SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 1, 2001
Commission File No. 1-15669
Gentiva Health Services, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-433-5801
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3 Huntington Quadrangle 2S, Melville, NY 11747-8943
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 501-7000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares outstanding of the Registrant's Common Stock,
as of August 9, 2001 was 23,049,907.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - July 1, 2001 (Unaudited)
and December 31, 2000 2
Consolidated Statements of Income (Unaudited) - Three and
Six Months Ended July 1, 2001 and July 2, 2000 3
Consolidated Statements of Cash Flows (Unaudited) - Six
Months Ended July 1, 2001 and July 2, 2000 4
Notes to Consolidated Financial Statements (Unaudited) 5-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21-23
Item 2. Change in Securities and Use of Proceeds 23
Item 3. Defaults Upon Senior Securities 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 5. Other Information 23-24
Item 6. Exhibits and Reports on Form 8-K 24-27
SIGNATURES 28
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
July 1, 2001 December 31, 2000
----------------- --------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 77,070 $ 452
Receivables, less allowance for doubtful accounts
of $91,222 and $105,962, respectively 384,896 419,178
Inventories 48,813 51,111
Prepaid expenses and other current
assets 46,723 50,333
----------------- --------------------
Total current assets 557,502 521,074
Fixed assets, net 31,252 36,961
Intangible assets, net 225,474 230,702
Other assets 17,534 16,747
----------------- --------------------
Total assets $ 831,762 $ 805,484
================= ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 71,566 $ 74,083
Accrued expenses 61,086 50,682
Payroll and related taxes 19,112 17,305
Insurance costs 28,136 30,320
----------------- --------------------
Total current liabilities 179,900 172,390
Other liabilities 47,344 46,945
Gentiva - obligated mandatorily redeemable
convertible securities of a subsidiary holding solely
Gentiva debentures 19,400 20,000
Shareholders' equity:
Common stock, $.10 par value; authorized
100,000,000 shares; issued and outstanding
22,995,058 and 21,196,693 shares, respectively 2,300 2,120
Additional paid-in capital 699,774 689,163
Accumulated deficit (116,140) (124,570)
Accumulated other comprehensive loss (816) (564)
----------------- --------------------
Total shareholders' equity 585,118 566,149
----------------- --------------------
Total liabilities and
shareholders' equity $ 831,762 $ 805,484
================= ====================
See notes to consolidated financial statements.
-2-
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
---------------------------------- -----------------------------------
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
-------------- ------------------ ---------------- -----------------
Net revenues $335,444 $383,270 $692,622 $767,877
Cost of services sold 221,809 254,646 462,557 510,751
-------------- ------------------ ---------------- -----------------
Gross profit 113,635 128,624 230,065 257,126
Selling, general and administrative
expenses 110,964 122,785 220,349 250,317
Interest expense, net 152 2,112 585 6,348
-------------- ------------------ ---------------- -----------------
Income before income taxes 2,519 3,727 9,131 461
Income tax expense 201 1,556 701 196
-------------- ------------------ ---------------- -----------------
Net income $ 2,318 $ 2,171 $ 8,430 $ 265
============== ================== ================ =================
Net income per share:
Basic $ 0.10 $ 0.11 $ 0.39 $ 0.01
============== ================== ================ =================
Diluted $ 0.10 $ 0.10 $ 0.36 $ 0.01
============== ================== ================ =================
Average shares outstanding:
Basic 22,265 20,513 21,859 20,429
============== ================== ================ =================
Diluted 23,859 21,823 23,382 21,681
============== ================== ================ =================
See notes to consolidated financial statements.
-3-
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
------------------------------------
July 1, 2001 July 2, 2000
------------------------------------
OPERATING ACTIVITIES:
Net income $ 8,430 $ 265
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 13,625 16,141
Provision for doubtful accounts 18,550 16,917
Gain on sale/disposal of assets (167) -
Changes in assets and liabilities:
Accounts receivable 15,732 (45,829)
Inventories 2,298 18,726
Prepaid expenses and other current
assets 3,610 (899)
Current liabilities (2,989) (48,696)
Other, net (640) 1,834
------------------------------------
Net cash provided by (used in) operating
activities 58,449 (41,541)
------------------------------------
INVESTING ACTIVITIES:
Purchase of fixed assets (2,796) (3,620)
Proceeds from sale of assets 275 -
------------------------------------
Net cash used in investing
activities (2,521) (3,620)
------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 10,191 1,234
Issuance of mandatorily redeemable and other
securities - 20,100
Net transactions with Olsten - 5,226
Proceeds from revolving credit facility - 26,191
Debt issuance costs - (2,564)
Increase (decrease) in book overdrafts (10,379) 3,856
Retirement of debt - (9,525)
Advances from Medicare program 20,878 -
------------------------------------
Net cash provided by financing activities 20,690 44,518
------------------------------------
Net increase (decrease) in cash and cash
equivalents 76,618 (643)
Cash and cash equivalents at beginning of
period 452 2,942
------------------------------------
Cash and cash equivalents at end of period $ 77,070 $ 2,299
====================================
See notes to consolidated financial statements.
-4-
Gentiva Health Services, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The accompanying interim consolidated financial statements are unaudited,
but have been prepared by Gentiva Health Services, Inc. (the "Company") pursuant
to the rules and regulations of the Securities and Exchange Commission and, in
the opinion of management, include all adjustments necessary for a fair
presentation of results of operations, financial position and cash flows for
each period presented. Results for interim periods are not necessarily
indicative of results for a full year. The year-end balance sheet data was
derived from audited financial statements, but does not include all disclosures
required by accounting principles generally accepted in the United States of
America.
2. Background and Basis of Presentation
On March 15, 2000, the Company and its subsidiaries 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. Prior to the Split-off, the
Company operated Olsten's health services business as a wholly-owned subsidiary
of Olsten.
The accompanying interim consolidated financial statements for periods
prior to or including March 15, 2000 reflect the results of operations,
financial position and cash flows of the Company as if it were a separate entity
for all periods presented. Such consolidated financial statements have been
prepared using the historical basis in the assets and liabilities and historical
results of operations related to the Company.
The Company's selling, general and administrative expenses included a
management fee of approximately $1.0 million for the first six months of fiscal
2000. 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.
Net interest expense as presented in the consolidated statement of income
included net interest expense of approximately $2.7 million for the first six
months of fiscal 2000 relating to the intercompany balances with Olsten. Such
intercompany balances were reflected as a contribution to capital as of the
Split-off date.
-5-
3. Earnings per Share
Basic net income per share for each period presented has been computed by
dividing net income by the weighted average number of shares outstanding for
each respective period. Diluted net income per share for each period presented
has been computed using the weighted average number of common and dilutive
common equivalent shares outstanding.
For the second quarter and first six months of fiscal 2001, the weighted
average numbers of shares outstanding were 22,265,000 and 21,859,000,
respectively. Dilutive common equivalent shares represented 1,594,000 shares for
the second quarter and 1,523,000 shares for the six month period that would be
issued upon the assumed exercise of approximately 2.8 million stock options
under the treasury stock method.
For the second quarter and first six months of fiscal 2000, the weighted
average numbers of shares outstanding were 20,513,000 and 20,429,000,
respectively. Dilutive common equivalent shares represented 1,310,000 shares for
the second quarter and 1,252,000 shares for the six month period that would be
issued upon the assumed conversion of stock options under the treasury stock
method.
The computation of diluted net income per share excluded the effect of
approximately 2.1 million shares issuable upon the conversion of the 10 percent
convertible preferred trust securities for the quarter and year to date fiscal
2001 and 2000 periods since the increase in net income resulting from the
exclusion of after-tax interest expense relating to these securities and the
increase in shares outstanding resulting from conversion would have an
antidilutive effect on earnings. For the fiscal 2000 periods, shares issuable
upon the conversion of the 4 3/4 percent convertible subordinated debentures,
which matured and were retired in October 2000, were also excluded from the
diluted net income per share computation because of their antidilutive effect on
earnings.
4. Restructuring and Special Charges
During the second quarter of fiscal 2001, the Company recorded special
charges of approximately $3.0 million in connection with the settlement of the
Gile v. Olsten Corporation, et al, and the State of Indiana v. Quantum Health
Resources, Inc. and Olsten Health Services, Inc. lawsuits and for various other
legal costs. These legal matters are further discussed in Note 8. These special
charges are reflected in selling, general and administrative expenses in the
accompanying consolidated statement of income.
During the six months ended July 2, 2000, the Company recorded special
charges aggregating $6.8 million which were reflected in selling, general and
administration expenses in the accompanying statement of income. Of this amount,
charges of $4.1 million were incurred 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
-6-
current executive officer of the Company, and transition costs of $0.5 million
relating to registration costs, professional fees and other items.
In addition, special charges of $1.2 million in the second quarter and $2.7
million in the first six months of fiscal 2000 were incurred in connection with
the change of the Company's name to Gentiva Health Services, Inc. These special
charges primarily consisted of costs incurred and paid for consulting fees,
promotional items and advertising.
The Company recorded charges of $5.5 million in the fourth quarter of
fiscal 2000 in connection with a restructuring of certain business operations.
As of December 31, 2000 and July 1, 2001, the unpaid portion of these
restructuring charges aggregated $3.4 million and $1.8 million, respectively, as
a result of cash payments made during the six month period.
5. Current Liabilities
In early 2001, the Center for Medicare and Medicaid Services, formerly
known as the Health Care Financing Administration, issued cash advances to
certain Medicare providers in connection with the transition from the Interim
Payment System to the Prospective Payment System for Medicare reimbursement.
Such advances are expected to be repaid during the first quarter of fiscal 2002.
In the first quarter of fiscal 2001, the Company received a cash advance, net of
payments for estimated settlements relating to cost report filings, of
approximately $20.9 million which was reflected in accrued expenses in the
accompanying consolidated balance sheet as of July 1, 2001.
6. Cash and Revolving Credit Facility
As of July 1, 2001, there were no outstanding borrowings and total
outstanding letters of credit approximated $25.7 million under the Company's
$150 million amended revolving credit facility which expires in 2004. The
Company was in compliance with the financial covenants of the credit facility as
of July 1, 2001.
In June 2001, the Company's credit facility was amended to increase the
portion of the facility available for letters of credit from $30 million to
either (i) $40 million or (ii) $70 million in the event that the Company elects
to post a letter of credit in lieu of an appellate bond for all or a part of the
total amount of the judgment plus interest in the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation case while the Company pursues its appeal
of the judgment as further discussed in Note 8. As of July 1, 2001, a
supersedeas bond in the amount of $35.2 million was posted to satisfy the
judgment plus interest. Under the terms of the bond, cash equal to the amount of
the bond is held in a segregated account as collateral for the bond and the
interest relating thereto accrues to the Company. The cash in the segregated
account is reflected in cash and cash equivalents in the accompanying
consolidated balance sheet. At its discretion, the Company may substitute a
letter of credit for the segregated cash to collateralize the bond.
-7-
7. Shareholders' Equity
Changes in shareholders' equity during the six months ended July 1, 2001
were as follows (in thousands):
Common Additional Accumulated Accumulated Total
Stock Paid-in Deficit Other
Capital Comprehensive
Loss
------------ ------------ ---------------------------------- -----------
Balance at December 31, 2000 $2,120 $689,163 $(124,570) $ (564) $ 566,149
Comprehensive income:
Net income 8,430 8,430
Unrealized loss on investments (252) (252)
Issuance of stock upon conversion of
convertible preferred trust securities 6 594 600
Issuance of stock upon exercise of stock
options and under stock plans for employees
and directors 174 10,017 10,191
------------ ------------ ---------------------------------- -----------
Balance at July 1, 2001 $2,300 $699,774 $ (116,140) $ (816) $ 585,118
============ ============ ================================== ===========
Total comprehensive income amounted to $2.7 million and $2.1 million during
the second quarter of fiscal 2001 and 2000, respectively, and $8.2 million and
$0.3 million during the first six months of fiscal 2001 and 2000, respectively.
In June 2001, the Company issued 64,383 shares of common stock upon the
conversion of $0.6 million of the convertible preferred trust securities at a
conversion price of $9.319219.
8. 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 to settle both lawsuits
for the aggregate sum of $25 million which was subject to
-8-
approval by the respective courts. The Company's insurers funded $18 million of
the proposed settlement sum. The Company funded the $7 million balance and
recorded a special charge for that amount during fiscal 2000. By order dated
April 30, 2001, the District Court preliminarily approved the settlement of the
Class Action and scheduled a settlement fairness hearing for August 31, 2001. On
August 7, 2001, the Delaware Chancery Court approved the settlement of the
Derivative Lawsuit.
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 sought unspecified monetary damages, double or treble damages, penalties
and investigative costs. The parties resolved this matter during the second
quarter of fiscal 2001 pursuant to a confidential Settlement agreement and full
release. There is no ongoing obligation on the part of the Company arising from
this settlement.
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. Still pending before the arbitrators is Columbia/HCA's
request to consolidate the proceedings, which Kimberly has opposed.
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,
-9-
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.
Plaintiff's motion for class certification is due to be filed with the court by
August 24, 2001. Because the Tennessee Lawsuit is in a relatively preliminary
discovery 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. The defendants posted a court ordered bond in the amount of $675,000
and filed 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 filed post-trial motions in connection with the entry of the judgment
and the amount of the bond posted by defendants. Following a hearing on the
parties' respective post-trial motions on March 23, 2001, the trial court, on
May 17, 2001, denied all post-trial motions, and entered judgment for the
plaintiff for the full amount of compensatory and punitive damages, and awarded
the plaintiff reduced attorney's fees of $247,938. On June 14, 2001, defendants
timely filed a Notice of Appeal with the Court of Appeals, Seventh Appellate
District, Mahoning County, Ohio, and on June 19, 2001, the Company posted a
supersedeas bond for the full amount of the judgment, plus interest. The Company
continues to defend this matter vigorously.
In Gile v. Olsten Corporation, et al, U.S. District Court for the Central
District of California, No. 97-9363-NM, plaintiff filed an age discrimination
suit against Olsten Corporation, Olsten Health Services, and a certain
individual in December 1997. The defendants denied the allegations of
discrimination on the basis that plaintiff's termination was part of a reduction
in force. The individual defendant was dismissed from the action, and the
remaining corporate defendants filed a motion for summary judgment that was
granted by the District Court in February 1999. The plaintiff appealed the
District Court's order to the Ninth Circuit Court of Appeals and in December,
2000, the Court of Appeals issued its ruling which reversed the District Court
and remanded the case for trial. On or about June 19, 2001, the Company and the
plaintiff agreed to settle this matter and entered into a confidential
settlement agreement with full release.
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.
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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.
9. Subsequent Event
On August 7, 2001, the Company's Board of Directors authorized the Company
to redeem its 10 percent convertible subordinated debentures at a redemption
price of 108 percent of the original principal amount of the debentures plus
accrued and unpaid interest in accordance with the terms of an Indenture dated
March 15, 2000, between the Company and Wilmington Trust Company. These
debentures, which are due in 2005, were issued to a Trust of which the Company
owns all the common equity. Upon such redemption, the Trust, in turn, is
required to use the proceeds of such redemption to redeem all of its convertible
preferred trust securities in accordance with the terms of a Trust Agreement
dated March 9, 2000. Holders of the trust securities may elect to convert such
securities into the Company's common stock until two business days prior to the
redemption date at a conversion price of $9.319219. The scheduled redemption
date is September 14, 2001.
At July 1, 2001, $19.4 million of the above referenced Gentiva-obligated
mandatorily redeemable securities were outstanding. If all such securities are
converted, the Company's outstanding common stock will increase by approximately
2.1 million shares.
10. Business Segment Information
The Company operates in the United States and operated in Canada during the
fiscal 2000 periods, servicing patients and customers through the following
business segments: Specialty Pharmaceutical Services, Home Health Services and,
for a portion of the fiscal 2000 periods, Staffing Services and Canada. These
segments are briefly described below.
-11-
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, (iii) distribution services for
pharmaceutical, biotechnology and medical service firms and (iv) clinical
support services for pharmaceutical and biotechnology firms.
Home Health 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 included services to institutional, occupational and
alternate site health care organizations by providing health care professionals
to meet supplemental staffing needs. Canada included professional and
paraprofessional services to individuals in home and institutional settings.
Both Staffing Services and Canada constituted less than 10 percent of the net
revenues, operating contribution and the total assets of the Company and, as
such, were combined for segment reporting purposes.
The Company and its chief decision makers evaluate performance and allocate
resources based on operating contributions of the reportable segments, which
exclude corporate expenses, depreciation, amortization and interest expense, but
include revenues and all other costs directly attributable to the specific
segment. Intersegment revenues represent Specialty Pharmaceutical Services
segment revenues generated from services provided to the Home Health Services
segment. Identifiable assets of the segments reflect net accounts receivable and
inventories associated with segment activities. All other assets are assigned to
the Company for the benefit of all segments.
During fiscal 2001, the Company changed its evaluation performance
methodology, as described below, which resulted in a change in reportable
segments. In the fiscal 2000 periods, clinical support services for the
pharmaceutical and biotechnology firms and staffing services provided under a
state contract were included in the Staffing Services segment. The Company now
considers these services to be part of the Specialty Pharmaceutical Services
segment and Home Health Services segment, respectively. In addition, services
relating to care management and coordination for managed care organizations and
self-insured employees were allocated between Specialty Pharmaceutical Services
and Home Care Nursing Services segments in the fiscal 2000 periods based on the
nature of services rendered; the Company now considers these services to be part
of the Home Health Services segment. Furthermore, Canadian operating results
were included in the Home Care Nursing Services segment in the prior year
periods and are now reflected in the Staffing and Canada results for
presentation purposes. Prior period segment data has been reclassified to
conform with the current year presentation.
-12-
Information about the Company's operations is as follows (in thousands):
Specialty Home Staffing Total
Pharmaceutical Health and
Services Services Canada
----------------- ------------ ----------- -----------
Three months ended July 1, 2001
- -------------------------------
Net revenues - segments $178,328 $179,705 $ - $358,033
================= ============ ===========
Intersegment revenues (22,589)
-----------
Net revenues $ 335,444
===========
Operating contribution $ 17,072 $ 12,774 $ - $ 29,846
================= ============ ===========
Corporate expenses (17,529)
Special charges - corporate (3,011)
-----------
Earnings before interest expense, taxes,
depreciation and amortization 9,306
Depreciation and amortization (6,635)
Interest expense, net (152)
-----------
Income before income taxes $ 2,519
===========
Three months ended July 2, 2000
- -------------------------------
Net revenues - segments $ 171,899 $ 187,167 $ 42,089 $ 401,155
=============== ============= ===========
Intersegment revenues (17,885)
-----------
Net revenues $ 383,270
===========
Operating contribution $20,848 $ 11,114 $ 3,153 $ 35,115
=============== ============= ===========
Corporate expenses (20,111)
Special charges - corporate (1,191)
-----------
Earnings before interest expense,
taxes, depreciation and amortization 13,813
Depreciation and amortization (7,974)
Interest expense, net (2,112)
-----------
Income before income taxes $ 3,727
===========
-13-
Specialty Home Staffing
Pharmaceutical Health and
Services Services Canada Total
------------------ -------------- -------------------------------
Six months ended July 1, 2001
- -----------------------------
Net revenues - segments $374,215 $365,322 $ - $ 739,537
================== ============== =================
Intersegment revenues (46,915)
--------------
Net revenues $ 692,622
==============
Operating contribution $ 33,919 $ 27,554 $ - $ 61,473
================== ============== =================
Corporate expenses (35,121)
Special charges - corporate (3,011)
--------------
Earnings before interest expense, taxes,
depreciation and amortization 23,341
Depreciation and amortization (13,625)
Interest expense, net (585)
--------------
Income before income taxes $ 9,131
==============
Segment assets $275,899 $157,810 $ - $ 433,709
================== ============== =================
Corporate assets 398,053
---------------
Total assets $ 831,762
===============
Six months ended July 2, 2000
- -----------------------------
Net revenues - segments $340,894 $376,711 $ 83,768 $ 801,373
================== ============== =================
Intersegment revenues (33,496)
--------------
Net revenues $ 767,877
==============
Operating contribution $ 43,421 $ 22,147 $ 5,652 $ 71,220
================== ============== =================
Corporate expenses (41,159)
Special charges - corporate (6,791)
--------------
Earnings before interest expense, taxes,
depreciation and amortization 23,270
Depreciation and amortization (16,461)
Interest expense, net (6,348)
--------------
Income before income taxes $ 461
===============
Segment assets $460,075 $192,629 $ 26,160 $ 678,864
================== ============== =================
Corporate assets 335,273
---------------
Total assets $ 1,014,137
===============
-14-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The comparability of the Company's results of operations between the second
quarter and the first six months of fiscal 2001 and 2000 was impacted by several
items which are briefly described below.
o On March 15, 2000, the Company was Split-off from Olsten Corporation
("Olsten") through the issuance of all of the Company's 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 for periods prior to
and including March 15, 2000 reflect the financial position, results
of operations and cash flows of the Company as if it were a separate
entity for all periods presented. Such consolidated financial
statements have been prepared using historical basis of assets and
liabilities and historical results of operations related to the
Company.
o During the second quarter of fiscal 2001, the Company recorded special
charges of approximately $3.0 million in connection with the
settlement of the Gile v. Olsten Corporation, et al, and the State of
Indiana v. Quantum Health Resources, Inc. and Olsten Health Services,
Inc. lawsuits and for various other legal costs. These legal matters
are further discussed in Note 8. These special charges were reflected
in selling, general and administration expenses in the accompanying
consolidated statement of income.
During the six months ended July 2, 2000, the Company recorded special
charges aggregating $6.8 million which were reflected in selling,
general and administration expenses in the accompanying statement of
income. Of this amount, charges of $4.1 million were incurred 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.
In addition, special charges of $1.2 million in the second quarter of
fiscal 2000 and $2.7 million in the first six months of fiscal 2000
were incurred in connection with the change of the Company's name to
Gentiva Health Services, Inc. These special
-15-
charges primarily consisted of costs incurred and paid for consulting
fees, promotional items and advertising.
o 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. Net revenues attributable to the Medicare program as
a percentage of total consolidated net revenues were 17 percent in the
second quarter and first six months of both fiscal 2001 and 2000.
o During the fourth quarter of fiscal 2000, the Company sold its health
care staffing services business and its Canadian operations. In the
first quarter and first six months of fiscal 2000, the Company
recorded revenues of $42 million and $84 million, respectively, gross
profit of $11 million and $22 million, respectively, and selling,
general and administrative expenses of $8 million and $16 million,
respectively, relating to the businesses that were sold.
The Company's results of operations are impacted by various regulations and
other matters that are implemented from time to time in its industry, some of
which are described in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 2000.
Results of Operations
Revenues
After adjusting for the Staffing and Canadian operations which were sold
during the fourth quarter of fiscal 2000, net revenues decreased by $6 million
or 1.7% to $335 million during the second quarter of fiscal 2001 as compared to
the second quarter of fiscal 2000 primarily due to a $7 million or 4 percent
decline in Home Health Services revenues. This decrease was partially offset by
a $6 million or 3.7 percent increase in the Specialty Pharmaceutical Services
segment which included an increase of $5 million in intersegment revenues
generated from services provided to the Home Health Services segment that is
eliminated in consolidation. Overall, net revenues in the second quarter of
fiscal 2001 decreased by $48 million or 12.5 percent as compared to the second
quarter of fiscal 2000, of which $42 million in revenues related to the
aforementioned sold operations.
-16-
After adjusting for the sales of the Staffing and Canadian operations as
noted above, net revenues increased by $9 million or 1.2 percent to $693 million
during the first six months of fiscal 2001 as compared to the corresponding
period of fiscal 2000. This increase was driven by growth in the Specialty
Pharmaceutical Services segment of $33 million or 9.8 percent, of which $13
million related to intersegment revenues, offset by a decline of $11 million in
Home Health Services revenue. Overall, net revenues decreased by $75 million or
9.8 percent during the first six months of fiscal 2001 as compared to the
corresponding period of the prior year which included $84 million in revenue
related to the sold operations.
In the Specialty Pharmaceutical Services business, revenue growth was
attributable to volume increases in several core chronic therapies, including
Flolan, IVIG, growth hormone products and biological response modifiers. This
revenue growth, however, was negatively impacted by some product shortages of
recombinant coagulation therapy, which is used in the treatment of hemophilia.
The decline in Home Health Services revenue during the second quarter and first
six months of fiscal 2001 was attributable primarily to the continuing
transition to new clinical protocols as part of the new Medicare reimbursement
system and the impact of the closing of certain home care nursing branches
during the fourth fiscal quarter at 2000 as well as the continued shortage of
nursing and caregiver personnel in certain parts of the country.
Gross Profit
Gross profit margins, as a percentage of net revenues, increased from 33.6
percent in the second quarter of fiscal 2000 to 33.9 percent in the second
quarter of fiscal 2001. The increase in margins was primarily attributable to
productivity enhancements resulting from a change in clinical protocols and rate
increases in Home Health Services as well as the absence of lower margin
Staffing and Canadian operations which were sold in late 2000 offset by a change
in business mix reflecting growth in the lower margin Specialty Pharmaceutical
Services products and higher costs attributable to certain biological and
pharmaceutical products due to product shortages. Gross profit margins decreased
from 33.5 percent in the first six months of fiscal 2000 to 33.2 percent in the
first six months of fiscal 2001. This decrease in margins was primarily
attributable to growth in lower margin Specialty Pharmaceutical Services
products and higher costs associated with certain biological and pharmaceutical
products due to product shortages.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $111 million
during the second quarter of fiscal 2001 as compared to $123 million during the
second quarter of fiscal 2000 due to (i) the reduction of $8 million in costs
associated with the sale of the Staffing and Canadian operations, (ii)
efficiency improvement efforts in Home Health Services and corporate
administrative support departments, and (iii) the closing of certain home care
nursing branches during the fourth quarter of fiscal 2000. These decreases were
offset by special charges of $3 million in connection with certain legal matters
recorded during the second
-17-
quarter of fiscal 2001, compared to $1.2 million in special charges associated
with the Company's name change recorded during the second quarter of fiscal
2000.
For the first six months of fiscal 2001, selling, general and
administrative expenses were $220 million as compared to $250 million for the
first six months of fiscal 2000. This decrease resulted from the reduction of
$16 million in costs associated with the sale of the Staffing and Canadian
operations, the impact of efficiency improvement efforts and the closing of home
care nursing branches as well as a change in special charges from $6.8 million
in the fiscal 2000 period to $3 million in the fiscal 2001 period.
Excluding the effects of the Canadian and Staffing Services businesses that
were sold and the special charges recorded in the periods as described above,
selling, general and administrative expenses as a percentage of net revenues
were 32.2 percent and 33.3 percent during the first six months of fiscal 2001
and 2000, respectively, and 31.4 percent and 33.2 percent during the second
quarter of fiscal 2001 and 2000, respectively.
Interest Expense, Net
Interest expense, net was approximately $0.6 million and $6.3 million in
the first six months of fiscal 2001 and 2000, respectively, and $0.2 million and
$2.1 million in the second quarters of fiscal 2001 and 2000, respectively.
Interest expense, net for the second quarter and first six months of fiscal 2001
represented primarily interest on the mandatorily redeemable securities and fees
relating to the revolving credit facility offset by interest income of
approximately $0.9 million and $1.4 million, respectively. During the second
quarter and six month periods of fiscal 2000, interest expense, net also
included interest on the outstanding 4 3/4 percent convertible subordinated
debentures which matured and were retired in October 2000, net intercompany
borrowings with Olsten up to the Split-off date and interest on borrowings under
the credit facility subsequent to the Split-off date.
Income Taxes
Income tax expense for the fiscal 2001 period consisted primarily of taxes
relating to certain state jurisdictions. The Company had 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 for the deferred tax
asset that is not otherwise used to offset deferred tax liabilities. The Company
expects its effective tax rate to be below 10 percent until such time as the
NOLs are utilized.
For the fiscal 2000 periods, the effective tax rates approximated 42
percent which differed from the statutory rate due to nondeductible goodwill
amortization and other nondeductible items.
-18-
Liquidity and Capital Resources
Working capital at July 1, 2001, was $378 million, an increase of $29
million as compared to $349 million at December 31, 2000. Net receivables
decreased by $34 million in the first six months of fiscal 2001 as a result of
improved cash collections driven by enhancements in the billing system for
Specialty Pharmaceutical Services as well as increases in billings through
electronic data interchange. After adjusting for the sale of the Company's
staffing services business and Canadian operations, adjusted Days Sales
Outstanding ("DSO") was 111 days at December 31, 2000. DSO was reduced by 7 days
to 104 days at July 1, 2001 as a result of improved cash collections.
Cash and cash equivalents increased by approximately $77 million as of July
1, 2001 as compared to December 31, 2000 as a result of (i) cash flow from
operations, net of decrease in book overdrafts which were included in accounts
payable at December 31, 2000, of approximately $48 million, (ii) Medicare
advances, net of payments for estimated settlements, of approximately $21
million, and (iii) proceeds from the exercise of stock options of approximately
$10 million, offset somewhat by capital expenditures of approximately $2
million. In early 2001, the Center for Medicare and Medicaid Services, formerly
known as the Health Care Financing Administration, issued cash advances to
certain Medicare providers in connection with the transition from the IPS to the
PPS for Medicare reimbursement. Such advances are expected to be repaid during
the first quarter of fiscal 2002. In the first quarter of fiscal 2001, the
Company received a cash advance, net of payments for estimated settlements
relating to cost report filings, of approximately $21 million which was
reflected in accrued expenses in the accompanying consolidated balance sheet as
of July 1, 2001.
The Company maintains a credit facility, which provides for up to $150
million in borrowings, including amounts which are 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. As
of July 1, 2001, there were no borrowings outstanding under the credit facility
and total outstanding letters of credit approximated $25.7 million. 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 amended 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, and other equipment. As of
July 1, 2001, the Company was in compliance with its financial covenants and had
borrowing capacity under the credit facility of approximately $124 million.
-19-
In June 2001, the Company's credit facility was amended to increase the
portion of the facility available for letters of credit from $30 million to
either (i) $40 million or (ii) $70 million in the event that the Company elects
to post a letter of credit in lieu of an appellate bond for all or a part of the
total amount of the judgment plus interest in the Fredrickson v. Olsten Health
Services Corp. and Olsten Corporation case while the Company pursues its appeal
of the judgment as further discussed in Note 8. As of July 1, 2001, a
supersedeas bond in the amount of $35 million was posted to satisfy the judgment
plus interest. Under the terms of the bond, cash equal to the amount of the bond
is held in a segregated account as collateral for the bond and the interest
relating thereto accrues to the Company. The cash in the segregated account is
reflected in cash and cash equivalents in the accompanying consolidated balance
sheet. At its discretion, the Company may substitute a letter of credit for the
segregated cash to collateralize the bond.
Management believes cash flows from operations, borrowings available under
the credit facility and other financing options, including issuance of debt or
equity securities under an effective shelf registration statement will be
adequate to support the ongoing operations and to meet debt service requirements
for the foreseeable future. The Company intends to make investments and other
expenditures to, among other things, upgrade its computer technology and system
infrastructure and 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 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's exposure to the market risk for changes in the interest rates
related to the fair value of its fixed rate Quantum debentures until their
repayment in October 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 July 1, 2001.
OTHER:
INFORMATION CONTAINED HEREIN, OTHER THAN HISTORICAL INFORMATION, SHOULD BE
CONSIDERED FORWARD-LOOKING AND IS SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES.
FOR INSTANCE, THE COMPANY'S STRATEGIES AND OPERATIONS INVOLVE RISKS OF
COMPETITION, CHANGING MARKET CONDITIONS, CHANGES IN LAWS AND REGULATIONS
AFFECTING THE COMPANY'S INDUSTRIES AND NUMEROUS OTHER FACTORS DISCUSSED IN THIS
DOCUMENT AND IN OTHER COMPANY FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION. ACCORDINGLY, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE
EXPRESSED IN ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN.
-20-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
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 to settle both lawsuits
for the aggregate sum of $25 million, which was subject to approval by the
respective courts. The Company's insurers funded $18 million of the proposed
settlement sum. The Company funded the $7 million balance and recorded a special
charge for that amount during fiscal 2000. By order dated April 30, 2001, the
District Court preliminarily approved the settlement of the Class Action and
scheduled a settlement fairness hearing date for August 31, 2001. On August 7,
2001, the Delaware Chancery Court approved the settlement of the Derivative
Lawsuit.
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 sought unspecified monetary damages, double or treble damages, penalties
and investigative costs. The parties have resolved this matter during the second
quarter of fiscal 2001 pursuant to a confidential Settlement agreement and full
release. There is no ongoing obligation on the part of the Company arising from
this settlement.
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. Still pending before the arbitrators is Columbia/HCA's
request to consolidate the proceedings, which Kimberly has opposed.
-21-
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. Plaintiff's motion for class certification is due to be
filed with the court by August 24, 2001. Because the Tennessee Lawsuit is in a
relatively preliminary discovery 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. The defendants posted a court ordered bond in the amount of $675,000
and filed 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 filed post-trial motions in connection with the entry of the judgment
and the amount of the bond posted by defendants. Following a hearing on the
parties' respective post-trial motions on March 23, 2001, the trial court, on
May 17, 2001, denied all post-trial motions, and entered judgment for the
plaintiff for the full amount of compensatory and punitive damages, and awarded
the plaintiff reduced attorney's fees of $247,938. On June 14, 2001, defendants
timely filed a Notice of Appeal with the Court of Appeals, Seventh Appellate
District, Mahoning County, Ohio, and on June 19, 2001, the Company posted a
supersedeas bond for the full amount of the judgment, plus interest. The Company
continues to defend this matter vigorously.
In Gile v. Olsten Corporation, et al, U.S. District Court for the Central
District of California, No. 97-9363-NM, plaintiff filed an age discrimination
suit against Olsten Corporation,
-22-
Olsten Health Services, and a certain individual in December 1997. The
defendants denied the allegations of discrimination on the basis that
plaintiff's termination was part of a reduction in force. The individual
defendant was dismissed from the action, and the remaining corporate defendants
filed a motion for summary judgment that was granted by the District Court in
February 1999. The plaintiff appealed the District Court's order to the Ninth
Circuit Court of Appeals and in December 2000, the Court of Appeals issued its
ruling which reversed the District Court and remanded the case for trial. On or
about June 19, 2001, the Company and the plaintiff agreed to settle this matter
and entered into a confidential settlement agreement with full release.
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 in Item 5. Other Information.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders was held on May 18, 2001. The shareholders of
the Company ratified the Board of Directors' appointment of
PricewaterhouseCoopers LLP as independent accountants for the Company for the
2001 fiscal year as follows:
For Against Abstentions Broker Non-Votes
--- ------- ----------- ----------------
21,033,545 12,464 7,864 0
The following directors were nominated and elected to serve as Directors of the
Company for a term of three years or until their successors shall have been duly
elected and qualified:
Nominee For Withheld
- ------- --- --------
Victor F. Ganzi 20,052,340 1,001,533
Josh S. Weston 21,034,503 19,370
Gail Wilensky 20,046,235 1,007,638
The term of office as a Director of the Company for Edward A. Blechschmidt,
Steven E. Grabowski and Raymond S. Troubh continued after the meeting and
expires in 2002 or until their successors shall have been duly elected and
qualified. The term of office as a Director of the Company for Stuart R. Levine
and Stuart Olsten continued after the meeting and expires in 2003 or until their
successors shall have been duly elected and qualified.
Item 5. Other Information
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 connection with the July 19, 1999 settlement with various government
agencies, Olsten executed a separate corporate integrity agreement with the
Office of Inspector General
-23-
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 Company will be subject to penalties.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit Number Description
3.1 Restated Certificate of Incorporation of Company. (1)
3.2 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)
-24-
10.1 Separation Agreement dated August 17, 1999, among Olsten
Corporation, Aaronco Corp. and Adecco SA. (1)*
10.2 Omnibus Amendment No. 1 dated October 7, 1999, by and among
Olsten Corporation, Aaronco Corp., Adecco SA and Olsten Health
Services Holding Corp. (1)
10.3 Form of Rights Agreement dated March 2, 2000 between the
Registrant and Equiserve Limited Partnership, as rights agent.
(1)
10.4 Company's Executive Officers Bonus Plan. (1)*
10.5 Company's 1999 Stock Incentive Plan. (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 by and between Fleet Capital Corp.,
on behalf of the lenders named therein, the Company, Olsten
Health Services Holding Corp. and the subsidiaries named therein,
dated March 13, 2000. (4)
10.10 Form of Employment Agreement with Edward A. Blechschmidt. (2)*
10.11 Form of Change of 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
-25-
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)
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
(7)
10.19 Third Amendment to Loan and Security Agreement dated as of June
1, 2001 by and among the lending institutions named therein,
Fleet Capital Corporation, the Company, Olsten Health Services
Holding Corp. and the subsidiaries named therein.**
21.1 List of Subsidiaries of Company. (2)
----------------------------------------------------------------------
(1) Incorporated herein by reference to Amendment No. 2 to the
Registration Statement on Form S-4, dated January 20, 2000 (File
No. 333-88663).
(2) Incorporated herein by reference to Amendment No. 3 to the
Registration Statement on Form S-4, dated February 4, 2000 (File
No. 333-88663).
(3) Incorporated herein by reference to Amendment No. 4 to the
Registration Statement on Form S-4, dated February 9, 2000 (File
No. 333-88663).
(4) Incorporated herein by reference to Form 10-K for the Registrant
for the fiscal year ended January 2, 2000.
(5) Incorporated herein by reference to Form 10-Q for the Regis-
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trant for the period ended July 2, 2000.
(6) Incorporated herein by reference to Form 10-Q for the Registrant
for the period ended October 1, 2000.
(7) Incorporated herein by reference to Form 10-K for the Registrant
for the fiscal year ended December 31, 2000.
* Management contract or compensatory plan or arrangement.
** Filed herewith
(b) Reports on Form 8-K
No reports on Form 8-K have been filed during the period covered by this
report.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 15, 2001 /S/ Edward A. Blechschmidt
------------------------------------
Edward A. Blechschmidt
President and Chief Executive
Officer
Date: August 15, 2001 /S/ John J. Collura
------------------------------------
John J. Collura
Executive Vice President,
Chief Financial Officer and
Treasurer
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