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 September 30, 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 November 9, 2001 was 25,395,958.
INDEX
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - September 30, 2001
(Unaudited) and December 31, 2000 2
Consolidated Statements of Operations (Unaudited) -
Three and Nine Months Ended September 30, 2001 and
October 1, 2000 3
Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2001 and October 1,
2000 4
Notes to Consolidated Financial Statements
(Unaudited) 5-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16-22
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 23-25
Item 2. Change in Securities and Use of Proceeds 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of Security Holders 25
Item 5. Other Information 25-26
Item 6. Exhibits and Reports on Form 8-K 26-39
SIGNATURES 30
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share amounts)
September 30, 2001 December 31, 2000
-------------------------- -------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 83,586 $ 452
Receivables, less allowance for doubtful accounts
of $90,256 and $105,962, respectively 366,303 419,178
Inventories 48,709 51,111
Prepaid expenses and other current assets 47,100 50,333
-------------------------- -------------------------
Total current assets 545,698 521,074
Fixed assets, net 30,939 36,961
Intangible assets, net 222,886 230,702
Other assets 16,069 16,747
-------------------------- -------------------------
Total assets $815,592 $805,484
========================== =========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 57,552 $ 74,083
Accrued expenses 57,031 50,682
Payroll and related taxes 13,029 17,305
Insurance costs 29,771 30,320
-------------------------- -------------------------
Total current liabilities 157,383 172,390
Other liabilities 46,249 46,945
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 25,316,824 and
21,196,693 shares, respectively 2,532 2,120
Additional paid-in capital 719,778 689,163
Accumulated deficit (109,893) (124,570)
Accumulated other comprehensive loss (457) (564)
-------------------------- -------------------------
Total shareholders' equity 611,960 566,149
-------------------------- -------------------------
Total liabilities and
shareholders' equity $815,592 $805,484
========================== =========================
See notes to consolidated financial statements.
-2-
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of
Operations (In thousands,
except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
-------------------------------------------- ----------------------------------------
September 30, 2001 October 1, 2000 September 30, 2001 October 1, 2000
-------------------- -------------------- --------------------- ------------------
Net revenues $ 328,262 $ 380,325 $1,020,884 $1,148,202
Cost of services sold 216,162 262,160 678,719 772,911
-------------------- -------------------- --------------------- ------------------
Gross profit 112,100 118,165 342,165 375,291
Selling, general and administrative
expenses 105,748 245,930 326,096 496,247
Interest income (expense), net 319 (2,270) (267) (8,618)
-------------------- -------------------- --------------------- ------------------
Income (loss) before income
taxes 6,671 (130,035) 15,802 (129,574)
Income tax expense 425 311 1,125 507
-------------------- -------------------- --------------------- ------------------
Net income (loss) $ 6,246 $(130,346) $ 14,677 $ (130,081)
==================== ==================== ===================== ==================
Net income (loss) per share:
Basic $ 0.26 $ (6.30) $ 0.65 $ (6.34)
==================== ==================== ===================== ==================
Diluted $ 0.24 $ (6.30) $ 0.61 $ (6.34)
==================== ==================== ===================== ==================
Average shares outstanding:
Basic 23,616 20,705 22,442 20,521
==================== ==================== ===================== ==================
Diluted 26,546 20,705 25,746 20,521
==================== ==================== ===================== ==================
See notes to consolidated financial statements.
-3-
Gentiva Health Services, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
--------------------------------------------------------
September 30, 2001 October 1, 2000
--------------------------- -------------------------
OPERATING ACTIVITIES:
Net income (loss) $ 14,677 $(130,081)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 20,048 24,307
Provision for doubtful accounts 26,929 136,408
Write-off of goodwill - 5,200
Gain on sale/disposal of assets (285) -
Changes in assets and liabilities:
Accounts receivable 25,946 (25,441)
Inventories 2,402 22,110
Prepaid expenses and other current
assets 3,233 89
Current liabilities (25,506) (52,147)
Other, net 89 (2,302)
--------------------------- -------------------------
Net cash provided by (used in) operating
activities 67,533 (21,857)
--------------------------- -------------------------
INVESTING ACTIVITIES:
Purchase of fixed assets (6,400) (4,778)
Proceeds from sale of assets 475 -
--------------------------- -------------------------
Net cash used in investing activities (5,925) (4,778)
--------------------------- -------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock 11,027 2,127
Issuance of mandatorily redeemable and other
securities - 20,100
Net transactions with Olsten - 5,226
Proceeds from revolving credit
facility - 7,128
Debt issuance costs - (2,657)
Increase (decrease) in book
overdrafts (10,379) 4,400
Retirement of debt - (9,525)
Advances from Medicare program 20,878 -
--------------------------- -------------------------
Net cash provided by financing
activities 21,526 26,799
--------------------------- -------------------------
Net increase in cash and cash equivalents 83,134 164
Cash and cash equivalents at beginning of period 452 2,942
--------------------------- -------------------------
Cash and cash equivalents at end of period $ 83,586 $ 3,106
=========================== =========================
NON-CASH INVESTING/FINANCING ACTIVITIES
Conversion of convertible debt $ 20,000 -
=========================== =========================
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 reflect the
results of operations, financial position and cash flows of the Company as if it
were a separate entity for all periods presented. The consolidated financial
statements have been prepared using the historical basis in the assets and
liabilities and historical results of operations related to the Company.
The Company's selling, general and administrative expenses included a
management fee of approximately $1.0 million for the first nine 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.
Interest income (expense), net as presented in the consolidated statement
of operations included net interest expense of approximately $2.7 million for
the first nine months of fiscal 2000 relating to the intercompany balances with
Olsten. Such intercompany balances have been reflected as a contribution to
capital as of the Split-off date.
-5-
3. Earnings per Share
Basic net income (loss) per share for each period presented has been
computed by dividing net income (loss) by the weighted average number of shares
outstanding for each respective period. Diluted net income (loss) per share for
each period presented has been computed using the weighted average number of
common and dilutive common equivalent shares outstanding.
During the three and nine months ended September 30, 2001, the weighted
average numbers of shares outstanding were 23,616,000 and 22,442,000,
respectively. As discussed in Note 7, the 10 percent convertible preferred trust
securities in the amount of $19.4 million during the third quarter of fiscal
2001 and $20.0 million for the first nine months of fiscal 2001 were converted
to common shares at a conversion price of $9.319219 per share and such shares
were included in the weighted average number of shares outstanding from the date
of conversion.
Dilutive common equivalent shares included (i) an incremental 1,543,000
shares for the third quarter and 1,938,000 shares for the nine month period that
would have been issued if the 10 percent convertible preferred trust securities
were converted at the beginning of each period and (ii) 1,387,000 shares for the
third quarter and 1,365,000 shares for the nine month period that would be
issued upon the assumed exercise of 2,603,000 stock options under the treasury
stock method.
During the three and nine months ended October 1, 2000, the basic and
diluted weighted average numbers of shares outstanding were 20,705,000 and
20,521,000, respectively. The computation of diluted net loss per share for the
fiscal 2000 periods excluded the effect of shares issuable upon the conversion
of the 4 3/4 percent convertible subordinated debentures, which matured and were
retired in October 2000, and the 10 percent convertible preferred trust
securities and the exercise of stock options since their inclusion would have an
antidilutive effect on earnings.
4. Restructuring and Special Charges
During the first nine months 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
-6-
and administrative expenses in the accompanying consolidated statement of
operations.
During the third quarter and first nine months of fiscal 2000, the Company
recorded special charges aggregating $132.0 million and $138.8 million,
respectively. Of this amount, charges of $125.6 million and $132.4 million,
respectively, were reflected in selling, general and administrative expenses.
These charges for both the third quarter and first nine months included (i) an
incremental provision for doubtful accounts of $112.0 million, (ii) a $7.2
million charge to reflect estimated settlement costs in excess of insurance
coverage related to class action securities and derivative lawsuits assumed by
the Company from Olsten Corporation under an indemnification provision in
connection with the split-off and government inquiries in New Mexico and North
Carolina and (iii) a charge of $5.2 million associated with the impairment of
goodwill relating to the Company's Canadian home care nursing services operation
which was sold during the fourth quarter of 2000.
In addition, special charges of $1.2 million in the third quarter and $3.9
million in the first nine months of fiscal 2000 were incurred in connection with
the change of the Company's name to Gentiva Health Services, Inc. These special
charges primarily consisted of costs incurred and paid for consulting fees,
promotional items and advertising.
Furthermore, charges of $4.1 million were incurred in the first nine months
of 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.
During the third quarter and first nine months of fiscal 2000, an
adjustment of $6.4 million was recorded in cost of services sold for the
estimated obsolescence, shrinkage of inventory and changes in cost estimates
arising from the systems conversion and asset verification and physical
inventory procedures which were performed during the third quarter of fiscal
2000.
The Company recorded charges of $5.5 million in the fourth quarter of
fiscal 2000 in connection with a restructuring of certain business operations.
During the period from December 31, 2000 to September 30, 2001, the unpaid
portion of these restructuring charges declined from $3.4 million to $0.8
million primarily as a result of cash payments made during the nine month period
relating to operating lease and severance payments.
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 (PPS) for Medicare
reimbursement. Such advances are expected to be repaid during the second quarter
of fiscal 2002. In the first quarter of fiscal 2001, the Company received a cash
advance relating to the transition to PPS, 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 September 30, 2001.
-7-
6. Cash and Revolving Credit Facility
As of September 30, 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 September 30, 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. 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 as of September 30,
2001. At its discretion, the Company may substitute a letter of credit for the
segregated cash to collateralize the bond.
7. Shareholders' Equity
Changes in shareholders' equity during the nine months ended September 30,
2001 were as follows (in thousands):
Common Additional Accumulated Accumulated Total
Stock Paid-in Deficit Other Compre-
Capital hensive Loss
----------- ------------- --------------- -------------- -----------
Balance at December 31, 2000 $ 2,120 $ 689,163 $ (124,570) $ (564) $566,149
Comprehensive income:
Net income 14,677 14,677
Unrealized gain on investments 107 107
Issuance of stock upon conversion
of convertible preferred trust
securities 214 19,786 - - 20,000
Issuance of stock upon exercise of
stock options and under stock plans
for employees and directors 198 10,829 - - 11,027
----------- ------------- --------------- -------------- -----------
Balance at September 30, 2001 $ 2,532 $ 719,778 $ (109,893) $ (457) $611,960
=========== ============= =============== ============== ===========
-8-
Total comprehensive income (loss) amounted to $6.6 million and ($131.0)
million during the third quarter of fiscal 2001 and 2000, respectively, and
$14.8 million and ($130.7) million during the first nine months of fiscal 2001
and 2000, respectively.
On August 7, 2001, the Company's Board of Directors authorized the Company
to call for the redemption of its 10 percent convertible subordinated debentures
on or about September 14, 2001 at a redemption price of 108 percent of the
original principal amount of the debentures 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. The Trust, in turn, issued
convertible preferred trust securities which have the same terms as the
debentures, including, but not limited to, maturity, interest, conversion and
redemption price to a number of holders under the terms of a Trust Agreement
dated March 9, 2000. The convertible preferred trust securities are convertible
into the Company's common stock at a conversion price of $9.319219.
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. During
the third quarter of fiscal 2001, the Company issued 2,081,722 shares of common
stock upon the conversion of the remaining $19.4 million of convertible
preferred trust securities. As of September 30, 2001, there were no convertible
subordinated debentures of the Company and no convertible preferred trust
securities of the Trust outstanding.
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 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. On August 7, 2001, the Delaware
Chancery Court gave final approval to the settlement of the Derivative Lawsuit
and, on August 31, 2001, the District Court issued its final approval to the
settlement of the Class Action.
On July 21, 2000, plaintiff Ultimate Home Health Care, Inc. served an
Amended Complaint in a purported class action lawsuit against the Company. This
Amended Complaint was filed in the U.S. District Court for the Middle District
of Tennessee, captioned Ul-
-9-
timate Home Health Care, Inc. v. Columbia/HCA Healthcare Corp., No. 3-00-0560,
(the "Tennessee Lawsuit") and named as defendants Columbia/HCA, Columbia
Homecare Group, Olsten Health Management a/k/a Hospital Contract Management
Services (an affiliate of the Company) and Olsten Corporation. The Amended
Complaint alleged, 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, and
state common law, and sought 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. By an order dated January 21, 2001, the Court
ruled on defendants' motion to dismiss and dismissed plaintiffs' RICO and state
common law tort claims, but allowed plaintiff's other claims to proceed. After
conducting some discovery on the issues, on October 10, 2001, the plaintiff
filed with the Court a Notice of Withdrawal of Certain Allegations notifying the
Court of plaintiff's intent to withdraw all allegations related to class status
and antitrust claims in the Amended Complaint. On November 5, 2001, plaintiff
filed a second amended complaint alleging violation of Tennessee Consumer
Protection Act and civil conspiracy, and seeking unspecified compensatory and
punitive damages, and attorney's fees. The Company intends to continue to defend
itself vigorously in this matter.
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,
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. The parties filed several
post-trial motions, and following a March 23, 2001 hearing on the parties'
respective post-trial motions, 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. On October 12, 2001, the Company
timely filed its appellate brief with the Court of Appeals. Defendants agreed to
extend the due date for Plaintiff's response brief up to and including January
4, 2002. The Company continues to defend itself vigorously in 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 as-
-10-
serted 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.
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 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.
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. Based on discussions with the Office of Inspector General,
the Company believed that the subpoena related to an investigation of possible
overpayments made to the Company by the Medicare program. The Company provided
the Office of Inspector General and other government agencies with requested
documents and cooperated fully with this investigation. On November 1, 2001, the
Company received notice of the entry of an Order dated October 25, 2001,
unsealing a complaint in an action captioned United States of America ex rel.
Lee Einer
-11-
v. Olsten Corporation, No. CIV-S-99-0860 DFL/DAD filed with the U.S. District
Court for the Eastern District of California. In connection with the unsealing
of the Complaint, and as recited in the Order unsealing the Complaint, the
United States gave notice to the District Court that the United States was
declining to intervene in the action. The Company believes that it was this
Complaint that gave rise to the December 1999 document subpoena, and that
following an almost two year investigation into the allegations made in the
Complaint, the United States decided not to intervene and not to proceed with
this action. The Company believes that the government has concluded its
investigation into this matter. The Plaintiff has not yet served the Company
with the Complaint.
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 continues to provide the Office of Inspector General and
other government agencies with the requested documents and to cooperate fully
with their investigation. At this time, the Company is unable to assess the
probable outcome or potential liability, if any, arising from this subpoena.
9. Business Segment Information
The Company operates in the United States and operated in Canada during the
fiscal 2000 period, servicing patients and customers through the following
business segments: Specialty Pharmaceutical Services, Home Health Services and,
for the fiscal 2000 period, 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, (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
-12-
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.
Information about the Company's operations is as follows (in thousands):
-13-
Specialty Home Staffing Total
Pharmaceutical Health and
Services Services Canada
----------------- ------------ ---------- ------------
Three months ended September 30, 2001
- -------------------------------------
Net revenues - segments $ 172,740 $ 175,496 $ - $ 348,236
================= ============ ==========
Intersegment revenues (19,974)
------------
Net revenues $ 328,262
============
Operating contribution $ 18,733 $ 11,901 $ - $ 30,634
================= ============ ==========
Corporate expenses (17,859)
------------
Earnings before interest expense, taxes,
depreciation and amortization 12,775
Depreciation and amortization (6,423)
Interest income, net 319
------------
Income before income taxes $ 6,671
============
Three months ended October 1, 2000
- ----------------------------------
Net revenues - segments $ 174,606 $ 178,715 $ 45,254 $ 398,575
================= ============ ==========
Intersegment revenues (18,250)
------------
Net revenues $ 380,325
============
Operating contribution before special charges $ 19,975 $ 7,824 $ 4,241 $ 32,040
Special charges - segments (99,400) (19,200) - (118,600)
----------------- ------------ ---------- ------------
Operating contribution (loss) $ (79,425) $ (11,376) $ 4,241 (86,560)
================= ============ ==========
Corporate expenses (19,934)
Special charges - corporate (13,425)
------------
Loss before interest expense, taxes,
depreciation and amortization (119,919)
Depreciation and amortization (7,846)
Interest expense, net (2,270)
------------
Loss before income taxes $(130,035)
============
-14-
Specialty Home Staffing Total
Pharmaceutical Health and
Services Services Canada
------------------- ------------ ---------- ------------
Nine months ended September 30, 2001
- ------------------------------------
Net revenues - segments $ 546,955 $ 540,818 $ - $1,087,773
==================== ============ ==========
Intersegment revenues (66,889)
------------
Net revenues $1,020,884
============
Operating contribution $ 52,652 $ 39,455 $ - $ 92,107
==================== ============ ==========
Corporate expenses (52,979)
Special charges - corporate (3,011)
------------
Earnings before interest expense, taxes,
depreciation and amortization 36,117
Depreciation and amortization (20,048)
Interest expense, net (267)
------------
Income before income taxes $ 15,802
============
Segment assets $ 286,782 $ 141,686 $ - $ 428,468
==================== ============ ==========
Intersegment assets (13,456)
------------
Segment assets, net 415,012
Corporate assets 400,580
------------
Total assets $ 815,592
============
Nine months ended October 1, 2000
- ---------------------------------
Net revenues - segments $ 515,500 $ 555,426 $ 129,022 $1,199,948
==================== ============ ==========
Intersegment revenues (51,746)
------------
Net revenues $1,148,202
============
Operating contribution before special charges $ 63,396 $ 29,971 $ 9,893 $ 103,260
Special charges - segments (99,400) (19,200) - (118,600)
-------------------- ------------ ---------- ------------
Operating contribution (loss) $ (36,004) $ 10,771 $ 9,893 (15,340)
==================== ============ ==========
Corporate expenses (61,093)
Special charges - corporate (20,216)
------------
Loss before interest expense, taxes,
depreciation and amortization (96,649)
Depreciation and amortization (24,307)
Interest expense, net (8,618)
------------
Loss before income taxes $ (129,574)
============
Segment assets $ 359,480 $ 147,234 $ 25,687 $ 532,401
==================== ============ ==========
Intersegment assets (12,000)
------------
Segment assets, net 520,401
Corporate assets 333,216
------------
Total assets $ 853,617
============
-15-
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 third
quarter and the first nine 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 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.
o During the first nine months 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 operations.
During the third quarter and first nine months of fiscal 2000, the
Company recorded special charges aggregating $132.0 million and $138.8
million, respectively. Of this amount, charges of $125.6 million and
$132.4 million, respectively, were reflected in selling, general and
administrative expenses. These charges for both the third quarter and
first nine months included (i) an incremental provision for doubtful
accounts of $112.0 million, (ii) a $7.2 million charge to reflect
estimated settlement costs in excess of insurance coverage related to
class action securities and derivative lawsuits assumed by the Company
from Olsten Corporation under an indemnification provision in
connection with the split-off and government inquiries in New Mexico
and North Carolina and (iii) a charge of $5.2 million associated with
the impairment of goodwill relating to the Company's Canadian home
care nursing services operation which was sold during the fourth
quarter of 2000.
In addition, special charges of $1.2 million in the third quarter and
$3.9 million in the first nine months of fiscal 2000 were incurred in
connection with the change of
-16-
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.
Furthermore, charges of $4.1 million were incurred in the first nine
months of 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.
During the third quarter and first nine months of fiscal 2000, an
adjustment of $6.4 million was recorded in cost of services sold for
the estimated obsolescence, shrinkage of inventory and changes in cost
estimates arising from the systems conversion and asset verification
and physical inventory procedures which were performed during the
third quarter of fiscal 2000.
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
third quarter and first nine 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
third quarter and first nine months of fiscal 2000, the Company
recorded revenues of $45 million and $129 million, respectively, gross
profit of $11 million and $33 million, respectively, and selling,
general and administrative expenses of $7 million and $24 million,
respectively, relating to the businesses that were sold.
-17-
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 of 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 $7 million
or 2.0% to $328 million during the third quarter of fiscal 2001 as compared to
the third quarter of fiscal 2000 primarily due to a $3 million or 1.8 percent
decline in Home Health Services revenues, a $2 million or 1.1 percent decrease
in the Specialty Pharmaceutical Services revenue and a $2 million increase in
the intersegment revenue elimination relating to services provided to the Home
Health Services segment by the Specialty Pharmaceutical Services segment that is
eliminated in consolidation. Overall, net revenues in the third quarter of
fiscal 2001 decreased by $52 million or 13.7 percent as compared to the third
quarter of fiscal 2000, of which $7 million in revenues related to the items
discussed above and $45 million in revenues related to the aforementioned sold
operations.
After adjusting for the sales of the Staffing and Canadian operations as
noted above, net revenues increased by $2 million or 0.2 percent to $1.02
billion during the first nine 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 $32 million or 6.1 percent, of
which $15 million related to intersegment revenues, offset by a decline of $15
million or 2.6 percent in Home Health Services revenue. Overall, net revenues
decreased by $12.7 million or 11.1 percent during the first nine months of
fiscal 2001 as compared to the corresponding period of the prior year which
included $129 million in revenue related to the sold operations.
During the third quarter and first nine months of fiscal 2001, the Company
experienced unit volume increases in several core chronic therapies in the
Specialty Pharmaceutical Services segment. These therapies included (i) Flolan,
an intravenous therapy used in the treatment of pulmonary arterial hypertension,
(ii) intravenous immune globulin (IVIG), used in the treatment of primary immune
deficiency and other diagnoses and (iii) growth hormone, used in the treatment
of growth hormone disorder. Revenue growth was negatively impacted in both the
third quarter and nine month periods by some product shortages of recombinant
coagulation therapy, which is used in the treatment of hemophilia. In addition,
revenue relating to acute infusion products decreased somewhat due to
management's decision to terminate certain contracts in an effort to improve
revenue quality and cash flow. Due to significant purchases by wholesale
customers early in 2001 revenue relating to Oxandrin, an oral pharmaceutical for
involuntary weight loss, increased during the fiscal 2001 year to date period as
compared to the corresponding period of fiscal 2000 as a result of growth in
unit volume dur-
-18-
ing the first half of fiscal 2001 offset by a decrease in volume during the
third quarter. In addition, the Company recognized revenues of $5.0 million in
the third quarter of fiscal 2000 relating to an adjustment to estimated revenue
accruals and increased a provision for doubtful accounts by a corresponding
amount. Excluding this adjustment, net revenues in the Specialty Pharmaceutical
Services segment increased by 1.7 percent in the third quarter and 7.1 percent
in the first nine months of fiscal 2001 as compared to the corresponding periods
of fiscal 2000.
The decline in Home Health Services revenue during the third quarter and
first nine months of fiscal 2001 was attributable primarily to the continuing
transition to new clinical protocols as part of the new Medicare reimbursement
system which has resulted in a more efficient delivery of care in fiscal 2002
and the impact of the closing of certain home care nursing branches during the
fourth fiscal quarter at 2000.
Gross Profit
Gross profit margins as a percentage of net revenues increased from 31.1
percent in the fiscal 2000 third quarter to 34.1 percent in the third quarter of
fiscal 2001 and from 32.7 percent in the first nine months of fiscal 2000 to
33.5 percent in the first nine months of the fiscal 2001. Of the total increase
in margins, 1.7 percent for the third quarter and 0.5 percent for the nine
months can be attributed to the special charges associated with the inventory
adjustment of $6.4 million which was recorded in the three month and nine month
periods of fiscal 2000. The remaining 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.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $106 million
during the third quarter of fiscal 2001 as compared to $246 million during the
third quarter of fiscal 2000 due to (i) special charges of $126 million which
were recorded in the fiscal 2000 period, (ii) the reduction of $8 million in
costs associated with the sale of the Staffing and Canadian operations, (iii)
efficiency improvement efforts in Home Health Services branch operations,
certain Specialty Pharmaceutical Services administrative functions and corporate
administrative support departments, and (iv) the closing of certain home care
nursing branches during the fourth quarter of fiscal 2000.
For the first nine months of fiscal 2001, selling, general and
administrative expenses were $326 million as compared to $496 million for the
first nine months of fiscal 2000. This decrease resulted from the reduction of
$24 million in costs associated with the sale of the Staffing and Canadian
operations, the impact of efficiency improvement efforts and the clos-
-19-
ing of home care nursing branches as well as a change in special charges from
$132 million in the fiscal 2000 period to $3 million in the fiscal 2001 period.
Excluding the effects of the 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 31.6 percent and
32.3 percent during the first nine months of fiscal 2001 and 2000, respectively,
and 32.2 percent and 33.7 percent during the third quarter of fiscal 2001 and
2000, respectively.
Interest Income (Expense), Net
Net interest income was approximately $0.3 million in the third quarter of
fiscal 2001 and net interest expense was approximately $2.3 million in the third
quarter of fiscal 2000. Net interest expense was approximately $0.3 million and
$8.6 million in the first nine months of fiscal 2001 and 2000, respectively. Net
interest income (expense) for the third quarter and first nine months of fiscal
2001 represented primarily fees relating to the revolving credit facility and
outstanding letters of credit and, for the first half of fiscal 2001, the 10
percent convertible preferred trust securities offset by interest income of
approximately $0.9 million and $1.4 million, respectively. During the three and
nine months ended October 1, 2000, net interest expense 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 range between 6 and 8 percent until such time
as the NOLs are utilized.
Liquidity and Capital Resources
Working capital at September 30, 2001, was $388 million, an increase of $39
million as compared to $349 million at December 31, 2000. Net receivables
decreased by $53 million in the first nine 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 and a decrease in related revenues. 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 9 days to 102 days at September 30, 2001 as a result of
improved cash collections.
-20-
Cash and cash equivalents increased by approximately $83 million as of
September 30, 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 $57 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 $11 million, offset somewhat by capital expenditures of
approximately $5.9 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 second quarter of fiscal 2002. In the first quarter of
fiscal 2001, the Company received a cash advance relating to the transition to
PPS, 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 September 30, 2001.
The Company maintains a credit facility, which provides for up to $150
million in borrowings. 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 September 30, 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
September 30, 2001, the Company was in compliance with its financial covenants
and had borrowing capacity under the credit facility, after adjusting for
outstanding letters of credit, of approximately $124 million.
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. 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
-21-
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 September 30, 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.
-22-
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
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 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. On August 7, 2001, the Delaware
Chancery Court gave final approval to the settlement of the Derivative Lawsuit
and, on August 31, 2001, the District Court issued its final approval to the
settlement of the Class Action.
On July 21, 2000, plaintiff Ultimate Home Health Care, Inc. served an
Amended Complaint in a purported class action lawsuit against the Company. This
Amended Complaint was filed 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"), and named as
defendants Columbia/HCA, Columbia Homecare Group, Olsten Health Management a/k/a
Hospital Contract Management Services (an affiliate of the Company) and Olsten
Corporation. The Amended Complaint alleged, 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, and state common law, and sought 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. By an order
dated January 21, 2001, the Court ruled on defendants' motion to dismiss and
dismissed plaintiffs' RICO and state common law tort claims, but allowed
plaintiff's other claims to proceed. After conducting some discovery on the
issues, on October 10, 2001, the plaintiff filed with the Court a Notice of
Withdrawal of Certain Allegations notifying the Court of plaintiff's intent to
withdraw all allegations related to class status and antitrust claims in the
Amended Complaint. On November 5, 2001, plaintiff filed a second amended
complaint alleging violation of Tennessee Consumer Protection Act and civil
conspiracy, and seeking un-
-23-
specified compensatory and punitive damages, and attorney's fees. The Company
intends to continue to defend itself vigorously in this matter.
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,
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. The parties filed several
post-trial motions, and following a March 23, 2001 hearing on the parties'
respective post-trial motions, 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. On October 12, 2001, the Company
timely filed its appellate brief with the Court of Appeals. Defendants agreed to
extend the due date for Plaintiff's response brief up to and including January
4, 2002. The Company continues to defend itself vigorously in 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. Still pending before the arbitrators is Columbia/HCA's
request to consolidate the proceedings, which Kimberly has opposed.
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.
-24-
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. Based on discussions with the Office of Inspector General,
the Company believed that the subpoena related to an investigation of possible
overpayments made to the Company by the Medicare program. The Company provided
the Office of Inspector General and other government agencies with requested
documents and cooperated fully with this investigation. On November 1, 2001, the
Company received notice of the entry of an Order dated October 25, 2001,
unsealing a complaint in an action captioned United States of America ex rel.
Lee Einer v. Olsten Corporation, No. CIV-S-99-0860 DFL/DAD filed with the U.S.
District Court for the Eastern District of California. In connection with the
unsealing of the Complaint, and as recited in the Order unsealing the Complaint,
the United States gave notice to the District Court that the United States was
declining to intervene in the action. The Company believes that it was this
Complaint that gave rise to the December 1999 document subpoena, and that
following an almost two year investigation into the allegations made in the
Complaint, the United States decided not to intervene and not to proceed with
this action. The Company believes that the government has concluded its
investigation into this matter. The Plaintiff has not yet served the Company
with the Complaint.
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 continues to provide the Office of Inspector General and
other government agencies with the requested documents and to cooperate fully
with their investigation. At this time, the Company is unable to assess the
probable outcome or potential liability, if any, arising from this subpoena.
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
---------------------------------------------------
(a) None.
-25-
Item 5. Other Information
-----------------
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 United 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.
In connection with a July 19, 1999 settlement with various government
agencies, Olsten executed a corporate integrity agreement with the Office of
Inspector General of the Department of Health and Human Services which will
remain in effect until August 18, 2004. The 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)
-26-
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
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)*
-27-
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 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
-28-
(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 Registrant
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.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the period covered by this
report.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001 /S/ Edward A. Blechschmidt
-----------------------------------
Edward A. Blechschmidt
President and Chief Executive
Officer
Date: November 14, 2001 /S/ John J. Collura
------------------------------------
John J. Collura
Executive Vice President,
Chief Financial Officer and
Treasurer
-30-