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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 2, 2000
Commission File No. 1-15669
Gentiva Health Services, Inc.
(Exact name of Registrant as specified in its charter)
DELAWARE 36-433-5801
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
175 Broad Hollow Road, Melville, New York 11747-8905
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (631) 844-7800
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, par value $.10 per share NASDAQ
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes No X
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the registrant's common equity held by
non-affiliates of the registrant as of March 16, 2000 was $102,663,816 based on
the closing price of the Common Stock on The Nasdaq National Market on such
date.
The number of shares outstanding of the registrant's Common Stock, as of
March 15, 2000 was 20,345,029.
Information contained in this Report, other than historical information, should
be considered forward-looking and is subject to various risk factors and
uncertainties. For instance, the Company's strategies and operations involve
risks of competition, establishing itself as an independent company, changing
market conditions, changes in laws and regulations affecting it and its
industries and numerous other factors discussed in this Report and in the
Company's filings with the Securities and Exchange Commission. Accordingly,
actual results may differ materially from those in any forward-looking
statements.
PART I
Item 1. Business.
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Introduction
Gentiva Health Services, Inc. ("Gentiva" or the "Company") became an
independent publicly owned company on March 15, 2000, as a result of the
issuance of all of the common stock of the Company to the stockholders of Olsten
Corporation, a Delaware corporation ("Olsten"), and the former parent
corporation to the Company (the "split-off"). Prior to the split-off, all of the
assets and liabilities of the health services business of Olsten (formerly known
as Olsten Health Services) were transferred to the Company pursuant to a
separation agreement and other agreements between the Company, Olsten and Adecco
SA ("Adecco"). The Company was incorporated in the state of Delaware on August
6, 1999.
The Company operates its health services business in the United States and
Canada and provides specialty pharmaceutical services (including infusion
therapy), home care nursing services and staffing services.
Specialty Pharmaceutical Services
The Company's specialty pharmaceutical services business is coordinated
through its network of 38 pharmacies across the United States and generally
includes:
o the distribution of drugs and other biological and pharmaceutical
products and professional support services for individuals with
chronic diseases, such as hemophilia, primary pulmonary hypertension,
autoimmune deficiencies and growth disorders;
o the administration of antibiotics, chemotherapy, nutrients and other
medications for patients with acute or episodic disease states;
o marketing and distribution services for pharmaceutical, biotechnology
and medical service firms; and
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o delivery, management and administration of its products in the home
setting and evaluation of equipment needs of the patient.
The specialty pharmaceutical services business provides a wide range of
home infusion therapies. Home infusion therapy involves the administration of
medications intravenously (into veins), subcutaneously (under the skin),
intramuscularly (into muscle), intraecally or epidurally (via spinal routes) or
through feeding tubes into the digestive tract. Infusion therapy often begins
during hospitalization of a patient and continues in the home environment.
The Company's specialty pharmaceutical services business also addresses
therapeutic, socioeconomic, psychosocial and professional support needs for
individuals with some of the following rare, chronic diseases:
o Hemophilia, which is a hereditary bleeding disorder in which a plasma
protein, known as factor, necessary for normal blood clotting, is
either missing or dysfunctional. Hemophilia is treated by
intravenously infusing anti-hemophilic factor, consisting of factor
concentrates and sterile water, to replace deficient clotting factor.
This disease is diagnosed at birth and has no known cure, but
hemophiliacs can lead relatively long and healthy lives with proper
treatment.
o Primary pulmonary hypertension, which is a chronic pulmonary disease
for which there is no known cure. This disease is treated by the
infusion of Flolan, which is an epoprostenol sodium product, for a
patient's lifetime or until the patient receives a lung transplant.
o Immunodeficiency/autoimmune disorders, which are a classification of
chronic disorders arising when the body's immune system fails to
produce sufficient antibodies to protect against infection. These
disorders include multiple sclerosis, myasthenia gravis and lupus.
These disorders are generally incurable but the symptoms can be
treated with a therapy consisting of intravenous immune globulin
prepared from human plasma (IVIG).
o Growth disorders, which result from damage to or malformation of
either the hypothalamus or the pituitary gland. This disorder is
treated by injecting growth hormone therapy into the patient.
Some of the Company's other significant specialty pharmaceutical services
also include:
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o Antibiotic therapies, which are the infusion of antibiotic medications
into a patient's bloodstream. These medications are typically used to
treat a variety of serious infections and diseases.
o Total Parenteral Nutrition (TPN), which is the long-term provision of
nutrients for patients with chronic gastrointestinal conditions. These
nutrients are infused through surgically implanted central vein
catheters or through peripherally inserted central catheters. Enteral
nutrition is the infusion of nutrients through a feeding tube inserted
directly into a patient's digestive tract. This long-term therapy is
prescribed for patients who are unable to eat and drink normally.
o Chemotherapy, which is the infusion of drugs in a patient's
bloodstream to treat various forms of cancer.
o Pain management, which involves the infusion of certain drugs into the
bloodstream of patients suffering from acute or chronic pain.
As part of specialty pharmaceutical services, the Company also offers a
distribution network to manufacturers after Federal government approval of their
products is secured. Distribution programs currently include:
o the first new drug for rheumatoid arthritis in 20 years;
o a new hand-held device for monitoring blood clotting time; and
o pharmaceuticals for chemotherapy and white blood cell stimulation, the
treatment of primary pulmonary hypertension, and management of
amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease), multiple
sclerosis and severe muscle wasting.
Home Care Nursing Services
The Company's home care nursing services business is conducted through more
than 300 locations and offers a broad range of services including:
o General skilled nursing care that is provided by registered nurses and
licensed practical nurses who assess the appropriateness of home
health care including the family and home environment for patients,
and perform clinical procedures and instruct the patient and family
regarding necessary treatments. Patients receiving this care typically
include stabilized post-operative patients in recovery at home,
patients who are acutely ill but who do not require hospitalization
and patients who are chronically or terminally ill.
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o Pediatric services consisting of nursing services specializing in care
for children. These services include early NICU discharge to the home,
prenatal, maternal/infant care and phototherapy.
o Rehabilitation services consisting of programs and services that
address a wide range of neurologic and orthopedic diagnoses, including
head or traumatic brain injuries, spinal cord injuries and other
complex rehabilitation cases.
o Other therapy services that consist of physical, occupational, speech
and respiratory therapy to patients recovering from strokes, traumas
or certain surgeries, services for high risk pregnancies, post-partum
care, mental health care, AIDS therapy and various medical social
services.
o Disease management programs that are administered by nurses who
provide specialty care regimens to patients in their home. These
nurses instruct patients and their families in the self-administration
of some therapies and procedures, such as wound care and infection
control, emergency procedures and the proper handling and usage of
medication, medical supplies and equipment as well as teach disease
state management programs at home to patients with asthma, diabetes
and other illnesses.
o Home health aide care that involves basic patient care from taking
temperatures and blood pressure to assisting with daily living
activities. The Company's home health aides must pass certain
competency tests and are supervised by registered nurses.
o Personal care services consisting of unskilled homemaker services
which are provided to the elderly or the disabled. These services may
include housekeeping, shopping and assistance with personal hygiene,
dressing and meals.
Through four regional centers in the United States, the Company provides
care management and coordination for managed care customers desiring referrals,
centralized intake and billing claims adjustment, utilization review, quality
assurance and data reporting and analysis.
Staffing Services
The Company's staffing services business provides services to institutions,
occupational and alternate site healthcare organizations by providing health
care professionals to meet supplemental staffing needs. Often, these
organizations use temporary healthcare professionals to maximize scheduling
flexibility and to monitor and control costs and to cover peak periods, illness
and vacation time of their permanent staff. The Company's healthcare
professionals include:
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o registered nurses;
o licensed practical nurses;
o physical, speech and occupational therapists;
o certified nursing assistants;
o medical assistants; and
o medical technologists.
These professionals typically work in hospitals, industrial settings,
long-term care facilities, clinics, schools, physicians' offices, laboratories,
home care agencies and insurance companies. The Company arranges for their
assignments from more than 40 locations throughout the United States.
Through the Company's Flying Nurses(R) division in Dallas, Texas, the
Company also makes special arrangements for healthcare professionals to travel
to virtually any location for special assignments. This provides health care
organizations in Florida, for example, with an economical way to manage peak
demand during the winter season.
Further, the Company assists drug companies with clinical trials of new
drug therapies awaiting U.S. Food and Drug Administration approval and in
distributing new products and meeting special distribution requirements. The
Company performs logistical and handling functions such as pharmacy mail order
services, and provides clinical support, reimbursement management and data
management.
Payors
In fiscal 1999, approximately 64 percent of the Company's revenues were
attributable to commercial pay sources, 20 percent of revenues were attributable
to Medicaid reimbursement, state reimbursed programs and other state/county
funding programs and 16 percent of revenues were attributable to Medicare
reimbursement. In fiscal 1999, Cigna Healthcare accounted for approximately 11
percent of revenues. The Company's three year contract with Cigna Healthcare had
an expiration date of December 31, 1998, but was amended to continue until
terminated by either party with 60 days, advance notice. Except for these
payors, no other payor accounts for as much as 10 percent of revenues. The
revenues from commercial payors are primarily generated under fee for service
contracts which are traditionally one year in term and renewable automatically
on an annual basis, unless terminated by either party.
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Source and Availability of Personnel
To maximize the cost effectiveness and productivity of caregivers, the
Company utilizes customized systems and procedures that have been developed and
refined over the years. These processes include the recruitment and selection of
applicants who fit the patients' individual parameters for skills, experience
and other criteria. Personalized matching is achieved through initial applicant
profiles, personal interviews, skill evaluations and background and reference
checks. The Company generally employs caregivers on an as-needed basis to meet
client demand. Specialized recruitment and retention programs are offered to
caregivers as incentives for them to remain in the Company's employ.
Caregivers are recruited through a variety of sources, including
advertising in local and national media, job fairs, solicitations on web sites,
direct mail and telephone solicitations, as well as referrals obtained directly
from clients and other caregivers. Caregivers are generally paid on an hourly
basis for time actually worked, subject to a four-hour daily minimum on the days
worked. The wages paid may vary in different geographic areas to reflect the
prevailing wages paid for the particular skills in the community where the
services are performed. In the northeastern and western regions of the United
States the Company is currently experiencing a shortage of licensed
professionals. A prolonged shortage of professionals could have a material
adverse effect on the Company's business.
Trademarks
The Company has various trademarks registered with the U.S. Patent and
Trademark Office, including Rehab Without Walls(R) and Chronicare(R) or in the
process of being registered with the U.S. Patent and Trademark Office, including
Care You Can Count On(SM) and Gentiva(SM). In addition, the Company has a
royalty-free license from Olsten which permits the Company to use, until March
15, 2001, some trademarks, service marks and names that were not transferred to
the Company in the split-off, including Olsten(R). Before the expiration of this
license, the Company intends to develop its Gentiva name and further develop its
health services business trademarks.
Business Environment
Factors that the Company believes have contributed and will contribute to
the development of home health care in particular include recognition that home
health care can be a cost-effective alternative to lengthy, more expensive
institutional care; an aging population; increasing consumer awareness and
interest in home health care; the psychological benefits of recuperating from an
illness or accident in one's own home and advanced technology that allows more
health care procedures to be provided at home.
The Company is actively pursuing relationships with managed care
organizations. The Company believes that its nationwide office network,
financial resources and the quality,
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range and cost-effectiveness of its services are important factors as it seeks
opportunities in its managed care relationships in a consolidating home health
care industry. The Company offers the direct and managed provision of care as a
single gatekeeper, thereby optimizing utilization.
Marketing and Sales
In general, the Company obtains clients through personal and corporate
sales presentations, telephone marketing calls, direct mail solicitation,
referrals from other clients and advertising in a variety of local and national
media, including the Yellow Pages, newspapers, magazines, trade publications and
television. Marketing efforts also involve personal contact with case managers
for managed health care programs, such as those involving health maintenance
organizations and preferred provider organizations, insurance company
representatives and employers with self-funded employee health benefit programs.
The Company does not seek reimbursement from government payors for unallowable
marketing and sales expenses.
Managed care and other non-governmental payors, which are an increasingly
significant source of referrals for home health care services, accounted for 64
percent of net revenues in fiscal 1999. The Joint Commission on Accreditation of
Healthcare Organizations (JCAHO) accredits about 98% of the locations. The
Company believes JCAHO accreditation enhances its ability to obtain contracts
with certain managed care organizations. The Company is also targeting referrals
from managed care organizations by offering disease management programs for the
treatment of asthma, diabetes and other chronic illnesses, as well as outcome
and utilization reports. The Company expects managed care contracts will
generate an increasing number of referrals as the penetration of managed care
accelerates in its markets. The Company believes that it has the local
relationships, the knowledge of the regional markets in which it operates, and
the cost-effective, comprehensive services and products required to compete
effectively for managed care contracts and other referrals.
The Company believes that its success in furnishing caregivers is based,
among other factors, on its reputation for quality and local market expertise
combined with the resources of extensive office network. The Company also
empowers its branch directors with a high level of responsibility, providing
strong incentives to manage the business effectively at the local level, one of
the central ingredients in a business where relationships are vital to success.
Competitive Position
The segments of the health care industry in which the Company operates are
highly competitive and fragmented. There are approximately 15,000 home care
agencies operating in the United States, in which the three largest providers
represented less than 15 percent of the national industry in revenues for 1999.
The industry is comprised of a few national companies, hundreds of regional
companies and thousands of locally based independent home health care
organizations. These companies range from facility-based (hospital, nursing
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home, rehabilitation facility, government agency) agencies to independent
companies to visiting nurse associations and nurse registries. They can be
not-for-profit organizations or for-profit organizations. In addition, there are
relatively few barriers to entry in some segments of the health care market in
which the Company operates. The Company could experience increased competition
in the future from existing competitors or new entrants that may limit the
Company's ability to maintain or increase its market share. The Company's
primary national competitors are Caremark Therapeutic Services and Coram
Healthcare Corp., and its primary regionally based competitors are
hospital-based home health agencies and visiting nurse associations.
The Company competes with other home health care providers on the basis of
availability of personnel, quality and expertise of services and the value and
price of services. The Company believes that it has a favorable competitive
position, attributable mainly to its widespread office network and the
consistently high quality and targeted services it has provided over the years
to its patients, as well as to its screening and evaluation procedures and
training programs for caregivers.
The Company may have existing competitors, as well as a number of potential
new competitors, who have greater name recognition, and significantly greater
financial, technical and marketing resources than the Company. This may allow
them to devote greater resources to the development and promotion of their
services. These competitors may also engage in more extensive research and
development, undertake more far-reaching marketing campaigns and adopt more
aggressive pricing policies and make more attractive offers to existing and
potential employees and clients.
The Company expects that industry forces will impact it and its
competitors. The Company's competitors will likely strive to improve their
service offerings and price competitiveness. The Company also expects its
competitors to develop new strategic relationships with providers, referral
sources and payors, which could result in increased competition. The
introduction of new and enhanced services, acquisitions and industry
consolidation and the development of strategic relationships by the Company's
competitors could cause a decline in sales or loss of market acceptance of the
Company's services or price competition, or make the Company's services less
attractive.
Number of Persons Employed
At January 2, 2000, the Company had approximately 5,100 full-time
administrative staff and 650 full time caregivers. The Company also employs
caregivers on a temporary basis, as needed, to provide home healthcare services.
In fiscal 1999, the average number of temporary caregivers employed on a weekly
basis was approximately 18,000.
In British Columbia some of the Company's caregivers are unionized by the
British Columbia Government Services' Employee Union under the master collective
bargaining
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agreement which applies to all home health agencies in British Columbia. In
addition, the Company is in the process of negotiating its first collective
bargaining agreement with all unionized caregivers in the Thunder Bay, Ontario
office with the Services' Employees International Union, Local 268. In the
Windsor, Ontario location, the Canadian Union of Public Workers filed an
application with the Ontario Labor Relations Board alleging that it is the
bargaining agent for the Company's caregivers. The Company has responded to
these allegations and a hearing has been set for November 4, 2000. In addition,
the Services' Employees International Union, Local 880 has filed a
representation petition with the National Labor Relations Board covering three
home health services offices in Chicago, Illinois with about 700 caregivers. An
election was held on November 5, 1999 at which the employees voted against the
representation. The union filed objections to the vote against the election.
These objections were upheld by the National Labor Relations Board Hearing
Officer; the Company intends to appeal this decision further. If the Company
loses the appeal, another election will be held. The Company believes that its
relationships with its employees are generally good.
With respect to administrative staff and caregivers, the Company pays the
employer's share of Social Security taxes, federal and state unemployment taxes,
workers' compensation insurance and other similar costs. Administrative staff
and caregivers are covered by professional medical liability insurance. The
Company believes that it maintains insurance coverages which are adequate for
the purposes of its business.
Canadian Operations
Through subsidiaries, the Company has provided home health services in
Canada for many years. In fiscal 1999, the Company's Canadian operations
represented about 3 percent of its revenues.
Item 2. Properties.
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Olsten agreed to provide office space to the Company without charge at 175
Broad Hollow Road, Melville, New York 11747-8905 for its corporate headquarters
until September 15, 2000. The Company agreed to use its best efforts to relocate
its corporate headquarters promptly, but in no event later than September 15,
2000. Other regional administrative offices leased by the Company are located in
Overland Park, Kansas and Tampa, Florida. The Company also maintains leases for
other offices and locations on various terms expiring on various dates. On March
15, 2000, the Company entered into an agreement with Olsten and a subsidiary of
Olsten pursuant to which the Company agreed to assume such subsidiary's
obligations under a lease for a property beginning on September 16, 2000. The
Company believes that its facilities are adequate for its immediate needs. The
Company does not anticipate that it will have great difficulty obtaining
additional or replacement space for the headquarters and other locations, as
needed in the future.
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Item 3. Legal Proceedings.
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Litigation
There is presently pending in the U.S. District Court for the Eastern
District of New York a class action filed by some Olsten stockholders against
Olsten and some of its directors and officers, captioned In re Olsten
Corporation Securities Litigation, No. 97-5056. The class action asserts claims
for violations of the Securities Act and the Securities Exchange Act, including
claims that the directors and officers of Olsten misrepresented information to
stockholders relating to the government investigations into Olsten's health
services business described in the "Government Investigations" section below.
There is also pending in the Delaware Chancery Court a purported derivative
lawsuit filed by some Olsten stockholders against some directors and officers of
Olsten (and Olsten, as nominal defendant), captioned Rubin v. May, No. 17135-NC.
This purported derivative lawsuit alleges that the Olsten directors and officers
breached their fiduciary duties to stockholders in connection with the
above-described class action and the below-described government investigations.
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.
On January 14, 1999, Kimberly Home Health Care, Inc. ("Kimberly") initiated
three arbitration proceedings against hospitals owned by Columbia/HCA Healthcare
Corp. ("Columbia/HCA") with which Kimberly had management services agreements to
provide services to the hospitals' home health agencies. The basis for each of
the arbitrations is that Columbia/HCA sold the home health agencies without
assigning the management services agreements and, as a result, Columbia/HCA has
breached the management services agreements. In response to the arbitrations,
Columbia/HCA has asserted that the arbitration be consolidated and stayed, in
part based upon its alleged claims against Kimberly for breach of contract, and
requested indemnity and possibly return of management fees. Columbia/HCA has not
yet formally presented these claims in the arbitrations or other legal
proceedings, and has not yet quantified the claims. The parties agreed to
suspend the proceedings until June 2000.
Because the above lawsuits and arbitration proceedings are in relatively
preliminary stages and seek unspecified damages, penalties and/or reimbursement
for costs and expenses, the Company is unable at this time to assess the
probable outcome or potential liability arising from such litigation.
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Furthermore, in connection with the split-off, the Company agreed to
assume, to the extent permitted by law, and indemnify Olsten for, the above
lawsuits and arbitration proceedings, together with any other liabilities
arising out of the health services business before or after the split-off,
including any such liabilities arising after the split-off in connection with
the government investigations described below.
Government Investigations
The Company's business has been subject to extensive federal and state
governmental investigations regarding, among other things:
o the preparation of Medicare costs reports, which is referred to as the
"Cost Reports Investigation";
o the relationship between Columbia/HCA and the health services business
in connection with the purchase by Columbia/HCA of some home health
agencies that were owned by the health services business and
subsequently managed under contract by a unit of the health services
business, which is referred to as the "Columbia/HCA Investigation";
and
o some of the health care practices of Quantum Health Resources, Inc.
("Quantum"), including alleged improper billing and fraud against
various federally funded medical assistance programs, which largely
occurred during the period prior to Olsten's acquisition of Quantum in
June 1996, which is referred to as the "Quantum New Mexico
Investigation."
On July 19, 1999, Olsten entered into written civil and criminal agreements
with the U.S. Department of Justice (and, as to the civil agreement, the Office
of Inspector General of the U.S. Department of Health and Human Services)
finalizing the settlement of the civil and criminal aspects of the Cost Reports
Investigation and the Columbia/HCA Investigation. Under the settlement:
o Olsten paid on August 11, 1999 the sum of $61 million to the
U.S. Department of Justice, including approximately $10.1 million in
criminal fines and penalties;
o In connection with the Columbia/HCA Investigation, Kimberly, then a
subsidiary of Olsten, pled guilty in the United States District Courts
for the Northern District of Georgia, the Southern District of Florida
and the Middle District of Florida to criminal violations of the
federal mail fraud, conspiracy and kickback statutes;
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o In connection with the Columbia/HCA Investigation, Kimberly has been
permanently excluded from participation in Medicare, Medicaid and all
other federal health care programs as defined in 42 U.S.C.
ss.1320a-7b(f); and
o In connection with the Cost Reports Investigation and the Columbia/HCA
Investigation, Olsten signed a corporate integrity agreement with the
Office of Inspector General of the U.S. Department of Health and Human
Services.
In October 1998, Olsten entered into a final settlement agreement with
several government agencies investigating the past practices of Quantum, which
is referred to as the "Quantum Past Practices Investigation." The agreement was
entered into with the U.S. Department of Justice, the Office of the Inspector
General of the U.S. Department of Health and Human Services, the U.S. Secretary
of Defense (for the CHAMPUS/Tricare program), and the Attorneys General for the
States of New York and Oklahoma. Under the settlement, Olsten reimbursed the
government approximately $4.5 million for disputed claims under the Medicaid and
CHAMPUS programs and entered into a corporate integrity agreement.
In early December 1999, Olsten received a document subpoena from the
Department of Health and Human Services, Office of Inspector General, 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 intends to
provide the Office of Inspector General with the requested documents and
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 has recently commenced discussions with the North Carolina
Attorney General's Office concerning questions that the Office has raised as to
the eligibility of a certain class of the Company's patients to receive
Medicaid-reimbursed home health services and, thus, the Company's entitlement to
Medicaid reimbursement in connection with those services. At this preliminary
stage, the Company is unable to assess the probable outcome of or potential
liability arising from this matter.
As noted above, in connection with the government's Cost Reports
Investigation and Columbia/HCA Investigation, Olsten executed a corporate
integrity agreement with the Office of Inspector General of the Department of
Health and Human Services. That corporate integrity agreement will be in effect
until August 18, 2004. In connection with the Quantum Past Practices
Investigation, Olsten executed a corporate integrity agreement in October 1998
with the U.S. Department of Justice, the Office of Inspector General of the U.S.
Department of
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Health and Human Services, the U.S. Secretary of Defense (for the
CHAMPUS/Tricare Program) and the Attorneys General for the States of New York
and Oklahoma that will be in effect until December 31, 2001. Under each of the
corporate integrity agreements, the Company is, for example, is required:
o to maintain a corporate compliance officer to develop and implement
compliance programs;
o to retain an independent review organization to perform annual
reviews; and
o to maintain a compliance program and reporting systems, as well as
provide certain training to employees.
The corporate integrity agreement entered into in connection with the
Quantum Past Practices Investigation applies to the Company's specialty
pharmaceutical services business and focuses on the training and billing of
blood factor products for hemophiliacs. The corporate integrity agreement
relating to the Cost Reports Investigation and the Columbia/HCA Investigation
applies to the Company's businesses that bill the federal government health
programs directly for services, such as its home care nursing business (but
excluding the specialty pharmaceutical services business). That corporate
integrity agreement focuses on issues and training related to cost report
preparation, contracting, medical necessity and billing of claims.
The Company's compliance program will be implemented for all newly
established or acquired business units if their type of business is covered by
the corporate integrity agreements. Reports under each integrity agreement are
to be filed annually with the Department of Health and Human Services, Office of
Inspector General. After each corporate integrity agreement expires, the Company
is to file a final annual report with the government. If the Company fails to
comply with the terms of either of its corporate integrity agreements, the
Company will be subject to penalties ranging from $1,500 to $2,500 for each day
of the breach.
In March 2000, Gentiva was notified by the U.S. Department of Justice that,
in light of the Adecco/Olsten merger and the split-off of Gentiva as an
independent public company, the Company has been substituted for Olsten in
connection with the civil settlement and corporate integrity agreements
referenced in this "Government Investigations" section.
Regulations
The Company's business is subject to extensive federal and state
regulations which govern, among other things:
o Medicare, Medicaid, CHAMPUS and other government-funded reimbursement
programs;
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o reporting requirements, certification and licensing standards for
certain home health agencies; and
o in some cases, certificate-of-need and pharmacy-licensing
requirements.
The Company's compliance with these regulations may affect its
participation in Medicare, Medicaid, CHAMPUS and other federal health care
programs. The Company is also subject to a variety of federal and state
regulations which prohibit fraud and abuse in the delivery of health care
services. These regulations include, among other things:
o prohibitions against the offering or making of direct or indirect
payments for the referral of patients;
o rules against physicians making referrals under Medicare for clinical
services to a home health agency with which the physician has certain
types of financial relationship; and
o laws against the filing of false claims.
As part of the extensive federal and state regulation of the home health
care business, and under the Company's corporate integrity agreements, the
Company is subject to periodic audits, examinations and investigations conducted
by, or at the direction of, governmental investigatory and oversight agencies.
Violation of the applicable federal and state health care regulations can result
in excluding a health care provider from participating in the Medicare, Medicaid
and/or CHAMPUS programs and can subject the provider to substantial civil and/or
criminal penalties. As noted in the "Government Investigations" section above,
one of the Company's subsidiaries, Kimberly, has been permanently excluded from
participation in Medicare, Medicaid and all other federal health care programs
pursuant to a plea agreement.
Periodic and random audits conducted by intermediaries may result in a
delay in receipt, or an adjustment to the amounts of reimbursement due or
received under Medicare, Medicaid, CHAMPUS and other federal health care
programs. In September 1999, the Company received a Notice of Amount of Program
Reimbursement for the 1997 Medicare cost reports from the Medicare fiscal
intermediary advising that it disagreed with the Company's methodology of
allocating a portion of its overhead. The Health Care Financing Administration
has indicated that it agrees with the fiscal intermediary. The notice indicates
a disallowance of approximately $7 million of costs in 1997 which the Company
would be required to pay if the fiscal intermediary is correct. Since the
Company used a similar methodology for allocating overhead costs in 1998 and
1999, an additional disallowance aggregating approximately $5 million could
result for these years. The Company believes its cost reports are accurate and
consistent with past practice accepted by the fiscal intermediary, and has
appealed the notice to the Provider Reimbursement Review Board. The Company is
unable to predict
14
the outcome of this appeal and the final determination of revenue to be
ultimately recognized by the Medicare program; however the Company has made
adequate provision for such disallowance in its financial statements. In
connection with the split-off, the Company agreed to assume all liabilities
arising out of and associated with the health services business.
Item 4. Submission of Matters to a Vote of Security Holders.
- ------- ----------------------------------------------------
In the last fiscal quarter of the 1999 fiscal year, the following matters
were submitted for vote and approval of Olsten, as the sole shareholder of the
Company:
o the name of the Company;
o the Company's directors;
o the Company's amended and restated certificate of incorporation;
o the Company's amended and restated by-laws;
o the Company's form of severance agreements;
o the Company's form of change of control agreements;
o the Company's executive officers bonus plan;
o the Company's 1999 stock incentive plan;
o the Company's stock and deferred compensation plan for non-employee
directors; and
o the Company's employee stock purchase plan.
15
PART II
Item 5. Market Price for Registrant's Common Equity and Related Stockholder
- ------- Matters.
-------------------------------------------------------------------
Market Information
During the period covered by this report, there was no established public
trading market for shares of the Company's common stock. As of March 16, 2000,
the Company's common stock was quoted on The Nasdaq National Market under the
symbol "GTIV".
Holders
Because the Company was a wholly-owned subsidiary of Olsten at January 2,
2000, Olsten was the only holder of the Company's common stock at that date. As
of March 16, 2000, the approximate number of holders of the Company's common
stock was 2,303.
Recent Sales of Unregistered Securities
The Company did not sell any equity securities during the period covered by
the report, other than the issuance of its common stock prior to the split-off,
to Olsten, its former parent corporation for consideration of par value per
share.
Dividends
The Company does not expect to pay any dividends on its common stock for
the foreseeable future. Any future payments of dividends and the amount of the
dividends will be determined by the board of directors from time to time based
on:
o results of operations;
o financial condition;
o cash requirements;
o future prospects; and
o other factors deemed relevant by the Company's board of directors.
In addition, some of the Company's debt instruments and other agreements
also contain restrictions of the Company's ability to declare and pay dividends.
See Item 7, Part II.
16
Item 6. Selected Financial Data.
- ------- ------------------------
The following table provides selected historical consolidated financial
data of the Company as of and for each of the fiscal years in the five-year
period ended January 2, 2000. The data as of and for each of the fiscal years in
the four-year period ended January 2, 2000 have been derived from the Company's
audited consolidated financial statements. The consolidated financial data as of
and for the fiscal year ended December 31, 1995 have been derived from the
Company's unaudited financial statements and include, in the Company's opinion,
all adjustments, consisting of normal recurring adjustments, necessary for a
fair statement of the results for that year. The historical consolidated
financial information presents the Company's results of operations and financial
position as if the Company was a separate entity from Olsten for all years
presented. The historical financial information may not be indicative of the
Company's future performance and may not necessarily reflect what the financial
position and results of operations of the Company would have been if the Company
was a separate stand-alone entity during the years covered.
Fiscal Year Ended
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(53 weeks)
(In thousands except for share amount)
Statement of Operations
Data
Net revenues.................. $1,369,382 $1,374,353 $1,433,854 $1,330,303 $1,489,822
Gross profit.................. 525,262 511,940 520,586 421,407 505,426
Selling, general and
Administrative expenses....... 436,674 421,222 460,254 552,528 509,658
Net income (loss)............. 45,163 (2,877)(1) 26,847 (101,465)(2) (15,086)(3)
Net income (loss) per share...
2.22 (.14) 1.32 (4.99) (.74)
Average shares out-
standing (4).................. 20,345 20,345 20,345 20,345 20,345
Balance Sheet Data (at
end of year):
Working capital............... $326,681 $334,512 $346,135 $367,915 $438,536
Total assets.................. 739,438 785,341 783,478 945,738 1,063,105
Long-term debt................ 86,250 86,250 86,250 86,250 --
Shareholders' equity.......... 516,716 541,737 530,270 561,859 705,291
(1) Net loss in fiscal 1996 reflects merger, integration and other
non-recurring pre-tax charges totaling approximately $75 million. These
charges resulted from acquisition of Quantum for $39 million; $30 million
of allowances for a change in the methodology used by Medicare for
computing reimbursements in prior years related to our home health care
business; and Quantum's charge of $5.5 million related to the settlement of
shareholder litigation.
17
(2) Net loss in fiscal 1998 reflects non-recurring pre-tax charges and other
adjustments totaling approximately $122 million. These charges resulted
from $66 million related to the restructuring of the Company's businesses
and a special charge of $56 million for the settlement of two federal
investigations. These provisions include a reduction in revenues of $14
million, a charge to cost of sales of $15 million and $93 million in
selling, general and administrative expenses. See Note 4 to the Company's
Consolidated Financial Statements.
(3) Net loss for fiscal 1999 reflects a special pre-tax charge of $15.2 million
for the realignment of business units as part of a new restructuring plan.
This charge is included in selling, general and administrative expenses.
See Note 4 to the Company's Consolidated Financial Statements.
(4) Historical earnings per share data has been computed based upon a
20,345,029 shares of common stock. Such amount is based on the number of
shares of the Company's common stock issued March 15, 2000, the date of the
split-off. Pursuant to the terms of the split-off, shareholders of Olsten
received .25 shares of Gentiva Health Services common stock for each share
of Olsten common stock or Class B common stock that they owned.
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------- Results of Operations.
---------------------------------------------------------------
The historical consolidated financial information presents the results of
operations and financial position as if the Company was an independent company
for all years presented. The historical financial information may not be
indicative of future performance and may not necessarily reflect what the
Company's financial position and results of operations would have been if it
were a separate stand-alone entity during the years covered. As an independent
company, the Company expects to incur additional legal, risk management, tax,
treasury, human resources and administrative and other expenses that it did not
experience as a wholly-owned subsidiary of Olsten.
The Company provides home health care through its caregivers, including
licensed health care personnel, such as registered nurses. The Company offers a
broad range of services, including:
o treatments for patients with chronic diseases;
o intravenous and oral administration of drugs, nutrients and other
solutions;
o skilled nursing care;
o pediatric/maternal care programs;
18
o rehabilitation and other therapies;
o disease management programs;
o home health aide and personal services care; and
o institutional, occupational and alternate site staffing.
The home health care industry in which the Company operates has undergone
significant changes due to government regulation. As part of the Balanced Budget
Act of 1997, the government enacted the Interim Payment System ("IPS") for
reimbursement of home care services provided under Medicare, which represents
approximately 16 percent of our business. Prior to enactment of the IPS, home
care services were reimbursed based on cost subject to a per-visit limit
determined by the Health Care Financing Administration. The IPS reimburses home
care services based on costs, subject to both a per-beneficiary limit and a
per-visit limit. Further, the IPS reduced the per-visit limit to 1994 levels. In
order to operate at the lowered reimbursement rates, home health care companies
reduced the services provided to patients by providing fewer patient visits. In
addition, the regulatory climate that ensued in home health care caused a lower
level of physician referrals.
As a result of these cuts, the amount the Company gets paid has been
reduced. Specifically, Medicare revenue, excluding acquisitions, was reduced as
compared to the preceding year by $127 million or 40% in fiscal 1998 and $36
million or 19% in fiscal 1999. These reductions have had a negative impact on
operations and liquidity.
Results of Operations
In the quarter ended April 4, 1999, the Company recorded a special charge
totaling $16.7 million for the realignment of business units as part of a new
restructuring plan, including:
o compensation and severance costs of $5 million to be paid to
operational support staff, branch administrative personnel and
management;
o asset write-offs of $6.5 million, related primarily to fixed assets
being disposed of in offices being closed and facilities being
consolidated as well as fixed assets and goodwill attributable to the
Company's exit from certain businesses; and
o integration costs of $5.2 million, primarily related to obligations
under lease agreements for offices and other facilities being closed.
19
As of the end of fiscal 1999, substantially all of the closures and
consolidation of facilities and expected terminations had occurred. These
activities have resulted in lower costs than originally estimated and, as a
result, the Company recognized a benefit of $1.5 million in the fourth quarter
of 1999 to reflect the change in estimate. The realignment of the business units
achieved a reduction of expenses of about $3 million in 1999, due to reduced
employee, lease and depreciation expenses.
On March 30, 1999, the Company announced plans to take a special charge
totaling $56 million, which was recorded in the fourth quarter of fiscal 1998.
The charge was for the settlement of two federal investigations focusing on
Medicare home office cost reports and certain transactions with Columbia/HCA.
The agreements in connection with the settlement were finalized and signed on
July 19, 1999. On August 11, 1999 Olsten paid $61 million pursuant to the
settlement, about $5 million of which was previously accrued as part of the 1996
merger, integration and other non-recurring charges.
In 1998, the Company also recorded non-recurring charges and other
adjustments of $66 million, of which approximately $64 million was recorded in
the second quarter and $2 million was recorded in the third quarter both related
to the restructuring of business. These charges, which were primarily for 60
office closings and consolidations in the United States, were taken to help
position the Company to operate more efficiently under the new IPS. In addition,
significant technological investments were made in order to improve operational
efficiencies and employee retention levels. The benefit of the restructuring
began to be realized in the second quarter of 1998.
Included in this provision was $24 million charged to selling, general and
administrative expenses, which included lease payments of $3 million, employee
severance of $4 million, fixed asset and software write-offs of $5 million to
reflect the loss incurred upon the Company's decision to dispose of the assets
in some closed offices, and an increase in the allowance for doubtful accounts
of $12 million. All closures and consolidations of facilities and employee
terminations, related to this charge, have been completed. The allowance for
doubtful accounts was increased because receipt of payment is highly dependent
on the Company's ability to provide some evidence of service and authorization
documentation to a variety of third-party payors. The office closings,
consolidation of certain business service centers and the termination of
employees are all events that, in the Company's experience, impair its ability
to provide the documentation required to collect on receivables. The Company
also recorded other adjustments to selling, general and administrative expenses
of $13 million which included professional fees and related costs resulting from
the settlement with several government agencies regarding certain past business
practices of Quantum, the level of effort required to respond to the significant
inquiries conducted by the government, and costs incurred to redesign the credit
and collection process of the Company's business.
In addition, upon final announcement of the per-beneficiary limits by the
government, the Company recorded a reduction in revenues in the second quarter
of fiscal 1998 of $14 million in anticipation of lower Medicare reimbursements
resulting from the new per-visit and per-beneficiary limits that were imposed by
Medicare under the IPS.
20
The Company recorded a charge to cost of sales of $15 million to reflect
the estimated increase in costs that have been incurred, but not yet reported,
based upon a change in the actuarial estimates utilized to determine the level
of service to patients covered under the Company's capitated contracts.
At January 2, 2000, about $2.8 million, consisting primarily of severance
and integration costs, remained unpaid and were included in accrued expenses.
Revenues
Revenues increased 12 percent, or $160 million, during fiscal 1999 compared
to fiscal 1998 driven by growth in specialty pharmaceutical services of 22
percent, or $128 million, staffing services of 28 percent, or $28 million, and
home care nursing services of 1 percent, or $4 million. Included in home care
nursing services revenues is an increase in revenue attributable to the
acquisition of Columbia/HCA's home health care operations in the state of
Florida, which was partially offset by declines in Medicare-related home care
visits and reimbursement due to the implementation of the IPS.
Revenues in fiscal 1998 had decreased 7 percent, or $104 million, compared
to fiscal 1997, primarily as a result of a 23 percent, or $197 million, decrease
in home care nursing services revenues resulting from the reduction in Medicare
related home care visits due to the implementation of IPS, partially offset by a
13 percent, or $68 million, increase in specialty pharmaceutical services
revenues and a 35 percent, or $25 million, increase in the staffing services
business.
Gross Profit
Gross profit margins increased in fiscal 1999 to 34 percent from 32 percent
for fiscal 1998 primarily as a result of productivity enhancements, rate
increases and a change of payor mix driven by the acquisition in the state of
Florida in the home care nursing services business, partially offset by greater
growth in the lower margin staffing services business.
Gross profit margins had decreased in fiscal 1998 to 32 percent from 36
percent in fiscal 1997 primarily as a result of a change in the business mix
reflecting growth in lower margin staffing services business and revenue decline
in the Medicare portion of the home care nursing business. The negative
influences on gross profit margins were partially offset by growth in the
specialty pharmaceutical services.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased to $510 million, or
34 percent of revenues, for fiscal 1999 from $553 million, or 42 percent of
revenues, as compared to fiscal 1998. Excluding the effects of special charges,
non-recurring charges and other adjustments recorded in both years, selling,
general and administrative expenses were 33 percent of
21
revenues during the fiscal 1999 as compared to 35 percent of revenues in fiscal
1998, primarily as a result of the impact of efficiency improvement efforts in
home care nursing services and corporate administrative support departments
partially offset by increased information systems costs.
Selling, general and administrative expenses for fiscal 1998 were $553
million, or 42 percent of revenues, as compared to $460 million, or 32 percent
of revenues, in fiscal 1997. Excluding the effects of the non-recurring charges
and other adjustments, selling, general and administrative expenses were $460
million, or 35 percent of revenues, for fiscal 1998. The increase in selling,
general and administrative expenses as a percent of revenues was primarily
attributable to investments in infrastructure, including new information systems
and increased expenses incurred to grow the specialty pharmaceutical services
and staffing services businesses. These increases were partially offset by the
cost reduction initiatives, including closing and consolidating offices in the
home care services business.
Interest expense
Interest expense of $17.0 million during fiscal 1999 was slightly lower
than interest expense of approximately $17.4 million for fiscal 1998 due to the
retirement of $7.7 million of Quantum's 4 3/4% convertible subordinated
debentures in January 1999. Interest expense for all years represented interest
on the debentures outstanding and intercompany borrowings with Olsten.
Income taxes
The effective income tax rates on income (loss) were 28.9 percent, 31.7
percent, 37.9 percent for fiscal 1999, fiscal 1998 and fiscal 1997 respectively.
The rates differ from statutory rates primarily because of non-deductible
goodwill amortization and other non-deductible items.
Year 2000
The technical infrastructure of the Company, encompassing all business
applications, is Year 2000 compliant. Systems not directly related to the
financial operations of the business, primarily voice communications, have also
been upgraded.
Systems critical to the Company's business, which were identified as
non-year 2000 compliant, have been replaced to increase efficiencies and improve
the Company's ability to provide services to customers. The new infrastructure,
which is Year 2000 compliant, was completely implemented in field offices before
January 1, 2000. Other systems, which required remediation, were completed
before January 1, 2000. The total cost of the Company's remediation plan was
about $2.5 million.
22
The Company has not experienced any transactional or operational problems
due to Year 2000 issues during the month of January 2000 or in any subsequent
months.
Liquidity and Capital Resources
Historically, the Company has relied on cash flow from operations and
advances from Olsten to meet its operating and investing activities. In the
past, when liquidity needs exceeded cash flow, Olsten provided the necessary
funds. In connection with the split-off and in accordance with the separation
agreement governing the split-off, the Company received approximately $32
million in cash (referred to as the true-up amount) prior to the split-off date.
Following the split-off, the Company paid Olsten approximately $13 million to
settle the intercompany account balance which related primarily to management
fees, additional advances and interest expense on intercompany balances. The
Company is no longer able to use Olsten's resources to meet its needs and has
acquired third party financing, as described below, for such purposes.
The Company received $20 million of proceeds from the issuance by Gentiva
Trust, a Delaware statutory trust (the "Trust"), of 10% convertible trust
preferred securities on March 15, 2000. The Company owns all the common equity
in the Trust. The Trust's only asset is the 10% convertible subordinated
debentures of the Company. The Company entered into a credit facility, which
provides for up to $150 million in borrowings, including up to $30 million which
is available for letters of credit. The Company may borrow up to 80 percent of
eligible accounts receivable, as defined. The credit facility, which expires in
2004, includes covenants requiring the Company to maintain a minimum tangible
net worth and minimum earnings before interest, taxes, depreciation and
amortization. Other covenants in the credit facility include: limitations on
mergers, consolidations, acquisitions, indebtedness, liens, capital expenditures
and disposition of assets and other limitations with respect to the Company's
operations. The interest rate on borrowings under the credit facility is based
on the London Interbank Offered Rate (LIBOR) plus 2.5 percent or the lender's
prime rate plus 0.25 percent.
As of March 16, 2000, there were no borrowings under the credit facility
and approximately $19 million of standby letters of credit outstanding. As of
such date, the Company had borrowing capacity of approximately $131 million
under the credit facility. By October 2000, the Company will be required to
repay $78.6 million of its 4-3/4% convertible subordinated debentures which
mature on October 1, 2000. The Company is evaluating various options, including
use of the new credit facility, to repay these debentures.
Working capital at January 2, 2000 was $439 million, an increase of 19
percent versus $368 million at January 3, 1999. Net receivables increased to
$575 million, or 27 percent, predominantly due to growth in the specialty
pharmaceutical services, which historically has a longer collection period than
the Company's other businesses. The Company has recently made and will continue
to make investments in billing and accounts receivable systems and has realigned
its billing and collection units in an effort to improve cash flow from
operations.
23
Management believes cash flows from operations, borrowings available under
the new credit facility and any remaining proceeds received from the issuance of
the 10% convertible trust preferred securities will be adequate to support the
ongoing operations and to meet debt service and principal repayment requirements
for the foreseeable future. The Company intends to make investments and other
expenditures to, among other things, upgrade its computer technology and system
infrastructure and relocate its headquarters. If cash flows from operations or
availability under the new credit facility fall below expectations, the Company
may be forced to delay planned capital expenditures, reduce operating expenses,
seek additional financing or consider alternatives designed to enhance
liquidity.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- -------- -----------------------------------------------------------
The Company's exposure to the market risk for changes in interest rates
relates to the fair value of its fixed rate Quantum debentures. Generally, the
fair market value of fixed rate debt will increase as interest rates fall and
decrease as interest rates rise. Based on the overall interest rate exposure on
the fixed rate debentures at January 2, 2000, a 10 percent change in market
interest rates would not have a material effect on the fair value of long-term
debt.
Fluctuations in currency exchange rates may impact shareholder's equity.
Assets and liabilities of the Company's Canadian subsidiary are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date. Revenues
and expenses are translated into U.S. dollars at the weighted average exchange
rate for the period. The resulting translation adjustments are recorded in
shareholder's equity as accumulated other comprehensive income (loss).
Although currency fluctuations impact reported results of operations, such
fluctuations generally do not affect cash flow or result in actual economic
gains or losses. Each of the Company's subsidiaries derives revenues and incurs
expenses within a single country and does not incur currency risks in connection
with the conduct of normal business operations.
Other than intercompany transactions between the United States and the
Company's Canadian subsidiary, the Company generally does not have significant
transactions that are denominated in a currency other than the functional
currency applicable to each entity. The Company does not engage in hedging
activities and did not hold any derivative instruments at January 2, 2000.
Item 8. Financial Statements and Supplementary Data.
- ------- --------------------------------------------
The following financial statements and financial schedule of the Company
are included in this report:
Page(s) in this Report
----------------------------------------------------------------- ----------------------------
Report of Independent Accountants F- 2
----------------------------------------------------------------- ----------------------------
Consolidated Balance Sheets as of January 2, 2000 and January
3, 1999 F- 3
----------------------------------------------------------------- ----------------------------
24
Consolidated Statements of Income for the three years ended
January 2, 2000 F- 4
----------------------------------------------------------------- ----------------------------
Consolidated Statements of Changes in Shareholders' Equity for
the three years ended January 2, 2000 F- 5
----------------------------------------------------------------- ----------------------------
Consolidated Statements of Cash Flows for the three years ended
January 2, 2000 F- 6
----------------------------------------------------------------- ----------------------------
Notes to Consolidated Financial Statements F- 7
----------------------------------------------------------------- ----------------------------
Schedule II - Valuation and Qualifying Accounts for the three
years ended January 2, 2000 F-32
----------------------------------------------------------------- ----------------------------
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------- Financial Disclosure.
---------------------------------------------------------------
There have been no such changes or disagreements.
25
PART III
Item 10. Directors and Executive Officers of the Registrant.
- -------- ---------------------------------------------------
The following table sets forth certain information regarding each of the
Company's directors and executive officers as of March 16, 2000:
Director/Executive
Officer Position and Offices
Name Since Age with the Company
- ---- ----------------------- --- ----------------
Victor F. Ganzi Nov. 1999 52 Director
Steven E. Grabowski Nov. 1999 45 Director
Stuart R. Levine Nov. 1999 52 Director
Stuart Olsten Nov. 1999 47 Director
Raymond S. Troubh Nov. 1999 73 Director
Josh S. Weston Nov. 1999 71 Director
Gail Wilensky Mar. 2000 56 Director
Edward A. Blechschmidt Nov. 1999 47 President, Chief
Executive Officer and
Chairman of the Board
of Directors
John J. Collura Nov. 1999 53 Executive Vice
President, Chief
Financial Officer
and Treasurer
Ronald A. Malone Mar. 2000 46 Executive Vice President
Robert J. Nixon Nov. 1999 43 Executive Vice President
Richard C. Christmas Nov. 1999 45 Senior Vice President
E. Rodney Hornbake Mar. 2000 49 Senior Vice President
and Chief Medical
Officer
26
Director/Executive
Officer Position and Offices
Name Since Age with the Company
- ---- ----------------------- --- ----------------
Patricia C. Ma Nov. 1999 38 Senior Vice President,
General Counsel and
Secretary
Terry Mitchell Mar. 2000 49 Senior Vice President
Vernon A. Perry Nov. 1999 48 Senior Vice President
David C. Silver Mar. 2000 57 Senior Vice President
The term of office for officers is until resignation or a succesor is
appointed, other than with respect to the term of office described below under
"Employment Agreement". The term of office for directors is as set forth under
the heading "Classified board of directors" below.
Victor F. Ganzi
Mr. Ganzi has served as a director of the Company since November 1999. He
served as a director of Olsten from 1998 until March 2000. He has been executive
vice president of The Hearst Corporation, a diversified communications company
with interests in magazine, newspaper and business publishing and television and
radio stations, since March 1997 and its chief operating officer since March
1998. From 1992 to 1997, at various times Mr. Ganzi served as Hearst's senior
vice president, chief financial officer and chief legal officer. From March 1995
until October 1999 he was group head of Hearst's Books/Business Publishing
Group. He is a director of Hearst-Argyle Television, Inc.
Steven E. Grabowski
Mr. Grabowski has served as a director of the Company since November 1999.
He is currently a Vice President in the Private Client Group of PaineWebber,
Inc., a member of the New York Stock Exchange, where he has worked since 1991.
Mr. Grabowski currently serves on the board of a not-for-profit entity named
VITA Education Services. Mr. Grabowski is the brother-in-law of Mr. Olsten, a
director of the Company.
Stuart R. Levine
Mr. Levine has served as a director of the Company since November 1999. He
served as a director of Olsten from 1995 until March 2000. Since June 1996 he
has served as the chairman and chief executive officer of Stuart Levine &
Associates LLC,
27
an international training company. From September 1992 to June 1996 he was Chief
Executive Officer of Dale Carnegie & Associates, Inc., a global provider of
corporate training in leadership and personal development. Mr. Levine currently
serves as a Trustee of Long Island Jewish Health Care, and for 15 years, until
1995, he served as a Vice Chairman of North Shore Hospital. Mr. Levine is a
member of the board of directors of European American Bank.
Stuart Olsten
Mr. Olsten has served as a director of the Company since November 1999. He
served as a director of Olsten from 1986 to March 2000. From February 1999 until
March 2000 he was the chairman of the board of directors of Olsten. He was vice
chairman of Olsten from August 1994 to February 1999 and was president of Olsten
from April 1990 to February 1999. Mr. Olsten was appointed to the board of
directors of Adecco at the time of the merger of Olsten into a subsidiary of
Adecco. Mr. Olsten is the brother-in-law of Mr. Grabowski, a director of the
Company.
Raymond S. Troubh
Mr. Troubh has served as a director of the Company since November 1999. He
served as a director of Olsten from 1993 to March 2000. He has been a financial
consultant for more than five years. He is a director of ARIAD Pharmaceuticals,
Inc., Diamond Offshore Drilling, Inc., Foundation Health Systems, Inc., General
American Investors Company, Starwood Hotels and Resorts, Triarc Companies and
WHX Corporation.
Josh S. Weston
Mr. Weston has served as a director of the Company since November 1999. He
served as a director of Olsten from 1995 to March 2000. Since May 1998 he has
been honorary chairman of Automatic Data Processing, Inc., a provider of
computerized transaction processing, data communication and information
services. He was chairman of Automatic Data Processing, Inc. from 1982 to April
1998 and was chief executive officer of Automatic Data Processing, Inc. from
1982 to August 1996. He is a director of Automatic Data Processing, Inc., J.
Crew Inc., Russ Berri Corp. and Shared Medical Systems, Inc. and a trustee of
Atlantic Health Systems, Inc.
Dr. Gail Wilensky
Dr. Wilensky has served as a director of the Company since March 2000. She
has been the John M. Olin Senior Fellow at Project HOPE, an international health
foundation, since January of 1993, and Chair of the Medicare Payment Advisory
Commission. She served as deputy assistant to President Bush for policy
development from March of 1992 to January of 1993 and as administrator of the
Health Care Fi-
28
nancing Administration from January of 1990 to March of 1992. Dr. Wilensky has
also served as vice president of health affairs at Project HOPE from 1983 to
1989, and has taught economics and public policy at the University of Michigan
and George Washington University. She is an elected member of the Institute of
Medicine and serves as a trustee of the Combined Benefits Fund of the United
Mineworkers of America and the Research Triangle Institute. She is an advisor to
the Robert Wood Johnson Foundation and The Commonwealth Fund. She is a director
of Advanced Tissue Sciences, ManorCare, Quest Diagnostics, St. Jude Medical,
Inc., Shared Medical Systems, Inc., Syncor International, and United HealthCare.
Edward A. Blechschmidt
Mr. Blechschmidt has served as chief executive officer and as a director of
the Company since November 1999. He served as the chief executive officer and a
director of Olsten from February 1999 until March 2000. He has also been the
president of Olsten since October 1998 and served as the chief operating officer
of Olsten from October 1998 to February 1999. From August 1996 to October 1998
he was president and chief executive officer of Siemens Nixdorf Americas, an
information technology company. From January 1996 to July 1996 he was senior
vice president and chief financial officer of Unisys Corporation, a provider of
information technology and consulting services. From January 1995 to December
1995 he was senior vice president and president of the United States and Canada
division of Unisys Corporation. From 1990 to December 1994 he was senior vice
president and president of the Pacific Asia Americas Division of Unisys
Corporation.
John J. Collura
Mr. Collura has served as the executive vice president, chief financial
officer and treasurer of the Company since November 1999. He served as senior
vice president and chief financial officer of Olsten Health Services from 1998
to March 2000. From 1996 to 1998, Mr. Collura was corporate director of
financial and business development operations of Partners Healthcare, an
integrated healthcare delivery system that manages 42 entities. From 1995 to
1996, Mr. Collura was the chief operating officer of the Port Authority of New
York and New Jersey. He also held several senior level finance positions at the
Port Authority and was assistant chief executive officer. Mr. Collura is a
member of the Institute of Management Accountants, where he has served as
president and national board member and a member of the Healthcare Financial
Management Association; he is also a board member of the Arthritis Foundation.
Ronald A. Malone
Mr. Malone has served as executive vice president of the Company since
March 2000. Prior to joining the Company, he served in various positions with
Olsten, including executive vice president of Olsten and president, Olsten
29
Staffing Services, United States and Canada, from January 1999 to March 2000;
from March 1998 to December 1998, he served as executive vice president,
Operations; from March 1997 to February 1998 he served as senior vice president,
Operations and from July 1994 to February 1997 he served as senior vice
president, Southeast Division.
Robert J. Nixon
Mr. Nixon has served as a senior vice president of the Company since
November 1999. He had been a member of Olsten Health Services' senior management
team since joining Olsten in 1994. From 1994 to 1999, he has served in various
capacities, including as a senior vice president. Prior to joining Olsten, Mr.
Nixon held positions with PediatriCare America, Critical Care America and
Sherwood Medical.
Richard C. Christmas
Mr. Christmas has served as senior vice president of the Company since
November 1999. He joined Olsten in 1992 and has served as regional director,
area vice president and project manager-vice president for a business and
technology reengineering project for Olsten. Prior to joining Olsten, Mr.
Christmas was a regional director of Manpower Inc. and vice president of
Helpmates Temporary Services.
E. Rodney Hornbake, M.D.
Dr. Hornbake has served as senior vice president and chief medical officer
since March 2000. Before joining the Company, Dr. Hornbake served as vice
president and medical director of the North Shore-Long Island Jewish Health
System. Prior to that, Dr. Hornbake was chief medical officer for Aetna
Professional Management Corporation and chief of medicine for the Park Ridge
Health System.
Patricia C. Ma
Ms. Ma has served as the Company's senior vice president, general counsel
and secretary since November 1999. She joined Olsten in June 1994. Since 1998
she served as general counsel and vice president. From 1994 to 1998, Ms. Ma
served in various legal positions with the Company, including vice president,
assistant general counsel, assistant vice president and senior counsel. Prior to
joining Olsten, Ms. Ma served as assistant general counsel of National Medical
Care, Inc. from 1990 to 1994.
Terry Mitchell
Mr. Mitchell has served as senior vice president of the Company since March
2000. Mr. Mitchell served in numerous capacities for Olsten Health Services from
1993 to March 2000. Prior to joining the Company, Mr. Mitchell had an eighteen
year
30
tenure at Marriott Corporation, including serving as senior vice president in
the management and facilities management divisions.
Vernon A. Perry, Jr.
Mr. Perry has served as senior vice president of the company since November
1999. He joined Olsten in 1994. From 1996 to 1999, he served as senior vice
president of network management. From 1994 to 1996, he served as vice president
of business development, primarily responsible for the health services business
development. Before joining Olsten, Mr. Perry spent twenty years in various
health care management positions, including senior positions at Georgetown
University Community Health Plan, Sierra Health Services and Principal Health
Care.
David C. Silver
Mr. Silver has served as senior vice president of the Company since March
2000. He joined Olsten in 1998 as director, Human Resources Planning and
Development. In April 1999 he was promoted to Vice President, Human Resources
for Olsten's staffing services business. Prior to joining Olsten he held senior
Human Resources positions with the Bank of Tokyo, Supermarkets General
Corporation, Chase Manhattan Bank and Amerada Hess. From 1989 to 1998 he served
as president of a human resources consulting firm delivering organizational
change, leadership development and general human resources consulting services.
Classified board of directors
The board of directors is divided into three classes. Victor F. Ganzi, Dr.
Gail Wilensky and Josh S. Weston, are the class 1 directors with an initial term
expiring at the first annual stockholders' meeting for election of directors.
Edward A. Blechschmidt, Steven E. Grabowski and Raymond S. Troubh, are the class
2 directors with an initial term expiring at the second annual stockholders'
meeting for election of directors. Stuart R. Levine and Stuart Olsten, are the
class 3 directors with an initial term expiring at the third annual stockholders
meeting for the election of directors. After their initial terms, directors will
generally serve for three years.
Committees of the board of directors
The board of directors has an audit committee, a human resources and
compensation committee and an executive committee. The audit committee
recommends the appointment of auditors and oversees accounting and audit
functions and other key financial matters of the Company. In addition, the audit
committee oversees compliance matters as well as the implementation of the
corporate integrity agreements described under the heading "Legal Proceedings".
Messrs. Ganzi and Troubh and Dr. Wilensky will serve as the audit committee's
members. The human resources and compensation
31
committee oversees compensation and benefit programs. Messrs. Levine, Troubh and
Weston will serve as members of the human resources and compensation committee.
The executive committee acts for the entire board of directors between board
meetings. Messrs. Blechschmidt, Ganzi, Olsten and Weston serve as members of the
executive committee.
Director compensation
Each non-employee member of the board of directors will receive an annual
retainer of $25,000 up to half of which such director may elect to receive in
cash, paid quarterly, the remainder of which will be paid in shares of the
Company's common stock. In addition, any non-employee directors who act as chair
of a committee of the board will receive $2,000 annually for acting as a
chairperson. Non-employee directors will also receive $1,000 for each board or
committee meeting they attend ($500 if attendance is by telephone). All
directors, regardless of whether or not they are employees, will receive
reimbursement for out-of-pocket expenses incurred in connection with attending
meetings. Upon initial election to the board, each non-employee director will
receive stock options exercisable for up to 5,000 shares of the Company's common
stock with future grants to be determined by the board of directors.
Item 11. Executive Compensation.
- -------- -----------------------
Set forth below is information regarding the compensation during Olsten's
1999 fiscal year for the people who served as chief executive officer of or in a
similar capacity for the Company and the four other most highly compensated
officers of the Company (collectively referred to as the "named officers").
During this period, the named officers, other than Mr. Blechschmidt who was
employed by Olsten and paid by Olsten, were the Company's employees and all
compensation was paid by the Company. After March 15, 2000, all of the named
officers who continued with the Company, became employees of the Company and the
compensation of the named officers and all of the other officers was determined
by the human resources and compensation committee of the Company.
32
Long Term Compensation
Awards
-----------------------
Annual Compensation Securities
------------------- Restricted Underlying All Other
Other Annual Stock Options/ Compensation
Name and Principal Position Year (1) Salary($) Bonus($) Compensation($)(2) Award(s)($) SARS(#) ($)(3)
- --------------------------- -------- --------- -------- ------------------ ----------- ------- ------
Edward A. Blechschmidt 1999 721,538 400,000 19,194 0 311,604 101,547
President, Chief Executive
Officer and Chairman of
the Board
Robert A. Fusco (4) 1999 600,000 100,000 2,312 0 103,868 50,040
Former President
Robert J. Nixon 1999 357,885 80,000 0 0 41,547 28,250
Executive Vice President
John J. Collura 1999 311,346 90,000 154,374 0 41,547 23,727
Executive Vice President, Chief
Financial Officer and Treasurer
Terry Mitchell 1999 288,648 0 0 0 20,774 22,018
Senior Vice President
Richard Christmas 1999 186,004 60,000 0 0 6,232 18,180
Senior Vice President
(1) Since the Company was not a reporting company during the three immediately
preceding fiscal years, information with respect to the 1999 fiscal year is
reflected in the table.
(2) Gross-up of taxable portion of fringe benefit.
(3) Represents profit sharing and matching contributions by Olsten for the
named officers pursuant to Olsten's Non-Qualified Retirement & Savings Plan
for selected management employees.
(4) Mr. Fusco resigned from his position as President of the health services
business of Olsten in late 1999. As of March 15, 2000, Mr. Fusco was no
longer employed by the Company.
Option Grants
- -------------
The table below sets forth further information concerning the grant of
stock options to the named officers by Olsten during Olsten's 1999 fiscal year.
33
Olsten Stock Option Grants in Fiscal 1999
Individual Grants POTENTIAL REALIZABLE VALUE AT
----------------- ASSUMED ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR OPTION
TERM(3)
------------------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Name Granted(#)(1) Fiscal Year(2) ($/Sh) Date 5%($) 10%($)
- ---- ------------- -------------- ------ ---- ----- ------
Edward A.
Blechschmidt 311,604 30.1 $3.49 2/10/09 $683,923 $1,733,192
Robert A. Fusco 103,868 10.0 $3.61 3/15/01 $42,492 $87,484
Robert J. Nixon 41,547 4.0 $3.61 1/5/09 $94,335 $239,063
John J. Collura 41,547 4.0 $3.61 1/5/09 $94,335 $239,063
Terry Mitchell 20,774 2.0 $3.61 1/5/09 $41,289 $104,636
Richard Christmas 6,232 .6 $3.61 1/5/09 $14,150 $35,859
(1) The options were originally granted as options to buy Olsten's common stock
at an exercise price equal to the fair market value of the Olsten common
stock on the date of the grant. At the time of the split-off, all options
to buy Olsten common stock held by the Company's employees were converted
to options to buy the Company's common stock. The numbers of securities
reflected in the table give effect to the conversion of Olsten options to
the Company's options on the date of the split-off.
(2) The percentages shown are based upon the total options granted to all of
the Company's employees in 1999, excluding grants awarded to Olsten
employees.
(3) The dollar amounts under the indicated columns are the result of
calculations at the 5% and 10% rates set forth by the Securities and
Exchange Commission and are not intended to forecast possible future
appreciation of the Company's stock price.
34
Aggregated option exercises in Gentiva's 1999 fiscal year and 1999 fiscal year
end option values.
The table below sets forth information with respect to the named officers
concerning the exercise of stock options during the Company's 1999 fiscal year
and unexercised options held as of the end of that year.
Number of Securities Value of Unexercised
Underlying In-the-Money
Unexercised Options at 1999 Options at
Fiscal Year End (#) 1999 Fiscal Year End ($)
------------------- ------------------------
Shares
Acquired on Value
Name Exercise(#) realized Exercisable Unexercisable(1) Exercisable Unexercisable(1)
---- ----------- -------- ----------- ------------- ----------- -------------
Edward A. Blechschmidt 0 0 83,094 643,981 215,000 1,469,375
Robert A. Fusco 0 0 358,343 420,665 19,141 248,047
Robert J. Nixon 0 0 86,209 159,957 13,672 117,266
John J. Collura 0 0 12,983 80,497 13,672 117,266
Terry Mitchell 0 0 49,337 37,912 0 38,125
Richard Christmas 0 0 8,050 19,475 3,849 25,661
(1) All such options were accelerated on March 15, 2000 in connection with the
split-off and in accordance with the 1994 Olsten Stock Option Plan.
Employment Agreement
On March 14, 2000, the Company entered into an employment agreement with
Mr. Blechschmidt, the current president, chief executive officer and chairman of
the board of directors. The agreement became effective on March 15, 2000 and
will be in effect for a period of three years. During the term of the agreement,
Mr. Blechschmidt will receive: (1) a base salary of $600,000 per year, and (2)
an annual bonus, based on the achievement of target levels of performance, with
target bonus equal to 80 percent of his base salary and the maximum bonus equal
to 120 percent of his salary. However, Mr. Blechschmidt's bonus will not be less
than 50 percent of his base salary for 2000. Mr. Blechschmidt will also receive
customary benefits, perquisites and reimbursement for expenses.
The agreement provides that Mr. Blechschmidt's employment will terminate:
o upon the death or disability of Mr. Blechschmidt,
o upon termination of his employment for cause,
o for termination of his employment without cause, or
o termination of his employment for good reason by Mr. Blechschmidt.
In the event his employment is terminated as a result of his death or
disability, he or his estate will be entitled to receive his earned salary,
vested benefits and accelerated vesting of his accrued pension benefits. He will
not be entitled to severance benefits. In the event the
35
agreement is terminated for cause by the Company he will be entitled to receive
earned salary and vested benefits and will not be entitled to severance
benefits. In the event the agreement is terminated for good reason by Mr.
Blechschmidt or without cause by the Company he will be entitled to earned
salary, vested benefits, severance benefits and accelerated vesting of his
accrued pension benefits and continued medical benefits for up to two years.
Severance benefits as referred to in this section, are equal to two times Mr.
Blechschmidt's base salary, so long as Mr. Blechschmidt does not receive any
amounts under his change in control agreement.
The agreement also restricts Mr. Blechschmidt's ability to engage in any of
the Company's business lines in the United States and Canada for the term of the
agreement and during the nine months after termination of his employment, other
than termination without cause and termination for good reason. It also contains
confidentiality provisions and provisions for non-solicitation of the Company's
employees.
Mr. Blechschmidt has entered into a change in control agreement with the
Company, similar to the terms described below.
Change in Control Agreements
The following officers of the Company are parties to change in control
agreements in connection with their employment with the Company: Edward A.
Blechschmidt, John J. Collura, Ronald A. Malone, Robert J. Nixon, Richard C.
Christmas, Patricia C. Ma, Terry Mitchell, Vernon A. Perry and David Silver.
These agreements have a term of three years, commencing on March 15, 2000. They
generally provide benefits in the event: (1) the employee's employment is
terminated by the Company and the termination is not for cause or is by the
employee for good reason (as specified in the agreement) and (2) the termination
is within three years after a change in control of the Company. In addition,
these executive officers will receive the benefit of their agreements if they
were terminated by the Company without cause up to a year before a change in
control, if their termination arose in connection with the change in control.
The benefits conferred under these agreements generally will include the
following:
o a cash payment equal to either one or two times the employee's base
salary and target bonus;
o continued benefits for the lesser of two years following the
termination or until the employee obtains comparable benefits from
another employer;
o immediate vesting of any stock options held by the employee (those
options would remain exercisable for one year following the
termination, but not beyond the original full term); and
36
o full vesting of retirement and deferred compensation benefits.
Under certain circumstances the benefits could be reduced in order to avoid
the incurrence of excise taxes by the employees.
Under the agreements, a change in control is defined to include the
following events:
o a person or group (with certain exceptions for the Olsten family)
beneficially owns at least 25 percent or more of the voting stock;
o either the directors (and their approved successors) cease to
constitute a majority of the board of directors or a majority of the
persons nominated by the board of directors for election fails to be
elected;
o a merger of the Company if the stockholders do not own a majority of
the stock of the surviving company or if the members of the board of
directors do not constitute a majority of the directors of the
surviving company's board;
o if the company is liquidated; or
o if all or substantially all of the assets are sold.
In addition, the change in control agreements provide that if an employee
substantially prevails in a dispute with the Company relating to their
agreement, the Company will pay that employee's attorney's fees which result
from their suit. The employees who have these agreements are not required to
seek other employment or otherwise mitigate any damages they are caused as a
result of a change in control, but they are required to keep the Company's
confidential information private.
Severance Agreements
The executive officers of the Company are parties to severance agreements
in connection with their employment with the Company. These severance agreements
generally provide that, in the event the executive officer is terminated other
than for cause or has his/her base salary reduced in a situation that is not
part of a general salary reduction, the executive officers have the right to
receive payments for periods ranging from one to two years in an amount based on
that executive's base salary at the time of termination. Additionally, the
severance agreements provide that the Company will provide these executive
officers with health benefits based on their benefit levels at the time of
termination for the same period or until they obtain similar health benefits
elsewhere.
37
Executive Officers Bonus Plan
The board of directors of the Company adopted an executive officers bonus
plan under which the executive officers may be entitled to receive a bonus
contingent upon the achievement of performance goals. The purpose of the plan is
to provide the executives with an opportunity to earn a bonus as an incentive
and reward for their leadership, ability and exceptional service. The plan will
be administered by the human resources and compensation committee of the board
of directors. The committee will be able to:
o establish performance goals for the granting of bonuses for each year;
o determine the executives who are eligible to take part in the plan;
o determine whether the performance goals for any year have been
achieved;
o authorize payment of bonuses under the plan;
o adopt, alter and repeal the administrative rules, guidelines and
practices governing the plan; and
o interpret the terms and provisions of the plan.
Currently, all executives officers are eligible to participate in
the executive officers bonus plan.
The amount of any bonus granted to any of the executives for any year can
not be more than the lesser of 200 percent of the executive's annual base salary
or $2.5 million. Performance goals may vary from executive to executive and will
be based upon some of the following performance criteria, as the committee may
deem appropriate:
o appreciation in stock value, total stockholder return, earnings per
share;
o operating income, net income, pro forma net income;
o return on equity, return on designated assets, return on capital;
o economic value added, earnings, revenues, expenses;
o operating profit margin, operating cash flow, gross profit margin, net
profit margin;
o employee turnover, employee headcount, labor costs; and
o customer service and accounts receivable.
38
A copy of the Executive Officers Bonus Plan is incorporated herein by
reference to Amendment No. 2 to the Registration Statement on Form S-4, dated
January 20, 2000.
1999 Stock Incentive Plan
The board of directors of the Company adopted a 1999 stock incentive plan.
The plan was adopted in order to enhance the Company's ability to attract and
retain highly qualified officers, employees, consultants and directors, and to
better enable those persons to participate in long-term success and growth. The
plan will provide for discretionary grants of stock options which may be either
incentive stock options or nonqualified options. The plan will be administered
by the human resources and compensation committee of the board of directors.
The committee has the power to select the eligible employees, consultants
and directors to whom stock options are to be granted under the plan and to
determine the terms and conditions of each stock option granted under the plan.
The committee will be able to determine the number of shares of common stock to
be covered by each award. The maximum total number of shares of common stock for
which grants may be made to any employee, consultant or director in any calendar
year, however, is 300,000. The chief executive officer may award options to
purchase up to 10,000 shares of common stock to employees who are not officers
or directors. A total of 5,000,000 shares of common stock are reserved for
issuance upon exercise of stock options granted under the plan.
A copy of the 1999 Stock Incentive Plan is attached as an exhibit hereto.
Stock & Deferred Compensation Plan
The board of directors of the Company adopted a stock & deferred
compensation plan for non-employee directors which provides for payment of
annual retainer fees of $25,000 for non-employee directors in a combination of
cash and shares of common stock. Non-employee directors may elect to receive up
to 50 percent of the total compensation in cash payable in quarterly
installments. The plan was adopted in order to enhance the Company's ability to
attract and retain highly qualified non-employee directors. About eight persons
are eligible to participate in this plan.
A total of 150,000 shares of common stock are reserved for issuance under
the plan. Each of the non-employee director's annual retainer fee will be paid
in shares of common stock in an amount (rounded to the nearest 100 shares)
determined by dividing the amount of compensation received in stock by the
average closing price of shares of common stock on The Nasdaq National Market
for the ten trading days immediately prior to the annual stockholders meeting at
which directors are elected or reelected. Non-employee directors can elect to
defer the retainer fee shares. Amounts deferred are credited in the form of
share units to a share unit account. If any dividends are payable on shares of
our common stock during the deferral period, non-employee directors shall have
dividend equivalents of an equal amount paid to them in cash.
39
A copy of the 1999 Stock and Deferred Compensation Plan is attached as an
exhibit hereto.
Employee Stock Purchase Plan
The board of directors of the Company adopted an employee stock purchase
plan under which employees may be entitled to purchase common stock. The plan
was adopted in order to provide eligible employees the opportunity to purchase
common stock, enhance the Company's ability to attract and retain
highly-qualified personnel, and to better enable such persons to participate in
long-term success and growth. The plan will be administered by the human
resources and compensation committees;
All of the Company's employees and the employees of its subsidiaries who
have been employed for at least eight months (or another period determined by
the committee not in excess of two years) will be eligible to purchase stock
under this plan, except that employees whose customary employment is twenty
hours or less per week will be excluded. The committee has the power to
determine the terms and conditions of each offering of common stock to employees
under the plan. The committee may also determine the number of shares of common
stock to be covered by each offering. The maximum number of shares of common
stock which may be sold to any employee in any offering, however, will generally
be 10 percent of that employee's compensation during the period of the offering.
A total of 1,200,000 shares of common stock are reserved for issuance under the
employee stock purchase plan.
A copy of the 1999 Employee Stock Purchase Plan is incorporated by
reference to Amendment No. 2 to the Registration Statement on Form S-4, dated
January 20, 2000.
Item 12. Securities Ownership of Certain Beneficial Owners and Management.
- -------- -----------------------------------------------------------------
The following table sets forth as of March 16, 2000, the amount of common
stock beneficially owned by:
o each director of the Company;
o the named officers of the Company;
o all officers and directors of the Company as a group; and
o all persons who beneficially own more than five percent of common
stock.
40
Percent
Name of Beneficial Owner Number of Owned
------------------------ Shares Owned (if more than 1%)
------------ -----------------
Edward A. Blechschmidt(1)(2)..................................................... 755,075 3.58
Richard C. Christmas(2)(3)....................................................... 27,525
John J. Collura(2)(3)............................................................ 93,481
E. Rodney Hornbake(2)........................................................... 0
Patricia C. Ma(2)(3)............................................................. 34,068
Ronald A. Malone................................................................. 0
Terry Mitchell(2)(4)............................................................. 88,124
Robert J. Nixon(2)(5)............................................................ 248,666 1.21
Vernon A. Perry(2)(3)............................................................ 85,274
David C. Silver(2)(3)............................................................ 4,155
Victor F. Ganzi(2)............................................................... 750
Steven Grabowski(2)(6)........................................................... 1,311,277 6.45
Stuart Levine(2)................................................................. 2,063
Stuart Olsten(2)(7).............................................................. 1,559,998 7.67
Raymond S. Troubh(2)............................................................. 36,149
Josh S. Weston(2)................................................................ 2,487
Gail Wilensky.................................................................... 0
Cheryl Olsten(2)(8).............................................................. 1,311,277 6.45
Miriam Olsten(2)(9).............................................................. 1,020,578 5.02
Greenhaven Associates............................................................ 1,938,850 9.53
Three Manhattanville (12)
Purchase, NY 10577
Pacific Financial Research(13) .................................................. 1,533,350 7.5
9601 Wilshire Boulevard
Beverly Hills, CA
First Manhattan Co.(14) ......................................................... 879,347 5.1
437 Madison Avenue
New York, NY
All executive officers and directors as a group (17 persons)(11)................. 3,563,732(11) 16.46
(1) Mr. Blechschmidt's holding includes 23,000 shares owned directly and 5,000
shares owned by his wife, as to which shares he disclaims beneficial
ownership, and 727,075 shares that may be acquired within 60 days through
the exercise of options.
(2) Excludes shares of convertible trust preferred securities that such person
has purchased. The convertible trust preferred securities are convertible
into our common stock based on a conversion price of 17.5 percent over the
average closing stock price of our common stock during the 10 trading days
following the first earnings announcement after the date of the split-off.
See "Certain Relationships and Related Transactions".
(3) Includes shares that may be acquired within 60 days through the exercise of
options.
(4) Includes 87,249 shares that may be acquired within 60 days through the
exercise of options.
(5) Includes 246,166 shares that may be acquired within 60 days through the
exercise of options.
41
(6) Mr. Grabowski's holdings include 425 shares owned directly and 1,310,852
shares beneficially owned by his wife, Cheryl Olsten, as to which shares he
disclaims beneficial ownership. See footnote (8).
(7) Mr. Stuart Olsten's holdings include 874,008 shares owned of record and 300
shares owned of record by his wife, as to which shares he disclaims
beneficial ownership. Mr. Olsten has shared voting and investment power as
a trustee with respect to 630,709 shares owned by a trust for his and his
sister's benefit. He has shared voting and investment power as a trustee
with respect to 11,250 shares owned by a trust for the benefit of his son,
22,500 shares owned by two trusts for the benefit of his niece and nephew
and 20,901 shares owned by a trust for the benefit of his descendants, as
to which shares he disclaims beneficial ownership. His holdings further
include 330 shares held in a custodial account for his daughter, as to
which shares he disclaims beneficial ownership.
(8) Ms. Cheryl Olsten owns of record 625,492 shares and has shared voting and
investment power as a trustee with respect to 630,709 shares owned by a
trust for her and her brother's benefit. Ms. Olsten has shared voting and
investment power as a trustee with respect to 22,500 shares owned by two
trusts for the benefit of her two children, 11,250 shares held by a trust
for the benefit of her nephew, 20,901 shares owned by a trust for the
benefit of her descendants, as to which shares she disclaims beneficial
ownership. Ms. Olsten's holdings also include 425 shares beneficially owned
by her husband, Mr. Grabowski, as to which shares she disclaims beneficial
ownership.
(9) Mrs. Miriam Olsten owns 785,276 shares. She has sole voting and investment
power with respect to 234,202 shares held under a trust for the benefit of
one of her children, of which she is trustee, and as to which shares she
disclaims beneficial ownership.
(10) Includes shares that may be acquired by executive officers within 60 days
through the exercise of options.
(11) In order to avoid counting shares attributable to two person twice, in
calculating the amounts and percentage, 685,360 shares were deducted to
give effect to beneficial ownership reflected for both Mr. Grabowski and
Mr. Olsten.
(12) Based on a Schedule 13G/A dated March 16, 2000 and filed with the
Securities and Exchange Commission, Greenhaven Associates has sole voting
and dispositive power as to 732,900 shares and shared dispositive power as
to 1,205,850 shares.
(13) Based on a Schedule 13G dated February 11, 1999 and filed with the
Securites and Exchange Commission, Pacific Financial Research held sole
voting power and sole dispositive power as to all of such shares.
(14) Based on a Schedule 13G for Olsten dated February 9, 2000 and filed with
the Securites and Exchange Commission, First Manhattan Co. held sole
voting power and sole dispositive power as to 47,500 of such shares, shared
voting power as to 769,572 of such shares and shared dispositive power as
to 831,847 of such shares.
Item 13. Certain Relationships and Related Transactions.
- -------- -----------------------------------------------
In connection with the split-off, the Company entered into various
agreements with Olsten and Adecco governing the terms of the split-off,
including the separation agreement. Additionally, on March 15, 2000 the Company
entered into an agreement with Olsten and a subsidiary of Olsten, pursuant to
which the Company agreed to assume the obligations of a lease for a property of
such subsidiary on September 16, 2000. The rental payments under that lease
are as follows: from September 16, 2000 to December 31, 2000, $242,000; for
fiscal year 2001, $877,000; for fiscal year 2002, $906,000; for fiscal year
2003, $934,000; for fiscal year 2004, $964,000; and thereafter $2,732,000.
42
On March 15, 2000 some of the Company's directors and officers, members of
the Olsten family and some other investors, purchased approximately $20 million
of 10% convertible trust preferred securities issued by the Trust. The
investments are in the following aggregate amounts: Miriam Olsten, $7.35
million; Mr. Blechschmidt, $1.25 million; Stuart Olsten and Cheryl Olsten, $1
million each; Mr. Troubh $650,000; Messrs. Ganzi and Weston, $600,000 each; Mr.
Levine $250,000; Mr. Fusco, $200,000; Messrs. Mitchell, Malone and Nixon,
$100,000 each; Mr. Collura and Dr. Hornbake, $50,000 each; Messrs. Christmas,
Perry and Silver and Ms. Ma, $25,000 each, other personnel an aggregate of
$50,000 and other investors, an aggregate of $6.55 million. The convertible
trust preferred securities were offered in a private placement exempt from the
registration requirements of the Securities Act. The Company made a $618,600
investment in the Trust to acquire its common securities. The Company issued
$20,618,600 of convertible subordinate debentures to the Trust on the same terms
as the 10% convertible preferred securities in exchange for $20,618,600.
The convertible trust preferred securities are mandatorily redeemable five
years after issuance and the trust may redeem the securities at any time after
issuance at a declining premium over face amount. Upon a change of control, the
holders of convertible trust preferred securities may require the trust to
purchase these securities at 100% of their face amount. Dividends are payable
quarterly in cash at the rate of 10 percent per annum, but the trust may defer
dividend payments for up to a total of twenty quarters, in which case dividends
will accrue. During any such deferral period, the Company's ability to, among
other things, pay dividends and redeem certain capital stock, may be restricted
under the terms of the convertible trust preferred securities. The convertible
trust preferred securities are convertible into the Company's common stock at a
conversion price on the basis of 17.5 percent over the average closing stock
price of the Company's common stock during the 10 trading days following the
first earnings announcement after the first quarter of 2000.
Mr. Stuart Olsten has agreed not to compete with the Company for a period
of four years from March 16, 2000. In return for this agreement, the Company
will pay him a lump sum of $250,000 in April 2000. Ms. Maureen McGurl, a former
executive officer of Olsten, has been retained as a consultant of the Company
for a payment of $200,000, payable during the term of her 6 month consulting
period. In addition, Mr. Robert A. Fusco, the past president of Olsten's health
services business, did not continue with the Company after March 15, 2000.
43
The Company paid him $2.0 million on March 15, 2000 pursuant to his change in
control agreement.
Messrs. Blechschmidt and Olsten will be compensated by the Company, on an
after tax basis, for excise taxes (no more than $1.0 million in excise taxes in
the case of Mr. Olsten) imposed by reason of the receipt of amounts payable
under their separation, consulting and non-competition agreements with Olsten
and its parent company, Adecco. The base tax amount for Mr. Blechschmidt is
estimated to be approximately $815,000 and will be accrued in the first quarter
of 2000.
44
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K.
- -------- ------------------------------------------------------------------
(a) (1) Financial Statements
- Report of Independent Accountants
- Consolidated Balance Sheets as of January 2, 2000 and January 3,
1999
- Consolidated Statements of Income for the three years ended
January 2, 2000
- Consolidated Statements of Changes in Shareholders' Equity for
the three years ended January 2, 2000
- Consolidated Statements of Cash Flows for the three years ended
January 2, 2000
- Notes to Consolidated Financial Statements
(a) (2) Financial Statement Schedules
- Schedule II - Valuation and Qualifying Accounts
(a) (3) Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Restated Certificate of Incorporation of Company(1)
3.2 Restated By-Laws of Company(1)
4.1 Specimen of common stock(3)
4.2 Indenture dated October 8, 1993, between Quantum Health Resources Inc.
and First Trust National Association, as Trustee(1)
4.3 Supplemental Indenture dated June 28, 1996, between Quantum Health
Resources Inc. and First Trust National Association, as Trustee(1)
4.4 Form of Certificate of Designation of Series A Junior Participating
Preferred Stock(1)
4.5 Form of Certificate of Designation of Series A Cumulative Non-Voting
Redeemable Preferred Stock(2)
4.6 Second Supplemental Indenture dated March 15, 2000, between Quantum
Health Resources, Inc. and U.S. Bank Trust National Association
(formerly known as First Trust National Association) as Trustee
4.7 Trust Agreement among the Company, Wilmington Trust Company, the
Administrative Trustees named therein and the holders from time to
time of the convertible trust preferred securites dated March 9, 2000.
4.8 Indenture between the Company and Wilmington Trust Company dated March
15, 2000
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)
45
10.4 Company's Executive Officers Bonus Plan(1)
10.5 Company's 1999 Stock Incentive Plan
10.6 Company's Stock & Deferred Compensation Plan for Non-Employee
Directors
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
10.10 Form of Employment Agreement with Edward A. Blechschmidt(2)
10.11 Form of Change in Control Agreement with Executive Officers of
Company
10.12 Form of Change in Control Agreement with Edward A. Blechschmidt
10.13 Form of Severance Agreement with Executive Officers of Company(2)
21.1 List of Subsidiaries of Company(2)
23.1 Consent of PricewaterhouseCoopers LLP, independent accountants
27 Financial Data Schedule
(1) Incorporated by reference to Amendment No. 2 to the Registration
Statement on Form S-4, dated January 20, 2000 (File No. 333-88663).
(2) Incorporated by reference to Amendment No. 3 to the Registration
Statement on Form S-4, dated February 4, 2000 (File No. 333-88663).
(3) Incorporated by reference to Amendment No. 4 to the Registration
Statement on Form S-4, dated February 9, 2000 (File No. 333-88663).
(4) Incorporated by reference to the Post-Effective Amendment No. 1 on
Form S-8 to Form S-4 dated March 27, 2000 (File No. 333-88663)
B. Report on Form 8-K
------------------
No reports on Form 8-K have been filed during the last quarter for the
period covered by this report.
46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GENTIVA HEALTH SERVICES, INC.
Date: April 3, 2000 By: /s/ EDWARD A. BLECHSCHMIDT
---------------------------------
Edward A. Blechschmidt
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: April 3, 2000 By: /s/ EDWARD A. BLECHSCHMIDT
------------------------------
Edward A. Blechschmidt
President and Chief
Executive Officer
Date: April 3, 2000 By: /s/ JOHN J. COLLURA
------------------------------
John J. Collura
Executive Vice President, Chief
Financial Officer and Treasurer
(Principal Financial and
Accounting Officer)
Date: April 3, 2000 By: /s/ VICTOR F. GANZI
------------------------------
Victor F. Ganzi
Director
Date: April 3, 2000 By: /s/ STEVEN E. GRABOWSKI
------------------------------
Steven E. Grabowski
Director
47
Date: April 3, 2000 By: /s/ STUART R. LEVINE
------------------------------
Stuart R. Levine
Director
Date: April , 2000 By:
------------------------------
Stuart Olsten
Director
Date: April 3, 2000 By: /s/ JOSH S. WESTON
------------------------------
Josh S. Weston
Director
Date: April 3, 2000 By: /s/ RAYMOND S. TROUBH
------------------------------
Raymond S. Troubh
Director
Date: April , 2000 By:
------------------------------
Gail Wilensky
Director
48
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets as of January 2, 2000 and January 3, 1999..... F-3
Consolidated Statements of Income for the three years
ended January 2, 2000................................................... F-4
Consolidated Statements of Changes in Shareholders'
Equity for the three years ended January 2, 2000 ....................... F-5
Consolidated Statements of Cash Flows for the three years
ended January 2, 2000................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
Schedule II - Valuation and Qualifying Accounts for the
three years ended January 2, 2000....................................... F-32
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Gentiva Health Services, Inc. and Subsidiaries:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Gentiva Health Services, Inc. and Subsidiaries at January 2, 2000
and January 3, 1999, and the results of their operations and their cash flows
for each of the three years in the period ended January 2, 2000, in conformity
with accounting principles generally accepted in the United States. In addition,
in our opinion, the financial statement schedule listed in the accompanying
index presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
New York, New York
March 15, 2000
F-2
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
January 2, 2000 January 3, 1999
ASSETS
Current assets
Cash and cash equivalents $ 2,942 $ 799
Receivables, less allowance for doubtful
accounts of $36,759 and $25,596, respectively 575,460 452,318
Inventories 93,218 90,276
Prepaid expenses and other current assets 87,611 83,746
---------- ---------
Total current assets 759,231 627,139
Fixed assets, net 51,809 60,877
Intangibles, principally goodwill, net of accumulated amortization
of $95,898 and $85,305, respectively 250,297 256,116
Other assets 1,678 1,606
---------- ---------
$1,063,015 $945,738
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 78,562 $ --
Accounts payable 114,197 93,210
Accrued expenses 76,746 118,627
Payroll and related taxes 20,020 24,109
Insurance costs 31,170 23,278
---------- ---------
Total current liabilities 320,695 259,224
Long-term debt -- 86,250
Other liabilities 37,029 38,405
Shareholders' equity
Common stock, $.10 par value; authorized 100,000,000 shares;
issued and outstanding 20,345,029 shares 2,035 2,035
Additional paid-in capital 725,998 567,525
Accumulated deficit (20,370) (5,284)
Accumulated other comprehensive loss (2,372) (2,417)
---------- ---------
Total shareholders' equity 705,291 561,859
---------- ---------
$1,063,015 $945,738
========== ========
See notes to consolidated financial statements.
F-3
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
For the Fiscal Years Ended
1999 1998 1997
---- ---- ----
(53 Weeks)
Net revenues $1,489,822 $1,330,303 $1,433,854
Cost of services sold 984,396 908,896 913,268
---------- ---------- ----------
Gross profit 505,426 421,407 520,586
Selling, general and administrative expenses 509,658 552,528 460,254
Interest expense, net 3,975 4,414 4,351
Interest expense on intercompany debt 13,000 13,000 13,000
---------- ---------- ----------
Income (loss) before income taxes and minority interest (21,207) (148,535) 42,981
Income tax expense (benefit) (6,121) (47,070) 16,298
---------- ---------- ----------
Income (loss) before minority interest (15,086) (101,465) 26,683
Minority interest -- -- 164
---------- ---------- ----------
Net income (loss) $ (15,086) $(101,465) $ 26,847
========== ========== ==========
SHARE INFORMATION:
Basic and diluted earnings (loss) per share
Net income (loss) $(.74) $(4.99) $ 1.32
========== ========== ==========
Average shares outstanding 20,345,029 20,345,029 20,345,029
========== ========== ==========
See notes to consolidated financial statements.
F-4
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
Retained Accumulated
Additional earnings other
Common Stock paid-in (accumulated comprehensive
Shares Amount capital deficit) loss Total
------ ------ ------- -------- ---- -----
Balance at December 29, 1996 20,345,029 $2,035 $472,426 $ 69,334 $(2,058) $541,737
Comprehensive income
(loss):
Net income and cumulative -- -- -- 26,847 (171) 26,676
translation adjustment
Net transactions with Olsten -- -- (38,143) -- -- (38,143)
----------- -------- --------- --------- ------- --------
Balance at December 28, 1997 20,345,029 2,035 434,283 96,181 (2,229) 530,270
Comprehensive income
(loss):
Net loss and cumulative
translation adjustment -- -- -- (101,465) (188) (101,653)
Net transactions with Olsten -- -- 133,242 -- -- 133,242
----------- -------- --------- -------- ------- --------
Balance at January 3, 1999 20,345,029 2,035 567,525 (5,284) (2,417) 561,859
Comprehensive income
(loss):
Net loss and cumulative
translation adjustment -- -- -- (15,086) 45 (15,041)
Net transactions with Olsten -- -- 158,473 -- -- 158,473
----------- -------- --------- -------- ------- --------
Balance at January 2, 2000 20,345,029 $2,035 $725,998 $(20,370) $(2,372) $705,291
=========== ======== ========= ======== ======= ========
See notes to consolidated financial statements.
F-5
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
For the Fiscal Years Ended
1999 1998 1997
(53 Weeks)
OPERATING ACTIVITIES:
Net income (loss) $(15,086) $(101,465) $26,847
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 33,625 31,401 29,493
Provision for doubtful accounts 38,687 24,046 25,884
Loss on disposal of fixed assets 1,909 4,202 2,944
Deferred income taxes 13,047 (17,556) 2,679
Minority interest in results of operations of
consolidated subsidiaries -- -- 164
Changes in assets and liabilities, net of
effects from acquisitions and dispositions:
Accounts receivable (161,829) (53,454) (89,089)
Inventories (2,942) (33,383) (4,453)
Prepaid expenses and other current assets (18,219) 9,073 8,749
Current liabilities (29,755) 70,425 15,274
Other, net (902) 2,836 1,708
---------- --------- --------
Net cash provided by (used in) operating
activities (141,465) (63,875) 20,200
---------- --------- --------
INVESTING ACTIVITIES:
Acquisitions of businesses, net of cash acquired (1,724) (33,989) (4,256)
Purchases of fixed assets, net (19,001) (34,579) (23,072)
Proceeds from sale of investment securities -- -- 9,415
---------- --------- --------
Net cash used in investing activities (20,725) (68,568) (17,913)
---------- --------- --------
FINANCING ACTIVITIES:
Net transactions with Olsten 158,473 133,242 (38,143)
Book overdrafts 12,664 -- --
Retirement of long-term debt (6,804) -- --
---------- --------- --------
Net cash provided by (used in) financing
activities 164,333 133,242 (38,143)
---------- --------- --------
Net increase (decrease) in cash and cash equivalents 2,143 799 (35,856)
Cash and cash equivalents at beginning of year 799 -- 35,856
---------- --------- --------
Cash and cash equivalents at end of year
$ 2,942 $ 799 $ --
========== ========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 3,975 $ 4,096 $ 4,096
See notes to consolidated financial statements.
F-6
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Background and Basis of Presentation
Background
On August 18, 1999, Olsten Corporation ("Olsten") announced its intention
to create a separate publicly traded company (the "Split-off") of Olsten's
health services business and to merge its staffing and information technology
businesses with those of Adecco SA ("Adecco") pursuant to the Merger Agreement,
(the "Merger" and, together with the Split-off, the "Transactions"). Prior to
the Split-off, Gentiva Health Services, Inc. (the "Company") operated Olsten's
health services business. Upon the consummation of the Merger on March 15, 2000,
in exchange for each share of Olsten stock, Olsten issued all of the shares of
common stock of the Company to its shareholders and Adecco delivered to the
Olsten shareholders $8.75 in cash or .12472 Adecco American Depository Shares
(ADS - each ADS representing one-eighth of an Adecco common share), or a
combination thereof determined in accordance with the formula described in the
Merger Agreement, in exchange for the remaining portion of each Olsten share
held.
In connection with the Merger and Split-off, the Company entered into a
$150 million credit facility as discussed in Note 6, issued mandatorily
redeemable securities as discussed in Note 7, settled certain transactions with
Olsten as discussed in Note 8, and agreed to assume certain obligations and
commitments including those described in Note 10 and the shareholders of Olsten
approved various stock plans for the Company as described in Note 12.
Basis of Presentation
The accompanying consolidated financial statements reflect the results of
operations, financial position, changes in shareholders' equity and cash flows
of the Company as if it were a separate entity for all periods presented. The
consolidated financial statements have been prepared using the historical basis
in the assets and liabilities and historical results of operations related to
the Company. Additionally, the Company's selling, general and administrative
expenses include a management fee, which represents an allocation of certain
general corporate overhead expenses of $5 million in each year related to
Olsten's corporate headquarters. Management believes the allocations related to
general corporate overhead expenses are reasonable, however, the costs of these
items deemed to be charged to the Company are not necessarily indicative of the
costs that would have been incurred if the Company had been a stand-alone
entity. Subsequent to the Split-off, the Company will perform these functions
using its own resources or purchased services and will be responsible for the
costs and expenses associated with the management of a public corporation.
Management estimates that had the Company been a separate entity for each year
presented, selling, general and administrative expenses would have been
approximately $5 million greater than the amounts presented in these historical
financial statements.
F-7
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Interest expense shown in the Consolidated Statements of Income reflects
the interest associated with the Convertible Subordinated Debentures discussed
in Note 6 and $13 million in all years presented relating to the intercompany
balances with Olsten. Such intercompany balances have been reflected as a
contribution to capital at the end of each year presented in these consolidated
financial statements.
Additionally, income taxes are calculated on a separate company basis. The
Company's financial statements include the costs experienced by the Olsten
benefit plans for employees for whom the Company will assume responsibility. As
part of the Transactions, the Company, Olsten and Adecco have entered into a
Separation Agreement, Tax Sharing Agreement and an Employee Benefits Allocation
Agreement, which address the allocation of assets and liabilities and govern
future relationships between them.
The financial information in these financial statements is not necessarily
indicative of results that would have occurred if the Company had been a
separate stand-alone entity during the years presented or of future results of
the Company.
Note 2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned and majority-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated. The Company's
fiscal year ends on the Sunday nearest to December 31st, which was January 2,
2000 for 1999, January 3, 1999 for 1998 and December 28, 1997 for 1997.
Revenue Recognition
Revenues and related costs, including labor, payroll taxes, fringe benefits
and products and supplies, are recognized in the period in which the services
and products are provided. Revenues are recorded based on fee-for-service or
contractual arrangements, including capitated agreements, with customers and
third party payors, estimates of expected reimbursement under arrangements with
Medicare and state reimbursed programs, and management fees generated from
services provided to hospital based home health agencies and are adjusted in
future periods as final settlements are determined. Net revenues from state
reimbursed programs amounted to 20 percent, 23 percent and 20 percent of total
consolidated net revenues in 1999, 1998 and 1997, respectively.
Medicare reimbursement is based primarily on reasonable, allowable costs
incurred in providing services to eligible beneficiaries. These costs are
reported in annual cost reports which are filed with the Medicare fiscal
intermediary and are subject to audit. Net revenues attributable to the Medicare
program, including estimated reimbursement of allowable costs, amounted to 16
F-8
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
percent, 14 percent and 22 percent of total consolidated net revenues in 1999,
1998 and 1997, respectively.
Under capitated agreements with managed care customers, the Company
recognizes revenue based on a predetermined contractual rate for each member of
the managed care plan. Costs are determined based on estimates of expected
service and product requirements. These estimates are developed by applying
actuarial assumptions and historical patterns of utilization to authorized
levels of service. Net revenues from capitated agreements with managed care
payors as a percentage of total consolidated net revenues represented 6 percent
for 1999 and 5 percent in 1998 and 1997.
One customer accounted for approximately 11 percent of total consolidated
net revenues in 1999.
Revenue adjustments result from differences between estimated and actual
reimbursement amounts, an inability to obtain appropriate billing documentation
or authorizations acceptable to the payor and other reasons unrelated to credit
risk. Revenue adjustments are deducted directly from gross accounts receivable.
Accounts receivable included approximately $9 million as of January 2, 2000 and
$1 million as of January 3, 1999 related to net contractual adjustments and
third party settlements. Management prepares various analyses to evaluate its
receivable valuation accounts. Such analyses include accounts receivable aging
trends, historical collection and write-off data and other statistical
information.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents deposited with banks and financial institutions
include highly liquid investments with original maturities of three months or
less.
Inventories
Inventories consist primarily of biological and pharmaceutical products and
supplies held for sale or distribution to patients through prescription. The
Company records inventories at the lower of cost or market. Cost represents the
weighted average cost of purchased products and supplies.
Fixed Assets
Fixed assets, including costs of Company developed software, are stated at
cost and depreciated over the estimated useful lives of the assets using the
straight-line method. Leasehold
F-9
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
improvements are amortized over the shorter of the life of the lease or the life
of the improvement.
Intangibles
Intangibles, principally goodwill, associated with acquired businesses are
being amortized on a straight-line basis over periods ranging from 10 to 40
years. When events and circumstances so indicate, all long-term assets,
including intangibles, are assessed for recoverability based upon undiscounted
operating cash flow forecasts. If an asset is impaired, it is written down to
fair value which is based on discounted future cash flows.
Foreign Currency Translation
Financial statements of the Company's Canadian subsidiary are translated
into U.S. dollars using the exchange rate at each balance sheet date for assets
and liabilities and a weighted average exchange rate for each period for
revenues, expenses, gains and losses and cash flows. Translation adjustments are
recorded within accumulated other comprehensive income/loss. Transaction gains
and losses that arise from exchange rate fluctuations on transactions
denominated in a currency other than the functional currency are not
significant.
Earnings Per Share
Historical earnings per share data has been computed based upon 20,345,029
shares of common stock. Such amount is based on the number of shares of the
Company's stock issued on March 15, 2000, the date of the Split-off. Pursuant to
the terms of the Split-off, shareholders of Olsten received .25 shares of
Gentiva Health Services common stock for each share of Olsten common stock or
Class B common stock that they owned.
Income Taxes
The Company has been included, where applicable, in the consolidated income
tax returns of Olsten for the respective periods. The provisions for the income
taxes in the Consolidated Statements of Income have been calculated on a
separate company basis. The Company provides for taxes based on current taxable
income and the future tax consequences of temporary differences between the
financial reporting and income tax carrying values of its assets and
liabilities. Under Statement of Financial Accounting Standards ("SFAS") No. 109,
assets and liabilities acquired in purchase business combinations are assigned
their fair values, and deferred taxes are provided for lower or higher tax
bases.
Fair Value of Financial Instruments
The fair value of a financial instrument represents the amount at which the
instrument could be exchanged in a current transaction between willing parties,
other than in a forced sale or liquidation. Significant differences can arise
between the fair value and carrying amount of financial instruments that are
recognized at historical amounts.
F-10
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate fair value because
of their short maturity. The estimated fair value of the Company's 4 3/4%
Convertible Subordinated Debentures, approximately $78 million and $83 million
at January 2, 2000 and January 3, 1999, respectively, was determined based on
quoted market prices for similar investments.
Note 3. Acquisitions
In 1999, the Company acquired several home care operations for an aggregate
purchase price of $1.7 million.
In 1998, the Company acquired all of Columbia/HCA Healthcare Corporation's
home health care operations in the state of Florida and several other companies
in asset transactions approximating $35 million in cash. Assets acquired in
these transactions related primarily to goodwill.
In 1997, the Company acquired several home care operations, providing
skilled nursing services for an aggregate purchase price of $4.6 million in cash
primarily related to goodwill.
Note 4. Special Charges, Non-Recurring Charges and Other Adjustments
In the quarter ended April 4, 1999, the Company recorded a special charge
aggregating $16.7 million. This charge was for the realignment of business units
as part of a new restructuring plan, including compensation and severance costs
of $5 million to be paid to operational support staff, branch administrative
personnel and management, asset write-offs of $6.5 million related primarily to
fixed assets being disposed of in offices being closed and facilities being
consolidated, as well as fixed assets and goodwill attributable to the Company's
exit from certain business previously acquired but not within the Company's
strategic objectives, and integration costs of $5.2 million, primarily related
to obligations under lease agreements for offices and other facilities being
closed. As of January 2, 2000, substantially all of the closures and
consolidations of facilities and expected terminations have occurred. These
activities have resulted in lower costs than originally estimated and, as a
result, the Company recognized a benefit of $1.5 million in the fourth quarter
of fiscal 1999 to reflect this change in estimate. Such benefit is included in
selling, general and administrative expenses.
On March 30, 1999, the Company announced plans to take a $56 million
special charge, which was recorded in the year ended January 3, 1999. This
charge was for the settlement of two federal investigations (described in Note
9), focusing on the Company's Medicare home office cost reports and certain
transactions with Columbia/HCA Healthcare Corporation ("Columbia/HCA") which was
finalized and signed on July 19, 1999. On August 11, 1999, Ol-
F-11
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
sten paid $61 million pursuant to the settlement, approximately $5 million of
which was accrued as part of the Company's 1996 merger, integration and other
non-recurring charges.
As part of the Balanced Budget Act of 1997, the government enacted the
Interim Payment System ("IPS") for reimbursement of home care services provided
under Medicare effective October 1, 1997. Prior to enactment of the IPS, home
care services were reimbursed based on cost subject to a cap determined by the
Health Care Financing Administration. The IPS reimburses home care services
based on costs, subject to both a per-beneficiary limit and a per-visit limit.
Further, the IPS reduced the per-visit limit to 1994 levels. As a result of
these cuts in reimbursement, provider reimbursements have been reduced. In order
to operate at the lowered reimbursement rates, home health care companies
reduced the services provided to patients by providing fewer patient visits. In
addition, the regulatory climate that ensued in home health care caused a lower
level of physician referrals.
As a consequence of these circumstances, in 1998, the Company also recorded
non-recurring charges and other adjustments of $66 million, of which
approximately $64 million and $2 million were recorded in the second and third
quarters of 1998, respectively, related to the restructuring of the Company's
businesses. These charges, which were primarily for 60 office closings and
consolidations in the United States, were taken to help position the Company to
operate more efficiently under the new IPS. In addition, the Company has also
made significant technological investments in order to improve operational
efficiencies and employee retention levels. The benefit of the restructuring
began to be realized in the second quarter of 1998.
Included in this provision was $24 million charged to selling, general and
administrative expenses, which included lease payments of $3 million, employee
severance of $4 million, fixed asset and software write-offs of $5 million to
reflect the loss incurred upon the Company's decision to dispose of the assets
in certain closed offices, and an increase in the allowance for doubtful
accounts of $12 million. All closures and consolidations of facilities and
employee terminations related to this charge have been completed. The allowance
for doubtful accounts was increased because the collection of receivables is
highly dependent on the service provider's ability to provide certain evidence
of service and authorization documentation to a variety of third-party payors.
The office closings, consolidation of certain business service centers and the
termination of employees are all events that, in the Company's past experience,
impair the ability to provide the aforementioned documentation and to collect
receivables.
The Company also recorded other adjustments to selling, general and
administrative expenses of $13 million which included professional fees and
related costs resulting from the settlement with several government agencies
regarding certain past business practices of Quantum Health Resources, Inc.
("Quantum", a subsidiary of the Company acquired in 1996), the level of effort
required to respond to the significant inquiries conducted by the government,
and costs incurred to redesign the credit and collection process of the home
health services business.
F-12
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition, upon final announcement of the per-beneficiary limits by the
government, the Company recorded a reduction in revenues of $14 million in the
second quarter of 1998 for the six month period ended June 28, 1998 in
anticipation of lower Medicare reimbursements resulting from the new per-visit
and per-beneficiary limits that have been imposed by Medicare under the IPS.
The Company recorded a charge to cost of sales of $15 million in the second
quarter of 1998 to reflect the estimated increase in costs that have been
incurred, but not yet reported, based upon a change in the actuarial estimates
utilized to determine the level of service to patients covered under the
Company's capitated contracts.
In 1996, the Company recorded merger, integration and other non-recurring
charges totalling approximately $75 million. At the beginning of fiscal year
1997, the balance of this charge aggregated $27.8 million.
F-13
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The major components, as well as the activity during the years
ended 1999, 1998, and 1997 of the charges were as follows (in
thousands):
Accounts
Receivable and Compensation
and Other and Severance Integration
Settlements Assets(1) Costs Costs Other Total
Charge - 1996
Balance at December 29, 1996 $ 5,200 $ 5,732 $5,989 $ 9,928 $985 $27,834
Cash expenditures -- -- (5,633) (9,021) (985) (15,639)
Non-cash write-offs -- (5,670) -- -- -- (5,670)
-------- -------- ------- ------- ------- -------
Balance at December 28, 1997 5,200 62 356 907 -- 6,525
Cash expenditures -- -- (356) (813) -- (1,169)
Non-cash write-offs -- (62) -- -- -- (62)
-------- -------- ------- ------- ------- -------
Balance at January 3, 1999 5,200 -- -- 94 -- 5,294
Cash expenditures (5,200) -- -- (94) -- (5,294)
Non-cash write-offs -- -- -- -- -- --
-------- -------- ------- ------- ------- -------
Balance at January 2, 2000 -- -- -- -- -- --
-------- -------- ------- ------- ------- -------
Charge - 1998 56,000 17,309 4,000 34,641 10,050 122,000
Cash expenditures -- -- (3,739) (33,839) (9,574) (47,152)
Non-cash write-offs -- (17,211) -- -- -- (17,211)
-------- -------- ------- ------- ------- -------
Balance at January 3, 1999 56,000 98 261 802 476 57,637
Cash expenditures (56,000) -- (261) (588) (476) (57,325)
Non-cash write-offs -- (98) -- -- -- (98)
-------- -------- ------- ------- ------- -------
Balance at January 2, 2000 -- -- -- 214 -- 214
-------- -------- ------- ------- ------- -------
Charge - 1999 -- 6,490 5,020 5,190 -- 16,700
Cash expenditures -- -- (2,787) (3,310) -- (6,097)
Non-cash write-offs -- (6,490) -- -- -- (6,490)
Adjustments -- -- (803) (697) -- (1,500)
-------- -------- ------- ------- ------- -------
Balance at January 2, 2000 -- -- 1,430 1,183 -- 2,613
-------- -------- ------- ------- ------- -------
Balance of all charges
combined at January 2, 2000 $ -- $ -- $ 1,430 $ 1,397 $ -- $ 2,827
======== ======== ======== ======== ======= ========
1 Amounts represent contra assets.
F-14
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Fixed Assets, Net
(in thousands) January 2, 2000 January 3, 1999
--------------- ---------------
Computer equipment and software $ 67,414 $ 67,025
Furniture and fixtures 32,248 38,658
Buildings and improvements 16,816 15,850
Machinery and equipment 15,203 14,597
------- -------
131,681 136,130
Less accumulated depreciation (79,872) (75,253)
-------- --------
$ 51,809 $ 60,877
======== ========
Depreciation expense was approximately $22 million in 1999, $21 million in
1998 and $19 million in 1997.
Note 6. Long-Term Debt
In 1993, the Company's Quantum subsidiary, issued $86.3 million of 4 3/4%
Convertible Subordinated Debentures maturing on October 1, 2000. The debentures
were convertible into Class B common stock of Olsten at $52.26 per share. As a
result of the Transactions, the debentures are exchangeable into shares of the
Company and the merger consideration as if the holder of the debenture held the
number of shares of Olsten's Class B common stock that the debentures would have
been convertible into immediately prior to the Transactions. For each share of
Class B common stock that would have been received had the holder converted
immediately prior to the Split-off, such holder will receive $8.75 and .25
shares of the Company's common stock upon conversion of the Quantum debentures.
In January 1999, $7.7 million of the convertible subordinated debentures
were retired at 88.5 percent of the principal amount, resulting in a gain of
approximately $900,000. Interest expense is net of interest income of $336,000
in 1999, $120,000 in 1998 and $310,000 in 1997.
On March 13, 2000, the Company entered into a credit facility, which
provides for up to $150 million in borrowings, including up to $30 million,
which is available for letters of credit. The Company may borrow up to a maximum
of 80 percent of eligible accounts receivable, as defined. At the Company's
option, the interest rate on borrowings under the credit facility is based on
the London Interbank Offered Rate (LIBOR) plus 2.5 percent or the lender's prime
rate plus 0.25 percent.
The credit facility, which expires in 2004, includes certain covenants
requiring the Company to maintain a minimum tangible net worth and minimum
earnings before interest, taxes, depreciation and amortization and provides
limitations on certain other activities. Loans under
F-15
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the credit facility will be collateralized by all of the Company's tangible and
intangible personal property, other than equipment.
Note 7. Mandatorily Redeemable Securities
Cumulative Preferred Stock
The Company's authorized capital stock includes 25,000,000 shares of
preferred stock, $.01 par value, of which 1,000 shares have been designated
Series A Cumulative Non-voting Redeemable Preferred Stock ("cumulative preferred
stock"). On March 10, 2000, 100 shares of cumulative preferred stock were issued
for proceeds of $100,000.
Holders of the cumulative preferred stock will be entitled to receive
cumulative cash dividends at an annual rate of LIBOR plus 2% on the stated
liquidation preference of $1,000 per share, payable quarterly in arrears out of
assets legally available for payment of dividends, when and as declared by the
Company's board of directors on March 31, June 30, September 30 and December 31
of each year, commencing June 30, 2000. Dividends will accumulate and be
cumulative from the issue date. In the event of any voluntary or involuntary
liquidation, dissolution or other winding-up of the Company or, at the option of
the Company on or after March 10, 2005 or the holder on or after May 10, 2005,
the holders of cumulative preferred stock will be entitled to receive the stated
liquidation preference or a redemption price of $1,000 per share.
Gentiva Obligated Mandatorily Redeemable Preferred Securities of a Subsidiary
Trust
On March 15, 2000, certain of the Company's and Olsten's directors,
officers and management and other related parties and other investors purchased
$20 million of 10% convertible trust preferred securities issued by a trust, of
which the Company owns all the common equity. The Company purchased all of the
common equity of the trust for a sum of $618,600. The convertible trust
preferred securities are mandatorily redeemable five years from issuance and the
trust may redeem the securities at any time after issuance at a declining
premium over face amount. Upon a change of control, as defined, the holders of
convertible trust preferred securities may require the trust to purchase these
securities at 100 percent of their face amount. Dividends are payable quarterly
in cash at the rate of 10 percent per annum, but the trust may defer dividend
payments for up to a total of twenty quarters, in which case dividends will
accrue. The convertible trust preferred securities are convertible into the
Company's common stock at a conversion price on the basis of 17.5 percent over
the average closing stock price of the Company's common stock during the ten
trading days following the first earnings announcement after the first quarter
of 2000.
Simultaneously with, and in connection with the issuance by the trust of
the convertible trust preferred securities, the Company issued to the trust $20
million of 10% convertible subordinated debentures. The convertible subordinated
debentures have the same terms as the convertible trust preferred securities,
including but not limited to maturity, interest, conversion and redemption
price.
F-16
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The trust which issued the convertible trust preferred securities is a
special purpose trust. The trust's operations are limited to issuing the
convertible trust preferred securities and holding the Company's convertible
subordinated debentures. The trust may pay dividends only to the extent that the
Company pays interest on its convertible subordinated debentures.
Note 8. Transactions with Olsten
Net transactions with Olsten, included in shareholders' equity, include the
accumulated excess of cash outlays made on the Company's behalf and management
fees charged to the Company by Olsten over cash receipts generated by the
Company. In accordance with the terms of the Separation Agreement, intercompany
balances at October 31, 1999 of approximately $507 million have been contributed
to the Company's capital in its entirety. The Separation Agreement provides that
on October 31, 1999 if the sum of (a) indebtedness for borrowed money, (b) the
deferred purchase price of property and (c) up to $10 million of transactions
fees related to the transactions contemplated by the Separation Agreement and
the Merger Agreement, less cash on hand (referred to as net debt) of Olsten and
its subsidiaries (excluding the Company and its subsidiaries) was (i) greater
than $750 million, then the new intercompany account would reflect a payable by
the Company to Olsten equal to the amount of excess, or (ii) less than $750
million, then the new intercompany account would reflect a payable by Olsten to
the Company, in an amount equal to the shortfall or (iii) equal to $750 million,
then no payment would be made in connection with the new debt calculation.
Pursuant to the Separation Agreement, on October 31, 1999, net debt of Olsten
and its subsidiaries (excluding the Company and its subsidiaries) was $718
million and accordingly, the Company was to receive approximately $32 million in
cash (referred to as the true-up amount) on or prior to the Split-off date. As
of January 2, 2000, the Company had received approximately $23 million of the
true-up amount; such amount is reflected in additional paid in capital in the
Consolidated Balance Sheet. Subsequent to year-end, the Company received the
remaining balance of the true-up amount and following the Split-off the Company
paid Olsten approximately $13 million to settle the intercompany account balance
which primarily related to advances for management fees, additional borrowings
and interest expense on intercompany balances.
Olsten used a centralized cash management system. As a result, cash and
cash equivalents (other than actual cash on hand) were not allocated to the
Company prior to October 31, 1999. On October 31, 1999, the Company ceased
participation in Olsten's cash management system and established its own cash
management system.
Included in selling, general and administrative expenses are $1.8 million,
$1.4 million and $1.6 million in 1999, 1998 and 1997, respectively, relating to
staffing services provided to the Company by Olsten.
F-17
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9. Legal Matters
Government Investigations
The Company has been subject to several federal and state governmental
investigations. Some of those investigations are still pending, although
substantially all of them have been settled. In connection with the Split-off,
the Company has agreed to assume, to the extent permitted by operation of law
and the terms of the liabilities, and indemnify Olsten for all liabilities
associated with any pending or future governmental investigation of the health
services business and has also agreed to comply with and be subject to all
related settlement agreements and corporate integrity agreements or other
operational agreements with the government.
The Company has cooperated with the Office of Investigations section of the
Office of Inspector General (an agency within the U.S. Department of Health and
Human Services) and the U.S. Department of Justice in connection with the
government's investigation into the Company's preparation of Medicare cost
reports (the "Cost Reports Investigation"). The Company has also cooperated with
the U.S. Department of Justice and other federal agencies investigating the
relationship between Columbia/HCA and the Company in connection with the
purchase by Columbia/HCA of some home health agencies which had been owned by
the health services business and subsequently managed under contract by a unit
of Gentiva Health Services (the "Columbia/HCA Investigation").
The Company continues to cooperate with various state and federal agencies,
including the U.S. Department of Justice, the Office of the Attorney General of
New Mexico and the New Mexico Health Care Anti-Fraud Task Force in connection
with their investigations into certain health care practices of Quantum. Among
the matters the federal agencies are or were inquiring are allegations of
improper billing and fraud against various federally funded medical assistance
programs on the part of Quantum and its post-acquisition successor, the
Specialty Pharmaceutical Services business of Gentiva Health Services (the
"Quantum New Mexico Investigation"). Most of the time period that the Company
understands to be at issue in the Quantum New Mexico Investigation predates
Olsten's June 1996 acquisition of Quantum.
In December 1999, Olsten received a document subpoena from the Department
of Health and Human Services, Office of Inspector General, Office of
Investigations. After preliminary discussion with the Office of Inspector
General, the Company believes that the December 1999 subpoena relates to
possible overpayments to Olsten 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, Office of Investigations. The Company
believes the February 2000 subpoena relates to its agencies cost reporting
procedures concerning contracted nursing and home health aide costs. The Company
intends to provide the Office of Inspector General with the requested documents
and 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 has recently commenced discussions with the North Carolina
Attorney General's Office concerning questions that the Office has raised as to
the eligibility of a certain class of the Company's patients to receive
Medicaid-reimbursed home health services and, thus, the Company's entitlement to
Medicaid reimbursement in connection with those services. At this preliminary
stage, the Company is unable to assess the probable outcome of or potential
liability arising from this matter.
On July 19, 1999, Olsten entered into written civil and criminal agreements
with the U.S. Department of Justice (and, as to the civil agreement, the Office
of Inspector General of the U.S.
F-18
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Department of Health and Human Services) finalizing the understanding that it
announced on March 30, 1999 to settle the civil and criminal aspects of the Cost
Reports Investigation and the Columbia/HCA Investigation. Pursuant to the
settlement, (a) Olsten paid on August 11, 1999 the sum of $61 million to the
U.S. Department of Justice, including approximately $10.1 million in criminal
fines and penalties; (b) in connection with the Columbia/HCA Investigation,
Kimberly Home Health Care, Inc., a subsidiary of Olsten, pled guilty in the
United States District Court for the Northern District of Georgia, the Southern
District of Florida and the Middle District of Florida, respectively, to a
criminal violation of the federal mail fraud, conspiracy and kickback statutes;
(c) Kimberly Home Health Care, Inc. has been permanently excluded from
participation in Medicare, Medicaid and all other federal health care programs
as defined in 42 U.S.C. ss. 1320a-7b(f); and (d) Olsten executed a corporate
integrity agreement with the Office of Inspector General of the U.S. Department
of Health and Human Services.
By letter dated June 30, 1999, the Medicare Fraud Control Unit of the New
Mexico Attorney General's Office notified Olsten that in connection with the
Quantum New Mexico Investigation, it had declined to criminally prosecute the
so-called "J-Code issue" relating to Quantum's past practices in seeking
government health care reimbursement.
On January 28, 1999, Olsten announced that it had been advised by the
United States Attorney's Office for the District of New Mexico ("New Mexico U.S.
Attorney's Office") that, in connection with the Quantum New Mexico
Investigation, it had dropped its criminal investigation into certain past
practices of Quantum. The criminal aspect of the Quantum New Mexico
Investigation had focused on allegations of improper billing and fraud against
various federally funded medical assistance programs on the part of Quantum
during the period between January 1992 and April 1997. By letter dated February
1, 1999, the New Mexico U.S. Attorney's Office advised Olsten that, having ended
its criminal inquiry, the Office has referred the Quantum matter to its
Affirmative Civil Enforcement Section. The Company continues to cooperate with
the civil inquiry into the Quantum matter and to explore with the New Mexico
U.S. Attorney's Office the possibility of reaching a negotiated monetary
resolution of the matter. Any negotiated amount could include multiple damages,
interest and civil penalties.
On October 28, 1998, Olsten announced that it entered into a final
settlement agreement with several government agencies investigating certain past
practices of Quantum. The agreement was entered into with the U.S. Department of
Justice, the Office of the Inspector General of the U.S. Department of Health
and Human Services, the U.S. Secretary of Defense (for the CHAMPUS/Tricare
program), and the Attorneys General for the States of New York and Oklahoma.
Pursuant to the settlement, Olsten reimbursed the government approximately $4.5
million for certain disputed claims under the Medicaid and CHAMPUS programs for
reimbursement for the provision of anti-hemophilia factor products to patients
covered by certain federal health care programs and entered into a corporate
integrity agreement.
F-19
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Legal Proceedings
In connection with the Split-off, the Company has agreed to assume, to the
extent permitted by operation of law and the terms of the liabilities, and
indemnify Olsten for all liabilities arising out of the health services business
before or after the Split-off, including any such liabilities arising after the
Split-off in connection with the government investigations described above and
the litigations described below.
In April 1997, a purported class action captioned Gail Weichman v. Olsten
Corporation, et al., No. CV 97-1946, was filed in the United States District
Court for the Eastern District of New York against Olsten, Miriam Olsten, Frank
Liguori and Anthony Puglisi. In August 1997, two additional proposed class
action lawsuits, captioned Esta S. Goldman v. Olsten Corporation, et al., No. CV
97-4501, and Elliott Waldman v. Olsten Corporation, et al., No. CV 97-5056, were
filed in the United States District Court for the Eastern District of New York
against the same defendants named in the Weichman lawsuit, plus Stuart Olsten.
In September 1997, a fourth proposed class action lawsuit, captioned Michael
Cannold v. Olsten Corporation, et al., No. CV 97-5408, was filed in the United
States District Court for the Eastern District of New York against Olsten,
Miriam Olsten, Stuart Olsten, Frank Liguori and Anthony Puglisi. (The Weichman,
Goldman, Waldman and Cannold actions are referred to collectively as the "Class
Actions"). On or about September 8, 1998, a Consolidated Amended Class Action
Complaint (the "Amended Complaint") was filed in the U.S. District Court for the
Eastern District of New York, captioned In re Olsten Corporation Securities
Litigation, No. 97-5056, by above plaintiffs against Olsten, Miriam Olsten,
Stuart Olsten, Frank Liguori and Anthony Puglisi. The Amended Complaint asserts
claims under Sections 10(b) (including Rule 10b-5 promulgated thereunder), 14(a)
and 20(a) of the Securities Exchange Act of 1934 and Sections 11, 12(a)(2) and
15 of the Securities Act of 1933, alleging that, as a result of certain alleged
misstatements and omissions by certain of the defendants, Olsten's common stock
was artificially inflated during the proposed class period (which is defined in
the Amended Complaint as the period from February 5, 1996 though July 22, 1997).
On October 19, 1998, Olsten and the individual defendants served a motion
seeking an order dismissing the Amended Complaint. That motion was fully briefed
on December 23, 1998. Plaintiffs filed a submission in connection with
defendants' motion on October 12, 1999. Defendants filed a response to
plaintiffs' submission on October 14, 1999, plaintiffs responded to it on
October 21, 1999 and defendants filed a reply on October 21, 1999.
The Amended Complaint seeks certification of the proposed class, a judgment
declaring the conduct of the defendants to be in violation of the law,
unspecified compensatory damages and unspecified costs and expenses, including
attorneys' fees and experts' fees. While the Company is unable at this time to
assess the probable outcome of the Class Actions or the materiality of the risk
of loss in connection with the class action (given the preliminary stage of the
Class Actions and the fact that the Amended Complaint does not allege damages
with any specificity), the Company believes that Olsten acted responsibly with
respect to its shareholders and intends to continue to vigorously defend the
Class Action.
F-20
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On or about May 11, 1999, a Complaint was filed in the Delaware Chancery
Court in a purported derivative lawsuit, captioned Rubin v. May, No. 17135-NC,
against certain current and former directors of Olsten (the "Derivative
Lawsuit"). The Complaint, which names Olsten as a nominal defendant, alleges a
claim for breach of fiduciary duties arising out of the Class Action and the
government investigations described above. The plaintiffs seek a judgment (1)
requiring the defendants to account to Olsten for unspecified alleged damages
resulting from the defendants' alleged conduct; (2) directing the defendants to
establish and maintain effective compliance programs; and (3) awarding
plaintiffs the costs and expenses of the lawsuit, including reasonable
attorneys' fees. On September 10, 1999, the defendants in the Derivative Lawsuit
filed a motion to dismiss or, in the alternative, stay the lawsuit.
On January 14, 1999, Kimberly Home Health Care, Inc. initiated three
arbitration proceedings against hospitals owned by Columbia/HCA with which one
of the Company's subsidiaries 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, while the management services
agreements had periods ranging from 18 to 42 months prior to expiration and that
as a result Columbia/HCA has breached the management services agreements. In
response to the arbitrations, Columbia/HCA has asserted that the arbitration be
consolidated and stayed, in part based upon its alleged claims against Kimberly
Home Health Care, Inc. for breach of contract and requests indemnity and
possibly return of management fees paid under the disallowance provision of the
management services agreements. Columbia/HCA has not yet fully presented these
claims in the arbitrations or other legal proceedings, and has not yet
quantified the claims. The parties agreed to suspend the proceedings until June
2000.
In July 1999, Olsten received notification that the Indiana Attorney
General's Office filed a civil complaint against Olsten requesting the court to
determine if Quantum violated Indiana law with respect to Medicaid claims. The
complaint alleges that (1) overpayment was made to Quantum due largely to
advances paid by Medicaid that were not properly credited by Quantum; (2)
Quantum supplied the Indiana Attorney General's Office with insufficient
documentation regarding services provided by one of our pharmacies; and (3)
deliveries exceeded the amounts of physicians' orders. The alleged violations
predate Olsten's acquisition of Quantum in June 1996.
Note 10. Commitments
The Company rents certain properties under noncancellable, long-term
operating leases, which expire at various dates. Certain of these leases require
additional payments for taxes, insurance and maintenance and, in many cases,
provide for renewal options. Rent expense under all leases was $22.5 million in
1999, $26.9 million in 1998 and $25.5 million in 1997.
F-21
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future minimum rental commitments for all noncancellable leases having a
remaining term in excess of one year at January 2, 2000, including the lease for
an Olsten subsidiary which the Company agreed to assume commencing September 16,
2000 under the terms of the Separation Agreement are as follows (in thousands
per year):
Olsten Subsidiary
Fiscal Year Company Leases Lease Total
----------- -------------- ----- -----
2000 $20,610 $242 $20,852
2001 14,461 877 15,338
2002 8,675 906 9,581
2003 5,361 934 6,295
2004 3,701 964 4,665
Thereafter 1,548 2,732 4,280
In connection with the Split-off, the Company has entered into an agreement
on March 16, 2000 pursuant to which a director of the Company and Olsten has
agreed not to compete with the Company for a four year period. In return for
this agreement, the Company agreed to pay a lump sum of $250,000. Following the
Split-off the Company paid its past president, who will not continue with the
Company, $2.0 million pursuant to a change in control agreement. Such amounts
will be charged to expense in 2000.
Under the terms of the Separation Agreement, a former executive officer of
Olsten (and current executive officer of the Company) will be compensated by the
Company for excise taxes imposed by reason of the receipt of amounts payable
under the executive's separation, consulting and non-competition agreements with
Adecco. Such amount is estimated to be approximately $815,000 and will be
accrued in the first quarter of 2000.
As discussed in Note 14, the Olsten non-qualified supplemental executive
retirement program was terminated prior to the Split-off. Prior to the
Split-off, the Company established its own non-qualified supplemental executive
retirement plan substantially similar to the Olsten plan and assumed all
liabilities of the program with respect to certain of its employees and former
employees of Olsten. The Company will be obligated for the funding of
liabilities of the program to the extent that such liabilities (approximately
$12 million on March 15, 2000) are in excess of assets transferred
(approximately $8.5 million on March 15, 2000).
Note 11. Accrued Expenses
As of January 2, 2000 and January 3, 1999, accrued expenses included
estimated costs under network service contracts of $48.5 million and $30.4
million, respectively. In addition, accrued expenses at January 3, 1999 included
a liability of $56 million for the settlement of federal investigations as
discussed in Notes 4 and 9.
F-22
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12. Stock Plans
Olsten maintained various stock option incentive plans under which certain
employees of the Company were eligible for the grant of stock options. These
options were awarded in the form of incentive stock options ("ISOs") or
non-qualified stock options ("NQSOs"). The option price of an ISO was not less
than 100 percent, and the option price of the NQSO was not less than 85 percent
of the fair market value at the date of grant. Options under the Plans generally
have a term of ten years and generally became cumulatively exercisable
commencing one year after grant in four or five equal annual installments.
Effective as of the Split-off date, all options to purchase Olsten stock
("Olsten stock options") held by the Company's employees became options to
purchase the Company's common stock ("Gentiva stock options") and the Company's
employees became fully vested in the Gentiva stock options. Olsten stock options
were converted into Gentiva stock options at the ratio of 1 to 2.077; the
exercise price of a Gentiva stock option represents 48.1 percent of the
corresponding Olsten stock option exercise price.
A summary of Olsten stock options for the three years ended January 2, 2000
for employees assigned to the Company is as follows:
1999 1998 1997
---------------------- ------------------------- --------------------------
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
------ --------- -------- --------- -------- ----------
Olsten options outstanding,
beginning of year 1,446,067 $15.72 980,376 $20.50 1,002,194 $20.87
Granted 498,700 7.84 701,500 10.00 230,000 19.63
Exercised (6,467) 1.28 (2,076) 7.89 (107,511) 15.25
Cancelled (240,938) 16.18 (233,733) 18.60 (144,307) 25.65
--------- ----- --------- ----- --------- -----
Olsten options
outstanding, end of year 1,697,362 $13.15 1,446,067 $15.72 980,376 $20.50
========= ===== ========= ===== ======= =====
Olsten options
exercisable, end of year 633,597 $18.77 485,485 $22.07 518,450 $21.69
======= ===== ======= ===== ======= =====
Gentiva options substituted
for Olsten options, end of year
(outstanding and exercisable) 3,526,026 $6.33
========= ====
The weighted average fair value of Olsten stock options, calculated using
the Black-Scholes option pricing model, granted during 1999, 1998 and 1997, is
$3.15, $3.57 and $8.19, respectively. The fair value of each option grant is
estimated on the date of grant with the following weighted-average assumptions
used for grants in 1999, 1998 and 1997, respectively: risk-free interest rates
of 4.7, 5.3 and 6.3 percent; dividend yield of 0 percent for 1999, 2 percent for
F-23
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1998 and 1 percent for 1997; expected lives of six years for all; and volatility
of 35 percent for 1999 and 36 percent for 1998 and 1997.
The following table summarizes information about Gentiva stock options
outstanding at January 2, 2000 for employees assigned to the Company had the
Split-off occurred on such date.
Options Outstanding
Number Weighted Weighted
Range of outstanding at average remaining average
exercise prices January 2, 2000 contractual life exercise price
--------------- --------------- ---------------- --------------
$ 1.04 to $ 1.24 2,084 0.70 $1.23
2.86 to 3.49 727,075 8.93 3.13
3.50 to 3.65 622,480 9.02 3.61
3.66 to 4.98 496,488 8.58 4.39
6.80 to 8.30 665,944 7.36 7.00
8.92 to 11.95 927,203 6.59 10.21
14.01 to 17.84 62,944 4.34 14.74
20.54 to 29.05 21,808 4.05 25.21
---------------- ----------------- ------------------
$ 1.04 to $29.05 3,526,026 7.85 $6.33
================ ================= ==================
In 1996, Olsten adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation." Accordingly, no compensation cost has been recognized
under the stock option plans. Had compensation cost for Olsten's stock option
plans been determined based on the fair value at the grant date for awards
consistent with the provisions of SFAS No. 123, the Company's net income (loss)
and net income (loss) per share would have been reduced (increased) to the pro
forma amounts indicated below (in thousands, except per share amounts):
1999 1998 1997
---- ---- ----
Net (loss) income - as reported $(15,086) $(101,465) $26,847
Net (loss) income - pro forma (16,864) (102,535) 26,287
Basic (loss) income per share - as reported (.74) (4.99) 1.32
Basic (loss) income per share - pro forma (.83) (5.04) 1.29
The statement provides for pro forma amounts for options granted beginning
in 1995; therefore, the pro forma expense will likely increase in future years
as the new option grants become subject to the pricing model.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of the Company's 1999 Stock Incentive Plan ("1999 Plan") under
which 5 million shares of common stock were
F-24
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reserved for issuance upon exercise of options thereunder. The maximum total
number of shares of common stock for which grants may be made to any employee,
consultant or director under the 1999 plan in any calendar year is 300,000.
These options may be awarded in the form of ISOs or NQSOs. The option price of
an ISO cannot be less than 100 percent, and the option price of the NQSO cannot
be less than 85 percent of the fair market value at the date of grant.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of the Company's Stock and Deferred Compensation Plan for
Non-Employee Directors, which provides for payment of annual retainer fees to
non-employee directors, up to 50 percent of which such directors may elect to
receive in cash and the remainder of which will be paid in the form of shares of
common stock and also allows deferral of such payments until termination of
director's service. The total number of shares of common stock reserved for
issuance under this plan is 150,000.
Prior to the Split-off, Olsten as sole shareholder of the Company approved
the adoption of an employee stock purchase plan for the Company. All employees
of the Company, who have been employed for at least eight months and whose
customary employment exceeds twenty hours per week, will be eligible to purchase
stock under this plan. The human resource and compensation committee of the
Company's Board of Directors will administer the plan and has the power to
determine the terms and conditions of each offering of common stock. The maximum
number of shares of common stock, which may be sold to any employee in any
offering, however, will generally be 10 percent of that employee's compensation
during the period of the offering. A total of 1,200,000 shares of common stock
are reserved for issuance under the employee stock purchase plan.
Note 13. Income Taxes
Comparative analyses of the provision (benefit) for income taxes follows
(in thousands):
1999 1998 1997
---- ---- ----
Current
Federal $(19,586) $(29,808) $14,166
State and local 170 294 (547)
Foreign 248 -- --
-------- -------- -------
(19,168) (29,514) 13,619
-------- -------- -------
Deferred
Federal 13,047 (17,556) 1,982
State and local -- -- 697
-------- -------- --------
13,047 (17,556) 2,679
-------- -------- --------
$(6,121) $(47,070) $16,298
======== ======== ========
F-25
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with the Tax Sharing Agreement, any net operating losses
generated up to the Split-off will be transferred to and utilized by Olsten. At
January 2, 2000, approximately $49 million relating to these net operating
losses was included in prepaid expenses and other current assets in the
consolidated balance sheet.
A reconciliation of the differences between income taxes computed at the
Federal statutory rate and provisions (benefits) for income taxes for each year
are as follows (in thousands):
1999 1998 1997
---- ---- ----
Income taxes computed at Federal statutory tax rate $(7,422) $(51,987) $ 15,043
State income taxes, net of Federal
benefit 111 190 98
Nondeductible settlement of government
investigations -- 3,500 --
Amortization of intangibles 902 922 1,701
Nondeductible meals & entertainment 265 343 357
Other, net 23 (38) (901)
------- --------- ----------
$(6,121) $(47,070) $ 16,298
======= ======== =======
Deferred tax assets, which are included in prepaid expenses and other
current assets, and deferred tax liabilities, which are included in other
liabilities in the consolidated balance sheet, are as follows (in thousands):
January 2, 2000 January 3, 1999
--------------- ---------------
Deferred tax assets
Reserves and allowances $ 25,074 $ 40,320
Other 1,183 291
------ -------
26,257 40,611
------ ------
Deferred tax liabilities
Capitalized software (2,163) (2,281)
Intangible assets (22,047) (24,933)
Depreciation (2,821) (371)
Other -- (753)
-------- --------
(27,031) (28,338)
------- --------
Net deferred tax asset (liability) $ (774) $ 12,273
======== ========
F-26
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14. Benefit Plans for Permanent Employees
Olsten and its subsidiaries maintained qualified and non-qualified defined
contribution retirement plans for its salaried employees, which provide for a
partial match of employee savings under the plans and for discretionary
profit-sharing contributions based on employee compensation. The Company
established similar retirement plans and assumed the obligations under the
Olsten plans for those employees assigned to the Company at the date of the
Split-off.
Olsten also maintained a non-qualified supplemental executive retirement
program for key employees and officers, which provided supplemental retirement
benefits funded in part by profit-sharing contributions. Certain employees of
the Company were eligible to participate in the Olsten sponsored plan. Prior to
the Split-off the Company established its own non-qualified supplemental
executive retirement plan substantially similar to the Olsten plan. As discussed
in Note 10, the Olsten plan was terminated prior to the Split-off.
Company contributions under the defined contribution plans were
approximately $3.6 million in 1999, $3.4 million in 1998, and $3.5 million in
1997.
Note 15. Business Segment Information
The Company operates in the United States and Canada, servicing patients
and customers through the following business segments: Specialty Pharmaceutical
Services, Home Care Nursing Services and Staffing Services. These segments are
briefly described below.
Specialty Pharmaceutical Services includes (i) the distribution of drugs
and other biological and pharmaceutical products and professional support
services for individuals with chronic diseases, such as hemophilia, primary
pulmonary hypertension, autoimmune deficiencies and growth disorders, (ii) the
administration of antibiotics, chemotherapy, nutrients and other medications for
patients with acute or episodic disease states and (iii) distribution services
for pharmaceutical, biotechnology and medical service firms.
F-27
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Home Care Nursing Services includes (i) professional and paraprofessional
services, including skilled nursing, rehabilitation and other therapies, home
health aide and personal care services, to individuals with acute illnesses,
long-term chronic health conditions, permanent disabilities, terminal illnesses
or post-procedural needs and (ii) care management and coordination for managed
care organizations and self-insured employees.
Staffing Services includes (i) services to institutional, occupational and
alternate site health care organizations by providing health care professionals
to meet supplemental staffing needs and (ii) clinical support services for
pharmaceutical and biotechnology firms.
As a result of the Split-off, the Company has changed the measurement
method used to determine reported segment profit or loss. In prior years, the
Company evaluated performance and allocated resources based on earnings (loss)
before interest, taxes, depreciation and amortization. The Company now evaluates
performance and allocates resources based on operating contributions of the
reportable segments, which excludes corporate expenses, depreciation,
amortization interest expense, but includes revenues and all other costs
directly attributable to the specific segment. Identifiable assets of the
segments reflect net accounts receivable and inventories associated with segment
activities. All other assets are assigned to the corporation for the benefit of
all segments. In prior years, clinical support services for pharmaceutical and
biotechnology firms were included in the Specialty Pharmaceutical Services
segment. The Company now considers these services to be part of its Staffing
Services segment. Prior year segment data has been reclassified to conform with
the current year presentation. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
Information about the Company's operations is as follows (in thousands):
Specialty Home Care
Pharmaceutical Nursing Staffing
Services Services Services Total
Year ended January 2, 2000
Net revenues $699,993 $662,477 $127,352 $1,489,822
======= ======= ======= =========
Operating contribution before special charges $98,590 $21,943 $10,088 $130,621
Special charges (1,730) (13,090) (380) (15,200)
-------- -------- -------- --------
Operating contribution $96,860 $8,853 $9,708 115,421
======= ======= ======
Corporate expenses (86,028)
---------
Earnings before interest expense, taxes,
depreciation and amortization 29,393
Depreciation and amortization (33,625)
Interest expense, net (16,975)
--------
Loss before income taxes $(21,207)
========
F-28
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Segment assets $440,185 $201,978 $26,515 $668,678
======= ======= ====== =======
Year ended January 3, 1999
Net revenues $571,718 $658,745 $99,840 $1,330,303
======= ======= ====== =========
Operating contribution before special
charges, non-recurring charges and other
adjustments $81,250 $14,984 $8,179 $104,413
Special charges, non-recurring charges and
other adjustments (24,046) (97,954) -- 122,000
-------- -------- ------ -------
Operating contribution $57,204 $(82,970) $8,179 (17,587)
====== ======== ======
Corporate expenses (82,133)
--------
Loss before interest expense, taxes,
depreciation and amortization (99,720)
Depreciation and amortization (31,401)
Interest expense, net (17,414)
--------
Loss before income taxes $(148,535)
==========
Segment assets $342,862 $180,753 $18,979 $ 542,594
======= ======= ====== ========
Year ended December 28, 1997
Net revenues $503,762 $856,072 $74,020 $1,433,854
======= ======= ====== =========
Operating contribution $70,885 $83,689 $6,696 161,270
======= ======= ======
Corporate expenses (71,445)
--------
Earnings before interest expense, taxes,
depreciation and amortization 89,825
Depreciation and amortization (29,493)
Interest expense, net (17,351)
--------
Income before income taxes and minority
interest $ 42,981
=========
Segment assets $261,003 $187,261 $15,685 $ 463,949
======= ======= ====== =======
Financial information, summarized by geographic area, is as follows (in
thousands):
Net Long-lived
Revenues assets
Year ended January 2, 2000
United States $1,446,532 $302,601
F-29
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Canada 43,290 1,183
---------- ----------
$1,489,822 $303,784
========= =======
Year ended January 3, 1999
United States $1,290,072 $317,849
Canada 40,231 750
---------- ---------
$1,330,303 $318,599
========= =======
Year ended December 28, 1997
United States $1,398,998 $286,008
Canada 34,856 628
----------- ---------
$1,433,854 $286,636
========= =======
Note 16. Quarterly Financial Information (Unaudited)
First Second Third Fourth
(in thousands, except share amounts) quarter quarter quarter quarter
------- ------- ------- -------
$ $ $ $
Year ended January 2, 2000
Net revenues 368,160 372,573 377,312 371,777
Gross profit 125,674 127,242 125,078 127,432
Net income (loss) (12,806) 2,435 (2,481) (2,234)
SHARE INFORMATION:
Basic and diluted income (loss) per share (.63) .12 (.12) (.11)
Year ended January 3, 1999
Net revenues 331,967 315,200 321,118 362,018
Gross profit 113,560 77,375 106,085 124,387
Net loss (1,743) (49,053) (7,675) (42,994)
SHARE INFORMATION:
Basic and diluted income (loss) per share (.09) (2.41) (.38) (2.11)
F-30
GENTIVA HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fourth quarters ended January 2, 2000 and January 3, 1999 include 13
weeks and 14 weeks, respectively.
The first quarter of 1999 includes $16.7 million of special charges and the
fourth quarter of 1999 includes a benefit of $1.5 million relating to these
special charges as indicated in Note 4. Additionally, during the fourth quarter
of 1999, the Company increased its allowance for doubtful accounts by
approximately $7 million.
F-31
GENTIVE HEALTH SERVICES, INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE THREE YEARS ENDED JANUARY 2, 2000
Col. B Col. C Col. D Col. E
------ ------ ------ ------
Balance at Additions Balance
Beginning charged to costs at end of
of period and expenses Deductions period
Allowance for Doubtful Accounts:
For the Year Ended January 2, 2000 $25,596 $38,687 $(27,524) $36,759
For the Year Ended January 3, 1999 $19,200 $24,046 $(17,650) $25,596
For the Year Ended December 28, 1997 $22,171 $25,884 $(28,855) $19,200
F-32