in Specialty Pharmaceutical Services
of $55 million or 7.8 percent offset by a decrease of $39 million or 5.9 percent
in Home Care Nursing Services. Staffing Services revenue was $128 million in
fiscal 2000 and $127 million in fiscal 1999. On October 27, 2000, the health
care staffing services business, which represented 82 percent and 78 percent of
Staffing Services revenue in fiscal 2000 and 1999, respectively, was sold.
In the Specialty Pharmaceutical Services business, revenue growth 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). 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 in
1999 to begin directly distributing Prolastin(R), an intravenous therapy used in
the treatment of the hereditary disorder Alpha 1 Antirypsin Deficiency. Prior to
the sale of the health care staffing services business, Staffing Services
revenue growth for fiscal 2000 reflected 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 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 and
2000.
After adjusting for the sale of the Company's health care staffing services
business as noted above and its Canadian operations, which were sold in November
2000, net revenues increased by $24 million or 1.8 percent in fiscal 2000 as
compared to fiscal 1999.
Revenues increased $160 million or 12.0 percent during fiscal 1999 compared
to fiscal 1998 driven by growth in Specialty Pharmaceutical Services of $128
million or 22.4 percent, Staffing Services of $28 million or 27.6 percent, and
Home Care Nursing Services of $4 million or 0.6 percent. Included in Home Care
Nursing Services revenues is an increase in revenue attributable to the
acquisition of Columbia/HCA's home health care operations in the state of
Florida, which was partially offset by declines in Medicare-related home care
visits and reimbursement due to the implementation of the IPS.
16
Gross Profit
Gross profit margins, as a percentage of net revenues, decreased from 33.9
percent in fiscal 1999 to 32.2 percent in fiscal 2000. Of the total decrease in
margins, 1.0 percent can be attributed to the special charges associated with
the inventory adjustment of $6.4 million and the increase in liabilities to
service providers under certain managed care contracts of $8.5 million which
were recorded in fiscal 2000. The remaining decrease in margins was primarily
attributable to a change in business mix 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.
Gross profit margins increased in fiscal 1999 to 33.9 percent from 31.7
percent for fiscal 1998. Fiscal 1998 gross profit margins were negatively
impacted by 1.8 percent as a result of special charges and other adjustments.
The remaining increase in margins was primarily attributable to productivity
enhancements, rate increases and a change of payor mix driven by the acquisition
in the state of Florida in the Home Care Nursing Services business, partially
offset by greater growth in the lower margin Staffing Services business.
Selling, General and Administrative Expenses
For fiscal 2000, selling, general and administrative expenses were $615
million as compared to $510 million for fiscal 1999. This increase resulted from
a change in the amount of restructuring and other special charges affecting
selling, general and administrative expenses from $15 million in fiscal 1999 to
$138 million in fiscal 2000 offset somewhat by the impact of efficiency
improvement efforts and the closing of home care nursing branches. Excluding the
impact of restructuring and other special charges recorded in both years,
selling, general and administrative expenses were 31.7 percent of revenues in
fiscal 2000 and 33.2 percent of revenues in fiscal 1999.
Selling, general and administrative expenses decreased to $510 million, or
34.2 percent of revenues, for fiscal 1999 from $553 million, or 41.5 percent of
revenues, as compared to fiscal 1998. Excluding the effects of special charges
recorded in both years, selling, general and administrative expenses were 33.2
percent of revenues during fiscal 1999 as compared to 34.5 percent of revenues
in fiscal 1998, primarily as a result of the impact of efficiency improvement
efforts in Home Care Nursing Services and corporate administrative support
departments partially offset by increased information systems costs.
Restructuring and Other Special Charges
During fiscal 2000, 1999 and 1998, the Company recorded restructuring and
other special charges aggregating $153.2 million, $15.2 million and $122.0
million, respectively.
Fiscal 2000
Restructuring and other special charges during fiscal 2000 aggregated
$153.2 million, of which $14.9 million was recorded in cost of services sold.
The remaining charges of approximately $138.3 million were recorded in selling,
general and administrative expenses and included charges to restructure business
operations of $5.5 million, an incremental charge of $112.0 million for
increases in the allowance for doubtful accounts and receivable writeoffs,
charges of $5.7 million associated with the implementation of the Prospective
Payment System for Medicare reimbursement, settlement costs of $7.2 million,
Split-off/transition costs of $4.1
17
million and name change and other costs of $3.8 million. A further description
of the nature of such restructuring and other special charges is presented
below.
Restructuring of Business Operations
The Company recorded charges of $5.5 million in the fourth quarter of
fiscal 2000 in connection with a restructuring plan which included the closing
and consolidation of twelve nursing branch locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's Staffing Services business and Canadian
operations. These charges included employee severance of $2.9 million relating
to the termination of 270 employees in nursing branches and certain corporate
and administrative departments, asset writedowns of $1.2 million and future
lease payments and other associated costs of $1.4 million. As of December 31,
2000, the twelve nursing branch locations were closed or consolidated; the
unpaid portion of these restructuring charges aggregated $3.4 million. The
Company expects the restructuring plan to be fully executed by the second
quarter of fiscal 2001.
Bad Debt/Receivables Write-Off
During fiscal 2000 the Company launched several initiatives including (i)
changes to systems, operational processes and procedures in its contracting,
delivery, billing and collection functions and inventory management, (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 fiscal 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.
In connection with these activities, the Company recorded an incremental
provision for doubtful accounts of $112.0 million, which is reflected in
selling, general and administrative expenses in the accompanying consolidated
statement of operations.
PPS Implementation Costs
The Company recorded charges of $5.7 million in connection with the
implementation of and transition to the PPS system for Medicare reimbursement.
Such charges included costs relating to the development of care protocols,
training of field personnel and changes in estimates of settlement amounts.
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
obligation 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 (See Note 9 to the consolidated financial statements). As of December
31, 2000, all payments have been made.
Split-off/Transition Costs
Special charges of $4.1 million were incurred during fiscal 2000 to reflect
obligations resulting from the Company's Split-off from Olsten and transition
costs associated with the
18
establishment of the Company as an independent, publicly-owned entity. These
special charges included change of control and 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, and transition costs of $0.5 million
relating to registration costs, professional fees and other items. Substantially
all amounts were paid as of December 31, 2000.
Name Change and Other
Special charges of approximately $3.8 million were incurred in fiscal 2000
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.
Costs of Services Sold
An adjustment of $6.4 million was recorded in cost of services sold for
changes in cost estimates arising from the systems conversion and physical
inventory procedures which were performed during the third quarter of fiscal
2000. The Company recorded a charge to cost of sales of $8.5 million in the
fourth quarter of fiscal 2000 to reflect an increase in estimated liabilities to
service providers under certain managed care contracts. Such changes in the
estimated liabilities were the result of the Company obtaining more timely and
accurate claim experience information as a result of completing a system
conversion which enhanced its claims reporting functionality.
Fiscal 1999
In the quarter ended April 4, 1999, the Company recorded a restructuring
charge totaling $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 businesses 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.
As of the end of fiscal 1999, substantially all of the closures and
consolidation of facilities and expected terminations had occurred. These
activities have 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. The realignment of the
business units achieved a reduction of expenses of about $3 million in 1999, due
to reduced employee, lease and depreciation expenses.
Fiscal 1998
On March 30, 1999, the Company announced plans to take a special charge
totaling $56 million, which was recorded in the fourth quarter of fiscal 1998.
The charge was for the settlement of two federal investigations focusing on the
Company's Medicare home office cost reports and certain transactions with
Columbia/HCA Healthcare Corp. The agreements in connection with the settlement
were finalized and signed on July 19, 1999. On August 11, 1999, Olsten paid $61
million pursuant to the settlement, approximately $5 million of which was
previously accrued as part of the 1996 merger, integration and other special
charges.
In 1998, the Company also recorded restructuring and other special charges
of $66 million relating to the restructuring of its business. These charges,
which were primarily for 60
19
office closings and consolidations in the United States, were taken to help
position the Company to operate more efficiently under the new IPS. In addition,
significant technological investments were made in order to improve operational
efficiencies and employee retention levels. The benefit of the restructuring
began to be realized in the second quarter of 1998.
Included in this provision was $24 million charged to selling, general and
administrative expenses, which included lease payments of $3 million, employee
severance of $4 million, fixed asset and software write-offs of $5 million to
reflect the loss incurred upon the Company's decision to dispose of the assets
in some closed offices, and an increase in the allowance for doubtful accounts
of $12 million. All closures and consolidations of facilities and employee
terminations related to this charge have been completed. The allowance for
doubtful accounts was increased because receipt of payment is highly dependent
on the Company's ability to provide some evidence of service and authorization
documentation to a variety of third-party payors. The office closings,
consolidation of certain business service centers and the termination of
employees are all events that, in the Company's experience, impair its ability
to provide the documentation required to collect on receivables. The Company
also recorded other adjustments to selling, general and administrative expenses
of $13 million which included professional fees and related costs resulting from
the settlement with several government agencies regarding certain past business
practices of Quantum, the level of effort required to respond to the significant
inquiries conducted by the government, and costs incurred to redesign the credit
and collection process of the Company's business.
In addition, upon final announcement of the per-beneficiary limits by the
government, the Company recorded a reduction in revenues in fiscal 1998 of $14
million in anticipation of lower Medicare reimbursements resulting from the new
per-visit and per-beneficiary limits that were imposed by Medicare under the
IPS.
The Company recorded a charge to cost of sales of $15 million to reflect
the estimated increase in costs that have been incurred, but not yet reported,
based upon a change in the actuarial estimates utilized to determine the level
of service to patients covered under the Company's capitated contracts.
At December 31, 2000, about $12.5 million, consisting primarily of
severance payments, integration costs and liabilities to service providers,
remained unpaid and were included in accrued expenses. These obligations are
expected to be paid primarily during fiscal 2001. (See Note 4 to consolidated
financial statements)
20
Gain on Sales of Businesses
During the fourth quarter of fiscal 2000, the Company recorded a gain of
$36.7 million on the sale of its health care staffing services business and its
Canadian operations. In connection with the sale of the health care staffing
services business, the Company received cash proceeds of $66.5 million, subject
to adjustment upon completion of the final closing balance sheet, and recorded a
gain of approximately $44.4 million on the sale.
As a result of the sale of its home care nursing services operations in
Canada, the Company received approximately $1.2 million in cash proceeds,
subject to adjustment based on the final closing balance sheet, and a minority
interest in the acquiror. The Company recorded a charge of approximately $5.2
million as a result of the impairment of goodwill. In addition, cumulative
translation losses of approximately $2.5 million were reversed from the
accumulated other comprehensive loss component of stockholders' equity and
were reflected as a loss. No other gain or loss was recorded on the sale.
Interest Expense, Net
Interest expense, net was $10 million in fiscal 2000 and $17 million in
fiscal 1999 and 1998. Interest expense, net represented primarily interest on
the outstanding 4 3/4 percent convertible subordinated debentures during fiscal
1998, fiscal 1999 and the period from January 3, 2000 to October 1, 2000 (the
debentures' maturity date), net intercompany borrowings with Olsten for fiscal
1998 and 1999 and the period from January 3, 2000 to March 15, 2000 (the
Split-off date) and, subsequent to March 15, 2000, borrowings and fees relating
to the revolving credit facility and the mandatorily redeemable securities.
Interest expense, net includes interest income of $0.8 million in fiscal
2000, $0.3 million in fiscal 1999 and $0.1 million in fiscal 1998.
Income Taxes
Income tax expense for fiscal 2000 consisted of taxes relating to certain
state jurisdictions. The Company has estimated net operating loss carryforwards
(NOLs) of approximately $76 million as of December 31, 2000. Because of the
uncertainty of ultimate realization of the net deferred tax asset, the Company
has established a valuation allowance of approximately $57 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 fiscal 2000. The Company expects its effective tax rate
to be below 10 percent until such time as the NOLs are utilized.
The effective income tax rates on loss were 28.9 percent and 31.7 percent
for fiscal 1999 and 1998, respectively. The rates differ from statutory rates
primarily because of non-deductible goodwill amortization and other
non-deductible items.
Liquidity and Capital Resources
Prior to March 15, 2000, the Company relied on cash flow from operations
and advances from Olsten to meet its operating and investing activities. In the
past, when liquidity needs exceeded cash flow, Olsten provided the necessary
funds. In connection with the Split-off and 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) prior to the 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. As of
March 15, 2000, the Company was no
21
longer able to use Olsten's resources to meet its needs and has acquired third
party financing, as described below, for such purposes.
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
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 (9.75% at December 31, 2000). Total outstanding letters of credit
were approximately $25.7 million as of December 31, 2000. There were no
borrowings outstanding under the credit facility as of December 31, 2000. The
Company is subject to an unused line fee equal to 0.375 percent per annum of the
average daily difference between $150 million and the total outstanding
borrowings and letters of credit. In addition, the Company must pay a fee equal
to 2.25 percent per annum of the aggregate face amount of outstanding standby
letters of credit.
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. Other covenants
in the credit facility include limitation on mergers, consolidations,
acquisitions, indebtedness, liens, capital expenditures and dispositions of
assets and other limitations with respect to the Company's operations. The
Company's obligations under the credit facility are collateralized by all of the
Company's tangible and intangible personal property, other than equipment. The
Company received a waiver from the lender for the third quarter of fiscal 2000
for a minimum tangible net worth covenant. In addition, at that time the
agreement was amended to lower the required minimum tangible net worth at
December 31, 2000 to $325 million. As of December 31, 2000, the Company met all
of its financial covenants and had borrowing capacity under the credit facility
of approximately $125 million.
In 1993, the Company's Quantum subsidiary, issued $86.3 million of 4 3/4%
convertible subordinated debentures maturing on October 1, 2000. In January
1999, $7.7 million of the convertible subordinated debentures were retired at
88.5 percent of the principal amount, resulting in a gain of approximately
$900,000. In June 2000, $10.0 million of the debentures were retired at 95.25
percent of the principal amount, resulting in a gain of $475,000. The remaining
$68.6 million of debentures was 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. Such borrowings under the
credit facility were repaid in late October 2000 upon receipt of proceeds of
$66.5 million from the sale of the staffing services business as well as cash
flow from operations.
Working capital at December 31, 2000 was $349 million, a decrease of $90
million as compared to $439 million at January 2, 2000. Net receivables
decreased by $156 million at December 31, 2000 as compared to the prior year-end
as a result of the increase in the provision for doubtful accounts, the sale of
the staffing services business and improved cash collections driven by
enhancements to the billing system for Specialty Pharmaceutical Services and a
restructuring of the Company's contracting, delivery, billing and collection
units. Days Sales Outstanding (DSOs) was reduced from 141 days at January 2,
2000 to 106 days at December 31, 2000. Approximately 10 days of this reduction
related to improved cash collection; the remaining reduction related primarily
to the increase in the provision for doubtful accounts.
22
After adjusting for the sale of the Company's staffing services business and
Canadian operations, adjusted DSO was 111 days at December 31, 2000.
Inventory was reduced by $42 million, from $93 million at January 2, 2000
to $51 million at December 31, 2000. Accounts payable and accrued expenses were
reduced by approximately $66 million between January 2, 2000 and December 31,
2000.
The Company used $9 million of cash in operating activities in fiscal 2000,
a significant improvement from $141 million and $64 million used in operating
activities in fiscal 1999 and 1998, respectively. Furthermore, the Company used
$41.9 million of cash in operating activities during the first quarter of fiscal
2000; in the second, third and fourth quarters of fiscal 2000, the Company
generated cash of $0.4 million, $19.6 million and $12.9 million, respectively,
from operating activities.
Management believes cash flows from operations, borrowings available under
the credit facility and other financing options, including issuances of debt or
equity securities under an effective shelf registration statement, will be
adequate to support the Company's 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 comply with regulatory changes in the industry. 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.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
----------------------------------------------------------
The Company's exposure to the market risk for changes in interest rates
related to the fair value of its fixed rate Quantum debentures until their
repayment 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.
The Company had no interest rate exposure on fixed rate debt at December 31,
2000.
23
Item 8. Financial Statements and Supplementary Data.
-------------------------------------------
The following financial statements and financial schedule of the Company
are included in this report:
Page(s) in this
Report
Report of Independent Accountants F- 2
Consolidated Balance Sheets as of December 31, 2000 and January 2, 2000
F- 3
Consolidated Statements of Operations for the three years ended
December 31, 2000 F- 4
Consolidated Statements of Changes in Shareholders' Equity for the three years F- 5
ended December 31, 2000
Consolidated Statements of Cash Flows for the three years ended
December 31, 2000 F- 6
Notes to Consolidated Financial Statements F- 7
Schedule II - Valuation and Qualifying Accounts for the
three years ended December 31, 2000 F-34
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
-----------------------------------------------------------------------
There have been no such changes or disagreements.
PART III
Item 10. Directors and Executive Officers of the Registrant.
--------------------------------------------------
Information required regarding the directors of the Company is incorporated
herein by reference to information to be contained in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission with regard to
its 2001 Annual Meeting of Shareholders. See also the information with respect
to executive officers of the Company under Item 4(a) of PART I hereof.
Item 11. Executive Compensation.
----------------------
Information required concerning executive compensation is incorporated
herein by reference to information to be contained in the Company's Proxy
Statement to be filed with the Securities and Exchange Commission with respect
to the Company's 2001 Annual Meeting of Shareholders.
Item 12. Securities Ownership of Certain Beneficial Owners and Management.
----------------------------------------------------------------
Information required regarding the security ownership of certain beneficial
owners and management of the Company is incorporated herein by reference to
information to be contained
24
in the Company's Proxy Statement to be filed with the Securities and Exchange
Commission with respect to the Company's 2001 Annual Meeting of Shareholders.
Item 13. Certain Relationships and Related Transactions.
----------------------------------------------
Information required regarding certain relationships and related
transactions is incorporated herein by reference to information to be contained
in the Company's Proxy Statement to be filed with the Securities and Exchange
Commission with respect to the Company's 2001 Annual Meeting of Shareholders.
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
-----------------------------------------------------------------
(a) (1) Financial Statements
- Report of Independent Accountants
- Consolidated Balance Sheets as of December 31, 2000 and
January 2, 2000
- Consolidated Statements of Operations for the three years
ended December 31, 2000
- Consolidated Statements of Changes in Shareholders' Equity
for the three years ended December 31, 2000
- Consolidated Statements of Cash Flows for the three years
ended December 31, 2000
- Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
- Schedule II - Valuation and Qualifying Accounts for the
three years ended December 31, 2000
(a) (3) Exhibits
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 Form of Certificate of Designation of Series A Junior
Participating Preferred Stock(1)
4.3 Form of Certificate of Designation of Series A Cumulative
Non-Voting Redeemable Preferred Stock(2)
4.4 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(4)
4.5 Indenture between the Company and Wilmington Trust Company dated
March 15, 2000(4)
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 Company
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(4)*
10.6 Company's Stock & Deferred Compensation Plan for Non-Employee
Directors (4)*
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)
10.9 Loan and Security Agreement dated March 13, 2000 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(4)
10.10 Form of Employment Agreement with Edward A. Blechschmidt (2)*
10.11 Form of Change in Control Agreement with Executive Officers of
Company(4) *
10.12 Form of Change in Control Agreement with Edward A. Blechschmidt
(4)*
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 (5)
10.15 Amendment No. 1 dated June 30, 2000 to Indenture between the
Company and Wilmington Trust Company (5)
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(6)
26
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.) (6)
10.18 Second Amendment and Consent Agreement dated as of November 20,
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+
21 List of Subsidiaries of Company +
23 Consent of PricewaterhouseCoopers LLP, independent accountants +
- -------------------------------
(1) Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form S-4, dated January 20, 2000 (File No.
333-88663).
(2) Incorporated by reference to Amendment No. 3 to the Registration
Statement on Form S-4, dated February 4, 2000 (File No.
333-88663).
(3) Incorporated 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 Form 10-K of Company for the
fiscal year ended January 2, 2000.
(5) Incorporated by reference to Form 10-Q of Company for quarterly
period ended July 2, 2000.
(6) Incorporated by reference to Form 10-Q of Company for quarterly
period ended October 1, 2000.
* Management contract or compensatory plan or arrangement
+ Filed herewith
(b) Report on Form 8-K
During the last quarter of the period covered by this report, Registrant
filed a (i) report on Form 8-K dated October 31, 2000 reporting in Item 5 "Other
Events" issuance of a press release on October 30, 2000 and (ii) report on Form
8-K dated November 27, 2000 reporting in Item 5 "Other Events" issuance of a
press release on November 27, 2000.
27
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
Date: March 30, 2001 By: /s/ Edward A. Blechschmidt
-------------------------------------------------------
Edward A. Blechschmidt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 30, 2001 By: /s/ Edward A. Blechschmidt
-------------------------------------------------------
Edward A. Blechschmidt
President and Chief Executive Officer and
Director (Principal Executive Officer)
Date: March 30, 2001 By: /s/ John J. Collura
-------------------------------------------------------
John J. Collura
Executive Vice President, Chief Financial
Officer and Treasurer (Principal Financial and
Accounting Officer)
Date: March 30, 2001 By: /s/ Victor F. Ganzi
-------------------------------------------------------
Victor F. Ganzi
Director
Date: March 30, 2001 By: /s/ Steven E. Grabowski
-------------------------------------------------------
Steven E. Grabowski
Director
Date: March 30, 2001 By: /s/ Stuart R. Levine
-------------------------------------------------------
Stuart R. Levine
Director
Date: March 30, 2001 By: /s/ Stuart Olsten
-------------------------------------------------------
Stuart Olsten
Director
Date: March 30, 2001 By: /s/ Josh S. Weston
-------------------------------------------------------
Josh S. Weston
Director
Date: March 30, 2001 By: /s/ Raymond S. Troubh
-------------------------------------------------------
Raymond S. Troubh
Director
Date: March 30, 2001 By: /s/ Gail Wilensky
-------------------------------------------------------
Gail Wilensky
Director
28
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
Report of Independent Accountants............................................................................F-2
Consolidated Balance Sheets as of December 31, 2000 and January 2, 2000......................................F-3
Consolidated Statements of Operations for the three years ended December 31, 2000............................F-4
Consolidated Statements of Changes in Shareholders' Equity for the three years ended December
31, 2000.................................................................................................F-5
Consolidated Statements of Cash Flows for the three years ended December 31, 2000............................F-6
Notes to Consolidated Financial Statements...................................................................F-7
Schedule II - Valuation and Qualifying Accounts for the three years ended December 31, 2000.............. F-34
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Gentiva Health Services, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Gentiva Health Services, Inc. and Subsidiaries at December 31, 2000 and January
2, 2000, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the
accompanying index presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 13, 2001
F-2
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
ASSETS December 31, 2000 January 2, 2000
----------------- ---------------
Current assets
Cash and cash equivalents....................................... $ 452 $ 2,942
Receivables, less allowance for doubtful accounts of
$105,962 and $36,759, respectively........................... 419,178 575,460
Inventories..................................................... 51,111 93,218
Prepaid expenses and other current assets....................... 50,333 87,611
---------------- ---------------
Total current assets.................................... 521,074 759,231
Fixed assets, net.................................................... 36,961 51,809
Intangibles, principally goodwill, net of accumulated
amortization of $103,573 and $95,898, respectively............... 230,702 250,297
Other assets......................................................... 16,747 1,678
---------------- ---------------
TOTAL ASSETS $ 805,484 $ 1,063,015
================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities..................................................
Current portion of long-term debt............................... $ -- 78,562
Accounts payable................................................ 74,083 114,197
Accrued expenses................................................ 50,682 76,746
Payroll and related taxes....................................... 17,305 20,020
Insurance costs................................................. 30,320 31,170
---------------- ---------------
Total current liabilities............................... 172,390 320,695
Other liabilities.................................................... 46,945 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 21,196,693 and 2,120 2,035
20,345,029 shares, respectively...............................
Additional paid-in capital...................................... 689,163 725,998
Accumulated deficit............................................. (124,570) (20,370)
Accumulated other comprehensive loss............................ (564) (2,372)
---------------- ---------------
Total shareholders' equity.............................. 566,149 705,291
---------------- ---------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 805,484 $ 1,063,015
================ ===============
See notes to consolidated financial statements.
F-3
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
For the Fiscal Years Ended
2000 1999 1998
(53 Weeks)
Net revenues.........................................................$ 1,506,644 $1,489,822 $1,330,303
Cost of services sold................................................ 1,021,644 984,396 908,896
----------- ---------- ----------
Gross profit.................................................... 485,000 505,426 421,407
Selling, general and administrative expenses......................... (615,198) (509,658) (552,528)
Gain on sales of businesses.......................................... 36,682 -- --
Interest expense, net................................................ ( 9,878) (16,975) (17,414)
----------- ---------- ----------
Loss before income taxes............................................. (103,394) (21,207) (148,535)
Income tax expense (benefit)......................................... 806 (6,121) (47,070)
----------- ---------- ----------
Net loss........................................................$ (104,200) $(15,086) $ (101,465)
=========== ========== ==========
SHARE INFORMATION:
Basic and diluted net loss per share............................$ (5.05) $ (.74) $ (4.99)
=========== ========== ==========
Average shares outstanding.................................... 20,637 20,345 20,345
=========== ========== ==========
See notes to consolidated financial statements.
F-4
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(In thousands, except share amounts)
Retained Accumulated
Additional Earnings Other
Common Stock Paid-in (Accumulated Comprehensive
Shares Amount Capital Deficit) Loss Total
Balance at December 28, 1997....... 20,345,029 $ 2,035 $ 434,283 $ 96,181 $ (2,229) $ 530,270
Comprehensive income (loss):....
Net loss and cumulative
translation adjustment...... -- -- -- (101,465) (188) (101,653)
Net transactions with Olsten.... -- -- 133,242 -- -- 133,242
----------- ----------- ---------- ------------- -------------- ---------
Balance at January 3, 1999......... 20,345,029 2,035 567,525 (5,284) (2,417) 561,859
Comprehensive income (loss):....
Net loss and cumulative
translation adjustment...... -- -- -- (15,086) 45 (15,041)
Net transactions with Olsten.... -- -- 158,473 -- -- 158,473
----------- ----------- ---------- ------------- -------------- ---------
Balance at January 2, 2000......... 20,345,029 2,035 725,998 (20,370) (2,372) 705,291
Comprehensive income (loss):
Net loss.................... -- -- -- (104,200) -- (104,200)
Cumulative translation
adjustment...................... -- -- -- -- (176) (176)
Reversal of cumulative
translation
adjustment related to
Canadian operations sold
during the year................ -- -- -- -- 2,548 2,548
Unrealized loss on
investments ................... -- -- -- -- (564) (564)
Net transactions with Olsten.... -- -- (41,786) -- -- (41,786)
Issuance of stock upon
exercise of
stock options and under stock
plans
for employees and directors..... 851,664 85 4,951 -- -- 5,036
----------- ---------- ----------- ------------ ------------
Balance at December 31, 2000....... 21,196,693 $ 2,120 $ 689,163 $ (124,570) $ (564) $566,149
=========== ========== =========== ============ ============ ========
See notes to consolidated financial statements.
F-5
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the Fiscal Years Ended
2000 1999 1998
OPERATING ACTIVITIES: (53 Weeks)
Net loss............................................................. $(104,200) $ (15,086) $(101,465)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization................................... 31,682 33,625 31,401
Provision for doubtful accounts................................. 144,883 38,687 24,046
Loss (gain) on sale/ disposal of businesses and fixed assets... (36,682) 1,909 4,202
Deferred income taxes........................................... 774 13,047 (17,556)
Changes in assets and liabilities, net of effects from
acquisitions and dispositions:
Accounts receivable..................................... (21,339) (161,829) (53,454)
Inventories............................................. 42,107 (2,942) (33,383)
Prepaid expenses and other current assets............... (5,673) (18,219) 9,073
Current liabilities..................................... (63,243) (29,755) 70,425
Other, net.............................................. 2,683 (902) 2,836
------------ ----------- ---------
Net cash used in operating activities........................... (9,008) (141,465) (63,875)
------------ ----------- ---------
INVESTING ACTIVITIES:
Purchases of fixed assets, net....................................... (8,549) (19,001) (34,579)
Proceeds from sale of businesses..................................... 67,734 -- --
Acquisitions of businesses, net of cash acquired..................... -- (1,724) (33,989)
------------ ----------- ---------
Net cash provided by (used in) investing activities............. 59,185 (20,725) (68,568)
------------ ----------- ---------
FINANCING ACTIVITIES:
Issuance of mandatorily redeemable and other securities.............. 20,100 -- --
Net transactions with Olsten......................................... 5,226 158,473 133,242
Increase (decrease) in book overdrafts............................... (2,285) 12,664 --
Retirement of long-term debt......................................... (78,087) (6,804) --
Debt issuance costs.................................................. (2,657) -- --
Proceeds from issuance of common stock............................... 5,036 -- --
------------ ----------- ---------
Net cash (used in) provided by financing activities............. (52,667) 164,333 133,242
------------ ----------- ---------
Net (decrease) increase in cash and cash equivalents................. (2,490) 2,143 799
Cash and cash equivalents at beginning of year....................... 2,942 799 --
------------ ----------- ---------
Cash and cash equivalents at end of year............................. $ 452 $ 2,942 $ 799
============ =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest...................................... $ 10,346 $ 3,975 $ 4,096
See notes to consolidated financial statements.
F-6
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
Background
On March 15, 2000, Gentiva Health Services, Inc. and its Subsidiaries (the
"Company") were 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. On
such date, Olsten also merged its remaining staffing and information technology
businesses with those of Adecco SA pursuant to a Merger Agreement (the
"Merger"). Prior to the Split-off, the Company operated Olsten's health services
business as a wholly-owned subsidiary of Olsten.
In connection with the Split-off and Merger, the Company entered into a
$150 million credit facility as discussed in Note 6, issued mandatorily
redeemable and other securities as discussed in Note 7, settled certain
transactions with Olsten as discussed in Note 8, and agreed to assume certain
obligations and commitments including those described in Notes 8 and 10 and the
shareholders of Olsten approved various stock plans for the Company as described
in Note 11.
Basis of Presentation
The accompanying consolidated financial statements reflect the financial
position, results of operations, changes in shareholders' equity 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
of 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 $1.0 million for fiscal 2000 and $5.0 million
for fiscal 1999 and 1998. 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 were reasonable; however, the costs charged to the Company were 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 began to perform these
functions using its own resources or purchased services, and additionally, 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 $3.0 million for
fiscal 2000 and $13.0 million for fiscal 1999 and 1998 relating 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.
Additionally, prior to the Split-off, income taxes were calculated on a
separate company basis. The Company's financial results prior to the Split-off
included the costs experienced by the Olsten
F-7
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
benefit plans for employees for whom the Company assumed responsibility on the
Split-off date. As part of the Split-off and Merger, the Company, Olsten and
Adecco SA entered into a Separation Agreement, Tax Sharing Agreement and an
Employee Benefits Allocation Agreement, which address the allocation of assets
and liabilities and govern future relationships between them.
Note 2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated. The Company's fiscal year ends on the Sunday
nearest to December 31st, which was December 31, 2000 for fiscal 2000, January
2, 2000 for fiscal 1999 and January 3, 1999 for fiscal 1998.
Revenue Recognition
Revenues and related costs, including labor, payroll taxes, fringe
benefits, products and supplies and contractor costs are recognized in the
period in which the services and products are provided or delivered. Revenues
are recorded based on fee-for-service or contractual arrangements, including
capitated agreements, with customers and third party payors, estimates of
expected reimbursement under arrangements with Medicare and state reimbursed
programs, and management fees generated from services provided to hospital-based
home health agencies and are adjusted in future periods as final settlements are
determined. Net revenues from state reimbursed programs amounted to 21 percent,
20 percent and 23 percent of total consolidated net revenues in fiscal 2000,
1999 and 1998, respectively.
Prior to October 1, 2000, reimbursement of Medicare home care nursing
services was based on reasonable, allowable costs incurred in providing services
to eligible beneficiaries subject to both per visit and per beneficiary limits
in accordance with the Interim Payment System (the "IPS") established through
the Balanced Budget Act of 1997. These costs are reported in annual cost reports
which are filed with the Medicare fiscal intermediary and are subject to audit.
Effective October 1, 2000, the IPS was replaced by a Prospective Payment System
("PPS") for Medicare home care reimbursement. Under PPS, the Company is eligible
to receive a fixed reimbursement which covers a specified treatment period for
each patient. The reimbursement rate is established based on a clinical
assessment of the severity of the patient's condition, service needs and certain
other factors. The rate is subject to adjustment if there are significant
changes in the patient's condition during the specified treatment period.
Medicare billings under PPS are initially recognized as deferred revenue and are
subsequently amortized into revenue over the patient's treatment period.
Reimbursement rate adjustments are accrued on an estimated basis in the period
related services are provided and are adjusted in future periods as final
reimbursement rates are determined. Net revenues attributable to the Medicare
program as a percentage of total consolidated net revenues were 16 percent in
fiscal 2000 and 1999 and 14 percent in fiscal 1998. As of December 31, 2000,
deferred revenue of approximately $9.3 million relating to the Medicare PPS
program was included in accrued expenses.
Under capitated agreements with managed care customers, the Company
recognizes revenue based on a predetermined monthly contractual rate for each
member of the managed care plan regard-
F-8
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
less of the services provided. Capitation payments received in advance of the
service period are recorded as deferred revenue. Costs resulting from services
provided under capitation contracts are determined based on estimates of
expected service and product requirements. These estimates are developed by
applying actuarial assumptions and historical patterns of utilization to
authorized levels of service. Net revenues from capitated agreements with
managed care payors as a percentage of total consolidated net revenues were 7
percent, 6 percent and 5 percent in fiscal 2000, 1999 and 1998, respectively. As
of December 31, 2000, accrued expenses included estimated amounts payable to
third party service providers under managed care contracts of approximately
$14.6 million.
One non-governmental customer accounted for approximately 15 percent and 11
percent of total consolidated net revenues in fiscal 2000 and 1999,
respectively.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payor and other reasons unrelated to credit
risk. Revenue adjustments are deducted directly from gross accounts receivable.
Management prepares various analyses to evaluate its receivable valuation
accounts including: accounts receivable aging trends, historical collection and
write-off data and other statistical information by business line.
Accounts receivable included approximately $21 million as of December 31,
2000 and $9 million as of January 2, 2000 which relate to third party settlement
and contractual accounts.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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. Actual results could differ from those
estimates. The most significant estimates relate to allowance for doubtful
accounts and accrued self insurance costs.
Cash and Cash Equivalents
Cash and cash equivalents deposited with banks and financial institutions
include highly liquid investments with original maturities of three months or
less.
Inventories
Inventories consist primarily of biological and pharmaceutical products and
supplies held for sale or distribution to patients through prescription. The
Company records inventories at the lower of cost or market. Cost represents the
weighted average cost of purchased products and supplies.
F-9
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fixed Assets
Fixed assets, including costs of Company developed software, are stated at
cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold improvements are amortized over the shorter of
the life of the lease or the life of the improvement.
Intangibles
Intangibles, principally goodwill, associated with acquired businesses are
being amortized on a straight-line basis over periods ranging from 10 to 40
years. Amortization expense recorded for fiscal 2000, 1999 and 1998 was
approximately $11.2 million, $11.0 million, and $10.1 million, respectively.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. If the
sum of the undiscounted future cash flows is less than the carrying amount of
the asset, a loss is recognized for the difference between the fair value
(discounted future cash flows) and carrying value of the asset. Impairment loss
on assets to be sold, if any, is based on the estimated proceeds to be received,
less estimated costs to sell.
Insurance Costs
The Company is obligated for certain costs under various insurance
programs, including employee health and welfare, workers compensation and
professional liability. The Company recognizes its obligations associated with
these policies in the period the claim is incurred. The costs of both reported
claims and claims incurred but not reported, up to specified deductible limits,
relating to these programs are estimated based on historical data, current
enrollment statistics and other information. Such estimates and the resulting
reserves are reviewed and updated periodically, and any adjustments resulting
therefrom are reflected in earnings currently.
Foreign Currency Translation
Prior to the sale of the Company's Canadian operations in November 2000,
financial statements denominated in Canadian dollars were translated into U.S.
dollars using the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period for revenues,
expenses, gains and losses and cash flows. Translation adjustments were recorded
within accumulated other comprehensive income/loss. As a result of the sale of
the Company's Canadian operations, cumulative translation adjustments of
approximately $2.5 million were reversed from accumulated other comprehensive
loss and reflected as a component of gain on sale of businesses in the
accompanying consolidated statement of operations. Transaction gains and losses
that arose from exchange rate fluctuations were not significant.
F-10
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings Per Share
Basic and diluted net loss per share for fiscal 2000 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 851,664 shares
of common stock issued during the period from the Split-off date through
December 31, 2000 in connection with the exercise of stock options and under the
provisions of the employee stock purchase plan and the stock and deferred
compensation plan for non-employee directors. The computation of dilutive net
loss per share for fiscal 2000, 1999 and 1998 excludes the effect of any shares
issuable upon the conversion of the 4 3/4% convertible subordinated debentures
which matured and were retired on October 2, 2000 (without any such conversion),
the exercise of stock options and, for fiscal 2000, the $20 million of 10%
convertible trust preferred securities, since their inclusion would have had an
antidilutive effect on earnings.
Basic and diluted net loss per share for the fiscal 1999 and 1998 periods
have been computed based solely on the shares of the Company's stock issued on
the Split-off date.
Income Taxes
The Company has been included, where applicable, in the consolidated income
tax returns of Olsten for periods up to the Split-off date. The provisions for
the income taxes in the consolidated statements of operations have been
calculated on a separate company basis. The Company provides for taxes based on
current taxable income and the future tax consequences of temporary differences
between the financial reporting and income tax carrying values of its assets and
liabilities. From March 15, 2000 forward the Company will file its own
consolidated tax return.
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical amounts.
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short maturity. The estimated fair value of the Company's 4 3/4%
Convertible Subordinated Debentures, which approximated $78 million at January
2, 2000, was determined based on quoted market prices for similar investments.
Reclassification
Certain reclassifications have been made to the 1999 and 1998 consolidated
financial statements to conform to current year presentation.
F-11
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Acquisitions and Dispositions
In October 2000, the Company consummated the sale of its health care
staffing services business and received cash proceeds of $66.5 million. These
proceeds may by adjusted (upward or downward) in accordance with the purchase
and sale agreement based on, among other things, the final closing balance
sheet. The Company recorded a gain of approximately $44.4 million on the sale.
In November 2000, the Company finalized the sale of its home care nursing
services operations in Canada. As consideration for the sale, the Company
received approximately $1.2 million in cash proceeds and a minority interest in
the acquiror. Cash proceeds may be adjusted upward or downward based on the
final closing balance sheet. The Company recorded a charge of approximately $5.2
million as a result of the impairment of goodwill due to the pending sale of the
business. In addition, cumulative translation adjustments of approximately $2.5
million were reversed from the accumulated other comprehensive loss component of
stockholders' equity and reflected as a loss in the gain on sales of businesses
component of the consolidated statement of operations. No other gain or loss was
recorded on the sale.
Net revenues associated with the Company's health care staffing services
business and its Canadian operations amounted to $145 million, $152 million and
$124 million in fiscal 2000, 1999 and 1998, respectively.
In 1999, the Company acquired several home care operations for an aggregate
purchase price of $1.7 million.
In 1998, the Company acquired all of Columbia/HCA Healthcare Corporation's
home health care operations in the state of Florida and several other companies
in asset transactions approximating $35 million in cash. Assets acquired in
these transactions related primarily to goodwill.
Note 4. Restructuring and Other Special Charges
During fiscal 2000, 1999 and 1998, the Company recorded restructuring and
other special charges aggregating $153.2 million, $15.2 million and $122.0
million, respectively.
Fiscal 2000
Restructuring and other special charges during fiscal 2000 aggregated
$153.2 million, of which $14.9 million was recorded in cost of services sold.
The remaining charges of approximately $138.3 million were recorded in selling,
general and administrative expenses and included charges to restructure business
operations of $5.5 million, an incremental charge of $112.0 million for
increases in the allowance for doubtful accounts and receivable writeoffs,
charges of $5.7 million associated with the implementation of the PPS for
Medicare reimbursement, settlement costs of $7.2 million, Split-off/transition
costs of $4.1 million and name change and other costs of $3.8 million. A further
description of the nature of such restructuring and other special charges is
presented below.
F-12
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restructuring of Business Operations
The Company recorded charges of $5.5 million in the fourth quarter of
fiscal 2000 in connection with a restructuring plan which included the closing
and consolidation of twelve nursing branch locations and the realignment and
consolidation of certain corporate and administrative support functions due
primarily to the sale of the Company's Staffing Services business and Canadian
operations. These charges included employee severance of $2.9 million relating
to the termination of 270 employees in nursing branches and certain corporate
and administrative departments, asset writedowns of $1.2 million and future
lease payments and other associated costs of $1.4 million. As of December 31,
2000, the twelve nursing branch locations were closed or consolidated; the
unpaid portion of these restructuring charges aggregated $3.4 million. The
Company expects the restructuring plan to be fully executed by the second
quarter of fiscal 2001.
Bad Debt/Receivables Write-Off
During fiscal 2000 the Company launched several initiatives including (i)
changes to systems, operational processes and procedures in its contracting,
delivery, billing and collection functions and inventory management,(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 fiscal 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.
In connection with these activities, the Company recorded an incremental
provision for doubtful accounts of $112.0 million, which is reflected in
selling, general and administrative expenses in the accompanying consolidated
statement of operations.
PPS Implementation Costs
The Company recorded charges of $5.7 million in connection with the
implementation of and transition to the PPS system for Medicare reimbursement.
Such charges included costs relating to the development of care protocols,
training of field personnel and changes in estimates of settlement amounts.
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
obligation 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 gov-
F-13
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ernment inquiries in New Mexico and North Carolina (See Note 9). As of December
31, 2000, all payments have been made.
Split-off/Transition Costs
Special charges of $4.1 million were incurred during fiscal 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 special charges included change of control and
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, and transition costs of $0.5 million relating to registration costs,
professional fees and other items. Substantially all amounts were paid as of
December 31, 2000.
Name Change and Other
Special charges of approximately $3.8 million were incurred in fiscal 2000
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.
Costs of Services Sold
An adjustment of $6.4 million was recorded in cost of services sold for
changes in cost estimates arising from the systems conversion and physical
inventory procedures which were performed during the third quarter of fiscal
2000. The Company recorded a charge to cost of sales of $8.5 million in the
fourth quarter of fiscal 2000 to reflect an increase in estimated liabilities to
service providers under certain managed care contracts. Such changes in the
estimated liabilities were the result of the Company obtaining more timely and
accurate claim experience information as a result of completing a system
conversion which enhanced its claims reporting functionality.
Fiscal 1999
In the quarter ended April 4, 1999, the Company recorded a restructuring
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 businesses 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. As of the end of fiscal 1999, substantially all of the
closures and consolidations of facilities and expected terminations have
occurred. These activities have 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. Such
benefit is included in selling, general and administrative expenses.
Fiscal 1998
F-14
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 30, 1999, the Company announced plans to take a $56 million
special charge, which was recorded in the year ended January 3, 1999. This
charge was for the settlement of two federal investigations focusing on the
Company's Medicare home office cost reports and certain transactions with
Columbia/HCA Healthcare Corporation ("Columbia/HCA"). The agreements in
connection with the settlements were finalized and signed on July 19, 1999. On
August 11, 1999, Olsten paid $61 million pursuant to the settlement,
approximately $5 million of which was accrued as part of the Company's 1996
merger, integration and other special charges.
As part of the Balanced Budget Act of 1997, the government enacted the IPS
for reimbursement of home care services provided under Medicare effective
October 1, 1997. Prior to enactment of the IPS, home care services were
reimbursed based on cost subject to a cap determined by the Health Care
Financing Administration. The IPS reimburses home care services based on costs,
subject to both a per-beneficiary limit and a per-visit limit. Further, the IPS
reduced the per-visit limit to 1994 levels. As a result of these cuts in
reimbursement, provider reimbursements have been reduced. In order to operate at
the lowered reimbursement rates, home health care companies reduced the services
provided to patients by providing fewer patient visits. In addition, the
regulatory climate that ensued in home health care caused a lower level of
physician referrals.
As a consequence of these circumstances, in 1998, the Company also recorded
restructuring and other special charges of $66 million relating to the
restructuring of its business. These charges, which were primarily for 60 office
closings and consolidations in the United States, were taken to help position
the Company to operate more efficiently under the new IPS. In addition,
significant technological investments were made in order to improve operational
efficiencies and employee retention levels. The benefit of the restructuring
began to be realized in the second quarter of 1998.
Included in this provision was $24 million charged to selling, general and
administrative expenses, which included lease payments of $3 million, employee
severance of $4 million, fixed asset and software write-offs of $5 million to
reflect the loss incurred upon the Company's decision to dispose of the assets
in certain closed offices, and an increase in the allowance for doubtful
accounts of $12 million. All closures and consolidations of facilities and
employee terminations related to this charge have been completed. The allowance
for doubtful accounts was increased because the collection of receivables is
highly dependent on the service provider's ability to provide certain evidence
of service and authorization documentation to a variety of third-party payors.
The office closings, consolidation of certain business service centers and the
termination of employees are all events that, in the Company's past experience,
impair the ability to provide the aforementioned documentation and to collect
receivables.
The Company also recorded other adjustments to selling, general and
administrative expenses of $13 million which included professional fees and
related costs resulting from the settlement with several government agencies
regarding certain past business practices of Quantum Health Resources, Inc.
("Quantum", a subsidiary of the Company acquired in 1996), the level of effort
required to respond to the significant inquiries conducted by the government,
and costs incurred to redesign the credit and collection process of the home
health services business.
F-15
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, upon final announcement of the per-beneficiary limits by the
government, the Company recorded a reduction in revenues of $14 million in
fiscal 1998 for the six month period ended June 28, 1998 in anticipation of
lower Medicare reimbursements resulting from the new per-visit and
per-beneficiary limits that have been imposed by Medicare under the IPS.
The major components of the charges as well as the activity during the
fiscal years 2000, 1999 and 1998 were as follows (in thousands):
Accounts Receiv- Compensation
able, net and and Severance Integration
Settlements Other Assets Costs Costs Other Total
----------- ---------------- -------------- ------------ --------- ---------
Fiscal 1998 Charge.............. $56,000 $17,309 $4,000 $ 34,641 $10,050 $122,000
Cash expenditures............... -- -- (3,739) (33,839) (9,574) (47,152)
Non-cash write-offs............. -- (17,211) -- -- -- (17,211)
--------- ---------- ---------- ----------- ------- --------
Balance at January 3, 1999...... 56,000 98 261 802 476 57,637
Cash expenditures............... (56,000) -- (261) (588) (476) (57,325)
Non-cash write-offs............. -- (98) -- -- -- --
--------- ---------- ---------- ----------- ------- --------
Balance at January 2, 2000...... -- -- -- 214 -- 214
Cash expenditures............... -- -- -- (214) -- (214)
Balance at December 31, 2000.... -- -- -- -- -- --
--------- ---------- ---------- ----------- ------- --------
Fiscal 1999 Charge.............. -- 6,490 5,020 5,190 -- 16,700
Cash expenditures............... -- -- (2,787) (3,310) -- (6,097)
Non-cash write-offs............. -- (6,490) -- -- -- (6,490)
Adjustments..................... -- -- (803) (697) -- (1,500)
--------- ---------- ---------- ----------- ------- --------
Balance at January 2, 2000...... -- -- 1,430 1,183 -- 2,613
Cash expenditures............... -- -- (1,378) (629) -- (2,007)
--------- ---------- ---------- ----------- ------- --------
Balance at December 31, 2000.... -- -- 52 554 -- 606
--------- ---------- ---------- ----------- ------- --------
Fiscal 2000 Charge.............. 7,200 124,605 2,900 9,413 9,125 153,243
Cash expenditures............... (7,200) -- (880) (8,906) -- (16,986)
Non-cash write-offs............. -- (124,319) -- -- -- (124,319)
--------- ---------- ---------- ----------- ------- --------
Balance at December 31, 2000.... -- 286 2,020 507 9,125 11,938
--------- ---------- ---------- ----------- ------- --------
Balance of all charges combined at $ -- $ 286 $ 2,072 $ 1,061 $ 9,125 $ 12,544
========== ========== ========== =========== ======= ========
December 31, 2000............
(Included in accrued expenses)
Note 5. Fixed Assets, Net
(in thousands) Useful Lives December 31, 2000 January 2, 2000
Computer equipment and software.................. 3-5 Years $ 65,617 67,414
Furniture and fixtures........................... 5 Years 31,737 32,248
Buildings and improvements....................... Lease Term 19,056 16,816
Machinery and equipment.......................... 5 Years 14,222 15,203
------------- ----------
130,632 131,681
Less accumulated depreciation.................... (93,671) (79,872)
------------- ----------
$ 36,961 $ 51,809
F-16
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation expense was approximately $20.5 million in fiscal 2000,
$22 million in fiscal 1999 and $21 million in fiscal
1998.
Note 6. Long-Term Debt
On March 13, 2000, the Company entered into a credit facility, 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 (9.75% at December 31, 2000). Total outstanding letters of credit
were approximately $25.7 million as of December 31, 2000. There were no
borrowings outstanding under the credit facility as of December 31, 2000. The
Company is subject to an unused line fee equal to 0.375 percent per annum of the
average daily difference between $150 million and the total outstanding
borrowings and letters of credit. In addition, the Company must pay a fee equal
to 2.25 percent per annum of the aggregate face amount of outstanding standby
letters of credit.
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 will be
collateralized by all of the Company's tangible and intangible personal
property, other than equipment. The Company received a waiver from the lender
for the third quarter of fiscal 2000 for the covenant related to a minimum
tangible net worth requirement. In addition, at that time the agreement was
amended to lower the minimum tangible net worth covenant to $325 million at
December 31, 2000. The Company was in compliance with its financial covenants as
of December 31, 2000.
In 1993, the Company's Quantum subsidiary, issued $86.3 million of 4 3/4%
convertible subordinated debentures maturing on October 1, 2000. In January
1999, $7.7 million of the convertible subordinated debentures were retired at
88.5 percent of the principal amount, resulting in a gain of approximately
$900,000. In June 2000, $10.0 million of the debentures were retired at 95.25
percent of the principal amount, resulting in a gain of $475,000. The remaining
$68.6 million of debentures 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. Borrowings under the credit
facility were repaid in October 2000 upon receipt of proceeds from the sale of
the staffing services business as well as cash flow from operations.
Interest expense in the accompanying statements of operations is presented
net of interest income of $803,000 in 2000, $336,000 in 1999 and $120,000 in
1998.
F-17
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7. Mandatorily Redeemable and Other Securities
Gentiva Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary
Trust
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. Simultaneously 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 preferred trust securities
are mandatorily redeemable on March 15, 2005 and may be optionally redeemed
after March 15, 2001 and prior to the mandatory redemption date at a declining
premium over face amount (8% at March 15, 2001 declining 2% annually through
maturity). 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 convertible preferred trust securities are convertible into the
Company's common stock at a conversion price of $9.319219. Such conversion price
represented a 17.5 percent premium 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. In addition, if the Trust intends to redeem the convertible preferred
trust securities, the holders of the preferred trust securities will have the
option to convert their securities into the Company's common stock at such
conversion price until two days before the scheduled redemption date.
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 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.
Cumulative Preferred Stock
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued
for proceeds of $100,000. Such amount is reflected in other liabilities in the
consolidated balance sheet as of December 31, 2000.
Holders of the cumulative preferred stock will be entitled to receive
cumulative cash dividends at an annual rate of LIBOR plus 2% on the stated
liquidation preference of $1,000 per share, payable quarterly in arrears out of
assets legally available for payment of dividends, when and as declared by
F-18
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Company's board of directors on March 31, June 30, September 30 and December
31 of each year, commencing June 30, 2000. Dividends will accumulate and be
cumulative from the issue date. In the event of any voluntary or involuntary
liquidation, dissolution or other winding-up of the Company or, at the option of
the Company on or after March 10, 2005 or the holder on or after May 10, 2005,
the holders of cumulative preferred stock will be entitled to receive the stated
liquidation preference or a redemption price of $1,000 per share.
Note 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. 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 its entirety. The Separation Agreement provides that
on October 31, 1999 if the sum of (a) indebtedness for borrowed money, (b) the
deferred purchase price of property and (c) up to $10 million of transactions
fees related to the transactions contemplated by the Separation Agreement and
the Merger Agreement, less cash on hand (referred to as net debt) of Olsten and
its subsidiaries (excluding the Company and its subsidiaries) was (i) greater
than $750 million, then the new intercompany account would reflect a payable by
the Company to Olsten equal to the amount of excess, or (ii) less than $750
million, then the new intercompany account would reflect a payable by Olsten to
the Company, in an amount equal to the shortfall or (iii) equal to $750 million,
then no payment would be made in connection with the new debt calculation.
Pursuant to the Separation Agreement, on October 31, 1999, net debt of Olsten
and its subsidiaries (excluding the Company and its subsidiaries) was $718
million and accordingly, 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. As
of January 2, 2000, the Company had received approximately $23 million of the
true-up amount; in fiscal 2000, the Company received the remaining balance of
the true-up amount and 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.
In addition, 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 was included in
restructuring and other special charges 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
F-19
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
estimated sublease rentals by $1.7 million. Such amount was charged directly to
additional paid-in capital during fiscal 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 relating to those net operating
losses to Olsten. Such amount is reflected as a reduction of additional paid-in
capital in fiscal 2000.
Olsten used a centralized cash management system. As a result, cash and
cash equivalents (other than actual cash on hand) were not allocated to the
Company prior to October 31, 1999. On October 31, 1999, the Company ceased
participation in Olsten's cash management system and established its own cash
management system.
Included in selling, general and administrative expenses were $0.6 million,
$1.8 million and $1.4 million in fiscal 2000, 1999 and 1998, respectively,
relating to staffing services provided to the Company by Olsten.
Note 9. Legal Matters
Litigation
In addition to the matters referenced below, 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.
In late 2000, after engaging in a mediation conducted by a third-party
mediator, the parties to the previously disclosed Class Action (In re Olsten
Corporation Securities Litigation, No. 97-CV-5056 (DRH), U.S. District Court for
the Eastern District of New York) and Derivative Lawsuit (Rubin v. May, No.
17135-NC, Delaware Chancery Court) reached an agreement in principle to settle
both lawsuits for the aggregate sum of $25 million. Finalization of the proposed
settlement is subject to the approval of the respective courts before which the
Class Action and the Derivative Lawsuit are pending. The Company's insurers have
funded $18 million of the proposed settlement sum; the $7 million balance was
funded by the Company, in each case subject to return of funds if the settlement
is not approved.
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
F-20
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
properly disclose information to Medicaid and engaged in improper billing. The
alleged violations predate Olsten's acquisition of Quantum Health Resources in
June 1996. The lawsuit seeks unspecified monetary damages, double or treble
damages, penalties and investigative costs. The parties are engaging in
discussions in an attempt to resolve this matter.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly"), one of
the Company's subsidiaries, 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 agreements and, as a result, Columbia/HCA has breached the management
services agreements. In response to the arbitrations, Columbia/HCA has asserted
that the arbitrations 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. Currently pending before one of the arbitrators is
Columbia/HCA's request to consolidate the proceedings, which Kimberly has
opposed. There has been no other development in this matter.
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, captioned Ultimate Home
Health Care, Inc. v. Columbia/HCA Healthcare Corp., No. 3-00-0560, (the
"Tennessee Lawsuit"). The Company was served with an Amended Complaint in the
Tennessee Lawsuit on July 21, 2000, 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.
The Amended Complaint alleges, among other things, that the defendants' business
practices in connection with home health care patient referrals between 1994 and
1996 violated provisions of Federal antitrust laws, the Racketeer Influenced and
Corrupt Organizations Act (RICO), the Tennessee Consumer Protection Act (TCPA),
and state common law. The Amended 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. In September 2000, the
defendants filed a motion to dismiss the Amended Complaint, and by an order
dated January 21, 2001, the Court dismissed plaintiffs' RICO and state common
law tort claims. The Court also held that the plaintiffs had properly pleaded
the antitrust, TCPA and civil conspiracy claims and allowed those claims to
proceed to discovery. 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.
On November 22, 2000, the jury in an age-discrimination lawsuit commenced
in 1998, captioned Fredrickson v. Olsten Health Services Corp. and Olsten
Corporation, Case No. 98 CV 1937, Court of Common Pleas, Mahoning County, Ohio
(the "Fredrickson Lawsuit"), returned a verdict in favor of the plaintiff
against Olsten consisting of $675,000 in compensatory damages, $30 million in
punitive damages and an undetermined amount of attorneys' fees. The jury found
that, although Olsten
F-21
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
had lawfully terminated the plaintiff's employment, its failure to transfer or
rehire the plaintiff rendered Olsten liable to the plaintiff. In vigorously
contesting the verdict and judgment, the defendants posted a bond ordered by the
trial court in the amount of $675,000 and filed with that court several
post-trial motions, including a motion seeking the entry of judgment in the
defendants' favor notwithstanding the verdict or, in the alternative, a new
trial or a remittitur of the punitive damages award. The plaintiff has filed
post-trial motions in connection with the entry of the judgment and the amount
of the bond posted by defendants. A hearing before the trial court on the
parties' respective post-trial motions was held on March 23, 2001. The decision
on the hearing is pending.
Furthermore, in connection with the Split-Off, the Company agreed to
assume, to the extent permitted by law, the liabilities, if any, arising out of
(and to indemnify Olsten for) the above lawsuits and arbitration proceedings and
other liabilities arising out of the health services business, including any
such liabilities arising after the Split-Off in connection with the government
investigations described below.
Government Investigations
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 both of these investigations may have been triggered by
lawsuits under federal or state whistle blower statutes against Olsten or the
Company.
On August 30, 2000, the Company entered into a settlement agreement with
all government agencies participating in the New Mexico United States Attorney's
civil office investigation of certain billing practices by Quantum Health
Resources during the period between January 1992 and April 1997. Under the terms
of this agreement, the Company paid the government $650,000 but denied all
wrongdoing.
In December 2000, the Company resolved an inquiry by the North Carolina
Attorney General's Office as to the eligibility of a certain class of the
Company's patients to receive Medicaid-reimbursed home health services. The
Company paid $50,000 in settlement without any admission of liability and was
given a full release.
F-22
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10. Commitments
The Company rents certain properties under noncancellable, long-term
operating leases, which expire at various dates. Certain of these leases require
additional payments for taxes, insurance and maintenance and, in many cases,
provide for renewal options. Rent expense under all leases was $25.0 million in
2000, $22.5 million in 1999 and $26.9 million in 1998.
Future minimum rental commitments and sublease rentals for all
noncancellable leases having an initial or remaining term in excess of one year
at December 31, 2000, including the lease for a former Olsten subsidiary which
the Company agreed to assume commencing September 16, 2000 under the terms of
the Separation Agreement, are as follows (in thousands):
Fiscal Year Total Commitment Sublease Rentals Net
----------- ---------------- ---------------- ---
2001 $ 23,885 $ 1,309 $22,576
2002 17,843 832 17,011
2003 13,138 737 12,401
2004 10,555 737 9,818
2005 6,007 737 5,270
Thereafter 2,823 -- 2,823
In connection with the Split-off, the Company entered into an agreement on
March 16, 2000 pursuant to which a director of the Company and Olsten agreed not
to compete with the Company for a four year period. In return for this
agreement, the Company paid a lump sum of $250,000. Following the Split-off the
Company paid its past president, who will not continue with the Company, $2.0
million pursuant to a change in control agreement. Such amounts were charged to
expense in 2000.
Note 11. Stock Plans
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of the Company's 1999 Stock Incentive Plan ("1999 Plan") under
which 5 million shares of common stock were reserved for issuance upon exercise
of options thereunder. The maximum total number of shares of common stock for
which grants may be made to any employee, consultant or director under the 1999
plan in any calendar year is 300,000. These options may be awarded in the form
of incentive stock options ("ISOs") or non-qualified stock options ("NQSOs").
The option price of an ISO and NQSO cannot be less than 100 percent and 85
percent, respectively, of the fair market value at the date of grant. As of
December 31, 2000, the Company has granted options for 1,124,407 shares.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of the Company's Stock & Deferred Compensation Plan for
Non-Employee Directors, which provides for payment of annual retainer fees to
non-employee directors, up to 50 percent of which such directors may elect to
receive in cash and the remainder of which will be paid in the form of shares of
common
F-23
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
stock of the Company and also allows deferral of such payment of shares
until termination of director's service. The total number of shares of common
stock reserved for issuance under this plan is 150,000. As of December 31, 2000,
the Company issued 9,440 shares under this plan and 15,104 shares were deferred.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of an employee stock purchase plan for the Company. All employees
of the Company, who have been employed for at least eight months and whose
customary employment exceeds twenty hours per week, will be eligible to purchase
stock under this plan. The human resources and compensation committee of the
Company's Board of Directors administers the plan and has the power to determine
the terms and conditions of each offering of common stock. The maximum number of
shares of common stock, which may be sold to any employee in any offering,
however, will generally be 10 percent of that employee's compensation during the
period of the offering. A total of 1,200,000 shares of common stock are reserved
for issuance under the employee stock purchase plan. As of December 31, 2000,
the Company has issued 142,788 shares under the plan.
Effective as of the Split-off date, all options to purchase Olsten stock
("Olsten stock options") held by the Company's employees became options to
purchase the Company's common stock ("Gentiva stock options") and the Company's
employees became fully vested in the Gentiva stock options. Olsten stock options
were converted into Gentiva stock options at the ratio of 1 to 2.077; the
exercise price of a Gentiva stock option represents 48.1 percent of the
corresponding Olsten stock option exercise price.
A summary of Gentiva stock options for fiscal 2000 is presented below.
2000
-------------------------------------
Weighted average
Stock Options exercise price
-------------------------------------
Options outstanding, beginning of year -- $ --
Granted in connection with conversion
of Olsten options 3,476,616 6.33
Granted 1,124,407 5.88
Exercised (699,436) 5.51
Cancelled (212,581) 10.84
---------------- ----------------
Options outstanding, end of year 3,689,006 $ 6.09
================ ================
Options exercisable, end of year 2,683,506 $ 6.15
================ ================
A summary of Olsten stock options for the period from January 3, 2000
through March 15, 2000 and fiscal years 1999 and 1998 for employees assigned to
the Company is as follows:
F-24
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
---------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Stock average Stock average Stock average
Options exercise price Options exercise price Options exercise price
---------------------------- ---------------------------- ----------------------------
Olsten options outstanding,
beginning of year 1,697,362 $ 13.15 1,446,067 $15.72 980,376 $20.50
Granted - - 498,700 7.84 701,500 10.00
Exercised (2,720) 8.55 (6,467) 1.28 (2,076) 7.89
Cancelled (20,778) 13.61 (240,938) 16.18 (233,733) 18.60
Converted to Gentiva options (1,673,864) 13.15
---------------------------- ---------------------------- ----------------------------
Olsten options outstanding,
end of period - $ - 1,697,362 $13.15 1,446,067 $15.72
============================ ============================ ============================
Olsten options exercisable,
end of period - $ 633,597 $18.77 485,485 $22.07
============================ ============================ ============================
The weighted average fair value of the Company's and Olsten's stock
options, calculated using the Black-Scholes option pricing model, granted during
2000, 1999 and 1998, is $2.93, $3.15 and $3.57, respectively. The fair value of
each option grant is estimated on the date of grant with the following
weighted-average assumptions used for grants in 2000, 1999 and 1998,
respectively: risk-free interest rates of 6.14 to 6.65, 4.7 and 5.3 percent;
dividend yield of 0 percent for 2000 and 1999 and 2 percent for 1998; expected
lives of five years for all; and volatility of 47 percent for 2000, 35 percent
for 1999 and 36 percent for 1998.
The following table summarizes information about Gentiva stock options
outstanding at December 31, 2000.
Options Outstanding
----------------------------------------------------------------------------------------
Weighted average
Number outstanding at remaining Weighted average exercise
Range of exercise prices December 31, 2000 contractual life (in years) price
------------------------- ---------------------- --------------------------- -------------------------
$ 2.86 to $ 3.49 727,073 7.93 $ 3.13
3.61 to 4.39 655,315 7.78 4.02
5.56 to 6.75 1,007,000 9.20 5.72
6.80 to 8.69 489,626 6.49 7.02
8.92 to 11.95 785,183 5.64 10.18
12.44 to 12.50 18,500 9.95 12.49
15.15 to 17.84 2,577 1.12 17.14
20.54 to 20.75 3,732 1.68 20.68
------------------- ------------------- ---------------------
$ 2.86 to $20.75 3,689,006 7.57 $ 6.09
=================== =================== =====================
F-25
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
under the stock option plans. Had compensation cost for the Company's and
Olsten's stock option plans been determined based on the fair value at the grant
date for awards consistent with the provisions of SFAS No. 123, the Company's
net loss and net loss per share would have been increased to the pro forma
amounts indicated below (in thousands, except per share amounts):
2000 1999 1998
---- ---- ----
Net loss - as reported $(104,200) $(15,086) $(101,465)
Net loss - pro forma (106,052) (16,864) (102,535)
Basic loss per share - as reported (5.05) (.74) (4.99)
Basic loss per share - pro forma (5.14) (.83) (5.04)
F-26
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 12. Income Taxes
Comparative analyses of the provision (benefit) for income taxes follows (in thousands):
2000 1999 1998
---- ---- ----
Current
Federal $ -- $ (19,586) $ (29,808)
State and local 1,580 170 294
Foreign -- 248 --
------------------ ------------------ ------------------
1,580 (19,168) (29,514)
------------------ ------------------ ------------------
Deferred
Federal (774) 13,047 (17,556)
State and local -- -- --
------------------ ------------------ ------------------
(774) 13,047 (17,556)
------------------ ------------------ ------------------
$ 806 $ (6,121) $ (47,070)
================== ================== ==================
A reconciliation of the differences between income taxes computed at
Federal statutory rate and provisions (benefits) for income taxes for each year
are as follows (in thousands):
2000 1999 1998
---- ---- ----
Income taxes computed at Federal statutory tax rate $ (36,188) $ (7,422) $ (51,987)
State income taxes, net of Federal
benefit and valuation allowance 1,027 111 190
Capital loss on disposition of domestic subsidiary (14,008) - -
Amortization of intangibles 858 902 922
Nondeductible meals and entertainment 312 265 343
Nondeductible settlement of government investigations - - 3,500
Other 81 23 (38)
Increase in Federal valuation allowance 48,724 - -
--------------------- --------------------- --------------
$ 806 $ (6,121) $ (47,070)
====================== ==================== ==============
F-27
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Deferred tax assets and deferred tax liabilities are as follows (in thousands):
December 31, 2000 January 2, 2000
----------------- ---------------
Deferred tax assets
Reserves and allowances $ 58,132 $ 25,074
Net operating loss (federal and state) 31,206 -
Other 470 1,183
Less: valuation allowance (57,556) -
------------------------ -------------------
Total deferred tax asset 32,252 26,257
------------------------ -------------------
Deferred tax liabilities
Capitalized software (2,130) (2,163)
Intangible assets (26,280) (22,047)
Depreciation (3,842) (2,821)
------------------------ --------------------
Total deferred tax liability (32,252) (27,031)
------------------------ --------------------
Net deferred tax asset (liability) $ -- $ (774)
======================== ====================
In accordance with the Tax Sharing Agreement, any net operating losses
generated up to the Split-off are to be allocated to and utilized by Olsten. As
of March 15, 2000, approximately, $49.7 million of recorded tax benefits related
to these net operating losses have been transferred to Olsten. At the end of
2000, Gentiva had a federal net operating loss carryforward of $76.4 million
generated after Split-off date, all of which will expire by 2020. Approximately
$11.7 million of the net operating loss carryforward relates to the
non-qualified supplemental executive retirement plan and stock options, the
benefits of which, when realized, will be credited to stockholders' equity.
Realization of deferred tax assets is dependent upon generating sufficient
taxable income prior to their expiration. The lack of historical pre-tax income
creates uncertainty about the Company's ability to earn taxable income and
realize tax benefits in future years. Therefore, management has provided a
valuation allowance for its deferred tax assets.
Note 13. Benefit Plans for Permanent Employees
Olsten and its subsidiaries maintained qualified and non-qualified defined
contribution retirement plans for its salaried employees, which provide for a
partial match of employee savings under the plans and for discretionary
profit-sharing contributions based on employee compensation. The Company
established similar retirement plans and assumed the obligations under the
Olsten plans for those employees assigned to the Company at the date of the
Split-off.
F-28
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Olsten also maintained a non-qualified supplemental executive retirement
program for key employees and officers. Certain employees of the Company were
eligible to participate in the Olsten sponsored plan. Prior to the Split-off the
Company established its own non-qualified supplemental executive retirement plan
substantially similar to the Olsten plan. The Olsten plan was terminated prior
to the Split-off, and the Company terminated its plan after the Split-off.
With respect to the Company's non-qualified defined contribution retirement
plan for salaried employees, all pre-tax contributions, matching contributions
and profit sharing contributions (and the earnings therein) are held in a Rabbi
Trust and are subject to the claims of the general, unsecured creditors of the
Company. All post-tax contributions are held in a secular trust and are not
subject to the claims of the creditors of the Company. The fair value of the
assets held in the Rabbi Trust and the liability to plan participants as of
December 31, 2000 totaling approximately $9.8 million are indicated in other
assets and other liabilities on the accompanying consolidated balance sheet.
Company contributions under the defined contribution plans were
approximately $2.7 million in 2000, $3.6 million in 1999 and $3.4 million in
1998.
Note 14. Business Segment Information
The Company operated in the United States and Canada during fiscal 2000,
1999 and 1998 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 needs and (ii) clinical support services for
pharmaceutical and biotechnology firms. 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 82 percent for fiscal 2000 and 78 percent for fiscal 1999.
F-29
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company evaluates performance and allocates resources based on
operating contributions of the reportable segments, which excludes corporate
expenses, depreciation, amortization, interest expense, restructuring and other
charges, 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 corporation for the benefit of all segments. The accounting
policies of the reportable segments are the same as those described in the
summary of significant accounting policies. Corporate restructuring and other
special charges primarily represent name change costs, transition costs,
settlement costs and certain restructuring costs.
Information about the Company's operations is as follows (in thousands):
F-30
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specialty Home Care
Pharmaceuti- Nursing Staffing
cal Services Services Services Total
--------------- ---------- --------- ------
Year ended December 31, 2000
- ----------------------------
Net revenues..................................................... $ 754,552 $ 623,664 $ 128,428 $1,506,644
============== =========== ========= ==========
Operating contribution before restructuring and other
special charges............................................... $ 94,446 $ 34,726 $ 10,546 $ 139,718
Restructuring and other special charges - segments............... (103,507) (31,484) --- (134,991)
------------ ----------- ---------- -----------
Operating contribution........................................... $ (9,061) $ 3,242 $ 10,546 4,727
============ =========== ==========
Restructuring and other special charges - corporate.............. (18,252)
Gain on sales of businesses...................................... 36,682
Corporate expenses............................................... (84,991)
-----------
Earnings before interest expense, taxes depreciation and
amortization.................................................. (61,834)
Depreciation and amortization.................................... (31,682)
Interest expense, net............................................ (9,878)
-----------
Loss before income taxes......................................... $ 103,394
===========
Segment assets................................................... $ 320,047 $ 148,972 $ 1,270 $ 470,289
=========== ========== ===========
Corporate assets................................................. 335,195
-----------
Total assets..................................................... $ 805,484
===========
Year ended January 2, 2000
- --------------------------
Net revenues..................................................... $ 699,993 $ 662,477 $ 127,352 $ 1,489,822
=========== ========== =========== ===========
Operating contribution before restructuring charges.............. $ 98,590 $ 21,943 $ 10,088 $ 130,621
Restructuring charges............................................ (1,730) (13,090) (380) (15,200)
============ =========== =========== ============
Operating contribution........................................... $ 96,860 $ 8,853 $ 9,708 115,421
=========== ========== ==========
Corporate expenses............................................... (86,028)
------------
Earnings before interest expense, taxes, depreciation
and amortization.............................................. 29,393
Depreciation and amortization.................................... (33,625)
Interest expense, net............................................ (16,975)
-------------
Loss before income taxes......................................... $ (21,207)
=============
Segment assets................................................... $ 440,185 $ 201,978 $ 26,515 $ 668,678
============ ========== ==========
Corporate assets................................................. 394,337
-------------
Total assets..................................................... $ 1,063,015
=============
F-31
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Specialty Home Care
Pharmaceuti- Nursing Staffing
cal Services Services Services Total
------------- ----------- --------- ------------
Year ended January 3, 1999
- --------------------------
Net revenues..................................................... $ 571,718 $ 658,745 $ 99,840 $ 1,330,303
============ =========== ========= ===========
Operating contribution before restructuring and other
special charges............................................... 81,250 $ 14,984 $ 8,179 $ 104,413
Restructuring and other special charges.......................... (24,046) (97,954) -- 122,000
------------- ------------ ---------- ------------
Operating contribution........................................... $ 57,204 $ (82,970) $ 8,179 (17,587)
============ =========== =========
Corporate expenses............................................... (82,133)
------------
Loss before interest expense, taxes, depreciation and
amortization.................................................. (99,720)
Depreciation and amortization.................................... (31,401)
Interest expense, net............................................ (17,414)
-----------
Loss before income taxes......................................... $ (148,535)
===========
Segment assets................................................... $ 342,862 $ 180,753 $ 18,979 $ 542,594
============ =========== =========
Corporate assets................................................. 403,144
-----------
Total assets..................................................... $ 945,738
===========
Financial information, summarized by geographic area, is as follows (in thousands):
Net Revenues Long-lived assets
Year ended December 31, 2000 ------------ -----------------
- ----------------------------
United States.................................................... $1,472,316 $ 281,978
Canada........................................................... 34,328 2,232
---------- ----------
$1,506,644 $ 284,410
========== ==========
Year ended January 2, 2000
- --------------------------
United States.................................................... $1,446,532 $ 302,601
Canada........................................................... 43,290 1,183
---------- -----------
$1,489,822 $ 303,784
========== ===========
Year ended January 3, 1999
- --------------------------
United States.................................................... $1,290,072 $ 317,849
Canada........................................................... 40,231 750
---------- -----------
$1,330,303 $ 318,599
========== ===========
F-32
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
Note 15. Quarterly Financial Information (Unaudited)
First Second Third Fourth
quarter quarter quarter quarter
------- ------- ------- --------
$ $ $ $
------- ------- ------- --------
(in thousands, except share amounts)
-------------------------------------------------
Year ended December 31, 2000
- ----------------------------
Net revenues 384,607 383,270 380,325 358,442
Gross profit 128,502 128,624 118,165 109,709
Net income (loss) (1,906) 2,171 (130,346) 25,881
Net income (loss) per share:
Basic (.09) .11 (6.30) 1.23
Diluted (.09) .10 (6.30) 1.05
Year ended January 2, 2000
- --------------------------
Net revenues 368,160 372,573 377,312 371,777
Gross profit 125,674 127,242 125,078 127,432
Net income (loss) (12,806) 2,435 (2,481) (2,234)
Net income (loss) per share:
Basic and diluted (.63) .12 (.12) (.11)
During the year ended December 31, 2000, the Company recorded restructuring
and other special charges of $5.6 million in the first quarter, $1.2 million in
the second quarter, $126.8 million in the third quarter and $19.6 million in the
fourth quarter. In addition, the Company recorded a charge of $5.2 million in
the third quarter of fiscal 2000 resulting from impairment of goodwill and gain
of $41.9 million in the fourth quarter of fiscal 2000 relating to sales of
businesses. The first quarter of 1999 included $16.7 million of special charges
and the fourth quarter of 1999 included a benefit of $1.5 million relating to
these special charges as indicated in Note 4.
During the third quarter of fiscal 2000, the Company realized revenues of
$5.0 million relating to an adjustment to estimated revenue accruals and
increased a provision for doubtful accounts by a corresponding amount.
F-33
GENTIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2000
(in thousands)
Col. B Col. C Col. D Col. E
------ ------ ------ ------
Additions
Balance at charged to costs
Beginning of and Balance at end
period expenses Deductions of period
------------ ---------------- ----------- ---------------
Allowance for Doubtful Accounts:
For the Year Ended December 31, 2000 $36,759 $144,883 $(75,680) $105,962
For the Year Ended January 2, 2000 $25,596 $38,687 $(27,524) $36,759
For the Year Ended January 3, 1999 $19,200 $24,046 $(17,650) $25,596
F-34